LINCOLN NATIONAL CORP
Item 1. Business
OVERVIEW
Lincoln National Corporation (“LNC,” which also may be referred to as “Lincoln,” “we,” “our” or “us”) is a holding company, which operates multiple insurance and retirement businesses through subsidiary companies. 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, term life insurance, indexed universal life insurance, employer-sponsored retirement plans and services, and group life, disability and dental. LNC was organized under the laws of the state of Indiana in 1968. We currently maintain our principal executive offices in Radnor, Pennsylvania. “Lincoln Financial Group” is the marketing name for LNC and its subsidiary companies. As of December 31, 2013, LNC had consolidated assets of $236.9 billion and consolidated stockholders’ equity of $13.5 billion.
We provide products and services and report results through four segments as follows:
						
						
Business Segments
						
Annuities
						
Retirement Plan Services
						
Life Insurance
						
Group Protection
						
We also have Other Operations, which includes the financial data for operations that are not directly related to the business segments.
The results of Lincoln Financial Network (“LFN”) and Lincoln Financial Distributors (“LFD”), our retail and wholesale distributors, respectively, are included in the segments for which they distribute products. LFD distributes our individual products and services, retirement plans and corporate-owned UL and VUL (“COLI”) and bank-owned UL and VUL (“BOLI”) products and services. The distribution occurs primarily through consultants, brokers, planners, agents, financial advisors, third-party administrators (“TPAs”) and other intermediaries. Group Protection distributes its products and services primarily through employee benefit brokers, TPAs and other employee benefit firms. As of December 31, 2013, LFD had approximately 575 internal and external wholesalers (including sales managers). As of December 31, 2013, LFN offered LNC and non-proprietary products and advisory services through a national network of approximately 8,450 active producers who placed business with us within the last 12 months.
Financial information in the tables that follow is presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”), unless otherwise indicated. We provide revenues, income (loss) from operations and assets attributable to each of our business segments and Other Operations in Note 22. Assets, revenues and earnings attributable to foreign activities were not material in the periods presented.
Acquisitions and Dispositions
On January 8, 2009, the Office of Thrift Supervision approved our application to become a savings and loan holding company and our acquisition of Newton County Loan & Savings, FSB (“NCLS”), a federally regulated savings bank located in Indiana. We closed on our purchase of NCLS on January 15, 2009. On July 25, 2011, NCLS submitted a voluntary plan of dissolution with the Officer of the Comptroller of the Currency (“OCC”). The OCC approved NCLS’s voluntary dissolution effective November 30, 2011.
On August 18, 2009, we entered into a purchase and sale agreement with Macquarie Bank Limited (“MBL”), pursuant to which we agreed to sell to MBL all of the outstanding capital stock of Delaware Management Holdings, Inc. (“Delaware”), our former subsidiary, which provided investment products and services to individuals and institutions. This transaction closed on January 4, 2010, with net of tax proceeds of approximately $405 million.
In addition, certain of our subsidiaries, including The Lincoln National Life Insurance Company (“LNL”), our primary insurance subsidiary, entered into investment advisory agreements with Delaware dated January 4, 2010, pursuant to which Delaware will continue to manage the majority of the general account insurance assets of the subsidiaries. The investment advisory agreements had 10-year terms, and we may terminate them without cause, subject to a purchase price adjustment of up to $50 million (as adjusted) in the event
that all of the agreements with our subsidiaries are terminated. The amount of the potential adjustment declines on a pro rata basis over the term of the advisory agreements.
On October 1, 2009, we completed the sale of the capital stock of Lincoln National (UK) plc (“Lincoln UK”) to SLF of Canada UK Limited for net of tax proceeds of $325 million. We retained Lincoln UK’s pension plan assets and liabilities. The former Lincoln UK segment primarily focused on providing life and retirement income products in the United Kingdom.
For further information about acquisitions and divestitures, see Note 3.
BUSINESS SEGMENTS AND OTHER OPERATIONS
ANNUITIES
Overview
The Annuities segment provides tax-deferred investment growth and lifetime income opportunities for its clients by offering fixed (including indexed) and variable annuities. The “fixed” and “variable” classifications describe whether we or the contract holders bear the investment risk of the assets supporting the contract. This also determines the manner in which we earn investment margin profits from these products, either as investment spreads for fixed products or as asset-based fees charged to variable products.
Annuities have several features that are attractive to customers. First, they provide tax-deferred growth on the underlying principal, thereby deferring the tax consequences of the growth in value until withdrawals are made from the accumulation values, often at lower tax rates occurring during retirement. Second, annuities are unique in that contract holders can select a variety of payout alternatives to help provide an income flow for life. Many annuity contracts include guarantee features (living and death benefits) that are not found in any other investment vehicle and, we believe, make annuities attractive especially in times of economic uncertainty.
Products
In general, an annuity is a contract between an insurance company and an individual or group in which the insurance company, after receipt of one or more premium payments, agrees to pay an amount of money either in one lump sum or on a periodic basis (i.e., annually, semi-annually, quarterly or monthly), beginning on a certain date and continuing for a period of time as specified in the contract or as requested. Periodic payments can begin within 12 months after the premium is received (referred to as an immediate annuity) or at a future date in time (referred to as a deferred annuity). This retirement vehicle helps protect an individual from outliving his or her money.
Variable Annuities
A variable annuity provides the contract holder the ability to direct the investment of premium deposits into one or more variable sub-accounts (“variable funds”) offered through the product (“variable portion”) and into a fixed account with a guaranteed return (“fixed portion”). The value of the variable portion of the contract holder’s account varies with the performance of the underlying variable funds chosen by the contract holder.
Our variable funds include the Managed Risk Strategies fund options, a series of risk-managed funds that embed volatility management and, with some funds, capital protection strategies, inside the funds themselves. These funds, introduced in late 2011, seek to reduce equity market risk for both the contract holder and us, especially when the contract holder elects a guaranteed benefit rider. As of December 31, 2013, the Managed Risk funds totaled $17.5 billion, or 18% of total variable annuity account values.
We charge mortality and expense assessments and administrative fees on variable annuity accounts to cover insurance and administrative expenses. These assessments are built into accumulation unit values, which when multiplied by the number of units owned for any variable fund equals the contract holder’s account value for that variable fund. In addition, for some contracts, we impose surrender charges, which are typically applicable during the early years of the annuity contract, with a declining level of surrender charges over time.
We offer guaranteed benefit riders with certain of our variable annuity products, such as a guaranteed death benefit (“GDB”), a guaranteed withdrawal benefit (“GWB”), a guaranteed income benefit (“GIB”) and a combination of such benefits.
The GDB features offered in 2013 included those where we contractually guarantee to the contract holder that upon death, depending on the particular product, we will return no less than: the current contract value; the total deposits made to the contract, adjusted to reflect any partial withdrawals; the highest contract value on a specified anniversary date adjusted to reflect any partial withdrawals following the contract anniversary; or the current contract value plus a specified percentage of contract earnings, not to exceed a covered earnings limit.
In 2013, we offered product riders including the Lincoln Lifetime IncomeSM Advantage 2.0 and Lincoln Lifetime IncomeSM Advantage 2.0 Protected Funds riders, which are hybrid benefit riders combining aspects of GWB and GIB. These benefit riders allow the contract holder the ability to take income at a maximum rate of up to 5% of the guaranteed amount when they are above the lifetime income age or income through i4LIFE® Advantage with the GIB. Lincoln Lifetime Income Advantage 2.0 and Lincoln Lifetime Income Advantage 2.0 Protected Funds riders provide higher income if the contract holder delays withdrawals, including both a 5% enhancement to the guaranteed amount each year a withdrawal is not taken for a specified period of time and an annual step-up of the guaranteed amount to
the current contract value. Contract holders under Lincoln Lifetime Income Advantage 2.0 are subject to restrictions on the allocation of their account value within the various investment choices. Contract holders under Lincoln Lifetime Income Advantage 2.0 Protected Funds are subject to the allocation of their account value to our Managed Risk Strategies fund options and certain fixed-income options.
We also offered the i4LIFE® Advantage, i4LIFE® Advantage Guaranteed Income Benefit and i4LIFE® Advantage Guaranteed Income Benefit Protected Funds riders. These riders, which are covered by U.S. patents, allow variable annuity contract holders access and control during the income distribution phase of their contract. This added flexibility allows the contract holder to access the account value for transfers, additional withdrawals and other service features like portfolio rebalancing. In general, GIB is an optional feature available with i4LIFE® Advantage and a non-optional feature on i4LIFE® Advantage Guaranteed Income Benefit and i4LIFE® Advantage Guaranteed Income Benefit Protected Funds that guarantees regular income payments will not fall below the greater of a minimum income floor set at benefit issue and 75% of the highest income payment on a specified anniversary date (reduced for any subsequent withdrawals). Contract holders under i4LIFE® Advantage Guaranteed Income Benefit are subject to restrictions on the allocation of their account value within the various investment choices. Contract holders under i4LIFE® Advantage Guaranteed Income Benefit Protected Funds are subject to the allocation of their account value to our Managed Risk Strategies fund options and certain fixed-income options.
We also offered the 4LATER® Advantage Protected Funds rider. This rider provides a minimum income base used to determine the GIB floor when a client begins income payments under i4LIFE® Advantage Guaranteed Income Benefit Protected Funds. 4LATER® Advantage Protected Funds rider provides growth during the accumulation phase through both a 5% enhancement to the income base each year a withdrawal is not taken for a specified period of time and an annual step-up of the income base to the current contract value. Contract holders under the 4LATER® Advantage Protected Funds rider are subject to the allocation of their account value to our Protected Strategies fund options and certain fixed-income options.
We also offered the Lincoln SmartSecurity® Advantage one-year benefit, which is a GWB rider that offers the contract holder a guarantee equal to the initial deposit (or contract value, if elected after issue), adjusted for any subsequent purchase payments or withdrawals. Lincoln SmartSecurity® Advantage one-year benefit allows an owner to step up the guarantee amount automatically on the benefit anniversary to the current contract value if the contract value is greater than the guarantee amount at the time of step up. To receive the full amount of the guarantee, annual withdrawals are limited to 5% of the guaranteed amount. Withdrawals will continue until the longer of when the guarantee is equal to zero or for the rest of the owner’s life (“single life version”) or the life of the owner or owner’s spouse (“joint life version”) as long as withdrawals begin after attained age 65 and are limited to 5% of the guaranteed amount. Contract holders under Lincoln SmartSecurity® Advantage are subject to restrictions on the allocation of their account value within the various investment choices. Withdrawals in excess of the applicable maximum in any contract year are assessed any applicable surrender charges, and the guaranteed amount is recalculated.
We design and actively manage the features and structure of our guaranteed benefit riders to maintain a competitive suite of products consistent with profitability and risk management goals. To mitigate the increased risks associated with guaranteed benefits, we developed a dynamic hedging program. The customized dynamic hedging program uses equity, interest rate and currency futures positions, interest rate and total return swaps, and equity-based options depending upon the risks underlying the guarantees. For more information on our hedging program, see “Critical Accounting Policies and Estimates - Derivatives” and “Realized Gain (Loss) and Benefit Ratio Unlocking” in the MD&A. For information regarding risks related to guaranteed benefits, see “
Item 1A. Risk Factors
You should carefully consider the risks described below before investing in our securities. The risks and uncertainties described below are not the only ones facing our Company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of these risks actually occur, our business, financial condition and results of operations could be materially affected. In that case, the value of our securities could decline substantially.
Legislative, Regulatory and Tax
Our businesses are heavily regulated and changes in regulation may affect our insurance subsidiary capital requirements or reduce our profitability.
Our insurance subsidiaries are subject to extensive supervision and regulation in the states in which we do business. The supervision and regulation relate to numerous aspects of our business and financial condition. The primary purpose of the supervision and regulation is the protection of our insurance contract holders, and not our investors. The extent of regulation varies, but generally is governed by state statutes. These statutes delegate regulatory, supervisory and administrative authority to state insurance departments. This system of supervision and regulation covers, among other things:
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Standards of minimum capital requirements and solvency, including RBC measurements;
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Restrictions on certain transactions, including, but not limited to, reinsurance between our insurance subsidiaries and their affiliates;
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Restrictions on the nature, quality and concentration of investments;
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Restrictions on the types of terms and conditions that we can include in the insurance policies offered by our primary insurance operations;
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Limitations on the amount of dividends that insurance subsidiaries can pay;
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Licensing status of the company;
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Certain required methods of accounting pursuant to statutory accounting principles (“SAP”);
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Reserves for unearned premiums, losses and other purposes; and
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Assignment of residual market business and potential assessments for the provision of funds necessary for the settlement of covered claims under certain policies provided by impaired, insolvent or failed insurance companies.
Although we endeavor to maintain all required licenses and approvals our businesses may not fully comply with the wide variety of applicable laws and regulations or the relevant authority’s interpretation of the laws and regulations, which may change from time to time. Also, regulatory authorities have relatively broad discretion to grant, renew or revoke licenses and approvals. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, the insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or impose substantial fines. Further, insurance regulatory authorities have relatively broad discretion to issue orders of supervision, which permit such authorities to supervise the business and operations of an insurance company. As of December 31, 2013, no state insurance regulatory authority had imposed on us any material fines or revoked or suspended any of our licenses to conduct insurance business in any state or issued an order of supervision with respect to our insurance subsidiaries, which would have a material adverse effect on our results of operations or financial condition.
In addition, Lincoln Financial Advisors Corporation, Lincoln Financial Securities Corporation, Lincoln Financial Investment Services Corporation and Lincoln Financial Distributors, Inc., as well as our variable annuities and variable life insurance products, are subject to regulation and supervision by the SEC and FINRA. These laws and regulations generally grant supervisory agencies and self-regulatory organizations broad administrative powers, including the power to limit or restrict the subsidiaries from carrying on their businesses in the
event that they fail to comply with such laws and regulations. Many of the foregoing regulatory or governmental bodies have the authority to review our products and business practices and those of our agents and employees. In recent years, there has been increased scrutiny of our businesses by these bodies, which has included more extensive examinations, regular sweep inquiries and more detailed review of disclosure documents. These regulatory or governmental bodies may bring regulatory or other legal actions against us if, in their view, our practices, or those of our agents or employees, are improper. These actions can result in substantial fines, penalties or prohibitions or restrictions on our business activities and could have a material adverse effect on our business, results of operations or financial condition.
Implementation of the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act may subject us to substantial additional federal regulation, and we cannot predict the effect on our business, results of operations, cash flows or financial condition.
Since it was enacted in 2010, the Dodd-Frank Act has brought wide-ranging changes to the financial services industry, including changes to the rules governing derivatives; restrictions on proprietary trading by certain entities; a study by the SEC of the rules governing broker-dealers and investment advisers with respect to individual investors and investment advice, followed potentially by rulemaking; the creation of a new Federal Insurance Office within the U.S. Treasury to gather information and make recommendations regarding regulation of the insurance industry; the creation of a resolution authority to unwind failing institutions; the creation of a new Consumer Financial Protection Bureau to protect consumers of certain financial products; and changes to executive compensation and certain corporate governance rules, among other things.
The Dodd-Frank Act requires significant rulemaking across numerous agencies within the federal government, some of which has been implemented. The implementation of newly-adopted rules will continue into 2014, as will the rulemaking process. The ultimate impact of these provisions on our businesses (including product offerings), results of operations, liquidity and capital resources is currently indeterminable.
Attempts to mitigate the impact of Regulation XXX and Actuarial Guideline 38 may fail in whole or in part resulting in an adverse effect on our financial condition and results of operations.
The Valuation of Life Insurance Policies Model Regulation (“XXX”) requires insurers to establish additional statutory reserves for term life insurance policies with long-term premium guarantees and UL policies with secondary guarantees. In addition, AG38 clarifies the application of XXX with respect to certain UL insurance policies with secondary guarantees. Virtually all of our newly issued term and the majority of our newly issued UL insurance products are affected by XXX and AG38. The application of both AG38 and XXX involve numerous interpretations. If state insurance departments do not agree with our interpretations, we may have to increase reserves related to such policies. Further, during the third quarter of 2013, the NYDFS announced that it would not recognize the NAIC revisions to AG38 discussed above in applying the New York law governing the reserves to be held for UL and VUL products containing secondary guarantees. The change, effective as of December 31, 2013, impacts our New York-domiciled insurance subsidiary, LLANY, notwithstanding that LLANY discontinued the sale of these products in early 2013. We expect to phase in the increase in reserves over five years beginning with 2013. As such, we increased reserves by $90 million as of December 31, 2013. The additional increase in reserves over the next four years is subject to on-going discussions with the NYDFS. However, we do not expect the amount for each of the remaining years to exceed $90 million per year.
We have implemented, and plan to continue to implement, reinsurance and capital management transactions to mitigate the capital impact of XXX and AG38, including the use of letters of credit to support the reinsurance provided by captive reinsurance subsidiaries. These arrangements are subject to review by state insurance regulators and rating agencies. A subgroup of the NAIC has been studying the use of captives and special purpose vehicles to transfer insurance risk in relation to existing state laws and regulations. Therefore, we cannot provide assurance regarding what, if any, actions regulators, rating agencies, or others may take in response to the transactions we have executed to date or the impact of any such potential actions. In the event that the reinsurance credit provided by existing captive structures was no longer recognized or limited, it may have a material adverse effect on our liquidity and financial condition.
Likewise, we also cannot provide assurance that we will be able to continue to implement transactions or take other actions to mitigate the impact of XXX or AG38 on future sales of term and UL insurance products. If we are unable to continue to implement such solutions for any reason, we may have lower returns on such products sold than we currently anticipate and/or reduce our sales of these products.
Changes in U.S. federal income tax law could increase our tax costs and make the products that we sell less desirable.
Changes to the Internal Revenue Code, administrative rulings or court decisions could increase our effective tax rate, make our products less desirable and lower our net income. For example, in early March 2014, the Obama Administration is scheduled to release its fiscal year 2015 budget proposal that is expected to include proposals which, if enacted, would affect the taxation of life insurance companies and certain life insurance products. If enacted into law, the statutory changes contemplated by the Administration’s revenue proposals could, among other things, change the method used to determine the amount of dividend income received by a life insurance company on assets held in separate accounts used to support products, including variable life insurance and variable annuity contracts, that are eligible for the dividends-received deduction. The dividends-received deduction reduces the amount of dividend income subject to tax and is a significant component of the difference between our actual tax expense and expected amount determined using the federal statutory tax rate of 35%. Our income tax provision for the year ended December 31, 2013, included a separate account dividends-received deduction benefit of $145 million. In addition, the proposals could affect the treatment of COLI policies by limiting the availability of certain interest deductions for companies that purchase those policies. If proposals of this type were enacted, our sale of
COLI, variable annuities and variable life products could be adversely affected and our actual tax expense could increase, reducing earnings.
Legal and regulatory actions are inherent in our businesses and could result in financial losses or harm our businesses.
We are, and in the future may be, subject to legal and regulatory actions in the ordinary course of our insurance and retirement operations. Pending legal actions include proceedings relating to aspects of our businesses and operations that are specific to us and proceedings that are typical of the businesses in which we operate. Some of these proceedings have been brought on behalf of various alleged classes of complainants. In certain of these matters, the plaintiffs are seeking large and/or indeterminate amounts, including punitive or exemplary damages. Substantial legal liability in these or future legal or regulatory actions could have a material financial effect or cause significant harm to our reputation, which in turn could materially harm our business prospects. See Note 13 for a description of legal and regulatory proceedings and actions. These actions include ongoing audits on behalf of multiple states’ treasury and controllers’ offices for compliance with laws and regulations concerning the identification, reporting and escheatment of unclaimed contract benefits or abandoned funds.
Changes in accounting standards issued by the Financial Accounting Standards Board or other standard-setting bodies may adversely affect our financial statements.
Our financial statements are prepared in accordance with GAAP as identified in the Financial Accounting Standards Board (“FASB”) Accounting Standards CodificationTM (“ASC”). From time to time, we are required to adopt new or revised accounting standards or guidance that are incorporated into the FASB ASC. It is possible that future accounting standards we are required to adopt could change the current accounting treatment that we apply to our consolidated financial statements and that such changes could have a material adverse effect on our financial condition and results of operations.
Specifically, the FASB is working on several key projects, including those which could result in significant changes to how we account for and report our insurance contracts, financial instruments and deferred acquisition costs (“DAC”). Depending on the magnitude of the changes ultimately adopted by the FASB, the proposed changes to GAAP may impose special demands on issuers in the areas of employee training, internal controls, contract fulfillment and disclosure and may affect how we manage our business, as it may affect other business processes such as design of compensation plans, product design, etc. The effective dates and transition methods are not known; however, issuers may be required to or may choose to adopt the new standards retrospectively. In this case, the issuer will report results under the new accounting method as of the effective date, as well as for all periods presented. In addition, the SEC is considering whether and how to incorporate International Financial Reporting Standards into the U.S. financial reporting system.
Our domestic insurance subsidiaries are subject to SAP. Changes in the method of calculating reserves for our life insurance and annuity products under SAP may result in increased reserve requirements. For example, on September 12, 2012, the NAIC adopted revisions to AG38. Effective as of December 31, 2012, reserves on in-force business written between July 1, 2005, and December 31, 2012, are subject to a new minimum floor calculation. This floor calculation is based on assumptions that are generally consistent with the principles-based reserving framework developed by the NAIC. Reserves on new business written after December 31, 2012, are calculated using a modified formulaic approach that generally results in higher reserves.
Anti-takeover provisions could delay, deter or prevent our change in control, even if the change in control would be beneficial to LNC shareholders.
We are an Indiana corporation subject to Indiana state law. Certain provisions of Indiana law could interfere with or restrict takeover bids or other change in control events affecting us. Also, provisions in our articles of incorporation, bylaws and other agreements to which we are a party could delay, deter or prevent our change in control, even if a change in control would be beneficial to shareholders. In addition, under Indiana law, directors may, in considering the best interests of a corporation, consider the effects of any action on shareholders, employees, suppliers and customers of the corporation and the communities in which offices and other facilities are located, and other factors the directors consider pertinent. One statutory provision prohibits, except under specified circumstances, LNC from engaging in any business combination with any shareholder who owns 10% or more of our common stock (which shareholder, under the statute, would be considered an “interested shareholder”) for a period of five years following the time that such shareholder became an interested shareholder, unless such business combination is approved by the board of directors prior to such person becoming an interested shareholder. In addition, our articles of incorporation contain a provision requiring holders of at least three-fourths of our voting shares then outstanding and entitled to vote at an election of directors, voting together, to approve a transaction with an interested shareholder rather than the simple majority required under Indiana law.
In addition to the anti-takeover provisions of Indiana law, there are other factors that may delay, deter or prevent our change in control. As an insurance holding company, we are regulated as an insurance holding company and are subject to the insurance holding company acts of the states in which our insurance company subsidiaries are domiciled. The insurance holding company acts and regulations restrict the ability of any person to obtain control of an insurance company without prior regulatory approval. Under those statutes and regulations, without such approval (or an exemption), no person may acquire any voting security of a domestic insurance company, or an insurance holding company which controls an insurance company, or merge with such a holding company, if as a result of such transaction such person would “control” the insurance holding company or insurance company. “Control” is generally defined as the direct or indirect power to direct or cause the direction of the management and policies of a person and is presumed to exist if a person directly or indirectly owns or controls 10% or more of the voting securities of another person.
Market Conditions
Weak conditions in the global capital markets and the economy generally may materially adversely affect our business and results of operations.
Our results of operations are materially affected by conditions in the global capital markets and the economy generally, both in the U.S. and elsewhere around the world. Continued unconventional easing from the major central banks, ongoing global growth weakness and the ability of the U.S. government to proactively address the fiscal imbalance remain key challenges for markets and our business. These macro-economic conditions may have an adverse effect on us given our credit and equity market exposure. In the event of extreme prolonged market events, such as the global credit crisis and recession that occurred during 2008 and 2009, we could incur significant losses. Even in the absence of a market downturn, we are exposed to substantial risk of loss due to market volatility.
Factors such as consumer spending, business investment, domestic and foreign government spending, the volatility and strength of the capital markets, the potential for inflation or deflation and uncertainty over domestic and foreign government actions all affect the business and economic environment and, ultimately, the amount and profitability of our business. In an economic downturn characterized by higher unemployment, lower disposable income, lower corporate earnings, lower business investment and lower consumer spending, the demand for our financial and insurance products could be adversely affected. In addition, we may experience an elevated incidence of claims and lapses or surrenders of policies. Our contract holders may choose to defer paying insurance premiums or stop paying insurance premiums altogether. Adverse changes in the economy could affect earnings negatively and could have a material adverse effect on our business, results of operations and financial condition.
Changes in interest rates and sustained low interest rates may cause interest rate spreads to decrease and changes in interest rates may also result in increased contract withdrawals.
Interest rate fluctuations and/or a sustained period of low interest rates could negatively affect our profitability. Some of our products, principally fixed annuities, UL and the fixed portions of variable annuities and VUL, have interest rate guarantees that expose us to the risk that changes in interest rates will reduce our spread, or the difference between the amounts that we are required to pay under the contracts and the amounts we are able to earn on our general account investments intended to support our obligations under the contracts. Spreads are an important component of our net income. Declines in our spread or instances where the returns on our general account investments are not enough to support the interest rate guarantees on these products could have a material adverse effect on our businesses or results of operations.
In periods when interest rates are declining or remain at low levels, we may have to reinvest the cash we receive as interest or return of principal on our investments in lower yielding instruments reducing our spread. Moreover, borrowers may prepay fixed-income securities, commercial mortgages and mortgage-backed securities in our general account in order to borrow at lower market rates, which exacerbates this risk. Lowering interest crediting rates helps to mitigate the effect of spread compression on some of our products. However, because we are entitled to reset the interest rates on our fixed-rate annuities only at limited, pre-established intervals, and since many of our contracts have guaranteed minimum interest or crediting rates, our spreads could still decrease. As of December 31, 2013, 43% of our annuities business, 94% of our retirement plan services business and 97% of our life insurance business with guaranteed minimum interest or crediting rates are at their guaranteed minimums.
Our expectation for future spreads is an important component in the amortization of DAC and value of business acquired (“VOBA”) as it affects the future profitability of the business. Currently, new money rates continue to be at historically low levels. The Federal Reserve Board has moved from calendar-based guidance to macro-based thresholds and forecasts that point toward short-term rates likely remaining below 1% until the end of 2015. If interest rates were to remain low over a sustained period of time, this will put additional pressure on our spreads, potentially resulting in unlocking of our DAC and VOBA assets, thereby reducing net income in the affected reporting period. We would expect the effect to be most pronounced in our Life Insurance segment. For additional information on interest rate risks, see “Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk.”
A decline in market interest rates could also reduce our return on investments that do not support particular policy obligations. During periods of sustained lower interest rates, our recorded policy liabilities may not be sufficient to meet future policy obligations and may need to be strengthened, thereby reducing net income in the affected reporting period. Accordingly, declining interest rates may materially affect our results of operations, financial condition and cash flows and significantly reduce our profitability.
Increases in market interest rates may also negatively affect our profitability. In periods of rapidly increasing interest rates, we may not be able to replace the assets in our general account with higher yielding assets needed to fund the higher crediting rates necessary to keep our interest-sensitive products competitive. We, therefore, may have to accept a lower spread and thus lower profitability or face a decline in sales and greater loss of existing contracts and related assets. Increases in interest rates may cause increased surrenders and withdrawals of insurance products. In periods of increasing interest rates, policy loans and surrenders and withdrawals of life insurance policies and annuity contracts may increase as contract holders seek to buy products with perceived higher returns. This process may lead to a flow of cash out of our businesses. These outflows may require investment assets to be sold at a time when the prices of those assets are lower because of the increase in market interest rates, which may result in realized investment losses. A sudden demand among consumers to change product types or withdraw funds could lead us to sell assets at a loss to meet the demand for funds. Furthermore, unanticipated increases in withdrawals and termination may cause us to unlock our DAC and VOBA assets, which would reduce net income. An increase in market interest rates could also have a material adverse effect on the value of our investment portfolio, for example, by decreasing the estimated fair values of the fixed-income securities that comprise a substantial portion of our investment portfolio. An
increase in interest rates could also result in decreased fee income associated with a decline in the value of variable annuity account balances invested in fixed-income funds.
Because the equity markets and other factors impact the profitability and expected profitability of many of our products, changes in equity markets and other factors may significantly affect our business and profitability.
The fee income that we earn on variable annuities and VUL insurance policies is based primarily upon account values. Because strong equity markets result in higher account values, strong equity markets positively affect our net income through increased fee income. Conversely, a weakening of the equity markets results in lower fee income and may have a material adverse effect on our results of operations and capital resources.
The increased fee income resulting from strong equity markets increases the estimated gross profits (“EGPs”) from variable insurance products as do better than expected lapses, mortality rates and expenses. As a result, higher EGPs may result in lower net amortized costs related to DAC, deferred sales inducements (“DSI”), VOBA, deferred front-end loads (“DFEL”) and changes in future contract benefits. However, a decrease in the equity markets, as well as worse than expected increases in lapses, mortality rates and expenses, depending upon their significance, may result in higher net amortized costs associated with DAC, DSI, VOBA, DFEL and changes in future contract benefits and may have a material adverse effect on our results of operations and capital resources. If we were to have unlocked our reversion to the mean (“RTM”) assumption in the corridor as of December 31, 2013, we would have recorded favorable unlocking of approximately $350 million, pre-tax, for our Annuities segment, approximately $30 million, pre-tax, for our Retirement Plan Services segment and approximately $45 million, pre-tax, for our Life Insurance segment. For further information about our RTM process, see “Critical Accounting Policies and Estimates - DAC, VOBA, DSI and DFEL - Reversion to the Mean” in the MD&A.
Changes in the equity markets, interest rates and/or volatility affect the profitability of our products with guaranteed benefits; therefore, such changes may have a material adverse effect on our business and profitability.
Certain of our variable annuity products include guaranteed benefit riders. These include GDB, GWB and GIB riders. Our GWB, GIB and 4LATER® (a form of GIB rider) features have elements of both insurance benefits accounted for under the Financial Services - Insurance - Claim Costs and Liabilities for Future Policy Benefits Subtopic of the FASB ASC (“benefit reserves”) and embedded derivatives accounted for under the Derivatives and Hedging and the Fair Value Measurements and Disclosures Topics of the FASB ASC (“embedded derivative reserves”). We calculate the value of the embedded derivative reserve and the benefit reserves based on the specific characteristics of each guaranteed living benefit feature. The amount of reserves related to GDB for variable annuities is tied to the difference between the value of the underlying accounts and the GDB, calculated using a benefit ratio approach. The GDB reserves take into account the present value of total expected GDB payments, the present value of total expected GDB assessments over the life of the contract, claims paid to date and assessments to date. Reserves for our GIB and certain GWB with lifetime benefits are based on a combination of fair value of the underlying benefit and a benefit ratio approach that is based on the projected future payments in excess of projected future account values. The benefit ratio approach takes into account the present value of total expected GIB payments, the present value of total expected GIB assessments over the life of the contract, claims paid to date and assessments to date. The amount of reserves related to those GWB that do not have lifetime benefits is based on the fair value of the underlying benefit.
Both the level of expected payments and expected total assessments used in calculating the reserves not carried at fair value are affected by the equity markets. The liabilities related to fair value are impacted by changes in equity markets, interest rates, volatility, foreign exchange rates and credit spreads. Accordingly, strong equity markets, increases in interest rates and decreases in volatility will generally decrease the reserves calculated using fair value. Conversely, a decrease in the equity markets along with a decrease in interest rates and an increase in volatility will generally result in an increase in the reserves calculated using fair value.
Increases in reserves would result in a charge to our earnings in the quarter in which the increase occurs. Therefore, we maintain a customized dynamic hedge program that is designed to mitigate the risks associated with income volatility around the change in reserves on guaranteed benefits. However, the hedge positions may not be effective to exactly offset the changes in the carrying value of the guarantees due to, among other things, the time lag between changes in their values and corresponding changes in the hedge positions, high levels of volatility in the equity markets and derivatives markets, extreme swings in interest rates, contract holder behavior different than expected, a strategic decision to adjust the hedging strategy in reaction to extreme market conditions or inconsistencies between economic and statutory reserving guidelines and divergence between the performance of the underlying funds and hedging indices.
In addition, we remain liable for the guaranteed benefits in the event that derivative counterparties are unable or unwilling to pay, and we are also subject to the risk that the cost of hedging these guaranteed benefits increases, resulting in a reduction to net income. These, individually or collectively, may have a material adverse effect on net income, financial condition or liquidity.
Liquidity and Capital Position
Adverse capital and credit market conditions may affect our ability to meet liquidity needs, access to capital and cost of capital.
We need liquidity to pay our operating expenses, interest on our debt and dividends on our capital stock, to maintain our securities lending activities and to replace certain maturing liabilities. Without sufficient liquidity, we will be forced to curtail our operations, and our business will suffer. When considering our liquidity and capital position, it is important to distinguish between the needs of our insurance subsidiaries and the needs of the holding company.
For our insurance and other subsidiaries, the principal sources of liquidity are insurance premiums and fees, annuity considerations and cash flow from our investment portfolio and assets, consisting mainly of cash or assets that are readily convertible into cash.
In the event that current resources do not satisfy our needs, we may have to seek additional financing. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the volume of trading activities, the overall availability of credit to the financial services industry, our credit ratings and credit capacity, as well as the possibility that customers or lenders could develop a negative perception of our long- or short-term financial prospects if we incur large investment losses or if the level of our business activity decreases due to a market downturn. Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us. See “Review of Consolidated Financial Condition - Liquidity and Capital Resources - Sources of Liquidity and Cash Flow” in the MD&A for a description of our credit ratings. Our internal sources of liquidity may prove to be insufficient, and in such case, we may not be able to successfully obtain additional financing on favorable terms, or at all.
Disruptions, uncertainty or volatility in the capital and credit markets may also limit our access to capital required to operate our business, most significantly our insurance operations. Such market conditions may limit our ability to replace, in a timely manner, maturing liabilities; satisfy statutory capital requirements; generate fee income and market-related revenue to meet liquidity needs; and access the capital necessary to grow our business. As such, we may be forced to delay raising capital, issue shorter term securities than we prefer or bear an unattractive cost of capital which could decrease our profitability and significantly reduce our financial flexibility. Our results of operations, financial condition, cash flows and statutory capital position could be materially adversely affected by disruptions in the financial markets.
Because we are a holding company with no direct operations, the inability of our subsidiaries to pay dividends to us in sufficient amounts would harm our ability to meet our obligations.
We are a holding company and we have no direct operations. Our principal asset is the capital stock of our insurance subsidiaries. Our ability to meet our obligations for payment of interest and principal on outstanding debt obligations and to pay dividends to shareholders, repurchase our securities and pay corporate expenses depends primarily on the ability of our subsidiaries to pay dividends or to advance or repay funds to us. Under Indiana laws and regulations, our Indiana insurance subsidiaries, including LNL, our primary insurance subsidiary, may pay dividends to us without prior approval of the Indiana Insurance Commissioner (the “Commissioner”) up to a certain threshold, or must receive prior approval of the Commissioner to pay a dividend if such dividend, along with all other dividends paid within the preceding 12 consecutive months, exceed the statutory limitation. The current Indiana statutory limitation is the greater of 10% of the insurer’s contract holders’ surplus, as shown on its last annual statement on file with the Commissioner, or the insurer’s statutory net gain from operations for the previous 12 months, but in no event to exceed statutory unassigned surplus.
In addition, payments of dividends and advances or repayment of funds to us by our insurance subsidiaries are restricted by the applicable laws of their respective jurisdictions requiring that our insurance subsidiaries hold a specified amount of minimum reserves in order to meet future obligations on their outstanding policies. These regulations specify that the minimum reserves shall be calculated to be sufficient to meet future obligations, after giving consideration to future required premiums to be received, and are based on certain specified mortality and morbidity tables, interest rates and methods of valuation, which are subject to change. In order to meet their claims-paying obligations, our insurance subsidiaries regularly monitor their reserves to ensure we hold sufficient amounts to cover actual or expected contract and claims payments. At times, we may determine that reserves in excess of the minimum may be needed to ensure sufficiency.
Changes in, or reinterpretations of, these laws can constrain the ability of our subsidiaries to pay dividends or to advance or repay funds to us in sufficient amounts and at times necessary to meet our debt obligations and corporate expenses. Requiring our insurance subsidiaries to hold additional reserves has the potential to constrain their ability to pay dividends to the holding company. See “Legislative, Regulatory and Tax - Attempts to mitigate the impact of Regulation XXX and Actuarial Guideline 38 may fail in whole or in part resulting in an adverse effect on our financial condition and results of operations” above for additional information on potential changes in these laws.
The earnings of our insurance subsidiaries impact contract holders’ surplus. Lower earnings constrain the growth in our insurance subsidiaries’ capital, and therefore, can constrain the payment of dividends and advances or repayment of funds to us.
In addition, the amount of surplus that our insurance subsidiaries could pay as dividends is constrained by the amount of surplus they hold to maintain their financial strength ratings, to provide an additional layer of margin for risk protection and for future investment in our businesses. Notwithstanding the foregoing, we believe that our insurance subsidiaries have sufficient liquidity to meet their contract holder obligations and maintain their operations.
A decrease in the capital and surplus of our insurance subsidiaries may result in a downgrade to our credit and insurer financial strength ratings.
In any particular year, statutory surplus amounts and RBC ratios may increase or decrease depending on a variety of factors, including the amount of statutory income or losses generated by our insurance subsidiaries (which itself is sensitive to equity market and credit market conditions), the amount of additional capital our insurance subsidiaries must hold to support business growth, changes in reserving requirements, such as principles-based reserving, our inability to secure capital market solutions to provide reserve relief, such as issuing letters of credit to support captive reinsurance structures, changes in equity market levels, the value of certain fixed-income and equity securities in our investment portfolio, the value of certain derivative instruments that do not get hedge accounting treatment, changes in
interest rates and foreign currency exchange rates, as well as changes to the NAIC RBC formulas. The RBC ratio is also affected by the product mix of the in-force book of business (i.e., the amount of business without guarantees is not subject to the same level of reserves as the business with guarantees). Most of these factors are outside of our control. Our credit and insurer financial strength ratings are significantly influenced by the statutory surplus amounts and RBC ratios of our insurance company subsidiaries. The RBC ratio of LNL is an important factor in the determination of the credit and financial strength ratings of LNC and its subsidiaries. In addition, rating agencies may implement changes to their internal models that have the effect of increasing or decreasing the amount of statutory capital we must hold in order to maintain our current ratings. In addition, in extreme scenarios of equity market declines, the amount of additional statutory reserves that we are required to hold for our variable annuity guarantees may increase at a rate greater than the rate of change of the markets. Increases in reserves reduce the statutory surplus used in calculating our RBC ratios. To the extent that our statutory capital resources are deemed to be insufficient to maintain a particular rating by one or more rating agencies, we may seek to raise additional capital through public or private equity or debt financing, which may be on terms not as favorable as in the past.
Alternatively, if we were not to raise additional capital in such a scenario, either at our discretion or because we were unable to do so, our financial strength and credit ratings might be downgraded by one or more rating agencies. For more information on risks regarding our ratings, see “Covenants and Ratings - A downgrade in our financial strength or credit ratings could limit our ability to market products, increase the number or value of policies being surrendered and/or hurt our relationships with creditors” below.
An inability to access our credit facilities could result in a reduction in our liquidity and lead to downgrades in our credit and financial strength ratings.
We have a $2.5 billion unsecured facility, which expires on May 29, 2018. We also have other facilities that we enter into in the ordinary course of business. See “Review of Consolidated Financial Condition - Liquidity and Capital Resources - Sources of Liquidity and Cash Flow - Financing Activities” in the MD&A and Note 12.
We rely on our credit facilities as a potential source of liquidity. The availability of these facilities could be critical to our credit and financial strength ratings and our ability to meet our obligations as they come due in a market when alternative sources of credit are tight. The credit facilities contain certain administrative, reporting, legal and financial covenants. We must comply with covenants under our credit facilities, including a requirement to maintain a specified minimum consolidated net worth.
Our right to borrow funds under these facilities is subject to the fulfillment of certain important conditions, including our compliance with all covenants, and our ability to borrow under these facilities is also subject to the continued willingness and ability of the lenders that are parties to the facilities to provide funds. Our failure to comply with the covenants in the credit facilities or fulfill the conditions to borrowings, or the failure of lenders to fund their lending commitments (whether due to insolvency, illiquidity or other reasons) in the amounts provided for under the terms of the facilities, would restrict our ability to access these credit facilities when needed and, consequently, could have a material adverse effect on our financial condition and results of operations.
Assumptions and Estimates
As a result of changes in assumptions, estimates and methods in calculating reserves, our reserves for future policy benefits and claims related to our current and future business as well as businesses we may acquire in the future may prove to be inadequate.
We establish and carry, as a liability, reserves based on estimates of how much we will need to pay for future benefits and claims. For our insurance products, we calculate these reserves based on many assumptions and estimates, including, but not limited to, estimated premiums we will receive over the assumed life of the policies, the timing of the events covered by the insurance policies, the lapse rate of the policies, the amount of benefits or claims to be paid and the investment returns on the assets we purchase with the premiums we receive.
The sensitivity of our statutory reserves and surplus established for our variable annuity base contracts and riders to changes in the equity markets will vary depending on the magnitude of the decline. The sensitivity will be affected by the level of account values relative to the level of guaranteed amounts, product design and reinsurance. Statutory reserves for variable annuities depend upon the cumulative equity market impacts on the business in force, and therefore, result in non-linear relationships with respect to the level of equity market performance within any reporting period.
The assumptions and estimates we use in connection with establishing and carrying our reserves are inherently uncertain. Accordingly, we cannot determine with precision the ultimate amount or the timing of the payment of actual benefits and claims or whether the assets supporting the policy liabilities will grow to the level we assume prior to payment of benefits or claims. If our actual experience is different from our assumptions or estimates, our reserves may prove to be inadequate in relation to our estimated future benefits and claims. Increases in reserves have a negative effect on income from operations in the quarter incurred.
If our businesses do not perform well and/or their estimated fair values decline or the price of our common stock does not increase, we may be required to recognize an impairment of our goodwill or to establish a valuation allowance against the deferred income tax asset, which could have a material adverse effect on our results of operations and financial condition.
Goodwill represents the excess of the acquisition price incurred to acquire subsidiaries and other businesses over the fair value of their net assets as of the date of acquisition. As of December 31, 2013, we had a total of $2.3 billion of goodwill on our Consolidated Balance Sheets. We test goodwill at least annually for indications of value impairment with consideration given to financial performance, mergers and acquisitions and other relevant factors. In addition, certain events, including a significant and adverse change in legal factors,
accounting standards or the business climate, an adverse action or assessment by a regulator or unanticipated competition, would cause us to review the carrying amounts of goodwill for impairment. Impairment testing is performed based upon estimates of the fair value of the “reporting unit” to which the goodwill relates. Subsequent reviews of goodwill could result in an impairment of goodwill, and such write downs could have a material adverse effect on our net income and book value, but will not affect the statutory capital of our insurance subsidiaries. For more information on goodwill, see “Critical Accounting Policies and Estimates - Goodwill and Other Intangible Assets” in the MD&A and Note 10.
Deferred income tax represents the tax effect of the differences between the book and tax basis of assets and liabilities. Deferred tax assets are assessed periodically by management to determine if they are realizable. As of December 31, 2013, we had a deferred tax asset of $2.0 billion. Factors in management’s determination include the performance of the business, including the ability to generate capital gains from a variety of sources and tax planning strategies. If, based on available information, it is more likely than not that the deferred income tax asset will not be realized, then a valuation allowance must be established with a corresponding charge to net income. Such valuation allowance could have a material adverse effect on our results of operations and financial condition.
The determination of the amount of allowances and impairments taken on our investments is highly subjective and could materially impact our results of operations or financial condition.
The determination of the amount of allowances and impairments varies by investment type and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. Management updates its evaluations regularly and reflects changes in allowances and impairments in operations as such evaluations are revised. There can be no assurance that our management has accurately assessed the level of impairments taken and allowances reflected in our financial statements. Furthermore, additional impairments may need to be taken or allowances provided for in the future. Historical trends may not be indicative of future impairments or allowances.
We regularly review our available-for-sale (“AFS”) securities for declines in fair value that we determine to be other-than-temporary. For an equity security, if we do not have the ability and intent to hold the security for a sufficient period of time to allow for a recovery in value, we conclude that an other-than-temporary impairment (“OTTI”) has occurred, and the amortized cost of the equity security is written down to the current fair value, with a corresponding change to realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss). When assessing our ability and intent to hold the equity security to recovery, we consider, among other things, the severity and duration of the decline in fair value of the equity security as well as the cause of decline, a fundamental analysis of the liquidity, business prospects and overall financial condition of the issuer.
For a debt security, if we intend to sell a security or it is more likely than not we will be required to sell a debt security before recovery of its amortized cost basis and the fair value of the debt security is below amortized cost, we conclude that an OTTI has occurred and the amortized cost is written down to current fair value, with a corresponding charge to realized loss on our Consolidated Statements of Comprehensive Income (Loss). If we do not intend to sell a debt security or it is not more likely than not we will be required to sell a debt security before recovery of its amortized cost basis but the present value of the cash flows expected to be collected is less than the amortized cost of the debt security (referred to as the credit loss), we conclude that an OTTI has occurred and the amortized cost is written down to the estimated recovery value with a corresponding charge to realized loss on our Consolidated Statements of Comprehensive Income (Loss), as this is also deemed the credit portion of the OTTI. The remainder of the decline to fair value is recorded in other comprehensive income (loss) (“OCI”) to unrealized OTTI on AFS securities on our Consolidated Statements of Stockholders’ Equity, as this is considered a noncredit (i.e., recoverable) impairment. Net OTTI recognized in net income (loss) was $70 million, $153 million and $124 million, pre-tax, for the years ended December 31, 2013, 2012, and 2011, respectively. The portion of OTTI recognized in OCI was $10 million and $106 million, pre-tax, for the years ended December 31, 2013 and 2012, respectively.
Related to our unrealized losses, we establish deferred tax assets for the tax benefit we may receive in the event that losses are realized. The realization of significant realized losses could result in an inability to recover the tax benefits and may result in the establishment of valuation allowances against our deferred tax assets. Realized losses or impairments may have a material adverse impact on our results of operations and financial condition.
Our valuation of fixed maturity, equity and trading securities may include methodologies, estimations and assumptions which are subject to differing interpretations and could result in changes to investment valuations that may materially adversely affect our results of operations or financial condition.
Fixed maturity, equity and trading securities and short-term investments, which are reported at fair value on our Consolidated Balance Sheets, represented the majority of our total cash and invested assets. Pursuant to the Fair Value Measurements and Disclosures Topics of the FASB ASC, we have categorized these securities into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The determination of fair values in the absence of quoted market prices is based on valuation methodologies, securities we deem to be comparable and assumptions deemed appropriate given the circumstances. The fair value estimates are made at a specific point in time, based on available market information and judgments about financial instruments, including estimates of the timing and amounts of expected future cash flows and the credit standing of the issuer or counterparty. Factors considered in estimating fair value include coupon rate, maturity, estimated duration, call provisions, sinking fund requirements, credit rating, industry sector of the issuer and quoted market prices of comparable securities. The use of different methodologies and assumptions may have a material effect on the estimated fair value amounts.
During periods of market disruption, including periods of significantly increasing/decreasing or high/low interest rates, rapidly widening credit spreads or illiquidity, it may be difficult to value certain securities if trading becomes less frequent and/or market data becomes less observable. There may be certain asset classes that were in active markets with significant observable data that become illiquid due to the current financial environment. In such cases, more securities may fall to Level 3 and thus require more subjectivity and management judgment. As such, valuations may include inputs and assumptions that are less observable or require greater estimation, as well as valuation methods which are more sophisticated or require greater estimation, thereby resulting in values which may be less than the value at which the investments may be ultimately sold. Further, rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of securities as reported within our consolidated financial statements and the period-to-period changes in value could vary significantly. Decreases in value may have a material adverse effect on our results of operations or financial condition.
Significant adverse mortality experience may result in the loss of, or higher prices for, reinsurance.
We reinsure a significant amount of the mortality risk on fully underwritten, newly issued, individual life insurance contracts. We regularly review retention limits for continued appropriateness and they may be changed in the future. If we were to experience adverse mortality or morbidity experience, a significant portion of that would be reimbursed by our reinsurers. Prolonged or severe adverse mortality or morbidity experience could result in increased reinsurance costs, and ultimately, reinsurers being unwilling to offer coverage. If we are unable to maintain our current level of reinsurance or purchase new reinsurance protection at comparable rates to what we are paying currently, we may have to accept an increase in our net exposures or revise our pricing to reflect higher reinsurance premiums or both. If this were to occur, we may be exposed to reduced profitability and cash flow strain or we may not be able to price new business at competitive rates.
Catastrophes may adversely impact liabilities for contract holder claims.
Our insurance operations are exposed to the risk of catastrophic mortality, such as a pandemic, an act of terrorism, natural disaster or other event that causes a large number of deaths or injuries. Significant influenza pandemics have occurred three times in the last century, but the likelihood, timing or severity of a future pandemic cannot be predicted. Additionally, the impact of climate change could cause changes in weather patterns, resulting in more severe and more frequent natural disasters such as forest fires, hurricanes, tornados, floods and storm surges. In our group insurance operations, a localized event that affects the workplace of one or more of our group insurance customers could cause a significant loss due to mortality or morbidity claims. These events could cause a material adverse effect on our results of operations in any period and, depending on their severity, could also materially and adversely affect our financial condition.
The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Pandemics, natural disasters and man-made catastrophes, including terrorism, may produce significant damage in larger areas, especially those that are heavily populated. Claims resulting from natural or man-made catastrophic events could cause substantial volatility in our financial results for any fiscal quarter or year and could materially reduce our profitability or harm our financial condition. Also, catastrophic events could harm the financial condition of our reinsurers and thereby increase the probability of default on reinsurance recoveries. Accordingly, our ability to write new business could also be affected.
Consistent with industry practice and accounting standards, we establish liabilities for claims arising from a catastrophe only after assessing the probable losses arising from the event. We cannot be certain that the liabilities we have established or applicable reinsurance will be adequate to cover actual claim liabilities, and a catastrophic event or multiple catastrophic events could have a material adverse effect on our business, results of operations and financial condition.
Operational Matters
Our enterprise risk management policies and procedures may leave us exposed to unidentified or unanticipated risk, which could negatively affect our businesses or result in losses.
We have devoted significant resources to develop our enterprise risk management policies and procedures and expect to continue to do so in the future. Nonetheless, our policies and procedures to identify, monitor and manage risks may not be fully effective. Many of our methods of managing risk and exposures are based upon our use of observed historical market behavior or statistics based on historical models. As a result, these methods may not predict future exposures, which could be significantly greater than the historical measures indicate, such as the risk of pandemics causing a large number of deaths. Other risk management methods depend upon the evaluation of information regarding markets, clients, catastrophe occurrence or other matters that is publicly available or otherwise accessible to us, which may not always be accurate, complete, up-to-date or properly evaluated. Management of operational, legal and regulatory risks requires, among other things, policies and procedures to record properly and verify a large number of transactions and events, and these policies and procedures may not be fully effective.
We face risks of non-collectibility of reinsurance and increased reinsurance rates, which could materially affect our results of operations.
We follow the insurance practice of reinsuring with other insurance and reinsurance companies a portion of the risks under the policies written by our insurance subsidiaries (known as “ceding”). As of December 31, 2013, we ceded $313.2 billion of life insurance in force to reinsurers for reinsurance protection. Although reinsurance does not discharge our subsidiaries from their primary obligation to pay contract holders for losses insured under the policies we issue, reinsurance does make the assuming reinsurer liable to the insurance subsidiaries for the reinsured portion of the risk. As of December 31, 2013, we had $6.0 billion of reinsurance receivables from reinsurers for paid and unpaid losses, for which they are obligated to reimburse us under our reinsurance contracts. Of this amount, $2.6 billion related to the sale of our reinsurance business to Swiss Re in 2001 through an indemnity reinsurance agreement. Swiss Re has funded a
trust to support this business. The balance in the trust changes as a result of ongoing reinsurance activity and was $2.2 billion as of December 31, 2013. Furthermore, $867 million of the Swiss Re treaties are funds withheld structures where we have a right of offset on assets backing the reinsurance receivables.
The balance of the reinsurance is due from a diverse group of reinsurers. The collectibility of reinsurance is largely a function of the solvency of the individual reinsurers. We perform annual credit reviews on our reinsurers, focusing on, among other things, financial capacity, stability, trends and commitment to the reinsurance business. We also require assets in trust, letters of credit or other acceptable collateral to support balances due from reinsurers not authorized to transact business in the applicable jurisdictions. Despite these measures, a reinsurer’s insolvency, inability or unwillingness to make payments under the terms of a reinsurance contract, especially Swiss Re, could have a material adverse effect on our results of operations and financial condition.
Reinsurers also may attempt to increase rates with respect to our existing reinsurance arrangements. The ability of our reinsurers to increase rates depends upon the terms of each reinsurance contract. An increase in reinsurance rates may affect the profitability of our insurance business.
Competition for our employees is intense, and we may not be able to attract and retain the highly skilled people we need to support our business.
Our success depends, in large part, on our ability to attract and retain key people. Intense competition exists for the key employees with demonstrated ability, and we may be unable to hire or retain such employees. The unexpected loss of services of one or more of our key personnel could have a material adverse effect on our operations due to their skills, knowledge of our business, their years of industry experience and the potential difficulty of promptly finding qualified replacement employees. We compete with other financial institutions primarily on the basis of our products, compensation, support services and financial condition. Sales in our businesses and our results of operations and financial condition could be materially adversely affected if we are unsuccessful in attracting and retaining key employees, including financial advisors, wholesalers and other employees, as well as independent distributors of our products.
We may not be able to protect our intellectual property and may be subject to infringement claims.
We rely on a combination of contractual rights and copyright, trademark, patent and trade secret laws to establish and protect our intellectual property. Although we use a broad range of measures to protect our intellectual property rights, third parties may infringe or misappropriate our intellectual property. We may have to litigate to enforce and protect our copyrights, trademarks, patents, trade secrets and know-how or to determine their scope, validity or enforceability, which represents a diversion of resources that may be significant in amount and may not prove successful. Additionally, complex legal and factual determinations and evolving laws and court interpretations make the scope of protection afforded our intellectual property uncertain, particularly in relation to our patents. While we believe our patents provide us with a competitive advantage, we cannot be certain that any issued patents will be interpreted with sufficient breadth to offer meaningful protection. In addition, our issued patents may be successfully challenged, invalidated, circumvented or found unenforceable so that our patent rights would not create an effective competitive barrier. The loss of intellectual property protection or the inability to secure or enforce the protection of our intellectual property assets could have a material adverse effect on our business and our ability to compete.
We also may be subject to costly litigation in the event that another party alleges our operations or activities infringe upon another party’s intellectual property rights. Third parties may have, or may eventually be issued, patents that could be infringed by our products, methods, processes or services. Any party that holds such a patent could make a claim of infringement against us. We may also be subject to claims by third parties for breach of copyright, trademark, trade secret or license usage rights. Any such claims and any resulting litigation could result in significant liability for damages. If we were found to have infringed a third-party patent or other intellectual property rights, we could incur substantial liability, and in some circumstances could be enjoined from providing certain products or services to our customers or utilizing and benefiting from certain methods, processes, copyrights, trademarks, trade secrets or licenses, or alternatively could be required to enter into costly licensing arrangements with third parties, all of which could have a material adverse effect on our business, results of operations and financial condition.
Our information systems may experience interruptions or breaches in security.
Our information systems are critical to the operation of our business. We collect, process, maintain, retain and distribute large amounts of personal financial and health information and other confidential and sensitive data about our customers in the ordinary course of our business. Our business therefore depends on our customers’ willingness to entrust us with their personal information. Any failure, interruption or breach in security could result in disruptions to our critical systems and adversely affect our customer relationships. While we employ a robust and tested information security program, there can be no assurance that any such failure, interruption or security breach will not occur or, if any does occur, that it can be sufficiently remediated. To date, we have not had a material security breach. The occurrence of any such failure, interruption or security breach of our systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and financial liability.
Covenants and Ratings
A downgrade in our financial strength or credit ratings could limit our ability to market products, increase the number or value of policies being surrendered and/or hurt our relationships with creditors.
Nationally recognized rating agencies rate the financial strength of our principal insurance subsidiaries and rate our debt. Ratings are not recommendations to buy our securities. Each of the rating agencies reviews its ratings periodically, and our current ratings may not be maintained in the future.
Our financial strength ratings, which are intended to measure our ability to meet contract holder obligations, are an important factor affecting public confidence in most of our products and, as a result, our competitiveness. A downgrade of the financial strength rating of one of our principal insurance subsidiaries could affect our competitive position in the insurance industry by making it more difficult for us to market our products as potential customers may select companies with higher financial strength ratings and by leading to increased withdrawals by current customers seeking companies with higher financial strength ratings. This could lead to a decrease in fees as net outflows of assets increase, and therefore, result in lower fee income. Furthermore, sales of assets to meet customer withdrawal demands could also result in losses, depending on market conditions. The interest rates we pay on our borrowings are largely dependent on our credit ratings. A downgrade of our debt ratings could affect our ability to raise additional debt, including bank lines of credit, with terms and conditions similar to our current debt, and accordingly, likely increase our cost of capital.
All of our ratings and ratings of our principal insurance subsidiaries are subject to revision or withdrawal at any time by the rating agencies, and therefore, no assurance can be given that our principal insurance subsidiaries or we can maintain these ratings. See “Item 1. Business - Financial Strength Ratings” and “Liquidity and Capital Resources - Sources of Liquidity and Cash Flow” in the MD&A for a description of our ratings.
We will be required to pay interest on our capital securities with proceeds from the issuance of qualifying securities if we fail to achieve capital adequacy or net income and stockholders’ equity levels.
As of December 31, 2013, we had approximately $1.2 billion in principal amount of capital securities outstanding. All of the capital securities contain covenants that require us to make interest payments in accordance with an alternative coupon satisfaction mechanism (“ACSM”) if we determine that one of the following triggers exists as of the 30th day prior to an interest payment date, or the “determination date”:
1.
LNL’s RBC ratio is less than 175% (based on the most recent annual financial statement filed with the State of Indiana); or
2. (i) The sum of our consolidated net income for the four trailing fiscal quarters ending on the quarter that is two quarters prior to the most recently completed quarter prior to the determination date is zero or negative, and (ii) our consolidated stockholders’ equity (excluding accumulated OCI and any increase in stockholders’ equity resulting from the issuance of preferred stock during a quarter), or “adjusted stockholders’ equity,” as of (x) the most recently completed quarter and (y) the end of the quarter that is two quarters before the most recently completed quarter, has declined by 10% or more as compared to the quarter that is ten fiscal quarters prior to the last completed quarter, or the “benchmark quarter.”
The ACSM would generally require us to use commercially reasonable efforts to satisfy our obligation to pay interest in full on the capital securities with the net proceeds from sales of our common stock and warrants to purchase our common stock with an exercise price greater than the market price. We would have to utilize the ACSM until the trigger events above no longer existed, and, in the case of test 2 above, until our adjusted stockholders’ equity amount increased or declined by less than 10% as compared to the adjusted stockholders’ equity at the end of the benchmark quarter for each interest payment date as to which interest payment restrictions were imposed by test 2 above.
If we were required to utilize the ACSM and were successful in selling sufficient shares of common stock or warrants to satisfy the interest payment, we would dilute the current holders of our common stock. Furthermore, while a trigger event is occurring and if we do not pay accrued interest in full, we may not, among other things, pay dividends on or repurchase our capital stock. Our failure to pay interest pursuant to the ACSM will not result in an event of default with respect to the capital securities, nor will a nonpayment of interest, unless it lasts for ten consecutive years, although such breaches may result in monetary damages to the holders of the capital securities.
The calculations of RBC, net income (loss) and adjusted stockholders’ equity are subject to adjustments and the capital securities are subject to additional terms and conditions as further described in supplemental indentures filed as exhibits to our Forms 8-K filed on March 13, 2007, May 17, 2006, and April 20, 2006.
Certain blocks of our insurance business purchased from third-party insurers under indemnity reinsurance agreements may require us to place assets in trust, secure letters of credit or return the business, if the financial strength ratings and/or capital ratios of certain insurance subsidiaries are not maintained at specified levels.
Under certain indemnity reinsurance agreements, two of our insurance subsidiaries, LNL and LLANY, provide 100% indemnity reinsurance for the business assumed; however, the third-party insurer, or the “cedent,” remains primarily liable on the underlying insurance business. Under these types of agreements, as of December 31, 2013, we held statutory reserves of $6.5 billion. These indemnity reinsurance arrangements require that our subsidiary, as the reinsurer, maintain certain insurer financial strength ratings and capital ratios. If these ratings or capital ratios are not maintained, depending upon the reinsurance agreement, the cedent may recapture the business, or require us to place assets in trust or provide letters of credit at least equal to the relevant statutory reserves. Under the LNL reinsurance arrangement, we held approximately $3.7 billion of statutory reserves. LNL must maintain an A.M. Best financial strength rating of at least B++, an S&P financial strength rating of at least BBB- and a Moody’s financial strength rating of at least Baa3. This arrangement may require LNL to place assets in trust equal to the relevant statutory reserves. Under LLANY’s largest indemnity
reinsurance arrangement, we held approximately $2.0 billion of statutory reserves as of December 31, 2013. LLANY must maintain an A.M. Best financial strength rating of at least B+, an S&P financial strength rating of at least BB+ and a Moody’s financial strength rating of at least Ba1, as well as maintain an RBC ratio of at least 160% or an S&P capital adequacy ratio of 100%, or the cedent may recapture the business. Under two other LLANY arrangements, by which we established $839 million of statutory reserves, LLANY must maintain an A.M. Best financial strength rating of at least B++, an S&P financial strength rating of at least BBB- and a Moody’s financial strength rating of at least Baa3. One of these arrangements also requires LLANY to maintain an RBC ratio of at least 185% or an S&P capital adequacy ratio of 115%. Each of these arrangements may require LLANY to place assets in trust equal to the relevant statutory reserves. As of December 31, 2013, LNL’s and LLANY’s RBC ratios exceeded the required ratio. See “Item 1. Business - Financial Strength Ratings” for a description of our financial strength ratings.
If the cedent recaptured the business, LNL and LLANY would be required to release reserves and transfer assets to the cedent. Such a recapture could adversely impact our future profits. Alternatively, if LNL and LLANY established a security trust for the cedent, the ability to transfer assets out of the trust could be severely restricted, thus negatively impacting our liquidity.
Investments
Some of our investments are relatively illiquid and are in asset classes that have been experiencing significant market valuation fluctuations.
We hold certain investments that may lack liquidity, such as privately placed fixed maturity securities, mortgage loans, policy loans and other limited partnership interests. These asset classes represented 25% of the carrying value of our total cash and invested assets as of December 31, 2013.
If we require significant amounts of cash on short notice in excess of normal cash requirements or are required to post or return collateral in connection with our investment portfolio, derivatives transactions or securities lending activities, we may have difficulty selling these investments in a timely manner, be forced to sell them for less than we otherwise would have been able to realize, or both.
The reported value of our relatively illiquid types of investments, our investments in the asset classes described in the paragraph above and, at times, our high quality, generally liquid asset classes, do not necessarily reflect the lowest current market price for the asset. If we were forced to sell certain of our assets in the current market, there can be no assurance that we would be able to sell them for the prices at which we have recorded them and we might be forced to sell them at significantly lower prices.
We invest a portion of our invested assets in investment funds, many of which make private equity investments. The amount and timing of income from such investment funds tends to be uneven as a result of the performance of the underlying investments, including private equity investments. The timing of distributions from the funds, which depends on particular events relating to the underlying investments, as well as the funds’ schedules for making distributions and their needs for cash, can be difficult to predict. As a result, the amount of income that we record from these investments can vary substantially from quarter to quarter.
Defaults on our mortgage loans and write downs of mortgage equity may adversely affect our profitability.
Our mortgage loans face default risk and are principally collateralized by commercial properties. The performance of our mortgage loan investments may fluctuate in the future. In addition, some of our mortgage loan investments have balloon payment maturities. An increase in the default rate of our mortgage loan investments could have a material adverse effect on our business, results of operations and financial condition.
Further, any geographic or sector exposure in our mortgage loans may have adverse effects on our investment portfolios and consequently on our consolidated results of operations or financial condition. While we seek to mitigate this risk by having a broadly diversified portfolio, events or developments that have a negative effect on any particular geographic region or sector may have a greater adverse effect on the investment portfolios to the extent that the portfolios are exposed.
The difficulties faced by other financial institutions could adversely affect us.
We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks and other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty. In addition, with respect to secured transactions, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due to it. We also may have exposure to these financial institutions in the form of unsecured debt instruments, derivative transactions and/or equity investments. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, downturns in the economy or real estate values, operational failure, corporate governance issues or other reasons. A downturn in the U.S. and other economies could result in increased impairments. There can be no assurance that any such losses or impairments to the carrying value of these assets would not materially and adversely affect our business and results of operations.
Our requirements to post collateral or make payments related to declines in market value of specified assets may adversely affect our liquidity and expose us to counterparty credit risk.
Many of our transactions with financial and other institutions, including settling futures positions, specify the circumstances under which the parties are required to post collateral. The amount of collateral we may be required to post under these agreements may increase
under certain circumstances, which could adversely affect our liquidity. In addition, under the terms of some of our transactions, we may be required to make payments to our counterparties related to any decline in the market value of the specified assets.
Our investments are reflected within our consolidated financial statements utilizing different accounting bases, and, accordingly, there may be significant differences between cost and fair value that are not recorded in our consolidated financial statements.
Our principal investments are in fixed maturity and equity securities, mortgage loans on real estate, policy loans, short-term investments, derivative instruments, limited partnerships and other invested assets. The carrying value of such investments is as follows:
·
Fixed maturity and equity securities are classified as AFS, except for those designated as trading securities, and are reported at their estimated fair value. The difference between the estimated fair value and amortized cost of such securities (i.e., unrealized investment gains and losses) is recorded as a separate component of OCI, net of adjustments to DAC, contract holder related amounts and deferred income taxes;
·
Fixed maturity and equity securities designated as trading securities are recorded at fair value with subsequent changes in fair value recognized in realized gain (loss). However, in certain cases, the trading securities support reinsurance arrangements. In those cases, offsetting the changes to fair value of the trading securities are corresponding changes in the fair value of the embedded derivative liability associated with the underlying reinsurance arrangement. In other words, the investment results for the trading securities, including gains and losses from sales, are passed directly to the reinsurers through the contractual terms of the reinsurance arrangements. These types of securities represent 59% of our trading securities;
·
Short-term investments include investments with remaining maturities of one year or less, but greater than three months, at the time of acquisition and are stated at amortized cost, which approximates fair value;
·
Also, mortgage loans on real estate are carried at unpaid principal balances, adjusted for any unamortized premiums or discounts and deferred fees or expenses, net of valuation allowances;
·
Policy loans are carried at unpaid principal balances;
·
Real estate joint ventures and other limited partnership interests are carried using the equity method of accounting; and
·
Other invested assets consist principally of derivatives with positive fair values. Derivatives are carried at fair value with changes in fair value reflected in income from non-qualifying derivatives and derivatives in fair value hedging relationships. Derivatives in cash flow hedging relationships are reflected as a separate component of other comprehensive income or loss.
Investments not carried at fair value on our consolidated financial statements, principally, mortgage loans, policy loans and real estate, may have fair values which are substantially higher or lower than the carrying value reflected on our consolidated financial statements. In addition, unrealized losses are not reflected in net income unless we realize the losses by either selling the security at below amortized cost or determine that the decline in fair value is deemed to be other-than-temporary (i.e., impaired). Each of such asset classes is regularly evaluated for impairment under the accounting guidance appropriate to the respective asset class.
Competition
Intense competition could negatively affect our ability to maintain or increase our profitability.
Our businesses are intensely competitive. We compete based on a number of factors, including name recognition, service, the quality of investment advice, investment performance, product features, price, perceived financial strength and claims-paying and credit ratings. Our competitors include insurers, broker-dealers, financial advisors, asset managers and other financial institutions. A number of our business units face competitors that have greater market share, offer a broader range of products or have higher financial strength or credit ratings than we do.
In recent years, there has been substantial consolidation and convergence among companies in the financial services industry resulting in increased competition from large, well-capitalized financial services firms. Many of these firms also have been able to increase their distribution systems through mergers or contractual arrangements. Furthermore, larger competitors may have lower operating costs and an ability to absorb greater risk while maintaining their financial strength ratings, thereby allowing them to price their products more competitively. We expect consolidation to continue and perhaps accelerate in the future, thereby increasing competitive pressure on us.
Our sales representatives are not captive and may sell products of our competitors.
We sell our annuity and life insurance products through independent sales representatives. These representatives are not captive, which means they may also sell our competitors’ products. If our competitors offer products that are more attractive than ours, or pay higher commission rates to the sales representatives than we do, these representatives may concentrate their efforts in selling our competitors’ products instead of ours.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2013, LNC and our subsidiaries owned or leased approximately 3.3 million square feet of office space. We leased 0.1 million square feet of office space in Philadelphia, Pennsylvania for LFN. We leased 0.2 million square feet of office space in Radnor, Pennsylvania for our corporate center and for LFD. We owned or leased 0.8 million square feet of office space in Fort Wayne, Indiana, primarily for our Annuities and Retirement Plan Services segments. We owned or leased 0.8 million square feet of office space in Greensboro, North Carolina, primarily for our Life Insurance segment. We owned or leased 0.3 million square feet of office space in Omaha, Nebraska, primarily for our Group Protection segment. An additional 1.1 million square feet of office space is owned or leased in other U.S. cities for branch offices. As provided in Note 13, the rental expense on operating leases for office space and equipment was $44 million for 2013. This discussion regarding properties does not include information on investment properties.
Item 3. Legal Proceedings
For information regarding legal proceedings, see “Regulatory and Litigation Matters” in Note 13, which is incorporated herein by reference.
Item 4. Mine Safety Disclosures
Not applicable.
Executive Officers of the Registrant
Executive Officers of the Registrant as of February 21, 2014, were as follows:
						
