Lincoln
National
Corporation
2020 Annual Report
to Shareholders
Dear Shareholders,
2020 Annual Letter to Shareholders
The year 2020 was an extraordinarily challenging one for our country and the world. Lincoln entered the COVID-19 crisis from a strong
position. As vaccination rates increase, we are emerging even stronger, due to our enhanced digital capabilities, expanded product
portfolio, industry-leading distribution, sound balance sheet and risk management, and thoughtful cost control. Guided by a tested
management team, and with an established strategy and history of effective execution, we are well prepared to advance our leadership
positions in the Annuities, Life Insurance, Retirement Plan Services and Group Protection markets.
2020 financial performance
In 2020, we delivered solid financial results in the face of elevated mortality and morbidity claims from COVID-19, as well as the
resulting lower interest rate and challenging sales environments. Adjusted income from operations per diluted share of $4.451 and
adjusted operating return on equity, excluding accumulated other comprehensive income (“AOCI”), of 6.3%1 included charges from our
annual actuarial assumption review and COVID-19 impacts. Book value per share, excluding AOCI, increased to a record $721 and
statutory capital rose to $10.2 billion. Given the challenges of 2020 we are pleased with our results, and when mortality claims ultimately
return to pre-pandemic levels, we expect earnings momentum to build in the second half of this year and into 2022. Beyond our financial
performance we are also proud of progress we have made in our strategic priorities, which include:
Leverage our powerful distribution, expand customer solutions and target attractive long-term growth opportunities
Our “reprice, shift and add new” product strategy—combined with our industry-leading distribution platform—positions us for long-
term growth and healthy returns. In 2020 we repriced products, as needed, to respond to lower interest rates and maintain appropriate
returns, continued to shift sales towards shorter-duration and less interest rate-sensitive products, and rapidly scaled new products in fast-
growing market segments, such as our indexed variable annuity, to complement our existing best-in-class portfolio. Despite the
pandemic, our variable annuity business achieved positive net flows for the first time since 2015, our Retirement Plan Services business
had positive net flows for the sixth consecutive year and our Life Insurance and Group Protection businesses reported premium growth.
Generate expense efficiency
We continue to diligently manage expenses and execute on two significant expense saving programs: our strategic digitization initiative
and our 2020 cost reduction program. First, our digitization initiative is progressing well and consistent with our expectations. We
achieved a net benefit of $50 million in 2020 and expect to increase savings this year. Second, in 2021 we plan to make permanent the
$100 million of savings achieved in 2020 through our 2020 cost reduction program. Additionally, we are pleased to have achieved
expense synergies of $125 million from our group benefits acquisition – above our original target. Finally, given our expense efficiency
mindset and record of cost-management success, we expect to identify additional savings opportunities in 2021.
Maintain balance sheet strength
We ended 2020 with $10.2 billion in statutory capital and increased our risk-based capital ratio to 451%. Holding company cash is above
our $450 million target. We have a highly rated and well-diversified investment portfolio grounded in disciplined matching of assets to
liabilities. Our multimanager framework rewards us with great access to investment opportunities and enhances our risk management
analysis. We regularly assess our capital adequacy, liquidity and investment portfolio, and take appropriate actions to ensure we maintain
our financial strength even in severe economic scenarios. Lincoln’s insurance companies hold among the highest financial strength
ratings in the industry. We are proud that rating agencies continue to recognize our strong business profile, operating performance and
capital position.
Allocate capital to its best use
While balance sheet strength and our policyholders are always top of mind, our high-quality in-force business generates significant
recurring capital, which helps us enhance shareholder value. While we paused share repurchases in the second and third quarters as we
prioritized balance sheet strength amidst uncertainty due to the pandemic, we confidently reinitiated buybacks in the fourth quarter.
Ultimately, we allocated nearly $600 million towards stock buybacks and dividends and pre-funded $300 million of debt in 2020. We also
increased our dividend for the eleventh consecutive year. We are well-positioned to continue to fund new business growth at attractive
returns while returning a significant amount of capital to shareholders.
Value our employees
Talent is a key driver of Lincoln’s success. As a result, we have established several strategic priorities that make sense for our business
and are the right things to do. These priorities include diversity and inclusion, employee development and promotion opportunities and
1 A reconciliation of non-GAAP measures to their most comparable GAAP measures appears at the end of this letter.
competitive compensation. We are proud to rank among Forbes’ World’s Best Employers, Best Large Employers, Best Employers for
Diversity and Best Employers for Women. We also received a perfect score on both the Human Rights Campaign Corporate Equality
Index and the Disability Equality Index. All our stakeholders benefit from our initiatives. Importantly, our employees are rewarded for
our collective success – over the past decade, salaries for non-executives increased at a faster rate than the average wages for the United
States population.
At the outset of the COVID-19 crisis we acted to protect our employees. Nearly overnight we seamlessly moved about 11,000 employees
from the office to home with minimal disruption to business operations, customer service or partners. Our distribution partners rose to
the challenge and shifted their approach to business, embracing, and in fact thriving in, a virtual environment. Throughout the past year
we have continued to both meet the needs of all Lincoln stakeholders and protect the well-being of our employees.
Commit to racial and social justice, our communities and sustainability
In 2020 we were reminded how far our country still must go to reach our ideals of racial and social justice. Diversity, inclusion and equity
are intrinsic to Lincoln’s culture. As part of our plan to advance racial equity, Lincoln is: taking steps to increase Black employee
populations and grow our network of Black financial advisors; focusing on increasing minority leadership at Lincoln and tying leaders’
compensation to Diversity and Inclusion objectives; expanding the Diversity and Inclusion function; and leveraging Lincoln’s Foundation
to support diverse communities. Though there is much more to do, we are proud of the steps we are taking.
We remain committed to our communities and environmental, social and governance (“ESG”) matters. In 2020 Lincoln donated more
than $10 million to those impacted by COVID-19 and our employees discovered new ways to volunteer virtually in their local
communities. We are mindful that our attention to ESG matters is essential to sustainable growth, and we integrate these considerations
into our assessments of risks and opportunities. Our commitment is demonstrated by our inclusion on the Dow Jones Sustainability
Index and FTSE4Good and in Newsweek’s Most Responsible Companies.
In closing, on behalf of Lincoln’s Board of Directors, management and employees, we thank you for your continued trust and
investment. As the world emerges from an unprecedented year, our focus remains on our customers, shareholders, employees and
distribution partners. We at Lincoln hope you and your family are safe. As we look to the future, our financial strength, veteran
management team and talented employees position us well to meet Americans’ protection and retirement needs, drive robust financial
performance and deliver long-term shareholder value.
Dennis R. Glass
President and CEO
William H. Cunningham
Chairman of the Board
Forward-Looking Statements – Cautionary Language
Statements in this letter that are not historical facts are forward-looking statements. Actual results may differ materially from those
projected in the forward-looking statements. See “Forward-Looking Statements – Cautionary Language” beginning on page 37 and “Risk
Factors” beginning on page 19.
Definitions of Non-GAAP Measures
Adjusted income (loss) from operations, adjusted operating revenues and adjusted operating return on equity (“ROE”) are financial
measures we use to evaluate and assess our results. These financial measures are non-GAAP financial measures and do not replace
GAAP net income (loss), revenues and ROE, the most directly comparable GAAP measures.
Adjusted Income (Loss) from Operations
Adjusted income (loss) from operations is GAAP net income (loss) excluding the after-tax effects of the following items, as applicable:
• Realized gains and losses associated with the following (“excluded realized gain (loss)”):
Sales or disposals and impairments of financial assets;
Changes in the fair value of equity securities;
Changes in the fair value of derivatives, embedded derivatives within certain reinsurance arrangements and trading securities
(“gain (loss) on the mark-to-market on certain instruments”);
Changes in the fair value of the derivatives we own to hedge our guaranteed death benefit (“GDB”) riders within our variable
annuities;
Changes in the fair value of the embedded derivatives of our guaranteed living benefit (“GLB”) riders reflected within variable
annuity net derivative results accounted for at fair value;
Changes in the fair value of the derivatives we own to hedge our GLB riders reflected within variable annuity net derivative
results;
Changes in the fair value of the embedded derivative liabilities related to index options we may purchase or sell in the future to
hedge contract holder index allocations applicable to future reset periods for our indexed annuity products accounted for at fair
value (“indexed annuity forward-starting option”); and
Income (loss) from reserve changes, net of related amortization, on business sold through reinsurance;
• Changes in reserves resulting from benefit ratio unlocking on our GDB and GLB riders (“benefit ratio unlocking”);
•
• Gains (losses) on early extinguishment of debt;
• Losses from the impairment of intangible assets;
•
Income (loss) from discontinued operations;
• Acquisition and integration costs related to mergers and acquisitions; and
•
Income (loss) from the initial adoption of new accounting standards, regulations, and policy changes including the net impact from
the Tax Cuts and Jobs Act.
Adjusted Operating Revenues
Adjusted operating revenues represent GAAP revenues excluding the pre-tax effects of the following items, as applicable:
• Excluded realized gain (loss);
• Revenue adjustments from the initial adoption of new accounting standards;
• Amortization of DFEL arising from changes in GDB and GLB benefit ratio unlocking; and
• Amortization of deferred gains arising from reserve changes on business sold through reinsurance.
Adjusted Operating ROE
Adjusted operating ROE measures how efficiently we generate profits from the resources provided by our net assets. Adjusted operating
ROE as used herein is calculated by dividing annualized adjusted income (loss) from operations by average equity, excluding AOCI.
Book Value Per Share, Excluding AOCI
Book value per share, excluding AOCI is calculated based upon a non-GAAP financial measure. It is calculated by dividing stockholders’
equity excluding AOCI by common shares outstanding. We provide book value per share, excluding AOCI to enable investors to analyze
the amount of our net worth that is primarily attributable to our business operations. Management believes book value per share,
excluding AOCI is useful to investors because it eliminates the effect of items that can fluctuate significantly from period to period,
primarily based on changes in interest rates. Book value per share is the most directly comparable GAAP measure.
A reconciliation of net income (loss) to adjusted income (loss) from operations (in millions of dollars, except per share data) is presented
below:
Net Income (Loss) Available to Common
Stockholders – Diluted
Less:
Adjustment for deferred units of LNC stock in our
deferred compensation plans (1)
Net Income (Loss)
Less:
Excluded realized gain (loss), after tax
Benefit ratio unlocking, after tax
Net impact from the Tax Cuts and Jobs Act
Acquisition and integration costs related to mergers
and acquisitions, after-tax
Gain (loss) on early extinguishment of debt, after tax
Adjusted Income (Loss) from Operations
Earnings (Loss) Per Common Share – Diluted
Net income (loss)
Adjusted income (loss) from operations
Average Stockholders' Equity
Average equity, including average AOCI
Average AOCI
Average equity, excluding AOCI
ROE, Including AOCI
Net income (loss)
Adjusted Operating ROE, Excluding AOCI
Adjusted income (loss) from operations
For the Years Ended
December 31,
2020
2019
$
499
$
886
-
499
(570)
194
37
(15)
(12)
865
2.56
4.45
20,012
6,359
13,653
$
$
$
$
-
886
(627)
277
17
(103)
(33)
1,355
4.38
6.71
17,973
4,019
13,954
2.5%
4.9%
6.3%
9.7%
$
$
$
$
(1) The numerator used in the calculation of our diluted EPS is adjusted to remove the mark-to-market adjustment for deferred units of
LNC stock in our deferred compensation plans if the effect of equity classification would result in a more dilutive EPS.
A reconciliation of book value per share to book value per share excluding AOCI is presented below:
Book value per share, including AOCI
Per share impact of AOCI
Book value per share, excluding AOCI
As of December 31,
2019
2020
$
$
118.02
46.43
71.59
100.11
28.84
71.27
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2020
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _________ to _________.
Commission File Number 1-6028
LINCOLN NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Indiana
(State or other jurisdiction of incorporation or organization)
35-1140070
(I.R.S. Employer Identification No.)
150 N. Radnor-Chester Road, Suite A305, Radnor, Pennsylvania
(Address of principal executive offices)
19087
(Zip Code)
Registrant’s telephone number, including area code: (484) 583-1400
Securities registered pursuant to Section 12(b) of the Act:
_______________________________________________________________________________________________________
Title of each class
Common Stock
Trading Symbol
LNC
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
_______________________________________________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files).
Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Non-accelerated Filer
Accelerated Filer
Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of
its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public
accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes No
The aggregate market value of the shares of the registrant’s common stock held by non-affiliates (based upon the closing price of these
shares on the New York Stock Exchange) as of the last business day of the registrant’s most recently completed second fiscal quarter was
$6.2 billion. Shares of common stock held by each executive officer and director and each entity that owns 10% or more of the
outstanding common stock have been excluded in that such persons may be deemed to be affiliates. The determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of February 12, 2021, 191,958,281 shares of common stock of the registrant were outstanding.
Documents Incorporated by Reference:
Selected portions of the Proxy Statement for the Annual Meeting of Shareholders, scheduled for June 3, 2021, have been incorporated by
reference into Part III of this Form 10-K.
Lincoln National Corporation
Table of Contents
PART I
Page
Item
1.
Business
Overview
Business Segments and Other Operations
Annuities
Retirement Plan Services
Life Insurance
Group Protection
Other Operations
Reinsurance
Reserves
Investments
Financial Strength Ratings
Regulatory
Human Capital Management
Available Information
1A. Risk Factors
1B. Unresolved Staff Comments
2.
3.
Properties
Legal Proceedings
4. Mine Safety Disclosures
Information About our Executive Officers
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
PART II
Equity Securities
6.
Selected Financial Data
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements – Cautionary Language
Introduction
Executive Summary
Critical Accounting Policies and Estimates
Acquisitions and Dispositions
Results of Consolidated Operations
Results of Annuities
Results of Retirement Plan Services
Results of Life Insurance
Results of Group Protection
Results of Other Operations
Realized Gain (Loss) and Benefit Ratio Unlocking
Consolidated Investments
Reinsurance
Review of Consolidated Financial Condition
Liquidity and Capital Resources
1
1
2
2
4
6
8
9
9
10
10
11
11
17
19
19
33
33
33
33
34
35
36
37
37
38
38
42
53
54
55
59
63
68
71
73
76
89
90
90
Lincoln National Corporation
Table of Contents
Item
7A. Quantitative and Qualitative Disclosures About Market Risk
8.
9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
9A. Controls and Procedures
9B. Other Information
PART III
10. Directors, Executive Officers and Corporate Governance
11. Executive Compensation
12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
13. Certain Relationships and Related Transactions, and Director Independence
14. Principal Accounting Fees and Services
PART IV
15. Exhibits, Financial Statement Schedules
Index to Exhibits
Signatures
Index to Financial Statement Schedules
Page
98
105
194
194
194
194
195
195
196
196
196
197
201
FS-1
PART I
The “Business” section and other parts of this Form 10-K contain forward-looking statements that involve inherent risks and
uncertainties. Statements that are not historical facts, including statements about our beliefs and expectations, and containing words such
as “believes,” “estimates,” “anticipates,” “expects” or similar words are forward-looking statements. Our actual results may differ
materially from the projected results discussed in the forward-looking statements. Factors that could cause such differences include, but
are not limited to, those discussed in “Item 1A. Risk Factors” and in the “Forward-Looking Statements – Cautionary Language” in “Part
II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) of the Form 10-K.
Our consolidated financial statements and the accompanying notes to the consolidated financial statements (“Notes”) are presented in
“Part II – Item 8. Financial Statements and Supplementary Data.”
Item 1. Business
OVERVIEW
Lincoln National Corporation (“LNC,” which also may be referred to as “Lincoln,” “we,” “our” or “us”) is a holding company, which
operates multiple insurance and retirement businesses through subsidiary companies. Through our business segments, we sell a wide
range of wealth protection, accumulation, retirement income and group protection products and solutions. LNC was organized under the
laws of the state of Indiana in 1968. We currently maintain our principal executive offices in Radnor, Pennsylvania. “Lincoln Financial
Group” is the marketing name for LNC and its subsidiary companies. As of December 31, 2020, LNC had consolidated assets of $365.9
billion and consolidated stockholders’ equity of $22.7 billion.
We provide products and services and report results through four segments as follows:
Business Segments
Annuities
Retirement Plan Services
Life Insurance
Group Protection
We also have Other Operations, which includes the financial data for operations that are not directly related to the business segments.
The results of Lincoln Financial Network (“LFN”) and Lincoln Financial Distributors (“LFD”), our retail and wholesale distributors,
respectively, are included in the segments for which they distribute products. LFD distributes our individual products and services,
retirement plans and corporate-owned universal life insurance and variable universal life insurance (“COLI”) and bank-owned universal
life insurance and variable universal life insurance (“BOLI”) products and services. The distribution occurs primarily through
consultants, brokers, planners, agents, financial advisers, third-party administrators (“TPAs”) and other intermediaries. Group Protection
distributes its products and services primarily through employee benefit brokers, TPAs and other employee benefit firms. As of
December 31, 2020, LFD had approximately 560 internal and external wholesalers (including sales and relationship managers). As of
December 31, 2020, LFN offered LNC and non-proprietary products and advisory services through a national network of approximately
13,500 active producers who placed business with us within the last 24 months.
Financial information in the tables that follow is presented in accordance with United States of America generally accepted accounting
principles (“GAAP”), unless otherwise indicated. We provide revenues, income (loss) from operations and assets attributable to each of
our business segments and Other Operations in Note 22.
Acquisitions and Dispositions
On May 1, 2018, we completed the acquisition from Liberty Mutual Insurance Company of 100% of the capital stock of Liberty Life
Assurance Company of Boston (“Liberty Life”), an operator of a group benefits business (the “Liberty Group Business”) and an
individual life and individual and group annuity business (the “Liberty Life Business”). In connection with the acquisition, Liberty Life
sold the Liberty Life Business on May 1, 2018, by entering into reinsurance agreements and related ancillary documents with Protective
Life Insurance Company and its wholly-owned subsidiary, Protective Life and Annuity Insurance Company (together with Protective Life
Insurance Company, “Protective”), providing for the reinsurance and administration of the Liberty Life Business. Liberty Life’s excess
capital of $1.8 billion was paid to Liberty Mutual Insurance Company through an extraordinary dividend at the acquisition date. We paid
$1.5 billion of cash to Liberty Mutual Insurance Company to acquire the Liberty Group Business. Effective September 1, 2019, Liberty
Life’s name was changed to Lincoln Life Assurance Company of Boston (“LLACB”).
For further information about acquisitions and dispositions, see Note 3.
1
BUSINESS SEGMENTS AND OTHER OPERATIONS
ANNUITIES
Overview
The Annuities segment provides tax-deferred investment growth and lifetime income opportunities for its clients by offering variable
annuities, fixed (including indexed) annuities and indexed variable annuities. The “fixed” and “variable” classifications describe whether
we or the contract holders bear the investment risk of the assets supporting the contract. With “indexed variable” annuities, the extent to
which we or the contract holders bear the investment risk of the assets is based on the investment allocations. The annuity classification
also determines the manner in which we earn investment margin profits from these products, either as investment spreads for fixed
products, as asset-based fees charged to variable products, or as both for indexed variable products.
Annuities have several features that are attractive to customers. Annuities are unique in that contract holders can select a variety of
payout alternatives to provide an income flow for life. Many annuity contracts also include guarantee features (living and death benefits)
that are not found in any other investment vehicle and that, we believe, make annuities attractive especially in times of economic
uncertainty. In addition, growth on the underlying principal in certain annuities is granted tax-deferred treatment, thereby deferring the
tax consequences of the growth in value until withdrawals are made from the accumulation values, often at lower tax rates occurring
during retirement.
Products
In general, an annuity is a contract between an insurance company and an individual in which the insurance company, after receipt of one
or more premium payments, agrees to pay an amount of money either in one lump sum or on a periodic basis (i.e., annually, semi-
annually, quarterly or monthly), beginning on a certain date and continuing for a period of time as specified in the contract or as
requested. Periodic payments can begin within 12 months after the premium is received (referred to as an immediate annuity) or at a
future date in time (referred to as a deferred annuity). This retirement vehicle helps protect an individual from outliving his or her money.
Variable Annuities
A variable annuity provides the contract holder the ability to direct the investment of premium deposits into one or more variable sub-
accounts (“variable funds”) offered through the product (“variable portion”) and, for a specified period, into a fixed account (if available)
with a guaranteed return (“fixed portion”). The value of the variable portion of the contract holder’s account varies with the performance
of the underlying variable funds chosen by the contract holder.
Our variable funds include the Managed Risk Strategies fund options, a series of funds that embed volatility risk management and, with
some funds, capital protection strategies inside the funds themselves. These funds seek to reduce equity market volatility risk for both the
contract holder and us. As of December 31, 2020 and 2019, the Managed Risk Strategies funds totaled $43.0 billion and $42.0 billion,
respectively, or 34% of total variable annuity product account values.
We charge mortality and expense assessments and administrative fees on variable annuity accounts to cover insurance and administrative
expenses. These assessments are built into accumulation unit values, which when multiplied by the number of units owned for any
variable fund equals the contract holder’s account value for that variable fund. In addition, for some contracts, we impose surrender
charges, which are typically applicable to withdrawals during the early years of the annuity contract, with a declining level of surrender
charges over time.
We offer guaranteed benefit riders with certain of our variable annuity products, such as a guaranteed death benefit (“GDB”), a
guaranteed withdrawal benefit (“GWB”), a guaranteed income benefit (“GIB”) and a combination of such benefits. In 2020, 69% of our
variable annuity deposits were on products without guaranteed living benefit (“GLB”) riders, compared to 47% in 2019.
The GDB features offered include those where we contractually guarantee to the contract holder that upon death, depending on the
particular product, we will return no less than: the current contract value; the total deposits made to the contract, adjusted to reflect any
partial withdrawals; or the highest contract value on a specified anniversary date adjusted to reflect any partial withdrawals following the
contract anniversary.
2
We offer optional benefit riders including the Lincoln Lifetime IncomeSM Advantage 2.0 (Managed Risk), Lincoln Market SelectSM Advantage
and Max 6 SelectSM Advantage riders. All provide contract holders with protected lifetime income that is based on a maximum rate of the
income base that grows annually at either the greater of a specified simple rate (available each year a withdrawal is not taken for a
specified period of time) or account value growth. The riders provide higher income if the contract holder delays withdrawals. The
Lincoln Lifetime Income Advantage 2.0 (Managed Risk) and Lincoln Market Select Advantage riders are hybrid benefit riders combining
aspects of GWB and GIB that provide a specified maximum rate of the income base or income through the i4LIFE® Advantage rider
with the GIB. The Lincoln Max 6 Select Advantage rider provides contract holders with protected lifetime income up to a specified
maximum rate of the income base and a different specified maximum rate of the income base if the account value falls to zero. Contract
holders under the Lincoln Lifetime Income SM Advantage 2.0 (Managed Risk) rider are subject to the allocation of their account value to our
Managed Risk Strategies fund options and certain fixed-income options. Contract holders under the Lincoln Market Select SM Advantage
and Lincoln Max 6 Select SM Advantage riders are subject to restrictions on the allocation of their account value within the various
investment choices.
We also offer the American Legacy® Target Date Income variable annuity with an optional Target Date Income Benefit rider, which
combines target date investing with a protected lifetime income. Contract holders who elect the Target Date Income Benefit are
automatically allocated to the Target Date Fund based on their year of birth. The protected lifetime income is based on a percentage rate
of income for their age at the time of purchase of the optional rider, which will grow at the greater of a specified simple rate (available
each year a withdrawal is not taken for a specified period of time) or account value growth.
In addition, we offer the i4LIFE Advantage, i4LIFE Advantage Guaranteed Income Benefit (Managed Risk) and i4LIFE Advantage
Select Guaranteed Income Benefit riders. These riders allow variable annuity contract holders access and control during a portion of the
income distribution phase of their contract. This added flexibility allows the contract holder to access the account value for transfers,
additional withdrawals and other service features like portfolio rebalancing. In general, GIB is an optional feature available with the
i4LIFE Advantage rider and a non-optional feature on the i4LIFE Advantage Guaranteed Income Benefit (Managed Risk) and i4LIFE
Advantage Select Guaranteed Income Benefit riders that guarantees regular income payments will not fall below the greater of a
minimum income floor set at benefit issue and 75% of the highest income payment on a specified anniversary date (reduced for any
subsequent withdrawals). Contract holders under the i4LIFE Advantage Guaranteed Income Benefit (Managed Risk) rider are subject to
the allocation of their account value to our Managed Risk Strategies fund options and certain fixed-income options. Contract holders
under the i4LIFE Advantage Select Guaranteed Income Benefit rider are subject to restrictions on the allocation of their account value
within the various investment choices.
We also offer the 4LATER® Select Advantage rider. This rider provides a minimum income base used to determine the GIB floor when
a client begins income payments under the i4LIFE Advantage Select Guaranteed Income Benefit rider. The 4LATER Select Advantage
rider provides growth during the accumulation phase through both an enhancement to the income base each year a withdrawal is not
taken for a specified period of time and an annual step-up of the income base to the current contract value. Contract holders under the
4LATER Select Advantage rider are subject to restrictions on the allocation of their account value within the various investment choices.
We design and actively manage the features and structure of our guaranteed benefit riders to maintain a competitive suite of products
consistent with profitability and risk management goals. To mitigate the increased risks associated with guaranteed benefits, we utilize a
dynamic hedging program. The customized dynamic hedging program uses equity, interest rate and currency futures positions, interest
rate and total return swaps and equity-based options depending upon the risks underlying the guarantees. For more information on our
hedging program, see “Critical Accounting Policies and Estimates – Derivatives” and “Realized Gain (Loss) and Benefit Ratio
Unlocking” in the MD&A. For information regarding risks related to guaranteed benefits, see “Item 1A. Risk Factors – Market
Conditions – Changes in the equity markets, interest rates and/or volatility affect the profitability of our products with guaranteed
benefits; therefore, such changes may have a material adverse effect on our business and profitability.”
Fixed Annuities
A fixed annuity preserves the principal value of the contract while guaranteeing a minimum interest rate to be credited to the
accumulation value. Our fixed annuity product offerings consist of traditional fixed-rate and fixed indexed deferred annuities, as well as
fixed-rate immediate and deferred income annuities with various payment options, including lifetime incomes. Fixed annuity contracts
are general account obligations. We bear the investment risk for fixed annuity contracts. To protect from premature withdrawals, we
impose surrender charges. Surrender charges are typically applicable during the early years of the annuity contract, with a declining level
of surrender charges over time. On most policies, within the surrender charge period, we also have a market value adjustment provision
that protects us against disintermediation risk in the case of rapidly rising interest rates. We expect to earn a spread between what we earn
on the underlying general account investments supporting the fixed annuity product line and what we credit to our fixed annuity contract
holders’ accounts.
We offer single and flexible premium fixed deferred annuities. Single premium fixed deferred annuities are contracts that allow only a
single premium to be paid. Flexible premium fixed deferred annuities are contracts that allow multiple premium payments, subject to
contractual limits, on either a scheduled or non-scheduled basis.
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Our fixed indexed annuities allow the contract holder to choose between a fixed interest crediting rate and an indexed interest crediting
rate, which is based on the performance of the S&P 500® Index, the S&P 500 Daily Risk Control 5%TM Index, the J.P. Morgan First
Trust Balanced Capital Strength 6SM Index, J.P. Morgan First Trust Balanced Capital Strength 5SM Index, the BlackRock iBLD Ascenda®
Index, or the Fidelity AIMSM Dividend Index. The indexed interest credit is guaranteed never to be less than zero.
We also offer the i4LIFE® Indexed Advantage rider on certain fixed indexed annuities which provides fixed indexed annuity contract
holders with access and control during a portion of the income phase of their contract. i4LIFE Indexed Advantage contracts may
include a GIB that guarantees regular income payments will not fall below a minimum income floor. The GIB has the opportunity to
increase, should regular income payments increase over the current GIB.
We use derivatives to hedge the equity market risk associated with our fixed indexed annuity products. For more information on our
hedging program, see “Critical Accounting Policies and Estimates – Derivatives” and “Realized Gain (Loss) and Benefit Ratio
Unlocking” in the MD&A.
Indexed Variable Annuities
Our indexed variable annuity, Lincoln Level Advantage®, provides the contract holder the ability to direct the investment of premium
deposits into one or more variable sub-accounts (“variable funds”) and/or indexed accounts offered through the product. The value of
the variable sub-accounts varies with the performance of the underlying variable funds chosen by the contract holder. The index interest
crediting rate for an indexed account is based, in part, on the performance of an index. The available indices are the S&P 500® Index,
the Russell 2000® Index, the MSCI EAFE and the Capital Strength Net Fee IndexSM.
We charge mortality and expense assessments and administrative fees on the variable funds to cover insurance and administrative
expenses. These assessments are built into accumulation unit values, which when multiplied by the number of units owned for any
variable fund equals the contract holder’s account value for that variable fund. In addition, for some contracts, we impose surrender
charges, which are typically applicable during the early years of the annuity contract, with a declining level of surrender charges over time.
We offer a guaranteed death benefit rider where we contractually guarantee to the contract holder that upon death, depending on the
particular product, we will return no less than the current contract value or the total deposits made to the contract, adjusted to reflect any
partial withdrawals.
We also offer the i4LIFE Advantage rider. This rider allows annuity contract holders access and control during a portion of the income
distribution phase of their contract. This added flexibility allows the contract holder to access the account value for transfers, additional
withdrawals and other service features like portfolio rebalancing.
We use derivatives to hedge the equity market risk associated with our indexed variable annuity products. For more information on our
hedging program, see “Critical Accounting Policies and Estimates – Derivatives” and “Realized Gain (Loss) and Benefit Ratio
Unlocking” in the MD&A.
Distribution
The Annuities segment distributes its individual fixed and variable annuity products through LFD. LFD’s distribution channels give the
Annuities segment access to its target markets. LFD distributes the segment’s products to a large number of financial intermediaries,
including LFN. The financial intermediaries include wire/regional firms, independent financial planners, financial institutions, registered
investment advisers and managing general agents.
Competition
The annuities market is very competitive and consists of many companies, with no one company dominating the market for all products.
The Annuities segment competes with numerous other financial services companies. The main factors upon which entities in this market
compete are distribution channel access and the quality of wholesalers, investment performance, cost, broad product portfolio and
features, speed to market, brand recognition, financial strength ratings, crediting rates and client service.
Overview
RETIREMENT PLAN SERVICES
The Retirement Plan Services segment provides employers with retirement plan products and services, primarily in the defined
contribution retirement plan marketplace. Defined contribution plans are a popular employee benefit offered by employers large and
small across a wide spectrum of industries. While our focus is employer-sponsored defined contribution plans, we also serve the defined
benefit plan and individual retirement account (“IRA”) markets on a limited basis. We provide a variety of plan investment vehicles,
including individual and group variable annuities, group fixed annuities and mutual fund-based programs. We also offer a broad array of
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plan services including plan recordkeeping, compliance testing, participant education and trust and custodial services through our
affiliated trust company, the Lincoln Financial Group Trust Company.
Products and Services
The Retirement Plan Services segment currently brings three primary offerings to the employer-sponsored market: LINCOLN
DIRECTORSM group variable annuity, LINCOLN ALLIANCE® program and Multi-Fund® variable annuity. The LINCOLN
ALLIANCE program is a mutual fund-based record-keeping platform. These offerings primarily cover the 403(b), 401(k) and 457 plan
marketplace. The 403(b) plans are available to educational institutions, not-for-profit healthcare organizations and certain other not-for-
profit entities; 401(k) plans are generally available to for-profit entities; and 457 plans are available to not-for-profit entities and state and
local government entities. The investment options for our annuities encompass the spectrum of asset classes with varying levels of risk
and include both equity and fixed-income.
LINCOLN DIRECTOR group variable annuity is a 401(k) defined contribution retirement plan solution available to small businesses,
typically those with plans having less than $10 million in account values. The LINCOLN DIRECTOR product offers participants a
broad array of investment options from several fund families and a fixed account. The Retirement Plan Services segment earns revenue
through asset charges and/or separate account charges, which are used to pay our fees for recordkeeping services. We also receive fees
from the underlying mutual fund companies for the services we provide, and we earn investment margins on assets in the fixed account.
The LINCOLN ALLIANCE program is a defined contribution retirement plan solution aimed at small, mid-large and large market
employers, typically those that have defined contribution plans with $10 million or more in account value. The target market is primarily
healthcare providers, public sector employers, corporations and educational institutions. The program bundles our traditional fixed
annuity products with the employer’s choice of mutual funds, along with recordkeeping, plan compliance services and customized
employee education services. The program allows the use of any mutual fund. We earn fees for our recordkeeping and educational
services and other services that we provide to plan sponsors and participants. We also earn investment margins on fixed annuities. We
also offer our proprietary YourPath® portfolios, a series of target-date portfolios for employer-sponsored retirement plans. These target-
date portfolios are managed along multiple risk-based paths to support a more personalized investment approach based upon financial
circumstances and risk tolerance.
Multi-Fund variable annuity is a defined contribution retirement plan solution with fully bundled administrative services and investment
choices for small- to mid-sized healthcare, education, governmental and not-for-profit employers sponsoring 403(b), 457(b) and
401(a)/(k) plans. The product is available to the employer through the Multi-Fund group variable annuity contract or directly to the
individual participant through the Multi-Fund Select variable annuity contract. We earn mortality and expense charges, investment income
on the fixed account and surrender charges from this product. We also receive fees for services that we provide to funds in the
underlying separate accounts.
Additionally, we offer other products and services that complement our primary offerings:
• The Lincoln Next Step® series of products is a suite of mutual fund-based IRAs available exclusively for participants in Lincoln-
serviced retirement plans and their spouses. The products can accept rollovers and transfers from other providers as well as ongoing
contributions. The Lincoln Next Step IRA product has no annual account charges and offers an array of mutual fund investment
options provided by 20 fund families all offered at net asset value. The Lincoln Next Step Select IRA has an annual record keeping
charge and offers an even wider array of mutual fund investment options from over 20 families, all at net asset value. We earn 12b-1
and service fees on the mutual funds within the product.
• The Lincoln Pathbuilder IncomeSM product is a GWB made available through a group variable annuity contract. This product is
intended to fulfill future needs of retirement security. By offering a GWB inside a retirement plan, we provide plan sponsors a
solution that gives participants the ability to participate in the market and receive guaranteed income for life while still maintaining
access to their plan account balance.
• Through a group annuity contract, we offer fixed annuity products to retirement plans where we do not provide plan recordkeeping
services. The fixed annuity is used within small, mid-large and large market employers covering the 403(b), 401(a)/(k) and 457 plan
marketplaces. The annuity provides a conservative investment option for those plan participants seeking stability. In some cases, we
earn investment margins on assets in the fixed account, and in other product versions we earn a fee on assets in the underlying
custodial account.
Distribution
Retirement Plan Services products are primarily distributed in two ways: through our Institutional Retirement Distribution team and by
LFD. Wholesalers distribute these products through advisers, consultants, banks, wirehouses and individual planners. We remain
focused on wholesaler productivity, increasing relationship management expertise and growing the number of broker-dealer relationships.
The Multi-Fund program is sold primarily by affiliated advisers. The LINCOLN ALLIANCE program is sold primarily through
consultants, registered independent advisers and both affiliated and non-affiliated financial advisers, planners and wirehouses.
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LINCOLN DIRECTORSM group variable annuity is sold in the small marketplace by intermediaries, including financial advisers and
planners.
Competition
The retirement plan marketplace is very competitive and is comprised of many providers with no one company dominating the market
for all products. As stated above, we compete with numerous other financial services corporations in the small, mid and large employer
markets. The main factors upon which entities in this market compete are product strength, technology, service model delivery,
participant education models, quality wholesale distribution access to intermediary firms and comprehensive marketing efforts to create
brand recognition. Our key differentiator is our high-touch, high-tech, digitally focused service model, which has been shown to drive
positive outcomes for plan sponsors and participants.
Overview
LIFE INSURANCE
The Life Insurance segment focuses on the creation and protection of wealth for its clients by providing life insurance products, including
term insurance, both single (including COLI and BOLI) and survivorship versions of universal life insurance (“UL”), variable universal
life insurance (“VUL”) and indexed universal life insurance (“IUL”) products, a linked-benefit product (which is UL with riders providing
for long-term care costs), and critical illness and long-term care riders, which can be attached to UL, VUL or IUL policies. Some of our
products include secondary guarantees, which are discussed more fully below. Generally, this segment has higher sales during the second
half of the year with the fourth quarter being the strongest. Mortality margins, morbidity margins, investment margins, expense margins
and surrender fees drive life insurance profits.
Similar to the annuity product classifications described above, life products can be classified as “fixed” (including indexed) or “variable”
contracts. This classification describes whether we or the contract holders bear the primary investment risk of the assets supporting the
policy. This also determines the manner in which we earn investment margin profits from these products, either as investment spreads
for fixed products or as asset-based fees charged to variable products.
Products
We offer four categories of life insurance products, consisting of:
UL and IUL
UL insurance products provide life insurance with account values that earn rates of return based on company-declared interest rates.
Contract holder account values are invested in our general account investment portfolio, so we bear the risk of investment performance.
We offer UL products, such as Lincoln LifeGuarantee® UL and Lincoln LifeGuarantee SUL. We also offer a UL BOLI product.
In a UL contract, contract holders typically have flexibility in the timing and amount of premium payments and the amount of death
benefit, provided there is sufficient account value to cover all policy charges for cost of insurance and expenses for the coming period.
Under certain contract holder options and market conditions, the death benefit amount may increase or decrease. Premiums received on
a UL product, net of expense loads and charges, are added to the contract holder’s account value and accrued with interest. The client
has access to their account value (or a portion thereof), less surrender charges and policy loan payoffs, through contractual liquidity
features such as loans, partial withdrawals and full surrenders. Loans and withdrawals reduce the death benefit amount payable and are
limited to certain contractual maximums (some of which are required under state law), and interest is charged on all loans. Our UL
contracts assess surrender charges against the policies’ account values for full or partial surrenders and certain policy changes that occur
during the contractual surrender charge period. Depending on the product selected, surrender charge periods can range from 0 to 25
years.
We also offer fixed IUL products that function similarly to a traditional UL policy, with the added flexibility of allowing contract holders
to have portions of their account values earn credits based on the performance of indexes such as the S&P 500® Index. These products
include Lincoln WealthPreserve® IUL, Lincoln WealthAccumulate® IUL and Lincoln WealthAdvantage® IUL.
As mentioned previously, we offer survivorship versions of our individual UL products, such as Lincoln LifeGuarantee SUL. These
products insure two lives with a single policy and pay death benefits upon the second death.
A UL policy with a lifetime secondary guarantee can stay in force, even if the base policy cash value is zero, as long as secondary
guarantee requirements have been met. These products include Lincoln LifeGuarantee UL and Lincoln LifeGuarantee SUL. The secondary
guarantee requirement is based on the payment of a required minimum premium or on the evaluation of a reference value within the
policy, calculated in a manner similar to the base policy account value, but using different expense charges, cost of insurance charges and
credited interest rates. The parameters for the secondary guarantee requirement are listed in the contract. As long as the contract holder
pays the minimum premium or funds the policy to a level that keeps this calculated reference value positive, the policy is guaranteed to
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stay in force. The reference value has no actual monetary value to the contract holder; it is only a calculated value used to determine
whether or not the policy will lapse should the base policy cash value be less than zero.
VUL
VUL products are UL products that provide a return on account values linked to an underlying investment portfolio of variable funds
offered through the product. The value of the variable portion of the contract holder’s account is driven by the performance of the
underlying variable funds chosen by the contract holder. As the return on the investment portfolio increases or decreases, the account
value of the VUL policy will increase or decrease. In addition, VUL products offer a fixed account option that is managed by us. As with
fixed UL products, contract holders have access, within contractual maximums, to account values through loans, withdrawals and
surrenders. Surrender charges are assessed during the surrender charge period, ranging from 0 to 20 years depending on the product.
Our single life VUL offerings include Lincoln AssetEdge® VUL and Lincoln VULONE insurance products. Our COLI products are also
VUL-type products.
We also offer survivorship versions of our individual VUL products, such as Lincoln SVULONE. These products insure two lives with a
single policy and pay death benefits upon the second death.
We offer lifetime guaranteed benefit riders with our Lincoln VULONE and Lincoln SVULONE products. The ONE rider features guarantee to
the contract holder that upon death, as long as secondary guarantee requirements have been met, the death benefit will be payable even if
the account value equals zero.
Our secondary guarantee benefits maintain the flexibility of a traditional UL or VUL policy, which allow a contract holder to take loans or
withdrawals. Although loans and withdrawals are likely to shorten the time period of the secondary guarantee, the guarantee is not
automatically or completely forfeited. The length of the guarantee may be increased at any time through additional excess premium
deposits. Reserves on UL and VUL products with secondary guarantees represented 38% and 37% of total life insurance in-force
reserves as of December 31, 2020 and 2019, respectively.
Linked-Benefit Life Products and Products with Critical Illness Riders
Lincoln MoneyGuard®, our linked-benefit life product, combines UL with long-term care insurance through the use of a rider or riders.
The policy rider allows the contract holder to accelerate death benefits on a tax-free basis in the event of a qualified long-term care need,
reducing the remaining death benefit, and, once the death benefit is exhausted, offers access to an additional pool of dollars that can be
used for qualified long-term care expenses. Certain policies also provide a reduced death benefit to the contract holder’s beneficiary if the
death benefit has been fully accelerated as long-term care benefits during the contract holder’s life.
Some life products provide for critical illness or long-term care insurance by the use of riders attached to UL, VUL or IUL policies.
These riders allow the contract holder to accelerate death benefits on a tax-free basis in the event of a qualified condition.
Term Life Insurance
Term life insurance provides a fixed death benefit for a scheduled period of time. Some of our term life insurance products give the
policyholder the option to reduce the death benefit at a future time. Scheduled policy premiums are required to be paid at least annually.
These products include Lincoln TermAccel® Level Term and Lincoln LifeElements® Level Term.
Distribution
The Life Insurance segment’s products are sold through LFD. LFD provides the Life Insurance segment with access to financial
intermediaries in the following primary distribution channels: wire/regional firms; independent planner firms (including LFN); financial
institutions; and managing general agents/independent marketing organizations. LFD distributes BOLI/COLI products and services to
banks and mid- to large-sized corporations, primarily through intermediaries who specialize in one or both of these markets and who are
serviced through a network of internal and external LFD sales professionals.
Competition
The life insurance market is very competitive and consists of many companies with no one company dominating the market for all
products. Principal competitive factors include product features, price, underwriting and issue process, customer service and insurers’
financial strength. With our broad distribution network, we compete in the three primary needs of life insurance: death benefit
protection, accumulation and linked benefits (MoneyGuard). In addition, we use automated underwriting within a defined criteria as well as
LincXpress®, a simplified issue process, both of which are seen as marketplace competitive advantages.
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Underwriting
In the context of life insurance, underwriting is the process of evaluating medical and non-medical information about an individual and
determining the effect these factors statistically have on mortality. This process of evaluation is often referred to as risk classification. Of
course, no one can accurately predict how long any individual will live, but certain risk factors can affect life expectancy and are evaluated
during the underwriting process.
Claims Administration
Claims service is handled primarily in-house, and claims examiners are assigned to each claim notification based on coverage amount, type
of claim and the experience of the examiner. Claims meeting certain criteria are referred to senior claims examiners. A formal quality
assurance program is carried out to ensure the consistency and effectiveness of claims examining activities. A network of in-house legal
counsel, compliance officers, medical personnel and an anti-fraud investigative unit also support claims examiners. A special team of
claims examiners, in conjunction with claims management, focus on more complex claims matters such as claims incurred during the
contestable period, beneficiary disputes and litigated claims.
Overview
GROUP PROTECTION
The Group Protection segment offers group non-medical insurance products and services, including short- and long-term disability,
statutory disability and paid family medical leave administration and absence management services, term life, dental, vision and accident
and critical illness benefits and services to the employer marketplace through various forms of employee-paid and employer-paid plans.
Group Protection markets its products and services to employer groups of all sizes, from small companies with fewer than 100 employees
to large employers with 10,000 or more employees, with enhanced disability and absence management competency.
Products
Disability Insurance and Services
We offer insured coverage for, as well as administrative services for employer self-funded, short- and long-term employer-sponsored
group disability insurance, which protects an employee against loss of wages due to illness or injury. Short-term disability insurance
generally provides weekly benefits for up to 26 weeks following a short waiting period, ranging from 1 to 30 days. Long-term disability
insurance provides benefits following a longer waiting period, usually between 90 and 180 days and provides benefits for a longer period,
ranging from 2 years to normal (Social Security) retirement age. The monthly benefits provided are subject to reduction when Social
Security benefits are also paid. We also provide insured coverage for, as well as administrative services for employer self-funded, state-
specific statutory disability programs and statutory paid family leave programs as legislation is passed and implemented.
Absence Management
We offer a robust portfolio of absence management services to help employers manage their state and federal family medical and
company leave programs (paid and unpaid), as well as accommodation services that help employers identify accommodations that could
be made to help claimants return to work (e.g., assistive devices, ergonomic assessments, etc.). Our comprehensive and compliant
solutions, with ease of intake, provide coordinated and integrated management expertise to handle both leave and disability events.
Life Insurance
We offer employer-sponsored group term life insurance products including basic, optional and voluntary term life insurance to employees
and their dependents. Additional benefits may be provided in the event of a covered individual’s accidental death or dismemberment.
Dental and Vision
We offer a variety of employer-sponsored group dental insurance plans, which cover a portion of the cost of eligible dental procedures
for employees and their dependents. Products offered include: indemnity coverage, which does not distinguish benefits based on a
dental provider’s participation in a network arrangement; Preferred Provider Organization (“PPO”) products, on an insured and
administrative services only basis, that do reflect the dental provider’s participation in the PPO network arrangement, including an
agreement with network fee schedules; a Dental Health Maintenance Organization product that limits benefit coverage to a closed panel
of network providers; an in-network-only option that limits benefit coverage to providers in certain states; and self-funded options for
groups with more than 200 employees.
We offer comprehensive employer-sponsored fully insured vision plans with a wide range of benefits for protecting employees’ and their
covered dependents’ sight and vision health. All plans provide access to a national network of providers, with in and out-of-network
benefits.
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Accident and Critical Illness Insurance
We offer employer-sponsored group accident insurance products for employees and their covered dependents. This product is
predominantly purchased on an employee-paid basis. Accident insurance provides scheduled benefits for over 30 types of benefit triggers
related to accidental causes, including sports-related injuries, and is available for non-occupational accidents exclusively or on a 24-hour
coverage basis.
We also offer employer-sponsored group critical illness insurance to employees and their covered dependents. This product is
predominantly purchased on an employee-paid basis. The coverage provides for lump sum payouts upon the occurrence of one of the
specified critical illness benefit triggers covered within a critical illness insurance policy. This product also includes benefits and services
that assist employees and their family members in prevention, early detection and treatment of critical illness events.
Distribution
The Group Protection segment’s products are marketed primarily through a national distribution system. The managers and marketing
representatives develop business through employee benefit brokers, consultants, TPAs and other employee benefit firms that work with
employers to provide access to our products.
Competition
The group protection marketplace is very competitive. Principal competitive factors include particular product features, price, quality of
customer service and claims management, technological capabilities, quality and efficiency of distribution and financial strength ratings.
In this market, the Group Protection segment competes nationally with a number of major companies and regionally with other
companies offering all or some of the products within our product set. In addition, there is competition in attracting brokers to actively
market our products and attracting and retaining sales representatives to sell our products. Key competitive factors in attracting brokers
include product offerings and features, financial strength, support services and compensation.
Underwriting
The Group Protection segment’s underwriters evaluate the risk characteristics of each employer group. Generally, the relevant
characteristics evaluated include employee census information (such as age, gender, income and occupation), employer industry
classification, geographic location, benefit design elements and other factors. The segment employs detailed underwriting policies,
guidelines and procedures designed to assist the underwriter to properly assess and quantify risks. Individual underwriting techniques
(including evaluation of individual medical history information) may be used on certain covered individuals selecting benefit amounts that
are above guarantee issue limits set forth in the insurance policies. For voluntary and other forms of employee paid coverages, minimum
participation requirements are used to obtain a better spread of risk and minimize the risk of anti-selection.
Claims Administration
Claims for the Group Protection segment are managed by in-house claim specialists. Claims are evaluated for eligibility and payment of
benefits pursuant to the group insurance contract and in compliance with federal and state regulations. Disability claims management is
especially important to segment results, as results depend on both the incidence and the length of approved disability claims. The
segment employs a variety of clinical experts, including employee and contract medical professionals and rehabilitation specialists, to
evaluate medically supported functional capabilities and develop return to work plans. The accuracy and speed of life claims are
important customer service and risk management factors. Some life policies provide for the waiver of premium coverage in the event of
the insured’s disability where our disability claims management expertise is utilized. Dental claims management focuses on assisting plan
administrators and members with the rising costs of insurance by utilizing tools to optimize dental claims payment accuracy through
advanced claims review and validation, improved data analysis, enhanced clinical review of claims and provider utilization monitoring.
OTHER OPERATIONS
Other Operations includes the financial data for operations that are not directly related to the business segments. Other Operations
includes investments related to the excess capital in our insurance subsidiaries; corporate investments; benefit plan net liability; the results
of certain disability income business; our run-off Institutional Pension business in the form of group annuity and insured funding-type of
contracts; debt; and strategic digitization expense. For more information on our strategic digitization initiative, see “Introduction –
Executive Summary – Significant Operational Matters” in the MD&A.
REINSURANCE
Our reinsurance strategy is designed to protect our insurance subsidiaries against the severity of losses on individual claims and unusually
serious occurrences in which a number of claims produce an aggregate extraordinary loss. Although reinsurance does not discharge the
insurance subsidiaries from their primary liabilities to their contract holders for losses insured under the insurance policies, it does make
the assuming reinsurer liable to the insurance subsidiaries for the reinsured portion of the risk. Because we bear the risk of nonpayment
9
by one or more of our reinsurers, we primarily cede reinsurance to well-capitalized, highly rated unaffiliated reinsurers. We also utilize
inter-company reinsurance agreements to manage our statutory capital position as well as our hedge program for variable annuity
guarantees. These inter-company agreements do not have an effect on our consolidated financial statements.
As of December 31, 2020, the policy for our reinsurance program was to retain up to $20 million on a single insured life. As the amount
we retain varies by policy, we reinsured 17% of the mortality risk on newly issued life insurance contracts in 2020. As of December 31,
2020, 33% of our total individual life in-force amount was reinsured.
Some portions of our annuity business have been reinsured on either a coinsurance or a modified coinsurance (“Modco”) basis with other
companies to limit our exposure associated with fixed and variable annuities. In a coinsurance program, the reinsurer shares
proportionally in all financial terms of the reinsured policies (i.e., premiums, expenses, claims, etc.) based on their respective percentage of
the risk. In a Modco program, we as the ceding company retain the reserves, as well as the assets backing those reserves, and the
reinsurer shares proportionally in all financial terms of the reinsured policies based on their respective percentage of the risk.
In addition, we acquire other reinsurance to cover products other than as discussed above with retentions and limits that management
believes are appropriate for the circumstances. For example, we use reinsurance to cover larger life and disability claims in our Group
Protection business.
We obtain reinsurance from a diverse group of reinsurers, and we monitor concentration and financial strength ratings of our principal
reinsurers. Protective, Athene Holding Ltd. (“Athene”) and Swiss Re Life & Health America, Inc. (“Swiss Re”) represent our largest
reinsurance exposures. For more information regarding our reinsurance arrangements and exposure, see “Reinsurance” in the MD&A
and Note 9. For risks involving reinsurance, see “Item 1A. Risk Factors – Operational Matters – We face risks of non-collectability of
reinsurance and increased reinsurance rates, which could materially affect our results of operations.”
RESERVES
The applicable insurance laws under which insurance companies operate require that they report, as liabilities, policy reserves to meet
future obligations on their outstanding policies. These reserves are the amounts that, with the additional premiums to be received and
interest thereon compounded annually at certain assumed rates, are calculated to be sufficient to meet the various policy and contract
obligations as they mature. These laws specify that the reserves shall not be less than reserves calculated using certain specified mortality
and morbidity tables, interest rates and methods of valuation. From time to time, the insurance laws, regulations, or regulatory guidance
that specify the mortality and morbidity tables, interest rates and methods of valuation may be changed or interpreted differently, which
may result in changes in the required reserves of our insurance subsidiaries. For more information on reserves, see “Critical Accounting
Policies and Estimates – Derivatives – GLB” and “Critical Accounting Policies and Estimates – Future Contract Benefits and Other
Contract Holder Obligations” in the MD&A. For information on risks regarding changes in regulations, see “Item 1A. Risk Factors –
Legislative, Regulatory and Tax – Our businesses are heavily regulated and changes in regulation and in supervisory and enforcement
policies may affect our insurance subsidiary capital requirements, reduce our profitability, limit our growth or otherwise adversely affect
our business, results of operations and financial condition.”
See “Regulatory” below for information on permitted practices and proposed regulations that may impact the amount of statutory
reserves necessary to support our current insurance liabilities.
For risks related to reserves, see “Item 1A. Risk Factors – Market Conditions – Changes in interest rates and sustained low interest rates
may cause interest rate spreads to decrease, impacting our profitability, and make it more challenging to meet certain statutory
requirements, and changes in interest rates may also result in increased contract withdrawals” and “Item 1A. Risk Factors – Operational
Matters – We face risks of non-collectability of reinsurance and increased reinsurance rates, which could materially affect our results of
operations.”
INVESTMENTS
An important component of our financial results is the return on investments. Our investment strategy is to balance the need for current
income with prudent risk management, with an emphasis on generating sufficient current income to meet our obligations. This approach
requires the evaluation of risk and expected return of each asset class utilized, while still meeting our income objectives. This approach
also permits us to be more effective in our asset-liability management because decisions can be made based upon both the economic and
current investment income considerations affecting assets and liabilities. Investments made by our insurance subsidiaries must comply
with the insurance laws and regulations of the states of domicile.
Derivatives are used primarily for hedging purposes and, to a lesser extent, income generation. Hedging strategies are employed for a
number of reasons including, but not limited to, hedging certain portions of our exposure to changes in our GDB, GWB and GIB
liabilities, interest rate fluctuations, the widening of bond yield spreads over comparable maturity U.S. government obligations and credit,
foreign exchange and equity risks. For additional information on our investments, including carrying values by category, quality ratings
and net investment income, see “Consolidated Investments” in the MD&A, as well as Notes 1 and 5.
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FINANCIAL STRENGTH RATINGS
The Nationally Recognized Statistical Ratings Organizations rate the financial strength of our principal insurance subsidiaries. Rating
agencies rate insurance companies based on financial strength and the ability to pay claims, factors more relevant to contract holders than
investors. We believe that the ratings assigned by nationally recognized, independent rating agencies are material to our operations.
There may be other rating agencies that also rate our insurance companies, which we do not disclose in our reports.
The insurer financial strength rating scales of A.M. Best, Fitch Ratings (“Fitch”), Moody’s Investors Service (“Moody’s”) and S&P Global
Ratings (“S&P”) are characterized as follows:
• A.M. Best – A++ to D
• Fitch – AAA to C
• Moody’s – Aaa to C
•
S&P – AAA to D
As of February 12, 2021, the financial strength ratings of our principal insurance subsidiaries, as published by the principal rating agencies
that rate us, were as follows:
A.M. Best
Fitch
Moody's
S&P
The Lincoln National Life Insurance Company (“LNL”)
A+
(2nd of 16)
A+
(5th of 19)
A1
(5th of 21)
AA-
(4th of 21)
Lincoln Life & Annuity Company of New York (“LLANY”)
A+
(2nd of 16)
A+
(5th of 19)
A1
(5th of 21)
AA-
(4th of 21)
Lincoln Life Assurance Company of Boston (“LLACB”)
A+
(2nd of 16)
N/A
N/A
AA-
(4th of 21)
First Penn-Pacific Life Insurance Company (“FPP”)
A
(3rd of 16)
A+
(5th of 19)
A1
(5th of 21)
A-
(7th of 21)
A downgrade of the financial strength rating of one of our principal insurance subsidiaries could affect our competitive position in the
insurance industry and make it more difficult for us to market our products, as potential customers may select companies with higher
financial strength ratings. See also “Item 1A. Risk Factors – Covenants and Ratings – A downgrade in our financial strength or credit
ratings could limit our ability to market products, increase the number or value of policies being surrendered and/or hurt our
relationships with creditors.”
All of our insurer financial strength ratings are on outlook stable. All of our ratings are subject to revision or withdrawal at any time by
the rating agencies, and therefore, no assurance can be given that our principal insurance subsidiaries can maintain these ratings. Each
rating should be evaluated independently of any other rating. Ratings are not recommendations to buy our securities. See “Review of
Consolidated Financial Condition – Liquidity and Capital Resources – Sources of Liquidity and Cash Flow” in the MD&A for a
discussion of our credit ratings.
Insurance Regulation
REGULATORY
Our insurance subsidiaries, like other insurance companies, are subject to regulation and supervision by the states, territories and
countries in which they are licensed to do business. The extent of such regulation varies, but generally has its source in statutes that
delegate regulatory, supervisory and administrative authority to supervisory agencies. In the U.S., this power is vested in state insurance
departments.
In supervising and regulating insurance companies, state insurance departments, charged primarily with protecting contract holders and
the public rather than investors, enjoy broad authority and discretion in applying applicable insurance laws and regulation for that
purpose. Our principal insurance subsidiaries, LNL, LLANY, LLACB and FPP, are domiciled in the states of Indiana, New York, New
Hampshire and Indiana, respectively.
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The insurance departments of the domiciliary states exercise principal regulatory jurisdiction over our insurance subsidiaries. The extent
of regulation by the states varies, but, in general, most jurisdictions have laws and regulations governing standards of solvency, adequacy
of reserves, reinsurance, capital adequacy, licensing of companies and agents to transact business, prescribing and approving policy forms,
regulating premium rates for some lines of business, prescribing the form and content of financial statements and reports, regulating the
type and amount of investments permitted and standards of business conduct. Insurance company regulation is discussed further in this
section under “Insurance Holding Company Regulation.”
As part of their regulatory oversight process, state insurance departments conduct periodic examinations, generally once every three to
five years, of the books, records, accounts and business practices of insurers domiciled in their states. Examinations are generally carried
out in cooperation with the insurance regulators of other states under guidelines promulgated by the National Association of Insurance
Commissioners (“NAIC”). State and federal insurance and securities regulatory authorities and other state law enforcement agencies and
Attorneys General also, from time to time, make inquiries and conduct examinations or investigations regarding the compliance by our
company, as well as other companies in our industry, with, among other things, insurance laws and securities laws. Our captive
reinsurance and reinsurance subsidiaries are subject to periodic financial examinations by their respective domiciliary state insurance
regulators. We have not received any material adverse findings resulting from state insurance department examinations of our insurance,
reinsurance and captive reinsurance subsidiaries conducted during the three-year period ended December 31, 2020.
State insurance laws and regulations require our U.S. insurance companies to file financial statements with state insurance departments
everywhere they do business, and the operations of our U.S. insurance companies and accounts are subject to examination by those
departments at any time. Our U.S. insurance companies prepare statutory financial statements in accordance with accounting practices
and procedures prescribed or permitted by these departments. The NAIC has approved a series of statutory accounting principles that
have been adopted, in some cases with minor modifications, by virtually all state insurance departments. Changes in these statutory
accounting principles can significantly affect our capital and surplus.
The NAIC’s adoption of the Valuation Manual that defines a principles-based reserving framework for newly issued life insurance
policies was effective January 1, 2017. Principles-based reserving places a greater weight on our past experience and anticipated future
experience and considers current economic conditions in calculating life insurance product reserves in accordance with statutory
accounting principles. We adopted the framework for our newly issued term business in 2017 and phased in the framework through
January 1, 2020, for all other newly issued life insurance products. We believe that these changes may reduce our future use of captive
reinsurance and reinsurance subsidiaries for reserve financing transactions for our life insurance business. In addition, the NAIC
implemented changes to the accounting, reserve and risk-based capital (“RBC”) regulations related to the variable annuity business that
went into effect in 2020, which impacted the level of reserves and required capital we hold on variable annuities (although the impacts
were not material upon adoption). These new regulations will also affect how statutory reserves and required capital for variable annuities
respond to changes in market conditions, including increased sensitivity to changes in interest rates, leading to more volatile movements
in certain market environments than under the prior regulations. Also, in August 2020, the NAIC approved changes to Actuarial
Guideline XLIX (“AG49”) that affect the way insurance companies are permitted to illustrate certain IUL products. We are required to
comply with the amended guideline, AG49-A, for any IUL products sold on, or after, December 14, 2020, and such compliance could
impact our sales of such products. The NAIC is also considering modifications to (i) the NAIC RBC capital charges for bonds, which
may impact the level of capital we are required to hold; and (ii) the economic scenario generator (“ESG”) used to calculate life and
annuity reserves according to the Valuation Manual (e.g., VM-20 and VM-21) and required capital for certain annuities and single
premium life insurance products and variable annuities and similar products, which could affect the level and volatility of statutory
reserves and required capital for products in scope. For more information, see “Item 1A. Risk Factors – Legislative, Regulatory and Tax
– Our businesses are heavily regulated and changes in regulation and in supervisory and enforcement policies may affect our insurance
subsidiary capital requirements, reduce our profitability, limit our growth or otherwise adversely affect our business, results of operations
and financial condition.” We are monitoring all potential changes and evaluating the potential impact they could have on our product
offerings, financial condition and results of operations.
For more information on statutory reserving and our use of captive reinsurance structures, see “Review of Consolidated Financial
Condition – Liquidity and Capital Resources – Sources of Liquidity and Cash Flow – Insurance Subsidiaries’ Statutory Capital and
Surplus” in the MD&A.
Insurance Holding Company Regulation
LNC and its primary insurance subsidiaries are subject to regulation pursuant to the insurance holding company laws of the states of
Indiana, New York and New Hampshire. These insurance holding company laws generally require an insurance holding company and
insurers that are members of such insurance holding company’s system to register with the insurance department authorities, to file with
it certain reports disclosing information, including their capital structure, ownership, management, financial condition and certain inter-
company transactions, including material transfers of assets and inter-company business agreements, and to report material changes in
that information. These laws also require that inter-company transactions be fair and reasonable and, under certain circumstances, prior
approval of the insurance departments must be received before entering into an inter-company transaction. Further, these laws require
that an insurer’s contract holders’ surplus following any dividends or distributions to shareholder affiliates is reasonable in relation to the
insurer’s outstanding liabilities and adequate for its financial needs.
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In general, under state holding company regulations, no person may acquire, directly or indirectly, a controlling interest in our capital
stock unless such person, corporation or other entity has obtained prior approval from the applicable insurance commissioner for such
acquisition of control. Pursuant to such laws, in general, any person acquiring, controlling or holding the power to vote, directly or
indirectly, 10% or more of the voting securities of an insurance company, is presumed to have “control” of such company. This
presumption may be rebutted by a showing that control does not exist in fact. The insurance commissioner, however, may find that
“control” exists in circumstances in which a person owns or controls a smaller amount of voting securities. To obtain approval from the
insurance commissioner of any acquisition of control of an insurance company, the proposed acquirer must file with the applicable
commissioner an application containing information regarding: the identity and background of the acquirer and its affiliates; the nature,
source and amount of funds to be used to carry out the acquisition; the financial statements of the acquirer and its affiliates; any potential
plans for disposition of the securities or business of the insurer; the number and type of securities to be acquired; any contracts with
respect to the securities to be acquired; any agreements with broker-dealers; and other matters.
Other jurisdictions in which our insurance subsidiaries are licensed to transact business may have similar or additional requirements for
prior approval of any acquisition of control of an insurance or reinsurance company licensed or authorized to transact business in those
jurisdictions. Additional requirements in those jurisdictions may include re-licensing or subsequent approval for renewal of existing
licenses upon an acquisition of control. In addition, laws that govern the holding company structure also govern payment of dividends to
us by our insurance subsidiaries. See “Review of Consolidated Financial Condition – Liquidity and Capital Resources – Sources of
Liquidity and Cash Flow” in the MD&A for a discussion of restrictions on subsidiaries’ dividends and other payments.
Risk-Based Capital
The NAIC has adopted RBC requirements for life insurance companies to evaluate the adequacy of statutory capital and surplus in
relation to investment and insurance risks. The requirements provide a means of measuring the minimum amount of statutory surplus
appropriate for an insurance company to support its overall business operations based on its size and risk profile. There are five major
risks involved in determining the requirements:
Category
Asset risk – affiliates
Asset risk – others
Insurance risk
Interest rate risk, health credit
risk and market risk
Name
Description
C-0
C-1
C-2
C-3
Risk of assets’ default for certain affiliated investments
Risk of assets’ default of principal and interest or fluctuation in fair value
Risk of underestimating liabilities from business already written or inadequately pricing
business to be written in the future
Risk of losses due to changes in interest rate levels, risk that health benefits prepaid to
providers become the obligation of the health insurer once again and risk of loss due
to changes in market levels associated with variable products with guarantees
Business risk
C-4
Risk of general business
A company’s risk-based statutory surplus is calculated by applying factors and performing calculations relating to various asset, premium,
claim, expense and reserve items. Regulators can then measure adequacy of a company’s statutory surplus by comparing it to the RBC
determined by the formula. Under RBC requirements, regulatory compliance is determined by the ratio of a company’s total adjusted
capital, as defined by the NAIC, to its company action level of RBC (known as the RBC ratio), also as defined by the NAIC.
Accordingly, factors that have an impact on the total adjusted capital of our insurance subsidiaries, such as the permitted practices
discussed above, will also affect their RBC levels. Four levels of regulatory attention may be triggered if the RBC ratio is insufficient:
•
•
•
•
“Company action level” – If the RBC ratio is between 75% and 100%, then the insurer must submit a plan to the regulator detailing
corrective action it proposes to undertake;
“Regulatory action level” – If the RBC ratio is between 50% and 75%, then the insurer must submit a plan, but a regulator may also
issue a corrective order requiring the insurer to comply within a specified period;
“Authorized control level” – If the RBC ratio is between 35% and 50%, then the regulatory response is the same as at the
“Regulatory action level,” but, in addition, the regulator may take action to rehabilitate or liquidate the insurer; and
“Mandatory control level” – If the RBC ratio is less than 35%, then the regulator must rehabilitate or liquidate the insurer.
As of December 31, 2020, the RBC ratios of LNL, LLANY, LLACB and FPP reported to their respective states of domicile and the
NAIC all exceeded the “company action level.” We believe that we will be able to maintain the RBC ratios of our insurance subsidiaries
in excess of “company action level” through prudent underwriting, claims handling, investing and capital management. However, no
assurances can be given that developments affecting the insurance subsidiaries, many of which could be outside of our control, will not
cause the RBC ratios to fall below our targeted levels. These developments may include, but may not be limited to: changes to the
manner in which the RBC ratio is calculated; new regulatory requirements for calculating reserves, such as principles-based reserving;
economic conditions leading to higher levels of impairments of securities in our insurance subsidiaries’ general accounts; and an inability
to finance life reserves such as the issuance of letters of credit (“LOCs”) supporting inter-company reinsurance structures.
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See “Item 1A. Risk Factors – Liquidity and Capital Position – A decrease in the capital and surplus of our insurance subsidiaries may
result in a downgrade to our credit and insurer financial strength ratings” and “Item 1A. Risk Factors – Legislative, Regulatory and Tax –
Our businesses are heavily regulated and changes in regulation and in supervisory and enforcement policies may affect our insurance
subsidiary capital requirements, reduce our profitability, limit our growth or otherwise adversely affect our business, results of operations
and financial condition.”
Privacy Regulations
In the course of our business, we collect and maintain personal data from our customers including personally identifiable non-public
financial and health information, which subjects us to regulation under numerous privacy laws. These laws require that we institute
certain policies and procedures in our business to safeguard this information from improper use or disclosure. The laws vary by
jurisdiction, and it is expected that additional regulations will continue to be enacted. In March 2017, New York’s cybersecurity
regulation for financial services institutions, including banking and insurance entities, became effective, and on October 24, 2017, the
NAIC adopted the Insurance Data Security Model Law, which states are adopting versions of, establishing new standards for data
security and for the investigation of and notification to insurance commissioners of cybersecurity events. Other states have proposed or
adopted broad privacy legislation that applies to all types of businesses, including California, which passed the California Consumer
Privacy Act in June 2018 and the California Privacy Rights Act in November 2020. Both laws grant new rights to California consumers
regarding their personal information. In addition, the European General Data Protection Regulation adopted by the European
Commission became effective in May 2018. While we employ robust and tested privacy and information security programs, as regulators
establish further regulations for addressing consumer and customer privacy, we may need to amend our policies and adapt our internal
procedures. See “Item 1A. Risk Factors – Legislative, Regulatory and Tax – Compliance with existing and emerging privacy regulations
could result in increased compliance costs and/or lead to changes in business practices and policies, and any failure to protect the
confidentiality of consumer and client information could adversely affect our reputation and have a material adverse effect on our
business, financial condition and results of operations.” For information regarding cybersecurity risks, see “Item 1A. Risk Factors –
Operational Matters – Our information systems may experience interruptions, breaches in security and/or a failure of disaster recovery
systems that could result in a loss or disclosure of confidential information, damage to our reputation and impairment of our ability to
conduct business effectively.”
Federal Initiatives
The U.S. federal government does not directly regulate the insurance industry; however, federal initiatives from time to time can impact
the insurance industry. The marketplace continues to evolve in the changing regulatory environment.
Financial Reform Legislation
Since it was enacted in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) has imposed
considerable reform in the financial services industry. The ongoing implementation continues to present challenges and uncertainties for
financial market participants. For instance, the Dodd-Frank Act and corresponding global initiatives imposed significant changes to the
regulation of derivatives transactions, which we use to mitigate many types of risk in our business. Significantly, swap documentation and
processing requirements continue to change in light of rules for margining uncleared swaps. As we prepare to comply with requirements
to post initial margin beginning in September 2021, we continue to evaluate the ways we will be required to manage our derivatives
trading and the attendant liquidity requirements. For more information, see “Item 1A. Risk Factors – Legislative, Regulatory and Tax –
Implementation of the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act relating to the regulation of
derivatives transactions will subject us to substantial additional federal regulation, and we cannot predict the effect on our business, results
of operations, cash flows or financial condition until final implementation.”
Our trading activities are also affected by the scheduled phaseout of LIBOR (the publication of which is now scheduled to cease by June
2023) and the use of alternative reference rates and related adjustments. We continue to prepare for and monitor developments regarding
these changes in order to reduce potential disruptions. As financial services regulatory reform continues to evolve in the U.S. and abroad,
and the marketplace continues to respond, the extent to which our derivatives costs and strategies may change and the extent to which
those changes may affect the range or pricing of our products remains uncertain.
In addition, the Dodd-Frank Act directed the Securities and Exchange Commission (“SEC”) to study the implications resulting from the
different standards applicable to broker-dealers and investment advisers and empowered the SEC to adopt a uniform fiduciary standard.
In January 2011, the SEC released its study on the obligations and standards of conduct of financial professionals. The SEC staff initially
recommended establishing a uniform fiduciary standard for investment advisers and broker-dealers when providing investment advice
about securities, including guidance for principal trading and definitions of the duties of loyalty and care owed to retail customers that
would be consistent with the standard that currently applies to investment advisers. Then, in June 2019, pursuant to the authority granted
by the Dodd-Frank Act, the SEC adopted “Regulation Best Interest,” which established a higher standard of care and disclosure for
broker-dealers when making recommendations to retail customers, but did not create an explicit fiduciary duty. For more information,
see “SEC Rules and Other Regulations relating to the Standard of Care Applicable to Investment Advisers and Broker-Dealers” below.
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Additional provisions of the Dodd-Frank Act include, among other things, the creation of a new Consumer Financial Protection Bureau
to protect consumers of certain financial products; and changes to certain corporate governance rules. The Federal Insurance Office
established under the Dodd-Frank Act issues annually a wide-ranging report on the state of insurance regulation in the U.S., together with
a series of recommendations on ways to monitor and improve the regulatory environment. The ultimate impact of these
recommendations on our business is undeterminable at this time.
SEC Rules and Other Regulations relating to the Standard of Care Applicable to Investment Advisers and Broker-Dealers
In 2016, the Department of Labor (“DOL”) released the DOL Fiduciary Rule, which became effective in 2017 and substantially
expanded the range of activities considered to be fiduciary investment advice under the Employee Retirement Income Security Act of
1974 (“ERISA”) and the Internal Revenue Code. The DOL Fiduciary Rule was subsequently vacated by the U.S. Court of Appeals for
the Fifth Circuit (the “Fifth Circuit”) in March 2018, and in June 2018, the Fifth Circuit issued a mandate stating that the original
definition of “fiduciary,” including the original five-part test, would apply going forward.
In 2019, the SEC approved “Regulation Best Interest,” including a new standard of conduct for broker-dealers under the Securities
Exchange Act of 1934, as amended (“Exchange Act”), which requires a broker-dealer to act in the best interest of a retail customer when
making a recommendation of any securities transaction, without putting its financial interests ahead of the interests of a retail customer.
The final rule includes guidance on what constitutes a “recommendation” and a definition of who would be a “retail customer” in
addition to provisions setting forth certain required disclosures, policies and procedures to identify conflicts of interest, and customer-
specific best interest obligations.
In addition, the SEC approved the use of a new disclosure document, the customer or client relationship summary, or Form CRS. Form
CRS is intended to provide retail investors with information about the nature of their relationship with their investment professional and
supplements other more detailed disclosures, including existing Form ADV for advisers and the new disclosures under Regulation Best
Interest for broker-dealers. Regulation Best Interest and Form CRS became effective as of September 10, 2019, with a transition period
for compliance through June 30, 2020, as of which date broker-dealers were required to be compliant.
Finally, the SEC issued interpretative guidance regarding an investment adviser’s fiduciary obligation under the Advisers Act. The
guidance indicates that investment advisers have a fiduciary duty to their clients that includes both a duty of care and a duty of loyalty and
further describes an investment adviser’s responsibilities under these fiduciary duties.
In June 2020, the DOL proposed a new prohibited transaction exemption, which was finalized in December 2020, and will allow the
payment of compensation to investment advice fiduciaries who comply with the requirements of the new exemption. The new
exemption generally tracks the standard set forth in Regulation Best Interest and went into effect on February 16, 2021. It is uncertain
whether there will be efforts to revise the new rule in the future.
In addition to the SEC and DOL rules, the NAIC and several states, including Massachusetts, Nevada, New Jersey and New York, have
either enacted or proposed laws and regulations requiring investment advisers, broker-dealers and/or agents to meet a higher standard of
care and provide additional disclosures when providing advice to their clients. The recently enacted state laws and regulations have
resulted in, and upon adoption by other states such laws and regulations may result in, additional requirements related to the sale of our
products. Additional disclosure and other requirements could adversely affect our business by causing us to reevaluate or change certain
business practices or otherwise.
If any revised DOL fiduciary rule or any additional new rules that are implemented are more onerous than Regulation Best Interest, or are
not coordinated with Regulation Best Interest, the impact on our business could be substantial. While we continue to monitor and
evaluate the various proposals, we cannot predict what other proposals may be made, or what new legislation or regulation may be
introduced or become law. Therefore, until such time as final rules or laws are in place, the potential impact on our business is uncertain.
Federal Tax Legislation
In late 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The Tax Act resulted in significant reforms for corporations
(in addition to individuals), including a number of provisions that directly impacted insurance companies. The vast majority of the
changes became effective January 1, 2018. Throughout 2020, the Internal Revenue Service and U.S. Treasury finalized published
guidance on the various provisions of the Tax Act. The issuance of this and prior guidance has not changed our interpretation and
related implementation of the law changes in the Tax Act.
Following the Presidential election in November 2020, the potential exists for tax legislative and regulatory changes, including reversing a
number of provisions in the Tax Act. The new Administration has a tax plan that includes increasing the marginal corporate tax rate to
28%, imposing a minimum tax on the financial profits of corporations, and a variety of other business-related proposals. Also included in
the plan is an increase in the top marginal tax rate for individuals, taxing capital gains at ordinary-income rates for high-income earners,
changes to the estate tax, and tax credits and incentives for low and middle-income retirement savers.
15
These tax policy changes are currently only in proposal form. Until enacted into the tax law, the potential impact on our business is
uncertain. The new Administration has a number of non-tax policy priorities, so the timing of any action on tax legislative changes is
difficult to predict. Outside of broader tax reform aligned to the reversal of specific provisions of the Tax Act, the potential exists for
smaller, more-targeted tax law changes in the nearer term. We will continue to be actively engaged with policymakers including the
incoming Administration to ensure the impacts of tax policy changes on our business and our customers are well understood.
Outside of potential tax law changes, the uncertainty of federal funding and the future of the Social Security Disability Insurance
(“SSDI”) program can have a substantial impact on the entire group benefit market because SSDI benefits are a direct offset to the
benefits paid under group disability policies. Congress alleviated some of this uncertainty by passing the Bipartisan Budget Act of 2015.
As a result, the Social Security Administration’s 2020 Annual Report projects that the SSDI reserves will not be depleted until 2035.
Health Care Reform Legislation
In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, which was subsequently amended by
the Health Care and Education Reconciliation Act. This legislation, as well as subsequent state and federal laws and regulations, includes
provisions that provide for additional taxes to help finance the cost of these reforms and substantive changes and additions to health care
and related laws, which could potentially impact some of our lines of business. We continue to monitor any efforts by the government to
repeal or replace provisions of the Patient Protection and Affordable Care Act and the effect those efforts may have on our businesses.
Patriot Act
The USA PATRIOT Act of 2001 includes anti-money laundering and financial transparency laws as well as various regulations applicable
to broker-dealers and other financial services companies, including insurance companies. Financial institutions are required to collect
information regarding the identity of their customers, watch for and report suspicious transactions, respond to requests for information
by regulatory authorities and law enforcement agencies and share information with other financial institutions. As a result, we are
required to maintain certain internal compliance practices, procedures and controls.
SECURE Act
In December 2019, President Trump signed into law the Setting Every Community Up for Retirement Enhancement Act (the “SECURE
Act”). Most of the provisions of the SECURE Act were effective for plan years beginning after December 31, 2019. Among other
things, the provisions of the SECURE Act make it easier for employers to offer lifetime income options in defined contribution
retirement plans, facilitate the ability of small employers to offer access to retirement savings vehicles to their employees and increase
opportunities for workers to save by enhancing retirement plan automatic enrollment and escalation features. We believe that the
financial services industry will benefit from the adoption of the SECURE Act through continued or increased savings in retirement and
annuity solutions, including through the utilization of Lincoln’s suite of offerings.
ERISA Considerations
ERISA is a comprehensive federal statute that applies to U.S. employee benefit plans sponsored by private employers and labor unions.
Plans subject to ERISA include pension and profit-sharing plans and welfare plans, including health, life and disability plans. ERISA
provisions include reporting and disclosure rules, standards of conduct that apply to plan fiduciaries and prohibitions on transactions
known as “prohibited transactions,” such as conflict-of-interest transactions and certain transactions between a benefit plan and a party in
interest. ERISA also provides for a scheme of civil and criminal penalties and enforcement. Our insurance, asset management, plan
administrative services and other businesses provide services to employee benefit plans subject to ERISA, including services where we
may act as an ERISA fiduciary. In addition, because certain of our businesses provide products and services to ERISA plans, transactions
with those plans are subject to ERISA’s prohibited transaction rules, which may affect our ability to enter into transactions, or the terms
on which transactions may be entered into, with such plans, even if the business entering into the transaction is unrelated to the business
giving rise to party-in-interest status.
