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Reserve for Life-Contingent Contract Benefits and Contractholder Funds | 12 Months Ended
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Dec. 31, 2017
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) |  | 2017 |  | 2016
Immediate fixed annuities: |  |  |  |
Structured settlement annuities |  | $ | 6,994 |  |  | $ | 6,681 |
Other immediate fixed annuities |  | 1,855 |  |  | 1,941 |
Traditional life insurance |  | 2,722 |  |  | 2,643 |
Accident and health insurance |  | 893 |  |  | 873 |
Other |  | 85 |  |  | 101 |
Total reserve for life-contingent contract benefits |  | $ | 12,549 |  |  | $ | 12,239 |
Key assumptions generally used in calculating the reserve for life-contingent contract benefits
Product |  | Mortality |  | Interest rate |  | Estimation method
Structured settlement annuities |  | U.S. population with projected calendar year improvements; mortality rates adjusted for each impaired life based on reduction in life expectancy |  | Interest rate assumptions range from 2.9% to 9.0% |  | Present value of contractually specified future benefits
Other immediate fixed annuities |  | 1983 group annuity mortality table with internal modifications; 1983 individual annuity mortality table; Annuity 2000 mortality table with internal modifications; Annuity 2000 mortality table; 1983 individual annuity mortality table with internal modifications |  | Interest rate assumptions range from 0% to 11.5% |  | Present value of expected future benefits based on historical experience
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 2.0% 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”).
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. In conjunction with the segment changes in 2017, the Company evaluated the need for a reserve adjustment separately for traditional life insurance and immediate annuities with life contingencies. As of December 31, 2017, the Company recorded a $315 million increase to the reserve for life-contingent contract benefits and a $249 million decrease to unrealized net capital gains, after-tax, included in shareholders’ equity. This liability was zero as of December 31, 2016.
Contractholder funds
|  | As of December 31,
($ in millions) |  | 2017 |  | 2016
Interest-sensitive life insurance |  | $ | 8,190 |  |  | $ | 8,062 |
Investment contracts: |  |  |  |
Fixed annuities |  | 10,828 |  |  | 11,933 |
Other investment contracts |  | 416 |  |  | 265 |
Total contractholder funds |  | $ | 19,434 |  |  | $ | 20,260 |
Key contract provisions of contractholder funds
Product |  | Interest rate |  | Withdrawal/surrender charges
Interest-sensitive life insurance |  | Interest rates credited range from 0% to 10.5% 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% to 9.8% for immediate annuities; (8.0)% to 12.3% for equity-indexed annuities (whose returns are indexed to the S&P 500); and 0.1% to 6.0% for all other products |  | Either a declining or a level percentage charge generally over ten years or less. Additionally, approximately 16.7% 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 1.5% 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) |  | 2017 |  | 2016 |  | 2015
Balance, beginning of year |  | $ | 20,260 |  |  | $ | 21,295 |  |  | $ | 22,529 |
Deposits |  | 1,130 |  |  | 1,164 |  |  | 1,203 |
Interest credited |  | 687 |  |  | 722 |  |  | 760 |
Benefits |  | (901 | ) |  | (966 | ) |  | (1,077 | )
Surrenders and partial withdrawals |  | (999 | ) |  | (1,053 | ) |  | (1,278 | )
Maturities of and interest payments on institutional products |  | — |  |  | (86 | ) |  | (1 | )
Contract charges |  | (826 | ) |  | (829 | ) |  | (818 | )
Net transfers from separate accounts |  | 5 |  |  | 5 |  |  | 7 |
Other adjustments |  | 78 |  |  | 8 |  |  | (30 | )
Balance, end of year |  | $ | 19,434 |  |  | $ | 20,260 |  |  | $ | 21,295 |
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 annuities contracts’ separate accounts with guarantees included $3.02 billion and $2.93 billion of equity, fixed income and balanced mutual funds and $322 million and $364 million of money market mutual funds as of December 31, 2017 and 2016, respectively. The table below presents information regarding the Company’s variable annuity contracts with guarantees. The Company’s variable annuity contracts may offer more than one type of guarantee in each contract; therefore, the sum of amounts listed exceeds the total account balances of variable annuity contracts’ separate accounts with guarantees.