						
						
						
						
						
						
						
Name
						
Age (1)
						
Position with LNC and Business Experience During the Past Five Years
						
						
						
						
Dennis R. Glass
						
						
President, Chief Executive Officer and Director (since July 2007). President, Chief Operating Officer and Director (April 2006 - July 2007). President and Chief Executive Officer, Jefferson-Pilot (2004 - April 2006). President and Chief Operating Officer, Jefferson-Pilot (2001 - April 2006).
						
						
						
						
Lisa M. Buckingham
						
						
Executive Vice President, Chief Human Resources Officer (since March 2011) Senior Vice President, Chief Human Resources Officer (December 2008 - March 2011). Senior Vice President, Global Talent, Thomson Reuters, a provider of information and services for businesses and professionals (April 2008 - November 2008). Senior Vice President, Human Resources, Thomson Corporation (2002 - April 2008).
						
						
						
						
Adam G. Ciongoli
						
						
Executive Vice President and General Counsel (since May 2012). General Counsel, Willis Group Holdings Plc, a global insurance broker (March 2007 - May 2012).
						
						
						
						
Ellen Cooper
						
						
Executive Vice President and Chief Investment Officer (since August 2012). Managing Director, Goldman Sachs Asset Management, an asset management firm (July 2008 - August 2012). Chief Risk Officer, Aegon USA, a provider of life insurance, pensions and asset management (May 2006 - June 2008). Principal, Ernst & Young LLP (May 2005 - April 2006). Senior Manager, Ernst & Young LLP (June 2000 - May 2005).
						
						
						
						
Charles C. Cornelio
						
						
President, Retirement Plan Services (since December 2009). Executive Vice President, Chief Administrative Officer (November 2008 - December 2009). Senior Vice President, Shared Services and Chief Information Officer (April 2006 - November 2008). Executive Vice President, Technology and Insurance Services, Jefferson-Pilot (2004 - April 2006). Senior Vice President, Jefferson-Pilot (1997 - 2004).
						
						
						
						
Randal J. Freitag
						
						
Executive Vice President and Chief Financial Officer (since January 2011). Senior Vice President, Chief Risk Officer (2007 - December 2010). Senior Vice President, Chief Risk Officer and Treasurer (2007 - October 2009). Senior Vice President, Product Risk and Profitability and Actuary (2004 - 2007).
						
						
						
						
Wilford H. Fuller
						
						
President, Lincoln Financial Group Distribution (2) (since October 2012). President and CEO, Lincoln Financial Distributors (2) (since February 2009). Head, Distribution, Global Wealth Management, Merrill Lynch & Co., a diversified financial services company (2007 - 2009). Head, Distribution, Managed Solutions Group, Merrill Lynch & Co. (2005 - 2007). National Sales Manager, Merrill Lynch & Co. (2000 - 2005).
						
						
						
						
Mark E. Konen
						
						
President, Insurance and Retirement Solutions (since July 2008 and February 2009 respectively). President, Individual Markets (April 2006 - July 2008). Executive Vice President, Life and Annuity Manufacturing, Jefferson-Pilot (2004 - April 2006). Executive Vice President, Product/Financial Management, Jefferson-Pilot (2002 - 2004).
(1)Age shown is based on the officer’s age as of February 21, 2014.
(2)Denotes an affiliate of LNC.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) Stock Market and Dividend Information
Our common stock is traded on the New York stock exchange under the symbol LNC. As of January 27, 2014, the number of shareholders of record of our common stock was 8,262. The dividend on our common stock is declared each quarter by our Board of Directors if we are eligible to pay dividends and the Board determines that we will pay dividends. In determining dividends, the Board takes into consideration items such as our financial condition, including current and expected earnings, projected cash flows and anticipated financing needs. For potential restrictions on our ability to pay dividends, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” and Note 20 in the accompanying notes to the consolidated financial statements presented in “Item 8. Financial Statements and Supplementary Data,” as well as in “Part I - Item 1. Business - Regulatory - Insurance Regulation - Restriction on Subsidiaries’ Dividends and Other Payments.” The following presents the high and low prices for our common stock on the New York Stock Exchange during the periods indicated and the dividends declared per share during such periods:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
1st Qtr
						
2nd Qtr
						
3rd Qtr
						
4th Qtr
						
						
						
						
						
						
						
						
						
						
						
						
						
High
$
33.66 				
						
$
36.75 				
						
$
45.46 				
						
$
52.27 				
						
Low
						
26.69 				
						
						
30.04 				
						
						
36.72 				
						
						
40.84 				
						
Dividend declared
						
0.120 				
						
						
0.120 				
						
						
0.120 				
						
						
0.160 				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
High
$
27.54 				
						
$
26.83 				
						
$
26.10 				
						
$
26.53 				
						
Low
						
19.38 				
						
						
19.04 				
						
						
19.17 				
						
						
22.51 				
						
Dividend declared
						
0.080 				
						
						
0.080 				
						
						
0.080 				
						
						
0.120 				
						
For information on securities authorized for issuance under equity compensation plans, see “Part III - Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” which is incorporated herein by reference.
(b) Not Applicable
(c) Issuer Purchases of Equity Securities
The following summarizes purchases of equity securities by the issuer during the quarter ended December 31, 2013 (dollars in millions, except per share data):
						
						
						
						
						
						
						
						
						
						
						
						
						
(a) Total
						
						
						
						
(c) Total Number
						
(d) Approximate Dollar
						
Number
						
(b) Average
						
of Shares (or Units)
						
Value of Shares (or
						
of Shares
						
Price Paid
						
Purchased as Part of
						
Units) that May Yet Be
						
(or Units)
						
per Share
						
Publicly Announced
						
Purchased Under the
Period
						
Purchased (1)
						
(or Unit)
						
Plans or Programs (2)
						
Plans or Programs (2)(3)
10/1/13 - 10/31/13
						
						
-
						
$
-
						
						
-
						
$
				
						
						
						
						
						
						
						
						
						
						
						
						
11/1/13 - 11/30/13
						
						
800,492 				
						
						
43.89 				
						
						
697,789 				
						
						
				
						
						
						
						
						
						
						
						
						
						
						
						
12/1/13 - 12/31/13
						
						
1,273,050 				
						
						
51.09 				
						
						
1,273,050 				
						
						
				
(1)Includes the deemed surrender of 102,703 shares of common stock to pay the exercise price in connection with the exercise of stock options. For the quarter ended December 31, 2013, there were 1,970,839 shares purchased as part of publicly announced plans or programs.
(2)On August 8, 2012, our Board of Directors authorized an increase in our securities repurchase authorization, bringing the total aggregate repurchase authorization to $1.0 billion. As of December 31, 2013, our remaining security repurchase authorization was $358 million. The security repurchase authorization does not have an expiration date. The amount and timing of share repurchase depends on key capital ratios, rating agency expectations, the generation of free cash flow and an evaluation of the costs and benefits associated with alternative uses of capital.
(3)As of the last day of the applicable month.
Item 6. Selected Financial Data
The following selected financial data (in millions, except per share data) should be read in conjunction with “
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the financial condition as of December 31, 2013, compared with December 31, 2012, and the results of operations in 2013 and 2012, compared with the immediately preceding year of Lincoln National Corporation and its consolidated subsidiaries. Unless otherwise stated or the context otherwise requires, “LNC,” “Lincoln,” “Company,” “we,” “our” or “us” refers to Lincoln National Corporation and its consolidated subsidiaries. The MD&A is provided as a supplement to, and should be read in conjunction with our consolidated financial statements and the accompanying notes to the consolidated financial statements (“Notes”) presented in “Part II - Item 8. Financial Statements and Supplementary Data,” as well as “Part I - Item 1A. Risk Factors” above.
In this report, in addition to providing consolidated revenues and net income (loss), we also provide segment operating revenues and income (loss) from operations because we believe they are meaningful measures of revenues and the profitability of our operating segments. Financial information that follows is presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”), unless otherwise indicated. See Note 1 for a discussion of GAAP.
Operating revenues and income (loss) from operations are the financial performance measures we use to evaluate and assess the results of our segments. Accordingly, we define and report operating revenues and income (loss) from operations by segment in Note 22. Our management believes that operating revenues and income (loss) from operations explain the results of our ongoing businesses in a manner that allows for a better understanding of the underlying trends in our current businesses because the excluded items are unpredictable and not necessarily indicative of current operating fundamentals or future performance of the business segments, and, in many instances, decisions regarding these items do not necessarily relate to the operations of the individual segments. In addition, we believe that our definitions of operating revenues and income (loss) from operations will provide investors with a more valuable measure of our performance because it better reveals trends in our business.
FORWARD-LOOKING STATEMENTS - CAUTIONARY LANGUAGE
Certain statements made in this report and in other written or oral statements made by us or on our behalf are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). A forward-looking statement is a statement that is not a historical fact and, without limitation, includes any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain words like: “believe,” “anticipate,” “expect,” “estimate,” “project,” “will,” “shall” and other words or phrases with similar meaning in connection with a discussion of future operating or financial performance. In particular, these include statements relating to future actions, trends in our businesses, prospective services or products, future performance or financial results and the outcome of contingencies, such as legal proceedings. We claim the protection afforded by the safe harbor for forward-looking statements provided by the PSLRA.
Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the results contained in the forward-looking statements. Risks and uncertainties that may cause actual results to vary materially, some of which are described within the forward-looking statements, include, among others:
·
Deterioration in general economic and business conditions that may affect account values, investment results, guaranteed benefit liabilities, premium levels, claims experience and the level of pension benefit costs, funding and investment results;
·
Adverse global capital and credit market conditions, including another shutdown of the U.S. federal government and/or failure to reach agreement on the U.S. federal government’s debt ceiling, could affect our ability to raise capital, if necessary, and may cause us to realize impairments on investments and certain intangible assets, including goodwill and the valuation allowance against deferred tax assets, which may reduce future earnings and/or affect our financial condition and ability to raise additional capital or refinance existing debt as it matures;
·
Because of our holding company structure, the inability of our subsidiaries to pay dividends to the holding company in sufficient amounts could harm the holding company’s ability to meet its obligations;
·
Legislative, regulatory or tax changes, both domestic and foreign, that affect the cost of, or demand for, our subsidiaries’ products, the required amount of reserves and/or surplus, or otherwise affect our ability to conduct business, including changes to statutory reserve requirements related to secondary guarantee universal life and annuities; regulations regarding captive reinsurance arrangements; restrictions on revenue sharing and 12b-1 payments; and the potential for U.S. federal tax reform;
·
Actions taken by reinsurers to increase rates on in-force business;
·
Declines in or sustained low interest rates causing a reduction in investment income, the interest margins of our businesses, estimated gross profits (“EGPs”) and demand for our products;
·
Rapidly increasing interest rates causing contract holders to surrender life insurance and annuity policies, thereby causing realized investment losses, and reduced hedge performance related to variable annuities;
·
Uncertainty about the effect of rules and regulations to be promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) on us and the economy and the financial services sector in particular;
·
The initiation of legal or regulatory proceedings against us, and the outcome of any legal or regulatory proceedings, such as: adverse actions related to present or past business practices common in businesses in which we compete; adverse decisions in significant actions including, but not limited to, actions brought by federal and state authorities and class action cases; new decisions that result in changes in law; and unexpected trial court rulings;
·
A decline in the equity markets causing a reduction in the sales of our subsidiaries’ products, a reduction of asset-based fees that our subsidiaries charge on various investment and insurance products, an acceleration of the net amortization of deferred acquisition
costs (“DAC”), value of business acquired (“VOBA”), deferred sales inducements (“DSI”) and deferred front-end loads (“DFEL”) and an increase in liabilities related to guaranteed benefit features of our subsidiaries’ variable annuity products;
·
Ineffectiveness of our risk management policies and procedures, including various hedging strategies used to offset the effect of changes in the value of liabilities due to changes in the level and volatility of the equity markets and interest rates;
·
A deviation in actual experience regarding future persistency, mortality, morbidity, interest rates or equity market returns from the assumptions used in pricing our subsidiaries’ products, in establishing related insurance reserves and in the net amortization of DAC, VOBA, DSI and DFEL, which may reduce future earnings;
·
Changes in GAAP, including convergence with International Financial Reporting Standards (“IFRS”), that may result in unanticipated changes to our net income;
·
Lowering of one or more of our debt ratings issued by nationally recognized statistical rating organizations and the adverse effect such action may have on our ability to raise capital and on our liquidity and financial condition;
·
Lowering of one or more of the insurer financial strength ratings of our insurance subsidiaries and the adverse effect such action may have on the premium writings, policy retention, profitability of our insurance subsidiaries and liquidity;
·
Significant credit, accounting, fraud, corporate governance or other issues that may adversely affect the value of certain investments in our portfolios, as well as counterparties to which we are exposed to credit risk, requiring that we realize losses on investments;
·
Inability to protect our intellectual property rights or claims of infringement of the intellectual property rights of others;
·
Interruption in telecommunication, information technology or other operational systems or failure to safeguard the confidentiality or privacy of sensitive data on such systems;
·
The effect of acquisitions and divestitures, restructurings, product withdrawals and other unusual items;
·
The adequacy and collectibility of reinsurance that we have purchased;
·
Acts of terrorism, a pandemic, war or other man-made and natural catastrophes that may adversely affect our businesses and the cost and availability of reinsurance;
·
Competitive conditions, including pricing pressures, new product offerings and the emergence of new competitors, that may affect the level of premiums and fees that our subsidiaries can charge for their products;
·
The unknown effect on our subsidiaries’ businesses resulting from changes in the demographics of their client base, as aging baby-boomers move from the asset-accumulation stage to the asset-distribution stage of life; and
·
Loss of key management, financial planners or wholesalers.
The risks included here are not exhaustive. Other sections of this report, quarterly reports on Form 10-Q, current reports on Form 8-K and other documents filed with the Securities and Exchange Commission (“SEC”) include additional factors that could affect our businesses and financial performance, including “Part I - Item 1A. Risk Factors” and “
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We analyze and manage the risks arising from market exposures of financial instruments, as well as other risks, in an integrated asset-liability management process that considers diversification. By aggregating the potential effect of market and other risks on the entire enterprise, we estimate, review and in some cases manage the risk to our earnings and shareholder value. We have exposures to several market risks including interest rate risk, equity market risk, default risk, credit risk and, to a lesser extent, foreign currency exchange risk. The exposures of financial instruments to market risks, and the related risk management processes, are most important to our business where most of the invested assets support accumulation and investment-oriented insurance products. As an important element of our integrated asset-liability management processes, we use derivatives to minimize the effects of changes in interest levels, the shape of the yield curve, currency movements and volatility. In this context, derivatives serve to minimize interest rate risk by mitigating the effect of significant increases in interest rates on our earnings. Additional market exposures exist in our other general account insurance products and in our debt structure and derivatives positions. Our primary sources of market risk are substantial, relatively rapid and sustained increases or decreases in interest rates or a sharp drop in equity market values. These market risks are discussed in detail in the following pages and should be read in conjunction with our consolidated financial statements and the accompanying notes to the consolidated financial statements (“Notes”) presented in “
Item 8. Financial Statements and Supplementary Data
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting for Lincoln National Corporation to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with United States of America generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of internal control over financial reporting effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Management assessed our internal control over financial reporting as of December 31, 2013, the end of our fiscal year. Management based its assessment on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework). Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment.
Based on the assessment, management has concluded that our internal control over financial reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with United States of America generally accepted accounting principles.
The effectiveness of our internal control over financial reporting as of December 31, 2013, has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included on the following page.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Lincoln National Corporation
We have audited Lincoln National Corporation’s (the “Corporation”) internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the “COSO criteria”). The Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Corporation’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Lincoln National Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Lincoln National Corporation as of December 31, 2013 and 2012, and the related consolidated statements of comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013 and our report dated February 25, 2014, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
February 25, 2014
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Lincoln National Corporation
We have audited the accompanying consolidated balance sheets of Lincoln National Corporation (the “Corporation”) as of December 31, 2013 and 2012, and the related consolidated statements of comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013. Our audits also included the financial statement schedules listed in the Index at Item 15(a)(2). These financial statements and schedules are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lincoln National Corporation at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, effective January 1, 2012, and retrospectively applied to all periods presented, the Corporation changed its method of accounting for costs relating to the acquisition of insurance contracts.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Lincoln National Corporation’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated February 25, 2014, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
February 25, 2014
			 		
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
						
						
						
						
						
						
						
						
As of December 31,
						
						
						
ASSETS
						
						
						
						
						
						
						
Investments:
						
						
						
						
						
						
						
Available-for-sale securities, at fair value:
						
						
						
						
						
						
						
Fixed maturity securities (amortized cost: 2013 - $76,353; 2012 - $72,718)
						
$
80,078 				
						
						
$
82,036 				
Variable interest entities' fixed maturity securities (amortized cost: 2013 - $682; 2012 - $677)
						
						
				
						
						
						
				
Equity securities (cost: 2013 - $182; 2012 - $137)
						
						
				
						
						
						
				
Trading securities
						
						
2,282 				
						
						
						
2,554 				
Mortgage loans on real estate
						
						
7,210 				
						
						
						
7,029 				
Real estate
						
						
				
						
						
						
				
Policy loans
						
						
2,677 				
						
						
						
2,766 				
Derivative investments
						
						
				
						
						
						
2,652 				
Other investments
						
						
1,218 				
						
						
						
1,098 				
Total investments
						
						
95,291 				
						
						
						
99,065 				
Cash and invested cash
						
						
2,364 				
						
						
						
4,230 				
Deferred acquisition costs and value of business acquired
						
						
8,886 				
						
						
						
6,667 				
Premiums and fees receivable
						
						
				
						
						
						
				
Accrued investment income
						
						
1,029 				
						
						
						
1,015 				
Reinsurance recoverables
						
						
6,041 				
						
						
						
6,449 				
Funds withheld reinsurance assets
						
						
				
						
						
						
				
Goodwill
						
						
2,273 				
						
						
						
2,273 				
Other assets
						
						
2,730 				
						
						
						
2,580 				
Separate account assets
						
						
117,135 				
						
						
						
95,373 				
Total assets
						
$
236,945 				
						
						
$
218,869 				
						
						
						
						
						
						
						
LIABILITIES AND STOCKHOLDERS' EQUITY
						
						
						
						
						
						
						
Liabilities
						
						
						
						
						
						
						
Future contract benefits
						
$
17,251 				
						
						
$
19,780 				
Other contract holder funds
						
						
74,548 				
						
						
						
72,218 				
Short-term debt
						
						
				
						
						
						
				
Long-term debt
						
						
5,320 				
						
						
						
5,439 				
Reinsurance related embedded derivatives
						
						
				
						
						
						
				
Funds withheld reinsurance liabilities
						
						
				
						
						
						
				
Deferred gain on business sold through reinsurance
						
						
				
						
						
						
				
Payables for collateral on investments
						
						
3,238 				
						
						
						
4,181 				
Variable interest entities' liabilities
						
						
				
						
						
						
				
Other liabilities
						
						
4,253 				
						
						
						
5,103 				
Separate account liabilities
						
						
117,135 				
						
						
						
95,373 				
Total liabilities
						
						
223,493 				
						
						
						
203,896 				
						
						
						
						
						
						
						
Contingencies and Commitments (See Note 13)
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Stockholders' Equity
						
						
						
						
						
						
						
Preferred stock - 10,000,000 shares authorized; Series A - 9,532 shares issued and
						
						
						
						
						
						
						
outstanding as of December 31, 2012
						
						
-
						
						
						
-
Common stock - 800,000,000 shares authorized; 262,896,701 and 271,402,586 shares
						
						
						
						
						
						
						
issued and outstanding as of December 31, 2013 and 2012, respectively
						
						
6,876 				
						
						
						
7,121 				
Retained earnings
						
						
5,013 				
						
						
						
4,044 				
Accumulated other comprehensive income (loss)
						
						
1,563 				
						
						
						
3,808 				
Total stockholders' equity
						
						
13,452 				
						
						
						
14,973 				
Total liabilities and stockholders' equity
						
$
236,945 				
						
						
$
218,869 				
See accompanying Notes to Consolidated Financial Statements
			
		
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions, except per share data)
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
Revenues
						
						
						
						
						
						
						
						
Insurance premiums
$
2,687 				
						
$
2,462 				
						
$
2,294 				
Fee income
						
4,069 				
						
						
3,736 				
						
						
3,437 				
Net investment income
						
4,754 				
						
						
4,698 				
						
						
4,652 				
Realized gain (loss):
						
						
						
						
						
						
						
						
Total other-than-temporary impairment losses on securities
						
(80) 				
						
						
(259) 				
						
						
(169) 				
Portion of loss recognized in other comprehensive income
						
				
						
						
				
						
						
				
Net other-than-temporary impairment losses on securities recognized in earnings
						
(70) 				
						
						
(153) 				
						
						
(124) 				
Realized gain (loss), excluding other-than-temporary impairment losses on securities
						
(65) 				
						
						
				
						
						
(170) 				
Total realized gain (loss)
						
(135) 				
						
						
				
						
						
(294) 				
Amortization of deferred gain on business sold through reinsurance
						
				
						
						
				
						
						
				
Other revenues
						
				
						
						
				
						
						
				
Total revenues
						
11,969 				
						
						
11,535 				
						
						
10,641 				
Expenses
						
						
						
						
						
						
						
						
Interest credited
						
2,510 				
						
						
2,470 				
						
						
2,488 				
Benefits
						
3,862 				
						
						
3,541 				
						
						
3,345 				
Commissions and other expenses
						
3,701 				
						
						
3,683 				
						
						
3,264 				
Interest and debt expense
						
				
						
						
				
						
						
				
Impairment of intangibles
						
-
						
						
-
						
						
				
Total expenses
						
10,338 				
						
						
9,967 				
						
						
10,138 				
Income (loss) from continuing operations before taxes
						
1,631 				
						
						
1,568 				
						
						
				
Federal income tax expense (benefit)
						
				
						
						
				
						
						
				
Income (loss) from continuing operations
						
1,244 				
						
						
1,286 				
						
						
				
Income (loss) from discontinued operations, net of federal income taxes
						
-
						
						
				
						
						
(8) 				
Net income (loss)
						
1,244 				
						
						
1,313 				
						
						
				
Other comprehensive income (loss), net of tax:
						
						
						
						
						
						
						
						
Unrealized gain (loss) on available-for-sale securities
						
(2,457) 				
						
						
1,119 				
						
						
1,771 				
Unrealized other-than-temporary impairment on available-for-sale securities
						
				
						
						
				
						
						
				
Unrealized gain (loss) on derivative instruments
						
				
						
						
				
						
						
				
Foreign currency translation adjustment
						
(1) 				
						
						
(5) 				
						
						
-
Funded status of employee benefit plans
						
				
						
						
(32) 				
						
						
(97) 				
Total other comprehensive income (loss), net of tax
						
(2,245) 				
						
						
1,128 				
						
						
1,829 				
Comprehensive income (loss)
$
(1,001) 				
						
$
2,441 				
						
$
2,050 				
						
						
						
						
						
						
						
						
Earnings (Loss) Per Common Share - Basic
						
						
						
						
						
						
						
						
Income (loss) from continuing operations
$
4.68 				
						
$
4.58 				
						
$
0.75 				
Income (loss) from discontinued operations
						
-
						
						
0.10 				
						
						
(0.03) 				
Net income (loss)
$
4.68 				
						
$
4.68 				
						
$
0.72 				
						
						
						
						
						
						
						
						
Earnings (Loss) Per Common Share - Diluted
						
						
						
						
						
						
						
						
Income (loss) from continuing operations
$
4.52 				
						
$
4.47 				
						
$
0.72 				
Income (loss) from discontinued operations
						
-
						
						
0.09 				
						
						
(0.03) 				
Net income (loss)
$
4.52 				
						
$
4.56 				
						
$
0.69 				
See accompanying Notes to Consolidated Financial Statements
			
		
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions, except per share data)
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
						
						
						
						
						
						
						
						
Common Stock
						
						
						
						
						
						
						
						
Balance as of beginning-of-year
$
7,121 				
						
$
7,590 				
						
$
8,124 				
Stock compensation/issued for benefit plans
						
				
						
						
				
						
						
				
Effect of amendment to deferred compensation plans
						
-
						
						
-
						
						
(6) 				
Retirement of common stock/cancellation of shares
						
(314) 				
						
						
(492) 				
						
						
(545) 				
Balance as of end-of-year
						
6,876 				
						
						
7,121 				
						
						
7,590 				
						
						
						
						
						
						
						
						
Retained Earnings
						
						
						
						
						
						
						
						
Balance as of beginning-of-year
						
4,044 				
						
						
2,831 				
						
						
2,711 				
Net income (loss)
						
1,244 				
						
						
1,313 				
						
						
				
Retirement of common stock
						
(136) 				
						
						
-
						
						
(30) 				
Dividends declared: Common (2013 - $0.520; 2012 - $0.360; 2011 - $0.230)
						
(139) 				
						
						
(100) 				
						
						
(71) 				
Balance as of end-of-year
						
5,013 				
						
						
4,044 				
						
						
2,831 				
						
						
						
						
						
						
						
						
Accumulated Other Comprehensive Income (Loss)
						
						
						
						
						
						
						
						
Balance as of beginning-of-year
						
3,808 				
						
						
2,680 				
						
						
				
Other comprehensive income (loss), net of tax
						
(2,245) 				
						
						
1,128 				
						
						
1,829 				
Balance as of end-of-year
						
1,563 				
						
						
3,808 				
						
						
2,680 				
Total stockholders' equity as of end-of-year
$
13,452 				
						
$
14,973 				
						
$
13,101 				
See accompanying Notes to Consolidated Financial Statements
			
		
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
Cash Flows from Operating Activities
						
						
						
						
						
						
						
						
Net income (loss)
$
1,244 				
						
$
1,313 				
						
$
				
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
						
(529) 				
						
						
(219) 				
						
						
(152) 				
Trading securities purchases, sales and maturities, net
						
				
						
						
				
						
						
				
Change in premiums and fees receivable
						
(40) 				
						
						
				
						
						
(73) 				
Change in accrued investment income
						
(14) 				
						
						
(34) 				
						
						
(48) 				
Change in future contract benefits and other contract holder funds
						
(634) 				
						
						
(131) 				
						
						
				
Change in reinsurance related assets and liabilities
						
				
						
						
				
						
						
(66) 				
Change in federal income tax accruals
						
				
						
						
				
						
						
				
Realized (gain) loss
						
				
						
						
(74) 				
						
						
				
(Income) loss attributable to equity method investments
						
(86) 				
						
						
(125) 				
						
						
(90) 				
(Gain) loss on early extinguishment of debt
						
-
						
						
				
						
						
				
Amortization of deferred gain on business sold through reinsurance
						
(74) 				
						
						
(74) 				
						
						
(75) 				
Impairment of intangibles
						
-
						
						
-
						
						
				
(Gain) loss on disposal of discontinued operations
						
-
						
						
				
						
						
				
Other
						
(31) 				
						
						
				
						
						
(24) 				
Net cash provided by (used in) operating activities
						
				
						
						
1,269 				
						
						
1,276 				
						
						
						
						
						
						
						
						
Cash Flows from Investing Activities
						
						
						
						
						
						
						
						
Purchases of available-for-sale securities
						
(10,880) 				
						
						
(11,161) 				
						
						
(10,702) 				
Sales of available-for-sale securities
						
				
						
						
1,134 				
						
						
1,497 				
Maturities of available-for-sale securities
						
6,171 				
						
						
5,974 				
						
						
5,324 				
Purchases of other investments
						
(2,543) 				
						
						
(2,345) 				
						
						
(3,282) 				
Sales or maturities of other investments
						
2,610 				
						
						
2,276 				
						
						
3,094 				
Increase (decrease) in payables for collateral on investments
						
(943) 				
						
						
				
						
						
2,074 				
Other
						
(100) 				
						
						
(183) 				
						
						
(130) 				
Net cash provided by (used in) investing activities
						
(4,710) 				
						
						
(3,857) 				
						
						
(2,125) 				
						
						
						
						
						
						
						
						
Cash Flows from Financing Activities
						
						
						
						
						
						
						
						
Payment of long-term debt, including current maturities
						
-
						
						
(320) 				
						
						
(525) 				
Issuance of long-term debt, net of issuance costs
						
				
						
						
				
						
						
				
Increase (decrease) in commercial paper, net
						
-
						
						
-
						
						
(100) 				
Deposits of fixed account values, including the fixed portion of variable
						
10,492 				
						
						
10,694 				
						
						
10,953 				
Withdrawals of fixed account values, including the fixed portion of variable
						
(5,296) 				
						
						
(5,691) 				
						
						
(5,050) 				
Transfers to and from separate accounts, net
						
(3,001) 				
						
						
(2,091) 				
						
						
(2,325) 				
Common stock issued for benefit plans and excess tax benefits
						
				
						
						
(1) 				
						
						
				
Repurchase of common stock
						
(450) 				
						
						
(492) 				
						
						
(575) 				
Dividends paid to common and preferred stockholders
						
(128) 				
						
						
(91) 				
						
						
(61) 				
Net cash provided by (used in) financing activities
						
2,045 				
						
						
2,308 				
						
						
2,618 				
						
						
						
						
						
						
						
						
Net increase (decrease) in cash and invested cash, including discontinued operations
						
(1,866) 				
						
						
(280) 				
						
						
1,769 				
Cash and invested cash, including discontinued operations, as of beginning-of-year
						
4,230 				
						
						
4,510 				
						
						
2,741 				
Cash and invested cash, including discontinued operations, as of end-of-year
$
2,364 				
						