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Broker-Dealer and Securities Regulation
In addition to being registered under the Securities Act of 1933, some of our separate accounts as well as mutual funds that we sponsor
are registered as investment companies under the Investment Company Act of 1940, and the shares of certain of these entities are
qualified for sale in some or all states and the District of Columbia. We also have subsidiaries that are registered as broker-dealers under
the Exchange Act and are subject to federal and state regulation, including, but not limited to, the Financial Industry Regulation
Authority’s (“FINRA”) net capital rules. In addition, we have subsidiaries that are registered investment advisers under the Investment
Advisers Act of 1940. Agents, advisers and employees registered or associated with any of our broker-dealer subsidiaries are subject to
the Exchange Act and to examination requirements and regulation by the SEC, FINRA and state securities commissions. Regulation also
extends to various LNC entities that employ or control those individuals. The SEC and other governmental agencies and self-regulatory
organizations, as well as state securities commissions in the U.S., have the power to conduct administrative proceedings that can result in
censure, fines, the issuance of cease-and-desist orders or suspension and termination or limitation of the activities of the regulated entity
or its employees. For more information about regulatory and litigation matters, see Note 14.
Environmental Considerations
Federal, state and local environmental laws and regulations apply to our ownership and operation of real property. Inherent in owning
and operating real property are the risks of hidden environmental liabilities and the costs of any required clean-up. Under the laws of
certain states, contamination of a property may give rise to a lien on the property to secure recovery of the costs of clean-up, which could
adversely affect our commercial mortgage lending. In several states, this lien has priority over the lien of an existing mortgage against
such property. In addition, in some states and under the federal Comprehensive Environmental Response, Compensation, and Liability
Act of 1980 (“CERCLA”), we may be liable, as an “owner” or “operator,” for costs of cleaning-up releases or threatened releases of
hazardous substances at a property mortgaged to us. We also risk environmental liability when we foreclose on a property mortgaged to
us. Federal legislation provides for a safe harbor from CERCLA liability for secured lenders that foreclose and sell the mortgaged real
estate, provided that certain requirements are met. However, there are circumstances in which actions taken could still expose us to
CERCLA liability. Application of various other federal and state environmental laws could also result in the imposition of liability on us
for costs associated with environmental hazards.
We routinely conduct environmental assessments for real estate we acquire for investment and before taking title through foreclosure to
real property collateralizing mortgages that we hold. Although unexpected environmental liabilities can always arise, based on these
environmental assessments and compliance with our internal procedures, we believe that any costs associated with compliance with
environmental laws and regulations or any clean-up of properties would not have a material adverse effect on our results of operations.
Intellectual Property
We rely on a combination of copyright, trademark, patent and trade secret laws to establish and protect our intellectual property. We
have implemented a patent strategy designed to protect innovative aspects of our products and processes which we believe distinguish us
from competitors. We currently own several issued U.S. patents.
We have an extensive portfolio of trademarks and service marks that we consider important in the marketing of our products and
services, including, among others, the trademarks of the Lincoln National and Lincoln Financial names, the Lincoln silhouette logo and
the combination of these marks. Trademark registrations may be renewed indefinitely subject to continued use and registration
requirements. We regard our trademarks as valuable assets in marketing our products and services and intend to protect them against
infringement and dilution.
HUMAN CAPITAL MANAGEMENT
As of December 31, 2020, we had a total of 10,966 employees, all based in the United States. Our mission is to help Americans achieve
financial peace of mind by offering leading products and services. We believe that every move we make, including how we manage talent,
shapes the future we share with our customers, communities and investors. Accordingly, each of our employees has access to important
resources designed to, among other things, help them improve their well-being, understand the value of their work, develop their careers
and thrive in a diverse and inclusive environment. From the moment our employees become part of Lincoln, they’re empowered to “Be
Lincoln” by living and acting with integrity and optimism in their communities, relationships and daily interactions with colleagues and
clients. Our enterprise strategy is driven by continued focus on this unique employee culture, including the following key areas:
Diversity and Inclusion
We believe that diversity and inclusion are fundamental to our ability to deliver on our promise to help customers secure their financial
futures. Our diversity and inclusion strategy is designed to deliver outcomes based on objectives and milestones in our workplace,
marketplace and the broader communities we serve. This strategy ensures that a culture of diversity and inclusion permeates every level
of our organization as well as our interactions with partners and suppliers.
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Our Board of Directors provides executive oversight of stated priorities, progress and strategic plans to support diversity and inclusion
across the enterprise. Lincoln’s commitment to diversity and inclusion begins at the highest level of management as a formal expectation
of our leaders and all employees, as part of our performance management process. Our employees are actively involved in our efforts to
further diversity and inclusion at the company and beyond, through the work of our seven Business Resource Groups (“BRGs”). We
maintain our BRG chapters nationwide across seven categories: African American, Asian American, Latino, LGBTQ, People with
Disabilities, Veterans and Women. Each BRG is sponsored and supported by senior leaders across the enterprise.
Employee Feedback and Employee Engagement
We actively listen to our employees in a variety of ways, including enterprise-wide and department-specific engagement surveys and focus
groups, and we gather feedback on an ongoing basis. The Company conducts a comprehensive, company-wide engagement survey every
two years, and department-specific pulse surveys in the alternate years, to inform our human resources strategy, measure progress and
adjust plans, as necessary. We focus on equipping our managers to foster employee development and strengthen their voices. We
support our managers through tools, resources and development programs to help them be the best leaders possible. We have also
created tools to help managers develop and execute on targeted action plans to address areas of opportunity for their work groups.
Talent and Development
Our talent strategy supports Lincoln’s ability to identify, develop, engage, retain and reward the talent we need for success in a
competitive environment of constant change. Our employees work together with their managers to learn new skills, create an annual
individual development plan and shape their careers. Their collaborative efforts are backed by a variety of resources we make available
and guided by our Career Framework, which provides tools and resources to help employees discover, assess, plan and invest in their
careers.
Our vision is to foster a premier learning culture, one that enhances leadership effectiveness, accelerates employee development and helps
drive business performance. Employees can access a range of learning and development opportunities including numerous instructor-led,
self-paced and curated courses. We have partnered with Harvard Business Publishing, a subsidiary of Harvard Business School, to offer
courses specifically designed for our mid-level employees and senior level leaders. All Lincoln employees can also participate in Coursera,
a massive open online course provider that offers classes from some of the world’s top universities.
Total Rewards and Employee Well-Being
We invest in our employees’ futures by offering market-competitive compensation and a broad range of health and wellness programs as
well as wealth accumulation, financial health and protection plans. Our employees receive a personalized Your Total Rewards statement
that provides a comprehensive look at their direct and indirect compensation - the total investment that we make in them.
We offer paid time off and various flexible work arrangements, in addition to benefits and wellness programs focusing on the physical,
social and financial well-being of our employees. For eligible employees, such programs include:
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a medical plan with domestic partner eligibility, plus optional dental and vision, a health savings account with a company
contribution and a healthcare flexible spending account;
a well-being program provides access to personal health coaches, on-site health screenings and flu shots, discounts and
reimbursements for programs that promote health;
an employee assistance program (“EAP”);
paid parental leave and adoption assistance programs;
a dependent care flexible spending account;
access to Homework Connection which, provides one-on-one, on-demand homework help to students at no cost to employees;
dedicated Lincoln Financial Retirement Consultants to evaluate employee retirement readiness and help them map out ways to
improve;
our employee 401(k) plan with a company match and other convenient features; and
accident and critical illness insurance coverages, short- and long-term disability plans, and company-provided life insurance.
Health and Safety During COVID-19 Pandemic
To protect the health and safety of our employees and their loved ones during the COVID-19 pandemic, we took early action,
implementing comprehensive measures to safeguard employees in alignment with guidelines established by the U.S. Centers for Disease
Control and state and local governments in the locations in which we operate. Starting as early as February 2020, we implemented travel
restrictions, visitor vetting, social distancing and enhanced cleaning requirements. Soon after, in mid-March 2020, we moved to 99%
work-from-home for our employees. For the small population of essential employees who remain working in our offices, we have
implemented robust health and safety protocols, including providing masks, enhanced cleaning and requiring social distancing and in-
office location tracking for each individual.
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During the pandemic, we also implemented several policies and programs to enhance support for our employees, including Emergency
Leave Time, which provides additional time off for employees if needed, related to the impacts of COVID-19. We also waived insurance
co-payments for COVID-19 testing and telemedicine visits. Additionally, we increased internal communication regarding many of our
existing benefits and programs that could help employees during this challenging time, such as our free mental health and wellness
resources, including access to the EAP for employees and members of their households.
AVAILABLE INFORMATION
We file annual, quarterly and current reports, proxy statements and other documents with the SEC under the Exchange Act. The SEC
maintains a website that contains reports, proxy and information statements and other information regarding issuers, including LNC, that
file electronically with the SEC. The public can obtain any documents that we file with the SEC at www.sec.gov.
We also make available, free of charge, on or through our website, www.lfg.com, our Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K, including exhibits, and all amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to,
the SEC.
The information contained on our website is not included as part of, or incorporated by reference into, this report.
Item 1A. Risk Factors
You should carefully consider the risks described below before investing in our securities. The risks and uncertainties described below are
not the only ones facing our Company. Additional risks and uncertainties not presently known to us or that we currently deem
immaterial may also impair our business operations. If any of these risks actually occur, our business, financial condition and results of
operations could be materially affected. In that case, the value of our securities could decline substantially.
Market Conditions
The impacts of the COVID-19 pandemic have adversely affected and are expected to continue to adversely affect our business and results of operations, and the
future impacts of the COVID-19 pandemic on the company’s business, results of operations and financial condition remain uncertain.
The health, economic and business conditions precipitated by the worldwide COVID-19 pandemic during 2020 adversely affected, and
during 2021 are expected to continue to adversely affect, our earnings as well as our business, results of operations and financial
condition. As a result of the pandemic and ensuing conditions, we have experienced and expect to continue to experience higher
mortality, leading to an elevated incidence and level of life insurance claims. In addition, we have experienced and expect to continue to
experience an increase in short-term disability claims related to the pandemic, and, beginning in 2021, we expect we may experience an
increase in long-term disability claims due to the recessionary conditions and high levels of unemployment that emerged during 2020.
Increased life and disability claim levels adversely affect our earnings. We may also experience an increase in activity such as surrenders of
policies, missed premium payments or 401(k) hardship withdrawals due to changes in consumer behavior as a result of financial stress.
Because the vast majority of our employees continue to work from home, along with many of our vendors and customers, and such
conditions may continue well into 2021, our business operations may be adversely impacted, among other things, due to privacy incidents,
cybersecurity incidents, technological issues or operational disruptions on the part of our vendors, and we may experience distribution
disruptions as we continue to sell our products virtually.
The severe restriction in economic activity caused by the COVID-19 pandemic and increased level of unemployment in the United States
have contributed to increased volatility and uncertainty regarding expectations for the economy and markets going forward. Although
states have eased restrictions and the capital markets have mostly recovered, it is unclear when the economy will operate under normal or
near-normal conditions. In response to the economic impact of the COVID-19 pandemic, the Federal Reserve cut interest rates to near
zero in March 2020 and announced in September 2020 its intention to keep interest rates near zero for the foreseeable future. We expect
the continuation of the low interest rate environment to continue to adversely affect the interest margins of our businesses. For a
discussion of specific risks related to economic and market conditions and low interest rates see the additional risk factors under “Market
Conditions” below.
In addition, although the economic environment has improved from early in 2020, there could be continued weakness in the current
environment that could impact select corporate industries and parts of the commercial mortgage loan market. The current environment
could lead to increased credit defaults and/or negative ratings migrations, resulting in an increase to our allowance for credit losses and
additional write-downs of financial assets for impairments in our broader investment portfolio.
The impacts of the pandemic may also have the effect of increasing the likelihood and/or magnitude of many of the other risks described
below, including in particular the risks described under “Liquidity and Capital Position” and “Investments.” The ultimate impact on our
business, results of operations and financial condition depends on the severity and duration of the COVID-19 pandemic and related
health, economic and business impacts and actions taken by governmental authorities and other third parties in response, each of which is
uncertain, rapidly changing and difficult to predict.
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Weak conditions in the global capital markets and the economy generally may materially adversely affect our business and results of operations.
Our results of operations are materially affected by conditions in the global capital markets and the economy generally, both in the U.S.
and elsewhere around the world. Major central bank policy actions, slowing of global growth, trade policy and political policy uncertainty
remain key challenges for markets and our business. These macro-economic conditions have in the past and may in the future have an
adverse effect on us given our credit and equity market exposure. In the event of extreme prolonged market events, such as the global
credit crisis and recession that occurred during 2008 and 2009, we could incur significant losses. Even in the absence of a market
downturn, we are exposed to substantial risk of loss and ratings downgrades due to market volatility.
Factors such as consumer spending, business investment, domestic and foreign government spending, the volatility and strength of the
capital markets, the potential for inflation or deflation and uncertainty over domestic and foreign government actions all affect the
business and economic environment and, ultimately, the amount and profitability of our business. In an economic downturn
characterized by higher unemployment, lower disposable income, lower corporate earnings, lower business investment and lower
consumer spending, the demand for our financial and insurance products could be adversely affected. In addition, we have experienced
and expect to continue to experience an elevated incidence of claims and could experience an increase in lapses or surrenders of policies.
Our contract holders may choose to defer paying insurance premiums or stop paying insurance premiums altogether. Adverse changes in
the economy have in the past and could in the future affect earnings negatively and could have a material adverse effect on our business,
results of operations and financial condition.
Changes in interest rates and sustained low interest rates may cause interest rate spreads to decrease, impacting our profitability, and make it more challenging to
meet certain statutory requirements, and changes in interest rates may also result in increased contract withdrawals.
Interest rate fluctuations and/or a sustained period of low interest rates could negatively affect our profitability. Some of our products,
principally fixed annuities and UL, including linked-benefit UL, have interest rate guarantees that expose us to the risk that changes in
interest rates will reduce our spread, or the difference between the amounts that we are required to pay under the contracts and the
amounts we are able to earn on our general account investments intended to support our obligations under the contracts. Spreads are an
important component of our net income. Declines in our spread or instances where the returns on our general account investments are
not enough to support the interest rate guarantees on these products could have a material adverse effect on our businesses or results of
operations. In addition, low rates increase the cost of providing variable annuity living benefit guarantees, which could negatively affect
our variable annuity profitability.
In periods when interest rates are declining or remain at low levels, we may have to reinvest the cash we receive as interest or return of
principal on our investments in lower yielding instruments reducing our spread. Moreover, borrowers may prepay fixed-income
securities, commercial mortgages and mortgage-backed securities in our general account in order to borrow at lower market rates, which
exacerbates this risk. Lowering interest crediting rates helps to mitigate the effect of spread compression on some of our products.
However, because we are entitled to reset the interest rates on our fixed-rate annuities only at limited, pre-established intervals, and since
many of our contracts have guaranteed minimum interest or crediting rates, our spreads could still decrease. As of December 31, 2020,
37% of our annuities business, 80% of our retirement plan services business and 88% of our life insurance business with guaranteed
minimum interest or crediting rates were at their guaranteed minimums.
Our expectation for future spreads is an important component in the amortization of DAC and value of business acquired (“VOBA”) as
it affects the future profitability of the business. Currently, new money rates are at historically low levels, with the Federal Reserve
decreasing the target range for the federal funds rate in March 2020 to a range of 0.00% to 0.25%. Due to the continued low interest rate
environment, in 2020 we updated our interest rate assumptions for the second year in a row, which included lowering starting new money
rates and reducing our long-term new money investment yield assumption. As a result of these updates, we recorded unfavorable after-
tax unlocking during 2020, which was most pronounced in our Life Insurance segment. We cannot give assurance that persistent low
interest rates will not result in future unfavorable unlocking. For additional information on interest rate risks, see “Part II – Item 7A.
Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk.”
A decline in market interest rates could also reduce our return on investments that do not support particular policy obligations. During
periods of sustained lower interest rates, our recorded policy liabilities may not be sufficient to meet future policy obligations and may
need to be strengthened, thereby reducing net income in the affected reporting period. Accordingly, declining interest rates may
materially affect our results of operations, financial condition and cash flows and significantly reduce our profitability. In addition, a
decline in market interest rates may make it more challenging for us to pass certain asset adequacy tests related to statutory reserves, given
the required conservatism of some of the regulations with which we must comply. To meet these requirements, we may be required to
post asset adequacy reserves, which, depending on the size of the reserve, could materially affect our financial results.
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Increases in market interest rates may also negatively affect our profitability. In periods of rapidly increasing interest rates, we may not be
able to replace the assets in our general account with higher yielding assets needed to fund the higher crediting rates necessary to keep our
interest-sensitive products competitive. We, therefore, may have to accept a lower spread and thus lower profitability or face a decline in
sales and greater loss of existing contracts and related assets. Increases in interest rates may cause increased surrenders and withdrawals
of insurance products. In periods of increasing interest rates, policy loans and surrenders and withdrawals of life insurance policies and
annuity contracts may increase as contract holders seek to buy products with perceived higher returns. This process may lead to a flow of
cash out of our businesses. These outflows may require investments to be sold at a time when the prices of those assets are lower
because of the increase in market interest rates, which may result in realized investment losses. A sudden demand among consumers to
change product types or withdraw funds could lead us to sell assets at a loss to meet the demand for funds. Furthermore, unanticipated
increases in withdrawals and termination may cause a change in our DAC and VOBA assets due to a change in future expected
profitability, which would reduce net income. An increase in market interest rates could also have a material adverse effect on the value
of our investment portfolio, for example, by decreasing the estimated fair values of the fixed-income securities that comprise a substantial
portion of our investment portfolio. An increase in interest rates could also result in decreased fee income associated with a decline in the
value of variable annuity account balances invested in fixed-income funds.
Because the equity markets and other factors impact the profitability and expected profitability of many of our products, changes in equity markets and other
factors may significantly affect our business and profitability.
The fee income that we earn on variable annuities is based primarily upon account values, and the fee income that we earn on VUL
insurance policies is partially based upon account values. Because strong equity markets result in higher account values, strong equity
markets positively affect our net income through increased fee income. Conversely, a weakening of the equity markets results in lower
fee income and may have a material adverse effect on our results of operations and capital resources.
The increased fee income resulting from strong equity markets increases the estimated gross profits (“EGPs”) from variable insurance
products as do better than expected lapses, mortality rates and expenses. As a result, higher EGPs may result in lower net amortized
costs related to DAC, deferred sales inducements (“DSI”), VOBA, deferred front-end loads (“DFEL”) and changes in future contract
benefits. However, a decrease in the equity markets, as well as worse than expected lapses, mortality rates and expenses, depending upon
their significance, may result in higher net amortized costs associated with DAC, DSI, VOBA, DFEL and changes in future contract
benefits and may have a material adverse effect on our results of operations and capital resources. If we had unlocked our reversion to
the mean (“RTM”) assumption in the corridor as of December 31, 2020, we would have recorded favorable unlocking of approximately
$365 million, pre-tax, primarily within our Annuities segment. For further information about our RTM process, see “Critical Accounting
Policies and Estimates – DAC, VOBA, DSI and DFEL – Reversion to the Mean” in the MD&A.
Changes in the equity markets, interest rates and/or volatility affect the profitability of our products with guaranteed benefits; therefore, such changes may have a
material adverse effect on our business and profitability.
Certain of our variable annuity and fixed indexed annuity products include optional guaranteed benefit riders. These include GDB
(variable annuity only), GWB and GIB riders. Both the level of expected payments and expected total assessments used in calculating the
benefit reserves are affected by the equity markets. The liabilities related to fair value are impacted by changes in equity markets, interest
rates, volatility, foreign exchange rates and credit spreads. Accordingly, strong equity markets, increases in interest rates and decreases in
volatility will generally decrease the reserves calculated using fair value. Conversely, a decrease in the equity markets along with a decrease
in interest rates and an increase in volatility will generally result in an increase in the reserves calculated using fair value.
Increases in reserves would result in a charge to our earnings in the quarter in which the increase occurs. Therefore, we maintain a
customized dynamic hedge program that is designed to mitigate the risks associated with income volatility around the change in reserves
on guaranteed benefits. However, the hedge positions may not be effective to exactly offset the changes in the carrying value of the
guarantees due to, among other things, the time lag between changes in their values and corresponding changes in the hedge positions,
high levels of volatility in the equity markets and derivatives markets, extreme swings in interest rates, contract holder behavior different
than expected, a strategic decision to adjust the hedging strategy in reaction to extreme market conditions or inconsistencies between
economic and statutory reserving guidelines and divergence between the performance of the underlying funds and hedging indices.
In addition, we remain liable for the guaranteed benefits in the event that derivative or reinsurance counterparties are unable or unwilling
to pay, and we are also subject to the risk that the cost of hedging these guaranteed benefits increases, resulting in a reduction to net
income. These, individually or collectively, may have a material adverse effect on net income, financial condition or liquidity.
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Legislative, Regulatory and Tax
Our businesses are heavily regulated and changes in regulation and in supervisory and enforcement policies may affect our insurance subsidiary capital requirements,
reduce our profitability, limit our growth or otherwise adversely affect our business, results of operations and financial condition.
Our insurance subsidiaries are subject to extensive supervision and regulation in the states in which we do business. The insurance
departments of the domiciliary states exercise principal regulatory jurisdiction over our insurance subsidiaries. The extent of regulation by
the states varies, but, in general, most jurisdictions have laws and regulations governing standards of solvency, adequacy of reserves,
reinsurance, capital adequacy, licensing of companies and agents to transact business, prescribing and approving policy forms, regulating
premium rates for some lines of business, prescribing the form and content of statutory financial statements and reports, regulating the
type and amount of investments permitted, and standards of business conduct. In addition, state insurance holding company laws impose
restrictions on certain inter-company transactions and limitations on the amount of dividends that insurance subsidiaries can pay.
State insurance regulators and the NAIC regularly re-examine existing laws and regulations applicable to insurance companies and their
products. Changes in these laws and regulations, or in interpretations thereof, sometimes lead to changes in business practices or
additional expense, statutory reserves and/or RBC requirements for the insurer and, thus, could have a material adverse effect on our
financial condition and results of operations. For example, the NAIC is considering modifications to the ESG used to calculate life and
annuity reserves according to the Valuation Manual (e.g. VM-20 and VM-21) and required capital for certain annuities and single
premium life insurance products and variable annuities and similar products, which could affect the level and volatility of statutory
reserves and required capital for products in scope. The economic scenarios are a key input in the statutory reserve and required capital
calculations for certain products, such as variable annuities. If the NAIC adopts an ESG that produces scenarios with characteristics that
differ significantly from what the current ESG prescribed in these calculations would produce under the same circumstances, this could
have a significant impact on the statutory reserves and required capital for products in scope upon adoption as well as affect how the
statutory reserves and required capital for these products respond to changes in market conditions. We are monitoring all potential
changes and evaluating the potential impact they could have on our product offerings and financial condition and results of operations.
See “Item 1. Business – Regulatory – Insurance Regulation” for a discussion of additional changes under consideration and recent
changes implemented by the NAIC, including recent changes to principles-based reserving, changes to the accounting, reserve and RBC
regulations related to the variable annuity business, and changes to AG49, and the impact of such changes on our business.
Although we endeavor to maintain all required licenses and approvals, our businesses may not fully comply with the wide variety of
applicable laws and regulations or the relevant authority’s interpretation of the laws and regulations, which may change from time to time.
Also, regulatory authorities have relatively broad discretion to grant, renew or revoke licenses and approvals. If we do not have the
requisite licenses and approvals or do not comply with applicable regulatory requirements, the insurance regulatory authorities could
preclude or temporarily suspend us from carrying on some or all of our activities or impose substantial fines. Further, insurance
regulatory authorities have relatively broad discretion to issue orders of supervision, which permit such authorities to supervise the
business and operations of an insurance company. As of December 31, 2020, no state insurance regulatory authority had imposed on us
any material fines or revoked or suspended any of our licenses to conduct insurance business in any state or issued an order of
supervision with respect to our insurance subsidiaries that would have a material adverse effect on our results of operations or financial
condition.
Compliance with existing and emerging privacy regulations could result in increased compliance costs and/or lead to changes in business practices and policies, and
any failure to protect the confidentiality of consumer and client information could adversely affect our reputation and have a material adverse effect on our business,
financial condition and results of operations.
Complying with the numerous privacy laws and regulations to which we are subject and other existing, emerging and changing privacy
requirements could cause us to incur substantial costs or require us to change our business practices and policies. Non-compliance could
result in monetary penalties or significant legal liability. For more information, see “Item 1. Business – Regulatory – Privacy Regulations.”
Many of the associates who conduct our business have access to, and routinely process, personal information of clients through a variety
of media, including information technology systems. We rely on various internal processes and controls to protect the confidentiality of
consumer and client information that is accessible to, or in the possession of, our company and our associates. It is possible that an
associate could, intentionally or unintentionally, disclose or misappropriate confidential consumer or client information or our data could
be the subject of a cybersecurity attack. If we fail to maintain adequate internal controls or if our associates fail to comply with our
policies and procedures, misappropriation or intentional or unintentional inappropriate disclosure or misuse of consumer or client
information could occur. Such internal control inadequacies or non-compliance could materially damage our reputation or lead to
regulatory, civil or criminal investigations and penalties, which, in turn, could have a material adverse effect on our business, financial
condition and results of operations.
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In addition, we analyze customer data to better manage our business. There has been increased scrutiny, including from U.S. state and
federal regulators, regarding the use of “big data” techniques such as price optimization. In August 2020, members of the NAIC
unanimously adopted guiding principles on artificial intelligence, to inform and articulate general expectations for businesses,
professionals and stakeholders across the insurance industry as they implement artificial intelligence tools to facilitate operations. We
cannot predict what, if any, actions may be taken with regard to “big data,” but any inquiries and limitations could have a material impact
on our business, financial condition and results of operations.
Federal regulatory actions could result in substantial fines, penalties or prohibitions or restrictions on our business activities and could have a material adverse effect
on our business, results of operations or financial condition.
Our broker-dealer and investment adviser subsidiaries as well as our variable annuities and variable life insurance products, are subject to
regulation and supervision by the SEC and FINRA. Applicable laws and regulations generally grant supervisory agencies and self-
regulatory organizations broad administrative powers, including the power to limit or restrict the subsidiaries from carrying on their
businesses in the event that they fail to comply with such laws and regulations. The foregoing regulatory or governmental bodies, as well
as the DOL and others, have the authority to review our products and business practices and those of our agents, advisers, registered
representatives, associated persons and employees. In recent years, there has been increased scrutiny of insurance companies and their
affiliates by these bodies, which has included more extensive examinations, regular sweep inquiries and more detailed review of disclosure
documents. These regulatory or governmental bodies may bring regulatory or other legal actions against us if, in their view, our practices,
or those of our agents or employees, are improper. These actions can result in substantial fines, penalties or prohibitions or restrictions
on our business activities and could have a material adverse effect on our business, results of operations or financial condition.
Changes to laws or regulations could adversely affect our distribution model and may result in additional disclosure and other requirements related to the sale and
delivery of our products and services, which may adversely affect our business.
In 2019, the SEC approved “Regulation Best Interest,” including a new standard of conduct for broker-dealers under the Exchange Act,
which requires a broker-dealer to act in the best interest of a retail customer when making a recommendation of any securities
transaction, without putting its financial interests ahead of the interests of a retail customer. Among other things, the final rule includes
provisions setting forth certain required disclosures, policies and procedures to identify conflicts of interest, and customer-specific best
interest obligations. In addition, the SEC approved the use of a new disclosure document, Form CRS, which is intended to provide retail
investors with information about the nature of their relationship with their investment professional and supplements other more detailed
disclosures. Regulation Best Interest and Form CRS became effective as of September 10, 2019, with a transition period for compliance
through June 30, 2020, as of which date broker-dealers were required to be compliant. The adoption of Regulation Best Interest has not
had a material impact on our business to date.
In June 2020, the DOL proposed a new prohibited transaction exemption, which was finalized in December 2020, and will allow the
payment of compensation to investment advice fiduciaries who comply with the requirements of the new exemption. The new
exemption generally tracks the standard set forth in Regulation Best Interest and went into effect on February 16, 2021. It is uncertain
whether there will be efforts to revise the new rule in the future.
In addition to the SEC and DOL rules, the NAIC and several states have either enacted or proposed laws and regulations requiring
investment advisers, broker-dealers and/or agents to meet a higher standard of care and provide additional disclosures when providing
advice to their clients, resulting in additional requirements related to the sale of our products. For more information on these regulations,
see “Item 1. Business – Regulatory – Federal Initiatives – SEC Rules and Other Regulations relating to the Standard of Care Applicable to
Investment Advisers and Broker-Dealers.”
Additional disclosure and other requirements could adversely affect our business by causing us to reevaluate or change certain business
practices or otherwise. If any revised DOL fiduciary rule or any additional new rules that are implemented are more onerous than
Regulation Best Interest, or are not coordinated with Regulation Best Interest, the impact on our business could be substantial. While we
continue to monitor and evaluate the various proposals, we cannot predict what other proposals may be made, or what new legislation or
regulation may be introduced or become law. Therefore, until such time as final rules or laws are in place, the potential impact on our
business is uncertain.
Changes in U.S. federal income tax law could impact our tax costs and the products that we sell.
Changes in tax laws or interpretations of such laws could increase our corporate taxes and negatively impact our results of operations and
financial condition. Tax authorities may enact changes in tax law or issue new regulations or other pronouncements that could increase
our current tax burden and impose new taxes on our business. Guidance on previously enacted tax law changes could impact our
interpretations of existing law and also have an impact on our business.
Following the recent Presidential election, tax policy changes are being considered related to the taxation of individuals and corporations.
Changes to the individual tax system could affect the attractiveness of the products we sell, impacting our sales, product profitability and
financial results. An increase in the marginal corporate tax rate would negatively impact our earnings and free cash flows and also affect
the value of our recorded deferred tax balances.
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We continue to monitor and evaluate the various proposals included in the tax plan put forward by the new Administration, and also
those that are being considered by the various state and local jurisdictions as a direct or indirect result of the COVID-19 pandemic. Until
such time that one or more of these proposals are introduced or enacted into law, the specific impact on our business is uncertain.
Legal and regulatory actions are inherent in our businesses and could result in financial losses or harm our businesses.
We are, and in the future may be, subject to legal and regulatory actions in the ordinary course of our business. Pending legal and
regulatory actions include proceedings relating to aspects of our businesses and operations that are specific to us and proceedings that are
typical of the businesses in which we operate. Some of these legal proceedings have been brought on behalf of various alleged classes of
complainants. In certain of these matters, the plaintiffs are seeking large and/or indeterminate amounts, including punitive or exemplary
damages. Substantial legal liability in these or future legal or regulatory actions could have a material financial effect or cause significant
harm to our reputation, which in turn could materially harm our business prospects. See Note 14 for a description of legal and regulatory
proceedings and actions.
Implementation of the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act relating to the regulation of derivatives transactions will
subject us to substantial additional federal regulation, and we cannot predict the effect on our business, results of operations, cash flows or financial condition until
final implementation.
Significant rulemaking across numerous agencies within the federal government has been implemented since the enactment of the Dodd-
Frank Act in 2010. The Dodd-Frank Act and corresponding global initiatives imposed significant changes to the regulation of derivatives
transactions, which we use to mitigate many types of risk in our business. Significantly, swap documentation and processing requirements
continue to change in light of rules for margining uncleared swaps. As we prepare to comply with requirements to post initial margin
beginning in September 2021, we continue to evaluate the ways we will be required to manage our derivatives trading and the attendant
liquidity requirements. Although these rules provide some flexibility in the categories of eligible collateral, we may be required to hold
more of our assets in cash and other low-yielding investments in order to satisfy margin requirements. Operational requirements
attendant to the new margining regime are potentially burdensome and costly. Swaps clearing requirements may reduce the level of risk
exposure we have to our derivatives counterparties (currently managed by holding collateral), but have increased our exposure to central
clearinghouses and clearing members with which we transact. Central clearinghouses and regulators alike continue to evaluate the
appropriate allocation of risk in the event of the failure of a clearing member or clearinghouse, and the results of these deliberations may
change our use of derivatives in ways we cannot yet determine. The standardization of derivatives products for clearing may make
customized products unavailable or uneconomical, potentially decreasing the effectiveness of some of our hedging activities. Until the
implementation of these provisions is complete, the impact of these provisions on our businesses (including product offerings), results of
operations and liquidity and capital resources remains uncertain.
Changes in accounting standards issued by the Financial Accounting Standards Board or other standard-setting bodies may adversely affect our financial
statements.
Our financial statements are prepared in accordance with GAAP as identified in the Financial Accounting Standards Board (“FASB”)
Accounting Standards CodificationTM (“ASC”). From time to time, we are required to adopt new or revised accounting standards or
guidance that are incorporated into the FASB ASC. It is possible that future accounting standards we are required to adopt could change
the current accounting treatment that we apply to our consolidated financial statements and that such changes could have a material
adverse effect on our financial condition and results of operations.
Specifically, in August 2018, the FASB released Accounting Standards Update (“ASU”) 2018-12, Targeted Improvements to the
Accounting for Long-Duration Contracts, which is expected to result in significant changes to how we account for and report our
insurance contracts (both in-force and new business), including updating assumptions used to measure the liability for future policy
benefits for traditional and limited-payment contracts, measurement of market risk benefits and amortization of deferred acquisition costs
(“DAC”). These changes will impose special demands on companies in the areas of employee training, internal controls and disclosure
and may affect how we manage our business, including business processes such as design of compensation plans, contract fulfillment,
product design, etc. The effective date of ASU 2018-12 is January 1, 2023, and there are various transition methods by topic that we may
elect upon adoption. We will report results under the new accounting method as of the effective date. We are currently evaluating the
impact of adopting this ASU on our consolidated financial condition and results of operations. See Note 2 for more information.
Our domestic insurance subsidiaries are subject to statutory accounting principles (“SAP”). Any changes in the method of calculating
reserves for our life insurance and annuity products under SAP may result in increased reserve requirements.
The NAIC also adopts changes to its regulations from time to time, which, depending of the scope of the change, could materially our
financial condition and results of operations. See “Item 1. Business – Regulatory – Insurance Regulation.”
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Anti-takeover provisions could delay, deter or prevent our change in control, even if the change in control would be beneficial to LNC shareholders.
We are an Indiana corporation subject to Indiana state law. Certain provisions of Indiana law could interfere with or restrict takeover
bids or other change in control events affecting us. Under Indiana law, directors may, in considering the best interests of a corporation,
consider the effects of any action on shareholders, employees, suppliers and customers of the corporation and the communities in which
offices and other facilities are located, and other factors the directors consider pertinent. One statutory provision prohibits, except under
specified circumstances, LNC from engaging in any business combination with any shareholder who owns 10% or more of our common
stock (which shareholder, under the statute, would be considered an “interested shareholder”) for a period of five years following the
time that such shareholder became an interested shareholder, unless such business combination is approved by the Board of Directors
prior to such person becoming an interested shareholder.
In addition to the anti-takeover provisions of Indiana law, there are other factors that may delay, deter or prevent our change in control.
As an insurance holding company, we are regulated as an insurance holding company and are subject to the insurance holding company
acts of the states in which our insurance company subsidiaries are domiciled. The insurance holding company acts and regulations restrict
the ability of any person to obtain control of an insurance company without prior regulatory approval. Under those statutes and
regulations, without such approval (or an exemption), no person may acquire any voting security of a domestic insurance company, or an
insurance holding company which controls an insurance company, or merge with such a holding company, if as a result of such
transaction such person would “control” the insurance holding company or insurance company. “Control” is generally defined as the
direct or indirect power to direct or cause the direction of the management and policies of a person and is presumed to exist if a person
directly or indirectly owns or controls 10% or more of the voting securities of another person.
Liquidity and Capital Position
Adverse capital and credit market conditions may affect our ability to meet liquidity needs, access to capital and cost of capital.
In the event that our current sources of liquidity do not satisfy our needs, we may have to seek additional financing. The availability of
additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the volume of trading
activities, the overall availability of credit to the financial services industry, our credit ratings and credit capacity, as well as the possibility
that customers or lenders could develop a negative perception of our long- or short-term financial prospects if we incur large investment
losses or if the level of our business activity decreases due to a market downturn. Similarly, our access to funds may be impaired if
regulatory authorities or rating agencies take negative actions against us. See “Review of Consolidated Financial Condition – Liquidity
and Capital Resources – Financing Activities” in the MD&A for a description of our credit ratings. Our internal sources of liquidity may
prove to be insufficient, and in such case, we may not be able to successfully obtain additional financing on favorable terms, or at all.
Disruptions, uncertainty or volatility in the capital and credit markets may also limit our access to capital required to operate our business,
most significantly our insurance operations. Such market conditions may limit our ability to replace, in a timely manner, maturing
liabilities; satisfy statutory capital requirements; generate fee income and market-related revenue to meet liquidity needs; and access the
capital necessary to grow our business. As such, we may be forced to delay raising capital, issue shorter term securities than we prefer or
bear an unattractive cost of capital which could decrease our profitability and significantly reduce our financial flexibility. Our results of
operations, financial condition, cash flows and statutory capital position could be materially adversely affected by disruptions in the
financial markets.
Because we are a holding company with no direct operations, the inability of our subsidiaries to pay dividends to us in sufficient amounts would harm our ability to
meet our obligations.
Our insurance subsidiaries are subject to certain insurance department regulatory restrictions related to the transfer of funds and payment
of dividends to LNC, including statutory limitations on the amount of dividends that can be paid. In addition, payments of dividends and
advances or repayment of funds to us by our insurance subsidiaries are restricted by the applicable laws of their respective jurisdictions
requiring that our insurance subsidiaries hold a specified amount of minimum reserves in order to meet future obligations on their
outstanding policies. In order to meet their claims-paying obligations, our insurance subsidiaries regularly monitor their reserves to
ensure we hold sufficient amounts to cover actual or expected contract and claims payments. At times, we may determine that reserves in
excess of the minimum may be needed to ensure sufficiency. See “Review of Consolidated Financial Condition – Liquidity and Capital
Resources – Restrictions on Subsidiaries’ Dividends and Other Payments” in the MD&A for additional information regarding these
restrictions and requirements.
Changes in, or reinterpretations of, these laws can constrain the ability of our subsidiaries to pay dividends or to advance or repay funds
to us in sufficient amounts and at times necessary to meet our debt obligations and corporate expenses. Requiring our insurance
subsidiaries to hold additional reserves has the potential to constrain their ability to pay dividends to the holding company.
The earnings of our insurance subsidiaries impact contract holders’ surplus. Lower earnings constrain the growth in our insurance
subsidiaries’ capital, and therefore, can constrain the payment of dividends and advances or repayment of funds to us. In addition, the
amount of surplus that our insurance subsidiaries could pay as dividends is constrained by the amount of surplus they hold to maintain
their financial strength ratings, to provide an additional layer of margin for risk protection and for future investment in our businesses.
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As a result, to the extent our subsidiaries are unable or are materially restricted from being able to pay dividends to us in sufficient
amounts, our ability to meet our obligations could be materially affected.
A decrease in the capital and surplus of our insurance subsidiaries may result in a downgrade to our credit and insurer financial strength ratings.
In any particular year, statutory surplus amounts and RBC ratios may increase or decrease depending on a variety of factors, including the
amount of statutory income or losses generated by our insurance subsidiaries (which itself is sensitive to equity market and credit market
conditions), the amount of additional capital our insurance subsidiaries must hold to support business growth, changes in reserving
requirements, such as principles-based reserving, our inability to obtain reserve relief, changes in equity market levels, the value of certain
fixed-income and equity securities in our investment portfolio, the value of certain derivative instruments that do not get hedge
accounting treatment, changes in interest rates and foreign currency exchange rates, as well as changes to the NAIC RBC formulas. The
RBC ratio is also affected by the product mix of the in-force book of business (i.e., the amount of business without guarantees is not
subject to the same level of reserves as the business with guarantees). Most of these factors are outside of our control. Our credit and
insurer financial strength ratings are significantly influenced by the statutory surplus amounts and RBC ratios of our insurance company
subsidiaries. The RBC ratio of LNL is an important factor in the determination of the credit and financial strength ratings of LNC and its
subsidiaries. In addition, rating agencies may implement changes to their internal models that have the effect of increasing or decreasing
the amount of statutory capital we must hold in order to maintain our current ratings. In extreme scenarios of equity market declines, the
amount of additional statutory reserves that we are required to hold for our variable universal life insurance guarantees and variable
annuity guarantees may increase at a rate greater than the rate of change of the markets. Increases in reserves reduce the statutory surplus
used in calculating our RBC ratios. To the extent that our statutory capital resources are deemed to be insufficient to maintain a
particular rating by one or more rating agencies, we may seek to raise additional capital through public or private equity or debt financing,
which may be on terms not as favorable as in the past.
Alternatively, if we were not to raise additional capital in such a scenario, either at our discretion or because we were unable to do so, our
financial strength and credit ratings might be downgraded by one or more rating agencies. For more information on risks regarding our
ratings, see “Covenants and Ratings – A downgrade in our financial strength or credit ratings could limit our ability to market products,
increase the number or value of policies being surrendered and/or hurt our relationships with creditors” below.
An inability to access our credit facilities could result in a reduction in our liquidity and lead to downgrades in our credit and financial strength ratings.
We rely on our credit facilities as a potential source of liquidity. We also use the credit facilities as a potential backstop to provide
statutory reserve credit, particularly for variable annuities. While our variable annuity hedge assets available to provide reserve credit have
normally exceeded the ceded statutory reserves, in certain stressed market conditions, it is possible that these assets could be less than the
ceded statutory reserve. Our credit facilities are available to provide reserve credit to LNL in such a case. If we were unable to access our
facility in such circumstances, it could materially impact LNL’s capital position. The availability of these facilities could be critical to our
credit and financial strength ratings and our ability to meet our obligations as they come due in a market when alternative sources of
credit are tight.
In addition, our failure to comply with the covenants in the credit facilities or fulfill the conditions to borrowings, or the failure of lenders
to fund their lending commitments (whether due to insolvency, illiquidity or other reasons) in the amounts provided for under the terms
of the facilities, would restrict our ability to access these credit facilities when needed and, consequently, could have a material adverse
effect on our financial condition and results of operations.
Assumptions and Estimates
As a result of changes in assumptions, estimates and methods in calculating reserves, our reserves for future policy benefits and claims related to our current and
future business as well as businesses we may acquire in the future may prove to be inadequate.
We establish and carry, as a liability, reserves based on estimates of how much we will need to pay for future benefits and claims. For our
insurance products, we calculate these reserves based on many assumptions and estimates, including, but not limited to, estimated
premiums we will receive over the assumed life of the policies, the timing of the events covered by the insurance policies, the lapse rate of
the policies, the amount of benefits or claims to be paid and the investment returns on the assets we purchase with the premiums we
receive.
The sensitivity of our statutory reserves and surplus established for our variable universal life contracts and variable annuity base contracts
and riders to changes in the equity markets will vary depending on the magnitude of the decline. The sensitivity will be affected by the
level of account values relative to the level of guaranteed amounts, product design and reinsurance. Statutory reserves for variable
annuities depend upon the cumulative equity market impacts on the business in force, and therefore, result in non-linear relationships
with respect to the level of equity market performance within any reporting period.
The assumptions and estimates we use in connection with establishing and carrying our reserves are inherently uncertain. Accordingly,
we cannot determine with precision the ultimate amount or the timing of the payment of actual benefits and claims or whether the assets
supporting the policy liabilities will grow to the level we assume prior to payment of benefits or claims. If our actual experience is
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different from our assumptions or estimates, our reserves may prove to be inadequate in relation to our estimated future benefits and
claims, which would adversely affect our financial position and results of operations. In addition, increases in reserves have a negative
effect on income from operations in the quarter incurred.
We may be required to recognize an impairment of our goodwill or to establish a valuation allowance against our deferred income tax assets.
If our businesses do not perform well and/or their estimated fair values decline or the price of our common stock does not increase, we
may be required to recognize an impairment of our goodwill or to establish a valuation allowance against the deferred income tax asset,
which could have a material adverse effect on our results of operations and financial condition. For example, during the fourth quarter of
2017, we recorded goodwill impairment of $905 million related to our Life Insurance segment. Future reviews of goodwill could result in
an impairment of goodwill, and such write-downs could have a material adverse effect on our net income and book value, although they
would not affect the statutory capital of our insurance subsidiaries. As of December 31, 2020, we had a total of $1.8 billion of goodwill
on our Consolidated Balance Sheets. For more information on goodwill, see “Critical Accounting Policies and Estimates – Goodwill and
Other Intangible Assets” in the MD&A and Note 10. As of December 31, 2020, we had a deferred tax asset of $3.0 billion. If, based on
available information, including about the performance of a business and its ability to generate future capital gains, we determine that it is
more likely than not that the deferred income tax asset will not be realized, then a valuation allowance must be established with a
corresponding charge to net income. Such valuation allowance could have a material adverse effect on our results of operations and
financial condition. For more information on our deferred income tax assets, see Note 7.
The determination of the amount of allowance for credit losses and impairments taken on our investments is highly subjective and could materially impact our
results of operations or financial condition.
The determination of the amount of allowances and impairments varies by investment type and is based upon our periodic evaluation and
assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as
conditions change and new information becomes available. Management updates its evaluations regularly and reflects changes in
allowances and impairments in operations as such evaluations are revised. There can be no assurance that our management has accurately
assessed the level of impairments taken and allowances reflected in our financial statements. Furthermore, additional impairments may
need to be taken or allowances provided for in the future. Historical trends may not be indicative of future impairments or allowances.
With respect to unrealized losses, we establish deferred tax assets for the tax benefit we may receive in the event that losses are realized.
The realization of significant realized losses could result in an inability to recover the tax benefits and may result in the establishment of
valuation allowances against our deferred tax assets. Realized losses or impairments may have a material adverse impact on our results of
operations and financial condition. See “Critical Accounting Policies and Estimates – Investments” in the MD&A for additional
information.
Changes to our valuation of investments and our methodologies, estimations and assumptions could harm our results of operations or financial condition.
During periods of market disruption or rapidly-changing market conditions, such as significantly rising or high interest rates, rapidly
widening credit spreads or illiquidity, or infrequent trading, or when market data is limited, our investments may become less liquid and
we may base our valuations on less-observable and more subjective inputs, assumptions, or methods that may result in estimated fair
values that significantly vary by period, and may exceed the investment’s sale price. Decreases in the estimated fair value of our securities
may harm our results of operations or financial condition. See “Critical Accounting Policies and Estimates – Investments” in the MD&A
for additional information.
Significant adverse mortality experience may result in the loss of, or higher prices for, reinsurance, which could adversely affect our profitability.
We reinsure a portion of the mortality risk on fully underwritten, newly issued, individual life insurance contracts. We regularly review
retention limits for continued appropriateness and they may be changed in the future. In the event that we experience adverse mortality
or morbidity experience, a significant portion of that is reimbursed by our reinsurers. Prolonged or severe adverse mortality or morbidity
experience could result in increased reinsurance costs and, ultimately, reinsurers being unwilling to offer future coverage. If we are unable
to maintain our current level of reinsurance or purchase new reinsurance protection at comparable rates to what we are paying currently,
we may have to accept an increase in our net exposures or revise our pricing to reflect higher reinsurance premiums or both. If this were
to occur, we may be exposed to reduced profitability and cash flow strain or we may not be able to price new business at competitive
rates.
Catastrophes have impacted, and may in the future, adversely impact liabilities for contract holder claims.
Our insurance operations are exposed to the risk of catastrophic mortality, such as a pandemic, an act of terrorism, natural disaster or
other event that causes a large number of deaths or injuries, such as the COVID-19 pandemic that emerged during the first quarter of
2020. Neither the length nor severity of the COVID-19 pandemic, nor the likelihood, timing or severity of a future pandemic or other
catastrophe, can be predicted. Additionally, the impact of climate change has caused, and may continue to cause, changes in weather
patterns, resulting in more severe and more frequent natural disasters such as forest fires, hurricanes, tornados, floods and storm surges.
In our group insurance operations, an event that affects the workplace of one or more of our group insurance customers, such as the
COVID-19 pandemic, could cause a significant loss due to mortality or morbidity claims. During 2020, we experienced a significant
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increase in mortality and morbidity claims associated with the COVID-19 pandemic, which negatively impacted our earnings for the year,
as discussed further in “Introduction – Executive Summary” in the MD&A. The continuation of the COVID-19 pandemic, or future
pandemics or other catastrophic events could cause a material adverse effect on our results of operations in any period and, depending on
their severity, could also materially and adversely affect our financial condition.
The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and
the severity of the event. Pandemics, natural disasters and man-made catastrophes, including terrorism, may produce significant damage
in larger areas, especially those that are heavily populated. Claims resulting from natural or man-made catastrophic events could cause
substantial volatility in our financial results for any fiscal quarter or year and could materially reduce our profitability or harm our financial
condition. Also, catastrophic events could harm the financial condition of our reinsurers and thereby increase the probability of default
on reinsurance recoveries. Accordingly, our ability to write new business could also be affected.
Consistent with industry practice and accounting standards, we establish liabilities for claims arising from a catastrophe only after
assessing the probable losses arising from the event. We cannot be certain that the liabilities we have established or applicable
reinsurance will be adequate to cover actual claim liabilities, and a catastrophic event or multiple catastrophic events could have a material
adverse effect on our business, results of operations and financial condition.
Operational Matters
Our enterprise risk management policies and procedures may leave us exposed to unidentified or unanticipated risk, which could negatively affect our businesses or
result in losses.
Our policies and procedures to identify, monitor and manage risks may not be fully effective. Many of our methods of managing risk and
exposures are based upon our use of observed historical market behavior or statistics based on historical models. As a result, these
methods may not predict future exposures, which could be significantly greater than the historical measures indicate, such as the risk of
pandemics causing a large number of deaths. Other risk management methods depend upon the evaluation of information regarding
markets, clients, catastrophe occurrence or other matters that is publicly available or otherwise accessible to us, which may not always be
accurate, complete, up-to-date or properly evaluated. Management of operational, legal and regulatory risks requires, among other things,
policies and procedures to record properly and verify a large number of transactions and events, and these policies and procedures may
not be fully effective.
We face risks of non-collectability of reinsurance and increased reinsurance rates, which could materially affect our results of operations.
We follow the insurance practice of reinsuring with other insurance and reinsurance companies a portion of the risks under the policies
written by our insurance subsidiaries (known as “ceding”). As of December 31, 2020, we ceded $674.3 billion of life insurance in force to
reinsurers for reinsurance protection. Although reinsurance does not discharge our subsidiaries from their primary obligation to pay
contract holders for losses insured under the policies we issue, reinsurance does make the assuming reinsurer liable to the insurance
subsidiaries for the reinsured portion of the risk. As of December 31, 2020, we had $16.5 billion of reinsurance receivables from
reinsurers for paid and unpaid losses, for which they are obligated to reimburse us under our reinsurance contracts. Of this amount,
$11.3 billion related to reinsurance agreements entered into with Protective in May 2018, providing for the reinsurance and administration
of the Liberty Life Business sold to Protective in connection with the Liberty acquisition, and $1.2 billion related to the sale of our
reinsurance business to Swiss Re in 2001 through an indemnity reinsurance agreement. The balance of the reinsurance is due from a
diverse group of reinsurers. For more information regarding our reinsurance arrangements and exposure, see “Reinsurance” in the
MD&A and Note 9.
The collectability of reinsurance is largely a function of the solvency of the individual reinsurers. We perform due diligence on all
reinsurers, including, but not limited to, a review of creditworthiness prior to entering into any reinsurance transaction, and we review our
reinsurers on an ongoing basis to monitor credit ratings. To support balances due and allow reserve credit when reinsurance is obtained
from reinsurers not authorized to transact business in the applicable jurisdictions, we also require assets in trust, LOCs or other
acceptable collateral. Despite these measures, the insolvency, inability or unwillingness to make payments under the terms of a
reinsurance contract by a large reinsurer or multiple reinsurers could have a material adverse effect on our results of operations and
financial condition.
Reinsurers also may attempt to increase rates with respect to our existing reinsurance arrangements. The ability of our reinsurers to
increase rates depends upon the terms of each reinsurance contract. Some of our reinsurance contracts contain provisions that limit the
reinsurer’s ability to increase rates on in-force business; however, some do not. An increase in reinsurance rates may affect the
profitability of our insurance business. Additionally, such a rate increase could result in our recapture of the business, which may result in
a need for additional reserves and increase our exposure to claims. While in recent years, we have faced a number of rate increase actions
on in-force business, our management of those actions has not had a material effect on our results of operations or financial condition.
However, there can be no assurance that the outcome of future rate increase actions would similarly result in no material effect. See Note
14 for a description of reinsurance related actions.
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Competition for our employees is intense, and we may not be able to attract and retain the highly skilled people we need to support our business.
Our success depends, in large part, on our ability to attract and retain key people. Intense competition exists for the key employees with
demonstrated ability, and we may be unable to hire or retain such employees. The unexpected loss of services of one or more of our key
personnel could have a material adverse effect on our operations due to their skills, knowledge of our business, their years of industry
experience and the potential difficulty of promptly finding qualified replacement employees. We compete with other financial institutions
primarily on the basis of our products, compensation, support services and financial condition. Sales in our businesses and our results of
operations and financial condition could be materially adversely affected if we are unsuccessful in attracting and retaining key employees,
including financial advisers, wholesalers and other employees, as well as independent distributors of our products.
We may not be able to protect our intellectual property and may be subject to infringement claims.
We may have to litigate to enforce and protect our intellectual property, which represents a diversion of resources that may be significant
and may not prove successful. The loss of intellectual property protection or the inability to secure or enforce the protection of our
intellectual property assets could have a material adverse effect on our business and our ability to compete.
We also may be subject to costly litigation in the event that another party alleges our operations or activities infringe upon another party’s
intellectual property rights. If we were found to have infringed a third-party patent or other intellectual property rights, we could incur
substantial liability, and in some circumstances could be enjoined from providing certain products or services to our customers, or
alternatively could be required to enter into costly licensing arrangements with third parties, all of which could have a material adverse
effect on our business, results of operations and financial condition.
Our information systems may experience interruptions, breaches in security and/or a failure of disaster recovery systems that could result in a loss or disclosure of
confidential information, damage to our reputation and impairment of our ability to conduct business effectively.
Our information systems are critical to the operation of our business. We collect, process, maintain, retain and distribute large amounts
of personal financial and health information and other confidential and sensitive data about our customers in the ordinary course of our
business. Our business therefore depends on our customers’ willingness to entrust us with their personal information. Any failure,
interruption or breach in security could result in disruptions to our critical systems and adversely affect our customer relationships.
Publicly reported cyber-security threats and incidents have increased over recent periods. Although our computer systems have in the
past been, and will likely in the future be, subject to or targets of unauthorized or fraudulent access, to date, we have not had a material
security breach. While we employ a robust and tested information security program, the preventative actions we take to reduce the
incidence and severity of cyber incidents and protect our information technology may be insufficient to prevent physical and electronic
break-ins, cyberattacks, compromised credentials, fraud, other security breaches or other unauthorized access to our computer systems,
and, given the increasing sophistication of cyberattacks, in some cases, such incidents could occur and persist for an extended period of
time without detection. As a result, there can be no assurance that any such failure, interruption or security breach will not occur or, if
any does occur, that it will be detected in a timely manner or that it can be sufficiently remediated. Such an occurrence may impede or
interrupt our business operations and could adversely affect our reputation, business, financial condition and results of operations.
In the event of a disaster such as a natural catastrophe, epidemic, industrial accident, blackout, computer virus, terrorist attack,
cyberattack or war, unanticipated problems with our disaster recovery systems could have a material adverse impact on our ability to
conduct business and on our results of operations and financial condition, particularly if those problems affect our computer-based data
processing, transmission, storage and retrieval systems and destroy valuable data. In addition, in the event that a significant number of
our managers were unavailable following a disaster, our ability to effectively conduct business could be severely compromised. These
interruptions also may interfere with our suppliers’ ability to provide goods and services and our employees’ ability to perform their job
responsibilities.
The failure of our computer systems and/or our disaster recovery plans for any reason could cause significant interruptions in our
operations and result in a failure to maintain the security, confidentiality or privacy of sensitive data, including personal information
relating to our customers. The occurrence of any such failure, interruption or security breach of our systems could damage our
reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and financial
liability. Depending on the nature of the information compromised, in the event of a data breach or other unauthorized access to our
customer data, we may also have obligations to notify affected individuals about the incident, and we may need to provide some form of
remedy, such as a subscription to a credit monitoring service, for the individuals affected by the incident. For more information, see
“Legislative, Regulatory and Tax – State Regulation – Compliance with existing and emerging privacy regulations could result in increased
compliance costs and/or lead to changes in business practices and policies, and any failure to protect the confidentiality of client
information could adversely affect our reputation and have a material adverse effect on our business, financial condition and results of
operations.”
Although we conduct due diligence, negotiate contractual provisions and, in many cases, conduct periodic reviews of our vendors,
distributors, and other third parties that provide operational or information technology services to us to confirm compliance with our
information security standards, the failure of such third parties’ computer systems and/or their disaster recovery plans for any reason
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might cause significant interruptions in our operations and result in a failure to maintain the security, confidentiality or privacy of sensitive
data, including personal information relating to our customers. Such a failure could harm our reputation, subject us to regulatory
sanctions and legal claims, lead to a loss of customers and revenues and otherwise adversely affect our business and financial results. In
addition, our cyber liability insurance may not be sufficient to protect us against all losses.
Acquisitions of businesses may not produce anticipated benefits resulting in operating difficulties, unforeseen liabilities or asset impairments, which may adversely
affect our operating results and financial condition.
Once completed, an acquired business may not perform as projected, expense and revenue synergies may not materialize as expected and
costs associated with the integration may be greater than anticipated. Our financial results could be adversely affected by unanticipated
performance issues, unforeseen liabilities, transaction-related charges, diversion of management time and resources to acquisition
integration challenges or growth strategies, loss of key employees or customers, amortization of expenses related to intangibles, charges
for impairment of long-term assets or goodwill and indemnifications. Factors such as receiving the required governmental or regulatory
approvals to merge the acquired entity, delays in implementation or completion of transition activities or a disruption to our or the
acquired entity’s business could impact our results.
Covenants and Ratings
A downgrade in our financial strength or credit ratings could limit our ability to market products, increase the number or value of policies being surrendered
and/or hurt our relationships with creditors.
A downgrade of the financial strength rating of one of our principal insurance subsidiaries could affect our competitive position in the
insurance industry by making it more difficult for us to market our products, as potential customers may select companies with higher
financial strength ratings, and by leading to increased withdrawals by current customers seeking companies with higher financial strength
ratings. This could lead to a decrease in fees as net outflows of assets increase, and therefore, result in lower fee income and lower spread
income. Furthermore, sales of assets to meet customer withdrawal demands could also result in losses, depending on market conditions.
The interest rates we pay on our borrowings are largely dependent on our credit ratings. A downgrade of our debt ratings could affect
our ability to raise additional debt, including bank lines of credit, with terms and conditions similar to our current debt, and accordingly,
likely increase our cost of capital.
All of our ratings and ratings of our principal insurance subsidiaries are subject to revision or withdrawal at any time by the rating
agencies, and therefore, no assurance can be given that our principal insurance subsidiaries or we can maintain these ratings. See “Item 1.
Business – Financial Strength Ratings” and “Liquidity and Capital Resources – Financing Activities” in the MD&A for a description of
our ratings.
We will be required to pay interest on our capital securities with proceeds from the issuance of qualifying securities if we fail to achieve specified capital adequacy or
net income and stockholders’ equity levels, which would dilute the current holders of our common stock.
Our outstanding capital securities contain covenants that require us to make interest payments in accordance with an alternative coupon
satisfaction mechanism (“ACSM”) if we determine that one of the following triggers exists as of the 30th day prior to an interest payment
date, or the “determination date”:
1. LNL’s RBC ratio is less than 175% (based on the most recent annual financial statement filed with the State of Indiana); or
2. (i) The sum of our consolidated net income for the four trailing fiscal quarters ending on the quarter that is two quarters prior to the
most recently completed quarter prior to the determination date is zero or negative, and (ii) our consolidated stockholders’ equity
(excluding accumulated other comprehensive income (loss) and any increase in stockholders’ equity resulting from the issuance of
preferred stock during a quarter), or “adjusted stockholders’ equity,” as of (x) the most recently completed quarter and (y) the end of the
quarter that is two quarters before the most recently completed quarter, has declined by 10% or more as compared to the quarter that is
ten fiscal quarters prior to the last completed quarter, or the “benchmark quarter.”
The ACSM would generally require us to use commercially reasonable efforts to satisfy our obligation to pay interest in full on the capital
securities with the net proceeds from sales of our common stock and warrants to purchase our common stock with an exercise price
greater than the market price. We would have to utilize the ACSM until the trigger events above no longer existed, and, in the case of test
2 above, until our adjusted stockholders’ equity amount increased or declined by less than 10% as compared to the adjusted stockholders’
equity at the end of the benchmark quarter for each interest payment date as to which interest payment restrictions were imposed by test
2 above.
If we were required to utilize the ACSM and were successful in selling sufficient shares of common stock or warrants to satisfy the
interest payment, we would dilute the current holders of our common stock. Furthermore, while a trigger event is occurring and if we do
not pay accrued interest in full, we may not, among other things, pay dividends on or repurchase our capital stock. Our failure to pay
interest pursuant to the ACSM will not result in an event of default with respect to the capital securities, nor will a nonpayment of
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interest, unless it lasts for ten consecutive years, although such breaches may result in monetary damages to the holders of the capital
securities.
The calculations of RBC, net income (loss) and adjusted stockholders’ equity are subject to adjustments and the capital securities are
subject to additional terms and conditions as further described in supplemental indentures filed as exhibits to this Form 10-K.
Certain blocks of our insurance business purchased from third-party insurers under indemnity reinsurance agreements may require us to place assets in trust, secure
letters of credit or return the business, if the financial strength ratings and/or capital ratios of certain insurance subsidiaries are not maintained at specified levels.
Under certain indemnity reinsurance agreements, two of our insurance subsidiaries, LNL and LLANY, provide 100% indemnity
reinsurance for the business assumed; however, the third-party insurer, or the “cedent,” remains primarily liable on the underlying
insurance business. Under these types of agreements, as of December 31, 2020, we held statutory reserves of $4.8 billion. These
indemnity reinsurance arrangements require that our subsidiary, as the reinsurer, maintain certain insurer financial strength ratings and
capital ratios. If these ratings or capital ratios are not maintained, depending upon the reinsurance agreement, the cedent may recapture
the business, or require us to place assets in trust or provide LOCs at least equal to the relevant statutory reserves. See “Item 1. Business
– Reinsurance” for a discussion of the indemnity reinsurance arrangements and the financial strength ratings and/or capital ratios that are
required to be maintained under such arrangements. As of December 31, 2020, LNL’s and LLANY’s financial strength ratings and RBC
ratios exceeded the ratings and ratios required under each agreement. See “Item 1. Business – Financial Strength Ratings” for a
description of our financial strength ratings.
If the cedent recaptured the business, LNL and LLANY would be required to release reserves and transfer assets to the cedent. Such a
recapture could adversely impact our future profits. Alternatively, if LNL and LLANY established a security trust for the cedent, the
ability to transfer assets out of the trust could be severely restricted, thus negatively impacting our liquidity.
Investments
We may have difficulty selling certain holdings in our investment portfolio in a timely manner and realizing full value.
We hold certain investments that may lack liquidity, such as privately placed securities, mortgage loans on real estate, policy loans, limited
partnership interests and other investments. These asset classes represented 27% of the carrying value of our total investments as of
December 31, 2020. If we require significant amounts of cash on short notice in excess of normal cash requirements or are required to
post or return collateral in connection with our investment portfolio, derivatives transactions or securities lending activities, we may have
difficulty selling these investments in a timely manner, be forced to sell them for less than we otherwise would have been able to realize,
or both.
The reported value of our relatively illiquid types of investments, our investments in the asset classes described in the paragraph above
and, at times, our high quality, generally liquid asset classes, do not necessarily reflect the lowest current market price for the asset. If we
were forced to sell certain of our assets in the current market, there can be no assurance that we would be able to sell them for the prices
at which we have recorded them, and we might be forced to sell them at significantly lower prices.
The amount and timing of income from certain investments can be uneven, and their valuations infrequent or volatile, which can impact the amount of income we
record or lead to lower than expected returns, and thereby adversely impact our earnings.
We invest a portion of our investments in investment funds, many of which make private equity investments. The amount and timing of
income from such investment funds tends to be uneven as a result of the performance of the underlying investments, including private
equity investments. The timing of distributions from the funds, which depends on particular events relating to the underlying
investments, as well as the funds’ schedules for making distributions and their needs for cash, can be difficult to predict. In addition,
because these funds, and private equity investments, do not trade on public markets and indications of realizable market value may not be
readily available, valuations can be infrequent and/or more volatile. As a result, the amount of income that we record from these
investments can vary substantially from quarter to quarter, and a sudden or sustained decline in the markets or valuation of one or more
substantial investments could result in lower than expected returns earned by our investment portfolio and thereby adversely impact our
earnings.
Defaults on our mortgage loans and write-downs of mortgage equity may adversely affect our profitability.
Our mortgage loans face default risk and are principally collateralized by commercial properties. The performance of our mortgage loan
investments may fluctuate in the future. In addition, some of our mortgage loan investments have balloon payment maturities. An
increase in the default rate of our mortgage loan investments could have a material adverse effect on our business, results of operations
and financial condition. Further, any geographic or sector exposure in our mortgage loans may have adverse effects on our investment
portfolios and consequently on our consolidated results of operations or financial condition. While we seek to mitigate this risk by having
a broadly diversified portfolio, events or developments that have a negative effect on any particular geographic region or sector may have
a greater adverse effect on the investment portfolios to the extent that the portfolios are exposed.
31
The difficulties faced by other financial institutions could adversely affect us.
We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial
services industry, including brokers and dealers, commercial banks, investment banks and other institutions. Many of these transactions
expose us to credit risk in the event of default of our counterparty. In addition, with respect to secured transactions, our credit risk may
be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the
related loan or derivative exposure. We also may have exposure to these financial institutions in the form of unsecured debt instruments,
derivative transactions and/or equity investments. These parties may default on their obligations to us due to bankruptcy, lack of
liquidity, downturns in the economy or real estate values, operational failure, corporate governance issues or other reasons. A downturn
in the U.S. or other economies could result in increased impairments. There can be no assurance that any such losses or impairments to
the carrying value of these assets would not materially and adversely affect our business and results of operations.
Our requirements to post collateral or make payments related to declines in market value of specified assets may adversely affect our liquidity and expose us to
counterparty credit risk.
Many of our transactions with financial and other institutions, including settling futures positions, specify the circumstances under which
the parties are required to post collateral. The amount of collateral we may be required to post under these agreements may increase
under certain circumstances, which could adversely affect our liquidity. In addition, under the terms of some of our transactions, we may
be required to make payments to our counterparties related to any decline in the market value of the specified assets.
Competition
Intense competition could negatively affect our ability to maintain or increase our profitability.
Our businesses are intensely competitive. We compete based on a number of factors, including name recognition, service, the quality of
investment advice, investment performance, product features, price, perceived financial strength and claims-paying and credit ratings.
Our competitors include insurers, broker-dealers, investment advisers, asset managers, hedge funds and other financial institutions. A
number of our business units face competitors that have greater market share, offer a broader range of products or have higher financial
strength or credit ratings than we do. In recent years, there has been consolidation and convergence among companies in the financial
services industry resulting in increased competition from large, well-capitalized financial services firms. Many of these firms also have
been able to increase their distribution systems through mergers or contractual arrangements. Furthermore, larger competitors may have
lower operating costs and an ability to absorb greater risk while maintaining their financial strength ratings, thereby allowing them to price
their products more competitively. Our customers and clients may engage other financial service providers, and the resulting loss of
business may harm our results of operations or financial condition.
Our sales representatives are not captive and may sell products of our competitors.
We sell our annuity and life insurance products through independent sales representatives. These representatives are not captive, which
means they may also sell our competitors’ products. If our competitors offer products that are more attractive than ours, or pay higher
commission rates to the sales representatives than we do, these representatives may concentrate their efforts in selling our competitors’
products instead of ours.
32
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2020, LNC and our subsidiaries owned or leased 2.8 million square feet of office and other space. We leased 0.1
million square feet of office space in Philadelphia, Pennsylvania, which includes space for LFN. We leased 0.2 million square feet of
office space in Radnor, Pennsylvania, for our corporate center and for LFD. We owned or leased 0.6 million square feet of office space
in Fort Wayne, Indiana, primarily for our Annuities and Retirement Plan Services segments. We owned or leased 0.8 million square feet
of office space in Greensboro, North Carolina, primarily for our Life Insurance segment. We owned or leased 0.3 million square feet of
office space in Omaha, Nebraska, 0.2 million square feet of office space in Atlanta, Georgia, and 0.1 million square feet in Dover, New
Hampshire, primarily for our Group Protection segment. An additional 0.5 million square feet of office space is owned or leased in other
U.S. cities for branch offices. This discussion regarding properties does not include information on field offices and investment
properties.
Item 3. Legal Proceedings
For information regarding legal proceedings, see “Regulatory and Litigation Matters” in Note 14, which is incorporated herein by
reference.
Item 4. Mine Safety Disclosures
Not applicable.
33
Information About our Executive Officers
Our Executive Officers as of February 12, 2021, were as follows:
Name
Age (1)
Position with LNC and Business Experience During the Past Five Years
Dennis R. Glass
71
President, Chief Executive Officer and Director (since July 2007). President, Chief Operating
Officer and Director (April 2006 - July 2007).
Craig T. Beazer
53
Executive Vice President and General Counsel (since December 2020). Executive Vice President,
General Counsel (January 2020 - December 2020) and Secretary (July 2019 - December 2020),
KeyCorp, a bank-based financial services company. Deputy General Counsel, KeyCorp (July
2018 - January 2020). Deputy General Counsel and Corporate Secretary, The Bank of New York
Mellon Corporation, a global investments company (July 2015 - July 2018).
Lisa M. Buckingham
55
Executive Vice President and Chief People, Place and Brand Officer (since August 2018).
Executive Vice President and Chief Human Resources Officer (March 2011 - August 2018).
Senior Vice President and Chief Human Resources Officer (December 2008 - March 2011).
Ellen Cooper
56
Executive Vice President and Chief Investment Officer (since August 2012).
Randal J. Freitag
58
Executive Vice President and Chief Financial Officer (since January 2011) and Head of Individual
Life (since June 2017). Senior Vice President, Chief Risk Officer (2007 - December 2010). Senior
Vice President, Chief Risk Officer and Treasurer (2007 - October 2009).
Wilford H. Fuller
50
Executive Vice President (since March 2011) and President, Annuity Solutions (since March
2015). President, Lincoln Financial Network (2) (since October 2012). President and CEO,
Lincoln Financial Distributors (2) (since February 2009).
Jamie B. Ohl
55
Executive Vice President (since July 2018), President, Workplace Solutions (since December
2020), and Head of Life and Annuity Operations (since July 2018). President, Retirement Plan
Services (August 2015 - December 2020).
Kenneth S. Solon
60
Executive Vice President, Chief Information Officer and Head of Digital (since July 2018).
Executive Vice President, Chief Information Officer and Head of Administrative Services
(January 2016 - July 2018). Senior Vice President, Head of Technology (March 2015 - December
2015). Senior Vice President, Head of Shared Services and Technology (January 2010 - March
2015).
(1) Age shown is based on the officer’s age as of February 12, 2021.
(2) Denotes an affiliate of LNC.
34
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) Stock Market and Dividend Information
Our common stock is traded on the New York stock exchange under the symbol LNC. As of February 12, 2021, the number of
shareholders of record of our common stock was 5,913. The dividend on our common stock is declared each quarter by our Board of
Directors if we are eligible to pay dividends and the Board determines that we will pay dividends. In determining dividends, the Board
takes into consideration items such as our financial condition, including current and expected earnings, projected cash flows and
anticipated financing needs. For potential restrictions on our ability to pay dividends, see “Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations – Liquidity and Capital Resources” and Note 20 in the accompanying notes to the
consolidated financial statements presented in “Item 8. Financial Statements and Supplementary Data.”
For information on securities authorized for issuance under equity compensation plans, see “Part III – Item 12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters – Securities Authorized for Issuance Under Equity
Compensation Plans,” which is incorporated herein by reference.
(b) Not Applicable
(c) Issuer Purchases of Equity Securities
The following summarizes purchases of equity securities by the issuer during the quarter ended December 31, 2020 (dollars in millions,
except per share data):
(a) Total
Number
of Shares
Purchased (1)
(b) Average
Price Paid
per Share
-
$
632,468
443,658
-
42.77
51.78
(c) Total Number
of Shares
Purchased as Part of
Publicly Announced
Plans or Programs (2)
(d) Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under the
Plans or Programs (2)
-
$
632,468
443,658
1,239
1,212
1,189
Period
10/1/20 – 10/31/20
11/1/20 – 11/30/20
12/1/20 – 12/31/20
(1) Of the total number of shares purchased, no shares were received in connection with the exercise of stock options and related taxes.
For the quarter ended December 31, 2020, there were 1,076,126 shares purchased as part of publicly announced plans or programs.
(2) On February 19, 2020, our Board of Directors authorized an increase in our securities repurchase authorization, bringing the total
aggregate repurchase authorization to $1.66 billion. As of December 31, 2020, our remaining security repurchase authorization was
$1.2 billion. The security repurchase authorization does not have an expiration date. The amount and timing of share repurchases
depends on key capital ratios, rating agency expectations, the generation of free cash flow and an evaluation of the costs and benefits
associated with alternative uses of capital. Our stock repurchases may be effected from time to time through open market purchases
or in privately negotiated transactions and may be made pursuant to an accelerated share repurchase agreement or Rule 10b5-1 plan.
35
Item 6. Selected Financial Data
The following selected financial data (in millions, except per share data) should be read in conjunction with “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and the accompanying notes to the consolidated financial
statements presented in “Item 8. Financial Statements and Supplementary Data.”
Total revenues
Net income (loss)
Per share data: (1)(2)
Net income (loss) – basic
Net income (loss) – diluted
Common stock dividends
Assets
Long-term debt:
Principal
Unamortized premiums (discounts), unamortized
debt issuance costs, unamortized adjustments
from discontinued hedges and fair value hedge
on interest rate swap agreements
Stockholders’ equity
Per common share data: (1)
Stockholders’ equity, including
2020
For the Years Ended December 31,
2017
2018
2019
2016
$
17,439
499
$
17,258
886
$
16,424
1,641
$
14,257
2,079
$
13,330
1,192
2.58
2.56
1.62
4.41
4.38
1.51
7.60
7.40
1.36
9.36
9.22
1.20
5.09
5.03
1.04
2020
365,948
$
$
As of December 31,
2018
298,147
$
$
2019
334,761
2017
281,763
2016
261,627
$
6,331
5,827
5,686
4,673
5,123
351
22,699
240
19,689
153
14,350
221
17,322
222
14,478
accumulated other comprehensive income (loss)
118.02
100.11
69.71
79.43
63.97
Stockholders’ equity, excluding
accumulated other comprehensive income (loss)
Market value of common stock
71.59
50.31
71.27
59.01
67.73
51.31
64.62
76.87
57.05
66.27
(1) Per share amounts were affected by the retirement of 4.9 million, 10.4 million, 13.2 million, 10.4 million and 19.3 million shares of
common stock during the years ended December 31, 2020, 2019, 2018, 2017 and 2016, respectively.
(2) To arrive at diluted earnings per share, if the effect of equity classification would result in a more dilutive earnings per share, we
adjust the numerator used in the calculation of our diluted earnings per share to remove the mark-to-market adjustment for deferred
units of LNC stock in our deferred compensation plans, which amounted to $18 million and $(7) million for the years ended
December 31, 2018 and 2017, respectively. There was no such adjustment for the years ended December 31, 2020, 2019 and 2016.
36
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the financial condition as of
December 31, 2020, compared with December 31, 2019, and the results of operations in 2020 compared to 2019 of Lincoln National
Corporation and its consolidated subsidiaries. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are
not included in this Form 10-K can be found in “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in our 2019 Form 10-K. Unless otherwise stated or the context otherwise requires, “LNC,” “Company,” “we,”
“our” or “us” refers to Lincoln National Corporation and its consolidated subsidiaries.
The MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the
accompanying notes to the consolidated financial statements (“Notes”) presented in “Part II – Item 8. Financial Statements and
Supplementary Data,” as well as “Part I – Item 1A. Risk Factors” above.
FORWARD-LOOKING STATEMENTS – CAUTIONARY LANGUAGE
Certain statements made in this report and in other written or oral statements made by us or on our behalf are “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). A forward-looking statement is a
statement that is not a historical fact and, without limitation, includes any statement that may predict, forecast, indicate or imply future
results, performance or achievements. Forward-looking statements may contain words like: “anticipate,” “believe,” “estimate,” “expect,”
“project,” “shall,” “will” and other words or phrases with similar meaning in connection with a discussion of future operating or financial
performance. In particular, these include statements relating to future actions, trends in our businesses, prospective services or products,
future performance or financial results and the outcome of contingencies, such as legal proceedings. We claim the protection afforded by
the safe harbor for forward-looking statements provided by the PSLRA.
Forward-looking statements are subject to risks and uncertainties. Actual results could differ materially from those expressed in or
implied by such forward-looking statements due to a variety of factors, including:
• The continuation of the COVID-19 pandemic, or future outbreaks of COVID-19, and uncertainty surrounding the length and
severity of future impacts on the global economy and on our business, results of operations and financial condition;
• Further deterioration in general economic and business conditions that may affect account values, investment results, guaranteed
benefit liabilities, premium levels and claims experience;
• Adverse global capital and credit market conditions that may affect our ability to raise capital, if necessary, and may cause us to
realize impairments on investments and certain intangible assets, including goodwill and the valuation allowance against deferred tax
assets, which may reduce future earnings and/or affect our financial condition and ability to raise additional capital or refinance
existing debt as it matures;
• The inability of our subsidiaries to pay dividends to the holding company in sufficient amounts, which could harm the holding
company’s ability to meet its obligations;
• Legislative, regulatory or tax changes, both domestic and foreign, that affect: the cost of, or demand for, our subsidiaries’ products;
the required amount of reserves and/or surplus; our ability to conduct business and our captive reinsurance arrangements as well as
restrictions on the payment of revenue sharing and 12b-1 distribution fees;
• The impact of U.S. federal tax reform legislation on our business, earnings and capital;
• The impact of Regulation Best Interest or other regulations adopted by the Securities and Exchange Commission (“SEC”), the
Department of Labor or other federal or state regulators or self-regulatory organizations relating to the standard of care owed by
investment advisers and/or broker-dealers that could affect our distribution model;
• Actions taken by reinsurers to raise rates on in-force business;
• Further declines in or sustained low interest rates causing a reduction in investment income, the interest margins of our businesses,
estimated gross profits (“EGPs”) and demand for our products;
• Rapidly increasing interest rates causing contract holders to surrender life insurance and annuity policies, thereby causing realized
investment losses, and reduced hedge performance related to variable annuities;
• The impact of the implementation of the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act relating to
the regulation of derivatives transactions;
• The initiation of legal or regulatory proceedings against us, and the outcome of any legal or regulatory proceedings, such as: adverse
actions related to present or past business practices common in businesses in which we compete; adverse decisions in significant
actions including, but not limited to, actions brought by federal and state authorities and class action cases; new decisions that result
in changes in law; and unexpected trial court rulings;
• A decline or continued volatility in the equity markets causing a reduction in the sales of our subsidiaries’ products; a reduction of
asset-based fees that our subsidiaries charge on various investment and insurance products; an acceleration of the net amortization of
deferred acquisition costs (“DAC”), value of business acquired (“VOBA”), deferred sales inducements (“DSI”) and deferred front-
end loads (“DFEL”); and an increase in liabilities related to guaranteed benefit features of our subsidiaries’ variable annuity products;
Ineffectiveness of our risk management policies and procedures, including various hedging strategies used to offset the effect of
changes in the value of liabilities due to changes in the level and volatility of the equity markets and interest rates;
•
37
• A deviation in actual experience regarding future persistency, mortality, morbidity, interest rates or equity market returns from the
assumptions used in pricing our subsidiaries’ products, in establishing related insurance reserves and in the net amortization of DAC,
VOBA, DSI and DFEL, which may reduce future earnings;
• Changes in accounting principles that may affect our business, results of operations and financial condition;
• Lowering of one or more of our debt ratings issued by nationally recognized statistical rating organizations and the adverse effect
such action may have on our ability to raise capital and on our liquidity and financial condition;
• Lowering of one or more of the insurer financial strength ratings of our insurance subsidiaries and the adverse effect such action may
•
•
have on the premium writings, policy retention, profitability of our insurance subsidiaries and liquidity;
Significant credit, accounting, fraud, corporate governance or other issues that may adversely affect the value of certain financial
assets, as well as counterparties to which we are exposed to credit risk, requiring that we realize losses on financial assets;
Interruption in telecommunication, information technology or other operational systems or failure to safeguard the confidentiality or
privacy of sensitive data on such systems, including from cyberattacks or other breaches of our data security systems;
• The effect of acquisitions and divestitures, restructurings, product withdrawals and other unusual items;
• The adequacy and collectability of reinsurance that we have purchased;
• Future pandemics, acts of terrorism, war or other man-made and natural catastrophes that may adversely affect our businesses and
the cost and availability of reinsurance;
• Competitive conditions, including pricing pressures, new product offerings and the emergence of new competitors, that may affect
the level of premiums and fees that our subsidiaries can charge for their products;
• The unknown effect on our subsidiaries’ businesses resulting from evolving market preferences and the changing demographics of
our client base; and
• The unanticipated loss of key management, financial planners or wholesalers.
