LINCOLN NATIONAL LIFE INSURANCE CO /IN/ – 10-K – Management's Narrative Analysis of the Results of Operations
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Forward-Looking Statements - Cautionary Language 33
Introduction 34
Critical Accounting Policies and Estimates 35
Results of Consolidated Operations 44
Results of Life Insurance 45
Results of Annuities 46
Results of Group Protection 47
Results of Retirement Plan Services 48
Results of Other Operations 49
Realized Gain (Loss) 50
Reinsurance 51
Liquidity and Capital Resources 53
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The following Management's Narrative Analysis of the Results of Operations
("MNA") is intended to help the reader understand the financial condition as of
operations in 2022 compared to 2021 of
Company
year-to-year comparisons between 2021 and 2020 that are not included in this
Form 10-K can be found in "Part II - Item 7. Management's Narrative Analysis of
the Results of Operations" in our 2021 Form 10-K. Unless otherwise stated or the
context otherwise requires, "LNL," "Company," "we," "our" or "us" refers to
Lincoln National Life Insurance Company
is a wholly-owned subsidiary of Lincoln National Corporation ("LNC").
See "Part I - Item 1. Business" and Note 1 for a description of the business.
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
readers with a more valuable measure of our performance because it better
reveals trends in our business.
The MNA is provided as a supplement to, and should be read in conjunction with,
the consolidated financial statements and the accompanying notes to the
consolidated financial statements ("Notes") presented in "Part II - Item 8.
Financial Statements and Supplementary Data," as well as "Part I - Item 1A. Risk
Factors" above.
Management's Narrative Analysis is presented pursuant to General Instruction
I(2)(a) of Form 10-K in lieu of Management's Discussion and Analysis of
Financial Condition and Results of Operations.
FORWARD-LOOKING STATEMENTS - CAUTIONARY LANGUAGE
Certain statements made in this report and in other written or oral statements
made by us or on our behalf are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). A
forward-looking statement is a statement that is not a historical fact and,
without limitation, includes any statement that may predict, forecast, indicate
or imply future results, performance or achievements. Forward-looking statements
may contain words like: "anticipate," "believe," "estimate," "expect,"
"project," "shall," "will" and other words or phrases with similar meaning in
connection with a discussion of future operating or financial performance. In
particular, these include statements relating to future actions, trends in our
businesses, prospective services or products, future performance or financial
results and the outcome of contingencies, such as legal proceedings. We claim
the protection afforded by the safe harbor for forward-looking statements
provided by the PSLRA.
Forward-looking statements are subject to risks and uncertainties. Actual
results could differ materially from those expressed in or implied by such
forward-looking statements due to a variety of factors, including:
?Weak general economic and business conditions that may affect demand for our
products, account values, investment results, 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;
?Legislative, regulatory or tax changes that affect the cost of, or demand for,
our products, the required amount of reserves and/or surplus or our ability to
conduct business;
?The impact of
capital;
?The impact of regulations adopted by the
("SEC"), the
self-regulatory organizations relating to the standard of care owed by
investment advisers and/or broker-dealers that could affect our distribution
model;
?The impact of new and emerging privacy regulations that may lead to increased
compliance costs and reputation risk;
?Increasing scrutiny and evolving expectations and regulations regarding
environmental, social and governance ("ESG") matters that may adversely affect
our reputation and our investment portfolio;
?Actions taken by reinsurers to raise rates on in-force business;
?Declines in or sustained low interest rates causing a reduction in investment
income, the interest margins of our businesses and demand for our products;
?Rapidly increasing interest rates causing contract holders to surrender life
insurance and annuity policies, thereby causing realized investment losses;
?The impact of the implementation of the provisions of the European Market
Infrastructure Regulation relating to the regulation of derivatives
transactions;
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?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 products; a reduction of asset-based fees that we charge on
various investment and insurance products; and an increase in liabilities
related to guaranteed benefit riders of our variable annuity products;
?Ineffectiveness of our risk management policies and procedures;
?A deviation in actual experience regarding future persistency, mortality,
morbidity, interest rates or equity market returns from the assumptions used in
pricing our products and in establishing related insurance reserves, which may
reduce future earnings;
?Changes in accounting principles that may affect our financial statements;
?Lowering of one or more of our financial strength ratings;
?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 inability to realize or sustain the benefits we expect from, greater than
expected investments in, and the potential impact of efforts related to, our
strategic initiatives, including the Spark Initiative;
?The adequacy and collectability of reinsurance that we have obtained;
?Pandemics, acts of terrorism, war or other man-made and natural catastrophes
that may adversely impact liabilities for policyholder claims, affect our
businesses and increase the cost and availability of reinsurance;
?Competitive conditions, including pricing pressures, new product offerings and
the emergence of new competitors, that may affect the level of premiums and fees
that we can charge for our products;
?The unknown effect on our businesses resulting from evolving market preferences
and the changing demographics of our client base; and
?The unanticipated loss of key management, financial planners or wholesalers.
The risks and uncertainties included here are not exhaustive. Other sections of
this report and other reports that we file with the
factors that could affect our businesses and financial performance. 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.
We do not intend, and are under no obligation, to update any particular
forward-looking statement included in this document. See "Part I - Item 1A. Risk
Factors" included in this Annual Report on Form 10-K for a discussion of certain
risks relating to our business.
INTRODUCTION
COVID-19 Pandemic
The health, economic and business conditions precipitated by the worldwide
COVID-19 pandemic that emerged in 2020 continued to adversely affect our
business, results of operations and financial condition during 2022. While
various treatments and vaccines are now available, COVID-19 variants continue to
emerge, which could prolong or lead to increased hospitalization and death
rates. We continue to monitor
potential continuing impacts of the COVID-19 pandemic on our Life Insurance and
Group Protection segments. See "Results of Life Insurance" and "Results of Group
Protection" below for impacts from the COVID-19 pandemic.
Interest Rate Environment
Throughout 2022, the
range to combat inflation. In
additional 25 basis points increase, when it set the range at 4.50% to 4.75% and
reiterated its commitment to implement and maintain policy as needed to bring
inflation down. Additionally, the
balance sheet, which started in
securities, agency debt and agency mortgage-backed securities. As interest rates
rise, which improves the yield on our new money and floating rate investments,
we continue to be proactive in our investment strategies, product designs,
crediting rate strategies, expense management actions and overall
asset-liability practices to mitigate the risk of unfavorable consequences in
this interest rate environment.
We have provided disclosures around risks related to increases in interest rate
risk in "Part I - Item 1A. Risk Factors - Market Conditions - Increases in
interest rates may negatively affect our profitability, capital position and the
value of our investment portfolio and may also result in increased contract
withdrawals," "Critical Accounting Policies and Estimates - Annual Assumption
Review - Long-Term New Money Investment Yield Sensitivity" below and "Part II -
Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Interest
Rate Risk."
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Table of Contents Spark Initiative
In 2021, LNC formally communicated its new expense savings initiative, the Spark
Initiative, focused on driving efficiencies throughout all aspects of its
business, from leveraging automation to simplifying and improving process
efficiency. In addition, the Spark Initiative targets benefits beyond cost
savings including improving the way we work by focusing on reskilling and
upskilling our valuable employee base.
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We have identified the accounting policies below as critical to the
understanding of our results of operations and our financial condition. In
applying these critical accounting policies in preparing our financial
statements, management must use critical assumptions, estimates and judgments
concerning future results or other developments, including the likelihood,
timing or amount of one or more future events. Actual results may differ from
these estimates under different assumptions or conditions. On an ongoing basis,
we evaluate our assumptions, estimates and judgments based upon historical
experience and various other information that we believe to be reasonable under
the circumstances. For a detailed discussion of other significant accounting
policies, see Note 1.
The processes, judgments and estimates described herein relate to the accounting
standards in effect through
Accounting Standards Update 2018-12, Targeted Improvements to the Accounting for
Long-Duration Contracts, that significantly changed how we account for our
long-duration contracts both in-force and new business, including updating
assumptions used to measure the liability for future policy benefits for
traditional and limited-payment contracts, measuring of market risk benefits and
changing the amortization of deferred acquisition costs ("DAC") and DAC-like
intangibles. For more information, see Note 2.
