Newswires
LINCOLN NATIONAL CORP – 10-K/A – Management's Discussion and Analysis of Financial Condition and Results of Operations
Index to Management's Discussion and Analysis of Financial Condition and Results
of Operations
Page
Forward-Looking Statements - Cautionary Language 36
Introduction 37 Executive Summary 37
Critical Accounting Policies and Estimates 41
Results of Consolidated Operations 53
Results of Life Insurance 55
Results of Annuities 60
Results of Group Protection 65
Results of Retirement Plan Services 69
Results of Other Operations 73
Realized Gain (Loss) 75
Consolidated Investments 79
Reinsurance 91
Liquidity and Capital Resources 92
?
35
--------------------------------------------------------------------------------
Table of Contents
The following Management's Discussion and Analysis ("MD&A") is intended to help
the reader understand the financial condition as of December 31, 2022 , compared
with December 31, 2021 , and the results of operations in 2022 and 2021 compared
to the immediately preceding year of Lincoln National Corporation and its
consolidated subsidiaries. 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,
the 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.
We have restated our previously issued consolidated financial statements
contained in this Form 10-K/A. For background on the restatement, the fiscal
periods impacted, control considerations and other information, see "Explanatory
Note" preceding "Part I - Item 1. Business" above.
In addition, we have restated certain previously reported financial information
as of and for the years ended December 31, 2022 , and December 31, 2021 , in this
MD&A including, but not limited to, information within the consolidated and
segment results of operations discussions.
For additional information related to the restatement, see "Part II - Item 8.
Financial Statements and Supplementary Data" below.
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:
?Weak general economic and business conditions that may affect demand for our products, 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
capital;
?The impact of regulations adopted by theSecurities and Exchange Commission ("SEC"), theDepartment 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;
?The impact of new and emerging privacy regulations that may lead to increased
compliance costs and reputation risk;
?Increasing scrutiny and evolving expectations and regulations regarding
environmental, social and governance ("ESG") matters that may adversely affect
our reputation and our investment portfolio;
?Actions taken by reinsurers to raise rates on in-force business;
?Declines in or sustained low interest rates causing a reduction in investment
income, the interest margins of our businesses and demand for our products;
?Rapidly increasing interest rates causing contract holders to surrender life
insurance and annuity policies, thereby causing realized investment losses;
?The impact of the implementation of the provisions of the European Market
Infrastructure Regulation 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
36
--------------------------------------------------------------------------------
Table of Contents
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; and an increase in liabilities related to guaranteed benefit riders of our subsidiaries' variable annuity products;
?Ineffectiveness of our risk management policies and procedures, including our
various hedging strategies;
?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 and in establishing related insurance
reserves, which may reduce future earnings;
?Changes in accounting principles that may affect our financial statements;
?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 inability to realize or sustain the benefits we expect from, greater than expected investments in, and the potential impact of efforts related to, our strategic initiatives, including the Spark Initiative;
?The adequacy and collectability of reinsurance that we have obtained;
?Pandemics, acts of terrorism, war or other man-made and natural catastrophes
that may adversely impact liabilities for policyholder claims, affect our
businesses and increase 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 theSEC 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, group protection and retirement income products and
solutions through our four business segments:
?Life Insurance;
?Annuities;
?Group Protection; and
?Retirement Plan Services
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.
37
--------------------------------------------------------------------------------
Table of Contents
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 21. 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 health, economic and business conditions precipitated by the worldwide COVID-19 pandemic that emerged in 2020 continued to adversely affect our business, results of operations and financial condition during 2022. While various treatments and vaccines are now available, COVID-19 variants continue to emerge, which could prolong or lead to increased hospitalization and death rates. We continue to monitorU.S. CDC reports related to COVID-19 and the potential continuing impacts of the COVID-19 pandemic on our Life Insurance and Group Protection segments. See "Results of Life Insurance" and "Results of Group Protection" below for impacts from the COVID-19 pandemic.
Interest Rate Environment
Throughout 2022, theFederal Reserve increased the federal funds rate target range to combat inflation. InFebruary 2023 , theFederal Reserve announced an additional 25 basis points increase, when it set the range at 4.50% to 4.75% and reiterated its commitment to implement and maintain policy as needed to bring inflation down. Additionally, theFederal Reserve has continued reducing its balance sheet, which started inJune 2022 , by not reinvestingTreasury securities, agency debt and agency mortgage-backed securities. As interest rates rise, which improves the yield on our new money and floating rate investments, we continue to be proactive in our investment strategies, product designs, crediting rate strategies, expense management actions and overall asset-liability practices to mitigate the risk of unfavorable consequences in this interest rate environment. We have provided disclosures around risks related to increases in interest rate risk in "Part I - Item 1A. Risk Factors - Market Conditions - Increases in interest rates may negatively affect our profitability, capital position and the value of our investment portfolio and may also result in increased contract withdrawals," "Critical Accounting Policies and Estimates - Annual Assumption Review - Long-Term New Money Investment Yield Sensitivity" below and "Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk." Regulatory EnvironmentU.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. InAugust 2022 , the Inflation Reduction Act of 2022 was passed by theU.S. Congress and signed into law byPresident Biden . The Inflation Reduction Act of 2022 established a new 15% corporate alternative minimum tax for corporations whose average adjusted net income for any consecutive three-year period beginning afterDecember 31, 2022 , exceeds$1.0 billion . The Inflation Reduction Act of 2022 also established a 1% excise tax on stock repurchases made by publicly traded corporations. For more information on income taxes, see "Critical Accounting Policies and Estimates - Income Taxes" below. 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. 38
--------------------------------------------------------------------------------
Table of Contents
Significant Operational Matters
Rebuild Risk-Based Capital Ratio
To rebuild our statutory capital to our risk-based capital ("RBC") ratio target
of 400%, we have taken or intend to take the following actions:
?In the fourth quarter, we paused shares repurchases, and we expect the pause to
continue through the end of 2023;
?We executed a partial hedge on our in-force variable universal life insurance
("VUL") products with secondary guarantees to mitigate potential capital
volatility;
?InNovember 2022 , we raised approximately$1 billion through the issuance of preferred stock,$780 million of which was contributed toThe Lincoln National Life Insurance Company ("LNL") in the fourth quarter; and
?Beginning in the first quarter of 2023, we intend to reduce the amount of
capital supporting new business and focus on maximizing our return on this
capital, which we expect will allow us to deliver more distributable earnings.
For additional information on the issuance of the preferred stock, see "Liquidity and Capital Resources" below and Note 14. For information on risks related to capital, see "Part I - Item 1A. Risk Factors - Liquidity and Capital Position." Spark Initiative
In 2021, we formally communicated our new expense savings initiative, the Spark
Initiative, focused on driving efficiencies throughout all aspects of our
business, from leveraging automation to simplifying and improving process
efficiency. In addition, the Spark Initiative targets benefits beyond cost
savings including improving the way we work by focusing on reskilling and
upskilling our valuable employee base.
During 2022, we recognized benefits of$22 million , pre-DAC and pre-tax, net of investments, as a result of these initiatives. In 2023, we expect to realize benefits of approximately$60 million to$100 million , pre-DAC and pre-tax, net of investments. We ultimately expect to realize annual benefits of approximately$260 million to$300 million , pre-DAC and pre-tax, net of investments, by the end of 2024. For risks related to the Spark Initiative, see "Part I - Item 1A. Risk Factors - Operational Matters - We may not realize or sustain all of the benefits we expect from the Spark Initiative, our investments associated with the initiative could be greater than expected, and our efforts with respect to the initiative may result in disruption of our businesses or distraction of our management and employees, which could have a material effect on our business, financial condition and results of operations" above.
Variable Annuity Hedge Program
We offer variable annuity products with living and death benefit guarantees. We use derivative instruments to hedge our exposure to selected risk and income statement volatility caused by changes in the equity markets, interest rates and market-implied volatilities associated with guaranteed benefit riders available in our variable annuity products. The hedge program in effect throughDecember 31, 2022 , was highly effective and focused on generating sufficient assets to fund future claims with a goal of minimizing the volatility of net income underUnited States of America generally accepted accounting principles ("GAAP"). InSeptember 2022 , we announced enhancements to our variable annuity hedge program that continues to focus on generating sufficient assets to fund future claims with a goal of maximizing distributable earnings and explicitly protecting capital. The revised variable annuity hedge program, effectiveJanuary 1, 2023 , aligns with our increased strategic focus on maximizing the economic value as measured by distributable earnings, which is achieved by managing risks to statutory capital generation due to market volatility. For risks related to our variable annuity hedge program, see "Part I - Item 1A. Risk Factors - Market Conditions - Our hedging strategies may not be fully effective to offset the changes in the carrying value of the guarantees on certain of our products, which could result in volatility in our results of operations and financial condition under GAAP and in the capital levels of our insurance and reinsurance subsidiaries."
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 capital-efficient new business and positive net flows through our
product development and distribution;
?Capital markets performing in-line with our expectations;
?Ongoing expense discipline as well as our Spark Initiative driving improvement
in operating margins; and
?Capital generation and active capital deployment, consisting of returning
capital to common stockholders.
39
--------------------------------------------------------------------------------
Table of Contents
Sources of Earnings
We monitor our sources of earnings as a factor in managing our businesses. 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:
As Restated For the
For the Years Ended Year Ended
December 31, December 31,
2022 2021 2020
Investment spread (1) -87.7% 26.9% 16.6%
Mortality/morbidity (2) -204.9% 8.3% 1.4%
Fees on AUM (3) 160.3% 62.3% 88.8%
VA riders (4) 32.3% 2.5% -6.8%
Total (5) 100.0% 100.0% 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 riders, less the net valuation
premium and associated change in benefit reserves and related expenses.
(5)The sources of earnings components include the results from our annual assumption review, which for 2022 and 2020 were significantly unfavorable. See "Critical Accounting Policies and Estimates - Annual Assumption Review" below for more information.
See Note 21 for additional information on income (loss) from operations by
segment.
Outlook
Management expects to continue focusing on the following in 2023:
?Continuing to rebuild RBC ratio and improving our ongoing capital generation;
?Exploring reinsurance and other strategies to maximize the value of our
in-force business;
?Maximizing distributable earnings and protecting capital with our updated
variable annuity hedge program;
?Further optimizing new business capital allocation;
?Continuing to enhance profitability of our Group Protection business;
?Continuing to execute on strategic objectives enabled by our experienced and
highly talented senior leadership team;
?Making investments in our businesses, product innovation and distribution to
grow revenues, drive margin expansion and reduce costs;
?Continuing to improve profitability through focusing on expense discipline and managing our expenses aggressively, including executing on the Spark Initiative to drive efficiencies throughout all aspects of our business;
?Closely monitoring our capital and liquidity positions taking into account
changing economic conditions, 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; and
?Maintaining risk management and the flexibility to adjust our hedge program in
response to regulatory and other changes.
40
--------------------------------------------------------------------------------
Table of Contents
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.
The processes, judgments and estimates described herein relate to the accounting
standards in effect through December 31, 2022 . On January 1, 2023 , we adopted
Accounting Standards Update 2018-12, Targeted Improvements to the Accounting for
Long-Duration Contracts, that significantly changed how we account for our
long-duration 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, measuring of market risk benefits and
changing the amortization of deferred acquisition costs ("DAC") and DAC-like
intangibles. For more information, see Note 2.
The hedge program discussed below relates to the variable annuity hedge program
design in effect through December 31, 2022 . On January 1, 2023 , we modified our
variable annuity hedge program that continues to focus on generating sufficient
assets to fund future claims with a goal of maximizing distributable earnings
and explicitly protecting capital. For additional information on our variable
annuity hedge program, see "Introduction - Executive Summary - Significant
Operational Matters - Variable Annuity Hedge Program." above. For risks related
to our variable annuity hedge program, see "Part I - Item 1A. Risk Factors -
Market Conditions - Our hedging strategies may not be fully effective to offset
the changes in the carrying value of the guarantees on certain of our products,
which could result in volatility in our results of operations and financial
condition under GAAP and in the capital levels of our insurance and reinsurance
subsidiaries."
DAC, VOBA, DSI and DFEL
Deferrals
Qualifying deferrable acquisition expenses are recorded as an asset on the
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 is an asset included
within other assets on the Consolidated Balance Sheets, and when amortized,
increases interest credited on the Consolidated Statements of Comprehensive
Income (Loss). DFEL is a liability included within other contract holder funds
on the Consolidated Balance Sheets, and when amortized, increases fee income on
the Consolidated Statements of Comprehensive Income (Loss).
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.
41
--------------------------------------------------------------------------------
Table of Contents
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
Retirement
Life Group Plan
Insurance Annuities Protection Services Total
DAC and VOBA
Gross $ 6,591 $ 4,297 $ 164 $ 224 $ 11,276
Unrealized (gain) loss 1,828 407 - 77 2,312
Carrying value $ 8,419 $ 4,704 $ 164 $ 301 $ 13,588
DSI
Gross $ 32 $ 154 $ - $ 16 $ 202
Unrealized (gain) loss - 13 - - 13
Carrying value $ 32 $ 167 $ - $ 16 $ 215
DFEL
Gross $ 3,450 $ 308 $ - $ - $ 3,758
Unrealized (gain) loss 1,910 1 - - 1,911
Carrying value $ 5,360 $ 309 $ - $ - $ 5,669
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.
