Reserve for Life-Contingent Contract Benefits and Contractholder Funds

12 Months Ended

Dec. 31, 2020

Reserve for Life-Contingent Contract Benefits and Contractholder Funds

Reserve for Life-Contingent Contract Benefits and Contractholder Funds

Note 9 Reserve for Life-Contingent Contract Benefits and Contractholder Funds

Reserve for life-contingent contract benefits
	As of December 31,
($ in millions)	2020		2019
Immediate fixed annuities:
Structured settlement annuities	$	7,407	$	6,840
Other immediate fixed annuities	1,511		1,612
Traditional life insurance	2,942		2,897
Accident and health insurance	841		873
Other	67		78
Total reserve for life-contingent contract benefits	$	12,768	$	12,300

Key assumptions generally used in calculating the reserve for life-contingent contract benefits
Product	Mortality	Interest rate	Estimation method
Structured settlement annuities	Actual company experience with projected calendar year improvements	4.7%	Present value of contractually specified future benefits and expenses
Other immediate fixed annuities	Actual company experience with projected calendar year improvements	4.7%	Present value of expected future benefits and expenses
Traditional life insurance	Actual company experience plus loading	Interest rate assumptions range from 2.5% to 11.3%	Net level premium reserve method using the Company’s withdrawal experience rates; includes reserves for unpaid claims
Accident and health insurance	Actual company experience plus loading	Interest rate assumptions range from 3.0% to 7.0%	Unearned premium; additional contract reserves for mortality risk and unpaid claims
Other: Variable annuity guaranteed minimum death benefits (1)	Annuity 2012 mortality table with internal modifications	Interest rate assumptions range from 1.4% to 5.8%	Projected benefit ratio applied to cumulative assessments

(1)In 2006, the Company disposed of substantially all of its variable annuity business through reinsurance agreements with The Prudential Insurance Company of America, a subsidiary of Prudential Financial, Inc. (collectively “Prudential”).

In the third quarter of 2020, the premium deficiency evaluation of the Company’s immediate annuities with life contingencies resulted in a premium deficiency reserve of $225 million, pre-tax. The long-term investment yield assumption was lowered, which resulted in the prior sufficiency changing to a deficiency. The deficiency was recognized as an increase in the reserve for life contingent contract benefits. The original assumptions used to establish reserves were updated to reflect current assumptions, and the primary changes included mortality expectations, where annuitants are living longer than originally anticipated, and long-term investment yields. In 2019, the Company’s reviews concluded that no premium deficiency adjustments were necessary.

The Company records an adjustment to the reserve for life-contingent contract benefits that represents the amount by which the reserve balance would increase if the net unrealized gains in the applicable product investment portfolios were realized and reinvested at current lower interest rates, resulting in a premium deficiency. The offset to this liability is recorded as a reduction of the unrealized net capital gains included in AOCI. This liability was $496 million and $126 million as of December 31, 2020 and 2019, respectively.

Contractholder funds
	As of December 31,
($ in millions)	2020		2019
Interest-sensitive life insurance	$	8,493	$	8,384
Investment contracts:
Fixed annuities	8,196		8,845
Other investment contracts	524		463
Total contractholder funds	$	17,213	$	17,692

Key contract provisions of contractholder funds
Product	Interest rate	Withdrawal/surrender charges
Interest-sensitive life insurance	Interest rates credited range from 0.0% to 9.0% for equity-indexed life (whose returns are indexed to the S&P 500) and 1.0% to 6.0% for all other products	Either a percentage of account balance or dollar amount grading off generally over 20 years
Fixed annuities	Interest rates credited range from 0.5% to 7.5% for immediate annuities; (8.0)% to 9.0% for equity-indexed annuities (whose returns are indexed to the S&P 500); and 0.1% to 5.0% for all other products	Either a declining or a level percentage charge generally over ten years or less. Additionally, approximately 11.0% of fixed annuities are subject to market value adjustment for discretionary withdrawals
Other investment contracts: Guaranteed minimum income, accumulation and withdrawal benefits on variable (1) and fixed annuities and secondary guarantees on interest-sensitive life insurance and fixed annuities	Interest rates used in establishing reserves range from 1.7% to 10.3%	Withdrawal and surrender charges are based on the terms of the related interest-sensitive life insurance or fixed annuity contract

(1)In 2006, the Company disposed of substantially all of its variable annuity business through reinsurance agreements with Prudential.

Contractholder funds activity
	For the years ended December 31,
($ in millions)	2020		2019		2018
Balance, beginning of year	$	17,692	$	18,371	$	19,434
Deposits	1,062		1,091		1,109
Interest credited	633		636		650
Benefits	(775)		(791)		(844)
Surrenders and partial withdrawals	(728)		(884)		(1,135)
Contract charges	(836)		(825)		(824)
Net transfers from separate accounts	5		10		6
Other adjustments	160		84		(25)
Balance, end of year	$	17,213	$	17,692	$	18,371

The Company offered various guarantees to variable annuity contractholders. In 2006, the Company disposed of substantially all of its variable annuity business through reinsurance agreements with Prudential. Liabilities for variable contract guarantees related to death benefits are included in the reserve for life-contingent contract benefits and the liabilities related to the income, withdrawal and accumulation benefits are included in contractholder funds. All liabilities for variable contract guarantees are reported on a gross basis on the balance sheet with a corresponding reinsurance recoverable asset for those contracts subject to reinsurance.