The hedge program discussed below relates to the variable annuity hedge program
design in effect through
variable annuity hedge program that continues to focus on generating sufficient
assets to fund future claims with a goal of maximizing distributable earnings
and explicitly protecting capital.
DAC, VOBA, DSI and DFEL
Deferrals
Qualifying deferrable acquisition expenses are recorded as an asset on the
Consolidated Balance Sheets as DAC for products we sold during a period or VOBA
for books of business we acquired during a period. In addition, we defer costs
associated with DSI and revenues associated with DFEL. DSI is an asset included
within other assets on the Consolidated Balance Sheets, and when amortized,
increases interest credited on the Consolidated Statements of Comprehensive
Income (Loss). DFEL is a liability included within other contract holder funds
on the Consolidated Balance Sheets, and when amortized, increases fee income on
the Consolidated Statements of Comprehensive Income (Loss).
We incur certain costs that can be capitalized in the acquisition of insurance
contracts. Only those costs incurred that result directly from and are essential
to the successful acquisition of new or renewal insurance contracts may be
capitalized as deferrable acquisition costs. This determination of deferability
must be made on a contract-level basis. Some examples of acquisition costs that
are subject to deferral include the following:
?Employee, agent or broker commissions;
?Wholesaler production bonuses;
?Renewal commissions and bonuses to agents or brokers;
?Medical and inspection fees;
?Premium-related taxes and assessments; and
?A portion of the salaries and benefits of certain employees involved in the
underwriting, contract issuance and processing, medical and inspection and sales
force contract selling functions.
All other acquisition-related costs, including costs incurred by the insurer for
soliciting potential customers, market research, training, administration,
management of distribution and underwriting functions, unsuccessful acquisition
or renewal efforts and product development, are considered non-deferrable
acquisition costs and must be expensed in the period incurred.
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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. 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 universal life insurance ("UL") and variable universal life insurance
("VUL") policies and variable annuity and deferred fixed annuity contracts is
amortized over the expected lives of the contracts in relation to the incidence
of EGPs derived from the contracts.
EGPs vary based on a number of factors, including assumptions about policy
persistency, mortality, fee income, investment margins, expense margins and
realized gains and losses on investments. When actual gross profits are higher
in the period than EGPs, we recognize more amortization than planned. When
actual gross profits are lower in the period than EGPs, we recognize less
amortization than planned. In a calendar year where the gross profits for a
certain group of policies, or "cohorts," are negative, our actuarial
process limits, or floors, the amortization expense offset to zero. For a
discussion of the periods over which we amortize our DAC, VOBA, DSI and DFEL see
"DAC, VOBA, DSI and DFEL" in Note 1.
During the third quarter of each year, we conduct our comprehensive review of
the assumptions and projection models used for our EGPs underlying the
amortization of DAC, VOBA, DSI and DFEL that may result in unlocking of
assumptions. See "Annual Assumption Review" below for more information.
Reversion to the Mean
Because returns within the variable sub-accounts ("variable funds") have a
significant effect on the value of variable annuity and VUL products and the
fees earned on these accounts, EGPs could increase or decrease with movements in
variable fund returns. Significant and sustained changes in variable funds have
had and could in the future have an effect on DAC, VOBA, DSI and DFEL
amortization primarily within our Annuities and Retirement Plan Services
segments, as well as, to a lesser extent, our Life Insurance segment.
As variable fund returns do not move in a systematic manner, we reset the
baseline of account values from which EGPs are projected, which we refer to as
our reversion to the mean ("RTM") process. Under our RTM process, future EGPs
are projected using stochastic modeling of a large number of market scenarios in
conjunction with best estimates of lapse rates, interest rate spreads and
mortality rates to develop a statistical distribution of the present value of
future EGPs for our variable annuity products. Because variable fund returns are
unpredictable, the underlying premise of this process is that best estimate
projections of future EGPs need not be affected by random short-term and
insignificant deviations from expectations in variable fund returns. However,
long-term or significant deviations from expected variable fund returns require
a change to best estimate projections of EGPs and unlocking of DAC, VOBA, DSI,
DFEL and changes in future contract benefits. The statistical distribution is
designed to identify when the deviations from expected returns have become
significant enough to warrant a change of the future variable fund growth rate
assumption.
As discussed above, stochastic modeling is used to develop a range of reasonably
possible future EGPs. We compare the range of the present value of the future
EGPs from the stochastic modeling to that used in our amortization model. A set
of intervals around the mean of these scenarios is utilized to calculate two
separate statistical ranges of reasonably possible EGPs. These intervals are
then compared to the present value of the EGPs used in the amortization model.
If the present value of EGPs utilized for amortization were to exceed the
reasonable range of statistically calculated EGPs, a revision of the EGPs used
to calculate amortization would be considered. If a revision is deemed
necessary, future EGPs would be re-projected using the current account values at
the end of the period during which the revision occurred along with a long-term
variable fund growth rate assumption such that the re-projected EGPs would be
our best estimate of EGPs.
Our practice is not necessarily to unlock immediately after exceeding the first
of the two statistical ranges, but, rather, if we stay between the first and
second statistical range for several quarters, we would likely unlock.
Additionally, if we exceed the ranges as a result of a short-term market
reaction, we would not necessarily unlock. However, if the second statistical
range is exceeded for more than one quarter, it is likely that we would unlock.
While this approach reduces adjustments to DAC, VOBA, DSI and DFEL due to
short-term fluctuations, significant changes in variable fund returns that
extend beyond one or two quarters could result in a significant favorable or
unfavorable unlocking. Notwithstanding these intervals, if a severe decline or
increase in variable fund values were to occur or should
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other circumstances suggest that the present value of future EGPs no longer
represents our best estimate, we could determine that a revision of the EGPs is
necessary.
Our long-term variable fund growth rate assumption, which is used in the
determination of DAC, VOBA, DSI and DFEL amortization for the variable component
of our variable annuity and VUL products, is an immediate increase of
approximately 2% followed by growth going forward of 6.5% to 8.25% depending on
the block of business and reflecting differences in contract holder fund
allocations between fixed-income and equity-type investments. If we had unlocked
our RTM assumption as of
unlocking of approximately
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 stockholder's equity as a component of AOCI. The difference
between amortized cost and fair value due to credit loss impairment is
recognized in realized gain (loss) on the Consolidated Statements of
Comprehensive Income (Loss). We also invest in equity securities that are
carried at fair value with changes in fair value recognized in realized gain
(loss).
Investment Valuation
Our measurement of fair value is based on assumptions used by market
participants in pricing the asset or liability, which may include inherent risk,
restrictions on the sale or use of an asset or
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.
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 and
value measurement. It is possible that different valuation techniques and
models, other than those described above, could produce materially different
estimates of fair value.
When the volume and level of activity for an asset or liability has
significantly decreased in relation to normal market activity for the asset or
liability, we believe that the market is not active. Activities that may
indicate a market is not active include fewer recent transactions in the market,
price quotations that lack current information and/or vary substantially over
time or among market makers, limited public information, uncorrelated indexes
with recent fair values of assets and abnormally wide bid-ask spread. As of
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.
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
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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.
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.
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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 versus expected credit-related investment losses. These actual to
expected amortization adjustments could create volatility in net realized gains
and losses.
Derivatives
Derivatives are primarily used for hedging purposes. We hedge certain portions
of our exposure to interest rate risk, default risk, basis risk, equity market
risk, credit risk and foreign currency exchange risk by entering into derivative
transactions. We also purchase and issue financial instruments that contain
embedded derivative instruments. See "Future Contract Benefits" and "Other
Contract Holder Funds" below for information on embedded derivatives. Assessing
the effectiveness of these hedging programs and evaluating the carrying values
of the related derivatives often involve a variety of assumptions and estimates.
We carry our derivative instruments at fair value, which we determine through
valuation techniques or models that use market data inputs or independent broker
quotations. The fair values fluctuate from period to period due to the
volatility of the valuation inputs, including but not limited to swap interest
rates, interest and equity volatility and equity index levels, foreign currency
forward and spot rates, credit spreads and correlations, some of which are
significantly affected by economic conditions. The effect to revenue is reported
in realized gain (loss) and such amount along with the associated federal income
taxes is excluded from income (loss) from operations of our segments.
