XNYS:LNC Lincoln National Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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d10-q.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
____________________
 
FORM 10-Q
____________________
 
 
 
(Mark One)
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended June 30, 2012
 OR

¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from              to             
 
Commission File Number:  1-6028
 
____________________
 
LINCOLN NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
 
____________________
 
 
 
   
               Indiana                
35-1140070
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
   
150 N. Radnor Chester Road, Suite A305, Radnor, Pennsylvania
19087
(Address of principal executive offices)
(Zip Code)
 
(484) 583-1400
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x    No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x    No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer x   Accelerated filer ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨ No x
 
As of July 31, 2012, there were 279,173,774 shares of the registrant’s common stock outstanding.

 
 

 

Lincoln National Corporation
 
Table of Contents

Item
     
Page
PART I
 
1.
Financial Statements
1
     
2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
45
   
Forward-Looking Statements – Cautionary Language
45
   
Introduction
46
     
Executive Summary
46
     
Critical Accounting Policies and Estimates
47
     
Acquisitions and Dispositions
49
   
Results of Consolidated Operations
49
   
Results of Annuities
51
   
Results of Retirement Plan Services
57
   
Results of Life Insurance
63
   
Results of Group Protection
70
   
Results of Other Operations
73
   
Realized Gain (Loss) and Benefit Ratio Unlocking
75
   
Consolidated Investments
77
   
Review of Consolidated Financial Condition
92
     
Liquidity and Capital Resources
92
   
Other Matters
96
     
Other Factors Affecting Our Business
96
     
Recent Accounting Pronouncements
96
   
3.
Quantitative and Qualitative Disclosures About Market Risk
96
     
4.
Controls and Procedures
100
     
PART II
 
     
1.
Legal Proceedings
100
     
1A.
Risk Factors
100
     
2.
Unregistered Sales of Equity Securities and Use of Proceeds
101
     
6.
Exhibits
102
     
 
Signatures
103
     
 
Exhibit Index for the Report on Form 10-Q
E-1

 
 

 
PART I – FINANCIAL INFORMATION
Item 1.  Financial Statements
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except share data)

 
 
 
 
 
 
 
As of
 
As of
 
 
 
 
 
 
 
 
June 30,
December 31,
 
 
 
 
 
 
 
2012 
 
2011 
 
 
 
 
 
 
 
 
(Unaudited)
 
 
 
 
ASSETS
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
Available-for-sale securities, at fair value:
 
 
 
 
 
 
 
 
Fixed maturity securities (amortized cost: 2012 - $71,394; 2011 - $68,988)
$
 79,191
 
$
 75,433
 
 
 
Variable interest entities' fixed maturity securities (amortized cost: 2012 - $675; 2011 - $673)
 
 705
 
 
 700
 
 
 
Equity securities (cost: 2012 - $143; 2011 - $135)
 
 154
 
 
 139
 
 
Trading securities
 
 2,649
 
 
 2,675
 
 
Mortgage loans on real estate
 
 6,804
 
 
 6,942
 
 
Real estate
 
 116
 
 
 137
 
 
Policy loans
 
 2,829
 
 
 2,884
 
 
Derivative investments
 
 3,399
 
 
 3,151
 
 
Other investments
 
 1,041
 
 
 1,069
 
 
 
 
Total investments
 
 96,888
 
 
 93,130
 
Cash and invested cash
 
 5,257
 
 
 4,510
 
Deferred acquisition costs and value of business acquired
 
 6,505
 
 
 6,776
 
Premiums and fees receivable
 
 388
 
 
 408
 
Accrued investment income
 
 1,021
 
 
 981
 
Reinsurance recoverables
 
 6,601
 
 
 6,526
 
Funds withheld reinsurance assets
 
 863
 
 
 874
 
Goodwill
 
 2,273
 
 
 2,273
 
Other assets
 
 2,475
 
 
 2,536
 
Separate account assets
 
 88,839
 
 
 83,477
 
 
 
 
 
 
Total assets
$
 211,110
 
$
 201,491
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
Future contract benefits
$
 19,930
 
$
 19,813
 
Other contract holder funds
 
 70,422
 
 
 69,466
 
Short-term debt
 
 300
 
 
 300
 
Long-term debt
 
 5,719
 
 
 5,391
 
Reinsurance related embedded derivatives
 
 185
 
 
 168
 
Funds withheld reinsurance liabilities
 
 999
 
 
 1,045
 
Deferred gain on business sold through reinsurance
 
 356
 
 
 394
 
Payables for collateral on investments
 
 5,070
 
 
 3,733
 
Variable interest entities' liabilities
 
 158
 
 
 193
 
Other liabilities
 
 4,950
 
 
 4,273
 
Separate account liabilities
 
 88,839
 
 
 83,477
 
 
 
