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LINCOLN NATIONAL CORP – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
Edgar Glimpses
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 52
Results of Annuities 54
Results of Retirement Plan Services 58
Results of Life Insurance 62
Results of Group Protection 67
Results of Other Operations 71
Realized Gain (Loss) 73
Consolidated Investments 76
Reinsurance 88
Liquidity and Capital Resources 89
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The following Management's Discussion and Analysis ("MD&A") is intended to help
the reader understand the financial condition as of December 31, 2021 , compared
with December 31, 2020 , and the results of operations in 2021 compared to 2020
of Lincoln National Corporation and its consolidated subsidiaries. Discussions
of 2019 items and year-to-year comparisons between 2020 and 2019 that are not
included in this Form 10-K can be found in "Part II - Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" in our
2020 Form 10-K. Unless otherwise stated or the context otherwise requires,
"LNC," "Company," "we," "our" or "us" refers to Lincoln National Corporation and
its consolidated subsidiaries.
The MD&A is provided as a supplement to, and should be read in conjunction with,
our consolidated financial statements and the accompanying notes to the
consolidated financial statements ("Notes") presented in "Part II - Item 8.
Financial Statements and Supplementary Data," as well as "Part I - Item 1A. Risk
Factors" above.
FORWARD-LOOKING STATEMENTS - CAUTIONARY LANGUAGE
Certain statements made in this report and in other written or oral statements
made by us or on our behalf are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). A
forward-looking statement is a statement that is not a historical fact and,
without limitation, includes any statement that may predict, forecast, indicate
or imply future results, performance or achievements. Forward-looking statements
may contain words like: "anticipate," "believe," "estimate," "expect,"
"project," "shall," "will" and other words or phrases with similar meaning in
connection with a discussion of future operating or financial performance. In
particular, these include statements relating to future actions, trends in our
businesses, prospective services or products, future performance or financial
results and the outcome of contingencies, such as legal proceedings. We claim
the protection afforded by the safe harbor for forward-looking statements
provided by the PSLRA.
Forward-looking statements are subject to risks and uncertainties. Actual
results could differ materially from those expressed in or implied by such
forward-looking statements due to a variety of factors, including:
?The continuation of the COVID-19 pandemic, or future outbreaks of COVID-19, and uncertainty surrounding the length and severity of future impacts on the global economy and on our business, results of operations and financial condition;
?Further deterioration in general economic and business conditions that may
affect account values, investment results, guaranteed benefit liabilities,
premium levels and claims experience;
?Adverse global capital and credit market conditions that may affect our ability to raise capital, if necessary, and may cause us to realize impairments on investments and certain intangible assets, including goodwill and the valuation allowance against deferred tax assets, which may reduce future earnings and/or affect our financial condition and ability to raise additional capital or refinance existing debt as it matures; ?The inability of our subsidiaries to pay dividends to the holding company in sufficient amounts, which could harm the holding company's ability to meet its obligations; ?Legislative, regulatory or tax changes, both domestic and foreign, that affect: the cost of, or demand for, our subsidiaries' products; the required amount of reserves and/or surplus; our ability to conduct business and our captive reinsurance arrangements as well as restrictions on the payment of revenue sharing and 12b-1 distribution fees;
?The impact of
capital;
?The impact of Regulation Best Interest or other 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;
?Actions taken by reinsurers to raise rates on in-force business;
?Further declines in or sustained low interest rates causing a reduction in
investment income, the interest margins of our businesses, estimated gross
profits ("EGPs") and demand for our products;
?Rapidly increasing interest rates causing contract holders to surrender life insurance and annuity policies, thereby causing realized investment losses, and reduced hedge performance related to variable annuities;
?The impact of the implementation of the provisions of the Dodd-Frank Wall
Street Reform and Consumer Protection Act relating to the regulation of
derivatives transactions;
?The initiation of legal or regulatory proceedings against us, and the outcome
of any legal or regulatory proceedings, such as: adverse actions related to
present or past business practices common in businesses in which we compete;
adverse decisions in significant actions including, but not limited to, actions
brought by federal and state authorities and class action cases; new decisions
that result in changes in law; and unexpected trial court rulings;
?A decline or continued volatility in the equity markets causing a reduction in
the sales of our subsidiaries' products; a reduction of asset-based fees that
our subsidiaries charge on various investment and insurance products; an
acceleration of the net amortization of deferred acquisition costs ("DAC"),
value of business acquired ("VOBA"), deferred sales inducements ("DSI") and
deferred front-end loads ("DFEL"); and an increase in liabilities related to
guaranteed benefit features of our subsidiaries' variable annuity products;
?Ineffectiveness of our risk management policies and procedures, including
various hedging strategies used to offset the effect of changes in the value of
liabilities due to changes in the level and volatility of the equity markets and
interest rates;
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Table of Contents ?A deviation in actual experience regarding future persistency, mortality, morbidity, interest rates or equity market returns from the assumptions used in pricing our subsidiaries' products, in establishing related insurance reserves and in the net amortization of DAC, VOBA, DSI and DFEL, which may reduce future earnings;
?Changes in accounting principles that may affect our business, results of
operations and financial condition, including the pending implementation of
("ASU") 2018-12, Targeted Improvements to the Accounting for Long-Duration
Contracts;
?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;
?Future pandemics, acts of terrorism, war or other man-made and natural
catastrophes that may adversely affect our businesses and the cost and
availability of reinsurance;
?Competitive conditions, including pricing pressures, new product offerings and the emergence of new competitors, that may affect the level of premiums and fees that our subsidiaries can charge for their products;
?The unknown effect on our subsidiaries' businesses resulting from evolving
market preferences and the changing demographics of our client base; and
?The unanticipated loss of key management, financial planners or wholesalers.
The risks and uncertainties included here are not exhaustive. Other sections of this report and other reports that we file with 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, retirement income and group protection products and
solutions through our four business segments:
?Annuities;
?Retirement Plan Services;
?Life Insurance; and
?Group Protection
We also have Other Operations, which includes the financial data for operations
that are not directly related to the business segments. See "Part I - Item 1.
Business" above for a discussion of our business segments and products.
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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 us during 2021 and are expected to continue to adversely affect our business, results of operations and financial condition in 2022. The COVID-19 pandemic led to an extreme downturn in and volatility of the capital markets in the early part of 2020, record-low interest rates and wide-ranging changes in consumer behavior, including as a result of quarantines, shelter-in-place orders and limitations on business activity. 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 impacts of the COVID-19 pandemic on our Life Insurance and Group Protection segments. See "Additional Information" within Results of Life Insurance and Results of Group Protection below for expected impacts of the COVID-19 pandemic in the first quarter of 2022. The ultimate impact on our business, results of operations and financial condition depends on the severity and duration of the COVID-19 pandemic and related health, economic and business impacts and actions taken by governmental authorities and other third parties in response, each of which is uncertain, rapidly changing and difficult to predict. For more information on the risks related to the COVID-19 pandemic, see "Part I - Item 1A. Risk Factors - Market Conditions - The impacts of the COVID-19 pandemic have adversely affected and are expected to continue to adversely affect our business and results of operations, and the future impacts of the COVID-19 pandemic on the company's business, results of operations and financial condition remain uncertain" above.
Economic Environment
Because the profitability of some of our business depends in part on interest
rates, changes in interest rates may impact both our margins and our return on
invested capital. Some of our products, principally our fixed annuities and
universal life insurance ("UL"), including indexed universal life insurance
("IUL") and linked-benefit UL, have interest rate guarantees that expose us to
the risk that changes in interest rates or prolonged low interest rates will
reduce our spread, or the difference between the interest that we are required
to credit to contracts and the yields that we are able to earn on our general
account investments supporting our obligations under the contracts.
In response to the economic impact of the COVID-19 pandemic, the Federal Reserve
cut interest rates to near zero in March 2020 . In December 2021 , in light of
substantial progress since 2020 in the economy and elevated inflation, the
Federal Reserve announced its intention to further reduce the monthly pace of
its large-scale bond-buying program. Additionally, short-term interest rates are
expected to slowly rise beginning in 2022, although we expect the continuation
of the low interest rate environment to continue to adversely affect the
interest margins of our businesses. 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 continued low interest rate environment. For
risks related to sustained low interest rates, see "Significant Operational
Matters - Sustained Low Interest Rate Environment" below and "Part I - Item 1A.
Risk Factors - Market Conditions - Changes in interest rates and sustained low
interest rates may cause interest rate spreads to decrease, impacting our
profitability, and make it more challenging to meet certain statutory
requirements, and changes in interest rates may also result in increased
contract withdrawals."
In addition, although the economic environment has continued to improve from the
early part of 2020 and economic restrictions have eased, there could be ongoing
weakness if there is a resurgence of COVID-19 cases that causes renewed
restrictions on economic activity. This could impact select corporate industries
and parts of the commercial mortgage loan market, which could lead to increased
credit defaults and/or negative ratings migrations within our investment
portfolio. We continue to closely monitor developments relating to the COVID-19
pandemic.
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For more information on the risks related to the COVID-19 pandemic, see "Part I - Item 1A. Risk Factors - Market Conditions - The impacts of the COVID-19 pandemic have adversely affected and are expected to continue to adversely affect our business and results of operations, and the future impacts of the COVID-19 pandemic on the company's business, results of operations and financial condition remain uncertain" above.
Regulatory Environment
U.S. -domiciled insurance entities are regulated at the state level, while certain products and services are also subject to federal regulation. Regulators may refine capital requirements and introduce new reserving standards for the life insurance industry. Regulations recently adopted or currently under review can potentially affect the capital requirements and profitability of the industry and result in increased regulation and oversight for the industry. See "Part I - Item 1. Business - Regulatory" and "Part I - Item 1A. Risk Factors - Legislative, Regulatory and Tax" for a discussion of regulatory developments that may impact the Company and the associated risks.
Significant Operational Matters
Spark and Strategic Digitization Initiatives
In the fourth quarter of 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, this program will target benefits beyond cost savings including improving the way we work by focusing on reskilling and upskilling our valuable employee base. Because we have almost completed the investments related to our strategic digitization initiative first announced in 2016, we have integrated the 2021 strategic digitization initiative program amounts and the remainder of the program's projected amounts into the amounts associated with the Spark Initiative. During 2021, we recognized benefits of approximately$9 million , pre-DAC and pre-tax, net of investments, as a result of these initiatives. We expect the greatest level of investments in 2022, with investments expected to exceed benefits by approximately$25 million to$65 million , pre-DAC and pre-tax. 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.
Targeted Annual Operating Earnings Per Share Growth
Growth in operating earnings per share ("EPS") is a key driver of our long-term
performance. We believe that the key drivers to growing our operating EPS over
time include:
?Generating new business and positive net flows through our product development
and distribution;
?Capital markets performing in-line with our expectations;
?Ongoing expense discipline as well as our Spark and strategic digitization
initiatives driving improvement in operating margins; and
?Capital generation and active capital deployment, consisting of returning
capital to common stockholders.
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Sources of Earnings
We monitor our sources of earnings as a factor in managing our businesses. This
information may be useful in assessing our risk profile and cost of capital. We
continue to focus on achieving our long-term goal of increasing mortality and
morbidity margins. Growth in this source of earnings component could be driven
by a number of factors, including, but not limited to, pricing actions on our
life and group products and acquiring blocks of mortality/morbidity business.
The following table presents the sources of earnings components of income (loss)
from operations, before income taxes, excluding Other Operations:
For the Years Ended December 31,
2021 2020 2019
Investment spread (1) 27.1% 16.6% 19.2%
Mortality/morbidity (2) 8.6% 1.4% 23.5%
Fees on AUM (3) 62.0% 88.8% 55.2%
VA riders (4) 2.3% -6.8% 2.1%
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 rider features, less the net
valuation premium and associated change in benefit reserves and related
expenses.
(5)The sources of earnings components include the effect of unlocking resulting from our comprehensive review of assumptions, which for 2020 and 2019 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.
Sustained Low Interest Rate Environment
Although we have been 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 continued low interest rate environment, declines in our spread, or instances where the returns on our general account investments are not enough to support the interest rate guarantees on these products, could have an adverse effect on some of our businesses or results of operations. We have provided disclosures around interest rate risk in "Part I - Item 1A. Risk Factors - Market Conditions - Changes in interest rates and sustained low interest rates may cause interest rate spreads to decrease, impacting our profitability, and make it more challenging to meet certain statutory requirements, and changes in interest rates may also result in increased contract withdrawals," "Critical Accounting Policies and Estimates - Annual Assumption Review - Long-Term New Money Investment Yield Sensitivity" below and "Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk."
Variable Annuity Hedge Program Performance
We offer variable annuity products with living benefit guarantees. As described
below in "Critical Accounting Policies and Estimates - Future Contract Benefits
- GLB," we use derivative instruments to hedge our exposure to the risks and
earnings volatility that result from the guaranteed living benefit ("GLB")
embedded derivatives and benefit ratio unlocking in certain of our variable
annuity products. The income statement effect due to the change in fair value of
these instruments tends to move in the opposite direction of the change in
embedded derivative reserves and benefit ratio unlocking. These results are
excluded from the Annuities and Retirement Plan Services segments' operating
revenues and income (loss) from operations (see Note 21). See "Realized Gain
(Loss) - Variable Annuity Net Derivatives Results" below for information on our
methodology for calculating the non-performance risk ("NPR"), which affects the
discount rate used in the calculation of the GLB embedded derivative reserves.
