UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
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(Mark One)
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2022
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _________ to _________.
Commission File Number 1-6028
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LINCOLN NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
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Indiana | 35-1140070 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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150 N. Radnor-Chester Road, Suite A305, Radnor, Pennsylvania | 19087 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (484) 583-1400
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Common Stock |
| LNC |
| New York Stock Exchange |
Depositary Shares, each representing a 1/1000th interest in a share of 9.000% Non-Cumulative Preferred Stock, Series D |
| LNC PRD |
| New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large Accelerated Filer | |
| Accelerated Filer | |
| Non-accelerated Filer | |
| Smaller Reporting Company | |
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| Emerging Growth Company | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes No
The aggregate market value of the shares of the registrant’s common stock held by non-affiliates (based upon the closing price of these shares on the New York Stock Exchange) as of the last business day of the registrant’s most recently completed second fiscal quarter was $7.0 billion. Shares of common stock held by each executive officer and director and each entity that owns 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of February 13, 2023, 169,220,989 shares of common stock of the registrant were outstanding.
Documents Incorporated by Reference:
Selected portions of the Proxy Statement for the Annual Meeting of Shareholders, scheduled for May 25, 2023, have been incorporated by reference into Part III of this Form 10-K.
Table of Contents
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PART I | ||
Item 1. | 1 | |
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| 6 8 | |
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Item 1A. | 19 | |
Item 1B. | 32 | |
Item 2. | 32 | |
Item 3. | 32 | |
Item 4. | 32 | |
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PART II | ||
Item 5. | 34 | |
Item 6. | 34 | |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 35 |
Item 7A. | 95 | |
Item 8. | 102 | |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 189 |
Item 9A. | 189 | |
Item 9B. | 189 | |
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PART III | ||
Item 10. | 189 | |
Item 11. | 189 | |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 189 |
Item 13. | Certain Relationships and Related Transactions, and Director Independence | 190 |
Item 14. | 190 | |
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PART IV | ||
Item 15. | 190 | |
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| FS-1 | |
PART I
The “Business” section and other parts of this Form 10-K contain forward-looking statements that involve inherent risks and uncertainties. Statements that are not historical facts, including statements about our beliefs and expectations, and containing words such as “believes,” “estimates,” “anticipates,” “expects” or similar words are forward-looking statements. Our actual results may differ materially from the projected results discussed in the forward-looking statements. Factors that could cause such differences include, but are not limited to, those discussed in “Item 1A. Risk Factors” and in the “Forward-Looking Statements – Cautionary Language” in “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) of the Form 10-K. The consolidated financial statements and the accompanying notes to the consolidated financial statements (“Notes”) are presented in “Part II – Item 8. Financial Statements and Supplementary Data.”
Item 1. Business
OVERVIEW
Lincoln National Corporation (“LNC,” which also may be referred to as “Lincoln,” “we,” “our” or “us”) is a holding company, which operates multiple insurance and retirement businesses through subsidiary companies. Through our business segments, we sell a wide range of wealth protection, accumulation, group protection and retirement income products and solutions. LNC was organized under the laws of the state of Indiana in 1968. We currently maintain our principal executive offices in Radnor, Pennsylvania. “Lincoln Financial Group” is the marketing name for LNC and its subsidiary companies.
We provide products and services and report results through four segments as follows:
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Business Segments |
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Life Insurance |
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Annuities |
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Group Protection |
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Retirement Plan Services |
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We also have Other Operations, which includes the financial data for operations that are not directly related to the business segments.
The results of Lincoln Financial Network (“LFN”) and Lincoln Financial Distributors (“LFD”), our retail and wholesale distributors, respectively, are included in the segments for which they distribute products. LFD distributes our individual products and services, retirement plans and corporate-owned universal life insurance and variable universal life insurance (“COLI”) and bank-owned universal life insurance and variable universal life insurance (“BOLI”) products and services. The distribution occurs primarily through consultants, brokers, planners, agents, financial advisers, third-party administrators (“TPAs”) and other intermediaries. Group Protection distributes its products and services primarily through employee benefit brokers, TPAs and other employee benefit firms. As of December 31, 2022, LFD had approximately 510 internal and external wholesalers (including sales and relationship managers). As of December 31, 2022, LFN offered LNC and non-proprietary products and advisory services through a national network of approximately 11,900 active producers who placed business with us within the last 24 months.
Financial information in the tables that follow is presented in accordance with United States of America generally accepted accounting principles (“GAAP”), unless otherwise indicated. We provide revenues, income (loss) from operations and assets attributable to each of our business segments and Other Operations in Note 21.
BUSINESS SEGMENTS AND OTHER OPERATIONS
LIFE INSURANCE
Overview
The Life Insurance segment focuses on the creation and protection of wealth for its clients by providing life insurance products, including term insurance, both single (including universal life insurance (“UL”), COLI and BOLI) and survivorship versions of indexed universal life insurance (“IUL”) and variable universal life insurance (“VUL”) products, linked-benefit products (which are UL and VUL with riders providing for long-term care costs), and critical illness and long-term care riders, which can be attached to IUL or VUL policies. Some of our products include secondary guarantees, which are discussed more fully below. Generally, this segment has higher sales during the second half of the year with the fourth quarter being the strongest.
Life products can be classified as “fixed” (including indexed) or “variable” contracts. These classifications describe whether we or the contract holders bear the primary investment risk of the assets supporting the policy. This also determines the manner in which we earn
investment margin profits from these products, either as investment spreads for fixed products or as asset-based fees charged to variable products.
In general, the Life Insurance segment’s sources of revenue include premium payments, cost of insurance assessments, expense and fee charges and investment income. In turn, this segment incurs expenses, which include paying death claims, long-term care claims, and surrender benefits, crediting interest, accruing reserves for future claim payments, as well as other expenses related to the business. The difference between revenue collected and expenses incurred is the profit for the Life Insurance business. Profitability, including fluctuations from period to period, is impacted by factors such as changes in sales of products, mortality experience (the frequency and magnitude of mortality claims paid during a given period), persistency and investment income. The impact of each factor varies by product type.
Products
We offer four categories of life insurance products, consisting of:
UL and IUL
UL insurance products provide life insurance with account values that earn rates of return solely based on company-declared interest rates. Contract holder account values are invested in our general account investment portfolio, so we bear the risk of investment performance. During 2022, we discontinued new sales of UL products with secondary guarantees. We continue to offer fixed IUL products that function similarly to a traditional UL policy, with the added flexibility of allowing contract holders to have portions of their account values earn credits based on the performance of indexes such as the S&P 500® Index. These products include Lincoln WealthPreserve® IUL and Lincoln WealthAccumulate® IUL.
In a UL contract, contract holders typically have flexibility in the timing and amount of premium payments and the amount of death benefit, provided there is sufficient account value to cover all policy charges for cost of insurance and expenses for the coming period. Under certain contract holder options and market conditions, the death benefit amount may increase or decrease. Premiums received on a UL product, net of expense loads and charges, are added to the contract holder’s account value and accrued with interest. The client has access to their account value (or a portion thereof), less surrender charges and policy loan payoffs, through contractual liquidity features such as loans, partial withdrawals and full surrenders. Loans and withdrawals reduce the death benefit amount payable and are limited to certain contractual maximums (some of which are required under state law), and interest is charged on all loans. Our UL contracts assess surrender charges against the policies’ account values for full or partial surrenders and certain policy changes that occur during the contractual surrender charge period. Depending on the product selected, surrender charge periods can range from 0 to 25 years.
As mentioned previously, we offer a survivorship version of our individual IUL products, Lincoln WealthPreserve® SIUL. This product insures two lives with a single policy and pays death benefits upon the second death.
A UL policy with a lifetime secondary guarantee can stay in force, even if the base policy cash value is zero, as long as secondary guarantee requirements have been met. The secondary guarantee requirement is based on the payment of a required minimum premium or on the evaluation of a reference value within the policy, calculated in a manner similar to the base policy account value, but using different expense charges, cost of insurance charges and credited interest rates. The parameters for the secondary guarantee requirement are listed in the contract. As long as the contract holder pays the minimum premium or funds the policy to a level that keeps this calculated reference value positive, the policy is guaranteed to stay in force. The reference value has no actual monetary value to the contract holder; it is only a calculated value used to determine whether or not the policy will lapse should the base policy cash value be less than zero.
VUL
VUL products are UL products that provide a return on account values linked to an underlying investment portfolio of variable funds offered through the product. The value of the variable portion of the contract holder’s account is driven by the performance of the underlying variable funds chosen by the contract holder. As the return on the investment portfolio increases or decreases, that portion of the account value of the VUL policy will increase or decrease. In addition, VUL products offer a fixed account option that is managed by us. As with fixed UL products, contract holders have access, within contractual maximums, to account values through loans, withdrawals and surrenders. Surrender charges are assessed during the surrender charge period, ranging from 0 to 20 years depending on the product. Our single life VUL offerings include Lincoln AssetEdge® VUL and Lincoln VULONE insurance products. Our COLI products are also VUL-type products.
We also offer a survivorship version of our individual VUL products, Lincoln SVULONE. This product insures two lives with a single policy and pays death benefits upon the second death.
We offer lifetime guaranteed benefit riders with our Lincoln VULONE and Lincoln SVULONE products. The ONE rider features guarantee to the contract holder that upon death, as long as secondary guarantee requirements have been met, the death benefit will be payable even if the account value equals zero.
Our secondary guarantee benefits maintain the flexibility of a UL or VUL policy, which allow a contract holder to take loans or withdrawals. Although loans and withdrawals are likely to shorten the time period of the secondary guarantee, the guarantee is not automatically or completely forfeited. Additional premium may be deposited to extend the length of the guarantee. For additional information on our reserves on UL and VUL products with secondary guarantees, see Note 10.
Linked-Benefit Life Products and Products with Critical Illness Riders
Lincoln MoneyGuard®, our linked-benefit life product group, combines UL or VUL with long-term care insurance through the use of a rider or riders. The policy rider allows the contract holder to accelerate death benefits on a tax-free basis in the event of a qualified long-term care need, reducing the remaining death benefit, and, once the death benefit is exhausted, offers access to an additional pool of dollars that can be used for qualified long-term care expenses. Certain policies also provide a reduced death benefit to the contract holder’s beneficiary if the death benefit has been fully accelerated as long-term care benefits during the contract holder’s life.
Some life products provide for critical illness or long-term care insurance by the use of riders attached to IUL or VUL policies. These riders allow the contract holder to accelerate death benefits on a tax-free basis in the event of a qualified condition.
Term Life Insurance
Term life insurance provides a fixed death benefit for a scheduled period of time. Some of our term life insurance products give the contract holder the option to reduce the death benefit at a future time. Scheduled policy premiums are required to be paid at least annually. These products include Lincoln TermAccel® Level Term and Lincoln LifeElements® Level Term.
Distribution
The Life Insurance segment’s products are sold through LFD. LFD provides the Life Insurance segment with access to financial intermediaries in the following primary distribution channels: wire/regional firms; independent planner firms (including LFN); financial institutions; and managing general agents/independent marketing organizations. LFD distributes BOLI/COLI products and services to banks and mid- to large-sized corporations, primarily through intermediaries who specialize in one or both of these markets and who are serviced through a network of internal and external LFD sales professionals.
Competition
The life insurance market is very competitive and consists of many companies with no one company dominating the market for all products. Principal competitive factors include product features, price, underwriting and issue process, customer service and insurers’ financial strength. With our broad distribution network, we compete in the three primary needs of life insurance: death benefit protection, accumulation and linked benefits (MoneyGuard). In addition, we use automated underwriting within a defined criteria as well as LincXpress®, a streamlined issue process, both of which are seen as marketplace competitive advantages.
Underwriting
In the context of life insurance, underwriting is the process of evaluating medical and non-medical information about an individual and determining the effect these factors statistically have on mortality. This process of evaluation is often referred to as risk classification. No one can accurately predict how long any individual will live, but certain risk factors can affect life expectancy and are evaluated during the underwriting process.
Claims Administration
Claims service is handled primarily in-house, and claims examiners are assigned to each claim notification based on coverage amount, type of claim and the experience of the examiner. Claims meeting certain criteria are referred to senior claims examiners. A formal quality assurance program is carried out to ensure the consistency and effectiveness of claims examining activities. A network of in-house legal counsel, compliance officers, medical personnel and an anti-fraud investigative unit also support claims examiners. A special team of claims examiners, in conjunction with claims management, focus on more complex claims matters such as claims incurred during the contestable period, beneficiary disputes and litigated claims. Long-term care claims are handled primarily by a third-party administrator.
ANNUITIES
Overview
The Annuities segment provides tax-deferred investment growth and lifetime income opportunities for its clients by offering variable annuities, fixed (including indexed) annuities and indexed variable annuities. Similar to the life insurance product classifications described above, the “fixed” and “variable” classifications describe whether we or the contract holders bear the investment risk of the assets supporting the contract. With “indexed variable” annuities, the extent to which we or the contract holders bear the investment risk of the assets is based on the investment allocations. The annuity classification also determines the manner in which we earn investment margin profits from these products, either as investment spreads for fixed products, as asset-based fees charged to variable products, or as both for indexed variable products.
Annuities have several features that are attractive to customers. Annuities are unique in that contract holders can select a variety of payout alternatives to provide an income flow for life. Many annuity contracts also include guarantee features (living and death benefits) that are not found in any other investment vehicle and that, we believe, make annuities attractive especially in times of economic uncertainty. In addition, growth on the underlying principal in annuities is typically granted tax-deferred treatment, thereby deferring the tax consequences of the growth in value until withdrawals are made from the accumulation values, potentially at lower tax rates occurring during retirement.
Products
In general, an annuity is a contract between an insurance company and an individual in which the insurance company, after receipt of one or more premium payments, agrees to pay an amount of money either in one lump sum or on a periodic basis (i.e., annually, semi-annually, quarterly or monthly), beginning on a certain date and continuing for a period of time as specified in the contract or as requested. Periodic payments can begin within 12 months after the premium is received (referred to as an immediate annuity) or at a future date in time (referred to as a deferred annuity). This retirement vehicle helps protect an individual from outliving their money.
Variable Annuities
A variable annuity provides the contract holder the ability to direct the investment of premium deposits into one or more variable sub-accounts (“variable funds”) offered through the product (“variable portion”) and, for a specified period, into a fixed account (if available) with a guaranteed return (“fixed portion”). The value of the variable portion of the contract holder’s account varies with the performance of the underlying variable funds chosen by the contract holder.
Our variable funds include the Managed Risk Strategies fund options, a series of funds that embed volatility risk management and, with some funds, capital protection strategies inside the funds themselves. These funds seek to reduce equity market volatility risk for both the contract holder and us.
We charge mortality and expense assessments and administrative fees on variable annuity accounts to cover insurance and administrative expenses. These assessments are built into accumulation unit values, which when multiplied by the number of units owned for any variable fund equals the contract holder’s account value for that variable fund. In addition, for some contracts, we impose surrender charges, which are typically applicable to withdrawals during the early years of the annuity contract, with a declining level of surrender charges over time.
We offer guaranteed benefit riders with certain of our variable annuity products, such as a guaranteed death benefit (“GDB”), a guaranteed withdrawal benefit (“GWB”), a guaranteed income benefit (“GIB”) and a combination of such benefits.
The GDB features offered include those where we contractually guarantee to the contract holder that upon death, depending on the particular product, we will return no less than: the current contract value; the total deposits made to the contract, adjusted to reflect any partial withdrawals; the highest contract value on a specified anniversary date adjusted to reflect any partial withdrawals following the contract anniversary; or an earnings enhancement on gains in the contract.
We offer the optional Lincoln ProtectedPaySM lifetime income suite, which provides a GWB and includes: Secure Core, Secure Plus and Secure Max, and Select Core, Select Plus and Select Max. All provide contract holders with protected lifetime income that is based on a maximum rate of the income base that grows annually for a specified period of time at the greater of a specified simple rate or account value growth. The riders provide higher income if the contract holder delays withdrawals. The Secure Core and Select Core riders are hybrid benefit riders combining aspects of GWB and GIB that provide a specified maximum rate of income. The Secure Plus and Secure Max riders and Select Plus and Select Max riders provide contract holders with protected lifetime income up to a specified maximum rate of the income base and a lower specified maximum rate of the income base if the account value falls to zero. Contract holders under the Secure riders are subject to the allocation of their account value to our Managed Risk Strategies fund options and certain fixed-income options. Contract holders under the Select riders are subject to restrictions on the allocation of their account value within the various investment choices.
We also offer the American Legacy® Target Date Income variable annuity with an optional Target Date Income Benefit rider, which combines target date investing with a protected lifetime income. Contract holders who elect the Target Date Income Benefit are automatically allocated to the Target Date Fund based on their year of birth. The protected lifetime income is based on a percentage rate of income for their age at the time of purchase of the optional rider, which will grow at the greater of a specified simple rate (available each year a withdrawal is not taken for a specified period of time) or account value growth.
In addition, we offer the i4LIFE® Advantage and i4LIFE Advantage Guaranteed Income Benefit (Managed Risk) riders. These riders allow variable annuity contract holders access and control during a portion of the income distribution phase of their contract. In general, GIB is an optional feature available with the i4LIFE Advantage rider and a non-optional feature on the i4LIFE Advantage Guaranteed Income Benefit (Managed Risk) rider that guarantees regular income payments will not fall below the greater of a minimum income floor set at benefit issue and 75% of the highest income payment on a specified anniversary date (reduced for any subsequent withdrawals). Contract holders under the i4LIFE Advantage Guaranteed Income Benefit (Managed Risk) rider are subject to the allocation of their account value to our Managed Risk Strategies fund options and certain fixed-income options.
We also offer the 4LATER® Select Advantage rider. This rider provides a minimum income base used to determine the GIB floor when a client begins income payments under the i4LIFE Advantage Select Guaranteed Income Benefit rider. The 4LATER Select Advantage rider provides growth during the accumulation phase through both an enhancement to the income base each year a withdrawal is not taken for a specified period of time and an annual step-up of the income base to the current contract value. Contract holders under the 4LATER Select Advantage rider are subject to restrictions on the allocation of their account value within the various investment choices.
We design and actively manage the features and structure of our guaranteed benefit riders to maintain a competitive suite of products consistent with profitability and risk management goals. We use a variety of hedging strategies to mitigate the risks to the statutory capital of our insurance subsidiaries associated with our guaranteed benefit riders. For more information on our hedging program, see “Introduction – Executive Summary – Significant Operational Matters – Variable Annuity Hedge Program” in the MD&A. For information regarding risks related to our guaranteed benefits and hedging strategies, see “Item 1A. Risk Factors – Market Conditions – Changes in the equity markets, interest rates and/or volatility affect the profitability of our products with guaranteed benefits; therefore, such changes may have a material adverse effect on our business and profitability,” and “Item 1A. Risk Factors – Market Conditions – Our hedging strategies may not be fully effective to offset the changes in the carrying value of the guarantees on certain of our products, which could result in volatility in our results of operations and financial condition under GAAP and in the capital levels of our insurance and reinsurance subsidiaries.”
Fixed Annuities
A fixed annuity preserves the principal value of the contract while guaranteeing a minimum interest rate to be credited to the accumulation value. Our fixed annuity product offerings consist of traditional fixed-rate and fixed indexed deferred annuities, as well as fixed-rate immediate and deferred income annuities with various payment options, including lifetime incomes. Fixed annuity contracts are general account obligations. We bear the investment risk for fixed annuity contracts. To protect from premature withdrawals, we impose surrender charges. Surrender charges are typically applicable during the early years of the annuity contract, with a declining level of surrender charges over time. On most policies, within the surrender charge period, we also have a market value adjustment provision that protects us against disintermediation risk in the case of rapidly rising interest rates. We expect to earn a spread between what we earn on the underlying general account investments supporting the fixed annuity product line and what we credit to our fixed annuity contract holders’ accounts.
We offer single and flexible premium fixed deferred annuities. Single premium fixed deferred annuities are contracts that allow only a single premium to be paid. Flexible premium fixed deferred annuities are contracts that allow multiple premium payments, subject to contractual limits, on either a scheduled or non-scheduled basis.
Our fixed indexed annuities allow the contract holder to choose between a fixed interest crediting rate and an indexed interest crediting rate, which is based on the performance of the S&P 500® Index, the S&P 500 Daily Risk Control 5%TM Index, the S&P 500 Daily Risk Control 10%TM Index, the J.P. Morgan First Trust Balanced Capital Strength 6SM Index, the J.P. Morgan First Trust Balanced Capital Strength 5SM Index, the BlackRock Dynamic Allocation Index, or the Fidelity AIMSM Dividend Index. The indexed interest credit is guaranteed never to be less than zero.
We use derivatives to hedge the equity market risk associated with our fixed indexed annuity products. For more information on our hedging program, see “Critical Accounting Policies and Estimates – Derivatives” and “Realized Gain (Loss)” in the MD&A.
Indexed Variable Annuities
Lincoln Level Advantage® is our indexed variable annuity product, which is commonly referred to in the industry as a registered index-linked annuity. Lincoln Level Advantage provides the contract holder the ability to direct the investment of premium deposits into one or more variable funds and/or indexed accounts offered through the product. The value of the variable sub-accounts varies with the performance of the underlying variable funds chosen by the contract holder. The index interest crediting rate for an indexed account is
based, in part, on the performance of an index. The available indices are the S&P 500® Index, the Russell 2000® Index, the MSCI EAFE, the Capital Strength Net Fee IndexSM, the First Trust American Leadership IndexTM and the NASDAQ-100 Index®.
We charge mortality and expense assessments and administrative fees on the variable funds to cover insurance and administrative expenses. These assessments are built into accumulation unit values, which when multiplied by the number of units owned for any variable fund equals the contract holder’s account value for that variable fund. In addition, for some contracts, we impose surrender charges, which are typically applicable during the early years of the annuity contract, with a declining level of surrender charges over time.
We offer a GDB rider where we contractually guarantee to the contract holder that upon death, depending on the particular product, we will return no less than the current contract value or the total deposits made to the contract, adjusted to reflect any partial withdrawals.
We also offer the i4LIFE® Advantage rider. This rider allows annuity contract holders access and control during a portion of the income distribution phase of their contract. This added flexibility allows the contract holder to access the account value for transfers and additional withdrawals.
We use derivatives to hedge the equity market risk associated with our indexed variable annuity products. For more information on our hedging program, see “Critical Accounting Policies and Estimates – Derivatives” and “Realized Gain (Loss)” in the MD&A.
Distribution
The Annuities segment distributes its individual fixed and variable annuity products through LFD. LFD’s distribution channels give the Annuities segment access to its target markets. LFD distributes the segment’s products to a large number of financial intermediaries, including LFN. The financial intermediaries include wire/regional firms, independent financial planners, financial institutions, registered investment advisers and managing general agents.
Competition
The annuities market is very competitive and consists of many companies, with no one company dominating the market for all products. The Annuities segment competes with numerous other financial services companies. The main factors upon which entities in this market compete are distribution channel access and the quality of wholesalers, investment performance, cost, breadth of product portfolio and features, speed to market, brand recognition, financial strength ratings, crediting rates and client service.
GROUP PROTECTION
Overview
The Group Protection segment offers group non-medical insurance products and services, including short- and long-term disability, statutory disability and paid family medical leave administration and absence management services, term life, dental, vision and accident, critical illness and hospital indemnity benefits and services to the employer marketplace through various forms of employee-paid and employer-paid plans. Group Protection markets its products and services to employer groups of all sizes, from small companies with fewer than 100 employees to large employers with 10,000 or more employees, with enhanced disability and absence management competency.
Products
Disability Insurance and Services
We offer insured coverage for, as well as administrative services for employer self-funded, short- and long-term employer-sponsored group and voluntary disability insurance, which protects an employee against loss of wages due to illness or injury. Short-term disability insurance generally provides weekly benefits for up to 26 weeks following a short waiting period, ranging from 1 to 30 days. Long-term disability insurance provides benefits following a longer waiting period, usually between 90 and 180 days, and provides benefits for a longer period, ranging from 2 years to normal (Social Security) retirement age. The monthly benefits provided are subject to reduction when Social Security benefits are also paid. We also provide insured coverage for, as well as administrative services for employer self-funded, state-specific statutory disability and paid family leave programs as legislation is passed and implemented.
Absence Management
We offer a robust portfolio of absence management services to help employers manage their state and federal family medical and company leave programs (paid and unpaid), as well as accommodation services that help employers identify accommodations that could be made to help claimants return to work (e.g., assistive devices, ergonomic assessments, etc.). Our comprehensive and compliant solutions, with ease of intake, provide coordinated and integrated management expertise to handle both leave and disability events.
Life Insurance
We offer employer-sponsored group term life insurance products including basic, optional, and voluntary term life insurance to employees and their dependents. Additional benefits may be provided in the event of a covered individual’s accidental death or dismemberment.
Dental and Vision
We offer a variety of employer-sponsored group dental insurance plans, which cover a portion of the cost of eligible dental procedures for employees and their dependents. Products offered include: indemnity coverage, which does not distinguish benefits based on a dental provider’s participation in a network arrangement; Preferred Provider Organization (“PPO”) products, on an insured and administrative services only basis, that do reflect the dental provider’s participation in the PPO network arrangement, including an agreement with network fee schedules; a Dental Health Maintenance Organization product that limits benefit coverage to a closed panel of network providers; an in-network-only option that limits benefit coverage to providers in certain states; and self-funded options for groups with more than 200 employees.
We offer comprehensive employer-sponsored fully insured vision plans with a wide range of benefits for protecting employees’ and their covered dependents’ sight and vision health. All plans provide access to a national network of providers, with in and out-of-network benefits.
Accident, Critical Illness and Hospital Indemnity Insurance
We offer employer-sponsored group accident insurance products for employees and their covered dependents. This product is predominantly purchased on an employee-paid basis. Accident insurance provides scheduled benefits for over 30 types of benefit triggers related to accidental causes, including sports-related injuries, and is available for non-occupational accidents exclusively or on a 24-hour coverage basis.
We also offer employer-sponsored group critical illness insurance to employees and their covered dependents. This product is predominantly purchased on an employee-paid basis. The coverage provides for lump sum payouts upon the occurrence of one of the specified critical illness benefit triggers covered within a critical illness insurance policy. This product also includes benefits and services that assist employees and their family members in the prevention, early detection and treatment of critical illness events.
We also offer hospital indemnity insurance as part of our suite of supplemental health solutions. Similar to our employer-sponsored group accident and critical illness insurance, hospital indemnity is offered to employees and their covered dependents and is predominantly purchased on an employee-paid basis. Hospital indemnity insurance provides scheduled benefits for hospital admission and daily confinement, as well as over 20 benefit triggers related to hospitalization due to an accident and/or illness.
Distribution
The Group Protection segment’s products are marketed primarily through a national distribution system. The managers and marketing representatives develop business through employee benefit brokers, consultants, TPAs and other employee benefit firms that work with employers to provide access to our products.
Competition
The group protection marketplace is very competitive. Principal competitive factors include product features, price, quality of customer service and claims management, technological capabilities, quality and efficiency of distribution and financial strength ratings. In this market, the Group Protection segment competes nationally with a number of major companies and regionally with other companies offering all or some of the products within our product set. In addition, there is competition in attracting brokers to actively market our products and attracting and retaining sales representatives to sell our products. Key competitive factors in attracting brokers include product offerings and features, financial strength, support services and compensation.
Underwriting
The Group Protection segment’s underwriters evaluate the risk characteristics of each employer group. Generally, the relevant characteristics evaluated include employee census information (such as age, gender, income and occupation), employer industry classification, geographic location, benefit design elements and other factors. The segment employs detailed underwriting policies, guidelines and procedures designed to assist the underwriter to properly assess and quantify risks. Individual underwriting techniques (including evaluation of individual medical history information) may be used on certain covered individuals selecting benefit amounts that are above guarantee issue limits set forth in the insurance policies. For voluntary and other forms of employee paid coverages, minimum participation requirements are used to obtain a better spread of risk and minimize the risk of anti-selection.
Claims Administration
Claims for the Group Protection segment are managed by in-house claim specialists. Claims are evaluated for eligibility and payment of benefits pursuant to the group insurance contract or self-insured plan and in compliance with federal and state regulations. Efficient and accurate disability claims management is especially important to customer service satisfaction and segment results. Results can be impacted by both the incidence and the length of approved disability claims. The segment employs a variety of clinical experts, including employee and contract medical professionals and rehabilitation specialists, to evaluate medically supported functional capabilities and to assist in the development of return to work plans. The accuracy and speed of life claims are important customer service and risk management factors. Some life policies include a waiver of premium provision in the event of the insured’s disability. Dental claims management focuses on assisting plan administrators and members with the rising costs of insurance by utilizing tools to optimize dental claims payment accuracy through advanced claims review and validation, improved data analysis, enhanced clinical review of claims and provider utilization monitoring.
RETIREMENT PLAN SERVICES
Overview
The Retirement Plan Services segment provides employers with retirement plan products and services, primarily in the defined contribution retirement plan marketplace. Defined contribution plans are a popular employee benefit offered by employers large and small across a wide spectrum of industries. While our focus is employer-sponsored defined contribution plans, we also serve the defined benefit plan and individual retirement account (“IRA”) markets on a limited basis. We provide a variety of plan investment vehicles, including individual and group variable annuities, group fixed annuities and mutual fund-based programs. We also offer a broad array of plan services including plan recordkeeping, compliance testing, participant education and trust and custodial services through our affiliated trust company, Lincoln Financial Group Trust Company.
Products and Services
The Retirement Plan Services segment currently brings three primary offerings to the employer-sponsored market: LINCOLN DIRECTORSM group variable annuity, LINCOLN ALLIANCE® program and Multi-Fund® variable annuity. The LINCOLN ALLIANCE program is a mutual fund-based record-keeping platform. These offerings primarily cover the 403(b), 401(k) and 457 plan marketplaces. The 403(b) plans are available to educational institutions, not-for-profit healthcare organizations and certain other not-for-profit entities; 401(k) plans are generally available to for-profit entities; and 457 plans are available to not-for-profit entities and state and local government entities. The investment options for our annuities encompass the spectrum of asset classes with varying levels of risk and include both equity and fixed-income.
LINCOLN DIRECTORSM group variable annuity is a 401(k) defined contribution retirement plan solution available to small businesses, typically those with plans having less than $10 million in account values. The LINCOLN DIRECTOR product offers participants a broad array of investment options from several fund families and a fixed account. The Retirement Plan Services segment earns revenue through asset charges and/or separate account charges, which are used to pay our fees for recordkeeping services. We also receive fees from the underlying mutual fund companies for the services we provide, and we earn investment margins on assets in the fixed account. Through the LINCOLN DIRECTOR product, as well the LINCOLN ALLIANCE® product discussed below, we also offer our proprietary YourPath® portfolios, a series of target-date portfolios for employer-sponsored retirement plans. These target-date portfolios are managed along multiple risk-based paths to support a more personalized investment approach based upon financial circumstances and risk tolerance. These target-date portfolios are also available with an income solution in the form of a GWB.
The LINCOLN ALLIANCE program is a defined contribution retirement plan solution aimed at small, mid-large and large market employers, typically those that have defined contribution plans with $10 million or more in account value. The target market is primarily healthcare providers, public sector employers, corporations and educational institutions. The program bundles our traditional fixed annuity products with the employer’s choice of mutual funds, along with recordkeeping, plan compliance services and customized employee education services. The program allows the use of any mutual fund. We earn fees for our recordkeeping and educational services and other services that we provide to plan sponsors and participants. We also earn investment margins on fixed annuities.
Multi-Fund® variable annuity is a defined contribution retirement plan solution with fully bundled administrative services and investment choices for small- to mid-sized healthcare, education, governmental and not-for-profit employers sponsoring 403(b), 457(b) and 401(a)/(k) plans. The product is available to the employer through the Multi-Fund group variable annuity contract or directly to the individual participant through the Multi-Fund Select variable annuity contract. We earn mortality and expense charges, investment income on the fixed account and surrender charges from this product. We also receive fees for services that we provide to funds in the underlying separate accounts.
Additionally, we offer other products and services that complement our primary offerings:
The Lincoln Next Step® series of products is a suite of mutual fund-based IRAs available exclusively for participants in Lincoln-serviced retirement plans and their spouses. The products can accept rollovers and transfers from other providers as well as ongoing contributions. The Lincoln Next Step IRA product has no annual account charges and offers an array of mutual fund investment options provided by 20 fund families all offered at net asset value. The Lincoln Next Step Select IRA has an annual record keeping charge and offers an even wider array of mutual fund investment options from over 20 families, all at net asset value. We earn 12b-1 and service fees on the mutual funds within the product.
Through a group annuity contract, we offer a series of products intended to fulfill future needs of retirement security for our clients. By offering a GWB inside a retirement plan, we provide plan sponsors a solution that gives participants the ability to participate in the market and receive guaranteed income for life while still maintaining access to their plan account value. These products are available both to retirement plans where we provide plan recordkeeping services and those where we do not.
Through a group annuity contract or funding agreement, we offer fixed return products to retirement plans and other institutional contract holders where we do not provide plan recordkeeping services. The fixed annuity or funding agreement is used within small, mid-large and large employer plan sponsors or institutional investors. The contract provides a conservative investment option for those seeking stability. In some cases, we earn investment margins on assets in the fixed account, and in other product versions we earn a fee on assets in the underlying custodial account.
Distribution
Retirement Plan Services products are primarily distributed in two ways: through our Institutional Retirement Distribution team and by LFD. Wholesalers distribute these products through advisers, consultants, banks, wirehouses and individual planners. We remain focused on wholesaler productivity, increasing relationship management expertise and growing the number of broker-dealer relationships.
The Multi-Fund program is sold primarily by affiliated advisers. The LINCOLN ALLIANCE program is sold primarily through consultants, registered independent advisers and both affiliated and non-affiliated financial advisers, planners and wirehouses. LINCOLN DIRECTOR group variable annuity is sold in the small marketplace by intermediaries, including financial advisers and planners.
Competition
The retirement plan marketplace is very competitive and comprised of many providers with no one company dominating the market for all products. As stated above, we compete with numerous other financial services corporations in the small, mid and large employer markets. The main factors upon which entities in this market compete are product strength, technology, service model delivery, participant education models, quality of wholesale distribution access to intermediary firms and brand recognition. Our key differentiator is our technology enabled, people-connected service model, which leverages digitally focused tools with personalized support and has been shown to drive positive outcomes for plan sponsors and participants.
OTHER OPERATIONS
Other Operations includes the financial data for operations that are not directly related to the business segments. Other Operations includes investments related to the excess capital in our insurance subsidiaries; corporate investments; benefit plan net liability; the results of certain disability income business; our run-off Institutional Pension business in the form of group annuity and insured funding-type of contracts; debt; and Spark program expenses. For more information on the Spark Initiative, see “Introduction – Executive Summary – Significant Operational Matters – Spark Initiative” in the MD&A.
REINSURANCE
Our reinsurance strategy is designed to protect our insurance subsidiaries against the severity of losses on individual claims and unusually serious occurrences in which a number of claims produce an aggregate extraordinary loss. Although reinsurance does not discharge the insurance subsidiaries from their primary liabilities to their contract holders for losses insured under the insurance policies, it does make the assuming reinsurer liable to the insurance subsidiaries for the reinsured portion of the risk. Because we bear the risk of nonpayment by one or more of our reinsurers, we primarily cede reinsurance to well-capitalized, highly rated unaffiliated reinsurers. We also utilize inter-company reinsurance agreements to manage our statutory capital position as well as our hedge program for variable annuity guarantees. These inter-company agreements do not have an effect on the consolidated financial statements.
As of December 31, 2022, the policy for our reinsurance program was to retain up to $20 million on a single insured life. For more information, see Note 8.
Some portions of our annuity business have been reinsured on either a coinsurance or a modified coinsurance basis with other companies to limit our exposure associated with fixed and variable annuities. In a coinsurance program, the reinsurer shares proportionally in all financial terms of the reinsured policies (i.e., premiums, expenses, claims, etc.) based on their respective percentage of the risk. In a
modified coinsurance program, we as the ceding company retain the reserves, as well as the assets backing those reserves, and the reinsurer shares proportionally in all financial terms of the reinsured policies based on their respective percentage of the risk.
In addition, we acquire other reinsurance to cover products other than as discussed above with retentions and limits that management believes are appropriate for the circumstances. For example, we use reinsurance to cover larger life and disability claims in our Group Protection business.
We obtain reinsurance from a diverse group of reinsurers, and we monitor concentration and financial strength ratings of our principal reinsurers. Protective, Security Life of Denver Insurance Company (a subsidiary of Resolution Life that we refer to herein as “Resolution Life”) and Athene Holding Ltd. (“Athene”) represent our largest reinsurance exposures. For more information regarding our reinsurance arrangements and exposure, see “Reinsurance” in the MD&A and Note 8. For risks involving reinsurance, see “Item 1A. Risk Factors – Operational Matters – We face risks of non-collectability of reinsurance and increased reinsurance rates, which could materially affect our results of operations.”
RESERVES
The applicable insurance laws under which insurance companies operate require that they report, as liabilities, policy reserves to meet future obligations on their outstanding policies. These reserves are the amounts that, with the additional premiums to be received and interest thereon compounded annually at certain assumed rates, are calculated to be sufficient to meet the various policy and contract obligations as they mature. These laws specify that the reserves shall not be less than reserves calculated using certain specified mortality and morbidity tables, interest rates and methods of valuation. From time to time, the insurance laws, regulations, or regulatory guidance that specify the mortality and morbidity tables, interest rates and methods of valuation may be changed or interpreted differently, which may result in changes in the required reserves of our insurance subsidiaries. For more information on reserves, see “Critical Accounting Policies and Estimates – Future Contract Benefits” and “Critical Accounting Policies and Estimates – Other Contract Holder Funds” in the MD&A. For information on risks regarding changes in regulations, see “Item 1A. Risk Factors – Legislative, Regulatory and Tax – Our businesses are heavily regulated and changes in regulation and in supervisory and enforcement policies may affect our insurance subsidiary capital requirements, reduce our profitability, limit our growth or otherwise adversely affect our business, results of operations and financial condition.”
See “Regulatory” below for information on permitted practices and proposed regulations that may impact the amount of statutory reserves necessary to support our current insurance liabilities.
For risks related to reserves, see “Item 1A. Risk Factors – Market Conditions – Changes in interest rates and sustained low interest rates may cause interest rate spreads to decrease, impacting our profitability, and make it more challenging to meet certain statutory requirements, and changes in interest rates may also result in increased contract withdrawals” and “Item 1A. Risk Factors – Operational Matters – We face risks of non-collectability of reinsurance and increased reinsurance rates, which could materially affect our results of operations.”
INVESTMENTS
An important component of our financial results is the return on investments. Our investment strategy is to balance the need for current income with prudent risk management, with an emphasis on generating sufficient current income to meet our obligations. This approach requires the evaluation of risk and expected return of each asset class utilized, while still meeting our income objectives. This approach also permits us to be more effective in our asset-liability management because decisions can be made based upon both the economic and current investment income considerations affecting assets and liabilities. Investments made by our insurance subsidiaries must comply with the insurance laws and regulations of the states of domicile.
Derivatives are used primarily for hedging purposes and, to a lesser extent, income generation. Hedging strategies are employed for a number of reasons including, but not limited to, hedging certain portions of our exposure to changes in interest rate fluctuations, credit risks, foreign exchange risks, equity risks and the market-implied volatilities associated with guaranteed benefit riders available in our variable annuity products. In September 2022, we announced enhancements to our variable annuity hedge program that continues to focus on generating sufficient assets to fund future claims with a goal of maximizing distributable earnings and explicitly protecting capital. The revised variable annuity hedge program, effective January 1, 2023, aligns with our increased strategic focus on maximizing the economic value as measured by distributable earnings, which is achieved by managing risks to capital generation due to market volatility. For additional information on our investments, including carrying values by category, quality ratings and net investment income, see “Consolidated Investments” in the MD&A, as well as Notes 1 and 4. For additional information on our variable annuity hedging program, see “Introduction – Executive Summary – Significant Operational Matters – Variable Annuity Hedge Program” in the MD&A.
FINANCIAL STRENGTH RATINGS
The Nationally Recognized Statistical Ratings Organizations rate the financial strength of our principal insurance subsidiaries. Rating agencies rate insurance companies based on financial strength and the ability to pay claims, factors more relevant to contract holders than investors. We believe that the ratings assigned by nationally recognized, independent rating agencies are material to our operations. There may be other rating agencies that also rate our insurance companies, which we do not disclose in our reports.
The insurer financial strength rating scales of AM Best, Fitch Ratings (“Fitch”), Moody’s Investors Service (“Moody’s”) and S&P Global Ratings (“S&P”) are characterized as follows:
AM Best – A++ to D
Fitch – AAA to C
Moody’s – Aaa to C
S&P – AAA to D
As of February 13, 2023, the financial strength ratings of our principal insurance subsidiaries, as published by the principal rating agencies that rate us, were as follows:
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| AM Best |
| Fitch |
| Moody's |
| S&P |
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The Lincoln National Life Insurance Company (“LNL”) | A |
| A+ |
| A1 |
| A+ |
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| (3rd highest of 16) |
| (5th highest of 19) |
| (5th highest of 21) |
| (5th highest of 21) |
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Lincoln Life & Annuity Company of New York (“LLANY”) | A |
| A+ |
| A1 |
| A+ |
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| (3rd highest of 16) |
| (5th highest of 19) |
| (5th highest of 21) |
| (5th highest of 21) |
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First Penn-Pacific Life Insurance Company (“FPP”) | A |
| A+ |
| A1 |
| A- |
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| (3rd highest of 16) |
| (5th highest of 19) |
| (5th highest of 21) |
| (7th highest of 21) |
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A downgrade of the financial strength rating of one of our principal insurance subsidiaries could affect our competitive position in the insurance industry and make it more difficult for us to market our products, as potential customers may select companies with higher financial strength ratings. See also “Item 1A. Risk Factors – Covenants and Ratings – A downgrade in our financial strength or credit ratings could limit our ability to market products, increase the number or value of policies being surrendered and/or hurt our relationships with creditors.”
Our insurer financial strength ratings assigned by AM Best and S&P for LNL and LLANY and assigned by S&P for FPP are on outlook stable, and all of our other insurer financial strength ratings are on outlook negative. All of our ratings are subject to revision or withdrawal at any time by the rating agencies, and therefore, no assurance can be given that our principal insurance subsidiaries can maintain these ratings. Each rating should be evaluated independently of any other rating. Ratings are not recommendations to buy our securities. See “Liquidity and Capital Resources – Ratings” in the MD&A for a discussion of our credit ratings.
REGULATORY
Insurance Regulation
Our insurance subsidiaries, like other insurance companies, are subject to regulation and supervision by the states, territories and countries in which they are licensed to do business. The extent of such regulation varies, but generally has its source in statutes that delegate regulatory, supervisory and administrative authority to supervisory agencies. In the U.S., this power is vested in state insurance departments.
In supervising and regulating insurance companies, state insurance departments, charged primarily with protecting contract holders and the public rather than investors, enjoy broad authority and discretion in applying applicable insurance laws and regulation for that purpose. Our principal insurance subsidiaries, LNL, LLANY and FPP, are domiciled in the states of Indiana, New York and Indiana, respectively.
The insurance departments of the domiciliary states exercise principal regulatory jurisdiction over our insurance subsidiaries. The extent of regulation by the states varies, but, in general, most jurisdictions have laws and regulations governing standards of solvency, adequacy of reserves, reinsurance, capital adequacy, licensing of companies and agents to transact business, prescribing and approving policy forms, regulating premium rates for some lines of business, prescribing the form and content of financial statements and reports, regulating the type and amount of investments permitted and standards of business conduct. Insurance company regulation is discussed further in this section under “Insurance Holding Company Regulation.”
As part of their regulatory oversight process, state insurance departments conduct periodic examinations, generally once every three to five years, of the books, records, accounts and business practices of insurers domiciled in their states. Examinations are generally carried out in cooperation with the insurance regulators of other states under guidelines promulgated by the National Association of Insurance Commissioners (“NAIC”). State and federal insurance and securities regulatory authorities and other state law enforcement agencies and Attorneys General also, from time to time, make inquiries and conduct examinations or investigations regarding the compliance by our company, as well as other companies in our industry, with, among other things, insurance laws and securities laws. Our captive reinsurance and reinsurance subsidiaries are subject to periodic financial examinations by their respective domiciliary state insurance regulators. We have not received any material adverse findings resulting from state insurance department examinations of our insurance, reinsurance and captive reinsurance subsidiaries conducted during the three-year period ended December 31, 2022.
State insurance laws and regulations require our U.S. insurance companies to file financial statements with state insurance departments everywhere they do business, and the operations of our U.S. insurance companies and accounts are subject to examination by those departments at any time. Our U.S. insurance companies prepare statutory financial statements in accordance with accounting practices and procedures prescribed or permitted by these departments. The NAIC has approved a series of statutory accounting principles (“SAP”) that have been adopted, in some cases with minor modifications, by virtually all state insurance departments. Changes in these statutory accounting principles can significantly affect our capital and surplus.
In December 2022, the NAIC approved changes to Actuarial Guideline XLIX (“AG49”) that affect the way insurance companies are permitted to illustrate certain IUL products. We are required to comply with the amended guideline, AG49-B, for any IUL products sold on, or after, May 1, 2023, and such compliance could impact our sales of such products. The NAIC is also considering modifications to the economic scenario generator used to calculate life and annuity reserves according to the Valuation Manual (e.g., VM-20 and VM-21) and the required capital for these life and annuity contracts, as well as certain fixed annuity and single premium life insurance products, which could affect the level and volatility of statutory reserves and required capital for products in scope. These modifications are expected to be implemented by January 1, 2025, at the earliest. Effective December 31, 2022, the NAIC revised the C-2 mortality calculation that is expected to result in a small decrease in risk-based capital (“RBC”). For more information, see “Item 1A. Risk Factors – Legislative, Regulatory and Tax – Our businesses are heavily regulated and changes in regulation and in supervisory and enforcement policies may affect our insurance subsidiary capital requirements, reduce our profitability, limit our growth or otherwise adversely affect our business, results of operations and financial condition.” We are monitoring all potential changes and evaluating the potential impact they could have on our product offerings, financial condition and results of operations.
For more information on statutory reserving and our use of captive reinsurance structures, see “Liquidity and Capital Resources – Holding Company Sources and Uses of Liquidity and Capital –Subsidiaries’ Capital” in the MD&A.
Insurance Holding Company Regulation
LNC and its primary insurance subsidiaries are subject to regulation pursuant to the insurance holding company laws of the states of Indiana and New York. These insurance holding company laws generally require an insurance holding company and insurers that are members of such insurance holding company’s system to register with the insurance department authorities, to file with it certain reports disclosing information, including their capital structure, ownership, management, financial condition and certain inter-company transactions, including material transfers of assets and inter-company business agreements, and to report material changes in that information. These laws also require that inter-company transactions be fair and reasonable and, under certain circumstances, prior approval of the insurance departments must be received before entering into an inter-company transaction. Further, these laws require that an insurer’s contract holders’ surplus following any dividends or distributions to shareholder affiliates is reasonable in relation to the insurer’s outstanding liabilities and adequate for its financial needs.
In general, under state holding company regulations, no person may acquire, directly or indirectly, a controlling interest in our capital stock unless such person, corporation or other entity has obtained prior approval from the applicable insurance commissioner for such acquisition of control. Pursuant to such laws, in general, any person acquiring, controlling or holding the power to vote, directly or indirectly, 10% or more of the voting securities of an insurance company, is presumed to have “control” of such company. This presumption may be rebutted by a showing that control does not exist in fact. The insurance commissioner, however, may find that “control” exists in circumstances in which a person owns or controls a smaller amount of voting securities. To obtain approval from the insurance commissioner of any acquisition of control of an insurance company, the proposed acquirer must file with the applicable commissioner an application containing information regarding: the identity and background of the acquirer and its affiliates; the nature, source and amount of funds to be used to carry out the acquisition; the financial statements of the acquirer and its affiliates; any potential plans for disposition of the securities or business of the insurer; the number and type of securities to be acquired; any contracts with respect to the securities to be acquired; any agreements with broker-dealers; and other matters.
Other jurisdictions in which our insurance subsidiaries are licensed to transact business may have similar or additional requirements for prior approval of any acquisition of control of an insurance or reinsurance company licensed or authorized to transact business in those jurisdictions. Additional requirements in those jurisdictions may include re-licensing or subsequent approval for renewal of existing licenses upon an acquisition of control. In addition, laws that govern the holding company structure also govern payment of dividends to us by our insurance subsidiaries. See “Liquidity and Capital Resources – Holding Company Sources and Uses of Liquidity and Capital – Restrictions on Subsidiaries’ Dividends” in the MD&A for a discussion of restrictions on subsidiaries’ dividends and other payments.
Risk-Based Capital
The NAIC has adopted RBC requirements for life insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks. The requirements provide a means of measuring the minimum amount of statutory surplus appropriate for an insurance company to support its overall business operations based on its size and risk profile. There are five major risks involved in determining the requirements:
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| Name | Description |
Asset risk – affiliates |
| C-0 | Risk of declining value of insurance subsidiaries and risk from off-balance sheet |
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Asset risk – others |
| C-1 | Risk of assets’ default of principal and interest or fluctuation in fair value |
Insurance risk |
| C-2 | Risk of underestimating liabilities from business already written or inadequately pricing |
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| business to be written in the future |
Interest rate risk, health credit | C-3 | Risk of losses due to changes in interest rate levels, risk that health benefits prepaid to | |
risk and market risk |
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| providers become the obligation of the health insurer once again and risk of loss due |
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| to changes in market levels associated with variable products with guarantees |
Business risk |
| C-4 | Risk of general business |
A company’s risk-based statutory surplus is calculated by applying factors and performing calculations relating to various asset, premium, claim, expense and reserve items. Regulators can then measure adequacy of a company’s statutory surplus by comparing it to the RBC determined by the formula. Under RBC requirements, regulatory compliance is determined by the ratio of a company’s total adjusted capital, as defined by the NAIC, to its company action level of RBC (known as the RBC ratio), also as defined by the NAIC.
Accordingly, factors that have an impact on the total adjusted capital of our insurance subsidiaries, such as the permitted practices discussed above or changes in actuarial assumptions that cause us to increase our reserves, will also affect their RBC levels. Four levels of regulatory attention may be triggered if the RBC ratio is insufficient:
“Company action level” – If the RBC ratio is between 75% and 100%, then the insurer must submit a plan to the regulator detailing corrective action it proposes to undertake;
“Regulatory action level” – If the RBC ratio is between 50% and 75%, then the insurer must submit a plan, but a regulator may also issue a corrective order requiring the insurer to comply within a specified period;
“Authorized control level” – If the RBC ratio is between 35% and 50%, then the regulatory response is the same as at the “Regulatory action level,” but, in addition, the regulator may take action to rehabilitate or liquidate the insurer; and
“Mandatory control level” – If the RBC ratio is less than 35%, then the regulator must rehabilitate or liquidate the insurer.
As of December 31, 2022, the RBC ratios of LNL, LLANY and FPP reported to their respective states of domicile and the NAIC all exceeded the “company action level.” We believe that we will be able to maintain the RBC ratios of our insurance subsidiaries in excess of “company action level” through prudent underwriting, claims handling, investing and capital management. However, no assurances can be given that developments affecting the insurance subsidiaries, many of which could be outside of our control, will not cause the RBC ratios to fall below the “company action level” or below our targeted levels, which are significantly higher than the “company action level.” These developments may include, but may not be limited to: changes to the manner in which the RBC ratio is calculated; new regulatory requirements for calculating reserves, such as principles-based reserving; economic conditions leading to higher levels of impairments of securities in our insurance subsidiaries’ general accounts; and an inability to finance life reserves such as through the issuance of letters of credit (“LOCs”) supporting inter-company reinsurance structures.
See “Item 1A. Risk Factors – Liquidity and Capital Position – A decrease in the capital and surplus of our insurance subsidiaries may result in a downgrade to our credit and insurer financial strength ratings” and “Item 1A. Risk Factors – Legislative, Regulatory and Tax – Our businesses are heavily regulated and changes in regulation and in supervisory and enforcement policies may affect our insurance subsidiary capital requirements, reduce our profitability, limit our growth or otherwise adversely affect our business, results of operations and financial condition.”
Privacy Regulations
In the course of our business, we collect and maintain personal data from our customers including personally identifiable non-public financial and health information, which subjects us to numerous privacy laws and regulations. These laws require, among other things, that we institute certain policies and procedures in our business to safeguard this information from improper use or disclosure, disclose our collection practices to consumers and customers, and promptly notify and report certain types of incidents involving this data. The laws and regulations vary by jurisdiction, and it is expected that additional laws and regulations will continue to be enacted. While we employ robust and tested privacy and information security programs, as regulators establish further regulations for addressing consumer and customer privacy, we may need to amend our policies and adapt our internal procedures. See “Item 1A. Risk Factors – Legislative, Regulatory and Tax – Compliance with existing and emerging privacy regulations could result in increased compliance costs and/or lead to changes in business practices and policies, and any failure to protect the confidentiality of personal information could adversely affect our reputation and have a material adverse effect on our business, financial condition and results of operations.” For information regarding cybersecurity risks, see “Item 1A. Risk Factors – Operational Matters – Our information systems may experience interruptions, breaches in security and/or a failure of disaster recovery systems that could result in a loss or disclosure of confidential information, damage to our reputation, impairment of our ability to conduct business effectively and increased expenses.”
Federal Initiatives
The U.S. federal government does not directly regulate the insurance industry; however, federal initiatives from time to time can impact the insurance industry. The marketplace continues to evolve in the changing regulatory environment.
Financial Reform Legislation
Since it was enacted in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) has imposed considerable reform in the financial services industry. The ongoing implementation continues to present challenges and uncertainties for financial market participants. For instance, the Dodd-Frank Act and corresponding global initiatives imposed significant changes to the regulation of derivatives transactions, which we use to mitigate many types of risk in our business. As we post and collect initial margin in compliance with requirements that began in September 2021, we continue to evaluate the ways we are required to manage our derivatives trading and the attendant liquidity requirements. For more information, see “Item 1A. Risk Factors – Legislative, Regulatory and Tax – Implementation of the provisions of the European Market Infrastructure Regulation relating to the regulation of derivatives transactions subject us to margin requirements, the impact of which remains uncertain.”
Our trading activities are also affected by the scheduled phaseout of the London Inter-Bank Offered Rate (“LIBOR”) (the publication of which is scheduled to cease by June 2023) and the use of alternative reference rates and related adjustments. We continue to prepare for and monitor developments regarding these changes in order to reduce potential disruptions. As financial services regulatory reform continues to evolve in the U.S. and abroad, and the marketplace continues to respond, the extent to which our derivatives costs and strategies may change and the extent to which those changes may affect the range or pricing of our products remains uncertain.
In addition, the Dodd-Frank Act directed the Securities and Exchange Commission (“SEC”) to study the implications resulting from the different standards applicable to broker-dealers and investment advisers and empowered the SEC to adopt a uniform fiduciary standard. In January 2011, the SEC released its study on the obligations and standards of conduct of financial professionals. The SEC staff initially recommended establishing a uniform fiduciary standard for investment advisers and broker-dealers when providing investment advice about securities, including guidance for principal trading and definitions of the duties of loyalty and care owed to retail customers that would be consistent with the standard that currently applies to investment advisers. Then, in June 2019, pursuant to the authority granted by the Dodd-Frank Act, the SEC adopted “Regulation Best Interest,” which established a higher standard of care and disclosure for broker-dealers when making recommendations to retail customers, but did not create an explicit fiduciary duty. For more information, see “SEC Rules and Other Regulations relating to the Standard of Care Applicable to Investment Advisers and Broker-Dealers” below.
Additional provisions of the Dodd-Frank Act include, among other things, the creation of a new Consumer Financial Protection Bureau to protect consumers of certain financial products; and changes to certain corporate governance rules. The Federal Insurance Office established under the Dodd-Frank Act issues annually a wide-ranging report on the state of insurance regulation in the U.S., together with a series of recommendations on ways to monitor and improve the regulatory environment. The ultimate impact of these recommendations on our business is undeterminable at this time.
SEC Rules and Other Regulations relating to the Standard of Care Applicable to Investment Advisers and Broker-Dealers
In 2016, the Department of Labor (“DOL”) released the DOL Fiduciary Rule, which became effective in 2017 and substantially expanded the range of activities considered to be fiduciary investment advice under the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Internal Revenue Code. The DOL Fiduciary Rule was subsequently vacated by the U.S. Court of Appeals for the Fifth Circuit (the “Fifth Circuit”) in March 2018, and in June 2018, the Fifth Circuit issued a mandate stating that the original definition of “fiduciary,” including the original five-part test, would apply going forward.
In 2019, the SEC approved “Regulation Best Interest,” including a new standard of conduct for broker-dealers under the Securities Exchange Act of 1934, as amended (“Exchange Act”), which requires broker-dealers and their representatives to act in the best interest of retail customers when making recommendations of any securities transaction, without putting their financial interests ahead of the interests of retail customers. The final rule includes guidance on what constitutes a “recommendation” and a definition of who would be a “retail customer” in addition to provisions setting forth certain required disclosures, policies and procedures to identify conflicts of interest, and customer-specific best interest obligations.
In addition, the SEC approved the use of a new disclosure document, the customer or client relationship summary, or Form CRS. Form CRS is intended to provide retail investors with information about the nature of their relationship with their investment professional and supplements other more detailed disclosures, including existing Form ADV for advisers and the new disclosures under Regulation Best Interest for broker-dealers. Regulation Best Interest and Form CRS became effective as of September 10, 2019, with a transition period for compliance through June 30, 2020, as of which date broker-dealers were required to be compliant.
Finally, the SEC issued interpretative guidance regarding an investment adviser’s fiduciary obligation under the Advisers Act. The guidance indicates that investment advisers have a fiduciary duty to their clients that includes both a duty of care and a duty of loyalty and further describes an investment adviser’s responsibilities under these fiduciary duties.
In June 2020, the DOL proposed a new prohibited transaction exemption, which was finalized in December 2020. The new exemption went into effect on February 16, 2021, and had a transition period for compliance that extended into 2022. The new exemption allows the payment of compensation to investment advice fiduciaries who comply with the exemption’s requirements and generally tracks the standard set forth in Regulation Best Interest. Lawsuits challenging certain aspects of the rule and related guidance have been initiated, and there may be additional efforts to challenge or revise this rule in the future. In addition, the DOL has indicated in its regulatory agenda that it plans to issue updated proposed rulemaking related to fiduciary advice. It is uncertain at this point whether these changes would have a material impact on our business.
In addition to the SEC and DOL rules, the NAIC and several states, including Massachusetts, Nevada, New Jersey and New York, have either enacted or proposed laws and regulations requiring investment advisers, broker-dealers and/or agents to meet a higher standard of care and provide additional disclosures when providing advice to their clients. The recently enacted state laws and regulations have resulted in, and upon adoption by other states such laws and regulations may result in, additional requirements related to the sale of our products. Additional disclosure and other requirements could adversely affect our business by causing us to reevaluate or change certain business practices or otherwise.
If any revised DOL fiduciary rule or any additional new rules that are implemented are more onerous than Regulation Best Interest, or are not coordinated with Regulation Best Interest, the impact on our business could be substantial. While we continue to monitor and evaluate the various proposals, we cannot predict what other proposals may be made, or what new legislation or regulation may be introduced or become law. Therefore, until such time as final rules or laws are in place, the potential impact on our business is uncertain.
Federal Tax Legislation
In late 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The Tax Act resulted in significant reforms for corporations (in addition to individuals), including a number of provisions that directly impacted insurance companies. The vast majority of the changes became effective January 1, 2018. Throughout 2022, the Internal Revenue Service and U.S. Treasury finalized published guidance on the various provisions of the Tax Act. The issuance of this and prior guidance has not changed our interpretation and related implementation of the law changes in the Tax Act.
In August 2022, the Inflation Reduction Act of 2022 was passed by the U.S. Congress and signed into law by President Biden. The Inflation Reduction Act of 2022 established a new 15% corporate alternative minimum tax for corporations whose average adjusted net income for any consecutive three-year period beginning after December 31, 2022, exceeds $1.0 billion. The Inflation Reduction Act of 2022 also established a 1% excise tax on stock repurchases made by publicly traded corporations. Both provisions are effective for tax years beginning after December 31, 2022. We are currently evaluating the impact of the corporate alternative minimum tax on our business, results of operations and financial condition.
We will continue to be actively engaged with policymakers including the Biden Administration to ensure the impacts of tax policy changes on our business and our customers are well understood.
Outside of potential tax law changes, the uncertainty of federal funding and the future of the Social Security Disability Insurance (“SSDI”) program can have a substantial impact on the entire group benefit market because SSDI benefits are a direct offset to the benefits paid under group disability policies. Congress alleviated some of this uncertainty by passing the Bipartisan Budget Act of 2015. As a result, the Social Security Administration’s 2022 Annual Report projects that the SSDI reserves will not be depleted until 2035.
Health Care Reform Legislation
In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, which was subsequently amended by the Health Care and Education Reconciliation Act. This legislation, as well as subsequent state and federal laws and regulations, includes provisions that provide for additional taxes to help finance the cost of these reforms and substantive changes and additions to health care and related laws, which could potentially impact some of our lines of business. We continue to monitor any efforts by the government to repeal or replace provisions of the Patient Protection and Affordable Care Act and the effect those efforts may have on our businesses.
Patriot Act
The USA PATRIOT Act of 2001 includes anti-money laundering and financial transparency laws as well as various regulations applicable to broker-dealers and other financial services companies, including insurance companies. Financial institutions are required to collect information regarding the identity of their customers, watch for and report suspicious transactions, respond to requests for information by regulatory authorities and law enforcement agencies and share information with other financial institutions. As a result, we are required to maintain certain internal compliance practices, procedures and controls.
SECURE Act
In December 2019, President Trump signed into law the Setting Every Community Up for Retirement Enhancement Act (the “SECURE Act”). Most of the provisions of the SECURE Act were effective for plan years beginning after December 31, 2019. Among other things, the provisions of the SECURE Act make it easier for employers to offer lifetime income options in defined contribution retirement plans, facilitate the ability of small employers to offer access to retirement savings vehicles to their employees and increase opportunities for workers to save by enhancing retirement plan automatic enrollment and escalation features. Congress continued to build on the value created by the SECURE Act by passing SECURE Act 2.0 on December 29, 2022. This legislation also helps increase plan adoption and savings opportunities, while also making the offering of lifetime income in plans more feasible. We believe that the financial services industry will continue to benefit from the adoption of these legislative changes through continued or increased savings in retirement and annuity solutions, including through the utilization of Lincoln’s suite of offerings.
ERISA Considerations
ERISA is a comprehensive federal statute that applies to U.S. employee benefit plans sponsored by private employers and labor unions. Plans subject to ERISA include pension and profit-sharing plans and welfare plans, including health, life and disability plans. ERISA provisions include reporting and disclosure rules, standards of conduct that apply to plan fiduciaries and prohibitions on transactions known as “prohibited transactions,” such as conflict-of-interest transactions and certain transactions between a benefit plan and a party in interest. ERISA also provides for a scheme of civil and criminal penalties and enforcement. Our insurance, asset management, plan administrative services and other businesses provide services to employee benefit plans subject to ERISA, including services where we may act as an ERISA fiduciary. In addition, because certain of our businesses provide products and services to ERISA plans, transactions with those plans are subject to ERISA’s prohibited transaction rules, which may affect our ability to enter into transactions, or the terms on which transactions may be entered into, with such plans, even if the business entering into the transaction is unrelated to the business giving rise to party-in-interest status.
Broker-Dealer and Securities Regulation
In addition to being registered under the Securities Act of 1933, some of our separate accounts as well as mutual funds that we sponsor are registered as investment companies under the Investment Company Act of 1940, and the shares of certain of these entities are qualified for sale in some or all states and the District of Columbia. We also have subsidiaries that are registered as broker-dealers under the Exchange Act and are subject to federal and state regulation, including, but not limited to, the Financial Industry Regulation Authority’s (“FINRA”) net capital rules. In addition, we have subsidiaries that are registered investment advisers under the Investment Advisers Act of 1940. Agents, advisers and employees registered or associated with any of our investment adviser or broker-dealer subsidiaries are subject to federal securities laws and to examination requirements and regulation by state and federal securities regulators. Regulation also extends to various LNC entities that employ or control those individuals. The SEC and other governmental agencies and self-regulatory organizations, as well as state securities commissions in the U.S., have the power to conduct administrative proceedings that can result in censure, fines, the issuance of cease-and-desist orders or suspension and termination or limitation of the activities of the regulated entity or its employees. For more information about regulatory and litigation matters, see Note 13.
Environmental Considerations
Federal, state and local environmental laws and regulations apply to our ownership and operation of real property. Inherent in owning and operating real property are the risks of hidden environmental liabilities and the costs of any required clean-up. Under the laws of certain states, contamination of a property may give rise to a lien on the property to secure recovery of the costs of clean-up, which could adversely affect our commercial mortgage lending. In several states, this lien has priority over the lien of an existing mortgage against such property. In addition, in some states and under the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”), we may be liable, as an “owner” or “operator,” for costs of cleaning-up releases or threatened releases of
hazardous substances at a property mortgaged to us. We also risk environmental liability when we foreclose on a property mortgaged to us. Federal legislation provides for a safe harbor from CERCLA liability for secured lenders that foreclose and sell the mortgaged real estate, provided that certain requirements are met. However, there are circumstances in which actions taken could still expose us to CERCLA liability. Application of various other federal and state environmental laws could also result in the imposition of liability on us for costs associated with environmental hazards.
We routinely conduct environmental assessments for real estate we acquire for investment and before taking title through foreclosure to real property collateralizing mortgages that we hold. Although unexpected environmental liabilities can always arise, based on these environmental assessments and compliance with our internal procedures, we believe that any costs associated with compliance with environmental laws and regulations or any clean-up of properties would not have a material adverse effect on our results of operations.
In addition, certain of our regulators have proposed or adopted, or may propose or adopt, environmental, social and governance (“ESG”) rules or standards that would apply to our business. For example, in March 2022, the SEC proposed extensive rule changes that would require companies to include certain climate-related disclosures in their registration statements and periodic reports filed with the SEC. See “Item 1A. Risk Factors – Legislative, Regulatory and Tax – Increasing scrutiny and evolving expectations from investors, customers, regulators and other stakeholders regarding ESG matters may adversely affect our reputation or otherwise adversely impact our business and results of operations” and “– Climate change and climate change regulation may adversely affect our investment portfolio and financial condition.”
Intellectual Property
We rely on a combination of copyright, trademark, patent and trade secret laws to establish and protect our intellectual property. We have implemented a patent strategy designed to protect innovative aspects of our products and processes which we believe distinguish us from competitors. We currently own several issued U.S. patents.
We have an extensive portfolio of trademarks and service marks that we consider important in the marketing of our products and services, including, among others, the trademarks of the Lincoln National and Lincoln Financial names, the Lincoln silhouette logo and the combination of these marks. Trademark registrations may be renewed indefinitely subject to continued use and registration requirements. We regard our trademarks as valuable assets in marketing our products and services and intend to protect them against infringement and dilution.
HUMAN CAPITAL MANAGEMENT
As of December 31, 2022, we had a total of 11,316 employees, all based in the United States. Our mission is to help Americans achieve financial peace of mind by offering leading products and services. We believe that every move we make, including how we manage talent, shapes the future we share with our customers, communities and investors. Accordingly, each of our employees has access to important resources designed to, among other things, help them improve their well-being, understand the value of their work, develop their careers and thrive in a diverse and inclusive environment. From the moment our employees become part of Lincoln, they’re empowered to “Be Lincoln” by living and acting with integrity and optimism in their communities, relationships and daily interactions with colleagues and clients. Our enterprise strategy is driven by continued focus on this unique employee culture, including the following key areas:
Diversity, Equity and Inclusion
We believe that diversity, equity and inclusion are fundamental to our ability to deliver on our promise to help customers secure their financial futures. Our diversity, equity and inclusion strategy is designed to deliver outcomes based on objectives and milestones in our workplace, marketplace and the broader communities we serve. This strategy ensures that a culture of diversity, equity and inclusion permeates every level of our organization as well as our interactions with partners and suppliers.
Our Board of Directors provides executive oversight of stated priorities, progress and strategic plans to support diversity, equity and inclusion across the enterprise. Lincoln’s commitment to diversity, equity and inclusion begins at the highest level of management as a formal expectation of our leaders and all employees, as part of our performance management process. In 2022, we launched an annual Diversity, Equity and Inclusion conference available to all employees, featuring internal and external speakers and educational sessions. Our employees are actively involved in our efforts to further diversity, equity and inclusion at the company and beyond, through the work of our seven Business Resource Groups (“BRGs”). We maintain our BRG chapters nationwide across seven categories: African American, Asian American, Latino, LGBTQ+, People with Disabilities, Veterans and Women. Each BRG is sponsored and supported by senior leaders across the enterprise.
Employee Feedback and Employee Engagement
We actively listen to our employees in a variety of ways, including enterprise-wide and department-specific engagement surveys and focus groups, and we gather feedback on an ongoing basis. The Company conducts a comprehensive, company-wide engagement survey every two years, and often conducts department-specific pulse surveys in the alternate years, to inform our human resources strategy, measure progress and adjust plans, as necessary. We focus on equipping our managers to foster employee development and strengthen their
voices. We support our managers through tools, resources and development programs to help them be the best leaders possible. We have also created tools to help managers develop and execute on targeted action plans to address areas of opportunity for their work groups.
Talent and Development
Our talent strategy supports Lincoln’s ability to identify, develop, engage, retain and reward the talent we need for success in a competitive environment of constant change. Our employees work together with their managers to learn new skills, create an annual individual development plan and shape their careers. Their collaborative efforts are backed by a variety of resources we make available and guided by our Career Framework, which provides tools and resources to help employees discover, assess, plan and invest in their careers. In 2022, we launched Get CAREER FIT, an enterprise-wide program to support all employees in creating a specific and targeted development plan. This boot-camp style program includes expert advice, exercises and tools to clarify career aspirations and define specific steps to achieve success. As part of the program, managers attend virtual instructor-led training to support their effectiveness in having development conversations with their direct reports.
Our vision is to foster a premier learning culture, one that enhances leadership effectiveness, accelerates employee development and helps drive business performance. Employees can access a range of learning and development opportunities including numerous instructor-led, self-paced and curated courses. We have partnered with Harvard Business Publishing, a subsidiary of Harvard Business School, to offer courses specifically designed for our mid-level employees and senior level leaders. All Lincoln employees can also access open online courses offered through third-party providers, including TED@Work and Harvard Business Publishing. In 2022, we launched a new Learner Experience Platform that serves as the front door to all of our learning content, courses and programs.
Total Rewards and Employee Well-Being
We invest in our employees’ futures by offering market-competitive compensation and a broad range of health and wellness programs as well as retirement savings, financial health and protection plans. Our employees receive a personalized Your Total Rewards statement that provides a comprehensive look at their direct and indirect compensation - the total investment that we make in them.
We offer paid time off and various flexible work arrangements, as part of a new hybrid work model that was informed by direct feedback from our workforce. In addition, we offer benefits and wellness programs focusing on the physical, emotional, social and financial well-being of our employees. For eligible employees, such programs include:
a subsidized medical plan with domestic partner eligibility, plus optional dental and vision, a health savings account with a company contribution and a healthcare flexible spending account;
a well-being program that provides access to personal health coaches, health screenings and flu shots, discounts and reimbursements for programs that promote health;
an employee assistance program (“EAP”) that provides counseling and tools to manage well-being;
paid parental leave and adoption assistance programs;
fertility, pregnancy and parenting support;
a dependent care flexible spending account;
access to Homework Connection which, provides one-on-one, on-demand homework help to students at no cost to employees;
dedicated Lincoln Financial Retirement Consultants to evaluate employee retirement readiness and help them map out ways to improve their readiness; in addition to an independent financial wellness advisor for complete financial well-being assistance;
our employee 401(k) plan with a company match and other convenient features; and
accident and critical illness insurance coverages, short- and long-term disability plans and company-provided life insurance.
AVAILABLE INFORMATION
We file annual, quarterly and current reports, proxy statements and other documents with the SEC under the Exchange Act. The SEC maintains a website that contains reports, proxy and information statements and other information regarding issuers, including LNC, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at www.sec.gov.
We also make available, free of charge, on or through our website, www.lfg.com, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, including exhibits, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
The information contained on our website is not included as part of, or incorporated by reference into, this report.
Item 1A. Risk Factors
You should carefully consider the risks described below before investing in our securities. The risks and uncertainties described below are not the only ones facing our Company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of these risks actually occur, our business, financial condition and results of operations could be materially affected. In that case, the value of our securities could decline substantially.
Market Conditions
Weak conditions in the global capital markets and the economy generally may materially adversely affect our business and results of operations.
Our results of operations are materially affected by conditions in the global capital markets and the economy generally, both in the U.S. and elsewhere around the world. Major central bank policy actions, inflation, recessionary conditions and political policy uncertainty remain key challenges for markets and our business. These macro-economic conditions have in the past and may in the future have an adverse effect on us given our credit and equity market exposure. In the event of extreme prolonged market events, such as the global credit crisis and recession that occurred during 2008 and 2009, we could incur significant losses. Even in the absence of a market downturn, we are exposed to substantial risk of loss and ratings downgrades due to market volatility.
Factors such as consumer spending, business investment, domestic and foreign government spending, the volatility and strength of the capital markets, the potential for inflation or deflation and uncertainty over domestic and foreign government actions all affect the business and economic environment and, ultimately, the amount and profitability of our business. In an economic downturn characterized by inflation, recessionary conditions, higher unemployment, lower disposable income, lower corporate earnings, lower business investment and lower consumer spending, the demand for our financial and insurance products could be adversely affected. In addition, we have experienced and expect to continue to experience an elevated incidence of claims, and we could experience changes in the rate of lapses or surrenders of policies or other changes in consumer behavior as a result of financial stress. Our contract holders may choose to defer paying insurance premiums or stop paying insurance premiums altogether. Adverse changes in the economy have in the past and could in the future affect earnings negatively and could have a material adverse effect on our business, results of operations and financial condition.
Changes in interest rates and sustained low interest rates may cause interest rate spreads to decrease, impacting our profitability, and make it more challenging to meet certain statutory requirements.
Interest rate fluctuations and/or a sustained period of low interest rates could negatively affect our profitability. Some of our products, principally fixed annuities and UL, including linked-benefit UL, have interest rate guarantees that expose us to the risk that changes in interest rates will reduce our spread, or the difference between the amounts that we are required to pay under the contracts and the amounts we are able to earn on our general account investments intended to support our obligations under the contracts. Spreads are an important component of our net income. Declines in our spread or instances where the returns on our general account investments are not enough to support the interest rate guarantees on these products could have a material adverse effect on our businesses or results of operations. In addition, low rates increase the cost of providing variable annuity living benefit guarantees, which could negatively affect our variable annuity profitability.
In periods when interest rates are declining or remain at low levels, we may have to reinvest the cash we receive as interest or return of principal on our investments in lower yielding instruments reducing our spread. Moreover, borrowers may prepay fixed-income securities, commercial mortgages and mortgage-backed securities in our general account in order to borrow at lower market rates, which exacerbates this risk. Lowering interest crediting rates helps to mitigate the effect of spread compression on some of our products. However, because we are entitled to reset the interest rates on our fixed-rate annuities only at limited, pre-established intervals, and since many of our contracts have guaranteed minimum interest or crediting rates, our spreads could still decrease. For additional information on our guaranteed crediting rates, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk – Interest Rate Risk on Fixed Insurance Businesses – Falling Rates.”
Generally, a decline in market interest rates could also reduce our return on investments that do not support particular policy obligations. During periods of sustained lower interest rates, our recorded policy liabilities may not be sufficient to meet future policy obligations and may need to be strengthened, thereby reducing net income in the affected reporting period. Accordingly, declining interest rates or sustained low-interest rates may materially affect our results of operations, financial condition and cash flows and significantly reduce our profitability. In addition, a decline in or sustained period of low market interest rates may make it more challenging for us to pass certain asset adequacy tests related to statutory reserves, given the required conservatism of some of the regulations with which we must comply. To meet these requirements, we may be required to post asset adequacy reserves, which, depending on the size of the reserve, could materially affect our financial results.
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.
Throughout 2022, the Federal Reserve increased the federal funds rate target range to combat inflation. In February 2023, the Federal Reserve announced an additional 25 basis points increase, when it set the range at 4.50% to 4.75% and reiterated its commitment to implement and maintain policy as needed to bring inflation down. In periods of rapidly increasing interest rates, such as that we are experiencing currently, while higher interest rates will lead to higher yields on our asset portfolios, such increases in yield may be more than offset by increases in crediting rates necessary to keep our interest-sensitive products competitive and potentially higher borrowing costs, thus lowering our spreads. In such a scenario, we may have to accept a lower spread and thus lower profitability or face a decline in sales and greater loss of existing contracts and related assets.
An increase in market interest rates could also have a material adverse effect on the value of our investment portfolio and capital position, for example, by decreasing the estimated fair values of the fixed-income securities that comprise a substantial portion of our investment portfolio. This decline in the fair value of fixed-income securities can have an adverse impact on our capital position, particularly from a GAAP perspective, as the decline in fair value of fixed-income securities may not be offset by a corresponding decline in the value of liabilities due to higher interest rates. An increase in interest rates could also result in decreased fee income associated with a decline in the value of variable annuity account values invested in fixed-income funds. In addition, statutory capital requirements for certain fixed annuity and single premium life insurance products incorporate stochastic projections that can result in increased capital requirements, particularly as interest rates increase, which may affect our reported RBC ratio.
Increases in interest rates may cause increased surrenders and withdrawals of insurance products. In periods of increasing interest rates, policy loans and surrenders and withdrawals of life insurance policies and annuity contracts may increase as contract holders seek to buy products with perceived higher returns. This process may lead to a flow of cash out of our businesses. These outflows may require investments to be sold at a time when the prices of those assets are lower because of the increase in market interest rates, which may result in realized investment losses that reduce our capital position. A sudden demand among consumers to change product types or withdraw funds could lead us to sell assets at a loss to meet the demand for funds. Furthermore, unanticipated increases in withdrawals and terminations may accelerate amortization of our deferred acquisition costs (“DAC”) and value of business acquired (“VOBA”) assets, which would reduce net income.
Because the equity markets impact the profitability and expected profitability of many of our products, changes in equity markets may significantly affect our business and profitability.
The fee income that we earn on certain products, including variable annuities, is based primarily upon account values, and the fee income that we earn on VUL policies is partially based upon account values. Because strong equity markets result in higher account values, strong equity markets positively affect our net income through increased fee income. Conversely, a weakening of the equity markets results in lower fee income and may have a material adverse effect on our results of operations and capital resources.
Changes in the equity markets, interest rates and/or volatility affect the profitability of our products with guaranteed benefits; therefore, such changes may have a material adverse effect on our business and profitability.
Certain of our variable annuity and fixed indexed annuity products include optional guaranteed benefit riders, including GDB (variable annuity only) and GLB riders. The fair value of these guaranteed benefit riders is impacted by changes in equity markets, interest rates, volatility, foreign exchange rates and credit spreads. Accordingly, strong equity markets, increases in interest rates and decreases in volatility will generally decrease the guaranteed benefit riders liability and would result in an increase to our earnings. Conversely, a decrease in the equity markets along with a decrease in interest rates and an increase in volatility will generally result in an increase to the guaranteed benefit riders liability and would result in a decrease to our earnings.
Certain of our VUL products include secondary guarantees. We accrue additional liabilities for these secondary guarantees, and these liabilities are impacted by changes in equity markets. Accordingly, strong equity markets generally decrease these additional liabilities. Conversely, a decrease in the equity markets will generally increase these additional liabilities. We use a hedge to partially mitigate the risk related to equity market volatility and are evaluating other financing solutions, but there can be no guarantee that our hedge or other solutions will be fully effective to mitigate this risk.
Our hedging strategies may not be fully effective to offset the changes in the carrying value of the guarantees on certain of our products, which could result in volatility in our results of operations and financial condition under GAAP and in the capital levels of our insurance and reinsurance subsidiaries.
We use a variety of hedging strategies to mitigate the risks to the capital of our insurance and reinsurance subsidiaries associated with certain guarantees on our variable products. However, the hedging strategies may not be fully effective to offset the changes in the carrying value of these guarantees, as our hedging strategies hedge risks on a basis that does not correspond to their anticipated or actual impact upon our results of operations or financial condition under GAAP. Changes from period to period in the valuation of these guarantees, and in the amount of our obligations effectively hedged, will result in volatility in our results of operations and financial condition under GAAP and in the capital levels of our insurance and reinsurance subsidiaries. Estimates and assumptions we make in connection with hedging activities may fail to reflect or correspond to our actual long-term exposure from our guarantees.
Legislative, Regulatory and Tax
Our businesses are heavily regulated and changes in regulation and in supervisory and enforcement policies may affect our insurance subsidiary capital requirements, reduce our profitability, limit our growth or otherwise adversely affect our business, results of operations and financial condition.
Our insurance subsidiaries are subject to extensive supervision and regulation in the states in which we do business. The insurance departments of the domiciliary states exercise principal regulatory jurisdiction over our insurance subsidiaries. The extent of regulation by the states varies, but, in general, most jurisdictions have laws and regulations governing standards of solvency, adequacy of reserves, reinsurance, capital adequacy, licensing of companies and agents to transact business, prescribing and approving policy forms, regulating premium rates for some lines of business, prescribing the form and content of statutory financial statements and reports, regulating the type and amount of investments permitted, and standards of business conduct. In addition, state insurance holding company laws impose restrictions on certain inter-company transactions and limitations on the amount of dividends that insurance subsidiaries can pay.
State insurance regulators and the NAIC regularly re-examine existing laws and regulations applicable to insurance companies and their products. Changes in these laws and regulations, or in interpretations thereof, sometimes lead to changes in business practices or additional expense, statutory reserves and/or RBC requirements for the insurer and, thus, could have a material adverse effect on our financial condition and results of operations. For example, the NAIC is considering modifications to the economic scenario generator used to calculate life and annuity reserves according to the Valuation Manual (e.g. VM-20 and VM-21) and the required capital for these life and annuity contracts, as well as certain fixed annuity and single premium life insurance products, which could affect the level and volatility of statutory reserves and required capital for products in scope. The economic scenarios are a key input in the statutory reserve and required capital calculations for certain products, such as variable annuities. If the NAIC adopts an economic scenario generator that produces scenarios with characteristics that differ significantly from what the current economic scenario generator prescribed in these calculations would produce under the same circumstances, this could have a significant impact on the statutory reserves and required capital for products in scope upon adoption as well as affect how the statutory reserves and required capital for these products respond to changes in market conditions. We are monitoring all potential changes and evaluating the potential impact they could have on our product offerings and financial condition and results of operations. See “Item 1. Business – Regulatory – Insurance Regulation” for a discussion of additional changes under consideration and recent changes implemented by the NAIC, including changes to principles-based reserving and changes to actuarial guidelines, and the impact of such changes on our business.
Although we endeavor to maintain all required licenses and approvals, our businesses may not fully comply with the wide variety of applicable laws and regulations or the relevant authority’s interpretation of the laws and regulations, which may change from time to time. Also, regulatory authorities have relatively broad discretion to grant, renew or revoke licenses and approvals. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, the insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or impose substantial fines. Further, insurance regulatory authorities have relatively broad discretion to issue orders of supervision, which permit such authorities to supervise the business and operations of an insurance company. As of December 31, 2022, no state insurance regulatory authority had imposed on us any material fines or revoked or suspended any of our licenses to conduct insurance business in any state or issued an order of supervision with respect to our insurance subsidiaries that would have a material adverse effect on our results of operations or financial condition.
Compliance with existing and emerging privacy regulations could result in increased compliance costs and/or lead to changes in business practices and policies, and any failure to protect the confidentiality of personal information could adversely affect our reputation and have a material adverse effect on our business, financial condition and results of operations.
Complying with the numerous privacy laws and regulations to which we are subject and other existing, emerging and changing privacy requirements could cause us to incur substantial costs or require us to change our business practices and policies. Non-compliance could result in monetary penalties or significant legal liability. For more information, see “Item 1. Business – Regulatory – Privacy Regulations.”
Many of the employees and associates who conduct our business have access to, and routinely process, personal information through a variety of media, including information technology systems. We rely on various internal processes and controls to protect the confidentiality of personal information that is accessible to, or in the possession of, our employees and our associates, including service providers, distribution partners, independent agents and others. It is possible that an employee or associate could, intentionally or unintentionally, disclose or misappropriate confidential consumer or client information or our data could be the subject of a cybersecurity attack. State and federal laws and regulations also require us to disclose our data collection and sharing practices to our consumers and customers and to provide certain consumers and customers with access to certain pieces of their personal information, the right to request correction of their information, the right to request deletion of their information, and the right to opt out of certain tracking, sharing and processing. We rely on various internal processes and associates to report our practices accurately and to respond appropriately to consumer and customer requests. We cannot predict what, if any, actions from U.S. state and federal regulators may be taken if we fail to maintain these processes or if we or our associates fail to comply with our policies or procedures. If we or our associates fail to comply with applicable processes, policies, procedures and controls, misappropriation or intentional or unintentional inappropriate disclosure or misuse of consumer or client information, or violation of applicable state or federal laws, could occur. Such an event could materially damage our reputation or lead to regulatory, civil or criminal investigations and penalties, which, in turn, could have a material impact on our business, financial condition and results of operations.
In addition, we analyze customer data to better manage our business. There has been increased scrutiny, including from U.S. state and federal regulators, regarding the use of “big data” techniques such as price optimization. In August 2020, members of the NAIC unanimously adopted guiding principles on artificial intelligence, to inform and articulate general expectations for businesses, professionals and stakeholders across the insurance industry as they implement artificial intelligence tools to facilitate operations. We cannot predict what, if any, actions may be taken with regard to “big data,” but any inquiries and limitations could have a material impact on our business, financial condition and results of operations.
Increasing scrutiny and evolving expectations from investors, customers, regulators and other stakeholders regarding ESG matters may adversely affect our reputation or otherwise adversely impact our business and results of operations.
Certain existing or potential investors, customers, regulators and other stakeholders evaluate our business or other practices according to a variety of ESG standards and expectations. Certain of our regulators have proposed or adopted, or may propose or adopt, ESG rules or standards that would apply to our business. For example, in March 2022, the SEC proposed extensive rule changes that would require companies to include certain climate-related disclosures in their registration statements and periodic reports filed with the SEC. ESG-related rules, guidance and policies may impose additional costs, cause changes to our corporate governance and risk management practices and expose the industry to new or additional risks.
Our practices may be judged by ESG standards that are continually evolving and not always clear. Prevailing ESG standards and expectations may also reflect contrasting or conflicting values or agendas. We may fail to meet our ESG-related commitments or targets, and our policies and processes to evaluate and manage ESG standards in coordination with other business priorities may not prove completely effective or satisfy investors, customers, regulators or others. We may face adverse regulatory, investor, customer, media or public scrutiny leading to business, reputational or legal challenges, which could adversely affect our reputation or otherwise adversely affect our business and results of operations, including but not limited to the ability to sell products, policyholder retention and increased cost of financing.
Federal or state regulatory actions could result in substantial fines, penalties or prohibitions or restrictions on our business activities and could have a material adverse effect on our business, results of operations or financial condition.
Our broker-dealer and investment adviser subsidiaries as well as our variable annuities and variable life insurance products, are subject to regulation and supervision by the SEC, FINRA and/or state securities regulators. Applicable laws and regulations generally grant supervisory agencies and self-regulatory organizations broad administrative powers, including the power to limit or restrict the subsidiaries from carrying on their businesses in the event that they fail to comply with such laws and regulations. The foregoing regulatory or governmental bodies, as well as the DOL and others, have the authority to review our products and business practices and those of our agents, advisers, registered representatives, associated persons and employees. In recent years, there has been increased scrutiny by these bodies, which has included more extensive examinations, regular sweep inquiries and more detailed review of disclosure documents. These regulatory or governmental bodies may bring regulatory or other legal actions against us if, in their view, our practices, or those of our agents or employees, are improper. These actions can result in substantial fines, penalties or prohibitions or restrictions on our business activities and could have a material adverse effect on our business, results of operations or financial condition.
Changes to laws or regulations could adversely affect our distribution model and may result in additional disclosure and other requirements related to the sale and delivery of our products and services, which may adversely affect our business.
In 2019, the SEC approved “Regulation Best Interest,” including a new standard of conduct for broker-dealers under the Exchange Act, which requires broker-dealers and their representatives to act in the best interest of retail customers when making recommendations of any securities transaction, without putting their financial interests ahead of the interests of retail customers. Among other things, the final rule includes provisions setting forth certain required disclosures, policies and procedures to identify conflicts of interest, and customer-specific best interest obligations. In addition, the SEC approved the use of a new disclosure document, Form CRS, which is intended to provide retail investors with information about the nature of their relationship with their investment professional and supplements other more detailed disclosures. Regulation Best Interest and Form CRS became effective as of September 10, 2019, with a transition period for compliance through June 30, 2020, as of which date broker-dealers were required to be compliant.
In June 2020, the DOL proposed a new prohibited transaction exemption, which was finalized in December 2020. The new exemption went into effect on February 16, 2021, and had a transition period for compliance that extended into 2022. The new exemption allows the payment of compensation to investment advice fiduciaries who comply with the exemption’s requirements and generally tracks the standard set forth in Regulation Best Interest. Lawsuits challenging certain aspects of the rule and related guidance have been initiated, and there may be additional efforts to challenge or revise this rule in the future. In addition, the DOL has indicated in its regulatory agenda that it plans to issue proposed rulemaking related to fiduciary advice. It is uncertain at this point whether these changes would have a material impact on our business.
In addition to the SEC and DOL rules, the NAIC and several states have either enacted or proposed laws and regulations requiring investment advisers, broker-dealers and/or agents to meet a higher standard of care and provide additional disclosures when providing advice to their clients, resulting in additional requirements related to the sale of our products. For more information on these regulations,
see “Item 1. Business – Regulatory – Federal Initiatives – SEC Rules and Other Regulations relating to the Standard of Care Applicable to Investment Advisers and Broker-Dealers.”
Additional disclosure and other requirements could adversely affect our business by causing us to reevaluate or change certain business practices or otherwise. If any revised DOL fiduciary rule or any additional new rules that are implemented are more onerous than Regulation Best Interest, or are not coordinated with Regulation Best Interest, the impact on our business could be substantial. While we continue to monitor and evaluate the various proposals, we cannot predict what other proposals may be made, or what new legislation or regulation may be introduced or become law. Therefore, until such time as final rules or laws are in place, the potential impact on our business is uncertain.
Changes in U.S. federal income tax law could impact our tax costs and the products that we sell.
Changes in tax laws or interpretations of such laws could increase our corporate taxes and negatively impact our results of operations and financial condition. Tax authorities may enact changes in tax law or issue new regulations or other pronouncements that could increase our current tax burden and impose new taxes on our business. Guidance on previously enacted tax law changes could impact our interpretations of existing law and also have an impact on our business.
In August 2022, the Inflation Reduction Act of 2022 was passed by the U.S. Congress and signed into law by President Biden. The Inflation Reduction Act of 2022 established a new 15% corporate alternative minimum tax for corporations whose average adjusted net income for any consecutive three-year period beginning after December 31, 2022, exceeds $1.0 billion. This provision is effective for tax years beginning after December 31, 2022. We are currently evaluating the impact of the impact of this new alternative minimum tax on our business, results of operations and financial condition.
Legal and regulatory actions are inherent in our businesses and could result in financial losses or harm our businesses.
We are, and in the future may be, subject to legal and regulatory actions in the ordinary course of our business. Pending legal and regulatory actions include proceedings relating to aspects of our businesses and operations that are specific to us and proceedings that are typical of the businesses in which we operate. Some of these legal proceedings have been brought on behalf of various alleged classes of complainants. In certain of these matters, the plaintiffs are seeking large and/or indeterminate amounts, including punitive or exemplary damages. Substantial legal liability in these or future legal or regulatory actions could have a material financial effect or cause significant harm to our reputation, which in turn could materially harm our business prospects. See Note 13 for a description of legal and regulatory proceedings and actions.
Climate change and climate change regulation may adversely affect our investment portfolio and financial condition.
Climate change and climate change regulation may affect the prospects of companies and other entities whose securities we hold or our willingness to continue to hold their securities. Climate change could also impact our counterparties and other third parties, including, among others, reinsurers and derivatives counterparties. Additionally, the value of investments, including real estate investments we hold, and the broader market indices could be adversely affected, which may impact our product profitability and the ability to write new business. Although we have performed, and will continue to perform, climate change scenario analyses with respect to the investments in portions of our general account, we cannot accurately predict the long-term impacts on us or our portfolio from climate change or related regulation.
Implementation of the provisions of the European Market Infrastructure Regulation relating to the regulation of derivatives transactions subjects us to margin requirements, the impact of which remains uncertain.
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), and corresponding global initiatives, including the European Market Infrastructure Regulation implemented in 2012, imposed significant changes to the regulation of derivatives transactions, which we use to mitigate many types of risk in our business. The European Market Infrastructure Regulation and matching U.K. rules impose initial margin requirements that largely correspond to the requirements of the Dodd-Frank Act. As an exception, our Europe-based swap providers may be subject to additional margin requirements with respect to equity options beginning in 2024, which may require us to post and collect additional initial margin. Until the application of initial margin requirements is complete, the impact of these provisions on liquidity and capital resources remains uncertain.
Changes in accounting standards issued by the Financial Accounting Standards Board or other standard-setting bodies may adversely affect our financial statements.
Our financial statements are prepared in accordance with GAAP as identified in the Financial Accounting Standards Board (“FASB”) Accounting Standards CodificationTM (“ASC”). From time to time, we are required to adopt new or revised accounting standards or guidance that are incorporated into the FASB ASC. It is possible that future accounting standards we are required to adopt could change the current accounting treatment that we apply to the consolidated financial statements and that such changes could have a material adverse effect on our financial condition and results of operations.
Specifically, in August 2018, the FASB released Accounting Standards Update 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts. We began accounting under the new method as of the January 1, 2023, effective date, which has resulted in significant changes to how we account for and report our insurance contracts (both in-force and new business), including updating assumptions used to measure the liability for future policy benefits for traditional and limited-payment contracts, measuring of market risk benefits (“MRBs”) and changing the amortization of DAC and DAC-like intangibles. See Note 2 for more information regarding our adoption of this standard. See also “Changes in the equity markets, interest rates and/or volatility affect the profitability of our products with guaranteed benefits; therefore, such changes may have a material adverse effect on our business and profitability” above.
Our domestic insurance subsidiaries are subject to SAP. Any changes in the method of calculating reserves for our life insurance and annuity products under SAP may result in increased reserve requirements.
The NAIC also adopts changes to its regulations from time to time, which, depending on the scope of the change, could materially affect our financial condition and results of operations. See “Item 1. Business – Regulatory – Insurance Regulation.”
Anti-takeover provisions could delay, deter or prevent our change in control, even if the change in control would be beneficial to LNC shareholders.
We are an Indiana corporation subject to Indiana state law. Certain provisions of Indiana law could interfere with or restrict takeover bids or other change in control events affecting us. Under Indiana law, directors may, in considering the best interests of a corporation, consider the effects of any action on shareholders, employees, suppliers and customers of the corporation and the communities in which offices and other facilities are located, and other factors the directors consider pertinent. One statutory provision prohibits, except under specified circumstances, LNC from engaging in any business combination with any shareholder who owns 10% or more of our common stock (which shareholder, under the statute, would be considered an “interested shareholder”) for a period of five years following the time that such shareholder became an interested shareholder, unless such business combination is approved by the Board of Directors prior to such person becoming an interested shareholder.
In addition to the anti-takeover provisions of Indiana law, there are other factors that may delay, deter or prevent our change in control. As an insurance holding company, we are regulated as an insurance holding company and are subject to the insurance holding company acts of the states in which our insurance company subsidiaries are domiciled. The insurance holding company acts and regulations restrict the ability of any person to obtain control of an insurance company without prior regulatory approval. Under those statutes and regulations, without such approval (or an exemption), no person may acquire any voting security of a domestic insurance company, or an insurance holding company which controls an insurance company, or merge with such a holding company, if as a result of such transaction such person would “control” the insurance holding company or insurance company. “Control” is generally defined as the direct or indirect power to direct or cause the direction of the management and policies of a person and is presumed to exist if a person directly or indirectly owns or controls 10% or more of the voting securities of another person.
Liquidity and Capital Position
Adverse capital and credit market conditions may affect our ability to meet liquidity needs, access to capital and cost of capital.
In the event that our current sources of liquidity do not satisfy our needs, we may have to seek additional financing. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the volume of trading activities, the overall availability of credit to the financial services industry, our credit ratings and credit capacity, as well as the possibility that customers or lenders could develop a negative perception of our long- or short-term financial prospects if we incur large investment losses or if the level of our business activity decreases due to a market downturn. Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us. See “Liquidity and Capital Resources – Ratings” in the MD&A for a description of our credit ratings. Our internal sources of liquidity may prove to be insufficient, and in such case, we may not be able to successfully obtain additional financing on favorable terms, or at all.
Disruptions, uncertainty or volatility in the capital and credit markets may also limit our access to capital required to operate our business, most significantly our insurance operations. Such market conditions may limit our ability to replace, in a timely manner, maturing liabilities; satisfy statutory capital requirements; generate fee income and market-related revenue to meet liquidity needs; and access the capital necessary to grow our business. As such, we may be forced to delay raising capital, issue shorter term securities than we prefer or bear an unattractive cost of capital which could decrease our profitability and significantly reduce our financial flexibility. Our results of operations, financial condition, cash flows and statutory capital position could be materially adversely affected by disruptions in the financial markets.
Because we are a holding company with no direct operations, the inability of our subsidiaries to pay dividends to us in sufficient amounts would harm our ability to meet our obligations.
Our insurance subsidiaries are subject to certain insurance department regulatory restrictions related to the transfer of funds and payment of dividends to LNC, including statutory limitations on the amount of dividends that can be paid. In addition, payments of dividends and advances or repayment of funds to us by our insurance subsidiaries are restricted by the applicable laws of their respective jurisdictions requiring that our insurance subsidiaries hold a specified amount of minimum reserves in order to meet future obligations on their
outstanding policies. In order to meet their claims-paying obligations, our insurance subsidiaries regularly monitor their reserves to ensure we hold sufficient amounts to cover actual or expected contract and claims payments. At times, we may determine that reserves in excess of the minimum may be needed to ensure sufficiency. See “Liquidity and Capital Resources – Holding Company Sources and Uses of Liquidity and Capital – Restrictions on Subsidiaries’ Dividends” in the MD&A for additional information regarding these restrictions and requirements.
Changes in, or reinterpretations of, these laws can constrain the ability of our subsidiaries to pay dividends or to advance or repay funds to us in sufficient amounts and at times necessary to meet our debt obligations and corporate expenses. Requiring our insurance subsidiaries to hold additional reserves has the potential to constrain their ability to pay dividends to the holding company.
The earnings of our insurance subsidiaries impact contract holders’ surplus. Lower earnings constrain the growth in our insurance subsidiaries’ capital, and therefore, can constrain the payment of dividends and advances or repayment of funds to us. In addition, the amount of surplus that our insurance subsidiaries could pay as dividends is constrained by the amount of surplus they hold to maintain their financial strength ratings, to provide an additional layer of margin for risk protection and for future investment in our businesses. As a result, to the extent our subsidiaries are unable or are materially restricted from being able to pay dividends to us in sufficient amounts, our ability to meet our obligations could be materially affected.
A decrease in the capital and surplus of our insurance subsidiaries may result in a downgrade to our credit and insurer financial strength ratings.
In any particular year, statutory surplus amounts and RBC ratios may increase or decrease depending on a variety of factors, including the amount of statutory income or losses generated by our insurance subsidiaries (which itself is sensitive to equity market and credit market conditions), the amount of additional capital our insurance subsidiaries must hold to support business growth, changes in reserving requirements, such as principles-based reserving, our inability to obtain reserve relief, changes in equity market levels, the value of certain fixed-income and equity securities in our investment portfolio, the value of certain derivative instruments that do not get hedge accounting treatment, changes in interest rates and foreign currency exchange rates, as well as changes to the NAIC RBC formulas. The RBC ratio is also affected by the product mix of the in-force book of business (i.e., the amount of business without guarantees is not subject to the same level of reserves as the business with guarantees). In extreme scenarios of equity market declines, the amount of additional statutory reserves that we are required to hold for our VUL insurance guarantees and variable annuity guarantees may increase at a rate greater than the rate of change of the markets. Increases in reserves reduce the statutory surplus used in calculating our RBC ratios. Most of these factors are outside of our control. Our credit and insurer financial strength ratings are significantly influenced by the statutory surplus amounts and RBC ratios of our insurance company subsidiaries. The RBC ratio of LNL is an important factor in the determination of the credit and financial strength ratings of LNC and its subsidiaries. For example, shortly after our announcement in November 2022 that we expected decreases to our statutory capital and RBC ratio by the end of 2022, AM Best downgraded LNC’s short and long-term issuer credit ratings and the financial strength ratings of LNL and LLANY, due in part to a decrease in our capital, and revised its ratings outlooks from stable to negative for LNC and FPP, while Moody’s and Fitch revised their short and long-term issuer credit and financial strength ratings outlooks for LNC and its insurance subsidiaries from stable to negative. See “Item 1. Business – Financial Strength Ratings” and “Liquidity and Capital Resources – Ratings” in the MD&A for a full description of our ratings and ratings outlooks, including our S&P ratings and outlooks, certain of which were also downgraded or revised in November 2022 prior to our above-referenced announcement.
In addition, rating agencies may implement changes to their internal models that have the effect of increasing or decreasing the amount of statutory capital we must hold in order to maintain our current ratings. For example, S&P has announced that it plans to propose changes to its insurer RBC capital adequacy model, which, depending on the final changes, could increase the amount of statutory capital we are required to hold in order to maintain our current ratings. To the extent that our statutory capital resources are deemed to be insufficient to maintain a particular rating by one or more rating agencies, we may seek to raise additional capital through public or private equity or debt financing, which may be on terms not as favorable as in the past.
Alternatively, if we were not to raise additional capital in such a scenario, either at our discretion or because we were unable to do so, our financial strength and credit ratings might be downgraded by one or more rating agencies. For more information on risks regarding our ratings, see “Covenants and Ratings – A downgrade in our financial strength or credit ratings could limit our ability to market products, increase the number or value of policies being surrendered and/or hurt our relationships with creditors” below.
An inability to access our credit facilities could result in a reduction in our liquidity and lead to downgrades in our credit and financial strength ratings.
We rely on our credit facilities as a potential source of liquidity. We also use the credit facilities as a potential backstop to provide statutory reserve credit. Our credit facilities are available to provide reserve credit to LNL in such a case. If we were unable to access our facility in such circumstances, it could materially impact LNL’s capital position. The availability of these facilities could be critical to our credit and financial strength ratings and our ability to meet our obligations as they come due in a market when alternative sources of credit are tight.
In addition, our failure to comply with the covenants in the credit facilities or fulfill the conditions to borrowings, or the failure of lenders to fund their lending commitments (whether due to insolvency, illiquidity or other reasons) in the amounts provided for under the terms
of the facilities, would restrict our ability to access these credit facilities when needed and, consequently, could have a material adverse effect on our financial condition and results of operations.
Assumptions and Estimates
As a result of changes in assumptions, estimates and methods in calculating reserves, our reserves for future policy benefits and claims related to our current and future business as well as businesses we may acquire in the future may prove to be inadequate.
We establish and carry, as a liability, reserves based on estimates of how much we will need to pay for future benefits and claims. For our insurance products, we calculate these reserves based on many assumptions and estimates, including, but not limited to, estimated premiums we will receive over the assumed life of the policies, the timing of the events covered by the insurance policies, the lapse rate of the policies, the amount of benefits or claims to be paid and the investment returns on the assets we purchase with the premiums we receive.
The sensitivity of our statutory reserves and surplus established for our variable universal life contracts and variable annuity base contracts and riders to changes in the equity markets will vary depending on the magnitude of the decline. The sensitivity will be affected by the level of account values relative to the level of guaranteed amounts, product design and reinsurance. Statutory reserves for variable annuities depend upon the cumulative equity market impacts on the business in force, and therefore, result in non-linear relationships with respect to the level of equity market performance within any reporting period.
The assumptions and estimates we use in connection with establishing and carrying our reserves are inherently uncertain. Accordingly, we cannot determine with precision the ultimate amount or the timing of the payment of actual benefits and claims or whether the assets supporting the policy liabilities will grow to the level we assume prior to payment of benefits or claims. If our actual experience is different from our assumptions or estimates, our reserves may prove to be inadequate in relation to our estimated future benefits and claims, which would adversely affect our financial condition and results of operations. In addition, increases in reserves have a negative effect on income from operations in the quarter incurred and could also have a negative impact in future periods. For example, in the third quarter of 2022, we incurred a substantial charge related to the company’s annual review of DAC and reserve assumptions, related primarily to updated lapse assumptions related to UL products with secondary guarantees in response to emerging experience, combined with recently validated external industry perspectives. This charge also impacted our statutory capital in the fourth quarter of 2022. For more information on our annual assumption review, see “Critical Accounting Policies and Estimates – Annual Assumption Review” in MD&A. For information on impacts to our statutory capital, see “Liquidity and Capital Resources – Overview – Capital” in the MD&A.
We may be required to recognize an impairment of our goodwill or to establish a valuation allowance against our deferred income tax assets.
If our businesses do not perform well and/or their estimated fair values decline or the price of our common stock does not increase, we may be required to recognize an impairment of our goodwill or to establish a valuation allowance against the deferred income tax asset, which could have a material adverse effect on our results of operations and financial condition. For example, during the third quarter of 2022, we recorded goodwill impairment of $634 million related to our Life Insurance segment. Future reviews of goodwill could result in an impairment of goodwill, and such write-downs could have a material adverse effect on our net income and book value, although they would not affect the statutory capital of our insurance subsidiaries. For more information on goodwill, see “Critical Accounting Policies and Estimates – Goodwill and Other Intangible Assets” in the MD&A and Note 9.
If, based on available information, including about the performance of a business and its ability to generate future capital gains, we determine that it is more likely than not that the deferred income tax asset will not be realized, then a valuation allowance must be established with a corresponding charge to net income. Such valuation allowance could have a material adverse effect on our results of operations and financial condition. For more information on our deferred income tax assets, see Note 6.
The determination of the amount of allowance for credit losses and impairments taken on our investments is highly subjective and could materially impact our results of operations or financial condition.
The determination of the amount of allowances and impairments varies by investment type and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. Management updates its evaluations regularly and reflects changes in allowances and impairments in operations as such evaluations are revised. There can be no assurance that our management has accurately assessed the level of impairments taken and allowances reflected in our financial statements. Furthermore, additional impairments may need to be taken or allowances provided for in the future. Historical trends may not be indicative of future impairments or allowances.
With respect to unrealized losses, we establish deferred tax assets for the tax benefit we may receive in the event that losses are realized. The realization of significant realized losses could result in an inability to recover the tax benefits and may result in the establishment of valuation allowances against our deferred tax assets. Realized losses or impairments may have a material adverse impact on our results of operations and financial condition. See “Critical Accounting Policies and Estimates – Investments” in the MD&A for additional information.
Changes to our valuation of investments and our methodologies, estimations and assumptions could harm our results of operations or financial condition.
During periods of market disruption or rapidly-changing market conditions, such as significantly rising or high interest rates, rapidly widening credit spreads or illiquidity, or infrequent trading, or when market data is limited, our investments may become less liquid and we may base our valuations on less-observable and more subjective inputs, assumptions, or methods that may result in estimated fair values that significantly vary by period, and may exceed the investment’s sale price. Decreases in the estimated fair value of our securities may harm our results of operations or financial condition. See “Critical Accounting Policies and Estimates – Investments” in the MD&A for additional information.
Significant adverse mortality experience may result in the loss of, or higher prices for, reinsurance, which could adversely affect our profitability.
We reinsure a portion of the mortality risk on fully underwritten, newly issued, individual life insurance contracts. We regularly review retention limits for continued appropriateness and they may be changed in the future. In the event that we experience adverse mortality or morbidity experience, a significant portion of that is reimbursed by our reinsurers. Prolonged or severe adverse mortality or morbidity experience could result in increased reinsurance costs and, ultimately, reinsurers being unwilling to offer future coverage. If we are unable to maintain our current level of reinsurance or obtain new reinsurance protection at comparable rates to what we are paying currently, we may have to accept an increase in our net exposures or revise our pricing to reflect higher reinsurance premiums or both. If this were to occur, we may be exposed to reduced profitability and cash flow strain or we may not be able to price new business at competitive rates.
Pandemics and other catastrophes have impacted, and may in the future, adversely impact liabilities for contract holder claims.
Our insurance operations are exposed to the risk of catastrophic mortality and morbidity, such as that caused by a pandemic, an act of terrorism, natural disaster or other event that causes a large number of deaths, injuries or illnesses. In addition, in our group insurance operations, an event that affects the workplace of one or more of our group insurance customers, such as a pandemic or a natural disaster, could also cause a significant loss due to mortality or morbidity claims. Due to the COVID-19 pandemic that emerged in the first quarter of 2020, we experienced higher mortality claim payments due to an elevation in claim incidence. In addition, we experienced an increase in short-term and long-term disability claims related to the pandemic. This elevated level of claim incidence negatively impacted our earnings in each of the last three years. We expect COVID-19-related mortality to continue to follow U.S. death trends. The likelihood, timing or severity of a future pandemic or other catastrophe cannot be predicted. Additionally, the impact of climate change has caused, and may continue to cause, changes in weather patterns, resulting in more severe and more frequent natural disasters such as forest fires, hurricanes, tornados, floods and storm surges. The continuation of the COVID-19 pandemic, or future pandemics or other catastrophic events could cause a material adverse effect on our results of operations in any period and, depending on their severity, could also materially and adversely affect our financial condition.
The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Pandemics, natural disasters and man-made catastrophes, including terrorism, may produce significant damage in larger areas, especially those that are heavily populated. Although our investment, product and physical exposures are diversified (e.g., geographically), reducing the enterprise impact to catastrophic events, claims resulting from natural or man-made catastrophic events could cause substantial volatility in our financial results for any fiscal quarter or year and could materially reduce our profitability or harm our financial condition. Also, catastrophic events could harm the financial condition of our reinsurers and thereby increase the probability of default on reinsurance recoveries. Accordingly, our ability to write new business could also be affected.
Consistent with industry practice and accounting standards, we establish liabilities for claims arising from a catastrophe only after assessing the probable losses arising from the event. We cannot be certain that the liabilities we have established or applicable reinsurance will be adequate to cover actual claim liabilities, and a catastrophic event or multiple catastrophic events could have a material adverse effect on our business, results of operations and financial condition.
Operational Matters
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.
In November 2021, we formally communicated a new expense savings initiative, the Spark Initiative, focused on driving efficiencies throughout all aspects of our business, from leveraging automation to simplifying and improving process efficiency. In addition, this program is targeting benefits beyond cost savings, including improving the way we work by focusing on reskilling and upskilling our valuable employee base. The multi-year program will require significant investment and resource prioritization. If we do not successfully manage and execute the Spark Initiative, or if the program is inadequate or ineffective, we may not achieve all of the cost savings we expect from the initiative, or projected savings may be delayed or not sustained. In addition, our investments related to the program may be greater than expected, and the work we are undertaking with respect to the initiative could result in disruption of our business or distraction of our management and employees. If any of these risks occur, our business, financial condition and results of operations could be materially affected.
Our enterprise risk management policies and procedures may leave us exposed to unidentified or unanticipated risk, which could negatively affect our businesses or result in losses.
Our policies and procedures to identify, monitor and manage risks may not be fully effective. Many of our methods of managing risk and exposures are based upon our use of observed historical market behavior or statistics based on historical models. As a result, these methods may not predict future exposures, which could be significantly greater than the historical measures indicate, such as the risk of pandemics causing a large number of deaths. Other risk management methods depend upon the evaluation of information regarding markets, clients, catastrophe occurrence or other matters that is publicly available or otherwise accessible to us, which may not always be accurate, complete, up-to-date or properly evaluated. Management of operational, legal and regulatory risks requires, among other things, policies and procedures to record properly and verify a large number of transactions and events, and these policies and procedures may not be fully effective.
We face risks of non-collectability of reinsurance and increased reinsurance rates, which could materially affect our results of operations.
We follow the insurance practice of reinsuring with other insurance and reinsurance companies a portion of the risks under the policies written by our insurance subsidiaries (known as “ceding”). As of December 31, 2022, we ceded $831.5 billion of life insurance in force to reinsurers for reinsurance protection. Although reinsurance does not discharge our subsidiaries from their primary obligation to pay contract holders for losses insured under the policies we issue, reinsurance does make the assuming reinsurer liable to the insurance subsidiaries for the reinsured portion of the risk. For more information regarding our reinsurance arrangements and exposure, see “Reinsurance” in the MD&A and Note 8.
The collectability of reinsurance is largely a function of the solvency of the individual reinsurers. We perform due diligence on all reinsurers, including, but not limited to, a review of creditworthiness prior to entering into any reinsurance transaction, and we review our reinsurers on an ongoing basis to monitor credit ratings. To support balances due and allow reserve credit when reinsurance is obtained from reinsurers not authorized to transact business in the applicable jurisdictions, we also require assets in trust, LOCs or other acceptable collateral. Despite these measures, the insolvency, inability or unwillingness to make payments under the terms of a reinsurance contract by a large reinsurer or multiple reinsurers could have a material adverse effect on our results of operations and financial condition. For information on reinsurance-related credit losses, see Note 8.
Reinsurers also may attempt to increase rates with respect to our existing reinsurance arrangements. The ability of our reinsurers to increase rates depends upon the terms of each reinsurance contract. Some of our reinsurance contracts contain provisions that limit the reinsurer’s ability to increase rates on in-force business. An increase in reinsurance rates may affect the profitability of our insurance business. Additionally, such a rate increase could result in our recapture of the business, which may result in a need for additional reserves and increase our exposure to claims. In recent years, we have faced a number of rate increase actions on in-force business, and reinsurers have initiated, and may in the future initiate, legal proceedings against us. Our management of these rate increase actions and the outcomes of legal proceedings have not to date had a material effect on our results of operations or financial condition, but we can make no assurance regarding the impact of future rate increase actions or outcomes of legal proceedings. See Note 13 for a description of reinsurance-related actions.
Competition for our employees is intense, and we may not be able to attract and retain the highly skilled people we need to support our business.
Our success depends, in large part, on our ability to attract and retain qualified employees. Intense competition exists for employees with demonstrated ability, and the competition for talent has increased during the last two years. In addition, opportunities to work remotely have expanded the reach of recruiters and options for employees. As a result of this competition, we may be unable to hire or retain the qualified employees we need to support our business. Further, the unexpected loss of services of one or more of our key employees could have a material adverse effect on our operations due to their skills, knowledge of our business, their years of industry experience and the potential difficulty of promptly finding qualified replacement employees. We compete with other financial institutions primarily on the basis of our products, compensation, support services and financial condition. Sales in our businesses and our results of operations and financial condition could be materially adversely affected if we are unsuccessful in attracting and retaining employees, including financial advisers, wholesalers and other employees, as well as independent distributors of our products.
We may not be able to protect our intellectual property and may be subject to infringement claims.
We may have to litigate to enforce and protect our intellectual property, which represents a diversion of resources that may be significant and may not prove successful. The loss of intellectual property protection or the inability to secure or enforce the protection of our intellectual property assets could have a material adverse effect on our business and our ability to compete.
We also may be subject to costly litigation in the event that another party alleges our operations or activities infringe upon another party’s intellectual property rights. If we were found to have infringed a third-party patent or other intellectual property rights, we could incur substantial liability, and in some circumstances could be enjoined from providing certain products or services to our customers, or alternatively could be required to enter into costly licensing arrangements with third parties, all of which could have a material adverse effect on our business, results of operations and financial condition.
Our information systems may experience interruptions, breaches in security and/or a failure of disaster recovery systems that could result in a loss or disclosure of confidential information, damage to our reputation, impairment of our ability to conduct business effectively and increased expense.
Our information systems are critical to the operation of our business. We collect, process, maintain, retain and distribute large amounts of personal financial and health information and other confidential and sensitive data about our customers in the ordinary course of our business. Our business therefore depends on our customers’ willingness to entrust us with their personal information. Any failure, interruption or breach in security could result in disruptions to our critical systems and adversely affect our customer relationships. In addition, our flexible hybrid work model, which allows the majority of our employees to work remotely on a regular basis, could increase our operational risk in these areas, including, but not limited to, cybersecurity risks, discussed further below.
Publicly reported cyber-security threats and incidents have increased over recent periods, including a proliferation of ransomware attacks. Although our computer systems have in the past been, and will likely in the future be, subject to or targets of unauthorized or fraudulent access, to date, we have not had a material security breach. While we employ a robust and tested information security program, the preventative actions we take to reduce the incidence and severity of cyber incidents and protect our information technology may be insufficient to prevent physical and electronic break-ins, cyberattacks, including ransomware and malware attacks, attacks targeting remote workers, compromised credentials, fraud, other security breaches or other unauthorized access to our computer systems, and, given the increasing sophistication of cyberattacks, in some cases, such incidents could occur and persist for an extended period of time without detection. As a result, there can be no assurance that any such failure, interruption or security breach will not occur or, if any does occur, that it will be detected in a timely manner or that it can be sufficiently remediated. Such an occurrence may impede or interrupt our business operations, adversely affect our reputation or lead to increased expense, any of which could adversely affect our business, financial condition and results of operations.
In the event of a disaster such as a natural catastrophe, pandemic, epidemic, industrial accident, blackout, computer virus, terrorist attack, cyberattack or war, unanticipated problems with our disaster recovery systems could have a material adverse impact on our ability to conduct business and on our results of operations and financial condition, particularly if those problems affect our computer-based data processing, transmission, storage and retrieval systems and destroy valuable data. In addition, in the event that a significant number of our managers were unavailable following a disaster, our ability to effectively conduct business could be severely compromised. These interruptions also may interfere with our suppliers’ ability to provide goods and services and our employees’ ability to perform their job responsibilities.
The failure of our computer systems and/or our disaster recovery plans for any reason could cause significant interruptions in our operations and result in a failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to our customers. The occurrence of any such failure, interruption or security breach of our systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and financial liability. Depending on the nature of the information compromised, in the event of a data breach or other unauthorized access to our customer data, we may also have obligations to notify affected individuals about the incident, and we may need to provide some form of remedy, such as a subscription to a credit monitoring service, for the individuals affected by the incident. For more information, see “Legislative, Regulatory and Tax – State Regulation – Compliance with existing and emerging privacy regulations could result in increased compliance costs and/or lead to changes in business practices and policies, and any failure to protect the confidentiality of personal information could adversely affect our reputation and have a material adverse effect on our business, financial condition and results of operations.”
Although we conduct due diligence, negotiate contractual provisions and, in many cases, conduct periodic reviews of our vendors, distributors, and other third parties that provide operational or information technology services to us to confirm compliance with our information security standards, the failure of such third parties’ computer systems and/or their disaster recovery plans for any reason might cause significant interruptions in our operations and result in a failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to our customers. Such a failure could harm our reputation, subject us to regulatory sanctions and legal claims, lead to a loss of customers and revenues and otherwise adversely affect our business and financial results.
Finally, our cyber liability insurance may not be sufficient to protect us against all losses resulting from any cyberattack or other interruption, breach in security or failure of our disaster recovery systems.
Acquisitions of businesses may not produce anticipated benefits resulting in operating difficulties, unforeseen liabilities or asset impairments, which may adversely affect our operating results and financial condition.
Once completed, an acquired business may not perform as projected, expense and revenue synergies may not materialize as expected and costs associated with the integration may be greater than anticipated. Our financial results could be adversely affected by unanticipated performance issues, unforeseen liabilities, transaction-related charges, diversion of management time and resources to acquisition integration challenges or growth strategies, loss of key employees or customers, amortization of expenses related to intangibles, charges for impairment of long-term assets or goodwill and indemnifications. Factors such as receiving the required governmental or regulatory approvals to merge the acquired entity, delays in implementation or completion of transition activities or a disruption to our or the acquired entity’s business could impact our results.
Covenants and Ratings
A downgrade in our financial strength or credit ratings could limit our ability to market products, increase the number or value of policies being surrendered and/or hurt our relationships with creditors.
A downgrade of the financial strength rating of one of our principal insurance subsidiaries could affect our competitive position in the insurance industry by making it more difficult for us to market our products, as potential customers may select companies with higher financial strength ratings, and by leading to increased withdrawals by current customers seeking companies with higher financial strength ratings. This could lead to a decrease in fees as net outflows of assets increase, and therefore, result in lower fee income and lower spread income. Furthermore, sales of assets to meet customer withdrawal demands could also result in losses, depending on market conditions. The interest rates we pay on our borrowings are largely dependent on our credit ratings. A downgrade of our debt ratings could affect our ability to raise additional debt, including bank lines of credit, with terms and conditions similar to our current debt, and accordingly, likely increase our cost of capital.