 
 
Total liabilities
 
 196,928
 
 
 188,253
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingencies and Commitments (See Note 8)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholders' Equity
 
 
 
 
 
 
Preferred stock - 10,000,000 shares authorized; Series A - 9,632 and 10,072 shares issued and outstanding as of June 30, 2012, and December 31, 2011, respectively
 
 -
 
 
 -
 
Common stock - 800,000,000 shares authorized; 279,168,971 and 291,319,222 shares issued and outstanding as of June 30, 2012, and December 31, 2011, respectively
 
 7,310
 
 
 7,590
 
Retained earnings
 
 3,493
 
 
 2,969
 
Accumulated other comprehensive income (loss)
 
 3,379
 
 
 2,679
 
 
 
 
 
Total stockholders' equity
 
 14,182
 
 
 13,238
 
 
 
 
 
 
Total liabilities and stockholders' equity
$
 211,110
 
$
 201,491
 

See accompanying Notes to Consolidated Financial Statements
 
 

 
1

 
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, in millions, except per share data)
 
 

 
 
 
 
 
 
 
For the Three
 
For the Six
 
 
 
 
 
 
 
 
Months Ended
 
Months Ended
 
 
 
 
 
 
 
 
June 30,
 
June 30,
 
 
 
 
 
 
 
 
2012 
 
2011 
 
2012 
 
2011 
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Insurance premiums
$
 630
 
$
 594
 
$
 1,219
 
$
 1,162
 
Insurance fees
 
 887
 
 
 900
 
 
 1,794
 
 
 1,718
 
Net investment income
 
 1,197
 
 
 1,181
 
 
 2,362
 
 
 2,372
 
Realized gain (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
Total other-than-temporary impairment losses on securities
 
 (50
)
 
 (47
)
 
 (147
)
 
 (91
 
Portion of loss recognized in other comprehensive income
 
 17
 
 
 16
 
 
 67
 
 
 19
 
 
 
Net other-than-temporary impairment losses on securities recognized in earnings
 
 (33
)
 
 (31
)
 
 (80
)
 
 (72
 
 
Realized gain (loss), excluding other-than-temporaryimpairment losses on securities
 
 76
 
 
 22
 
 
 37
 
 
 65
 
 
 
 
Total realized gain (loss)
 
 43
 
 
 (9
)
 
 (43
)
 
 (7
Amortization of deferred gain on business sold through reinsurance
 
 18
 
 
 19
 
 
 38
 
 
 37
 
Other revenues and fees
 
 124
 
 
 122
 
 
 244
 
 
 244
 
 
 
Total revenues
 
 2,899
 
 
 2,807
 
 
 5,614
 
 
 5,526
 
Expenses
 
 
 
 
 
 
 
 
 
 
 
 
Interest credited
 
 616
 
 
 625
 
 
 1,241
 
 
 1,239
 
Benefits
 
 945
 
 
 1,027
 
 
 1,804
 
 
 1,862
 
Commissions and other expenses
 
 828
 
 
 674
 
 
 1,684
 
 
 1,443
 
Interest and debt expense
 
 68
 
 
 72
 
 
 135
 
 
 144
 
 
Total expenses
 
 2,457
 
 
 2,398
 
 
 4,864
 
 
 4,688
 
 
 
Income (loss) from continuing operations before taxes
 
 442
 
 
 409
 
 
 750
 
 
 838
 
 
 
Federal income tax expense (benefit)
 
 118
 
 
 105
 
 
 180
 
 
 221
 
 
 
 
Income (loss) from continuing operations
 
 324
 
 
 304
 
 
 570
 
 
 617
 
 
 
 
Income (loss) from discontinued operations, net of federal income taxes
 
 -
 
 
 -
 
 
 (1
)
 
 -
 
 
 
 
 
Net income (loss)
 
 324
 
 
 304
 
 
 569
 
 
 617
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
 757
 
 
 354
 
 
 700
 
 
 376
 
 
 
 
 
 
Comprehensive income (loss)
$
 1,081
 
$
 658
 
$
 1,269
 
$
 993
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (Loss) Per Common Share - Basic
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
 1.15
 
$
 0.98
 
$
 1.99
 
$
 1.97
 
Income (loss) from discontinued operations
 
 -
 
 
 -
 
 
 -
 
 
 -
 
 
Net income (loss)
$
 1.15
 
$
 0.98
 
$
 1.99
 
$
 1.97
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (Loss) Per Common Share - Diluted
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
 1.10
 