For more information on derivatives, see Notes 1 and 5. For more information on
market exposures associated with our derivatives, including sensitivities, see
"Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk."
Future Contract Benefits
Reserves
Reserves are the amounts that, with the additional premiums to be received and
interest thereon compounded annually at certain assumed rates, are calculated to
be sufficient to meet the various policy and contract obligations as they
mature. Generally, the reserves in excess of account value are reported within
future contract benefits on the Consolidated Balance Sheets. Establishing
adequate reserves for our obligations to contract holders requires assumptions
to be made that are intended to represent an estimation of experience for the
period that policy benefits are payable. If actual experience is better than or
equal to the assumptions, then reserves should be adequate to provide for future
benefits and expenses. If experience is worse than the assumptions, additional
reserves may be required. Significant assumptions include mortality rates,
morbidity, policy persistency and interest rates. We periodically review our
experience and update our policy reserves for new issues and reserve for all
claims incurred, as we believe appropriate.
GLB
We have certain GLB variable annuity products with GWB and GIB features that are
embedded derivatives. Certain features of these guarantees have elements of both
insurance benefits accounted for under the Financial Services - Insurance -
Claim Costs and Liabilities for Future Policy Benefits Subtopic of the FASB ASC
("benefit reserves") and embedded derivative reserves. We calculate the value of
the embedded derivative reserve and the benefit reserve based on the specific
characteristics of each GLB feature. Through our hybrid accounting approach, for
reserve calculation purposes we assign product cash flows to the embedded
derivative or insurance portion of the reserves based on the life-contingent
nature of the benefits. We report the insurance portion of the reserves in
future contract benefits with the embedded derivative reported in either other
assets or other liabilities. During the third quarter of each year, we conduct
our comprehensive review of the assumptions and projection models underlying our
reserves and embedded derivatives. See "Annual Assumption Review" below for more
information. These embedded derivatives are valued based on a stochastic
projection of scenarios of the embedded derivative cash flows. The scenario
assumptions, at each valuation date, are those we view to be appropriate for a
hypothetical market participant and include assumptions for capital markets,
actuarial lapse, benefit utilization, mortality, risk margin, administrative
expenses and a margin for profit. In addition, an
each valuation date that reflects our risk of not fulfilling the obligations of
the underlying liability. The spread for the
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.
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These GLB features are reinsured among various reinsurance counterparties on
either a modified coinsurance or coinsurance basis. We cede a portion of the GLB
features to
a funds withheld basis. The funds withheld arrangement includes a dynamic
hedging strategy designed to mitigate selected risk. This dynamic hedging
strategy utilizes options and total return swaps on
and futures on
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 assumed by LNBAR
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.
As part of the hedging program, equity market, interest rate and market-implied
volatility conditions are monitored on a daily basis. The hedge positions are
rebalanced based upon changes in these factors as needed. While the hedge
positions are actively managed, 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 the desired risk and return trade-off. The hedging results do
not impact LNL due to the funds withheld arrangement with LNBAR, which causes
the financial impact of the derivatives, as well as the cash flow activity, to
be reflected on LNBAR.
GDB
The reserves related to the GDB features available in our variable annuity
products are based on the application of a "benefit ratio" (the present value of
total expected benefit payments over the life of the contract divided by the
present value of total expected assessments over the life of the contract) to
total variable annuity assessments received in the period. The level and
direction of the change in reserves will vary over time based on the emergence
of the benefit ratio and the level of assessments associated with the variable
annuity. These reserves are reported within future contract benefits on the
Consolidated Balance Sheets with the change reported in benefits in the
Consolidated Statements of Comprehensive Income (Loss). The change in the
liability for a period is the benefit ratio multiplied by the assessments
recorded for the period less GDB claims paid in the period plus interest. As
experience or assumption changes result in a change in expected benefit payments
or assessments, the benefit ratio is unlocked or, in other words, recalculated
using the updated expected benefit payments and assessments over the life of the
contract since inception. During the third quarter of each year, we conduct our
comprehensive review of the assumptions and projection models used in estimating
these reserves and unlock assumptions similar to the DAC discussion above. We
may have unlocking in other quarters as we become aware of information that
warrants 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.
These GDB features are reinsured with LNBAR on a funds withheld coinsurance
basis.
Within the funds withheld arrangement, a delta hedging strategy is utilized 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 LNBAR's exposure to earnings
volatility that results from equity market driven changes in the reserve for GDB
contracts. The hedging results do not impact LNL due to the funds withheld
arrangement with LNBAR, which causes the financial impact of the derivatives, as
well as the cash flow activity, to be reflected on LNBAR.
UL Products with Secondary Guarantees
We issue UL-type contracts where we provide a secondary guarantee to the
contract holder. The policy can remain in force, even if the base policy account
value is zero, as long as contractual secondary guarantee requirements have been
met. The reserves related to UL products with secondary guarantees are based on
the application of a benefit ratio the same as our GDB features, which are
discussed above. These secondary guarantees are reported within future contract
benefits on the Consolidated Balance Sheets. The level and direction of the
change in reserves will vary over time based on the emergence of the benefit
ratio and the level of assessments associated with the contracts. During the
third quarter of each year, we conduct our comprehensive review of the
assumptions and projection models used in estimating these reserves and unlock
assumptions similar to the DAC discussion above. We may have unlocking in other
quarters as we become aware of information that warrants updating assumptions
outside of our comprehensive review. We may also identify and implement
actuarial modeling refinements that result in increases or decreases to the
carrying values of these reserves. See "Annual Assumption Review" below for more
information.
Liability for Unpaid Claims
Future contract benefits include reserves for long-term life and disability
claims associated with our Group Protection segment. These reserves are based on
assumptions as to interest, claim resolution rates and offsets for other
insurance including social security. Claim resolution rate assumptions and
social security offsets are based on our actual experience. The interest rate
assumption used for discounting long-term claim reserves is an important part of
the reserving process due to the long benefit period for these claims. The
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interest rate assumptions used for discounting claim reserves are based on
projected portfolio yield rates, after consideration for defaults and investment
expenses, for assets supporting the liabilities. Our long-term disability
reserves are discounted using rates ranging from 2.5% to 5.0 % and vary by year
of claim incurral. During the third quarter of each year, we conduct our
comprehensive review of the assumptions and reserving models used in calculating
these reserves. We may also identify and implement actuarial modeling
refinements that result in increases or decreases to the carrying values of
these reserves. See "Annual Assumption Review" below for more information.
Other Contract Holder Funds
Other contract holder funds includes account values on UL and VUL insurance and
investment-type annuity products where account values are equal to deposits plus
interest credited less withdrawals, surrender charges, asset-based fees and
contract administration charges, as well as amounts representing the fair value
of embedded derivative instruments associated with our IUL and indexed annuity
products. During the third quarter of each year, we conduct our comprehensive
review of the assumptions and projection models underlying our reserves and
embedded derivatives. We may have unlocking in other quarters as we become aware
of information that warrants updating assumptions outside of our comprehensive
review. See "Annual Assumption Review" below for more information.
Our indexed annuity and IUL contracts permit the holder to elect a fixed
interest rate return or a return where interest credited to the contracts is
linked to the performance of the S&P 500® Index or other indices. The value of
the variable portion of the contract holder's account balance varies with the
performance of the underlying variable funds chosen by the contract holder.
Contract holders may elect to rebalance among the various accounts within the
product at renewal dates. At the end of each indexed term, which can be up to
six years, we have the opportunity to re-price the indexed component by
establishing different participation rates, caps, spreads or specified rates,
subject to contractual guarantees. We purchase and sell index options that are
highly correlated to the portfolio allocation decisions of our contract holders,
such that we are economically hedged with respect to equity returns for the
current reset period. The mark-to-market of the options held generally offsets
the change in value of the embedded derivative within the contract, both of
which are recorded as a component of realized gain (loss) on the Consolidated
Statements of Comprehensive Income (Loss). The Derivatives and Hedging and the
Fair Value Measurements and Disclosures Topics of the FASB ASC require that we
calculate fair values of index options we may purchase or sell in the future to
hedge contract holder index allocations in future reset periods. These fair
values represent an estimate of the cost of the options we will purchase or sell
in the future, discounted back to the date of the balance sheet, using current
market indicators of volatility and interest rates. Changes in the fair values
of these liabilities are included as a component of realized gain (loss) on the
Consolidated Statements of Comprehensive Income (Loss). For information on our
index benefits hedging results, see our discussion in "Realized Gain (Loss)"
below.