Amortization
For our traditional life insurance and group protection 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.
DAC for variable annuity and deferred fixed annuity contracts and universal life
insurance ("UL") and VUL policies is amortized over the expected lives of the
contracts in relation to the incidence of EGPs derived from the contracts.
EGPs vary based on a number of factors, including assumptions about policy
persistency, mortality, fee income, investment margins, expense margins and
realized gains and losses on investments. 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.
During the third quarter of each year, we conduct our comprehensive review of
the assumptions and projection models used for our EGPs underlying the
amortization of DAC, VOBA, DSI and DFEL that may result in unlocking of
assumptions. See "Annual Assumption Review" below for more information.
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
42
--------------------------------------------------------------------------------
Table of Contents
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 Retirement Plan Services 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 rates 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 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 increase of
approximately 2% 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, 2022 , we would have recorded unfavorable
unlocking of approximately $90 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 AFS 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 the 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 orNPR , 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. 43
--------------------------------------------------------------------------------
Table of Contents
The following summarizes investments on the Consolidated Balance Sheets carried at fair value by pricing source and fair value hierarchy level (in millions) as ofDecember 31, 2022 : Quoted Prices in Active Markets for Significant Significant Identical Observable Unobservable Assets Inputs Inputs Total (Level 1) (Level 2) (Level 3) Fair Value Priced by third-party pricing services$ 400 $ 85,981 $ 162 $ 86,543 Priced by independent broker quotations - - 4,297 4,297 Priced by matrices - 16,506 - 16,506 Priced by other methods (1) - - 261 261 Total$ 400 $ 102,487 $ 4,720 $ 107,607 Percent of total 0% 95% 5% 100%
(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
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 andTreasury 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 ofDecember 31, 2022 , 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 ofDecember 31, 2022 , we used broker quotes for 47 securities as our final price source, representing less than 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. 44
--------------------------------------------------------------------------------
Table of Contents
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
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 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.
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
45
--------------------------------------------------------------------------------
Table of Contents
versus expected credit-related investment losses. These actual to expected
amortization adjustments could create volatility in net realized gains and
losses.
Derivatives
Derivatives are primarily used for hedging purposes. We hedge certain portions of our exposure to interest rate risk, default risk, basis risk, equity market risk, credit risk and foreign currency exchange risk by entering into derivative transactions. We also purchase and issue financial instruments that contain embedded derivative instruments. See "Future Contract Benefits" and "Other Contract Holder Funds" below for information on embedded derivatives. Assessing the effectiveness of these hedging programs and evaluating the carrying values of the related derivatives often involve a variety of assumptions and estimates. 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. For more information on derivatives, see Notes 1 and 5. For more information on market exposures associated with our derivatives, including sensitivities, see "Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk." Future Contract Benefits 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. Generally, the reserves in excess of account value are reported within future contract benefits on the Consolidated Balance Sheets. Establishing adequate reserves for our obligations to contract holders requires assumptions to be made that 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. Significant assumptions include mortality rates, morbidity, 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.
GLB
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. 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 report the insurance portion of the reserves in
future contract benefits with the embedded derivative reported in either other
assets or other liabilities. During the third quarter of each year, we conduct
our comprehensive review of the assumptions and projection models underlying our
reserves and embedded derivatives. See "Annual Assumption Review" below for more
information. 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. These embedded derivatives are carried at fair value
and are all classified as Level 3 of the fair value hierarchy. 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 20.
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 GWB and GIB features that are
available in our variable annuity products. 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.
46
--------------------------------------------------------------------------------
Table of Contents
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 onU.S. -based equity indices, and futures onU.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 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) - Variable Annuity Net Derivatives Results" below for information on how we determine ourNPR , including the sensitivity of theNPR factor. As part of our 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. Within our annuity business, we have certain products that contain GLB features. The proportion of our variable annuity account values that contained GLB features to our total annuity account values, net of reinsurance, was 45% and 50% as ofDecember 31, 2022 and 2021, 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 value falls below the present value of guaranteed withdrawal or income benefits, assuming no lapses. As ofDecember 31, 2022 and 2021, 37% and 7%, respectively, of all in-force contracts with a GLB feature were "in the money," and our exposure, after reinsurance, as ofDecember 31, 2022 and 2021, was$3.1 billion and$453 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$3.1 billion , 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-neutralMonte Carlo simulations in our calculation to value the entire block of guarantees, which involve 100 unique scenarios per policy or approximately 44 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.), contract holder 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) - Variable Annuity Net Derivatives Results" below. 47
--------------------------------------------------------------------------------
Table of Contents
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 theNPR 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 ofDecember 31, 2022 , 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. In-Force Sensitivities Equity Market Return -20% -10% -5%
5%
Hypothetical effect to net income
Interest Rates -50 bps -25 bps +25 bps +50
bps
Hypothetical effect to net income
(30 )
Implied Volatilities 4% 2% -2%
-4%
Hypothetical effect to net income
(28 )
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:
Assumptions of Changes In
Equity Interest Market
Market Rate Implied Net
Return Yields Volatilities Income
Scenario 1 -5% -12.5 bps +1% $ 210
Scenario 2 -10% -25.0 bps +2% 421
Scenario 3 -20% -50.0 bps +4% 790
?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
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.
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. These reserves are reported within future contract benefits on the
Consolidated Balance Sheets with the change reported in benefits in the
Consolidated Statements of Comprehensive Income (Loss). 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 or, in other words, recalculated
using the updated expected benefit payments and assessments over the life of the
contract since inception. During the third quarter of each year, we conduct our
comprehensive review of the assumptions and projection models used in estimating
these reserves and unlock assumptions similar to the DAC discussion above. We
may have unlocking in other quarters as we become aware of information that
warrants
48
--------------------------------------------------------------------------------
Table of Contents
updating assumptions outside of our comprehensive review. We may also identify
and implement actuarial modeling refinements that result in increases or
decreases to the carrying values of these reserves. See "Annual Assumption
Review" below for more information.
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) - Variable Annuity Net Derivative Results" below.
UL Products with Secondary Guarantees
We issue UL-type 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. These secondary guarantees are reported within future contract benefits on the Consolidated Balance Sheets. 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. During the third quarter of each year, we conduct our comprehensive review of the assumptions and projection models used in estimating these reserves and unlock assumptions similar to the DAC discussion above. We may have unlocking in other quarters as we become aware of information that warrants updating assumptions outside of our comprehensive review. We may also identify and implement actuarial modeling refinements that result in increases or decreases to the carrying values of these reserves. See "Annual Assumption Review" below for more information. Liability for Unpaid Claims Future contract benefits include reserves for long-term life and disability claims associated with our Group Protection segment. These reserves are 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 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. 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. Our long-term disability reserves are discounted using rates ranging from 2.5% to 5.0% and vary by year of claim incurral. During the third quarter of each year, we conduct our comprehensive review of the assumptions and reserving models used in calculating these reserves. We may also identify and implement actuarial modeling refinements that result in increases or decreases to the carrying values of these reserves. See "Annual Assumption Review" below for more information.
Other Contract Holder Funds
Other contract holder funds includes account values on UL and VUL insurance and
investment-type annuity products where account values are equal to deposits plus
interest credited less withdrawals, surrender charges, asset-based fees and
contract administration charges, as well as amounts representing the fair value
of embedded derivative instruments associated with our IUL and indexed annuity
products. During the third quarter of each year, we conduct our comprehensive
review of the assumptions and projection models underlying our reserves and
embedded derivatives. We may have unlocking in other quarters as we become aware
of information that warrants updating assumptions outside of our comprehensive
review. See "Annual Assumption Review" below for more information.
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. The value of
the variable portion of the contract holder's account balance varies with the
performance of the underlying variable funds chosen by the contract holder.
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 the 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 the
Consolidated Statements of Comprehensive Income (Loss). For information on our
index benefits hedging results, see our discussion in "Realized Gain (Loss)"
below.
49
--------------------------------------------------------------------------------
Table of Contents
Annual Assumption Review
During the third quarter of each year, we conduct our comprehensive review of
the assumptions and projection models used for our EGPs underlying the
amortization of DAC, VOBA, DSI and DFEL as well as our reserves and embedded
derivatives. For more information on our comprehensive review, see Note 1.
Details underlying the effect to net income (loss) from our annual assumption
review (in millions) were as follows:
For the Years Ended December 31,
2022 2021 2020
Income (loss) from operations:
Life Insurance $ (2,197 ) $ (26 ) $ (440 )
Annuities 217 (5 ) (101 )
Group Protection 1 16 (3 )
Retirement Plan Services 6 - (3 )
Excluded realized gain (loss) (86 ) 6 58
Net income (loss) $ (2,059 ) $ (9 ) $ (489 )
The impacts of our annual assumption review were driven primarily by the
following:
2022
?For Life Insurance , unfavorable unlocking was driven by updates to policyholder behavior assumptions related to UL products with secondary guarantees in the amount of$1.8 billion , after-tax, as well as updates to mortality, morbidity and reinsurance assumptions and other items.
?For Annuities, favorable unlocking was driven by increases to interest rate
assumptions, partially offset by unfavorable updates to other items.
?For Group Protection, the favorable impact was driven by updates to life waiver
assumptions and increases to interest rate assumptions, partially offset by
unfavorable updates to long-term disability incidence and severity assumptions.
?For Retirement Plan Services, favorable unlocking was driven by increases to
interest rate assumptions and other items.
?For excluded realized gain (loss), unfavorable unlocking was driven by updates to policyholder behavior assumptions that impacted ceded reserves, partially offset by favorable updates to expense and capital market assumptions.
2021
?For Life Insurance , unfavorable unlocking was driven by updates to policyholder behavior and interest rate assumptions, partially offset by favorable updates to investment allocation assumptions.
?For Annuities, unfavorable unlocking was driven by updates to policyholder
behavior and interest rate assumptions, partially offset by favorable updates to
expense assumptions.
?For Group Protection, the favorable impact was driven by updates to long-term disability termination rate assumptions, partially offset by unfavorable updates to interest rate assumptions. ?For excluded realized gain (loss), favorable unlocking was driven by updates to expense assumptions and other items, partially offset by unfavorable updates to policyholder behavior assumptions.
Long-Term New Money Investment Yield Sensitivity
New money rates have increased but underlying interest rate volatility remains high. As a result, new money rates require careful analysis when forecasting the future direction of changes in rates. If we 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$(225) 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. For more information on our interest rate risk, see "Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk." 50
--------------------------------------------------------------------------------
Table of Contents
Goodwill and intangible assets with indefinite lives are not amortized, but are reviewed for impairment annually as ofOctober 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 (Life Insurance, Annuities, Group Protection and Retirement Plan Services) 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. 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 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. As a result of the capital market environment during the third quarter of 2022, including (i) declining equity markets and (ii) the impact of rising interest rates on our discount rate assumption, we accelerated our quantitative goodwill impairment test for our Life Insurance reporting unit as we concluded that there were indicators of impairment. Based on this quantitative test, which included updating our best estimate assumptions therein, we incurred an impairment during the third quarter of 2022 of the Life Insurance reporting unit goodwill of$634 million , which represented a write-off of the entire balance of goodwill for the reporting unit. As ofOctober 1, 2022 , we performed our annual quantitative goodwill impairment test for the remaining reporting units, and, as ofOctober 1, 2022 , the fair value was in excess of each such other reporting unit's carrying value.
Refer to Note 9 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. InAugust 2022 , the Inflation Reduction Act of 2022 was passed by theU.S. Congress and signed into law byPresident Biden . The Inflation Reduction Act of 2022 established a new 15% corporate alternative minimum tax for corporations whose average adjusted net income for any consecutive three-year period beginning afterDecember 31, 2022 , exceeds$1.0 billion . The Inflation Reduction Act of 2022 also established a 1% excise tax on stock repurchases made by publicly traded corporations. Both provisions are effective for tax years beginning afterDecember 31, 2022 . We are currently evaluating the impact of the corporate alternative minimum tax on our business, results of operations and financial condition. 51
--------------------------------------------------------------------------------
Table of Contents
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. As ofDecember 31, 2022 , we had an approximate$2.3 billion deferred tax asset related to net unrealized losses on fixed maturity AFS securities. In the assessment of the future realizability of this deferred tax asset, management considered tax planning strategy and concluded that unrealized losses were caused by factors other than credit loss, and we have the intent and ability to hold these securities to recovery and collect all of the contractual cash flows. Additionally, as ofDecember 31, 2022 , we had a$278 million deferred tax asset related to net operating loss carryforwards that can be used to offset taxable income in future periods and reduce our income taxes payable in those future periods. The net operating loss carryforwards do not expire and can be carried forward indefinitely. 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 income taxes, see Note 6. ? 52
--------------------------------------------------------------------------------
Table of Contents
RESULTS OF CONSOLIDATED OPERATIONS
Details underlying the consolidated results, deposits, net flows and account
values (in millions) were as follows:
As Restated For the
For the Years Ended Year Ended
December 31, December 31,
2022 2021 2020
Net Income (Loss)
Income (loss) from operations:
Life Insurance $ (1,965 ) $ 525 $ (34 )
Annuities 1,246 1,282 983
Group Protection 102 (127 ) 43
Retirement Plan Services 210 235 168
Other Operations (496 ) (374 ) (295 )
Excluded realized gain (loss),
after-tax 116 167 (570 )
Benefit ratio unlocking, after-tax (820 ) 196
194
Impairment of intangibles (634 ) - - Net impact from the Tax Cuts and Jobs Act - -
37
Transaction and integration costs related to mergers, acquisitions and divestitures, after-tax - (11 ) (15 ) Gain (loss) on modification or early extinguishment of debt, after-tax - (6 ) (12 ) Net income (loss)$ (2,241 ) $ 1,887 $ 499 For the Years Ended December 31, 2022 2021 2020 Deposits Life Insurance$ 5,735 $ 5,693 $ 5,890 Annuities 11,879 11,740 11,260 Retirement Plan Services 11,886 10,840 10,017 Total deposits$ 29,500 $ 28,273 $ 27,167 Net Flows Life Insurance$ 3,998 $ 3,982 $ 4,137 Annuities (415 ) (2,569 ) (341 ) Retirement Plan Services 2,905 464 166 Total net flows$ 6,488 $ 1,877 $ 3,962 As Restated As of As of As of December 31, December 31, December 31, 2022 2021 2020 Account Values Life Insurance$ 48,634 $ 51,846 $ 57,605 Annuities 144,966 172,734 157,518 Retirement Plan Services 88,735 99,114 88,307 Total account values$ 282,335 $ 323,694 $ 303,430 ? 53
--------------------------------------------------------------------------------
Table of Contents Comparison of 2022 to 2021
Net income decreased due primarily to the following:
?The effect of our annual assumption review.