Our ratings and the ratings of our principal insurance subsidiaries are subject to revision or withdrawal at any time by the rating agencies, and therefore, no assurance can be given that our principal insurance subsidiaries or we can maintain our current ratings. See “Item 1. Business – Financial Strength Ratings” and “Liquidity and Capital Resources – Ratings” in the MD&A for a description of our ratings. See also “A decrease in the capital and surplus of our insurance subsidiaries may result in a downgrade to our credit and insurer financial strength ratings” above.
Certain blocks of our insurance business purchased from third-party insurers under indemnity reinsurance agreements may require us to place assets in trust, secure letters of credit or return the business, if the financial strength ratings and/or capital ratios of certain insurance subsidiaries are not maintained at specified levels.
Under certain indemnity reinsurance agreements, two of our insurance subsidiaries, LNL and LLANY, provide 100% indemnity reinsurance for the business assumed; however, the third-party insurer, or the “cedent,” remains primarily liable on the underlying insurance business. These indemnity reinsurance arrangements require that our subsidiary, as the reinsurer, maintain certain insurer financial strength ratings and capital ratios. If these ratings or capital ratios are not maintained, depending upon the reinsurance agreement, the cedent may recapture the business, or require us to place assets in trust or provide LOCs at least equal to the relevant statutory reserves. See “Item 1. Business – Reinsurance” for a discussion of the indemnity reinsurance arrangements and the financial strength ratings and/or capital ratios that are required to be maintained under such arrangements. As of December 31, 2022, LNL’s and LLANY’s financial strength ratings and RBC ratios exceeded the ratings and ratios required under each agreement. See “Item 1. Business – Financial Strength Ratings” for a description of our financial strength ratings. See “Reinsurance” in the MD&A for additional information on these indemnity reinsurance agreements.
If the cedent recaptured the business, LNL and LLANY would be required to release reserves and transfer assets to the cedent. Such a recapture could adversely impact our future profits. Alternatively, if LNL and LLANY established a security trust for the cedent, the ability to transfer assets out of the trust could be severely restricted, thus negatively impacting our liquidity.
Investments
We may have difficulty selling certain holdings in our investment portfolio in a timely manner and realizing full value.
We hold certain investments that may lack liquidity, such as privately placed securities, mortgage loans on real estate, policy loans, limited partnership interests and other investments. These asset classes represented 33% of the carrying value of our total investments as of December 31, 2022. If we require significant amounts of cash on short notice in excess of normal cash requirements or are required to post or return collateral in connection with our investment portfolio, derivatives transactions or securities lending activities, we may have difficulty selling these investments in a timely manner, be forced to sell them for less than we otherwise would have been able to realize, or both.
The reported value of our relatively illiquid types of investments, our investments in the asset classes described in the paragraph above and, at times, our high quality, generally liquid asset classes, do not necessarily reflect the lowest current market price for the asset. If we were forced to sell certain of our assets in the current market, there can be no assurance that we would be able to sell them for the prices at which we have recorded them, and we might be forced to sell them at significantly lower prices.
The amount and timing of income from certain investments can be uneven, and their valuations infrequent or volatile, which can impact the amount of income we record or lead to lower than expected returns, and thereby adversely impact our earnings.
We invest a portion of our investments in investment funds, many of which make private equity investments. The amount and timing of income from such investment funds tends to be uneven as a result of the performance of the underlying investments, including private equity investments. The timing of distributions from the funds, which depends on particular events relating to the underlying investments, as well as the funds’ schedules for making distributions and their needs for cash, can be difficult to predict. In addition, because these funds, and private equity investments, do not trade on public markets and indications of realizable market value may not be readily available, valuations can be infrequent and/or more volatile. As a result, the amount of income that we record from these investments can vary substantially from quarter to quarter, and a sudden or sustained decline in the markets or valuation of one or more substantial investments could result in lower than expected returns earned by our investment portfolio and thereby adversely impact our earnings.
Defaults on our mortgage loans and write-downs of mortgage equity may adversely affect our profitability.
Our mortgage loans face default risk and are principally collateralized by commercial properties. The performance of our mortgage loan investments may fluctuate in the future. In addition, some of our mortgage loan investments have balloon payment maturities. An increase in the default rate of our mortgage loan investments could have a material adverse effect on our business, results of operations and financial condition. Further, any geographic or sector exposure in our mortgage loans may have adverse effects on our investment portfolios and consequently on our consolidated results of operations or financial condition. While we seek to mitigate this risk by having a broadly diversified portfolio, events or developments that have a negative effect on any particular geographic region or sector may have a greater adverse effect on the investment portfolios to the extent that the portfolios are exposed.
The difficulties faced by other financial institutions could adversely affect us.
We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks and other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty. In addition, with respect to secured transactions, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the related loan or derivative exposure. We also may have exposure to these financial institutions in the form of unsecured debt instruments, derivative transactions and/or equity investments. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, downturns in the economy or real estate values, operational failure, corporate governance issues or other reasons. A downturn in the U.S. or other economies could result in increased impairments. There can be no assurance that any such losses or impairments to the carrying value of these assets would not materially and adversely affect our business and results of operations.
Our requirements to post collateral or make payments related to declines in market value of specified assets may adversely affect our liquidity and expose us to counterparty credit risk.
Many of our transactions with financial and other institutions, including settling futures positions, specify the circumstances under which the parties are required to post collateral. The amount of collateral we may be required to post under these agreements may increase under certain circumstances, which could adversely affect our liquidity. In addition, under the terms of some of our transactions, we may be required to make payments to our counterparties related to any decline in the market value of the specified assets.
The elimination of LIBOR may affect the value of certain derivatives and floating rate securities we hold or have issued.
In July 2017, the Chief Executive of the U.K. Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. On March 5, 2021, the FCA announced that all LIBOR settings will either cease to be provided by any benchmark administrator, or no longer be representative (a) immediately after December 31, 2021, in the case of the 1-week and 2-month U.S. dollar settings; and (b) immediately after June 30, 2023, in the case of the remaining U.S. dollar settings. Since the initial announcement in 2017, we have been monitoring developments, determining how our hedging strategies, asset portfolio, liabilities, systems and operations may be affected by the transition and taking actions to prepare for the transition to a post-LIBOR environment. In December 2022, the Federal Reserve Board adopted regulations implementing the provisions of the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”) by identifying the benchmark rates based on SOFR (Secured Overnight Financing Rate) that, after June 30, 2023, will replace LIBOR in certain financial contracts that do not have adequate interest rate fallback provisions. Although we have taken actions to mitigate many of the potential risks, the transition to alternative reference rates may still adversely affect the value of certain derivatives and floating rate securities we hold and the value of our remaining outstanding floating rate capital securities. The ultimate effect of the discontinuation of LIBOR on new or existing financial instruments, liabilities or operational processes will vary depending on a number of factors, including the fallback provisions in contracts; adoption of replacement language or application of the LIBOR Act regulations in contracts where such language is currently absent; potential changes in spreads causing valuation changes; treatment of hedge effectiveness; and impacts on our models and systems. See Note 2 for additional information on reference rate reform.
Competition
Intense competition could negatively affect our ability to maintain or increase our profitability.
Our businesses are intensely competitive. We compete based on a number of factors, including name recognition, service, the quality of investment advice, investment performance, product features, price, perceived financial strength and claims-paying and credit ratings. Our competitors include insurers, broker-dealers, investment advisers, asset managers, hedge funds and other financial institutions. A number of our business units face competitors that have greater market share, offer a broader range of products or have higher financial strength or credit ratings than we do. In recent years, there has been consolidation and convergence among companies in the financial services industry resulting in increased competition from large, well-capitalized financial services firms. Many of these firms also have been able to increase their distribution systems through mergers or contractual arrangements. Furthermore, larger competitors may have lower operating costs and an ability to absorb greater risk while maintaining their financial strength ratings, thereby allowing them to price their products more competitively. Our customers and clients may engage other financial service providers, and the resulting loss of business may harm our results of operations or financial condition.
Our sales representatives are not captive and may sell products of our competitors.
We sell our life insurance and annuity products through independent sales representatives. These representatives are not captive, which means they may also sell our competitors’ products. If our competitors offer products that are more attractive than ours, or pay higher commission rates to the sales representatives than we do, these representatives may concentrate their efforts in selling our competitors’ products instead of ours.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2022, LNC and our subsidiaries owned or leased 2.5 million square feet of office and other space. We leased less than 0.1 million square feet of office space in Philadelphia, Pennsylvania, which includes space for LFN. We leased 0.2 million square feet of office space in Radnor, Pennsylvania, for our corporate center and for LFD. We leased 0.6 million square feet of office space in Fort Wayne, Indiana, primarily for our Annuities and Retirement Plan Services segments. We owned 0.8 million square feet of office space in Greensboro, North Carolina, primarily for our Life Insurance segment. We owned or leased 0.3 million square feet of office space in Omaha, Nebraska, 0.2 million square feet of office space in Atlanta, Georgia, and 0.1 million square feet in Dover, New Hampshire, primarily for our Group Protection segment. An additional 0.3 million square feet of office space is leased in other U.S. cities for branch offices. This discussion regarding properties does not include information on field offices and investment properties.
Item 3. Legal Proceedings
For information regarding legal proceedings, see “Regulatory and Litigation Matters” in Note 13, which is incorporated herein by reference.
Item 4. Mine Safety Disclosures
Not applicable.
Information About our Executive Officers
Our Executive Officers as of February 13, 2023, were as follows:
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| Position with LNC and Business Experience During the Past Five Years |
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Ellen G. Cooper |
| 58 |
| President, Chief Executive Officer and Director (since May 2022). Until May 2022, Executive Vice President (since August 2012), Head of Enterprise Risk (since 2019) and Head of Annuity Solutions Group (since March 2021). Chief Investment Officer (August 2012 - November 2021). |
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Craig T. Beazer |
| 55 |
| Executive Vice President and General Counsel (since December 2020). Executive Vice President, General Counsel (January 2020 - December 2020) and Secretary (July 2019 - December 2020), KeyCorp, a bank-based financial services company. Deputy General Counsel, KeyCorp (July 2018 - January 2020). Deputy General Counsel and Corporate Secretary, The Bank of New York Mellon Corporation, a global investments company (July 2015 - July 2018). |
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Jayson R. Bronchetti |
| 43 |
| Executive Vice President (since May 2022), Chief Investment Officer (since November 2021) and Head of Risk & Sustainability (since May 2022), and President, Lincoln Investment Advisors Corporation (2) (since March 2016). Head of Corporate Fixed Income (February 2020 - November 2021). Managing Director, Head of Manager Selection & Research (July 2015 - March 2016). |
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Randal J. Freitag |
| 60 |
| Executive Vice President and Chief Financial Officer (since January 2011). Head of Individual Life (June 2017 - July 2022). Senior Vice President, Chief Risk Officer (2007 - December 2010). Senior Vice President, Chief Risk Officer and Treasurer (2007 - October 2009). (3) |
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Matthew Grove |
| 47 |
| Executive Vice President and Head of Individual Life & Annuities and Lincoln Financial Network (since July 2022). Chief Executive Officer and President (January 2021 - July 2022), Resolution Life USA, a global life insurance company. Co-Chief Operating Officer and Executive Vice President (2017 - 2020), New York Life Insurance Company. |
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John C. Kennedy |
| 56 |
| Executive Vice President and President, LFD (2) (since March 2021) and Head of Brand (since March 2022). Senior Vice President and Head of Retirement Solutions Distribution for LFD (September 2009 - March 2021). |
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Jennifer Warne Krow |
| 48 |
| Executive Vice President and Chief People Officer (since June 2021). Senior Vice President, Chief Talent Officer and Head of HR Business Partnering (March 2011 - June 2021). |
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Christopher Neczypor |
| 42 |
| Executive Vice President and Chief Strategy Officer (since November 2021). Senior Vice President and Head of Investment Risk and Strategy (April 2018 - November 2021). (3) |
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James Reid |
| 56 |
| Executive Vice President and President, Workplace Solutions (since August 2022). President and Chief Executive Officer (April 2021 - August 2022), Versant Health, a managed vision care company. Executive Vice President and Head of Global Employee Benefits (January 2016 - March 2021), MetLife, Inc. |
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Kenneth S. Solon |
| 62 |
| Executive Vice President, Chief Information Officer, Head of IT and Digital (since July 2018) and Head of Enterprise Services (since March 2021). Executive Vice President, Chief Information Officer and Head of Administrative Services (January 2016 - July 2018). Senior Vice President, Head of Technology (March 2015 - December 2015). Senior Vice President, Head of Shared Services and Technology (January 2010 - March 2015). |
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(1)Age shown is based on the officer’s age as of February 13, 2023.
(2)Denotes an affiliate of LNC.
(3)Effective February 17, 2023, Mr. Neczypor will succeed Mr. Freitag as Chief Financial Officer and Mr. Freitag will no longer be an Executive Officer of the Company.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) Stock Market and Dividend Information
Our common stock is traded on the New York stock exchange under the symbol LNC. As of February 13, 2023, the number of shareholders of record of our common stock was 5,424. The dividend on our common stock is declared each quarter by our Board of Directors if we are eligible to pay dividends and the Board determines that we will pay dividends. In determining dividends, the Board takes into consideration items such as our financial condition, including current and expected earnings, projected cash flows and anticipated financing needs. For potential restrictions on our ability to pay dividends, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Restrictions on Subsidiaries’ Dividends” and Note 19 in the accompanying notes to the consolidated financial statements presented in “Item 8. Financial Statements and Supplementary Data.”
For information on securities authorized for issuance under equity compensation plans, see “Part III – Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters – Securities Authorized for Issuance Under Equity Compensation Plans,” which is incorporated herein by reference.
(b) Not Applicable
(c) Issuer Purchases of Equity Securities
The following summarizes purchases of equity securities by the issuer during the quarter ended December 31, 2022 (dollars in millions, except per share data):
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10/1/22 – 10/31/22 |
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| $ | 714 |
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11/1/22 – 11/30/22 |
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| 714 |
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12/1/22 – 12/31/22 |
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(1)Of the total number of shares purchased, no shares were received in connection with the exercise of stock options and related taxes. For the quarter ended December 31, 2022, there were no shares purchased as part of publicly announced plans or programs.
(2)On November 10, 2021, our Board of Directors authorized an increase in our securities repurchase authorization, bringing the total aggregate repurchase authorization to $1.5 billion. As of December 31, 2022, our remaining security repurchase authorization was $714 million. The security repurchase authorization does not have an expiration date. The amount and timing of share repurchases depends on key capital ratios, rating agency expectations, the generation of free cash flow and an evaluation of the costs and benefits associated with alternative uses of capital. Our stock repurchases may be effected from time to time through open market purchases or in privately negotiated transactions and may be made pursuant to an accelerated share repurchase agreement or Rule 10b5-1 plan.
Item 6. [Reserved]
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Index to Management’s Discussion and Analysis of Financial Condition and Results of Operations
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The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the financial condition as of December 31, 2022, compared with December 31, 2021, and the results of operations in 2022 compared to 2021 of Lincoln National Corporation and its consolidated subsidiaries. Discussions of 2020 items and 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 Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Form 10-K. Unless otherwise stated or the context otherwise requires, “LNC,” “Company,” “we,” “our” or “us” refers to Lincoln National Corporation and its consolidated subsidiaries.
The MD&A is provided as a supplement to, and should be read in conjunction with, 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.
FORWARD-LOOKING STATEMENTS – CAUTIONARY LANGUAGE
Certain statements made in this report and in other written or oral statements made by us or on our behalf are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). A forward-looking statement is a statement that is not a historical fact and, without limitation, includes any statement that may predict, forecast, indicate or imply future results, performance or achievements. Forward-looking statements may contain words like: “anticipate,” “believe,” “estimate,” “expect,” “project,” “shall,” “will” and other words or phrases with similar meaning in connection with a discussion of future operating or financial performance. In particular, these include statements relating to future actions, trends in our businesses, prospective services or products, future performance or financial results and the outcome of contingencies, such as legal proceedings. We claim the protection afforded by the safe harbor for forward-looking statements provided by the PSLRA.
Forward-looking statements are subject to risks and uncertainties. Actual results could differ materially from those expressed in or implied by such forward-looking statements due to a variety of factors, including:
Weak general economic and business conditions that may affect demand for our products, account values, investment results, guaranteed benefit liabilities, premium levels and claims experience;
Adverse global capital and credit market conditions that may affect our ability to raise capital, if necessary, and may cause us to realize impairments on investments and certain intangible assets, including goodwill and the valuation allowance against deferred tax assets, which may reduce future earnings and/or affect our financial condition and ability to raise additional capital or refinance existing debt as it matures;
The inability of our subsidiaries to pay dividends to the holding company in sufficient amounts, which could harm the holding company’s ability to meet its obligations;
Legislative, regulatory or tax changes, both domestic and foreign, that affect: the cost of, or demand for, our subsidiaries’ products; the required amount of reserves and/or surplus; our ability to conduct business and our captive reinsurance arrangements as well as restrictions on the payment of revenue sharing and 12b-1 distribution fees;
The impact of U.S. federal tax reform legislation on our business, earnings and capital;
The impact of regulations adopted by the Securities and Exchange Commission (“SEC”), the Department of Labor or other federal or state regulators or self-regulatory organizations relating to the standard of care owed by investment advisers and/or broker-dealers that could affect our distribution model;
The impact of new and emerging privacy regulations that may lead to increased compliance costs and reputation risk;
Increasing scrutiny and evolving expectations and regulations regarding environmental, social and governance (“ESG”) matters that may adversely affect our reputation and our investment portfolio;
Actions taken by reinsurers to raise rates on in-force business;
Declines in or sustained low interest rates causing a reduction in investment income, the interest margins of our businesses and demand for our products;
Rapidly increasing interest rates causing contract holders to surrender life insurance and annuity policies, thereby causing realized investment losses;
The impact of the implementation of the provisions of the European Market Infrastructure Regulation relating to the regulation of derivatives transactions;
The initiation of legal or regulatory proceedings against us, and the outcome of any legal or regulatory proceedings, such as: adverse actions related to present or past business practices common in businesses in which we compete; adverse decisions in significant actions including, but not limited to, actions brought by federal and state authorities and class action cases; new decisions that result in changes in law; and unexpected trial court rulings;
A decline or continued volatility in the equity markets causing a reduction in the sales of our subsidiaries’ products; a reduction of asset-based fees that our subsidiaries charge on various investment and insurance products; and an increase in liabilities related to guaranteed benefit riders of our subsidiaries’ variable annuity products;
Ineffectiveness of our risk management policies and procedures, including our various hedging strategies;
A deviation in actual experience regarding future persistency, mortality, morbidity, interest rates or equity market returns from the assumptions used in pricing our subsidiaries’ products and in establishing related insurance reserves, which may reduce future earnings;
Changes in accounting principles that may affect our financial statements;
Lowering of one or more of our debt ratings issued by nationally recognized statistical rating organizations and the adverse effect such action may have on our ability to raise capital and on our liquidity and financial condition;
Lowering of one or more of the insurer financial strength ratings of our insurance subsidiaries and the adverse effect such action may have on the premium writings, policy retention, profitability of our insurance subsidiaries and liquidity;
Significant credit, accounting, fraud, corporate governance or other issues that may adversely affect the value of certain financial assets, as well as counterparties to which we are exposed to credit risk, requiring that we realize losses on financial assets;
Interruption in telecommunication, information technology or other operational systems or failure to safeguard the confidentiality or privacy of sensitive data on such systems, including from cyberattacks or other breaches of our data security systems;
The effect of acquisitions and divestitures, restructurings, product withdrawals and other unusual items;
The inability to realize or sustain the benefits we expect from, greater than expected investments in, and the potential impact of efforts related to, our strategic initiatives, including the Spark Initiative;
The adequacy and collectability of reinsurance that we have obtained;
Pandemics, acts of terrorism, war or other man-made and natural catastrophes that may adversely impact liabilities for policyholder claims, affect our businesses and increase the cost and availability of reinsurance;
Competitive conditions, including pricing pressures, new product offerings and the emergence of new competitors, that may affect the level of premiums and fees that our subsidiaries can charge for their products;
The unknown effect on our subsidiaries’ businesses resulting from evolving market preferences and the changing demographics of our client base; and
The unanticipated loss of key management, financial planners or wholesalers.
The risks and uncertainties included here are not exhaustive. Other sections of this report and other reports that we file with the SEC include additional factors that could affect our businesses and financial performance, including “Part I – Item 1A. Risk Factors” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk,” which are incorporated herein by reference. Moreover, we operate in a rapidly changing and competitive environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors.
Further, it is not possible to assess the effect of all risk factors on our businesses or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. In addition, we disclaim any obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of this report.
INTRODUCTION
Executive Summary
We are a holding company that operates multiple insurance and retirement businesses through subsidiary companies. We sell a wide range of wealth protection, accumulation, group protection and retirement income products and solutions through our four business segments:
Life Insurance;
Annuities;
Group Protection; and
Retirement Plan Services
We also have Other Operations, which includes the financial data for operations that are not directly related to the business segments. See “Part I – Item 1. Business” above for a discussion of our business segments and products.
In this report, in addition to providing consolidated revenues and net income (loss), we also provide segment operating revenues and income (loss) from operations because we believe they are meaningful measures of revenues and the profitability of our operating segments. Operating revenues and income (loss) from operations are the financial performance measures we use to evaluate and assess the results of our segments. Accordingly, we define and report operating revenues and income (loss) from operations by segment in Note 21. Our management believes that operating revenues and income (loss) from operations explain the results of our ongoing businesses in a manner that allows for a better understanding of the underlying trends in our current businesses. Certain items are excluded from operating revenue and income (loss) from operations because they are unpredictable and not necessarily indicative of current operating fundamentals or future performance of the business segments, and, in many instances, decisions regarding these items do not necessarily relate to the operations of the individual segments. In addition, we believe that our definitions of operating revenues and income (loss) from operations will provide investors with a more valuable measure of our performance because it better reveals trends in our businesses.
We provide information about our segments’ and Other Operations’ operating revenue and expense line items and realized gain (loss), key drivers of changes and historical details underlying the line items below. For factors that could cause actual results to differ materially from those set forth, see “Part I – Item 1A. Risk Factors” and “Forward-Looking Statements – Cautionary Language” above.
Industry Trends
We continue to be influenced by a variety of trends that affect the industry.
COVID-19 Pandemic
The health, economic and business conditions precipitated by the worldwide COVID-19 pandemic that emerged in 2020 continued to adversely affect our business, results of operations and financial condition during 2022. While various treatments and vaccines are now available, COVID-19 variants continue to emerge, which could prolong or lead to increased hospitalization and death rates. We continue to monitor U.S. CDC reports related to COVID-19 and the potential continuing impacts of the COVID-19 pandemic on our Life Insurance and Group Protection segments. See “Results of Life Insurance” and “Results of Group Protection” below for impacts from the COVID-19 pandemic.
Interest Rate Environment
Throughout 2022, the Federal Reserve increased the federal funds rate target range to combat inflation. In February 2023, the Federal Reserve announced an additional 25 basis points increase, when it set the range at 4.50% to 4.75% and reiterated its commitment to implement and maintain policy as needed to bring inflation down. Additionally, the Federal Reserve has continued reducing its balance sheet, which started in June 2022, by not reinvesting Treasury securities, agency debt and agency mortgage-backed securities. As interest rates rise, which improves the yield on our new money and floating rate investments, we continue to be proactive in our investment strategies, product designs, crediting rate strategies, expense management actions and overall asset-liability practices to mitigate the risk of unfavorable consequences in this interest rate environment.
We have provided disclosures around risks related to increases in interest rate risk in “Part I – Item 1A. Risk Factors – Market Conditions – Increases in interest rates may negatively affect our profitability, capital position and the value of our investment portfolio and may also result in increased contract withdrawals,” “Critical Accounting Policies and Estimates – Annual Assumption Review – Long-Term New Money Investment Yield Sensitivity” below and “Part II – Item 7A. Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk.”
Regulatory Environment
U.S.-domiciled insurance entities are regulated at the state level, while certain products and services are also subject to federal regulation. Regulators may refine capital requirements and introduce new reserving standards for the life insurance industry. Regulations recently adopted or currently under review can potentially affect the capital requirements and profitability of the industry and result in increased regulation and oversight for the industry. In August 2022, the Inflation Reduction Act of 2022 was passed by the U.S. Congress and signed into law by President Biden. The Inflation Reduction Act of 2022 established a new 15% corporate alternative minimum tax for corporations whose average adjusted net income for any consecutive three-year period beginning after December 31, 2022, exceeds $1.0 billion. The Inflation Reduction Act of 2022 also established a 1% excise tax on stock repurchases made by publicly traded corporations. For more information on income taxes, see “Critical Accounting Policies and Estimates – Income Taxes” below. See “Part I – Item 1. Business – Regulatory” and “Part I – Item 1A. Risk Factors – Legislative, Regulatory and Tax” for a discussion of regulatory developments that may impact the Company and the associated risks.
Significant Operational Matters
Rebuild Risk-Based Capital Ratio
To rebuild our statutory capital to our risk-based capital (“RBC”) ratio target of 400%, we have taken or intend to take the following actions:
In the fourth quarter, we paused shares repurchases, and we expect the pause to continue through the end of 2023;
We executed a partial hedge on our in-force variable universal life insurance (“VUL”) products with secondary guarantees to mitigate potential capital volatility;
In November 2022, we raised approximately $1 billion through the issuance of preferred stock, $780 million of which was contributed to The Lincoln National Life Insurance Company (“LNL”) in the fourth quarter; and
Beginning in the first quarter of 2023, we intend to reduce the amount of capital supporting new business and focus on maximizing our return on this capital, which we expect will allow us to deliver more distributable earnings.
For additional information on the issuance of the preferred stock, see “Liquidity and Capital Resources” below and Note 14. For information on risks related to capital, see “Part I – Item 1A. Risk Factors – Liquidity and Capital Position.”
Spark Initiative
In 2021, we formally communicated our new expense savings initiative, the Spark Initiative, focused on driving efficiencies throughout all aspects of our business, from leveraging automation to simplifying and improving process efficiency. In addition, the Spark Initiative targets benefits beyond cost savings including improving the way we work by focusing on reskilling and upskilling our valuable employee base.
During 2022, we recognized benefits of $22 million, pre-DAC and pre-tax, net of investments, as a result of these initiatives. In 2023, we expect to realize benefits of approximately $60 million to $100 million, pre-DAC and pre-tax, net of investments. We ultimately expect to realize annual benefits of approximately $260 million to $300 million, pre-DAC and pre-tax, net of investments, by the end of 2024.
For risks related to the Spark Initiative, see “Part I – Item 1A. Risk Factors – Operational Matters – We may not realize or sustain all of the benefits we expect from the Spark Initiative, our investments associated with the initiative could be greater than expected, and our efforts with respect to the initiative may result in disruption of our businesses or distraction of our management and employees, which could have a material effect on our business, financial condition and results of operations” above.
Variable Annuity Hedge Program
We offer variable annuity products with living and death benefit guarantees. We use derivative instruments to hedge our exposure to selected risk and income statement volatility caused by changes in the equity markets, interest rates and market-implied volatilities associated with guaranteed benefit riders available in our variable annuity products. The hedge program in effect through December 31, 2022, was highly effective and focused on generating sufficient assets to fund future claims with a goal of minimizing the volatility of net income under United States of America generally accepted accounting principles (“GAAP”). In September 2022, we announced enhancements to our variable annuity hedge program that continues to focus on generating sufficient assets to fund future claims with a goal of maximizing distributable earnings and explicitly protecting capital. The revised variable annuity hedge program, effective January 1, 2023, aligns with our increased strategic focus on maximizing the economic value as measured by distributable earnings, which is achieved by managing risks to statutory capital generation due to market volatility. For risks related to our variable annuity hedge program, see “Part I – Item 1A. Risk Factors – Market Conditions – Our hedging strategies may not be fully effective to offset the changes in the carrying value of the guarantees on certain of our products, which could result in volatility in our results of operations and financial condition under GAAP and in the capital levels of our insurance and reinsurance subsidiaries.”
Targeted Annual Operating Earnings Per Share Growth
Growth in operating earnings per share (“EPS”) is a key driver of our long-term performance. We believe that the key drivers to growing our operating EPS over time include:
Generating capital-efficient new business and positive net flows through our product development and distribution;
Capital markets performing in-line with our expectations;
Ongoing expense discipline as well as our Spark Initiative driving improvement in operating margins; and
Capital generation and active capital deployment, consisting of returning capital to common stockholders.
Sources of Earnings
We monitor our sources of earnings as a factor in managing our businesses. We continue to focus on achieving our long-term goal of increasing mortality and morbidity margins. Growth in this source of earnings component could be driven by a number of factors, including, but not limited to, pricing actions on our life and group products and acquiring blocks of mortality/morbidity business. The following table presents the sources of earnings components of income (loss) from operations, before income taxes, excluding Other Operations:
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| For the Years Ended December 31, |
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| 2022 |
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| 2021 |
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| 2020 |
|
Investment spread (1) |
| -89.5% |
|
| 27.1% |
|
| 16.6% |
|
Mortality/morbidity (2) |
| -210.7% |
|
| 8.6% |
|
| 1.4% |
|
Fees on AUM (3) |
| 166.9% |
|
| 62.0% |
|
| 88.8% |
|
VA riders (4) |
| 33.3% |
|
| 2.3% |
|
| -6.8% |
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Total (5) |
| 100.0% |
|
| 100.0% |
|
| 100.0% |
|
(1)Investment spread earnings consist primarily of net investment income, net of interest credited, earned on the underlying general account investments supporting our fixed products less related expenses.
(2)Mortality/morbidity earnings result from mortality margins, morbidity margins, and certain expense assessments and related fees that are a function of the rates priced into the product and level of business in force.
(3)Fees on assets under management (“AUM”) earnings consist primarily of asset-based fees charged on variable account values less associated benefits and related expenses.
(4)Variable annuity (“VA”) riders’ earnings consist of fees charged to the contract holder related to guaranteed benefit riders, less the net valuation premium and associated change in benefit reserves and related expenses.
(5)The sources of earnings components include the results from our annual assumption review, which for 2022 and 2020 were significantly unfavorable. See “Critical Accounting Policies and Estimates – Annual Assumption Review” below for more information.
See Note 21 for additional information on income (loss) from operations by segment.
Outlook
Management expects to continue focusing on the following in 2023:
Continuing to rebuild RBC ratio and improving our ongoing capital generation;
Exploring reinsurance and other strategies to maximize the value of our in-force business;
Maximizing distributable earnings and protecting capital with our updated variable annuity hedge program;
Further optimizing new business capital allocation;
Continuing to enhance profitability of our Group Protection business;
Continuing to execute on strategic objectives enabled by our experienced and highly talented senior leadership team;
Making investments in our businesses, product innovation and distribution to grow revenues, drive margin expansion and reduce costs;
Continuing to improve profitability through focusing on expense discipline and managing our expenses aggressively, including executing on the Spark Initiative to drive efficiencies throughout all aspects of our business;
Closely monitoring our capital and liquidity positions taking into account changing economic conditions, ongoing regulatory activities and our capital deployment strategy;
Closely monitoring ongoing activities in the legal and regulatory environment and taking an active role in the legislative and/or regulatory process; and
Maintaining risk management and the flexibility to adjust our hedge program in response to regulatory and other changes.
Critical Accounting Policies and Estimates
We have identified the accounting policies below as critical to the understanding of our results of operations and our financial condition. In applying these critical accounting policies in preparing our financial statements, management must use critical assumptions, estimates and judgments concerning future results or other developments, including the likelihood, timing or amount of one or more future events. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our assumptions, estimates and judgments based upon historical experience and various other information that we believe to be reasonable under the circumstances. For a detailed discussion of other significant accounting policies, see Note 1.
The processes, judgments and estimates described herein relate to the accounting standards in effect through December 31, 2022. On January 1, 2023, we adopted Accounting Standards Update 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts, that significantly changed how we account for our long-duration contracts both in-force and new business, including updating assumptions used to measure the liability for future policy benefits for traditional and limited-payment contracts, measuring of market risk benefits and changing the amortization of deferred acquisition costs (“DAC”) and DAC-like intangibles. For more information, see Note 2.
The hedge program discussed below relates to the variable annuity hedge program design in effect through December 31, 2022. On January 1, 2023, we modified our variable annuity hedge program that continues to focus on generating sufficient assets to fund future claims with a goal of maximizing distributable earnings and explicitly protecting capital. For additional information on our variable annuity hedge program, see “Introduction – Executive Summary – Significant Operational Matters – Variable Annuity Hedge Program.” above. For risks related to our variable annuity hedge program, see “Part I – Item 1A. Risk Factors – Market Conditions – Our hedging strategies may not be fully effective to offset the changes in the carrying value of the guarantees on certain of our products, which could result in volatility in our results of operations and financial condition under GAAP and in the capital levels of our insurance and reinsurance subsidiaries.”
DAC, VOBA, DSI and DFEL
Deferrals
Qualifying deferrable acquisition expenses are recorded as an asset on the Consolidated Balance Sheets as DAC for products we sold during a period or VOBA for books of business we acquired during a period. In addition, we defer costs associated with DSI and revenues associated with DFEL. DSI is an asset included within other assets on the Consolidated Balance Sheets, and when amortized, increases interest credited on the Consolidated Statements of Comprehensive Income (Loss). DFEL is a liability included within other contract holder funds on the Consolidated Balance Sheets, and when amortized, increases fee income on the Consolidated Statements of Comprehensive Income (Loss).
We incur certain costs that can be capitalized in the acquisition of insurance contracts. Only those costs incurred that result directly from and are essential to the successful acquisition of new or renewal insurance contracts may be capitalized as deferrable acquisition costs. This determination of deferability must be made on a contract-level basis. Some examples of acquisition costs that are subject to deferral include the following:
Employee, agent or broker commissions;
Wholesaler production bonuses;
Renewal commissions and bonuses to agents or brokers;
Medical and inspection fees;
Premium-related taxes and assessments; and
A portion of the salaries and benefits of certain employees involved in the underwriting, contract issuance and processing, medical and inspection and sales force contract selling functions.
All other acquisition-related costs, including costs incurred by the insurer for soliciting potential customers, market research, training, administration, management of distribution and underwriting functions, unsuccessful acquisition or renewal efforts and product development, are considered non-deferrable acquisition costs and must be expensed in the period incurred.
In addition, the following indirect costs are considered non-deferrable acquisition costs and must be charged to expense in the period incurred:
Administrative costs;
Rent;
Depreciation;
Occupancy costs;
Equipment costs (including data processing equipment dedicated to acquiring insurance contracts);
Trail commissions; and
Other general overhead.
Our DAC, VOBA, DSI and DFEL balances (in millions) by business segment as of December 31, 2022, were as follows:
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| Retirement |
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| ||
| Life |
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| Group |
| Plan |
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| Insurance |
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| Annuities |
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| Protection |
| Services |
| Total |
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DAC and VOBA |
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Gross | $ | 6,591 |
|
| $ | 4,297 |
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| $ | 164 |
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| $ | 224 |
| $ | 11,276 |
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Unrealized (gain) loss |
| 1,828 |
|
|
| 407 |
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|
| - |
|
|
| 77 |
|
| 2,312 |
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Carrying value | $ | 8,419 |
|
| $ | 4,704 |
|
| $ | 164 |
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| $ | 301 |
| $ | 13,588 |
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DSI |
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Gross | $ | 32 |
|
| $ | 154 |
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| $ | - |
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| $ | 16 |
| $ | 202 |
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Unrealized (gain) loss |
| - |
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|
| 13 |
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| - |
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| - |
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| 13 |
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Carrying value | $ | 32 |
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| $ | 167 |
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| $ | - |
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| $ | 16 |
| $ | 215 |
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DFEL |
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Gross | $ | 3,450 |
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| $ | 308 |
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| $ | - |
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| $ | - |
| $ | 3,758 |
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Unrealized (gain) loss |
| 1,910 |
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| 1 |
|
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| - |
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|
| - |
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| 1,911 |
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Carrying value | $ | 5,360 |
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| $ | 309 |
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| $ | - |
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| $ | - |
| $ | 5,669 |
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Fixed maturity available-for-sale (“AFS”) securities and certain derivatives are stated at fair value with unrealized gains and losses included within accumulated other comprehensive income (loss) (“AOCI”), net of associated DAC, VOBA, DSI, future contract benefits, other contract holder funds and deferred income taxes. The unrealized balances in the table above represent the DAC, VOBA, DSI and DFEL balances for these effects of unrealized gains and losses on fixed maturity AFS securities and certain derivatives.
Amortization
For our traditional life insurance and group protection products, we amortize deferrable acquisition costs either on a straight-line basis or as a level percent of premium of the related contracts, depending on the block of business. DAC for variable annuity and deferred fixed annuity contracts and universal life insurance (“UL”) and VUL policies is amortized over the expected lives of the contracts in relation to the incidence of EGPs derived from the contracts.
EGPs vary based on a number of factors, including assumptions about policy persistency, mortality, fee income, investment margins, expense margins and realized gains and losses on investments. When actual gross profits are higher in the period than EGPs, we recognize more amortization than planned. When actual gross profits are lower in the period than EGPs, we recognize less amortization than planned. In a calendar year where the gross profits for a certain group of policies, or “cohorts,” are negative, our actuarial process limits, or floors, the amortization expense offset to zero. For a discussion of the periods over which we amortize our DAC, VOBA, DSI and DFEL see “DAC, VOBA, DSI and DFEL” in Note 1.
During the third quarter of each year, we conduct our comprehensive review of the assumptions and projection models used for our EGPs underlying the amortization of DAC, VOBA, DSI and DFEL that may result in unlocking of assumptions. See “Annual Assumption Review” below for more information.
Reversion to the Mean
Because returns within the variable sub-accounts (“variable funds”) have a significant effect on the value of variable annuity and VUL products and the fees earned on these accounts, EGPs could increase or decrease with movements in variable fund returns. Significant
and sustained changes in variable funds have had and could in the future have an effect on DAC, VOBA, DSI and DFEL amortization primarily within our Annuities and Retirement Plan Services segments, as well as, to a lesser extent, our Life Insurance segment.
As variable fund returns do not move in a systematic manner, we reset the baseline of account values from which EGPs are projected, which we refer to as our reversion to the mean (“RTM”) process. Under our RTM process, future EGPs are projected using stochastic modeling of a large number of market scenarios in conjunction with best estimates of lapse rates, interest rate spreads and mortality rates to develop a statistical distribution of the present value of future EGPs for our variable annuity products. Because variable fund returns are unpredictable, the underlying premise of this process is that best estimate projections of future EGPs need not be affected by random short-term and insignificant deviations from expectations in variable fund returns. However, long-term or significant deviations from expected variable fund returns require a change to best estimate projections of EGPs and unlocking of DAC, VOBA, DSI, DFEL and changes in future contract benefits. The statistical distribution is designed to identify when the deviations from expected returns have become significant enough to warrant a change of the future variable fund growth rate assumption.
As discussed above, stochastic modeling is used to develop a range of reasonably possible future EGPs. We compare the range of the present value of the future EGPs from the stochastic modeling to that used in our amortization model. A set of intervals around the mean of these scenarios is utilized to calculate two separate statistical ranges of reasonably possible EGPs. These intervals are then compared to the present value of the EGPs used in the amortization model. If the present value of EGPs utilized for amortization were to exceed the reasonable range of statistically calculated EGPs, a revision of the EGPs used to calculate amortization would be considered. If a revision is deemed necessary, future EGPs would be re-projected using the current account values at the end of the period during which the revision occurred along with a long-term variable fund growth rate assumption such that the re-projected EGPs would be our best estimate of EGPs.
Our practice is not necessarily to unlock immediately after exceeding the first of the two statistical ranges, but, rather, if we stay between the first and second statistical range for several quarters, we would likely unlock. Additionally, if we exceed the ranges as a result of a short-term market reaction, we would not necessarily unlock. However, if the second statistical range is exceeded for more than one quarter, it is likely that we would unlock. While this approach reduces adjustments to DAC, VOBA, DSI and DFEL due to short-term fluctuations, significant changes in variable fund returns that extend beyond one or two quarters could result in a significant favorable or unfavorable unlocking. Notwithstanding these intervals, if a severe decline or increase in variable fund values were to occur or should other circumstances suggest that the present value of future EGPs no longer represents our best estimate, we could determine that a revision of the EGPs is necessary.
Our long-term variable fund growth rate assumption, which is used in the determination of DAC, VOBA, DSI and DFEL amortization for the variable component of our variable annuity and VUL products, is an immediate increase of approximately 2% followed by growth going forward of 6.5% to 8.25% depending on the block of business and reflecting differences in contract holder fund allocations between fixed-income and equity-type investments. If we had unlocked our RTM assumption as of December 31, 2022, we would have recorded unfavorable unlocking of approximately $90 million, pre-tax, primarily within our Annuities segment.
Investments
Investments are an integral part of our operations, and we invest in fixed maturity securities that are primarily classified as AFS and carried at fair value with the difference from amortized cost due to factors other than credit loss included in stockholders’ equity as a component of AOCI. The difference between amortized cost and fair value due to credit loss impairment is recognized in realized gain (loss) on the Consolidated Statements of Comprehensive Income (Loss). We also invest in equity securities that are carried at fair value with changes in fair value recognized in realized gain (loss). See “Consolidated Investments” below for more information.
Investment Valuation
Our measurement of fair value is based on assumptions used by market participants in pricing the asset or liability, which may include inherent risk, restrictions on the sale or use of an asset or NPR, which would include our own credit risk. Our estimate of an exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability (“exit price”) in the principal market, or the most advantageous market in the absence of a principal market, for that asset or liability, as opposed to the price that would be paid to acquire the asset or receive a liability (“entry price”). We categorize our financial instruments carried at fair value into a three-level fair value hierarchy, based on the priority of inputs to the respective valuation technique. The three-level hierarchy for fair value measurement is defined in Note 1.
The following summarizes investments on the Consolidated Balance Sheets carried at fair value by pricing source and fair value hierarchy level (in millions) as of December 31, 2022:
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| Quoted |
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| Prices |
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| in Active |
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| Markets for | Significant | Significant |
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| Identical |
| Observable | Unobservable |
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| Assets |
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| Inputs |
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| Inputs |
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| Total |
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| (Level 1) |
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| (Level 2) |
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| (Level 3) |
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| Fair Value |
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Priced by third-party pricing services |
| $ | 400 |
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| $ | 86,156 |
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| $ | 162 |
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| $ | 86,718 |
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Priced by independent broker quotations |
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| - |
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| - |
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| 4,297 |
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|
| 4,297 |
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Priced by matrices |
|
| - |
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| 16,506 |
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| - |
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| 16,506 |
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Priced by other methods (1) |
|
| - |
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| - |
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| 261 |
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| 261 |
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Total |
| $ | 400 |
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| $ | 102,662 |
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| $ | 4,720 |
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| $ | 107,782 |
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Percent of total |
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| 0% |
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| 95% |
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| 5% |
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| 100% |
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(1)Represents primarily securities for which pricing models were used to compute fair value.
For the categories and associated fair value of our fixed maturity AFS securities classified within Level 3 of the fair value hierarchy as of December 31, 2022 and 2021, see Notes 1 and 20.
Our investments are valued using the appropriate market inputs based on the investment type, and include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. In addition, market indicators and industry and economic events are monitored, and further market data is acquired if certain triggers are met. We incorporate the issuer’s credit rating and a risk premium, if warranted, given the issuer’s industry and the security’s time to maturity. We use an internationally recognized pricing service as our primary pricing source, and we do not adjust prices received from third parties or obtain multiple prices when measuring the fair value of our investments. We generally use prices from the pricing service rather than broker quotes because we have documentation from the pricing service on the observable market inputs they use, as compared to the limited information on the pricing inputs from broker quotes. For private placement securities, we use pricing matrices that utilize observable pricing inputs of similar public securities and Treasury yields as inputs to the fair value measurement. It is possible that different valuation techniques and models, other than those described above, could produce materially different estimates of fair value.
When the volume and level of activity for an asset or liability has significantly decreased in relation to normal market activity for the asset or liability, we believe that the market is not active. Activities that may indicate a market is not active include fewer recent transactions in the market, price quotations that lack current information and/or vary substantially over time or among market makers, limited public information, uncorrelated indexes with recent fair values of assets and abnormally wide bid-ask spread. As of December 31, 2022, we evaluated the markets that our securities trade in and concluded that none were inactive. We will continue to re-evaluate this conclusion, as needed, based on market conditions.
We use unobservable inputs to measure the fair value of securities trading in less liquid or illiquid markets with limited or no pricing information. We obtain broker quotes for securities such as synthetic convertibles, index-linked certificates of deposit and collateralized debt obligations when sufficient security structure or other market information is not available to produce an evaluation. For broker-quoted only securities, non-binding quotes from market makers or broker-dealers are obtained from sources recognized as market participants. Broker-quoted securities are based solely on receipt of updated quotes from a single market maker or a broker-dealer recognized as a market participant. Our broker-quoted only securities are generally classified as Level 3 of the fair value hierarchy. As of December 31, 2022, we used broker quotes for 47 securities as our final price source, representing less than 1% of total securities owned.
In order to validate the pricing information and broker quotes, we employ, where possible, procedures that include comparisons with similar observable positions, comparisons with subsequent sales and observations of general market movements for those security classes. Our primary third-party pricing service has policies and processes to ensure that it is using objectively verifiable observable market data. The pricing service regularly reviews the evaluation inputs for securities covered, including broker quotes, executed trades and credit information, as applicable. If the pricing service determines it does not have sufficient objectively verifiable information about a security’s valuation, it discontinues providing a valuation for the security. The pricing service regularly publishes and updates a summary of inputs used in its valuations by major security type. In addition, we have policies and procedures in place to review the process that is utilized by the third-party pricing service and the output that is provided to us by the pricing service. On a periodic basis, we test the pricing for a sample of securities to evaluate the inputs and assumptions used by the pricing service, and we perform a comparison of the pricing service output to an alternative pricing source. In addition, we check prices provided by our primary pricing service to ensure that they are not stale or unreasonable by reviewing the prices for unusual changes from period to period based on certain parameters or for lack of change from one period to the next. If such anomalies in the pricing are observed, we may use pricing information from another pricing source.
Valuation of Alternative Investments
Recognition of investment income on alternative investments is delayed due to the availability of the related financial statements, which are generally obtained from the partnerships’ general partners, as our venture capital, real estate and oil and gas portfolios are generally reported to us on a three-month delay, and our hedge funds are reported to us on a one-month delay. In addition, the effect of annual audit adjustments related to completion of calendar-year financial statement audits of the investees are typically received during the first or second quarter of each calendar year. Accordingly, our investment income from alternative investments for any calendar year period may not include the complete effect of the change in the underlying net assets for the partnership for that calendar year period. Recorded audit adjustments affect our investment income on alternative investments in the period that the adjustments are recorded.
Measurement of Allowances for Credit Losses and Recognition of Impairments
We regularly review our fixed maturity AFS securities for declines in fair value that we determine to be impairment-related. Realized gains and losses generally originate from asset sales to reposition the portfolio or to respond to product experience. In the process of evaluating whether a security with an unrealized loss reflects declines that are related to credit losses, we consider our ability and intent to sell the security prior to a recovery of value. However, subsequent decisions on securities sales are made within the context of overall risk monitoring, assessing value relative to other comparable securities and overall portfolio maintenance. Although our portfolio managers may, at a given point in time, believe that the preferred course of action is to hold securities with unrealized losses attributable to factors other than credit loss until such losses are recovered, the dynamic nature of portfolio management may result in a subsequent decision to sell. These subsequent decisions are consistent with the classification of our investment portfolio as AFS. We expect to continue to manage all non-trading investments within our portfolios in a manner that is consistent with the AFS classification.
We consider economic factors and circumstances within industries and countries where recent impairments have occurred in our assessment of the position of securities we own of similarly situated issuers. While it is possible for realized or unrealized losses on a particular investment to affect other investments, our risk management strategy has been designed to identify correlation risks and other risks inherent in managing an investment portfolio. Once identified, strategies and procedures are developed to effectively monitor and manage these risks. The areas of risk correlation that we pay particular attention to are risks that may be correlated within specific financial and business markets, risks within specific industries and risks associated with related parties. When the detailed analysis by our external asset managers and investment portfolio managers leads us to the conclusion that a security’s decline in fair value is due to credit loss, a credit loss allowance is recorded. In instances where declines are related to factors other than credit loss, the security will continue to be carefully monitored.
There are risks and uncertainties associated with determining whether an investment shows indications of impairment. These include subsequent significant changes in general overall economic conditions, as well as specific business conditions affecting particular issuers, future financial market effects such as interest rate spreads, stability of foreign governments and economies, future rating agency actions and significant accounting, fraud or corporate governance issues that may adversely affect certain investments. In addition, there are often significant estimates and assumptions that we use to estimate the fair values of securities as described in “Investment Valuation” above. We continually monitor developments and update underlying assumptions and financial models based upon new information.
For certain securitized fixed maturity AFS securities with contractual cash flows, including asset-backed securities (“ABS”), we use our best estimate of cash flows for the life of the security to determine whether it is credit impaired. In addition, we review for other indicators of impairment as required by the Investments – Debt and Equity Securities Topic of the FASB Accounting Standards CodificationTM (“ASC”).
Write-downs on real estate and other investments are experienced when the estimated value of the asset is deemed to be less than the carrying value. Write-downs and allowance for credit losses for commercial mortgage loans are established when the estimated value of the asset is deemed to be less than the carrying value. All commercial mortgage loans that are impaired are individually reviewed to determine an appropriate credit loss allowance. Changing economic conditions affect our valuation of commercial mortgage loans. Increasing vacancies, declining rents and the like are incorporated into the allowance for credit losses analysis that we perform for monitored loans and may contribute to an increase in the allowance for credit losses. In addition, we continue to monitor the entire commercial mortgage loan portfolio to identify both current and projected future risk based on reasonable and supportable forecasts. Areas of emphasis include properties that have deteriorating credits or have experienced debt-service coverage and/or loan-to-value reduction. Where warranted, we have established or increased our allowance for credit losses based upon this analysis.
We have also established an allowance for credit losses on our residential mortgage loan portfolio that includes a specific credit loss allowance for loans that are deemed to be impaired as well as an allowance for credit losses for pools of loans with similar risk characteristics. The allowance for credit losses for the performing population of loans is based on historical performance for similar loans, as well as projected future losses based on modeling, which includes reasonable and supportable forecasts. The historical data utilized in the allowance for credit losses calculation process is adjusted for current economic conditions.
Amortization of DAC, VOBA, DSI and DFEL and changes in other contract holder funds reflect an assumption for an expected level of credit-related investment losses. When actual credit-related investment losses are realized, we recognize a true-up to our DAC, VOBA, DSI and DFEL amortization and changes in other contract holder funds within realized losses reflecting the incremental effect of actual
versus expected credit-related investment losses. These actual to expected amortization adjustments could create volatility in net realized gains and losses.
Derivatives
Derivatives are primarily used for hedging purposes. We hedge certain portions of our exposure to interest rate risk, default risk, basis risk, equity market risk, credit risk and foreign currency exchange risk by entering into derivative transactions. We also purchase and issue financial instruments that contain embedded derivative instruments. See “Future Contract Benefits” and “Other Contract Holder Funds” below for information on embedded derivatives. Assessing the effectiveness of these hedging programs and evaluating the carrying values of the related derivatives often involve a variety of assumptions and estimates.
We carry our derivative instruments at fair value, which we determine through valuation techniques or models that use market data inputs or independent broker quotations. The fair values fluctuate from period to period due to the volatility of the valuation inputs, including but not limited to swap interest rates, interest and equity volatility and equity index levels, foreign currency forward and spot rates, credit spreads and correlations, some of which are significantly affected by economic conditions. The effect to revenue is reported in realized gain (loss) and such amount along with the associated federal income taxes is excluded from income (loss) from operations of our segments.
For more information on derivatives, see Notes 1 and 5. For more information on market exposures associated with our derivatives, including sensitivities, see “Part II – Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”
Future Contract Benefits
Reserves
Reserves are the amounts that, with the additional premiums to be received and interest thereon compounded annually at certain assumed rates, are calculated to be sufficient to meet the various policy and contract obligations as they mature. Generally, the reserves in excess of account value are reported within future contract benefits on the Consolidated Balance Sheets. Establishing adequate reserves for our obligations to contract holders requires assumptions to be made that are intended to represent an estimation of experience for the period that policy benefits are payable. If actual experience is better than or equal to the assumptions, then reserves should be adequate to provide for future benefits and expenses. If experience is worse than the assumptions, additional reserves may be required. Significant assumptions include mortality rates, morbidity, policy persistency and interest rates. We periodically review our experience and update our policy reserves for new issues and reserve for all claims incurred, as we believe appropriate.
GLB
We have certain GLB variable annuity products with GWB and GIB features that are embedded derivatives. Certain features of these guarantees have elements of both insurance benefits accounted for under the Financial Services – Insurance – Claim Costs and Liabilities for Future Policy Benefits Subtopic of the FASB ASC (“benefit reserves”) and embedded derivative reserves. We calculate the value of the embedded derivative reserve and the benefit reserve based on the specific characteristics of each GLB feature. Through our hybrid accounting approach, for reserve calculation purposes we assign product cash flows to the embedded derivative or insurance portion of the reserves based on the life-contingent nature of the benefits. We report the insurance portion of the reserves in future contract benefits with the embedded derivative reported in either other assets or other liabilities. During the third quarter of each year, we conduct our comprehensive review of the assumptions and projection models underlying our reserves and embedded derivatives. See “Annual Assumption Review” below for more information. These embedded derivatives are valued based on a stochastic projection of scenarios of the embedded derivative cash flows. The scenario assumptions, at each valuation date, are those we view to be appropriate for a hypothetical market participant and include assumptions for capital markets, actuarial lapse, benefit utilization, mortality, risk margin, administrative expenses and a margin for profit. In addition, an NPR component is determined at each valuation date that reflects our risk of not fulfilling the obligations of the underlying liability. The spread for the NPR is added to the discount rates used in determining the fair value from the net cash flows. We believe these assumptions are consistent with those that would be used by a market participant; however, as the related markets develop, we will continue to reassess our assumptions. These embedded derivatives are carried at fair value and are all classified as Level 3 of the fair value hierarchy. It is possible that different valuation techniques and assumptions could produce a materially different estimate of fair value. Changes in the fair value of these embedded derivatives result primarily from changes in market conditions. For more information, see Notes 1 and 20.
We have a dynamic hedging strategy designed to mitigate selected risk and income statement volatility caused by changes in the equity markets, interest rates and market-implied volatilities associated with GWB and GIB features that are available in our variable annuity products. In addition to mitigating selected risk and income statement volatility, the hedge program is also focused on a long-term goal of accumulating assets that could be used to pay claims under these benefits.
Changes in the value of the hedge contracts hedge the income statement effect of changes in GLB embedded derivative reserves and benefit reserves. This dynamic hedging strategy utilizes options and total return swaps on U.S.-based equity indices, and futures on U.S.-based and international equity indices, as well as interest rate futures, interest rate swaps and currency futures. The notional amounts of the underlying hedge instruments are such that the magnitude of the change in the value of the hedge instruments due to changes in equity markets, interest rates and implied volatilities is designed to offset the magnitude of the change in the GLB embedded derivative reserves and benefit reserves caused by changes in equity markets, as well as the change in GLB embedded derivative reserves caused by changes in interest rates and implied volatilities. See “Realized Gain (Loss) – Variable Annuity Net Derivatives Results” below for information on how we determine our NPR, including the sensitivity of the NPR factor.
As part of our hedging program, equity market, interest rate and market-implied volatility conditions are monitored on a daily basis. We rebalance our hedge positions based upon changes in these factors as needed. While we actively manage our hedge positions, these positions may not completely offset changes in the fair value of embedded derivative reserves and benefit reserves caused by movements in these factors due to, among other things, differences in timing between when a market exposure changes and corresponding changes to the hedge positions, extreme swings in the equity markets, interest rates and market-implied volatilities, realized market volatility, contract holder behavior, divergence between the performance of the underlying funds and the hedging indices, divergence between the actual and expected performance of the hedge instruments or our ability to purchase hedging instruments at prices consistent with our desired risk and return trade-off.
Within our annuity business, we have certain products that contain GLB features. The proportion of our variable annuity account values that contained GLB features to our total annuity account values, net of reinsurance, was 45% and 50% as of December 31, 2022 and 2021, respectively. Underperforming equity markets increase our exposure to potential benefits with the GLB features. A contract with a GLB feature is “in the money” if the contract holder’s account value falls below the present value of guaranteed withdrawal or income benefits, assuming no lapses. As of December 31, 2022 and 2021, 37% and 7%, respectively, of all in-force contracts with a GLB feature were “in the money,” and our exposure, after reinsurance, as of December 31, 2022 and 2021, was $3.1 billion and $453 million, respectively. However, the only way the contract holder can realize the excess of the present value of benefits over the account value of the contract is through a series of withdrawals or income payments that do not exceed a maximum amount. If, after the series of withdrawals or income payments, the account value is exhausted, the contract holder will continue to receive a series of annuity payments. The account value can also fluctuate with equity market returns on a daily basis resulting in increases or decreases in the excess of the present value of benefits over account value.
As a result of these factors, the ultimate amount to be paid by us related to GLB guarantees is uncertain and could be significantly more or less than $3.1 billion, net of reinsurance. Our fair value estimates of the GLB embedded derivatives, which are based on detailed models of future cash flows under a wide range of market-consistent scenarios, reflect a more comprehensive view of the related factors and represent our best estimate of the present value of these potential liabilities. The market-consistent scenarios used in the determination of the fair value of the GLB embedded derivatives are similar to those used by an investment bank to value derivatives for which the pricing is not transparent and the aftermarket is nonexistent or illiquid. We use risk-neutral Monte Carlo simulations in our calculation to value the entire block of guarantees, which involve 100 unique scenarios per policy or approximately 44 million scenarios. The market-consistent scenario assumptions, at each valuation date, are those we view to be appropriate for a hypothetical market participant. The market-consistent inputs include, but are not limited to, assumptions for capital markets (e.g., implied volatilities, correlation among indices, risk-free swap curve, etc.), contract holder behavior (e.g., policy lapse, rider utilization, etc.), mortality, risk margins, maintenance expenses and a margin for profit. We believe these assumptions are consistent with those that would be used by a market participant; however, as the related markets develop, we will continue to reassess our assumptions. It is possible that different valuation techniques and assumptions could produce a materially different estimate of fair value. For information on our variable annuity hedge program performance, see our discussion in “Realized Gain (Loss) – Variable Annuity Net Derivatives Results” below.
The following table presents our estimates of the potential instantaneous effect to net income (loss) that could result from sudden changes that may occur in equity markets, interest rates and implied market volatilities (in millions) at the levels indicated in the table and excludes the net cost of operating the hedging program. The amounts represent the estimated difference between the change in the portion of GLB reserves that is calculated on a fair value basis and the change in the value of the underlying hedge instruments after the amortization of DAC, VOBA, DSI and DFEL and taxes. These effects do not include any estimate of unlocking that could occur, nor do they estimate any change in the NPR component of the GLB reserve or any estimate of effects to our GLB benefit ratio unlocking. These estimates are based upon the recorded reserves as of December 31, 2022, and the related hedge instruments in place as of that date. The effects presented in the table below are not representative of the aggregate impacts that could result if a combination of such changes to equity market returns, interest rates and implied volatilities occurred.
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Equity Market Return | -20% |
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Hypothetical effect to net income | $ | 864 |
| $ | 427 |
| $ | 205 |
| $ | (194 | ) |
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Interest Rates | -50 bps |
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Hypothetical effect to net income | $ | 21 |
| $ | 12 |
| $ | (14 | ) | $ | (30 | ) |
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Implied Volatilities | 4% |
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| -4% |
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Hypothetical effect to net income | $ | 25 |
| $ | 13 |
| $ | (14 | ) | $ | (28 | ) |
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The following table shows the effect (dollars in millions) of indicated changes in instantaneous shifts in equity market returns, interest rate scenarios and market-implied volatilities:
The actual effects of the results illustrated in the two tables above could vary significantly depending on a variety of factors, many of which are out of our control, and consideration should be given to the following:
The analysis is only valid as of December 31, 2022, due to changing market conditions, contract holder activity, hedge positions and other factors;
The analysis assumes instantaneous shifts in the capital market factors and no ability to rebalance hedge positions prior to the market changes;
The analysis assumes constant exchange rates and implied dividend yields;
Assumptions regarding shifts in the market factors, such as assuming parallel shifts in interest rate and implied volatility term structures, may be overly simplistic and not indicative of actual market behavior in stress scenarios;
It is very unlikely that one capital market sector (e.g., equity markets) will sustain such a large instantaneous movement without affecting other capital market sectors; and
The analysis assumes that there is no tracking or basis risk between the funds and/or indices affecting the GLB reserves and the instruments utilized to hedge these exposures.
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.
We utilize a delta hedging strategy for variable annuity products with a GDB feature, which uses futures and total return swaps on equity market indices to hedge against movements in equity markets. The hedging strategy is designed to hedge our exposure to earnings volatility that results from equity market driven changes in the reserve for GDB contracts. Because the GDB reserves are based upon projected long-term equity market return assumptions, and because the value of the hedging contracts will reflect current capital market conditions, the quarterly changes in values for the GDB reserves and the hedging contracts may not exactly offset each other. For information on our variable annuity hedge program performance, see our discussion in “Realized Gain (Loss) – Variable Annuity Net Derivative Results” below.
UL Products with Secondary Guarantees
We issue UL-type contracts where we provide a secondary guarantee to the contract holder. The policy can remain in force, even if the base policy account value is zero, as long as contractual secondary guarantee requirements have been met. The reserves related to UL products with secondary guarantees are based on the application of a benefit ratio the same as our GDB features, which are discussed above. These secondary guarantees are reported within future contract benefits on the Consolidated Balance Sheets. The level and direction of the change in reserves will vary over time based on the emergence of the benefit ratio and the level of assessments associated with the contracts. During the third quarter of each year, we conduct our comprehensive review of the assumptions and projection models used in estimating these reserves and unlock assumptions similar to the DAC discussion above. We may have unlocking in other quarters as we become aware of information that warrants updating assumptions outside of our comprehensive review. We may also identify and implement actuarial modeling refinements that result in increases or decreases to the carrying values of these reserves. See “Annual Assumption Review” below for more information.
Liability for Unpaid Claims
Future contract benefits include reserves for long-term life and disability claims associated with our Group Protection segment. These reserves are based on assumptions as to interest, claim resolution rates and offsets for other insurance including social security. Claim resolution rate assumptions and social security offsets are based on our actual experience. The interest rate assumption used for discounting long-term claim reserves is an important part of the reserving process due to the long benefit period for these claims. The interest rate assumptions used for discounting claim reserves are based on projected portfolio yield rates, after consideration for defaults and investment expenses, for assets supporting the liabilities. Our long-term disability reserves are discounted using rates ranging from 2.5% to 5.0% and vary by year of claim incurral. During the third quarter of each year, we conduct our comprehensive review of the assumptions and reserving models used in calculating these reserves. We may also identify and implement actuarial modeling refinements that result in increases or decreases to the carrying values of these reserves. See “Annual Assumption Review” below for more information.
Other Contract Holder Funds
Other contract holder funds includes account values on UL and VUL insurance and investment-type annuity products where account values are equal to deposits plus interest credited less withdrawals, surrender charges, asset-based fees and contract administration charges, as well as amounts representing the fair value of embedded derivative instruments associated with our IUL and indexed annuity products. During the third quarter of each year, we conduct our comprehensive review of the assumptions and projection models underlying our reserves and embedded derivatives. We may have unlocking in other quarters as we become aware of information that warrants updating assumptions outside of our comprehensive review. See “Annual Assumption Review” below for more information.
Our indexed annuity and IUL contracts permit the holder to elect a fixed interest rate return or a return where interest credited to the contracts is linked to the performance of the S&P 500® Index or other indices. The value of the variable portion of the contract holder’s account balance varies with the performance of the underlying variable funds chosen by the contract holder. Contract holders may elect to rebalance among the various accounts within the product at renewal dates. At the end of each indexed term, which can be up to six years, we have the opportunity to re-price the indexed component by establishing different participation rates, caps, spreads or specified rates, subject to contractual guarantees. We purchase and sell index options that are highly correlated to the portfolio allocation decisions of our contract holders, such that we are economically hedged with respect to equity returns for the current reset period. The mark-to-market of the options held generally offsets the change in value of the embedded derivative within the contract, both of which are recorded as a component of realized gain (loss) on the Consolidated Statements of Comprehensive Income (Loss). The Derivatives and Hedging and the Fair Value Measurements and Disclosures Topics of the FASB ASC require that we calculate fair values of index options we may purchase or sell in the future to hedge contract holder index allocations in future reset periods. These fair values represent an estimate of the cost of the options we will purchase or sell in the future, discounted back to the date of the balance sheet, using current market indicators of volatility and interest rates. Changes in the fair values of these liabilities are included as a component of realized gain (loss) on the Consolidated Statements of Comprehensive Income (Loss). For information on our index benefits hedging results, see our discussion in “Realized Gain (Loss)” below.
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:
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Income (loss) from operations: |
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Life Insurance | $ | (2,197 | ) | $ | (26 | ) | $ | (440 | ) |
Annuities |
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| (101 | ) |
Group Protection |
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Retirement Plan Services |
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Excluded realized gain (loss) |
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| 6 |
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| 58 |
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Net income (loss) | $ | (2,059 | ) | $ | (9 | ) | $ | (489 | ) |
The impacts of our annual assumption review were driven primarily by the following:
2022
For Life Insurance, unfavorable unlocking was driven by updates to policyholder behavior assumptions related to UL products with secondary guarantees in the amount of $1.8 billion, after-tax, as well as updates to mortality, morbidity and reinsurance assumptions and other items.
For Annuities, favorable unlocking was driven by increases to interest rate assumptions, partially offset by unfavorable updates to other items.
For Group Protection, the favorable impact was driven by updates to life waiver assumptions and increases to interest rate assumptions, partially offset by unfavorable updates to long-term disability incidence and severity assumptions.
For Retirement Plan Services, favorable unlocking was driven by increases to interest rate assumptions and other items.
For excluded realized gain (loss), unfavorable unlocking was driven by updates to policyholder behavior assumptions that impacted ceded reserves, partially offset by favorable updates to expense and capital market assumptions.
2021
For Life Insurance, unfavorable unlocking was driven by updates to policyholder behavior and interest rate assumptions, partially offset by favorable updates to investment allocation assumptions.
For Annuities, unfavorable unlocking was driven by updates to policyholder behavior and interest rate assumptions, partially offset by favorable updates to expense assumptions.
For Group Protection, the favorable impact was driven by updates to long-term disability termination rate assumptions, partially offset by unfavorable updates to interest rate assumptions.
For excluded realized gain (loss), favorable unlocking was driven by updates to expense assumptions and other items, partially offset by unfavorable updates to policyholder behavior assumptions.
Long-Term New Money Investment Yield Sensitivity
New money rates have increased but underlying interest rate volatility remains high. As a result, new money rates require careful analysis when forecasting the future direction of changes in rates. If we change our view of future new money rates and lower our current long-term new money investment yield assumption, then, assuming that all other assumptions remain constant, we estimate the impact of lowering this assumption by 50 basis points would be approximately $(225) million to income (loss) from operations due primarily to unlocking our DAC and VOBA assets. This impact would be most pronounced in our Life Insurance segment. The actual impact of a 50 basis point decline in the yield would be based upon a number of factors existing at the time of the assumption update, and, therefore, the actual amount of the loss may differ from our current estimate. In addition, lower investment margins may also impact the recoverability of intangible assets such as goodwill, require the establishment of additional liabilities or trigger loss recognition events on certain policyholder liabilities. For more information on our interest rate risk, see “Part II – Item 7A. Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk.”
Goodwill and Other Intangible Assets
Goodwill and intangible assets with indefinite lives are not amortized, but are reviewed for impairment annually as of October 1 and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Intangibles that do not have indefinite lives are amortized over their estimated useful lives. We perform a quantitative goodwill impairment test where the fair value of the reporting unit is determined and compared to the carrying value of the reporting unit. If the carrying value of the reporting unit exceeds the reporting unit’s fair value, goodwill is impaired and written down to the reporting unit’s fair value. The results of one test on one reporting unit cannot subsidize the results of another reporting unit. For the purposes of the evaluation of the carrying value of goodwill, our reporting units (Life Insurance, Annuities, Group Protection and Retirement Plan Services) correspond with our reporting segments.
The fair values of our reporting units are comprised of the value of in-force (i.e., existing) business and the value of new business. Specifically, new business is representative of cash flows and profitability associated with policies or contracts we expect to issue in the future, reflecting our forecasts of future sales volume and product mix over a 10-year period. To determine the values of in-force and new business, we use a discounted cash flows technique that applies a discount rate reflecting the market expected, weighted-average rate of return adjusted for the risk factors associated with operations to the projected future cash flows for each reporting unit.
We apply significant judgment when determining the estimated fair value of our reporting units. Factors that can influence the value of goodwill include the capital markets, competitive landscape, regulatory environment, consumer confidence and any items that can directly or indirectly affect new business future cash flows. Factors that could affect production levels and profitability of new business include mix of new business, pricing changes, customer acceptance of our products and distribution strength. Spread compression and related effects to profitability caused by lower interest rates affect the valuation of in-force business more significantly than the valuation of new business, as new business pricing assumptions reflect the current and anticipated future interest rate environment. Estimates of fair value are inherently uncertain and represent only management’s reasonable expectation regarding future developments. Examples of unfavorable changes to assumptions or factors that could result in future impairment include, but are not limited to, the following:
Lower expectations for future sales levels or future sales profitability;
Higher discount rates on new business assumptions;
Weakened expectations for the ability to execute future reserve financing transactions for life insurance business over the long-term or expectations for significant increases in the associated costs;
Legislative, regulatory or tax changes that affect the cost of, or demand for, our subsidiaries’ products, the required amount of reserves and/or surplus, or otherwise affect our ability to conduct business, including changes to statutory reserve requirements or changes to RBC requirements; and
Valuations of significant mergers or acquisitions of companies or blocks of business that would provide relevant market-based inputs for our impairment assessment that could support less favorable conclusions regarding the estimated fair value of our reporting units.
As a result of the capital market environment during the third quarter of 2022, including (i) declining equity markets and (ii) the impact of rising interest rates on our discount rate assumption, we accelerated our quantitative goodwill impairment test for our Life Insurance reporting unit as we concluded that there were indicators of impairment. Based on this quantitative test, which included updating our best estimate assumptions therein, we incurred an impairment during the third quarter of 2022 of the Life Insurance reporting unit goodwill of $634 million, which represented a write-off of the entire balance of goodwill for the reporting unit. As of October 1, 2022, we performed our annual quantitative goodwill impairment test for the remaining reporting units, and, as of October 1, 2022, the fair value was in excess of each such other reporting unit’s carrying value.
Refer to Note 9 for goodwill and specifically identifiable intangible assets by segment.
Income Taxes
Management uses certain assumptions and estimates in determining the income taxes payable or refundable for the current year, the deferred income tax liabilities and assets for items recognized differently in its financial statements from amounts shown on its income tax returns and the federal income tax expense. Determining these amounts requires analysis and interpretation of current tax laws and regulations. Management exercises considerable judgment in evaluating the amount and timing of recognition of the resulting income tax liabilities and assets. These judgments and estimates are re-evaluated on a continual basis as regulatory and business factors change. Legislative changes to the Internal Revenue Code of 1986, as amended, modifications or new regulations, administrative rulings, or court decisions could increase or decrease our effective tax rate.
In August 2022, the Inflation Reduction Act of 2022 was passed by the U.S. Congress and signed into law by President Biden. The Inflation Reduction Act of 2022 established a new 15% corporate alternative minimum tax for corporations whose average adjusted net income for any consecutive three-year period beginning after December 31, 2022, exceeds $1.0 billion. The Inflation Reduction Act of 2022 also established a 1% excise tax on stock repurchases made by publicly traded corporations. Both provisions are effective for tax years beginning after December 31, 2022. We are currently evaluating the impact of the 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 December 31, 2022, we had an approximate $2.2 billion deferred tax asset related to net unrealized losses on fixed maturity AFS securities. In the assessment of the future realizability of this deferred tax asset, management considered tax planning strategy and concluded that unrealized losses were caused by factors other than credit loss, and we have the intent and ability to hold these securities to recovery and collect all of the contractual cash flows. Additionally, as of December 31, 2022, we had a $278 million deferred tax asset related to net operating loss carryforwards that can be used to offset taxable income in future periods and reduce our income taxes payable in those future periods. The net operating loss carryforwards do not expire and can be carried forward indefinitely. Although realization is not assured, management believes it is more likely than not that the deferred tax assets, including our net operating loss deferred tax asset, will be realized. For additional information on income taxes, see Note 6.
RESULTS OF CONSOLIDATED OPERATIONS
Details underlying the consolidated results, deposits, net flows and account values (in millions) were as follows:
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|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Net Income (Loss) |
|
|
|
|
|
|
|
|
|
Income (loss) from operations: |
|
|
|
|
|
|
|
|
|
Life Insurance | $ | (1,941 | ) | $ | 535 |
| $ | (34 | ) |
Annuities |
| 1,245 |
|
| 1,283 |
|
| 983 |
|
Group Protection |
| 102 |
|
| (127 | ) |
| 43 |
|
Retirement Plan Services |
| 209 |
|
| 235 |
|
| 168 |
|
Other Operations |
| (495 | ) |
| (375 | ) |
| (295 | ) |
Excluded realized gain (loss), after-tax |
| 107 |
|
| (325 | ) |
| (570 | ) |
Benefit ratio unlocking, after-tax |
| (820 | ) |
| 196 |
|
| 194 |
|
Impairment of intangibles |
| (634 | ) |
| - |
|
| - |
|
Net impact from the Tax Cuts and Jobs Act |
| - |
|
| - |
|
| 37 |
|
Transaction and integration costs related to mergers, |
|
|
|
|
|
|
|
|
|
acquisitions and divestitures, after-tax |
| - |
|
| (11 | ) |
| (15 | ) |
Gain (loss) on modification or early extinguishment |
|
|
|
|
|
|
|
|
|
of debt, after-tax |
| - |
|
| (6 | ) |
| (12 | ) |
Net income (loss) | $ | (2,227 | ) | $ | 1,405 |
| $ | 499 |
|
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|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Deposits |
|
|
|
|
|
|
|
|
|
Life Insurance | $ | 5,735 |
| $ | 5,693 |
| $ | 5,890 |
|
Annuities |
| 11,879 |
|
| 11,740 |
|
| 11,260 |
|
Retirement Plan Services |
| 11,886 |
|
| 10,840 |
|
| 10,017 |
|
Total deposits | $ | 29,500 |
| $ | 28,273 |
| $ | 27,167 |
|
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|
|
|
|
|
|
|
|
|
Net Flows |
|
|
|
|
|
|
|
|
|
Life Insurance | $ | 3,998 |
| $ | 3,982 |
| $ | 4,137 |
|
Annuities |
| (415 | ) |
| (2,569 | ) |
| (341 | ) |
Retirement Plan Services |
| 2,905 |
|
| 464 |
|
| 166 |
|
Total net flows | $ | 6,488 |
| $ | 1,877 |
| $ | 3,962 |
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|
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|
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|
|
|
|
|
|
|
| As of December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Account Values |
|
|
|
|
|
|
|
|
|
Life Insurance | $ | 48,634 |
| $ | 51,846 |
| $ | 57,605 |
|
Annuities |
| 144,966 |
|
| 172,725 |
|
| 157,518 |
|
Retirement Plan Services |
| 88,735 |
|
| 99,114 |
|
| 88,307 |
|
Total account values | $ | 282,335 |
| $ | 323,685 |
| $ | 303,430 |
|
Comparison of 2022 to 2021
Net income decreased due primarily to the following:
The effect of our annual assumption review.
Goodwill impairment in our Life Insurance segment.
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.
Unfavorable variable annuity net derivative results.
The decrease in net income was partially offset by the following:
Lower mortality claims in our Life Insurance and Group Protection segments.
Lower expenses driven by lower compensation-related expenses, partially offset by higher Spark program and legal expenses.
Growth in business in force.
For a discussion of the goodwill impairment, see “Introduction – Critical Accounting Policies and Estimates – Goodwill and Other Intangible Assets” above.
RESULTS OF LIFE INSURANCE
Income (Loss) from Operations
Details underlying the results for Life Insurance (in millions) were as follows:
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|
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|
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|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Operating Revenues |
|
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|
|
|
|
|
|
Insurance premiums (1) | $ | 1,146 |
| $ | 1,033 |
| $ | 950 |
|
Fee income |
| 3,374 |
|
| 3,863 |
|
| 3,727 |
|
Net investment income |
| 2,585 |
|
| 3,209 |
|
| 2,823 |
|
Operating realized gain (loss) (2) |
| (6 | ) |
| (9 | ) |
| (6 | ) |
Amortization of deferred gain on |
|
|
|
|
|
|
|
|
|
business sold through reinsurance |
| 49 |
|
| 20 |
|
| 12 |
|
Other revenues |
| 8 |
|
| 21 |
|
| 10 |
|
Total operating revenues |
| 7,156 |
|
| 8,137 |
|
| 7,516 |
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
Interest credited |
| 1,307 |
|
| 1,439 |
|
| 1,491 |
|
Benefits |
| 7,020 |
|
| 4,275 |
|
| 4,586 |
|
Commissions and other expenses |
| 1,316 |
|
| 1,766 |
|
| 1,506 |
|
Total operating expenses |
| 9,643 |
|
| 7,480 |
|
| 7,583 |
|
Income (loss) from operations before taxes |
| (2,487 | ) |
| 657 |
|
| (67 | ) |
Federal income tax expense (benefit) |
| (546 | ) |
| 122 |
|
| (33 | ) |
Income (loss) from operations | $ | (1,941 | ) | $ | 535 |
| $ | (34 | ) |
(1)Includes term insurance premiums, which have a corresponding partial offset in benefits for changes in reserves.
(2)See “Realized Gain (Loss)” below.
Comparison of 2022 to 2021
Income from operations for this segment decreased due primarily to the following:
Higher benefits due to the effect of unlocking and growth in business in force, partially offset by lower mortality claims.
Lower net investment income, net of interest credited, driven by negative performance on alternative investments in 2022 compared to investment income in 2021, and the impact of the fourth quarter 2021 reinsurance agreement.
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.
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 $45 million per quarter as a result of the significantly unfavorable impact of the third quarter 2022 annual assumption review.
For information on our fourth quarter 2021 reinsurance agreement, see Note 8.
For information on interest rate spreads and interest rate risk, see “Part I – Item 1A. Risk Factors – Market Conditions – Changes in interest rates and sustained low interest rates may cause interest rate spreads to decrease, impacting our profitability, and make it more challenging to meet certain statutory requirements,” “Part I – Item 1A. Risk Factors – Market Conditions – Increases in interest rates may negatively affect our profitability, capital position and the value of our investment portfolio and may also result in increased contract withdrawals” and “Part II – Item 7A. Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk.” For information on the current interest rate environment, see “Introduction – Executive Summary – Industry Trends – Interest Rate Environment” above.
Insurance Premiums
Insurance premiums relate to traditional products and are a function of the rates priced into the product and insurance in force. Insurance in force, in turn, is driven by sales, persistency and mortality claims.
Fee Income
Details underlying fee income, sales, net flows, account values and in-force face amount (in millions) were as follows:
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|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Fee Income |
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|
|
|
|
|
|
|
|
Cost of insurance assessments | $ | 2,258 |
| $ | 2,362 |
| $ | 2,377 |
|
Expense assessments |
| 1,540 |
|
| 1,507 |
|
| 1,502 |
|
Surrender charges |
| 30 |
|
| 31 |
|
| 33 |
|
DFEL: |
|
|
|
|
|
|
|
|
|
Deferrals |
| (1,061 | ) |
| (989 | ) |
| (972 | ) |
Amortization, net of interest: |
|
|
|
|
|
|
|
|
|
Amortization, net of interest, excluding unlocking |
| 558 |
|
| 560 |
|
| 514 |
|
Unlocking |
| 49 |
|
| 392 |
|
| 273 |
|
Total fee income | $ | 3,374 |
| $ | 3,863 |
| $ | 3,727 |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Sales by Product |
|
|
|
|
|
|
|
|
|
IUL/UL | $ | 135 |
| $ | 104 |
| $ | 111 |
|
MoneyGuard® |
| 94 |
|
| 101 |
|
| 127 |
|
VUL |
| 163 |
|
| 181 |
|
| 188 |
|
Term |
| 177 |
|
| 152 |
|
| 132 |
|
Executive Benefits |
| 136 |
|
| 122 |
|
| 72 |
|
Total sales | $ | 705 |
| $ | 660 |
| $ | 630 |
|
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|
|
|
|
|
|
|
|
|
Net Flows |
|
|
|
|
|
|
|
|
|
Deposits | $ | 5,735 |
| $ | 5,693 |
| $ | 5,890 |
|
Withdrawals and deaths |
| (1,737 | ) |
| (1,711 | ) |
| (1,753 | ) |
Net flows | $ | 3,998 |
| $ | 3,982 |
| $ | 4,137 |
|
|
|
|
|
|
|
|
|
|
|
Contract Holder Assessments | $ | 5,361 |
| $ | 5,201 |
| $ | 5,154 |
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Account Values (1) |
|
|
|
|
|
|
|
|
|
General account | $ | 32,158 |
| $ | 32,532 |
| $ | 37,496 |
|
Separate account |
| 16,476 |
|
| 19,314 |
|
| 20,109 |
|
Total account values | $ | 48,634 |
| $ | 51,846 |
| $ | 57,605 |
|
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|
|
|
|
|
|
|
|
In-Force Face Amount |
|
|
|
|
|
|
|
|
|
UL and other | $ | 363,884 |
| $ | 362,106 |
| $ | 358,554 |
|
Term insurance |
| 707,747 |
|
| 611,854 |
|
| 535,387 |
|
Total in-force face amount | $ | 1,071,631 |
| $ | 973,960 |
| $ | 893,941 |
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|
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|
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|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Average General Account Values (1) | $ | 32,701 |
| $ | 36,560 |
| $ | 37,791 |
|
(1) Net of reinsurance ceded.
Fee income relates only to interest-sensitive products and includes cost of insurance assessments, expense assessments and surrender charges. Both cost of insurance and expense assessments can have deferrals and amortization related to DFEL. Cost of insurance and expense assessments are deducted from our contract holders’ account values. These amounts are a function of the rates priced into the product and premiums received, face amount in force and account values.
Sales are not recorded as a component of revenues (other than for traditional products) and do not have a significant effect on current quarter income from operations but are indicators of future profitability. Generally, we have higher sales during the second half of the year with the fourth quarter being our strongest. For more information on sales, see “Additional Information” above.
Sales in the table above and as discussed above were reported as follows:
UL, IUL and VUL – first-year commissionable premiums plus 5% of excess premiums received;
MoneyGuard® linked-benefit products – MoneyGuard (UL), 15% of total expected premium deposits, and MoneyGuard Market AdvantageSM (VUL), 150% of commissionable premiums;
Executive Benefits – insurance and corporate-owned UL and VUL, first-year commissionable premiums plus 5% of excess premium received, and single premium bank-owned UL and VUL, 15% of single premium deposits; and
Term – 100% of annualized first-year premiums.
We monitor the business environment, including but not limited to the regulatory and interest rate environments, and make changes to our product offerings and in-force products as needed, and as permitted under the terms of the policies, to sustain the future profitability of our segment.
Net Investment Income and Interest Credited
Details underlying net investment income and interest credited (in millions) were as follows:
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|
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|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Net Investment Income |
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities, mortgage loans on real estate |
|
|
|
|
|
|
|
|
|
and other, net of investment expenses | $ | 2,366 |
| $ | 2,512 |
| $ | 2,531 |
|
Commercial mortgage loan prepayment and bond |
|
|
|
|
|
|
|
|
|
make-whole premiums (1) |
| 37 |
|
| 46 |
|
| 24 |
|
Alternative investments (2) |
| 48 |
|
| 522 |
|
| 140 |
|
Surplus investments (3) |
| 134 |
|
| 129 |
|
| 128 |
|
Total net investment income | $ | 2,585 |
| $ | 3,209 |
| $ | 2,823 |
|
|
|
|
|
|
|
|
|
|
|
Interest Credited | $ | 1,307 |
| $ | 1,439 |
| $ | 1,491 |
|
(1)See “Consolidated Investments – Commercial Mortgage Loan Prepayment and Bond Make-Whole Premiums” below for additional information.
(2)See “Consolidated Investments – Alternative Investments” below for additional information.
(3)Represents net investment income on the required statutory surplus for this segment and includes the effect of investment income on alternative investments for such assets that are held in the portfolios supporting statutory surplus versus the portfolios supporting product liabilities.
A portion of the investment income earned for this segment is credited to contract holder accounts. Statutory reserves will typically grow at a faster rate than account values because of reserve requirements. Investments allocated to this segment are based upon the statutory reserve liabilities and are affected by various reserve adjustments, including financing transactions providing relief from reserve requirements. These financing transactions lead to a transfer of investments from this segment to Other Operations. We expect to earn a spread between what we earn on the underlying general account investments and what we credit to our contract holders’ accounts. We use our investment income to offset the earnings effect of the associated growth of our policy reserves for traditional products. Commercial mortgage loan prepayments and bond make-whole premiums and investment income on alternative investments can vary significantly from period to period due to a number of factors, and, therefore, may contribute to investment income results that are not indicative of the underlying trends.
Benefits
Details underlying benefits (dollars in millions) were as follows:
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|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Benefits |
|
|
|
|
|
|
|
|
|
Death claims direct and assumed | $ | 5,440 |
| $ | 5,866 |
| $ | 5,521 |
|
Death claims ceded |
| (2,110 | ) |
| (2,325 | ) |
| (2,019 | ) |
Reserves released on death |
| (609 | ) |
| (708 | ) |
| (738 | ) |
Net death benefits |
| 2,721 |
|
| 2,833 |
|
| 2,764 |
|
Change in secondary guarantee life insurance product |
|
|
|
|
|
|
|
|
|
reserves: |
|
|
|
|
|
|
|
|
|
Change in reserves, excluding unlocking |
| 627 |
|
| 703 |
|
| 644 |
|
Unlocking |
| 2,533 |
|
| (190 | ) |
| 112 |
|
Change in MoneyGuard® reserves: |
|
|
|
|
|
|
|
|
|
Change in reserves, excluding unlocking |
| 588 |
|
| 548 |
|
| 482 |
|
Unlocking |
| 157 |
|
| 33 |
|
| 272 |
|
Other benefits (1) |
| 394 |
|
| 348 |
|
| 312 |
|
Total benefits | $ | 7,020 |
| $ | 4,275 |
| $ | 4,586 |
|
|
|
|
|
|
|
|
|
|
|
Death claims per $1,000 of in-force |
| 2.66 |
|
| 3.05 |
|
| 3.21 |
|
(1)Includes primarily changes in reserves and dividends on traditional and other products.
Benefits for this segment include claims incurred during the period in excess of the associated reserves for its interest-sensitive and traditional products. In addition, benefits include the change in secondary guarantee and linked-benefit life insurance product reserves. These reserves are affected by changes in expected future trends of assessments and benefits causing unlocking adjustments to these liabilities similar to DAC, VOBA and DFEL. Generally, we experience higher mortality in the first quarter of the year due to the seasonality of claims. We expect COVID-19-related mortality to continue to follow U.S. death trends.
Commissions and Other Expenses
Details underlying commissions and other expenses (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Commissions and Other Expenses |
|
|
|
|
|
|
|
|
|
Commissions | $ | 698 |
| $ | 639 |
| $ | 687 |
|
General and administrative expenses |
| 554 |
|
| 576 |
|
| 557 |
|
Expenses associated with reserve financing |
| 105 |
|
| 100 |
|
| 99 |
|
Taxes, licenses and fees |
| 159 |
|
| 162 |
|
| 163 |
|
Total expenses incurred |
| 1,516 |
|
| 1,477 |
|
| 1,506 |
|
DAC and VOBA deferrals |
| (805 | ) |
| (745 | ) |
| (788 | ) |
Total expenses recognized before amortization |
| 711 |
|
| 732 |
|
| 718 |
|
DAC and VOBA amortization, net of interest: |
|
|
|
|
|
|
|
|
|
Amortization, net of interest, excluding unlocking |
| 458 |
|
| 450 |
|
| 339 |
|
Unlocking |
| 143 |
|
| 580 |
|
| 445 |
|
Other intangible amortization |
| 4 |
|
| 4 |
|
| 4 |
|
Total commissions and other expenses | $ | 1,316 |
| $ | 1,766 |
| $ | 1,506 |
|
|
|
|
|
|
|
|
|
|
|
DAC and VOBA Deferrals |
|
|
|
|
|
|
|
|
|
As a percentage of sales |
| 114.2% |
|
| 112.9% |
|
| 125.1% |
|
Commissions and costs that result directly from and are essential to successful acquisition of new or renewal business are deferred to the extent recoverable and for our interest-sensitive products are generally amortized over the life of the contracts in relation to EGPs. For our traditional products, DAC and VOBA are amortized on either a straight-line basis or as a level percent of premium of the related contracts, depending on the block of business. When comparing DAC and VOBA deferrals as a percentage of sales for 2022 and 2021, the fluctuations were primarily a result of changes in sales mix to products with different commission rates. For more information, see “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates – DAC, VOBA, DSI and DFEL” above.
RESULTS OF ANNUITIES
Income (Loss) from Operations
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 |
| 2,434 |
|
| 2,724 |
|
| 2,394 |
|
Net investment income |
| 1,461 |
|
| 1,401 |
|
| 1,272 |
|
Operating realized gain (loss) (2) |
| 207 |
|
| 208 |
|
| 214 |
|
Amortization of deferred gain on |
|
|
|
|
|
|
|
|
|
business sold through reinsurance |
| 25 |
|
| 26 |
|
| 29 |
|
Other revenues (3) |
| 482 |
|
| 527 |
|
| 425 |
|
Total operating revenues |
| 4,774 |
|
| 5,002 |
|
| 4,455 |
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
Interest credited |
| 894 |
|
| 811 |
|
| 773 |
|
Benefits (1) |
| 468 |
|
| 548 |
|
| 696 |
|
Commissions and other expenses |
| 1,960 |
|
| 2,119 |
|
| 1,854 |
|
Total operating expenses |
| 3,322 |
|
| 3,478 |
|
| 3,323 |
|
Income (loss) from operations before taxes |
| 1,452 |
|
| 1,524 |
|
| 1,132 |
|
Federal income tax expense (benefit) |
| 207 |
|
| 241 |
|
| 149 |
|
Income (loss) from operations | $ | 1,245 |
| $ | 1,283 |
| $ | 983 |
|
(1)Insurance premiums include primarily our income annuities that have a corresponding offset in benefits. Benefits include changes in income annuity reserves driven by premiums.
(2)See “Realized Gain (Loss)” below.
(3)Consists primarily of revenues attributable to broker-dealer services, which are subject to market volatility, and the net settlement related to certain reinsurance transactions, which has a corresponding offset in net investment income and interest credited.
Comparison of 2022 to 2021
Income from operations for this segment decreased due primarily to the following:
Lower fee income driven by lower average daily variable account values.
Lower net investment income, net of interest credited, driven by lower investment income on alternative investments within our surplus portfolio and lower prepayment and bond make-whole premiums, partially offset by higher average fixed account values and impacts to portfolio yields from the current interest rate environment.
The decrease in income from operations was partially offset by the following:
Lower commissions and other expenses driven by lower trail commissions resulting from lower average daily variable account values, lower incentive compensation as a result of production performance and lower amortization expense as a result of lower actual gross profits.
Lower benefits, net of changes in income annuity reserves, due to the effect of unlocking, partially offset by an increase in the growth of GLB and GDB benefit reserves due to market performance.
See “Critical Accounting Policies and Estimates – Annual Assumption Review” above for information about unlocking.
Additional Information
New deposits are an important component of net flows and key to our efforts to grow our business. Although deposits do not significantly affect current period income from operations, they can significantly impact future income from operations.
The other component of net flows relates to the retention of new business and account values. An important measure of retention is the reduction in account values caused by full surrenders, deaths and other contract benefits. These outflows as a percentage of average gross account values were 7%, 8% and 7% in 2022, 2021 and 2020, respectively.
Our fixed and indexed variable annuities have discretionary fixed and indexed crediting rates that reset on an annual or periodic basis and may be subject to surrender charges. Our ability to retain these annuities will be subject to current competitive conditions at the time interest rates for these products reset. We expect to manage the effects of spreads on near-term income from operations through portfolio management and, to a lesser extent, crediting rate actions, which assumes no significant changes in net flows or other changes that may cause interest rate spreads to differ from our expectations. For information on interest rate spreads and interest rate risk, see “Part I – Item 1A. Risk Factors – Market Conditions – Changes in interest rates and sustained low interest rates may cause interest rate spreads to decrease, impacting our profitability, and make it more challenging to meet certain statutory requirements,” “Part I – Item 1A. Risk Factors – Market Conditions – Increases in interest rates may negatively affect our profitability, capital position and the value of our investment portfolio and may also result in increased contract withdrawals” and “Part II – Item 7A. Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk.” For information on the current interest rate environment, see “Introduction – Executive Summary – Industry Trends – Interest Rate Environment” above.
Fee Income
Details underlying fee income, account values and net flows (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Fee Income |
|
|
|
|
|
|
|
|
|
Mortality, expense and other assessments | $ | 2,411 |
| $ | 2,713 |
| $ | 2,381 |
|
Surrender charges |
| 23 |
|
| 11 |
|
| 16 |
|
DFEL: |
|
|
|
|
|
|
|
|
|
Deferrals |
| (22 | ) |
| (27 | ) |
| (31 | ) |
Amortization, net of interest: |
|
|
|
|
|
|
|
|
|
Amortization, net of interest, excluding unlocking |
| 23 |
|
| 32 |
|
| 26 |
|
Unlocking |
| (1 | ) |
| (5 | ) |
| 2 |
|
Total fee income | $ | 2,434 |
| $ | 2,724 |
| $ | 2,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of or For the Years Ended |
| |||||||
| December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Variable Account Value Information |
|
|
|
|
|
|
|
|
|
Variable annuity deposits (1) | $ | 3,370 |
| $ | 5,220 |
| $ | 3,978 |
|
Increases (decreases) in variable annuity account values: |
|
|
|
|
|
|
|
|
|
Net flows (1) |
| (5,871 | ) |
| (6,283 | ) |
| (5,262 | ) |
Change in market value (1) |
| (23,205 | ) |
| 16,997 |
|
| 16,106 |
|
Contract holder assessments (1) |
| (2,604 | ) |
| (2,838 | ) |
| (2,554 | ) |
Transfers to the variable portion of variable annuity |
|
|
|
|
|
|
|
|
|
products from the fixed portion of variable |
|
|
|
|
|
|
|
|
|
annuity products |
| 492 |
|
| 588 |
|
| 831 |
|
Variable annuity account values (1) |
| 105,613 |
|
| 136,721 |
|
| 128,175 |
|
Average daily variable annuity account values (1) |
| 114,882 |
|
| 133,888 |
|
| 116,117 |
|
Average daily S&P 500® Index (2) |
| 4,100 |
|
| 4,269 |
|
| 3,218 |
|
(1)Excludes the fixed portion of variable.
(2)We generally use the S&P 500 Index as a benchmark for the performance of our variable account values. The account values of our variable annuity contracts are invested by our policyholders in a variety of investment options including, but not limited to, domestic and international equity securities and fixed income, which do not necessarily align with S&P 500 Index performance. See Note 10 for additional information.
We charge contract holders mortality and expense assessments on variable annuity accounts to cover insurance and administrative expenses. These assessments are a function of the rates priced into the product and the average daily variable account values. Average daily variable account values are driven by net flows and variable fund returns. Charges on GLB riders are assessed based on a contractual rate that is applied either to the account value or the guaranteed amount. We may collect surrender charges when our fixed and variable annuity contract holders surrender their contracts during the surrender charge period to protect us from premature withdrawals. Fee income includes charges on both our variable and fixed annuity products, but excludes the attributed fees on our GLB riders; see “Realized Gain (Loss) – Operating Realized Gain (Loss)” below for discussion of these attributed fees.
Net Investment Income and Interest Credited
Details underlying net investment income, interest credited and fixed account values (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Net Investment Income |
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities, mortgage loans on real estate |
|
|
|
|
|
|
|
|
|
and other, net of investment expenses | $ | 1,305 |
| $ | 1,155 |
| $ | 1,122 |
|
Commercial mortgage loan prepayment and bond |
|
|
|
|
|
|
|
|
|
make-whole premiums (1) |
| 31 |
|
| 70 |
|
| 23 |
|
Surplus investments (2) |
| 125 |
|
| 176 |
|
| 127 |
|
Total net investment income | $ | 1,461 |
| $ | 1,401 |
| $ | 1,272 |
|
|
|
|
|
|
|
|
|
|
|
Interest Credited |
|
|
|
|
|
|
|
|
|
Amount provided to contract holders | $ | 880 |
| $ | 794 |
| $ | 755 |
|
DSI deferrals |
| (2 | ) |
| (3 | ) |
| (4 | ) |
Interest credited before DSI amortization |
| 878 |
|
| 791 |
|
| 751 |
|
DSI amortization: |
|
|
|
|
|
|
|
|
|
Amortization, excluding unlocking |
| 17 |
|
| 21 |
|
| 21 |
|
Unlocking |
| (1 | ) |
| (1 | ) |
| 1 |
|
Total interest credited | $ | 894 |
| $ | 811 |
| $ | 773 |
|
(1)See “Consolidated Investments – Commercial Mortgage Loan Prepayment and Bond Make-Whole Premiums” below for additional information.
(2)Represents net investment income on the required statutory surplus for this segment and includes the effect of investment income on alternative investments for such assets that are held in the portfolios supporting statutory surplus versus the portfolios supporting product liabilities. See “Consolidated Investments – Alternative Investments” below for more information on alternative investments.
|
|
|
|
|
|
|
|
|
|
| As of or For the Years Ended |
| |||||||
| December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Fixed Account Value Information |
|
|
|
|
|
|
|
|
|
Fixed annuity deposits (1) | $ | 8,509 |
| $ | 6,520 |
| $ | 7,282 |
|
Increases (decreases) in fixed annuity account values: |
|
|
|
|
|
|
|
|
|
Net flows (1) |
| 5,456 |
|
| 3,714 |
|
| 4,921 |
|
Contract holder assessments (1) |
| (52 | ) |
| (86 | ) |
| (66 | ) |
Transfers from the fixed portion of variable annuity |
|
|
|
|
|
|
|
|
|
products to the variable portion of variable |
|
|
|
|
|
|
|
|
|
annuity products |
| (492 | ) |
| (588 | ) |
| (831 | ) |
Reinvested interest credited (1)(3) |
| (1,048 | ) |
| 3,286 |
|
| 1,686 |
|
Fixed annuity account values (1)(2) |
| 39,353 |
|
| 36,004 |
|
| 29,343 |
|
Average fixed account values (1)(2) |
| 36,914 |
|
| 32,803 |
|
| 25,804 |
|
(1)Includes the fixed portion of variable.
(2)Net of reinsurance ceded.
(3)The decrease in reinvested interest credited was driven by the change in embedded derivatives related to our indexed annuity products.
A portion of our investment income earned is credited to the contract holders of our deferred fixed annuity products, including the fixed portion of variable annuity contracts. We expect to earn a spread between what we earn on the underlying general account investments supporting the fixed annuity product line, including the fixed portion of variable annuity contracts, and what we credit to our fixed annuity contract holders’ accounts, including the fixed portion of variable annuity contracts. Changes in commercial mortgage loan prepayments and bond make-whole premiums, investment income on alternative investments and surplus investment income can vary significantly from period to period due to a number of factors and, therefore, may contribute to investment income results that are not indicative of the underlying trends.
Benefits
Details underlying benefits (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Benefits |
|
|
|
|
|
|
|
|
|
Net death and other benefits, excluding unlocking | $ | 736 |
| $ | 540 |
| $ | 553 |
|
Unlocking |
| (268 | ) |
| 8 |
|
| 143 |
|
Total benefits | $ | 468 |
| $ | 548 |
| $ | 696 |
|
Benefits for this segment include changes in income annuity reserves driven by premiums, changes in benefit reserves and costs associated with the hedging of our benefit ratio unlocking on benefit reserves associated with our variable annuity GDB and GLB riders. For a corresponding offset of changes in income annuity reserves, see footnote 1 of “Income (Loss) from Operations” above.
Commissions and Other Expenses
Details underlying commissions and other expenses (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Commissions and Other Expenses |
|
|
|
|
|
|
|
|
|
Commissions: |
|
|
|
|
|
|
|
|
|
Deferrable | $ | 388 |
| $ | 450 |
| $ | 480 |
|
Non-deferrable |
| 632 |
|
| 686 |
|
| 581 |
|
General and administrative expenses |
| 408 |
|
| 439 |
|
| 427 |
|
Inter-segment reimbursement associated with reserve |
|
|
|
|
|
|
|
|
|
financing and LOC expenses (1) |
| 4 |
|
| 2 |
|
| 3 |
|
Taxes, licenses and fees |
| 45 |
|
| 45 |
|
| 31 |
|
Total expenses incurred, excluding broker-dealer |
| 1,477 |
|
| 1,622 |
|
| 1,522 |
|
DAC deferrals |
| (449 | ) |
| (515 | ) |
| (548 | ) |
Total pre-broker-dealer expenses incurred, |
|
|
|
|
|
|
|
|
|
excluding amortization, net of interest |
| 1,028 |
|
| 1,107 |
|
| 974 |
|
DAC and VOBA amortization, net of interest: |
|
|
|
|
|
|
|
|
|
Amortization, net of interest, excluding unlocking |
| 403 |
|
| 449 |
|
| 401 |
|
Unlocking |
| (7 | ) |
| (7 | ) |
| (14 | ) |
Broker-dealer expenses incurred |
| 536 |
|
| 570 |
|
| 493 |
|
Total commissions and other expenses | $ | 1,960 |
| $ | 2,119 |
| $ | 1,854 |
|
|
|
|
|
|
|
|
|
|
|
DAC Deferrals |
|
|
|
|
|
|
|
|
|
As a percentage of sales/deposits |
| 3.8% |
|
| 4.4% |
|
| 4.9% |
|
(1)Includes reimbursements to Annuities from the Life Insurance segment for reserve financing, net of expenses incurred by Annuities for its use of letters of credit (“LOCs”). The inter-segment amounts are not reported on the Consolidated Statements of Comprehensive Income (Loss).
Commissions and other costs that result directly from and are essential to the successful acquisition of new or renewal business are deferred to the extent recoverable and are amortized over the lives of the contracts in relation to EGPs. Certain types of commissions, such as trail commissions that are based on account values, are expensed as incurred rather than deferred and amortized. Broker-dealer expenses that vary with and are related to sales are expensed as incurred and not deferred and amortized. Fluctuations in these expenses correspond with fluctuations in other revenues. For more information, see “Critical Accounting Policies and Estimates – DAC, VOBA, DSI and DFEL” above.
RESULTS OF GROUP PROTECTION
Income (Loss) from Operations
Details underlying the results for Group Protection (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Operating Revenues |
|
|
|
|
|
|
|
|
|
Insurance premiums | $ | 4,768 |
| $ | 4,450 |
| $ | 4,280 |
|
Net investment income |
| 333 |
|
| 366 |
|
| 330 |
|
Other revenues (1) |
| 202 |
|
| 180 |
|
| 183 |
|
Total operating revenues |
| 5,303 |
|
| 4,996 |
|
| 4,793 |
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
Interest credited |
| 5 |
|
| 6 |
|
| 5 |
|
Benefits |
| 3,844 |
|
| 3,890 |
|
| 3,500 |
|
Commissions and other expenses |
| 1,325 |
|
| 1,260 |
|
| 1,234 |
|
Total operating expenses |
| 5,174 |
|
| 5,156 |
|
| 4,739 |
|
Income (loss) from operations before taxes |
| 129 |
|
| (160 | ) |
| 54 |
|
Federal income tax expense (benefit) |
| 27 |
|
| (33 | ) |
| 11 |
|
Income (loss) from operations | $ | 102 |
| $ | (127 | ) | $ | 43 |
|
(1)Consists of revenue from third parties for administrative services performed, which has a corresponding partial offset in commissions and other expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Income (Loss) from Operations by Product Line |
|
|
|
|
|
|
|
|
|
Life | $ | 12 |
| $ | (243 | ) | $ | (95 | ) |
Disability |
| 91 |
|
| 122 |
|
| 126 |
|
Dental |
| (1 | ) |
| (6 | ) |
| 12 |
|
Income (loss) from operations | $ | 102 |
| $ | (127 | ) | $ | 43 |
|
Comparison of 2022 to 2021
Income from operations for this segment increased due primarily to the following:
Higher insurance premiums due to growth in business in force and favorable persistency.
Lower benefits driven by lower COVID-19-related incidence in our life business and lower incidence in our disability business, partially offset by less favorable reserve adjustments.
The increase in income from operations was partially offset by the following:
Higher commissions and other expenses driven by investments in claims management to help improve ongoing operations and higher sales volumes.
Lower net investment income, net of interest credited, driven by lower investment income on alternative investments within our surplus portfolio and lower prepayment and bond make-whole premiums.
See “Critical Accounting Policies and Estimates – Annual Assumption Review” above for information on our reserve adjustments.
Additional Information
The total loss ratio for the year ended December 31, 2022, decreased as compared to the prior year, due primarily to lower COVID-19-related incidence and favorable reserve adjustments in our life business and lower incidence in our disability business, partially offset by unfavorable reserve adjustments in our disability business in 2022 compared to favorable reserve adjustments in 2021. For a discussion of the COVID-19 pandemic, see “Introduction – Executive Summary – Industry Trends – COVID-19 Pandemic” above.
Management compares trends in actual loss ratios to pricing expectations as group-underwriting risks change over time. We expect normal fluctuations in our total loss ratio, as claims experience is inherently uncertain. For every one percent increase in the total loss ratio, we would expect an annual decrease to income from operations of approximately $37 million to $41 million. The effects are symmetrical for a comparable decrease in the loss ratio and, therefore, move in an equal and opposite direction.
For information on the effects of current interest rates on our long-term disability claim reserves, see “Part II – Item 7A. Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk – Effect of Interest Rate Sensitivity.” For information on the current interest rate environment, see “Introduction – Executive Summary – Industry Trends – Interest Rate Environment” above.
Insurance Premiums
Details underlying insurance premiums (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Insurance Premiums by Product Line |
|
|
|
|
|
|
|
|
|
Life | $ | 1,808 |
| $ | 1,653 |
| $ | 1,613 |
|
Disability |
| 2,763 |
|
| 2,569 |
|
| 2,401 |
|
Dental |
| 197 |
|
| 228 |
|
| 266 |
|
Total insurance premiums | $ | 4,768 |
| $ | 4,450 |
| $ | 4,280 |
|
|
|
|
|
|
|
|
|
|
|
Sales by Product Line |
|
|
|
|
|
|
|
|
|
Life |
| 299 |
|
| 264 |
|
| 265 |
|
Disability |
| 337 |
|
| 284 |
|
| 397 |
|
Dental |
| 40 |
|
| 38 |
|
| 44 |
|
Total sales | $ | 676 |
| $ | 586 |
| $ | 706 |
|
|
|
|
|
|
|
|
|
|
|
Our cost of insurance and policy administration charges are embedded in the premiums charged to our customers. The premiums are a function of the rates priced into the product and our business in force. Business in force, in turn, is driven by sales and persistency experience.
Sales relate to new contract holders and new programs sold to existing contract holders. We believe that the trend in sales is an important indicator of development of business in force over time. Sales in the table above are the combined annualized premiums for our products.
Net Investment Income
We use our investment income to offset the earnings effect of the associated build of our reserves, which are a function of our insurance premiums and the yields on our investments. Details underlying net investment income (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Net Investment Income |
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities, mortgage loans on real estate |
|
|
|
|
|
|
|
|
|
and other, net of investment expenses | $ | 253 |
| $ | 237 |
| $ | 240 |
|
Commercial mortgage loan prepayment and bond |
|
|
|
|
|
|
|
|
|
make-whole premiums (1) |
| 6 |
|
| 16 |
|
| 9 |
|
Surplus investments (2) |
| 74 |
|
| 113 |
|
| 81 |
|
Total net investment income | $ | 333 |
| $ | 366 |
| $ | 330 |
|
|
|
|
|
|
|
|
|
|
|
(1)See “Consolidated Investments – Commercial Mortgage Loan Prepayment and Bond Make-Whole Premiums” below for additional information.
(2)Represents net investment income on the required statutory surplus for this segment and includes the effect of investment income on alternative investments for such assets that are held in the portfolios supporting statutory surplus versus the portfolios supporting product liabilities. See “Consolidated Investments – Alternative Investments” below for more information on alternative investments.
Benefits and Interest Credited
Details underlying benefits and interest credited (in millions) and loss ratios by product line were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Benefits and Interest Credited by Product Line |
|
|
|
|
|
|
|
|
|
Life | $ | 1,434 |
| $ | 1,630 |
| $ | 1,399 |
|
Disability |
| 2,270 |
|
| 2,092 |
|
| 1,938 |
|
Dental |
| 145 |
|
| 174 |
|
| 168 |
|
Total benefits and interest credited | $ | 3,849 |
| $ | 3,896 |
| $ | 3,505 |
|
|
|
|
|
|
|
|
|
|
|
Loss Ratios by Product Line |
|
|
|
|
|
|
|
|
|
Life |
| 79.4% |
|
| 98.6% |
|
| 86.7% |
|
Disability |
| 82.2% |
|
| 81.4% |
|
| 80.5% |
|
Dental |
| 73.5% |
|
| 76.3% |
|
| 63.1% |
|
Total |
| 80.7% |
|
| 87.5% |
|
| 81.8% |
|
Generally, we experience higher mortality in the first quarter of the year and higher disability claims in the fourth quarter of the year due to the seasonality of claims. We expect COVID-19-related mortality to continue to follow U.S. death trends. For additional information on our loss ratios, see “Additional Information” above.
Commissions and Other Expenses
Details underlying commissions and other expenses (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Commissions and Other Expenses |
|
|
|
|
|
|
|
|
|
Commissions | $ | 394 |
| $ | 361 |
| $ | 359 |
|
General and administrative expenses |
| 768 |
|
| 731 |
|
| 697 |
|
Taxes, licenses and fees |
| 124 |
|
| 120 |
|
| 122 |
|
Total expenses incurred |
| 1,286 |
|
| 1,212 |
|
| 1,178 |
|
DAC deferrals |
| (99 | ) |
| (91 | ) |
| (92 | ) |
Total expenses recognized before amortization |
| 1,187 |
|
| 1,121 |
|
| 1,086 |
|
DAC and VOBA amortization, net of interest |
| 106 |
|
| 107 |
|
| 115 |
|
Other intangible amortization |
| 32 |
|
| 32 |
|
| 33 |
|
Total commissions and other expenses | $ | 1,325 |
| $ | 1,260 |
| $ | 1,234 |
|
|
|
|
|
|
|
|
|
|
|
DAC Deferrals |
|
|
|
|
|
|
|
|
|
As a percentage of insurance premiums |
| 2.1% |
|
| 2.0% |
|
| 2.1% |
|
Commissions and other costs that result directly from and are essential to the successful acquisition of new or renewal business are deferred to the extent recoverable and are amortized as a level percent of insurance premiums of the related contracts, depending on the block of business. Certain broker commissions that vary with and are related to paid premiums are expensed as incurred rather than deferred and amortized. For more information, see “Critical Accounting Policies and Estimates – DAC, VOBA, DSI and DFEL” above.
RESULTS OF RETIREMENT PLAN SERVICES
Income (Loss) from Operations
Details underlying the results for Retirement Plan Services (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Operating Revenues |
|
|
|
|
|
|
|
|
|
Fee income | $ | 261 |
| $ | 296 |
| $ | 253 |
|
Net investment income |
| 975 |
|
| 992 |
|
| 933 |
|
Other revenues (1) |
| 37 |
|
| 36 |
|
| 27 |
|
Total operating revenues |
| 1,273 |
|
| 1,324 |
|
| 1,213 |
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
Interest credited |
| 630 |
|
| 617 |
|
| 615 |
|
Benefits |
| 3 |
|
| 3 |
|
| 2 |
|
Commissions and other expenses |
| 396 |
|
| 420 |
|
| 404 |
|
Total operating expenses |
| 1,029 |
|
| 1,040 |
|
| 1,021 |
|
Income (loss) from operations before taxes |
| 244 |
|
| 284 |
|
| 192 |
|
Federal income tax expense (benefit) |
| 35 |
|
| 49 |
|
| 24 |
|
Income (loss) from operations | $ | 209 |
| $ | 235 |
| $ | 168 |
|
(1)Consists primarily of mutual fund account program revenues from mid to large employers.
Comparison of 2022 to 2021
Income from operations for this segment decreased due primarily to the following:
Lower fee income driven by lower average daily account values.
Lower net investment income, net of interest credited, driven by lower investment income on alternative investments within our surplus portfolio and lower prepayment and bond make-whole premiums, partially offset by higher average fixed account values and impacts to portfolio yields from the current interest rate environment.
The decrease in income from operations was partially offset by lower commissions and other expenses driven by amortization as a result of lower actual gross profits, the effect of unlocking, incentive compensation as a result of production performance and trail commissions resulting from lower average account values.
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 caused by plan sponsor terminations and participant withdrawals. These outflows as a percentage of average account values were 10%, 11% and 13% for 2022, 2021 and 2020, respectively.
Our net flows are negatively affected by the continued net outflows from our oldest blocks of annuities business (as presented on our Net Flows By Market table below as “Multi-Fund® and other”), which are among our higher margin product lines in this segment, due to the fact that they are mature blocks with low distribution and servicing costs. The proportion of these products to our total account values was 17%, 18% and 19% for 2022, 2021 and 2020, respectively. Due to this overall shift in business mix toward products with lower returns, new deposit production continues to be necessary to maintain earnings at current levels.
Our fixed annuity business includes products with discretionary and index-based crediting rates that are reset on either a quarterly or semi-annual basis. Our ability to retain quarterly or semi-annual reset annuities will be subject to current competitive conditions at the time interest rates for these products reset. We expect to manage the effects of spreads on near-term income from operations through portfolio management and, to a lesser extent, crediting rate actions, which assumes no significant changes in net flows into or out of our fixed accounts or other changes that may cause interest rate spreads to differ from our expectations. For information on interest rate spreads and interest rate risk, see “Part I – Item 1A. Risk Factors – Market Conditions – Changes in interest rates and sustained low
interest rates may cause interest rate spreads to decrease, impacting our profitability, and make it more challenging to meet certain statutory requirements,” “Part I – Item 1A. Risk Factors – Market Conditions – Increases in interest rates may negatively affect our profitability, capital position and the value of our investment portfolio and may also result in increased contract withdrawals” and “Part II – Item 7A. Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk.” For information on the current interest rate environment, see “Introduction – Executive Summary – Industry Trends – Interest Rate Environment” above.
Fee Income
Details underlying fee income, net flows and account values (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Fee Income |
|
|
|
|
|
|
|
|
|
Annuity expense assessments | $ | 192 |
| $ | 219 |
| $ | 184 |
|
Mutual fund fees |
| 68 |
|
| 77 |
|
| 68 |
|
Total expense assessments |
| 260 |
|
| 296 |
|
| 252 |
|
Surrender charges |
| 1 |
|
| - |
|
| 1 |
|
Total fee income | $ | 261 |
| $ | 296 |
| $ | 253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Net Flows By Market |
|
|
|
|
|
|
|
|
|
Small market | $ | 295 |
| $ | 133 |
| $ | 350 |
|
Mid – large market |
| 3,811 |
|
| 1,800 |
|
| 792 |
|
Multi-Fund® and other |
| (1,201 | ) |
| (1,469 | ) |
| (976 | ) |
Total net flows | $ | 2,905 |
| $ | 464 |
| $ | 166 |
|
|
|
|
|
|
|
|
|
|
|
| As of or For the Years Ended |
| |||||||
| December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Variable Account Value Information |
|
|
|
|
|
|
|
|
|
Variable annuity deposits (1) | $ | 2,348 |
| $ | 2,218 |
| $ | 1,843 |
|
Increases (decreases) in variable annuity account values: |
|
|
|
|
|
|
|
|
|
Net flows (1) |
| 10 |
|
| (733 | ) |
| (333 | ) |
Change in market value (1) |
| (3,713 | ) |
| 3,247 |
|
| 2,731 |
|
Contract holder assessments (1) |
| (164 | ) |
| (185 | ) |
| (156 | ) |
Variable annuity account values (1) |
| 16,891 |
|
| 20,957 |
|
| 18,755 |
|
Average daily variable annuity account values (1) |
| 17,946 |
|
| 20,147 |
|
| 16,426 |
|
Average daily S&P 500® Index |
| 4,100 |
|
| 4,269 |
|
| 3,218 |
|
(1) Excludes the fixed portion of variable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of or For the Years Ended |
| |||||||
| December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Mutual Fund Account Value Information |
|
|
|
|
|
|
|
|
|
Mutual fund deposits | $ | 6,542 |
| $ | 6,297 |
| $ | 5,449 |
|
Mutual fund net flows |
| 2,251 |
|
| 1,323 |
|
| 100 |
|
Mutual fund account values (1) |
| 46,707 |
|
| 54,518 |
|
| 46,636 |
|
(1) Mutual funds are not included in the separate accounts reported on the Consolidated Balance Sheets as we do not have any ownership interest in them.
Our fee income is primarily composed of expense assessments that we charge to cover insurance and administrative expenses, and mutual fund fees earned for services we provide to our mutual fund programs. Fee income is primarily based on average account values, both fixed and variable, which are driven by net flows and the equity markets. Fee income is also driven by non-account value-related items such as participant counts. We may collect surrender charges when our fixed and variable annuity contract holders surrender their contracts during the surrender charge period to protect us from premature withdrawals.
Net Investment Income and Interest Credited
Details underlying net investment income, interest credited and fixed account values (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Net Investment Income |
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities, mortgage loans on real estate |
|
|
|
|
|
|
|
|
|
and other, net of investment expenses | $ | 883 |
| $ | 828 |
| $ | 834 |
|
Commercial mortgage loan prepayment and bond |
|
|
|
|
|
|
|
|
|
make-whole premiums (1) |
| 23 |
|
| 58 |
|
| 23 |
|
Surplus investments (2) |
| 69 |
|
| 106 |
|
| 76 |
|
Total net investment income | $ | 975 |
| $ | 992 |
| $ | 933 |
|
|
|
|
|
|
|
|
|
|
|
Interest Credited | $ | 630 |
| $ | 617 |
| $ | 615 |
|
(1)See “Consolidated Investments – Commercial Mortgage Loan Prepayment and Bond Make-Whole Premiums” below for additional information.
(2)Represents net investment income on the required statutory surplus for this segment and includes the effect of investment income on alternative investments for such assets that are held in the portfolios supporting statutory surplus versus the portfolios supporting product liabilities. See “Consolidated Investments – Alternative Investments” below for more information on alternative investments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of or For the Years Ended |
| |||||||
| December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Fixed Account Value Information |
|
|
|
|
|
|
|
|
|
Fixed annuity deposits (1) | $ | 2,996 |
| $ | 2,325 |
| $ | 2,725 |
|
Increases (decreases) in fixed annuity account values: |
|
|
|
|
|
|
|
|
|
Net flows (1) |
| 644 |
|
| (126 | ) |
| 399 |
|
Reinvested interest credited (1) |
| 629 |
|
| 616 |
|
| 613 |
|
Contract holder assessments (1) |
| (13 | ) |
| (14 | ) |
| (13 | ) |
Fixed annuity account values (1) |
| 25,137 |
|
| 23,639 |
|
| 22,916 |
|
Average fixed account values (1) |
| 24,571 |
|
| 23,147 |
|
| 21,696 |
|
(1)Includes the fixed portion of variable.
A portion of our investment income earned is credited to the contract holders of our fixed annuity products, including the fixed portion of variable annuity contracts. We expect to earn a spread between what we earn on the underlying general account investments supporting the fixed annuity product line, including the fixed portion of variable annuity contracts, and what we credit to our fixed annuity contract holders’ accounts, including the fixed portion of variable annuity contracts. Commercial mortgage loan prepayments and bond make-whole premiums, investment income on alternative investments and surplus investment income can vary significantly from period to period due to a number of factors and, therefore, may contribute to investment income results that are not indicative of the underlying trends.
Benefits
Benefits for this segment include changes in annuity benefit reserves.
