Reinsurance

12 Months Ended

Dec. 31, 2018

Note 8 – Reinsurance

The Company’s insurance subsidiaries enter into agreements with other insurance companies to assume and cede reinsurance. Reinsurance is ceded primarily in acquisition and disposition transactions when the underwriting company is not being acquired. Reinsurance is also used to limit losses from large exposures and to permit recovery of a portion of direct or assumed losses. Reinsurance does not relieve the originating insurer of liability. Therefore, reinsured liabilities must continue to be reported along with the related reinsurance recoverables. The Company regularly evaluates the financial condition of its reinsurers and monitors concentrations of its credit risk.

Reinsurance Recoverables

The majority of the Company’s reinsurance recoverables resulted from acquisition and disposition transactions in which the underwriting company was not acquired. Components of the Company’s reinsurance recoverables are presented in the following table. Included in the table below is $297 million as of December 31, 2018 and $282 million as of December 31, 2017 of current reinsurance recoverables that are reported in other current assets.


(Dollars in millions)
	Line of Business	Reinsurer(s)	December 31, 2018		December 31, 2017		Collateral and Other Termsat December 31, 2018
Ongoing Operations
	Integrated Medical, International Markets, Group Disability, COLI	Various	$	464	$	454	Balances range from less than $1 million up to $70 million. Over 70% of the balance is from companies rated as investment grade by Standard & Poor’s.
	Total recoverables related to ongoing operations			464		454
Acquisition, disposition or runoff activities
	Individual Life and Annuity (sold in 1998)	Lincoln National Life and Lincoln Life & Annuity of New York		3,312		3,436	Both companies’ ratings were well above the level that would trigger a contractual obligation to fully secure the outstanding balance.
	GMDB (effectively exited in 2013)	Berkshire		893		928	100% secured by assets in a trust.
	Retirement Benefits Business (sold in 2004)	Prudential Retirement Insurance and Annuity		787		850	100% secured by assets in a trust.
	Supplemental Benefits Business (2012 acquisition)	Great American Life		261		283	100% secured by assets in a trust.
	Other	Various		87		95	100% secured by assets in a trust or other deposits.
	Total recoverables related to acquisition, disposition or runoff activities			5,340		5,592
Total reinsurance recoverables			$	5,804	$	6,046

The Company bears the risk of loss if its reinsurers and retrocessionaires do not meet or are unable to meet their reinsurance obligations to the Company. The Company reviews its reinsurance arrangements and establishes reserves against the recoverables if recovery is not considered probable.

Effects of Reinsurance

The following table presents direct, assumed and ceded premiums for both short-duration and long-duration insurance contracts. It also presents reinsurance recoveries that have been netted against benefit expenses in the Company’s Consolidated Statements of Income.

(In millions)	2018		2017		2016
Premiums
Short-duration contracts
Direct	$	32,148	$	28,838	$	27,694
Assumed		77		199		247
Ceded		(182)		(150)		(229)
Total short-duration contract premiums		32,043		28,887		27,712
Long-duration contracts
Direct		4,268		3,748		3,259
Assumed		116		130		137
Ceded
Individual life insurance and annuity business sold		(133)		(143)		(153)
Other		(181)		(131)		(131)
Total long-duration contract premiums		4,070		3,604		3,112
Total premiums	$	36,113	$	32,491	$	30,824
Reinsurance recoveries
Individual life insurance and annuity business sold	$	249	$	259	$	279
Other		203		66		261
Total reinsurance recoveries	$	452	$	325	$	540

The effects of reinsurance on written premiums for short-duration contracts were not materially different from the recognized premium amounts shown in the table above.

Effective Exit of GMDB and GMIB Business

The Company entered into an agreement with Berkshire to effectively exit the GMDB and GMIB business via a reinsurance transaction in 2013. Berkshire reinsured 100% of the Company's future claim payments in this business, net of other reinsurance arrangements existing at that time. The reinsurance agreement is subject to an overall limit with approximately $3.4 billion remaining at December 31, 2018.

