LINCOLN NATIONAL CORP
Item 1. Business
OVERVIEW
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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. 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, 2016, LNC had consolidated assets of $261.6 billion and consolidated stockholders’ equity of $14.5 billion.
We provide products and services and report results through four segments as follows:
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Business Segments
						
Annuities
						
Retirement Plan Services
						
Life Insurance
						
Group Protection
						
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We also have Other Operations, which includes the financial data for operations that are not directly related to the business segments.
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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 universal life insurance and variable universal life insurance (“COLI”) and bank-owned universal life insurance and variable universal life insurance (“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, 2016, LFD had approximately 550 internal and external wholesalers (including sales and relationship managers). As of December 31, 2016, LFN offered LNC and non-proprietary products and advisory services through a national network of approximately 8,890 active producers who placed business with us within the last 12 months.
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Financial information in the tables that follow is presented in accordance with United States of America generally accepted accounting principles (“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 21. Assets, revenues and earnings attributable to foreign activities were not material in the periods presented.
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Acquisitions and Dispositions
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On July 16, 2015, we closed on the sale of Lincoln Financial Media Company with Entercom Communications Corp. (“Entercom Parent”) and Entercom Radio, LLC. We received $75 million in cash, net of transaction expenses, and $28 million face amount of perpetual cumulative convertible preferred stock of Entercom Parent.
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For further information about acquisitions and divestitures, see Note 3.
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BUSINESS SEGMENTS AND OTHER OPERATIONS
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ANNUITIES
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Overview
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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.
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Annuities have several features that are attractive to customers. 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 also 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. In addition, growth on the underlying principal in certain annuities is granted tax-deferred treatment, 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.
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Products
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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.
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Variable Annuities
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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, for a specified period, 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.
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Our variable funds include the Managed Risk Strategies fund options, a series of funds that embed volatility risk management and, with some funds, capital protection strategies, inside the funds themselves. These funds seek to reduce equity market volatility risk for both the contract holder and us. As of December 31, 2016 and 2015, the Managed Risk Strategies funds totaled $34.9 billion and $32.2 billion, or 33% and 31% of total variable annuity account values, respectively.
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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.
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The GDB features offered in 2016 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.
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In 2016, we offered product riders including the Lincoln Lifetime IncomeSM Advantage 2.0 (Managed Risk) and Lincoln Market SelectSM Advantage 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 (Managed Risk) and Lincoln Market Select Advantage riders provide higher income if the contract holder delays withdrawals. Lincoln Lifetime Income Advantage 2.0 (Managed Risks) includes 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, while Lincoln Market Select Advantage only offers an annual step-up of the guaranteed amount to the current contract value. Contract holders under Lincoln Lifetime Income Advantage 2.0 (Managed Risk) are subject
to the allocation of their account value to our Managed Risk Strategies fund options and certain fixed-income options. Contract holders under Lincoln Market Select Advantage are subject to restrictions on the allocation of their account value within the various investment choices.
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We also offered the i4LIFE® Advantage, i4LIFE® Advantage Guaranteed Income Benefit (Managed Risk) and i4LIFE® Advantage Guaranteed Income Benefit riders. These riders, which are covered by U.S. patents, allow variable annuity contract holders access and
control during a portion of 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 (Managed Risk) and i4LIFE Advantage Guaranteed Income Benefit 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 (Managed Risk) are subject to the allocation of their account value to our Managed Risk Strategies fund options and certain fixed-income options. Contract holders under i4LIFE Advantage Guaranteed Income Benefit are subject to restrictions on the allocation of their account value within the various investment choices.
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We also offered the 4LATER® Advantage (Managed Risk) 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 (Managed Risk). 4LATER Advantage (Managed Risk) 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 (Managed Risk) rider are subject to the allocation of their account value to our Managed Risk Strategies fund options and certain fixed-income options.
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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
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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.
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Legislative, Regulatory and Tax
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Our businesses are heavily regulated and changes in regulation may affect our insurance subsidiary capital requirements or reduce our profitability.
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State Regulation
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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 receipt of reinsurance credit;
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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;
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Payment of policy benefits (claims); 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.
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State insurance regulators and the NAIC regularly re-examine existing laws and regulations applicable to insurance companies and their products. Changes in these laws and regulations, or in interpretations thereof, sometimes lead to additional expense for the insurer and, thus, could have a material adverse effect on our financial condition and results of operations. For example, the NAIC is currently considering changes to the accounting and reserve regulations related to variable annuity business.
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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, 2016, 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.
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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.
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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, Actuarial Guideline 38 (“AG38”) clarifies the application of XXX with respect to certain UL insurance policies with secondary guarantees. Virtually all of our newly issued term and a portion 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. The New York State Department of Financial Services does 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, which was effective as of December 31, 2013, impacted our New York-domiciled insurance subsidiary, LLANY. Although
LLANY discontinued the sale of these products in early 2013, the change affected those policies previously sold. We began phasing in the increase in reserves in 2013 at $90 million per year over five years, with the final increase in reserves occurring in 2017. As of December 31, 2016, we had increased reserves by $360 million. In April 2016, LLANY entered into a third-party reinsurance arrangement primarily covering UL policies containing secondary guarantees issued between 2002 through 2014 that mitigates the financial impact of the increase of the aforementioned reserves.
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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 captive reinsurance subsidiaries. The NAIC adopted Actuarial Guideline 48 (“AG48”) regulating the terms of these arrangements that are entered into or amended in certain ways after December 31, 2014. This guideline imposed restrictions on the types of assets that can be used to support the reinsurance in these kinds of transactions. While we have executed an AG48 compliant reserve financing transaction, we cannot provide assurance that in light of AG48 and/or future rules and regulations that we will be able to continue to efficiently 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 efficiently implement such solutions for any reason, we may realize lower than anticipated returns and/or reduced sales on such products.
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Federal Regulation
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In addition, our broker-dealer and investment advisor subsidiaries 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. The foregoing regulatory or governmental bodies, as well as the DOL and others, have the authority to review our products and business practices and those of our agents, advisors, registered representatives, associated persons and employees. In recent years, there has been increased scrutiny of the insurance industry 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.
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Department of Labor regulation defining fiduciary could cause changes to the manner in which we deliver products and services as well as changes in nature and amount of compensation and fees.
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On April 8, 2016, the DOL released the DOL Fiduciary Rule, which, when effective, will substantially expand the range of activities that would be considered to be fiduciary investment advice under ERISA and the Internal Revenue Code. The DOL Fiduciary Rule provides for a phased implementation of the provisions of this new regulation, the first of which will be effective on April 10, 2017, with full implementation by January 1, 2018. Under the DOL Fiduciary Rule, the investment-related information and support that our advisors and employees may provide to plan sponsors, participants and IRA holders on a non-fiduciary basis will be limited beyond what is allowed under the current law. As a result, changes to the methods that we use to (i) deliver products and services, and (ii) pay and receive compensation for our investment-related products and services may be required, which may impact sales or margins. In addition, to the extent that advisors with our affiliated retail broker-dealers (LFN) provide fiduciary investment advice as defined in the DOL Fiduciary Rule, it could expose those broker-dealers and their advisors to additional risk of legal liability in connection with that advice, which ultimately impacts us.
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As of the date of this filing, President Trump directed the DOL to prepare an updated economic and legal analysis on whether the DOL Fiduciary Rule (i) has harmed or is likely to harm investors due to a reduction of Americans’ access to certain retirement savings offerings, retirement product structures, retirement savings information or related advice, (ii) has resulted in dislocations or disruptions within the retirement services industry that may adversely affect investors or retirees and (iii) is likely to cause an increase in litigation and an increase in prices that investors or retirees must pay to gain access to retirement services. This analysis may result in an implementation delay beyond the April 10, 2017, date.
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Changes in U.S. federal income tax law could impact our tax costs and the products that we sell.
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Changes to the Internal Revenue Code, the issuance of administrative rulings or court decisions could increase our effective tax rate, make our products less desirable and lower our net income on both a statutory accounting and GAAP basis. For example, the Republican members of the House Ways and Means Committee released “A Better Way, Our Vision for a Confident America” on June 24, 2016, which provides an outline for comprehensive tax reform. While, at this point, we cannot predict the likelihood of tax reform occurring in 2017 or beyond, both President Trump and key members of Congress have indicated that comprehensive tax reform is a high priority for the new Administration. If comprehensive tax reform legislation moves forward, there may be an impact to the life insurance company tax regime.
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Current discussions focus on three major changes: (i) lowering the corporate and individual tax rates and reducing the number of tax brackets, (ii) moving towards a cash-flow based system of taxation for corporations and other businesses and (iii) reforming the international tax regime by moving to a territorial system of international taxation. However, none of the proposals being discussed include sufficient detail to understand their full effect. Based on the detail that has been provided, these 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, 2016, included a tax benefit for the separate account dividends-received deduction benefit of $182 million relating to the 2016 tax year.
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In addition, should the current proposals move forward, they could change the manner in which we deduct policy acquisition expenses, impose limitations on the deductibility of interest expense and the availability of net operating loss deductions and repeal the corporate Alternative Minimum Tax. These and other changes have been proposed in the context of tax simplification and as part of a plan to reduce the statutory corporate tax rate from a current rate of 35% to a rate of 20%. At this point, it is impossible to predict the enactment of any of the proposals, whether as part of a comprehensive tax reform act or as discrete legislative changes. We continue to closely monitor developments related to potential changes in the tax law and assess, when possible, the potential impact to both our earnings and the products we sell.
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Legal and regulatory actions are inherent in our businesses and could result in financial losses or harm our businesses.
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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.
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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.
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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; 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.
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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 throughout 2017, as will the rulemaking process. The ultimate impact of these provisions on our businesses (including product offerings), results of operations and liquidity and capital resources is currently indeterminable.
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Changes in accounting standards issued by the Financial Accounting Standards Board or other standard-setting bodies may adversely affect our financial statements.
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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.
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Specifically, the FASB is working on a project that could result in significant changes to how we account for and report our insurance contracts 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.
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Our domestic insurance subsidiaries are subject to SAP. Any changes in the method of calculating reserves for our life insurance and annuity products under SAP may result in increased reserve requirements.
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The NAIC continues to review the statutory accounting and capital requirements for variable annuities for potential changes with assistance from Oliver Wyman. Additional testing of these potential changes is expected to occur during 2017. Once any changes are finalized by the NAIC, the resulting new variable annuity framework could result in changes in reserve and/or capital requirements and statutory surplus and could impact the volatility of those item(s).
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The NAIC is evaluating changes to the C-1 (asset default) capital charges used in the NAIC RBC formula. Once any changes are finalized by the NAIC, it may impact the level of the C-1 related RBC we are required to hold.
Anti-takeover provisions could delay, deter or prevent our change in control, even if the change in control would be beneficial to LNC shareholders.
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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, unless certain price thresholds are met.
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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.
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Market Conditions
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Weak conditions in the global capital markets and the economy generally may materially adversely affect our business and results of operations.
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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, slowing of global growth, continued impact of falling global energy and other commodity prices, 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.
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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.
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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.
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Interest rate fluctuations and/or a sustained period of low interest rates could negatively affect our profitability. Some of our products, principally fixed annuities and UL, including IUL and linked-benefit UL, 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 addition, low rates increase the cost of providing variable annuity living benefit guarantees, which could negatively affect our variable annuity profitability.
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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, 2016, 41% of our annuities business, 88% of our retirement plan services business and 95% 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 forecasts point toward short-term rates likely moving above 1% at the end of 2017. For additional information on interest rate risks, see “Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk.”
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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.
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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.
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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.
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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.
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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 had unlocked our reversion to the mean (“RTM”) assumption in the corridor as of December 31, 2016, we would have recorded favorable unlocking of approximately $110 million, pre-tax, for our Annuities segment and approximately $20 million, pre-tax, for our Retirement Plan Services and Life Insurance segments, respectively. 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.
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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.
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Certain of our variable annuity products include optional 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 related 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. The benefit ratio approach takes into account, among other things, the present value of 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.
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Both the level of expected payments and expected total assessments used in calculating the benefit reserves 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 or reinsurance 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.
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Liquidity and Capital Position
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Adverse capital and credit market conditions may affect our ability to meet liquidity needs, access to capital and cost of capital.
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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.
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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.
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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.
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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.
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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 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 lesser 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.
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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.
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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.
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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.
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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.
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A decrease in the capital and surplus of our insurance subsidiaries may result in a downgrade to our credit and insurer financial strength ratings.
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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 obtain reserve relief, 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 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.
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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.
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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.
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We have a $2.5 billion unsecured facility, which expires on June 30, 2021. 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.
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We rely on our credit facilities as a potential source of liquidity. We also use the credit facility as a potential backstop to provide variable annuity statutory reserve credit. While our variable annuity hedge assets have normally exceeded the statutory reserves, in certain severely stressed market conditions, it is possible that the hedge assets could be less than the statutory reserve. Our credit facility is available to provide reserve credit to LNL in such a case. If we were unable to access our facility in such circumstances, it could materially impact LNL’s capital position. 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.
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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.
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Assumptions and Estimates
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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.
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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.
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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.
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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.
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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.
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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, 2016, 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.
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In January 2017, the FASB issued amendments to the goodwill impairment accounting guidance. For more information regarding this new accounting standard, see “ASU 2017-04, Simplifying the Test for Goodwill Impairment” in Note 2.
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For more information on goodwill, see “Critical Accounting Policies and Estimates - Goodwill and Other Intangible Assets” in the MD&A and Note 10.
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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, 2016, we had a deferred tax asset of $1.8 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.
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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.
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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.
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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.
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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 change 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 change to realized gain (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.
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In June 2016, the FASB issued amendments to the accounting guidance for measuring credit losses on financial instruments. For more information regarding the new accounting standard, see “ASU 2016-13, Measurement of Credit Losses on Financial Instruments” in Note 2.
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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.
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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.
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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. 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).
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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.
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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.
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Significant adverse mortality experience may result in the loss of, or higher prices for, reinsurance.
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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.
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Catastrophes may adversely impact liabilities for contract holder claims.
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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.
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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.
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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.
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Operational Matters
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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.
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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.
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We face risks of non-collectability of reinsurance and increased reinsurance rates, which could materially affect our results of operations.
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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, 2016, we ceded $288.0 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, 2016, we had $5.3 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, $2.1 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 $2.6 billion as of December 31, 2016. Furthermore, we hold trading securities to support the $495 million of funds withheld liabilities related to the Swiss Re treaties for which we would have the right of offset to the corresponding reinsurance receivables in the event of a default by Swiss Re.
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The balance of the reinsurance is due from a diverse group of reinsurers. The collectability 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, LOCs 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.
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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.
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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.
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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.
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We may not be able to protect our intellectual property and may be subject to infringement claims.
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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.
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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.
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Our information systems may experience interruptions or breaches in security and a failure of disaster recovery systems could result in a loss or disclosure of confidential information, damage to our reputation and impairment of our ability to conduct business effectively.
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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. Although hackers have attempted and continue to try to infiltrate our computer systems, to date, we have not had a material security breach. While we employ a robust and tested information security program, given the increasing sophistication of cyberattacks, a cyberattack could occur and persist for an extended period of time without detection. There can be no assurance that any such failure, interruption or security breach will not occur or, if any does occur, that it will be detected in a timely manner or that it can be sufficiently remediated.
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In the event of a disaster such as a natural catastrophe, epidemic, industrial accident, blackout, computer virus, terrorist attack, cyberattack or war, unanticipated problems with our disaster recovery systems could have a material adverse impact on our ability to conduct business and on our results of operations and financial condition, particularly if those problems affect our computer-based data processing, transmission, storage and retrieval systems and destroy valuable data. In addition, in the event that a significant number of our managers were unavailable following a disaster, our ability to effectively conduct business could be severely compromised. These interruptions also may interfere with our suppliers’ ability to provide goods and services and our employees’ ability to perform their job responsibilities.
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The failure of our computer systems and/or our disaster recovery plans for any reason could cause significant interruptions in our operations and result in a failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to our customers. 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.
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Although we conduct due diligence, negotiate contractual provisions and, in many cases, conduct periodic reviews of our vendors, distributors, and other third parties that provide operational or information technology services to us to confirm compliance with our information security standards, the failure of such third parties’ computer systems and/or their disaster recovery plans for any reason might cause significant interruptions in our operations and result in a failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to our customers. Such a failure could harm our reputation, subject us to regulatory sanctions and legal claims, lead to a loss of customers and revenues and otherwise adversely affect our business and financial results. While we maintain cyber liability insurance that provides both third-party liability and first party liability coverages, our insurance may not be sufficient to protect us against all losses.
﻿
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, 2016, 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, and May 17, 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, 2016, we held statutory reserves of $5.9 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 LOCs at least equal to the relevant statutory reserves. Under the LNL reinsurance arrangement, we held approximately $3.5 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 $1.6 billion of statutory reserves as of December 31, 2016. 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 $761 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, 2016, 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, 2016.
﻿
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 46% 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 OCI.
﻿
Investments not carried at fair value on our consolidated financial statements, principally, mortgage loans, policy loans and real estate, may have fair values that 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, hedge funds 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 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.
﻿
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, 2016, LNC and our subsidiaries owned or leased approximately 2.7 million square feet of office and other space. We leased 0.1 million square feet of office space in Philadelphia, Pennsylvania, which includes space 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, and 0.1 million square feet of office space in Atlanta, Georgia, primarily for our Group Protection segment. An additional 0.4 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 2016. This discussion regarding properties does not include information on field offices and 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 17, 2017, 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).
﻿
						
						
						
						
Lisa M. Buckingham
						
						
Executive Vice President, Chief Human Resources Officer (since March 2011). Senior Vice President, Chief Human Resources Officer (December 2008 - March 2011).
﻿
						
						
						
						
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).
﻿
						
						
						
						
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).
﻿
						
						
						
						
Wilford H. Fuller
						
						
President, Annuity Solutions (since March 2015). President, Lincoln Financial Network (2) (since October 2012). Executive Vice President (since March 2011). President and CEO, Lincoln Financial Distributors (2) (since February 2009).
﻿
						
						
						
						
Kirkland L. Hicks
						
						
Executive Vice President and General Counsel (since December 2015). Vice President, General Counsel and Secretary, Towers Watson (November 2012 - November 2015). Chair, Diversity and Inclusion Counsel for the Americas, Towers Watson (July 2011 - October 2012). Managing Counsel-Commercial, Americas, Towers Watson (January 2010 - November 2012).
﻿
						
						
						
						
Mark E. Konen
						
						
President, Insurance and Retirement Solutions (since July 2008 and February 2009, respectively). Executive Vice President (since March 2011). President, Individual Markets (April 2006 - July 2008).
﻿
						
						
						
						
Kenneth S. Solon
						
						
Executive Vice President, Chief Information Officer and Head of Administrative Services (since January 2016). Senior Vice President, Head of Technology (March 2015 - December 2015). Senior Vice President, Head of Shared Services and Technology (January 2010 - March 2015).
﻿
(1)Age shown is based on the officer’s age as of February 17, 2017.
(2)Denotes an affiliate of LNC.
﻿
﻿
﻿
PART II
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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 February 17, 2017, the number of shareholders of record of our common stock was 7,170. 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 19 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 - Restrictions 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:
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﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
﻿
1st Qtr
						
2nd Qtr
						
3rd Qtr
						
4th Qtr
						
						
						
						
						
						
						
						
						
						
						
						
						
High
$
49.51 				
						
$
46.69 				
						
$
48.48 				
						
$
69.49 				
						
Low
						
30.39 				
						
						
35.27 				
						
						
36.00 				
						
						
46.62 				
						
Dividend declared
						
0.25 				
						
						
0.25 				
						
						
0.25 				
						
						
0.29 				
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
High
$
60.84 				
						
$
62.08 				
						
$
61.20 				
						
$
57.54 				
						
Low
						
49.83 				
						
						
55.75 				
						
						
45.77 				
						
						
45.56 				
						
Dividend declared
						
0.20 				
						
						
0.20 				
						
						
0.20 				
						
						
0.25 				
						
﻿
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, 2016 (dollars in millions, except per share data):
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﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
(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)
						
10/1/16 - 10/31/16
						
						
-
						
$
-
						
						
-
						
$
				
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
11/1/16 - 11/30/16
						
						
2,155,767 				
						
						
61.51 				
						
						
2,155,767 				
						
						
				
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
12/1/16 - 12/31/16
						
						
1,079,300 				
						
						
65.86 				
						
						
1,079,300 				
						
						
				
						
﻿
(1)
Of the total number of shares purchased, no shares were received in connection with the exercise of stock options and related taxes. For the quarter ended December 31, 2016, there were 3,235,067 shares purchased as part of publicly announced plans or programs.
(2)
On May 26, 2016, 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, 2016, our remaining security repurchase authorization was $78 million, which reflects the purchases of common stock shown in the table above and the repurchase of a portion of our outstanding debt securities pursuant to our debt tender offer commenced on December 5, 2016. On January 24, 2017, our Board of Directors authorized an increase in our securities repurchase authorization, bringing the total aggregate repurchase authorization to $1.0 billion. 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
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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, 2016, compared with December 31, 2015, and the results of operations in 2016 and 2015, compared with the immediately preceding year of Lincoln National Corporation and its consolidated subsidiaries. Unless otherwise stated or the context otherwise requires, “LNC,” “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 accordance with United States of America generally accepted accounting principles (“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 21. 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
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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 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, our ability to conduct business and our captive reinsurance arrangements as well as restrictions on revenue sharing and 12b-1 payments, the potential for U.S. federal tax reform and the effect of the Department of Labor’s (“DOL”) regulation defining fiduciary;
·
Actions taken by reinsurers to raise 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 continuing promulgation and implementation of rules and regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act on us and the economy, and 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 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 from cyberattacks or other breaches of our data security systems;
·
The effect of acquisitions and divestitures, restructurings, product withdrawals and other unusual items;
·
The adequacy and collectability 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
·
The unanticipated 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 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, 2016, 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 (2013 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, 2016, 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, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 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, 2016, 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, 2016 and 2015, 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, 2016 and our report dated February 23, 2017, expressed an unqualified opinion thereon.
﻿
﻿
﻿
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
February 23, 2017
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, 2016 and 2015, 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, 2016. 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, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, 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.
﻿
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, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 23, 2017, expressed an unqualified opinion thereon.
﻿
﻿
﻿
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
February 23, 2017
﻿
﻿
﻿
﻿
﻿
﻿
﻿
			 		
﻿
			 		
See accompanying Notes to Consolidated Financial Statements
			
		
﻿
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: 2016 - $84,287; 2015 - $81,993)
						
$
89,013 				
						
						
$
84,964 				
						
Variable interest entities’ fixed maturity securities (amortized cost: 2016 - $200; 2015 - $596)
						
						
				
						
						
						
				
						
Equity securities (cost: 2016 - $260; 2015 - $226)
						
						
				
						
						
						
				
						
Trading securities
						
						
1,712 				
						
						
						
1,854 				
						
Mortgage loans on real estate
						
						
9,889 				
						
						
						
8,678 				
						
Real estate
						
						
				
						
						
						
				
						
Policy loans
						
						
2,451 				
						
						
						
2,545 				
						
Derivative investments
						
						
				
						
						
						
1,537 				
						
Other investments
						
						
2,230 				
						
						
						
1,778 				
						
Total investments
						
						
106,721 				
						
						
						
102,208 				
						
Cash and invested cash
						
						
2,722 				
						
						
						
3,146 				
						
Deferred acquisition costs and value of business acquired
						
						
9,134 				
						
						
						
9,510 				
						
Premiums and fees receivable
						
						
				
						
						
						
				
						
Accrued investment income
						
						
1,062 				
						
						
						
1,070 				
						
Reinsurance recoverables
						
						
5,265 				
						
						
						
5,623 				
						
Funds withheld reinsurance assets
						
						
				
						
						
						
				
						
Goodwill
						
						
2,273 				
						
						
						
2,273 				
						
Other assets
						
						
5,006 				
						
						
						
3,454 				
						
Separate account assets
						
						
128,397 				
						
						
						
123,619 				
						
Total assets
						
$
261,627 				
						
						
$
251,908 				
						
﻿
						
						
						
						
						
						
						
						
LIABILITIES AND STOCKHOLDERS’ EQUITY
						
						
						
						
						
						
						
						
Liabilities
						
						
						
						
						
						
						
						
Future contract benefits
						
$
21,576 				
						
						
$
20,708 				
						
Other contract holder funds
						
						
78,903 				
						
						
						
77,362 				
						
Long-term debt
						
						
5,345 				
						
						
						
5,553 				
						
Reinsurance related embedded derivatives
						
						
				
						
						
						
				
						
Funds withheld reinsurance liabilities
						
						
1,976 				
						
						
						
				
						
Deferred gain on business sold through reinsurance
						
						
				
						
						
						
				
						
Payables for collateral on investments
						
						
4,995 				
						
						
						
4,657 				
						
Variable interest entities’ liabilities
						
						
-
						
						
						
				
						
Other liabilities
						
						
5,880 				
						
						
						
5,565 				
						
Separate account liabilities
						
						
128,397 				
						
						
						
123,619 				
						
Total liabilities
						
						
247,149 				
						
						
						
238,291 				
						
﻿
						
						
						
						
						
						
						
						
Contingencies and Commitments (See Note 13)
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
Stockholders’ Equity
						
						
						
						
						
						
						
						
Preferred stock - 10,000,000 shares authorized
						
						
-
						
						
						
-
						
Common stock - 800,000,000 shares authorized; 226,335,105 and 243,835,893 shares
						
						
						
						
						
						
						
						
issued and outstanding as of December 31, 2016, and December 31, 2015, respectively
						
						
5,869 				
						
						
						
6,298 				
						
Retained earnings
						
						
7,043 				
						
						
						
6,474 				
						
Accumulated other comprehensive income (loss)
						
						
1,566 				
						
						
						
				
						
Total stockholders’ equity
						
						
14,478 				
						
						
						
13,617 				
						
Total liabilities and stockholders’ equity
						
$
261,627 				
						
						
$
251,908 				
						
﻿
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
$
2,987 				
						
$
3,246 				
						
$
2,988 				
						
Fee income
						
5,244 				
						
						
5,045 				
						
						
4,673 				
						
Net investment income
						
4,874 				
						
						
4,827 				
						
						
4,859 				
						
Realized gain (loss):
						
						
						
						
						
						
						
						
						
Total other-than-temporary impairment losses on securities
						
(145 				
)
						
(80 				
)
						
(26 				
)
Portion of loss recognized in other comprehensive income
						
				
						
						
				
						
						
				
						
Net other-than-temporary impairment losses on securities recognized in earnings
						
(102 				
)
						
(54 				
)
						
(16 				
)
Realized gain (loss), excluding other-than-temporary impairment losses on securities
						
(237 				
)
						
(97 				
)
						
				
						
Total realized gain (loss)
						
(339 				
)
						
(151 				
)
						
-
						
Amortization of deferred gain on business sold through reinsurance
						
				
						
						
				
						
						
				
						
Other revenues
						
				
						
						
				
						
						
				
						
Total revenues
						
13,330 				
						
						
13,572 				
						
						
13,554 				
						
Expenses
						
						
						
						
						
						
						
						
						
Interest credited
						
2,564 				
						
						
2,508 				
						
						
2,532 				
						
Benefits
						
4,692 				
						
						
5,044 				
						
						
4,679 				
						
Commissions and other expenses
						
4,277 				
						
						
4,318 				
						
						
4,079 				
						
Interest and debt expense
						
				
						
						
				
						
						