Commissions and Other Expenses
Details underlying commissions and other expenses (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Commissions and Other Expenses |
|
|
|
|
|
|
|
|
|
Commissions: |
|
|
|
|
|
|
|
|
|
Deferrable | $ | 4 |
| $ | 5 |
| $ | 5 |
|
Non-deferrable |
| 75 |
|
| 79 |
|
| 71 |
|
General and administrative expenses |
| 303 |
|
| 309 |
|
| 304 |
|
Taxes, licenses and fees |
| 17 |
|
| 17 |
|
| 16 |
|
Total expenses incurred |
| 399 |
|
| 410 |
|
| 396 |
|
DAC deferrals |
| (21 | ) |
| (22 | ) |
| (21 | ) |
Total expenses recognized before amortization |
| 378 |
|
| 388 |
|
| 375 |
|
DAC and VOBA amortization, net of interest: |
|
|
|
|
|
|
|
|
|
Amortization, net of interest, excluding unlocking |
| 25 |
|
| 32 |
|
| 25 |
|
Unlocking |
| (7 | ) |
| - |
|
| 4 |
|
Total commissions and other expenses | $ | 396 |
| $ | 420 |
| $ | 404 |
|
|
|
|
|
|
|
|
|
|
|
DAC Deferrals |
|
|
|
|
|
|
|
|
|
As a percentage of annuity sales/deposits |
| 0.4% |
|
| 0.5% |
|
| 0.5% |
|
Commissions and other costs that result directly from and are essential to the successful acquisition of new or renewal business are deferred to the extent recoverable and are amortized over the lives of the contracts in relation to EGPs. Certain types of commissions, such as trail commissions that are based on account values, are expensed as incurred rather than deferred and amortized. Distribution expenses associated with the sale of mutual fund products are expensed as incurred. For more information, see “Critical Accounting Policies and Estimates – DAC, VOBA, DSI and DFEL” above.
RESULTS OF OTHER OPERATIONS
Income (Loss) from Operations
Details underlying the results for Other Operations (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Operating Revenues |
|
|
|
|
|
|
|
|
|
Insurance premiums (1) | $ | 8 |
| $ | 19 |
| $ | 21 |
|
Net investment income |
| 157 |
|
| 147 |
|
| 152 |
|
Other revenues |
| (6 | ) |
| 14 |
|
| 12 |
|
Total operating revenues |
| 159 |
|
| 180 |
|
| 185 |
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
Interest credited |
| 39 |
|
| 42 |
|
| 39 |
|
Benefits |
| 79 |
|
| 81 |
|
| 117 |
|
Other expenses |
| 203 |
|
| 189 |
|
| 69 |
|
Interest and debt expense |
| 283 |
|
| 262 |
|
| 269 |
|
Spark program expense |
| 167 |
|
| 87 |
|
| 68 |
|
Total operating expenses |
| 771 |
|
| 661 |
|
| 562 |
|
Income (loss) from operations before taxes |
| (612 | ) |
| (481 | ) |
| (377 | ) |
Federal income tax expense (benefit) |
| (117 | ) |
| (106 | ) |
| (82 | ) |
Income (loss) from operations | $ | (495 | ) | $ | (375 | ) | $ | (295 | ) |
(1)Includes our disability income business, which has a corresponding offset in benefits for changes in reserves.
Comparison of 2022 to 2021
Loss from operations for Other Operations increased due primarily to the following:
Higher Spark program expense.
Higher interest and debt expense driven by an increase in average interest rates.
Lower other revenues due to the effect of market fluctuations on assets held as part of certain compensation plans, which decreased during 2022 compared to an increase during 2021.
Higher other expenses related to higher legal expenses, partially offset by the effect of changes in our stock price on our deferred compensation plans, as our stock price decreased during 2022, compared to an increase during 2021.
The increase in loss from operations was partially offset by higher net investment income, net of interest credited, related to higher allocated investments driven by an increase in excess capital retained by Other Operations.
Additional Information
We expect to continue making investments as part of our Spark Initiative. For more information, see “Introduction – Executive Summary – Significant Operational Matters – Spark Initiative.”
Net Investment Income and Interest Credited
We utilize an internal formula to determine the amount of capital that is allocated to our business segments. Investment income on capital in excess of the calculated amounts is reported in Other Operations. If our business segments require increases in statutory reserves, surplus or investments, the amount of excess capital that is retained by Other Operations would decrease and net investment income would be negatively affected.
Write-downs for impairments decrease the recorded value of investments owned by the business segments. These write-downs are not included in the income from operations of our business segments. When impairment occurs, assets are transferred to the business segments’ portfolios and will reduce the future net investment income for Other Operations. Statutory reserve adjustments for our business segments can also cause allocations of investments between the business segments and Other Operations.
The majority of our interest credited relates to our reinsurance operations sold to Swiss Re Life & Health America, Inc. (“Swiss Re”) in 2001. A substantial amount of the business was sold through indemnity reinsurance transactions, which is still recorded in the consolidated financial statements. The interest credited corresponds to investment income earnings on the assets we continue to hold for this business. There is no effect to income or loss in Other Operations or on a consolidated basis for these amounts because interest earned on the blocks that continue to be reinsured is passed through to Swiss Re in the form of interest credited.
Benefits
Benefits are recognized when incurred for institutional pension products and disability income business.
Other Expenses
Details underlying other expenses (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
General and administrative expenses: |
|
|
|
|
|
|
|
|
|
Legal | $ | 156 |
| $ | 94 |
| $ | - |
|
Branding |
| 43 |
|
| 45 |
|
| 43 |
|
Other (1) |
| 10 |
|
| 61 |
|
| 46 |
|
Total general and administrative expenses |
| 209 |
|
| 200 |
|
| 89 |
|
Taxes, licenses and fees (2) |
| (3 | ) |
| (9 | ) |
| (11 | ) |
Other (3) |
| (3 | ) |
| (2 | ) |
| (9 | ) |
Total other expenses | $ | 203 |
| $ | 189 |
| $ | 69 |
|
(1)Includes the portion of our deferred compensation plan expense attributable to participants’ selection of LNC stock as the measure for their investment return, expenses that are corporate in nature including charitable contributions and other expenses not allocated to our business segments.
(2)Includes state guaranty funds assessments to cover losses to contract holders of insolvent or rehabilitated insurance companies. Mandatory assessments may be partially recovered through a reduction in future premium taxes in some states.
(3)Consists primarily of reimbursements to Other Operations from the Life Insurance segment for the use of proceeds from certain issuances of senior notes that were used as long-term structured solutions, net of expenses incurred by Other Operations for its access to a financing facility and issuance of LOCs.
Interest and Debt Expense
Our current level of interest expense may not be indicative of the future due to, among other things, the timing of the use of cash, the availability of funds from our inter-company cash management program and the future cost of capital. For additional information on our financing activities, see “Liquidity and Capital Resources – Holding Company Sources and Uses of Liquidity and Capital – Debt” below.
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) | $ | 201 |
| $ | 199 |
| $ | 208 |
|
|
Total excluded realized gain (loss) |
| 135 |
|
| (411 | ) |
| (721 | ) |
|
Total realized gain (loss), pre-tax | $ | 336 |
| $ | (212 | ) | $ | (513 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
Components of Excluded Realized Gain (Loss), |
|
|
|
|
|
|
|
|
|
|
After-Tax |
|
|
|
|
|
|
|
|
|
|
Credit loss benefit (expense) on mortgage loans on |
|
|
|
|
|
|
|
|
|
|
real estate | $ | (7 | ) | $ | 79 |
| $ | (85 | ) |
|
Credit loss benefit (expense) on reinsurance-related assets |
| (99 | ) |
| 1 |
|
| - |
|
|
Credit loss benefit (expense) on other financial assets |
| (12 | ) |
| (9 | ) |
| (20 | ) |
|
Realized gain (loss) related to certain financial assets |
| (67 | ) |
| (14 | ) |
| (35 | ) |
|
Realized gain (loss) on equity securities |
| 13 |
|
| 32 |
|
| 4 |
|
|
Realized gain (loss) on the mark-to-market on |
|
|
|
|
|
|
|
|
|
|
certain instruments (2) |
| 48 |
|
| 60 |
|
| 33 |
|
|
Total realized gain (loss) related to financial instruments |
|
|
|
|
|
|
|
|
|
|
and reinsurance-related assets |
| (124 | ) |
| 149 |
|
| (103 | ) |
|
Variable annuity net derivative results: |
|
|
|
|
|
|
|
|
|
|
Hedge program performance, including unlocking |
|
|
|
|
|
|
|
|
|
|
for GLB reserves hedged and benefit ratio unlocking |
| (588 | ) |
| (109 | ) |
| (564 | ) |
|
GLB NPR component |
| 17 |
|
| (195 | ) |
| 293 |
|
|
Total variable annuity net derivative results |
| (571 | ) |
| (304 | ) |
| (271 | ) |
|
Indexed annuity forward-starting option |
| 4 |
|
| 26 |
|
| (2 | ) |
|
Excluded realized gain (loss), including benefit |
|
|
|
|
|
|
|
|
|
|
ratio unlocking |
| (691 | ) |
| (129 | ) |
| (376 | ) |
|
Less: benefit ratio unlocking on GDB |
|
|
|
|
|
|
|
|
|
|
and GLB riders |
| (798 | ) |
| 196 |
|
| 194 |
|
|
Total excluded realized gain (loss), after-tax | $ | 107 |
| $ | (325 | ) | $ | (570 | ) |
|
(1)DAC refers to the associated amortization of DAC, VOBA, DSI and DFEL and changes in other contract holder funds and funds withheld reinsurance assets and liabilities.
(2)The modified coinsurance investment portfolio includes fixed maturity securities classified as AFS with changes in fair value recorded in other comprehensive income (loss) (“OCI”). Since the corresponding and offsetting changes in fair value of the embedded derivatives related to the modified coinsurance investment portfolio are recorded in realized gain (loss), volatility can occur within net income (loss). See Note 8 for more information.
Comparison of 2022 to 2021
We had higher realized losses due primarily to the following:
Unfavorable variable annuity net derivative results driven by unfavorable hedge program performance due to more volatile capital markets, partially offset by a favorable GLB NPR component due to credit spreads widening and our associated reserves increasing.
Losses related to an increase in the credit loss allowance for reinsurance-related assets in 2022 due to updates to policyholder behavior assumptions that impacted ceded reserves.
Losses related to an increase in the credit loss allowance for mortgage loans on real estate in 2022 compared to a decrease in 2021 due to changes in economic projections.
Lower gains related to the indexed annuity forward-starting option driven primarily by an increase of option costs and other items, partially offset by the effect of unlocking.
Lower gains on equity securities due to unfavorable equity market performance in 2022 compared to favorable equity market performance in 2021.
Lower gains on the mark-to-market on certain instruments driven by declines in trading securities due to increases in interest rates, partially offset by gains on certain derivatives.
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). For our Annuities and Retirement Plan Services segments, the excess of total fees collected from the contract holders over the GLB attributed rider fees is reported in fee income.
Realized Gain (Loss) Related to Financial Instruments and Reinsurance-Related Assets
For information on realized gain (loss) related to financial instruments and reinsurance-related assets, see Note 15.
Gain (loss) on the mark-to-market on certain instruments, including those associated with our consolidated variable interest entities (“VIEs”) represents changes in the fair values of certain derivative investments (not including those associated with our variable annuity net derivative results), reinsurance-related embedded derivatives and trading securities.
See Note 3 for information about our consolidated VIEs.
We also recognize the mark-to-market on certain mortgage loans on real estate for which we have elected the fair value option. See Note 20 for additional information.
Variable Annuity Net Derivative Results
Our variable annuity net derivative results include the net valuation premium, the change in the GLB embedded derivative reserves and the change in the fair value of the derivative instruments we own to hedge them, including the cost of purchasing the hedging instruments. In addition, these results include the changes in reserves not accounted for at fair value and results from benefit ratio unlocking on our GDB and GLB riders and the change in the fair value of the derivative instruments we own to hedge the benefit ratio unlocking on our GDB and GLB riders.
We use derivative instruments to hedge our exposure to the risks and earnings volatility that result from changes in the GLB embedded derivative reserves. The change in fair value of these derivative instruments is designed to generally offset the change in embedded derivative reserves. Our variable annuity net derivative results can be volatile, especially when sudden and significant changes in equity markets and/or interest rates occur. We do not attempt to hedge the change in the NPR component of the liability. The NPR factors affect the discount rate used in the calculation of the GLB embedded derivative reserve. Our methodology for calculating the NPR component of the embedded derivative reserve utilizes an extrapolated 30-year NPR spread curve applied to a series of expected cash flows over the expected life of the embedded derivative. Our cash flows consist of both expected fees to be received from contract holders and benefits to be paid, and these cash flows are different on a pre- and post-NPR basis. We utilize a model based on our holding company’s credit default swap (“CDS”) spread adjusted to reflect the credit quality of our insurance subsidiary as the issuing entity. Because the guaranteed benefit liabilities are contained within our insurance subsidiaries, we apply items, such as the effect of our insurance subsidiaries’ claims-paying ratings compared to holding company credit risk and the over-collateralization of insurance liabilities, in order to determine factors that are representative of a theoretical market participant’s view of the NPR of the specific liability within our insurance subsidiaries.
Details underlying our variable annuity hedging program (dollars in millions) were as follows:
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|
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| As of |
|
| As of |
|
| As of |
|
| As of |
|
| As of |
| |||||
| December 31, | September 30, | June 30, | March 31, | December 31, | |||||||||||||||
|
| 2022 |
|
| 2022 |
|
| 2022 |
|
| 2022 |
|
| 2021 |
| |||||
Variable annuity hedge program assets (liabilities) |
| $ | 1,928 |
|
| $ | 1,952 |
|
| $ | 1,623 |
|
| $ | 625 |
|
| $ | 721 |
|
|
|
|
|
|
|
|
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|
|
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|
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|
|
|
|
Variable annuity reserves – asset (liability): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivative reserves, pre-NPR (1) |
| $ | 1,513 |
|
| $ | 1,180 |
|
| $ | 1,136 |
|
| $ | 1,699 |
|
| $ | 1,818 |
|
NPR |
|
| 40 |
|
|
| 145 |
|
|
| 164 |
|
|
| 46 |
|
|
| 17 |
|
Embedded derivative reserves |
|
| 1,553 |
|
|
| 1,325 |
|
|
| 1,300 |
|
|
| 1,745 |
|
|
| 1,835 |
|
Insurance benefit reserves |
|
| (2,468 | ) |
|
| (2,668 | ) |
|
| (2,349 | ) |
|
| (1,547 | ) |
|
| (1,231 | ) |
Total variable annuity reserves – asset (liability) |
| $ | (915 | ) |
| $ | (1,343 | ) |
| $ | (1,049 | ) |
| $ | 198 |
|
| $ | 604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10-year CDS spread |
|
| 2.31% |
|
|
| 2.10% |
|
|
| 2.05% |
|
|
| 1.44% |
|
|
| 1.15% |
|
NPR factor related to 10-year CDS spread |
|
| 1.58% |
|
|
| 1.47% |
|
|
| 1.33% |
|
|
| 0.99% |
|
|
| 0.70% |
|
(1)Embedded derivative reserves in an asset (liability) position indicate we estimate the present value of future benefits to be less (greater) than the present value of future net valuation premiums.
The following shows the hypothetical effect (in millions) to net income (loss) for changes in the NPR factor along all points on the spread curve as of December 31, 2022:
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| Hypothetical |
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| |||
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| Effect |
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| |
NPR factor: |
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|
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Down 158 basis points to zero |
| $ | (180 | ) |
|
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|
|
Up 20 basis points |
|
| 9 |
|
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|
See “Critical Accounting Policies and Estimates – Future Contract Benefits – GLB” above for additional information about our guaranteed benefits.
Indexed Annuity Forward-Starting Option
The liability for the forward-starting option reflects changes in the fair value of embedded derivative liabilities related to index options we may purchase or sell in the future to hedge contract holder index allocations applicable to future reset periods for our indexed annuity products accounted for under the Derivatives and Hedging and the Fair Value Measurements and Disclosures Topics of the FASB ASC. These fair values represent an estimate of the cost of the options we will purchase or sell in the future, discounted back to the date of the balance sheet, using current market indications of volatility and interest rates, which can vary significantly from period to period due to a number of factors and therefore can provide results that are not indicative of the underlying trends.
CONSOLIDATED INVESTMENTS
Details underlying our consolidated investment balances (in millions) were as follows:
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|
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| Percentage of |
|
| |||
|
|
|
|
|
|
|
|
| Total Investments |
|
| ||||
|
| As of |
|
| As of |
| As of |
| As of |
|
| ||||
| December 31, | December 31, | December 31, | December 31, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| ||
Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities |
| $ | 99,736 |
|
| $ | 118,746 |
|
| 75.7% |
|
| 77.3% |
|
|
Trading securities |
|
| 3,498 |
|
|
| 4,482 |
|
| 2.7% |
|
| 2.9% |
|
|
Equity securities |
|
| 427 |
|
|
| 318 |
|
| 0.3% |
|
| 0.2% |
|
|
Mortgage loans on real estate |
|
| 18,301 |
|
|
| 17,991 |
|
| 13.9% |
|
| 11.7% |
|
|
Policy loans |
|
| 2,359 |
|
|
| 2,364 |
|
| 1.8% |
|
| 1.5% |
|
|
Derivative investments |
|
| 3,736 |
|
|
| 5,437 |
|
| 2.8% |
|
| 3.6% |
|
|
Alternative investments |
|
| 3,021 |
|
|
| 2,666 |
|
| 2.3% |
|
| 1.7% |
|
|
Other investments |
|
| 718 |
|
|
| 1,626 |
|
| 0.5% |
|
| 1.1% |
|
|
Total investments |
| $ | 131,796 |
|
| $ | 153,630 |
|
| 100.0% |
|
| 100.0% |
|
|
Investment Objective
Investments are an integral part of our operations. We follow a balanced approach to investing for both current income and prudent risk management, with an emphasis on generating sufficient current income, net of income tax, to meet our obligations to customers, as well as other general liabilities. This balanced approach requires the evaluation of expected return and risk of each asset class utilized, while still meeting our income objectives. This approach is important to our asset-liability management because decisions can be made based upon both the economic and current investment income considerations affecting assets and liabilities. For a discussion of our risk management process, see “Part II – Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”
Investment Portfolio Composition and Diversification
Fundamental to our investment policy is diversification across asset classes. Our investment portfolio, excluding cash and invested cash, is composed of fixed maturity securities, mortgage loans on real estate, real estate (either wholly-owned or in joint ventures) and other long-term investments. We purchase investments for our segmented portfolios that have yield, duration and other characteristics that take into account the liabilities of the products being supported.
We have the ability to maintain our investment holdings throughout credit cycles because of our capital position, the long-term nature of our liabilities and the matching of our portfolios of investment assets with the liabilities of our various products.
Fixed Maturity and Equity Securities Portfolios
Fixed maturity securities consist of portfolios classified as AFS and trading. Details underlying our fixed maturity AFS securities by industry classification (in millions) are presented in the tables below. These tables agree in total with the presentation of fixed maturity AFS securities in Note 4; however, the categories below represent a more detailed breakout of the fixed maturity AFS portfolio. Therefore, the investment classifications listed below do not agree to the investment categories provided in Note 4.
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|
|
| As of December 31, 2022 |
| ||||||||||||
| Net |
|
|
|
|
|
|
|
|
|
| % |
| |
| Amortized |
| Gross Unrealized |
| Fair |
| Fair |
| ||||||
| Cost (1) |
| Gains |
| Losses |
| Value |
| Value |
| ||||
Fixed Maturity AFS Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry corporate bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services | $ | 17,762 |
| $ | 133 |
| $ | 1,998 |
| $ | 15,897 |
| 15.9% |
|
Basic industry |
| 4,352 |
|
| 45 |
|
| 478 |
|
| 3,919 |
| 3.9% |
|
Capital goods |
| 7,374 |
|
| 63 |
|
| 884 |
|
| 6,553 |
| 6.6% |
|
Communications |
| 4,239 |
|
| 72 |
|
| 519 |
|
| 3,792 |
| 3.8% |
|
Consumer cyclical |
| 6,056 |
|
| 40 |
|
| 698 |
|
| 5,398 |
| 5.4% |
|
Consumer non-cyclical |
| 17,080 |
|
| 184 |
|
| 2,395 |
|
| 14,869 |
| 14.9% |
|
Energy |
| 4,776 |
|
| 53 |
|
| 485 |
|
| 4,344 |
| 4.4% |
|
Technology |
| 5,581 |
|
| 27 |
|
| 675 |
|
| 4,933 |
| 4.9% |
|
Transportation |
| 3,666 |
|
| 19 |
|
| 421 |
|
| 3,264 |
| 3.3% |
|
Industrial other |
| 2,330 |
|
| 3 |
|
| 416 |
|
| 1,917 |
| 1.9% |
|
Utilities |
| 14,204 |
|
| 111 |
|
| 1,822 |
|
| 12,493 |
| 12.5% |
|
Government-related entities |
| 1,820 |
|
| 37 |
|
| 213 |
|
| 1,644 |
| 1.6% |
|
Collateralized mortgage and other obligations (“CMOs”): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
| 1,451 |
|
| 3 |
|
| 166 |
|
| 1,288 |
| 1.3% |
|
Non-agency backed |
| 364 |
|
| 18 |
|
| 14 |
|
| 368 |
| 0.4% |
|
Mortgage pass through securities (“MPTS”): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
| 394 |
|
| 1 |
|
| 42 |
|
| 353 |
| 0.4% |
|
Commercial mortgage-backed securities (“CMBS”): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
| 15 |
|
| - |
|
| - |
|
| 15 |
| 0.0% |
|
Non-agency backed |
| 1,902 |
|
| 3 |
|
| 246 |
|
| 1,659 |
| 1.7% |
|
Asset-backed securities (“ABS”): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized loan obligations (“CLOs”) |
| 8,497 |
|
| 1 |
|
| 671 |
|
| 7,827 |
| 7.8% |
|
Credit card |
| 85 |
|
| 6 |
|
| 1 |
|
| 90 |
| 0.1% |
|
Home equity |
| 196 |
|
| 27 |
|
| 4 |
|
| 219 |
| 0.2% |
|
Other |
| 3,014 |
|
| 4 |
|
| 250 |
|
| 2,768 |
| 2.8% |
|
Municipals: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
| 5,319 |
|
| 171 |
|
| 506 |
|
| 4,984 |
| 5.0% |
|
Tax-exempt |
| 91 |
|
| 1 |
|
| 6 |
|
| 86 |
| 0.1% |
|
Government: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
| 405 |
|
| 5 |
|
| 31 |
|
| 379 |
| 0.4% |
|
Foreign |
| 348 |
|
| 17 |
|
| 47 |
|
| 318 |
| 0.3% |
|
Hybrid and redeemable preferred securities |
| 364 |
|
| 25 |
|
| 30 |
|
| 359 |
| 0.4% |
|
Total fixed maturity AFS securities |
| 111,685 |
|
| 1,069 |
|
| 13,018 |
|
| 99,736 |
| 100.0% |
|
Trading Securities (2) |
| 3,833 |
|
| 44 |
|
| 379 |
|
| 3,498 |
|
|
|
Equity Securities |
| 383 |
|
| 104 |
|
| 60 |
|
| 427 |
|
|
|
Total fixed maturity AFS, trading and equity securities | $ | 115,901 |
| $ | 1,217 |
| $ | 13,457 |
| $ | 103,661 |
|
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|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
|
|
| As of December 31, 2021 |
| ||||||||||||
| Net |
|
|
|
|
|
| % |
| |||||
| Amortized |
| Gross Unrealized |
| Fair |
| Fair |
| ||||||
| Cost (1) |
| Gains |
| Losses |
| Value |
| Value |
| ||||
Fixed Maturity AFS Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry corporate bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services | $ | 16,438 |
| $ | 1,981 |
| $ | 81 |
| $ | 18,338 |
| 15.4% |
|
Basic industry |
| 4,436 |
|
| 741 |
|
| 11 |
|
| 5,166 |
| 4.4% |
|
Capital goods |
| 7,316 |
|
| 1,040 |
|
| 31 |
|
| 8,325 |
| 7.0% |
|
Communications |
| 4,124 |
|
| 734 |
|
| 7 |
|
| 4,851 |
| 4.1% |
|
Consumer cyclical |
| 5,811 |
|
| 616 |
|
| 22 |
|
| 6,405 |
| 5.4% |
|
Consumer non-cyclical |
| 16,905 |
|
| 2,565 |
|
| 83 |
|
| 19,387 |
| 16.3% |
|
Energy |
| 4,932 |
|
| 728 |
|
| 13 |
|
| 5,647 |
| 4.8% |
|
Technology |
| 5,173 |
|
| 546 |
|
| 34 |
|
| 5,685 |
| 4.8% |
|
Transportation |
| 3,414 |
|
| 423 |
|
| 11 |
|
| 3,826 |
| 3.2% |
|
Industrial other |
| 2,159 |
|
| 174 |
|
| 11 |
|
| 2,322 |
| 2.0% |
|
Utilities |
| 13,785 |
|
| 2,250 |
|
| 38 |
|
| 15,997 |
| 13.5% |
|
Government-related entities |
| 1,863 |
|
| 315 |
|
| 7 |
|
| 2,171 |
| 1.8% |
|
CMOs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
| 1,544 |
|
| 123 |
|
| 1 |
|
| 1,666 |
| 1.4% |
|
Non-agency backed |
| 360 |
|
| 52 |
|
| 1 |
|
| 411 |
| 0.3% |
|
MPTS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
| 429 |
|
| 21 |
|
| 2 |
|
| 448 |
| 0.4% |
|
CMBS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
| 20 |
|
| - |
|
| - |
|
| 20 |
| 0.0% |
|
Non-agency backed |
| 1,532 |
|
| 61 |
|
| 14 |
|
| 1,579 |
| 1.3% |
|
ABS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLOs |
| 6,356 |
|
| 11 |
|
| 49 |
|
| 6,318 |
| 5.3% |
|
Credit card |
| 82 |
|
| 24 |
|
| 1 |
|
| 105 |
| 0.1% |
|
Home equity |
| 236 |
|
| 54 |
|
| - |
|
| 290 |
| 0.2% |
|
Other |
| 1,765 |
|
| 38 |
|
| 4 |
|
| 1,799 |
| 1.5% |
|
Municipals: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
| 5,250 |
|
| 1,290 |
|
| 12 |
|
| 6,528 |
| 5.5% |
|
Tax-exempt |
| 72 |
|
| 21 |
|
| - |
|
| 93 |
| 0.1% |
|
Government: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
| 375 |
|
| 60 |
|
| 2 |
|
| 433 |
| 0.4% |
|
Foreign |
| 373 |
|
| 64 |
|
| 5 |
|
| 432 |
| 0.4% |
|
Hybrid and redeemable preferred securities |
| 408 |
|
| 107 |
|
| 11 |
|
| 504 |
| 0.4% |
|
Total fixed maturity AFS securities |
| 105,158 |
|
| 14,039 |
|
| 451 |
|
| 118,746 |
| 100.0% |
|
Trading Securities (2) |
| 4,170 |
|
| 343 |
|
| 31 |
|
| 4,482 |
|
|
|
Equity Securities |
| 285 |
|
| 55 |
|
| 22 |
|
| 318 |
|
|
|
Total fixed maturity AFS, trading and equity securities | $ | 109,613 |
| $ | 14,437 |
| $ | 504 |
| $ | 123,546 |
|
|
|
(1)Represents amortized cost, net of the allowance for credit losses.
(2)Certain of our trading securities support our reinsurance funds withheld and modified coinsurance agreements and the investment results are passed directly to the reinsurers. See “Trading Securities” below for more information.
Fixed Maturity AFS Securities
In accordance with the fixed maturity AFS accounting guidance, we reflect stockholders’ equity as if unrealized gains and losses were actually recognized and consider all related accounting adjustments that would occur upon such a hypothetical recognition of unrealized gains and losses. Such related balance sheet effects include adjustments to the balances of DAC, VOBA, DFEL, future contract benefits, other contract holder funds and deferred income taxes. Adjustments to each of these balances are charged or credited to AOCI. For instance, DAC is adjusted upon the recognition of unrealized gains or losses because the amortization of DAC is based upon an assumed emergence of gross profits on certain insurance business. Deferred income tax balances are also adjusted because unrealized gains or losses do not affect actual taxes currently paid.
The quality of our fixed maturity AFS securities portfolio, as measured at estimated fair value and by the percentage of fixed maturity AFS securities invested in various ratings categories, relative to the entire fixed maturity AFS security portfolio (in millions) was as follows:
(1)Based upon the rating designations determined and provided by the National Association of Insurance Commissioners (“NAIC”) or the major credit rating agencies (Fitch Ratings (“Fitch”), Moody’s Investors Service (“Moody’s”) and S&P Global Ratings (“S&P”)). For securities where the ratings assigned by the major credit rating agencies are not equivalent, the second lowest rating assigned is used. For those securities where ratings by the major credit rating agencies are not available, which does not represent a significant amount of our total fixed maturity AFS securities, we base the ratings disclosed upon internal ratings.
Comparisons between the NAIC designations and rating agency designations are published by the NAIC. The NAIC assigns securities quality designations and uniform valuations, which are used by insurers when preparing their annual statements. The NAIC designations are similar to the rating agency designations of the Nationally Recognized Statistical Rating Organizations for marketable bonds. NAIC designations 1 and 2 include bonds generally considered investment grade (rated Baa3 or higher by Moody’s, or rated BBB- or higher by S&P and Fitch) by such ratings organizations. However, securities designated NAIC 1 and 2 could be deemed below investment grade by the rating agencies as a result of the current RBC rules for residential mortgage-backed securities (“RMBS”) and CMBS for statutory reporting. NAIC designations 3 through 6 include bonds generally considered below investment grade (rated Ba1 or lower by Moody’s, or rated BB+ or lower by S&P and Fitch).
As of December 31, 2022 and 2021, 97% and 94%, respectively, of the total fixed maturity AFS securities in an unrealized loss position were investment grade. See Note 4 for maturity date information for our fixed maturity investment portfolio. Our gross unrealized losses recognized in OCI on fixed maturity AFS securities as of December 31, 2022, increased by $12.6 billion since December 31, 2021. For further information on our unrealized losses on fixed maturity AFS securities, see “Composition by Industry Categories of our Unrealized Losses on Fixed Maturity AFS Securities” below.
We regularly review our fixed maturity AFS securities for declines in fair value that we determine to be impairment-related, including those attributable to credit risk factors that may require a credit allowance. We believe the unrealized loss position as of December 31, 2022, did not require an impairment recognized in earnings as: (i) we did not intend to sell these fixed maturity AFS securities; (ii) it is not more likely than not that we will be required to sell the fixed maturity AFS securities before recovery of their amortized cost basis; and (iii) the difference in the fair value compared to the amortized cost was due to factors other than credit loss. This conclusion is consistent with our asset-liability management process. Management considered the following as part of the evaluation:
The current economic environment and market conditions;
Our business strategy and current business plans;
The nature and type of security, including expected maturities and exposure to general credit, liquidity, market and interest rate risk;
Our analysis of data from financial models and other internal and industry sources to evaluate the current effectiveness of our hedging and overall risk management strategies;
The current and expected timing of contractual maturities of our assets and liabilities, expectations of prepayments on investments and expectations for surrenders and withdrawals of life insurance policies and annuity contracts;
The capital risk limits approved by management; and
Our current financial condition and liquidity demands.
We recognized $(15) million and $(11) million of credit loss benefit (expense) on our fixed maturity AFS securities for the years ended December 31, 2022 and 2021, respectively. In order to determine the amount of credit loss, we calculated the recovery value by performing a discounted cash flow analysis based on the current cash flows and future cash flows we expect to recover. To determine the recoverability, we considered the facts and circumstances surrounding the underlying issuer including, but not limited to, the following:
Historical and implied volatility of the security;
The extent to which the fair value has been less than amortized cost;
Adverse conditions specifically related to the security or to specific conditions in an industry or geographic area;
Failure, if any, of the issuer of the security to make scheduled payments; and
Recoveries or additional declines in fair value subsequent to the balance sheet date.
For information on credit loss impairment on fixed maturity AFS securities, see Notes 1, 4 and 15.
As reported on the Consolidated Balance Sheets, we had $143.1 billion of liabilities for future obligations under insurance policies and
contracts, net of amounts recoverable from reinsurers, which exceeded investments and cash and invested cash, which totaled $135.1 billion as of December 31, 2022. If it were necessary to liquidate fixed maturity AFS securities prior to maturity or call to meet cash flow needs, we would first look to those fixed maturity AFS securities that are in an unrealized gain position, which had a fair value of $16.6 billion as of December 31, 2022, rather than selling fixed maturity AFS securities in an unrealized loss position. The amount of cash that we have on hand at any point in time takes into account our liquidity needs in the future, other sources of cash, such as the maturities of investments, interest and dividends we earn on our investments and the ongoing cash flows from new and existing business. For additional discussion, see “Fixed Maturity AFS Securities – Evaluation for Recovery of Amortized Cost” in Note 1 and “Liquidity and Capital Resources” below.
As of December 31, 2022 and 2021, the estimated fair value for all private placement securities was $19.0 billion and $20.7 billion, respectively, representing 14% and 13% of total investments, respectively.
Trading Securities
Trading securities, which in certain cases support reinsurance funds withheld and our modified coinsurance agreements, are carried at fair value and changes in fair value are recorded in net income as they occur. Investment results for these certain portfolios, including gains and losses from sales, are passed directly to the reinsurers through the contractual terms of the reinsurance arrangements. Offsetting these amounts in certain cases are corresponding changes in fair value of the embedded derivative liability associated with the underlying reinsurance arrangement. See Notes 1 and 8 for more information regarding modified coinsurance.
Mortgage-Backed Securities (Included in Fixed Maturity AFS and Trading Securities)
Our fixed maturity securities include mortgage-backed securities (“MBS”). These securities are subject to risks associated with variable prepayments. This may result in differences between the actual cash flow and maturity of these securities than that expected at the time of purchase. Securities that have an amortized cost greater than par and are backed by mortgages that prepay faster than expected will incur a reduction in yield or a loss. Those securities with an amortized cost lower than par that prepay faster than expected will generate an increase in yield or a gain. In addition, we may incur reinvestment risks if market yields are lower than the book yields earned on the securities. Prepayments occurring slower than expected have the opposite effect. The degree to which a security is susceptible to either gains or losses is influenced by: the difference between its amortized cost and par; the relative sensitivity of the underlying mortgages
backing the assets to prepayment in a changing interest rate environment; and the repayment priority of the securities in the overall securitization structure.
We limit the extent of our risk on MBS by prudently limiting exposure to the asset class, by generally avoiding the purchase of securities with a cost that significantly exceeds par, by purchasing securities with improving collateral performance, and by primarily investing in securities that are current pay and senior priority in their trust structure. A significant amount of assets in our MBS portfolio are either guaranteed by U.S. government-sponsored enterprises, supported in the securitization structure by junior securities or purchased at discounted prices significantly lower than their expected recovery value, enabling the assets to achieve high investment grade status.
Our exposure to subprime mortgage lending is limited to investments in banks and other financial institutions that may be affected by subprime lending and direct investments in ABS and RMBS. Mortgage-related ABS are backed by home equity loans and RMBS are backed by residential mortgages. These securities are backed by loans that are characterized by borrowers of differing levels of creditworthiness: prime; Alt-A; and subprime. Prime lending is the origination of residential mortgage loans to customers with excellent credit profiles. Alt-A lending is the origination of residential mortgage loans to customers who have prime credit profiles but lack documentation to substantiate income. Subprime lending is the origination of loans to customers with weak or impaired credit profiles.
Delinquency and loss rates on residential mortgages and home equity loans have been showing positive trends, and, as long as the unemployment rate remains stable to improving, we expect these trends to continue. We continue to expect to receive payments in accordance with contractual terms for a significant amount of our securities, largely due to the seniority of the claims on the collateral of the securities that we own. The tranches of the securities will experience losses according to their seniority level with the least senior (or most junior), typically the unrated residual tranche, taking the first loss. As of December 31, 2022 and 2021, our ABS home equity and RMBS had a market value of $2.3 billion and $2.9 billion, respectively, and a net unrealized gain (loss) of $(195) million and $245 million, respectively.
The market value of fixed maturity AFS and trading securities backed by subprime loans was $191 million and represented less than 1% of our total investment portfolio as of December 31, 2022. Fixed maturity AFS securities represented $183 million, or 96%, and trading securities represented $8 million, or 4%, of the subprime exposure as of December 31, 2022. The table below summarizes our investments in fixed maturity AFS securities backed by pools of residential mortgages (in millions) as of December 31, 2022:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
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|
|
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|
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|
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|
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|
|
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| Subprime/ |
|
|
|
|
|
|
| ||||
| Agency |
| Prime |
| Alt-A |
| Option ARM (1) |
| Total |
| ||||||||||||||||||||
| Net |
|
|
|
| Net |
|
|
|
| Net |
|
|
|
| Net |
|
|
|
| Net |
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| |||||
| Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | Amortized | Fair | ||||||||||||||||||||
| Cost |
| Value |
| Cost |
| Value |
| Cost |
| Value |
| Cost |
| Value |
| Cost |
| Value |
| ||||||||||
Type |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMBS | $ | 1,845 |
| $ | 1,641 |
| $ | 190 |
| $ | 182 |
| $ | 65 |
| $ | 70 |
| $ | 109 |
| $ | 116 |
| $ | 2,209 |
| $ | 2,009 |
|
ABS home equity |
| 1 |
|
| - |
|
| 18 |
|
| 19 |
|
| 18 |
|
| 26 |
|
| 159 |
|
| 174 |
|
| 196 |
|
| 219 |
|
Total by type (2)(3) | $ | 1,846 |
| $ | 1,641 |
| $ | 208 |
| $ | 201 |
| $ | 83 |
| $ | 96 |
| $ | 268 |
| $ | 290 |
| $ | 2,405 |
| $ | 2,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA | $ | 1,495 |
| $ | 1,333 |
| $ | 104 |
| $ | 100 |
| $ | - |
| $ | - |
| $ | 6 |
| $ | 6 |
| $ | 1,605 |
| $ | 1,439 |
|
AA |
| 345 |
|
| 302 |
|
| 8 |
|
| 8 |
|
| 5 |
|
| 5 |
|
| 4 |
|
| 4 |
|
| 362 |
|
| 319 |
|
A |
| 6 |
|
| 6 |
|
| 1 |
|
| 1 |
|
| - |
|
| - |
|
| 8 |
|
| 8 |
|
| 15 |
|
| 15 |
|
BBB |
| - |
|
| - |
|
| 31 |
|
| 27 |
|
| 5 |
|
| 5 |
|
| 6 |
|
| 6 |
|
| 42 |
|
| 38 |
|
BB and below |
| - |
|
| - |
|
| 64 |
|
| 65 |
|
| 73 |
|
| 86 |
|
| 244 |
|
| 266 |
|
| 381 |
|
| 417 |
|
Total by rating (2)(3)(4) | $ | 1,846 |
| $ | 1,641 |
| $ | 208 |
| $ | 201 |
| $ | 83 |
| $ | 96 |
| $ | 268 |
| $ | 290 |
| $ | 2,405 |
| $ | 2,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 and prior | $ | 341 |
| $ | 338 |
| $ | 84 |
| $ | 85 |
| $ | 83 |
| $ | 96 |
| $ | 268 |
| $ | 290 |
| $ | 776 |
| $ | 809 |
|
2013 |
| 112 |
|
| 101 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 112 |
|
| 101 |
|
2014 |
| 49 |
|
| 45 |
|
| 1 |
|
| 1 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 50 |
|
| 46 |
|
2015 |
| 145 |
|
| 128 |
|
| 15 |
|
| 14 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 160 |
|
| 142 |
|
2016 |
| 459 |
|
| 387 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 459 |
|
| 387 |
|
2017 |
| 220 |
|
| 194 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 220 |
|
| 194 |
|
2018 |
| 180 |
|
| 166 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 180 |
|
| 166 |
|
2019 |
| 158 |
|
| 131 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 158 |
|
| 131 |
|
2020 |
| 67 |
|
| 55 |
|
| 3 |
|
| 3 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 70 |
|
| 58 |
|
2021 |
| 89 |
|
| 72 |
|
| 33 |
|
| 28 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 122 |
|
| 100 |
|
2022 |
| 26 |
|
| 24 |
|
| 72 |
|
| 70 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 98 |
|
| 94 |
|
Total by origination |
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|
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|
|
|
|
|
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|
|
|
|
|
year (2)(3) | $ | 1,846 |
| $ | 1,641 |
| $ | 208 |
| $ | 201 |
| $ | 83 |
| $ | 96 |
| $ | 268 |
| $ | 290 |
| $ | 2,405 |
| $ | 2,228 |
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Total fixed maturity AFS securities backed by pools of |
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| |||||||||||||||||||||||
residential mortgages as a percentage of total fixed maturity AFS securities |
|
| 2.2% |
|
| 2.2% |
| |||||||||||||||||||||||
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|
|
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|
|
Total prime, Alt-A and subprime/option ARM as a percentage of total fixed maturity AFS securities |
|
| 0.5% |
|
| 0.6% |
| |||||||||||||||||||||||
(1)Includes the net amortized cost and fair value of option adjustable rate mortgages (“ARM”) within RMBS, totaling $101 million and $107 million, respectively.
(2)Does not include the amortized cost of trading securities totaling $120 million that primarily support our reinsurance funds withheld and modified coinsurance agreements because investment results for these agreements are passed directly to the reinsurers. The $120 million in trading securities consisted of $110 million prime, $1 million Alt-A and $9 million subprime.
(3)Does not include the fair value of trading securities totaling $102 million that primarily support our reinsurance funds withheld and modified coinsurance agreements because investment results for these agreements are passed directly to the reinsurers. The $102 million in trading securities consisted of $93 million prime, $1 million Alt-A and $8 million subprime.
(4)Based upon the rating designations determined and provided by the major credit rating agencies (Fitch, Moody’s and S&P). For securities where the ratings assigned by the major credit rating agencies are not equivalent, the second lowest rating assigned is used. For those securities where ratings by the major credit rating agencies are not available, which does not represent a significant amount of our total fixed maturity AFS securities, we base the ratings disclosed upon internal ratings.
None of these investments included any direct investments in subprime lenders or mortgages. We are not aware of material exposure to subprime loans in our alternative investment portfolio.
The following summarizes our investments in fixed maturity AFS securities backed by pools of commercial mortgages (in millions) as of December 31, 2022:
(1)Does not include the amortized cost of trading securities totaling $160 million that primarily support our reinsurance funds withheld and modified coinsurance agreements because investment results for these agreements are passed directly to the reinsurers. The $160 million in trading securities consisted of $120 million of multiple property CMBS and $40 million of single property CMBS.
(2)Does not include the fair value of trading securities totaling $137 million that primarily support our reinsurance funds withheld and modified coinsurance agreements because investment results for these agreements are passed directly to the reinsurers. The $137 million in trading securities consisted of $101 million of multiple property CMBS and $36 million of single property CMBS.
(3)Based upon the rating designations determined and provided by the major credit rating agencies (Fitch, Moody’s and S&P). For securities where the ratings assigned by the major credit rating agencies are not equivalent, the second lowest rating assigned is used. For those securities where ratings by the major credit rating agencies are not available, which does not represent a significant amount of our total fixed maturity AFS securities, we base the ratings disclosed upon internal ratings.
As of December 31, 2022, the net amortized cost and fair value of our fixed maturity AFS exposure to monoline insurers was $306 million and $296 million, respectively.
Composition by Industry Categories of our Unrealized Losses on Fixed Maturity AFS Securities
When considering unrealized gain and loss information, it is important to recognize that the information relates to the position of securities at a particular point in time and may not be indicative of the position of our investment portfolios subsequent to the balance sheet date. Further, because the timing of the recognition of realized investment gains and losses through the selection of which securities are sold is largely at management’s discretion, it is important to consider the information provided below within the context of the overall unrealized gain or loss position of our investment portfolios. These are important considerations that should be included in any evaluation of the potential effect of securities in an unrealized loss position on our future earnings.
The composition by industry categories of all fixed maturity AFS securities in an unrealized loss position (in millions) as of December 31, 2022, was as follows:
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| % |
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| % |
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| |||
| Net |
| Net |
| Gross |
| Gross |
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| % |
| |||
| Amortized |
| Amortized |
| Unrealized |
| Unrealized |
| Fair |
| Fair |
| |||
| Cost |
| Cost |
| Losses |
| Losses |
| Value |
| Value |
| |||
Healthcare | $ | 6,229 |
| 6.5% |
| $ | 1,238 |
| 9.5% |
| $ | 4,991 |
| 6.0% |
|
Electric |
| 8,233 |
| 8.6% |
|
| 1,216 |
| 9.3% |
|
| 7,017 |
| 8.4% |
|
ABS |
| 10,559 |
| 11.0% |
|
| 904 |
| 6.9% |
|
| 9,655 |
| 11.6% |
|
Banking |
| 6,967 |
| 7.2% |
|
| 765 |
| 5.9% |
|
| 6,202 |
| 7.5% |
|
Technology |
| 5,142 |
| 5.3% |
|
| 675 |
| 5.2% |
|
| 4,467 |
| 5.4% |
|
Food and beverage |
| 4,293 |
| 4.5% |
|
| 613 |
| 4.7% |
|
| 3,680 |
| 4.4% |
|
Local authorities |
| 2,756 |
| 2.9% |
|
| 518 |
| 4.0% |
|
| 2,238 |
| 2.7% |
|
Manufacturing |
| 3,066 |
| 3.2% |
|
| 422 |
| 3.2% |
|
| 2,644 |
| 3.2% |
|
Industrial – other |
| 2,237 |
| 2.3% |
|
| 422 |
| 3.2% |
|
| 1,815 |
| 2.2% |
|
Natural gas |
| 1,901 |
| 2.0% |
|
| 320 |
| 2.5% |
|
| 1,581 |
| 1.9% |
|
Pharmaceuticals |
| 2,642 |
| 2.7% |
|
| 317 |
| 2.4% |
|
| 2,325 |
| 2.8% |
|
Brokerage asset management |
| 1,983 |
| 2.1% |
|
| 306 |
| 2.4% |
|
| 1,677 |
| 2.0% |
|
Chemicals |
| 2,296 |
| 2.4% |
|
| 305 |
| 2.3% |
|
| 1,991 |
| 2.4% |
|
Retail |
| 1,983 |
| 2.1% |
|
| 282 |
| 2.2% |
|
| 1,701 |
| 2.0% |
|
Transportation services |
| 2,327 |
| 2.4% |
|
| 268 |
| 2.1% |
|
| 2,059 |
| 2.5% |
|
Property and casualty |
| 1,879 |
| 2.0% |
|
| 258 |
| 2.0% |
|
| 1,621 |
| 2.0% |
|
Life |
| 1,627 |
| 1.7% |
|
| 257 |
| 2.0% |
|
| 1,370 |
| 1.6% |
|
Non-agency CMBS |
| 1,782 |
| 1.9% |
|
| 246 |
| 1.9% |
|
| 1,536 |
| 1.8% |
|
Midstream |
| 1,853 |
| 1.9% |
|
| 224 |
| 1.7% |
|
| 1,629 |
| 2.0% |
|
Aerospace and defense |
| 1,483 |
| 1.5% |
|
| 201 |
| 1.5% |
|
| 1,282 |
| 1.5% |
|
Utility – other |
| 1,100 |
| 1.1% |
|
| 187 |
| 1.4% |
|
| 913 |
| 1.1% |
|
Consumer products |
| 1,259 |
| 1.3% |
|
| 175 |
| 1.3% |
|
| 1,084 |
| 1.3% |
|
Wirelines |
| 1,151 |
| 1.2% |
|
| 174 |
| 1.3% |
|
| 977 |
| 1.2% |
|
Automotive |
| 1,565 |
| 1.6% |
|
| 172 |
| 1.3% |
|
| 1,393 |
| 1.7% |
|
Railroads |
| 953 |
| 1.0% |
|
| 139 |
| 1.1% |
|
| 814 |
| 1.0% |
|
Wireless |
| 844 |
| 0.9% |
|
| 136 |
| 1.0% |
|
| 708 |
| 0.9% |
|
Integrated |
| 925 |
| 1.0% |
|
| 134 |
| 1.0% |
|
| 791 |
| 1.0% |
|
Government sponsored |
| 541 |
| 0.6% |
|
| 127 |
| 1.0% |
|
| 414 |
| 0.5% |
|
Metals and mining |
| 960 |
| 1.0% |
|
| 115 |
| 0.9% |
|
| 845 |
| 1.0% |
|
Entertainment |
| 835 |
| 0.9% |
|
| 108 |
| 0.8% |
|
| 727 |
| 0.9% |
|
Project finance |
| 957 |
| 0.9% |
|
| 102 |
| 0.9% |
|
| 855 |
| 1.0% |
|
Building materials |
| 876 |
| 0.9% |
|
| 102 |
| 0.8% |
|
| 774 |
| 0.9% |
|
Cable – satellite |
| 646 |
| 0.7% |
|
| 101 |
| 0.8% |
|
| 545 |
| 0.7% |
|
Industries with unrealized losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
less than $100 million |
| 12,290 |
| 12.7% |
|
| 1,489 |
| 11.5% |
|
| 10,801 |
| 12.9% |
|
Total by industry | $ | 96,140 |
| 100.0% |
| $ | 13,018 |
| 100.0% |
| $ | 83,122 |
| 100.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total by industry as a percentage of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
total fixed maturity AFS securities |
| 86.1% |
|
|
|
| 100.0% |
|
|
|
| 83.3% |
|
|
|
As of December 31, 2022, the net amortized cost and fair value of securities subject to enhanced analysis and monitoring for potential changes in unrealized loss position was $58 million and $55 million, respectively.
Mortgage Loans on Real Estate
The following tables summarize key information on mortgage loans on real estate (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, 2022 |
| |||||||||
| Commercial |
| Residential |
| Total |
| % |
| |||
Credit Quality Indicator |
|
|
|
|
|
|
|
|
|
|
|
Current | $ | 16,987 |
| $ | 1,379 |
| $ | 18,366 |
| 99.8% |
|
Delinquent (1) |
| - |
|
| 13 |
|
| 13 |
| 0.1% |
|
Foreclosure (2) |
| - |
|
| 21 |
|
| 21 |
| 0.1% |
|
Total mortgage loans on real estate before allowance |
| 16,987 |
|
| 1,413 |
|
| 18,400 |
| 100.0% |
|
Allowance for credit losses |
| (84 | ) |
| (15 | ) |
| (99 | ) |
|
|
Total mortgage loans on real estate | $ | 16,903 |
| $ | 1,398 |
| $ | 18,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, 2021 |
| |||||||||
| Commercial |
| Residential |
| Total |
| % |
| |||
Credit Quality Indicator |
|
|
|
|
|
|
|
|
|
|
|
Current | $ | 17,168 |
| $ | 889 |
| $ | 18,057 |
| 99.8% |
|
Delinquent (1) |
| - |
|
| 14 |
|
| 14 |
| 0.1% |
|
Foreclosure (2) |
| - |
|
| 16 |
|
| 16 |
| 0.1% |
|
Total mortgage loans on real estate before allowance |
| 17,168 |
|
| 919 |
|
| 18,087 |
| 100.0% |
|
Allowance for credit losses |
| (79 | ) |
| (17 | ) |
| (96 | ) |
|
|
Total mortgage loans on real estate | $ | 17,089 |
| $ | 902 |
| $ | 17,991 |
|
|
|
(1)As of December 31, 2022, no commercial mortgage loans and 24 residential mortgage loans were delinquent. As of December 31, 2021, 2 commercial mortgage loans and 31 residential mortgage loans were delinquent.
(2)As of December 31, 2022, no commercial mortgage loans and 49 residential mortgage loans were in foreclosure. As of December 31, 2021, no commercial mortgage loans and 34 residential mortgage loans were in foreclosure.
As of December 31, 2022, there were 2 specifically identified impaired commercial mortgage loans on real estate with an aggregate carrying value of less than $1 million and 37 specifically identified impaired residential mortgage loans on real estate with an aggregate carrying value of $16 million. As of December 31, 2021, there were 4 specifically identified impaired commercial mortgage loans on real estate with an aggregate carrying value of $1 million and 50 specifically identified impaired residential mortgage loans on real estate with an aggregate carrying value of $22 million.
The total outstanding principal and interest on commercial mortgage loans on real estate that were two or more payments delinquent, excluding foreclosures, as of December 31, 2022 and 2021, was less than $1 million. The total outstanding principal and interest on residential mortgage loans on real estate that were three or more payments delinquent, excluding foreclosures, as of December 31, 2022 and 2021, was $13 million and $14 million, respectively.
See Note 1 for more information regarding our accounting policy relating to the impairment of mortgage loans on real estate.
The carrying value of mortgage loans on real estate by business segment (in millions) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of |
|
| As of |
|
| ||
| December 31, | December 31, |
| ||||||
|
| 2022 |
|
| 2021 |
|
| ||
Segment |
|
|
|
|
|
|
|
|
|
Life Insurance |
| $ | 3,536 |
|
| $ | 3,890 |
|
|
Annuities |
|
| 7,008 |
|
|
| 6,732 |
|
|
Group Protection |
|
| 1,417 |
|
|
| 1,435 |
|
|
Retirement Plan Services |
|
| 4,253 |
|
|
| 4,326 |
|
|
Other Operations |
|
| 2,087 |
|
|
| 1,608 |
|
|
Total mortgage loans on real estate |
| $ | 18,301 |
|
| $ | 17,991 |
|
|
The composition of commercial mortgage loans (in millions) by property type, geographic region and state is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, 2022 |
|
| As of December 31, 2022 |
| ||||||
| Carrying |
|
|
|
| Carrying |
|
|
| ||
| Value |
| % |
|
| Value |
| % |
| ||
Property Type |
|
|
|
|
| State |
|
|
|
|
|
Apartment | $ | 5,445 |
| 32.2% |
| CA | $ | 4,641 |
| 27.5% |
|
Industrial |
| 4,071 |
| 24.1% |
| TX |
| 1,569 |
| 9.3% |
|
Office building |
| 3,588 |
| 21.2% |
| NY |
| 1,011 |
| 6.0% |
|
Retail |
| 2,595 |
| 15.4% |
| PA |
| 869 |
| 5.1% |
|
Other commercial |
| 773 |
| 4.6% |
| FL |
| 788 |
| 4.7% |
|
Hotel/motel |
| 226 |
| 1.3% |
| MD |
| 704 |
| 4.3% |
|
Mixed use |
| 205 |
| 1.2% |
| WA |
| 662 |
| 3.9% |
|
Total | $ | 16,903 |
| 100.0% |
| AZ |
| 615 |
| 3.6% |
|
Geographic Region |
|
|
|
|
| GA |
| 614 |
| 3.6% |
|
Pacific |
| 5,633 |
| 33.3% |
| TN |
| 548 |
| 3.2% |
|
South Atlantic |
| 3,427 |
| 20.3% |
| OH |
| 423 |
| 2.5% |
|
Middle Atlantic |
| 2,153 |
| 12.7% |
| VA |
| 412 |
| 2.4% |
|
West South Central |
| 1,706 |
| 10.1% |
| NC |
| 402 |
| 2.4% |
|
Mountain |
| 1,231 |
| 7.3% |
| WI |
| 358 |
| 2.1% |
|
East North Central |
| 1,218 |
| 7.2% |
| OR |
| 329 |
| 1.9% |
|
East South Central |
| 671 |
| 4.0% |
| SC |
| 306 |
| 1.8% |
|
West North Central |
| 461 |
| 2.7% |
| IL |
| 302 |
| 1.8% |
|
New England |
| 371 |
| 2.2% |
| Non U.S. |
| 32 |
| 0.2% |
|
Non U.S. |
| 32 |
| 0.2% |
| All other states |
| 2,318 |
| 13.7% |
|
Total | $ | 16,903 |
| 100.0% |
| Total | $ | 16,903 |
| 100.0% |
|
The following table shows the principal amount (in millions) of our commercial and residential mortgage loans by year in which the principal is contractually obligated to be repaid:
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, 2022 |
| |||||||||
| Commercial |
| Residential |
| Total |
| % |
| |||
Principal Repayment Year |
|
|
|
|
|
|
|
|
|
|
|
2023 | $ | 800 |
| $ | 17 |
| $ | 817 |
| 4.4% |
|
2024 |
| 973 |
|
| 18 |
|
| 991 |
| 5.4% |
|
2025 |
| 1,044 |
|
| 19 |
|
| 1,063 |
| 5.8% |
|
2026 |
| 1,400 |
|
| 20 |
|
| 1,420 |
| 7.7% |
|
2027 |
| 1,681 |
|
| 22 |
|
| 1,703 |
| 9.3% |
|
2028 and thereafter |
| 11,124 |
|
| 1,281 |
|
| 12,405 |
| 67.4% |
|
Total | $ | 17,022 |
| $ | 1,377 |
| $ | 18,399 |
| 100.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
See Note 4 for information regarding our loan-to-value and debt-service coverage ratios and our allowance for credit losses.
Alternative Investments
Investment income (loss) on alternative investments by business segment (in millions) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Life Insurance | $ | 47 |
| $ | 522 |
| $ | 140 |
|
Annuities |
| 8 |
|
| 63 |
|
| 23 |
|
Group Protection |
| 5 |
|
| 41 |
|
| 15 |
|
Retirement Plan Services |
| 4 |
|
| 38 |
|
| 14 |
|
Other Operations |
| 2 |
|
| 15 |
|
| 5 |
|
Total (1) | $ | 66 |
| $ | 679 |
| $ | 197 |
|
(1)Includes net investment income on the alternative investments supporting the required statutory surplus of our insurance businesses.
As of December 31, 2022 and 2021, alternative investments included investments in 337 and 311 different partnerships, respectively, and the portfolio represented approximately 2% of total investments. The partnerships do not represent off-balance sheet financing and generally involve several third-party partners. Some of our partnerships contain capital calls, which require us to contribute capital upon notification by the general partner. These capital calls are contemplated during the initial investment decision and are planned for well in advance of the call date. The capital calls are not material in size and are not material to our liquidity. Alternative investments are accounted for using the equity method of accounting and are included in other investments on the Consolidated Balance Sheets.
Non-Income Producing Investments
As of December 31, 2022 and 2021, the carrying amount of fixed maturity securities, mortgage loans on real estate and real estate that were non-income producing was $11 million and $14 million, respectively.
Net Investment Income
Details underlying net investment income (in millions) and our investment yield were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Net Investment Income |
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities | $ | 4,469 |
| $ | 4,351 |
| $ | 4,334 |
|
Trading securities |
| 182 |
|
| 167 |
|
| 202 |
|
Equity securities |
| 11 |
|
| 3 |
|
| 3 |
|
Mortgage loans on real estate |
| 689 |
|
| 680 |
|
| 677 |
|
Policy loans |
| 101 |
|
| 115 |
|
| 125 |
|
Cash and invested cash |
| 13 |
|
| - |
|
| 12 |
|
Commercial mortgage loan prepayment |
|
|
|
|
|
|
|
|
|
and bond make-whole premiums (1) |
| 105 |
|
| 199 |
|
| 82 |
|
Alternative investments (2) |
| 66 |
|
| 679 |
|
| 197 |
|
Consent fees |
| 8 |
|
| 10 |
|
| 7 |
|
Other investments |
| 79 |
|
| 64 |
|
| 46 |
|
Investment income |
| 5,723 |
|
| 6,268 |
|
| 5,685 |
|
Investment expense |
| (212 | ) |
| (153 | ) |
| (175 | ) |
Net investment income | $ | 5,511 |
| $ | 6,115 |
| $ | 5,510 |
|
(1)See “Commercial Mortgage Loan Prepayment and Bond Make-Whole Premiums” below for additional information.
(2)See “Alternative Investments” above for additional information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| ||||
| 2022 |
| 2021 |
| 2020 |
|
Interest Rate Yield |
|
|
|
|
|
|
Fixed maturity AFS securities, mortgage loans on |
|
|
|
|
|
|
real estate and other, net of investment expenses | 3.87% |
| 3.92% |
| 4.12% |
|
Commercial mortgage loan prepayment and |
|
|
|
|
|
|
bond make-whole premiums | 0.08% |
| 0.15% |
| 0.06% |
|
Alternative investments | 0.05% |
| 0.51% |
| 0.16% |
|
Net investment income yield on invested assets | 4.00% |
| 4.58% |
| 4.34% |
|
|
|
|
|
|
|
|
We earn investment income on our general account assets supporting fixed annuity, term life, whole life, UL, interest-sensitive whole life and the fixed portion of retirement plan and VUL products. The profitability of our fixed annuity and life insurance products is affected by our ability to achieve target spreads, or margins, between the interest income earned on the general account assets and the interest credited to the contract holder on our average fixed account values, including the fixed portion of variable. Net investment income and the interest rate yield table each include commercial mortgage loan prepayments and bond make-whole premiums, alternative investments and contingent interest and standby real estate equity commitments. These items can vary significantly from period to period due to a number of factors and, therefore, can provide results that are not indicative of the underlying trends.
Commercial Mortgage Loan Prepayment and Bond Make-Whole Premiums
Prepayment and make-whole premiums are collected when borrowers elect to call or prepay their debt prior to the stated maturity. A prepayment or make-whole premium allows investors to attain the same yield as if the borrower made all scheduled interest payments until maturity. These premiums are designed to make investors indifferent to prepayment.
REINSURANCE
Our insurance companies cede insurance to other companies. The portion of our life insurance risks exceeding each of our insurance companies’ retention limit is reinsured with other insurers. We seek life and annuity reinsurance coverage to limit our exposure to mortality losses and/or to enhance our capital and risk management. We acquire other reinsurance as applicable with retentions and limits that management believes are appropriate for the circumstances. The consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” reflect insurance premiums, insurance fees, benefits and DAC amortization net of insurance ceded. Our insurance companies remain liable if their reinsurers are unable to meet contractual obligations under applicable reinsurance agreements. We utilize inter-company reinsurance agreements to manage our statutory capital position as well as our hedge program for variable annuity guarantees. With regard to risk retention from a consolidated basis, these inter-company agreements do not have an effect on the consolidated financial statements. For information regarding reserve financing and LOC expenses from inter-company reinsurance agreements, see “Liquidity and Capital Resources – Material Cash Outflows” below.
We focus on obtaining reinsurance from a diverse group of reinsurers. We have established standards and criteria for our use and selection of reinsurers. In order for a new reinsurer to participate in our current program, we generally require the reinsurer to have an AM Best rating of A+ or greater or an S&P rating of AA- or better and a specified RBC percentage (or similar capital ratio measure). If the reinsurer does not have these ratings, we may require them to post collateral as described below; however, we may waive the collateral requirements based on the facts and circumstances. In addition, we may require collateral from a reinsurer to mitigate credit/collectability risk. Typically, in such cases, the reinsurer must either maintain minimum specified ratings and RBC ratios or establish the specified quality and quantity of collateral. Similarly, we have also required collateral in connection with books of business sold pursuant to indemnity reinsurance agreements.
Reinsurers, including affiliated reinsurers, that are not licensed, accredited or authorized in the state of domicile of the reinsured (“ceding company”), i.e., unauthorized reinsurers, are required to post statutorily prescribed forms of collateral for the ceding company to receive reinsurance credit. The three primary forms of collateral are: (i) qualifying assets held in a reserve credit trust; (ii) irrevocable, unconditional, evergreen LOCs issued by a qualified U.S. financial institution; and (iii) assets held by the ceding company in a segregated funds withheld account. Collateral must be maintained in accordance with the rules of the ceding company’s state of domicile and must be readily accessible by the ceding company to cover claims under the reinsurance agreement. Accordingly, our insurance subsidiaries require unauthorized reinsurers to post acceptable forms of collateral to support their reinsurance obligations to us.
As a result of our modified coinsurance agreement with Athene to reinsure fixed annuity products, we reported a $3.8 billion deposit asset within other assets on the Consolidated Balance Sheets as of December 31, 2022. For additional information, see Note 8.
Our amounts recoverable from reinsurers represent receivables from and reserves ceded to reinsurers. As of December 31, 2022, 83%, or $16.6 billion, of our total reinsurance recoverable was secured by collateral for our benefit. Of this amount, $16.4 billion was held by reinsurers in reserve credit trusts (such reserve credit trusts are held by non-affiliated reinsurers; therefore, they are not reflected on the Consolidated Balance Sheets), $130 million was held in our funds withheld portfolios and $93 million was secured by LOCs for which we are the beneficiary, an off-balance sheet arrangement. The total in our funds withheld portfolios was $2.3 billion and reported in other
liabilities on the Consolidated Balance Sheets as of December 31, 2022. The excess funds withheld represent funds above the reinsurance recoverable from our reinsurers.
We regularly evaluate the financial condition of our reinsurers and monitor concentration risk with our largest reinsurers. We monitor all of our existing reinsurers’ financial strength ratings on a monthly basis. We also monitor our reinsurers’ financial health, trends and commitment to the reinsurance business, statutory surplus, RBC levels, statutory earnings and fluctuations, current claims payment aging and our reinsurers’ own reinsurers. In addition, we present at least annually information regarding our reinsurance exposures to the Finance Committee of our Board of Directors. For more discussion of our counterparty risk with our reinsurers, see “Part I – Item 1A. Risk Factors – Operational Matters – We face risks of non-collectability of reinsurance and increased reinsurance rates, which could materially affect our results of operations.”
Under certain indemnity reinsurance agreements, two of our insurance subsidiaries, LNL and Lincoln Life & Annuity Company of New York (“LLANY”), provide 100% indemnity reinsurance for the business assumed; however, the third-party insurer, or the “cedent,” remains primarily liable on the underlying insurance business. These indemnity reinsurance arrangements require that our subsidiary, as the reinsurer, maintain certain insurer financial strength ratings and capital ratios. If these ratings or capital ratios are not maintained, depending upon the reinsurance agreement, the cedent may recapture the business, or require us to place assets in trust or provide LOCs at least equal to the relevant statutory reserves. Under the LNL reinsurance arrangement, we held approximately $2.7 billion of statutory reserves as of December 31, 2022. LNL must maintain an AM Best financial strength rating of at least B++, an S&P financial strength rating of at least BBB- and a Moody’s financial strength rating of at least Baa3. This arrangement may require LNL to place assets in trust equal to the relevant statutory reserves. Under LLANY’s largest indemnity reinsurance arrangement, we held approximately $1.1 billion of statutory reserves as of December 31, 2022. LLANY must maintain an AM Best financial strength rating of at least B+, an S&P financial strength rating of at least BB+ and a Moody’s financial strength rating of at least Ba1, as well as maintain an RBC ratio of at least 160% or an S&P capital adequacy ratio of 100%, or the cedent may recapture the business. Under two other LLANY arrangements, by which we established $612 million of statutory reserves as of December 31, 2022, LLANY must maintain an AM Best financial strength rating of at least B++, an S&P financial strength rating of at least BBB- and a Moody’s financial strength rating of at least Baa3. One of these arrangements also requires LLANY to maintain an RBC ratio of at least 185% or an S&P capital adequacy ratio of 115%. Each of these arrangements may require LLANY to place assets in trust equal to the relevant statutory reserves. See “Item 1. Business – Financial Strength Ratings” for a description of our financial strength ratings.
For more information about reinsurance, see Notes 8 and 13 and “Liquidity and Capital Resources – Holding Company Sources and Uses of Liquidity and Capital –Subsidiaries’ Capital” below.
For factors that could cause actual results to differ materially from those set forth in this section, see “Part I – Item 1A. Risk Factors” and “Forward-Looking Statements – Cautionary Language” above.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Liquidity
Liquidity refers to our ability to generate adequate amounts of cash from our normal operations to meet cash requirements with a prudent margin of safety. Our ability to generate and maintain sufficient liquidity depends on the profitability of our businesses, general economic conditions and access to the capital markets and other sources of liquidity and capital as described below.
When considering our liquidity, it is important to distinguish between the needs of our insurance subsidiaries and the needs of the holding company, LNC. As a holding company with no operations of its own, LNC is largely dependent upon the dividend capacity of its insurance subsidiaries as well as their ability to advance or repay funds to it through inter-company borrowing arrangements, which may be affected by factors influencing the insurance subsidiaries’ RBC and statutory earnings performance. Based on the sources of liquidity available to us as discussed below, we currently expect to be able to meet the holding company’s ongoing cash needs.
Capital
Capital refers to our long-term financial resources to support the operations of our businesses, to fund long-term growth strategies and to support our operations during adverse conditions. Our ability to generate and maintain sufficient capital depends on the profitability of our businesses, general economic conditions and access to the capital markets and other sources of liquidity and capital as described below. Disruptions, uncertainty or volatility in the capital and credit markets may materially affect our business operations and results of operations. These poor market conditions may reduce our insurance subsidiaries’ statutory surplus and RBC.
Reductions to our subsidiaries’ statutory surplus and RBC may cause them to retain more capital, which may pressure their ability to pay dividends to LNC, which may lead us to take steps to preserve or raise additional capital. As a result of the charge taken in connection with the annual assumption review in the third quarter of 2022, we expect an approximate $300 million statutory capital impact in the
fourth quarter of 2022 that will reduce our RBC ratio by approximately 12 points. We believe we have adequate capital to operate our business as we replenish statutory capital back to our targeted levels. For more information, see “Subsidiaries’ Capital” below.
For factors that could cause actual results to differ materially from those set forth in this section and that could affect our expectations for liquidity and capital, see “Part I – Item 1A. Risk Factors” and “Forward-Looking Statements – Cautionary Language” above.
Consolidated Sources and Uses of Liquidity and Capital
Our primary sources of liquidity and capital are insurance premiums and fees, investment income, maturities and sales of investments, issuance of debt or other types of securities and contract holder deposits. We also have access to alternative sources of liquidity as discussed below. Our primary uses are to pay policy claims and benefits, to fund commissions and other general operating expenses, to purchase investments, to fund policy surrenders and withdrawals, to pay dividends to our common and preferred stockholders, to repurchase our common stock and to repay debt. Our operating activities provided (used) cash of $4.0 billion, $151 million and $534 million in 2022, 2021 and 2020, respectively.
Holding Company Sources and Uses of Liquidity and Capital
The primary sources of liquidity and capital at the holding company level are dividends and interest payments from subsidiaries, augmented by holding company short-term investments, bank lines of credit and the ongoing availability of long-term public financing under an effective shelf registration statement, which allows us to issue, in unlimited amounts, securities, including debt securities, preferred stock, common stock, warrants, stock purchase contracts, stock purchase units and depository shares. These sources support the general corporate needs of the holding company, including its common and preferred stock dividends, common stock repurchases, interest and debt service, funding of callable securities, acquisitions and investment in core businesses.
Details underlying the primary sources of the holding company’s liquidity (in millions) were as follows:
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| 2022 |
| 2021 |
| 2020 |
| |||
Dividends from Subsidiaries |
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LNL | $ | 645 |
| $ | 1,910 |
| $ | 660 |
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First Penn-Pacific Life Insurance Company |
| 22 |
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| 45 |
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| - |
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Lincoln Investment Management Company |
| 38 |
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| 20 |
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| 25 |
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Lincoln National Management Corporation |
| 7 |
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| 10 |
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| 5 |
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Lincoln National Reinsurance Company (Barbados) Limited |
| 85 |
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| 75 |
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| 150 |
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Total dividends from subsidiaries | $ | 797 |
| $ | 2,060 |
| $ | 840 |
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Interest from Subsidiaries |
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Interest on inter-company notes | $ | 118 |
| $ | 111 |
| $ | 123 |
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See Note 19 for information on the increase in dividends from LNL in 2021. The table above focuses on significant and recurring cash flow items and excludes the effects of certain financing activities, including the periodic issuance and retirement of debt, issuance of preferred stock, cash flows related to our inter-company cash management program and certain investing activities, including capital contributions to subsidiaries. These activities are discussed below. Taxes have been eliminated from the analysis due to a tax sharing agreement among our primary subsidiaries resulting in a modest effect on net cash flows at the holding company. Also excluded from this analysis is the modest amount of investment income on short-term investments of the holding company and employee stock exercise activity related to our stock-based incentive compensation plans. See “Part IV – Item 15(a)(2) Financial Statement Schedules – Schedule II – Condensed Financial Information of Registrant” for the holding company cash flow statement.
Restrictions on Subsidiaries’ Dividends
Our insurance subsidiaries are subject to certain insurance department regulatory restrictions as to the transfer of funds and payment of dividends to the holding company. Under Indiana laws and regulations, our Indiana insurance subsidiaries, including our primary insurance subsidiary, LNL, may pay dividends to LNC without prior approval of the Indiana Insurance Commissioner (the “Commissioner”) only from unassigned surplus or must receive prior approval of the Commissioner to pay a dividend if such dividend, along with all other dividends paid within the preceding 12 consecutive months, would exceed the statutory limitation. The current statutory limitation is the greater of 10% of the insurer’s contract holders’ surplus, as shown on its last annual statement on file with the Commissioner or the insurer’s statutory net gain from operations for the previous 12 months, but in no event to exceed statutory unassigned surplus. Indiana law gives the Commissioner broad discretion to disapprove requests for dividends in excess of these limits. LNL’s subsidiary LLANY, a New York-domiciled insurance company, is bound by similar restrictions under New York law, with the applicable statutory limitation on dividends equal to the lesser of 10% of surplus to contract holders as of the end of the immediately preceding calendar year or net gain from operations for the immediately preceding calendar year, not including realized capital gains.
Indiana law also provides that following the payment of any dividend, the insurer’s contract holders’ surplus must be reasonable in relation to its outstanding liabilities and adequate for its financial needs, and permits the Commissioner to bring an action to rescind a dividend that violates these standards. In the event the Commissioner determines that the contract holders’ surplus of one subsidiary is inadequate, the Commissioner could use his or her broad discretionary authority to seek to require us to apply payments received from another subsidiary for the benefit of that insurance subsidiary.
We expect our direct domestic insurance subsidiaries could pay dividends to LNC of approximately $1.7 billion in 2023 without prior approval from the respective state commissioners. The amount of surplus that our insurance subsidiaries could pay as dividends is constrained by the amount of surplus we hold to maintain our ratings, to provide an additional layer of margin for risk protection and for future investment in our businesses. See “Part I – Item 1A. Risk Factors – Liquidity and Capital Position – A decrease in the capital and surplus of our insurance subsidiaries may result in a downgrade to our credit and insurer financial strength ratings.”
We maintain an investment portfolio of various holdings, types and maturities. These investments are subject to general credit, liquidity, market and interest rate risks. An extended disruption in the credit and capital markets could adversely affect LNC and its subsidiaries’ ability to access sources of liquidity, and there can be no assurance that additional financing will be available to us on favorable terms, or at all, in the current market environment. In addition, further impairment could reduce our statutory surplus, leading to lower RBC ratios and potentially reducing future dividend capacity from our insurance subsidiaries. See “Part I – Item 1A. Risk Factors – Liquidity and Capital Position – Adverse capital and credit market conditions may affect our ability to meet liquidity needs, access to capital and cost of capital.”
Subsidiaries’ Capital
Our insurance subsidiaries must maintain certain regulatory capital levels. We utilize the RBC ratio as a primary measure of the capital adequacy of our insurance subsidiaries. The RBC ratio is an important factor in the determination of the credit and financial strength ratings of LNC and its subsidiaries, as a reduction in our insurance subsidiaries’ surplus will affect their RBC ratios and dividend-paying capacity. For a discussion of the actions management is taking to rebuild statutory capital, see “Introduction – Executive Summary – Significant Operational Matters – Rebuilding Risk-Based Capital.” For additional information on RBC ratios, see “Part I – Item 1. Business – Regulatory – Insurance Regulation – Risk-Based Capital.”
Our insurance subsidiaries’ regulatory capital levels are affected by statutory accounting rules, which are subject to change by each applicable insurance regulator. Our term products and UL products containing secondary guarantees require reserves calculated pursuant to Actuarial Guideline XXXVIII (“AG38”). Our insurance subsidiaries employ strategies to reduce the strain caused by AG38 by reinsuring the business to reinsurance captives. Our captive reinsurance and reinsurance subsidiaries provide a mechanism for financing a portion of the excess reserve amounts in a more efficient manner and free up capital the insurance subsidiaries can use for any number of purposes, including paying dividends to the holding company. We use long-dated LOCs and debt financing as well as other financing strategies to finance those reserves. Included in the LOCs issued as of December 31, 2022, was $1.8 billion of long-dated LOCs issued to support inter-company reinsurance arrangements for UL products containing secondary guarantees. For information on the LOCs, see the credit facilities table in Note 12. Our captive reinsurance and reinsurance subsidiaries have also issued long-term notes of $3.9 billion to finance a portion of the excess reserves as of December 31, 2022; of this amount, $3.1 billion involve exposure to VIEs. For information on these long-term notes issued by our captive reinsurance and reinsurance subsidiaries, see Note 3. We have also used the proceeds from senior note issuances of $875 million to execute long-term structured solutions primarily supporting reinsurance of UL products containing secondary guarantees. LOCs and related capital market solutions lower the capital effect of term products and UL products containing secondary guarantees.
Statutory reserves established for variable annuity guaranteed benefit riders are sensitive to changes in the equity markets and interest rates and are affected by the level of account values relative to the level of any guarantees, product design and reinsurance arrangements. As a result, the relationship between reserve changes and equity market performance is non-linear during any given reporting period. Our insurance subsidiaries’ cede a portion of the guaranteed benefit riders to Lincoln National Reinsurance Company (Barbados) Limited (“LNBAR”) through inter-company reinsurance arrangements. Our variable annuity hedge program in LNBAR seeks to hedge our exposure to selected risk and income statement volatility caused by changes in the capital markets associated with the variable annuity guarantees. Market conditions greatly influence the ultimate capital required due to its effect on the valuation of reserves and derivative instruments hedging these reserves. The capital markets environment in 2022 led to market volatility and increased hedge breakage that has impacted capital in LNBAR. As a result, we did not take dividends out of LNBAR after the first quarter of 2022. In December 2022, LNC issued a $500 million long-term note to a non-affiliated variable interest entity in exchange for a corporate bond AFS security of like principal and duration. LNC contributed the security to LNBAR to address asset value volatility based on market conditions. There are no impacts to the LNC Consolidated Balance Sheets based on the set-off right provided in the transaction. For more information, see Note 3.
In September 2022, we announced enhancements to our variable annuity hedge program that continues to focus on generating sufficient assets to fund future claims with a goal of maximizing distributable earnings and explicitly protecting capital. The revised variable annuity hedge program, effective January 1, 2023, aligns with our increased strategic focus on maximizing the economic value as measured by distributable earnings, which is achieved by managing risks to capital generation due to market volatility. For additional information on our variable annuity hedge program, see “Introduction – Executive Summary – Significant Operational Matters – Variable Annuity Hedge
Program.” For risks related to our variable annuity hedge program, see “Part I – Item 1A. Risk Factors – Market Conditions – Our hedging strategies may not be fully effective to offset the changes in the carrying value of the guarantees on certain of our products, which could result in volatility in our results of operations and financial condition under GAAP and in the capital levels of our insurance and reinsurance subsidiaries.”
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. Included in the LOCs issued as of December 31, 2022, was $1.6 billion of long-dated LOCs issued to support inter-company reinsurance arrangements for variable annuity guaranteed benefit riders. For information on the LOCs, see the credit facilities table in Note 12.
Changes in equity markets may also affect the capital position of our insurance subsidiaries. We may decide to reallocate available capital among our insurance subsidiaries, including our captive reinsurance subsidiaries, which would result in different RBC ratios for our insurance subsidiaries. In addition, changes in the equity markets can affect the value of our variable annuity and variable universal life insurance separate accounts. When the market value of our separate account assets increases, the statutory surplus within our insurance subsidiaries also increases. Contrarily, when the market value of our separate account assets decreases, the statutory surplus within our insurance subsidiaries may also decrease, which 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 our life insurance subsidiaries.
Debt
Although our subsidiaries currently generate adequate cash flow to meet the needs of our normal operations, periodically LNC may issue debt to maintain ratings and increase liquidity, as well as to fund internal growth, acquisitions and the retirement of its debt.
Details underlying our debt activities (in millions) for the year ended December 31, 2022, were as follows:
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| Maturities, |
| Change |
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| Repayments |
| in Fair |
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| Beginning |
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| and |
| Value |
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| Other |
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| Ending | |||||||
| Balance |
| Issuance |
| Refinancing |
| Hedges |
| Changes (1) |
| Balance | ||||||||||
Short-Term Debt |
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Current maturities of long-term debt (2) | $ | 300 |
| $ | - |
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| $ | (300 | ) |
| $ | - |
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| $ | 500 |
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| $ | 500 |
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Long-Term Debt |
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Senior notes | $ | 4,867 |
| $ | 300 |
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| $ | - |
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| $ | (156 | ) |
| $ | (514 | ) |
| $ | 4,497 |
Term loans |
| 250 |
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| - |
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| - |
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| - |
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| - |
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| 250 |
Subordinated notes (3) |
| 995 |
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| - |
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| - |
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| - |
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| - |
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| 995 |
Capital securities (3) |
| 213 |
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| - |
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| - |
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| - |
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| - |
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| 213 |
Total long-term debt | $ | 6,325 |
| $ | 300 |
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| $ | - |
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| $ | (156 | ) |
| $ | (514 | ) |
| $ | 5,955 |
(1)Includes the non-cash reclassification of long-term debt to current maturities of long-term debt, accretion (amortization) of discounts and premiums, amortization of debt issuance costs and amortization of adjustments from discontinued hedges, as applicable.
(2)As of December 31, 2022, consisted of $500 million principal amount of our 4.00% Senior Notes due September 1, 2023.
(3)To hedge the variability in rates, we purchased interest rate swaps to lock in a fixed rate of approximately 5% over the remaining terms of the subordinated notes and capital securities.
On March 1, 2022, we completed the issuance and sale of $300 million aggregate principal amount of our 3.40% Senior Notes due 2032. We intend to use the net proceeds from the offering for general corporate purposes, which may include the repayment of debt on or prior to its maturity.
LNC made interest payments to service debt of $298 million, $294 million and $277 million for the years ended December 31, 2022, 2021 and 2020, respectively.
For additional information about our short-term and long-term debt and our credit facilities, see Note 12.
Preferred Stock
In November 2022, we raised approximately $1 billion through the issuance of preferred stock, $780 million of which was contributed to LNL in the fourth quarter to strengthen LNL’s statutory capital. We intend to use the remaining proceeds to fund part of the repayment upon maturity of our 4.00% Senior Notes due September 1, 2023. For additional information, see “Introduction – Executive Summary – Significant Operational Matters – Rebuild Risk-Based Capital Ratio” above and Note 14.
Capital Contributions to Subsidiaries
LNC made capital contributions to subsidiaries of $925 million, $65 million and $518 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Return of Capital to Common Stockholders
One of our primary goals is to provide a return to our common stockholders through share price accretion, dividends and stock repurchases. In determining dividends, the Board of Directors takes into consideration items such as current and expected earnings, capital needs, rating agency considerations and requirements for financial flexibility. The amount and timing of share repurchases depends on key capital ratios, rating agency expectations, the generation of dividends from our subsidiaries and an evaluation of the costs and benefits associated with alternative uses of capital. We paused our common stock repurchases under our buyback program beginning in the fourth quarter of 2022, and we expect the pause to continue through the end of 2023. For additional information regarding share repurchases, see “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – (c) Issuer Purchases of Equity Securities.”
Details underlying return of capital to common stockholders (in millions) were as follows:
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| For the Years Ended December 31, |
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| 2022 |
| 2021 |
| 2020 |
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Dividends to common stockholders | $ | 310 |
| $ | 319 |
| $ | 311 |
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Repurchase of common stock |
| 550 |
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| 1,105 |
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| 275 |
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Total cash returned to common stockholders | $ | 860 |
| $ | 1,424 |
| $ | 586 |
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Number of shares repurchased |
| 8.7 |
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| 16.2 |
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| 4.9 |
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Alternative Sources of Liquidity
Inter-Company Cash Management Program
In order to manage our capital more efficiently, we have an inter-company cash management program where certain subsidiaries can lend to or borrow from the holding company to meet short-term borrowing needs. The cash management program is essentially a series of demand loans between LNC and participating subsidiaries that reduces overall borrowing costs by allowing LNC and its subsidiaries to access internal resources instead of incurring third-party transaction costs. As of December 31, 2022, the holding company had a net outstanding receivable (payable) of $62 million from (to) certain subsidiaries resulting from loans made by subsidiaries in excess of amounts placed (borrowed) by the holding company and subsidiaries in the inter-company cash management account. Any change in holding company cash management program balances is offset by the immediate and equal change in holding company cash and invested cash. Loans under the cash management program are permitted under applicable insurance laws subject to certain restrictions. For our Indiana-domiciled insurance subsidiary, the borrowing and lending limit is currently 3% of the insurance company’s admitted assets as of its most recent year end. For our New York-domiciled insurance subsidiary, it may borrow from LNC less than 2% of its admitted assets as of its most recent year end but may not lend any amounts to LNC.
Facility Agreement for Senior Notes Issuance
LNC entered into a facility agreement in 2020 with a Delaware trust that gives LNC the right over a 10-year period to issue, from time to time, up to $500 million of 2.330% senior notes to the trust in exchange for a corresponding amount of U.S. Treasury securities held by the trust. By agreeing to purchase the 2.330% senior notes in exchange for U.S. Treasury securities upon exercise of the issuance right, the trust will provide a source of liquid assets for the Company. The issuance right will be exercised automatically in full upon our failure to make certain payments to the trust, if the failure to pay is not cured within 30 days, or upon certain bankruptcy events involving LNC. We are also required to exercise the issuance right in full if our consolidated stockholders’ equity (excluding AOCI) falls below a minimum threshold (which was $2.75 billion as of December 31, 2022, and is subject to adjustment from time to time in certain cases) and upon certain other events described in the facility agreement. For additional information, see Note 12.
Federal Home Loan Bank
Our primary insurance subsidiary, LNL, is a member of the Federal Home Loan Bank (“FHLB”) of Indianapolis (“FHLBI”). Membership allows LNL access to the FHLBI’s financial services, including the ability to obtain loans and to issue funding agreements as an alternative source of liquidity that are collateralized by qualifying mortgage-related assets, agency securities or U.S. Treasury securities. Borrowings under this facility are subject to the FHLBI’s discretion and require the availability of qualifying assets at LNL. As of December 31, 2022, LNL had an estimated maximum borrowing capacity of $7.0 billion under the FHLBI facility and maximum available borrowing based on qualifying assets of $6.1 billion. As of December 31, 2022, LNL had outstanding borrowings of $3.1 billion under this facility reported within payables for collateral on investments on the Consolidated Balance Sheets. LLANY is a member of the Federal Home Loan Bank of New York (“FHLBNY”) with an estimated maximum borrowing capacity of $750 million. Borrowings under this facility are subject to the FHLBNY’s discretion and require the availability of qualifying assets at LLANY. As of December 31, 2022, LLANY had no outstanding borrowings under this facility. For additional information, see “Payables for Collateral on Investments” in Note 4.
Securities Lending Programs and Repurchase Agreements
Our insurance subsidiaries, by virtue of their general account fixed-income investment holdings, can access liquidity through securities lending programs and repurchase agreements. As of December 31, 2022, our insurance subsidiaries had securities pledged under securities lending agreements with a carrying value of $298 million. In addition, our insurance and reinsurance subsidiaries had access to $2.25 billion through committed repurchase agreements, of which $25 million was utilized as of December 31, 2022. The cash received in our securities lending programs and repurchase agreements is typically invested in cash and invested cash or fixed maturity AFS securities. For additional information, see “Payables for Collateral on Investments” in Note 4.
Collateral on Derivative Contracts
Our cash flows associated with collateral received from counterparties (when we are in a net collateral payable position) and posted with counterparties (when we are in a net collateral receivable position) change as the market value of the underlying derivative contract changes. The net collateral position depends on changes in interest rates and equity markets related to the amount of the exposures hedged. As of December 31, 2022, we were in a net collateral payable position of $3.1 billion compared to $4.9 billion as of December 31, 2021. In the event of adverse changes in fair value of our derivative instruments, we may need to post collateral with a counterparty. If we do not have sufficient high-quality securities or cash and invested cash to provide as collateral, we have committed liquidity sources through facilities that can provide up to $1.25 billion of additional liquidity to help meet collateral needs. Access to such facilities is contingent upon interest rates having achieved certain threshold levels. In addition to these facilities, we have the facility agreement for senior notes issuance, the FHLB facilities and the repurchase agreements discussed above as well as the five-year revolving credit facility discussed in Note 12 to leverage that would be eligible for collateral posting. For additional information, see “Credit Risk” in Note 5.
Material Cash Outflows
Details underlying our estimated material cash outflows as of December 31, 2022, were as follows:
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| Less |
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| Than |
| 1 - 3 |
| 3 - 5 |
| Than |
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| 1 Year |
| Years |
| Years |
| 5 Years |
| Total |
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Future contract benefits and other contract holder |
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obligations (1) | $ | 22,681 |
| $ | 46,546 |
| $ | 48,204 |
| $ | 402,968 |
| $ | 520,399 |
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Short-term and long-term debt (2) |
| 500 |
|
| 550 |
|
| 400 |
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| 4,881 |
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| 6,331 |
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Reserve financing and LOC expenses (3) |
| 66 |
|
| 125 |
|
| 112 |
|
| 256 |
|
| 559 |
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Payables for collateral on investments (4) |
| 3,428 |
|
| - |
|
| - |
|
| - |
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| 3,428 |
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Investment commitments (5) |
| 651 |
|
| 441 |
|
| 1,142 |
|
| 151 |
|
| 2,385 |
|
Operating leases (6) |
| 44 |
|
| 80 |
|
| 52 |
|
| 15 |
|
| 191 |
|
Finance leases (6) |
| 82 |
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| 25 |
|
| 4 |
|
| - |
|
| 111 |
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Certain financing arrangements (7) |
| 43 |
|
| 222 |
|
| 366 |
|
| - |
|
| 631 |
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Retirement and other plans (8) |
| 101 |
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| 200 |
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| 195 |
|
| 453 |
|
| 949 |
|
Total | $ | 27,596 |
| $ | 48,189 |
| $ | 50,475 |
| $ | 408,724 |
| $ | 534,984 |
|
(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 and known payments under deferred compensation arrangements. In addition to these benefit payments, we periodically fund the employees’ defined benefit plans. See Note 17 for additional information.
Ratings
Financial Strength Ratings
See “Part I – Item 1. Business – Financial Strength Ratings” for information on our financial strength ratings.
Credit Ratings
Our indicative credit ratings published by the primary rating agencies are set forth below. Securities are rated at the time of issuance so actual ratings may differ from the indicative ratings. There may be other rating agencies that also provide credit ratings, which we do not disclose in our reports. Each rating should be evaluated independently of any other rating. All credit ratings are on outlook negative except for the ratings assigned by S&P, which are on outlook stable.
As of February 13, 2023, our indicative long-term credit ratings as published by the principal rating agencies that rate our long-term credit are indicated in the following table.
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|
|
|
|
|
|
|
AM Best |
| Fitch |
| Moody's |
| S&P |
|
“aaa to c” |
| “AAA to D” |
| “Aaa to C” |
| “AAA to D” |
|
bbb+ |
| BBB+ |
| Baa1 |
| BBB+ |
|
(8th of 22) |
| (8th of 21) |
| (8th of 21) |
| (8th of 22) |
|
As of February 13, 2023, our indicative short-term credit ratings as published by the principal rating agencies that rate our short-term credit are indicated in the following table.
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|
|
|
|
|
|
|
AM Best |
| Fitch |
| Moody's |
| S&P |
|
“AMB-1+ to AMB-4” |
| “F1 to D” |
| “P-1 to NP” |
| “A-1+ to D” |
|
AMB-2 |
| F2 |
| P-2 |
| A-2 |
|
(3rd of 6) |
| (3rd of 8) |
| (2nd of 4) |
| (3rd of 7) |
|
All of our credit ratings are subject to revision or withdrawal at any time by the rating agencies, and therefore, no assurance can be given that we can maintain these ratings. A downgrade of our credit ratings could affect our ability to raise additional debt with terms and conditions similar to our current debt, and accordingly, likely increase our cost of capital. In addition, a downgrade of these ratings could make it more difficult to raise capital to refinance any maturing debt obligations, to support business growth at our insurance subsidiaries and to maintain or improve the current financial strength ratings of our insurance subsidiaries described in “Part I – Item 1. Business – Financial Strength Ratings.”
If our current financial strength ratings or credit ratings were downgraded in the future, terms in our derivative agreements may be triggered, which could negatively affect overall liquidity. For the majority of our derivative counterparties, there is a termination event with respect to LNC if its long-term senior debt ratings drop below BBB-/Baa3 (S&P/Moody’s); or with respect to LNL if its financial strength ratings drop below BBB-/Baa3 (S&P/Moody’s). In addition, contractual selling agreements with intermediaries could be negatively affected, which could have an adverse effect on overall sales of annuities, life insurance and investment products.
See “Part I – Item 1A. Risk Factors – Covenants and Ratings – A downgrade in our financial strength or credit ratings could limit our ability to market products, increase the number or value of policies being surrendered and/or hurt our relationships with creditors” for more information.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We analyze and manage the risks arising from market exposures of financial instruments, as well as other risks, in an integrated asset-liability management process that considers diversification. By aggregating the potential effect of market and other risks on the entire enterprise, we estimate, review and in some cases manage the risk to our earnings and shareholder value. We have exposures to several market risks including interest rate risk, equity market risk, credit risk and, to a lesser extent, foreign currency exchange risk. The exposures of financial instruments to market risks, and the related risk management processes, are most important to our business where most of the investments support accumulation and investment-oriented insurance products. As an important element of our integrated asset-liability management processes, we use derivatives to minimize the effects of changes in interest levels, the shape of the yield curve, currency movements and volatility. In this context, derivatives serve to minimize interest rate risk by mitigating the effect of significant increases in interest rates on our earnings. Additional market exposures exist in our other general account insurance products and in our debt structure and derivatives positions. Our primary sources of market risk are substantial, relatively rapid and sustained increases or decreases in interest rates or a sharp drop in equity market values. These market risks are discussed in detail in the following pages and should be read in conjunction with the consolidated financial statements and the accompanying Notes presented in “Item 8. Financial Statements and Supplementary Data,” as well as “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Interest Rate Risk
Interest rate risk is the risk of financial loss due to adverse changes in the value of assets and liabilities due to movements in interest rates. We are exposed to interest rate risk arising from our fixed maturity securities and interest sensitive liabilities.
With respect to accumulation and investment-oriented products, we seek to earn a stable and profitable spread, or margin, between investment income we earn on our investments and interest credited to account values of our contract holders. If we have adverse experience on investments that cannot be passed on to customers, our spreads are reduced. The combination of a probable range of interest rate changes over the next 12 months, asset-liability management strategies, flexibility in adjusting policy crediting rate levels and protection afforded by policy surrender charges all work together to mitigate this risk. The interest rate scenarios of concern are those in which there is a substantial, relatively prolonged decrease in interest rates that is sustained over a long period or a rapid increase in interest rates.
Significant Interest Rate Exposures
The following provides a general measure of our significant interest rate risk; principal, including amortization of premiums and discounts, notional amounts, and estimated fair values of assets, liabilities and derivatives are shown by year of maturity (dollars in millions) as of December 31, 2022:
(1)The information shown is for our fixed maturity securities and mortgage loans on real estate that support these insurance contracts.
(2)The indexes are the 5-year and 10-year constant maturity swap.
(3)The Constant Maturity Treasury (“CMT”) curve is the applicable 5-year, 10-year or 30-year CMT forward curve.
(4)Includes notional of $354 million and fair value of $21 million that support our modified coinsurance agreements. Investment results for these agreements are passed directly to the reinsurers.
The following provides the principal, including amortization of premiums and discounts, notional amounts, and estimated fair values of assets, liabilities and derivatives (in millions) having significant interest rate risks as of December 31, 2021:
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|
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|
|
|
|
|
|
|
|
|
| Principal/ |
|
|
|
| |
| Notional |
| Estimated |
| ||
| Amount |
| Fair Value |
| ||
Fixed maturity AFS securities | $ | 105,177 |
| $ | 118,746 |
|
Trading securities |
| 4,170 |
|
| 4,482 |
|
Mortgage loans on real estate |
| 18,074 |
|
| 18,700 |
|
Investment-type insurance contracts (1) |
| 50,605 |
|
| 53,416 |
|
Debt |
| 6,331 |
|
| 7,009 |
|
Interest rate and foreign currency swaps |
| 61,991 |
|
| 276 |
|
Interest rate cap corridors |
| 26,800 |
|
| - |
|
Reverse Treasury locks |
| 1,950 |
|
| 80 |
|
Total return swaps |
| 5,407 |
|
| (3 | ) |
Interest rate futures |
| 728 |
|
| - |
|
Foreign currency futures |
| 163 |
|
| - |
|
(1)The information shown is for our fixed maturity securities and mortgage loans on real estate that support these insurance contracts.
Effect of Interest Rate Sensitivity
The following table presents our estimate of the effect on income (loss) from operations by segment (in millions) for the next 12-month period if the level of interest rates were to instantaneously increase or decrease by 1% and remain at those levels immediately after December 31, 2022, relative to interest rates remaining flat:
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|
|
|
|
|
|
|
|
|
|
|
|
| 1% |
| 1% |
| ||
| Increase |
| Decrease |
| ||
Life Insurance | $ | 7 |
| $ | (7 | ) |
Annuities (1) |
| (8 | ) |
| 12 |
|
Group Protection |
| 4 |
|
| (4 | ) |
Retirement Plan Services |
| 5 |
|
| (7 | ) |
Other Operations |
| - |
|
| (8 | ) |
Income (loss) from operations | $ | 8 |
| $ | (14 | ) |
(1)Includes the impact on bond funds in our separate accounts, which move in the opposite direction of interest rates.
For purposes of this estimate, we assumed asset purchases are made at prevailing new money rates and exclude the impact of new business, unlocking, persistency, hedge program performance or customer behavior caused by the interest rate changes.
Interest Rate Risk on Fixed Insurance Businesses – Falling Rates
In periods of declining interest rates, we have to reinvest the cash we receive as interest or return of principal on our investments in lower yielding instruments. Moreover, borrowers may prepay fixed-income securities, commercial mortgages and MBS in our general accounts in order to borrow at lower market rates, which exacerbates this risk. Because we are entitled to reset the interest rates on our fixed-rate annuities only at limited, pre-established intervals, and because many of our contracts have guaranteed minimum interest or crediting rates, our spreads could decrease and potentially become negative.
Prolonged historically low rates are not healthy for our business fundamentals. However, we have recognized this risk and have been proactive in our investment strategies, product designs, crediting rate strategies and overall asset-liability practices to mitigate the risk of unfavorable consequences in this type of environment. For some time now, new products have been sold with low minimum crediting floors, and we apply disciplined asset-liability management standards, such as locking in spreads on these products at the time of issue. See “Part I – Item 1A. Risk Factors – Market Conditions – Changes in interest rates and sustained low interest rates may cause interest rate spreads to decrease, impacting our profitability, and make it more challenging to meet certain statutory requirements” for additional information on low interest rate risks.
The following provides detail on the percentage differences between the December 31, 2022, interest rates being credited to contract holders based on the fourth quarter of 2022 declared rates and the respective minimum guaranteed policy rate (in millions), broken out by contract holder account values reported within our segments:
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| Account Values |
| |||||||||||||||
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|
|
|
|
| Retirement |
|
|
|
|
| % |
| |
| Life |
|
|
|
|
|
| Plan |
|
|
|
|
| Account |
| ||
| Insurance (1) |
| Annuities |
|
| Services |
|
| Total |
| Values |
| |||||
Excess of Crediting Rates over Contract Minimums |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discretionary rate setting products: (2) |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occurring within the next twelve months: (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No difference | $ | 28,464 |
|
| $ | 9,184 |
|
| $ | 17,678 |
|
| $ | 55,326 |
| 52.4% |
|
Up to 0.50% |
| 158 |
|
|
| 2,664 |
|
|
| 1,467 |
|
|
| 4,289 |
| 4.1% |
|
0.51% to 1.00% |
| 196 |
|
|
| 2,964 |
|
|
| 3,415 |
|
|
| 6,575 |
| 6.2% |
|
1.01% to 1.50% |
| 57 |
|
|
| 2,027 |
|
|
| 236 |
|
|
| 2,320 |
| 2.2% |
|
1.51% to 2.00% |
| 3,536 |
|
|
| 1,422 |
|
|
| - |
|
|
| 4,958 |
| 4.7% |
|
2.01% to 2.50% |
| 13 |
|
|
| 223 |
|
|
| - |
|
|
| 236 |
| 0.2% |
|
2.51% to 3.00% |
| 113 |
|
|
| 95 |
|
|
| - |
|
|
| 208 |
| 0.2% |
|
3.01% or greater |
| 59 |
|
|
| 2,323 |
|
|
| - |
|
|
| 2,382 |
| 2.3% |
|
Occurring after the next twelve months (4) |
| - |
|
|
| 4,234 |
|
|
| - |
|
|
| 4,234 |
| 4.0% |
|
Total discretionary rate setting products |
| 32,596 |
|
|
| 25,136 |
|
|
| 22,795 |
|
|
| 80,527 |
| 76.3% |
|
Other contracts (5) |
| - |
|
|
| 22,603 |
|
|
| 2,342 |
|
|
| 24,945 |
| 23.7% |
|
Total account values | $ | 32,596 |
|
| $ | 47,739 |
|
| $ | 25,137 |
|
| $ | 105,472 |
| 100.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of discretionary rate setting product account |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
values at minimum guaranteed rates |
| 87.3% |
|
|
| 36.5% |
|
|
| 77.6% |
|
|
| 68.7% |
|
|
|
(1)Excludes policy loans.
(2)Contracts currently within new money rate bands are grouped according to the corresponding portfolio rate band in which they will fall upon their first anniversary.
(3)The average crediting rates were 88 basis points, 14 basis points and 24 basis point in excess of average minimum guaranteed rates for our Life Insurance, Annuities and Retirement Plan Services segments, respectively.
(4)The average crediting rates were 148 basis points in excess of average minimum guaranteed rates. Of our account values for these products, 71% are scheduled to reset in more than one year but not more than two years; 15% are scheduled to reset in more than two years but not more than three years; and 14% are scheduled to reset in more than three years.
(5)For Annuities, this amount relates primarily to income annuity and short-term dollar cost averaging business. For Retirement Plan Services, this amount relates primarily to indexed-based rate setting products in which the average crediting rates were 8 basis points in excess of average minimum guaranteed rates, and 82% of account values were already at their minimum guaranteed rates.
The maturity structure and call provisions of the related portfolios are structured to afford protection against erosion of investment portfolio yields during periods of declining interest rates. We devote extensive effort to evaluating the risks associated with falling interest rates by simulating asset and liability cash flows for a wide range of interest rate scenarios. We seek to manage these exposures by maintaining a suitable maturity structure and by limiting our exposure to call risk in each respective investment portfolio.
Interest Rate Risk on Fixed Insurance Businesses – Rising Rates
For both universal life insurance and annuities, a rapid rise in interest rates poses risks of deteriorating spreads and high surrenders. The portfolios supporting these products have fixed-rate assets laddered over maturities generally ranging from 1 to 10 years or more. Accordingly, the earned rate on each portfolio lags behind changes in market yields. As rates rise, the lag may be increased by slowing MBS prepayments. The greater and faster the rise in interest rates, the more the earned rate will tend to lag behind market rates. If we set renewal crediting rates to earn the desired spread, the gap between our renewal crediting rates and competitors’ new money rates may be wide enough to cause increased surrenders that could cause us to liquidate a portion of our portfolio to fund these surrenders. If we credit more competitive renewal rates to limit surrenders, our spreads will narrow. We devote extensive effort to evaluating these risks by simulating asset and liability cash flows for a wide range of interest rate scenarios. Such analysis has led to adjustments in the target maturity structure and to hedging the risk of rising rates by entering into interest rate cap corridor agreements. With these instruments in place, the potential adverse effect of a rapid and sustained rise in rates is kept within our risk tolerances. See “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” for more information on the risks related to rising interest rates.
Short-Term and Long-Term Debt
We manage the timing of maturities and the mixture of fixed-rate and floating-rate debt as part of the process of integrated management of interest rate risk for the entire enterprise. See Note 12 for additional information on our debt.
Derivatives
See Note 5 for information on our derivatives used to hedge our exposure to changes in interest rates.
Equity Market Risk
Equity market risk is the risk of financial loss due to changes in the value of equity securities or equity indices. Our revenues, assets and liabilities are exposed to equity market risk that we often hedge with derivatives. Due to the use of our RTM process and our hedging strategies, we expect that, in general, short-term fluctuations in the equity markets should not have a significant effect on our quarterly earnings from unlocking of assumptions for DAC, VOBA, DSI and DFEL. However, earnings are affected by equity market movements on account values and the related fees we earn on those assets. Refer to “Critical Accounting Policies and Estimates – DAC, VOBA, DSI and DFEL – Reversion to the Mean” in the MD&A for further discussion of the effects of equity markets on our RTM.
Fee Income
The fees earned from variable life insurance and variable annuities products are exposed to the risk of a decline in equity market values. These fees are generally a fixed percentage of the market value of account values. In a severe equity market decline, fee income could be reduced by not only reduced market valuations but also by customer withdrawals and redemptions. Such withdrawals and redemptions from equity funds and accounts might be partially offset by transfers to our fixed-income accounts and the transfer of funds to us from our competitors’ customers.
Equity Assets
While we invest in equity assets with the expectation of achieving higher returns than would be available in our core fixed-income investments, the returns on and values of these equity investments are subject to somewhat greater market risk than our fixed-income investments. These investments, however, add diversification benefits to our fixed-income investments.
Derivatives Hedging Equity Market Risk
We enter into derivative transactions to hedge our exposure to equity market risk. Such derivatives include over-the-counter equity options, total return swaps, variance swaps, and equity futures. See Note 5 for additional information on our derivatives used to hedge our exposure to equity market fluctuations.
The following provides the sensitivity of price changes (in millions) to our equity assets owned and derivatives hedging equity market risk:
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|
|
|
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|
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|
|
|
|
|
|
| As of December 31, 2022 |
| As of December 31, 2021 |
| ||||||||||||||
| Carrying/ |
|
|
|
| 10% Fair |
| 10% Fair |
| Carrying/ |
|
|
|
| ||||
| Notional |
| Estimated |
| Value |
| Value |
| Notional |
| Estimated |
| ||||||
| Value |
| Fair Value |
| Increase (1) |
| Decrease (1) |
| Value |
| Fair Value |
| ||||||
Equity Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic equities | $ | 282 |
| $ | 282 |
| $ | 28 |
| $ | (28 | ) | $ | 244 |
| $ | 244 |
|
Foreign equities |
| 145 |
|
| 145 |
|
| 15 |
|
| (15 | ) |
| 74 |
|
| 74 |
|
Total equity securities |
| 427 |
|
| 427 |
|
| 43 |
|
| (43 | ) |
| 318 |
|
| 318 |
|
Hedge funds |
| 265 |
|
| 265 |
|
| 27 |
|
| (27 | ) |
| 265 |
|
| 265 |
|
Private equities |
| 2,793 |
|
| 2,793 |
|
| 279 |
|
| (279 | ) |
| 2,631 |
|
| 2,631 |
|
Other equity interests |
| 3 |
|
| 3 |
|
| - |
|
| - |
|
| 12 |
|
| 14 |
|
Total equity assets | $ | 3,488 |
| $ | 3,488 |
| $ | 349 |
| $ | (349 | ) | $ | 3,226 |
| $ | 3,228 |
|
Derivatives Hedging Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Risk |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Call options (2) | $ | 40,821 |
| $ | 4,330 |
| $ | 1,407 |
| $ | (1,201 | ) | $ | 34,140 |
| $ | 5,441 |
|
Equity futures |
| 983 |
|
| - |
|
| (98 | ) |
| 98 |
|
| 1,453 |
|
| - |
|
Put options |
| 47,206 |
|
| (911 | ) |
| (34 | ) |
| 455 |
|
| 17,971 |
|
| (931 | ) |
Total return swaps |
| 25,247 |
|
| (144 | ) |
| (701 | ) |
| 701 |
|
| 25,031 |
|
| (157 | ) |
Total derivatives hedging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity market risk | $ | 114,257 |
| $ | 3,275 |
| $ | 574 |
| $ | 53 |
| $ | 78,595 |
| $ | 4,353 |
|
(1)Assumes a plus or minus 10% change in underlying indexes. Estimated fair value does not reflect daily settlement of futures or monthly settlement of total return swaps.
(2)Includes notional of $1.8 billion and fair value of $18 million that support our modified coinsurance agreements. Investment results for these agreements are passed directly to the reinsurers.
Liabilities
We have exposure to changes in our stock price through both our deferred and stock-based incentive compensation plans. For additional information on our deferred and stock-based incentive compensations plans, see Notes 17 and 18, respectively.
Effect of Equity Market Sensitivity
If the level of the equity markets were to have instantaneously increased or decreased by 1% immediately after December 31, 2022, we estimate the effect on income (loss) from operations for the next 12-month period from the change in asset-based fees and related expenses would be approximately $10 million. For purposes of this estimate, we excluded any effect related to net flows, unlocking, persistency, hedge program performance, policyholder behavior or reduction in account values attributable to contract holder assessments.
The effect of quarterly equity market changes upon fee income and asset-based expenses is generally not fully recognized in the first quarter of the change because fee income is earned and related expenses are incurred based upon daily variable account values. The difference between the current period average daily variable account values compared to the end-of-period variable account values affects fee income in subsequent periods. Additionally, the effect on earnings may not necessarily be symmetrical with comparable increases or decreases in the equity markets. This discussion concerning the estimated effects of ongoing equity market volatility on the fees we earn from account values is intended to be illustrative and is concentrated primarily in our Annuities and Retirement Plan Services segments. Actual effects may vary depending on a variety of factors, many of which are outside of our control, such as changing customer behaviors that might result in changes in the mix of our business between variable and fixed annuity contracts, switching among investment alternatives available within variable products, changes in sales production levels or changes in policy persistency. For purposes of this guidance, the change in account values is assumed to correlate with the change in the relevant index.
Credit Risk
Credit risk is the risk to earnings and capital that arises from uncertainty of an obligor’s or counterparty’s ability or willingness to meet its obligations in accordance with contractually agreed upon terms. We are exposed to credit risk primarily by our investments in corporate bonds and mortgage loans on real estate and through our use of derivatives.
Investments
The majority of our credit risk is concentrated in investment holdings. Our portfolio of investments was $131.8 billion and $153.6 billion as of December 31, 2022 and 2021, respectively. Of this total, $81.3 billion and $100.9 billion consisted of corporate bonds and $18.3 billion and $18.0 billion consisted of mortgage loans on real estate as of December 31, 2022 and 2021, respectively. We manage the risk of adverse default experience on these investments by applying disciplined credit evaluation and underwriting standards, prudently limiting allocations to lower-quality, higher-yielding investments and diversifying exposures by issuer, industry, region and property type. For each counterparty or borrowing entity and its affiliates, our exposures from all transactions are aggregated and managed in relation to formal limits set by rating quality. Additional diversification limits, such as limits per industry, are also applied. We remain exposed to occasional adverse cyclical economic downturns during which default rates may be significantly higher than the long-term historical average used in pricing.
Derivatives
We are exposed to counterparty credit risk through our various derivative contracts. We depend on the ability of derivative product dealers and their guarantors to honor their obligations to pay the contract amounts under various derivatives agreements. In order to minimize the risk of default losses, we diversify our exposures among several dealers and limit the amount of exposure to each in accordance with the credit rating of each dealer or its guarantor. We generally limit our selection of counterparties that are obligated under these derivative contracts to those with an “A” credit rating or above. See Note 5 for additional information on managing the credit risk of our counterparties.
We are also exposed to credit risk through the use of certain derivatives. We buy CDSs to minimize our exposure to credit-related events with respect to a single entity or referenced index. We also sell CDSs to offer credit protection to our contract holders and investors with respect to a single entity or referenced index. See Note 5 for additional information on our use of credit derivatives.
Foreign Currency Exchange Risk
Foreign Currency Denominated Investments
Foreign currency exchange risk is the risk of financial loss due to changes in the relative value between currencies. We have foreign currency exchange risk in our non-U.S. dollar denominated investments, which primarily consist of fixed maturity securities. The currency risk is hedged using foreign currency derivatives of the same currency as the foreign denominated security.
We invest in fixed maturity securities denominated in foreign currencies for incremental return and risk diversification relative to U.S. dollar-denominated securities. We use foreign currency swaps to hedge the foreign exchange risk related to our investment in fixed maturity securities denominated in foreign currencies. As of December 31, 2022 and 2021, our unhedged positions consisted of zero and $4 million, respectively, of principal in U.S. dollar equivalents of Canadian-denominated investments with maturity dates up to 2025 and an average interest rate of 2%. As of the same dates, our modified coinsurance portfolios were partially hedged and consisted of $164 million and $181 million, respectively, of principal in U.S. dollar equivalents of foreign denominated investments with maturity dates up to 2063 and an average interest rate of 4%. Investment results for our modified coinsurance agreements are passed directly to the reinsurers. See “Interest Rate Risk – Significant Interest Rate Exposures” above for our notional amounts in U.S. dollar equivalents (in millions) by year of maturity for our foreign currency swaps.
See Note 5 for additional information on our foreign currency swaps used to hedge our exposure to foreign currency exchange risk.
Consolidated Financial Statements
Table of Contents
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| Page |
Management’s Annual Report on Internal Control Over Financial Reporting | 103 |
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42) | 104 |
108 | |
109 | |
110 | |
111 | |
112 | |
Note 1 – Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies | 112 |
126 | |
128 | |
129 | |
138 | |
147 | |
149 | |
150 | |
Note 9 – Goodwill and Specifically Identifiable Intangible Assets | 152 |
153 | |
154 | |
155 | |
157 | |
162 | |
166 | |
167 | |
167 | |
169 | |
171 | |
173 | |
185 | |
188 | |
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Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for Lincoln National Corporation to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with United States of America generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with United States of America generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of internal control over financial reporting effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Management assessed our internal control over financial reporting as of December 31, 2022, the end of our fiscal year. Management based its assessment on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment.
Based on the assessment, management has concluded that our internal control over financial reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with United States of America generally accepted accounting principles.
The effectiveness of our internal control over financial reporting as of December 31, 2022, has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included on the following page.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Lincoln National Corporation
Opinion on Internal Control Over Financial Reporting
We have audited Lincoln National Corporation’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Lincoln National Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedules listed in the Index at Item 15(a) and our report dated February 16, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
February 16, 2023
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Lincoln National Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Lincoln National Corporation (the Company) as of December 31, 2022 and 2021, the related consolidated statements of comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 16, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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| Deferred Acquisition Costs Asset and Future Contract Benefits Liability |
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| |
Description of the Matter |
| At December 31, 2022, deferred acquisition costs totaled $12.8 billion and future contract benefits liabilities totaled $42.2 billion, a portion of which related to universal life-type contracts with secondary guarantees and variable annuity contracts with guaranteed benefit riders.
The carrying amount of the deferred acquisition costs related to these products is the total of costs deferred less amortization, which is calculated in relation to the present value of estimated gross profits of the underlying contracts. As described in Notes 1 (see section on DAC, VOBA, DSI and DFEL) and 7 to the consolidated financial statements, there is a significant amount of uncertainty inherent in calculating estimated gross profits as the calculation includes significant management judgment in developing certain assumptions, such as expected future frequency and level of mortality claims, investment margins, retention and rider utilization. Management’s assumptions are adjusted, also known as unlocked, for emerging experience and expected changes in trends. The unlocking results in deferred acquisition cost amortization being recalculated, using the new assumptions for estimated gross profits, that results either in additional or less cumulative amortization expense.
The future contract benefits liability related to these product guarantees is based on estimates of how much the Company will need to pay for future benefits and the amount of fees to be collected from policyholders for these policy features. As described in Note 1 to the consolidated financial statements (see section on Future Contract Benefits), there is significant uncertainty inherent in estimating this liability because there is a significant amount of management judgment involved in developing certain assumptions that impact the liability balance, which are consistent with the assumptions used to amortize the related deferred acquisition cost asset as noted above and which include expected future frequency and level of mortality claims, investment margins, retention and rider utilization.
Auditing the valuation of deferred acquisition costs and future contract benefits liabilities related to these products was complex and required the involvement of our actuarial specialists due to the high degree of judgment used by management in setting the assumptions used in the estimate of both the amortization of deferred acquisition costs and the future contract benefits liability related to these products. |
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How We Addressed the Matter in Our Audit |
| We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the deferred acquisition costs and future contract benefits liability estimation processes, including, among others, controls related to the review and approval processes that management has in place for the assumptions used in estimating the estimated gross profits related to deferred acquisition costs and the future contract benefits liability. This included testing controls related to management’s evaluation of the need to update assumptions based on the comparison of actual Company experience to previous assumptions and updating investment margins for current and expected future market conditions.
We involved actuarial specialists to assist with our audit procedures which included, among others, an evaluation of the methodology applied by management with those methods used in prior periods. To assess the significant assumptions used by management, we compared the significant assumptions noted above to historical experience, observable market data or management’s estimates of prospective changes in these assumptions. In addition, we performed an independent recalculation of estimated gross profits related to deferred policy acquisition costs and the future policy benefit reserves for a sample of cohorts or contracts which we compared to the actuarial model used by management. |
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| Variable Annuity Guaranteed Living Benefit Riders Embedded Derivatives |
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Description of the Matter |
| The Company’s variable annuity guaranteed living benefit riders include an embedded derivative, represented by an asset totaling $1.7 billion as of December 31, 2022, related to the non-life contingent feature of the product which is accounted for at fair value, with changes in fair value recognized in income. As described in Notes 1 (see section on Future Contract Benefits), 5 and 20 to the consolidated financial statements, there is a significant amount of estimation uncertainty inherent in measuring the fair value of the embedded derivative because of the sensitivity of certain assumptions underlying the estimate, including stock market performance, policy lapse experience and rider utilization. Management’s assumptions are adjusted over time for emerging experience and expected changes in trends, resulting in changes to the estimated fair value of the embedded derivative.
Auditing the valuation of the embedded derivative related to variable annuity guaranteed living benefit riders was complex and required the involvement of our actuarial specialists due to the high degree of judgment used by management in setting the assumptions used in the estimate of the value of the embedded derivative. |
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How We Addressed the Matter in Our Audit |
| We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the embedded derivative estimation process, including, among others, controls related to the review and approval processes that management has in place to develop the assumptions used in measuring the fair value of the embedded derivative. This included testing controls related to management’s evaluation of current and future market conditions and the need to update policy lapse and rider utilization assumptions.
We involved actuarial specialists to assist with our audit procedures which included, among others, an evaluation of the methodology applied by management with those methods used in prior periods. To assess the significant assumptions used by management, we compared the significant assumptions noted above to historical experience, observable market data or management’s estimates of prospective changes in these assumptions. In addition, we performed an independent recalculation of the embedded derivative for a sample of contracts which we compared to the fair value model used by management.
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| Goodwill Impairment Charge |
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| |
Description of the Matter |
| For the year ended December 31, 2022, the Company recorded a goodwill impairment charge of $634 million. As discussed in Notes 1 (see section on Goodwill) and 9 of the consolidated financial statements, goodwill is tested for impairment at least annually at the reporting unit level. 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 the Company’s discount rate assumption, the Company accelerated the quantitative goodwill impairment test for the Life Insurance reporting unit as the Company concluded that there were indicators of impairment. Based on this quantitative test, the Company incurred an impairment during the third quarter of 2022 of the Life Insurance reporting unit goodwill of $634 million, which represented a write-off of the entire balance of goodwill for the reporting unit. Determining the fair value of the Life Insurance reporting unit as part of the goodwill impairment analysis is sensitive to significant assumptions such as the discount rate, and other relevant assumptions impacting projected financial information, including policyholder behavior assumptions, and those impacted by market or economic conditions.
Auditing the fair value of the Company’s Life Insurance reporting unit was complex and required the involvement of our valuation and actuarial specialists due to the high degree of judgment used by management. |
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How We Addressed the Matter in Our Audit |
| We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment review process. This included, among others, controls related to the review and approval processes that management has in place to develop the assumptions used in the estimation process, including management’s determination of the applicable discount rate, and the profitability of in-force business including policyholder behavior assumptions for the Life Insurance reporting unit.
We involved actuarial and valuation specialists to assist with our audit procedures which included, among others, an evaluation of the methodology applied by management with those methods used in prior periods. To assess the significant assumptions used by management, we compared the significant assumptions noted above to current industry and economic trends and recent market transactions. We reviewed the historical accuracy of management’s estimate and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the Life Insurance reporting unit that would result from changes in the assumptions.
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/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1966.