Annual Assumption Review
During the third quarter of each year, we conduct our comprehensive review of
the assumptions and projection models used for our EGPs underlying the
amortization of DAC, VOBA, DSI and DFEL as well as our reserves and embedded
derivatives. For more information on our comprehensive review, see Note 1.
Details underlying the effect to net income (loss) from our annual assumption
review (in millions) were as follows:
For the Years Ended December 31,
2022 2021 2020
Income (loss) from operations:
Life Insurance $ (1,971 ) $ (51 ) $ (426 )
Annuities 35 18 (10 )
Group Protection 1 16 (3 )
Retirement Plan Services 6 - (3 )
Excluded realized gain (loss) (102 ) (11 ) 21
Net income (loss) $ (2,031 ) $ (28 ) $ (421 )
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The impacts of our annual assumption review were driven primarily by the
following:
2022
?
behavior assumptions related to UL products with secondary guarantees in the
amount of
and reinsurance assumptions and other items.
?For Annuities, favorable unlocking was driven by increases to interest rate
assumptions.
?For Group Protection, the favorable impact was driven by updates to life waiver
assumptions and increases to interest rate assumptions, partially offset by
unfavorable updates to long-term disability incidence and severity assumptions.
?For Retirement Plan Services, favorable unlocking was driven by increases to
interest rate assumptions and other items.
?For excluded realized gain (loss), unfavorable unlocking was driven by updates
to policyholder behavior assumptions that impacted ceded reserves, partially
offset by favorable updates to capital market assumptions.
2021
?
behavior and interest rate assumptions, partially offset by favorable updates to
investment allocation assumptions.
?For Annuities, favorable unlocking was driven by updates to expense and
policyholder behavior assumptions, partially offset by unfavorable updates to
interest rate assumptions.
?For Group Protection, the favorable impact was driven by updates to long-term
disability termination rate assumptions, partially offset by unfavorable updates
to interest rate assumptions.
?For excluded realized gain (loss), unfavorable unlocking was driven by updates
to policyholder behavior assumptions, partially offset by favorable updates to
other items.
Long-Term New Money Investment Yield Sensitivity
New money rates have increased but underlying interest rate volatility remains
high. As a result, new money rates require careful analysis when forecasting the
future direction of changes in rates. If we change our view of future new money
rates and lower our current long-term new money investment yield assumption,
then, assuming that all other assumptions remain constant, we estimate the
impact of lowering this assumption by 50 basis points would be approximately
DAC and VOBA assets. This impact would be most pronounced in our Life Insurance
segment. The actual impact of a 50 basis point decline in the yield would be
based upon a number of factors existing at the time of the assumption update,
and, therefore, the actual amount of the loss may differ from our current
estimate. In addition, lower investment margins may also impact the
recoverability of intangible assets such as goodwill, require the establishment
of additional liabilities or trigger loss recognition events on certain
policyholder liabilities. For more information on our interest rate risk, see
"Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk -
Interest Rate Risk."
reviewed for impairment annually as of
occurs or circumstances change that would more likely than not reduce the fair
value of a reporting unit below its carrying value. Intangibles that do not have
indefinite lives are amortized over their estimated useful lives. We perform a
quantitative goodwill impairment test where the fair value of the reporting unit
is determined and compared to the carrying value of the reporting unit. If the
carrying value of the reporting unit exceeds the reporting unit's fair value,
goodwill is impaired and written down to the reporting unit's fair value. The
results of one test on one reporting unit cannot subsidize the results of
another reporting unit.
For the purposes of the evaluation of the carrying value of goodwill, our
reporting units (Life Insurance, Annuities, Group Protection and Retirement Plan
Services) correspond with our reporting segments.
The fair values of our reporting units are comprised of the value of in-force
(i.e., existing) business and the value of new business. Specifically, new
business is representative of cash flows and profitability associated with
policies or contracts we expect to issue in the future, reflecting our forecasts
of future sales volume and product mix over a 10-year period. To determine the
values of in-force and new business, we use a discounted cash flows technique
that applies a discount rate reflecting the market expected, weighted-average
rate of return adjusted for the risk factors associated with operations to the
projected future cash flows for each reporting unit.
We apply significant judgment when determining the estimated fair value of our
reporting units. Factors that can influence the value of goodwill include the
capital markets, competitive landscape, regulatory environment, consumer
confidence and any items that can directly or indirectly affect new business
future cash flows. Factors that could affect production levels and profitability
of new business include mix of new business, pricing changes, customer
acceptance of our products and distribution strength. Spread compression and
related effects to profitability caused by lower interest rates affect the
valuation of in-force business more significantly than the valuation of new
business, as new business pricing assumptions reflect the current and
anticipated future interest rate environment. Estimates of fair value
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are inherently uncertain and represent only management's reasonable expectation
regarding future developments.
Examples of unfavorable changes to assumptions or factors that could result in
future impairment include, but are not limited to, the following:
?Lower expectations for future sales levels or future sales profitability;
?Higher discount rates on new business assumptions;
?Weakened expectations for the ability to execute future reserve financing
transactions for life insurance business over the long-term or expectations for
significant increases in the associated costs;
?Legislative, regulatory or tax changes that affect the cost of, or demand for,
our subsidiaries' products, the required amount of reserves and/or surplus, or
otherwise affect our ability to conduct business, including changes to statutory
reserve requirements or changes to RBC requirements; and
?Valuations of significant mergers or acquisitions of companies or blocks of
business that would provide relevant market-based inputs for our impairment
assessment that could support less favorable conclusions regarding the estimated
fair value of our reporting units.
As a result of the capital market environment during the third quarter of 2022,
including (i) declining equity markets and (ii) the impact of rising interest
rates on our discount rate assumption, we accelerated our quantitative goodwill
impairment test for our Life Insurance reporting unit as we concluded that there
were indicators of impairment. Based on this quantitative test, which included
updating our best estimate assumptions therein, we incurred an impairment during
the third quarter of 2022 of the Life Insurance reporting unit goodwill of
million
reporting unit. As of
goodwill impairment test for the remaining reporting units, and, as of
1, 2022
carrying value.
Refer to Note 9 for goodwill and specifically identifiable intangible assets by
segment.
Income Taxes
Management uses certain assumptions and estimates in determining the income
taxes payable or refundable for the current year, the deferred income tax
liabilities and assets for items recognized differently in its financial
statements from amounts shown on its income tax returns and the federal income
tax expense. Determining these amounts requires analysis and interpretation of
current tax laws and regulations. Management exercises considerable judgment in
evaluating the amount and timing of recognition of the resulting income tax
liabilities and assets. These judgments and estimates are re-evaluated on a
continual basis as regulatory and business factors change. Legislative changes
to the Internal Revenue Code of 1986, as amended, modifications or new
regulations, administrative rulings, or court decisions could increase or
decrease our effective tax rate.
In
Congress
2022 established a new 15% corporate alternative minimum tax for corporations
whose average adjusted net income for any consecutive three-year period
beginning after
Act of 2022 also established a 1% excise tax on stock repurchases made by
publicly traded corporations. Both provisions are effective for tax years
beginning after
corporate alternative minimum tax on our business, results of operations and
financial condition.
The application of GAAP requires us to evaluate the recoverability of our
deferred tax assets and establish a valuation allowance, if necessary, to reduce
our deferred tax asset to an amount that is more likely than not to be
realizable. Considerable judgment and the use of estimates are required in
determining whether a valuation allowance is necessary, and if so, the amount of
such valuation allowance. In evaluating the need for a valuation allowance, we
consider many factors, including: the nature and character of the deferred tax
assets and liabilities; taxable income in prior carryback years; future
reversals of existing temporary differences; the length of time carryovers can
be utilized; and any tax planning strategies we would employ to avoid a tax
benefit from expiring unused.