Absent any contract provision wherein the Company guarantees either a minimum return or account value upon death, a specified contract anniversary date, partial withdrawal or annuitization, variable annuity and variable life insurance contractholders bear the investment risk that the separate accounts’ funds may not meet their stated investment objectives. The account balances of variable annuity contracts’ separate accounts with guarantees included $2.96 billion and $2.68 billion of equity, fixed income and balanced mutual funds and $238 million and $253 million of money market mutual funds as of December 31, 2020 and 2019, respectively.

The table below presents information regarding the Company’s variable annuity contracts with guarantees. The Company’s variable annuity contracts may offer more than one type of guarantee in each contract; therefore, the sum of amounts listed exceeds the total account balances of variable annuity contracts’ separate accounts with guarantees.

($ in millions)	As of December 31,
	2020		2019
In the event of death
Separate account value	$	3,197	$	2,928
Net amount at risk (1)	$	308	$	373
Average attained age of contractholders	72 years		71 years
At annuitization (includes income benefit guarantees)
Separate account value	$	925	$	848
Net amount at risk (2)	$	140	$	173
Weighted average waiting period until annuitization options available	None		None
For cumulative periodic withdrawals
Separate account value	$	178	$	190
Net amount at risk (3)	$	12	$	13
Accumulation at specified dates
Separate account value	$	93	$	123
Net amount at risk (4)	$	11	$	15
Weighted average waiting period until guarantee date	3 years		4 years

(1)Defined as the estimated current guaranteed minimum death benefit in excess of the current account balance as of the balance sheet date.

(2)Defined as the estimated present value of the guaranteed minimum annuity payments in excess of the current account balance.

(3)Defined as the estimated current guaranteed minimum withdrawal balance (initial deposit) in excess of the current account balance as of the balance sheet date.

(4)Defined as the estimated present value of the guaranteed minimum accumulation balance in excess of the current account balance.

The liability for death and income benefit guarantees is equal to a benefit ratio multiplied by the cumulative contract charges earned, plus accrued interest less contract excess guarantee benefit payments. The benefit ratio is calculated as the estimated present value of all expected contract excess guarantee benefits divided by the present value of all expected contract charges. The establishment of reserves for these guarantees requires the projection of future fund values, mortality, persistency and customer benefit utilization rates. These assumptions are periodically reviewed and updated. For guarantees related to death benefits, benefits represent the projected excess guaranteed minimum death benefit payments. For guarantees related to income benefits, benefits represent the present value of the minimum guaranteed annuitization benefits in excess of the projected account balance at the time of annuitization.

Projected benefits and contract charges used in determining the liability for certain guarantees are developed using models and stochastic scenarios that are also used in the development of estimated expected gross profits. Underlying assumptions for the liability related to income benefits include assumed future annuitization elections based on factors such as the extent of benefit to the potential annuitant, eligibility conditions and the annuitant’s attained age. The liability for guarantees is re-evaluated periodically, and adjustments are made to the liability balance through a charge or credit to life and annuity contract benefits.

Guarantees related to the majority of withdrawal and accumulation benefits are considered to be derivative financial instruments; therefore, the liability for these benefits is established based on its fair value.

Summary of liabilities for guarantees
($ in millions)	Liability for guarantees related to death benefits and interest-sensitive life products		Liability for guarantees related to income benefits		Liability for guarantees related to accumulation and withdrawal benefits		Total
Balance, December 31, 2019	$	293	$	24	$	102	$	419
Less reinsurance recoverables	81		20		32		133
Net balance as of December 31, 2019	212		4		70		286
Incurred guarantee benefits	50		—		18		68
Paid guarantee benefits	(2)		—		—		(2)
Net change	48		—		18		66
Net balance as of December 31, 2020	260		4		88		352
Plus reinsurance recoverables	69		23		33		125
Balance, December 31, 2020	$	329	$	27	$	121	$	477
Balance, December 31, 2018	$	308	$	39	$	97	$	444
Less reinsurance recoverables	111		35		39		185
Net balance as of December 31, 2018	197		4		58		259
Incurred guarantee benefits	18		—		12		30
Paid guarantee benefits	(3)		—		—		(3)
Net change	15		—		12		27
Net balance as of December 31, 2019	212		4		70		286
Plus reinsurance recoverables	81		20		32		133
Balance, December 31, 2019	$	293	$	24	$	102	$	419

Reserves included in total liability balance for guarantees, as of December 31, by type of benefit
($ in millions)	2020		2019		2018
Variable annuity
Death benefits	$	67	$	78	$	109
Income benefits	24		21		36
Accumulation benefits	18		18		25
Withdrawal benefits	15		14		14
Other guarantees	353		288		260
Total	$	477	$	419	$	444