Philadelphia, Pennsylvania
February 16, 2023
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
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| As of December 31, |
| |||||
|
| 2022 |
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| 2021 |
| ||
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|
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ASSETS |
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Investments: |
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|
|
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Fixed maturity available-for-sale securities, at fair value |
|
|
|
|
|
|
|
|
(amortized cost: 2022 - $111,707; 2021 - $105,177; allowance for credit losses: 2022 - $22; 2021 - $19) |
| $ | 99,736 |
|
| $ | 118,746 |
|
Trading securities |
|
| 3,498 |
|
|
| 4,482 |
|
Equity securities |
|
| 427 |
|
|
| 318 |
|
Mortgage loans on real estate, net of allowance for credit losses |
|
|
|
|
|
|
|
|
(portion at fair value: 2022 - $487; 2021 - $739) |
|
| 18,301 |
|
|
| 17,991 |
|
Policy loans |
|
| 2,359 |
|
|
| 2,364 |
|
Derivative investments |
|
| 3,736 |
|
|
| 5,437 |
|
Other investments |
|
| 3,739 |
|
|
| 4,292 |
|
Total investments |
|
| 131,796 |
|
|
| 153,630 |
|
Cash and invested cash |
|
| 3,343 |
|
|
| 2,612 |
|
Deferred acquisition costs and value of business acquired |
|
| 13,588 |
|
|
| 6,081 |
|
Accrued investment income |
|
| 1,253 |
|
|
| 1,189 |
|
Reinsurance recoverables, net of allowance for credit losses |
|
| 19,882 |
|
|
| 20,295 |
|
Goodwill |
|
| 1,144 |
|
|
| 1,778 |
|
Other assets |
|
| 20,895 |
|
|
| 19,133 |
|
Separate account assets |
|
| 143,536 |
|
|
| 182,583 |
|
Total assets |
| $ | 335,437 |
|
| $ | 387,301 |
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|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Liabilities |
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|
Future contract benefits |
| $ | 42,151 |
|
| $ | 41,030 |
|
Other contract holder funds |
|
| 120,800 |
|
|
| 111,702 |
|
Short-term debt |
|
| 500 |
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|
| 300 |
|
Long-term debt |
|
| 5,955 |
|
|
| 6,325 |
|
Payables for collateral on investments |
|
| 6,712 |
|
|
| 8,946 |
|
Other liabilities |
|
| 11,682 |
|
|
| 16,143 |
|
Separate account liabilities |
|
| 143,536 |
|
|
| 182,583 |
|
Total liabilities |
|
| 331,336 |
|
|
| 367,029 |
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|
|
Contingencies and Commitments (See Note 13) |
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| ||
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Stockholders’ Equity |
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|
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Preferred stock – 10,000,000 shares authorized: |
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Series C preferred stock – 20,000 shares authorized, issued and outstanding as of December 31, 2022 |
|
| 493 |
|
|
| - |
|
Series D preferred stock – 20,000 shares authorized, issued and outstanding as of December 31, 2022 |
|
| 493 |
|
|
| - |
|
Common stock – 800,000,000 shares authorized; 169,220,511 and 177,193,515 shares |
|
|
|
|
|
|
|
|
issued and outstanding as of December 31, 2022, and December 31, 2021, respectively |
|
| 4,544 |
|
|
| 4,735 |
|
Retained earnings |
|
| 6,239 |
|
|
| 9,096 |
|
Accumulated other comprehensive income (loss) |
|
| (7,668 | ) |
|
| 6,441 |
|
Total stockholders’ equity |
|
| 4,101 |
|
|
| 20,272 |
|
Total liabilities and stockholders’ equity |
| $ | 335,437 |
|
| $ | 387,301 |
|
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions, except per share data)
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| For the Years Ended December 31, |
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| 2022 |
| 2021 |
| 2020 |
| |||
Revenues |
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Insurance premiums | $ | 6,087 |
| $ | 5,617 |
| $ | 5,372 |
|
Fee income |
| 6,054 |
|
| 6,887 |
|
| 6,371 |
|
Net investment income |
| 5,511 |
|
| 6,115 |
|
| 5,510 |
|
Realized gain (loss) |
| 336 |
|
| (212 | ) |
| (513 | ) |
Amortization of deferred gain on business sold through reinsurance |
| 74 |
|
| 46 |
|
| 41 |
|
Other revenues |
| 722 |
|
| 777 |
|
| 658 |
|
Total revenues |
| 18,784 |
|
| 19,230 |
|
| 17,439 |
|
Expenses |
|
|
|
|
|
|
|
|
|
Interest credited |
| 2,870 |
|
| 2,915 |
|
| 2,923 |
|
Benefits |
| 12,546 |
|
| 8,529 |
|
| 8,677 |
|
Commissions and other expenses |
| 5,095 |
|
| 5,791 |
|
| 5,064 |
|
Interest and debt expense |
| 283 |
|
| 270 |
|
| 284 |
|
Spark program expense |
| 167 |
|
| 87 |
|
| 68 |
|
Impairment of intangibles |
| 634 |
|
| - |
|
| - |
|
Total expenses |
| 21,595 |
|
| 17,592 |
|
| 17,016 |
|
Income (loss) before taxes |
| (2,811 | ) |
| 1,638 |
|
| 423 |
|
Federal income tax expense (benefit) |
| (584 | ) |
| 233 |
|
| (76 | ) |
Net income (loss) |
| (2,227 | ) |
| 1,405 |
|
| 499 |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
Unrealized investment gains (losses) |
| (14,030 | ) |
| (2,535 | ) |
| 3,192 |
|
Foreign currency translation adjustment |
| (20 | ) |
| (2 | ) |
| 5 |
|
Funded status of employee benefit plans |
| (59 | ) |
| 47 |
|
| 61 |
|
Total other comprehensive income (loss), net of tax |
| (14,109 | ) |
| (2,490 | ) |
| 3,258 |
|
Comprehensive income (loss) | $ | (16,336 | ) | $ | (1,085 | ) | $ | 3,757 |
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Net Income (Loss) Per Common Share |
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|
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|
|
|
|
|
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Basic | $ | (13.02 | ) | $ | 7.50 |
| $ | 2.58 |
|
Diluted | $ | (13.10 | ) | $ | 7.43 |
| $ | 2.56 |
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Cash Dividends Declared Per Common Share | $ | 1.80 |
| $ | 1.71 |
| $ | 1.62 |
|
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)
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|
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| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Preferred Stock |
|
|
|
|
|
|
|
|
|
Balance as of beginning-of-year | $ | - |
| $ | - |
| $ | - |
|
Issuance of Series C preferred stock |
| 493 |
|
| - |
|
| - |
|
Issuance of Series D preferred stock |
| 493 |
|
| - |
|
| - |
|
Balance as of end-of-year |
| 986 |
|
| - |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
Balance as of beginning-of-year |
| 4,735 |
|
| 5,082 |
|
| 5,162 |
|
Stock compensation/issued for benefit plans |
| 40 |
|
| 85 |
|
| 48 |
|
Retirement of common stock/cancellation of shares |
| (231 | ) |
| (432 | ) |
| (128 | ) |
Balance as of end-of-year |
| 4,544 |
|
| 4,735 |
|
| 5,082 |
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings |
|
|
|
|
|
|
|
|
|
Balance as of beginning-of-year |
| 9,096 |
|
| 8,686 |
|
| 8,854 |
|
Cumulative effect from adoption of new accounting standards |
| - |
|
| - |
|
| (203 | ) |
Net income (loss) |
| (2,227 | ) |
| 1,405 |
|
| 499 |
|
Retirement of common stock |
| (319 | ) |
| (673 | ) |
| (147 | ) |
Common stock dividends declared |
| (311 | ) |
| (322 | ) |
| (317 | ) |
Balance as of end-of-year |
| 6,239 |
|
| 9,096 |
|
| 8,686 |
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss) |
|
|
|
|
|
|
|
|
|
Balance as of beginning-of-year |
| 6,441 |
|
| 8,931 |
|
| 5,673 |
|
Other comprehensive income (loss), net of tax |
| (14,109 | ) |
| (2,490 | ) |
| 3,258 |
|
Balance as of end-of-year |
| (7,668 | ) |
| 6,441 |
|
| 8,931 |
|
Total stockholders’ equity as of end-of-year | $ | 4,101 |
| $ | 20,272 |
| $ | 22,699 |
|
LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
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| For the Years Ended December 31, |
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| 2022 |
| 2021 |
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| 2020 |
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Cash Flows from Operating Activities |
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Net income (loss) | $ | (2,227 | ) | $ | 1,405 |
| $ | 499 |
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Adjustments to reconcile net income (loss) to net cash provided by (used in) |
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operating activities: |
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Realized (gain) loss |
| (336 | ) |
| 212 |
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| 513 |
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Sales and maturities (purchases) of trading securities, net |
| 300 |
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| (108 | ) |
| 266 |
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Amortization of deferred gain on business sold through reinsurance |
| (74 | ) |
| (46 | ) |
| (41 | ) |
Impairment of intangibles |
| 634 |
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| - |
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| - |
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Change in: |
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Deferred acquisition costs, value of business acquired, deferred sales inducements |
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and deferred front-end loads deferrals and interest, net of amortization |
| 115 |
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| 315 |
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| 48 |
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Premiums and fees receivable |
| (54 | ) |
| (93 | ) |
| (21 | ) |
Accrued investment income |
| (67 | ) |
| 16 |
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| (84 | ) |
Insurance liabilities and reinsurance-related balances |
| 5,956 |
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| (1,954 | ) |
| (699 | ) |
Accrued expenses |
| (89 | ) |
| 389 |
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| (18 | ) |
Federal income tax accruals |
| (530 | ) |
| 232 |
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| (98 | ) |
Other |
| 405 |
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| (217 | ) |
| 169 |
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Net cash provided by (used in) operating activities |
| 4,033 |
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| 151 |
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| 534 |
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Cash Flows from Investing Activities |
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Purchases of available-for-sale securities and equity securities |
| (14,813 | ) |
| (16,893 | ) |
| (16,761 | ) |
Sales of available-for-sale securities and equity securities |
| 2,297 |
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| 2,268 |
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| 1,426 |
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Maturities of available-for-sale securities |
| 5,453 |
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| 9,621 |
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| 5,354 |
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Purchases of alternative investments |
| (664 | ) |
| (757 | ) |
| (396 | ) |
Sales and repayments of alternative investments |
| 446 |
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| 377 |
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| 171 |
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Issuance of mortgage loans on real estate |
| (2,503 | ) |
| (3,084 | ) |
| (1,800 | ) |
Repayment and maturities of mortgage loans on real estate |
| 2,255 |
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| 1,881 |
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| 1,154 |
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Repayment (issuance) of policy loans, net |
| 5 |
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| 62 |
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| 50 |
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Net change in collateral on investments, derivatives and related settlements |
| (4,071 | ) |
| 3,261 |
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| 1,474 |
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Other |
| (48 | ) |
| (303 | ) |
| (153 | ) |
Net cash provided by (used in) investing activities |
| (11,643 | ) |
| (3,567 | ) |
| (9,481 | ) |
Cash Flows from Financing Activities |
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Payment of long-term debt, including current maturities |
| (300 | ) |
| - |
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| (1,096 | ) |
Issuance of long-term debt, net of issuance costs |
| 296 |
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| - |
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| 1,289 |
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Payment related to modification or early extinguishment of debt |
| - |
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| (8 | ) |
| (13 | ) |
Payment related to sale-leaseback transactions |
| (70 | ) |
| (59 | ) |
| (47 | ) |
Proceeds from certain financing arrangements |
| 186 |
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| 159 |
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| 109 |
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Deposits of fixed account values, including the fixed portion of variable |
| 15,229 |
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| 12,639 |
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| 14,034 |
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Withdrawals of fixed account values, including the fixed portion of variable |
| (6,913 | ) |
| (6,607 | ) |
| (6,113 | ) |
Transfers from (to) separate accounts, net |
| (195 | ) |
| (340 | ) |
| 528 |
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Common stock issued for benefit plans |
| (16 | ) |
| 20 |
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| (7 | ) |
Issuance of preferred stock, net of issuance costs |
| 986 |
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| - |
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| - |
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Repurchase of common stock |
| (550 | ) |
| (1,105 | ) |
| (275 | ) |
Dividends paid to common stockholders |
| (310 | ) |
| (319 | ) |
| (311 | ) |
Other |
| (2 | ) |
| (60 | ) |
| (6 | ) |
Net cash provided by (used in) financing activities |
| 8,341 |
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| 4,320 |
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| 8,092 |
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Net increase (decrease) in cash, invested cash and restricted cash |
| 731 |
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| 904 |
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| (855 | ) |
Cash, invested cash and restricted cash as of beginning-of-year |
| 2,612 |
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| 1,708 |
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| 2,563 |
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Cash, invested cash and restricted cash as of end-of-year | $ | 3,343 |
| $ | 2,612 |
| $ | 1,708 |
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LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies
Nature of Operations
Lincoln National Corporation and its subsidiaries (“LNC” or the “Company,” which also may be referred to as “we,” “our” or “us”) operate multiple insurance businesses through four business segments. See Note 21 for additional details. The collective group of businesses uses “Lincoln Financial Group” as its marketing identity. Through our business segments, we sell a wide range of wealth protection, accumulation, group protection and retirement income products and solutions. These products primarily include universal life insurance (“UL”), variable universal life insurance (“VUL”), linked-benefit UL and VUL, indexed universal life insurance (“IUL”), term life insurance, fixed and indexed annuities, variable annuities, group life, disability and dental and employer-sponsored retirement plans and services.
Basis of Presentation
The accompanying consolidated financial statements are prepared in accordance with United States of America generally accepted accounting principles (“GAAP”). Certain GAAP policies, which significantly affect the determination of financial condition, results of operations and cash flows, are summarized below.
Certain amounts reported in prior year’s Consolidated Balance Sheets have been reclassified to conform to the presentation adopted in the current year. Specifically, we reclassified premiums and fees receivable and funds withheld reinsurance assets to other assets. We also reclassified reinsurance-related embedded derivatives and funds withheld reinsurance liabilities to other liabilities. These reclassifications had no effect on total assets, total liabilities or stockholders’ equity for the prior year.
Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of LNC and all other entities in which we have a controlling financial interest and any variable interest entities (“VIEs”) in which we are the primary beneficiary. We use the equity method of accounting to recognize all of our investments in limited liability partnerships. All material inter-company accounts and transactions have been eliminated in consolidation.
Our involvement with VIEs is primarily to invest in assets that allow us to gain exposure to a broadly diversified portfolio of asset classes. A VIE is an entity that does not have sufficient equity to finance its own activities without additional financial support or where investors lack certain characteristics of a controlling financial interest. We assess our contractual, ownership or other interests in a VIE to determine if our interest participates in the variability the VIE was designed to absorb and pass onto variable interest holders. We perform an ongoing qualitative assessment of our variable interests in VIEs to determine whether we have a controlling financial interest and would therefore be considered the primary beneficiary of the VIE. If we determine we are the primary beneficiary of a VIE, we consolidate the assets and liabilities of the VIE in the consolidated financial statements.
Accounting Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. In applying these estimates and assumptions, management makes subjective and complex judgments that frequently require assumptions about matters that are uncertain and inherently subject to change, including matters related to or impacted by the COVID-19 pandemic. Actual results could differ from these estimates and assumptions. Included among the material (or potentially material) reported amounts and disclosures that require extensive use of estimates are: fair value of certain financial assets, derivatives, allowances for credit losses, deferred acquisition costs (“DAC”), value of business acquired (“VOBA”), deferred sales inducements (“DSI”), goodwill and other intangibles, future contract benefits, other contract holder funds including deferred front-end loads (“DFEL”), pension plans, stock-based incentive compensation, income taxes including the recoverability of our deferred tax assets, and the potential effects of resolving litigated matters.
Business Combinations
We use the acquisition method of accounting for all business combination transactions, and accordingly, recognize the fair values of assets acquired, liabilities assumed and any noncontrolling interests in the consolidated financial statements. The allocation of fair values may be subject to adjustment after the initial allocation for up to a one-year period as more information becomes available relative to the fair values as of the acquisition date. The consolidated financial statements include the results of operations of any acquired company since the acquisition date.
Fair Value Measurement
Our measurement of fair value is based on assumptions used by market participants in pricing the asset or liability, which may include inherent risk, restrictions on the sale or use of an asset or non-performance risk (“NPR”), which would include our own credit risk. Our estimate of an exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability (“exit price”) in the principal market, or the most advantageous market in the absence of a principal market, for that asset or liability, as opposed to the price that would be paid to acquire the asset or receive a liability (“entry price”). Pursuant to the Fair Value Measurements and Disclosures Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards CodificationTM (“ASC”), we categorize our financial instruments carried at fair value into a three-level fair value hierarchy, based on the priority of inputs to the respective valuation technique. The three-level hierarchy for fair value measurement is defined as follows:
Level 1 – inputs to the valuation methodology are quoted prices available in active markets for identical investments as of the reporting date, except for large holdings subject to “blockage discounts” that are excluded;
Level 2 – inputs to the valuation methodology are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value can be determined through the use of models or other valuation methodologies; and
Level 3 – inputs to the valuation methodology are unobservable inputs in situations where there is little or no market activity for the asset or liability, and we make estimates and assumptions related to the pricing of the asset or liability, including assumptions regarding risk.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.
When a determination is made to classify an asset or liability within Level 3 of the fair value hierarchy, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement. Because certain securities trade in less liquid or illiquid markets with limited or no pricing information, the determination of fair value for these securities is inherently more difficult. However, Level 3 fair value investments may include, in addition to the unobservable or Level 3 inputs, observable components, which are components that are actively quoted or can be validated to market-based sources.
Fixed Maturity Available-For-Sale Securities – Fair Valuation Methodologies and Associated Inputs
Securities classified as available-for-sale (“AFS”) consist of fixed maturity securities and are stated at fair value with unrealized gains and losses included within accumulated other comprehensive income (loss) (“AOCI”), net of associated DAC, VOBA, DSI, future contract benefits, other contract holder funds and deferred income taxes.
We measure the fair value of our securities classified as fixed maturity AFS based on assumptions used by market participants in pricing the security. The most appropriate valuation methodology is selected based on the specific characteristics of the fixed maturity security, and we consistently apply the valuation methodology to measure the security’s fair value. Our fair value measurement is based on a market approach that utilizes prices and other relevant information generated by market transactions involving identical or comparable securities. Sources of inputs to the market approach primarily include third-party pricing services, independent broker quotations or pricing matrices. We do not adjust prices received from third parties; however, we do analyze the third-party pricing services’ valuation methodologies and related inputs and perform additional evaluation to determine the appropriate level within the fair value hierarchy.
The observable and unobservable inputs to our valuation methodologies are based on a set of standard inputs that we generally use to evaluate all of our fixed maturity AFS securities. Observable inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. In addition, market indicators, industry and economic events are monitored, and further market data is acquired if certain triggers are met. For certain security types, additional inputs may be used, or some of the inputs described above may not be applicable. For private placement securities, we use pricing matrices that utilize observable pricing inputs of similar public securities and Treasury yields as inputs to the fair value measurement. Depending on the type of security or the daily market activity, standard inputs may be prioritized differently or may not be available for all fixed maturity AFS securities on any given day. For broker-quoted only securities, non-binding quotes from market makers or broker-dealers are obtained from sources recognized as market participants. For securities trading in less liquid or illiquid markets with limited or no pricing information, we use unobservable inputs to measure fair value.
The following summarizes our fair valuation methodologies and associated inputs, which are particular to the specified security type and are in addition to the defined standard inputs to our valuation methodologies for all of our fixed maturity AFS securities discussed above:
Corporate bonds and U.S. government bonds – We also use Trade Reporting and Compliance EngineTM reported tables for our corporate bonds and vendor trading platform data for our U.S. government bonds.
Mortgage- and asset-backed securities (“ABS”) – We also utilize additional inputs, which include new issues data, monthly payment information and monthly collateral performance, including prepayments, severity, delinquencies, step-down features and over collateralization features for each of our mortgage-backed securities (“MBS”), which include collateralized mortgage obligations and mortgage pass through securities backed by residential mortgages (“RMBS”), commercial mortgage-backed securities (“CMBS”) and collateralized loan obligations (“CLOs”).
State and municipal bonds – We also use additional inputs that include information from the Municipal Securities Rule Making Board, as well as material event notices, new issue data, issuer financial statements and Municipal Market Data benchmark yields for our state and municipal bonds.
Hybrid and redeemable preferred securities – We also utilize additional inputs of exchange prices (underlying and common stock of the same issuer) for our hybrid and redeemable preferred securities.
In order to validate the pricing information and broker-dealer quotes, we employ, where possible, procedures that include comparisons with similar observable positions, comparisons with subsequent sales and observations of general market movements for those security classes. We have policies and procedures in place to review the process that is utilized by our third-party pricing service and the output that is provided to us by the pricing service. On a periodic basis, we test the pricing for a sample of securities to evaluate the inputs and assumptions used by the pricing service, and we perform a comparison of the pricing service output to an alternative pricing source. We also evaluate prices provided by our primary pricing service to ensure that they are not stale or unreasonable by reviewing the prices for unusual changes from period to period based on certain parameters or for lack of change from one period to the next.
Fixed Maturity AFS Securities – Evaluation for Recovery of Amortized Cost
We regularly review our fixed maturity AFS securities (also referred to as “debt securities”) for declines in fair value that we determine to be impairment-related, including those attributable to credit risk factors that may require a credit loss allowance.
For our debt securities, we generally consider the following to determine whether our debt securities with unrealized losses are credit impaired:
The estimated range and average period until recovery;
The estimated range and average holding period to maturity;
Remaining payment terms of the security;
Current delinquencies and nonperforming assets of underlying collateral;
Expected future default rates;
Collateral value by vintage, geographic region, industry concentration or property type;
Subordination levels or other credit enhancements as of the balance sheet date as compared to origination; and
Contractual and regulatory cash obligations.
For a debt security, if we intend to sell a security, or it is more likely than not we will be required to sell a debt security before recovery of its amortized cost basis and the fair value of the debt security is below amortized cost, we conclude that an impairment has occurred and the amortized cost is written down to current fair value, with a corresponding charge to realized gain (loss) on the Consolidated Statements of Comprehensive Income (Loss). If we do not intend to sell a debt security, or it is not more likely than not we will be required to sell a debt security before recovery of its amortized cost basis but the present value of the cash flows expected to be collected is less than the amortized cost of the debt security (referred to as the credit loss), we conclude that an impairment has occurred, and a credit loss allowance is recorded, with a corresponding charge to realized gain (loss) on the Consolidated Statements of Comprehensive Income (Loss). The remainder of the decline to fair value related to factors other than credit loss is recorded in other comprehensive income (“OCI”) to unrealized losses on fixed maturity AFS securities on the Consolidated Statements of Stockholders’ Equity, as this amount is considered a noncredit impairment.
When assessing our intent to sell a debt security, or if it is more likely than not we will be required to sell a debt security before recovery of its cost basis, we evaluate facts and circumstances such as, but not limited to, decisions to reposition our security portfolio, sales of securities to meet cash flow needs and sales of securities to capitalize on favorable pricing. Management considers the following as part of the evaluation:
The current economic environment and market conditions;
Our business strategy and current business plans;
The nature and type of security, including expected maturities and exposure to general credit, liquidity, market and interest rate risk;
Our analysis of data from financial models and other internal and industry sources to evaluate the current effectiveness of our hedging and overall risk management strategies;
The current and expected timing of contractual maturities of our assets and liabilities, expectations of prepayments on investments and expectations for surrenders and withdrawals of life insurance policies and annuity contracts;
The capital risk limits approved by management; and
Our current financial condition and liquidity demands.
In order to determine the amount of the credit loss for a debt security, we calculate the recovery value by performing a discounted cash flow analysis based on the current cash flows and future cash flows we expect to recover. The discount rate is the effective interest rate implicit in the underlying debt security. The effective interest rate is the original yield, or the coupon if the debt security was previously impaired. See the discussion below for additional information on the methodology and significant inputs, by security type, that we use to determine the amount of a credit loss.
To determine the recovery period of a debt security, we consider the facts and circumstances surrounding the underlying issuer including, but not limited to, the following:
Historical and implied volatility of the security;
The extent to which the fair value has been less than amortized cost;
Adverse conditions specifically related to the security or to specific conditions in an industry or geographic area;
Failure, if any, of the issuer of the security to make scheduled payments; and
Recoveries or additional declines in fair value subsequent to the balance sheet date.
In periods subsequent to the recognition of a credit loss impairment through a credit loss allowance, we continue to reassess the expected cash flows of the debt security at each subsequent measurement date as necessary. If the measurement of credit loss changes, we recognize a provision for (or reversal of) credit loss expense through realized gain (loss) on the Consolidated Statements of Comprehensive Income (Loss), limited by the amount that amortized cost exceeds fair value. Losses are charged against the allowance for credit losses when management believes the uncollectibility of a debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest on debt securities is written-off when deemed uncollectible.
To determine the recovery value of a corporate bond or CLO, we perform additional analysis related to the underlying issuer including, but not limited to, the following:
Fundamentals of the issuer to determine what we would recover if they were to file bankruptcy versus the price at which the market is trading;
Fundamentals of the industry in which the issuer operates;
Earnings multiples for the given industry or sector of an industry that the underlying issuer operates within, divided by the outstanding debt to determine an expected recovery value of the security in the case of a liquidation;
Expected cash flows of the issuer (e.g., whether the issuer has cash flows in excess of what is required to fund its operations);
Expectations regarding defaults and recovery rates;
Changes to the rating of the security by a rating agency; and
Additional market information (e.g., if there has been a replacement of the corporate debt security).
Each quarter, we review the cash flows for the MBS portfolio, including current credit enhancements and trends in the underlying collateral performance to determine whether or not they are sufficient to provide for the recovery of our amortized cost. To determine recovery value of a MBS, we perform additional analysis related to the underlying issuer including, but not limited to, the following:
Discounted cash flow analysis based on the current cash flows and future cash flows we expect to recover;
Level of borrower creditworthiness of the home equity loans or residential mortgages that back an RMBS or commercial mortgages that back a CMBS;
Susceptibility to fair value fluctuations for changes in the interest rate environment;
Susceptibility to reinvestment risks, in cases where market yields are lower than the securities’ book yield earned;
Susceptibility to reinvestment risks, in cases where market yields are higher than the book yields earned on a security;
Expectations of sale of such a security where market yields are higher than the book yields earned on a security; and
Susceptibility to variability of prepayments.
When evaluating MBS and mortgage-related ABS, we consider a number of pool-specific factors as well as market level factors when determining whether or not the impairment on the security requires a credit loss allowance. The most important factor is the performance of the underlying collateral in the security and the trends of that performance in the prior periods. We use this information about the collateral to forecast the timing and rate of mortgage loan defaults, including making projections for loans that are already delinquent and for those loans that are currently performing but may become delinquent in the future. Other factors used in this analysis include the credit characteristics of borrowers, geographic distribution of underlying loans and timing of liquidations by state. Once default rates and timing assumptions are determined, we then make assumptions regarding the severity of a default if it were to occur. Factors that impact the severity assumption include expectations for future home price appreciation or depreciation, loan size, first lien versus second lien, existence of loan level private mortgage insurance, type of occupancy and geographic distribution of loans. Once default and severity assumptions are determined for the security in question, cash flows for the underlying collateral are projected including expected defaults and prepayments. These cash flows on the collateral are then translated to cash flows on our tranche based on the cash flow waterfall of the entire capital security structure. If this analysis indicates the entire principal on a particular security will not be returned, the security is reviewed for a credit loss by comparing the expected cash flows to amortized cost. To the extent that the security has already been impaired through a credit loss allowance or was purchased at a discount, such that the amortized cost of the security is less than or equal to the present value of cash flows expected to be collected, no credit loss allowance is required. Otherwise, if the amortized cost of the security is greater than the present value of the cash flows expected to be collected, and the security was not purchased at a discount greater than the expected principal loss, then an impairment through a credit loss allowance is recognized.
We further monitor the cash flows of all of our debt securities backed by mortgages on an ongoing basis. We also perform detailed analysis on all of our subprime, Alt-A, non-agency residential MBS and on a significant percentage of our debt securities backed by pools of commercial mortgages. The detailed analysis includes revising projected cash flows by updating the cash flows for actual cash received and applying assumptions with respect to expected defaults, foreclosures and recoveries in the future. These revised projected cash flows are then compared to the amount of credit enhancement (subordination) in the structure to determine whether the amortized cost of the security is recoverable. If it is not recoverable, we record an impairment through a credit loss allowance for the security.
Trading Securities
Trading securities consist of fixed maturity securities in designated portfolios, some of which support modified coinsurance and coinsurance with funds withheld reinsurance agreements. Investment results for the portfolios that support modified coinsurance and coinsurance with funds withheld reinsurance agreements, including gains and losses from sales, are passed directly to the reinsurers pursuant to contractual terms of the reinsurance agreements. Trading securities are carried at fair value, and changes in fair value and changes in the fair value of embedded derivative liabilities associated with the underlying reinsurance agreements are recorded in realized gain (loss) on the Consolidated Statements of Comprehensive Income (Loss) as they occur.
Equity Securities
Equity securities are carried at fair value, and changes in fair value are recorded in realized gain (loss) on the Consolidated Statements of Comprehensive Income (Loss) as they occur. Equity securities consist primarily of common stock of publicly-traded companies, privately placed securities and mutual fund shares. We measure the fair value of our equity securities based on assumptions used by market participants in pricing the security. The most appropriate valuation methodology is selected based on the specific characteristics of the equity security. Fair values of publicly-traded equity securities are determined using quoted prices in active markets for identical or comparable securities. When quoted prices are not available, we use valuation methodologies most appropriate for the specific asset. Fair values for private placement securities are determined using discounted cash flow, earnings multiple and other valuation models. The fair values of mutual fund shares that transact regularly are based on transaction prices of identical fund shares.
Mortgage Loans on Real Estate
Mortgage loans on real estate consist of commercial and residential mortgage loans and are generally carried at unpaid principal balances adjusted for amortization of premiums and accretion of discounts and are net of allowance for credit losses. We carry certain commercial mortgage loans at fair value where the fair value option has been elected. Interest income is accrued on the principal balance of the loan based on the loan’s contractual interest rate. Premiums and discounts are amortized using the effective yield method over the life of the loan. Interest income and amortization of premiums and discounts are reported in net investment income on the Consolidated Statements of Comprehensive Income (Loss) along with mortgage loan fees, which are recorded as they are incurred.
Our policy for commercial mortgage loans is to report loans that are 60 or more days past due, which equates to two or more payments missed, as delinquent. Our policy for residential mortgage loans is to report loans that are 90 or more days past due, which equates to three or more payments missed, as delinquent. We do not accrue interest on loans 90 days past due, and any interest received on these loans is either applied to the principal or recorded in net investment income on the Consolidated Statements of Comprehensive Income (Loss) when received, depending on the assessment of the collectability of the loan. We resume accruing interest once a loan complies with all of its original terms or restructured terms. Mortgage loans deemed uncollectible are charged against the allowance for credit losses, and subsequent recoveries, if any, are likewise credited to the allowance for credit losses. Accrued interest on mortgage loans is written-off when deemed uncollectible.
In connection with our recognition of an allowance for credit losses for mortgage loans on real estate, we perform a quantitative analysis using a probability of default/loss given default/exposure at default approach to estimate expected credit losses in our mortgage loan portfolio as well as unfunded commitments related to commercial mortgage loans, exclusive of certain mortgage loans held at fair value. Our model estimates expected credit losses over the contractual terms of the loans, which are the periods over which we are exposed to credit risk, adjusted for expected prepayments. Credit loss estimates are segmented by commercial mortgage loans, residential mortgage loans, and unfunded commitments related to commercial mortgage loans.
The allowance for credit losses for pooled loans of similar risk (i.e., commercial and residential mortgage loans) is estimated using relevant historical credit loss information adjusted for current conditions and reasonable and supportable forecasts of future conditions. Historical credit loss experience provides the basis for the estimation of expected credit losses with adjustments for differences in current loan-specific risk characteristics, such as differences in underwriting standards, portfolio mix, delinquency level, or term lengths as well as adjustments for changes in environmental conditions, such as unemployment rates, property values, or other factors that management deems relevant. We apply probability weights to the positive, base and adverse scenarios we use. For periods beyond our reasonable and supportable forecast, we use implicit mean reversion over the remaining life of the recoverable, meaning our model will inherently revert to the baseline scenario as the baseline is representative of the historical average over a longer period of time.
Loans are considered impaired when it is probable that, based upon current information and events, we will be unable to collect all amounts due under the contractual terms of the loan agreement. When we determine that a loan is impaired, a specific credit loss allowance is established for the excess carrying value of the loan over its estimated value. The loan’s estimated value is based on: the present value of expected future cash flows discounted at the loan’s effective interest rate; the loan’s observable market price; or the fair value of the loan’s collateral.
Allowance for credit losses are maintained at a level we believe is adequate to absorb current expected lifetime credit losses. Our periodic evaluation of the adequacy of the allowance for credit losses is based on historical loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payments), the estimated value of the underlying collateral, composition of the loan portfolio, current economic conditions, reasonable and supportable forecasts about the future and other relevant factors.
Mortgage loans on real estate are presented net of the allowance for credit losses on the Consolidated Balance Sheets. Changes in the allowance are reported in realized gain (loss) on the Consolidated Statements of Comprehensive Income (Loss). Mortgage loans on real estate deemed uncollectible are charged against the allowance for credit losses, and subsequent recoveries, if any, are credited to the allowance for credit losses, limited to the aggregate of amounts previously charged-off and expected to be charged-off.
Our commercial loan portfolio is primarily comprised of long-term loans secured by existing commercial real estate. We believe all of the commercial loans in our portfolio share three primary risks: borrower credit worthiness; sustainability of the cash flow of the property; and market risk; therefore, our methods of monitoring and assessing credit risk are consistent for our entire portfolio.
For our commercial mortgage loan portfolio, trends in market vacancy and rental rates are incorporated into the analysis that we perform for monitored loans and may contribute to the establishment of (or an increase or decrease in) an allowance for credit losses. In addition, we review each loan individually in our commercial mortgage loan portfolio on an annual basis to identify emerging risks. We focus on properties that experienced a reduction in debt-service coverage or that have significant exposure to tenants with deteriorating credit profiles. Where warranted, we establish or increase a credit loss allowance for a specific loan based upon this analysis.
We measure and assess the credit quality of our commercial mortgage loans by using loan-to-value and debt-service coverage ratios. The loan-to-value ratio compares the principal amount of the loan to the fair value at origination of the underlying property collateralizing the loan and is commonly expressed as a percentage. Loan-to-value ratios greater than 100% indicate that the principal amount is greater
than the collateral value. Therefore, all else being equal, a lower loan-to-value ratio generally indicates a higher quality loan. The debt-service coverage ratio compares a property’s net operating income to its debt-service payments. Debt-service coverage ratios of less than 1.0 indicate that property operations do not generate enough income to cover its current debt payments. Therefore, all else being equal, a higher debt-service coverage ratio generally indicates a higher quality loan. These credit quality metrics are monitored and reviewed at least annually.
We have off-balance sheet commitments related to commercial mortgage loans. As such, an allowance for credit losses is developed based on the commercial mortgage loan process outlined above, along with an internally developed conversion factor.
Our residential loan portfolio is primarily comprised of first lien mortgages secured by existing residential real estate. In contrast to the commercial mortgage loan portfolio, residential mortgage loans are primarily smaller-balance homogenous loans that share similar risk characteristics. Therefore, these pools of loans are collectively evaluated for inherent credit losses. Such evaluations consider numerous factors, including, but not limited to borrower credit scores, collateral values, loss forecasts, geographic location, delinquency rates and economic trends. These evaluations and assessments are revised as conditions change and new information becomes available, including updated forecasts, which can cause the allowance for credit losses to increase or decrease over time as such evaluations are revised. Generally, residential mortgage loan pools exclude loans that are nonperforming, as those loans are evaluated individually using the evaluation framework for specific allowance for credit losses described above.
For residential mortgage loans, our primary credit quality indicator is whether the loan is performing or nonperforming. We generally define nonperforming residential mortgage loans as those that are 90 or more days past due and/or in nonaccrual status. There is generally a higher risk of experiencing credit losses when a residential mortgage loan is nonperforming. We monitor and update aging schedules and nonaccrual status on a monthly basis.
Policy Loans
Policy loans represent loans we issue to contract holders that use the cash surrender value of their life insurance policy as collateral. Policy loans are carried at unpaid principal balances.
Derivative Instruments
We hedge certain portions of our exposure to interest rate risk, foreign currency exchange risk, equity market risk and credit risk by entering into derivative transactions. Our derivative instruments are recognized as either assets or liabilities on the Consolidated Balance Sheets at estimated fair value. We have master netting agreements with each of our derivative counterparties that allow for the netting of our derivative asset and liability positions by counterparty. We categorized derivatives into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique as discussed above in “Fair Value Measurement.” The accounting for changes in the estimated fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship, and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we designate the hedging instrument based upon the exposure being hedged: as a cash flow hedge or a fair value hedge.
For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of AOCI and reclassified into net income in the same period or periods during which the hedged transaction affects net income. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of designated future cash flows of the hedged item (hedge ineffectiveness), if any, is recognized in net income during the period of change. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in net income during the period of change in estimated fair values. For derivative instruments not designated as hedging instruments, but that are economic hedges, the gain or loss is recognized in net income.
We purchase and issue financial instruments and products that contain embedded derivative instruments that are recorded with the associated host contract. When it is determined that the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is bifurcated from the host for measurement purposes and reported within other assets or other liabilities on the Consolidated Balance Sheets. The embedded derivative is carried at fair value with changes in fair value recognized in net income during the period of change.
We employ several different methods for determining the fair value of our derivative instruments. The fair value of our derivative contracts are measured based on current settlement values, which are based on quoted market prices, industry standard models that are commercially available and broker quotes. These techniques project cash flows of the derivatives using current and implied future market conditions. We calculate the present value of the cash flows to measure the current fair market value of the derivative.
Other Investments
Other investments consist primarily of alternative investments, cash collateral receivables related to our derivative instruments, Federal Home Loan Bank (“FHLB”) common stock and short-term investments.
Alternative investments consist primarily of investments in limited partnerships (“LPs”). We account for our investments in LPs using the equity method to determine the carrying value. Recognition of alternative investment income is delayed due to the availability of the related financial statements, which are generally obtained from the partnerships’ general partners. As a result, our private equity investments are generally on a three-month delay and our hedge funds are on a one-month delay. In addition, the impact of audit adjustments related to completion of calendar-year financial statement audits of the investees are typically received during the second quarter of each calendar year. Accordingly, our investment income from alternative investments for any calendar-year period may not include the complete impact of the change in the underlying net assets for the partnership for that calendar-year period.
In uncleared derivative transactions, we and the counterparty enter into a credit support annex requiring either party to post collateral, which may be in the form of cash, equal to the net derivative exposure. Cash collateral we have posted to a counterparty is recorded within other investments. Cash collateral a counterparty has posted is recorded within payables for collateral on investments. We also have investments in FHLB common stock, carried at cost, that enable access to the FHLB lending program. For more information on our collateralized financing arrangements, see “Payables for Collateral on Investments” below.
Short-term investments consist of securities with original maturities of one year or less, but greater than three months. Securities included in short-term investments are carried at fair value, with valuation methods and inputs consistent with those applied to fixed maturity AFS securities.
Cash and Invested Cash
Cash and invested cash is carried at cost and includes all highly liquid debt instruments purchased with an original maturity of three months or less.
DAC, VOBA, DSI and DFEL
Acquisition costs directly related to successful contract acquisitions or renewals of UL, VUL, traditional life insurance, group life and disability insurance, annuities and other investment contracts have been deferred (i.e., DAC) to the extent recoverable. Such acquisition costs are capitalized in the period they are incurred and primarily include commissions, certain bonuses, portion of total compensation and benefits of certain employees involved in the acquisition process and medical and inspection fees. VOBA is an intangible asset that reflects the estimated fair value of in-force contracts in a life insurance company acquisition and represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the business in force at the acquisition date. Bonus credits and excess interest for dollar cost averaging contracts are considered DSI, and the unamortized balance is reported within other assets on the Consolidated Balance Sheets. Contract sales charges that are collected in the early years of an insurance contract are deferred (i.e., DFEL), and the unamortized balance is reported in other contract holder funds on the Consolidated Balance Sheets.
Both DAC and VOBA amortization, excluding amounts reported in realized gain (loss), is reported within commissions and other expenses on the Consolidated Statements of Comprehensive Income (Loss). DSI amortization, excluding amounts reported in realized gain (loss), is reported in interest credited on the Consolidated Statements of Comprehensive Income (Loss). The amortization of DFEL, excluding amounts reported in realized gain (loss), is reported within fee income on the Consolidated Statements of Comprehensive Income (Loss). The methodology for determining the amortization of DAC, VOBA, DSI and DFEL varies by product type. Amortization is based on assumptions consistent with those used in the development of the underlying contract adjusted for emerging experience and expected trends.
The carrying amounts of DAC, VOBA, DSI and DFEL are adjusted for the effects of realized and unrealized gains and losses on securities classified as fixed maturity AFS and certain derivatives and embedded derivatives. Amortization expense of DAC, VOBA, DSI and DFEL reflects an assumption for an expected level of credit-related investment losses. When actual credit-related investment losses are realized, we recognize a true-up to our DAC, VOBA, DSI and DFEL amortization within realized gain (loss) on the Consolidated Statements of Comprehensive Income (Loss) reflecting the incremental effect of actual versus expected credit-related investment losses. These actual to expected amortization adjustments can create volatility from period to period in realized gain (loss).
We account for modifications of insurance contracts that result in a substantially unchanged contract as a continuation of the replaced contract. We account for modifications of insurance contracts that result in a substantially changed contract as an extinguishment of the replaced contract.
For reinsurance transactions where we receive proceeds that represent recovery of our previously incurred acquisition costs, we reduce the applicable unamortized acquisition costs such that the net acquisition costs are capitalized and charged to commissions and other expenses on the Consolidated Statements of Comprehensive Income (Loss).
Acquisition costs for all traditional contracts, including term life insurance, individual whole life and group business, are amortized over the premium-paying period or level term period, depending on the contract, which generally results in amortization less than or equal to 30 years. Acquisition costs are either amortized on a straight-line basis or as a level percent of premium of the related policies depending on the block of business. There is currently no intangible balance or related amortization for fixed and variable payout annuities.
Acquisition costs for UL and VUL insurance and investment-type products, which include fixed and variable deferred annuities, are generally amortized over the lives of the policies in relation to the incidence of estimated gross profits (“EGPs”) from surrender charges, investment, death benefits expected to be paid, net of reinsurance ceded and expense margins and actual realized gain (loss) on investments. Contract lives for UL and VUL policies are estimated to be 40 years based on the expected lives of the contracts. Contract lives for fixed and variable deferred annuities are generally between 15 and 30 years, while some of our fixed multi-year guarantee products have amortization periods equal to the guarantee period. The front-end load annuity product has an assumed life of 25 years. Longer lives are assigned to those blocks that have demonstrated lower lapse experience.
During the third quarter of each year, we conduct our comprehensive review of the assumptions and the projection models used for our estimates of future gross profits underlying the amortization of DAC, VOBA, DSI and DFEL. These assumptions include, but are not limited to, capital markets, investment margins, mortality rates, retention, rider utilization and maintenance expenses (costs associated with maintaining records relating to insurance and individual and group annuity contracts, and with the processing of premium collections, deposits, withdrawals and commissions). Based on our review, the cumulative balances of DAC, VOBA, DSI and DFEL included on the Consolidated Balance Sheets are adjusted with an offsetting benefit or charge to revenue or amortization expense to reflect such change related to our expectations of future EGPs (“unlocking”). We may have unlocking in other quarters as we become aware of information that warrants updating assumptions outside of our comprehensive review. We may also identify and implement actuarial modeling refinements that result in increases or decreases to the carrying values of DAC, VOBA, DSI and DFEL.
DAC, VOBA, DSI and DFEL are reviewed to ensure that the unamortized portion does not exceed the expected recoverable amounts.
Reinsurance
Our insurance subsidiaries enter into reinsurance agreements in the normal course of business to limit our exposure to the risk of loss and to enhance our capital management.
In order for a reinsurance agreement to qualify for reinsurance accounting, the agreement must satisfy certain risk transfer conditions that include, among other items, a reasonable possibility of a significant loss for the assuming entity. When we apply reinsurance accounting, premiums, benefits and DAC amortization are reported net of reinsurance ceded on the Consolidated Statements of Comprehensive Income (Loss). Amounts currently recoverable, such as ceded reserves, are reported in reinsurance recoverables and amounts currently payable to the reinsurers, such as premiums, are included in other liabilities on the Consolidated Balance Sheets. Assets and liabilities and revenues and expenses from certain reinsurance contracts that grant statutory surplus relief to our insurance companies are netted on the Consolidated Balance Sheets and Consolidated Statements of Comprehensive Income (Loss), respectively, if there is a contractual right of offset.
We use deposit accounting to recognize reinsurance agreements that do not transfer significant insurance risk. This accounting treatment results in amounts paid or received by our insurance subsidiaries to be considered on deposit with the reinsurer and such amounts are reported in other assets and other liabilities, respectively, on the Consolidated Balance Sheets. As amounts are paid or received, consistent with the underlying contracts, deposit assets or liabilities are adjusted.
We estimated an allowance for credit losses for all reinsurance recoverables and related reinsurance deposit assets held by our subsidiaries. As such, we performed a quantitative analysis using a probability of loss model approach to estimate expected credit losses for reinsurance recoverables, inclusive of similar assets recognized using the deposit method of accounting. The credit loss allowance is a general allowance for pools of receivables with similar risk characteristics segmented by credit risk ratings and receivables assessed on an individual basis that do not share similar risk characteristics where we anticipate a credit loss over the life of reinsurance-related assets.
Our model uses relevant internal or external historical loss information adjusted for current conditions and reasonable and supportable forecasts of future events and conditions in developing our credit loss estimate. We utilized historical credit rating data to form an estimation of probability of default of counterparties by means of a transition matrix that provides the rates of credit migration for credit ratings transitioning to impairment. We updated reinsurer credit ratings during the period to incorporate the most up-to-date information on the current state of the financial stability of our reinsurers. To simulate changes in economic conditions, we used positive, base and adverse scenarios that include varying levels of loss given default assumptions to reflect the impact of changes in severity of losses. We applied probability weights to the positive, base and adverse scenarios. For periods beyond our reasonable and supportable forecasts, we used implicit mean reversion over the remaining life of the recoverable. Additionally, we considered factors that impact our exposure at default that are driven by actuarial expectations around term assumptions rather than being directly driven by market or economic environment.
Our model estimates the expected credit losses over the life of the reinsurance asset. Credit loss estimates are segmented based on counterparty credit risk. Our modeling process utilizes counterparty credit ratings, collateral types and amounts, and term and run-off
assumptions. For reinsurance recoverables that do not share similar risk characteristics, we assessed on an individual basis to determine a specific credit loss allowance.
We estimated expected credit losses over the contractual term of the recoverable, which is the period during which we are exposed to the credit risk. Reinsurance recoverables may not have explicit contractual lives, but are tied to the underlying insurance products; as a result, we estimated the contractual life by utilizing actuarial estimates of the timing of payouts related to those underlying products.
Reinsurance agreements often require the reinsurer to collateralize the recoverable with funds in a trust account or with a letter of credit for the benefit of the ceding insurance entity that can reduce the expected credit losses on a given agreement. As such, we review reinsurance collateral by individual agreement to sensitize risk of loss based on level of collateralization. This review is driven by the assumption that non-collateralized reinsurance recoverables would have materially higher losses in times of default. Therefore, reinsurance recoverables are pooled as either fully-collateralized or non-collateralized.
Reinsurance recoverables are presented net of the allowance for credit losses on the Consolidated Balance Sheets. Changes in the allowance for credit losses are reported in realized gain (loss) on the Consolidated Statements of Comprehensive Income (Loss). Reinsurance recoverables deemed uncollectible are charged against the allowance for credit losses, and subsequent recoveries, if any, are credited to the allowance for credit losses, limited to the aggregate of amounts previously charged-off and expected to be charged-off.
Goodwill
We recognize the excess of the purchase price, plus the fair value of any noncontrolling interest in the acquiree, over the fair value of identifiable net assets acquired as goodwill. Goodwill is not amortized, but is reviewed for impairment annually as of October 1 and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
We perform a quantitative goodwill impairment test where the fair value of the reporting unit is determined and compared to the carrying value of the reporting unit. If the carrying value of the reporting unit is greater than the reporting unit’s fair value, goodwill is impaired and written down to the reporting unit’s fair value; and a charge is reported in impairment of intangibles on the Consolidated Statements of Comprehensive Income (Loss). The results of one goodwill impairment test on one reporting unit cannot subsidize the results of another reporting unit.
Other Assets and Other Liabilities
Other assets consist primarily of certain reinsurance assets, net of allowance for credit losses, certain guaranteed living benefit (“GLB”) features, current and deferred taxes, premiums and fees receivable, property and equipment owned by the Company, balances associated with corporate-owned and bank-owned life insurance, receivables resulting from sales of securities that had not yet settled as of the balance sheet date, specifically identifiable intangible assets, DSI, operating lease right-of-use (“ROU”) assets and other receivables and prepaid expenses. Other liabilities consist primarily of certain reinsurance payables, certain GLB features, current and deferred taxes, pension and other employee benefit liabilities, deferred gain on business sold through reinsurance, derivative instrument liabilities, payables resulting from purchases of securities that had not yet settled as of the balance sheet date, long-term operating lease liabilities, certain financing arrangements, finance lease liabilities and other accrued expenses.
The carrying values of specifically identifiable intangible assets are reviewed at least annually for indicators of impairment in value that are related to credit loss or non-credit, including unexpected or adverse changes in the following: the economic or competitive environments in which the company operates; profitability analyses; cash flow analyses; and the fair value of the relevant business operation. If there was an indication of impairment, then the discounted cash flow method would be used to measure the impairment, and the carrying value would be adjusted as necessary and reported in impairment of intangibles on the Consolidated Statements of Comprehensive Income (Loss). Sales force intangibles are attributable to the value of the new business distribution system acquired through business combinations. These assets are amortized on a straight-line basis over their useful life of 25 years. Specifically identifiable intangible assets also includes the value of customer relationships acquired (“VOCRA”) and value of distribution agreements (“VODA”). The carrying values of VOCRA and VODA are amortized using a straight-line basis over their weighted average life of 20 years and 13 years, respectively. See Note 9 for more information regarding specifically identifiable intangible assets.
Property and equipment owned for company use is carried at cost less allowances for depreciation. Provisions for depreciation of investment real estate and property and equipment owned for company use are computed principally on the straight-line method over the estimated useful lives of the assets, which include buildings, computer hardware and software and other property and equipment. Certain assets on the Consolidated Balance Sheets are related to finance leases and certain financing arrangements and are depreciated in a manner consistent with our current depreciation policy for owned assets. We periodically review the carrying value of our long-lived assets, including property and equipment, for impairment whenever events or circumstances indicate that the carrying amount of such assets may not be fully recoverable. For long-lived assets to be held and used, impairments are recognized when the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. An impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value.
Long-lived assets to be disposed of by abandonment or in an exchange for a similar productive long-lived asset are classified as held-for-use until they are disposed. Long-lived assets to be sold are classified as held-for-sale and are no longer depreciated. Certain criteria have to be met in order for the long-lived asset to be classified as held-for-sale, including that a sale is probable and expected to occur within one year. Long-lived assets classified as held-for-sale are recorded at the lower of their carrying amount or fair value less cost to sell.
We lease office space and certain equipment under various long-term lease agreements. We determine if an arrangement is a lease at inception. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Our leases do not provide an implicit rate; therefore, we use our incremental borrowing rate at the commencement date in determining the present value of future payments. The ROU asset is calculated using the lease liability carrying amount, plus or minus prepaid/accrued lease payments, minus the unamortized balance of lease incentives received, plus unamortized initial direct costs. Lease terms used to calculate our lease obligation include options when we are reasonably certain that we will exercise such options. Our lease agreements may contain both lease and non-lease components, which are accounted for separately. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
Other liabilities include deferred gains on business sold through reinsurance. Effective October 1, 2021, we entered into a reinsurance agreement with Security Life of Denver Insurance Company (a subsidiary of Resolution Life that we refer to herein as “Resolution Life”). We are recognizing the gain related to this transaction over the projected life of the policies, or 30 years. Effective January 1, 2020, we entered into a reinsurance agreement with Swiss Re Life & Health America, Inc (“Swiss Re”). We are recognizing the gain related to this transaction over the period in which the in-force policies are expected to run off, or 15 years. Effective October 1, 2018, we entered into a reinsurance agreement with Athene Holding Ltd. (“Athene”). We are recognizing the gain related to this transaction over the period in which the majority of account values is expected to run off, or 20 years. See Note 8 for additional information.
Separate Account Assets and Liabilities
Separate accounts represent segregated funds that are maintained to meet specific investment objectives of contract holders who direct the investments and bear the investment risk, except to the extent of minimum guarantees made by the Company with respect to certain accounts. The assets of each account are legally segregated and are not subject to claims that arise out of any other business of the Company.
We report separate account assets as a summary total on the Consolidated Balance Sheets based on the fair value of the underlying investments. The underlying investments consist primarily of mutual funds, fixed maturity AFS securities, short-term investments and cash. Investment income and net realized and unrealized gains (losses) of the separate accounts generally accrue directly to the contract holders; therefore, they are not reflected on the Consolidated Statements of Comprehensive Income (Loss), and the Consolidated Statements of Cash Flows do not reflect investment activity of the separate accounts. Asset-based fees and contract administration charges are assessed against the accounts and included within fee income on the Consolidated Statements of Comprehensive Income (Loss). An amount equivalent to the separate account assets is recorded as separate account liabilities, representing the account balance obligated to be returned to the contract holder.
Future Contract Benefits
Future contract benefits represent liability reserves that we have established and carry based on estimates of how much we will need to pay for future benefits and claims. We continually review overall reserve position, reserving techniques and reinsurance arrangements. As experience develops and new information becomes known, liabilities are adjusted as deemed necessary.
The liabilities for future insurance contract benefits and claim reserves for traditional life policies are computed using assumptions for investment yields, mortality rates and withdrawals based principally on generally accepted actuarial methods and assumptions at the time of contract issue. Investment yield assumptions for traditional direct individual life reserves for all contracts range from 2.25% to 7.75% depending on the time of contract issue. The liabilities for future contract benefits and claims reserves for immediate and deferred paid-up annuities are computed using investment yield assumptions that range from 0.50% to 12.15%. These investment yield assumptions are intended to represent an estimation of the interest rate experience for the period that these contract benefits are payable.
The liability for future claim reserves for long-term disability contracts for incurred and reported claims are calculated based on assumptions as to interest, claim resolution rates and offsets for other insurance including social security. Claim resolution rate assumptions and social security offsets are based on our actual experience. The interest rate assumptions used for discounting claim reserves are based on projected portfolio yield rates, after consideration for defaults and investment expenses, for assets supporting the liabilities. During the third quarter of each year, we conduct our comprehensive review of the assumptions and reserving models used in calculating these reserves. The incurred but not reported claim reserves are based on our experiences as to the reporting lags and ultimate loss experience. Claim reserves are subject to revision as current claim experience and projections of future factors affecting claim experience change. Claim reserves do not include a provision for adverse deviation.
The business written or assumed by us includes participating life insurance contracts, under which the contract holder is entitled to share in the earnings of such contracts via receipt of dividends. The dividend scale for participating policies is reviewed annually and may be adjusted to reflect recent experience and future expectations. As of December 31, 2022, 2021 and 2020, participating policies comprised
less than 1% of the face amount of business in force, and dividend expenses were $49 million, $48 million and $53 million for the years ended December 31, 2022, 2021 and 2020, respectively.
We issue variable annuity and life contracts through separate accounts that may include various types of guaranteed benefits. The liabilities for these guarantees are calculated by estimating the present value of total expected benefit payments over the life of the contract from inception divided by the present value of total expected assessments over the life of the contract (“benefit ratio”) multiplied by the cumulative assessments recorded from the contract inception through the balance sheet date less the cumulative payments plus interest on the liability. The change in the liability for a period is the benefit ratio multiplied by the assessments recorded for the period less payments made 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. The revised benefit ratio is then applied to the liability calculation described above, with the resulting change in liability reported in benefits on the Consolidated Statements of Comprehensive Income (Loss). 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 value of these reserves. The change in liability impacts EGPs used to calculate amortization of DAC, VOBA, DFEL and DSI.
Certain of our variable annuity contracts reported within future contract benefits contain GLB reserves embedded derivatives, a portion of which may be reported in either other assets or other liabilities, and include guaranteed interest and similar contracts, that are carried at fair value on the Consolidated Balance Sheets, which represents approximate exit price including an estimate for our NPR. Certain of these features have elements of both insurance benefits and embedded derivatives. Through our hybrid accounting approach, for reserve calculation purposes we assign product cash flows to the embedded derivative or insurance portion of the reserves based on the life-contingent nature of the benefits. We report the insurance portion of the reserves in future contract benefits. We classify these GLB reserves embedded derivatives items in Level 3 within the hierarchy levels described above in “Fair Value Measurement.” The “market consistent scenarios” used in the determination of the fair value of the GLB liability are similar to those used by an investment bank to value derivatives for which the pricing is not transparent and the aftermarket is nonexistent or illiquid. We use risk-neutral Monte Carlo simulations in our calculation to value the entire block of guarantees, which involve 100 unique scenarios per policy or approximately 44 million scenarios. The market consistent scenario assumptions, as of each valuation date, are those we view to be appropriate for a hypothetical market participant. The market consistent inputs include, but are not limited to, assumptions for capital markets (e.g., implied volatilities, correlation among indices, risk-free swap curve, etc.), policyholder behavior (e.g., policy lapse, rider utilization, etc.), mortality rates, risk margins, maintenance expenses and a margin for profit. We believe these assumptions are consistent with those that would be used by a market participant; however, as the related markets develop we will continue to reassess our assumptions. It is possible that different valuation techniques and assumptions could produce a materially different estimate of fair value. As discussed in Note 5, we use derivative instruments to hedge our exposure to the risks and earnings volatility that result from the embedded derivatives for living benefits in certain of our variable annuity products. The change in fair value of these instruments tends to move in the opposite direction of the change in the value of the associated reserves. The net impact of these changes is reported as a component of realized gain (loss) on the Consolidated Statements of Comprehensive Income (Loss).
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 used in estimating these embedded derivatives 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 value of these embedded derivatives. Other contract holder funds also includes DFEL (see “DAC, VOBA, DFEL and DSI” above), dividends payable to contract holders and undistributed earnings on participating business.
Short-Term and Long-Term Debt
Short-term debt has contractual or expected maturities of one year or less. Long-term debt has contractual or expected maturities greater than one year.
Payables for Collateral on Investments
When we enter into collateralized financing transactions on our investments, a liability is recorded equal to the cash or non-cash collateral received. This liability is included within payables for collateral on investments on the Consolidated Balance Sheets. Income and expenses associated with these transactions are recorded as investment income and investment expenses within net investment income on the Consolidated Statements of Comprehensive Income (Loss). Changes in payables for collateral on investments are reflected within cash flows from investing activities on the Consolidated Statements of Cash Flows.
Contingencies and Commitments
A loss contingency is an existing condition, situation or set of circumstances involving uncertainty as to possible loss that will ultimately be resolved when one or more future events occur or fail to occur. Contingencies arising from environmental remediation costs, regulatory judgments, claims, assessments, guarantees, litigation, recourse reserves, fines, penalties and other sources are recorded when deemed probable and reasonably estimable, based on our best estimate.
Fee Income
Fee income for investment and interest-sensitive life insurance contracts consists of asset-based fees, percent of premium charges, contract administration charges and surrender charges that are assessed against contract holder account values. Investment products consist primarily of individual and group variable and fixed annuities. Interest-sensitive life insurance products include UL, VUL, linked-benefit UL and VUL and other interest-sensitive life insurance policies. These products include life insurance sold to individuals, corporate-owned life insurance and bank-owned life insurance.
In bifurcating the embedded derivative of our GLB features on our variable annuity products, we attribute to the embedded derivative the portion of total fees collected from the contract holder that relate to the GLB riders (the “attributed fees”), which are not reported within fee income on the Consolidated Statements of Comprehensive Income (Loss). These attributed fees represent the present value of future claims expected to be paid for the GLB at the inception of the contract plus a margin that a theoretical market participant would include for risk/profit and are reported within realized gain (loss) on the Consolidated Statements of Comprehensive Income (Loss).
The timing of revenue recognition as it relates to fees assessed on investment contracts is determined based on the nature of such fees. Asset-based fees and contract administration charges are assessed on a daily or monthly basis and recognized as revenue as performance obligations are met, over the period underlying customer assets are owned or advisory services are provided. Percent of premium charges are assessed at the time of premium payment and recognized as revenue when assessed and earned. Certain amounts assessed that represent compensation for services to be provided in future periods are reported as unearned revenue and recognized in income over the periods benefited. Surrender charges are recognized upon surrender of a contract by the contract holder in accordance with contractual terms. For investment and interest-sensitive life insurance contracts, the amounts collected from contract holders are considered deposits and are not included in revenue.
Wholesaling-related 12b-1 fees received from separate account fund sponsors as compensation for servicing the underlying mutual funds are recorded as revenues based on a contractual percentage of the market value of mutual fund assets over the period shares are owned by customers. Net investment advisory fees related to asset management of certain separate account funds are recorded as revenues based on a contractual percentage of the customer’s managed assets over the period advisory services are provided. Fee income related to 12b-1 fees and net investment advisory fees, reported primarily within our Annuities segment, was $743 million, $848 million and $732 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Insurance Premiums
Insurance premiums consist primarily of group insurance products, traditional life insurance and payout annuities with life contingencies. These premiums are recognized as revenue when due.
Net Investment Income
We earn investment income on the underlying general account investments supporting our fixed products less related expenses. Dividends and interest income, recorded in net investment income, are recognized when earned. Amortization of premiums and accretion of discounts on investments in debt securities are reflected in net investment income over the contractual terms of the investments in a manner that produces a constant effective yield.
For CLOs and MBS, included in the trading and fixed maturity AFS securities portfolios, we recognize income using a constant effective yield based on anticipated prepayments and the estimated economic life of the securities. When actual prepayments differ significantly from originally anticipated prepayments, the retrospective effective yield is recalculated to reflect actual payments to date and a catch up adjustment is recorded in the current period. In addition, the new effective yield, which reflects anticipated future payments, is used prospectively. Any adjustments resulting from changes in effective yield are reflected in net investment income on the Consolidated Statements of Comprehensive Income (Loss).
Realized Gain (Loss)
Realized gain (loss) includes realized gains and losses from the sale of investments, write-downs for impairments of investments and changes in the allowance for credit losses for financial assets, changes in fair value of mortgage loans on real estate accounted for under the fair value option, changes in fair value of equity securities, certain derivative and embedded derivative gains and losses, gains and losses on the sale of subsidiaries and businesses and net gains and losses on reinsurance-related embedded derivatives and trading securities. Realized gains and losses on the sale of investments are determined using the specific identification method. Realized gain (loss) is recognized in net income, net of associated amortization of DAC, VOBA, DSI and DFEL. Realized gain (loss) is also net of
allocations of investment gains and losses to certain contract holders and certain funds withheld on reinsurance arrangements and certain modified coinsurance for which we have a contractual obligation.
Other Revenues
Other revenues consist primarily of fees attributable to broker-dealer services recorded as performance obligations are met, either at the time of sale or over time based on a contractual percentage of customer account values, and proceeds from reinsurance recaptures. The broker-dealer services primarily relate to our retail sales network and consist of commission revenue for the sale of non-affiliated securities recorded on a trade date basis and advisory fee income. Advisory fee income is asset-based revenues recorded as earned based on a contractual percentage of customer account values. Other revenues attributable to broker-dealer services and advisory fee income, reported primarily within our Annuities segment, were $584 million, $628 million and $516 million for the years ended December 31, 2022, 2021 and 2020, respectively. Other revenues earned by our Group Protection segment consist of fees from administrative services performed, which are recognized as performance obligations are met over the terms of the underlying agreements, and were $203 million, $180 million and $177 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Interest Credited
We credit interest to our contract holder account values based on the contractual terms supporting our products.
Benefits
Benefits for UL and other interest-sensitive life insurance products include benefit claims incurred during the period in excess of contract account values. Benefits also include the change in reserves for life insurance products with secondary guarantee benefits, annuity products with guaranteed death and living benefits and certain annuities with life contingencies. For traditional life, group life and disability income products, benefits are recognized when incurred in a manner consistent with the related premium recognition policies.
Spark Program Expense
Spark program expense consists primarily of costs related to our Spark Initiative.
Pension and Other Postretirement Benefit Plans
Pursuant to the accounting rules for our obligations to employees and agents under our various pension and other postretirement benefit plans, we are required to make a number of assumptions to estimate related liabilities and expenses. The mortality assumption is based on actual and anticipated plan experience, determined using acceptable actuarial methods. We use assumptions for the weighted-average discount rate and expected return on plan assets to estimate pension expense. The discount rate assumptions are determined using an analysis of current market information and the projected benefit flows associated with these plans. The expected long-term rate of return on plan assets is based on historical and projected future rates of return on the funds invested in the plan. The calculation of our accumulated postretirement benefit obligation also uses an assumption of weighted-average annual rate of increase in the per capita cost of covered benefits, which reflects a health care cost trend rate.
Stock-Based Compensation
In general, we expense the fair value of stock awards included in our incentive compensation plans. As of the date our stock awards are approved, the fair value of stock options is determined using a Black-Scholes options valuation methodology, and the fair value of other stock awards is based upon the market value of the stock. The fair value of the awards is expensed over the performance or service period, which generally corresponds to the vesting period, and is recognized as an increase to common stock in stockholders’ equity. We apply an estimated forfeiture rate to our accrual of compensation cost. We classify certain stock awards as liabilities. For these awards, the settlement value is classified as a liability on the Consolidated Balance Sheets, and the liability is marked-to-market through net income at the end of each reporting period. Stock-based compensation expense is reflected in commissions and other expenses on the Consolidated Statements of Comprehensive Income (Loss).
Interest and Debt Expense
Interest expense on our short-term and long-term debt is recognized as due and any associated premiums, discounts and debt issuance costs are amortized (accreted) over the term of the related borrowing utilizing the effective interest method. In addition, gains or losses related to certain derivative instruments associated with debt are recognized in interest and debt expense during the period of the change.
Income Taxes
We file a U.S. consolidated income tax return that includes all of our eligible subsidiaries. Ineligible subsidiaries file separate individual corporate tax returns. Subsidiaries operating outside of the U.S. are taxed, and income tax expense is recorded, based on applicable foreign statutes. Deferred income taxes are recognized, based on enacted rates, when assets and liabilities have different values for financial statement and tax reporting purposes. A valuation allowance is recorded to the extent required. Considerable judgment and the
use of estimates are required in determining whether a valuation allowance is necessary and, if so, the amount of such valuation allowance. In evaluating the need for a valuation allowance, we consider many factors, including: the nature and character of the deferred tax assets and liabilities; taxable income in prior carryback years; future reversals of temporary differences; the length of time carryovers can be utilized; and any tax planning strategies we would employ to avoid a tax benefit from expiring unused.
Foreign Currency Translation
The balance sheet accounts and income statement items of foreign subsidiaries, reported in functional currencies other than the U.S. dollar are translated at the current and average exchange rates for the year, respectively. Resulting translation adjustments and other translation adjustments for foreign currency transactions that affect cash flows are reported in AOCI, a component of stockholders’ equity.
Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing earnings available to common shareholders by the average common shares outstanding. Diluted EPS is computed assuming the conversion or exercise of non-vested stock, stock options and performance share units outstanding during the year.
For any period where a net loss is experienced, shares used in the diluted EPS calculation represent basic shares, as the use of diluted shares would result in a lower loss per share.
2. New Accounting Standards
The following table provides a description of our adoption of new Accounting Standards Updates (“ASUs”) issued by the FASB and the impact of the adoption on the consolidated financial statements. ASUs not listed below were assessed and determined to be either not applicable or insignificant in presentation or amount.
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Standard | Description | Effective Date | Effect on Financial Statements or Other Significant Matters |
ASU 2020-04, Reference Rate Reform (Topic 848) and related amendments | The amendments in this update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions impacted by reference rate reform. If certain criteria are met, an entity will not be required to remeasure or reassess contracts impacted by reference rate reform. Additionally, changes to the critical terms of a hedging relationship affected by reference rate reform will not require entities to de-designate the relationship if certain requirements are met. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2024, with certain exceptions. The amendments are effective for contract modifications made between March 12, 2020, and December 31, 2024. | March 12, 2020 through December 31, 2024 | This standard may be elected and applied prospectively as reference rate reform unfolds. We have elected practical expedients to maintain hedge accounting for certain derivatives. We will continue to evaluate our options under this guidance as our reference rate reform adoption process continues. This ASU has not had a material impact to our consolidated financial condition and results of operations, but we will continue to evaluate those impacts as our transition progresses. |
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Standard | Description | Effective Date | Effect on Financial Statements or Other Significant Matters |
ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts and related amendments | These amendments make changes to the accounting and reporting for long-duration contracts issued by an insurance entity that will significantly change how insurers account for long-duration contracts, including how they measure, recognize and make disclosures about insurance liabilities and DAC. Under this ASU, insurers will be required to review cash flow assumptions at least annually and update them if necessary. They also will have to make quarterly updates to the discount rate assumptions they use to measure the liability for future policyholder benefits. The ASU creates a new category of market risk benefits (i.e., features that protect the contract holder from capital market risk and expose the insurer to that risk) that insurers will have to measure at fair value. The ASU provides various transition methods by topic that entities may elect upon adoption. The ASU is effective January 1, 2023, and early adoption is permitted. | January 1, 2023 | We will adopt this ASU effective January 1, 2023, with a transition date of January 1, 2021, using a modified retrospective approach, except for market risk benefits in which we will apply a full retrospective transition approach. We currently estimate that, at the transition date of January 1, 2021, the adoption of this standard and related amendments will result in a decrease to previously reported stockholders’ equity in an after-tax range of approximately $1.4 billion to $1.9 billion, including a decrease to previously reported retained earnings in an after-tax range of approximately $6.0 billion to $6.5 billion, and an increase to previously reported AOCI in an after-tax range of approximately $4.4 billion to $4.9 billion.
The remeasurement of certain current benefits (e.g., guaranteed death benefits on variable annuities) to fair valued market risk benefits, excluding the portion attributable to NPR, is expected to have the most significant impact to retained earnings.
The most significant drivers of the cumulative adjustment to AOCI are expected to be the NPR associated with the fair valued market risk benefits, the elimination of DAC and DAC-like intangible balances recorded in AOCI related to changes in unrealized gains and losses on investments, and the changes in the discount rate assumption since the inception of the contracts to reflect the changes in the upper-medium-grade fixed-income instrument (single-A) interest rate for the liability for future policy benefits associated with certain long-duration contracts.
The effect this standard adoption has on stockholders’ equity will be impacted by economic conditions, including fluctuations in both the capital markets and interest rates, as well as certain actuarial assumptions. As such, based on market movements subsequent to January 1, 2021, we expect the impact to stockholders’ equity will be less significant as of December 31, 2022, in comparison to the expected transition impact. |
3. Variable Interest Entities
Consolidated VIEs
Reinsurance-Related Notes
We are the sole equity owner of Lincoln Financial Limited Liability Company I (“LFLLCI”), which we formed in July 2013. The activities of LFLLCI relate solely to our captive reinsurance subsidiary, the Lincoln Reinsurance Company of Vermont V (“LRCVV”), and are primarily to acquire, hold and issue notes with LRCVV as well as pay and collect interest on the notes. LFLLCI holds a surplus note issued by LRCVV that had an outstanding principal balance of $568 million as of December 31, 2022. LFLLCI issued a long-term note to LRCVV that has a principal balance that moves concurrently with any variability in the face amount of the surplus note LFLLCI received from LRCVV. We concluded that LFLLCI is a VIE and that LNC is the primary beneficiary as we have the power to direct the most significant activities affecting the performance of LFLLCI.
Asset information (dollars in millions) for the consolidated VIEs included on the Consolidated Balance Sheets was as follows:
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Total return swap |
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| 1 |
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| $ | 568 |
| $ | - |
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| 1 |
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| $ | 594 |
| $ | - |
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There were no gains or losses for consolidated VIEs recognized on the Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2022 and 2021.
Unconsolidated VIEs
Reinsurance-Related Notes
Effective September 30, 2014, we entered into a transaction with a non-affiliated VIE whose primary activities are to acquire, hold and issue notes and loans, pay and collect interest on the notes and loans, and enter into derivative instruments. We issued a long-term senior note to the non-affiliated VIE in exchange for a corporate bond AFS security of like principal and duration that was assigned to one of our subsidiaries. The outstanding principal balance of this long-term senior note was $1.0 billion as of December 31, 2022, and it is variable in nature; moving concurrently with any variability in the face amount of the corporate bond AFS security up to a maximum amount of $1.1 billion. We have concluded that we are not the primary beneficiary of the non-affiliated VIE because we do not have power over the activities that most significantly affect its economic performance. In addition, the terms of the senior note provide us with a set-off right with the corporate bond AFS security we purchased from the VIE; therefore, neither appears on the Consolidated Balance Sheets. The VIE has entered into a total return swap with an unaffiliated third party that supports any necessary principal funding of the corporate bond AFS security required by our subsidiaries while the security is outstanding.
Effective October 1, 2017, our captive reinsurance subsidiary, the Lincoln Reinsurance Company of Vermont VI, restructured the $275 million, long-term surplus note which was originally issued to a non-affiliated VIE in October 2015 in exchange for two corporate bond AFS securities of like principal and duration. The activities of the VIE are primarily to acquire, hold and issue notes and loans and to pay and collect interest on the notes and loans. The outstanding principal balance of the long-term surplus note is variable in nature; moving concurrently with any variability in the face amount of the corporate bond AFS securities. We have concluded that we are not the primary beneficiary of the non-affiliated VIE because we do not have power over the activities that most significantly affect its economic performance. As of December 31, 2022, the principal balance of the long-term surplus note was zero and we do not currently have any exposure to this VIE.
Effective November 1, 2019, we entered into a transaction with a non-affiliated VIE whose primary activities are to acquire, hold and issue notes, as well as pay and collect interest on the notes. We issued a long-term senior note to the non-affiliated VIE in exchange for a corporate bond AFS security of like principal and duration that was assigned to one of our subsidiaries. The outstanding principal balance of this long-term senior note was $391 million as of December 31, 2022, and it is variable in nature, moving concurrently with any variability in the face amount of the corporate bond AFS security up to a maximum amount of $500 million. We have concluded that we are not the primary beneficiary of the non-affiliated VIE due to our lack of power over the activities that most significantly affect its economic performance as well as the extent of our obligation to absorb its losses. In addition, the terms of the senior note provide us with a set-off right with the corporate bond AFS security we purchased from the VIE; therefore, neither appears on the Consolidated Balance Sheets.
Effective September 30, 2021, we entered into a transaction with a non-affiliated VIE whose primary activities are to acquire, hold and issue notes, as well as pay and collect interest on the notes. We issued a long-term senior note to the non-affiliated VIE in exchange for a corporate bond AFS security of like principal and duration that was assigned to one of our subsidiaries. The outstanding principal balance of this long-term senior note was $400 million as of December 31, 2022, and it is variable in nature, moving concurrently with any variability in the face amount of the corporate bond AFS security up to a maximum amount of $400 million. We have concluded that we are not the primary beneficiary of the non-affiliated VIE due to our lack of power over the activities that most significantly affect its economic performance as well as the extent of our obligation to absorb its losses. In addition, the terms of the senior note provide us with a set-off right with the corporate bond AFS security we purchased from the VIE; therefore, neither appears on the Consolidated Balance Sheets.
Effective December 31, 2022, we entered into a transaction with a non-affiliated VIE whose primary activities are to acquire, hold and issue notes, as well as pay and collect interest on the notes. We issued a long-term note to the non-affiliated VIE in exchange for a corporate bond AFS security of like principal and duration that was assigned to one of our subsidiaries. The outstanding principal balance of this long-term note was $500 million as of December 31, 2022, and it is variable in nature, moving concurrently with any variability in the face amount of the corporate bond AFS security up to a maximum amount of $500 million. We have concluded that we are not the primary beneficiary of the non-affiliated VIE due to our lack of power over the activities that most significantly affect its economic performance as well as the extent of our obligation to absorb its losses. In addition, the terms of the note provide us with a set-off right with the corporate bond AFS security we received from the VIE; therefore, neither appears on the Consolidated Balance Sheets.
Structured Securities
Through our investment activities, we make passive investments in structured securities issued by VIEs for which we are not the manager. These structured securities include our ABS, RMBS and CMBS. We have not provided financial or other support with respect to these VIEs other than our original investment. We have determined that we are not the primary beneficiary of these VIEs due to the relative size of our investment in comparison to the principal amount of the structured securities issued by the VIEs and the level of credit subordination that reduces our obligation to absorb losses or right to receive benefits. Our maximum exposure to loss on these structured securities is limited to the amortized cost for these investments. We recognize our variable interest in these VIEs at fair value on the Consolidated Balance Sheets. For information about these structured securities, see Note 4.
Limited Partnerships and Limited Liability Companies
We invest in certain LPs and limited liability companies (“LLCs”) that we have concluded are VIEs. Our exposure to loss is limited to the capital we invest in the LPs and LLCs. We do not hold any substantive kick-out or participation rights in the LPs and LLCs, and we do not receive any performance fees or decision maker fees from the LPs and LLCs. Based on our analysis of the LPs and LLCs, we are not the primary beneficiary of the VIEs as we do not have the power to direct the most significant activities of the LPs and LLCs. The carrying amounts of our investments in the LPs and LLCs are recognized in other investments on the Consolidated Balance Sheets and were $3.1 billion and $2.9 billion as of December 31, 2022 and 2021, respectively.
4. Investments
Fixed Maturity AFS Securities
The amortized cost, gross unrealized gains and losses, allowance for credit losses and fair value of fixed maturity AFS securities (in millions) were as follows:
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| As of December 31, 2022 |
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| Allowance |
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| Amortized |
| Gross Unrealized |
| for Credit |
| Fair |
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| Cost |
| Gains |
| Losses |
| Losses |
| Value |
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Fixed maturity AFS securities: |
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Corporate bonds | $ | 89,249 |
| $ | 787 |
| $ | 11,004 |
| $ | 9 |
| $ | 79,023 |
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U.S. government bonds |
| 405 |
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| 5 |
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| 31 |
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| - |
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| 379 |
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State and municipal bonds |
| 5,410 |
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| 172 |
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| 512 |
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| - |
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| 5,070 |
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Foreign government bonds |
| 348 |
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| 17 |
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| 47 |
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| - |
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| 318 |
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RMBS |
| 2,216 |
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| 22 |
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| 222 |
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| 7 |
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| 2,009 |
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CMBS |
| 1,917 |
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| 3 |
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| 246 |
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| - |
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| 1,674 |
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ABS |
| 11,797 |
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| 38 |
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| 926 |
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| 5 |
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| 10,904 |
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Hybrid and redeemable preferred securities |
| 365 |
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| 25 |
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| 30 |
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| 1 |
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| 359 |
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Total fixed maturity AFS securities | $ | 111,707 |
| $ | 1,069 |
| $ | 13,018 |
| $ | 22 |
| $ | 99,736 |
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| Fair |
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| Cost |
| Gains |
| Losses |
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| Value |
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Fixed maturity AFS securities: |
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Corporate bonds | $ | 86,373 |
| $ | 12,113 |
| $ | 349 |
| $ | 17 |
| $ | 98,120 |
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U.S. government bonds |
| 375 |
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| 60 |
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| 2 |
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| - |
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| 433 |
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State and municipal bonds |
| 5,322 |
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| 1,311 |
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| 12 |
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| - |
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| 6,621 |
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Foreign government bonds |
| 373 |
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| 64 |
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| 5 |
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| - |
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| 432 |
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RMBS |
| 2,334 |
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| 196 |
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| 4 |
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| 1 |
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| 2,525 |
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CMBS |
| 1,552 |
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| 61 |
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| 14 |
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| - |
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| 1,599 |
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ABS |
| 8,439 |
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| 127 |
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| 54 |
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| - |
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| 8,512 |
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Hybrid and redeemable preferred securities |
| 409 |
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| 107 |
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| 11 |
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| 1 |
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| 504 |
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Total fixed maturity AFS securities | $ | 105,177 |
| $ | 14,039 |
| $ | 451 |
| $ | 19 |
| $ | 118,746 |
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The amortized cost and fair value of fixed maturity AFS securities by contractual maturities (in millions) as of December 31, 2022, were as follows:
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| Amortized |
| Fair |
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| Cost |
| Value |
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Due in one year or less | $ | 3,386 |
| $ | 3,352 |
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Due after one year through five years |
| 17,659 |
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| 16,816 |
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Due after five years through ten years |
| 18,568 |
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| 16,736 |
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Due after ten years |
| 56,164 |
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| 48,245 |
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Subtotal |
| 95,777 |
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| 85,149 |
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Structured securities (RMBS, CMBS, ABS) |
| 15,930 |
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| 14,587 |
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Total fixed maturity AFS securities | $ | 111,707 |
| $ | 99,736 |
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Actual maturities may differ from contractual maturities because issuers may have the right to call or pre-pay obligations.
The fair value and gross unrealized losses of fixed maturity AFS securities (dollars in millions) for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:
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| Less Than or Equal |
| Greater Than |
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| to Twelve Months |
| Twelve Months |
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| Fair | Unrealized | Fair | Unrealized | Fair |
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| Value |
| Losses |
| Value |
| Losses |
| Value |
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| Losses (1) |
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Fixed maturity AFS securities: |
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Corporate bonds | $ | 10,796 |
| $ | 234 |
| $ | 1,567 |
| $ | 115 |
| $ | 12,363 |
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| $ | 349 |
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U.S. government bonds |
| 6 |
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| - |
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| 26 |
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| 2 |
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| 32 |
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| 2 |
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State and municipal bonds |
| 522 |
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| 11 |
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| 24 |
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| 1 |
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| 546 |
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| 12 |
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Foreign government bonds |
| 61 |
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| 3 |
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| 56 |
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| 2 |
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| 117 |
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| 5 |
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RMBS |
| 262 |
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| 3 |
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| 22 |
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| 1 |
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| 284 |
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| 4 |
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CMBS |
| 446 |
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| 12 |
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| 37 |
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| 2 |
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| 483 |
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| 14 |
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ABS |
| 4,646 |
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| 49 |
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| 165 |
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| 5 |
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| 4,811 |
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| 54 |
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Hybrid and redeemable |
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preferred securities |
| 47 |
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| 1 |
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| 76 |
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| 10 |
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| 123 |
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| 11 |
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Total fixed maturity AFS securities | $ | 16,786 |
| $ | 313 |
| $ | 1,973 |
| $ | 138 |
| $ | 18,759 |
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| $ | 451 |
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Total number of fixed maturity AFS securities in an unrealized loss position |
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| 2,597 |
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(1)As of December 31, 2022 and 2021, we recognized $6 million and $8 million of gross unrealized losses, respectively, in OCI for fixed maturity AFS securities for which an allowance for credit losses has been recorded.
The fair value, gross unrealized losses (in millions) and number of fixed maturity AFS securities where the fair value had declined and remained below amortized cost by greater than 20% were as follows:
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| As of December 31, 2022 |
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| Gross |
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| Number |
| ||
| Fair |
| Unrealized |
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| of |
| |||
| Value |
| Losses |
| Securities (1) | |||||
Less than six months | $ | 11,351 |
| $ | 3,659 |
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| 1,500 |
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Six months or greater, but less than nine months |
| 4,411 |
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| 2,226 |
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| 650 |
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Nine months or greater, but less than twelve months |
| 447 |
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| 302 |
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| 74 |
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Twelve months or greater |
| 2 |
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| 1 |
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| 15 |
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Total | $ | 16,211 |
| $ | 6,188 |
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| 2,239 |
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| As of December 31, 2021 |
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| Gross |
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| Number |
| |||
| Fair |
| Unrealized |
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| of |
| |||
| Value |
| Losses |
| Securities (1) | |||||
Less than six months | $ | 12 |
| $ | 3 |
|
|
| 6 |
|
Twelve months or greater |
| 58 |
|
| 8 |
|
|
| 24 |
|
Total | $ | 70 |
| $ | 11 |
|
|
| 30 |
|
(1)We may reflect a security in more than one aging category based on various purchase dates.
Our gross unrealized losses on fixed maturity AFS securities increased by $12.6 billion for the year ended December 31, 2022. As discussed further below, we believe the unrealized loss position as of December 31, 2022, did not require an impairment recognized in earnings as (i) we did not intend to sell these fixed maturity AFS securities; (ii) it is not more likely than not that we will be required to sell the fixed maturity AFS securities before recovery of their amortized cost basis; and (iii) the difference in the fair value compared to the amortized cost was due to factors other than credit loss. Based upon this evaluation as of December 31, 2022, management believes we have the ability to generate adequate amounts of cash from our normal operations (e.g., insurance premiums, fee income and investment income) to meet cash requirements with a prudent margin of safety without requiring the sale of our impaired securities.
As of December 31, 2022, the unrealized losses associated with our corporate bond, U.S. government bond, state and municipal bond and foreign government bond securities were attributable primarily to rising interest rates and widening credit spreads since purchase. We performed a detailed analysis of the financial performance of the underlying issuers and determined that we expected to recover the entire amortized cost of each impaired security.
Credit ratings express opinions about the credit quality of a security. Securities rated investment grade (those rated BBB- or higher by S&P Global Ratings (“S&P”) or Baa3 or higher by Moody’s Investors Service (“Moody’s”)) are generally considered by the rating agencies and market participants to be low credit risk. As of December 31, 2022 and 2021, 96% of the fair value of our corporate bond portfolio was rated investment grade. As of December 31, 2022 and 2021, the portion of our corporate bond portfolio rated below investment grade had an amortized cost of $3.7 billion, and a fair value of $3.5 billion and $3.8 billion, respectively. Based upon the analysis discussed above, we believe that as of December 31, 2022 and 2021, we would have recovered the amortized cost of each corporate bond.
As of December 31, 2022, the unrealized losses associated with our MBS and ABS were attributable primarily to rising interest rates and widening credit spreads since purchase. We assessed for credit impairment using a cash flow model that incorporates key assumptions including default rates, severities and prepayment rates. We estimated losses for a security by forecasting the underlying loans in each transaction. The forecasted loan performance was used to project cash flows to the various tranches in the structure, as applicable. Our forecasted cash flows also considered, as applicable, independent industry analyst reports and forecasts and other independent market data. Based upon our assessment of the expected credit losses of the security given the performance of the underlying collateral compared to our subordination or other credit enhancement, we expected to recover the entire amortized cost of each impaired security.
As of December 31, 2022, the unrealized losses associated with our hybrid and redeemable preferred securities were attributable primarily to wider credit spreads caused by illiquidity in the market and subordination within the capital structure, as well as credit risk of underlying issuers. For our hybrid and redeemable preferred securities, we evaluated the financial performance of the underlying issuers based upon credit performance and investment ratings and determined that we expected to recover the entire amortized cost of each impaired security.
Credit Loss Impairment on Fixed Maturity AFS Securities
We regularly review our fixed maturity AFS securities for declines in fair value that we determine to be impairment-related, including those attributable to credit risk factors that may require an allowance for credit losses. See Note 1 for a detailed discussion regarding our accounting policy relating to the allowance for credit losses on our fixed maturity AFS securities.
Changes in the allowance for credit losses on fixed maturity AFS securities (in millions), aggregated by investment category, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Year Ended December 31, 2022 |
| ||||||||||
| Corporate |
|
|
|
|
|
|
|
|
|
| |
| Bonds |
| RMBS |
| Other |
| Total |
| ||||
Balance as of beginning-of-year | $ | 17 |
| $ | 1 |
| $ | 1 |
| $ | 19 |
|
Additions from purchases of PCD debt securities (1) |
| - |
|
| - |
|
| - |
|
| - |
|
Additions for securities for which credit losses were not |
|
|
|
|
|
|
|
|
|
|
|
|
previously recognized |
| 4 |
|
| 3 |
|
| 1 |
|
| 8 |
|
Additions (reductions) for securities for which credit losses |
|
|
|
|
|
|
|
|
|
|
|
|
were previously recognized |
| 2 |
|
| 3 |
|
| 4 |
|
| 9 |
|
Reductions for securities disposed |
| (2 | ) |
| - |
|
| - |
|
| (2 | ) |
Reductions for securities charged-off |
| (12 | ) |
| - |
|
| - |
|
| (12 | ) |
Balance as of end-of-year (2) | $ | 9 |
| $ | 7 |
| $ | 6 |
| $ | 22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Year Ended December 31, 2021 |
| ||||||||||
| Corporate |
|
|
|
|
|
|
|
|
|
| |
| Bonds |
| RMBS |
| Other |
| Total |
| ||||
Balance as of beginning-of-year | $ | 12 |
| $ | 1 |
| $ | - |
| $ | 13 |
|
Additions from purchases of PCD debt securities (1) |
| - |
|
| - |
|
| - |
|
| - |
|
Additions for securities for which credit losses were not |
|
|
|
|
|
|
|
|
|
|
|
|
previously recognized |
| 8 |
|
| - |
|
| 1 |
|
| 9 |
|
Additions (reductions) for securities for which credit losses |
|
|
|
|
|
|
|
|
|
|
|
|
were previously recognized |
| 5 |
|
| - |
|
| - |
|
| 5 |
|
Reductions for securities disposed |
| (2 | ) |
| - |
|
| - |
|
| (2 | ) |
Reductions for securities charged-off |
| (6 | ) |
| - |
|
| - |
|
| (6 | ) |
Balance as of end-of-year (2) | $ | 17 |
| $ | 1 |
| $ | 1 |
| $ | 19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Year Ended December 31, 2020 |
| ||||||||||
| Corporate |
|
|
|
|
|
|
|
|
|
| |
| Bonds |
| RMBS |
| Other |
| Total |
| ||||
Balance as of beginning-of-year | $ | - |
| $ | - |
| $ | - |
| $ | - |
|
Additions from purchases of PCD debt securities (1) |
| - |
|
| - |
|
| - |
|
| - |
|
Additions for securities for which credit losses were not |
|
|
|
|
|
|
|
|
|
|
|
|
previously recognized |
| 43 |
|
| 1 |
|
| 1 |
|
| 45 |
|
Additions (reductions) for securities for which credit losses |
|
|
|
|
|
|
|
|
|
|
|
|
were previously recognized |
| (1 | ) |
| - |
|
| (1 | ) |
| (2 | ) |
Reductions for securities disposed |
| (17 | ) |
| - |
|
| - |
|
| (17 | ) |
Reductions for securities charged-off |
| (13 | ) |
| - |
|
| - |
|
| (13 | ) |
Balance as of end-of-year (2) | $ | 12 |
| $ | 1 |
| $ | - |
| $ | 13 |
|
(1)Represents purchased credit-deteriorated (“PCD”) fixed maturity AFS securities.
(2)As of December 31, 2022, 2021 and 2020, accrued investment income on fixed maturity AFS securities totaled $1.1 billion, $972 million and $1.0 billion, respectively, and was excluded from the estimate of credit losses.
Trading Securities
Trading securities at fair value (in millions) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, |
| ||||
| 2022 |
| 2021 |
| ||
Fixed maturity securities: |
|
|
|
|
|
|
Corporate bonds | $ | 2,248 |
| $ | 2,734 |
|
U.S. government bonds |
| - |
|
| 32 |
|
State and municipal bonds |
| 21 |
|
| 27 |
|
Foreign government bonds |
| 49 |
|
| 73 |
|
RMBS |
| 99 |
|
| 95 |
|
CMBS |
| 137 |
|
| 137 |
|
ABS |
| 919 |
|
| 1,338 |
|
Hybrid and redeemable preferred securities |
| 25 |
|
| 46 |
|
Total trading securities | $ | 3,498 |
| $ | 4,482 |
|
The portion of the market adjustment for trading gains and losses recognized in realized gain (loss) that relate to trading securities still held as of December 31, 2022, 2021 and 2020, was $(632) million, $(51) million and $118 million, respectively.
Mortgage Loans on Real Estate
The following provides the current and past due composition of our mortgage loans on real estate (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, 2022 |
| As of December 31, 2021 |
| ||||||||||||||
| Commercial |
| Residential |
| Total |
| Commercial |
| Residential |
| Total |
| ||||||
Current | $ | 17,003 |
| $ | 1,315 |
| $ | 18,318 |
| $ | 17,167 |
| $ | 837 |
| $ | 18,004 |
|
30 to 59 days past due |
| 19 |
|
| 23 |
|
| 42 |
|
| 15 |
|
| 21 |
|
| 36 |
|
60 to 89 days past due |
| - |
|
| 6 |
|
| 6 |
|
| - |
|
| 5 |
|
| 5 |
|
90 or more days past due |
| - |
|
| 33 |
|
| 33 |
|
| - |
|
| 29 |
|
| 29 |
|
Allowance for credit losses |
| (84 | ) |
| (15 | ) |
| (99 | ) |
| (79 | ) |
| (17 | ) |
| (96 | ) |
Unamortized premium (discount) |
| (8 | ) |
| 36 |
|
| 28 |
|
| (11 | ) |
| 27 |
|
| 16 |
|
Mark-to-market gains (losses) (1) |
| (27 | ) |
| - |
|
| (27 | ) |
| (3 | ) |
| - |
|
| (3 | ) |
Total carrying value | $ | 16,903 |
| $ | 1,398 |
| $ | 18,301 |
| $ | 17,089 |
| $ | 902 |
| $ | 17,991 |
|
(1)Represents 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.
Our commercial mortgage loan portfolio had the largest concentrations in California, which accounted for 27% and 26% of commercial mortgage loans on real estate as of December 31, 2022 and 2021, respectively, and Texas, which accounted for 9% of commercial mortgage loans on real estate as of December 31, 2022 and 2021.
As of December 31, 2022, our residential mortgage loan portfolio had the largest concentrations in California and New Jersey, which accounted for 17% and 12% of residential mortgage loans on real estate, respectively. As of December 31, 2021, our residential mortgage loan portfolio had the largest concentrations in California and Florida, which accounted for 22% and 14% of residential mortgage loans on real estate, respectively.
As of December 31, 2022 and 2021, we had 73 and 65 residential mortgage loans, respectively, that were either delinquent or in foreclosure. As of December 31, 2022 and 2021, we had 49 and 34 residential mortgage loans in foreclosure, respectively, with an aggregate carrying value of $21 million and $15 million, respectively.
As of December 31, 2022 and 2021, there were two and four specifically identified impaired commercial mortgage loans, respectively, with an aggregate carrying value of less than $1 million and $1 million, respectively.
As of December 31, 2022 and 2021, there were 37 and 50 specifically identified impaired residential mortgage loans, respectively, with an aggregate carrying value of $16 million and $22 million, respectively.
Additional information related to impaired mortgage loans on real estate (in millions) was as follows:
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Average aggregate carrying value for impaired mortgage loans on real estate | $ | 16 |
| $ | 32 |
| $ | 21 |
|
Interest income recognized on impaired mortgage loans on real estate |
| - |
|
| - |
|
| - |
|
Interest income collected on impaired mortgage loans on real estate |
| - |
|
| - |
|
| - |
|
The amortized cost of mortgage loans on real estate on nonaccrual status (in millions) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, 2022 |
| As of December 31, 2021 |
| ||||||||
| Nonaccrual |
|
|
|
| Nonaccrual |
|
|
|
| ||
| with no |
|
|
|
| with no |
|
|
|
| ||
| Allowance |
|
|
|
| Allowance |
|
|
|
| ||
| for Credit |
|
|
|
| for Credit |
|
|
|
| ||
| Losses |
| Nonaccrual |
| Losses |
| Nonaccrual |
| ||||
Commercial mortgage loans on real estate | $ | - |
| $ | - |
| $ | - |
| $ | - |
|
Residential mortgage loans on real estate |
| - |
|
| 34 |
|
| - |
|
| 30 |
|
Total | $ | - |
| $ | 34 |
| $ | - |
| $ | 30 |
|
We use loan-to-value and debt-service coverage ratios as credit quality indicators for our commercial mortgage loans on real estate. The amortized cost of commercial mortgage loans on real estate (dollars in millions) by year of origination and credit quality indicator was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, 2022 |
| ||||||||||||||||
|
|
|
| Debt- |
|
|
|
| Debt- |
|
|
|
| Debt- |
|
|
|
|
|
|
|
| Service |
|
|
|
| Service |
|
|
|
| Service |
|
|
|
|
| Less |
| Coverage |
| 65% |
| Coverage |
| Greater |
| Coverage |
|
|
| ||||
| than 65% |
| Ratio |
| to 75% |
| Ratio |
| than 75% |
| Ratio |
| Total |
| ||||
Origination Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 | $ | 1,769 |
| 2.06 |
| $ | 105 |
| 1.50 |
| $ | 2 |
| 1.45 |
| $ | 1,876 |
|
2021 |
| 2,354 |
| 3.05 |
|
| 72 |
| 1.53 |
|
| - |
| - |
|
| 2,426 |
|
2020 |
| 1,289 |
| 3.00 |
|
| 17 |
| 1.58 |
|
| - |
| - |
|
| 1,306 |
|
2019 |
| 2,685 |
| 2.18 |
|
| 81 |
| 1.50 |
|
| 29 |
| 1.58 |
|
| 2,795 |
|
2018 |
| 2,225 |
| 2.17 |
|
| 71 |
| 1.62 |
|
| - |
| - |
|
| 2,296 |
|
2017 and prior |
| 6,184 |
| 2.44 |
|
| 131 |
| 1.75 |
|
| - |
| - |
|
| 6,315 |
|
Total | $ | 16,506 |
|
|
| $ | 477 |
|
|
| $ | 31 |
|
|
| $ | 17,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, 2021 |
| ||||||||||||||||
|
|
|
| Debt- |
|
|
|
| Debt- |
|
|
|
| Debt- |
|
|
|
|
|
|
|
| Service |
|
|
|
| Service |
|
|
|
| Service |
|
|
|
|
| Less |
| Coverage |
| 65% |
| Coverage |
| Greater |
| Coverage |
|
|
| ||||
| than 65% |
| Ratio |
| to 75% |
| Ratio |
| than 75% |
| Ratio |
| Total |
| ||||
Origination Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 | $ | 2,384 |
| 3.04 |
| $ | 136 |
| 1.74 |
| $ | - |
| - |
| $ | 2,520 |
|
2020 |
| 1,358 |
| 3.03 |
|
| 144 |
| 2.06 |
|
| - |
| - |
|
| 1,502 |
|
2019 |
| 2,917 |
| 2.15 |
|
| 188 |
| 1.42 |
|
| - |
| - |
|
| 3,105 |
|
2018 |
| 2,274 |
| 2.13 |
|
| 172 |
| 1.59 |
|
| 15 |
| 1.02 |
|
| 2,461 |
|
2017 |
| 1,655 |
| 2.33 |
|
| 149 |
| 1.74 |
|
| 27 |
| 0.83 |
|
| 1,831 |
|
2016 and prior |
| 5,554 |
| 2.41 |
|
| 171 |
| 1.76 |
|
| 27 |
| 1.08 |
|
| 5,752 |
|
Total | $ | 16,142 |
|
|
| $ | 960 |
|
|
| $ | 69 |
|
|
| $ | 17,171 |
|
We use loan performance status as the primary credit quality indicator for our residential mortgage loans on real estate. The amortized cost of residential mortgage loans on real estate (in millions) by year of origination and credit quality indicator was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, 2022 |
| |||||||||
| Performing |
| Nonperforming |
| Total |
| |||||
Origination Year |
|
|
|
|
|
|
|
|
|
|
|
2022 | $ | 578 |
|
| $ | 5 |
|
| $ | 583 |
|
2021 |
| 527 |
|
|
| 6 |
|
|
| 533 |
|
2020 |
| 90 |
|
|
| 3 |
|
|
| 93 |
|
2019 |
| 119 |
|
|
| 18 |
|
|
| 137 |
|
2018 |
| 65 |
|
|
| 2 |
|
|
| 67 |
|
2017 and prior |
| - |
|
|
| - |
|
|
| - |
|
Total | $ | 1,379 |
|
| $ | 34 |
|
| $ | 1,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, 2021 |
| |||||||||
| Performing |
| Nonperforming |
| Total |
| |||||
Origination Year |
|
|
|
|
|
|
|
|
|
|
|
2021 | $ | 467 |
|
| $ | 2 |
|
| $ | 469 |
|
2020 |
| 129 |
|
|
| 2 |
|
|
| 131 |
|
2019 |
| 189 |
|
|
| 21 |
|
|
| 210 |
|
2018 |
| 104 |
|
|
| 5 |
|
|
| 109 |
|
2017 |
| - |
|
|
| - |
|
|
| - |
|
2016 and prior |
| - |
|
|
| - |
|
|
| - |
|
Total | $ | 889 |
|
| $ | 30 |
|
| $ | 919 |
|
Credit Losses on Mortgage Loans on Real Estate
In connection with our recognition of an allowance for credit losses for mortgage loans on real estate, we perform a quantitative analysis using a probability of default/loss given default/exposure at default approach to estimate expected credit losses in our mortgage loan portfolio as well as unfunded commitments related to commercial mortgage loans, exclusive of certain mortgage loans held at fair value. See Note 1 for a detailed discussion regarding our accounting policy relating to the allowance for credit losses on our mortgage loans on real estate.
Changes in the allowance for credit losses on mortgage loans on real estate (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
| For the Year Ended December 31, 2022 |
| |||||||
| Commercial |
| Residential |
| Total |
| |||
Balance as of beginning-of-year | $ | 79 |
| $ | 17 |
| $ | 96 |
|
Additions (reductions) from provision for credit loss expense (1) |
| 5 |
|
| (2 | ) |
| 3 |
|
Additions from purchases of PCD mortgage loans on real estate |
| - |
|
| - |
|
| - |
|
Balance as of end-of-year (2) | $ | 84 |
| $ | 15 |
| $ | 99 |
|
|
|
|
|
|
|
|
|
|
|
| For the Year Ended December 31, 2021 |
| |||||||
| Commercial |
| Residential |
| Total |
| |||
Balance as of beginning-of-year | $ | 187 |
| $ | 17 |
| $ | 204 |
|
Additions (reductions) from provision for credit loss expense (1) |
| (108 | ) |
| - |
|
| (108 | ) |
Additions from purchases of PCD mortgage loans on real estate |
| - |
|
| - |
|
| - |
|
Balance as of end-of-year (2) | $ | 79 |
| $ | 17 |
| $ | 96 |
|
|
|
|
|
|
|
|
|
|
|
| For the Year Ended December 31, 2020 |
| |||||||
| Commercial |
| Residential |
| Total |
| |||
Balance as of beginning-of-year | $ | - |
| $ | 2 |
| $ | 2 |
|
Impact of adopting new accounting standard |
| 62 |
|
| 26 |
|
| 88 |
|
Additions (reductions) from provision for credit loss expense (1) |
| 125 |
|
| (11 | ) |
| 114 |
|
Additions from purchases of PCD mortgage loans on real estate |
| - |
|
| - |
|
| - |
|
Balance as of end-of-year (2) | $ | 187 |
| $ | 17 |
| $ | 204 |
|
(1)We did not recognize any credit loss benefit (expense) related to unfunded commitments for mortgage loans on real estate for the year ended December 31, 2022. We recognized $4 million and $(2) million of credit loss benefit (expense) related to unfunded commitments for mortgage loans on real estate for the years ended December 31, 2021 and 2020, respectively.
(2)Accrued investment income on mortgage loans on real estate totaled $51 million, $49 million and $49 million as of December 31, 2022, 2021 and 2020, respectively, and was excluded from the estimate of credit losses.
Alternative Investments
As of December 31, 2022 and 2021, alternative investments included investments in 337 and 311 different partnerships, respectively, and represented approximately 2% of total investments.
Net Investment Income
The major categories of net investment income (in millions) on the Consolidated Statements of Comprehensive Income (Loss) were as follows:
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|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Fixed maturity AFS securities | $ | 4,469 |
| $ | 4,351 |
| $ | 4,334 |
|
Trading securities |
| 182 |
|
| 167 |
|
| 202 |
|
Equity securities |
| 11 |
|
| 3 |
|
| 3 |
|
Mortgage loans on real estate |
| 689 |
|
| 680 |
|
| 677 |
|
Policy loans |
| 101 |
|
| 115 |
|
| 125 |
|
Cash and invested cash |
| 13 |
|
| - |
|
| 12 |
|
Commercial mortgage loan prepayment |
|
|
|
|
|
|
|
|
|
and bond make-whole premiums |
| 105 |
|
| 199 |
|
| 82 |
|
Alternative investments |
| 66 |
|
| 679 |
|
| 197 |
|
Consent fees |
| 8 |
|
| 10 |
|
| 7 |
|
Other investments |
| 79 |
|
| 64 |
|
| 46 |
|
Investment income |
| 5,723 |
|
| 6,268 |
|
| 5,685 |
|
Investment expense |
| (212 | ) |
| (153 | ) |
| (175 | ) |
Net investment income | $ | 5,511 |
| $ | 6,115 |
| $ | 5,510 |
|
Impairments on Fixed Maturity AFS Securities
Details underlying credit loss benefit (expense) incurred as a result of impairments that were recognized in net income (loss) and included in realized gain (loss) on fixed maturity AFS securities (in millions) were as follows:
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| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Credit Loss Benefit (Expense) |
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|
|
|
|
|
Fixed maturity AFS securities: |
|
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|
|
|
|
|
|
|
Corporate bonds | $ | (5 | ) | $ | (10 | ) | $ | (25 | ) |
RMBS |
| (6 | ) |
| - |
|
| (1 | ) |
ABS |
| (4 | ) |
| - |
|
| - |
|
Hybrid and redeemable preferred securities |
| - |
|
| (1 | ) |
| - |
|
Gross credit loss benefit (expense) |
| (15 | ) |
| (11 | ) |
| (26 | ) |
Associated amortization of DAC, VOBA, DSI and DFEL |
| - |
|
| - |
|
| 1 |
|
Net credit loss benefit (expense) | $ | (15 | ) | $ | (11 | ) | $ | (25 | ) |
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Payables for Collateral on Investments
The carrying value of the payables for collateral on investments included on the Consolidated Balance Sheets and the fair value of the related investments or collateral (in millions) consisted of the following:
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| As of December 31, 2022 |
| As of December 31, 2021 |
| ||||||||
| Carrying |
| Fair |
| Carrying |
| Fair |
| ||||
| Value |
| Value |
| Value |
| Value |
| ||||
Collateral payable for derivative investments (1) | $ | 3,284 |
| $ | 3,284 |
| $ | 5,575 |
| $ | 5,575 |
|
Securities pledged under securities lending agreements (2) |
| 298 |
|
| 287 |
|
| 241 |
|
| 235 |
|
Investments pledged for FHLBI (3) |
| 3,130 |
|
| 3,925 |
|
| 3,130 |
|
| 4,876 |
|
Total payables for collateral on investments | $ | 6,712 |
| $ | 7,496 |
| $ | 8,946 |
| $ | 10,686 |
|
(1)We obtain collateral based upon contractual provisions with our counterparties. These agreements take into consideration the counterparties’ credit rating as compared to ours, the fair value of the derivative investments and specified thresholds that if exceeded result in the receipt of cash that is typically invested in cash and invested cash. This also includes interest payable on collateral. See Note 5 for additional information.
(2)Our pledged securities under securities lending agreements are included in fixed maturity AFS securities on the Consolidated Balance Sheets. We generally obtain collateral in an amount equal to 102% and 105% of the fair value of the domestic and foreign securities, respectively. We value collateral daily and obtain additional collateral when deemed appropriate. The cash received in our securities lending program is typically invested in cash and invested cash or fixed maturity AFS securities.
(3)Our pledged investments for FHLBI are included in fixed maturity AFS securities and mortgage loans on real estate on the Consolidated Balance Sheets. The collateral requirements are generally 105% to 115% of the fair value for fixed maturity AFS securities and 155% to 175% of the fair value for mortgage loans on real estate. The cash received in these transactions is primarily invested in cash and invested cash or fixed maturity AFS securities.
We have repurchase agreements through which we can obtain liquidity by pledging securities. The collateral requirements are generally 80% to 95% of the fair value of the securities, and our agreements with third parties contain contractual provisions to allow for additional collateral to be obtained when necessary. The cash received in our repurchase program is typically invested in fixed maturity AFS securities. As of December 31, 2022 and 2021, we were not participating in any open repurchase agreements.
Increase (decrease) in payables for collateral on investments (in millions) consisted of the following:
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|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Collateral payable for derivative investments | $ | (2,291 | ) | $ | 2,599 |
| $ | 1,588 |
|
Securities pledged under securities lending agreements |
| 57 |
|
| 125 |
|
| 2 |
|
Investments pledged for FHLBI |
| - |
|
| - |
|
| (450 | ) |
Total increase (decrease) in payables for collateral on investments | $ | (2,234 | ) | $ | 2,724 |
| $ | 1,140 |
|
We have elected not to offset our securities lending transactions in the consolidated financial statements. The remaining contractual maturities of securities lending transactions accounted for as secured borrowings (in millions) were as follows:
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|
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|
|
|
| As of December 31, 2022 |
| |||||||||||||
| Overnight and Continuous |
| Up to 30 Days |
| 30 - 90 |
| Greater Than 90 Days |
| Total |
| |||||
Securities Lending |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds | $ | 288 |
| $ | - |
| $ | - |
| $ | - |
| $ | 288 |
|
Foreign government bonds |
| 2 |
|
| - |
|
| - |
|
| - |
|
| 2 |
|
Equity securities |
| 8 |
|
| - |
|
| - |
|
| - |
|
| 8 |
|
Total gross secured borrowings | $ | 298 |
| $ | - |
| $ | - |
| $ | - |
| $ | 298 |
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|
|
| As of December 31, 2021 |
| |||||||||||||
| Overnight and Continuous |
| Up to 30 Days |
| 30 - 90 |
| Greater Than 90 Days |
| Total |
| |||||
Securities Lending |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds | $ | 239 |
| $ | - |
| $ | - |
| $ | - |
| $ | 239 |
|
Foreign government bonds |
| 1 |
|
| - |
|
| - |
|
| - |
|
| 1 |
|
Equity securities |
| 1 |
|
| - |
|
| - |
|
| - |
|
| 1 |
|
Total gross secured borrowings | $ | 241 |
| $ | - |
| $ | - |
| $ | - |
| $ | 241 |
|
We accept collateral in the form of securities in connection with repurchase agreements. In instances where we are permitted to sell or re-pledge the securities received, we report the fair value of the collateral received and a related obligation to return the collateral in the consolidated financial statements. In addition, we receive securities in connection with securities borrowing agreements that we are permitted to sell or re-pledge. As of December 31, 2022, the fair value of all collateral received that we are permitted to sell or re-pledge was $25 million, and we had re-pledged all of this collateral to cover initial margin and over-the-counter collateral requirements on certain derivative investments.
Investment Commitments
As of December 31, 2022, our investment commitments were $2.4 billion, which included $1.9 billion of LPs, $310 million of private placement securities and $226 million of mortgage loans on real estate.
Concentrations of Financial Instruments
As of December 31, 2022 and 2021, our most significant investments in one issuer were our investments in securities issued by the Federal National Mortgage Association with a fair value of $745 million and $926 million, respectively, or 1% of total investments, and our investments in securities issued by the Federal Home Loan Mortgage Corporation with a fair value of $720 million and $953 million, respectively, or 1% of total investments. These concentrations include fixed maturity AFS, trading and equity securities.
As of December 31, 2022 and 2021, our most significant investments in one industry were our investments in securities in the financial services industry with a fair value of $16.6 billion and $19.2 billion, respectively, or 13% and 12%, respectively, of total investments, and our investments in securities in the consumer non-cyclical industry with a fair value of $15.1 billion and $19.6 billion, respectively, or 11% and 13%, respectively, of total investments. These concentrations include fixed maturity AFS, trading and equity securities.
5. Derivative Instruments
We maintain an overall risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate risk, foreign currency exchange risk, equity market risk, basis risk, commodity risk and credit risk. We assess these risks by continually identifying and monitoring changes in our exposures that may adversely affect expected future cash flows and by evaluating hedging opportunities.
Derivative activities are monitored by various management committees. The committees are responsible for overseeing the implementation of various hedging strategies that are developed through the analysis of financial simulation models and other internal and industry sources. The resulting hedging strategies are incorporated into our overall risk management strategies.
See Note 1 for a detailed discussion of the accounting treatment for derivative instruments. See Note 20 for additional disclosures related to the fair value of our derivative instruments and Note 3 for derivative instruments related to our consolidated VIEs.
Interest Rate Contracts
We use derivative instruments as part of our interest rate risk management strategy. These instruments are economic hedges unless otherwise noted and include:
Forward-Starting Interest Rate Swaps
We use forward-starting interest rate swaps designated and qualifying as cash flow hedges to hedge our exposure to interest rate fluctuations related to the forecasted purchases of certain assets and anticipated issuances of fixed-rate securities.
We also use forward-starting interest rate swaps to hedge the interest rate exposure within our life and annuity products.
Interest Rate Cap Corridors
We use interest rate cap corridors to provide a level of protection from the effect of rising interest rates for certain life insurance products and annuity contracts. Interest rate cap corridors involve purchasing an interest rate cap at a specific cap rate and selling an interest rate cap with a higher cap rate. For each corridor, the amount of quarterly payments, if any, is determined by the rate at which the underlying index rate resets above the original capped rate. The corridor limits the benefit the purchaser can receive as the related interest rate index rises above the higher capped rate. There is no additional liability to us other than the purchase price associated with the interest rate cap corridor.
Interest Rate Futures
We use interest rate futures contracts to hedge the liability exposure on certain options in variable annuity products. These futures contracts require payment between our counterparty and us on a daily basis for changes in the futures index price.
Interest Rate Swap Agreements
We use interest rate swap agreements to hedge the liability exposure on certain options in variable annuity products.
We also use interest rate swap agreements designated and qualifying as cash flow hedges to hedge the interest rate risk of floating-rate bond coupon payments by replicating a fixed-rate bond.
Finally, we use interest rate swap agreements designated and qualifying as fair value hedges to hedge against changes in the fair value of certain fixed-rate long-term debt and fixed maturity securities due to interest rate risks.
Treasury and Reverse Treasury Locks
We use treasury locks designated and qualifying as cash flow hedges to hedge the interest rate exposure related to our issuance of fixed-rate securities or the anticipated future cash flows of floating-rate fixed maturity securities due to changes in interest rates. In addition, we use reverse treasury locks designated and qualifying as cash flow hedges to hedge the interest rate exposure related to the anticipated purchase of fixed-rate securities or the anticipated future cash flows of floating-rate fixed maturity securities due to changes in interest rates. These derivatives are primarily structured to hedge interest rate risk inherent in the assumptions used to price certain liabilities.
Foreign Currency Contracts
We use derivative instruments as part of our foreign currency risk management strategy. These instruments are economic hedges unless otherwise noted and include:
Currency Futures
We use currency futures to hedge foreign exchange risk associated with certain options in variable annuity products. Currency futures exchange one currency for another at a specified date in the future at a specified exchange rate.
Foreign Currency Swaps
We use foreign currency swaps to hedge foreign exchange risk of investments in fixed maturity securities denominated in foreign currencies. A foreign currency swap is a contractual agreement to exchange one currency for another at specified dates in the future at a specified exchange rate.
We also use foreign currency swaps designated and qualifying as cash flow hedges to hedge foreign exchange risk of investments in fixed maturity securities denominated in foreign currencies.
Foreign Currency Forwards
We use foreign currency forwards to hedge foreign exchange risk of investments in fixed maturity securities denominated in foreign currencies. A foreign currency forward is a contractual agreement to exchange one currency for another at specified dates in the future at a specified current exchange rate.
Equity Market Contracts
We use derivative instruments as part of our equity market risk management strategy that are economic hedges and include:
Call Options Based on the S&P 500® Index and Other Indices
We use call options to hedge the liability exposure on certain options in variable annuity, indexed variable annuity, fixed indexed annuity, IUL and VUL products.
Our indexed annuity and IUL contracts permit the holder to elect an interest rate return or an equity market component, where interest credited to the contracts is linked to the performance of the S&P 500 Index or other indices. Contract holders may elect to rebalance index options at renewal dates. At the end of each indexed term, which can be up to six years, we have the opportunity to re-price the indexed component by establishing participation rates, caps, spreads and specified rates, subject to contractual guarantees. We use call options that are highly correlated to the portfolio allocation decisions of our contract holders, such that we are economically hedged with respect to equity returns for the current reset period.
Consumer Price Index Swaps
We use consumer price index swaps to hedge the liability exposure on certain options in fixed annuity products. Consumer price index swaps are contracts entered into at no cost and whose payoff is the difference between the consumer price index inflation rate and the fixed-rate determined as of inception.
Equity Futures
We use equity futures contracts to hedge the liability exposure on certain options in variable annuity products. These futures contracts require payment between our counterparty and us on a daily basis for changes in the futures index price.
Put Options
We use put options to hedge the liability exposure on certain options in variable annuity, indexed variable annuity and VUL products. Put options are contracts that require counterparties to pay us at a specified future date the amount, if any, by which a specified equity index is less than the strike rate stated in the agreement, applied to a notional amount.
Total Return Swaps
We use total return swaps to hedge the liability exposure on certain options in variable annuity products and indexed variable annuity products.
In addition, we use total return swaps to hedge a portion of the liability related to our deferred compensation plans. We receive the total return on a portfolio of indexes and pay a floating-rate of interest.
Commodity Contracts
We use commodity contracts to economically hedge certain investments that are closely tied to the changes in commodity values. The commodity contract is an over-the-counter contract that combines a purchase put/sold call to lock in a commodity price within a predetermined range in exchange for a net premium.
Credit Contracts
We use derivative instruments as part of our credit risk management strategy that are economic hedges and include:
Credit Default Swaps – Buying Protection
We use credit default swaps (“CDSs”) to hedge the liability exposure on certain options in variable annuity products.
We buy CDSs to hedge against a drop in bond prices due to credit concerns of certain bond issuers. A CDS allows us to put the bond back to the counterparty at par upon a default event by the bond issuer. A default event is defined as bankruptcy, failure to pay, obligation acceleration or restructuring.
CDSs – Selling Protection
We use CDSs to hedge the liability exposure on certain options in variable annuity products.
We sell CDSs to offer credit protection to contract holders and investors. The CDSs hedge the contract holders and investors against a drop in bond prices due to credit concerns of certain bond issuers. A CDS allows the investor to put the bond back to us at par upon a default event by the bond issuer. A default event is defined as bankruptcy, failure to pay, obligation acceleration or restructuring.
Embedded Derivatives
We have embedded derivatives that include:
GLB Reserves Embedded Derivatives
Certain features of these guarantees have elements of both insurance benefits accounted for under the Financial Services – Insurance – Claim Costs and Liabilities for Future Policy Benefits Subtopic of the FASB ASC (“benefit reserves”) and embedded derivatives accounted for under the Derivatives and Hedging and the Fair Value Measurements and Disclosures Topics of the FASB ASC (“embedded derivative reserves”). We calculate the value of the benefit reserves and the embedded derivative reserves based on the specific characteristics of each GLB feature.
We use a hedging strategy designed to mitigate the risk and income statement volatility caused by changes in the equity markets, interest rates and volatility associated with GLBs offered in our variable annuity products, including products with GWB and GIB features. Changes in the value of the hedge contracts due to changes in equity markets, interest rates and implied volatilities hedge the income statement effect of changes in embedded derivative GLB reserves caused by those same factors. We rebalance our hedge positions based upon changes in these factors as needed. While we actively manage our hedge positions, these hedge positions may not be totally effective in offsetting changes in the embedded derivative reserve due to, among other things, differences in timing between when a market exposure changes and corresponding changes to the hedge positions, extreme swings in the equity markets and interest rates, market volatility, contract holder behavior, divergence between the performance of the underlying funds and the hedging indices, divergence between the actual and expected performance of the hedge instruments and our ability to purchase hedging instruments at prices consistent with our desired risk and return trade-off.
Indexed Annuity and IUL Contracts Embedded Derivatives
Our indexed annuity and IUL contracts permit the holder to elect an interest rate return or an equity market component, where interest credited to the contracts is linked to the performance of the S&P 500® Index or other indices. Contract holders may elect to rebalance index options at renewal dates. At the end of each indexed term, which can be up to six years, we have the opportunity to re-price the indexed component by establishing participation rates, caps, spreads and specified rates, subject to contractual guarantees. We use options that are highly correlated to the portfolio allocation decisions of our contract holders, such that we are economically hedged with respect to equity returns for the current reset period.
Reinsurance-Related Embedded Derivatives
We have certain modified coinsurance and coinsurance with funds withheld reinsurance agreements with embedded derivatives related to the withheld assets of the related funds. These derivatives are considered total return swaps with contractual returns that are attributable to various assets and liabilities associated with these reinsurance agreements.