?Realized gain in 2021 related to the fourth quarter reinsurance transaction and
unfavorable variable annuity net derivative results.
?
?Lower investment income on alternative investments and lower prepayment and
bond make-whole premiums.
?Lower fee income driven by lower average daily variable account values.
The decrease in net income was partially offset by the following:
?Lower mortality claims in our Life Insurance and Group Protection segments.
?Lower expenses driven by lower compensation-related expenses, partially offset
by higher Spark program and legal expenses.
?Growth in business in force.
Comparison of 2021 to 2020
Net income increased due primarily to the following:
?Realized gains in 2021 as compared to realized losses in 2020.
?Higher investment income on alternative investments, and higher prepayment and
bond make-whole premiums.
?The effect of unlocking.
?Growth in average account values, business in force and group earned premiums.
The increase in net income was partially offset by the following:
?Unfavorable experience in our Group Protection segment driven by the COVID-19
pandemic.
?Higher trail commissions, legal expenses, incentive compensation and Spark
program expense, partially offset by continued focus on expense management.
?Spread compression due to average new money rates trailing our current
portfolio yields, partially offset by actions implemented to reduce interest
crediting rates.
For a discussion of the goodwill impairment, see "Introduction - Critical
Accounting Policies and Estimates -
For a discussion of the COVID-19 pandemic, see "Introduction - Executive
Summary" above.
?
54
--------------------------------------------------------------------------------
Table of Contents
RESULTS OF LIFE INSURANCE
Income (Loss) from Operations
Details underlying the results for Life Insurance (in millions) were as follows:
As Restated For the
For the Years Ended Year Ended
December 31, December 31,
2022 2021 2020
Operating Revenues
Insurance premiums (1) $ 1,146 $ 1,033 $ 950
Fee income 3,374 3,881 3,727
Net investment income 2,586 3,207 2,823
Operating realized gain (loss) (2) (6 ) (9 ) (6 )
Amortization of deferred gain on
business sold through reinsurance 18 12 12
Other revenues 8 21 10
Total operating revenues 7,126 8,145 7,516
Operating Expenses
Interest credited 1,307 1,457 1,491
Benefits 7,020 4,275 4,586
Commissions and other expenses 1,316 1,769
1,506
Total operating expenses 9,643 7,501
7,583
Income (loss) from operations before taxes (2,517 ) 644
(67 ) Federal income tax expense (benefit) (552 ) 119 (33 ) Income (loss) from operations$ (1,965 ) $ 525 $ (34 )
(1)Includes term insurance premiums, which have a corresponding partial offset
in benefits for changes in reserves.
(2)See "Realized Gain (Loss)" below.
Comparison of 2022 to 2021
Income from operations for this segment decreased due primarily to the
following:
?Higher benefits due to the effect of unlocking and growth in business in force,
partially offset by lower mortality claims.
?Lower net investment income, net of interest credited, driven by negative
performance on alternative investments in 2022 compared to investment income in
2021, and the impact of the fourth quarter 2021 reinsurance transaction.
?Lower fee income due to the effect of unlocking and the impact of the fourth quarter 2021 reinsurance transaction, partially offset by growth in business in force.
The decrease in income from operations was partially offset by the following:
?Lower commissions and other expenses due to the effect of unlocking and lower
incentive compensation as a result of production performance.
?Higher insurance premiums due to growth in business in force.
Comparison of 2021 to 2020
Income from operations for this segment increased due primarily to the
following:
?Higher net investment income, net of interest credited, driven by investment income on alternative investments and prepayment and bond make-whole premiums, partially offset by the impact of the fourth quarter 2021 reinsurance transaction (see "Additional Information" below) and spread compression due to average new money rates trailing our current portfolio yields. ?Lower benefits due to the effect of unlocking, partially offset by growth in business in force; both periods were impacted by elevated mortality claims due to the COVID-19 pandemic.
?Higher fee income due to the effect of unlocking, growth in business in force
and higher DFEL amortization as a result of higher actual gross profits,
partially offset by the impact of the fourth quarter 2021 reinsurance
transaction.
55
--------------------------------------------------------------------------------
Table of Contents
The increase in income from operations was partially offset by higher
commissions and other expenses due to the effect of unlocking and incentive
compensation as a result of production performance, partially offset by expense
management.
See "Critical Accounting Policies and Estimates - Annual Assumption Review"
above for information about unlocking.
Additional Information
We expect an ongoing reduction in income from operations in future quarters of
approximately
unfavorable impact of the third quarter 2022 annual assumption review.
For information on our fourth quarter 2021 reinsurance transaction, see Note 8.
For information on interest rate spreads and interest rate risk, 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," "Part I - Item 1A. Risk Factors - Market Conditions - Increases in interest rates may negatively affect our profitability, capital position and the value of our investment portfolio and may also result in increased contract withdrawals" and "Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk." For information on the current interest rate environment, see "Introduction - Executive Summary - Industry Trends - Interest Rate Environment" above.
Insurance Premiums
Insurance premiums relate to traditional products and are a function of the
rates priced into the product and insurance in force. Insurance in force, in
turn, is driven by sales, persistency and mortality claims.
Fee Income
Details underlying fee income, sales, net flows, account values and in-force
face amount (in millions) were as follows:
As Restated
For the For the For the
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2022 2021 2020
Fee Income
Cost of insurance assessments $ 2,258 $ 2,362 $ 2,377
Expense assessments 1,540 1,525 1,502
Surrender charges 30 31 33
DFEL:
Deferrals (1,061 ) (989 ) (972 )
Amortization, net of interest:
Amortization, net of interest,
excluding unlocking 558 560 514
Unlocking 49 392 273
Total fee income $ 3,374 $ 3,881 $ 3,727
56
--------------------------------------------------------------------------------
Table of Contents
As Restated
For the For the For the
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2022 2021 2020
Sales by Product
IUL/UL $ 135 $ 104 $ 111
MoneyGuard® 94 101 127
VUL 163 181 188
Term 177 152 132
Executive Benefits 136 122 72
Total sales $ 705 $ 660 $ 630
Net Flows
Deposits $ 5,735 $ 5,693 $ 5,890
Withdrawals and deaths (1,737 ) (1,711 ) (1,753 )
Net flows $ 3,998 $ 3,982 $ 4,137
Contract Holder Assessments
As of December 31,
2022 2021 2020
Account Values (1)
General account $ 32,158 $ 32,532 $ 37,496
Separate account 16,476 19,314 20,109
Total account values $ 48,634 $ 51,846 $ 57,605
In-Force Face Amount
UL and other $ 363,884 $ 362,106 $ 358,554
Term insurance 707,747 611,854 535,387
Total in-force face amount
For the Years Ended December 31,
2022 2021 2020
Average General Account Values (1)
(1) Net of reinsurance ceded.
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. 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. Generally, we have higher sales during the second half of the year with the fourth quarter being our strongest. For more information on sales, see "Additional Information" above.
Sales in the table above and as discussed above were reported as follows:
?UL, IUL and VUL - first-year commissionable premiums plus 5% of excess premiums
received;
?MoneyGuard® linked-benefit products - MoneyGuard (UL), 15% of total expected
premium deposits, and MoneyGuard Market AdvantageSM (VUL), 150% of
commissionable premiums;
?Executive Benefits - insurance and corporate-owned UL and VUL, first-year
commissionable premiums plus 5% of excess premium received, and single premium
bank-owned UL and VUL, 15% of single premium deposits; 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.
57
--------------------------------------------------------------------------------
Table of Contents
Net Investment Income and Interest Credited
Details underlying net investment income and interest credited (in millions)
were as follows:
As Restated For the
For the Years Ended Year Ended
December 31, December 31,
2022 2021 2020
Net Investment Income
Fixed maturity AFS securities,
mortgage loans on real estate
and other, net of investment
expenses $ 2,366 $ 2,512 $ 2,531
Commercial mortgage loan prepayment
and bond
make-whole premiums (1) 37 46 24
Alternative investments (2) 47 522 140
Surplus investments (3) 136 127 128
Total net investment income $ 2,586 $ 3,207 $ 2,823
Interest Credited $ 1,307 $ 1,457 $ 1,491
(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 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 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:
For the Years Ended December 31,
2022 2021 2020
Benefits
Death claims direct and assumed$ 5,440 $ 5,866 $ 5,521 Death claims ceded (2,110 ) (2,325 ) (2,019 ) Reserves released on death (609 ) (708 ) (738 ) Net death benefits 2,721 2,833 2,764 Change in secondary guarantee life insurance product reserves: Change in reserves, excluding unlocking 627 703
644
Unlocking 2,533 (190 )
112
Change in MoneyGuard® reserves: Change in reserves, excluding unlocking 588 548 482 Unlocking 157 33 272 Other benefits (1) 394 348 312 Total benefits$ 7,020 $ 4,275 $ 4,586 Death claims per$1,000 of in-force 2.66 3.05
3.21
(1)Includes primarily changes in reserves and dividends on traditional and other
products.
58
--------------------------------------------------------------------------------
Table of Contents
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 experience higher mortality in the first quarter of the year due to the seasonality of claims. We expect COVID-19-related mortality to continue to followU.S. death trends.
Commissions and Other Expenses
Details underlying commissions and other expenses (in millions) were as follows:
As Restated
For the For the For the
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2022 2021 2020
Commissions and Other Expenses
Commissions $ 698 $ 639 $
687
General and administrative expenses 554 576
557
Expenses associated with reserve financing 105 100 99 Taxes, licenses and fees 159 165 163 Total expenses incurred 1,516 1,480 1,506 DAC and VOBA deferrals (805 ) (745 ) (788 ) Total expenses recognized before amortization 711 735
718
DAC and VOBA amortization, net of interest: Amortization, net of interest, excluding unlocking 458 450
339
Unlocking 143 580
445
Other intangible amortization 4 4 4 Total commissions and other expenses$ 1,316 $ 1,769 $ 1,506 DAC and VOBA Deferrals As a percentage of sales 114.2% 112.9% 125.1% 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 2022 and 2021, the fluctuations were primarily a result of changes in sales mix to products with different commission rates. For more information, see "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates - DAC, VOBA, DSI and DFEL" above. 59
--------------------------------------------------------------------------------
Table of Contents
RESULTS OF ANNUITIES
Income (Loss) from Operations
Details underlying the results for Annuities (in millions) were as follows:
As Restated For the
For the Years Ended Year Ended
December 31, December 31,
2022 2021 2020
Operating Revenues
Insurance premiums (1) $ 165 $ 116 $ 121
Fee income 2,434 2,724 2,394
Net investment income 1,463 1,400 1,272
Operating realized gain (loss) (2) 207 208
214
Amortization of deferred gain on business sold through reinsurance 25 26 29 Other revenues (3) 482 527 425 Total operating revenues 4,776 5,001 4,455 Operating Expenses Interest credited 895 811 773 Benefits (1) 468 548 696 Commissions and other expenses 1,960 2,119
1,854
Total operating expenses 3,323 3,478
3,323
Income (loss) from operations before taxes 1,453 1,523
1,132
Federal income tax expense (benefit) 207 241
149
Income (loss) from operations$ 1,246 $ 1,282 $
983
(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)" below.
(3)Consists primarily of revenues attributable to broker-dealer services, which are subject to market volatility, and the net settlement related to certain reinsurance transactions, which has a corresponding offset in net investment income and interest credited. Comparison of 2022 to 2021
Income from operations for this segment decreased due primarily to the
following:
?Lower fee income driven by lower average daily variable account values.