We also offer variable annuity products with death benefit guarantees. As
described below in "Critical Accounting Policies and Estimates - Future Contract
Benefits - GDB," we use derivative instruments to hedge the income statement
effect of the guaranteed death benefit ("GDB") benefit ratio unlocking for
movements in equity markets. These results are excluded from income (loss) from
operations (see Note 21).
The costs of derivative instruments that we use to hedge these variable annuity
products may increase as a result of a low interest rate environment.
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Table of Contents Earnings from Account Values The Annuities and Retirement Plan Services segments are the most sensitive to the equity markets, as well as, to a lesser extent, our Life Insurance segment. We discuss the earnings effect of the equity markets on account values and the related asset-based earnings below in each business segment's operating results section and "Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Equity Market Risk - Effect of Equity Market Sensitivity."
Outlook
Management expects to continue focusing on the following in 2022:
?Selling new business at attractive returns while increasing consumer choice,
expanding customer value propositions and leveraging digital capabilities;
?Monitoring and adjusting product pricing to ensure we are achieving the
necessary return on capital;
?Focusing a large majority of our new business mix on products without long-term
guarantees, which are less sensitive to interest rates, in line with our
long-term growth strategies;
?Exploring reinsurance and other strategies to maximize the value of our
existing blocks of business;
?Making investments in our businesses, product innovation and distribution to
grow revenues, drive margin expansion and reduce costs;
?Focusing on expense discipline and managing our expenses aggressively,
including executing the recently announced 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;
?Implementing the FASB ASU 2018-12, Targeted Improvements to the Accounting for
Long-Duration Contracts, for adoption on
?Maintaining risk management and the flexibility to adjust our hedge program in
response to regulatory and other changes.
Critical Accounting Policies and Estimates We have identified the accounting policies below as critical to the understanding of our results of operations and our financial condition. In applying these critical accounting policies in preparing our financial statements, management must use critical assumptions, estimates and judgments concerning future results or other developments, including the likelihood, timing or amount of one or more future events. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our assumptions, estimates and judgments based upon historical experience and various other information that we believe to be reasonable under the circumstances. For a detailed discussion of other significant accounting policies, see Note 1. DAC, VOBA, DSI and DFEL Deferrals Qualifying deferrable acquisition expenses are recorded as an asset on our Consolidated Balance Sheets as DAC for products we sold during a period or VOBA for books of business we acquired during a period. In addition, we defer costs associated with DSI and revenues associated with DFEL. DSI is an asset included within other assets on our Consolidated Balance Sheets, and when amortized, increases interest credited on our Consolidated Statements of Comprehensive Income (Loss). DFEL is a liability included within other contract holder funds on our Consolidated Balance Sheets, and when amortized, increases fee income on our Consolidated Statements of Comprehensive Income (Loss). 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.
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All other acquisition-related costs, including costs incurred by the insurer for soliciting potential customers, market research, training, administration, management of distribution and underwriting functions, unsuccessful acquisition or renewal efforts and product development, are considered non-deferrable acquisition costs and must be expensed in the period incurred.
In addition, the following indirect costs are considered non-deferrable
acquisition costs and must be charged to expense in the period incurred:
?Administrative costs; ?Rent; ?Depreciation; ?Occupancy costs;
?Equipment costs (including data processing equipment dedicated to acquiring
insurance contracts);
?Trail commissions; and ?Other general overhead.
Our DAC, VOBA, DSI and DFEL balances (in millions) by business segment as of
Retirement
Plan Life Group
Annuities Services Insurance Protection Total
DAC and VOBA
Gross $ 4,224 $ 221 $ 6,430 $ 171 $ 11,046
Unrealized (gain) loss (138 ) (69 ) (4,758 ) - (4,965 )
Carrying value $ 4,086 $ 152 $ 1,672 $ 171 $ 6,081
DSI
Gross $ 165 $ 14 $ 32 $ - $ 211
Unrealized (gain) loss (7 ) - (1 ) - (8 )
Carrying value $ 158 $ 14 $ 31 $ - $ 203
DFEL
Gross $ 298 $ - $ 3,026 $ - $ 3,324
Unrealized (gain) loss (2 ) - (2,907 ) - (2,909 )
Carrying value $ 296 $ - $ 119 $ - $ 415
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 UL and
variable universal life insurance ("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.
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Reversion to the Mean
Because returns within the variable sub-accounts ("variable funds") have a
significant effect on the value of variable annuity and VUL products and the
fees earned on these accounts, EGPs could increase or decrease with movements in
variable fund returns. Significant and sustained changes in variable funds have
had and could in the future have an effect on DAC, VOBA, DSI and DFEL
amortization primarily within our Annuities and RPS segments, as well as, to a
lesser extent, our Life Insurance segment.
As variable fund returns do not move in a systematic manner, we reset the
baseline of account values from which EGPs are projected, which we refer to as
our reversion to the mean ("RTM") process. Under our RTM process, future EGPs
are projected using stochastic modeling of a large number of market scenarios in
conjunction with best estimates of lapse rates, interest rate spreads and
mortality 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 decrease of
approximately 19% 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, 2021 , we would have recorded favorable
unlocking of approximately $475 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 our Consolidated Statements of
Comprehensive Income (Loss). We also invest in equity securities that are
carried at fair value with changes in fair value recognized in realized gain
(loss). See "Consolidated Investments" below for more information.
Investment Valuation
Our measurement of fair value is based on assumptions used by market participants in pricing the asset or liability, which may include inherent risk, restrictions on the sale or use of an asset 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
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The following summarizes investments on our Consolidated Balance Sheets carried at fair value by pricing source and fair value hierarchy level (in millions) as ofDecember 31, 2021 : 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$ 521 $ 105,150 $ 215 $ 105,886 Priced by independent broker quotations - - 4,391 4,391 Priced by matrices - 15,117 - 15,117 Priced by other methods (1) - - 3,805 3,805 Total$ 521 $ 120,267 $ 8,411 $ 129,199 Percent of total 0% 93% 7% 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, 2021 , 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, 2021 , we used broker quotes for 99 securities as our final price source, representing 1% of total securities owned. In order to validate the pricing information and broker quotes, we employ, where possible, procedures that include comparisons with similar observable positions, comparisons with subsequent sales and observations of general market movements for those security classes. Our primary third-party pricing service has policies and processes to ensure that it is using objectively verifiable observable market data. The pricing service regularly reviews the evaluation inputs for securities covered, including broker quotes, executed trades and credit information, as applicable. If the pricing service determines it does not have sufficient objectively verifiable information about a security's valuation, it discontinues providing a valuation for the security. The pricing service regularly publishes and updates a summary of inputs used in its valuations by major security type. In addition, we have policies and procedures in place to review the process that is utilized by the third-party pricing service and the output that is provided to us by the pricing service. On a periodic basis, we test the pricing for a sample of securities to evaluate the inputs and assumptions used by the pricing service, and we perform a comparison of the pricing service output to an alternative pricing source. In addition, we check prices provided by our primary pricing service to ensure that they are not stale or unreasonable by reviewing the prices for unusual changes from period to period based on certain parameters or for lack of change from one period to the next. If such anomalies in the pricing are observed, we may use pricing information from another pricing source. 44
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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
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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 "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 our 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.
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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 current hedging program, equity market, interest rate and market-implied volatility conditions are monitored on a daily basis. We rebalance our hedge positions based upon changes in these factors as needed. While we actively manage our hedge positions, these positions may not completely offset changes in the fair value of embedded derivative reserves and benefit reserves caused by movements in these factors due to, among other things, differences in timing between when a market exposure changes and corresponding changes to the hedge positions, extreme swings in the equity markets, interest rates and market-implied volatilities, realized market volatility, contract holder behavior, divergence between the performance of the underlying funds and the hedging indices, divergence between the actual and expected performance of the hedge instruments or our ability to purchase hedging instruments at prices consistent with our desired risk and return trade-off. Within our annuity business, 55% and 59% of our variable annuity account values contained GLB features as ofDecember 31, 2021 and 2020, respectively. Underperforming equity markets increase our exposure to potential benefits with the GLB features. A contract with a GLB feature is "in the money" if the contract holder's account balance falls below the present value of guaranteed withdrawal or income benefits, assuming no lapses. As ofDecember 31, 2021 and 2020, 7% and 10%, respectively, of all in-force contracts with a GLB feature were "in the money," and our exposure, after reinsurance, as ofDecember 31, 2021 and 2020, was$453 million and$582 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$453 million , net of reinsurance. Our fair value estimates of the GLB embedded derivatives, which are based on detailed models of future cash flows under a wide range of market-consistent scenarios, reflect a more comprehensive view of the related factors and represent our best estimate of the present value of these potential liabilities. The market-consistent scenarios used in the determination of the fair value of the GLB embedded derivatives are similar to those used by an investment bank to value derivatives for which the pricing is not transparent and the aftermarket is nonexistent or illiquid. We use risk-neutralMonte Carlo simulations in our calculation to value the entire block of guarantees, which involve 100 unique scenarios per policy or approximately 45 million scenarios. The market-consistent scenario assumptions, at each valuation date, are those we view to be appropriate for a hypothetical market participant. The market-consistent inputs include, but are not limited to, assumptions for capital markets (e.g., implied volatilities, correlation among indices, risk-free swap curve, etc.), policyholder behavior (e.g., policy lapse, rider utilization, etc.), mortality, risk margins, maintenance expenses and a margin for profit. We believe these assumptions are consistent with those that would be used by a market participant; however, as the related markets develop, we will continue to reassess our assumptions. It is possible that different valuation techniques and assumptions could produce a materially different estimate of fair value. For information on our variable annuity hedge program performance, see our discussion in "Realized Gain (Loss) - Variable Annuity Net Derivatives Results" below. 47
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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, 2021 , 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
Implied Volatilities 4% 2% -2% -4%
Hypothetical effect to net income $ - $ -
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% $ (19 )
Scenario 2 -10% -25.0 bps +2% (84 )
Scenario 3 -20% -50.0 bps +4% (365 )
?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 our
Consolidated Balance Sheets with the change reported in benefits in our
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
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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 Derivatives 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 our 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 balances on UL and VUL insurance
and investment-type annuity products where account balances 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 our Consolidated
Statements of Comprehensive Income (Loss). The Derivatives and Hedging and the
Fair Value Measurements and Disclosures Topics of the FASB ASC require that we
calculate fair values of index options we may purchase or sell in the future to
hedge contract holder index allocations in future reset periods. These fair
values represent an estimate of the cost of the options we will purchase or sell
in the future, discounted back to the date of the balance sheet, using current
market indicators of volatility and interest rates. Changes in the fair values
of these liabilities are included as a component of realized gain (loss) on our
Consolidated Statements of Comprehensive Income (Loss). For information on our
index benefits hedging results, see our discussion in "Realized Gain (Loss)"
below.
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Details underlying the effect to net income (loss) from our annual assumption
review (in millions) were as follows:
For the Years Ended December 31,
2021 2020 2019
Income (loss) from operations:
Annuities $ (5 ) $ (101 ) $ (93 )
Retirement Plan Services - (3 ) -
Life Insurance (26 ) (440 ) (320 )
Group Protection 16 (3 ) 10
Excluded realized gain (loss) 6 58 3
Net income (loss) $ (9 ) $ (489 ) $ (400 )
The impacts of our annual assumption review were driven primarily by the
following:
2021
?For Annuities, unfavorable unlocking was driven by updates to policyholder
behavior and interest rate assumptions, partially offset by favorable updates to
expense assumptions.
?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 Group Protection, favorable 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.
2020
As part of our annual assumption review in the third quarter of 2020, we updated our interest rate assumptions. These updates included lowering starting new money rates to reflect the current interest rate environment and reducing our long-term new money investment yield assumption by 50 basis points, resulting in an ultimate long-term assumption of 3.0% for a 10-yearU.S. Treasury . As a result of these updates, we recorded unfavorable after-tax unlocking of$361 million for Life Insurance,$140 million for Annuities and$7 million for Retirement Plan Services.
?For Annuities, unfavorable unlocking was driven by updates to interest rate
assumptions, partially offset by favorable updates to policyholder behavior
assumptions and other items.
?For Retirement Plan Services, unfavorable unlocking was driven by updates to
interest rate assumptions, partially offset by favorable updates to expense
assumptions and other items.
?
rate and policyholder behavior assumptions.
?For Group Protection, unfavorable updates to interest rate assumptions,
partially offset by favorable updates to long-term disability termination rate
assumptions.
?For excluded realized gain (loss), favorable unlocking was driven by updates to policyholder behavior and expense assumptions, partially offset by unfavorable updates to other items.