We have derivative instruments with off-balance-sheet risks whose notional or contract amounts exceed the related credit exposure. Outstanding derivative instruments with off-balance-sheet risks (in millions) were as follows:
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| As of December 31, 2022 |
| As of December 31, 2021 |
| ||||||||||||||
| Notional |
| Fair Value |
| Notional |
| Fair Value |
| ||||||||||
| Amounts |
| Asset |
| Liability |
| Amounts |
| Asset |
| Liability |
| ||||||
Qualifying Hedges |
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts (1) | $ | 2,590 |
| $ | 123 |
| $ | 232 |
| $ | 3,222 |
| $ | 98 |
| $ | 436 |
|
Foreign currency contracts (1) |
| 4,383 |
|
| 643 |
|
| 18 |
|
| 3,979 |
|
| 283 |
|
| 51 |
|
Total cash flow hedges |
| 6,973 |
|
| 766 |
|
| 250 |
|
| 7,201 |
|
| 381 |
|
| 487 |
|
Fair value hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts (1) |
| 1,155 |
|
| 2 |
|
| 44 |
|
| 1,157 |
|
| - |
|
| 213 |
|
Non-Qualifying Hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts (1) |
| 105,977 |
|
| 709 |
|
| 935 |
|
| 82,786 |
|
| 897 |
|
| 176 |
|
Foreign currency contracts (1) |
| 395 |
|
| 27 |
|
| 2 |
|
| 487 |
|
| 7 |
|
| 2 |
|
Equity market contracts (1) |
| 125,337 |
|
| 4,771 |
|
| 1,496 |
|
| 92,641 |
|
| 6,461 |
|
| 2,108 |
|
Commodity contracts (1) |
| 13 |
|
| 14 |
|
| 3 |
|
| - |
|
| - |
|
| - |
|
Credit contracts (1) |
| - |
|
| - |
|
| - |
|
| 49 |
|
| - |
|
| - |
|
Embedded derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GLB direct (2) |
| - |
|
| 1,697 |
|
| - |
|
| - |
|
| 1,963 |
|
| - |
|
GLB ceded (2) |
| - |
|
| 29 |
|
| 167 |
|
| - |
|
| 56 |
|
| 182 |
|
Reinsurance-related (2) |
| - |
|
| 416 |
|
| - |
|
| - |
|
| - |
|
| 206 |
|
Indexed annuity and IUL contracts (2) (3) |
| - |
|
| 525 |
|
| 4,783 |
|
| - |
|
| 528 |
|
| 6,131 |
|
Total derivative instruments | $ | 239,850 |
| $ | 8,956 |
| $ | 7,680 |
| $ | 184,321 |
| $ | 10,293 |
| $ | 9,505 |
|
(1)Reported in derivative investments and other liabilities on the Consolidated Balance Sheets.
(2)Reported in other assets and other liabilities on the Consolidated Balance Sheets.
(3)Reported in future contract benefits on the Consolidated Balance Sheets.
The maturity of the notional amounts of derivative instruments (in millions) was as follows:
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|
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|
|
|
|
|
|
| Remaining Life as of December 31, 2022 |
| ||||||||||||||||
| Less Than |
| 1 - 5 |
| 6 - 10 |
| 11 - 30 |
| Over 30 |
|
|
| ||||||
| 1 Year |
| Years |
| Years |
| Years |
| Years |
| Total |
| ||||||
Interest rate contracts (1) | $ | 31,463 |
| $ | 27,958 |
| $ | 24,892 |
| $ | 21,196 |
| $ | 4,213 |
| $ | 109,722 |
|
Foreign currency contracts (2) |
| 261 |
|
| 730 |
|
| 1,681 |
|
| 2,037 |
|
| 69 |
|
| 4,778 |
|
Equity market contracts |
| 82,256 |
|
| 24,221 |
|
| 7,796 |
|
| 9 |
|
| 11,055 |
|
| 125,337 |
|
Commodity contracts |
| 13 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 13 |
|
Total derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
with notional amounts | $ | 113,993 |
| $ | 52,909 |
| $ | 34,369 |
| $ | 23,242 |
| $ | 15,337 |
| $ | 239,850 |
|
(1)As of December 31, 2022, the latest maturity date for which we were hedging our exposure to the variability in future cash flows for these instruments was April 20, 2067.
(2)As of December 31, 2022, the latest maturity date for which we were hedging our exposure to the variability in future cash flows for these instruments was June 16, 2061.
The following amounts (in millions) were recorded on the Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges:
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|
|
| Cumulative Fair Value |
|
| |||||
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|
|
|
| Hedging Adjustment |
|
| |||||
|
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|
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| Included in the |
|
| |||||
| Amortized Cost of the |
|
| Amortized Cost of the |
|
| ||||||||||
| Hedged |
|
| Hedged |
|
| ||||||||||
| Assets / (Liabilities) |
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| Assets / (Liabilities) |
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| As of |
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| As of |
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| As of |
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| As of |
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| December 31, |
| December 31, |
| December 31, |
| December 31, |
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| 2022 |
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| 2021 |
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| 2022 |
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| 2021 |
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Line Item in the Consolidated Balance Sheets in |
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which the Hedged Item is Included |
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Fixed maturity AFS securities, at fair value | $ | 587 |
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| $ | 764 |
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| $ | 44 |
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| $ | 211 |
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Long-term debt (1) |
| (698 | ) |
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| (854 | ) |
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| 177 |
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| 21 |
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(1)Includes $(341) million and $(356) million of unamortized adjustments from discontinued hedges as of December 31, 2022 and 2021, respectively.
The change in our unrealized gain (loss) on derivative instruments within AOCI (in millions) was as follows:
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| For the Years Ended December 31, |
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| 2022 |
| 2021 |
| 2020 |
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Unrealized Gain (Loss) on Derivative Instruments |
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Balance as of beginning-of-year | $ | (103 | ) | $ | (402 | ) | $ | (11 | ) |
Other comprehensive income (loss): |
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Unrealized holding gains (losses) arising during the period: |
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Cash flow hedges: |
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Interest rate contracts |
| 196 |
|
| 116 |
|
| (350 | ) |
Foreign currency contracts |
| 182 |
|
| 130 |
|
| 93 |
|
Change in foreign currency exchange rate adjustment |
| 312 |
|
| 152 |
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| (174 | ) |
Change in DAC, VOBA, DSI and DFEL |
| 27 |
|
| 8 |
|
| (17 | ) |
Income tax benefit (expense) |
| (150 | ) |
| (87 | ) |
| 94 |
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Less: |
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Reclassification adjustment for gains (losses) |
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included in net income (loss): |
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Cash flow hedges: |
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Interest rate contracts (1) |
| 2 |
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| 3 |
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| 2 |
|
Interest rate contracts (2) |
| (11 | ) |
| (23 | ) |
| (16 | ) |
Foreign currency contracts (1) |
| 62 |
|
| 48 |
|
| 56 |
|
Foreign currency contracts (3) |
| 39 |
|
| (2 | ) |
| 6 |
|
Associated amortization of DAC, VOBA, DSI and DFEL |
| (6 | ) |
| (1 | ) |
| (1 | ) |
Income tax benefit (expense) |
| (18 | ) |
| (5 | ) |
| (10 | ) |
Balance as of end-of-year | $ | 396 |
| $ | (103 | ) | $ | (402 | ) |
(1)The OCI offset is reported within net investment income on the Consolidated Statements of Comprehensive Income (Loss).
(2)The OCI offset is reported within interest and debt expense on the Consolidated Statements of Comprehensive Income (Loss).
(3)The OCI offset is reported within realized gain (loss) on the Consolidated Statements of Comprehensive Income (Loss).
The effects of qualifying and non-qualifying hedges (in millions) on the Consolidated Statements of Comprehensive Income (Loss) were as follows:
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| Gain (Loss) Recognized in Income |
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| For the Year Ended December 31, 2022 |
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| Realized |
| Net |
| Interest |
| |||
| Gain |
| Investment |
| and Debt |
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| (Loss) |
| Income |
| Expense |
| |||
Total Line Items in which the Effects of Fair Value or Cash |
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Flow Hedges are Recorded | $ | 336 |
| $ | 5,511 |
| $ | 283 |
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Qualifying Hedges |
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Gain or (loss) on fair value hedging relationships: |
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Interest rate contracts: |
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Hedged items |
| - |
|
| (167 | ) |
| 156 |
|
Derivatives designated as hedging instruments |
| - |
|
| 167 |
|
| (156 | ) |
Gain or (loss) on cash flow hedging relationships: |
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Interest rate contracts: |
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Amount of gain or (loss) reclassified from AOCI into income |
| - |
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| 2 |
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| (11 | ) |
Foreign currency contracts: |
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Amount of gain or (loss) reclassified from AOCI into income |
| 39 |
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| 62 |
|
| - |
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Non-Qualifying Hedges |
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Interest rate contracts |
| (2,113 | ) |
| - |
|
| - |
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Foreign currency contracts |
| 3 |
|
| - |
|
| - |
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Equity market contracts |
| (2,075 | ) |
| - |
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| - |
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Commodity contracts |
| 11 |
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Credit contracts |
| (4 | ) |
| - |
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| - |
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Embedded derivatives: |
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GLB |
| (278 | ) |
| - |
|
| - |
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Reinsurance-related |
| 622 |
|
| - |
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| - |
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Indexed annuity and IUL contracts |
| 1,760 |
|
| - |
|
| - |
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| Gain (Loss) Recognized in Income |
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| For the Year Ended December 31, 2021 |
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| Realized |
| Net |
| Interest |
| |||
| Gain |
| Investment |
| and Debt |
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| (Loss) |
| Income |
| Expense |
| |||
Total Line Items in which the Effects of Fair Value or Cash |
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Flow Hedges are Recorded | $ | (212 | ) | $ | 6,115 |
| $ | 270 |
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Qualifying Hedges |
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Gain or (loss) on fair value hedging relationships: |
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Interest rate contracts: |
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Hedged items |
| - |
|
| (60 | ) |
| 46 |
|
Derivatives designated as hedging instruments |
| - |
|
| 60 |
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| (46 | ) |
Gain or (loss) on cash flow hedging relationships: |
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Interest rate contracts: |
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Amount of gain or (loss) reclassified from AOCI into income |
| - |
|
| 3 |
|
| (23 | ) |
Foreign currency contracts: |
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Amount of gain or (loss) reclassified from AOCI into income |
| (2 | ) |
| 48 |
|
| - |
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Non-Qualifying Hedges |
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Interest rate contracts |
| (957 | ) |
| - |
|
| - |
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Foreign currency contracts |
| (1 | ) |
| - |
|
| - |
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Equity market contracts |
| 3,354 |
|
| - |
|
| - |
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Credit contracts |
| (1 | ) |
| - |
|
| - |
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Embedded derivatives: |
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GLB |
| 1,304 |
|
| - |
|
| - |
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Reinsurance-related |
| 185 |
|
| - |
|
| - |
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Indexed annuity and IUL contracts |
| (2,622 | ) |
| - |
|
| - |
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| Gain (Loss) Recognized in Income |
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| For the Year Ended December 31, 2020 |
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| Realized |
| Net |
| Interest |
| |||
| Gain |
| Investment |
| and Debt |
| |||
| (Loss) |
| Income |
| Expense |
| |||
Total Line Items in which the Effects of Fair Value or Cash |
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Flow Hedges are Recorded | $ | (513 | ) | $ | 5,510 |
| $ | 284 |
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Qualifying Hedges |
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Gain or (loss) on fair value hedging relationships: |
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Interest rate contracts: |
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Hedged items |
| - |
|
| 69 |
|
| 136 |
|
Derivatives designated as hedging instruments |
| - |
|
| (69 | ) |
| (136 | ) |
Gain or (loss) on cash flow hedging relationships: |
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Interest rate contracts: |
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Amount of gain or (loss) reclassified from AOCI into income |
| - |
|
| 2 |
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| (16 | ) |
Foreign currency contracts: |
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Amount of gain or (loss) reclassified from AOCI into income |
| 6 |
|
| 56 |
|
| - |
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Non-Qualifying Hedges |
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Interest rate contracts |
| 1,287 |
|
| - |
|
| - |
|
Foreign currency contracts |
| (3 | ) |
| - |
|
| - |
|
Equity market contracts |
| 971 |
|
| - |
|
| - |
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Credit contracts |
| (6 | ) |
| - |
|
| - |
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Embedded derivatives: |
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GLB |
| 32 |
|
| - |
|
| - |
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Reinsurance-related |
| (65 | ) |
| - |
|
| - |
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Indexed annuity and IUL contracts |
| (471 | ) |
| - |
|
| - |
|
As of December 31, 2022, $68 million of the deferred net gains (losses) on derivative instruments in AOCI were expected to be reclassified to earnings during the next 12 months. This reclassification would be due primarily to interest rate variances related to our interest rate swap agreements.
For the years ended December 31, 2022 and 2021, there were no material reclassifications to earnings due to hedged firm commitments no longer deemed probable or due to hedged forecasted transactions that had not occurred by the end of the originally specified time period.
As of December 31, 2022 and 2021, we did not have any exposure related to CDSs for which we are the seller.
Credit Risk
We are exposed to credit losses in the event of non-performance by our counterparties on various derivative contracts and reflect assumptions regarding the credit or NPR. The NPR is based upon assumptions for each counterparty’s credit spread over the estimated weighted average life of the counterparty exposure, less collateral held. As of December 31, 2022, the NPR adjustment was zero. The credit risk associated with such agreements is minimized by entering into agreements with financial institutions with long-standing, superior performance records. Additionally, we maintain a policy of requiring derivative contracts to be governed by an International Swaps and Derivatives Association (“ISDA”) Master Agreement. We are required to maintain minimum ratings as a matter of routine practice in negotiating ISDA agreements. Under some ISDA agreements, our insurance subsidiaries have agreed to maintain certain financial strength or claims-paying ratings. A downgrade below these levels could result in termination of derivative contracts, at which time any amounts payable by us would be dependent on the market value of the underlying derivative contracts. In certain transactions, we and the counterparty have entered into a credit support annex requiring either party to post collateral when net exposures exceed pre-determined thresholds. These thresholds vary by counterparty and credit rating. The amount of such exposure is essentially the net replacement cost or market value less collateral held for such agreements with each counterparty if the net market value is in our favor. We did not have any exposure as of December 31, 2022 or 2021.
The amounts recognized (in millions) by S&P credit rating of counterparty, for which we had the right to reclaim cash collateral or were obligated to return cash collateral, were as follows:
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| As of December 31, 2022 |
| As of December 31, 2021 |
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|
| Collateral |
| Collateral |
| Collateral |
| Collateral |
| ||||
|
| Posted by |
| Posted by |
| Posted by |
| Posted by |
| ||||
S&P |
| Counter- |
| LNC |
| Counter- |
| LNC |
| ||||
Credit |
| Party |
| (Held by |
| Party |
| (Held by |
| ||||
Rating of |
| (Held by |
| Counter- |
| (Held by |
| Counter- |
| ||||
Counterparty |
| LNC) |
| Party) |
| LNC) |
| Party) |
| ||||
AA- |
| $ | 383 |
| $ | (6 | ) | $ | 2,346 |
| $ | (281 | ) |
A+ |
|
| 1,718 |
|
| (166 | ) |
| 2,772 |
|
| (251 | ) |
A |
|
| 1,172 |
|
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|
|
| 456 |
|
| (189 | ) |
|
| $ | 3,273 |
| $ | (172 | ) | $ | 5,574 |
| $ | (721 | ) |
Balance Sheet Offsetting
Information related to the effects of offsetting on the Consolidated Balance Sheets (in millions) was as follows:
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| As of December 31, 2022 |
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| Embedded |
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| Derivative |
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| Derivative |
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| Instruments |
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| Instruments |
| Total |
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Financial Assets |
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Gross amount of recognized assets |
| $ | 6,099 |
|
| $ | 2,667 |
|
| $ | 8,766 |
|
Gross amounts offset |
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| (2,506 | ) |
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|
|
|
| (2,506 | ) |
Net amount of assets (1) |
|
| 3,593 |
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|
| 2,667 |
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|
| 6,260 |
|
Gross amounts not offset: |
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Cash collateral |
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| (3,273 | ) |
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| (3,273 | ) |
Non-cash collateral (2) |
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| (320 | ) |
|
|
|
|
|
| (320 | ) |
Net amount |
| $ |
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|
| $ | 2,667 |
|
| $ | 2,667 |
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Financial Liabilities |
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Gross amount of recognized liabilities |
| $ | 256 |
|
| $ | 4,950 |
|
| $ | 5,206 |
|
Gross amounts offset |
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| (47 | ) |
|
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|
|
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| (47 | ) |
Net amount of liabilities |
|
| 209 |
|
|
| 4,950 |
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|
| 5,159 |
|
Gross amounts not offset: |
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Cash collateral |
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| (172 | ) |
|
|
|
|
|
| (172 | ) |
Non-cash collateral (2) |
|
| (37 | ) |
|
|
|
|
|
| (37 | ) |
Net amount |
| $ |
|
|
| $ | 4,950 |
|
| $ | 4,950 |
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(1)Includes a net deferred premium payable of $143 million, the components of which are reported in other assets and other liabilities on the Consolidated Balance Sheets.
(2)Excludes excess non-cash collateral received of $1.1 billion and excess non-cash collateral pledged of $9 million, as the collateral offset is limited to the net estimated fair value of derivatives after application of netting arrangements.
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| As of December 31, 2021 |
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| Embedded |
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| Derivative |
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| Derivative |
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| |||
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| Instruments |
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| Instruments |
| Total |
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Financial Assets |
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Gross amount of recognized assets |
| $ | 7,938 |
|
| $ | 2,547 |
|
| $ | 10,485 |
|
Gross amounts offset |
|
| (2,241 | ) |
|
| - |
|
|
| (2,241 | ) |
Net amount of assets (1) |
|
| 5,697 |
|
|
| 2,547 |
|
|
| 8,244 |
|
Gross amounts not offset: |
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Cash collateral (2) |
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| (5,574 | ) |
|
| - |
|
|
| (5,574 | ) |
Non-cash collateral (3) |
|
| (123 | ) |
|
| - |
|
|
| (123 | ) |
Net amount |
| $ | - |
|
| $ | 2,547 |
|
| $ | 2,547 |
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Financial Liabilities |
|
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|
|
|
|
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Gross amount of recognized liabilities |
| $ | 777 |
|
| $ | 6,519 |
|
| $ | 7,296 |
|
Gross amounts offset |
|
| (68 | ) |
|
| - |
|
|
| (68 | ) |
Net amount of liabilities |
|
| 709 |
|
|
| 6,519 |
|
|
| 7,228 |
|
Gross amounts not offset: |
|
|
|
|
|
|
|
|
|
|
|
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Cash collateral (2) |
|
| (709 | ) |
|
| - |
|
|
| (709 | ) |
Non-cash collateral (3) |
|
| - |
|
|
| - |
|
|
| - |
|
Net amount |
| $ | - |
|
| $ | 6,519 |
|
| $ | 6,519 |
|
(1)Includes a net deferred premium receivable of $260 million, the components of which are reported in other assets and other liabilities on the Consolidated Balance Sheets.
(2)Excludes excess cash collateral pledged of $12 million, as the cash collateral offset is limited to the net estimated fair value of derivatives after application of netting arrangements.
(3)Excludes excess non-cash collateral received of $410 million and excess non-cash collateral pledged of $292 million, as the collateral offset is limited to the net estimated fair value of derivatives after application of netting arrangements.
6. Federal Income Taxes
The federal income tax expense (benefit) on continuing operations (in millions) was as follows:
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| For the Years Ended December 31, |
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| 2022 |
| 2021 |
| 2020 |
| |||
Current | $ | 3 |
| $ | 12 |
| $ | (61 | ) |
Deferred |
| (587 | ) |
| 221 |
|
| (15 | ) |
Federal income tax expense (benefit) | $ | (584 | ) | $ | 233 |
| $ | (76 | ) |
A reconciliation of the effective tax rate differences (in millions) was as follows:
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| For the Years Ended December 31, |
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| 2022 |
| 2021 |
| 2020 |
| |||
Income (loss) before taxes | $ | (2,811 | ) | $ | 1,638 |
| $ | 423 |
|
Federal statutory rate |
| 21% |
|
| 21% |
|
| 21% |
|
Federal income tax expense (benefit) at federal statutory rate |
| (590 | ) |
| 344 |
|
| 89 |
|
Effect of: |
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|
|
|
|
|
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Tax-preferred investment income (1) |
| (90 | ) |
| (88 | ) |
| (98 | ) |
Tax credits |
| (42 | ) |
| (26 | ) |
| (39 | ) |
Excess tax benefits from stock-based compensation |
| (1 | ) |
| - |
|
| 3 |
|
Goodwill impairment |
| 133 |
|
| - |
|
| - |
|
Tax impact associated with the Tax Cuts and Jobs Act (2) |
| - |
|
| - |
|
| (37 | ) |
Other items |
| 6 |
|
| 3 |
|
| 6 |
|
Federal income tax expense (benefit) | $ | (584 | ) | $ | 233 |
| $ | (76 | ) |
Effective tax rate |
| 21% |
|
| 14% |
|
| -18% |
|
(1)Relates primarily to separate account dividends eligible for the dividends-received deduction.
(2)In 2020, we recognized a $37 million tax benefit attributable to the carry back of a 2020 net operating loss under the provisions of the Coronavirus Aid, Relief, and Economic Security Act, which provides for a five-year carryback period.
The federal income tax asset (liability) (in millions) was as follows:
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|
| As of December 31, |
| ||||
| 2022 |
| 2021 |
| ||
Current | $ | 83 |
| $ | 142 |
|
Deferred |
| 1,618 |
|
| (2,800 | ) |
Total federal income tax asset (liability) | $ | 1,701 |
| $ | (2,658 | ) |
Significant components of our deferred tax assets and liabilities (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, |
| ||||
| 2022 |
| 2021 |
| ||
Deferred Tax Assets |
|
|
|
|
|
|
Future contract benefits and other contract holder funds | $ | 700 |
| $ | 3,527 |
|
Reinsurance-related embedded derivative liability |
| - |
|
| 43 |
|
Compensation and benefit plans |
| 172 |
|
| 198 |
|
Intangibles |
| 18 |
|
| 25 |
|
Net unrealized loss on fixed maturity AFS securities |
| 2,236 |
|
| - |
|
Net unrealized loss on trading securities |
| 70 |
|
| - |
|
Investment activity |
| 243 |
|
| - |
|
Tax credits |
| 101 |
|
| 58 |
|
Net operating losses |
| 278 |
|
| 292 |
|
Other |
| 208 |
|
| 129 |
|
Total deferred tax assets | $ | 4,026 |
| $ | 4,272 |
|
Deferred Tax Liabilities |
|
|
|
|
|
|
DAC | $ | 1,813 |
| $ | 426 |
|
VOBA |
| 276 |
|
| 149 |
|
Net unrealized gain on fixed maturity AFS securities |
| - |
|
| 2,877 |
|
Net unrealized gain on trading securities |
| - |
|
| 66 |
|
Investment activity |
| - |
|
| 3,331 |
|
Reinsurance-related embedded derivative asset |
| 87 |
|
| - |
|
Other |
| 232 |
|
| 223 |
|
Total deferred tax liabilities | $ | 2,408 |
| $ | 7,072 |
|
Net deferred tax asset (liability) | $ | 1,618 |
| $ | (2,800 | ) |
As of December 31, 2022, we have $101 million of federal income tax credits that can be carried forward to 2030 through 2032. As of December 31, 2022, we have $1.3 billion of net operating losses to carry forward to future years. The net operating losses arose in tax years 2018 and 2021, and under the Tax Cuts and Jobs Act changes, have an unlimited carryforward period. As a result, management believes that it is more likely than not that the deferred tax asset associated with the loss carryforwards will be realized. Inclusive of the tax attribute for the net operating losses, although realization is not assured, management believes that it is more likely than not that we will realize the benefits of all our deferred tax assets, and, accordingly, no valuation allowance has been recorded.
We are subject to examination by U.S. federal, state, local and non-U.S. income authorities. With few exceptions for limited scope review, we are no longer subject to U.S. federal examinations for years before 2019. In the first quarter of 2021, the Internal Revenue Service commenced an examination of our refund claims for 2014 and 2015 that is anticipated to be completed by the end of 2023. We are currently under examination by several state and local taxing jurisdictions; however, we do not expect these examinations will materially impact us.
A reconciliation of the unrecognized tax benefits (in millions) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended |
| ||||
| December 31, |
| ||||
| 2022 |
| 2021 |
| ||
Balance as of beginning-of-year | $ | 53 |
| $ | 51 |
|
Increases for prior year tax positions |
| 5 |
|
| 2 |
|
Settlements for prior year tax positions |
| (6 | ) |
| - |
|
Balance as of end-of-year | $ | 52 |
| $ | 53 |
|
As of December 31, 2022 and 2021, $52 million and $53 million, respectively, of our unrecognized tax benefits presented above, if recognized, would have affected our federal income tax expense (benefit) and our effective tax rate. We anticipate that it is reasonably
possible that unrecognized tax benefits associated with separate account dividends-received deduction and tax credits will decrease by $8 million by the end of 2023, upon the completion of the examination of our refund claims for 2014 and 2015.
We recognize interest and penalties accrued, if any, related to unrecognized tax benefits as a component of tax expense. For the years ended December 31, 2022, 2021 and 2020, we recognized no interest and penalty expense (benefit), and there was no accrued interest and penalty expense related to the unrecognized tax benefits as of December 31, 2022 and 2021.
7. DAC, VOBA, DSI and DFEL
Changes in DAC (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Balance as of beginning-of-year | $ | 5,888 |
| $ | 5,565 |
| $ | 7,352 |
|
Cumulative effect from adoption of new accounting |
|
|
|
|
|
|
|
|
|
standard |
| - |
|
| - |
|
| 5 |
|
Business acquired (sold) through reinsurance |
| - |
|
| (362 | ) |
| (10 | ) |
Deferrals |
| 1,372 |
|
| 1,373 |
|
| 1,446 |
|
Amortization, net of interest: |
|
|
|
|
|
|
|
|
|
Amortization, excluding unlocking, net of interest |
| (811 | ) |
| (1,001 | ) |
| (796 | ) |
Unlocking |
| (210 | ) |
| (565 | ) |
| (231 | ) |
Adjustment related to realized (gains) losses |
| (129 | ) |
| 86 |
|
| (19 | ) |
Adjustment related to unrealized (gains) losses |
| 6,648 |
|
| 792 |
|
| (2,182 | ) |
Balance as of end-of-year | $ | 12,758 |
| $ | 5,888 |
| $ | 5,565 |
|
Changes in VOBA (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Balance as of beginning-of-year | $ | 193 |
| $ | 247 |
| $ | 342 |
|
Business acquired (sold) through reinsurance |
| - |
|
| (288 | ) |
| - |
|
Deferrals |
| 2 |
|
| - |
|
| 3 |
|
Amortization: |
|
|
|
|
|
|
|
|
|
Amortization, excluding unlocking |
| (75 | ) |
| (94 | ) |
| (105 | ) |
Unlocking |
| 60 |
|
| (7 | ) |
| (205 | ) |
Accretion of interest (1) |
| 23 |
|
| 33 |
|
| 44 |
|
Adjustment related to realized (gains) losses |
| (2 | ) |
| (3 | ) |
| - |
|
Adjustment related to unrealized (gains) losses |
| 629 |
|
| 305 |
|
| 168 |
|
Balance as of end-of-year | $ | 830 |
| $ | 193 |
| $ | 247 |
|
(1)The interest accrual rates utilized to calculate the accretion of interest ranged from 4.2% to 6.9%.
Estimated future amortization of VOBA, net of interest (in millions), as of December 31, 2022, was as follows:
|
|
|
|
|
|
|
|
2023 | $ | 33 |
|
2024 |
| 35 |
|
2025 |
| 34 |
|
2026 |
| 33 |
|
2027 |
| 31 |
|
Changes in DSI (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Balance as of beginning-of-year | $ | 203 |
| $ | 213 |
| $ | 234 |
|
Deferrals |
| 6 |
|
| 5 |
|
| 7 |
|
Amortization, net of interest: |
|
|
|
|
|
|
|
|
|
Amortization, excluding unlocking, net of interest |
| (15 | ) |
| (26 | ) |
| (20 | ) |
Unlocking |
| 2 |
|
| - |
|
| (1 | ) |
Adjustment related to realized (gains) losses |
| (2 | ) |
| 3 |
|
| (1 | ) |
Adjustment related to unrealized (gains) losses |
| 21 |
|
| 8 |
|
| (6 | ) |
Balance as of end-of-year | $ | 215 |
| $ | 203 |
| $ | 213 |
|
Changes in DFEL (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Balance as of beginning-of-year | $ | 415 |
| $ | 401 |
| $ | 650 |
|
Cumulative effect from adoption of new accounting |
|
|
|
|
|
|
|
|
|
standard |
| - |
|
| - |
|
| 4 |
|
Business acquired (sold) through reinsurance |
| - |
|
| (290 | ) |
| - |
|
Deferrals |
| 1,083 |
|
| 1,015 |
|
| 1,003 |
|
Amortization, net of interest: |
|
|
|
|
|
|
|
|
|
Amortization, excluding unlocking, net of interest |
| (565 | ) |
| (595 | ) |
| (538 | ) |
Unlocking |
| (49 | ) |
| (387 | ) |
| (275 | ) |
Adjustment related to realized (gains) losses |
| (35 | ) |
| (10 | ) |
| 25 |
|
Adjustment related to unrealized (gains) losses |
| 4,820 |
|
| 281 |
|
| (468 | ) |
Balance as of end-of-year | $ | 5,669 |
| $ | 415 |
| $ | 401 |
|
8. Reinsurance
The following summarizes reinsurance amounts (in millions) recorded on the Consolidated Statements of Comprehensive Income (Loss), excluding amounts attributable to the indemnity reinsurance agreements with Protective and Swiss Re:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Direct insurance premiums and fee income | $ | 13,941 |
| $ | 14,154 |
| $ | 13,304 |
|
Reinsurance assumed |
| 98 |
|
| 94 |
|
| 95 |
|
Reinsurance ceded |
| (1,898 | ) |
| (1,744 | ) |
| (1,656 | ) |
Total insurance premiums and fee income | $ | 12,141 |
| $ | 12,504 |
| $ | 11,743 |
|
|
|
|
|
|
|
|
|
|
|
Direct insurance benefits | $ | 15,065 |
| $ | 10,714 |
| $ | 10,630 |
|
Reinsurance recoveries |
| (2,519 | ) |
| (2,185 | ) |
| (1,953 | ) |
Total benefits | $ | 12,546 |
| $ | 8,529 |
| $ | 8,677 |
|
Our insurance companies cede insurance to other companies. The portion of our life insurance and annuity risks exceeding each of our insurance companies’ retention limit is reinsured with other insurers. We seek reinsurance coverage to limit our exposure to mortality losses and to enhance our capital management. Reinsurance does not discharge us from our primary obligation to contract holders for losses incurred under the policies we issue. We evaluate each reinsurance agreement to determine whether the agreement provides indemnification against loss or liability.
As of December 31, 2022, the policy for our reinsurance program was to retain up to $20 million on a single insured life. As the amount we retain varies by policy, we reinsured 21% of the mortality risk on newly issued life insurance contracts in 2022.
Reinsurance Exposures
We focus on obtaining reinsurance from a diverse group of reinsurers, and we monitor concentration as well as financial strength ratings of our reinsurers. Our amounts recoverable from reinsurers represent receivables from and reserves ceded to reinsurers. The amounts recoverable from reinsurers were $19.9 billion and $20.3 billion as of December 31, 2022 and 2021, respectively. Protective represents
our largest reinsurance exposure following the sale of the individual life and individual and group annuity business acquired from Liberty Life Assurance Company of Boston in 2018, which resulted in amounts recoverable from Protective of $10.1 billion and $10.7 billion as of December 31, 2022 and 2021, respectively. Protective has funded trusts, of which the balance in the trusts changes as a result of ongoing reinsurance activity, to support the business ceded, which totaled $11.5 billion and $14.0 billion as of December 31, 2022 and 2021, respectively.
Effective October 1, 2021, we entered into a reinsurance agreement with Resolution Life to reinsure liabilities under a block of in-force executive benefit and universal life policies. The agreement is structured as coinsurance for the general account reserves and modified coinsurance for the separate account reserves. Amounts recoverable from Resolution Life were $4.7 billion as of December 31, 2022 and 2021. Resolution Life has funded trusts, the balances of which change as a result of ongoing reinsurance activity to support the business ceded, that totaled $4.1 billion as of December 31, 2022 and 2021. As described in Note 1, we recorded a deferred gain on business sold through reinsurance and amortized $40 million and $10 million of the gain during 2022 and 2021, respectively.
Some portions of our annuity business have been reinsured on a modified coinsurance basis with other companies. In a modified coinsurance agreement, we as the ceding company retain the reserves, as well as the assets backing those reserves, and the reinsurer shares proportionally in all financial terms of the reinsured policies based on their respective percentage of the risk.
Effective October 1, 2018, we entered into one such modified coinsurance agreement with Athene to reinsure fixed annuity products, which resulted in a deposit asset of $3.8 billion and $5.0 billion as of December 31, 2022 and 2021, respectively, within other assets on the Consolidated Balance Sheets.
We held assets in support of reserves associated with the Athene transaction in a modified coinsurance investment portfolio, which consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| As of December 31, |
|
| |||||
| 2022 | 2021 |
| ||||||
Fixed maturity AFS securities |
| $ | 474 |
|
| $ | 744 |
|
|
Trading securities |
|
| 2,644 |
|
|
| 3,399 |
|
|
Equity securities |
|
| 60 |
|
|
| 54 |
|
|
Mortgage loans on real estate |
|
| 487 |
|
|
| 739 |
|
|
Derivative investments |
|
| 39 |
|
|
| 93 |
|
|
Other investments |
|
| 42 |
|
|
| 227 |
|
|
Cash and invested cash |
|
| 26 |
|
|
| 110 |
|
|
Accrued investment income |
|
| 35 |
|
|
| 33 |
|
|
Other assets |
|
| 2 |
|
|
| 5 |
|
|
Total |
| $ | 3,809 |
|
| $ | 5,404 |
|
|
|
|
|
|
|
|
|
|
|
|
The portfolio was supported by $105 million of over-collateralization and a $117 million letter of credit as of December 31, 2022. Additionally, we recorded a deferred gain on business sold through reinsurance related to the transaction with Athene and amortized $25 million, $26 million and $29 million of the gain during 2022, 2021 and 2020, respectively.
See “Realized Gain (Loss)” in Note 15 for information on reinsurance-related embedded derivatives.
Our reinsurance operations were acquired by Swiss Re in December 2001 through a series of indemnity reinsurance transactions. As such, Swiss Re reinsured certain liabilities and obligations under the indemnity reinsurance agreements. As we are not relieved of our liability to the ceding companies for this business, the liabilities and obligations associated with the reinsured policies remain on the Consolidated Balance Sheets with a corresponding reinsurance recoverable from Swiss Re, which totaled $1.1 billion as of December 31, 2022 and 2021. Swiss Re has funded a trust, with a balance of $710 million and $1.0 billion as of December 31, 2022 and 2021, respectively, to support this business. In addition to various remedies that we would have in the event of a default by Swiss Re, we continue to hold assets in support of certain of the transferred reserves. These assets consist of those reported as trading securities and certain mortgage loans.
Credit Losses on Reinsurance-Related Assets
In connection with our recognition of an allowance for credit losses for reinsurance-related assets, we perform a quantitative analysis using a probability of loss approach to estimate expected credit losses for reinsurance recoverables, inclusive of similar assets recognized using the deposit method of accounting. Our allowance for credit losses was $316 million and $190 million as of December 31, 2022 and 2021, respectively. The increase was attributable to updates to policyholder behavior assumptions that impacted ceded reserves.
9. Goodwill and Specifically Identifiable Intangible Assets
The changes in the carrying amount of goodwill (in millions) by reportable segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Year Ended December 31, 2022 |
| ||||||||||
| Gross | Accumulated |
| Net |
|
|
|
|
|
|
|
| |||||||||
| Goodwill | Impairment |
| Goodwill |
|
|
|
|
|
| Net |
| |||||||||
| as of | as of |
| as of |
|
|
|
|
| Goodwill |
|
| |||||||||
| Beginning- | Beginning- |
| Beginning- |
|
|
|
|
| as of End- |
|
| |||||||||
|
| of-Year |
|
| of-Year |
|
| of-Year |
|
| Impairment |
|
| of-Year |
|
| |||||
Life Insurance |
| $ | 2,188 |
|
| $ | (1,554 | ) |
| $ | 634 |
|
| $ | (634 | ) |
| $ | - |
|
|
Annuities |
|
| 1,040 |
|
|
| (600 | ) |
|
| 440 |
|
|
|
|
|
|
| 440 |
|
|
Group Protection |
|
| 684 |
|
|
| - |
|
|
| 684 |
|
|
|
|
|
|
| 684 |
|
|
Retirement Plan Services |
|
| 20 |
|
|
| - |
|
|
| 20 |
|
|
|
|
|
|
| 20 |
|
|
Total goodwill |
| $ | 3,932 |
|
| $ | (2,154 | ) |
| $ | 1,778 |
|
| $ | (634 | ) |
| $ | 1,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Year Ended December 31, 2021 |
| ||||||||||
| Gross | Accumulated |
| Net |
|
|
|
|
|
|
|
| |||||||||
| Goodwill | Impairment |
| Goodwill |
|
|
|
|
|
| Net |
|
| ||||||||
| as of | as of |
| as of |
|
|
|
|
| Goodwill |
|
| |||||||||
| Beginning- | Beginning- |
| Beginning- |
|
|
|
|
| as of End- |
|
| |||||||||
|
| of-Year |
|
| of-Year |
|
| of-Year |
|
| Impairment |
|
| of-Year |
|
| |||||
Life Insurance |
| $ | 2,188 |
|
| $ | (1,554 | ) |
| $ | 634 |
|
| $ |
|
|
| $ | 634 |
|
|
Annuities |
|
| 1,040 |
|
|
| (600 | ) |
|
| 440 |
|
|
|
|
|
|
| 440 |
|
|
Group Protection |
|
| 684 |
|
|
| - |
|
|
| 684 |
|
|
|
|
|
|
| 684 |
|
|
Retirement Plan Services |
|
| 20 |
|
|
| - |
|
|
| 20 |
|
|
|
|
|
|
| 20 |
|
|
Total goodwill |
| $ | 3,932 |
|
| $ | (2,154 | ) |
| $ | 1,778 |
|
| $ |
|
|
| $ | 1,778 |
|
|
The fair values of our reporting units (Level 3 fair value estimates) are comprised of the value of in-force (i.e., existing) business and the value of new business. Specifically, new business is representative of cash flows and profitability associated with policies or contracts we expect to issue in the future, reflecting our forecasts of future sales volume and product mix over a 10-year period. To determine the values of in-force and new business, we use a discounted cash flows technique that applies a discount rate reflecting the market expected, weighted-average rate of return adjusted for the risk factors associated with operations to the projected future cash flows for each reporting unit.
As a result of the capital market environment during the third quarter of 2022, including (i) declining equity markets and (ii) the impact of rising interest rates on our discount rate assumption, we accelerated our quantitative goodwill impairment test for our Life Insurance reporting unit as we concluded that there were indicators of impairment. Based on this quantitative test, which included updating our best estimate assumptions therein, we incurred an impairment during the third quarter of 2022 of the Life Insurance reporting unit goodwill of $634 million, which represented a write-off of the entire balance of goodwill for the reporting unit.
As of October 1, 2022, we performed our annual quantitative goodwill impairment test for our other reporting units, and, as of such date, the fair value was in excess of the carrying value for each of the Annuities, Group Protection and Retirement Plan Services reporting units.
As of October 1, 2021, we performed our annual quantitative goodwill impairment test for all of our reporting units, and, as of such date, the fair value was in excess of each reporting unit’s carrying value.
The gross carrying amounts and accumulated amortization (in millions) for each major specifically identifiable intangible asset class by reportable segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, 2022 |
|
| As of December 31, 2021 |
|
| ||||||||||
| Gross |
|
|
|
|
|
| Gross |
|
|
|
|
| |||
| Carrying |
| Accumulated |
| Carrying |
| Accumulated |
| ||||||||
| Amount |
| Amortization |
| Amount |
| Amortization |
| ||||||||
Life Insurance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales force | $ | 100 |
|
| $ | 67 |
|
| $ | 100 |
|
| $ | 63 |
|
|
Group Protection: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VOCRA |
| 576 |
|
|
| 115 |
|
|
| 576 |
|
|
| 85 |
|
|
VODA |
| 31 |
|
|
| 10 |
|
|
| 31 |
|
|
| 7 |
|
|
Insurance licenses (1) |
| - |
|
|
| - |
|
|
| 3 |
|
|
| - |
|
|
Retirement Plan Services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual fund contract rights (1) |
| 5 |
|
|
| - |
|
|
| 5 |
|
|
| - |
|
|
Total | $ | 712 |
|
| $ | 192 |
|
| $ | 715 |
|
| $ | 155 |
|
|
(1)No amortization recorded as the intangible asset has indefinite life.
Future estimated amortization of specifically identifiable intangible assets (in millions) as of December 31, 2022, was as follows:
|
|
|
|
2023 | $ | 37 |
|
2024 |
| 37 |
|
2025 |
| 37 |
|
2026 |
| 37 |
|
2027 |
| 37 |
|
Thereafter |
| 330 |
|
10. Guaranteed Benefit Features
The GDB features include those where we contractually guarantee to the contract holder either: return of no less than total deposits made to the contract less any partial withdrawals (“return of net deposits”); total deposits made to the contract less any partial withdrawals plus a minimum return (“minimum return”); or the highest contract value on any contract anniversary date through age 80. The highest contract value is increased by purchase payments and is decreased by withdrawals subsequent to that anniversary date.
Information on the GDB features outstanding (dollars in millions) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, |
|
| |||||
| 2022 (1) |
|
| 2021 (1) |
|
| ||
Return of Net Deposits |
|
|
|
|
|
|
|
|
Total account value | $ | 94,297 |
|
| $ | 117,503 |
|
|
Net amount at risk (2) |
| 1,376 |
|
|
| 84 |
|
|
Average attained age of contract holders |
| 67 years |
|
|
| 67 years |
|
|
|
|
|
|
|
|
|
|
|
Minimum Return |
|
|
|
|
|
|
|
|
Total account value | $ | 71 |
|
| $ | 102 |
|
|
Net amount at risk (2) |
| 14 |
|
|
| 11 |
|
|
Average attained age of contract holders |
| 79 years |
|
|
| 79 years |
|
|
Guaranteed minimum return |
| 5% |
|
|
| 5% |
|
|
|
|
|
|
|
|
|
|
|
Anniversary Contract Value |
|
|
|
|
|
|
|
|
Total account value | $ | 21,730 |
|
| $ | 28,788 |
|
|
Net amount at risk (2) |
| 3,699 |
|
|
| 400 |
|
|
Average attained age of contract holders |
| 73 years |
|
|
| 73 years |
|
|
(1)Our variable contracts with guarantees may offer more than one type of guarantee in each contract; therefore, the amounts listed are not mutually exclusive.
(2)Represents the amount of death benefit in excess of the account value that is subject to market fluctuations.
The determination of GDB liabilities is based on models that involve a range of scenarios and assumptions, including those regarding expected market rates of return and volatility, contract surrender rates and mortality experience. The following summarizes the balances of and changes in the liabilities for GDBs (in millions), which were recorded in future contract benefits on the Consolidated Balance Sheets:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
|
| |||||||
| 2022 |
| 2021 |
| 2020 |
|
| |||
Balance as of beginning-of-year | $ | 132 |
| $ | 121 |
| $ | 117 |
|
|
Changes in reserves |
| 210 |
|
| 31 |
|
| 30 |
|
|
Benefits paid |
| (58 | ) |
| (20 | ) |
| (26 | ) |
|
Balance as of end-of-year | $ | 284 |
| $ | 132 |
| $ | 121 |
|
|
Variable Annuity Contracts
Account values of variable annuity contracts, including those with guarantees, (in millions) were invested in separate account investment options as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, |
|
| |||||
| 2022 |
|
| 2021 |
|
| ||
Asset Type |
|
|
|
|
|
|
|
|
Domestic equity | $ | 58,640 |
|
| $ | 77,290 |
|
|
International equity |
| 15,959 |
|
|
| 21,223 |
|
|
Fixed income |
| 35,982 |
|
|
| 45,231 |
|
|
Total | $ | 110,581 |
|
| $ | 143,744 |
|
|
Secondary Guarantee Products
Future contract benefits and other contract holder funds include reserves for our secondary guarantee products sold through our Life Insurance segment. Reserves on UL and VUL products with secondary guarantees represented 40% and 39% of total life insurance in-force reserves as of December 31, 2022 and 2021, respectively.
11. Liability for Unpaid Claims
The liability for unpaid claims consists primarily of long-term disability claims and is reported in future contract benefits on the Consolidated Balance Sheets. Changes in the liability for unpaid claims (in millions) were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Balance as of beginning-of-year | $ | 6,280 |
| $ | 5,934 |
| $ | 5,552 |
|
Reinsurance recoverable |
| 147 |
|
| 151 |
|
| 152 |
|
Net balance as of beginning-of-year |
| 6,133 |
|
| 5,783 |
|
| 5,400 |
|
Incurred related to: |
|
|
|
|
|
|
|
|
|
Current year |
| 3,875 |
|
| 4,026 |
|
| 3,517 |
|
Prior years: |
|
|
|
|
|
|
|
|
|
Interest |
| 159 |
|
| 141 |
|
| 148 |
|
All other incurred (1) |
| (190 | ) |
| (271 | ) |
| (209 | ) |
Total incurred |
| 3,844 |
|
| 3,896 |
|
| 3,456 |
|
Paid related to: |
|
|
|
|
|
|
|
|
|
Current year |
| (1,951 | ) |
| (2,074 | ) |
| (1,707 | ) |
Prior years |
| (1,638 | ) |
| (1,472 | ) |
| (1,366 | ) |
Total paid |
| (3,589 | ) |
| (3,546 | ) |
| (3,073 | ) |
Net balance as of end-of-year |
| 6,388 |
|
| 6,133 |
|
| 5,783 |
|
Reinsurance recoverable |
| 143 |
|
| 147 |
|
| 151 |
|
Balance as of end-of-year | $ | 6,531 |
| $ | 6,280 |
| $ | 5,934 |
|
(1)All other incurred is primarily impacted by the level of claim resolutions in the period compared to that which is expected by the reserve assumption. A negative number implies a favorable result where claim resolutions were more favorable than assumed. Our claim resolution rate assumption used in determining reserves is our expectation of the resolution rate we will experience over the long-term life of the block of claims. It will vary from actual experience in any one period, both favorably and unfavorably.
The interest rate assumption used for discounting long-term claim reserves is an important part of the reserving process due to the long benefit period for these claims. Interest accrued on prior years’ reserves has been calculated on the opening reserve balance less one-half of the prior years’ incurred claim payments at our average reserve discount rate.
Long-term disability benefits may extend for many years, and claim development schedules do not reflect these longer benefit periods. As a result, we use longer term retrospective runoff studies, experience studies and prospective studies to develop our liability estimates. Long-term disability reserves are discounted using rates ranging from 2.5% to 5.0% that vary by year of claim incurral.
12. Short-Term and Long-Term Debt
Details underlying short-term and long-term debt (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, |
|
| ||||
| 2022 |
| 2021 |
|
| ||
Short-Term Debt |
|
|
|
|
|
|
|
Current maturities of long-term debt | $ | 500 |
| $ | 300 |
|
|
Total short-term debt | $ | 500 |
| $ | 300 |
|
|
|
|
|
|
|
|
|
|
Long-Term Debt, Excluding Current Portion |
|
|
|
|
|
|
|
Senior notes: |
|
|
|
|
|
|
|
4.00% notes, due 2023 (1) | $ | - |
| $ | 500 |
|
|
3.35% notes, due 2025 (1) |
| 300 |
|
| 300 |
|
|
3.625% notes, due 2026 (1) |
| 400 |
|
| 400 |
|
|
3.80% notes, due 2028 (1) |
| 500 |
|
| 500 |
|
|
3.05% notes, due 2030 (1) |
| 500 |
|
| 500 |
|
|
3.40% notes, due 2031 (1) |
| 500 |
|
| 500 |
|
|
3.40% notes, due 2032 (1) |
| 300 |
|
| - |
|
|
6.15% notes, due 2036 (1) |
| 243 |
|
| 243 |
|
|
6.30% notes, due 2037 (1)(2) |
| 375 |
|
| 375 |
|
|
7.00% notes, due 2040 (1)(2) |
| 500 |
|
| 500 |
|
|
4.35% notes, due 2048 (1) |
| 450 |
|
| 450 |
|
|
4.375% notes, due 2050 (1) |
| 300 |
|
| 300 |
|
|
Total senior notes |
| 4,368 |
|
| 4,568 |
|
|
Term loan due 2024 (3) |
| 250 |
|
| 250 |
|
|
Subordinated notes: |
|
|
|
|
|
|
|
LIBOR + 236 bps, due 2066 (4) |
| 562 |
|
| 562 |
|
|
LIBOR + 204 bps, due 2067 (4) |
| 433 |
|
| 433 |
|
|
Total subordinated notes |
| 995 |
|
| 995 |
|
|
Capital securities: |
|
|
|
|
|
|
|
LIBOR + 236 bps, due 2066 (4) |
| 160 |
|
| 160 |
|
|
LIBOR + 204 bps, due 2067 (4) |
| 58 |
|
| 58 |
|
|
Total capital securities |
| 218 |
|
| 218 |
|
|
Unamortized premiums (discounts) |
| (6 | ) |
| (6 | ) |
|
Unamortized debt issuance costs |
| (34 | ) |
| (35 | ) |
|
Unamortized adjustments from discontinued hedges |
| 341 |
|
| 356 |
|
|
Fair value hedge on interest rate swap agreements |
| (177 | ) |
| (21 | ) |
|
Total long-term debt | $ | 5,955 |
| $ | 6,325 |
|
|
(1)We have the option to repurchase the outstanding notes by paying the greater of 100% of the principal amount of the notes to be redeemed or the make-whole amount (as defined in each note agreement), plus in each case any accrued and unpaid interest as of the date of redemption.
(2)Categorized as operating debt for leverage ratio calculations as the proceeds were primarily used as a long-term structured solution to reduce the strain on increasing statutory reserves associated with secondary guarantee UL and term policies.
(3)The term loan bears interest at LIBOR plus an applicable margin. The applicable margin changed from 87.5 basis points to 112.5 basis points on November 3, 2022.
(4)To hedge the variability in rates, we purchased interest rate swaps to lock in a fixed rate of approximately 5% over the remaining terms of the subordinated notes and capital securities.
Details underlying the recognition of a gain (loss) on the modification or early extinguishment of debt (in millions) reported within interest expense on the Consolidated Statements of Comprehensive Income (Loss) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Principal balance outstanding prior to modification |
|
|
|
|
|
|
|
|
|
or payoff (1) | $ | - |
| $ | 995 |
| $ | 796 |
|
Unamortized debt issuance costs and discounts |
| - |
|
| - |
|
| (2 | ) |
Amount exchanged or paid to modify or retire debt |
| - |
|
| (1,003 | ) |
| (809 | ) |
Gain (loss) on modification or early |
|
|
|
|
|
|
|
|
|
extinguishment of debt, pre-tax | $ | - |
| $ | (8 | ) | $ | (15 | ) |
(1)During 2021, we completed the exchange of a portion of our outstanding capital securities for newly issued subordinated notes. In connection with the exchange offer, we solicited and received the requisite number of consents to amend the indentures governing the remaining outstanding capital securities to eliminate various terms and conditions and other provisions, including the covenant that required us to make interest payments in accordance with an alternative coupon satisfaction mechanism upon the occurrence of certain trigger events. During 2020, we redeemed our $296 million outstanding principal amount of 4.85% senior notes due 2021 and repaid our $500 million LIBOR + 150 bps term loan due 2022.
Future principal payments due on long-term debt (in millions) as of December 31, 2022, were as follows:
|
|
|
|
|
|
|
|
|
|
2023 | $ | 500 |
|
|
2024 |
| 250 |
|
|
2025 |
| 300 |
|
|
2026 |
| 400 |
|
|
2027 |
| - |
|
|
Thereafter |
| 4,881 |
|
|
Total | $ | 6,331 |
|
|
For our long-term debt outstanding, unsecured senior debt, which consists of senior notes and a term loan, ranks highest in priority, followed by subordinated notes and then capital securities.
Facility Agreement for Senior Notes Issuance
During August 2020, LNC entered into a 10-year facility agreement (the “facility agreement”) with a Delaware trust in connection with the sale by the trust of $500 million of pre-capitalized trust securities in a private placement pursuant to Rule 144A of the Securities Act of 1933, as amended. The trust invested the proceeds from the sale of the trust securities in a portfolio of principal and interest strips of U.S. Treasury securities. The facility agreement provides LNC the right to issue and sell to the trust, on one or more occasions, up to an aggregate principal amount outstanding at any one time of $500 million of LNC’s 2.330% senior notes due August 15, 2030 (“2.330% senior notes”) in exchange for a corresponding amount of U.S. Treasury securities held by the trust. The 2.330% senior notes will not be issued unless and until the issuance right is exercised. In return, LNC pays a semi-annual facility fee to the trust at a rate of 1.691% per year (applied to the unexercised portion of the maximum amount of senior notes that LNC could issue and sell to the trust), and LNC reimburses the trust for its expenses.
The issuance right will be exercised automatically in full upon our failure to make certain payments to the trust, such as paying the facility fee or reimbursing the trust for its expenses, if the failure to pay is not cured within 30 days, or upon certain bankruptcy events involving LNC. We are also required to exercise the issuance right in full if our consolidated stockholders’ equity (excluding AOCI) falls below a minimum threshold (which was $2.75 billion as of December 31, 2022, and is subject to adjustment from time to time in certain cases) and upon certain other events described in the facility agreement.
Prior to any involuntary exercise of the issuance right, LNC has the right to repurchase any or all of the 2.330% senior notes then held by the trust in exchange for U.S. Treasury securities. LNC may redeem any outstanding 2.330% senior notes, in whole or in part, prior to their maturity. Prior to May 15, 2030, the redemption price will equal the greater of par or a make-whole redemption price. After May 15, 2030, any outstanding 2.330% senior notes may be redeemed at par.
Credit Facilities
Credit facilities, which allow for borrowing or issuances of letters of credit (“LOCs”), (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, 2022 |
| ||||
| Expiration |
| Maximum |
| LOCs |
| ||
| Date |
| Available |
| Issued |
| ||
Credit Facilities |
|
|
|
|
|
|
|
|
Five-year revolving credit facility | June 19, 2026 |
| $ | 2,500 |
| $ | 1,641 |
|
LOC facility (1) | August 26, 2031 |
|
| 979 |
|
| 948 |
|
LOC facility (1) | October 1, 2031 |
|
| 891 |
|
| 891 |
|
Total |
|
| $ | 4,370 |
| $ | 3,480 |
|
(1)Our wholly-owned subsidiaries entered into irrevocable LOC facility agreements with third-party lenders supporting inter-company reinsurance agreements.
During June 2021, we entered into an amended and restated credit agreement with a syndicate of banks, which amended and restated our existing five-year revolving credit facility agreement. The credit facility, which is unsecured, allows for the issuance of LOCs and borrowing of up to $2.5 billion and has a commitment termination date of June 19, 2026. The LOCs under the credit facility are used primarily to satisfy reserve credit requirements of (i) our domestic insurance companies for which reserve credit is provided by our affiliated reinsurance companies and (ii) certain ceding companies of our legacy reinsurance business.
The credit facility agreement, as currently in effect, contains:
Customary terms and conditions, including covenants restricting our ability to incur liens, merge or consolidate with another entity where we are not the surviving entity and dispose of all or substantially all of our assets;
Financial covenants including maintenance of a minimum consolidated net worth equal to the sum of $10.0 billion plus 50% of the aggregate net proceeds of equity issuances received by us after December 1, 2022, all as more fully set forth in the agreement; and a debt-to-capital ratio as defined in accordance with the agreement not to exceed 0.35 to 1.00;
A cap on secured non-operating indebtedness and non-operating indebtedness of our subsidiaries equal to 7.5% of total capitalization, as defined in accordance with the agreement; and
Customary events of default, subject to certain materiality thresholds and grace periods for certain of those events of default.
Upon an event of default, the credit facility agreement, as currently in effect, provides that, among other things, the commitments may be terminated and the loans then outstanding may be declared due and payable. As of December 31, 2022, we were in compliance with all such covenants.
Our LOC facility agreements each contain customary terms and conditions, including early termination fees, covenants restricting the ability of the subsidiaries to incur liens, merge or consolidate with another entity and dispose of all or substantially all of their assets. Upon an event of early termination, the agreements require the immediate payment of all or a portion of the present value of the future LOC fees that would have otherwise been paid. Further, the agreements contain customary events of default, subject to certain materiality thresholds and grace periods for certain of those events of default. The events of default include payment defaults, covenant defaults, material inaccuracies in representations and warranties, bankruptcy and liquidation proceedings and other customary defaults. Upon an event of default, the agreements provide that, among other things, obligations to issue, amend or increase the amount of any LOC shall be terminated and any obligations shall become immediately due and payable. As of December 31, 2022, we were in compliance with all such covenants.
Shelf Registration
We currently have an effective shelf registration statement, which allows us to issue, in unlimited amounts, securities, including debt securities, preferred stock, common stock, warrants, stock purchase contracts, stock purchase units and depository shares.
13. Contingencies and Commitments
Contingencies
Reinsurance Disputes
Certain reinsurers have sought rate increases on certain yearly renewable term agreements. We are disputing the requested rate increases under these agreements. We may initiate legal proceedings, as necessary, under these agreements in order to protect our contractual rights. Additionally, reinsurers have initiated, and may in the future initiate, legal proceedings against us. While this may impact the Life
Insurance segment, we believe it is unlikely the outcome of these disputes would have a material impact on the consolidated financial statements. For more information about reinsurance, see Note 8.
Regulatory and Litigation Matters
Regulatory bodies, such as state insurance departments, the SEC, Financial Industry Regulatory Authority and other regulatory bodies regularly make inquiries and conduct examinations or investigations concerning our compliance with, among other things, insurance laws, securities laws, laws governing the activities of broker-dealers, registered investment advisers and unclaimed property laws.
LNC is involved in various pending or threatened legal or regulatory proceedings, including purported class actions, arising from the conduct of business both in the ordinary course and otherwise. In some of the matters, very large and/or indeterminate amounts, including punitive and treble damages, are sought. Modern pleading practice in the U.S. permits considerable variation in the assertion of monetary damages or other relief. Jurisdictions may permit claimants not to specify the monetary damages sought or may permit claimants to state only that the amount sought is sufficient to invoke the jurisdiction of the trial court. In addition, jurisdictions may permit plaintiffs to allege monetary damages in amounts well exceeding verdicts obtained in the jurisdiction for similar matters. This variability in pleadings, together with the actual experiences of LNC in litigating or resolving through settlement numerous claims over an extended period of time, demonstrates to management that the monetary relief which may be specified in a lawsuit or claim bears little relevance to its merits or disposition value.
Due to the unpredictable nature of litigation, the outcome of a litigation matter and the amount or range of potential loss at particular points in time is normally difficult to ascertain. Uncertainties can include how fact finders will evaluate documentary evidence and the credibility and effectiveness of witness testimony, and how trial and appellate courts will apply the law in the context of the pleadings or evidence presented, whether by motion practice, or at trial or on appeal. Disposition valuations are also subject to the uncertainty of how opposing parties and their counsel will themselves view the relevant evidence and applicable law.
We establish liabilities for litigation and regulatory loss contingencies when information related to the loss contingencies shows both that it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. It is possible that some matters could require us to pay damages or make other expenditures or establish accruals in amounts that could not be estimated as of December 31, 2022.
For some matters, the Company is able to estimate a reasonably possible range of loss. For such matters in which a loss is probable, an accrual has been made. For such matters where a loss is believed to be reasonably possible, but not probable, no accrual has been made. Accordingly, the estimate contained in this paragraph reflects two types of matters. For some matters included within this estimate, an accrual has been made, but there is a reasonable possibility that an exposure exists in excess of the amount accrued. In these cases, the estimate reflects the reasonably possible range of loss in excess of the accrued amount. For other matters included within this estimation, no accrual has been made because a loss, while potentially estimable, is believed to be reasonably possible but not probable. In these cases, the estimate reflects the reasonably possible loss or range of loss. As of December 31, 2022, we estimate the aggregate range of reasonably possible losses, including amounts in excess of amounts accrued for these matters as of such date, to be up to approximately $190 million, after-tax. Any estimate is not an indication of expected loss, if any, or of the Company’s maximum possible loss exposure on such matters.
For other matters, we are not currently able to estimate the reasonably possible loss or range of loss. We are often unable to estimate the possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the range of possible loss, such as quantification of a damage demand from plaintiffs, discovery from other parties and investigation of factual allegations, rulings by the court on motions or appeals, analysis by experts and the progress of settlement negotiations. On a quarterly and annual basis, we review relevant information with respect to litigation contingencies and update our accruals, disclosures and estimates of reasonably possible losses or ranges of loss based on such reviews.
Among other matters, we are presently engaged in litigation, including relating to cost of insurance rates (“Cost of Insurance and Other Litigation”), as described below. No accrual has been made for some of these matters. Although a loss is believed to be reasonably possible for these matters, for some of these matters, we are not able to estimate a reasonably possible amount or range of potential liability. An adverse outcome in one or more of these matters may have a material impact on the consolidated financial statements, but, based on information currently known, management does not believe those cases are likely to have such an impact.
Cost of Insurance and Other Litigation
Cost of Insurance Litigation
Glover v. Connecticut General Life Insurance Company and The Lincoln National Life Insurance Company, filed in the U.S. District Court for the District of Connecticut, No. 3:16-cv-00827, is a putative class action that was served on LNL on June 8, 2016. Plaintiff is the owner of a universal life insurance policy who alleges that LNL charged more for non-guaranteed cost of insurance than permitted by the policy. Plaintiff seeks to represent all universal life and variable universal life policyholders who owned policies containing non-guaranteed cost of insurance provisions that are similar to those of Plaintiff’s policy and seeks damages on behalf of all such policyholders. On January
11, 2019, the court dismissed Plaintiff’s complaint in its entirety. In response, Plaintiff filed a motion for leave to amend the complaint, which we have opposed.
EFG Bank AG, Cayman Branch, et al. v. The Lincoln National Life Insurance Company, pending in the U.S. District Court for the Eastern District of Pennsylvania, No. 2:17-cv-02592, is a civil action filed on February 1, 2017. Plaintiffs own universal life insurance policies originally issued by Jefferson-Pilot (now LNL). Plaintiffs allege that LNL breached the terms of policyholders’ contracts when it increased non-guaranteed cost of insurance rates beginning in 2016. We are vigorously defending this matter.
In re: Lincoln National COI Litigation, pending in the U.S. District Court for the Eastern District of Pennsylvania, Case No. 2:16-cv-06605-GJP, is a consolidated litigation matter related to multiple putative class action cases that were consolidated by an order dated March 20, 2017. Plaintiffs purport to own certain universal life insurance policies originally issued by Jefferson-Pilot (now LNL). Among other things, plaintiffs allege that LNL and LNC breached the terms of policyholders’ contracts by increasing non-guaranteed cost of insurance rates beginning in 2016. Plaintiffs sought to represent classes of policyowners and sought damages on their behalf. On August 9, 2022, the court denied plaintiffs’ motion for class certification. The parties participated in a mediation on December 13, 2022, and subsequently reached a settlement. On January 26, 2023, the parties informed the presiding judge of a class settlement in this action, subject to final documentation and court approval. The parties requested an extension of the current case schedule and indicated that plaintiffs anticipate filing a motion for preliminary approval of the class settlement on or before March 24, 2023. The terms of the provisional class settlement remain confidential.
In re: Lincoln National 2017 COI Rate Litigation, pending in the U.S. District Court for the Eastern District of Pennsylvania, Case No. 2:17-cv-04150, is a consolidated litigation matter related to multiple putative class action cases that were consolidated by an order dated March 28, 2018. Plaintiffs purport to own certain universal life insurance policies originally issued by Jefferson-Pilot (now LNL). Among other things, plaintiffs allege that LNL and LNC breached the terms of policyholders’ contracts by increasing non-guaranteed cost of insurance rates beginning in 2017. Plaintiffs sought to represent classes of policyholders and sought damages on their behalf. On August 9, 2022, the court denied plaintiffs’ motion for class certification. The parties participated in a mediation on December 13, 2022, and subsequently reached a settlement. On January 26, 2023, the parties informed the presiding judge of a class settlement in this action, subject to final documentation and court approval. The parties requested an extension of the current case schedule and indicated that plaintiffs anticipate filing a motion for preliminary approval of the class settlement on or before March 24, 2023. The terms of the provisional class settlement remain confidential.
Iwanski v. First Penn-Pacific Life Insurance Company (“FPP”), No. 2:18-cv-01573 filed in the U.S. District Court for the Eastern District of Pennsylvania is a putative class action that was filed on April 13, 2018. Plaintiff alleges that defendant FPP breached the terms of his life insurance policy by deducting non-guaranteed cost of insurance charges in excess of what is permitted by the policies. Plaintiff seeks to represent all owners of universal life insurance policies issued by FPP containing non-guaranteed cost of insurance provisions that are similar to those of Plaintiff’s policy and seeks damages on their behalf. Breach of contract is the only cause of action asserted. We are vigorously defending this matter.
TVPX ARS INC., as Securities Intermediary for Consolidated Wealth Management, LTD. v. The Lincoln National Life Insurance Company, filed in the U.S. District Court for the Eastern District of Pennsylvania, No. 2:18-cv-02989, is a putative class action that was filed on July 17, 2018. Plaintiff alleges that LNL charged more for non-guaranteed cost of insurance than permitted by the policy. Plaintiff seeks to represent all universal life and variable universal life policyholders who own policies issued by LNL or its predecessors containing non-guaranteed cost of insurance provisions that are similar to those of Plaintiff’s policy and seeks damages on behalf of all such policyholders. We are vigorously defending this matter.
LSH Co. and Wells Fargo Bank, National Association, as securities intermediary for LSH Co. v. Lincoln National Corporation and The Lincoln National Life Insurance Company, pending in the U.S. District Court for the Eastern District of Pennsylvania, No. 2:18-cv-05529, is a civil action filed on December 21, 2018. Plaintiffs own universal life insurance policies originally issued by Jefferson-Pilot (now LNL). Plaintiffs allege that LNL breached the terms of policyholders’ contracts when it increased non-guaranteed cost of insurance rates in 2016 and 2017. We are vigorously defending this matter.
Vida Longevity Fund, LP v. Lincoln Life & Annuity Company of New York, pending in the U.S. District Court for the Southern District of New York, No. 1:19-cv-06004, is a putative class action that was filed on June 27, 2019. Plaintiff alleges that Lincoln Life & Annuity Company of New York (“LLANY”) charged more for non-guaranteed cost of insurance than was permitted by the policies. On March 31, 2022, the court issued an order granting plaintiff’s motion for class certification and certified a class of all current or former owners of six universal life insurance products issued by LLANY that were assessed a cost of insurance charge any time on or after June 27, 2013. Plaintiff seeks damages on behalf of the class. We are vigorously defending this matter.
Angus v. The Lincoln National Life Insurance Company, pending in the U.S. District Court for the Eastern District of Pennsylvania, No. 2:22-cv-01878, is a putative class action filed on May 13, 2022. Plaintiff alleges that defendant LNL breached the terms of her life insurance policy by deducting non-guaranteed cost of insurance charges in excess of what is permitted by the policies. Plaintiff seeks to represent all owners of universal life insurance policies issued or insured by LNL or its predecessors containing non-guaranteed cost of insurance provisions that are similar to those of plaintiff’s policy and seeks damages on their behalf. Breach of contract is the only cause of action asserted. On August 26, 2022, LNL filed a motion to dismiss. We are vigorously defending this matter.
Other Litigation
Andrew Nitkewicz v. Lincoln Life & Annuity Company of New York, pending in the U.S. District Court for the Southern District of New York, No. 1:20-cv-06805, is a putative class action that was filed on August 24, 2020. Plaintiff Andrew Nitkewicz, as trustee of the Joan C. Lupe Trust, seeks to represent all current and former owners of universal life (including variable universal life) policies who own or owned policies issued by LLANY and its predecessors in interest that were in force at any time on or after June 27, 2013, and for which planned annual, semi-annual, or quarterly premiums were paid for any period beyond the end of the policy month of the insured’s death. Plaintiff alleges LLANY failed to refund unearned premium in violation of New York Insurance Law Section 3203(a)(2) in connection with the payment of death benefit claims for certain insurance policies. Plaintiff seeks compensatory damages and pre-judgment interest on behalf of the various classes and sub-class. On July 2, 2021, the court granted, with prejudice, LLANY’s November 2020 motion to dismiss this matter. Plaintiff filed a notice of appeal on July 28, 2021, and on September 26, 2022, the U.S. Court of Appeals for the Second Circuit reserved its decision and certified a question to the New York Court of Appeals. On October 20, 2022, the New York Court of Appeals accepted the question, and has set a briefing schedule.
Commitments
Leases
As of December 31, 2022 and 2021, we had operating lease assets of $140 million and $147 million, respectively, and associated lease of $152 million and $157 million, respectively. The weighted-average discount rate was 3.3% and 2.6%, respectively, and the weighted-average remaining lease term was five years as of December 31, 2022 and 2021. Operating lease expense for the years ended December 31, 2022, 2021 and 2020, was $45 million, $49 million and $50 million, respectively, and reported in commissions and other expenses on the Consolidated Statements of Comprehensive Income (Loss).
As of December 31, 2022 and 2021, we had of $14 million and $37 million, respectively, and associated finance lease of $106 million and $175 million, respectively. The accumulated amortization associated with the finance lease assets was $458 million and $436 million as of December 31, 2022 and 2021, respectively. These assets will continue to be amortized on a straight-line basis over the assets’ remaining lives. The weighted-average discount rate was 2.9% and 1.4%, respectively, and the weighted-average remaining lease term was one year as of December 31, 2022 and 2021.
Finance lease expense (in millions) was as follows:
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| For the Years Ended |
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| December 31, |
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| 2022 |
| 2021 |
| 2020 |
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Amortization of finance lease assets (1) | $ | 23 |
| $ | 38 |
| $ | 53 |
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Interest on finance lease liabilities (2) |
| 4 |
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| 3 |
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| 6 |
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Total | $ | 27 |
| $ | 41 |
| $ | 59 |
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(1)Amortization of finance lease assets is reported in commissions and other expenses on the Consolidated Statements of Comprehensive Income (Loss).
(2)Interest on finance lease liabilities is reported in interest and debt expense on the Consolidated Statements of Comprehensive Income (Loss).
The table below presents cash flow information (in millions) related to leases:
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| For the Years Ended |
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| December 31, |
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| 2022 |
| 2021 |
| 2020 |
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Supplemental Cash Flow Information |
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Cash paid for amounts included in the measurement of lease liabilities: |
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Operating cash flows from operating leases | $ | 47 |
| $ | 47 |
| $ | 54 |
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Financing cash flows from finance leases |
| 74 |
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| 62 |
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| 53 |
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Supplemental Non-Cash Information |
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ROU assets obtained in exchange for new lease obligations: |
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Operating leases | $ | 23 |
| $ | 8 |
| $ | 10 |
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Our future minimum lease payments (in millions) under non-cancellable leases as of December 31, 2022, were as follows:
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| Operating |
| Finance |
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| Leases |
| Leases |
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2023 | $ | 44 |
| $ | 82 |
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2024 |
| 42 |
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| 18 |
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2025 |
| 38 |
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| 7 |
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2026 |
| 34 |
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| 4 |
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2027 |
| 18 |
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| - |
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Thereafter |
| 15 |
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| - |
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Total future minimum lease payments |
| 191 |
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| 111 |
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Less: Amount representing interest |
| 39 |
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| 5 |
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Present value of minimum lease payments | $ | 152 |
| $ | 106 |
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As of December 31, 2022, we had no leases that had not yet commenced.
Certain Financing Arrangements
We periodically enter into sale-leaseback arrangements that do not meet the criteria of a sale for accounting purposes. As such, we account for these transactions as financing arrangements. As of December 31, 2022 and 2021, we had $558 million and $375 million, respectively, of financing obligations reported within other liabilities on the Consolidated Balance Sheets. Future payments due on certain financing arrangements (in millions) as of December 31, 2022, were as follows:
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2023 | $ | 43 |
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2024 |
| 95 |
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2025 |
| 127 |
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2026 |
| 175 |
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2027 |
| 191 |
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Thereafter |
| - |
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Total future minimum lease payments |
| 631 |
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Less: Amount representing interest |
| 73 |
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Present value of minimum lease payments | $ | 558 |
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Vulnerability from Concentrations
As of December 31, 2022, we did not have a concentration of: business transactions with a particular customer or lender; sources of supply of labor or services used in the business; or a market or geographic area in which business is conducted that makes us vulnerable to an event that is at least reasonably possible to occur in the near term and which could cause a severe impact to our financial condition. For information on our investment and reinsurance concentrations, see Notes 4 and 8, respectively.
Other Contingency Matters
State guaranty funds assess insurance companies to cover losses to contract holders of insolvent or rehabilitated companies. Mandatory assessments may be partially recovered through a reduction in future premium taxes in some states. We have accrued for expected assessments and the related reductions in future state premium taxes, which net to assessments (recoveries) of $(2) million and $(6) million as of December 31, 2022 and 2021, respectively.
14. Shares and Stockholders’ Equity
Preferred Shares
Preferred shares authorized, issued and outstanding were as follows:
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| As of December 31, | ||||||||||
| 2022 |
| 2021 | ||||||||
| Shares Authorized |
| Shares Issued |
| Shares Outstanding |
| Shares Authorized |
| Shares Issued |
| Shares Outstanding |
9.250% Fixed Rate Reset Non-Cumulative |
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Preferred Stock, Series C | 20,000 |
| 20,000 |
| 20,000 |
| - |
| - |
| - |
9.000% Non-Cumulative Preferred Stock, Series D | 20,000 |
| 20,000 |
| 20,000 |
| - |
| - |
| - |
Not designated | 9,960,000 |
| - |
| - |
| 10,000,000 |
| - |
| - |
Total preferred shares | 10,000,000 |
| 40,000 |
| 40,000 |
| 10,000,000 |
| - |
| - |
In November 2022, we issued 500,000 depositary shares (“Series C Depositary Shares”), each representing a 1/25th interest in a share of our 9.250% Fixed Rate Reset Non-Cumulative Preferred Stock, Series C liquidation preference $25,000 per share (the “Series C Preferred Stock”) and in the aggregate representing 20,000 shares of Series C Preferred Stock, for aggregate net cash proceeds of $493 million. Dividends, if declared, will be payable commencing on March 1, 2023, and will accrue and be payable on the first day of March and September each year, in arrears, at an annual rate of 9.250% on the liquidation preference of $25,000 per share. From, and including March 1, 2028 (the first “reset date”), the annual rate will reset every five years at a rate equal to the five-year treasury rate as of the most recent reset dividend determination date plus 5.318%. We may, at our option, redeem our Series C Preferred Stock in whole but not in part within 90 days after certain rating agency events, or a regulatory capital event, or in whole or in part, from time to time, during the three-month period prior to each reset date.
We may, at our option, redeem the Series C Preferred Stock, (a) in whole but not in part within 90 days after the occurrence of a rating agency event at a redemption price equal to 102% of the stated amount of a share of Series C Preferred Stock (initially, $25,500 per share of Series C Preferred Stock, equivalent to $1,020 per Depositary Share), plus an amount equal to any dividends per share that have accrued but not been declared and paid for the then-current dividend period to, but excluding, such redemption date; and (b)(i)in whole but not in part within 90 days after the occurrence of a regulatory capital event, or (ii) in whole or in part, from time to time, during the three-month period prior to March 1, 2028, and during the three-month period prior to each reset date thereafter in each case, at a redemption price equal to the stated amount of a share of Series C Preferred Stock (initially, $25,000 per share of Series C Preferred Stock, equivalent to $1,000 per Depositary Share), plus an amount equal to any dividends per share that have accrued but not been declared and paid for the then-current dividend period to, but excluding, such redemption date.
In November 2022, we issued 20,000,000 depositary shares (“Series D Depositary Shares”), each representing a 1/1000th interest in a share of our 9.000% Series D, Non-Cumulative Preferred Stock, liquidation preference $25,000 per share (the “Series D Preferred Stock”) and in the aggregate representing 20,000 shares of Series D Preferred Stock, for aggregate net cash proceeds of $493 million. Dividends, if declared, will be payable commencing on March 1, 2023, and will accrue and be payable quarterly on the first day of March, June, September, and December each year, in arrears, at an annual rate of 9.000%. We may, at our option, redeem our Series D Preferred Stock in whole but not in part within 90 days after certain rating agency events, or a regulatory capital event, or in whole or in part, at any time or from time to time, on or after December 1, 2027.
We may, at our option, redeem the Series D Preferred Stock, (a) in whole but not in part, at any time prior to December 1, 2027, within 90 days after the occurrence of a rating agency event at a redemption price equal to 102% of the stated amount of a share of Series D Preferred Stock (initially, $25,500 per share of Series D Preferred Stock, equivalent to $25.50 per Depositary Share), plus an amount equal to any dividends per share that have accrued but not been declared and paid for the then-current dividend period to, but excluding, such redemption date, and (b)(i) in whole but not in part, at any time prior to December 1, 2027, within 90 days after the occurrence of a regulatory capital event; or (ii) in whole or in part, at any time or from time to time on or after December 1, 2027, in each case, at a redemption price equal to the stated amount of a share of Series D Preferred Stock (initially, $25,000 per share of Series D Preferred Stock, equivalent to $25.00 per Depositary Share), plus an amount equal to any dividends per share that have accrued but not been declared and paid for the then-current dividend period to, but excluding, such redemption date.
The Series C Preferred Stock and the Series D Preferred Stock (together, the “Preferred Stock”) rank equally with each other for liquidation preference. The Preferred Stock is senior to our common stock with respect to the payment of dividends, if declared, and distributions of assets upon any liquidation, dissolution or winding-up of the Company. The ability of the Company to declare or pay dividends on, or purchase, redeem or otherwise acquire, shares of its common stock or any shares of the Company that rank junior to, or on parity with, the Preferred Stock is subject to certain restrictions in the event that we do not declare and pay (or set aside) dividends on the Preferred Stock for the last preceding dividend period.
Except as otherwise provided by law, every holder of Preferred Stock will have the right at every shareholders’ meeting to one vote for each share of Preferred Stock held in their name as of the record date for such meeting. In addition, at any time when six or more quarterly dividends, whether or not consecutive, on one or more series of the Preferred Stock is in default, the holders of all preferred stock at the time or times outstanding as to which such default shall exist shall have certain voting rights with respect to the election of additional directors to the Company’s Board of Directors, as provided in the Certificate of Designations for each series of Preferred Stock.
Each share of Preferred Stock is perpetual and has no maturity date. The Preferred Stock is not convertible into, or exchangeable for, any other class or series of stock or other securities of the Company or its subsidiaries and is not subject to any mandatory redemption, sinking fund, retirement fund, purchase fund, or other similar provisions.
Our Series C and D Preferred Stock are without par value.
Common Shares
The changes in our common stock (number of shares) were as follows:
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| For the Years Ended December 31, |
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| 2022 |
| 2021 |
| 2020 |
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Common Stock |
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Balance as of beginning-of-year | 177,193,515 |
| 192,329,691 |
| 196,668,532 |
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Stock compensation/issued for benefit plans | 692,491 |
| 1,106,572 |
| 547,209 |
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Retirement/cancellation of shares | (8,665,495 | ) | (16,242,748 | ) | (4,886,050 | ) |
Balance as of end-of-year | 169,220,511 |
| 177,193,515 |
| 192,329,691 |
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Common Stock as of End-of-Year |
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Basic basis | 169,220,511 |
| 177,193,515 |
| 192,329,691 |
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Diluted basis | 170,483,323 |
| 179,229,110 |
| 193,672,296 |
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Average Common Shares
A reconciliation of the denominator (number of shares) in the calculations of basic and diluted earnings (loss) per common share was as follows:
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| For the Years Ended December 31, |
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| 2022 |
| 2021 |
| 2020 |
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Weighted-average shares, as used in basic calculation | 171,034,695 |
| 187,359,884 |
| 193,610,225 |
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Shares to cover non-vested stock | 968,005 |
| 1,357,245 |
| 687,240 |
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Average stock options outstanding during the year | 989,123 |
| 1,844,117 |
| 746,742 |
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options (at average market price for the year) | (783,232 | ) | (1,419,165 | ) | (576,582 | ) |
Shares repurchasable from measured but |
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unrecognized stock option expense | (21,006 | ) | (43,314 | ) | (2,445 | ) |
Average deferred compensation shares | 512,570 |
| - |
| - |
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Weighted-average shares, as used in diluted calculation (1) | 172,700,155 |
| 189,098,767 |
| 194,465,180 |
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(1)Due to reporting a net loss for the year ended December 31, 2022, basic shares were used in the diluted EPS calculation for this year as the use of diluted shares would have resulted in a lower loss per share.
In the event the average market price of LNC common stock exceeds the issue price of stock options and the options have a dilutive effect to our EPS, such options will be shown in the table above.
We have participants in our deferred compensation plans who selected LNC stock as the measure for the investment return attributable to all or a portion of their deferral amounts. This obligation is settled in either cash or LNC stock pursuant to the applicable plan document. We exclude deferred units of LNC stock that are antidilutive from our diluted EPS calculation. The mark-to-market adjustment of these deferred units excluded from our diluted EPS calculation was $13 million for the year ended December 31, 2022.
Our common stock is without par value.
AOCI
The following summarizes the components and changes in AOCI (in millions):
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| For the Years Ended December 31, |
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| 2022 |
| 2021 |
| 2020 |
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Unrealized Gain (Loss) on Fixed Maturity AFS Securities and Certain Other |
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Investments |
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Balance as of beginning-of-year | $ | 6,777 |
| $ | 9,611 |
| $ | 5,983 |
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Cumulative effect from adoption of new accounting standards |
| - |
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| - |
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| 45 |
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Unrealized holding gains (losses) arising during the year |
| (25,552 | ) |
| (5,304 | ) |
| 7,925 |
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Change in foreign currency exchange rate adjustment |
| (322 | ) |
| (145 | ) |
| 180 |
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Change in DAC, VOBA, DSI, future contract benefits and other contract holder funds |
| 7,369 |
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| 1,815 |
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| (3,569 | ) |
Income tax benefit (expense) |
| 3,955 |
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| 774 |
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| (970 | ) |
Less: |
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Reclassification adjustment for gains (losses) included in net income (loss) |
| (15 | ) |
| (9 | ) |
| (53 | ) |
Associated amortization of DAC, VOBA, DSI and DFEL |
| (12 | ) |
| (24 | ) |
| 32 |
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Income tax benefit (expense) |
| 6 |
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| 7 |
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| 4 |
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Balance as of end-of-year | $ | (7,752 | ) | $ | 6,777 |
| $ | 9,611 |
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Unrealized OTTI on Fixed Maturity AFS Securities |
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Balance as of beginning-of-year | $ | - |
| $ | - |
| $ | 45 |
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(Increases) attributable to: |
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Cumulative effect from adoption of new accounting standards |
| - |
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| - |
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| (45 | ) |
Balance as of end-of-year | $ | - |
| $ | - |
| $ | - |
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Unrealized Gain (Loss) on Derivative Instruments |
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Balance as of beginning-of-year | $ | (103 | ) | $ | (402 | ) | $ | (11 | ) |
Unrealized holding gains (losses) arising during the year |
| 378 |
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| 246 |
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| (257 | ) |
Change in foreign currency exchange rate adjustment |
| 312 |
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| 152 |
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| (174 | ) |
Change in DAC, VOBA, DSI and DFEL |
| 27 |
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| 8 |
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| (17 | ) |
Income tax benefit (expense) |
| (150 | ) |
| (87 | ) |
| 94 |
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Less: |
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Reclassification adjustment for gains (losses) included in net income (loss) |
| 92 |
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| 26 |
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| 48 |
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Associated amortization of DAC, VOBA, DSI and DFEL |
| (6 | ) |
| (1 | ) |
| (1 | ) |
Income tax benefit (expense) |
| (18 | ) |
| (5 | ) |
| (10 | ) |
Balance as of end-of-year | $ | 396 |
| $ | (103 | ) | $ | (402 | ) |
Foreign Currency Translation Adjustment |
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Balance as of beginning-of-year | $ | (14 | ) | $ | (12 | ) | $ | (17 | ) |
Foreign currency translation adjustment arising during the year |
| (20 | ) |
| (2 | ) |
| 5 |
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Balance as of end-of-year | $ | (34 | ) | $ | (14 | ) | $ | (12 | ) |
Funded Status of Employee Benefit Plans |
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Balance as of beginning-of-year | $ | (219 | ) | $ | (266 | ) | $ | (327 | ) |
Adjustment arising during the year |
| (74 | ) |
| 56 |
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| 74 |
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Income tax benefit (expense) |
| 15 |
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| (9 | ) |
| (13 | ) |
Balance as of end-of-year | $ | (278 | ) | $ | (219 | ) | $ | (266 | ) |
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The following summarizes the reclassifications out of AOCI (in millions) and the associated line item in the Consolidated Statements of Comprehensive Income (Loss):
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| For the Years Ended December 31, |
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| 2022 |
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| 2021 |
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| 2020 |
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Unrealized Gain (Loss) on Fixed Maturity AFS |
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Securities and Certain Other Investments |
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Gross reclassification | $ | (15 | ) |
| $ | (9 | ) |
| $ | (53 | ) | Realized gain (loss) |
Associated amortization of DAC, |
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VOBA, DSI and DFEL |
| (12 | ) |
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| (24 | ) |
|
| 32 |
| Realized gain (loss) |
Reclassification before income |
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tax benefit (expense) |
| (27 | ) |
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| (33 | ) |
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| (21 | ) | Income (loss) before taxes |
Income tax benefit (expense) |
| 6 |
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| 7 |
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| 4 |
| Federal income tax expense (benefit) |
Reclassification, net of income tax | $ | (21 | ) |
| $ | (26 | ) |
| $ | (17 | ) | Net income (loss) |
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Unrealized Gain (Loss) on Derivative |
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Instruments |
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Gross reclassifications: |
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Interest rate contracts | $ | 2 |
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| $ | 3 |
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| $ | 2 |
| Net investment income |
Interest rate contracts |
| (11 | ) |
|
| (23 | ) |
|
| (16 | ) | Interest and debt expense |
Foreign currency contracts |
| 62 |
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|
| 48 |
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| 56 |
| Net investment income |
Foreign currency contracts |
| 39 |
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|
| (2 | ) |
|
| 6 |
| Realized gain (loss) |
Total gross reclassifications |
| 92 |
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| 26 |
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| 48 |
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Associated amortization of DAC, |
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| Commissions and other |
VOBA, DSI and DFEL |
| (6 | ) |
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| (1 | ) |
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| (1 | ) | expenses |
Reclassifications before income |
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|
|
tax benefit (expense) |
| 86 |
|
|
| 25 |
|
|
| 47 |
| Income (loss) before taxes |
Income tax benefit (expense) |
| (18 | ) |
|
| (5 | ) |
|
| (10 | ) | Federal income tax expense (benefit) |
Reclassifications, net of income tax | $ | 68 |
|
| $ | 20 |
|
| $ | 37 |
| Net income (loss) |
16
15. Realized Gain (Loss)
Details underlying realized gain (loss) (in millions) reported on the Consolidated Statements of Comprehensive Income (Loss) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Fixed maturity AFS securities: |
|
|
|
|
|
|
|
|
|
Gross gains | $ | 38 |
| $ | 20 |
| $ | 31 |
|
Gross losses |
| (53 | ) |
| (29 | ) |
| (84 | ) |
Credit loss benefit (expense) (1) |
| (15 | ) |
| (11 | ) |
| (26 | ) |
Realized gain (loss) on equity securities (2) |
| 16 |
|
| 43 |
|
| 8 |
|
Credit loss benefit (expense) on mortgage loans on real estate |
| (3 | ) |
| 112 |
|
| (117 | ) |
Credit loss benefit (expense) on reinsurance-related assets (3) |
| (126 | ) |
| 2 |
|
| - |
|
Realized gain (loss) on the mark-to-market on certain instruments (4)(5) |
| 33 |
|
| 68 |
|
| 26 |
|
Other gain (loss) on investments |
| (35 | ) |
| - |
|
| (7 | ) |
Associated amortization of DAC, VOBA, DSI and DFEL |
|
|
|
|
|
|
|
|
|
and changes in other contract holder funds |
| (18 | ) |
| (25 | ) |
| 31 |
|
Total realized gain (loss) related to financial instruments |
|
|
|
|
|
|
|
|
|
and reinsurance-related assets |
| (163 | ) |
| 180 |
|
| (138 | ) |
Indexed annuity and IUL contracts net derivative results: (6) |
|
|
|
|
|
|
|
|
|
Gross gain (loss) |
| 66 |
|
| 30 |
|
| 37 |
|
Associated amortization of DAC, VOBA, DSI and DFEL |
| (56 | ) |
| 4 |
|
| (25 | ) |
Variable annuity net derivative results: (7) |
|
|
|
|
|
|
|
|
|
Gross gain (loss) |
| 529 |
|
| (517 | ) |
| (367 | ) |
Associated amortization of DAC, VOBA, DSI and DFEL |
| (40 | ) |
| 91 |
|
| (20 | ) |
Total realized gain (loss) | $ | 336 |
| $ | (212 | ) | $ | (513 | ) |
(1)Includes changes in the allowance for credit losses as well as direct write-downs to amortized cost as a result of negative credit events.
(2)Includes mark-to-market adjustments on equity securities still held of $10 million, $46 million and $8 million for the years ended December 31, 2022, 2021 and 2020, respectively.
(3)See Note 8 for information on credit losses on reinsurance-related assets.
(4)Represents changes in the fair values of certain derivative investments (not including those associated with our variable and indexed annuity and IUL contracts net derivative results), reinsurance-related embedded derivatives, mortgage loans on real estate accounted for under the fair value option and trading securities. See Notes 1 and 8 for information regarding modified coinsurance.
(5)Includes gains and losses from fair value changes on mortgage loans on real estate accounted for under the fair value option of $(24) million, $3 million and $(24) million for the years ended December 31, 2022, 2021 and 2020, respectively.
(6)Represents the net difference between the change in fair value of the index options that we hold and the change in the fair value of the embedded derivative liabilities of our indexed annuity and IUL contracts along with changes in the fair value of embedded derivative liabilities related to index options we may purchase or sell in the future to hedge contract holder index allocations applicable to future reset periods for our indexed annuity products.
(7)Includes the net difference in the change in embedded derivative reserves of our GLB riders and the change in the fair value of the derivative instruments we own to hedge the change in embedded derivative reserves on our GLB riders and the benefit ratio unlocking on our GLB and GDB riders, including the cost of purchasing the hedging instruments.
16. Commissions and Other Expenses
Details underlying commissions and other expenses (in millions) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Commissions | $ | 2,192 |
| $ | 2,221 |
| $ | 2,183 |
|
General and administrative expenses |
| 2,241 |
|
| 2,251 |
|
| 2,072 |
|
Expenses associated with reserve financing and LOCs |
| 108 |
|
| 102 |
|
| 94 |
|
DAC and VOBA deferrals and interest, net of amortization |
| (361 | ) |
| 261 |
|
| (156 | ) |
Broker-dealer expenses |
| 536 |
|
| 570 |
|
| 493 |
|
Specifically identifiable intangible asset amortization |
| 37 |
|
| 37 |
|
| 37 |
|
Taxes, licenses and fees |
| 342 |
|
| 335 |
|
| 321 |
|
Transaction and integration costs related to |
|
|
|
|
|
|
|
|
|
mergers, acquisitions and divestitures |
| - |
|
| 14 |
|
| 20 |
|
Total | $ | 5,095 |
| $ | 5,791 |
| $ | 5,064 |
|
17. Retirement and Deferred Compensation Plans
Defined Benefit Pension and Other Postretirement Benefit Plans
We maintain U.S. defined benefit pension plans in which certain U.S. employees and agents are participants, and a U.K. plan we retained after the sale of the Lincoln UK business. Our defined benefit pension plans are closed to new entrants and existing participants do not accrue any additional benefits. We comply with the minimum funding requirements in both the U.S. and the U.K. In accordance with such practice, we were not required to make contributions for the years ended December 31, 2022 and 2021. We do not expect to be required to make any contributions to these pension plans in 2023. We sponsor other postretirement benefit plans that provide health care and life insurance to certain retired employees and agents. Total net periodic cost (recovery) for these plans was $(41) million, $(41) million and $(11) million during 2022, 2021 and 2020, respectively, which was reported within commissions and other expenses on the Consolidated Statements of Comprehensive Income (Loss). In 2023, we expect the plans to make benefit payments of approximately $100 million.
Information (in millions) with respect to these plans was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of or For the Years Ended December 31, |
|
| ||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 |
|
| ||||
|
|
|
|
|
|
| Other Postretirement |
|
| ||||
| Pension Plans |
| Benefit Plans |
|
| ||||||||
Fair value of plan assets | $ | 1,126 |
| $ | 1,667 |
| $ | 71 |
| $ | 67 |
|
|
Projected benefit obligation |
| 1,126 |
|
| 1,595 |
|
| 44 |
|
| 79 |
|
|
Funded status | $ | - |
| $ | 72 |
| $ | 27 |
| $ | (12 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recognized on the |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets | $ | 91 |
| $ | 182 |
| $ | 27 |
| $ | - |
|
|
Other liabilities |
| (91 | ) |
| (110 | ) |
| - |
|
| (12 | ) |
|
Net amount recognized | $ | - |
| $ | 72 |
| $ | 27 |
| $ | (12 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Assumptions |
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average discount rate |
| 5.49% |
|
| 2.76% |
|
| 5.70% |
|
| 3.10% |
|
|
Net periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average discount rate |
| 2.81% |
|
| 2.61% |
|
| 3.73% |
|
| 2.96% |
|
|
Expected return on plan assets |
| 5.67% |
|
| 6.13% |
|
| 6.50% |
|
| 6.50% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average discount rate was determined based on a corporate yield curve as of December 31, 2022, and projected benefit obligation cash flows. The expected return on plan assets was determined based on historical and expected future returns of the various asset categories, using the plans’ target plan allocation. We reevaluate these assumptions each plan year.
The following summarizes our fair value measurements of our benefit plans’ assets (in millions) on a recurring basis by asset category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, |
|
| ||||
| 2022 |
| 2021 |
|
| ||
|
|
|
|
|
|
|
|
Fixed maturity securities: |
|
|
|
|
|
|
|
Corporate bonds | $ | 292 |
| $ | 452 |
|
|
U.S. government bonds |
| 196 |
|
| 228 |
|
|
Foreign government bonds |
| 128 |
|
| 191 |
|
|
State and municipal bonds |
| 22 |
|
| 28 |
|
|
Limited partnerships and common and |
|
|
|
|
|
|
|
preferred stock |
| 353 |
|
| 527 |
|
|
Bulk annuity insurance policy |
| 89 |
|
| 150 |
|
|
Cash and invested cash |
| 46 |
|
| 91 |
|
|
Other investments |
| 71 |
|
| 67 |
|
|
Total | $ | 1,197 |
| $ | 1,734 |
|
|
|
|
|
|
|
|
|
|
Defined Contribution Plans
We sponsor tax-qualified defined contribution plans for eligible employees and agents. We administer these plans in accordance with the plan documents and various limitations under section 401(a) of the Internal Revenue Code of 1986. For the years ended December 31, 2022, 2021 and 2020, expenses for these plans were $102 million, $107 million and $100 million, respectively.
Deferred Compensation Plans
We sponsor non-qualified, unfunded, deferred compensation plans for certain current and former employees, agents and non-employee directors. The results of certain notional investment options within some of the plans are hedged by total return swaps. Our expenses increase or decrease in direct proportion to the change in market value of the participants’ investment options. Participants of certain plans are able to select our stock as a notional investment option; however, it is not hedged by the total return swaps and is a primary source of expense volatility related to these plans. For the years ended December 31, 2022, 2021 and 2020, expenses for these plans were $(4) million, $32 million and $35 million, respectively. For further discussion of total return swaps related to our deferred compensation plans, see Note 5.
Information (in millions) with respect to these plans was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, |
|
|
|
| ||||
| 2022 |
| 2021 |
|
|
|
| ||
Total liabilities (1) | $ | 686 |
| $ | 841 |
|
|
|
|
Investments dedicated to fund liabilities (2) |
| 206 |
|
| 254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)Reported in other liabilities on the Consolidated Balance Sheets.
(2)Reported in other assets on the Consolidated Balance Sheets.
18. Stock-Based Incentive Compensation Plans
We sponsor stock-based incentive compensation plans for our employees and directors and for the employees and agents of our subsidiaries that provide for the issuance of stock options, performance shares and restricted stock units (“RSUs”), among other types of awards. We issue new shares to satisfy option exercises and vested performance shares and RSUs.
Total compensation expense (in millions) by award type for our stock-based incentive compensation plans was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Stock options | $ | 6 |
| $ | 8 |
| $ | 10 |
|
Performance shares |
| 10 |
|
| 18 |
|
| 5 |
|
RSUs |
| 35 |
|
| 35 |
|
| 36 |
|
Total | $ | 51 |
| $ | 61 |
| $ | 51 |
|
|
|
|
|
|
|
|
|
|
|
Recognized tax benefit | $ | 11 |
| $ | 13 |
| $ | 11 |
|
Total unrecognized compensation expense (in millions) and expected weighted-average life (in years) by award type for our stock-based incentive compensation plans was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||||||||
| 2022 |
| 2021 |
| 2020 |
| |||||||||
|
|
| Weighted- |
|
|
| Weighted- |
|
|
| Weighted- |
| |||
|
|
| Average |
|
|
| Average |
|
|
| Average |
| |||
| Expense |
| Period |
| Expense |
| Period |
| Expense |
| Period |
| |||
Stock options | $ | 11 |
| 0.8 |
| $ | 8 |
| 0.7 |
| $ | 8 |
| 0.7 |
|
Performance shares |
| 19 |
| 1.2 |
|
| 14 |
| 1.2 |
|
| 14 |
| 1.3 |
|
RSUs |
| 55 |
| 1.4 |
|
| 43 |
| 1.4 |
|
| 37 |
| 1.2 |
|
Total unrecognized stock-based |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
incentive compensation expense | $ | 85 |
|
|
| $ | 65 |
|
|
| $ | 59 |
|
|
|
Stock Options
The option price assumptions used for our stock option awards were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Weighted-average fair value per option granted | $ | 18.13 |
| $ | 17.26 |
| $ | 12.25 |
|
Weighted-average assumptions: |
|
|
|
|
|
|
|
|
|
Dividend yield |
| 3.2% |
|
| 3.0% |
|
| 3.0% |
|
Expected volatility |
| 44.4% |
|
| 45.0% |
|
| 30.1% |
|
Risk-free interest rate (1) |
| 1.9-3.8% |
|
| 0.6-1.0% |
|
| 0.3-1.4% |
|
Expected life (in years) |
| 5.8 |
|
| 5.8 |
|
| 5.8 |
|
(1)Risk-free interest rate expressed as a range and not a weighted average.
The fair value of options is determined using a Black-Scholes options valuation model with the assumptions disclosed in the table above. The dividend yield is based on the expected dividend rate during the expected life of the option. Expected volatility is based on the implied volatility of exchange-traded securities and the historical volatility of the LNC stock price. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life of the options granted represents the weighted-average period of time from the grant date to the date of exercise, expiration or cancellation based upon historical behavior.
Generally, stock options have a maximum contractual term of ten years and vest ratably over a three year period based solely on a service condition. Information with respect to our incentive plans involving stock options with service conditions (aggregate intrinsic value shown in millions) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted- |
|
|
|
|
|
|
| Weighted- |
| Average |
|
|
| ||
|
|
| Average | Remaining | Aggregate |
| ||||
|
|
| Exercise | Contractual | Intrinsic |
| ||||
| Shares |
| Price |
| Term |
| Value |
| ||
Outstanding as of December 31, 2021 | 3,011,536 |
| $ | 59.23 |
|
|
|
|
|
|
Granted | 593,609 |
|
| 55.10 |
|
|
|
|
|
|
Exercised | (38,374 | ) |
| 54.76 |
|
|
|
|
|
|
Forfeited or expired | (170,232 | ) |
| 63.19 |
|
|
|
|
|
|
Outstanding as of December 31, 2022 | 3,396,539 |
| $ | 58.36 |
| 6.09 |
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest as of December 31, 2022 (1) | 3,238,301 |
| $ | 58.49 |
| 5.97 |
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2022 | 2,476,028 |
| $ | 59.47 |
| 5.05 |
| $ | - |
|
(1)Includes estimated forfeitures.
The total fair value of stock options with service conditions that vested during the years ended December 31, 2022, 2021 and 2020 was $8 million, $8 million and $8 million, respectively. The total intrinsic value of such options exercised during the years ended December 31, 2022, 2021 and 2020, was $1 million, $15 million and $3 million, respectively.
We award to certain agents stock options that have a maximum contractual term of five years and generally vest ratably over a two year period depending on the satisfaction of the performance conditions. Information with respect to our incentive plans involving stock options with performance conditions (aggregate intrinsic value shown in millions) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted- |
|
|
|
|
|
|
| Weighted- |
| Average |
|
|
| ||
|
|
| Average | Remaining | Aggregate |
| ||||
|
|
| Exercise | Contractual | Intrinsic |
| ||||
| Shares |
| Price |
| Term |
| Value |
| ||
Outstanding as of December 31, 2021 | 166,278 |
| $ | 58.88 |
|
|
|
|
|
|
Granted | 33,435 |
|
| 60.58 |
|
|
|
|
|
|
Exercised | (29,931 | ) |
| 63.59 |
|
|
|
|
|
|
Forfeited or expired | (48,385 | ) |
| 60.49 |
|
|
|
|
|
|
Outstanding as of December 31, 2022 | 121,397 |
| $ | 57.55 |
| 2.36 |
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest as of December 31, 2022 (1) | 114,310 |
| $ | 57.34 |
| 2.26 |
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2022 | 97,773 |
| $ | 56.72 |
| 1.99 |
| $ | - |
|
(1) Includes estimated forfeitures.
The total fair value of stock options with performance conditions that vested during the years ended December 31, 2022, 2021 and 2020, was $1 million, less than $1 million and less than $1 million, respectively. The total intrinsic value of such options exercised during the years ended December 31, 2022, 2021 and 2020, was less than $1 million, $1 million and less than $1 million, respectively.
Performance Shares
LNC performance shares vest, if at all, after the conclusion of the three-year performance period and certification of performance results by the Compensation Committee, and, generally, on the third anniversary of the grant date. Depending on the achievement level of performance measures pre-determined by the Compensation Committee for the three-year performance period, payouts could range from 0% to 200% of the target award for performance shares granted prior to 2021, 0% to 240% of the target award for performance shares granted in 2021 and 0% to 232% of the target award for performance shares granted in 2022. Dividend equivalents accrue with respect to unvested performance shares when and as cash dividends are paid on the Company’s common stock and vest if and to the extent that the underlying performance shares vest. Performance share information in the table below includes dividend equivalents credited on unvested performance share awards at target. Information with respect to our performance shares was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted- |
|
| |
|
|
|
| Average |
|
| |
|
|
| Grant-Date |
| |||
| Shares |
|
| Fair Value |
|
| |
Outstanding as of December 31, 2021 (1) | 630,670 |
|
| $ | 63.16 |
|
|
Granted | 374,128 |
|
|
| 69.37 |
|
|
Vested | (185,194 | ) |
|
| 66.89 |
|
|
Forfeited | (72,756 | ) |
|
| 69.97 |
|
|
Performance adjustment (2) | 20,580 |
|
|
| 66.89 |
|
|
Outstanding as of December 31, 2022 (1) | 767,428 |
|
| $ | 64.61 |
|
|
(1)Represents target award amounts.
(2)Represents the difference between the target shares granted and the actual shares vested based upon the achievement level of performance measures.
RSUs
LNC RSUs generally cliff vest on the third anniversary of the grant date, based solely on a service condition. Dividend equivalents accrue with respect to unvested RSUs when and as cash dividends are paid on the Company’s common stock and vest if and when the underlying RSUs vest. RSU information in the table below includes dividend equivalents credited on unvested RSU awards. Information with respect to our RSUs was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted- |
|
| |
|
|
|
| Average |
|
| |
|
|
| Grant-Date |
| |||
| Shares |
|
| Fair Value |
|
| |
Outstanding as of December 31, 2021 | 1,870,556 |
|
| $ | 59.78 |
|
|
Granted | 938,181 |
|
|
| 65.53 |
|
|
Vested | (713,247 | ) |
|
| 62.53 |
|
|
Forfeited | (156,341 | ) |
|
| 62.27 |
|
|
Outstanding as of December 31, 2022 | 1,939,149 |
|
| $ | 61.26 |
|
|
19. Statutory Information and Restrictions
The Company’s domestic life insurance subsidiaries prepare financial statements in accordance with statutory accounting principles (“SAP”) prescribed or permitted by the insurance departments of their states of domicile, which may vary materially from GAAP.
Prescribed SAP includes the Accounting Practices and Procedures Manual of the National Association of Insurance Commissioners (“NAIC”) as well as state laws, regulations and administrative rules. Permitted SAP encompasses all accounting practices not so prescribed. The principal differences between statutory financial statements and financial statements prepared in accordance with GAAP are that statutory financial statements do not reflect DAC, some bond portfolios may be carried at amortized cost, assets and liabilities are presented net of reinsurance, contract holder liabilities are generally valued using more conservative assumptions and certain assets are non-admitted.
Our insurance subsidiaries are subject to the applicable laws and regulations of their respective states of domicile. Changes in these laws and regulations could change capital levels or capital requirements for our insurance subsidiaries.
Statutory capital and surplus, net gain (loss) from operations, after-tax, net income (loss) and dividends to the LNC holding company amounts (in millions) below consist of all or a combination of the following entities: LNL, LLANY, FPP, Lincoln Reinsurance Company of South Carolina, Lincoln Reinsurance Company of Vermont I, Lincoln Reinsurance Company of Vermont III, Lincoln Reinsurance Company of Vermont IV, Lincoln Reinsurance Company of Vermont V, Lincoln Reinsurance Company of Vermont VI and Lincoln Reinsurance Company of Vermont VII.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, |
| ||||
| 2022 |
| 2021 |
| ||
U.S. capital and surplus | $ | 8,624 |
| $ | 8,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
U.S. net gain (loss) from operations, after-tax | $ | 1,730 |
| $ | (1,262 | ) | $ | (271 | ) |
U.S. net income (loss) |
| 1,991 |
|
| (547 | ) |
| 29 |
|
U.S. dividends to LNC holding company |
| 667 |
|
| 1,955 |
|
| 660 |
|
State Prescribed and Permitted Practices
The states of domicile of the Company’s insurance subsidiaries have adopted certain prescribed or permitted accounting practices that differ from those found in NAIC SAP. These prescribed practices are the calculation of reserves on universal life policies based on the Indiana universal life method as prescribed by the state of Indiana for policies issued before January 1, 2006, the use of a more conservative valuation interest rate on certain annuities prescribed by the states of Indiana and New York. Also, the state of New York prescribes use of the continuous Commissioners’ Annuity Reserve Valuation Method in the calculation of reserves and use of minimum reserve methods and assumptions for variable annuity and individual life insurance contracts that may be more conservative than those required by NAIC SAP. The statutory permitted practices allow accounting for certain derivative assets at amortized cost and allow determining certain indexed annuity and indexed universal life statutory reserve calculations with the assumption that the market value of the related liability call option(s) associated with the current index term is zero. At the conclusion of the index term, credited interest is reflected in the reserve as realized, based on actual index performance. The statutory accounting practices also allow accounting for certain group fixed annuity assets at general account values.
The Vermont reinsurance subsidiaries also have certain accounting practices permitted by the state of Vermont that differ from those found in NAIC SAP. One permitted practice involves accounting for the lesser of the face amount of all amounts outstanding under an LOC and the value of the Valuation of Life Insurance Policies Model Regulation (“XXX”) additional statutory reserves as an admitted asset and a form of surplus as of December 31, 2022 and 2021. Another permitted practice involves the acquisition of an LLC note in exchange for a variable value surplus note that is recognized as an admitted asset and a form of surplus as of December 31, 2022 and 2021. Lastly, the state of Vermont has permitted a practice to account for certain excess of loss reinsurance agreements with unaffiliated reinsurers as an asset and form of surplus as of December 31, 2022 and 2021. These permitted practices are related to structures that continue to be allowed in accordance with the grandfathered structures under the provisions of Actuarial Guideline 48 (“AG48”) or are compliant under AG48 requirements.
The favorable (unfavorable) effects on statutory surplus compared to NAIC statutory surplus from the use of these prescribed and permitted practices (in millions) were as follows:
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|
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|
|
|
|
| As of December 31, |
| ||||
| 2022 |
| 2021 |
| ||
State Prescribed Practices |
|
|
|
|
|
|
Calculation of reserves using the Indiana universal life method | $ | 3 |
| $ | 6 |
|
Conservative valuation rate on certain annuities |
| (36 | ) |
| (40 | ) |
Calculation of reserves using continuous CARVM |
| (1 | ) |
| - |
|
Conservative Reg 213 reserves on variable annuity and individual life contracts |
| (37 | ) |
| (27 | ) |
State Permitted Practice |
|
|
|
|
|
|
Derivative instruments and equity indexed reserves |
| 14 |
|
| (113 | ) |
Assets in group fixed annuity contracts held at general account values |
| 436 |
|
| - |
|
Vermont Subsidiaries Permitted Practices |
|
|
|
|
|
|
Lesser of LOC and XXX additional reserve as surplus |
| 1,838 |
|
| 1,847 |
|
LLC notes and variable value surplus notes |
| 1,547 |
|
| 1,616 |
|
Excess of loss reinsurance agreements |
| 549 |
|
| 493 |
|
The NAIC has adopted RBC requirements for life insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks. The requirements provide a means of measuring the minimum amount of statutory surplus
appropriate for an insurance company to support its overall business operations based on its size and risk profile. Under RBC requirements, regulatory compliance is determined by the ratio of a company’s total adjusted capital, as defined by the NAIC, to its company action level of RBC (known as the “RBC ratio”), also as defined by the NAIC. The company action level may be triggered if the RBC ratio is between 75% and 100%, which would require the insurer to submit a plan to the regulator detailing corrective action it proposes to undertake. As of December 31, 2022, the consolidated RBC ratio for LNC’s statutory insurance companies was in excess of three times the aforementioned company action level RBC.
Our insurance subsidiaries are subject to certain insurance department regulatory restrictions as to the transfer of funds and payment of dividends to the holding company. Under Indiana laws and regulations, our Indiana insurance subsidiaries, including our primary insurance subsidiary, LNL, may pay dividends to LNC without prior approval of the Indiana Insurance Commissioner (the “Commissioner”), only from unassigned surplus and must receive prior approval of the Commissioner to pay a dividend if such dividend, along with all other dividends paid within the preceding 12 consecutive months, would exceed the statutory limitation. The current statutory limitation is the greater of 10% of the insurer’s contract holders’ surplus, as shown on its last annual statement on file with the Commissioner or the insurer’s statutory net gain from operations for the previous 12 months, but in no event to exceed statutory unassigned surplus. Indiana law gives the Commissioner broad discretion to disapprove requests for dividends in excess of these limits. LNL’s subsidiary LLANY, a New York-domiciled insurance company, is bound by similar restrictions under the laws of New York. Under New York law, the applicable statutory limitation on dividends is equal to the lesser of 10% of surplus to contract holders as of the immediately preceding calendar year or net gain from operations for the immediately preceding calendar year, not including realized capital gains. We expect our direct domestic insurance subsidiaries could pay dividends to LNC of approximately $1.7 billion in 2023 without prior approval from the respective Commissioner of Insurance.
All payments of principal and interest on surplus notes between LNC and our insurance subsidiaries must be approved by the respective Commissioner of Insurance.
20. Fair Value of Financial Instruments
The carrying values and estimated fair values of our financial instruments (in millions) were as follows:
|
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|
|
|
|
|
|
|
|
| As of December 31, 2022 |
| As of December 31, 2021 |
| ||||||||
| Carrying |
| Fair |
| Carrying |
| Fair |
| ||||
| Value |
| Value |
| Value |
| Value |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities | $ | 99,736 |
| $ | 99,736 |
| $ | 118,746 |
| $ | 118,746 |
|
Trading securities |
| 3,498 |
|
| 3,498 |
|
| 4,482 |
|
| 4,482 |
|
Equity securities |
| 427 |
|
| 427 |
|
| 318 |
|
| 318 |
|
Mortgage loans on real estate |
| 18,301 |
|
| 16,553 |
|
| 17,991 |
|
| 18,700 |
|
Derivative investments |
| 3,736 |
|
| 3,736 |
|
| 5,437 |
|
| 5,437 |
|
Other investments |
| 3,739 |
|
| 3,739 |
|
| 4,284 |
|
| 4,284 |
|
Cash and invested cash |
| 3,343 |
|
| 3,343 |
|
| 2,612 |
|
| 2,612 |
|
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
GLB direct embedded derivatives |
| 1,697 |
|
| 1,697 |
|
| 1,963 |
|
| 1,963 |
|
GLB ceded embedded derivatives |
| 29 |
|
| 29 |
|
| 56 |
|
| 56 |
|
Reinsurance-related embedded derivatives |
| 416 |
|
| 416 |
|
| - |
|
| - |
|
Indexed annuity ceded embedded derivatives |
| 525 |
|
| 525 |
|
| 528 |
|
| 528 |
|
Separate account assets |
| 143,536 |
|
| 143,536 |
|
| 182,583 |
|
| 182,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Future contract benefits – indexed annuity |
|
|
|
|
|
|
|
|
|
|
|
|
and IUL contracts embedded derivatives |
| (4,783 | ) |
| (4,783 | ) |
| (6,131 | ) |
| (6,131 | ) |
Other contract holder funds: |
|
|
|
|
|
|
|
|
|
|
|
|
Remaining guaranteed interest and similar contracts |
| (1,686 | ) |
| (1,686 | ) |
| (1,788 | ) |
| (1,788 | ) |
Account values of certain investment contracts |
| (43,573 | ) |
| (34,268 | ) |
| (41,194 | ) |
| (47,862 | ) |
Short-term debt |
| (500 | ) |
| (496 | ) |
| (300 | ) |
| (302 | ) |
Long-term debt |
| (5,955 | ) |
| (5,005 | ) |
| (6,325 | ) |
| (6,707 | ) |
Other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance-related embedded derivatives |
| - |
|
| - |
|
| (206 | ) |
| (206 | ) |
Derivative liabilities |
| (177 | ) |
| (177 | ) |
| (677 | ) |
| (677 | ) |
GLB ceded embedded derivatives |
| (167 | ) |
| (167 | ) |
| (182 | ) |
| (182 | ) |
Valuation Methodologies and Associated Inputs for Financial Instruments Not Carried at Fair Value
The following discussion outlines the methodologies and assumptions used to determine the fair value of our financial instruments not carried at fair value on the Consolidated Balance Sheets. Considerable judgment is required to develop these assumptions used to measure fair value. Accordingly, the estimates shown are not necessarily indicative of the amounts that would be realized in a one-time, current market exchange of all of our financial instruments.
Mortgage Loans on Real Estate
The fair value of mortgage loans on real estate, excluding mortgage loans accounted for using the fair value option, is established using a discounted cash flow method based on credit rating, maturity and future income. The ratings for mortgages in good standing are based on property type, location, market conditions, occupancy, debt-service coverage, loan-to-value, quality of tenancy, borrower and payment record. The fair value for impaired mortgage loans is based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s market price or the fair value of the collateral if the loan is collateral dependent. The inputs used to measure the fair value of our mortgage loans on real estate, excluding mortgage loans accounted for using the fair value option, are classified as Level 2 within the fair value hierarchy.
Other Investments
The carrying value of our assets classified as other investments, excluding short-term investments, approximates fair value. Other investments includes primarily LPs and other privately held investments that are accounted for using the equity method of accounting and the carrying value is based on our proportional share of the net assets of the LPs. Other investments also includes FHLB stock carried at cost and periodically evaluated for impairment based on ultimate recovery of par value. The inputs used to measure the fair value of our LPs, other privately held investments and FHLB stock are classified as Level 3 within the fair value hierarchy. The remaining assets in other investments include cash collateral receivables and securities that are not LPs or other privately held investments. The inputs used to measure the fair value of these assets are classified as Level 2 within the fair value hierarchy.
Separate Account Assets
Separate account assets are primarily carried at fair value. A portion of our separate account assets includes LPs, which are accounted for using the equity method of accounting. The carrying value is based on our proportional share of the net assets of the LPs and approximates fair value. The inputs used to measure the fair value of the separate account asset LPs are classified as Level 3 within the fair value hierarchy.
Other Contract Holder Funds
Other contract holder funds include remaining guaranteed interest and similar contracts and account values of certain investment contracts. The fair value for the remaining guaranteed interest and similar contracts is estimated using discounted cash flow calculations as of the balance sheet date. These calculations are based on interest rates currently offered on similar contracts with maturities that are consistent with those remaining for the contracts being valued. As of December 31, 2022 and 2021, the remaining guaranteed interest and similar contracts carrying value approximated fair value. The fair value of the account values of certain investment contracts is based on their approximate surrender value as of the balance sheet date. The inputs used to measure the fair value of our other contract holder funds are classified as Level 3 within the fair value hierarchy.
Short-Term and Long-Term Debt
The fair value of short-term and long-term debt is based on quoted market prices. The inputs used to measure the fair value of our short-term and long-term debt are classified as Level 2 within the fair value hierarchy.
Fair Value Option
Mortgage loans on real estate, net of allowance for credit losses, as reported on the Consolidated Balance Sheets, includes mortgage loans on real estate for which the fair value option was elected. The fair value option allows us to elect fair value as an alternative measurement for mortgage loans not otherwise reported at fair value. We have made these elections for certain mortgage loans associated with modified coinsurance agreements to help mitigate the inconsistency in earnings that would otherwise result from the use of embedded derivatives included with these loans. Changes in fair value are reflected in realized gain (loss) on the Consolidated Statement of Comprehensive Income (Loss). Changes in fair value due to instrument-specific credit risk are estimated using changes in credit spreads and quality ratings for the period reported. Mortgage loans on real estate for which the fair value option was elected are valued using third-party pricing services. We have procedures in place to review the valuations each quarter to ensure they are reasonable, including utilizing a separate third party to reperform the valuation for a selection of mortgage loans on an annual basis. Due to lack of observable inputs, mortgage loans electing the fair value option are classified as Level 3 within the fair value hierarchy.
The fair value and aggregate contractual principal for mortgage loans on real estate where the fair value option was elected (in millions) were as follows:
|
|
|
|
|
|
|
|
| As of December 31, |
|
| ||||
| 2022 |
| 2021 |
|
| ||
Fair value | $ | 487 |
| $ | 739 |
|
|
Aggregate contractual principal |
| 514 |
|
| 742 |
|
|
As of December 31, 2022 and 2021, no loans for which the fair value option was elected were in non-accrual status, and none were more than 90 days past due and still accruing interest.
Financial Instruments Carried at Fair Value
We did not have any assets or liabilities measured at fair value on a nonrecurring basis as of December 31, 2022 or 2021.