$
4,230 				
						
$
4,510 				
			 		
See accompanying Notes to Consolidated Financial Statements
			
		
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies
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 22 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 UL, term life insurance, employer-sponsored retirement plans and services, and group life, disability and dental.
Basis of Presentation
The accompanying consolidated financial statements are prepared in accordance with United States of America generally accepted accounting principles (“GAAP”). Certain GAAP policies, which significantly affect the determination of financial condition, results of operations and cash flows, are summarized below.
Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of LNC and all other entities in which we have a controlling financial interest and any variable interest entities (“VIEs”) in which we are the primary beneficiary. Entities in which we do not have a controlling financial interest and do not exercise significant management influence over the operating and financing decisions are reported using the equity method. All material inter-company accounts and transactions have been eliminated in consolidation.
Our involvement with VIEs is primarily to invest in assets that allow us to gain exposure to a broadly diversified portfolio of asset classes. A VIE is an entity that does not have sufficient equity to finance its own activities without additional financial support or where investors lack certain characteristics of a controlling financial interest. We assess our contractual, ownership or other interests in a VIE to determine if our interest participates in the variability the VIE was designed to absorb and pass onto variable interest holders. We perform an ongoing qualitative assessment of our variable interests in VIEs to determine whether we have a controlling financial interest and would therefore be considered the primary beneficiary of the VIE. If we determine we are the primary beneficiary of a VIE, we consolidate the assets and liabilities of the VIE in our consolidated financial statements.
Accounting Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Those estimates are inherently subject to change and actual results could differ from those estimates. Included among the material (or potentially material) reported amounts and disclosures that require extensive use of estimates are: fair value of certain invested assets and derivatives, asset valuation allowances, deferred acquisition costs (“DAC”), value of business acquired (“VOBA”), deferred sales inducements (“DSI”), goodwill, future contract benefits, other contract holder funds including deferred front-end loads (“DFEL”), pension plans, stock-based incentive compensation, income taxes and the potential effects of resolving litigated matters.
Business Combinations
We use the acquisition method of accounting for all business combination transactions, and accordingly, recognize the fair values of assets acquired, liabilities assumed and any noncontrolling interests in our consolidated financial statements. The allocation of fair values may be subject to adjustment after the initial allocation for up to a one-year period as more information becomes available relative to the fair values as of the acquisition date. The consolidated financial statements include the results of operations of any acquired company since the acquisition date.
Fair Value Measurement
Our measurement of fair value is based on assumptions used by market participants in pricing the asset or liability, which may include inherent risk, restrictions on the sale or use of an asset or non-performance risk, which would include our own credit risk. Our estimate of an exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability (“exit price”) in the principal market, or the most advantageous market in the absence of a principal market, for that asset or liability, as opposed to the price that would be paid to acquire the asset or receive a liability (“entry price”). Pursuant to the Fair Value Measurements and Disclosures Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards CodificationTM (“ASC”),
we categorize our financial instruments carried at fair value into a three-level fair value hierarchy, based on the priority of inputs to the respective valuation technique. The three-level hierarchy for fair value measurement is defined as follows:
·
Level 1 - inputs to the valuation methodology are quoted prices available in active markets for identical investments as of the reporting date, except for large holdings subject to “blockage discounts” that are excluded;
·
Level 2 - inputs to the valuation methodology are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value can be determined through the use of models or other valuation methodologies; and
·
Level 3 - inputs to the valuation methodology are unobservable inputs in situations where there is little or no market activity for the asset or liability, and we make estimates and assumptions related to the pricing of the asset or liability, including assumptions regarding risk.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.
When a determination is made to classify an asset or liability within Level 3 of the fair value hierarchy, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement. Because certain securities trade in less liquid or illiquid markets with limited or no pricing information, the determination of fair value for these securities is inherently more difficult. However, Level 3 fair value investments may include, in addition to the unobservable or Level 3 inputs, observable components, which are components that are actively quoted or can be validated to market-based sources.
Available-For-Sale Securities - Fair Valuation Methodologies and Associated Inputs
Securities classified as available-for-sale (“AFS”) consist of fixed maturity and equity securities and are stated at fair value with unrealized gains and losses included within accumulated other comprehensive income (loss) (“AOCI”), net of associated DAC, VOBA, DSI, future contract benefits, other contract holder funds and deferred income taxes.
We measure the fair value of our securities classified as AFS based on assumptions used by market participants in pricing the security. The most appropriate valuation methodology is selected based on the specific characteristics of the fixed maturity or equity security, and we consistently apply the valuation methodology to measure the security’s fair value. Our fair value measurement is based on a market approach that utilizes prices and other relevant information generated by market transactions involving identical or comparable securities. Sources of inputs to the market approach primarily include third-party pricing services, independent broker quotations or pricing matrices. We do not adjust prices received from third parties; however, we do analyze the third-party pricing services’ valuation methodologies and related inputs and perform additional evaluation to determine the appropriate level within the fair value hierarchy.
The observable and unobservable inputs to our valuation methodologies are based on a set of standard inputs that we generally use to evaluate all of our AFS securities. Observable inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. In addition, market indicators, industry and economic events are monitored, and further market data is acquired if certain triggers are met. For certain security types, additional inputs may be used, or some of the inputs described above may not be applicable. For private placement securities, we use pricing matrices that utilize observable pricing inputs of similar public securities and Treasury yields as inputs to the fair value measurement. Depending on the type of security or the daily market activity, standard inputs may be prioritized differently or may not be available for all AFS securities on any given day. For broker-quoted only securities, non-binding quotes from market makers or broker-dealers are obtained from sources recognized as market participants. For securities trading in less liquid or illiquid markets with limited or no pricing information, we use unobservable inputs to measure fair value.
The following summarizes our fair valuation methodologies and associated inputs, which are particular to the specified security type and are in addition to the defined standard inputs to our valuation methodologies for all of our AFS securities discussed above:
·
Corporate bonds and U.S. government bonds - We also use Trade Reporting and Compliance EngineTM reported tables for our corporate bonds and vendor trading platform data for our U.S. government bonds.
·
Mortgage- and asset-backed securities - We also utilize additional inputs, which include new issues data, monthly payment information and monthly collateral performance, including prepayments, severity, delinquencies, step-down features and over collateralization features for each of our mortgage-backed securities (“MBS”), which include collateralized mortgage obligations and mortgage pass through securities backed by residential mortgages (“RMBS”), commercial mortgage-backed securities (“CMBS”), collateralized loan obligations (“CLOs”) and collateralized debt obligations (“CDOs”).
·
State and municipal bonds - We also use additional inputs that include information from the Municipal Securities Rule Making Board, as well as material event notices, new issue data, issuer financial statements and Municipal Market Data benchmark yields for our state and municipal bonds.
·
Hybrid and redeemable preferred and equity securities - We also utilize additional inputs of exchange prices (underlying and common stock of the same issuer) for our hybrid and redeemable preferred and equity securities.
In order to validate the pricing information and broker-dealer quotes, we employ, where possible, procedures that include comparisons with similar observable positions, comparisons with subsequent sales and observations of general market movements for those security classes. We have policies and procedures in place to review the process that is utilized by our third-party pricing service and the output that is provided to us by the pricing service. On a periodic basis, we test the pricing for a sample of securities to evaluate the inputs and assumptions used by the pricing service, and we perform a comparison of the pricing service output to an alternative pricing source. We also evaluate prices provided by our primary pricing service to ensure that they are not stale or unreasonable by reviewing the prices for unusual changes from period to period based on certain parameters or for lack of change from one period to the next.
AFS Securities - Evaluation for Recovery of Amortized Cost
We regularly review our AFS securities for declines in fair value that we determine to be other-than-temporary. For an equity security, if we do not have the ability and intent to hold the security for a sufficient period of time to allow for a recovery in value, we conclude that an other-than-temporary impairment (“OTTI”) has occurred and the amortized cost of the equity security is written down to the current fair value, with a corresponding charge to realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss). When assessing our ability and intent to hold the equity security to recovery, we consider, among other things, the severity and duration of the decline in fair value of the equity security as well as the cause of the decline, a fundamental analysis of the liquidity, and business prospects and overall financial condition of the issuer.
For our fixed maturity AFS securities (also referred to as “debt securities”), we generally consider the following to determine whether our unrealized losses are other-than-temporarily impaired:
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The estimated range and average period until recovery;
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The estimated range and average holding period to maturity;
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Remaining payment terms of the security;
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Current delinquencies and nonperforming assets of underlying collateral;
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Expected future default rates;
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Collateral value by vintage, geographic region, industry concentration or property type;
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Subordination levels or other credit enhancements as of the balance sheet date as compared to origination; and
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Contractual and regulatory cash obligations.
For a debt security, if we intend to sell a security, or it is more likely than not we will be required to sell a debt security before recovery of its amortized cost basis and the fair value of the debt security is below amortized cost, we conclude that an OTTI has occurred and the amortized cost is written down to current fair value, with a corresponding charge to realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss). If we do not intend to sell a debt security, or it is not more likely than not we will be required to sell a debt security before recovery of its amortized cost basis but the present value of the cash flows expected to be collected is less than the amortized cost of the debt security (referred to as the credit loss), we conclude that an OTTI has occurred and the amortized cost is written down to the estimated recovery value with a corresponding charge to realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss), as this amount is deemed the credit portion of the OTTI. The remainder of the decline to fair value is recorded in other comprehensive income (“OCI”) to unrealized OTTI on AFS securities on our Consolidated Statements of Stockholders’ Equity, as this amount is considered a noncredit (i.e., recoverable) impairment.
When assessing our intent to sell a debt security, or if it is more likely than not we will be required to sell a debt security before recovery of its cost basis, we evaluate facts and circumstances such as, but not limited to, decisions to reposition our security portfolio, sales of securities to meet cash flow needs and sales of securities to capitalize on favorable pricing. In order to determine the amount of the credit loss for a debt security, we calculate the recovery value by performing a discounted cash flow analysis based on the current cash flows and future cash flows we expect to recover. The discount rate is the effective interest rate implicit in the underlying debt security. The effective interest rate is the original yield, or the coupon if the debt security was previously impaired. See the discussion below for additional information on the methodology and significant inputs, by security type, which we use to determine the amount of a credit loss.
Our conclusion that it is not more likely than not that we will be required to sell the fixed maturity AFS securities before recovery of their amortized cost basis, the estimated future cash flows are equal to or greater than the amortized cost basis of the debt securities, or we have the ability to hold the equity AFS securities for a period of time sufficient for recovery is based upon our asset-liability management process. Management considers the following as part of the evaluation:
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The current economic environment and market conditions;
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Our business strategy and current business plans;
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The nature and type of security, including expected maturities and exposure to general credit, liquidity, market and interest rate risk;
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Our analysis of data from financial models and other internal and industry sources to evaluate the current effectiveness of our hedging and overall risk management strategies;
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The current and expected timing of contractual maturities of our assets and liabilities, expectations of prepayments on investments and expectations for surrenders and withdrawals of life insurance policies and annuity contracts;
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The capital risk limits approved by management; and
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Our current financial condition and liquidity demands.
To determine the recovery period of a debt security, we consider the facts and circumstances surrounding the underlying issuer including, but not limited to, the following:
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Historical and implied volatility of the security;
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Length of time and extent to which the fair value has been less than amortized cost;
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Adverse conditions specifically related to the security or to specific conditions in an industry or geographic area;
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Failure, if any, of the issuer of the security to make scheduled payments; and
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Recoveries or additional declines in fair value subsequent to the balance sheet date.
In periods subsequent to the recognition of an OTTI, the AFS security is accounted for as if it had been purchased on the measurement date of the OTTI. Therefore, for the fixed maturity AFS security, the original discount or reduced premium is reflected in net investment income over the contractual term of the investment in a manner that produces a constant effective yield.
To determine recovery value of a corporate bond, CLO or CDO, we perform additional analysis related to the underlying issuer including, but not limited to, the following:
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Fundamentals of the issuer to determine what we would recover if they were to file bankruptcy versus the price at which the market is trading;
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Fundamentals of the industry in which the issuer operates;
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Earnings multiples for the given industry or sector of an industry that the underlying issuer operates within, divided by the outstanding debt to determine an expected recovery value of the security in the case of a liquidation;
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Expected cash flows of the issuer (e.g., whether the issuer has cash flows in excess of what is required to fund its operations);
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Expectations regarding defaults and recovery rates;
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Changes to the rating of the security by a rating agency; and
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Additional market information (e.g., if there has been a replacement of the corporate debt security).
Each quarter we review the cash flows for the MBS to determine whether or not they are sufficient to provide for the recovery of our amortized cost. We revise our cash flow projections only for those securities that are at most risk for impairment based on current credit enhancement and trends in the underlying collateral performance. To determine recovery value of a MBS, we perform additional analysis related to the underlying issuer including, but not limited to, the following:
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Discounted cash flow analysis based on the current cash flows and future cash flows we expect to recover;
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Level of creditworthiness of the home equity loans or residential mortgages that back an RMBS or commercial mortgages that back a CMBS;
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Susceptibility to fair value fluctuations for changes in the interest rate environment;
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Susceptibility to reinvestment risks, in cases where market yields are lower than the securities’ book yield earned;
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Susceptibility to reinvestment risks, in cases where market yields are higher than the book yields earned on a security;
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Expectations of sale of such a security where market yields are higher than the book yields earned on a security; and
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Susceptibility to variability of prepayments.
When evaluating MBS and mortgage-related asset-backed securities (“ABS”), we consider a number of pool-specific factors as well as market level factors when determining whether or not the impairment on the security is temporary or other-than-temporary. The most important factor is the performance of the underlying collateral in the security and the trends of that performance in the prior periods. We use this information about the collateral to forecast the timing and rate of mortgage loan defaults, including making projections for loans that are already delinquent and for those loans that are currently performing but may become delinquent in the future. Other factors used in this analysis include type of underlying collateral (e.g., prime, Alt-A or subprime), geographic distribution of underlying loans and timing of liquidations by state. Once default rates and timing assumptions are determined, we then make assumptions regarding the severity of a default if it were to occur. Factors that impact the severity assumption include expectations for future home price appreciation or depreciation, loan size, first lien versus second lien, existence of loan level private mortgage insurance, type of occupancy and geographic distribution of loans. Once default and severity assumptions are determined for the security in question, cash flows for the underlying collateral are projected including expected defaults and prepayments. These cash flows on the collateral are then translated to cash flows on our tranche based on the cash flow waterfall of the entire capital security structure. If this analysis indicates the entire principal on a particular security will not be returned, the security is reviewed for OTTI by comparing the expected cash flows to amortized cost. To the extent that the security has already been impaired or was purchased at a discount, such that the amortized cost of the security is less than or equal to the present value of cash flows expected to be collected, no impairment is required.
Otherwise, if the amortized cost of the security is greater than the present value of the cash flows expected to be collected, and the security was not purchased at a discount greater than the expected principal loss, then impairment is recognized.
We further monitor the cash flows of all of our AFS securities backed by pools on an ongoing basis. We also perform detailed analysis on all of our subprime, Alt-A, non-agency residential MBS and on a significant percentage of our AFS securities backed by pools of commercial mortgages. The detailed analysis includes revising projected cash flows by updating the cash flows for actual cash received and applying assumptions with respect to expected defaults, foreclosures and recoveries in the future. These revised projected cash flows
are then compared to the amount of credit enhancement (subordination) in the structure to determine whether the amortized cost of the security is recoverable. If it is not recoverable, we record an impairment of the security.
Trading Securities
Trading securities consist of fixed maturity and equity securities in designated portfolios, some of which support modified coinsurance (“Modco”) and coinsurance with funds withheld (“CFW”) reinsurance arrangements. Investment results for the portfolios that support Modco and CFW reinsurance arrangements, including gains and losses from sales, are passed directly to the reinsurers pursuant to contractual terms of the reinsurance arrangements. Trading securities are carried at fair value and changes in fair value and changes in the fair value of embedded derivative liabilities associated with the underlying reinsurance arrangements, are recorded in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss) as they occur.
Alternative Investments
Alternative investments, which consist primarily of investments in limited partnerships (“LPs”), are included in other investments on our Consolidated Balance Sheets. We account for our investments in LPs using the equity method to determine the carrying value. Recognition of alternative investment income is delayed due to the availability of the related financial statements, which are generally obtained from the partnerships’ general partners. As a result, our venture capital, real estate and oil and gas portfolios are generally on a three-month delay and our hedge funds are on a one-month delay. In addition, the impact of audit adjustments related to completion of calendar-year financial statement audits of the investees are typically received during the second quarter of each calendar year. Accordingly, our investment income from alternative investments for any calendar-year period may not include the complete impact of the change in the underlying net assets for the partnership for that calendar-year period.
Payables for Collateral on Investments
When we enter into collateralized financing transactions on our investments, a liability is recorded equal to the cash collateral received. This liability is included within payables for collateral on investments on our Consolidated Balance Sheets. Income and expenses associated with these transactions are recorded as investment income and investment expenses within net investment income on our Consolidated Statements of Comprehensive Income (Loss). Changes in payables for collateral on investments are reflected within cash flows from investing activities on our Consolidated Statements of Cash Flows.
Mortgage Loans on Real Estate
Mortgage loans on real estate are carried at unpaid principal balances adjusted for amortization of premiums and accretion of discounts and are net of valuation allowances. Interest income is accrued on the principal balance of the loan based on the loan’s contractual interest rate. Premiums and discounts are amortized using the effective yield method over the life of the loan. Interest income and amortization of premiums and discounts are reported in net investment income on our Consolidated Statements of Comprehensive Income (Loss) along with mortgage loan fees, which are recorded as they are incurred.
Our commercial loan portfolio is comprised of long-term loans secured by existing commercial real estate. As such, it does not exhibit risk characteristics unique to mezzanine, construction, residential, agricultural, land or other types of real estate loans. We believe all of the loans in our portfolio share three primary risks: borrower creditworthiness; sustainability of the cash flow of the property; and market risk; therefore, our methods for monitoring and assessing credit risk are consistent for our entire portfolio. Loans are considered impaired when it is probable that, based upon current information and events, we will be unable to collect all amounts due under the contractual terms of the loan agreement. When we determine that a loan is impaired, a valuation allowance is established for the excess carrying value of the loan over its estimated value. The loan’s estimated value is based on: the present value of expected future cash flows discounted at the loan’s effective interest rate; the loan’s observable market price; or the fair value of the loan’s collateral. Valuation allowances are maintained at a level we believe is adequate to absorb estimated probable credit losses of each specific loan. Our periodic evaluation of the adequacy of the allowance for losses is based on our past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payments), the estimated value of the underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. Trends in market vacancy and rental rates are incorporated into the analysis that we perform for monitored loans and may contribute to the establishment of (or an increase or decrease in) an allowance for credit losses. In addition, we review each loan individually in our commercial mortgage loan portfolio on an annual basis to identify emerging risks. We focus on properties that experienced a reduction in debt-service coverage or that have significant exposure to tenants with deteriorating credit profiles. Where warranted, we establish or increase loss reserves for a specific loan based upon this analysis. Our process for determining past due or delinquency status begins when a payment date is missed, at which time the borrower is contacted. After the grace period expiration that may last up to 10 days, we send a default notice. The default notice generally provides a short time period to cure the default. Our policy is to report loans that are 60 or more days past due, which equates to two or more payments missed, as delinquent. We do not accrue interest on loans 90 days past due, and any interest received on these loans is either applied to the principal or recorded in net investment income on our Consolidated Statements of Comprehensive Income (Loss) when received, depending on the assessment of the collectibility of the loan. We resume accruing interest once a loan complies with all of its original terms or restructured terms. Mortgage loans deemed uncollectible are charged against the allowance for losses, and subsequent recoveries, if any, are credited to the allowance for losses. All mortgage loans that are impaired have an established allowance for credit losses. Changes in valuation allowances are reported in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).
We measure and assess the credit quality of our mortgage loans by using loan-to-value and debt-service coverage ratios. The loan-to-value ratio compares the principal amount of the loan to the fair value at origination of the underlying property collateralizing the loan and is commonly expressed as a percentage. Loan-to-value ratios greater than 100% indicate that the principal amount is greater than the collateral value. Therefore, all else being equal, a lower loan-to-value ratio generally indicates a higher quality loan. The debt-service coverage ratio compares a property’s net operating income to its debt-service payments. Debt-service coverage ratios of less than 1.0 indicate that property operations do not generate enough income to cover its current debt payments. Therefore, all else being equal, a higher debt-service coverage ratio generally indicates a higher quality loan.
Policy Loans
Policy loans represent loans we issue to contract holders that use the cash surrender value of their life insurance policy as collateral. Policy loans are carried at unpaid principal balances.
Real Estate
Real estate includes both real estate held for the production of income and real estate held-for-sale. Real estate held for the production of income is carried at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset. We periodically review properties held for the production of income for impairment. Properties whose carrying values are greater than their projected undiscounted cash flows are written down to estimated fair value, with impairment losses reported in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss). The estimated fair value of real estate is generally computed using the present value of expected future cash flows from the real estate discounted at a rate commensurate with the underlying risks. Real estate classified as held-for-sale is stated at the lower of depreciated cost or fair value less expected disposition costs at the time classified as held-for-sale. Real estate is not depreciated while it is classified as held-for-sale. Also, valuation allowances for losses are established, as appropriate, for real estate held-for-sale and any changes to the valuation allowances are reported in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss). Real estate acquired through foreclosure proceedings is recorded at fair value at the settlement date.
Derivative Instruments
We hedge certain portions of our exposure to interest rate risk, foreign currency exchange risk, equity market risk and credit risk by entering into derivative transactions. All of our derivative instruments are recognized as either assets or liabilities on our Consolidated Balance Sheets at estimated fair value. We categorized derivatives into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique as discussed above in “Fair Value Measurement.” The accounting for changes in the estimated fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship, and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we designate the hedging instrument based upon the exposure being hedged: as a cash flow hedge or a fair value hedge.
For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated OCI and reclassified into net income in the same period or periods during which the hedged transaction affects net income. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of designated future cash flows of the hedged item (hedge ineffectiveness), if any, is recognized in net income during the period of change. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in net income during the period of change in estimated fair values. For derivative instruments not designated as hedging instruments, but that are economic hedges, the gain or loss is recognized in net income.
We purchase and issue financial instruments and products that contain embedded derivative instruments. When it is determined that the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is bifurcated from the host for measurement purposes. The embedded derivative, which is reported with the host instrument in the Consolidated Balance Sheets, is carried at fair value with changes in fair value recognized in net income during the period of change.
We employ several different methods for determining the fair value of our derivative instruments. The fair value of our derivative contracts are measured based on current settlement values, which are based on quoted market prices, industry standard models that are commercially available and broker quotes. These techniques project cash flows of the derivatives using current and implied future market conditions. We calculate the present value of the cash flows to measure the current fair market value of the derivative.
Cash and Invested Cash
Cash and invested cash is carried at cost and includes all highly liquid debt instruments purchased with an original maturity of three months or less.
DAC, VOBA, DSI and DFEL
Acquisition costs directly related to successful contract acquisitions or renewals of UL insurance, VUL insurance, traditional life insurance, annuities and other investment contracts have been deferred (i.e., DAC) to the extent recoverable. VOBA is an intangible
asset that reflects the estimated fair value of in-force contracts in a life insurance company acquisition and represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the business in force at the acquisition date. Bonus credits and excess interest for dollar cost averaging contracts are considered DSI. Contract sales charges that are collected in the early years of an insurance contract are deferred (i.e., DFEL), and the unamortized balance is reported in other contract holder funds on our Consolidated Balance Sheets.
Both DAC and VOBA amortization, excluding amounts reported in realized gain (loss), is reported within commissions and other expenses on our Consolidated Statements of Comprehensive Income (Loss). DSI amortization, excluding amounts reported in realized gain (loss), is reported in interest credited on our Consolidated Statements of Comprehensive Income (Loss). The amortization of DFEL, excluding amounts reported in realized gain (loss), is reported within fee income on our Consolidated Statements of Comprehensive Income (Loss). The methodology for determining the amortization of DAC, VOBA, DSI and DFEL varies by product type. For all insurance contracts, amortization is based on assumptions consistent with those used in the development of the underlying contract adjusted for emerging experience and expected trends.
Acquisition costs for UL and VUL insurance and investment-type products, which include fixed and variable deferred annuities, are generally amortized over the lives of the policies in relation to the incidence of estimated gross profits (“EGPs”) from surrender charges, investment, mortality net of reinsurance ceded and expense margins and actual realized gain (loss) on investments. Contract lives for UL and VUL policies are estimated to be 40 years based on the expected lives of the contracts. Contract lives for fixed and variable deferred annuities are generally between 13 and 30 years, while some of our fixed multi-year guarantee products have amortization periods equal to the guarantee period. The front-end load annuity product has an assumed life of 25 years. Longer lives are assigned to those blocks that have demonstrated favorable lapse experience.
Acquisition costs for all traditional contracts, including traditional life insurance contracts, such as individual whole life, group business and term life insurance, are amortized over the expected premium-paying period that ranges from 7 to 77 years. Acquisition costs are either amortized on a straight-line basis or as a level percent of premium of the related policies depending on the block of business. There is currently no DAC, VOBA, DSI or DFEL balance or related amortization for fixed and variable payout annuities.
We account for modifications of insurance contracts that result in a substantially unchanged contract as a continuation of the replaced contract. We account for modifications of insurance contracts that result in a substantially changed contract as an extinguishment of the replaced contract.
The carrying amounts of DAC, VOBA, DSI and DFEL are adjusted for the effects of realized and unrealized gains and losses on securities classified as AFS and certain derivatives and embedded derivatives. Amortization expense of DAC, VOBA, DSI and DFEL reflects an assumption for an expected level of credit-related investment losses. When actual credit-related investment losses are realized, we recognize a true-up to our DAC, VOBA, DSI and DFEL amortization within realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss) reflecting the incremental effect of actual versus expected credit-related investment losses. These actual to expected amortization adjustments can create volatility from period to period in realized gain (loss).
During the third quarter of each year, we conduct our annual comprehensive review of the assumptions and the projection models used for our estimates of future gross profits underlying the amortization of DAC, VOBA, DSI and DFEL and the calculations of the embedded derivatives and reserves for life insurance and annuity products with living benefit and death benefit guarantees. These assumptions include investment margins, mortality, retention, rider utilization and maintenance expenses (costs associated with maintaining records relating to insurance and individual and group annuity contracts, and with the processing of premium collections, deposits, withdrawals and commissions). Based on our review, the cumulative balances of DAC, VOBA, DSI and DFEL included on our Consolidated Balance Sheets are adjusted with an offsetting benefit or charge to revenue or amortization expense to reflect such change related to our expectations of future EGPs (“unlocking”). We may have unlocking in other quarters as we become aware of information that warrants updating assumptions outside of our annual comprehensive review. We may also identify and implement actuarial modeling refinements that result in increases or decreases to the carrying values of DAC, VOBA, DSI, DFEL, embedded derivatives and reserves for life insurance and annuity products with living benefit and death benefit guarantees.
DAC, VOBA, DSI and DFEL are reviewed to ensure that the unamortized portion does not exceed the expected recoverable amounts.
Reinsurance
Our insurance companies enter into reinsurance agreements with other companies in the normal course of business. Assets and liabilities and premiums and benefits from certain reinsurance contracts that grant statutory surplus relief to other insurance companies are netted on our Consolidated Balance Sheets and Consolidated Statements of Comprehensive Income (Loss), respectively, because there is a right of offset. All other reinsurance agreements are reported on a gross basis on our Consolidated Balance Sheets as an asset for amounts recoverable from reinsurers or as a component of other liabilities for amounts, such as premiums, owed to the reinsurers, with the exception of Modco agreements for which the right of offset also exists. Reinsurance premiums and benefits paid or provided are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums, benefits and DAC are reported net of insurance ceded.
Goodwill
We recognize the excess of the purchase price, plus the fair value of any noncontrolling interest in the acquiree, over the fair value of identifiable net assets acquired as goodwill. Goodwill is not amortized, but is reviewed at least annually for indications of value impairment, with consideration given to financial performance and other relevant factors. We perform a two-step test in our evaluation of the carrying value of goodwill for each of our reporting units, if qualitative factors determine it is necessary to complete the two-step goodwill impairment test. The results of one test on one reporting unit cannot subsidize the results of another reporting unit. In Step 1 of the evaluation, the fair value of each reporting unit is determined and compared to the carrying value of the reporting unit. If the fair value is greater than the carrying value, then the carrying value of the reporting unit is deemed to be recoverable, and Step 2 is not required. If the fair value estimate is less than the carrying value, it is an indicator that impairment may exist, and Step 2 is required. In Step 2, the implied fair value of goodwill is determined for the reporting unit. The reporting unit’s fair value as determined in Step 1 is assigned to all of its net assets (recognized and unrecognized) as if the reporting unit were acquired in a business combination as of the date of the impairment test. If the implied fair value of the reporting unit’s goodwill is lower than its carrying amount, goodwill is impaired and written down to its fair value; and a charge is reported in impairment of intangibles on our Consolidated Statements of Comprehensive Income (Loss).
Other Assets and Other Liabilities
Other assets consist primarily of DSI, specifically identifiable intangible assets, property and equipment owned by the Company, balances associated with corporate-owned and bank-owned life insurance, certain reinsurance assets, receivables resulting from sales of securities that had not yet settled as of the balance sheet date, debt issue costs and other prepaid expenses. Other liabilities consist primarily of current and deferred taxes, pension and other employee benefit liabilities, derivative instrument liabilities, certain reinsurance payables, payables resulting from purchases of securities that had not yet settled as of the balance sheet date, interest on borrowed funds and other accrued expenses.
The carrying values of specifically identifiable intangible assets are reviewed at least annually for indicators of impairment in value that are other-than-temporary, including unexpected or adverse changes in the following: the economic or competitive environments in which the company operates; profitability analyses; cash flow analyses; and the fair value of the relevant business operation. If there was an indication of impairment, then the discounted cash flow method would be used to measure the impairment, and the carrying value would be adjusted as necessary and reported in impairment of intangibles on our Consolidated Statements of Comprehensive Income (Loss). Sales force intangibles are attributable to the value of the new business distribution system acquired through business combinations. These assets are amortized on a straight-line basis over their useful life of 25 years. Federal Communications Commission (“FCC”) licenses acquired through business combinations are not amortized.
Property and equipment owned for company use is carried at cost less allowances for depreciation. Provisions for depreciation of investment real estate and property and equipment owned for company use are computed principally on the straight-line method over the estimated useful lives of the assets, which include buildings, computer hardware and software and other property and equipment. We periodically review the carrying value of our long-lived assets, including property and equipment, for impairment whenever events or circumstances indicate that the carrying amount of such assets may not be fully recoverable. For long-lived assets to be held and used, impairments are recognized when the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. An impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value.
Long-lived assets to be disposed of by abandonment or in an exchange for a similar productive long-lived asset are classified as held-for-use until they are disposed. Long-lived assets to be sold are classified as held-for-sale and are no longer depreciated. Certain criteria have to be met in order for the long-lived asset to be classified as held-for-sale, including that a sale is probable and expected to occur within one year. Long-lived assets classified as held-for-sale are recorded at the lower of their carrying amount or fair value less cost to sell.
Separate Account Assets and Liabilities
We maintain separate account assets, which are reported at fair value. The related liabilities are reported at an amount equivalent to the separate account assets. Investment risks associated with market value changes are borne by the contract holders, except to the extent of minimum guarantees made by the Company with respect to certain accounts.
We issue variable annuity contracts through our separate accounts for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contract holder (traditional variable annuities). We also issue variable annuity and life contracts through separate accounts that include various types of guaranteed death benefit (“GDB”), guaranteed withdrawal benefit (“GWB”) and guaranteed income benefit (“GIB”) features. The GDB features include those where we contractually guarantee to the contract holder either: return of no less than total deposits made to the contract less any partial withdrawals (“return of net deposits”); total deposits made to the contract less any partial withdrawals plus a minimum return (“minimum return”); or the highest contract value on any contract anniversary date through age 80 minus any payments or withdrawals following the contract anniversary (“anniversary contract value”).
As discussed in Note 6, certain features of these guarantees are accounted for as embedded derivative reserves, whereas other guarantees are accounted for as benefit reserves. Other guarantees contain characteristics of both and are accounted for under an approach that
calculates the value of the embedded derivative reserve and the benefit reserve based on the specific characteristics of each guaranteed living benefit (“GLB”) feature. We use derivative instruments to hedge our exposure to the risks and earnings volatility that result from the embedded derivatives for living benefits in certain of our variable annuity products. The change in fair value of these instruments tends to move in the opposite direction of the change in the value of the associated reserves. The net impact of these changes is reported as a component of realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).
The “market consistent scenarios” used in the determination of the fair value of the GLB liability are similar to those used by an investment bank to value derivatives for which the pricing is not transparent and the aftermarket is nonexistent or illiquid. We use risk-neutral Monte Carlo simulations in our calculation to value the entire block of guarantees, which involve 100 unique scenarios per policy or approximately 43 million scenarios. The market consistent scenario assumptions, as of each valuation date, are those we view to be appropriate for a hypothetical market participant. The market consistent inputs include assumptions for the capital markets (e.g., implied volatilities, correlation among indices, risk-free swap curve, etc.), policyholder behavior (e.g., policy lapse, benefit utilization, mortality, etc.), risk margins, administrative expenses and a margin for profit. We believe these assumptions are consistent with those that would be used by a market participant; however, as the related markets develop we will continue to reassess our assumptions. It is possible that different valuation techniques and assumptions could produce a materially different estimate of fair value.
Future Contract Benefits and Other Contract Holder Funds
Future contract benefits represent liability reserves that we have established and carry based on estimates of how much we will need to pay for future benefits and claims. Other contract holder funds represent liabilities for fixed account values, including the fixed portion of variable, dividends payable, premium deposit funds, undistributed earnings on participating business and other contract holder funds as well the carrying value of DFEL discussed above.
The liabilities for future contract benefits and claim reserves for UL and VUL insurance policies consist of contract account balances that accrue to the benefit of the contract holders, excluding surrender charges. The liabilities for future insurance contract benefits and claim reserves for traditional life policies are computed using assumptions for investment yields, mortality and withdrawals based principally on generally accepted actuarial methods and assumptions at the time of contract issue. Investment yield assumptions for traditional direct individual life reserves for all contracts range from 2.25% to 7.75% depending on the time of contract issue. The investment yield assumptions for immediate and deferred paid-up annuities range from 1.50% to 13.50%. These investment yield assumptions are intended to represent an estimation of the interest rate experience for the period that these contract benefits are payable.
The liabilities for future claim reserves for variable annuity products containing GDB features are calculated by estimating the present value of total expected benefit payments over the life of the contract from inception divided by the present value of total expected assessments over the life of the contract (“benefit ratio”) multiplied by the cumulative assessments recorded from the contract inception through the balance sheet date less the cumulative GDB payments plus interest on the liability. The change in the liability for a period is the benefit ratio multiplied by the assessments recorded for the period less GDB claims paid in the period plus interest. As experience or assumption changes result in a change in expected benefit payments or assessments, the benefit ratio is unlocked, that is, recalculated using the updated expected benefit payments and assessments over the life of the contract since inception. The revised benefit ratio is then applied to the liability calculation described above, with the resulting change in liability reported as benefit ratio unlocking.
With respect to our future contract benefits and other contract holder funds, we continually review overall reserve position, reserving techniques and reinsurance arrangements. As experience develops and new information becomes known, liabilities are adjusted as deemed necessary. The effects of changes in estimates are included in the operating results for the period in which such changes occur.
The business written or assumed by us includes participating life insurance contracts, under which the contract holder is entitled to share in the earnings of such contracts via receipt of dividends. The dividend scale for participating policies is reviewed annually and may be adjusted to reflect recent experience and future expectations. As of December 31, 2013 and 2012, participating policies comprised approximately 1% of the face amount of insurance in force, and dividend expenses were $62 million, $71 million and $79 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Liabilities for the secondary guarantees on UL-type products are calculated by multiplying the benefit ratio by the cumulative assessments recorded from contract inception through the balance sheet date less the cumulative secondary guarantee benefit payments plus interest. If experience or assumption changes result in a new benefit ratio, the reserves are adjusted to reflect the changes in a manner similar to the unlocking of DAC, VOBA, DFEL and DSI. The accounting for secondary guarantee benefits impacts, and is impacted by, EGPs used to calculate amortization of DAC, VOBA, DFEL and DSI.
Future contract benefits on our Consolidated Balance Sheets include GLB features and remaining guaranteed interest and similar contracts that are carried at fair value, which represents approximate exit value including an estimate for our non-performance risk (“NPR”). Certain of these features have elements of both insurance benefits and embedded derivatives. Through our hybrid accounting approach, we assign benefits to the embedded derivative or insurance based on the life-contingent nature of the benefits. We classify these items in Level 3 within the hierarchy levels described above in “Fair Value Measurement.”
The fair value of our indexed annuity contracts is based on their approximate surrender values.
Borrowed Funds
LNC’s short-term borrowings are defined as borrowings with contractual or expected maturities of one year or less. Long-term borrowings have contractual or expected maturities greater than one year.
Deferred Gain on Business Sold Through Reinsurance
Our reinsurance operations were acquired by Swiss Re Life & Health America, Inc. (“Swiss Re”) in December 2001 through a series of indemnity reinsurance transactions. We are recognizing the gain related to these transactions at the rate that earnings on the reinsured business are expected to emerge, over a period of 15 years from the date of sale.
Commitments and Contingencies
Contingencies arising from environmental remediation costs, regulatory judgments, claims, assessments, guarantees, litigation, recourse reserves, fines, penalties and other sources are recorded when deemed probable and reasonably estimable.
Fee Income
Fee income for investment and interest-sensitive life insurance contracts consist of asset-based fees, cost of insurance charges, percent of premium charges, contract administration charges and surrender charges that are assessed against contract holder account balances. Investment products consist primarily of individual and group variable and fixed deferred annuities. Interest-sensitive life insurance products include UL insurance, VUL insurance and other interest-sensitive life insurance policies. These products include life insurance sold to individuals, corporate-owned life insurance and bank-owned life insurance.
In bifurcating the embedded derivative of our GLB features on our variable annuity products, we attribute to the embedded derivative the portion of total fees collected from the contract holder that relate to the GLB riders (the “attributed fees”), which are not reported within fee income on our Consolidated Statements of Comprehensive Income (Loss). These attributed fees represent the present value of future claims expected to be paid for the GLB at the inception of the contract plus a margin that a theoretical market participant would include for risk/profit and are reported within realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).
The timing of revenue recognition as it relates to fees assessed on investment contracts is determined based on the nature of such fees. Asset-based fees, cost of insurance and contract administration charges are assessed on a daily or monthly basis and recognized as revenue when assessed and earned. Percent of premium charges are assessed at the time of premium payment and recognized as revenue when assessed and earned. Certain amounts assessed that represent compensation for services to be provided in future periods are reported as unearned revenue and recognized in income over the periods benefited. Surrender charges are recognized upon surrender of a contract by the contract holder in accordance with contractual terms.
For investment and interest-sensitive life insurance contracts, the amounts collected from contract holders are considered deposits and are not included in revenue.
Insurance Premiums
Our insurance premiums for traditional life insurance and group insurance products are recognized as revenue when due from the contract holder. Our traditional life insurance products include those products with fixed and guaranteed premiums and benefits and consist primarily of whole life insurance, limited-payment life insurance, term life insurance and certain annuities with life contingencies. Our group non-medical insurance products consist primarily of term life, disability and dental.
Net Investment Income
Dividends and interest income, recorded in net investment income, are recognized when earned. Amortization of premiums and accretion of discounts on investments in debt securities are reflected in net investment income over the contractual terms of the investments in a manner that produces a constant effective yield.
For CLOs and MBS, included in the trading and AFS fixed maturity securities portfolios, we recognize income using a constant effective yield based on anticipated prepayments and the estimated economic life of the securities. When actual prepayments differ significantly from originally anticipated prepayments, the retrospective effective yield is recalculated to reflect actual payments to date and a catch up adjustment is recorded in the current period. In addition, the new effective yield, which reflects anticipated future payments, is used prospectively. Any adjustments resulting from changes in effective yield are reflected in net investment income on our Consolidated Statements of Comprehensive Income (Loss).
Realized Gain (Loss)
Realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss) includes realized gains and losses from the sale of investments, write-downs for other-than-temporary impairments of investments, certain derivative and embedded derivative gains and losses, gains and losses on the sale of subsidiaries and businesses and net gains and losses on reinsurance embedded derivatives and trading securities. Realized gains and losses on the sale of investments are determined using the specific identification method. Realized
gain (loss) is recognized in net income, net of associated amortization of DAC, VOBA, DSI and DFEL. Realized gain (loss) is also net of allocations of investment gains and losses to certain contract holders and certain funds withheld on reinsurance arrangements for which we have a contractual obligation.
Other Revenues
Other revenues consists primarily of fees attributable to broker-dealer services recorded as earned at the time of sale, changes in the market value of our seed capital investments and communications sales recognized as earned, net of agency and representative commissions.
Interest Credited
Interest credited includes interest credited to contract holder account balances. Interest crediting rates associated with funds invested in the general account of LNC’s insurance subsidiaries during 2011 through 2013 ranged from 1% to 10%.
Benefits
Benefits for UL and other interest-sensitive life insurance products include benefit claims incurred during the period in excess of contract account balances. Benefits also include the change in reserves for life insurance products with secondary guarantee benefits, annuity products with guaranteed death and living benefits, and certain annuities with life contingencies. For traditional life, group health and disability income products, benefits are recognized when incurred in a manner consistent with the related premium recognition policies.
Pension and Other Postretirement Benefit Plans
Pursuant to the accounting rules for our obligations to employees and agents under our various pension and other postretirement benefit plans, we are required to make a number of assumptions to estimate related liabilities and expenses. We use assumptions for the weighted-average discount rate and expected return on plan assets to estimate pension expense. The discount rate assumptions are determined using an analysis of current market information and the projected benefit flows associated with these plans. The expected long-term rate of return on plan assets is based on historical and projected future rates of return on the funds invested in the plan. The calculation of our accumulated postretirement benefit obligation also uses an assumption of weighted-average annual rate of increase in the per capita cost of covered benefits, which reflects a health care cost trend rate.
Stock-Based Compensation
In general, we expense the fair value of stock awards included in our incentive compensation plans. As of the date our stock awards are approved, the fair value of stock options is determined using a Black-Scholes options valuation methodology, and the fair value of other stock awards is based upon the market value of the stock. The fair value of the awards is expensed over the performance or service period, which generally corresponds to the vesting period, and is recognized as an increase to common stock in stockholders’ equity. We classify certain stock awards as liabilities. For these awards, the settlement value is classified as a liability on our Consolidated Balance Sheets, and the liability is marked-to-market through net income at the end of each reporting period. Stock-based compensation expense is reflected in commissions and other expenses on our Consolidated Statements of Comprehensive Income (Loss).
Interest and Debt Expense
Interest expense on our short-term and long-term debt is recognized as due and any associated premiums, discounts, and costs are amortized (accreted) over the term of the related borrowing utilizing the effective interest method. In addition, gains or losses related to certain derivative instruments associated with debt are recognized in interest and debt expense during the period of the change.
Income Taxes
We file a U.S. consolidated income tax return that includes all of our eligible subsidiaries. Ineligible subsidiaries file separate individual corporate tax returns. Subsidiaries operating outside of the U.S. are taxed, and income tax expense is recorded based on applicable foreign statutes. Deferred income taxes are recognized, based on enacted rates, when assets and liabilities have different values for financial statement and tax reporting purposes. A valuation allowance is recorded to the extent required. Considerable judgment and the use of estimates are required in determining whether a valuation allowance is necessary and, if so, the amount of such valuation allowance. In evaluating the need for a valuation allowance, we consider many factors, including: the nature and character of the deferred tax assets and liabilities; taxable income in prior carryback years; future reversals of temporary differences; the length of time carryovers can be utilized; and any tax planning strategies we would employ to avoid a tax benefit from expiring unused.
Discontinued Operations
The results of operations of a component of the Company that either has been disposed of or is classified as held-for-sale are reported in income (loss) from discontinued operations, net of federal income taxes, for all periods presented if the operations and cash flows of the component have been or will be eliminated from our ongoing operations as a result of the disposal transaction and we will not have any significant continuing involvement in the operations.
Foreign Currency Translation
The balance sheet accounts and income statement items of foreign subsidiaries, reported in functional currencies other than the U.S. dollar are translated at the current and average exchange rates for the year, respectively. Resulting translation adjustments and other translation adjustments for foreign currency transactions that affect cash flows are reported in accumulated OCI, a component of stockholders’ equity.
Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing earnings available to common shareholders by the average common shares outstanding. Diluted EPS is computed assuming the conversion or exercise of dilutive convertible preferred securities, nonvested stock, stock options, performance share units and warrants outstanding during the year.
Our deferred compensation plans allow participants the option to diversify from LNC stock to other investment alternatives. When calculating our weighted-average dilutive shares, we presume the investment option will be settled in cash and exclude these shares from our calculation, unless the effect of settlement in shares would be more dilutive to our diluted EPS calculation.
For any period where a loss from continuing operations is experienced, shares used in the diluted EPS calculation represent basic shares because using diluted shares would be anti-dilutive to the calculation.
2. New Accounting Standards
Adoption of New Accounting Standards
Balance Sheet Topic
In December 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-11, “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”) to address certain comparability issues between financial statements prepared in accordance with GAAP and those prepared in accordance with International Financial Reporting Standards (“IFRS”). In January 2013, the FASB issued ASU No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” (“ASU 2013-01”), to provide information regarding the scope of the disclosures required by ASU 2011-11 to the financial instruments and derivatives reported in an entity’s financial statements. ASU 2011-11 requires an entity to provide enhanced disclosures about certain financial instruments and derivative instruments, as defined in ASU 2013-01, to enable users to understand the effects of offsetting in the financial statements as well as the effects of master netting arrangements on an entity’s financial condition. We adopted the disclosure requirements of ASU 2011-11, after considering the scope clarification in ASU 2013-01, as of January 1, 2013, and have included the required disclosures for all comparative periods in Note 6.
Comprehensive Income Topic
In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”), which requires enhanced reporting of such amounts either on the face of the financial statements or in the notes to the financial statements. Under ASU 2013-02, the type of reclassification out of AOCI, as defined under current GAAP, will dictate whether the disclosure must provide the effect of the reclassification on the respective financial statement line items or whether cross-referencing to other disclosures that provide additional detail about the reclassification will be required. We adopted the disclosure requirements in ASU 2013-02 as of January 1, 2013, and have included the required disclosure in Note 14.
Derivatives and Hedging Topic
In July 2013, the FASB issued ASU No. 2013-10, “Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes” (“ASU 2013-10”), which permits the Fed Funds Effective Swap Rate to be used as a benchmark interest rate for hedge accounting purposes under the FASB ASC in addition to interest rates on direct Treasury obligations of the U.S. government and the LIBOR swap rate. We adopted the amendments in ASU 2013-10 prospectively for qualifying new or designated hedging relationships entered into, on, or after July 17, 2013. The adoption of ASU 2013-10 did not have an effect on our consolidated financial condition and results of operation.
Future Adoption of New Accounting Standards
Financial Services - Investment Companies Topic
In June 2013, the FASB issued ASU No. 2013-08, “Amendments to the Scope, Measurement, and Disclosure Requirements” (“ASU 2013-08”), which provides comprehensive accounting guidance for assessing whether an entity is an investment company. ASU 2013-08 requires an assessment of all the characteristics of an investment company through the use of a new two-tiered approach, which considers the entity’s purpose and design to determine whether it is an investment company. As a result of applying the new criteria in ASU 2013-08, an entity once considered an investment company may no longer meet the new criteria to be classified as such, and conversely, an entity not classified as an investment company under current GAAP may satisfy the criteria to be classified as such upon the adoption of
ASU 2013-08. If an entity is no longer classified as an investment company, it must discontinue the application of investment company accounting guidance and present the change in status through a cumulative effect adjustment to the beginning balance of retained earnings in the period of adoption. If an entity becomes classified as an investment company, ASU 2013-08 should be applied prospectively with the effect of adoption recognized as an adjustment to opening net assets for the period of adoption. The amendments in ASU 2013-08 are effective for interim and annual reporting periods in fiscal years beginning after December 15, 2013, with early application prohibited. We will adopt the requirements in ASU 2013-08 effective January 1, 2014, and are currently evaluating the impact of adoption on our consolidated financial condition and results of operations.
Income Taxes Topic
In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”) in order to explicitly define the financial statement presentation requirements in GAAP. ASU 2013-11 provides guidance on the presentation of unrecognized tax benefits when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. The amendments in the ASU are effective prospectively for interim and annual reporting periods in fiscal years beginning after December 15, 2013, with early application permitted. We will adopt the requirements of ASU 2013-11 effective January 1, 2014, and will include the new disclosure requirements in the notes to our consolidated financial statements.
Investments - Equity Method and Joint Ventures
In January 2014, the FASB issued ASU No. 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects” (“ASU 2014-01”) in response to stakeholders’ feedback that the presence of certain conditions in order to apply the effective yield method to investments in qualified affordable housing projects may be overly restrictive and could result in certain investments being accounted for under a method of accounting that may not fairly represent the economics of the investments. ASU 2014-01 allows entities to make an accounting policy election to account for investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. The conditions in ASU 2014-01 have been modified from the current GAAP requirements allowing for the application of the effective yield method, to enable more entities to make use of the proportional amortization method. The decision to apply the proportional amortization method should be applied consistently to all investments in qualified affordable housing projects rather than on an individual investment basis. The amendments in this ASU are to be applied retrospectively for interim and annual reporting periods beginning after December 15, 2014; however, a reporting entity that uses the effective yield method to account for investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. We will adopt the requirements of ASU 2014-01 effective January 1, 2015, and are currently evaluating the impact of adoption on our consolidated financial condition and results of operations.
Other Expenses Topic
In July 2011, the FASB issued ASU No. 2011-06, “Fees Paid to the Federal Government by Health Insurers” (“ASU 2011-06”) in order to address the question of how health insurers should recognize and classify fees mandated by the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act. The annual fee is imposed on health insurers for each calendar year beginning on or after January 1, 2014, and is payable no later than September 30 of the applicable year. If a fee payment is required in the applicable year, ASU 2011-06 requires the health insurer to record the liability in full with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation over the applicable year. The ASU indicates that the annual fee does not meet the definition of an acquisition cost in accordance with Topic 944 of the FASB ASC. The amendments in ASU 2011-06 are effective for calendar years beginning after December 31, 2013, when the fee initially becomes effective. We will adopt the requirements of ASU 2011-06 effective January 1, 2014. The amendments will not have a material effect on our consolidated financial condition and results of operations.
3. Dispositions
Newton County Loan & Savings, FSB (“NCLS”)
On November 30, 2011, we completed the liquidation of NCLS, a federally regulated savings bank located in Indiana, which did not have a material effect on our consolidated financial condition or results of operations.
Discontinued Investment Management Operations
On January 4, 2010, we closed on the stock sale of our subsidiary Delaware Management Holdings, Inc. (“Delaware”), which provided investment products and services to individuals and institutions, to Macquarie Bank Limited.
In addition, certain of our subsidiaries, including The Lincoln National Life Insurance Company (“LNL”), our primary insurance subsidiary, entered into investment advisory agreements with Delaware, pursuant to which Delaware will continue to manage the majority of the general account insurance assets of the subsidiaries. The investment advisory agreements have 10-year terms, and we may terminate them without cause, subject to a purchase price adjustment of up to $50 million, the amount of which is dependent on the timing of any termination and which agreements are terminated. The amount of the potential adjustment will decline on a pro rata basis over the 10-year term of the advisory agreements.
We reclassified the results of operations of Delaware into income (loss) from discontinued operations, net of federal income taxes, for all periods presented on our Consolidated Statements of Comprehensive Income (Loss), and selected amounts (in millions) were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
Disposal
						