?Lower net investment income, net of interest credited, driven by lower investment income on alternative investments within our surplus portfolio and lower prepayment and bond make-whole premiums, partially offset by higher average fixed account values and impacts to portfolio yields from the current interest rate environment.
The decrease in income from operations was partially offset by the following:
?Lower commissions and other expenses driven by lower trail commissions
resulting from lower average daily variable account values, lower incentive
compensation as a result of production performance and lower amortization
expense as a result of lower actual gross profits.
?Lower benefits, net of changes in income annuity reserves, due to the effect of unlocking, partially offset by an increase in the growth of GLB and GDB benefit reserves due to market performance.
Comparison of 2021 to 2020
Income from operations for this segment increased due primarily to the
following:
?Higher fee income driven by higher average daily variable account values.
?Lower benefits due to the effect of unlocking.
?Higher net investment income, net of interest credited, driven by prepayment
and bond make-whole premiums and investment income on alternative investments
within our surplus portfolio.
60
--------------------------------------------------------------------------------
Table of Contents
The increase in income from operations was partially offset by higher commissions and other expenses due to trail commissions resulting from higher average account values, amortization expense as a result of higher actual gross profits and incentive compensation as a result of production performance, partially offset by expense management.
See "Critical Accounting Policies and Estimates - Annual Assumption Review"
above for information about unlocking.
Additional Information
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 new business and account values. 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%, 8% and 7% in 2022, 2021 and 2020, respectively. Our fixed and indexed variable annuities have discretionary fixed and indexed crediting rates that reset on an annual or periodic basis and may be subject to surrender charges. Our ability to retain these 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 or other changes that may cause interest rate spreads to differ from our expectations. For information on interest rate spreads and interest rate risk, 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," "Part I - Item 1A. Risk Factors - Market Conditions - Increases in interest rates may negatively affect our profitability, capital position and the value of our investment portfolio and may also result in increased contract withdrawals" and "Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk." For information on the current interest rate environment, see "Introduction - Executive Summary - Industry Trends - Interest Rate Environment" above.
Fee Income
Details underlying fee income, account values and net flows (in millions) were
as follows:
For the Years Ended December 31,
2022 2021 2020
Fee Income
Mortality, expense and other
assessments $ 2,411 $ 2,713 $ 2,381
Surrender charges 23 11 16
DFEL:
Deferrals (22 ) (27 ) (31 )
Amortization, net of interest:
Amortization, net of interest,
excluding unlocking 23 32 26
Unlocking (1 ) (5 ) 2
Total fee income $ 2,434 $ 2,724 $ 2,394
61
--------------------------------------------------------------------------------
Table of Contents
As of or For the Years Ended
December 31,
2022 2021 2020
Variable Account Value Information
Variable annuity deposits (1) $ 3,370 $ 5,220 $ 3,978
Increases (decreases) in variable
annuity account values:
Net flows (1) (5,871 ) (6,283 ) (5,262 )
Change in market value (1) (23,205 ) 16,997 16,106
Contract holder assessments (1) (2,604 ) (2,838 ) (2,554 )
Transfers to the variable portion
of variable annuity
products from the fixed portion of
variable
annuity products 492 588 831
Variable annuity account values (1) 105,613 136,721 128,175
Average daily variable annuity
account values (1)
114,882 133,888 116,117
Average daily S&P 500® Index (2) 4,100 4,269 3,218
(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
10 for additional information.
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) - Operating Realized Gain (Loss)" below for
discussion of these attributed fees.
62
--------------------------------------------------------------------------------
Table of Contents
Net Investment Income and Interest Credited
Details underlying net investment income, interest credited and fixed account
values (in millions) were as follows:
As Restated For the
For the Years Ended Year Ended
December 31, December 31,
2022 2021 2020
Net Investment Income
Fixed maturity AFS securities,
mortgage loans on real estate
and other, net of investment
expenses $ 1,305 $ 1,155 $
1,122
Commercial mortgage loan prepayment and bond make-whole premiums (1) 31 70 23 Surplus investments (2) 127 175 127 Total net investment income$ 1,463 $ 1,400 $ 1,272 Interest Credited Amount provided to contract holders$ 880 $ 794 $ 755 DSI deferrals (2 ) (3 ) (4 ) Interest credited before DSI amortization 878 791 751 DSI amortization: Amortization, excluding unlocking 18 21 21 Unlocking (1 ) (1 ) 1 Total interest credited$ 895 $ 811 $ 773
(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 Restated As of or For the
As of or For the Years
Ended Year Ended
December 31, December 31,
2022 2021 2020
Fixed Account Value Information
Fixed annuity deposits (1) $ 8,509 $ 6,520 $ 7,282
Increases (decreases) in fixed
annuity account values:
Net flows (1) 5,456 3,714
4,921
Contract holder assessments (1) (52 ) (86 ) (66 ) Transfers from the fixed portion of variable annuity products to the variable portion of variable annuity products (492 ) (588 ) (831 ) Reinvested interest credited (1)(3) (1,056 ) 3,294
1,686
Fixed annuity account values (1)(2) 39,353 36,012
29,343
Average fixed account values (1)(2) 36,914 32,803
25,804
(1)Includes the fixed portion of variable.
(2)Net of reinsurance ceded.
(3)The decrease in reinvested interest credited was driven by the change in
embedded derivatives related to our indexed annuity products.
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
63
--------------------------------------------------------------------------------
Table of Contents
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:
For the Years Ended December 31,
2022 2021 2020
Benefits
Net death and other benefits,
excluding unlocking $ 736 $ 540 $ 553
Unlocking (268 ) 8 143
Total benefits $ 468 $ 548 $ 696
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:
As Restated For the
For the Years Ended Year Ended
December 31, December 31,
2022 2021 2020
Commissions and Other Expenses
Commissions:
Deferrable $ 389 $ 450 $ 480
Non-deferrable 629 689 581
General and administrative expenses 408 439
427
Inter-segment reimbursement associated with reserve financing and LOC expenses (1) 4 2 3 Taxes, licenses and fees 45 45
31
Total expenses incurred, excluding broker-dealer 1,475 1,625
1,522
DAC deferrals (449 ) (515 ) (548 ) Total pre-broker-dealer expenses incurred, excluding amortization, net of interest 1,026 1,110
974
DAC and VOBA amortization, net of interest: Amortization, net of interest, excluding unlocking 405 446
401
Unlocking (7 ) (7 ) (14 ) Broker-dealer expenses incurred 536 570
493
Total commissions and other expenses
DAC Deferrals As a percentage of sales/deposits 3.8% 4.4%
4.9%
(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 the
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. For more information, see
"Critical Accounting Policies and Estimates - DAC, VOBA, DSI and DFEL" above.
64
--------------------------------------------------------------------------------
Table of Contents
RESULTS OF GROUP PROTECTION
Income (Loss) from Operations
Details underlying the results for Group Protection (in millions) were as
follows:
As Restated For the
For the Years Ended Year Ended
December 31, December 31,
2022 2021 2020
Operating Revenues
Insurance premiums $ 4,768 $ 4,450 $ 4,280
Net investment income 334 365 330
Other revenues (1) 202 180 183
Total operating revenues 5,304 4,995 4,793
Operating Expenses
Interest credited 5 6 5
Benefits 3,844 3,890 3,500
Commissions and other expenses 1,325 1,260
1,234
Total operating expenses 5,174 5,156
4,739
Income (loss) from operations before taxes 130 (161 )
54
Federal income tax expense (benefit) 28 (34 ) 11 Income (loss) from operations$ 102 $ (127 ) $ 43
(1)Consists of revenue from third parties for administrative services performed,
which has a corresponding partial offset in commissions and other expenses.
For the Years Ended
2022 2021
2020
Income (Loss) from Operations by Product Line Life$ 12 $ (243 ) $ (95 ) Disability 91 122 126 Dental (1 ) (6 ) 12 Income (loss) from operations$ 102 $ (127 ) $ 43 Comparison of 2022 to 2021
Income from operations for this segment increased due primarily to the
following:
?Higher insurance premiums due to growth in business in force and favorable
persistency.
?Lower benefits driven by lower COVID-19-related incidence in our life business
and lower incidence in our disability business, partially offset by less
favorable reserve adjustments.
The increase in income from operations was partially offset by the following:
?Higher commissions and other expenses driven by investments in claims
management to help improve ongoing operations and higher sales volumes.
?Lower net investment income, net of interest credited, driven by lower
investment income on alternative investments within our surplus portfolio and
lower prepayment and bond make-whole premiums.
65
--------------------------------------------------------------------------------
Table of Contents Comparison of 2021 to 2020
Income from operations for this segment decreased due primarily to the
following:
?Higher benefits driven by higher mortality in our life business and higher morbidity in our disability business as a result of the impacts of the COVID-19 pandemic, and lower utilization in our dental business in 2020, partially offset by favorable reserve adjustments in our disability business. ?Higher commissions and other expenses due to incentive compensation as a result of production performance and investments in our claims organization to address higher claims volume attributable to the COVID-19 pandemic, partially offset by a decrease in amortization as a VOBA intangible asset was fully amortized in 2020.
The decrease in income from operations was partially offset by the following:
?Higher insurance premiums due to growth in the business and favorable
persistency.
?Higher net investment income, net of interest credited, driven by investment income on alternative investments within our surplus portfolio and prepayment and bond make-whole premiums.
See "Critical Accounting Policies and Estimates - Annual Assumption Review"
above for information on our reserve adjustments.
Additional Information
The total loss ratio for the year endedDecember 31, 2022 , decreased as compared to the prior year, due primarily to lower COVID-19-related incidence and favorable reserve adjustments in our life business and lower incidence in our disability business, partially offset by unfavorable reserve adjustments in our disability business in 2022 compared to favorable reserve adjustments in 2021. For a discussion of the COVID-19 pandemic, see "Introduction - Executive Summary - Industry Trends - COVID-19 Pandemic" above. 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$37 million to$41 million . The effects are symmetrical for a comparable decrease in the loss ratio and, therefore, move in an equal and opposite direction. For information on the effects of current interest rates on our long-term disability claim reserves, see "Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk - Effect of Interest Rate Sensitivity." For information on the current interest rate environment, see "Introduction - Executive Summary - Industry Trends - Interest Rate Environment" above. Insurance Premiums
Details underlying insurance premiums (in millions) were as follows:
For the Years Ended December 31,
2022 2021
2020
Insurance Premiums by Product Line Life$ 1,808 $ 1,653 $ 1,613 Disability 2,763 2,569 2,401 Dental 197 228 266 Total insurance premiums$ 4,768 $ 4,450 $ 4,280 Sales by Product Line Life 299 264 265 Disability 337 284 397 Dental 40 38 44 Total sales$ 676 $ 586 $ 706
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.
66
--------------------------------------------------------------------------------
Table of Contents
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. Details underlying net investment income (in
millions) were as follows:
As Restated For the
For the Years Ended Year Ended
December 31, December 31,
2022 2021 2020
Net Investment Income
Fixed maturity AFS securities,
mortgage loans on real estate
and other, net of investment
expenses $ 254 $ 236 $
240
Commercial mortgage loan prepayment and bond make-whole premiums (1) 6 16 9 Surplus investments (2) 74 113 81 Total net investment income $ 334$ 365 $ 330
(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.
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,
2022 2021 2020
Benefits and Interest Credited by
Product Line
Life $ 1,434 $ 1,630 $ 1,399
Disability 2,270 2,092 1,938
Dental 145 174 168
Total benefits and interest
credited $ 3,849 $ 3,896 $ 3,505
Loss Ratios by Product Line
Life 79.4% 98.6% 86.7%
Disability 82.2% 81.4% 80.5%
Dental 73.5% 76.3% 63.1%
Total 80.7% 87.5% 81.8%
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. We expect COVID-19-related mortality to continue to
follow U.S. death trends. For additional information on our loss ratios, see
"Additional Information" above.
67
--------------------------------------------------------------------------------
Table of Contents
Commissions and Other Expenses
Details underlying commissions and other expenses (in millions) were as follows:
For the Years Ended December 31,
2022 2021 2020
Commissions and Other Expenses
Commissions $ 394 $ 361 $
359
General and administrative expenses 768 731 697 Taxes, licenses and fees 124 120 122 Total expenses incurred 1,286 1,212 1,178 DAC deferrals (99 ) (91 ) (92 ) Total expenses recognized before amortization 1,187 1,121
1,086
DAC and VOBA amortization, net of interest 106 107
115
Other intangible amortization 32 32
33
Total commissions and other expenses$ 1,325 $ 1,260 $
1,234
DAC Deferrals As a percentage of insurance premiums 2.1% 2.0%
2.1%
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. For more information, see "Critical
Accounting Policies and Estimates - DAC, VOBA, DSI and DFEL" above.
?
68
--------------------------------------------------------------------------------
Table of Contents
RESULTS OF RETIREMENT PLAN SERVICES
Income (Loss) from Operations
Details underlying the results for Retirement Plan Services (in millions) were
as follows:
As Restated For the
For the Years Ended Year Ended
December 31, December 31,
2022 2021 2020
Operating Revenues
Fee income $ 261 $ 296 $ 253
Net investment income 976 991 933
Other revenues (1) 37 36 27
Total operating revenues 1,274 1,323 1,213
Operating Expenses
Interest credited 630 617 615
Benefits 3 3 2
Commissions and other expenses 396 420
404
Total operating expenses 1,029 1,040
1,021
Income (loss) from operations before taxes 245 283
192
Federal income tax expense (benefit) 35 48 24 Income (loss) from operations$ 210 $ 235 $ 168
(1)Consists primarily of mutual fund account program revenues from mid to large
employers.