Long-Term New Money Investment Yield Sensitivity
New money rates continue to be at low levels and, as a result, require careful analysis when forecasting the future direction of changes in rates. If we change our view of future new money rates and lower our current long-term new money investment yield assumption, then, assuming that all other assumptions remain constant, we estimate the impact of lowering this assumption by 50 basis points would be approximately$(160) 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 "II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk." 50
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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 (Annuities, Retirement Plan Services, Life
Insurance and Group Protection) correspond with our reporting segments.
The fair values of our reporting units are comprised of the value of in-force (i.e., existing) business and the value of new business. Specifically, new business is representative of cash flows and profitability associated with policies or contracts we expect to issue in the future, reflecting our forecasts of future sales volume and product mix over a 10-year period. To determine the values of in-force and new business, we use a discounted cash flows technique that applies a discount rate reflecting the market expected, weighted-average rate of return adjusted for the risk factors associated with operations to the projected future cash flows for each reporting unit. As ofOctober 1, 2021 and 2020, we performed our annual quantitative goodwill impairment test for our reporting units, and, as of each such date, the fair value was in excess of each reporting unit's carrying value for Annuities, Retirement Plan Services, Life Insurance and Group Protection. We apply significant judgment when determining the estimated fair value of our reporting units. Factors that can influence the value of goodwill include the capital markets, competitive landscape, regulatory environment, consumer confidence and any items that can directly or indirectly affect new business future cash flows. Factors that could affect production levels and profitability of new business include mix of new business, pricing changes, customer acceptance of our products and distribution strength. Spread compression and related effects to profitability caused by lower interest rates affect the valuation of in-force business more significantly than the valuation of new business, as new business pricing assumptions reflect the current and anticipated future interest rate environment. Estimates of fair value are inherently uncertain and represent only management's reasonable expectation regarding future developments. Examples of unfavorable changes to assumptions or factors that could result in future impairment include, but are not limited to, the following:
?Lower expectations for future sales levels or future sales profitability;
?Higher discount rates on new business assumptions;
?Weakened expectations for the ability to execute future reserve financing
transactions for life insurance business over the long-term or expectations for
significant increases in the associated costs;
?Legislative, regulatory or tax changes that affect the cost of, or demand for,
our subsidiaries' products, the required amount of reserves and/or surplus, or
otherwise affect our ability to conduct business, including changes to statutory
reserve requirements or changes to risk-based capital ("RBC") requirements; and
?Valuations of significant mergers or acquisitions of companies or blocks of
business that would provide relevant market-based inputs for our impairment
assessment that could support less favorable conclusions regarding the estimated
fair value of our reporting units.
Refer to Note 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.
The application of GAAP requires us to evaluate the recoverability of our
deferred tax assets and establish a valuation allowance, if necessary, to reduce
our deferred tax asset to an amount that is more likely than not to be
realizable. Considerable judgment and the use of estimates are required in
determining whether a valuation allowance is necessary, and if so, the amount of
such valuation allowance. In evaluating the need for a valuation allowance, we
consider many factors, including: the nature and character of the deferred tax
assets and liabilities; taxable income in prior carryback years; future
reversals of existing temporary differences; the length of time carryovers can
be utilized; and any tax planning strategies we would employ to avoid a tax
benefit from expiring unused. Although realization is not assured, management
believes it is more likely than not that the deferred tax assets, including our
net operating loss deferred tax asset, will be realized. For additional
information on our income taxes, see Note 6.
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RESULTS OF CONSOLIDATED OPERATIONS
Details underlying the consolidated results, deposits, net flows and account
values (in millions) were as follows:
For the Years Ended December 31,
2021 2020 2019
Net Income (Loss)
Income (loss) from operations:
Annuities $ 1,283 $ 983 $ 954
Retirement Plan Services 235 168 172
Life Insurance 535 (34 ) 259
Group Protection (127 ) 43 238
Other Operations (375 ) (295 ) (268 )
Excluded realized gain (loss),
after-tax (325 ) (570 ) (627 )
Benefit ratio unlocking, after-tax 196 194
277
Net impact from the Tax Cuts and Jobs Act - 37
17
Transaction and integration costs related to mergers, acquisitions and divestitures, after-tax (11 ) (15 ) (103 ) Gain (loss) on modification or early extinguishment of debt, after-tax (6 ) (12 ) (33 ) Net income (loss)$ 1,405 $ 499 $ 886 For the Years Ended December 31, 2021 2020 2019 Deposits Annuities$ 11,740 $ 11,260 $ 14,525 Retirement Plan Services 10,840 10,017 9,465 Life Insurance 5,693 5,890 7,320 Total deposits$ 28,273 $ 27,167 $ 31,310 Net Flows Annuities$ (2,569 ) $ (341 ) $ 1,851 Retirement Plan Services 464 166 620 Life Insurance 3,982 4,137 5,422 Total net flows$ 1,877 $ 3,962 $ 7,893 As of December 31,
2021 2020 2019 Account Values Annuities$ 172,725 $ 157,518 $ 142,128 Retirement Plan Services 99,114 88,307 78,689 Life Insurance 51,846 57,605 54,255 Total account values$ 323,685 $ 303,430 $ 275,072 52
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Table of Contents Comparison of 2021 to 2020
Net income increased due primarily to the following:
?Higher investment income on alternative investments, and higher prepayment and
bond make-whole premiums.
?The effect of unlocking. ?Lower realized losses.
?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 and
strategic digitization investments, 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 COVID-19 pandemic, see "Introduction - Executive
Summary" above and "Part I - Item 1A. Risk Factors - Market Conditions - The
impacts of the COVID-19 pandemic have adversely affected and are expected to
continue to adversely affect our business and results of operations, and the
future impacts of the COVID-19 pandemic on the company's business, results of
operations and financial condition remain uncertain."
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RESULTS OF ANNUITIES
Income (Loss) from Operations
Details underlying the results for Annuities (in millions) were as follows:
For the Years Ended December 31,
2021 2020 2019
Operating Revenues
Insurance premiums (1) $ 116 $ 121 $ 502
Fee income 2,724 2,394 2,357
Net investment income 1,401 1,272 1,140
Operating realized gain (loss) (2) 208 214 190
Amortization of deferred gain on
business sold through reinsurance 26 29 30
Other revenues (3) 527 425 381
Total operating revenues 5,002 4,455 4,600
Operating Expenses
Interest credited 811 773 698
Benefits (1) 548 696 938
Commissions and other expenses 2,119 1,854 1,871
Total operating expenses 3,478 3,323 3,507
Income (loss) from operations before taxes 1,524 1,132 1,093
Federal income tax expense (benefit) 241 149 139
Income (loss) from operations $ 1,283 $
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 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. 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
For a discussion of the COVID-19 pandemic, see "Introduction - Executive
Summary" above and "Part I - Item 1A. Risk Factors - Market Conditions - The
impacts of the COVID-19 pandemic have adversely affected and are expected to
continue to adversely affect our business and results of operations, and the
future impacts of the COVID-19 pandemic on the company's business, results of
operations and financial condition remain uncertain."
New deposits are an important component of net flows and key to our efforts to
grow our business. Although deposits do not significantly affect current period
income from operations, they can significantly impact future income from
operations. As a result of our strategic actions, deposits increased from 2020
to 2021 but remain below pre-pandemic levels contributing to negative net flows.
We expect the trend of negative net flows to persist.
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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 8%, 7% and 9% in 2021, 2020 and 2019, 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, and changes in interest rates may also result in increased contract withdrawals" and "Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk."
Fee Income
Details underlying fee income, account values and net flows (in millions) were
as follows:
For the Years Ended December 31,
2021 2020 2019
Fee Income
Mortality, expense and other
assessments $ 2,713 $ 2,381 $ 2,336
Surrender charges 11 16 25
DFEL:
Deferrals (27 ) (31 ) (38 )
Amortization, net of interest:
Amortization, net of interest,
excluding unlocking 32 26 34
Unlocking (5 ) 2 -
Total fee income $ 2,724 $ 2,394 $ 2,357
As of or For the Years Ended
December 31,
2021 2020 2019
Variable Account Value Information
Variable annuity deposits (1) $ 5,220 $ 3,978 $ 5,293
Increases (decreases) in variable
annuity account values:
Net flows (1) (6,283 ) (5,262 ) (4,805 )
Change in market value (1) 16,997 16,106 19,844
Contract holder assessments (1) (2,838 ) (2,554 ) (2,491 )
Transfers to the variable portion
of variable annuity
products from the fixed portion of
variable
annuity products 588 831 1,760
Variable annuity account values (1) 136,721 128,175 119,047
Average daily variable annuity
account values (1)
133,888 116,117 112,978
Average daily S&P 500® Index (2) 4,269 3,218 2,914
(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.
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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.
Net Investment Income and Interest Credited
Details underlying net investment income, interest credited and fixed account
values (in millions) were as follows:
For the Years Ended December 31,
2021 2020 2019
Net Investment Income
Fixed maturity AFS securities,
mortgage loans on real estate
and other, net of investment
expenses $ 1,155 $ 1,122 $
1,004
Commercial mortgage loan prepayment and bond make-whole premiums (1) 70 23 29 Surplus investments (2) 176 127 107 Total net investment income$ 1,401 $ 1,272 $ 1,140 Interest Credited Amount provided to contract holders$ 794 $ 755 $ 690 DSI deferrals (3 ) (4 ) (21 ) Interest credited before DSI amortization 791 751 669 DSI amortization: Amortization, excluding unlocking 21 21 26 Unlocking (1 ) 1 3 Total interest credited$ 811 $ 773 $ 698
(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,
2021 2020 2019
Fixed Account Value Information
Fixed annuity deposits (1) $ 6,520 $ 7,282 $ 9,232
Increases (decreases) in fixed
annuity account values:
Net flows (1) 3,714 4,921 6,656
Contract holder assessments (1) (86 ) (66 ) (43 )
Transfers from the fixed portion of
variable annuity
products to the variable portion of
variable
annuity products (588 ) (831 ) (1,760 )
Reinvested interest credited (1) 3,286 1,686 1,489
Fixed annuity account values (1)(2) 36,004 29,343 23,081
Average fixed account values (1)(2) 32,803 25,804 19,717
(1)Includes the fixed portion of variable.
(2)Net of reinsurance ceded.
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A portion of our investment income earned is credited to the contract holders of our deferred fixed annuity products, including the fixed portion of variable annuity contracts. We expect to earn a spread between what we earn on the underlying general account investments supporting the fixed annuity product line, including the fixed portion of variable annuity contracts, and what we credit to our fixed annuity contract holders' accounts, including the fixed portion of variable annuity contracts. Changes in commercial mortgage loan prepayments and bond make-whole premiums, investment income on alternative investments and surplus investment income can vary significantly from period to period due to a number of factors and, therefore, may contribute to investment income results that are not indicative of the underlying trends.
Benefits
Details underlying benefits (in millions) were as follows:
For the Years Ended December 31,
2021 2020 2019
Benefits
Net death and other benefits,
excluding unlocking $ 540 $ 553 $ 834
Unlocking 8 143 104
Total benefits $ 548 $ 696 $ 938
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:
For the Years Ended December 31,
2021 2020 2019
Commissions and Other Expenses
Commissions:
Deferrable $ 450 $ 480 $ 606
Non-deferrable 686 581 565
General and administrative expenses 439 427
453
Inter-segment reimbursement associated with reserve financing and LOC expenses (1) 2 3 4 Taxes, licenses and fees 45 31
35
Total expenses incurred, excluding broker-dealer 1,622 1,522
1,663
DAC deferrals (515 ) (548 ) (681 ) Total pre-broker-dealer expenses incurred, excluding amortization, net of interest 1,107 974
982
DAC and VOBA amortization, net of interest: Amortization, net of interest, excluding unlocking 449 401
396
Unlocking (7 ) (14 )
12
Broker-dealer expenses incurred 570 493 481 Total commissions and other expenses$ 2,119 $ 1,854 $ 1,871 DAC Deferrals As a percentage of sales/deposits 4.4% 4.9%
4.7%
(1)Includes reimbursements to Annuities from the Life Insurance segment for
reserve financing, net of expenses incurred by Annuities for its use of letters
of credit ("LOCs"). The inter-segment amounts are not reported on our
Consolidated Statements of Comprehensive Income (Loss).
Commissions and other costs that result directly from and are essential to the
successful acquisition of new or renewal business are deferred to the extent
recoverable and are amortized over the lives of the contracts in relation to
EGPs. Certain types of commissions, such as trail commissions that are based on
account values, are expensed as incurred rather than deferred and amortized.
Broker-dealer expenses that vary with and are related to sales are expensed as
incurred and not deferred and amortized. Fluctuations in these expenses
correspond with fluctuations in other revenues. For more information, see
"Critical Accounting Policies and Estimates - DAC, VOBA, DSI and DFEL" above.
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RESULTS OF RETIREMENT PLAN SERVICES
Income (Loss) from Operations
Details underlying the results for Retirement Plan Services (in millions) were
as follows:
For the Years Ended December 31,
2021 2020 2019
Operating Revenues
Fee income $ 296 $ 253 $ 252
Net investment income 992 933 924
Other revenues (1) 36 27 24
Total operating revenues 1,324 1,213 1,200
Operating Expenses
Interest credited 617 615 585
Benefits 3 2 2
Commissions and other expenses 420 404 418
Total operating expenses 1,040 1,021 1,005
Income (loss) from operations before taxes 284 192 195
Federal income tax expense (benefit) 49 24 23
Income (loss) from operations $ 235 $ 168 $ 172
(1)Consists primarily of mutual fund account program revenues from mid to large
employers.
