Reinsurance

9 Months Ended

Sep. 30, 2020

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

Accounting policy. Reinsurance recoverables represent amounts due from reinsurers for both paid and unpaid claims of the Company’s insurance businesses. Most reinsurance recoverables are classified as non-current assets. The current portion of reinsurance recoverables is reported in Other current assets and consists primarily of recoverables on paid claims expected to be settled within one year. Reinsurance recoverables are presented net of allowances for uncollectible reinsurance that, effective with adopting ASU 2016-13 on January 1, 2020, consists primarily of an allowance for expected credit losses. Estimates of the allowance for expected credit losses are based on internal and external data used to develop expected loss rates over the anticipated duration of the recoverable asset that vary by external credit rating and collateral level. The Company's allowance for credit losses on reinsurance recoverables was $34 million as of September 30, 2020, of which $31 million was recorded as a cumulative effect adjustment to retained earnings at adoption.

The majority of the Company’s reinsurance recoverables resulted from acquisition and disposition transactions in which the underwriting company was not acquired. Included in the table below is $209 million of current reinsurance recoverables that are reported in Other current assets as of September 30, 2020; as of December 31, 2019 there was $222 million of current reinsurance recoverables reported in Other current assets. The Company’s reinsurance recoverables are presented in the following table by range of external credit rating and collateral level.


(Dollars in millions)	Fair value of collateral contractually required to meet or exceed carrying value of recoverable		Collateral provisions exist that may mitigate risk of credit loss (3)		No collateral		Total
Ongoing Operations
Upper-medium grade and higher (1)	$	—	$	8	$	326	$	334
Lower-medium grade (2)	—		—		63		63
Not rated	90		14		29		133
Total recoverables related to ongoing operations (3)	$	90	$	22	$	418	$	530
Acquisition, disposition or runoff activities
Upper-medium grade and higher (1)
Lincoln National Life and Lincoln Life & Annuity of New York	—		3,049		—		3,049
Berkshire	318		476		—		794
Prudential Retirement Insurance and Annuity	641		—		—		641
Other	237		21		17		275

Not rated	—		38		4		42
Total recoverables related to acquisition, disposition or runoff activities	1,196		3,584		21		4,801
Total	$	1,286	$	3,606	$	439	$	5,331
Allowance for uncollectible reinsurance							(34)
Reinsurance recoverables classified as assets of business held for sale							(190)
Total reinsurance recoverables							$	5,107
(1) Includes A- equivalent and higher current ratings certified by a nationally recognized statistical rating organization ('NRSRO')
(2) Includes BBB- to BBB+ equivalent current credit ratings certified by a NRSRO
(3) This includes collateral provisions requiring the reinsurer to fully collateralize its obligation if its external credit rating is downgraded to a specified level

Collateral levels are defined internally based on the fair value of the collateral relative to the carrying amount of the reinsurance recoverable, the frequency at which collateral is required to be replenished and the potential for volatility in the collateral’s fair value. 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, as further described above.

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 September 30,				Nine Months Ended September 30,
(In millions)	2020		2019		2020		2019
Total ceded premiums	$	122	$	124	$	367	$	380
Total reinsurance recoveries	$	117	$	180	$	397	$	292

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 $3.2 billion remaining at September 30, 2020.

GMDB is accounted for as assumed and ceded 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. The Company should be reimbursed in full for these payments unless the Berkshire reinsurance limit is exceeded.


(Dollars in millions, excludes impact of reinsurance ceded)	September 30, 2020		December 31, 2019
Account value	$	8,650	$	9,110
Net amount at risk	$	1,694	$	1,764
Number of contractholders (estimated)	190,000		200,000

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 related 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 12 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 nine months ended September 30, 2020 and September 30, 2019.

GMIB liabilities totaling $786 million as of September 30, 2020 and $688 million as of December 31, 2019 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 September 30, 2020 and December 31, 2019 as follows:


(In millions)
Line of Business	Reinsurer	September 30, 2020		December 31, 2019		Collateral and Other Terms at September 30, 2020
GMIB	Berkshire	$	382	$	332	100% were secured by assets in a trust.
	Sun Life Assurance Company of Canada	233		202
	Liberty Re (Bermuda) Ltd.	205		179		100% were secured by assets in a trust.
Total GMIB recoverables reported in Other current assets and Other assets		$	820	$	713

All reinsurers are rated A- equivalent and higher by a nationally recognized statistical rating organization ('NRSRO')

Amounts included in shareholders’ net income for GMIB assets and liabilities were not material for the three or nine months ended September 30, 2020 or September 30, 2019.