LINCOLN NATIONAL LIFE INSURANCE CO /IN/ – 10-Q – Management's Narrative Analysis of the Results of Operations
Index to Management's Narrative Analysis of the Results of Operations
Page
Forward-Looking Statements - Cautionary Language 53
Introduction 54
Critical Accounting Policies and Estimates 55
Results of Consolidated Operations 56 Results of Annuities 57 Results of Retirement Plan Services 58 Results of Life Insurance 59 Results of Group Protection 60 Results of Other Operations 62 Realized Gain (Loss) 63 Liquidity and Capital Resources 64 ? 53
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Management's Narrative Analysis ("MNA") of the results of operations for the
three and six months ended
periods in 2021 of
consolidated subsidiaries should be read in conjunction with our consolidated
financial statements and the accompanying notes to the consolidated financial
statements ("Notes") presented in "Part I - Item 1. Financial Statements," our
Form 10-K for the year ended
reports filed with the
otherwise stated or the context otherwise requires, "LNL," "Company," "we,"
"our" or "us" refers to
consolidated subsidiaries. LNL is a wholly-owned subsidiary of Lincoln National
Corporation ("LNC").
See "Part I - Item 1. Business" and Note 1 in our 2021 Form 10-K 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 13. 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.
Management's Narrative Analysis is presented pursuant to General Instructions
H(2)(a) of Form 10-Q in lieu of Management's Discussion and Analysis of
Financial Condition and Results of Operations.
FORWARD-LOOKING STATEMENTS - CAUTIONARY LANGUAGE
This Quarterly Report on Form 10-Q, including "Risk Factors" and "Management's
Narrative Analysis of the Results of Operations," contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 ("PSLRA"). A forward-looking statement is a statement that is not a
historical fact and, without limitation, includes any statement that may
predict, forecast, indicate or imply future results, performance or
achievements. Forward-looking statements may contain words like: "anticipate,"
"believe," "estimate," "expect," "project," "shall," "will" and other words or
phrases with similar meaning in connection with a discussion of future operating
or financial performance. In particular, these include statements relating to
future actions, trends in our businesses, prospective services or products,
future performance or financial results and the outcome of contingencies, such
as legal proceedings. We claim the protection afforded by the safe harbor for
forward-looking statements provided by the PSLRA.
Forward-looking statements are subject to risks and uncertainties. Actual
results could differ materially from those expressed in or implied by such
forward-looking statements due to a variety of factors, including:
?The continuation of the COVID-19 pandemic, or future outbreaks of COVID-19, and
uncertainty surrounding the length and severity of future impacts on the global
economy and on our business, results of operations and financial condition;
?Weak general economic and business conditions that may affect demand for our
products, account values, investment results 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 or our ability to conduct business;
?The impact of
capital;
?The impact of Regulation Best Interest or other regulations adopted by the
the
organizations relating to the standard of care owed by investment advisers
and/or broker-dealers that could affect our distribution model;
?Actions taken by reinsurers to raise rates on in-force business;
?Declines in or sustained low interest rates causing a reduction in investment
income, the interest margins of our businesses, estimated gross profits ("EGPs")
and demand for our products;
?Rapidly increasing interest rates causing contract holders to surrender life
insurance and annuity policies, thereby causing realized investment losses, and
reduced hedge performance related to variable annuities;
?The impact of the implementation of the provisions of the Dodd-Frank Wall
Street Reform and Consumer Protection Act relating to the regulation of
derivatives transactions;
?The initiation of legal or regulatory proceedings against us, and the outcome
of any legal or regulatory proceedings, such as: adverse actions related to
present or past business practices common in businesses in which we compete;
adverse decisions in significant actions including, but not limited to, actions
brought by federal and state authorities and class action cases; new decisions
that result in changes in law; and unexpected trial court rulings;
?A decline or continued volatility in the equity markets causing a reduction in
the sales of our 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 features of our variable annuity products;
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?Changes in our assumptions related to deferred acquisition costs ("DAC"), value
of business acquired ("VOBA"), deferred sales inducements ("DSI") or deferred
front-end loads ("DFEL");
?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;
?Changes in accounting principles that may affect our business, results of
operations and financial condition, including the adoption effective
2023
Update ("ASU") 2018-12, Targeted Improvements to the Accounting for
Long-Duration Contracts;
?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;
?Future pandemics, acts of terrorism, war or other man-made and natural
catastrophes that may adversely affect our businesses and the cost and
availability of reinsurance;
?Competitive conditions, including pricing pressures, new product offerings and
the emergence of new competitors, that may affect the level of premiums and fees
that 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. Our most recent
Form 10-K as well as 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 "Risk Factors" included
in "Part I - Item 1A. Risk Factors" in our 2021 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 continue to adversely affect us and are
expected to continue to adversely affect our business, results of operations and
financial condition in the third quarter of 2022. We continue to monitor
CDC reports related to COVID-19 and the potential impacts of the COVID-19
pandemic on our Life Insurance and Group Protection segments. See "Additional
Information" within Results of Life Insurance and Results of Group Protection
below for expected impacts of the COVID-19 pandemic in the third quarter of
2022.