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
For a discussion of the COVID-19 pandemic, see "Introduction - Executive Summary" above and "Part I - Item 1A. Risk Factors - Market Conditions - The impacts of the COVID-19 pandemic have adversely affected and are expected to continue to adversely affect our business and results of operations, and the future impacts of the COVID-19 pandemic on the company's business, results of operations and financial condition remain uncertain."
Net flows in this business fluctuate based on the timing of larger plans being
implemented and terminating over the course of the year.
New deposits are an important component of net flows and key to our efforts to
grow our business. Although deposits do not significantly affect current period
income from operations, they can significantly impact future income from
operations. The other component of net flows relates to the retention of the
business. An important measure of retention is the reduction in account values
caused by plan sponsor terminations and participant withdrawals. These outflows
as a percentage of average account values were 11%, 13% and 12% for 2021, 2020
and 2019, 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 18%, 19% and 21% for 2021, 2020 and 2019, 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.
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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, and changes in interest rates may also result in increased contract withdrawals" and "Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk."
Fee Income
Details underlying fee income, net flows and account values (in millions) were
as follows:
For the Years Ended December 31,
2021 2020 2019
Fee Income
Annuity expense assessments $ 219 $ 184 $ 184
Mutual fund fees 77 68 67
Total expense assessments 296 252 251
Surrender charges - 1 1
Total fee income $ 296 $ 253 $ 252
For the Years Ended December 31,
2021 2020 2019
Net Flows By Market
Small market $ 133 $ 350 $ 449
Mid - large market 1,800 792 1,336
Multi-Fund® and other (1,469 ) (976 ) (1,165 )
Total net flows $ 464 $ 166 $ 620
As of or For the Years Ended
December 31,
2021 2020 2019
Variable Account Value Information
Variable annuity deposits (1) $ 2,218 $ 1,843 $ 1,880
Increases (decreases) in variable
annuity account values:
Net flows (1) (733 ) (333 ) (518 )
Change in market value (1) 3,247 2,731 3,426
Contract holder assessments (1) (185 ) (156 ) (155 )
Variable annuity account values (1) 20,957 18,755 16,952
Average daily variable annuity
account values (1)
20,147 16,426 15,960
Average daily S&P 500® Index 4,269 3,218 2,914
(1) Excludes the fixed portion of variable.
As of or For the Years Ended
December 31,
2021 2020 2019
Mutual Fund Account Value Information
Mutual fund deposits $ 6,297 $ 5,449 $
5,602
Mutual fund net flows 1,323 100
1,316
Mutual fund account values (1) 54,518 46,636
41,179
(1) Mutual funds are not included in the separate accounts reported on our
Consolidated Balance Sheets as we do not have any ownership interest in them.
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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:
For the Years Ended December 31,
2021 2020 2019
Net Investment Income
Fixed maturity AFS securities,
mortgage loans on real estate
and other, net of investment
expenses $ 828 $ 834 $ 831
Commercial mortgage loan prepayment
and bond
make-whole premiums (1) 58 23 26
Surplus investments (2) 106 76 67
Total net investment income $ 992 $ 933 $ 924
Interest Credited $ 617 $ 615 $ 585
(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,
2021 2020 2019
Fixed Account Value Information
Fixed annuity deposits (1) $ 2,325 $ 2,725 $ 1,983
Increases (decreases) in fixed
annuity account values:
Net flows (1) (126 ) 399 (178 )
Reinvested interest credited (1) 616 613 585
Contract holder assessments (1) (14 ) (13 ) (12 )
Fixed annuity account values (1) 23,639 22,916 20,558
Average fixed account values (1) 23,147 21,696 20,119
(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 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.
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Commissions and Other Expenses
Details underlying commissions and other expenses (in millions) were as follows:
For the Years Ended December 31,
2021 2020 2019
Commissions and Other Expenses
Commissions:
Deferrable $ 5 $ 5 $ 6
Non-deferrable 79 71 73
General and administrative expenses 309 304 319
Taxes, licenses and fees 17 16 17
Total expenses incurred 410 396 415
DAC deferrals (22 ) (21 ) (23 )
Total expenses recognized before
amortization 388 375
392
DAC and VOBA amortization, net of interest: Amortization, net of interest, excluding unlocking 32 25 27 Unlocking - 4 (1 ) Total commissions and other expenses$ 420 $ 404 $ 418 DAC Deferrals As a percentage of annuity sales/deposits 0.5% 0.5% 0.6% Commissions and other costs that result directly from and are essential to the successful acquisition of new or renewal business are deferred to the extent recoverable and are amortized over the lives of the contracts in relation to EGPs. Certain types of commissions, such as trail commissions that are based on account values, are expensed as incurred rather than deferred and amortized. Distribution expenses associated with the sale of mutual fund products are expensed as incurred. For more information, see "Critical Accounting Policies and Estimates - DAC, VOBA, DSI and DFEL" above. ? 61
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RESULTS OF LIFE INSURANCE
Income (Loss) from Operations
Details underlying the results for Life Insurance (in millions) were as follows:
For the Years Ended December 31,
2021 2020 2019
Operating Revenues
Insurance premiums (1) $ 1,033 $ 950 $ 885
Fee income 3,863 3,727 3,882
Net investment income 3,209 2,823 2,658
Operating realized gain (loss) (2) (9 ) (6 ) (6 )
Amortization of deferred gain on
business sold through reinsurance 20 12 -
Other revenues 21 10 19
Total operating revenues 8,137 7,516 7,438
Operating Expenses
Interest credited 1,439 1,491 1,433
Benefits 4,275 4,586 4,183
Commissions and other expenses 1,766 1,506
1,516
Total operating expenses 7,480 7,583
7,132
Income (loss) from operations before taxes 657 (67 )
306
Federal income tax expense (benefit) 122 (33 ) 47 Income (loss) from operations$ 535 $ (34 ) $ 259
(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 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 agreement (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 agreement.
?Higher amortization of deferred gain on business sold through reinsurance as a
result of the fourth quarter 2021 reinsurance agreement.
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.
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Table of Contents Additional Information EffectiveOctober 1, 2021 , we entered into a reinsurance agreement withSecurity Life of Denver Insurance Company (a subsidiary ofResolution Life that we refer to herein as "Resolution Life") to reinsure liabilities under a block of in-force executive benefit and universal life policies. For more information, see "Liquidity and Capital Resources - Holding Company Sources and Uses of Liquidity and Capital - Return of Capital to Common Stockholders" below and Note 8. We expect an ongoing reduction in income from operations in future periods as a result of this reinsurance agreement. We continue to expect elevated mortality to persist into the first quarter of 2022 as a result of the impacts of the COVID-19 pandemic. For a discussion of the COVID-19 pandemic, see "Introduction - Executive Summary" above and "Part I - Item 1A. Risk Factors - Market Conditions - The impacts of the COVID-19 pandemic have adversely affected and are expected to continue to adversely affect our business and results of operations, and the future impacts of the COVID-19 pandemic on the company's business, results of operations and financial condition remain uncertain."
For information on interest rate spreads and 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, and changes in interest rates may also result in
increased contract withdrawals" and "Part II - Item 7A. Quantitative and
Qualitative Disclosures About Market Risk - Interest Rate Risk."
Insurance Premiums
Insurance premiums relate to traditional products and are a function of the
rates priced into the product and 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:
For the Years Ended December 31,
2021 2020 2019
Fee Income
Cost of insurance assessments $ 2,362 $ 2,377 $ 2,280
Expense assessments 1,507 1,502 1,694
Surrender charges 31 33 41
DFEL:
Deferrals (989 ) (972 ) (1,063 )
Amortization, net of interest:
Amortization, net of interest,
excluding unlocking 560 514 504
Unlocking 392 273 426
Total fee income $ 3,863 $ 3,727 $ 3,882
For the Years Ended December 31,
2021 2020 2019
Sales by Product
UL $ 8 $ 20 $ 57
MoneyGuard® 101 127 298
IUL 96 91 155
VUL 181 188 265
Term 152 132 144
Total individual life sales 538 558 919
Executive Benefits 122 72 163
Total sales $ 660 $ 630 $ 1,082
Net Flows
Deposits $ 5,693 $ 5,890 $ 7,320
Withdrawals and deaths (1,711 ) (1,753 ) (1,898 )
Net flows $ 3,982 $ 4,137 $ 5,422
Contract Holder Assessments
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As of December 31,
2021 2020 2019
Account Values
General account $ 32,532 $ 37,496 $ 37,485
Separate account 19,314 20,109 16,770
Total account values $ 51,846 $ 57,605 $ 54,255
In-Force Face Amount
UL and other $ 362,106 $ 358,554 $ 357,726
Term insurance 611,854 535,387 472,050
Total in-force face amount $ 973,960 $ 893,941 $ 829,776
For the Years Ended December 31,
2021 2020 2019
Average General Account Values
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.
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Net Investment Income and Interest Credited
Details underlying net investment income and interest credited (in millions)
were as follows:
For the Years Ended December 31,
2021 2020 2019
Net Investment Income
Fixed maturity AFS securities,
mortgage loans on real estate
and other, net of investment
expenses $ 2,512 $ 2,531 $ 2,448
Commercial mortgage loan prepayment
and bond
make-whole premiums (1) 46 24 47
Alternative investments (2) 522 140 12
Surplus investments (3) 129 128 151
Total net investment income $ 3,209 $ 2,823 $ 2,658
Interest Credited $ 1,439 $ 1,491 $ 1,433
(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,
2021 2020 2019
Benefits
Death claims direct and assumed$ 5,866 $ 5,521 $ 4,594 Death claims ceded (2,325 ) (2,019 ) (1,689 ) Reserves released on death (708 ) (738 ) (616 ) Net death benefits 2,833 2,764 2,289 Change in secondary guarantee life insurance product reserves: Change in reserves, excluding unlocking 703 644 625 Unlocking (190 ) 112 445 Change in MoneyGuard® reserves: Change in reserves, excluding unlocking 548 482 451 Unlocking 33 272 48 Other benefits (1) 348 312 325 Total benefits$ 4,275 $ 4,586 $ 4,183 Death claims per$1,000 of in-force 3.05 3.21 2.92
(1)Includes primarily changes in reserves and dividends on traditional and other
products.
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Benefits for this segment include claims incurred during the period in excess of the associated reserves for its interest-sensitive and traditional products. In addition, benefits include the change in secondary guarantee and linked-benefit life insurance product reserves. These reserves are affected by changes in expected future trends of assessments and benefits causing unlocking adjustments to these liabilities similar to DAC, VOBA and DFEL. Generally, we have higher mortality in the first quarter of the year due to the seasonality of claims.
Commissions and Other Expenses
Details underlying commissions and other expenses (in millions) were as follows:
For the Years Ended December 31,
2021 2020 2019
Commissions and Other Expenses
Commissions $ 639 $ 687 $ 931
General and administrative expenses 576 557 617
Expenses associated with reserve
financing 100 99 95
Taxes, licenses and fees 162 163 184
Total expenses incurred 1,477 1,506 1,827
DAC and VOBA deferrals (745 ) (788 ) (1,094 )
Total expenses recognized before
amortization 732 718 733
DAC and VOBA amortization, net of
interest:
Amortization, net of interest,
excluding unlocking 450 339 441
Unlocking 580 445 338
Other intangible amortization 4 4 4
Total commissions and other
expenses $ 1,766 $ 1,506 $ 1,516
DAC and VOBA Deferrals
As a percentage of sales 112.9% 125.1% 101.1%
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 2021 and 2020, the decrease was
primarily a result of changes in sales mix to products with lower commission
rates. For more information, see "Critical Accounting Policies and Estimates -
DAC, VOBA, DSI and DFEL" above.
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RESULTS OF GROUP PROTECTION
Income (Loss) from Operations
Details underlying the results for Group Protection (in millions) were as
follows:
For the Years Ended December 31,
2021 2020 2019
Operating Revenues
Insurance premiums $ 4,450 $ 4,280 $ 4,113
Net investment income 366 330 307
Other revenues (1) 180 183 168
Total operating revenues 4,996 4,793 4,588
Operating Expenses
Interest credited 6 5 5
Benefits 3,890 3,500 3,036
Commissions and other expenses 1,260 1,234 1,246
Total operating expenses 5,156 4,739 4,287
Income (loss) from operations
before taxes (160 ) 54 301
Federal income tax expense
(benefit) (33 ) 11 63
Income (loss) from operations
(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
2021 2020
2019
Income (Loss) from Operations by Product Line Life$ (243 ) $ (95 ) $ 77 Disability 122 126 169 Dental (6 ) 12 (9 ) Total non-medical (127 ) 43 237 Medical - - 1 Income (loss) from operations$ (127 ) $ 43 $ 238 Comparison of 2021 to 2020
Income from operations for this segment decreased due primarily to the
following:
?Higher benefits driven by unfavorable experience in our life and disability businesses in 2021 and lower utilization in our dental business in 2020, partially offset by favorable reserve adjustments in our disability business. See "Additional Information" below for further discussion on the impacts to benefits. ?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.