The following summarizes our financial instruments carried at fair value (in millions) on a recurring basis by the fair value hierarchy levels:
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, 2022 |
| |||||||||||||
|
| Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Prices |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| in Active |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Markets for | Significant | Significant |
|
|
|
| |||||||||
|
| Identical |
| Observable | Unobservable |
| Total |
| ||||||||
|
| Assets |
|
| Inputs |
|
| Inputs |
|
| Fair |
| ||||
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
|
| Value |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
| $ | - |
|
| $ | 76,728 |
|
| $ | 2,295 |
|
| $ | 79,023 |
|
U.S. government bonds |
|
| 359 |
|
|
| 20 |
|
|
| - |
|
|
| 379 |
|
State and municipal bonds |
|
| - |
|
|
| 5,035 |
|
|
| 35 |
|
|
| 5,070 |
|
Foreign government bonds |
|
| - |
|
|
| 318 |
|
|
| - |
|
|
| 318 |
|
RMBS |
|
| - |
|
|
| 2,008 |
|
|
| 1 |
|
|
| 2,009 |
|
CMBS |
|
| - |
|
|
| 1,674 |
|
|
| - |
|
|
| 1,674 |
|
ABS |
|
| - |
|
|
| 9,787 |
|
|
| 1,117 |
|
|
| 10,904 |
|
Hybrid and redeemable preferred securities |
|
| 41 |
|
|
| 269 |
|
|
| 49 |
|
|
| 359 |
|
Trading securities |
|
| - |
|
|
| 2,917 |
|
|
| 581 |
|
|
| 3,498 |
|
Equity securities |
|
| - |
|
|
| 274 |
|
|
| 153 |
|
|
| 427 |
|
Mortgage loans on real estate |
|
| - |
|
|
| - |
|
|
| 487 |
|
|
| 487 |
|
Derivative investments (1) |
|
| - |
|
|
| 5,684 |
|
|
| 605 |
|
|
| 6,289 |
|
Other investments – short-term investments |
|
| - |
|
|
| 75 |
|
|
| - |
|
|
| 75 |
|
Cash and invested cash |
|
| - |
|
|
| 3,343 |
|
|
| - |
|
|
| 3,343 |
|
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GLB direct embedded derivatives |
|
| - |
|
|
| - |
|
|
| 1,697 |
|
|
| 1,697 |
|
GLB ceded embedded derivatives |
|
| - |
|
|
| - |
|
|
| 29 |
|
|
| 29 |
|
Reinsurance-related embedded derivatives |
|
| - |
|
|
| 416 |
|
|
| - |
|
|
| 416 |
|
Indexed annuity ceded embedded derivatives |
|
| - |
|
|
| - |
|
|
| 525 |
|
|
| 525 |
|
Separate account assets |
|
| 412 |
|
|
| 143,124 |
|
|
| - |
|
|
| 143,536 |
|
Total assets |
| $ | 812 |
|
| $ | 251,672 |
|
| $ | 7,574 |
|
| $ | 260,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future contract benefits – indexed annuity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and IUL contracts embedded derivatives |
| $ | - |
|
| $ | - |
|
| $ | (4,783 | ) |
| $ | (4,783 | ) |
Other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities (1) |
|
| - |
|
|
| (2,127 | ) |
|
| (603 | ) |
|
| (2,730 | ) |
GLB ceded embedded derivatives |
|
| - |
|
|
| - |
|
|
| (167 | ) |
|
| (167 | ) |
Total liabilities |
| $ | - |
|
| $ | (2,127 | ) |
| $ | (5,553 | ) |
| $ | (7,680 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, 2021 |
| |||||||||||||
|
| Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Prices |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| in Active |
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Markets for | Significant | Significant |
|
|
|
| |||||||||
|
| Identical |
| Observable | Unobservable |
| Total |
| ||||||||
|
| Assets |
|
| Inputs |
|
| Inputs |
|
| Fair |
| ||||
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
|
| Value |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
| $ | - |
|
| $ | 92,400 |
|
| $ | 5,720 |
|
| $ | 98,120 |
|
U.S. government bonds |
|
| 428 |
|
|
| 5 |
|
|
| - |
|
|
| 433 |
|
State and municipal bonds |
|
| - |
|
|
| 6,621 |
|
|
| - |
|
|
| 6,621 |
|
Foreign government bonds |
|
| - |
|
|
| 391 |
|
|
| 41 |
|
|
| 432 |
|
RMBS |
|
| - |
|
|
| 2,521 |
|
|
| 4 |
|
|
| 2,525 |
|
CMBS |
|
| - |
|
|
| 1,599 |
|
|
| - |
|
|
| 1,599 |
|
ABS |
|
| - |
|
|
| 7,642 |
|
|
| 870 |
|
|
| 8,512 |
|
Hybrid and redeemable preferred securities |
|
| 54 |
|
|
| 357 |
|
|
| 93 |
|
|
| 504 |
|
Trading securities |
|
| 32 |
|
|
| 3,622 |
|
|
| 828 |
|
|
| 4,482 |
|
Equity securities |
|
| 7 |
|
|
| 216 |
|
|
| 95 |
|
|
| 318 |
|
Mortgage loans on real estate |
|
| - |
|
|
| - |
|
|
| 739 |
|
|
| 739 |
|
Derivative investments (1) |
|
| - |
|
|
| 7,597 |
|
|
| 149 |
|
|
| 7,746 |
|
Other investments – short-term investments |
|
| - |
|
|
| 154 |
|
|
| - |
|
|
| 154 |
|
Cash and invested cash |
|
| - |
|
|
| 2,612 |
|
|
| - |
|
|
| 2,612 |
|
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GLB direct embedded derivatives |
|
| - |
|
|
| - |
|
|
| 1,963 |
|
|
| 1,963 |
|
GLB ceded embedded derivatives |
|
| - |
|
|
| - |
|
|
| 56 |
|
|
| 56 |
|
Indexed annuity ceded embedded derivatives |
|
| - |
|
|
| - |
|
|
| 528 |
|
|
| 528 |
|
Separate account assets |
|
| 646 |
|
|
| 181,929 |
|
|
| - |
|
|
| 182,575 |
|
Total assets |
| $ | 1,167 |
|
| $ | 307,666 |
|
| $ | 11,086 |
|
| $ | 319,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future contract benefits – indexed annuity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and IUL contracts embedded derivatives |
| $ | - |
|
| $ | - |
|
| $ | (6,131 | ) |
| $ | (6,131 | ) |
Other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance-related embedded derivatives |
|
| - |
|
|
| (206 | ) |
|
| - |
|
|
| (206 | ) |
Derivative liabilities (1) |
|
| - |
|
|
| (2,858 | ) |
|
| (128 | ) |
|
| (2,986 | ) |
GLB ceded embedded derivatives |
|
| - |
|
|
| - |
|
|
| (182 | ) |
|
| (182 | ) |
Total liabilities |
| $ | - |
|
| $ | (3,064 | ) |
| $ | (6,441 | ) |
| $ | (9,505 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)Derivative investment assets and liabilities are presented within the fair value hierarchy on a gross basis by derivative type and not on a master netting basis by counterparty.
The following summarizes changes to our financial instruments carried at fair value (in millions) and classified within Level 3 of the fair value hierarchy. This summary excludes any effect of amortization of DAC, VOBA, DSI and DFEL. The gains and losses below may include changes in fair value due in part to observable inputs that are a component of the valuation methodology.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Year Ended December 31, 2022 |
| ||||||||||||||||
|
|
|
|
|
|
| Gains | Issuances, | Transfers |
|
|
|
| |||||
|
|
|
| Items |
| (Losses) | Sales, | Into or |
|
|
|
| ||||||
|
|
|
| Included |
| in | Maturities, | Out |
|
|
|
| ||||||
| Beginning |
| in |
| Settlements, | of |
| Ending |
| |||||||||
| Fair |
| Net |
| and |
| Calls, |
| Level 3, |
| Fair |
| ||||||
| Value |
| Income |
| Other (1) |
| Net |
| Net |
| Value |
| ||||||
Investments: (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds | $ | 5,720 |
| $ | 1 |
| $ | (1,550 | ) | $ | 796 |
| $ | (2,672 | ) | $ | 2,295 |
|
State and municipal bonds |
| - |
|
| - |
|
| (1 | ) |
| - |
|
| 36 |
|
| 35 |
|
Foreign government bonds |
| 41 |
|
|
|
|
| (6 | ) |
| (30 | ) |
| (5 | ) |
|
|
|
RMBS |
| 4 |
|
|
|
|
| 1 |
|
| 21 |
|
| (25 | ) |
| 1 |
|
CMBS |
| - |
|
| - |
|
| - |
|
| 17 |
|
| (17 | ) |
| - |
|
ABS |
| 870 |
|
| - |
|
| (113 | ) |
| 676 |
|
| (316 | ) |
| 1,117 |
|
Hybrid and redeemable preferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities |
| 93 |
|
| (6 | ) |
| (22 | ) |
| (12 | ) |
| (4 | ) |
| 49 |
|
Trading securities |
| 828 |
|
| (80 | ) |
| - |
|
| (152 | ) |
| (15 | ) |
| 581 |
|
Equity securities |
| 95 |
|
| 54 |
|
| - |
|
| 19 |
|
| (15 | ) |
| 153 |
|
Mortgage loans on real estate |
| 739 |
|
| (20 | ) |
| (5 | ) |
| (227 | ) |
| - |
|
| 487 |
|
Derivative investments |
| 21 |
|
| 2 |
|
| (6 | ) |
| - |
|
| (15 | ) |
| 2 |
|
Other assets: (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GLB direct embedded derivatives |
| 1,963 |
|
| (266 | ) |
| - |
|
| - |
|
| - |
|
| 1,697 |
|
GLB ceded embedded derivatives |
| 56 |
|
| (27 | ) |
| - |
|
| - |
|
| - |
|
| 29 |
|
Indexed annuity ceded embedded derivatives |
| 528 |
|
| (215 | ) |
| - |
|
| 212 |
|
| - |
|
| 525 |
|
Future contract benefits – indexed annuity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and IUL contracts embedded derivatives (3) |
| (6,131 | ) |
| 1,975 |
|
| - |
|
| (627 | ) |
| - |
|
| (4,783 | ) |
Other liabilities – GLB ceded embedded |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
derivatives (3) |
| (182 | ) |
| 15 |
|
| - |
|
| - |
|
| - |
|
| (167 | ) |
Total, net | $ | 4,645 |
| $ | 1,433 |
| $ | (1,702 | ) | $ | 693 |
| $ | (3,048 | ) | $ | 2,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Year Ended December 31, 2021 |
| ||||||||||||||||
|
|
|
|
|
|
| Gains | Issuances, | Transfers |
|
|
|
| |||||
|
|
|
| Items |
| (Losses) | Sales, | Into or |
|
|
|
| ||||||
|
|
|
| Included |
| in | Maturities, | Out |
|
|
|
| ||||||
| Beginning |
| in |
| OCI | Settlements, | of |
| Ending |
| ||||||||
| Fair |
| Net |
| and |
| Calls, |
| Level 3, |
| Fair |
| ||||||
| Value |
| Income |
| Other (1) |
| Net |
| Net |
| Value |
| ||||||
Investments: (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds | $ | 5,121 |
| $ | 4 |
| $ | (182 | ) | $ | 748 |
| $ | 29 |
| $ | 5,720 |
|
U.S. government bonds |
| 5 |
|
| - |
|
| - |
|
| (5 | ) |
| - |
|
| - |
|
Foreign government bonds |
| 74 |
|
| - |
|
| (11 | ) |
| 80 |
|
| (102 | ) |
| 41 |
|
RMBS |
| 2 |
|
| (1 | ) |
| - |
|
| 3 |
|
| - |
|
| 4 |
|
CMBS |
| - |
|
| - |
|
| - |
|
| 8 |
|
| (8 | ) |
| - |
|
ABS |
| 570 |
|
| 1 |
|
| (9 | ) |
| 602 |
|
| (294 | ) |
| 870 |
|
Hybrid and redeemable preferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities |
| 104 |
|
| - |
|
| 27 |
|
| (38 | ) |
| - |
|
| 93 |
|
Trading securities |
| 644 |
|
| (3 | ) |
| - |
|
| 210 |
|
| (23 | ) |
| 828 |
|
Equity securities |
| 59 |
|
| 39 |
|
| - |
|
| (3 | ) |
| - |
|
| 95 |
|
Mortgage loans on real estate |
| 832 |
|
| 11 |
|
| 5 |
|
| (109 | ) |
| - |
|
| 739 |
|
Derivative investments |
| 1,542 |
|
| 1,255 |
|
| (3 | ) |
| (139 | ) |
| (2,634 | ) |
| 21 |
|
Other assets: (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GLB direct embedded derivatives |
| 450 |
|
| 1,513 |
|
| - |
|
| - |
|
| - |
|
| 1,963 |
|
GLB ceded embedded derivatives |
| 82 |
|
| (26 | ) |
| - |
|
| - |
|
| - |
|
| 56 |
|
Indexed annuity ceded embedded derivatives |
| 550 |
|
| 87 |
|
| - |
|
| (109 | ) |
| - |
|
| 528 |
|
Future contract benefits – indexed annuity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and IUL contracts embedded derivatives (3) |
| (3,594 | ) |
| (2,709 | ) |
| - |
|
| 172 |
|
| - |
|
| (6,131 | ) |
Other liabilities – GLB ceded embedded |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
derivatives (3) |
| - |
|
| (182 | ) |
| - |
|
| - |
|
| - |
|
| (182 | ) |
Total, net | $ | 6,441 |
| $ | (11 | ) | $ | (173 | ) | $ | 1,420 |
| $ | (3,032 | ) | $ | 4,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Year Ended December 31, 2020 |
| ||||||||||||||||
|
|
|
|
|
|
| Gains | Issuances, | Transfers |
|
|
|
| |||||
|
|
|
| Items |
| (Losses) | Sales, | Into or |
|
|
|
| ||||||
|
|
|
| Included |
| in | Maturities, | Out |
|
|
|
| ||||||
| Beginning |
| in |
| OCI | Settlements, | of |
| Ending |
| ||||||||
| Fair |
| Net |
| and |
| Calls, |
| Level 3, |
| Fair |
| ||||||
| Value |
| Income |
| Other (1) |
| Net |
| Net |
| Value |
| ||||||
Investments: (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds | $ | 4,281 |
| $ | (8 | ) | $ | 284 |
| $ | 464 |
| $ | 100 |
| $ | 5,121 |
|
U.S. government bonds |
| 5 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 5 |
|
Foreign government bonds |
| 90 |
|
| 1 |
|
| 3 |
|
| (20 | ) |
| - |
|
| 74 |
|
RMBS |
| 11 |
|
|
|
|
|
|
|
|
|
|
| (9 | ) |
| 2 |
|
CMBS |
| 1 |
|
| (1 | ) |
| - |
|
| - |
|
| - |
|
| - |
|
ABS |
| 268 |
|
| - |
|
| 7 |
|
| 496 |
|
| (201 | ) |
| 570 |
|
Hybrid and redeemable preferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities |
| 78 |
|
| - |
|
| (2 | ) |
| 10 |
|
| 18 |
|
| 104 |
|
Trading securities |
| 666 |
|
| 11 |
|
| - |
|
| (32 | ) |
| (1 | ) |
| 644 |
|
Equity securities |
| 30 |
|
| 4 |
|
| - |
|
| 20 |
|
| 5 |
|
| 59 |
|
Mortgage loans on real estate |
| - |
|
| (1 | ) |
| (10 | ) |
| 56 |
|
| 787 |
|
| 832 |
|
Derivative investments |
| 868 |
|
| 986 |
|
| 267 |
|
| (363 | ) |
| (216 | ) |
| 1,542 |
|
Other assets: (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GLB direct embedded derivatives |
| 450 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 450 |
|
GLB ceded embedded derivatives |
| 60 |
|
| 22 |
|
| - |
|
| - |
|
| - |
|
| 82 |
|
Indexed annuity ceded embedded derivatives |
| 927 |
|
| 538 |
|
| - |
|
| (915 | ) |
| - |
|
| 550 |
|
Future contract benefits – indexed annuity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and IUL contracts embedded derivatives (3) |
| (2,585 | ) |
| (1,009 | ) |
| - |
|
| - |
|
| - |
|
| (3,594 | ) |
Other liabilities – GLB ceded embedded |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
derivatives (3) |
| (9 | ) |
| 9 |
|
| - |
|
| - |
|
| - |
|
| - |
|
Total, net | $ | 5,141 |
| $ | 552 |
| $ | 549 |
| $ | (284 | ) | $ | 483 |
| $ | 6,441 |
|
(1)The changes in fair value of the interest rate swaps are offset by an adjustment to derivative investments (see Note 5).
(2)Amortization and accretion of premiums and discounts are included in net investment income on the Consolidated Statements of Comprehensive Income (Loss). Gains (losses) from sales, maturities, settlements and calls and credit loss expense are included in realized gain (loss) on the Consolidated Statements of Comprehensive Income (Loss).
(3)Gains (losses) from the changes in fair value are included in realized gain (loss) on the Consolidated Statements of Comprehensive Income (Loss).
The following provides the components of the items included in issuances, sales, maturities, settlements and calls, net, excluding any effect of amortization of DAC, VOBA, DSI and DFEL and changes in future contract benefits, (in millions) as reported above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Year Ended December 31, 2022 |
| ||||||||||||||||
| Issuances |
| Sales |
| Maturities | Settlements | Calls |
| Total |
| ||||||||
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds | $ | 1,263 |
| $ | (100 | ) | $ | (82 | ) | $ | (235 | ) | $ | (50 | ) | $ | 796 |
|
Foreign government bonds |
| - |
|
| - |
|
| (30 | ) |
| - |
|
| - |
|
| (30 | ) |
RMBS |
| 21 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 21 |
|
CMBS |
| 17 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 17 |
|
ABS |
| 918 |
|
| - |
|
| - |
|
| (235 | ) |
| (7 | ) |
| 676 |
|
Hybrid and redeemable preferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities |
| - |
|
| - |
|
| - |
|
| - |
|
| (12 | ) |
| (12 | ) |
Trading securities |
| 287 |
|
| (229 | ) |
| - |
|
| (210 | ) |
| - |
|
| (152 | ) |
Equity securities |
| 28 |
|
| (9 | ) |
| - |
|
| - |
|
| - |
|
| 19 |
|
Mortgage loans on real estate |
| 15 |
|
| - |
|
| - |
|
| (242 | ) |
| - |
|
| (227 | ) |
Other assets – indexed annuity ceded |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
embedded derivatives |
| 124 |
|
| - |
|
| - |
|
| 88 |
|
| - |
|
| 212 |
|
Future contract benefits – indexed annuity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and IUL contracts embedded derivatives |
| (710 | ) |
| - |
|
| - |
|
| 83 |
|
| - |
|
| (627 | ) |
Total, net | $ | 1,963 |
| $ | (338 | ) | $ | (112 | ) | $ | (751 | ) | $ | (69 | ) | $ | 693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Year Ended December 31, 2021 |
| ||||||||||||||||
| Issuances |
| Sales |
| Maturities | Settlements | Calls |
| Total |
| ||||||||
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds | $ | 1,408 |
| $ | (33 | ) | $ | (109 | ) | $ | (488 | ) | $ | (30 | ) | $ | 748 |
|
U.S. government bonds |
| - |
|
| - |
|
| (5 | ) |
| - |
|
| - |
|
| (5 | ) |
Foreign government bonds |
| 80 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 80 |
|
RMBS |
| 3 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 3 |
|
CMBS |
| 8 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 8 |
|
ABS |
| 835 |
|
| - |
|
| - |
|
| (233 | ) |
| - |
|
| 602 |
|
Hybrid and redeemable preferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities |
| 12 |
|
| (20 | ) |
| - |
|
| - |
|
| (30 | ) |
| (38 | ) |
Trading securities |
| 383 |
|
| (24 | ) |
| - |
|
| (149 | ) |
| - |
|
| 210 |
|
Equity securities |
| 7 |
|
| (10 | ) |
| - |
|
| - |
|
| - |
|
| (3 | ) |
Mortgage loans on real estate |
| 96 |
|
| (101 | ) |
| (26 | ) |
| (78 | ) |
| - |
|
| (109 | ) |
Derivative investments |
| 174 |
|
| (124 | ) |
| (189 | ) |
| - |
|
| - |
|
| (139 | ) |
Other assets – indexed annuity ceded |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
embedded derivatives |
| 55 |
|
| - |
|
| - |
|
| (164 | ) |
| - |
|
| (109 | ) |
Future contract benefits – indexed annuity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and IUL contracts embedded derivatives |
| (400 | ) |
| - |
|
| - |
|
| 572 |
|
| - |
|
| 172 |
|
Total, net | $ | 2,661 |
| $ | (312 | ) | $ | (329 | ) | $ | (540 | ) | $ | (60 | ) | $ | 1,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Year Ended December 31, 2020 |
| ||||||||||||||||
| Issuances |
| Sales |
| Maturities | Settlements | Calls |
| Total |
| ||||||||
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds | $ | 1,126 |
| $ | (250 | ) | $ | (43 | ) | $ | (237 | ) | $ | (132 | ) | $ | 464 |
|
Foreign government bonds |
| - |
|
| - |
|
| (20 | ) |
| - |
|
| - |
|
| (20 | ) |
ABS |
| 572 |
|
| - |
|
| - |
|
| (76 | ) |
| - |
|
| 496 |
|
Hybrid and redeemable preferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities |
| 14 |
|
| (4 | ) |
| - |
|
| - |
|
| - |
|
| 10 |
|
Trading securities |
| 300 |
|
| (126 | ) |
| (40 | ) |
| (166 | ) |
| - |
|
| (32 | ) |
Equity securities |
| 22 |
|
| (2 | ) |
| - |
|
| - |
|
| - |
|
| 20 |
|
Mortgage loans on real estate |
| 71 |
|
| (15 | ) |
| - |
|
| - |
|
| - |
|
| 56 |
|
Derivative investments |
| 520 |
|
| (412 | ) |
| (471 | ) |
| - |
|
| - |
|
| (363 | ) |
Other assets – indexed annuity ceded |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
embedded derivatives |
| 25 |
|
| - |
|
| - |
|
| (940 | ) |
| - |
|
| (915 | ) |
Future contract benefits – indexed annuity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and IUL contracts embedded derivatives |
| (284 | ) |
| - |
|
| - |
|
| 284 |
|
| - |
|
| - |
|
Total, net | $ | 2,366 |
| $ | (809 | ) | $ | (574 | ) | $ | (1,135 | ) | $ | (132 | ) | $ | (284 | ) |
The following summarizes changes in unrealized gains (losses) included in net income, excluding any effect of amortization of DAC, VOBA, DSI and DFEL and changes in future contract benefits, related to financial instruments carried at fair value classified within Level 3 that we still held (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Trading securities | $ | (81 | ) | $ | 4 |
| $ | - |
|
Equity securities |
| 56 |
|
| 43 |
|
| - |
|
Mortgage loans on real estate |
| (20 | ) |
| 12 |
|
| - |
|
Derivative investments |
| 2 |
|
| 1,051 |
|
| 536 |
|
GLB embedded derivatives |
| 521 |
|
| 2,326 |
|
| 671 |
|
Embedded derivatives – indexed annuity |
|
|
|
|
|
|
|
|
|
and IUL contracts |
| (95 | ) |
| 44 |
|
| 634 |
|
Total, net (1) | $ | 383 |
| $ | 3,480 |
| $ | 1,841 |
|
(1)Included in realized gain (loss) on the Consolidated Statements of Comprehensive Income (Loss).
The following summarizes changes in unrealized gains (losses) included in OCI, net of tax, excluding any effect of amortization of DAC, VOBA, DSI and DFEL and changes in future contract benefits, related to financial instruments carried at fair value classified within Level 3 that we still held (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Fixed maturity AFS securities: |
|
|
|
|
|
|
|
|
|
Corporate bonds | $ | (1,562 | ) | $ | (183 | ) | $ | 58 |
|
State and municipal bonds |
| (1 | ) |
| - |
|
| - |
|
Foreign government bonds |
| (7 | ) |
| (10 | ) |
| 4 |
|
ABS |
| (116 | ) |
| (9 | ) |
| 5 |
|
Hybrid and redeemable preferred |
|
|
|
|
|
|
|
|
|
securities |
| (22 | ) |
| 27 |
|
| (3 | ) |
Mortgage loans on real estate |
| (5 | ) |
| 4 |
|
| - |
|
Total, net | $ | (1,713 | ) | $ | (171 | ) | $ | 64 |
|
The following provides the components of the transfers into and out of Level 3 (in millions) as reported above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Year Ended December 31, 2022 |
| |||||||
| Transfers |
| Transfers |
|
|
|
| ||
| Into |
| Out of |
|
|
|
| ||
| Level 3 |
| Level 3 |
| Total |
| |||
Investments: |
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities: |
|
|
|
|
|
|
|
|
|
Corporate bonds | $ | 296 |
| $ | (2,968 | ) | $ | (2,672 | ) |
State and municipal bonds |
| 36 |
|
| - |
|
| 36 |
|
Foreign government bonds |
| - |
|
| (5 | ) |
| (5 | ) |
RMBS |
| - |
|
| (25 | ) |
| (25 | ) |
CMBS |
| - |
|
| (17 | ) |
| (17 | ) |
ABS |
| 16 |
|
| (332 | ) |
| (316 | ) |
Hybrid and redeemable preferred securities |
| - |
|
| (4 | ) |
| (4 | ) |
Trading securities |
| 4 |
|
| (19 | ) |
| (15 | ) |
Equity securities |
| - |
|
| (15 | ) |
| (15 | ) |
Derivative investments |
| - |
|
| (15 | ) |
| (15 | ) |
Total, net | $ | 352 |
| $ | (3,400 | ) | $ | (3,048 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Year Ended December 31, 2021 |
| |||||||
| Transfers |
| Transfers |
|
|
|
| ||
| Into |
| Out of |
|
|
|
| ||
| Level 3 |
| Level 3 |
| Total |
| |||
Investments: |
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities: |
|
|
|
|
|
|
|
|
|
Corporate bonds | $ | 163 |
| $ | (134 | ) | $ | 29 |
|
Foreign government bonds |
| - |
|
| (102 | ) |
| (102 | ) |
CMBS |
| - |
|
| (8 | ) |
| (8 | ) |
ABS |
| 36 |
|
| (330 | ) |
| (294 | ) |
Trading securities |
| 14 |
|
| (37 | ) |
| (23 | ) |
Derivative investments |
| 24 |
|
| (2,658 | ) |
| (2,634 | ) |
Total, net | $ | 237 |
| $ | (3,269 | ) | $ | (3,032 | ) |
|
|
|
|
|
|
|
|
|
|
| For the Year Ended December 31, 2020 |
| |||||||
| Transfers |
| Transfers |
|
|
|
| ||
| Into |
| Out of |
|
|
|
| ||
| Level 3 |
| Level 3 |
| Total |
| |||
Investments: |
|
|
|
|
|
|
|
|
|
Fixed maturity AFS securities: |
|
|
|
|
|
|
|
|
|
Corporate bonds | $ | 343 |
| $ | (243 | ) | $ | 100 |
|
U.S. government bonds |
| 5 |
|
| (5 | ) |
| - |
|
RMBS |
| 1 |
|
| (10 | ) |
| (9 | ) |
ABS |
| 20 |
|
| (221 | ) |
| (201 | ) |
Hybrid and redeemable preferred securities |
| 18 |
|
| - |
|
| 18 |
|
Trading securities |
| 33 |
|
| (34 | ) |
| (1 | ) |
Equity securities |
| 5 |
|
| - |
|
| 5 |
|
Mortgage loans on real estate |
| 787 |
|
| - |
|
| 787 |
|
Derivative investments |
| - |
|
| (216 | ) |
| (216 | ) |
Total, net | $ | 1,212 |
| $ | (729 | ) | $ | 483 |
|
Transfers into and out of Level 3 are generally the result of observable market information on financial instruments no longer being available or becoming available to our pricing vendors. For the years ended December 31, 2022, 2021 and 2020, transfers in and out of Level 3 were attributable primarily to the financial instruments’ observable market information no longer being available or becoming available. In 2022, transfers out of Level 3 included corporate bonds and ABS for which we changed valuation techniques. This change in valuation technique was primarily from a change to a third-party-provided pricing model that did not use significant unobservable inputs. In 2021, transfers out of Level 3 included derivative instruments for which we changed valuation techniques. This change in valuation technique was primarily from unobservable inputs in counterparty models to a mathematical model provided by a third party. These updated valuation techniques are considered industry standard and provide us with greater visibility into the economic valuation inputs.
The following summarizes the fair value (in millions), valuation techniques and significant unobservable inputs of the Level 3 fair value measurements as of December 31, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average |
| |
| Fair |
| Valuation |
| Significant |
| Assumption or |
| Input |
| |||||||||
| Value |
| Technique |
| Unobservable Inputs |
| Input Ranges |
| Range (1) |
| |||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity AFS and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
trading securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds | $ | 204 |
| Discounted cash flow |
| Liquidity/duration adjustment (2) |
| (0.2) | % |
| - | 4.2 | % |
| 2.1 | % |
| ||
State and municipal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bonds |
| 35 |
| Discounted cash flow |
| Liquidity/duration adjustment (2) |
| 1.2 | % |
| - | 2.4 | % |
| 2.3 | % |
| ||
ABS |
| 15 |
| Discounted cash flow |
| Liquidity/duration adjustment (2) |
| 1.4 | % |
| - | 1.4 | % |
| 1.4 | % |
| ||
Hybrid and redeemable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
preferred securities |
| 3 |
| Discounted cash flow |
| Liquidity/duration adjustment (2) |
| 1.5 | % |
| - | 1.5 | % |
| 1.5 | % |
| ||
Equity securities |
| 4 |
| Discounted cash flow |
| Liquidity/duration adjustment (2) |
| 4.5 | % |
| - | 4.5 | % |
| 4.5 | % |
| ||
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GLB direct and ceded |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
embedded derivatives |
| 1,726 |
| Discounted cash flow |
| Long-term lapse rate (3) |
| 1 | % |
| - | 30 | % |
| (10) |
|
| ||
|
|
|
|
|
| Utilization of guaranteed withdrawals (4) | 85 | % |
| - | 100 | % |
| 94 | % |
| |||
|
|
|
|
|
|
| Claims utilization factor (5) |
| 60 | % |
| - | 100 | % |
| (10) |
|
| |
|
|
|
|
|
|
| Premiums utilization factor (5) |
| 80 | % |
| - | 115 | % |
| (10) |
|
| |
|
|
|
|
|
|
| NPR (6) |
| 0.35 | % |
| - | 2.41 | % |
| 1.73 | % |
| |
|
|
|
|
|
|
| Mortality rate (7) |
|
|
|
|
| (9) |
|
| (10) |
|
| |
|
|
|
|
|
|
| Volatility (8) |
| 1 | % |
| - | 28 | % |
| 14.47 | % |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Indexed annuity ceded |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
embedded derivatives |
| 525 |
| Discounted cash flow |
| Lapse rate (3) |
| 0 | % |
| - | 9 | % |
| (10) |
|
| ||
|
|
|
|
|
|
| Mortality rate (7) |
|
|
|
|
| (9) |
|
| (10) |
|
| |
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future contract benefits – |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
indexed annuity contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
embedded derivatives | $ | (4,845 | ) | Discounted cash flow |
| Lapse rate (3) |
| 0 | % |
| - | 9 | % |
| (10) |
|
| ||
|
|
|
|
|
|
| Mortality rate (7) |
|
|
|
|
| (9) |
|
| (10) |
|
| |
Other liabilities – |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GLB ceded embedded |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
derivatives |
| (167 | ) | Discounted cash flow |
| Long-term lapse rate (3) |
| 1 | % |
| - | 30 | % |
| (10) |
|
| ||
|
|
|
|
|
|
| Utilization of guaranteed withdrawals (4) | 85 | % |
| - | 100 | % |
| 94 | % |
| ||
|
|
|
|
|
|
| Claims utilization factor (5) |
| 60 | % |
| - | 100 | % |
| (10) |
|
| |
|
|
|
|
|
|
| Premiums utilization factor (5) |
| 80 | % |
| - | 115 | % |
| (10) |
|
| |
|
|
|
|
|
|
| NPR (6) |
| 0.35 | % |
| - | 2.41 | % |
| 1.73 | % |
| |
|
|
|
|
|
|
| Mortality rate (7) |
|
|
|
|
| (9) |
|
| (10) |
|
| |
|
|
|
|
|
|
| Volatility (8) |
| 1 | % |
| - | 28 | % |
| 14.47 | % |
| |
(1)Unobservable inputs were weighted by the relative fair value of the instruments, unless otherwise noted.
(2)The liquidity/duration adjustment input represents an estimated market participant composite of adjustments attributable to liquidity premiums, expected durations, structures and credit quality that would be applied to the market observable information of an investment.
(3)The lapse rate input represents the estimated probability of a contract surrendering during a year, and thereby forgoing any future benefits. The range for indexed annuity contracts represents the lapse rates during the surrender charge period.
(4)The utilization of guaranteed withdrawals input represents the estimated percentage of contract holders that utilize the guaranteed withdrawal feature.
(5)The utilization factors are applied to the present value of claims or premiums, as appropriate, in the GLB reserve calculation to estimate the impact of inefficient withdrawal behavior, including taking less than or more than the maximum guaranteed withdrawal.
(6)The NPR input represents the estimated additional credit spread that market participants would apply to the market observable discount rate when pricing a contract. The NPR input was weighted by the absolute value of the sensitivity of the reserve to the NPR assumption.
(7)The mortality rate input represents the estimated probability of when an individual belonging to a particular group, categorized according to age or some other factor such as gender, will die.
(8)The volatility input represents overall volatilities assumed for the underlying variable annuity funds, which include a mixture of equity and fixed-income assets. Fair value of the variable annuity GLB embedded derivatives would increase if higher volatilities were used for valuation. Volatility assumptions vary by fund due to the benchmarking of different indices. The volatility input was weighted by the relative account value assigned to each index.
(9)The mortality rate is based on a combination of company and industry experience, adjusted for improvement factors.
(10)A weighted average input range is not a meaningful measurement for lapse rate, utilization factors or mortality rate.
From the table above, we have excluded Level 3 fair value measurements obtained from independent, third-party pricing sources. We do not develop the significant inputs used to measure the fair value of these assets and liabilities, and the information regarding the significant inputs is not readily available to us. Independent broker-quoted fair values are non-binding quotes developed by market makers or broker-dealers obtained from third-party sources recognized as market participants. The fair value of a broker-quoted asset or liability is based solely on the receipt of an updated quote from a single market maker or a broker-dealer recognized as a market participant as we do not adjust broker quotes when used as the fair value measurement for an asset or liability. Significant increases or decreases in any of the quotes received from a third-party broker-dealer may result in a significantly higher or lower fair value measurement.
Changes in any of the significant inputs presented in the table above would have resulted in a significant change in the fair value measurement of the asset or liability as follows:
Investments – An increase in the liquidity/duration adjustment input would have resulted in a decrease in the fair value measurement.
Indexed annuity contracts embedded derivatives – For direct embedded derivatives, an increase in the lapse rate or mortality rate inputs would have resulted in a decrease in the fair value measurement.
GLB embedded derivatives – Assuming our GLB direct embedded derivatives are in a liability position: an increase in our lapse rate, NPR or mortality rate inputs would have resulted in a decrease in the fair value measurement; and an increase in the utilization of guaranteed withdrawal or volatility inputs would have resulted in an increase in the fair value measurement.
For each category discussed above, the unobservable inputs are not inter-related; therefore, a directional change in one input would not have affected the other inputs.
As part of our ongoing valuation process, we assess the reasonableness of our valuation techniques or models and make adjustments as necessary. For more information, see Note 1.
21. Segment Information
We provide products and services and report results through our Life Insurance, Annuities, Group Protection and Retirement Plan Services segments. We also have Other Operations, which includes the financial data for operations that are not directly related to the business segments. Our reporting segments reflect the manner by which our chief operating decision makers view and manage the business. The following is a brief description of these segments and Other Operations.
The Life Insurance segment focuses on the creation and protection of wealth through life insurance products, including term insurance, both single (including UL, corporate-owned UL and VUL and bank-owned UL and VUL products) and survivorship versions of IUL and VUL products, linked-benefit products (which are UL and VUL with riders providing for long-term care costs), and critical illness and long-term care riders, which can be attached to IUL or VUL policies.
The Annuities segment provides tax-deferred investment growth and lifetime income opportunities for its clients by offering variable annuities, fixed (including indexed) annuities and indexed variable annuities.
The Group Protection segment offers group non-medical insurance products and services, including short- and long-term disability, statutory disability and paid family medical leave administration and absence management services, term life, dental, vision and accident, critical illness and hospital indemnity benefits and services to the employer marketplace through various forms of employee-paid and employer-paid plans.
The Retirement Plan Services segment provides employer-sponsored defined benefit and individual retirement accounts, as well as individual and group variable annuities, group fixed annuities and mutual-fund based programs in the retirement plan marketplace.
Other Operations includes investments related to the excess capital in our insurance subsidiaries; benefit plan obligations; the results of certain disability income business; our run-off institutional pension business, the majority of which was sold on a group annuity basis; debt costs; Spark program expense; and other corporate investments.
Segment operating revenues and income (loss) from operations are internal measures used by our management and Board of Directors to evaluate and assess the results of our segments. Income (loss) from operations is GAAP net income excluding the after-tax effects of the following items, as applicable:
Realized gains and losses associated with the following (“excluded realized gain (loss)”):
Sales or disposals and impairments of financial assets;
Changes in the fair value of equity securities;
Changes in the fair value of derivatives, embedded derivatives within certain reinsurance arrangements and trading securities (“gain (loss) on the mark-to-market on certain instruments”);
Changes in the fair value of the derivatives we own to hedge our GDB riders within our variable annuities;
Changes in the fair value of the embedded derivatives of our GLB riders reflected within variable annuity net derivative results accounted for at fair value;
Changes in the fair value of the derivatives we own to hedge our GLB riders reflected within variable annuity net derivative results; and
Changes in the fair value of the embedded derivative liabilities related to index options we may purchase or sell in the future to hedge contract holder index allocations applicable to future reset periods for our indexed annuity products accounted for at fair value (“indexed annuity forward-starting option”);
Changes in reserves resulting from benefit ratio unlocking on our GDB and GLB riders and VUL products with secondary guarantees (“benefit ratio unlocking”);
Income (loss) from reserve changes, net of related amortization, on business sold through reinsurance;
Gains (losses) on modification or early extinguishment of debt;
Losses from the impairment of intangible assets;
Income (loss) from discontinued operations;
Transaction and integration costs related to mergers and acquisitions including the acquisition or divestiture, through reinsurance or other means, of businesses or blocks of business; and
Income (loss) from the initial adoption of new accounting standards, regulations, and policy changes including the net impact from the Tax Cuts and Jobs Act.
Operating revenues represent GAAP revenues excluding the pre-tax effects of the following items, as applicable:
Excluded realized gain (loss);
Revenue adjustments from the initial adoption of new accounting standards;
Amortization of DFEL arising from changes in benefit ratio unlocking; and
Amortization of deferred gains arising from reserve changes on business sold through reinsurance.
The tables below reconcile our segment measures of performance to the GAAP measures presented in the Consolidated Statements of Comprehensive Income (Loss) (in millions):
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| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Revenues |
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Operating revenues: |
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Life Insurance | $ | 7,156 |
| $ | 8,137 |
| $ | 7,516 |
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Annuities |
| 4,774 |
|
| 5,002 |
|
| 4,455 |
|
Group Protection |
| 5,303 |
|
| 4,996 |
|
| 4,793 |
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Retirement Plan Services |
| 1,273 |
|
| 1,324 |
|
| 1,213 |
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Other Operations |
| 159 |
|
| 180 |
|
| 185 |
|
Excluded realized gain (loss), pre-tax |
| 135 |
|
| (411 | ) |
| (721 | ) |
Amortization of DFEL associated with benefit ratio unlocking, pre-tax |
| (16 | ) |
| 2 |
|
| (2 | ) |
Total revenues | $ | 18,784 |
| $ | 19,230 |
| $ | 17,439 |
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| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Net Income (Loss) |
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Income (loss) from operations: |
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Life Insurance | $ | (1,941 | ) | $ | 535 |
| $ | (34 | ) |
Annuities |
| 1,245 |
|
| 1,283 |
|
| 983 |
|
Group Protection |
| 102 |
|
| (127 | ) |
| 43 |
|
Retirement Plan Services |
| 209 |
|
| 235 |
|
| 168 |
|
Other Operations |
| (495 | ) |
| (375 | ) |
| (295 | ) |
Excluded realized gain (loss), after-tax |
| 107 |
|
| (325 | ) |
| (570 | ) |
Benefit ratio unlocking, after-tax |
| (820 | ) |
| 196 |
|
| 194 |
|
Impairment of intangibles |
| (634 | ) |
| - |
|
| - |
|
Net impact from the Tax Cuts and Jobs Act |
| - |
|
| - |
|
| 37 |
|
Transaction and integration costs related to mergers, acquisitions and divestitures, after-tax |
| - |
|
| (11 | ) |
| (15 | ) |
Gain (loss) on modification or early extinguishment of debt, after-tax |
| - |
|
| (6 | ) |
| (12 | ) |
Net income (loss) | $ | (2,227 | ) | $ | 1,405 |
| $ | 499 |
|
Other segment information (in millions) was as follows:
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| For the Years Ended December 31, |
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| 2022 |
| 2021 |
| 2020 |
| |||
Net Investment Income |
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Life Insurance | $ | 2,585 |
| $ | 3,209 |
| $ | 2,823 |
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Annuities |
| 1,461 |
|
| 1,401 |
|
| 1,272 |
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Group Protection |
| 333 |
|
| 366 |
|
| 330 |
|
Retirement Plan Services |
| 975 |
|
| 992 |
|
| 933 |
|
Other Operations |
| 157 |
|
| 147 |
|
| 152 |
|
Total net investment income | $ | 5,511 |
| $ | 6,115 |
| $ | 5,510 |
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| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Amortization of DAC and VOBA, Net of Interest |
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Life Insurance | $ | 623 |
| $ | 1,030 |
| $ | 785 |
|
Annuities |
| 396 |
|
| 442 |
|
| 387 |
|
Group Protection |
| 106 |
|
| 107 |
|
| 114 |
|
Retirement Plan Services |
| 18 |
|
| 32 |
|
| 29 |
|
Total amortization of DAC and VOBA, net of interest | $ | 1,143 |
| $ | 1,611 |
| $ | 1,315 |
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| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Federal Income Tax Expense (Benefit) |
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Life Insurance | $ | (546 | ) | $ | 122 |
| $ | (33 | ) |
Annuities |
| 207 |
|
| 241 |
|
| 149 |
|
Group Protection |
| 27 |
|
| (33 | ) |
| 11 |
|
Retirement Plan Services |
| 35 |
|
| 49 |
|
| 24 |
|
Other Operations |
| (117 | ) |
| (106 | ) |
| (82 | ) |
Excluded realized gain (loss) |
| 28 |
|
| (86 | ) |
| (151 | ) |
Gain (loss) on early extinguishment of debt |
| - |
|
| (2 | ) |
| (3 | ) |
Benefit ratio unlocking |
| (218 | ) |
| 52 |
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| 51 |
|
Net impact from the Tax Cuts and Jobs Act |
| - |
|
| - |
|
| (37 | ) |
Transaction and integration costs related to mergers, |
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acquisitions and divestitures |
| - |
|
| (4 | ) |
| (5 | ) |
Total federal income tax expense (benefit) | $ | (584 | ) | $ | 233 |
| $ | (76 | ) |
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| As of December 31, |
| ||||
| 2022 |
| 2021 |
| ||
Assets |
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Life Insurance | $ | 95,410 |
| $ | 105,208 |
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Annuities |
| 167,206 |
|
| 201,732 |
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Group Protection |
| 9,802 |
|
| 10,522 |
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Retirement Plan Services |
| 41,886 |
|
| 47,625 |
|
Other Operations |
| 21,133 |
|
| 22,214 |
|
Total assets | $ | 335,437 |
| $ | 387,301 |
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22. Supplemental Disclosures of Cash Flow Data
The following summarizes our supplemental cash flow data (in millions):
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| For the Years Ended December 31, |
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| 2022 |
| 2021 |
| 2020 |
| |||
Interest paid | $ | 269 |
| $ | 277 |
| $ | 283 |
|
Income taxes paid (received) |
| (54 | ) |
| 1 |
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| 22 |
|
Significant non-cash investing transactions: |
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Equity securities received in exchange of fixed maturity AFS securities |
| - |
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| - |
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| 19 |
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Significant non-cash financing transactions: |
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Net reduction of fixed maturity AFS securities and |
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accrued investment income in connection with a reinsurance transaction |
| - |
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| (3,499 | ) |
| - |
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a)Conclusions Regarding Disclosure Controls and Procedures
We maintain disclosure controls and procedures, which are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period required by this report, we, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us and our consolidated subsidiaries required to be disclosed in our periodic reports under the Exchange Act.
(b)Management’s Report on Internal Control Over Financial Reporting
Management’s Report on Internal Control Over Financial Reporting is included on page 103 of “Item 8. Financial Statements and Supplementary Data” and is incorporated herein by reference.
A control system, no matter how well designed and operated, can provide only reasonable assurance that the control system’s objectives will be met. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. Projections of any evaluation of controls’ effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
(c)Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as that term is defined in rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information required by this item relating to our executive officers is incorporated by reference to “Part I – Information About our Executive Officers” of this Form 10-K. Information required by this item relating to our directors and corporate governance matters is incorporated by reference to the sections captioned “Governance of the Company – Our Corporate Governance Guidelines,” “Governance of the Company – Director Nomination Process,” “Governance of the Company – Board Committees – Current Committee Membership and Meetings Held During 2022,” “Governance of the Company – Board Committees – Audit Committee,” “Agenda Item 1 – Election of Directors” and “General Information – Shareholder Proposals for the 2024 Annual Meeting” of LNC’s Proxy Statement for the Annual Meeting scheduled for May 25, 2023.
Item 11. Executive Compensation
Information required by this item is incorporated by reference to the sections captioned “Compensation of Outside Directors,” “Compensation Discussion & Analysis,” “Executive Compensation Tables” and “Compensation Committee Interlocks and Insider Participation” of LNC’s Proxy Statement for the Annual Meeting scheduled for May 25, 2023.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by this item is incorporated by reference to the sections captioned “Security Ownership” and “Equity Compensation Plan Information” of LNC’s Proxy Statement for the Annual Meeting scheduled for May 25, 2023.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required by this item is incorporated by reference to the sections captioned “Related-Party Transactions” and “Governance of the Company – Director Independence” of LNC’s Proxy Statement for the Annual Meeting scheduled for May 25, 2023.
Item 14. Principal Accounting Fees and Services
Information required by this item is incorporated by reference to the sections captioned “Agenda Item 2 – Ratification of Appointment of Independent Registered Public Accounting Firm” of LNC’s Proxy Statement for the Annual Meeting scheduled for May 25, 2023.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) (1) Financial Statements
The following Consolidated Financial Statements of Lincoln National Corporation are included in Part II – Item 8:
Management Report on Internal Control Over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets – December 31, 2022 and 2021
Consolidated Statements of Comprehensive Income (Loss) – Years ended December 31, 2022, 2021 and 2020
Consolidated Statements of Stockholders’ Equity – Years ended December 31, 2022, 2021 and 2020
Consolidated Statements of Cash Flows – Years ended December 31, 2022, 2021 and 2020
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedules
The Financial Statement Schedules are listed in the Index to Financial Statement Schedules on page FS-1, which is incorporated herein by reference.
(a) (3) Listing of Exhibits
The Exhibits are listed in the Index to Exhibits beginning on page 191, which is incorporated herein by reference.
(c) The Financial Statement Schedules for Lincoln National Corporation begin on page FS-2, which are incorporated herein by reference.
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4.21 | |
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*This exhibit is a management contract or compensatory plan or arrangement.
** Schedules to this agreement have been omitted pursuant to Item 601(a) of Regulation S-K. LNC will furnish supplementally a copy of the schedule to the SEC, upon request.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, LNC has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| LINCOLN NATIONAL CORPORATION |
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Dated: February 16, 2023 | By: | /s/ Randal J. Freitag |
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| Randal J. Freitag |
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| Executive Vice President and Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 16, 2023.
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Signature |
| Title |
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/s/ Ellen G. Cooper |
| President, Chief Executive Officer and Director |
Ellen G. Cooper |
| (Principal Executive Officer) |
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/s/ Randal J. Freitag |
| Executive Vice President and Chief Financial Officer |
Randal J. Freitag |
| (Principal Financial Officer) |
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/s/ Adam Cohen |
| Senior Vice President and Chief Accounting Officer |
Adam Cohen |
| (Principal Accounting Officer) |
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/s/ Deirdre P. Connelly |
| Director |
Deirdre P. Connelly |
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/s/ William H. Cunningham |
| Director |
William H. Cunningham |
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/s/Reginald E. Davis |
| Director |
Reginald E. Davis |
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/s/ Dennis R. Glass |
| Director |
Dennis R. Glass |
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/s/ Eric G. Johnson |
| Director |
Eric G. Johnson |
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/s/ Gary C. Kelly |
| Director |
Gary C. Kelly |
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/s/ M. Leanne Lachman |
| Director |
M. Leanne Lachman |
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/s/Dale LeFebvre |
| Director |
Dale LeFebvre |
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/s/ Janet Liang |
| Director |
Janet Liang |
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/s/ Michael F. Mee |
| Director |
Michael F. Mee |
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/s/ Patrick S. Pittard |
| Director |
Patrick S. Pittard |
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/s/ Lynn M. Utter |
| Director |
Lynn M. Utter |
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Index to Financial Statement Schedules
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or the required information is included in the consolidated financial statements, and therefore omitted. See “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” on page 41 for more detail on items contained within these schedules.
LINCOLN NATIONAL CORPORATION
SCHEDULE I – CONSOLIDATED SUMMARY OF INVESTMENTS – OTHER THAN
INVESTMENTS IN RELATED PARTIES
(in millions)
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Column A |
| Column B |
| Column C |
| Column D |
| |||
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| As of December 31, 2022 |
| |||||||
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| Fair |
| Carrying |
| |||
Type of Investment |
| Cost |
| Value |
| Value |
| |||
Fixed Maturity Available-For-Sale Securities (1) |
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Bonds: |
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U.S. government bonds |
| $ | 405 |
| $ | 379 |
| $ | 379 |
|
Foreign government bonds |
|
| 348 |
|
| 318 |
|
| 318 |
|
State and municipal bonds |
|
| 5,410 |
|
| 5,070 |
|
| 5,070 |
|
Public utilities |
|
| 14,204 |
|
| 12,493 |
|
| 12,493 |
|
All other corporate bonds |
|
| 75,045 |
|
| 66,530 |
|
| 66,530 |
|
Mortgage-backed and asset-backed securities |
|
| 15,930 |
|
| 14,587 |
|
| 14,587 |
|
Hybrid and redeemable preferred securities |
|
| 365 |
|
| 359 |
|
| 359 |
|
Total fixed maturity available-for-sale securities |
|
| 111,707 |
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| 99,736 |
|
| 99,736 |
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Equity Securities |
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Common stocks: |
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Banks, trusts and insurance companies |
|
| 48 |
|
| 47 |
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| 47 |
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Industrial, miscellaneous and all other |
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| 50 |
|
| 146 |
|
| 146 |
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Non-redeemable preferred securities |
|
| 285 |
|
| 234 |
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| 234 |
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Total equity securities |
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| 383 |
|
| 427 |
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| 427 |
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Trading securities |
|
| 3,833 |
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| 3,498 |
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| 3,498 |
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Mortgage loans on real estate (2) |
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| 18,427 |
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| 16,553 |
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| 18,301 |
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Policy loans |
|
| 2,359 |
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| N/A |
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| 2,359 |
|
Derivative investments (3) |
|
| 1,869 |
|
| 3,736 |
|
| 3,736 |
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Other investments |
|
| 3,739 |
|
| 3,739 |
|
| 3,739 |
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Total investments |
| $ | 142,317 |
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| $ | 131,796 |
|
(1)For investments deemed to have declines in value that are impairment-related, an allowance for credit losses is recorded to reduce the carrying value to their estimated realizable value.
(2)Mortgage loans on real estate are generally carried at unpaid principal balances adjusted for amortization of premiums and accretion of discounts and are net of allowance for credit losses. We carry certain mortgage loans at fair value where the fair value option has been elected.
(3)Derivative investment assets were offset by $177 million in reflected in other liabilities on the Consolidated Balance Sheets.
LINCOLN NATIONAL CORPORATION
SCHEDULE II – CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(Parent Company Only) (in millions, except share data)
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| As of December 31, |
| ||||
| 2022 |
| 2021 |
| ||
ASSETS |
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Investments in subsidiaries (1) | $ | 8,781 |
| $ | 24,689 |
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Derivative investments |
| 119 |
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| - |
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Other investments |
| 92 |
|
| 761 |
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Cash and invested cash |
| 715 |
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| 203 |
|
Loans and accrued interest to subsidiaries (1) |
| 2,491 |
|
| 3,194 |
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Other assets |
| 101 |
|
| 159 |
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Total assets | $ | 12,299 |
| $ | 29,006 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Liabilities |
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Common stock dividends payable | $ | 76 |
| $ | 80 |
|
Derivative investments liability |
| - |
|
| 425 |
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Short-term debt |
| 500 |
|
| 300 |
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Long-term debt |
| 6,455 |
|
| 6,325 |
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Loans from subsidiaries (1) |
| 679 |
|
| 1,247 |
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Other liabilities |
| 488 |
|
| 357 |
|
Total liabilities |
| 8,198 |
|
| 8,734 |
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Contingencies and Commitments |
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| ||
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Stockholders’ Equity |
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Preferred stock – 10,000,000 shares authorized: |
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Series C preferred stock – 20,000 shares authorized, issued and outstanding as of December 31, 2022 |
| 493 |
|
| - |
|
Series D preferred stock – 20,000 shares authorized, issued and outstanding as of December 31, 2022 |
| 493 |
|
| - |
|
Common stock – 800,000,000 shares authorized; 169,220,511 and 177,193,515 shares |
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|
|
issued and outstanding as of December 31, 2022, and December 31, 2021, respectively |
| 4,544 |
|
| 4,735 |
|
Retained earnings |
| 6,239 |
|
| 9,096 |
|
Accumulated other comprehensive income (loss) |
| (7,668 | ) |
| 6,441 |
|
Total stockholders’ equity |
| 4,101 |
|
| 20,272 |
|
Total liabilities and stockholders’ equity | $ | 12,299 |
| $ | 29,006 |
|
(1)Eliminated in consolidation.
LINCOLN NATIONAL CORPORATION
SCHEDULE II – CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Parent Company Only) (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Revenues |
|
|
|
|
|
|
|
|
|
Dividends from subsidiaries (1) | $ | 797 |
| $ | 2,060 |
| $ | 840 |
|
Interest from subsidiaries (1) |
| 159 |
|
| 114 |
|
| 127 |
|
Net investment income |
| 3 |
|
| 1 |
|
| 4 |
|
Total revenues |
| 959 |
|
| 2,175 |
|
| 971 |
|
Expenses |
|
|
|
|
|
|
|
|
|
Operating and administrative expenses |
| 52 |
|
| 69 |
|
| 50 |
|
Interest – subsidiaries (1) |
| 38 |
|
| 10 |
|
| 20 |
|
Interest – other |
| 266 |
|
| 263 |
|
| 275 |
|
Total expenses |
| 356 |
|
| 342 |
|
| 345 |
|
Income (loss) before federal income taxes, equity in income (loss) of subsidiaries |
| 603 |
|
| 1,833 |
|
| 626 |
|
Federal income tax expense (benefit) |
| (42 | ) |
| (49 | ) |
| (45 | ) |
Income (loss) before equity in income (loss) of subsidiaries |
| 645 |
|
| 1,882 |
|
| 671 |
|
Equity in income (loss) of subsidiaries |
| (2,872 | ) |
| (477 | ) |
| (172 | ) |
Net income (loss) |
| (2,227 | ) |
| 1,405 |
|
| 499 |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
Unrealized investment gains (losses) |
| (14,030 | ) |
| (2,535 | ) |
| 3,192 |
|
Foreign currency translation adjustment |
| (20 | ) |
| (2 | ) |
| 5 |
|
Funded status of employee benefit plans |
| (59 | ) |
| 47 |
|
| 61 |
|
Total other comprehensive income (loss), net of tax |
| (14,109 | ) |
| (2,490 | ) |
| 3,258 |
|
Comprehensive income (loss) | $ | (16,336 | ) | $ | (1,085 | ) | $ | 3,757 |
|
(1)Eliminated in consolidation.
LINCOLN NATIONAL CORPORATION
SCHEDULE II – CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
STATEMENTS OF CASH FLOWS
(Parent Company Only) (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Years Ended December 31, |
| |||||||
| 2022 |
| 2021 |
| 2020 |
| |||
Net Cash Provided by (Used in) Operating Activities | $ | 608 |
| $ | 1,860 |
| $ | 726 |
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
|
Capital contribution to subsidiaries (1) |
| (925 | ) |
| (65 | ) |
| (518 | ) |
Net change in collateral on investments, derivatives and related settlements |
| 583 |
|
| 168 |
|
| (303 | ) |
Other |
| (5 | ) |
| (40 | ) |
| - |
|
Net cash provided by (used in) investing activities |
| (347 | ) |
| 63 |
|
| (821 | ) |
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
|
Payment of long-term debt, including current maturities |
| (300 | ) |
| - |
|
| (1,096 | ) |
Issuance of long-term debt, net of issuance costs |
| 296 |
|
| - |
|
| 1,289 |
|
Payment related to modification or early extinguishment of debt |
| - |
|
| (8 | ) |
| (13 | ) |
Increase (decrease) in loans from subsidiaries, net (1) |
| (563 | ) |
| (188 | ) |
| 565 |
|
Increase (decrease) in loans to subsidiaries, net (1) |
| 708 |
|
| (234 | ) |
| (514 | ) |
Common stock issued for benefit plans |
| (16 | ) |
| 20 |
|
| (7 | ) |
Issuance of preferred stock, net of issuance costs |
| 986 |
|
| - |
|
| - |
|
Repurchase of common stock |
| (550 | ) |
| (1,105 | ) |
| (275 | ) |
Dividends paid to common stockholders |
| (310 | ) |
| (319 | ) |
| (311 | ) |
Other |
| - |
|
| - |
|
| (6 | ) |
Net cash provided by (used in) financing activities |
| 251 |
|
| (1,834 | ) |
| (368 | ) |
Net increase (decrease) in cash, invested cash and restricted cash |
| 512 |
|
| 89 |
|
| (463 | ) |
Cash, invested cash and restricted cash as of beginning-of-year |
| 203 |
|
| 114 |
|
| 577 |
|
Cash, invested cash and restricted cash as of end-of-year | $ | 715 |
| $ | 203 |
| $ | 114 |
|
|
|
|
|
|
|
|
|
|
|
(1) Eliminated in consolidation.
LINCOLN NATIONAL CORPORATION
SCHEDULE III – CONDENSED SUPPLEMENTARY INSURANCE INFORMATION
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A |
| Column B |
| Column C |
|
| Column D |
|
| Column E |
| Column F |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
| Other |
|
|
|
| |
|
|
|
|
| Future |
|
|
|
|
|
| Contract |
|
|
|
| ||
|
| DAC and |
| Contract |
|
| Unearned |
|
| Holder |
| Insurance |
| |||||
Segment |
| VOBA |
| Benefits |
| Premiums (1) |
| Funds |
| Premiums |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of or For the Year Ended December 31, 2022 |
| |||||||||||||||
Life Insurance |
| $ | 8,419 |
| $ | 20,208 |
|
| $ |
|
|
| $ | 44,129 |
| $ | 1,146 |
|
Annuities |
|
| 4,704 |
|
| 5,556 |
|
|
|
|
|
|
| 45,487 |
|
| 165 |
|
Group Protection |
|
| 164 |
|
| 6,580 |
|
|
|
|
|
|
| 213 |
|
| 4,768 |
|
Retirement Plan Services |
|
| 301 |
|
| 18 |
|
|
|
|
|
|
| 25,133 |
|
| - |
|
Other Operations |
|
| - |
|
| 9,789 |
|
|
|
|
|
|
| 5,838 |
|
| 8 |
|
Total |
| $ | 13,588 |
| $ | 42,151 |
|
| $ |
|
|
| $ | 120,800 |
| $ | 6,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of or For the Year Ended December 31, 2021 |
| |||||||||||||||
Life Insurance |
| $ | 1,672 |
| $ | 20,389 |
|
| $ |
|
|
| $ | 39,717 |
| $ | 1,033 |
|
Annuities |
|
| 4,086 |
|
| 4,181 |
|
|
|
|
|
|
| 41,619 |
|
| 116 |
|
Group Protection |
|
| 171 |
|
| 6,326 |
|
|
|
|
|
|
| 214 |
|
| 4,450 |
|
Retirement Plan Services |
|
| 152 |
|
| 15 |
|
|
|
|
|
|
| 23,635 |
|
| - |
|
Other Operations |
|
| - |
|
| 10,119 |
|
|
|
|
|
|
| 6,517 |
|
| 18 |
|
Total |
| $ | 6,081 |
| $ | 41,030 |
|
| $ |
|
|
| $ | 111,702 |
| $ | 5,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of or For the Year Ended December 31, 2020 |
| |||||||||||||||
Life Insurance |
| $ | 1,723 |
| $ | 20,127 |
|
| $ |
|
|
| $ | 39,797 |
| $ | 950 |
|
Annuities |
|
| 3,782 |
|
| 4,183 |
|
|
|
|
|
|
| 35,218 |
|
| 121 |
|
Group Protection |
|
| 187 |
|
| 5,986 |
|
|
|
|
|
|
| 213 |
|
| 4,280 |
|
Retirement Plan Services |
|
| 120 |
|
| 11 |
|
|
|
|
|
|
| 22,912 |
|
| - |
|
Other Operations |
|
| - |
|
| 10,507 |
|
|
|
|
|
|
| 7,265 |
|
| 21 |
|
Total |
| $ | 5,812 |
| $ | 40,814 |
|
| $ |
|
|
| $ | 105,405 |
| $ | 5,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)Unearned premiums are included in Column C, future contract benefits.
LINCOLN NATIONAL CORPORATION
SCHEDULE III – CONDENSED SUPPLEMENTARY INSURANCE INFORMATION (Continued)
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A |
| Column G |
| Column H |
|
| Column I |
|
| Column J |
|
| Column K | |||||
|
|
|
|
| Benefits |
| Amortization |
|
|
|
|
|
|
| ||||
|
| Net |
| and |
|
| of DAC |
|
| Other |
|
|
|
| ||||
| Investment | Interest |
|
| and |
|
| Operating |
|
| Premiums | |||||||
Segment |
| Income |
| Credited |
|
| VOBA |
| Expenses |
| Written | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of or For the Year Ended December 31, 2022 | ||||||||||||||||
Life Insurance |
| $ | 2,585 |
| $ | 8,338 |
|
| $ | 623 |
|
| $ | 716 |
|
| $ |
|
Annuities |
|
| 1,461 |
|
| 2,480 |
|
|
| 267 |
|
|
| 1,564 |
|
|
|
|
Group Protection |
|
| 333 |
|
| 3,849 |
|
|
| 106 |
|
|
| 1,220 |
|
|
|
|
Retirement Plan Services |
|
| 975 |
|
| 633 |
|
|
| 18 |
|
|
| 378 |
|
|
|
|
Other Operations |
|
| 157 |
|
| 116 |
|
|
| - |
|
|
| 653 |
|
|
|
|
Total |
| $ | 5,511 |
| $ | 15,416 |
|
| $ | 1,014 |
|
| $ | 4,531 |
|
| $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of or For the Year Ended December 31, 2021 | ||||||||||||||||
Life Insurance |
| $ | 3,209 |
| $ | 5,714 |
|
| $ | 1,030 |
|
| $ | 735 |
|
| $ |
|
Annuities |
|
| 1,401 |
|
| 1,091 |
|
|
| 465 |
|
|
| 1,677 |
|
|
|
|
Group Protection |
|
| 366 |
|
| 3,896 |
|
|
| 107 |
|
|
| 1,154 |
|
|
|
|
Retirement Plan Services |
|
| 992 |
|
| 620 |
|
|
| 32 |
|
|
| 388 |
|
|
|
|
Other Operations |
|
| 147 |
|
| 123 |
|
|
| - |
|
|
| 568 |
|
|
|
|
Total |
| $ | 6,115 |
| $ | 11,444 |
|
| $ | 1,634 |
|
| $ | 4,522 |
|
| $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of or For the Year Ended December 31, 2020 | ||||||||||||||||
Life Insurance |
| $ | 2,823 |
| $ | 6,077 |
|
| $ | 786 |
|
| $ | 720 |
|
| $ |
|
Annuities |
|
| 1,272 |
|
| 1,245 |
|
|
| 365 |
|
|
| 1,467 |
|
|
|
|
Group Protection |
|
| 330 |
|
| 3,505 |
|
|
| 114 |
|
|
| 1,120 |
|
|
|
|
Retirement Plan Services |
|
| 933 |
|
| 617 |
|
|
| 29 |
|
|
| 375 |
|
|
|
|
Other Operations |
|
| 152 |
|
| 156 |
|
|
| - |
|
|
| 456 |
|
|
|
|
Total |
| $ | 5,510 |
| $ | 11,600 |
|
| $ | 1,294 |
|
| $ | 4,138 |
|
| $ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LINCOLN NATIONAL CORPORATION
SCHEDULE IV – CONSOLIDATED REINSURANCE
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A |
| Column B |
|
| Column C |
|
| Column D |
|
| Column E |
| Column F |
| ||||
|
|
|
|
| Ceded |
| Assumed |
|
|
| Percentage |
| ||||||
|
|
|
|
| to |
|
| from |
|
|
|
| of Amount |
| ||||
|
| Gross |
|
| Other |
|
| Other |
|
| Net |
| Assumed |
| ||||
Description |
| Amount |
| Companies | Companies |
| Amount |
| to Net |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of or For the Year Ended December 31, 2022 |
| |||||||||||||||
Individual life insurance in-force (1) |
| $ | 2,028,279 |
|
| $ | 831,478 |
|
| $ | 6,512 |
|
| $ | 1,203,313 |
| 0.5% |
|
Premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance and annuities (2) |
|
| 10,698 |
|
|
| 1,864 |
|
|
| 94 |
|
|
| 8,928 |
| 1.1% |
|
Accident and health insurance |
|
| 3,243 |
|
|
| 34 |
|
|
| 4 |
|
|
| 3,213 |
| 0.1% |
|
Total premiums |
| $ | 13,941 |
|
| $ | 1,898 |
|
| $ | 98 |
|
| $ | 12,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of or For the Year Ended December 31, 2021 |
| |||||||||||||||
Individual life insurance in-force (1) |
| $ | 1,845,479 |
|
| $ | 776,226 |
|
| $ | 7,659 |
|
| $ | 1,076,912 |
| 0.7% |
|
Premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance and annuities (2) |
|
| 11,104 |
|
|
| 1,707 |
|
|
| 88 |
|
|
| 9,485 |
| 0.9% |
|
Accident and health insurance |
|
| 3,050 |
|
|
| 37 |
|
|
| 6 |
|
|
| 3,019 |
| 0.2% |
|
Total premiums |
| $ | 14,154 |
|
| $ | 1,744 |
|
| $ | 94 |
|
| $ | 12,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of or For the Year Ended December 31, 2020 |
| |||||||||||||||
Individual life insurance in-force (1) |
| $ | 1,653,625 |
|
| $ | 674,256 |
|
| $ | 7,875 |
|
| $ | 987,244 |
| 0.8% |
|
Premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance and annuities (2) |
|
| 10,474 |
|
|
| 1,621 |
|
|
| 88 |
|
|
| 8,941 |
| 1.0% |
|
Accident and health insurance |
|
| 2,830 |
|
|
| 35 |
|
|
| 7 |
|
|
| 2,802 |
| 0.2% |
|
Total premiums |
| $ | 13,304 |
|
| $ | 1,656 |
|
| $ | 95 |
|
| $ | 11,743 |
|
|
|
(1)Includes Group Protection segment and Other Operations in-force amounts.
(2)Includes insurance fees on universal life and other interest-sensitive products.
Exhibit 4.38
Description of Securities Registered Pursuant to Section 12 of the Exchange Act
Lincoln National Corporation (“LNC”) has two classes of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”): our common stock and our depositary shares (the “Series D Depositary Shares”), each representing a 1/1000th interest in a share of our 9.000% Non-Cumulative Preferred Stock, Series D (the “Series D Preferred Stock”).
Common Stock
The following description of our common stock is a summary and does not purport to be complete. It is subject to and qualified in its entirety by reference to our restated articles of incorporation and our amended and restated bylaws (the “Bylaws”), each of which has been previously filed and is incorporated by reference as an exhibit to the Annual Report on Form 10-K of which this exhibit is a part, and the Indiana Business Corporation Law, which we refer to as the IBCL (described below). You should read these documents and the applicable provisions of the IBCL for a full description of the terms of common stock.
Authorized Capital Shares
Our authorized capital stock includes 800,000,000 shares of common stock (“Common Stock”), without par value. The outstanding shares of our Common Stock are fully paid and non-assessable.
Voting Rights
Except as set forth below under “Anti-Takeover Provisions—Certain State Law Provisions,” each holder of record of our Common Stock is entitled to one vote for each share of our Common Stock held on all matters submitted to a vote of the shareholders, including election of directors. Holders of our Common Stock do not have cumulative voting rights with respect to the election of directors or any other matter.
Dividend Rights
The holders of our Common Stock may receive cash dividends, if and when declared by our board of directors out of funds legally available for that purpose, and subject to preferential rights of the holders of Preferred Stock or other special classes of stock.
Liquidation Rights
In the event of a liquidation, dissolution or winding up, holders of our Common Stock will be entitled to share ratably in all assets remaining after payments to creditors and after satisfaction of the liquidation preference, if any, of the holders of any Preferred Stock that may at the time be outstanding.
Preemptive Rights
Holders of our Common Stock do not have any preemptive or similar equity rights.
Listing and Transfer Agent
Our Common Stock is traded on the New York Stock Exchange under the trading symbol “LNC.” Our transfer agent is EQ Shareowner Services.
Anti-Takeover Considerations
Certain Provisions of LNC’s Bylaws
Article I of our Bylaws provides that special meetings of shareholders may be only called (i) by the board of directors, (ii) by the Chairman of the board of directors or (iii) by the Secretary of the Company at the valid
1
written request of shareholders of record who own, or are acting on behalf of one or more beneficial owners who own, continuously for at least one year as of the record date fixed in accordance with our Bylaws to determine who may deliver a written request to call such special meeting, capital stock representing ten percent (10%) of the voting stock (the “Special Meeting Request Required Shares”), and who continue to own the Special Meeting Request Required Shares at all times between such record date and the date of the applicable meeting of shareholders.
Article I of our Bylaws further provides that control shares (as discussed below) of the corporation acquired in a control share acquisition with respect to which the acquiring person has not filed with the corporation the statement required by the IBCL may, at any time during the period ending 60 days after the last acquisition of control shares by the acquiring person, be redeemed by the corporation at their fair value pursuant to procedures authorized by a resolution of the board of directors.
Article I also gives the board of directors the authority to enter into any arrangement to direct the voting of any other person’s shares in connection with a change of control of LNC.
Certain State Law Provisions.
Chapter 43 of the IBCL also restricts business combinations with interested shareholders. It prohibits certain business combinations, including mergers, sales of assets, recapitalizations, and reverse stock splits, between certain corporations having 100 or more shareholders that also have a class of voting shares registered with the SEC under Section 12 of the Securities Exchange Act of 1934, as amended (which includes us) and an interested shareholder, defined as the beneficial owner of 10% or more of the voting power of the outstanding voting shares of that corporation, for five years following the date the shareholder acquired such 10% beneficial ownership, unless the acquisition or the business combination was approved by the board of directors in advance of that date. If the combination was not previously approved, the interested shareholder may effect a combination after the five-year period only if the shareholder receives approval from a majority of the disinterested shares or the offer meets certain fair price criteria. A corporation may elect to opt out of these provisions in an amendment to its articles of incorporation approved by a majority of the disinterested shares. Such an amendment, however, would not become effective for 18 months after its passage and would apply only to stock acquisitions occurring after its effective date. Our restated articles of incorporation do not elect to opt out of these provisions.
Chapter 42 of the IBCL includes provisions designed to protect minority shareholders in the event that a person acquires, pursuant to a tender offer or otherwise, shares giving it more than 20%, more than 33 1/3%, or more than 50% of the outstanding voting power (which we refer to as “control shares”) of an “issuing public corporation.” Unless the issuing public corporation’s articles of incorporation or bylaws provide that Chapter 42 does not apply to control share acquisitions of shares of the corporation before the control share acquisition, an acquirer who purchases control shares cannot vote the control shares until each class or series of shares entitled to vote separately on the proposal, by a majority of all votes entitled to be cast by that group (excluding the control shares and any shares held by officers of the corporation and employees of the corporation who are directors thereof), approve in a special or annual meeting the rights of the acquirer to vote the control shares. Unless otherwise provided in a corporation’s articles of incorporation or bylaws before a control share acquisition has occurred, in the event that control shares acquired in a control share acquisition are accorded full voting rights and the acquiring person acquires control shares with a majority or more of all voting power, all shareholders of the issuing public corporation have dissenters’ rights to receive the fair value of their shares. “Issuing public corporation” means a corporation which is organized in Indiana, has 100 or more shareholders, its principal place of business, its principal office or substantial assets within Indiana and has one of the following:
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more than 10% of its shareholders resident in Indiana; |
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more than 10% of its shares owned by Indiana residents; or |
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1,000 shareholders resident in Indiana. |
An issuing public corporation may elect not to be covered by the statute by so providing in its articles of incorporation or bylaws. Our restated articles of incorporation do not elect to opt out of these provisions. Indiana insurance laws and regulations provide that no person may acquire our voting securities if that person would directly or indirectly be in control of us after the acquisition, unless that person has provided certain
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required information to us and to the Indiana Insurance Commissioner, and the Indiana Insurance Commissioner has approved the acquisition. Control of us is presumed to exist if any person beneficially owns 10% or more of our voting securities. Furthermore, the Indiana Insurance Commissioner may determine, after notice and hearing, that control exists despite the absence of a presumption to that effect. Consequently, no person may acquire, directly or indirectly, 10% or more of our voting securities, or otherwise acquire control of us, unless that person has provided such required information to the Indiana Insurance Commissioner and the Indiana Insurance Commissioner has approved such acquisition.
Series D Preferred Stock and Series D Depositary Shares
The following descriptions of the Series D Preferred Stock and Series D Depositary Shares are a summary and do not purport to be complete. They are subject to and qualified in its entirety by reference to our restated articles of incorporation, our Bylaws, the articles of amendment to our restated articles of incorporation designating the Series D Preferred Stock and the deposit agreement in connection with the Series D Depositary Shares, each of which have been previously filed and are incorporated by reference as an exhibit to the Annual Report on Form 10-K of which this exhibit is a part, and the IBCL. You should read these documents and the applicable provisions of the IBCL for a full description of the terms of Series D Preferred Stock and Series D Depositary Shares.
Series D Preferred Stock
General
Our authorized capital stock includes 10,000,000 shares of preferred stock. The shares of Series D Preferred Stock are represented by the Series D Depositary Shares (described further below), currently consisting of 20,000 shares with a stated amount of $25,000 per share.
The articles of amendment setting forth the terms of the Series D Preferred Stock provide that the Series D Preferred Stock rank senior to our junior stock (as defined herein). In addition, the articles of amendment setting forth the terms of the Series D Preferred Stock prohibit the issuance of any series of preferred stock senior to the Series D Preferred Stock in either the payment of dividends or in the distribution of assets upon liquidation, dissolution or winding up of LNC. In addition, we are generally be able to pay dividends, any redemption price and distributions upon liquidation, dissolution or winding-up only out of lawfully available funds for such payment (i.e., after taking account of all indebtedness and other non-equity claims). The Series D Preferred Stock are fully paid and nonassessable. Holders of the Series D Preferred Stock do not have preemptive or subscription rights to acquire more stock of LNC.
The Series D Preferred Stock is not convertible into, or exchangeable for, shares of any other class or series of stock or other securities of LNC. The Series D Preferred Stock has no stated maturity and is not be subject to any sinking fund, retirement fund or purchase fund or other obligation of LNC to redeem, repurchase or retire the Series D Preferred Stock.
Dividends
Dividends on the Series D Preferred Stock are not mandatory. Holders of the Series D Preferred Stock are entitled to receive, when, as and if declared by our board of directors (or a duly authorized committee of the board), out of funds legally available for the payment of dividends of the stated amount per share, under Indiana law, non-cumulative cash dividends that accrue for the relevant dividend period quarterly in arrears on the first day of March, June, September and December of each year, commencing on March 1, 2023. Dividends accrue from the date of original issue at a fixed rate per annum of 9.000% of the stated amount per share. Dividend payment dates are subject to adjustment for business days.
A dividend period is the period from, and including, a dividend payment date (other than the initial dividend period, which commenced on and included November 22, 2022); provided that, for any share of Series D Preferred Stock issued after November 22, 2022, the initial Dividend Period for such shares may commence on and include such other date as LNC’s board of directors or a duly authorized committee of the board of directors shall determine and publicly disclose.
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Dividends are payable to holders of record of the Series D Preferred Stock as they appear on our books on the applicable record date, which is the 15th calendar day before that dividend payment date or such other record date fixed by our board of directors (or a duly authorized committee of the board) that is not more than 60 nor less than 10 days prior to such dividend payment date (each, a “dividend record date”). Dividend record dates will apply regardless of whether a particular dividend record date is a business day.
Dividends payable on the Series D Preferred Stock are calculated on the basis of a 360-day year consisting of twelve 30-day months. If any dividend payment date is a day that is not a business day, then the dividend with respect to that dividend payment date will instead be paid on the immediately succeeding business day, without interest or other payment in respect of such delayed payment. “Business day” means any day other than a day on which federal or state banking institutions in the Borough of Manhattan, The City of New York, are authorized or obligated by law, executive order or regulation to close.
Dividends on the Series D Preferred Stock are not cumulative. Accordingly, if LNC’s board of directors (or a duly authorized committee of the board) does not declare a dividend on the Series D Preferred Stock payable in respect of any dividend period before the related dividend payment date, such dividend will not accrue, we will have no obligation to pay a dividend for that dividend period on the dividend payment date or at any future time, whether or not dividends on the Series D Preferred Stock are declared for any future dividend period and no interest, or sum of money in lieu of interest, will be payable in respect of any dividend not so declared.
So long as any Series D Preferred Stock remains outstanding for any dividend period, unless the full dividends for the latest completed dividend period on all outstanding Series D Preferred Stock have been declared and paid (or declared and a sum sufficient for the payment thereof has been set aside):
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no dividend shall be paid or declared or set aside for payment, and no distribution may be made, on our common stock or any other shares of our junior stock (as defined herein) (other than a dividend payable solely in shares of stock that rank junior to the Series D Preferred Stock in the payment of dividends in the distribution of assets on any liquidation, dissolution or winding up of LNC); and |
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no monies may be paid or made available for a sinking fund for the redemption or retirement of common stock or other junior stock nor shall any shares of junior stock be purchased, redeemed or otherwise acquired for consideration by us, directly or indirectly (other than as a result of a reclassification of junior stock for or into other junior stock, or the exchange or conversion of one share of junior stock for or into another share of junior stock that ranks junior to the Series D Preferred Stock in the payment of dividends and in the distribution of assets on any liquidation, dissolution or winding up of LNC and other than through the use of the proceeds of a substantially contemporaneous sale of junior stock that ranks junior to the Series D Preferred Stock in the payment of dividends and in the distribution of assets on any liquidation, dissolution or winding up of LNC) during a dividend period. |
As used in this section, “junior stock” means our common stock and any other class or series of stock of LNC that ranks junior to the Series D Preferred Stock either as to the payment of dividends (whether such dividends are cumulative or non-cumulative) and/or as to the distribution of assets upon any liquidation, dissolution or winding-up of LNC.
If our board or a duly authorized committee of our board elects to declare only partial instead of full dividends for a dividend payment date and related dividend period on the Series D Preferred Stock or any class or series of our stock that ranks on a parity with the Series D Preferred Stock in the payment of current dividends (“dividend parity stock”), then to the extent permitted by the terms of the Series D Preferred Stock and each outstanding series of dividend parity stock such partial dividends shall be declared on the Series D Preferred Stock and dividend parity stock, and dividends so declared shall be paid, as to any such dividend payment date and related dividend period in amounts such that the ratio of the partial dividends declared and paid on each such series to full dividends on each such series is the same. As used in this paragraph, “full dividends” means, as to any parity stock that bears dividends on a cumulative basis, the amount of dividends that would need to be declared and paid to bring such parity stock current in dividends, including undeclared dividends for past dividend periods.
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As used in this section, “parity stock” means any other class or series of stock of LNC that we may issue that ranks equally with the Series D Preferred Stock in the payment of dividends (whether such dividends are cumulative or non-cumulative) and in the distribution of assets on any liquidation, dissolution or winding-up of LNC, subject to the limits under LNC’s restated articles of incorporation and the Series D articles of amendment against creating any other class of stock that ranks equally with the preferred stock absent preferred stock approval. Our 9.250% Fixed Rate Reset Non-Cumulative Preferred Stock, Series C (the “Series C Preferred Stock”), which is not registered under Section 12 of the Exchange Act, is a parity stock. LNC may issue preferred stock that is parity stock from time to time in the future without the approval of holders of Series D Preferred Stock.
Subject to the foregoing, dividends (payable in cash, stock or otherwise) as may be determined by our board of directors (or a duly authorized committee of the board) may be declared and paid on our common stock and any other junior stock from time to time out of any funds legally available for such payment, and the Series D Preferred Stock shall not be entitled to participate in any such dividend. We do not currently have any junior stock other than common stock outstanding.
Dividends on the Series D Preferred Stock will not be declared, paid or set aside for payment if we fail to comply, or if such act would cause us to fail to comply, with applicable laws, rules and regulations (including, to the extent LNC becomes subject to regulation by a capital regulator, any applicable capital adequacy guidelines).
Liquidation Rights
Upon any voluntary or involuntary liquidation, dissolution or winding-up of LNC, holders of the Series D Preferred Stock are entitled to receive out of assets of LNC available for distribution to shareholders, after satisfaction of liabilities to creditors, if any, before any distribution of assets is made to holders of common stock and any other junior stock, a liquidating distribution in an amount equal to the stated amount per share of Series D Preferred Stock (initially equivalent to $25.00 per Depositary Share), plus declared and unpaid dividends, without accumulation of any undeclared dividends. Holders of the Series D Preferred Stock will not be entitled to any other amounts from us after they have received their full liquidation preference.
In any such distribution, if the assets of LNC are not sufficient to pay the liquidation preferences in full to all holders of the Series D Preferred Stock and all holders of any class or series of our stock that ranks on a parity with the Series D Preferred Stock in the distribution of assets upon liquidation, dissolution or winding up of LNC (the “liquidation preference parity stock”), the amounts paid to the holders of Series D Preferred Stock and to the holders of any parity stock will be paid pro rata in accordance with the respective aggregate liquidation preferences of those holders. In any such distribution, the “liquidation preference” of any holder of preferred stock other than the Series D Preferred Stock means the amount payable to such holder in such distribution (assuming no limitation on our assets available for such distribution), including any declared but unpaid dividends in the case of any holder of stock on which dividends accrue on a noncumulative basis (and any unpaid, accrued cumulative dividends in the case of any holder of stock on which dividends accrue on a cumulative basis). If the liquidation preference has been paid in full to all holders of the Series D Preferred Stock and any holders of liquidation preference parity stock, the holders of our other stock shall be entitled to receive all remaining assets of LNC according to their respective rights and preferences.
For purposes of this section, the merger or consolidation of LNC with any other entity, including a merger or consolidation in which the holders of the Series D Preferred Stock receive cash, securities or other property for their shares, or the sale, lease or exchange of all or substantially all of the assets of LNC, for cash, securities or other property shall not constitute a liquidation, dissolution or winding-up of LNC.
Optional Redemption
The Series D Preferred Stock is not subject to any mandatory redemption, sinking fund, retirement fund, purchase fund or other similar provisions. We may redeem the Series D Preferred Stock at our option:
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in whole but not in part, at any time prior to December 1, 2027, within 90 days after the occurrence of a rating agency event at a redemption price equal to 102% of the stated amount of a share of Series D Preferred Stock (initially, $25,500 per share of Series D Preferred Stock, equivalent to $25.50 per |
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Depositary Share), plus an amount equal to any dividends per share that have accrued but not been declared and paid for the then-current dividend period to, but excluding, such redemption date, or |
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(i) in whole but not in part, at any time prior to December 1, 2027, within 90 days after the occurrence of a regulatory capital event, or (ii) in whole or in part, at any time or from time to time on or after December 1, 2027, in each case, at a redemption price equal to the stated amount of a share of Series D Preferred Stock (initially, $25,000 per share of Series D Preferred Stock, equivalent to $25.00 per Depositary Share), plus an amount equal to any dividends per share that have accrued but not been declared and paid for the then-current dividend period to, but excluding, such redemption date. |
Any declared but unpaid dividends payable on a redemption date that occurs subsequent to the dividend record date for a dividend period will not constitute a part of or be paid to the holder entitled to receive the redemption price on the redemption date, but rather will be paid to the holder of record of the redeemed shares on the dividend record date relating to the dividend payment date.
Holders of the shares of Series D Preferred Stock do not have the right to require the redemption or repurchase of the Series D Preferred Stock.
“Rating agency event” means that any nationally recognized statistical rating organization, as defined in Section 3(a)(62) of the Exchange Act, that then publishes a rating for us (a “rating agency”) amends, clarifies or changes the criteria it uses to assign equity credit to securities such as the Series D Preferred Stock, which amendment, clarification or change results in:
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the shortening of the length of time the Series D Preferred Stock is assigned a particular level of equity credit by that rating agency as compared to the length of time they would have been assigned that level of equity credit by that rating agency or its predecessor on the initial issuance of the Series D Preferred Stock; or |
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the lowering of the equity credit (including up to a lesser amount) assigned to the Series D Preferred Stock by that rating agency as compared to the equity credit assigned by that rating agency or its predecessor on the initial issuance of the Series D Preferred Stock. |
“Regulatory capital event” means that we become subject to capital adequacy supervision by a capital regulator that includes group-wide prescribed capital adequacy requirements and the capital adequacy requirements that apply to us as a result of being so subject set forth criteria pursuant to which the aggregate stated amount of the Series D Preferred Stock would not qualify as capital under such capital adequacy requirements.
If the Series D Preferred Stock is to be redeemed, the notice of redemption shall be given by first class mail to the holders of record of the Series D Preferred Stock to be redeemed, mailed not less than 30 days nor more than 90 days prior to the date fixed for redemption thereof (provided that, if the Series D Preferred Stock is held in book-entry form through DTC, we may give such notice in any manner permitted by DTC). Each notice of redemption will include a statement setting forth:
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the redemption date; |
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the number of shares of Series D Preferred Stock to be redeemed and, if less than all the shares of Series D Preferred Stock held by such holder are to be redeemed, the number of such shares of Series D Preferred Stock to be redeemed from such holder; |
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the redemption price; and |
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the place or places where holders may surrender certificates evidencing the Series D Preferred Stock for payment of the redemption price. |
If notice of redemption of any Series D Preferred Stock has been given and if the funds necessary for such redemption have been set aside by us for the benefit of the holders of any Series D Preferred Stock so called for redemption, then, from and after the redemption date, dividends will cease to accrue on such Series D Preferred Stock, such Series D Preferred Stock shall no longer be deemed outstanding and all rights of the holders of such Series D Preferred Stock will terminate, except the right to receive the redemption price, without interest. Any funds
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unclaimed at the end of three years from the redemption date shall, to the extent permitted by law, be released to LNC, after which time the holders of the shares of Series D Preferred Stock so called for redemption shall look only to LNC for payment of the redemption price of such shares.
In case of any redemption of only part of the Series D Preferred Stock at the time outstanding, the Series D Preferred Stock to be redeemed shall be selected either pro rata or by lot.
If we become subject to capital adequacy supervision that includes group-wide prescribed capital adequacy requirements and the Series D Preferred Stock is included in our regulatory capital, the redemption of the Series D Preferred Stock may be subject to our receipt of any required prior approval from a capital regulator of ours and to the satisfaction of any conditions set forth in applicable capital rules and any other regulations of such capital regulator.
Voting Rights
Our restated articles of incorporation provide that, except as otherwise required by law, all shares of preferred stock (defined in our restated articles and this document to include all series of preferred stock outstanding from time to time) shall have the right at every shareholders’ meeting to one vote for each share of preferred stock standing in such holder’s name on the books of LNC on the date established by our board as of the record date for determination of shareholders entitled to vote at such meeting. Under the Series D Preferred Stock articles of amendment, except as otherwise provided by law, every holder of Series D Preferred Stock has the right at every shareholders’ meeting to one vote for each share of Series D Preferred Stock standing in such holder’s name on the books of LNC on the date established by the board as the record date for determination of shareholders entitled to vote at such meeting.
In addition, at any time when six or more quarterly dividends, whether or not consecutive, on one or more series of the preferred stock shall be in default, the holders of all preferred stock at the time or times outstanding as to which such default shall exist shall be entitled, at the next annual meeting of shareholders, voting as a class, to vote for and elect two of LNC’s directors. In the case of any vacancy in the office of a director occurring among the directors elected by the holders of the shares of the preferred stock voting as a class pursuant to the Series D Preferred Stock articles of amendment, the remaining director or directors elected by the holders of the shares of the preferred stock pursuant to the Series D Preferred Stock articles of amendment may elect a successor or successors to hold office until the next annual or special meeting of the shareholders.
At all meetings of shareholders held for the purpose of electing directors during such time as the holders of the shares of the preferred stock shall have the right, voting as a class, to elect directors pursuant to the Series D Preferred Stock articles of amendment, the presence in person or by proxy of the holders of a majority of the outstanding shares of the preferred stock then entitled, as a class, to elect directors pursuant to the Series D Preferred Stock articles of amendment shall be required to constitute a quorum of such class for the election of directors; provided, that the absence of a quorum of the holders of preferred stock shall not prevent the election at any such meeting or adjournment thereof of directors by any other class or classes of stock if the necessary quorum of the holders of such stock is present in person or by proxy at such meeting.
The right of the holders of preferred stock, voting as a class, to participate in the election of directors pursuant to the Series D Preferred Stock articles of amendment shall continue in effect in the case of all preferred stock entitled to receive cumulative dividends, until all accumulated and unpaid dividends have been paid or declared and set apart for payment on all cumulative preferred stock, the holders of which shall have been entitled to vote at the previous annual meeting of shareholders, or in the case of all non-cumulative preferred stock until non-cumulative dividends have been paid or declared and set apart for payment for four consecutive quarterly dividend periods on all non-cumulative preferred stock, the holders of which shall have been entitled to vote at the previous annual meeting of shareholders, and thereafter the right of the holders of preferred stock, voting as a class, to participate in the election of directors pursuant to the Series D Preferred Stock articles of amendment shall terminate.
The foregoing voting provisions (other than the voting right described in the first paragraph under this section “— Voting Rights”) will not apply if, at or prior to the time when any such vote would otherwise be required
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pursuant to the Series D Preferred Stock articles of amendment, all outstanding Series D Preferred Stock shall have been redeemed or shall have been called for redemption upon proper notice and sufficient funds shall have been set aside for such redemption.
Upon termination of the right of the holders of preferred stock, voting as a class, to participate in the election of directors pursuant to the Series D Preferred Stock articles of amendment, the term of office of each director then in office elected by the holders of the preferred stock shall terminate, and any vacancy so created may be filled as provided by our Bylaws.
Any director or directors elected by the holders of preferred stock, voting as a class pursuant to the Series D Preferred Stock articles of amendment, may be removed, with or without cause, only by a vote of the holders of a
majority of the shares of preferred stock taken at a meeting as provided by Section 4 of Article III of our restated articles of incorporation.
So long as any shares of Series D Preferred Stock remain outstanding, LNC shall not, without the approval of the holders of a majority of the preferred stock, voting as a class:
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Amend LNC’s restated articles of incorporation to create or authorize any kind of stock ranking prior to or on a parity with the preferred stock with respect to payment of dividends or distribution on dissolution, liquidation or winding up, or create or authorize any security convertible into shares of stock of any such kind; or |
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Amend, alter, change or repeal any of the express terms of the preferred stock, or of any series thereof, then outstanding in a manner prejudicial to the holders thereof; provided, that if any such amendment, alteration, change or repeal would be prejudicial to the holders of one or more, but not all, of the series of the preferred stock at the time outstanding, only such consent of the holders of two-thirds of the total number of outstanding shares of all series so affected shall be required, unless a different or greater vote shall be required by law; or |
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Authorize the voluntary dissolution of LNC or any revocation of dissolution proceedings theretofore approved, authorize the sale, lease, exchange, or other disposition of all or substantially all of the property of LNC, or approve any limitation of the term of existence of LNC; or |
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Merge or consolidate with another corporation in such manner that LNC does not survive as a continuing entity, if thereby the rights, preferences, or powers of the preferred stock would be adversely affected, or if there would thereupon be authorized or outstanding securities which LNC, if it owned all of the properties then owned by the resulting corporation, could not create without the approval of the holders of the preferred stock. |
Transfer Agent, Registrar and Dividend Disbursing Agent
Equiniti Trust Company is the transfer agent, registrar and dividend disbursing agent for the Series D Preferred Stock.
Series D Depositary Shares
This section summarizes specific terms and provisions of the Series D Depositary Shares relating to our Series D Preferred Stock. Each Depositary Share represents a 1/1,000th interest in a share of the Series D Preferred Stock, and is evidenced by a depositary receipt. The shares of the Series D Preferred Stock represented by the Depositary Shares were deposited under a deposit agreement among us, Equiniti Trust Company as the Depositary, and the holders from time to time of the depositary receipts evidencing the Depositary Shares. Subject to the terms of the deposit agreement, each holder of Depositary Shares is entitled, through the Depositary, in proportion to the applicable fraction of a share of the Series D Preferred Stock represented by such Depositary Shares, to all the rights and preferences of the Series D Preferred Stock represented thereby (including dividend, voting, redemption and liquidation rights).
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Dividends and Other Distributions
Each dividend on a Depositary Share will be in an amount equal to 1/1,000th of the dividend declared on each share of the Series D Preferred Stock.
The Depositary distributes any cash dividends or other cash distributions received in respect of the deposited Series D Preferred Stock to the record holders of the Depositary Shares in proportion to the number of the Depositary Shares held by each holder on the relevant record date. The Depositary will distribute any property received by it other than cash to the record holders of the Depositary Shares entitled to those distributions, unless it determines that the distribution cannot be made proportionally among those holders or that it is not feasible to make a distribution. In that event, the Depositary may, with our approval, sell the property and distribute the net proceeds from the sale to the holders of the Depositary Shares entitled to such distribution in proportion to the number of the Depositary Shares they hold.
Record dates for the payment of dividends and other matters relating to the Depositary Shares will be the same as the corresponding record dates for the Series D Preferred Stock.
The amounts distributed to holders of the Depositary Shares will be reduced by any amounts required to be withheld by the Depositary or by us on account of taxes or other governmental charges.
Redemption of the Depositary Shares
If we redeem the Series D Preferred Stock represented by the Depositary Shares, in whole or in part, a corresponding number of Depositary Shares will be redeemed from the proceeds received by the Depositary resulting from the redemption of the Series D Preferred Stock held by the Depositary. The redemption price per Depositary Share will be equal to 1/1,000th of the redemption price per share payable with respect to the Series D Preferred Stock, plus any declared and unpaid dividends, without accumulation of any undeclared dividends, on the shares of the Series D Preferred Stock. Whenever we redeem shares of the Series D Preferred Stock held by the Depositary, the Depositary will redeem, as of the same redemption date, the number of the Depositary Shares representing shares of the Series D Preferred Stock so redeemed.
In case of any redemption of less than all of the outstanding Depositary Shares, the Depositary Shares to be redeemed will be selected by the Depositary pro rata, by lot (or, if the Depositary Shares are in the form of global depositary receipts, in accordance with the applicable procedures of DTC in compliance with then-applicable rules of NYSE). In any such case, the Depositary will redeem the Depositary Shares only in increments of 1,000 Depositary Shares and any integral multiple thereof.
The Depositary will mail (or otherwise transmit by an authorized method) notice of redemption to holders of the Depositary Shares not less than 30 and not more than 90 days prior to the date fixed for redemption of the Series D Preferred Stock and the Depositary Shares.
Voting of the Depositary Shares
When the Depositary receives notice of any meeting at which the holders of the Series D Preferred Stock are entitled to vote, the Depositary will mail (or otherwise transmit by an authorized method) the information contained in the notice to the record holders of the Depositary Shares. Each record holder of Depositary Shares on the record date, which will be the same date as the record date for the Series D Preferred Stock, may instruct the Depositary to vote the amount of the Series D Preferred Stock represented by the holder’s Depositary Shares. Although each Depositary Share is entitled to 1/1,000th of a vote, the Depositary can only vote whole shares of Series D Preferred Stock. To the extent possible, the Depositary will vote the amount of the Series D Preferred Stock represented by the Depositary Shares in accordance with the instructions it receives. We have agreed to take all reasonable actions that the Depositary determines are necessary to enable the Depositary to vote as instructed. If the Depositary does not receive specific instructions from the holders of any Depositary Shares, it will not vote the amount of the Series D Preferred Stock represented by such Depositary Shares.
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Listing
The Series D Depositary Shares are listed on the New York Stock Exchange under the symbol “LNC PRD.”
Form of the Depositary Shares
The Series D Depositary Shares were issued in book-entry form through DTC. The Series D Preferred Stock was issued in registered form to the Depositary.
Depositary
Equiniti Trust Company is the Depositary for the Series D Depositary Shares. We may terminate any such appointment and may appoint a successor Depositary at any time and from time to time, provided that we will use our best efforts to ensure that there is, at all relevant times when the Series D Preferred Stock is outstanding, a person or entity appointed and serving as such Depositary.
Delivery and Form
The Series D Depositary Shares are represented by one or more fully registered global depositary receipts, each of which we refer to as a “global security.” Each such global security was deposited with, or on behalf of, DTC, and registered in the name of DTC or a nominee thereof. Unless and until it is exchanged in whole or in part for Depositary Shares in definitive form, no global security may be transferred except as a whole by DTC to a nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC or by DTC or any such nominee to a successor of DTC or a nominee of such successor.
Beneficial interests in the Series D Preferred Stock are represented through book-entry accounts of financial institutions acting on behalf of beneficial owners as direct and indirect participants in DTC. Except under limited circumstances, Series D Depositary Shares represented by a global security are not exchangeable for, and are not issuable as, certificated depositary receipts.
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Exhibit 10.10
Amendment No. 2
Lincoln National Corporation
Deferred Compensation & Supplemental/Excess Retirement Plan
(As Amended and Restated Effective January 1, 2020)
The Lincoln National Corporation Deferred Compensation & Supplemental/Excess Retirement Plan (the “Plan”) is hereby amended, effective December 19, 2022, by:
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Amending Section 2.1 of the Plan, in its entirety, to read as follows: |
“2.1General. This Plan is maintained by the Company for the benefit of a select group of management and highly compensated employees.
The Benefits Administrator shall have the discretion to determine the eligibility of employees to participate in this Plan; provided, however, that in order to be eligible, (a) the employee must be a member of a select group of management or highly compensated employees of an Employer and (b) the employee must be a regular employee on an Employer’s U.S. payroll, provided that if he or she is employed outside of the United States, he or she must be a U.S. citizen and his or her Employer must have consented to his or her participation in the Plan.”
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In all other respects, said Plan shall remain in full force and effect. |
IN WITNESS WHEREOF, the President and Chief Executive Officer of the Company has executed this Amendment this 19th day of December 2022.
LINCOLN NATIONAL CORPORATION
/s/ Ellen Cooper
By: Ellen Cooper
Its: President and Chief Executive Officer
Exhibit 10.46
LINCOLN NATIONAL CORPORATION
NONQUALIFIED STOCK OPTION AGREEMENT
For Senior Management Committee (other than CEO)
This Nonqualified Stock Option Agreement (the “Agreement”) evidences the terms of the grant by Lincoln National Corporation (“LNC”) of a Nonqualified Stock Option (the “Option”) to <First Name> <Last Name> (“Grantee”) on <Grant Date> (the “Grant Date”), and Grantee’s acceptance of the Option, in accordance with and subject to the terms and provisions of the Lincoln National Corporation 2020 Incentive Compensation Plan effective June 11, 2020 (the “Plan”) and this Agreement. LNC and Grantee agree as follows:
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1. |
Shares Optioned and Option Price. |
Grantee shall have an Option to purchase <Granted Amount> shares of LNC common stock (the “Shares”) for <Grant Price> (in United States Dollars) for each Share.
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2. |
Vesting Dates. |
The Option shall vest as follows, provided the Grantee remains in Service (defined in Paragraph 9, below) through the specified vesting date:
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(a) |
100% as of the third anniversary of the Grant Date; or |
(b) 100% as of the date of Grantee’s death; or
(c) 100% as of the date of Grantee’s termination of Service on account of Total Disability (defined in Paragraph 9, below); or
(d) 100% as of the date of Grantee’s involuntary termination of Service other than for Cause, within two (2) years after a Change of Control pursuant to the definition in effect on the day immediately preceding such Change of Control; or
(e) Pro-rata as of the date Grantee Retires (defined in Paragraph 9, below), unless Grantee’s Retirement occurs on or after the second anniversary of the Grant Date of this award, in which case the options shall vest at 100%.
An Option that vests pro-rata upon the event described in Subparagraph 2(d) above shall vest according to a pro-ration formula equal to the total number of days of Service that Grantee provides during the applicable Vesting Period (defined below), divided by the number of days in
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the applicable Vesting Period in which the event described in Subparagraph 2(d) occurs, multiplied by the number of Shares subject to the Option that may vest during the applicable Vesting Period (rounding up to the nearest whole Share). For purposes of pro-rating, the applicable “Vesting Period” is the period between the Grant Date and the third anniversary of the Grant Date during which a portion of the Option vests.
Except as provided above, any portion of the Option that is unvested upon Grantee’s termination of Service shall be deemed forfeited immediately following termination.
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3. |
Exercise Period. |
Grantee may exercise all or part of the Option, to the extent vested, prior to the close of business at LNC headquarters on any LNC business day (in accordance with procedures established by LNC) until the first to occur of:
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(a) |
the tenth anniversary of the Grant Date; or |
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(b) |
the first anniversary of the date of Grantee’s termination of Service on account of death or Total Disability; or |
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(c) |
the fifth anniversary of Grantee’s Retirement; or |
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(d) |
the date three (3) months after Grantee’s involuntary termination of Service other than for Cause, including the sale or disposition of the business for which Grantee provides Service; or |
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(e) |
the date of Grantee’s termination of Service for any reason other than those described in Subparagraphs 3(b), (c), or (d), respectively. |
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4. |
Manner of Exercise. |
To exercise an Option, Grantee must: (a) accept the terms of this award by delivering an acknowledgment (in the form specified by LNC); (b) deliver notice of the exercise (in the form specified by LNC) to the LNC stock option administrator; and (c) submit full payment of the exercise price. Payment of the exercise price may be made in any combination of cash, certified check, Shares (including the surrender of Shares held by the Grantee or those that would otherwise be issued on exercise of the Option), or, to the extent LNC has adopted a broker assisted cashless exercise program, through a broker assisted cashless exercise. Any surrendered or withheld Shares will constitute payment to the extent of their Fair Market Value.
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5. |
Tax Withholding. |
As soon as practicable after the exercise date, LNC shall cause the appropriate number of Shares to be issued to Grantee. LNC shall not issue Shares until any required tax withholding payments are remitted to LNC by Grantee. In accordance with procedures established by the Compensation Committee of the LNC Board of Directors (the “Committee”), Grantee may
2
satisfy any required tax withholding payments in any combination of cash, certified check, or Shares (including the surrender of Shares held by the Grantee or those that would otherwise be issued on exercise of the Option) or, to the extent LNC has adopted a broker assisted cashless exercise program, through a broker assisted cashless exercise. Any surrendered or withheld Shares will constitute satisfaction of any required tax withholding to the extent of their Fair Market Value.
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6. |
Transferability. |
Unless otherwise approved by the Committee, no rights under this Agreement may be transferred except by will or the laws of descent and distribution. The rights under this Agreement may be exercised during the lifetime of Grantee only by Grantee. After Grantee’s death, the Option may be exercised by the person or persons to whom the Option was transferred by will or the laws of descent and distribution.
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7. |
Cancellation/Rescission of Options and/or Related Exercise/Termination for Cause. |
(a)If Grantee’s Service is terminated for Cause, any Shares acquired upon exercise of the Option during the six (6) month period prior to such termination for Cause shall be rescinded and any remaining portion of the Option shall be cancelled without further action by the Committee or its delegate.
(b)If Grantee fails to comply with the non-competition, non-solicitation, non-disparagement, or non-disclosure provisions described in Subparagraphs 8(a) through 8(d) below, before the applicable vesting date of the Option, in addition to the remedies provided in Subparagraph 8(e) below, the Option shall be cancelled without further action by the Committee or its delegate.
(c)Grantee’s failure to comply with Subparagraphs 8(a) or 8(b) at any time from the Grant Date through the applicable time periods specified in Subparagraphs 8(a) or 8(b) shall cause such Option and/or any Shares acquired upon exercise of the Option to be rescinded. Grantee’s failure to comply with Subparagraphs 8(c) or 8(d) at any time on or after the Grant Date shall cause such Option and/or any Shares acquired upon exercise of the Option to be rescinded.
(d)(1) LNC shall notify Grantee in writing of any such rescission: (A) in the case of Subparagraph 7(a), not later than 90 days after such termination for Cause; and (B) not later than 180 days after LNC obtains knowledge of Grantee’s failure to comply with Subparagraphs 8(a) through 8(d) below.
(2) Within ten (10) days after receiving a rescission notice from LNC: (A) Grantee must surrender to LNC the Shares acquired upon exercise of the Option, less a number of Shares having a Fair Market Value equal to the aggregate exercise price of the Option; or (B) if the Shares acquired upon exercise of the Option have been sold or transferred, (i) Grantee must make a payment to LNC of the proceeds from such sale or transfer, or (ii) if there are no proceeds from such transfer, Grantee must make a payment to LNC equal to the Fair Market Value of the Shares on the date of such transfer.
3
In all cases, Grantee shall pay to LNC the gross amount of any gain realized or payment received (not net of any withholding or other taxes paid by Grantee) as a result of the Option.
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8. |
Covenants. |
Grantee recognizes and acknowledges that during the term of employment, Grantee has had, and will continue to have, access to confidential and proprietary business information and trade secrets belonging to LNC and LNC’s customers, including, but not limited to, customer information, customer lists, pricing, products, information relating to sales, sales leads, sales performance, sales volume, LNC business and financial strategy, LNC quarterly business reviews, and LNC data, all of which are of substantial value to LNC. Grantee therefore agrees that the restrictive covenants below are reasonable and necessary to protect LNC’s trade secrets and confidential information.
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(b) Non-Solicitation of Employees and Other Service Providers. During Grantee’s employment with LNC, and for a period of twelve (12) months following the date of Grantee’s Separation from Service, for any reason, Grantee shall not directly or indirectly hire, manage, solicit, or recruit, or aid in the hiring, soliciting, or recruiting of any persons who are at the time of hire, or were at any time within the six (6) months prior to hire, employees, agents, representatives, or consultants of LNC whom Grantee had hired, managed, supervised, or otherwise became familiar with in any capacity as a result of his/her Service. |
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(c) Non-Disparagement. Grantee agrees not to defame LNC or any of its affiliates, products, employees, officers, directors or services, or make or solicit any comments, statement or the like to the media or others that may be considered to be derogatory or harmful to the good name or business reputation of LNC or its affiliates, except that Grantee may testify truthfully in any legal proceeding where his testimony is compelled by subpoena under oath. This provision also applies to any comments or statements which Grantee may make on the internet, including but not limited to comments, statements and/or videos placed in email, and/or on YouTube, Instagram, Facebook, Twitter or any other social media site. |
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(d) Non-Disclosure & Ideas Provision. Grantee shall not, without prior written authorization from LNC, disclose to anyone outside LNC, or use in other than LNC’s business, any trade secrets or confidential and/or proprietary information received from or on behalf of, developed for, or otherwise relating to the business of, LNC. Any confidentiality or non-disclosure obligations in this Agreement does not prohibit or restrict Grantee (or Grantee’s
4
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attorney) from initiating communications directly with, or responding to any inquiry from, or providing testimony before, the SEC, FINRA, any other self-regulatory organization, or any other state, local, or federal regulatory, investigative, or enforcement entity, agency, or authority. For purposes of this Agreement, a confidential disclosure to government officials or attorneys solely for purposes of reporting or investigating a suspected violation of the law (or disclosures made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal) is immune from civil and criminal liabilities under federal and state trade secret laws. Furthermore, Grantee agrees to disclose and assign to LNC all rights and interest in any invention or idea that Grantee developed or helped develop for actual or related business, research, or development work during the period of Grantee’s Service. |
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(e) Consent to Injunction; Attorneys’ Fees and Costs. Grantee acknowledges that any violation of the non-competition, non-solicitation, non- disparagement, or non-disclosure provisions described in Subparagraphs 8(a) through 8(d) would entail irreparable injury to the business and goodwill of LNC and would jeopardize the competitive position in the marketplace held by LNC. Therefore, Grantee also acknowledges that, in the event of any violation of Subparagraphs 8(a) through 8(d) by Grantee, the cancellation/rescission of the award alone will be inadequate to compensate LNC, and LNC will be entitled, as a matter of right and without the obligation to post a bond or other security, to an injunction issued by any court of competent jurisdiction and other equitable relief to prevent any actual, intended or likely violation of this Agreement. If LNC brings legal action for injunctive relief, LNC shall have the benefit of the full periods of the post-employment covenants set forth above. The injunction shall run from the date injunctive relief is granted but reduced by the time period after the separation of employment that Grantee was not in violation of the applicable covenant(s). In the event LNC elects to seek any remedy by court action, rendered necessary as the result of any violation or threatened violation of the Agreement by Grantee, and LNC prevails in such action, Grantee shall be responsible to pay all costs and attorneys’ fees incurred by LNC in taking such action. |
Notwithstanding anything to the contrary herein, LNC may, in its discretion, waive Grantee’s compliance with Subparagraphs 8(a) through 8(d) in whole or part in any individual case. Moreover, if Grantee’s Service is terminated by LNC other than for Cause, a failure by Grantee to comply with the provisions of Subparagraph 8(a) through 8(d) above, after such termination shall not in and of itself cause rescission to the extent the Option was exercised before Grantee’s termination.
If any term, provision or paragraph of this Paragraph 8 shall be determined by a court to be invalid or unenforceable for any reason, the term, provision or paragraph shall be construed so as to be enforceable to the maximum extent compatible with the applicable laws in effect at the time; and such determination of invalidity shall not affect the remaining terms, provisions or paragraphs of this Agreement, which shall continue to be given full force and effect. If any term, provision or paragraph of this Paragraph 8 shall be determined by a court to be unenforceable because of the scope or duration thereof, the parties hereby expressly agree that the court making such determination shall have the power to reduce the scope or duration and/or restrict the geographical area of such term, provision or paragraph and/or to delete such specific words or phrases which the court shall deem necessary to permit enforcement of such term, provision or paragraph in restricted form. If any term, provision or paragraph of this Paragraph 8 is found to
5
be in conflict with any state or local law or regulation, the applicable state or local law will control to the extent that such state or local law applies to the Grantee.
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9. |
Definitions. |
As used in this Agreement:
“Cause” means (a) a conviction of a crime that is job related or that may otherwise cause harm to the reputation of LNC or any Subsidiary; (b) any act or omission detrimental to the conduct of business of LNC or any Subsidiary; (c) inability to obtain or retain proper licenses; (d) theft, dishonesty, fraud or misrepresentation; (e) failure to cooperate or be truthful in connection with an investigation related to LNC or any Subsidiary; (f) violation of any rule or regulation of any regulatory agency or self-regulatory agency; (g) violation of any policy or rule of LNC or any Subsidiary; or (h) unsatisfactory performance that does not meet expectations after coaching or counseling. Cause shall be determined in the sole discretion of the Committee.
“Retires” or “Retirement” means Grantee’s termination of Service, other than for Cause, from LNC or any Subsidiary either (i) at age 55 or older with at least five (5) years of Service or (ii) at any age with at least seven (7) years of Service as a member of LNC’s Senior Management Committee.
“Service” means Grantee’s continuous service as a common law employee of, or as a planner with a full-time agent’s contract with, LNC or any Subsidiary. Service as a common law employee is the period of time Grantee is on the payroll of LNC or a Subsidiary. Service as a planner is the period of time Grantee’s full-time agent’s contract is in effect.
“Subsidiary” means any corporation in which LNC has ownership of at least twenty-five percent.
“Total Disability” means (as determined by the Committee) a disability that results in Grantee being unable to engage in any occupation or employment for wage or profit for which Grantee is, or becomes, reasonably qualified by training, education or experience. In addition, the disability must have lasted six (6) months and be expected to continue for at least six (6) more months or be expected to continue unto death.
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10. |
Governing Law; Forum for Disputes. |
This Agreement shall be governed by the laws of the Commonwealth of Pennsylvania, without giving effect to any choice of law or conflict of law provision or rule (whether of the chosen state or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the Commonwealth of Pennsylvania. Venue for any dispute relating to the Agreement shall be in the state or federal court, as applicable, having jurisdiction over claims arising in Delaware County, Pennsylvania, or such other venue as determined by LNC to best enforce its rights under this Agreement. To the extent legally possible, Grantee expressly waives any objections to LNC’s choice of venue and waives any arguments based on the inconvenience of the selected venue.
This award is subject to the terms and conditions of the Plan. Such terms and conditions of the Plan are incorporated into and made a part of this Agreement by reference. In the event of any conflicts between the provisions of this Agreement and the terms of the Plan, the terms of the Plan will control. Capitalized terms used but not defined in this Agreement shall have the meanings set forth in the Plan unless the context clearly requires an alternative meaning.
IN WITNESS WHEREOF, LNC, by its duly authorized officer has signed this Agreement as of the day and year first above written.
LINCOLN NATIONAL CORPORATION
/s/ Ellen Cooper
Ellen Cooper
President and Chief Executive Officer
Grant Plan 224
LTI Option Grant
SMC - CIO
7
Exhibit 10.47
LINCOLN NATIONAL CORPORATION
RESTRICTED STOCK UNIT AWARD AGREEMENT
For Senior Management Committee (Other than CEO)
This Restricted Stock Unit Award Agreement (the “Agreement”) is by and between Lincoln National Corporation (“LNC”) on behalf of itself and its affiliates, and <First Name> <Last Name> (the “Grantee”), and evidences the grant on <Grant Date> (the “Grant Date”) of Restricted Stock Units (“RSUs”) to Grantee, and Grantee’s acceptance of the RSUs, in accordance with the terms and provisions of the Lincoln National Corporation 2020 Incentive Compensation Plan effective June 11, 2020 (the “Plan”) and this Agreement. LNC and Grantee agree as follows:
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1. Number of Shares Granted. Grantee is awarded <Granted Amount> RSUs subject to the terms and restrictions as set forth in the Plan and in this Agreement. In the event an adjustment pursuant to Section 10(c) of the Plan is required, the number of RSUs awarded under this Agreement and/or the number of shares of LNC common stock (the “Shares”) delivered pursuant to RSUs granted under this Agreement shall be adjusted in accordance with Section 10(c) of the Plan. All RSUs after such adjustment (and/or Shares deliverable pursuant to RSUs granted under this Agreement) shall be subject to the same restrictions applicable to such RSUs (and/or Shares issuable pursuant to an RSU granted under this Agreement) before the adjustment. |
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2. Vesting of Restricted Stock Units. Subject to Paragraph 8, below, the RSUs shall vest upon the earliest to occur of the following dates (such date, the “Vesting Date”), provided Grantee remains in Service (defined in Paragraph 10, below) through such date: |
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(a) |
100% as of the third anniversary of the Grant Date; or |
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(b) |
100% as of the date on which the Grantee has a Separation from Service (defined in Paragraph 10, below) on account of Total Disability (defined in Paragraph 10, below); or |
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(c) |
100% as of the date of the Grantee’s death; or |
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(d) |
100% as of the date of the Grantee’s involuntary Separation from Service other than for Cause (defined in Paragraph 10, below), provided such Separation from Service occurs within two years after a Change of Control pursuant to the definition in effect on the day immediately preceding such Change of Control; or |
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(e) |
Pro-rata as of the date on which Grantee Retires (defined in Paragraph 10, below) unless Grantee’s Retirement occurs on or after the
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second anniversary of the Grant Date of this award, in which case the RSUs shall vest at 100%. |
The number of RSUs vesting pro-rata upon the event described in Subparagraph 2(e) shall be calculated by taking a fraction where the denominator is equal to the number of days during the three-year period beginning on the Grant Date and ending on the third anniversary of the Grant Date (such three-year period, the “Vesting Period”), and the numerator is equal to the number of days that the Grantee provided Service during the Vesting Period, with this award multiplied by such fraction (rounding up the nearest whole RSU).
In the event that Grantee has a Separation from Service prior to the vesting of RSUs as set forth above, other than under the circumstances described in Subparagraphs 2(b) through (e), the RSUs shall be forfeited and automatically transferred back to LNC. Upon forfeiture, Grantee shall have no further rights in such RSUs or Shares deliverable pursuant to an RSU granted hereunder.
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3. Dividend Equivalent Rights. No cash dividends shall be payable with respect to the RSUs. Instead, for each RSU, Grantee shall have a dividend equivalent right (“DER”). The DER shall entitle the Grantee to additional RSUs on each date that dividends are paid on Shares while the RSU is outstanding. The number of RSUs to be credited on a dividend payment date based on each DER shall equal the number (or fraction thereof) obtained by dividing the aggregate dividend that would have been paid if the RSUs had been outstanding Shares by the Fair Market Value of a Share on the date of the payment of the dividend. DERs have the same restrictions as the underlying RSUs. |
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4. Distribution of Shares. Except as provided below, a Share shall be distributed to Grantee (or to Grantee’s estate) for every vested RSU (including RSUs credited based on DERs), on or within 60 days after the Vesting Date. |
Once a Share has been issued with respect to an RSU pursuant to this Agreement and the Plan, the Grantee shall have no further rights with respect to the RSU.
Notwithstanding anything in this Paragraph 4 to the contrary, in the case of a Key Employee (defined below) who is eligible for Retirement at any time prior to the third anniversary of the Grant Date, a distribution upon the Key Employee’s Separation from Service shall be made on the date that is six (6) months after the date on which the Key Employee has a Separation from Service. A “Key Employee” means an employee who, as of his Separation from Service from LNC or its affiliates, is treated as a “specified employee” under Code section 409A(a)(2)(B)(i) (i.e., a key employee as defined in Code section 416(i) without regard to paragraph (5) thereof). Key Employees shall be determined in accordance with Code section 409A.
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5. Tax Withholding. LNC will require Grantee to remit an amount equal to any tax withholding required by federal, state, or local law on the value of the RSUs at such time as LNC is required to withhold such amounts. In accordance with procedures established by the Committee, Grantee may satisfy any required tax withholding payments in any combination of cash, certified check, or Shares (including the surrender of Shares held by the Grantee or those
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that would otherwise be issued in settlement of this award). Any surrendered or withheld Shares will constitute satisfaction of any required tax withholding to the extent of their Fair Market Value. |
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6. Voting Rights. Grantee shall have no voting rights with respect to RSUs. |
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7. Transferability. Neither the RSUs granted under this Agreement, nor any interest or right therein or part thereof, shall be transferred, sold, pledged, hypothecated, margined or otherwise encumbered by the Grantee, except by will or the laws of descent and distribution. |
(a)If Grantee’s Service is terminated for Cause, any Shares distributed in settlement of this award during the six (6) month period prior to such termination for Cause shall be rescinded and any such Shares not yet delivered in settlement of this award shall be cancelled without further action by the Compensation Committee of the LNC Board of Directors (the “Committee”) or its delegate.
(b)If Grantee fails to comply with the non-competition, non-solicitation, non-disparagement, or non-disclosure provisions described in Subparagraphs 9(a) through 9(d) below, before Shares are distributed in settlement of this award, in addition to the remedies provided in Subparagraph 9(e) below, this award shall be cancelled without further action by the Committee or its delegate.
(c)If requested by LNC, at the time Shares are to be distributed pursuant to this Agreement, Grantee shall certify in a form acceptable to LNC that Grantee is in compliance with the terms and conditions described in Subparagraphs 9(a) through 9(d) below. Grantee’s failure to comply with Subparagraphs 9(a) or 9(b) at any time from the Grant Date through the applicable time periods specified in Subparagraphs 9(a) or 9(b) shall cause such Shares to be rescinded. Grantee’s failure to comply with Subparagraphs 9(c) or 9(d) at any time on or after the Grant Date shall cause such Shares to be rescinded.
(d)(1) LNC shall notify Grantee in writing of any such rescission: (A) in the case of Subparagraph 8(a), not later than 90 days after such termination for Cause; and (B) not later than 180 days after LNC obtains knowledge of Grantee’s failure to comply with Subparagraphs 9(a) through 9(d) below.
(2) Within ten (10) days after receiving a rescission notice from LNC: (A) Grantee must surrender to LNC the Shares acquired upon settlement of this award; or (B) if such Shares have been sold or transferred, (i) Grantee must make a payment to LNC of the proceeds from such sale or transfer, or (ii) if there are no proceeds from such transfer, Grantee must make a payment to LNC equal to the Fair Market Value of such Shares on the date of such transfer.
In all cases, Grantee shall pay to LNC the gross amount of any gain realized or payment received (not net of any withholding or other taxes paid by Grantee) as a result of the RSUs.