The risks and uncertainties included here are not exhaustive. Other sections of this report and other reports that we file with the SEC
include additional factors that could affect our businesses and financial performance, including “Part I – Item 1A. Risk Factors” and
“Item 7A. Quantitative and Qualitative Disclosures About Market Risk,” which are incorporated herein by reference. Moreover, we
operate in a rapidly changing and competitive environment. New risk factors emerge from time to time, and it is not possible for
management to predict all such risk factors.
Further, it is not possible to assess the effect of all risk factors on our businesses or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. In addition, we
disclaim any obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of this
report.
INTRODUCTION
Executive Summary
We are a holding company that operates multiple insurance and retirement businesses through subsidiary companies. We sell a wide
range of wealth protection, accumulation, retirement income and group protection products and solutions through our four business
segments:
• Annuities;
• Retirement Plan Services;
• Life Insurance; and
• Group Protection
We also have Other Operations, which includes the financial data for operations that are not directly related to the business segments.
See “Part I – Item 1. Business” above for a discussion of our business segments and products.
As discussed in Note 3, on May 1, 2018, we completed the acquisition from Liberty Mutual Insurance Company of 100% of the capital
stock of Liberty Life Assurance Company of Boston (“Liberty Life”), an operator of a group benefits business (the “Liberty Group
Business”) and an individual life and individual and group annuity business. We ceded insurance policies relating to the individual life and
individual and group annuity business to third-party reinsurers. The acquisition expanded the scale and capabilities of the Group
Protection business while further diversifying the Company’s sources of earnings. Effective September 1, 2019, Liberty Life’s name was
changed to Lincoln Life Assurance Company of Boston (“LLACB”).
38
In this report, in addition to providing consolidated revenues and net income (loss), we also provide segment operating revenues and
income (loss) from operations because we believe they are meaningful measures of revenues and the profitability of our operating
segments. Operating revenues and income (loss) from operations are the financial performance measures we use to evaluate and assess
the results of our segments. Accordingly, we define and report operating revenues and income (loss) from operations by segment in Note
22. Our management believes that operating revenues and income (loss) from operations explain the results of our ongoing businesses in
a manner that allows for a better understanding of the underlying trends in our current businesses. Certain items are excluded from
operating revenue and income (loss) from operations because they are unpredictable and not necessarily indicative of current operating
fundamentals or future performance of the business segments, and, in many instances, decisions regarding these items do not necessarily
relate to the operations of the individual segments. In addition, we believe that our definitions of operating revenues and income (loss)
from operations will provide investors with a more valuable measure of our performance because it better reveals trends in our
businesses.
We provide information about our segments’ and Other Operations’ operating revenue and expense line items and realized gain (loss),
key drivers of changes and historical details underlying the line items below. For factors that could cause actual results to differ materially
from those set forth, see “Part I – Item 1A. Risk Factors” and “Forward-Looking Statements – Cautionary Language” above.
Industry Trends
We continue to be influenced by a variety of trends that affect the industry.
COVID-19 Pandemic
The COVID-19 pandemic emerged in the United States in the first quarter of 2020 and led to an extreme downturn in and volatility of
the capital markets, record-low interest rates and wide-ranging changes in consumer behavior, including as a result of quarantines, shelter-
in-place orders and limitations on business activity. The severe restriction in economic activity caused by the COVID-19 pandemic and
increased level of unemployment in the United States have contributed to increased volatility and uncertainty regarding expectations for
the economy and markets going forward. The National Bureau of Economic Research, a panel of economists charged with officially
designating business cycles, announced in June 2020 that a recession began in March 2020, ending the longest expansion period in United
States history. Although states have eased restrictions and the capital markets have mostly recovered, it is unclear when the economy will
operate under normal or near-normal conditions. In the third quarter, the economy began to recover from what has been deemed the
shortest recession on record in the United States. However, as the economic and regulatory environment continues to react and evolve,
we cannot predict the full impact of the pandemic and ensuing conditions on our business and financial condition.
As a result of the impacts of the COVID-19 pandemic, we continue to expect higher mortality in our Life Insurance and Group
Protection segments in 2021. Separately, we continue to expect increased disability claims in our Group Protection segment related to the
economic environment and the increased level of unemployment in the United States.
Economic Environment
Because the profitability of some of our business depends in part on interest rates, changes in interest rates may impact both our margins
and our return on invested capital. Some of our products, principally our fixed annuities and universal life insurance (“UL”), including
indexed universal life insurance (“IUL”) and linked-benefit UL, have interest rate guarantees that expose us to the risk that changes in
interest rates or prolonged low interest rates will reduce our spread, or the difference between the interest that we are required to credit to
contracts and the yields that we are able to earn on our general account investments supporting our obligations under the contracts.
In response to the economic impact of the COVID-19 pandemic, the Federal Reserve cut interest rates to near zero in March 2020 and
announced in September 2020 its intention to keep interest rates near zero for the foreseeable future. We expect the continuation of the
low interest rate environment to continue to adversely affect the interest margins of our businesses. For risks related to sustained low
interest rates, see “Significant Operational Matters – Sustained Low Interest Rate Environment” below and “Part I – Item 1A. Risk
Factors – Market Conditions – Changes in interest rates and sustained low interest rates may cause interest rate spreads to decrease,
impacting our profitability, and make it more challenging to meet certain statutory requirements, and changes in interest rates may also
result in increased contract withdrawals.”
The economic environment has improved from early in 2020 but there could be continued weakness in the current environment as a
result of restrictions on economic activity and the increased level of unemployment in the United States. This could impact select
corporate industries and parts of the commercial mortgage loan market. The current environment could lead to increased credit defaults
and/or negative ratings migrations, resulting in an increase to our allowance for credit losses and additional write-downs of financial
assets for impairments in our broader investment portfolio.
39
Regulatory Environment
U.S.-domiciled insurance entities are regulated at the state level, while certain products and services are also subject to federal regulation.
Regulators may refine capital requirements and introduce new reserving standards for the life insurance industry. Regulations recently
adopted or currently under review can potentially affect the capital requirements and profitability of the industry and result in increased
regulation and oversight for the industry. See “Part I – Item 1. Business – Regulatory” and “Part I – Item 1A. Risk Factors – Legislative,
Regulatory and Tax” for a discussion of regulatory developments that may impact the Company and the associated risks.
Significant Operational Matters
Actions in Response to the COVID-19 Pandemic
We took several actions during 2020, and expect to continue to take actions, to preserve our liquidity and capital position in response to
the COVID-19 pandemic and ensuing economic environment conditions. During the second and third quarters of 2020, we suspended
common stock repurchases under our buyback program after repurchasing $225 million of shares in the first quarter of 2020. We
resumed common stock repurchases in the fourth quarter of 2020, repurchasing $50 million of shares.
Debt financing transactions in the first half of 2020 allowed us to redeem our 2021 and prefund our 2022 senior debt maturities, with our
next debt maturity not until 2023.
While the COVID-19 pandemic caused distribution disruption, we efficiently moved to a virtual sales environment across all of our
distribution channels beginning in mid-March 2020. In addition, during 2020, we accelerated a plan already in place, in light of the low
interest rate environment, to re-price certain products to achieve appropriate returns, shift our sales mix toward shorter-duration products
that are less sensitive to interest rates, and add new products that are more capital efficient while increasing consumer choice and
expanding customer value propositions.
We also continue to focus on expense discipline. During the second quarter of 2020, we implemented a plan that significantly reduced
expenses in 2020, and we expect to continue to manage expenses aggressively going forward.
Targeted Annual Operating Earnings Per Share Growth
Growth in operating earnings per share (“EPS”) is a key driver of our long-term performance. We believe that the key drivers to growing
our operating EPS over time include:
• Generating new business and positive net flows through our product development and distribution;
• Capital markets performing in-line with our expectations;
• Expense discipline, our strategic digitization initiative and expense synergies of acquired businesses driving improvement in operating
margins; and
• Capital generation and active capital deployment, consisting of returning capital to common stockholders.
40
Sources of Earnings
We monitor our sources of earnings as a factor in managing our businesses. This information may be useful in assessing our risk profile
and cost of capital. We continue to focus on achieving our long-term goal of increasing mortality and morbidity margins. Growth in this
source of earnings component could be driven by a number of factors, including, but not limited to, pricing actions on our life and group
products and acquiring blocks of mortality/morbidity business. The following table presents the sources of earnings components of
income (loss) from operations, before income taxes, excluding Other Operations:
Investment spread (1)
Mortality/morbidity (2)
Fees on AUM (3)
VA riders (4)
Total (5)
For the Years Ended December 31,
2018
2019
2020
16.6%
1.4%
88.8%
-6.8%
100.0%
19.2%
23.5%
55.2%
2.1%
100.0%
26.4%
26.7%
41.4%
5.5%
100.0%
(1)
Investment spread earnings consist primarily of net investment income, net of interest credited, earned on the underlying general
account investments supporting our fixed products less related expenses.
(2) Mortality/morbidity earnings result from mortality margins, morbidity margins, and certain expense assessments and related fees that
are a function of the rates priced into the product and level of business in force.
(3) Fees on assets under management (“AUM”) earnings consist primarily of asset-based fees charged on variable account values less
associated benefits and related expenses.
(4) Variable annuity (“VA”) riders’ earnings consist of fees charged to the contract holder related to guaranteed benefit rider features,
less the net valuation premium and associated change in benefit reserves and related expenses.
(5) The sources of earnings components include the effect of unlocking resulting from our annual comprehensive review, which for
2020 and 2019 were significantly unfavorable. See “Critical Accounting Policies and Estimates – DAC, VOBA, DSI and DFEL –
Unlocking” below for more information about unlocking.
See Note 22 for additional information on income (loss) from operations by segment.
Sustained Low Interest Rate Environment
Although we have been proactive in our investment strategies, product designs, crediting rate strategies and overall asset-liability practices
to mitigate the risk of unfavorable consequences in this type of environment, declines in our spread, or instances where the returns on
our general account investments are not enough to support the interest rate guarantees on these products, could have an adverse effect on
some of our businesses or results of operations. We have provided disclosures around interest rate spreads and interest rate risk in “Part
I – Item 1A. Risk Factors – Market Conditions – Changes in interest rates and sustained low interest rates may cause interest rate spreads
to decrease, impacting our profitability, and make it more challenging to meet certain statutory requirements, and changes in interest rates
may also result in increased contract withdrawals” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk – Interest
Rate Risk.”
Variable Annuity Hedge Program Performance
We offer variable annuity products with living benefit guarantees. As described below in “Critical Accounting Policies and Estimates –
Derivatives – GLB,” we use derivative instruments to hedge our exposure to the risks and earnings volatility that result from the
guaranteed living benefit (“GLB”) embedded derivatives and benefit ratio unlocking in certain of our variable annuity products. The
income statement effect due to the change in fair value of these instruments tends to move in the opposite direction of the change in
embedded derivative reserves and benefit ratio unlocking. These results are excluded from the Annuities and Retirement Plan Services
segments’ operating revenues and income (loss) from operations (see Note 22). See “Realized Gain (Loss) and Benefit Ratio Unlocking –
Variable Annuity Net Derivatives Results” below for information on our methodology for calculating the non-performance risk (“NPR”),
which affects the discount rate used in the calculation of the GLB embedded derivative reserves.
We also offer variable annuity products with death benefit guarantees. As described below in “Critical Accounting Policies and Estimates
– Future Contract Benefits and Other Contract Holder Obligations – GDB,” we use derivative instruments to hedge the income
statement effect of the guaranteed death benefit (“GDB”) benefit ratio unlocking for movements in equity markets. These results are
excluded from income (loss) from operations (see Note 22).
The costs of derivative instruments that we use to hedge these variable annuity products may increase as a result of a low interest rate
environment.
41
Earnings from Account Values
The Annuities and Retirement Plan Services segments are the most sensitive to the equity markets, as well as, to a lesser extent, our Life
Insurance segment. We discuss the earnings effect of the equity markets on account values and the related asset-based earnings below in
each business segment’s operating results section and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk – Equity
Market Risk – Effect of Equity Market Sensitivity.”
Strategic Digitization Initiative
We continue to make strategic investments in our businesses to grow revenues, further spur productivity and improve our efficiency and
service to our customers. In 2016, we began our enterprise-wide digitization initiative that intends to significantly enhance our customer
experience and provide operational efficiencies over time to meet evolving consumer preferences and marketplace shifts. During 2020,
we saw benefits of approximately $50 million, pre-tax, net of investment. We expect to see annual benefits of $80 million, pre-tax, net of
investment, in 2021, and ultimately $90 million to $150 million as a result of this initiative.
Outlook
Management expects to continue focusing on the following in 2021:
• Making investments in our businesses, primarily in technology/digitization (including integrating and consolidating systems and
processes), product innovation and distribution, to grow revenues, drive margin expansion and reduce costs;
• Re-pricing products to ensure we are achieving the necessary return on capital;
• Focusing a large majority of our new business mix on products without long-term guarantees, which are less sensitive to interest
rates, in line with our long-term growth strategies;
• Adding new products that are more capital efficient while increasing consumer choice and expanding customer value propositions;
• Focusing on expense discipline and managing our expenses aggressively;
• Closely monitoring our capital and liquidity positions taking into account changing economic conditions and monetary policy,
ongoing regulatory activities and our capital deployment strategy;
• Closely monitoring ongoing activities in the legal and regulatory environment and taking an active role in the legislative and/or
regulatory process;
• Exploring additional reinsurance and other strategies addressing the statutory reserve strain related to certain products, namely our
term products; and
• Maintaining risk management and the flexibility to adjust the risk profile of assets within our investment portfolio.
Critical Accounting Policies and Estimates
We have identified the accounting policies below as critical to the understanding of our results of operations and our financial condition.
In applying these critical accounting policies in preparing our financial statements, management must use critical assumptions, estimates
and judgments concerning future results or other developments, including the likelihood, timing or amount of one or more future events.
Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our
assumptions, estimates and judgments based upon historical experience and various other information that we believe to be reasonable
under the circumstances. For a detailed discussion of other significant accounting policies, see Note 1.
DAC, VOBA, DSI and DFEL
Accounting for intangible assets requires numerous assumptions, such as estimates of expected future profitability for our operations and
our ability to retain existing blocks of life and annuity business in force. Our accounting policies for DAC, VOBA, DSI and DFEL affect
the Annuities, Retirement Plan Services, Life Insurance and Group Protection segments.
Deferrals
Qualifying deferrable acquisition expenses are recorded as an asset on our Consolidated Balance Sheets as DAC for products we sold
during a period or VOBA for books of business we acquired during a period. In addition, we defer costs associated with DSI and
revenues associated with DFEL. DSI increases interest credited and reduces income when amortized. DFEL is a liability included within
other contract holder funds on our Consolidated Balance Sheets, and when amortized, increases fee income on our Consolidated
Statements of Comprehensive Income (Loss).
42
We incur certain costs that can be capitalized in the acquisition of insurance contracts. Only those costs incurred that result directly from
and are essential to the successful acquisition of new or renewal insurance contracts may be capitalized as deferrable acquisition costs.
This determination of deferability must be made on a contract-level basis. Some examples of acquisition costs that are subject to deferral
include the following:
• Employee, agent or broker commissions;
• Wholesaler production bonuses;
• Renewal commissions and bonuses to agents or brokers;
• Medical and inspection fees;
• Premium-related taxes and assessments; and
• A portion of the salaries and benefits of certain employees involved in the underwriting, contract issuance and processing, medical
and inspection and sales force contract selling functions.
All other acquisition-related costs, including costs incurred by the insurer for soliciting potential customers, market research, training,
administration, management of distribution and underwriting functions, unsuccessful acquisition or renewal efforts and product
development, are considered non-deferrable acquisition costs and must be expensed in the period incurred.
In addition, the following indirect costs are considered non-deferrable acquisition costs and must be charged to expense in the period
incurred:
• Administrative costs;
• Rent;
• Depreciation;
• Occupancy costs;
• Equipment costs (including data processing equipment dedicated to acquiring insurance contracts);
• Trail commissions; and
• Other general overhead.
Our DAC, VOBA, DSI and DFEL balances (in millions) by business segment as of December 31, 2020, were as follows:
Retirement
Plan
Services
Life
Insurance
Annuities
DAC and VOBA
Gross
Unrealized (gain) loss
Carrying value
DSI
Gross
Unrealized (gain) loss
Carrying value
DFEL
Gross
Unrealized (gain) loss
Carrying value
$
$
$
$
$
$
4,073 $
(291)
3,782 $
232 $
(112)
120 $
7,383
(5,660)
1,723
180 $
(16)
164 $
293 $
(5)
288 $
13 $
-
13 $
36
-
36
- $
-
- $
3,298
(3,185)
113
Group
Protection
Total
$
$
$
$
$
$
187
-
187
-
-
-
-
-
-
$
$
$
$
$
$
11,875
(6,063)
5,812
229
(16)
213
3,591
(3,190)
401
Fixed maturity available-for-sale (“AFS”) securities and certain derivatives are stated at fair value with unrealized gains and losses included
within accumulated other comprehensive income (loss) (“AOCI”), net of associated DAC, VOBA, DSI, future contract benefits, other
contract holder funds and deferred income taxes. The unrealized balances in the table above represent the DAC, VOBA, DSI and DFEL
balances for these effects of unrealized gains and losses on fixed maturity AFS securities and certain derivatives.
43
Amortization
DAC for variable annuity and deferred fixed annuity contracts and UL and variable universal life insurance (“VUL”) policies is amortized
over the lives of the contracts in relation to the incidence of EGPs derived from the contracts. Certain broker commissions or broker-
dealer expenses that vary with and are related to sales of mutual fund products, respectively, are expensed as incurred rather than deferred
and amortized. For our traditional products, we amortize deferrable acquisition costs either on a straight-line basis or as a level percent of
premium of the related contracts, depending on the block of business.
EGPs vary based on a number of sources including policy persistency, mortality, fee income, investment margins, expense margins and
realized gains and losses on investments, including assumptions about the expected level of credit-related losses. Each of these sources of
profit is, in turn, driven by other factors. For example, assets under management and the spread between earned and credited rates drive
investment margins; net amount at risk drives the level of cost of insurance charges and reinsurance premiums. The level of separate
account assets under management is driven by changes in the financial markets (equity and bond markets, hereafter referred to
collectively as “equity markets”) and net flows. Realized gains and losses on investments include amounts resulting from differences in
the actual level of impairments and the levels assumed in calculating EGPs.
We generally amortize DAC, VOBA, DSI and DFEL in proportion to our EGPs for interest-sensitive products. When actual gross
profits are higher in the period than EGPs, we recognize more amortization than planned. When actual gross profits are lower in the
period than EGPs, we recognize less amortization than planned. In a calendar year where the gross profits for a certain group of policies,
or “cohorts,” are negative, our actuarial process limits, or floors, the amortization expense offset to zero. For a discussion of the periods
over which we amortize our DAC, VOBA, DSI and DFEL see “DAC, VOBA, DSI and DFEL” in Note 1.
Unlocking
As discussed and defined in “DAC, VOBA, DSI and DFEL” in Note 1, we conduct our annual comprehensive review of the
assumptions and projection models underlying the amortization of DAC, VOBA, DSI, DFEL, embedded derivatives and reserves for life
insurance and annuity products in the third quarter of each year. We may have unlocking in other quarters as we become aware of
information that warrants updating assumptions outside of our annual comprehensive review.
For illustrative purposes, the following generally presents the hypothetical effects to net income (loss) attributable to changes in certain
assumptions from those our model projections assume, assuming all other factors remain constant:
Change in Assumption
Higher equity markets
Hypothetical
Effect to
Net Income (Loss)
Favorable
Description of Expected Effect
Increase to fee income and decrease to changes in reserves.
Lower equity markets
Unfavorable
Decrease to fee income and increase to changes in reserves.
Higher investment margins
Favorable
Increase to interest rate spread on our fixed product line, including fixed
portion of variable.
Lower investment margins
Unfavorable
Decrease to interest rate spread on our fixed product line, including fixed
portion of variable.
Higher lapses
Unfavorable
Decrease to fee income, partially offset by decrease to benefits due to
shorter contract life.
Lower lapses
Favorable
Increase to fee income, partially offset by increase to benefits due to
longer contract life.
Unfavorable mortality
Unfavorable
Decrease to fee income and increase to changes in reserves due to
shorter contract life.
Favorable mortality
Favorable
Increase to fee income and decrease to changes in reserves due to
longer contract life.
44
Details underlying the effect to net income (loss) from unlocking (in millions) were as follows:
Income (loss) from operations:
Annuities
Retirement Plan Services
Life Insurance
Excluded realized gain (loss)
Net income (loss)
Unlocking was driven primarily by the following:
2020
For the Years Ended December 31,
2018
2019
2020
$
$
(101) $
(3)
(440)
58
(486) $
(93) $
-
(320)
3
(410) $
13
(2)
(20)
8
(1)
As part of our annual comprehensive review in the third quarter, we updated our interest rate assumptions. These updates included
lowering starting new money rates to reflect the current interest rate environment and reducing our long-term new money investment
yield assumption by 50 basis points, resulting in an ultimate long-term assumption of 3.0% for a 10-year U.S. Treasury. As a result of
these updates, we recorded unfavorable after-tax unlocking of $361 million for Life Insurance, $140 million for Annuities and $7 million
for Retirement Plan Services.
• For Annuities, unfavorable unlocking was driven by updates to interest rate assumptions, partially offset by favorable updates to
policyholder behavior assumptions and other items.
• For Retirement Plan Services, unfavorable unlocking was driven by updates to interest rate assumptions, partially offset by favorable
updates to maintenance expense and other items.
• For Life Insurance, unfavorable unlocking was driven by updates to interest rate and policyholder behavior assumptions.
• For excluded realized gain (loss), favorable unlocking was driven by updates to policyholder behavior and separate account fee
assumptions, partially offset by unfavorable updates to other items.
2019
As part of our annual comprehensive review in the third quarter, we updated our interest rate assumptions. These updates included
lowering starting new money rates to reflect the current interest rate environment; reducing our long-term new money investment yield
assumption by 25 basis points, resulting in an ultimate long-term assumption of 3.5% for a 10-year U.S. Treasury; and extending the
grade-in period from current rates to long-term rates from five years to seven years. As a result of these updates, we recorded
unfavorable after-tax unlocking of $225 million for Life Insurance, $63 million for Annuities and $3 million for Retirement Plan Services.
• For Annuities, unfavorable unlocking was driven by updates to interest rate assumptions and other items, partially offset by favorable
updates to separate account fee and policyholder behavior assumptions.
• For Retirement Plan Services, unfavorable unlocking impact from updates to interest rate assumptions was entirely offset by
favorable updates to separate account fee, maintenance expense and policyholder behavior assumptions.
• For Life Insurance, unfavorable unlocking was driven by updates to mortality margin, interest rate and reinsurance assumptions,
partially offset by favorable updates to investment allocation and reserve discount rate assumptions and other items.
• For excluded realized gain (loss), favorable unlocking was driven by updates to capital markets, separate account fee and policyholder
behavior assumptions, partially offset by unfavorable updates to other items.
Reversion to the Mean
Because returns within the variable sub-accounts (“variable funds”) have a significant effect on the value of variable annuity and VUL
products and the fees earned on these accounts, EGPs could increase or decrease with movements in variable fund returns. Significant
and sustained changes in variable funds have had and could in the future have an effect on DAC, VOBA, DSI and DFEL amortization
primarily within our Annuities and RPS segments, as well as, to a lesser extent, our Life Insurance segment.
As variable fund returns do not move in a systematic manner, we reset the baseline of account values from which EGPs are projected,
which we refer to as our reversion to the mean (“RTM”) process. Under our RTM process, future EGPs are projected using stochastic
modeling of a large number of market scenarios in conjunction with best estimates of lapse rates, interest rate spreads and mortality to
develop a statistical distribution of the present value of future EGPs for our variable annuity products. Because variable fund returns are
unpredictable, the underlying premise of this process is that best estimate projections of future EGPs need not be affected by random
short-term and insignificant deviations from expectations in variable fund returns. However, long-term or significant deviations from
expected variable fund returns require a change to best estimate projections of EGPs and unlocking of DAC, VOBA, DSI, DFEL and
45
changes in future contract benefits. The statistical distribution is designed to identify when the deviations from expected returns have
become significant enough to warrant a change of the future variable fund growth rate assumption.
As discussed above, stochastic modeling is used to develop a range of reasonably possible future EGPs. We compare the range of the
present value of the future EGPs from the stochastic modeling to that used in our amortization model. A set of intervals around the
mean of these scenarios is utilized to calculate two separate statistical ranges of reasonably possible EGPs. These intervals are then
compared to the present value of the EGPs used in the amortization model. If the present value of EGPs utilized for amortization were
to exceed the reasonable range of statistically calculated EGPs, a revision of the EGPs used to calculate amortization would be
considered. If a revision is deemed necessary, future EGPs would be re-projected using the current account values at the end of the
period during which the revision occurred along with a long-term variable fund growth rate assumption such that the re-projected EGPs
would be our best estimate of EGPs.
Our practice is not necessarily to unlock immediately after exceeding the first of the two statistical ranges, but, rather, if we stay between
the first and second statistical range for several quarters, we would likely unlock. Additionally, if we exceed the ranges as a result of a
short-term market reaction, we would not necessarily unlock. However, if the second statistical range is exceeded for more than one
quarter, it is likely that we would unlock. While this approach reduces adjustments to DAC, VOBA, DSI and DFEL due to short-term
fluctuations, significant changes in variable fund returns that extend beyond one or two quarters could result in a significant favorable or
unfavorable unlocking. Notwithstanding these intervals, if a severe decline or increase in variable fund values were to occur or should
other circumstances suggest that the present value of future EGPs no longer represents our best estimate, we could determine that a
revision of the EGPs is necessary.
Our long-term variable fund growth rate assumption, which is used in the determination of DAC, VOBA, DSI and DFEL amortization
for the variable component of our variable annuity and VUL products, is an immediate decrease of approximately 13% followed by
growth going forward of 6.5% to 8.25% depending on the block of business and reflecting differences in contract holder fund allocations
between fixed-income and equity-type investments. If we had unlocked our RTM assumption as of December 31, 2020, we would have
recorded favorable unlocking of approximately $365 million, pre-tax, primarily within our Annuities segment.
Investments
Investments are an integral part of our operations, and we invest in fixed maturity securities that are primarily classified as available-for-
sale and carried at fair value with the difference from amortized cost due to factors other than credit loss included in stockholders’ equity
as a component of AOCI. The difference between amortized cost and fair value due to credit loss impairment is recognized in realized
gain (loss) on our Consolidated Statements of Comprehensive Income (Loss). We also invest in equity securities that are carried at fair
value with changes in fair value recognized in realized gain (loss). See “Consolidated Investments” below for more information.
Investment Valuation
Our measurement of fair value is based on assumptions used by market participants in pricing the asset or liability, which may include
inherent risk, restrictions on the sale or use of an asset or NPR, which would include our own credit risk. Our estimate of an exchange
price is the price in an orderly transaction between market participants to sell the asset or transfer the liability (“exit price”) in the
principal market, or the most advantageous market in the absence of a principal market, for that asset or liability, as opposed to the price
that would be paid to acquire the asset or receive a liability (“entry price”). We categorize our financial instruments carried at fair value
into a three-level fair value hierarchy, based on the priority of inputs to the respective valuation technique. The three-level hierarchy for
fair value measurement is defined in Note 1.
46
The following summarizes investments on our Consolidated Balance Sheets carried at fair value by pricing source and fair value hierarchy
level (in millions) as of December 31, 2020:
Quoted
Prices
in Active
Markets for
Significant
Significant
Identical Observable Unobservable
Assets
(Level 1)
Inputs
(Level 2)
Inputs
(Level 3)
Priced by third-party pricing services
Priced by independent broker quotations
Priced by matrices
Priced by other methods (1)
Total
Percent of total
$
$
554 $
-
-
-
554 $
106,696 $
-
14,506
-
121,202 $
0%
93%
7%
100%
Total
Fair Value
107,465
5,296
14,506
3,442
130,709
215 $
5,296
-
3,442
8,953 $
(1) Represents primarily securities for which pricing models were used to compute fair value.
For the categories and associated fair value of our fixed maturity AFS securities classified within Level 3 of the fair value hierarchy as of
December 31, 2020 and 2019, see Notes 1 and 21.
Our investments are valued using the appropriate market inputs based on the investment type, and include benchmark yields, reported
trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. In addition, market
indicators and industry and economic events are monitored, and further market data is acquired if certain triggers are met. We
incorporate the issuer’s credit rating and a risk premium, if warranted, given the issuer’s industry and the security’s time to maturity. We
use an internationally recognized pricing service as our primary pricing source, and we do not adjust prices received from third parties or
obtain multiple prices when measuring the fair value of our investments. We generally use prices from the pricing service rather than
broker quotes because we have documentation from the pricing service on the observable market inputs they use, as compared to the
limited information on the pricing inputs from broker quotes. For private placement securities, we use pricing matrices that utilize
observable pricing inputs of similar public securities and Treasury yields as inputs to the fair value measurement. It is possible that
different valuation techniques and models, other than those described above, could produce materially different estimates of fair value.
When the volume and level of activity for an asset or liability has significantly decreased in relation to normal market activity for the asset
or liability, we believe that the market is not active. Activities that may indicate a market is not active include fewer recent transactions in
the market, price quotations that lack current information and/or vary substantially over time or among market makers, limited public
information, uncorrelated indexes with recent fair values of assets and abnormally wide bid-ask spread. As of December 31, 2020, we
evaluated the markets that our securities trade in and concluded that none were inactive. We will continue to re-evaluate this conclusion,
as needed, based on market conditions.
We use unobservable inputs to measure the fair value of securities trading in less liquid or illiquid markets with limited or no pricing
information. We obtain broker quotes for securities such as synthetic convertibles, index-linked certificates of deposit and collateralized
debt obligations when sufficient security structure or other market information is not available to produce an evaluation. For broker-
quoted only securities, non-binding quotes from market makers or broker-dealers are obtained from sources recognized as market
participants. Broker-quoted securities are based solely on receipt of updated quotes from a single market maker or a broker-dealer
recognized as a market participant. Our broker-quoted only securities are generally classified as Level 3 of the fair value hierarchy. As of
December 31, 2020, we used broker quotes for 94 securities as our final price source, representing 1% of total securities owned.
In order to validate the pricing information and broker quotes, we employ, where possible, procedures that include comparisons with
similar observable positions, comparisons with subsequent sales and observations of general market movements for those security classes.
Our primary third-party pricing service has policies and processes to ensure that it is using objectively verifiable observable market data.
The pricing service regularly reviews the evaluation inputs for securities covered, including broker quotes, executed trades and credit
information, as applicable. If the pricing service determines it does not have sufficient objectively verifiable information about a security’s
valuation, it discontinues providing a valuation for the security. The pricing service regularly publishes and updates a summary of inputs
used in its valuations by major security type. In addition, we have policies and procedures in place to review the process that is utilized by
the third-party pricing service and the output that is provided to us by the pricing service. On a periodic basis, we test the pricing for a
sample of securities to evaluate the inputs and assumptions used by the pricing service, and we perform a comparison of the pricing
service output to an alternative pricing source. In addition, we check prices provided by our primary pricing service to ensure that they
are not stale or unreasonable by reviewing the prices for unusual changes from period to period based on certain parameters or for lack of
change from one period to the next. If such anomalies in the pricing are observed, we may use pricing information from another pricing
source.
47
Valuation of Alternative Investments
Recognition of investment income on alternative investments is delayed due to the availability of the related financial statements, which
are generally obtained from the partnerships’ general partners, as our venture capital, real estate and oil and gas portfolios are generally
reported to us on a three-month delay, and our hedge funds are reported to us on a one-month delay. In addition, the effect of annual
audit adjustments related to completion of calendar-year financial statement audits of the investees are typically received during the first
or second quarter of each calendar year. Accordingly, our investment income from alternative investments for any calendar year period
may not include the complete effect of the change in the underlying net assets for the partnership for that calendar year period. Recorded
audit adjustments affect our investment income on alternative investments in the period that the adjustments are recorded.
Measurement of Allowances for Credit Losses and Recognition of Impairments
As of January 1, 2020, we adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments (“ASU 2016-13”), which replaced the historical incurred credit loss methodology with an expected credit loss
methodology and impacts the way we recognize and measure impairment. See Note 2 for additional information.
We regularly review our fixed maturity AFS securities for declines in fair value that we determine to be impairment-related. Realized
gains and losses generally originate from asset sales to reposition the portfolio or to respond to product experience. In the process of
evaluating whether a security with an unrealized loss reflects declines that are related to credit losses, we consider our ability and intent to
sell the security prior to a recovery of value. However, subsequent decisions on securities sales are made within the context of overall risk
monitoring, assessing value relative to other comparable securities and overall portfolio maintenance. Although our portfolio managers
may, at a given point in time, believe that the preferred course of action is to hold securities with unrealized losses attributable to factors
other than credit loss until such losses are recovered, the dynamic nature of portfolio management may result in a subsequent decision to
sell. These subsequent decisions are consistent with the classification of our investment portfolio as AFS. We expect to continue to
manage all non-trading investments within our portfolios in a manner that is consistent with the AFS classification.
We consider economic factors and circumstances within industries and countries where recent impairments have occurred in our
assessment of the position of securities we own of similarly situated issuers. While it is possible for realized or unrealized losses on a
particular investment to affect other investments, our risk management strategy has been designed to identify correlation risks and other
risks inherent in managing an investment portfolio. Once identified, strategies and procedures are developed to effectively monitor and
manage these risks. The areas of risk correlation that we pay particular attention to are risks that may be correlated within specific
financial and business markets, risks within specific industries and risks associated with related parties. When the detailed analysis by our
external asset managers and investment portfolio managers leads us to the conclusion that a security’s decline in fair value is due to credit
loss, a credit loss allowance is recorded. In instances where declines are related to factors other than credit loss, the security will continue
to be carefully monitored.
There are risks and uncertainties associated with determining whether an investment shows indications of impairment. These include
subsequent significant changes in general overall economic conditions, as well as specific business conditions affecting particular issuers,
future financial market effects such as interest rate spreads, stability of foreign governments and economies, future rating agency actions
and significant accounting, fraud or corporate governance issues that may adversely affect certain investments. In addition, there are
often significant estimates and assumptions that we use to estimate the fair values of securities as described in “Investment Valuation”
above. We continually monitor developments and update underlying assumptions and financial models based upon new information.
For certain securitized fixed maturity AFS securities with contractual cash flows, including asset-backed securities (“ABS”), we use our
best estimate of cash flows for the life of the security to determine whether it is credit impaired. In addition, we review for other
indicators of impairment as required by the Investments – Debt and Equity Securities Topic of the Financial Accounting Standards Board
(“FASB”) Accounting Standards CodificationTM (“ASC”).
Write-downs on real estate and other investments are experienced when the estimated value of the asset is deemed to be less than the
carrying value. Write-downs and allowance for credit losses for commercial mortgage loans are established when the estimated value of
the asset is deemed to be less than the carrying value. All commercial mortgage loans that are impaired are individually reviewed to
determine an appropriate credit loss allowance. Changing economic conditions affect our valuation of commercial mortgage loans.
Increasing vacancies, declining rents and the like are incorporated into the allowance for credit losses analysis that we perform for
monitored loans and may contribute to an increase in the allowance for credit losses. In addition, we continue to monitor the entire
commercial mortgage loan portfolio to identify both current and projected future risk based on reasonable and supportable forecasts.
Areas of emphasis include properties that have deteriorating credits or have experienced debt-service coverage and/or loan-to-value
reduction. Where warranted, we have established or increased our allowance for credit losses based upon this analysis.
We have also established an allowance for credit losses on our residential mortgage loan portfolio that includes a specific credit loss
allowance for loans that are deemed to be impaired as well as an allowance for credit losses for pools of loans with similar risk
characteristics. The allowance for credit losses for the performing population of loans is based on historical performance for similar
loans, as well as projected future losses based on modeling, which includes reasonable and supportable forecasts. The historical data
utilized in the allowance for credit losses calculation process is adjusted for current economic conditions.
48
Amortization of DAC, VOBA, DSI and DFEL and changes in other contract holder funds reflect an assumption for an expected level of
credit-related investment losses. When actual credit-related investment losses are realized, we recognize a true-up to our DAC, VOBA,
DSI and DFEL amortization and changes in other contract holder funds within realized losses reflecting the incremental effect of actual
versus expected credit-related investment losses. These actual to expected amortization adjustments could create volatility in net realized
gains and losses.
Derivatives
We maintain an overall risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned
fluctuations in earnings that are caused by interest rate risk, foreign currency exchange risk, equity market risk, default risk, basis risk and
credit risk. Assessing the effectiveness of these hedging programs and evaluating the carrying values of the related derivatives often
involve a variety of assumptions and estimates. Our accounting policies for derivatives and the potential effect on interest spreads in a
falling rate environment are discussed in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk,” Notes 1 and 6.
We carry our derivative instruments at fair value, which we determine through valuation techniques or models that use market data inputs
or independent broker quotations. The fair values fluctuate from period to period due to the volatility of the valuation inputs, including
but not limited to swap interest rates, interest and equity volatility and equity index levels, foreign currency forward and spot rates, credit
spreads and correlations, some of which are significantly affected by economic conditions. The effect to revenue is reported in realized
gain (loss) and such amount along with the associated federal income taxes is excluded from income (loss) from operations of our
segments.
Certain of our variable annuity contracts reported within future contract benefits contain embedded derivatives that are carried at fair
value on a recurring basis and are all classified as Level 3 of the fair value hierarchy, including our GLB reserves embedded derivatives, a
portion of which may be reported in either other assets or other liabilities. These embedded derivatives are valued based on a stochastic
projection of scenarios of the embedded derivative cash flows. The scenario assumptions, at each valuation date, are those we view to be
appropriate for a hypothetical market participant and include assumptions for capital markets, actuarial lapse, benefit utilization, mortality,
risk margin, administrative expenses and a margin for profit. In addition, an NPR component is determined at each valuation date that
reflects our risk of not fulfilling the obligations of the underlying liability. The spread for the NPR is added to the discount rates used in
determining the fair value from the net cash flows. We believe these assumptions are consistent with those that would be used by a
market participant; however, as the related markets develop, we will continue to reassess our assumptions. It is possible that different
valuation techniques and assumptions could produce a materially different estimate of fair value. Changes in the fair value of these
embedded derivatives result primarily from changes in market conditions. For more information, see Notes 1 and 21.
GLB
We have a dynamic hedging strategy designed to mitigate selected risk and income statement volatility caused by changes in the equity
markets, interest rates and market-implied volatilities associated with the guaranteed withdrawal benefit (“GWB”) and guaranteed income
benefit (“GIB”) features that are available in our variable annuity products. We have certain GLB variable annuity products with GWB
and GIB features that are embedded derivatives. Certain features of these guarantees have elements of both insurance benefits accounted
for under the Financial Services – Insurance – Claim Costs and Liabilities for Future Policy Benefits Subtopic of the FASB ASC (“benefit
reserves”) and embedded derivative reserves. We calculate the value of the embedded derivative reserve and the benefit reserve based on
the specific characteristics of each GLB feature. In addition to mitigating selected risk and income statement volatility, the hedge
program is also focused on a long-term goal of accumulating assets that could be used to pay claims under these benefits.
Changes in the value of the hedge contracts hedge the income statement effect of changes in GLB embedded derivative reserves and
benefit reserves. This dynamic hedging strategy utilizes options and total return swaps on U.S.-based equity indices, and futures on U.S.-
based and international equity indices, as well as interest rate futures, interest rate swaps and currency futures. The notional amounts of
the underlying hedge instruments are such that the magnitude of the change in the value of the hedge instruments due to changes in
equity markets, interest rates and implied volatilities is designed to offset the magnitude of the change in the GLB embedded derivative
reserves and GLB benefit reserves caused by changes in equity markets, as well as the change in GLB embedded derivative reserves
caused by changes in interest rates and implied volatilities. See “Realized Gain (Loss) and Benefit Ratio Unlocking – Variable Annuity
Net Derivatives Results” below for information on how we determine our NPR.
As part of our current hedging program, equity market, interest rate and market-implied volatility conditions are monitored on a daily
basis. We rebalance our hedge positions based upon changes in these factors as needed. While we actively manage our hedge positions,
these positions may not completely offset changes in the fair value of embedded derivative reserves and benefit reserves caused by
movements in these factors due to, among other things, differences in timing between when a market exposure changes and
corresponding changes to the hedge positions, extreme swings in the equity markets, interest rates and market-implied volatilities, realized
market volatility, contract holder behavior, divergence between the performance of the underlying funds and the hedging indices,
divergence between the actual and expected performance of the hedge instruments or our ability to purchase hedging instruments at
prices consistent with our desired risk and return trade-off.
49
Within our individual annuity business, 59% and 63% of our variable annuity account values contained GLB features as of December 31,
2020 and 2019, respectively. Underperforming equity markets increase our exposure to potential benefits with the GLB features. A
contract with a GLB feature is “in the money” if the contract holder’s account balance falls below the present value of guaranteed
withdrawal or income benefits, assuming no lapses. As of December 31, 2020 and 2019, 10% of all in-force contracts with a GLB feature
were “in the money,” and our exposure, after reinsurance, as of December 31, 2020 and 2019, was $582 million and $598 million,
respectively. However, the only way the contract holder can realize the excess of the present value of benefits over the account value of
the contract is through a series of withdrawals or income payments that do not exceed a maximum amount. If, after the series of
withdrawals or income payments, the account value is exhausted, the contract holder will continue to receive a series of annuity payments.
The account value can also fluctuate with equity market returns on a daily basis resulting in increases or decreases in the excess of the
present value of benefits over account value.
As a result of these factors, the ultimate amount to be paid by us related to GLB guarantees is uncertain and could be significantly more
or less than $582 million, net of reinsurance. Our fair value estimates of the GLB embedded derivatives, which are based on detailed
models of future cash flows under a wide range of market-consistent scenarios, reflect a more comprehensive view of the related factors
and represent our best estimate of the present value of these potential liabilities. The market-consistent scenarios used in the
determination of the fair value of the GLB embedded derivatives are similar to those used by an investment bank to value derivatives for
which the pricing is not transparent and the aftermarket is nonexistent or illiquid. We use risk-neutral Monte Carlo simulations in our
calculation to value the entire block of guarantees, which involve 100 unique scenarios per policy or approximately 47 million scenarios.
The market-consistent scenario assumptions, at each valuation date, are those we view to be appropriate for a hypothetical market
participant. The market-consistent inputs include, but are not limited to, assumptions for capital markets (e.g., implied volatilities,
correlation among indices, risk-free swap curve, etc.), policyholder behavior (e.g., policy lapse, rider utilization, etc.), mortality, risk
margins, maintenance expenses and a margin for profit. We believe these assumptions are consistent with those that would be used by a
market participant; however, as the related markets develop, we will continue to reassess our assumptions. It is possible that different
valuation techniques and assumptions could produce a materially different estimate of fair value. For information on our variable annuity
hedge program performance, see our discussion in “Realized Gain (Loss) and Benefit Ratio Unlocking – Variable Annuity Net
Derivatives Results” below.
The following table presents our estimates of the potential instantaneous effect to net income (loss) that could result from sudden
changes that may occur in equity markets, interest rates and implied market volatilities (in millions) at the levels indicated in the table and
excludes the net cost of operating the hedging program. The amounts represent the estimated difference between the change in the
portion of GLB reserves that is calculated on a fair value basis and the change in the value of the underlying hedge instruments after the
amortization of DAC, VOBA, DSI and DFEL and taxes. These effects do not include any estimate of unlocking that could occur, nor
do they estimate any change in the NPR component of the GLB reserve or any estimate of effects to our GLB benefit ratio unlocking.
These estimates are based upon the recorded reserves as of December 31, 2020, and the related hedge instruments in place as of that date.
The effects presented in the table below are not representative of the aggregate impacts that could result if a combination of such changes
to equity market returns, interest rates and implied volatilities occurred.
Equity Market Return
Hypothetical effect to net income
Interest Rates
Hypothetical effect to net income
Implied Volatilities
Hypothetical effect to net income
-20%
In-Force Sensitivities
-10%
-5%
5%
(215) $
(44) $
(8) $
(18)
-50 bps
-25 bps
+25 bps
+50 bps
(11) $
(3) $
(5) $
(19)
4%
2%
-2%
-4%
2
$
2
$
(2) $
(6)
$
$
$
50
The following table shows the effect (dollars in millions) of indicated changes in instantaneous shifts in equity market returns, interest rate
scenarios and market-implied volatilities:
Scenario 1
Scenario 2
Scenario 3
Equity
Market
Return
Assumptions of Changes In
Interest
Rate
Yields
-12.5 bps
-25.0 bps
-50.0 bps
Market
Implied
Volatilities
+1%
+2%
+4%
-5%
-10%
-20%
Net
Income
$
(14)
(72)
(327)
The actual effects of the results illustrated in the two tables above could vary significantly depending on a variety of factors, many of
which are out of our control, and consideration should be given to the following:
• The analysis is only valid as of December 31, 2020, due to changing market conditions, contract holder activity, hedge positions and
other factors;
• The analysis assumes instantaneous shifts in the capital market factors and no ability to rebalance hedge positions prior to the market
changes;
• The analysis assumes constant exchange rates and implied dividend yields;
• Assumptions regarding shifts in the market factors, such as assuming parallel shifts in interest rate and implied volatility term
•
structures, may be overly simplistic and not indicative of actual market behavior in stress scenarios;
It is very unlikely that one capital market sector (e.g., equity markets) will sustain such a large instantaneous movement without
affecting other capital market sectors; and
• The analysis assumes that there is no tracking or basis risk between the funds and/or indices affecting the GLB reserves and the
instruments utilized to hedge these exposures.
Index Benefits
Our indexed annuity and IUL contracts permit the holder to elect a fixed interest rate return or a return where interest credited to the
contracts is linked to the performance of the S&P 500® Index or other indices. Contract holders may elect to rebalance among the
various accounts within the product at renewal dates. At the end of each indexed term, which can be up to six years, we have the
opportunity to re-price the indexed component by establishing different participation rates, caps, spreads or specified rates, subject to
contractual guarantees. We purchase and sell index options that are highly correlated to the portfolio allocation decisions of our contract
holders, such that we are economically hedged with respect to equity returns for the current reset period. The mark-to-market of the
options held generally offsets the change in value of the embedded derivative within the contract, both of which are recorded as a
component of realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss). The Derivatives and Hedging and
the Fair Value Measurements and Disclosures Topics of the FASB ASC require that we calculate fair values of index options we may
purchase or sell in the future to hedge contract holder index allocations in future reset periods. These fair values represent an estimate of
the cost of the options we will purchase or sell in the future, discounted back to the date of the balance sheet, using current market
indicators of volatility and interest rates. Changes in the fair values of these liabilities are included as a component of realized gain (loss)
on our Consolidated Statements of Comprehensive Income (Loss). For information on our index benefits hedging results, see our
discussion in “Realized Gain (Loss) and Benefit Ratio Unlocking” below.
Future Contract Benefits and Other Contract Holder Obligations
Reserves
Reserves are the amounts that, with the additional premiums to be received and interest thereon compounded annually at certain assumed
rates, are calculated to be sufficient to meet the various policy and contract obligations as they mature. Establishing adequate reserves for
our obligations to contract holders requires assumptions to be made regarding mortality and morbidity. The applicable insurance laws
under which insurance companies operate require that they report, as liabilities, policy reserves to meet future obligations on their
outstanding contracts. These laws specify that the reserves shall not be less than reserves calculated using certain specified mortality and
morbidity tables, interest rates and methods of valuation.
The reserves reported in our consolidated financial statements contained herein are calculated in accordance with generally accepted
accounting principles (“GAAP”) and differ from those specified by the laws of the various states and carried in the statutory financial
statements of the life insurance subsidiaries. These differences arise from the use of mortality and morbidity tables, interest, persistency
and other assumptions that we believe to be more representative of the expected experience for these contracts than those required for
statutory accounting purposes and from differences in actuarial reserving methods.
51
The assumptions on which reserves are based are intended to represent an estimation of experience for the period that policy benefits are
payable. If actual experience is better than or equal to the assumptions, then reserves should be adequate to provide for future benefits
and expenses. If experience is worse than the assumptions, additional reserves may be required. This would result in a charge to our net
income during the period the increase in reserves occurred. The key experience assumptions include mortality rates, policy persistency
and interest rates. We periodically review our experience and update our policy reserves for new issues and reserve for all claims incurred,
as we believe appropriate.
GDB
The reserves related to the GDB features available in our variable annuity products are based on the application of a “benefit ratio” (the
present value of total expected benefit payments over the life of the contract divided by the present value of total expected assessments
over the life of the contract) to total variable annuity assessments received in the period. The level and direction of the change in reserves
will vary over time based on the emergence of the benefit ratio and the level of assessments associated with the variable annuity.
We utilize a delta hedging strategy for variable annuity products with a GDB feature, which uses futures and total return swaps on equity
market indices to hedge against movements in equity markets. The hedging strategy is designed to hedge our exposure to earnings
volatility that results from equity market driven changes in the reserve for GDB contracts. Because the GDB reserves are based upon
projected long-term equity market return assumptions, and because the value of the hedging contracts will reflect current capital market
conditions, the quarterly changes in values for the GDB reserves and the hedging contracts may not exactly offset each other. For
information on our variable annuity hedge program performance, see our discussion in “Realized Gain (Loss) and Benefit Ratio
Unlocking – Variable Annuity Net Derivatives Results” below.
UL Products with Secondary Guarantees
We issue UL contracts where we provide a secondary guarantee to the contract holder. The policy can remain in force, even if the base
policy account value is zero, as long as contractual secondary guarantee requirements have been met. The reserves related to UL products
with secondary guarantees are based on the application of a benefit ratio the same as our GDB features, which are discussed above. The
level and direction of the change in reserves will vary over time based on the emergence of the benefit ratio and the level of assessments
associated with the contracts. For more discussion, see “Results of Life Insurance” below.
Goodwill and Other Intangible Assets
Goodwill and intangible assets with indefinite lives are not amortized, but are reviewed for impairment annually as of October 1 and
more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit
below its carrying value. Intangibles that do not have indefinite lives are amortized over their estimated useful lives. We perform a
quantitative goodwill impairment test where the fair value of the reporting unit is determined and compared to the carrying value of the
reporting unit. If the carrying value of the reporting unit exceeds the reporting unit’s fair value, goodwill is impaired and written down to
the reporting unit’s fair value. The results of one test on one reporting unit cannot subsidize the results of another reporting unit. For
the purposes of the evaluation of the carrying value of goodwill, our reporting units (Annuities, Retirement Plan Services, Life
Insurance and Group Protection) correspond with our reporting segments.
The fair values of our reporting units are comprised of the value of in-force (i.e., existing) business and the value of new business.
Specifically, new business is representative of cash flows and profitability associated with policies or contracts we expect to issue in the
future, reflecting our forecasts of future sales volume and product mix over a 10-year period. To determine the values of in-force and
new business, we use a discounted cash flows technique that applies a discount rate reflecting the market expected, weighted-average rate
of return adjusted for the risk factors associated with operations to the projected future cash flows for each reporting unit.
As of October 1, 2020 and 2019, we performed our annual quantitative goodwill impairment test for our reporting units, and, as of each
such date, the fair value was in excess of each reporting unit’s carrying value for Annuities, Retirement Plan Services, Life Insurance and
Group Protection.
52
We apply significant judgment when determining the estimated fair value of our reporting units. Factors that can influence the value of
goodwill include the capital markets, competitive landscape, regulatory environment, consumer confidence and any items that can directly
or indirectly affect new business future cash flows. Factors that could affect production levels and profitability of new business include
mix of new business, pricing changes, customer acceptance of our products and distribution strength. Spread compression and related
effects to profitability caused by lower interest rates affect the valuation of in-force business more significantly than the valuation of new
business, as new business pricing assumptions reflect the current and anticipated future interest rate environment. Estimates of fair value
are inherently uncertain and represent only management’s reasonable expectation regarding future developments. Examples of
unfavorable changes to assumptions or factors that could result in future impairment include, but are not limited to, the following:
• Lower expectations for future sales levels or future sales profitability;
• Higher discount rates on new business assumptions;
• Weakened expectations for the ability to execute future reserve financing transactions for life insurance business over the long-term
or expectations for significant increases in the associated costs;
• Legislative, regulatory or tax changes that affect the cost of, or demand for, our subsidiaries’ products, the required amount of
reserves and/or surplus, or otherwise affect our ability to conduct business, including changes to statutory reserve requirements or
changes to risk-based capital (“RBC”) requirements; and
• Valuations of significant mergers or acquisitions of companies or blocks of business that would provide relevant market-based inputs
for our impairment assessment that could support less favorable conclusions regarding the estimated fair value of our reporting units.
Refer to Note 10 for goodwill and specifically identifiable intangible assets by segment.
Income Taxes
Management uses certain assumptions and estimates in determining the income taxes payable or refundable for the current year, the
deferred income tax liabilities and assets for items recognized differently in its financial statements from amounts shown on its income
tax returns and the federal income tax expense. Determining these amounts requires analysis and interpretation of current tax laws and
regulations. Management exercises considerable judgment in evaluating the amount and timing of recognition of the resulting income tax
liabilities and assets. These judgments and estimates are re-evaluated on a continual basis as regulatory and business factors change.
Legislative changes to the Internal Revenue Code of 1986, as amended, modifications or new regulations, administrative rulings, or court
decisions could increase or decrease our effective tax rate.
The application of GAAP requires us to evaluate the recoverability of our deferred tax assets and establish a valuation allowance, if
necessary, to reduce our deferred tax asset to an amount that is more likely than not to be realizable. Considerable judgment and the use
of estimates are required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. In
evaluating the need for a valuation allowance, we consider many factors, including: the nature and character of the deferred tax assets and
liabilities; taxable income in prior carryback years; future reversals of existing temporary differences; the length of time carryovers can be
utilized; and any tax planning strategies we would employ to avoid a tax benefit from expiring unused. Although realization is not
assured, management believes it is more likely than not that the deferred tax assets, including our net operating loss deferred tax asset, will
be realized. For additional information on our income taxes, see Note 7.
For information about acquisitions and dispositions, see Note 3.
Acquisitions and Dispositions
53
Details underlying the consolidated results, deposits, net flows and account values (in millions) were as follows:
RESULTS OF CONSOLIDATED OPERATIONS
Net Income (Loss)
Income (loss) from operations:
Annuities
Retirement Plan Services
Life Insurance
Group Protection
Other Operations
Excluded realized gain (loss), after-tax
Benefit ratio unlocking, after-tax
Net impact from the Tax Cuts and Jobs Act
Acquisition and integration costs related to mergers
and acquisitions, after-tax
Gain (loss) on early extinguishment of debt, after-tax
Net income (loss)
Deposits
Annuities
Retirement Plan Services
Life Insurance
Total deposits
Net Flows
Annuities
Retirement Plan Services
Life Insurance
Total net flows
Account Values
Annuities
Retirement Plan Services
Life Insurance
Total account values
Comparison of 2020 to 2019
Net income decreased due primarily to the following:
For the Years Ended December 31,
2018
2019
2020
$
$
$
$
$
$
$
$
$
983
168
(34)
43
(295)
(570)
194
37
(15)
(12)
499
$
954
172
259
238
(268)
(627)
277
17
(103)
(33)
886
$
$
1,102
171
645
187
(225)
(37)
(136)
19
(67)
(18)
1,641
For the Years Ended December 31,
2018
2019
2020
11,260
10,017
5,890
27,167
$
$
14,525
9,465
7,320
31,310
(341) $
166
4,137
3,962
$
1,851
620
5,422
7,893
$
$
$
$
12,363
10,068
6,438
28,869
(139)
2,546
4,679
7,086
As of December 31,
2019
2018
2020
157,518
88,307
57,605
303,430
$
$
142,128
78,689
54,255
275,072
$
$
121,279
67,055
49,589
237,923
• Higher benefits in our Life Insurance and Group Protection segments driven by the COVID-19 pandemic.
•
Spread compression due to average new money rates trailing our current portfolio yields, partially offset by actions implemented to
reduce interest crediting rates.
• The effect of unlocking.
• Lower prepayment and bond make-whole premiums.
The decrease in net income was partially offset by the following:
• Higher investment income on alternative investments.
• Aggressively managing expenses, and lower incentive compensation as a result of production performance.
• Lower acquisition and integration costs incurred associated with our 2018 acquisition.
• Growth in average account values, business in force and group earned premiums.
• Lower realized losses.
For a discussion of the expected and potential impacts of the COVID-19 pandemic, see “Introduction – Executive Summary” above and
“Part I – Item 1A. Risk Factors – Market Conditions – The impacts of the COVID-19 pandemic have adversely affected and are
expected to continue to adversely affect our business and results of operations, and the future impacts of the COVID-19 pandemic on
the company’s business, results of operations and financial condition remain uncertain.”
54
Income (Loss) from Operations
Details underlying the results for Annuities (in millions) were as follows:
RESULTS OF ANNUITIES
Operating Revenues
Insurance premiums (1)
Fee income
Net investment income
Operating realized gain (loss) (2)
Amortization of deferred gain on
business sold through reinsurance
Other revenues (3)
Total operating revenues
Operating Expenses
Interest credited
Benefits (1)
Commissions and other expenses
Total operating expenses
Income (loss) from operations before taxes
Federal income tax expense (benefit)
Income (loss) from operations
For the Years Ended December 31,
2018
2019
2020
$
$
121
2,394
1,272
214
29
425
4,455
773
696
1,854
3,323
1,132
149
983
$
$
502
2,357
1,140
190
30
381
4,600
698
938
1,871
3,507
1,093
139
954
$
$
390
2,342
1,005
192
8
446
4,383
587
673
1,838
3,098
1,285
183
1,102
(1)
Insurance premiums include primarily our income annuities that have a corresponding offset in benefits. Benefits include changes in
income annuity reserves driven by premiums.
(2) See “Realized Gain (Loss) and Benefit Ratio Unlocking” below.
(3) Consists primarily of revenues attributable to broker-dealer services that are subject to market volatility and the net settlement related
to a modified coinsurance (“Modco”) reinsurance transaction.
Comparison of 2020 to 2019
Income from operations for this segment increased due primarily to the following:
• Higher net investment income, net of interest credited, driven by higher average gross fixed account values and investment income
on alternative investments within our surplus portfolio.
• Higher fee income driven by higher average daily variable account values.
• Lower commissions and other expenses due to the effect of unlocking, expense management and incentive compensation as a result
of production performance, partially offset by higher trail commissions resulting from higher average account values.
The increase in income from operations was partially offset by higher benefits, net of changes in income annuity reserves, due to the
effect of unlocking, an increase in the growth in benefit reserves driven primarily by equity market performance and an increase in costs
associated with our hedge program.
See “Critical Accounting Policies and Estimates – DAC, VOBA, DSI and DFEL – Unlocking” above for information about unlocking.
Additional Information
Strategic near-term actions to re-price certain products and to shift sales from fixed annuity products to respond to the low interest rate
environment have contributed to lower deposits and negative net flows in 2020. We expect the trend of negative net flows to persist into
2021. For a discussion of the expected and potential impacts of the COVID-19 pandemic, see “Introduction – Executive Summary”
above and “Part I – Item 1A. Risk Factors – Market Conditions – The impacts of the COVID-19 pandemic have adversely affected and
are expected to continue to adversely affect our business and results of operations, and the future impacts of the COVID-19 pandemic
on the company’s business, results of operations and financial condition remain uncertain.”
New deposits are an important component of net flows and key to our efforts to grow our business. Although deposits do not
significantly affect current period income from operations, they can significantly impact future income from operations.
55
The other component of net flows relates to the retention of the business. An important measure of retention is the reduction in account
values caused by full surrenders, deaths and other contract benefits. These outflows as a percentage of average gross account values were
7%, 9% and 9% in 2020, 2019 and 2018, respectively.
Our fixed annuity business includes products with discretionary crediting rates that are reset on an annual basis and are not subject to
surrender charges. Our ability to retain annual reset annuities will be subject to current competitive conditions at the time interest rates
for these products reset. We expect to manage the effects of spreads on near-term income from operations through portfolio
management and, to a lesser extent, crediting rate actions, which assumes no significant changes in net flows into or out of our fixed
accounts or other changes that may cause interest rate spreads to differ from our expectations. For information on interest rate spreads
and the interest rate risk due to falling interest rates, see “Part I – Item 1A. Risk Factors – Market Conditions – Changes in interest rates
and sustained low interest rates may cause interest rate spreads to decrease, impacting our profitability, and make it more challenging to
meet certain statutory requirements, and changes in interest rates may also result in increased contract withdrawals” and “Effect of
Interest Rate Sensitivity” and “Interest Rate Risk on Fixed Insurance Businesses – Falling Rates” in “Item 7A. Quantitative and
Qualitative Disclosures About Market Risk – Interest Rate Risk.”
Fee Income
Details underlying fee income, account values and net flows (in millions) were as follows:
Fee Income
Mortality, expense and other assessments
Surrender charges
DFEL:
Deferrals
Amortization, net of interest:
For the Years Ended December 31,
2018
2019
2020
$
$
2,381
16
$
2,336
25
2,322
30
(31)
(38)
(39)
Amortization, net of interest, excluding unlocking
Unlocking
Total fee income
26
2
2,394
$
34
-
2,357
$
31
(2)
2,342
$
As of or For the Years Ended
December 31,
2019
2018
2020
Variable Account Value Information
Variable annuity deposits (1)
Increases (decreases) in variable annuity account values:
Net flows (1)
Change in market value (1)
Contract holder assessments (1)
Transfers to the variable portion of variable annuity
products from the fixed portion of variable annuity
products
Variable annuity account values (1)
Average daily variable annuity account values (1)
Average daily S&P 500® Index (2)
$
3,978
$
5,293
$
5,105
(5,262)
16,106
(2,554)
(4,805)
19,844
(2,491)
(4,580)
(5,412)
(2,484)
831
128,175
116,117
3,218
1,760
119,047
112,978
2,914
2,867
104,737
113,595
2,744
(1) Excludes the fixed portion of variable.
(2) We generally use the S&P 500 Index as a benchmark for the performance of our variable account values. The account values of our
variable annuity contracts are invested by our policyholders in a variety of investment options including, but not limited to, domestic
and international equity securities and fixed income, which do not necessarily align with S&P 500 Index performance. See Note 11
for additional information.
56
We charge contract holders mortality and expense assessments on variable annuity accounts to cover insurance and administrative
expenses. These assessments are a function of the rates priced into the product and the average daily variable account values. Average
daily variable account values are driven by net flows and variable fund returns. Charges on GLB riders are assessed based on a
contractual rate that is applied either to the account value or the guaranteed amount. We may collect surrender charges when our fixed
and variable annuity contract holders surrender their contracts during the surrender charge period to protect us from premature
withdrawals. Fee income includes charges on both our variable and fixed annuity products, but excludes the attributed fees on our GLB
riders; see “Realized Gain (Loss) and Benefit Ratio Unlocking – Operating Realized Gain (Loss)” below for discussion of these attributed
fees.
Net Investment Income and Interest Credited
Details underlying net investment income, interest credited and fixed account values (in millions) were as follows:
Net Investment Income
Fixed maturity AFS securities, mortgage loans on real estate
and other, net of investment expenses
$
1,122
$
1,004
$
835
Commercial mortgage loan prepayment and bond
For the Years Ended December 31,
2018
2019
2020
make-whole premiums (1)
Surplus investments (2)
Total net investment income
Interest Credited
Amount provided to contract holders
DSI deferrals
Interest credited before DSI amortization
DSI amortization:
Amortization, excluding unlocking
Unlocking
Total interest credited
23
127
1,272
755
(4)
751
21
1
773
$
$
$
29
107
1,140
690
(21)
669
26
3
698
$
$
$
21
149
1,005
600
(43)
557
30
-
587
$
$
$
(1) See “Consolidated Investments – Commercial Mortgage Loan Prepayment and Bond Make-Whole Premiums” below for additional
information.
(2) Represents net investment income on the required statutory surplus for this segment and includes the effect of investment income
on alternative investments for such assets that are held in the portfolios supporting statutory surplus versus the portfolios supporting
product liabilities. See “Consolidated Investments – Alternative Investments” below for more information on alternative
investments.
As of or For the Years Ended
December 31,
2019
2018
2020
Fixed Account Value Information
Fixed annuity deposits (1)
Increases (decreases) in fixed annuity account values:
Net flows (1)
Contract holder assessments (1)
Transfers from the fixed portion of variable annuity
products to the variable portion of variable annuity
products
Reinvested interest credited (1)
Fixed annuity account values (1)(2)
Average fixed account values (1)(2)
Includes the fixed portion of variable.
(1)
(2) Net of reinsurance ceded.
$
7,282
$
9,232
$
7,258
4,921
(66)
6,656
(43)
4,441
(31)
(831)
1,686
29,343
25,804
(1,760)
1,489
23,081
19,717
(2,867)
440
16,542
20,591
57
A portion of our investment income earned is credited to the contract holders of our deferred fixed annuity products, including the fixed
portion of variable annuity contracts. We expect to earn a spread between what we earn on the underlying general account investments
supporting the fixed annuity product line, including the fixed portion of variable annuity contracts, and what we credit to our fixed
annuity contract holders’ accounts, including the fixed portion of variable annuity contracts. Changes in commercial mortgage loan
prepayments and bond make-whole premiums, investment income on alternative investments and surplus investment income can vary
significantly from period to period due to a number of factors and, therefore, may contribute to investment income results that are not
indicative of the underlying trends.
Benefits
Details underlying benefits (in millions) were as follows:
Benefits
Net death and other benefits, excluding unlocking
Unlocking
Total benefits
For the Years Ended December 31,
2018
2019
2020
$
$
553
143
696
$
$
834
104
938
$
$
699
(26)
673
Benefits for this segment include changes in income annuity reserves driven by premiums, changes in benefit reserves and costs
associated with the hedging of our benefit ratio unlocking on benefit reserves associated with our variable annuity GDB and GLB riders.
For a corresponding offset of changes in income annuity reserves, see footnote 1 of “Income (Loss) from Operations” above.
Commissions and Other Expenses
Details underlying commissions and other expenses (in millions) were as follows:
Commissions and Other Expenses
Commissions:
Deferrable
Non-deferrable
General and administrative expenses
Inter-segment reimbursement associated with reserve
financing and LOC expenses (1)
Taxes, licenses and fees
Total expenses incurred, excluding broker-dealer
DAC deferrals
Total pre-broker-dealer expenses incurred,
excluding amortization, net of interest
DAC and VOBA amortization, net of interest:
Amortization, net of interest, excluding unlocking
Unlocking
Broker-dealer expenses incurred
Total commissions and other expenses
$
DAC Deferrals
As a percentage of sales/deposits
For the Years Ended December 31,
2018
2019
2020
$
$
480
581
427
$
606
565
453
3
31
1,522
(548)
4
35
1,663
(681)
505
573
425
4
34
1,541
(578)
974
982
963
401
(14)
493
1,854
$
396
12
481
1,871
$
403
7
465
1,838
4.9%
4.7%
4.7%
(1)
Includes reimbursements to Annuities from the Life Insurance segment for reserve financing, net of expenses incurred by Annuities
for its use of letters of credit (“LOCs”). The inter-segment amounts are not reported on our Consolidated Statements of
Comprehensive Income (Loss).
Commissions and other costs that result directly from and are essential to the successful acquisition of new or renewal business are
deferred to the extent recoverable and are amortized over the lives of the contracts in relation to EGPs. Certain types of commissions,
such as trail commissions that are based on account values, are expensed as incurred rather than deferred and amortized. Broker-dealer
expenses that vary with and are related to sales are expensed as incurred and not deferred and amortized. Fluctuations in these expenses
correspond with fluctuations in other revenues.
58
RESULTS OF RETIREMENT PLAN SERVICES
Income (Loss) from Operations
Details underlying the results for Retirement Plan Services (in millions) were as follows:
Operating Revenues
Fee income
Net investment income
Other revenues (1)
Total operating revenues
Operating Expenses
Interest credited
Benefits
Commissions and other expenses
Total operating expenses
Income (loss) from operations before taxes
Federal income tax expense (benefit)
Income (loss) from operations
For the Years Ended December 31,
2018
2019
2020
$
$
253
933
27
1,213
615
2
404
1,021
192
24
168
$
$
252
924
24
1,200
585
2
418
1,005
195
23
172
$
$
256
899
23
1,178
555
2
421
978
200
29
171
(1) Consists primarily of mutual fund account program revenues from mid to large employers.
Comparison of 2020 to 2019
Income from operations for this segment decreased due primarily to lower net investment income, net of interest credited, driven by
spread compression due to average new money rates trailing our current portfolio yields and lower prepayment and bond make-whole
premiums, partially offset by investment income on alternative investments within our surplus portfolio and higher average fixed account
values.
The decrease in income from operations was partially offset by lower commissions and other expenses driven by expense management
and incentive compensation as a result of production performance, partially offset by the effect of unlocking.
See “Critical Accounting Policies and Estimates – DAC, VOBA, DSI and DFEL – Unlocking” above for information about unlocking.
Additional Information
For a discussion of the expected and potential impacts of the COVID-19 pandemic, see “Introduction – Executive Summary” above and
“Part I – Item 1A. Risk Factors – Market Conditions – The impacts of the COVID-19 pandemic have adversely affected and are
expected to continue to adversely affect our business and results of operations, and the future impacts of the COVID-19 pandemic on
the company’s business, results of operations and financial condition remain uncertain.”
Net flows in this business fluctuate based on the timing of larger plans being implemented and terminating over the course of the year.
New deposits are an important component of net flows and key to our efforts to grow our business. Although deposits do not
significantly affect current period income from operations, they can significantly impact future income from operations. The other
component of net flows relates to the retention of the business. An important measure of retention is the reduction in account values
caused by plan sponsor terminations and participant withdrawals. These outflows as a percentage of average account values were 13%,
12% and 11% for 2020, 2019 and 2018, respectively.
Our net flows are negatively affected by the continued net outflows from our oldest blocks of annuities business (as presented on our Net
Flows By Market table below as “Multi-Fund® and other”), which are among our higher margin product lines in this segment, due to the
fact that they are mature blocks with low distribution and servicing costs. The proportion of these products to our total account values
was 19%, 21% and 23% for 2020, 2019 and 2018, respectively. Due to this expected overall shift in business mix toward products with
lower returns, new deposit production continues to be necessary to maintain earnings at current levels.
59
Our fixed annuity business includes products with discretionary and index-based crediting rates that are reset on either a quarterly or
semi-annual basis. Our ability to retain quarterly or semi-annual reset annuities will be subject to current competitive conditions at the
time interest rates for these products reset. We expect to manage the effects of spreads on near-term income from operations through
portfolio management and, to a lesser extent, crediting rate actions, which assumes no significant changes in net flows into or out of our
fixed accounts or other changes that may cause interest rate spreads to differ from our expectations. For information on interest rate
spreads and the interest rate risk due to falling interest rates, see “Part I – Item 1A. Risk Factors – Market Conditions – Changes in
interest rates and sustained low interest rates may cause interest rate spreads to decrease, impacting our profitability, and make it more
challenging to meet certain statutory requirements, and changes in interest rates may also result in increased contract withdrawals” and
“Effect of Interest Rate Sensitivity” and “Interest Rate Risk on Fixed Insurance Businesses – Falling Rates” in “Item 7A. Quantitative
and Qualitative Disclosures About Market Risk – Interest Rate Risk.”
Fee Income
Details underlying fee income, net flows and account values (in millions) were as follows:
Fee Income
Annuity expense assessments
Mutual fund fees
Total expense assessments
Surrender charges
Total fee income
Net Flows By Market
Small market
Mid – large market
Multi-Fund® and other
Total net flows
For the Years Ended December 31,
2018
2019
2020
184
68
252
1
253
$
$
184
67
251
1
252
$
$
189
65
254
2
256
For the Years Ended December 31,
2018
2019
2020
350
792
(976)
166
$
$
449
1,336
(1,165)
620
$
$
290
3,401
(1,145)
2,546
$
$
$
$
As of or For the Years Ended
December 31,
2019
2018
2020
Variable Account Value Information
Variable annuity deposits (1)
Increases (decreases) in variable annuity account values:
Net flows (1)
Change in market value (1)
Contract holder assessments (1)
Variable annuity account values (1)
Average daily variable annuity account values (1)
Average daily S&P 500® Index
(1) Excludes the fixed portion of variable.
$
1,843
$
1,880
$
1,803
(333)
2,731
(156)
18,755
16,426
3,218
(518)
3,426
(155)
16,952
15,960
2,914
(453)
(885)
(159)
14,413
15,989
2,744
As of or For the Years Ended
December 31,
2019
2018
2020
Mutual Fund Account Value Information
Mutual fund deposits
Mutual fund net flows
Mutual fund account values (1)
$
$
5,449
100
46,636
5,602
1,316
41,179
$
6,219
2,902
32,876
(1) Mutual funds are not included in the separate accounts reported on our Consolidated Balance Sheets as we do not have any
ownership interest in them.
60
We charge expense assessments to cover insurance and administrative expenses. Expense assessments are generally equal to a percentage
of the daily variable account values. Average daily account values are driven by net flows and the equity markets. Our expense
assessments include fees we earn for the services that we provide to our mutual fund programs. We may collect surrender charges when
our fixed and variable annuity contract holders surrender their contracts during the surrender charge period to protect us from premature
withdrawals.
Net Investment Income and Interest Credited
Details underlying net investment income, interest credited and fixed account values (in millions) were as follows:
Net Investment Income
Fixed maturity AFS securities, mortgage loans on real estate
$
and other, net of investment expenses
Commercial mortgage loan prepayment and bond
For the Years Ended December 31,
2018
2019
2020
834
$
831
$
806
make-whole premiums (1)
Surplus investments (2)
Total net investment income
Interest Credited
23
76
933
$
26
67
924
$
615
$
585
$
18
75
899
555
$
$
(1) See “Consolidated Investments – Commercial Mortgage Loan Prepayment and Bond Make-Whole Premiums” below for additional
information.
(2) Represents net investment income on the required statutory surplus for this segment and includes the effect of investment income
on alternative investments for such assets that are held in the portfolios supporting statutory surplus versus the portfolios supporting
product liabilities. See “Consolidated Investments – Alternative Investments” below for more information on alternative
investments.
As of or For the Years Ended
December 31,
2019
2018
2020
Fixed Account Value Information
Fixed annuity deposits (1)
Increases (decreases) in fixed annuity account values:
Net flows (1)
Reinvested interest credited (1)
Contract holder assessments (1)
Fixed annuity account values (1)
Average fixed account values (1)
(1)
Includes the fixed portion of variable.
$
2,725
$
1,983
$
2,046
399
613
(13)
22,916
21,696
(178)
585
(12)
20,558
20,119
97
558
(11)
19,766
19,164
A portion of our investment income earned is credited to the contract holders of our fixed annuity products, including the fixed portion
of variable annuity contracts. We expect to earn a spread between what we earn on the underlying general account investments
supporting the fixed annuity product line, including the fixed portion of variable annuity contracts, and what we credit to our fixed
annuity contract holders’ accounts, including the fixed portion of variable annuity contracts. Commercial mortgage loan prepayments and
bond make-whole premiums, investment income on alternative investments and surplus investment income can vary significantly from
period to period due to a number of factors and, therefore, may contribute to investment income results that are not indicative of the
underlying trends.
Benefits
Benefits for this segment include changes in annuity benefit reserves.
61
Commissions and Other Expenses
Details underlying commissions and other expenses (in millions) were as follows:
Commissions and Other Expenses
Commissions:
Deferrable
Non-deferrable
General and administrative expenses
Taxes, licenses and fees
Total expenses incurred
DAC deferrals
$
Total expenses recognized before amortization
DAC and VOBA amortization, net of interest:
Amortization, net of interest, excluding unlocking
Unlocking
Total commissions and other expenses
$
DAC Deferrals
As a percentage of annuity sales/deposits
For the Years Ended December 31,
2018
2019
2020
5
71
304
16
396
(21)
375
25
4
404
$
$
6
73
319
17
415
(23)
392
27
(1)
418
$
$
7
71
318
19
415
(22)
393
25
3
421
0.5%
0.6%
0.6%
Commissions and other costs that result directly from and are essential to the successful acquisition of new or renewal business are
deferred to the extent recoverable and are amortized over the lives of the contracts in relation to EGPs. Certain types of commissions,
such as trail commissions that are based on account values, are expensed as incurred rather than deferred and amortized. Distribution
expenses associated with the sale of mutual fund products are expensed as incurred.
62
RESULTS OF LIFE INSURANCE
Income (Loss) from Operations
Details underlying the results for Life Insurance (in millions) were as follows:
For the Years Ended December 31,
2018
2019
2020
Operating Revenues
Insurance premiums (1)
Fee income
Net investment income
Operating realized gain (loss) (2)
Amortization of deferred gain on
business sold through reinsurance
Other revenues
Total operating revenues
Operating Expenses
Interest credited
Benefits
Commissions and other expenses
Total operating expenses
Income (loss) from operations before taxes
Federal income tax expense (benefit)
Income (loss) from operations
$
$
950
3,727
2,823
(6)
12
10
7,516
1,491
4,586
1,506
7,583
(67)
(33)
(34) $
$
$
885
3,882
2,658
(6)
-
19
7,438
1,433
4,183
1,516
7,132
306
47
259
$
817
3,392
2,697
(5)
-
21
6,922
1,414
3,345
1,371
6,130
792
147
645
Includes term insurance premiums, which have a corresponding partial offset in benefits for changes in reserves.
(1)
(2) See “Realized Gain (Loss) and Benefit Ratio Unlocking” below.
Comparison of 2020 to 2019
Income from operations for this segment decreased due primarily to the following:
• Higher benefits due to unfavorable mortality as a result of impacts of the COVID-19 pandemic and growth in business in force,
partially offset by the effect of unlocking.
• Lower fee income due to the effect of unlocking, partially offset by growth in business in force.
The decrease in income from operations was partially offset by the following:
• Higher net investment income, net of interest credited, driven by investment income on alternative investments, partially offset by
spread compression due to average new money rates trailing our current portfolio yields and lower prepayment and bond make-
whole premiums.
• Lower commissions and other expenses due to lower amortization rates, expense management and incentive compensation as a
result of production performance, partially offset by the effect of unlocking.
See “Critical Accounting Policies and Estimates – DAC, VOBA, DSI and DFEL – Unlocking” above for information about unlocking.
Strategies to Address Statutory Reserve Strain
Our insurance subsidiaries have statutory surplus and RBC levels above current regulatory required levels. Term products and other
products containing secondary guarantees require reserves calculated pursuant to the Valuation of Life Insurance Policies Model
Regulation (“XXX”), Actuarial Guideline 38 (“AG38”) and the principles-based reserving framework. For information on strategies we
use to reduce the statutory reserve strain, see “Review of Consolidated Financial Condition – Liquidity and Capital Resources – Sources
of Liquidity and Cash Flow – Insurance Subsidiaries’ Statutory Capital and Surplus” below.