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Table of Contents Additional Information The total loss ratio for the year endedDecember 31, 2021 , increased due primarily to higher mortality in our life business and higher morbidity in our disability business as a result of the impacts of the COVID-19 pandemic. We continue to expect elevated mortality in our life business, and we believe there is an on-going risk of morbidity headwinds in our disability business during the first quarter of 2022 as a result of the impacts of the COVID-19 pandemic. For a discussion of the COVID-19 pandemic, see "Introduction - Executive Summary" above and "Part I - Item 1A. Risk Factors - Market Conditions - The impacts of the COVID-19 pandemic have adversely affected and are expected to continue to adversely affect our business and results of operations, and the future impacts of the COVID-19 pandemic on the company's business, results of operations and financial condition remain uncertain." Management compares trends in actual loss ratios to pricing expectations as group-underwriting risks change over time. We expect normal fluctuations in our total loss ratio, as claims experience is inherently uncertain. For every one percent increase in the total loss ratio, we would expect an annual decrease to income from operations of approximately$34 million to$38 million . The effects are symmetrical for a comparable decrease in the loss ratio and, therefore, move in an equal and opposite direction. For information on the effects of current interest rates on our long-term disability claim reserves, see "Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk - Effect of Interest Rate Sensitivity." Insurance Premiums
Details underlying insurance premiums (in millions) were as follows:
For the Years Ended December 31,
2021 2020
2019
Insurance Premiums by Product Line Life$ 1,653 $ 1,613 $ 1,500 Disability 2,569 2,401 2,320 Dental 228 266 293 Total insurance premiums$ 4,450 $ 4,280 $ 4,113 Sales by Product Line Life 264 265 344 Disability 284 397 319 Dental 38 44 89 Total sales$ 586 $ 706 $ 752
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.
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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:
For the Years Ended December 31,
2021 2020 2019
Net Investment Income
Fixed maturity AFS securities,
mortgage loans on real estate
and other, net of investment
expenses $ 237 $ 240 $ 239
Commercial mortgage loan prepayment
and bond
make-whole premiums (1) 16 9 -
Surplus investments (2) 113 81 68
Total net investment income $ 366 $ 330 $ 307
(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,
2021 2020 2019
Benefits and Interest Credited by
Product Line
Life $ 1,630 $ 1,399 $ 1,045
Disability 2,092 1,938 1,783
Dental 174 168 213
Total benefits and interest
credited $ 3,896 $ 3,505 $ 3,041
Loss Ratios by Product Line
Life 98.6% 86.7% 69.7%
Disability 81.4% 80.5% 76.8%
Dental 76.3% 63.1% 72.8%
Total 87.5% 81.8% 73.9%
Generally, we experience higher mortality in the first quarter of the year and
higher disability claims in the fourth quarter of the year due to the
seasonality of claims. For additional information on our loss ratios, see
"Additional Information" above.
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Commissions and Other Expenses
Details underlying commissions and other expenses (in millions) were as follows:
For the Years Ended December 31,
2021 2020 2019
Commissions and Other Expenses
Commissions $ 361 $ 359 $
367
General and administrative expenses 731 697 741 Taxes, licenses and fees 120 122 114 Total expenses incurred 1,212 1,178 1,222 DAC deferrals (91 ) (92 ) (110 ) Total expenses recognized before amortization 1,121 1,086
1,112
DAC and VOBA amortization, net of interest 107 115
112
Other intangible amortization 32 33
22
Total commissions and other expenses$ 1,260 $ 1,234 $
1,246
DAC Deferrals As a percentage of insurance premiums 2.0% 2.1%
2.7%
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.
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RESULTS OF OTHER OPERATIONS
Income (Loss) from Operations
Details underlying the results for Other Operations (in millions) were as
follows:
For the Years Ended December 31,
2021 2020 2019
Operating Revenues
Insurance premiums (1) $ 19 $ 21 $ 13
Net investment income 147 152 194
Other revenues 14 12 13
Total operating revenues 180 185 220
Operating Expenses
Interest credited 42 39 58
Benefits 81 117 110
Other expenses 189 69 62
Interest and debt expense 262 269 284
Spark and strategic digitization expense 87 68
66
Total operating expenses 661 562
580
Income (loss) from operations before taxes (481 ) (377 )
(360 ) Federal income tax expense (benefit) (106 ) (82 ) (92 ) Income (loss) from operations$ (375 ) $ (295 ) $ (268 )
(1)Includes our disability income business, which has a corresponding offset in
benefits for changes in reserves.
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 and strategic digitization expense as part of our Spark and
strategic digitization initiatives.
?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.
Additional Information
We expect to continue making investments as part of our Spark and strategic digitization initiatives. For more information, see "Introduction - Executive Summary - Significant Operational Matters - Spark and Strategic Digitization Initiatives."
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.
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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 our consolidated financial statements. The interest credited corresponds to investment income earnings on the assets we continue to hold for this business. There is no effect to income or loss in Other Operations or on a consolidated basis for these amounts because interest earned on the blocks that continue to be reinsured is passed through to Swiss Re in the form of interest credited. Benefits
Benefits are recognized when incurred for institutional pension products and
disability income business.
Other Expenses
Details underlying other expenses (in millions) were as follows:
For the Years Ended December
31,
2021 2020
2019
General and administrative expenses: Legal$ 94 $ - $ - Branding 45 43 45 Other (1) 61 46 36 Total general and administrative expenses 200 89
81
Taxes, licenses and fees (2) (9 ) (11 ) (7 ) Other (3) (2 ) (9 ) (12 ) Total other expenses$ 189 $ 69 $ 62
(1)Includes expenses that are corporate in nature including charitable
contributions, the portion of our deferred compensation plan expense
attributable to participants' selection of LNC stock as the measure for their
investment return and other expenses not allocated to our business segments.
(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.
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REALIZED GAIN (LOSS)
Details underlying realized gain (loss), after-DAC (1) (in millions) were as
follows:
For the Years Ended December 31,
2021 2020 2019
Components of Realized Gain (Loss),
Pre-Tax
Total operating realized gain
(loss) $ 199 $ 208 $
184
Total excluded realized gain (loss) (411 ) (721 ) (794 )
Total realized gain (loss), pre-tax
Components of Excluded Realized Gain (Loss), After-Tax Realized gain (loss) related to certain financial assets$ 89 $ (136 ) $ (58 ) Realized gain (loss) on the mark-to-market on certain instruments (2) 60 33 (95 ) Variable annuity net derivative results: Hedge program performance, including unlocking for GLB reserves hedged and benefit ratio unlocking (109 ) (564 ) (97 ) GLB NPR component (195 ) 293 (41 ) Total variable annuity net derivative results (304 ) (271 ) (138 ) Indexed annuity forward-starting option 26 (2 ) (59 ) Excluded realized gain (loss) including benefit ratio unlocking, after-tax (129 ) (376 ) (350 ) Less: benefit ratio unlocking, after tax 196 194 277 Total excluded realized gain (loss), after-tax$ (325 ) $ (570 ) $ (627 )
(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.
Comparison of 2021 to 2020
We had lower realized losses due primarily to the following:
?Gains related to certain financial assets in 2021 as compared to losses in 2020
due to changes in economic projections associated with our review of credit
losses for mortgage loans on real estate.
?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 lower realized losses 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 more information about unlocking.
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.
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Our GWB, GIB and 4LATER® features have elements of both benefit reserves and embedded derivative reserves. We calculate the value of the benefit reserves and the embedded derivative reserves based on the specific characteristics of each GLB feature. For our GLBs that meet the definition of an embedded derivative under the Derivatives and Hedging Topic of the FASB ASC, we record them at fair value on our Consolidated Balance Sheets with changes in fair value recorded in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss). In bifurcating the embedded derivative, we attribute to the embedded derivative the portion of total fees collected from the contract holder that relates to the GLB riders (the "attributed fees"). These attributed fees represent the present value of future claims expected to be paid for the GLB at the inception of the contract (the "net valuation premium") plus a margin that a theoretical market participant would include for risk/profit (the "risk/profit margin"). We also include the risk/profit margin portion of the GLB attributed rider fees in operating realized gain (loss) and include the net valuation premium of the GLB attributed rider fees in excluded realized gain (loss). For our Annuities and Retirement Plan Services segments, the excess of total fees collected from the contract holders over the GLB attributed rider fees is reported in fee income.
Realized Gain (Loss) Related to Certain Financial Assets
For information on realized gain (loss) related to certain financial assets, see
Note 15.
Realized Gain (Loss) on the Mark-to-Market on Certain Instruments
Gain (loss) on the mark-to-market on certain instruments, including those
associated with our consolidated variable interest entities ("VIEs") represents
changes in the fair values of certain derivative investments (not including
those associated with our variable annuity net 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. 74
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Details underlying our variable annuity hedging program (dollars in millions)
were as follows:
As of As of As of As of As of
December 31, September 30, June 30, March 31, December 31,
2021 2021 2021 2021 2020
Variable annuity hedge program
assets (liabilities) $ 721 $ 1,090 $
881
Variable annuity reserves - asset (liability): Embedded derivative reserves, pre-NPR (1)$ 1,818 $ 1,511 $ 1,569 $ 1,619 $ 198 NPR 17 94 98 101 333 Embedded derivative reserves 1,835 1,605 1,667 1,719 531 Insurance benefit reserves (1,231 ) (1,254 ) (1,135 ) (1,164 ) (1,150 ) Total variable annuity reserves - asset (liability)$ 604 $ 351 $ 532 $ 555 $ (619 ) 10-year CDS spread 1.15% 1.18% 1.15% 1.28% 1.25%NPR factor related to 10-year CDS spread 0.70% 0.74% 0.70% 0.78% 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.
The following shows the hypothetical effect (in millions) to net income (loss)
for changes in the
Hypothetical
Effect
NPR factor:
Down 70 basis points to zero $ (182 )
Up 20 basis points 18
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.
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CONSOLIDATED INVESTMENTS
Details underlying our consolidated investment balances (in millions) were as
follows:
Percentage of
Total Investments
As of As of As of As of
December 31, December 31, December 31, December 31,
2021 2020 2021 2020
Investments
Fixed maturity AFS
securities $ 118,746 $ 123,044 77.3% 79.9%
Trading securities 4,482 4,501 2.9% 2.9%
Equity securities 318 129 0.2% 0.1%
Mortgage loans on
real estate 17,991 16,763 11.7% 10.9%
Policy loans 2,364 2,426 1.5% 1.6%
Derivative
investments 5,437 3,109 3.6% 2.0%
Alternative
investments 2,666 1,944 1.7% 1.3%
Other investments 1,626 2,040 1.1% 1.3%
Total investments $ 153,630 $ 153,956 100.0% 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.
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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, 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%
Collateralized mortgage and other
obligations ("CMOs"):
Agency backed 1,544 123 1 1,666 1.4%
Non-agency backed 360 52 1 411 0.3%
Mortgage pass through securities
("MPTS"):
Agency backed 429 21 2 448 0.4%
Commercial mortgage-backed
securities ("CMBS"):
Agency backed 20 - - 20 0.0%
Non-agency backed 1,532 61 14 1,579 1.3%
Asset-backed securities ("ABS"):
Collateralized loan obligations
("CLOs") 6,356 11 49 6,318 5.3%
Credit card 82 24 1 105 0.1%
Equipment receivables 10 - - 10 0.0%
Home equity 236 54 - 290 0.2%
Manufactured housing 6 - - 6 0.0%
Student loans 7 - - 7 0.0%
Other 1,742 38 4 1,776 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 408 107 11 504 0.4%
Total fixed maturity AFS securities 105,158 14,039 451 118,746 100.0%
Trading Securities (2) 4,170 343 31 4,482
Equity Securities 285 55 22 318
Total fixed maturity AFS, trading
and equity securities $ 109,613 $ 14,437 $ 504 $ 123,546
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As of December 31, 2020
Net %
Amortized Gross Unrealized Fair Fair
Cost (1) Gains Losses Value Value
Fixed Maturity AFS Securities
Industry corporate bonds:
Financial services $ 15,889 $ 2,836 $ 32 $ 18,693 15.2%
Basic industry 4,719 992 3 5,708 4.6%
Capital goods 7,323 1,402 13 8,712 7.1%
Communications 4,331 1,036 4 5,363 4.4%
Consumer cyclical 5,707 926 12 6,621 5.4%
Consumer non-cyclical 16,600 3,412 17 19,995 16.3%
Energy 5,605 877 24 6,458 5.2%
Technology 4,590 742 7 5,325 4.3%
Transportation 3,450 619 12 4,057 3.3%
Industrial other 2,082 224 6 2,300 1.9%
Utilities 14,096 3,198 6 17,288 14.1%
Government related entities 1,885 398 14 2,269 1.8%
CMOs:
Agency backed 1,874 216 1 2,089 1.7%
Non-agency backed 433 53 - 486 0.4%
MPTS:
Agency backed 457 44 - 501 0.4%
CMBS:
Agency backed 20 1 - 21 0.0%
Non-agency backed 1,370 114 - 1,484 1.2%
ABS:
CLOs 5,571 23 11 5,583 4.5%
Credit card 78 31 1 108 0.1%
Equipment receivables 15 - - 15 0.0%
Home equity 303 52 1 354 0.3%
Manufactured housing 7 1 - 8 0.0%
Student loans 17 1 - 18 0.0%
Other 1,050 50 2 1,098 0.9%
Municipals:
Taxable 5,249 1,532 - 6,781 5.5%
Tax-exempt 111 29 - 140 0.1%
Government:
United States 397 88 1 484 0.4%
Foreign 384 87 1 470 0.4%
Hybrid and redeemable preferred
securities 548 97 30 615 0.5%
Total fixed maturity AFS securities 104,161 19,081 198 123,044 100.0%
Trading Securities (2) 4,072 477 48 4,501
Equity Securities 132 21 24 129
Total fixed maturity AFS, trading
and equity securities $ 108,365 $ 19,579 $
270
(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.
