Reinsurance

9 Months Ended

Sep. 30, 2013

Reinsurance [Abstract]

Reinsurance

Note 6 ― 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.  The Company regularly evaluates the financial condition of its reinsurers and monitors its concentrations of credit risk.

Effective Exit of GMDB and GMIB Business

On February 4, 2013, the Company entered into an agreement with Berkshire Hathaway Life Insurance Company of Nebraska (“Berkshire”) to effectively exit the GMDB and GMIB business via a reinsurance transaction. Berkshire reinsured 100% of the Company's future claim payments in these businesses, net of retrocessional arrangements existing at that time. The reinsurance agreement is subject to an overall limit of approximately $3.8 billion plus future premiums collected under the contracts being reinsured that will be paid to Berkshire. The Company estimates that these future premium amounts will be from $0.1 to $0.3 billion and, accordingly, expects future claims of approximately $4 billion to be covered by the agreement.

This transaction resulted in an after-tax charge to shareholders' net income in the first quarter of 2013 of $507 million ($781 million pre-tax reported as follows: $727 million in other benefits expense; $45 million in GMIB fair value loss; and $9 million in other operating expenses). The reinsurance premium due to Berkshire under the agreement was $2.2 billion, of which $1.5 billion was paid in the first quarter of 2013. The remaining premium was paid in April 2013. The reinsurance premium was ultimately funded from the sale of investment assets, tax benefits related to the transaction and available parent cash.

Recoverablesfor GMDB and GMIB Business

The Company had reinsurance recoverables related to the GMDB business of $1.4 billion and GMIB assets of $853 million as of September 30, 2013. Approximately 88% of the combined GMDB recoverables and GMIB assets of $2.2 billion are secured by assets in trust, letters of credit, or are not subject to collection risk. Approximately $1.7 billion of the combined GMDB recoverables and GMIB assets relate to the February 4, 2013 reinsurance arrangement with Berkshire, including $0.7 billion for the cost of reinsurance (excess of premium over recorded reserves).

The following disclosures for the reinsured GMDB and GMIB business provide further context to prior year results, as well as activity in the assets and liabilities for these businesses, including the impact of the reinsurance transaction with Berkshire.

GMDB

The Company has historically estimated its liabilities for assumed and ceded GMDB exposures with an internal model using many scenarios and based on assumptions regarding lapse, future partial surrenders, claim mortality (deaths that result in claims), interest rates (mean investment performance and discount rate) and volatility. These assumptions are based on the Company's experience and future expectations over an extended period, consistent with the long-term nature of this product.

In 2000, the Company determined that the GMDB reinsurance business was premium deficient because the recorded future policy benefit reserve was less than the expected present value of future claims and expenses less the expected present value of future premiums and investment income using revised assumptions based on actual and expected experience. Each quarter, the Company tests for premium deficiency by reviewing its reserve using current market conditions and its long-term assumptions. Under premium deficiency accounting, if the recorded reserve is determined insufficient, an increase to the reserve is reflected as a charge to current period income. The premium attributable to GMDB from the Berkshire reinsurance transaction was approximately $1.6 billion.Because this premium exceeded the recorded reserve on February 4, 2013, the Company recorded a reserve strengthening of $0.7 billion ($0.5 billion after-tax) in the first quarter of 2013. Reserve increases after February 4, 2013are expected to have a corresponding increase in the recorded reinsurance recoverable, provided that the increased recoverable remains within the overall limit (including the GMIB asset).

The Company's dynamic hedge programs were discontinued during the first quarter of 2013 due to the Berkshire reinsurance transaction. These programs had been used to reduce certain equity and interest rate exposures associated with this business. These hedge programs generated losses (included in Other Revenues) of $32 million for the nine months ended September 30, 2013, $35 million for the three months ended September 30, 2012 and $94 million for the nine months ended September 30, 2012. Prior to discontinuing the hedge programs, amounts representing corresponding increases or reductions in liabilities for GMDB contracts were included in benefits and expenses. As a result of discontinuing the hedge programs, the growth rate assumption for the underlying equity funds was changed to use long-term historical averages, resulting in a decrease in the gross reserve liability and the offsetting reinsurance recoverable.

For the year ended December 31, 2012, a reserve strengthening of $43 million ($27 million after-tax) was due primarily to reductions to the lapse rate assumptions, adverse interest rate impacts, and, to a lesser extent, an increase in the volatility and correlation assumptions, partially offset by favorable equity market conditions. The adverse interest rate impacts reflected management's consideration of the anticipated impact of continued low short-term interest rates.

Activity in future policy benefit reserves for the GMDB business was as follows:

	For the period ended
	September 30,		December 31,
(In millions)	2013		2012
Balance at January 1	$	1,090	$	1,170
Add: Unpaid claims		24		40
Less: Reinsurance and other amounts recoverable		42		53
Balance at January 1, net		1,072		1,157
Add: Incurred benefits		700		17
Less: Paid benefits (including $1,647 premium for Berkshire reinsurance transaction)		1,675		102
Ending balance, net		97		1,072
Less: Unpaid claims		20		24
Add: Reinsurance and other amounts recoverable		1,367		42
Ending balance	$	1,444	$	1,090

Benefits paid and incurred are net of ceded amounts.  For the nine months ended September 30, 2013, incurred benefits reflect the February 4, 2013 reinsurance transaction. The ending net retained reserve as of September 30, 2013 is to cover ongoing administrative expenses, as well as claims retained by the Company. Incurred benefits reflect the favorable or unfavorable impact of a rising or falling equity market on the liability, and include the charges discussed above.  