($ in millions) |  | As of December 31,
|  | 2017 |  | 2016
In the event of death |  |  |  |
Separate account value |  | $ | 3,344 |  |  | $ | 3,298 |
Net amount at risk (1) |  | $ | 454 |  |  | $ | 585 |
Average attained age of contractholders |  | 70 years |  |  | 70 years |
At annuitization (includes income benefit guarantees) |  |  |  |
Separate account value |  | $ | 944 |  |  | $ | 915 |
Net amount at risk (2) |  | $ | 202 |  |  | $ | 265 |
Weighted average waiting period until annuitization options available |  | None |  |  | None |
For cumulative periodic withdrawals |  |  |  |
Separate account value |  | $ | 253 |  |  | $ | 267 |
Net amount at risk (3) |  | $ | 10 |  |  | $ | 10 |
Accumulation at specified dates |  |  |  |
Separate account value |  | $ | 170 |  |  | $ | 310 |
Net amount at risk (4) |  | $ | 17 |  |  | $ | 26 |
Weighted average waiting period until guarantee date |  | 5 years |  |  | 3 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, 2016 (1) |  | $ | 244 |  |  | $ | 44 |  |  | $ | 77 |  |  | $ | 365 |
Less reinsurance recoverables |  | 101 |  |  | 40 |  |  | 43 |  |  | 184 |
Net balance as of December 31, 2016 |  | 143 |  |  | 4 |  |  | 34 |  |  | 181 |
Incurred guarantee benefits |  | 34 |  |  | — |  |  | 11 |  |  | 45 |
Paid guarantee benefits |  | (2 | ) |  | — |  |  | — |  |  | (2 | )
Net change |  | 32 |  |  | — |  |  | 11 |  |  | 43 |
Net balance as of December 31, 2017 |  | 175 |  |  | 4 |  |  | 45 |  |  | 224 |
Plus reinsurance recoverables |  | 87 |  |  | 25 |  |  | 34 |  |  | 146 |
Balance, December 31, 2017 (2) |  | $ | 262 |  |  | $ | 29 |  |  | $ | 79 |  |  | $ | 370 |
Balance, December 31, 2015 (3) |  | $ | 223 |  |  | $ | 68 |  |  | $ | 75 |  |  | $ | 366 |
Less reinsurance recoverables |  | 106 |  |  | 64 |  |  | 52 |  |  | 222 |
Net balance as of December 31, 2015 |  | 117 |  |  | 4 |  |  | 23 |  |  | 144 |
Incurred guarantee benefits |  | 26 |  |  | — |  |  | 11 |  |  | 37 |
Paid guarantee benefits |  | — |  |  | — |  |  | — |  |  | — |
Net change |  | 26 |  |  | — |  |  | 11 |  |  | 37 |
Net balance as of December 31, 2016 |  | 143 |  |  | 4 |  |  | 34 |  |  | 181 |
Plus reinsurance recoverables |  | 101 |  |  | 40 |  |  | 43 |  |  | 184 |
Balance, December 31, 2016 (1) |  | $ | 244 |  |  | $ | 44 |  |  | $ | 77 |  |  | $ | 365 |
(1) | Included in the total liability balance as of December 31, 2016 are reserves for variable annuity death benefits of $100 million, variable annuity income benefits of $40 million, variable annuity accumulation benefits of $34 million, variable annuity withdrawal benefits of $9 million and other guarantees of $182 million.
(2) | Included in the total liability balance as of December 31, 2017 are reserves for variable annuity death benefits of $85 million, variable annuity income benefits of $26 million, variable annuity accumulation benefits of $22 million, variable annuity withdrawal benefits of $12 million and other guarantees of $225 million.
(3) | Included in the total liability balance as of December 31, 2015 are reserves for variable annuity death benefits of $105 million, variable annuity income benefits of $65 million, variable annuity accumulation benefits of $38 million, variable annuity withdrawal benefits of $14 million and other guarantees of $144 million.

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- Definition Describes the various components of the reserve for Life-Contingent Contract Benefits and Contractholder Funds, the significant assumptions, the causes of significant variances from prior periods and reconciliations of beginning to ending reserve balances. Also includes disclosures of minimum guarantee liabilities and separate accounts. + References No definition available. + Details
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