As of
related to net unrealized losses on fixed maturity AFS securities. In the
assessment of the future realizability of this deferred tax asset, management
considered tax planning strategy and concluded that unrealized losses were
caused by factors other than credit loss, and we have the intent and ability to
hold these securities to recovery and collect all of the contractual cash flows.
Additionally, as of
related to net operating loss carryforwards that can be used to offset taxable
income in future periods and reduce our income taxes payable in those future
periods. The net operating loss carryforwards do not expire and can be carried
forward indefinitely. Although realization is not assured, management believes
it is more likely than not that the deferred tax assets, including our net
operating loss deferred tax asset, will be realized. For additional information
on income taxes, see Note 6.
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RESULTS OF CONSOLIDATED OPERATIONS
Details underlying the consolidated results (in millions) were as follows:
For the Years Ended December 31,
2022 2021 2020
Net Income (Loss)
Income (loss) from operations:
Life Insurance $ (1,818 ) $ 540 $ (12 )
Annuities 1,308 1,326 1,125
Group Protection 101 (128 ) 42
Retirement Plan Services 197 223 157
Other Operations (375 ) (243 ) (161 )
Excluded realized gain (loss),
after-tax (5 ) (93 ) (586 )
Benefit ratio unlocking, after-tax (47 ) 15 4
Impairment of intangibles (634 ) - -
Net impact from the Tax Cuts and
Jobs Act - - 37
Transaction and integration costs
related to mergers,
acquisitions and divestitures,
after-tax - (11 ) (15 )
Net income (loss) $ (1,273 ) $ 1,629 $ 591
Comparison of 2022 to 2021
Net income decreased due primarily to the following:
?The effect of our annual assumption review.
?
?Lower investment income on alternative investments and lower prepayment and
bond make-whole premiums.
?Lower fee income driven by lower average daily variable account values.
The decrease in net income was partially offset by the following:
?Lower mortality claims in our Life Insurance and Group Protection segments.
?Higher realized gains.
?Lower expenses driven by lower compensation-related expenses, partially offset
by higher Spark program and legal expenses.
?Growth in business in force.
For a discussion of the goodwill impairment, see "Introduction - Critical
Accounting Policies and Estimates -
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
"Forward-Looking Statements - Cautionary Language" and "Part I - Item 1A. Risk
Factors" above.
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RESULTS OF LIFE INSURANCE
Details underlying the results for Life Insurance (in millions) were as follows:
For the Years Ended December 31,
2022 2021 2020
Operating Revenues
Insurance premiums (1) $ 908 $ 783 $ 711
Fee income 3,302 3,820 3,671
Net investment income 2,462 3,056 2,689
Operating realized gain (loss) (2) - (2 ) 2
Amortization of deferred gain (loss) on
business sold through reinsurance 43 13 4
Other revenues 9 22 9
Total operating revenues 6,724 7,692 7,086
Operating Expenses
Interest credited 1,288 1,418 1,468
Benefits 6,578 3,891 4,200
Commissions and other expenses 1,189 1,720 1,458
Total operating expenses 9,055 7,029 7,126
Income (loss) from operations before taxes (2,331 ) 663 (40 )
Federal income tax expense (benefit)
(513 ) 123 (28 ) Income (loss) from operations$ (1,818 ) $ 540 $ (12 )
(1)Includes term insurance premiums, which have a corresponding partial offset
in benefits for changes in reserves.
(2)See "Realized Gain (Loss)" below.
Comparison of 2022 to 2021
Income from operations for this segment decreased due primarily to the
following:
?Higher benefits due to the effect of unlocking and growth in business in force,
partially offset by lower mortality claims.
?Lower fee income due to the effect of unlocking and the impact of the fourth
quarter 2021 reinsurance agreement, partially offset by growth in business in
force.
?Lower net investment income, net of interest credited, driven by negative
performance on alternative investments in 2022 compared to investment income in
2021, and the impact of the fourth quarter 2021 reinsurance agreement.
The decrease in income from operations was partially offset by the following:
?Lower commissions and other expenses due to the effect of unlocking and lower
incentive compensation as a result of production performance.
?Higher insurance premiums due to growth in business in force.
?Higher amortization of deferred gain on business sold through reinsurance as a
result of the fourth quarter 2021 reinsurance agreement.
See "Critical Accounting Policies and Estimates - Annual Assumption Review"
above for information about unlocking.
Additional Information
We expect an ongoing reduction in income from operations in future quarters of
approximately
unfavorable impact of the third quarter 2022 annual assumption review.
For information on our fourth quarter 2021 reinsurance agreement, see Note 8.
Generally, we experience higher mortality in the first quarter of the year due
to the seasonality of claims. We expect COVID-19-related mortality to continue
to follow
Generally, we have higher sales during the second half of the year with the
fourth quarter being our strongest.
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For information on interest rate spreads and interest rate risk, see "Part I -
Item 1A. Risk Factors - Market Conditions - Changes in interest rates and
sustained low interest rates may cause interest rate spreads to decrease,
impacting our profitability, and make it more challenging to meet certain
statutory requirements," "Part I - Item 1A. Risk Factors - Market Conditions -
Increases in interest rates may negatively affect our profitability, capital
position and the value of our investment portfolio and may also result in
increased contract withdrawals" and "Part II - Item 7A. Quantitative and
Qualitative Disclosures About Market Risk - Interest Rate Risk." For information
on the current interest rate environment, see "Introduction - Interest Rate
Environment" above.
RESULTS OF ANNUITIES
Details underlying the results for Annuities (in millions) were as follows:
For the Years Ended December 31,
2022 2021 2020
Operating Revenues
Insurance premiums (1) $ 165 $ 116 $ 121
Fee income 2,223 2,503 2,203
Net investment income 1,385 1,316 1,192
Operating realized gain (loss) (2) 207 208 214
Amortization of deferred gain on
business sold through reinsurance 25 25 29
Other revenues (3) 366 398 308
Total operating revenues 4,371 4,566 4,067
Operating Expenses
Interest credited 887 810 772
Benefits (1) 265 199 259
Commissions and other expenses 1,688 1,980 1,724
Total operating expenses 2,840 2,989 2,755
Income (loss) from operations before taxes 1,531 1,577 1,312
Federal income tax expense (benefit) 223 251 187
Income (loss) from operations $ 1,308 $ 1,326 $ 1,125
(1)Insurance premiums include primarily our income annuities that have a
corresponding offset in benefits. Benefits include changes in income annuity
reserves driven by premiums.
(2)See "Realized Gain (Loss)" below.
(3)Consists primarily of revenues attributable to broker-dealer services, which
are subject to market volatility, and the net settlement related to certain
reinsurance transactions, which has a corresponding offset in net investment
income and interest credited.
Comparison of 2022 to 2021
Income from operations for this segment decreased due primarily to the
following:
?Lower fee income driven by lower average daily variable account values.
?Higher benefits, net of changes in income annuity reserves, driven by an
increase in the growth in benefit reserves driven primarily by equity market
performance, partially offset by the effect of unlocking.
?Lower net investment income, net of interest credited, driven by lower
investment income on alternative investments within our surplus portfolio and
lower prepayment and bond make-whole premiums, partially offset by higher
average fixed account values and impacts to portfolio yields from the current
interest rate environment.
The decrease in income from operations was partially offset by amortization
expense as a result of lower actual gross profits, trail commissions resulting
from lower average daily variable account values and lower incentive
compensation as a result of production performance.
See "Critical Accounting Policies and Estimates - Annual Assumption Review"
above for information about unlocking.
Additional Information
New deposits are an important component of net flows and key to our efforts to
grow our business. Although deposits do not significantly affect current period
income from operations, they can significantly impact future income from
operations.
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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 7%, 8% and 7% in
2022, 2021 and 2020, respectively.