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9. |
Covenants. |
Grantee recognizes and acknowledges that during the term of employment, Grantee has had, and will continue to have, access to confidential and proprietary business information and trade secrets belonging to LNC and LNC’s customers, including, but not limited to, customer information, customer lists, pricing, products, information relating to sales, sales leads, sales performance, sales volume, LNC business and financial strategy, LNC quarterly business reviews, and LNC data, all of which are of substantial value to LNC. Grantee therefore agrees that the restrictive covenants below are reasonable and necessary to protect LNC’s trade secrets and confidential information.
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(a) Non-Competition. From the Grant Date through the six (6) month period after the date Shares are distributed in settlement of the RSUs, Grantee may not become employed by, work on behalf of, consult with, or otherwise render services that are the same or similar to the services rendered by Grantee to the business unit(s) for which Grantee provided Service or otherwise had responsibilities for within six (6) months prior to his/her Separation from Service to any other business, firm, person, partnership, corporation or other organization that competes with or provides, or is planning to provide, the same or similar products and/or services. Grantee understands and agrees that due to the nature of LNC’s nationwide business and the nationwide scope of Grantee’s employment, this restriction is nationwide in scope. |
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(b) Non-Solicitation of Employees and Other Service Providers. During Grantee’s employment with LNC, and for a period of twelve (12) months following the date of Grantee’s Separation from Service, for any reason, Grantee shall not directly or indirectly hire, manage, solicit, or recruit, or aid in the hiring, soliciting, or recruiting of any persons who are at the time of hire, or were at any time within the six (6) months prior to hire, employees, agents, representatives, or consultants of LNC whom Grantee had hired, managed, supervised, or otherwise became familiar in any capacity with as a result of his/her Service. |
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(c) Non-Disparagement. Grantee agrees not to defame LNC or any of its affiliates, products, employees, officers, directors or services, or make or solicit any comments, statement or the like to the media or others that may be considered to be derogatory or harmful to the good name or business reputation of LNC or its affiliates, except that Grantee may testify truthfully in any legal proceeding where his testimony is compelled by subpoena under oath. This provision also applies to any comments or statements which Grantee may make on the internet, including but not limited to comments, statements and/or videos placed in email, and/or on YouTube, Instagram, Facebook, Twitter or any other social media site. |
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(d) Non-Disclosure & Ideas Provision. Grantee shall not, without prior written authorization from LNC, disclose to anyone outside LNC, or use in other than LNC’s business, any trade secrets or confidential and/or proprietary information received from or on behalf of, developed for, or otherwise relating to the business of, LNC. Any confidentiality or non-disclosure obligations in this Agreement does not prohibit or restrict Grantee (or Grantee’s
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attorney) from initiating communications directly with, or responding to any inquiry from, or providing testimony before, the SEC, FINRA, any other self-regulatory organization, or any other state, local, or federal regulatory, investigative, or enforcement entity, agency, or authority. For purposes of this Agreement, a confidential disclosure to government officials or attorneys solely for purposes of reporting or investigating a suspected violation of the law (or disclosures made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal) is immune from civil and criminal liabilities under federal and state trade secret laws. Furthermore, Grantee agrees to disclose and assign to LNC all rights and interest in any invention or idea that Grantee developed or helped develop for actual or related business, research, or development work during the period of Grantee’s Service. |
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(e) Consent to Injunction; Attorneys’ Fees and Costs. Grantee acknowledges that any violation of the non-competition, non-solicitation, non- disparagement, or non-disclosure provisions described in Subparagraphs 9(a) through 9(d) would entail irreparable injury to the business and goodwill of LNC and would jeopardize the competitive position in the marketplace held by LNC. Therefore, Grantee also acknowledges that, in the event of any violation of Subparagraphs 9(a) through 9(d) by Grantee, the cancellation/rescission of the award alone will be inadequate to compensate LNC, and LNC will be entitled, as a matter of right and without the obligation to post a bond or other security, to an injunction issued by any court of competent jurisdiction and other equitable relief to prevent any actual, intended or likely violation of this Agreement. If LNC brings legal action for injunctive relief, LNC shall have the benefit of the full periods of the post-employment covenants set forth above. The injunction shall run from the date injunctive relief is granted but reduced by the time period after the separation of employment that Grantee was not in violation of the applicable covenant(s). In the event LNC elects to seek any remedy by court action, rendered necessary as the result of any violation or threatened violation of the Agreement by Grantee, and LNC prevails in such action, Grantee shall be responsible to pay all costs and attorneys’ fees incurred by LNC in taking such action. |
Notwithstanding anything herein to the contrary, LNC may, in its discretion, waive Grantee’s compliance with Subparagraphs 9(a) through 9(d) in whole or part in any individual case. Moreover, if Grantee’s Service is terminated by LNC other than for Cause, a failure by Grantee to comply with the provisions of Subparagraph 9(a) through 9(d) above, after such termination shall not in and of itself cause rescission if the Shares were distributed in settlement of the RSUs prior to Grantee’s date of termination.
If any term, provision or paragraph of this Paragraph 9 shall be determined by a court to be invalid or unenforceable for any reason, the term, provision or paragraph shall be construed so as to be enforceable to the maximum extent compatible with the applicable laws in effect at the time; and such determination of invalidity shall not affect the remaining terms, provisions or paragraphs of this Agreement, which shall continue to be given full force and effect. If any term, provision or paragraph of this Paragraph 9 shall be determined by a court to be unenforceable because of the scope or duration thereof, the parties hereby expressly agree that the court making such determination shall have the power to reduce the scope or duration and/or restrict the geographical area of such term, provision or paragraph and/or to delete such specific words or phrases which the court shall deem necessary to permit enforcement of such term, provision or paragraph in restricted form. If any term, provision or paragraph of this Paragraph
9 is found to be in conflict with any state or local law or regulation, the applicable state or local law will control to the extent that such state or local law applies to the Grantee.
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10. Definitions. As used in this Agreement: |
“Cause” means (a) a conviction of a crime that is job related or that may otherwise cause harm to the reputation of LNC or any Subsidiary; (b) any act or omission detrimental to the conduct of business of LNC or any Subsidiary; (c) inability to obtain or retain proper licenses; (d) theft, dishonesty, fraud or misrepresentation; (e) failure to cooperate or be truthful in connection with an investigation related to LNC or any Subsidiary; (f) violation of any rule or regulation of any regulatory agency or self-regulatory agency; (g) violation of any policy or rule of LNC or any Subsidiary; or (h) unsatisfactory performance that does not meet expectations after coaching or counseling. Cause shall be determined in the sole discretion of the Committee.
“Retires” or “Retirement” means Grantee’s Separation from Service, other than for Cause, from LNC or any Subsidiary either (i) at age 55 or older with at least five (5) years of Service or (ii) at any age with at least seven (7) years of Service as a member of LNC’s Senior Management Committee.
“Service” means Grantee’s continuous service as a common law employee of, or as a planner with a full-time agent’s contract with, LNC or any Subsidiary. Service as a common law employee is the period of time Grantee is on the payroll of LNC or a Subsidiary but prior to the time the Grantee has had a Separation from Service. Service as a planner is the period of time Grantee’s full-time agent’s contract is in effect but prior to the time the Grantee has had a Separation from Service.
“Separation from Service” has the meaning given such term in Code section 409A and the regulations issued thereunder.
“Subsidiary” means a corporation in which LNC has ownership of at least twenty-five percent.
“Total Disability” means (as determined by the Committee) a disability that results in Grantee being unable to engage in any occupation or employment for wage or profit for which Grantee is, or becomes, reasonably qualified by training, education or experience. In addition, the disability must have lasted six (6) months and be expected to continue for at least six (6) more months or be expected to continue unto death.
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11. Compliance with Securities Laws. Shares shall not be issued with respect to RSUs unless the issuance and delivery of such Shares shall comply with all relevant provisions of state and federal laws, rules and regulations, and, in the discretion of LNC, shall be further subject to the approval of counsel for LNC with respect to that compliance. |
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12. Governing Law; Forum for Disputes. This Agreement shall be governed by the laws of the Commonwealth of Pennsylvania, without giving effect to any choice of law or conflict of law provision or rule (whether of the chosen state or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the Commonwealth of Pennsylvania. Venue for any dispute relating to the Agreement shall be in the state or federal
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court, as applicable, having jurisdiction over claims arising in Delaware County, Pennsylvania, or such other venue as determined by LNC to best enforce its rights under this Agreement. To the extent legally possible, Grantee expressly waives any objections to LNC’s choice of venue and waives any arguments based on the inconvenience of the selected venue. |
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13. Incorporation of Plan Terms. This award is subject to the terms and conditions of the Plan. Such terms and conditions of the Plan are incorporated into and made a part of this Agreement by reference. In the event of any conflicts between the provisions of this Agreement and the terms of the Plan, the terms of the Plan will control. Capitalized terms used but not defined in this Agreement shall have the meanings set forth in the Plan unless the context clearly requires an alternative meaning. |
IN WITNESS WHEREOF, LNC, by its duly authorized officer has signed this Agreement as of the effective date set out above.
LINCOLN NATIONAL CORPORATION
By: /s/ Ellen Cooper
Ellen Cooper
President and Chief Executive Officer
Restricted Stock Unit Grant, Plan No. 225
3 Year Cliff Vesting
SMC CIO
Exhibit 10.56
SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
This SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this “Amendment”) is entered into as of December 15, 2022, by and among LINCOLN NATIONAL CORPORATION, an Indiana corporation, as a borrower (the “Company”), the other Account Parties signatory hereto, the Banks signatory hereto, and BANK OF AMERICA, N.A., as Administrative Agent (the “Administrative Agent”).
W I T N E S S E T H:
WHEREAS, the Company, the other Account Parties from time to time party thereto, the Administrative Agent, the Fronting Issuing Banks from time to time party thereto, and the Banks from time to time party thereto are parties to an Amended and Restated Credit Agreement, dated as of June 21, 2021 (as amended, restated, amended and restated, supplemented, and otherwise modified from time to time prior to the date hereof, the “Existing Credit Agreement”; the Existing Credit Agreement as amended hereby, the “Amended Credit Agreement”); and
WHEREAS, the Company, the other Account Parties signatory hereto, the Banks and the Administrative Agent wish to amend the Existing Credit Agreement pursuant to Section 10.05 of the Existing Credit Agreement.
NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is agreed as follows:
SECTION 1.Definitions.
Unless otherwise indicated, all capitalized terms used herein (including the preamble and the recitals) and not otherwise defined shall have the respective meanings provided to such terms in the Amended Credit Agreement.
SECTION 2.Amendments to Existing Credit Agreement.
Subject to the satisfaction (or waiver) of the conditions set forth in Section 3 of this Amendment:
(a)the Existing Credit Agreement (excluding the schedules and exhibits thereto, which shall remain in full force and effect) is hereby amended as set forth in Annex A attached hereto such that all of the newly inserted double underlined text (indicated textually in the same manner as the following example: double-underlined text) and any formatting changes attached hereto
1
shall be deemed to be inserted and all stricken text (indicated textually in the same manner as the following example: stricken text) shall be deemed to be deleted therefrom.
SECTION 3.Conditions of Effectiveness of this Amendment. This Amendment shall become effective on the date when the following conditions shall have been satisfied (or waived) (the “Amendment Effective Date”):
(a)Receipt by the Administrative Agent of counterparts of this Amendment, duly executed by the Account Parties and each Bank.
SECTION 4.Representations and Warranties. To induce the Administrative Agent and the Banks to enter into this Amendment, the Company represents and warrants to the Administrative Agent, and the Banks on and as of the Amendment Effective Date that, in each case:
(a)all of the representations and warranties contained in the Amended Credit Agreement or the other Credit Documents are true and correct in all material respects on the Amendment Effective Date both immediately before and after giving effect to this Amendment, with the same effect as though such representations and warranties had been made on and as of the Amendment Effective Date (it being understood that (x) any representation or warranty that is qualified by materiality or Material Adverse Effect shall be required to be true and correct in all respects after taking into account such qualification and (y) any representation or warranty made as of a specific date shall be true and correct in all material respects (or all respects after taking into account such qualification, as the case may be) as of such date); and
(b)no Default or Event of Default exists as of the Amendment Effective Date, after giving effect to this Amendment.
SECTION 5.Reference to and Effect on the Amended Credit Agreement and the Credit Documents; Ratification.
(a)On and after the Amendment Effective Date, each reference in the Existing Credit Agreement to “this Agreement,” “hereunder,” “hereof” or words of like import referring to the Existing Credit Agreement shall mean and be a reference to the Amended Credit Agreement.
(b)The Existing Credit Agreement and each of the other Credit Documents, as specifically amended by this Amendment, are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed.
(c)The Company expressly acknowledges and agrees that (i) there has not been, and this Amendment does not constitute or establish, a novation with respect to the Existing Credit Agreement or any of the other Credit Documents, or a mutual departure from the strict terms, provisions, and conditions thereof, other than as set forth herein, and (ii) nothing in this Amendment shall affect or limit Agent’s or the Banks’ right to demand payment of liabilities owing from Company to Agent or the Banks under, or to demand strict performance of the terms, provisions and conditions of, the Amended Credit Agreement and the other Credit Documents, to exercise any and all rights, powers, and remedies under the Amended Credit Agreement or the
2
other Credit Documents or at law or in equity, or to do any and all of the foregoing, immediately at any time after the occurrence of a Default or an Event of Default under the Amended Credit Agreement or the other Credit Documents.
(d)The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any Bank, the Administrative Agent or any Fronting Issuing Bank under any of the Credit Documents, nor constitute a waiver of any provision of any of the Credit Documents.
SECTION 6.New York Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York.
SECTION 7.Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof.
SECTION 8.Electronic Execution. The words “execute,” “execution,” “signed,” “signature,” and words of like import in or related to any document to be signed in connection with this Amendment shall be deemed to include electronic signatures and contract formations on electronic platforms approved by the Administrative Agent, or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic Transactions Act; provided that notwithstanding anything contained herein to the contrary, neither the Account Parties nor the Administrative Agent are under any obligation to agree to accept electronic signatures in any form or in any format unless expressly agreed to by the applicable Account Party or the Administrative Agent pursuant to procedures approved by it.
SECTION 9. Miscellaneous. Sections 10.03, 10.09, 10.12, and 10.17 of the Existing Credit Agreement are incorporated herein mutatis mutandis. This Amendment shall constitute a Credit Document.
3
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized officers to execute and deliver this Amendment as of the date first above written.
By: /s/ Randal J. Freitag
Name: Randal J. Freitag
Title: Executive Vice President and
Chief Executive Officer
Name: Shantanu Mishra
Title: Senior Vice President and Treasurer
[Lincoln – Signature Page to Second Amendment]
SUBSIDIARY ACCOUNT PARTIES
LINCOLN NATIONAL REINSURANCE
COMPANY (BARBADOS) LIMITED
By: /s/ Shantanu Mishra
Name: Shantanu Mishra
Title: Senior Vice President and Treasurer
THE LINCOLN NATIONAL LIFE INSURANCE
COMPANY
By: /s/ Shantanu Mishra
Name: Shantanu Mishra
Title: Senior Vice President and Treasurer
FIRST PENN-PACIFIC LIFE INSURANCE COMPANY
By: /s/ Shantanu Mishra
Name: Shantanu Mishra
Title: Senior Vice President and Treasurer
LINCOLN LIFE AND ANNUITY COMPANY OF NEW YORK
By: /s/ Shantanu Mishra
Name: Shantanu Mishra
Title: Senior Vice President and Treasurer
LINCOLN REINSURANCE COMPANY OF VERMONT I
By: /s/ Shantanu Mishra
Name: Shantanu Mishra
Title: Senior Vice President and Treasurer
[Lincoln – Signature Page to Second Amendment]
SUBSIDIARY ACCOUNT PARTIES (cont’d)
LINCOLN REINSURANCE COMPANY OF VERMONT III
By: /s/ Shantanu Mishra
Name: Shantanu Mishra
Title: Senior Vice President and Treasurer
LINCOLN REINSURANCE COMPANY OF VERMONT IV
By: /s/ Shantanu Mishra
Name: Shantanu Mishra
Title: Senior Vice President and Treasurer
LINCOLN REINSURANCE COMPANY OF VERMONT V
By: /s/ Shantanu Mishra
Name: Shantanu Mishra
Title: Senior Vice President and Treasurer
LINCOLN REINSURANCE COMPANY OF VERMONT VI
By: /s/ Shantanu Mishra
Name: Shantanu Mishra
Title: Senior Vice President and Treasurer
LINCOLN REINSURANCE COMPANY OF VERMONT VII
By: /s/ Shantanu Mishra
Name: Shantanu Mishra
Title: Senior Vice President and Treasurer
[Lincoln – Signature Page to Second Amendment]
SUBSIDIARY ACCOUNT PARTIES (cont’d)
LINCOLN FINANCIAL REINSURANCE COMPANY OF VERMONT
By: /s/ Shantanu Mishra
Name: Shantanu Mishra
Title: President and Treasurer
[Lincoln – Signature Page to Second Amendment]
BANK OF AMERICA, N.A., as Administrative Agent
By: /s/ Angela Larkin
Name: Angela Larkin
Title: Vice President
[Lincoln – Signature Page to Second Amendment]
BANK OF AMERICA, N.A., as a Bank and as Fronting Issuing Bank
By: /s/ Chris Choi
Name: Chris Choi
Title: Managing Director
[Lincoln – Signature Page to Second Amendment]
JPMORGAN CHASE BANK, N.A., as a Bank
By: /s/ Kristen M. Murphy
Name: Kristen M. Murphy
Title: Vice President
[Lincoln – Signature Page to Second Amendment]
WELLS FARGO BANK, NATIONAL ASSOCIATION, as a Bank
By: /s/ Kimberly Shaffer
Name: Kimberly Shaffer
Title: Managing Director
[Lincoln – Signature Page to Second Amendment]
BNP PARIBAS, as a Bank
By: /s/ Monica Hanson
Name: Monica Hanson
Title: Managing Director
By: /s/ Patrick Cunnane
Name: Patrick Cunnane
Title: Vice President
[Lincoln – Signature Page to Second Amendment]
CITIBANK, N.A., as a Bank
By: /s/ Peter Bickford
Name: Peter Bickford
Title: Vice President and Managing Director
[Lincoln – Signature Page to Second Amendment]
CREDIT SUISSE AG, NEW YORK BRANCH, as a Bank
By: /s/ Doreen Barr
Name: Doreen Barr
Title: Authorized Signatory
By: /s/ Michael Dieffenbacher
Name: Michael Dieffenbacher
Title: Authorized Signatory
[Lincoln – Signature Page to Second Amendment]
DEUTSCHE BANK AG NEW YORK BRANCH, as a Bank
By: /s/ Ming K Chu
Name: Ming K Chu ming.k.chu@db.com
Title: Director +1-212-250-5451
By: /s/ Annie Chung
Name: Annie Chung annie.chung@db.com
Title: Director +1-212-250-6375
[Lincoln – Signature Page to Second Amendment]
GOLDMAN SACHS BANK USA, as a Bank
By: /s/ Keshia Leday
Name: Keshia Leday
Title: Authorized Signatory
[Lincoln – Signature Page to Second Amendment]
HSBC BANK USA, N.A., as a Bank
By: /s/ Daniel Hartmann
Name: Daniel Hartmann
Title: Director
[Lincoln – Signature Page to Second Amendment]
PNC BANK, NATIONAL ASSOCIATION, as a Bank
By: /s/ Srisupen Andersen
Name: Srisupen Andersen
Title: Vice President
[Lincoln – Signature Page to Second Amendment]
STATE STREET BANK AND TRUST COMPANY, as a Bank
By: /s/ Kimberly Costa
Name: Kimberly Costa
Title: Vice President
[Lincoln – Signature Page to Second Amendment]
THE TORONTO-DOMINION BANK, NEW YORK BRANCH, as a Bank
By: /s/ Betty Chang
Name: Betty Chang
Title: Authorized Signatory
[Lincoln – Signature Page to Second Amendment]
BARCLAYS BANK PLC, as a Bank
By: /s/ Craig J. Malloy
Name: Craig J. Malloy
Title: Director
[Lincoln – Signature Page to Second Amendment]
SOCIÉTÉ GÉNÉRALE, as a Bank
By: /s/ Arun Bansal
Name: Arun Bansal
Title: Managing Director
[Lincoln – Signature Page to Second Amendment]
THE NORTHERN TRUST COMPANY, as a Bank
By: /s/ Edward C. Jones
Name: Edward C. Jones
Title: Second Vice President
[Lincoln – Signature Page to Second Amendment]
U.S. BANK NATIONAL ASSOCIATION, as a Bank
By: /s/ Kyle Rinderle
Name: Kyle Rinderle
Title: Assistant Vice President
[Lincoln – Signature Page to Second Amendment]
THE BANK OF NEW YORK MELLON, as a Bank
By: /s/ Matthew Morris
Name: Matthew Morris
Title: Vice President
[Lincoln – Signature Page to Second Amendment]
Annex A
Amended Credit Agreement
[Please see attached]
Marked Version Reflecting Changes Pursuant to THE SECOND AMENDMENT
TO AMENDED AND RESTATED CREDIT AGREEMENT dated DECEMBER 15, 2022
ADDED TEXT SHOWN UNDERSCORED
DELETED TEXT SHOWN STRIKETHROUGH
Deal CUSIP: 53404UAU8
Revolver CUSIP: 53404UAV6
AMENDED AND RESTATED CREDIT AGREEMENT
dated as of
June 21, 2021
amended as of November 19, 2021 and December 15, 2022
among
LINCOLN NATIONAL CORPORATION,
as an Account Party and Guarantor
The SUBSIDIARY ACCOUNT PARTIES,
as additional Account Parties
The BANKS Party Hereto
and
BANK OF AMERICA, N.A.
as Administrative Agent
_____________________
____________________
BOFA SECURITIES, INC., JPMORGAN CHASE BANK, N.A.,
and
WELLS FARGO SECURITIES, LLC,
as Joint Lead Arrangers and Joint Bookrunners
and
WELLS FARGO BANK, NATIONAL ASSOCIATION,
as Syndication Agents
and
BOFA SECURITIES, INC.
as Sustainability Coordinator
TABLE OF CONTENTS
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Base Rate Loans Substituted for Affected Euro-Dollar Term SOFR Loans |
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Discharge Only Upon Payment In Full; Reinstatement In Certain Circumstances |
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Acknowledgement and Consent to Bail-In of Affected Financial Institutions |
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-iv-
Schedule ICommitments
Schedule IIContinued Existing Letters of Credit
Schedule IIIRestricted Subsidiaries
Schedule IVExisting Instruments
EXHIBIT AForm of Note
EXHIBIT BOpinion of Counsel of the Company
EXHIBIT COpinion of Morgan, Lewis & Bockius LLP, Special New York Counsel to the Administrative Agent
EXHIBIT DForm of Assignment and Assumption
EXHIBIT EForm of Confirming Bank Agreement
EXHIBIT FForm of Subsidiary Joinder Agreement
EXHIBIT GSubsidiary Termination Notice
-v-
This AMENDED AND RESTATED CREDIT AGREEMENT dated as of June 21, 2021 among LINCOLN NATIONAL CORPORATION (the “Company”), the SUBSIDIARY ACCOUNT PARTIES party hereto, the BANKS party hereto and BANK OF AMERICA, N.A., as Administrative Agent, amends and restates in its entirety that certain Credit Agreement, dated as of July 31, 2019, among the Company, the Subsidiary Account Parties, the Administrative Agent, the Banks party thereto, and the other parties thereto.
The Account Parties have requested (i) that the Existing Credit Agreement be amended and restated in its entirety and (ii) that the Banks issue letters of credit for their account and make loans to them in an aggregate face or principal amount not exceeding $2,500,000,000 at any one time outstanding, and the Banks are willing to amend and restate the Existing Credit Agreement and prepared to issue such letters of credit and make such loans upon the terms and conditions hereof.
Accordingly, the parties hereto agree as follows:
SECTION 1.01.Definitions. The following terms, as used herein, have the following meanings: “Account Party” means any of the Company and the Subsidiary Account Parties, as the context may require, and “Account Parties” means all of the foregoing.
“Additional Commitment Bank” means (a) a Bank or (b) any other Person which is a NAIC Approved Bank, in each case that agrees to provide a Commitment or (in the case of a Bank) agrees to increase the amount of its Commitment pursuant to Section 2.11(c), with the consent of the Administrative Agent (such consent not to be unreasonably withheld).
“Adjusted Consolidated Net Worth” means, at any date, without duplication, the sum of (a) the consolidated shareholders’ equity of the Company and its Consolidated Subsidiaries, plus (without duplication) (b) the aggregate principal amount of Instruments, to the extent given equity credit by S&P and/or Moody’s; provided that (i) for purposes of clause (b) above, (A) in the case such Instruments are given equity credit by both S&P and Moody’s, the higher of the two amounts shall apply and (B) the equity credit treatment given by S&P or Moody’s to any Instrument outstanding as of the Effective Date (and listed on Schedule IV hereto) shall be deemed to apply to such Instrument to the extent such Instrument remains outstanding, irrespective of any change in the equity credit treatment given by either such rating agency to such Instrument at any time after the Effective Date (for avoidance of doubt, any change in the amount or percentage of the equity credit given to such Instrument that is contemplated in the equity credit treatment given to such Instrument as of the Effective Date, including without limitation any such change resulting from the life to maturity of such Instrument or the amount of all such Instruments as a percentage of total adjusted capital (as determined by S&P), shall continue to be given effect after the Effective Date for purposes of clause (b) above); (ii) there shall be excluded from “Adjusted Consolidated Net Worth” (A)
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accumulated other comprehensive income (or loss), as shown on the relevant consolidated balance sheet of the Company and its Consolidated Subsidiaries most recently filed with the SEC, (B) all obligations of the Company and its Subsidiaries in respect of Disqualified Capital Stock and, (C) all noncontrolling interests in subsidiaries (as determined in accordance with the Statement of Financial Accounting Standards No. 160, entitled “Noncontrolling Interests in Consolidated Financial Statements”), and (D) for all dates on or after January 1, 2023, the Annuity Adjustment Amount; and (iii) the calculation of “Adjusted Consolidated Net Worth” shall not give effect to any election under the Statement of Financial Accounting Standards No. 159, entitled “The Fair Value Option for Financial Assets and Financial Liabilities” (or any similar accounting principle) permitting a Person to value its financial liabilities at the fair value thereof.
“Adjusted LIBOR” means (a) for any Interest Period with respect to a Euro-Dollar Loan, the rate per annum equal to the London Interbank Offered Rate as administered by ICE Benchmark Administration (or any other Person that takes over the administration of such rate) for U.S. Dollars for a period equal in length to such Interest Period (“LIBOR”) as published on the applicable Bloomberg screen page (or such other commercially available source providing such quotations as may be designated by the Administrative Agent from time to time) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, for Dollar deposits (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period;
(b)for any interest calculation with respect to a Base Rate Loan on any date, the rate per annum equal to LIBOR, at or about 11:00 a.m., London time determined two Business Days prior to such date for U.S. Dollar deposits with a term of one month commencing that day; and
(c)if Adjusted LIBOR shall be less than zero, such rate shall be deemed zero for purposes of this Agreement.
“Administrative Agent” means Bank of America, in its capacity as agent for the Banks under any of the Credit Documents, and its successors in such capacity.
“Administrative Questionnaire” means, with respect to each Bank, an administrative questionnaire in the form prepared by the Administrative Agent and submitted to the Administrative Agent (with a copy to the Company) duly completed by such Bank.
“Affected Financial Institution” means (a) any EEA Financial Institution or (b) any UK Financial Institution.
“Affiliate” of any Person means any other Person directly or indirectly controlling, controlled by or under common control with such Person. A Person shall be deemed to control another Person if the controlling Person owns 10% or more of any class of voting securities (or other ownership interests) of the controlled Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of stock, by contract or otherwise.
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“Agreement” means this Amended and Restated Credit Agreement, as it may be amended or modified and in effect from time to time.
“Annuity Adjustment Amount” means, for any date on or after January 1, 2023, an amount equal to the sum of (a) the transition impact of adopting ASU 2018-12 related to market risk benefits (“MRB”) on the Company’s January 1, 2021, retained earnings, as reflected in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, (b) the change in carrying value of liabilities associated with annuity guarantees, measured after-tax and cumulatively across each quarter commencing with the quarter ended March 31, 2021, which for the avoidance of doubt, will include the ongoing change in total reserves due to MRB, and (c) the change in the fair value of derivatives owned by the Company or any of its Consolidated Subsidiaries for the purpose of hedging the change in the liability associated with annuity guarantees, measured after-tax and cumulatively across each quarter commencing with the quarter ended March 31, 2023. The amounts referenced in clauses (b) and (c) will be as reported quarterly in the Company’s Form 10-Q or 10-K, as applicable, under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; provided, that such adjustments shall be determined in a manner substantially consistent with past practice as reflected in the calculation for the fiscal year ended December 31, 2021, as updated as disclosed in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 to reflect adoption of ASU 2018-12. The Annuity Adjustment Amount may be a negative value (in which case it shall increase Adjusted Consolidated Net Worth) or positive value (in which case it shall reduce Adjusted Consolidated Net Worth) or zero. For the avoidance of doubt, an increase in the carrying value of liabilities referenced in clause (b) and/or a decrease in the fair value of derivatives referenced in clause (c) would have a negative impact on the Annuity Adjustment Amount, and the inverse would have a positive impact on the Annuity Adjustment Amount.
“Anti-Corruption Laws” has the meaning set forth in Section 4.17.
“Anti-Money Laundering Laws” has the meaning set forth in Section 4.17.
“Applicable Lending Office” means, as to each Bank, its office, branch or Affiliate located at its address set forth in its Administrative Questionnaire or such other office, branch or Affiliate of such Bank as it may hereafter designate as its Applicable Lending Office for purposes hereof by notice to the Company and the Administrative Agent.
“Applicable Facility Fee Rate”, “Applicable Letter of Credit Commission” and “Applicable Margin” means, for any day, with respect to the facility fees payable hereunder or with respect to the letter of credit fees payable under Section 2.10(b) or with respect to the interest margin on any Base Rate Loan or Euro-DollarTerm SOFR Loan, as the case may be, the applicable rate per annum set forth below under the caption “Applicable Facility Fee Rate”, “Applicable Letter of Credit Commission”, “Applicable Margin (Base Rate Loans)” or “Applicable Margin (Euro-DollarTerm SOFR Loans)”, respectively, based upon the ratings by Moody’s and S&P, respectively, applicable on such date to the Index Debt:
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|
|
Applicable Facility Fee Rate |
Applicable Letter of Credit Commission |
Applicable Margin (Base Rate Loans) |
Applicable Margin (Euro-DollarTerm SOFR Loans) |
|
|
Category 1 |
> A1 / A+ |
||||
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Category 2 |
A / A2 |
||||
|
Category 3 |
A- / A3 |
||||
|
Category 4 |
BBB+ / Baa1 |
||||
|
Category 5 |
< BBB / Baa2 |
For purposes of the foregoing, (a) if the ratings established or deemed to have been established by Moody’s and S&P for the Index Debt shall fall within different Categories that are one Category apart, the Applicable Facility Fee Rate, the Applicable Letter of Credit Commission and the Applicable Margin shall be determined by reference to the Category of the higher of the two ratings; (b) if the ratings established or deemed to have been established by Moody’s and S&P for the Index Debt shall fall within different Categories that are more than one Category apart, the Applicable Facility Fee Rate, the Applicable Letter of Credit Commission and the Applicable Margin shall be determined by reference to the Category next below that of the higher of the two ratings; (c) if only one of Moody’s and S&P shall have in effect a rating for the Index Debt, the Applicable Facility Fee Rate, the Applicable Letter of Credit Commission and the Applicable Margin shall be determined by reference to the Category of such rating; (d) if neither Moody’s nor S&P shall have in effect a rating for the Index Debt (other than by reason of the circumstances referred to in the last sentence of this definition), then the applicable rating shall be determined by reference to Category 5; and (e) if the ratings established or deemed to have been established by Moody’s and S&P for the Index Debt shall be changed (other than as a result of a change in the rating system of Moody’s or S&P), such change shall be effective as of the date on which it is first announced by the applicable rating agency, irrespective of when notice of such change shall have been furnished by the Company to the Administrative Agent and the Banks pursuant to Section 5.01 or otherwise. Each change in the Applicable Facility Fee Rate, the Applicable Letter of Credit Commission and the Applicable Margin shall apply during the period commencing on the effective date of such change and ending on the date immediately preceding the effective date of the next such change. If the rating system of Moody’s or S&P shall change, or if either such rating agency shall cease to be in the business of rating corporate debt obligations, the Company and the Banks shall negotiate in good faith to amend this definition to reflect such changed rating system or the unavailability of ratings from such rating agency and, pending the effectiveness of any such amendment, the Applicable Facility Fee Rate, the Applicable Letter of Credit Commission and the Applicable Margin shall be determined by reference to the rating of Moody’s and/or S&P, as the case may be, most recently in effect prior to such change or cessation. References herein to “Applicable Margin” shall refer to the Applicable Margin for the relevant Type of Loan, as applicable. The rates set forth herein may be adjusted from time to time as set forth in Schedule 2.18.
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“Applicable Percentage” means, with respect to any Bank, the percentage of the total Commitments represented by such Bank’s Commitment; provided that in the case of Section 2.17 when a Defaulting Bank shall exist, “Applicable Percentage” shall mean the percentage of the total Commitments (disregarding any Defaulting Bank’s Commitment) represented by such Bank’s Commitment. If the Commitments have terminated or expired, the Applicable Percentages shall be determined based upon the Commitments most recently in effect, giving effect to any assignments and to any Bank’s status as a Defaulting Bank at the time of determination.
“Assignee” has the meaning set forth in Section 10.06(c).
“Assignment and Assumption” means an assignment and assumption entered into by a Bank and an assignee (with the consent of any party whose consent is required by Section 10.06), and accepted by the Administrative Agent, in the form of Exhibit D or any other form approved by the Administrative Agent.
“Available Tenor” means, as of any date of determination and with respect to the then-current Benchmark, as applicable, (x) if the then-current Benchmark is a term rate, any tenor for such Benchmark that is or may be used for determining the length of an Interest Period or (y) otherwise, any payment period for interest calculated with reference to such Benchmark, as applicable, pursuant to this Agreement as of such date.
“ASU 2018-12” means the Accounting Standards Update No. 2018-12 regarding the accounting for long-duration insurance contracts issued by FASB on August 15, 2018.
“Bail-In Action” means the exercise of any Write-Down and Conversion Powers by the applicable Resolution Authority in respect of any liability of an Affected Financial Institution.
“Bail-In Legislation” means, (a) with respect to any EEA Member Country implementing Article 55 of Directive 2014/59/EU of the European Parliament and of the Council of the European Union, the implementing law, rule, regulation or requirement for such EEA Member Country from time to time which is described in the EU Bail-In Legislation Schedule, and (b) with respect to the United Kingdom, Part I of the United Kingdom Banking Act 2009 (as amended from time to time) and any other law, regulation or rule applicable in the United Kingdom relating to the resolution of unsound or failing banks, investment firms or other financial institutions or their affiliates (other than through liquidation, administration or other insolvency proceedings).
“Bank” means each Person listed under the caption “BANKS” on the signature pages hereof, and each other Person that shall become a party hereto as a Bank pursuant to this Agreement (other than any such Person that ceases to be a Bank by means of assignment pursuant to this Agreement), together with its successors. For purposes of clarification, the term “Bank” shall include each Fronting Issuing Bank.
“Bank of America” means Bank of America, N.A.
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“Bankruptcy Event” means, with respect to any Person, such Person becomes the subject of a bankruptcy or insolvency proceeding, or has had a receiver, conservator, trustee, administrator, custodian, assignee for the benefit of creditors or similar Person charged with the reorganization or liquidation of its business appointed for it, or, in the good faith determination of the Administrative Agent, has taken any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any such proceeding or appointment, provided that a Bankruptcy Event shall not result solely by virtue of any ownership interest, or the acquisition of any ownership interest, in such Person by a governmental body, agency or official or instrumentality thereof, provided, further, that such ownership interest does not result in or provide such Person with immunity from the jurisdiction of courts within the United States or from the enforcement of judgments or writs of attachment on its assets or permit such Person (or such governmental body, agency or official or instrumentality) to reject, repudiate, disavow or disaffirm any contracts or agreements made by such Person.
“Base Rate” means for any day a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus 1/2 of 1%, (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its “prime rate,” and (c) the Adjusted LIBORTerm SOFR with a term of one month plus 1.00% and (d) 1.00%. The “prime rate” is a rate set by Bank of America based upon various factors including Bank of America’s costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in such prime rate announced by Bank of America shall take effect at the opening of business on the day specified in the public announcement of such change. If the Base Rate is being used as an alternate rate of interest pursuant to Section 8.01 hereof, then the Base Rate shall be the greater of clauses (a) and, (b) and (d) above and shall be determined without reference to clause (c) above.
“Base Rate Loan” means a Loan to be made by a Bank pursuant to Section 2.04 as a Base Rate Loan in accordance with the applicable Notice of Borrowing or Article VIII.
“Benchmark” means, initially, Adjusted LIBOR; provided that if a replacement of the Benchmark has occurred pursuant to Section 8.01(c) then “Benchmark” means the applicable Benchmark Replacement to the extent that such Benchmark Replacement has replaced such prior benchmark rate. Any reference to “Benchmark” shall include, as applicable, the published component used in the calculation thereof.
“Benchmark Replacement” means:
(1) For purposes of Section 8.01(c)(i), the first alternative set forth below that can be determined by the Administrative Agent:
(a) the sum of: (i) Term SOFR and (ii) 0.11448% (11.448 basis points) for an Available Tenor of one-month’s duration, 0.26161% (26.161 basis points) for an Available Tenor of three-months’ duration, 0.42826% (42.826 basis points) for an Available Tenor of six-months’ duration, and 0.71513% (71.513 basis points) for an Available Tenor of twelve-months’ duration, or
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(b) the sum of: (i) Daily Simple SOFR and (ii) 0.26161% (26.161 basis points);
provided that, if initially Adjusted LIBOR is replaced with the rate contained in clause (b) above (Daily Simple SOFR plus the applicable spread adjustment) and subsequent to such replacement, the Administrative Agent determines that Term SOFR has become available and is administratively feasible for the Administrative Agent in its sole discretion, and the Administrative Agent notifies the Company and each Bank of such availability, then from and after the beginning of the Interest Period, relevant interest payment date or payment period for interest calculated, in each case, commencing no less than thirty (30) days after the date of such notice, the Benchmark Replacement shall be as set forth in clause (a) above; and
(2) For purposes of Section 8.01(c)(ii), the sum of (a) the alternate benchmark rate and (b) an adjustment (which may be a positive or negative value or zero), in each case, that has been selected by the Administrative Agent and the Company as the replacement Benchmark giving due consideration to any evolving or then-prevailing market convention, including any applicable recommendations made by a Relevant Governmental Body, for U.S. dollar-denominated syndicated credit facilities at such time;
provided that, if the Benchmark Replacement as determined pursuant to clause (1) or (2) above would be less than 0%, the Benchmark Replacement will be deemed to be 0% for the purposes of this Agreement and the other Credit Documents.
Any Benchmark Replacement shall be applied in a manner consistent with market practice; provided that to the extent such market practice is not administratively feasible for the Administrative Agent, such Benchmark Replacement shall be applied in a manner as otherwise reasonably determined by the Administrative Agent.
“Benchmark Replacement Conforming Changes” means, with respect to any Benchmark Replacement, any technical, administrative or operational changes (including changes to the definition of “Base Rate,” the definition of “Business Day,” the definition of “Interest Period,” timing and frequency of determining rates and making payments of interest, timing of borrowing requests or prepayment, conversion or continuation notices, the applicability and length of lookback periods, the applicability of breakage provisions, and other technical, administrative or operational matters) that the Administrative Agent in its reasonable discretion decides may be appropriate to reflect the adoption and implementation of such Benchmark Replacement and to permit the administration thereof by the Administrative Agent in a manner substantially consistent with market practice (or, if the Administrative Agent decides that adoption of any portion of such market practice is not administratively feasible or if the Administrative Agent determines that no market practice for the administration of such Benchmark Replacement exists, in such other manner of administration as the Administrative Agent decides is reasonably necessary in connection with the administration of this Agreement and the other Credit Documents).
“Benchmark Transition Event” means, with respect to any then-current Benchmark other than Adjusted LIBOR, the occurrence of a public statement or publication of information by or on behalf of the administrator of the then-current Benchmark or a governmental authority with jurisdiction over such administrator announcing or stating that all Available Tenors are or will no longer be representative, or made available, or used for
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determining the interest rate of loans, or shall or will otherwise cease, provided that, at the time of such statement or publication, there is no successor administrator that is satisfactory to the Administrative Agent, that will continue to provide any representative tenors of such Benchmark after such specific date.
“Beneficial Ownership Certification” means a certification regarding beneficial ownership required by the Beneficial Ownership Regulation.
“Beneficial Ownership Regulation” means 31 C.F.R. § 1010.230.
“Benefit Arrangement” means at any time an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group.
“Benefit Plan” means any of (a) an “employee benefit plan” (as defined in ERISA) that is subject to Title I of ERISA, (b) a “plan” as defined in and subject to Section 4975 of the Code or (c) any Person whose assets include (for purposes of ERISA Section 3(42) or otherwise for purposes of Title I of ERISA or Section 4975 of the Code) the assets of any such “employee benefit plan” or “plan”.
“BofA Securities” means BofA Securities, Inc.
“Borrowing” has the meaning set forth in Section 1.03.
“Business Day” means any day other than a Saturday, Sunday or other day on which commercial banks are authorized to close under the laws of, or are in fact closed in, the state where the Administrative Agent’s Applicable Lending Office is located and, if such day relates to any Euro-DollarTerm SOFR Loan, means any such day that is also a London BankingU.S. Government Securities Business Day. For purposes hereof, the Administrative Agent’s Applicable Lending Office shall be deemed to located in the State of New York.
“Capital Stock” means any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation), including partnership interests and membership interests, and any and all warrants, rights or options to purchase or other arrangements or rights to acquire any of the foregoing.
“CME” means CME Group Benchmark Administration Limited.
“Code” means the Internal Revenue Code of 1986, as amended, or any successor statute. “Collateral Account” has the meaning set forth in Section 2.03(e).
“Commitment” means, with respect to any Bank, the commitment of such Bank (a) to issue Syndicated Letters of Credit under Section 2.01(a) and to acquire participations in Fronted Letters of Credit and/or (b) to make Loans hereunder, in each case expressed as an amount representing the maximum aggregate amount of such Bank’s Credit Exposure hereunder, as such commitment may be reduced or increased from time to time pursuant to this Agreement (including pursuant to assignments by or to such Bank pursuant to Section 10.06). The initial
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amount of each Bank’s Commitment is set forth on Schedule I hereto or in the Assignment and Assumption or other instrument executed and delivered hereunder pursuant to which such Bank shall have assumed its Commitment, as applicable. The aggregate amount of the Banks’ Commitments is $2,500,000,000 as of the Effective Date. The Commitments of the Banks are several and not joint and no Bank shall be responsible for any other Bank’s failure (a) to issue Syndicated Letters of Credit under Section 2.01(a) and to acquire participations in Fronted Letters of Credit and/or (b) to make Loans hereunder.
“Commitment Availability Period” means the period from and including the Effective Date to but excluding earlier of the Commitment Termination Date and the date of termination of the Commitments.
“Commitment Termination Date” means June 21, 2026 or, if such day is not a Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day.
“Company” means Lincoln National Corporation, an Indiana corporation, and its successors.
“Company’s 2020 Form 10-K” means the Company’s annual report on Form 10-K for 2020, as filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended.
“Confirming Bank” means, with respect to any Bank, any other bank that has agreed, by delivery of a confirming bank agreement in substantially the form of Exhibit E (a “Confirming Bank Agreement”), that such other bank will itself honor the obligations of such Bank in respect of a drawing complying with the terms of a Letter of Credit as if, and to the extent, such other bank were the “Issuing Bank” named in such Letter of Credit.
“Confirming Bank Agreement” has the meaning set forth in the definition of “Confirming Bank”.
“Conforming Changes” means, with respect to the use, administration of or any conventions associated with SOFR or any proposed Successor Rate or Term SOFR, as applicable, any conforming changes to the definitions of “Base Rate”, “SOFR”, “Term SOFR” and “Interest Period”, timing and frequency of determining rates and making payments of interest and other technical, administrative or operational matters (including, for the avoidance of doubt, the definitions of “Business Day” and “U.S. Government Securities Business Day”, timing of borrowing requests or prepayment, conversion or continuation notices and length of lookback periods) that the Administrative Agent in its reasonable discretion decides may be appropriate to reflect the adoption and implementation of such applicable rate(s) and to permit the administration thereof by the Administrative Agent in a manner substantially consistent with market practice (or, if the Administrative Agent determines that adoption of any portion of such market practice is not administratively feasible or that no market practice for the administration of such rate exists, in such other manner of administration as the Administrative Agent determines is reasonably necessary in connection with the administration of this Agreement and any other Credit Document).
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“Consolidated Subsidiary” means, at any date, any Subsidiary or other entity the accounts of which would be consolidated with those of the Company in its consolidated financial statements if such statements were prepared as of such date.
“Consolidated Total Capitalization” means, at any date, the sum of Consolidated Total Indebtedness and Adjusted Consolidated Net Worth.
“Consolidated Total Indebtedness” means, at any date, the aggregate amount of all Non-Operating Indebtedness of the Company and its Consolidated Subsidiaries.
“Continued Existing Fronted Letters of Credit” means each Fronted Letter of Credit under (and as defined in) the Existing Credit Agreement outstanding as of the Effective Date and listed on Part A of Schedule II, which, in each case, shall be deemed issued and continued as a Fronted Letter of Credit hereunder pursuant to the third paragraph of Section 2.01(a).
“Continued Existing Syndicated Letters of Credit” means each Syndicated Letter of Credit under (and as defined in) the Existing Credit Agreement outstanding as of the Effective Date and listed on Part B of Schedule II, which, in each case, shall be deemed issued and continued as a Syndicated Letter of Credit hereunder pursuant to the second paragraph of Section 2.01(a) (and amended in accordance with the terms thereof).
“Covered Entity” means any of the following: (i) a “covered entity” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 252.82(b); (ii) a “covered bank” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 47.3(b); or (iii) a “covered FSI” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 382.2(b).
“Credit Documents” means (a) this Agreement, (b) the Notes, (c) with respect to any Subsidiary Account Party that becomes an Account Party after the Effective Date, the Subsidiary Joinder Agreement to which it is a party and (d) with respect to any Letter of Credit, collectively, any application therefor and any other agreements, instruments, guarantees or other documents (whether general in application or applicable only to such Letter of Credit) governing or providing for (i) the rights and obligations of the parties concerned or at risk with respect to such Letter of Credit or (ii) any collateral security for any of such obligations, each as the same may be modified and supplemented and in effect from time to time.
“Credit Exposure” means, with respect to any Bank at any time, the sum of (a) the aggregate principal amount of such Bank’s Loans and (b) the aggregate amount of such Bank’s LC Exposure, in each case, outstanding at such time.
“Credit Party” means the Administrative Agent, each Fronting Issuing Bank or any Bank.
“Daily Simple SOFR” with respect to any applicable determination date means the secured overnight financing rate (“SOFR”) published on such date by the Federal Reserve Bank of New York, as the administrator of the benchmark (or a successor administrator) on the Federal Reserve Bank of New York’s website (or any successor source).
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“Debt” of any Person means, at any date, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (d) all obligations of such Person as lessee under capital leases, (e) all non-contingent obligations of such Person to reimburse any bank or other Person in respect of amounts paid under a letter of credit or similar instrument, (f) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person, (g) all Debt of others Guaranteed by such Person, (h) all obligations of such Person in respect of Disqualified Capital Stock and (i) all Instruments of such Person to the extent they would not be included in Adjusted Consolidated Net Worth; provided that the definition of “Debt” does not include any obligations of such Person (i) to purchase securities (or other property) which arise out of or in connection with the sale of the same or substantially similar securities (or other property) or (ii) to return collateral consisting of securities arising out of or in connection with the loan of the same or substantially similar securities.
“Debtor Relief Laws” means the Bankruptcy Code of the United States, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief Laws of the United States or other applicable jurisdictions from time to time in effect.
“Default” means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default.
“Defaulting Bank” means any Bank that (a) has failed, within two Business Days of the date required to be funded or paid, to (i) fund any portion of its Loans, (ii) fund any portion of its obligations in respect of Letters of Credit (including its participations in Fronted Letters of Credit) or (iii) pay over to any Credit Party any other amount required to be paid by it hereunder, unless, in the case of clause (i) above, such Bank notifies the Administrative Agent in writing that such failure is the result of such Bank’s good faith determination that a condition precedent to funding (specifically identified and including the particular default, if any) has not been satisfied, (b) has notified the Company or any Credit Party in writing, or has made a public statement to the effect, that it does not intend or expect to comply with any of its funding obligations under this Agreement (unless such writing or public statement indicates that such position is based on such Bank’s good faith determination that a condition precedent (specifically identified and including the particular default, if any) to funding a loan under this Agreement cannot be satisfied) or generally under other agreements in which it commits to extend credit, (c) has failed, within three Business Days after request by the Administrative Agent or any Fronting Issuing Bank, acting in good faith, to provide a certification in writing from an authorized officer of such Bank that it will comply with its obligations (and is financially able to meet such obligations) to fund prospective Loans and obligations in respect of then outstanding Letters of Credit (including its participations in then outstanding Fronted Letters of Credit) under this Agreement, provided that such Bank shall cease to be a Defaulting Bank pursuant to this clause (c) upon receipt by the Administrative Agent or such Fronting Issuing Bank of such certification in form and substance satisfactory to the Administrative Agent and (if applicable) such Fronting Issuing Bank, (d) has become the subject of (A) a Bankruptcy
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Event or (B) a Bail-In Action, or (e) ceases to be a NAIC Approved Bank and has failed to comply with its obligations under Section 2.16(b).
“Derivative Financial Products” of any Person means all obligations (including whether pursuant to any master agreement or any particular agreement or transaction) of such Person in respect of any rate swap transaction, basis swap, forward rate transaction, interest rate future, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency future, currency option or any other similar transaction (including any option with respect to any of the foregoing) or any combination thereof.
“Disqualified Capital Stock” means that portion of any Capital Stock (other than Capital Stock that is solely redeemable, or at the election of the issuer thereof (not subject to any condition), may be redeemed, with Capital Stock that is not Disqualified Capital Stock) which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable at the option of the holder thereof), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the sole option of the holder thereof, on or prior to 180 days after the first anniversary of the Commitment Termination Date.
“Dollars” and the sign “$” means lawful money in the United States of America.
“Domestic Business Day” means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close.
“Early Opt-in Effective Date” means, with respect to any Early Opt-in Election, the sixth (6th) Business Day after the date notice of such Early Opt-in Election is provided to the Banks, so long as the Administrative Agent has not received, by 5:00 p.m. (New York City time) on the fifth (5th) Business Day after the date notice of such Early Opt-in Election is provided to the Banks, written notice of objection to such Early Opt-in Election from Banks comprising the Required Banks.
“Early Opt-in Election” means the occurrence of:
(1)a determination by the Administrative Agent, or a notification by the Company to the Administrative Agent that the Company has made a determination, that U.S. dollar-denominated syndicated credit facilities currently being executed, or that include language similar to that contained in Section 8.01(c), are being executed or amended (as applicable) to incorporate or adopt a new benchmark interest rate to replace Adjusted LIBOR, and
(2)the joint election by the Administrative Agent and the Company to replace Adjusted LIBOR with a Benchmark Replacement and the provision by the Administrative Agent of written notice of such election to the Banks.
“EEA Financial Institution” means (a) any institution established in any EEA Member Country which is subject to the supervision of an EEA Resolution Authority, (b) any entity established in an EEA Member Country which is a parent of an institution described in
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clause (a) of this definition, or (c) any institution established in an EEA Member Country which is a subsidiary of an institution described in clauses (a) or (b) of this definition and is subject to consolidated supervision with its parent;
“EEA Member Country” means any of the member states of the European Union, Iceland, Liechtenstein, and Norway.
“EEA Resolution Authority” means any public administrative authority or any Person entrusted with public administrative authority of any EEA Member Country (including any delegee) having responsibility for the resolution of any EEA Financial Institution.
“Effective Date” means the date this Agreement becomes effective in accordance with Section 3.02.
“Environmental Laws” means any and all federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or other governmental restrictions relating to the environment or to emissions, discharges or releases of pollutants, contaminants, petroleum or petroleum products, chemicals or industrial, toxic or hazardous substances or wastes into the environment including, without limitation, ambient air, surface water, ground water or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, petroleum or petroleum products, chemicals or industrial, toxic or hazardous substances or wastes or the clean-up or other remediation thereof.
“Equity Issuance” means, with respect to any Person, (a) any issuance or sale by such Person of (i) any Capital Stock, (ii) any warrants or options exercisable in respect of Capital Stock (other than any warrants or options issued to directors, officers or employees of such Person in their capacity as such and any Capital Stock issued upon the exercise thereof) or (iii) any other security or instrument representing Capital Stock (or the right to obtain any Capital Stock) in such Person or (b) the receipt by such Person of any contribution to its capital (whether or not evidenced by any equity security) by any other Person; provided that Equity Issuance shall not include, with respect to any Subsidiary of the Company, any such issuance or sale by such Subsidiary to the Company or another Subsidiary or any capital contribution by the Company or another Subsidiary to such Subsidiary.
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute.
“ERISA Group” means the Company and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Company, are treated as a single employer under Section 414(b) or 414(c) of the Code.
“ESG Margin Adjustment” has the meaning set forth in Schedule 2.18.
“ESG Fee Adjustment” has the meaning set forth in Schedule 2.18.
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“EU Bail-In Legislation Schedule” means the EU Bail-In Legislation Schedule published by the Loan Market Association (or any successor Person), as in effect from time to time.
“Euro-Dollar Business Day” means any Domestic Business Day on which commercial banks are open for international business (including dealings in Dollar deposits) in London.
“Euro-Dollar Loan” means a Loan to be made by a Bank pursuant to Section 2.04 as a Euro-Dollar Loan in accordance with the applicable Notice of Borrowing.
“Euro-Dollar Reserve Percentage” means, for any day, that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of “Eurocurrency liabilities” (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents).
“Event of Default” has the meaning set forth in Section 6.01.
“Existing Credit Agreement” means the Credit Agreement dated as of July 31, 2019 among the Company, the Subsidiary Account Parties, the banks party thereto and Bank of America, as Administrative Agent, as amended and in effect immediately prior to the effectiveness of this Agreement.
“Federal Funds Rate” means, for any day, the rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day; provided that (a) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (b) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate (rounded upward, if necessary, to a whole multiple of 1/100 of 1%) charged to Bank of America on such day on such transactions as determined by the Administrative Agent.
“Fronted LC Commitment” means, with respect to any Fronting Issuing Bank, the maximum aggregate undrawn amount of Fronted Letters of Credit which such Fronting Issuing Bank shall have agreed to issue hereunder (as set forth (i) in the case of any Fronting Issuing Bank party hereto as of the Effective Date, beneath the signature of such Fronting Issuing Bank on its signature page hereto or (ii) in the case of any Bank that shall become a Fronting Issuing Bank after the Effective Date, in the written instrument referred to in the definition of “Fronting Issuing Bank” by which it agrees to be a Fronting Issuing Bank hereunder), as such maximum amount may be changed from time to time in accordance with Section 2.01(a).
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“Fronted LC Exposure” means, at any time, the sum of (a) the aggregate undrawn amount of all outstanding Fronted Letters of Credit at such time plus (b) the aggregate amount of all LC Disbursements under Fronted Letters of Credit that have not yet been reimbursed by or on behalf of the Account Parties at such time. The Fronted LC Exposure of any Bank shall at any time be its Applicable Percentage of the total Fronted LC Exposure at such time.
“Fronted Letter of Credit” means a letter of credit issued by a Fronting Issuing Bank as the sole issuing bank, and shall include the Continued Existing Fronted Letters of Credit.
“Fronting Issuing Bank” means each Bank that has agreed to be a Fronting Issuing Bank and to issue Fronted Letters of Credit hereunder, as evidenced by such Bank’s execution of a signature page to this Agreement in its capacity as a “Fronting Issuing Bank” or, if such Bank shall have so agreed with the Company at any time after the Effective Date, by a written instrument executed by such Bank and the Company and delivered to the Administrative Agent hereunder (which instrument shall be in form and substance satisfactory to the Administrative Agent), whereupon such Bank shall become a Fronting Issuing Bank hereunder.
“Guarantee” by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part), provided that the term “Guarantee” shall not include endorsements for collection or deposit in the ordinary course of business. The term “Guarantee” used as a verb has a corresponding meaning.
“Guarantor” means the Company in its capacity as guarantor of the obligations of each other Account Party pursuant to the provisions of Article IX.
“Index Debt” means senior, unsecured, long-term indebtedness for borrowed money of the Company that is not guaranteed by any other Person or subject to any other credit enhancement.
“Instruments” means Securities (as defined below) that are given equity credit by S&P or Moody’s (and as to which, in the case of any Instrument issued after the Effective Date, the Company shall have provided evidence of such credit to the Administrative Agent), provided that the term “Instruments” shall exclude any Securities that are recorded in the shareholder’s equity section of the consolidated balance sheet of the Company and its Consolidated Subsidiaries most recently filed with the SEC. As used herein “Securities” means any stock, share, partnership interest, membership interest in a limited liability company, voting trust certificate, certificate of interest or participation in any profit-sharing agreement or arrangement, option, warrant, bond, debenture, note, or other evidence of indebtedness, secured or unsecured, convertible, subordinated or otherwise, or in general any instruments commonly known as
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“securities” or any certificates of interest, shares or participations in temporary or interim certificates for the purchase or acquisition of, or any right to subscribe to, purchase or acquire, any of the foregoing.
“Insurance Subsidiary” means any Restricted Subsidiary which is subject to the regulation of, and is required to file statements with, any governmental body, agency or official in any State or territory of the United States or the District of Columbia which regulates insurance companies or the doing of an insurance business therein.
“Interest Election Request” means a request by an Account Party to convert or continue a Borrowing in accordance with Section 2.05(b).
“Interest Period” means, with respect as to each Euro-Dollar BorrowingTerm SOFR Loan, the period commencing on the date of such BorrowingTerm SOFR Loan is disbursed or converted to or continued as a Term SOFR Loan and ending on the date one, two, or three or six months thereafter, as the applicable Account Party may elect in the applicable Notice of Borrowing or Interest Election Request; provided that:
(a) (i)any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless, in the case of a Term SOFR Loan, such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day;
(b) (ii)any Interest Period whichpertaining to a Term SOFR Loan that begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Euro-Dollar Business Day of athe calendar month at the end of such Interest Period; and
(c) (iii)any Interest Period which begins before the Commitment Termination Date and would otherwise end after the Commitment Termination Date shall end on the Commitment Termination Date.
For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing.
“LC Disbursement” means a payment made by a Bank pursuant to a Letter of Credit.
“LC Exposure” means, at any time, the sum of (a) the Syndicated LC Exposure at such time plus (b) the Fronted LC Exposure at such time. The LC Exposure of any Bank shall at any time be the sum of (a) its Syndicated LC Exposure at such time plus (b) its Fronted LC Exposure at such time.
“LC Reimbursement Loan” means a Loan the proceeds of which are used solely to finance the reimbursement of LC Disbursements as contemplated by Section 2.03(a).
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“Letters of Credit” means letters of credit issued under Section 2.01 and shall include Syndicated Letters of Credit and Fronted Letters of Credit.
“Lien” means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. For the purposes of this Agreement, the Company or any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or beneficially holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset.
“Loan” means a Base Rate Loan or a Euro-DollarTerm SOFR Loan and “Loans” means Base Rate Loans or Euro-DollarTerm SOFR Loans or any combination of the foregoing.
“London Banking Day” means any day on which dealings in Dollar deposits are conducted by and between banks in the London interbank eurodollar market.
“Material Adverse Effect” means a material adverse effect on (a) business, financial condition, results of operations or prospects of the Company and its Consolidated Subsidiaries, taken as a whole or (b) the validity or enforceability of any of the Credit Documents or the material rights and remedies of the Banks under the Credit Documents.
“Material Subsidiary” means any Subsidiary of the Company with assets of $150,000,000 or more.
“Moody’s” means Moody’s Investors Service, Inc. or such affiliate thereof that may from time to time issue the credit ratings for the Company as contemplated hereby.
“Multiemployer Plan” means at any time an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five-year period.
“NAIC” means the National Association of Insurance Commissioners and any successor thereto.
“NAIC Approved Bank” means (a) any Bank that is a bank listed on the most current “List of Qualified U.S. Financial Institutions” approved by the NAIC (the “NAIC Approved Bank List”) or (b) any Bank as to which its Confirming Bank is a bank listed on the NAIC Approved Bank List.
“NAIC Approved Bank List” has the meaning set forth in the definition of “NAIC Approved Bank”.
“Net Proceeds” means, with respect to any Equity Issuance, the aggregate cash proceeds received in respect of such Equity Issuance, net of all reasonable fees and out-of-pocket expenses paid to third parties (other than Affiliates of the Company) in connection therewith; provided that Net Proceeds of any Equity Issuance shall not include any proceeds received in
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respect of the exercise of stock options held by officers, directors, employees, or consultants of the Company or any of its Subsidiaries.
“Newly Acquired Subsidiary” means any Subsidiary that is not a Subsidiary on the date hereof but that becomes a Subsidiary after the date hereof, but only during the 180 days after the first date on which such Subsidiary became a Subsidiary.
“Newly Acquired Subsidiary Debt” has the meaning set forth in Section 6.01(e). “Non-Defaulting Banks” means any Bank that is not a Defaulting Bank.
“Non-Operating Indebtedness” of any Person means, at any date, all Debt (other than Operating Indebtedness) of such Person.
“Notes” means a promissory note or notes of an Account Party, substantially in the form of Exhibit A hereto, evidencing the obligation of such Account Party to repay the Loans made to it hereunder, and “Note” means any one of such promissory notes issued hereunder.
“Notice of Borrowing” has the meaning set forth in Section 2.05(a).
“Operating Indebtedness” of any Person means, at any date, without duplication, any Debt of such Person (a) in respect of AXXX, XXX and other similar life reserve requirements, (b) incurred in connection with repurchase agreements and securities lending, (c) to the extent the proceeds of which are used directly or indirectly (including for the purpose of funding portfolios that are used to fund trusts in order) to support AXXX, XXX and other similar life reserves, (d) to the extent the proceeds of which are used to fund discrete customer-related assets or pools of assets (and related hedge instruments and capital) that are at least notionally segregated from other assets and have sufficient cash flow to pay principal and interest thereof, with insignificant risk of other assets of the Company and its Subsidiaries being called upon to make such principal and interest payments or (e) excluded from financial leverage by both S&P and Moody’s in their evaluation of such Person.
“Other Rate Early Opt-in” means the Administrative Agent and the Company have elected to replace Adjusted LIBOR with a Benchmark Replacement other than a SOFR-based rate pursuant to (1) an Early Opt-in Election and (2) Section 8.01(c)(ii) and paragraph (2) of the definition of “Benchmark Replacement”.
“Parent” means, with respect to any Bank, any Person as to which such Bank is, directly or indirectly, a subsidiary.
“Participant” has the meaning set forth in Section 10.06(b).
“Participant Register” has the meaning set forth in Section 10.06(e).
“Patriot Act” has the meaning set forth in Section 4.17.
“Payment Account” means an account designated by the Administrative Agent in a notice to the Account Parties and the Banks to which payments hereunder are to be made.
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“PBGC” means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA.
“Person” means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.
“Plan” means at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group.
“Pricing Certificate” has the meaning set forth on Schedule 2.18.
“PTE” means a prohibited transaction class exemption issued by the U.S. Department of Labor, as any such exemption may be amended from time to time.
“Quarterly Dates” means the last business day of March, June, September and December in each year, the first of which shall be the first such day after the date hereof.
“Regulation S-X” means Regulation S-X promulgated under the Securities Act of 1933, as amended from time to time, and as interpreted by the SEC.
“Regulations T, U and X” means Regulations T, U and X, respectively, of the Board of Governors of the Federal Reserve System, in each case as in effect from time to time.
“Related Parties” means, with respect to any Person, such Person’s Affiliates and the partners, directors, officers, employees, agents, trustees, administrators, managers, advisors, consultants, service providers and representatives of such Person and of such Person’s Affiliates.
“Relevant Governmental Body” means the Federal Reserve Board and/or the Federal Reserve Bank of New York, or a committee officially endorsed or convened by the Federal Reserve Board and/or the Federal Reserve Bank of New York, or any successor thereto.
“Required Banks” means at any time Banks having Commitments representing more than 50% of the aggregate amount of the Commitments at such time; provided that, if the Commitments have expired or been terminated, “Required Banks” means Banks having more than 50% of the aggregate amount of the Credit Exposures of the Banks at such time.
“Rescindable Amount” has the meaning as defined in Section 2.13(d).
“Resolution Authority” means an EEA Resolution Authority or, with respect to any UK Financial Institution, a UK Resolution Authority.
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“Responsible Officer” means the chief executive officer, president, chief financial officer, or treasurer of an Account Party, and solely for purposes of the delivery of incumbency certificates pursuant to Section 3.02, the secretary or any assistant secretary of an Account Party and, solely for purposes of notices given pursuant to Article II, any other officer or employee of the applicable Account Party so designated by any of the foregoing officers in a notice to the Administrative Agent or any other officer or employee of the applicable Account Party designated in or pursuant to an agreement between the applicable Account Party and the Administrative Agent. Any document delivered hereunder that is signed by a Responsible Officer of an Account Party shall be conclusively presumed to have been authorized by all necessary corporate, partnership and/or other action on the part of such Account Party and such Responsible Officer shall be conclusively presumed to have acted on behalf of such Account Party.
“Restricted Subsidiary” means (a) any Subsidiary that has total assets in excess of 10% of the total assets of the Company and its Consolidated Subsidiaries (based upon and as of the date of the filing of the most recent consolidated balance sheet of the Company furnished pursuant to Section 4.04 or 5.01), (b) any Subsidiary formed or organized after the Effective Date that owns, directly or indirectly, greater than 10% of Capital Stock in any other Restricted Subsidiary and (c) each Subsidiary Account Party (so long as it remains a Subsidiary Account Party hereof). In the event that the aggregate total assets of the Restricted Subsidiaries represents less than 80% of the consolidated total assets of the Company and its Consolidated Subsidiaries (as reported on the Company’s most recent consolidated balance sheet furnished pursuant to Section 4.04 or 5.01), the Company shall promptly designate an additional Subsidiary or Subsidiaries as Restricted Subsidiaries in order that, after such designation, the aggregate total assets of the Restricted Subsidiaries represent at least 80% of the consolidated total assets of the Company and its Consolidated Subsidiaries (as reported on the Company’s most recent consolidated balance sheet furnished pursuant to Section 4.04 or 5.01).
“Sanctions” has the meaning set forth in Section 4.17.
“Sanctions Laws” has the meaning set forth in Section 4.17.
“S&P” means Standard & Poor’s Financial Services LLC or such affiliate thereof that may from time to time issue the credit ratings for the Company as contemplated hereby.
“Scheduled Unavailability Date” has the meaning set forth in Section 8.01(b).
“SEC” means Securities and Exchange Commission or any governmental body, agency or official succeeding to its principal functions.
“Secured Obligations” has the meaning set forth in Section 2.03(e).
“SOFR Early Opt-in” means the Administrative Agent and the Company have elected to replace Adjusted LIBOR pursuant to (1) an Early Opt-in Election and (2) Section 8.01(c)(i) and paragraph (1) of the definition of “Benchmark Replacement”.
“SOFR” means the Secured Overnight Financing Rate as administered by the Federal Reserve Bank of New York (or a successor administrator).
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“SOFR Adjustment” with respect to Term SOFR and Daily Simple SOFR means 0.10% (10 basis points).
“Subsidiary” means any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Company.
“Subsidiary Account Parties” means each Subsidiary of the Company that is listed on the signature pages hereof under the caption “SUBSIDIARY ACCOUNT PARTIES” and each other Subsidiary of the Company that shall become a Subsidiary Account Party pursuant to Section 10.13, so long as such Subsidiary shall remain a Subsidiary Account Party hereunder.
“Successor Rate” has the meaning set forth in Section 8.01(b).
“Sustainability Coordinator” means BofA Securities, in its capacity as the sustainability coordinator.
“Syndicated LC Exposure” means, at any time, the sum of (a) the aggregate undrawn amount of all outstanding Syndicated Letters of Credit at such time plus (b) the aggregate amount of all LC Disbursements under Syndicated Letters of Credit that have not yet been reimbursed by or on behalf of the Account Parties at such time. The Syndicated LC Exposure of any Bank shall at any time be its Applicable Percentage of the total Syndicated LC Exposure at such time.
“Syndicated Letter of Credit” means a single multi-bank letter of credit issued by all of the Banks (acting through the Administrative Agent in accordance with the provisions hereof) in which each Bank, as an issuing bank thereunder, has a several (but not joint) obligation in respect of a specified portion of the amount of such letter of credit, and shall include the Continued Existing Syndicated Letters of Credit.
“Term SOFR” means, for the applicable corresponding tenor (or if any Available Tenor of a Benchmark does not correspond to an Available Tenor for the applicable Benchmark Replacement, the closest corresponding Available Tenor and if such Available Tenor corresponds equally to two Available Tenors of the applicable Benchmark Replacement, the corresponding tenor of the shorter duration shall be applied), the :
(a)for any Interest Period with respect to a Term SOFR Loan, the rate per annum equal to the Term SOFR Screen Rate two U.S. Government Securities Business Days prior to the commencement of such Interest Period with a term equivalent to such Interest Period; provided, that if the rate is not published prior to 11:00 a.m. on such determination date then Term SOFR means the Term SOFR Screen Rate on the first U.S. Government Securities Business Day immediately prior thereto, in each case, plus the SOFR Adjustment for such Interest Period; and
(b)for any interest calculation with respect to a Base Rate Loan on any date, the rate per annum equal to the Term SOFR Screen Rate with a term of one month commencing that day;
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provided, that if the Term SOFR determined in accordance with either of the foregoing provisions (a) or (b) of this definition would otherwise be less than zero, the Term SOFR shall be deemed zero for purposes of this Agreement.
“Term SOFR Loan” means a Loan to be made by a Bank pursuant to Section 2.04 as a Term SOFR Loan in accordance with the applicable Notice of Borrowing.
“Term SOFR Screen Rate” means the forward-looking SOFR term rate based on SOFR that has been selected or recommended by the Relevant Governmental Body.administered by CME (or any successor administrator satisfactory to the Administrative Agent) and published on the applicable Reuters screen page (or such other commercially available source providing such quotations as may be designated by the Administrative Agent from time to time).
“Type”, when used in reference to any Loan or Borrowing, refers to whether the Loan is a Base Rate Loan or a Euro-DollarTerm SOFR Loan.
“UK Financial Institution” means any BRRD Undertaking (as such term is defined under the PRA Rulebook (as amended form time to time) promulgated by the United Kingdom Prudential Regulation Authority) or any person falling within IFPRU 11.6 of the FCA Handbook (as amended from time to time) promulgated by the United Kingdom Financial Conduct Authority, which includes certain credit institutions and investment firms, and certain affiliates of such credit institutions or investment firms.
“UK Resolution Authority” means the Bank of England or any other public administrative authority having responsibility for the resolution of any UK Financial Institution.
“U.S. Government Securities Business Day” means any Business Day, except any Business Day on which any of the Securities Industry and Financial Markets Association, the New York Stock Exchange or the Federal Reserve Bank of New York is not open for business because such day is a legal holiday under the federal laws of the United States or the laws of the State of New York, as applicable.
“Write-Down and Conversion Powers” means (a) with respect to any EEA Resolution Authority, the write-down and conversion powers of such EEA Resolution Authority from time to time under the Bail-In Legislation for the applicable EEA Member Country, which write-down and conversion powers are described in the EU Bail-In Legislation Schedule and (b) with respect to the United Kingdom, any powers of the applicable Resolution Authority under the Bail-In Legislation to cancel, reduce, modify or change the form of a liability of any UK Financial Institution or any contract or instrument under which that liability arises, to convert all or part of that liability into shares, securities or obligations of that person or any other person, to provide that any such contract or instrument is to have effect as if a right had been exercised under it or to suspend any obligation in respect of that liability or any of the powers under that Bail-In Legislation that are related to or ancillary to any of those powers.
SECTION 1.02Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made and all financial statements required to be delivered
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hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Company’s independent public accountants) with the most recent audited consolidated financial statements of the Company and its Consolidated Subsidiaries delivered to the Banks; provided that if the Company notifies the Administrative Agent that the Company wishes to amend any covenant in Article V to eliminate the effect of any change in generally accepted accounting principles on the operation of such covenant (or if the Administrative Agent notifies the Company that the Required Banks wish to amend Article V for such purpose), then the Company’s compliance with such covenant shall be determined on the basis of generally accepted accounting principles in effect immediately before the relevant change in generally accepted accounting principles became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Company and the Required Banks. Without limiting the foregoing, unless and until the Company notifies the Administrative Agent otherwise, leases shall be classified and accounted for on a basis that does not give effect to Accounting Standards Update 2016-02 for all purposes of this Agreement, notwithstanding any change in GAAP relating thereto, unless the parties hereto shall enter into a mutually acceptable amendment addressing such changes, as provided for above.
SECTION 1.03Types of Borrowings. The term “Borrowing” denotes the aggregation of Loans to be made to an Account Party pursuant to Section 2.04, or converted or continued pursuant to Section 2.05(b), on a single date and for a single Interest Period. Borrowings are classified for purposes of this Agreement by reference to the pricing of Loans comprising such Borrowing (e.g., a “Euro-DollarTerm SOFR Borrowing” is a Borrowing comprised of Euro-DollarTerm SOFR Loans).
SECTION 1.04Other Interpretive Provisions. Any reference herein to a merger, consolidation, assignment, sale, or transfer, or similar term, shall be deemed to apply to a division of or by a limited liability company, or an allocation of assets to a series of a limited liability company (or the unwinding of such a division or allocation), as if it were a merger, consolidation, assignment, sale or transfer, or similar term, as applicable, to, of or with a separate Person. Any division of a limited liability company shall constitute a separate Person hereunder (and each division of any limited liability company that is a Subsidiary, joint venture or any other like term shall also constitute such a Person or entity).
SECTION 1.05Interest Rates. The Administrative Agent does not warrant, nor accept responsibility, nor shall the Administrative Agent have any liability with respect to the administration, submission or any other matter related to the rates for Euro-Dollar Loansany reference rate referred to herein or with respect to any rate (including, for the avoidance of doubt, the selection of such rate and any related spread or other adjustment) that is an alternative or replacement for or successor to any of such rate (including, without limitation, any Benchmark ReplacementSuccessor Rate) (or any component of any of the foregoing) or the effect of any of the foregoing, or of any Benchmark Replacement Conforming Changes. The Administrative Agent and its affiliates or other related entities may engage in transactions or other activities that affect any reference rate referred to herein, or any alternative, successor or replacement rate (including, without limitation, any Successor Rate) (or any component of any of the foregoing) or any related spread or other adjustments thereto, in each case, in a manner adverse to the Account Parties. The Administrative Agent may
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select information sources or services in its reasonable discretion to ascertain any reference rate referred to herein or any alternative, successor or replacement rate (including, without limitation, any Successor Rate) (or any component of any of the foregoing), in each case pursuant to the terms of this Agreement, and shall have no liability to any Account Party, any Bank or any other person or entity for damages of any kind, including direct or indirect, special, punitive, incidental or consequential damages, costs, losses or expenses (whether in tort, contract or otherwise and whether at law or in equity), for any error or other action or omission related to or affecting the selection, determination, or calculation of any rate (or component thereof) provided by any such information source or service.
SECTION 2.01Letters of Credit.
(a)General. Subject to the terms and conditions set forth herein, at the request of any Account Party, at any time and from time to time during the Commitment Availability Period, (i) each Bank agrees to issue Syndicated Letters of Credit and (ii) each Fronting Issuing Bank agrees to issue Fronted Letters of Credit, in each case denominated in Dollars for the account of such Account Party, that will not result in (x) the aggregate outstanding amount of the Credit Exposures of the Banks exceeding the aggregate amount of the Commitments of the Banks, (y) the aggregate outstanding amount of the Credit Exposure of such Bank exceeding the aggregate amount of the Commitment of such Bank and (z) with respect to Fronted Letters of Credit, the aggregate undrawn amount of Fronted Letters of Credit issued by such Fronting Issuing Bank exceeding its Fronted LC Commitment.
Each Syndicated Letter of Credit shall be a standby letter of credit in such form as the relevant Account Party shall request and which (i) the Administrative Agent shall determine in good faith does not contain any obligations, or diminish any rights, of any Bank with respect thereto or other terms thereof that are inconsistent with the terms hereof or (ii) the Required Banks shall approve. Without the prior consent of each Bank, no Syndicated Letter of Credit may be issued that would vary the several and not joint nature of the obligations of the Banks thereunder, and each Syndicated Letter of Credit shall be issued by all of the Banks having Commitments at the time of issuance as a single multi-bank letter of credit, but the obligation of each Bank thereunder shall be several and not joint, based upon its Applicable Percentage of the aggregate undrawn amount of such Letter of Credit. Subject to the terms and conditions hereof, as of the Effective Date, each Continued Existing Syndicated Letter of Credit shall automatically be deemed issued and continued as a Syndicated Letter of Credit hereunder by all of the Banks having Commitments on the Effective Date. From and after the Effective Date, the obligation of each Bank in respect of each Continued Existing Syndicated Letter of Credit shall be several and not joint, based upon its Applicable Percentage and the aggregate undrawn amount thereof, and each Continued Existing Syndicated Letter of Credit shall be a Syndicated Letter of Credit for all purposes of this Agreement.
Each Fronted Letter of Credit shall be a standby letter of credit in such form as the relevant Account Party shall request and reasonably acceptable to the Administrative Agent and
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the applicable Fronting Issuing Bank with respect thereto. Each Fronted Letter of Credit shall be issued by, and be the sole obligation as issuing bank of, the applicable Fronting Issuing Bank. No Bank shall have any obligation hereunder to become a Fronting Issuing Bank hereunder and any election to do so shall be in the sole discretion of each Bank. Notwithstanding anything herein to the contrary, any addition or removal of a Fronting Issuing Bank hereunder or change in its Fronted LC Commitment may be effected only with the agreement of such Fronting Issuing Bank and the Company (and with the consent of Administrative Agent (such consent not to be unreasonably withheld)) (provided that no such change shall increase the Commitment of any Bank).
(b)Notice of Issuance, Amendment, Renewal or Extension. To request the issuance of a Letter of Credit (or the amendment, renewal or extension of an outstanding Letter of Credit), an Account Party shall hand deliver or telecopy (or transmit by electronic communication, if arrangements for doing so have been approved by the Administrative Agent) to the Administrative Agent and (in the case of a Fronted Letter of Credit) the applicable Fronting Issuing Bank (if by hand delivery or telecopy, not later than noon (New York City time) on the Domestic Business Day prior to, and if by approved electronic communication, not later than 10:00 a.m. (New York City time) on the date of, the requested date of issuance, amendment, renewal or extension) a notice requesting the issuance of a Syndicated Letter of Credit or Fronted Letter of Credit, or identifying the Letter of Credit to be amended, renewed or extended, and specifying the date of issuance, amendment, renewal or extension, as the case may be (which shall be a Domestic Business Day), the date on which such Letter of Credit is to expire (which shall comply with Section 2.01(d)), the amount of such Letter of Credit, the name and address of the beneficiary thereof and the terms and conditions of (and such other information as shall be necessary to prepare, amend, renew or extend, as the case may be) such Letter of Credit.
If requested by the Administrative Agent or (in the case of any Fronted Letter of Credit) the applicable Fronting Issuing Bank through the Administrative Agent, such Account Party also shall submit a letter of credit application on standard form of the Person that is serving as Administrative Agent or such Fronting Issuing Bank, as applicable, in connection with any request for a Letter of Credit. In the event of any inconsistency between the terms and conditions of this Agreement and the terms and conditions of any form of letter of credit application or other agreement submitted by any Account Party to, or entered into by any Account Party with, the Person that is serving as Administrative Agent or such Fronting Issuing Bank, as applicable, relating to any Letter of Credit, the terms and conditions of this Agreement shall control.
If any Letter of Credit shall provide for the automatic extension of the expiry date thereof unless the Administrative Agent or (in the case of any Fronted Letter of Credit) the applicable Fronting Issuing Bank shall give notice to the beneficiary thereof on or before the time specified therein that such expiry date shall not be extended (each such Letter of Credit, an “Evergreen Letter of Credit” and such notice, a “Non-Extension Notice”), then the Administrative Agent or such Fronting Issuing Bank, as applicable, will give a Non-Extension Notice under such Evergreen Letter of Credit in accordance with its terms if requested to do so by notice given to the Administrative Agent or such Fronting Issuing Bank (through the Administrative Agent) by (i) at any time a Default shall have occurred and be continuing, the Required Banks, (ii) at any time on or after the date that the Commitments are terminated, any Bank or (iii) the applicable Account Party or the Company.
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(c)Limitations on Amounts and Daily Transactions. Each Letter of Credit shall be issued, amended, renewed or extended if and only if (and upon such issuance, amendment, renewal or extension of each Letter of Credit the Account Parties shall be deemed to represent and warrant that), after giving effect to such issuance, amendment, renewal or extension, the aggregate outstanding amount of the Credit Exposures of the Banks shall not exceed the aggregate amount of the Commitments of the Banks.
In no event may more than 25 issuances, amendments, renewals and/or extensions of Letters of Credit occur on any day, unless the Administrative Agent shall otherwise agree.
(d)Expiry Date. Each Letter of Credit shall expire at or prior to the close of business on the earlier of (i) the date one year after the date of the issuance of such Letter of Credit (provided that such Letter of Credit may contain “evergreen” provisions for the renewal or extension thereof to a date not later than one year after the then current expiry date thereof) or (ii) the first anniversary of the Commitment Termination Date. The Company shall cause any Letter of Credit outstanding on or after the date that is ten Business Days prior to the Commitment Termination Date to be cash collateralized in accordance with Section 2.03(e) on or prior to such date and for so long as such Letter of Credit is outstanding.
(e)Obligation of Banks. With respect to any Syndicated Letter of Credit, the obligation of any Bank under such Syndicated Letter of Credit shall be several and not joint and shall at any time be in an amount equal to such Bank’s Applicable Percentage of the aggregate undrawn amount of such Letter of Credit, and each Syndicated Letter of Credit shall expressly so provide.
By the issuance of a Fronted Letter of Credit (or an amendment to a Fronted Letter of Credit increasing the amount thereof) (including the deemed issuance hereunder of the Continued Existing Fronted Letters of Credit) by any Fronting Issuing Bank, and without any further action on the part of any Fronting Issuing Bank or the Banks, the applicable Fronting Issuing Bank hereby grants to each Bank, and each Bank hereby acquires from such Fronting Issuing Bank, a participation in such Fronted Letter of Credit equal to such Bank’s Applicable Percentage of the aggregate amount available to be drawn under such Fronted Letter of Credit. Each Bank acknowledges and agrees that its obligation to acquire participations in respect of Fronted Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including any amendment, renewal or extension of any Fronted Letter of Credit or the occurrence and continuance of a Default or reduction or termination of the Commitments. In consideration and in furtherance of the foregoing, each Bank hereby absolutely and unconditionally agrees to pay to the Administrative Agent, for account of the applicable Fronting Issuing Bank, such Bank’s Applicable Percentage of each LC Disbursement made by such Fronting Issuing Bank in respect of any Fronted Letter of Credit, promptly upon the request of such Fronting Issuing Bank at any time from the time such LC Disbursement is made until such LC Disbursement is reimbursed by the applicable Account Party or at any time after any reimbursement payment is required to be refunded to such Account Party for any reason. Such payment shall be made without any offset, abatement, withholding or reduction whatsoever. Promptly following receipt by the Administrative Agent of any payment from the applicable Account Party pursuant to Section 2.03(a) in respect of any Fronted Letter of Credit, the Administrative Agent shall distribute such payment to the applicable Fronting Issuing Bank or,
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to the extent that the Banks have made payments pursuant to this paragraph to reimburse such Fronting Issuing Bank, then to the Banks and such Fronting Issuing Bank as their interests may appear. Any payment made by a Bank pursuant to this paragraph to reimburse the applicable Fronting Issuing Bank for any LC Disbursement shall not relieve any Account Party of its obligation to reimburse such LC Disbursement.
(f)Adjustment of Applicable Percentages. Upon (i) each addition of a new Bank hereunder and (ii) each change in the Commitment of a Bank pursuant to this Agreement, then (A) in the case of each outstanding Syndicated Letter of Credit, with the consent of the beneficiary thereunder to the extent required by the terms thereof or under applicable law (including, if applicable, the Uniform Customs and Practices for Documentary Credits, ICC Publication No. 600 (or such later version thereof as may be in effect at the applicable time), or the International Standby Practices, International Chamber of Commerce, Publication No. 590 (or such later version thereof as may be in effect at the applicable time)) governing such Syndicated Letter of Credit, the Administrative Agent shall promptly amend such Syndicated Letter of Credit to specify the Banks that are parties thereto, after giving effect to such event, and such Banks’ respective Applicable Percentages as of the effective date of such amendment and (B) in the case of each outstanding Fronted Letter of Credit, the participation interest of each Bank therein shall automatically be adjusted to reflect, and each Bank shall have a participation in such Fronted Letter of Credit equal to, such Bank’s Applicable Percentage of the aggregate amount available to be drawn under such Fronted Letter of Credit after giving effect to such event.
SECTION 2.02Issuance and Administration of Syndicated Letters of Credit. With respect to each Syndicated Letter of Credit, such Syndicated Letter of Credit shall be executed and delivered by the Administrative Agent in the name and on behalf of, and as attorney-in-fact for, the Banks party to such Syndicated Letter of Credit, and the Administrative Agent shall act as the agent of each such Bank to (a) receive drafts, other demands for payment and other documents presented by the beneficiary under such Syndicated Letter of Credit, (b) determine whether such drafts, demands and documents are in compliance with the terms and conditions of such Syndicated Letter of Credit and (c) notify such Bank, the Company and the applicable Account Party that a valid drawing has been made and the date that the related LC Disbursement is to be made; provided that the Administrative Agent, in its capacity as Administrative Agent, shall have no obligation or liability for any LC Disbursement under such Syndicated Letter of Credit, and each Syndicated Letter of Credit shall expressly so provide. Each Bank hereby irrevocably appoints and designates the Administrative Agent as its attorney-in-fact, acting through any duly authorized officer of the Person that is serving as the Administrative Agent, to execute and deliver in the name and on behalf of such Bank each Syndicated Letter of Credit to be issued by the Banks hereunder. Promptly upon the request of the Administrative Agent, each Bank will furnish to the Administrative Agent such powers of attorney or other evidence as any beneficiary of any such Letter of Credit may reasonably request in order to demonstrate that the Administrative Agent has the power to act as attorney-in-fact for such Bank to execute and deliver each Syndicated Letter of Credit.
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SECTION 2.03Reimbursement for LC Disbursements, Cover, Etc.
(a)Reimbursement. If any Bank shall make any LC Disbursement in respect of any Letter of Credit, the Account Party with respect to such Letter of Credit shall reimburse such Bank in respect of any such LC Disbursement by paying to the Administrative Agent an amount equal to such LC Disbursement not later than noon, New York City time, on (A) the Domestic Business Day that the Company and such Account Party receive notice of such LC Disbursement, if such notice is received prior to 10:00 a.m., New York City time, or (B) the Domestic Business Day immediately following the day that the Company and such Account Party receive such notice, if such notice is received on a day which is not a Domestic Business Day or is not received prior to 10:00 a.m., New York City time, on a Domestic Business Day; provided that, at any time during the Commitment Availability Period, such Account Party may, subject to the conditions to borrowing set forth herein, request in accordance with Section 2.05(a) that such payment be financed with a Base Rate Borrowing in an equivalent amount and, to the extent so financed, such Account Party’s obligation to make such payment shall be discharged and replaced by the resulting Base Rate Borrowing.
(b)Reimbursement Obligations Absolute. The Account Parties’ obligations to reimburse LC Disbursements as provided in Section 2.03(a) shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement under any and all circumstances whatsoever and irrespective of (i) any lack of validity or enforceability of any Letter of Credit, or any term or provision therein, (ii) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect, (iii) payment under a Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit, (iv) at any time or from time to time, without notice to any Account Party, the time for any performance of or compliance with any of such reimbursement obligations of any other Account Party shall be waived, extended or renewed, (v) any of such reimbursement obligations of any other Account Party shall be amended or otherwise modified in any respect, or the Guarantee of any of such reimbursement obligations or any security therefor shall be released, substituted or exchanged in whole or in part or otherwise dealt with, (vi) any lien or security interest granted to, or in favor of, the Administrative Agent or any of the Banks as security for any of such reimbursement obligations shall fail to be perfected, (vii) the occurrence of any Default, (viii) the existence of any proceedings of the type described in Section 6.01(g) or (h) with respect to any other Account Party or the Guarantor of any of such reimbursement obligations, (ix) any lack of validity or enforceability of any of such reimbursement obligations against any other Account Party or the Guarantor of any of such reimbursement obligations, or (x) any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of the obligations of any Account Party hereunder.
Neither the Administrative Agent nor any Bank nor any of their Related Parties shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit or any payment or failure to make any payment thereunder (irrespective of any of the circumstances referred to in the preceding sentence), or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Letter of Credit (including any document required to
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make a drawing thereunder), any error in interpretation of technical terms or any consequence arising from causes beyond their control; provided that the foregoing shall not be construed to excuse the Administrative Agent or a Bank from liability to any Account Party to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Account Parties to the extent permitted by applicable law) suffered by any Account Party that are caused by (x) the gross negligence or willful misconduct of the Administrative Agent or such Bank, as the case may be, or (y) in the case of any Bank, its failure to make an LC Disbursement in respect of any drawing properly made under a Letter of Credit as provided in Section 2.03(c), in the case of each of the foregoing clauses (x) and (y), as determined by a court of competent jurisdiction. The parties hereto expressly agree that:
(i)the Administrative Agent or (in the case of any Fronted Letter of Credit) the applicable Fronting Issuing Bank may accept documents that appear on their face to be in substantial compliance with the terms of a Letter of Credit without responsibility for further investigation, regardless of any notice or information to the contrary, and may make payment upon presentation of documents that appear on their face to be in substantial compliance with the terms of such Letter of Credit;
(ii)the Administrative Agent or (in the case of any Fronted Letter of Credit) the applicable Fronting Issuing Bank shall have the right, in its sole discretion, to decline to accept such documents and to make such payment if such documents are not in strict compliance with the terms of such Letter of Credit; and
(iii)this sentence shall establish the standard of care to be exercised by the Administrative Agent or (in the case of any Fronted Letter of Credit) the applicable Fronting Issuing Bank when determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof (and the parties hereto hereby waive, to the extent permitted by applicable law, any standard of care inconsistent with the foregoing).
(c)Disbursement Procedures. (i) The following provisions shall apply to any Syndicated Letter of Credit. The Administrative Agent shall, within a reasonable time following its receipt thereof, examine all documents purporting to represent a demand for payment under any Syndicated Letter of Credit. The Administrative Agent shall promptly after such examination, (A) notify each of the Banks, the Company and the Account Party by telephone (confirmed by telecopy) of such demand for payment and (B) deliver to each Bank a copy of each document purporting to represent a demand for payment under such Syndicated Letter of Credit. With respect to any drawing properly made under any such Syndicated Letter of Credit, each Bank will make an LC Disbursement in respect of such Syndicated Letter of Credit in accordance with its liability under such Syndicated Letter of Credit and this Agreement, such LC Disbursement to be made to the account of the Administrative Agent most recently designated by it for such purpose by notice to the Banks. Bank of America, as Administrative Agent, will make any such LC Disbursement available to the beneficiary of such Syndicated Letter of Credit by promptly crediting the amounts so received, in like funds, to the account identified by such beneficiary in connection with such demand for payment. Promptly following any LC
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Disbursement by any Bank in respect of any such Syndicated Letter of Credit, the Administrative Agent will notify the Company and the applicable Account Party of such LC Disbursement; provided that any failure to give or delay in giving such notice shall not relieve such Account Party of its obligation to reimburse the Banks with respect to any such LC Disbursement or the Guarantor of its guarantee of such obligation.
(ii)The following provisions shall apply to any Fronted Letter of Credit. The applicable Fronting Issuing Bank shall, within a reasonable time following its receipt thereof, examine all documents purporting to represent a demand for payment under a Fronted Letter of Credit. The applicable Fronting Issuing Bank shall promptly after such examination notify the Administrative Agent and the Company by telephone (confirmed by telecopy) of such demand for payment and whether such Fronting Issuing Bank has made or will make a LC Disbursement thereunder; provided that any failure to give or delay in giving such notice shall not relieve the applicable Account Party of its obligation to reimburse such Fronting Issuing Bank and the Banks with respect to any such LC Disbursement.
(d)Interim Interest. If any LC Disbursement is made, then, unless the Account Parties shall reimburse such LC Disbursement in full on the date such LC Disbursement is made (without regard for when notice thereof is given), the unpaid amount thereof shall bear interest, for each day from and including the date such LC Disbursement is made to but excluding the date that the applicable Account Party reimburses such LC Disbursement, at the rate per annum equal to (i) 1% plus the Base Rate plus the Applicable Margin to but excluding the date three Domestic Business Days after such LC Disbursement and (ii) from and including the date three Domestic Business Days after such LC Disbursement, 3% plus the Base Rate plus the Applicable Margin.
(e)Provision of Cover. In the event the Company and the Account Parties shall have provided (or be required to provide) cash collateral for outstanding Letters of Credit pursuant to Section 2.01(d), Section 2.17 or Section 6.01, the Administrative Agent will establish a separate cash collateral account (the “Collateral Account”), which may be a “securities account” (as defined in Section 8-501 of the Uniform Commercial Code as in effect in New York (the “NY UCC”)), in the name and under the sole dominion and control of the Administrative Agent (and, in the case of a securities account, in respect of which the Administrative Agent is the “entitlement holder” (as defined in Section 8-102(a)(7) of the NY UCC)) into which there shall be deposited from time to time such amounts paid to the Administrative Agent as cash collateral for the applicable LC Exposure. As collateral security for the prompt payment in full when due of all reimbursement obligations in respect of LC Disbursements, all interest thereon, and all other obligations of the Account Parties under the Credit Documents whether or not then outstanding or due and payable (such obligations being herein collectively called the “Secured Obligations”), each of the Company and the other Account Parties hereby pledges and grants to the Administrative Agent, for the benefit of the Banks and the Administrative Agent as provided herein, a security interest in all of its right, title and interest in and to the Collateral Account and the balances from time to time in the Collateral Account (including the investments and reinvestments therein provided for below). The balances from time to time in the Collateral Account shall not constitute payment of any Secured Obligations until applied by the
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Administrative Agent as provided herein. Anything in this Agreement to the contrary notwithstanding, funds held in the Collateral Account shall be subject to withdrawal only as provided in this Section 2.03(e). Amounts on deposit in the Collateral Account shall be invested and reinvested by the Administrative Agent in such short-term investments as the Administrative Agent shall determine in its sole discretion. All such investments and reinvestments shall be held in the name and be under the sole dominion and control of the Administrative Agent and shall be credited to the Collateral Account. At any time, and from time to time, while an Event of Default has occurred and is continuing, the Administrative Agent shall, if instructed by the Required Banks in their sole discretion, liquidate any such investments and reinvestments and credit the proceeds thereof to the Collateral Account and apply or cause to be applied such proceeds and any other balances in the Collateral Account to the payment of any of the Secured Obligations due and payable. If at any time (i) no Default has occurred and is continuing and (ii) all of the Secured Obligations then due have been paid in full but Letters of Credit remain outstanding, the Administrative Agent shall, from time to time, at the request of the Company, deliver to the Company, against receipt but without any recourse, warranty or representation whatsoever, such of the balances in the Collateral Account as exceed the aggregate undrawn amount of all outstanding Letters of Credit. When all of the Secured Obligations shall have been paid in full, all Letters of Credit have expired or been terminated and the Commitments have terminated, the Administrative Agent shall promptly deliver to the Company, for account of the Company and the other Account Parties, as applicable, against receipt but without any recourse, warranty or representation whatsoever, the balances remaining in the Collateral Account.
SECTION 2.04Loans. At any time and from time to time during the Commitment Availability Period each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make loans in Dollars to the Account Parties pursuant to this Section in amounts such that (x) the aggregate outstanding amount of the Credit Exposures of the Banks shall not exceed the aggregate amount of the Commitments of the Banks and (y) the aggregate outstanding amount of the Credit Exposure of such Bank shall not exceed the Commitment of such Bank. Each Borrowing (i) of Euro-DollarTerm SOFR Loans shall be in an aggregate principal amount of $5,000,000 or any larger multiple of $1,000,000 and (ii) of Base Rate Loans shall be in a principal amount of $500,000 or any larger multiple of $100,000 and, in each case, shall be made from the several Banks ratably in proportion to their respective Commitments; provided that, notwithstanding the foregoing, a Base Rate Borrowing may be in an amount that is required to finance the reimbursement of an LC Disbursement as contemplated by Section 2.03(a). Within the foregoing limits, the Account Parties may borrow under this Section, repay or, to the extent permitted by Section 2.12, prepay Loans and reborrow at any time during the Commitment Availability Period under this Section. Each Bank may, at its option, make any Loan available to any Subsidiary Account Party that is organized under the laws of a jurisdiction other than of the United States or a political subdivision thereof by causing any foreign or domestic branch or Affiliate of such Bank to make such Loan; provided that any exercise of such option shall not affect the obligation of such Subsidiary Account Party to repay such Loan in accordance with the terms of this Agreement.
SECTION 2.05Notice of Borrowings; Interest Elections. (a) The applicable Account Party shall give the Administrative Agent a notice (a “Notice of Borrowing”) in writing, (A) signed by a Responsible Officer, not later than 11:00 a.m. (New York City time) on (x) the date of each Base Rate Borrowing by such Account Party and (y) the third Euro-Dollarsecond
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Business Day before each Euro-DollarTerm SOFR Borrowing by such Account Party, specifying:
(i) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Base Rate Borrowing or a Euro-Dollar Business Day in the case of a Euro-DollarTerm SOFR Borrowing,
(ii)the aggregate amount (in Dollars) of such Borrowing,
(iii)whether the Loans comprising such Borrowing are to be Base Rate Loans or Euro-DollarTerm SOFR Loans,
(iv)in the case of a Euro-DollarTerm SOFR Borrowing, the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period, and
(v)whether the Loans comprising such Borrowing are to be LC Reimbursement Loans
or (B) such other form of notice as may be approved by the Administrative Agent (including any form on an electronic platform or electronic transmission system as shall be approved by the Administrative Agent).
(b)Interest Elections. Each Borrowing initially shall be of the Type specified in the applicable Notice of Borrowing and, in the case of a Euro-DollarTerm SOFR Borrowing, shall have an initial Interest Period as specified in such Notice of Borrowing. Thereafter, the applicable Account Party may elect to convert such Borrowing to a different Type or to continue such Borrowing and, in the case of a Euro-DollarTerm SOFR Borrowing, may elect Interest Periods therefor, all as provided in this subsection (b). The applicable Account Party may elect different options with respect to different portions of the affected Borrowing, in which case each such portion shall be allocated ratably among the Banks holding the Loans comprising such Borrowing, and the Loans comprising each such portion shall be considered a separate Borrowing. To make an election pursuant to this Section, the applicable Account Party shall notify the Administrative Agent of such election by the time that a Notice of Borrowing would be required under Section 2.05(a) if such Account Party were requesting a Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such Interest Election Request shall be in writing, irrevocable and in a form approved by the Administrative Agent and signed by a Responsible Officer of such Account Party. Each Interest Election Request shall specify the following information in compliance with Section 2.04:
(i)the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (iii) and (iv) below shall be specified for each resulting Borrowing);
(ii)the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day;
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(iii)whether the resulting Borrowing is to be a Base Rate Borrowing or a Euro-DollarTerm SOFR Borrowing; and
(iv)if the resulting Borrowing is a Euro-DollarTerm SOFR Borrowing, the Interest Period to be applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of the term “Interest Period”.
If any such Interest Election Request requests a Euro-DollarTerm SOFR Borrowing but does not specify an Interest Period, then the applicable Account Party shall be deemed to have selected an Interest Period of one month’s duration. Promptly following receipt of an Interest Election Request, the Administrative Agent shall advise each Bank of the details thereof and of such Bank’s portion of each resulting Borrowing. If the applicable Account Party fails to deliver a timely Interest Election Request with respect to a Euro-DollarTerm SOFR Revolving Borrowing prior to the end of the Interest Period applicable thereto, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall be converted to a Base Rate Borrowing. Notwithstanding any contrary provision hereof, if an Event of Default has occurred and is continuing and the Administrative Agent, at the request of the Required Banks, so notifies the Account Parties, then, so long as an Event of Default is continuing (i) no outstanding Borrowing may be converted to or continued as a Euro-DollarTerm SOFR Borrowing and (ii) unless repaid, each Euro-DollarTerm SOFR Borrowing shall be converted to a Base Rate Borrowing at the end of the Interest Period applicable thereto. After giving effect to all Borrowings, all conversions of Borrowings from one Type to the other, and all continuations of Loans of the same Type, there shall not be more than ten Interest Periods in effect with respect to Loans.
(a)Upon receipt of a Notice of Borrowing, the Administrative Agent shall promptly notify each Bank of the contents thereof and of such Bank’s share of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the applicable Account Party.
(b)Not later than 1:00 p.m. (New York City time) on the date of each Borrowing, each Bank participating therein shall (except as provided in subsection (c) of this Section) make available its share of such Borrowing, in Federal or other funds immediately available in New York City, to the Administrative Agent at its address specified in or pursuant to Section 10.01. Unless the Administrative Agent determines that any applicable condition specified in Article III has not been satisfied, the Administrative Agent will make the funds so received from the Banks available to the applicable Account Party at the Administrative Agent’s aforesaid address.
(c)If any Bank makes a new Loan hereunder to an Account Party on a day on which such Account Party is to repay all or any part of an outstanding Loan or unreimbursed LC Disbursement from such Bank, such Bank shall apply the proceeds of its new Loan to make such repayment and only an amount equal to the difference (if any) between the amount being borrowed and the amount being repaid shall be made available by such Bank to the
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Administrative Agent as provided in subsection (b) of this Section, or remitted by such Account Party to the Administrative Agent as provided in Section 2.13, as the case may be.
(d)Unless the Administrative Agent shall have received notice from a Bank prior to the time of any Borrowing that such Bank will not make available to the Administrative Agent such Bank’s share of such Borrowing, the Administrative Agent may assume that such Bank has made such share available to the Administrative Agent on the date of such Borrowing in accordance with subsections (b) and (c) of this Section and the Administrative Agent may, in reliance upon such assumption, make available to the applicable Account Party on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Administrative Agent, such Bank and such Account Party severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to such Account Party until the date such amount is repaid to the Administrative Agent, at (i) in the case of such Account Party, a rate per annum equal to the higher of the Federal Funds Rate and the interest rate applicable thereto pursuant to Section 2.09 and (ii) in the case of such Bank, the higher of the Federal Funds Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation. If such Bank shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Bank’s Loan included in such Borrowing for purposes of this Agreement.
SECTION 2.07Evidence of Loans.
(a)Each Bank shall maintain in accordance with its usual practice records evidencing the indebtedness of each Account Party to such Bank resulting from each Loan made by such Bank, including the amounts of principal and interest payable and paid to such Bank from time to time hereunder, and setting forth the Commitments of the Banks.
(b)The Administrative Agent, acting solely for this purpose as an agent of the Account Parties, shall maintain a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Banks and the Commitments of, and principal amounts (and stated interest) of the Loans owing to, each Bank from time to time (the “Register”). The entries in the Register shall be conclusive absent clear error, and the Account Parties, the Administrative Agent and the Banks shall treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Bank hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Account Parties and any Bank at any reasonable time and from time to time upon reasonable prior notice.
(c)The failure of any Bank or the Administrative Agent to maintain such records required by this Section 2.07 or any error therein shall not in any manner affect the obligations of the Account Parties to repay the Loans in accordance with the terms of this Agreement.
(d)Any Bank may request that the Loans of such Bank to an Account Party be evidenced by a single Note, in substantially the form of Exhibit A hereto with appropriate modifications to reflect the fact that it evidences solely Loans of the relevant Type, payable by such Account Party to such Bank for the account of its Applicable Lending Office. In such event,
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such Account Party shall prepare, execute and deliver to such Bank a Note payable to such Bank (or, if requested by such Bank, to such Bank and its registered assigns). Thereafter, once recorded in and to the extent consistent with the information contained in the Register, the Loans evidenced by such Note and interest thereon shall at all times (including after assignment pursuant to Section 10.06) be represented by one or more Notes in such form payable to the payee named therein (or, to such payee and its registered assigns). For any Loan evidenced by a Note pursuant to this clause (d), any transfer of a Note must be recorded in the Register in order to be effective.
SECTION 2.08Maturity of Loans. Each Loan shall mature, and each Account Party hereby unconditionally promises to pay the unpaid principal of each Loan made to such Account Party (together with accrued interest thereon), on the Commitment Termination Date.
SECTION 2.09Interest Rates of Loans.
(a)Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the sum of the Base Rate for such day plus the Applicable Margin. Such interest shall accrue and be payable quarterly in arrears on each Quarterly Date and on the date of termination of the Commitments in their entirety (and, if later, the date the Loans shall be paid in full). Any overdue principal of or interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the Base Rate for such day plus the Applicable Margin.
(b)Each Euro-DollarTerm SOFR Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the sum of the Adjusted LIBORTerm SOFR plus the Applicable Margin. Such interest shall be payable (i) for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof and (ii) in the event of any conversion of any Euro-DollarTerm SOFR Loan prior to the end of the current Interest Period therefor, accrued interest on such Euro-DollarTerm SOFR Loan shall be payable on the effective date of such conversion.
(c)Any overdue principal of any Euro-DollarTerm SOFR Loan shall bear interest, payable on demand, for each day from and including the date payment thereof was due to but excluding the date of actual payment, at a rate per annum equal to the sum of 2% plus the Applicable Margin plus the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum (as of the date of determination) at which one-day (or, if such amount due remains unpaid more than three Euro-Dollar Business Days, then for such other period of time not longer than six months as the Administrative Agent may select) deposits in Dollars in an amount approximately equal to such overdue payment due to the Person serving as the Administrative Agent are offered to such Person in the London interbank market for the applicable period determined as provided above (or, if the circumstances described in Section 8.01(a)(i) or (ii) shall exist, at a rate per annum equal to the sum of 2% plus the Base Rate for such day plus the Applicable Margin). Any overdue interest on any Euro-DollarTerm SOFR Loan shall bear interest, payable on demand, for each day from and including the date payment
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thereof is due to but excluding the date of actual payment, at a rate per annum equal to the sum of 2% plus the Base Rate for such day plus the Applicable Margin.
(d)The Administrative Agent shall determine each interest rate applicable to the Loans and other amounts hereunder. The Administrative Agent shall give prompt notice to the applicable Account Party and the Banks of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error.
(a)The Company agrees to pay to the Administrative Agent for account of each Bank a facility fee, which shall accrue at the Applicable Facility Fee Rate, (i) prior to the termination of such Bank’s Commitment, on the daily amount of the Commitment of such Bank (whether used or unused) during the period from and including the Effective Date to but excluding the date that the Commitments terminate and (ii) if such Bank continues to have any Credit Exposure after its Commitment terminates, on the daily amount of such Bank’s Credit Exposure from and including the date its Commitment terminates to but excluding the date such Bank ceases to have any Credit Exposure. Accrued facility fees shall be payable on each Quarterly Date, commencing on the first such date after the Effective Date; provided that all such fees shall be payable on the date on which the Commitments terminate and any such fees accruing after such date shall be payable on demand.
(b)The Company agrees to pay to the Administrative Agent for account of each Bank a letter of credit fee with respect to Letters of Credit, which shall accrue at the Applicable Letter of Credit Commission on the daily amount available to be drawn under all outstanding Letters of Credit during the period from and including the Effective Date to but excluding the later of the date on which such Bank’s Commitment terminates and the date on which such Bank ceases to have any LC Exposure. Letter of credit fees accrued through and including each Quarterly Date shall be payable on the third Business Day following such Quarterly Date, commencing on the first such Business Day to occur; provided that all such fees shall be payable on the date on which the Commitments terminate and any such fees accruing after such date shall be payable on demand.
(c)The Company agrees to pay to the Administrative Agent for account of each Fronting Issuing Bank a fronting fee with respect to each Fronted Letter of Credit issued by such Fronting Issuing Bank, which shall accrue at a rate per annum agreed in writing between the Company and such Fronting Issuing Bank (and notified to the Administrative Agent) on the average daily aggregate undrawn amount of each such Fronted Letters of Credit during the period from and including the date of issuance thereof to but excluding the later of the expiry date thereof and the date on which there ceases to be any LC Exposure thereunder. Fronting fees accrued through and including each Quarterly Date shall be payable on the tenth Business Day following such Quarterly Date, commencing on the first such Business Day to occur; provided that all such fees shall be payable on the date on which the Commitments terminate and any such fees accruing after such date shall be payable on demand.
(d)The Account Parties agree to pay, on demand, to the Administrative Agent (with respect to Syndicated Letters of Credit), and each Fronting Issuing Bank (with respect to
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Fronted Letters of Credit issued by it), in each case for its own account, all commissions, charges, costs and expenses with respect to the issuance, amendment, renewal and extension of each such Letter of Credit and drawings and other transactions relating thereto in amounts customarily charged from time to time in like circumstances by the Person that is serving as the Administrative Agent, or such Fronting Issuing Bank, as the case may be, or, as may be separately agreed from time to time by the Company on behalf of the Account Parties and the Administrative Agent, or such Fronting Issuing Bank, as the case may be.
(e)All fees payable hereunder shall be paid on the dates due, in immediately available funds, to the Administrative Agent for distribution, as applicable, to the Banks entitled thereto. Fees paid hereunder shall not be refundable under any circumstances. Any overdue fees or other amounts, other than principal or interest, shall bear interest, payable on demand, for each day from and including the date payment thereof is due to but excluding the date of actual payment, at a rate per annum equal to the sum of 2% plus the Base Rate for such day plus the Applicable Margin.
SECTION 2.11Termination, Reduction or Increase of Commitments.
(a) Unless previously terminated, the Commitments shall automatically terminate on the Commitment Termination Date.
(b)The Company may, upon notice to the Administrative Agent, terminate at any time, or proportionately and permanently reduce from time to time by an aggregate amount of $10,000,000 or any larger multiple of $5,000,000, the aggregate amount of the Commitments, provided that, (A) such notice must be in a form acceptable to the Administrative Agent and be received by the Administrative Agent not later than 11:00 a.m. (x) three Euro-Dollartwo Business Days prior to the date of prepayment of Euro-DollarTerm SOFR Loans and (y) on the date of prepayment of Base Rate Loans and (B) after giving effect to such termination or any such reduction, the aggregate outstanding amount of the Credit Exposures of the Banks shall not exceed the aggregate amount of the Commitments of the Banks. Upon receipt of such a notice, the Administrative Agent shall promptly notify each Bank of the contents thereof and of such Bank’s ratable share of such reduction (if such notice is a notice of reduction) and such notice shall not thereafter be revocable by the Company. Any termination or reduction of the Commitments shall be permanent.
(c)The Company shall have the right, at any time or from time to time prior to the date that is 30 days prior to the Commitment Termination Date, to increase the aggregate Commitments hereunder by an aggregate amount of up to $1,000,000,000, by causing one or more Additional Commitment Banks (which may include any existing Bank) to provide a (or, in the case of an existing Bank, to increase its) Commitment (each such increase, an “Commitment Increase”), provided that (i) no Bank shall have any obligation hereunder to become an Additional Commitment Bank and any election to do so shall be in the sole discretion of each Bank, (ii) each Additional Commitment Bank shall have entered into an agreement in form and substance satisfactory to the Company and the Administrative Agent pursuant to which such Additional Commitment Bank shall provide a Commitment (or, if such Additional Commitment Bank is an existing Bank, pursuant to which its Commitment shall be increased), (iii) unless the Administrative Agent otherwise agrees, such Commitment of any Additional Commitment Bank
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which is not an existing Bank shall be in an amount of at least $25,000,000 and (iv) unless the Administrative Agent otherwise agrees, each Commitment Increase shall be in an amount of at least $25,000,000. Each such Additional Commitment Bank shall enter into an agreement in form and substance satisfactory to the Company and the Administrative Agent pursuant to which such Additional Commitment Bank shall, as of effective date of such Commitment Increase (which shall be a Domestic Business Day) and, unless the Administrative Agent otherwise agrees, on which no issuance, amendment, renewal or extension of any Letter of Credit is scheduled to occur, provide a Commitment (or, if any such Additional Commitment Bank is an existing Bank, increase its Commitment in the amount specified therein and (if not an existing Bank) become a Bank hereunder. Notwithstanding the foregoing, no Commitment Increase pursuant to this Section shall be effective unless:
(i)the Company shall have given the Administrative Agent notice of any such increase at least three Domestic Business Days prior to the relevant effective date of such Commitment Increase;
(ii)no Default or Event of Default shall have occurred and be continuing on such effective date; and
(iii)each of the representations and warranties of each Account Party contained in this Agreement (other than the representations and warranties set forth in Sections 4.04(e) and 4.05 as to any matter which has theretofore been disclosed in writing by the Account Parties to the Banks) shall be true on and as of such effective date with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date).
Each notice under clause (i) above shall be deemed to constitute a representation and warranty by the Company and the Subsidiary Account Parties as to the matters specified in clauses (ii) and (iii) above. On the effective date of each Commitment Increase, the Company shall simultaneously (i) prepay in full the outstanding Loans (if any) held by the Banks immediately prior to giving effect to the relevant Commitment Increase, (ii) if the Company shall have so requested in accordance with this Agreement, borrow new Loans from all Banks (including, if applicable, any new Banks) such that, after giving effect thereto, the Loans are held ratably by the Banks in accordance with their respective Commitments (after giving effect to such Commitment Increase) and (iii) pay to the Banks the amounts, if any, payable under Section 2.14.
SECTION 2.12Optional Prepayments.
(a)An Account Party may, upon at least one Domestic Business Days’ notice to the Administrative Agent, prepay any Base Rate Borrowing made to such Account Party in whole at any time, or from time to time in part in amounts aggregating $5,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment.
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(b)An Account Party may, upon notice to the Administrative Agent by 10:00 a.m., New York City time, at least three Domestic Business Days prior to the date of prepayment, prepay any Euro-DollarTerm SOFR Borrowing made to such Account Party in whole at any time, or from time to time in part in amounts aggregating $5,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with (x) accrued interest thereon to the date of prepayment and (y) all losses and expenses (if any) relating thereto which are (i) determined pursuant to Section 2.14 and (ii) notified to such Account Party by the relevant Bank at least one Domestic Business Day prior to the date of such prepayment, provided that the failure of any Bank to so notify such Account Party of the amount of any such loss or expense shall not relieve such Account Party of its obligation to pay the same.
(c)Each prepayment pursuant to this Section shall be applied to prepay ratably the Loans of the several Banks included in the relevant Borrowing being prepaid. Upon receipt of a notice of prepayment pursuant to this Section, the Administrative Agent shall promptly notify each Bank of the contents thereof and of such Bank’s ratable share (if any) of such prepayment and such notice shall not thereafter be revocable by the applicable Account Party. Each notice of prepayment shall be in such form as may be approved by the Administrative Agent (including any form on an electronic platform or electronic transmission system as shall be approved by the Administrative Agent), appropriately completed and signed by a Responsible Officer.
SECTION 2.13Payments Generally; Pro Rata Treatment.
(a)Each Account Party shall make each payment required to be made by it hereunder (whether reimbursement of LC Disbursements, principal of or interest on the Loans, fees, amounts under Article VIII or otherwise) or under any other Credit Document (except to the extent otherwise provided therein) not later than 2:00 p.m., New York City time, on the date when due, in immediately available funds, without set-off or counterclaim. Any amounts received after such time on any date may, in the discretion of the Administrative Agent, be deemed to have been received on the next succeeding Domestic Business Day for purposes of calculating interest thereon. All such payments shall be made to the Administrative Agent at its Payment Account, except as otherwise expressly provided in the relevant Credit Document, and except that payments pursuant to Section 10.03 and Article VIII shall be made directly to the Persons entitled thereto. The Administrative Agent shall distribute any such payments received by it for account of any other Person to the appropriate recipient promptly following receipt thereof. If any payment hereunder shall be due on a day that is not a Domestic Business Day or Euro-Dollar Business Day (as applicable), the date for payment shall be extended to the next succeeding Domestic Business Day or Euro-Dollar Business Day (as applicable) and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments hereunder or under any other Credit Document shall be made in Dollars.
(b)If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of unreimbursed LC Disbursements in respect of Letters of Credit or interest thereon, principal of or interest on the Loans and fees then due hereunder, such funds shall be applied (i) first, to pay interest and fees then due hereunder in respect of such Letters of Credit or Loans (as applicable), pro rata among the Banks in accordance with the amounts of interest and fees then due to the Banks, and (ii) second, to pay
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such unreimbursed LC Disbursements or principal in respect of Loans (as applicable) then due hereunder, pro rata among the Banks in accordance with the amounts of unreimbursed LC Disbursements or principal of Loans then due to the Banks.
(c)Except to the extent otherwise provided herein: (i) each reimbursement of LC Disbursements in respect of Letters of Credit and each payment of principal in respect of Loans shall be for account of the Banks, pro rata in accordance with the amounts of unreimbursed LC Disbursements or principal of Loans (as the case may be) then due and payable to the Banks; (ii) each termination or reduction of the amount of Commitments under Section 2.11 shall be applied to the respective Commitments of the Banks, pro rata in accordance with their respective Applicable Percentages; and (iii) each payment of interest, facility fees and letter of credit fees shall be for account of the Banks, pro rata in accordance with the amounts of interest, facility fees and letter of credit fees (as the case may be) then due and payable to the Banks.
(d)Unless the Administrative Agent shall have received notice from the Company or another Account Party prior to the date on which any payment is due to the Administrative Agent for the account of the Banks or any Fronting Issuing Bank hereunder that neither the Company nor any other Account Party will make such payment, the Administrative Agent may assume that the Company or applicable Account Party has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Banks or the applicable Fronting Issuing Bank, as the case may be, the amount due.
With respect to any payment that the Administrative Agent makes for the account of the Banks or any Fronting Issuing Bank hereunder as to which the Administrative Agent determines (which determination shall be conclusive absent manifest error) that any of the following applies (such payment referred to as the “Rescindable Amount”): (1) the Company has not in fact made such payment; (2) the Administrative Agent has made a payment in excess of the amount so paid by the Company (whether or not then owed); or (3) the Administrative Agent has for any reason otherwise erroneously made such payment; then each of the Banks or the applicable Fronting Issuing Banks, as the case may be, severally agrees to repay to the Administrative Agent forthwith on demand the Rescindable Amount so distributed to such Bank or such Fronting Issuing Bank, in immediately available funds with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the greater of the Federal Funds Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation.
A notice of the Administrative Agent to any Bank or the Company or any other Account Party with respect to any amount owing under this clause (d) shall be conclusive, absent manifest error
(e)If any Bank shall fail to make any payment required to be made by it pursuant to Section 2.01(e), 2.03(a), 2.06(d), 2.13(d) or 7.07, then the Administrative Agent may, in its discretion and notwithstanding any contrary provision hereof, (i) apply any amounts thereafter received by the Administrative Agent for the account of such Bank for the benefit of the Administrative Agent or the applicable Fronting Issuing Bank to satisfy such Bank’s obligations to it or any such Fronting Issuing Bank under such Section until all such unsatisfied obligations are fully paid, and/or (ii) hold any such amounts in a segregated account as cash
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collateral for, and application to, any future funding obligations of such Bank under any such Section, in the case of each of clauses (i) and (ii) above, in any order as determined by the Administrative Agent in its discretion.
SECTION 2.14Funding Losses. If an Account Party makes any payment of principal with respect to any Euro-DollarTerm SOFR Loan (pursuant to Article VI or VIII or otherwise), or converts any Euro-DollarTerm SOFR Loan, on any day other than the last day of the Interest Period applicable thereto, or the end of an applicable period fixed pursuant to Section 2.09(c), or if an Account Party fails to borrow, convert, continue or prepay any Euro-DollarTerm SOFR Loans after notice has been given to any Bank in accordance with Section 2.05(a), 2.05(b) or 2.12(b), as applicable, such Account Party shall reimburse each Bank within 15 days after demand for any resulting loss or expense incurred by it (or by an existing or prospective participant in the related Loan), including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after any such payment or failure to borrow, provided that such Bank shall have delivered to such Account Party a certificate as to the amount of such loss or expense, which certificate shall be conclusive in the absence of manifest error.