						
						
						
						
						
						
						
Gain (loss) on disposal, before federal income taxes
$
-
						
$
(1) 				
						
$
(3) 				
Federal income tax expense (benefit)
						
-
						
						
(28) 				
						
						
				
Gain (loss) on disposal
						
-
						
						
				
						
						
(8) 				
Income (loss) from discontinued operations
$
-
						
$
				
						
$
(8) 				
The income from discontinued operations for the year ended December 31, 2012, related to the release of reserves associated with prior tax years that were closed out during the year and a purchase price adjustment associated with the termination of a portion of the investment advisory agreement with Delaware. The loss from discontinued operations for the year ended December 31, 2011, related to an unfavorable tax return true-up from the prior year.
4. Variable Interest Entities
Consolidated VIEs
Credit-Linked Notes (“CLNs”)
We have invested in the Class 1 notes of two CLN structures, which represent special purpose trusts combining asset-backed securities with credit default swaps to produce multi-class structured securities. The CLN structures also include subordinated Class 2 notes, which are held by third parties, and, together with the Class 1 notes, represent 100% of the outstanding notes of the CLN structures. The entities that issued the CLNs are financed by the note holders, and, as such, the note holders participate in the expected losses and residual returns of the entities.
Because the note holders do not have voting rights or similar rights, we determined the entities issuing the CLNs are VIEs, and as a note holder, our interest represented a variable interest. We have the power to direct the most significant activity affecting the performance of both CLN structures, as we have the ability to actively manage the reference portfolios underlying the credit default swaps. In addition, we receive returns from the CLN structures and may absorb losses that could potentially be significant to the CLN structures. As such, we concluded that we are the primary beneficiary of the VIEs associated with the CLNs. We reflect the assets and liabilities on our Consolidated Balance Sheets and recognize the results of operations of these VIEs on our Consolidated Statements of Comprehensive Income (Loss).
As a result of consolidating the CLNs, we also consolidate the derivative instruments in the CLN structures. The credit default swaps create variability in the CLN structures and expose the note holders to the credit risk of the referenced portfolio. The contingent forward contracts transfer a portion of the loss in the underlying fixed maturity corporate asset-backed credit card loan securities back to the counterparty after credit losses reach our attachment point.
The following summarizes information regarding the CLN structures (dollars in millions) as of December 31, 2013:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Amount and Date of Issuance
						
						
						
$400
						
$200
						
						
						
						
December
						
April
						
						
						
						
						
						
						
Original attachment point (subordination)
						
						
5.50% 				
						
2.05% 				
						
						
Current attachment point (subordination)
						
						
4.17% 				
						
1.48% 				
						
						
Maturity
						
						
12/20/2016
						
3/20/2017
						
						
Current rating of tranche
						
						
BB+
						
Ba2
						
						
Current rating of underlying collateral pool
Aa1-B1
						
Aaa-Caa2
						
						
Number of defaults in underlying collateral pool
				
						
				
						
						
Number of entities
						
						
				
						
				
						
						
Number of countries
						
						
				
						
				
						
						
There has been no event of default on the CLNs themselves. Based upon our analysis, the remaining subordination as represented by the attachment point should be sufficient to absorb future credit losses, subject to changing market conditions. Similar to other debt market instruments, our maximum principal loss is limited to our original investment.
The following summarizes the exposure of the CLN structures’ underlying reference portfolios by industry and rating as of December 31, 2013:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
AAA
						
AA
						
A
						
BBB
						
BB
						
B
						
CCC
						
Total
Industry
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Financial intermediaries
0.0% 				
						
2.1% 				
						
6.7% 				
						
1.7% 				
						
0.0% 				
						
0.0% 				
						
0.0% 				
						
10.5% 				
Telecommunications
0.0% 				
						
0.0% 				
						
4.0% 				
						
5.5% 				
						
1.5% 				
						
0.0% 				
						
0.0% 				
						
11.0% 				
Oil and gas
0.3% 				
						
2.1% 				
						
1.0% 				
						
4.6% 				
						
0.0% 				
						
0.0% 				
						
0.0% 				
						
8.0% 				
Utilities
0.0% 				
						
0.0% 				
						
2.6% 				
						
1.9% 				
						
0.0% 				
						
0.0% 				
						
0.0% 				
						
4.5% 				
Chemicals and plastics
0.0% 				
						
0.0% 				
						
2.3% 				
						
1.2% 				
						
0.3% 				
						
0.0% 				
						
0.0% 				
						
3.8% 				
Drugs
0.3% 				
						
2.2% 				
						
1.2% 				
						
0.0% 				
						
0.0% 				
						
0.0% 				
						
0.0% 				
						
3.7% 				
Retailers (except food
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
and drug)
0.0% 				
						
0.0% 				
						
2.1% 				
						
0.9% 				
						
0.5% 				
						
0.0% 				
						
0.0% 				
						
3.5% 				
Industrial equipment
0.0% 				
						
0.0% 				
						
2.6% 				
						
0.7% 				
						
0.0% 				
						
0.0% 				
						
0.0% 				
						
3.3% 				
Sovereign
0.0% 				
						
0.7% 				
						
1.2% 				
						
1.3% 				
						
0.0% 				
						
0.0% 				
						
0.0% 				
						
3.2% 				
Conglomerates
0.0% 				
						
2.3% 				
						
0.9% 				
						
0.0% 				
						
0.0% 				
						
0.0% 				
						
0.0% 				
						
3.2% 				
Forest products
0.0% 				
						
0.0% 				
						
0.0% 				
						
1.6% 				
						
1.4% 				
						
0.0% 				
						
0.0% 				
						
3.0% 				
Other
0.0% 				
						
4.1% 				
						
15.5% 				
						
17.1% 				
						
4.6% 				
						
0.7% 				
						
0.3% 				
						
42.3% 				
Total
0.6% 				
						
13.5% 				
						
40.1% 				
						
36.5% 				
						
8.3% 				
						
0.7% 				
						
0.3% 				
						
100.0% 				
Statutory Trust Note
In August 2011, we purchased a $100 million note issued by a statutory trust (“Issuer”) in a private placement offering. The proceeds were used by the Issuer to purchase U.S. Treasury securities to be held as collateral assets supporting an excess mortality swap. Our maximum exposure to loss is limited to our original investment in the notes. We have concluded that the Issuer of the note is a VIE as the entity does not have sufficient equity to support its activities without additional financial support, and as a note holder, our interest represents a variable interest. In our evaluation of the primary beneficiary, we concluded that our economic interest was greater than our stated power. As a result, we concluded that we are the primary beneficiary of the VIE and consolidated all of the assets and liabilities of the Issuer on our Consolidated Balance Sheets as of August 1, 2011.
On December 16, 2013, the excess mortality swap underlying this VIE was terminated as a result of a cancellation event under the associated swap agreement. Subsequently, the U.S. government bonds were redeemed on January 6, 2014. The combination of these two events, under the direction of LNC and its counterparty, has provided for the dissolution of this VIE effective January 6, 2014.
Lincoln Financial Limited Liability Company I
In July 2013, we formed a new limited liability company, Lincoln Financial Limited Liability Company I (“LFLLCI”), and we became the sole equity owner of LFLLCI through our capital contribution. The activities of LFLLCI relate solely to our reinsurance subsidiary, the Lincoln Reinsurance Company of Vermont V (“LRCVV”), and primarily are to acquire, hold and issue notes as well as pay and collect interest on the notes. We concluded that LFLLCI is a VIE and that LNC is the primary beneficiary as we have the power to direct the most significant activities affecting the performance of LFLLCI. We do not expect the financial results of LFLLCI to have a material effect on our consolidated results of operations or financial condition.
Asset and liability information (dollars in millions) for the consolidated VIEs included on our Consolidated Balance Sheets was as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31, 2013
						
						
As of December 31, 2012
						
Number
						
						
						
						
						
						
						
						
						
Number
						
						
						
						
						
						
						
						
of
						
						
Notional
						
Carrying
						
						
of
						
						
Notional
						
Carrying
Instruments
						
Amounts
						
Value
						
Instruments
						
Amounts
						
Value
Assets
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Fixed maturity securities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Asset-backed credit card loans
						
						
N/A
						
						
$
-
						
$
				
						
						
						
N/A
						
						
$
-
						
$
				
U.S. government bonds
						
						
N/A
						
						
						
-
						
						
				
						
						
						
N/A
						
						
						
-
						
						
				
Excess mortality swap
						
						
-
						
						
						
-
						
						
-
						
						
						
				
						
						
						
				
						
						
-
Total return swap
						
						
				
						
						
						
				
						
						
-
						
						
						
-
						
						
						
-
						
						
-
Total assets (1)
						
						
				
						
						
$
				
						
$
				
						
						
						
				
						
						
$
				
						
$
				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Liabilities
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Non-qualifying hedges:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Credit default swaps
						
						
				
						
						
$
				
						
$
				
						
						
						
				
						
						
$
				
						
$
				
Contingent forwards
						
						
				
						
						
						
-
						
						
-
						
						
						
				
						
						
						
-
						
						
-
Total liabilities (2)
						
						
				
						
						
$
				
						
$
				
						
						
						
				
						
						
$
				
						
$
				
(1)
Reported in variable interest entities’ fixed maturity securities on our Consolidated Balance Sheets.
(2)
Reported in variable interest entities’ liabilities on our Consolidated Balance Sheets.
For details related to the fixed maturity AFS securities for these VIEs, see Note 5.
As described more fully in Note 1, we regularly review our investment holdings for OTTI. Based upon this review, we believe that the AFS fixed maturity securities were not other-than-temporarily impaired as of December 31, 2013.
The gains (losses) for the consolidated VIEs (in millions) recorded on our Consolidated Statements of Comprehensive Income (Loss) were as follows:
						
						
						
						
						
						
						
						
For the Years Ended
						
December 31,
						
						
						
Non-Qualifying Hedges
						
						
						
						
						
						
Credit default swaps
$
				
						
$
				
						
Contingent forwards
						
-
						
						
(3) 				
						
Total non-qualifying hedges (1)
$
				
						
$
				
						
(1)
Reported in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).
Unconsolidated VIEs
Effective December 31, 2010, we issued a $500 million long-term senior note in exchange for a corporate bond AFS security of like principal and duration from a non-affiliated VIE whose primary activities are to acquire, hold and issue notes and loans, as well as pay and collect interest on the notes and loans. We have concluded that we are not the primary beneficiary of this VIE because we do not have power over the activities that most significantly affect its economic performance. In addition, the terms of the senior note provide us with a set-off right to the corporate bond AFS security we purchased from the VIE; therefore, neither appears on our Consolidated Balance Sheets. We assigned the corporate bond AFS security to one of our subsidiaries and issued a guarantee to our subsidiary for the timely payment of the corporate bond’s principal.
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 RMBS, CMBS, CLOs and CDOs. 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.
We invest in certain LPs that operate qualified affordable housing projects that we concluded are VIEs. We receive returns from the LPs in the form of income tax credits that are guaranteed by creditworthy third parties, and our exposure to loss is limited to the capital we
invest in the LPs. We are not the primary beneficiary of these VIEs as we do not have the power to direct the most significant activities of the LPs. Our maximum exposure to loss was $77 million and $92 million as of December 31, 2013 and 2012, respectively.
5. Investments
AFS Securities
Pursuant to the Fair Value Measurements and Disclosures Topic of the FASB ASC, we have categorized AFS securities into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3), as described in Note 1, 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 December 31, 2013
Amortized
						
Gross Unrealized
						
Fair
Cost
						
Gains
						
Losses
						
OTTI
						
Value
Fixed maturity securities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Corporate bonds
$
65,808 				
						
$
4,374 				
						
$
1,157 				
						
$
				
						
$
68,935 				
U.S. government bonds
						
				
						
						
				
						
						
				
						
						
-
						
						
				
Foreign government bonds
						
				
						
						
				
						
						
				
						
						
-
						
						
				
RMBS
						
4,135 				
						
						
				
						
						
				
						
						
				
						
						
4,350 				
CMBS
						
				
						
						
				
						
						
				
						
						
				
						
						
				
CLOs
						
				
						
						
-
						
						
				
						
						
				
						
						
				
State and municipal bonds
						
3,638 				
						
						
				
						
						
				
						
						
-
						
						
3,919 				
Hybrid and redeemable preferred securities
						
				
						
						
				
						
						
				
						
						
-
						
						
1,005 				
VIEs' fixed maturity securities
						
				
						
						
				
						
						
-
						
						
-
						
						
				
Total fixed maturity securities
						
77,035 				
						
						
5,149 				
						
						
1,265 				
						
						
				
						
						
80,775 				
Equity securities
						
				
						
						
				
						
						
-
						
						
-
						
						
				
Total AFS securities
$
77,217 				
						
$
5,168 				
						
$
1,265 				
						
$
				
						
$
80,976 				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31, 2012
Amortized
						
Gross Unrealized
						
Fair
Cost
						
Gains
						
Losses
						
OTTI
						
Value
Fixed maturity securities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Corporate bonds
$
60,124 				
						
$
8,219 				
						
$
				
						
$
				
						
$
68,016 				
U.S. government bonds
						
				
						
						
				
						
						
-
						
						
-
						
						
				
Foreign government bonds
						
				
						
						
				
						
						
-
						
						
-
						
						
				
RMBS
						
5,763 				
						
						
				
						
						
				
						
						
				
						
						
6,171 				
CMBS
						
				
						
						
				
						
						
				
						
						
				
						
						
1,003 				
CLOs
						
				
						
						
				
						
						
				
						
						
				
						
						
				
State and municipal bonds
						
3,546 				
						
						
				
						
						
				
						
						
-
						
						
4,353 				
Hybrid and redeemable preferred securities
						
1,181 				
						
						
				
						
						
				
						
						
-
						
						
1,217 				
VIEs' fixed maturity securities
						
				
						
						
				
						
						
-
						
						
-
						
						
				
Total fixed maturity securities
						
73,395 				
						
						
9,862 				
						
						
				
						
						
				
						
						
82,744 				
Equity securities
						
				
						
						
				
						
						
				
						
						
-
						
						
				
Total AFS securities
$
73,532 				
						
$
9,884 				
						
$
				
						
$
				
						
$
82,901 				
The amortized cost and fair value of fixed maturity AFS securities by contractual maturities (in millions) as of December 31, 2013, were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
Amortized
						
Fair
						
Cost
						
Value
						
Due in one year or less
$
2,599 				
						
$
2,670 				
						
Due after one year through five years
						
14,301 				
						
						
15,461 				
						
Due after five years through ten years
						
24,680 				
						
						
25,621 				
						
Due after ten years
						
30,375 				
						
						
31,720 				
						
Subtotal
						
71,955 				
						
						
75,472 				
						
MBS
						
4,848 				
						
						
5,078 				
						
CLOs
						
				
						
						
				
						
Total fixed maturity AFS securities
$
77,035 				
						
$
80,775 				
						
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 December 31, 2013
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 securities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Corporate bonds
$
16,918 				
						
$
1,018 				
						
$
1,258 				
						
$
				
						
$
18,176 				
						
						
$
1,247 				
U.S. government bonds
						
				
						
						
				
						
						
-
						
						
-
						
						
				
						
						
						
				
Foreign government bonds
						
				
						
						
				
						
						
-
						
						
-
						
						
				
						
						
						
				
RMBS
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
						
				
CMBS
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
						
				
CLOs
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
						
				
State and municipal bonds
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
						
				
Hybrid and redeemable
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
preferred securities
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
						
				
Total fixed maturity securities
						
18,322 				
						
						
1,085 				
						
						
1,839 				
						
						
				
						
						
20,161 				
						
						
						
1,409 				
Equity securities
						
-
						
						
-
						
						
-
						
						
-
						
						
-
						
						
						
-
Total AFS securities
$
18,322 				
						
$
1,085 				
						
$
1,839 				
						
$
				
						
$
20,161 				
						
						
$
1,409 				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Total number of AFS securities in an unrealized loss position
						
						
						
						
						
						
						
						
						
						
						
						
1,484 				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31, 2012
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 securities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Corporate bonds
$
2,853 				
						
$
				
						
$
				
						
$
				
						
$
3,787 				
						
						
$
				
RMBS
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
						
				
CMBS
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
						
				
CLOs
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
						
				
State and municipal bonds
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
						
				
Hybrid and redeemable
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
preferred securities
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
						
				
Total fixed maturity securities
						
3,336 				
						
						
				
						
						
1,616 				
						
						
				
						
						
4,952 				
						
						
						
				
Equity securities
						
				
						
						
				
						
						
-
						
						
-
						
						
				
						
						
						
				
Total AFS securities
$
3,343 				
						
$
				
						
$
1,616 				
						
$
				
						
$
4,959 				
						
						
$
				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Total number of AFS securities in an unrealized loss position
						
						
						
						
						
						
						
						
						
						
						
						
				
For information regarding our investments in VIEs, see Note 4.
We perform detailed analysis on the AFS securities backed by pools of residential and commercial mortgages that are most at risk of impairment based on factors discussed in Note 1. Selected information for these securities in a gross unrealized loss position (in millions) was as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31, 2013
						
Amortized
						
Fair
						
Unrealized
						
Cost
						
Value
						
Loss
						
Total
						
						
						
						
						
						
						
						
						
AFS securities backed by pools of residential mortgages
$
1,261 				
						
$
1,146 				
						
$
				
						
AFS securities backed by pools of commercial mortgages
						
				
						
						
				
						
						
				
						
Total
$
1,454 				
						
$
1,315 				
						
$
				
						
						
						
						
						
						
						
						
						
						
Subject to Detailed Analysis
						
						
						
						
						
						
						
						
						
AFS securities backed by pools of residential mortgages
$
				
						
$
				
						
$
				
						
AFS securities backed by pools of commercial mortgages
						
				
						
						
				
						
						
				
						
Total
$
				
						
$
				
						
$
				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31, 2012
						
Amortized
						
Fair
						
Unrealized
						
Cost
						
Value
						
Loss
						
Total
						
						
						
						
						
						
						
						
						
AFS securities backed by pools of residential mortgages
$
1,181 				
						
$
				
						
$
				
						
AFS securities backed by pools of commercial mortgages
						
				
						
						
				
						
						
				
						
Total
$
1,417 				
						
$
1,172 				
						
$
				
						
						
						
						
						
						
						
						
						
						
Subject to Detailed Analysis
						
						
						
						
						
						
						
						
						
AFS securities backed by pools of residential mortgages
$
1,173 				
						
$
				
						
$
				
						
AFS securities backed by pools of commercial mortgages
						
				
						
						
				
						
						
				
						
Total
$
1,229 				
						
$
1,012 				
						
$
				
						
For the years ended December 31, 2013 and 2012, we recorded OTTI for AFS securities backed by pools of residential and commercial mortgages of $21 million and $103 million, pre-tax, respectively, and before associated amortization expense for DAC, VOBA, DSI and DFEL, of which $ (46) million and $ (45) million, respectively, was recognized in OCI and $67 million and $148 million, respectively, was recognized in net income (loss).
The fair value, gross unrealized losses, the portion of OTTI recognized in OCI (in millions) and number of AFS securities where the fair value had declined and remained below amortized cost by greater than 20% were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31, 2013
						
						
						
						
						
						
						
						
						
						
						
Number
						
Fair
						
Gross Unrealized
						
						
of
						
Value
						
Losses
						
OTTI
						
Securities (1)
Less than six months
$
				
						
$
				
						
$
-
						
						
						
				
						
Six months or greater, but less than nine months
						
				
						
						
				
						
						
-
						
						
						
				
						
Nine months or greater, but less than twelve months
						
				
						
						
				
						
						
-
						
						
						
				
						
Twelve months or greater
						
				
						
						
				
						
						
				
						
						
						
				
						
Total
$
				
						
$
				
						
$
				
						
						
						
				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31, 2012
						
						
						
						
						
						
						
						
						
						
						
Number
						
Fair
						
Gross Unrealized
						
						
of
						
Value
						
Losses
						
OTTI
						
Securities (1)
Less than six months
$
				
						
$
				
						
$
				
						
						
						
				
						
Nine months or greater, but less than twelve months
						
				
						
						
				
						
						
-
						
						
						
				
						
Twelve months or greater
						
				
						
						
				
						
						
				
						
						
						
				
						
Total
$
				
						
$
				
						
$
				
						
						
						
				
						
(1)
We may reflect a security in more than one aging category based on various purchase dates.
We regularly review our investment holdings for OTTI. Our gross unrealized losses, including the portion of OTTI recognized in OCI, on AFS securities increased $894 million for the year ended December 31, 2013. As discussed further below, we believe the unrealized loss position as of December 31, 2013, did not represent OTTI as (i) we did not intend to sell these fixed maturity AFS securities; (ii) it is not more likely than not that we will be required to sell the fixed maturity AFS securities before recovery of their amortized cost basis; (iii) the estimated future cash flows were equal to or greater than the amortized cost basis of the debt securities; and (iv) we had the ability and intent to hold the equity AFS securities for a period of time sufficient for recovery.
Based upon this evaluation as of December 31, 2013, management believes we have the ability to generate adequate amounts of cash from our normal operations (e.g., insurance premiums and fees and investment income) to meet cash requirements with a prudent margin of safety without requiring the sale of our temporarily-impaired securities.
As of December 31, 2013, the unrealized losses associated with our corporate bond securities were attributable primarily to securities that were backed by commercial loans and individual issuer companies. For our corporate bond securities with commercial loans as the underlying collateral, we evaluated the projected credit losses in the underlying collateral and concluded that we had sufficient subordination or other credit enhancement when compared with our estimate of credit losses for the individual security and we expected to recover the entire amortized cost for each security. For individual issuers, we performed detailed analysis of the financial performance of the issuer and determined that we expected to recover the entire amortized cost for each security.
As of December 31, 2013, the unrealized losses associated with our MBS and CLOs were attributable primarily to collateral losses and credit spreads. We assessed for credit impairment using a cash flow model that incorporates key assumptions including default rates, severities and prepayment rates. We estimated losses for a security by forecasting the underlying loans in each transaction. The forecasted loan performance was used to project cash flows to the various tranches in the structure, as applicable. Our forecasted cash flows also considered, as applicable, independent industry analyst reports and forecasts, sector credit ratings and other independent market data. Based upon our assessment of the expected credit losses of the security given the performance of the underlying collateral compared to our subordination or other credit enhancement, we expected to recover the entire amortized cost basis of each temporarily impaired security.
As of December 31, 2013, the unrealized losses associated with our hybrid and redeemable preferred securities were attributable primarily to wider credit spreads caused by illiquidity in the market and subordination within the capital structure, as well as credit risk of specific issuers. For our hybrid and redeemable preferred securities, we evaluated the financial performance of the issuer based upon credit performance and investment ratings and determined that we expected to recover the entire amortized cost of each security.
Changes in the amount of credit loss of OTTI recognized in net income (loss) where the portion related to other factors was recognized in OCI (in millions) on fixed maturity AFS securities were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
						
						
Balance as of beginning-of-year
$
				
						
$
				
						
$
				
						
Increases attributable to:
						
						
						
						
						
						
						
						
						
Credit losses on securities for which an OTTI was not previously recognized
						
				
						
						
				
						
						
				
						
Credit losses on securities for which an OTTI was previously recognized
						
				
						
						
				
						
						
				
						
Decreases attributable to:
						
						
						
						
						
						
						
						
						
Securities sold
						
(102) 				
						
						
(136) 				
						
						
(55) 				
						
Balance as of end-of-year
$
				
						
$
				
						
$
				
						
During 2013, 2012 and 2011, we recorded credit losses on securities for which an OTTI was not previously recognized as we determined the cash flows expected to be collected would not be sufficient to recover the entire amortized cost basis of the debt security. The credit losses we recorded on securities for which an OTTI was not previously recognized were attributable primarily to one or a combination of the following reasons:
·
Failure of the issuer of the security to make scheduled payments;
·
Deterioration of creditworthiness of the issuer;
·
Deterioration of conditions specifically related to the security;
·
Deterioration of fundamentals of the industry in which the issuer operates; and
·
Deterioration of the rating of the security by a rating agency.
We recognize the OTTI attributed to the noncredit portion as a separate component in OCI referred to as unrealized OTTI on AFS securities.
Details of the amount of credit loss of OTTI recognized in net income (loss) for which a portion related to other factors was recognized in OCI (in millions), were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31, 2013
						
						
Gross Unrealized
						
						
						
OTTI in
Amortized
						
						
						
Losses and
						
Fair
						
Credit
Cost
						
Gains
						
OTTI
						
Value
						
Losses
Corporate bonds
$
				
						
$
				
						
$
				
						
$
				
						
$
				
RMBS
						
				
						
						
				
						
						
				
						
						
				
						
						
				
CMBS
						
				
						
						
				
						
						
				
						
						
				
						
						
				
Total
$
				
						
$
				
						
$
				
						
$
				
						
$
				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31, 2012
						
						
Gross Unrealized
						
						
						
OTTI in
Amortized
						
						
						
Losses and
						
Fair
						
Credit
Cost
						
Gains
						
OTTI
						
Value
						
Losses
Corporate bonds
$
				
						
$
				
						
$
				
						
$
				
						
$
				
RMBS
						
				
						
						
				
						
						
				
						
						
				
						
						
				
CMBS
						
				
						
						
				
						
						
				
						
						
				
						
						
				
Total
$
				
						
$
				
						
$
				
						
$
				
						
$
				
Trading Securities
Trading securities at fair value (in millions) consisted of the following:
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31,
						
						
						
Fixed maturity securities:
						
						
						
						
						
						
Corporate bonds
$
1,771 				
						
$
1,929 				
						
U.S. government bonds
						
				
						
						
				
						
Foreign government bonds
						
				
						
						
				
						
RMBS
						
				
						
						
				
						
CMBS
						
				
						
						
				
						
CLOs
						
				
						
						
				
						
State and municipal bonds
						
				
						
						
				
						
Hybrid and redeemable preferred securities
						
				
						
						
				
						
Total fixed maturity securities
						
2,282 				
						
						
2,552 				
						
Equity Securities
						
-
						
						
				
						
Total trading securities
$
2,282 				
						
$
2,554 				
						
The portion of the market adjustment for gains (losses) that relate to trading securities still held as of December 31, 2013, 2012 and 2011, was $(172) million, $53 million and $118 million, respectively.
Mortgage Loans on Real Estate
Mortgage loans on real estate principally involve commercial real estate. The commercial loans are geographically diversified throughout the U.S. with the largest concentrations in California and Texas, which accounted for 32% of mortgage loans on real estate as of December 31, 2013 and 2012.
The following provides the current and past due composition of our mortgage loans on real estate (in millions):
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31,
						
						
						
Current
$
7,200 				
						
$
7,011 				
						
60 to 90 days past due
						
				
						
						
				
						
Greater than 90 days past due
						
				
						
						
				
						
Valuation allowance associated with impaired mortgage loans on real estate
						
(3) 				
						
						
(21) 				
						
Unamortized premium (discount)
						
				
						
						
				
						
Total carrying value
$
7,210 				
						
$
7,029 				
						
The number of impaired mortgage loans on real estate, each of which had an associated specific valuation allowance, and the carrying value of impaired mortgage loans on real estate (dollars in millions) were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31,
						
						
						
Number of impaired mortgage loans on real estate
				
						
				
						
						
						
						
						
						
						
Principal balance of impaired mortgage loans on real estate
$
				
						
$
				
						
Valuation allowance associated with impaired mortgage loans on real estate
						
(3) 				
						
						
(21) 				
						
Carrying value of impaired mortgage loans on real estate
$
				
						
$
				
						
The changes in the valuation allowance associated with impaired mortgage loans on real estate (in millions) were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31,
						
						
						
						
Balance as of beginning-of-year
$
				
						
						
$
				
						
Additions
						
				
						
						
						
				
						
Charge-offs, net of recoveries
						
(21) 				
						
						
						
(24) 				
						
Balance as of end-of-year
$
				
						
						
$
				
						
The average carrying value on the impaired mortgage loans on real estate (in millions) was as follows:
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
Average carrying value for impaired mortgage loans on real estate
$
				
						
$
				
						
$
				
Interest income recognized on impaired mortgage loans on real estate
						
				
						
						
				
						
						
				
Interest income collected on impaired mortgage loans on real estate
						
				
						
						
				
						
						
				
As described in Note 1, we use the loan-to-value and debt-service coverage ratios as credit quality indicators for our mortgage loans, which were as follows (dollars in millions):
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31, 2013
						
As of December 31, 2012
						
						
						
						
						
Debt-
						
						
						
						
						
						
Debt-
						
						
						
						
						
Service
						
						
						
						
						
						
Service
Principal
						
% of
						
Coverage
						
Principal
						
% of
						
Coverage
Amount
						
Total
						
Ratio
						
Amount
						
Total
						
Ratio
Less than 65%
$
6,026 				
						
83.6% 				
						
1.78
						
$
5,677 				
						
80.6% 				
						
1.68
65% to 74%
						
				
						
10.3% 				
						
1.42
						
						
				
						
12.7% 				
						
1.39
75% to 100%
						
				
						
5.6% 				
						
0.83
						
						
				
						
5.5% 				
						
0.84
Greater than 100%
						
				
						
0.5% 				
						
0.78
						
						
				
						
1.2% 				
						
0.66
Total mortgage loans on real estate
$
7,207 				
						
100.0% 				
						
						
						
$
7,043 				
						
100.0% 				
						
						
Alternative Investments
As of December 31, 2013 and 2012, alternative investments included investments in 121 and 98 different partnerships, respectively, and the portfolio represented approximately 1% of our overall invested assets.
Net Investment Income
The major categories of net investment income (in millions) on our Consolidated Statements of Comprehensive Income (Loss) were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
Fixed maturity AFS securities
$
3,976 				
						
$
3,910 				
						
$
3,842 				
Equity AFS securities
						
				
						
						
				
						
						
				
Trading securities
						
				
						
						
				
						
						
				
Mortgage loans on real estate
						
				
						
						
				
						
						
				
Real estate
						
				
						
						
				
						
						
				
Standby real estate equity commitments
						
-
						
						
-
						
						
				
Policy loans
						
				
						
						
				
						
						
				
Invested cash
						
				
						
						
				
						
						
				
Commercial mortgage loan prepayment and bond make-whole premiums
						
				
						
						
				
						
						
				
Alternative investments
						
				
						
						
				
						
						
				
Consent fees
						
				
						
						
				
						
						
				
Other investments
						
(9) 				
						
						
(19) 				
						
						
(13) 				
Investment income
						
4,876 				
						
						
4,801 				
						
						
4,763 				
Investment expense
						
(122) 				
						
						
(103) 				
						
						
(111) 				
Net investment income
$
4,754 				
						
$
4,698 				
						
$
4,652 				
Realized Gain (Loss) Related to Certain Investments
The detail of the realized gain (loss) related to certain investments (in millions) was as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
Fixed maturity AFS securities:
						
						
						
						
						
						
						
						
Gross gains
$
				
						
$
				
						
$
				
Gross losses
						
(94) 				
						
						
(202) 				
						
						
(227) 				
Equity AFS securities:
						
						
						
						
						
						
						
						
Gross gains
						
				
						
						
				
						
						
				
Gross losses
						
(2) 				
						
						
(9) 				
						
						
-
Gain (loss) on other investments
						
(3) 				
						
						
				
						
						
(9) 				
Associated amortization of DAC, VOBA, DSI and DFEL
						
						
						
						
						
						
						
						
and changes in other contract holder funds
						
(28) 				
						
						
				
						
						
(10) 				
Total realized gain (loss) related to certain investments
$
(98) 				
						
$
(190) 				
						
$
(148) 				
Details underlying write-downs taken as a result of OTTI (in millions) that were recognized in net income (loss) and included in realized gain (loss) on AFS securities above, and the portion of OTTI recognized in OCI (in millions) were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
OTTI Recognized in Net Income (Loss)
						
						
						
						
						
						
						
						
Fixed maturity securities:
						
						
						
						
						
						
						
						
Corporate bonds
$
(35) 				
						
$
(65) 				
						
$
(14) 				
RMBS
						
(31) 				
						
						
(53) 				
						
						
(79) 				
CMBS
						
(15) 				
						
						
(55) 				
						
						
(57) 				
CRE CDOs
						
(1) 				
						
						
(2) 				
						
						
(1) 				
Hybrid and redeemable preferred securities
						
-
						
						
-
						
						
(2) 				
Total fixed maturity securities
						
(82) 				
						
						
(175) 				
						
						
(153) 				
Equity securities
						
(1) 				
						
						
(8) 				
						
						
-
Gross OTTI recognized in net income (loss)
						
(83) 				
						
						
(183) 				
						
						
(153) 				
Associated amortization of DAC, VOBA, DSI, and DFEL
						
				
						
						
				
						
						
				
Net OTTI recognized in net income (loss), pre-tax
$
(70) 				
						
$
(153) 				
						
$
(124) 				
						
						
						
						
						
						
						
						
Portion of OTTI Recognized in OCI
						
						
						
						
						
						
						
						
Gross OTTI recognized in OCI
$
				
						
$
				
						
$
				
Change in DAC, VOBA, DSI and DFEL
						
(1) 				
						
						
(15) 				
						
						
(13) 				
Net portion of OTTI recognized in OCI, pre-tax
$
				
						
$
				
						
$
				
Determination of Credit Losses on Corporate Bonds and CLOs
As of December 31, 2013 and 2012, we reviewed our corporate bond and CLO portfolios for potential shortfall in contractual principal and interest based on numerous subjective and objective inputs. The factors used to determine the amount of credit loss for each individual security, include, but are not limited to, near term risk, substantial discrepancy between book and market value, sector or company-specific volatility, negative operating trends and trading levels wider than peers.
Credit ratings express opinions about the credit quality of a security. Securities rated investment grade, that is those rated BBB- or higher by Standard & Poor’s (“S&P”) Rating Services or Baa3 or higher by Moody’s Investors Service (“Moody’s”), are generally considered by the rating agencies and market participants to be low credit risk. As of December 31, 2013 and 2012, 96% of the fair value of our corporate bond portfolio was rated investment grade. As of December 31, 2013 and 2012, the portion of our corporate bond portfolio rated below investment grade had an amortized cost of $3.0 billion, and a fair value of $2.9 billion. As of December 31, 2013 and 2012, 94% and 93%, respectively, of the fair value of our CLO portfolio was rated investment grade. As of December 31, 2013 and 2012, the portion of our CLO portfolio rated below investment grade had an amortized cost of $16 million and $21 million, respectively, and fair value of $13 million. Based upon the analysis discussed above, we believed as of December 31, 2013 and 2012, that we would recover the amortized cost of each investment grade corporate bond and CLO security.
Determination of Credit Losses on MBS
As of December 31, 2013 and 2012, default rates were projected by considering underlying MBS loan performance and collateral type. Projected default rates on existing delinquencies vary between 10% to 100% depending on loan type and severity of delinquency
status. In addition, we estimate the potential contributions of currently performing loans that may become delinquent in the future based on the change in delinquencies and loan liquidations experienced in the recent history. Finally, we develop a default rate timing curve by aggregating the defaults for all loans in the pool (delinquent loans, foreclosure and real estate owned and new delinquencies from currently performing loans) and the associated loan-level loss severities.
We use certain available loan characteristics such as lien status, loan sizes and occupancy to estimate the loss severity of loans. Second lien loans are assigned 100% severity, if defaulted. For first lien loans, we assume a minimum of 30% severity with higher severity assumed for investor properties and further adjusted by housing price assumptions. With the default rate timing curve and loan-level severity, we derive the future expected credit losses.
Payables for Collateral on Investments
The carrying value of the payables for collateral on investments (in millions) included on our Consolidated Balance Sheets and the fair value of the related investments or collateral consisted of the following:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31, 2013
						
As of December 31, 2012
Carrying
						
Fair
						
Carrying
						
Fair
Value
						
Value
						
Value
						
Value
Collateral payable held for derivative investments (1)
$
				
						
$
				
						
$
2,567 				
						
$
2,567 				
Securities pledged under securities lending agreements (2)
						
				
						
						
				
						
						
				
						
						
				
Securities pledged under repurchase agreements (3)
						
				
						
						
				
						
						
				
						
						
				
Securities pledged for Term Asset-Backed Securities
						
						
						
						
						
						
						
						
						
						
						
Loan Facility ("TALF") (4)
						
				
						
						
				
						
						
				
						
						
				
Investments pledged for Federal Home Loan Bank of
						
						
						
						
						
						
						
						
						
						
						
Indianapolis ("FHLBI") (5)
						
1,850 				
						
						
3,127 				
						
						
1,100 				
						
						
1,936 				
Total payables for collateral on investments
$
3,238 				
						
$
4,545 				
						
$
4,181 				
						
$
5,038 				
(1) We obtain collateral based upon contractual provisions with our counterparties. These agreements take into consideration the counterparties’ credit rating as compared to ours, the fair value of the derivative investments and specified thresholds that if exceeded result in the receipt of cash that is typically invested in cash and invested cash. See Note 6 for additional information.
(2) Our pledged securities under securities lending agreements are included in fixed maturity AFS securities on our Consolidated Balance Sheets. We generally obtain collateral in an amount equal to 102% and 105% of the fair value of the domestic and foreign securities, respectively. We value collateral daily and obtain additional collateral when deemed appropriate. The cash received in our securities lending program is typically invested in cash and invested cash or fixed maturity AFS securities.
(3) Our pledged securities under repurchase agreements are included in fixed maturity AFS securities on our Consolidated Balance Sheets. We obtain collateral in an amount equal to 95% of the fair value of the securities, and our agreements with third parties contain contractual provisions to allow for additional collateral to be obtained when necessary. The cash received in our repurchase program is typically invested in fixed maturity AFS securities.
(4) Our pledged securities for TALF are included in fixed maturity AFS securities on our Consolidated Balance Sheets. We obtain collateral in an amount that has typically averaged 90% of the fair value of the TALF securities. The cash received in these transactions is invested in fixed maturity AFS securities.
(5) Our pledged investments for FHLBI are included in fixed maturity AFS securities and mortgage loans on real estate on our Consolidated Balance Sheets. The collateral requirements are generally 105% to 115% of the fair value for fixed maturity AFS securities and 155% to 175% of the fair value for mortgage loans on real estate. The cash received in these transactions is primarily invested in cash and invested cash or fixed maturity AFS securities.
For information related to balance sheet offsetting of our securities lending and repurchase agreements, see Note 6.
Increase (decrease) in payables for collateral on investments (in millions) included on the Consolidated Statements of Cash Flows consisted of the following:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
Collateral payable held for derivative investments
$
(1,929) 				
						
$
(413) 				
						
$
2,180 				
Securities pledged under securities lending agreements
						
(13) 				
						
						
(3) 				
						
						
				
Securities pledged under repurchase agreements
						
				
						
						
-
						
						
-
Securities pledged for TALF
						
(1) 				
						
						
(136) 				
						
						
(107) 				
Investments pledged for FHLBI
						
				
						
						
1,000 				
						
						
-
Total increase (decrease) in payables for collateral on investments
$
(943) 				
						
$
				
						
$
2,074 				
Investment Commitments
As of December 31, 2013, our investment commitments were $868 million, which included $411 million of LPs, $372 million of private placement securities and $85 million of mortgage loans on real estate.
Concentrations of Financial Instruments
As of December 31, 2013 and 2012, our most significant investments in one issuer were our investments in securities issued by the Federal Home Loan Mortgage Corporation with a fair value of $2.6 billion and $3.8 billion, respectively, or 3% and 4% of our invested assets portfolio, respectively, and our investments in securities issued by Fannie Mae with a fair value of $1.7 billion and $2.2 billion, respectively, or 2% of our invested assets portfolio. These investments are included in corporate bonds in the tables above.
As of December 31, 2013 and 2012, our most significant investments in one industry were our investment securities in the electric industry with a fair value of $8.7 billion, or 9% of our invested assets portfolio, and our investment securities in the banking industry with a fair value of $5.0 billion, or 5% of our invested assets portfolio. We utilized the industry classifications to obtain the concentration of financial instruments amount; as such, this amount will not agree to the AFS securities table above.
6. Derivative Instruments
We maintain an overall risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate risk, foreign currency exchange risk, equity market risk, default risk, basis risk and credit risk. We assess these risks by continually identifying and monitoring changes in our exposures that may adversely affect expected future cash flows and by evaluating hedging opportunities.
Derivative activities are monitored by various management committees. The committees are responsible for overseeing the implementation of various hedging strategies that are developed through the analysis of financial simulation models and other internal and industry sources. The resulting hedging strategies are incorporated into our overall risk management strategies.
See Note 1 for a detailed discussion of the accounting treatment for derivative instruments. See Note 21 for additional disclosures related to the fair value of our derivative instruments and Note 4 for derivative instruments related to our consolidated VIEs.
Interest Rate Contracts
We use derivative instruments as part of our interest rate risk management strategy. These instruments are economic hedges unless otherwise noted and include:
Consumer Price Index Swaps
We use consumer price index swaps to hedge the liability exposure on certain options in fixed annuity products. Consumer price index swaps are contracts entered into at no cost and whose payoff is the difference between the consumer price index inflation rate and the fixed-rate determined as of inception.
Forward-Starting Interest Rate Swaps
We use forward-starting interest rate swaps designated and qualifying as cash flow hedges to hedge our exposure to interest rate fluctuations related to the forecasted purchase of certain assets and liabilities.
Interest Rate Cap Agreements
We use interest rate cap agreements to provide a level of protection from the effect of rising interest rates to economically hedge certain life insurance products and annuity contracts. Interest rate cap agreements entitle us to receive quarterly payments from the counterparties on specified future reset dates, contingent on future interest rates. For each cap, the amount of such quarterly payments, if any, is determined by the excess of a market interest rate over a specified cap rate, multiplied by the notional amount divided by four.
Interest Rate Cap Corridors
We use interest rate cap corridors to provide a level of protection from the effect of rising interest rates for certain life insurance products and annuity contracts. Interest rate cap corridors involve purchasing an interest rate cap at a specific cap rate and selling an interest rate cap with a higher cap rate. For each corridor, the amount of quarterly payments, if any, is determined by the rate at which the underlying index rate resets above the original capped rate. The corridor limits the benefit the purchaser can receive as the related interest rate index rises above the higher capped rate. There is no additional liability to us other than the purchase price associated with the interest rate cap corridor.
Interest Rate Futures
We use interest rate futures contracts to hedge the liability exposure on certain options in variable annuity products. These futures contracts require payment between our counterparty and us on a daily basis for changes in the futures index price.
Interest Rate Swap Agreements
We use interest rate swap agreements to hedge the liability exposure on certain options in variable annuity products.
We also use interest rate swap agreements designated and qualifying as cash flow hedges. These instruments either hedge the interest rate risk of floating-rate bond coupon payments by replicating a fixed-rate bond, or hedge our exposure to fixed-rate bond coupon payments and the change in the underlying asset values as interest rates fluctuate.
Finally, we use interest rate swap agreements designated and qualifying as fair value hedges to hedge against changes in the value of anticipated transactions and commitments as interest rates fluctuate.
Treasury and Reverse Treasury Locks
We use treasury locks designated and qualifying as cash flow hedges to hedge the interest rate exposure related to our issuance of fixed-rate securities or the anticipated future cash flows of floating-rate fixed maturity securities due to changes in interest rates. In addition, we use reverse treasury locks designated and qualifying as cash flow hedges to hedge the interest rate exposure related to the purchase of fixed-rate securities or the anticipated future cash flows of floating-rate fixed maturity securities due to changes in interest rates. These derivatives are primarily structured to hedge interest rate risk inherent in the assumptions used to price certain liabilities.
Foreign Currency Contracts
We use derivative instruments as part of our foreign currency risk management strategy. These instruments are economic hedges unless otherwise noted and include:
Currency Futures
We use currency futures to hedge foreign exchange risk associated with certain options in variable annuity products. Currency futures exchange one currency for another at a specified date in the future at a specified exchange rate.
Foreign Currency Swaps
We use foreign currency swaps designated and qualifying as cash flow hedges, which are traded over-the-counter, to hedge some of the foreign exchange risk of investments in fixed maturity securities denominated in foreign currencies. A foreign currency swap is a contractual agreement to exchange the currencies of two different countries at a specified rate of exchange in the future.
Equity Market Contracts
We use derivative instruments as part of our equity market risk management strategy that are economic hedges and include:
Call Options Based on the S&P 500 Index® (“S&P 500”)
We use indexed annuity contracts to permit the holder to elect an interest rate return or an equity market component, where interest credited to the contracts is linked to the performance of the S&P 500. Contract holders may elect to rebalance index options at renewal dates, either annually or biannually. As of each renewal date, we have the opportunity to re-price the indexed component by establishing participation rates, caps, spreads and specified rates, subject to contractual guarantees. We purchase call options that are highly correlated to the portfolio allocation decisions of our contract holders, such that we are economically hedged with respect to equity returns for the current reset period.
Equity Futures
We use equity futures contracts to hedge the liability exposure on certain options in variable annuity products. These futures contracts require payment between our counterparty and us on a daily basis for changes in the futures index price.
Put Options
We use put options to hedge the liability exposure on certain options in variable annuity products. Put options are contracts that require counterparties to pay us at a specified future date the amount, if any, by which a specified equity index is less than the strike rate stated in the agreement, applied to a notional amount.
Total Return Swaps
We use total return swaps to hedge a portion of the liability related to our deferred compensation plans. We receive the total return on a portfolio of indexes and pay a floating-rate of interest.
In addition, we use total return swaps to hedge the liability exposure on certain options in variable annuity products. We receive the total return on a portfolio of indexes and pay a floating-rate of interest.
Variance Swaps
We use variance swaps to hedge the liability exposure on certain options in variable annuity products. Variance swaps are contracts entered into at no cost and whose payoff is the difference between the realized variance rate of an underlying index and the fixed variance rate determined as of inception.
Credit Contracts
We use derivative instruments as part of our credit risk management strategy that are economic hedges and include:
Credit Default Swaps - Buying Protection
We buy credit default swaps to hedge against a drop in bond prices due to credit concerns of certain bond issuers. A credit default swap allows us to put the bond back to the counterparty at par upon a default event by the bond issuer. A default event is defined as bankruptcy, failure to pay, obligation acceleration or restructuring.
Credit Default Swaps - Selling Protection
We sell credit default swaps to offer credit protection to contract holders and investors. The credit default swaps hedge the contract holders and investors against a drop in bond prices due to credit concerns of certain bond issuers. A credit default swap allows the investor to put the bond back to us at par upon a default event by the bond issuer. A default event is defined as bankruptcy, failure to pay, obligation acceleration or restructuring.
Embedded Derivatives
We have embedded derivatives that include:
GLB Reserves Embedded Derivatives
We use a hedging strategy designed to mitigate the risk and income statement volatility caused by changes in the equity markets, interest rates and volatility associated with GLBs offered in our variable annuity products, including products with GWB and GIB features. The hedging strategy is designed such that changes in the value of the hedge contracts due to changes in equity markets, interest rates and implied volatilities move in the opposite direction of changes in embedded derivative GLB reserves caused by those same factors. We rebalance our hedge positions based upon changes in these factors as needed. While we actively manage our hedge positions, these hedge positions may not be totally effective in offsetting changes in the embedded derivative reserve due to, among other things, differences in timing between when a market exposure changes and corresponding changes to the hedge positions, extreme swings in the equity markets and interest rates, market volatility, contract holder behavior, divergence between the performance of the underlying funds and the hedging indices, divergence between the actual and expected performance of the hedge instruments and our ability to purchase hedging instruments at prices consistent with our desired risk and return trade-off.
Certain features of these guarantees have elements of both insurance benefits accounted for under the Financial Services - Insurance - Claim Costs and Liabilities for Future Policy Benefits Subtopic of the FASB ASC (“benefit reserves”) and embedded derivatives accounted for under the Derivatives and Hedging and the Fair Value Measurements and Disclosures Topics of the FASB ASC (“embedded derivative reserves”). We calculate the value of the embedded derivative reserve and the benefit reserve based on the specific characteristics of each GLB feature.
Indexed Annuity Contracts Embedded Derivatives
We distribute indexed annuity contracts that permit the holder to elect an interest rate return or an equity market component, where interest credited to the contracts is linked to the performance of the S&P 500. Contract holders may elect to rebalance index options at renewal dates, either annually or biannually. As of each renewal date, we have the opportunity to re-price the indexed component by establishing participation rates, caps, spreads and specified rates, subject to contractual guarantees. We purchase S&P 500 call options that are highly correlated to the portfolio allocation decisions of our contract holders, such that we are economically hedged with respect to equity returns for the current reset period.
Reinsurance Related Embedded Derivatives
We have certain modified coinsurance arrangements and coinsurance with funds withheld reinsurance arrangements with embedded derivatives related to the withheld assets of the related funds. These derivatives are considered total return swaps with contractual returns that are attributable to various assets and liabilities associated with these reinsurance arrangements.
We have derivative instruments with off-balance-sheet risks whose notional or contract amounts exceed the related credit exposure. Outstanding derivative instruments with off-balance-sheet risks (in millions) were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31, 2013
						