$
 0.95
 
$
 1.94
 
$
 1.92
 
Income (loss) from discontinued operations
 
 - 
 
 
 -
 
 
 -
 
 
 - 
 
 
Net income (loss)
$
 1.10
 
$
 0.95
 
$
 1.94
 
$
 1.92
 

See accompanying Notes to Consolidated Financial Statements
 
 

 
2

 
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in millions, except per share data)
 
 

 
   
For the Six
 
 
   
Months Ended
 
 
   
June 30,
 
 
   
2012
 
2011
 
Common Stock
 
 
 
 
Balance as of beginning-of-year
$ 7,590   $ 8,124  
Stock compensation/issued for benefit plans
  20     9  
Retirement of common stock/cancellation of shares
  (300 )   (195 )
  Balance as of end-of-period   7,310     7,938  
 
               
Retained Earnings
           
Balance as of beginning-of-year
  2,969     3,934  
Cumulative effect from adoption of new accounting standards
  -     (1,095 )
Net income (loss)
  569     617  
Retirement of common stock
  -     (31 )
Dividends declared:  Common (2012 - $0.160; 2011 - $0.100)
  (45 )   (32 )
 
Balance as of end-of-period
  3,493     3,393  
 
               
Accumulated Other Comprehensive Income (Loss)
           
Balance as of beginning-of-year
  2,679     748  
Cumulative effect from adoption of new accounting standards
  -     103  
Other comprehensive income (loss), net of tax
  700     376  
 
Balance as of end-of-period
  3,379     1,227  
   
Total stockholders' equity as of end-of-period
$ 14,182   $ 12,558  

See accompanying Notes to Consolidated Financial Statements
 
 

 
3

 
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
 
 

 
 
 
For the Six
 
 
 
 
Months Ended
 
 
 
 
June 30,
 
 
 
 
2012 
 
2011 
 
Cash Flows from Operating Activities
 
 
 
 
 
 
Net income (loss)
$
 569
 
$
 617
 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
 
 
 
Deferred acquisition costs, value of business acquired, deferred sales inducements
 
 
 
 
 
 
 
 
and deferred front-end loads deferrals and interest, net of amortization
 
 (114
)
 
 (215
 
Trading securities purchases, sales and maturities, net
 
 67
 
 
 26
 
 
Change in premiums and fees receivable
 
 20
 
 
 (35
 
Change in accrued investment income
 
 (40
)
 
 (61
 
Change in future contract benefits and other contract holder funds
 
 120
 
 
 371
 
 
Change in reinsurance related assets and liabilities
 
 (111
)
 
 (72
 
Change in federal income tax accruals
 
 197
 
 
 297
 
 
Realized (gain) loss
 
 43
 
 
 7
 
  (Income) loss attributable to equity method investments   (81   (75
 
Amortization of deferred gain on business sold through reinsurance
 
 (38
)
 
 (37
 
(Gain) loss on disposal of discontinued operations
 
 1
 
 
 -
 
 
Other
 
 (19
)
 
 55
 
 
 
Net cash provided by (used in) operating activities
 
 614
 
 
 878 
 
 
 
 
 
 
 
 
 
 
Cash Flows from Investing Activities
 
 
 
 
 
 
Purchases of available-for-sale securities
 
 (5,717
)
 
 (5,901
Sales of available-for-sale securities
 
 369
 
 
 1,042
 
Maturities of available-for-sale securities
 
 2,983
 
 
 2,857
 
Purchases of other investments
 
 (1,398
)
 
 (1,701
Sales or maturities of other investments
 
 1,451
 
 
 1,527
 
Increase (decrease) in payables for collateral on investments
 
 1,337
 
 
 146
 
Other
 
 (47
)
 
 (42
 
 
Net cash provided by (used in) investing activities
 
 (1,022
)
 
 (2,072
)
 
 
 
 
 
 
 
 
 
Cash Flows from Financing Activities
 
 
 
 
 
 
Issuance of long-term debt, net of issuance costs
 
 298
 
 
 298
 
Increase (decrease) in commercial paper, net
 
 -
 
 
 (100
Deposits of fixed account values, including the fixed portion of variable
 
 4,979
 
 
 5,335
 
Withdrawals of fixed account values, including the fixed portion of variable
 
 (2,611
)
 
 (2,515
Transfers to and from separate accounts, net
 
 (1,160
)
 
 (1,391
Common stock issued for benefit plans and excess tax benefits
 
 (5
)
 
 (5
Repurchase of common stock
 
 (300
)
 