				
						
Strategic digitization expense
						
				
						
						
-
						
						
-
						
Total expenses
						
11,872 				
						
						
12,142 				
						
						
11,557 				
						
Income (loss) from continuing operations before taxes
						
1,458 				
						
						
1,430 				
						
						
1,997 				
						
Federal income tax expense (benefit)
						
				
						
						
				
						
						
				
						
Income (loss) from continuing operations
						
1,192 				
						
						
1,154 				
						
						
1,514 				
						
Income (loss) from discontinued operations, net of federal income taxes
						
-
						
						
-
						
						
				
						
Net income (loss)
						
1,192 				
						
						
1,154 				
						
						
1,515 				
						
Other comprehensive income (loss), net of tax
						
						
						
						
						
						
						
						
						
Comprehensive income (loss)
						
						
						
						
						
						
						
						
						
Unrealized investment gains (losses)
						
				
						
						
(2,229 				
)
						
1,591 				
						
Foreign currency translation adjustment
						
(22 				
)
						
(2 				
)
						
				
						
Funded status of employee benefit plans
						
				
						
						
(20 				
)
						
(60 				
)
Total other comprehensive income (loss), net of tax
						
				
						
						
(2,251 				
)
						
1,533 				
						
Comprehensive income (loss)
$
1,913 				
						
$
(1,097 				
)
$
3,048 				
						
﻿
						
						
						
						
						
						
						
						
						
Earnings (Loss) Per Common Share - Basic
						
						
						
						
						
						
						
						
						
Income (loss) from continuing operations
$
5.09 				
						
$
4.60 				
						
$
5.81 				
						
Income (loss) from discontinued operations
						
-
						
						
-
						
						
-
						
Net income (loss)
$
5.09 				
						
$
4.60 				
						
$
5.81 				
						
﻿
						
						
						
						
						
						
						
						
						
Earnings (Loss) Per Common Share - Diluted
						
						
						
						
						
						
						
						
						
Income (loss) from continuing operations
$
5.03 				
						
$
4.51 				
						
$
5.67 				
						
Income (loss) from discontinued operations
						
-
						
						
-
						
						
-
						
Net income (loss)
$
5.03 				
						
$
4.51 				
						
$
5.67 				
						
﻿
						
						
						
						
						
						
						
						
						
Cash Dividends Declared Per Common Share
$
1.04 				
						
$
0.85 				
						
$
0.68 				
						
﻿
See accompanying Notes to Consolidated Financial Statements
			
		
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)
﻿
﻿
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
﻿
For the Years Ended December 31,
						
﻿
						
						
						
﻿
						
						
						
						
						
						
						
						
						
Common Stock
						
						
						
						
						
						
						
						
						
Balance as of beginning-of-year
$
6,298 				
						
$
6,622 				
						
$
6,876 				
						
Stock compensation/issued for benefit plans
						
				
						
						
				
						
						
				
						
Retirement of common stock/cancellation of shares
						
(499 				
)
						
(412 				
)
						
(323 				
)
Balance as of end-of-year
						
5,869 				
						
						
6,298 				
						
						
6,622 				
						
﻿
						
						
						
						
						
						
						
						
						
Retained Earnings
						
						
						
						
						
						
						
						
						
Balance as of beginning-of-year
						
6,474 				
						
						
6,022 				
						
						
5,013 				
						
Net income (loss)
						
1,192 				
						
						
1,154 				
						
						
1,515 				
						
Retirement of common stock
						
(380 				
)
						
(488 				
)
						
(327 				
)
Common stock dividends declared
						
(243 				
)
						
(214 				
)
						
(179 				
)
Balance as of end-of-year
						
7,043 				
						
						
6,474 				
						
						
6,022 				
						
﻿
						
						
						
						
						
						
						
						
						
Accumulated Other Comprehensive Income (Loss)
						
						
						
						
						
						
						
						
						
Balance as of beginning-of-year
						
				
						
						
3,096 				
						
						
1,563 				
						
Other comprehensive income (loss), net of tax
						
				
						
						
(2,251 				
)
						
1,533 				
						
Balance as of end-of-year
						
1,566 				
						
						
				
						
						
3,096 				
						
Total stockholders’ equity as of end-of-year
$
14,478 				
						
$
13,617 				
						
$
15,740 				
						
﻿
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)
$
1,192 				
						
$
1,154 				
						
$
1,515 				
						
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
						
				
						
						
(119 				
)
						
(517 				
)
Trading securities purchases, sales and maturities, net
						
				
						
						
				
						
						
				
						
Change in premiums and fees receivable
						
(54 				
)
						
				
						
						
(53 				
)
Change in accrued investment income
						
				
						
						
(21 				
)
						
(20 				
)
Change in future contract benefits and other contract holder funds
						
(1,024 				
)
						
				
						
						
				
						
Change in reinsurance related assets and liabilities
						
				
						
						
(252 				
)
						
(9 				
)
Change in federal income tax accruals
						
				
						
						
				
						
						
				
						
Realized (gain) loss
						
				
						
						
				
						
						
-
						
Amortization of deferred gain on business sold through reinsurance
						
(73 				
)
						
(74 				
)
						
(74 				
)
Proceeds from reinsurance recapture
						
-
						
						
-
						
						
				
						
Other
						
				
						
						
				
						
						
				
						
Net cash provided by (used in) operating activities
						
1,272 				
						
						
2,243 				
						
						
2,526 				
						
﻿
						
						
						
						
						
						
						
						
						
Cash Flows from Investing Activities
						
						
						
						
						
						
						
						
						
Purchases of available-for-sale securities
						
(11,113 				
)
						
(9,429 				
)
						
(8,636 				
)
Sales of available-for-sale securities
						
2,959 				
						
						
1,351 				
						
						
1,118 				
						
Maturities of available-for-sale securities
						
5,364 				
						
						
4,408 				
						
						
5,212 				
						
Purchases of alternative investments
						
(302 				
)
						
(324 				
)
						
(370 				
)
Sales and repayments of alternative investments
						
				
						
						
				
						
						
				
						
Issuance of mortgage loans on real estate
						
(2,155 				
)
						
(1,959 				
)
						
(1,374 				
)
Repayment and maturities of mortgage loans on real estate
						
				
						
						
				
						
						
1,009 				
						
Issuance and repayment of policy loans, net
						
				
						
						
				
						
						
				
						
Net change in collateral on investments and derivatives
						
				
						
						
				
						
						
1,052 				
						
Proceeds from sale of subsidiary/business
						
-
						
						
				
						
						
-
						
Other
						
(106 				
)
						
(78 				
)
						
(62 				
)
Net cash provided by (used in) investing activities
						
(3,666 				
)
						
(4,223 				
)
						
(1,805 				
)
﻿
						
						
						
						
						
						
						
						
						
Cash Flows from Financing Activities
						
						
						
						
						
						
						
						
						
Payment of long-term debt, including current maturities
						
(600 				
)
						
(250 				
)
						
(500 				
)
Issuance of long-term debt, net of issuance costs
						
				
						
						
				
						
						
-
						
Payment related to early extinguishment of debt
						
(59 				
)
						
-
						
						
-
						
Proceeds from sales leaseback transaction
						
				
						
						
				
						
						
				
						
Deposits of fixed account values, including the fixed portion of variable
						
10,053 				
						
						
10,769 				
						
						
10,388 				
						
Withdrawals of fixed account values, including the fixed portion of variable
						
(5,505 				
)
						
(6,126 				
)
						
(5,840 				
)
Transfers to and from separate accounts, net
						
(1,308 				
)
						
(2,474 				
)
						
(2,509 				
)
Common stock issued for benefit plans and excess tax benefits
						
				
						
						
				
						
						
				
						
Repurchase of common stock
						
(879 				
)
						
(900 				
)
						
(650 				
)
Dividends paid to common stockholders
						
(238 				
)
						
(204 				
)
						
(170 				
)
Net cash provided by (used in) financing activities
						
1,970 				
						
						
1,207 				
						
						
				
						
﻿
						
						
						
						
						
						
						
						
						
Net increase (decrease) in cash and invested cash
						
(424 				
)
						
(773 				
)
						
1,555 				
						
Cash and invested cash as of beginning-of-year
						
3,146 				
						
						
3,919 				
						
						
2,364 				
						
Cash and invested cash as of end-of-year
$
2,722 				
						
$
3,146 				
						
$
3,919 				
						
﻿
			 		
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 21 for additional details. The collective group of businesses uses “Lincoln Financial Group” as its marketing identity. Through our business segments, we sell a wide range of wealth protection, accumulation and retirement income products and solutions. These products include fixed and indexed annuities, variable annuities, universal life insurance (“UL”), variable universal life insurance (“VUL”), linked-benefit UL, indexed universal life insurance (“IUL”), term life insurance, employer-sponsored retirement plans and services, and group life, disability and dental.
﻿
Basis of Presentation
﻿
The accompanying 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.
﻿
Certain amounts reported in prior years’ consolidated financial statements have been reclassified to conform to the presentation adopted in the current year. Specifically, we reclassified cash flows from certain investing activities into their own respective line items within the Consolidated Statements of Cash Flows. Previously, these amounts were reported within purchases of other investments or sales or maturities of other investments line items, as applicable, within cash flows from investing activities. These reclassifications had no effect on net income (loss), net cash provided by (used in) investing activities, or stockholders’ equity for the prior years.
﻿
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, other-than-temporary impairment (“OTTI”) and 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 (“NPR”), 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:
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·
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;
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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
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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.
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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.
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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.
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Available-For-Sale Securities - Fair Valuation Methodologies and Associated Inputs
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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.
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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.
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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.
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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:
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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.
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Mortgage- and asset-backed securities (“ABS”) - 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”).
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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.
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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.
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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.
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AFS Securities - Evaluation for Recovery of Amortized Cost
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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 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.
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For our fixed maturity AFS securities (also referred to as “debt securities”), we generally consider the following to determine whether our debt securities with 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.
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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.
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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. 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.
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, that we use to determine the amount of a credit loss.
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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.
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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.
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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).
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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.
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When evaluating MBS and mortgage-related 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 the credit characteristics of borrowers, 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 mortgages 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.
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Trading Securities
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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.
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Alternative Investments
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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.
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Payables for Collateral on Investments
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When we enter into collateralized financing transactions on our investments, a liability is recorded equal to the cash or non-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.
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Mortgage Loans on Real Estate
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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.
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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 collectability of the loan. We resume accruing interest once a loan complies with all of its original terms or restructured terms. Mortgage loans deemed uncollectable 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).
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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.
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Policy Loans
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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.
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Real Estate
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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.
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Derivative Instruments
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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.
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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 AOCI 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.
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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 is carried at fair value with changes in fair value recognized in net income during the period of change.
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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.
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Cash and Invested Cash
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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
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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.
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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.
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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 30 to 40 years based on the expected lives of the contracts. Contract lives for fixed and variable deferred annuities are generally between 15 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.
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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 generally results in amortization less than 30 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.
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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.
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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).
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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. These assumptions include, but are not limited to, capital markets, 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.
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Reinsurance
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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.
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Goodwill
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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. 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).
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Other Assets and Other Liabilities
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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 issuance costs associated with line-of-credit arrangements, assets under capital leases 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, obligations under capital leases and other accrued expenses.
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Other assets and other liabilities on our Consolidated Balance Sheets include guaranteed living benefit (“GLB”) features and remaining guaranteed interest and similar contracts that are carried at fair value, which may be reported in either other assets or other liabilities. The fair value of these items represents approximate exit price including an estimate for our NPR. Certain of these features have elements of both insurance benefits and embedded derivatives. Through our hybrid accounting approach, for reserve calculation purposes we assign product cash flows to the embedded derivative or insurance portion of the reserves based on the life-contingent nature of the benefits. We classify these GLB reserves embedded derivatives in Level 3 within the hierarchy levels described above in “Fair Value Measurement.” We report the insurance portion of the reserves in future contract benefits.
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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.
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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. Certain assets on our Consolidated Balance Sheets are related to capital leases. These assets under capital leases are depreciated in a manner consistent with our current depreciation policy for owned assets. 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.
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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.
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Separate Account Assets and Liabilities
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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 may 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. The highest contract value is increased by purchase payments and is decreased by withdrawals subsequent to that anniversary date in the same proportion that withdrawals reduce the contract value.
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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 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).
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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 49 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, but are not limited to, assumptions for capital markets (e.g., implied volatilities, correlation among indices, risk-free swap curve, etc.), policyholder behavior (e.g., policy lapse, rider utilization, etc.), mortality, risk margins, maintenance 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.
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Future Contract Benefits and Other Contract Holder Funds
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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.
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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 1.25% to 12.75%. 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 in benefits on our Consolidated Statements of Comprehensive Income (Loss).
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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.
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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, 2016 and 2015, participating policies comprised less than 1% of the face amount of business in force, and dividend expenses were $59 million, $67 million and $64 million for the years ended December 31, 2016, 2015 and 2014, respectively.
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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.
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Certain of our variable annuity contracts reported within future contract benefits contain GLB reserves embedded derivatives, a portion of which may be reported in either other assets or other liabilities, and include guaranteed interest and similar contracts, that are carried at fair value on our Consolidated Balance Sheets, which represents approximate exit price including an estimate for our NPR. Certain of these features have elements of both insurance benefits and embedded derivatives. Through our hybrid accounting approach, for reserve calculation purposes we assign product cash flows to the embedded derivative or insurance portion of the reserves based on the life-contingent nature of the benefits. We classify these GLB reserves embedded derivatives items in Level 3 within the hierarchy levels described above in “Fair Value Measurement.” We report the insurance portion of the reserves in future contract benefits.
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The fair value of our indexed annuity contracts is based on their approximate surrender values.
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Borrowed Funds
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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.
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Deferred Gain on Business Sold Through Reinsurance
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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.
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Contingencies and Commitments
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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.
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Fee Income
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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.
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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).
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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.
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For investment and interest-sensitive life insurance contracts, the amounts collected from contract holders are considered deposits and are not included in revenue.
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Insurance Premiums
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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.
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Net Investment Income
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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.
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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).
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Realized Gain (Loss)
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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.
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Other Revenues
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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, proceeds from reinsurance recaptures and communications sales recognized as earned, net of agency and representative commissions.
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Interest Credited
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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 2014 through 2016 ranged from 1% to 10%.
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Benefits
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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.
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Strategic Digitization Expense
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Strategic digitization expense consists primarily of costs related to our enterprise-wide digitization initiative.
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Pension and Other Postretirement Benefit Plans
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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. The mortality assumption is based on actual and anticipated plan experience, determined using acceptable actuarial methods. 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.
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Stock-Based Compensation
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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. In accordance with our early adoption of Accounting Standards Update (“ASU”) 2016-09, Improvements to Employee Share-Based Payment Accounting, we have elected to continue applying an estimated forfeiture rate to our accrual of compensation costs. Stock-based compensation expense is reflected in commissions and other expenses on our Consolidated Statements of Comprehensive Income (Loss).
Interest and Debt Expense
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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.
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Income Taxes
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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.
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Discontinued Operations
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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, if the disposal represents a strategic shift that has, or will have, a major effect on our consolidated financial condition and results of operations.
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Foreign Currency Translation
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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 AOCI, a component of stockholders’ equity.
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Earnings Per Share
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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. Effective October 1, 2016, we early adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. We have updated certain previously reported interim results and metrics as of January 1, 2016, in accordance with the new guidance. The adoption of this ASU did not have a material effect on our diluted EPS calculation.
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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.
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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.
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2. New Accounting Standards
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Adoption of New Accounting Standards
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The following table provides a description of our adoption of new ASUs issued by the FASB and the impact of the adoption on our financial statements:
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Standard
Description
Date of Adoption
Effect on Financial Statements or Other Significant Matters
ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
This standard changed the requirements for reporting discontinued operations. The disposal of a component of an entity must be reported as a discontinued operation if the disposal represents a strategic shift that has a major effect on an entity’s operations and financial results. The amendments also require entities to provide new disclosures about a disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation.
October 1, 2014
We applied the guidance in this standard to our sale of Lincoln Financial Media Company (“LFM”) in the fourth quarter of 2014. For more information regarding our sale of LFM, see Note 3.
ASU 2014-16, Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity
This standard clarifies that when considering the nature of the host contract in a hybrid financial instrument issued in the form of a share; an entity must consider all of the stated and implied substantive terms of the hybrid instrument, including the embedded derivative feature that is being considered for separate accounting from the host contract.
January 1, 2016
The adoption of this ASU did not have an effect on our consolidated financial condition or results of operations.
ASU 2015-02, Amendments to the Consolidation Analysis
This standard addresses consolidation accounting guidance related to limited partnerships, limited liability companies and securitization structures. The new standard includes changes to existing consolidation models that eliminates the presumption that a general partner should consolidate a limited partnership, clarifies when fees paid to a decision maker should be a factor in the VIE consolidation evaluation and reduces the VIE consolidation models from two to one by eliminating the indefinite deferral for certain investment funds.
January 1, 2016
The adoption of this ASU did not have an effect on our consolidated financial condition or results of operations. We have provided additional financial statement disclosures related to our limited partnerships in Note 4.
ASU 2015-03,
Simplifying the Presentation of Debt Issuance Costs
Debt issuance costs were previously recognized as a deferred charge in the balance sheet. This amendment requires the presentation of debt issuance costs in the balance sheet as a direct deduction from the carrying amount of that debt. This standard does not change the recognition and measurement requirements related to debt issuance costs. Retrospective application of the amendments in this ASU is required.
January 1, 2016
We have retrospectively reclassified approximately $29 million of our debt issuance costs from other assets to long-term debt on the Consolidated Balance Sheets as of December 31, 2015. See ASU 2015-15 for debt issuance costs associated with line-of-credit arrangements.
ASU 2015-05,
Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
This standard clarifies the accounting requirements for recognizing cloud computing arrangements. Software licenses purchased through cloud computing arrangements should be accounted for in a manner consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the arrangement should be accounted for as a service contract.
January 1, 2016
The adoption of this ASU did not have an effect on our consolidated financial condition or results of operations.
Standard
Description
Date of Adoption
Effect on Financial Statements or Other Significant Matters
ASU 2015-07, Disclosures for Certain Investments That Calculate Net Asset Value per Share (or its Equivalent)
This standard removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. In addition, the standard removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient, and limits those disclosures only to those investments for which the practical expedient has been elected.
January 1, 2016
The adoption of this ASU did not result in a change to our financial statement disclosures.
ASU 2015-09, Disclosures about Short-Duration Contracts
This standard enhances the disclosure requirements related to short-duration insurance contracts. The new disclosure requirements focus on providing users of financial statements with more transparent information related to short-duration contracts about an insurance entity’s (1) initial claims estimates and subsequent adjustments to those estimates, (2) methodologies and judgments in estimating claims and (3) timing, frequency and severity of claims. Retrospective application is required for each comparative period presented, except for those requirements that apply only to the current period.
Annual periods beginning January 1, 2016
The adoption of this ASU did not result in a change to our financial statements as we determined these additional disclosures are not material to our financial statements.
ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements
Given the absence of authoritative accounting guidance in ASU 2015-03 related to debt issuance costs for line-of-credit arrangements, this standard clarifies that the Securities and Exchange Commission (SEC) Staff would not object to an entity deferring and presenting these debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement.
January 1, 2016
The adoption of this ASU did not have an effect on our consolidated financial condition or results of operations.
ASU 2016-09, Improvements to Employee Share-Based Payment Accounting
These amendments require all income tax effects of awards to be recognized in the income statement when the awards vest or are settled rather than through additional paid-in capital in the equity section of the balance sheet. The amendments also permit an employer to repurchase an employee’s shares at the maximum statutory tax rate in the employee’s applicable jurisdiction for tax withholding purposes without triggering liability accounting. Finally, the amendments permit entities to make a one-time accounting policy election to account for forfeitures as they occur. Specific adoption methods depend on the issue being adopted and range from prospective to retrospective adoption. Early adoption is permitted; however, all amendments must be adopted in the same period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.
Early adopted as of October 1, 2016
We recognized an income tax benefit of $8 million in federal income tax expense (benefit) in our Consolidated Statements of Comprehensive Income (Loss) for the year ended December 31, 2016. The income tax benefit includes a reclassification of $3 million from additional paid-in capital for the nine months ended September 30, 2016, as the transition guidance requires us to reflect any adjustment as of January 1, 2016. For more information, see “Note 1 - Earnings Per Share.”
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Future Adoption of New Accounting Standards
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The following table provides a description of future adoptions of new accounting standards that may have an impact on our financial statements when adopted:
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Standard
Description
Projected Date of Adoption
Effect on Financial Statements or Other Significant Matters
ASU 2014-09, Revenue from Contracts with Customers & ASU 2015-14, Revenue from Contracts with Customers; Deferral of the Effective Date
This standard establishes the core principle of recognizing revenue to depict the transfer of promised goods and services. The amendments define a five-step process that systematically identifies the various components of the revenue recognition process, culminating with the recognition of revenue upon satisfaction of an entity’s performance obligation. Retrospective application is required. After performing extensive outreach, the FASB decided to delay the effective date of ASU 2014-09 for one year. Early application is permitted but only for annual reporting periods beginning after December 15, 2016.
January 1, 2018
Our primary sources of revenues are recognized in accordance with ASC Topic 944, Financial Services - Insurance (“Topic 944”). All contracts within the scope of Topic 944 are excluded from the scope of ASU 2014-09. The initial phase of our adoption project indicates the revenue we report in other revenues in our Consolidated Statements of Comprehensive Income (Loss) is our primary revenue source that is within scope of this ASU. We continue to evaluate the impact of adopting this ASU on our revenue recognition for contracts within scope.
ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities
These amendments require, among other things, the fair value measurement of investments in equity securities and certain other ownership interests that do not result in consolidation and are not accounted for under the equity method of accounting. The change in fair value of the impacted investments in equity securities must be recognized in net income. In addition, the amendments include certain enhancements to the presentation and disclosure requirements for financial assets and financial liabilities. Early adoption of the ASU is generally not permitted, except as defined in the ASU. The amendments should be adopted in the financial statements through a cumulative-effect adjustment to the beginning balance of retained earnings.
January 1, 2018
We hold equity securities classified as AFS securities that are currently measured at fair value with changes in fair value recognized through OCI. Upon adoption of this ASU, we will be required to recognize changes in fair value of our equity securities through net income. See Note 5 for details regarding our equity securities currently classified as AFS securities.
ASU 2016-02, Leases
This standard establishes a new accounting model for leases. Lessees will recognize most leases on the balance sheet as a right-of-use asset and a related lease liability. The lease liability is measured as the present value of the lease payments over the lease term with the right-of-use asset measured at the lease liability amount and including adjustments for certain lease incentives and initial direct costs. Lease expense recognition will continue to differentiate between finance leases and operating leases resulting in a similar pattern of lease expense recognition as under current GAAP. This ASU permits a modified retrospective adoption approach that includes a number of optional practical expedients that entities may elect upon adoption. Early adoption is permitted.
January 1, 2019
We are currently identifying all of our leases that will be within the scope of this standard; as such, we continue to evaluate the quantitative impact of adopting this ASU on our Consolidated Balance Sheets. Based on our initial assessment, we do not expect there to be a significant difference in our pattern of lease expense recognition under this ASU.
Standard
Description
Projected Date of Adoption
Effect on Financial Statements or Other Significant Matters
ASU 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships
The amendments clarify that a change in the counterparty to a derivative instrument identified in a hedging relationship in and of itself does not require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The ASU may be adopted prospectively or through a modified retrospective approach. Early adoption is permitted.
January 1, 2017
This amendment is not expected to have a material effect on our consolidated financial condition and results of operations.
ASU 2016-06, Contingent Put and Call Options in Debt Instruments
The amendments clarify the requirements for assessing whether contingent call and put options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. Upon adoption of this ASU, entities will be required to assess embedded call and put options solely in accordance with the four-step decision sequence that was developed by the FASB Derivatives Implementation Group. The ASU should be adopted based on a modified retrospective basis for existing debt instruments. Early adoption is permitted.
January 1, 2017
This amendment is not expected to have a material effect on our consolidated financial condition and results of operations.
ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
These amendments clarify the implementation guidance on principal versus agent considerations in ASU 2014-09, including how an entity should identify the unit of accounting for the principal versus agent evaluation. In addition, the amendments clarify how to apply the control principle to certain types of arrangements, such as service transactions, by explaining what a principal controls before the good or service is transferred to the customer. Transition requirements are consistent with ASU 2014-09.
January 1, 2018
We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations. See comments under ASU 2014-09 for more information.
ASU 2016-10, Identifying Performance Obligations and Licensing
These amendments clarify, among other things, the accounting guidance in ASU 2014-09 regarding how an entity will determine whether promised goods or services are separately identifiable, which is an important consideration in determining whether to account for goods or services as a separate performance obligation. Transition requirements are consistent with ASU 2014-09.
January 1, 2018
We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations. See comments under ASU 2014-09 for more information.
ASU 2016-12, Narrow Scope Improvements and Practical Expedients
The standard update amends the revenue recognition guidance in ASU 2014-09 related to transition, collectability, noncash consideration and the presentation of sales and other similar taxes. The amendments clarify that, for a contract to be considered completed at transition, substantially all of the revenue must have been recognized under current GAAP. The amendments also clarify how an entity should evaluate the collectability threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard’s contract criteria. Transition requirements are consistent with ASU 2014-09.
January 1, 2018
We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations. See comments under ASU 2014-09 for more information.
Standard
Description
Projected Date of Adoption
Effect on Financial Statements or Other Significant Matters
ASU 2016-13, Measurement of Credit Losses on Financial Instruments
These amendments adopt a new model to measure and recognize credit losses for most financial assets. The method used to measure estimated credit losses for AFS debt securities will be unchanged from current GAAP; however, the amendments require credit losses to be recognized through an allowance rather than as a reduction to the amortized cost of those debt securities. The amendments will permit entities to recognize improvements in credit loss estimates on AFS debt securities by reducing the allowance account immediately through earnings. The amendments will be adopted through a cumulative effect adjustment to the beginning balance of retained earnings as of the first reporting period in which the amendments are effective. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein.
January 1, 2020
We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations, with a primary focus on our fixed maturity securities (see Note 5). We currently reduce the amortized cost of the individual security when recognizing OTTI on these securities. Upon adoption of ASU 2016-13, we will no longer reduce the amortized cost of each individual security; rather we will establish a valuation allowance, and any declines or improvements in credit quality will be recognized through the valuation allowance.
ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments
These amendments clarify the classification of eight specific cash flow issues in an entity’s statement of cash flows where it was determined by the FASB that there is diversity in practice. Early adoption of the amendments is permitted, and retrospective transition is required for each period presented in the statement of cash flows.
January 1, 2018
We are currently evaluating these disclosure requirements and will amend classifications in our Consolidated Statements of Cash Flows upon adoption as applicable.
ASU 2016-16, Intra-Entity Asset Transfers Other Than Inventory
This amendment requires an entity to recognize current and deferred income taxes for an intra-entity asset transfer, other than inventory, when the transfer occurs, thereby eliminating the current GAAP exception that prohibits the recognition of income taxes until the asset has been sold to an outside party. Early adoption is permitted as of the beginning of the annual reporting period for which financial statements have not been issued.
January 1, 2018
We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations.
ASU 2016-18, Restricted Cash
This amendment requires that amounts generally described as restricted cash and restricted cash equivalents should be included within cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Early adoption is permitted using a retrospective transition method applied to each period presented.
January 1, 2018
We will provide these additional disclosures in our Consolidated Statements of Cash Flows upon the adoption date as applicable.
ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
These amendments clarify 13 issues related to the adoption of ASU 2014-09. The most significant issue of these amendments for us is the clarification that all contracts within the scope of Topic 944 are excluded from the scope of ASU 2014-09, rather than just insurance contracts as described in ASU 2014-09. Transition requirements are consistent with ASU 2014-09.
January 1, 2018
We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations. See comments under ASU 2014-09 for more information.
Standard
Description
Projected Date of Adoption
Effect on Financial Statements or Other Significant Matters
ASU 2017-04, Simplifying the Test for Goodwill Impairment
These amendments eliminate the requirement in current GAAP to perform Step 2 of the goodwill impairment test in favor of only applying Step 1. Under Step 1, the fair value of the reporting unit is compared with its carrying value, and an impairment charge is recognized when the carrying value exceeds the reporting unit’s fair value. An entity still has the option to first perform a qualitative assessment of an individual reporting unit to determine if the quantitative assessment in Step 1 is necessary. ASU 2017-04 should be adopted prospectively, and early adoption is permitted on impairment testing dates after January 1, 2017.
Impairment tests performed after January 1, 2020
We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations.
3. Dispositions
﻿
LFM
﻿
On July 16, 2015, we closed on the sale of LFM to Entercom Communications Corp. (“Entercom Parent”) and Entercom Radio, LLC. We received $75 million in cash, net of transaction expenses, and $28 million face amount of perpetual cumulative convertible preferred stock of Entercom Parent.
﻿
As of December 31, 2014, we adjusted the carrying amount of the assets and liabilities of LFM that were to be sold to fair value less cost to sell and reclassified such amounts as held-for-sale within other assets and other liabilities on our Consolidated Balance Sheets. Accordingly, we recognized a loss of $28 million, after-tax, during the fourth quarter of 2014 reflected within income (loss) from continuing operations on our Consolidated Statements of Comprehensive Income (Loss). During 2015, we recognized an additional loss of $2 million, after-tax, related to finalizing the transaction.
﻿
4. Variable Interest Entities
﻿
Consolidated VIEs
﻿
Credit-Linked Notes
﻿
We have invested in the Class 1 notes of two credit-linked note (“CLN”) structures, which represent special purpose trusts combining ABS 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 contract transfers 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, 2016:
﻿
﻿
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
﻿
						