As of December 31, 2012
Notional
						
Fair Value
						
Notional
						
Fair Value
Amounts
						
Asset
						
Liability
						
Amounts
						
Asset
						
Liability
Qualifying Hedges
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Cash flow hedges:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Interest rate contracts (1)
$
4,339 				
						
$
				
						
$
				
						
$
3,214 				
						
$
				
						
$
				
Foreign currency contracts (1)
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
				
Total cash flow hedges
						
4,954 				
						
						
				
						
						
				
						
						
3,634 				
						
						
				
						
						
				
Fair value hedges:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Interest rate contracts (1)
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
-
Non-Qualifying Hedges
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Interest rate contracts (1)
						
45,620 				
						
						
				
						
						
				
						
						
36,539 				
						
						
1,042 				
						
						
				
Foreign currency contracts (1)
						
				
						
						
-
						
						
-
						
						
				
						
						
-
						
						
-
Equity market contracts (1)
						
19,917 				
						
						
				
						
						
				
						
						
19,857 				
						
						
1,734 				
						
						
				
Equity collar (1)
						
-
						
						
-
						
						
-
						
						
				
						
						
				
						
						
-
Credit contracts (2)
						
				
						
						
-
						
						
				
						
						
				
						
						
-
						
						
				
Embedded derivatives:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Indexed annuity and universal life
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
contracts (3)
						
-
						
						
-
						
						
1,048 				
						
						
-
						
						
-
						
						
				
GLB (3)
						
-
						
						
1,244 				
						
						
-
						
						
-
						
						
-
						
						
				
Reinsurance related (4)
						
-
						
						
-
						
						
				
						
						
-
						
						
-
						
						
				
Total derivative instruments
$
71,594 				
						
$
3,102 				
						
$
2,322 				
						
$
61,110 				
						
$
3,547 				
						
$
2,762 				
(1)
Reported in derivative investments and other liabilities on our Consolidated Balance Sheets.
(2)
Reported in other liabilities on our Consolidated Balance Sheets.
(3)
Reported in future contract benefits on our Consolidated Balance Sheets.
(4)
Reported in reinsurance related embedded derivatives on our Consolidated Balance Sheets.
The maturity of the notional amounts of derivative instruments (in millions) was as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Remaining Life as of December 31, 2013
Less Than
						
1 - 5
						
6 - 10
						
11 - 30
						
Over 30
						
						
1 Year
						
Years
						
Years
						
Years
						
Years
						
Total
Interest rate contracts (1)
$
5,343 				
						
$
23,374 				
						
$
10,697 				
						
$
10,207 				
						
$
1,213 				
						
$
50,834 				
Foreign currency contracts (2)
						
				
						
						
				
						
						
				
						
						
				
						
						
-
						
						
				
Equity market contracts
						
10,977 				
						
						
3,573 				
						
						
5,344 				
						
						
				
						
						
				
						
						
19,917 				
Credit contracts
						
-
						
						
				
						
						
-
						
						
-
						
						
-
						
						
				
Total derivative instruments
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
with notional amounts
$
16,495 				
						
$
27,183 				
						
$
16,346 				
						
$
10,355 				
						
$
1,215 				
						
$
71,594 				
(1)
As of December 31, 2013, the latest maturity date for which we were hedging our exposure to the variability in future cash flows for these instruments was April 2067.
(2)
As of December 31, 2013, the latest maturity date for which we were hedging our exposure to the variability in future cash flows for these instruments was April 2028.
The change in our unrealized gain (loss) on derivative instruments in accumulated OCI (in millions) was as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
Unrealized Gain (Loss) on Derivative Instruments
						
						
						
						
						
						
						
						
Balance as of beginning-of-year
$
				
						
$
				
						
$
(11) 				
Other comprehensive income (loss):
						
						
						
						
						
						
						
						
Unrealized holding gains (losses) arising during the year:
						
						
						
						
						
						
						
						
Cash flow hedges:
						
						
						
						
						
						
						
						
Interest rate contracts
						
				
						
						
				
						
						
				
Foreign currency contracts
						
(24) 				
						
						
(22) 				
						
						
				
Fair value hedges:
						
						
						
						
						
						
						
						
Interest rate contracts
						
				
						
						
				
						
						
				
Change in foreign currency exchange rate adjustment
						
(19) 				
						
						
(12) 				
						
						
				
Change in DAC, VOBA, DSI and DFEL
						
				
						
						
				
						
						
-
Income tax benefit (expense)
						
(45) 				
						
						
(21) 				
						
						
(67) 				
Less:
						
						
						
						
						
						
						
						
Reclassification adjustment for gains (losses) included in net income (loss):
						
						
						
						
						
						
						
						
Cash flow hedges:
						
						
						
						
						
						
						
						
Interest rate contracts (1)
						
(21) 				
						
						
(21) 				
						
						
(15) 				
Interest rate contracts (2)
						
(1) 				
						
						
(1) 				
						
						
(1) 				
Foreign currency contracts (1)
						
				
						
						
				
						
						
				
Fair value hedges:
						
						
						
						
						
						
						
						
Interest rate contracts (2)
						
				
						
						
				
						
						
				
Associated amortization of DAC, VOBA, DSI and DFEL
						
				
						
						
				
						
						
				
Income tax benefit (expense)
						
				
						
						
				
						
						
				
Balance as of end-of-year
$
				
						
$
				
						
$
				
(1)
The OCI offset is reported within net investment income on our Consolidated Statements of Comprehensive Income (Loss).
(2)
The OCI offset is reported within interest and debt expense on our Consolidated Statements of Comprehensive Income (Loss).
The gains (losses) on derivative instruments (in millions) recorded within income (loss) from continuing operations on our Consolidated Statements of Comprehensive Income (Loss) were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
						
						
Qualifying Hedges
						
						
						
						
						
						
						
						
						
Cash flow hedges:
						
						
						
						
						
						
						
						
						
Interest rate contracts (1)
$
(21) 				
						
$
(21) 				
						
$
(15) 				
						
Foreign currency contracts (1)
						
				
						
						
				
						
						
				
						
Total cash flow hedges
						
(18) 				
						
						
(18) 				
						
						
(13) 				
						
Fair value hedges:
						
						
						
						
						
						
						
						
						
Interest rate contracts (2)
						
				
						
						
				
						
						
				
						
Non-Qualifying Hedges
						
						
						
						
						
						
						
						
						
Interest rate contracts (3)
						
(989) 				
						
						
				
						
						
1,100 				
						
Foreign currency contracts (3)
						
(4) 				
						
						
(8) 				
						
						
(12) 				
						
Equity market contracts (3)
						
(1,306) 				
						
						
(1,377) 				
						
						
				
						
Equity market contracts (4)
						
				
						
						
				
						
						
				
						
Credit contracts (3)
						
				
						
						
				
						
						
(7) 				
						
Embedded derivatives:
						
						
						
						
						
						
						
						
						
Indexed annuity and universal life contracts (3)
						
(356) 				
						
						
(136) 				
						
						
				
						
GLB reserves (3)
						
2,153 				
						
						
1,308 				
						
						
(1,809) 				
						
Reinsurance related (3)
						
				
						
						
(47) 				
						
						
(66) 				
						
Total derivative instruments
$
(330) 				
						
$
(187) 				
						
$
(415) 				
						
(1)
Reported in net investment income on our Consolidated Statements of Comprehensive Income (Loss).
(2)
Reported in interest and debt expense on our Consolidated Statements of Comprehensive Income (Loss).
(3)
Reported in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).
(4)
Reported in commissions and other expenses on our Consolidated Statements of Comprehensive Income (Loss).
Gains (losses) (in millions) on derivative instruments designated and qualifying as cash flow hedges were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
						
						
Gain (loss) recognized as a component of OCI with
						
						
						
						
						
						
						
						
						
the offset to net investment income
$
(19) 				
						
$
(19) 				
						
$
(13) 				
						
As of December 31, 2013, $24 million of the deferred net losses on derivative instruments in accumulated OCI were expected to be reclassified to earnings during the next 12 months. This reclassification would be due primarily to interest rate variances related to our interest rate swap agreements.
For the years ended December 31, 2013 and 2012, there were no material reclassifications to earnings due to hedged firm commitments no longer deemed probable or due to hedged forecasted transactions that had not occurred by the end of the originally specified time period.
Gains (losses) (in millions) on derivative instruments designated and qualifying as fair value hedges were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
						
						
Gain (loss) recognized as a component of OCI with
						
						
						
						
						
						
						
						
						
the offset to interest expense
$
				
						
$
				
						
$
				
						
Information related to our open credit default swap liabilities for which we are the seller (dollars in millions) was as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31, 2013
						
						
						
						
						
						
Credit
						
						
						
						
						
						
						
						
						
						
Reason
						
Nature
						
Rating of
						
Number
						
						
						
						
Maximum
						
						
for
						
of
Underlying
of
						
Fair
						
Potential
						
Maturity
						
Entering
						
Recourse
Obligation (1)
Instruments
						
Value (2)
						
Payout
						
12/20/2016 (3)
						
(4)
						
(5)
						
BBB-
						
				
						
$
(1) 				
						
$
				
						
3/20/2017 (3)
						
(4)
						
(5)
						
BBB-
						
				
						
						
(1) 				
						
						
				
						
						
						
						
						
						
						
						
				
						
$
(2) 				
						
$
				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31, 2012
						
						
						
						
						
						
Credit
						
						
						
						
						
						
						
						
						
						
Reason
						
Nature
						
Rating of
						
Number
						
						
						
						
Maximum
						
						
for
						
of
Underlying
of
						
Fair
						
Potential
						
Maturity
						
Entering
						
Recourse
Obligation (1)
Instruments
						
Value (2)
						
Payout
						
12/20/2016 (3)
						
(4)
						
(5)
						
BBB-
						
				
						
$
(4) 				
						
$
				
						
3/20/2017 (3)
						
(4)
						
(5)
						
BBB-
						
				
						
						
(7) 				
						
						
				
						
						
						
						
						
						
						
						
				
						
$
(11) 				
						
$
				
						
(1)
Represents average credit ratings based on the midpoint of the applicable ratings among Moody’s, S&P and Fitch Ratings, as scaled to the corresponding S&P ratings.
(2)
Broker quotes are used to determine the market value of our credit default swaps.
(3)
These credit default swaps were sold to a counterparty of the consolidated VIEs discussed in Note 4.
(4)
Credit default swaps were entered into in order to generate income by providing default protection in return for a quarterly payment.
(5)
Sellers do not have the right to demand indemnification or compensation from third parties in case of a loss (payment) on the contract.
Details underlying the associated collateral of our open credit default swaps for which we are the seller if credit risk-related contingent features were triggered (in millions) were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31,
						
						
						
						
Maximum potential payout
$
				
						
						
$
				
						
Less: Counterparty thresholds
						
-
						
						
						
-
						
Maximum collateral potentially required to post
$
				
						
						
$
				
						
Certain of our credit default swap agreements contain contractual provisions that allow for the netting of collateral with our counterparties related to all of our collateralized financing transactions that we have outstanding. If these netting agreements were not in place, we would have been required to post $2 million as of December 31, 2013, after considering the fair values of the associated investments counterparties’ credit ratings as compared to ours and specified thresholds that once exceeded result in the payment of cash.
Credit Risk
We are exposed to credit loss in the event of non-performance by our counterparties on various derivative contracts and reflect assumptions regarding the credit or NPR. The NPR is based upon assumptions for each counterparty’s credit spread over the estimated weighted average life of the counterparty exposure less collateral held. As of December 31, 2013, the NPR adjustment was $2 million. The credit risk associated with such agreements is minimized by purchasing such agreements from financial institutions with long-standing, superior performance records. Additionally, we maintain a policy of requiring all derivative contracts to be governed by an International Swaps and Derivatives Association (“ISDA”) Master Agreement. We are required to maintain minimum ratings as a matter of routine practice in negotiating ISDA agreements. Under some ISDA agreements, our insurance subsidiaries have agreed to maintain certain financial strength or claims-paying ratings. A downgrade below these levels could result in termination of derivative contracts, at which time any amounts payable by us would be dependent on the market value of the underlying derivative contracts. In certain transactions, we and the counterparty have entered into a credit support annex requiring either party to post collateral when net exposures exceed pre-determined thresholds. These thresholds vary by counterparty and credit rating. The amount of such exposure is essentially the net replacement cost or market value less collateral held for such agreements with each counterparty if the net market value is in our favor. As of December 31, 2013, our exposure was $69 million.
The amounts recognized (in millions) by S&P credit rating of counterparty, for which we had the right to reclaim cash collateral or were obligated to return cash collateral, were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31, 2013
						
As of December 31, 2012
						
						
Collateral
						
Collateral
						
Collateral
						
Collateral
						
						
Posted by
						
Posted by
						
Posted by
						
Posted by
						
S&P
						
Counter-
						
LNC
						
Counter-
						
LNC
						
Credit
						
Party
						
(Held by
						
Party
						
(Held by
						
Rating of
						
(Held by
						
Counter-
						
(Held by
						
Counter-
						
Counterparty
						
LNC)
						
Party)
						
LNC)
						
Party)
						
						
						
						
						
						
						
						
						
						
						
						
						
						
AA
						
$
-
						
$
-
						
$
				
						
$
-
						
AA-
						
						
				
						
						
(10) 				
						
						
				
						
						
-
						
A+
						
						
				
						
						
-
						
						
				
						
						
-
						
A
						
						
				
						
						
(183) 				
						
						
				
						
						
(68) 				
						
A-
						
						
				
						
						
(123) 				
						
						
1,214 				
						
						
-
						
BBB+
						
				
						
						
-
						
						
-
						
						
-
						
BBB
						
						
-
						
						
-
						
						
				
						
						
-
						
						
$
				
						
$
(316) 				
						
$
2,692 				
						
$
(68) 				
						
Balance Sheet Offsetting
Information related to our derivative instruments, securities lending transactions and repurchase agreements and the effects of offsetting on our Consolidated Balance Sheets (in millions) were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31, 2013
						
						
						
						
						
						
						
						
						
Securities
						
						
						
						
						
						
						
						
Embedded
Lending and
						
						
						
						
Derivative
Derivative
Repurchase
						
						
						
						
Instruments
Instruments
Agreements
						
Total
						
Financial Assets
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Gross amount of recognized assets
						
$
1,805 				
						
						
$
1,244 				
						
						
$
-
						
						
$
3,049 				
						
Gross amounts offset
						
						
(924) 				
						
						
						
-
						
						
						
-
						
						
						
(924) 				
						
Net amount of assets
						
						
				
						
						
						
1,244 				
						
						
						
-
						
						
						
2,125 				
						
Gross amounts not offset:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Cash collateral received
						
						
(623) 				
						
						
						
-
						
						
						
-
						
						
						
(623) 				
						
Net amount
						
$
				
						
						
$
1,244 				
						
						
$
-
						
						
$
1,502 				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Financial Liabilities
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Gross amount of recognized liabilities
						
$
				
						
						
$
1,156 				
						
						
$
2,600 				
						
						
$
3,998 				
						
Gross amounts offset
						
						
(55) 				
						
						
						
-
						
						
						
-
						
						
						
(55) 				
						
Net amount of liabilities
						
						
				
						
						
						
1,156 				
						
						
						
2,600 				
						
						
						
3,943 				
						
Gross amounts not offset:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Cash collateral received
						
						
-
						
						
						
-
						
						
						
(2,600) 				
						
						
						
(2,600) 				
						
Net amount
						
$
				
						
						
$
1,156 				
						
						
$
-
						
						
$
1,343 				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31, 2012
						
						
						
						
						
						
						
						
						
Securities
						
						
						
						
						
						
						
						
Embedded
Lending and
						
						
						
						
Derivative
Derivative
Repurchase
						
						
						
						
Instruments
Instruments
Agreements
						
Total
						
Financial Assets
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Gross amount of recognized assets
						
$
3,547 				
						
						
$
-
						
						
$
-
						
						
$
3,547 				
						
Gross amounts offset
						
						
(895) 				
						
						
						
-
						
						
						
-
						
						
						
(895) 				
						
Net amount of assets
						
						
2,652 				
						
						
						
-
						
						
						
-
						
						
						
2,652 				
						
Gross amounts not offset:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Cash collateral received
						
						
(2,624) 				
						
						
						
-
						
						
						
-
						
						
						
(2,624) 				
						
Net amount
						
$
				
						
						
$
-
						
						
$
-
						
						
$
				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Financial Liabilities
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Gross amount of recognized liabilities
						
$
				
						
						
$
1,856 				
						
						
$
1,614 				
						
						
$
3,481 				
						
Gross amounts offset
						
						
-
						
						
						
-
						
						
						
-
						
						
						
-
						
Net amount of liabilities
						
						
				
						
						
						
1,856 				
						
						
						
1,614 				
						
						
						
3,481 				
						
Gross amounts not offset:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Cash collateral received
						
						
-
						
						
						
-
						
						
						
(1,614) 				
						
						
						
(1,614) 				
						
Net amount
						
$
				
						
						
$
1,856 				
						
						
$
-
						
						
$
1,867 				
						
7. Federal Income Taxes
The federal income tax expense (benefit) on continuing operations (in millions) was as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
						
						
Current
$
				
						
$
				
						
$
				
						
Deferred
						
				
						
						
				
						
						
				
						
Federal income tax expense (benefit)
$
				
						
$
				
						
$
				
						
A reconciliation of the effective tax rate differences (in millions) was as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
						
						
Tax rate times pre-tax income
$
				
						
$
				
						
$
				
						
Effect of:
						
						
						
						
						
						
						
						
						
Tax-preferred investment income
						
(160) 				
						
						
(141) 				
						
						
(144) 				
						
Tax credits
						
(35) 				
						
						
(34) 				
						
						
(34) 				
						
Goodwill
						
-
						
						
(2) 				
						
						
				
						
Change in uncertain tax positions
						
				
						
						
(94) 				
						
						
				
						
Other items
						
				
						
						
				
						
						
				
						
Federal income tax expense (benefit)
$
				
						
$
				
						
$
				
						
Effective tax rate
						
24% 				
						
						
18% 				
						
						
55% 				
						
The effective tax rate is the ratio of tax expense over pre-tax income (loss). The tax-preferred investment income relates primarily to separate account dividends-received deductions. The separate account dividends-received deduction benefit was $145 million, $128 million and $135 million for the years ended December 31, 2013, 2012 and 2011.
The federal income tax asset (liability) (in millions) was as follows:
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31,
						
						
						
Current
$
(186) 				
						
$
(27) 				
						
Deferred
						
(1,966) 				
						
						
(2,982) 				
						
Total federal income tax asset (liability)
$
(2,152) 				
						
$
(3,009) 				
						
Significant components of our deferred tax assets and liabilities (in millions) were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31,
						
						
						
Deferred Tax Assets
						
						
						
						
						
						
Future contract benefits and other contract holder funds
$
1,225 				
						
$
1,189 				
						
Deferred gain on business sold through reinsurance
						
				
						
						
				
						
Reinsurance related embedded derivative asset
						
				
						
						
				
						
Investments
						
				
						
						
				
						
Compensation and benefit plans
						
				
						
						
				
						
Net operating loss
						
				
						
						
				
						
Net capital loss
						
-
						
						
				
						
Tax credits
						
				
						
						
				
						
VIE
						
				
						
						
				
						
Other
						
				
						
						
				
						
Total deferred tax assets
						
2,063 				
						
						
2,320 				
						
Deferred Tax Liabilities
						
						
						
						
						
						
DAC
						
1,914 				
						
						
1,332 				
						
VOBA
						
				
						
						
				
						
Net unrealized gain on AFS securities
						
1,319 				
						
						
3,283 				
						
Net unrealized gain on trading securities
						
				
						
						
				
						
Intangibles
						
				
						
						
				
						
Other
						
				
						
						
				
						
Total deferred tax liabilities
						
4,029 				
						
						
5,302 				
						
Net deferred tax asset (liability)
$
(1,966) 				
						
$
(2,982) 				
						
As of December 31, 2013, the Company had $78 million of net operating loss carryforwards that begin to expire in 2031. In addition, the Company had $119 million of alternative minimum tax credits that are not subject to expiration and $82 million of general business credits that begin to expire in 2030.
Although realization is not assured, management believes that it is more likely than not that the Company will realize the benefits of its deferred tax assets, and, accordingly, no valuation allowance has been recorded.
As of December 31, 2013 and 2012, $74 million and $69 million, respectively, of our unrecognized tax benefits presented below, if recognized, would have affected our income tax expense and our effective tax rate. The Company is not aware of any events for which it is likely that unrecognized tax benefits will significantly increase or decrease within the next year. A reconciliation of the unrecognized tax benefits (in millions) was as follows:
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended
						
December 31,
						
						
						
Balance as of beginning-of-year
$
				
						
$
				
						
Decreases for prior year tax positions
						
-
						
						
(49) 				
						
Increases for current year tax positions
						
				
						
						
				
						
Decreases for settlements with taxing authorities
						
-
						
						
(2) 				
						
Decreases for lapse of statute of limitations
						
-
						
						
(88) 				
						
Balance as of end-of-year
$
				
						
$
				
						
We recognize interest and penalties accrued, if any, related to unrecognized tax benefits as a component of tax expense. For the years ended December 31, 2013, 2012 and 2011, we recognized interest and penalty expense (benefit) related to uncertain tax positions of $2 million, $(61) million and $6 million, respectively. We had accrued interest and penalty expense related to the unrecognized tax benefits of $13 million and $11 million as of December 31, 2013 and 2012, respectively.
The Company is subject to examination by U.S. federal, state, local and non-U.S. income authorities. The Company is currently under examination by the Internal Revenue Service (“IRS”) for tax years 2009 through 2011. The IRS concluded its examination of tax years 2007 and 2008 on January 18, 2013. The Company has protested the final assessment, which is being combined with tax years 2005 and 2006 in IRS Appeals. The IRS also completed its examination of tax years 2005 and 2006, and 2006 of the former Jefferson-Pilot Corporation (“JP”) and its subsidiaries during 2010. The Company believes a portion of the 2005 through 2008 assessments is inconsistent with current laws and is using the established IRS Appeals process to attempt to settle the remaining issues. The IRS also concluded its examination of non-consolidated returns for JP Life Insurance Company and JP Financial Insurance Company for the tax years ended April 1, 2007, and July 1, 2007, respectively, with agreement on all adjustments on January 18, 2013. The Company does not expect any adjustments that might result from those audits would be material to its consolidated results of operations or its financial condition.
8. DAC, VOBA, DSI and DFEL
Changes in DAC (in millions) were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
						
						
Balance as of beginning-of-year
$
5,943 				
						
$
5,721 				
						
$
6,036 				
						
Deferrals
						
1,564 				
						
						
1,294 				
						
						
1,375 				
						
Amortization, net of interest:
						
						
						
						
						
						
						
						
						
Amortization, excluding unlocking, net of interest
						
(816) 				
						
						
(785) 				
						
						
(687) 				
						
Unlocking
						
				
						
						
(71) 				
						
						
(130) 				
						
Adjustment related to realized (gains) losses
						
(8) 				
						
						
(70) 				
						
						
(18) 				
						
Adjustment related to unrealized (gains) losses
						
				
						
						
(146) 				
						
						
(855) 				
						
Balance as of end-of-year
$
7,695 				
						
$
5,943 				
						
$
5,721 				
						
Changes in VOBA (in millions) were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
						
						
Balance as of beginning-of-year
$
				
						
$
1,055 				
						
$
1,378 				
						
Business acquired (sold) through reinsurance
						
				
						
						
				
						
						
				
						
Deferrals
						
				
						
						
				
						
						
				
						
Amortization:
						
						
						
						
						
						
						
						
						
Amortization, excluding unlocking
						
(179) 				
						
						
(225) 				
						
						
(279) 				
						
Unlocking
						
(52) 				
						
						
(23) 				
						
						
				
						
Accretion of interest (1)
						
				
						
						
				
						
						
				
						
Adjustment related to realized (gains) losses
						
(1) 				
						
						
				
						
						
(6) 				
						
Adjustment related to unrealized (gains) losses
						
				
						
						
(179) 				
						
						
(322) 				
						
Balance as of end-of-year
$
1,191 				
						
$
				
						
$
1,055 				
						
(1)
The interest accrual rates utilized to calculate the accretion of interest ranged from 4.02% to 7.05%.
Estimated future amortization of VOBA, net of interest (in millions), as of December 31, 2013, was as follows:
						
						
						
						
						
						
$
				
						
						
				
						
						
				
						
						
				
						
						
				
						
Changes in DSI (in millions) were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
						
						
Balance as of beginning-of-year
$
				
						
$
				
						
$
				
						
Deferrals
						
				
						
						
				
						
						
				
						
Amortization, net of interest:
						
						
						
						
						
						
						
						
						
Amortization, excluding unlocking, net of interest
						
(43) 				
						
						
(46) 				
						
						
(38) 				
						
Unlocking
						
				
						
						
				
						
						
(2) 				
						
Adjustment related to realized (gains) losses
						
(1) 				
						
						
(8) 				
						
						
(1) 				
						
Adjustment related to unrealized (gains) losses
						
				
						
						
(17) 				
						
						
(13) 				
						
Balance as of end-of-year
$
				
						
$
				
						
$
				
						
Changes in DFEL (in millions) were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
						
						
Balance as of beginning-of-year
$
1,373 				
						
$
1,369 				
						
$
1,502 				
						
Deferrals
						
				
						
						
				
						
						
				
						
Amortization, net of interest:
						
						
						
						
						
						
						
						
						
Amortization, excluding unlocking, net of interest
						
(216) 				
						
						
(216) 				
						
						
(166) 				
						
Unlocking
						
(14) 				
						
						
(69) 				
						
						
				
						
Adjustment related to realized (gains) losses
						
(2) 				
						
						
(18) 				
						
						
(9) 				
						
Adjustment related to unrealized (gains) losses
						
				
						
						
(42) 				
						
						
(533) 				
						
Balance as of end-of-year
$
1,938 				
						
$
1,373 				
						
$
1,369 				
						
9. Reinsurance
The following summarizes reinsurance amounts (in millions) recorded on our Consolidated Statements of Comprehensive Income (Loss), excluding amounts attributable to the indemnity reinsurance transaction with Swiss Re:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
						
						
Direct insurance premiums and fee income
$
8,023 				
						
$
7,379 				
						
$
6,997 				
						
Reinsurance assumed
						
				
						
						
				
						
						
				
						
Reinsurance ceded
						
(1,275) 				
						
						
(1,190) 				
						
						
(1,276) 				
						
Total insurance premiums and fee income
$
6,756 				
						
$
6,198 				
						
$
5,731 				
						
						
						
						
						
						
						
						
						
						
Direct insurance benefits
$
5,487 				
						
$
5,095 				
						
$
4,897 				
						
Reinsurance recoveries netted against benefits
						
(1,625) 				
						
						
(1,554) 				
						
						
(1,552) 				
						
Total benefits
$
3,862 				
						
$
3,541 				
						
$
3,345 				
						
Our insurance companies cede insurance to other companies. The portion of our life insurance and annuity risks exceeding each of our insurance companies’ retention limit is reinsured with other insurers. We seek reinsurance coverage to limit our exposure to mortality losses and to enhance our capital management.
Under our reinsurance program, we reinsure 26% to 33% of the mortality risk on newly issued non-term life insurance contracts and 23% to 27% of total mortality risk including term insurance contracts. Our policy for this program is to retain no more than $20 million on a single insured life issued on fixed, VUL and term life insurance contracts. Portions of our deferred annuity business have been reinsured on a Modco basis with other companies to limit our exposure to interest rate risks. As of December 31, 2013, the reserves associated with these reinsurance arrangements totaled $742 million.
Our amounts recoverable from reinsurers represent receivables from and reserves ceded to reinsurers. The amounts recoverable from reinsurers were $6.0 billion and $6.4 billion as of December 31, 2013 and 2012, respectively. We focus on obtaining reinsurance from a diverse group of reinsurers, and we monitor concentration as well as financial strength ratings of our reinsurers. Our reinsurance operations were acquired by Swiss Re in December 2001 through a series of indemnity reinsurance transactions. As such, Swiss Re reinsured certain of our liabilities and obligations under the indemnity reinsurance agreements and thereby represents our largest reinsurance exposure. As we are not relieved of our liability to the ceding companies for this business, the liabilities and obligations associated with the reinsured policies remain on our Consolidated Balance Sheets with a corresponding reinsurance receivable from Swiss Re, which totaled $2.6 billion and $2.8 billion as of December 31, 2013 and 2012, respectively. Swiss Re has funded a trust, with a balance of $2.2 billion as of December 31, 2013, to support this business. In addition to various remedies that we would have in the event of a default by Swiss Re, we continue to hold assets in support of certain of the transferred reserves. These assets consist of those reported as trading securities and certain mortgage loans. Our liabilities for funds withheld and embedded derivatives as of December 31, 2013, included $867 million and $92 million, respectively, related to the business sold to Swiss Re.
We recorded the gain related to the indemnity reinsurance transactions with Swiss Re as a deferred gain on business sold through reinsurance on our Consolidated Balance Sheets. The deferred gain is being amortized into income at the rate that earnings on the reinsured business are expected to emerge, over a period of 15 years from the date of sale. During 2013, 2012 and 2011, we amortized $48 million, $48 million and $49 million, after-tax, respectively, of deferred gain on business sold through reinsurance.
10. Goodwill and Specifically Identifiable Intangible Assets
The changes in the carrying amount of goodwill (in millions) by reportable segment were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Year Ended December 31, 2013
Acquisition
Cumulative
						
						
						
						
						
Balance
Impairment
						
						
						
						
						
						
						
as of
as of
						
						
						
Balance
Beginning-
Beginning-
						
						
						
						
as of End-
						
of-Year
						
						
of-Year
						
						
Impairment
						
						
of-Year
Annuities
						
$
1,040 				
						
						
$
(600) 				
						
						
$
-
						
						
$
				
Retirement Plan Services
						
						
				
						
						
						
-
						
						
						
-
						
						
						
				
Life Insurance
						
						
2,188 				
						
						
						
(649) 				
						
						
						
-
						
						
						
1,539 				
Group Protection
						
						
				
						
						
						
-
						
						
						
-
						
						
						
				
Other Operations - Media
						
						
				
						
						
						
(341) 				
						
						
						
-
						
						
						
-
Total goodwill
						
$
3,863 				
						
						
$
(1,590) 				
						
						
$
-
						
						
$
2,273 				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Year Ended December 31, 2012
Acquisition
Cumulative
						
						
						
						
						
Balance
Impairment
						
						
						
						
						
						
						
as of
as of
						
						
						
Balance
Beginning-
Beginning-
						
						
						
						
as of End-
						
of-Year
						
						
of-Year
						
						
Impairment
						
						
of-Year
Annuities
						
$
1,040 				
						
						
$
(600) 				
						
						
$
-
						
						
$
				
Retirement Plan Services
						
						
				
						
						
						
-
						
						
						
-
						
						
						
				
Life Insurance
						
						
2,188 				
						
						
						
(649) 				
						
						
						
-
						
						
						
1,539 				
Group Protection
						
						
				
						
						
						
-
						
						
						
-
						
						
						
				
Other Operations - Media
						
						
				
						
						
						
(341) 				
						
						
						
-
						
						
						
-
Total goodwill
						
$
3,863 				
						
						
$
(1,590) 				
						
						
$
-
						
						
$
2,273 				
We perform a Step 1 goodwill impairment analysis on all of our reporting units at least annually on October 1. To determine the implied fair value for our reporting units, we utilize primarily a discounted cash flow valuation technique (“income approach”), although limited available market data is also considered. In determining the estimated fair value, we consider discounted cash flow calculations, the level of our own share price and assumptions that market participants would make in valuing the reporting unit. This analysis requires us to make judgments about revenues, earnings projections, capital market assumptions and discount rates.
As of October 1, 2013, our Annuities and Retirement Plan Services reporting units passed the Step 1 analysis. Given the Step 1 results, we performed a Step 2 analysis for our Life Insurance and Group Protection reporting units. Based upon our Step 2 analysis for Life Insurance and Group Protection, we determined that there was no impairment due to the implied fair value of goodwill being in excess of the carrying value of goodwill.
As of October 1, 2012, our Annuities, Retirement Plan Services and Group Protection reporting units passed the Step 1 analysis, and although the carrying value of the net assets for Group Protection was within the estimated fair value range, we deemed it prudent to validate the carrying value of goodwill through a Step 2 analysis. Given the Step 1 results, we also performed a Step 2 analysis for our
Life Insurance reporting unit. Based upon our Step 2 analysis for Life Insurance and Group Protection, we determined that there was no impairment due to the implied fair value of goodwill being in excess of the carrying value of goodwill.
As of October 1, 2011, our Annuities, Retirement Plan Services and Group Protection reporting units passed the Step 1 analysis, and although the carrying value of the net assets for Group Protection was within the estimated fair value range, we deemed it prudent to validate the carrying value of goodwill through a Step 2 analysis. Given the Step 1 results, we also performed a Step 2 analysis for our Life Insurance and Media reporting units. Based upon our Step 2 analysis for Life Insurance, we recorded a goodwill impairment that was attributable primarily to marketplace dynamics and lower expectations associated with product changes that we have implemented or will implement shortly that we believe will have an unfavorable effect on our sales levels for a period of time. Based upon our Step 2 analysis for Group Protection, we determined that there was no impairment due to the implied fair value of goodwill being in excess of the carrying value of goodwill. Based upon our Step 2 analysis for Media, we recorded a goodwill impairment that was primarily a result of the deterioration in operating environment and outlook for the business.
The gross carrying amounts and accumulated amortization (in millions) for each major specifically identifiable intangible asset class by reportable segment were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31, 2013
						
						
As of December 31, 2012
						
						
Gross
						
						
						
						
						
						
Gross
						
						
						
						
						
Carrying
						
Accumulated
						
Carrying
						
Accumulated
						
Amount
						
Amortization
						
Amount
						
Amortization
						
Life Insurance:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Sales force
$
				
						
						
$
				
						
						
$
				
						
						
$
				
						
						
Retirement Plan Services:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Mutual fund contract rights (1)
						
				
						
						
						
-
						
						
						
				
						
						
						
-
						
						
Other Operations:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
FCC licenses (1)
						
				
						
						
						
-
						
						
						
				
						
						
						
-
						
						
Other
						
				
						
						
						
				
						
						
						
				
						
						
						
				
						
						
Total
$
				
						
						
$
				
						
						
$
				
						
						
$
				
						
						
(1)
No amortization recorded as the intangible asset has indefinite life.
Future estimated amortization of specifically identifiable intangible assets (in millions) as of December 31, 2013, was as follows:
						
						
						
						
						
						
$
				
						
						
				
						
						
				
						
						
				
						
						
				
						
Thereafter
						
				
						
11. Guaranteed Benefit Features
Information on the GDB features outstanding (dollars in millions) was as follows (our variable contracts with guarantees may offer more than one type of guarantee in each contract; therefore, the amounts listed are not mutually exclusive):
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31,
						
						
						
						
Return of Net Deposits
						
						
						
						
						
						
						
Total account value
$
79,391 				
						
						
$
63,478 				
						
Net amount at risk (1)
						
				
						
						
						
				
						
Average attained age of contract holders
						
61 years
						
						
						
60 years
						
Minimum Return
						
						
						
						
						
						
						
Total account value
$
				
						
						
$
				
						
Net amount at risk (1)
						
				
						
						
						
				
						
Average attained age of contract holders
						
73 years
						
						
						
73 years
						
Guaranteed minimum return
						
5% 				
						
						
						
5% 				
						
Anniversary Contract Value
						
						
						
						
						
						
						
Total account value
$
25,958 				
						
						
$
23,019 				
						
Net amount at risk (1)
						
				
						
						
						
1,133 				
						
Average attained age of contract holders
						
68 years
						
						
						
67 years
						
(1) Represents the amount of death benefit in excess of the account balance. The decrease in net amount at risk when comparing
December 31, 2013, to December 31, 2012, was attributable primarily to the increase in the equity markets during 2013.
The determination of GDB liabilities is based on models that involve a range of scenarios and assumptions, including those regarding expected market rates of return and volatility, contract surrender rates and mortality experience. The following summarizes the balances of and changes in the liabilities for GDBs (in millions), which were recorded in future contract benefits on our Consolidated Balance Sheets:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
						
						
Balance as of beginning-of-year
$
				
						
$
				
						
$
				
						
Changes in reserves
						
(10) 				
						
						
				
						
						
				
						
Benefits paid
						
(21) 				
						
						
(44) 				
						
						
(53) 				
						
Balance as of end-of-year
$
				
						
$
				
						
$
				
						
Variable Annuity Contracts
Account balances of variable annuity contracts with guarantees (in millions) were invested in separate account investment options as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31,
						
						
						
						
Asset Type
						
						
						
						
						
						
						
Domestic equity
$
47,042 				
						
						
$
37,899 				
						
International equity
						
18,341 				
						
						
						
14,850 				
						
Bonds
						
24,547 				
						
						
						
21,174 				
						
Money market
						
10,926 				
						
						
						
7,747 				
						
Total
$
100,856 				
						
						
$
81,670 				
						
						
						
						
						
						
						
						
Percent of total variable annuity
						
						
						
						
						
						
						
separate account values
						
98% 				
						
						
						
98% 				
						
Secondary Guarantee Products
Future contract benefits also includes reserves for our secondary guarantee products sold through our Life Insurance segment. These UL and VUL products with secondary guarantees represented 28% of total life insurance in-force reserves as of December 31, 2013, and 35% of total sales for the year ended December 31, 2013.
12. Short-Term and Long-Term Debt
Details underlying short-term and long-term debt (in millions) were as follows:
						
						
						
						
						
						
						
						
						
						
As of December 31,
						
Short-Term Debt
						
						
						
						
						
Current maturities of long-term debt
$
				
						
$
				
Unamortized premiums (discounts)
						
				
						
						
-
Total short-term debt
$
				
						
$
				
						
						
						
						
						
Long-Term Debt, Excluding Current Portion
						
						
						
						
						
Senior notes:
						
						
						
						
						
4.75% notes, due 2014
$
-
						
$
				
4.75% notes, due 2014
						
-
						
						
				
4.30% notes, due 2015 (1)
						
				
						
						
				
LIBOR + 3 bps notes, due 2017 (2)
						
				
						
						
				
7.00% notes, due 2018
						
				
						
						
				
LIBOR + 110 bps loan, due 2018
						
				
						
						
-
8.75% notes, due 2019 (1)
						
				
						
						
				
6.25% notes, due 2020 (1)
						
				
						
						
				
4.85% notes, due 2021 (1)
						
				
						
						
				
4.20% notes, due 2022 (1)
						
				
						
						
				
4.00% notes, due 2023 (1)
						
				
						
						
-
6.15% notes, due 2036 (1)
						
				
						
						
				
6.30% notes, due 2037 (1)(2)
						
				
						
						
				
7.00% notes, due 2040 (1)(2)
						
				
						
						
				
Total senior notes
						
4,060 				
						
						
3,960 				
						
						
						
						
						
Capital securities:
						
						
						
						
						
7.00%, due 2066
						
				
						
						
				
6.05%, due 2067
						
				
						
						
				
Total capital securities
						
1,213 				
						
						
1,213 				
Unamortized premiums (discounts)
						
(12) 				
						
						
(3) 				
Fair value hedge - interest rate swap agreements
						
				
						
						
				
Total unamortized premiums (discounts) and fair value
						
						
						
						
						
hedge - interest rate swap agreements
						
				
						
						
				
Total long-term debt
$
5,320 				
						
$
5,439 				
(1)
We have the option to repurchase the outstanding notes by paying the greater of 100% of the principal amount of the notes to be redeemed or the make-whole amount (as defined in each note agreement), plus in each case any accrued and unpaid interest as of the date of redemption.
(2)
Categorized as operating debt for leverage ratio calculations as the proceeds were used as a long-term structured solution to reduce the strain on increasing statutory reserves associated with secondary guarantee UL and term policies.
Details underlying the recognition of a gain (loss) on the extinguishment of debt (in millions) reported within interest and debt expense on our Consolidated Statements of Comprehensive Income (Loss) were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
Principal balance outstanding prior to payoff (1)
$
-
						
$
				
						
$
				
Unamortized debt issuance costs and discounts prior to payoff
						
-
						
						
-
						
						
(8) 				
Amount paid to retire
						
-
						
						
(20) 				
						
						
(275) 				
Gain (loss) on extinguishment of debt, pre-tax
$
-
						
$
(5) 				
						
$
(8) 				
(1)
During the fourth quarter of 2012, we repurchased $13 million of our 8.75% senior notes due 2019 and $2 million of our 6.15% senior notes due 2036. During the third quarter of 2011, we repurchased all of our 6.75% capital securities due 2066.
Future principal payments due on long-term debt (in millions) as of December 31, 2013, were as follows:
						
						
						
						
						
						
$
				
						
						
				
						
						
-
						
						
				
						
						
				
						
Thereafter
						
4,323 				
						
Total
$
5,773 				
						
For our long-term debt outstanding, unsecured senior debt, which consists of senior notes, fixed-rate notes and other notes with varying interest rates, ranks highest in priority, followed by capital securities.
Credit Facilities and Letters of Credit (“LOCs”)
Credit facilities, which allow for borrowing or issuances of LOCs, and LOCs (in millions) were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31, 2013
						
Expiration
						
Maximum
						
LOCs
						
Date
						
Available
						
Issued
						
Credit Facilities
						
						
						
						
						
						
						
						
Five-year revolving credit facility
May-2018
						
$
2,500 				
						
$
				
						
LOC facility
Mar-2023
						
						
				
						
						
				
						
LOC facility
Mar-2023
						
						
				
						
						
				
						
LOC facility
Aug-2031
						
						
				
						
						
				
						
LOC facility
Oct-2031
						
						
				
						
						
				
						
Total
						
						
$
5,340 				
						
$
3,657 				
						
Effective as of May 29, 2013, we entered into a credit agreement with a syndicate of banks. This agreement (the “credit facility”) allows for the issuance of LOCs of up to $2.5 billion and borrowing of up to $2.5 billion, $1.75 billion of which is available only to reimburse the banks for drawn LOCs. The credit facility is unsecured and has a commitment termination date of May 29, 2018. The LOCs support inter-company reinsurance transactions and specific treaties associated with our business sold through reinsurance. LOCs are used primarily to satisfy the U.S. regulatory requirements of our domestic insurance companies for which reserve credit is provided by our affiliated reinsurance companies and our domestic clients of the business sold through reinsurance.
The credit facility contains or includes:
·
Customary terms and conditions, including covenants restricting our ability to incur liens, merge or consolidate with another entity where we are not the surviving entity and dispose of all or substantially all of our assets;
·
Financial covenants including maintenance of a minimum consolidated net worth (as defined in the facility) equal to the sum of $9.4 billion plus 50% of the aggregate net proceeds of equity issuances received by us in accordance with the terms of the credit facility; and a debt-to-capital ratio as defined in accordance with the credit facility not to exceed 0.35 to 1.00; and
·
Customary events of default, subject to certain materiality thresholds and grace periods for certain of those events of default.
Upon an event of default, the credit facility provides that, among other things, the commitments may be terminated and the loans then outstanding may be declared due and payable. As of December 31, 2013, we were in compliance with all such covenants.
This credit facility replaced our previous four-year credit facility dated as of June 10, 2011, that was scheduled to expire on June 10, 2015.
On December 23, 2013, we entered into a credit facility agreement with a third-party lender. Under the agreement, the lender issued an irrevocable LOC effective December 23, 2013, with a maximum scheduled LOC amount of up to approximately $156 million. The LOC supports certain fees owed to another third-party lender and is automatically renewable until March 31, 2023. On October 30, 2012, one of our wholly-owned subsidiaries amended and restated the credit facility agreement entered into on November 1, 2011, with a third-party lender. Under the amended and restated agreement, the lender issued an irrevocable LOC effective October 30, 2012, with a maximum scheduled LOC amount of up to approximately $1.0 billion. The LOC supports an inter-company reinsurance agreement and expires October 1, 2031. On August 20, 2012, one of our wholly-owned subsidiaries amended the credit facility agreement entered into on August 26, 2011, with a third-party lender. Under the amended agreement, the lender issued an irrevocable LOC effective August 20, 2012, with a maximum scheduled LOC amount of up to approximately $863 million. The LOC supports an inter-company reinsurance agreement and expires August 26, 2031. On April 28, 2011, certain of our wholly-owned subsidiaries amended and restated the reimbursement agreement entered into on December 31, 2009, with a third-party lender. Under the amended agreement, the lender issued an irrevocable LOC effective April 1, 2011, with a maximum scheduled LOC amount of up to approximately $925 million. The LOC supports an inter-company reinsurance agreement and expires March 31, 2023.
These agreements each contain customary terms and conditions, including early termination fees, covenants restricting the ability of the subsidiaries to incur liens, merge or consolidate with another entity and dispose of all or substantially all of their assets. Upon an event of early termination, the agreements require the immediate payment of all or a portion of the present value of the future LOC fees that would have otherwise been paid. Further, the agreements contain customary events of default, subject to certain materiality thresholds and grace periods for certain of those events of default. The events of default include payment defaults, covenant defaults, material inaccuracies in representations and warranties, bankruptcy and liquidation proceedings and other customary defaults. Upon an event of default, the agreements provide that, among other things, obligations to issue, amend or increase the amount of any LOC shall be terminated and any obligations shall become immediately due and payable. As of December 31, 2013, we were in compliance with all such covenants.
Effective October 1, 2013, one of our wholly-owned subsidiaries entered into a third-party financing arrangement that supports an inter-company reinsurance agreement. The arrangement provides for a maximum scheduled financing capacity of up to $700 million and expires on October 1, 2028.
Shelf Registration
We currently have an effective shelf registration statement, which allows us to issue, in unlimited amounts, securities, including debt securities, preferred stock, common stock, warrants, stock purchase contracts, stock purchase units and trust preferred securities of our affiliated trusts.
Certain Debt Covenants on Capital Securities
Our $1.2 billion in principal amount of capital securities outstanding contain certain covenants that require us to make interest payments in accordance with an alternative coupon satisfaction mechanism (“ACSM”) if we determine that one of the following trigger events exists as of the 30th day prior to an interest payment date (“determination date”):
·
LNL’s risk-based capital ratio is less than 175% (based on the most recent annual financial statement filed with the State of Indiana); or
·
(i) The sum of our consolidated net income for the four trailing fiscal quarters ending on the quarter that is two quarters prior to the most recently completed quarter prior to the determination date is zero or negative; and (ii) our consolidated stockholders’ equity (excluding accumulated other comprehensive income and any increase in stockholders’ equity resulting from the issuance of preferred stock during a quarter), or “adjusted stockholders’ equity,” as of (x) the most recently completed quarter and (y) the end of the quarter that is two quarters before the most recently completed quarter, has declined by 10% or more as compared to the quarter that is 10 fiscal quarters prior to the last completed quarter, or the “benchmark quarter.”
The ACSM would generally require us to use commercially reasonable efforts to satisfy our obligation to pay interest in full on the capital securities with the net proceeds from sales of our common stock and warrants to purchase our common stock with an exercise price greater than the market price. We would have to utilize the ACSM until the trigger events no longer existed. Our failure to pay interest pursuant to the ACSM will not result in an event of default with respect to the capital securities nor will a nonpayment of interest unless it lasts for 10 consecutive years, although such breaches may result in monetary damages to the holders of the capital securities.
13. Contingencies and Commitments
Contingencies
Regulatory and Litigation Matters
Regulatory bodies, such as state insurance departments, the Securities and Exchange Commission, Financial Industry Regulatory Authority and other regulatory bodies regularly make inquiries and conduct examinations or investigations concerning our compliance with, among other things, insurance laws, securities laws, laws governing the activities of broker-dealers, registered investment advisors and unclaimed property laws.
LNC and its subsidiaries are involved in various pending or threatened legal or regulatory proceedings, including purported class actions, arising from the conduct of business both in the ordinary course and otherwise. In some of the matters, very large and/or indeterminate amounts, including punitive and treble damages, are sought. Modern pleading practice in the U.S. permits considerable variation in the assertion of monetary damages or other relief. Jurisdictions may permit claimants not to specify the monetary damages sought or may permit claimants to state only that the amount sought is sufficient to invoke the jurisdiction of the trial court. In addition, jurisdictions may permit plaintiffs to allege monetary damages in amounts well exceeding reasonably possible verdicts in the jurisdiction for similar matters. This variability in pleadings, together with the actual experiences of LNC in litigating or resolving through settlement numerous claims over an extended period of time, demonstrates to management that the monetary relief which may be specified in a lawsuit or claim bears little relevance to its merits or disposition value.
Due to the unpredictable nature of litigation, the outcome of a litigation matter and the amount or range of potential loss at particular points in time is normally difficult to ascertain. Uncertainties can include how fact finders will evaluate documentary evidence and the credibility and effectiveness of witness testimony, and how trial and appellate courts will apply the law in the context of the pleadings or
evidence presented, whether by motion practice, or at trial or on appeal. Disposition valuations are also subject to the uncertainty of how opposing parties and their counsel will themselves view the relevant evidence and applicable law.
We establish liabilities for litigation and regulatory loss contingencies when information related to the loss contingencies shows both that it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. It is possible that some matters could require us to pay damages or make other expenditures or establish accruals in amounts that could not be estimated as of December 31, 2013. While the potential future charges could be material in the particular quarterly or annual periods in which they are recorded, based on information currently known by management, management does not believe any such charges are likely to have a material adverse effect on LNC’s financial condition.
For some matters, the Company is able to estimate a reasonably possible range of loss. For such matters in which a loss is probable, an accrual has been made. For such matters where a loss is believed to be reasonably possible, but not probable, no accrual has been made. Accordingly, the estimate contained in this paragraph reflects two types of matters. For some matters included within this estimate, an accrual has been made, but there is a reasonable possibility that an exposure exists in excess of the amount accrued. In these cases, the estimate reflects the reasonably possible range of loss in excess of the accrued amount. For other matters included within this estimation, no accrual has been made because a loss, while potentially estimable, is believed to be reasonably possible but not probable. In these cases, the estimate reflects the reasonably possible loss or range of loss. As of December 31, 2013, we estimate the aggregate range of reasonably possible losses, including amounts in excess of amounts accrued for these matters as of such date, to be up to approximately $220 million.
For other matters, we are not currently able to estimate the reasonably possible loss or range of loss. We are often unable to estimate the possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the range of possible loss, such as quantification of a damage demand from plaintiffs, discovery from other parties and investigation of factual allegations, rulings by the court on motions or appeals, analysis by experts, and the progress of settlement negotiations. On a quarterly and annual basis, we review relevant information with respect to litigation contingencies and update our accruals, disclosures and estimates of reasonably possible losses or ranges of loss based on such reviews.
On June 13, 2009, a single named plaintiff filed a putative national class action in the Circuit Court of Allen County, Indiana, captioned Peter S. Bezich v. LNL, No. 02C01-0906-PL73, asserting he was charged a cost-of-insurance fee that exceeded the applicable mortality charge, and that this fee breached the terms of the insurance contract. We dispute the allegations and are vigorously defending this matter. Plaintiffs have filed a motion for class certification. We expect a hearing on class certification in the first half of 2014.
On July 23, 2012, LNL was added as a noteholder defendant to a putative class action adversary proceeding (“adversary proceeding”) captioned Lehman Brothers Special Financing, Inc. v. Bank of America, N.A. et al., Adv. Pro. No. 10-03547 (JMP) and instituted under In re Lehman Brothers Holdings Inc. in the United States Bankruptcy Court in the Southern District of New York. Plaintiff Lehman Brothers Special Financing Inc. seeks to (i) overturn the application of certain priority of payment provisions in 47 collateralized debt obligation transactions on the basis such provisions are unenforceable under the Bankruptcy Code; and (ii) recover funds paid out to noteholders in accordance with the note agreements. The adversary proceeding is stayed through May 20, 2014, and LNL’s response is currently due by the middle of 2014.
During 2013, we entered into a Global Resolution Agreement with multiple states’ treasury and controller offices for compliance with laws and regulations concerning the identification, reporting and escheatment of unclaimed contract benefits or abandoned funds. Under the terms of the Global Resolution Agreement, a third-party auditor acting on behalf of the signatory states will compare expanded matching criteria to the Social Security Death Master File (“SSDMF”) to identify deceased insureds and contract holders where a valid claim has not been made. In addition, we entered into a Regulatory Settlement Agreement with the insurance regulators of seven states to settle regulatory inquiries and examinations with respect to our processes for identifying and paying claims and benefits in the future. As part of the settlement, we have agreed to reimburse the participating states $12.6 million for the costs of such examinations. The Regulatory Settlement Agreement applies prospectively and requires us to adopt and implement additional procedures comparing our records to the SSDMF to identify unclaimed death benefits, and prescribes procedures for identifying and locating beneficiaries once deaths are identified. Other jurisdictions that are not signatories to the Regulatory Settlement Agreement are considering proposals that would apply prospectively and require life insurance companies to take additional steps to identify unreported deceased policy and contract holders. These prospective changes and any escheatable property identified as a result of the audits and inquiries could result in: (1) additional payments of previously unclaimed death benefits; (2) the payment of abandoned funds to U.S. jurisdictions; and (3) changes in the Company’s practices and procedures for the identification of escheatable funds and beneficiaries, which would impact claim payments and reserves, among other consequences.
Commitments
Leases
Certain subsidiaries of ours lease their home office properties. In 2006, we exercised the right and option to extend the Fort Wayne lease for two extended terms such that the lease shall expire in 2019. We retain our right and option to exercise the remaining four extended terms of five years each in accordance with the lease agreement. These agreements also provide us with the right of first refusal to purchase the properties at a price defined in the agreements and the option to purchase the leased properties at fair market value on the last day of any renewal period. In 2012, we exercised the right and option to extend the Hartford lease for one extended term such that
the lease shall expire in 2018. During 2007, we moved our corporate headquarters to Radnor, Pennsylvania from Philadelphia, Pennsylvania and entered into a new 13-year lease for office space.
Total rental expense on operating leases for the years ended December 31, 2013, 2012 and 2011, was $44 million, $43 million and $42 million, respectively. Future minimum rental commitments (in millions) as of December 31, 2013, were as follows:
						