 (226
Dividends paid to common and preferred stockholders
 
 (46
)
 
 (31
 
 
Net cash provided by (used in) financing activities
 
 1,155
 
 
 1,365
 
 
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and invested cash, including discontinued operations
 
 747
 
 
 171
 
Cash and invested cash, including discontinued operations, as of beginning-of-year
 
 4,510
 
 
 2,741
 
 
Cash and invested cash, including discontinued operations, as of end-of-period
$
 5,257
 
$
 2,912
 

See accompanying Notes to Consolidated Financial Statements
 
 

 
4

 
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
 

1.  Nature of Operations and Basis of Presentation

Nature of Operations

Lincoln National Corporation and its majority-owned subsidiaries (“LNC” or the “Company,” which also may be referred to as “we,” “our” or “us”) operate multiple insurance businesses through four business segments.  See Note 13 for additional details.  The collective group of businesses uses “Lincoln Financial Group” as its marketing identity.  Through our business segments, we sell a wide range of wealth protection, accumulation and retirement income products.  These products include institutional and/or retail fixed and indexed annuities, variable annuities, universal life insurance (“UL”), variable universal life insurance (“VUL”), linked-benefit UL, term life insurance, mutual funds and group life, disability and dental.

Basis of Presentation

The accompanying unaudited consolidated financial statements are prepared in accordance with United States of America generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for the Securities and Exchange Commission (“SEC”) Quarterly Report on Form 10-Q, including Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.  Therefore, the information contained in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (“2011 Form 10-K”), should be read in connection with the reading of these interim unaudited consolidated financial statements.

Certain GAAP policies, which significantly affect the determination of financial position, results of operations and cash flows, are summarized in our 2011 Form 10-K.

In the opinion of management, these statements include all normal recurring adjustments necessary for a fair presentation of the Company’s results.  Operating results for the six month period ended June 30, 2012, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2012.  All material intercompany accounts and transactions have been eliminated in consolidation.

See Note 2 “Financial Services – Insurance Industry Topic” below for information about the retrospective restatement of amounts due to the adoption of new accounting guidance.  In addition, certain amounts reported in prior years’ consolidated financial statements have been reclassified to conform to the presentation adopted in the current year.  These reclassifications had no effect on net income or stockholders’ equity of the prior years.

2.  New Accounting Standards

Adoption of New Accounting Standards

Comprehensive Income Topic

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”), with an objective of increasing the prominence of items reported in other comprehensive income (“OCI”); however, in December 2011, the FASB deferred a portion of the presentation requirements by issuing ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (“ASU 2011- 12”).  For a more detailed description of ASU 2011-05 and ASU 2011-12, see “Future Adoption of New Accounting Standards – Comprehensive Income Topic” in Note 2 of our 2011 Form 10-K.  We adopted the provisions of ASU 2011-05 as of January 1, 2012, after considering the deferral in ASU 2011-12, and have included a single continuous statement of comprehensive income in Item 1 of this quarterly report on Form 10-Q for the quarterly period ended June 30, 2012.

Fair Value Measurements and Disclosures Topic

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards” (“ASU 2011-04”), which was issued to create a consistent framework for the application of fair value measurement across jurisdictions.  For a more detailed description of ASU 2011-04 see “Future Adoption of New Accounting Standards – Fair Value Measurements and Disclosures Topic” in Note 2 of our 2011 Form 10-K.  We adopted the provisions of ASU 2011-04 effective January 1, 2012, and have included the additional disclosures required for fair value measurements in Note 12 for the quarterly period ended June 30, 2012.

 
5

 

Financial Services – Insurance Industry Topic

In October 2010, the FASB issued ASU No. 2010-26, “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts” (“ASU 2010-26”), which clarifies the types of costs incurred by an insurance entity that can be capitalized in the acquisition of insurance contracts.  Only those costs incurred that result directly from and are essential to the successful acquisition of new or renewal insurance contracts may be capitalized as deferrable acquisition costs.  The determination of deferability must be made on a contract-level basis.

Prior to the adoption of ASU 2010-26, we defined deferred acquisition costs (“DAC”) as commissions and other costs of acquiring UL insurance, VUL insurance, traditional life insurance, annuities and other investments contracts that vary with and are related primarily to new or renewal business, regardless of whether the acquisition efforts were successful or unsuccessful.  Upon the adoption of ASU 2010-26, we revised our accounting policy to only defer acquisition costs directly related to successful contract acquisitions or renewals, and excluded from DAC those costs incurred for soliciting potential customers, market research, training, administration, management of distribution and underwriting functions, unsuccessful acquisition or renewal efforts and product development.  In addition, indirect acquisition costs including administrative costs, rent, depreciation, occupancy costs, equipment costs and other general overhead are excluded from DAC.  The costs that are considered non-deferrable acquisition costs under ASU 2010-26 are expensed in the period incurred.
 