63
Additional Information
Strategic repricing actions to respond to the low interest rate environment have contributed to lower sales for 2020 as compared to 2019.
We continue to expect elevated mortality to persist into 2021 as a result of the impacts of the COVID-19 pandemic. For a discussion of
the expected and potential impacts of the COVID-19 pandemic, see “Introduction – Executive Summary” above and “Part I – Item 1A.
Risk Factors – Market Conditions – The impacts of the COVID-19 pandemic have adversely affected and are expected to continue to
adversely affect our business and results of operations, and the future impacts of the COVID-19 pandemic on the company’s business,
results of operations and financial condition remain uncertain.”
For information on interest rate spreads and the interest rate risk due to falling interest rates, see “Part I – Item 1A. Risk Factors – Market
Conditions – Changes in interest rates and sustained low interest rates may cause interest rate spreads to decrease, impacting our
profitability, and make it more challenging to meet certain statutory requirements, and changes in interest rates may also result in
increased contract withdrawals” and “Effect of Interest Rate Sensitivity” and “Interest Rate Risk on Fixed Insurance Businesses – Falling
Rates” in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk.”
Insurance Premiums
Insurance premiums relate to traditional products and are a function of the rates priced into the product and the level of business in
force. Business in force, in turn, is driven by sales, persistency and mortality experience.
Fee Income
Details underlying fee income, sales, net flows, account values and in-force face amount (in millions) were as follows:
Fee Income
Cost of insurance assessments
Expense assessments
Surrender charges
DFEL:
Deferrals
Amortization, net of interest:
Amortization, net of interest, excluding unlocking
Unlocking
Total fee income
Sales by Product
UL
MoneyGuard®
IUL
VUL
Term
Total individual life sales
Executive Benefits
Total sales
Net Flows
Deposits
Withdrawals and deaths
Net flows
Contract Holder Assessments
For the Years Ended December 31,
2018
2019
2020
$
2,377
1,502
33
$
2,280
1,694
41
2,136
1,529
45
(972)
(1,063)
(829)
514
273
3,727
$
504
426
3,882
$
457
54
3,392
For the Years Ended December 31,
2018
2019
2020
20
127
91
188
132
558
72
630
5,890
(1,753)
4,137
5,154
$
$
$
$
$
57
298
155
265
144
919
163
1,082
7,320
(1,898)
5,422
5,243
$
$
$
$
$
43
226
62
268
113
712
52
764
6,438
(1,759)
4,679
4,869
$
$
$
$
$
$
$
64
Account Values
General account
Separate account
Total account values
In-Force Face Amount
UL and other
Term insurance
Total in-force face amount
As of December 31,
2019
2018
2020
$
$
$
$
37,496
20,109
57,605
358,554
535,387
893,941
$
$
$
$
37,485
16,770
54,255
357,726
472,050
829,776
$
$
$
$
36,612
12,977
49,589
343,922
399,877
743,799
For the Years Ended December 31,
2018
2019
2020
Average General Account Values
$
37,791
$
37,215
$
36,698
Fee income relates only to interest-sensitive products and includes cost of insurance assessments, expense assessments and surrender
charges. Both cost of insurance and expense assessments can have deferrals and amortization related to DFEL. Cost of insurance and
expense assessments are deducted from our contract holders’ account values. These amounts are a function of the rates priced into the
product and premiums received, face amount in force and account values. Business in force, in turn, is driven by sales, persistency and
mortality experience.
Sales are not recorded as a component of revenues (other than for traditional products) and do not have a significant effect on current
quarter income from operations but are indicators of future profitability. For more information on sales, see “Additional Information”
above.
Sales in the table above and as discussed above were reported as follows:
• MoneyGuard®, our linked-benefit product – 15% of total expected premium deposits;
• UL, IUL and VUL – first-year commissionable premiums plus 5% of excess premiums received;
• Executive Benefits – single premium bank-owned UL and VUL, 15% of single premium deposits, and corporate-owned UL and
VUL, first-year commissionable premiums plus 5% of excess premium received; and
• Term – 100% of annualized first-year premiums.
We monitor the business environment, including but not limited to the regulatory and interest rate environments, and make changes to
our product offerings and in-force products as needed, and as permitted under the terms of the policies, to sustain the future profitability
of our segment.
65
Net Investment Income and Interest Credited
Details underlying net investment income and interest credited (in millions) were as follows:
Net Investment Income
Fixed maturity AFS securities, mortgage loans on real estate
and other, net of investment expenses
$
2,531
$
2,448
$
2,366
Commercial mortgage loan prepayment and bond
For the Years Ended December 31,
2018
2019
2020
make-whole premiums (1)
Alternative investments (2)
Surplus investments (3)
Total net investment income
Interest Credited
24
140
128
2,823
1,491
$
$
47
12
151
2,658
1,433
$
$
28
133
170
2,697
1,414
$
$
(1) See “Consolidated Investments – Commercial Mortgage Loan Prepayment and Bond Make-Whole Premiums” below for additional
information.
(2) See “Consolidated Investments – Alternative Investments” below for additional information.
(3) Represents net investment income on the required statutory surplus for this segment and includes the effect of investment income
on alternative investments for such assets that are held in the portfolios supporting statutory surplus versus the portfolios supporting
product liabilities.
A portion of the investment income earned for this segment is credited to contract holder accounts. Statutory reserves will typically grow
at a faster rate than account values because of the AG38 reserve requirements. Investments allocated to this segment are based upon the
statutory reserve liabilities and are affected by various reserve adjustments, including financing transactions providing relief from AG38
reserve requirements. These financing transactions lead to a transfer of investments from this segment to Other Operations. We expect
to earn a spread between what we earn on the underlying general account investments and what we credit to our contract holders’
accounts. We use our investment income to offset the earnings effect of the associated growth of our policy reserves for traditional
products. Commercial mortgage loan prepayments and bond make-whole premiums and investment income on alternative investments
can vary significantly from period to period due to a number of factors, and, therefore, may contribute to investment income results that
are not indicative of the underlying trends.
Benefits
Details underlying benefits (dollars in millions) were as follows:
Benefits
Death claims direct and assumed
Death claims ceded
Reserves released on death
Net death benefits
Change in secondary guarantee life insurance product
reserves:
Change in reserves, excluding unlocking
Unlocking
Change in MoneyGuard® reserves:
Change in reserves, excluding unlocking
Unlocking
Other benefits (1)
Total benefits
Death claims per $1,000 of in-force
$
$
For the Years Ended December 31,
2018
2019
2020
$
5,521
(2,019)
(738)
2,764
$
4,594
(1,689)
(616)
2,289
4,295
(1,648)
(586)
2,061
644
112
482
272
312
4,586
3.21
$
625
445
451
48
325
4,183
2.92
$
676
(61)
385
(24)
308
3,345
2.82
(1)
Includes primarily changes in reserves and dividends on traditional and other products.
66
Benefits for this segment include claims incurred during the period in excess of the associated reserves for its interest-sensitive and
traditional products. In addition, benefits include the change in secondary guarantee and linked-benefit life insurance product reserves.
These reserves are affected by changes in expected future trends of assessments and benefits causing unlocking adjustments to these
liabilities similar to DAC, VOBA and DFEL. Generally, we have higher mortality in the first quarter of the year due to the seasonality of
claims. See “Future Contract Benefits and Other Contract Holder Funds” in Note 1 for additional information.
Commissions and Other Expenses
Details underlying commissions and other expenses (in millions) were as follows:
Commissions and Other Expenses
Commissions
General and administrative expenses
Expenses associated with reserve financing
Taxes, licenses and fees
Total expenses incurred
DAC and VOBA deferrals
$
Total expenses recognized before amortization
DAC and VOBA amortization, net of interest:
Amortization, net of interest, excluding unlocking
Unlocking
Other intangible amortization
Total commissions and other expenses
$
DAC and VOBA Deferrals
As a percentage of sales
For the Years Ended December 31,
2018
2019
2020
687
557
99
163
1,506
(788)
718
339
445
4
1,506
$
$
$
931
617
95
184
1,827
(1,094)
733
441
338
4
1,516
$
760
541
91
179
1,571
(914)
657
545
165
4
1,371
125.1%
101.1%
119.6%
Commissions and costs that result directly from and are essential to successful acquisition of new or renewal business are deferred to the
extent recoverable and for our interest-sensitive products are generally amortized over the life of the contracts in relation to EGPs. For
our traditional products, DAC and VOBA are amortized on either a straight-line basis or as a level percent of premium of the related
contracts, depending on the block of business. When comparing DAC and VOBA deferrals as a percentage of sales for 2020 and 2019,
the increase was primarily a result of changes in sales mix to products with higher commission rates.
67
RESULTS OF GROUP PROTECTION
Income (Loss) from Operations
Details underlying the results for Group Protection (in millions) were as follows:
Operating Revenues
Insurance premiums
Net investment income
Other revenues (1)
Total operating revenues
Operating Expenses
Interest credited
Benefits
Commissions and other expenses
Total operating expenses
Income (loss) from operations before taxes
Federal income tax expense (benefit)
Income (loss) from operations
For the Years Ended December 31,
2018
2019
2020
$
$
4,280
330
183
4,793
5
3,500
1,234
4,739
54
11
43
$
$
4,113
307
168
4,588
5
3,036
1,246
4,287
301
63
238
$
$
3,383
260
114
3,757
5
2,455
1,060
3,520
237
50
187
(1) Consists of revenue from third parties for administrative services performed, which has a corresponding partial offset in
commissions and other expenses.
Income (Loss) from Operations by Product Line
Life
Disability
Dental
Total non-medical
Medical
Income (loss) from operations
Comparison of 2020 to 2019
For the Years Ended December 31,
2018
2019
2020
$
$
(95) $
126
12
43
-
43
$
77
169
(9)
237
1
238
$
$
72
123
(8)
187
-
187
Income from operations for this segment decreased due primarily to higher benefits driven by unfavorable experience in our life and
disability businesses and unfavorable reserve adjustments in 2020 as compared to favorable reserve adjustments in 2019 due to modifying
certain assumptions on the reserves in these businesses, partially offset by lower incidence in our dental business.
The decrease in income from operations was partially offset by the following:
• Higher insurance premiums due to favorable persistency.
• Higher net investment income, net of interest credited, driven by investment income on alternative investments within our surplus
portfolio.
• Lower commissions and other expenses driven by expense management and incentive compensation as a result of production
performance.
68
Additional Information
The total loss ratio for the year ended December 31, 2020, was driven primarily by unfavorable mortality in our life business and
unfavorable morbidity in our disability business due primarily to the impacts of the COVID-19 pandemic. Additionally, we experienced
higher new claims severity, delays in social security approvals and higher incidence in our disability business, partially offset by lower
incidence in our dental business due to the COVID-19 pandemic. We continue to expect an unfavorable loss ratio to persist into 2021 as
a result of the impacts of the COVID-19 pandemic. In addition, we anticipate both morbidity headwinds in our disability business related
to the economic environment and continued delays in social security approvals to persist into 2021. For a discussion of the expected and
potential impacts of the COVID-19 pandemic, see “Introduction – Executive Summary” above and “Part I – Item 1A. Risk Factors –
Market Conditions – The impacts of the COVID-19 pandemic have adversely affected and are expected to continue to adversely affect
our business and results of operations, and the future impacts of the COVID-19 pandemic on the company’s business, results of
operations and financial condition remain uncertain.”
Management compares trends in actual loss ratios to pricing expectations as group-underwriting risks change over time. We expect
normal fluctuations in our total loss ratio, as claims experience is inherently uncertain. For every one percent increase in the total loss
ratio, we would expect an annual decrease to income from operations of approximately $32 million to $36 million. The effects are
symmetrical for a comparable decrease in the loss ratio and, therefore, move in an equal and opposite direction.
For information on the effects of current interest rates on our long-term disability claim reserves, see “Item 7A. Quantitative and
Qualitative Disclosures About Market Risk – Interest Rate Risk – Effect of Interest Rate Sensitivity.”
Insurance Premiums
Details underlying insurance premiums (in millions) were as follows:
Insurance Premiums by Product Line
Life
Disability
Dental
Total insurance premiums
Sales by Product Line
Life
Disability
Dental
Total sales
For the Years Ended December 31,
2018
2019
2020
$
$
$
1,613
2,401
266
4,280
265
397
44
706
$
$
$
1,500
2,320
293
4,113
344
319
89
752
$
$
$
1,246
1,838
299
3,383
222
257
101
580
Our cost of insurance and policy administration charges are embedded in the premiums charged to our customers. The premiums are a
function of the rates priced into the product and our business in force. Business in force, in turn, is driven by sales and persistency
experience.
Sales relate to new contract holders and new programs sold to existing contract holders. We believe that the trend in sales is an important
indicator of development of business in force over time. Sales in the table above are the combined annualized premiums for our
products. The decrease in sales when comparing 2020 to 2019 was primarily driven by the impacts of the COVID-19 pandemic, which
resulted in fewer cases going to market and a more highly competitive and price-sensitive market.
Net Investment Income
We use our investment income to offset the earnings effect of the associated build of our reserves, which are a function of our insurance
premiums and the yields on our investments.
69
Benefits and Interest Credited
Details underlying benefits and interest credited (in millions) and loss ratios by product line were as follows:
For the Years Ended December 31,
2018
2019
2020
Benefits and Interest Credited by Product Line
Life
Disability
Dental
Total benefits and interest credited
$
$
1,399
1,938
168
3,505
$
$
1,045
1,783
213
3,041
$
$
Loss Ratios by Product Line
Life
Disability
Dental
Total
86.7%
80.5%
63.1%
81.8%
69.7%
76.8%
72.8%
73.9%
857
1,386
217
2,460
68.8%
75.4%
72.7%
72.7%
Generally, we experience higher mortality in the first quarter of the year and higher disability claims in the fourth quarter of the year due
to the seasonality of claims. For additional information on our loss ratios, see “Additional Information” above.
Commissions and Other Expenses
Details underlying commissions and other expenses (in millions) were as follows:
Commissions and Other Expenses
Commissions
General and administrative expenses
Taxes, licenses and fees
Total expenses incurred
DAC deferrals
$
Total expenses recognized before amortization
DAC and VOBA amortization, net of interest (1)
Other intangible amortization (1)
Total commissions and other expenses
$
DAC Deferrals
As a percentage of insurance premiums
For the Years Ended December 31,
2018
2019
2020
359
697
122
1,178
(92)
1,086
115
33
1,234
$
$
367
741
114
1,222
(110)
1,112
112
22
1,246
$
$
339
623
94
1,056
(94)
962
93
5
1,060
2.1%
2.7%
2.8%
(1) See Note 10 for information regarding intangible assets acquired during 2018.
Commissions and other costs that result directly from and are essential to the successful acquisition of new or renewal business are
deferred to the extent recoverable and are amortized as a level percent of insurance premiums of the related contracts, depending on the
block of business. Certain broker commissions that vary with and are related to paid premiums are expensed as incurred rather than
deferred and amortized. Generally, we have higher amortization in the first quarter of the year due to a significant number of policies
renewing in the quarter. The decrease in DAC deferrals as a percentage of insurance premiums when comparing 2020 to 2019 was
primarily driven by lower deferrable acquisition costs incurred in 2020, some of which resulted from lower sales due to the impacts of the
COVID-19 pandemic, and higher persistency.
70
RESULTS OF OTHER OPERATIONS
Income (Loss) from Operations
Details underlying the results for Other Operations (in millions) were as follows:
Operating Revenues
Insurance premiums (1)
Net investment income
Amortization of deferred gain on
business sold through reinsurance
Other revenues
Total operating revenues
Operating Expenses
Interest credited
Benefits
Other expenses
Interest and debt expense
Strategic digitization expense
Total operating expenses
Income (loss) from operations before taxes
Federal income tax expense (benefit)
Income (loss) from operations
For the Years Ended December 31,
2018
2019
2020
$
$
$
21
152
-
12
185
39
117
69
269
68
562
(377)
(82)
(295) $
$
13
194
-
13
220
58
110
62
284
66
580
(360)
(92)
(268) $
11
224
1
(1)
235
56
106
25
274
76
537
(302)
(77)
(225)
(1)
Includes our disability income business, which has a corresponding offset in benefits for changes in reserves.
Comparison of 2020 to 2019
Loss from operations for Other Operations increased due primarily to the following:
• Lower net investment income, net of interest credited, related to lower allocated investments driven by a decline in excess capital
retained by Other Operations.
• Less favorable income tax benefits driven by lower excess tax benefits associated with stock-based compensation.
• Higher benefits attributable to unfavorable experience and reserve adjustments in our run-off disability income business.
The increase in loss from operations was partially offset by lower interest and debt expense driven by a decline in average interest rates.
Additional Information
We expect to continue making investments as part of our strategic digitization initiative, which are expected to be more than offset by the
associated expense savings in the business segments. For more information, see “Introduction – Executive Summary – Significant
Operational Matters – Strategic Digitization Initiative.”
Net Investment Income and Interest Credited
We utilize an internal formula to determine the amount of capital that is allocated to our business segments. Investment income on
capital in excess of the calculated amounts is reported in Other Operations. If our business segments require increases in statutory
reserves, surplus or investments, the amount of excess capital that is retained by Other Operations would decrease and net investment
income would be negatively affected.
Write-downs for impairments decrease the recorded value of investments owned by the business segments. These write-downs are not
included in the income from operations of our business segments. When impairment occurs, assets are transferred to the business
segments’ portfolios and will reduce the future net investment income for Other Operations. Statutory reserve adjustments for our
business segments can also cause allocations of investments between the business segments and Other Operations.
71
The majority of our interest credited relates to our reinsurance operations sold to Swiss Re Life & Health America, Inc. (“Swiss Re”) in
2001. A substantial amount of the business was sold through indemnity reinsurance transactions, which is still recorded in our
consolidated financial statements. The interest credited corresponds to investment income earnings on the assets we continue to hold for
this business. There is no effect to income or loss in Other Operations or on a consolidated basis for these amounts because interest
earned on the blocks that continue to be reinsured is passed through to Swiss Re in the form of interest credited.
Benefits
Benefits are recognized when incurred for institutional pension products and disability income business.
Other Expenses
Details underlying other expenses (in millions) were as follows:
General and administrative expenses:
Branding
Other (1)
Total general and administrative expenses
Taxes, licenses and fees (2)
Other (3)
Total other expenses
For the Years Ended December 31,
2018
2019
2020
$
$
43
46
89
(11)
(9)
69
$
$
45
36
81
(7)
(12)
62
$
$
40
10
50
(13)
(12)
25
(1)
(2)
Includes expenses that are corporate in nature including charitable contributions, the portion of our deferred compensation plan
expense attributable to participants’ selection of LNC stock as the measure for their investment return and other expenses not
allocated to our business segments.
Includes state guaranty funds assessments to cover losses to contract holders of insolvent or rehabilitated insurance companies.
Mandatory assessments may be partially recovered through a reduction in future premium taxes in some states.
(3) Consists of reimbursements to Other Operations from the Life Insurance segment for the use of proceeds from certain issuances of
senior notes that were used as long-term structured solutions, net of expenses incurred by Other Operations for its access to a
financing facility and issuance of LOCs.
Interest and Debt Expense
Our current level of interest expense may not be indicative of the future due to, among other things, the timing of the use of cash, the
availability of funds from our inter-company cash management program and the future cost of capital. For additional information on our
financing activities, see “Review of Consolidated Financial Condition – Liquidity and Capital Resources – Sources of Liquidity and Cash
Flow – Financing Activities” below.
72
REALIZED GAIN (LOSS) AND BENEFIT RATIO UNLOCKING
Details underlying realized gain (loss), after-DAC (1) and benefit ratio unlocking (in millions) were as follows:
Components of Realized Gain (Loss), Pre-Tax
Total operating realized gain (loss)
Total excluded realized gain (loss)
Total realized gain (loss), pre-tax
Reconciliation of Excluded Realized Gain (Loss)
Net of Benefit Ratio Unlocking, After-Tax
Total excluded realized gain (loss)
Benefit ratio unlocking
Excluded realized gain (loss) net of benefit
ratio unlocking, after-tax
$
$
$
$
For the Years Ended December 31,
2018
2019
2020
$
208
(721)
(513) $
$
184
(794)
(610) $
187
(46)
141
(570) $
194
(627) $
277
(37)
(136)
(376) $
(350) $
(173)
Components of Excluded Realized Gain (Loss)
Net of Benefit Ratio Unlocking, After-Tax
Realized gain (loss) related to certain financial assets
Realized gain (loss) on the mark-to-market on
certain instruments (2)
Variable annuity net derivatives results:
Hedge program performance, including unlocking
for GLB reserves hedged
GLB NPR component
Total variable annuity net derivatives results
Indexed annuity forward-starting option
Excluded realized gain (loss) net of benefit
$
(136) $
(58) $
(66)
33
(95)
7
(564)
293
(271)
(2)
(97)
(41)
(138)
(59)
(137)
57
(80)
(34)
ratio unlocking, after-tax
$
(376) $
(350) $
(173)
(1) DAC refers to the associated amortization of DAC, VOBA, DSI and DFEL and changes in other contract holder funds and funds
withheld reinsurance assets and liabilities.
(2) As of December 31, 2020, the Modco investment portfolio included fixed maturity securities classified as AFS with changes in fair
value recorded in other comprehensive income (loss) (“OCI”). Since the corresponding and offsetting changes in fair value of the
embedded derivatives related to the Modco investment portfolio are recorded in realized gain (loss), volatility can occur within net
income (loss). See Note 9 for more information.
Comparison of 2020 to 2019
We had higher realized losses due primarily to the following:
• Unfavorable variable annuity net derivatives results driven by unfavorable hedge program performance due to more volatile markets,
partially offset by favorable GLB NPR component results. An update to our NPR input to the fair value calculation of our GLB
embedded derivatives and the effect of unlocking drove favorable GLB NPR component results, partially offset by our associated
reserves decreasing and credit spreads narrowing.
• Higher losses related to certain financial assets due to an increase in our allowance for credit losses.
The higher realized losses were partially offset by the following:
• Gains on the mark-to-market on certain instruments due primarily to favorable changes in the fair value of embedded derivatives
related to certain Modco arrangements.
• Lower losses related to our indexed annuity forward-starting option driven by the effect of unlocking and a decrease in option costs.
The above components of excluded realized gain (loss) are described net of benefit ratio unlocking, after-tax.
See “Critical Accounting Policies and Estimates – DAC, VOBA, DSI and DFEL – Unlocking” above for more information about
unlocking.
73
Operating Realized Gain (Loss)
Operating realized gain (loss) includes indexed annuity and IUL net derivatives results representing the net difference between the change
in the fair value of the options that we hold and a portion of the change in the fair value of the embedded derivative liabilities of our
indexed annuity and IUL products. The portion of the change in the fair value of the embedded derivative liabilities reported in operating
realized gain (loss) represents the amount that is credited to the indexed annuity and IUL contracts.
Our GWB, GIB and 4LATER® features have elements of both benefit reserves and embedded derivative reserves. We calculate the
value of the benefit reserves and the embedded derivative reserves based on the specific characteristics of each GLB feature. For our
GLBs that meet the definition of an embedded derivative under the Derivatives and Hedging Topic of the FASB ASC, we record them at
fair value on our Consolidated Balance Sheets with changes in fair value recorded in realized gain (loss) on our Consolidated Statements
of Comprehensive Income (Loss). In bifurcating the embedded derivative, we attribute to the embedded derivative the portion of total
fees collected from the contract holder that relates to the GLB riders (the “attributed fees”). These attributed fees represent the present
value of future claims expected to be paid for the GLB at the inception of the contract (the “net valuation premium”) plus a margin that a
theoretical market participant would include for risk/profit (the “risk/profit margin”).
We also include the risk/profit margin portion of the GLB attributed rider fees in operating realized gain (loss) and include the net
valuation premium of the GLB attributed rider fees in excluded realized gain (loss). For our Annuities and Retirement Plan Services
segments, the excess of total fees collected from the contract holders over the GLB attributed rider fees is reported in fee income.
Realized Gain (Loss) Related to Certain Financial Assets
For information on realized gain (loss) related to certain financial assets, see Note 16.
Gain (Loss) on the Mark-to-Market on Certain Instruments
Gain (loss) on the mark-to-market on certain instruments, including those associated with our consolidated variable interest entities
(“VIEs”) represents changes in the fair values of certain derivative investments (not including those associated with our variable annuity
net derivatives results), reinsurance related embedded derivatives and trading securities.
See Note 4 for information about our consolidated VIEs.
Variable Annuity Net Derivatives Results
Our variable annuity net derivatives results include the net valuation premium, the change in the GLB embedded derivative reserves and
the change in the fair value of the derivative instruments we own to hedge them, including the cost of purchasing the hedging
instruments. In addition, these results include the changes in reserves not accounted for at fair value and results from benefit ratio
unlocking on our GDB and GLB riders and the change in the fair value of the derivative instruments we own to hedge the benefit ratio
unlocking on our GDB and GLB riders.
We use derivative instruments to hedge our exposure to the risks and earnings volatility that result from changes in the GLB embedded
derivative reserves. The change in fair value of these derivative instruments is designed to generally offset the change in embedded
derivative reserves. Our variable annuity net derivatives results can be volatile, especially when sudden and significant changes in equity
markets and/or interest rates occur. We do not attempt to hedge the change in the NPR component of the liability. The NPR factors
affect the discount rate used in the calculation of the GLB embedded derivative reserve. Our methodology for calculating the NPR
component of the embedded derivative reserve utilizes an extrapolated 30-year NPR spread curve applied to a series of expected cash
flows over the expected life of the embedded derivative. Our cash flows consist of both expected fees to be received from contract
holders and benefits to be paid, and these cash flows are different on a pre- and post-NPR basis. We utilize a model based on our
holding company’s credit default swap (“CDS”) spread adjusted to reflect the credit quality of our insurance subsidiary as the issuing
entity. Because the guaranteed benefit liabilities are contained within our insurance subsidiaries, we apply items, such as the effect of our
insurance subsidiaries’ claims-paying ratings compared to holding company credit risk and the over-collateralization of insurance
liabilities, in order to determine factors that are representative of a theoretical market participant’s view of the NPR of the specific liability
within our insurance subsidiaries.
74
Details underlying our variable annuity hedging program (dollars in millions) were as follows:
As of
As of
December 31, September 30,
2020
2020
As of
June 30,
2020
As of
As of
March 31, December 31,
2020
2019
Variable annuity hedge program assets (liabilities)
$
2,284 $
4,040 $
4,903 $
6,529 $
1,998
Variable annuity reserves – asset (liability):
Embedded derivative reserves, pre-NPR (1)
NPR
Embedded derivative reserves
Insurance benefit reserves
Total variable annuity reserves – asset (liability)
10-year CDS spread
NPR factor related to 10-year CDS spread
$
$
198 $
333
531
(1,150)
(619) $
1.25%
0.70%
(1,543) $
717
(826)
(1,314)
(2,140) $
1.34%
0.80%
(2,498) $
(19)
(2,517)
(1,239)
(3,756) $
1.14%
0.13%
(3,968) $
99
(3,869)
(1,525)
(5,394) $
1.56%
0.22%
620
(120)
500
(958)
(458)
1.14%
0.13%
(1) Embedded derivative reserves in an asset (liability) position indicate we estimate the present value of future benefits to be less
(greater) than the present value of future net valuation premiums.
The following shows the hypothetical effect (in millions) to net income (loss) for changes in the NPR factor along all points on the spread
curve as of December 31, 2020:
NPR factor:
Down 70 basis points to zero
Up 20 basis points
Hypothetical
Effect
$
(365)
47
See “Critical Accounting Policies and Estimates – Derivatives – GLB” above for additional information about our guaranteed benefits.
Indexed Annuity Forward-Starting Option
The liability for the forward-starting option reflects changes in the fair value of embedded derivative liabilities related to index options we
may purchase or sell in the future to hedge contract holder index allocations applicable to future reset periods for our indexed annuity
products accounted for under the Derivatives and Hedging and the Fair Value Measurements and Disclosures Topics of the FASB ASC.
These fair values represent an estimate of the cost of the options we will purchase or sell in the future, discounted back to the date of the
balance sheet, using current market indications of volatility and interest rates, which can vary significantly from period to period due to a
number of factors and therefore can provide results that are not indicative of the underlying trends.
75
Details underlying our consolidated investment balances (in millions) were as follows:
CONSOLIDATED INVESTMENTS
As of December 31,
2019
2020
123,044 $
4,501
129
16,763
10
2,426
3,109
1,944
2,030
153,956 $
105,200
4,673
103
16,339
11
2,477
1,911
1,821
1,162
133,697
Percentage of
Total Investments
As of December 31,
2019
2020
79.9%
2.9%
0.1%
10.9%
0.0%
1.6%
2.0%
1.3%
1.3%
100.0%
78.7%
3.5%
0.1%
12.2%
0.0%
1.8%
1.4%
1.4%
0.9%
100.0%
Investments
Fixed maturity AFS securities $
Trading securities
Equity securities
Mortgage loans on real estate
Real estate
Policy loans
Derivative investments
Alternative investments
Other investments
Total investments
$
Investment Objective
Investments are an integral part of our operations. We follow a balanced approach to investing for both current income and prudent risk
management, with an emphasis on generating sufficient current income, net of income tax, to meet our obligations to customers, as well
as other general liabilities. This balanced approach requires the evaluation of expected return and risk of each asset class utilized, while
still meeting our income objectives. This approach is important to our asset-liability management because decisions can be made based
upon both the economic and current investment income considerations affecting assets and liabilities. For a discussion of our risk
management process, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”
Investment Portfolio Composition and Diversification
Fundamental to our investment policy is diversification across asset classes. Our investment portfolio, excluding cash and invested cash,
is composed of fixed maturity securities, mortgage loans on real estate, real estate (either wholly-owned or in joint ventures) and other
long-term investments. We purchase investments for our segmented portfolios that have yield, duration and other characteristics that
take into account the liabilities of the products being supported.
We have the ability to maintain our investment holdings throughout credit cycles because of our capital position, the long-term nature of
our liabilities and the matching of our portfolios of investment assets with the liabilities of our various products.
76
Fixed Maturity and Equity Securities Portfolios
In 2020, we adopted ASU 2016-13, which resulted in a new recognition and measurement of credit losses on most financial assets. See
Note 2 for additional information. Fixed maturity securities consist of portfolios classified as AFS and trading. Details underlying our
fixed maturity AFS securities by industry classification (in millions) are presented in the tables below. These tables agree in total with the
presentation of fixed maturity AFS securities in Note 5; however, the categories below represent a more detailed breakout of the fixed
maturity AFS portfolio. Therefore, the investment classifications listed below do not agree to the investment categories provided in Note
5.
Net
Amortized
Cost (1)
As of December 31, 2020
Gross Unrealized
Gains
Losses
Fair
Value
%
Fair
Value
$
Fixed Maturity AFS Securities
Industry corporate bonds:
Financial services
Basic industry
Capital goods
Communications
Consumer cyclical
Consumer non-cyclical
Energy
Technology
Transportation
Industrial other
Utilities
Government related entities
Collateralized mortgage and other obligations ("CMOs"):
Agency backed
Non-agency backed
Mortgage pass through securities ("MPTS"):
Agency backed
Commercial mortgage-backed securities ("CMBS"):
Agency backed
Non-agency backed
Asset-backed securities ("ABS"):
Collateralized loan obligations ("CLOs")
Credit card
Equipment receivables
Home equity
Manufactured housing
Student loans
Other
Municipals:
Taxable
Tax-exempt
Government:
United States
Foreign
Hybrid and redeemable preferred securities
Total fixed maturity AFS securities
Trading Securities (2)
Equity Securities
Total fixed maturity AFS, trading and equity securities $
15.2%
4.6%
7.1%
4.4%
5.4%
16.3%
5.2%
4.3%
3.3%
1.9%
14.1%
1.8%
1.7%
0.4%
0.4%
0.0%
1.2%
4.5%
0.1%
0.0%
0.3%
0.0%
0.0%
0.9%
5.5%
0.1%
0.4%
0.4%
0.5%
100.0%
$
32
3
13
4
12
17
24
7
12
6
6
14
1
-
-
-
-
11
1
-
1
-
-
2
-
-
18,693
5,708
8,712
5,363
6,621
19,995
6,458
5,325
4,057
2,300
17,288
2,269
2,089
486
501
21
1,484
5,583
108
15
354
8
18
1,098
6,781
140
1
1
30
198
48
24
270
484
470
615
123,044
4,501
129
127,674
$
$
2,836
992
1,402
1,036
926
3,412
877
742
619
224
3,198
398
216
53
44
1
114
23
31
-
52
1
1
50
1,532
29
88
87
97
19,081
477
21
19,579
$
$
15,889
4,719
7,323
4,331
5,707
16,600
5,605
4,590
3,450
2,082
14,096
1,885
1,874
433
457
20
1,370
5,571
78
15
303
7
17
1,050
5,249
111
397
384
548
104,161
4,072
132
108,365
$
77
As of December 31, 2019
Gross Unrealized
Amortized
Cost
Gains
Losses and
OTTI (3)
Fair
Value
%
Fair
Value
$
Fixed Maturity AFS Securities
Industry corporate bonds:
Financial services
Basic industry
Capital goods
Communications
Consumer cyclical
Consumer non-cyclical
Energy
Technology
Transportation
Industrial other
Utilities
Government related entities
CMOs:
Agency backed
Non-agency backed
MPTS:
Agency backed
CMBS:
Agency backed
Non-agency backed
ABS:
CLOs
Credit card
Equipment receivables
Home equity
Manufactured housing
Student loans
Other
Municipals:
Taxable
Tax-exempt
Government:
United States
Foreign
Hybrid and redeemable preferred securities
Total fixed maturity AFS securities
Trading Securities (2)
Equity Securities
Total fixed maturity AFS, trading and equity securities $
$
13,991
4,570
6,700
4,314
5,335
14,215
6,080
4,039
3,283
1,563
13,533
1,794
1,893
527
622
20
1,018
3,612
78
20
369
9
30
692
4,675
103
384
329
497
94,295
4,330
123
98,748
$
$
1,632
491
760
654
536
1,813
649
382
309
98
1,861
294
108
49
33
1
44
7
22
1
15
-
1
16
1,091
22
51
64
82
11,086
353
5
11,444
$
43
6
10
7
9
21
44
4
2
2
20
12
9
(18)
-
-
-
8
1
-
(27)
-
-
1
7
-
-
-
20
181
10
25
216
$
15,580
5,055
7,450
4,961
5,862
16,007
6,685
4,417
3,590
1,659
15,374
2,076
1,992
594
655
21
1,062
3,611
99
21
411
9
31
707
5,759
125
435
393
559
105,200
4,673
103
109,976
$
14.8%
4.8%
7.1%
4.7%
5.6%
15.2%
6.4%
4.2%
3.4%
1.6%
14.6%
2.0%
1.9%
0.6%
0.6%
0.0%
1.0%
3.4%
0.1%
0.0%
0.4%
0.0%
0.0%
0.7%
5.5%
0.1%
0.4%
0.4%
0.5%
100.0%
(1) Represents amortized cost, net of allowance for credit losses.
(2) Certain of our trading securities support our Modco reinsurance agreements and the investment results are passed directly to the
reinsurers. See “Trading Securities” below for more information.
(3) Other-than-temporary impairment (“OTTI”) includes unrealized (gains) and losses on credit-impaired securities related to changes in
the fair value of such securities subsequent to the impairment measurement date.
78
Fixed Maturity AFS Securities
In accordance with the fixed maturity AFS accounting guidance, we reflect stockholders’ equity as if unrealized gains and losses were
actually recognized and consider all related accounting adjustments that would occur upon such a hypothetical recognition of unrealized
gains and losses. Such related balance sheet effects include adjustments to the balances of DAC, VOBA, DFEL, future contract benefits,
other contract holder funds and deferred income taxes. Adjustments to each of these balances are charged or credited to AOCI. For
instance, DAC is adjusted upon the recognition of unrealized gains or losses because the amortization of DAC is based upon an assumed
emergence of gross profits on certain insurance business. Deferred income tax balances are also adjusted because unrealized gains or
losses do not affect actual taxes currently paid.
The quality of our fixed maturity AFS securities portfolio, as measured at estimated fair value and by the percentage of fixed maturity
AFS securities invested in various ratings categories, relative to the entire fixed maturity AFS security portfolio (in millions) was as
follows:
NAIC
Designation (1)
Rating Agency
Equivalent
Designation (1)
Investment Grade Securities
1
2
AAA / AA / A
BBB
Total investment grade securities
Below Investment Grade Securities
3
4
5
6
BB
B
CCC and lower
In or near default
Total below investment grade securities
Total fixed maturity AFS securities
$
Total securities below investment
grade as a percentage of total
fixed maturity AFS securities
As of December 31, 2020
As of December 31, 2019
Net
Amortized
Cost
Fair
Value
% of
Total
Amortized
Cost
Fair
Value
% of
Total
$
57,934
41,970
99,904
$
69,226
49,390
118,616
$
56.3%
40.1%
96.4%
51,367
39,473
90,840
$
58,235
43,460
101,695
2,959
1,249
46
3
4,257
104,161
3,157
1,218
48
5
4,428
123,044
$
2.6%
1.0%
0.0%
0.0%
3.6%
100.0%
$
2,309
960
158
28
3,455
94,295
2,388
955
136
26
3,505
105,200
$
4.1%
3.6%
3.7%
3.3%
55.4%
41.3%
96.7%
2.3%
0.9%
0.1%
0.0%
3.3%
100.0%
(1) Based upon the rating designations determined and provided by the National Association of Insurance Commissioners (“NAIC”) or
the major credit rating agencies (Fitch Ratings (“Fitch”), Moody’s Investors Service (“Moody’s”) and S&P Global Ratings
(“S&P”)). For securities where the ratings assigned by the major credit rating agencies are not equivalent, the second lowest rating
assigned is used. For those securities where ratings by the major credit rating agencies are not available, which does not represent a
significant amount of our total fixed maturity AFS securities, we base the ratings disclosed upon internal ratings.
Comparisons between the NAIC designations and rating agency designations are published by the NAIC. The NAIC assigns securities
quality designations and uniform valuations, which are used by insurers when preparing their annual statements. The NAIC designations
are similar to the rating agency designations of the Nationally Recognized Statistical Rating Organizations for marketable bonds. NAIC
designations 1 and 2 include bonds generally considered investment grade (rated Baa3 or higher by Moody’s, or rated BBB- or higher by
S&P and Fitch) by such ratings organizations. However, securities designated NAIC 1 and 2 could be deemed below investment grade by
the rating agencies as a result of the current RBC rules for residential mortgage-backed securities (“RMBS”) and CMBS for statutory
reporting. NAIC designations 3 through 6 include bonds generally considered below investment grade (rated Ba1 or lower by Moody’s,
or rated BB+ or lower by S&P and Fitch).
As of December 31, 2020, and 2019, 78% and 87%, respectively, of the total fixed maturity AFS securities in an unrealized loss position
were investment grade. See Note 5 for maturity date information for our fixed maturity investment portfolio. Our gross unrealized
losses recognized in OCI on fixed maturity AFS securities as of December 31, 2020, decreased by $45 million since December 31, 2019.
For further information on our unrealized losses on fixed maturity AFS securities, see “Composition by Industry Categories of our
Unrealized Losses on Fixed Maturity AFS Securities” below.
79
We believe the unrealized loss position as of December 31, 2020, did not require an impairment recognized in earnings as: (i) we did not
intend to sell these fixed maturity AFS securities; (ii) it is not more likely than not that we will be required to sell the fixed maturity AFS
securities before recovery of their amortized cost basis; and (iii) the difference in the fair value compared to the amortized cost was due to
factors other than credit loss. This conclusion is consistent with our asset-liability management process. Management considers the
following as part of the evaluation:
• The current economic environment and market conditions;
• Our business strategy and current business plans;
• The nature and type of security, including expected maturities and exposure to general credit, liquidity, market and interest rate risk;
• Our analysis of data from financial models and other internal and industry sources to evaluate the current effectiveness of our
hedging and overall risk management strategies;
• The current and expected timing of contractual maturities of our assets and liabilities, expectations of prepayments on investments
and expectations for surrenders and withdrawals of life insurance policies and annuity contracts;
• The capital risk limits approved by management; and
• Our current financial condition and liquidity demands.
To determine the recoverability of a debt security, we consider the facts and circumstances surrounding the underlying issuer including,
but not limited to, the following:
• Historical and implied volatility of the security;
• The extent to which the fair value has been less than amortized cost;
• Adverse conditions specifically related to the security or to specific conditions in an industry or geographic area;
• Failure, if any, of the issuer of the security to make scheduled payments; and
• Recoveries or additional declines in fair value subsequent to the balance sheet date.
As reported on our Consolidated Balance Sheets, we had $155.7 billion of investments and cash, which exceeded the liabilities for our
future obligations under insurance policies and contracts, net of amounts recoverable from reinsurers, which totaled $129.7 billion as of
December 31, 2020. If it were necessary to liquidate fixed maturity AFS securities prior to maturity or call to meet cash flow needs, we
would first look to those fixed maturity AFS securities that are in an unrealized gain position, which had a fair value of $117.0 billion as of
December 31, 2020, rather than selling fixed maturity AFS securities in an unrealized loss position. The amount of cash that we have on
hand at any point in time takes into account our liquidity needs in the future, other sources of cash, such as the maturities of investments,
interest and dividends we earn on our investments and the ongoing cash flows from new and existing business. See “Fixed Maturity AFS
Securities – Evaluation for Recovery of Amortized Cost” in Notes 1 and 5 for additional discussion.
As of December 31, 2020, and 2019, the estimated fair value for all private placement securities was $19.1 billion and $17.0 billion,
respectively, representing 12% and 13% of total investments, respectively.
Trading Securities
Trading securities, which in certain cases support reinsurance funds withheld and our Modco reinsurance agreements, are carried at fair
value and changes in fair value are recorded in net income as they occur. Investment results for these certain portfolios, including gains
and losses from sales, are passed directly to the reinsurers through the contractual terms of the reinsurance arrangements. Offsetting
these amounts in certain cases are corresponding changes in fair value of the embedded derivative liability associated with the underlying
reinsurance arrangement. See Notes 1 and 9 for more information regarding Modco.
Mortgage-Backed Securities (Included in Fixed Maturity AFS and Trading Securities)
Our fixed maturity securities include mortgage-backed securities (“MBS”). These securities are subject to risks associated with variable
prepayments. This may result in differences between the actual cash flow and maturity of these securities than that expected at the time
of purchase. Securities that have an amortized cost greater than par and are backed by mortgages that prepay faster than expected will
incur a reduction in yield or a loss. Those securities with an amortized cost lower than par that prepay faster than expected will generate
an increase in yield or a gain. In addition, we may incur reinvestment risks if market yields are lower than the book yields earned on the
securities. Prepayments occurring slower than expected have the opposite effect. The degree to which a security is susceptible to either
gains or losses is influenced by: the difference between its amortized cost and par; the relative sensitivity of the underlying mortgages
backing the assets to prepayment in a changing interest rate environment; and the repayment priority of the securities in the overall
securitization structure.
We limit the extent of our risk on MBS by prudently limiting exposure to the asset class, by generally avoiding the purchase of securities
with a cost that significantly exceeds par, by purchasing securities with improving collateral performance, and by primarily investing in
securities that are current pay and senior priority in their trust structure. A significant amount of assets in our MBS portfolio are either
guaranteed by U.S. government-sponsored enterprises, supported in the securitization structure by junior securities or purchased at
discounted prices significantly lower than their expected recovery value, enabling the assets to achieve high investment grade status.
80
Our exposure to subprime mortgage lending is limited to investments in banks and other financial institutions that may be affected by
subprime lending and direct investments in ABS and RMBS. Mortgage-related ABS are backed by home equity loans and RMBS are
backed by residential mortgages. These securities are backed by loans that are characterized by borrowers of differing levels of
creditworthiness: prime; Alt-A; and subprime. Prime lending is the origination of residential mortgage loans to customers with excellent
credit profiles. Alt-A lending is the origination of residential mortgage loans to customers who have prime credit profiles but lack
documentation to substantiate income. Subprime lending is the origination of loans to customers with weak or impaired credit profiles.
Delinquency and loss rates on residential mortgages and home equity loans have been showing positive trends, and, as long as the
unemployment rate remains stable to improving, we expect these trends to continue. We continue to expect to receive payments in
accordance with contractual terms for a significant amount of our securities, largely due to the seniority of the claims on the collateral of
the securities that we own. The tranches of the securities will experience losses according to their seniority level with the least senior (or
most junior), typically the unrated residual tranche, taking the first loss. Our ABS home equity and RMBS had a market value of $3.6
billion and a net unrealized gain of $366 million as of December 31, 2020.
81
The market value of fixed maturity AFS securities and trading securities backed by subprime loans was $322 million and represented less
than 1% of our total investment portfolio as of December 31, 2020. Fixed maturity AFS securities represented $309 million, or 96%, and
trading securities represented $13 million, or 4%, of the subprime exposure as of December 31, 2020. The table below summarizes our
investments in fixed maturity AFS securities backed by pools of residential mortgages (in millions) as of December 31, 2020:
Agency
Net
Prime
Alt-A
Net
Net
Subprime/
Option ARM (1)
Net
Total
Net
Amortized Fair Amortized Fair Amortized
Fair Amortized
Fair Amortized
Cost
Value
Cost
Value
Cost
Value
Cost
Value
Cost
Fair
Value
2,331 $ 2,591 $
1
1
2,332 $ 2,592 $
136 $
29
165 $
150 $
30
180 $
109 $
36
145 $
125 $
46
171 $
188 $
237
425 $
210 $
277
487 $
2,764 $ 3,076
354
3,067 $ 3,430
303
$
$
$
Type
RMBS
ABS home equity
Total by type (2)(3)
Rating
AAA
AA
A
BBB
BB and below
1,893 $ 2,110 $
439
-
-
-
482
-
-
-
Total by rating (2)(3)(4) $
2,332 $ 2,592 $
$
Origination Year
2010 and prior
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total by origination
536 $
57
29
168
71
177
571
289
231
180
23
610 $
63
30
186
82
195
617
321
268
196
24
6 $
18
12
3
126
165 $
144 $
-
-
-
2
15
-
-
6 $
19
11
3
141
180 $
158 $
-
-
-
1
17
-
-
1
3
1
3
- $
7
5
10
123
145 $
144 $
-
-
-
-
-
1
-
-
-
-
- $
7
5
11
148
171 $
170 $
-
-
-
-
-
1
-
-
-
-
- $
7
35
11
372
425 $
425 $
-
-
-
-
-
-
-
-
-
-
- $
7
36
11
433
487 $
487 $
-
-
-
-
-
-
-
-
-
-
1,899 $ 2,116
515
52
25
722
3,067 $ 3,430
471
52
24
621
1,249 $ 1,425
63
30
186
83
212
618
321
268
197
27
57
29
168
73
192
572
289
231
181
26
year (2)(3)
$
2,332 $ 2,592 $
165 $
180 $
145 $
171 $
425 $
487 $
3,067 $ 3,430
Total fixed maturity AFS securities backed by pools of
residential mortgages as a percentage of total fixed maturity AFS securities
Total prime, Alt-A and subprime/option ARM as a percentage of total fixed maturity AFS securities
2.9%
2.8%
0.7%
0.7%
(1)
Includes the net amortized cost and fair value of option adjustable rate mortgages (“ARM”) within RMBS, totaling $158 million and
$178 million, respectively.
(2) Does not include the amortized cost of trading securities totaling $132 million that primarily support our Modco reinsurance
agreements because investment results for these agreements are passed directly to the reinsurers. The $132 million in trading
securities consisted of $118 million prime, $2 million Alt-A and $12 million subprime.
(3) Does not include the fair value of trading securities totaling $137 million that primarily support our Modco reinsurance agreements
because investment results for these agreements are passed directly to the reinsurers. The $137 million in trading securities consisted
of $123 million prime, $1 million Alt-A and $13 million subprime.
(4) Based upon the rating designations determined and provided by the major credit rating agencies (Fitch, Moody’s and S&P). For
securities where the ratings assigned by the major credit agencies are not equivalent, the second lowest rating assigned is used. For
those securities where ratings by the major credit rating agencies are not available, which does not represent a significant amount of
our total fixed maturity AFS securities, we base the ratings disclosed upon internal ratings.
None of these investments included any direct investments in subprime lenders or mortgages. We are not aware of material exposure to
subprime loans in our alternative asset portfolio.
82
The following summarizes our investments in AFS securities backed by pools of commercial mortgages (in millions) as of December 31,
2020:
Multiple Property
Net
Amortized
Cost
Fair
Value
Single Property
Total
Net
Amortized
Cost
Fair
Value
Net
Amortized
Cost
Fair
Value
$
$
$
$
Type
CMBS (1)(2)
Rating
AAA
AA
A
Total by rating (1)(2)(3)
Origination Year
2010 and prior
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
1,370 $
1,481 $
20 $
24 $
1,390 $
1,505
1,280 $
90
-
1,387 $
94
-
1,370 $
1,481 $
12 $
4
27
147
14
26
112
323
169
298
238
14 $
4
27
152
14
28
120
361
195
326
240
4 $
11
5
20 $
11 $
-
-
-
-
-
4
-
-
5 $
13
6
1,284 $
101
5
1,392
107
6
24 $
1,390 $
1,505
14 $
-
-
-
-
-
5
-
-
23 $
4
27
147
14
26
116
323
169
298
243
28
4
27
152
14
28
125
361
195
326
245
5
5
Total by origination year (1)(2)
$
1,370 $
1,481 $
20 $
24 $
1,390 $
1,505
Total fixed maturity AFS securities backed by pools of
commercial mortgages as a percentage of total fixed maturity AFS securities
1.3%
1.2%
(1) Does not include the amortized cost of trading securities totaling $145 million that primarily support our Modco reinsurance
agreements because investment results for these agreements are passed directly to the reinsurers. The $145 million in trading
securities consisted of $64 million of multiple property CMBS and $81 million of single property CMBS.
(2) Does not include the fair value of trading securities totaling $134 million that primarily support our Modco reinsurance agreements
because investment results for these agreements are passed directly to the reinsurers. The $134 million in trading securities consisted
of $62 million of multiple property CMBS and $72 million of single property CMBS.
(3) Based upon the rating designations determined and provided by the major credit rating agencies (Fitch, Moody’s and S&P). For
securities where the ratings assigned by the major credit rating agencies are not equivalent, the second lowest rating assigned is used.
For those securities where ratings by the major credit rating agencies are not available, which does not represent a significant amount
of our total fixed maturity AFS securities, we base the ratings disclosed upon internal ratings.
As of December 31, 2020, the net amortized cost and fair value of our fixed maturity AFS exposure to monoline insurers was $366
million and $427 million, respectively.
Composition by Industry Categories of our Unrealized Losses on Fixed Maturity AFS Securities
When considering unrealized gain and loss information, it is important to recognize that the information relates to the position of
securities at a particular point in time and may not be indicative of the position of our investment portfolios subsequent to the balance
sheet date. Further, because the timing of the recognition of realized investment gains and losses through the selection of which
securities are sold is largely at management’s discretion, it is important to consider the information provided below within the context of
the overall unrealized gain or loss position of our investment portfolios. These are important considerations that should be included in
any evaluation of the potential effect of securities in an unrealized loss position on our future earnings.
83
The composition by industry categories of all fixed maturity AFS securities in an unrealized loss position (in millions) as of December 31,
2020, was as follows:
Finance companies
Banking
Government owned, no guarantee
ABS
Independent
Healthcare
Aerospace and defense
Integrated
Property and casualty
Technology
Transportation services
Industrial – other
Airlines
Industries with unrealized losses
less than $5 million
Total by industry
Total by industry as a percentage of
total fixed maturity AFS securities
Net
Amortized
Cost
%
Net
Amortized
Cost
Gross
%
Gross
Unrealized Unrealized
Losses
Losses
Fair
Value
$
$
98
345
84
1,885
171
596
188
50
56
339
127
156
92
2,043
6,230
6.0%
$
1.6%
5.5%
1.3%
30.3%
2.7%
9.6%
3.0%
0.8%
0.9%
5.4%
2.0%
2.5%
1.6%
25
17
14
13
13
11
11
8
7
7
6
6
6
$
12.6%
8.6%
7.1%
6.6%
6.6%
5.6%
5.6%
4.0%
3.5%
3.5%
3.0%
3.0%
3.0%
32.8%
100.0%
$
54
198
27.3%
100.0%
$
100.0%
73
328
70
1,872
158
585
177
42
49
332
121
150
86
1,989
6,032
4.9%
%
Fair
Value
1.2%
5.4%
1.2%
31.0%
2.6%
9.7%
3.0%
0.7%
0.8%
5.5%
2.0%
2.5%
1.4%
33.0%
100.0%
As of December 31, 2020, the net amortized cost and fair value of securities subject to enhanced analysis and monitoring for potential
changes in unrealized loss position was $38 million and $37 million, respectively.
84
Mortgage Loans on Real Estate
The following tables summarize key information on mortgage loans on real estate (in millions):
Credit Quality Indicator
Current
Delinquent (1)
Foreclosure (2)
Total mortgage loans on real estate before allowance
Allowance for credit losses
Total mortgage loans on real estate
Credit Quality Indicator
Current
Delinquent (1)
Foreclosure (2)
Total mortgage loans on real estate before allowance
Allowance for credit losses
Total mortgage loans on real estate
As of December 31, 2020
Commercial
Residential
Total
%
$
$
16,230
-
-
16,230
(187 )
16,043
$
$
666
42
29
737
(17)
720
$
$
16,896
42
29
16,967
(204)
16,763
99.6%
0.2%
0.2%
100.0%
As of December 31, 2019
Commercial
Residential
Total
%
$
$
15,606
-
-
15,606
-
15,606
$
$
718
9
8
735
(2)
$
733
$
16,324
9
8
16,341
(2)
16,339
99.9%
0.1%
0.0%
100.0%
(1) As of December 31, 2020, 2 commercial mortgage loans and 72 residential mortgage loans were delinquent. As of December 31,
2019, 3 commercial mortgage loans and 24 residential mortgage loans were delinquent.
(2) As of December 31, 2020, no commercial mortgage loans and 75 residential mortgage loans were in foreclosure. As of December
31, 2019, no commercial mortgage loans and 14 residential mortgage loans were delinquent.
As of December 31, 2020, there were 4 specifically identified impaired commercial mortgage loans on real estate with a carrying value of
$1 million and 76 specifically identified impaired residential mortgage loans on real estate with an aggregate carrying value of $34 million.
As of December 31, 2019, there was one specifically identified impaired commercial mortgage loan on real estate with a carrying value of
less than $1 million and four specifically identified impaired residential mortgage loans on real estate with an aggregate carrying value of
$1 million.
The total outstanding principal and interest on commercial mortgage loans on real estate that were two or more payments delinquent as
of December 31, 2020 and 2019, was less than $1 million. The total outstanding principal and interest on residential mortgage loans on
real estate that were three or more payments delinquent as of December 31, 2020 and 2019, was $41 million and $9 million, respectively.
See Note 1 for more information regarding our accounting policy relating to the impairment of mortgage loans on real estate.
The carrying value of mortgage loans on real estate by business segment (in millions) was as follows:
Segment
Annuities
Retirement Plan Services
Life Insurance
Group Protection
Other Operations
Total mortgage loans on real estate
As of December 31,
2019
2020
$
$
5,934 $
4,152
3,979
1,374
1,324
16,763 $
5,453
4,096
4,096
1,361
1,333
16,339
85
The composition of commercial mortgage loans (in millions) by property type, geographic region and state is shown below:
As of December 31, 2020
Carrying
Value
%
As of December 31, 2020
Carrying
Value
%
Property Type
Apartment
Office building
Industrial
Retail
Other commercial
Hotel/motel
Mixed use
Total
Geographic Region
Pacific
South Atlantic
Middle Atlantic
West South Central
East North Central
Mountain
East South Central
West North Central
New England
Non-U.S.
Total
$
$
$
5,194
3,910
3,180
2,580
715
245
219
16,043
4,772
3,513
2,030
1,808
1,393
816
690
492
489
40
16,043
State
32.4% CA
24.4% TX
19.8% NY
16.1% FL
4.4% GA
1.5% MD
1.4% PA
100.0% WA
TN
29.7% OH
21.9% VA
12.7% NC
11.3% AZ
8.7% WI
5.1%
IL
4.3% OR
3.1% MA
3.0% Non U.S.
0.2% All other states
Total
100.0%
$
$
3,843
1,665
1,130
774
718
707
661
605
564
556
549
364
348
332
324
323
314
40
2,226
16,043
24.0%
10.4%
7.0%
4.8%
4.4%
4.4%
4.1%
3.8%
3.5%
3.5%
3.4%
2.3%
2.2%
2.1%
2.0%
2.0%
2.0%
0.2%
13.9%
100.0%
The following table shows the principal amount (in millions) of our commercial and residential mortgage loans by year in which the
principal is contractually obligated to be repaid:
Principal Repayment Year
2020
2021
2022
2023
2024
2025 and thereafter
Total
As of December 31, 2020
Commercial
Residential
Total
%
$
$
900
944
863
1,304
1,202
11,036
16,249
$
$
9
9
9
10
10
668
715
$
$
909
953
872
1,314
1,212
11,704
16,964
5.4%
5.6%
5.1%
7.8%
7.1%
69.0%
100.0%
See Note 5 for information regarding our loan-to-value and debt-service coverage ratios and our allowance for credit losses.
86
Alternative Investments
Investment income (loss) on alternative investments by business segment (in millions) was as follows:
Annuities
Retirement Plan Services
Life Insurance
Group Protection
Other Operations
Total (1)
For the Years Ended December 31,
2018
2019
2020
$
$
23
14
140
15
5
197
$
$
2
2
15
2
1
22
$
$
27
15
161
14
5
222
(1)
Includes net investment income on the alternative investments supporting the required statutory surplus of our insurance businesses.
As of December 31, 2020 and 2019, alternative investments included investments in 271 and 258 different partnerships, respectively, and
the portfolio represented approximately 1% of total investments. The partnerships do not represent off-balance sheet financing and
generally involve several third-party partners. Some of our partnerships contain capital calls, which require us to contribute capital upon
notification by the general partner. These capital calls are contemplated during the initial investment decision and are planned for well in
advance of the call date. The capital calls are not material in size and are not material to our liquidity. Alternative investments are
accounted for using the equity method of accounting and are included in other investments on our Consolidated Balance Sheets.
Non-Income Producing Investments
As of December 31, 2020 and 2019, the carrying amount of fixed maturity securities, mortgage loans on real estate and real estate that
were non-income producing was $13 million and $9 million, respectively.
87
Net Investment Income
Details underlying net investment income (in millions) and our investment yield were as follows:
Net Investment Income
Fixed maturity AFS securities
Trading securities
Equity securities
Mortgage loans on real estate
Real estate
Policy loans
Invested cash
Commercial mortgage loan prepayment
and bond make-whole premiums (1)
Alternative investments (2)
Consent fees
Other investments
Investment income
Investment expense
Net investment income
For the Years Ended December 31,
2018
2019
2020
$
$
4,334
202
3
677
1
125
12
82
197
7
45
5,685
(175)
5,510
$
$
4,281
191
4
629
1
129
40
119
22
8
30
5,454
(231)
5,223
$
$
4,209
84
4
496
1
123
26
79
222
4
23
5,271
(186)
5,085
(1) See “Commercial Mortgage Loan Prepayment and Bond Make-Whole Premiums” below for additional information.
(2) See “Alternative Investments” above for additional information.
Interest Rate Yield
Fixed maturity AFS securities, mortgage loans on
real estate and other, net of investment expenses
Commercial mortgage loan prepayment and
bond make-whole premiums
Alternative investments
Net investment income yield on invested assets
For the Years Ended December 31,
2018
2019
2020
4.12%
4.35%
4.44%
0.06%
0.16%
4.34%
0.10%
0.02%
4.47%
0.07%
0.21%
4.72%
We earn investment income on our general account assets supporting fixed annuity, term life, whole life, UL, interest-sensitive whole life
and the fixed portion of retirement plan and VUL products. The profitability of our fixed annuity and life insurance products is affected
by our ability to achieve target spreads, or margins, between the interest income earned on the general account assets and the interest
credited to the contract holder on our average fixed account values, including the fixed portion of variable. Net investment income and
the interest rate yield table each include commercial mortgage loan prepayments and bond make-whole premiums, alternative investments
and contingent interest and standby real estate equity commitments. These items can vary significantly from period to period due to a
number of factors and, therefore, can provide results that are not indicative of the underlying trends.
Commercial Mortgage Loan Prepayment and Bond Make-Whole Premiums
Prepayment and make-whole premiums are collected when borrowers elect to call or prepay their debt prior to the stated maturity. A
prepayment or make-whole premium allows investors to attain the same yield as if the borrower made all scheduled interest payments
until maturity. These premiums are designed to make investors indifferent to prepayment.
The increase in prepayment and make-whole premiums when comparing 2020 to 2019 was attributable primarily to increased refinancing
activity.
88
Impairments on Fixed Maturity AFS Securities
See “Critical Accounting Policies and Estimates – Measurement of Allowances for Credit Losses and Recognition of Impairments” above
for information on our portfolio management strategy. Details underlying credit loss expense incurred as a result of impairments that
were recognized in net income (loss) and included in realized gain (loss) on fixed maturity AFS securities (in millions) were as follows:
Credit Loss Expense Recognized in Net Income (Loss) (1)
Fixed maturity AFS securities:
Corporate bonds
RMBS
ABS
Gross credit loss expense recognized in net income (loss)
Associated amortization of DAC, VOBA, DSI and DFEL
Net credit loss expense recognized in net income (loss)
For the Years Ended December 31,
2018
2019
2020
$
$
(24) $
(1)
(1)
(26)
1
(25) $
(14) $
(1)
(1)
(16)
1
(15) $
(5)
(1)
(1)
(7)
-
(7)
(1) Upon adoption of ASU 2016-13, we recognized credit loss expense incurred and write-downs taken as a result of impairments
through net income (loss) for the year ended December 31, 2020. Prior to the adoption of ASU 2016-13, we recognized write-
downs taken as a result of OTTI through net income (loss) for the year ended December 31, 2019.
The $26 million of impairments recognized in net income (loss) during the year ended December 31, 2020, were all credit-related
impairments. The increase in credit losses was primarily attributable to the destabilization of the energy industry. For a discussion of the
expected and potential impacts of the COVID-19 pandemic, see “Introduction – Executive Summary” above and “Part I – Item 1A. Rick
Factors – Market Conditions – The impacts of the COVID-19 pandemic have adversely affected and are expected to continue to
adversely affect our business and results of operations, and the future impacts of the COVID-19 pandemic on the company’s business,
results of operations and financial condition remain uncertain.”
REINSURANCE
Our insurance companies cede insurance to other companies. The portion of our life insurance risks exceeding each of our insurance
companies’ retention limit is reinsured with other insurers. We seek life and annuity reinsurance coverage to limit our exposure to
mortality losses and/or to enhance our capital and risk management. We acquire other reinsurance as applicable with retentions and
limits that management believes are appropriate for the circumstances. The consolidated financial statements included in “Item 8.
Financial Statements and Supplementary Data” reflect insurance premiums, insurance fees, benefits and DAC amortization net of
insurance ceded. Our insurance companies remain liable if their reinsurers are unable to meet contractual obligations under applicable
reinsurance agreements. We utilize inter-company reinsurance agreements to manage our statutory capital position as well as our hedge
program for variable annuity guarantees. With regard to risk retention from a consolidated basis, these inter-company agreements do not
have an effect on our consolidated financial statements. For information regarding reserve financing and LOC expenses from inter-
company reinsurance agreements, see “Review of Consolidated Financial Condition – Liquidity and Capital Resources – Uses of Capital –
Contractual Obligations” below.
We focus on obtaining reinsurance from a diverse group of reinsurers. We have established standards and criteria for our use and
selection of reinsurers. In order for a new reinsurer to participate in our current program, we generally require the reinsurer to have an
A.M. Best rating of A+ or greater or an S&P rating of AA- or better and a specified RBC percentage (or similar capital ratio measure). If
the reinsurer does not have these ratings, we may require them to post collateral as described below; however, we may waive the collateral
requirements based on the facts and circumstances. In addition, we may require collateral from a reinsurer to mitigate credit/collectability
risk. Typically, in such cases, the reinsurer must either maintain minimum specified ratings and RBC ratios or establish the specified
quality and quantity of collateral. Similarly, we have also required collateral in connection with books of business sold pursuant to
indemnity reinsurance agreements.
Reinsurers, including affiliated reinsurers, that are not licensed, accredited or authorized in the state of domicile of the reinsured (“ceding
company”), i.e., unauthorized reinsurers, are required to post statutorily prescribed forms of collateral for the ceding company to receive
reinsurance credit. The three primary forms of collateral are: (i) qualifying assets held in a reserve credit trust; (ii) irrevocable,
unconditional, evergreen LOCs issued by a qualified U.S. financial institution; and (iii) assets held by the ceding company in a segregated
funds withheld account. Collateral must be maintained in accordance with the rules of the ceding company’s state of domicile and must
be readily accessible by the ceding company to cover claims under the reinsurance agreement. Accordingly, our insurance subsidiaries
require unauthorized reinsurers to post acceptable forms of collateral to support their reinsurance obligations to us.
As a result of our Modco agreement with Athene to reinsure fixed and fixed indexed annuity products, we recorded a $5.8 billion deposit
asset reflected within other assets on our Consolidated Balance Sheets as of December 31, 2020. For additional information, see Note 9.
89
Our amounts recoverable from reinsurers represent receivables from and reserves ceded to reinsurers. As of December 31, 2020, 85%,
or $14.1 billion, of our total reinsurance recoverable was secured by collateral for our benefit. Of this amount, $13.8 billion was held by
reinsurers in reserve credit trusts (such reserve credit trusts are held by non-affiliated reinsurers; therefore, they are not reflected on our
Consolidated Balance Sheets), $1.9 billion was reflected as funds withheld reinsurance liabilities on our Consolidated Balance Sheets as of
December 31, 2020, although only $151 million can be utilized as collateral due to excess funds withheld above the reinsurance
recoverable from our reinsurers, and $151 million was secured by LOCs for which we are the beneficiary, an off-balance sheet
arrangement.
We regularly evaluate the financial condition of our reinsurers and monitor concentration risk with our largest reinsurers at least annually.
We monitor all of our existing reinsurers’ financial strength ratings on a monthly basis. We also monitor our reinsurers’ financial health,
trends and commitment to the reinsurance business, statutory surplus, RBC levels, statutory earnings and fluctuations, current claims
payment aging and our reinsurers’ own reinsurers. In addition, we present at least annually information regarding our reinsurance
exposures to the Finance Committee of our Board of Directors. For more discussion of our counterparty risk with our reinsurers, see
“Part I – Item 1A. Risk Factors – Operational Matters – We face risks of non-collectability of reinsurance and increased reinsurance rates,
which could materially affect our results of operations.”
Under certain indemnity reinsurance agreements, two of our insurance subsidiaries, LNL and LLANY, provide 100% indemnity
reinsurance for the business assumed; however, the third-party insurer, or the “cedent,” remains primarily liable on the underlying
insurance business. These indemnity reinsurance arrangements require that our subsidiary, as the reinsurer, maintain certain insurer
financial strength ratings and capital ratios. If these ratings or capital ratios are not maintained, depending upon the reinsurance
agreement, the cedent may recapture the business, or require us to place assets in trust or provide LOCs at least equal to the relevant
statutory reserves. Under the LNL reinsurance arrangement, we held approximately $2.9 billion of statutory reserves as of December 31,
2020. LNL must maintain an A.M. Best financial strength rating of at least B++, an S&P financial strength rating of at least BBB- and a
Moody’s financial strength rating of at least Baa3. This arrangement may require LNL to place assets in trust equal to the relevant
statutory reserves. Under LLANY’s largest indemnity reinsurance arrangement, we held approximately $1.2 billion of statutory reserves
as of December 31, 2020. LLANY must maintain an A.M. Best financial strength rating of at least B+, an S&P financial strength rating
of at least BB+ and a Moody’s financial strength rating of at least Ba1, as well as maintain an RBC ratio of at least 160% or an S&P capital
adequacy ratio of 100%, or the cedent may recapture the business. Under two other LLANY arrangements, by which we established
$672 million of statutory reserves as of December 31, 2020, LLANY must maintain an A.M. Best financial strength rating of at least
B++, an S&P financial strength rating of at least BBB- and a Moody’s financial strength rating of at least Baa3. One of these
arrangements also requires LLANY to maintain an RBC ratio of at least 185% or an S&P capital adequacy ratio of 115%. Each of these
arrangements may require LLANY to place assets in trust equal to the relevant statutory reserves. See “Item 1. Business – Financial
Strength Ratings” for a description of our financial strength ratings.
For more information about reinsurance, see Notes 9 and 14 and “Review of Consolidated Financial Condition – Liquidity and Capital
Resources – Sources of Liquidity and Cash Flow – Insurance Subsidiaries’ Statutory Capital and Surplus” below.
For factors that could cause actual results to differ materially from those set forth in this section, see “Part I – Item 1A. Risk Factors” and
“Forward-Looking Statements – Cautionary Language” above.
REVIEW OF CONSOLIDATED FINANCIAL CONDITION
Liquidity and Capital Resources
Overview
Liquidity refers to the ability of an enterprise to generate adequate amounts of cash from its normal operations to meet cash requirements
with a prudent margin of safety. Our principal sources of cash flow from operating activities are insurance premiums and fees and
investment income, while sources of cash flows from investing activities result from maturities and sales of investments. Our operating
activities provided (used) cash of $534 million, $(2.7) billion and $1.9 billion in 2020, 2019 and 2018, respectively. When considering our
liquidity and cash flow, it is important to distinguish between the needs of our insurance subsidiaries and the needs of the holding
company, LNC. As a holding company with no operations of its own, LNC is largely dependent upon the dividend capacity of its
insurance subsidiaries as well as their ability to advance or repay funds to it through inter-company borrowing arrangements, which may
be affected by factors influencing the insurance subsidiaries’ RBC and statutory earnings performance. The sources of liquidity and cash
flow of the holding company are principally comprised of dividends and interest payments from subsidiaries, augmented by holding
company short-term investments, bank lines of credit and the ongoing availability of long-term public financing under an SEC-filed shelf
registration statement. These sources of liquidity and cash flow support the general corporate needs of the holding company, including
its common stock dividends, interest and debt service, funding of callable securities, securities repurchases, acquisitions and investment in
core businesses.
90
Disruptions, uncertainty or volatility in the capital and credit markets, including any current or future impacts related to the COVID-19
pandemic, may materially affect our business operations and results of operations. These poor market conditions may reduce our
insurance subsidiaries’ statutory surplus and RBC requiring them to retain more capital and may pressure their ability to pay dividends to
LNC, which may lead us to take steps to preserve or raise additional capital. We monitor and adjust our liquidity and capital plans in light
of market conditions, as well as changing needs and opportunities. Available liquidity consists of cash and invested cash, excluding cash
held as collateral, and certain short-term investments that can be readily converted into cash. As of December 31, 2020, the holding
company had available liquidity of $754 million, which includes amounts related to the pre-funding of our $300 million senior notes due
2022. Based on the sources of liquidity and cash flow available to us as discussed below, we currently expect to be able to meet the
holding company’s ongoing cash needs and to have sufficient capital to offer downside protection. For factors that could cause actual
results to differ materially from those set forth in this section and that could affect our expectations for liquidity and capital, see “Part I –
Item 1A. Risk Factors” and “Forward-Looking Statements – Cautionary Language” above. For a discussion of the expected and
potential impacts of the COVID-19 pandemic, see “Introduction – Executive Summary” above and “Part I – Item 1A. Risk Factors –
Market Conditions – The impacts of the COVID-19 pandemic have adversely affected and are expected to continue to adversely affect
our business and results of operations, and the future impacts of the COVID-19 pandemic on the company’s business, results of
operations and financial condition remain uncertain.”
Sources of Liquidity and Cash Flow
Details underlying the primary sources of our holding company cash flows (in millions) were as follows:
Dividends from Subsidiaries
The Lincoln National Life Insurance Company
First Penn-Pacific
Lincoln Investment Management Company
Lincoln National Management Corporation
Lincoln National Reinsurance Company (Barbados) Limited
$
Total dividends from subsidiaries
$
For the Years Ended December 31,
2018
2019
2020
660
-
25
5
150
840
$
$
600
-
30
5
195
830
$
$
910
15
25
-
75
1,025
Loan Repayments and Interest from Subsidiaries
Interest on inter-company notes
$
123
$
132
$
145
Other Cash Flow Items
Amounts received from (paid for taxes on)
stock option exercises and restricted stock, net
$
(2) $
(10) $
2
The table above focuses on significant and recurring cash flow items and excludes the effects of certain financing activities, namely the
periodic issuance and retirement of debt and cash flows related to our inter-company cash management program (discussed below).
Taxes have been eliminated from the analysis due to a tax sharing agreement among our primary subsidiaries resulting in a modest effect
on net cash flows at the holding company. Also excluded from this analysis is the modest amount of investment income on short-term
investments of the holding company. See “Part IV – Item 15(a)(2) Financial Statement Schedules – Schedule II – Condensed Financial
Information of Registrant” for the parent company cash flow statement.
Restrictions on Subsidiaries’ Dividends and Other Payments
We are a holding company that transacts substantially all of our business directly and indirectly through subsidiaries. Our primary assets
are the stock of our operating subsidiaries. Our ability to meet our obligations on our outstanding debt and to pay dividends and our
general and administrative expenses depends on the surplus and earnings of our subsidiaries and the ability of our subsidiaries to pay
dividends or to advance or repay funds to us.
91
Our insurance subsidiaries are subject to certain insurance department regulatory restrictions as to the transfer of funds and payment of
dividends to the holding company. Under Indiana laws and regulations, our Indiana insurance subsidiaries, including our primary
insurance subsidiary, The Lincoln National Life Insurance Company (“LNL”), may pay dividends to LNC without prior approval of the
Indiana Insurance Commissioner (the “Commissioner”) only from unassigned surplus or must receive prior approval of the
Commissioner to pay a dividend if such dividend, along with all other dividends paid within the preceding 12 consecutive months, would
exceed the statutory limitation. The current statutory limitation is the greater of 10% of the insurer’s contract holders’ surplus, as shown
on its last annual statement on file with the Commissioner or the insurer’s statutory net gain from operations for the previous 12 months,
but in no event to exceed statutory unassigned surplus. Indiana law gives the Commissioner broad discretion to disapprove requests for
dividends in excess of these limits. LNL’s subsidiaries, the Lincoln Life & Annuity Company of New York (“LLANY”), a New York-
domiciled insurance company, and LLACB, a New Hampshire-domiciled insurance company, are bound by similar restrictions, under
New York law and New Hampshire law, respectively. Under both New York and New Hampshire law, the applicable statutory limitation
on dividends is equal to the lesser of 10% of surplus to contract holders as of the end of the immediately preceding calendar year or net
gain from operations for the immediately preceding calendar year, not including realized capital gains.
Indiana law also provides that following the payment of any dividend, the insurer’s contract holders’ surplus must be reasonable in
relation to its outstanding liabilities and adequate for its financial needs, and permits the Commissioner to bring an action to rescind a
dividend that violates these standards. In the event the Commissioner determines that the contract holders’ surplus of one subsidiary is
inadequate, the Commissioner could use his or her broad discretionary authority to seek to require us to apply payments received from
another subsidiary for the benefit of that insurance subsidiary.
We expect our direct domestic insurance subsidiaries could pay dividends to LNC of approximately $865 million in 2021 without prior
approval from the respective state commissioners. The amount of surplus that our insurance subsidiaries could pay as dividends is
constrained by the amount of surplus we hold to maintain our ratings, to provide an additional layer of margin for risk protection and for
future investment in our businesses.
We maintain an investment portfolio of various holdings, types and maturities. These investments are subject to general credit, liquidity,
market and interest rate risks. An extended disruption in the credit and capital markets could adversely affect LNC and its subsidiaries’
ability to access sources of liquidity, and there can be no assurance that additional financing will be available to us on favorable terms, or
at all, in the current market environment. In addition, further impairment could reduce our statutory surplus, leading to lower RBC ratios
and potentially reducing future dividend capacity from our insurance subsidiaries.
Insurance Subsidiaries’ Statutory Capital and Surplus
Our insurance subsidiaries must maintain certain regulatory capital levels. We utilize the RBC ratio as a primary measure of the capital
adequacy of our insurance subsidiaries. The RBC ratio is an important factor in the determination of the credit and financial strength
ratings of LNC and its subsidiaries, as a reduction in our insurance subsidiaries’ surplus may affect their RBC ratios and dividend-paying
capacity. For a discussion of RBC ratios, see “Part I – Item 1. Business – Regulatory – Insurance Regulation – Risk-Based Capital.”
Our regulatory capital levels are also affected by statutory accounting rules, which are subject to change by each applicable insurance
regulator. Our term products and UL products containing secondary guarantees require reserves calculated pursuant to XXX and AG38,
respectively. Our insurance subsidiaries employ strategies to reduce the strain caused by XXX and AG38 by reinsuring the business to
reinsurance captives. Our captive reinsurance and reinsurance subsidiaries provide a mechanism for financing a portion of the excess
reserve amounts in a more efficient manner. We use long-dated LOCs and debt financing as well as other financing strategies to finance
those reserves. Included in the LOCs issued as of December 31, 2020, was approximately $2.1 billion of long-dated LOCs issued to
support inter-company reinsurance arrangements for UL products containing secondary guarantees ($201 million will expire in 2024 and
$1.9 billion relates to arrangements that will expire by 2031). For information on the LOCs, see the credit facilities table in Note 13. Our
captive reinsurance and reinsurance subsidiaries have also issued long-term notes of $3.6 billion to finance a portion of the excess
reserves as of December 31, 2020; of this amount, $2.6 billion involve exposure to VIEs. For information on these long-term notes
issued by our captive reinsurance and reinsurance subsidiaries, see Note 4. We have also used the proceeds from senior note issuances of
$875 million to execute long-term structured solutions primarily supporting reinsurance of UL products containing secondary guarantees.
LOCs and related capital market solutions lower the capital effect of term products and UL products containing secondary guarantees.
Our captive reinsurance and reinsurance subsidiaries free up capital the insurance subsidiaries can use for any number of purposes,
including paying dividends to the holding company. The NAIC’s adoption of the Valuation Manual that defines a principles-based
reserving framework for newly issued life insurance policies was effective January 1, 2017. We adopted the framework for our newly
issued term business in 2017 and phased in the framework through January 1, 2020, for all other newly issued life insurance products. We
continue to analyze the effects of principles-based reserving on the use of captive reinsurance and reinsurance subsidiaries and third-party
reinsurance for reserve financing transactions for our life insurance business. For more information on the NAIC’s adoption of
principles-based reserving, see “Part I – Item 1. Business – Regulatory – Insurance Regulation.”
92
Statutory reserves established for variable annuity contracts and riders are sensitive to changes in the equity markets and interest rates, and
are affected by the level of account values relative to the level of any guarantees, product design and reinsurance arrangements. As a
result, the relationship between reserve changes and equity market performance is non-linear during any given reporting period. Market
conditions greatly influence the ultimate capital required due to its effect on the valuation of reserves and derivative assets hedging these
reserves. We also utilize inter-company reinsurance arrangements to manage our hedge program for variable annuity guarantees.
Changes in equity markets may also affect the capital position of our insurance subsidiaries. We may decide to reallocate available capital
among our insurance subsidiaries, including our captive reinsurance subsidiaries, which would result in different RBC ratios for our
insurance subsidiaries. In addition, changes in the equity markets can affect the value of our variable annuity and variable universal life
insurance separate accounts. When the market value of our separate account assets increases, the statutory surplus within our insurance
subsidiaries also increases. Contrarily, when the market value of our separate account assets decreases, the statutory surplus within our
insurance subsidiaries may also decrease, which may affect RBC ratios, and in the case of our separate account assets becoming less than
the related product liabilities, we must allocate additional capital to fund the difference.
We continue to analyze the use of our existing captive reinsurance structures, as well as additional third-party reinsurance arrangements,
and our current hedging strategies relative to managing the effects of equity markets and interest rates on the statutory reserves, statutory
capital and the dividend capacity of our life insurance subsidiaries.