						
						
						
						
						
$
				
						
						
				
						
						
				
						
						
				
						
						
				
						
Thereafter
						
				
						
Total
$
				
						
Football Stadium Naming Rights Commitment
In 2002, we entered into an agreement with the Philadelphia Eagles to name the Eagles’ new stadium Lincoln Financial Field. In exchange for the naming rights, we agreed to pay $140 million over a 20-year period through annual payments to the Philadelphia Eagles, which average approximately $7 million per year. The total amount includes a maximum annual increase related to the Consumer Price Index. This future commitment has not been recorded as a liability on our Consolidated Balance Sheets as it is being accounted for in a manner consistent with the accounting for operating leases under the Leases Topic of the FASB ASC.
Vulnerability from Concentrations
As of December 31, 2013, we did not have a concentration of: business transactions with a particular customer or lender; sources of supply of labor or services used in the business; or a market or geographic area in which business is conducted that makes us vulnerable to an event that is at least reasonably possible to occur in the near term and which could cause a severe impact to our financial condition.
Although we do not have any significant concentration of customers, our American Legacy Variable Annuity (“ALVA”) product offered in our Annuities segment is significant to this segment. The ALVA product accounted for 17%, 19% and 22% of Annuities’ variable annuity product deposits in 2013, 2012 and 2011, respectively, and represented approximately 47%, 50% and 54% of the segment’s total variable annuity product account values as of December 31, 2013, 2012 and 2011, respectively. In addition, fund choices for certain of our other variable annuity products offered in our Annuities segment include American Fund Insurance SeriesSM (“AFIS”) funds. For the Annuities segment, AFIS funds accounted for 19%, 21% and 27% of variable annuity product deposits in 2013, 2012 and 2011, respectively, and represented 54%, 58% and 62% of the segment’s total variable annuity product account values as of December 31, 2013, 2012 and 2011, respectively.
Other Contingency Matters
State guaranty funds assess insurance companies to cover losses to contract holders of insolvent or rehabilitated companies. Mandatory assessments may be partially recovered through a reduction in future premium taxes in some states. We have accrued for expected assessments and the related reductions in future state premium taxes, which net to assessments (recoveries) of $(6) million and $34 million as of December 31, 2013 and 2012, respectively.
14. Shares and Stockholders’ Equity
Common and Preferred Shares
The changes in our preferred and common stock (number of shares) were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
						
						
Series A Preferred Stock
						
						
						
						
						
						
Balance as of beginning-of-year
9,532 				
						
10,072 				
						
10,914 				
						
Conversion of convertible preferred stock (1)
(5,818) 				
						
(540) 				
						
(842) 				
						
Redemption of convertible preferred stock
(3,714) 				
						
-
						
-
						
Balance as of end-of-year
-
						
9,532 				
						
10,072 				
						
						
						
						
						
						
						
Common Stock
						
						
						
						
						
						
Balance as of beginning-of-year
271,402,586 				
						
291,319,222 				
						
315,718,554 				
						
Conversion of convertible preferred stock (1)
93,088 				
						
8,640 				
						
13,472 				
						
Stock issued for exercise of warrants
1,981,856 				
						
-
						
-
						
Stock compensation/issued for benefit plans
1,399,995 				
						
542,125 				
						
248,553 				
						
Retirement/cancellation of shares
(11,980,824) 				
						
(20,467,401) 				
						
(24,661,357) 				
						
Balance as of end-of-year
262,896,701 				
						
271,402,586 				
						
291,319,222 				
						
						
						
						
						
						
						
Common Stock as of End-of-Year
						
						
						
						
						
						
Assuming conversion of preferred stock
262,896,701 				
						
271,555,098 				
						
291,480,374 				
						
Diluted basis
272,196,891 				
						
279,087,588 				
						
298,225,244 				
						
(1) Represents the conversion of Series A preferred stock into common stock.
Our common and Series A preferred stocks are without par value.
Average Shares
A reconciliation of the denominator (number of shares) in the calculations of basic and diluted earnings (loss) per common share was as follows:
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
						
						
Weighted-average shares, as used in basic calculation
265,631,377 				
						
280,648,391 				
						
307,216,181 				
						
Shares to cover exercise of outstanding warrants
9,884,307 				
						
10,150,212 				
						
10,150,292 				
						
Shares to cover conversion of preferred stock
74,582 				
						
153,749 				
						
173,289 				
						
Shares to cover non-vested stock
1,491,483 				
						
1,153,178 				
						
813,905 				
						
Average stock options outstanding during the year
2,873,295 				
						
570,180 				
						
636,989 				
						
Assumed acquisition of shares with assumed
						
						
						
						
						
						
proceeds from exercising outstanding warrants
(2,630,939) 				
						
(4,685,901) 				
						
(4,658,020) 				
						
Assumed acquisition of shares with assumed
						
						
						
						
						
						
proceeds and benefits from exercising stock
						
						
						
						
						
						
options (at average market price for the year)
(2,036,098) 				
						
(394,241) 				
						
(427,425) 				
						
Shares repurchaseable from measured but
						
						
						
						
						
						
unrecognized stock option expense
(139,131) 				
						
(4,723) 				
						
(65,882) 				
						
Average deferred compensation shares
-
						
-
						
1,110,722 				
						
Weighted-average shares, as used in diluted calculation
275,148,876 				
						
287,590,845 				
						
314,950,051 				
						
In the event the average market price of LNC common stock exceeds the issue price of stock options and the options have a dilutive effect to our EPS, such options will be shown in the table above.
The income used in the calculation of our diluted EPS is our net income (loss) reduced by preferred stock dividends.
We have participants in our deferred compensation plans who selected LNC stock as the measure for the investment return attributable to their deferral amounts. For the year ended December 31, 2011, the effect of settling this obligation in LNC stock (“equity classification”) was more dilutive than the scenario of settling it in cash (“liability classification”). Therefore, for our EPS calculation for this period, we added these shares to the denominator and adjusted the numerator to present net income as if the shares had been
accounted for under equity classification by removing the mark-to-market adjustment included in net income attributable to these deferred units of LNC stock. The amount of this adjustment was $5 million for the year ended December 31, 2011.
As of December 31, 2013, we had 7,711,505 outstanding warrants. The warrants, each representing the right to purchase one share of our common stock, no par value per share, had an exercise price of $10.58 as of December 31, 2013, subject to adjustment. The warrants expire on July 10, 2019, and are listed on the New York Stock Exchange under the symbol “LNC WS.”
Accumulated OCI (“AOCI”)
The following summarizes the components and changes in accumulated OCI (in millions):
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
Unrealized Gain (Loss) on AFS Securities
						
						
						
						
						
						
						
						
Balance as of beginning-of-year
$
4,066 				
						
$
2,947 				
						
$
1,176 				
Unrealized holding gains (losses) arising during the year
						
(5,728) 				
						
						
2,691 				
						
						
3,414 				
Change in foreign currency exchange rate adjustment
						
				
						
						
				
						
						
(5) 				
Change in DAC, VOBA, DSI, future contract benefits and other contract holder funds
						
1,834 				
						
						
(1,233) 				
						
						
(797) 				
Income tax benefit (expense)
						
1,356 				
						
						
(480) 				
						
						
(932) 				
Less:
						
						
						
						
						
						
						
						
Reclassification adjustment for gains (losses) included in net income (loss)
						
(67) 				
						
						
(194) 				
						
						
(129) 				
Associated amortization of DAC, VOBA, DSI and DFEL
						
(29) 				
						
						
(2) 				
						
						
(11) 				
Income tax benefit (expense)
						
				
						
						
				
						
						
				
Balance as of end-of-year
$
1,609 				
						
$
4,066 				
						
$
2,947 				
Unrealized OTTI on AFS Securities
						
						
						
						
						
						
						
						
Balance as of beginning-of-year
$
(107) 				
						
$
(109) 				
						
$
(134) 				
(Increases) attributable to:
						
						
						
						
						
						
						
						
Gross OTTI recognized in OCI during the year
						
(11) 				
						
						
(121) 				
						
						
(58) 				
Change in DAC, VOBA, DSI and DFEL
						
				
						
						
				
						
						
				
Income tax benefit (expense)
						
				
						
						
				
						
						
				
Decreases attributable to:
						
						
						
						
						
						
						
						
Sales, maturities or other settlements of AFS securities
						
				
						
						
				
						
						
				
Change in DAC, VOBA, DSI and DFEL
						
(8) 				
						
						
(18) 				
						
						
(20) 				
Income tax benefit (expense)
						
(19) 				
						
						
(39) 				
						
						
(29) 				
Balance as of end-of-year
$
(78) 				
						
$
(107) 				
						
$
(109) 				
Unrealized Gain (Loss) on Derivative Instruments
						
						
						
						
						
						
						
						
Balance as of beginning-of-year
$
				
						
$
				
						
$
(11) 				
Unrealized holding gains (losses) arising during the year
						
				
						
						
				
						
						
				
Change in foreign currency exchange rate adjustment
						
(19) 				
						
						
(12) 				
						
						
				
Change in DAC, VOBA, DSI and DFEL
						
				
						
						
				
						
						
-
Income tax benefit (expense)
						
(45) 				
						
						
(21) 				
						
						
(67) 				
Less:
						
						
						
						
						
						
						
						
Reclassification adjustment for gains (losses) included in net income (loss)
						
(15) 				
						
						
(15) 				
						
						
(10) 				
Associated amortization of DAC, VOBA, DSI and DFEL
						
				
						
						
				
						
						
				
Income tax benefit (expense)
						
				
						
						
				
						
						
				
Balance as of end-of-year
$
				
						
$
				
						
$
				
Foreign Currency Translation Adjustment
						
						
						
						
						
						
						
						
Balance as of beginning-of-year
$
(4) 				
						
$
				
						
$
				
Foreign currency translation adjustment arising during the year
						
(1) 				
						
						
(5) 				
						
						
-
Income tax benefit (expense)
						
-
						
						
-
						
						
-
Balance as of end-of-year
$
(5) 				
						
$
(4) 				
						
$
				
Funded Status of Employee Benefit Plans
						
						
						
						
						
						
						
						
Balance as of beginning-of-year
$
(310) 				
						
$
(278) 				
						
$
(181) 				
Adjustment arising during the year
						
				
						
						
				
						
						
(149) 				
Income tax benefit (expense)
						
(49) 				
						
						
(34) 				
						
						
				
Balance as of end-of-year
$
(219) 				
						
$
(310) 				
						
$
(278) 				
The following summarizes the reclassifications out of AOCI (in millions) for the year ended December 31, 2013, and the associated line item in the Consolidated Statements of Comprehensive Income (Loss):
						
						
						
						
						
						
						
						
Unrealized Gain (Loss) on AFS Securities
						
						
						
						
Gross reclassification
$
(67) 				
						
Total realized gain (loss)
Change in DAC, VOBA, DSI, and DFEL
						
(29) 				
						
Total realized gain (loss)
Reclassification before income tax benefit (expense)
						
(96) 				
						
Income (loss) from continuing operations before taxes
Income tax benefit (expense)
						
				
						
Federal income tax expense (benefit)
Reclassification, net of income tax
$
(62) 				
						
Net income (loss)
						
						
						
						
Unrealized OTTI on AFS Securities
						
						
						
						
Gross reclassification
$
				
						
Total realized gain (loss)
Change in DAC, VOBA, DSI, and DFEL
						
(8) 				
						
Total realized gain (loss)
Reclassification before income tax benefit (expense)
						
				
						
Income (loss) from continuing operations before taxes
Income tax benefit (expense)
						
(19) 				
						
Federal income tax expense (benefit)
Reclassification, net of income tax
$
				
						
Net income (loss)
						
						
						
						
Unrealized Gain (Loss) on Derivative Instruments
						
						
						
						
Gross reclassifications:
						
						
						
						
Interest rate contracts
$
(21) 				
						
Net investment income
Interest rate contracts
						
				
						
Interest and debt expense
Foreign currency contracts
						
				
						
Net investment income
Total gross reclassifications
						
(15) 				
						
						
Change in DAC, VOBA, DSI, and DFEL
						
				
						
Commissions and other expenses
Reclassifications before income tax benefit (expense)
						
(14) 				
						
Income (loss) from continuing operations before taxes
Income tax benefit (expense)
						
				
						
Federal income tax expense (benefit)
Reclassification, net of income tax
$
(9) 				
						
Net income (loss)
15. Realized Gain (Loss)
Details underlying realized gain (loss) (in millions) reported on our Consolidated Statements of Comprehensive Income (Loss) were as follows:
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
Total realized gain (loss) related to certain investments (1)
$
(98) 				
						
$
(190) 				
						
$
(148) 				
Realized gain (loss) on the mark-to-market on certain instruments (2)
						
				
						
						
				
						
						
(82) 				
Indexed annuity and universal life net derivatives results: (3)
						
						
						
						
						
						
						
						
Gross gain (loss)
						
(39) 				
						
						
				
						
						
				
Associated amortization of DAC, VOBA, DSI and DFEL
						
				
						
						
(5) 				
						
						
(2) 				
Variable annuity net derivatives results: (4)
						
						
						
						
						
						
						
						
Gross gain (loss)
						
(60) 				
						
						
				
						
						
(60) 				
Associated amortization of DAC, VOBA, DSI and DFEL
						
				
						
						
(44) 				
						
						
(4) 				
Total realized gain (loss)
$
(135) 				
						
$
				
						
$
(294) 				
(1)
See “Realized Gain (Loss) Related to Certain Investments” section in Note 5.
(2)
Represents changes in the fair values of certain derivative investments (not including those associated with our variable annuity net derivatives results), reinsurance related embedded derivatives and trading securities.
(3)
Represents the net difference between the change in the fair value of the S&P 500 call options that we hold and the change in the fair value of the embedded derivative liabilities of our indexed annuity and universal life products along with changes in the fair value of embedded derivative liabilities related to index call options we may purchase in the future to hedge contract holder index allocations applicable to future reset periods for our indexed annuity products.
(4)
Includes the net difference in the change in embedded derivative reserves of our GLB riders and the change in the fair value of the derivative instruments we own to hedge the change in embedded derivative reserves on our GLB riders and the benefit ratio unlocking on our GDB riders, including the cost of purchasing the hedging instruments.
16. Commissions and Other Expenses
Details underlying commissions and other expenses (in millions) were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
Commissions
$
1,962 				
						
$
1,660 				
						
$
1,672 				
General and administrative expenses
						
1,630 				
						
						
1,564 				
						
						
1,423 				
Expenses associated with reserve financing and unrelated LOCs
						
				
						
						
				
						
						
				
DAC and VOBA deferrals and interest, net of amortization
						
(640) 				
						
						
(275) 				
						
						
(551) 				
Broker-dealer expenses
						
				
						
						
				
						
						
				
Specifically identifiable intangible asset amortization
						
				
						
						
				
						
						
				
Media expenses
						
				
						
						
				
						
						
				
Taxes, licenses and fees
						
				
						
						
				
						
						
				
Restructuring charges
						
-
						
						
				
						
						
-
Total
$
3,701 				
						
$
3,683 				
						
$
3,264 				
17. Pension, Postretirement Health Care and Life Insurance Benefit Plans
We maintain U.S. qualified funded defined benefit pension plans in which many of our U.S. employees and agents are participants, and we retained the Lincoln UK pension plan after the sale of this business. We also maintain non-qualified, unfunded defined benefit pension plans for certain employees and agents. In addition, for certain former employees we have supplemental retirement plans that provide defined benefit pension benefits in excess of limits imposed by federal tax law. All of our defined benefit pension plans are frozen, including the defined benefit pension plan that was retained after the sale of Lincoln UK, and there are no new participants and no future accruals of benefits from the date of the freeze.
The eligibility requirements for each plan are described in each plan document and vary for each plan based on completion of a specified period of continuous service and date of hire, subject to age limitations. The frozen pension plan benefits are calculated either on a traditional final pay or cash balance formula. Those formulas are based upon years of credited service and eligible earnings as defined in each plan document. The traditional formula provides benefits stated in terms of a single life annuity payable at age 65. The cash balance formula provides benefits stated as a lump sum hypothetical account balance. That account balance equals the sum of the employee’s accumulated annual benefit credits plus interest credits. Benefit credits, which are based on years of service and base salary plus bonus, ceased as of the date the plan was frozen. Interest credits continue until the participant’s benefit is paid.
We also sponsor a voluntary employees’ beneficiary association (“VEBA”) trust that provides postretirement medical, dental and life insurance benefits to retired full-time U.S. employees and agents who, depending on the plan, have worked for us for at least 10 years and attained age 55 (age 60 for agents). VEBAs are a special type of tax-exempt trust used to provide benefits that are subject to preferential tax treatment under the Internal Revenue Code. Medical and dental benefits are available to spouses and other eligible dependents of retired employees and agents. Retirees may be required to contribute toward the cost of these benefits. Eligibility and the amount of required contribution for these benefits varies based upon a variety of factors including years of service and year of retirement.
Obligations, Funded Status and Assumptions
Information (in millions) with respect to our benefit plans’ assets and obligations was as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of or For the Years Ended December 31,
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
U.S.
						
Non-U.S.
						
Other
Pension Benefits
						
Pension Benefits
						
Postretirement Benefits
Change in Plan Assets
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Fair value as of beginning-of-year
$
1,043 				
						
$
				
						
$
				
						
$
				
						
$
				
						
$
				
Actual return on plan assets
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
				
Company and participant contributions
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
				
Benefits paid
						
(69) 				
						
						
(68) 				
						
						
(16) 				
						
						
(14) 				
						
						
(16) 				
						
						
(17) 				
Medicare Part D subsidy
						
-
						
						
-
						
						
-
						
						
-
						
						
				
						
						
				
Fair value as of end-of-year
						
1,047 				
						
						
1,043 				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Change in Benefit Obligation
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Balance as of beginning-of-year
						
1,284 				
						
						
1,238 				
						
						
				
						
						
				
						
						
				
						
						
				
Service cost (1)
						
				
						
						
				
						
						
-
						
						
-
						
						
				
						
						
				
Interest cost
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
				
Company and participant contributions
						
-
						
						
-
						
						
-
						
						
-
						
						
				
						
						
				
Amendments
						
-
						
						
-
						
						
-
						
						
-
						
						
(29) 				
						
						
-
Actuarial (gains) losses
						
(93) 				
						
						
				
						
						
				
						
						
				
						
						
(7) 				
						
						
(24) 				
Administrative expenses paid
						
(6) 				
						
						
(5) 				
						
						
-
						
						
-
						
						
-
						
						
-
Benefits paid
						
(69) 				
						
						
(68) 				
						
						
(16) 				
						
						
(14) 				
						
						
(16) 				
						
						
(17) 				
Medicare Part D subsidy
						
-
						
						
-
						
						
-
						
						
-
						
						
				
						
						
				
Balance as of end-of-year
						
1,172 				
						
						
1,284 				
						
						
				
						
						
				
						
						
				
						
						
				
Funded status of the plans
$
(125) 				
						
$
(241) 				
						
$
				
						
$
				
						
$
(57) 				
						
$
(97) 				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Amounts Recognized on the
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Consolidated Balance Sheets
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Other assets
$
				
						
$
				
						
$
				
						
$
				
						
$
-
						
$
-
Other liabilities
						
(139) 				
						
						
(262) 				
						
						
-
						
						
-
						
						
(57) 				
						
						
(97) 				
Net amount recognized
$
(125) 				
						
$
(241) 				
						
$
				
						
$
				
						
$
(57) 				
						
$
(97) 				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Amounts Recognized in
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Accumulated OCI, Net of Tax
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Net (gain) loss
$
				
						
$
				
						
$
				
						
$
				
						
$
(15) 				
						
$
(11) 				
Prior service credit
						
-
						
						
-
						
						
-
						
						
-
						
						
(18) 				
						
						
(3) 				
Net amount recognized
$
				
						
$
				
						
$
				
						
$
				
						
$
(33) 				
						
$
(14) 				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Rate of Increase in Compensation
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Retiree Life Insurance Plan
						
N/A
						
						
N/A
						
						
N/A
						
						
N/A
						
						
4.00% 				
						
						
4.00% 				
All other plans
						
N/A
						
						
N/A
						
						
N/A
						
						
N/A
						
						
N/A
						
						
N/A
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Weighted-Average Assumptions
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Benefit obligations:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Weighted-average discount rate
						
4.70% 				
						
						
4.16% 				
						
						
4.45% 				
						
						
4.40% 				
						
						
4.50% 				
						
						
4.03%
Expected return on plan assets
						
7.82% 				
						
						
7.79% 				
						
						
5.50% 				
						
						
5.30% 				
						
						
6.50% 				
						
						
6.50%
Net periodic benefit cost:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Weighted-average discount rate
						
4.16% 				
						
						
4.45% 				
						
						
4.40% 				
						
						
5.00% 				
						
						
4.03% 				
						
						
4.25%
Expected return on plan assets
						
7.82% 				
						
						
7.79% 				
						
						
5.50% 				
						
						
5.30% 				
						
						
6.50% 				
						
						
6.50%
(1)
Amounts for our U.S. pension plans represent general and administrative expenses.
Consistent with our benefit plans’ year end, we use December 31 as the measurement date.
The discount rate was determined based on a corporate yield curve as of December 31, 2013, and projected benefit obligation cash flows for the U.S. pension plans. We reevaluate this assumption each plan year. For 2014, our discount rate will be 4.70% for the U.S. pension plans, and 4.45% for the non-U.S. plan.
The expected return on plan assets was determined based on historical and expected future returns of the various asset categories, using the plans’ target plan allocation. We reevaluate this assumption each plan year. For 2014, our expected return on plan assets is 7.82% for the U.S. plans and 5.50% for the non-U.S. plan.
The calculation of the accumulated other postretirement benefit obligation assumes a weighted-average annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) as follows:
						
						
						
						
						
						
						
						
						
						
						
						
As of or For the
						
Years Ended December 31,
						
						
						
						
Pre-65 health care cost trend rate
7.50% 				
						
8.00% 				
						
8.50% 				
						
Post-65 health care cost trend rate
7.50% 				
						
8.00% 				
						
8.50% 				
						
Ultimate trend rate
4.50% 				
						
4.50% 				
						
4.50% 				
						
Year that the rate reaches the ultimate trend rate
				
						
				
						
				
						
We expect the health care cost trend rate for 2014 to be 7.50% for both the pre-65 and the post-65 population. A one-percentage point increase in assumed health care cost trend rates would have increased the accumulated postretirement benefit obligation by $4 million and total service and interest cost components by less than $1 million. A one-percentage point decrease in assumed health care cost trend rates would have decreased the accumulated postretirement benefit obligation by $4 million and total service and interest cost components by less than $1 million.
Information for our pension plans with an accumulated benefit obligation in excess of plan assets (in millions) was as follows:
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31,
						
						
						
U.S. Plan
						
						
						
						
						
						
Accumulated benefit obligation
$
1,059 				
						
$
1,160 				
						
Projected benefit obligation
						
1,059 				
						
						
1,160 				
						
Fair value of plan assets
						
				
						
						
				
						
Components of Net Periodic Benefit Cost
The components of net periodic benefit cost for our pension plans’ and other postretirement plans’ expense (recovery) (in millions) were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
						
						
						
Pension Benefits
						
Other Postretirement Benefits
U.S. Plans
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Service cost (1)
$
				
						
$
				
						
$
				
						
$
				
						
$
				
						
$
				
Interest cost
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
				
Expected return on plan assets
						
(78) 				
						
						
(72) 				
						
						
(71) 				
						
						
(3) 				
						
						
(3) 				
						
						
(2) 				
Amortization of prior service cost
						
-
						
						
-
						
						
-
						
						
(1) 				
						
						
(1) 				
						
						
(1) 				
Recognized net actuarial loss (gain)
						
				
						
						
				
						
						
				
						
						
(1) 				
						
						
				
						
						
				
Recognized actuarial gain due
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
to curtailments
						
-
						
						
-
						
						
-
						
						
(5) 				
						
						
-
						
						
-
Net periodic benefit expense (recovery)
$
				
						
$
				
						
$
				
						
$
(2) 				
						
$
				
						
$
				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Non-U.S. Plans
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Interest cost
$
				
						
$
				
						
$
				
						
						
						
						
						
						
						
						
						
Expected return on plan assets
						
(19) 				
						
						
(17) 				
						
						
(16) 				
						
						
						
						
						
						
						
						
						
Recognized net actuarial loss (gain)
						
				
						
						
				
						
						
-
						
						
						
						
						
						
						
						
						
Net periodic benefit expense (recovery)
$
(1) 				
						
$
(1) 				
						
$
(1) 				
						
						
						
						
						
						
						
						
						
(1)
Amounts for our pension plans represent general and administrative expenses.
We expect our 2014 U.S. pension plans’ expense to be approximately $1 million. In addition, we expect our non-U.S. pension plan income for 2014 to be approximately $4 million when assuming an average exchange rate of 1.66 pounds sterling to U.S. dollars.
For 2014, the estimated amount of amortization from accumulated OCI into net periodic benefit expense related to net actuarial loss or gain is expected to be a $17 million loss for our pension plans and a $2 million gain for our other postretirement plans.
Plan Assets
Our pension plans’ asset target allocations by asset category based on estimated fair values were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
U.S. Plan - Employees
						
U.S. Plan - Agents
						
Non-U.S. Plan
Asset Class
						
						
						
						
						
						
						
						
						
						
						
Fixed maturity securities
50% 				
						
50% 				
						
100% 				
						
80% 				
						
39% 				
						
39% 				
Common stock:
						
						
						
						
						
						
						
						
						
						
						
Domestic equity
35% 				
						
35% 				
						
0% 				
						
14% 				
						
0% 				
						
0% 				
International equity
15% 				
						
15% 				
						
0% 				
						
6% 				
						
0% 				
						
0% 				
Equity securities
0% 				
						
0% 				
						
0% 				
						
0% 				
						
58% 				
						
59% 				
Cash and invested cash
0% 				
						
0% 				
						
0% 				
						
0% 				
						
3% 				
						
2% 				
The investment objectives for the assets related to our pension plans are to:
·
Maintain sufficient liquidity to pay obligations of the plans as they come due;
·
Minimize the effect of a single investment loss and large losses to the plans through prudent risk/reward diversification consistent with sound fiduciary standards;
·
Maintain an appropriate asset allocation policy;
·
Earn a return commensurate with the level of risk assumed through the asset allocation policy; and
·
Control costs of administering and managing the plans' investment operations.
Investments can be made in various asset classes and styles, including, but not limited to: domestic and international equity, fixed-income securities, derivatives and other asset classes the investment managers deem prudent. Our plans follow a strategic asset allocation policy that strives to systemically increase the percentage of assets in liability-matching fixed-income investments as funding levels increase.
We currently target asset weightings as follows: for the U.S. Plan - Employees, domestic equity allocations (35%) are split into large cap (25%), small cap (5%) and hedge funds (5%). Fixed maturity securities represent core fixed-income investments. The performance of the pension trust assets is monitored on a quarterly basis relative to the plans’ objectives.
Our U.S. pension plans’ assets have been combined into a master retirement trust where a variety of qualified managers, including manager of managers, are expected to have returns that exceed the median of similar funds over three-year periods, above an appropriate index over five-year periods and meet real return standards over ten-year periods. Managers are monitored for adherence to approved investment policy guidelines and managers not meeting these criteria are subject to additional due diligence review, corrective action or possible termination.
Fair Value of Plan Assets
See “Fair Value Measurement” in Note 1 for discussion of how we categorize our pension plans’ assets into the three-level fair value hierarchy. See “Financial Instruments Carried at Fair Value” in Note 21 for a summary of our fair value measurements of our pension plans’ assets by the three-level fair value hierarchy.
The following summarizes our fair value measurements of benefit plans’ assets (in millions) on a recurring basis by asset category:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31,
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
U.S.
						
Non-U.S.
						
Other
Pension Plans
						
Pension Plans
						
Postretirement Benefits
Fixed maturity securities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Corporate bonds
$
				
						
$
				
						
$
				
						
$
				
						
$
-
						
$
-
U.S. government bonds
						
				
						
						
				
						
						
				
						
						
				
						
						
-
						
						
-
Foreign government bonds
						
-
						
						
				
						
						
				
						
						
				
						
						
-
						
						
-
RMBS
						
-
						
						
				
						
						
-
						
						
-
						
						
-
						
						
-
CMBS
						
-
						
						
				
						
						
-
						
						
-
						
						
-
						
						
-
CDOs
						
-
						
						
				
						
						
				
						
						
				
						
						
-
						
						
-
State and municipal bonds
						
				
						
						
				
						
						
-
						
						
-
						
						
-
						
						
-
Common and preferred stock
						
				
						
						
				
						
						
				
						
						
				
						
						
-
						
						
-
Cash and invested cash
						
				
						
						
				
						
						
				
						
						
				
						
						
-
						
						
-
Other investments
						
-
						
						
-
						
						
-
						
						
-
						
						
				
						
						
				
Total
$
1,047 				
						
$
1,043 				
						
$
				
						
$
				
						
$
				
						
$
				
Valuation Methodologies and Associated Inputs for Pension Plans’ Assets
The fair value measurements of our pension plans’ assets are based on assumptions used by market participants in pricing the security. The most appropriate valuation methodology is selected based on the specific characteristics of the security, and the valuation methodology is consistently applied to measure the security’s fair value. The fair value measurement is based on a market approach, which utilizes prices and other relevant information generated by market transactions involving identical or comparable securities. Sources of inputs to the market approach include third-party pricing services, independent broker quotations or pricing matrices. Both observable and unobservable inputs are used in the valuation methodologies. Observable inputs include benchmark yields, reported trades, broker quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. In addition, market indicators, industry and economic events are monitored and further market data is acquired if certain triggers are met. For certain security types, additional inputs may be used, or some of the inputs described above may not be applicable. For broker-quoted only securities, quotes from market makers or broker dealers are obtained from sources recognized to be market participants. In order to validate the pricing information and broker quotes, procedures are employed, where possible, that include comparisons with similar observable positions, comparisons with subsequent sales, discussions with brokers and observations of general market movements for those security classes. For those securities trading in less liquid or illiquid markets with limited or no pricing information, unobservable inputs are used in order to measure the fair value of these securities. In cases where this information is not available, such as for privately placed securities, fair value is estimated using an internal pricing matrix. This matrix relies on judgment concerning the discount rate used in calculating expected future cash flows, credit quality, industry sector performance and expected maturity.
Prices received from third parties are not adjusted; however, the third-party pricing services’ valuation methodologies and related inputs are evaluated and additional evaluation is performed to determine the appropriate level within the fair value hierarchy.
The observable and unobservable inputs to the valuation methodologies are based on general standard inputs. The standard inputs used in order of priority are benchmark yields, reported trades, broker quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Depending on the type of security or the daily market activity, standard inputs may be prioritized differently or may not be available for all securities on any given day.
Cash and invested cash is carried at cost, which approximates fair value. This category includes highly liquid debt instruments purchased with a maturity of three months or less. Due to the nature of these assets, we believe these assets should be classified as Level 2.
Plan Cash Flows
It is our practice to make contributions to the qualified pension plans to comply with minimum funding requirements of the Employee Retirement Income Security Act of 1974, as amended and with guidance issued there under. In accordance with such practice, no contributions were required for the years ended December 31, 2013 or 2012 however, we elected to contribute $25 million on December 20, 2012. Based on our calculations, we do not expect to be required to make any contributions to our qualified pension plans in 2014 under applicable pension law.
For our nonqualified pension plans, we fund the benefits as they become due to retirees. The amount expected to be contributed to the nonqualified pension plans during 2014 is approximately $10 million.
We expect the following benefit payments (in millions):
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Pension Plans
						
						
						
						
Qualified
						
Nonqualified
						
Qualified
						
						
						
U.S.
						
						
U.S.
						
						
Non-U.S.
						
U.S.
						
Defined
						
						
Defined
						
						
Defined
						
Other
						
Benefit
						
						
Benefit
						
						
Benefit
						
Post-
						
Pension
						
						
Pension
						
						
Pension
						
retirement
						
Plans
						
						
Plans
						
						
Plans
						
Plans
						
$
				
						
						
$
				
						
						
$
				
						
$
				
						
						
				
						
						
						
				
						
						
						
				
						
						
				
						
						
				
						
						
						
				
						
						
						
				
						
						
				
						
						
				
						
						
						
				
						
						
						
				
						
						
				
						
						
				
						
						
						
				
						
						
						
				
						
						
				
						
Following five years thereafter
						
				
						
						
						
				
						
						
						
				
						
						
				
						
18. Defined Contribution and Deferred Compensation Plans
Defined Contribution Plans
We sponsor defined contribution plans, which include 401(k) and money purchase plans, for eligible employees and agents. We make contributions and matching contributions to each of the active plans in accordance with the plan documents and various limitations
under Section 401(a) of the Internal Revenue Code of 1986, as amended. For the years ended December 31, 2013, 2012 and 2011, expenses for these plans were $72 million, $70 million and $67 million, respectively.
Deferred Compensation Plans
We sponsor six separate non-qualified, unfunded, deferred compensation plans for employees, agents and non-employee directors.
The results for certain investment options within the plans are hedged by total return swaps. Participants’ account values change due primarily to investment earnings driven by market fluctuations. Our expenses increase or decrease in direct proportion to the change in market value of the participants’ investment options. Participants are able to select our stock as an investment option; however, it is not hedged by the total return swaps and is a primary source of expense volatility related to these plans. For further discussion of total return swaps related to our deferred compensation plans, see Note 6.
Information (in millions) with respect to these plans was as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31,
						
						
						
						
						
						
						
						
						
Total liabilities (1)
$
				
						
$
				
						
						
						
						
Investments held to fund liabilities (2)
						
				
						
						
				
						
						
						
						
(1)
Reported in other liabilities on our Consolidated Balance Sheets.
(2)
Reported in other assets on our Consolidated Balance Sheets.
Deferred Compensation Plan for Employees
Participants may elect to defer a portion of their compensation as defined by the plan. Participants may select from prescribed “phantom” investment options that are used as measures for calculating the returns that are notionally credited to their accounts. Under the terms of the plan, we agree to pay out amounts based upon the aggregate performance of the investment measures selected by the participants. We make matching contributions based upon amounts placed into the plan by individuals after participants have exceeded applicable limits of the Internal Revenue Code applicable to 401(k) plans. The amount of our contribution is calculated in accordance with the plan document. Expenses (income) (in millions) for this plan were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
						
						
Employer matching contributions
$
				
						
$
				
						
$
				
						
Increase (decrease) in measurement of
						
						
						
						
						
						
						
						
						
liabilities, net of total return swap
						
				
						
						
				
						
						
				
						
Total plan expenses (income)
$
				
						
$
				
						
$
				
						
Deferred Compensation Plans for Agents
We sponsor three deferred compensation plans for certain eligible agents. Participants may elect to defer a portion of their compensation as defined by the respective plan. Participants may select from prescribed “phantom” investment options that are used as measures for calculating the returns that are notionally credited to their accounts. Under the terms of these plans, we agree to pay out amounts based upon the aggregate performance of the investment measures selected by the participants. We make matching contributions based upon amounts placed into the plans by individuals after participants have exceeded applicable limits of the Internal Revenue Code applicable to 401(k) plans. The amounts of our contributions are calculated in accordance with the plans’ documents. Expenses (income) (in millions) for these plans were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
						
						
Employer matching contributions
$
				
						
$
				
						
$
				
						
Increase (decrease) in measurement of
						
						
						
						
						
						
						
						
						
liabilities, net of total return swap
						
				
						
						
				
						
						
-
						
Total plan expenses (income)
$
				
						
$
				
						
$
				
						
Deferred Compensation Plan for Non-Employee Directors
Non-employee directors may defer a portion of their annual cash retainers. They also receive a portion of their retainer in the form of deferred stock units, which we credit quarterly in arrears to their accounts. The prescribed “phantom” investment options are identical to those offered in the employees’ deferred compensation plan. For the years ended December 31, 2013, 2012 and 2011, expenses (income) for this plan were $8 million, $2 million and less than ($1) million, respectively.
Deferred Compensation Plan for Former JP Agents
Eligible former agents of JP may participate in this deferred compensation plan. Participants may elect to defer commissions and bonuses and specify where this deferred compensation will be invested in selected notional mutual funds. Participants may not receive the returns on these funds until attaining a specified age or in the event of a significant lifestyle change. The funded amount is rebalanced to match the funds that have been elected under the deferred compensation plan. The plan obligation increases with contributions, deferrals and investment gains, and decreases with withdrawals and investment losses. The plan assets increase with investment gains and decrease with investment losses and payouts of benefits. For the years ended December 31, 2013, 2012 and 2011, expenses (income) for this plan were $2 million, $3 million and $4 million, respectively.
19. Stock-Based Incentive Compensation Plans
LNC Stock-Based Incentive Plans
We sponsor two stock-based incentive plans for our employees and directors and for the employees and agents of our subsidiaries that provide for the issuance of stock options, performance shares (performance-vested shares as opposed to service-vested shares), stock appreciation rights (“SARs”) and restricted stock units (“RSUs”). We issue new shares to satisfy option exercises.
Total compensation expense (in millions) by award type for all of our stock-based incentive plans was as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
						
						
Stock options
$
				
						
$
				
						
$
				
						
Performance shares
						
				
						
						
				
						
						
				
						
SARs
						
				
						
						
				
						
						
-
						
RSUs and nonvested stock
						
				
						
						
				
						
						
				
						
Total
$
				
						
$
				
						
$
				
						
						
						
						
						
						
						
						
						
						
Recognized tax benefit
$
				
						
$
				
						
$
				
						
Total unrecognized compensation expense (in millions) and expected weighted-average life (in years) by award type for all of our stock-based incentive plans was as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
						
						
Weighted-
						
						
						
Weighted-
						
						
						
Weighted-
						
						
Average
						
						
						
Average
						
						
						
Average
Expense
						
Period
						
Expense
						
Period
						
Expense
						
Period
Stock options
$
				
						
1.9 				
						
$
				
						
1.8 				
						
$
				
						
1.7 				
Performance shares
						
				
						
1.5 				
						
						
				
						
1.6 				
						
						
				
						
2.0 				
SARs
						
				
						
3.4 				
						
						
				
						
3.3 				
						
						
				
						
3.4 				
RSUs and nonvested stock
						
				
						
1.2 				
						
						
				
						
1.3 				
						
						
				
						
1.7 				
Total unrecognized stock-based
						
						
						
						
						
						
						
						
						
						
						
						
						
						
incentive compensation expense
$
				
						
						
						
$
				
						
						
						
$
				
						
						
In the first quarter of 2013, a performance period from 2013-2015 was approved for certain of our executive officers by the Compensation Committee. The award for executive officers participating in this performance period consisted of LNC RSUs representing approximately 29%, LNC stock options representing approximately 35% and LNC performance shares representing approximately 36% of the total award. LNC RSUs granted for this period cliff-vest on the third anniversary of the grant date, based solely on a service condition. LNC stock options granted for this performance period have a maximum contractual term of ten years and vest ratably over the three-year period, based solely on a service condition. Depending on the performance results for this period, the ultimate payout of performance shares could range from zero to 200% of the target award. Under the 2013-2015 plan, a total of 583,404 LNC RSUs, 1,011,365 LNC stock options and 260,114 LNC performance shares were granted.
In the first quarter of 2012, a performance period from 2012-2014 was approved for certain of our executive officers by the Compensation Committee. The award for executive officers participating in this performance period consisted of LNC RSUs representing approximately 29%, LNC stock options representing approximately 35% and LNC performance shares representing approximately 36% of the total award. LNC RSUs granted for this period cliff-vest on the third anniversary of the grant date, based solely on a service condition. LNC stock options granted for this performance period have a maximum contractual term of ten years and vest ratably over the three-year period, based solely on a service condition. Depending on the performance results for this period, the ultimate payout of performance shares could range from zero to 200% of the target award. Under the 2012-2014 plan, a total of 766,217 LNC RSUs, 903,502 LNC stock options and 306,456 LNC performance shares were granted.
In the first quarter of 2011, a performance period from 2011-2013 was approved for certain of our executive officers by the Compensation Committee. The award for executive officers participating in this performance period consisted of LNC RSUs representing approximately 34%, LNC stock options representing approximately 33% and LNC performance shares representing approximately 33% of the total award. LNC RSUs granted for this period cliff-vest on the third anniversary of the grant date, based solely on a service condition. LNC stock options granted for this performance period have a maximum contractual term of ten years and vest ratably over the three-year period, based solely on a service condition. Under the 2011-2013 plan, a total of 221,813 LNC RSUs, 459,093 LNC stock options and 215,137 LNC performance shares were granted.
The option price assumptions used for our stock option awards were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
						
						
Weighted-average fair value per option granted
$
7.39 				
						
$
8.35 				
						
$
13.88 				
						
Assumptions:
						
						
						
						
						
						
						
						
						
Dividend yield
						
2.4% 				
						
						
1.9% 				
						
						
1.2% 				
						
Expected volatility
						
34.1% 				
						
						
42.0% 				
						
						
48.5% 				
						
Risk-free interest rate
						
0.6-0.9%
						
						
0.9-1.2%
						
						
1.4-2.9%
						
Expected life (in years)
						
5.6 				
						
						
5.8 				
						
						
6.7 				
						
The fair value of options is determined using a Black-Scholes options valuation model with the assumptions disclosed in the table above. The dividend yield is based on the expected dividend rate during the expected life of the option. Expected volatility is based on the implied volatility of exchange-traded securities and the historical volatility of the LNC stock price. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life of the options granted represents the weighted-average period of time from the grant date to the date of exercise, expiration or cancellation based upon historical behavior.
Information with respect to our incentive plans involving stock options with performance conditions (aggregate intrinsic value shown in millions) was as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Weighted-
						
						
						
						
						
Weighted-
						
Average
						
						
						
						
Average
Remaining
Aggregate
						
						
Exercise
Contractual
Intrinsic
Shares
						
Price
						
Term
						
Value
Outstanding as of December 31, 2012
1,267,595 				
						
$
45.29 				
						
						
						
						
						
Granted - original
82,317 				
						
						
33.44 				
						
						
						
						
						
Exercised (includes shares tendered)
(65,521) 				
						
						
25.11 				
						
						
						
						
						
Forfeited or expired
(107,417) 				
						
						
44.17 				
						
						
						
						
						
Outstanding as of December 31, 2013
1,176,974 				
						
$
45.84 				
						
3.64 				
						
$
				
						
						
						
						
						
						
						
						
						
Vested or expected to vest as of December 31, 2013 (1)
1,120,709 				
						
$
46.61 				
						
3.65 				
						
$
				
						
						
						
						
						
						
						
						
						
Exercisable as of December 31, 2013
1,064,562 				
						
$
47.46 				
						
3.66 				
						
$
				
(1)
Includes estimated forfeitures.
The total fair value of options vested during the years ended December 31, 2013, 2012 and 2011, was $1 million, $1 million and $2 million, respectively. The total intrinsic value of options exercised during the years ended December 31, 2013, 2012 and 2011, was $1 million, zero and zero, respectively.
Information with respect to our incentive plans involving stock options with service conditions (aggregate intrinsic value shown in millions) was as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Weighted-
						
						
						
						
						
Weighted-
						
Average
						
						
						
						
Average
Remaining
Aggregate
						
						
Exercise
Contractual
Intrinsic
Shares
						
Price
						
Term
						
Value
Outstanding as of December 31, 2012
5,515,761 				
						
$
41.20 				
						
						
						
						
						
Granted - original
1,070,085 				
						
						
29.54 				
						
						
						
						
						
Exercised (includes shares tendered)
(1,003,571) 				
						
						
41.99 				
						
						
						
						
						
Forfeited or expired
(653,922) 				
						
						
43.83 				
						
						
						
						
						
Outstanding as of December 31, 2013
4,928,353 				
						
$
38.18 				
						
5.28 				
						
$
				
						
						
						
						
						
						
						
						
						
Vested or expected to vest as of December 31, 2013 (1)
4,641,843 				
						
$
38.82 				
						
5.08 				
						
$
				
						
						
						
						
						
						
						
						
						
Exercisable as of December 31, 2013
3,245,712 				
						
$
43.41 				
						
3.50 				
						
$
				
(1)
Includes estimated forfeitures.
The total fair value of options vested during the years ended December 31, 2013, 2012 and 2011, was $6 million, $4 million and $7 million, respectively. The total intrinsic value of options exercised during the years ended December 31, 2013, 2012 and 2011, was $6 million, zero and zero, respectively.
Information with respect to our performance shares was as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Weighted-
						
						
						
						
						
Average
						
						
						
						
Grant-Date
						
Shares
						
						
Fair Value
						
						
Nonvested as of December 31, 2012
479,498 				
						
						
$
32.48 				
						
						
Granted
260,114 				
						
						
						
33.60 				
						
						
Forfeited
(28,920) 				
						
						
						
32.51 				
						
						
Nonvested as of December 31, 2013
710,692 				
						
						
$
32.74 				
						
						
SARs
Under our incentive compensation plan, we issue SARs to certain planners and advisors who have full-time contracts with us. The SARs under this plan are rights on our stock that are cash settled and become exercisable in increments of 25% over the four-year period following the SARs grant date. SARs are granted with an exercise price equal to the fair market value of our stock at the date of grant and, unless cancelled earlier due to certain terminations of employment, expire five years from the date of grant. Generally, such SARs are transferable only upon death.
We recognize compensation expense for SARs based on the fair value method using the Black-Scholes option-pricing model. Compensation expense and the related liability are recognized on a straight-line basis over the vesting period of the SARs. The SARs liability is marked-to-market through net income, which causes volatility in net income (loss) as a result of changes in the market value of our stock and reported within commissions and other expenses on our Consolidated Statements of Comprehensive Income (Loss). The SARs liability as of December 31, 2013 and 2012, was $5 million and $1 million, respectively, and reported within other liabilities on our Consolidated Balance Sheets.
The option price assumptions used for our SARs were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
						