Amount and
						
						
						
﻿
						
Date of Issuance
						
						
						
﻿
						
$200
						
						
						
﻿
						
April
						
						
						
﻿
						
						
						
						
						
						
Original attachment point (subordination)
2.05%
						
						
Current attachment point (subordination)
1.48%
						
						
Maturity
3/20/2017
						
						
Current rating of tranche
BB
						
						
Current rating of underlying reference obligations
AAA - CCC
						
						
Number of defaults in underlying reference obligations
						
						
Number of entities
						
						
Number of countries
						
						
﻿
As of December 2016, our $400 million CLN matured, and we no longer reflect the assets and liabilities associated with the VIE on our Consolidated Balance Sheets or recognize the results of operations of this VIE on our Consolidated Statements of Comprehensive Income (Loss). We did not incur any principal losses under the CLN structure, and we no longer have any exposure to losses related to this VIE.
﻿
There has been no event of default on the remaining CLN. 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 instruments, our maximum principal loss is limited to our original investment.
﻿
The following summarizes the exposure of the CLN structure’s underlying reference portfolios by industry and rating as of December 31, 2016:
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
AAA
						
AA
						
A
						
BBB
						
BB
						
B
						
CCC
						
Total
						
Industry
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Financial intermediaries
0.0% 				
						
3.0% 				
						
7.1% 				
						
2.0% 				
						
0.0% 				
						
0.0% 				
						
0.0% 				
						
12.1% 				
						
Telecommunications
0.0% 				
						
1.0% 				
						
2.0% 				
						
3.1% 				
						
1.0% 				
						
0.0% 				
						
0.0% 				
						
7.1% 				
						
Oil and gas
1.0% 				
						
3.0% 				
						
0.0% 				
						
5.1% 				
						
1.0% 				
						
1.0% 				
						
0.0% 				
						
11.1% 				
						
Utilities
0.0% 				
						
0.0% 				
						
3.0% 				
						
4.1% 				
						
0.0% 				
						
0.0% 				
						
0.0% 				
						
7.1% 				
						
Chemicals and plastics
0.0% 				
						
0.0% 				
						
3.1% 				
						
1.0% 				
						
1.0% 				
						
0.0% 				
						
0.0% 				
						
5.1% 				
						
Drugs
1.0% 				
						
0.0% 				
						
2.0% 				
						
0.0% 				
						
0.0% 				
						
0.0% 				
						
0.0% 				
						
3.0% 				
						
Retailers (except food
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
and drug)
0.0% 				
						
0.0% 				
						
3.0% 				
						
1.0% 				
						
0.0% 				
						
0.0% 				
						
0.0% 				
						
4.0% 				
						
Industrial equipment
0.0% 				
						
0.0% 				
						
3.1% 				
						
2.0% 				
						
0.0% 				
						
0.0% 				
						
0.0% 				
						
5.1% 				
						
Sovereign
0.0% 				
						
2.1% 				
						
3.0% 				
						
2.0% 				
						
1.0% 				
						
0.0% 				
						
0.0% 				
						
8.1% 				
						
Conglomerates
0.0% 				
						
1.0% 				
						
2.0% 				
						
0.0% 				
						
0.0% 				
						
0.0% 				
						
0.0% 				
						
3.0% 				
						
Forest products
0.0% 				
						
0.0% 				
						
0.0% 				
						
0.0% 				
						
1.0% 				
						
0.0% 				
						
0.0% 				
						
1.0% 				
						
Other
0.0% 				
						
1.0% 				
						
9.1% 				
						
12.1% 				
						
8.1% 				
						
2.0% 				
						
1.0% 				
						
33.3% 				
						
Total
2.0% 				
						
11.1% 				
						
37.4% 				
						
32.4% 				
						
13.1% 				
						
3.0% 				
						
1.0% 				
						
100.0% 				
						
﻿
Reinsurance Related Notes
﻿
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 captive reinsurance subsidiary, the Lincoln Reinsurance Company of Vermont V (“LRCVV”), and are primarily to acquire, hold and issue notes with LRCVV as well as pay and collect interest on the notes. LFLLCI holds a surplus note issued by LRCVV that had an outstanding principal balance of $533 million as of December 31, 2016. LFLLCI issued a long-term note to LRCVV that has a principal balance that moves concurrently with any variability in the face amount of the surplus note LFLLCI received from LRCVV. 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.
﻿
Asset and liability information (dollars in millions) for the consolidated VIEs included on our Consolidated Balance Sheets was as follows:
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
As of December 31, 2016
						
						
As of December 31, 2015
						
﻿
						
Number
						
						
						
						
						
						
						
						
						
Number
						
						
						
						
						
						
						
						
﻿
						
of
						
						
Notional
						
Carrying
						
						
of
						
						
Notional
						
Carrying
						
﻿
Instruments
						
Amounts
						
Value
						
Instruments
						
Amounts
						
Value
						
Assets
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Fixed maturity securities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Asset-backed credit card loans (1)
						
						
N/A
						
						
$
-
						
$
				
						
						
						
N/A
						
						
$
-
						
$
				
						
Total return swap
						
						
				
						
						
						
				
						
						
-
						
						
						
				
						
						
						
				
						
						
-
						
Credit default swaps
						
						
				
						
						
						
				
						
						
-
						
						
						
-
						
						
						
-
						
						
-
						
Total assets
						
						
				
						
						
$
				
						
$
				
						
						
						
				
						
						
$
				
						
$
				
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
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, 2016.
﻿
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
						
						
-
						
						
-
						
						
Total non-qualifying hedges (1)
						
$
				
						
$
				
						
						
﻿
(1)
Reported in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).
﻿
Unconsolidated VIEs
﻿
Reinsurance Related Notes
﻿
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.
﻿
Effective September 30, 2014, we terminated our $500 million long-term senior note financing arrangement and entered into a new transaction with the same non-affiliated VIE whose primary activities are to acquire, hold and issue notes and loans, pay and collect interest on the notes and loans, and enter into derivative instruments. Under this new transaction, we issued a long-term senior note to the non-affiliated VIE in exchange for a corporate bond AFS security of like principal and duration that was assigned to one of our subsidiaries. The outstanding principal balance of this long-term senior note was $809 million as of December 31, 2016, and it is variable in nature; moving concurrently with any variability in the face amount of the corporate bond AFS security up to a maximum amount of $1.1 billion. We have concluded that we are not the primary beneficiary of the non-affiliated 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 with the corporate bond AFS security we purchased from the VIE; therefore, neither appears on our Consolidated Balance Sheets. The
VIE has entered into a total return swap with an unaffiliated third-party that supports any necessary principal funding of the corporate bond AFS security required by our subsidiaries while the security is outstanding.
﻿
Effective October 1, 2015, our captive reinsurance subsidiary, the Lincoln Reinsurance Company of Vermont VI, issued a long-term surplus note for $275 million to a non-affiliated VIE in exchange for two corporate bond AFS securities of like principal and duration. The activities of the VIE are primarily to acquire, hold and issue notes and loans and to pay and collect interest on the notes and loans. The outstanding principal balance of the long-term surplus note was $474 million as of December 31, 2016, and is variable in nature; moving concurrently with any variability in the face amount of the corporate bond AFS securities. We have concluded that we are not the primary beneficiary of the non-affiliated VIE because we do not have power over the activities that most significantly affect its economic performance. In addition, the terms of the long-term surplus note provide us with a set-off right with the corporate bond AFS securities we purchased from the VIE; therefore, neither appears on our Consolidated Balance Sheets.
﻿
Structured Securities
﻿
Through our investment activities, we make passive investments in structured securities issued by VIEs for which we are not the manager. These structured securities include our 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.
﻿
Limited Partnerships and Limited Liability Companies
﻿
We invest in certain LPs and limited liability companies (“LLCs”), including qualified affordable housing projects, that we have concluded are VIEs. We do not hold any substantive kick-out or participation rights in the LPs and LLCs, and we do not receive any performance fees or decision maker fees from the LPs and LLCs. Based on our analysis of the LPs and LLCs, we are not the primary beneficiary of the VIEs as we do not have the power to direct the most significant activities of the LPs and LLCs.
﻿
The carrying amounts of our investments in the LPs and LLCs are recognized in other investments on our Consolidated Balance Sheets and were $1.3 billion and $1.2 billion as of December 31, 2016 and 2015, respectively. Included in these carrying amounts are our investments in qualified affordable housing projects, which were $37 million and $47 million as of December 31, 2016 and 2015, respectively. We do not have any contingent commitments to provide additional capital funding to these qualified affordable housing projects. We receive returns from these qualified affordable housing projects in the form of income tax credits and other tax benefits, which are recognized in federal income tax expense (benefit) on our Consolidated Statements of Comprehensive Income (Loss) and were $3 million and less than $1 million for the years ended December 31, 2016 and 2015, respectively. Our exposure to loss is limited to the capital we invest in the LPs and LLCs, and there have been no indicators of impairment that would require us to recognize an impairment loss related to the LPs and LLCs as of December 31, 2016.
﻿
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, 2016
						
﻿
Amortized
						
Gross Unrealized
						
						
						
						
Fair
						
﻿
Cost
						
Gains
						
Losses
						
OTTI (1)
						
Value
						
Fixed maturity securities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Corporate bonds
$
73,275 				
						
$
4,754 				
						
$
				
						
$
(5 				
)
$
77,064 				
						
ABS
						
1,047 				
						
						
				
						
						
				
						
						
(13 				
)
						
1,085 				
						
U.S. government bonds
						
				
						
						
				
						
						
				
						
						
-
						
						
				
						
Foreign government bonds
						
				
						
						
				
						
						
				
						
						
-
						
						
				
						
RMBS
						
3,534 				
						
						
				
						
						
				
						
						
(6 				
)
						
3,614 				
						
CMBS
						
				
						
						
				
						
						
				
						
						
(1 				
)
						
				
						
CLOs
						
				
						
						
				
						
						
				
						
						
(4 				
)
						
				
						
State and municipal bonds
						
3,929 				
						
						
				
						
						
				
						
						
-
						
						
4,627 				
						
Hybrid and redeemable preferred securities
						
				
						
						
				
						
						
				
						
						
-
						
						
				
						
VIEs’ fixed maturity securities
						
				
						
						
-
						
						
-
						
						
-
						
						
				
						
Total fixed maturity securities
						
84,487 				
						
						
5,832 				
						
						
1,135 				
						
						
(29 				
)
						
89,213 				
						
Equity securities
						
				
						
						
				
						
						
				
						
						
-
						
						
				
						
Total AFS securities
$
84,747 				
						
$
5,851 				
						
$
1,139 				
						
$
(29 				
)
$
89,488 				
						
﻿
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
As of December 31, 2015
						
﻿
Amortized
						
Gross Unrealized
						
						
						
						
Fair
						
﻿
Cost
						
Gains
						
Losses
						
OTTI (1)
						
Value
						
Fixed maturity securities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Corporate bonds
$
70,993 				
						
$
3,924 				
						
$
1,984 				
						
$
				
						
$
72,931 				
						
ABS
						
1,064 				
						
						
				
						
						
				
						
						
(13 				
)
						
1,101 				
						
U.S. government bonds
						
				
						
						
				
						
						
				
						
						
-
						
						
				
						
Foreign government bonds
						
				
						
						
				
						
						
				
						
						
-
						
						
				
						
RMBS
						
3,566 				
						
						
				
						
						
				
						
						
(12 				
)
						
3,728 				
						
CMBS
						
				
						
						
				
						
						
				
						
						
(4 				
)
						
				
						
CLOs
						
				
						
						
				
						
						
				
						
						
(3 				
)
						
				
						
State and municipal bonds
						
3,806 				
						
						
				
						
						
				
						
						
-
						
						
4,480 				
						
Hybrid and redeemable preferred securities
						
				
						
						
				
						
						
				
						
						
-
						
						
				
						
VIEs’ fixed maturity securities
						
				
						
						
				
						
						
-
						
						
-
						
						
				
						
Total fixed maturity securities
						
82,589 				
						
						
5,044 				
						
						
2,101 				
						
						
(30 				
)
						
85,562 				
						
Equity securities
						
				
						
						
				
						
						
				
						
						
-
						
						
				
						
Total AFS securities
$
82,815 				
						
$
5,061 				
						
$
2,107 				
						
$
(30 				
)
$
85,799 				
						
﻿
(1)
Includes unrealized (gains) and losses on impaired securities related to changes in the fair value of such securities subsequent to the impairment measurement date.
﻿
The amortized cost and fair value of fixed maturity AFS securities by contractual maturities (in millions) as of December 31, 2016, were as follows:
﻿
﻿
						
						
						
						
						
						
﻿
						
						
						
						
						
						
﻿
Amortized
						
Fair
						
﻿
Cost
						
Value
						
Due in one year or less
$
2,862 				
						
$
2,904 				
						
Due after one year through five years
						
18,598 				
						
						
19,522 				
						
Due after five years through ten years
						
17,655 				
						
						
18,001 				
						
Due after ten years
						
39,504 				
						
						
42,793 				
						
Subtotal
						
78,619 				
						
						
83,220 				
						
Structured securities (ABS, MBS, CLOs)
						
5,868 				
						
						
5,993 				
						
Total fixed maturity AFS securities
$
84,487 				
						
$
89,213 				
						
﻿
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, 2016
						
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
$
15,820 				
						
$
				
						
$
3,187 				
						
$
				
						
$
19,007 				
						
						
$
				
						
ABS
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
						
				
						
U.S. government bonds
						
				
						
						
				
						
						
-
						
						
-
						
						
				
						
						
						
				
						
Foreign government bonds
						
				
						
						
				
						
						
-
						
						
-
						
						
				
						
						
						
				
						
RMBS
						
				
						
						
				
						
						
				
						
						
				
						
						
1,381 				
						
						
						
				
						
CMBS
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
						
				
						
CLOs
						
				
						
						
				
						
						
				
						
						
-
						
						
				
						
						
						
				
						
State and municipal bonds
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
						
				
						
Hybrid and redeemable
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
preferred securities
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
						
				
						
Total fixed maturity securities
						
17,809 				
						
						
				
						
						
4,111 				
						
						
				
						
						
21,920 				
						
						
						
1,162 				
						
Equity securities
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
						
				
						
Total AFS securities
$
17,813 				
						
$
				
						
$
4,155 				
						
$
				
						
$
21,968 				
						
						
$
1,166 				
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Total number of AFS securities in an unrealized loss position
						
						
						
						
						
						
						
						
						
						
						
						
1,744 				
						
﻿
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
As of December 31, 2015
						
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
$
20,380 				
						
$
1,364 				
						
$
2,383 				
						
$
				
						
$
22,763 				
						
						
$
1,987 				
						
ABS
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
						
				
						
U.S. government bonds
						
				
						
						
				
						
						
-
						
						
-
						
						
				
						
						
						
				
						
Foreign government bonds
						
				
						
						
				
						
						
-
						
						
-
						
						
				
						
						
						
				
						
RMBS
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
						
				
						
CMBS
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
						
				
						
CLOs
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
						
				
						
State and municipal bonds
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
						
				
						
Hybrid and redeemable
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
preferred securities
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
						
				
						
Total fixed maturity securities
						
21,826 				
						
						
1,405 				
						
						
3,263 				
						
						
				
						
						
25,089 				
						
						
						
2,129 				
						
Equity securities
						
				
						
						
				
						
						
-
						
						
-
						
						
				
						
						
						
				
						
Total AFS securities
$
21,873 				
						
$
1,411 				
						
$
3,263 				
						
$
				
						
$
25,136 				
						
						
$
2,135 				
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Total number of AFS securities in an unrealized loss position
						
						
						
						
						
						
						
						
						
						
						
						
2,007 				
						
﻿
For information regarding our investments in VIEs, see Note 4.
﻿
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, 2016
						
﻿
						
						
						
						
						
						
						
						
						
						
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
$
				
						
$
				
						
$
				
						
						
						
				
						
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
As of December 31, 2015
						
﻿
						
						
						
						
						
						
						
						
						
						
Number
						
﻿
Fair
						
Gross Unrealized
						
						
of
						
﻿
Value
						
Losses
						
OTTI
						
Securities (1)
Less than six months
$
1,584 				
						
$
				
						
$
				
						
						
						
				
						
Six months or greater, but less than nine months
						
				
						
						
				
						
						
-
						
						
						
				
						
Nine months or greater, but less than twelve months
						
				
						
						
				
						
						
-
						
						
						
				
						
Twelve months or greater
						
				
						
						
				
						
						
				
						
						
						
				
						
Total
$
1,852 				
						
$
				
						
$
				
						
						
						
				
						
﻿
(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 decreased $969 million for the year ended December 31, 2016. As discussed further below, we believe the unrealized loss position as of December 31, 2016, 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, 2016, 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, 2016, the unrealized losses associated with our corporate bond securities were attributable primarily to widening credit spreads and rising interest rates since purchase. We performed a detailed analysis of the financial performance of the underlying issuers and determined that we expected to recover the entire amortized cost for each security.
﻿
As of December 31, 2016, the unrealized losses associated with our MBS and ABS 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 of each temporarily-impaired security.
﻿
As of December 31, 2016, 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 underlying issuers. For our hybrid and redeemable preferred securities, we evaluated the financial performance of the underlying issuers 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, paid down or matured
						
(53 				
)
						
(33 				
)
						
(44 				
)
Balance as of end-of-year
$
				
						
$
				
						
$
				
						
﻿
During 2016, 2015 and 2014, 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, 2016
						
﻿
						
						
						
Net
						
						
						
						
						
						
﻿
						
						
						
Unrealized
						
						
						
						
OTTI in
						
﻿
Amortized
						
Gain/(Loss)
						
Fair
						
Credit
						
﻿
Cost
						
Position
						
Value
						
Losses
						
Corporate bonds
$
				
						
$
				
						
$
				
						
$
				
						
ABS
						
				
						
						
				
						
						
				
						
						
				
						
RMBS
						
				
						
						
				
						
						
				
						
						
				
						
CMBS
						
				
						
						
				
						
						
				
						
						
				
						
CLOs
						
				
						
						
				
						
						
				
						
						
				
						
State and municipal bonds
						
				
						
						
-
						
						
				
						
						
				
						
Total
$
				
						
$
				
						
$
				
						
$
				
						
﻿
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
﻿
As of December 31, 2015
						
﻿
						
						
						
Net
						
						
						
						
						
						
﻿
						
						
						
Unrealized
						
						
						
						
OTTI in
						
﻿
Amortized
						
Gain/(Loss)
						
Fair
						
Credit
						
﻿
Cost
						
Position
						
Value
						
Losses
						
Corporate bonds
$
				
						
$
(2 				
)
$
				
						
$
				
						
ABS
						
				
						
						
				
						
						
				
						
						
				
						
RMBS
						
				
						
						
				
						
						
				
						
						
				
						
CMBS
						
				
						
						
				
						
						
				
						
						
				
						
CLOs
						
				
						
						
				
						
						
				
						
						
				
						
Total
$
				
						
$
				
						
$
				
						
$
				
						
﻿
Trading Securities
﻿
Trading securities at fair value (in millions) consisted of the following:
﻿
﻿
﻿
						
						
						
						
						
						
﻿
						
						
						
						
						
						
﻿
As of December 31,
						
﻿
						
						
Fixed maturity securities:
						
						
						
						
						
						
Corporate bonds
$
1,360 				
						
$
1,416 				
						
ABS
						
				
						
						
				
						
U.S. government bonds
						
				
						
						
				
						
Foreign government bonds
						
				
						
						
				
						
RMBS
						
				
						
						
				
						
CMBS
						
				
						
						
				
						
CLOs
						
				
						
						
				
						
State and municipal bonds
						
				
						
						
				
						
Hybrid and redeemable preferred securities
						
				
						
						
				
						
Total trading securities
$
1,712 				
						
$
1,854 				
						
﻿
The portion of the market adjustment for trading gains and losses recognized in realized gain (loss) that relate to trading securities still held as of December 31, 2016, 2015 and 2014, was $(3) million, $(100) million and $45 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, which accounted for 20% and 21%, respectively, and Texas, which accounted for 11% and 10%, respectively, of mortgage loans on real estate as of December 31, 2016 and 2015.
﻿
The following provides the current and past due composition of our mortgage loans on real estate (in millions):
﻿
﻿
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
﻿
						
As of December 31,
						
﻿
						
						
						
						
Current
						
$
9,888 				
						
						
$
8,677 				
						
60 to 90 days past due
						
						
-
						
						
						
-
						
Greater than 90 days past due
						
						
				
						
						
						
-
						
Valuation allowance associated with impaired mortgage loans on real estate
						
						
(2 				
)
						
						
(2 				
)
Unamortized premium (discount)
						
						
				
						
						
						
				
						
Total carrying value
						
$
9,889 				
						
						
$
8,678 				
						
﻿
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
						
						
(2 				
)
						
						
(2 				
)
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
						
(1 				
)
						
(1 				
)
						
-
						
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, 2016
						
As of December 31, 2015
						
﻿
						
						
						
						
						
Debt-
						
						
						
						
						
						
Debt-
						
﻿
						
						
						
						
						
Service
						
						
						
						
						
						
Service
						
﻿
Carrying
						
% of
						
Coverage
						
Carrying
						
% of
						
Coverage
						
Loan-to-Value Ratio
Value
						
Total
						
Ratio
						
Value
						
Total
						
Ratio
						
Less than 65%
$
8,709 				
						
88.0% 				
						
2.16
						
$
7,718 				
						
88.9% 				
						
2.06
						
65% to 74%
						
1,009 				
						
10.2% 				
						
1.87
						
						
				
						
7.5% 				
						
1.60
						
75% to 100%
						
				
						
1.7% 				
						
0.82
						
						
				
						
3.5% 				
						
0.83
						
Greater than 100%
						
				
						
0.1% 				
						
1.04
						
						
				
						
0.1% 				
						
1.05
						
Total mortgage loans on real estate
$
9,889 				
						
100.0% 				
						
						
						
$
8,678 				
						
100.0% 				
						
						
						
﻿
Alternative Investments
﻿
As of December 31, 2016 and 2015, alternative investments included investments in 202 and 190 different partnerships, respectively, and the portfolios 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
$
4,138 				
						
$
4,079 				
						
$
4,041 				
						
Equity AFS securities
						
				
						
						
				
						
						
				
						
Trading securities
						
				
						
						
				
						
						
				
						
Mortgage loans on real estate
						
				
						
						
				
						
						
				
						
Real estate
						
				
						
						
				
						
						
				
						
Policy loans
						
				
						
						
				
						
						
				
						
Invested cash
						
				
						
						
				
						
						
				
						
Commercial mortgage loan prepayment
						
						
						
						
						
						
						
						
						
and bond make-whole premiums
						
				
						
						
				
						
						
				
						
Alternative investments
						
				
						
						
				
						
						
				
						
Consent fees
						
				
						
						
				
						
						
				
						
Other investments
						
				
						
						
				
						
						
(11 				
)
Investment income
						
5,032 				
						
						
4,952 				
						
						
4,976 				
						
Investment expense
						
(158 				
)
						
(125 				
)
						
(117 				
)
Net investment income
$
4,874 				
						
$
4,827 				
						
$
4,859 				
						
﻿
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: (1)
						
						
						
						
						
						
						
						
						
Gross gains
$
				
						
$
				
						
$
				
						
Gross losses
						
(234 				
)
						
(99 				
)
						
(23 				
)
Equity AFS securities:
						
						
						
						
						
						
						
						
						
Gross gains
						
				
						
						
				
						
						
				
						
Gross losses
						
(1 				
)
						
-
						
						
-
						
Gain (loss) on other investments
						
(68 				
)
						
(9 				
)
						
				
						
Associated amortization of DAC, VOBA, DSI and DFEL
						
						
						
						
						
						
						
						
						
and changes in other contract holder funds
						
(24 				
)
						
(26 				
)
						
(32 				
)
Total realized gain (loss) related to certain investments, pre-tax
$
(250 				
)
$
(88 				
)
$
(18 				
)
﻿
(1)
These amounts are represented net of related fair value hedging activity. See Note 6 for more information.
﻿
Details underlying write-downs taken as a result of OTTI 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
$
(80 				
)
$
(45 				
)
$
(1 				
)
ABS
						
(5 				
)
						
(7 				
)
						
(10 				
)
RMBS
						
(11 				
)
						
(7 				
)
						
(8 				
)
CMBS
						
(2 				
)
						
(1 				
)
						
(1 				
)
State and municipal bonds
						
(3 				
)
						
-
						
						
-
						
Total fixed maturity securities
						
(101 				
)
						
(60 				
)
						
(20 				
)
Equity securities
						
(1 				
)
						
-
						
						
-
						
Gross OTTI recognized in net income (loss)
						
(102 				
)
						
(60 				
)
						
(20 				
)
Associated amortization of DAC, VOBA, DSI and DFEL
						
-
						
						
				
						
						
				
						
Net OTTI recognized in net income (loss), pre-tax
$
(102 				
)
$
(54 				
)
$
(16 				
)
﻿
						
						
						
						
						
						
						
						
						
Portion of OTTI Recognized in OCI
						
						
						
						
						
						
						
						
						
Gross OTTI recognized in OCI
$
				
						
$
				
						
$
				
						
Change in DAC, VOBA, DSI and DFEL
						
(12 				
)
						