We adopted the provisions of ASU 2010-26 as of January 1, 2012, and elected to retrospectively restate all prior periods.  The following summarizes the prior period increases (decreases) (in millions) reflected in our Consolidated Balance Sheets and Consolidated Statements of Stockholders’ Equity related to the adoption:

 
 
 
 
As of December 31,
 
 
 
 
 
2011 
 
2010 
 
Assets
 
 
 
 
 
 
Deferred acquisition costs
$
 (1,415
)
$
 (1,516
)
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
 
 
Other liabilities - deferred income taxes
$
 (490
)
$
 (524
)
 
 
 
 
 
 
 
 
 
 
Stockholders' equity:
 
 
 
 
 
 
 
Retained earnings
 
 (1,157
)
 
 (1,095
)
 
Accumulated other comprehensive income (loss)
 
 232
 
 
 103
 
 
 
Total stockholders' equity
 
 (925
)
 
 (992
)
 
 
 
Total liabilities and stockholders' equity
$
 (1,415
)
$
 (1,516
)


 
6

 

The following summarizes the prior period increases (decreases) to income from continuing operations and earnings (loss) per share (“EPS”) (in millions, except per share data) reflected in our Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2011, related to the adoption:

 
 
 
 
  For the Three For the Six  
 
 
 
 
    Months   Months  
 
 
 
 
    Ended   Ended  
 
 
 
 
    June 30,   June 30,  
 
 
 
 
    2011   2011  
Revenues
 
 
 
 
 
 
 
Realized gain (loss)
 
$
 4
 
$
 8
 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Commissions and other expenses
 
 
 (37
)
 
 (81
 
Income (loss) from continuing operations before taxes
 
 
 (33
)
 
 (73
 
Federal income tax expense (benefit)
 
 
 12
 
 
 26
 
 
 
Income (loss) from continuing operations
 
$
 (21
)
$
 (47
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (Loss) Per Common Share - Basic
 
$
 (0.07
)
$
 (0.15
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (Loss) Per Common Share - Diluted
 
$
 (0.07
)
$
 (0.15
)

Intangibles – Goodwill and Other Topic

In September 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment” (“ASU 2011-08”), which provides an option to first assess qualitative factors to determine if it is necessary to complete the two-step goodwill impairment test.  For a more detailed description of ASU 2011-08, see “Future Adoption of New Accounting Standards – Intangibles – Goodwill and Other Topic” in Note 2 of our 2011 Form 10-K.  We adopted the provisions of ASU 2011-08 effective January 1, 2012.  The adoption did not have a material effect on our consolidated financial condition and results of operations.
 
Transfers and Servicing Topic

In April 2011, the FASB issued ASU No. 2011-03, “Reconsideration of Effective Control for Repurchase Agreements” (“ASU 2011-03”), which revises the criteria for assessing effective control for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity.  For a more detailed description of ASU 2011-03, see “Future Adoption of New Accounting Standards – Transfers and Servicing Topic” in Note 2 of our 2011 Form 10-K.  We adopted the provisions of ASU 2011-03 effective January 1, 2012.  The adoption did not have a material effect on our consolidated financial condition and results of operations.

Future Adoption of New Accounting Standards

Balance Sheet Topic

In December 2011, the FASB issued ASU No. 2011-11, “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”), to address certain comparability issues between financial statements prepared in accordance with GAAP and those prepared in accordance with International Financial Reporting Standards.  For a more detailed description of ASU 2011-11, see “Future Adoption of New Accounting Standards – Balance Sheet Topic” in Note 2 of our 2011 Form 10-K.  We will adopt the disclosure requirements in ASU 2011-11 beginning with our first quarter 2013 financial statements and are currently evaluating the appropriate location for these disclosures in the notes to our financial statements.

3.  Variable Interest Entities (“VIEs”)

Consolidated VIEs

See Note 4 in our 2011 Form 10-K for a detailed discussion of our consolidated VIEs, which information is incorporated herein by reference.