Comparison of 2022 to 2021
Income from operations for this segment decreased due primarily to the
following:
?Lower fee income driven by lower average daily account values.
?Lower net investment income, net of interest credited, driven by lower investment income on alternative investments within our surplus portfolio and lower prepayment and bond make-whole premiums, partially offset by higher average fixed account values and impacts to portfolio yields from the current interest rate environment.
The decrease in income from operations was partially offset by lower commissions
and other expenses driven by amortization as a result of lower actual gross
profits, the effect of unlocking, incentive compensation as a result of
production performance and trail commissions resulting from lower average
account values.
Comparison of 2021 to 2020
Income from operations for this segment increased due primarily to the
following:
?Higher net investment income, net of interest credited, driven by prepayment and bond make-whole premiums and investment income on alternative investments within our surplus portfolio, partially offset by spread compression due to average new money rates trailing our current portfolio yields.
?Higher fee income driven by higher average account values.
The increase in income from operations was partially offset by higher
commissions and other expenses driven by trail commissions resulting from higher
average account values and incentive compensation as a result of production
performance, partially offset by expense management.
See "Critical Accounting Policies and Estimates - Annual Assumption Review"
above for information about unlocking.
Additional Information
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
69
--------------------------------------------------------------------------------
Table of Contents
caused by plan sponsor terminations and participant withdrawals. These outflows
as a percentage of average account values were 10%, 11% and 13% for 2022, 2021
and 2020, 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 17%, 18% and 19% for 2022, 2021 and 2020, respectively.
Due to this overall shift in business mix toward products with lower returns,
new deposit production continues to be necessary to maintain earnings at current
levels.
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 interest
rate risk, 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," "Part I - Item 1A. Risk Factors - Market
Conditions - Increases in interest rates may negatively affect our
profitability, capital position and the value of our investment portfolio and
may also result in increased contract withdrawals" and "Part II - Item 7A.
Quantitative and Qualitative Disclosures About Market Risk - Interest Rate
Risk." For information on the current interest rate environment, see
"Introduction - Executive Summary - Industry Trends - Interest Rate Environment"
above.
Fee Income
Details underlying fee income, net flows and account values (in millions) were
as follows:
For the Years Ended December 31,
2022 2021 2020
Fee Income
Annuity expense assessments $ 192 $ 219 $ 184
Mutual fund fees 68 77 68
Total expense assessments 260 296 252
Surrender charges 1 - 1
Total fee income $ 261 $ 296 $ 253
For the Years Ended December 31,
2022 2021 2020
Net Flows By Market
Small market $ 295 $ 133 $ 350
Mid - large market 3,811 1,800 792
Multi-Fund® and other (1,201 ) (1,469 ) (976 )
Total net flows $ 2,905 $ 464 $ 166
As of or For the Years Ended
December 31,
2022 2021 2020
Variable Account Value Information
Variable annuity deposits (1) $ 2,348 $ 2,218 $ 1,843
Increases (decreases) in variable
annuity account values:
Net flows (1) 10 (733 ) (333 )
Change in market value (1) (3,713 ) 3,247 2,731
Contract holder assessments (1) (164 ) (185 ) (156 )
Variable annuity account values (1) 16,891 20,957 18,755
Average daily variable annuity
account values (1)
17,946 20,147 16,426
Average daily S&P 500® Index 4,100 4,269 3,218
(1) Excludes the fixed portion of variable.
70
--------------------------------------------------------------------------------
Table of Contents
As of or For the Years Ended
December 31,
2022 2021 2020
Mutual Fund Account Value Information
Mutual fund deposits $ 6,542 $ 6,297 $
5,449
Mutual fund net flows 2,251 1,323
100
Mutual fund account values (1) 46,707 54,518
46,636
(1) Mutual funds are not included in the separate accounts reported on the
Consolidated Balance Sheets as we do not have any ownership interest in them.
Our fee income is primarily composed of expense assessments that we charge to cover insurance and administrative expenses, and mutual fund fees earned for services we provide to our mutual fund programs. Fee income is primarily based on average account values, both fixed and variable, which are driven by net flows and the equity markets. Fee income is also driven by non-account value-related items such as participant counts. 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:
As Restated For the
For the Years Ended Year Ended
December 31, December 31,
2022 2021 2020
Net Investment Income
Fixed maturity AFS securities,
mortgage loans on real estate
and other, net of investment
expenses $ 883 $ 828 $
834
Commercial mortgage loan prepayment and bond make-whole premiums (1) 23 58 23 Surplus investments (2) 70 105 76 Total net investment income $ 976$ 991 $ 933 Interest Credited $ 630$ 617 $ 615
(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,
2022 2021 2020
Fixed Account Value Information
Fixed annuity deposits (1) $ 2,996 $ 2,325 $ 2,725
Increases (decreases) in fixed
annuity account values:
Net flows (1) 644 (126 ) 399
Reinvested interest credited (1) 629 616 613
Contract holder assessments (1) (13 ) (14 ) (13 )
Fixed annuity account values (1) 25,137 23,639 22,916
Average fixed account values (1) 24,571 23,147 21,696
(1)Includes the fixed portion of variable.
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
71
--------------------------------------------------------------------------------
Table of Contents
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.
Commissions and Other Expenses
Details underlying commissions and other expenses (in millions) were as follows:
For the Years Ended December 31,
2022 2021 2020
Commissions and Other Expenses
Commissions:
Deferrable $ 4 $ 5 $ 5
Non-deferrable 75 79 71
General and administrative expenses 303 309 304
Taxes, licenses and fees 17 17 16
Total expenses incurred 399 410 396
DAC deferrals (21 ) (22 ) (21 )
Total expenses recognized before
amortization 378 388
375
DAC and VOBA amortization, net of interest: Amortization, net of interest, excluding unlocking 25 32 25 Unlocking (7 ) - 4 Total commissions and other expenses$ 396 $ 420 $ 404 DAC Deferrals As a percentage of annuity sales/deposits 0.4% 0.5% 0.5% 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. For more information, see "Critical Accounting Policies and Estimates - DAC, VOBA, DSI and DFEL" above. 72
--------------------------------------------------------------------------------
Table of Contents
RESULTS OF OTHER OPERATIONS
Income (Loss) from Operations
Details underlying the results for Other Operations (in millions) were as
follows:
As Restated For the
For the Years Ended Year Ended
December 31, December 31,
2022 2021 2020
Operating Revenues
Insurance premiums (1) $ 8 $ 19 $ 21
Net investment income 156 148 152
Other revenues (6 ) 14 12
Total operating revenues 158 181 185
Operating Expenses
Interest credited 39 42 39
Benefits 79 81 117
Other expenses 203 189 69
Interest and debt expense 283 262 269
Spark program expense 167 87 68
Total operating expenses 771 661 562
Income (loss) from operations before taxes (613 ) (480 )
(377 ) Federal income tax expense (benefit) (117 ) (106 ) (82 ) Income (loss) from operations$ (496 ) $ (374 ) $ (295 )
(1)Includes our disability income business, which has a corresponding offset in
benefits for changes in reserves.
Comparison of 2022 to 2021
Loss from operations for Other Operations increased due primarily to the
following:
?Higher Spark program expense.
?Higher interest and debt expense driven by an increase in average interest
rates.
?Lower other revenues due to the effect of market fluctuations on assets held as part of certain compensation plans, which decreased during 2022 compared to an increase during 2021. ?Higher other expenses related to higher legal expenses, partially offset by the effect of changes in our stock price on our deferred compensation plans, as our stock price decreased during 2022, compared to an increase during 2021.
The increase in loss from operations was partially offset by higher net
investment income, net of interest credited, related to higher allocated
investments driven by an increase in excess capital retained by Other
Operations.
Comparison of 2021 to 2020
Loss from operations for Other Operations increased due primarily to the
following:
?Higher other expenses related to a one-time legal expense and the effect of changes in our stock price on our deferred compensation plans, as our stock price increased significantly during 2021, compared to a significant decrease during 2020.
?Higher Spark program expense.
?Lower net investment income, net of interest credited, related to lower
allocated investments driven by a decrease in excess capital retained by Other
Operations.
The increase in loss from operations was partially offset by the following:
?Lower benefits attributable to favorable experience in our run-off
institutional pension and disability income businesses and modifying certain
assumptions in 2020 on the reserves supporting our institutional pension
business.
?Lower interest and debt expense driven by a decline in average interest rates.
73
--------------------------------------------------------------------------------
Table of Contents Additional Information
We expect to continue making investments as part of our Spark Initiative. For
more information, see "Introduction - Executive Summary - Significant
Operational Matters - Spark 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. The majority of our interest credited relates to our reinsurance operations sold toSwiss 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 the 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:
For the Years Ended December
31,
2022 2021
2020
General and administrative expenses: Legal$ 156 $ 94 $ - Branding 43 45 43 Other (1) 10 61 46 Total general and administrative expenses 209 200 89 Taxes, licenses and fees (2) (3 ) (9 ) (11 ) Other (3) (3 ) (2 ) (9 ) Total other expenses$ 203 $ 189 $ 69 (1)Includes the portion of our deferred compensation plan expense attributable to participants' selection of LNC stock as the measure for their investment return, expenses that are corporate in nature including charitable contributions and other expenses not allocated to our business segments. (2)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 primarily 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 "Liquidity and
Capital Resources - Holding Company Sources and Uses of Liquidity and Capital -
Debt" below.
74
--------------------------------------------------------------------------------
Table of Contents
REALIZED GAIN (LOSS)
Details underlying realized gain (loss), after-DAC (1) (in millions) were as
follows:
As Restated For the
For the Years Ended Year Ended
December 31, December 31,
2022 2021 2020
Components of Realized Gain (Loss),
Pre-Tax
Total operating realized gain
(loss) $ 201 $ 200 $
208
Total excluded realized gain (loss) 144 214
(721 )
Total realized gain (loss), pre-tax
Components of Excluded Realized Gain (Loss), After-Tax Credit loss benefit (expense) on mortgage loans on real estate$ (7 ) $ 79 $ (85 ) Credit loss benefit (expense) on reinsurance-related assets (99 ) 1 - Credit loss benefit (expense) on other financial assets (12 ) (9 ) (20 ) Realized gain (loss) related to certain financial assets (66 ) 488 (35 ) Realized gain (loss) on equity securities 13 32 4 Realized gain (loss) on the mark-to-market on certain instruments (2) 52 57 33 Total realized gain (loss) related to financial instruments and reinsurance-related assets (119 ) 648 (103 ) Variable annuity net derivative results: Hedge program performance, including unlocking for GLB reserves hedged and benefit ratio unlocking (590 ) (110 ) (564 ) GLB NPR component 17 (195 ) 293 Total variable annuity net derivative results (573 ) (305 ) (271 ) Indexed annuity forward-starting option 10 20 (2 ) Excluded realized gain (loss), including benefit ratio unlocking (682 ) 363 (376 ) Less: benefit ratio unlocking on GDB and GLB riders (798 ) 196
194
Total excluded realized gain (loss), after-tax$ 116 $ 167 $
(570 )
(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)The modified coinsurance investment portfolio includes 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 modified
coinsurance investment portfolio are recorded in realized gain (loss),
volatility can occur within net income (loss). See Note 8 for more information.
75
--------------------------------------------------------------------------------
Table of Contents Comparison of 2022 to 2021
We had realized losses compared to realized gains due primarily to the
following:
?Gains related to certain financial assets related primarily to the fourth
quarter 2021 reinsurance transaction.
?Unfavorable variable annuity net derivative results driven by unfavorable hedge program performance due to more volatile capital markets, partially offset by a favorable GLB NPR component due to credit spreads widening and our associated reserves increasing.
?Losses related to an increase in the credit loss allowance for
reinsurance-related assets in 2022 due to updates to policyholder behavior
assumptions that impacted ceded reserves.
?Losses related to an increase in the credit loss allowance for mortgage loans on real estate in 2022 compared to a decrease in 2021 due to changes in economic projections.
?Lower gains related to the indexed annuity forward-starting option driven
primarily by an increase of option costs and other items, partially offset by
the effect of unlocking.
?Lower gains on equity securities due to unfavorable equity market performance
in 2022 compared to favorable equity market performance in 2021.
?Lower gains on the mark-to-market on certain instruments driven by declines in trading securities due to increases in interest rates, partially offset by gains on certain derivatives. Comparison of 2021 to 2020
We had realized gains compared to realized losses due primarily to the
following:
?Gains related to certain financial assets related primarily to the fourth
quarter 2021 reinsurance transaction.
?Gains related to a decrease in the credit loss allowance for mortgage loans on real estate in 2021 compared to an increase in 2020 due to changes in economic projections.
?Gains related to our indexed annuity forward-starting option driven by an
increase in discount rates, partially offset by the effect of unlocking.