(4 				
)
						
(2 				
)
Net portion of OTTI recognized in OCI, pre-tax
$
				
						
$
				
						
$
				
						
﻿
Determination of Credit Losses on Corporate Bonds and ABS
﻿
As of December 31, 2016 and 2015, we reviewed our corporate bond and ABS 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, 2016 and 2015, 95% and 96%, respectively, of the fair value of our corporate bond portfolio was rated investment grade. As of December 31, 2016 and 2015, the portion of our corporate bond portfolio rated below investment grade had an amortized cost of $3.8 billion and $3.6 billion, respectively, and a fair value of $3.7 billion and $3.3 billion, respectively. As of December 31, 2016 and 2015, 96% of the fair value of our ABS portfolio was rated investment grade. As of December 31, 2016 and 2015, the portion of our ABS portfolio rated below investment grade had an amortized cost of $91 million and $107 million, respectively, and a fair value of $75 million and $92 million, respectively. Based upon the analysis discussed above, we believed as of December 31, 2016 and 2015, that we would recover the amortized cost of each investment grade corporate bond and ABS security.
﻿
Determination of Credit Losses on MBS
﻿
As of December 31, 2016 and 2015, 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 loss 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, 2016
						
As of December 31, 2015
						
﻿
Carrying
						
Fair
						
Carrying
						
Fair
						
﻿
Value
						
Value
						
Value
						
Value
						
Collateral payable for derivative investments (1)
$
				
						
$
				
						
$
1,387 				
						
$
1,387 				
						
Securities pledged under securities lending agreements (2)
						
				
						
						
				
						
						
				
						
						
				
						
Securities pledged under repurchase agreements (3)
						
				
						
						
				
						
						
				
						
						
				
						
Investments pledged for Federal Home Loan Bank of
						
						
						
						
						
						
						
						
						
						
						
						
Indianapolis (“FHLBI”) (4)
						
3,350 				
						
						
4,947 				
						
						
2,355 				
						
						
3,391 				
						
Total payables for collateral on investments
$
4,995 				
						
$
6,639 				
						
$
4,657 				
						
$
5,748 				
						
﻿
(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 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.
﻿
Increase (decrease) in payables for collateral on investments (in millions) consisted of the following:
﻿
﻿
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
﻿
For the Years Ended December 31,
						
﻿
						
						
						
Collateral payable for derivative investments
$
(493 				
)
$
(286 				
)
$
1,035 				
						
Securities pledged under securities lending agreements
						
(26 				
)
						
				
						
						
				
						
Securities pledged under repurchase agreements
						
(138 				
)
						
				
						
						
				
						
Securities pledged for Term Asset-Backed Securities Loan Facility
						
-
						
						
-
						
						
(36 				
)
Investments pledged for FHLBI
						
				
						
						
				
						
						
				
						
Total increase (decrease) in payables for collateral on investments
$
				
						
$
				
						
$
1,171 				
						
﻿
We have elected not to offset our repurchase agreements and securities lending transactions in our financial statements. The remaining contractual maturities of repurchase agreements and securities lending transactions accounted for as secured borrowings were as follows:
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
﻿
As of December 31, 2016
						
﻿
Overnight and Continuous
						
Up to 30 Days
						
30 - 90 Days
						
Greater Than 90 Days
						
Total
						
Repurchase Agreements
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Corporate bonds
$
-
						
$
-
						
$
				
						
$
				
						
$
				
						
Total
						
-
						
						
-
						
						
				
						
						
				
						
						
				
						
Securities Lending
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Corporate bonds
						
				
						
						
-
						
						
-
						
						
-
						
						
				
						
Foreign government bonds
						
				
						
						
-
						
						
-
						
						
-
						
						
				
						
Total
						
				
						
						
-
						
						
-
						
						
-
						
						
				
						
Total gross secured borrowings
$
				
						
$
-
						
$
				
						
$
				
						
$
				
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
As of December 31, 2015
						
﻿
Overnight and Continuous
						
Up to 30 Days
						
30 - 90 Days
						
Greater Than 90 Days
						
Total
						
Repurchase Agreements
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Corporate bonds
$
-
						
$
-
						
$
				
						
$
				
						
$
				
						
RMBS
						
-
						
						
-
						
						
-
						
						
				
						
						
				
						
Total
						
-
						
						
-
						
						
				
						
						
				
						
						
				
						
Securities Lending
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Corporate bonds
						
				
						
						
-
						
						
-
						
						
-
						
						
				
						
Total
						
				
						
						
-
						
						
-
						
						
-
						
						
				
						
Total gross secured borrowings
$
				
						
$
-
						
$
				
						
$
				
						
$
				
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
We accept collateral in the form of securities in connection with repurchase agreements. In instances where we are permitted to sell or re-pledge the securities received, we report the fair value of the collateral received and a related obligation to return the collateral in the financial statements. In addition, we receive securities in connection with securities borrowing agreements which we are permitted to sell or re-pledge. As of December 31, 2016, the fair value of all collateral received that we are permitted to sell or re-pledge was $171 million. As of December 31, 2016, we have not sold or re-pledged this collateral.
﻿
Investment Commitments
﻿
As of December 31, 2016, our investment commitments were $1.2 billion, which included $741 million of LPs, $183 million of private placement securities and $261 million of mortgage loans on real estate.
﻿
Concentrations of Financial Instruments
﻿
As of December 31, 2016 and 2015, 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 $1.5 billion and $1.8 billion, respectively, or 1% and 2%, respectively, of our invested assets portfolio, and our investments in securities issued by Fannie Mae with a fair value of $1.1 billion and $1.2 billion, respectively, or 1% of our invested assets portfolio. These concentrations include both AFS and trading securities.
﻿
As of December 31, 2016 and 2015, our most significant investments in one industry were our investment securities in the consumer non-cyclical industry with a fair value of $13.7 billion and $12.0 billion, respectively, or 13% and 12%, respectively, of our invested assets portfolio, and our investment securities in the utilities industry with a fair value of $13.2 billion and $12.8 billion, respectively, or 12% and 13%, respectively, of our invested assets portfolio. These concentrations include both AFS and trading securities.
﻿
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 20 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:
﻿
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 purchases of certain assets and liabilities and anticipated issuances of fixed-rate securities.
﻿
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 to hedge the interest rate risk of floating-rate bond coupon payments by replicating a fixed-rate bond.
﻿
Finally, we use interest rate swap agreements designated and qualifying as fair value hedges to hedge against changes in the fair value of certain fixed-rate long-term debt and fixed maturity securities due to interest rate risks.
﻿
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 anticipated 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, to hedge foreign exchange risk of investments in fixed maturity securities denominated in foreign currencies. A foreign currency swap is a contractual agreement to exchange one currency for another at specified dates in the future at a specified exchange rate.
﻿
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®
﻿
Our indexed annuity and IUL contracts 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 Index® (“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.
﻿
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.
﻿
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 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.
﻿
In addition, 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.
﻿
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 whose payoff is the difference between the realized variance rate of an underlying index and the fixed variance rate determined as of inception of the contract.
﻿
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 use credit default swaps to hedge the liability exposure on certain options in variable annuity products.
﻿
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. Changes in the value of the hedge contracts due to changes in equity markets, interest rates and implied volatilities hedge the income statement effect 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 benefit reserves and the embedded derivative reserves based on the specific characteristics of each GLB feature.
﻿
Indexed Annuity and IUL Contracts Embedded Derivatives
﻿
Our indexed annuity and IUL contracts 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, 2016
						
As of December 31, 2015
						
﻿
Notional
						
Fair Value
						
Notional
						
Fair Value
						
﻿
Amounts
						
Asset
						
Liability
						
Amounts
						
Asset
						
Liability
						
Qualifying Hedges
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Cash flow hedges:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Interest rate contracts (1)
$
3,552 				
						
$
				
						
$
				
						
$
2,937 				
						
$
				
						
$
				
						
Foreign currency contracts (1)
						
1,177 				
						
						
				
						
						
				
						
						
				
						
						
				
						
						
				
						
Total cash flow hedges
						
4,729 				
						
						
				
						
						
				
						
						
3,847 				
						
						
				
						
						
				
						
Fair value hedges:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Interest rate contracts (1)
						
1,512 				
						
						
				
						
						
				
						
						
1,529 				
						
						
				
						
						
				
						
Non-Qualifying Hedges
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Interest rate contracts (1)
						
70,290 				
						
						
				
						
						
				
						
						
71,898 				
						
						
1,088 				
						
						
				
						
Foreign currency contracts (1)
						
				
						
						
-
						
						
-
						
						
				
						
						
-
						
						
-
						
Equity market contracts (1)
						
28,315 				
						
						
				
						
						
				
						
						
27,882 				
						
						
				
						
						
				
						
Credit contracts (2)
						
				
						
						
-
						
						
-
						
						
				
						
						
-
						
						
				
						
Embedded derivatives:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
GLB reserves (2)
						
-
						
						
-
						
						
				
						
						
-
						
						
-
						
						
				
						
Reinsurance related (3)
						
-
						
						
-
						
						
				
						
						
-
						
						
-
						
						
				
						
Indexed annuity and IUL contracts (4)
						
-
						
						
-
						
						
1,139 				
						
						
-
						
						
-
						
						
1,100 				
						
Total derivative instruments
$
104,926 				
						
$
2,005 				
						
$
3,194 				
						
$
105,333 				
						
$
2,313 				
						
$
2,994 				
						
﻿
(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 reinsurance related embedded derivatives on our Consolidated Balance Sheets.
(4)
Reported in future contract benefits 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, 2016
						
﻿
Less Than
						
1 - 5
						
6 - 10
						
11 - 30
						
Over 30
						
						
						
﻿
1 Year
						
Years
						
Years
						
Years
						
Years
						
Total
						
Interest rate contracts (1)
$
11,102 				
						
$
25,530 				
						
$
23,164 				
						
$
14,345 				
						
$
1,213 				
						
$
75,354 				
						
Foreign currency contracts (2)
						
				
						
						
				
						
						
				
						
						
				
						
						
-
						
						
1,191 				
						
Equity market contracts
						
15,924 				
						
						
9,369 				
						
						
1,872 				
						
						
				
						
						
1,133 				
						
						
28,315 				
						
Credit contracts
						
				
						
						
				
						
						
-
						
						
-
						
						
-
						
						
				
						
Total derivative instruments
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
with notional amounts
$
27,126 				
						
$
35,024 				
						
$
25,382 				
						
$
15,048 				
						
$
2,346 				
						
$
104,926 				
						
﻿
(1)
As of December 31, 2016, 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, 2016, the latest maturity date for which we were hedging our exposure to the variability in future cash flows for these instruments was December 2045.
﻿
The change in our unrealized gain (loss) on derivative instruments in AOCI (in millions) was as follows:
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
﻿
For the Years Ended December 31,
						
﻿
						
						
						
Unrealized Gain (Loss) on Derivative Instruments
						
						
						
						
						
						
						
						
						
Balance as of beginning-of-year
$
				
						
$
				
						
$
				
						
Other comprehensive income (loss):
						
						
						
						
						
						
						
						
						
Unrealized holding gains (losses) arising during the period:
						
						
						
						
						
						
						
						
						
Cash flow hedges:
						
						
						
						
						
						
						
						
						
Interest rate contracts
						
(205 				
)
						
(258 				
)
						
(286 				
)
Foreign currency contracts
						
(10 				
)
						
				
						
						
				
						
Change in foreign currency exchange rate adjustment
						
				
						
						
				
						
						
				
						
Change in DAC, VOBA, DSI and DFEL
						
				
						
						
				
						
						
				
						
Income tax benefit (expense)
						
				
						
						
				
						
						
				
						
Less:
						
						
						
						
						
						
						
						
						
Reclassification adjustment for gains (losses)
						
						
						
						
						
						
						
						
						
included in net income (loss):
						
						
						
						
						
						
						
						
						
Cash flow hedges:
						
						
						
						
						
						
						
						
						
Interest rate contracts (1)
						
				
						
						
(190 				
)
						
(22 				
)
Interest rate contracts (2)
						
(10 				
)
						
				
						
						
				
						
Interest rate contracts (3)
						
				
						
						
-
						
						
-
						
Foreign currency contracts (1)
						
				
						
						
				
						
						
-
						
Foreign currency contracts (3)
						
				
						
						
-
						
						
-
						
Associated amortization of DAC, VOBA, DSI and DFEL
						
(1 				
)
						
				
						
						
				
						
Income tax benefit (expense)
						
(5 				
)
						
				
						
						
				
						
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).
(3)
The OCI offset is reported within realized gain (loss) 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)
$
				
						
$
				
						
$
(22 				
)
						
Interest rate contracts (2)
						
(10 				
)
						
				
						
						
-
						
						
Interest rate contracts (3)
						
				
						
						
-
						
						
-
						
						
Foreign currency contracts (1)
						
				
						
						
				
						
						
-
						
						
Foreign currency contracts (3)
						
				
						
						
-
						
						
-
						
						
Total cash flow hedges
						
				
						
						
				
						
						
(22 				
)
						
Fair value hedges:
						
						
						
						
						
						
						
						
						
						
Interest rate contracts (1)
						
(28 				
)
						
(30 				
)
						
-
						
						
Interest rate contracts (2)
						
				
						
						
				
						
						
				
						
						
Interest rate contracts (3)
						
				
						
						
(198 				
)
						
-
						
						
Total fair value hedges
						
				
						
						
(196 				
)
						
				
						
						
Non-Qualifying Hedges
						
						
						
						
						
						
						
						
						
						
Interest rate contracts (3)
						
				
						
						
				
						
						
1,303 				
						
						
Foreign currency contracts (3)
						
(14 				
)
						
(11 				
)
						
(8 				
)
						
Equity market contracts (3)
						
(1,253 				
)
						
(118 				
)
						
(215 				
)
						
Equity market contracts (4)
						
				
						
						
				
						
						
				
						
						
Credit contracts (3)
						
(5 				
)
						
(6 				
)
						
(1 				
)
						
Embedded derivatives:
						
						
						
						
						
						
						
						
						
						
GLB reserves (3)
						
				
						
						
(779 				
)
						
(1,391 				
)
						
Reinsurance related (3)
						
				
						
						
				
						
						
(42 				
)
						
Indexed annuity and IUL contracts (3)
						
(120 				
)
						
(57 				
)
						
(210 				
)
						
Total derivative instruments
$
(549 				
)
$
(784 				
)
$
(540 				
)
						
﻿
(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) recognized as a component of OCI (in millions) on derivative instruments designated and qualifying as cash flow hedges were as follows:
﻿
﻿
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
﻿
For the Years Ended December 31,
						
﻿
						
						
						
Offset to net investment income
$
				
						
$
				
						
$
(22 				
)
Offset to realized gain (loss)
						
				
						
						
-
						
						
-
						
Offset to interest and debt expense
						
(10 				
)
						
				
						
						
				
						
﻿
						
						
						
						
						
						
						
						
						
﻿
As of December 31, 2016, $7 million of the deferred net gains (losses) on derivative instruments in AOCI 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, 2016 and 2015, 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.
﻿
﻿
﻿
﻿
Information related to our credit default swap liabilities for which we are the seller (dollars in millions) was as follows:
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31, 2016
						
﻿
						
						
						
						
						
Credit
						
						
						
						
						
						
						
						
						
﻿
						
Reason
						
Nature
						
Rating of
						
Number
						
						
						
						
Maximum
						
﻿
						
for
						
of
Underlying
of
						
Fair
						
Potential
						
Maturity
						
Entering
						
Recourse
Obligation (1)
Instruments
						
Value (2)
						
Payout
						
3/20/2017 (3)
						
(4)
						
(5)
						
BBB+
						
				
						
$
-
						
$
				
						
﻿
						
						
						
						
						
						
						
				
						
$
-
						
$
				
						
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
As of December 31, 2015
						
﻿
						
						
						
						
						
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-
						
				
						
$
(2 				
)
$
				
						
3/20/2017 (3)
						
(4)
						
(5)
						
BBB-
						
				
						
						
(7 				
)
						
				
						
﻿
						
						
						
						
						
						
						
				
						
$
(9 				
)
$
				
						
﻿
(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 credit default swaps for which we are the seller if credit risk-related contingent features were triggered (in millions) were as follows:
﻿
﻿
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
﻿
						
As of
						
						
As of
						
						
﻿
December 31,
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 less than $1 million of collateral as of December 31, 2016.
﻿
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, 2016, the NPR adjustment was less than $1 million. The credit risk associated with such agreements is minimized by entering into agreements with financial institutions with long-standing, superior performance records. Additionally, we maintain a policy of requiring 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, 2016, our exposure was $5 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, 2016
						
As of December 31, 2015
						
﻿
						
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-
						
$
				
						
$
(32 				
)
$
				
						
$
-
						
A+
						
						
				
						
						
(217 				
)
						
				
						
						
-
						
A
						
						
				
						
						
(381 				
)
						
				
						
						
(143 				
)
A-
						
						
				
						
						
-
						
						
				
						
						
-
						
BBB+
						
				
						
						
-
						
						
				
						
						
-
						
﻿
						
$
				
						
$
(630 				
)
$
1,387 				
						
$
(143 				
)
﻿
Balance Sheet Offsetting
﻿
Information related to the effects of offsetting on our Consolidated Balance Sheets (in millions) was as follows:
﻿
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
As of December 31, 2016
						
﻿
						
						
						
						
Embedded
						
						
						
						
﻿
Derivative
Derivative
						
						
						
						
﻿
Instruments
Instruments
						
Total
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
Financial Assets
						
						
						
						
						
						
						
						
						
						
						
						
Gross amount of recognized assets
						
$
1,470 				
						
						
$
-
						
						
$
1,470 				
						
Gross amounts offset
						
						
(543 				
)
						
						
-
						
						
						
(543 				
)
Net amount of assets
						
						
				
						
						
						
-
						
						
						
				
						
Gross amounts not offset:
						
						
						
						
						
						
						
						
						
						
						
						
Cash collateral
						
						
(894 				
)
						
						
-
						
						
						
(894 				
)
Net amount
						
$
				
						
						
$
-
						
						
$
				
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
Financial Liabilities
						
						
						
						
						
						
						
						
						
						
						
						
Gross amount of recognized liabilities
						
$
1,089 				
						
						
$
1,563 				
						
						
$
2,652 				
						
Gross amounts offset
						
						
(536 				
)
						
						
-
						
						
						
(536 				
)
Net amount of liabilities
						
						
				
						
						
						
1,563 				
						
						
						
2,116 				
						
Gross amounts not offset:
						
						
						
						
						
						
						
						
						
						
						
						
Cash collateral
						
						
(630 				
)
						
						
-
						
						
						
(630 				
)
Net amount
						
$
(77 				
)
						
$
1,563 				
						
						
$
1,486 				
						
﻿
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
As of December 31, 2015
						
﻿
						
						
						
						
Embedded
						
						
						
						
﻿
Derivative
Derivative
						
						
						
						
﻿
Instruments
Instruments
						
Total
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
Financial Assets
						
						
						
						
						
						
						
						
						
						
						
						
Gross amount of recognized assets
						
$
2,250 				
						
						
$
-
						
						
$
2,250 				
						
Gross amounts offset
						
						
(713 				
)
						
						
-
						
						
						
(713 				
)
Net amount of assets
						
						
1,537 				
						
						
						
-
						
						
						
1,537 				
						
Gross amounts not offset:
						
						
						
						
						
						
						
						
						
						
						
						
Cash collateral
						
						
(1,387 				
)
						
						
-
						
						
						
(1,387 				
)
Net amount
						
$
				
						
						
$
-
						
						
$
				
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
Financial Liabilities
						
						
						
						
						
						
						
						
						
						
						
						
Gross amount of recognized liabilities
						
$
				
						
						
$
2,140 				
						
						
$
2,279 				
						
Gross amounts offset
						
						
(61 				
)
						
						
-
						
						
						
(61 				
)
Net amount of liabilities
						
						
				
						
						
						
2,140 				
						
						
						
2,218 				
						
Gross amounts not offset:
						
						
						
						
						
						
						
						
						
						
						
						
Cash collateral
						
						
(143 				
)
						
						
-
						
						
						
(143 				
)
Net amount
						
$
(65 				
)
						
$
2,140 				
						
						
$
2,075 				
						
﻿
﻿
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
						
(196 				
)
						
(197 				
)
						
(185 				
)
Tax credits
						
(28 				
)
						
(26 				
)
						
(27 				
)
Change in uncertain tax positions
						
(14 				
)
						
(2 				
)
						
(16 				
)
Excess tax benefits from share-based
						
						
						
						
						
						
						
						
						
compensation
						
(8 				
)
						
-
						
						
-
						
Other items
						
				
						
						
-
						
						
				
						
Federal income tax expense (benefit)
$
				
						
$
				
						
$
				
						
Effective tax rate
						
18% 				
						
						
19% 				
						
						
24% 				
						
﻿
The effective tax rate is the ratio of tax expense (benefit) over pre-tax income (loss). The tax-preferred investment income relates primarily to the separate account dividends-received deduction. The separate account dividends-received deduction benefit was $182 million, $192 million and $163 million for the years ended December 31, 2016, 2015 and 2014. Tax benefits for uncertain tax positions for the year ended December 31, 2016, were primarily attributable to the release of reserves associated with prior tax years that closed during 2016. A tax benefit was also recorded for the year ended December 31, 2016, in association with the early adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. For more information, see Note 2.
﻿
The federal income tax asset (liability) (in millions) was as follows:
﻿
﻿
﻿
						
						
						
						
						
						
﻿
						
						
						
						
						
						
﻿
As of December 31,
						
﻿
						
						
Current
$
				
						
$
(136 				
)
Deferred
						
(2,463 				
)
						
(1,867 				
)
Total federal income tax asset (liability)
$
(2,459 				
)
$
(2,003 				
)
﻿
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
$
1,286 				
						
$
1,494 				
						
Deferred gain on business sold through reinsurance
						
				
						
						
				
						
Reinsurance related embedded derivative asset
						
				
						
						
				
						
Compensation and benefit plans
						
				
						
						
				
						
Net operating loss carryforwards
						
-
						
						
				
						
Tax credits
						
				
						
						
				
						
Other
						
				
						
						
				
						
Total deferred tax assets
$
1,840 				
						
$
2,075 				
						
Deferred Tax Liabilities
						
						
						
						
						
						
DAC
$
1,986 				
						
$
2,064 				
						
VOBA
						
				
						
						
				
						
Net unrealized gain on AFS securities
						
1,646 				
						
						
1,116 				
						
Net unrealized gain on trading securities
						
				
						
						
				
						
Intangibles
						
				
						
						
				
						
Investment activity
						
				
						
						
				
						
Other
						
				
						
						
				
						
Total deferred tax liabilities
$
4,303 				
						
$
3,942 				
						
Net deferred tax asset (liability)
$
(2,463 				
)
$
(1,867 				
)
﻿
As of December 31, 2016, we had $85 million of alternative minimum tax credits that are not subject to expiration. Although realization is not assured, management believes that it is more likely than not that we will realize the benefits of our deferred tax assets, and, accordingly, no valuation allowance has been recorded.
﻿
As of December 31, 2016 and 2015, $1 million and $13 million, respectively, of our unrecognized tax benefits presented below, if recognized, would have affected our income tax expense and our effective tax rate. We are 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
$
				
						
$
				
						
Increases for prior year tax positions
						
-
						
						
-
						
Decreases for prior year tax positions
						
-
						
						
(2 				
)
Increases for current year tax positions
						
				
						
						
-
						
Decreases for settlements with taxing authorities
						
(1 				
)
						
-
						
Decreases for expiring statutes
						
(12 				
)
						
-
						
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, 2016, 2015 and 2014, we recognized interest and penalty expense (benefit) related to uncertain tax positions of $(3) million, zero and $(10) million, respectively. We had accrued interest and penalty expense related to the unrecognized tax benefits of zero and $3 million as of December 31, 2016 and 2015, respectively.
﻿
We are subject to examination by U.S. federal, state, local and non-U.S. income authorities. We are currently not under examination by the Internal Revenue Service; however, tax years 2013 and forward remain open. We are currently under examination by several state and local taxing jurisdictions; however, we do not expect these examinations will materially impact us.
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
$
8,617 				
						
$
7,558 				
						
$
7,695 				
						
Business acquired (sold) through reinsurance
						
-
						
						
				
						
						
-
						
Deferrals
						
1,344 				
						
						
1,490 				
						
						
1,537 				
						
Amortization, net of interest:
						
						
						
						
						
						
						
						
						
Amortization, excluding unlocking, net of interest
						
(981 				
)
						
(879 				
)
						
(988 				
)
Unlocking
						
(276 				
)
						
(238 				
)
						
				
						
Adjustment related to realized (gains) losses
						
				
						
						
(15 				
)
						
(31 				
)
Adjustment related to unrealized (gains) losses
						
(483 				
)
						
				
						
						
(672 				
)
Balance as of end-of-year
$
8,243 				
						
$
8,617 				
						
$
7,558 				
						
﻿
Changes in VOBA (in millions) were as follows:
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
﻿
For the Years Ended December 31,
						
﻿
						
						
						
Balance as of beginning-of-year
$
				
						
$
				
						
$
1,191 				
						
Business acquired (sold) through reinsurance
						
-
						
						
(22 				
)
						
				
						
Deferrals
						
				
						
						
				
						
						
				
						
Amortization:
						
						
						
						
						
						
						
						
						
Amortization, excluding unlocking
						
(108 				
)
						
(129 				
)
						
(186 				
)
Unlocking
						
				
						
						
(82 				
)
						
(21 				
)
Accretion of interest (1)
						
				
						
						
				
						
						
				
						
Adjustment related to realized (gains) losses
						
(2 				
)
						
(1 				
)
						
(1 				
)
Adjustment related to unrealized (gains) losses
						
				
						
						
				
						
						
(409 				
)
Balance as of end-of-year
$
				
						
$
				
						
$
				
						
﻿
(1)
The interest accrual rates utilized to calculate the accretion of interest ranged from 4.2% to 6.9%.
﻿
Estimated future amortization of VOBA, net of interest (in millions), as of December 31, 2016, 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
						
(32 				
)
						
(33 				
)
						
(38 				
)
Unlocking
						
(2 				
)
						
				
						
						
				
						
Adjustment related to realized (gains) losses
						
(1 				
)
						
(1 				
)
						
(4 				
)
Adjustment related to unrealized (gains) losses
						
(2 				
)
						
				
						
						
-
						
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
$
1,952 				
						
$
1,401 				
						
$
1,938 				
						
Deferrals
						
				
						
						
				
						
						
				
						
Amortization, net of interest:
						
						
						
						
						
						
						
						
						
Amortization, excluding unlocking, net of interest
						
(365 				
)
						
(308 				
)
						
(335 				
)
Unlocking
						
(63 				
)
						
(68 				
)
						
(50 				
)
Adjustment related to realized (gains) losses
						
(3 				
)
						
(4 				
)
						
(6 				
)
Adjustment related to unrealized (gains) losses
						
(278 				
)
						
				
						
						
(548 				
)
Balance as of end-of-year
$
1,874 				
						
$
1,952 				
						
$
1,401 				
						
﻿
﻿
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
$
9,551 				
						
$
9,529 				
						
$
9,064 				
						
Reinsurance assumed
						
				
						
						
				
						
						
				
						
Reinsurance ceded
						
(1,413 				
)
						
(1,311 				
)
						