Financing Activities
Although our subsidiaries currently generate adequate cash flow to meet the needs of our normal operations, periodically we may issue
debt or equity securities to maintain ratings and increase liquidity, as well as to fund internal growth, acquisitions and the retirement of
our debt and equity securities.
We currently have an effective shelf registration statement, which allows us to issue, in unlimited amounts, securities, including debt
securities, preferred stock, common stock, warrants, stock purchase contracts, stock purchase units and depository shares.
Details underlying debt and financing activities (in millions) for the year ended December 31, 2020, were as follows:
Maturities, Change
in Fair
Repayments
Value
and
Issuance Refinancing Hedges
Beginning
Balance
Other
Ending
Changes (1) Balance
Short-Term Debt
Current maturities of long-term debt
Long-Term Debt
Senior notes
Bank borrowings
Capital securities (2)
Total long-term debt
$
$
$
300
$
-
$
(300) $
-
$
- $
-
4,610
250
1,207
6,067
$
$
800
500
-
1,300
$
$
(296) $
(500)
-
(796) $
117
-
-
117
$
$
(6) $
(1)
1
(6) $
5,225
249
1,208
6,682
(1)
Includes the non-cash reclassification of long-term debt to current maturities of long-term debt, accretion (amortization) of
discounts and premiums, amortization of debt issuance costs and amortization of adjustments from discontinued hedges, as
applicable.
(2) To hedge the variability in rates, we purchased interest rate swaps to lock in a fixed rate of approximately 5% over the remaining
terms of the capital securities.
During March 2020, we entered into a $500 million floating-rate loan maturing on March 30, 2022 (the “2022 Term Loan”). In addition,
during March 2020, we unwound the fair value hedge on our 7.00% senior notes due 2040 and entered into two fair value hedges on the
same notes, which generated capital deployed for general corporate purposes. During May 2020, we completed the issuance and sale of
$500 million aggregate principal amount of our 3.40% senior notes due 2031 and $300 million aggregate principal amount of our 4.375%
senior notes due 2050. We used the net proceeds from the offering to fund the redemption of our $296 million 4.85% senior notes due
2021 and to repay the 2022 Term Loan. For more information, see Note 13.
We have not accounted for repurchase agreements, securities lending transactions or other transactions involving the transfer of financial
assets with an obligation to repurchase the transferred assets as sales. For information about our collateralized financing transactions on
our investments, see “Payables for Collateral on Investments” in Note 5.
93
If current credit ratings or claims-paying ratings were downgraded in the future, terms in our derivative agreements may be triggered,
which could negatively affect overall liquidity. For the majority of our derivative counterparties, there is a termination event with respect
to LNC if its long-term senior debt ratings drop below BBB-/Baa3 (S&P/Moody’s); or with respect to LNL if its financial strength
ratings drop below BBB-/Baa3 (S&P/Moody’s). Our long-term senior debt held a rating of A-/Baa1 (S&P/Moody’s) as of December
31, 2020. In addition, contractual selling agreements with intermediaries could be negatively affected, which could have an adverse effect
on overall sales of annuities, life insurance and investment products. See “Part I – Item 1A. Risk Factors – Liquidity and Capital Position
– A decrease in the capital and surplus of our insurance subsidiaries may result in a downgrade to our credit and insurer financial strength
ratings” and “Part I – Item 1A. Risk Factors – Covenants and Ratings – A downgrade in our financial strength or credit ratings could
limit our ability to market products, increase the number or value of policies being surrendered and/or hurt our relationships with
creditors” for more information. See “Part I – Item 1. Business – Financial Strength Ratings” for additional information on our current
financial strength ratings.
Our indicative credit ratings published by the primary rating agencies are set forth below. Securities are rated at the time of issuance so
actual ratings may differ from the indicative ratings. There may be other rating agencies that also provide credit ratings, which we do not
disclose in our reports.
The long-term credit rating scales of A.M. Best, Fitch, Moody’s and S&P are characterized as follows:
• A.M. Best – aaa to c
• Fitch – AAA to D
• Moody’s – Aaa to C
•
S&P – AAA to D
As of February 12, 2021, our indicative long-term credit ratings as published by the principal rating agencies that rate our long-term credit
were as follows:
A.M. Best
a-
(7th of 22)
Fitch
BBB+
(8th of 21)
Moody's
Baa1
(8th of 21)
S&P
A-
(7th of 22)
The short-term credit rating scales of A.M. Best, Fitch, Moody’s and S&P are characterized as follows:
• A.M. Best – AMB-1+ to AMB-4
• Fitch – F1+ to D
• Moody’s – P-1 to NP
•
S&P – A-1+ to D
As of February 12, 2021, our indicative short-term credit ratings as published by the principal rating agencies that rate our short-term
credit were as follows:
A.M. Best
AMB-1
(2nd of 6)
Fitch
F2
(3rd of 8)
Moody's
P-2
(2nd of 4)
S&P
A-2
(3rd of 7)
A downgrade of our debt ratings could affect our ability to raise additional debt with terms and conditions similar to our current debt,
and accordingly, likely increase our cost of capital. In addition, a downgrade of these ratings could make it more difficult to raise capital
to refinance any maturing debt obligations, to support business growth at our insurance subsidiaries and to maintain or improve the
current financial strength ratings of our principal insurance subsidiaries described in “Part I – Item 1. Business – Financial Strength
Ratings.”
All ratings are on outlook stable. All of our ratings are subject to revision or withdrawal at any time by the rating agencies, and therefore,
no assurance can be given that we can maintain these ratings. Each rating should be evaluated independently of any other rating.
94
Management monitors the covenants associated with LNC’s capital securities. If we fail to meet capital adequacy or net income and
stockholders’ equity levels (also referred to as “trigger events”), terms in the agreements may be triggered, which would require us to
make interest payments in accordance with an alternative coupon satisfaction mechanism (“ACSM”). This would generally require us to
use commercially reasonable efforts to pay interest in full on the capital securities with the net proceeds from sales of our common stock
and warrants to purchase our common stock with an exercise price greater than the market price. We would have to utilize the ACSM
until the trigger events above no longer existed. If we were required to utilize the ACSM and were successful in selling sufficient shares
of common stock or warrants to satisfy the interest payment, we would dilute the current holders of our common stock. Furthermore,
while a trigger event is occurring and if we do not pay accrued interest in full, we may not, among other things, pay dividends on or
repurchase our capital stock. We have not triggered either the net income test or the overall stockholders’ equity test looking forward to
the quarters ending March 31, 2021, and June 30, 2021. For more information, see “Part I – Item 1A. Risk Factors – Covenants and
Ratings – We will be required to pay interest on our capital securities with proceeds from the issuance of qualifying securities if we fail to
achieve specified capital adequacy or net income and stockholders’ equity levels, which would dilute the current holders of our common
stock.”
Alternative Sources of Liquidity
Inter-company Cash Management Program
In order to manage our capital more efficiently, we have an inter-company cash management program where certain subsidiaries can lend
to or borrow from the holding company to meet short-term borrowing needs. The cash management program is essentially a series of
demand loans between LNC and participating subsidiaries that reduces overall borrowing costs by allowing LNC and its subsidiaries to
access internal resources instead of incurring third-party transaction costs. As of December 31, 2020, the holding company had a net
outstanding receivable (payable) of $(254) million from (to) certain subsidiaries resulting from loans made by subsidiaries in excess of
amounts placed (borrowed) by the holding company and subsidiaries in the inter-company cash management account. Any change in
holding company cash management program balances is offset by the immediate and equal change in holding company cash and invested
cash. The holding company had an average borrowing balance of $1.0 billion from the cash management program during 2020. The
holding company had a maximum and minimum amount of financing from the cash management program during 2020 of $1.4 billion
and $322 million, respectively. Loans under the cash management program are permitted under applicable insurance laws subject to
certain restrictions. For our Indiana and New Hampshire-domiciled insurance subsidiaries, the borrowing and lending limit is currently
3% of the insurance company’s admitted assets as of its most recent year end. For our New York-domiciled insurance subsidiary, it may
borrow from LNC less than 2% of its admitted assets as of its most recent year end but may not lend any amounts to LNC.
Facility Agreement for Senior Notes Issuance
During August 2020, LNC entered into a facility agreement with a Delaware trust that gives LNC the right over a 10-year period to issue,
from time to time, up to $500 million of 2.330% senior notes to the trust in exchange for a corresponding amount of U.S. Treasury
securities held by the trust. By agreeing to purchase the 2.330% senior notes in exchange for U.S. Treasury securities upon exercise of the
issuance right, the trust will provide a source of liquid assets for the Company. For additional details, see Note 13.
Federal Home Loan Bank
Our primary insurance subsidiary, LNL, is a member of the Federal Home Loan Bank (“FHLB”) of Indianapolis (“FHLBI”).
Membership allows LNL access to the FHLBI’s financial services, including the ability to obtain loans and to issue funding agreements as
an alternative source of liquidity that are collateralized by qualifying mortgage-related assets, agency securities or U.S. Treasury securities.
Borrowings under this facility are subject to the FHLBI’s discretion and require the availability of qualifying assets at LNL. As of
December 31, 2020, LNL had an estimated maximum borrowing capacity of $7.0 billion under the FHLBI facility and maximum available
borrowing based on qualifying assets of $4.4 billion. As of December 31, 2020, LNL had outstanding borrowings of $3.1 billion reported
within payables for collateral on investments on the Consolidated Balance Sheets. In October 2020, LLANY became a member of the
Federal Home Loan Bank of New York (“FHLBNY”) with an estimated maximum borrowing capacity of $750 million. Borrowings
under this facility are subject to the FHLBNY’s discretion and require the availability of qualifying assets at LLANY. As of December 31,
2020, there were no outstanding borrowings. For additional details, see “Payables for Collateral on Investments” in Note 5.
Securities Lending Programs and Repurchase Agreements
Our insurance subsidiaries, by virtue of their general account fixed-income investment holdings, can access liquidity through securities
lending programs and repurchase agreements. As of December 31, 2020, our insurance subsidiaries had securities pledged under
securities lending agreements with a carrying value of $115 million. In addition, our insurance subsidiaries had access to $750 million
through a committed repurchase agreement. The cash received in our securities lending programs and repurchase agreements is typically
invested in cash and invested cash or fixed maturity AFS securities. For additional details, see “Payables for Collateral on Investments” in
Note 5.
95
Collateral on Derivative Contracts
Our cash flows associated with collateral received from counterparties (when we are in a net payable position) and posted with
counterparties (when we are in a net receivable position) change as the market value of the underlying derivative contract changes. The
net collateral position depends on changes in interest rates and equity markets related to the amount of the exposures hedged. As of
December 31, 2020, we were in a net collateral payable position of $1.9 billion compared to $830 million as of December 31, 2019.
During 2020, our net collateral payable position increased due primarily to decreasing interest rates that increased the fair values of our
associated over-the-counter derivative investments. In the event of adverse changes in fair value of our derivative instruments, we may
need to post collateral with a counterparty. If we do not have sufficient high quality securities or cash and invested cash to provide as
collateral, we have committed liquidity sources through facilities that can provide up to $1.25 billion of additional liquidity to help meet
collateral needs. Access to such facilities is contingent upon interest rates having achieved certain threshold levels. In addition to these
facilities, we have the facility agreement for senior notes issuance, the FHLB facilities and the repurchase agreements discussed above as
well as the five-year revolving credit facility discussed in Note 13 to leverage that would be eligible for collateral posting. For additional
information, see “Credit Risk” in Note 6.
Uses of Capital
Our principal uses of cash are to pay policy claims and benefits, operating expenses, commissions and taxes, to purchase new
investments, to purchase reinsurance, to fund policy surrenders and withdrawals, to pay dividends to our stockholders, to repurchase our
stock and to repay debt.
Return of Capital to Common Stockholders
One of the Company’s primary goals is to provide a return to our common stockholders through share price accretion, dividends and
stock repurchases. In determining dividends, the Board of Directors takes into consideration items such as current and expected
earnings, capital needs, rating agency considerations and requirements for financial flexibility. On November 3, 2020, our Board of
Directors approved an increase to the quarterly dividend on our common stock from $0.40 to $0.42 per share. The amount and timing of
share repurchases depends on key capital ratios, rating agency expectations, the generation of free cash flow and an evaluation of the
costs and benefits associated with alternative uses of capital. Free cash flow for the holding company generally represents the amount of
dividends and interest received from subsidiaries less interest paid on debt. During the second and third quarters of 2020, we suspended
common stock repurchases under our buyback program; however, we resumed common stock repurchases in the fourth quarter of 2020.
We may repurchase additional shares of common stock during 2021 depending on market conditions and alternative uses of capital. For
more information regarding share repurchases, see “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities – (c) Issuer Purchases of Equity Securities.”
Details underlying this activity (in millions) were as follows:
Dividends to common stockholders
Repurchase of common stock
Total cash returned to stockholders
Number of shares repurchased
Other Uses of Capital
For the Years Ended December 31,
2019
2020
2018
$
$
$
$
311
275
586
4.9
$
$
298
640
938
10.4
286
810
1,096
13.2
In addition to the amounts in the table above in “Return of Capital to Common Stockholders,” other uses of holding company cash flow
(in millions) were as follows:
Debt service (interest paid)
Capital contribution to subsidiaries
Total
For the Years Ended December 31,
2018
2019
2020
$
$
277
518
795
$
$
288
50
338
$
$
286
502
788
The above table focuses on significant and recurring cash flow items and excludes the effects of certain financing activities, namely the
periodic retirement of debt and cash flows related to our inter-company cash management account. Taxes have been eliminated from the
analysis due to a tax sharing agreement among our primary subsidiaries resulting in a modest effect on net cash flows at the holding
company.
96
Contractual Obligations
Details underlying our future estimated cash payments for our contractual obligations (in millions) as of December 31, 2020, were as
follows:
Future contract benefits and other contract holder
obligations (1)
Short-term and long-term debt (2)
Reserve financing and LOC expenses (3)
Payables for collateral on investments (4)
Operating leases (5)
Finance leases (5)
Certain financing arrangements (6)
Retirement and other plans (7)
Total
Less
Than
1 Year
1 - 3
Years
3 - 5
Years
More
Than
5 Years
$
$
23,152
-
68
3,245
51
62
4
110
26,692
$
$
45,371
800
128
-
89
151
30
212
46,781
$
$
44,020
550
109
-
51
24
190
206
45,150
$
$
391,562
4,981
317
-
47
4
9
484
397,404
Total
$
$
504,105
6,331
622
3,245
238
241
233
1,012
516,027
(1) Estimates are based on financial projections over 40 years and are not discounted for the time value of money. New business issued
or acquired, business ceded or sold, changes to or variances from actuarial assumptions and economic conditions will cause these
amounts to change over time, possibly materially. See Note 1 for details of what these liabilities include and represent.
(2) Represents principal amounts of debt only. See Note 13 for additional information.
(3) Estimates are based on the level of capacity we expect to utilize during the life of the LOCs and other reserve financing
arrangements. See Note 13 for additional information.
(4) Excludes collateral payable held for derivative investments. See Note 5 for additional information.
(5) See Note 14 for additional information.
(6) Represents certain financing arrangements that did not meet the requirements to be classified as a sale-leaseback arrangement.
(7)
Includes anticipated funding for benefit payments for our retirement and postretirement plans through 2030 and known payments
under deferred compensation arrangements. In addition to these benefit payments, we periodically fund the employees’ defined
benefit plans. The majority of contributions and benefit payments are made by our insurance subsidiaries with little effect on
holding company cash flow. See Note 18 for additional information.
Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits as of December 31,
2020, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authority.
Therefore, $51 million of unrecognized tax benefits and its associated interest have been excluded from the contractual obligations table
above. See Note 7 for additional information.
Contingencies and Off-Balance Sheet Arrangements
During August 2020, LNC entered into a facility agreement with a Delaware trust that gives LNC the right over a 10-year period to issue,
from time to time, up to $500 million of 2.330% senior notes to the trust in exchange for a corresponding amount of U.S. Treasury
securities held by the trust. The issuance right will be exercised automatically in full upon our failure to make certain payments to the
trust, if the failure to pay is not cured within 30 days, or upon certain bankruptcy events involving LNC. We are also required to exercise
the issuance right in full if our consolidated stockholders’ equity (excluding AOCI) falls below $2.75 billion, subject to adjustment from
time to time in certain cases, and upon certain other events described in the facility agreement. For more information, see Note 13.
Other than as described above, we do not have any off-balance sheet arrangements that are reasonably likely to have a material effect on
our financial condition, results of operations, liquidity or capital resources.
97
Details underlying our contingent commitments (in millions) as of December 31, 2020, were as follows:
Credit facilities (1)
Investment commitments (2)
Total
(1) See Note 13 for additional information.
(2) See Note 5 for additional information.
Amount of Commitment Expiring per Period
Less Than
1 Year
1 - 3
Years
3 - 5
Years
After
5 Years
$
$
-
1,665
1,665
$
$
-
295
295
$
$
2,250
613
2,863
$
$
1,944
281
2,225
Total
Amount
Committed
4,194
2,854
7,048
$
$
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We analyze and manage the risks arising from market exposures of financial instruments, as well as other risks, in an integrated asset-
liability management process that considers diversification. By aggregating the potential effect of market and other risks on the entire
enterprise, we estimate, review and in some cases manage the risk to our earnings and shareholder value. We have exposures to several
market risks including interest rate risk, equity market risk, credit risk and, to a lesser extent, foreign currency exchange risk. The
exposures of financial instruments to market risks, and the related risk management processes, are most important to our business where
most of the investments support accumulation and investment-oriented insurance products. As an important element of our integrated
asset-liability management processes, we use derivatives to minimize the effects of changes in interest levels, the shape of the yield curve,
currency movements and volatility. In this context, derivatives serve to minimize interest rate risk by mitigating the effect of significant
increases in interest rates on our earnings. Additional market exposures exist in our other general account insurance products and in our
debt structure and derivatives positions. Our primary sources of market risk are substantial, relatively rapid and sustained increases or
decreases in interest rates or a sharp drop in equity market values. These market risks are discussed in detail in the following pages and
should be read in conjunction with our consolidated financial statements and the accompanying Notes presented in “Item 8. Financial
Statements and Supplementary Data,” as well as “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
Interest Rate Risk
Interest rate risk is the risk of financial loss due to adverse changes in the value of assets and liabilities due to movements in interest rates.
We are exposed to interest rate risk arising from our fixed maturity securities and interest sensitive liabilities.
With respect to accumulation and investment-oriented products, we seek to earn a stable and profitable spread, or margin, between
investment income we earn on our investments and interest credited to account values of our contract holders. If we have adverse
experience on investments that cannot be passed on to customers, our spreads are reduced. The combination of a probable range of
interest rate changes over the next 12 months, asset-liability management strategies, flexibility in adjusting policy crediting rate levels and
protection afforded by policy surrender charges all work together to mitigate this risk. The interest rate scenarios of concern are those in
which there is a substantial, relatively prolonged decrease in interest rates that is sustained over a long period or a rapid increase in interest
rates.
98
Significant Interest Rate Exposures
The following provides a general measure of our significant interest rate risk; principal, including amortization of premiums and
discounts, notional amounts, and estimated fair values of assets, liabilities and derivatives are shown by year of maturity (dollars in
millions) as of December 31, 2020:
2021
2022
2023
2024
2025
Thereafter
Total
Estimated
Fair Value
Rate Sensitive Assets
Fixed maturity AFS securities:
Fixed interest rate securities
Average interest rate
Variable interest rate securities $
Average interest rate
$
Trading securities:
Fixed interest rate securities
Average interest rate
Variable interest rate securities $
Average interest rate
$
Mortgage loans on real estate:
3,242 $
3.9%
77 $
5.9%
3,095 $
3.8%
99 $
3.7%
3,655 $
4.1%
43 $
6.1%
3,960 $
4.1%
29 $
4.8%
4,308 $
3.9%
35 $
2.8%
4.2%
917 $
5.3%
4.2%
1,200 $
5.1%
84,714 $ 102,974 $ 121,649
102 $
3.8%
- $
0.0%
116 $
3.6%
- $
0.0%
184 $
3.4%
1 $
3.4%
126 $
4.7%
- $
0.0%
141 $
4.9%
- $
0.0%
3,387 $
4.6%
15 $
7.2%
4,056 $
4.5%
16 $
6.9%
1,395
4,479
22
Total mortgage loans
Average interest rate
Rate Sensitive Liabilities
Investment type
$
909 $
4.3%
953 $
4.3%
872 $
4.1%
1,314 $
3.9%
1,212 $
4.0%
11,704 $
4.1%
16,964 $
4.1%
18,219
$
insurance contracts (1)
Average interest rate (1)
Debt
Average interest rate
Rate Sensitive Derivative Financial Instruments
2,224 $
3.5%
- $
0.0%
$
2,143 $
3.7%
300 $
4.2%
2,171 $
3.7%
500 $
4.0%
3,215 $
3.7%
250 $
1.1%
3,185 $
3.6%
300 $
3.4%
36,634 $
3.6%
4,981 $
4.1%
49,572 $
3.6%
6,331 $
3.9%
54,111
7,067
Interest rate, foreign currency swaps and forwards (4)
$
$
$
Pay variable/receive fixed
Average pay rate
Average receive rate
Pay fixed/receive variable
Average pay rate
Average receive rate
Interest rate cap corridors:
Average buy strike rate (2)
Average sell strike rate (2)
Forward swap curve
Reverse Treasury locks:
10-year on-the-run Treasury $
Average strike rate
Forward CMT curve (3)
30-year on-the-run Treasury $
Average strike rate
Forward CMT curve (3)
Total return swaps:
Pay variable/receive fixed
Pay fixed/receive variable
Interest rate futures:
2-year Treasury notes
5-year Treasury notes
10-year Treasury notes
Treasury bonds
$
$
Foreign currency futures (5)
$
1,938 $
0.3%
2.3%
2,706 $
2.1%
0.2%
8,000 $
7.0%
11.0%
1.1%
115 $
0.8%
1.1%
690 $
2.1%
1.7%
488 $
4,939
309 $
90
91
226
114 $
4,881 $
0.3%
0.7%
6,459 $
0.5%
0.2%
1,000 $
7.0%
11.0%
1.2%
- $
0.0%
0.0%
100 $
1.5%
1.8%
3,071 $
0.3%
2.6%
681 $
2.3%
0.2%
13,500 $
7.0%
11.0%
1.4%
4,466 $
0.4%
2.0%
3,796 $
1.9%
0.2%
12,300 $
6.0%
10.0%
1.3%
- $
0.0%
0.0%
- $
0.0%
0.0%
- $
0.0%
0.0%
- $
0.0%
0.0%
2,805 $
0.3%
1.6%
4,683 $
1.5%
0.2%
- $
0.0%
0.0%
0.0%
- $
0.0%
0.0%
- $
0.0%
0.0%
40,817 $
0.5%
2.4%
29,326 $
2.1%
0.4%
- $
0.0%
0.0%
0.0%
57,978 $
0.4%
2.2%
47,651 $
1.8%
0.3%
34,800 $
6.6%
10.6%
1.3%
- $
0.0%
0.0%
- $
0.0%
0.0%
115 $
0.8%
1.1%
790 $
2.1%
1.7%
5,457
(3,905)
-
(1)
68
- $
-
- $
-
-
-
- $
- $
-
- $
-
-
-
- $
99
- $
-
- $
-
-
-
- $
- $
-
- $
-
-
-
- $
- $
-
- $
-
-
-
- $
488 $
4,939
8
(38)
309 $
90
91
226
114 $
-
-
-
-
-
(1) The information shown is for our fixed maturity securities and mortgage loans on real estate that support these insurance contracts.
(2) The indexes are the 7-year and 10-year constant maturity swap.
(3) The Constant Maturity Treasury (“CMT”) curve is the applicable 5-year, 10-year or 30-year CMT forward curve.
(4)
Includes notional of $176 million and fair value of $(6) million that support our Modco reinsurance agreements. Investment results
for these agreements are passed directly to the reinsurers.
Includes $34 million of Euro, $33 million of Japanese Yen, $31 million of British Pound and $16 million of Australian Dollar.
(5)
The following provides the principal, including amortization of premiums and discounts, notional amounts, and estimated fair values of
assets, liabilities and derivatives (in millions) having significant interest rate risks as of December 31, 2019:
Fixed maturity AFS securities
Trading securities
Mortgage loans on real estate
Investment type insurance contracts (1)
Debt
Interest rate and foreign currency swaps
Interest rate cap corridors
Reverse Treasury locks
Interest rate futures
$
$
Principal/
Notional Estimated
Fair Value
Amount
105,200
4,673
16,872
52,692
6,217
930
4
89
-
94,295
4,330
16,335
49,880
6,127
74,666
43,550
1,115
274
(1) The information shown is for our fixed maturity securities and mortgage loans on real estate that support these insurance contracts.
Effect of Interest Rate Sensitivity
The following table presents our estimate of the effect on income (loss) from operations by segment (in millions) for the next 12-month
period if the level of interest rates were to instantaneously increase or decrease by 1% and remain at those levels immediately after
December 31, 2020, relative to interest rates remaining flat:
Annuities (1)
Retirement Plan Services
Life Insurance
Group Protection
Income (loss) from operations
$
$
1%
Increase
1%
Decrease
14
(4)
(3)
(3)
4
(10) $
3
3
3
(1) $
(1)
Includes the impact on bond funds in our separate accounts, which move in the opposite direction of interest rates.
For purposes of this estimate, we assumed asset purchases are made at prevailing new money rates and exclude the impact of new
business, unlocking, persistency, hedge program performance or customer behavior caused by the interest rate changes.
Interest Rate Risk on Fixed Insurance Businesses – Falling Rates
In periods of declining interest rates, we have to reinvest the cash we receive as interest or return of principal on our investments in lower
yielding instruments. Moreover, borrowers may prepay fixed-income securities, commercial mortgages and MBS in our general accounts
in order to borrow at lower market rates, which exacerbates this risk. Because we are entitled to reset the interest rates on our fixed-rate
annuities only at limited, pre-established intervals, and because many of our contracts have guaranteed minimum interest or crediting
rates, our spreads could decrease and potentially become negative.
Prolonged historically low rates are not healthy for our business fundamentals. However, we have recognized this risk and have been
proactive in our investment strategies, product designs, crediting rate strategies and overall asset-liability practices to mitigate the risk of
unfavorable consequences in this type of environment. For some time now, new products have been sold with low minimum crediting
floors, and we apply disciplined asset-liability management standards, such as locking in spreads on these products at the time of issue.
See “Part I – Item 1A. Risk Factors – Market Conditions – Changes in interest rates and sustained low interest rates may cause interest
rate spreads to decrease, impacting our profitability, and make it more challenging to meet certain statutory requirements and changes in
interest rates may also result in increased contract withdrawals” for additional information on interest rate risks.
100
The following provides detail on the percentage differences between the December 31, 2020, interest rates being credited to contract
holders based on the fourth quarter of 2020 declared rates and the respective minimum guaranteed policy rate (in millions), broken out by
contract holder account values reported within our segments:
Excess of Crediting Rates over Contract Minimums
Discretionary rate setting products: (2)
Occurring within the next twelve months: (3)
No difference
Up to 0.50%
0.51% to 1.00%
1.01% to 1.50%
1.51% to 2.00%
2.01% to 2.50%
2.51% to 3.00%
3.01% or greater
Occurring after the next twelve months (4)
Total discretionary rate setting products
Other contracts (5)
Total account values
Percentage of discretionary rate setting product account
Account Values
Retirement
Annuities
Plan
Services
Life
Insurance (1)
Total
%
Account
Values
$
$
9,347 $
3,011
2,982
2,230
430
37
2
-
6,981
25,020
12,523
37,543 $
16,385 $
1,632
2,379
162
-
-
-
-
-
20,558
2,358
22,916 $
30,112 $
24
342
40
3,452
13
106
-
-
34,089
-
34,089 $
55,844
4,667
5,703
2,432
3,882
50
108
-
6,981
79,667
14,881
94,548
59.1%
4.9%
6.0%
2.6%
4.1%
0.1%
0.1%
0.0%
7.4%
84.3%
15.7%
100.0%
values at minimum guaranteed rates
37.4%
79.7%
88.3%
70.1%
(1) Excludes policy loans.
(2) Contracts currently within new money rate bands are grouped according to the corresponding portfolio rate band in which they will
fall upon their first anniversary.
(3) The average crediting rates were 39 basis points, 12 basis points and 22 basis point in excess of average minimum guaranteed rates
for our Annuities, Retirement Plan Services and Life Insurance segments, respectively.
(4) The average crediting rates were 147 basis points in excess of average minimum guaranteed rates. Of our account values for these
products, 17% are scheduled to reset in more than one year but not more than two years; 25% are scheduled to reset in more than
two years but not more than three years; and 58% are scheduled to reset in more than three years.
(5) For Annuities, this amount relates primarily to income annuity and short-term dollar cost averaging business. For Retirement Plan
Services, this amount relates primarily to indexed-based rate setting products in which the average crediting rates were 23 basis points
in excess of average minimum guaranteed rates, and 72% of account values were already at their minimum guaranteed rates.
The maturity structure and call provisions of the related portfolios are structured to afford protection against erosion of investment
portfolio yields during periods of declining interest rates. We devote extensive effort to evaluating the risks associated with falling interest
rates by simulating asset and liability cash flows for a wide range of interest rate scenarios. We seek to manage these exposures by
maintaining a suitable maturity structure and by limiting our exposure to call risk in each respective investment portfolio.
Long-Term New Money Investment Yield Sensitivity
New money rates continue to be at low levels and, as a result, require careful analysis when forecasting the future direction of changes in
rates. We updated our interest rate assumptions during 2020, which included reducing our long-term new money investment yield
assumption (see “Critical Accounting Policies and Estimates – DAC, VOBA, DSI and DFEL – Unlocking” above for more information).
If we were to further change our view of future new money rates and lower our current long-term new money investment yield
assumption, then, assuming that all other assumptions remain constant, we estimate the impact of lowering this assumption by 50 basis
points would be approximately $(180) million to income (loss) from operations due primarily to unlocking our DAC and VOBA assets.
This impact would be most pronounced in our Life Insurance segment. The actual impact of a 50 basis point decline in the yield would
be based upon a number of factors existing at the time of the assumption update, and, therefore, the actual amount of the loss may differ
from our current estimate. In addition, lower investment margins may also impact the recoverability of intangible assets such as goodwill,
require the establishment of additional liabilities or trigger loss recognition events on certain policyholder liabilities.
101
Interest Rate Risk on Fixed Insurance Businesses – Rising Rates
For both annuities and universal life insurance, a rapid rise in interest rates poses risks of deteriorating spreads and high surrenders. The
portfolios supporting these products have fixed-rate assets laddered over maturities generally ranging from 1 to 10 years or more.
Accordingly, the earned rate on each portfolio lags behind changes in market yields. As rates rise, the lag may be increased by slowing
MBS prepayments. The greater and faster the rise in interest rates, the more the earned rate will tend to lag behind market rates. If we
set renewal crediting rates to earn the desired spread, the gap between our renewal crediting rates and competitors’ new money rates may
be wide enough to cause increased surrenders that could cause us to liquidate a portion of our portfolio to fund these surrenders. If we
credit more competitive renewal rates to limit surrenders, our spreads will narrow. We devote extensive effort to evaluating these risks by
simulating asset and liability cash flows for a wide range of interest rate scenarios. Such analysis has led to adjustments in the target
maturity structure and to hedging the risk of rising rates by entering into interest rate cap corridor agreements. With these instruments in
place, the potential adverse effect of a rapid and sustained rise in rates is kept within our risk tolerances.
Short-Term and Long-Term Debt
We manage the timing of maturities and the mixture of fixed-rate and floating-rate debt as part of the process of integrated management
of interest rate risk for the entire enterprise. See Note 13 for additional information on our debt.
Derivatives
See Note 6 for information on our derivatives used to hedge our exposure to changes in interest rates.
Equity Market Risk
Equity market risk is the risk of financial loss due to changes in the value of equity securities or equity indices. Our revenues, assets and
liabilities are exposed to equity market risk that we often hedge with derivatives. Due to the use of our RTM process and our hedging
strategies, we expect that, in general, short-term fluctuations in the equity markets should not have a significant effect on our quarterly
earnings from unlocking of assumptions for DAC, VOBA, DSI and DFEL. However, earnings are affected by equity market movements
on account values and assets under management and the related fees we earn on those assets. Refer to “Critical Accounting Policies and
Estimates – DAC, VOBA, DSI and DFEL” in the MD&A for further discussion of the effects of equity markets on our RTM.
Fee Income
The fees earned from variable annuities and variable life insurance products are exposed to the risk of a decline in equity market values.
These fees are generally a fixed percentage of the market value of assets under management. In a severe equity market decline, fee
income could be reduced by not only reduced market valuations but also by customer withdrawals and redemptions. Such withdrawals
and redemptions from equity funds and accounts might be partially offset by transfers to our fixed-income accounts and the transfer of
funds to us from our competitors’ customers.
Equity Assets
While we invest in equity assets with the expectation of achieving higher returns than would be available in our core fixed-income
investments, the returns on and values of these equity investments are subject to somewhat greater market risk than our fixed-income
investments. These investments, however, add diversification benefits to our fixed-income investments.
Derivatives Hedging Equity Market Risk
We enter into derivative transactions to hedge our exposure to equity market risk. Such derivatives include over-the-counter equity
options, total return swaps, variance swaps, and equity futures. See Note 6 for additional information on our derivatives used to hedge
our exposure to equity market fluctuations.
102
The following provides the sensitivity of price changes (in millions) to our equity assets owned and derivatives hedging equity market risk:
Carrying/
Notional
Value
As of December 31, 2020
10% Fair
Value
Increase (1)
Estimated
Fair Value
As of December 31, 2019
10% Fair
Value
Decrease (1)
Carrying/
Notional
Value
Estimated
Fair Value
Equity Assets
Domestic equities
Foreign equities
Total equity securities
Real estate
Hedge funds
Private equities
Tax credits
Other equity interests
Total equity assets
Derivatives Hedging Equity
Market Risk
Call options (2)
Equity futures
Put options
Total return swaps
Total derivatives hedging
equity market risk
$
$
$
$
$
$
103
26
129
10
245
1,855
7
3
2,249
26,536
1,619
13,804
18,898
$
$
$
103
26
129
13
245
1,855
7
3
2,252
2,805
-
(602)
(632)
$
$
$
10
3
13
1
25
186
1
-
226
1,059
(105)
40
(956)
$
$
$
(10) $
(3)
(13)
(1)
(25)
(186)
(1)
-
(226) $
97
6
103
11
221
1,685
13
3
2,036
(771) $
105
(68)
958
16,829
1,602
4,178
11,460
97
6
103
13
221
1,685
13
3
2,038
1,353
-
(245)
(325)
$
60,857
$
1,571
$
38
$
224
$
34,069
$
783
(1) Assumes a plus or minus 10% change in underlying indexes. Estimated fair value does not reflect daily settlement of futures or
(2)
monthly settlement of total return swaps.
Includes notional of $2.8 billion and fair value of $108 million that support our Modco reinsurance agreements. Investment results
for these agreements are passed directly to the reinsurers.
Liabilities
We have exposure to changes in our stock price through both our deferred and stock-based incentive compensation plans. For additional
information on our deferred and stock-based incentive compensations plans, see Notes 18 and 19, respectively.
Effect of Equity Market Sensitivity
If the level of the equity markets were to have instantaneously increased or decreased by 1% immediately after December 31, 2020, we
estimate the effect on income (loss) from operations for the next 12-month period from the change in asset-based fees and related
expenses would be approximately $10 million. For purposes of this estimate, we excluded any effect related to net flows, unlocking,
persistency, hedge program performance, customer behavior or reduction in account values attributable to contract holder assessments.
The effect of quarterly equity market changes upon fee income and asset-based expenses is generally not fully recognized in the first
quarter of the change because fee income is earned and related expenses are incurred based upon daily variable account values. The
difference between the current period average daily variable account values compared to the end-of-period variable account values affects
fee income in subsequent periods. Additionally, the effect on earnings may not necessarily be symmetrical with comparable increases or
decreases in the equity markets. This discussion concerning the estimated effects of ongoing equity market volatility on the fees we earn
from account values and assets under management is intended to be illustrative and is concentrated primarily in our Annuities and
Retirement Plan Services segments. Actual effects may vary depending on a variety of factors, many of which are outside of our control,
such as changing customer behaviors that might result in changes in the mix of our business between variable and fixed annuity contracts,
switching among investment alternatives available within variable products, changes in sales production levels or changes in policy
persistency. For purposes of this guidance, the change in account values is assumed to correlate with the change in the relevant index.
103
Credit Risk
Credit risk is the risk to earnings and capital that arises from uncertainty of an obligor’s or counterparty’s ability or willingness to meet its
obligations in accordance with contractually agreed upon terms. We are exposed to credit risk primarily by our investments in corporate
bonds and mortgage loans on real estate and through our use of derivatives.
Investments
The majority of our credit risk is concentrated in investment holdings. Our portfolio of investments was $154.0 billion and $133.7 billion
as of December 31, 2020 and 2019, respectively. Of this total, $105.9 billion and $92.0 billion consisted of corporate bonds and $16.8
billion and $16.3 billion consisted of mortgage loans on real estate as of December 31, 2020 and 2019, respectively. We manage the risk
of adverse default experience on these investments by applying disciplined credit evaluation and underwriting standards, prudently
limiting allocations to lower-quality, higher-yielding investments and diversifying exposures by issuer, industry, region and property type.
For each counterparty or borrowing entity and its affiliates, our exposures from all transactions are aggregated and managed in relation to
formal limits set by rating quality. Additional diversification limits, such as limits per industry, are also applied. We remain exposed to
occasional adverse cyclical economic downturns during which default rates may be significantly higher than the long-term historical
average used in pricing.
Derivatives
We are exposed to counterparty credit risk through our various derivative contracts. We depend on the ability of derivative product
dealers and their guarantors to honor their obligations to pay the contract amounts under various derivatives agreements. In order to
minimize the risk of default losses, we diversify our exposures among several dealers and limit the amount of exposure to each in
accordance with the credit rating of each dealer or its guarantor. We generally limit our selection of counterparties that are obligated
under these derivative contracts to those with an “A” credit rating or above. See Note 6 for additional information on managing the
credit risk of our counterparties.
We are also exposed to credit risk through the use of certain derivatives. We buy credit default swaps to minimize our exposure to credit-
related events with respect to a single entity or referenced index. We also sell credit default swaps to offer credit protection to our
contract holders and investors with respect to a single entity or referenced index. See Note 6 for additional information on our use of
credit derivatives.
Foreign Currency Exchange Risk
Foreign Currency Denominated Investments
Foreign currency exchange risk is the risk of financial loss due to changes in the relative value between currencies. We have foreign
currency exchange risk in our non-U.S. dollar denominated investments, which primarily consist of fixed maturity securities. The
currency risk is hedged using foreign currency derivatives of the same currency as the foreign denominated security.
We invest in fixed maturity securities denominated in foreign currencies for incremental return and risk diversification relative to U.S.
dollar-denominated securities. We use foreign currency swaps to hedge the foreign exchange risk related to our investment in fixed
maturity securities denominated in foreign currencies. As of December 31, 2020 and 2019, our unhedged positions consisted of $6
million and $8 million, respectively, of principal in U.S. dollar equivalents of Canadian-denominated investments with maturity dates up
to 2025 and an average interest rate of 2%. As of the same dates, our Modco reinsurance portfolios were partially hedged and consisted
of $184 million and $133 million, respectively, of principal in U.S. dollar equivalents of foreign denominated investments with maturity
dates up to 2063 and an average interest rate of 4%. Investment results for our Modco reinsurance agreements are passed directly to the
reinsurers. See “Interest Rate Risk – Significant Interest Rate Exposures” above for our notional amounts in U.S. dollar equivalents (in
millions) by year of maturity for our foreign currency swaps.
See Note 6 for additional information on our foreign currency swaps used to hedge our exposure to foreign currency exchange risk.
104
Item 8. Financial Statements and Supplementary Data
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting for Lincoln National
Corporation to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of the consolidated
financial statements for external purposes in accordance with United States of America generally accepted accounting principles. Internal
control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with United States of America generally accepted
accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management
and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any
evaluation of internal control over financial reporting effectiveness to future periods are subject to risks. Over time, controls may
become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Management assessed our internal control over financial reporting as of December 31, 2020, the end of our fiscal year. Management
based its assessment on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework). Management’s assessment included evaluation of such elements as the
design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control
environment.
Based on the assessment, management has concluded that our internal control over financial reporting was effective as of the end of the
fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial
statements for external reporting purposes in accordance with United States of America generally accepted accounting principles.
The effectiveness of our internal control over financial reporting as of December 31, 2020, has been audited by Ernst & Young LLP, an
independent registered public accounting firm, as stated in their report which is included on the following page.
105
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Lincoln National Corporation
Opinion on Internal Control Over Financial Reporting
We have audited Lincoln National Corporation’s internal control over financial reporting as of December 31, 2020, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). In our opinion, Lincoln National Corporation (the Company) maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),
the consolidated balance sheets of the Company as of December 31, 2020 and 2019, and the related consolidated statements of
comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and
the related notes and financial statement schedules listed in the Index at Item 15(a)(2) and our report dated February 18, 2021 expressed
an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our
audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
February 18, 2021
106
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Lincoln National Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Lincoln National Corporation (the Company) as of December 31,
2020 and 2019, and the related consolidated statements of comprehensive income (loss), stockholders’ equity and cash flows for each of
the three years in the period ended December 31, 2020, and the related notes and financial statement schedules listed in the Index at Item
15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),
the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our
report dated February 18, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were
communicated or required to be communicated to the Audit Committee and that: (1) relate to accounts or disclosures that are material to
the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit
matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by
communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures
to which they relate.
107
Deferred Acquisition Costs Asset and Future Contract Benefits Liability
Description of the Matter
At December 31, 2020, deferred acquisition costs totaled $5.6 billion and future contract benefits liabilities
totaled $40.8 billion, a portion of which related to universal life-type contracts with secondary guarantees and
variable annuity contracts with guaranteed benefit riders.
The carrying amount of the deferred acquisition costs related to these products is the total of costs deferred less
amortization, which is calculated in relation to the present value of estimated gross profits of the underlying
contracts. As described in Notes 1 (see section on DAC, VOBA, DSI and DFEL) and 8 to the consolidated
financial statements, there is a significant amount of uncertainty inherent in calculating estimated gross profits as
the calculation includes significant management judgment in developing certain assumptions, such as expected
future mortality experience, investment margins, capital market performance, retention and rider utilization.
Management’s assumptions are adjusted, also known as unlocked, for emerging experience and expected changes
in trends. The unlocking results in deferred acquisition cost amortization being recalculated, using the new
assumptions for estimated gross profits, that results either in additional or less cumulative amortization expense.
The future contract benefits liability related to these product guarantees is based on estimates of how much the
Company will need to pay for future benefits and the amount of fees to be collected from policyholders for these
policy features. As described in Note 1 to the consolidated financial statements (see section on Future Contract
Benefits and Other Contract Holder Funds), there is significant uncertainty inherent in estimating this liability because
there is a significant amount of management judgment involved in developing certain assumptions that impact
the liability balance, which are consistent with the assumptions used to amortize the related deferred acquisition
cost asset as noted above and which include expected mortality experience, investment margins, capital market
performance, retention and rider utilization.
Auditing the valuation of deferred acquisition costs and future contract benefits liabilities related to these
products was complex and required the involvement of our actuarial specialists due to the high degree of
judgment used by management in setting the assumptions used in the estimate of both the amortization of
deferred acquisition costs and the future contract benefits liability related to these products.
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the
deferred acquisition costs and future contract benefits liability estimation processes, including, among others,
controls related to the review and approval processes that management has in place for the assumptions used in
estimating the estimated gross profits related to deferred acquisition costs and the future contract benefits
liability. This included testing controls related to management’s evaluation of the need to update assumptions
based on the comparison of actual Company experience to previous assumptions and updating investment
margins for current and expected future market conditions.
We involved actuarial specialists to assist with our audit procedures which included, among others, an evaluation
of the methodology applied by management with those methods used in prior periods. To assess the significant
assumptions used by management, we compared the significant assumptions noted above to historical
experience, observable market data or management’s estimates of prospective changes in these assumptions. In
addition, we performed an independent recalculation of estimated gross profits related to deferred policy
acquisition costs and the future policy benefit reserves for a sample of cohorts or contracts which we compared
to the actuarial model used by management.
How We Addressed the
Matter in Our Audit
108
Variable Annuity Guaranteed Living Benefit Riders Embedded Derivatives
Description of the Matter
The Company’s variable annuity guaranteed living benefit riders include an embedded derivative, represented by
an asset totaling $450 million as of December 31, 2020, related to the non-life contingent feature of the product
which is accounted for at fair value, with changes in fair value recognized in income. As described in Notes 1
(see section on Separate Account Assets and Liabilities), 6 and 21 to the consolidated financial statements, there is a
significant amount of estimation uncertainty inherent in measuring the fair value of the embedded derivative
because of the sensitivity of certain assumptions underlying the estimate, including stock market performance,
policy lapse experience and rider utilization. Management’s assumptions are adjusted over time for emerging
experience and expected changes in trends, resulting in changes to the estimated fair value of the embedded
derivative.
Auditing the valuation of the embedded derivative related to variable annuity guaranteed living benefit riders was
complex and required the involvement of our actuarial specialists due to the high degree of judgment used by
management in setting the assumptions used in the estimate of the value of the embedded derivative.
How We Addressed the
Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the
embedded derivative estimation process, including, among others, controls related to the review and approval
processes that management has in place to develop the assumptions used in measuring the fair value of the
embedded derivative. This included testing controls related to management’s evaluation of current and future
market conditions and the need to update policy lapse and rider utilization assumptions.
We involved actuarial specialists to assist with our audit procedures which included, among others, an evaluation
of the methodology applied by management with those methods used in prior periods. To assess the significant
assumptions used by management, we compared the significant assumptions noted above to historical
experience, observable market data or management’s estimates of prospective changes in these assumptions. In
addition, we performed an independent recalculation of the embedded derivative for a sample of contracts which
we compared to the fair value model used by management.
Valuation of Goodwill for the Life Insurance Reporting Unit
Description of the Matter
At December 31, 2020, the Company’s goodwill was $1.8 billion, of which $634 million related to the Company’s
Life Insurance reporting unit. As discussed in Notes 1 (see section on Goodwill) and 10 of the consolidated
financial statements, goodwill is tested for impairment at least annually at the reporting unit level. Determining
the fair value of the Life Insurance reporting unit as part of the goodwill impairment analysis is sensitive to
significant assumptions such as the discount rate, which reflects the market expected, weighted-average rate of
return adjusted for the risk factors associated with the operations, and other relevant assumptions impacting
projected financial information, such as the profitability of new and in-force business, all of which are affected by
expectations about future market or economic conditions.
Auditing the fair value of the Company’s Life Insurance reporting unit was complex and required the
involvement of our valuation and actuarial specialists due to the high degree of judgment used by management.
How We Addressed the
Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the
Company’s goodwill impairment review process. This included, among others, controls related to the review and
approval processes that management has in place to develop the assumptions used in the estimation process,
including management’s determination of the applicable discount rate, and other assumptions for the Life
Insurance reporting unit.
We involved actuarial and valuation specialists to assist with our audit procedures which included, among others,
an evaluation of the methodology applied by management with those methods used in prior periods. To assess
the significant assumptions used by management, we compared the significant assumptions noted above to
current industry and economic trends, recent market transactions and other relevant factors. We reviewed the
historical accuracy of management’s estimate and performed sensitivity analyses of significant assumptions to
evaluate the changes in the fair value of the Life Insurance reporting unit that would result from changes in the
assumptions.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1966.
Philadelphia, Pennsylvania
February 18, 2021
109
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
ASSETS
Investments:
Fixed maturity available-for-sale securities, at fair value
(amortized cost: 2020 – $104,174; 2019 – $94,295; allowance for credit losses: 2020 – $13; 2019 – $0) $
Trading securities
Equity securities
Mortgage loans on real estate, net of allowance for credit losses
(portion at fair value: 2020 – $832; 2019 – $0)
Policy loans
Derivative investments
Other investments
Total investments
Cash and invested cash
Deferred acquisition costs and value of business acquired
Premiums and fees receivable
Accrued investment income
Reinsurance recoverables, net of allowance for credit losses
Funds withheld reinsurance assets
Goodwill
Other assets
Separate account assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Future contract benefits
Other contract holder funds
Short-term debt
Long-term debt
Reinsurance related embedded derivatives
Funds withheld reinsurance liabilities
Payables for collateral on investments
Other liabilities
Separate account liabilities
Total liabilities
Contingencies and Commitments (See Note 14)
Stockholders’ Equity
Preferred stock – 10,000,000 shares authorized
Common stock – 800,000,000 shares authorized; 192,329,691 and 196,668,532 shares
issued and outstanding as of December 31, 2020, and December 31, 2019, respectively
Retained earnings
Accumulated other comprehensive income (loss)
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying Notes to Consolidated Financial Statements
110
As of December 31,
2019
2020
123,044
$
4,501
129
105,200
4,673
103
16,763
2,426
3,109
3,984
153,956
1,708
5,812
486
1,257
16,496
530
1,778
15,960
167,965
365,948
$
$
$
40,814 $
105,405
-
6,682
392
1,946
6,222
13,823
167,965
343,249
16,339
2,477
1,911
2,994
133,697
2,563
7,694
465
1,148
17,144
536
1,778
16,170
153,566
334,761
36,420
98,018
300
6,067
327
1,810
5,082
13,482
153,566
315,072
-
-
5,082
8,686
8,931
22,699
365,948
5,162
8,854
5,673
19,689
334,761
$
$
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions, except per share data)
Revenues
Insurance premiums
Fee income
Net investment income
Realized gain (loss)
Amortization of deferred gain on business sold through reinsurance
Other revenues
Total revenues
Expenses
Interest credited
Benefits
Commissions and other expenses
Interest and debt expense
Strategic digitization expense
Total expenses
Income (loss) before taxes
Federal income tax expense (benefit)
Net income (loss)
Other comprehensive income (loss), net of tax:
Unrealized investment gains (losses)
Foreign currency translation adjustment
Funded status of employee benefit plans
Total other comprehensive income (loss), net of tax
Comprehensive income (loss)
Net Income (Loss) Per Common Share
Basic
Diluted
Cash Dividends Declared Per Common Share
For the Years Ended December 31,
2018
2019
2020
$
$
$
$
$
5,372
6,371
5,510
(513)
41
658
17,439
2,923
8,677
5,064
284
68
17,016
423
(76)
499
3,192
5
61
3,258
3,757
2.58
2.56
$
$
$
$
5,513
6,497
5,223
(610)
31
604
17,258
2,780
7,880
5,287
326
66
16,339
919
33
886
5,288
6
(28)
5,266
6,152
4.41
4.38
$
$
$
$
4,601
5,986
5,085
141
9
602
16,424
2,617
6,786
4,763
297
76
14,539
1,885
244
1,641
(3,449)
(9)
(7)
(3,465)
(1,824)
7.60
7.40
1.62 $
1.51 $
1.36
See accompanying Notes to Consolidated Financial Statements
111
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)
Common Stock
Balance as of beginning-of-year
Stock compensation/issued for benefit plans
Retirement of common stock/cancellation of shares
Balance as of end-of-year
Retained Earnings
Balance as of beginning-of-year
Cumulative effect from adoption of new accounting standards
Net income (loss)
Retirement of common stock
Common stock dividends declared
Balance as of end-of-year
Accumulated Other Comprehensive Income (Loss)
Balance as of beginning-of-year
Cumulative effect from adoption of new accounting standards
Other comprehensive income (loss), net of tax
Balance as of end-of-year
Total stockholders’ equity as of end-of-year
For the Years Ended December 31,
2018
2019
2020
$
$
5,162
48
(128)
5,082
$
5,392
42
(272)
5,162
8,854
(203)
499
(147)
(317)
8,686
8,551
-
886
(278)
(305)
8,854
5,693
45
(346)
5,392
8,399
(642)
1,641
(554)
(293)
8,551
5,673
-
3,258
8,931
22,699
$
407
-
5,266
5,673
19,689
$
3,230
642
(3,465)
407
14,350
$
See accompanying Notes to Consolidated Financial Statements
112
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Cash Flows from Operating Activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
Realized (gain) loss
Trading securities purchases, sales and maturities, net
Amortization of deferred gain on business sold through reinsurance
Change in:
Deferred acquisition costs, value of business acquired, deferred sales inducements
and deferred front-end loads deferrals and interest, net of amortization
Premiums and fees receivable
Accrued investment income
Insurance liabilities and reinsurance-related balances
Accrued expenses
Federal income tax accruals
Other
Net cash provided by (used in) operating activities
Cash Flows from Investing Activities
Purchases of available-for-sale securities and equity securities
Sales of available-for-sale securities and equity securities
Maturities of available-for-sale securities
Purchase of common stock in acquisition, net of cash acquired
Sale of business, net
Purchases of alternative investments
Sales and repayments of alternative investments
Issuance of mortgage loans on real estate
Repayment and maturities of mortgage loans on real estate
Issuance (repayment) of policy loans, net
Net change in collateral on investments, derivatives and related settlements
Other
Net cash provided by (used in) investing activities
Cash Flows from Financing Activities
Payment of long-term debt, including current maturities
Issuance of long-term debt, net of issuance costs
Payment related to early extinguishment of debt
Proceeds from sale-leaseback transactions
Payment related to sale-leaseback transactions
Proceeds from certain financing arrangements
Deposits of fixed account values, including the fixed portion of variable
Withdrawals of fixed account values, including the fixed portion of variable
Transfers to and from separate accounts, net
Common stock issued for benefit plans
Repurchase of common stock
Dividends paid to common stockholders
Other
Net cash provided by (used in) financing activities
Net increase (decrease) in cash, invested cash and restricted cash
Cash, invested cash and restricted cash as of beginning-of-year
Cash, invested cash and restricted cash as of end-of-year
For the Years Ended December 31,
2018
2019
2020
$
499
$
886
$
1,641
513
266
(41)
48
(21)
(84)
(699)
(18)
(98)
169
534
(16,761)
1,426
5,354
-
-
(396)
171
(1,800)
1,154
50
1,474
(153)
(9,481)
(1,096)
1,289
(13)
-
(47)
109
14,034
(6,113)
528
(7)
(275)
(311)
(6)
8,092
(855)
2,563
1,708
$
610
(2,510)
(31)
(409)
105
(29)
(1,613)
107
(227)
425
(2,686)
(15,326)
6,807
6,571
-
-
(433)
131
(4,262)
1,163
32
79
(261)
(5,499)
(308)
744
(42)
-
(83)
107
16,069
(5,849)
(1,362)
(20)
(550)
(303)
-
8,403
218
2,345
2,563
$
(141)
(118)
(9)
(81)
(87)
(17)
613
(101)
154
89
1,943
(12,650)
3,668
6,004
(1,410)
(12)
(314)
178
(2,927)
1,085
21
735
(193)
(5,815)
(537)
1,094
(23)
88
-
-
13,638
(6,007)
(2,469)
(6)
(900)
(289)
-
4,589
717
1,628
2,345
$
See accompanying Notes to Consolidated Financial Statements
113
LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies
Nature of Operations
Lincoln National Corporation and its majority-owned subsidiaries (“LNC” or the “Company,” which also may be referred to as “we,”
“our” or “us”) operate multiple insurance businesses through four business segments. See Note 22 for additional details. The collective
group of businesses uses “Lincoln Financial Group” as its marketing identity. Through our business segments, we sell a wide range of
wealth protection, accumulation, retirement income and group protection products and solutions. These products primarily include fixed
and indexed annuities, variable annuities, universal life insurance (“UL”), variable universal life insurance (“VUL”), linked-benefit UL,
indexed universal life insurance (“IUL”), term life insurance, employer-sponsored retirement plans and services, and group life, disability
and dental.
Basis of Presentation
The accompanying consolidated financial statements are prepared in accordance with United States of America generally accepted
accounting principles (“GAAP”). Certain GAAP policies, which significantly affect the determination of financial condition, results of
operations and cash flows, are summarized below.
Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of LNC and all other entities in which we have a controlling
financial interest and any variable interest entities (“VIEs”) in which we are the primary beneficiary. As discussed in Note 3, on May 1,
2018, LNC and The Lincoln National Life Insurance Company (“LNL”) completed the acquisition of Liberty Life Assurance Company
of Boston (“Liberty Life”). We use the equity method of accounting to recognize all of our investments in limited liability partnerships.
All material inter-company accounts and transactions have been eliminated in consolidation.
Our involvement with VIEs is primarily to invest in assets that allow us to gain exposure to a broadly diversified portfolio of asset classes.
A VIE is an entity that does not have sufficient equity to finance its own activities without additional financial support or where investors
lack certain characteristics of a controlling financial interest. We assess our contractual, ownership or other interests in a VIE to
determine if our interest participates in the variability the VIE was designed to absorb and pass onto variable interest holders. We
perform an ongoing qualitative assessment of our variable interests in VIEs to determine whether we have a controlling financial interest
and would therefore be considered the primary beneficiary of the VIE. If we determine we are the primary beneficiary of a VIE, we
consolidate the assets and liabilities of the VIE in our consolidated financial statements.
Accounting Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions affecting the
reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements
and the reported amounts of revenues and expenses for the reporting period. Those estimates are inherently subject to change and actual
results could differ from those estimates. Included among the material (or potentially material) reported amounts and disclosures that
require extensive use of estimates are: fair value of certain financial assets, derivatives, allowances for credit losses, deferred acquisition
costs (“DAC”), value of business acquired (“VOBA”), deferred sales inducements (“DSI”), goodwill and other intangibles, future
contract benefits, other contract holder funds including deferred front-end loads (“DFEL”), income taxes including the recoverability of
our deferred tax assets, and the potential effects of resolving litigated matters.
Business Combinations
We use the acquisition method of accounting for all business combination transactions, and accordingly, recognize the fair values of
assets acquired, liabilities assumed and any noncontrolling interests in our consolidated financial statements. The allocation of fair values
may be subject to adjustment after the initial allocation for up to a one-year period as more information becomes available relative to the
fair values as of the acquisition date. The consolidated financial statements include the results of operations of any acquired company
since the acquisition date.
114
Fair Value Measurement
Our measurement of fair value is based on assumptions used by market participants in pricing the asset or liability, which may include
inherent risk, restrictions on the sale or use of an asset or non-performance risk (“NPR”), which would include our own credit risk. Our
estimate of an exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability
(“exit price”) in the principal market, or the most advantageous market in the absence of a principal market, for that asset or liability, as
opposed to the price that would be paid to acquire the asset or receive a liability (“entry price”). Pursuant to the Fair Value
Measurements and Disclosures Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards CodificationTM (“ASC”),
we categorize our financial instruments carried at fair value into a three-level fair value hierarchy, based on the priority of inputs to the
respective valuation technique. The three-level hierarchy for fair value measurement is defined as follows:
• Level 1 – inputs to the valuation methodology are quoted prices available in active markets for identical investments as of the
reporting date, except for large holdings subject to “blockage discounts” that are excluded;
• Level 2 – inputs to the valuation methodology are other than quoted prices in active markets, which are either directly or indirectly
observable as of the reporting date, and fair value can be determined through the use of models or other valuation methodologies;
and
• Level 3 – inputs to the valuation methodology are unobservable inputs in situations where there is little or no market activity for the
asset or liability, and we make estimates and assumptions related to the pricing of the asset or liability, including assumptions
regarding risk.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level
within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of
the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the
investment.
When a determination is made to classify an asset or liability within Level 3 of the fair value hierarchy, the determination is based upon
the significance of the unobservable inputs to the overall fair value measurement. Because certain securities trade in less liquid or illiquid
markets with limited or no pricing information, the determination of fair value for these securities is inherently more difficult. However,
Level 3 fair value investments may include, in addition to the unobservable or Level 3 inputs, observable components, which are
components that are actively quoted or can be validated to market-based sources.
Fixed Maturity Available-For-Sale Securities – Fair Valuation Methodologies and Associated Inputs
Securities classified as available-for-sale (“AFS”) consist of fixed maturity securities and are stated at fair value with unrealized gains and
losses included within accumulated other comprehensive income (loss) (“AOCI”), net of associated DAC, VOBA, DSI, future contract
benefits, other contract holder funds and deferred income taxes.
We measure the fair value of our securities classified as fixed maturity AFS based on assumptions used by market participants in pricing
the security. The most appropriate valuation methodology is selected based on the specific characteristics of the fixed maturity security,
and we consistently apply the valuation methodology to measure the security’s fair value. Our fair value measurement is based on a
market approach that utilizes prices and other relevant information generated by market transactions involving identical or comparable
securities. Sources of inputs to the market approach primarily include third-party pricing services, independent broker quotations or
pricing matrices. We do not adjust prices received from third parties; however, we do analyze the third-party pricing services’ valuation
methodologies and related inputs and perform additional evaluation to determine the appropriate level within the fair value hierarchy.
The observable and unobservable inputs to our valuation methodologies are based on a set of standard inputs that we generally use to
evaluate all of our fixed maturity AFS securities. Observable inputs include benchmark yields, reported trades, broker-dealer quotes,
issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. In addition, market indicators, industry and
economic events are monitored, and further market data is acquired if certain triggers are met. For certain security types, additional
inputs may be used, or some of the inputs described above may not be applicable. For private placement securities, we use pricing
matrices that utilize observable pricing inputs of similar public securities and Treasury yields as inputs to the fair value measurement.
Depending on the type of security or the daily market activity, standard inputs may be prioritized differently or may not be available for
all fixed maturity AFS securities on any given day. For broker-quoted only securities, non-binding quotes from market makers or broker-
dealers are obtained from sources recognized as market participants. For securities trading in less liquid or illiquid markets with limited or
no pricing information, we use unobservable inputs to measure fair value.
115
The following summarizes our fair valuation methodologies and associated inputs, which are particular to the specified security type and
are in addition to the defined standard inputs to our valuation methodologies for all of our fixed maturity AFS securities discussed above:
• Corporate bonds and U.S. government bonds – We also use Trade Reporting and Compliance EngineTM reported tables for our
corporate bonds and vendor trading platform data for our U.S. government bonds.
• Mortgage- and asset-backed securities (“ABS”) – We also utilize additional inputs, which include new issues data, monthly payment
information and monthly collateral performance, including prepayments, severity, delinquencies, step-down features and over
collateralization features for each of our mortgage-backed securities (“MBS”), which include collateralized mortgage obligations and
mortgage pass through securities backed by residential mortgages (“RMBS”), commercial mortgage-backed securities (“CMBS”),
collateralized loan obligations (“CLOs”) and collateralized debt obligations (“CDOs”).
State and municipal bonds – We also use additional inputs that include information from the Municipal Securities Rule Making
Board, as well as material event notices, new issue data, issuer financial statements and Municipal Market Data benchmark yields for
our state and municipal bonds.
•
• Hybrid and redeemable preferred securities – We also utilize additional inputs of exchange prices (underlying and common stock of
the same issuer) for our hybrid and redeemable preferred securities.
In order to validate the pricing information and broker-dealer quotes, we employ, where possible, procedures that include comparisons
with similar observable positions, comparisons with subsequent sales and observations of general market movements for those security
classes. We have policies and procedures in place to review the process that is utilized by our third-party pricing service and the output
that is provided to us by the pricing service. On a periodic basis, we test the pricing for a sample of securities to evaluate the inputs and
assumptions used by the pricing service, and we perform a comparison of the pricing service output to an alternative pricing source. We
also evaluate prices provided by our primary pricing service to ensure that they are not stale or unreasonable by reviewing the prices
for unusual changes from period to period based on certain parameters or for lack of change from one period to the next.
Fixed Maturity AFS Securities – Evaluation for Recovery of Amortized Cost
We regularly review our fixed maturity AFS securities (also referred to as “debt securities”) for declines in fair value that we determine to
be impairment-related, including those attributable to credit risk factors that may require a credit loss allowance.
For our debt securities, we generally consider the following to determine whether our debt securities with unrealized losses are credit
impaired:
• The estimated range and average period until recovery;
• The estimated range and average holding period to maturity;
• Remaining payment terms of the security;
• Current delinquencies and nonperforming assets of underlying collateral;
• Expected future default rates;
• Collateral value by vintage, geographic region, industry concentration or property type;
•
• Contractual and regulatory cash obligations.
Subordination levels or other credit enhancements as of the balance sheet date as compared to origination; and
For a debt security, if we intend to sell a security, or it is more likely than not we will be required to sell a debt security before recovery of
its amortized cost basis and the fair value of the debt security is below amortized cost, we conclude that an impairment has occurred and
the amortized cost is written down to current fair value, with a corresponding charge to realized gain (loss) on our Consolidated
Statements of Comprehensive Income (Loss). If we do not intend to sell a debt security, or it is not more likely than not we will be
required to sell a debt security before recovery of its amortized cost basis but the present value of the cash flows expected to be collected
is less than the amortized cost of the debt security (referred to as the credit loss), we conclude that an impairment has occurred, and a
credit loss allowance is recorded, with a corresponding charge to realized gain (loss) on our Consolidated Statements of Comprehensive
Income (Loss). The remainder of the decline to fair value related to factors other than credit loss is recorded in other comprehensive
income (“OCI”) to unrealized losses on fixed maturity AFS securities on our Consolidated Statements of Stockholders’ Equity, as this
amount is considered a noncredit impairment.
116
When assessing our intent to sell a debt security, or if it is more likely than not we will be required to sell a debt security before recovery
of its cost basis, we evaluate facts and circumstances such as, but not limited to, decisions to reposition our security portfolio, sales of
securities to meet cash flow needs and sales of securities to capitalize on favorable pricing. Management considers the following as part
of the evaluation:
• The current economic environment and market conditions;
• Our business strategy and current business plans;
• The nature and type of security, including expected maturities and exposure to general credit, liquidity, market and interest rate risk;
• Our analysis of data from financial models and other internal and industry sources to evaluate the current effectiveness of our
hedging and overall risk management strategies;
• The current and expected timing of contractual maturities of our assets and liabilities, expectations of prepayments on investments
and expectations for surrenders and withdrawals of life insurance policies and annuity contracts;
• The capital risk limits approved by management; and
• Our current financial condition and liquidity demands.
In order to determine the amount of the credit loss for a debt security, we calculate the recovery value by performing a discounted cash
flow analysis based on the current cash flows and future cash flows we expect to recover. The discount rate is the effective interest rate
implicit in the underlying debt security. The effective interest rate is the original yield, or the coupon if the debt security was previously
impaired. See the discussion below for additional information on the methodology and significant inputs, by security type, that we use to
determine the amount of a credit loss.
To determine the recovery period of a debt security, we consider the facts and circumstances surrounding the underlying issuer including,
but not limited to, the following:
• Historical and implied volatility of the security;
• The extent to which the fair value has been less than amortized cost;
• Adverse conditions specifically related to the security or to specific conditions in an industry or geographic area;
• Failure, if any, of the issuer of the security to make scheduled payments; and
• Recoveries or additional declines in fair value subsequent to the balance sheet date.
In periods subsequent to the recognition of a credit loss impairment through a credit loss allowance, we continue to reassess the expected
cash flows of the debt security at each subsequent measurement date as necessary. If the measurement of credit loss changes, we
recognize a provision for (or reversal of) credit loss expense through realized gain (loss) on our Consolidated Statements of
Comprehensive Income (Loss), limited by the amount that amortized cost exceeds fair value. Losses are charged against the allowance
for credit losses when management believes the uncollectibility of a debt security is confirmed or when either of the criteria regarding
intent or requirement to sell is met. Accrued interest on debt securities is written-off when deemed uncollectible.
To determine the recovery value of a corporate bond, CLO or CDO, we perform additional analysis related to the underlying issuer
including, but not limited to, the following:
• Fundamentals of the issuer to determine what we would recover if they were to file bankruptcy versus the price at which the market
is trading;
• Fundamentals of the industry in which the issuer operates;
• Earnings multiples for the given industry or sector of an industry that the underlying issuer operates within, divided by the
outstanding debt to determine an expected recovery value of the security in the case of a liquidation;
• Expected cash flows of the issuer (e.g., whether the issuer has cash flows in excess of what is required to fund its operations);
• Expectations regarding defaults and recovery rates;
• Changes to the rating of the security by a rating agency; and
• Additional market information (e.g., if there has been a replacement of the corporate debt security).
117
Each quarter, we review the cash flows for the MBS portfolio, including current credit enhancements and trends in the underlying
collateral performance to determine whether or not they are sufficient to provide for the recovery of our amortized cost. To
determine recovery value of a MBS, we perform additional analysis related to the underlying issuer including, but not limited to, the
following:
• Discounted cash flow analysis based on the current cash flows and future cash flows we expect to recover;
• Level of borrower creditworthiness of the home equity loans or residential mortgages that back an RMBS or commercial mortgages
that back a CMBS;
•
Susceptibility to fair value fluctuations for changes in the interest rate environment;
•
Susceptibility to reinvestment risks, in cases where market yields are lower than the securities’ book yield earned;
•
Susceptibility to reinvestment risks, in cases where market yields are higher than the book yields earned on a security;
• Expectations of sale of such a security where market yields are higher than the book yields earned on a security; and
•
Susceptibility to variability of prepayments.
When evaluating MBS and mortgage-related ABS, we consider a number of pool-specific factors as well as market level factors when
determining whether or not the impairment on the security requires a credit loss allowance. The most important factor is the
performance of the underlying collateral in the security and the trends of that performance in the prior periods. We use this information
about the collateral to forecast the timing and rate of mortgage loan defaults, including making projections for loans that are already
delinquent and for those loans that are currently performing but may become delinquent in the future. Other factors used in this analysis
include the credit characteristics of borrowers, geographic distribution of underlying loans and timing of liquidations by state. Once
default rates and timing assumptions are determined, we then make assumptions regarding the severity of a default if it were to occur.
Factors that impact the severity assumption include expectations for future home price appreciation or depreciation, loan size, first lien
versus second lien, existence of loan level private mortgage insurance, type of occupancy and geographic distribution of loans. Second
lien loans are assigned 100% severity, if defaulted. For first lien loans, we assume a minimum of 30% severity, with higher severity
assumed for investor properties and further adjusted by housing price assumptions. Once default and severity assumptions are
determined for the security in question, cash flows for the underlying collateral are projected including expected defaults and
prepayments. These cash flows on the collateral are then translated to cash flows on our tranche based on the cash flow waterfall of the
entire capital security structure. If this analysis indicates the entire principal on a particular security will not be returned, the security is
reviewed for a credit loss by comparing the expected cash flows to amortized cost. To the extent that the security has already been
impaired through a credit loss allowance or was purchased at a discount, such that the amortized cost of the security is less than or equal
to the present value of cash flows expected to be collected, no credit loss allowance is required. Otherwise, if the amortized cost of the
security is greater than the present value of the cash flows expected to be collected, and the security was not purchased at a discount
greater than the expected principal loss, then an impairment through a credit loss allowance is recognized.
We further monitor the cash flows of all of our debt securities backed by mortgages on an ongoing basis. We also perform detailed
analysis on all of our subprime, Alt-A, non-agency residential MBS and on a significant percentage of our debt securities backed by pools
of commercial mortgages. The detailed analysis includes revising projected cash flows by updating the cash flows for actual cash received
and applying assumptions with respect to expected defaults, foreclosures and recoveries in the future. These revised projected cash flows
are then compared to the amount of credit enhancement (subordination) in the structure to determine whether the amortized cost of the
security is recoverable. If it is not recoverable, we record an impairment through a credit loss allowance for the security.
Trading Securities
Trading securities consist of fixed maturity securities in designated portfolios, some of which support modified coinsurance (“Modco”)
and coinsurance with funds withheld (“CFW”) reinsurance agreements. Investment results for the portfolios that support Modco and
CFW reinsurance agreements, including gains and losses from sales, are passed directly to the reinsurers pursuant to contractual terms of
the reinsurance agreements. Trading securities are carried at fair value, and changes in fair value and changes in the fair value of
embedded derivative liabilities associated with the underlying reinsurance agreements are recorded in realized gain (loss) on our
Consolidated Statements of Comprehensive Income (Loss) as they occur.
Equity Securities
Equity securities are carried at fair value, and changes in fair value are recorded in realized gain (loss) on our Consolidated Statements of
Comprehensive Income (Loss) as they occur. Equity securities consist primarily of common stock of publicly-traded companies,
privately placed securities and mutual fund shares. We measure the fair value of our equity securities based on assumptions used by
market participants in pricing the security. The most appropriate valuation methodology is selected based on the specific characteristics
of the equity security. Fair values of publicly-traded equity securities are determined using quoted prices in active markets for identical or
comparable securities. When quoted prices are not available, we use valuation methodologies most appropriate for the specific asset.
Fair values for private placement securities are determined using discounted cash flow, earnings multiple and other valuation models. The
fair values of mutual fund shares that transact regularly are based on transaction prices of identical fund shares.
118
Alternative Investments
Alternative investments, which consist primarily of investments in limited partnerships (“LPs”), are included in other investments on our
Consolidated Balance Sheets. We account for our investments in LPs using the equity method to determine the carrying value.
Recognition of alternative investment income is delayed due to the availability of the related financial statements, which are generally
obtained from the partnerships’ general partners. As a result, our private equity investments are generally on a three-month delay and our
hedge funds are on a one-month delay. In addition, the impact of audit adjustments related to completion of calendar-year financial
statement audits of the investees are typically received during the second quarter of each calendar year. Accordingly, our investment
income from alternative investments for any calendar-year period may not include the complete impact of the change in the underlying
net assets for the partnership for that calendar-year period.
Payables for Collateral on Investments
When we enter into collateralized financing transactions on our investments, a liability is recorded equal to the cash or non-cash collateral
received. This liability is included within payables for collateral on investments on our Consolidated Balance Sheets. Income and
expenses associated with these transactions are recorded as investment income and investment expenses within net investment income on
our Consolidated Statements of Comprehensive Income (Loss). Changes in payables for collateral on investments are reflected within
cash flows from investing activities on our Consolidated Statements of Cash Flows.
Mortgage Loans on Real Estate
Mortgage loans on real estate consist of commercial and residential mortgage loans and are generally carried at unpaid principal balances
adjusted for amortization of premiums and accretion of discounts and are net of allowance for credit losses. We carry certain commercial
mortgage loans at fair value where the fair value option has been elected. Interest income is accrued on the principal balance of the loan
based on the loan’s contractual interest rate. Premiums and discounts are amortized using the effective yield method over the life of the
loan. Interest income and amortization of premiums and discounts are reported in net investment income on our Consolidated
Statements of Comprehensive Income (Loss) along with mortgage loan fees, which are recorded as they are incurred.
Our policy for commercial mortgage loans is to report loans that are 60 or more days past due, which equates to two or more payments
missed, as delinquent. Our policy for residential mortgage loans is to report loans that are 90 or more days past due, which equates to
three or more payments missed, as delinquent. We do not accrue interest on loans 90 days past due, and any interest received on these
loans is either applied to the principal or recorded in net investment income on our Consolidated Statements of Comprehensive Income
(Loss) when received, depending on the assessment of the collectability of the loan. We resume accruing interest once a loan complies
with all of its original terms or restructured terms. Mortgage loans deemed uncollectible are charged against the allowance for credit
losses, and subsequent recoveries, if any, are likewise credited to the allowance for credit losses. Accrued interest on mortgage loans is
written-off when deemed uncollectible.
In connection with our recognition of an allowance for credit losses for mortgage loans on real estate, we perform a quantitative analysis
using a probability of default/loss given default/exposure at default approach to estimate expected credit losses in our mortgage loan
portfolio as well as unfunded commitments related to commercial mortgage loans, exclusive of certain mortgage loans held at fair value.
Our model estimates expected credit losses over the contractual terms of the loans, which are the periods over which we are exposed to
credit risk, adjusted for expected prepayments. Credit loss estimates are segmented by commercial mortgage loans, residential mortgage
loans, and unfunded commitments related to commercial mortgage loans.
The allowance for credit losses for pooled loans of similar risk (i.e., commercial and residential mortgage loans) is estimated using relevant
historical credit loss information adjusted for current conditions and reasonable and supportable forecasts of future conditions.
Historical credit loss experience provides the basis for the estimation of expected credit losses with adjustments for differences in current
loan-specific risk characteristics, such as differences in underwriting standards, portfolio mix, delinquency level, or term lengths as well as
adjustments for changes in environmental conditions, such as unemployment rates, property values, or other factors that management
deems relevant. We apply probability weights to the positive, base and adverse scenarios we use. For periods beyond our reasonable and
supportable forecast, we use implicit mean reversion over the remaining life of the recoverable, meaning our model will inherently revert
to the baseline scenario as the baseline is representative of the historical average over a longer period of time.
Loans are considered impaired when it is probable that, based upon current information and events, we will be unable to collect all
amounts due under the contractual terms of the loan agreement. When we determine that a loan is impaired, a specific credit loss
allowance is established for the excess carrying value of the loan over its estimated value. The loan’s estimated value is based on: the
present value of expected future cash flows discounted at the loan’s effective interest rate; the loan’s observable market price; or the fair
value of the loan’s collateral.
Allowance for credit losses are maintained at a level we believe is adequate to absorb current expected lifetime credit losses. Our periodic
evaluation of the adequacy of the allowance for credit losses is based on historical loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payments), the estimated value
of the underlying collateral, composition of the loan portfolio, current economic conditions, reasonable and supportable forecasts about
the future and other relevant factors.
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Mortgage loans on real estate are presented net of the allowance for credit losses on our Consolidated Balance Sheets. Changes in the
allowance are reported in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss). Mortgage loans on real
estate deemed uncollectible are charged against the allowance for credit losses, and subsequent recoveries, if any, are credited to the
allowance for credit losses, limited to the aggregate of amounts previously charged-off and expected to be charged-off.
Our commercial loan portfolio is primarily comprised of long-term loans secured by existing commercial real estate. We believe all of the
commercial loans in our portfolio share three primary risks: borrower credit worthiness; sustainability of the cash flow of the property;
and market risk; therefore, our methods of monitoring and assessing credit risk are consistent for our entire portfolio.
For our commercial mortgage loan portfolio, trends in market vacancy and rental rates are incorporated into the analysis that we perform
for monitored loans and may contribute to the establishment of (or an increase or decrease in) an allowance for credit losses. In addition,
we review each loan individually in our commercial mortgage loan portfolio on an annual basis to identify emerging risks. We focus on
properties that experienced a reduction in debt-service coverage or that have significant exposure to tenants with deteriorating credit
profiles. Where warranted, we establish or increase a credit loss allowance for a specific loan based upon this analysis.
We measure and assess the credit quality of our commercial mortgage loans by using loan-to-value and debt-service coverage ratios. The
loan-to-value ratio compares the principal amount of the loan to the fair value at origination of the underlying property collateralizing the
loan and is commonly expressed as a percentage. Loan-to-value ratios greater than 100% indicate that the principal amount is greater
than the collateral value. Therefore, all else being equal, a lower loan-to-value ratio generally indicates a higher quality loan. The debt-
service coverage ratio compares a property’s net operating income to its debt-service payments. Debt-service coverage ratios of less than
1.0 indicate that property operations do not generate enough income to cover its current debt payments. Therefore, all else being equal, a
higher debt-service coverage ratio generally indicates a higher quality loan. These credit quality metrics are monitored and reviewed at
least annually.
Most of our off-balance sheet commitments relate to commercial mortgage loans. As such, an allowance for credit losses is developed
based on the commercial mortgage loan process outlined above, along with an internally developed conversion factor.
Our residential loan portfolio is primarily comprised of first lien mortgages secured by existing residential real estate. In contrast to the
commercial mortgage loan portfolio, residential mortgage loans are primarily smaller-balance homogenous loans that share similar risk
characteristics. Therefore, these pools of loans are collectively evaluated for inherent credit losses. Such evaluations consider numerous
factors, including, but not limited to borrower credit scores, collateral values, loss forecasts, geographic location, delinquency rates and
economic trends. These evaluations and assessments are revised as conditions change and new information becomes available, including
updated forecasts, which can cause the allowance for credit losses to increase or decrease over time as such evaluations are revised.