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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 of December 31, 2021 As
of
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 $ 58,542 $ 66,571 56.1% $
57,934
2 BBB 42,797 48,130 40.5% 41,970 49,390 40.1%
Total investment grade
securities 101,339 114,701 96.6%
99,904 118,616 96.4%
Below Investment Grade
Securities
3 BB 2,278 2,492 2.1% 2,959 3,157 2.6%
4 B 1,424 1,441 1.2% 1,249 1,218 1.0%
CCC and
5 lower 51 53 0.0% 46 48 0.0%
In or near
6 default 66 59 0.1% 3 5 0.0%
Total below investment grade
securities 3,819 4,045 3.4% 4,257 4,428 3.6%
Total fixed maturity AFS
securities $ 105,158 $ 118,746 100.0% $
104,161
Total securities below investment grade as a percentage of total fixed maturity AFS securities 3.6% 3.4%
4.1% 3.6%
(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, 2021 and 2020, 94% and 78%, 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, 2021 , increased by$253 million sinceDecember 31, 2020 . 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. 79
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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, 2021 , 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
maturity AFS securities for the year ended
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.
As reported on our Consolidated Balance Sheets, we had$156.2 billion of investments and cash and invested cash, which exceeded the liabilities for our future obligations under insurance policies and contracts, net of amounts recoverable from reinsurers, which totaled$132.4 billion as ofDecember 31, 2021 . 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$100.0 billion as ofDecember 31, 2021 , rather than selling fixed maturity AFS securities in an unrealized loss position. The amount of cash that we have on hand at any point in time takes into account our liquidity needs in the future, other sources of cash, such as the maturities of investments, interest and dividends we earn on our investments and the ongoing cash flows from new and existing business. See "Fixed Maturity AFS Securities - Evaluation for Recovery of Amortized Cost" in Note 1 for additional discussion.
As of
placement securities was
representing 13% and 12% 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 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
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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. Our ABS home equity and RMBS had a market value of$2.9 billion and a net unrealized gain of$245 million as ofDecember 31, 2021 . ? 81
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The market value of fixed maturity AFS and trading securities backed by subprime loans was$259 million and represented less than 1% of our total investment portfolio as ofDecember 31, 2021 . Fixed maturity AFS securities represented$247 million , or 96%, and trading securities represented$12 million , or 4%, of the subprime exposure as ofDecember 31, 2021 . The table below summarizes our investments in fixed maturity AFS securities backed by pools of residential mortgages (in millions) as ofDecember 31, 2021 : Subprime/ Agency Prime Alt-A Option ARM (1) Total Net Net Net Net Net Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value Cost Value Cost Value Type RMBS$ 1,973 $ 2,114 $ 138 $ 151 $ 81 $ 96 $ 141 $ 164 $ 2,333 $ 2,525 ABS home equity 1 - 22 23 25 38 188 229 236 290 Total by type (2)(3)$ 1,974 $ 2,114 $ 160 $ 174 $ 106 $ 134 $ 329 $ 393 $ 2,569 $ 2,815 Rating AAA$ 1,599 $ 1,716 $ 14 $ 14 $ - $ - $ - $ -$ 1,613 $ 1,730 AA 368 391 17 17 5 5 3 3 393 416 A 7 7 8 8 2 3 16 17 33 35 BBB - - 26 26 9 9 18 19 53 54 BB and below - - 95 109 90 117 292 354 477 580 Total by rating (2)(3)(4)$ 1,974 $ 2,114 $ 160 $ 174 $ 106 $ 134 $ 329 $ 393 $ 2,569 $ 2,815 Origination Year 2011 and prior $ 407$ 452 $ 108 $ 122 $ 106 $ 134 $ 329 $ 393 $ 950 $ 1,101 2012 18 19 - - - - - - 18 19 2013 118 128 - - - - - - 118 128 2014 48 53 1 1 - - - - 49 54 2015 146 155 15 15 - - - - 161 170 2016 471 493 - - - - - - 471 493 2017 237 255 - - - - - - 237 255 2018 197 219 - - - - - - 197 219 2019 161 171 1 1 - - - - 162 172 2020 73 73 - - - - - - 73 73 2021 98 96 35 35 - - - - 133 131 Total by origination year (2)(3)$ 1,974 $ 2,114 $ 160 $ 174 $ 106 $ 134 $ 329 $ 393 $ 2,569 $ 2,815
Total fixed maturity AFS securities backed by pools of
residential mortgages as a percentage of total fixed maturity AFS securities
2.4% 2.4%
Total prime, Alt-A and subprime/option ARM as a percentage of total fixed maturity AFS securities
0.6% 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
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$99 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$99 million in trading securities consisted of$87 million prime and$12 million subprime. (4)Based upon the rating designations determined and provided by the major credit rating agencies (Fitch, Moody's and S&P). For securities where the ratings assigned by the major credit agencies are not equivalent, the second lowest rating assigned is used. For those securities where ratings by the major credit rating agencies are not available, which does not represent a significant amount of our total fixed maturity AFS securities, we base the ratings disclosed upon internal ratings.
None of these investments included any direct investments in subprime lenders or
mortgages. We are not aware of material exposure to subprime loans in our
alternative investment portfolio.
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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) $ 1,493 $ 1,537 $ 59 $ 62 $ 1,552 $ 1,599
Rating
AAA $ 1,252 $ 1,299 $ 11 $ 11 $ 1,263 $ 1,310
AA 241 238 43 45 284 283
A - - 5 6 5 6
Total by rating (1)(2)(3) $ 1,493 $ 1,537 $ 59 $ 62 $ 1,552 $ 1,599
Origination Year
2011 and prior $ 12 $ 14 $ 11 $ 14 $ 23 $ 28
2012 14 14 - - 14 14
2013 95 96 - - 95 96
2014 13 13 - - 13 13
2015 25 26 - - 25 26
2016 112 115 4 4 116 119
2017 322 342 - - 322 342
2018 168 184 - - 168 184
2019 299 312 - - 299 312
2020 238 229 5 5 243 234
2021 195 192 39 39 234 231
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
1.5% 1.3% (1)Does not include the amortized cost 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$56 million of multiple property CMBS and$81 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$56 million of multiple property CMBS and$81 million of single property CMBS. (3)Based upon the rating designations determined and provided by the major credit rating agencies (Fitch, Moody's and S&P). For securities where the ratings assigned by the major credit rating agencies are not equivalent, the second lowest rating assigned is used. For those securities where ratings by the major credit rating agencies are not available, which does not represent a significant amount of our total fixed maturity AFS securities, we base the ratings disclosed upon internal ratings.
As of
maturity AFS exposure to monoline insurers was
respectively.
Composition by Industry Categories of our Unrealized Losses on
AFS Securities
When considering unrealized gain and loss information, it is important to
recognize that the information relates to the position of securities at a
particular point in time and may not be indicative of the position of our
investment portfolios subsequent to the balance sheet date. Further, because the
timing of the recognition of realized investment gains and losses through the
selection of which securities are sold is largely at management's discretion, it
is important to consider the information provided below within the context of
the overall unrealized gain or loss position of our investment portfolios. These
are important considerations that should be included in any evaluation of the
potential effect of securities in an unrealized loss position on our future
earnings.
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The composition by industry categories of all fixed maturity AFS securities in an unrealized loss position (in millions) as ofDecember 31, 2021 , was as follows: % % Net Net Gross Gross % Amortized Amortized Unrealized Unrealized Fair Fair Cost Cost Losses Losses Value Value ABS$ 4,697 24.5% $ 52 11.5%$ 4,645 24.7% Healthcare 1,542 8.0% 48 10.6% 1,494 8.0% Technology 1,036 5.4% 34 7.5% 1,002 5.3% Banking 1,500 7.8% 30 6.7% 1,470 7.8% Electric 601 3.1% 22 4.9% 579 3.1% Food and beverage 802 4.2% 19 4.2% 783 4.2% Brokerage asset management 611 3.2% 16 3.5% 595 3.2% Non agency CMBS 497 2.6% 14 3.1% 483 2.6% Local authorities 567 3.0% 12 2.7% 555 3.0% Pharmaceuticals 458 2.4% 12 2.7% 446 2.4% Aerospace and defense 367 1.9% 12 2.7% 355 1.9% Industrial - other 391 2.0% 12 2.7% 379 2.0% Finance companies 143 0.7% 11 2.4% 132 0.7% Property and casualty 250 1.3% 10 2.2% 240 1.3% Manufacturing 440 2.3% 10 2.2% 430 2.3% Retail 324 1.7% 9 1.9% 315 1.7% Integrated 160 0.8% 9 1.9% 151 0.8% Transportation services 314 1.6% 9 2.0% 305 1.6% Life 328 1.7% 9 2.0% 319 1.7% Automotive 416 2.2% 7 1.6% 409 2.2% Metals and mining 242 1.3% 7 1.6% 235 1.3% Project finance 163 0.8% 7 1.6% 156 0.8% Natural gas 221 1.2% 7 1.6% 214 1.1% Government owned, no guarantee 62 0.3% 5 1.1% 57 0.3% Industries with unrealized losses less than$5 million 3,078 16.0% 68
15.1% 3,010 16.0%
Total by industry
Total by industry as a percentage of total fixed maturity AFS securities 18.3% 100.0% 15.8% As ofDecember 31, 2021 , the net amortized cost and fair value of securities subject to enhanced analysis and monitoring for potential changes in unrealized loss position was$102 million and$94 million , respectively. 84
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Mortgage Loans on Real Estate
The following tables summarize key information on mortgage loans on real estate
(in millions):
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 $ 17,089 $ 902 $ 17,991
As of December 31, 2020
Commercial Residential Total %
Credit Quality Indicator
Current $ 16,230 $ 666 $ 16,896 99.6%
Delinquent (1) - 42 42 0.2%
Foreclosure (2) - 29 29 0.2%
Total mortgage loans on real estate before
allowance 16,230 737 16,967 100.0%
Allowance for credit losses (187 ) (17 )
(204 )
Total mortgage loans on real estate
(1)As of
mortgage loans were delinquent. As of
loans and 72 residential mortgage loans were delinquent.
(2)As of
mortgage loans were in foreclosure. As of
mortgage loans and 75 residential mortgage loans were in foreclosure.
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 . As ofDecember 31, 2020 , there were 4 specifically identified impaired commercial mortgage loans on real estate with an aggregate carrying value of$1 million and 76 specifically identified impaired residential mortgage loans on real estate with an aggregate carrying value of$34 million . The total outstanding principal and interest on commercial mortgage loans on real estate that were two or more payments delinquent as ofDecember 31, 2021 and 2020, was less than$1 million . The total outstanding principal and interest on residential mortgage loans on real estate that were three or more payments delinquent as ofDecember 31, 2021 and 2020, was$14 million and$41 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,
2021 2020
Segment
Annuities $ 6,732 $ 5,934
Retirement Plan Services 4,326 4,152
Life Insurance 3,890 3,979
Group Protection 1,435 1,374
Other Operations 1,608 1,324
Total mortgage loans on real estate
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The composition of commercial mortgage loans (in millions) by property type,
geographic region and state is shown below:
As of December 31, 2021 As of December 31, 2021
Carrying Carrying
Value % Value %
Property Type State
Apartment $ 5,820 34.1% CA $ 4,479 26.2%
Industrial 3,832 22.4% TX 1,549 9.1%
Office building 3,783 22.2% NY 1,060 6.2%
Retail 2,571 15.0% GA 841 4.9%
Other commercial 649 3.8% FL 711 4.3%
Hotel/motel 245 1.4% MD 704 4.1%
Mixed use 189 1.1% PA 701 4.1%
Total $ 17,089 100.0% WA 690 4.0%
Geographic Region TN 575 3.4%
Pacific 5,483 32.1% VA 544 3.2%
South Atlantic 3,690 21.6% OH 504 2.9%
Middle Atlantic 2,037 11.9% AZ 489 2.9%
West South Central 1,690 9.9% NC 445 2.6%
East North Central 1,273 7.4% IL 341 2.0%
Mountain 1,196 7.0% WI 325 1.9%
East South Central 698 4.1% UT 315 1.8%
West North Central 493 2.9% OR 314 1.8%
New England 486 2.8% Non U.S. 43 0.2%
Non-U.S. 43 0.3% All other states 2,459 14.4%
Total $ 17,089 100.0% Total $ 17,089 100.0%
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, 2021
Commercial Residential Total %
Principal Repayment Year
2022 $ 859 $ 12 $ 871 4.8%
2023 768 12 780 4.3%
2024 1,182 13 1,195 6.6%
2025 1,164 13 1,177 6.5%
2026 1,439 15 1,454 8.0%
2027 and thereafter 11,770 827 12,597 69.8%
Total $ 17,182 $ 892 $ 18,074 100.0%
See Note 4 for information regarding our loan-to-value and debt-service coverage
ratios and our allowance for credit losses.