(1,410 				
)
Total insurance premiums and fee income
$
8,231 				
						
$
8,291 				
						
$
7,661 				
						
﻿
						
						
						
						
						
						
						
						
						
Direct insurance benefits
$
6,195 				
						
$
6,420 				
						
$
6,127 				
						
Reinsurance recoveries netted against benefits
						
(1,503 				
)
						
(1,376 				
)
						
(1,448 				
)
Total benefits
$
4,692 				
						
$
5,044 				
						
$
4,679 				
						
﻿
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.
﻿
As of December 31, 2016, the policy for our reinsurance program was to retain up to $20 million on a single insured life. As the amount we retain varies by policy, we reinsured approximately 25% of the mortality risk on newly issued life insurance contracts in 2016. As of December 31, 2016, approximately 41% of our total individual life in-force amount is reinsured. 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, 2016, the reserves associated with these reinsurance arrangements totaled $571 million.
﻿
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 amounts recoverable from reinsurers represent receivables from and reserves ceded to reinsurers. The amounts recoverable from reinsurers were $5.3 billion and $5.6 billion as of December 31, 2016 and 2015, respectively. Our reinsurance operations were acquired by Swiss Re in December 2001 through a series of indemnity reinsurance transactions. As such, Swiss Re reinsured certain 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 $2.1 billion and $2.4 billion as of December 31, 2016 and 2015, respectively. Swiss Re has funded a trust, with a balance of $2.6 billion as of December 31, 2016, 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, 2016, included $495 million and $47 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. We amortized $48 million, after-tax, of deferred gain on business sold through reinsurance during 2016, 2015 and 2014, respectively.
﻿
During the fourth quarter of 2014, we entered into an agreement to recapture certain traditional and interest sensitive business under several yearly renewable term reinsurance treaties that were originally ceded to a reinsurer. As part of this agreement, we received cash consideration of $500 million, of which $78 million represented reimbursement for prepaid reinsurance premiums related to the recaptured treaties. We recognized a one-time gain of $57 million, after-tax, related to this recapture with the remaining difference between the proceeds and the gain being driven primarily by increases in reserves of $226 million and a reduction of DAC of $123 million.
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, 2016
						
						
﻿
Gross
Accumulated
						
						
						
						
						
						
						
﻿
Goodwill
Impairment
						
						
						
						
						
Net
						
﻿
as of
as of
						
						
						
						
Goodwill
						
						
﻿
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
						
						
				
						
						
						
-
						
						
						
-
						
						
						
				
						
						
Total goodwill
						
$
3,522 				
						
						
$
(1,249 				
)
						
$
-
						
						
$
2,273 				
						
						
﻿
﻿
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
For the Year Ended December 31, 2015
						
						
﻿
						
Gross
Accumulated
						
						
						
						
						
						
						
﻿
						
Goodwill
Impairment
						
						
						
						
						
Net
						
						
﻿
						
as of
as of
						
						
						
						
Goodwill
						
						
﻿
						
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
						
						
				
						
						
						
-
						
						
						
-
						
						
						
				
						
						
Total goodwill
						
$
3,522 				
						
						
$
(1,249 				
)
						
$
-
						
						
$
2,273 				
						
						
﻿
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, 2016
						
						
As of December 31, 2015
						
						
﻿
Gross
						
						
						
						
						
						
Gross
						
						
						
						
						
﻿
Carrying
						
Accumulated
						
Carrying
						
Accumulated
						
﻿
Amount
						
Amortization
						
Amount
						
Amortization
						
Life Insurance:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Sales force
$
				
						
						
$
				
						
						
$
				
						
						
$
				
						
						
Retirement Plan Services:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Mutual fund contract rights (1)
						
				
						
						
						
-
						
						
						
				
						
						
						
-
						
						
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, 2016, was as follows:
﻿
﻿
﻿
						
						
						
﻿
						
						
						
$
				
						
						
				
						
						
				
						
						
				
						
						
				
						
Thereafter
						
				
						
﻿
﻿
﻿
﻿
11. Guaranteed Benefit Features
﻿
Information on the GDB features outstanding (dollars in millions) was as follows:
﻿
﻿
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
﻿
As of December 31,
						
						
﻿
2016 (1)
						
						
2015 (1)
						
						
Return of Net Deposits
						
						
						
						
						
						
						
						
Total account value
$
87,707 				
						
						
$
85,345 				
						
						
Net amount at risk (2)
						
				
						
						
						
1,201 				
						
						
Average attained age of contract holders
						
63 years
						
						
						
63 years
						
						
﻿
						
						
						
						
						
						
						
						
Minimum Return
						
						
						
						
						
						
						
						
Total account value
$
				
						
						
$
				
						
						
Net amount at risk (2)
						
				
						
						
						
				
						
						
Average attained age of contract holders
						
75 years
						
						
						
75 years
						
						
Guaranteed minimum return
						
5% 				
						
						
						
5% 				
						
						
﻿
						
						
						
						
						
						
						
						
Anniversary Contract Value
						
						
						
						
						
						
						
						
Total account value
$
24,605 				
						
						
$
24,659 				
						
						
Net amount at risk (2)
						
				
						
						
						
1,345 				
						
						
Average attained age of contract holders
						
69 years
						
						
						
69 years
						
						
﻿
(1)
Our variable contracts with guarantees may offer more than one type of guarantee in each contract; therefore, the amounts listed are not mutually exclusive.
(2)
Represents the amount of death benefit in excess of the account balance that is subject to market fluctuations.
﻿
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
						
				
						
						
				
						
						
				
						
						
Benefits paid
						
(39 				
)
						
(26 				
)
						
(18 				
)
						
Balance as of end-of-year
$
				
						
$
				
						
$
				
						
						
﻿
Variable Annuity Contracts
﻿
Account balances of variable annuity contracts, including those with guarantees, (in millions) were invested in separate account investment options as follows:
﻿
﻿
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
﻿
As of December 31,
						
						
﻿
						
						
						
						
Asset Type
						
						
						
						
						
						
						
						
Domestic equity
$
52,244 				
						
						
$
48,362 				
						
						
International equity
						
17,396 				
						
						
						
18,382 				
						
						
Bonds
						
27,532 				
						
						
						
26,492 				
						
						
Money market
						
12,010 				
						
						
						
13,057 				
						
						
Total
$
109,182 				
						
						
$
106,293 				
						
						
﻿
						
						
						
						
						
						
						
						
Percent of total variable annuity separate account values
						
99% 				
						
						
						
99% 				
						
						
﻿
Secondary Guarantee Products
﻿
Future contract benefits and other contract holder funds include reserves for our secondary guarantee products sold through our Life Insurance segment. These UL and VUL products with secondary guarantees represented 35% of total life insurance in-force reserves as of December 31, 2016 and 2015. UL and VUL products with secondary guarantees represented 33% of total sales for the years ended December 31, 2016 and 2015, and 39% for the year ended December 31, 2014.
﻿
12. Short-Term and Long-Term Debt
﻿
Details underlying short-term and long-term debt (in millions) were as follows:
﻿
﻿
﻿
﻿
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
﻿
As of December 31,
						
						
﻿
						
						
						
Long-Term Debt, Excluding Current Portion
						
						
						
						
						
						
						
Senior notes:
						
						
						
						
						
						
						
LIBOR + 3 bps notes, due 2017 (1)
$
-
						
$
				
						
						
7.00% notes, due 2018
						
				
						
						
				
						
						
LIBOR + 110 bps loan, due 2018
						
				
						
						
				
						
						
8.75% notes, due 2019 (2)
						
				
						
						
				
						
						
6.25% notes, due 2020 (2)
						
				
						
						
				
						
						
4.85% notes, due 2021 (2)
						
				
						
						
				
						
						
4.20% notes, due 2022 (2)
						
				
						
						
				
						
						
4.00% notes, due 2023 (2)
						
				
						
						
				
						
						
3.35% notes, due 2025 (2)
						
				
						
						
				
						
						
3.63% notes, due 2026 (2)
						
				
						
						
-
						
						
6.15% notes, due 2036 (2)
						
				
						
						
				
						
						
6.30% notes, due 2037 (1)(2)
						
				
						
						
				
						
						
7.00% notes, due 2040 (1)(2)
						
				
						
						
				
						
						
Total senior notes
						
3,910 				
						
						
4,110 				
						
						
﻿
						
						
						
						
						
						
						
Capital securities:
						
						
						
						
						
						
						
7.00%, due 2066
						
				
						
						
				
						
						
6.05%, due 2067
						
				
						
						
				
						
						
Total capital securities
						
1,213 				
						
						
1,213 				
						
						
Unamortized premiums (discounts)
						
(9 				
)
						
(12 				
)
						
Unamortized debt issuance costs
						
(27 				
)
						
(29 				
)
						
Fair value hedge - interest rate swap agreements
						
				
						
						
				
						
						
Total unamortized premiums (discounts), unamortized debt
						
						
						
						
						
						
						
issuance costs and fair value hedge on interest rate swap agreements
						
				
						
						
				
						
						
Total long-term debt
$
5,345 				
						
$
5,553 				
						
						
﻿
(1)
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.
(2)
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.
﻿
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
						
(3 				
)
						
-
						
						
-
						
Amount paid to retire debt
						
(410 				
)
						
-
						
						
-
						
Gain (loss) on extinguishment of debt, pre-tax
$
(63 				
)
$
-
						
$
-
						
﻿
(1)
During the fourth quarter of 2016, we repurchased $200 million of our 8.75% senior notes due 2019 and $150 million of our 6.15% senior notes due 2036.
Future principal payments due on long-term debt (in millions) as of December 31, 2016, were as follows:
﻿
﻿
﻿
﻿
						
						
						
						
﻿
						
						
						
						
$
				
						
						
						
				
						
						
						
				
						
						
						
				
						
						
Thereafter
						
3,786 				
						
						
Total
$
5,123 				
						
						
﻿
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
﻿
Credit facilities, which allow for borrowing or issuances of letters of credit (“LOCs”), and LOCs (in millions) were as follows:
﻿
﻿
﻿
﻿
						
						
						
						
						
						
						
						
﻿
﻿
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
﻿
						
						
As of December 31, 2016
						
﻿
Expiration
						
Maximum
						
LOCs
						
﻿
Date
						
Available
						
Issued
						
Credit Facilities
						
						
						
						
						
						
						
						
Five-year revolving credit facility
Jun-2021
						
$
2,500 				
						
$
				
						
LOC facility (1)
Dec-2019
						
						
				
						
						
				
						
LOC facility (2)
Mar-2023
						
						
				
						
						
				
						
LOC facility (1)
Mar-2023
						
						
				
						
						
				
						
LOC facility (1)
Aug-2031
						
						
				
						
						
				
						
LOC facility (1)
Oct-2031
						
						
1,029 				
						
						
1,023 				
						
Total
						
						
$
5,903 				
						
$
3,656 				
						
﻿
(1)
Our wholly-owned subsidiaries entered into irrevocable LOC facility agreements with third-party lenders supporting inter-company reinsurance agreements.
(2)
We entered into an irrevocable LOC facility agreement with a third-party lender supporting certain fees owed to another third-party lender that automatically renews on an annual basis, unless not extended by the third-party upon 30 days’ notice.
﻿
On June 30, 2016, we refinanced our existing 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 June 30, 2021. The LOCs under the facility are used primarily to satisfy reserve credit requirements of (i) our domestic insurance companies for which reserve credit is provided by our affiliated reinsurance companies and (ii) certain ceding companies of our legacy reinsurance business.
﻿
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 $10.5 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, 2016, we were in compliance with all such covenants.
﻿
Our LOC facility 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, 2016, we were in compliance with all such covenants.
﻿
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 depository shares.
﻿
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”):
﻿
·
The Lincoln National Life Insurance Company’s (“LNL”) risk-based capital (“RBC”) 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 AOCI 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. As of December 31, 2016, we were in compliance with all such covenants.
﻿
13. Contingencies and Commitments
﻿
Contingencies
﻿
Regulatory and Litigation Matters
﻿
Regulatory bodies, such as state insurance departments, the SEC, 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 is 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 verdicts obtained 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, 2016. 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, 2016, we estimate the aggregate range of reasonably possible losses to be up to approximately $50 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.
﻿
Cost of Insurance Litigation
﻿
Glover v. Connecticut General Life Insurance Company and The Lincoln National Life Insurance Company, filed in the U.S. District Court for the District of Connecticut, No. 3:16cv00827, is a putative class action that was served on LNL on June 8, 2016. Plaintiff is the owner of a universal life insurance policy who alleges that LNL charged more for cost of insurance than permitted by the policy. Plaintiff seeks to represent all universal life and variable universal life policyholders who owned policies containing cost of insurance provisions that are similar to those of Plaintiff’s policy and seeks damages on behalf of all such policyholders. We are vigorously defending this matter.
﻿
Helen Hanks v. The Lincoln Life and Annuity Company of New York (“LLANY”) and Voya Retirement Insurance and Annuity Company (“Voya”), filed in the U.S. District Court for the Southern District of New York, No. 16cv6399, is a putative class action that was served on LLANY on August 12, 2016. Plaintiff owns a universal life policy originally issued by Aetna (now Voya) and alleges that (i) Voya breached the terms of the policy when it increased cost of insurance rates on Plaintiff’s policy; and (ii) LLANY, as reinsurer and administrator of Plaintiff’s policy, engaged in wrongful conduct related to the cost of insurance increase and was unjustly enriched as a result. Plaintiff seeks to represent all owners of Aetna life insurance policies that were subject to cost of insurance rate increases in 2016 and seeks damages on their behalf. We are vigorously defending this matter.
﻿
Bharwani, et al. v. Lincoln National Corporation and Lincoln National Life Insurance Company, pending in the U.S. District Court for the Eastern District of Pennsylvania, No. 16-cv-06605, is a putative class action filed on December 23, 2016. Plaintiffs own universal life insurance policies originally issued by Jefferson-Pilot (now Lincoln). Plaintiffs allege that Lincoln and LNL breached the terms of policyholders’ contracts when they increased cost of insurance rates beginning in September 2016. Plaintiffs seek to represent three classes of policyowners and seek damages on their behalf. We are vigorously defending this matter.
﻿
Mukamal, et al. v. Lincoln National Life Insurance Company and Lincoln National Corporation, pending in the U.S. District Court for the Eastern District of Pennsylvania, No. 17-cv-00234, is a putative class action filed on January 17, 2017. This action is substantially similar to a lawsuit filed in the U.S. District Court for the Southern District of Florida in December 2016 that was subsequently dismissed. Plaintiffs, Barry Mukamal, as Trustee for the Mutual Benefits Keep Policy Trust, and Milgram Investments, LP, own universal life insurance policies originally issued by Jefferson-Pilot (now Lincoln). Plaintiffs allege that Lincoln and LNL breached the terms of policyholders’ contracts when they increased cost of insurance rates beginning in September 2016. Plaintiffs seek to represent three classes of policyowners and seek damages on their behalf. We are vigorously defending this matter.
﻿
US Life 1 Renditefonds GmbH & Co. Kg and US Life 2 Renditefonds GmbH & Co. Kg v. The Lincoln National Life Insurance Company, pending in the U.S. District Court for the Eastern District of Pennsylvania, No. 2:17-cv-00307, is a putative class action filed on January 20, 2017. Plaintiffs own Legend Series universal life insurance policies originally issued by Jefferson-Pilot (now Lincoln). Plaintiffs allege that Lincoln breached the terms of policyholders’ contracts when it increased cost of insurance rates beginning in 2016. Plaintiffs seek to represent two classes of policyowners and seek damages on their behalf. We are vigorously defending this matter.
﻿
EFG Bank AG, Cayman Branch, et al. v. The Lincoln National Life Insurance Company, pending in the U.S. District Court for the Central District of California, No. 2:17-cv-00817, is a civil action filed on February 1, 2017. Plaintiffs own Legend Series universal life insurance policies originally issued by Jefferson-Pilot (now Lincoln). Plaintiffs allege that Lincoln breached the terms of policyholders’ contracts when it increased cost of insurance rates beginning in 2016. We are vigorously defending this matter.
﻿
Swenson, et al. v. The Lincoln National Life Insurance Company, Lincoln Life & Annuity Company of New York, Lincoln National Corporation, Voya Retirement Insurance and Annuity Company, and Voya Financial, Inc., pending in the U.S. District Court for the Eastern District of Washington, No. 2:17-cv-00048, is a putative class action filed on February 1, 2017. Plaintiffs own universal life insurance policies originally issued by Aetna (now Voya). Plaintiffs allege that Lincoln breached the terms of policyholders’ contracts when it increased cost of insurance rates beginning in 2016. Plaintiffs seek to represent multiple subclasses of policy owners and seek damages on their behalf. We are vigorously defending this matter.
﻿
Commitments
﻿
Operating 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. In 2016, we renegotiated this lease with a new term expiring in 2028. During 2007, we moved our corporate headquarters to Radnor, Pennsylvania from Philadelphia, Pennsylvania and entered into a new 13-year lease for office space. During 2016, a lease commenced in Atlanta, Georgia at our RiverEdge Summit location and the lease shall expire in 2027.
﻿
Total rental expense on operating leases for the years ended December 31, 2016, 2015 and 2014, was $44 million, $42 million and $44 million, respectively. Future minimum rental commitments (in millions) as of December 31, 2016, were as follows:
﻿
﻿
						
						
						
﻿
						
						
						
$
				
						
						
				
						
						
				
						
						
				
						
						
				
						
Thereafter
						
				
						
Total
$
				
						
Capital Leases
﻿
In December 2016 and 2015, we entered into sale-leaseback transactions on $85 million and $47 million, respectively, (net of amortization) of assets. These transactions have been classified as capital leases on our Consolidated Balance Sheets. These assets will continue to be amortized on a straight-line basis over the assets’ remaining lives. Total accumulated amortization related to these leased assets as of December 31, 2016 and 2015, was $92 million and $64 million, respectively. Future minimum lease payments under capital leases (in millions) as of December 31, 2016, were as follows:
﻿
﻿
						
						
						
﻿
						
						
						
$
				
						
						
				
						
						
				
						
						
				
						
						
				
						
Thereafter
						
				
						
Total minimum lease payments
						
				
						
Less: Amount representing interest
						
				
						
Present value of minimum lease payments
$
				
						
﻿
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, 2016, 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 21%, 18% and 20% of Annuities’ variable annuity product deposits in 2016, 2015 and 2014, respectively, and represented approximately 41%, 42% and 44% of the segment’s total variable annuity product account values as of December 31, 2016, 2015 and 2014, 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 23%, 20% and 22% of variable annuity product deposits in 2016, 2015 and 2014, respectively, and represented 47%, 48% and 50% of the segment’s total variable annuity product account values as of December 31, 2016, 2015 and 2014, 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 $(9) million and $(16) million as of December 31, 2016 and 2015, respectively.
14. Shares and Stockholders’ Equity
﻿
Common Shares
﻿
The changes in our common stock (number of shares) were as follows:
﻿
﻿
﻿
﻿
﻿
						
						
						
						
						
						
﻿
						
						
						
						
						
						
﻿
For the Years Ended December 31,
						
﻿
						
						
						
Common Stock
						
						
						
						
						
						
Balance as of beginning-of-year
243,835,893 				
						
256,551,440 				
						
262,896,701 				
						
Stock issued for exercise of warrants
79,397 				
						
1,168,966 				
						
4,356,385 				
						
Stock compensation/issued for benefit plans
1,732,812 				
						
2,108,155 				
						
1,770,430 				
						
Retirement/cancellation of shares
(19,312,997 				
)
(15,992,668 				
)
(12,472,076 				
)
Balance as of end-of-year
226,335,105 				
						
243,835,893 				
						
256,551,440 				
						
﻿
						
						
						
						
						
						
Common Stock as of End-of-Year
						
						
						
						
						
						
Basic basis
226,335,105 				
						
243,835,893 				
						
256,551,440 				
						
Diluted basis (1)
230,126,820 				
						
247,732,609 				
						
261,538,593 				
						
﻿
(1)Effective October 1, 2016, we early adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. We have updated certain previously reported interim results and metrics as of January 1, 2016, in accordance with the new guidance. For more information, see “Note 1 - Earnings Per Share”.
﻿
Our common stock is 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
234,181,717 				
						
250,629,243 				
						
260,877,533 				
						
Shares to cover exercise of outstanding warrants
1,089,221 				
						
1,389,768 				
						
4,342,860 				
						
Shares to cover non-vested stock
1,109,490 				
						
1,302,859 				
						
1,522,737 				
						
Average stock options outstanding during the year
2,256,720 				
						
3,162,508 				
						
3,828,292 				
						
Assumed acquisition of shares with assumed proceeds
						
						
						
						
						
						
from exercising outstanding warrants
(248,402 				
)
(262,709 				
)
(894,175 				
)
Assumed acquisition of shares with assumed
						
						
						
						
						
						
proceeds and benefits from exercising stock
						
						
						
						
						
						
options (at average market price for the year)
(1,508,620 				
)
(2,258,658 				
)
(2,679,571 				
)
Shares repurchasable from measured but
						
						
						
						
						
						
unrecognized stock option expense
(49,839 				
)
(45,958 				
)
(75,268 				
)
Average deferred compensation shares
-
						
1,021,059 				
						
1,041,587 				
						
Weighted-average shares, as used in diluted calculation
236,830,287 				
						
254,938,112 				
						
267,963,995 				
						
﻿
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.
We have participants in our deferred compensation plans who selected LNC stock as the measure for the investment return attributable to all or a portion of their deferral amounts. For the years ended December 2015 and 2014, the effect of settling this obligation in LNC stock (“equity classification”) was more dilutive than the scenario of settling in cash (“liability classification”). Therefore, for our EPS calculation for these periods, 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 $4 million and $(4) million for the years ended December 31, 2015 and 2014, respectively.
﻿
As of December 31, 2016, we had 973,383 outstanding warrants. The warrants, each representing the right to purchase one share of our common stock had an exercise price of $10.08 as of December 31, 2016, subject to adjustment. The warrants expire on July 10, 2019, and are listed on the New York Stock Exchange under the symbol “LNC WS.”
AOCI
﻿
The following summarizes the components and changes in AOCI (in millions):
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
﻿
For the Years Ended December 31,
						
﻿
						
						
						
Unrealized Gain (Loss) on AFS Securities
						
						
						
						
						
						
						
						
						
Balance as of beginning-of-year
$
				
						
$
3,213 				
						
$
1,538 				
						
Unrealized holding gains (losses) arising during the year
						
1,600 				
						
						
(4,541 				
)
						
3,855 				
						
Change in foreign currency exchange rate adjustment
						
(99 				
)
						
(45 				
)
						
(47 				
)
Change in DAC, VOBA, DSI, future contract benefits and other contract holder funds
						
(456 				
)
						
1,294 				
						
						
(1,252 				
)
Income tax benefit (expense)
						
(370 				
)
						
1,147 				
						
						
(895 				
)
Less:
						
						
						
						
						
						
						
						
						
Reclassification adjustment for gains (losses) included in net income (loss)
						
(158 				
)
						
				
						
						
				
						
Associated amortization of DAC, VOBA, DSI and DFEL
						
(23 				
)
						
(27 				
)
						
(32 				
)
Income tax benefit (expense)
						
				
						
						
(41 				
)
						
				
						
Balance as of end-of-year
$
1,784 				
						
$
				
						
$
3,213 				
						
Unrealized OTTI on AFS Securities
						
						
						
						
						
						
						
						
						
Balance as of beginning-of-year
$
				
						
$
				
						
$
(7 				
)
(Increases) attributable to:
						
						
						
						
						
						
						
						
						
Gross OTTI recognized in OCI during the year
						
(55 				
)
						
(30 				
)
						
(12 				
)
Change in DAC, VOBA, DSI and DFEL
						
				
						
						
				
						
						
				
						
Income tax benefit (expense)
						
				
						
						
				
						
						
				
						
Decreases attributable to:
						
						
						
						
						
						
						
						
						
Changes in fair value, sales, maturities or other settlements of AFS securities
						
				
						
						
				
						
						
				
						
Change in DAC, VOBA, DSI and DFEL
						
(12 				
)
						
(17 				
)
						
(5 				
)
Income tax benefit (expense)
						
(15 				
)
						
(9 				
)
						
(21 				
)
Balance as of end-of-year
$
				
						
$
				
						
$
				
						
Unrealized Gain (Loss) on Derivative Instruments
						
						
						
						
						
						
						
						
						
Balance as of beginning-of-year
$
				
						
$
				
						
$
				
						
Unrealized holding gains (losses) arising during the year
						
(215 				
)
						
(241 				
)
						
(250 				
)
Change in foreign currency exchange rate adjustment
						
				
						
						
				
						
						
				
						
Change in DAC, VOBA, DSI and DFEL
						
				
						
						
				
						
						
				
						
Income tax benefit (expense)
						
				
						
						
				
						
						
				
						
Less:
						
						
						
						
						
						
						
						
						
Reclassification adjustment for gains (losses) included in net income (loss)
						
				
						
						
(183 				
)
						
(19 				
)
Associated amortization of DAC, VOBA, DSI and DFEL
						
(1 				
)
						
				
						
						
				
						
Income tax benefit (expense)
						
(5 				
)
						
				
						
						
				
						
Balance as of end-of-year
$
				
						
$
				
						
$
				
						
Foreign Currency Translation Adjustment
						
						
						
						
						
						
						
						
						
Balance as of beginning-of-year
$
(5 				
)
$
(3 				
)
$
(5 				
)
Foreign currency translation adjustment arising during the year
						
(22 				
)
						
(2 				
)
						
				
						
Balance as of end-of-year
$
(27 				
)
$
(5 				
)
$
(3 				
)
Funded Status of Employee Benefit Plans
						
						
						
						
						
						
						
						
						
Balance as of beginning-of-year
$
(299 				
)
$
(279 				
)
$
(219 				
)
Adjustment arising during the year
						
				
						
						
(21 				
)
						
(96 				
)
Income tax benefit (expense)
						
(9 				
)
						
				
						
						
				
						
Balance as of end-of-year
$
(265 				
)
$
(299 				
)
$
(279 				
)
The following summarizes the reclassifications out of AOCI (in millions) and the associated line item in the Consolidated Statements of Comprehensive Income (Loss):
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﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
﻿
For the Years Ended December 31,
						
						
﻿
						
						
						
						
						
						
Unrealized Gain (Loss) on AFS Securities
						
						
						
						
						
						
						
						
						
						
						
						
Gross reclassification
$
(158 				
)
						
$
				
						
						
$
				
						
Total realized gain (loss)
Associated amortization of DAC,
						
						
						
						
						
						
						
						
						
						
						
						
VOBA, DSI and DFEL
						
(23 				
)
						
						
(27 				
)
						
						
(32 				
)
Total realized gain (loss)
Reclassification before income
						
						
						
						
						
						
						
						
						
						
						
Income (loss) from continuing
tax benefit (expense)
						
(181 				
)
						
						
				
						
						
						
(22 				
)
operations before taxes
Income tax benefit (expense)
						
				
						
						
						
(41 				
)
						
						
				
						
Federal income tax expense (benefit)
Reclassification, net of income tax
$
(118 				
)
						
$
				
						
						
$
(14 				
)
Net income (loss)
﻿
						
						
						
						
						
						
						
						
						
						
						
						
Unrealized OTTI on AFS Securities
						
						
						
						
						
						
						
						
						
						
						
						
Gross reclassification
$
				
						
						
$
				
						
						
$
				
						
Total realized gain (loss)
Change in DAC, VOBA, DSI and DFEL
						
-
						
						
						
-
						
						
						
