Reinsurance

12 Months Ended

Dec. 31, 2017

Note 9 – Reinsurance

The Company’s insurance subsidiaries enter into agreements with other insurance companies to assume and cede reinsurance. Reinsurance is ceded primarily to limit losses from large exposures and to permit recovery of a portion of direct or assumed losses. Reinsurance is also used in acquisition and disposition transactions when the underwriting company is not being acquired. 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:


(Dollars in millions)
	Line of Business	Reinsurer(s)	December 31, 2017		December 31, 2016		Collateral and Other Termsat December 31, 2017
Ongoing Operations
	Global Health Care, Global Supplemental Benefits, Group Disability and Life, COLI	Various	$	454	$	478	Recoverables from approximately 90 reinsurers, used in the ordinary course of business. Current balances range from less than $1 million up to $80 million. Over 70% of the balance is from companies rated as investment grade by Standard & Poor's, and 11% is secured by assets in trusts or letters of credit.
	Total recoverables related to ongoing operations			454		478
Acquisition, disposition or runoff activities
	Individual Life and Annuity (sold in 1998)	Lincoln National Life and Lincoln Life & Annuity of New York		3,436		3,586	Both companies' ratings were sufficient to avoid triggering a contractual obligation to fully secure the outstanding balance.
	GMDB (effectively exited in 2013)	Berkshire		928		1,085	100% secured by assets in a trust.
		Other		34		44	100% secured by assets in a trust or letters of credit.
	Retirement Benefits Business (sold in 2004)	Prudential Retirement Insurance and Annuity		850		921	100% secured by assets in a trust.
	Supplemental Benefits Business (2012 acquisition)	Great American Life		283		297	100% secured by assets in a trust.
	Other run-off reinsurance	Various		61		67	100% secured by assets in a trust or other deposits.
	Total recoverables related to acquisition, disposition or runoff activities			5,592		6,000
Total reinsurance recoverables			$	6,046	$	6,478

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 benefits and expenses in the Company’s Consolidated Statements of Income.

(In millions)	2017		2016		2015
Premiums
Short-duration contracts
Direct	$	28,654	$	27,496	$	26,751
Assumed		199		247		289
Ceded		(150)		(229)		(254)
Total short-duration contract premiums		28,703		27,514		26,786
Long-duration contracts
Direct		3,748		3,259		3,061
Assumed		130		137		111
Ceded
Individual life insurance and annuity business sold		(143)		(153)		(158)
Other		(131)		(131)		(158)
Total long-duration contract premiums		3,604		3,112		2,856
Total premiums	$	32,307	$	30,626	$	29,642
Reinsurance recoveries
Individual life insurance and annuity business sold	$	259	$	279	$	301
Other		66		261		436
Total reinsurance recoveries	$	325	$	540	$	737

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

In 2013, the Company entered into an agreement with Berkshire to effectively exit the GMDB and GMIB business via a reinsurance transaction. 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, 2017.

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 assets, including intangibles, and GMIB liabilities are reported in accounts payable, accrued expenses and other liabilities.

GMDB

The majority of the GMDB exposure arises under annuities written by ceding companies that guarantee the benefit received at death will be no less than the highest historical account value of the related mutual fund investments on a contractholder’s anniversary date. Under this type of death benefit, the Company’s exposure arises when the highest anniversary account value 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 ending net retained reserve covers ongoing administrative expenses, as well as minor claim exposure retained by the Company.

Because the product is premium deficient, the Company records an increase to the net retained reserve if it is inadequate based on the model.

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)	2017		2016
Account value	$	10,109	$	10,650
Net amount at risk	$	2,112	$	2,458
Average attained age of contractholders (weighted by exposure)		75		75
Number of contractholders		245,000		285,000

GMIB

In this business, 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”) 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. Periodically, the Company receives and pays fees 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.

As of December 31, 2017 and 2016, there were three reinsurers for GMIB as follows:

(In millions)
Line of Business	Reinsurer	December 31, 2017		December 31, 2016		Collateral and Other Termsat December 31, 2017
GMIB	Berkshire	$	359	$	370	100% were secured by assets in a trust.
	Sun Life Assurance Company of Canada		221		227
	Liberty Re (Bermuda) Ltd.		197		202	100% were secured by assets in a trust.
Total GMIB recoverables reported in other assets		$	777	$	799

Assumptions used in fair value measurement. GMIB assets and liabilities are established using capital market assumptions (including market returns, interest rates and market volatilities of the underlying equity and bond mutual fund investments) and assumptions related to future annuitant behavior (including mortality, lapse, and annuity election rates). As assumptions related to future annuitant behavior are largely unobservable, the Company classifies GMIB assets and liabilities in Level 3 in the fair value hierarchy presented in Note 10.

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 guarantees. Future payments are not fixed and determinable under the terms of these contracts. Accordingly, the Company calculated exposure, without considering any reinsurance coverage, using the following hypothetical assumptions:

no annuitants surrendered their accounts;
all annuitants lived to elect their benefit;
all annuitants elected to receive their benefit on the next available date (2018 through 2022); and
all underlying mutual fund investment values remained at the December 31, 2017 value of $822 million with no future returns.

The Company has reinsurance coverage in place that covers the exposures on these contracts. Using these hypothetical assumptions, GMIB exposure is $573 million, which is lower than the recorded liability for GMIB calculated using fair value assumptions.