						
Weighted-average fair value per SAR granted
$
7.47 				
						
$
8.91 				
						
$
9.41 				
						
Assumptions:
						
						
						
						
						
						
						
						
						
Dividend yield
						
2.2% 				
						
						
1.4% 				
						
						
1.9% 				
						
Expected volatility
						
30.5% 				
						
						
40.7% 				
						
						
39.1% 				
						
Risk-free interest rate
						
1.0% 				
						
						
1.3% 				
						
						
2.2% 				
						
Expected life (in years)
						
5.0 				
						
						
5.0 				
						
						
5.0 				
						
The assumptions above are the same as those discussed for options above, except the dividend yield is based on the current dividend rate at the date of grant, expected volatility is based on the implied volatility of exchange-traded securities and the expected life represents the contractual term.
Information with respect to our SARs plan (aggregate intrinsic value shown in millions) was as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Weighted-
						
						
						
						
						
Weighted-
						
Average
						
						
						
						
Average
Remaining
Aggregate
						
						
Exercise
Contractual
Intrinsic
Shares
						
Price
						
Term
						
Value
Outstanding as of December 31, 2012
569,681 				
						
$
35.01 				
						
						
						
						
						
Granted - original
112,990 				
						
						
33.44 				
						
						
						
						
						
Exercised (includes shares tendered)
(97,722) 				
						
						
23.08 				
						
						
						
						
						
Forfeited or expired
(230,906) 				
						
						
48.39 				
						
						
						
						
						
Outstanding as of December 31, 2013
354,043 				
						
$
29.00 				
						
2.73 				
						
$
				
						
						
						
						
						
						
						
						
						
Vested or expected to vest as of December 31, 2013 (1)
335,586 				
						
$
28.89 				
						
2.67 				
						
$
				
						
						
						
						
						
						
						
						
						
Exercisable as of December 31, 2013
185,822 				
						
$
27.09 				
						
1.99 				
						
$
				
(1)
Includes estimated forfeitures.
The payment for SARs exercised during the years ended December 31, 2013, 2012 and 2011, was $1 million, zero and zero, respectively.
RSUs
We award RSUs under the incentive compensation plan, generally subject to a three-year vesting period. Information with respect to our restricted stock units was as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Weighted-
						
						
						
						
						
Average
						
						
						
						
Grant-Date
						
Shares
						
						
Fair Value
						
						
Outstanding as of December 31, 2012
1,716,407 				
						
						
$
26.49 				
						
						
Granted
583,404 				
						
						
						
30.53 				
						
						
Vested
(588,217) 				
						
						
						
25.26 				
						
						
Forfeited
(81,187) 				
						
						
						
27.08 				
						
						
Outstanding as of December 31, 2013
1,630,407 				
						
						
$
28.24 				
						
						
20. Statutory Information and Restrictions
The Company’s domestic life insurance subsidiaries prepare financial statements in accordance with statutory accounting principles (“SAP”) prescribed or permitted by the insurance departments of their states of domicile, which may vary materially from GAAP.
Prescribed SAP includes the Accounting Practices and Procedures Manual of the National Association of Insurance Commissioners (“NAIC”) as well as state laws, regulations and administrative rules. Permitted SAP encompasses all accounting practices not so prescribed. The principal differences between statutory financial statements and financial statements prepared in accordance with GAAP are that statutory financial statements do not reflect DAC, some bond portfolios may be carried at amortized cost, assets and liabilities are presented net of reinsurance, contract holder liabilities are generally valued using more conservative assumptions and certain assets are non-admitted.
Our insurance subsidiaries are subject to the applicable laws and regulations of their respective states. Changes in these laws and regulations could change capital levels or capital requirements for our insurance subsidiaries.
Statutory capital and surplus, net gain (loss) from operations, after-tax, net income (loss) and dividends to the LNC holding company amounts (in millions) below consist of all or a combination of the following entities: LNL, First Penn-Pacific Life Insurance Company (“FPP”), Lincoln Reinsurance Company of South Carolina, Lincoln Reinsurance Company of South Carolina II, Lincoln Life & Annuity Company of New York (“LLANY”), Lincoln Reinsurance Company of Vermont I, Lincoln Reinsurance Company of Vermont II,
Lincoln Reinsurance Company of Vermont III, Lincoln Reinsurance Company of Vermont IV and Lincoln Reinsurance Company of Vermont V.
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31,
						
						
						
U.S. capital and surplus
$
7,484 				
						
$
6,715 				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
						
						
U.S. net gain (loss) from operations, after-tax
$
				
						
$
				
						
$
				
						
U.S. net income (loss)
						
				
						
						
				
						
						
				
						
U.S. dividends to LNC holding company
						
				
						
						
				
						
						
				
						
The decrease in statutory net income (loss) when comparing 2013 to 2012 was due primarily to the effects of reserve financing transactions in 2013.
The increase in statutory net income (loss) when comparing 2012 to 2011 was due primarily to a decrease in realized losses in invested assets, an increase in favorable tax items over prior year and favorable reserve development in variable annuities due to improvements in the equity market and less volatility in the forward interest rates.
The states of domicile of the Company’s insurance subsidiaries have adopted certain prescribed accounting practices that differ from those found in NAIC SAP. These prescribed practices are the use of continuous Commissioners Annuity Reserve Valuation Method (“CARVM”) in the calculation of reserves as prescribed by the state of New York, the calculation of reserves on universal life policies based on the Indiana universal life method as prescribed by the state of Indiana for policies issued before January 1, 2006, and the use of a more conservative valuation interest rate on certain annuities prescribed by the states of Indiana and New York. The Vermont insurance subsidiaries also have an accounting practice permitted by the state of Vermont that differs from that found in NAIC SAP. Specifically, the permitted practice involves accounting for the lesser of the face amount of all amounts outstanding under an LOC and the value of the Valuation of Life Insurance Policies Model Regulation (“XXX”) additional statutory reserves as an admitted asset and a form of surplus as of December 31, 2013 and 2012.
The favorable (unfavorable) effects on statutory surplus compared to NAIC statutory surplus from the use of these prescribed and permitted practices (in millions) were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31,
						
						
						
Calculation of reserves using the Indiana universal life method
$
				
						
$
				
						
Calculation of reserves using continuous CARVM
						
(2) 				
						
						
(2) 				
						
Conservative valuation rate on certain annuities
						
(30) 				
						
						
(26) 				
						
Lesser of LOC and XXX additional reserve as surplus
						
2,635 				
						
						
2,483 				
						
During the third quarter of 2013, the New York Department of Financial Services (“NYDFS”) announced that it would not recognize the NAIC revisions to AG38 in applying the New York law governing the reserves to be held for UL and VUL products containing secondary guarantees. The change, effective December 31, 2013, impacts our New York-domiciled insurance subsidiary, LLANY, notwithstanding that LLANY discontinued the sale of these products in early 2013. We expect to phase in the increase in reserves over five years beginning with 2013. As such, we increased reserves by $90 million as of December 31, 2013. The additional increase in reserves over the next four years is subject to on-going discussions with the NYDFS. However, we do not expect the amount for each of the remaining years to exceed $90 million per year.
The NAIC has adopted Risk-Based Capital (“RBC”) requirements for life insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks. The requirements provide a means of measuring the minimum amount of statutory surplus appropriate for an insurance company to support its overall business operations based on its size and risk profile. Under RBC requirements, regulatory compliance is determined by the ratio of a company’s total adjusted capital, as defined by the NAIC, to its company action level of RBC (known as the “RBC ratio”), also as defined by the NAIC. The company action level may be triggered if the RBC ratio is between 75% and 100%, which would require the insurer to submit a plan to the regulator detailing corrective action it proposes to undertake. As of December 31, 2013, the combined RBC ratio of LNL, LLANY and FPP was approximately five times the aforementioned company action level.
Our insurance subsidiaries are subject to certain insurance department regulatory restrictions as to the transfer of funds and payment of dividends to the holding company. Under Indiana laws and regulations, our Indiana insurance subsidiaries, including our primary insurance subsidiary, LNL, may pay dividends to LNC without prior approval of the Indiana Insurance Commissioner (the “Commissioner”), only from unassigned surplus and must receive prior approval of the Commissioner to pay a dividend if such dividend, along with all other dividends paid within the preceding 12 consecutive months, would exceed the statutory limitation. The current statutory limitation is the greater of 10% of the insurer’s contract holders’ surplus, as shown on its last annual statement on file with the
Commissioner or the insurer’s statutory net gain from operations for the previous 12 months, but in no event to exceed statutory unassigned surplus. Indiana law gives the Commissioner broad discretion to disapprove requests for dividends in excess of these limits. LNL’s subsidiary, LLANY, a New York domiciled insurance company, has similar restrictions, except that in New York it is the lesser of 10% of surplus to contract holders as of the immediately preceding calendar year or net gain from operations for the immediately preceding calendar year, not including realized capital gains. We expect our domestic insurance subsidiaries could pay dividends of approximately $750 million in 2014 without prior approval from the respective state commissioner.
All payments of principal and interest on surplus notes between LNC and our insurance subsidiaries must be approved by the respective Commissioner of Insurance.
21. Fair Value of Financial Instruments
The carrying values and estimated fair values of our financial instruments (in millions) were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31, 2013
						
As of December 31, 2012
Carrying
						
Fair
						
Carrying
						
Fair
Value
						
Value
						
Value
						
Value
Assets
						
						
						
						
						
						
						
						
						
						
						
AFS securities:
						
						
						
						
						
						
						
						
						
						
						
Fixed maturity securities
$
80,078 				
						
$
80,078 				
						
$
82,036 				
						
$
82,036 				
VIEs' fixed maturity securities
						
				
						
						
				
						
						
				
						
						
				
Equity securities
						
				
						
						
				
						
						
				
						
						
				
Trading securities
						
2,282 				
						
						
2,282 				
						
						
2,554 				
						
						
2,554 				
Mortgage loans on real estate
						
7,210 				
						
						
7,386 				
						
						
7,029 				
						
						
7,704 				
Derivative investments (1)
						
				
						
						
				
						
						
2,652 				
						
						
2,652 				
Other investments
						
1,218 				
						
						
1,218 				
						
						
1,098 				
						
						
1,098 				
Cash and invested cash
						
2,364 				
						
						
2,364 				
						
						
4,230 				
						
						
4,230 				
Separate account assets
						
117,135 				
						
						
117,135 				
						
						
95,373 				
						
						
95,373 				
						
						
						
						
						
						
						
						
						
						
						
Liabilities
						
						
						
						
						
						
						
						
						
						
						
Future contract benefits:
						
						
						
						
						
						
						
						
						
						
						
Indexed annuity and universal life contracts
						
						
						
						
						
						
						
						
						
						
						
embedded derivatives
						
(1,048) 				
						
						
(1,048) 				
						
						
(732) 				
						
						
(732) 				
GLB reserves embedded derivatives
						
1,244 				
						
						
1,244 				
						
						
(909) 				
						
						
(909) 				
Other contract holder funds:
						
						
						
						
						
						
						
						
						
						
						
Remaining guaranteed interest and similar contracts
						
(809) 				
						
						
(809) 				
						
						
(867) 				
						
						
(867) 				
Account values of certain investment contracts
						
(29,078) 				
						
						
(30,574) 				
						
						
(28,540) 				
						
						
(32,688) 				
Short-term debt (2)
						
(501) 				
						
						
(500) 				
						
						
(200) 				
						
						
(204) 				
Long-term debt
						
(5,320) 				
						
						
(5,762) 				
						
						
(5,439) 				
						
						
(5,824) 				
Reinsurance related embedded derivatives
						
(108) 				
						
						
(108) 				
						
						
(215) 				
						
						
(215) 				
VIEs' liabilities - derivative instruments
						
(27) 				
						
						
(27) 				
						
						
(128) 				
						
						
(128) 				
Other liabilities:
						
						
						
						
						
						
						
						
						
						
						
Credit default swaps
						
(2) 				
						
						
(2) 				
						
						
(11) 				
						
						
(11) 				
Derivative liabilities (1)
						
(187) 				
						
						
(187) 				
						
						
-
						
						
-
						
						
						
						
						
						
						
						
						
						
						
Benefit Plans' Assets (3)
						
1,471 				
						
						
1,471 				
						
						
1,456 				
						
						
1,456 				
(1)
We have master netting agreements with each of our derivative counterparties, which allow for the netting of our derivative asset and liability positions by counterparty.
(2)
The difference between the carrying value and fair value of short-term debt as of December 31, 2013 and 2012, related to current maturities of long-term debt.
(3)
Included in the funded statuses of the benefit plans, which is reported in other liabilities on our Consolidated Balance Sheets. Refer to Note 17 for additional detail.
Valuation Methodologies and Associated Inputs for Financial Instruments Not Carried at Fair Value
The following discussion outlines the methodologies and assumptions used to determine the fair value of our financial instruments not carried at fair value on our Consolidated Balance Sheets. Considerable judgment is required to develop these assumptions used to measure fair value. Accordingly, the estimates shown are not necessarily indicative of the amounts that would be realized in a one-time, current market exchange of all of our financial instruments.
Mortgage Loans on Real Estate
The fair value of mortgage loans on real estate is established using a discounted cash flow method based on credit rating, maturity and future income. The ratings for mortgages in good standing are based on property type, location, market conditions, occupancy, debt-service coverage, loan-to-value, quality of tenancy, borrower and payment record. The fair value for impaired mortgage loans is based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s market price or the fair value of the collateral if the loan is collateral dependent. The inputs used to measure the fair value of our mortgage loans on real estate are classified as Level 2 within the fair value hierarchy.
Other Investments
The carrying value of our assets classified as other investments approximates fair value. Other investments include LPs and other privately held investments that are accounted for using the equity method of accounting and the carrying value is based on our proportional share of the net assets of the LPs. The inputs used to measure the fair value of our other investments are classified as Level 3 within the fair value hierarchy.
Other Contract Holder Funds
Other contract holder funds include remaining guaranteed interest and similar contracts and account values of certain investment contracts. The fair value for the remaining guaranteed interest and similar contracts is estimated using discounted cash flow calculations as of the balance sheet date. These calculations are based on interest rates currently offered on similar contracts with maturities that are consistent with those remaining for the contracts being valued. As of December 31, 2013 and 2012, the remaining guaranteed interest and similar contracts carrying value approximated fair value. The fair value of the account values of certain investment contracts is based on their approximate surrender value as of the balance sheet date. The inputs used to measure the fair value of our other contract holder funds are classified as Level 3 within the fair value hierarchy.
Short-Term and Long-Term Debt
The fair value of long-term debt is based on quoted market prices. For short-term debt, excluding current maturities of long-term debt, the carrying value approximates fair value. The inputs used to measure the fair value of our short-term and long-term debt are classified as Level 2 within the fair value hierarchy.
Financial Instruments Carried at Fair Value
We did not have any assets or liabilities measured at fair value on a nonrecurring basis as of December 31, 2013 or 2012, and we noted no changes in our valuation methodologies between these periods.
The following summarizes our financial instruments carried at fair value (in millions) on a recurring basis by the fair value hierarchy levels described above:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31, 2013
						
Quoted
						
						
						
						
						
						
						
						
						
						
						
						
						
Prices
						
						
						
						
						
						
						
						
						
						
						
						
						
in Active
						
						
						
						
						
						
						
						
						
						
						
						
Markets for
Significant
Significant
						
						
						
						
Identical
						
Observable
Unobservable
						
Total
						
Assets
						
						
Inputs
						
						
Inputs
						
						
Fair
						
(Level 1)
						
						
(Level 2)
						
						
(Level 3)
						
						
Value
Assets
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Investments:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Fixed maturity AFS securities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Corporate bonds
						
$
				
						
						
$
67,164 				
						
						
$
1,711 				
						
						
$
68,935 				
U.S. government bonds
						
						
				
						
						
						
				
						
						
						
-
						
						
						
				
Foreign government bonds
						
						
-
						
						
						
				
						
						
						
				
						
						
						
				
RMBS
						
						
-
						
						
						
4,349 				
						
						
						
				
						
						
						
4,350 				
CMBS
						
						
-
						
						
						
				
						
						
						
				
						
						
						
				
CLOs
						
						
-
						
						
						
				
						
						
						
				
						
						
						
				
State and municipal bonds
						
						
-
						
						
						
3,891 				
						
						
						
				
						
						
						
3,919 				
Hybrid and redeemable preferred securities
						
						
				
						
						
						
				
						
						
						
				
						
						
						
1,005 				
VIEs' fixed maturity securities
						
						
				
						
						
						
				
						
						
						
-
						
						
						
				
Equity AFS securities
						
						
				
						
						
						
				
						
						
						
				
						
						
						
				
Trading securities
						
						
-
						
						
						
2,230 				
						
						
						
				
						
						
						
2,282 				
Derivative investments (1)
						
						
-
						
						
						
				
						
						
						
1,518 				
						
						
						
1,858 				
Cash and invested cash
						
						
-
						
						
						
2,364 				
						
						
						
-
						
						
						
2,364 				
Separate account assets
						
						
1,767 				
						
						
						
115,368 				
						
						
						
-
						
						
						
117,135 				
Total assets
						
$
2,318 				
						
						
$
198,482 				
						
						
$
5,059 				
						
						
$
205,859 				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Liabilities
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Future contract benefits:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Indexed annuity and universal life contracts
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
embedded derivatives
						
$
-
						
						
$
-
						
						
$
(1,048) 				
						
						
$
(1,048) 				
GLB reserves embedded derivatives
						
						
-
						
						
						
-
						
						
						
1,244 				
						
						
						
1,244 				
Long-term debt
						
						
-
						
						
						
(1,203) 				
						
						
						
-
						
						
						
(1,203) 				
Reinsurance related embedded derivatives
						
						
-
						
						
						
(108) 				
						
						
						
-
						
						
						
(108) 				
VIEs' liabilities - derivative instruments
						
						
-
						
						
						
-
						
						
						
(27) 				
						
						
						
(27) 				
Other liabilities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Credit default swaps
						
						
-
						
						
						
-
						
						
						
(2) 				
						
						
						
(2) 				
Derivative liabilities (1)
						
						
-
						
						
						
(912) 				
						
						
						
(252) 				
						
						
						
(1,164) 				
Total liabilities
						
$
-
						
						
$
(2,223) 				
						
						
$
(85) 				
						
						
$
(2,308) 				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Benefit Plans' Assets
						
$
				
						
						
$
1,357 				
						
						
$
-
						
						
$
1,471 				
(1)
Derivative investment assets and liabilities presented within the fair value hierarchy are presented on a gross basis by derivative type and not on a master netting basis by counterparty.
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31, 2012
						
Quoted
						
						
						
						
						
						
						
						
						
						
						
						
						
Prices
						
						
						
						
						
						
						
						
						
						
						
						
						
in Active
						
						
						
						
						
						
						
						
						
						
						
						
Markets for
Significant
Significant
						
						
						
						
Identical
						
Observable
Unobservable
						
Total
						
Assets
						
						
Inputs
						
						
Inputs
						
						
Fair
						
(Level 1)
						
						
(Level 2)
						
						
(Level 3)
						
						
Value
Assets
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Investments:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Fixed maturity AFS securities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Corporate bonds
						
$
				
						
						
$
66,446 				
						
						
$
1,505 				
						
						
$
68,016 				
U.S. government bonds
						
						
				
						
						
						
				
						
						
						
				
						
						
						
				
Foreign government bonds
						
						
-
						
						
						
				
						
						
						
				
						
						
						
				
RMBS
						
						
-
						
						
						
6,168 				
						
						
						
				
						
						
						
6,171 				
CMBS
						
						
-
						
						
						
				
						
						
						
				
						
						
						
1,003 				
CLOs
						
						
-
						
						
						
				
						
						
						
				
						
						
						
				
State and municipal bonds
						
						
-
						
						
						
4,321 				
						
						
						
				
						
						
						
4,353 				
Hybrid and redeemable preferred securities
						
						
				
						
						
						
1,069 				
						
						
						
				
						
						
						
1,217 				
VIEs' fixed maturity securities
						
						
				
						
						
						
				
						
						
						
-
						
						
						
				
Equity AFS securities
						
						
				
						
						
						
				
						
						
						
				
						
						
						
				
Trading securities
						
						
				
						
						
						
2,496 				
						
						
						
				
						
						
						
2,554 				
Derivative investments
						
						
-
						
						
						
				
						
						
						
2,026 				
						
						
						
2,652 				
Cash and invested cash
						
						
-
						
						
						
4,230 				
						
						
						
-
						
						
						
4,230 				
Separate account assets
						
						
1,519 				
						
						
						
93,854 				
						
						
						
-
						
						
						
95,373 				
Total assets
						
$
2,181 				
						
						
$
181,474 				
						
						
$
4,055 				
						
						
$
187,710 				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Liabilities
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Future contract benefits:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Indexed annuity and universal life contracts
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
embedded derivatives
						
$
-
						
						
$
-
						
						
$
(732) 				
						
						
$
(732) 				
GLB reserves embedded derivatives
						
						
-
						
						
						
-
						
						
						
(909) 				
						
						
						
(909) 				
Long-term debt
						
						
-
						
						
						
(1,203) 				
						
						
						
-
						
						
						
(1,203) 				
Reinsurance related embedded derivatives
						
						
-
						
						
						
(215) 				
						
						
						
-
						
						
						
(215) 				
VIEs' liabilities - derivative instruments
						
						
-
						
						
						
-
						
						
						
(128) 				
						
						
						
(128) 				
Other liabilities - credit default swaps
						
						
-
						
						
						
-
						
						
						
(11) 				
						
						
						
(11) 				
Total liabilities
						
$
-
						
						
$
(1,418) 				
						
						
$
(1,780) 				
						
						
$
(3,198) 				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Benefit Plans' Assets
						
$
				
						
						
$
1,340 				
						
						
$
-
						
						
$
1,456 				
The following summarizes changes to our financial instruments carried at fair value (in millions) and classified within Level 3 of the fair value hierarchy. This summary excludes any effect of amortization of DAC, VOBA, DSI and DFEL. The gains and losses below may include changes in fair value due in part to observable inputs that are a component of the valuation methodology.
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Year Ended December 31, 2013
						
						
						
						
						
						
						
						
Purchases,
						
						
						
						
						
						
						
						
						
						
						
Gains
Issuances,
Transfers
						
						
						
						
						
						
Items
						
(Losses)
Sales,
In or
						
						
						
						
						
						
Included
						
in
Maturities,
Out
						
						
						
Beginning
						
in
						
OCI
Settlements,
of
						
Ending
Fair
						
Net
						
and
						
Calls,
						
Level 3,
						
Fair
Value
						
Income
						
Other (1)
						
Net
						
Net (2)
						
Value
Investments: (3)
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Fixed maturity AFS securities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Corporate bonds
$
1,505 				
						
$
(18) 				
						
$
(1) 				
						
$
				
						
$
(120) 				
						
$
1,711 				
U.S. government bonds
						
				
						
						
-
						
						
-
						
						
(1) 				
						
						
-
						
						
-
Foreign government bonds
						
				
						
						
-
						
						
-
						
						
				
						
						
-
						
						
				
RMBS
						
				
						
						
-
						
						
-
						
						
(2) 				
						
						
-
						
						
				
CMBS
						
				
						
						
				
						
						
				
						
						
(6) 				
						
						
(8) 				
						
						
				
CLOs
						
				
						
						
(1) 				
						
						
				
						
						
				
						
						
(28) 				
						
						
				
State and municipal bonds
						
				
						
						
-
						
						
(4) 				
						
						
-
						
						
-
						
						
				
Hybrid and redeemable
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
preferred securities
						
				
						
						
-
						
						
				
						
						
(35) 				
						
						
(30) 				
						
						
				
Equity AFS securities
						
				
						
						
(1) 				
						
						
				
						
						
				
						
						
-
						
						
				
Trading securities
						
				
						
						
				
						
						
(7) 				
						
						
(6) 				
						
						
				
						
						
				
Derivative investments
						
2,026 				
						
						
(681) 				
						
						
				
						
						
(175) 				
						
						
-
						
						
1,266 				
Future contract benefits: (4)
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Indexed annuity and universal life
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
contracts embedded derivatives
						
(732) 				
						
						
(356) 				
						
						
-
						
						
				
						
						
-
						
						
(1,048) 				
GLB reserves embedded derivatives
						
(909) 				
						
						
2,153 				
						
						
-
						
						
-
						
						
-
						
						
1,244 				
VIEs' liabilities - derivative instruments (5)
						
(128) 				
						
						
				
						
						
-
						
						
-
						
						
-
						
						
(27) 				
Other liabilities - credit default swaps (6)
						
(11) 				
						
						
				
						
						
-
						
						
-
						
						
-
						
						
(2) 				
Total, net
$
2,275 				
						
$
1,210 				
						
$
				
						
$
				
						
$
(180) 				
						
$
3,730 				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Year Ended December 31, 2012
						
						
						
						
						
						
						
						
Purchases,
						
						
						
						
						
						
						
						
						
						
						
Gains
Issuances,
Transfers
						
						
						
						
						
						
Items
						
(Losses)
Sales,
In or
						
						
						
						
						
						
Included
						
in
Maturities,
Out
						
						
						
Beginning
						
in
						
OCI
Settlements,
of
						
Ending
Fair
						
Net
						
and
						
Calls,
						
Level 3,
						
Fair
Value
						
Income
						
Other (1)
						
Net
						
Net (2)
						
Value
Investments: (3)
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Fixed maturity AFS securities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Corporate bonds
$
1,888 				
						
$
(27) 				
						
$
				
						
$
				
						
$
(656) 				
						
$
1,505 				
U.S. government bonds
						
				
						
						
-
						
						
-
						
						
-
						
						
-
						
						
				
Foreign government bonds
						
				
						
						
-
						
						
-
						
						
(5) 				
						
						
(46) 				
						
						
				
RMBS
						
				
						
						
(3) 				
						
						
				
						
						
(8) 				
						
						
(147) 				
						
						
				
CMBS
						
				
						
						
(11) 				
						
						
				
						
						
(12) 				
						
						
(2) 				
						
						
				
CLOs
						
				
						
						
(2) 				
						
						
				
						
						
				
						
						
(15) 				
						
						
				
State and municipal bonds
						
-
						
						
-
						
						
-
						
						
				
						
						
-
						
						
				
Hybrid and redeemable
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
preferred securities
						
				
						
						
(1) 				
						
						
				
						
						
-
						
						
(5) 				
						
						
				
Equity AFS securities
						
				
						
						
(8) 				
						
						
				
						
						
				
						
						
-
						
						
				
Trading securities
						
				
						
						
				
						
						
				
						
						
(2) 				
						
						
(17) 				
						
						
				
Derivative investments
						
2,470 				
						
						
(790) 				
						
						
				
						
						
				
						
						
-
						
						
2,026 				
Future contract benefits: (4)
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Indexed annuity and universal life
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
contracts embedded derivatives
						
(399) 				
						
						
(136) 				
						
						
-
						
						
(197) 				
						
						
-
						
						
(732) 				
GLB reserves embedded derivatives
						
(2,217) 				
						
						
1,308 				
						
						
-
						
						
-
						
						
-
						
						
(909) 				
VIEs' liabilities - derivative instruments (5)
						
(291) 				
						
						
				
						
						
-
						
						
-
						
						
-
						
						
(128) 				
Other liabilities - credit default swaps (6)
						
(16) 				
						
						
				
						
						
-
						
						
-
						
						
-
						
						
(11) 				
Total, net
$
2,051 				
						
$
				
						
$
				
						
$
				
						
$
(888) 				
						
$
2,275 				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Year Ended December 31, 2011
						
						
						
						
						
						
						
						
Purchases,
						
						
						
						
						
						
						
						
						
						
						
Gains
Issuances,
Transfers
						
						
						
						
						
						
Items
						
(Losses)
Sales,
In or
						
						
						
						
						
						
Included
						
in
Maturities,
Out
						
						
						
Beginning
						
in
						
OCI
Settlements,
of
						
Ending
Fair
						
Net
						
and
						
Calls,
						
Level 3,
						
Fair
Value
						
Income
						
Other (1)
						
Net
						
Net (2)
						
Value
Investments: (3)
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Fixed maturity AFS securities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Corporate bonds
$
1,816 				
						
$
				
						
$
				
						
$
(138) 				
						
$
				
						
$
1,888 				
U.S. government bonds
						
				
						
						
-
						
						
-
						
						
(1) 				
						
						
-
						
						
				
Foreign government bonds
						
				
						
						
-
						
						
				
						
						
(3) 				
						
						
(17) 				
						
						
				
RMBS
						
				
						
						
(3) 				
						
						
				
						
						
				
						
						
-
						
						
				
CMBS
						
				
						
						
(62) 				
						
						
				
						
						
(78) 				
						
						
				
						
						
				
CLOs
						
				
						
						
				
						
						
(17) 				
						
						
(72) 				
						
						
-
						
						
				
Hybrid and redeemable
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
preferred securities
						
				
						
						
(1) 				
						
						
(6) 				
						
						
(9) 				
						
						
(3) 				
						
						
				
Equity AFS securities
						
				
						
						
				
						
						
(12) 				
						
						
				
						
						
(33) 				
						
						
				
Trading securities
						
				
						
						
				
						
						
				
						
						
(8) 				
						
						
(4) 				
						
						
				
Derivative investments
						
1,495 				
						
						
				
						
						
				
						
						
				
						
						
-
						
						
2,470 				
Future contract benefits: (4)
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Indexed annuity and universal life
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
contracts embedded derivatives
						
(497) 				
						
						
				
						
						
-
						
						
				
						
						
-
						
						
(399) 				
GLB reserves embedded derivatives
						
(408) 				
						
						
(1,809) 				
						
						
-
						
						
-
						
						
-
						
						
(2,217) 				
VIEs' liabilities - derivative instruments (5)
						
(209) 				
						
						
(82) 				
						
						
-
						
						
-
						
						
-
						
						
(291) 				
Other liabilities - credit default swaps (6)
						
(16) 				
						
						
(7) 				
						
						
-
						
						
				
						
						
-
						
						
(16) 				
Total, net
$
2,983 				
						
$
(1,434) 				
						
$
				
						
$
(56) 				
						
$
				
						
$
2,051 				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Benefit plans' assets (7)
$
				
						
$
				
						
$
(3) 				
						
$
(39) 				
						
$
-
						
$
-
(1)
The changes in fair value of the interest rate swaps are offset by an adjustment to derivative investments (see Note 6).
(2)
Transfers in or out of Level 3 for AFS and trading securities are displayed at amortized cost as of the beginning-of-year. For AFS and trading securities, the difference between beginning-of-year amortized cost and beginning-of-year fair value was included in OCI and earnings, respectively, in prior years.
(3)
Amortization and accretion of premiums and discounts are included in net investment income on our Consolidated Statements of Comprehensive Income (Loss). Gains (losses) from sales, maturities, settlements and calls and OTTI are included in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).
(4)
Gains (losses) from sales, maturities, settlements and calls are included in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).
(5)
The changes in fair value of the credit default swaps and contingency forwards are included in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).
(6)
Gains (losses) from sales, maturities, settlements and calls are included in net investment income on our Consolidated Statements of Comprehensive Income (Loss).
(7)
The expected return on plan assets is reported in commissions and other expenses on our Consolidated Statements of Comprehensive Income (Loss).
The following provides the components of the items included in issuances, sales, maturities, settlements and calls, net, excluding any effect of amortization of DAC, VOBA, DSI and DFEL and changes in future contract benefits, (in millions) as reported above:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Year Ended December 31, 2013
Issuances
						
Sales
						
Maturities
Settlements
Calls
						
Total
Investments:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Fixed maturity AFS securities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Corporate bonds
$
				
						
$
(51) 				
						
$
(47) 				
						
$
(50) 				
						
$
(70) 				
						
$
				
U.S. government bonds
						
-
						
						
-
						
						
-
						
						
(1) 				
						
						
-
						
						
(1) 				
Foreign government bonds
						
				
						
						
-
						
						
(17) 				
						
						
-
						
						
-
						
						
				
RMBS
						
-
						
						
-
						
						
-
						
						
(2) 				
						
						
-
						
						
(2) 				
CMBS
						
-
						
						
-
						
						
-
						
						
(4) 				
						
						
(2) 				
						
						
(6) 				
CLOs
						
				
						
						
-
						
						
-
						
						
(24) 				
						
						
-
						
						
				
Hybrid and redeemable
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
preferred securities
						
-
						
						
(35) 				
						
						
-
						
						
-
						
						
-
						
						
(35) 				
Equity AFS securities
						
				
						
						
(5) 				
						
						
-
						
						
-
						
						
-
						
						
				
Trading securities
						
-
						
						
(3) 				
						
						
(1) 				
						
						
(2) 				
						
						
-
						
						
(6) 				
Derivative investments
						
				
						
						
(23) 				
						
						
(304) 				
						
						
-
						
						
-
						
						
(175) 				
Future contract benefits - indexed annuity
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
and universal life contracts embedded
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
derivatives
						
(68) 				
						
						
-
						
						
-
						
						
				
						
						
-
						
						
				
Total, net
$
				
						
$
(117) 				
						
$
(369) 				
						
$
				
						
$
(72) 				
						
$
				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Year Ended December 31, 2012
Issuances
						
Sales
						
Maturities
Settlements
Calls
						
Total
Investments:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Fixed maturity AFS securities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Corporate bonds
$
				
						
$
(30) 				
						
$
(6) 				
						
$
(55) 				
						
$
(7) 				
						
$
				
Foreign government bonds
						
-
						
						
-
						
						
(5) 				
						
						
-
						
						
-
						
						
(5) 				
RMBS
						
-
						
						
-
						
						
(7) 				
						
						
(1) 				
						
						
-
						
						
(8) 				
CMBS
						
-
						
						
-
						
						
-
						
						
(12) 				
						
						
-
						
						
(12) 				
CLOs
						
				
						
						
-
						
						
-
						
						
(11) 				
						
						
-
						
						
				
State and municipal bonds
						
				
						
						
-
						
						
-
						
						
-
						
						
-
						
						
				
Equity AFS securities
						
				
						
						
-
						
						
-
						
						
-
						
						
-
						
						
				
Trading securities
						
-
						
						
-
						
						
-
						
						
(2) 				
						
						
-
						
						
(2) 				
Derivative investments
						
				
						
						
(28) 				
						
						
(238) 				
						
						
-
						
						
-
						
						
				
Future contract benefits - indexed annuity
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
and universal life contracts embedded
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
derivatives
						
(99) 				
						
						
-
						
						
-
						
						
(98) 				
						
						
-
						
						
(197) 				
Total, net
$
				
						
$
(58) 				
						
$
(256) 				
						
$
(179) 				
						
$
(7) 				
						
$
				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Year Ended December 31, 2011
Issuances
						
Sales
						
Maturities
Settlements
Calls
						
Total
Investments:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Fixed maturity AFS securities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Corporate bonds
$
				
						
$
(216) 				
						
$
(16) 				
						
$
(54) 				
						
$
(89) 				
						
$
(138) 				
U.S. government bonds
						
-
						
						
-
						
						
-
						
						
(1) 				
						
						
-
						
						
(1) 				
Foreign government bonds
						
-
						
						
(2) 				
						
						
-
						
						
-
						
						
(1) 				
						
						
(3) 				
RMBS
						
				
						
						
(1) 				
						
						
-
						
						
(15) 				
						
						
-
						
						
				
CMBS
						
-
						
						
(53) 				
						
						
-
						
						
(24) 				
						
						
(1) 				
						
						
(78) 				
CLOs
						
-
						
						
(33) 				
						
						
-
						
						
(39) 				
						
						
-
						
						
(72) 				
Hybrid and redeemable
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
preferred securities
						
				
						
						
(18) 				
						
						
-
						
						
-
						
						
-
						
						
(9) 				
Equity AFS securities
						
				
						
						
(18) 				
						
						
-
						
						
-
						
						
-
						
						
				
Trading securities
						
-
						
						
(3) 				
						
						
-
						
						
(5) 				
						
						
-
						
						
(8) 				
Derivative investments
						
				
						
						
(2) 				
						
						
(277) 				
						
						
-
						
						
-
						
						
				
Future contract benefits - indexed annuity
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
and universal life contracts embedded
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
derivatives
						
(59) 				
						
						
-
						
						
-
						
						
				
						
						
-
						
						
				
Other liabilities - credit default swaps
						
-
						
						
				
						
						
-
						
						
-
						
						
-
						
						
				
Total, net
$
				
						
$
(339) 				
						
$
(293) 				
						
$
				
						
$
(91) 				
						
$
(56) 				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Benefit plans' assets
$
-
						
$
(22) 				
						
$
(17) 				
						
$
-
						
$
-
						
$
(39) 				
The following summarizes changes in unrealized gains (losses) included in net income, excluding any effect of amortization of DAC, VOBA, DSI and DFEL and changes in future contract benefits, related to financial instruments carried at fair value classified within Level 3 that we still held (in millions):
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
						
						
Investments: (1)
						
						
						
						
						
						
						
						
						
Derivative investments
$
(752) 				
						
$
				
						
$
				
						
Future contract benefits: (1)
						
						
						
						
						
						
						
						
						
Indexed annuity and universal life contracts
						
						
						
						
						
						
						
						
						
embedded derivatives
						
(44) 				
						
						
(10) 				
						
						
(1) 				
						
GLB reserves embedded derivatives
						
2,444 				
						
						
1,472 				
						
						
(1,615) 				
						
VIEs' liabilities - derivative instruments (1)
						
				
						
						
				
						
						
(82) 				
						
Other liabilities - credit default swaps (2)
						
				
						
						
				
						
						
(8) 				
						
Total, net
$
1,758 				
						
$
2,454 				
						
$
(1,234) 				
						
(1)
Included in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).
(2)
Included in net investment income on our Consolidated Statements of Comprehensive Income (Loss).
The following provides the components of the transfers in and out of Level 3 (in millions) as reported above:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Year Ended December 31, 2013
						
Transfers
						
Transfers
						
						
						
						
In to
						
Out of
						
						
						
						
Level 3
						
Level 3
						
Total
						
Investments:
						
						
						
						
						
						
						
						
						
Fixed maturity AFS securities:
						
						
						
						
						
						
						
						
						
Corporate bonds
$
				
						
$
(493) 				
						
$
(120) 				
						
CMBS
						
-
						
						
(8) 				
						
						
(8) 				
						
CLOs
						
-
						
						
(28) 				
						
						
(28) 				
						
Hybrid and redeemable preferred securities
						
				
						
						
(50) 				
						
						
(30) 				
						
Trading securities
						
				
						
						
(2) 				
						
						
				
						
Total, net
$
				
						
$
(581) 				
						
$
(180) 				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Year Ended December 31, 2012
						
Transfers
						
Transfers
						
						
						
						
In to
						
Out of
						
						
						
						
Level 3
						
Level 3
						
Total
						
Investments:
						
						
						
						
						
						
						
						
						
Fixed maturity AFS securities:
						
						
						
						
						
						
						
						
						
Corporate bonds
$
				
						
$
(691) 				
						
$
(656) 				
						
Foreign government bonds
						
-
						
						
(46) 				
						
						
(46) 				
						
RMBS
						
-
						
						
(147) 				
						
						
(147) 				
						
CMBS
						
				
						
						
(7) 				
						
						
(2) 				
						
CLOs
						
				
						
						
(21) 				
						
						
(15) 				
						
Hybrid and redeemable preferred securities
						
				
						
						
(40) 				
						
						
(5) 				
						
Trading securities
						
				
						
						
(19) 				
						
						
(17) 				
						
Total, net
$
				
						
$
(971) 				
						
$
(888) 				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Year Ended December 31, 2011
						
Transfers
						
Transfers
						
						
						
						
In to
						
Out of
						
						
						
						
Level 3
						
Level 3
						
Total
						
Investments:
						
						
						
						
						
						
						
						
						
Fixed maturity AFS securities:
						
						
						
						
						
						
						
						
						
Corporate bonds
$
				
						
$
(83) 				
						
$
				
						
Foreign government bonds
						
-
						
						
(17) 				
						
						
(17) 				
						
CMBS
						
				
						
						
(1) 				
						
						
				
						
Hybrid and redeemable preferred securities
						
				
						
						
(21) 				
						
						
(3) 				
						
Equity AFS securities
						
				
						
						
(35) 				
						
						
(33) 				
						
Trading securities
						
				
						
						
(5) 				
						
						
(4) 				
						
Total, net
$
				
						
$
(162) 				
						
$
				
						
Transfers in and out of Level 3 are generally the result of observable market information on a security no longer being available or becoming available to our pricing vendors. For the years ended December 31, 2013, 2012 and 2011, our corporate bonds and RMBS transfers in and out were attributable primarily to the securities’ observable market information no longer being available or becoming available. Transfers in and out of Levels 1 and 2 are generally the result of a change in the type of input used to measure the fair value of an asset or liability at the end of the reporting period. When quoted prices in active markets become available, transfers from Level 2 to Level 1 will result. When quoted prices in active markets become unavailable, but we are able to employ a valuation methodology using significant observable inputs, transfers from Level 1 to Level 2 will result. For the years ended December 31, 2013, 2012 and 2011, the transfers between Levels 1 and 2 of the fair value hierarchy were less than $1 million for our financial instruments carried at fair value.
The following summarizes the fair value (in millions), valuation techniques and significant unobservable inputs of the Level 3 fair value measurements as of December 31, 2013:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Fair
						
Valuation
						
Significant
						
Assumption or
Value
						
Technique
						
Unobservable Inputs
						
Input Ranges
Assets
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Investments:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Fixed maturity AFS and trading
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
securities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Corporate bonds
$
1,082 				
						
Discounted cash flow
						
Liquidity/duration adjustment (1)
						
0.8 				
%
						
-
10.6 				
%
Foreign government bonds
						
				
						
Discounted cash flow
						
Liquidity/duration adjustment (1)
						
2.3 				
%
						
-
3.9 				
%
Hybrid and redeemable
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
preferred securities
						
				
						
Discounted cash flow
						
Liquidity/duration adjustment (1)
						
						
						
						
						
2.4 				
%
Equity AFS and trading
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
securities
						
				
						
Discounted cash flow
						
Liquidity/duration adjustment (1)
						
4.3 				
%
						
-
5.9 				
%
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Liabilities
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Future contract benefits:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Indexed annuity and universal life
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
contracts embedded derivatives
						
(1,048) 				
						
Discounted cash flow
						
Lapse rate (2)
						
				
%
						
-
				
%
						
						
						
						
						
						
Mortality rate (3)
						
						
						
						
						
(8)
						
GLB reserves embedded
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
derivatives
						
1,244 				
						
Discounted cash flow
						
Long-term lapse rate (2)
						
				
%
						
-
				
%
						
						
						
						
						
						
Utilization of guaranteed withdrawal (4)
				
%
						
-
				
%
						
						
						
						
						
						
Claims utilization factor (5)
						
				
%
						
-
				
%
						
						
						
						
						
						
Premiums utilization factor (5)
						
				
%
						
-
				
%
						
						
						
						
						
						
NPR (6)
						
				
%
						
-
0.53 				
%
						
						
						
						
						
						
Mortality rate (3)
						
						
						
						
						
(9)
						
						
						
						
						
						
						
Volatility (7)
						
				
%
						
-
				
%
(1)
The liquidity/duration adjustment input represents an estimated market participant composite of adjustments attributable to liquidity premiums, expected durations, structures and credit quality that would be applied to the market observable information of an investment.
(2)
The lapse rate input represents the estimated probability of a contract surrendering during a year, and thereby forgoing any future benefits. The range for indexed annuity and universal life contracts represents the lapse rates during the surrender charge period.
(3)
The mortality rate input represents the estimated probability of when an individual belonging to a particular group, categorized according to age or some other factor such as gender, will die.
(4)
The utilization of guaranteed withdrawals input represents the estimated percentage of contract holders that utilize the guaranteed withdrawal feature.
(5)
The utilization factors are applied to the present value of claims or premiums, as appropriate, in the GLB reserve calculation to estimate the impact of inefficient withdrawal behavior, including taking less than or more than the maximum guaranteed withdrawal.
(6)
The NPR input represents the estimated additional credit spread that market participants would apply to the market observable discount rate when pricing a contract.
(7)
The volatility input represents overall volatilities assumed for the underlying variable annuity funds, which include a mixture of equity and fixed-income assets. Fair value of the variable annuity GLB embedded derivatives would increase if higher volatilities were used for valuation.
(8)
Based on the “Annuity 2000 Mortality Table” developed by the Society of Actuaries Committee on Life Insurance Research that was adopted by the National Association of Insurance Commissioners in 1996 for our mortality input.
(9)
The mortality rate is based on a combination of company and industry experience, adjusted for improvement factors.
From the table above, we have excluded Level 3 fair value measurements obtained from independent, third-party pricing sources. We do not develop the significant inputs used to measure the fair value of these assets and liabilities, and the information regarding the significant inputs is not readily available to us. Independent broker-quoted fair values are non-binding quotes developed by market makers or broker-dealers obtained from third-party sources recognized as market participants. The fair value of a broker-quoted asset or liability is based solely on the receipt of an updated quote from a single market maker or a broker-dealer recognized as a market participant as we do not adjust broker quotes when used as the fair value measurement for an asset or liability. Significant increases or decreases in any of the broker quotes received may result in a significantly higher or lower fair value measurement.
Changes in any of the significant inputs presented in the table above may result in a significant change in the fair value measurement of the asset or liability as follows:
·
Investments - An increase in the liquidity/duration adjustment input would result in a decrease in the fair value measurement.
·
Indexed annuity and universal life contracts - An increase in the lapse rate or mortality rate inputs would result in a decrease in the fair value measurement.
·
GLB reserves embedded derivatives - Assuming our GLB reserves embedded derivatives are in a liability position: an increase in our lapse rate, NPR or mortality rate inputs would result in a decrease in the fair value measurement; and an increase in the utilization of guarantee withdrawal or volatility inputs would result in an increase in the fair value measurement.
For each category discussed above, the unobservable inputs are not inter-related; therefore, a directional change in one input will not affect the other inputs.
As part of our on-going valuation process, we assess the reasonableness of our valuation techniques or models and make adjustments as necessary. For more information, see “Summary of Significant Accounting Policies” above.
22. Segment Information
We provide products and services and report results through our Annuities, Retirement Plan Services, Life Insurance and Group Protection segments. We also have Other Operations, which includes the financial data for operations that are not directly related to the business segments. Our reporting segments reflect the manner by which our chief operating decision makers view and manage the business. The following is a brief description of these segments and Other Operations.
The Annuities segment provides tax-deferred investment growth and lifetime income opportunities for its clients by offering fixed (including indexed) and variable annuities.
The Retirement Plan Services segment provides employer-sponsored defined benefit and individual retirement accounts, as well as individual and group variable annuities, group fixed annuities and mutual-fund based programs in the retirement plan marketplace.
The Life Insurance segment focuses in the creation and protection of wealth through life insurance products, including term insurance, a linked-benefit product (which is a UL policy linked with riders that provide for long-term care costs), indexed UL and both single and survivorship versions of UL and VUL, including corporate-owned UL and VUL insurance and bank-owned UL and VUL insurance products.
The Group Protection segment offers principally group non-medical insurance products, including term life, universal life, disability, dental, vision, accident and critical illness insurance to the employer market place through various forms of contributory and non-contributory plans. Its products are marketed primarily through a national distribution system of regional group offices. These offices develop business through employee benefit brokers, third-party administrators and other employee benefit firms.
Other Operations includes investments related to the excess capital in our insurance subsidiaries; investments in media properties and other corporate investments; benefit plan net liability; the unamortized deferred gain on indemnity reinsurance related to the sale of reinsurance; the results of certain disability income business; our run-off Institutional Pension business, the majority of which was sold on a group annuity basis; and debt costs.
Segment operating revenues and income (loss) from operations are internal measures used by our management and Board of Directors to evaluate and assess the results of our segments. Income (loss) from operations is GAAP net income excluding the after-tax effects of the following items, as applicable:
·
Realized gains and losses associated with the following (“excluded realized gain (loss)”):
§
Sales or disposals of securities;
§
Impairments of securities;
§
Changes in the fair value of derivatives, embedded derivatives within certain reinsurance arrangements and trading securities;
§
Changes in the fair value of the derivatives we own to hedge our GDB riders within our variable annuities;
§
Changes in the fair value of the embedded derivatives of our GLB riders accounted for at fair value, net of the change in the fair value of the derivatives we own to hedge them; and
§
Changes in the fair value of the embedded derivative liabilities related to index call options we may purchase in the future to hedge contract holder index allocations applicable to future reset periods for our indexed annuity products accounted for at fair value;
·
Changes in reserves resulting from benefit ratio unlocking on our GDB and GLB riders;
·
Income (loss) from reserve changes, net of related amortization, on business sold through reinsurance;
·
Gains (losses) on early extinguishment of debt;
·
Losses from the impairment of intangible assets;
·
Income (loss) from discontinued operations; and
·
Income (loss) from the initial adoption of new accounting standards.
Operating revenues represent GAAP revenues excluding the pre-tax effects of the following items, as applicable:
·
Excluded realized gain (loss);
·
Revenue adjustments from the initial adoption of new accounting standards;
·
Amortization of DFEL arising from changes in GDB and GLB benefit ratio unlocking; and
·
Amortization of deferred gains arising from reserve changes on business sold through reinsurance.
We use our prevailing corporate federal income tax rate of 35% while taking into account any permanent differences for events recognized differently in our financial statements and federal income tax returns when reconciling our non-GAAP measures to the most comparable GAAP measure. Operating revenues and income (loss) from operations do not replace revenues and net income as the GAAP measures of our consolidated results of operations.
Segment information (in millions) was as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
Revenues
						
						
						
						
						
						
						
						
Operating revenues:
						
						
						
						
						
						
						
						
Annuities
$
3,321 				
						
$
2,975 				
						
$
2,871 				
Retirement Plan Services
						
1,071 				
						
						
1,024 				
						
						
1,017 				
Life Insurance
						
5,170 				
						
						
5,056 				
						
						
4,740 				
Group Protection
						
2,260 				
						
						
2,091 				
						
						
1,938 				
Other Operations
						
				
						