(5 				
)
Total realized gain (loss)
Reclassification before income
						
						
						
						
						
						
						
						
						
						
						
Income (loss) from continuing
tax benefit (expense)
						
				
						
						
						
				
						
						
						
				
						
operations before taxes
Income tax benefit (expense)
						
-
						
						
						
-
						
						
						
(21 				
)
Federal income tax expense (benefit)
Reclassification, net of income tax
$
				
						
						
$
				
						
						
$
				
						
Net income (loss)
﻿
						
						
						
						
						
						
						
						
						
						
						
						
Unrealized Gain (Loss) on Derivative Instruments
						
						
						
						
						
						
						
						
						
						
Gross reclassifications:
						
						
						
						
						
						
						
						
						
						
						
						
Interest rate contracts
$
				
						
						
$
(190 				
)
						
$
(22 				
)
Net investment income
Interest rate contracts
						
(10 				
)
						
						
				
						
						
						
				
						
Interest and debt expense
Interest rate contracts
						
				
						
						
						
-
						
						
						
-
						
Total realized gain (loss)
Foreign currency contracts
						
				
						
						
						
				
						
						
						
-
						
Net investment income
Foreign currency contracts
						
				
						
						
						
-
						
						
						
-
						
Total realized gain (loss)
Total gross reclassifications
						
				
						
						
						
(183 				
)
						
						
(19 				
)
						
Associated amortization of DAC,
						
						
						
						
						
						
						
						
						
						
						
						
VOBA, DSI and DFEL
						
(1 				
)
						
						
				
						
						
						
				
						
Commissions and other expenses
Reclassifications before income
						
						
						
						
						
						
						
						
						
						
						
Income (loss) from continuing
tax benefit (expense)
						
				
						
						
						
(182 				
)
						
						
(18 				
)
operations before taxes
Income tax benefit (expense)
						
(5 				
)
						
						
				
						
						
						
				
						
Federal income tax expense (benefit)
Reclassifications, net of income tax
$
				
						
						
$
(118 				
)
						
$
(12 				
)
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)
$
(250 				
)
$
(88 				
)
$
(18 				
)
Realized gain (loss) on the mark-to-market on certain instruments (2)
						
				
						
						
(45 				
)
						
(54 				
)
Indexed annuity and IUL contracts net derivatives results: (3)
						
						
						
						
						
						
						
						
						
Gross gain (loss)
						
(1 				
)
						
(77 				
)
						
(35 				
)
Associated amortization of DAC, VOBA, DSI and DFEL
						
(4 				
)
						
				
						
						
				
						
Variable annuity net derivatives results: (4)
						
						
						
						
						
						
						
						
						
Gross gain (loss)
						
(138 				
)
						
				
						
						
				
						
Associated amortization of DAC, VOBA, DSI and DFEL
						
				
						
						
(8 				
)
						
(12 				
)
Realized gain (loss) on sale of subsidiaries/businesses (5)
						
-
						
						
(3 				
)
						
(46 				
)
Total realized gain (loss)
$
(339 				
)
$
(151 				
)
$
-
						
﻿
(1)
See “Realized Gain (Loss) Related to Certain Investments” in Note 5.
(2)
Represents changes in the fair values of certain derivative investments (not including those associated with our variable and indexed annuity and IUL contracts 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 IUL contracts 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.
(5)
See LFM in Note 3.
﻿
16. Commissions and Other Expenses
﻿
Details underlying commissions and other expenses (in millions) were as follows:
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
﻿
For the Years Ended December 31,
						
﻿
						
						
						
Commissions
$
1,910 				
						
$
2,071 				
						
$
2,092 				
						
General and administrative expenses
						
1,687 				
						
						
1,701 				
						
						
1,640 				
						
Expenses associated with reserve financing and unrelated LOCs
						
				
						
						
				
						
						
				
						
DAC and VOBA deferrals and interest, net of amortization
						
(70 				
)
						
(226 				
)
						
(432 				
)
Broker-dealer expenses
						
				
						
						
				
						
						
				
						
Specifically identifiable intangible asset amortization
						
				
						
						
				
						
						
				
						
Media expenses
						
-
						
						
				
						
						
				
						
Taxes, licenses and fees
						
				
						
						
				
						
						
				
						
Total
$
4,277 				
						
$
4,318 				
						
$
4,079 				
						
﻿
﻿
17. Retirement and Deferred Compensation Plans
﻿
Defined Benefit Pension and Other Postretirement Benefit Plans
﻿
We maintain U.S. defined benefit pension plans in which certain U.S. employees and agents are participants, and a U.K. plan we retained after the sale of the Lincoln UK business. Our defined benefit pension plans are closed to new entrants and existing participants do not accrue any additional benefits. We comply with the minimum funding requirements in both the U.S. and the U.K. In accordance with such practice, we were required to contribute zero and $11 million for the years ended December 31, 2016 and 2015, respectively. We elected to contribute $4 million and $25 million for the years ended December 31, 2016 and 2015, respectively. We do not expect to be required to make any contributions to these pension plans in 2017. We sponsor other postretirement benefit plans that provide health care and life insurance to certain retired employees and agents. Total net periodic cost (recovery) for these plans was $5 million, $(6) million and $(4) million during 2016, 2015 and 2014, respectively. In 2017, we expect to make benefit payments of approximately $106 million for these plans.
Information (in millions) with respect to these plans was as follows:
﻿
﻿
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
As of or For the Years Ended December 31,
						
						
﻿
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
Other Postretirement
						
						
﻿
Pension Plans
						
Benefit Plans
						
						
Fair value of plan assets
$
1,433 				
						
$
1,434 				
						
$
				
						
$
				
						
						
Projected benefit obligation
						
1,593 				
						
						
1,607 				
						
						
				
						
						
				
						
						
Funded status of plan
$
(160 				
)
$
(173 				
)
$
(28 				
)
$
(45 				
)
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
Amounts Recognized on the
						
						
						
						
						
						
						
						
						
						
						
						
						
Consolidated Balance Sheets
						
						
						
						
						
						
						
						
						
						
						
						
						
Other assets
$
				
						
$
				
						
$
-
						
$
				
						
						
Other liabilities
						
(186 				
)
						
(201 				
)
						
(28 				
)
						
(47 				
)
						
Net amount recognized
$
(160 				
)
$
(173 				
)
$
(28 				
)
$
(45 				
)
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
Weighted-Average Assumptions
						
						
						
						
						
						
						
						
						
						
						
						
						
Benefit obligations:
						
						
						
						
						
						
						
						
						
						
						
						
						
Weighted-average discount rate
						
4.03% 				
						
						
4.29% 				
						
						
4.50% 				
						
						
4.50% 				
						
						
Net periodic benefit cost:
						
						
						
						
						
						
						
						
						
						
						
						
						
Weighted-average discount rate
						
4.29% 				
						
						
3.88% 				
						
						
4.50% 				
						
						
4.00% 				
						
						
Expected return on plan assets
						
6.99% 				
						
						
6.87% 				
						
						
6.50% 				
						
						
6.50% 				
						
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
The weighted average discount rate was determined based on a corporate yield curve as of December 31, 2016, and projected benefit obligation cash flows. 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 these assumptions each plan year.
﻿
The following summarizes our fair value measurements of our benefit plans’ assets (in millions) on a recurring basis by asset category:
﻿
﻿
﻿
﻿
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
﻿
As of December 31,
						
						
﻿
						
						
						
﻿
						
						
						
						
						
						
						
Fixed maturity securities:
						
						
						
						
						
						
						
Corporate bonds
$
				
						
$
				
						
						
U.S. government bonds
						
				
						
						
				
						
						
Foreign government bonds
						
				
						
						
				
						
						
State and municipal bonds
						
				
						
						
				
						
						
Common and preferred stock
						
				
						
						
				
						
						
Cash and invested cash
						
				
						
						
				
						
						
Other investments
						
				
						
						
				
						
						
Total
$
1,489 				
						
$
1,486 				
						
						
﻿
						
						
						
						
						
						
						
See “Fair Value Measurement” in Note 1 for discussion on how we categorize our pension plans’ assets into the three-level fair value hierarchy. See “Financial Instruments Carried at Fair Value” in Note 20 for a summary of our fair value measurement of our pension plans’ assets by the three-level fair value hierarchy.
﻿
Defined Contribution Plans
﻿
We sponsor tax-qualified defined contribution plans for eligible employees and agents. We administer these plans in accordance with the plan documents and various limitations under section 401(a) of the Internal Revenue Code of 1986. For the years ended December 31, 2016, 2015 and 2014, expenses for these plans were $86 million, $82 million and $78 million, respectively.
﻿
Deferred Compensation Plans
﻿
We sponsor non-qualified, unfunded, deferred compensation plans for certain current and former employees, agents and non-employee directors. The results of certain notional investment options within some of the plans are hedged by total return swaps. Our expenses increase or decrease in direct proportion to the change in market value of the participants’ investment options. Participants of certain plans are able to select our stock as a notional 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. For the years ended December 31, 2016, 2015 and 2014, expenses for these plans were $33 million, $10 million and $23 million, respectively.
Information (in millions) with respect to these plans was as follows:
﻿
﻿
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
﻿
As of December 31,
						
						
						
						
﻿
						
						
						
						
						
Total liabilities (1)
$
				
						
$
				
						
						
						
						
Investments dedicated to fund liabilities (2)
						
				
						
						
				
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
(1)
Reported in other liabilities on our Consolidated Balance Sheets.
(2)
Reported in other assets on our Consolidated Balance Sheets.
﻿
18. Stock-Based Incentive Compensation Plans
﻿
LNC Stock-Based Incentive Plans
﻿
We sponsor three 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”) among other types of awards. We issue new shares to satisfy option exercises and vested performance shares and RSUs.
﻿
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
						
				
						
						
				
						
						
				
						
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
$
				
						
1.4 				
						
$
				
						
1.4 				
						
$
				
						
1.5 				
						
Performance shares
						
				
						
1.4 				
						
						
				
						
1.0 				
						
						
				
						
1.5 				
						
SARs
						
				
						
3.6 				
						
						
				
						
3.0 				
						
						
				
						
3.2 				
						
RSUs
						
				
						
1.2 				
						
						
				
						
1.0 				
						
						
				
						
1.0 				
						
Total unrecognized stock-based
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
incentive compensation expense
$
				
						
						
						
$
				
						
						
						
$
				
						
						
						
﻿
In the first quarter of 2016, a performance period from 2016-2018 was approved for our executive officers by the Compensation Committee. The award for executive officers participating in this performance period consisted of LNC RSUs representing approximately 40%, LNC stock options representing approximately 24% 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. For the 2016-2018 performance period, a total of 767,733 LNC RSUs, 776,895 LNC stock options and 291,298 LNC performance shares were granted.
﻿
In the first quarter of 2015, a performance period from 2015-2017 was approved for our executive officers by the Compensation Committee. The award for executive officers participating in this performance period consisted of LNC RSUs representing approximately 41%, LNC stock options representing approximately 24% and LNC performance shares representing approximately 35% 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. For the 2015-2017 performance period, a total of 481,900 LNC RSUs, 502,664 LNC stock options and 161,255 LNC performance shares were granted.
In the first quarter of 2014, a performance period from 2014-2016 was approved for our executive officers by the Compensation Committee. The award for executive officers participating in this performance period consisted of LNC RSUs representing approximately 37%, LNC stock options representing approximately 25% and LNC performance shares representing approximately 38% 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. For the 2014-2016 performance period, a total of 462,231 LNC RSUs, 490,852 LNC stock options and 182,149 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
$
9.32 				
						
$
13.00 				
						
$
12.95 				
						
Assumptions:
						
						
						
						
						
						
						
						
						
Dividend yield
						
2.8% 				
						
						
1.9% 				
						
						
2.2% 				
						
Expected volatility
						
35.9% 				
						
						
28.0% 				
						
						
33.2% 				
						
Risk-free interest rate
						
1.0-1.6%
						
						
1.4-1.7%
						
						
0.9-1.8%
						
Expected life (in years)
						
5.7 				
						
						
5.5 				
						
						
5.4 				
						
﻿
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, 2015
1,008,080 				
						
$
50.05 				
						
						
						
						
						
						
Granted - original
92,310 				
						
						
40.07 				
						
						
						
						
						
						
Exercised (includes shares tendered)
(297,858 				
)
						
47.66 				
						
						
						
						
						
						
Forfeited or expired
(22,716 				
)
						
48.17 				
						
						
						
						
						
						
Outstanding as of December 31, 2016
779,816 				
						
$
49.83 				
						
1.72 				
						
$
				
						
﻿
						
						
						
						
						
						
						
						
						
						
Vested or expected to vest as of December 31, 2016 (1)
734,680 				
						
$
49.85 				
						
1.61 				
						
$
				
						
﻿
						
						
						
						
						
						
						
						
						
						
Exercisable as of December 31, 2016
689,544 				
						
$
49.87 				
						
1.50 				
						
$
				
						
﻿
(1)
Includes estimated forfeitures.
﻿
The total fair value of options with performance conditions vested during each of the years ended December 31, 2016, 2015 and 2014, was $1 million. The total intrinsic value of options exercised during the years ended December 31, 2016, 2015 and 2014, was $3 million, $2 million and $2 million, 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, 2015
3,024,348 				
						
$
41.23 				
						
						
						
						
						
						
Granted - original
776,895 				
						
						
35.51 				
						
						
						
						
						
						
Exercised (includes shares tendered)
(826,542 				
)
						
30.00 				
						
						
						
						
						
						
Forfeited or expired
(261,643 				
)
						
52.03 				
						
						
						
						
						
						
Outstanding as of December 31, 2016
2,713,058 				
						
$
41.97 				
						
6.53 				
						
$
				
						
﻿
						
						
						
						
						
						
						
						
						
						
Vested or expected to vest as of December 31, 2016 (1)
2,482,191 				
						
$
41.69 				
						
6.35 				
						
$
				
						
﻿
						
						
						
						
						
						
						
						
						
						
Exercisable as of December 31, 2016
1,562,171 				
						
$
41.40 				
						
4.93 				
						
$
				
						
﻿
(1)
Includes estimated forfeitures.
﻿
The total fair value of options with service conditions vested during the years ended December 31, 2016, 2015 and 2014, was $6 million, $7 million and $7 million, respectively. The total intrinsic value of options exercised during the years ended December 31, 2016, 2015 and 2014, was $22 million, $25 million and $18 million, respectively.
﻿
Information with respect to our performance shares was as follows:
﻿
﻿
﻿
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
﻿
						
						
						
Weighted-
						
						
﻿
						
						
						
Average
						
						
﻿
						
						
Grant-Date
						
﻿
Shares
						
						
Fair Value
						
						
Nonvested as of December 31, 2015
537,887 				
						
						
$
49.52 				
						
						
Granted
291,298 				
						
						
						
38.59 				
						
						
Vested
(227,367 				
)
						
						
33.60 				
						
						
Forfeited
(23,883 				
)
						
						
50.80 				
						
						
Nonvested as of December 31, 2016
577,935 				
						
						
$
50.23 				
						
						
﻿
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, 2016 and 2015, was $4 million and $3 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
$
10.25 				
						
$
14.22 				
						
$
13.64 				
						
Assumptions:
						
						
						
						
						
						
						
						
						
Dividend yield
						
2.9% 				
						
						
1.6% 				
						
						
1.5% 				
						
Expected volatility
						
35.8% 				
						
						
29.8% 				
						
						
32.7% 				
						
Risk-free interest rate
						
1.4% 				
						
						
1.8% 				
						
						
1.7% 				
						
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, 2015
264,871 				
						
$
39.61 				
						
						
						
						
						
						
Granted - original
63,807 				
						
						
40.06 				
						
						
						
						
						
						
Exercised (includes shares tendered)
(87,147 				
)
						
31.36 				
						
						
						
						
						
						
Forfeited or expired
(4,259 				
)
						
49.01 				
						
						
						
						
						
						
Outstanding as of December 31, 2016
237,272 				
						
$
42.59 				
						
2.48 				
						
$
				
						
﻿
						
						
						
						
						
						
						
						
						
						
Vested or expected to vest as of December 31, 2016 (1)
226,463 				
						
$
42.66 				
						
2.45 				
						
$
				
						
﻿
						
						
						
						
						
						
						
						
						
						
Exercisable as of December 31, 2016
138,343 				
						
$
40.42 				
						
1.81 				
						
$
				
						
﻿
(1)
Includes estimated forfeitures.
﻿
The payment for SARs exercised was $2 million during the years ended December 31, 2016, 2015 and 2014, respectively.
﻿
RSUs
﻿
We award RSUs under the incentive compensation plan, generally subject to a three-year vesting period. Information with respect to our RSUs was as follows:
﻿
﻿
﻿
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
﻿
						
						
						
Weighted-
						
						
﻿
						
						
						
Average
						
						
﻿
						
						
Grant-Date
						
﻿
Shares
						
						
Fair Value
						
						
Outstanding as of December 31, 2015
1,299,999 				
						
						
$
46.21 				
						
						
Granted
767,733 				
						
						
						
35.72 				
						
						
Vested
(481,760 				
)
						
						
31.37 				
						
						
Forfeited
(77,605 				
)
						
						
46.17 				
						
						
Outstanding as of December 31, 2016
1,508,367 				
						
						
$
45.61 				
						
						
﻿
﻿
﻿
19. 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, LLANY, Lincoln Reinsurance Company of Vermont I, Lincoln Reinsurance Company of Vermont III, Lincoln Reinsurance Company of Vermont IV, Lincoln Reinsurance Company of Vermont V and Lincoln Reinsurance Company of Vermont VI.
﻿
﻿
﻿
﻿
						
						
						
						
						
						
﻿
						
						
						
						
						
						
﻿
As of December 31,
						
﻿
						
						
U.S. capital and surplus
$
8,218 				
						
$
7,815 				
						
﻿
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
﻿
For the Years Ended December 31,
						
﻿
						
						
						
U.S. net gain (loss) from operations, after-tax
$
1,111 				
						
$
				
						
$
1,225 				
						
U.S. net income (loss)
						
1,002 				
						
						
				
						
						
1,456 				
						
U.S. dividends to LNC holding company
						
				
						
						
1,175 				
						
						
				
						
﻿
Comparison of 2016 to 2015
﻿
Statutory net income (loss) increased due primarily to changes in estimate on reserves for certain products and gains related to reinsurance transactions, partially offset by lower realized gains on investments.
﻿
Comparison of 2015 to 2014
﻿
Statutory net income (loss) decreased due primarily to the recapture in 2014 of certain traditional and interest sensitive business under several yearly renewable term reinsurance treaties that were originally ceded to a reinsurer, a change in estimate on reserves for certain products in 2014 and a decrease in favorable tax items.
﻿
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, 2016 and 2015. The permitted practice is related to structures that continue to be allowed in accordance with the grandfathered structures under the provisions of Actuarial Guideline 48 (“AG48”).
﻿
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,
						
﻿
						
						
﻿
						
						
						
						
						
						
State Prescribed Practices
						
						
						
						
						
						
Calculation of reserves using the Indiana universal life method
$
				
						
$
				
						
Calculation of reserves using continuous CARVM
						
-
						
						
(1 				
)
Conservative valuation rate on certain annuities
						
(49 				
)
						
(43 				
)
Vermont Subsidiaries Permitted Practice
						
						
						
						
						
						
Lesser of LOC and XXX additional reserve as surplus (1)
						
2,855 				
						
						
2,835 				
						
﻿
(1)
The permitted practice is related to structures that continue to be allowed in accordance with the grandfathered structures under the provisions of AG48.
﻿
During the third quarter of 2013, the New York State Department of Financial Services announced that it would not recognize the NAIC revisions to Actuarial Guideline 38 in applying the New York law governing the reserves to be held for UL and VUL products containing secondary guarantees. The change, which was effective as of December 31, 2013, impacts our New York-domiciled insurance subsidiary, LLANY. Although LLANY discontinued the sale of these products in early 2013, the change affected those policies previously sold. We began phasing in the increase in reserves in 2013 at $90 million per year over five years. As of December 31, 2016, we had increased reserves by $360 million.
﻿
The NAIC has adopted 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, 2016, the combined RBC ratio of LNL, LLANY and FPP reported to their respective states of domicile and the NAIC was nearly 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 lesser 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, is bound by similar restrictions, under New York law, with the applicable statutory limitation on dividends equal to 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 $765 million in 2017 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.
﻿
﻿
﻿
20. 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, 2016
						
As of December 31, 2015
						
﻿
Carrying
						
Fair
						
Carrying
						
Fair
						
﻿
Value
						
Value
						
Value
						
Value
						
Assets
						
						
						
						
						
						
						
						
						
						
						
						
AFS securities:
						
						
						
						
						
						
						
						
						
						
						
						
Fixed maturity securities
$
89,013 				
						
$
89,013 				
						
$
84,964 				
						
$
84,964 				
						
VIEs’ fixed maturity securities
						
				
						
						
				
						
						
				
						
						
				
						
Equity securities
						
				
						
						
				
						
						
				
						
						
				
						
Trading securities
						
1,712 				
						
						
1,712 				
						
						
1,854 				
						
						
1,854 				
						
Mortgage loans on real estate
						
9,889 				
						
						
9,853 				
						
						
8,678 				
						
						
8,936 				
						
Derivative investments (1)
						
				
						
						
				
						
						
1,537 				
						
						
1,537 				
						
Other investments
						
2,230 				
						
						
2,230 				
						
						
1,778 				
						
						
1,778 				
						
Cash and invested cash
						
2,722 				
						
						
2,722 				
						
						
3,146 				
						
						
3,146 				
						
Other assets - reinsurance recoverable
						
				
						
						
				
						
						
				
						
						
				
						
Separate account assets
						
128,397 				
						
						
128,397 				
						
						
123,619 				
						
						
123,619 				
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
Liabilities
						
						
						
						
						
						
						
						
						
						
						
						
Future contract benefits - indexed annuity
						
						
						
						
						
						
						
						
						
						
						
						
and IUL contracts embedded derivatives
						
(1,139 				
)
						
(1,139 				
)
						
(1,100 				
)
						
(1,100 				
)
Other contract holder funds:
						
						
						
						
						
						
						
						
						
						
						
						
Remaining guaranteed interest and similar contracts
						
(629 				
)
						
(629 				
)
						
(687 				
)
						
(687 				
)
Account values of certain investment contracts
						
(31,516 				
)
						
(35,647 				
)
						
(30,392 				
)
						
(34,618 				
)
Long-term debt
						
(5,345 				
)
						
(5,679 				
)
						
(5,553 				
)
						
(5,505 				
)
Reinsurance related embedded derivatives
						
(53 				
)
						
(53 				
)
						
(87 				
)
						
(87 				
)
VIEs’ liabilities - derivative instruments
						
-
						
						
-
						
						
(4 				
)
						
(4 				
)
Other liabilities:
						
						
						
						
						
						
						
						
						
						
						
						
Credit default swaps
						
-
						
						
-
						
						
(9 				
)
						
(9 				
)
Derivative liabilities (1)
						
(553 				
)
						
(553 				
)
						
(69 				
)
						
(69 				
)
GLB reserves embedded derivatives (2)
						
(371 				
)
						
(371 				
)
						
(953 				
)
						
(953 				
)
﻿
						
						
						
						
						
						
						
						
						
						
						
						
Benefit Plans’ Assets (3)
						
1,489 				
						
						
1,489 				
						
						
1,486 				
						
						
1,486 				
						
﻿
(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)
Portions of our GLB reserves embedded derivatives are ceded to third-party reinsurance counterparties. Refer to Note 6 for additional detail.
(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 information regarding our benefit plans.
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 includes primarily 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 LPs and other privately held investments are classified as Level 3 within the fair value hierarchy. Other investments also includes securities that are not LPs or other privately held investments and the inputs used to measure the fair value of these securities are classified as Level 1 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, 2016 and 2015, 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.
﻿
Long-Term Debt
﻿
The fair value of long-term debt is based on quoted market prices. The inputs used to measure the fair value of our 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, 2016 or 2015, 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, 2016
						
﻿
						
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
						
$
-
						
						
$
74,659 				
						
						
$
2,405 				
						
						
$
77,064 				
						
ABS
						
						
-
						
						
						
1,052 				
						
						
						
				
						
						
						
1,085 				
						
U.S. government bonds
						
						
				
						
						
						
				
						
						
						
-
						
						
						
				
						
Foreign government bonds
						
						
-
						
						
						
				
						
						
						
				
						
						
						
				
						
RMBS
						
						
-
						
						
						
3,611 				
						
						
						
				
						
						
						
3,614 				
						
CMBS
						
						
-
						
						
						
				
						
						
						
				
						
						
						
				
						
CLOs
						
						
-
						
						
						
				
						
						
						
				
						
						
						
				
						
State and municipal bonds
						
						
-
						
						
						
4,627 				
						
						
						
-
						
						
						
4,627 				
						
Hybrid and redeemable preferred securities
						
						
				
						
						
						
				
						
						
						
				
						
						
						
				
						
VIEs’ fixed maturity securities
						
						
-
						
						
						
				
						
						
						
-
						
						
						
				
						
Equity AFS securities
						
						
				
						
						
						
				
						
						
						
				
						
						
						
				
						
Trading securities
						
						
				
						
						
						
1,545 				
						
						
						
				
						
						
						
1,712 				
						
Derivative investments (1)
						
						
-
						
						
						
1,406 				
						
						
						
				
						
						
						
2,005 				
						
Other investments
						
						
				
						
						
						
-
						
						
						
-
						
						
						
				
						
Cash and invested cash
						
						
-
						
						
						
2,722 				
						
						
						
-
						
						
						
2,722 				
						
Other assets - reinsurance recoverable
						
						
-
						
						
						
-
						
						
						
				
						
						
						
				
						
Separate account assets
						
						
				
						
						
						
127,534 				
						
						
						
-
						
						
						
128,397 				
						
Total assets
						
$
1,596 				
						
						
$
219,330 				
						
						
$
3,747 				
						
						
$
224,673 				
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Liabilities
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Future contract benefits - indexed annuity
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
and IUL contracts embedded derivatives
						
$
-
						
						
$
-
						
						
$
(1,139 				
)
						
$
(1,139 				
)
Long-term debt
						
						
-
						
						
						
(1,203 				
)
						
						
-
						
						
						
(1,203 				
)
Reinsurance related embedded derivatives
						
						
-
						
						
						
(53 				
)
						
						
-
						
						
						
(53 				
)
Other liabilities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Derivative liabilities (1)
						
						
-
						
						
						
(939 				
)
						
						
(692 				
)
						
						
(1,631 				
)
GLB reserves embedded derivatives
						
						
-
						
						
						
-
						
						
						
(371 				
)
						
						
(371 				
)
Total liabilities
						
$
-
						
						
$
(2,195 				
)
						
$
(2,202 				
)
						
$
(4,397 				
)
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Benefit Plans’ Assets
						
$
				
						
						
$
1,299 				
						
						
$
-
						
						
$
1,489 				
						
﻿
﻿
﻿
﻿
﻿
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
As of December 31, 2015
						
﻿
						
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
						
$
				
						
						
$
70,878 				
						
						
$
1,993 				
						
						
$
72,931 				
						
ABS
						
						
-
						
						
						
1,056 				
						
						
						
				
						
						
						
1,101 				
						
U.S. government bonds
						
						
				
						
						
						
				
						
						
						
-
						
						
						
				
						
Foreign government bonds
						
						
-
						
						
						
				
						
						
						
				
						
						
						
				
						
RMBS
						
						
-
						
						
						