 
7

 

The following summarizes information regarding the credit-linked note (“CLN”) structures (dollars in millions) as of June 30, 2012:

 
 
Amount and Date of Issuance
 
 
 
 
$400
 
 
$200
 
 
 
 
 
December
 
 
April
 
 
 
 
 
2006
 
 
2007
 
 
Original attachment point (subordination)
 
5.50
%
 
2.05
%
 
Current attachment point (subordination)
 
4.17
%
 
1.48
%
 
Maturity
 
12/20/2016
 
 
3/20/2017
 
 
Current rating of tranche
 
BB-
 
 
Ba2
 
 
Current rating of underlying collateral pool
 
Aa1-B3
 
 
Aaa-Caa1
 
 
Number of defaults in underlying collateral pool
 
2
 
 
 2
 
 
Number of entities
 
 123
 
 
 99
 
 
Number of countries
 
20
 
 
 22
 
 

The following summarizes the exposure of the CLN structures’ underlying collateral by industry and rating as of June 30, 2012:

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AAA
 
AA
 
A
 
BBB
 
BB
 
B
 
CCC
 
Total
Industry
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Telecommunications
-
%
 
-
%
 
5.5
%
 
4.5
%
 
0.7
%
 
0.5
%
 
-
%
 
 11.2
%
Financial intermediaries
-
%
 
2.1
%
 
7.5
%
 
0.9
%
 
-
%
 
-
%
 
-
%
 
 10.5
%
Oil and gas
-
%
 
1.8
%
 
1.0
%
 
4.6
%
 
-
%
 
-
%
 
-
%
 
 7.4
%
Utilities
-
%
 
-
%
 
2.6
%
 
2.0
%
 
-
%
 
-
%
 
-
%
 
 4.6
%
Chemicals and plastics
-
%
 
-
%
 
2.3
%
 
1.2
%
 
0.3
%
 
-
%
 
-
%
 
 3.8
%
Drugs
0.3
%
 
2.7
%
 
0.7
%
 
-
%
 
-
%
 
-
%
 
-
%
 
 3.7
%
Retailers (except food and drug)
-
%
 
-
%
 
2.1
%
 
0.9
%
 
0.5
%
 
-
%
 
-
%
 
 3.5
%
Industrial equipment
-
%
 
-
%
 
3.0
%
 
0.3
%
 
-
%
 
-
%
 
-
%
 
 3.3
%
Sovereign
-
%
 
0.7
%
 
1.6
%
 
1.0
%
 
-
%
 
-
%
 
-
%
 
 3.3
%
Conglomerates
-
%
 
2.3
%
 
0.9
%
 
-
%
 
-
%
 
-
%
 
-
%
 
 3.2
%
Forest products
-
%
 
-
%
 
-
%
 
1.6
%
 
1.4
%
 
-
%
 
-
%
 
 3.0
%
Other
-
%
 
3.9
%
 
16.0
%
 
17.7
%
 
3.7
%
 
0.9
%
 
0.3
%
 
 42.5
%
 
Total
0.3
%
 
13.5
%
 
43.2
%
 
34.7
%
 
6.6
%
 
1.4
%
 
0.3
%
 
100.0
%


 
8

 

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

 
 
 
 
 
As of June 30, 2012
 
As of December 31, 2011
 
 
 
 
 
 
Number
 
 
 
 
 
 
 
Number
 
 
 
 
 
 
 
 
 
 
 
 
of
 
Notional
 
Carrying
 
of
 
Notional
 
Carrying
 
 
 
 
 
  Instruments  
Amounts
 
Value
 
Instruments  
Amounts
 
Value
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed credit card loans
 
 
N/A
 
$
 -
 
$
 595
 
 
N/A
 
$
 -
 
$
 592
 
 
U.S. government bonds
 
 
N/A
 
 
 -
 
 
 110
 
 
N/A
 
 
 -
 
 
 108
 
Excess mortality swap
 
 
 1
 
 
 100
 
 
 -
 
 
 1
 
 
 100
 
 
 -
 
 
 
 
Total assets (1)
 
 
 1
 
$
 100
 
$
 705
 
 
 1
 
$
 100
 
$
 700
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-qualifying hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit default swaps
 
 
 2
 
$
 600
 
$
 234
 
 
 2
 
$
 600
 
$
 295
 
 
Contingent forwards
 
 
 2
 
 
 -
 
 
 (3
)
 
 2
 
 
 -
 
 
 (4
 
 
Total non-qualifying hedges
 
 
 4
 
 
 600
 
 
 231
 
 
 4
 
 
 600
 
 
 291
 
Federal income tax
 
 
N/A
 
 
 -
 
 
 (73
)
 
N/A
 
 
 -
 
 
 (98
 
 
 
Total liabilities (2)
 
 
 4
 
$
 600
 
$
 158
 
 
 4
 
$
 600
 
$
 193
 

(1)  
Reported in VIEs’ fixed maturity securities on our Consolidated Balance Sheets.
(2)  
Reported in VIEs’ liabilities on our Consolidated Balance Sheets.