?Gains related to the mark-to-market on certain instruments due to favorable changes in the fair value of embedded derivatives related to certain modified coinsurance arrangements. The realized gains were partially offset by unfavorable variable annuity net derivative results driven by an update to ourNPR input to the fair value calculation of our GLB embedded derivatives in 2020 and the effects of unlocking, partially offset by less unfavorable hedge program performance due to less volatile capital markets.
The above components of excluded realized gain (loss) are described including
benefit ratio unlocking, after-tax.
See "Critical Accounting Policies and Estimates - Annual Assumption Review"
above for information about unlocking.
For information on our fourth quarter 2021 reinsurance transaction, see Note 8.
Operating Realized Gain (Loss)
Operating realized gain (loss) includes indexed annuity and IUL net derivative
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 the Consolidated Balance Sheets with changes in fair value recorded in
realized gain (loss) on the 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.
76
--------------------------------------------------------------------------------
Table of Contents
Realized Gain (Loss) Related to Financial Instruments and Reinsurance-Related
Assets
For information on realized gain (loss) related to financial instruments and
reinsurance-related assets, see Note 15.
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 derivative results),
reinsurance-related embedded derivatives and trading securities.
See Note 3 for information about our consolidated VIEs.
We also recognize the mark-to-market on certain mortgage loans on real estate
for which we have elected the fair value option. See Note 20 for additional
information.
Variable Annuity Net Derivative Results
Our variable annuity net derivative 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 derivative 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 theNPR component of the liability. TheNPR factors affect the discount rate used in the calculation of the GLB embedded derivative reserve. Our methodology for calculating theNPR component of the embedded derivative reserve utilizes an extrapolated 30-yearNPR 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 theNPR of the specific liability within our insurance subsidiaries. Details underlying our variable annuity hedging program (dollars in millions) were as follows: As Restated As of As of As of As of As of December 31, September 30, June 30, March 31, December 31, 2022 2022 2022 2022 2021 Variable annuity hedge program assets (liabilities)$ 1,928 $ 1,952 $
1,623
Variable annuity reserves - asset (liability): Embedded derivative reserves, pre-NPR (1)$ 1,513 $ 1,180 $ 1,150 $ 1,708 $ 1,822 NPR 40 145 164 46 17 Embedded derivative reserves 1,553 1,325 1,314 1,754 1,839 Insurance benefit reserves (2,468 ) (2,668 ) (2,349 ) (1,547 ) (1,231 ) Total variable annuity reserves - asset (liability)$ (915 ) $ (1,343 ) $ (1,035 ) $ 207 $ 608 10-year CDS spread 2.31% 2.10% 2.05% 1.44% 1.15%NPR factor related to 10-year CDS spread 1.58% 1.47% 1.33% 0.99% 0.70%
(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.
77
--------------------------------------------------------------------------------
Table of Contents
The following shows the hypothetical effect (in millions) to net income (loss)
for changes in the
Hypothetical
Effect
NPR factor:
Down 158 basis points to zero $ (180 )
Up 20 basis points 9
See "Critical Accounting Policies and Estimates - Future Contract Benefits -
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.
78
--------------------------------------------------------------------------------
Table of Contents
CONSOLIDATED INVESTMENTS
Details underlying our consolidated investment balances (in millions) were as
follows:
As Restated
Percentage of
As Restated Total Investments
As of As of As of As of
December 31, December 31, December 31, December 31,
2022 2021 2022 2021
Investments
Fixed maturity AFS
securities $ 99,736 $ 118,711 75.8% 77.1%
Trading securities 3,498 4,460 2.7% 2.9%
Equity securities 427 375 0.3% 0.2%
Mortgage loans on
real estate 18,301 17,991 13.9% 11.7%
Policy loans 2,359 2,364 1.8% 1.5%
Derivative
investments 3,594 5,697 2.7% 3.8%
Alternative
investments 3,021 2,666 2.3% 1.7%
Other investments 718 1,622 0.5% 1.1%
Total investments $ 131,654 $ 153,886 100.0% 100.0%
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 "Part II - 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.
?
79
--------------------------------------------------------------------------------
Table of Contents
Fixed Maturity and Equity Securities Portfolios
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 4; 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 4.
As of December 31, 2022
Net %
Amortized Gross Unrealized Fair Fair
Cost (1) Gains Losses Value Value
Fixed Maturity AFS Securities
Industry corporate bonds:
Financial services $ 17,762 $ 133 $ 1,998 $ 15,897 15.9%
Basic industry 4,352 45 478 3,919 3.9%
Capital goods 7,374 63 884 6,553 6.6%
Communications 4,239 72 519 3,792 3.8%
Consumer cyclical 6,056 40 698 5,398 5.4%
Consumer non-cyclical 17,080 184 2,395 14,869 14.9%
Energy 4,776 53 485 4,344 4.4%
Technology 5,581 27 675 4,933 4.9%
Transportation 3,666 19 421 3,264 3.3%
Industrial other 2,330 3 416 1,917 1.9%
Utilities 14,204 111 1,822 12,493 12.5%
Government-related entities 1,820 37 213 1,644 1.6%
Collateralized mortgage and other
obligations ("CMOs"):
Agency backed 1,451 3 166 1,288 1.3%
Non-agency backed 364 18 14 368 0.4%
Mortgage pass through securities
("MPTS"):
Agency backed 394 1 42 353 0.4%
Commercial mortgage-backed
securities ("CMBS"):
Agency backed 15 - - 15 0.0%
Non-agency backed 1,902 3 246 1,659 1.7%
Asset-backed securities ("ABS"):
Collateralized loan obligations
("CLOs") 8,497 1 671 7,827 7.8%
Credit card 85 6 1 90 0.1%
Home equity 196 27 4 219 0.2%
Other 3,014 4 250 2,768 2.8%
Municipals:
Taxable 5,319 171 506 4,984 5.0%
Tax-exempt 91 1 6 86 0.1%
Government:
United States 405 5 31 379 0.4%
Foreign 348 17 47 318 0.3%
Hybrid and redeemable preferred
securities 364 25 30 359 0.4%
Total fixed maturity AFS securities 111,685 1,069 13,018 99,736 100.0%
Trading Securities (2) 3,833 44 379 3,498
Equity Securities 383 104 60 427
Total fixed maturity AFS, trading
and equity securities $ 115,901 $ 1,217 $ 13,457 $ 103,661
?
80
--------------------------------------------------------------------------------
Table of Contents
As Restated
As of December 31, 2021
Net %
Amortized Gross Unrealized Fair Fair
Cost (1) Gains Losses Value Value
Fixed Maturity AFS Securities
Industry corporate bonds:
Financial services $ 16,438 $ 1,981 $ 81 $ 18,338 15.4%
Basic industry 4,436 741 11 5,166 4.4%
Capital goods 7,316 1,040 31 8,325 7.0%
Communications 4,124 734 7 4,851 4.1%
Consumer cyclical 5,811 616 22 6,405 5.4%
Consumer non-cyclical 16,905 2,565 83 19,387 16.3%
Energy 4,932 728 13 5,647 4.8%
Technology 5,173 546 34 5,685 4.8%
Transportation 3,414 423 11 3,826 3.2%
Industrial other 2,159 174 11 2,322 2.0%
Utilities 13,785 2,250 38 15,997 13.5%
Government-related entities 1,863 315 7 2,171 1.8%
CMOs:
Agency backed 1,544 123 1 1,666 1.4%
Non-agency backed 360 52 1 411 0.3%
MPTS:
Agency backed 429 21 2 448 0.4%
CMBS:
Agency backed 20 - - 20 0.0%
Non-agency backed 1,532 61 14 1,579 1.3%
ABS:
CLOs 6,356 11 49 6,318 5.3%
Credit card 82 24 1 105 0.1%
Home equity 236 54 - 290 0.2%
Other 1,765 38 4 1,799 1.5%
Municipals:
Taxable 5,250 1,290 12 6,528 5.5%
Tax-exempt 72 21 - 93 0.1%
Government:
United States 375 60 2 433 0.4%
Foreign 373 64 5 432 0.4%
Hybrid and redeemable preferred
securities 373 107 11 469 0.4%
Total fixed maturity AFS securities 105,123 14,039 451 118,711 100.0%
Trading Securities (2) 4,148 343 31 4,460
Equity Securities 341 56 22 375
Total fixed maturity AFS, trading
and equity securities $ 109,612 $ 14,438 $
504
(1)Represents amortized cost, net of the allowance for credit losses.
(2)Certain of our trading securities support our reinsurance funds withheld and
modified coinsurance agreements and the investment results are passed directly
to the reinsurers. See "Trading Securities" below for more information.
?
81
--------------------------------------------------------------------------------
Table of ContentsFixed 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:
As Restated
As of December 31, 2022 As of December 31, 2021
Rating
Agency Net Net
NAIC Equivalent Amortized Fair % of Amortized Fair % of
Designation Designation
(1) (1) Cost Value Total
Cost Value Total
1 AAA / AA / A $ 63,741 $ 56,892 57.0% $
58,542
2 BBB 44,103 39,230 39.4% 42,762 48,095 40.5%
Total investment grade
securities 107,844 96,122 96.4%
101,304 114,666 96.6%
Below Investment Grade
Securities
3 BB 2,101 1,938 1.9% 2,278 2,492 2.1%
4 B 1,679 1,620 1.6% 1,424 1,441 1.2%
CCC and
5 lower 59 53 0.1% 51 53 0.0%
In or near
6 default 2 3 0.0% 66 59 0.1%
Total below investment grade
securities 3,841 3,614 3.6% 3,819 4,045 3.4%
Total fixed maturity AFS
securities $ 111,685 $ 99,736 100.0% $
105,123
Total securities below investment grade as a percentage of total fixed maturity AFS securities 3.4% 3.6%
3.6% 3.4%
(1)Based upon the rating designations determined and provided by theNational Association of Insurance Commissioners ("NAIC") or the major credit rating agencies (Fitch Ratings ("Fitch"), Moody's Investors Service ("Moody's") andS&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 ofDecember 31, 2022 and 2021, 97% and 94%, respectively, of the total fixed maturity AFS securities in an unrealized loss position were investment grade. See Note 4 for maturity date information for our fixed maturity investment portfolio. Our gross unrealized losses recognized in OCI on fixed maturity AFS securities as ofDecember 31, 2022 , increased by$12.6 billion sinceDecember 31, 2021 . For further information on our unrealized losses on fixed maturity AFS securities, see "Composition by Industry Categories of our Unrealized Losses onFixed Maturity AFS Securities " below. 82
--------------------------------------------------------------------------------
Table of Contents
We regularly review our fixed maturity AFS securities for declines in fair value that we determine to be impairment-related, including those attributable to credit risk factors that may require a credit allowance. We believe the unrealized loss position as ofDecember 31, 2022 , did not require an impairment recognized in earnings as: (i) we did not intend to sell these fixed maturity AFS securities; (ii) it is not more likely than not that we will be required to sell the fixed maturity AFS securities before recovery of their amortized cost basis; and (iii) the difference in the fair value compared to the amortized cost was due to factors other than credit loss. This conclusion is consistent with our asset-liability management process. Management considered the following as part of the evaluation:
?The current economic environment and market conditions;
?Our business strategy and current business plans;
?The nature and type of security, including expected maturities and exposure to
general credit, liquidity, market and interest rate risk;
?Our analysis of data from financial models and other internal and industry
sources to evaluate the current effectiveness of our hedging and overall risk
management strategies;
?The current and expected timing of contractual maturities of our assets and liabilities, expectations of prepayments on investments and expectations for surrenders and withdrawals of life insurance policies and annuity contracts;
?The capital risk limits approved by management; and
?Our current financial condition and liquidity demands.
We recognized$(15) million and$(11) million of credit loss benefit (expense) on our fixed maturity AFS securities for the years endedDecember 31, 2022 and 2021, respectively. In order to determine the amount of credit loss, we calculated the recovery value by performing a discounted cash flow analysis based on the current cash flows and future cash flows we expect to recover. To determine the recoverability, we considered 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.
For information on credit loss impairment on fixed maturity AFS securities, see
Notes 1, 4 and 15.
As reported on the Consolidated Balance Sheets, we had
liabilities for future obligations under insurance policies and
contracts, net of amounts recoverable from reinsurers, which exceeded investments and cash and invested cash, which totaled$135.0 billion (as restated) as ofDecember 31, 2022 . 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$16.6 billion as ofDecember 31, 2022 , 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. For additional discussion, see "Fixed Maturity AFS Securities - Evaluation for Recovery of Amortized Cost" in Note 1 and "Liquidity and Capital Resources" below.
As of
placement securities was
representing 14% and 13% of total investments, respectively.
Trading Securities
Trading securities, which in certain cases support reinsurance funds withheld and our modified coinsurance 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 8 for more information regarding modified coinsurance.