3,727 				
						
						
						
				
						
						
						
3,728 				
						
CMBS
						
						
-
						
						
						
				
						
						
						
				
						
						
						
				
						
CLOs
						
						
-
						
						
						
				
						
						
						
				
						
						
						
				
						
State and municipal bonds
						
						
-
						
						
						
4,480 				
						
						
						
-
						
						
						
4,480 				
						
Hybrid and redeemable preferred securities
						
						
				
						
						
						
				
						
						
						
				
						
						
						
				
						
VIEs’ fixed maturity securities
						
						
-
						
						
						
				
						
						
						
-
						
						
						
				
						
Equity AFS securities
						
						
				
						
						
						
				
						
						
						
				
						
						
						
				
						
Trading securities
						
						
				
						
						
						
1,621 				
						
						
						
				
						
						
						
1,854 				
						
Derivative investments (1)
						
						
-
						
						
						
1,459 				
						
						
						
				
						
						
						
2,312 				
						
Other investments
						
						
				
						
						
						
-
						
						
						
-
						
						
						
				
						
Cash and invested cash
						
						
-
						
						
						
3,146 				
						
						
						
-
						
						
						
3,146 				
						
Other assets - reinsurance recoverable
						
						
-
						
						
						
-
						
						
						
				
						
						
						
				
						
Separate account assets
						
						
1,053 				
						
						
						
122,566 				
						
						
						
-
						
						
						
123,619 				
						
Total assets
						
$
1,889 				
						
						
$
211,094 				
						
						
$
4,163 				
						
						
$
217,146 				
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Liabilities
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Future contract benefits - indexed annuity
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
and IUL contracts embedded derivatives
						
$
-
						
						
$
-
						
						
$
(1,100 				
)
						
$
(1,100 				
)
Long-term debt
						
						
-
						
						
						
(1,203 				
)
						
						
-
						
						
						
(1,203 				
)
Reinsurance related embedded derivatives
						
						
-
						
						
						
(87 				
)
						
						
-
						
						
						
(87 				
)
VIEs’ liabilities - derivative instruments
						
						
-
						
						
						
-
						
						
						
(4 				
)
						
						
(4 				
)
Other liabilities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Credit default swaps
						
						
-
						
						
						
-
						
						
						
(9 				
)
						
						
(9 				
)
Derivative liabilities (1)
						
						
-
						
						
						
(546 				
)
						
						
(298 				
)
						
						
(844 				
)
GLB reserves embedded derivatives
						
						
-
						
						
						
-
						
						
						
(953 				
)
						
						
(953 				
)
Total liabilities
						
$
-
						
						
$
(1,836 				
)
						
$
(2,364 				
)
						
$
(4,200 				
)
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Benefit Plans’ Assets
						
$
				
						
						
$
1,330 				
						
						
$
-
						
						
$
1,486 				
						
﻿
(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.
﻿
﻿
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, 2016
						
﻿
						
						
						
						
						
						
Gains
Issuances,
Transfers
						
						
						
						
﻿
						
						
						
Items
						
(Losses)
Sales,
Into 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: (4)
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Fixed maturity AFS securities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Corporate bonds
$
1,993 				
						
$
				
						
$
(31 				
)
$
				
						
$
				
						
$
2,405 				
						
ABS
						
				
						
						
-
						
						
(2 				
)
						
				
						
						
(24 				
)
						
				
						
U.S. government bonds
						
-
						
						
-
						
						
-
						
						
				
						
						
(8 				
)
						
-
						
Foreign government bonds
						
				
						
						
-
						
						
-
						
						
-
						
						
-
						
						
				
						
RMBS
						
				
						
						
-
						
						
-
						
						
				
						
						
(64 				
)
						
				
						
CMBS
						
				
						
						
				
						
						
(1 				
)
						
				
						
						
(31 				
)
						
				
						
CLOs
						
				
						
						
-
						
						
-
						
						
				
						
						
(621 				
)
						
				
						
Hybrid and redeemable
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
preferred securities
						
				
						
						
-
						
						
(3 				
)
						
(15 				
)
						
-
						
						
				
						
Equity AFS securities
						
				
						
						
				
						
						
(4 				
)
						
				
						
						
-
						
						
				
						
Trading securities
						
				
						
						
				
						
						
-
						
						
				
						
						
(17 				
)
						
				
						
Derivative investments
						
				
						
						
(483 				
)
						
(1 				
)
						
(164 				
)
						
-
						
						
(93 				
)
Other assets - reinsurance recoverable (5)
						
				
						
						
(65 				
)
						
-
						
						
-
						
						
-
						
						
				
						
Future contract benefits - indexed annuity
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
and IUL contracts embedded derivatives (5)
						
(1,100 				
)
						
(120 				
)
						
-
						
						
				
						
						
-
						
						
(1,139 				
)
VIEs’ liabilities - derivative instruments (6)
						
(4 				
)
						
				
						
						
-
						
						
-
						
						
-
						
						
-
						
Other liabilities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Credit default swaps (6)
						
(9 				
)
						
(6 				
)
						
-
						
						
				
						
						
-
						
						
-
						
GLB reserves embedded derivatives (5)
						
(953 				
)
						
				
						
						
-
						
						
-
						
						
-
						
						
(371 				
)
Total, net
$
1,799 				
						
$
(73 				
)
$
(42 				
)
$
				
						
$
(384 				
)
$
1,545 				
						
﻿
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
For the Year Ended December 31, 2015
						
﻿
						
						
						
						
						
						
Gains
Issuances,
Transfers
						
						
						
						
﻿
						
						
						
Items
						
(Losses)
Sales,
Into 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: (4)
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Fixed maturity AFS securities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Corporate bonds
$
1,953 				
						
$
				
						
$
(140 				
)
$
				
						
$
				
						
$
1,993 				
						
ABS
						
				
						
						
-
						
						
-
						
						
				
						
						
-
						
						
				
						
Foreign government bonds
						
				
						
						
-
						
						
				
						
						
-
						
						
-
						
						
				
						
RMBS
						
				
						
						
				
						
						
-
						
						
(4 				
)
						
-
						
						
				
						
CMBS
						
				
						
						
				
						
						
				
						
						
(15 				
)
						
-
						
						
				
						
CLOs
						
				
						
						
-
						
						
				
						
						
				
						
						
(12 				
)
						
				
						
Hybrid and redeemable
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
preferred securities
						
				
						
						
(1 				
)
						
(3 				
)
						
-
						
						
				
						
						
				
						
Equity AFS securities
						
				
						
						
				
						
						
				
						
						
				
						
						
(1 				
)
						
				
						
Trading securities
						
				
						
						
				
						
						
(3 				
)
						
-
						
						
-
						
						
				
						
Derivative investments
						
				
						
						
(90 				
)
						
(41 				
)
						
(303 				
)
						
-
						
						
				
						
Other assets - reinsurance recoverable (5)
						
				
						
						
				
						
						
-
						
						
-
						
						
-
						
						
				
						
Future contract benefits - indexed annuity
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
and IUL contracts embedded derivatives (5)
						
(1,170 				
)
						
(57 				
)
						
-
						
						
				
						
						
-
						
						
(1,100 				
)
VIEs’ liabilities - derivative instruments (6)
						
(13 				
)
						
				
						
						
-
						
						
-
						
						
-
						
						
(4 				
)
Other liabilities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Credit default swaps (6)
						
(3 				
)
						
(6 				
)
						
-
						
						
-
						
						
-
						
						
(9 				
)
GLB reserves embedded derivatives (5)
						
(174 				
)
						
(779 				
)
						
-
						
						
-
						
						
-
						
						
(953 				
)
Total, net
$
2,547 				
						
$
(795 				
)
$
(173 				
)
$
				
						
$
				
						
$
1,799 				
						
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
For the Year Ended December 31, 2014
						
﻿
						
						
						
						
						
						
Gains
Issuances,
Transfers
						
						
						
						
﻿
						
						
						
Items
						
(Losses)
Sales,
Into 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)(3)
						
Value
						
Investments: (4)
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Fixed maturity AFS securities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Corporate bonds
$
1,701 				
						
$
				
						
$
				
						
$
				
						
$
				
						
$
1,953 				
						
ABS
						
				
						
						
-
						
						
				
						
						
-
						
						
				
						
						
				
						
Foreign government bonds
						
				
						
						
-
						
						
				
						
						
-
						
						
				
						
						
				
						
RMBS
						
				
						
						
-
						
						
-
						
						
-
						
						
-
						
						
				
						
CMBS
						
				
						
						
-
						
						
				
						
						
(13 				
)
						
				
						
						
				
						
CLOs
						
				
						
						
(3 				
)
						
				
						
						
				
						
						
				
						
						
				
						
State and municipal bonds
						
				
						
						
-
						
						
				
						
						
-
						
						
(29 				
)
						
-
						
Hybrid and redeemable
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
preferred securities
						
				
						
						
-
						
						
(1 				
)
						
(5 				
)
						
(5 				
)
						
				
						
Equity AFS securities
						
				
						
						
				
						
						
(3 				
)
						
(5 				
)
						
-
						
						
				
						
Trading securities
						
				
						
						
				
						
						
				
						
						
				
						
						
(1 				
)
						
				
						
Derivative investments
						
1,266 				
						
						
				
						
						
				
						
						
(279 				
)
						
(426 				
)
						
				
						
Other assets - reinsurance recoverable (5)
						
				
						
						
				
						
						
-
						
						
-
						
						
-
						
						
				
						
Future contract benefits - indexed annuity
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
and IUL contracts embedded derivatives (5)
						
(1,048 				
)
						
(210 				
)
						
-
						
						
				
						
						
-
						
						
(1,170 				
)
GLB reserves embedded derivatives
						
1,244 				
						
						
-
						
						
-
						
						
-
						
						
(1,244 				
)
						
-
						
VIEs’ liabilities - derivative instruments (6)
						
(27 				
)
						
				
						
						
-
						
						
-
						
						
-
						
						
(13 				
)
Other liabilities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Credit default swaps (6)
						
(2 				
)
						
(1 				
)
						
-
						
						
-
						
						
-
						
						
(3 				
)
GLB reserves embedded derivatives (5)
						
(27 				
)
						
(1,391 				
)
						
-
						
						
-
						
						
1,244 				
						
						
(174 				
)
Total, net
$
3,730 				
						
$
(1,375 				
)
$
				
						
$
				
						
$
(340 				
)
$
2,547 				
						
﻿
(1)
The changes in fair value of the interest rate swaps are offset by an adjustment to derivative investments (see Note 6).
(2)
Transfers into 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)
Transfers into or out of Level 3 for GLB reserves embedded derivatives between future contract benefits, other assets and other liabilities on our Consolidated Balance Sheets.
(4)
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).
(5)
Gains (losses) from sales, maturities, settlements and calls are included in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).
(6)
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).
﻿
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, 2016
						
﻿
Issuances
						
Sales
						
Maturities
Settlements
Calls
						
Total
						
Investments:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Fixed maturity AFS securities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Corporate bonds
$
				
						
$
(62 				
)
$
(23 				
)
$
(177 				
)
$
(140 				
)
$
				
						
ABS
						
				
						
						
-
						
						
-
						
						
(1 				
)
						
-
						
						
				
						
U.S. government bonds
						
-
						
						
-
						
						
-
						
						
				
						
						
-
						
						
				
						
RMBS
						
				
						
						
-
						
						
-
						
						
(1 				
)
						
-
						
						
				
						
CMBS
						
				
						
						
(1 				
)
						
-
						
						
(3 				
)
						
-
						
						
				
						
CLOs
						
				
						
						
-
						
						
-
						
						
(2 				
)
						
-
						
						
				
						
Hybrid and redeemable
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
preferred securities
						
-
						
						
(15 				
)
						
-
						
						
-
						
						
-
						
						
(15 				
)
Equity AFS securities
						
				
						
						
(6 				
)
						
-
						
						
-
						
						
-
						
						
				
						
Trading securities
						
				
						
						
-
						
						
-
						
						
(1 				
)
						
-
						
						
				
						
Derivative investments
						
				
						
						
(169 				
)
						
(171 				
)
						
-
						
						
-
						
						
(164 				
)
Future contract benefits - indexed annuity
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
and IUL contracts embedded derivatives
						
(70 				
)
						
-
						
						
-
						
						
				
						
						
-
						
						
				
						
Other liabilities - credit default swaps
						
-
						
						
				
						
						
-
						
						
-
						
						
-
						
						
				
						
Total, net
$
				
						
$
(238 				
)
$
(194 				
)
$
(26 				
)
$
(140 				
)
$
				
						
﻿
﻿
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
For the Year Ended December 31, 2015
						
﻿
Issuances
						
Sales
						
Maturities
Settlements
Calls
						
Total
						
Investments:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Fixed maturity AFS securities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Corporate bonds
$
				
						
$
(38 				
)
$
(44 				
)
$
(119 				
)
$
(40 				
)
$
				
						
ABS
						
				
						
						
-
						
						
-
						
						
(1 				
)
						
-
						
						
				
						
RMBS
						
-
						
						
(4 				
)
						
-
						
						
-
						
						
-
						
						
(4 				
)
CMBS
						
-
						
						
-
						
						
-
						
						
(14 				
)
						
(1 				
)
						
(15 				
)
CLOs
						
				
						
						
-
						
						
-
						
						
(23 				
)
						
-
						
						
				
						
Equity AFS securities
						
				
						
						
(40 				
)
						
-
						
						
-
						
						
-
						
						
				
						
Derivative investments
						
				
						
						
(162 				
)
						
(320 				
)
						
-
						
						
-
						
						
(303 				
)
Future contract benefits - indexed annuity
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
and IUL contracts embedded derivatives
						
(51 				
)
						
-
						
						
-
						
						
				
						
						
-
						
						
				
						
Total, net
$
				
						
$
(244 				
)
$
(364 				
)
$
				
						
$
(41 				
)
$
				
						
﻿
﻿
﻿
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
For the Year Ended December 31, 2014
						
﻿
Issuances
						
Sales
						
Maturities
Settlements
Calls
						
Total
						
Investments:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Fixed maturity AFS securities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Corporate bonds
$
				
						
$
(75 				
)
$
(115 				
)
$
(51 				
)
$
(162 				
)
$
				
						
CMBS
						
-
						
						
-
						
						
-
						
						
(13 				
)
						
-
						
						
(13 				
)
CLOs
						
				
						
						
-
						
						
-
						
						
(46 				
)
						
(5 				
)
						
				
						
Hybrid and redeemable
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
preferred securities
						
-
						
						
(5 				
)
						
-
						
						
-
						
						
-
						
						
(5 				
)
Equity AFS securities
						
-
						
						
(5 				
)
						
-
						
						
-
						
						
-
						
						
(5 				
)
Trading securities
						
				
						
						
-
						
						
-
						
						
(4 				
)
						
-
						
						
				
						
Derivative investments
						
				
						
						
(87 				
)
						
(352 				
)
						
-
						
						
-
						
						
(279 				
)
Future contract benefits - indexed annuity
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
and IUL contracts embedded derivatives
						
(69 				
)
						
-
						
						
-
						
						
				
						
						
-
						
						
				
						
Total, net
$
				
						
$
(172 				
)
$
(467 				
)
$
				
						
$
(167 				
)
$
				
						
﻿
﻿
﻿
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,
						
﻿
						
						
						
Derivative investments
$
(431 				
)
$
(102 				
)
$
(15 				
)
Embedded derivatives:
						
						
						
						
						
						
						
						
						
Indexed annuity and IUL contracts
						
(16 				
)
						
(84 				
)
						
(37 				
)
GLB reserves
						
1,122 				
						
						
(244 				
)
						
(678 				
)
VIEs’ liabilities - derivative instruments
						
				
						
						
				
						
						
				
						
Credit default swaps
						
-
						
						
(6 				
)
						
(1 				
)
Total, net (1)
$
				
						
$
(427 				
)
$
(717 				
)
﻿
(1)
Included in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).
﻿
The following provides the components of the transfers into and out of Level 3 (in millions) as reported above:
﻿
﻿
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
﻿
For the Year Ended December 31, 2016
						
﻿
Transfers
						
Transfers
						
						
						
						
﻿
Into
						
Out of
						
						
						
						
﻿
Level 3
						
Level 3
						
Total
						
Investments:
						
						
						
						
						
						
						
						
						
Fixed maturity AFS securities:
						
						
						
						
						
						
						
						
						
Corporate bonds
$
				
						
$
(224 				
)
$
				
						
ABS
						
				
						
						
(28 				
)
						
(24 				
)
U.S. government bonds
						
-
						
						
(8 				
)
						
(8 				
)
RMBS
						
				
						
						
(67 				
)
						
(64 				
)
CMBS
						
-
						
						
(31 				
)
						
(31 				
)
CLOs
						
-
						
						
(621 				
)
						
(621 				
)
Trading securities
						
				
						
						
(18 				
)
						
(17 				
)
Total, net
$
				
						
$
(997 				
)
$
(384 				
)
﻿
﻿
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
﻿
For the Year Ended December 31, 2015
						
﻿
Transfers
						
Transfers
						
						
						
						
﻿
Into
						
Out of
						
						
						
						
﻿
Level 3
						
Level 3
						
Total
						
Investments:
						
						
						
						
						
						
						
						
						
Fixed maturity AFS securities:
						
						
						
						
						
						
						
						
						
Corporate bonds
$
				
						
$
(166 				
)
$
				
						
Foreign government bonds
						
				
						
						
(4 				
)
						
-
						
CLOs
						
				
						
						
(16 				
)
						
(12 				
)
Hybrid and redeemable preferred securities
						
				
						
						
(5 				
)
						
				
						
Equity AFS securities
						
-
						
						
(1 				
)
						
(1 				
)
Trading securities
						
				
						
						
(4 				
)
						
-
						
Total, net
$
				
						
$
(196 				
)
$
				
						
﻿
﻿
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
﻿
For the Year Ended December 31, 2014
						
﻿
Transfers
						
Transfers
						
						
						
						
﻿
Into
						
Out of
						
						
						
						
﻿
Level 3
						
Level 3
						
Total
						
Investments:
						
						
						
						
						
						
						
						
						
Fixed maturity AFS securities:
						
						
						
						
						
						
						
						
						
Corporate bonds
$
				
						
$
(456 				
)
$
				
						
ABS
						
				
						
						
(4 				
)
						
				
						
Foreign government bonds
						
				
						
						
-
						
						
				
						
CMBS
						
				
						
						
-
						
						
				
						
CLOs
						
				
						
						
(4 				
)
						
				
						
State and municipal bonds
						
-
						
						
(29 				
)
						
(29 				
)
Hybrid and redeemable preferred securities
						
				
						
						
(22 				
)
						
(5 				
)
Trading securities
						
				
						
						
(11 				
)
						
(1 				
)
Derivative investments
						
-
						
						
(426 				
)
						
(426 				
)
Future contract benefits - GLB reserves embedded derivatives
						
-
						
						
(1,244 				
)
						
(1,244 				
)
Other liabilities - GLB reserves embedded derivatives
						
1,244 				
						
						
-
						
						
1,244 				
						
Total, net
$
1,856 				
						
$
(2,196 				
)
$
(340 				
)
﻿
Transfers into 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, 2016, 2015 and 2014, transfers in and out of Level 3 were attributable primarily to the securities’ observable market information no longer being available or becoming available. Transfers in and out for GLB reserves embedded derivatives represent reclassifications between future contract benefits and other assets or other liabilities. Transfers into 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, 2016 and 2014, 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. For the year ended December 31, 2015, the transfers from Level 2 to Level 1 of the fair value hierarchy were $172 million for our financial instruments carried at fair value which was attributable to quoted market prices becoming available.
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, 2016:
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
Fair
						
Valuation
						
Significant
						
Assumption or
						
﻿
Value
						
Technique
						
Unobservable Inputs
						
Input Ranges
						
Assets
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Investments:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Fixed maturity AFS and trading
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
securities:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Corporate bonds
$
1,797 				
						
Discounted cash flow
						
Liquidity/duration adjustment (1)
						
0.9 				
%
						
-
20.4 				
%
						
ABS
						
				
						
Discounted cash flow
						
Liquidity/duration adjustment (1)
						
3.5 				
%
						
-
3.5 				
%
						
Foreign government bonds
						
				
						
Discounted cash flow
						
Liquidity/duration adjustment (1)
						
1.8 				
%
						
-
5.0 				
%
						
Hybrid and redeemable
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
preferred securities
						
				
						
Discounted cash flow
						
Liquidity/duration adjustment (1)
						
2.1 				
%
						
-
2.1 				
%
						
Equity AFS securities
						
				
						
Discounted cash flow
						
Liquidity/duration adjustment (1)
						
4.5 				
%
						
-
5.1 				
%
						
Other assets - reinsurance
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
recoverable
						
				
						
Discounted cash flow
						
Long-term lapse rate (2)
						
				
%
						
-
				
%
						
﻿
						
						
						
						
						
						
Utilization of guaranteed withdrawals (3)
				
%
						
-
				
%
						
﻿
						
						
						
						
						
						
Claims utilization factor (4)
						
				
%
						
-
				
%
						
﻿
						
						
						
						
						
						
Premiums utilization factor (4)
						
				
%
						
-
				
%
						
﻿
						
						
						
						
						
						
NPR (5)
						
0.02 				
%
						
-
0.35 				
%
						
﻿
						
						
						
						
						
						
Mortality rate (6)
						
						
						
						
						
(8)
						
						
﻿
						
						
						
						
						
						
Volatility (7)
						
				
%
						
-
				
%
						
Liabilities
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Future contract benefits - indexed
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
annuity and IUL contracts
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
embedded derivatives
$
(1,139 				
)
Discounted cash flow
						
Lapse rate (2)
						
				
%
						
-
				
%
						
﻿
						
						
						
						
						
						
Mortality rate (6)
						
						
						
						
						
(8)
						
						
Other liabilities - GLB reserves
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
embedded derivatives
						
(371 				
)
Discounted cash flow
						
Long-term lapse rate (2)
						
				
%
						
-
				
%
						
﻿
						
						
						
						
						
						
Utilization of guaranteed withdrawals (3)
				
%
						
-
				
%
						
﻿
						
						
						
						
						
						
Claims utilization factor (4)
						
				
%
						
-
				
%
						
﻿
						
						
						
						
						
						
Premiums utilization factor (4)
						
				
%
						
-
				
%
						
﻿
						
						
						
						
						
						
NPR (5)
						
0.02 				
%
						
-
0.35 				
%
						
﻿
						
						
						
						
						
						
Mortality rate (6)
						
						
						
						
						
(8)
						
						
﻿
						
						
						
						
						
						
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 IUL contracts represents the lapse rates during the surrender charge period.
(3)
The utilization of guaranteed withdrawals input represents the estimated percentage of contract holders that utilize the guaranteed withdrawal feature.
(4)
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.
(5)
The NPR input represents the estimated additional credit spread that market participants would apply to the market observable discount rate when pricing a contract.
(6)
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.
(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)
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 quotes received from a third-party broker-dealer 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.
·
Reinsurance recoverable asset - 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 guaranteed withdrawal or volatility inputs would result in an increase in the fair value measurement.
·
Indexed annuity and IUL contracts embedded derivatives - 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 guaranteed 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 ongoing 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.
﻿
21. 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), IUL 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 (see Note 3 for more information) 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 and 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 reflected within variable annuity net derivative results accounted for at fair value;
§
Changes in the fair value of the derivatives we own to hedge our GLB riders reflected within variable annuity net derivative results; 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
$
4,033 				
						
$
4,120 				
						
$
3,746 				
						
Retirement Plan Services
						
1,103 				
						
						
1,101 				
						
						
1,090 				
						
Life Insurance
						
6,246 				
						
						
5,948 				
						
						
6,003 				
						
Group Protection
						
2,130 				
						
						
2,357 				
						
						
2,445 				
						
Other Operations
						
				
						
						
				
						
						
				
						
Excluded realized gain (loss), pre-tax
						
(518 				
)
						
(329 				
)
						
(165 				
)
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
						
				
						
						
(2 				
)
						
-
						
Total revenues
$
13,330 				
						
$
13,572 				
						
$
13,554 				
						
﻿
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
﻿
For the Years Ended December 31,
						
﻿
						
						
						
Net Income (Loss)
						
						
						
						
						
						
						
						
						
Income (loss) from operations:
						
						
						
						
						
						
						
						
						
Annuities
$
				
						
$
				
						
$
				
						
Retirement Plan Services
						
				
						
						
				
						
						
				
						
Life Insurance
						
				
						
						
				
						
						
				
						
Group Protection
						
				
						
						
				
						
						
				
						
Other Operations
						
(102 				
)
						
(154 				
)
						
(109 				
)
Excluded realized gain (loss), after-tax
						
(337 				
)
						
(214 				
)
						
(106 				
)
Gain (loss) on early extinguishment of debt, after-tax
						
(41 				
)
						
-
						
						
-
						
Income (loss) from reserve changes (net of related amortization)
						
						
						
						
						
						
						
						
						
on business sold through reinsurance, after-tax
						
				
						
						
				
						
						
				
						
Benefit ratio unlocking, after-tax
						
				
						
						
(29 				
)
						
				
						
Income (loss) from continuing operations, after-tax
						
1,192 				
						
						
1,154 				
						
						
1,514 				
						
Income (loss) from discontinued operations, after-tax
						
-
						
						
-
						
						
				
						
Net income (loss)
$
1,192 				
						
$
1,154 				
						
$
1,515 				
						
﻿
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
﻿
For the Years Ended December 31,
						
﻿
						
						
						
Net Investment Income
						
						
						
						
						
						
						
						
						
Annuities
$
1,033 				
						
$
1,004 				
						
$
1,033 				
						
Retirement Plan Services
						
				
						
						
				
						
						
				
						
Life Insurance
						
2,562 				
						
						
2,541 				
						
						
2,529 				
						
Group Protection
						
				
						
						
				
						
						
				
						
Other Operations
						
				
						
						
				
						
						
				
						
Total net investment income
$
4,874 				
						
$
4,827 				
						
$
4,859 				
						
﻿
﻿
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
﻿
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
$
1,271 				
						
$
1,283 				
						
$
1,111 				
						
﻿
﻿
﻿
﻿
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
﻿
For the Years Ended December 31,
						
﻿
						
						
						
Federal Income Tax Expense (Benefit)
						
						
						
						
						
						
						
						
						
Annuities
$
				
						
$
				
						
$
				
						
Retirement Plan Services
						
				
						
						
				
						
						
				
						
Life Insurance
						
				
						
						
				
						
						
				
						
Group Protection
						
				
						
						
				
						
						
				
						
Other Operations
						
(109 				
)
						
(86 				
)
						
(57 				
)
Excluded realized gain (loss)
						
(181 				
)
						
(116 				
)
						
(60 				
)
Gain (loss) on early extinguishment of debt
						
(22 				
)
						
-
						
						
-
						
Reserve changes (net of related amortization)
						
						
						
						
						
						
						
						
						
on business sold through reinsurance
						
				
						
						
				
						
						
				
						
Benefit ratio unlocking
						
				
						
						
(16 				
)
						
				
						
Total federal income tax expense (benefit)
$
				
						
$
				
						
$
				
						
﻿
﻿
﻿
﻿
						
						
						
						
						
						
﻿
						
						
						
						
						
						
﻿
As of December 31,
						
﻿
						
						
Assets
						
						
						
						
						