For details related to the fixed maturity available-for-sale (“AFS”) securities for these VIEs, see Note 4.

As described more fully in Note 1 of our 2011 Form 10-K, we regularly review our investment holdings for other-than-temporary impairment (“OTTI”).  Based upon this review, we believe that the fixed maturity securities were not other-than-temporarily impaired as of June 30, 2012.

The gains (losses) for these consolidated VIEs (in millions) recorded on our Consolidated Statements of Comprehensive Income (Loss) were as follows:

 
 
For the Three
 
For the Six
   
 
 
Months Ended
 
Months Ended
   
 
 
June 30,
 
June 30,
   
 
 
2012 
 
2011 
 
2012 
 
2011 
   
Non-Qualifying Hedges
 
 
 
 
 
 
 
 
 
 
 
   
Credit default swaps
$
 (10
)
$
 6
 
$
 61
 
$
 13
   
Contingent forwards
 
 -
 
 
 (1
)
 
 (2
)
 
 (3
 
 
Total non-qualifying hedges (1)
$
 (10
)
$
 5
 
$
 59
 
$
 10
   

(1)  
Reported in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).

Unconsolidated VIEs

See Note 4 in our 2011 Form 10-K for a detailed discussion of our unconsolidated VIEs, which information is incorporated herein by reference.


 
9

 

4.  Investments

AFS Securities

Pursuant to the Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards CodificationTM (“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 in our 2011 Form 10-K, which also includes additional disclosures regarding our fair value measurements.

The amortized cost, gross unrealized gains, losses and OTTI and fair value of AFS securities (in millions) were as follows:

 
 
 
As of June 30, 2012
 
 
 
 
Amortized
 
Gross Unrealized
 
Fair
 
 
 
 
Cost
 
Gains
 
Losses
 
OTTI
 
Value
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$
 57,342
 
$
 7,068
 
$
 393
 
$
 103
 
$
 63,914
 
 
U.S. Government bonds
 
 449
 
 
 68
 
 
 -
 
 
 -
 
 
 517
 
 
Foreign government bonds
 
 583
 
 
 81
 
 
 -
 
 
 -
 
 
 664
 
 
Residential mortgage-backed securities ("RMBS")
 
 6,808
 
 
 522
 
 
 41
 
 
 92
 
 
 7,197
 
 
Commercial mortgage-backed securities ("CMBS")
 
 1,304
 
 
 71
 
 
 43
 
 
 25
 
 
 1,307
 
 
Collateralized debt obligations ("CDOs")
 
 135
 
 
 -
 
 
 15
 
 
 -
 
 
 120
 
 
State and municipal bonds
 
 3,525
 
 
 767
 
 
 8
 
 
 -
 
 
 4,284
 
 
Hybrid and redeemable preferred securities
 
 1,248
 
 
 63
 
 
 123
 
 
 -
 
 
 1,188
 
 
VIEs' fixed maturity securities
 
 675
 
 
 30
 
 
 -
 
 
 -
 
 
 705
 
 
 
Total fixed maturity securities
 
 72,069
 
 
 8,670
 
 
 623
 
 
 220
 
 
 79,896
 
Equity securities
 
 143
 
 
 19
 
 
 8
 
 
 -
 
 
 154
 
 
 
Total AFS securities
$
 72,212
 
$
 8,689
 
$
 631
 
$
 220
 
$
 80,050
 

 
 
 
As of December 31, 2011
 
 
 
 
Amortized
 
Gross Unrealized
 
Fair
 
 
 
 
Cost
 
Gains
 
Losses
 
OTTI
 
Value
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$
 53,661 
 
$
 6,185 
 
$
 517 
 
$
 68 
 
$
 59,261 
 
 
U.S. Government bonds
 
 439 
 
 
 55 
 
 
 - 
 
 
 - 
 
 
 494 
 
 
Foreign government bonds
 
 668 
 
 
 65 
 
 
 - 
 
 
 - 
 
 
 733 
 
 
RMBS
 
 7,690 
 
 
 548 
 
 
 73 
 
 
 126 
 
 
 8,039 
 
 
CMBS
 
 1,642 
 
 
 73 
 
 
 106 
 
 
 9 
 
 
 1,600 
 
 
CDOs
 
 121 
 
 
 - 
 
 
 19 
 
 
 - 
 
 
 102 
 
 
State and municipal bonds
 
 3,490 
 
 
 566 
 
 
 9 
 
 
 - 
 
 
 4,047 
 
 
Hybrid and redeemable preferred securities
 
 1,277 
 
 
 50 
 
 
 170 
 
 
 - 
 
 
 1,157 
 
 
VIEs' fixed maturity securities
 
 673 
 
 
 27 
 
 
 - 
 
 
 - 
 
 
 700 
 
 
 
