SIGNIFICANT TRANSACTIONS

9 Months Ended

Sep. 30, 2019

The Lincoln National Life Insurance Company

On May 1, 2018, The Lincoln National Life Insurance Company (“Lincoln Life”) completed its previously announced acquisition (the “Liberty Closing”) of Liberty Mutual Group Inc.’s (“Liberty Mutual”) Group Benefits Business and Individual Life and Annuity Business (the “Life Business”) through the acquisition of all of the issued and outstanding capital stock of Liberty Life Assurance Company of Boston (“Liberty”). In connection with the Liberty Closing and pursuant to the Master Transaction Agreement, dated January 18, 2018 (the “Master Transaction Agreement”), the Company and Protective Life and Annuity Insurance Company (“PLAIC”), a wholly owned subsidiary of the Company, entered into reinsurance agreements (the “Liberty Reinsurance Agreements”) and related ancillary documents (including administrative services agreements and transition services agreements) providing for the reinsurance and administration of the Life Business.

Pursuant to the Liberty Reinsurance Agreements, Liberty ceded to the Company and PLAIC the insurance policies related to the Life Business on a 100% coinsurance basis. The aggregate ceding commission for the reinsurance of the Life Business was $422.4 million, which is the purchase price.

All policies issued in states other than New York were ceded to the Company under a reinsurance agreement between Liberty and the Company, and all policies issued in New York were ceded to PLAIC under a reinsurance agreement between Liberty and PLAIC. The aggregate statutory reserves of Liberty ceded to the Company and PLAIC as of the date of the Liberty Closing were approximately $13.2 billion, which amount was based on initial estimates. The final reserve amount determined, as adjusted during the measurement period, was $13.7 billion. In addition, there are certain pending items which remain subject to adjustment in accordance with the Master Transaction Agreement and could result in a gain in future periods. Pursuant to the terms of the Liberty Reinsurance Agreements, each of the Company and PLAIC are required to maintain assets in trust for the benefit of Liberty to secure their respective obligations to Liberty under the Liberty Reinsurance Agreements. The trust accounts were initially funded by each of the Company and PLAIC principally with the investment assets that were received from Liberty. Additionally, the Company and PLAIC have each agreed to provide, on behalf of Liberty, administration and policyholder servicing of the Life Business reinsured by it pursuant to administrative services agreements between Liberty and each of the Company and PLAIC.

The terms of the Liberty Reinsurance Agreements resulted in an acquisition of the Life Business by the Company in accordance with Accounting Standards Codification ("ASC" or "Codification") Topic 805, Business Combinations.

The following table details the purchase consideration and final allocation of assets acquired and liabilities from the Life Business reinsurance transaction as of the date of the Liberty Closing.


	Fair Value as of May 1, 2018
	(Dollars In Thousands)
ASSETS
Fixed maturities	$	12,588,512
Mortgage loans	435,405
Policy loans	131,489
Total investments	13,155,406
Cash	35,179
Accrued investment income	152,030

Reinsurance receivables	272
Value of business acquired	379,717
Other assets	916
Total assets	13,723,520
LIABILITIES
Future policy benefits and claims	$	11,751,895
Unearned premiums	—
Total policy liabilities and accruals	11,751,895
Annuity account balances	1,864,141
Other policyholders’ funds	41,936
Other liabilities	65,548
Total liabilities	13,723,520
NET ASSETS ACQUIRED	$	—

The following unaudited pro forma condensed consolidated results of operations assumes that the aforementioned transactions of the Life Business were completed as of January 1, 2017. The unaudited pro forma condensed results of operations are presented solely for information purposes and are not necessarily indicative of the consolidated condensed results of operations that might have been achieved had the transaction been completed as of the date indicated:


	Unaudited
	For The Three Months Ended September 30, 2018		For The Nine Months Ended September 30, 2018
	(Dollars In Thousands)
Revenue	$	1,269,963	$	3,826,859
Net income	$	78,524	$	195,211

Great-West Life & Annuity Insurance Company

On January 23, 2019, the Company entered into a Master Transaction Agreement (the “GWL&A Master Transaction Agreement”) with Great-West Life & Annuity Insurance Company (“GWL&A”), Great-West Life & Annuity Insurance Company of New York (“GWL&A of NY”), The Canada Life Assurance Company (“CLAC”) and The Great-West Life Assurance Company (“GWL” and, together with GWL&A, GWL&A of NY and CLAC, the “Sellers”), pursuant to which the Company will acquire via reinsurance (the “Transaction”) substantially all of the Sellers’ individual life insurance and annuity business (the “Individual Life Business”).

On June 3, 2019, the Company and PLAIC completed the Transaction (the “GWL&A Closing”). Pursuant to the GWL&A Master Transaction Agreement, the Company and PLAIC entered into reinsurance agreements (the “GWL&A Reinsurance Agreements”) and related ancillary documents at the GWL&A Closing. On the terms and subject to the conditions of the GWL&A Reinsurance Agreements, the Sellers ceded to the Company and PLAIC, effective as of the date of the GWL&A Closing, substantially all of the insurance policies related to the Individual Life Business on a 100% indemnity basis net of reinsurance recoveries. The aggregate ceding commission for the reinsurance of the Individual Life Business paid at the GWL&A Closing was $765.7 million, which amount is subject to adjustment in accordance with the GWL&A Master Transaction Agreement. All policies issued in states other than New York were ceded to the Company under reinsurance agreements between the applicable Seller and the Company, and all policies issued in New York were ceded to PLAIC under a reinsurance agreement between GWL&A of NY and PLAIC. The aggregate statutory reserves of the Sellers ceded to the Company and PLAIC as of the GWL&A Closing were approximately $20.4 billion, which amount was based on initial estimates and is subject to adjustment following the GWL&A Closing. To support its obligations under the GWL&A Reinsurance Agreements, the Company established trust accounts for the benefit of GWL&A, CLAC and GWL, and PLAIC established a trust account for the benefit of GWL&A of NY. The Sellers retained a block of participating policies, which will be administered by PLC.