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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,
2021 2020 2019
Annuities $ 63 $ 23 $ 2
Retirement Plan Services 38 14 2
Life Insurance 522 140 15
Group Protection 41 15 2
Other Operations 15 5 1
Total (1) $ 679 $ 197 $ 22
(1)Includes net investment income on the alternative investments supporting the
required statutory surplus of our insurance businesses.
As ofDecember 31, 2021 and 2020, alternative investments included investments in 311 and 271 different partnerships, respectively, and the portfolio represented approximately 2% and 1% of total investments, respectively. The partnerships do not represent off-balance sheet financing and generally involve several third-party partners. Some of our partnerships contain capital calls, which require us to contribute capital upon notification by the general partner. These capital calls are contemplated during the initial investment decision and are planned for well in advance of the call date. The capital calls are not material in size and are not material to our liquidity. Alternative investments are accounted for using the equity method of accounting and are included in other investments on our Consolidated Balance Sheets.
Non-Income Producing Investments
As of
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:
For the Years Ended December 31,
2021 2020 2019
Net Investment Income
Fixed maturity AFS securities $ 4,351 $ 4,334 $ 4,281
Trading securities 167 202 191
Equity securities 3 3 4
Mortgage loans on real estate 680 677 629
Real estate - 1 1
Policy loans 115 125 129
Invested cash - 12 40
Commercial mortgage loan prepayment
and bond make-whole premiums (1) 199 82 119
Alternative investments (2) 679 197 22
Consent fees 10 7 8
Other investments 64 45 30
Investment income 6,268 5,685 5,454
Investment expense (153 ) (175 ) (231 )
Net investment income $ 6,115 $ 5,510 $ 5,223
(1)See "Commercial Mortgage Loan Prepayment and Bond Make-Whole Premiums" below
for additional information.
(2)See "Alternative Investments" above for additional information.
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For the Years Ended December
31,
2021 2020 2019
Interest Rate Yield
Fixed maturity AFS securities, mortgage loans on
real estate and other, net of investment expenses 3.92% 4.12%
4.35%
Commercial mortgage loan prepayment and bond make-whole premiums 0.15% 0.06%
0.10%
Alternative investments 0.51% 0.16%
0.02%
Net investment income yield on invested assets 4.58% 4.34%
4.47%
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 our consolidated
financial statements. For information regarding reserve financing and LOC
expenses from inter-company reinsurance agreements, see "Liquidity and Capital
Resources - Consolidated Sources and Uses of Liquidity and Capital - 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 A.M. Best rating of A+ or greater or an S&P
rating of AA- or better and a specified RBC percentage (or similar capital ratio
measure). If the reinsurer does not have these ratings, we may require them to
post collateral as described below; however, we may waive the collateral
requirements based on the facts and circumstances. In addition, we may require
collateral from a reinsurer to mitigate credit/collectability risk. Typically,
in such cases, the reinsurer must either maintain minimum specified ratings and
RBC ratios or establish the specified quality and quantity of collateral.
Similarly, we have also required collateral in connection with books of business
sold pursuant to indemnity reinsurance agreements.
Reinsurers, including affiliated reinsurers, that are not licensed, accredited
or authorized in the state of domicile of the reinsured ("ceding company"),
i.e., unauthorized reinsurers, are required to post statutorily prescribed forms
of collateral for the ceding company to receive reinsurance credit. The three
primary forms of collateral are: (i) qualifying assets held in a reserve credit
trust; (ii) irrevocable, unconditional, evergreen LOCs issued by a qualified
U.S. financial institution; and (iii) assets held by the ceding company in a
segregated funds withheld account. Collateral must be maintained in accordance
with the rules of the ceding company's state of domicile and must be readily
accessible by the ceding company to cover claims under the reinsurance
agreement. Accordingly, our insurance subsidiaries require unauthorized
reinsurers to post acceptable forms of collateral to support their reinsurance
obligations to us.
Effective October 1, 2021 , we entered into a reinsurance agreement with
Resolution Life to reinsure liabilities under a block of in-force executive
benefit and universal life policies. For more information, see "Liquidity and
Capital Resources - Holding Company Sources and Uses of Liquidity and Capital -
Return of Capital to Common Stockholders" below and Note 8.
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As a result of our modified coinsurance agreement with Athene to reinsure fixed annuity products, we recorded a$5.0 billion deposit asset reflected within other assets on our Consolidated Balance Sheets as ofDecember 31, 2021 . For additional information, see Note 8. Our amounts recoverable from reinsurers represent receivables from and reserves ceded to reinsurers. As ofDecember 31, 2021 , 86%, or$17.5 billion , of our total reinsurance recoverable was secured by collateral for our benefit. Of this amount,$17.2 billion was held by reinsurers in reserve credit trusts (such reserve credit trusts are held by non-affiliated reinsurers; therefore, they are not reflected on our Consolidated Balance Sheets),$2.1 billion was reflected as funds withheld reinsurance liabilities on our Consolidated Balance Sheets as ofDecember 31, 2021 , although only$143 million can be utilized as collateral due to excess funds withheld above the reinsurance recoverable from our reinsurers, and$157 million was secured by LOCs for which we are the beneficiary, an off-balance sheet arrangement. We regularly evaluate the financial condition of our reinsurers and monitor concentration risk with our largest reinsurers. 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,The Lincoln National Life Insurance Company ("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$2.9 billion of statutory reserves as ofDecember 31, 2021 . LNL must maintain anA.M. Best financial strength rating of at least B++, an S&P financial strength rating of at least BBB- and a Moody's financial strength rating of at least Baa3. This arrangement may require LNL to place assets in trust equal to the relevant statutory reserves. Under LLANY's largest indemnity reinsurance arrangement, we held approximately$1.1 billion of statutory reserves as ofDecember 31, 2021 . LLANY must maintain anA.M. Best financial strength rating of at least B+, an S&P financial strength rating of at least BB+ and a Moody's financial strength rating of at least Ba1, as well as maintain an RBC ratio of at least 160% or an S&P capital adequacy ratio of 100%, or the cedent may recapture the business. Under two other LLANY arrangements, by which we established$655 million of statutory reserves as ofDecember 31, 2021 , LLANY must maintain anA.M. Best financial strength rating of at least B++, an S&P financial strength rating of at least BBB- and a Moody's financial strength rating of at least Baa3. One of these arrangements also requires LLANY to maintain an RBC ratio of at least 185% or an S&P capital adequacy ratio of 115%. Each of these arrangements may require LLANY to place assets in trust equal to the relevant statutory reserves. See "Item 1. Business - Financial Strength Ratings" for a description of our financial strength ratings. For more information about reinsurance, see Notes 8 and 13 and "Liquidity and Capital Resources - Holding Company Sources and Uses of Liquidity and Capital -Insurance Subsidiaries' Statutory Capital and Surplus" below. For factors that could cause actual results to differ materially from those set forth in this section, see "Part I - Item 1A. Risk Factors" and "Forward-Looking Statements - Cautionary Language" above. LIQUIDITY AND CAPITAL RESOURCES
Overview
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.
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 liquidity and 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.
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. Disruptions, uncertainty or volatility in the
capital and credit markets, including any current or future impacts related to
the COVID-19 pandemic, may materially affect our business operations and results
of operations. These poor market conditions may reduce our insurance
subsidiaries' statutory surplus and RBC requiring them to retain more capital
and may pressure their ability to pay dividends to LNC, which may lead us to
take steps to preserve or raise additional capital. We monitor and adjust our
liquidity and capital plans in light of market conditions, as well as changing
needs and opportunities. Based on the sources of liquidity available to us as
discussed below, we currently expect to be able to
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meet the holding company's ongoing cash needs and to have sufficient capital to offer downside protection. For factors that could cause actual results to differ materially from those set forth in this section and that could affect our expectations for liquidity and capital, see "Part I - Item 1A. Risk Factors" and "Forward-Looking Statements - Cautionary Language" above. For a discussion of the COVID-19 pandemic, see "Introduction - Executive Summary" above and "Part I - Item 1A. Risk Factors - Market Conditions - The impacts of the COVID-19 pandemic have adversely affected and are expected to continue to adversely affect our business and results of operations, and the future impacts of the COVID-19 pandemic on the company's business, results of operations and financial condition remain uncertain."
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 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 stockholders, to repurchase our stock and to repay debt. Our operating activities provided (used) cash of$151 million ,$534 million and$(2.7) billion in 2021, 2020 and 2019, 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 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,
2021 2020 2019
Dividends from Subsidiaries
LNL $ 1,910 $ 660 $ 600
First Penn-Pacific Life Insurance
Company 45 - -
Lincoln Investment Management
Company 20 25 30
Lincoln National Management
Corporation 10 5 5
Lincoln National Reinsurance
Company (Barbados) Limited 75 150 195
Total dividends from subsidiaries
Interest from Subsidiaries Interest on inter-company notes$ 111 $ 123 $ 132 See Note 19 for information on the increase in dividends from LNL. 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, 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. 90
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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.Indiana law also provides that following the payment of any dividend, the insurer's contract holders' surplus must be reasonable in relation to its outstanding liabilities and adequate for its financial needs, and permits the Commissioner to bring an action to rescind a dividend that violates these standards. In the event the Commissioner determines that the contract holders' surplus of one subsidiary is inadequate, the Commissioner could use his or her broad discretionary authority to seek to require us to apply payments received from another subsidiary for the benefit of that insurance subsidiary. We expect our direct domestic insurance subsidiaries could pay dividends to LNC of approximately$865 million in 2022 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."
Our insurance subsidiaries must maintain certain regulatory capital levels. We utilize the RBC ratio as a primary measure of the capital adequacy of our insurance subsidiaries. The RBC ratio is an important factor in the determination of the credit and financial strength ratings of LNC and its subsidiaries, as a reduction in our insurance subsidiaries' surplus may affect their RBC ratios and dividend-paying capacity. For a discussion of RBC ratios, see "Part I - Item 1. Business - Regulatory - Insurance Regulation -Risk-Based Capital ." Our regulatory capital levels are also affected by statutory accounting rules, which are subject to change by each applicable insurance regulator. Our term products and UL products containing secondary guarantees require reserves calculated pursuant to XXX and AG38, respectively. Our insurance subsidiaries employ strategies to reduce the strain caused by XXX and AG38 by reinsuring the business to reinsurance captives. Our captive reinsurance and reinsurance subsidiaries provide a mechanism for financing a portion of the excess reserve amounts in a more efficient manner 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 ofDecember 31, 2021 , was approximately$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$4.0 billion to finance a portion of the excess reserves as ofDecember 31, 2021 ; 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 contracts and riders are sensitive to changes in the equity markets and interest rates, and are affected by the level of account values relative to the level of any guarantees, product design and reinsurance arrangements. As a result, the relationship between reserve changes and equity market performance is non-linear during any given reporting period. Market conditions greatly influence the ultimate capital required due to its effect on the valuation of reserves and derivative assets hedging these reserves. We also utilize inter-company reinsurance arrangements to manage our hedge program for variable annuity guarantees. 91
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Changes in equity markets may also affect the capital position of our insurance subsidiaries. We may decide to reallocate available capital among our insurance subsidiaries, including our captive reinsurance subsidiaries, which would result in different RBC ratios for our insurance subsidiaries. In addition, changes in the equity markets can affect the value of our variable annuity and variable universal life insurance separate accounts. When the market value of our separate account assets increases, the statutory surplus within our insurance subsidiaries also increases. Contrarily, when the market value of our separate account assets decreases, the statutory surplus within our insurance subsidiaries may also decrease, which may affect RBC ratios, and in the case of our separate account assets becoming less than the related product liabilities, we must allocate additional capital to fund the difference. We continue to analyze the use of our existing captive reinsurance structures, as well as additional third-party reinsurance arrangements, and our current hedging strategies relative to managing the effects of equity markets and interest rates on the statutory reserves, statutory capital and the dividend capacity of our life insurance subsidiaries.
Debt
Although our subsidiaries currently generate adequate cash flow to meet the
needs of our normal operations, periodically LNC may issue debt to maintain
ratings and increase liquidity, as well as to fund internal growth, acquisitions
and the retirement of its debt.