The death benefit coverage in force for GMDB contracts assumed by the Company (and reinsured as of February 4, 2013)was $3.2 billion as of September 30, 2013 and $4.0 billion as of December 31, 2012.  The death benefit coverage in force represents the excess of the guaranteed benefit amount over the value of the underlying mutual fund investments for all contractholders (approximately 400,000 as of September 30, 2013 and 435,000 as of December 31, 2012). The aggregate value of the underlying mutual fund investments for these GMDB contracts, assuming no reinsurance, was $13.7 billion as of September 30, 2013 and $13.3 billion as of December 31, 2012.

GMIB

As discussed further in Note 8, because GMIB contracts are without significant life insurance risk, they are not accounted for as insurance products. Instead, the Company reports GMIB liabilities and assets as derivatives at fair value. The GMIB asset is classified in Other assets, including other intangibles, and the GMIB liability is classified in Accounts payable, accrued expenses and other liabilities in the Consolidated Balance Sheet. Disclosures related to fair value are included in Note 8 and derivatives are further described in Note 10.

The Berkshire reinsurance transaction resulted in an increase in GMIB assets, representing the increased receivable from that transaction. As of September 30, 2013, GMIB assets included $0.4 billion from Berkshire.

In addition, the GMIB business had GMIB assets of $0.5 billion (classified in Other assets, including other intangibles in the Consolidated Balance Sheet) from two other retrocessionaires as of September 30, 2013.

Other Run-off

The Company's Run-off Reinsurance operations also assumed risks related to workers' compensation and personal accident business, and purchased reinsurance coverage to reduce the risk of loss on these contracts. The reinsurance recoverables were $118 million as of September 30, 2013 and 100% secured by assets intrust or letters of credit.

Other Reinsurance

Supplemental benefits business. The Company had reinsurance recoverables of $380 million as of September 30, 2013and $402 million as of December 31, 2012 from Great American Life Insurance Company resulting from the acquisition of Great American on August 31, 2012. The life insurance and annuity lines of business written by the acquired legal entities were fully reinsured by the seller as part of the transaction. The resulting reinsurance recoverablesare secured primarily by fixed maturities with book value equal to 96% of the reinsured policy liabilities. These fixed maturities are held in a trust established for the benefit of the Company.

Retirement benefits business.  The Company had reinsurance recoverables of $1.2 billion as of September 30, 2013and $1.3 billion as of December 31, 2012 from Prudential Retirement Insurance and Annuity Company resulting from the sale of the retirement benefits business, primarily in the form of a reinsurance arrangement.  The reinsurance recoverable is reduced as the Company's reinsured liabilities are paid or directly assumed by the reinsurer and is secured primarily by fixed maturities whose book value is equal to or greater than 100% of the reinsured liabilities. These fixed maturities are held in a trust established for the benefit of the Company.As of September 30, 2013, the book value of the trust assets exceeded the recoverable.

Individual life and annuity reinsurance. The Company had reinsurance recoverablesof $3.9 billion as of September 30, 2013 and$4.0 billion as of December 31, 2012 from The Lincoln National Life Insurance Company and Lincoln Life & Annuity of New York resulting from the 1998 sale of the Company's individual life insurance and annuity business through indemnity reinsurance arrangements. The Lincoln National Life Insurance Company and Lincoln Life & Annuity of New York must maintain a specified minimum credit or claims paying rating, or they will be required to fully secure the outstanding balance. As of September 30, 2013, both companies had ratings sufficient to avoid triggering this contractual obligation.

Ceded Reinsurance: Ongoing operations. The Company's insurance subsidiaries have reinsurance recoverables from various reinsurance arrangements in the ordinary course of business for its Global Health Care, Global Supplemental Benefits and Group Disability and Life segments as well as the non-leveraged and leveraged corporate-owned life insurance business. Reinsurance recoverables of $351 million as of September 30, 2013 are expected to be collected from more than 80 reinsurers.

The Company reviews its reinsurance arrangements and establishes reserves against the recoverables in the event that recovery is not considered probable. As of September 30, 2013, the Company's recoverables related to these segments were net of a reserve of $3 million.

Summary.The Company's reserves for underlying reinsurance exposures assumed by the Company, as well as for amounts recoverable from reinsurers and retrocessionaires for both ongoing operations and the run-off reinsurance operation, are considered appropriate as of September 30, 2013, based on current information.  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.

Effects of reinsurance.In the Company's Consolidated Statements of Income, Premiums and fees were net of ceded premiums, and Total benefits and expenses were net of reinsurance recoveries, in the following amounts:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In millions)	2013		2012		2013		2012
Ceded premiums and fees
Individual life insurance and annuity business sold	$	39	$	41	$	130	$	138
Other		90		72		273		208
Total	$	129	$	113	$	403	$	346
Reinsurance recoveries
Individual life insurance and annuity business sold	$	74	$	79	$	256	$	216
Other		125		54		(69)		150
Total	$	199	$	133	$	187	$	366

As noted in the GMDB section above, recoveries for the nine months ended September 30, 2013 are net of the impact ofa decrease in reinsurance recoverables due to a change in the growth rate assumption, resulting from the discontinuance of the hedge programs following the reinsurance transaction with Berkshire.