The ultimate impact on our business, results of operations and financial
condition depends on the severity and duration of the COVID-19 pandemic and
related health, economic and business impacts and actions taken by governmental
authorities and other third parties in response, each of which is uncertain,
rapidly changing and difficult to predict. For more information on the risks
related to the COVID-19 pandemic, see "Part I - Item 1A. Risk Factors - Market
Conditions - The impacts of the COVID-19 pandemic have adversely affected and
are expected to continue to adversely affect our business and results of
operations, and the future impacts of the COVID-19 pandemic on the company's
business, results of operations and financial condition remain uncertain" in our
2021 Form 10-K.
Interest Rate Environment
In light of substantial progress since 2020 in the labor markets, elevated
inflation and geopolitical events, the
the first increase to the federal funds rate target range since
Subsequently, the
federal funds rate target range through
2.25% to 2.50% and stated that it anticipates ongoing increases through the
remainder of 2022 to combat inflation. Additionally, the
announced that it will continue the reduction it started in
holdings of
securities. Although short-term interest rates have been rising in 2022, we
continue to be proactive in our investment strategies, product designs,
crediting rate strategies, expense management actions and overall
asset-liability practices to mitigate the risk of unfavorable consequences in
this continued historically low interest rate environment.
We have provided disclosures around interest rate risk in "Part I - Item 1A.
Risk Factors - Market Conditions - Changes in interest rates and sustained low
interest rates may cause interest rate spreads to decrease, impacting our
profitability, and make it more challenging to meet certain statutory
requirements, and changes in interest rates may also result in increased
contract withdrawals," "Part II - Item 7. Management's Narrative Analysis of the
Results of Operations - Critical Accounting Policies and Estimates - Annual
Assumption
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Review - Long-Term New Money Investment Yield Sensitivity" and "Part II - Item
7A. Quantitative and Qualitative Disclosures About Market Risk - Interest Rate
Risk" in our 2021 Form 10-K.
Critical Accounting Policies and Estimates
The MNA included in our 2021 Form 10-K contains a detailed discussion of our
critical accounting policies and estimates. The following information updates
the "Critical Accounting Policies and Estimates" provided in our 2021 Form 10-K,
and therefore, should be read in conjunction with that disclosure.
DAC, VOBA, DSI and DFEL
Reversion to the Mean
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, as discussed in our 2021 Form 10-K.
If we had unlocked our RTM assumption as of
recorded unfavorable unlocking of approximately
within our Annuities segment.
Investments
Investment Valuation
For more information about the valuation of our financial instruments carried at
fair value, see "Part II - Item 7. Management's Narrative Analysis of the
Results of Operations - Critical Accounting Policies and Estimates - Investments
- Investment Valuation" in our 2021 Form 10-K and Note 12 herein.
Derivatives
For information on our accounting policies for derivatives, see Note 5 herein.
For information on market exposures associated with our derivatives, including
sensitivities, see "Part II - Item 7A. Quantitative and Qualitative Disclosures
About Market Risk" in our 2021 Form 10-K.
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 "Part II -
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Introduction - Annual Assumption Review" and Note 1 in our 2021
Form 10-K.
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