Details underlying our debt activities (in millions) for the year ended
December 31, 2021, were as follows:
Maturities, Change
Repayments in Fair
Beginning and Value Other Ending
Balance Issuance Refinancing Hedges Changes (1) Balance
Short-Term Debt
Current maturities of
long-term debt $ - $ - $ - $ - $ 300 $ 300
Long-Term Debt
Senior notes $ 5,225 $ - $ - $ (46 ) $ (312 ) $ 4,867
Term loans 249 - - - 1 250
Subordinated notes (2) - 995 - - - 995
Capital securities (2) 1,208 - (995 ) - - 213
Total long-term debt $ 6,682 $ 995 $ (995 ) $ (46 ) $ (311 ) $ 6,325
(1)Includes the non-cash reclassification of long-term debt to current
maturities of long-term debt, accretion (amortization) of discounts and
premiums, amortization of debt issuance costs and amortization of adjustments
from discontinued hedges, as applicable.
(2)To hedge the variability in rates, we purchased interest rate swaps to lock in a fixed rate of approximately 5% over the remaining terms of the subordinated notes and capital securities. During August 2021, we exchanged $562 million of our 7.00% capital securities due 2066 for $562 million of floating rate subordinated notes due 2066, and $433 million of our 6.05% capital securities due 2067 for $433 million of floating rate subordinated notes due 2067. The subordinated notes contain benchmark transition provisions that will allow us to determine the interest rate payable on the subordinated notes based on a new reference rate once LIBOR is unavailable. See Note 2 for additional information on reference rate reform. For risks related to the elimination of LIBOR, see "Part I - Item 1A. Risk Factors - Investments - The elimination of LIBOR may affect the value of certain derivatives and floating rate securities we hold or have issued." In connection with the exchange offer, we solicited and received the requisite number of consents to amend the indentures governing the remaining outstanding capital securities to eliminate various terms and conditions and other provisions, including the covenant that required us to make interest payments in accordance with an alternative coupon satisfaction mechanism upon the occurrence of certain trigger events. LNC made interest payments to service debt of $294 million, $277 million and $288 million for the years ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021, we have pre-funded our $300 million senior notes due 2022.
For additional information about our short-term and long-term debt and our
credit facilities, see Note 12.
Capital Contributions to Subsidiaries
LNC made capital contributions to subsidiaries of $65 million, $518 million and
$50 million for the years ended December 31, 2021, 2020 and 2019, respectively.
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Return of Capital to Common Stockholders
One of our primary goals is to provide a return to our common stockholders
through share price accretion, dividends and stock repurchases. In determining
dividends, the Board of Directors takes into consideration items such as current
and expected earnings, capital needs, rating agency considerations and
requirements for financial flexibility. On November 2, 2021, our Board of
Directors approved an increase to the quarterly dividend on our common stock
from $0.42 per share to $0.45 per share. The amount and timing of share
repurchases depends on key capital ratios, rating agency expectations, the
generation of free cash flow and an evaluation of the costs and benefits
associated with alternative uses of capital. Free cash flow for the holding
company generally represents the amount of dividends and interest received from
subsidiaries less interest paid on debt.
The proceeds of $1.2 billion from the reinsurance agreement that became
effective October 1, 2021, will predominantly be used to fund incremental share
repurchases, with the remainder to be used for general corporate purposes,
primarily paying down debt. As of December 31, 2021, we have completed $500
million in incremental share repurchases, and an additional $400 million in
incremental repurchases is expected to be completed by the end of the first
quarter of 2022. See Note 8 herein for additional information. For additional
information regarding share repurchases, see "Item 5. Market for Registrant's
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities - (c) Issuer Purchases of Equity Securities."
Details underlying return of capital to common stockholders (in millions) were
as follows:
For the Years Ended December 31,
2021 2020 2019
Dividends to common stockholders $ 319 $ 311 $ 298
Repurchase of common stock 1,105 275 640
Total cash returned to common
stockholders $ 1,424 $ 586 $ 938
Number of shares repurchased 16.2 4.9 10.4
Alternative Sources of Liquidity
Inter-Company Cash Management Program
In order to manage our capital more efficiently, we have an inter-company cash management program where certain subsidiaries can lend to or borrow from the holding company to meet short-term borrowing needs. The cash management program is essentially a series of demand loans between LNC and participating subsidiaries that reduces overall borrowing costs by allowing LNC and its subsidiaries to access internal resources instead of incurring third-party transaction costs. As of December 31, 2021, the holding company had a net outstanding receivable (payable) of $168 million from (to) certain subsidiaries resulting from loans made by subsidiaries in excess of amounts placed (borrowed) by the holding company and subsidiaries in the inter-company cash management account. Any change in holding company cash management program balances is offset by the immediate and equal change in holding company cash and invested cash. Loans under the cash management program are permitted under applicable insurance laws subject to certain restrictions. For ourIndiana -domiciled insurance subsidiary, the borrowing and lending limit is currently 3% of the insurance company's admitted assets as of its most recent year end. For ourNew York -domiciled insurance subsidiary, it may borrow from LNC less than 2% of its admitted assets as of its most recent year end but may not lend any amounts to LNC.
Facility Agreement for Senior Notes Issuance
LNC entered into a facility agreement in 2020 with aDelaware trust that gives LNC the right over a 10-year period to issue, from time to time, up to $500 million of 2.330% senior notes to the trust in exchange for a corresponding amount ofU.S. Treasury securities held by the trust. By agreeing to purchase the 2.330% senior notes in exchange forU.S. Treasury securities upon exercise of the issuance right, the trust will provide a source of liquid assets for the Company. The issuance right will be exercised automatically in full upon our failure to make certain payments to the trust, if the failure to pay is not cured within 30 days, or upon certain bankruptcy events involving LNC. We are also required to exercise the issuance right in full if our consolidated stockholders' equity (excluding AOCI) falls below $2.75 billion, subject to adjustment from time to time in certain cases, and upon certain other events described in the facility agreement. For additional information, see Note 12.
Federal Home Loan Bank
Our primary insurance subsidiary, LNL, is a member of the Federal Home Loan Bank
("FHLB") of Indianapolis ("FHLBI"). Membership allows LNL access to the FHLBI's
financial services, including the ability to obtain loans and to issue funding
agreements as an alternative source of liquidity that are collateralized by
qualifying mortgage-related assets, agency securities or U.S. Treasury
securities. Borrowings under this facility are subject to the FHLBI's discretion
and require the availability of qualifying assets at LNL. As of December 31,
2021, LNL had an estimated maximum borrowing capacity of $7.0 billion under the
FHLBI facility and maximum available borrowing based on qualifying assets of
$4.1 billion. As of December 31, 2021, LNL had outstanding borrowings of
$3.1 billion under
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this facility reported within payables for collateral on investments on the Consolidated Balance Sheets. LLANY is a member of theFederal Home Loan Bank of New York ("FHLBNY") with an estimated maximum borrowing capacity of $750 million. Borrowings under this facility are subject to the FHLBNY's discretion and require the availability of qualifying assets at LLANY. As of December 31, 2021, LLANY had no outstanding borrowings under this facility. For additional information, see "Payables for Collateral on Investments" in Note 4.
Securities Lending Programs and Repurchase Agreements
Our insurance subsidiaries, by virtue of their general account fixed-income investment holdings, can access liquidity through securities lending programs and repurchase agreements. As of December 31, 2021, our insurance subsidiaries had securities pledged under securities lending agreements with a carrying value of $241 million. In addition, our insurance and reinsurance subsidiaries had access to $1.75 billion through committed repurchase agreements, of which $25 million was utilized as of December 31, 2021. The cash received in our securities lending programs and repurchase agreements is typically invested in cash and invested cash or fixed maturity AFS securities. For additional information, see "Payables for Collateral on Investments" in Note 4.
Collateral on Derivative Contracts
Our cash flows associated with collateral received from counterparties (when we
are in a net collateral payable position) and posted with counterparties (when
we are in a net collateral receivable position) change as the market value of
the underlying derivative contract changes. The net collateral position depends
on changes in interest rates and equity markets related to the amount of the
exposures hedged. As of December 31, 2021, we were in a net collateral payable
position of $4.9 billion compared to $1.9 billion as of December 31, 2020. In
the event of adverse changes in fair value of our derivative instruments, we may
need to post collateral with a counterparty. If we do not have sufficient high
quality securities or cash and invested cash to provide as collateral, we have
committed liquidity sources through facilities that can provide up to
$1.25 billion of additional liquidity to help meet collateral needs. Access to
such facilities is contingent upon interest rates having achieved certain
threshold levels. In addition to these facilities, we have the facility
agreement for senior notes issuance, the FHLB facilities and the repurchase
agreements discussed above as well as the five-year revolving credit facility
discussed in Note 12 to leverage that would be eligible for collateral posting.
For additional information, see "Credit Risk" in Note 5.
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Material Cash Outflows
Details underlying our estimated material cash outflows as of December 31, 2021,
were as follows:
Less More
Than 1 - 3 3 - 5 Than
1 Year Years Years 5 Years Total
Future contract benefits and other
contract holder
obligations (1) $ 25,153 $ 50,032 $ 51,137 $ 432,232 $ 558,554
Short-term and long-term debt (2) 300 750 700 4,581 6,331
Reserve financing and LOC expenses
(3) 68 122 111 289 590
Payables for collateral on
investments (4) 3,371 - - - 3,371
Investment commitments (5) 1,720 296 681 458 3,155
Operating leases (6) 46 73 44 27 190
Finance leases (6) 72 96 11 - 179
Certain financing arrangements (7) 8 106 279 4 397
Retirement and other plans (8) 111 214 207 481 1,013
Total $ 30,849 $ 51,689 $ 53,170 $ 438,072 $ 573,780
(1)Estimates are based on financial projections over 40 years and are not
discounted for the time value of money. New business issued or acquired,
business ceded or sold, changes to or variances from actuarial assumptions and
economic conditions will cause these amounts to change over time, possibly
materially. See Note 1 for details of what these liabilities include and
represent.
(2)Represents principal amounts of debt only. See Note 12 for additional
information.
(3)Estimates are based on the level of capacity we expect to utilize during the
life of the LOCs and other reserve financing arrangements. See Note 12 for
additional information.
(4)Excludes collateral payable held for derivative investments. See Note 4 for
additional information.
(5)See Note 4 for additional information.
(6)See Note 13 for additional information.
(7)Represents certain financing arrangements that did not meet the requirements to be classified as a sale-leaseback arrangement. See Note 13 for additional information. (8)Includes anticipated funding for benefit payments for our retirement and postretirement plans through 2031 and known payments under deferred compensation arrangements. In addition to these benefit payments, we periodically fund the employees' defined benefit plans. See Note 17 for additional information.
Ratings
Financial Strength Ratings
See "Part I - Item 1. Business - Financial Strength Ratings" for information on
our financial strength ratings.
Credit Ratings
Our indicative credit ratings published by the primary rating agencies are set
forth below. Securities are rated at the time of issuance so actual ratings may
differ from the indicative ratings. There may be other rating agencies that also
provide credit ratings, which we do not disclose in our reports. Each rating
should be evaluated independently of any other rating. All ratings are on
outlook stable except for the ratings assigned by S&P, which are on outlook
negative.
As of February 11, 2022, our indicative long-term credit ratings as published by
the principal rating agencies that rate our long-term credit are indicated in
the following table.
A.M. Best Fitch Moody> S&P
"aaa to c" "AAA to D" "Aaa to C" "AAA to D"
a- BBB+ Baa1 A-
(7th of 22) (8th of 21) (8th of 21) (7th of 22)
95
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Table of Contents
As of February 11, 2022, our indicative short-term credit ratings as published by the principal rating agencies that rate our short-term credit are indicated in the following table.
"AMB-1+ to AMB-4" "F1 to D" "P-1 to NP" "A-1+ to D"
AMB-1 F2 P-2 A-2
(2nd of 6) (3rd of 8) (2nd of 4) (3rd of 7)
All of our credit ratings are subject to revision or withdrawal at any time by the rating agencies, and therefore, no assurance can be given that we can maintain these ratings. A downgrade of our credit ratings could affect our ability to raise additional debt with terms and conditions similar to our current debt, and accordingly, likely increase our cost of capital. In addition, a downgrade of these ratings could make it more difficult to raise capital to refinance any maturing debt obligations, to support business growth at our insurance subsidiaries and to maintain or improve the current financial strength ratings of our insurance subsidiaries described in "Part I - Item 1. Business - Financial Strength Ratings." If our current financial strength ratings or credit ratings were downgraded in the future, terms in our derivative agreements may be triggered, which could negatively affect overall liquidity. For the majority of our derivative counterparties, there is a termination event with respect to LNC if its long-term senior debt ratings drop below BBB-/Baa3 (S&P/Moody's); or with respect to LNL if its financial strength ratings drop below BBB-/Baa3 (S&P/Moody's). In addition, contractual selling agreements with intermediaries could be negatively affected, which could have an adverse effect on overall sales of annuities, life insurance and investment products. See "Part I - Item 1A. Risk Factors - Covenants and Ratings - A downgrade in our financial strength or credit ratings could limit our ability to market products, increase the number or value of policies being surrendered and/or hurt our relationships with creditors" for more information.
Medicare counseling coming to Etowah
AMERICAN INTERNATIONAL GROUP, INC. – 10-K – | Management's Discussion and Analysis of Financial Condition and Results of Operations
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