Total fixed maturity securities
 
 69,661 
 
 
 7,569 
 
 
 894 
 
 
 203 
 
 
 76,133 
 
Equity securities
 
 135 
 
 
 16 
 
 
 12 
 
 
 - 
 
 
 139 
 
 
 
Total AFS securities
$
 69,796 
 
$
 7,585 
 
$
 906 
 
$
 203 
 
$
 76,272 
 


 
10

 

The amortized cost and fair value of fixed maturity AFS securities by contractual maturities (in millions) as of June 30, 2012, were as follows:

 
 
 
Amortized
 
Fair
 
 
 
 
Cost
 
Value
 
Due in one year or less
$
 2,931 
 
$
 2,989 
 
Due after one year through five years
 
 12,188 
 
 
 13,136 
 
Due after five years through ten years
 
 23,651 
 
 
 26,185 
 
Due after ten years
 
 25,052 
 
 
 28,962 
 
 
Subtotal
 
 63,822 
 
 
 71,272 
 
Mortgage-backed securities ("MBS")
 
 8,112 
 
 
 8,504 
 
CDOs
 
 135 
 
 
 120 
 
 
 
Total fixed maturity AFS securities
$
 72,069 
 
$
 79,896 
 

Actual maturities may differ from contractual maturities because issuers may have the right to call or pre-pay obligations.

The fair value and gross unrealized losses, including the portion of OTTI recognized in OCI, of AFS securities (dollars in millions), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:

 
 
 
 
As of June 30, 2012
 
 
 
 
 
Less Than or Equal
 
Greater Than
 
 
 
 
 
 
 
to Twelve Months
 
Twelve Months
 
Total
 
 
 
 
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
 
 
 
 
 
 
 
Unrealized
 
 
 
Unrealized
 
 
 
Unrealized
 
 
 
 
 
Fair
 
Losses and
 
Fair
 
Losses and
 
Fair
 
Losses and
 
 
 
 
 
Value
 
OTTI
 
Value
 
OTTI
 
Value
 
OTTI
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$
 2,389 
 
$
 175 
 
$
 1,293 
 
$
 321 
 
$
 3,682 
 
$
 496 
 
 
RMBS
 
 521 
 
 
 90 
 
 
 314 
 
 
 43 
 
 
 835 
 
 
 133 
 
 
CMBS
 
 110 
 
 
 25 
 
 
 146 
 
 
 43 
 
 
 256 
 
 
 68 
 
 
CDOs
 
 - 
 
 
 - 
 
 
 68 
 
 
 15 
 
 
 68 
 
 
 15 
 
 
State and municipal bonds
 
 5 
 
 
 - 
 
 
 22 
 
 
 8 
 
 
 27 
 
 
 8 
 
 
Hybrid and redeemable preferred securities
 
 125 
 
 
 4 
 
 
 425 
 
 
 119 
 
 
 550 
 
 
 123 
 
 
 
Total fixed maturity securities
 
 3,150 
 
 
 294 
 
 
 2,268 
 
 
 549 
 
 
 5,418 
 
 
 843 
 
Equity securities
 
 10 
 
 
 1 
 
 
 4 
 
 
 7 
 
 
 14 
 
 
 8 
 
 
 
 
Total AFS securities
$
 3,160 
 
$
 295 
 
$
 2,272 
 
$
 556 
 
$
 5,432 
 
$
 851 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total number of AFS securities in an unrealized loss position
 
 
 734 
 


 
11

 


 
 
 
 
As of December 31, 2011
 
 
 
 
 
Less Than or Equal
 
Greater Than
 
 
 
 
 
 
 
to Twelve Months
 
Twelve Months
 
Total
 
 
 
 
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
 
 
 
 
 
 
 
Unrealized
 
 
 
Unrealized
 
 
 
Unrealized
 
 
 
 
 
Fair
 
Losses and
 
Fair
 
Losses and
 
Fair
 
Losses and
 
 
 
 
 
Value
 
OTTI
 
Value
 
OTTI
 
Value
 
OTTI
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$
 2,848
 
$
 162
 
$
 1,452
 
$
 423
 
$
 4,300
 
$
 585
 
 
RMBS
 
 565
 
 
 125
 
 
 429