Generally, residential mortgage loan pools exclude loans that are nonperforming, as those loans are evaluated individually using the
evaluation framework for specific allowance for credit losses described above.
For residential mortgage loans, our primary credit quality indicator is whether the loan is performing or nonperforming. We generally
define nonperforming residential mortgage loans as those that are 90 or more days past due and/or in nonaccrual status. There is
generally a higher risk of experiencing credit losses when a residential mortgage loan is nonperforming. We monitor and update aging
schedules and nonaccrual status on a monthly basis.
Policy Loans
Policy loans represent loans we issue to contract holders that use the cash surrender value of their life insurance policy as collateral.
Policy loans are carried at unpaid principal balances.
Real Estate
Real estate includes both real estate held for the production of income and real estate held-for-sale. Real estate held for the production of
income is carried at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful life of
the asset. We periodically review properties held for the production of income for impairment. Properties whose carrying values are
greater than their projected undiscounted cash flows are written down to estimated fair value, with impairment losses reported in realized
gain (loss) on our Consolidated Statements of Comprehensive Income (Loss). The estimated fair value of real estate is generally
computed using the present value of expected future cash flows from the real estate discounted at a rate commensurate with the
underlying risks. Real estate classified as held-for-sale is stated at the lower of depreciated cost or fair value less expected disposition
costs at the time classified as held-for-sale. Real estate is not depreciated while it is classified as held-for-sale. Also, valuation allowances
are established, as appropriate, for real estate held-for-sale and any changes to the valuation allowances are reported in realized gain (loss)
on our Consolidated Statements of Comprehensive Income (Loss). Real estate acquired through foreclosure proceedings is recorded at
fair value at the settlement date.
Derivative Instruments
We hedge certain portions of our exposure to interest rate risk, foreign currency exchange risk, equity market risk and credit risk by
entering into derivative transactions. All of our derivative instruments are recognized as either assets or liabilities on our Consolidated
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Balance Sheets at estimated fair value. We categorized derivatives into a three-level hierarchy, based on the priority of the inputs to the
respective valuation technique as discussed above in “Fair Value Measurement.” The accounting for changes in the estimated fair value
of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship, and further, on the
type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we designate the
hedging instrument based upon the exposure being hedged: as a cash flow hedge or a fair value hedge.
For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative
instrument is reported as a component of AOCI and reclassified into net income in the same period or periods during which the hedged
transaction affects net income. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present
value of designated future cash flows of the hedged item (hedge ineffectiveness), if any, is recognized in net income during the period of
change. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument, as
well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in net income during the period of
change in estimated fair values. For derivative instruments not designated as hedging instruments, but that are economic hedges, the gain
or loss is recognized in net income.
We purchase and issue financial instruments and products that contain embedded derivative instruments. When it is determined that the
embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host
contract, and a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is bifurcated
from the host for measurement purposes. The embedded derivative is carried at fair value with changes in fair value recognized in net
income during the period of change.
We employ several different methods for determining the fair value of our derivative instruments. The fair value of our derivative
contracts are measured based on current settlement values, which are based on quoted market prices, industry standard models that are
commercially available and broker quotes. These techniques project cash flows of the derivatives using current and implied future market
conditions. We calculate the present value of the cash flows to measure the current fair market value of the derivative.
Cash and Invested Cash
Cash and invested cash is carried at cost and includes all highly liquid debt instruments purchased with an original maturity of three
months or less.
DAC, VOBA, DSI and DFEL
Acquisition costs directly related to successful contract acquisitions or renewals of UL, VUL, traditional life insurance, annuities and other
investment contracts have been deferred (i.e., DAC) to the extent recoverable. VOBA is an intangible asset that reflects the estimated fair
value of in-force contracts in a life insurance company acquisition and represents the portion of the purchase price that is allocated to the
value of the right to receive future cash flows from the business in force at the acquisition date. Bonus credits and excess interest for
dollar cost averaging contracts are considered DSI. Contract sales charges that are collected in the early years of an insurance contract are
deferred (i.e., DFEL), and the unamortized balance is reported in other contract holder funds on our Consolidated Balance Sheets.
Both DAC and VOBA amortization, excluding amounts reported in realized gain (loss), is reported within commissions and other
expenses on our Consolidated Statements of Comprehensive Income (Loss). DSI amortization, excluding amounts reported in realized
gain (loss), is reported in interest credited on our Consolidated Statements of Comprehensive Income (Loss). The amortization of
DFEL, excluding amounts reported in realized gain (loss), is reported within fee income on our Consolidated Statements of
Comprehensive Income (Loss). The methodology for determining the amortization of DAC, VOBA, DSI and DFEL varies by product
type. For all insurance contracts, amortization is based on assumptions consistent with those used in the development of the underlying
contract adjusted for emerging experience and expected trends.
Acquisition costs for UL and VUL insurance and investment-type products, which include fixed and variable deferred annuities, are
generally amortized over the lives of the policies in relation to the incidence of estimated gross profits (“EGPs”) from surrender charges,
investment, mortality net of reinsurance ceded and expense margins and actual realized gain (loss) on investments. Contract lives for UL
and VUL policies are estimated to be 40 years based on the expected lives of the contracts. Contract lives for fixed and variable deferred
annuities are generally between 15 and 30 years, while some of our fixed multi-year guarantee products have amortization periods equal to
the guarantee period. The front-end load annuity product has an assumed life of 25 years. Longer lives are assigned to those blocks that
have demonstrated lower lapse experience.
Acquisition costs for all traditional contracts, including traditional life insurance contracts, such as individual whole life, group business
and term life insurance, are amortized over the expected premium-paying period that generally results in amortization less than 30 years.
Acquisition costs are either amortized on a straight-line basis or as a level percent of premium of the related policies depending on the
block of business. There is currently no intangible balance or related amortization for fixed and variable payout annuities.
We account for modifications of insurance contracts that result in a substantially unchanged contract as a continuation of the replaced
contract. We account for modifications of insurance contracts that result in a substantially changed contract as an extinguishment of the
replaced contract.
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The carrying amounts of DAC, VOBA, DSI and DFEL are adjusted for the effects of realized and unrealized gains and losses on
securities classified as fixed maturity AFS and certain derivatives and embedded derivatives. Amortization expense of DAC, VOBA, DSI
and DFEL reflects an assumption for an expected level of credit-related investment losses. When actual credit-related investment losses
are realized, we recognize a true-up to our DAC, VOBA, DSI and DFEL amortization within realized gain (loss) on our Consolidated
Statements of Comprehensive Income (Loss) reflecting the incremental effect of actual versus expected credit-related investment losses.
These actual to expected amortization adjustments can create volatility from period to period in realized gain (loss).
During the third quarter of each year, we conduct our annual comprehensive review of the assumptions and the projection models used
for our estimates of future gross profits underlying the amortization of DAC, VOBA, DSI and DFEL and the calculations of the
embedded derivatives and reserves for life insurance and annuity products. These assumptions include, but are not limited to, capital
markets, investment margins, mortality, retention, rider utilization and maintenance expenses (costs associated with maintaining records
relating to insurance and individual and group annuity contracts, and with the processing of premium collections, deposits, withdrawals
and commissions). Based on our review, the cumulative balances of DAC, VOBA, DSI and DFEL included on our Consolidated
Balance Sheets are adjusted with an offsetting benefit or charge to revenue or amortization expense to reflect such change related to our
expectations of future EGPs (“unlocking”). We may have unlocking in other quarters as we become aware of information that warrants
updating assumptions outside of our annual comprehensive review. We may also identify and implement actuarial modeling refinements
that result in increases or decreases to the carrying values of DAC, VOBA, DSI, DFEL, embedded derivatives and reserves for life
insurance and annuity products with living benefit and death benefit guarantees.
DAC, VOBA, DSI and DFEL are reviewed to ensure that the unamortized portion does not exceed the expected recoverable amounts.
Reinsurance
Our insurance subsidiaries enter into reinsurance agreements in the normal course of business to limit our exposure to the risk of loss and
to enhance our capital management.
In order for a reinsurance agreement to qualify for reinsurance accounting, the agreement must satisfy certain risk transfer conditions that
include, among other items, a reasonable possibility of a significant loss for the assuming entity. When we apply reinsurance accounting,
premiums, benefits and DAC amortization are reported net of insurance ceded on our Consolidated Statements of Comprehensive
Income (Loss). Amounts currently recoverable, such as ceded reserves, are reported in reinsurance recoverables and amounts currently
payable to the reinsurers, such as premiums, are included in other liabilities on our Consolidated Balance Sheets. Assets and liabilities and
revenue and expenses from certain reinsurance contracts that grant statutory surplus relief to our insurance companies are netted on our
Consolidated Balance Sheets and Consolidated Statements of Comprehensive Income (Loss), respectively, if there is a contractual right of
offset.
We use deposit accounting to recognize reinsurance agreements that do not transfer significant insurance risk. This accounting treatment
results in amounts paid or received by our insurance subsidiaries to be considered on deposit with the reinsurer and such amounts are
reported in other assets and other liabilities, respectively, on our Consolidated Balance Sheets. As amounts are paid or received,
consistent with the underlying contracts, deposit assets or liabilities are adjusted.
We estimated an allowance for credit losses for all reinsurance recoverables and related reinsurance deposit assets held by our subsidiaries.
As such, we performed a quantitative analysis using a probability of loss approach to estimate expected credit losses for reinsurance
recoverables, inclusive of similar assets recognized using the deposit method of accounting. The credit loss allowance is a general
allowance for pools of receivables with similar risk characteristics segmented by credit risk ratings and receivables assessed on an
individual basis that do not share similar risk characteristics where we anticipate a credit loss over the life of reinsurance-related assets.
Our model uses relevant internal or external historical loss information adjusted for current conditions and reasonable and supportable
forecasts of future events and conditions in developing our loss estimate. We utilized historical credit rating data to form an estimation of
probability of default of counterparties by means of a transition matrix that provides the rates of credit migration for credit ratings
transitioning to impairment. We updated reinsurer credit ratings during the quarter to incorporate the most up-to-date information on
the current state of the financial stability of our reinsurers. To simulate changes in economic conditions, we used positive, base and
adverse scenarios that include varying levels of loss given default assumptions to reflect the impact of changes in severity of losses. We
applied probability weights to the positive, base and adverse scenarios. For periods beyond our reasonable and supportable forecasts, we
used implicit mean reversion over the remaining life of the recoverable. Additionally, we considered factors that impact our exposure at
default that are driven by actuarial expectations around term and mortality assumptions rather than being directly driven by market or
economic environment.
Our model estimates the expected credit losses over the life of the reinsurance asset. Credit loss estimates are segmented based on
counterparty credit risk. Our modeling process utilizes counterparty credit ratings, collateral types and amounts, and term and run-off
assumptions. For reinsurance recoverables that do not share similar risk characteristics, we assessed on an individual basis to determine a
specific credit loss allowance.
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We estimated expected credit losses over the contractual term of the recoverable, which is the period during which we are exposed to the
credit risk. Reinsurance recoverables may not have explicit contractual lives, but are tied to the underlying insurance products; as a result,
we estimated the contractual life by utilizing actuarial estimates of the timing of payouts related to those underlying products.
Reinsurance agreements often require the reinsurer to collateralize the recoverable with funds in a trust account for the benefit of the
ceding insurance entity that can reduce the expected credit losses on a given agreement. As such, we review reinsurance collateral by
individual agreement to sensitize risk of loss based on level of collateralization. This review is driven by the assumption that non-
collateralized reinsurance recoverables would have materially higher losses in time of default. Therefore, reinsurance recoverables are
pooled as either fully-collateralized or non-collateralized.
Reinsurance recoverables are presented net of the allowance for credit losses on our Consolidated Balance Sheets. Changes in the
allowance for credit losses are reported in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).
Reinsurance recoverables deemed uncollectible are charged against the allowance for credit losses, and subsequent recoveries, if any, are
credited to the allowance for credit losses, limited to the aggregate of amounts previously charged-off and expected to be charged-off.
Goodwill
We recognize the excess of the purchase price, plus the fair value of any noncontrolling interest in the acquiree, over the fair value of
identifiable net assets acquired as goodwill. Goodwill is not amortized, but is reviewed for impairment annually as of October 1 and more
frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its
carrying value.
We perform a quantitative goodwill impairment test where the fair value of the reporting unit is determined and compared to the carrying
value of the reporting unit. If the carrying value of the reporting unit is greater than the reporting unit’s fair value, goodwill is impaired
and written down to the reporting unit’s fair value; and a charge is reported in impairment of intangibles on our Consolidated Statements
of Comprehensive Income (Loss). The results of one goodwill impairment test on one reporting unit cannot subsidize the results of
another reporting unit.
Other Assets and Other Liabilities
Other assets consist primarily of certain reinsurance assets, net of allowance for credit losses, specifically identifiable intangible assets,
property and equipment owned by the Company, balances associated with corporate-owned and bank-owned life insurance, receivables
resulting from sales of securities that had not yet settled as of the balance sheet date, DSI, operating lease right-of-use (“ROU”) assets,
finance lease assets, certain financing arrangements, debt issuance costs associated with line-of-credit arrangements and other receivables
and prepaid expenses. Other liabilities consist primarily of certain reinsurance payables, current and deferred taxes, pension and other
employee benefit liabilities, derivative instrument liabilities, payables resulting from purchases of securities that had not yet settled as of
the balance sheet date, long-term operating lease liabilities, finance lease liabilities, certain financing arrangements, deferred gain on
business sold through reinsurance and other accrued expenses.
Other assets and other liabilities on our Consolidated Balance Sheets include guaranteed living benefit (“GLB”) features and remaining
guaranteed interest and similar contracts that are carried at fair value, which may be reported in either other assets or other liabilities. The
fair value of these items represents approximate exit price including an estimate for our NPR. Certain of these features have elements of
both insurance benefits and embedded derivatives. Through our hybrid accounting approach, for reserve calculation purposes we assign
product cash flows to the embedded derivative or insurance portion of the reserves based on the life-contingent nature of the benefits.
We classify these GLB reserves embedded derivatives in Level 3 within the hierarchy levels described above in “Fair Value
Measurement.” We report the insurance portion of the reserves in future contract benefits.
The carrying values of specifically identifiable intangible assets are reviewed at least annually for indicators of impairment in value that are
related to credit loss or non-credit, including unexpected or adverse changes in the following: the economic or competitive environments
in which the company operates; profitability analyses; cash flow analyses; and the fair value of the relevant business operation. If there
was an indication of impairment, then the discounted cash flow method would be used to measure the impairment, and the carrying value
would be adjusted as necessary and reported in impairment of intangibles on our Consolidated Statements of Comprehensive Income
(Loss). Sales force intangibles are attributable to the value of the new business distribution system acquired through business
combinations. These assets are amortized on a straight-line basis over their useful life of 25 years. Specifically identifiable intangible
assets also includes the value of customer relationships acquired (“VOCRA”) and value of distribution agreements (“VODA”). The
carrying values of VOCRA and VODA are amortized using a straight-line basis over their weighted average life of 20 years and 13 years,
respectively. See Note 10 for more information regarding specifically identifiable intangible assets.
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Property and equipment owned for company use is carried at cost less allowances for depreciation. Provisions for depreciation of
investment real estate and property and equipment owned for company use are computed principally on the straight-line method over the
estimated useful lives of the assets, which include buildings, computer hardware and software and other property and equipment. Certain
assets on our Consolidated Balance Sheets are related to finance leases and certain financing arrangements and are depreciated in a
manner consistent with our current depreciation policy for owned assets. We periodically review the carrying value of our long-lived
assets, including property and equipment, for impairment whenever events or circumstances indicate that the carrying amount of such
assets may not be fully recoverable. For long-lived assets to be held and used, impairments are recognized when the carrying amount of a
long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the
sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. An impairment loss is
measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value.
Long-lived assets to be disposed of by abandonment or in an exchange for a similar productive long-lived asset are classified as held-for-
use until they are disposed. Long-lived assets to be sold are classified as held-for-sale and are no longer depreciated. Certain criteria have
to be met in order for the long-lived asset to be classified as held-for-sale, including that a sale is probable and expected to occur within
one year. Long-lived assets classified as held-for-sale are recorded at the lower of their carrying amount or fair value less cost to sell.
We lease office space and certain equipment under various long-term lease agreements. We determine if an arrangement is a lease at
inception. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum
lease payments over the lease term at the commencement date. Our leases do not provide an implicit rate; therefore, we use our
incremental borrowing rate at the commencement date in determining the present value of future payments. The ROU asset is calculated
using the lease liability carrying amount, plus or minus prepaid/accrued lease payments, minus the unamortized balance of lease
incentives received, plus unamortized initial direct costs. Lease terms used to calculate our lease obligation include options when we are
reasonably certain that we will exercise such options. Our lease agreements may contain both lease and non-lease components, which are
accounted for separately. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
Other liabilities includes a deferred gain on business sold through reinsurance attributable to a reinsurance agreement with Swiss Re Life
& Health America, Inc (“Swiss Re”) effective January 1, 2020. We are recognizing the gain related to this transaction over the period
over which the majority of account values are expected to run off, or 15 years.
Other liabilities includes a deferred gain on business sold through reinsurance attributable to our annuity reinsurance agreement with
Athene Holding Ltd. (“Athene”) effective October 1, 2018. We are recognizing the gain related to this transaction over the period over
which the majority of account values are expected to run off, or 20 years.
Separate Account Assets and Liabilities
We maintain separate account assets, which are reported at fair value. The related liabilities are reported at an amount equivalent to the
separate account assets. Investment risks associated with market value changes are borne by the contract holders, except to the extent of
minimum guarantees made by the Company with respect to certain accounts.
We issue variable annuity contracts through our separate accounts for which investment income and investment gains and losses accrue
directly to, and investment risk is borne by, the contract holder (traditional variable annuities). We also issue variable annuity and life
contracts through separate accounts that may include various types of guaranteed death benefit (“GDB”), guaranteed withdrawal benefit
(“GWB”) and guaranteed income benefit (“GIB”) features. The GDB features include those where we contractually guarantee to the
contract holder either: return of no less than total deposits made to the contract less any partial withdrawals (“return of net deposits”);
total deposits made to the contract less any partial withdrawals plus a minimum return (“minimum return”); or the highest contract value
on any contract anniversary date through age 80. The highest contract value is increased by purchase payments and is decreased by
withdrawals subsequent to that anniversary date in the same proportion that withdrawals reduce the contract value.
As discussed in Note 6, certain features of these guarantees are accounted for as embedded derivative reserves, whereas other guarantees
are accounted for as benefit reserves. Other guarantees contain characteristics of both and are accounted for under an approach that
calculates the value of the embedded derivative reserve and the benefit reserve based on the specific characteristics of each GLB feature.
We use derivative instruments to hedge our exposure to the risks and earnings volatility that result from the embedded derivatives for
living benefits in certain of our variable annuity products. The change in fair value of these instruments tends to move in the opposite
direction of the change in the value of the associated reserves. The net impact of these changes is reported as a component of realized
gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).
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The “market consistent scenarios” used in the determination of the fair value of the GLB liability are similar to those used by an
investment bank to value derivatives for which the pricing is not transparent and the aftermarket is nonexistent or illiquid. We use risk-
neutral Monte Carlo simulations in our calculation to value the entire block of guarantees, which involve 100 unique scenarios per policy
or approximately 47 million scenarios. The market consistent scenario assumptions, as of each valuation date, are those we view to be
appropriate for a hypothetical market participant. The market consistent inputs include, but are not limited to, assumptions for capital
markets (e.g., implied volatilities, correlation among indices, risk-free swap curve, etc.), policyholder behavior (e.g., policy lapse, rider
utilization, etc.), mortality, risk margins, maintenance expenses and a margin for profit. We believe these assumptions are consistent with
those that would be used by a market participant; however, as the related markets develop we will continue to reassess our assumptions.
It is possible that different valuation techniques and assumptions could produce a materially different estimate of fair value.
Future Contract Benefits and Other Contract Holder Funds
Future contract benefits represent liability reserves that we have established and carry based on estimates of how much we will need to
pay for future benefits and claims. Other contract holder funds represent liabilities for fixed account values, including the fixed portion
of variable, dividends payable, premium deposit funds, undistributed earnings on participating business and other contract holder funds
as well as the carrying value of DFEL discussed above.
The liabilities for future contract benefits and claim reserves for UL and VUL insurance policies consist of contract account balances that
are equal to deposits net of withdrawals, excluding surrender charges and fees, plus interest credited, and if applicable an additional
reserve for other insurance benefit guarantees. The liabilities for future insurance contract benefits and claim reserves for traditional life
policies are computed using assumptions for investment yields, mortality and withdrawals based principally on generally accepted actuarial
methods and assumptions at the time of contract issue. Investment yield assumptions for traditional direct individual life reserves for all
contracts range from 2.25% to 7.75% depending on the time of contract issue. The investment yield assumptions for immediate and
deferred paid-up annuities range from 1.25% to 12.75%. These investment yield assumptions are intended to represent an estimation of
the interest rate experience for the period that these contract benefits are payable.
The liabilities for future claim reserves for variable annuity products containing GDB features are calculated by estimating the present
value of total expected benefit payments over the life of the contract from inception divided by the present value of total expected
assessments over the life of the contract (“benefit ratio”) multiplied by the cumulative assessments recorded from the contract inception
through the balance sheet date less the cumulative GDB payments plus interest on the liability. The change in the liability for a period is
the benefit ratio multiplied by the assessments recorded for the period less GDB claims paid in the period plus interest. As experience or
assumption changes result in a change in expected benefit payments or assessments, the benefit ratio is unlocked, that is, recalculated
using the updated expected benefit payments and assessments over the life of the contract since inception. The revised benefit ratio is
then applied to the liability calculation described above, with the resulting change in liability reported in benefits on our Consolidated
Statements of Comprehensive Income (Loss).
The liability for future claim reserves for long-term disability contracts for incurred and reported claims are calculated based on
assumptions as to interest, claim resolution rates and offsets for other insurance including social security. Claim resolution rate
assumptions and social security offsets are based on our actual experience. The interest rate assumptions used for discounting claim
reserves are based on projected portfolio yield rates, after consideration for defaults and investment expenses, for assets supporting the
liabilities. The incurred but not reported claim reserves are based on our experiences as to the reporting lags and ultimate loss experience.
Claim reserves are subject to revision as current claim experience and projections of future factors affecting claim experience change.
Claim reserves do not include a provision for adverse deviation.
With respect to our future contract benefits and other contract holder funds, we continually review overall reserve position, reserving
techniques and reinsurance arrangements. As experience develops and new information becomes known, liabilities are adjusted as
deemed necessary. The effects of changes in estimates are included in the operating results for the period in which such changes occur.
The business written or assumed by us includes participating life insurance contracts, under which the contract holder is entitled to share
in the earnings of such contracts via receipt of dividends. The dividend scale for participating policies is reviewed annually and may be
adjusted to reflect recent experience and future expectations. As of December 31, 2020 and 2019, participating policies comprised less
than 1% of the face amount of business in force, and dividend expenses were $53 million, $51 million and $56 million for the years ended
December 31, 2020, 2019 and 2018, respectively.
Liabilities for the secondary guarantees on UL-type products are calculated by multiplying the benefit ratio by the cumulative assessments
recorded from contract inception through the balance sheet date less the cumulative secondary guarantee benefit payments plus interest.
If experience or assumption changes result in a new benefit ratio, the reserves are adjusted to reflect the changes in a manner similar to
the unlocking of DAC, VOBA, DFEL and DSI. The accounting for secondary guarantee benefits impacts, and is impacted by, EGPs
used to calculate amortization of DAC, VOBA, DFEL and DSI.
125
Certain of our variable annuity contracts reported within future contract benefits contain GLB reserves embedded derivatives, a portion
of which may be reported in either other assets or other liabilities, and include guaranteed interest and similar contracts, that are carried at
fair value on our Consolidated Balance Sheets, which represents approximate exit price including an estimate for our NPR. Certain of
these features have elements of both insurance benefits and embedded derivatives. Through our hybrid accounting approach, for reserve
calculation purposes we assign product cash flows to the embedded derivative or insurance portion of the reserves based on the life-
contingent nature of the benefits. We classify these GLB reserves embedded derivatives items in Level 3 within the hierarchy levels
described above in “Fair Value Measurement.” We report the insurance portion of the reserves in future contract benefits.
The fair value of our indexed annuity contracts is based on their approximate surrender values.
Short-term and Long-term Debt
Short-term debt has contractual or expected maturities of one year or less. Long-term debt has contractual or expected maturities greater
than one year.
Contingencies and Commitments
Contingencies arising from environmental remediation costs, regulatory judgments, claims, assessments, guarantees, litigation, recourse
reserves, fines, penalties and other sources are recorded when deemed probable and reasonably estimable.
Fee Income
Fee income for investment and interest-sensitive life insurance contracts consists of asset-based fees, percent of premium charges,
contract administration charges and surrender charges that are assessed against contract holder account balances. Investment products
consist primarily of individual and group variable and fixed deferred annuities. Interest-sensitive life insurance products include UL
insurance, VUL insurance and other interest-sensitive life insurance policies. These products include life insurance sold to individuals,
corporate-owned life insurance and bank-owned life insurance.
In bifurcating the embedded derivative of our GLB features on our variable annuity products, we attribute to the embedded derivative
the portion of total fees collected from the contract holder that relate to the GLB riders (the “attributed fees”), which are not reported
within fee income on our Consolidated Statements of Comprehensive Income (Loss). These attributed fees represent the present value
of future claims expected to be paid for the GLB at the inception of the contract plus a margin that a theoretical market participant would
include for risk/profit and are reported within realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).
The timing of revenue recognition as it relates to fees assessed on investment contracts is determined based on the nature of such fees.
Asset-based fees and contract administration charges are assessed on a daily or monthly basis and recognized as revenue as performance
obligations are met, over the period underlying customer assets are owned or advisory services are provided. Wholesaling-related 12b-1
fees received from separate account fund sponsors as compensation for servicing the underlying mutual funds are recorded as revenues
based on a contractual percentage of the market value of mutual fund assets over the period shares are owned by customers. Net
investment advisory fees related to asset management of certain separate account funds are recorded as revenues based on a contractual
percentage of the customer’s managed assets over the period advisory services are provided. Percent of premium charges are assessed at
the time of premium payment and recognized as revenue when assessed and earned. Certain amounts assessed that represent
compensation for services to be provided in future periods are reported as unearned revenue and recognized in income over the periods
benefited. Surrender charges are recognized upon surrender of a contract by the contract holder in accordance with contractual terms.
For investment and interest-sensitive life insurance contracts, the amounts collected from contract holders are considered deposits and
are not included in revenue.
Insurance Premiums
Our insurance premiums for traditional life insurance and group insurance products are recognized as revenue when due from the
contract holder. Our traditional life insurance products include those products with fixed and guaranteed premiums and benefits and
consist primarily of whole life insurance, limited-payment life insurance, term life insurance and certain annuities with life contingencies.
Our group insurance products consist primarily of term life, disability and dental.
Net Investment Income
We earn investment income on the underlying general account investments supporting our fixed products less related expenses.
Dividends and interest income, recorded in net investment income, are recognized when earned. Amortization of premiums and
accretion of discounts on investments in debt securities are reflected in net investment income over the contractual terms of the
investments in a manner that produces a constant effective yield.
126
For CLOs and MBS, included in the trading and fixed maturity AFS securities portfolios, we recognize income using a constant effective
yield based on anticipated prepayments and the estimated economic life of the securities. When actual prepayments differ significantly
from originally anticipated prepayments, the retrospective effective yield is recalculated to reflect actual payments to date and a catch up
adjustment is recorded in the current period. In addition, the new effective yield, which reflects anticipated future payments,
is used prospectively. Any adjustments resulting from changes in effective yield are reflected in net investment income on our
Consolidated Statements of Comprehensive Income (Loss).
Realized Gain (Loss)
Realized gain (loss) includes realized gains and losses from the sale of investments, write-downs for impairments of investments and
changes in the allowance for credit losses for financial assets, changes in fair value for mortgage loans on real estate accounted for under
the fair value option, changes in fair value of equity securities, certain derivative and embedded derivative gains and losses, gains and
losses on the sale of subsidiaries and businesses and net gains and losses on reinsurance embedded derivatives and trading securities.
Realized gains and losses on the sale of investments are determined using the specific identification method. Realized gain (loss) is
recognized in net income, net of associated amortization of DAC, VOBA, DSI and DFEL. Realized gain (loss) is also net of allocations
of investment gains and losses to certain contract holders and certain funds withheld on reinsurance arrangements for which we have a
contractual obligation.
Other Revenues
Other revenues consists primarily of fees attributable to broker-dealer services recorded as performance obligations are met, either at the
time of sale or over time based on a contractual percentage of customer account values, changes in the market value of our seed capital
investments, and proceeds from reinsurance recaptures. The broker-dealer services primarily relate to our retail sales network and consist
of commission revenue for the sale of non-affiliated securities recorded on a trade date basis and advisory fee income. Advisory fee
income is asset-based revenues recorded as earned based on a contractual percentage of customer account values. Other revenues earned
by our Group Protection segment consist of fees from administrative services performed, which are recognized as performance
obligations are met over the terms of the underlying agreements.
Interest Credited
We credit interest to our contract holder account balances based on the contractual terms supporting our products.
Benefits
Benefits for UL and other interest-sensitive life insurance products include benefit claims incurred during the period in excess of contract
account balances. Benefits also include the change in reserves for life insurance products with secondary guarantee benefits, annuity
products with guaranteed death and living benefits and certain annuities with life contingencies. For traditional life, group health and
disability income products, benefits are recognized when incurred in a manner consistent with the related premium recognition policies.
Strategic Digitization Expense
Strategic digitization expense consists primarily of costs related to our enterprise-wide digitization initiative.
Pension and Other Postretirement Benefit Plans
Pursuant to the accounting rules for our obligations to employees and agents under our various pension and other postretirement benefit
plans, we are required to make a number of assumptions to estimate related liabilities and expenses. The mortality assumption is based
on actual and anticipated plan experience, determined using acceptable actuarial methods. We use assumptions for the weighted-average
discount rate and expected return on plan assets to estimate pension expense. The discount rate assumptions are determined using an
analysis of current market information and the projected benefit flows associated with these plans. The expected long-term rate of return
on plan assets is based on historical and projected future rates of return on the funds invested in the plan. The calculation of our
accumulated postretirement benefit obligation also uses an assumption of weighted-average annual rate of increase in the per capita cost
of covered benefits, which reflects a health care cost trend rate.
127
Stock-Based Compensation
In general, we expense the fair value of stock awards included in our incentive compensation plans. As of the date our stock awards are
approved, the fair value of stock options is determined using a Black-Scholes options valuation methodology, and the fair value of other
stock awards is based upon the market value of the stock. The fair value of the awards is expensed over the performance or service
period, which generally corresponds to the vesting period, and is recognized as an increase to common stock in stockholders’ equity. We
apply an estimated forfeiture rate to our accrual of compensation cost. We classify certain stock awards as liabilities. For these awards,
the settlement value is classified as a liability on our Consolidated Balance Sheets, and the liability is marked-to-market through net
income at the end of each reporting period. Stock-based compensation expense is reflected in commissions and other expenses on our
Consolidated Statements of Comprehensive Income (Loss).
Interest and Debt Expense
Interest expense on our short-term and long-term debt is recognized as due and any associated premiums, discounts and debt issuance
costs are amortized (accreted) over the term of the related borrowing utilizing the effective interest method. In addition, gains or losses
related to certain derivative instruments associated with debt are recognized in interest and debt expense during the period of the change.
Income Taxes
We file a U.S. consolidated income tax return that includes all of our eligible subsidiaries. Ineligible subsidiaries file separate individual
corporate tax returns. Subsidiaries operating outside of the U.S. are taxed, and income tax expense is recorded, based on applicable
foreign statutes. Deferred income taxes are recognized, based on enacted rates, when assets and liabilities have different values for
financial statement and tax reporting purposes. A valuation allowance is recorded to the extent required. Considerable judgment and the
use of estimates are required in determining whether a valuation allowance is necessary and, if so, the amount of such valuation
allowance. In evaluating the need for a valuation allowance, we consider many factors, including: the nature and character of the
deferred tax assets and liabilities; taxable income in prior carryback years; future reversals of temporary differences; the length of time
carryovers can be utilized; and any tax planning strategies we would employ to avoid a tax benefit from expiring unused.
Foreign Currency Translation
The balance sheet accounts and income statement items of foreign subsidiaries, reported in functional currencies other than the U.S.
dollar are translated at the current and average exchange rates for the year, respectively. Resulting translation adjustments and other
translation adjustments for foreign currency transactions that affect cash flows are reported in AOCI, a component of stockholders’
equity.
Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing earnings available to common shareholders by the average common shares
outstanding. Diluted EPS is computed assuming the conversion or exercise of dilutive convertible preferred securities, nonvested stock,
stock options, performance share units and warrants outstanding during the year.
Our deferred compensation plans allow participants the option to diversify from LNC stock to other investment alternatives. When
calculating our weighted-average dilutive shares, we presume the investment option will be settled in cash and exclude these shares from
our calculation, unless the effect of settlement in shares would be more dilutive to our diluted EPS calculation.
For any period where a net loss is experienced, shares used in the diluted EPS calculation represent basic shares, as the use of diluted
shares would result in a lower loss per share.
128
2. New Accounting Standards
Adoption of New Accounting Standards
The following table provides a description of our adoption of new Accounting Standards Updates (“ASUs”) issued by the FASB and the
impact of the adoption on our financial statements. ASUs not listed below were assessed and determined to be either not applicable or
insignificant in presentation or amount.
Effective Date
January 1, 2020
Effect on Financial Statements or Other
Significant Matters
The adoption of this standard and related
amendments resulted in the recognition of a
cumulative effect decrease of $218 million,
net of DAC, VOBA, DSI, DFEL and
changes in other contract holder funds,
after-tax, to retained earnings. The overall
adjustment recorded our allowance for
credit losses as of the date of adoption,
primarily related to commercial and
residential mortgage loans, as well as
reinsurance recoverables. Upon adoption of
the standard, the concept of other-than-
temporary impairment (“OTTI”) no longer
exists; however, our prior period
presentation herein is reflective of OTTI
recorded in those periods.
January 1, 2020
Our adoption of ASU 2016-13 and related
amendments is discussed above. The
adoption of the remainder of this guidance
did not have a material impact on our
consolidated financial condition and results
of operations.
Standard
ASU 2016-13,
Financial
Instruments –
Credit Losses
(Topic 326):
Measurement of
Credit Losses on
Financial
Instruments (“ASU
2016-13”),
Measurement of
Credit Losses on
Financial
Instruments and
related
amendments
ASU 2019-04,
Codification
Improvements to
Topic 326,
Financial
Instruments –
Credit Losses,
Topic 815,
Derivatives and
Hedging and Topic
825, Financial
Instruments
Description
These amendments adopt a new model in ASC
Topic 326 to measure and recognize credit
losses for most financial assets. The ASU
requires a financial asset measured at amortized
cost to be presented at the net amount
expected to be collected over the life of the
asset using a credit loss allowance. Changes in
the allowance are charged to earnings. The
measurement of expected credit losses is based
on relevant information about past events,
including historical experience, as well as
current economic conditions and reasonable
and supportable forecasts that affect the
collectability of the financial asset. The
method used to measure estimated credit losses
for fixed maturity AFS securities will be
unchanged from current GAAP; however, the
amendments require credit losses to be
recognized through an allowance rather than as
a reduction to the amortized cost of those
securities. The amendments permit entities to
recognize improvements in credit loss
estimates on fixed maturity AFS securities by
reducing the allowance account immediately
through earnings. The amendments are
adopted through a cumulative effect
adjustment to the beginning balance of retained
earnings as of the first reporting period in
which the amendments are effective. Early
adoption was permitted for annual periods
beginning after December 15, 2018, and
interim periods therein.
These amendments clarify the measurement,
recognition and presentation of the allowance
for credit losses on accrued interest receivable
balances; the inclusion of recoveries when
estimating the allowance for credit losses; the
inclusion of all ASC Topic 944 – Financial Services
– Insurance reinsurance recoverables within the
scope of ASC 326-20; and provide additional
targeted clarifications on the calculation of the
allowance for credit losses.
These amendments also make targeted
clarifications to ASC Topics 815 and 825.
Early adoption was permitted.
129
Effective Date
January 1, 2020
Effect on Financial Statements or Other
Significant Matters
We recognized a cumulative effect increase
to retained earnings of $15 million, after-tax,
by electing the fair value option for certain
mortgage loans in connection with our
adoption of ASC Topic 326.
March 12, 2020
through December
31, 2022
This standard may be elected and applied
prospectively as reference rate reform
unfolds. We have begun our
implementation and are currently evaluating
the impact of this ASU on our consolidated
financial condition and results of operations.
January 1, 2023
We are currently evaluating the impact of
adopting this ASU on our consolidated
financial condition and results of operations.
Standard
ASU 2019-05,
Financial
Instruments –
Credit Losses
(Topic 326):
Targeted Transition
Relief
ASU 2020-04,
Reference Rate
Reform (Topic
848)
ASU 2018-12,
Targeted
Improvements to
the Accounting for
Long-Duration
Contracts and
related
amendments
Description
The amendments provide entities that have
certain instruments within the scope of
Subtopic 326-20, Financial Instruments – Credit
Losses – Measured at Amortized Cost, with an
option to irrevocably elect the fair value option
in Subtopic 825-10, Financial Instruments – Overall,
applied on an instrument-by-instrument basis
for eligible instruments, upon adoption of ASC
Topic 326.
The amendments in this update provide
optional guidance for a limited period of time
to ease the potential burden in accounting for
(or recognizing the effects of) reference rate
reform on financial reporting. The
amendments provide optional expedients and
exceptions for applying GAAP to contracts,
hedging relationships and other transactions
impacted by reference rate reform. If certain
criteria are met, an entity will not be required to
remeasure or reassess contracts impacted by
reference rate reform. Additionally, changes to
the critical terms of a hedging relationship
affected by reference rate reform will not
require entities to de-designate the relationship
if certain requirements are met. The expedients
and exceptions provided by the amendments
do not apply to contract modifications made
and hedging relationships entered into or
evaluated after December 31, 2022, with
certain exceptions. The amendments are
effective for contract modifications made
between March 12, 2020, and December 31,
2022.
These amendments make changes to the
accounting and reporting for long-duration
contracts issued by an insurance entity that will
significantly change how insurers account for
long-duration contracts, including how they
measure, recognize and make disclosures about
insurance liabilities and DAC. Under this ASU,
insurers will be required to review cash flow
assumptions at least annually and update them
if necessary. They also will have to make
quarterly updates to the discount rate
assumptions they use to measure the liability
for future policyholder benefits. The ASU
creates a new category of market risk benefits
(i.e., features that protect the contract holder
from capital market risk and expose the insurer
to that risk) that insurers will have to measure
at fair value. The ASU provides various
transition methods by topic that entities may
elect upon adoption. The ASU is currently
effective January 1, 2023, and early adoption is
permitted.
130
3. Acquisition
On May 1, 2018, we completed the acquisition from Liberty Mutual Insurance Company of 100% of the capital stock of Liberty Life, an
operator of a group benefits business (the “Liberty Group Business”) and an individual life and individual and group annuity business
(the “Liberty Life Business”). The acquisition expanded the scale and capabilities of the Group Protection business while further
diversifying the Company’s sources of earnings. Effective September 1, 2019, Liberty Life’s name was changed to Lincoln Life Assurance
Company of Boston (“LLACB”).
In connection with the acquisition and pursuant to the Master Transaction Agreement (“MTA”), dated January 18, 2018, which is filed as
Exhibit 2.1 to this Form 10-K, Liberty Life sold the Liberty Life Business on May 1, 2018, by entering into reinsurance agreements and
related ancillary documents (including administrative services agreements and transition services agreements) with Protective Life
Insurance Company and its wholly-owned subsidiary, Protective Life and Annuity Insurance Company (together with Protective Life
Insurance Company, “Protective”), providing for the reinsurance and administration of the Liberty Life Business.
We recognized $85 million of acquisition-related costs, pre-tax, for the year ended December 31, 2018. These costs were included in
commissions and other expenses on our Consolidated Statements of Comprehensive Income (Loss).
Since the acquisition date of May 1, 2018, the revenues and net income of the business acquired have been included in our Consolidated
Statements of Comprehensive Income (Loss) in the Group Protection segment and were $1.5 billion and $36 million, respectively, for the
period ended December 31, 2018.
4. Variable Interest Entities
Consolidated VIEs
Reinsurance Related Notes
We are the sole equity owner of Lincoln Financial Limited Liability Company I (“LFLLCI”), which we formed in July 2013. The
activities of LFLLCI relate solely to our captive reinsurance subsidiary, the Lincoln Reinsurance Company of Vermont V (“LRCVV”),
and are primarily to acquire, hold and issue notes with LRCVV as well as pay and collect interest on the notes. LFLLCI holds a surplus
note issued by LRCVV that had an outstanding principal balance of $611 million as of December 31, 2020. LFLLCI issued a long-term
note to LRCVV that has a principal balance that moves concurrently with any variability in the face amount of the surplus note LFLLCI
received from LRCVV. We concluded that LFLLCI is a VIE and that LNC is the primary beneficiary as we have the power to direct the
most significant activities affecting the performance of LFLLCI.
Asset information (dollars in millions) for the consolidated VIEs included on our Consolidated Balance Sheets was as follows:
Assets
Total return swap
As of December 31, 2020
As of December 31, 2019
Number
Number
of
Instruments
Notional
Amounts
Carrying
Value
of
Notional
Instruments Amounts
Carrying
Value
1 $
611
$
-
1 $
613
$
-
There were no gains or losses for consolidated VIEs recognized on our Consolidated Statements of Comprehensive Income (Loss) for
the years ended December 31, 2020 and 2019.
Unconsolidated VIEs
Reinsurance Related Notes
Effective September 30, 2014, we entered into a transaction with a non-affiliated VIE whose primary activities are to acquire, hold and
issue notes and loans, pay and collect interest on the notes and loans, and enter into derivative instruments. We issued a long-term senior
note to the non-affiliated VIE in exchange for a corporate bond AFS security of like principal and duration that was assigned to one of
our subsidiaries. The outstanding principal balance of this long-term senior note was $963 million as of December 31, 2020, and it is
variable in nature; moving concurrently with any variability in the face amount of the corporate bond AFS security up to a maximum
amount of $1.1 billion. We have concluded that we are not the primary beneficiary of the non-affiliated VIE because we do not have
power over the activities that most significantly affect its economic performance. In addition, the terms of the senior note provide us
with a set-off right with the corporate bond AFS security we purchased from the VIE; therefore, neither appears on our Consolidated
Balance Sheets. The VIE has entered into a total return swap with an unaffiliated third party that supports any necessary principal
funding of the corporate bond AFS security required by our subsidiaries while the security is outstanding.
131
Effective October 1, 2017, our captive reinsurance subsidiary, the Lincoln Reinsurance Company of Vermont VI, restructured the $275
million, long-term surplus note which was originally issued to a non-affiliated VIE in October 2015 in exchange for two corporate bond
AFS securities of like principal and duration. The activities of the VIE are primarily to acquire, hold and issue notes and loans and to pay
and collect interest on the notes and loans. The outstanding principal balance of the long-term surplus note is variable in nature; moving
concurrently with any variability in the face amount of the corporate bond AFS securities. We have concluded that we are not the
primary beneficiary of the non-affiliated VIE because we do not have power over the activities that most significantly affect its economic
performance. As of December 31, 2020, the principal balance of the long-term surplus note was zero and we do not currently have any
exposure to this VIE.
Effective November 1, 2019, we entered into a transaction with a non-affiliated VIE whose primary activities are to acquire, hold and
issue notes, as well as pay and collect interest on the notes. We issued a long-term senior note to the non-affiliated VIE in exchange for a
corporate bond AFS security of like principal and duration that was assigned to one of our subsidiaries. The outstanding principal
balance of this long-term senior note was $359 million as of December 31, 2020, and it is variable in nature, moving concurrently with
any variability in the face amount of the corporate bond AFS security up to a maximum amount of $500 million. We have concluded that
we are not the primary beneficiary of the non-affiliated VIE due to our lack of power over the activities that most significantly affect its
economic performance as well as the extent of our obligation to absorb its losses. In addition, the terms of the senior note provide us
with a set-off right with the corporate bond AFS security we purchased from the VIE; therefore, neither appears on our Consolidated
Balance Sheets.
Structured Securities
Through our investment activities, we make passive investments in structured securities issued by VIEs for which we are not the
manager. These structured securities include our ABS, RMBS and CMBS. We have not provided financial or other support with respect
to these VIEs other than our original investment. We have determined that we are not the primary beneficiary of these VIEs due to the
relative size of our investment in comparison to the principal amount of the structured securities issued by the VIEs and the level of
credit subordination that reduces our obligation to absorb losses or right to receive benefits. Our maximum exposure to loss on these
structured securities is limited to the amortized cost for these investments. We recognize our variable interest in these VIEs at fair value
on our Consolidated Balance Sheets. For information about these structured securities, see Note 5.
Limited Partnerships and Limited Liability Companies
We invest in certain LPs and limited liability companies (“LLCs”), including qualified affordable housing projects, that we have concluded
are VIEs. We do not hold any substantive kick-out or participation rights in the LPs and LLCs, and we do not receive any performance
fees or decision maker fees from the LPs and LLCs. Based on our analysis of the LPs and LLCs, we are not the primary beneficiary of
the VIEs as we do not have the power to direct the most significant activities of the LPs and LLCs.
The carrying amounts of our investments in the LPs and LLCs are recognized in other investments on our Consolidated Balance Sheets
and were $2.1 billion and $1.9 billion as of December 31, 2020 and 2019, respectively. Included in these carrying amounts are our
investments in qualified affordable housing projects, which were $7 million and $13 million as of December 31, 2020 and 2019,
respectively. We do not have any contingent commitments to provide additional capital funding to these qualified affordable housing
projects. We receive returns from these qualified affordable housing projects in the form of income tax credits and other tax benefits,
which are recognized in federal income tax expense (benefit) on our Consolidated Statements of Comprehensive Income (Loss) and were
$1 million and $2 million for the years ended December 31, 2020 and 2019, respectively.
Our exposure to loss is limited to the capital we invest in the LPs and LLCs, and there have been no indicators of impairment that would
require us to recognize an impairment loss related to the LPs and LLCs as of December 31, 2020.
132
5. Investments
Fixed Maturity AFS Securities
In 2020, we adopted ASU 2016-13, which resulted in a new recognition and measurement of credit losses on most financial assets. See
Note 2 for additional information.
The amortized cost, gross unrealized gains, losses, allowance for credit losses and fair value of fixed maturity AFS securities (in millions)
were as follows:
Fixed maturity AFS securities:
Corporate bonds
U.S. government bonds
State and municipal bonds
Foreign government bonds
RMBS
CMBS
ABS
Hybrid and redeemable preferred securities
Total fixed maturity AFS securities
As of December 31, 2020
Amortized
Cost
Gross Unrealized
Gains
Losses
Allowance
for Credit
Losses
Fair
Value
$
$
86,289
397
5,360
384
2,765
1,390
7,041
548
104,174
$
$
16,662
88
1,561
87
313
115
158
97
19,081
$
$
150
1
-
1
1
-
15
30
198
$
$
12
-
-
-
1
-
-
-
13
$
$
102,789
484
6,921
470
3,076
1,505
7,184
615
123,044
The amortized cost, gross unrealized gains, losses, OTTI and fair value of fixed maturity AFS securities (in millions) were as follows:
Fixed maturity AFS securities:
Corporate bonds
U.S. government bonds
State and municipal bonds
Foreign government bonds
RMBS
CMBS
ABS
Hybrid and redeemable preferred securities
Total fixed maturity AFS securities
Amortized
Cost
As of December 31, 2019
Gross Unrealized
Gains
Losses
OTTI (1)
Fair
Value
$
$
79,417
384
4,778
329
3,042
1,038
4,810
497
94,295
$
$
9,479
51
1,113
64
190
45
62
82
11,086
$
$
184
-
7
-
10
1
18
20
240
$
$
(4) $
-
-
-
(19)
(1)
(35)
-
(59) $
88,716
435
5,884
393
3,241
1,083
4,889
559
105,200
(1) Prior to the adoption of ASU 2016-13, we recognized the OTTI attributed to noncredit factors as a separate component in OCI
referred to as unrealized OTTI on fixed maturity AFS securities. This includes unrealized (gains) and losses on credit-impaired
securities related to changes in the fair value of such securities subsequent to the impairment measurement date.
133
The amortized cost and fair value of fixed maturity AFS securities by contractual maturities (in millions) as of December 31, 2020, were
as follows:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Subtotal
Structured securities (RMBS, CMBS, ABS)
Total fixed maturity AFS securities
Amortized
Cost
Fair
Value
$
$
3,319
15,016
19,105
55,538
92,978
11,196
104,174
$
$
3,344
16,052
21,660
70,223
111,279
11,765
123,044
Actual maturities may differ from contractual maturities because issuers may have the right to call or pre-pay obligations.
The fair value and gross unrealized losses of fixed maturity AFS securities (dollars in millions) for which an allowance for credit losses has
not been recorded, aggregated by investment category and length of time that individual securities have been in a continuous unrealized
loss position, were as follows:
Less Than or Equal
to Twelve Months
Gross
Unrealized
Losses
Fair
Value
As of December 31, 2020
Greater Than
Twelve Months
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses (1)
Fixed maturity AFS securities:
Corporate bonds
U.S. government bonds
Foreign government bonds
RMBS
ABS
Hybrid and redeemable
preferred securities
$
$
3,039
28
57
45
1,527
$
92
1
1
1
9
$
607
-
-
7
358
Total fixed maturity AFS securities
$
112
4,808
$
13
117
$
96
1,068
$
Total number of fixed maturity AFS securities in an unrealized loss position
58
-
-
-
6
17
81
$
3,646 $
28
57
52
1,885
208
5,876 $
$
150
1
1
1
15
30
198
802
(1) We recognized $1 million of gross unrealized losses in OCI for fixed maturity AFS securities for which an allowance for credit losses
has been recorded.
134
The fair value and gross unrealized losses, including the portion of OTTI recognized in OCI, of fixed maturity AFS securities (dollars in
millions), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss
position, were as follows:
Less Than or Equal
to Twelve Months
Gross
Unrealized
Losses and
OTTI
Fair
Value
As of December 31, 2019
Greater Than
Twelve Months
Gross
Unrealized
Losses and
OTTI
Fair
Value
Total
Gross
Unrealized
Losses and
OTTI
Fair
Value
$
Fixed maturity AFS securities:
Corporate bonds
State and municipal bonds
RMBS
CMBS
ABS
Hybrid and redeemable
preferred securities
Total fixed maturity AFS securities
$
$
2,935
333
536
48
1,792
29
5,673
$
46
7
10
1
8
1
73
$
$
1,406
18
15
4
303
102
1,848
$
$
141
-
-
-
10
19
170
$
4,341 $
351
551
52
2,095
131
7,521 $
$
Total number of fixed maturity AFS securities in an unrealized loss position
187
7
10
1
18
20
243
895
The fair value, gross unrealized losses (in millions) and number of fixed maturity AFS securities where the fair value had declined and
remained below amortized cost by greater than 20% were as follows:
Less than six months
Six months or greater, but less than nine months
Nine months or greater, but less than twelve months
Twelve months or greater
Total
$
$
63
2
23
30
118
$
$
23
1
7
11
42
As of December 31, 2020
Gross
Unrealized
Losses
Fair
Value
Number
of
Securities (1)
14
4
14
20
52
(1) We may reflect a security in more than one aging category based on various purchase dates.
The fair value, gross unrealized losses, the portion of OTTI recognized in OCI (in millions) and number of fixed maturity AFS securities
where the fair value had declined and remained below amortized cost by greater than 20% were as follows:
Less than six months
Six months or greater, but less than nine months
Twelve months or greater
Total
As of December 31, 2019
Fair
Value
Gross Unrealized
Losses
OTTI
$
$
15
10
132
157
$
$
5
3
76
84
$
$
Number
of
Securities (1)
7
4
31
42
-
-
-
-
(1) We may reflect a security in more than one aging category based on various purchase dates.
135
Our gross unrealized losses on fixed maturity AFS securities decreased by $45 million for the year ended December 31, 2020. As
discussed further below, we believe the unrealized loss position as of December 31, 2020, did not require an impairment recognized in
earnings as (i) we did not intend to sell these fixed maturity AFS securities; (ii) it is not more likely than not that we will be required to sell
the fixed maturity AFS securities before recovery of their amortized cost basis; and (iii) the difference in the fair value compared to the
amortized cost was due to factors other than credit loss. Based upon this evaluation as of December 31, 2020, management believes we
have the ability to generate adequate amounts of cash from our normal operations (e.g., insurance premiums, fee income and investment
income) to meet cash requirements with a prudent margin of safety without requiring the sale of our impaired securities.
As of December 31, 2020, the unrealized losses associated with our corporate bond, U.S. government bond, state and municipal bond
and foreign government bond securities were attributable primarily to widening credit spreads and rising interest rates since purchase. We
performed a detailed analysis of the financial performance of the underlying issuers and determined that we expected to recover the entire
amortized cost of each impaired security.
Credit ratings express opinions about the credit quality of a security. Securities rated investment grade (those rated BBB- or higher by
Standard & Poor’s Rating Services (“S&P”) or Baa3 or higher by Moody’s Investors Service (“Moody’s”)) are generally considered by the
rating agencies and market participants to be low credit risk. As of December 31, 2020 and 2019, 96% of the fair value of our corporate
bond portfolio was rated investment grade. As of December 31, 2020 and 2019, the portion of our corporate bond portfolio rated below
investment grade had an amortized cost of $4.1 billion and $3.2 billion, respectively, and a fair value of $4.2 billion and $3.3 billion,
respectively. Based upon the analysis discussed above, we believe that as of December 31, 2020 and 2019, we would have recovered the
amortized cost of each corporate bond.
As of December 31, 2020, the unrealized losses associated with our MBS and ABS were attributable primarily to widening credit spreads
and rising interest rates since purchase. We assessed for credit impairment using a cash flow model that incorporates key assumptions
including default rates, severities and prepayment rates. We estimated losses for a security by forecasting the underlying loans in each
transaction. The forecasted loan performance was used to project cash flows to the various tranches in the structure, as applicable. Our
forecasted cash flows also considered, as applicable, independent industry analyst reports and forecasts and other independent market
data. Based upon our assessment of the expected credit losses of the security given the performance of the underlying collateral
compared to our subordination or other credit enhancement, we expected to recover the entire amortized cost of each impaired security.
As of December 31, 2020, the unrealized losses associated with our hybrid and redeemable preferred securities were attributable primarily
to wider credit spreads caused by illiquidity in the market and subordination within the capital structure, as well as credit risk of
underlying issuers. For our hybrid and redeemable preferred securities, we evaluated the financial performance of the underlying issuers
based upon credit performance and investment ratings and determined that we expected to recover the entire amortized cost of each
impaired security.
Credit Loss Impairment on Fixed Maturity AFS Securities
We regularly review our fixed maturity AFS securities for declines in fair value that we determine to be impairment-related, including
those attributable to credit risk factors that may require an allowance for credit losses. See Note 1 for a detailed discussion regarding our
accounting policy relating to the allowance for credit losses on our fixed maturity AFS securities.
136
Changes in the allowance for credit losses on fixed maturity AFS securities (in millions), aggregated by investment category, were as
follows:
Balance as of beginning-of-year
Additions for securities for which credit losses were not
previously recognized
Additions from purchases of PCD debt securities (1)
Additions (reductions) for securities for which credit losses
were previously recognized
Reductions for securities disposed
Reductions for securities charged-off
Balance as of end-of-year (2)
For the Year Ended December 31, 2020
Corporate
Bonds
RMBS
ABS
Total
$
-
$
-
$
-
$
43
-
(1)
(17)
(13)
12
$
$
1
-
-
-
-
1
$
1
-
(1)
-
-
-
$
-
45
-
(2)
(17)
(13)
13
(1) Represents purchased credit-deteriorated (“PCD”) fixed maturity AFS securities.
(2) Accrued interest receivable on fixed maturity AFS securities totaled $1.0 billion as of December 31, 2020, and was excluded from the
estimate of credit losses.
Changes in the amount of credit loss of OTTI recognized in net income (loss) where the portion related to other factors was recognized
in OCI (in millions) on fixed maturity AFS securities were as follows:
Balance as of beginning-of-year
Increases attributable to:
Credit losses on securities for which an
OTTI was not previously recognized
Credit losses on securities for which an
OTTI was previously recognized
Decreases attributable to:
Securities sold, paid down or matured
Balance as of end-of-year
Trading Securities
Trading securities at fair value (in millions) consisted of the following:
Fixed maturity securities:
Corporate bonds
U.S. government bonds
State and municipal bonds
Foreign government bonds
RMBS
CMBS
ABS
Hybrid and redeemable preferred securities
Total trading securities
For the Years Ended
December 31,
2019
2018
$
355
$
378
13
3
5
2
(160)
211
$
(30)
355
$
As of December 31,
2019
2020
$
$
3,107
-
28
92
132
134
966
42
4,501
$
$
2,947
45
17
44
170
163
1,238
49
4,673
The portion of the market adjustment for trading gains and losses recognized in realized gain (loss) that relate to trading securities still
held as of December 31, 2020, 2019 and 2018, was $118 million, $228 million and $(58) million, respectively.
137
Mortgage Loans on Real Estate
The following provides the current and past due composition of our mortgage loans on real estate (in millions):
Current
30 to 59 days past due
60 to 89 days past due
90 or more days past due
Allowance for credit losses
Unamortized premium (discount)
Mark-to-market gains (losses) (1)
As of December 31, 2020
Residential
Total
As of December 31, 2019
Residential
Total
$
Commercial
16,245
$
4
-
-
(187)
(14)
(5)
610
28
8
69
(17)
22
-
720
$
$
$
Commercial
15,620
3
-
-
-
(17)
-
15,606
16,855
32
8
69
(204)
8
(5)
16,763
$
$
$
659
27
10
16
(2)
23
-
733
$
$
16,279
30
10
16
(2)
6
-
16,339
Total carrying value
$
16,043
$
(1) Represents the mark-to-market on certain commercial mortgage loans on real estate for which we have elected the fair value option.
See Note 21 for additional information.
Our commercial mortgage loan portfolio has the largest concentrations in California, which accounted for 24% of commercial mortgage
loans on real estate as of December 31, 2020 and 2019, and Texas, which accounted for 10% and 11% of commercial mortgage loans on
real estate as of December 31, 2020 and 2019, respectively.
Our residential mortgage loan portfolio has the largest concentrations in California, which accounted for 32% and 34% of residential
mortgage loans on real estate as of December 31, 2020 and 2019, respectively, and Florida, which accounted for 18% and 20% of
residential mortgage loans on real estate as of December 31, 2020 and 2019, respectively.
As of December 31, 2020 and 2019, we had 147 and 38 residential mortgage loans, respectively, that were either delinquent or in
foreclosure.
For our commercial mortgage loans, there were four specifically identified impaired loans with an aggregate carrying value of $1 million as
of December 31, 2020. There was one specifically identified impaired loan with a carrying value of less than $1 million as of December
31, 2019.
For our residential mortgage loans, there were 76 specifically identified impaired loans with an aggregate carrying value of $34 million as
of December 31, 2020. There were four specifically identified impaired loans with an aggregate carrying value of $1 million as of
December 31, 2019.
Additional information related to impaired mortgage loans on real estate (in millions) was as follows:
Average carrying value for impaired mortgage loans on real estate
Interest income recognized on impaired mortgage loans on real estate
Interest income collected on impaired mortgage loans on real estate
For the Years Ended December 31,
2018
2019
2020
$
$
21
-
-
$
-
-
-
5
1
1
The amortized cost of mortgage loans on real estate on nonaccrual status (in millions) was as follows:
As of January 1, 2020
As of December 31, 2020
Nonaccrual
with no
Allowance
for Credit
Losses
Nonaccrual
Nonaccrual
with no
Allowance
for Credit
Losses
$
Nonaccrual
-
17
17
$
Commercial mortgage loans on real estate
Residential mortgage loans on real estate
Total
$
$
-
-
-
$
$
- $
71
71
$
-
-
-
138
We use loan-to-value and debt-service coverage ratios as credit quality indicators for our commercial mortgage loans on real estate
(dollars in millions) as follows:
Loan-to-Value Ratio
Less than 65%
65% to 74%
75% to 100%
Total
As of December 31, 2020
As of December 31, 2019
Amortized
Cost
% of
Total
$
$
15,236
952
47
16,235
93.8%
5.9%
0.3%
100.0%
Debt-
Service
Coverage
Ratio
2.36
1.69
1.21
Amortized
Cost
% of
Total
$
$
14,206
1,399
1
15,606
91.0%
9.0%
0.0%
100.0%
Debt-
Service
Coverage
Ratio
2.35
1.87
1.09
The amortized cost of commercial mortgage loans on real estate (in millions) by year of origination and credit quality indicator was as
follows:
Origination Year
2020
2019
2018
2017
2016
2015 and prior
Total
Less
than 65%
$
$
1,504
3,141
2,382
1,786
1,713
4,710
15,236
Debt-
Service
Coverage
Ratio
As of December 31, 2020
Debt-
Service
Coverage
Ratio
65%
to 74%
75%
to 100%
Debt-
Service
Coverage
Ratio
2.86
2.25
2.16
2.34
2.37
2.38
$
$
32
258
186
169
174
133
952
1.52
1.78
1.49
1.73
1.56
1.95
$
$
-
2
15
-
22
8
47
-
1.74
0.71
-
1.58
1.02
Total
$
$
1,536
3,401
2,583
1,955
1,909
4,851
16,235
We use loan performance status as the primary credit quality indicator for our residential mortgage loans on real estate (dollars in millions)
as follows:
Performance Indicator
Performing
Nonperforming
Total
As of December 31, 2020
Amortized
Cost
% of
Total
As of December 31, 2019
Amortized
Cost (1)
% of
Total
$
$
666
71
737
90.4% $
9.6%
100.0%
$
718
17
735
97.7%
2.3%
100.0%
(1) A valuation allowance of $2 million was established on residential mortgage loans on real estate as of December 31, 2019.
The amortized cost of residential mortgage loans on real estate (in millions) by year of origination and credit quality indicator was as
follows:
As of December 31, 2020
Performing Nonperforming Total
Origination Year
2020
2019
2018
2017
2016
2015 and prior
Total
$
$
139
$
176
315
175
-
-
-
$
666
$
8
51
12
-
-
-
$
71
184
366
187
-
-
-
737
Credit Losses on Mortgage Loans on Real Estate
In connection with our recognition of an allowance for credit losses for mortgage loans on real estate, we perform a quantitative analysis
using a probability of default/loss given default/exposure at default approach to estimate expected credit losses in our mortgage loan
portfolio as well as unfunded commitments related to commercial mortgage loans, exclusive of certain mortgage loans held at fair value.
See Note 1 for a detailed discussion regarding our accounting policy relating to the allowance for credit losses on our mortgage loans on
real estate.
Changes in the allowance for credit losses on mortgage loans on real estate (in millions) were as follows:
Balance as of beginning-of-year
Impact of adopting ASU 2016-13
Additions from provision for credit loss expense (1)
Additions from purchases of PCD mortgage loans on real estate
Additions (reductions) for mortgage loans on real estate for which
credit losses were previously recognized (1)
Balance as of end-of-year (2)
For the Year Ended December 31, 2020
Commercial Residential
- $
$
Total
62
178
-
2 $
26
10
-
2
88
188
-
(53)
187 $
(21)
17 $
(74)
204
$
(1) Due to changes in economic projections driven by the impact of the COVID-19 pandemic, the provision for credit loss expense
increased by $114 million for the year ended December 31, 2020. For the year ended December 31, 2020, we recognized $2 million
of credit loss expense related to unfunded commitments for mortgage loans on real estate.
(2) Accrued interest receivable on mortgage loans on real estate totaled $49 million as of December 31, 2020, and was excluded from the
estimate of credit losses.
Changes in the valuation allowance associated with impaired commercial mortgage loans on real estate (in millions) were as follows:
Balance as of beginning-of-year
Additions
Charge-offs, net of recoveries
Balance as of end-of-year
Alternative Investments
For the Years Ended
December 31,
2019
2018
$
$
-
-
-
-
$
$
3
-
(3)
-
As of December 31, 2020 and 2019, alternative investments included investments in 271 and 258 different partnerships, respectively, and
represented approximately 1% of total investments.
140
Net Investment Income
The major categories of net investment income (in millions) on our Consolidated Statements of Comprehensive Income (Loss) were as
follows:
Fixed maturity AFS securities
Trading securities
Equity securities
Mortgage loans on real estate
Real estate
Policy loans
Invested cash
Commercial mortgage loan prepayment
and bond make-whole premiums
Alternative investments
Consent fees
Other investments
Investment income
Investment expense
Net investment income
For the Years Ended December 31,
2018
2019
2020
$
$
4,334
202
3
677
1
125
12
82
197
7
45
5,685
(175)
5,510
$
$
4,281
191
4
629
1
129
40
119
22
8
30
5,454
(231)
5,223
$
$
4,209
84
4
496
1
123
26
79
222
4
23
5,271
(186)
5,085
Impairments on Fixed Maturity AFS Securities
Details underlying credit loss expense incurred as a result of impairments that were recognized in net income (loss) and included in
realized gain (loss) on fixed maturity AFS securities (in millions) were as follows:
Credit Loss Expense Recognized in Net Income (Loss) (1)
Fixed maturity AFS securities:
Corporate bonds
RMBS
ABS
Gross credit loss expense recognized in net income (loss)
Associated amortization of DAC, VOBA, DSI and DFEL
Net credit loss expense recognized in net income (loss)
For the Years Ended December 31,
2018
2019
2020
$
$
(25) $
(1)
-
(26)
1
(25) $
(14) $
(1)
(1)
(16)
1
(15) $
(5)
(1)
(1)
(7)
-
(7)
(1) For the year ended December 31, 2020, we recognized credit loss expense incurred and write-downs taken as a result of impairments
through net income (loss), pursuant to ASU 2016-13. For the years ended December 31, 2019 and 2018, prior to the adoption of
ASU 2016-13, we recognized write-downs taken as a result of OTTI through net income (loss).
During the year ended December 31, 2019, we recorded $15 million of OTTI recognized in OCI. During the year ended December 31,
2018, we recorded no OTTI recognized in OCI.
141
Payables for Collateral on Investments
The carrying value of the payables for collateral on investments included on our Consolidated Balance Sheets and the fair value of the
related investments or collateral (in millions) consisted of the following:
Collateral payable for derivative investments (1)
Securities pledged under securities lending agreements (2)
Investments pledged for Federal Home Loan Bank of
Indianapolis (“FHLBI”) (3)
Total payables for collateral on investments
As of December 31, 2020
Carrying
Value
Fair
Value
As of December 31, 2019
Carrying
Value
Fair
Value
$
$
2,976
116
3,130
6,222
$
$
2,976
112
5,049
8,137
$
$
1,388
114
3,580
5,082
$
$
1,388
110
5,480
6,978
(1) We obtain collateral based upon contractual provisions with our counterparties. These agreements take into consideration the
counterparties’ credit rating as compared to ours, the fair value of the derivative investments and specified thresholds that if
exceeded result in the receipt of cash that is typically invested in cash and invested cash. See Note 6 for additional information.
(2) Our pledged securities under securities lending agreements are included in fixed maturity AFS securities on our Consolidated Balance
Sheets. We generally obtain collateral in an amount equal to 102% and 105% of the fair value of the domestic and foreign securities,
respectively. We value collateral daily and obtain additional collateral when deemed appropriate. The cash received in our securities
lending program is typically invested in cash and invested cash or fixed maturity AFS securities.
(3) Our pledged investments for FHLBI are included in fixed maturity AFS securities and mortgage loans on real estate on our
Consolidated Balance Sheets. The collateral requirements are generally 105% to 115% of the fair value for fixed maturity AFS
securities and 155% to 175% of the fair value for mortgage loans on real estate. The cash received in these transactions is primarily
invested in cash and invested cash or fixed maturity AFS securities.
We have repurchase agreements through which we can obtain liquidity by pledging securities. The collateral requirements are generally
80% to 95% of the fair value of the securities, and our agreements with third parties contain contractual provisions to allow for additional
collateral to be obtained when necessary. The cash received in our repurchase program is typically invested in fixed maturity AFS
securities. As of December 31, 2020 and 2019, we were not participating in any open repurchase agreements.
Increase (decrease) in payables for collateral on investments (in millions) consisted of the following:
Collateral payable for derivative investments
Securities pledged under securities lending agreements
Securities pledged under repurchase agreements
Investments pledged for FHLBI
Total increase (decrease) in payables for collateral on investments
For the Years Ended December 31,
2018
2019
2020
$
$
1,588
2
-
(450)
1,140
$
$
751
26
(150)
(350)
277
$
$
(128)
(134)
(380)
1,030
388
We have elected not to offset our securities lending transactions in our financial statements. The remaining contractual maturities of
securities lending transactions accounted for as secured borrowings (in millions) were as follows:
Securities Lending
Corporate bonds
Foreign government bonds
Total gross secured borrowings
As of December 31, 2020
Overnight
and
Continuous
Up to 30
Days
30 - 90
Days
Greater
Than 90
Days
Total
$
$
114
2
116
$
$
-
-
-
$
$
-
-
-
$
$
-
-
-
$
$
114
2
116
142
Securities Lending
Corporate bonds
Total gross secured borrowings
As of December 31, 2019
Overnight
and
Continuous
Up to 30
Days
30 - 90
Days
Greater
Than 90
Days
Total
$
$
114
114
$
$
-
-
$
$
-
-
$
$
-
-
$
$
114
114
We accept collateral in the form of securities in connection with repurchase agreements. In instances where we are permitted to sell or
re-pledge the securities received, we report the fair value of the collateral received and a related obligation to return the collateral in the
financial statements. In addition, we receive securities in connection with securities borrowing agreements that we are permitted to sell or
re-pledge. As of December 31, 2020, the fair value of all collateral received that we are permitted to sell or re-pledge was $25 million, and
we did not re-pledge any of this collateral to cover initial margin and over-the-counter collateral requirements on certain derivative
investments as of December 31, 2020.
Investment Commitments
As of December 31, 2020, our investment commitments were $2.9 billion, which included $1.4 billion of LPs, $989 million of mortgage
loans on real estate and $508 million of private placement securities.
Concentrations of Financial Instruments
As of December 31, 2020 and 2019, our most significant investments in one issuer were our investments in securities issued by the
Federal Home Loan Mortgage Corporation with a fair value of $1.2 billion and $1.3 billion, respectively, or 1% of total investments, and
our investments in securities issued by the Federal National Mortgage Association with a fair value of $1.0 billion, or 1% of total
investments. These concentrations include fixed maturity AFS, trading and equity securities.
As of December 31, 2020 and 2019, our most significant investments in one industry were our investments in securities in the consumer
non-cyclical industry with a fair value of $20.3 billion and $16.3 billion, respectively, or 13% and 12%, respectively, of total investments,
and our investments in securities in the financial services industry with a fair value of $19.6 billion and $16.4 billion, respectively, or 13%
and 12%, respectively, of total investments. These concentrations include fixed maturity AFS, trading and equity securities.
6. Derivative Instruments
We maintain an overall risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned
fluctuations in earnings that are caused by interest rate risk, foreign currency exchange risk, equity market risk, basis risk and credit risk.
We assess these risks by continually identifying and monitoring changes in our exposures that may adversely affect expected future cash
flows and by evaluating hedging opportunities.
Derivative activities are monitored by various management committees. The committees are responsible for overseeing the
implementation of various hedging strategies that are developed through the analysis of financial simulation models and other internal
and industry sources. The resulting hedging strategies are incorporated into our overall risk management strategies.
See Note 1 for a detailed discussion of the accounting treatment for derivative instruments. See Note 21 for additional disclosures related
to the fair value of our derivative instruments and Note 4 for derivative instruments related to our consolidated VIEs.
Interest Rate Contracts
We use derivative instruments as part of our interest rate risk management strategy. These instruments are economic hedges unless
otherwise noted and include:
Forward-Starting Interest Rate Swaps
We use forward-starting interest rate swaps designated and qualifying as cash flow hedges to hedge our exposure to interest rate
fluctuations related to the forecasted purchases of certain assets and anticipated issuances of fixed-rate securities.
We also use forward-starting interest rate swaps to hedge the interest rate exposure within our life products related to the forecasted
purchases of certain assets.
143
Interest Rate Cap Corridors
We use interest rate cap corridors to provide a level of protection from the effect of rising interest rates for certain life insurance products
and annuity contracts. Interest rate cap corridors involve purchasing an interest rate cap at a specific cap rate and selling an interest rate
cap with a higher cap rate. For each corridor, the amount of quarterly payments, if any, is determined by the rate at which the underlying
index rate resets above the original capped rate. The corridor limits the benefit the purchaser can receive as the related interest rate index
rises above the higher capped rate. There is no additional liability to us other than the purchase price associated with the interest rate cap
corridor.
Interest Rate Futures
We use interest rate futures contracts to hedge the liability exposure on certain options in variable annuity products. These futures
contracts require payment between our counterparty and us on a daily basis for changes in the futures index price.
Interest Rate Swap Agreements
We use interest rate swap agreements to hedge the liability exposure on certain options in variable annuity products.
We also use interest rate swap agreements designated and qualifying as cash flow hedges to hedge the interest rate risk of floating-rate
bond coupon payments by replicating a fixed-rate bond.
Finally, we use interest rate swap agreements designated and qualifying as fair value hedges to hedge against changes in the fair value of
certain fixed-rate long-term debt and fixed maturity securities due to interest rate risks.
Treasury and Reverse Treasury Locks
We use treasury locks designated and qualifying as cash flow hedges to hedge the interest rate exposure related to our issuance of fixed-
rate securities or the anticipated future cash flows of floating-rate fixed maturity securities due to changes in interest rates. In addition, we
use reverse treasury locks designated and qualifying as cash flow hedges to hedge the interest rate exposure related to the anticipated
purchase of fixed-rate securities or the anticipated future cash flows of floating-rate fixed maturity securities due to changes in interest
rates. These derivatives are primarily structured to hedge interest rate risk inherent in the assumptions used to price certain liabilities.
Foreign Currency Contracts
We use derivative instruments as part of our foreign currency risk management strategy. These instruments are economic hedges unless
otherwise noted and include:
Currency Futures
We use currency futures to hedge foreign exchange risk associated with certain options in variable annuity products. Currency futures
exchange one currency for another at a specified date in the future at a specified exchange rate.
Foreign Currency Swaps
We use foreign currency swaps to hedge foreign exchange risk of investments in fixed maturity securities denominated in foreign
currencies. A foreign currency swap is a contractual agreement to exchange one currency for another at specified dates in the future at a
specified exchange rate.
We also use foreign currency swaps designated and qualifying as cash flow hedges to hedge foreign exchange risk of investments in fixed
maturity securities denominated in foreign currencies.
Foreign Currency Forwards
We use foreign currency forwards to hedge foreign exchange risk of investments in fixed maturity securities denominated in foreign
currencies. A foreign currency forward is a contractual agreement to exchange one currency for another at specified dates in the future at
a specified current exchange rate.
144
Equity Market Contracts
We use derivative instruments as part of our equity market risk management strategy that are economic hedges and include:
Call Options Based on the S&P 500® Index and Other Indices
We use call options to hedge the liability exposure on certain options in variable annuity products.
Our indexed annuity and IUL contracts permit the holder to elect an interest rate return or an equity market component, where interest
credited to the contracts is linked to the performance of the S&P 500 Index or other indices. Contract holders may elect to rebalance
index options at renewal dates. At the end of each indexed term, which can be up to six years, we have the opportunity to re-price the
indexed component by establishing participation rates, caps, spreads and specified rates, subject to contractual guarantees. We use call
options that are highly correlated to the portfolio allocation decisions of our contract holders, such that we are economically hedged with
respect to equity returns for the current reset period.
Consumer Price Index Swaps
We use consumer price index swaps to hedge the liability exposure on certain options in fixed annuity products. Consumer price index
swaps are contracts entered into at no cost and whose payoff is the difference between the consumer price index inflation rate and the
fixed-rate determined as of inception.
Equity Futures
We use equity futures contracts to hedge the liability exposure on certain options in variable annuity products. These futures contracts
require payment between our counterparty and us on a daily basis for changes in the futures index price.
Put Options
We use put options to hedge the liability exposure on certain options in variable annuity products. Put options are contracts that require
counterparties to pay us at a specified future date the amount, if any, by which a specified equity index is less than the strike rate stated in
the agreement, applied to a notional amount.
Total Return Swaps
We use total return swaps to hedge the liability exposure on certain options in variable annuity products.
In addition, we use total return swaps to hedge a portion of the liability related to our deferred compensation plans. We receive the total
return on a portfolio of indexes and pay a floating-rate of interest.
Credit Contracts
We use derivative instruments as part of our credit risk management strategy that are economic hedges and include:
Credit Default Swaps – Buying Protection
We use credit default swaps to hedge the liability exposure on certain options in variable annuity products.
We buy credit default swaps to hedge against a drop in bond prices due to credit concerns of certain bond issuers. A credit default swap
allows us to put the bond back to the counterparty at par upon a default event by the bond issuer. A default event is defined as
bankruptcy, failure to pay, obligation acceleration or restructuring.
Credit Default Swaps – Selling Protection
We use credit default swaps to hedge the liability exposure on certain options in variable annuity products.
We sell credit default swaps to offer credit protection to contract holders and investors. The credit default swaps hedge the contract
holders and investors against a drop in bond prices due to credit concerns of certain bond issuers. A credit default swap allows the
investor to put the bond back to us at par upon a default event by the bond issuer. A default event is defined as bankruptcy, failure to
pay, obligation acceleration or restructuring.
145
Embedded Derivatives
We have embedded derivatives that include:
GLB Reserves Embedded Derivatives
Certain features of these guarantees have elements of both insurance benefits accounted for under the Financial Services – Insurance –
Claim Costs and Liabilities for Future Policy Benefits Subtopic of the FASB ASC (“benefit reserves”) and embedded derivatives
accounted for under the Derivatives and Hedging and the Fair Value Measurements and Disclosures Topics of the FASB ASC
(“embedded derivative reserves”). We calculate the value of the benefit reserves and the embedded derivative reserves based on the
specific characteristics of each GLB feature.
We use a hedging strategy designed to mitigate the risk and income statement volatility caused by changes in the equity markets, interest
rates and volatility associated with GLBs offered in our variable annuity products, including products with guaranteed withdrawal benefit
and guaranteed income benefit features. Changes in the value of the hedge contracts due to changes in equity markets, interest rates and
implied volatilities hedge the income statement effect of changes in embedded derivative GLB reserves caused by those same factors. We
rebalance our hedge positions based upon changes in these factors as needed. While we actively manage our hedge positions, these hedge
positions may not be totally effective in offsetting changes in the embedded derivative reserve due to, among other things, differences in
timing between when a market exposure changes and corresponding changes to the hedge positions, extreme swings in the equity markets
and interest rates, market volatility, contract holder behavior, divergence between the performance of the underlying funds and the
hedging indices, divergence between the actual and expected performance of the hedge instruments and our ability to purchase hedging
instruments at prices consistent with our desired risk and return trade-off.
Indexed Annuity and IUL Contracts Embedded Derivatives
Our indexed annuity and IUL contracts permit the holder to elect an interest rate return or an equity market component, where interest
credited to the contracts is linked to the performance of the S&P 500® Index or other indices. Contract holders may elect to rebalance
index options at renewal dates. At the end of each indexed term, which can be up to six years, we have the opportunity to re-price the
indexed component by establishing participation rates, caps, spreads and specified rates, subject to contractual guarantees. We use
options that are highly correlated to the portfolio allocation decisions of our contract holders, such that we are economically hedged with
respect to equity returns for the current reset period.
Reinsurance Related Embedded Derivatives
We have certain Modco and coinsurance with funds withheld reinsurance agreements with embedded derivatives related to the withheld
assets of the related funds. These derivatives are considered total return swaps with contractual returns that are attributable to various
assets and liabilities associated with these reinsurance agreements.
