Reinsurance

6 Months Ended

Jun. 30, 2019

Reinsurance Disclosures [Abstract]

Reinsurance

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.

A.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. The table below includes $ 284 million as of June 30, 2019 and $ 297 million as of December 31, 2018 of current reinsurance recoverables that are reported in other current assets.

(Dollars in millions)			June 30,		December 31,		Collateral and Other Terms
	Line of Business	Reinsurer(s)	2019		2018		at June 30, 2019
Ongoing Operations
	Integrated Medical, International Markets, Group Disability, COLI	Various	$	490	$	464	Balances range from less than $1 million up to $64 million. Over 70% of the balance is from companies rated as investment grade by Standard & Poor’s.
	Total recoverables related to ongoing operations			490		464
Acquisition, disposition or runoff activities
	Individual Life and Annuity (sold in 1998)	Lincoln National Life and Lincoln Life & Annuity of New York		3,229		3,312	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		817		893	100% secured by assets in a trust.
	Retirement Benefits Business (sold in 2004)	Prudential Retirement Insurance and Annuity		742		787	100% secured by assets in a trust.
	Supplemental Benefits Business (2012 acquisition)	Great American Life		250		261	100% secured by assets in a trust.
	Other	Various		80		87	100% secured by assets in a trust or other deposits.
	Total recoverables related to acquisition, disposition or runoff activities			5,118		5,340
Total reinsurance recoverables			$	5,608	$	5,804

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.

B. Effects of Reinsurance

In the Company’s Consolidated Statements of Income, premiums were reported net of amounts ceded to reinsurers and medical costs and other benefit expenses were reported net of reinsurance recoveries in the following amounts:

	Three Months Ended				Six Months Ended
(In millions)	June 30, 2019		June 30, 2018		June 30, 2019		June 30, 2018
Ceded premiums
Individual life insurance and annuity business sold	$	32	$	34	$	66	$	71
Other		94		98		190		196
Total ceded premiums	$	126	$	132	$	256	$	267
Reinsurance recoveries
Individual life insurance and annuity business sold	$	53	$	56	$	108	$	113
Other		-		-		4		47
Total reinsurance recoveries	$	53	$	56	$	112	$	160

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.

C.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 $3.3 billion remaining at June 30, 2019.

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.

The following table presents the account value, net amount at risk and the number of 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.

	June 30,		December 31,
(Dollars in millions, excludes impact of reinsurance ceded)	2019		2018
Account value	$	9,009	$	8,402
Net amount at risk	$	1,873	$	2,466
Number of contractholders (estimated)		210,000		220,000

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 can only occur within 30 days of a policy anniversary after the appropriate waiting period. The Company has purchased retrocessional coverage (“GMIB assets”) for these contracts including retrocessional coverage from Berkshire.

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 of 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 impact of non-performance risk was immaterial for the three and six months ended June 30, 2019 and 2018.

GMIB liabilities totaling $736 million as of June 30, 2019 and $706 million as of December 31, 2018 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 June 30, 2019 and December 31, 2018 as follows:

(In millions)
Line of Business	Reinsurer	June 30, 2019		December 31, 2018		Collateral and Other Terms at June 30, 2019
GMIB	Berkshire	$	355	$	341	100% were secured by assets in a trust.
	Sun Life Assurance Company of Canada		216		208
	Liberty Re (Bermuda) Ltd.		191		184	93% were secured by assets in a trust.
Total GMIB recoverables reported in other current assets and other assets		$	762	$	733

Amounts included in shareholders’ net income for GMIB assets and liabilities were not material for the three or six months ended June 30, 2019 or 2018.