Our fixed and indexed variable annuities have discretionary fixed and indexed
crediting rates that reset on an annual or periodic basis and may be subject to
surrender charges. Our ability to retain these annuities will be subject to
current competitive conditions at the time interest rates for these products
reset. We expect to manage the effects of spreads on near-term income from
operations through portfolio management and, to a lesser extent, crediting rate
actions, which assumes no significant changes in net flows or other changes that
may cause interest rate spreads to differ from our expectations. For information
on interest rate spreads and interest rate risk, see "Part I - Item 1A. Risk
Factors - Market Conditions - Changes in interest rates and sustained low
interest rates may cause interest rate spreads to decrease, impacting our
profitability, and make it more challenging to meet certain statutory
requirements," "Part I - Item 1A. Risk Factors - Market Conditions - Increases
in interest rates may negatively affect our profitability, capital position and
the value of our investment portfolio and may also result in increased contract
withdrawals" and "Part II - Item 7A. Quantitative and Qualitative Disclosures
About Market Risk - Interest Rate Risk." For information on the current interest
rate environment, see "Introduction - Interest Rate Environment" above.
RESULTS OF GROUP PROTECTION
Details underlying the results for Group Protection (in millions) were as
follows:
For the Years Ended December 31,
2022 2021 2020
Operating Revenues
Insurance premiums $ 4,768 $ 4,450 $ 4,280
Net investment income 332 365 329
Other revenues (1) 202 180 183
Total operating revenues 5,302 4,995 4,792
Operating Expenses
Interest credited 5 6 5
Benefits 3,844 3,890 3,500
Commissions and other expenses 1,325 1,260 1,234
Total operating expenses 5,174 5,156 4,739
Income (loss) from operations before taxes 128 (161 ) 53
Federal income tax expense (benefit) 27 (33 ) 11
Income (loss) from operations $ 101 $ (128 ) $ 42
(1)Consists of revenue from third parties for administrative services performed,
which has a corresponding partial offset in commissions and other expenses.
Comparison of 2022 to 2021
Income from operations for this segment increased due primarily to the
following:
?Higher insurance premiums due to growth in business in force and favorable
persistency.
?Lower benefits driven by lower COVID-19-related incidence in our life business
and lower incidence in our disability business, partially offset by less
favorable reserve adjustments.
The increase in income from operations was partially offset by the following:
?Higher commissions and other expenses driven by investments in claims
management to help improve ongoing operations and higher sales volumes.
?Lower net investment income, net of interest credited, driven by lower
investment income on alternative investments within our surplus portfolio and
lower prepayment and bond make-whole premiums.
See "Critical Accounting Policies and Estimates - Annual Assumption Review"
above for information on our reserve adjustments.
Additional Information
Our total loss ratio for the years ended
and 87.5%, respectively. The total loss ratio for the year ended
2022
COVID-19-related incidence and favorable
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reserve adjustments in our life business and lower incidence in our disability
business, partially offset by unfavorable reserve adjustments in our disability
business in 2022 compared to favorable reserve adjustments in 2021. For a
discussion of the COVID-19 pandemic, see "Introduction - COVID-19 Pandemic"
above.
Generally, we experience higher mortality in the first quarter of the year and
higher disability claims in the fourth quarter of the year due to the
seasonality of claims. We expect COVID-19-related mortality to continue to
follow
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
are symmetrical for a comparable decrease in the loss ratio and, therefore, move
in an equal and opposite direction.
For information on the effects of current interest rates on our long-term
disability claim reserves, see "Part II - Item 7A. Quantitative and Qualitative
Disclosures About Market Risk - Interest Rate Risk - Effect of Interest Rate
Sensitivity." For information on the current interest rate environment, see
"Introduction - Interest Rate Environment" above.
RESULTS OF RETIREMENT PLAN SERVICES
Details underlying the results for Retirement Plan Services (in millions) were
as follows:
For the Years Ended December 31,
2022 2021 2020
Operating Revenues
Fee income $ 255 $ 289 $ 246
Net investment income 965 983 924
Other revenues (1) 37 36 27
Total operating revenues 1,257 1,308 1,197
Operating Expenses
Interest credited 630 617 615
Benefits 3 3 2
Commissions and other expenses 395 418 402
Total operating expenses 1,028 1,038 1,019
Income (loss) from operations before taxes 229 270 178
Federal income tax expense (benefit) 32 47 21
Income (loss) from operations $ 197 $ 223 $ 157
(1)Consists primarily of mutual fund account program revenues from mid to large
employers.
Comparison of 2022 to 2021
Income from operations for this segment decreased due primarily to the
following:
?Lower fee income driven by lower average daily account values.
?Lower net investment income, net of interest credited, driven by lower
investment income on alternative investments within our surplus portfolio and
lower prepayment and bond make-whole premiums, partially offset by higher
average fixed account values and impacts to portfolio yields from the current
interest rate environment.
The decrease in income from operations was partially offset by lower commissions
and other expenses driven by amortization as a result of lower actual gross
profits, the effect of unlocking, incentive compensation as a result of
production performance and trail commissions resulting from lower average
account values.
See "Critical Accounting Policies and Estimates - Annual Assumption Review"
above for information about unlocking.
Additional Information
Net flows in this business fluctuate based on the timing of larger plans being
implemented and terminating over the course of the year.
New deposits are an important component of net flows and key to our efforts to
grow our business. Although deposits do not significantly affect current period
income from operations, they can significantly impact future income from
operations. The other component of net flows relates to the retention of the
business. An important measure of retention is the reduction in account values
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caused by plan sponsor terminations and participant withdrawals. These outflows
as a percentage of average account values were 10%, 11% and 13% for 2022, 2021
and 2020, respectively.
Our net flows are negatively affected by the continued net outflows from our
oldest blocks of annuities business, which are among our higher margin product
lines in this segment, due to the fact that they are mature blocks with low
distribution and servicing costs. The proportion of these products to our total
account values was 17%, 18% and 19% for 2022, 2021 and 2020, respectively. Due
to this overall shift in business mix toward products with lower returns, new
deposit production continues to be necessary to maintain earnings at current
levels.
Our fixed annuity business includes products with discretionary and index-based
crediting rates that are reset on either a quarterly or semi-annual basis. Our
ability to retain quarterly or semi-annual reset annuities will be subject to
current competitive conditions at the time interest rates for these products
reset. We expect to manage the effects of spreads on near-term income from
operations through portfolio management and, to a lesser extent, crediting rate
actions, which assumes no significant changes in net flows into or out of our
fixed accounts or other changes that may cause interest rate spreads to differ
from our expectations. For information on interest rate spreads and interest
rate risk, see "Part I - Item 1A. Risk Factors - Market Conditions - Changes in
interest rates and sustained low interest rates may cause interest rate spreads
to decrease, impacting our profitability, capital position and make it more
challenging to meet certain statutory requirements," "Part I - Item 1A. Risk
Factors - Market Conditions - Increases in interest rates may negatively affect
our profitability, capital position and the value of our investment portfolio
and may also result in increased contract withdrawals" and "Part II - Item 7A.
Quantitative and Qualitative Disclosures About Market Risk - Interest Rate
Risk." For information on the current interest rate environment, see
"Introduction - Interest Rate Environment" above.
RESULTS OF OTHER OPERATIONS
Details underlying the results for Other Operations (in millions) were as
follows:
For the Years Ended December 31,
2022 2021 2020
Operating Revenues
Insurance premiums (1) $ - $ 10 $ 10
Net investment income 126 124 130
Other revenues 9 23 26
Total operating revenues 135 157 166
Operating Expenses
Interest credited 39 42 39
Benefits 72 75 94
Other expenses 179 152 52
Interest and debt expense 137 114 125
Spark program expense 167 87 68
Total operating expenses 594 470 378
Income (loss) from operations before taxes (459 ) (313 ) (212 )
Federal income tax expense (benefit)
(84 ) (70 ) (51 ) Income (loss) from operations$ (375 ) $ (243 ) $ (161 )
(1)Includes our disability income business, which has a corresponding offset in
benefits for changes in reserves.
Comparison of 2022 to 2021
Loss from operations for Other Operations increased due primarily to the
following:
?Higher Spark program expense.
?Higher other expenses related to higher legal expenses, partially offset by the
effect of changes in LNC's stock price on our deferred compensation plans, as
LNC's stock price decreased during 2022, compared to an increase during 2021.
?Higher interest and debt expense driven by an increase in average interest
rates.