						
Annuities
$
133,817 				
						
$
130,641 				
						
Retirement Plan Services
						
34,344 				
						
						
32,649 				
						
Life Insurance
						
76,083 				
						
						
71,062 				
						
Group Protection
						
4,007 				
						
						
4,182 				
						
Other Operations
						
13,376 				
						
						
13,374 				
						
Total assets
$
261,627 				
						
$
251,908 				
						
﻿
﻿
﻿
22. 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)
						
				
						
						
				
						
						
				
						
Significant non-cash investing and financing transactions:
						
						
						
						
						
						
						
						
						
Value of stock received from stock options exercised
						
						
						
						
						
						
						
						
						
through stock swap transactions
						
-
						
						
-
						
						
				
						
Other assets received in our financing transaction
						
-
						
						
				
						
						
-
						
Other investments received in our repurchase program
						
-
						
						
-
						
						
				
						
﻿
						
						
						
						
						
						
						
						
						
﻿
﻿
﻿
23. 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
$
3,243 				
						
$
3,307 				
						
						
$
3,525 				
						
						
$
3,255 				
						
						
						
Total expenses
						
3,008 				
						
						
2,893 				
						
						
						
2,913 				
						
						
						
3,058 				
						
						
						
Net income (loss) (1)
						
				
						
						
				
						
						
						
				
						
						
						
				
						
						
						
Earnings (loss) per common share - basic:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Net income (loss) (1)
						
0.87 				
						
						
1.37 				
						
						
						
2.02 				
						
						
						
0.83 				
						
						
						
Earnings (loss) per common share - diluted:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Net income (loss) (1)
						
0.83 				
						
						
1.35 				
						
						
						
2.00 				
						
						
						
0.82 				
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Total revenues
$
3,304 				
						
$
3,381 				
						
						
$
3,716 				
						
						
$
3,171 				
						
						
						
Total expenses
						
2,942 				
						
						
2,932 				
						
						
						
3,448 				
						
						
						
2,820 				
						
						
						
Net income (loss)
						
				
						
						
				
						
						
						
				
						
						
						
				
						
						
						
Earnings (loss) per common share - basic:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Net income (loss)
						
1.17 				
						
						
1.37 				
						
						
						
0.91 				
						
						
						
1.15 				
						
						
						
Earnings (loss) per common share - diluted:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Net income (loss)
						
1.15 				
						
						
1.35 				
						
						
						
0.87 				
						
						
						
1.14 				
						
						
						
﻿
﻿
(1) Effective October 1, 2016, we early adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. We have updated certain previously reported interim results and metrics as of January 1, 2016, in accordance with the new guidance. For more information, see Note 2.
﻿
﻿
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 102 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, 2016, 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,” “COMPLIANCE WITH BENEFICIAL OWNERSHIP REPORTING” and “GENERAL - Shareholder Proposals” of LNC’s Proxy Statement for the Annual Meeting scheduled for May 26, 2017.
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 “COMPENSATION OF DIRECTORS,” “COMPENSATION DISCUSSION & ANALYSIS,” “EXECUTIVE COMPENSATION TABLES” and “COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION” of LNC’s Proxy Statement for the Annual Meeting scheduled for May 26, 2017.
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” of LNC’s Proxy Statement for the Annual Meeting scheduled for May 26, 2017.
﻿
Securities Authorized for Issuance Under Equity Compensation Plans
﻿
The table below provides information as of December 31, 2016, regarding securities authorized for issuance under LNC’s equity compensation plans. See Note 18 to the consolidated financial statements included in “Part II - Item 8. Financial Statements and Supplementary Data” of this Form 10-K for a brief description of our equity compensation plans.
﻿
﻿
﻿
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
﻿
Number of
						
						
Weighted-
Number of
						
﻿
Securities To Be
						
						
Average
Securities Remaining
						
﻿
Issued Upon
						
						
Exercise
Available For Future
						
﻿
Exercise of
						
						
Price of
Issuance Under
						
﻿
Outstanding
						
						
Outstanding
Equity Compensation
						
﻿
Options,
						
						
Options,
Plans (Excluding
						
﻿
Warrants
						
						
Warrants
Securities Reflected
						
﻿
and Rights
						
						
and Rights
in Column (a))
						
﻿
(a)
						
						
(b)
						
(c)
						
						
Plan Category
						
						
						
						
						
						
						
						
Equity compensation plans approved by shareholders
7,121,042 				
(1)
$
43.72 				
(2)
7,087,791 				
(3)
						
Equity compensation plans not approved by shareholders
-
						
						
-
						
-
						
						
Total
7,121,042 				
						
$
43.72 				
						
7,087,791 				
						
						
﻿
(1)
This amount includes the following:
﻿
·
1,155,870 representing the number of performance share awards based on the maximum number of shares potentially payable under the awards. 577,935 represents the target number of performance share awards as of December 31, 2016, as set forth in Note 18 of the Notes to the Consolidated Financial Statements, included in Item 8 of the 2016 Form 10-K. The performance share awards have not been earned as of December 31, 2016. The number of shares, if any, to be issued pursuant to such awards will be determined based upon performance over the applicable three-year performance period. The performance share awards are all granted under either the LNC 2009 Amended and Restated Incentive Compensation Plan (the “2009 ICP”) or the LNC 2014 Incentive Compensation Plan (the “2014 ICP”);
·
1,508,367 outstanding restricted stock units, which were granted under the 2009 ICP or the 2014 ICP;
·
2,713,058 outstanding stock options with service conditions granted under the 2009 ICP, the 2014 ICP, or the LNC Stock Option Plan for Non-Employee Directors (the “Directors’ Option Plan”);
·
779,816 outstanding options with performance conditions granted under the 2009 ICP; and
·
963,931 outstanding deferred stock units under deferred compensation plans for our employees, directors and agents. These outstanding deferred stock units are vested and are not included in Note 18 of the Notes to the Consolidated Financial Statements, included in Part II - Item 8 of the 2016 Form 10-K.
﻿
(2)
The price in column (b) reflects the weighted average price of all outstanding options under any plan that, as of December 31, 2016, had been granted but not forfeited, expired or exercised. Performance shares, restricted stock units, and deferred stock units are not included in determining the weighted average in column (b) because they have no exercise price.
﻿
(3)
Includes up to:
﻿
·
744,238 securities available for issuance in connection with awards under the 2009 ICP;
·
5,963,580 securities available for issuance in connection with awards under the 2014 ICP;
·
165,153 securities available for issuance in connection with stock options under the Directors’ Option Plan; and
·
214,820 securities available for issuance in connection with deferred stock units under the LNC Deferred Compensation Plan for Non-Employee Directors.
﻿
Shares that may be issued in payment of awards granted under the 2009 ICP, other than stock options, reduce the number of securities remaining available for future issuance at a ratio of 1.63 to 1. Shares that may be issued in payment of awards granted under the 2014 ICP reduce the number of securities remaining available for future issuance at a ratio of 1 to 1.
﻿
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 26, 2017.
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” of LNC’s Proxy Statement for the Annual Meeting scheduled for May 26, 2017.
﻿
﻿
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, 2016 and 2015
﻿
Consolidated Statements of Comprehensive Income (Loss) - Years ended December 31, 2016, 2015 and 2014
﻿
Consolidated Statements of Stockholders’ Equity - Years ended December 31, 2016, 2015 and 2014
﻿
Consolidated Statements of Cash Flows - Years ended December 31, 2016, 2015 and 2014
﻿
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 23, 2017
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 23, 2017.
﻿
﻿
﻿
						
						
﻿
						
						
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/ Christine A. Janofsky
						
Senior Vice President and Chief Accounting Officer
Christine A. Janofsky
						
(Principal Accounting Officer)
﻿
						
						
/s/ Deirdre P. Connelly
						
Director
Deirdre P. Connelly
						
						
﻿
						
						
/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/ Michael F. Mee
						
Director
Michael F. Mee
						
						
﻿
						
						
/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
						
﻿
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 38 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, 2016
						
﻿
						
						
						
Fair
						
Carrying
						
Type of Investment
						
Cost
						
Value
						
Value
						
Available-For-Sale Fixed Maturity Securities (1)
						
						
						
						
						
						
						
						
						
						
Bonds:
						
						
						
						
						
						
						
						
						
						
U.S. government and government agencies and authorities
						
$
				
						
$
				
						
$
				
						
Asset-backed securities
						
						
1,789 				
						
						
1,829 				
						
						
1,829 				
						
States, municipalities and political subdivisions
						
						
3,929 				
						
						
4,627 				
						
						
4,627 				
						
Mortgage-backed securities
						
						
3,879 				
						
						
3,964 				
						
						
3,964 				
						
Foreign governments
						
						
				
						
						
				
						
						
				
						
Public utilities
						
						
12,179 				
						
						
13,111 				
						
						
13,111 				
						
All other corporate bonds
						
						
61,096 				
						
						
63,953 				
						
						
63,953 				
						
Hybrid and redeemable preferred securities
						
						
				
						
						
				
						
						
				
						
Variable interest entities
						
						
				
						
						
				
						
						
				
						
Total available-for-sale fixed maturity securities
						
						
84,487 				
						
						
89,213 				
						
						
89,213 				
						
﻿
						
						
						
						
						
						
						
						
						
						
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
						
						
1,517 				
						
						
1,712 				
						
						
1,712 				
						
Mortgage loans on real estate
						
						
9,889 				
						
						
9,853 				
						
						
9,889 				
						
Real estate
						
						
				
						
						
N/A
						
						
				
						
Policy loans
						
						
2,451 				
						
						
N/A
						
						
2,451 				
						
Derivative investments (2)
						
						
1,564 				
						
						
				
						
						
				
						
Other investments
						
						
2,230 				
						
						
2,229 				
						
						
2,230 				
						
Total investments
						
$
102,422 				
						
						
						
						
$
106,721 				
						
﻿
(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 $552 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)
$
17,576 				
						
$
16,499 				
						
Derivative investments
						
				
						
						
				
						
Other investments
						
				
						
						
				
						
Cash and invested cash
						
				
						
						
				
						
Loans and accrued interest to subsidiaries (1)
						
2,542 				
						
						
2,522 				
						
Other assets
						
				
						
						
				
						
Total assets
$
21,020 				
						
$
19,998 				
						
﻿
						
						
						
						
						
						
LIABILITIES AND STOCKHOLDERS’ EQUITY
						
						
						
						
						
						
Liabilities
						
						
						
						
						
						
Common dividends payable
$
				
						
$
				
						
Long-term debt
						
5,343 				
						
						
5,302 				
						
Loans from subsidiaries (1)
						
				
						
						
				
						
Payables for collateral on investments
						
				
						
						
				
						
Other liabilities
						
				
						
						
				
						
Total liabilities
						
6,542 				
						
						
6,381 				
						
﻿
						
						
						
						
						
						
Contingencies and Commitments
						
						
						
						
						
						
﻿
						
						
						
						
						
						
Stockholders’ Equity
						
						
						
						
						
						
Preferred stock - 10,000,000 shares authorized
						
-
						
						
-
						
Common stock - 800,000,000 shares authorized
						
5,869 				
						
						
6,298 				
						
Retained earnings
						
7,043 				
						
						
6,474 				
						
Accumulated other comprehensive income (loss)
						
1,566 				
						
						
				
						
Total stockholders’ equity
						
14,478 				
						
						
13,617 				
						
Total liabilities and stockholders’ equity
$
21,020 				
						
$
19,998 				
						
﻿
(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)
$
1,035 				
						
$
1,175 				
						
$
				
						
Interest from subsidiaries (1)
						
				
						
						
				
						
						
				
						
Net investment income
						
				
						
						
-
						
						
				
						
Realized gain (loss)
						
-
						
						
-
						
						
				
						
Other revenues
						
-
						
						
				
						
						
-
						
Total revenues
						
1,161 				
						
						
1,311 				
						
						
				
						
Expenses
						
						
						
						
						
						
						
						
						
Operating and administrative expenses
						
				
						
						
				
						
						
				
						
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)
						
(95 				
)
						
(66 				
)
						
(77 				
)
Income (loss) before equity in income (loss) of subsidiaries, less dividends
						
				
						
						
1,062 				
						
						
				
						
Equity in income (loss) of subsidiaries, less dividends
						
				
						
						
				
						
						
				
						
Net income (loss)
						
1,192 				
						
						
1,154 				
						
						
1,515 				
						
Other comprehensive income (loss), net of tax:
						
						
						
						
						
						
						
						
						
Unrealized investment gains (losses)
						
				
						
						
(2,229 				
)
						
1,591 				
						
Foreign currency translation adjustment
						
(22 				
)
						
(2 				
)
						
				
						
Funded status of employee benefit plans
						
				
						
						
(20 				
)
						
(60 				
)
Total other comprehensive income (loss), net of tax
						
				
						
						
(2,251 				
)
						
1,533 				
						
Comprehensive income (loss)
$
1,913 				
						
$
(1,097 				
)
$
3,048 				
						
﻿
﻿
﻿
(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)
$
1,192 				
						
$
1,154 				
						
$
1,515 				
						
Adjustments to reconcile net income (loss) to net cash provided by
						
						
						
						
						
						
						
						
						
operating activities:
						
						
						
						
						
						
						
						
						
Equity in (income) loss of subsidiaries greater than distributions (1)
						
(325 				
)
						
(92 				
)
						
(845 				
)
Realized (gain) loss
						
-
						
						
-
						
						
(1 				
)
Change in federal income tax accruals
						
				
						
						
				
						
						
(32 				
)
Other
						
				
						
						
(74 				
)
						
(1 				
)
Net cash provided by (used in) operating activities
						
1,041 				
						
						
1,094 				
						
						
				
						
﻿
						
						
						
						
						
						
						
						
						
Cash Flows from Investing Activities
						
						
						
						
						
						
						
						
						
Sales or maturities of investments
						
-
						
						
-
						
						
				
						
Capital contribution to subsidiaries (1)
						
-
						
						
(75 				
)
						
(5 				
)
Increase (decrease) in collateral on investments
						
(23 				
)
						
(38 				
)
						
(278 				
)
Net cash provided by (used in) investing activities
						
(23 				
)
						
(113 				
)
						
(233 				
)
﻿
						
						
						
						
						
						
						
						
						
Cash Flows from Financing Activities
						
						
						
						
						
						
						
						
						
Payment of long-term debt, including current maturities
						
(350 				
)
						
(250 				
)
						
(500 				
)
Issuance of long-term debt, net of issuance costs
						
				
						
						
				
						
						
-
						
Payment related to early extinguishment of debt
						
(59 				
)
						
-
						
						
-
						
Increase (decrease) in loans from subsidiaries, net (1)
						
				
						
						
				
						
						
(7 				
)
Increase (decrease) in loans to subsidiaries, net (1)
						
(20 				
)
						
(27 				
)
						
-
						
Common stock issued for benefit plans and excess tax benefits
						
				
						
						
				
						
						
				
						
Repurchase of common stock
						
(879 				
)
						
(900 				
)
						
(650 				
)
Dividends paid to common stockholders
						
(238 				
)
						
(204 				
)
						
(170 				
)
Net cash provided by (used in) financing activities
						
(1,088 				
)
						
(966 				
)
						
(1,295 				
)
Net increase (decrease) in cash and invested cash
						
(70 				
)
						
				
						
						
(892 				
)
Cash and invested cash as of beginning-of-year
						
				
						
						
				
						
						
1,558 				
						
Cash and invested cash as of end-of-year
$
				
						
$
				
						
$
				
						
﻿
						
						
						
						
						
						
						
						
						
﻿
(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, 2016
Annuities
						
$
3,597 				
						
$
2,485 				
						
						
$
-
						
						
$
21,202 				
						
$
				
Retirement Plan Services
						
						
				
						
						
				
						
						
						
-
						
						
						
17,878 				
						
						
-
Life Insurance
						
						
5,145 				
						
						
11,400 				
						
						
						
-
						
						
						
39,332 				
						
						
				
Group Protection
						
						
				
						
						
2,280 				
						
						
						
-
						
						
						
				
						
						
1,939 				
Other Operations
						
						
-
						
						
5,407 				
						
						
						
-
						
						
						
				
						
						
				
Total
						
$
9,134 				
						
$
21,576 				
						
						
$
-
						
						
$
78,903 				
						
$
2,987 				
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
As of or For the Year Ended December 31, 2015
Annuities
						
$
3,558 				
						
$
2,095 				
						
						
$
-
						
						
$
21,162 				
						
$
				
Retirement Plan Services
						
						
				
						
						
				
						
						
						
-
						
						
						
16,583 				
						
						
-
Life Insurance
						
						
5,496 				
						
						
10,595 				
						
						
						
-
						
						
						
38,706 				
						
						
				
Group Protection
						
						
				
						
						
2,347 				
						
						
						
-
						
						
						
				
						
						
2,163 				
Other Operations
						
						
-
						
						
5,667 				
						
						
						
-
						
						
						
				
						
						
				
Total
						
$
9,510 				
						
$
20,708 				
						
						
$
-
						
						
$
77,362 				
						
$
3,246 				
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
As of or For the Year Ended December 31, 2014
Annuities
						
$
3,062 				
						
$
1,569 				
						
						
$
-
						
						
$
21,070 				
						
$
				
Retirement Plan Services
						
						
				
						
						
				
						
						
						
-
						
						
						
16,223 				
						
						
-
Life Insurance
						
						
4,749 				
						
						
10,347 				
						
						
						
-
						
						
						
37,280 				
						
						
				
Group Protection
						
						
				
						
						
2,249 				
						
						
						
-
						
						
						
				
						
						
2,252 				
Other Operations
						
						
-
						
						
5,890 				
						
						
						
-
						
						
						
				
						
						
				
Total
						
$
8,207 				
						
$
20,057 				
						
						
$
-
						
						
$
75,512 				
						
$
2,988 				
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
(1)
Unearned premiums are included in Column C, future contract benefits.
			 		
FS-6
LINCOLN NATIONAL CORPORATION
SCHEDULE III - CONDENSED SUPPLEMENTARY INSURANCE INFORMATION (Continued)
(in millions)
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
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
						
Written
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
As of or For the Year Ended December 31, 2016
Annuities
						
$
1,033 				
						
$
1,130 				
						
						
$
				
						
						
$
1,296 				
						
						
$
-
Retirement Plan Services
						
						
				
						
						
				
						
						
						
				
						
						
						
				
						
						
						
-
Life Insurance
						
						
2,562 				
						
						
4,071 				
						
						
						
				
						
						
						
				
						
						
						
-
Group Protection
						
						
				
						
						
1,324 				
						
						
						
				
						
						
						
				
						
						
						
-
Other Operations
						
						
				
						
						
				
						
						
						
-
						
						
						
				
						
						
						
-
Total
						
$
4,874 				
						
$
7,256 				
						
						
$
1,276 				
						
						
$
3,403 				
						
						
$
-
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
As of or For the Year Ended December 31, 2015
Annuities
						
$
1,004 				
						
$
1,259 				
						
						
$
				
						
						
$
1,317 				
						
						
$
-
Retirement Plan Services
						
						
				
						
						
				
						
						
						
				
						
						
						
				
						
						
						
-
Life Insurance
						
						
2,541 				
						
						
3,938 				
						
						
						
				
						
						
						
				
						
						
						
-
Group Protection
						
						
				
						
						
1,638 				
						
						
						
				
						
						
						
				
						
						
						
-
Other Operations
						
						
				
						
						
				
						
						
						
-
						
						
						
				
						
						
						
-
Total
						
$
4,827 				
						
$
7,552 				
						
						
$
1,271 				
						
						
$
3,319 				
						
						
$
-
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
As of or For the Year Ended December 31, 2014
Annuities
						
$
1,034 				
						
$
				
						
						
$
				
						
						
$
1,252 				
						
						
$
-
Retirement Plan Services
						
						
				
						
						
				
						
						
						
				
						
						
						
				
						
						
						
-
Life Insurance
						
						
2,530 				
						
						
3,783 				
						
						
						
				
						
						
						
				
						
						
						
-
Group Protection
						
						
				
						
						
1,778 				
						
						
						
				
						
						
						
				
						
						
						
-
Other Operations
						
						
				
						
						
				
						
						
						
-
						
						
						
				
						
						
						
-
Total
						
$
4,859 				
						
$
7,211 				
						
						
$
1,114 				
						
						
$
3,232 				
						
						
$
-
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
			 		
FS-7
LINCOLN NATIONAL CORPORATION
SCHEDULE IV - CONSOLIDATED REINSURANCE
(in millions)
﻿
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
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, 2016
						
Individual life insurance in-force (1)
						
$
1,035,600 				
						
						
$
288,000 				
						
						
$
10,200 				
						
						
$
757,800 				
						
1.3% 				
						
Premiums:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Life insurance and annuities (2)
						
						
8,277 				
						
						
						
1,392 				
						
						
						
				
						
						
						
6,965 				
						
1.1% 				
						
Accident and health insurance
						
						
1,274 				
						
						
						
				
						
						
						
				
						
						
						
1,266 				
						
1.0% 				
						
Total premiums
						
$
9,551 				
						
						
$
1,413 				
						
						
$
				
						
						
$
8,231 				
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
As of or For the Year Ended December 31, 2015
						
Individual life insurance in-force (1)
						
$
1,032,900 				
						
						
$
287,400 				
						
						
$
10,400 				
						
						
$
755,900 				
						
1.4% 				
						
Premiums:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Life insurance and annuities (2)
						
						
8,112 				
						
						
						
1,289 				
						
						
						
				
						
						
						
6,881 				
						
0.8% 				
						
Accident and health insurance
						
						
1,417 				
						
						
						
				
						
						
						
				
						
						
						
1,410 				
						
1.1% 				
						
Total premiums
						
$
9,529 				
						
						
$
1,311 				
						
						
$
				
						
						
$
8,291 				
						
						
						
﻿
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
﻿
						
As of or For the Year Ended December 31, 2014
						
Individual life insurance in-force (1)
						
$
1,034,800 				
						
						
$
292,800 				
						
						
$
1,500 				
						
						
$
743,500 				
						
0.2% 				
						
Premiums:
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
Life insurance and annuities (2)
						
						
7,579 				
						
						
						
1,381 				
						
						
						
				
						
						
						
6,205 				
						
0.1% 				
						
Accident and health insurance
						
						
1,485 				
						
						
						
				
						
						
						
-
						
						
						
1,456 				
						
0.0% 				
						
Total premiums
						
$
9,064 				
						
						
$
1,410 				
						
						
$
				
						
						
$
7,661 				
						
						
						
﻿
(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
﻿
INDEX TO EXHIBITS
﻿
﻿
﻿
﻿
﻿
						
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 January 24, 2017) are incorporated by reference to Exhibit 3.1 to LNC’s Form 8-K (File No. 1-6028) filed on January 30, 2017.
						
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
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.
						
4.5
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.
						
4.6
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.
						
4.7
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.
						
4.8
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.
						
4.9
Form of 7.00% 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.
						
4.10
Form of 7.00% 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.
						
4.11
Form of 6.15% Senior Notes 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.
﻿
						
4.12
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.
						
4.13
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.
						
4.14
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.
			 		
E-1
4.15
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.
﻿
﻿
﻿
						
4.16
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.
						
4.17
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.
						
4.18
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.
						
4.19
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.
						
4.20
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.
						
4.21
Form of 3.50% Senior Notes due 2025 incorporated by reference to Exhibit 4.1 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on March 9, 2015.
						
4.22
Form of 3.625% Senior Notes due 2026 incorporated by reference to Exhibit 4.1 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on December 12, 2016.
						
10.1
LNC 2014 Incentive Compensation Plan (effective May 22, 2014) is incorporated by reference to Exhibit 10.1 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on May 28, 2014.*
﻿
						
10.2
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.*
						
10.3
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
2017 Non-Employee Director Fees are 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 (Amended and Restated effective as of February 24, 2016) is incorporated by reference to Exhibit 10.4 to LNC’s Form 10-Q (File No.1-6028) for the quarter ended March 31, 2016.*
						
10.8
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.*
						
10.9
LNC Deferred Compensation and Supplemental/Excess Retirement Plan, as amended and restated effective December 31, 2013, is incorporated by reference to Exhibit 10.13 to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2013.*
						
10.10
Amendment No. 1 to the LNC Deferred Compensation & Supplemental/Excess Retirement Plan, dated December 18, 2014, is incorporated by reference to Exhibit 10.15 to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2014.*
			 		
E-2
						
10.11
Amendment No. 2 to the LNC Deferred Compensation & Supplemental/Excess Retirement Plan, effective December 31, 2015, is incorporated by reference to Exhibit 10.11 to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2015.*
						
10.12
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.*
﻿
﻿
﻿
﻿
						
10.13
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.*
﻿
						
10.14
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.*
						
10.15
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.*
						
10.16
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.*
						
10.17
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.*
						
10.18
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.*
						
10.19
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.*
						
10.20
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.*
						
10.21
Amendment #1 to the Form of Non-Qualified Stock Option Award Agreements, effective August 13, 2014, is incorporated by reference to Exhibit 10.28 to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2014.*
						
10.22
Amendment #2 to the Form of Non-Qualified Stock Option Award Agreements, effective August 13, 2014, is incorporated by reference to Exhibit 10.29 to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2014.*
						
10.23
Form of 2014-2016 Performance Cycle Agreement for the Senior Management Committee and the Corporate Leadership Group under the LNC 2009 Amended and Restated Incentive Compensation Plan is incorporated by Reference to Exhibit 10.1 to LNC’s Form 10-Q (File No. 1-6028) for the quarter ended March 31, 2014.*
						
10.24
Form of Restricted Stock Unit Award Agreement for 2015 under the LNC 2014 Incentive Compensation Plan is incorporated by Reference to Exhibit 10.1 to LNC’s Form 10-Q (File No. 1-6028) for the quarter ended March 31, 2015.*
						
10.25
Form of Nonqualified Stock Option Agreement under the LNC 2014 Incentive Compensation Plan is incorporated by Reference to Exhibit 10.2 to LNC’s Form 10-Q (File No. 1-6028) for the quarter ended March 31, 2015.*
						
10.26
Form of 2015-2017 Performance Cycle Agreement for 2015 under the LNC 2014 Incentive Compensation Plan is incorporated by Reference to Exhibit 10.3 to LNC’s Form 10-Q (File No. 1-6028) for the quarter ended March 31, 2015.*
						
10.27
Form of Restricted Stock Unit Award Agreement for Senior Management Committee (Other than CEO) is incorporated by reference to Exhibit 10.1 to LNC’s Form 10-Q (File No. 1-6028) for the quarter ended March 31, 2016.*
						
10.28
Form of Nonqualified Stock Option Award Agreement for Senior Management Committee (Other than CEO) is incorporated by reference to Exhibit 10.2 to LNC’s Form 10-Q (File No. 1-6028) for the quarter ended March 31, 2016.*
			 		
E-3
						
10.29
Form of 2016-2018 Performance Cycle Agreement for Senior Management Committee (Other than CEO) is incorporated by reference to Exhibit 10.3 to LNC’s Form 10-Q (File No. 1-6028) for the quarter ended March 31, 2016.*
						
10.30
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.*
						
10.31
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.*
						
﻿
﻿
﻿
﻿
						
10.32
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.*
						
10.33
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.*
﻿
						
10.34
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.*
						
10.35
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.*
						
10.36
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.*
						
10.37
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.
						
10.38
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.
						
10.39
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.
						
10.40
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.
						
10.41
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.**
						
10.42
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.**
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10.43
Credit Agreement, dated as of June 30, 2016, 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 July 6, 2016.
						
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.
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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.
** 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.
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We will furnish to the SEC, upon request, a copy of any of our long-term debt agreements not otherwise filed with the SEC.
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