GMDB is accounted for as reinsurance and GMIB assets and liabilities are reported as derivatives at fair value as discussed below. GMIB assets are reported in other current assets and other assets, and GMIB liabilities are reported in accrued expenses and other liabilities and other non-current liabilities.

GMDB

The GMDB exposure arises under annuities written by ceding companies that guarantee the benefit received at death. The Company’s exposure arises when the guaranteed minimum death benefit exceeds the fair value of the related mutual fund investments at the time of a contractholder’s death.

Accounting policy. The Company estimates the gross liability and reinsurance recoverable with an internal model based on the Company’s experience and future expectations over an extended period, consistent with the long-term nature of this product. As a result of the reinsurance transaction, reserve increases have a corresponding increase in the recorded reinsurance recoverable, provided the increased recoverable remains within the overall Berkshire limit (including the GMIB asset presented below).

The following table presents the account value, net amount at risk and average attained age of underlying contractholders for guarantees assumed by the Company in the event of death. The net amount at risk is the amount that the Company would have to pay if all contractholders died as of the specified date. Unless the Berkshire reinsurance limit is exceeded, the Company should be reimbursed in full for these payments.

(Dollars in millions, excludes impact of reinsurance ceded)	2018		2017
Account value	$	8,402	$	10,109
Net amount at risk	$	2,466	$	2,112
Average attained age of contractholders (weighted by exposure)		74		75
Number of contractholders		220,000		245,000

GMIB

The Company reinsured contracts with issuers of GMIB products. The Company’s exposure represents the excess of a contractually guaranteed amount over the level of variable annuity account values. Payment by the Company depends on the actual account value in the underlying mutual funds and the level of interest rates when the contractholders elect to receive minimum income payments that must occur within 30 days of a policy anniversary after the appropriate waiting period. The Company has purchased retrocessional coverage (“GMIB assets”), including retrocessional coverage from Berkshire, for these contracts.

Accounting policy. The Company reports GMIB liabilities and assets as derivatives at fair value because cash flows of these liabilities and assets are affected by equity markets and interest rates, but are without significant life insurance risk and are settled in lump sum payments. The Company receives and pays fees periodically based on either contractholders’ account values or deposits increased at a contractual rate. The Company will also pay and receive cash depending on changes in account values and interest rates when contractholders first elect to receive minimum income payments. Cash flows on these contracts are reported in operating activities.

Assumptions used in fair value measurement. GMIB assets and liabilities are established using capital market assumptions and assumptions related to future annuitant behavior (including mortality, lapse, and annuity election rates). The Company classifies GMIB assets and liabilities in Level 3 in the fair value hierarchy described in Note 10 because assumptions related to future annuitant behavior are largely unobservable.

The only assumption expected to impact future shareholders’ net income is non-performance risk. The non-performance risk adjustment reflects a market participant’s view of nonpayment risk by adding an additional spread to the discount rate in the calculation of both (a) the GMIB liabilities to be paid by the Company, and (b) the GMIB assets to be paid by the reinsurers, after considering collateral.

The Company regularly evaluates each of the assumptions used in establishing these assets and liabilities. Significant decreases in assumed lapse rates or spreads used to calculate non-performance risk of the Company, or significant increases in assumed annuity election rates or spreads used to calculate the non-performance risk of the reinsurers, would result in higher fair value measurements. A change in one of these assumptions is not necessarily accompanied by a change in another assumption.

GMIB liabilities totaling $706 million as of December 31, 2018 and $762 million as of December 31, 2017 were reported in accrued expenses and other liabilities and other non-current liabilities. There were three reinsurers covering 100% of the GMIB exposures as of December 31, 2018 and 2017 as follows:

(In millions)
Line of Business	Reinsurer	December 31, 2018		December 31, 2017		Collateral and Other Termsat December 31, 2018
GMIB	Berkshire	$	341	$	359	100% were secured by assets in a trust.
	Sun Life Assurance Company of Canada		208		221
	Liberty Re (Bermuda) Ltd.		184		197	86% were secured by assets in a trust.
Total GMIB recoverables reported in other current assets and other assets		$	733	$	777

Amounts included in shareholders net income for GMIB assets and liabilities were not material in 2018, 2017 and 2016.