As of the purchase date, the Company has recorded an estimate in the amount of $49.5 million related to contingent consideration. The final ceding commission is subject to adjustment based on these amounts. These amounts are accrued within other liabilities in the Company’s consolidated condensed balance sheet.

The contingent consideration is comprised of a holdback provision and a post-closing sales adjustment. The holdback amount is related to the performance of certain blocks of business for a specified period of time after the close of the transaction. The range of amounts payable to Great West under this provision is $0 - $40 million. The Company established a liability of $37.6 million as of the transaction date, which represents the Company's best estimate of the present value of future payments.

Great West is also entitled to a payment for certain post-closing sales occurring between June 1, 2019 and December 31, 2019. At this time, a range for this payment cannot be estimated and the Company established a liability of $11.9 million on the transaction date, which represents the Company's best estimate of the present value of future payments as of the transaction date. During the three months ended September 30, 2019, this estimate was revised based on sales and returns achieved during that period. The liability as of September 30, 2019 was $8.2 million, which represents the Company's best estimate of the present value of future payments. The reduction in the liability was recorded as a component of earnings.

The GWL&A Master Transaction Agreement and other transaction documents contain certain customary representations and warranties made by each of the parties, and certain customary covenants regarding the Sellers and the Individual Life Business, and provide for indemnification, among other things, for breaches of those representations, warranties, and covenants. The terms of the GWL&A Reinsurance Agreements resulted in an acquisition of the Individual Life Business by PLC in accordance with ASC Topic 805, Business Combinations.

The following table details the preliminary allocation of assets acquired and liabilities assumed from the Individual Life Business reinsurance transaction as of the date of the GWL&A Closing. The Company has not completed the process of determining the fair value of assets acquired and liabilities assumed, but will do so in the twelve month measurement period subsequent to the date of the GWL&A Closing. These estimates are provisional and subject to adjustment. Any adjustments to these fair value estimates will be reflected, retroactively, as of the date of the acquisition, and may result in adjustments to the value of business acquired.


	Fair Value as of June 1, 2019
	(Unaudited)
	(Dollars In Thousands)
ASSETS
Fixed maturities	$	8,697,966
Mortgage loans	1,386,228
Policy loans	44,002
Other long-term investments	1,579
Total investments	10,129,775
Cash	34,835
Accrued investment income	101,452
Accounts and premiums receivable	62
Premium due and deferred	1,642
Value of business acquired	510,875
Other intangibles	21,300
Other assets	1,525,911
Assets related to separate accounts	9,583,217
Total assets	21,909,069
LIABILITIES
Future policy benefits and claims	$	11,000,902
Annuity account balances	220,064
Other policyholders’ funds	220,117
Other liabilities	72,127
Liabilities related to separate accounts	9,583,217
Total liabilities	21,096,427
NET ASSETS ACQUIRED	$	812,642

Assets related to separate accounts and liabilities related to separate accounts represent amounts receivable and payable for variable annuity and variable universal life products reinsured on a modified co-insurance basis.

The following unaudited pro forma condensed consolidated results of operations assumes that the aforementioned transactions of the Individual Life Business were completed as of January 1, 2018. The unaudited pro forma condensed results of operations are presented solely for information purposes and are not necessarily indicative of the consolidated condensed results of operations that might have been achieved had the transaction been completed as of the date indicated:


	Unaudited						Unaudited
	For The Three Months Ended September 30,						For The Nine Months Ended September 30,
	2019		2018		2019		2018
	(Dollars In Thousands)
Revenue	$	1,681,993	$	1,507,056	$	4,868,168	$	4,158,840
Net income	$	190,424	$	84,653	$	504,031	$	181,623

The amount of revenue and income before income tax of the Individual Life Business since the transaction date, June 1, 2019, included in the consolidated statements of income for the nine months ended September 30, 2019, amounted to $352.5 million and $74.0 million. The Company incurred approximately $12.2 million of non-recurring transaction costs for the nine months ended September 30, 2019.

Intangible assets recognized by the Company included the following (excluding goodwill):


	Estimated Fair Value on Acquisition Date		Estimated Useful Life
	(Dollars In Thousands)		(In Years)
Distribution relationships	$	15,000	18
Technology	6,300		10
Total intangible assets	$	21,300

Amortizable intangible assets will be amortized on a straight line basis over their assigned useful lives. The following is a schedule of future estimated aggregate amortization expense:


Year	Amount
	(Dollars In Thousands)
Remainder of 2019	$	366
2020	1,463
2021	1,463
2022	1,463
2023	1,463

Based on the balance recorded as of June 1, 2019, the expected amortization of value of business acquired ("VOBA") for the next five years is as follows:


Year	Amount
	(Dollars In Thousands)
Remainder of 2019	$	(3,616)
2020	(19,741)
2021	(12,153)
2022	(5,090)
2023	1,143

VOBA is calculated at a product level and can either be positive or negative depending on the underlying fair values of the associated product lines. VOBA is amortized in accordance with ASC 944-805-35-1, which requires that the amortization should be on a basis consistent with the related reinsurance liability. As such, the net amortization related to a specific transaction in a given year can be either positive or negative as amortization patterns differ between the product lines.