?Lower other revenues due to the effect of market fluctuations on assets held as
part of certain compensation plans, which decreased during 2022 compared to an
increase during 2021.
The increase in loss from operations was partially offset by higher net
investment income, net of interest credited, related to higher allocated
investments driven by an increase in excess capital retained by Other
Operations.
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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,
2022 2021 2020
Components of Realized Gain (Loss),
Pre-Tax
Total operating realized gain
(loss) $ 207 $ 206 $ 216
Total excluded realized gain (loss) (6 ) (117 ) (742 )
Total realized gain (loss), pre-tax
Components of Excluded Realized Gain (Loss), After-Tax Credit loss benefit (expense) on mortgage loans on real estate$ (7 ) $ 78 $ (85 ) Credit loss benefit (expense) on reinsurance-related assets (99 ) 1 - Credit loss benefit (expense) on other financial assets (12 ) (9 ) (19 ) Realized gain (loss) related to certain financial assets (67 ) (16 ) (30 ) Realized gain (loss) on equity securities 12 30 6 Realized gain (loss) on the mark-to-market on certain instruments (2) 554 137 (112 ) Total realized gain (loss) related to financial instruments and reinsurance-related assets 381 221 (240 ) GLB fees ceded to LNBAR and attributed fees, including benefit ratio unlocking (414 ) (327 ) (339 ) Indexed annuity forward-starting option 4 27 (2 ) Excluded realized gain (loss), including benefit ratio unlocking (29 ) (79 ) (581 ) Less: benefit ratio unlocking on GDB and GLB riders (24 ) 14 5 Total excluded realized gain (loss), after-tax$ (5 ) $ (93 ) $ (586 )
(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)Includes activity with LNBAR. The modified coinsurance investment portfolio
includes fixed maturity securities classified as AFS with changes in fair value
recorded in 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 2022 to 2021
We had lower realized losses due primarily to gains on the mark-to-market on
certain instruments driven by favorable changes in the fair value of embedded
derivatives related to certain modified coinsurance arrangements and gains on
derivatives.
The lower realized losses were partially offset by:
?Losses related to an increase in the credit loss allowance for
reinsurance-related assets in 2022 due to updates to policyholder behavior
assumptions that impacted ceded reserves.
?Higher losses related to GLB fees ceded to LNBAR and attributed fees driven by
increased policyholder guaranteed amounts resulting from market activity.
?Losses related to an increase in the credit loss allowance for mortgage loans
on real estate in 2022 compared to a decrease in 2021 due to changes in economic
projections.
?Lower gains related to the indexed annuity forward-starting option driven
primarily by an increase of option costs and other items, partially offset by
the effect of unlocking.
?Lower gains on equity securities due to unfavorable equity market performance
in 2022 compared to favorable equity market performance in 2021.
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The above components of excluded realized gain (loss) are described including
benefit ratio unlocking, after-tax.
See "Critical Accounting Policies and Estimates - Annual Assumption Review"
above for information about unlocking.
Operating Realized Gain (Loss)
Operating realized gain (loss) includes indexed annuity and IUL net derivative
results representing the net difference between the change in the fair value of
the options that we hold and a portion of the change in the fair value of the
embedded derivative liabilities of our indexed annuity and IUL products. The
portion of the change in the fair value of the embedded derivative liabilities
reported in operating realized gain (loss) represents the amount that is
credited to the indexed annuity and IUL contracts.
Our GWB, GIB and 4LATER® features have elements of both benefit reserves and
embedded derivative reserves. We calculate the value of the benefit reserves and
the embedded derivative reserves based on the specific characteristics of each
GLB feature. For our GLBs that meet the definition of an embedded derivative
under the Derivatives and Hedging Topic of the FASB ASC, we record them at fair
value on the Consolidated Balance Sheets with changes in fair value recorded in
realized gain (loss) on the Consolidated Statements of Comprehensive Income
(Loss). In bifurcating the embedded derivative, we attribute to the embedded
derivative the portion of total fees collected from the contract holder that
relates to the GLB riders (the "attributed fees"). These attributed fees
represent the present value of future claims expected to be paid for the GLB at
the inception of the contract (the "net valuation premium") plus a margin that a
theoretical market participant would include for risk/profit (the "risk/profit
margin").
We also include the risk/profit margin portion of the GLB attributed rider fees
in operating realized gain (loss) and include the net valuation premium of the
GLB attributed rider fees in excluded realized gain (loss).
Realized Gain (Loss) Related to Financial Instruments and Reinsurance-Related
Assets
For information on realized gain (loss) related to financial instruments and
reinsurance-related assets, see Note 15.
Gain (loss) on the mark-to-market on certain instruments, including those
associated with our consolidated variable interest entities ("VIEs") represents
changes in the fair values of certain derivative investments,
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.
GLB Fees Ceded to LNBAR and Attributed Fees
Our GLB fees ceded to LNBAR and attributed fees include the GLB rider fees ceded
to LNBAR and the net valuation premium. See "Operating Realized Gain (Loss)"
above for more information on the net valuation premium.
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.
REINSURANCE
We and
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. We remain liable if our reinsurers are unable to meet
contractual obligations under applicable reinsurance agreements. We utilize
inter-company and affiliate reinsurance agreements to manage our statutory
capital position as well as the hedge program for variable annuity guarantees.
For information regarding reserve financing and letter of credit ("LOC")
expenses from inter-company reinsurance agreements, see "Liquidity and Capital
Resources - Material Cash Outflows" below.
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We focus on obtaining reinsurance from a diverse group of reinsurers. We have
established standards and criteria for our use and selection of reinsurers. In
order for a new reinsurer to participate in our current program, we generally
require the reinsurer to have an AM Best rating of A+ or greater or an S&P
rating of AA- or better and a specified RBC percentage (or similar capital ratio
measure). If the reinsurer does not have these ratings, we may require them to
post collateral as described below; however, we may waive the collateral
requirements based on the facts and circumstances. In addition, we may require
collateral from a reinsurer to mitigate credit/collectability risk. Typically,
in such cases, the reinsurer must either maintain minimum specified ratings and
RBC ratios or establish the specified quality and quantity of collateral.
Similarly, we have also required collateral in connection with books of business
sold pursuant to indemnity reinsurance agreements.
Reinsurers, including affiliated reinsurers, that are not licensed, accredited
or authorized in the state of domicile of the reinsured ("ceding company"),
i.e., unauthorized reinsurers, are required to post statutorily prescribed forms
of collateral for the ceding company to receive reinsurance credit. The three
primary forms of collateral are: (i) qualifying assets held in a reserve credit
trust; (ii) irrevocable, unconditional, evergreen LOCs issued by a qualified
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, we require unauthorized reinsurers to post acceptable
forms of collateral to support their reinsurance obligations to us.
As a result of our modified coinsurance agreement with Athene to reinsure fixed
annuity products, we reported a
on the Consolidated Balance Sheets as of
information, see Note 8.
Our amounts recoverable from reinsurers represent receivables from and reserves
ceded to third-party reinsurers and LNBAR. As of
for our benefit. Of this amount,
credit trusts (such reserve credit trusts are held by non-affiliated reinsurers;
therefore, they are not reflected on the Consolidated Balance Sheets),
billion
LOCs for which we are the beneficiary, an off-balance sheet arrangement. The
total in our funds withheld portfolios was
liabilities on the Consolidated Balance Sheets as of
excess funds withheld represent funds above the reinsurance recoverable from our
third-party reinsurers and LNBAR.
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 the
Committee
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, we and LLANY provide 100%
indemnity reinsurance for the business assumed; however, the third-party
insurer, or the "cedent," remains primarily liable on the underlying insurance
business. These indemnity reinsurance arrangements require that we, 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 our reinsurance arrangement, we held approximately
AM Best financial strength rating of at least B++, an S&P financial strength
rating of at least BBB- and a Moody's financial strength rating of at least
Baa3. This arrangement may require us to place assets in trust equal to the
relevant statutory reserves. Under LLANY's largest indemnity reinsurance
arrangement, we held approximately
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
must maintain an AM Best financial strength rating of at least B++, an S&P
financial strength rating of at least BBB- and a Moody's financial strength
rating of at least Baa3. One of these arrangements also requires LLANY to
maintain an RBC ratio of at least 185% or an S&P capital adequacy ratio of 115%.