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
83
--------------------------------------------------------------------------------
Table of Contents
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 byU.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. 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. As ofDecember 31, 2022 and 2021, our ABS home equity and RMBS had a market value of$2.3 billion and$2.9 billion , respectively, and a net unrealized gain (loss) of$(195) million and$245 million , respectively. ? 84
--------------------------------------------------------------------------------
Table of Contents
The market value of fixed maturity AFS and trading securities backed by subprime loans was$191 million and represented less than 1% of our total investment portfolio as ofDecember 31, 2022 . Fixed maturity AFS securities represented$183 million , or 96%, and trading securities represented$8 million , or 4%, of the subprime exposure as ofDecember 31, 2022 . The table below summarizes our investments in fixed maturity AFS securities backed by pools of residential mortgages (in millions) as ofDecember 31, 2022 : Subprime/ Agency Prime Alt-A Option ARM (1) Total Net Net Net Net Net Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value Cost Value Cost Value Type RMBS$ 1,845 $ 1,641 $ 190 $ 182 $ 65 $ 70 $ 109 $ 116 $ 2,209 $ 2,009 ABS home equity 1 - 18 19 18 26 159 174 196 219 Total by type (2)(3)$ 1,846 $ 1,641 $ 208 $ 201 $ 83 $ 96 $ 268 $ 290 $ 2,405 $ 2,228 Rating AAA$ 1,495 $ 1,333 $ 104 $ 100 $ - $ - $ 6$ 6 $ 1,605 $ 1,439 AA 345 302 8 8 5 5 4 4 362 319 A 6 6 1 1 - - 8 8 15 15 BBB - - 31 27 5 5 6 6 42 38 BB and below - - 64 65 73 86 244 266 381 417 Total by rating (2)(3)(4)$ 1,846 $ 1,641 $ 208 $ 201 $ 83 $ 96 $ 268 $ 290 $ 2,405 $ 2,228 Origination Year 2012 and prior $ 341$ 338 $ 84 $ 85 $ 83 $ 96 $ 268 $ 290 $ 776 $ 809 2013 112 101 - - - - - - 112 101 2014 49 45 1 1 - - - - 50 46 2015 145 128 15 14 - - - - 160 142 2016 459 387 - - - - - - 459 387 2017 220 194 - - - - - - 220 194 2018 180 166 - - - - - - 180 166 2019 158 131 - - - - - - 158 131 2020 67 55 3 3 - - - - 70 58 2021 89 72 33 28 - - - - 122 100 2022 26 24 72 70 - - - - 98 94 Total by origination year (2)(3)$ 1,846 $ 1,641 $ 208 $ 201 $ 83 $ 96 $ 268 $ 290 $ 2,405 $ 2,228
Total fixed maturity AFS securities backed by pools of
residential mortgages as a percentage of total fixed maturity AFS securities
2.2%
2.2%
Total prime, Alt-A and subprime/option ARM as a percentage of total fixed maturity AFS securities
0.5% 0.6%
(1)Includes the net amortized cost and fair value of option adjustable rate
mortgages ("ARM") within RMBS, totaling
respectively.
(2)Does not include the amortized cost of trading securities totaling
million
coinsurance agreements because investment results for these agreements are
passed directly to the reinsurers. The
consisted of
(3)Does not include the fair value of trading securities totaling$102 million that primarily support our reinsurance funds withheld and modified coinsurance agreements because investment results for these agreements are passed directly to the reinsurers. The$102 million in trading securities consisted of$93 million prime,$1 million Alt-A and$8 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 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.
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 investment portfolio.
?
85
--------------------------------------------------------------------------------
Table of Contents
The following summarizes our investments in fixed maturity AFS securities backed
by pools of commercial mortgages (in millions) as of
Multiple Property Single Property Total
Net Net Net
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
Type
CMBS (1)(2) $ 1,844 $ 1,614 $ 73 $ 60 $ 1,917 $ 1,674
Rating
AAA $ 1,354 $ 1,218 $ 16 $ 15 $ 1,370 $ 1,233
AA 490 396 53 41 543 437
A - - 4 4 4 4
Total by rating (1)(2)(3) $ 1,844 $ 1,614 $ 73 $ 60 $ 1,917 $ 1,674
Origination Year
2012 and prior $ 12 $ 12 $ 11 $ 10 $ 23 $ 22
2013 80 79 - - 80 79
2014 15 14 - - 15 14
2015 28 26 - - 28 26
2016 111 100 4 4 115 104
2017 355 327 - - 355 327
2018 194 181 - - 194 181
2019 350 309 - - 350 309
2020 259 207 5 4 264 211
2021 235 177 39 30 274 207
2022 205 182 14 12 219 194
Total by origination year (1)(2)
Total fixed maturity AFS securities backed by pools of
commercial mortgages as a percentage of total fixed maturity AFS securities
1.7% 1.7% (1)Does not include the amortized cost of trading securities totaling$160 million that primarily support our reinsurance funds withheld and modified coinsurance agreements because investment results for these agreements are passed directly to the reinsurers. The$160 million in trading securities consisted of$120 million of multiple property CMBS and$40 million of single property CMBS. (2)Does not include the fair value of trading securities totaling$137 million that primarily support our reinsurance funds withheld and modified coinsurance agreements because investment results for these agreements are passed directly to the reinsurers. The$137 million in trading securities consisted of$101 million of multiple property CMBS and$36 million of single property CMBS. (3)Based upon the rating designations determined and provided by the major credit rating agencies (Fitch, Moody's and S&P). For securities where the ratings assigned by the major credit rating agencies are not equivalent, the second lowest rating assigned is used. For those securities where ratings by the major credit rating agencies are not available, which does not represent a significant amount of our total fixed maturity AFS securities, we base the ratings disclosed upon internal ratings.
As of
maturity AFS exposure to monoline insurers was
respectively.
Composition by Industry Categories of our Unrealized Losses on
AFS Securities
When considering unrealized gain and loss information, it is important to
recognize that the information relates to the position of securities at a
particular point in time and may not be indicative of the position of our
investment portfolios subsequent to the balance sheet date. Further, because the
timing of the recognition of realized investment gains and losses through the
selection of which securities are sold is largely at management's discretion, it
is important to consider the information provided below within the context of
the overall unrealized gain or loss position of our investment portfolios. These
are important considerations that should be included in any evaluation of the
potential effect of securities in an unrealized loss position on our future
earnings.
86
--------------------------------------------------------------------------------
Table of Contents
The composition by industry categories of all fixed maturity AFS securities in an unrealized loss position (in millions) as ofDecember 31, 2022 , was as follows: % % Net Net Gross Gross % Amortized Amortized Unrealized Unrealized Fair Fair Cost Cost Losses Losses Value Value Healthcare$ 6,229 6.5%$ 1,238 9.5%$ 4,991 6.0% Electric 8,233 8.6% 1,216 9.3% 7,017 8.4% ABS 10,559 11.0% 904 6.9% 9,655 11.6% Banking 6,967 7.2% 765 5.9% 6,202 7.5% Technology 5,142 5.3% 675 5.2% 4,467 5.4% Food and beverage 4,293 4.5% 613 4.7% 3,680 4.4% Local authorities 2,756 2.9% 518 4.0% 2,238 2.7% Manufacturing 3,066 3.2% 422 3.2% 2,644 3.2% Industrial - other 2,237 2.3% 422 3.2% 1,815 2.2% Natural gas 1,901 2.0% 320 2.5% 1,581 1.9% Pharmaceuticals 2,642 2.7% 317 2.4% 2,325 2.8% Brokerage asset management 1,983 2.1% 306 2.4% 1,677 2.0% Chemicals 2,296 2.4% 305 2.3% 1,991 2.4% Retail 1,983 2.1% 282 2.2% 1,701 2.0% Transportation services 2,327 2.4% 268 2.1% 2,059 2.5% Property and casualty 1,879 2.0% 258 2.0% 1,621 2.0% Life 1,627 1.7% 257 2.0% 1,370 1.6% Non-agency CMBS 1,782 1.9% 246 1.9% 1,536 1.8% Midstream 1,853 1.9% 224 1.7% 1,629 2.0% Aerospace and defense 1,483 1.5% 201 1.5% 1,282 1.5% Utility - other 1,100 1.1% 187 1.4% 913 1.1% Consumer products 1,259 1.3% 175 1.3% 1,084 1.3% Wirelines 1,151 1.2% 174 1.3% 977 1.2% Automotive 1,565 1.6% 172 1.3% 1,393 1.7% Railroads 953 1.0% 139 1.1% 814 1.0% Wireless 844 0.9% 136 1.0% 708 0.9% Integrated 925 1.0% 134 1.0% 791 1.0% Government sponsored 541 0.6% 127 1.0% 414 0.5% Metals and mining 960 1.0% 115 0.9% 845 1.0% Entertainment 835 0.9% 108 0.8% 727 0.9% Project finance 957 0.9% 102 0.9% 855 1.0% Building materials 876 0.9% 102 0.8% 774 0.9% Cable - satellite 646 0.7% 101 0.8% 545 0.7% Industries with unrealized losses less than$100 million 12,290 12.7% 1,489 11.5% 10,801 12.9% Total by industry$ 96,140 100.0%$ 13,018 100.0%$ 83,122 100.0% Total by industry as a percentage of total fixed maturity AFS securities 86.1% 100.0% 83.3% As ofDecember 31, 2022 , the net amortized cost and fair value of securities subject to enhanced analysis and monitoring for potential changes in unrealized loss position was$58 million and$55 million , respectively. 87
--------------------------------------------------------------------------------
Table of Contents
Mortgage Loans on Real Estate
The following tables summarize key information on mortgage loans on real estate
(in millions):
As of December 31, 2022
Commercial Residential Total %
Credit Quality Indicator
Current $ 16,987 $ 1,379 $ 18,366 99.8%
Delinquent (1) - 13 13 0.1%
Foreclosure (2) - 21 21 0.1%
Total mortgage loans on real estate before
allowance 16,987 1,413 18,400 100.0%
Allowance for credit losses (84 ) (15 ) (99 )
Total mortgage loans on real estate $ 16,903 $ 1,398 $ 18,301
As of December 31, 2021
Commercial Residential Total %
Credit Quality Indicator
Current $ 17,168 $ 889 $ 18,057 99.8%
Delinquent (1) - 14 14 0.1%
Foreclosure (2) - 16 16 0.1%
Total mortgage loans on real estate before
allowance 17,168 919 18,087 100.0%
Allowance for credit losses (79 ) (17 )
(96 )
Total mortgage loans on real estate
(1)As of
mortgage loans were delinquent. As of
loans and 31 residential mortgage loans were delinquent.
(2)As of
mortgage loans were in foreclosure. As of
mortgage loans and 34 residential mortgage loans were in foreclosure.
As ofDecember 31, 2022 , there were 2 specifically identified impaired commercial mortgage loans on real estate with an aggregate carrying value of less than$1 million and 37 specifically identified impaired residential mortgage loans on real estate with an aggregate carrying value of$16 million . As ofDecember 31, 2021 , there were 4 specifically identified impaired commercial mortgage loans on real estate with an aggregate carrying value of$1 million and 50 specifically identified impaired residential mortgage loans on real estate with an aggregate carrying value of$22 million . The total outstanding principal and interest on commercial mortgage loans on real estate that were two or more payments delinquent, excluding foreclosures, as ofDecember 31, 2022 and 2021, 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, excluding foreclosures, as ofDecember 31, 2022 and 2021, was$13 million and$14 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:
As of As of
December 31, December 31,
2022 2021
Segment
Life Insurance $ 3,536 $ 3,890
Annuities 7,008 6,732
Group Protection 1,417 1,435
Retirement Plan Services 4,253 4,326
Other Operations 2,087 1,608
Total mortgage loans on real estate
88
--------------------------------------------------------------------------------
Table of Contents
The composition of commercial mortgage loans (in millions) by property type,
geographic region and state is shown below:
As of December 31, 2022 As of December 31, 2022
Carrying Carrying
Value % Value %
Property Type State
Apartment $ 5,445 32.2% CA $ 4,641 27.5%
Industrial 4,071 24.1% TX 1,569 9.3%
Office building 3,588 21.2% NY 1,011 6.0%
Retail 2,595 15.4% PA 869 5.1%
Other commercial 773 4.6% FL 788 4.7%
Hotel/motel 226 1.3% MD 704 4.3%
Mixed use 205 1.2% WA 662 3.9%
Total $ 16,903 100.0% AZ 615 3.6%
Geographic Region GA 614 3.6%
Pacific 5,633 33.3% TN 548 3.2%
South Atlantic 3,427 20.3% OH 423 2.5%
Middle Atlantic 2,153 12.7% VA 412 2.4%
West South Central 1,706 10.1% NC 402 2.4%
Mountain 1,231 7.3% WI 358 2.1%
East North Central 1,218 7.2% OR 329 1.9%
East South Central 671 4.0% SC 306 1.8%
West North Central 461 2.7% IL 302 1.8%
New England 371 2.2% Non U.S. 32 0.2%
Non U.S. 32 0.2% All other states 2,318 13.7%
Total $ 16,903 100.0% Total $ 16,903 100.0%
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:
As of December 31, 2022
Commercial Residential Total %
Principal Repayment Year
2023 $ 800 $ 17 $ 817 4.4%
2024 973 18 991 5.4%
2025 1,044 19 1,063 5.8%
2026 1,400 20 1,420 7.7%
2027 1,681 22 1,703 9.3%
2028 and thereafter 11,124 1,281 12,405 67.4%
Total $ 17,022 $ 1,377 $ 18,399 100.0%
See Note 4 for information regarding our loan-to-value and debt-service coverage
ratios and our allowance for credit losses.
