Reinsurance

9 Months Ended

Sep. 30, 2018

Note 8 ― 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. Because reinsurance does not relieve the originating insurer of liability, such 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 below:

(In millions)
			September 30,		December 31,		Collateral and Other Terms
Line of Business		Reinsurer(s)	2018		2017		at September 30, 2018
Ongoing operations
	Global Health Care, Global Supplemental Benefits, Group Disability and Life, COLI	Various	$	439	$	454	Recoverables from approximately 80 reinsurers, used in the ordinary course of business. Current balances range from less than $1 million up to $70 million. Over 70% of the balance is from companies rated as investment grade by Standard & Poor's, and 13% is secured by assets in trusts or letters of credit.
	Total recoverables related to ongoing operations			439		454
Acquisition, disposition or runoff activities
	Individual Life and Annuity (sold in 1998)	Lincoln National Life and Lincoln Life & Annuity of New York		3,319		3,436	Both companies' ratings are sufficient to avoid triggering a contractual obligation to fully secure the outstanding balance.
	GMDB	Berkshire		864		928	100% secured by assets in a trust.
		Other		31		34	100% secured by assets in a trust or letters of credit.
	Retirement Benefits Business (sold in 2004)	Prudential Retirement Insurance and Annuity		806		850	100% secured by assets in a trust.
	Supplemental Benefits Business (2012 acquisition)	Great American Life		265		283	100% secured by assets in a trust.
	Other run-off reinsurance	Various		56		61	100% secured by assets in trusts.
	Total recoverables related to acquisition, disposition or runoff activities			5,341		5,592
Total reinsurance recoverables			$	5,780	$	6,046

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

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

	Three Months Ended				Nine Months Ended
(In millions)	September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017
Ceded premiums
Individual life insurance and annuity business sold	$	32	$	33	$	103	$	105
Other		81		70		277		205
Total ceded premiums	$	113	$	103	$	380	$	310
Reinsurance recoveries
Individual life insurance and annuity business sold	$	70	$	62	$	183	$	198
Other		70		33		117		79
Total reinsurance recoveries	$	140	$	95	$	300	$	277

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 of this business, net of other reinsurance arrangements existing at that time. The Berkshire reinsurance agreement is subject to an overall limit with approximately $3.4 billion remaining as of September 30, 2018.

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 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 following table presents the account value, net amount at risk and number 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)	September 30, 2018		December 31, 2017
Account value	$	9,666	$	10,109
Net amount at risk	$	1,962	$	2,112
Number of contractholders		225,000		245,000

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.

The Company reports GMIB liabilities and assets as derivatives at fair value because the 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.

As of September 30, 2018 and December 31, 2017, there were three reinsurers for GMIB as follows:

(In millions)
		September 30,		December 31,		Collateral and Other Terms
Line of Business	Reinsurer	2018		2017		at September 30, 2018
GMIB	Berkshire	$	299	$	359	100% secured by assets in a trust.
	Sun Life Assurance Company of Canada		177		221
	Liberty Re (Bermuda) Ltd.		160		197	100% secured by assets in a trust.
Total GMIB recoverables reported in other assets		$	636	$	777

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 9.

The only assumption expected to impact the Company’s 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 fair value 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 the 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 September 30, 2018 value of $786 million with no future returns.

The Company has reinsurance coverage in place that covers the exposures on these contracts. Using these hypothetical assumptions, the GMIB exposure of $514 million is lower than the recorded liability for GMIB calculated using fair value assumptions.