Each of these arrangements may require LLANY to place assets in trust equal to
the relevant statutory reserves. See "Item 1. Business - Financial Strength
Ratings" for a description of our financial strength ratings.
For more information about reinsurance, see Notes 8 and 13 and "Liquidity and
Capital Resources - Sources and Uses of Liquidity and Capital -
Capital
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.
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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 our needs, the needs of LLANY and the needs
of the holding company, LNC. As a holding company with no operations of its own,
LNC derives its cash primarily from its operating subsidiaries. Disruptions,
uncertainty or volatility in the capital and credit markets may materially
affect our business operations and results of operations. These poor market
conditions may reduce our or LLANY's statutory surplus and risk-based capital
("RBC").
Reductions to our or LLANY's statutory surplus and RBC may cause us to retain
more capital, which may pressure our ability to receive dividends from LLANY or
pay dividends to LNC, which may lead us to take steps to preserve or raise
additional capital. As a result of the charge taken in connection with the
annual assumption review in the third quarter of 2022, we expect an approximate
reduce our RBC ratio by approximately 12 points. We believe we and LLANY have
adequate capital to operate our business as we replenish statutory capital back
to our targeted levels.
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 LNC
and to repay debt. Our operating activities provided (used) cash of
billion
addition, we received capital contributions from LNC of
million
to LNC of
respectively. See Note 19 for additional information. We also received dividends
from our subsidiaries of
2021 and 2020, respectively.
We must maintain certain regulatory capital levels. We utilize the RBC ratio as
a primary measure of our capital adequacy. The RBC ratio is an important factor
in the determination of our financial strength ratings, and a reduction in our
or LLANY's surplus will affect our RBC ratios and dividend-paying capacity. For
a discussion of RBC ratios, see "Part I - Item 1. Business - Regulatory -
Insurance Regulation -
Our regulatory capital levels are affected by statutory accounting rules, which
are subject to change by each applicable insurance regulator. Our term products
and UL products containing secondary guarantees require reserves calculated
pursuant to Actuarial Guideline XXXVIII ("AG38"). We employ strategies to reduce
the strain caused by AG38 by reinsuring the business to reinsurance captives.
Our captive reinsurance subsidiaries and LNBAR provide a mechanism for financing
a portion of the excess reserve amounts in a more efficient manner and free up
capital we can use for any number of purposes, including paying dividends to
LNC. We use long-dated letters of credit ("LOCs") and debt financing as well as
other financing strategies to finance those reserves. For information on the
LOCs, see the credit facilities table in Note 12. Our captive reinsurance
subsidiaries and LNBAR have also issued long-term notes to finance a portion of
the excess reserves. For information on long-term notes issued by our captive
reinsurance subsidiaries, see Note 3. We have also used the proceeds from
certain senior notes issued by LNC to execute long-term structured solutions
primarily supporting reinsurance of UL products containing secondary guarantees.
Statutory reserves established for variable annuity guaranteed benefit riders
are sensitive to changes in the equity markets and interest rates and are
affected by the level of account values relative to the level of any guarantees,
product design and reinsurance arrangements. As a result, the relationship
between reserve changes and equity market performance is non-linear during any
given reporting period. We cede a portion of the guaranteed benefit riders to
LNBAR through inter-company reinsurance arrangements. The variable annuity hedge
program in LNBAR seeks to hedge the exposure to selected risk and income
statement volatility caused by changes in the capital markets associated with
the variable annuity guarantees. Market conditions greatly influence the
ultimate capital required due to its effect on the valuation of reserves and
derivative instruments hedging these reserves.
We also use long-dated LOCs or other capital market solutions to reduce the
potential strain caused by temporary mismatches between movements in the
statutory reserves and derivative instruments for variable annuity guaranteed
benefit riders reinsured to LNBAR. For information on the LOCs, see the credit
facilities table in Note 12.
Changes in equity markets may also affect our capital position. We may decide to
reallocate available capital among us and our insurance and captive reinsurance
subsidiaries, which would result in different RBC ratios for us. In addition,
changes in the equity markets can
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affect the value of our variable annuity and VUL separate accounts. When the
market value of our separate account assets increases, the statutory surplus
within us and LLANY also increases. Contrarily, when the market value of our
separate account assets decreases, the statutory surplus within us and LLANY may
also decrease, which will 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 hedging
strategies relative to managing the effects of equity markets and interest rates
on the statutory reserves, statutory capital and the dividend capacity of LNL
and LLANY.
Debt
For information about our short-term and long-term debt and our credit
facilities, see Note 12.
Alternative Sources of Liquidity
Inter-Company Cash Management Program
In order to manage our capital more efficiently, we participate in an
inter-company cash management program where LNL, certain of our subsidiaries and
certain affiliates, 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
2022
certain subsidiaries and affiliates in the inter-company cash management
program. Loans under the cash management program are permitted under applicable
insurance laws subject to certain restrictions. LNL, domiciled in
subject to a borrowing and lending limit of, currently, 3% of the insurance
company's admitted assets as of its most recent year end. For our
York
admitted assets as of its most recent year end but may not lend any amounts to
LNC.
LNL is a member of the
("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
Borrowings under this facility are subject to the FHLBI's discretion and require
the availability of qualifying assets at LNL. As of
an estimated maximum borrowing capacity of
and maximum available borrowing based on qualifying assets of
of
facility reported within payables for collateral on investments on the
Consolidated Balance Sheets. LLANY is a member of the
New York
million
and require the availability of qualifying assets at LLANY. As of
2022
information, see "Payables for Collateral on Investments" in Note 4.
Securities Lending Programs and Repurchase Agreements
LNL and LLANY, by virtue of their general account fixed-income investment
holdings, can access liquidity through securities lending programs and
repurchase agreements. As of
securities lending agreements with a carrying value of
addition, LNL, LLANY and LNBAR had access to
repurchase agreements, of which
2022
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
position of
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
billion
facilities is contingent upon interest rates having achieved certain threshold
levels. In addition to these facilities, we have 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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Table of Contents Material Cash Outflows Details underlying our estimated material cash outflows as ofDecember 31, 2022 , 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)$ 22,586 $ 46,374 $ 48,054 $ 401,713 $ 518,727 Short-term and long-term debt (2) 562 50 - 2,219 2,831 Reserve financing and LOC expenses (3) 45 83 75 111 314 Payables for collateral on investments (4) 3,428 - - - 3,428 Investment commitments (5) 638 439 1,091 143 2,311 Operating leases (6) 34 59 38 16 147 Finance leases (6) 82 25 4 - 111 Certain financing arrangements (7) 43 222 366 - 631 Retirement and other plans (8) 10 18 17 35 80 Total$ 27,428 $ 47,270 $ 49,645 $ 404,237 $ 528,580
(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 2032. In addition to these benefit payments, we
periodically contribute to the agents' defined benefit plan and remit funds to
LNC to assist in funding the employees' defined benefit plan. 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.
If our current financial strength 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 if our financial strength ratings drop below BBB-/Baa3
(S&P/Moody's Investors Service. In addition, contractual selling agreements with
intermediaries could be negatively affected, which could have an adverse effect
on overall sales of annuities, life insurance and investment products.
See "Part I - Item 1A. Risk Factors - Liquidity and Capital Position - A
decrease in our capital and surplus may result in a downgrade to our financial
strength ratings" and "Part I - Item 1A. Risk Factors - Covenants and Ratings -
A downgrade in our insurer financial strength 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.
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Humana and Thor Hit the Casualty List
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- An Application for the Trademark “PREMIER ACCESS” Has Been Filed by The Guardian Life Insurance Company of America: The Guardian Life Insurance Company of America
- AM Best Assigns Credit Ratings to North American Fire & General Insurance Company Limited and North American Life Insurance Company Limited
- Supporting the ‘better late than never’ market with life insurance
- Best’s Special Report: Analysis Shows Drastic Shift in Life Insurance Reserves Toward Annuity Products, and a Slide in Credit Quality
- The child-free client: how advisors can support this growing demographic
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