146
We have derivative instruments with off-balance-sheet risks whose notional or contract amounts exceed the related credit exposure.
Outstanding derivative instruments with off-balance-sheet risks (in millions) were as follows:
As of December 31, 2020
Fair Value
Notional
Amounts
As of December 31, 2019
Fair Value
Notional
Amounts
Asset
Liability
Asset
Liability
Qualifying Hedges
Cash flow hedges:
Interest rate contracts (1)
Foreign currency contracts (1)
Total cash flow hedges
Fair value hedges:
Interest rate contracts (1)
Non-Qualifying Hedges
Interest rate contracts (1)
Foreign currency contracts (1)
Equity market contracts (1)
Credit contracts (1)
Embedded derivatives:
GLB direct (2)
GLB ceded (2)
Reinsurance related (3)
Indexed annuity and IUL contracts (2) (4)
Total derivative instruments
$
$
$
2,177
3,089
5,266
1,161
135,434
304
74,610
51
-
-
-
-
216,826
$
87
147
234
-
1,587
1
3,486
-
450
82
-
550
6,390
$
$
563
151
714
272
159
8
1,952
-
-
-
392
3,594
7,091
$
$
$
2,387
2,874
5,261
1,261
112,921
262
43,555
55
-
-
-
-
163,315
$
108
191
299
123
1,082
1
1,442
-
450
60
-
927
4,384
$
$
245
51
296
203
219
3
664
-
-
9
327
2,585
4,306
(1) Reported in derivative investments and other liabilities on our Consolidated Balance Sheets.
(2) Reported in other assets and other liabilities on our Consolidated Balance Sheets.
(3) Reported in reinsurance related embedded derivatives on our Consolidated Balance Sheets.
(4) Reported in future contract benefits on our Consolidated Balance Sheets.
The maturity of the notional amounts of derivative instruments (in millions) was as follows:
Interest rate contracts (1)
Foreign currency contracts (2)
Equity market contracts
Credit contracts
Total derivative instruments
with notional amounts
Remaining Life as of December 31, 2020
Less Than
1 Year
1 - 5
Years
6 - 10
Years
11 - 30
Years
Over 30
Years
$
$
14,052
227
40,716
-
$
$
57,331
411
19,755
51
29,217
1,062
5,831
-
$
36,959
1,693
12
-
1,213
-
8,296
-
$
Total
138,772
3,393
74,610
51
$
54,995
$
77,548
$
36,110
$
38,664
$
9,509
$
216,826
(1) As of December 31, 2020, the latest maturity date for which we were hedging our exposure to the variability in future cash flows for
these instruments was April 20, 2067.
(2) As of December 31, 2020, the latest maturity date for which we were hedging our exposure to the variability in future cash flows for
these instruments was June 17, 2050.
147
The following amounts (in millions) were recorded on the Consolidated Balance Sheets related to cumulative basis adjustments for fair
value hedges:
Amortized Cost of the
Hedged
Assets / (Liabilities)
As of
As of
Cumulative Fair Value
Hedging Adjustment
Included in the
Amortized Cost of the
Hedged
Assets / (Liabilities)
As of
As of
December 31, December 31, December 31, December 31,
2020
2019
2020
2019
$
824 $
(900)
776 $
(1,035)
271 $
(25)
202
(160)
Line Item in the Consolidated Balance Sheets in
which the Hedged Item is Included
Fixed maturity AFS securities, at fair value
Long-term debt (1)
(1) The balance includes $(370) million and $(118) million of unamortized adjustments from discontinued hedges as of December 31,
2020, and 2019, respectively.
The change in our unrealized gain (loss) on derivative instruments within AOCI (in millions) was as follows:
Unrealized Gain (Loss) on Derivative Instruments
Balance as of beginning-of-year
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during the period:
Cumulative effect from adoption of
new accounting standard
Cash flow hedges:
Interest rate contracts
Foreign currency contracts
Change in foreign currency exchange rate adjustment
Change in DAC, VOBA, DSI and DFEL
Income tax benefit (expense)
Less:
Reclassification adjustment for gains (losses)
included in net income (loss):
Cash flow hedges:
Interest rate contracts (1)
Interest rate contracts (2)
Foreign currency contracts (1)
Foreign currency contracts (3)
Associated amortization of DAC, VOBA, DSI and DFEL
Income tax benefit (expense)
Balance as of end-of-year
$
For the Years Ended December 31,
2019
2018
2020
$
(11) $
139
$
(29)
-
(350)
93
(174)
(17)
94
-
(201)
108
(52)
(4)
31
2
(16)
56
6
(1)
(10)
(402) $
3
(5)
35
9
(1)
(9)
(11) $
(6)
100
44
111
(13)
(51)
4
(7)
27
-
(2)
(5)
139
(1) The OCI offset is reported within net investment income on our Consolidated Statements of Comprehensive Income (Loss).
(2) The OCI offset is reported within interest and debt expense on our Consolidated Statements of Comprehensive Income (Loss).
(3) The OCI offset is reported within realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).
148
The effects of qualifying and non-qualifying hedges (in millions) on the Consolidated Statements of Comprehensive Income (Loss) were
as follows:
Gain (Loss) Recognized in Income
For the Years Ended December 31,
Realized
Gain
(Loss)
2020
Net
Interest
Investment and Debt
Expense
Income
Realized
Gain
(Loss)
2019
Net
Interest
Investment and Debt
Expense
Income
$
(513) $
5,510
$
284
$
(610) $
5,223
$
326
Total Line Items in which
the Effects of Fair Value or
Cash Flow Hedges are
Recorded
Qualifying Hedges
Gain or (loss) on fair value
hedging relationships:
Interest rate contracts:
Hedged items
Derivatives designated as
hedging instruments
Gain or (loss) on cash flow
hedging relationships:
Interest rate contracts:
Amount of gain or (loss)
reclassified from AOCI
into income
Foreign currency contracts:
Amount of gain or (loss)
reclassified from AOCI
into income
Non-Qualifying Hedges
Interest rate contracts
Foreign currency contracts
Equity market contracts
Credit contracts
Embedded derivatives:
GLB
Reinsurance related
Indexed annuity and IUL
contracts
-
-
-
6
1,287
(3)
971
(6)
32
(65)
(471)
69
136
(69)
(136)
2
(16)
56
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
9
984
(1)
(137)
-
306
(324)
(742)
63
(63)
(93)
93
3
(5)
35
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
149
The gains (losses) on derivative instruments (in millions) recorded within income (loss) from continuing operations on our Consolidated
Statements of Comprehensive Income (Loss) were as follows:
For the Year
Ended
December 31,
2018
$
Qualifying Hedges
Cash flow hedges:
Interest rate contracts (1)
Interest rate contracts (2)
Foreign currency contracts (3)
Total cash flow hedges
Fair value hedges:
Interest rate contracts (1)
Interest rate contracts (2)
Interest rate contracts (3)
Total fair value hedges
Non-Qualifying Hedges
Interest rate contracts (3)
Foreign currency contracts (3)
Equity market contracts (3)
Equity market contracts (4)
Embedded derivatives:
GLB (3)
Reinsurance related (3)
Indexed annuity and IUL contracts (3)
Total derivative instruments
$
4
(7)
27
24
(14)
13
37
36
(150)
5
444
(18)
(692)
54
81
(216)
(1) Reported in net investment income on our Consolidated Statements of Comprehensive Income (Loss).
(2) Reported in interest and debt expense on our Consolidated Statements of Comprehensive Income (Loss).
(3) Reported in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).
(4) Reported in commissions and other expenses on our Consolidated Statements of Comprehensive Income (Loss).
Gains (losses) recognized as a component of OCI (in millions) on derivative instruments designated and qualifying as cash flow hedges
were as follows:
Offset to net investment income
Offset to realized gain (loss)
Offset to interest and debt expense
For the Year
Ended
December 31,
2018
$
4
27
(7)
As of December 31, 2020, $13 million of the deferred net gains (losses) on derivative instruments in AOCI were expected to be
reclassified to earnings during the next 12 months. This reclassification would be due primarily to interest rate variances related to our
interest rate swap agreements.
For the years ended December 31, 2020 and 2019, there were no material reclassifications to earnings due to hedged firm commitments
no longer deemed probable or due to hedged forecasted transactions that had not occurred by the end of the originally specified time
period.
150
Information related to our credit default swaps for which we are the seller (dollars in millions) was as follows:
As of December 31, 2020
Reason Nature
for
of
Credit
Rating of
Underlying
Number
of
Fair
Maturity
12/20/2025
Entering Recourse Obligation (1) Instruments Value (2)
1
BBB+
1
$
(4)
(3)
Credit Contract Type
Basket credit default swaps
Credit Contract Type
Basket credit default swaps
As of December 31, 2019
Reason Nature
for
of
Credit
Rating of
Underlying
Number
of
Fair
Maturity
12/20/2024
Entering Recourse Obligation (1) Instruments Value (2)
1
BBB+
1
$
(3)
(4)
Maximum
Potential
Payout
$
51
Maximum
Potential
Payout
$
55
(1) Represents average credit ratings based on the midpoint of the applicable ratings among Moody’s, S&P and Fitch Ratings, as scaled
to the corresponding S&P ratings.
(2) Broker quotes are used to determine the market value of our credit default swaps.
(3) Credit default swaps were entered into in order to hedge the liability exposure on certain variable annuity products.
(4) Sellers do not have the right to demand indemnification or compensation from third parties in case of a loss (payment) on the
contract.
Details underlying the associated collateral of our credit default swaps for which we are the seller if credit risk-related contingent features
were triggered (in millions) were as follows:
Maximum potential payout
Less: Counterparty thresholds
Maximum collateral potentially required to post
As of
As of
December 31, December 31,
2020
2019
$
$
51 $
-
51 $
55
-
55
Certain of our credit default swap agreements contain contractual provisions that allow for the netting of collateral with our
counterparties related to all of our collateralized financing transactions that we have outstanding. If these netting agreements were not in
place, our counterparties would have been required to post $1 million of collateral as of December 31, 2020.
Credit Risk
We are exposed to credit losses in the event of non-performance by our counterparties on various derivative contracts and reflect
assumptions regarding the credit or NPR. The NPR is based upon assumptions for each counterparty’s credit spread over the estimated
weighted average life of the counterparty exposure, less collateral held. As of December 31, 2020, the NPR adjustment was zero. The
credit risk associated with such agreements is minimized by entering into agreements with financial institutions with long-standing,
superior performance records. Additionally, we maintain a policy of requiring derivative contracts to be governed by an International
Swaps and Derivatives Association (“ISDA”) Master Agreement. We are required to maintain minimum ratings as a matter of routine
practice in negotiating ISDA agreements. Under some ISDA agreements, our insurance subsidiaries have agreed to maintain certain
financial strength or claims-paying ratings. A downgrade below these levels could result in termination of derivative contracts, at which
time any amounts payable by us would be dependent on the market value of the underlying derivative contracts. In certain transactions,
we and the counterparty have entered into a credit support annex requiring either party to post collateral when net exposures exceed pre-
determined thresholds. These thresholds vary by counterparty and credit rating. The amount of such exposure is essentially the net
replacement cost or market value less collateral held for such agreements with each counterparty if the net market value is in our favor.
We did not have any exposure as of December 31, 2020 or 2019.
151
The amounts recognized (in millions) by S&P credit rating of counterparty, for which we had the right to reclaim cash collateral or were
obligated to return cash collateral, were as follows:
As of December 31, 2020
Collateral
Posted by
Counter-
Party
(Held by
LNC)
As of December 31, 2019
Collateral Collateral Collateral
Posted by
Posted by Posted by
LNC
Counter-
(Held by
Party
Counter-
(Held by
Party)
LNC)
LNC
(Held by
Counter-
Party)
$
$
1,233
1,119
53
571
2,976
$
$
(371) $
(445)
-
(245)
(1,061) $
441
555
36
355
1,387
$
$
(167)
(339)
-
(51)
(557)
S&P
Credit
Rating of
Counterparty
AA-
A+
A
A-
Balance Sheet Offsetting
Information related to the effects of offsetting on our Consolidated Balance Sheets (in millions) was as follows:
As of December 31, 2020
Embedded
Derivative Derivative
Instruments Instruments Total
Financial Assets
Gross amount of recognized assets
Gross amounts offset
Net amount of assets
Gross amounts not offset:
Cash collateral
Non-cash collateral
Net amount
Financial Liabilities
Gross amount of recognized liabilities
Gross amounts offset
Net amount of liabilities
Gross amounts not offset:
Cash collateral
Non-cash collateral
Net amount
$
$
$
$
4,978 $
(1,869)
3,109
(2,976)
(56)
77 $
1,456 $
(330)
1,126
(1,061)
-
65 $
1,082
-
1,082
-
-
1,082
3,986
-
3,986
-
-
3,986
$
$
$
$
6,060
(1,869)
4,191
(2,976)
(56)
1,159
5,442
(330)
5,112
(1,061)
-
4,051
152
Financial Assets
Gross amount of recognized assets
Gross amounts offset
Net amount of assets
Gross amounts not offset:
Cash collateral
Non-cash collateral
Net amount
Financial Liabilities
Gross amount of recognized liabilities
Gross amounts offset
Net amount of liabilities
Gross amounts not offset:
Cash collateral
Non-cash collateral
Net amount
7. Federal Income Taxes
As of December 31, 2019
Embedded
Derivative Derivative
Instruments Instruments Total
$
$
$
$
2,619 $
(708)
1,911
(1,387)
(242)
282 $
1,005 $
(138)
867
(557)
-
310 $
1,437
-
1,437
-
-
1,437
2,921
-
2,921
-
-
2,921
$
$
$
$
4,056
(708)
3,348
(1,387)
(242)
1,719
3,926
(138)
3,788
(557)
-
3,231
The federal income tax expense (benefit) on continuing operations (in millions) was as follows:
Current
Deferred
Federal income tax expense (benefit)
For the Years Ended December 31,
2018
2019
2020
$
$
(61) $
(15)
(76) $
181
(148)
33
$
$
91
153
244
A reconciliation of the effective tax rate differences (in millions) was as follows:
For the Years Ended December 31,
2018
2019
2020
Income (loss) before taxes
Federal statutory rate
Federal income tax expense (benefit) at federal statutory rate
Effect of:
$
Tax-preferred investment income (1)
Tax credits
Excess tax benefits from stock-based compensation
Tax impact associated with the Tax Cuts and Jobs Act (2)
Other items
Federal income tax expense (benefit)
$
Effective tax rate
$
423
21%
89
(98)
(39)
3
(37)
6
(76) $
-18%
$
919
21%
193
1,885
21%
396
(99)
(40)
(9)
(17)
5
33
4%
$
(87)
(39)
(5)
(19)
(2)
244
13%
(1) Relates primarily to separate account dividends eligible for the dividends-received deduction.
(2)
In 2018, we recognized a $27 million tax benefit from the impact of the reduced federal statutory rate under the Tax Cuts and Jobs
Act (the “Tax Act”) on our adoption of an Internal Revenue Service pronouncement related to variable annuity contracts. In 2019,
we recognized a $17 million tax benefit from the impact of the reduced corporate tax rate under the Tax Act on our election to
revalue policyholder tax reserves. In 2020, we recognized a $37 million tax benefit attributable to the carry back of a 2020 net
operating loss under the provisions of the Coronavirus Aid, Relief, and Economic Security Act, which provides for a five-year
carryback period.
153
The federal income tax asset (liability) (in millions) was as follows:
Current
Deferred
Total federal income tax asset (liability)
As of December 31,
2019
2020
$
$
$
147
(3,256)
(3,109) $
60
(2,443)
(2,383)
Significant components of our deferred tax assets and liabilities (in millions) were as follows:
Deferred Tax Assets
Future contract benefits and other contract holder funds
Reinsurance related embedded derivative asset
Compensation and benefit plans
Intangibles
Tax credits
Net operating losses
Other
Total deferred tax assets
Deferred Tax Liabilities
DAC
VOBA
Net unrealized gain on fixed maturity AFS securities
Net unrealized gain on trading securities
Investment activity
Other
Total deferred tax liabilities
Net deferred tax asset (liability)
$
$
$
$
$
As of December 31,
2019
2020
2,377
82
212
27
19
218
36
2,971
$
$
$
382
167
4,001
90
1,249
338
$
6,227
(3,256) $
643
69
190
26
-
216
14
1,158
813
194
2,308
72
109
105
3,601
(2,443)
As of December 31, 2020, we have $1.0 billion of net operating losses to carry forward to future years. The net operating losses arose in
tax year 2018, and under the Tax Act changes, have an unlimited carryforward period. As a result, management believes that it is more
likely than not that the deferred tax asset associated with the loss carryforwards will be realized. Inclusive of the tax attribute for the net
operating losses, although realization is not assured, management believes that it is more likely than not that we will realize the benefits of
all of our deferred tax assets, and, accordingly, no valuation allowance has been recorded.
We are subject to examination by U.S. federal, state, local and non-U.S. income authorities. With few exceptions for limited scope review,
we are no longer subject to U.S. federal examinations for years before 2017. In the first quarter of 2021 the Internal Revenue Service
commenced an examination of our refund claims for 2014 and 2015 that is anticipated to be completed by the end of 2021. We are
currently under examination by several state and local taxing jurisdictions; however, we do not expect these examinations will materially
impact us.
A reconciliation of the unrecognized tax benefits (in millions) was as follows:
Balance as of beginning-of-year
Increases for prior year tax positions
Increases for current year tax positions
Balance as of end-of-year
For the Years Ended
December 31,
2020
2019
$
$
48
-
3
51
$
$
16
32
-
48
As of December 31, 2020 and 2019, $51 million and $48 million, respectively, of our unrecognized tax benefits presented above, if
recognized, would have affected our federal income tax expense (benefit) and our effective tax rate. We anticipate that it is reasonably
possible that unrecognized tax benefits will decrease by $10 million by the end of 2021.
154
We recognize interest and penalties accrued, if any, related to unrecognized tax benefits as a component of tax expense. For the years
ended December 31, 2020, 2019 and 2018, we recognized no interest and penalty expense (benefit), and there was no accrued interest and
penalty expense related to the unrecognized tax benefits as of December 31, 2020 and 2019.
8. DAC, VOBA, DSI and DFEL
Changes in DAC (in millions) were as follows:
Balance as of beginning-of-year
Cumulative effect from adoption of new accounting
standard
Business acquired (sold) through reinsurance
Deferrals
Amortization, net of interest:
Amortization, excluding unlocking, net of interest
Unlocking
Adjustment related to realized (gains) losses
Adjustment related to unrealized (gains) losses
Balance as of end-of-year
Changes in VOBA (in millions) were as follows:
Balance as of beginning-of-year
Business acquired (sold) through reinsurance
Business acquired
Deferrals
Amortization:
Amortization, excluding unlocking
Unlocking
Accretion of interest (1)
Adjustment related to realized (gains) losses
Adjustment related to unrealized (gains) losses
Balance as of end-of-year
For the Years Ended December 31,
2018
2019
2020
$
7,352
$
9,448
$
7,887
5
(10)
1,446
(796)
(231)
(19)
(2,182)
5,565
$
-
-
1,902
(950)
(489)
54
(2,613)
7,352
$
-
(246)
1,600
(951)
(115)
(47)
1,320
9,448
For the Years Ended December 31,
2018
2019
2020
342
-
-
3
(105)
(205)
44
-
168
247
$
$
816
-
-
6
(114)
140
45
(1)
(550)
342
$
$
516
(11)
30
7
(127)
(60)
48
(2)
415
816
$
$
$
(1) The interest accrual rates utilized to calculate the accretion of interest ranged from 4.2% to 6.9%.
Estimated future amortization of VOBA, net of interest (in millions), as of December 31, 2020, was as follows:
2021
2022
2023
2024
2025
$
67
65
64
59
52
155
Changes in DSI (in millions) were as follows:
Balance as of beginning-of-year
Business acquired (sold) through reinsurance
Deferrals
Amortization, net of interest:
Amortization, excluding unlocking, net of interest
Unlocking
Adjustment related to realized (gains) losses
Adjustment related to unrealized (gains) losses
Balance as of end-of-year
Changes in DFEL (in millions) were as follows:
Balance as of beginning-of-year
Cumulative effect from adoption of new accounting
standard
Deferrals
Amortization, net of interest:
Amortization, excluding unlocking, net of interest
Unlocking
Adjustment related to realized (gains) losses
Adjustment related to unrealized (gains) losses
Balance as of end-of-year
$
9. Reinsurance
For the Years Ended December 31,
2018
2019
2020
$
$
234
-
7
(20)
(1)
(1)
(6)
213
$
$
248
-
26
(29)
(3)
2
(10)
234
$
$
238
(21)
47
(28)
-
(1)
13
248
For the Years Ended December 31,
2018
2019
2020
$
650
$
2,769
$
1,445
4
1,003
(538)
(275)
25
(468)
401
$
-
1,095
(544)
(426)
-
(2,244)
650
$
-
875
(482)
(53)
(20)
1,004
2,769
The following summarizes reinsurance amounts (in millions) recorded on our Consolidated Statements of Comprehensive Income (Loss),
excluding amounts attributable to the indemnity reinsurance agreements with Protective and Swiss Re:
Direct insurance premiums and fee income
Reinsurance assumed
Reinsurance ceded
Total insurance premiums and fee income
Direct insurance benefits
Reinsurance recoveries netted against benefits
Total benefits
For the Years Ended December 31,
2018
2019
2020
$
$
$
$
13,304
95
(1,656)
11,743
10,630
(1,953)
8,677
$
$
$
$
13,498
91
(1,579)
12,010
9,574
(1,694)
7,880
$
$
$
$
12,041
89
(1,543)
10,587
8,592
(1,806)
6,786
Our insurance companies cede insurance to other companies. The portion of our life insurance and annuity risks exceeding each of our
insurance companies’ retention limit is reinsured with other insurers. We seek reinsurance coverage to limit our exposure to mortality
losses and to enhance our capital management. Reinsurance does not discharge us from our primary obligation to contract holders for
losses incurred under the policies we issue. We evaluate each reinsurance agreement to determine whether the agreement provides
indemnification against loss or liability.
As of December 31, 2020, the policy for our reinsurance program was to retain up to $20 million on a single insured life. As the amount
we retain varies by policy, we reinsured 17% of the mortality risk on newly issued life insurance contracts in 2020.
We focus on obtaining reinsurance from a diverse group of reinsurers, and we monitor concentration as well as financial strength ratings
of our reinsurers. Our amounts recoverable from reinsurers represent receivables from and reserves ceded to reinsurers. The amounts
recoverable from reinsurers were $16.5 billion and $17.1 billion as of December 31, 2020 and 2019, respectively.
156
Protective represents our largest reinsurance exposure following the sale of the Liberty Life Business as discussed in Note 3, which
resulted in amounts recoverable from Protective of $11.3 billion and $11.8 billion as of December 31, 2020 and 2019, respectively.
Protective has funded trusts, of which the balance in the trusts changes as a result of ongoing reinsurance activity, to support the business
ceded, which totaled $15.2 billion and $14.7 billion as of December 31, 2020 and 2019, respectively.
Our reinsurance operations were acquired by Swiss Re in December 2001 through a series of indemnity reinsurance transactions. As
such, Swiss Re reinsured certain liabilities and obligations under the indemnity reinsurance agreements. As we are not relieved of our
liability to the ceding companies for this business, the liabilities and obligations associated with the reinsured policies remain on our
Consolidated Balance Sheets with a corresponding reinsurance receivable from Swiss Re, which totaled $1.2 billion and $1.3 billion as of
December 31, 2020 and 2019, respectively. Swiss Re has funded a trust, with a balance of $1.2 billion as of December 31, 2020, to
support this business. In addition to various remedies that we would have in the event of a default by Swiss Re, we continue to hold
assets in support of certain of the transferred reserves. These assets consist of those reported as trading securities and certain mortgage
loans. Our liabilities for funds withheld and embedded derivatives as of December 31, 2020, included $151 million and $35 million,
respectively, related to the business sold to Swiss Re.
Adoption of ASU 2016-13
In 2020, we adopted ASU 2016-13, which resulted in a new recognition and measurement of credit losses on most financial assets. We
established a credit loss allowance of $192 million as of January 1, 2020, for reinsurance-related assets for the risk of credit losses inherent
in reinsurance transactions. During 2020, there have not been any changes to the credit loss allowance that would be material to our
financial statements. See Note 2 for additional information. See Note 1 for a detailed discussion regarding our accounting policy relating
to the allowance for credit losses on our reinsurance-related assets.
Modco Agreements
Some portions of our annuity business have been reinsured on a Modco basis with other companies. In a Modco agreement, we as the
ceding company retain the reserves, as well as the assets backing those reserves, and the reinsurer shares proportionally in all financial
terms of the reinsured policies based on their respective percentage of the risk. Effective October 1, 2018, we entered into one such
Modco agreement with Athene to reinsure fixed and fixed indexed annuity products, which resulted in a deposit asset of $5.8 billion and
$6.6 billion as of December 31, 2020 and 2019, respectively, within other assets on our Consolidated Balance Sheets. We held assets in
support of reserves associated with the transaction in a Modco investment portfolio, which consisted of the following (in millions):
Fixed maturity AFS securities
Trading securities
Equity securities
Mortgage loans on real estate
Derivative investments
Other investments
Cash and invested cash
Accrued investment income
Other assets
Total
As of
As of
December 31, December 31,
2020
2019
$
$
1,531 $
3,357
17
832
103
167
92
42
3
6,144 $
2,308
3,534
14
698
130
94
62
57
-
6,897
In addition, the portfolio was supported by $185 million of over-collateralization and a $170 million letter of credit as of December 31,
2020. As described in Note 1, we recorded a deferred gain on business sold through reinsurance related to the transaction with Athene
and amortized $29 million, $30 million and $8 million of the gain during 2020, 2019 and 2018, respectively.
See “Realized Gain (Loss)” in Note 16 for information on reinsurance related embedded derivatives.
157
10. Goodwill and Specifically Identifiable Intangible Assets
The changes in the carrying amount of goodwill (in millions) by reportable segment were as follows:
Annuities
Retirement Plan Services
Life Insurance
Group Protection
Total goodwill
For the Year Ended December 31, 2020
Gross
Goodwill
as of
Accumulated
Impairment
Acquisition
as of
Beginning- Beginning- Accounting
of-Year
of-Year
Adjustments Impairment
Net
Goodwill
as of End-
of-Year
$
$
1,040 $
20
2,188
684
3,932 $
(600) $
-
(1,554)
-
(2,154) $
- $
-
-
-
- $
- $
-
-
-
- $
440
20
634
684
1,778
For the Year Ended December 31, 2019
Gross
Goodwill
Accumulated
Impairment
Acquisition
as of
Beginning- Beginning- Accounting
as of
of-Year
of-Year
Adjustments Impairment
Net
Goodwill
as of End-
of-Year
Annuities
Retirement Plan Services
Life Insurance
Group Protection
Total goodwill
$
$
1,040 $
20
2,188
688
3,936 $
(600) $
-
(1,554)
-
(2,154) $
- $
-
-
(4)
(4) $
- $
-
-
-
- $
440
20
634
684
1,778
The fair values of our reporting units (Level 3 fair value estimates) are comprised of the value of in-force (i.e., existing) business and the
value of new business. Specifically, new business is representative of cash flows and profitability associated with policies or contracts we
expect to issue in the future, reflecting our forecasts of future sales volume and product mix over a 10-year period. To determine the
values of in-force and new business, we use a discounted cash flows technique that applies a discount rate reflecting the market expected,
weighted-average rate of return adjusted for the risk factors associated with operations to the projected future cash flows for each
reporting unit.
As of October 1, 2020 and 2019, we performed our annual quantitative goodwill impairment test for our reporting units, and, as of each
such date, the fair value was in excess of each reporting unit’s carrying value for Annuities, Retirement Plan Services, Life Insurance and
Group Protection.
The gross carrying amounts and accumulated amortization (in millions) for each major specifically identifiable intangible asset class by
reportable segment were as follows:
As of December 31, 2020 As of December 31, 2019
Gross
Carrying
Amount
Gross
Accumulated Carrying
Amortization Amount
Accumulated
Amortization
Retirement Plan Services:
Mutual fund contract rights (1)
$
5 $
- $
5 $
-
Life Insurance:
Sales force
Group Protection:
VOCRA
VODA
Insurance licenses (1)
Total
100
59
100
55
576
31
3
715 $
55
5
-
119 $
576
31
3
715 $
25
2
-
82
$
(1) No amortization recorded as the intangible asset has indefinite life.
158
Future estimated amortization of specifically identifiable intangible assets (in millions) as of December 31, 2020, was as follows:
2021
2022
2023
2024
2025
Thereafter
$
37
37
37
37
37
403
11. Guaranteed Benefit Features
Information on the GDB features outstanding (dollars in millions) was as follows:
Return of Net Deposits
Total account value
Net amount at risk (2)
Average attained age of contract holders
Minimum Return
Total account value
Net amount at risk (2)
Average attained age of contract holders
Guaranteed minimum return
Anniversary Contract Value
Total account value
Net amount at risk (2)
Average attained age of contract holders
As of December 31,
2019 (1)
2020 (1)
$
109,856 $
72
66 years
101,601
71
65 years
$
$
100 $
12
78 years
5%
92
13
77 years
5%
27,650 $
390
72 years
25,763
384
71 years
(1) Our variable contracts with guarantees may offer more than one type of guarantee in each contract; therefore, the amounts listed are
not mutually exclusive.
(2) Represents the amount of death benefit in excess of the account balance that is subject to market fluctuations.
The determination of GDB liabilities is based on models that involve a range of scenarios and assumptions, including those regarding
expected market rates of return and volatility, contract surrender rates and mortality experience. The following summarizes the balances
of and changes in the liabilities for GDBs (in millions), which were recorded in future contract benefits on our Consolidated Balance
Sheets:
Balance as of beginning-of-year
Changes in reserves
Benefits paid
Balance as of end-of-year
For the Years Ended December 31,
2018
2019
2020
$
$
117
30
(26)
121
$
$
161
(24)
(20)
117
$
$
100
77
(16 )
161
159
Variable Annuity Contracts
Account balances of variable annuity contracts, including those with guarantees, (in millions) were invested in separate account
investment options as follows:
Asset Type
Domestic equity
International equity
Fixed income
Total
As of December 31,
2019
2020
$
$
70,362 $
20,855
43,521
134,738 $
64,093
19,852
41,405
125,350
Percent of total variable annuity separate account values
98%
98%
Secondary Guarantee Products
Future contract benefits and other contract holder funds include reserves for our secondary guarantee products sold through our Life
Insurance segment. Reserves on UL and VUL products with secondary guarantees represented 38% and 37% of total life insurance in-
force reserves as of December 31, 2020 and 2019, respectively. UL and VUL products with secondary guarantees represented 31%, 27%
and 36% of total life insurance sales for the years ended December 31, 2020, 2019 and 2018, respectively.
12. Liability for Unpaid Claims
The liability for unpaid claims consists primarily of long-term disability claims and is reported in future contract benefits on our
Consolidated Balance Sheets. Changes in the liability for unpaid claims (in millions) were as follows:
Balance as of beginning-of-year
Reinsurance recoverable
Net balance as of beginning-of-year
Business acquired (1)
Incurred related to:
Current year
Prior years:
Interest
All other incurred (2)
Total incurred
Paid related to:
Current year
Prior years
Total paid
Net balance as of end-of-year
Reinsurance recoverable
Balance as of end-of-year
For the Years Ended December 31,
2018
2019
2020
$
$
5,552
152
5,400
-
$
5,335
143
5,192
-
2,222
57
2,165
2,842
3,517
3,193
2,531
148
(209)
3,456
(1,707)
(1,366)
(3,073)
5,783
151
5,934
$
151
(308)
3,036
(1,518)
(1,310)
(2,828)
5,400
152
5,552
$
120
(208)
2,443
(1,197)
(1,061)
(2,258)
5,192
143
5,335
$
(1) Represents acquired group life and disability reserves, net, as of May 1, 2018. See Note 3 for additional information.
(2) All other incurred is primarily impacted by the level of claim resolutions in the period compared to that which is expected by the
reserve assumption. A negative number implies a favorable result where claim resolutions were more favorable than assumed. Our
claim resolution rate assumption used in determining reserves is our expectation of the resolution rate we will experience over the
long-term life of the block of claims. It will vary from actual experience in any one period, both favorably and unfavorably.
The interest rate assumption used for discounting long-term claim reserves is an important part of the reserving process due to the long
benefit period for these claims. Interest accrued on prior years’ reserves has been calculated on the opening reserve balance less one-half
of the prior years’ incurred claim payments at our average reserve discount rate.
160
Long-term disability benefits may extend for many years, and claim development schedules do not reflect these longer benefit periods.
As a result, we use longer term retrospective runoff studies, experience studies and prospective studies to develop our liability estimates.
Long-term disability reserves are discounted using rates ranging from 2.75% to 5%. The discount rates vary by year of claim incurral.
13. Short-Term and Long-Term Debt
Details underlying short-term and long-term debt (in millions) were as follows:
$
$
$
Short-Term Debt
Current maturities of long-term debt
Total short-term debt
Long-Term Debt, Excluding Current Portion
Senior notes:
4.85% notes, due 2021 (1)
4.20% notes, due 2022 (1)
4.00% notes, due 2023 (1)
3.35% notes, due 2025 (1)
3.625% notes, due 2026 (1)
3.80% notes, due 2028 (1)
3.05% notes, due 2030 (1)
3.40% notes, due 2031 (1)
6.15% notes, due 2036 (1)
6.30% notes, due 2037 (1)(2)
7.00% notes, due 2040 (1)(2)
4.35% notes, due 2048 (1)
4.375% notes, due 2050 (1)
Total senior notes
Term loans:
LIBOR + 87.5 bps loan, due 2024
Total term loans
Capital securities:
LIBOR + 236 bps, due 2066 (3)
LIBOR + 204 bps, due 2067 (3)
Total capital securities
Unamortized premiums (discounts)
Unamortized debt issuance costs
Unamortized adjustments from discontinued hedges
Fair value hedge on interest rate swap agreements
Total long-term debt
$
As of December 31,
2019
2020
-
-
$
$
300
300
-
300
500
300
400
500
500
500
243
375
500
450
300
4,868
250
250
722
491
1,213
(6)
(38)
370
25
6,682
$
$
296
300
500
300
400
500
500
-
243
375
500
450
-
4,364
250
250
722
491
1,213
(4)
(34)
118
160
6,067
(1) We have the option to repurchase the outstanding notes by paying the greater of 100% of the principal amount of the notes to be
redeemed or the make-whole amount (as defined in each note agreement), plus in each case any accrued and unpaid interest as of the
date of redemption.
(2) Categorized as operating debt for leverage ratio calculations as the proceeds were primarily used as a long-term structured solution to
reduce the strain on increasing statutory reserves associated with secondary guarantee UL and term policies.
(3) To hedge the variability in rates, we purchased interest rate swaps to lock in a fixed rate of approximately 5% over the remaining
terms of the capital securities.
161
Details underlying the recognition of a gain (loss) on the early extinguishment of debt (in millions) reported within interest expense on
our Consolidated Statements of Comprehensive Income (Loss) were as follows:
Principal balance outstanding prior to payoff (1)
Unamortized debt issuance costs and discounts
Amount paid to retire debt
Gain (loss) on early extinguishment of debt, pre-tax
For the Years Ended December 31,
2018
2019
2020
$
$
$
796
(2)
(809)
(15) $
$
109
(1)
(150)
(42) $
287
(1)
(309)
(23)
(1) During the second quarter of 2020, we redeemed our $296 million outstanding principal amount of 4.85% senior notes due 2021 and
repaid our $500 million LIBOR + 150 bps term loan due 2022 that was issued in the first quarter of 2020. During 2019, we
repurchased $105 million of our 6.15% senior notes due 2036 and $4 million of our 4.85% senior notes due 2021. During 2018, we
repurchased $287 million of our 8.75% senior notes due 2019.
Future principal payments due on long-term debt (in millions) as of December 31, 2020, were as follows:
2021
2022
2023
2024
2025
Thereafter
Total
$
$
-
300
500
250
300
4,981
6,331
For our long-term debt outstanding, unsecured senior debt, which consists of senior notes and term loans, ranks highest in priority,
followed by capital securities.
Facility Agreement for Senior Notes Issuance
During August 2020, LNC entered into a 10-year facility agreement (the “facility agreement”) with a Delaware trust in connection with
the sale by the trust of $500 million of pre-capitalized trust securities in a private placement pursuant to Rule 144A of the Securities Act
of 1933, as amended. The trust invested the proceeds from the sale of the trust securities in a portfolio of principal and interest strips of
U.S. Treasury securities. The facility agreement provides LNC the right to issue and sell to the trust, on one or more occasions, up to an
aggregate principal amount outstanding at any one time of $500 million of LNC’s 2.330% senior notes due August 15, 2030 (“2.330%
senior notes”) in exchange for a corresponding amount of U.S. Treasury securities held by the trust. The 2.330% senior notes will not be
issued unless and until the issuance right is exercised. In return, LNC pays a semi-annual facility fee to the trust at a rate of 1.691% per
year (applied to the unexercised portion of the maximum amount of senior notes that LNC could issue and sell to the trust), and LNC
reimburses the trust for its expenses.
The issuance right will be exercised automatically in full upon our failure to make certain payments to the trust, such as paying the facility
fee or reimbursing the trust for its expenses, if the failure to pay is not cured within 30 days, or upon certain bankruptcy events involving
LNC. We are also required to exercise the issuance right in full if our consolidated stockholders’ equity (excluding AOCI) falls below
$2.75 billion, subject to adjustment from time to time in certain cases, and upon certain other events described in the facility agreement.
Prior to any involuntary exercise of the issuance right, LNC has the right to repurchase any or all of the 2.330% senior notes then held by
the trust in exchange for U.S. Treasury securities. LNC may redeem any outstanding 2.330% senior notes, in whole or in part, prior to
their maturity. Prior to May 15, 2030, the redemption price will equal the greater of par or a make-whole redemption price. After May
15, 2030, any outstanding 2.330% senior notes may be redeemed at par.
162
Credit Facilities
Credit facilities, which allow for borrowing or issuances of letters of credit (“LOCs”), (in millions) were as follows:
Credit Facilities
Five-year revolving credit facility
LOC facility (1)
LOC facility (1)
Total
As of December 31, 2020
Expiration
Date
Maximum
Available
LOCs
Issued
July 31, 2024
August 26, 2031
October 1, 2031
$
$
2,250
990
954
4,194
$
$
219
943
954
2,116
(1) Our wholly-owned subsidiaries entered into irrevocable LOC facility agreements with third-party lenders supporting inter-company
reinsurance agreements.
On July 31, 2019, we refinanced our existing credit facility with a syndicate of banks. This facility (the “credit facility”) allows for the
issuance of LOCs and borrowing of up to $2.25 billion. The credit facility is unsecured and has a commitment termination date of July
31, 2024. The LOCs under the credit facility are used primarily to satisfy reserve credit requirements of (i) our domestic insurance
companies for which reserve credit is provided by our affiliated reinsurance companies and (ii) certain ceding companies of our legacy
reinsurance business.
The credit agreement governing the credit facility contains or includes:
• Customary terms and conditions, including covenants restricting our ability to incur liens, merge or consolidate with another entity
where we are not the surviving entity and dispose of all or substantially all of our assets;
• Financial covenants including maintenance of a minimum consolidated net worth (as defined in the credit agreement) equal to the
sum of $10.6 billion plus 50% of the aggregate net proceeds of equity issuances received by us as set forth in the credit agreement;
and a debt-to-capital ratio as defined in accordance with the credit facility not to exceed 0.35 to 1.00;
• A cap on secured non-operating indebtedness and non-operating indebtedness of our subsidiaries equal to 7.5% of total
capitalization, as defined in accordance with the credit agreement; and
• Customary events of default, subject to certain materiality thresholds and grace periods for certain of those events of default.
Upon an event of default, the credit agreement provides that, among other things, the commitments may be terminated and the loans
then outstanding may be declared due and payable. As of December 31, 2020, we were in compliance with all such covenants.
Our LOC facility agreements each contain customary terms and conditions, including early termination fees, covenants restricting the
ability of the subsidiaries to incur liens, merge or consolidate with another entity and dispose of all or substantially all of their assets.
Upon an event of early termination, the agreements require the immediate payment of all or a portion of the present value of the future
LOC fees that would have otherwise been paid. Further, the agreements contain customary events of default, subject to certain
materiality thresholds and grace periods for certain of those events of default. The events of default include payment defaults, covenant
defaults, material inaccuracies in representations and warranties, bankruptcy and liquidation proceedings and other customary defaults.
Upon an event of default, the agreements provide that, among other things, obligations to issue, amend or increase the amount of any
LOC shall be terminated and any obligations shall become immediately due and payable. As of December 31, 2020, we were in
compliance with all such covenants.
163
Shelf Registration
We currently have an effective shelf registration statement, which allows us to issue, in unlimited amounts, securities, including debt
securities, preferred stock, common stock, warrants, stock purchase contracts, stock purchase units and depository shares.
Certain Debt Covenants on Capital Securities
Our $1.2 billion in principal amount of capital securities outstanding contain certain covenants that require us to make interest payments
in accordance with an alternative coupon satisfaction mechanism (“ACSM”) if we determine that one of the following trigger events
exists as of the 30th day prior to an interest payment date (“determination date”):
• LNL’s risk-based capital (“RBC”) ratio is less than 175% (based on the most recent annual financial statement filed with the State of
•
Indiana); or
(i) The sum of our consolidated net income for the four trailing fiscal quarters ending on the quarter that is two quarters prior to the
most recently completed quarter prior to the determination date is zero or negative; and (ii) our consolidated stockholders’ equity
(excluding AOCI and any increase in stockholders’ equity resulting from the issuance of preferred stock during a quarter), or
“adjusted stockholders’ equity,” as of (x) the most recently completed quarter and (y) the end of the quarter that is two quarters
before the most recently completed quarter, has declined by 10% or more as compared to the quarter that is 10 fiscal quarters prior
to the last completed quarter, or the “benchmark quarter.”
The ACSM would generally require us to use commercially reasonable efforts to satisfy our obligation to pay interest in full on the capital
securities with the net proceeds from sales of our common stock and warrants to purchase our common stock with an exercise price
greater than the market price. We would have to utilize the ACSM until the trigger events no longer existed. Our failure to pay interest
pursuant to the ACSM will not result in an event of default with respect to the capital securities nor will a nonpayment of interest unless it
lasts for 10 consecutive years, although such breaches may result in monetary damages to the holders of the capital securities. As of
December 31, 2020, we were in compliance with all such covenants.
14. Contingencies and Commitments
Contingencies
Regulatory and Litigation Matters
Regulatory bodies, such as state insurance departments, the SEC, Financial Industry Regulatory Authority and other regulatory bodies
regularly make inquiries and conduct examinations or investigations concerning our compliance with, among other things, insurance laws,
securities laws, laws governing the activities of broker-dealers, registered investment advisers and unclaimed property laws.
LNC is involved in various pending or threatened legal or regulatory proceedings, including purported class actions, arising from the
conduct of business both in the ordinary course and otherwise. In some of the matters, very large and/or indeterminate amounts,
including punitive and treble damages, are sought. Modern pleading practice in the U.S. permits considerable variation in the assertion of
monetary damages or other relief. Jurisdictions may permit claimants not to specify the monetary damages sought or may permit
claimants to state only that the amount sought is sufficient to invoke the jurisdiction of the trial court. In addition, jurisdictions may
permit plaintiffs to allege monetary damages in amounts well exceeding verdicts obtained in the jurisdiction for similar matters. This
variability in pleadings, together with the actual experiences of LNC in litigating or resolving through settlement numerous claims over an
extended period of time, demonstrates to management that the monetary relief which may be specified in a lawsuit or claim bears little
relevance to its merits or disposition value.
Due to the unpredictable nature of litigation, the outcome of a litigation matter and the amount or range of potential loss at particular
points in time is normally difficult to ascertain. Uncertainties can include how fact finders will evaluate documentary evidence and the
credibility and effectiveness of witness testimony, and how trial and appellate courts will apply the law in the context of the pleadings or
evidence presented, whether by motion practice, or at trial or on appeal. Disposition valuations are also subject to the uncertainty of how
opposing parties and their counsel will themselves view the relevant evidence and applicable law.
We establish liabilities for litigation and regulatory loss contingencies when information related to the loss contingencies shows both that
it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. It is possible that some matters could
require us to pay damages or make other expenditures or establish accruals in amounts that could not be estimated as of December 31,
2020. While the potential future charges could be material in the particular quarterly or annual periods in which they are recorded, based
on information currently known by management, management does not believe any such charges are likely to have a material adverse
effect on LNC’s financial condition.
164
For some matters, the Company is able to estimate a reasonably possible range of loss. For such matters in which a loss is probable, an
accrual has been made. For such matters where a loss is believed to be reasonably possible, but not probable, no accrual has been made.
Accordingly, the estimate contained in this paragraph reflects two types of matters. For some matters included within this estimate, an
accrual has been made, but there is a reasonable possibility that an exposure exists in excess of the amount accrued. In these cases, the
estimate reflects the reasonably possible range of loss in excess of the accrued amount. For other matters included within this estimation,
no accrual has been made because a loss, while potentially estimable, is believed to be reasonably possible but not probable. In these
cases, the estimate reflects the reasonably possible loss or range of loss. As of December 31, 2020, we estimate the aggregate range of
reasonably possible losses, including amounts in excess of amounts accrued for these matters as of such date, to be up to approximately
$90 million. Any estimate is not an indication of expected loss, if any, or of the Company’s maximum possible loss exposure on such
matters.
For other matters, we are not currently able to estimate the reasonably possible loss or range of loss. We are often unable to estimate the
possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the
range of possible loss, such as quantification of a damage demand from plaintiffs, discovery from other parties and investigation of
factual allegations, rulings by the court on motions or appeals, analysis by experts and the progress of settlement negotiations. On a
quarterly and annual basis, we review relevant information with respect to litigation contingencies and update our accruals, disclosures
and estimates of reasonably possible losses or ranges of loss based on such reviews.
Certain reinsurers have sought rate increases on certain yearly renewable term agreements. We are disputing the requested rate increases
under these agreements. We will initiate arbitration proceedings, as necessary, under these agreements in order to protect our contractual
rights. Additionally, reinsurers have initiated, and may in the future initiate, arbitration proceedings against us. We believe it is unlikely
the outcome of these disputes will have a material adverse effect on our financial condition. For more information about reinsurance, see
Note 9.
Cost of Insurance Litigation
Glover v. Connecticut General Life Insurance Company and The Lincoln National Life Insurance Company, filed in the U.S. District Court for the
District of Connecticut, No. 3:16-cv-00827, is a putative class action that was served on LNL on June 8, 2016. Plaintiff is the owner of a
universal life insurance policy who alleges that LNL charged more for non-guaranteed cost of insurance than permitted by the policy.
Plaintiff seeks to represent all universal life and variable universal life policyholders who owned policies containing non-guaranteed cost
of insurance provisions that are similar to those of Plaintiff’s policy and seeks damages on behalf of all such policyholders. On January
11, 2019, the court dismissed Plaintiff’s complaint in its entirety. In response, Plaintiff filed a motion for leave to amend the complaint,
which we have opposed.
Hanks v. Lincoln Life & Annuity Company of New York (“LLANY”) and Voya Retirement Insurance and Annuity Company (“Voya”), filed in the
U.S. District Court for the Southern District of New York, No. 1:16-cv-6399, is a putative class action that was served on LLANY on
August 12, 2016. Plaintiff owns a universal life policy originally issued by Aetna (now Voya) and alleges that (i) Voya breached the terms
of the policy when it increased non-guaranteed cost of insurance rates on Plaintiff’s policy; and (ii) LLANY, as reinsurer and
administrator of Plaintiff’s policy, engaged in wrongful conduct related to the cost of insurance increase and was unjustly enriched as a
result. Plaintiff seeks to represent all owners of Aetna life insurance policies that were subject to non-guaranteed cost of insurance rate
increases in 2016 and seeks damages on their behalf. On March 13, 2019, the court issued an order granting plaintiff’s motion for class
certification for the breach of contract claim and denying such motion with respect to the unjust enrichment claim against LLANY, and,
on September 12, 2019, the court issued an order approving the parties’ joint stipulation of dismissal with respect to the unjust
enrichment claim and dismissed LLANY as a defendant in the case. In light of LLANY’s role as reinsurer and administrator under the
1998 coinsurance agreement with Aetna (now Voya), and of the parties’ rights and obligations thereunder, LLANY continues to be
actively engaged in the defense of this case. On September 30, 2020, the court denied plaintiff’s motion for summary judgment and
granted in part Voya’s motion for summary judgment. The court has not yet set a trial date, and we continue to vigorously defend this
action.
EFG Bank AG, Cayman Branch, et al. v. The Lincoln National Life Insurance Company, pending in the U.S. District Court for the Eastern
District of Pennsylvania, No. 2:17-cv-02592, is a civil action filed on February 1, 2017. Plaintiffs own Legend Series universal life
insurance policies originally issued by Jefferson-Pilot (now LNL). Plaintiffs allege that LNL breached the terms of policyholders’
contracts when it increased non-guaranteed cost of insurance rates beginning in 2016. We are vigorously defending this matter.
In re: Lincoln National COI Litigation, pending in the U.S. District Court for the Eastern District of Pennsylvania, Master File No. 2:16-cv-
06605-GJP, is a consolidated litigation matter related to multiple putative class action filings that were consolidated by an order dated
March 20, 2017. In addition to consolidating a number of existing matters, the order also covers any future cases filed in the same district
related to the same subject matter. Plaintiffs own universal life insurance policies originally issued by Jefferson-Pilot (now LNL).
Plaintiffs allege that LNL and LNC breached the terms of policyholders’ contracts by increasing non-guaranteed cost of insurance rates
beginning in 2016. Plaintiffs seek to represent classes of policyowners and seek damages on their behalf. We are vigorously defending
this matter.
165
In re: Lincoln National 2017 COI Rate Litigation, Master File No. 2:17-cv-04150 is a consolidated litigation matter related to multiple putative
class action filings that were consolidated by an order of the court in March 2018. Plaintiffs own universal life insurance policies
originally issued by former Jefferson-Pilot (now LNL). Plaintiffs allege that LNL and LNC breached the terms of policyholders’
contracts by increasing non-guaranteed cost of insurance rates beginning in 2017. Plaintiffs seek to represent classes of policyholders and
seek damages on their behalf. We are vigorously defending this matter.
Iwanski v. First Penn-Pacific Life Insurance Company (“FPP”), No. 2:18-cv-01573 filed in the U.S. District Court for the District Court, Eastern
District of Pennsylvania is a putative class action that was filed on April 13, 2018. Plaintiff alleges that defendant FPP breached the terms
of his life insurance policy by deducting non-guaranteed cost of insurance charges in excess of what is permitted by the policies. Plaintiff
seeks to represent all owners of universal life insurance policies issued by FPP containing non-guaranteed cost of insurance provisions
that are similar to those of Plaintiff’s policy and seeks damages on their behalf. Breach of contract is the only cause of action asserted.
We are vigorously defending this matter.
TVPX ARS INC., as Securities Intermediary for Consolidated Wealth Management, LTD. v. The Lincoln National Life Insurance Company, filed in the
U.S. District Court for the Eastern District of Pennsylvania, No. 2:18-cv-02989, is a putative class action that was filed on July 17, 2018.
Plaintiff alleges that LNL charged more for non-guaranteed cost of insurance than permitted by the policy. Plaintiff seeks to represent all
universal life and variable universal life policyholders who own policies issued by LNL or its predecessors containing non-guaranteed cost
of insurance provisions that are similar to those of Plaintiff’s policy and seeks damages on behalf of all such policyholders. We are
vigorously defending this matter.
LSH Co. and Wells Fargo Bank, National Association, as securities intermediary for LSH Co. v. Lincoln National Corporation and The Lincoln National
Life Insurance Company, pending in the U.S. District Court for the Eastern District of Pennsylvania, No. 2:18-cv-05529, is a civil action filed
on December 21, 2018. Plaintiffs own universal life insurance policies originally issued by Jefferson-Pilot (now LNL). Plaintiffs allege
that LNL breached the terms of policyholders’ contracts when it increased non-guaranteed cost of insurance rates in 2016 and 2017. We
are vigorously defending this matter.
Vida Longevity Fund, LP v. Lincoln Life & Annuity Company of New York, pending in the U.S. District Court for the Southern District of New
York, No. 1:19-cv-06004, is a putative class action that was filed on June 27, 2019. Plaintiff alleges that LLANY charged more for non-
guaranteed cost of insurance than was permitted by the policies. Plaintiff seeks to represent all current and former owners of universal
life (including variable universal life) policies who own or owned policies issued by LLANY and its predecessors in interest that were in
force at any time on or after June 27, 2013, and which contain non-guaranteed cost of insurance provisions that are similar to those of
Plaintiff’s policies. Plaintiff also seeks to represent a sub-class of such policyholders who own or owned “life insurance policies issued in
the State of New York.” Plaintiff seeks damages on behalf of the policyholder class and sub-class. We are vigorously defending this
matter.
Other Litigation
Andrew Nitkewicz v. Lincoln Life & Annuity Company of New York, pending in the U.S. District Court for the Southern District of New York,
No. 1:20-cv-06805, is a putative class action that was filed on August 24, 2020. Plaintiff Andrew Nitkewicz, as trustee of the Joan C.
Lupe Trust, seeks to represent all current and former owners of universal life (including variable universal life) policies who own or
owned policies issued by LLANY and its predecessors in interest that were in force at any time on or after June 27, 2013, and for which
planned annual, semi-annual, or quarterly premiums were paid for any period beyond the end of the policy month of the insured’s death.
Plaintiff alleges LLANY failed to refund unearned premium in violation of New York Insurance Law Section 3203(a)(2) in connection
with the payment of death benefit claims for certain insurance policies. Plaintiff seeks compensatory damages and pre-judgment interest
on behalf of the various classes and sub-class. We are vigorously defending this matter.
Commitments
Leases
As of December 31, 2020 and 2019, we recognized operating lease ROU assets of $182 million and $233 million, respectively, and
associated lease liabilities of $194 million and $240 million, respectively. The weighted-average discount rate and remaining lease term
were 3.2% and six years, respectively, as of December 31, 2020 and 2019. Operating lease expense for the years ended December 31,
2020, 2019 and 2018, was $50 million, $54 million and $50 million, respectively, and reported in commissions and other expenses on our
Consolidated Statements of Comprehensive Income (Loss).
As of December 31, 2020 and 2019, the net book value of assets recorded as finance leases was $75 million and $128 million, respectively,
and the associated accumulated amortization was $398 million and $345 million, respectively. These assets will continue to be amortized
on a straight-line basis over the assets’ remaining lives. The weighted-average discount rate and remaining lease term were 2.2% and two
years, respectively, as of December 31, 2020 and 2019.
166
Finance lease expense (in millions) was as follows:
Amortization of ROU assets (1)
Interest on lease liabilities (2)
Total
For the Years Ended
December 31,
2020
2019
$
$
53
6
59
$
$
67
13
80
(1) Amortization of ROU assets is reported in commissions and other expenses on our Consolidated Statements of Comprehensive
(2)
Income (Loss).
Interest on lease liabilities is reported in interest and debt expense on our Consolidated Statements of Comprehensive Income
(Loss).
The table below presents cash flow information (in millions) related to leases:
For the Years Ended
December 31,
2020
2019
Supplemental Cash Flow Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Financing cash flows from finance leases
$
$
54
53
56
96
Supplemental Non-cash Information
ROU assets obtained in exchange for new lease obligations:
Operating leases
$
10
$
80
Our future minimum lease payments (in millions) under non-cancellable leases as of December 31, 2020, were as follows:
2021
2022
2023
2024
2025
Thereafter
Total future minimum lease payments
Less: Amount representing interest
Present value of minimum lease payments
As of December 31, 2020, we had no leases that had not yet commenced.
Vulnerability from Concentrations
Operating Finance
Leases
Leases
$
$
51
46
43
29
22
47
238
44
194
$
$
62
72
79
17
7
4
241
7
234
As of December 31, 2020, we did not have a concentration of: business transactions with a particular customer or lender; sources of
supply of labor or services used in the business; or a market or geographic area in which business is conducted that makes us vulnerable
to an event that is at least reasonably possible to occur in the near term and which could cause a severe impact to our financial condition.
For information on our investment and reinsurance concentrations, see Notes 5 and 9, respectively.
Other Contingency Matters
State guaranty funds assess insurance companies to cover losses to contract holders of insolvent or rehabilitated companies. Mandatory
assessments may be partially recovered through a reduction in future premium taxes in some states. We have accrued for expected
assessments and the related reductions in future state premium taxes, which net to assessments (recoveries) of $(9) million and $(12)
million as of December 31, 2020 and 2019, respectively.
167
15. Shares and Stockholders’ Equity
Common Shares
The changes in our common stock (number of shares) were as follows:
Common Stock
Balance as of beginning-of-year
Stock issued for exercise of warrants
Stock compensation/issued for benefit plans
Retirement/cancellation of shares
Balance as of end-of-year
Common Stock as of End-of-Year
Basic basis
Diluted basis
Our common stock is without par value.
Average Shares
For the Years Ended December 31,
2019
2018
2020
196,668,532
-
547,209
(4,886,050)
192,329,691
205,862,760
258,633
942,318
(10,395,179)
196,668,532
218,090,114
212,670
800,325
(13,240,349)
205,862,760
192,329,691
193,672,296
196,668,532
199,196,043
205,862,760
209,034,686
A reconciliation of the denominator (number of shares) in the calculations of basic and diluted earnings (loss) per common share was as
follows:
Weighted-average shares, as used in basic calculation
Shares to cover exercise of outstanding warrants
Shares to cover non-vested stock
Average stock options outstanding during the year
Assumed acquisition of shares with assumed proceeds
from exercising outstanding warrants
Assumed acquisition of shares with assumed
proceeds and benefits from exercising stock
options (at average market price for the year)
Shares repurchasable from measured but
unrecognized stock option expense
Average deferred compensation shares
Weighted-average shares, as used in diluted calculation
For the Years Ended December 31,
2019
200,608,737
58,765
973,901
1,507,049
2020
193,610,225
-
687,240
746,742
2018
215,936,448
568,602
1,534,142
1,739,029
-
(9,594)
(81,260)
(576,582)
(1,033,507)
(1,074,406)
(2,445)
-
194,465,180
(217)
-
202,105,134
(14,600)
944,151
219,552,106
In the event the average market price of LNC common stock exceeds the issue price of stock options and the options have a dilutive
effect to our EPS, such options will be shown in the table above.
We have participants in our deferred compensation plans who selected LNC stock as the measure for the investment return attributable
to all or a portion of their deferral amounts. For the year ended December 31, 2018, the effect of settling this obligation in LNC stock
(“equity classification”) was more dilutive than the scenario of settling in cash (“liability classification”). Therefore, for our EPS
calculation for this period, we added these shares to the denominator and adjusted the numerator to present net income as if the shares
had been accounted for under equity classification by removing the mark-to-market adjustment included in net income attributable to
these deferred units of LNC stock. The amount of this adjustment was $18 million for the year ended December 31, 2018.
The outstanding warrants issued in 2009, each representing the right to purchase one share of our common stock, expired on July 10,
2019.
168
AOCI
The following summarizes the components and changes in AOCI (in millions):
Unrealized Gain (Loss) on AFS Securities
Balance as of beginning-of-year
Cumulative effect from adoption of new accounting standards
Unrealized holding gains (losses) arising during the year
Change in foreign currency exchange rate adjustment
Change in DAC, VOBA, DSI, future contract benefits and other contract holder funds
Income tax benefit (expense)
Less:
Reclassification adjustment for gains (losses) included in net income (loss)
Associated amortization of DAC, VOBA, DSI and DFEL
Income tax benefit (expense)
Balance as of end-of-year
Unrealized OTTI on AFS Securities
Balance as of beginning-of-year
(Increases) attributable to:
Cumulative effect from adoption of new accounting standards
Gross OTTI recognized in OCI during the year
Change in DAC, VOBA, DSI and DFEL
Income tax benefit (expense)
Decreases attributable to:
Changes in fair value, sales, maturities or other settlements of AFS securities
Change in DAC, VOBA, DSI and DFEL
Income tax benefit (expense)
Balance as of end-of-year
Unrealized Gain (Loss) on Derivative Instruments
Balance as of beginning-of-year
Cumulative effect from adoption of new accounting standard
Unrealized holding gains (losses) arising during the year
Change in foreign currency exchange rate adjustment
Change in DAC, VOBA, DSI and DFEL
Income tax benefit (expense)
Less:
Reclassification adjustment for gains (losses) included in net income (loss)
Associated amortization of DAC, VOBA, DSI and DFEL
Income tax benefit (expense)
Balance as of end-of-year
Foreign Currency Translation Adjustment
Balance as of beginning-of-year
Foreign currency translation adjustment arising during the year
Balance as of end-of-year
Funded Status of Employee Benefit Plans
Balance as of beginning-of-year
Cumulative effect from adoption of new accounting standard
Adjustment arising during the year
Income tax benefit (expense)
Balance as of end-of-year
For the Years Ended December 31,
2018
2019
2020
$
5,983
45
7,925
180
(3,569)
(970)
$
557
-
9,267
46
(2,462)
(1,457)
(53)
32
4
9,611
$
(28)
(12)
8
5,983
$
3,486
674
(6,274)
(107)
1,748
981
(42)
(20)
13
557
45
$
33
$
44
(45)
-
-
-
-
-
-
-
$
(11) $
-
(257)
(174)
(17)
94
48
(1)
(10)
(402) $
(17) $
5
(12) $
(327) $
-
74
(13)
(266) $
-
(16)
1
3
31
(1)
(6)
45
139
-
(93)
(52)
(4)
31
$
$
42
(1)
(9)
(11) $
(23) $
6
(17) $
(299) $
-
(20)
(8)
(327) $
9
-
-
-
(19)
(6)
5
33
(29)
(6)
144
111
(13)
(51)
24
(2)
(5)
139
(14)
(9)
(23)
(257)
(35)
(12)
5
(299)
$
$
$
$
$
$
$
$
$
$
169
The following summarizes the reclassifications out of AOCI (in millions) and the associated line item in the Consolidated Statements of
Comprehensive Income (Loss):
For the Years Ended December 31,
2018
2019
2020
$
(53)
$
(28)
$
(42) Total realized gain (loss)
Unrealized Gain (Loss) on AFS Securities
Gross reclassification
Associated amortization of DAC,
VOBA, DSI and DFEL
Reclassification before income
tax benefit (expense)
Income tax benefit (expense)
Reclassification, net of income tax
Unrealized OTTI on AFS Securities
Gross reclassification
Change in DAC, VOBA, DSI and DFEL
Reclassification before income
tax benefit (expense)
Income tax benefit (expense)
Reclassification, net of income tax
$
$
$
Unrealized Gain (Loss) on Derivative Instruments
Gross reclassifications:
Interest rate contracts
Interest rate contracts
Foreign currency contracts
Foreign currency contracts
$
Total gross reclassifications
Associated amortization of DAC,
VOBA, DSI and DFEL
Reclassifications before income
tax benefit (expense)
Income tax benefit (expense)
Reclassifications, net of income tax
$
16
32
(21)
4
(17)
-
-
-
-
-
2
(16)
56
6
48
(1)
47
(10)
37
$
$
$
$
$
(12)
(40)
8
(32)
4
-
4
(1)
3
3
(5)
35
9
42
(1)
41
(9)
32
$
$
$
$
$
(20) Total realized gain (loss)
Income (loss) from continuing
operations before taxes
(62)
13 Federal income tax expense (benefit)
(49) Net income (loss)
8 Total realized gain (loss)
- Total realized gain (loss)
Income (loss) from continuing
operations before taxes
8
(2) Federal income tax expense (benefit)
6 Net income (loss)
4 Net investment income
(7) Interest and debt expense
27 Net investment income
- Total realized gain (loss)
24
(2) Commissions and other expenses
Income (loss) from continuing
operations before taxes
22
(5) Federal income tax expense (benefit)
17 Net income (loss)
170
616. Realized Gain (Loss)
Details underlying realized gain (loss) (in millions) reported on our Consolidated Statements of Comprehensive Income (Loss) were as
follows:
Fixed maturity AFS securities:
Gross gains
Gross losses
Credit loss benefit (expense) (1)
Gross OTTI
Realized gain (loss) on equity securities (2)
Credit loss benefit (expense) on mortgage loans on real estate
Other gain (loss) on investments
Associated amortization of DAC, VOBA, DSI and DFEL
and changes in other contract holder funds
Total realized gain (loss) related to certain financial assets
Realized gain (loss) on the mark-to-market on certain instruments (3)(4)
Indexed annuity and IUL contracts net derivatives results: (5)
Gross gain (loss)
Associated amortization of DAC, VOBA, DSI and DFEL
Variable annuity net derivatives results: (6)
Gross gain (loss)
Associated amortization of DAC, VOBA, DSI and DFEL
Total realized gain (loss)
For the Years Ended December 31,
2018
2019
2020
$
$
31
(84)
(26)
-
8
(117)
(7)
31
(164)
26
37
(25)
$
45
(73)
-
(16)
(6)
(1)
(9)
(13)
(73)
(127)
(80)
2
(367)
(20)
(513) $
(389)
57
(610) $
$
38
(80)
-
(7)
(17)
2
2
(22)
(84)
4
(51)
12
295
(35)
141
(1)
(2)
Includes changes in the allowance for credit losses as well as direct write-downs to amortized cost as a result of negative credit
events.
Includes market adjustments on equity securities still held of $8 million and $(4) million for the years ended December 31, 2020 and
2019, respectively.
(3) Represents changes in the fair values of certain derivative investments (not including those associated with our variable and indexed
annuity and IUL contracts net derivative results), reinsurance related embedded derivatives mortgage loans on real estate accounted
for under the fair value option and trading securities. See Notes 1 and 9 for information regarding Modco.
Includes gains and losses from fair value changes on mortgage loans on real estate accounted for under the fair value option of $(24)
million for the year ended December 31, 2020.
(4)
(5) Represents the net difference between the change in fair value of the index options that we hold and the change in the fair value of
the embedded derivative liabilities of our indexed annuity and IUL contracts along with changes in the fair value of embedded
derivative liabilities related to index options we may purchase or sell in the future to hedge contract holder index allocations
applicable to future reset periods for our indexed annuity products.
Includes the net difference in the change in embedded derivative reserves of our GLB riders and the change in the fair value of the
derivative instruments we own to hedge the change in embedded derivative reserves on our GLB riders and the benefit ratio
unlocking on our GLB and GDB riders, including the cost of purchasing the hedging instruments.
(6)
17. Commissions and Other Expenses
Details underlying commissions and other expenses (in millions) were as follows:
Commissions
General and administrative expenses
Expenses associated with reserve financing and LOCs
DAC and VOBA deferrals and interest, net of amortization
Broker-dealer expenses
Specifically identifiable intangible asset amortization
Taxes, licenses and fees
Acquisition and integration costs related to mergers and acquisitions
Total
171
For the Years Ended December 31,
2018
2019
2020
$
$
2,183
2,072
94
(156)
493
37
321
20
5,064
$
$
2,549
2,210
88
(540)
481
26
343
130
5,287
$
$
2,256
1,953
84
(402)
465
9
313
85
4,763
18. Retirement and Deferred Compensation Plans
Defined Benefit Pension and Other Postretirement Benefit Plans
We maintain U.S. defined benefit pension plans in which certain U.S. employees and agents are participants, and a U.K. plan we retained
after the sale of the Lincoln UK business. Our defined benefit pension plans are closed to new entrants and existing participants do not
accrue any additional benefits. We comply with the minimum funding requirements in both the U.S. and the U.K. In accordance with
such practice, we were not required to make contributions but elected to contribute $2 million for the year ended December 31, 2019.
We do not expect to be required to make any contributions to these pension plans in 2021. We sponsor other postretirement benefit
plans that provide health care and life insurance to certain retired employees and agents. Total net periodic cost (recovery) for these plans
was $(11) million, $8 million and $(2) million during 2020, 2019 and 2018, respectively. In 2021, we expect the plans to make benefit
payments of approximately $110 million.
Information (in millions) with respect to these plans was as follows:
As of or For the Years Ended December 31,
2020
2019
2020
2019
$
$
$
$
Fair value of plan assets
Projected benefit obligation
Funded status
Amounts Recognized on the
Consolidated Balance Sheets
Other assets
Other liabilities
Net amount recognized
Weighted-Average Assumptions
Benefit obligations:
Weighted-average discount rate
Net periodic benefit cost:
Weighted-average discount rate
Expected return on plan assets
Other Postretirement
Benefit Plans
Pension Plans
1,670
1,698
$
(28) $
$
1,520
1,646
(126) $
$
66
79
(13) $
$
88
(116)
(28) $
$
12
(138)
(126) $
$
-
(13)
(13) $
69
78
(9)
-
(9)
(9)
2.58%
3.14%
2.96%
3.50%
3.12%
6.10%
4.10%
6.48%
3.50%
6.50%
4.50%
6.50%
The increase in the fair value of plan assets during the reporting period was driven by market performance. The weighted average
discount rate was determined based on a corporate yield curve as of December 31, 2020, and projected benefit obligation cash flows. The
expected return on plan assets was determined based on historical and expected future returns of the various asset categories, using the
plans’ target plan allocation. We reevaluate these assumptions each plan year.
172
The following summarizes our fair value measurements of our benefit plans’ assets (in millions) on a recurring basis by asset category:
Fixed maturity securities:
Corporate bonds
U.S. government bonds
Foreign government bonds
State and municipal bonds
Limited partnerships and common and
preferred stock
Bulk annuity insurance policy
Cash and invested cash
Other investments
Total
As of December 31,
2019
2020
$
$
320
246
138
29
671
178
88
66
1,736
$
$
274
280
67
29
599
165
106
69
1,589
See “Fair Value Measurement” in Note 1 for discussion on how we categorize our pension plans’ assets into the three-level fair value
hierarchy. See “Financial Instruments Carried at Fair Value” in Note 21 for a summary of our fair value measurement of our pension
plans’ assets by the three-level fair value hierarchy.
Defined Contribution Plans
We sponsor tax-qualified defined contribution plans for eligible employees and agents. We administer these plans in accordance with the
plan documents and various limitations under section 401(a) of the Internal Revenue Code of 1986. For the years ended December 31,
2020, 2019 and 2018, expenses for these plans were $100 million, $104 million and $93 million, respectively.
Deferred Compensation Plans
We sponsor non-qualified, unfunded, deferred compensation plans for certain current and former employees, agents and non-employee
directors. The results of certain notional investment options within some of the plans are hedged by total return swaps. Our expenses
increase or decrease in direct proportion to the change in market value of the participants’ investment options. Participants of certain
plans are able to select our stock as a notional investment option; however, it is not hedged by the total return swaps and is a primary
source of expense volatility related to these plans. For the years ended December 31, 2020, 2019 and 2018, expenses for these plans were
$35 million, $28 million and $4 million, respectively. For further discussion of total return swaps related to our deferred compensation
plans, see Note 6.
Information (in millions) with respect to these plans was as follows:
As of December 31,
2019
2020
Total liabilities (1)
Investments dedicated to fund liabilities (2)
$
$
743
229
645
202
(1) Reported in other liabilities on our Consolidated Balance Sheets.
(2) Reported in other assets on our Consolidated Balance Sheets.
173
19. Stock-Based Incentive Compensation Plans
We sponsor stock-based incentive compensation plans for our employees and directors and for the employees and agents of our
subsidiaries that provide for the issuance of stock options, performance shares, and restricted stock units (“RSUs”), among other types of
awards. We issue new shares to satisfy option exercises and vested performance shares and RSUs.
Total compensation expense (in millions) by award type for our stock-based incentive compensation plans was as follows:
Stock options
Performance shares
RSUs
Total
Recognized tax benefit
For the Years Ended December 31,
2018
2019
2020
$
$
$
10
5
36
51
11
$
$
$
8
17
37
62
13
$
$
$
5
15
32
52
11
Total unrecognized compensation expense (in millions) and expected weighted-average life (in years) by award type for our stock-based
incentive compensation plans was as follows:
2020
For the Years Ended December 31,
2019
Weighted-
Average
Period
Weighted-
Average
Period
Expense
Expense
Expense
2018
Weighted-
Average
Period
Stock options
Performance shares
RSUs
Total unrecognized stock-based
incentive compensation expense
$
$
8
14
37
59
0.7
1.3
1.2
$
$
9
15
42
66
0.9
1.3
1.4
$
$
9
14
50
73
1.1
0.9
1.2
Stock Options
The option price assumptions used for our stock option awards were as follows:
Weighted-average fair value per option granted
Weighted-average assumptions:
Dividend yield
Expected volatility
Risk-free interest rate (1)
Expected life (in years)
For the Years Ended December 31,
2018
2019
2020
$
12.25
$
13.23
$
18.74
3.0%
30.1%
0.3-1.4%
5.8
2.8%
26.9%
2.1-2.5%
5.8
2.1%
27.2%
2.5-2.9%
5.8
(1) Risk-free interest rate expressed as a range and not a weighted average.
The fair value of options is determined using a Black-Scholes options valuation model with the assumptions disclosed in the table
above. The dividend yield is based on the expected dividend rate during the expected life of the option. Expected volatility is based on
the implied volatility of exchange-traded securities and the historical volatility of the LNC stock price. The risk-free interest rate is based
on the U.S. Treasury yield curve in effect at the time of the grant. The expected life of the options granted represents the weighted-
average period of time from the grant date to the date of exercise, expiration or cancellation based upon historical behavior.
174
Generally, stock options have a maximum contractual term of ten years and vest ratably over a three year period based solely on a service
condition. Information with respect to our incentive plans involving stock options with service conditions (aggregate intrinsic value
shown in millions) was as follows:
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
$
$
$
$
55.67
60.86
32.70
62.72
57.64
56.93
54.26
6.46
6.32
5.12
$
$
$
12
12
12
Shares
2,894,656
837,329
(146,370 )
(126,656 )
3,458,959
Outstanding as of December 31, 2019
Granted
Exercised
Forfeited or expired
Outstanding as of December 31, 2020
Vested or expected to vest as of December 31, 2020 (1)
Exercisable as of December 31, 2020
(1)
Includes estimated forfeitures.
3,181,759
2,141,140
The total fair value of stock options with service conditions that vested during the years ended December 31, 2020, 2019 and 2018 was $8
million, $7 million and $6 million, respectively. The total intrinsic value of such options exercised during the years ended December 31,
2020, 2019 and 2018, was $3 million, $3 million and $11 million, respectively.
We award to certain agents stock options that have a maximum contractual term of five years and generally vest ratably over a two year
period depending on the satisfaction of the performance conditions. Information with respect to our incentive plans involving stock
options with performance conditions (aggregate intrinsic value shown in millions) was as follows:
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Shares
Outstanding as of December 31, 2019
Granted
Exercised
Forfeited or expired
Outstanding as of December 31, 2020
Vested or expected to vest as of December 31, 2020 (1)
Exercisable as of December 31, 2020
(1)
Includes estimated forfeitures.
209,104
56,125
(17,687 )
(38,892 )
208,650
190,370
172,006
$
$
$
$
61.17
23.49
45.60
59.29
52.70
54.74
57.21
2.20
2.03
1.82
$
$
$
2
1
1
The total fair value of stock options with performance conditions that vested during the years ended December 31, 2020, 2019 and 2018,
was less than $1 million, $1 million and $1 million, respectively. The total intrinsic value of such options exercised during the years ended
December 31, 2020, 2019 and 2018, was less than $1 million, $1 million and $2 million, respectively.
175
Performance Shares
LNC performance shares vest, if at all, on the third anniversary of the grant date; depending on the achievement level of performance
measures pre-determined by the Compensation Committee for the three year performance period, payout could range from zero to 200%
of the target award.
Information with respect to our performance shares was as follows:
Shares
Weighted-
Average
Grant-Date
Fair Value
77.29
64.62
79.61
70.54
71.61
471,071 $
233,039
(134,282)
(27,120)
542,708 $
Outstanding as of December 31, 2019 (1)
Granted
Vested
Forfeited
Outstanding as of December 31, 2020 (1)
(1) Represents target award amounts.
RSUs
LNC RSUs generally cliff vest on the third anniversary of the grant date, based solely on a service condition. Information with respect to
our RSUs was as follows:
Outstanding as of December 31, 2019
Granted
Vested
Forfeited
Outstanding as of December 31, 2020
20. Statutory Information and Restrictions
Weighted-
Average
Grant-Date
Fair Value
70.09
60.83
70.96
66.48
66.62
Shares
1,551,129 $
623,599
(413,309)
(103,517)
1,657,902 $
The Company’s domestic life insurance subsidiaries prepare financial statements in accordance with statutory accounting principles
(“SAP”) prescribed or permitted by the insurance departments of their states of domicile, which may vary materially from GAAP.
Prescribed SAP includes the Accounting Practices and Procedures Manual of the National Association of Insurance Commissioners
(“NAIC”) as well as state laws, regulations and administrative rules. Permitted SAP encompasses all accounting practices not so
prescribed. The principal differences between statutory financial statements and financial statements prepared in accordance with GAAP
are that statutory financial statements do not reflect DAC, some bond portfolios may be carried at amortized cost, assets and liabilities are
presented net of reinsurance, contract holder liabilities are generally valued using more conservative assumptions and certain assets are
non-admitted.
Our insurance subsidiaries are subject to the applicable laws and regulations of their respective states of domicile. Changes in these laws
and regulations could change capital levels or capital requirements for our insurance subsidiaries.
176
Statutory capital and surplus, net gain (loss) from operations, after-tax, net income (loss) and dividends to the LNC holding company
amounts (in millions) below consist of all or a combination of the following entities: LNL, LLANY, LLACB, FPP, Lincoln Reinsurance
Company of South Carolina, Lincoln Reinsurance Company of Vermont I, Lincoln Reinsurance Company of Vermont III, Lincoln
Reinsurance Company of Vermont IV, Lincoln Reinsurance Company of Vermont V, Lincoln Reinsurance Company of Vermont VI and
Lincoln Reinsurance Company of Vermont VII.
U.S. capital and surplus
U.S. net gain (loss) from operations, after-tax
U.S. net income (loss)
U.S. dividends to LNC holding company
Comparison of 2020 to 2019
As of December 31,
2019
2020
$
8,938
$
8,564
For the Years Ended December 31,
2018
2019
2020
$
(271) $
29
660
$
409
388
600
692
1,019
925
Statutory net income (loss) decreased due primarily to increases in benefits and unfavorable reserve strain on certain products, partially
offset by favorable equity markets.
Comparison of 2019 to 2018
Statutory net income (loss) decreased due primarily to lower dividends from affiliates, unfavorable reserve strain on certain products, and
integration costs incurred as part of the acquisition of Liberty Life. See Note 3 for information regarding the acquisition.
State Prescribed and Permitted Practices
The states of domicile of the Company’s insurance subsidiaries have adopted certain prescribed or permitted accounting practices that
differ from those found in NAIC SAP. These prescribed practices are the calculation of reserves on universal life policies based on the
Indiana universal life method as prescribed by the state of Indiana for policies issued before January 1, 2006, the use of a more
conservative valuation interest rate on certain annuities prescribed by the states of Indiana and New York and use of the continuous
Commissioners’ Annuity Reserve Valuation Method in the calculation of reserves as prescribed by the state of New York. The statutory
permitted practice allows accounting for certain call option derivative assets at amortized cost and allows determining certain indexed
annuity and indexed life statutory reserve calculations with the assumption that the market value of the related liability call option(s)
associated with the current index term is zero. At the conclusion of the index term, credited interest is reflected in the reserve as realized,
based on actual index performance.
The Vermont reinsurance subsidiaries also have certain accounting practices permitted by the state of Vermont that differ from those
found in NAIC SAP. One permitted practice involves accounting for the lesser of the face amount of all amounts outstanding under an
LOC and the value of the Valuation of Life Insurance Policies Model Regulation (“XXX”) additional statutory reserves as an admitted
asset and a form of surplus as of December 31, 2020 and 2019. Another permitted practice involves the acquisition of an LLC note in
exchange for a variable value surplus note that is recognized as an admitted asset and a form of surplus as of December 31, 2020 and
2019. Lastly, the state of Vermont has permitted a practice to account for certain excess of loss reinsurance agreements with unaffiliated
reinsurers as an asset and form of surplus as of December 31, 2020 and 2019. These permitted practices are related to structures that
continue to be allowed in accordance with the grandfathered structures under the provisions of Actuarial Guideline 48 (“AG48”) or are
compliant under AG48 requirements.