						
				
						
						
				
Excluded realized gain (loss), pre-tax
						
(274) 				
						
						
(39) 				
						
						
(388) 				
Amortization of deferred gain arising from reserve changes on business
						
						
						
						
						
						
						
						
sold through reinsurance, pre-tax
						
				
						
						
				
						
						
				
Amortization of DFEL associated with benefit ratio unlocking, pre-tax
						
				
						
						
				
						
						
-
Total revenues
$
11,969 				
						
$
11,535 				
						
$
10,641 				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
Net Income (Loss)
						
						
						
						
						
						
						
						
Income (loss) from operations:
						
						
						
						
						
						
						
						
Annuities
$
				
						
$
				
						
$
				
Retirement Plan Services
						
				
						
						
				
						
						
				
Life Insurance
						
				
						
						
				
						
						
				
Group Protection
						
				
						
						
				
						
						
				
Other Operations
						
(122) 				
						
						
(87) 				
						
						
(146) 				
Excluded realized gain (loss), after-tax
						
(178) 				
						
						
(25) 				
						
						
(252) 				
Gain (loss) on early extinguishment of debt, after-tax
						
-
						
						
(3) 				
						
						
(5) 				
Income (loss) from reserve changes (net of related
						
						
						
						
						
						
						
						
amortization) on business sold through reinsurance, after-tax
						
				
						
						
				
						
						
				
Impairment of intangibles, after-tax
						
-
						
						
				
						
						
(747) 				
Benefit ratio unlocking, after-tax
						
				
						
						
				
						
						
(15) 				
Income (loss) from continuing operations, after-tax
						
1,244 				
						
						
1,286 				
						
						
				
Income (loss) from discontinued operations, after-tax
						
-
						
						
				
						
						
(8) 				
Net income (loss)
$
1,244 				
						
$
1,313 				
						
$
				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
Net Investment Income
						
						
						
						
						
						
						
						
Annuities
$
1,044 				
						
$
1,082 				
						
$
1,106 				
Retirement Plan Services
						
				
						
						
				
						
						
				
Life Insurance
						
2,452 				
						
						
2,396 				
						
						
2,294 				
Group Protection
						
				
						
						
				
						
						
				
Other Operations
						
				
						
						
				
						
						
				
Total net investment income
$
4,754 				
						
$
4,698 				
						
$
4,652 				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
						
						
Amortization of DAC and VOBA, Net of Interest
						
						
						
						
						
						
						
						
						
Annuities
$
				
						
$
				
						
$
				
						
Retirement Plan Services
						
				
						
						
				
						
						
				
						
Life Insurance
						
				
						
						
				
						
						
				
						
Group Protection
						
				
						
						
				
						
						
				
						
Total amortization of DAC and VOBA, net of interest
$
				
						
$
1,026 				
						
$
				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
						
						
Federal Income Tax Expense (Benefit)
						
						
						
						
						
						
						
						
						
Annuities
$
				
						
$
				
						
$
				
						
Retirement Plan Services
						
				
						
						
				
						
						
				
						
Life Insurance
						
				
						
						
				
						
						
				
						
Group Protection
						
				
						
						
				
						
						
				
						
Other Operations
						
(71) 				
						
						
(177) 				
						
						
(77) 				
						
Excluded realized gain (loss)
						
(95) 				
						
						
(14) 				
						
						
(136) 				
						
Gain (loss) on early extinguishment of debt
						
-
						
						
(2) 				
						
						
(3) 				
						
Reserve changes (net of related amortization)
						
						
						
						
						
						
						
						
						
on business sold through reinsurance
						
				
						
						
				
						
						
				
						
Impairment of intangibles
						
-
						
						
(2) 				
						
						
-
						
Benefit ratio unlocking
						
				
						
						
				
						
						
(6) 				
						
Total federal income tax expense (benefit)
$
				
						
$
				
						
$
				
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31,
						
						
						
Assets
						
						
						
						
						
						
Annuities
$
120,267 				
						
$
106,906 				
						
Retirement Plan Services
						
32,369 				
						
						
30,651 				
						
Life Insurance
						
65,639 				
						
						
64,115 				
						
Group Protection
						
3,865 				
						
						
3,733 				
						
Other Operations
						
14,805 				
						
						
13,464 				
						
Total assets
$
236,945 				
						
$
218,869 				
						
23. Supplemental Disclosures of Cash Flow Data
The following summarizes our supplemental cash flow data (in millions):
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
						
						
Interest paid
$
				
						
$
				
						
$
				
						
Income taxes paid (received)
						
				
						
						
				
						
						
(36) 				
						
Significant non-cash investing and financing transactions:
						
						
						
						
						
						
						
						
						
Value of stock received from stock options exercised
						
						
						
						
						
						
						
						
						
through stock swap transactions
$
				
						
$
-
						
$
-
						
Business dispositions:
						
						
						
						
						
						
						
						
						
Liabilities disposed
$
-
						
$
-
						
$
(3) 				
						
Cash received (paid)
						
-
						
						
(1) 				
						
						
-
						
Gain (loss) on dispositions
$
-
						
$
(1) 				
						
$
(3) 				
						
24. Quarterly Results of Operations (Unaudited)
The unaudited quarterly results of operations (in millions, except per share data) were as follows:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Three Months Ended
						
March 31,
						
June 30,
						
September 30,
December 31,
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Total revenues
$
2,839 				
						
$
2,999 				
						
						
$
3,009 				
						
						
$
3,122 				
						
Total expenses
						
2,534 				
						
						
2,581 				
						
						
						
2,567 				
						
						
						
2,656 				
						
Net income (loss)
						
				
						
						
				
						
						
						
				
						
						
						
				
						
Earnings (loss) per common share - basic:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Net income (loss)
						
0.89 				
						
						
1.19 				
						
						
						
1.28 				
						
						
						
1.34 				
						
Earnings (loss) per common share - diluted:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Net income (loss)
						
0.86 				
						
						
1.15 				
						
						
						
1.23 				
						
						
						
1.29 				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Total revenues
$
2,710 				
						
$
2,898 				
						
						
$
2,954 				
						
						
$
2,973 				
						
Total expenses
						
2,402 				
						
						
2,456 				
						
						
						
2,536 				
						
						
						
2,573 				
						
Income (loss) from continuing operations
						
				
						
						
				
						
						
						
				
						
						
						
				
						
Income (loss) from discontinued operations,
						
						
						
						
						
						
						
						
						
						
						
						
						
						
net of federal income taxes
						
(1) 				
						
						
-
						
						
						
				
						
						
						
-
						
Net income (loss)
						
				
						
						
				
						
						
						
				
						
						
						
				
						
Earnings (loss) per common share - basic:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Income (loss) from continuing operations
						
0.84 				
						
						
1.14 				
						
						
						
1.44 				
						
						
						
1.17 				
						
Income (loss) from discontinued operations
						
-
						
						
-
						
						
						
0.10 				
						
						
						
-
						
Net income (loss)
						
0.84 				
						
						
1.14 				
						
						
						
1.54 				
						
						
						
1.17 				
						
Earnings (loss) per common share - diluted:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Income (loss) from continuing operations
						
0.82 				
						
						
1.09 				
						
						
						
1.41 				
						
						
						
1.14 				
						
Income (loss) from discontinued operations
						
-
						
						
-
						
						
						
0.10 				
						
						
						
-
						
Net income (loss)
						
0.82 				
						
						
1.09 				
						
						
						
1.51 				
						
						
						
1.14
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a)Conclusions Regarding Disclosure Controls and Procedures
We maintain disclosure controls and procedures, which are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period required by this report, we, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us and our consolidated subsidiaries required to be disclosed in our periodic reports under the Exchange Act.
(b)Management’s Report on Internal Control Over Financial Reporting
Management’s Report on Internal Control Over Financial Reporting is included on page 100 of “Item 8. Financial Statements and Supplementary Data” and is incorporated herein by reference.
A control system, no matter how well designed and operated, can provide only reasonable assurance that the control system’s objectives will be met. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. Projections of any evaluation of controls’ effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
(c)Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as that term is defined in rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information for this item relating to officers of LNC is incorporated by reference to “Part I - Executive Officers of the Registrant.” Information for this item relating to directors of LNC is incorporated by reference to the sections captioned “GOVERNANCE OF THE COMPANY - Our Corporate Governance Guidelines,” “GOVERNANCE OF THE COMPANY - Director Nomination Process,” “THE BOARD OF DIRECTORS AND COMMITTEES - Current Committee Membership and Meetings Held During 2013,” “THE BOARD OF DIRECTORS AND COMMITTEES - Audit Committee,” “ITEM 1 - Election of Directors,” “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” and “GENERAL - Shareholder Proposals” of LNC’s Proxy Statement for the Annual Meeting scheduled for May 22, 2014.
We have adopted a code of ethics, which we refer to as our “Code of Conduct,” that applies, among others, to our principal executive officer, principal financial officer, principal accounting officer or controller and other persons performing similar functions. The Code of Conduct is posted on our website, www.lfg.com. LNC will provide to any person without charge, upon request, a copy of such code. Requests for the Code of Conduct should be directed to: Corporate Secretary, Lincoln National Corporation, 150 N. Radnor Chester Road, Suite A305, Radnor, PA 19087. We intend to disclose any amendment to or waiver from the provisions of our Code of Conduct that applies to our directors and executive officers on our website, www.lfg.com.
Item 11. Executive Compensation
Information for this item is incorporated by reference to the sections captioned “EXECUTIVE COMPENSATION,” “COMPENSATION OF DIRECTORS” and “COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION” of LNC’s Proxy Statement for the Annual Meeting scheduled for May 22, 2014.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information for this item is incorporated by reference to the section captioned “SECURITY OWNERSHIP” and “EQUITY COMPENSATION PLAN INFORMATION” of LNC’s Proxy Statement for the Annual Meeting scheduled for May 22, 2014.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information for this item is incorporated by reference to the sections captioned “RELATED PARTY TRANSACTIONS” and “GOVERNANCE OF THE COMPANY - Director Independence” of LNC’s Proxy Statement for the Annual Meeting scheduled for May 22, 2014.
Item 14. Principal Accounting Fees and Services
Information for this item is incorporated by reference to the sections captioned “ITEM 2 - RATIFICATION OF THE APPOINTMENT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - Independent Registered Public Accounting Firm Fees and Services” and “ITEM 2 - RATIFICATION OF THE APPOINTMENT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - Audit Committee Pre-Approval Policy” of LNC’s Proxy Statement for the Annual Meeting scheduled for May 22, 2014.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) (1) Financial Statements
The following Consolidated Financial Statements of Lincoln National Corporation are included in Part II - Item 8:
Management Report on Internal Control Over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - December 31, 2013 and 2012
Consolidated Statements of Comprehensive Income (Loss) - Years ended December 31, 2013, 2012 and 2011
Consolidated Statements of Stockholders’ Equity - Years ended December 31, 2013, 2012 and 2011
Consolidated Statements of Cash Flows - Years ended December 31, 2013, 2012 and 2011
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedules
The Financial Statement Schedules are listed in the Index to Financial Statement Schedules on page FS-1, which is incorporated herein by reference.
(a) (3) Listing of Exhibits
The Exhibits are listed in the Index to Exhibits beginning on page E-1, which is incorporated herein by reference.
(c) The Financial Statement Schedules for Lincoln National Corporation begin on page FS-2, which are incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, LNC has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
						
						
						
						
						
LINCOLN NATIONAL CORPORATION
						
						
Dated: February 25, 2014
By:
/s/ Randal J. Freitag
						
Randal J. Freitag
						
Executive Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 25, 2014.
						
						
						
						
Signature
						
Title
						
						
/s/ Dennis R. Glass
						
President, Chief Executive Officer and Director
Dennis R. Glass
						
(Principal Executive Officer)
						
						
/s/ Randal J. Freitag
						
Executive Vice President and Chief Financial Officer
Randal J. Freitag
						
(Principal Financial Officer)
						
						
/s/ Douglas N. Miller
						
Senior Vice President and Chief Accounting Officer
Douglas N. Miller
						
(Principal Accounting Officer)
						
						
/s/ William J. Avery
						
Director
William J. Avery
						
						
						
						
/s/ William H. Cunningham
						
Director
William H. Cunningham
						
						
						
						
/s/ George W. Henderson, III
						
Director
George W. Henderson, III
						
						
						
						
/s/ Eric G. Johnson
						
Director
Eric G. Johnson
						
						
						
						
/s/ Gary C. Kelly
						
Director
Gary C. Kelly
						
						
						
						
/s/ M. Leanne Lachman
						
Director
M. Leanne Lachman
						
						
						
						
/s/ William Porter Payne
						
Director
William Porter Payne
						
						
						
						
/s/ Patrick S. Pittard
						
Director
Patrick S. Pittard
						
						
						
						
/s/ Isaiah Tidwell
						
Director
Isaiah Tidwell
						
						
			 		
Index to Financial Statement Schedules
						
						
						
						
						
						
						
						
I
- Summary of Investments - Other than Investments in Related Parties
FS-2
						
II
- Condensed Financial Information of Registrant
FS-3
						
III
- Supplementary Insurance Information
FS-6
						
IV
- Reinsurance
FS-8
						
V
- Valuation and Qualifying Accounts
FS-9
						
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or the required information is included in the consolidated financial statements, and therefore omitted. See “Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” on page 37 for more detail on items contained within these schedules.
			 		
FS-1
LINCOLN NATIONAL CORPORATION
SCHEDULE I - CONSOLIDATED SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES
(in millions)
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Column A
						
Column B
						
Column C
						
Column D
						
						
As of December 31, 2013
						
						
						
						
Fair
						
Carrying
						
Type of Investment
						
Cost
						
Value
						
Value
						
Available-For-Sale Fixed Maturity Securities (1)
						
						
						
						
						
						
						
						
						
						
Bonds:
						
						
						
						
						
						
						
						
						
						
U.S. government and government agencies and authorities
						
$
				
						
$
				
						
$
				
						
States, municipalities and political subdivisions
						
						
3,638 				
						
						
3,919 				
						
						
3,919 				
						
Mortgage-backed securities
						
						
4,848 				
						
						
5,078 				
						
						
5,078 				
						
Foreign governments
						
						
				
						
						
				
						
						
				
						
Public utilities
						
						
12,997 				
						
						
13,653 				
						
						
13,653 				
						
All other corporate bonds
						
						
53,043 				
						
						
55,507 				
						
						
55,507 				
						
Hybrid and redeemable preferred securities
						
						
				
						
						
1,005 				
						
						
1,005 				
						
Variable interest entities
						
						
				
						
						
				
						
						
				
						
Total available-for-sale fixed maturity securities
						
						
77,035 				
						
						
80,775 				
						
						
80,775 				
						
						
						
						
						
						
						
						
						
						
						
Available-For-Sale Equity Securities (1)
						
						
						
						
						
						
						
						
						
						
Common stocks:
						
						
						
						
						
						
						
						
						
						
Banks, trusts and insurance companies
						
						
				
						
						
				
						
						
				
						
Industrial, miscellaneous and all other
						
						
				
						
						
				
						
						
				
						
Nonredeemable preferred securities
						
						
				
						
						
				
						
						
				
						
Total available-for-sale equity securities
						
						
				
						
						
				
						
						
				
						
Trading securities
						
						
2,027 				
						
						
2,282 				
						
						
2,282 				
						
Mortgage loans on real estate
						
						
7,210 				
						
						
7,386 				
						
						
7,210 				
						
Real estate
						
						
				
						
						
N/A
						
						
				
						
Policy loans
						
						
2,677 				
						
						
N/A
						
						
2,677 				
						
Derivative investments (2)
						
						
1,708 				
						
						
				
						
						
				
						
Other investments
						
						
1,218 				
						
						
1,218 				
						
						
1,218 				
						
Total investments
						
$
92,104 				
						
						
						
						
$
95,291 				
						
(1)
Investments deemed to have declines in value that are other-than-temporary are written down or reserved for to reduce the carrying value to their estimated realizable value.
(2)
Derivative investment assets were offset by $187 million in derivative liabilities reflected in other liabilities on our Consolidated Balance Sheets.
			 		
FS-2
LINCOLN NATIONAL CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(Parent Company Only) (in millions, except share data)
						
						
						
						
						
						
						
						
						
						
As of December 31,
						
						
						
						
						
						
ASSETS
						
						
						
						
						
Investments in subsidiaries (1)
$
15,782 				
						
$
17,557 				
Derivative investments
						
				
						
						
				
Other investments
						
				
						
						
				
Cash and invested cash
						
1,558 				
						
						
				
Loans and accrued interest to subsidiaries (1)
						
2,995 				
						
						
2,585 				
Other assets
						
				
						
						
				
Total assets
$
20,708 				
						
$
21,432 				
						
						
						
						
						
LIABILITIES AND STOCKHOLDERS' EQUITY
						
						
						
						
						
Liabilities
						
						
						
						
						
Common and preferred dividends payable
$
				
						
$
				
Short-term debt
						
				
						
						
				
Long-term debt
						
5,571 				
						
						
5,689 				
Loans from subsidiaries (1)
						
				
						
						
				
Payables for collateral on investments
						
				
						
						
				
Other liabilities
						
				
						
						
				
Total liabilities
						
7,256 				
						
						
6,459 				
						
						
						
						
						
Contingencies and Commitments
						
						
						
						
						
						
						
						
						
						
Stockholders' Equity
						
						
						
						
						
Preferred stock - 10,000,000 shares authorized; Series A
						
-
						
						
-
Common stock - 800,000,000 shares authorized
						
6,876 				
						
						
7,121 				
Retained earnings
						
5,013 				
						
						
4,044 				
Accumulated other comprehensive income (loss)
						
1,563 				
						
						
3,808 				
Total stockholders' equity
						
13,452 				
						
						
14,973 				
Total liabilities and stockholders' equity
$
20,708 				
						
$
21,432 				
(1)
Eliminated in consolidation.
			 		
FS-3
LINCOLN NATIONAL CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Parent Company Only) (in millions)
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
Revenues
						
						
						
						
						
						
						
						
Dividends from subsidiaries (1)
$
				
						
$
				
						
$
				
Interest from subsidiaries (1)
						
				
						
						
				
						
						
				
Net investment income
						
-
						
						
				
						
						
				
Realized gain (loss)
						
(9) 				
						
						
(6) 				
						
						
(3) 				
Other revenues
						
				
						
						
				
						
						
				
Total revenues
						
				
						
						
				
						
						
1,024 				
Expenses
						
						
						
						
						
						
						
						
Operating and administrative
						
				
						
						
				
						
						
				
Interest - subsidiaries (1)
						
				
						
						
				
						
						
				
Interest - other
						
				
						
						
				
						
						
				
Total expenses
						
				
						
						
				
						
						
				
Income (loss) before federal income taxes, equity in income (loss) of
						
						
						
						
						
						
						
						
subsidiaries, less dividends
						
				
						
						
				
						
						
				
Federal income tax expense (benefit)
						
(73) 				
						
						
(85) 				
						
						
(68) 				
Income (loss) before equity in income (loss) of subsidiaries, less dividends
						
				
						
						
				
						
						
				
Equity in income (loss) of subsidiaries, less dividends
						
				
						
						
				
						
						
(529) 				
Net income (loss)
						
1,244 				
						
						
1,313 				
						
						
				
Other comprehensive income (loss), net of tax:
						
						
						
						
						
						
						
						
Unrealized gain (loss) on available-for-sale securities
						
(2,457) 				
						
						
1,119 				
						
						
1,771 				
Unrealized other-than-temporary impairment on available-for-sale securities
						
				
						
						
				
						
						
				
Unrealized gain (loss) on derivatives instruments
						
				
						
						
				
						
						
				
Foreign currency translation adjustment
						
(1) 				
						
						
(5) 				
						
						
-
Funded status of employee benefit plans
						
				
						
						
(32) 				
						
						
(97) 				
Total other comprehensive income (loss), net of tax
						
(2,245) 				
						
						
1,128 				
						
						
1,829 				
Comprehensive income (loss)
$
(1,001) 				
						
$
2,441 				
						
$
2,050 				
(1)
Eliminated in consolidation.
			 		
FS-4
LINCOLN NATIONAL CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
STATEMENTS OF CASH FLOWS
(Parent Company Only) (in millions)
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Years Ended December 31,
						
						
Cash Flows from Operating Activities
						
						
						
						
						
						
						
						
Net income (loss)
$
1,244 				
						
$
1,313 				
						
$
				
Adjustments to reconcile net income (loss) to net cash provided by
						
						
						
						
						
						
						
						
operating activities:
						
						
						
						
						
						
						
						
Equity in (income) loss of subsidiaries greater than distributions (1)
						
(655) 				
						
						
(751) 				
						
						
				
Realized (gain) loss
						
				
						
						
				
						
						
				
Change in legal accruals
						
-
						
						
-
						
						
(70) 				
Change in federal income tax accruals
						
				
						
						
				
						
						
				
(Gain) loss on early extinguishment of debt
						
-
						
						
				
						
						
				
Other
						
(10) 				
						
						
(13) 				
						
						
(21) 				
Net cash provided by (used in) operating activities
						
				
						
						
				
						
						
				
						
						
						
						
						
						
						
						
Cash Flows from Investing Activities
						
						
						
						
						
						
						
						
Sales or maturities of investments
						
-
						
						
-
						
						
				
Investment acquisition
						
(25) 				
						
						
-
						
						
-
Capital contribution to subsidiaries (1)
						
(75) 				
						
						
-
						
						
(17) 				
Increase (decrease) in payables for collateral on investments
						
				
						
						
				
						
						
-
Net cash provided by (used in) investing activities
						
				
						
						
				
						
						
				
						
						
						
						
						
						
						
						
Cash Flows from Financing Activities
						
						
						
						
						
						
						
						
Payment of long-term debt, including current maturities
						
-
						
						
(320) 				
						
						
(525) 				
Issuance of long-term debt, net of issuance costs
						
				
						
						
				
						
						
				
Increase (decrease) in commercial paper, net
						
-
						
						
-
						
						
(100) 				
Increase (decrease) in loans from subsidiaries, net (1)
						
				
						
						
(3) 				
						
						
				
Increase (decrease) in loans to subsidiaries, net (1)
						
(410) 				
						
						
				
						
						
				
Common stock issued for benefit plans and excess tax benefits
						
				
						
						
				
						
						
				
Repurchase of common stock
						
(450) 				
						
						
(493) 				
						
						
(576) 				
Dividends paid to common and preferred stockholders
						
(129) 				
						
						
(90) 				
						
						
(62) 				
Net cash provided by (used in) financing activities
						
(152) 				
						
						
(581) 				
						
						
(750) 				
						
						
						
						
						
						
						
						
Net increase (decrease) in cash and invested cash
						
				
						
						
				
						
						
				
Cash and invested cash as of beginning-of-year
						
				
						
						
				
						
						
				
Cash and invested cash as of end-of-year
$
1,558 				
						
$
				
						
$
				
						
						
						
						
						
						
						
						
(1)
Eliminated in consolidation.
			 		
FS-5
LINCOLN NATIONAL CORPORATION
SCHEDULE III - CONDENSED SUPPLEMENTARY INSURANCE INFORMATION
(in millions)
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Column A
						
Column B
						
Column C
						
						
Column D
						
						
Column E
						
Column F
						
						
						
						
						
						
						
						
						
						
						
						
Other
						
						
						
						
						
						
						
Future
						
						
						
						
						
						
Contract
						
						
						
						
DAC and
						
Contract
						
						
Unearned
						
						
Holder
						
Insurance
Segment
						
VOBA
						
Benefits
						
Premiums (1)
						
Funds
						
Premiums
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of or For the Year Ended December 31, 2013
Annuities
						
$
2,770 				
						
$
				
						
						
$
-
						
						
$
21,269 				
						
$
				
Retirement Plan Services
						
						
				
						
						
-
						
						
						
-
						
						
						
15,310 				
						
						
-
Life Insurance
						
						
5,713 				
						
						
9,058 				
						
						
						
-
						
						
						
36,997 				
						
						
				
Group Protection
						
						
				
						
						
2,033 				
						
						
						
-
						
						
						
				
						
						
2,084 				
Other Operations
						
						
-
						
						
6,022 				
						
						
						
-
						
						
						
				
						
						
				
Total
						
$
8,886 				
						
$
17,251 				
						
						
$
-
						
						
$
74,548 				
						
$
2,687 				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of or For the Year Ended December 31, 2012
Annuities
						
$
2,092 				
						
$
2,339 				
						
						
$
-
						
						
$
21,108 				
						
$
				
Retirement Plan Services
						
						
				
						
						
				
						
						
						
-
						
						
						
14,712 				
						
						
-
Life Insurance
						
						
4,281 				
						
						
9,177 				
						
						
						
-
						
						
						
35,365 				
						
						
				
Group Protection
						
						
				
						
						
1,882 				
						
						
						
-
						
						
						
				
						
						
1,919 				
Other Operations
						
						
-
						
						
6,379 				
						
						
						
-
						
						
						
				
						
						
				
Total
						
$
6,667 				
						
$
19,780 				
						
						
$
-
						
						
$
72,218 				
						
$
2,462 				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of or For the Year Ended December 31, 2011
Annuities
						
$
1,912 				
						
$
3,642 				
						
						
$
-
						
						
$
20,701 				
						
$
				
Retirement Plan Services
						
						
				
						
						
				
						
						
						
-
						
						
						
13,624 				
						
						
-
Life Insurance
						
						
4,516 				
						
						
7,984 				
						
						
						
-
						
						
						
34,066 				
						
						
				
Group Protection
						
						
				
						
						
1,742 				
						
						
						
-
						
						
						
				
						
						
1,778 				
Other Operations
						
						
-
						
						
6,438 				
						
						
						
-
						
						
						
				
						
						
				
Total
						
$
6,776 				
						
$
19,813 				
						
						
$
-
						
						
$
69,466 				
						
$
2,294 				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
(1)
Unearned premiums are included in Column E, other contract holder funds.
			 		
FS-6
LINCOLN NATIONAL CORPORATION
SCHEDULE III - CONDENSED SUPPLEMENTARY INSURANCE INFORMATION (Continued)
(in millions)
Asd
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Column A
						
Column G
						
Column H
						
						
Column I
						
						
Column J
						
						
Column K
						
						
						
						
Benefits
						
Amortization
						
						
						
						
						
						
						
						
Net
						
and
						
						
of DAC
						
						
Other
						
						
						
						
Investment
Interest
						
						
and
						
						
Operating
						
						
Premiums
Segment
						
Income
						
Credited
						
						
VOBA
						
Expenses (2)
						
Written
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of or For the Year Ended December 31, 2013
Annuities
						
$
1,044 				
						
$
				
						
						
$
				
						
						
$
1,113 				
						
						
$
-
Retirement Plan Services
						
						
				
						
						
				
						
						
						
				
						
						
						
				
						
						
						
-
Life Insurance
						
						
2,452 				
						
						
3,283 				
						
						
						
				
						
						
						
				
						
						
						
-
Group Protection
						
						
				
						
						
1,562 				
						
						
						
				
						
						
						
				
						
						
						
-
Other Operations
						
						
				
						
						
				
						
						
						
-
						
						
						
				
						
						
						
-
Total
						
$
4,754 				
						
$
6,372 				
						
						
$
				
						
						
$
3,028 				
						
						
$
-
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of or For the Year Ended December 31, 2012
Annuities
						
$
1,082 				
						
$
				
						
						
$
				
						
						
$
1,018 				
						
						
$
-
Retirement Plan Services
						
						
				
						
						
				
						
						
						
				
						
						
						
				
						
						
						
-
Life Insurance
						
						
2,396 				
						
						
2,982 				
						
						
						
				
						
						
						
				
						
						
						
-
Group Protection
						
						
				
						
						
1,447 				
						
						
						
				
						
						
						
				
						
						
						
-
Other Operations
						
						
				
						
						
				
						
						
						
-
						
						
						
				
						
						
						
-
Total
						
$
4,698 				
						
$
6,008 				
						
						
$
1,029 				
						
						
$
2,917 				
						
						
$
-
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of or For the Year Ended December 31, 2011
Annuities
						
$
1,106 				
						
$
				
						
						
$
				
						
						
$
				
						
						
$
-
Retirement Plan Services
						
						
				
						
						
				
						
						
						
				
						
						
						
				
						
						
						
-
Life Insurance
						
						
2,294 				
						
						
2,904 				
						
						
						
				
						
						
						
				
						
						
						
-
Group Protection
						
						
				
						
						
1,317 				
						
						
						
				
						
						
						
				
						
						
						
-
Other Operations
						
						
				
						
						
				
						
						
						
-
						
						
						
				
						
						
						
-
Total
						
$
4,652 				
						
$
5,833 				
						
						
$
				
						
						
$
2,716 				
						
						
$
-
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
(2)
Excludes impairment of intangibles of $747 million for the year ended December 31, 2011. The allocation of expenses between investments and other operations is based on a number of assumptions and estimates. Results would change if different methods were applied.
			 		
FS-7
LINCOLN NATIONAL CORPORATION
SCHEDULE IV - CONSOLIDATED REINSURANCE
(in millions)
Adsfas
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Column A
						
Column B
						
						
Column C
						
						
Column D
						
						
Column E
						
Column F
						
						
						
						
Ceded
						
Assumed
						
						
						
Percentage
						
						
						
						
to
						
						
from
						
						
						
						
of Amount
						
Gross
						
						
Other
						
						
Other
						
						
Net
						
Assumed
Description
						
Amount
						
Companies
Companies
						
Amount
						
to Net
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of or For the Year Ended December 31, 2013
Individual life insurance in force (1)
						
$
990,600 				
						
						
$
313,200 				
						
						
$
1,700 				
						
						
$
679,100 				
						
0.3% 				
Premiums:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Life insurance and annuities (2)
						
						
6,644 				
						
						
						
1,247 				
						
						
						
				
						
						
						
5,405 				
						
0.1% 				
Accident and health insurance
						
						
1,379 				
						
						
						
				
						
						
						
-
						
						
						
1,351 				
						
0.0% 				
Total premiums
						
$
8,023 				
						
						
$
1,275 				
						
						
$
				
						
						
$
6,756 				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of or For the Year Ended December 31, 2012
Individual life insurance in force (1)
						
$
929,100 				
						
						
$
323,300 				
						
						
$
2,000 				
						
						
$
607,800 				
						
0.3% 				
Premiums:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Life insurance and annuities (2)
						
						
6,113 				
						
						
						
1,164 				
						
						
						
				
						
						
						
4,958 				
						
0.2% 				
Accident and health insurance
						
						
1,266 				
						
						
						
				
						
						
						
-
						
						
						
1,240 				
						
0.0% 				
Total premiums
						
$
7,379 				
						
						
$
1,190 				
						
						
$
				
						
						
$
6,198 				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of or For the Year Ended December 31, 2011
Individual life insurance in force (1)
						
$
881,100 				
						
						
$
331,700 				
						
						
$
2,800 				
						
						
$
552,200 				
						
0.5% 				
Premiums:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Life insurance and annuities (2)
						
						
5,811 				
						
						
						
1,252 				
						
						
						
				
						
						
						
4,569 				
						
0.2% 				
Accident and health insurance
						
						
1,186 				
						
						
						
				
						
						
						
-
						
						
						
1,162 				
						
0.0% 				
Total premiums
						
$
6,997 				
						
						
$
1,276 				
						
						
$
				
						
						
$
5,731 				
						
						
(1)
Includes Group Protection segment and Other Operations in-force amounts.
(2)
Includes insurance fees on universal life and other interest-sensitive products.
			 		
FS-8
LINCOLN NATIONAL CORPORATION
SCHEDULE V - CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(In millions)
ads
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Column C
						
						
						
						
						
						
						
						
Column A
						
						
Column B
						
						
Additions
						
						
Column D
						
						
Column E
						
						
						
						
						
						
						
						
						
						
Charged
						
						
						
						
						
						
						
						
						
						
Balance at
						
Charged to
						
to Other
						
						
						
						
						
						
Balance
						
Beginning-
						
Costs
						
Accounts -
Deductions -
						
at End-
Description
						
						
of-Year
						
Expenses (1)
						
Describe
						
Describe (2)
						
of-Year
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Year Ended December 31, 2013
Deducted from asset accounts:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Reserve for mortgage loans on real estate
						
						
$
				
						
						
$
				
						
						
$
-
						
						
$
(21) 				
						
						
$
				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Year Ended December 31, 2012
Deducted from asset accounts:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Reserve for mortgage loans on real estate
						
						
$
				
						
						
$
				
						
						
$
-
						
						
$
(24) 				
						
						
$
				
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
For the Year Ended December 31, 2011
Deducted from asset accounts:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Reserve for mortgage loans on real estate
						
						
$
				
						
						
$
				
						
						
$
-
						
						
$
(6) 				
						
						
$
				
(1)
Excludes charges for the direct write-off assets.
(2)
Deductions reflect sales, foreclosures of the underlying holdings or change in reserves.
			 		
FS-9
INDEX TO EXHIBITS
						
2.1
Purchase and Sale Agreement By and Among LNC, Lincoln National Investment Companies, Inc. and Macquarie Bank Limited, dated as of August 18, 2009 is incorporated by reference to Exhibit 2.1 to LNC’s Quarterly Report on Form 10-Q (File No. 1-6028) for the quarter ended September 30, 2009.***
3.1
Restated Articles of Incorporation of LNC are incorporated by reference to Exhibit 3.1 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on July 8, 2013.
3.2
Amended and Restated Bylaws of LNC (effective May 23, 2013) are incorporated by reference to Exhibit 3.2 to LNC’s Form 10-Q (File No. 1-6028) for the quarter ended June 30, 2013.
4.1
Indenture of LNC, dated as of September 15, 1994, between LNC and The Bank of New York, as trustee, is incorporated by reference to Exhibit 4(c) to LNC’s Registration Statement on Form S-3/A (File No. 33-55379) filed with the SEC on September 15, 1994.
4.2
First Supplemental Indenture, dated as of November 1, 2006, to Indenture dated as of September 15, 1994 is incorporated by reference to Exhibit 4.4 to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2006.
4.3
Junior Subordinated Indenture, dated as of May 1, 1996, between LNC and The Bank of New York Trust Company, N.A. (successor in interest to J.P. Morgan Trust Company and The First National Bank of Chicago) is incorporated by reference to Exhibit 4(j) to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2001.
4.4
First Supplemental Indenture, dated as of August 14, 1998, to Junior Subordinated Indenture dated as of May 1, 1996 is incorporated by reference to Exhibit 4.3 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on August 27, 1998.
4.5
Second Supplemental Junior Subordinated Indenture, dated April 20, 2006, to Junior Subordinated Indenture, dated as of May 1, 1996, is incorporated by reference to Exhibit 4.1 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on April 20, 2006.
4.6
Third Supplemental Junior Subordinated Indenture dated May 17, 2006, to Junior Subordinated Indenture, dated as of May 1, 1996, is incorporated by reference to Exhibit 4.1 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on May 17, 2006.
4.7
Fourth Supplemental Junior Subordinated Indenture, dated as of November 1, 2006, to Junior Subordinated Indenture, dated May 1, 1996, is incorporated by reference to Exhibit 4.9 to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2006.
4.8
Fifth Supplemental Junior Subordinated Indenture, dated as of March 13, 2007, to Junior Subordinated Indenture, dated May 1, 1996, is incorporated by reference to Exhibit 4.1 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on March 13, 2007.
4.9
Senior Indenture, dated as of March 10, 2009, between LNC and the Bank of New York Mellon, is incorporated by reference to LNC’s Form S-3ASR (File No. 333-157822) filed with the SEC on March 10, 2009.
4.10
Junior Subordinated Indenture, dated as of March 10, 2009, between LNC and the Bank of New York Mellon, is incorporated by reference to LNC’s Form S-3ASR (File No. 333-157822) filed with the SEC on March 10, 2009.
4.11
Indenture, dated as of November 21, 1995, between Jefferson-Pilot Corporation and U.S. National Bank Association (as successor in interest to Wachovia Bank, National Association), is incorporated by reference to Exhibit 4.7 to LNC’s Form 10-Q (File No. 1-6028) for the quarter ended June 30, 2006.
						
4.12
Third Supplemental Indenture, dated as of January 27, 2004, to Indenture dated as of November 21, 1995, is incorporated by reference to Exhibit 4.8 to LNC’s Form 10-Q (File No. 1-6028) for the quarter ended June 30, 2006.
4.13
Fourth Supplemental Indenture, dated as of January 27, 2004, to Indenture dated as of November 21, 1995, is incorporated by reference to Exhibit 4.9 to LNC’s Form 10-Q (File No. 1-6028) for the quarter ended June 30, 2006.
						
4.14
Fifth Supplemental Indenture, dated as of April 3, 2006, to Indenture, dated as of November 21, 1995, incorporated by reference to Exhibit 10.1 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on April 3, 2006.
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4.15
Sixth Supplemental Indenture, dated as of March 1, 2007, to Indenture dated as of November 21, 1995, is incorporated by reference to Exhibit 4.4 to LNC’s Form 10-Q (File No. 1-6028) for the quarter ended March 31, 2007.
4.16
Form of 7% Notes due March 15, 2018 incorporated by reference to Exhibit 4.2 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on March 24, 1998.
4.17
Form of 4.75% Note due February 15, 2014 is incorporated by reference to Exhibit 4.1 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on February 4, 2004.
4.18
Form of 7% Capital Securities due 2066 of LNC is incorporated by reference to Exhibit 4.2 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on May 17, 2006.
4.19
Form of 6.15% Senior Note due April 6, 2036 is incorporated by reference to Exhibit 4.2 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on April 7, 2006.
4.20
Amended and Restated Trust Agreement dated September 11, 2003, among LNC, as Depositor, Bank One Trust Company, National Association, as Property Trustee, Bank One Delaware, Inc., as Delaware Trustee, and the Administrative Trustees named therein is incorporated by reference to Exhibit 4.1 of Form 8-K (File No. 1-6028) filed with the SEC on September 16, 2003.
4.21
Guarantee Agreement, dated September 11, 2003, between LNC, as Guarantor, and Bank One Trust Company, National Association, as Guarantee Trustee is incorporated by reference to Exhibit 4.4 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on September 16, 2003.
4.22
Form of 6.05% Capital Securities due 2067 is incorporated by reference to Exhibit 4.2 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on March 13, 2007.
4.23
Form of 6.30% Senior Notes due 2037 is incorporated by reference to Exhibit 4.1 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on October 9, 2007.
4.24
Form of 8.75% Senior Notes due 2019 is incorporated by reference to Exhibit 4.1 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on June 22, 2009.
4.25
Form of 6.25% Senior Notes due 2020 is incorporated by reference to Exhibit 4.1 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on December 11, 2009.
4.26
Form of 4.30% Senior Notes due 2015 incorporated by reference to Exhibit 4.1 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on June 18, 2010.
4.27
Form of 7.00% Senior Notes due 2040 incorporated by reference to Exhibit 4.1 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on June 18, 2010.
4.28
Form of 4.85% Senior Notes due 2021 incorporated by reference to Exhibit 4.1 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on June 24, 2011.
4.29
Form of 4.20% Senior Notes due 2022 incorporated by reference to Exhibit 4.1 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on March 29, 2012.
						
4.30
Form of 4.00% Senior Notes due 2023 incorporated by reference to Exhibit 4.1 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on August 16, 2013.
						
4.31
First Supplemental Indenture, dated as of April 3, 2006, among Lincoln JP Holdings, L.P. and JPMorgan Chase Bank, N.A., as trustee, to the Indenture, dated as of January 15, 1997, among Jefferson-Pilot and JPMorgan Chase Bank, N.A., as trustee, is incorporated by reference to Exhibit 10.2 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on April 3, 2006.
						
						
10.1
LNC 2009 Amended and Restated Incentive Compensation Plan (as amended and restated on May 14, 2009) is incorporated by reference to Exhibit 4 to LNC’s Proxy Statement (File No. 1-6028) filed with the SEC on April 9, 2009.*
						
10.2
Form of Restricted Stock Unit Award Agreement under the LNC 2009 Amended and Restated Incentive Compensation Plan, adopted November 2009, is incorporated by reference to Exhibit 99.1 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on November 6, 2009.*
E-1
10.3
LNC Stock Option Plan for Non-Employee Directors is incorporated by reference to Exhibit 5 to LNC’s Proxy Statement (File No. 1-6028) filed with the SEC on April 4, 2007.*
10.4
Non-Qualified Stock Option Agreement for the LNC Stock Option Plan for Non-Employee Directors is incorporated by reference to Exhibit 10.3 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on May 10, 2007.*
10.5
2014 Non-Employee Director Fees is filed herewith.*
						
10.6
Amended and Restated LNC Supplemental Retirement Plan is incorporated by reference to Exhibit 10.10 to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2007.*
						
10.7
The Severance Plan for Officers of LNC is incorporated by Reference to Exhibit 10.9 to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2012.*
10.8
Amendment No. 1 to The Severance Plan for Officers of LNC is incorporated by Reference to Exhibit 10.9 to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2012.*
10.9
Amendment No. 2 to The Severance Plan for Officers of LNC is incorporated by Reference to Exhibit 10.9 to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2012.*
10.10
Amendment No. 3 to The Severance Plan for Officers of LNC is incorporated by reference to Exhibit 10.1 to LNC’s Form 10-Q (File No. 1-6028) for the quarter ended September 30, 2012.*
10.11
Amendment No. 4 to The Severance Plan for Officers of LNC is incorporated by reference to Exhibit 10.1 to LNC’s Form 10-Q (File No. 1-6028) for the quarter ended September 30, 2012.*
10.12
The LNC Outside Directors’ Value Sharing Plan, last amended March 8, 2001, is incorporated by reference to Exhibit 10(e) to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2001.*
10.13
LNC Deferred Compensation and Supplemental/Excess Retirement Plan, as amended and restated effective December 31, 2013, is filed herewith.*
						
10.14
LNC 1993 Stock Plan for Non-Employee Directors, as last amended May 10, 2001, is incorporated by reference to Exhibit 10(g), to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2001.*
10.15
Amendment No. 2 to the LNC 1993 Stock Plan for Non-Employee Directors (effective February 1, 2006) is incorporated by reference to Exhibit 10.1 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on January 13, 2006.*
						
10.16
Non-Qualified Stock Option Agreement (For Non-Employee Directors) under the LNC 1993 Stock Plan for Non-Employee Directors is incorporated by reference to Exhibit 10(z) to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2004.*
10.17
Amendment of outstanding Non-Qualified Option Agreements (for Non-Employee Directors) under the LNC 1993 Stock Plan for Non-Employee Directors is incorporated by reference to Exhibit 10.2 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on January 12, 2006.*
10.18
LNC Executives’ Severance Benefit Plan (effective August 7, 2008) is incorporated by reference to Exhibit 10.3 to LNC’s Form 10-Q (File No. 1-6028) for the quarter ended June 30, 2008.*
						
10.19
Amendment No. 1 to the LNC Executives’ Severance Benefit Plan (effective November 9, 2011) is incorporated by reference to Exhibit 10.22 to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2011.*
10.20
Amended and Restated LNC Excess Retirement Plan is incorporated by reference to Exhibit 10.26 to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2007.*
10.21
LNC Deferred Compensation Plan for Non-Employee Directors, as amended and restated November 5, 2008 is incorporated by reference to Exhibit 10.23 to LNC’s Form 10-K (File NO. 1-6028) for the year ended December 31, 2008.*
10.22
Phased Retirement Agreement, dated as of October 26, 2012, between Robert W. Dineen and LNC is incorporated by reference to Exhibit 10.1 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on November 1, 2012..*
E-2
10.23
Consulting Agreement between, dated as of October 26, 2012, between Robert W. Dineen and LNC is incorporated by reference to Exhibit 10.2 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on November 1, 2012.*
10.24
Agreement, Waiver and General Release, dated as of October 26, 2012, between Robert W. Dineen and LNC is incorporated by reference to Exhibit 10.3 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on November 1, 2012.*
10.25
Form of 2008 Non-Qualified Stock Option Agreement under the LNC Amended and Restated Incentive Compensation Plan is incorporated by reference to Exhibit 10.2 of LNC’s Form 8-K (File No. 1-6028) filed with the SEC on February 13, 2008.*
10.26
Form of Indemnification between LNC and each director incorporated by reference to Exhibit 10.1 to LNC’s Form 10-Q (File No. 1-6028) for the quarter ended September 30, 2009.*
10.27
Form of Stock Option Agreement is incorporated by reference to Exhibit 10.3 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on April 18, 2006.*
10.28
Form of Restricted Stock Unit Award Agreement is incorporated by Reference to Exhibit 10.9 to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2012.*
10.29
Form of Non-Qualified Stock Option Award Agreement is incorporated by Reference to Exhibit 10.9 to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2012.*
10.30
Form of 2012-2014 Performance Cycle Agreement under the LNC 2009 Amended and Restated Incentive Compensation Plan is incorporated by Reference to Exhibit 10.9 to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2012.*
10.31
LNC Domestic Relocation Policy Home Sale Assistance Plan, effective as of September 6, 2007, is incorporated by reference to Exhibit 10.35 to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2009.*
						
10.32
Jefferson Pilot Corporation Long Term Stock Incentive Plan, as amended in February 2005, is incorporated by reference to Exhibit 10(iii) of Jefferson-Pilot’s Form 10-K (File No. 1-5955) for the year ended December 31, 2004.*
10.33
Jefferson Pilot Corporation Non-Employee Directors’ Stock Option Plan, as amended in February 2005, is incorporated by reference to Exhibit 10(iv) of Jefferson-Pilot’s Form 10-K (File No. 1-5955) for the year ended December 31, 2004.*
10.34
Jefferson Pilot Corporation Non-Employee Directors’ Stock Option Plan, as last amended in 1999, is incorporated by reference to Exhibit 10(vii) of Jefferson-Pilot’s Form 10-K (File No. 1-5955) for the year ended December 31, 1998.*
10.35
Jefferson Pilot Corporation forms of stock option terms for non-employee directors are incorporated by reference to Exhibit 10(xi) of Jefferson-Pilot’s Form 10-K (File No. 1-5955) for the year ended December 31, 2004 and to Exhibit 10.2 of Jefferson-Pilot’s Form 8-K filed with the SEC on February 17, 2006.*
10.36
Jefferson Pilot Corporation forms of stock option terms for officers are incorporated by reference to Exhibit 10(xi) of Jefferson-Pilot’s Form 10-K (File No. 1-5955) for the year ended December 31, 2004 and to Exhibit 10.1 of Jefferson-Pilot’s Form 8-K filed with the SEC on February 17, 2006.*
						
10.37
Jefferson-Pilot Deferred Fee Plan for Non-Employee Directors, as amended and restated November 5, 2008 is incorporated by reference to Exhibit 10.55 to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2008.*
10.38
Lease and Agreement dated August 1, 1984, with respect to LNL’s offices located at Clinton Street and Harrison Street, Fort Wayne, Indiana is incorporated by reference to Exhibit 10(n) to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 1995.
10.39
First Amendment of Lease, dated as of June 16, 2006, between Trona Cogeneration Corporation and The Lincoln National Life Insurance Company, is incorporated by reference to Exhibit 10.22 to LNC’s Form 10-Q (File No. 1-6028) for the quarter ended June 30, 2006.
10.40
Agreement of Lease dated February 17, 1998, with respect to LNL’s offices located at 350 Church Street, Hartford, Connecticut is incorporated by reference to Exhibit 10(q) to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 1997.
E-3
10.41
Stock and Asset Purchase Agreement by and among LNC, The Lincoln National Life Insurance Company, Lincoln National Reinsurance Company (Barbados) Limited and Swiss Re Life & Health America Inc. dated July 27, 2001 is incorporated by reference to Exhibit 99.1 to LNC’s Form 8-K (File No. 1-6028) filed with the Commission on August 1, 2001. Omitted schedules and exhibits listed in the Agreement will be furnished to the Commission upon request.
10.42
Credit Agreement, dated as of May 29, 2013, among Lincoln National Corporation, as an Account Party and Guarantor, the Subsidiary Account Parties, as additional Account Parties, JPMorgan Chase Bank, N.A. as administrative agent, and the other lenders named therein, incorporated by reference to Exhibit 10.1 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on May 29, 2013.
10.43
Indemnity Reinsurance Agreement, dated as of January 1, 1998, between Connecticut General Life Insurance Company and Lincoln Life & Annuity Company of New York is incorporated by reference to Exhibit 10.67 to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2008.***
10.44
Coinsurance Agreement, dated as of October 1, 1998, AETNA Life Insurance and Annuity Company and Lincoln Life & Annuity Company of New York is incorporated by reference to Exhibit 10.68 to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2008.***
10.45
Investment Advisory Agreement, dated as of January 4, 2010, between The Lincoln National Life Insurance Company and Delaware Investment Advisers is incorporated by reference to Exhibit 10.58 to LNC’s for 10-K (File No. 1-6028) for the year ended December 31, 2009.
10.46
Investment Advisory Agreement, dated as of January 4, 2010, between Lincoln Life & Annuity Company of New York and Delaware Investment Advisers is incorporated by reference to Exhibit 10.59 to LNC’s for 10-K (File No. 1-6028) for the year ended December 31, 2009.
						
10.47
Reimbursement Agreement, dated December 31, 2009, between Lincoln Reinsurance Company of Vermont I, Lincoln Financial Holdings, LLC II and Credit Suisse AG is incorporated by reference to Exhibit 10.60 to LNC’s for 10-K (File No. 1-6028) for the year ended December 31, 2009.**
Historical Ratio of Earnings to Fixed Charges.
Subsidiaries List.
Consent of Independent Registered Public Accounting Firm.
31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
						
32.2
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document.
101.SCH
XBRL Taxonomy Extension Schema Document.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
* This exhibit is a management contract or compensatory plan or arrangement.
E-4
** Portions of the exhibit have been redacted and are subject to a confidential treatment request filed with the Secretary of the Securities and Exchange Commission (“SEC”) pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.
*** Schedules to the agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. LNC will furnish supplementally a copy of the schedule to the SEC, upon request.
We will furnish to the SEC, upon request, a copy of any of our long-term debt agreements not otherwise filed with the SEC.
E-5