89
--------------------------------------------------------------------------------
Table of Contents Alternative Investments
Investment income (loss) on alternative investments by business segment (in
millions) was as follows:
For the Years Ended December 31,
2022 2021 2020
Life Insurance $ 47 $ 522 $ 140
Annuities 8 63 23
Group Protection 5 41 15
Retirement Plan Services 4 38 14
Other Operations 2 15 5
Total (1) $ 66 $ 679 $ 197
(1)Includes net investment income on the alternative investments supporting the
required statutory surplus of our insurance businesses.
As ofDecember 31, 2022 and 2021, alternative investments included investments in 337 and 311 different partnerships, respectively, and the portfolio represented approximately 2% 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 the Consolidated Balance Sheets.
Non-Income Producing Investments
As of
securities, mortgage loans on real estate and real estate that were non-income
producing was
Net Investment Income
Details underlying net investment income (in millions) and our investment yield
were as follows:
As Restated For the
For the Years Ended Year Ended
December 31, December 31,
2022 2021 2020
Net Investment Income
Fixed maturity AFS securities $ 4,469 $ 4,351 $ 4,334
Trading securities 182 167 202
Equity securities 11 3 3
Mortgage loans on real estate 689 680 677
Policy loans 101 115 125
Cash and invested cash 13 - 12
Commercial mortgage loan prepayment
and bond make-whole premiums (1) 105 199 82
Alternative investments (2) 66 679 197
Consent fees 8 10 7
Other investments 79 64 46
Investment income 5,723 6,268 5,685
Investment expense (208 ) (157 ) (175 )
Net investment income $ 5,515 $ 6,111 $ 5,510
(1)See "Commercial Mortgage Loan Prepayment and Bond Make-Whole Premiums" below
for additional information.
(2)See "Alternative Investments" above for additional information.
90
--------------------------------------------------------------------------------
Table of Contents
For the Years Ended December
31,
2022 2021 2020
Interest Rate Yield
Fixed maturity AFS securities, mortgage loans on
real estate and other, net of investment expenses 3.87% 3.92%
4.12%
Commercial mortgage loan prepayment and bond make-whole premiums 0.08% 0.15%
0.06%
Alternative investments 0.05% 0.51%
0.16%
Net investment income yield on invested assets 4.00% 4.58%
4.34%
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.
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 the consolidated
financial statements. For information regarding reserve financing and LOC
expenses from inter-company reinsurance agreements, see "Liquidity and Capital
Resources - Material Cash Outflows" 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 AM 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 modified coinsurance agreement with Athene to reinsure fixed
annuity products, we reported a $3.8 billion deposit asset within other assets
on the Consolidated Balance Sheets as of December 31, 2022 . For additional
information, see Note 8.
Our amounts recoverable from reinsurers represent receivables from and reserves
ceded to reinsurers. As of December 31, 2022 , 83%, or $16.6 billion , of our
total reinsurance recoverable was secured by collateral for our benefit. Of this
amount, $16.4 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 the Consolidated Balance Sheets), $130 million was held in our
funds withheld portfolios and $93 million was secured by LOCs for which we are
the beneficiary, an off-balance sheet arrangement. The total in our funds
withheld portfolios was $2.3 billion and reported in other
91
--------------------------------------------------------------------------------
Table of Contents
liabilities on the Consolidated Balance Sheets as of
excess funds withheld represent funds above the reinsurance recoverable from our
reinsurers.
We regularly evaluate the financial condition of our reinsurers and monitor concentration risk with our largest reinsurers. 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 theFinance 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 andLincoln Life & Annuity Company of New York ("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$2.7 billion of statutory reserves as ofDecember 31, 2022 . LNL must maintain an AM 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$1.1 billion of statutory reserves as ofDecember 31, 2022 . LLANY must maintain an AM 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$612 million of statutory reserves as ofDecember 31, 2022 , LLANY must maintain an AM 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 8 and 13 and "Liquidity and Capital Resources - Holding Company Sources and Uses of Liquidity and Capital -Subsidiaries' Capital " 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. LIQUIDITY AND CAPITAL RESOURCES Overview Liquidity Liquidity refers to our ability to generate adequate amounts of cash from our normal operations to meet cash requirements with a prudent margin of safety. Our ability to generate and maintain sufficient liquidity depends on the profitability of our businesses, general economic conditions and access to the capital markets and other sources of liquidity and capital as described below. When considering our liquidity, 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. Based on the sources of liquidity available to us as discussed below, we currently expect to be able to meet the holding company's ongoing cash needs.
Capital
Capital refers to our long-term financial resources to support the operations of
our businesses, to fund long-term growth strategies and to support our
operations during adverse conditions. Our ability to generate and maintain
sufficient capital depends on the profitability of our businesses, general
economic conditions and access to the capital markets and other sources of
liquidity and capital as described below. Disruptions, uncertainty or volatility
in the capital and credit markets may materially affect our business operations
and results of operations. These poor market conditions may reduce our insurance
subsidiaries' statutory surplus and RBC.
Reductions to our subsidiaries' statutory surplus and RBC may cause them to
retain more capital, which may pressure their ability to pay dividends to LNC,
which may lead us to take steps to preserve or raise additional capital. As a
result of the charge taken in connection with the annual assumption review in
the third quarter of 2022, we expect an approximate $300 million statutory
capital impact in the
92
--------------------------------------------------------------------------------
Table of Contents
fourth quarter of 2022 that will reduce our RBC ratio by approximately 12
points. We believe we have adequate capital to operate our business as we
replenish statutory capital back to our targeted levels. For more information,
see "Subsidiaries' Capital" below.
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.
Consolidated Sources and Uses of Liquidity and Capital
Our primary sources of liquidity and capital are insurance premiums and fees, investment income, maturities and sales of investments, issuance of debt or other types of securities and contract holder deposits. We also have access to alternative sources of liquidity as discussed below. Our primary uses are to pay policy claims and benefits, to fund commissions and other general operating expenses, to purchase investments, to fund policy surrenders and withdrawals, to pay dividends to our common and preferred stockholders, to repurchase our common stock and to repay debt. Our operating activities provided (used) cash of $4.0 billion, $168 million (as restated) and $534 million in 2022, 2021 and 2020, respectively.
Holding Company Sources and Uses of Liquidity and Capital
The primary sources of liquidity and capital at the holding company level are
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 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. These sources support the general
corporate needs of the holding company, including its common and preferred stock
dividends, common stock repurchases, interest and debt service, funding of
callable securities, acquisitions and investment in core businesses.
Details underlying the primary sources of the holding company's liquidity (in
millions) were as follows:
For the Years Ended December 31,
2022 2021 2020
Dividends from Subsidiaries
LNL $ 645 $ 1,910 $ 660
First Penn-Pacific Life Insurance
Company 22 45 -
Lincoln Investment Management
Company 38 20 25
Lincoln National Management
Corporation 7 10 5
Lincoln National Reinsurance
Company (Barbados) Limited 85 75 150
Total dividends from subsidiaries $ 797 $ 2,060 $ 840
Interest from Subsidiaries Interest on inter-company notes $ 118 $ 111 $ 123 See Note 19 for information on the increase in dividends from LNL in 2021. The table above focuses on significant and recurring cash flow items and excludes the effects of certain financing activities, including the periodic issuance and retirement of debt, issuance of preferred stock, cash flows related to our inter-company cash management program and certain investing activities, including capital contributions to subsidiaries. These activities are 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 and employee stock exercise activity related to our stock-based incentive compensation plans. See "Part IV - Item 15(a)(2) Financial Statement Schedules - Schedule II - Condensed Financial Information of Registrant" for the holding company cash flow statement.
Restrictions on Subsidiaries' Dividends
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. UnderIndiana laws and regulations, ourIndiana 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 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 subsidiary LLANY, aNew York -domiciled insurance company, is bound by similar restrictions underNew York law, with the applicable statutory limitation on dividends 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. 93
--------------------------------------------------------------------------------
Table of Contents
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 $1.7 billion in 2023 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. 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." 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. See "Part I - Item 1A. Risk Factors - 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."
Subsidiaries' Capital
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 will affect
their RBC ratios and dividend-paying capacity. For a discussion of the actions
management is taking to rebuild statutory capital, see "Introduction - Executive
Summary - Significant Operational Matters - Rebuilding Risk-Based Capital." For
additional information on RBC ratios, see "Part I - Item 1. Business -
Regulatory - Insurance Regulation - Risk-Based Capital."
Our insurance subsidiaries' regulatory capital levels are 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 Actuarial Guideline XXXVIII ("AG38").
Our insurance subsidiaries employ strategies to reduce the strain caused by 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 and free up capital the
insurance subsidiaries can use for any number of purposes, including paying
dividends to the holding company. 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, 2022, was $1.8 billion of long-dated LOCs issued
to support inter-company reinsurance arrangements for UL products containing
secondary guarantees. For information on the LOCs, see the credit facilities
table in Note 12. Our captive reinsurance and reinsurance subsidiaries have also
issued long-term notes of $3.9 billion to finance a portion of the excess
reserves as of December 31, 2022; of this amount, $3.1 billion involve exposure
to VIEs. For information on these long-term notes issued by our captive
reinsurance and reinsurance subsidiaries, see Note 3. 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.
Statutory reserves established for variable annuity guaranteed benefit 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. Our insurance subsidiaries' cede a portion of the
guaranteed benefit riders to Lincoln National Reinsurance Company (Barbados )
Limited ("LNBAR") through inter-company reinsurance arrangements. Our variable
annuity hedge program in LNBAR seeks to hedge our exposure to selected risk and
income statement volatility caused by changes in the capital markets associated
with the variable annuity guarantees. Market conditions greatly influence the
ultimate capital required due to its effect on the valuation of reserves and
derivative instruments hedging these reserves. The capital markets environment
in 2022 led to market volatility and increased hedge breakage that has impacted
capital in LNBAR. As a result, we did not take dividends out of LNBAR after the
first quarter of 2022. In December 2022, LNC issued a $500 million long-term
note to a non-affiliated variable interest entity in exchange for a corporate
bond AFS security of like principal and duration. LNC contributed the security
to LNBAR to address asset value volatility based on market conditions. There are
no impacts to the LNC Consolidated Balance Sheets based on the set-off right
provided in the transaction. For more information, see Note 3.
In September 2022, we announced enhancements to our variable annuity hedge
program that continues to focus on generating sufficient assets to fund future
claims with a goal of maximizing distributable earnings and explicitly
protecting capital. The revised variable annuity hedge program, effective
January 1, 2023, aligns with our increased strategic focus on maximizing the
economic value as measured by distributable earnings, which is achieved by
managing risks to capital generation due to market volatility. For additional
information on our variable annuity hedge program, see "Introduction - Executive
Summary - Significant Operational Matters - Variable Annuity Hedge
94
--------------------------------------------------------------------------------
Table of Contents
Program." For risks related to our variable annuity hedge program, see "Part I -
Fort Worth judge sides with plaintiffs in lawsuit challenging key provision of Obamacare [Fort Worth Star-Telegram]
Pritzker: Illinois will work to protect preventive health care for residents, following Texas ruling [Chicago Tribune]
Advisor News
- Strong underwriting: what it means for insurers and advisors
- Retirement is increasingly defined by a secure income stream
- Addressing the ‘menopause tax:’ A guide for advisors with female clients
- Alternative investments in 401(k)s: What advisors must know
- The modern advisor: Merging income, insurance, and investments
More Advisor NewsAnnuity News
- ALIRT Insurance Research: U.S. Life Insurance Industry In Transition
- My Annuity Store Launches a Free AI Annuity Research Assistant Trained on 146 Carrier Brochures and Live Annuity Rates
- Ameritas settles with Navy vet in lawsuit over disputed annuity sale
- NAIC annuity guidance updates divide insurance and advisory groups
- Retirement is increasingly defined by a secure income stream
More Annuity NewsHealth/Employee Benefits News
- Researchers from Virginia Commonwealth University Report on Findings in Substance Abuse (Health insurance type moderates the association between substance use disorders and cardiovascular multimorbidity among U.S. adults – Results from the 2023 …): Addiction Research – Substance Abuse
- New Findings from Fudan University Describe Advances in Beta-Lactam Antibiotics (Budget impact analysis of aztreonam-avibactam for metallo-b-lactamase carbapenem-resistant enterobacterales infections in China): Drugs and Therapies – Beta-Lactam Antibiotics
- 4 major class action settlements could put cash in your pocket — See if you qualify
- A LOOK AT NEW OR EXPANDED MEDICAID AND PUBLIC HEALTH PARTNERSHIPS FROM 2025: FINDINGS FROM A SURVEY OF STATE MEDICAID PROGRAMS
- TRUMP ANNOUNCES PROPOSAL TO EXPAND IVF INSURANCE COVERAGE
More Health/Employee Benefits NewsLife Insurance News
- 5 steps to take before selling your firm
- Bismarck man pleads guilty to taking out insurance policy on dead wife
- ALIRT Insurance Research: U.S. Life Insurance Industry In Transition
- U-Haul Holding Company Schedules Fourth Quarter Fiscal Year End 2026 Financial Results Release and Investor Webcast
- New Empathy and LIMRA Research: The Overlooked Opportunity to Engage the Next Generation After an Insurance Payout
More Life Insurance News