177
The favorable (unfavorable) effects on statutory surplus compared to NAIC statutory surplus from the use of these prescribed and
permitted practices (in millions) were as follows:
State Prescribed Practices
Calculation of reserves using the Indiana universal life method
Conservative valuation rate on certain annuities
Calculation of reserves using continuous CARVM
State Permitted Practice
Derivative instruments and equity indexed reserves
Vermont Subsidiaries Permitted Practices (1)
Lesser of LOC and XXX additional reserve as surplus
LLC notes and variable value surplus notes
Excess of loss reinsurance agreements
As of December 31,
2019
2020
$
$
14
(44)
(1)
(100)
1,897
1,640
452
24
(49)
-
-
1,947
1,648
419
(1) These permitted practices are related to structures that continue to be allowed in accordance with the grandfathered structures under
the provisions of AG48 or are compliant under AG48 requirements.
The NAIC has adopted RBC requirements for life insurance companies to evaluate the adequacy of statutory capital and surplus in
relation to investment and insurance risks. The requirements provide a means of measuring the minimum amount of statutory surplus
appropriate for an insurance company to support its overall business operations based on its size and risk profile. Under RBC
requirements, regulatory compliance is determined by the ratio of a company’s total adjusted capital, as defined by the NAIC, to its
company action level of RBC (known as the “RBC ratio”), also as defined by the NAIC. The company action level may be triggered if
the RBC ratio is between 75% and 100%, which would require the insurer to submit a plan to the regulator detailing corrective action it
proposes to undertake. As of December 31, 2020, the consolidated RBC ratio for LNC’s statutory insurance companies was in excess of
four times the aforementioned company action level RBC.
Our insurance subsidiaries are subject to certain insurance department regulatory restrictions as to the transfer of funds and payment of
dividends to the holding company. Under Indiana laws and regulations, our Indiana insurance subsidiaries, including our primary
insurance subsidiary, LNL, may pay dividends to LNC without prior approval of the Indiana Insurance Commissioner (the
“Commissioner”), only from unassigned surplus and must receive prior approval of the Commissioner to pay a dividend if such dividend,
along with all other dividends paid within the preceding 12 consecutive months, would exceed the statutory limitation. The current
statutory limitation is the greater of 10% of the insurer’s contract holders’ surplus, as shown on its last annual statement on file with the
Commissioner or the insurer’s statutory net gain from operations for the previous 12 months, but in no event to exceed statutory
unassigned surplus. Indiana law gives the Commissioner broad discretion to disapprove requests for dividends in excess of these limits.
LNL’s subsidiaries, LLANY, a New York-domiciled insurance company, and LLACB, a New Hampshire-domiciled company, are bound
by similar restrictions, under the laws of New York and New Hampshire, respectively. Under both New York and New Hampshire law,
the applicable statutory limitation on dividends is equal to the lesser of 10% of surplus to contract holders as of the immediately
preceding calendar year or net gain from operations for the immediately preceding calendar year, not including realized capital gains. We
expect our direct domestic insurance subsidiaries could pay dividends to LNC of approximately $865 million in 2021 without prior
approval from the respective Commissioner of Insurance.
All payments of principal and interest on surplus notes between LNC and our insurance subsidiaries must be approved by the respective
Commissioner of Insurance.
178
21. Fair Value of Financial Instruments
The carrying values and estimated fair values of our financial instruments (in millions) were as follows:
Assets
Fixed maturity AFS securities
Trading securities
Equity securities
Mortgage loans on real estate
Derivative investments (1)
Other investments
Cash and invested cash
Other assets:
GLB direct embedded derivatives
GLB ceded embedded derivatives
Indexed annuity ceded embedded derivatives
Separate account assets
Liabilities
Future contract benefits – indexed annuity
and IUL contracts embedded derivatives
Other contract holder funds:
Remaining guaranteed interest and similar contracts
Account values of certain investment contracts
Short-term debt
Long-term debt
Reinsurance related embedded derivatives
Other liabilities:
Derivative liabilities (1)
GLB ceded embedded derivatives
As of December 31, 2020
Carrying
Value
Fair
Value
As of December 31, 2019
Carrying
Value
Fair
Value
$
$
123,044
4,501
129
16,763
3,109
3,974
1,708
450
82
550
167,965
$
123,044
4,501
129
18,219
3,109
3,974
1,708
450
82
550
167,965
$
105,200
4,673
103
16,339
1,911
2,983
2,563
450
60
927
153,566
105,200
4,673
103
16,872
1,911
2,983
2,563
450
60
927
153,566
(3,594)
(3,594 )
(2,585)
(2,585)
(1,854)
(40,947)
-
(6,682)
(392)
(906)
-
(1,854 )
(49,745 )
-
(7,067 )
(392 )
(906 )
-
(1,900)
(38,639)
(300)
(6,067)
(327)
(349)
(9)
(1,900)
(46,822)
(304)
(6,217)
(327)
(349)
(9)
Benefit Plans’ Assets (2)
1,736
1,736
1,589
1,589
(1) We have master netting agreements with each of our derivative counterparties, which allow for the netting of our derivative asset and
(2)
liability positions by counterparty.
Included in the funded statuses of the benefit plans, which is reported in other liabilities on our Consolidated Balance Sheets. Refer
to Note 18 for information regarding our benefit plans.
Valuation Methodologies and Associated Inputs for Financial Instruments Not Carried at Fair Value
The following discussion outlines the methodologies and assumptions used to determine the fair value of our financial instruments not
carried at fair value on our Consolidated Balance Sheets. Considerable judgment is required to develop these assumptions used to
measure fair value. Accordingly, the estimates shown are not necessarily indicative of the amounts that would be realized in a one-time,
current market exchange of all of our financial instruments.
Mortgage Loans on Real Estate
The fair value of mortgage loans on real estate, excluding mortgage loans accounted for using the fair value option, is established using a
discounted cash flow method based on credit rating, maturity and future income. The ratings for mortgages in good standing are based
on property type, location, market conditions, occupancy, debt-service coverage, loan-to-value, quality of tenancy, borrower and payment
record. The fair value for impaired mortgage loans is based on the present value of expected future cash flows discounted at the loan’s
effective interest rate, the loan’s market price or the fair value of the collateral if the loan is collateral dependent. The inputs used to
measure the fair value of our mortgage loans on real estate are classified as Level 2 within the fair value hierarchy.
179
Other Investments
The carrying value of our assets classified as other investments approximates fair value. Other investments includes primarily LPs and
other privately held investments that are accounted for using the equity method of accounting and the carrying value is based on our
proportional share of the net assets of the LPs. Other investments also includes Federal Home Loan Bank (“FHLB”) stock carried at
cost and periodically evaluated for impairment based on ultimate recovery of par value. The inputs used to measure the fair value of our
LPs, other privately held investments and FHLB stock are classified as Level 3 within the fair value hierarchy. The remaining assets in
other investments include cash collateral receivables and securities that are not LPs or other privately held investments. The inputs used
to measure the fair value of these assets are classified as Level 1 within the fair value hierarchy.
Separate Account Assets
Separate account assets are primarily carried at fair value. A portion of our separate account assets includes LPs, which are accounted for
using the equity method of accounting. The carrying value is based on our proportional share of the net assets of the LPs and
approximates fair value. The inputs used to measure the fair value of the separate account asset LPs are classified as Level 3 within the
fair value hierarchy.
Other Contract Holder Funds
Other contract holder funds include remaining guaranteed interest and similar contracts and account values of certain investment
contracts. The fair value for the remaining guaranteed interest and similar contracts is estimated using discounted cash flow calculations
as of the balance sheet date. These calculations are based on interest rates currently offered on similar contracts with maturities that are
consistent with those remaining for the contracts being valued. As of December 31, 2020 and 2019, the remaining guaranteed interest
and similar contracts carrying value approximated fair value. The fair value of the account values of certain investment contracts is based
on their approximate surrender value as of the balance sheet date. The inputs used to measure the fair value of our other contract holder
funds are classified as Level 3 within the fair value hierarchy.
Short-Term and Long-Term Debt
The fair value of short-term and long-term debt is based on quoted market prices. The inputs used to measure the fair value of our
short-term and long-term debt are classified as Level 2 within the fair value hierarchy.
Fair Value Option
Mortgage loans on real estate, net of allowance for credit losses, as reported on our Consolidated Balance Sheets, includes commercial
mortgage loans for which the fair value option was elected. The fair value option allows us to elect fair value as an alternative
measurement for mortgage loans not otherwise reported at fair value. We have made these elections for certain mortgage loans
associated with Modco agreements to help mitigate the inconsistency in earnings that would otherwise result from the use of embedded
derivatives included with these loans. Changes in fair value are reflected in realized gain (loss) on our Consolidated Statement of
Comprehensive Income (Loss) for commercial mortgage loans. Changes in fair value due to instrument-specific credit risk are estimated
using changes in credit spreads and quality ratings for the period reported. Due to lack of observable inputs as a result of a change to a
third-party pricing source, certain mortgage loans electing the fair value option were categorized as Level 3 as of December 31, 2020.
The fair value and aggregate contractual principal for mortgage loans where the fair value option was elected (in millions) was as follows:
Commercial mortgage loans: (1)
Fair value
Aggregate contractual principal
As of
December 31,
2020
$
832
839
(1) As of December 31, 2020, no loans for which the fair value option has been elected were in non-accrual status and none were more
than 90 days past due and still accruing interest.
180
Financial Instruments Carried at Fair Value
We did not have any assets or liabilities measured at fair value on a nonrecurring basis as of December 31, 2020 or 2019.
The following summarizes our financial instruments carried at fair value (in millions) on a recurring basis by the fair value hierarchy levels:
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
As of December 31, 2020
Significant
Significant
Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
Total
Fair
Value
Assets
Investments:
Fixed maturity AFS securities:
Corporate bonds
U.S. government bonds
State and municipal bonds
Foreign government bonds
RMBS
CMBS
ABS
Hybrid and redeemable preferred securities
Mortgage loans on real estate
Trading securities
Equity securities
Derivative investments (1)
Cash and invested cash
Other assets:
GLB direct embedded derivatives
GLB ceded embedded derivatives
Indexed annuity ceded embedded derivatives
Separate account assets
Total assets
Liabilities
Future contract benefits – indexed annuity
and IUL contracts embedded derivatives
Reinsurance related embedded derivatives
Other liabilities:
Derivative liabilities (1)
Total liabilities
Benefit Plans’ Assets
$
- $
97,668 $
473
-
-
-
-
-
54
-
5
22
-
-
6
6,921
396
3,074
1,505
6,614
457
-
3,852
48
1,733
1,708
5,121 $
5
-
74
2
-
570
104
832
644
59
3,575
-
-
-
-
606
1,160 $
-
-
-
167,351
291,333 $
450
82
550
-
12,068 $
102,789
484
6,921
470
3,076
1,505
7,184
615
832
4,501
129
5,308
1,708
450
82
550
167,957
304,561
- $
-
- $
(392)
(3,594) $
-
(3,594)
(392)
-
- $
(1,072)
(1,464) $
(2,033)
(5,627) $
(3,105)
(7,091)
207 $
1,529 $
- $
1,736
$
$
$
$
181
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
As of December 31, 2019
Significant
Significant
Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
Total
Fair
Value
Assets
Investments:
Fixed maturity AFS securities:
Corporate bonds
U.S. government bonds
State and municipal bonds
Foreign government bonds
RMBS
CMBS
ABS
Hybrid and redeemable preferred securities
Trading securities
Equity securities
Derivative investments (1)
Cash and invested cash
Other assets:
GLB direct embedded derivatives
GLB ceded embedded derivatives
Indexed annuity ceded embedded derivatives
Separate account assets
Total assets
Liabilities
Future contract benefits – indexed annuity
and IUL contracts embedded derivatives
Reinsurance related embedded derivatives
Other liabilities:
Derivative liabilities (1)
GLB ceded embedded derivatives
Total liabilities
Benefit Plans’ Assets
$
- $
84,435 $
424
-
-
-
-
-
77
50
25
-
-
6
5,884
303
3,230
1,082
4,621
404
3,957
48
1,212
2,563
4,281 $
5
-
90
11
1
268
78
666
30
1,735
-
88,716
435
5,884
393
3,241
1,083
4,889
559
4,673
103
2,947
2,563
-
-
-
639
1,215 $
-
-
-
152,916
260,661 $
450
60
927
-
8,602 $
450
60
927
153,555
270,478
- $
-
-
-
- $
- $
(327)
(2,585) $
-
(2,585)
(327)
(518)
-
(845) $
(867)
(9)
(3,461) $
(1,385)
(9)
(4,306)
195 $
1,394 $
- $
1,589
$
$
$
$
(1) Derivative investment assets and liabilities are presented within the fair value hierarchy on a gross basis by derivative type and not on
a master netting basis by counterparty.
182
The following summarizes changes to our financial instruments carried at fair value (in millions) and classified within Level 3 of the fair
value hierarchy. This summary excludes any effect of amortization of DAC, VOBA, DSI and DFEL. The gains and losses below may
include changes in fair value due in part to observable inputs that are a component of the valuation methodology.
For the Year Ended December 31, 2020
Items
Included
in
Net
Income
Gains
(Losses)
in
OCI
and
Other (1)
Issuances,
Sales,
Maturities,
Settlements,
Calls,
Net
Transfers
Into or
Out
of
Level 3,
Net (3)
Ending
Fair
Value
Beginning
Fair
Value
Investments: (5)
Fixed maturity AFS securities:
Corporate bonds
U.S. government bonds
Foreign government bonds
RMBS
CMBS
ABS
Hybrid and redeemable
preferred securities
Mortgage loans on real estate
Trading securities
Equity securities
Derivative investments
Other assets: (6)
GLB direct embedded derivatives
GLB ceded embedded derivatives
Indexed annuity ceded embedded derivatives
Future contract benefits – indexed annuity
$
4,281 $
5
90
11
1
268
(8) $
-
1
-
(1)
-
284 $
-
3
-
-
7
464 $
-
(20)
-
-
496
78
-
666
30
868
450
60
927
-
(1)
11
4
986
-
22
538
(2)
(10)
-
-
267
-
-
-
-
10
56
(32)
20
(363)
-
-
(915)
-
100 $
-
-
(9)
-
(201)
18
787
(1)
5
(216)
-
-
-
-
5,121
5
74
2
-
570
104
832
644
59
1,542
450
82
550
(3,594)
and IUL contracts embedded derivatives (6)
(2,585)
(1,009)
Other liabilities – GLB ceded embedded
derivatives (6)
Total, net
(9)
5,141 $
$
9
552 $
-
549 $
-
(284) $
-
483 $
-
6,441
183
For the Year Ended December 31, 2019
Items
Included
in
Net
Income
Gains
(Losses)
in
OCI
and
Other (1)
Issuances,
Sales,
Maturities,
Settlements,
Calls,
Net
Transfers
Into or
Out
of
Level 3,
Net (3)
Ending
Fair
Value
Beginning
Fair
Value
$
3,269 $
-
109
7
2
134
3 $
-
-
-
1
-
180 $
-
6
-
-
1
878 $
-
(25)
21
5
619
75
67
25
534
123
72
902
-
17
(12)
10
327
(12)
158
3
-
-
163
-
-
-
-
-
850
17
161
-
-
(133)
(380)
(49) $
5
-
(17)
(7)
(486)
-
(268)
-
-
-
-
-
-
4,281
5
90
11
1
268
78
666
30
868
450
60
927
(2,585)
Investments: (5)
Fixed maturity AFS securities:
Corporate bonds
U.S. government bonds
Foreign government bonds
RMBS
CMBS
ABS
Hybrid and redeemable
preferred securities
Trading securities
Equity securities
Derivative investments
Other assets: (6)
GLB direct embedded derivatives
GLB ceded embedded derivatives
Indexed annuity ceded embedded derivatives
Future contract benefits – indexed annuity
and IUL contracts embedded derivatives (6)
(1,305)
(900)
Other liabilities – GLB ceded embedded
derivatives (6)
Total, net
-
4,014 $
$
(9)
(417) $
-
353 $
-
2,013 $
-
(822) $
(9)
5,141
184
For the Year Ended December 31, 2018
Items
Included
in
Net
Income
Gains
(Losses)
in
OCI
and
Other (1)
Purchases,
Issuances,
Sales,
Maturities,
Settlements,
Calls,
Net (2)
Transfers
Into or
Out
of
Level 3,
Net (3)(4)
Ending
Fair
Value
Beginning
Fair
Value
Investments: (5)
Fixed maturity AFS securities:
Corporate bonds
U.S. government bonds
Foreign government bonds
RMBS
CMBS
ABS
Hybrid and redeemable
preferred securities
Equity AFS securities
Trading securities
Equity securities
Derivative investments
Other assets: (6)
GLB direct embedded derivatives
GLB ceded embedded derivatives
Indexed annuity ceded embedded derivatives
Future contract benefits – indexed annuity
and IUL contracts embedded derivatives (6)
Other liabilities – GLB ceded embedded
derivatives (6)
Total, net
$
3,091 $
5
110
12
6
118
10 $
-
-
-
-
-
(199) $
-
(1)
-
-
(1)
429 $
(5)
-
7
35
223
(62) $
-
-
(12)
(39)
(206)
76
162
49
-
30
903
51
11
-
-
(5)
(1)
170
(780)
21
(117)
(1)
-
-
-
(69)
-
-
-
-
-
30
-
403
-
-
1,008
-
(162)
(7)
26
-
-
-
-
3,269
-
109
7
2
134
75
-
67
25
534
123
72
902
(1,418)
-
(67)
3,139 $
$
198
-
67
(437) $
-
-
-
(271) $
(85)
-
-
2,045 $
-
-
-
(462) $
(1,305)
-
-
4,014
(1) The changes in fair value of the interest rate swaps are offset by an adjustment to derivative investments (see Note 6).
(2)
Issuances, sales, maturities, settlements, calls, net, includes financial instruments acquired in the Liberty Life transaction as follows:
corporate bonds of $67 million and ABS of $17 million.
(3) Transfers into or out of Level 3 for fixed maturity AFS and trading securities are reported at amortized cost as of the beginning-of-
year. For fixed maturity AFS and trading securities, the difference between beginning-of-year amortized cost and beginning-of-year
fair value was included in OCI and earnings, respectively, in the prior years.
(4) Transfers into or out of Level 3 for FHLB stock between equity securities and other investments are reported at cost on our
Consolidated Balance Sheets.
(5) Amortization and accretion of premiums and discounts are included in net investment income on our Consolidated Statements of
Comprehensive Income (Loss). Gains (losses) from sales, maturities, settlements and calls and credit loss expense are included in
realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).
(6) Gains (losses) from the changes in fair value are included in realized gain (loss) on our Consolidated Statements of Comprehensive
Income (Loss).
185
The following provides the components of the items included in issuances, sales, maturities, settlements and calls, net, excluding any
effect of amortization of DAC, VOBA, DSI and DFEL and changes in future contract benefits, (in millions) as reported above:
Investments:
Fixed maturity AFS securities:
Corporate bonds
Foreign government bonds
ABS
Hybrid and redeemable preferred
securities
Mortgage loans on real estate
Trading securities
Equity securities
Derivative investments
Other assets – indexed annuity ceded
embedded derivatives
Future contract benefits – indexed annuity
and IUL contracts embedded derivatives
Total, net
Investments:
Fixed maturity AFS securities:
Corporate bonds
Foreign government bonds
RMBS
CMBS
ABS
Trading securities
Equity securities
Derivative investments
Other assets – indexed annuity ceded
embedded derivatives
Future contract benefits – indexed annuity
and IUL contracts embedded derivatives
Total, net
Issuances
Sales
Maturities
Settlements
Calls
Total
For the Year Ended December 31, 2020
$
$
1,126
-
572
(250) $
-
-
(43) $
(20)
-
(237) $
-
(76)
(132) $
-
-
14
71
300
22
520
25
(4)
(15)
(126)
(2)
(412)
-
(284)
2,366
$
$
-
(809) $
-
-
(40)
-
(471)
-
-
-
(574) $
-
-
(166)
-
-
(940)
-
-
-
-
-
-
284
(1,135) $
-
(132) $
464
(20)
496
10
56
(32)
20
(363)
(915)
-
(284)
Issuances
Sales
Maturities
Settlements
Calls
Total
For the Year Ended December 31, 2019
$
$
1,170
-
21
7
646
872
50
555
56
(28) $
-
-
-
(8)
-
(33)
(63)
(78) $
(25)
-
-
-
-
-
(331)
(156) $
-
-
(2)
(19)
(22)
-
-
(30) $
-
-
-
-
-
-
-
878
(25)
21
5
619
850
17
161
-
-
(189)
-
(133)
(591)
2,786
$
$
-
(132) $
-
(434) $
211
(177) $
-
(30) $
(380)
2,013
186
Issuances
Sales
Maturities
Settlements
Calls
Total
For the Year Ended December 31, 2018
Investments:
Fixed maturity AFS securities:
Corporate bonds
U.S. government bonds
RMBS
CMBS
ABS
Trading securities
Equity securities
Derivative investments
Other assets – indexed annuity ceded
embedded derivatives
Future contract benefits – indexed annuity
and IUL contracts embedded derivatives
Total, net
$
$
947
-
7
39
240
54
1
365
(161) $
(5)
-
-
(17)
(24)
(1)
464
(3) $
-
-
-
-
-
-
(426)
(277) $
-
-
(4)
-
-
-
-
(77) $
-
-
-
-
-
-
-
429
(5)
7
35
223
30
-
403
1,030
-
-
(22)
-
1,008
(284)
2,399
$
$
-
256
$
-
(429) $
199
(104) $
-
(77) $
(85)
2,045
The following summarizes changes in unrealized gains (losses) included in net income, excluding any effect of amortization of DAC,
VOBA, DSI and DFEL and changes in future contract benefits, related to financial instruments carried at fair value classified within
Level 3 that we still held (in millions):
GLB
Derivative investments
Embedded derivatives – indexed annuity
and IUL contracts
Total, net (1)
For the Years Ended December 31,
2018
2019
2020
$
$
671
536
634
1,841
$
$
$
1,015
168
(97)
1,086
$
(75)
90
(38)
(23)
(1)
Included in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).
The following summarizes changes in unrealized gains (losses) included in OCI, net of tax, excluding any effect of amortization of DAC,
VOBA, DSI and DFEL and changes in future contract benefits, related to financial instruments carried at fair value classified within
Level 3 that we still held (in millions):
Fixed maturity AFS securities:
Corporate bonds
Foreign government bonds
ABS
Hybrid and redeemable preferred securities
Total, net
For the
Year Ended
December 31,
2020
$
$
58
4
5
(3)
64
187
The following provides the components of the transfers into and out of Level 3 (in millions) as reported above:
For the Year Ended December 31, 2020
Transfers
Into
Level 3
Out of
Level 3
Transfers
Total
Investments:
Fixed maturity AFS securities:
Corporate bonds
U.S. government bonds
RMBS
ABS
Hybrid and redeemable preferred
securities
Mortgage loans on real estate
Trading securities
Equity securities
Derivative investments
Total, net
Investments:
Fixed maturity AFS securities:
Corporate bonds
U.S. government bonds
RMBS
CMBS
ABS
Trading securities
Total, net
Investments:
Fixed maturity AFS securities:
Corporate bonds
RMBS
CMBS
ABS
Equity AFS securities
Trading securities
Equity securities
Total, net
$
$
$
343
5
1
20
18
787
33
5
-
1,212
$
(243) $
(5)
(10)
(221)
-
-
(34)
-
(216)
(729) $
100
-
(9)
(201)
18
787
(1)
5
(216)
483
For the Year Ended December 31, 2019
Transfers
Into
Level 3
Out of
Level 3
Transfers
Total
$
$
173
5
-
-
9
5
192
$
$
(222) $
-
(17)
(7)
(495)
(273)
(1,014) $
(49)
5
(17)
(7)
(486)
(268)
(822)
For the Year Ended December 31, 2018
Transfers
Into
Level 3
Out of
Level 3
Transfers
Total
$
$
78
-
1
-
-
-
26
105
$
$
(140) $
(12)
(40)
(206)
(162)
(7)
-
(567) $
(62)
(12)
(39)
(206)
(162)
(7)
26
(462)
Transfers into and out of Level 3 are generally the result of observable market information on a security no longer being available or
becoming available to our pricing vendors. For the years ended December 31, 2020, 2019 and 2018, transfers in and out of Level 3 were
attributable primarily to the securities’ observable market information no longer being available or becoming available. In 2020, transfers
into Level 3 included certain commercial mortgage loans electing the fair value option. The transfers were due to a lack of observable
valuation inputs used by a third-party pricing source. In 2018, transfers into or out of Level 3 also included FHLB stock between equity
securities and other investments at cost on our Consolidated Balance Sheets.
188
The following summarizes the fair value (in millions), valuation techniques and significant unobservable inputs of the Level 3 fair value
measurements as of December 31, 2020:
Fair
Value
Valuation
Technique
Significant
Unobservable Inputs
Weighted
Average
Input
Range (1)
Assumption or
Input Ranges
Assets
Investments:
Fixed maturity AFS and
trading securities:
Corporate bonds
Foreign government
bonds
ABS
Equity securities
Other assets – GLB direct
and ceded embedded
derivatives
Indexed annuity ceded
embedded derivatives
Liabilities
Future contract benefits –
indexed annuity and IUL
contracts embedded
derivatives
$
3,370 Discounted cash flow Liquidity/duration adjustment (2)
0.2% - 19.9%
1.8%
29 Discounted cash flow Liquidity/duration adjustment (2)
20 Discounted cash flow Liquidity/duration adjustment (2)
22 Discounted cash flow Liquidity/duration adjustment (2)
6.0% - 6.0%
3.5% - 3.5%
4.5% - 6.0%
6.0%
3.5%
5.6%
532 Discounted cash flow Long-term lapse rate (3)
Utilization of guaranteed withdrawals (4)
Claims utilization factor (5)
Premiums utilization factor (5)
NPR (6)
Mortality rate (7)
Volatility (8)
550 Discounted cash flow Lapse rate (3)
Mortality rate (7)
30%
1% -
85% - 100%
60% - 100%
80% - 115%
0.06% - 1.35%
(10) %
94%
(10) %
(10) %
0.95%
(9)
(10)
1% -
28%
14.53%
0% -
9%
(9)
(10) %
(10)
$
(3,594) Discounted cash flow Lapse rate (3)
Mortality rate (7)
0% -
9%
(9)
(10) %
(10)
(1) Unobservable inputs were weighted by the relative fair value of the instruments, unless otherwise noted.
(2) The liquidity/duration adjustment input represents an estimated market participant composite of adjustments attributable to liquidity
premiums, expected durations, structures and credit quality that would be applied to the market observable information of an
investment.
(3) The lapse rate input represents the estimated probability of a contract surrendering during a year, and thereby forgoing any future
benefits. The range for indexed annuity and IUL contracts represents the lapse rates during the surrender charge period.
(4) The utilization of guaranteed withdrawals input represents the estimated percentage of contract holders that utilize the guaranteed
withdrawal feature.
(5) The utilization factors are applied to the present value of claims or premiums, as appropriate, in the GLB reserve calculation to
estimate the impact of inefficient withdrawal behavior, including taking less than or more than the maximum guaranteed withdrawal.
(6) The NPR input represents the estimated additional credit spread that market participants would apply to the market observable
discount rate when pricing a contract. The NPR input was weighted by the absolute value of the sensitivity of the reserve to the NPR
assumption.
(7) The mortality rate input represents the estimated probability of when an individual belonging to a particular group, categorized
according to age or some other factor such as gender, will die.
(8) The volatility input represents overall volatilities assumed for the underlying variable annuity funds, which include a mixture of equity
and fixed-income assets. Fair value of the variable annuity GLB embedded derivatives would increase if higher volatilities were used
for valuation. Volatility assumptions vary by fund due to the benchmarking of different indices. The volatility input was weighted by
the relative account value assigned to each index.
(9) The mortality rate is based on a combination of company and industry experience, adjusted for improvement factors.
(10) A weighted average input range is not a meaningful measurement for lapse rate, utilization factors or mortality rate.
189
From the table above, we have excluded Level 3 fair value measurements obtained from independent, third-party pricing sources. We do
not develop the significant inputs used to measure the fair value of these assets and liabilities, and the information regarding the
significant inputs is not readily available to us. Independent broker-quoted fair values are non-binding quotes developed by market
makers or broker-dealers obtained from third-party sources recognized as market participants. The fair value of a broker-quoted asset or
liability is based solely on the receipt of an updated quote from a single market maker or a broker-dealer recognized as a market
participant as we do not adjust broker quotes when used as the fair value measurement for an asset or liability. Significant increases or
decreases in any of the quotes received from a third-party broker-dealer may result in a significantly higher or lower fair value
measurement.
Changes in any of the significant inputs presented in the table above would have resulted in a significant change in the fair value
measurement of the asset or liability as follows:
•
•
Investments – An increase in the liquidity/duration adjustment input would have resulted in a decrease in the fair value measurement.
Indexed annuity and IUL contracts embedded derivatives – For direct embedded derivatives, an increase in the lapse rate or mortality rate
inputs would have resulted in a decrease in the fair value measurement.
• GLB embedded derivatives – Assuming our GLB direct embedded derivatives are in a liability position: an increase in our lapse rate,
NPR or mortality rate inputs would have resulted in a decrease in the fair value measurement; and an increase in the utilization of
guaranteed withdrawal or volatility inputs would have resulted in an increase in the fair value measurement.
For each category discussed above, the unobservable inputs are not inter-related; therefore, a directional change in one input would not
have affected the other inputs.
As part of our ongoing valuation process, we assess the reasonableness of our valuation techniques or models and make adjustments as
necessary. For more information, see Note 1.
22. Segment Information
We provide products and services and report results through our Annuities, Retirement Plan Services, Life Insurance and Group
Protection segments. As discussed in Note 3, we completed the acquisition of Liberty Life during the second quarter of 2018. Related
results are included within the Group Protection segment. We also have Other Operations, which includes the financial data for
operations that are not directly related to the business segments. Our reporting segments reflect the manner by which our chief operating
decision makers view and manage the business. The following is a brief description of these segments and Other Operations.
The Annuities segment provides tax-deferred investment growth and lifetime income opportunities for its clients by offering fixed
(including indexed) and variable annuities.
The Retirement Plan Services segment provides employer-sponsored defined benefit and individual retirement accounts, as well as
individual and group variable annuities, group fixed annuities and mutual-fund based programs in the retirement plan marketplace.
The Life Insurance segment focuses in the creation and protection of wealth through life insurance products, including term insurance, a
linked-benefit product (which is a UL policy linked with riders that provide for long-term care costs), IUL and both single and
survivorship versions of UL and VUL, including corporate-owned UL and VUL and bank-owned UL and VUL products.
The Group Protection segment offers group non-medical insurance products, including short and long-term disability, absence
management services, term life, dental, vision and accident and critical illness benefits and services to the employer marketplace through
various forms of employee-paid and employer-paid plans.
Other Operations includes investments related to the excess capital in our insurance subsidiaries; benefit plan net liability; the
unamortized deferred gain on indemnity reinsurance related to the sale of reinsurance; the results of certain disability income business;
our run-off institutional pension business, the majority of which was sold on a group annuity basis; debt costs; strategic digitization
expense; and other corporate investments.
Segment operating revenues and income (loss) from operations are internal measures used by our management and Board of Directors to
evaluate and assess the results of our segments. Income (loss) from operations is GAAP net income excluding the after-tax effects of the
following items, as applicable:
• Realized gains and losses associated with the following (“excluded realized gain (loss)”):
Sales or disposals and impairments of financial assets;
•
• Changes in the fair value of equity securities;
• Changes in the fair value of derivatives, embedded derivatives within certain reinsurance arrangements and trading securities
(“gain (loss) on the mark-to-market on certain instruments”);
• Changes in the fair value of the derivatives we own to hedge our GDB riders within our variable annuities;
190
• Changes in the fair value of the embedded derivatives of our GLB riders reflected within variable annuity net derivative results
accounted for at fair value;
• Changes in the fair value of the derivatives we own to hedge our GLB riders reflected within variable annuity net derivative
results; and
• Changes in the fair value of the embedded derivative liabilities related to index options we may purchase or sell in the future to
hedge contract holder index allocations applicable to future reset periods for our indexed annuity products accounted for at fair
value (“indexed annuity forward-starting option”);
Income (loss) from reserve changes, net of related amortization, on business sold through reinsurance;
• Changes in reserves resulting from benefit ratio unlocking on our GDB and GLB riders (“benefit ratio unlocking”);
•
• Gains (losses) on early extinguishment of debt;
• Losses from the impairment of intangible assets;
•
Income (loss) from discontinued operations;
• Acquisition and integration costs related to mergers and acquisitions; and
•
Income (loss) from the initial adoption of new accounting standards, regulations, and policy changes including the net impact from
the Tax Cuts and Jobs Act.
Operating revenues represent GAAP revenues excluding the pre-tax effects of the following items, as applicable:
• Excluded realized gain (loss);
• Revenue adjustments from the initial adoption of new accounting standards;
• Amortization of DFEL arising from changes in GDB and GLB benefit ratio unlocking; and
• Amortization of deferred gains arising from reserve changes on business sold through reinsurance.
The tables below reconcile our segment measures of performance to the GAAP measures presented in our Consolidated Statements of
Comprehensive Income (Loss) (in millions):
Revenues
Operating revenues:
Annuities
Retirement Plan Services
Life Insurance
Group Protection
Other Operations
Excluded realized gain (loss), pre-tax
Amortization of DFEL associated with benefit ratio unlocking, pre-tax
Total revenues
Net Income (Loss)
Income (loss) from operations:
Annuities
Retirement Plan Services
Life Insurance
Group Protection
Other Operations
Excluded realized gain (loss), after-tax
Benefit ratio unlocking, after-tax
Net impact from the Tax Cuts and Jobs Act
Acquisition and integration costs related to mergers and acquisitions, after-tax
Gain (loss) on early extinguishment of debt, after-tax
Net income (loss)
191
For the Years Ended December 31,
2018
2019
2020
4,455
1,213
7,516
4,793
185
(721)
(2)
17,439
$
$
4,600
1,200
7,438
4,588
220
(794)
6
17,258
$
$
4,383
1,178
6,922
3,757
235
(46)
(5)
16,424
For the Years Ended December 31,
2018
2019
2020
983
168
(34)
43
(295)
(570)
194
37
(15)
(12)
499
$
$
954
172
259
238
(268)
(627)
277
17
(103)
(33)
886
$
$
1,102
171
645
187
(225)
(37)
(136)
19
(67)
(18)
1,641
$
$
$
$
Other segment information (in millions) was as follows:
Net Investment Income
Annuities
Retirement Plan Services
Life Insurance
Group Protection
Other Operations
Total net investment income
Amortization of DAC and VOBA, Net of Interest
Annuities
Retirement Plan Services
Life Insurance
Group Protection
Total amortization of DAC and VOBA, net of interest
Federal Income Tax Expense (Benefit)
Annuities
Retirement Plan Services
Life Insurance
Group Protection
Other Operations
Excluded realized gain (loss)
Gain (loss) on early extinguishment of debt
Benefit ratio unlocking
Net impact from the Tax Cuts and Jobs Act
Acquisition and integration costs related to
mergers and acquisitions
Total federal income tax expense (benefit)
Assets
Annuities
Retirement Plan Services
Life Insurance
Group Protection
Other Operations
Total assets
192
For the Years Ended December 31,
2018
2019
2020
1,272
933
2,823
330
152
5,510
$
$
1,140
924
2,658
307
194
5,223
$
$
1,005
899
2,697
260
224
5,085
For the Years Ended December 31,
2018
2019
2020
387
29
785
114
1,315
$
$
408
26
779
111
1,324
$
$
410
28
711
92
1,241
For the Years Ended December 31,
2018
2019
2020
$
149
24
(33)
11
(82)
(151)
(3)
51
(37)
$
139
23
47
63
(92)
(167)
(9)
74
(17)
(5)
(76) $
(28)
33
$
183
29
147
50
(77)
(9)
(5)
(36)
(19)
(19)
244
As of December 31,
2019
2020
184,678
45,372
101,941
10,201
23,756
365,948
$
$
167,443
40,184
92,561
9,467
25,106
334,761
$
$
$
$
$
$
$
$
23. Supplemental Disclosures of Cash Flow Data
The following summarizes our supplemental cash flow data (in millions):
For the Years Ended December 31,
2018
2019
2020
Interest paid
Income taxes paid (received)
Significant non-cash investing and financing transactions:
$
$
283
22
$
281
260
Equity securities received in exchange of
fixed maturity AFS securities
Reduction of other investments in connection with
the expiration of a repurchase agreement
Investments received in financing transactions
24. Quarterly Results of Operations (Unaudited)
19
-
-
-
(150)
-
281
90
-
-
263
The unaudited quarterly results of operations (in millions, except per share data) were as follows:
2020
Total revenues
Total expenses
Net income (loss)
Earnings (loss) per common share – basic:
Net income (loss)
Earnings (loss) per common share – diluted:
Net income (loss)
2019
Total revenues
Total expenses
Net income (loss)
Earnings (loss) per common share – basic:
Net income (loss)
Earnings (loss) per common share – diluted:
Net income (loss)
For the Three Months Ended
March 31,
June 30,
September 30, December 31,
$
$
4,425 $
4,391
52
0.27
0.15
3,965 $
3,697
252
1.23
1.22
3,517 $
3,678
(94)
(0.49)
(0.49)
4,310 $
3,889
363
1.80
1.79
5,361 $
4,901
398
2.06
2.01
4,638 $
4,888
(161)
(0.81)
(0.83)
4,135
4,046
143
0.74
0.74
4,344
3,863
431
2.18
2.15
193
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Conclusions Regarding Disclosure Controls and Procedures
We maintain disclosure controls and procedures, which are designed to ensure that information required to be disclosed in the reports we
file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is
accumulated and communicated to the Company’s management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure. As of the end of the period required by this report, we, under the
supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the
effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in timely
alerting them to material information relating to us and our consolidated subsidiaries required to be disclosed in our periodic reports
under the Exchange Act.
(b) Management’s Report on Internal Control Over Financial Reporting
Management’s Report on Internal Control Over Financial Reporting is included on page 105 of “Item 8. Financial Statements and
Supplementary Data” and is incorporated herein by reference.
A control system, no matter how well designed and operated, can provide only reasonable assurance that the control system’s objectives
will be met. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance
that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have
been detected. Projections of any evaluation of controls’ effectiveness to future periods are subject to risks. Over time, controls may
become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
(c) Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as that term is defined in rules 13a-15(f) and 15d-15(f) under the
Exchange Act) that occurred during the quarter ended December 31, 2020, that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Information required by this item relating to our executive officers is incorporated by reference to “Part I – Information About our
Executive Officers” of this Form 10-K. Information required by this item relating to our directors and corporate governance matters is
incorporated by reference to the sections captioned “Governance of the Company – Our Corporate Governance Guidelines,”
“Governance of the Company – Director Nomination Process,” “Governance of the Company – Board Committees – Current
Committee Membership and Meetings Held During 2020,” “Governance of the Company – Board Committees – Audit Committee,”
“Agenda Item 1 – Election of Directors” and “General Information – Shareholder Proposals for the 2022 Annual Meeting” of LNC’s
Proxy Statement for the Annual Meeting scheduled for June 3, 2021.
194
Item 11. Executive Compensation
Information required by this item is incorporated by reference to the sections captioned “Compensation of Outside Directors,”
“Compensation Discussion & Analysis,” “Executive Compensation Tables” and “Compensation Committee Interlocks and Insider
Participation” of LNC’s Proxy Statement for the Annual Meeting scheduled for June 3, 2021.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by this item is incorporated by reference to the section captioned “Security Ownership” of LNC’s Proxy Statement
for the Annual Meeting scheduled for June 3, 2021.
Securities Authorized for Issuance Under Equity Compensation Plans
The table below provides information as of December 31, 2020, regarding securities authorized for issuance under LNC’s equity
compensation plans. See Note 19 to the consolidated financial statements included in “Part II – Item 8. Financial Statements and
Supplementary Data” of this Form 10-K for a brief description of our equity compensation plans.
Number of
Securities To Be
Issued Upon
Exercise of
Outstanding
Options,
Warrants
and Rights
(a)
Weighted-
Average
Exercise
Price of
Outstanding
Options,
Warrants
and Rights
(b)
Number of
Securities Remaining
Available For Future
Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected
in Column (a))
(c)
7,213,000 (1)
$
-
7,213,000
$
57.36 (2)
-
57.36
5,662,207 (3)
-
5,662,207
Plan Category
Equity compensation plans approved by shareholders
Equity compensation plans not approved by shareholders
Total
(1) This amount includes the following:
•
•
•
•
•
1,085,416 representing the number of performance shares based on the maximum number of shares potentially payable under the
awards (i.e. 200% of target). 542,708 represents the target number of performance shares that were outstanding as of December 31,
2020, as set forth in Note 19 of the Notes to the Consolidated Financial Statements, included in Part II, Item 8 of this Form 10-K.
The performance share awards have not been earned as of December 31, 2020. The number of shares, if any, to be issued pursuant
to such awards will be determined based upon performance over the applicable three-year performance period. The performance
shares are all granted under either the LNC 2009 Amended and Restated Incentive Compensation Plan (“the 2009 ICP”) or the LNC
2014 Incentive Compensation Plan (“the 2014 ICP”);
1,657,902 outstanding restricted stock units, which were granted under the 2009 ICP, 2014 ICP or the LNC 2020 Incentive
Compensation Plan (the “2020 ICP”);
3,458,959 outstanding stock options with service conditions granted under the 2009 ICP, the 2014 ICP or the LNC Stock Option
Plan for Non-Employee Directors (which has expired and, as a result, no additional awards may be granted under this plan);
208,650 outstanding stock options with performance conditions granted under the 2009 ICP; and
802,073 outstanding deferred stock units, which have been granted under deferred compensation plans for our employees and non-
employee directors from the 2009 ICP, the 2014 ICP, the 2020 ICP or the LNC Deferred Compensation Plan for Non-Employee
Directors (the “Directors’ DCP”). These outstanding deferred stock units are vested and are not included in Note 19 of the Notes
to the Consolidated Financial Statements, included in Part II – Item 8 of this Form 10-K.
(2) The price in column (b) reflects the weighted average price of all outstanding options under any plan that, as of December 31, 2020,
had been granted but not forfeited, expired or exercised. Performance shares, restricted stock units, and deferred stock units are not
included in determining the weighted average in column (b) because they have no exercise price.
(3)
Includes up to:
•
•
•
431,916 securities available for issuance in connection with awards under the 2009 ICP;
5,165,512 securities available for issuance in connection with awards under the 2020 ICP; and
64,779 securities available for issuance in connection with deferred stock units under the Directors’ DCP, which are vested upon
grant.
195
Shares that may be issued in payment of awards, other than stock options and stock appreciation rights, reduce the number of securities
remaining available for future issuance under the 2009 ICP at a ratio of 1.63 to 1. Shares that may be issued in payment of awards
granted under the 2014 ICP and the 2020 ICP reduce the number of securities remaining available for future issuance under such plans at
a ratio of 1 to 1.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required by this item is incorporated by reference to the sections captioned “Related-Party Transactions” and “Governance
of the Company – Director Independence” of LNC’s Proxy Statement for the Annual Meeting scheduled for June 3, 2021.
Item 14. Principal Accounting Fees and Services
Information required by this item is incorporated by reference to the sections captioned “Agenda Item 2 – Ratification of Appointment
of Independent Registered Public Accounting Firm” of LNC’s Proxy Statement for the Annual Meeting scheduled for June 3, 2021.
Item 15. Exhibits, Financial Statement Schedules
(a) (1) Financial Statements
PART IV
The following Consolidated Financial Statements of Lincoln National Corporation are included in Part II – Item 8:
Management Report on Internal Control Over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets – December 31, 2020 and 2019
Consolidated Statements of Comprehensive Income (Loss) – Years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Stockholders’ Equity – Years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows – Years ended December 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedules
The Financial Statement Schedules are listed in the Index to Financial Statement Schedules on page FS-1, which is incorporated herein by
reference.
(a) (3) Listing of Exhibits
The Exhibits are listed in the Index to Exhibits beginning on page 197, which is incorporated herein by reference.
(c) The Financial Statement Schedules for Lincoln National Corporation begin on page FS-2, which are incorporated herein by reference.
196
2.1
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
INDEX TO EXHIBITS
Master Transaction Agreement, dated as of January 18, 2018, by and among The Lincoln National Life Insurance Company,
for the limited purposes set forth therein, LNC, Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance
Company, for the limited purposes set forth therein, Liberty Mutual Group Inc., Protective Life Insurance Company and for
the limited purposes set forth therein, Protective Life Corporation, is incorporated by reference to Exhibit 2.1 to LNC’s
Form 8-K (File No. 1-6028) filed with the SEC on January 22, 2018.**
Restated Articles of Incorporation of LNC are incorporated by reference to Exhibit 3.1 to LNC’s Form 8-K (File No. 1-
6028) filed with the SEC on August 14, 2017.
Amended and Restated Bylaws of LNC (effective August 19, 2020) are incorporated by reference to Exhibit 3.1 to LNC’s
Form 8-K (File No. 1-6028) filed with the SEC on August 20, 2020.
Indenture of LNC, dated as of September 15, 1994, between LNC and The Bank of New York, as trustee, is incorporated by
reference to Exhibit 4(c) to LNC’s Registration Statement on Form S-3/A (File No. 33-55379) filed with the SEC on
September 15, 1994.
First Supplemental Indenture, dated as of November 1, 2006, to Indenture dated as of September 15, 1994, is incorporated
by reference to Exhibit 4.4 to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2006.
Junior Subordinated Indenture, dated as of May 1, 1996, between LNC and The Bank of New York Trust Company, N.A.
(successor in interest to J.P. Morgan Trust Company and The First National Bank of Chicago) is incorporated by reference to
Exhibit 4(j) to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2001.
Third Supplemental Junior Subordinated Indenture dated May 17, 2006, to Junior Subordinated Indenture, dated as of May
1, 1996, is incorporated by reference to Exhibit 4.1 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on May 17,
2006.
Fourth Supplemental Junior Subordinated Indenture, dated as of November 1, 2006, to Junior Subordinated Indenture, dated
May 1, 1996, is incorporated by reference to Exhibit 4.9 to LNC’s Form 10-K (File No. 1-6028) for the year ended
December 31, 2006.
Fifth Supplemental Junior Subordinated Indenture, dated as of March 13, 2007, to Junior Subordinated Indenture, dated May
1, 1996, is incorporated by reference to Exhibit 4.1 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on March 13,
2007.
Senior Indenture, dated as of March 10, 2009, between LNC and the Bank of New York Mellon, is incorporated by reference
to Exhibit 4.1 to LNC’s Form S-3ASR (File No. 333-157822) filed with the SEC on March 10, 2009.
First Supplemental Indenture, dated as of August 18, 2020, to Senior Indenture dated as of March 10, 2009 between LNC
and the Bank of New York Mellon, is incorporated by reference to Exhibit 4.4 to LNC’s Form S-3ASR (File No. 333-
249058) filed with the SEC on September 25, 2020.
Junior Subordinated Indenture, dated as of March 10, 2009, between LNC and the Bank of New York Mellon, is
incorporated by reference to Exhibit 4.3 to LNC’s Form S-3ASR (File No. 333-157822) filed with the SEC on March 10,
2009.
Form of 7.00% Capital Securities due 2066 of LNC is incorporated by reference to Exhibit 4.2 to LNC’s Form 8-K (File No.
1-6028) filed with the SEC on May 17, 2006.
Form of 6.15% Senior Notes due April 6, 2036 is incorporated by reference to Exhibit 4.2 to LNC’s Form 8-K (File No. 1-
6028) filed with the SEC on April 7, 2006.
Form of 6.05% Capital Securities due 2067 is incorporated by reference to Exhibit 4.2 to LNC’s Form 8-K (File No. 1-6028)
filed with the SEC on March 13, 2007.
Form of 6.30% Senior Notes due 2037 is incorporated by reference to Exhibit 4.1 to LNC’s Form 8-K (File No. 1-6028)
filed with the SEC on October 9, 2007.
Form of 7.00% Senior Notes due 2040 is incorporated by reference to Exhibit 4.2 to LNC’s Form 8-K (File No. 1-6028)
filed with the SEC on June 18, 2010.
Form of 4.20% Senior Notes due 2022 is incorporated by reference to Exhibit 4.1 to LNC’s Form 8-K (File No. 1-6028)
filed with the SEC on March 29, 2012.
197
4.16
4.17
4.18
4.19
4.20
4.21
4.22
4.23
4.24
4.25
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
Form of 4.00% Senior Notes due 2023 is incorporated by reference to Exhibit 4.1 to LNC’s Form 8-K (File No. 1-6028)
filed with the SEC on August 16, 2013.
Form of 3.350% Senior Notes due 2025 is incorporated by reference to Exhibit 4.1 to LNC’s Form 8-K (File No. 1-6028)
filed with the SEC on March 10, 2015.
Form of 3.625% Senior Notes due 2026 is incorporated by reference to Exhibit 4.1 to LNC’s Form 8-K (File No. 1-6028)
filed with the SEC on December 12, 2016.
Form of 4.00% Senior Notes due 2023 is incorporated by reference to Exhibit 4.1 to LNC’s Form 8-K (File no. 1-6028) filed
with the SEC on February 12, 2018.
Form of 3.800% Senior Notes due 2028 is incorporated by reference to Exhibit 4.2 to LNC’s Form 8-K (File No. 1-6028)
filed with the SEC on February 12, 2018.
Form of 4.350% Senior Notes due 2048 is incorporated by reference to Exhibit 4.3 to LNC’s Form 8-K (File No. 1-6028)
filed with the SEC on February 12, 2018.
Form of 3.050% Senior Notes due 2030 is incorporated by reference to Exhibit 4.1 to LNC’s Form 8-K (File No. 1-6028)
filed with the SEC on August 19, 2019.
Form of 3.400% Senior Notes due 2031, incorporated by reference to Exhibit 4.1 to LNC’s Form 8-K (File No. 1-6028) filed
with the SEC on May 15, 2020.
Form of 4.375% Senior Notes due 2050, incorporated by reference to Exhibit 4.2 to LNC’s Form 8-K (File No. 1-6028) filed
with the SEC on May 15, 2020.
Description of Securities Registered Pursuant to Section 12 of the Exchange Act is filed herewith.
LNC 2014 Incentive Compensation Plan (effective May 22, 2014) is incorporated by reference to Exhibit 10.1 to LNC’s
Form 8-K (File No. 1-6028) filed with the SEC on May 28, 2014.*
LNC 2009 Amended and Restated Incentive Compensation Plan (as amended and restated on May 14, 2009) is incorporated
by reference to Exhibit 4 to LNC’s Proxy Statement (File No. 1-6028) filed with the SEC on April 9, 2009.*
LNC Stock Option Plan for Non-Employee Directors is incorporated by reference to Exhibit 5 to LNC’s Proxy Statement
(File No. 1-6028) filed with the SEC on April 4, 2007.*
Non-Qualified Stock Option Agreement for the LNC Stock Option Plan for Non-Employee Directors is incorporated by
reference to Exhibit 10.3 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on May 10, 2007.*
Non-Employee Director Fees are filed herewith.*
Amended and Restated LNC Supplemental Retirement Plan is incorporated by reference to Exhibit 10.10 to LNC’s Form
10-K (File No. 1-6028) for the year ended December 31, 2007.*
The Severance Plan for Officers of LNC (Amended and Restated effective as of February 27, 2019) is incorporated by
reference to Exhibit 10.1 to LNC’s Form 10-Q (File No. 1-6028) for the quarter ended March 31, 2019.*
Amendment No 1. to the Severance Plan for Officers of LNC, effective January 1, 2020, is incorporated by reference to
Exhibit 10.8 to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2019.*
The LNC Outside Directors’ Value Sharing Plan, last amended March 8, 2001, is incorporated by reference to Exhibit 10(e)
to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2001.*
LNC Deferred Compensation and Supplemental/Excess Retirement Plan, as amended and restated effective January 1, 2020,
is incorporated by reference to Exhibit 10.10 to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2019.*
Amendment No. 1 to the LNC Deferred Compensation and Supplemental/Excess Retirement Plan is filed herewith.*
LNC 1993 Stock Plan for Non-Employee Directors, as last amended May 10, 2001, is incorporated by reference to Exhibit
10(g), to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2001.*
Amendment No. 2 to the LNC 1993 Stock Plan for Non-Employee Directors (effective February 1, 2006) is incorporated by
reference to Exhibit 10.1 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on January 13, 2006.*
198
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
LNC Executives’ Severance Benefit Plan (effective August 7, 2008) is incorporated by reference to Exhibit 10.3 to LNC’s
Form 10-Q (File No. 1-6028) for the quarter ended June 30, 2008.*
Amendment No. 1 to the LNC Executives’ Severance Benefit Plan (effective November 9, 2011) is incorporated by
reference to Exhibit 10.22 to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2011.*
Amended and Restated LNC Excess Retirement Plan is incorporated by reference to Exhibit 10.26 to LNC’s Form 10-K
(File No. 1-6028) for the year ended December 31, 2007.*
Amendment No. 1 to the Amended and Restated LNC Excess Retirement Plan is filed herewith.*
Amendment No. 2 to the Amended and Restated LNC Excess Retirement Plan is filed herewith.*
Amendment No. 3 to the Amended and Restated LNC Excess Retirement Plan is filed herewith.*
Amendment No. 4 to the Amended and Restated LNC Excess Retirement Plan is filed herewith.*
Amendment No. 5 to the Amended and Restated LNC Excess Retirement Plan is filed herewith.*
LNC Deferred Compensation Plan for Non-Employee Directors, as amended and restated November 5, 2008, is
incorporated by reference to Exhibit 10.23 to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2008.*
Form of Indemnification between LNC and each director is incorporated by reference to Exhibit 10.1 to LNC’s Form 10-Q
(File No. 1-6028) for the quarter ended September 30, 2009.*
Form of Non-Qualified Stock Option Award Agreement is incorporated by Reference to Exhibit 10.35 to LNC’s Form 10-
K (File No. 1-6028) for the year ended December 31, 2012.*
Amendment #1 to the Form of Non-Qualified Stock Option Award Agreements, effective August 13, 2014, is incorporated
by reference to Exhibit 10.28 to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2014.*
Amendment #2 to the Form of Non-Qualified Stock Option Award Agreements, effective August 13, 2014, is incorporated
by reference to Exhibit 10.29 to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2014.*
Form of Nonqualified Stock Option Agreement under the LNC 2014 Incentive Compensation Plan is incorporated by
reference to Exhibit 10.2 to LNC’s Form 10-Q (File No. 1-6028) for the quarter ended March 31, 2015.*
Form of Restricted Stock Unit Award Agreement for Senior Management Committee (Other than CEO) is incorporated by
reference to Exhibit 10.1 to LNC’s Form 10-Q (File No. 1-6028) for the quarter ended March 31, 2016.*
Form of Nonqualified Stock Option Award Agreement for Senior Management Committee (Other than CEO) is
incorporated by reference to Exhibit 10.1 to LNC’s Form 10-Q (File No. 1-6028) for the quarter ended March 31, 2017.*
Form of Performance Cycle Agreement for Senior Management Committee (Other than CEO) is incorporated by reference
to Exhibit 10.3 to LNC’s Form 10-Q (File No. 1-6028) for the quarter ended March 31, 2016.*
Form of Nonqualified Stock Option Agreement for CEO is incorporated by reference to Exhibit 10.1 to LNC’s Form 10-Q
(File No. 1-6028) for the quarter ended March 31, 2020.*
Form of Long-Term Incentive Award Program Performance Cycle Agreement for CEO is incorporated by reference to
Exhibit 10.2 to LNC’s Form 10-Q (File No. 1-6028) for the quarter ended March 31, 2020.*
Form of Restricted Stock Unit Award Agreement for CEO is incorporated by reference to Exhibit 10.3 to LNC’s Form 10-
Q (File No. 1-6028) for the quarter ended March 31, 2020.*
Form of Nonqualified Stock Option Agreement for Senior Management Committee (“SMC”) is incorporated by reference to
Exhibit 10.4 to LNC’s Form 10-Q (File No. 1-6028) for the quarter ended March 31, 2020.*
Form of Long-Term Incentive Award Program Performance Cycle Agreement for SMC (other than CEO) is incorporated
by reference to Exhibit 10.5 to LNC’s Form 10-Q (File No. 1-6028) for the quarter ended March 31, 2020.*
Form of Restricted Stock Unit Award Agreement for SMC (other than CEO) is incorporated by reference to Exhibit 10.6 to
LNC’s Form 10-Q (File No. 1-6028) for the quarter ended March 31, 2020.*
Lincoln National Corporation 2020 Incentive Compensation Plan, incorporated by reference to Exhibit 4.3 to LNC’s
Registration Statement on Form S-8 (File No. 333-239117) filed with the SEC on June 12, 2020.*
199
10.38
10.39
10.40
10.41
10.42
21
23
31.1
31.2
32.1
32.2
LNC Domestic Relocation Policy Home Sale Assistance Plan, effective as of September 6, 2007, is incorporated by reference
to Exhibit 10.35 to LNC’s Form 10-K (File No. 1-6028) for the year ended December 31, 2009.*
Stock and Asset Purchase Agreement by and among LNC, The Lincoln National Life Insurance Company, Lincoln National
Reinsurance Company (Barbados) Limited and Swiss Re Life & Health America Inc. dated July 27, 2001 is incorporated by
reference to Exhibit 99.1 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on August 1, 2001. Omitted schedules
and exhibits listed in the Agreement will be furnished to the SEC upon request.
Indemnity Reinsurance Agreement, dated as of January 1, 1998, between Connecticut General Life Insurance Company and
Lincoln Life & Annuity Company of New York is incorporated by reference to Exhibit 10.67 to LNC’s Form 10-K (File No.
1-6028) for the year ended December 31, 2008.**
Coinsurance Agreement, dated as of October 1, 1998, AETNA Life Insurance and Annuity Company and Lincoln Life &
Annuity Company of New York is incorporated by reference to Exhibit 10.68 to LNC’s Form 10-K (File No. 1-6028) for
the year ended December 31, 2008.**
Credit Agreement, dated as of July 31, 2019, among LNC, as an Account Party and Guarantor, the Subsidiary Account
Parties, as additional Account Parties, Bank of America, N.A. as administrative agent, and the other lenders named therein, is
incorporated by reference to Exhibit 10.1 to LNC’s Form 8-K (File No. 1-6028) filed with the SEC on July 31, 2019.
Subsidiaries List.
Consent of Independent Registered Public Accounting Firm.
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are
embedded within the Inline XBRL document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
* This exhibit is a management contract or compensatory plan or arrangement.
** Schedules to the agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. LNC will furnish supplementally a
copy of the schedule to the SEC, upon request.
NOTE: This is an abbreviated version of the Lincoln National Corporation Form 10-K. Copies of the full Form 10-K and these
exhibits are available electronically at www.sec.gov or www.lfg.com, or by writing to the Corporate Secretary at Lincoln
National Corporation, 150 N. Radnor-Chester Road, Suite A305, Radnor, PA 19087.
200
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, LNC has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Dated: February 18, 2021
LINCOLN NATIONAL CORPORATION
By:
/s/ Randal J. Freitag
Randal J. Freitag
Executive Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities indicated on February 18, 2021.
Title
President, Chief Executive Officer and Director
(Principal Executive Officer)
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Signature
/s/ Dennis R. Glass
Dennis R. Glass
/s/ Randal J. Freitag
Randal J. Freitag
/s/ Christine A. Janofsky
Christine A. Janofsky
/s/ Deirdre P. Connelly
Deirdre P. Connelly
/s/ William H. Cunningham
William H. Cunningham
/s/Reginald E. Davis
Reginald E. Davis
/s/ George W. Henderson, III
George W. Henderson, III
/s/ Eric G. Johnson
Eric G. Johnson
/s/ Gary C. Kelly
Gary C. Kelly
/s/ M. Leanne Lachman
M. Leanne Lachman
/s/ Michael F. Mee
Michael F. Mee
/s/ Patrick S. Pittard
Patrick S. Pittard
/s/ Lynn M. Utter
Lynn M. Utter
201
Index to Financial Statement Schedules
– Summary of Investments – Other than Investments in Related Parties
I
II – Condensed Financial Information of Registrant
III – Supplementary Insurance Information
IV – Reinsurance
FS-2
FS-3
FS-6
FS-8
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are
not required under the related instructions, are inapplicable, or the required information is included in the consolidated financial
statements, and therefore omitted. See “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Critical Accounting Policies and Estimates” on page 42 for more detail on items contained within these schedules.
FS-1
LINCOLN NATIONAL CORPORATION
SCHEDULE I – CONSOLIDATED SUMMARY OF INVESTMENTS – OTHER THAN
INVESTMENTS IN RELATED PARTIES
(in millions)
Column A
Column B Column C Column D
Type of Investment
Fixed Maturity Available-For-Sale Securities (1)
Bonds:
U.S. government bonds
Foreign government bonds
State and municipal bonds
Public utilities
All other corporate bonds
Mortgage-backed and asset-backed securities
Hybrid and redeemable preferred securities
Total fixed maturity available-for-sale securities
Equity Securities
Common stocks:
Public utilities
Banks, trusts and insurance companies
Industrial, miscellaneous and all other
Non-redeemable preferred securities
Total equity securities
Trading securities
Mortgage loans on real estate (2)
Real estate
Policy loans
Derivative investments (3)
Other investments
Total investments
As of December 31, 2020
Fair
Value
Carrying
Value
Cost
$
397
384
5,360
14,096
72,193
11,196
548
104,174
$
484
470
6,921
17,288
85,501
11,765
615
123,044
$
484
470
6,921
17,288
85,501
11,765
615
123,044
5
33
44
50
132
4,072
16,972
10
2,426
910
3,974
132,670
$
7
38
44
40
129
4,501
18,219
N/A
N/A
3,109
3,974
7
38
44
40
129
4,501
16,763
10
2,426
3,109
3,974
153,956
$
(1) For investments deemed to have declines in value that are impairment-related, an allowance for credit losses is recorded to reduce
the carrying value to their estimated realizable value.
(2) Mortgage loans on real estate are generally carried at unpaid principal balances adjusted for amortization of premiums and accretion
of discounts and are net of allowance for credit losses. We carry certain commercial mortgage loans at fair value where the fair value
option has been elected.
(3) Derivative investment assets were offset by $906 million in derivative liabilities reflected in other liabilities on our Consolidated
Balance Sheets.
FS-2
LINCOLN NATIONAL CORPORATION
SCHEDULE II – CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(Parent Company Only) (in millions, except share data)
ASSETS
Investments in subsidiaries (1)
Other investments
Cash and invested cash
Loans and accrued interest to subsidiaries (1)
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Common stock dividends payable
Derivative investments liability
Short-term debt
Long-term debt
Loans from subsidiaries (1)
Payables for collateral on investments
Other liabilities
Total liabilities
Contingencies and Commitments
Stockholders’ Equity
Preferred stock – 10,000,000 shares authorized
Common stock – 800,000,000 shares authorized
Retained earnings
Accumulated other comprehensive income (loss)
Total stockholders’ equity
Total liabilities and stockholders’ equity
(1) Eliminated in consolidation.
As of December 31,
2019
2020
$
$
$
27,677
933
114
2,960
83
31,767
81
552
-
6,682
1,424
7
322
9,068
24,029
382
577
2,446
28
27,462
79
110
300
6,067
844
6
367
7,773
-
5,082
8,686
8,931
22,699
31,767
$
-
5,162
8,854
5,673
19,689
27,462
$
$
$
$
FS-3
LINCOLN NATIONAL CORPORATION
SCHEDULE II – CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Parent Company Only) (in millions)
Revenues
Dividends from subsidiaries (1)
Interest from subsidiaries (1)
Net investment income
Realized gain (loss)
Total revenues
Expenses
Operating and administrative expenses
Interest – subsidiaries (1)
Interest – other
Total expenses
Income (loss) before federal income taxes, equity in income (loss) of subsidiaries
Federal income tax expense (benefit)
Income (loss) before equity in income (loss) of subsidiaries
Equity in income (loss) of subsidiaries
Net income (loss)
Other comprehensive income (loss), net of tax:
Unrealized investment gains (losses)
Foreign currency translation adjustment
Funded status of employee benefit plans
Total other comprehensive income (loss), net of tax
Comprehensive income (loss)
(1) Eliminated in consolidation.
For the Years Ended December 31,
2018
2019
2020
$
840
127
4
-
971
50
20
275
345
626
(45)
671
(172)
499
$
$
830
158
11
2
1,001
51
48
311
410
591
(52)
643
243
886
1,025
148
7
3
1,183
18
34
288
340
843
(42)
885
756
1,641
3,192
5
61
3,258
3,757
$
5,288
6
(28)
5,266
6,152
$
(3,449)
(9)
(7)
(3,465)
(1,824)
$
FS-4
LINCOLN NATIONAL CORPORATION
SCHEDULE II – CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
STATEMENTS OF CASH FLOWS
(Parent Company Only) (in millions)
For the Years Ended December 31,
2018
2019
2020
$
499
$
886
$
1,641
172
-
24
31
726
(518)
(303)
(821)
(1,096)
1,289
(13)
565
(514)
(7)
(275)
(311)
(6)
(368)
(463)
577
114
$
(243)
(2)
24
106
771
(50)
(279)
(329)
(308)
744
(42)
264
(70)
(20)
(550)
(303)
-
(285)
157
420
577
$
(756)
(3)
15
(27)
870
(502)
89
(413)
(537)
1,094
(23)
52
(48)
(6)
(900)
(289)
-
(657)
(200)
620
420
Cash Flows from Operating Activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Equity in (income) loss of subsidiaries greater than distributions (1)
Realized (gain) loss
Change in federal income tax accruals
Other
Net cash provided by (used in) operating activities
Cash Flows from Investing Activities
Capital contribution to subsidiaries (1)
Net change in collateral on investments, derivatives and related settlements
Net cash provided by (used in) investing activities
Cash Flows from Financing Activities
Payment of long-term debt, including current maturities
Issuance of long-term debt, net of issuance costs
Payment related to early extinguishment of debt
Increase (decrease) in loans from subsidiaries, net (1)
Increase (decrease) in loans to subsidiaries, net (1)
Common stock issued for benefit plans
Repurchase of common stock
Dividends paid to common stockholders
Other
Net cash provided by (used in) financing activities
Net increase (decrease) in cash, invested cash and restricted cash
Cash, invested cash and restricted cash as of beginning-of-year
Cash, invested cash and restricted cash as of end-of-year
$
(1) Eliminated in consolidation.
FS-5
LINCOLN NATIONAL CORPORATION
SCHEDULE III – CONDENSED SUPPLEMENTARY INSURANCE INFORMATION
(in millions)
Column A
Column B Column C Column D Column E Column F
Segment
Annuities
Retirement Plan Services
Life Insurance
Group Protection
Other Operations
Total
Annuities
Retirement Plan Services
Life Insurance
Group Protection
Other Operations
Total
Annuities
Retirement Plan Services
Life Insurance
Group Protection
Other Operations
Total
Future
Contract
Benefits
Other
Contract
Unearned Holder
Funds
Premiums (1)
DAC and
VOBA
Insurance
Premiums
As of or For the Year Ended December 31, 2020
$
$
As of or For the Year Ended December 31, 2019
$
$
$
$
$
$
$
$
3,782
120
1,723
187
-
5,812
3,790
176
3,519
209
-
7,694
3,660
243
6,151
210
-
10,264
$
$
$
4,183 $
11
20,127
5,986
10,507
40,814 $
3,862 $
9
16,249
5,601
10,699
36,420 $
3,509 $
8
13,139
5,396
12,596
34,648 $
- $
-
-
-
-
- $
35,218
22,912
39,797
213
7,265
105,405
- $
-
-
-
-
- $
- $
-
-
-
-
- $
29,493
20,553
39,941
194
7,837
98,018
23,493
19,761
40,997
197
6,785
91,233
$
$
$
121
-
950
4,280
21
5,372
502
-
885
4,113
13
5,513
390
-
817
3,383
11
4,601
As of or For the Year Ended December 31, 2018
$
$
(1) Unearned premiums are included in Column C, future contract benefits.
FS-6
LINCOLN NATIONAL CORPORATION
SCHEDULE III – CONDENSED SUPPLEMENTARY INSURANCE INFORMATION (Continued)
(in millions)
Column A
Segment
Annuities
Retirement Plan Services
Life Insurance
Group Protection
Other Operations
Total
Annuities
Retirement Plan Services
Life Insurance
Group Protection
Other Operations
Total
Annuities
Retirement Plan Services
Life Insurance
Group Protection
Other Operations
Total
Column G Column H Column I
Benefits
Net
Investment
Income
and
Interest
Credited
Column J Column K
Amortization
of DAC
and
VOBA
Other
Operating Premiums
Expenses
Written
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
$
$
$
$
$
As of or For the Year Ended December 31, 2020
1,467 $
375
720
1,120
456
4,138 $
1,245 $
617
6,077
3,505
156
11,600 $
365 $
29
786
114
-
1,294 $
$
1,272
933
2,823
330
152
5,510
$
As of or For the Year Ended December 31, 2019
1,463 $
392
737
1,134
626
4,352 $
1,248 $
587
5,616
3,041
168
10,660 $
452 $
26
779
111
-
1,368 $
$
1,140
924
2,658
307
194
5,223
$
As of or For the Year Ended December 31, 2018
1,428 $
393
660
967
507
3,955 $
1,465 $
557
4,759
2,460
162
9,403 $
373 $
28
711
92
-
1,204 $
$
1,005
899
2,697
260
224
5,085
FS-7
LINCOLN NATIONAL CORPORATION
SCHEDULE IV – CONSOLIDATED REINSURANCE
(in millions)
Column A
Column B Column C Column D Column E
Ceded
Assumed
to
from
Other
Gross
Amount
Other
Companies Companies
Net
Amount
Column F
Percentage
of Amount
Assumed
to Net
Description
Individual life insurance in-force (1)
Premiums:
Life insurance and annuities (2)
Accident and health insurance
Total premiums
Individual life insurance in-force (1)
Premiums:
Life insurance and annuities (2)
Accident and health insurance
Total premiums
Individual life insurance in-force (1)
Premiums:
Life insurance and annuities (2)
Accident and health insurance
Total premiums
As of or For the Year Ended December 31, 2020
$ 1,653,625 $
674,256 $
7,875 $
987,244
10,474
2,830
13,304 $
1,621
35
1,656 $
$
88
7
95 $
8,941
2,802
11,743
As of or For the Year Ended December 31, 2019
$ 1,524,977 $
628,654 $
7,611 $
903,934
10,725
2,773
13,498 $
1,545
34
1,579 $
$
82
9
91 $
9,262
2,748
12,010
As of or For the Year Ended December 31, 2018
$ 1,420,500 $
667,900 $
8,700 $
761,300
9,742
2,299
12,041 $
1,509
34
1,543 $
$
81
8
89 $
8,314
2,273
10,587
0.8%
1.0%
0.2%
0.8%
0.9%
0.3%
1.1%
1.0%
0.4%
(1)
(2)
Includes Group Protection segment and Other Operations in-force amounts.
Includes insurance fees on universal life and other interest-sensitive products
FS-8
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following registration statements of Lincoln National Corporation and in the related
prospectuses listed below:
1. Forms S-3
a. No. 333- 249058 pertaining to the Lincoln National Corporation automatic shelf registration for certain securities,
b. No. 333-228471 pertaining to the LNL Agents’ 401(k) Savings Plan,
c. No. 333-225228 pertaining to the Lincoln National Corporation 2009 Amended and Restated Incentive Compensation Plan,
and
d. No. 333-231903 pertaining to the Lincoln National Corporation Deferred Compensation Plan for Agents and Brokers;
2. Forms S-8
a. No. 333-203690 pertaining to the Lincoln National Corporation 2009 Amended and Restated Incentive Compensation Plan
and the Jefferson-Pilot Corporation Long-Term Stock Incentive Plan,
b. No. 333-196233 pertaining to the Lincoln National Corporation 2014 Incentive Compensation Plan,
c. No. 333-239117 pertaining to the Lincoln National Corporation 2020 Incentive Compensation Plan,
d. No. 333-155385 pertaining to the Lincoln National Corporation Deferred Compensation and Supplemental/Excess
Retirement Plan,
e. No. 333-142872 pertaining to the Lincoln National Corporation Stock Option Plan for Non-Employee Directors,
f. No. 333-133039 pertaining to various Jefferson-Pilot Corporation benefit plans,
g. Nos. 333-143796 and 333-126452 pertaining to the Lincoln National Corporation Executive Deferred Compensation Plan for
Employees,
h. Nos. 333-126020 pertaining to the Lincoln National Corporation Employees’ Savings and Profit-Sharing Plan and 333-
161989 pertaining to the Lincoln National Corporation Employees’ Savings and Retirement Plan;
i. Nos. 333-143795 and 333-121069 pertaining to the Lincoln National Corporation Deferred Compensation Plan for Non-
Employee Directors,
j. No. 033-58113 pertaining to the Lincoln National Corporation 1993 Stock Plan for Non-Employee Directors, and
k. No. 333-105344 pertaining to the Lincoln National Corporation 1993 Stock Plan for Non-Employee Directors;
of our reports dated February 18, 2021, with respect to the consolidated financial statements and financial statement schedules of Lincoln
National Corporation and the effectiveness of internal control over financial reporting of Lincoln National Corporation, included in this
Annual Report (Form 10-K) for the year ended December 31, 2020.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
February 18, 2021
Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 31.1
I, Dennis R. Glass, President and Chief Executive Officer, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Lincoln National Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Dated: February 18, 2021
/s/ Dennis R. Glass
Name: Dennis R. Glass
Title: President and Chief Executive Officer
Exhibit 31.2
I, Randal J. Freitag, Executive Vice President and Chief Financial Officer, certify that:
Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Lincoln National Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Dated: February 18, 2021
/s/ Randal J. Freitag
Name: Randal J. Freitag
Title: Executive Vice President and Chief Financial Officer
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
Exhibit 32.1
Pursuant to 18 U.S.C. § 1350, the undersigned officer of Lincoln National Corporation (the “Company”), hereby certifies that the
Company’s Annual Report on Form 10-K for the year ended December 31, 2020, (the “Report”) fully complies with the requirements of
Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly
presents, in all material respects, the financial condition and results of operations of the Company.
Dated: February 18, 2021
/s/ Dennis R. Glass
Name: Dennis R. Glass
Title: President and Chief Executive Officer
The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a
separate disclosure document.
A signed original of this written statement required under Section 906 has been provided to the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission or its staff upon request.
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
Exhibit 32.2
Pursuant to 18 U.S.C. § 1350, the undersigned officer of Lincoln National Corporation (the “Company”), hereby certifies that the
Company’s Annual Report on Form 10-K for the year ended December 31, 2020, (the “Report”) fully complies with the requirements of
Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly
presents, in all material respects, the financial condition and results of operations of the Company.
Dated: February 18, 2021
/s/ Randal J. Freitag
Name: Randal J. Freitag
Title: Executive Vice President and Chief Financial Officer
The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a
separate disclosure document.
A signed original of this written statement required under Section 906 has been provided to the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission or its staff upon request.
Comparison of Five-Year Cumulative Total Return
The following represents a five-year comparison of the annual performance of our cumulative total shareholder return (change in the
year-end stock price plus reinvested dividends), based on a hypothetical investment of $100 (invested on December 31, 2015, with
dividends reinvested through December 31, 2020), with the Standard & Poor’s (“S&P”) 500® Index and the S&P Life/Health Index.
Returns of the S&P Life/Health Index have been weighted according to their respective aggregate market capitalization at the beginning
of each period shown on the graph.
Comparison of Five-Year Cumulative Total Return
$225.00
$200.00
$175.00
$150.00
$125.00
$100.00
$75.00
$50.00
$25.00
$-
Lincoln National Corporation
S&P 500 Index
S&P Life/Health Index
2015
2016
2017
2018
2019
2020
Lincoln National Corporation
S&P 500 Index
S&P Life/Health Index
$
2015
100.00
100.00
100.00
$
2016
135.04
111.96
124.86
$
As of December 31,
2018
2017
108.31
159.29
130.42
136.40
115.17
145.37
$
$
2019
127.74
171.49
141.88
$
2020
113.54
203.04
128.43
There can be no assurance that our stock performance will continue in the future with the same or similar trends depicted in the
preceding graph. We will not make or endorse any predictions as to future stock performance. Pursuant to Securities and Exchange
Commission (“SEC”) rules, the Comparison of Five-Year Cumulative Total Return graph shall not be considered “soliciting material” or
to be “filed” with the SEC, except to the extent we specifically request that such information be treated as soliciting material or
specifically incorporate such information by reference into a document filed with the SEC under the Securities Exchange Act of 1934, as
amended, or under the Securities Act of 1933, as amended.
Board of Directors
Deirdre P. Connelly
Retired President
North American Pharmaceuticals of GlaxoSmithKline
William H. Cunningham
Professor
The University of Texas at Austin
Reginald E. Davis
EVP and President of Banking
Flagstar Bank, FSB
Dennis R. Glass
President and CEO
Lincoln National Corporation
George W. Henderson, III
Retired Chairman and CEO
Burlington Industries, Inc.
Eric G. Johnson
CEO
Baldwin Richardson Foods Company
Gary C. Kelly
Chairman and CEO
Southwest Airlines Co.
M. Leanne Lachman
President
Lachman Associates LLC
Michael F. Mee
Retired EVP and CFO
Bristol-Myers Squibb Company
Patrick S. Pittard
CEO
BDI DataLynk, LLC
Lynn M. Utter
Operating Partner
Atlas Holdings LLC
Corporate Headquarters
Lincoln National Corporation
150 N. Radnor-Chester Road
Radnor, PA 19087-5238
Internet Information
Information on LNC’s financial results and its products and services as well as SEC filings are available on our website at www.lfg.com.
Stock Listings
LNC’s common stock is traded on the New York Stock Exchange under the symbol LNC.
Inquiries
Analysts and institutional investors should contact:
Albert Copersino
Vice President, Investor Relations
Lincoln National Corporation
150 N. Radnor-Chester Road
Radnor, PA 19087
E-mail: investorrelations@LFG.com
Annual Meeting of Shareholders
The annual meeting of shareholders will be held virtually via live webcast at 9 a.m. EDT on Thursday, June 3, 2021.
Shareholder Services
General inquiries or concerns about LNC shareholder services may be directed to shareholder services at 1-800-237-2920 or by email at
shareholderservices@LFG.com. Questions that are specific in nature, such as transfer of stock, change of address or general inquiries
regarding stock or dividend matters, should be directed to the transfer agent and registrar.
Transfer Agent and Registrar
For regular mailings use:
EQ Shareowner Services
P.O. Box 64874
St. Paul, MN 55164-0874
1-866-541-9693
www.shareowneronline.com
For registered or overnight mailings use:
EQ Shareowner Services
1110 Centre Point Curve, Suite 101
Mendota Heights, MN 55120
Dividend Reinvestment Program/Direct Stock Purchase Plan
LNC has a Dividend Reinvestment and Cash Investment Plan. For further information, write to EQ Shareowner Services at the
addresses noted above.
Direct Deposit of Dividends
Quarterly dividends can be electronically deposited to shareholders’ checking or savings accounts on the dividend payment date.
Telephone inquiries may be directed to EQ Shareowner Services at 1-866-541-9693.
Dividend Payment Schedule
Dividends on LNC common stock are paid on or about February 1, May 1, August 1 and November 1.
Lincoln Financial Group is a registered service mark of LNC.
©202(cid:21) Lincoln National Corporation
Lincoln National Corporation
150 N. Radnor-Chester Road
Radnor, PA 19087
Lincoln Financial Group is the
marketing name for Lincoln National
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LincolnFinancial.com
AR-LNC-20