SECTION 2.15Computation of Interest and Fees. Interest on Base Rate Loans shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). All other interest and fees shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day).
SECTION 2.16Provisions Relating to NAIC Approved Banks.
(a)Each Bank agrees to use commercially reasonable efforts in order to, at all times, (i) be listed on the NAIC Approved Bank List or (ii) maintain in effect a Confirming Bank Agreement with a Person which is listed on the NAIC Approved Bank List to act as a Confirming Bank for such Bank in respect of its obligations under the Syndicated Letters of Credit (which Person, prior to entering in such Confirming Bank Agreement, shall be subject to the prior written consent of each of the Company and the Administrative Agent, such consent, in each case, shall not be unreasonably withheld). If any Bank shall enter into a Confirming Bank Agreement hereunder at any time, it shall promptly furnish a copy thereof to the Company and the Administrative Agent. If at any time any Bank shall cease to be a NAIC Approved Bank, such Bank shall promptly notify the Company and the Administrative Agent and forthwith comply with its obligations under this subsection (a).
(b)If at any time any Bank shall not be listed on the NAIC Approved Bank List and shall not have in effect a Confirming Bank Agreement with a Person which is so listed (provided such Bank is not a Defaulting Bank at such time), such Bank shall be obligated to provide cash collateral for its LC Exposure on the following terms:
(i)With respect to any then existing Fronted LC Exposure of such Bank, at the option of the applicable Fronting Issuing Bank, such Bank shall forthwith deliver to the Administrative Agent an amount in cash equal to the maximum amount of such Fronted LC Exposure (such amount provided in respect
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of such Fronted LC Exposure being herein called “Fronted LC Cash Collateral”). Upon receipt of any Fronted LC Cash Collateral (including any additional cash collateral provided under clause (iii) below that constitutes Fronted LC Cash Collateral), the Administrative Agent will establish one or more cash collateral accounts (which, in each case, may be a “securities account” (as defined in Section 8-501 of the NY UCC, in the name and under the sole dominion and control of the Administrative Agent (and, in the case of a securities account, in respect of which the Administrative Agent is the “entitlement holder” (as defined in Section 8-102(a)(7) of the NY UCC)) (each such cash collateral account, a “Fronted LC Collateral Account”) and deposit therein the relevant portion of such Fronted LC Cash Collateral (including the relevant portion of any additional cash collateral provided by such Bank in respect of its additional Fronted LC Exposure pursuant to clause (iii) below) as collateral solely for the benefit of the applicable Fronting Issuing Bank to secure such Bank’s obligations in respect of the Fronted LC Exposure with respect to Fronted Letters of Credit issued by such Fronting Issuing Bank and such Bank hereby pledges and grants to the Administrative Agent, for the benefit of the applicable Fronting Issuing Bank, a security interest in all of its right, title and interest in and to each Fronted LC Collateral Account and the balances from time to time therein (including the investments and reinvestments therein provided for below). The balances from time to time in a Fronted LC Collateral Account shall not constitute payment of any such obligations until applied by the Administrative Agent as provided herein.
(ii)With respect to any then existing Syndicated LC Exposure of such Bank, subject to the payment by such Bank of a fee reasonably determined by Bank of America, Bank of America agrees to act as a Confirming Bank for (and to enter into a Confirming Bank Agreement with) such Bank with respect to such Bank’s then existing Syndicated LC Exposure (and such additional Syndicated LC Exposure of such Bank, to the extent provided in clause (iii) below) and (unless not required by Bank of America in its sole discretion) such Bank shall forthwith deliver to the Administrative Agent an amount in cash equal to the maximum amount of such Syndicated LC Exposure (such amount provided in respect of such Syndicated LC Exposure being herein called the “Syndicated LC Cash Collateral”). Upon receipt of any Syndicated LC Cash Collateral (including any additional cash collateral provided under clause (iii) below that constitutes Syndicated LC Cash Collateral) by the Administrative Agent from such Bank, the Administrative Agent will establish a cash collateral account (of the type described in clause (i) above) (the “Syndicated LC Collateral Account” and, together with each Fronted LC Collateral Account, each a “LC Collateral Account”) and deposit therein such Syndicated LC Cash Collateral (including any additional cash collateral provided by such Bank in respect of its additional Syndicated LC Exposure pursuant to clause (iii) below) as collateral solely for the benefit of Bank of America to secure such Bank’s obligations to Bank of America under such Confirming Bank Agreement in respect of such Bank’s Syndicated LC Exposure and such Bank hereby pledges and grants to the Administrative Agent, for the benefit of Bank of America, a security interest in all of its right, title and interest in and to the Syndicated LC Collateral Account and the balances from
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time to time therein (including the investments and reinvestments therein provided for below). The balances from time to time in the Syndicated LC Collateral Account shall not constitute payment of any such obligations until applied by the Administrative Agent as provided herein.
(iii)If at any time thereafter the Account Parties shall request additional Letters of Credit and at such time such Bank shall not be a NAIC Approved Bank (provided such Bank is not a Defaulting Bank), such Bank shall provide additional cash collateral in respect of its Applicable Percentage of the maximum amount of the LC Exposure under such Letter of Credit in accordance with clause (i) or (ii) above, as applicable (provided that, with respect to any Fronted LC Exposure, such collateral shall be provided only at the option of the applicable Fronting Issuing Bank) and, upon receipt of such collateral, the Administrative Agent shall deposit, hold and apply such collateral as Fronted LC Cash Collateral or Syndicated LC Cash Collateral, as applicable, in accordance with this subsection (b).
(iv)Anything in this Agreement to the contrary notwithstanding, funds held in any LC Collateral Account established under this subsection (b) shall be subject to withdrawal only as provided herein. Amounts on deposit in each LC Collateral Account shall be invested and reinvested by the Administrative Agent in such short-term investments as the Administrative Agent shall determine in its sole discretion or, in the case of any Fronted LC Collateral Account, as the applicable Fronting Issuing Bank for whose benefits the funds therein have been pledged may direct the Administrative Agent or, in the case of the Syndicated LC Collateral Account, as Bank of America may direct the Administrative Agent. All such investments and reinvestments shall be held in the name and be under the sole dominion and control of the Administrative Agent and shall be credited to the relevant LC Collateral Account for the benefit of the Person for which such funds are being held. At any time, and from time to time, the Administrative Agent shall, if instructed by (in the case of any Fronted LC Collateral Account) the applicable Fronting Issuing Bank in its sole discretion or (in the case of the Syndicated LC Collateral Account) Bank of America in its sole discretion, as the case may be, liquidate any such investments and reinvestments and credit the proceeds thereof to such LC Collateral Account and apply or cause to be applied the balances therein to the payment of such Bank’s obligations then due and payable which are secured by such balances.
(v)If at any time the Letters of Credit in respect of any LC Exposure for which cash collateral has been provided by such Bank under this subsection (b) shall no longer exist, the Administrative Agent shall, at the request of such Bank, deliver to such Bank (with the concurrence of the applicable Fronting Issuing Bank or Bank of America, as applicable), against receipt but without any recourse, warranty or representation whatsoever, the remaining balance in the relevant LC Collateral Account.
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(vi)If at any time such Bank shall have become a NAIC Approved Bank, subject, in the case of any Syndicated LC Exposure of such Bank, to (x) the termination of the Confirming Bank Agreement entered into between Bank of America and such Bank releasing Bank of America’s obligation thereunder to act a Confirming Bank for such Bank and (y) with the consent of the beneficiary under each Syndicated Letter of Credit to the extent required by the terms thereof or under applicable law (including, if applicable, the Uniform Customs and Practices for Documentary Credits governing such Syndicated Letter of Credit), the amendment of each such Syndicated Letter of Credit by the Administrative Agent to reinstate such Bank’s liability thereunder (and terminate Bank of America’s liability thereunder as such Confirming Bank), the Administrative Agent shall, at the request of such Bank, deliver to such Bank (with the concurrence of the applicable Fronting Issuing Bank (with respect to any Fronted LC Exposure) or Bank of America (with respect to any Syndicated LC Exposure)), against receipt but without any recourse, warranty or representation whatsoever, the remaining balance in the relevant LC Collateral Account.
(c)Notwithstanding anything herein to the contrary, so long as any Bank shall not be a NAIC Approved Bank, the Company may, upon notice to such Bank and the Administrative Agent, require such Bank, at the expense of such Bank, to assign, without recourse (in accordance with and subject to the restrictions contained in Section 10.06), all its interests, rights and obligations under this Agreement and the Letters of Credit issued, or participated in, by such Bank to any Person that shall assume such obligations (which assignee may be another Bank, if it accepts such assignment) with (and subject to) the consent of the Administrative Agent (which consent shall not unreasonably be withheld); provided that such Bank shall have received payment of an amount equal to the outstanding amount of its LC Disbursements (including participations therein), principal of its Loans, accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding LC Disbursements, Loans and accrued interest and fees) or the applicable Account Parties (in the case of all other amounts) (provided that the Account Parties may deduct, or cause such assignee to deduct, from amounts payable by them or it, as applicable, to such Bank hereunder all fees, costs and expenses reasonably incurred by the Account Parties in effecting such assignment).
SECTION 2.17Defaulting Banks. Notwithstanding any provision of this Agreement to the contrary, if any Bank becomes a Defaulting Bank, then the following provisions shall apply for so long as such Bank is a Defaulting Bank:
(a)facility fees shall cease to accrue on the Commitment of such Defaulting Bank pursuant to Section 2.10(a);
(b)the Commitment and Credit Exposure of such Defaulting Bank shall not be included in determining whether the Required Banks have taken or may take any action hereunder (including any consent to any amendment, waiver or other modification pursuant to Section 10.05); provided that this clause (b) shall not apply to the vote of a Defaulting Bank in the case of an amendment, waiver or other modification requiring the consent of such Bank or each Bank affected thereby;
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(c)with respect to any Fronted LC Exposure (if any):
(i)all or any part of the Fronted LC Exposure of such Defaulting Bank (other than such Fronted LC Exposure that is cash collateralized pursuant to Section 2.16(b)) shall be reallocated among the Non-Defaulting Banks in accordance with their respective Applicable Percentages but only to the extent (x) the sum of all Non-Defaulting Banks’ Credit Exposures plus such Defaulting Bank’s LC Exposure does not exceed the total of all Non-Defaulting Banks’ Commitments and (y) such reallocation does not, as to any non-Defaulting Bank, cause such non-Defaulting Bank’s Credit Exposure to exceed its Commitment (and, if such reallocation can only partially be effected, such reallocation shall be made ratably among the then outstanding Fronted Letters of Credit, unless otherwise agreed by the Fronting Issuing Banks and the Administrative Agent);
(ii)if the reallocation described in clause (i) above cannot, or can only partially, be effected, the relevant Account Party under each outstanding Fronted Letter of Credit shall within one Business Day following notice by the Administrative Agent cash collateralize for the benefit of the applicable Fronting Issuing Bank only such Account Party’s obligations in respect thereof corresponding to such Defaulting Bank’s Fronted LC Exposure thereunder (after giving effect to any partial reallocation pursuant to clause (i) above) in accordance with the procedures set forth in Section 2.03(e) for so long as such Fronted LC Exposure is outstanding;
(iii)if the Account Parties cash collateralizes any portion of such Defaulting Bank’s Fronted LC Exposure pursuant to clause (ii) above, the Company shall not be required to pay any letter of credit fees to such Defaulting Bank pursuant to Section 2.10(b) with respect to such Defaulting Bank’s Fronted LC Exposure during the period and to the extent that such Defaulting Bank’s Fronted LC Exposure is cash collateralized;
(iv)if the Fronted LC Exposure of the Non-Defaulting Banks is reallocated pursuant to clause (i) above, then the letter of credit fees payable to the Banks pursuant to Section 2.10(b) shall be adjusted in accordance with such Non-Defaulting Banks’ Applicable Percentages;
(v)if all or any portion of such Defaulting Bank’s Fronted LC Exposure is neither reallocated nor cash collateralized pursuant to clause (i) or (ii) above, then, without prejudice to any rights or remedies of any applicable Fronting Issuing Bank or any other Bank hereunder, all facility fees that otherwise would have been payable to such Defaulting Bank (solely with respect to the portion of such Defaulting Bank’s Commitment that was utilized by such Fronted LC Exposure) and letter of credit fees payable under Section 2.10(b) with respect to such Defaulting Bank’s Fronted LC Exposure shall be payable to the applicable Fronting Issuing Banks until and to the extent that such Fronted LC Exposure is reallocated and/or cash collateralized;
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(vi)so long as such Bank is a Defaulting Bank, no Fronting Issuing Bank shall be required to issue, amend or increase any Fronted Letter of Credit, unless it is satisfied that the related exposure and the Defaulting Bank’s then outstanding Fronted LC Exposure will be 100% covered by the Commitments of the Non-Defaulting Banks and/or cash collateral will be provided by the Account Parties in accordance with Section 2.17(c), and participating interests in any newly issued or increased Fronted Letter of Credit shall be allocated among Non-Defaulting Banks in a manner consistent with Section 2.17(c)(i) (and such Defaulting Bank shall not participate therein); and
(vii)if (i) a Bankruptcy Event or a Bail-In Action with respect to a Parent of any Bank shall occur following the date hereof and for so long as such event shall continue or (ii) any Fronting Issuing Bank has a good faith belief that any Bank has defaulted in fulfilling its obligations under one or more other agreements in which such Bank commits to extend credit, such Fronting Issuing Bank shall not be required to issue, amend or increase any Fronted Letter of Credit, unless such Fronting Issuing Bank shall have entered into arrangements with the Account Parties or such Bank, satisfactory to such Fronting Issuing Bank, to defease any risk to it in respect of such Bank hereunder;
(d)with respect to any Syndicated LC Exposure (if any):
(i)letter of credit fees shall cease to accrue on such Defaulting Bank’s Syndicated LC Exposure pursuant to Section 2.10(b);
(ii)with respect to any Syndicated Letter of Credit outstanding at the time such Bank becomes a Defaulting Bank, with the consent of the beneficiary thereunder to the extent required by the terms thereof or under applicable law (including, if applicable, the Uniform Customs and Practices for Documentary Credits governing such Syndicated Letter of Credit), (x) all or any part of the Syndicated LC Exposure of such Defaulting Bank (other than any such Syndicated LC Exposure for which Bank of America is then acting as a Confirming Bank for such Defaulting Bank pursuant to Section 2.16(b)) shall be reallocated among the Non-Defaulting Banks in accordance with their respective Applicable Percentages but only to the extent (I) the sum of all Non-Defaulting Banks’ Credit Exposures plus such Defaulting Bank’s LC Exposure does not exceed the total of all Non-Defaulting Banks’ Commitments and (II) such reallocation does not, as to any non-Defaulting Bank, cause such non-Defaulting Bank’s Credit Exposure to exceed its Commitment and (y) each such Syndicated Letter of Credit (other than any Syndicated Letter of Credit in respect of which Bank of America is then acting as a Confirming Bank for such Bank pursuant to Section 2.16(b)) shall be amended by the Administrative Agent to specify the Banks that are parties to such Syndicated Letter of Credit (excluding, for avoidance of doubt, such Bank), after giving effect to such event, and such Banks’ respective Applicable Percentages as of the effective date of such amendment;
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(iii)if the Syndicated LC Exposure of the Non-Defaulting Banks is reallocated with respect to any Syndicated Letter of Credit pursuant to clause (ii) above, then the letter of credit fees payable to the Banks with respect to such Syndicated Letter of Credit pursuant to Section 2.10(b) shall be adjusted in accordance with such Non-Defaulting Banks’ Applicable Percentages; and
(iv)the Syndicated LC Exposures of the Banks in respect of any newly issued Syndicated Letter of Credit shall be allocated among Non-Defaulting Banks in a manner consistent with clause (ii) above (and such Defaulting Bank shall have no obligation under each such Syndicated Letter of Credit to the extent such Syndicated LC Exposures in respect thereof are so reallocated);
(e)until such time as the readjustments with respect to such Defaulting Bank are effected pursuant to subsection (f) of this Section, the Company may, upon notice to such Defaulting Bank and the Administrative Agent, require such Bank, at the expense of such Defaulting Bank, to assign, without recourse (in accordance with and subject to the restrictions contained in Section 10.06), all its interests, rights and obligations under this Agreement and the Letters of Credit issued, or participated in, by such Defaulting Bank to any Person that shall assume such obligations (which assignee may be another Bank, if it accepts such assignment) with (and subject to) the consent of the Administrative Agent (which consent shall not unreasonably be withheld); provided that (i) such Defaulting Bank shall have received payment of an amount equal to the outstanding amount of its LC Disbursements (including participations therein), principal of its Loans, accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding LC Disbursements, Loans and accrued interest and fees) or the applicable Account Parties (in the case of all other amounts) (provided that the Account Parties may deduct, or cause such assignee to deduct, from amounts payable by them or it, as applicable, to such Bank hereunder all fees, costs and expenses reasonably incurred by the Account Parties in effecting such assignment) and (ii) concurrently with such assignment, to the extent any LC Exposure of such Defaulting Bank theretofore shall have been reallocated pursuant to this Section, the Credit Exposures of the Banks (including, after giving effect to such assignment, such assignee) shall be readjusted (and payments made by the relevant parties) in a manner consistent with subsection (f) of this Section, such that, after giving effect thereto, the Banks (including such assignee, but not such Defaulting Bank) shall hold the Credit Exposures then outstanding in accordance with their respective Applicable Percentages; and
(f)in the event that the Administrative Agent, the Account Parties and (to the extent there shall be Fronted Letters of Credit then outstanding) each Fronting Issuing Bank each agrees that a Defaulting Bank has adequately remedied all matters that caused such Bank to be a Defaulting Bank, then such Bank shall cease to be a Defaulting Bank and the Credit Exposures of the Banks shall be readjusted as follows:
(i)with respect to any Fronted LC Exposure then outstanding, such Fronted LC Exposure shall be readjusted to reflect the inclusion of such Bank’s Commitment and such Bank shall purchase at par such of the unreimbursed LC Disbursements then outstanding (if any) of the other Banks in respect of such Fronted LC Exposure as the Administrative Agent shall determine may be
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necessary in order for such Bank to hold such LC Disbursements in accordance with its Applicable Percentage;
(ii)with respect to any Syndicated LC Exposure then outstanding, (x) with the consent of the beneficiary under each outstanding Syndicated Letter of Credit to the extent required by the terms thereof or under applicable law (including, if applicable, the Uniform Customs and Practices for Documentary Credits governing such Syndicated Letter of Credit) and to the extent such Syndicated Letter of Credit was theretofore amended or issued pursuant to subsection (d)(ii) or (d)(iv), as applicable, of this Section to reflect the exclusion of such Bank’s Commitment, (I) each such Syndicated Letter of Credit shall be amended by the Administrative Agent to specify the Banks (including such Bank) that are then parties to such Syndicated Letter of Credit and such Banks’ respective Applicable Percentages, in each case reflecting the inclusion of such Bank’s Commitment, as of the effective date of such amendment and (II) if such Syndicated Letter of Credit was not theretofore amended pursuant to subsection (d)(ii) of this Section to reflect the exclusion of such Bank’s Commitment thereunder, but instead the amount of such Syndicated Letter of Credit was increased or a new Letter of Credit was issued hereunder in favor of the beneficiary of such Syndicated Letter of Credit in order to provide such beneficiary with an aggregate undrawn amount of Letters of Credit from the Non-Defaulting Banks (including, if applicable, the applicable Fronting Issuing Banks) in the amount required by such beneficiary, the amount of such Syndicated Letter of Credit or new Letter of Credit shall be amended by the Administrative Agent to decrease the amount thereof, or the Company shall arrange for such new Letter of Credit to be surrendered by such beneficiary to the Administrative Agent or the applicable Fronting Issuing Bank, in order to reflect the inclusion of such Bank’s Commitment pursuant to the amendment to such Syndicated Letter of Credit under sub-clause (I) above (provided that, notwithstanding anything herein to the contrary, the Company shall not be required to pay any letter of credit fees to such Bank pursuant to Section 2.10(b) until such amendments with respect to such Letters of Credit shall have become effective); (y) (subject to clause (x) being satisfied with respect to a Syndicated Letter of Credit) the Syndicated LC Exposure of the Banks with respect to such Syndicated Letter of Credit shall be readjusted to reflect the inclusion of such Bank’s Commitment; and (z) (subject to clause (x) being satisfied with respect to a Syndicated Letter of Credit) such Bank shall purchase at par such of the unreimbursed LC Disbursements then outstanding (if any) of the other Banks with respect to such Syndicated Letter of Credit as the Administrative Agent shall determine may be necessary in order for such Bank to hold such LC Disbursements in accordance with its Applicable Percentage; and
(iii)with respect to any Loans then outstanding, such Bank shall purchase at par such of the Loans of the other Banks as the Administrative Agent shall determine may be necessary in order for such Bank to hold such Loans in accordance with its Applicable Percentage.
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SECTION 3.01Each Credit Extension. The obligation of each Bank to issue, amend, renew or extend any Letter of Credit or to make any Loan is subject to the satisfaction of the following conditions:
(a)in the case of a Letter of Credit, receipt by the Administrative Agent of a notice of issuance, amendment, renewal or extension, as the case may be, with respect to such Letter of Credit, as required by Section 2.01(b) or, in the case of a Borrowing, receipt by the Administrative Agent of a Notice of Borrowing as required by Section 2.05(a);
(b)the fact that, immediately before and after issuance, amendment, renewal or extension of such Letter of Credit or such Loan no Default or Event of Default shall have occurred and be continuing; and
(c)the fact that the representations and warranties of each Account Party contained in this Agreement (other than the representations and warranties set forth in Sections 4.04(e) and 4.05 as to any matter which has theretofore been disclosed in writing by the Account Parties to the Banks) shall be true on and as of the date of such issuance, amendment, renewal or extension of such Letter of Credit or such Loan (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date), provided that the exception in the first parenthetical phrase in this clause (c) shall not apply in the case of any issuance, amendment, renewal or extension of a Letter of Credit or the making of a Loan on the Effective Date or with respect to the certificate under clause (d) of Section 3.02.
Each issuance, amendment, renewal or extension of a Letter of Credit and the making of any Loan hereunder shall be deemed to be a representation and warranty by the applicable Account Party on the date of such issuance, amendment, renewal or extension or Loan, as the case may be, as to the facts specified in clauses (b) and (c) of this Section.
SECTION 3.02Effectiveness. This Agreement shall become effective on the first date that all of the following conditions shall have been satisfied (or waived in accordance with Section 10.05):
(a)receipt by the Administrative Agent of counterparts hereof signed by each of the Persons listed on the signature pages hereto;
(b)receipt by the Administrative Agent of an opinion of counsel of the Company reasonably satisfactory to the Administrative Agent, substantially in the form of Exhibit B hereto;
(c)receipt by the Administrative Agent of an opinion of Morgan, Lewis & Bockius LLP, special New York counsel to Bank of America, substantially in the form of Exhibit C hereto;
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(d)receipt by the Administrative Agent of a certificate, dated the Effective Date and signed by a senior financial officer of the Company, certifying as to clauses (b) and (c) of Section 3.01;
(e)receipt by the Administrative Agent of (i) copies of the articles of organization and by-laws (or entity equivalents) for each Account Party, (ii) except with respect to Lincoln National Reinsurance Company (Barbados) Limited, a certificate of good standing or status (or equivalent) certified by the secretary of state of such Account Party’s jurisdiction of organization or formation, (iii) a certificate of incumbency for each Responsible Officer of each Account Party who has executed a Credit Document as of the Effective Date, and (iv) a copy of the resolutions of the Board of Directors of each Account Party, in form and substance satisfactory to the Administrative Agent, authorizing the execution, delivery and performance of this Agreement and other Credit Documents;
(f)receipt by the Administrative Agent of (i) at least three business days prior to the Effective Date all documentation and other information required by bank regulatory authorities under applicable “know-your-customer” and anti-money laundering rules and regulations, including the PATRIOT Act, to the extent requested at least seven days prior to the Effective Date and (ii) at least three business days prior to the Effective Date, to the extent any Account Party qualifies as a “legal entity customer” under the Beneficial Ownership Regulation, a certification regarding beneficial ownership required by the Beneficial Ownership Certification; and
(g)receipt by the Administrative Agent of evidence as of the Effective Date as to (i) payment of all fees required to be paid, and all expenses required to be paid or reimbursed for which invoices have been presented (including, without limitation, fees and disbursements of counsel to Bank of America) in connection with this Agreement, on or before the Effective Date;
provided that this Agreement shall not become effective or be binding on any party hereto unless all of the foregoing conditions are satisfied not later than 3:00 p.m. (New York City time) July 15, 2021 or such later date as may be agreed in writing by the Company and all of the Banks. The Administrative Agent shall promptly notify the Company and the Banks of the Effective Date, and such notice shall be conclusive and binding on all parties hereto. For purposes of determining compliance with the conditions specified in this Section 3.02, each Bank that has signed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document (to the extent delivered to such Bank) or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to a Bank unless the Administrative Agent shall have received notice from such Bank prior to the Effective Date specifying its objection thereto.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Each of the Company (other than with respect to Section 4.15) and the Subsidiary Account Parties (with respect to Section 4.15 only) represents and warrants that:
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SECTION 4.01Corporate Existence and Power. The Company (a) is a corporation duly incorporated and validly existing under the laws of the State of Indiana, (b) has all corporate power and authority and all material governmental licenses, authorizations, consents and approvals required to own or lease its assets and carry on its business as now conducted and (c) is duly qualified and is licensed and, as applicable, in good standing under the laws of each jurisdiction where its ownership, lease or operation of properties or the conduct of its business requires such qualification or license, except in each case referred to in the foregoing clauses (b) and (c) to the extent that such failure to do so would not reasonably be expected to have a Material Adverse Effect.
SECTION 4.02Corporate and Governmental Authorization; Contravention. The execution, delivery and performance by the Company of this Agreement and the other Credit Documents to which it is a party are within the Company’s corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the articles of incorporation or by-laws of the Company or of any material agreement, judgment, injunction, order, decree or other instrument binding upon the Company or any of its Restricted Subsidiaries or result in the creation or imposition of any Lien on any asset of the Company or any of its Restricted Subsidiaries.
SECTION 4.03Binding Effect. This Agreement and the other Credit Documents to which it is a party constitute the legal, valid and binding obligations of the Company, in each case enforceable in accordance with their respective terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors’ rights generally and by general principles of equity.
SECTION 4.04Financial Information.
(a)The consolidated balance sheets of the Company and its Consolidated Subsidiaries as of December 31, 2020 and the related consolidated statements of income, cash flows and shareholders’ equity for the fiscal year then ended, reported on by Ernst & Young LLP and set forth in the Company’s 2020 Form 10-K, a copy of which has been delivered to the Administrative Agent on behalf of each of the Banks, fairly present, in conformity with generally accepted accounting principles, the consolidated financial position of the Company and its Consolidated Subsidiaries as of such date and their consolidated results of operations and changes in financial position for such fiscal year.
(b)The unaudited consolidated balance sheets of the Company and its Consolidated Subsidiaries as of March 31, 2021 and the related unaudited consolidated statements of income, cash flows and shareholders’ equity for the three months then ended, set forth in the Company’s quarterly report for the fiscal quarter ended March 31, 2021 as filed with the SEC on Form 10-Q, a copy of which has been delivered to the Administrative Agent on behalf of each of the Banks, fairly present, in conformity with generally accepted accounting principles applied on a basis consistent with the financial statements referred to in subsection (a) of this Section, the consolidated financial position of the Company and its Consolidated Subsidiaries as of such date and their consolidated results of operations and changes in financial
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position for such three month period (subject to normal year-end adjustments and, to the extent permitted by Regulation S-X, the absence of footnotes).
(c)A copy of a duly completed and signed Annual Statement or other similar report of or for each Insurance Subsidiary that is a Restricted Subsidiary in the form filed with the governmental body, agency or official which regulates insurance companies in the jurisdiction in which such Insurance Subsidiary is domiciled for the year ended December 31, 2020 has been delivered to the Administrative Agent on behalf of each of the Banks and fairly presents, in accordance with statutory accounting principles, the information contained therein.
(d)A copy of a duly completed and signed Quarterly Statement or other similar report of or for each Insurance Subsidiary that is a Restricted subsidiary in the form filed with the governmental body, agency or official which regulates insurance companies in the jurisdiction in which such Insurance Subsidiary is domiciled for the quarter ended March 31, 2021 has been delivered to the Administrative Agent on behalf of each of the Banks and fairly presents, in accordance with statutory accounting principles, the information contained therein.
(e)Since December 31, 2020 and as of the Effective Date, there has been no material adverse change in the business, financial condition, results of operations or prospects of the Company and its Consolidated Subsidiaries, considered as a whole.
SECTION 4.05Litigation. As of the Effective Date, there is no action, suit or proceeding pending against, or to the knowledge of the Company threatened against, the Company or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official (a) which has or would be reasonably expected to have a Material Adverse Effect, or (b) which in any manner draws into question the validity or enforceability of this Agreement or any other Credit Document.
SECTION 4.06Compliance with ERISA. Except as would not result in a Material Adverse Effect, each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Code with respect to each Plan. Except as would not result in a Material Adverse Effect, no member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA.
SECTION 4.07Taxes. United States Federal income tax returns of the Company and its Subsidiaries have been examined and closed through the fiscal year ended December 31, 2017. The Company and its Subsidiaries have filed all income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes due pursuant to such returns or, except for any such taxes that are being contested in good faith by appropriate proceedings and for which adequate reserves have been made, pursuant to any
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assessment received by the Company or any Subsidiary, except in each to the extent that the failure to do so would not reasonably be expected to have a Material Adverse Effect. The charges, accruals and reserves on the books of the Company and its Subsidiaries in respect of taxes are, in the opinion of the Company, adequate.
SECTION 4.08Subsidiaries. Each of the Company’s Restricted Subsidiaries (a) is a corporation duly incorporated, validly existing and (except where such concept is not applicable) in good standing under the laws of its jurisdiction of incorporation, (b) has all corporate power and authority and all material governmental licenses, authorizations, consents and approvals required to own or lease its assets and carry on its business as now conducted and (c) is duly qualified and is licensed and, as applicable, in good standing under the laws of each jurisdiction where its ownership, lease or operation of properties or the conduct of its business requires such qualification or license, except in each case referred to in the foregoing clauses (b) and (c) to the extent that such failure to do so would not reasonably be expected to have a Material Adverse Effect.
SECTION 4.09Not an Investment Company. The Company is not an “investment company” within the meaning of the Investment Company Act of 1940, as amended.
SECTION 4.10Obligations to be Pari Passu. The Company’s obligations under this Agreement and each other Credit Document to which it is a party rank pari passu as to priority of payment and in all other respects with all other material unsecured and unsubordinated Debt of the Company, with the exception of those obligations that are mandatorily preferred by law and not by contract.
SECTION 4.11No Default. No event has occurred and is continuing which constitutes, or which, with the passage of time or the giving of notice or both, would constitute, a default under or in respect of any material agreement, instrument or undertaking to which the Company or any Restricted Subsidiary is a party or by which either the Company or any Restricted Subsidiary or any of their respective assets is bound, unless such default would not have or be reasonably expected to have a Material Adverse Effect.
SECTION 4.12Restricted Subsidiaries. Set forth as Schedule III hereto is a true, correct and complete list of each Restricted Subsidiary as of the date hereof.
SECTION 4.13Environmental Matters. The Company has reasonably concluded that Environmental Laws are unlikely to have a Material Adverse Effect.
SECTION 4.14Full Disclosure. None of the reports, financial statements, certificates or other information, including the Beneficial Ownership Certification, if any, furnished by or on the behalf of the Company or any other Account Party to the Administrative Agent or any Bank in connection with the negotiation of this Agreement and the other Credit Documents or delivered hereunder or thereunder (as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading as of the date made; provided that, with respect to projected or
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pro forma financial information, the Company represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time furnished (it being understood that such projections and forecasts are subject to uncertainties and contingencies and no assurances can be given that such projections or forecasts will be realized).
SECTION 4.15Separate Representations of Subsidiary Account Parties. Each of the Subsidiary Account Parties represents and warrants that:
(a)Such Subsidiary Account Party (i) is a company duly organized and validly existing under the laws of the jurisdiction of its organization, (ii) has all corporate power and authority and all material governmental licenses, authorizations, consents and approvals required to own or lease its assets and carry on its business as now conducted and (iii) is duly qualified and is licensed and, as applicable, in good standing under the laws of each jurisdiction where its ownership, lease or operation of properties or the conduct of its business requires such qualification or license, except in each case referred to in the foregoing clauses (ii) and (iii) to the extent that such failure to do so would not reasonably be expected to have a Material Adverse Effect.
(b)The execution, delivery and performance by such Subsidiary Account Party of this Agreement and each other Credit Document to which it is a party are within such Subsidiary Account Party’s corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of any organizational document of such Subsidiary Account Party or of any material agreement, judgment, injunction, order, decree or other instrument binding upon such Subsidiary Account Party or result in the creation or imposition of any Lien on any asset of such Subsidiary Account Party.
(c)The Credit Documents (including this Agreement) to which such Subsidiary Account Party is a party constitute the legal, valid and binding obligations of such Subsidiary Account Party, in each case enforceable in accordance with their respective terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors’ rights generally and by general principles of equity.
(d)Such Subsidiary Account Party is not an “investment company” within the meaning of the Investment Company Act of 1940, as amended.
(e)Such Subsidiary Account Party’s obligations under this Agreement to which it is a party rank pari passu as to priority of payment and in all other respects with all other material unsecured and unsubordinated Debt of such Subsidiary Account Party, with the exception of those obligations that are mandatorily preferred by law and not by contract.
(f)No event has occurred and is continuing which constitutes or which, with the passage of time or the giving of notice or both, would constitute, a default under or in respect of any material agreement, instrument or undertaking to which such Subsidiary Account Party is a party or by which either such Subsidiary Account Party or any of its assets is bound, unless such default would not have or be reasonably expected to have a Material Adverse Effect.
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(g)Such Subsidiary Account Party is not the subject of (i) any winding up (whether compulsory or otherwise) or any other corporate, judicial or administrative proceeding or action which could result in the winding up of such Subsidiary Account Party or (ii) any other proceeding or action relating to the insolvency, bankruptcy, liquidation, moratorium on the payment of obligations or any other similar condition of or relating to such Subsidiary Account Party, and such Subsidiary Account Party has taken no action in furtherance of any of the foregoing.
SECTION 4.16Instruments. Set forth as Schedule IV hereto is a true, correct and complete list of each Instrument of the Company and its Consolidated Subsidiaries outstanding as of the date hereof, specifying in each case the equity credit treatment given to each such Instrument by S&P and/or Moody’s as of the date hereof.
SECTION 4.17Sanctioned Persons; Anti-Corruption Laws; Patriot Act. None of the Company or any of its Subsidiaries or, to the knowledge of the Company, any of their respective directors, officers, employees, agents or Affiliates is subject to any sanctions or economic embargoes administered or enforced by the U.S. Department of State or the Office of Foreign Asset Control of the U.S. Department of Treasury (collectively, “Sanctions”, and the associated laws, rules, regulations and orders, collectively, “Sanctions Laws”), except to the extent that being subject to such Sanctions would not reasonably be expected to have a Material Adverse Effect or reasonably be expected to result in any Bank violating any Sanctions Laws. Each of the Company and its Subsidiaries and their respective directors, officers and, to the knowledge of the Company, employees, agents and Affiliates is in compliance, in all material respects, with (i) all Sanctions Laws, (ii) the United States Foreign Corrupt Practices Act of 1977, as amended, and any other applicable anti-bribery or anti-corruption laws, rules, regulations and orders (collectively, “Anti-Corruption Laws”) and (iii) USA PATRIOT Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001) the “Patriot Act”) and any other applicable terrorism and money laundering laws, rules, regulations and orders (collectively, “Anti-Money Laundering Laws”), except in each case to the extent that such non-compliance therewith would not reasonably be expected to have a Material Adverse Effect or reasonably be expected to result in any Bank violating any such Sanctions Laws, Anti-Corruption Laws or Anti-Money Laundering Laws. No part of the proceeds of the Loans or Letters of Credit will be used by any Account Party, directly or indirectly, (A) for the purpose of funding, financing or facilitating any activities or business of or with, or making any payments to, any Person or in any country or territory in violation of any Sanctions Law or (B) for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of any Anti-Corruption Law, except in each case to the extent that such use would not reasonably be expected to have a Material Adverse Effect or reasonably be expected to result in any Bank violating any Sanctions Laws, Anti-Corruption Laws or Anti-Money Laundering Laws.
SECTION 4.18Affected Financial Institutions. No Account Party is an Affected Financial Institution.
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SECTION 4.19Beneficial Ownership. As of the Effective Date, the information included in the Beneficial Ownership Certification, if applicable, is true and correct in all respects.
SECTION 4.20Covered Entity. No Loan Party is a Covered Entity.
Until all Commitments have expired or been terminated, the principal of and interest on each Loan and all fees payable hereunder shall have been paid in full and all Letters of Credit shall have expired or terminated and all LC Disbursements shall have been reimbursed, the Company and (in the case of Sections 5.01(k) and (l), 5.02, 5.03, 5.04, 5.05, 5.06, 5.08, 5.10, 5.11, 5.12 and 5.13) the Subsidiary Account Parties agree that:
The Company (and, in the case of Section 5.01(k), each Subsidiary Account Party, but only as to information concerning such Subsidiary Account Party and its Subsidiaries) will deliver to each of the Banks:
(a)within 90 days after the end of each fiscal year of the Company, the consolidated balance sheet of the Company and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of income, cash flows and shareholders’ equity for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on in a manner acceptable to the SEC by Ernst & Young LLP or other independent public accountants of nationally recognized standing;
(b)within 45 days after the end of each of the first three quarters of each fiscal year of the Company, the consolidated balance sheet of the Company and its Consolidated Subsidiaries as of the end of such quarter and the related consolidated statements of income, cash flows and shareholders’ equity for such quarter and for the portion of the Company’s fiscal year ended at the end of such quarter, setting forth in each case in comparative form the figures for the corresponding quarter and the corresponding portion of the Company’s previous fiscal year, all certified (subject to normal year-end adjustments and, to the extent permitted by Regulation S-X, the absence of footnotes) as to fairness of presentation, generally accepted accounting principles and consistency with the most recent audited consolidated financial statements of the Company and its Consolidated Subsidiaries delivered to the Banks (except for changes concurred in by the Company’s independent public accountants) by the chief financial officer or the chief accounting officer of the Company;
(c)(I) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above a certificate of the chief financial officer or the chief accounting officer of the Company (i) setting forth in reasonable detail the calculations required to establish whether the Company was in compliance with the requirements of Sections 5.07 and 5.12 on the date of such financial statements and (ii) stating that such chief financial officer or chief accounting officer, as the case may be, has no knowledge of any Default existing on the
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date of such certificate or, if such chief financial officer or chief accounting officer has knowledge of the existence on such date of any Default, setting forth the details thereof and the action which the Company or the applicable Subsidiary Account Party, as the case may be is taking or proposes to take with respect thereto and (II) simultaneously with the delivery of each set of financial statements referred to in clause (a) above a certificate of the chief financial officer or the chief accounting officer of the Company specifying any changes to the list of Restricted Subsidiaries as of the last day of the fiscal period to which such financial statements relate;
(d)within 120 days after the end of each fiscal year of each Insurance Subsidiary that is a Restricted Subsidiary, a copy of a duly completed and signed Annual Statement (or any successor form thereto) required to be filed by such Insurance Subsidiary with the governmental body, agency or official which regulates insurance companies in the jurisdiction in which such Insurance Subsidiary is domiciled, in the form submitted to such governmental body, agency or official;
(e)within 60 days after the end of each of the first three fiscal quarters of each Insurance Subsidiary that is a Restricted Subsidiary, a copy of a duly completed and signed Quarterly Statement (or any successor form thereto) required to be filed by such Insurance Subsidiary with the governmental body, agency or official which regulates insurance companies in the jurisdiction in which such Insurance Subsidiary is domiciled, in the form submitted to such governmental body, agency or official;
(f)forthwith upon learning of the occurrence of any Default, a certificate of the chief financial officer or the chief accounting officer of the Company setting forth the details thereof and the action which the Company is taking or proposes to take with respect thereto;
(g)promptly upon the mailing thereof to the shareholders of the Company generally, if and only to the extent not duplicative of information otherwise provided pursuant to clause (h) below, copies of all financial statements, reports and proxy statements so mailed;
(h)promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents) which any Account Party shall have filed with the SEC;
(i)if and when, and only if the liability for the Company and its Subsidiaries from the applicable event could reasonably be expected to exceed $75,000,000, any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any “reportable event” (as defined in Section 4043 of ERISA), with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint
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a trustee to administer, any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Code, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any payment or contribution to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement or makes any amendment to any Plan or Benefit Arrangement which has resulted or could result in the imposition of a Lien or the posting of a bond or other security, a certificate of the chief financial officer or the chief accounting officer of the Company setting forth details as to such occurrence and action, if any, which the Company or applicable member of the ERISA Group is required or proposes to take;
(j)promptly after Moody’s or S&P shall have announced a change in the rating established or deemed to have been established for the Index Debt, written notice of such rating change;
(k)from time to time such additional information regarding the financial position or business of any Account Party as the Administrative Agent, at the request of any Bank, may reasonably request;
(l)promptly following any request therefor, provide information and documentation reasonably requested by the Administrative Agent or any Bank for purposes of compliance with applicable “know your customer” and anti-money-laundering rules and regulations, including, without limitation, the PATRIOT Act and the Beneficial Ownership Regulation; and
(m)with respect to each calendar year (commencing with the calendar year ending December 31, 2022), and in any event no earlier than the date that is 180 days after the beginning of the following calendar year and no later than the date that is 270 days after the beginning of the following calendar year, a Pricing Certificate for the most recently-ended calendar year; provided, that, for any calendar year the Company may elect not to deliver a Pricing Certificate, and such election shall not constitute a Default or Event of Default (but such failure to so deliver a Pricing Certificate by the date that is 270 days after the beginning of such calendar year shall result in the ESG Margin Adjustment and the ESG Fee Adjustment being applied as set forth in Schedule 2.18(c) in respect of situations where the Pricing Certificate is not so delivered by the end of such period).
Documents required to be delivered pursuant to Section 5.01 (a), (b), (d), (e), (g) or (h) may be delivered electronically on the following Internet websites: (a) the Company’s website www.lfg.com, (b) with respect to Section 5.01(a), (b), (g) or (h) the SEC’s website www.sec.com (to the extent that any such documents are included in materials otherwise filed with the SEC) or (c) such other third party website that shall have been identified by the Company in a notice to the Administrative Agent and the Banks, that is accessible to the Banks without charge, and that is managed by the Company or (d) the Platform and in each case if so delivered shall be deemed to have been delivered on the date such materials are publicly available; provided that (i) the Company shall deliver paper copies of such information to any Bank promptly upon the request of such Bank through the Administrative Agent and (ii) the
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Company shall have notified the Administrative Agent of the posting of such documents delivered pursuant to Section 5.01(a), (b), (d), (e) and (g). The Administrative Agent shall have no obligation to request the delivery of or to maintain paper copies of the documents referred to above, and in any event shall have no responsibility to monitor compliance by the Company with any such request by a Bank for delivery, and each Bank shall be solely responsible for requesting delivery to it or maintaining its copies of such documents.
Each Account Party hereby acknowledges that the Administrative Agent may, but shall not be obligated to, make available to the Banks materials and/or information provided by or on behalf of such Account Party hereunder (collectively, “Borrower Materials”) by posting the Borrower Materials on IntraLinks, Syndtrak, ClearPar, or a substantially similar electronic transmission system (the “Platform”). All Borrower Materials shall be posted and made available to the Banks on the Platform only on a portion of the Platform designated “Private Side Information” unless such Borrower Materials are marked “PUBLIC” by the Company, in which case the Company shall be deemed to have authorized the Administrative Agent and the Banks to treat such Borrower Materials as not containing any material non-public information.
SECTION 5.02Payment of Obligations. The Company will pay and discharge, and will cause each Restricted Subsidiary and Subsidiary Account Party to pay and discharge, at or before maturity, all their respective material obligations and liabilities, including, without limitation, tax liabilities, that if not paid, would reasonably be expected to result in a Material Adverse Effect, except where (a) the same may be contested in good faith by appropriate proceedings, (b) the Company or such Restricted Subsidiary has set aside, in accordance with generally accepted accounting principles, appropriate reserves for the accrual of any of the same and (c) the failure to make payment pending such contest would not reasonably be expected to result in a Material Adverse Effect; provided that, for avoidance of doubt, solely with respect to tax liabilities an obligation shall be considered to be delinquent or in default for purposes of this Section only if there has first been notice and demand therefore (as defined in Section 6306 of the Code and similar provisions of applicable law) by a tax authority.
SECTION 5.03Conduct of Business and Maintenance of Existence. The Company will continue, and will cause each Restricted Subsidiary and Subsidiary Account Party to continue, to engage in business of the same general type as conducted by the Company and its Restricted Subsidiaries, taken as a whole, on the date hereof and will preserve, renew and keep in full force and effect, and will cause each Restricted Subsidiary to preserve, renew and keep in full force and effect (a) their respective corporate existence and (b) their respective rights, privileges, licenses and franchises, other than, in the case of the foregoing clause (b), the loss of which would not reasonably be expected to result in a Material Adverse Effect; except that if at the time thereof and immediately after giving effect thereto no Default has occurred and is continuing, (i) any Restricted Subsidiary may merge with or into the Company, provided that the Company shall be the surviving entity, (ii) any Restricted Subsidiary may merge with or into any other Subsidiary, provided that such Restricted Subsidiary shall be the surviving entity or, if such Restricted Subsidiary is not the surviving entity, the surviving entity shall be deemed a Restricted Subsidiary, and (iii) any Restricted Subsidiary may sell, transfer, lease or otherwise dispose of its assets to the Company or to another Restricted Subsidiary.
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SECTION 5.04Maintenance of Property; Insurance.
(a)The Company will keep, and will cause each Restricted Subsidiary and Subsidiary Account Party to keep, all property useful and necessary in its business in good working order and condition, except, in each case, to the extent that failure to do so would not be reasonably expected to result in a Material Adverse Effect.
(b)The Company will maintain, and will cause each Restricted Subsidiary and Subsidiary Account Party to maintain (either in the name of the Company or in such Subsidiary’s own name) with financially sound and responsible insurance companies, insurance on all their respective properties and against at least such risks, in each case as is consistent with sound business practice for companies in substantially the same industry as the Company, the Restricted Subsidiaries and the Subsidiary Account Parties; and the Company will furnish to the Banks, upon request from the Administrative Agent, information presented in reasonable detail as to the insurance so carried.
SECTION 5.05Compliance with Laws. The Company will comply, and will cause each Subsidiary to comply, in all material respects with all applicable laws, ordinances, rules, regulations and requirements of governmental bodies, agencies and officials (including, without limitation, Sanctions Laws, Anti-Corruption Laws, Anti-Money-Laundering Laws, Environmental Laws and ERISA and the rules and regulations thereunder) except where the necessity of compliance therewith is contested in good faith by appropriate proceedings, except where such non-compliance therewith would not reasonably be expected to have a Material Adverse Effect (or, in the case of the laws, rules, regulations and orders referred to in Section 4.17, reasonably be expected to result in any Bank violating such laws, rules, regulations or orders).
SECTION 5.06Inspection of Property, Books and Records. The Company will keep, and will cause each Restricted Subsidiary and Subsidiary Account Party to keep, proper books of record and account in which entries that are full, true and correct in all material respects shall be made of all dealings and transactions in relation to its business and activities; and, subject in all cases to Section 10.11, will permit, and will cause each Restricted Subsidiary and Subsidiary Account Party to permit, representatives of any Bank to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records and to discuss their respective affairs, finances and accounts with their respective officers, employees, actuaries and independent public accountants, all upon reasonable notice, at such reasonable times during ordinary business hours and as often as may reasonably be desired; provided that neither the Company nor any of its Subsidiaries shall be required to disclose any information subject to its attorney-client privilege.
SECTION 5.07Financial Covenants.
(a)Minimum Adjusted Consolidated Net Worth. The Company will not at any time permit Adjusted Consolidated Net Worth to be less than (a) $10,000,000,000 plus (b) 50% of the aggregate Net Proceeds received by the Company or any of its Subsidiaries from Equity Issuances of the Company and its Subsidiaries (including from any issuance or incurrence of Instruments, but only to the extent such Instruments are included, at the time of issuance, in
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Adjusted Consolidated Net Worth) after March 31, 2021December 1, 2022. For the avoidance of doubt, for all dates on or before December 31, 2022, the Company’s compliance with this paragraph shall be calculated as if ASU 2018-12 was never issued.
(b)Total Indebtedness to Total Capitalization Ratio. The Company will not at any time permit the ratio of (a) Consolidated Total Indebtedness to (b) Consolidated Total Capitalization to exceed 0.35 to 1.00. For the avoidance of doubt, for all dates on or before December 31, 2022, the Company’s compliance with this paragraph shall be calculated as if ASU 2018-12 was never issued.
SECTION 5.08Negative Pledge. The Company will not, and will not permit any Subsidiary to, create or suffer to exist any Lien upon any present or future capital stock or any other Ownership Interests (as defined below) of any of its Material Subsidiaries (other than any Subsidiary established primarily for the purpose of reinsuring redundant reserve insurance liabilities of the Company or any other Insurance Subsidiary). As used herein “Ownership Interests” means, with respect to any Person, all of the shares of Capital Stock of such Person and all debt securities of such Person that can be converted or exchanged for Capital Stock of such Person, whether voting or nonvoting, and whether or not such Capital Stock or debt securities are outstanding on any date of determination.
SECTION 5.09Consolidations, Mergers and Sales of Assets. The Company will not (a) consolidate or merge with or into any other Person or (b) sell, lease or otherwise transfer, directly or indirectly, all or substantially all of the assets of the Company and its Subsidiaries, taken as a whole, to any other Person; provided that the Company may merge with another Person if (i) the Company is the corporation surviving such merger and (ii) immediately after giving effect to such merger, no Default shall have occurred and be continuing.
SECTION 5.10Use of Credit. Each Account Party shall use each Letter of Credit issued under this Agreement for its general corporate purposes. The proceeds of each Loan made to any Account Party hereunder will be used for its general corporate purposes (including to finance the reimbursement of LC Disbursements as contemplated by Section 2.03(a)). No Letter of Credit or proceeds of Loans will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any “margin stock” within the meaning of Regulations T, U and X.
SECTION 5.11Obligations to be Pari Passu. Each Account Party’s obligations under this Agreement and the other Credit Documents to which it is a party will rank at all times pari passu as to priority of payment and in all other respects with all other material unsecured and unsubordinated Debt of such Account Party with the exception of those obligations that are mandatorily preferred by law and not by contract.
SECTION 5.12Certain Indebtedness. The Company will not at any time permit the sum of (a) Non-Operating Indebtedness of the Company that is secured by a Lien on any property or assets of the Company and its Subsidiaries and (b) Non-Operating Indebtedness of the Subsidiaries of the Company to exceed 7.5% of Consolidated Total Capitalization. For the avoidance of doubt, for all dates on or before December 31, 2022, the Company’s compliance with this paragraph shall be calculated as if ASU 2018-12 was never issued.
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SECTION 5.13Post-Closing Obligations. The Company shall exercise commercially reasonable efforts to deliver on or before the date that is thirty (30) days after the Effective Date (or such other date as may be agreed to by the Administrative Agent in its sole discretion) a certificate of good standing or status (or equivalent) certified by the secretary of state (or equivalent) of Lincoln National Reinsurance Company (Barbados) Limited’s jurisdiction of organization or formation.
SECTION 6.01Events of Default. If one or more of the following events (“Events of Default”) shall have occurred and be continuing:
(a)(i) any Account Party shall fail to pay when due any principal of any Loan or any reimbursement obligation in respect of an LC Disbursement or (ii) any Account Party shall fail to pay when due any interest on any Loan or LC Disbursement or any fees or any other amounts payable hereunder and such failure under this clause (ii) shall continue for four Domestic Business Days;
(b)any Account Party shall fail to observe or perform any covenant contained in Sections 5.03(a), 5.07 through 5.13, inclusive, or its obligation to provide cash collateral pursuant to the last sentence of Section 2.01(d);
(c)any Account Party shall fail to observe or perform any covenant or agreement contained in this Agreement (other than those covered by clause (a) or (b) above) for 30 days after written notice thereof has been given to the Company by the Administrative Agent at the request of any Bank;
(d)any representation, warranty, certification or statement made by any Account Party in this Agreement or in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made (or deemed made);
(e)the Company or any Subsidiary (other than a Newly Acquired Subsidiary) shall fail to make any payment in respect of any Debt (other than Loans and other extensions of credit hereunder and any Debt solely of a Newly Acquired Subsidiary existing at the time such Person becomes a Subsidiary and not created in contemplation of such event (“Newly Acquired Subsidiary Debt”)) having a principal amount then outstanding of not less than $150,000,000 when due and such failure shall continue beyond any applicable grace period or the Company or any Subsidiary (other than a Newly Acquired Subsidiary) shall fail to make any payment in an amount at least equal to $150,000,000 in respect of any Derivative Financial Product when due and such failure shall continue beyond any applicable grace period;
(f)any event or condition shall occur which results in the acceleration of the maturity of any Debt (other than Loans and other extensions of credit hereunder and Newly Acquired Subsidiary Debt) having a principal or face amount then outstanding of not less than $150,000,000 of the Company or any Subsidiary or enables (or, with the giving of notice or lapse
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of time or both, would enable) the holder of such Debt or any Person acting on such holder’s behalf to accelerate the maturity thereof;
(g)any Account Party or Restricted Subsidiary (other than a Newly Acquired Subsidiary) shall commence a voluntary case or other proceeding seeking rehabilitation, dissolution, conservation, liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, rehabilitator, dissolver, conservator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing;
(h)an involuntary case or other proceeding shall be commenced against any Account Party or Restricted Subsidiary (other than a Newly Acquired Subsidiary) seeking rehabilitation, dissolution, conservation, liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, rehabilitator, dissolver, conservator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against any Account Party or such Restricted Subsidiary under the federal bankruptcy laws as now or hereafter in effect; or any governmental body, agency or official shall apply for, or commence a case or other proceeding to seek, an order for the rehabilitation, conservation, dissolution or other liquidation of Account Party or Restricted Subsidiary or of the assets or any substantial part thereof of any Account Party or Restricted Subsidiary or any other similar remedy;
(i)any of the following events or conditions shall occur, which, in the aggregate, reasonably could be expected to involve possible taxes, penalties and other liabilities in an aggregate amount in excess of $150,000,000: (i) any member of the ERISA Group shall fail to pay when due any amount or amounts which it shall have become liable to pay under Title IV of ERISA; (ii) notice of intent to terminate a Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; (iii) the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer, any Plan; (iv) a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Plan must be terminated; or (v) there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans;
(j)a judgment or order for the payment of money in excess of the greater of (i) $150,000,000 or (ii) 3% of the consolidated shareholders’ equity of the Company and its Consolidated Subsidiaries (after (without duplication) the actual amounts of insurance recoveries, offsets and contributions received and amounts thereof not yet received but which the insurer thereon has acknowledged in writing its obligation to pay) shall be rendered against any Account Party or Restricted Subsidiary and such judgment or order shall continue unsatisfied
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and unstayed for a period of 90 days after entry of such judgment (and, for purposes of this clause, a judgment shall be stayed if, among other things, an appeal is timely filed and such judgment cannot be enforced);
(k)(i) any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the SEC under said Act) of 20% or more of the outstanding shares of common stock of the Company; or (ii) occupation of a majority of the seats (other than vacant seats) on the board of directors of the Company by Persons who were neither (x) nominated by the board of directors of the Company or (y) appointed by directors so nominated; or
(l)any Subsidiary Account Party shall cease for any reason to be a Consolidated Subsidiary, unless (i) such Subsidiary Account Party shall have been consolidated or merged with or into a wholly owned Subsidiary or the Company or (ii) Subsidiary Account Party shall have been terminated as an Account Party hereunder pursuant to Section 10.13;
then, and in every such event, and at any time thereafter during the continuance of such event, the Administrative Agent shall, if requested by the Required Banks, by notice to the Company take any or all of the following actions, at the same or different times: (i) terminate the Commitments and they shall thereupon terminate, (ii) declare the Loans then outstanding to be due and payable in whole (or in part, in which case any principal not so declared to be due and payable may thereafter be declared to be due and payable), and thereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and all fees and other obligations of the Account Parties accrued hereunder shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by each Account Party and the Guarantor, (iii) notify (or, in the case of any Fronted Letter of Credit, request the applicable Fronting Issuing Bank (and such Fronting Issuing Bank agrees upon such request) to notify) each beneficiary of an outstanding Letters of Credit of the existence of an Event of Default hereunder and cause a drawing of the aggregate undrawn amount thereunder (if such Letters of Credit so permit) and (iv) demand cash collateral from the Account Parties and the Guarantor in immediately available funds in an amount equal to the then aggregate undrawn amount of all Letters of Credit pursuant to Section 2.03(e); provided that, in the case of any of the Events of Default specified in clause (g) or (h) above (A) with respect to the Company, without any notice to any Account Party or the Guarantor or any other act by the Administrative Agent or the Banks, the Commitments shall thereupon terminate and the principal of the Loans then outstanding, together with accrued interest thereon and all fees and other obligations of the Account Parties accrued hereunder, and the obligations to provide cash collateral under clause (iv) above, shall automatically become due and payable without presentment, demand, protest or notice of any kind, all of which are hereby waived by each Account Party and the Guarantor and (B) with respect to any Account Party (other than the Company), without any notice to any Account Party or the Guarantor or any other act by the Administrative Agent or the Banks, the Commitments to issue Letters of Credit for the account of, and to make Loans to, such Account Party shall thereupon terminate, the principal of the Loans made to such Account Party then outstanding, together with accrued interest thereon and all fees and other obligations of such Account Party accrued hereunder, and the obligations of such Account Party to provide cash collateral under clause (iv) above, shall automatically
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become due and payable without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Account Parties and the Guarantor; provided, further, that, in the case of an Event of Default under Section 6.01(b) resulting from a default by any Subsidiary Account Party under Section 5.08, 5.10 or 5.11 or under Section 6.01(c) or (d) (in the latter case, resulting from a default by any Subsidiary Account Party under Section 4.15), the termination of the Commitments, the acceleration of all fees and other obligations of the Account Parties accrued hereunder and the causing of drawings under Letters of Credit shall apply only to the Commitments, fees, obligations in respect of such Subsidiary Account Party and to the Letters of Credit with respect to which it is the Account Party.
SECTION 6.02Notice of Default. The Administrative Agent shall give notice to the Company under Section 6.01(c) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof.
ARTICLE VII
THE ADMINISTRATIVE AGENT
SECTION 7.01Appointment and Authorization. Each Bank irrevocably appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the other Credit Documents as are delegated to the Administrative Agent by the terms hereof or thereof, together with all such powers as are reasonably incidental thereto.
SECTION 7.02Agent’s Fee. The Company shall pay to the Administrative Agent for its own account fees in the amounts and at the times previously agreed upon between the Company and the Administrative Agent.
SECTION 7.03Agent and Affiliates. The Person serving as the Administrative Agent hereunder shall have the same rights and powers in its capacity as a Bank as any other Bank and may exercise the same as though it were not the Administrative Agent and the term “Bank” or “Banks” shall, unless otherwise expressly indicated or unless the context otherwise requires, include the Person serving as the Administrative Agent hereunder in its individual capacity. Such Person and its Affiliates may accept deposits from, lend money to, own securities of, act as the financial advisor or in any other advisory capacity for and generally engage in any kind of business with an Account Party or any Subsidiary or other Affiliate thereof as if such Person were not the Administrative Agent hereunder and without any duty to account therefor to the Banks.
SECTION 7.04Action by Agent. The obligations of the Administrative Agent hereunder are only those expressly set forth herein. The Administrative Agent shall not have any duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement unless it shall be requested in writing to do so by the Required Banks. Without limiting the generality of the foregoing, the Administrative Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article VI. The Administrative Agent shall have no duty to disclose to the Banks information that is not required to be furnished by an Account Party to the Administrative Agent at such time, but is voluntarily
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furnished by an Account Party to the Administrative Agent (either in its capacity as Administrative Agent or in its individual capacity).
SECTION 7.05Consultation with Experts. The Administrative Agent may consult with legal counsel (who may be counsel for any Account Party ), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts.
SECTION 7.06Liability of Agent. Neither the Administrative Agent nor any of its directors, officers, agents or employees shall be liable to any Bank for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Banks or (ii) in the absence of its own gross negligence or willful misconduct as determined by a court of competent jurisdiction. The Administrative Agent shall be deemed not to have knowledge of any Default unless and until written notice thereof is given to the Administrative Agent by an Account Party or a Bank. Neither the Administrative Agent nor any of its directors, officers, agents or employees shall be responsible to any Bank for or have any duty to any Bank to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or any borrowing hereunder or the issuance, amendment, or extension of any Letter of Credit; (ii) the performance or observance of any of the covenants or agreements of any Account Party; (iii) the satisfaction of any condition specified in Article III, except receipt of items required to be delivered to the Administrative Agent; (iv) the validity, effectiveness or genuineness of this Agreement, any other Credit Document or any other instrument or writing furnished in connection herewith; (v) the existence or possible existence of any Default; (vi) the financial condition of any Account Party or any Account Party’s Subsidiaries; or (vii) the contents of any certificate, report or other document delivered hereunder or in connection herewith. The Administrative Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing believed by it in good faith to be genuine or to be signed by the proper party or parties. In determining compliance with any condition hereunder to the making of a Loan, or the issuance, extension, or increase of a Letter of Credit, that by its terms must be fulfilled to the satisfaction of a Bank or Fronting Issuing Bank, the Administrative Agent may presume that such condition is satisfactory to such Bank or Fronting Issuing Bank (to the extent, in the case of a documentary condition, that such Bank or Fronting Issuing Bank received the applicable document) unless the Administrative Agent shall have received notice to the contrary from such Bank or Fronting Issuing Bank prior to the making of such Loan or the issuance of such Letter of Credit. The Administrative Agent (i) shall have no fiduciary or other implied duties to the Banks, (ii) shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby or by the other Credit Documents that the Administrative Agent is required to exercise as directed in writing by the Required Banks (or such other number or percentage of the Banks as shall be expressly provided for herein or in the other Credit Documents), provided that the Administrative Agent shall not be required to take any action that is contrary to any Credit Document or applicable law, including for the avoidance of doubt any action that may be in violation of the automatic stay under any Debtor Relief Law or that may effect a forfeiture, modification or termination of property of a Defaulting Banks in violation of any Debtor Relief Law; and (iii) shall not, except as expressly set forth herein and in the other Credit Documents, have any duty to disclose, and shall not be liable for the failure to
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disclose, any information relating to an Account Party or any of its Affiliates that is communicated to or obtained by the Person serving as the Administrative Agent or any of its Affiliates in any capacity.
SECTION 7.07Indemnification. Each Bank shall, ratably in accordance with its Commitment (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought), indemnify the Administrative Agent (to the extent not reimbursed by the Company) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from the Administrative Agent’s gross negligence or willful misconduct as determined by a court of competent jurisdiction) that the Administrative Agent may suffer or incur in connection with this Agreement or any action taken or omitted by the Administrative Agent hereunder. The Administrative Agent shall be fully justified in failing or refusing to take any action hereunder unless it shall first be indemnified to its satisfaction by the Banks pro rata against any and all liability, cost and expense that it may incur by reason of taking or continuing to take any such action.
SECTION 7.08Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Bank or any of their Related Parties, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Bank or any of their Related Parties, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement.
SECTION 7.09Successor Agent. The Administrative Agent may resign at any time by giving written notice thereof to the Banks and the Company. Upon any such resignation, the Required Banks shall have the right to appoint a successor Administrative Agent, which successor Administrative Agent shall be satisfactory to the Company, provided that no Default is continuing. If no successor Administrative Agent shall have been so appointed by the Required Banks, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent gives notice of resignation, then the retiring Administrative Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $100,000,000 and (unless a Default has occurred and is continuing) shall otherwise be subject to the consent of the Company, which consent shall not be unreasonably withheld. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After any retiring Administrative Agent’s resignation hereunder as Administrative Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent.
SECTION 7.10Delegation to Affiliates. The Account Party and the Banks agree that the Administrative Agent may delegate any of its duties under this Agreement to any of its Affiliates. Any such Affiliate (and such Affiliate’s directors, officers, agents and
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employees) which performs duties in connection with this Agreement shall be entitled to the same benefits of the indemnification, waiver and other protective provisions to which the Administrative Agent is entitled under Articles VII and X.
SECTION 7.11Joint Lead Arrangers and Other Agents. Notwithstanding anything herein to the contrary, none of the Joint Lead Arrangers and Joint Bookrunners, the Syndication Agent or the Documentation Agents listed on the cover page of this Agreement shall have any right, power, obligation, liability, responsibility or duty under this Agreement in its capacity as such, except in its respective capacity, if any, as a Bank.
SECTION 7.12Certain ERISA Matters.
(a)Each Bank (x) represents and warrants, as of the date such Person became a Bank party hereto, to, and (y) covenants, from the date such Person became a Bank party hereto to the date such Person ceases being a Bank party hereto, for the benefit of, the Administrative Agent and not, for the avoidance of doubt, to or for the benefit of the Account Parties, that at least one of the following is and will be true:
(i)such Bank is not using “plan assets” (within the meaning of Section 3(42) of ERISA or otherwise) of one or more Benefit Plans with respect to such Banks’s entrance into, participation in, administration of and performance of the Loans, the Letters of Credit, the Commitments or this Agreement,
(ii)the transaction exemption set forth in one or more PTEs, such as PTE 84-14 (a class exemption for certain transactions determined by independent qualified professional asset managers), PTE 95-60 (a class exemption for certain transactions involving insurance company general accounts), PTE 90-1 (a class exemption for certain transactions involving insurance company pooled separate accounts), PTE 91-38 (a class exemption for certain transactions involving bank collective investment funds) or PTE 96-23 (a class exemption for certain transactions determined by in-house asset managers), is applicable with respect to such Bank’s entrance into, participation in, administration of and performance of the Loans, the Letters of Credit, the Commitments and this Agreement,
(iii)(A) such Bank is an investment fund managed by a “Qualified Professional Asset Manager” (within the meaning of Part VI of PTE 84-14), (B) such Qualified Professional Asset Manager made the investment decision on behalf of such Bank to enter into, participate in, administer and perform the Loans, the Letters of Credit, the Commitments and this Agreement, (C) the entrance into, participation in, administration of and performance of the Loans, the Letters of Credit, the Commitments and this Agreement satisfies the requirements of sub-sections (b) through (g) of Part I of PTE 84-14 and (D) to the best knowledge of such Bank, the requirements of subsection (a) of Part I of PTE 84-14 are satisfied with respect to such Bank’s entrance into, participation in, administration of and performance of the Loans, the Letters of Credit, the Commitments and this Agreement, or
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(iv)such other representation, warranty and covenant as may be agreed in writing between the Administrative Agent, in its sole discretion, and such Bank.
In addition, unless either (1) sub-clause (i) in the immediately preceding clause (a) is true with respect to a Bank or (2) a Bank has provided another representation, warranty and covenant in accordance with sub-clause (iv) in the immediately preceding clause (a), such Bank further (x) represents and warrants, as of the date such Person became a Bank party hereto, to, and (y) covenants, from the date such Person became a Bank party hereto to the date such Person ceases being a Bank party hereto, for the benefit of, the Administrative Agent and not, for the avoidance of doubt, to or for the benefit of the Account Parties, that the Administrative Agent is not a fiduciary with respect to the assets of such Bank involved in such Bank’s entrance into, participation in, administration of and performance of the Loans, the Letters of Credit, the Commitments and this Agreement (including in connection with the reservation or exercise of any rights by the Administrative Agent under this Agreement, any Credit Document or any documents related hereto or thereto).
SECTION 7.13Recovery of Erroneous Payments. Without limitation of any other provision in this Agreement, if at any time the Administrative Agent makes a payment hereunder in error to any Bank or any Fronting Issuing Bank (the “Credit Party”), whether or not in respect of Loans and/or other Credit Exposure due and owing by the Company or another Account Party at such time, where such payment is a Rescindable Amount, then in any such event, each Credit Party receiving a Rescindable Amount severally agrees to repay to the Administrative Agent forthwith on demand the Rescindable Amount received by such Credit Party in immediately available funds in the currency so received, with interest thereon, for each day from and including the date such Rescindable Amount is received by it to but excluding the date of payment to the Administrative Agent, at the greater of the Federal Funds Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation. Each Credit Party irrevocably waives any and all defenses, including any “discharge for value” (under which a creditor might otherwise claim a right to retain funds mistakenly paid by a third party in respect of a debt owed by another) or similar defense to its obligation to return any Rescindable Amount. The Administrative Agent shall inform each Credit Party promptly upon determining that any payment made to such Credit Party comprised, in whole or in part, a Rescindable Amount.
ARTICLE VIII
CHANGE IN CIRCUMSTANCES
SECTION 8.01LIBOR Successor RateInability to Determine Rates.
(a)If in connection with any request for a Euro-DollarTerm SOFR Loan or a conversion to orof Base Rate Loans to Term SOFR Loans or a continuation thereofof any of such Loans, as applicable, (i) the Administrative Agent determines that (A)(which determination shall be conclusive absent manifest error) that (A) no Successor Rate has been determined in accordance with Section 8.01(b), and the circumstances under clause (i) of Section 8.01(b) or the Scheduled Unavailability Date has occurred, or (B) adequate and
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reasonable means do not otherwise exist for determining Adjusted LIBORTerm SOFR for any requested Interest Period with respect to a proposed Euro-DollarTerm SOFR Loan or in connection with an existing or proposed Base Rate Loan and (B) the circumstances described in Section 8.01(c)(i) do not apply (“Impacted Loans”), or (ii) the Administrative Agent at the direction of the Required Banks or the Required Banks determine for any reason that Adjusted LIBORTerm SOFR for any requested Interest Period with respect to a proposed Euro-Dollar Loan does not adequately and fairly reflect the cost to such Banks of funding such Euro-Dollar Loan, the Administrative Agent will promptly so notify the Company and each Bank.
(a) Thereafter, (x) the obligation of the Banks to make or maintain Euro-Dollar LoansTerm SOFR Loans, or to convert Base Rate Loans to Term SOFR Loans, shall be suspended, (to the extent of the affected Euro-DollarTerm SOFR Loans or Interest Periods), and (y) in the event of a determination described in the preceding sentence with respect to the Adjusted LIBORTerm SOFR component of the Base Rate, the utilization of the Adjusted LIBORTerm SOFR component in determining the Base Rate shall be suspended, in each case until the Administrative Agent (or, in the case of a determination by the Required Banks described in clause (ii) of this Section 8.01(a), until the Administrative Agent upon instruction of the Required Banks) revokes such notice.
Upon receipt of such notice, (i) the Account PartiesCompany may revoke any pending request for a Borrowing of, or conversion to, or continuation of Euro-DollarTerm SOFR Loans (to the extent of the affected Euro-DollarTerm SOFR Loans or Interest Periods) or, failing that, will be deemed to have converted such request into a request for a Committed Borrowing of Base Rate Loans in the amount specified therein and (ii) any outstanding Term SOFR Loans shall be deemed to have been converted to Base Rate Loans immediately at the end of their respective applicable Interest Period.
(b) Notwithstanding the foregoing, if the Administrative Agent has made the determination described in clause (i) of Section 8.01(a), the Administrative Agent, with the written consent of the Company, and in consultation with the Required Banks, may establish an alternative interest rate for the Impacted Loans, in which case, such alternative rate of interest shall apply with respect to the Impacted Loans until (1) the Administrative Agent revokes the notice delivered with respect to the Impacted Loans under clause (i) of the first sentence of this section, (2) the Administrative Agent or the Required Banks notify the Administrative Agent and the Company that such alternative interest rate does not adequately and fairly reflect the cost to such Banks of funding the Impacted Loans, or (3) any Bank determines that any law has made it unlawful, or that any governmental authority has asserted that it is unlawful, for such Bank or its Applicable Lending Office to make, maintain or fund Loans whose interest is determined by reference to such alternative rate of interest or to determine or charge interest rates based upon such rate or any governmental authority has imposed material restrictions on the authority of such Bank to do any of the foregoing and provides the Administrative Agent and the Company written notice thereof. The Administrative Agent will promptly (in one or more notices) notify the Company and each Bank of the establishment of an alternative interest rate pursuant to this clause (b).
(c) Notwithstanding anything to the contrary herein or in any other Credit Document:
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(i) On March 5, 2021 the Financial Conduct Authority (“FCA”), the regulatory supervisor of Adjusted LIBOR’s administrator (“IBA”), announced in a public statement the future cessation or loss of representativeness of overnight/Spot Next, 1-week, 1-month, 2-month, 3-month, 6-month and 12- month U.S. dollar LIBOR tenor settings. On the earliest of (A) the date that all Available Tenors of U.S dollar LIBOR have permanently or indefinitely ceased to be provided by IBA or have been announced by the FCA pursuant to public statement or publication of information to be no longer representative, (B) June 30, 2023 and (C) the Early Opt-in Effective Date in respect of a SOFR Early Opt-in, if the then-current Benchmark is Adjusted LIBOR, the Benchmark Replacement will replace such Benchmark for all purposes hereunder and under any Credit Document in respect of any setting of such Benchmark on such day and all subsequent settings without any amendment to, or further action or consent of any other party to this Agreement or any other Credit Document. If the Benchmark Replacement is Daily Simple SOFR, all interest payments will be payable on a quarterly basis;
(ii) (x) Upon (A) the occurrence of a Benchmark Transition Event or (B) a determination by the Administrative Agent that neither of the alternatives under clause (1) of the definition of Benchmark Replacement are available, the Benchmark Replacement will replace the then-current Benchmark for all purposes hereunder and under any Credit Document in respect of any Benchmark setting at or after 5:00 p.m. on the fifth (5th) Business Day after the date notice of such Benchmark Replacement is provided to the Banks without any amendment to, or further action or consent of any other party to, this Agreement or any other Credit Document so long as the Administrative Agent has not received, by such time, written notice of objection to such Benchmark Replacement from Banks comprising the Required Banks (and any such objection shall be conclusive and binding absent manifest error). (y) On the Early Opt-in Effective Date in respect of an Other Rate Early Opt-in, the Benchmark Replacement will replace Adjusted LIBOR for all purposes hereunder and under any Credit Document in respect of any setting of such Benchmark on such day and all subsequent settings without any amendment to, or further action or consent of any other party to this Agreement or any other Credit Document.
(iii) At any time that the administrator of the then-current Benchmark has permanently or indefinitely ceased to provide such Benchmark or such Benchmark has been announced by the regulatory supervisor for the administrator of such Benchmark pursuant to public statement or publication of information to be no longer representative of the underlying market and economic reality that such Benchmark is intended to measure and that representativeness will not be restored, the Company may revoke any request for a borrowing of, conversion to or continuation of Loans to be made, converted or continued that would bear interest by reference to such Benchmark until the Company’s receipt of notice from the Administrative Agent that a Benchmark Replacement has replaced such Benchmark, and, failing that, the Company will be deemed to have converted any such request into a request for a borrowing of or conversion to Base Rate Loans.
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During the period referenced in the foregoing sentence, the component of Base Rate based upon the Benchmark will not be used in any determination of Base Rate; provided that solely in the event that the then-current Benchmark at the time of such Benchmark Transition Event is not a SOFR-based rate, the Benchmark Replacement therefor shall be determined in accordance with clause (1) of the definition of Benchmark Replacement unless the Administrative Agent determines that neither of such alternative rates is available.
(b)Replacement of Term SOFR or Successor Rate. Notwithstanding anything to the contrary in this Agreement or any other Credit Documents, if the Administrative Agent determines (which determination shall be conclusive absent manifest error), or the Company or Required Banks notify the Administrative Agent (with, in the case of the Required Banks, a copy to the Company) that the Company or Required Banks (as applicable) have determined, that:
(i)adequate and reasonable means do not exist for ascertaining one month and three month interest periods of Term SOFR, including, without limitation, because the Term SOFR Screen Rate is not available or published on a current basis and such circumstances are unlikely to be temporary; or
(ii)CME or any successor administrator of the Term SOFR Screen Rate or a Governmental Authority having jurisdiction over the Administrative Agent or such administrator with respect to its publication of Term SOFR, in each case acting in such capacity, has made a public statement identifying a specific date after which one month and three month interest periods of Term SOFR or the Term SOFR Screen Rate shall or will no longer be made available, or permitted to be used for determining the interest rate of U.S. dollar denominated syndicated loans, or shall or will otherwise cease, provided that, at the time of such statement, there is no successor administrator that is satisfactory to the Administrative Agent, that will continue to provide such interest periods of Term SOFR after such specific date (the latest date on which one month and three month interest periods of Term SOFR or the Term SOFR Screen Rate are no longer available permanently or indefinitely, the “Scheduled Unavailability Date”);
then, on a date and time determined by the Administrative Agent (any such date, the “Term SOFR Replacement Date”), which date shall be at the end of an Interest Period or on the relevant interest payment date, as applicable, for interest calculated and, solely with respect to clause (ii) above, no later than the Scheduled Unavailability Date, Term SOFR will be replaced hereunder and under any Credit Document with Daily Simple SOFR plus the SOFR Adjustment for any payment period for interest calculated that can be determined by the Administrative Agent, in each case, without any amendment to, or further action or consent of any other party to, this Agreement or any other Credit Document (the “Successor Rate).
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If the Successor Rate is Daily Simple SOFR plus the SOFR Adjustment, all interest payments will be payable quarterly in arrears on each Quarterly Date and on the date of termination of the Commitments in their entirety (and, if later, the date the Loans shall be paid in full).
Notwithstanding anything to the contrary herein, (i) if the Administrative Agent determines that Daily Simple SOFR is not available on or prior to the Term SOFR Replacement Date, or (ii) if the events or circumstances of the type described in Section 8.01(b)(i) or (ii) have occurred with respect to the Successor Rate then in effect, then in each case, the Administrative Agent and the Company may amend this Agreement solely for the purpose of replacing Term SOFR or any then current Successor Rate in accordance with this Section 8.01 at the end of any Interest Period, relevant interest payment date or payment period for interest calculated, as applicable, with an alternative benchmark rate giving due consideration to any evolving or then existing convention for similar U.S. dollar denominated credit facilities syndicated and agented in the United States for such alternative benchmark, and, in each case, including any mathematical or other adjustments to such benchmark giving due consideration to any evolving or then existing convention for similar U.S. dollar denominated credit facilities syndicated and agented in the United States for such benchmark. For the avoidance of doubt, any such proposed rate and adjustments, shall constitute a “Successor Rate”. Any such amendment shall become effective at 5:00 p.m. on the fifth Business Day after the Administrative Agent shall have posted such proposed amendment to all Banks and the Company unless, prior to such time, Banks comprising the Required Banks have delivered to the Administrative Agent written notice that such Required Banks object to such amendment.
The Administrative Agent will promptly (in one or more notices) notify the Company and each Bank of the implementation of any Successor Rate.
Any Successor Rate shall be applied in a manner consistent with market practice; provided that to the extent such market practice is not administratively feasible for the Administrative Agent, such Successor Rate shall be applied in a manner as otherwise reasonably determined by the Administrative Agent.
Notwithstanding anything else herein, if at any time any Successor Rate as so determined would otherwise be less than zero, the Successor Rate will be deemed to be zero for the purposes of this Agreement and the other Credit Documents.
(iv) In connection with the implementation and administration of a Benchmark Replacementof a Successor Rate, the Administrative Agent will have the right to make Benchmark Replacement Conforming Changes from time to time and, notwithstanding anything to the contrary herein or in any other Credit Document, any amendments implementing such Benchmark Replacement Conforming Changes will become effective without any further action or consent of any other party to this
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Agreement.; provided that, with respect to any such amendment effected, the Administrative Agent shall post each such amendment implementing such Conforming Changes to the Company and the Banks reasonably promptly after such amendment becomes effective.
(v) The Administrative Agent will promptly notify the Company and the Banks of (A) the implementation of any Benchmark Replacement and (B) the effectiveness of any Benchmark Replacement Conforming Changes. Any determination, decision or election that may be made by the Administrative Agent pursuant to this Section 8.01(c), including any determination with respect to a tenor, rate or adjustment or of the occurrence or non-occurrence of an event, circumstance or date and any decision to take or refrain from taking any action, will be conclusive and binding absent manifest error and may be made in its sole discretion and without consent from any other party hereto, except, in each case, as expressly required pursuant to this Section 8.01(c).
(vi) At any time (including in connection with the implementation of a Benchmark Replacement), (A) if the then-current Benchmark is a term rate (including Term SOFR or Adjusted LIBOR), then the Administrative Agent may remove any tenor of such Benchmark that is unavailable or non-representative (because the regulatory supervisor for the administrator of such Benchmark has announced pursuant to a public statement or publication of information that such tenor is not representative of the underlying market and economic reality that such Benchmark is intended to measure) for Benchmark (including Benchmark Replacement) settings and (B) the Administrative Agent may reinstate any such previously removed tenor for Benchmark (including Benchmark Replacement) settings if and when the conditions in the preceding clause (A) no longer apply.
SECTION 8.02Illegality. If, after the date of this Agreement, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Applicable Lending Office) to make, continue, maintain or fund its Euro-DollarTerm SOFR Loans and such Bank shall so notify the Administrative Agent, the Administrative Agent shall forthwith give notice thereof to the other Banks and the Company, whereupon until such Bank notifies the Company and the Administrative Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make Euro-DollarTerm SOFR Loans shall be suspended. Before giving any notice to the Administrative Agent pursuant to this Section, such Bank shall designate a different Applicable Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such Bank shall determine that it may not lawfully continue to maintain and fund any of its outstanding Euro-DollarTerm SOFR Loans to maturity and shall so specify in such notice, the applicable Account Parties shall immediately prepay in full the then outstanding principal amount of each such Euro-DollarTerm SOFR Loan, together with accrued interest thereon.
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Concurrently with prepaying each such Euro-DollarTerm SOFR Loan, the applicable Account Parties shall borrow Base Rate Loans in an equal principal amount from such Bank (on which interest and principal shall be payable contemporaneously with the related Euro-DollarTerm SOFR Loans of the other Banks), and such Bank shall make such Base Rate Loans.
SECTION 8.03Increased Cost and Reduced Return.
(a)If on or after the date hereof, in the case of any Loan or any obligation to make Loans or in the case of any Letter of Credit or any obligation to issue, participate in, renew or extend any Letter of Credit, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding with respect to any Euro-Dollar Loan any such requirement included in an applicable Euro-Dollar Reserve Percentage), special deposit, compulsory loan, insurance assessment or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or the London interbank market any other condition affecting its Euro-DollarTerm SOFR Loans, its Notes or its obligation to make Euro-DollarTerm SOFR Loans or its obligation to issue or participate in Letters of Credit, any outstanding Letters of Credit or reimbursement claims in respect of LC Disbursements and the result of any of the foregoing is to increase the cost or expense to such Bank (or its Applicable Lending Office) of making, continuing, converting to or maintaining any Euro-DollarTerm SOFR Loan or of issuing, participating in or maintaining any Letter of Credit, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under other Credit Document with respect thereto, by an amount deemed by such Bank to be material, then, within 15 days after demand by such Bank (with a copy to the Administrative Agent), the Company shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction.
(b)If any Bank shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any applicable law, rule or regulation regarding capital adequacy or liquidity requirements, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy or liquidity requirements (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank’s obligations hereunder to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 15 days after demand by such Bank (with a copy to the Administrative Agent), the Company shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its Parent) for such reduction.
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(c)Each Bank will promptly notify the Company and the Administrative Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section. A certificate of any Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder and, in reasonable detail, such Bank’s computation of such amount or amounts, shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods.
(d)Notwithstanding anything herein to the contrary, for purposes of this Section, (x) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives thereunder or issued in connection therewith and (y) all requests, rules, guidelines or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities, in each case pursuant to Basel III, shall in each case be deemed to have gone into effect after the date hereof, regardless of the date enacted, adopted or issued unless such request, rule, guideline or directive was enforceable with respect to the applicable Bank by the applicable regulatory authority on the Effective Date (which for the avoidance of doubt assumes that final implementing regulations and rules are in full force and effect and such request, rule, guideline or directive is applicable only to the extent rolled out at such time).
SECTION 8.04Base Rate Loans Substituted for Affected Euro-DollarTerm SOFR Loans. If (i) the obligation of any Bank to make or continue Euro-DollarTerm SOFR Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03(a) or 8.05 and the Company shall, by at least five Euro-Dollar Business Days’ prior notice to such Bank through the Administrative Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Company that the circumstances giving rise to such suspension or demand for compensation no longer apply:
(a)all Loans which would otherwise be made, or continued, by such Bank as Euro-DollarTerm SOFR Loans shall be made instead as, or converted into, Base Rate Loans (on which interest and principal shall be payable contemporaneously with the related Euro-DollarTerm SOFR Loans of the other Banks), and
(b)after each of its Euro-DollarTerm SOFR Loans has been repaid, all payments of principal which would otherwise be applied to repay such Euro-DollarTerm SOFR Loans shall be applied to repay its Base Rate Loans instead.
(a)For purposes of this Section, the following terms have the following meanings:
“Domestic Taxes” has the meaning set forth in the definition of Taxes in this Section 8.05(a).
“FATCA” means Sections 1471 through 1474 of the Code and any regulations or official interpretations thereof.
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“Other Taxes” means any present or future stamp or documentary taxes and any other excise or property taxes, or similar charges or levies, which arise from any payment made pursuant to this Agreement or any other Credit Document or from the execution, delivery, registration or enforcement of, or otherwise with respect to, this Agreement or any other Credit Document.
“Taxes” means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings of any nature with respect to any payment by any Account Party or the Guarantor pursuant to this Agreement or any other Credit Document, and all liabilities with respect thereto ( excluding, in the case of each Bank and the Administrative Agent, (i) taxes imposed on its net income, and franchise or similar taxes imposed on it, by a jurisdiction under the laws of which such Bank or the Administrative Agent (as the case may be) is organized or in which its principal executive office is located or, in the case of each Bank, in which its Applicable Lending Office is located (all such excluded taxes being hereinafter referred to as “Domestic Taxes”) and (ii) any U.S. Federal withholding Taxes imposed by FATCA). If the form provided by a Bank pursuant to Section 8.05(d) at the time such Bank first becomes a party to this Agreement indicates a United States interest withholding tax rate in excess of zero, any United States interest withholding tax at such rate imposed on payments by the Company under this Agreement or any other Credit Document shall be excluded from the definition of “Taxes”.
“Withholding Agent” means any Account Party or the Administrative Agent.
(b)Any and all payments by any Account Party or the Guarantor to or for the account of any Bank or the Administrative Agent hereunder or under any other Credit Document shall be made free and clear and without deduction or withholding for any Taxes or Other Taxes; provided that, if any Account Party or the Guarantor shall be required by law to deduct any Taxes or Other Taxes from any such payments, (i) the sum payable shall be increased as necessary so that after making all required deductions and withholdings (including deductions and withholdings applicable to additional sums payable under this Section) such Bank or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions or withholdings been made, (ii) such Account Party or the Guarantor (as the case may be) shall make such deductions or withholdings, (iii) such Account Party or the Guarantor (as the case may be) shall pay the full amount deducted or withheld to the relevant taxation authority or other authority in accordance with applicable law and (iv) such Account Party or the Guarantor (as the case may be) shall promptly furnish to the Administrative Agent, at its address referred to in Section 10.01, the original or a certified copy of a receipt evidencing payment thereof, and, if such receipt relates to Taxes or Other Taxes in respect of a sum payable to any Bank, the Administrative Agent shall promptly deliver such original or certified copy to such Bank.
(c)The Company agrees to indemnify each Bank and the Administrative Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section), whether or not correctly or legally imposed, paid by such Bank or the Administrative Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. In addition, the Company agrees to indemnify each Bank and the
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Administrative Agent for all Domestic Taxes of such Bank or the Administrative Agent (calculated based on a hypothetical basis at the maximum marginal rate for a corporation) and any liability (including penalties, interest and expenses to the extent not attributable to the gross negligence or willful misconduct of each Bank or the Administrative Agent, as the case may be, as determined by a court of competent jurisdiction) arising therefrom or with respect thereto, in each case to the extent that such Domestic Taxes result from any payment or indemnification pursuant to this Section for any taxes imposed by any jurisdiction for which the Company or any Account Party is responsible under Section 8.05(a), (b) or (c). This indemnification shall be paid within 30 days after such Bank or Agent, as the case may be, makes demand therefor.
(d)At least five Domestic Business Days prior to the first date on which interest or fees are payable hereunder for the account of any Bank, each Bank that is not incorporated under the laws of the United States of America or a state thereof agrees that it will deliver to each of the Company and the Administrative Agent two duly completed copies of United States Internal Revenue Service Form W-8BEN, W-8BEN-E or W-8ECI, certifying in either case that such Bank is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal income taxes. Each Bank which so delivers a Form W-8BEN, W-8BEN-E or W-8ECI further undertakes to deliver to each of the Company and the Administrative Agent two additional copies of such form (or successor form) on or before the date that such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the Company or the Administrative Agent, in each case certifying that such Bank is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal income taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such form with respect to it and such Bank advises the Company and the Administrative Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax.
(e)If a payment made to a Bank under any Credit Document would be subject to U.S. federal withholding tax imposed by FATCA if such Bank fails to comply with the applicable reporting requirements of FATCA (including those contained in Section 1471(b) or 1472(b) of the Code, as applicable), such Bank shall deliver to the Withholding Agent documentation reasonably requested by the Withholding Agent sufficient for the Withholding Agent to comply with its obligations under FATCA and to determine that such Bank has complied with such applicable reporting requirements or to determine the amount to deduct and withhold from such payment.
(f)For any period with respect to which a Bank has failed to provide the Company or the Administrative Agent with the appropriate form as required by Section 8.05(d) (whether or not such Bank is lawfully able to do so, unless such failure is due to a change in treaty, law or regulation occurring subsequent to the date on which such form originally was required to be provided), such Bank shall not be entitled to indemnification under Section 8.05(b) or (c) with respect to any withholding of the United States federal income tax resulting from such failure; provided that if a Bank, which is otherwise exempt from or subject to a
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reduced rate of withholding tax, becomes subject to Taxes because of its failure to deliver a form required hereunder, the Company shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes.
(g)Each Bank and the Administrative Agent shall, at the request of the Company, use reasonable efforts (consistent with applicable legal and regulatory restrictions) to file any certificate or document requested by the Company if the making of such a filing would avoid the need for or reduce the amount of any such additional amounts payable to or for the account of such Bank or the Administrative Agent (as the case may be) pursuant to this Section which may thereafter accrue and would not, in the sole judgment of such Bank or the Administrative Agent, require such Bank or the Administrative Agent to disclose any confidential or proprietary information or be otherwise disadvantageous to such Bank or the Administrative Agent.
(h)Notwithstanding the foregoing, nothing in this Section shall interfere with the rights of any Bank to conduct its fiscal or tax affairs in such manner as it deems fit.
SECTION 8.06Regulation D Compensation [Reserved].
For so long as any Bank maintains reserves against “Eurocurrency liabilities” (or any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of such Bank to United States residents), and as a result the cost to such Bank (or its Applicable Lending Office) of making or maintaining its Euro-Dollar Loans is increased, then such Bank may require the applicable Account Parties to pay, contemporaneously with each payment of interest on the Euro-Dollar Loans, additional interest on the related Euro-Dollar Loans of such Bank at a rate per annum up to but not exceeding the excess of (i) (A) the applicable Adjusted LIBOR rate divided by (B) one minus the Euro-Dollar Reserve Percentage over (ii) the applicable Adjusted LIBOR rate. Any Bank wishing to require payment of such additional interest (x) shall so notify the applicable Account Parties and the Administrative Agent, in which case such additional interest on the Euro-Dollar Loans of such Bank shall be payable to such Bank at the place indicated in such notice with respect to each Interest Period commencing at least three Euro-Dollar Business Days after the giving of such notice and (y) shall furnish to the applicable Account Parties at least five Euro-Dollar Business Days prior to each date on which interest is payable on the Euro-Dollar Loans an officer’s certificate setting forth the amount to which such Bank is then entitled under this Section (which shall be consistent with such Bank’s good faith estimate of the level at which the related reserves are maintained by it). Each such certificate shall be accompanied by such information as the applicable Account Parties may reasonably request as to the computation set forth therein.
SECTION 8.07Mitigation Obligations; Replacement of Banks.
(a)If any Bank requests compensation under Section 8.03, or if any Account Party is required to pay any additional amount to any Bank or any governmental body, agency or official for the account of any Bank pursuant to Section 8.05, then such Bank shall use
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reasonable efforts to designate a different Applicable Lending Office for funding or booking its Loans and/or other Credit Exposure hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Bank (with the concurrence of the Company), such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 8.03 or 8.05, as the case may be, in the future and (ii) would not subject such Bank to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Bank. The Company hereby agrees to pay all reasonable costs and expenses incurred by any Bank in connection with any such designation or assignment.
(b)So long as no Default or Event of Default has occurred and is continuing, if any Bank requests compensation under Section 8.03 or if any Account Party is required to pay any additional amount to any Bank or any governmental body, agency or official for the account of any Bank pursuant to Section 8.05, then the Company may, at its sole expense and effort, upon notice to such Bank and the Administrative Agent, require such Bank to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 10.06(c)), all its interests, rights and obligations under this Agreement to an assignee that shall assume such obligations (which assignee may be another Bank, if a Bank accepts such assignment); provided that (i) the Company shall have received the prior written consent of the Administrative Agent (and, if a Commitment is being assigned, each Fronting Issuing Banks), which consent shall not unreasonably be withheld, (ii) such Bank shall have received payment of an amount equal to the outstanding principal of its Loans and participations in LC Disbursements, accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Company (in the case of all other amounts) and (iii) in the case of any such assignment resulting from a claim for compensation under Section 8.03 or payments required to be made pursuant to Section 8.05, such assignment will result in a reduction in such compensation or payments. A Bank shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Bank or otherwise, the circumstances entitling the Company to require such assignment and delegation cease to apply.
SECTION 9.01The Guaranty. The Company hereby unconditionally guarantees the full and punctual payment of the principal and interest on the Loans and all reimbursement obligations in respect of LC Disbursements and all interest thereon payable by each Subsidiary Account Party pursuant to this Agreement (including, without limitation, any Subsidiary Account Party that shall become party hereto after the date hereof pursuant to Section 10.13), and the full and punctual payment of all other amounts payable by each Subsidiary Account Party under this Agreement, including amounts payable as cash collateral pursuant to Sections 2.03(e) and 6.01. Upon failure by any Subsidiary Account Party to pay punctually any such amount, the Company shall forthwith on demand pay the amount not so paid at the place and in the manner specified in this Agreement. This guarantee is a continuing guarantee and shall apply to all obligations of the Subsidiary Account Parties under this Agreement whenever arising, and is a guarantee of payment and is not merely a guarantee of collection.
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SECTION 9.02Guaranty Unconditional. The obligations of the Company hereunder shall be unconditional, absolute and continuing and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by:
(i)any extension, renewal, settlement, compromise, waiver or release in respect of any obligation of any Subsidiary Account Party under this Agreement, by operation of law or otherwise;
(ii)any modification or amendment of or supplement to this Agreement;
(iii)any release, impairment, non-perfection or invalidity of any direct or indirect security for any obligation of any Subsidiary Account Party under this Agreement;
(iv)any change in the corporate existence, structure or ownership of any Subsidiary Account Party, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting any Subsidiary Account Party or its assets or any resulting release or discharge of any obligation of any Subsidiary Account Party contained in this Agreement;
(v)the existence of any claim, set-off or other rights which the Company may have at any time against any Subsidiary Account Party, the Administrative Agent, any Bank or any other Person, whether in connection herewith or any unrelated transactions, provided that nothing herein shall prevent the assertion of any such claim by separate suit or compulsory counterclaim;
(vi)any invalidity or unenforceability relating to or against any Subsidiary Account Party for any reason of this Agreement, or any provision of applicable law or regulation purporting to prohibit the payment by any Subsidiary Account Party of any reimbursement obligation, interest or any other amount payable by it under this Agreement;
(vii)any other act or omission to act or delay of any kind by Subsidiary Account Party, the Administrative Agent, any Bank or any other Person or any other circumstance whatsoever which might, but for the provisions of this paragraph, constitute a legal or equitable discharge of or defense to the Company’s obligations hereunder; or
(viii)any Bank and its Affiliates accepting deposits from, lending money to, or otherwise engaging in any kind of business with the Company, its Subsidiaries, the Subsidiary Account Parties or the Affiliates of any thereof.
SECTION 9.03Discharge Only Upon Payment In Full; Reinstatement In Certain Circumstances. The Company’s obligations hereunder shall remain in full force and effect until the Commitments shall have terminated and all reimbursement obligations, interest and all other amounts payable by the Company and each Subsidiary Account Party under this Agreement shall have been paid in full. If at any time any payment of reimbursement obligation,
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interest or any other amount payable by any Subsidiary Account Party under this Agreement is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of such Subsidiary Account Party or otherwise, the Company’s obligations hereunder with respect to such payment shall be reinstated at such time as though such payment had been due but not made at such time.
SECTION 9.04Waiver by the Company. The Company irrevocably waives acceptance hereof, presentment, demand, protest and any notice not provided for herein, as well as any requirement that at any time any action be taken by any Person against any Subsidiary Account Parties or any other Person.
SECTION 9.05Subrogation. Upon making any payment with respect to the obligations of any Subsidiary Account Party hereunder, the Company shall be subrogated to the rights of the payee against such Subsidiary Account Party with respect to such payment; provided that the Company shall not enforce any payment by way of subrogation against such Subsidiary Account Party so long as (i) any Bank has any Commitment hereunder or (ii) any amount payable hereunder remains unpaid.
SECTION 10.01Notices. All notices, requests and other communications to any party hereunder shall be in writing (including facsimile transmission, or by electronic communication, if arrangements for doing so have been approved by such party) and shall be given to such party: (a) in the case of any Account Party, at the Company’s address or telecopier number set forth on the Company’s signature page hereof, (b) in the case of the Administrative Agent, at its address or telecopier number set forth on its respective signature page hereof, (c) in the case of any Bank, at its address or telecopier number set forth in its Administrative Questionnaire or (d) in the case of any party, such other address or telecopier number as such party may hereafter specify for the purpose by notice to the Administrative Agent and the Company. Each such notice, request or other communication shall be effective (i) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid and return receipt requested, (ii) if given by telecopier, when transmitted to the telecopier number specified in this Section or (iii) if given by any other means, when delivered at the relevant address specified by such party pursuant to this Section; provided that notices to the Administrative Agent under Article II or Article VIII shall not be effective until received.
Notices and other communications to the Banks hereunder may be delivered or furnished by electronic communications pursuant to procedures approved by the Administrative Agent; provided that the foregoing shall not apply to notices pursuant to Article II unless otherwise agreed by the Administrative Agent and the applicable Bank. The Administrative Agent or the Account Parties may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it; provided that approval of such procedures may be limited to particular notices or communications.
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The Platform. THE PLATFORM IS PROVIDED “AS IS” AND “AS AVAILABLE.” THE ADMINISTRATIVE AGENT AND ITS RELATED PARTIES (THE “AGENT PARTIES”) DO NOT WARRANT THE ACCURACY OR COMPLETENESS OF THE BORROWER MATERIALS OR THE ADEQUACY OF THE PLATFORM, AND EXPRESSLY DISCLAIM LIABILITY FOR ERRORS IN OR OMISSIONS FROM THE BORROWER MATERIALS. NO WARRANTY OF ANY KIND, EXPRESS, IMPLIED OR STATUTORY, INCLUDING ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT OF THIRD PARTY RIGHTS OR FREEDOM FROM VIRUSES OR OTHER CODE DEFECTS, IS MADE BY ANY AGENT PARTY IN CONNECTION WITH THE BORROWER MATERIALS OR THE PLATFORM.
SECTION 10.02No Waivers. No failure or delay by the Administrative Agent or any Bank in exercising any right, power or privilege hereunder or under any other Credit Document shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law.
SECTION 10.03Expenses; Indemnification; Non-Liability of Banks.
(a)The Company shall pay (i) all out-of-pocket expenses of the Administrative Agent, including reasonable fees and disbursements of special counsel for the Administrative Agent, in connection with the preparation of this Agreement, any waiver or consent hereunder or any amendment hereof or any Default or alleged Default hereunder and (ii) if an Event of Default occurs, all out-of-pocket expenses incurred by the Administrative Agent and each Bank, including fees and disbursements of counsel including costs allocated to in-house counsel, in connection with such Event of Default and collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom.
(b)The Company agrees to indemnify the Administrative Agent, each Bank and each Confirming Bank, their Affiliates and the respective directors, officers, agents, advisors and employees of the foregoing (each an “Indemnitee”) and hold each Indemnitee harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel and costs of settlement, which may be incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto or whether such proceeding is brought by the Company, its equity holders or its creditors) relating to or arising out of (i) the execution or delivery of this Agreement or any agreement or instrument contemplated hereby, the performance by the parties hereto of their respective obligations hereunder or any other transactions contemplated hereby; (ii) any Loan or Letter of Credit or the use of proceeds therefrom (including any refusal by any Bank to honor a demand for payment under a Letter of Credit if the documents presented in connection with such demand do not comply with the terms of such Letter of Credit); or (iii) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort, or any other theory and regardless of whether any Indemnitee is a party thereto; provided that no Indemnitee shall have the right to be indemnified hereunder for (x) its own gross negligence or willful misconduct or (y) the material breach by such Indemnitee of its obligations
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hereunder or, in the case of a Confirming Bank, under its Confirming Bank Agreement, in the case of each of the foregoing clauses (x) and (y), as determined by a court of competent jurisdiction.
(c)[Reserved].
(d)Reimbursement by Banks. To the extent that an Account Party for any reason fails to pay any amount required under this Section to be paid by it to the Administrative Agent (or any sub-agent thereof), Fronting Issuing Bank, or any Related Party of any of the foregoing, each Bank severally agrees to pay to the Administrative Agent (or any such sub-agent), Fronting Issuing Bank, or such Related Party, as the case may be, such Bank’s pro rata share (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought based on each Bank’s share of the unused Commitments and Credit Exposure at such time) of such unpaid amount (including any such unpaid amount in respect of a claim asserted by such Bank), such payment to be made severally among them based on such Banks’ Applicable Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought), provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent (or any such sub-agent), Fronting Issuing Bank in its capacity as such, or against any Related Party of any of the foregoing acting for the Administrative Agent (or any such sub-agent), or Fronting Issuing Bank in connection with such capacity.
(e)Payments. All amounts due under this Section shall be payable not later than ten Domestic Business Days after written demand therefor.
(f)Survival. The agreements in this Section shall survive the resignation of the Administrative Agent, the replacement of any Bank, the termination of the Commitments.
SECTION 10.04Sharing of Payments. Each Bank agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of principal and interest due with respect to any Loan made by it or reimbursement obligation or interest due with respect to any LC Disbursement made by it under a Letter of Credit which is greater than the proportion received by any other Bank in respect of the aggregate amount of principal and interest due with respect to any Loan made by such other Bank or reimbursement obligation or interest due, as the case may be, with respect to any LC Disbursement made by such other Bank under such Letter of Credit, the Bank receiving such proportionately greater payment shall purchase such participations in the Loans held by or the LC Exposure by the other Banks under such Letter of Credit, as applicable, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Loans and reimbursement obligations and interest with respect to LC Disbursements made by the Banks under such Letter of Credit shall be shared by the Banks pro rata; provided that (i) nothing in this Section shall impair the right of any Bank to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the applicable Account Party other than its indebtedness under this Agreement and (ii) the provisions of this Section shall not be construed to apply to any payment made by any Account Party pursuant to and in accordance with the express terms of this Agreement. Each Account Party agrees, to the fullest extent it may effectively do so under
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applicable law, that any holder of a participation in any Loan or LC Exposure, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of such Account Party in the amount of such participation.
SECTION 10.05Amendments and Waivers. Subject to Section 8.01 and Schedule 2.18, any provision of this Agreement may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by each Account Party and the Required Banks or by the Administrative Agent (with the consent of the Required Banks) (and, if the rights or duties of the Administrative Agent or any Fronting Issuing Bank, in such capacity, are affected thereby, by the Administrative Agent or such Fronting Issuing Bank, as the case may be) and notice of such amendment or waiver is provided to the Administrative Agent; provided that the Administrative Agent may, with the consent of the Company (which shall not be unreasonably withheld), specify by notice to the Banks modifications in the procedures set forth in Section 2.01(b); provided, further, that no such amendment or waiver shall (i) increase the amount or extend the expiry date of the Commitment of any Bank or increase the LC Exposure of any Bank, without the written consent of such Bank, (ii) reduce the principal amount of any Loan or the amount of any reimbursement obligation of any Account Party in respect of any LC Disbursement, the rate or amount of interest thereon (except as set forth in Schedule 2.18) or any fees payable to any Bank hereunder, without the written consent of each Bank affected thereby, (iii) postpone the scheduled date of payment of the principal amount of any Loan or for reimbursement of any LC Disbursement, or any interest thereon, or any fees payable hereunder, or waive or excuse any such payment, or postpone the scheduled date of expiration of any Commitment, without the written consent of each Bank affected thereby, (iv) change Section 2.13(b) or (c) or Section 10.04 in a manner that would alter the pro rata sharing of payments required thereby, without the written consent of each Bank affected thereby, (v) change any of the provisions of this Section or the definition of “Required Banks” or any other provision hereof specifying the number or percentage of Banks required to waive, amend or modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Bank, (vi) the release of any of the collateral provided for the LC Exposure pursuant to Sections 2.03(e) and 6.01 (other than as expressly provided in Section 2.03(e)), without the written consent of each Bank, or (vii) any change in the obligations of the Company under Article IX, without the written consent of each Bank.
SECTION 10.06Successors and Assigns.
(a)The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that no Account Party may assign or otherwise transfer any of its rights or obligations under this Agreement, without the prior written consent of each Bank.
(b)Any Bank may at any time grant to one or more banks or other institutions (each a “Participant”) participating interests in its Commitment or the Loans or any or all of its Letters of Credit. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Company and the Administrative Agent, such Bank shall remain solely responsible for the performance of its obligations hereunder, and the Account Parties and the Administrative Agent shall continue to deal solely and directly with such
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Bank in connection with such Bank’s rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Account Parties hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in the proviso of Section 10.05 without the consent of the Participant. Each Account Party agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of Article VIII with respect to its participating interest. An assignment or other transfer which is not permitted by subsection (c) or (d) of this Section shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (b). Each Bank that grants a participation shall, acting solely for this purpose as a non-fiduciary agent of the Account Parties, maintain a register on which it enters the name and address of each Participant and the principal amounts (and stated interest) of each Participant’s interest in the Loans, Letters of Credit or other obligations under this Agreement (the “Participant Register”); provided that no Bank shall have any obligation to disclose all or any portion of the Participant Register to any Person (including the identity of any Participant or any information relating to a Participant’s interest in any Commitment, Loan, Letter of Credit or other obligations under any Credit Document) except to the extent that such disclosure is necessary to establish that such Commitment, Loan, Letter of Credit or other obligation is in registered form under Section 5f.103-1(c) of the United States Treasury Regulations. The entries in the Participant Register shall be conclusive absent manifest error, and such Bank shall treat each Person whose name is recorded in the Participant Register as the owner of such participation for all purposes of this Agreement notwithstanding any notice to the contrary. For the avoidance of doubt, the Administrative Agent (in its capacity as Administrative Agent) shall have no responsibility for maintaining a Participant Register.
(c)Any Bank may at any time assign to one or more NAIC Approved Banks (each an “Assignee”) all, or a proportionate part of all, of its rights and obligations under this Agreement, and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption executed by such Assignee and such transferor Bank, with (and subject to) the consent (which in each case shall not be unreasonably withheld, conditioned or delayed) of each of the Company, the Administrative Agent and each Fronting Issuing Bank; provided that (i) if an Assignee is an Affiliate of any Bank or was a Bank immediately prior to such assignment, no such consent of the Company shall be required and (ii) if an Assignee was a Bank immediately prior to such assignment, no such consent of the Administrative Agent or any Fronting Issuing Bank shall be required; provided, further, that no assignment shall be permitted to a Defaulting Bank; provided, further, that (x) the Company shall be deemed to have consented to any such assignment unless it shall object thereto by written notice to the Administrative Agent within ten Business Days after having received notice thereof and (y) if an Event of Default occurs and is continuing, no such consent of the Company shall be required; and provided, further, that any such assignment (other than an assignment to another Bank or an Affiliate of any Bank or an assignment of the entire remaining amount of the transferor Bank’s Commitment and interests in outstanding Loans and Letters of Credit) shall be in an amount that is at least $5,000,000 unless otherwise agreed by the Account Parties and the Administrative Agent. Upon execution and delivery of such Assignment and Assumption and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such
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transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. In connection with any such assignment, the transferor Bank or Assignee shall pay to the Administrative Agent an administrative fee for processing such assignment in the amount of $3,500. If the Assignee is not incorporated under the laws of the United States of America or a state thereof, it shall, prior to the first date on which interest or fees are payable hereunder for its account, deliver to the Company and the Administrative Agent certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with Section 8.05(d).
(d)Any Bank may at any time assign all or any portion of its rights under this Agreement to any Person to secure obligations of such Bank, including, without limitation, to one or more of the Federal Reserve Banks which comprise the Federal Reserve System or other central banks. No such assignment shall release the transferor Bank from its obligations hereunder.
(e)No Assignee, Participant or other transferee of any Bank’s rights shall be entitled to receive any greater payment under Section 8.03, 8.05 or 8.06 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made (i) with the Company’s prior written consent, (ii) by reason of the provisions of Section 8.02 or 8.07 requiring such Bank to designate a different Applicable Lending Office under certain circumstances or (iii) at a time when the circumstances giving rise to such greater payment did not exist.
SECTION 10.07Collateral. Each of the Banks represents to the Administrative Agent and each of the other Banks that it in good faith is not relying upon any “margin stock” (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement.
SECTION 10.08New York Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York.
SECTION 10.09Judicial Proceedings.
(a)Submission to Jurisdiction. Each Account Party hereby submits to the exclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State court sitting in New York City, borough of Manhattan, for purposes of all legal proceedings arising out of or relating to this Agreement or any other Credit Document or the transactions contemplated hereby. Each Account Party irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum.
(b)Appointment of Agent for Service of Process. Each Subsidiary Account Party irrevocably designates and appoints the Company, and the Company hereby accepts such
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appointment, at its office in Radnor, Pennsylvania set forth beneath the Company’s signature on the signature page hereof, as the authorized agent of such Subsidiary Account Party, to accept and acknowledge on its behalf, service of any and all process which may be served in any suit, action or proceeding of the nature referred to in subsection (a) of this Section in any federal or New York State court sitting in New York City. Said designation and appointment shall be irrevocable by each Subsidiary Account Party until all reimbursement obligations, interest thereon and all other amounts payable hereunder shall have been paid in full in accordance with the provisions hereof and thereof or, if earlier, when such Subsidiary Account Party is terminated as an Account Party hereunder pursuant to Section 10.13.
(c)Service of Process. Each Account Party hereby consents to process being served in any suit, action or proceeding of the nature referred to in subsection (a) of this Section in any federal or New York State court sitting in New York City by service of process upon its agent appointed as provided in subsection (b) of this Section; provided that, to the extent lawful and possible, notice of said service upon such agent shall be mailed by registered or certified air mail, postage prepaid, return receipt requested, to such Account Party at its address specified on the signature page hereof (or, in the case of any Subsidiary Account Party, on the signature page of the Subsidiary Joinder Agreement to which it is a party) or to any other address of which such Account Party shall have given written notice to the applicable Bank. Each Account Party irrevocably waives, to the fullest extent permitted by law, all claim of error by reason of any such service in such manner and agrees that such service shall be deemed in every respect effective service of process upon such Account Party in any such suit, action or proceeding and shall, to the fullest extent permitted by law, be taken and held to be valid and personal service upon and personal delivery to such Account Party.
(d)No Limitation on Service or Suit. Nothing in this Section shall affect the right of the Administrative Agent or any Bank to serve process in any other manner permitted by law or limit the right of the Administrative Agent or any Bank to bring proceedings against any Account Party in the courts of any jurisdiction or jurisdictions.
SECTION 10.10Counterparts; Integration; Headings. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement.
SECTION 10.11Confidentiality. The Administrative Agent and each Bank agree that they will maintain the confidentiality of, and will not use for any purpose (other than exercising its rights and enforcing its remedies hereunder and under the other Credit Documents), any written or oral information provided under this Agreement by or on behalf of the Account Parties (hereinafter collectively called “Confidential Information”), subject to the Administrative Agent’s and each Bank’s (a) obligation to disclose any such Confidential Information pursuant to a request or order under applicable laws and regulations or by a self-regulatory body or pursuant to a subpoena or other legal process, (b) right to disclose any such
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Confidential Information to its bank examiners, auditors, counsel and other professional advisors and to other Banks and to its subsidiaries and Affiliates and the subsidiaries and Affiliates of its holding company, provided that the Administrative Agent or such Bank, as the case may be, shall cause each such subsidiary or Affiliate to maintain the Confidential Information on the same terms as the terms provided herein, (c) right to disclose any such Confidential Information in connection with any litigation or dispute involving the Banks and the Company or any of its Subsidiaries and Affiliates and (d) right to provide such information to participants, prospective participants, prospective assignees or assignees pursuant to Section 10.06, to its prospective Confirming Bank or Confirming Bank or (with the consent of the Company (such consent not to be unreasonably withheld)) to its agents if prior thereto such participant, prospective participant, prospective assignee, prospective Confirming Bank, Confirming Bank or agent agrees in writing to maintain the confidentiality of such information on terms substantially similar to those of this Section as if it were a “Bank” party hereto. Notwithstanding the foregoing, any such information supplied to a Bank, participant, prospective participant, prospective assignee, prospective Confirming Bank or Confirming Bank under this Agreement shall cease to be Confidential Information if it is or becomes known to such Person by other than unauthorized disclosure, or if it is, at the time of disclosure, or becomes a matter of public knowledge. In addition, the Administrative Agent and the Banks may disclose the existence of this Agreement and information about this Agreement to market data collectors and other service providers to the lending industry and service providers to the Administrative Agent and the Banks in connection with the administration of this Agreement, the other Credit Documents and the Commitments.
SECTION 10.12WAIVER OF JURY TRIAL. EACH OF THE ACCOUNT PARTIES, THE ADMINISTRATIVE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE NOTES OR THE TRANSACTIONS CONTEMPLATED HEREBY.
SECTION 10.13Joinder and Termination of Subsidiary Account Party.
(a)Any direct or indirect wholly-owned Subsidiary of the Company that is organized, licensed or regulated under applicable law as an insurance or reinsurance company may, upon the request of the Company at any time, upon not less than seven Business Days’ notice to the Administrative Agent in the case of any Subsidiary that is organized under the laws of a jurisdiction other than of the United States or a political subdivision thereof (a “Foreign Subsidiary”) and upon not less than three Business Days’ notice to the Administrative Agent in the case of any other Subsidiary, become a party to this Agreement as an Account Party by delivering an executed Subsidiary Joinder Agreement, substantially in the form of Exhibit F hereto, to the Administrative Agent for acceptance by it (which shall promptly notify the Banks), provided that on and as of the date of acceptance of such Subsidiary Joinder Agreement by the Administrative Agent (i) no Default shall have occurred and be continuing, (ii) each of the representations and warranties contained in this Agreement (other than the representations and warranties set forth in Sections 4.04(e) and 4.05 as to any matter which has theretofore been disclosed in writing by the Account Parties to the Banks) shall be true with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date), (iii) such Subsidiary Account Party shall be deemed to have appointed the Company as its authorized agent pursuant
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to Section 10.09(b) to accept service of any and all process which may be served in any suit, action or proceeding of any nature in any federal or New York State court sitting in New York City arising out of or relating to this Agreement or any other Credit Document or the transactions contemplated hereby and (iv) the Administrative Agent shall have received such other documents as the Administrative Agent shall reasonably request, which may include opinions of counsel and other documents that are consistent with conditions set forth in Section 3.02, each in form and substance satisfactory to the Administrative Agent. Following the giving of any such notice pursuant to this Section if the designation of such Subsidiary Account Party obligates the Administrative Agent or any Bank to comply with “know your customer” or similar identification procedures in circumstances where the necessary information is not already available to it, the Company shall, promptly upon the request of the Administrative Agent or any Bank, supply such documentation and other evidence as is reasonably requested by the Administrative Agent or any Bank in order for the Administrative Agent or such Bank to carry out and be satisfied it has complied with the results of all necessary “know your customer” or other similar checks under all applicable laws and regulations, and such Bank’s satisfaction, acting reasonably, shall be a condition precedent to the effectiveness of the designation of such Subsidiary Account Party.
Notwithstanding the foregoing, as soon as practicable after receiving notice from the Administrative Agent of the Company’s intent to designate a Foreign Subsidiary to become a Subsidiary Account Party, and in any event at least two Business Days’ prior to the delivery of an executed Subsidiary Joinder Agreement pursuant to this subsection (a), any Bank that may not legally lend to, establish credit for the account of and/or do any business whatsoever with such Foreign Subsidiary directly or through an Affiliate of such Bank (a “Protesting Bank”) shall so notify the Company and the Administrative Agent in writing. With respect to each Protesting Bank, the Company shall, effective on or before the date that such Foreign Subsidiary shall become a Subsidiary Account Party, either (A) notify the Administrative Agent and such Protesting Bank that the Commitment of such Protesting Bank shall be terminated, provided that such Protesting Bank shall have received payment of an amount equal to the outstanding principal of its Loans and/or its LC Disbursement reimbursement obligations, accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal, LC Disbursements and accrued interest and fees) or the Company or the relevant Subsidiary Account Party (in the case of all other amounts) or (B) cancel the request to designate such Foreign Subsidiary as a Subsidiary Account Party hereunder.
(b)The Company may, at any time at which a Subsidiary Account Party shall not be an Account Party with respect to an outstanding Letter of Credit and which shall have no unpaid LC Disbursements or unpaid interest on any LC Disbursements, terminate such Subsidiary Account Party as an Account Party hereunder by delivering an executed notice thereof, substantially in the form of Exhibit G hereto, to the Administrative Agent (which shall promptly notify the Banks). Immediately upon the receipt by the Administrative Agent of such notice, all commitments of the Banks to issue Letters of Credit for the account of such Subsidiary Account Party and all rights of such Subsidiary Account Party hereunder, shall terminate and such Subsidiary Account Party shall immediately cease to be an Account Party hereunder; provided that all obligations of such Subsidiary Account Party as an Account Party hereunder arising in respect of any period in which such Subsidiary Account Party was, or on
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account of any action or inaction by such Subsidiary Account Party as, an Account Party hereunder shall survive such termination.
SECTION 10.14USA PATRIOT Act. Each Bank that is subject to the Patriot Act and the Administrative Agent (for itself and not on behalf of any Bank) hereby notifies the Account Parties that pursuant to the requirements of the Patriot Act, it is required to obtain, verify and record information that identifies the Account Parties, which information includes the name and address of the Account Parties and other information that will allow such Bank or the Administrative Agent, as applicable, to identify the Account Parties in accordance with the Patriot Act. The Account Parties shall, promptly following a request by the Administrative Agent or any Bank, provide all documentation and other information that the Administrative Agent or such Bank reasonably requests in order to comply with its ongoing obligations under applicable “know your customer” and anti-money laundering rules and regulations, including the Patriot Act.
SECTION 10.15No Fiduciary Duty. The Administrative Agent, each Bank and their Affiliates (collectively, solely for purposes of this Section, the “Banks”), may have economic interests that conflict with those of the Account Parties, their respective stockholders and/or their affiliates. The Account Parties agree that nothing in the Credit Documents or otherwise will be deemed to create an advisory, fiduciary or agency relationship or fiduciary or other implied duty between any Bank, on the one hand, and any Account Party, its stockholders or its affiliates, on the other. The Account Parties acknowledge and agree that (i) the transactions contemplated by the Credit Documents (including the exercise of rights and remedies hereunder and thereunder) are arm’s-length commercial transactions between the Banks, on the one hand, and the Account Parties, on the other, and (ii) in connection therewith and with the process leading thereto, (x) no Bank has assumed an advisory or fiduciary responsibility in favor of any Account Party, its stockholders or its affiliates with respect to the transactions contemplated hereby (or the exercise of rights or remedies with respect thereto) or the process leading thereto (irrespective of whether any Bank has advised, is currently advising or will advise any Account Party, its stockholders or its Affiliates on other matters) or any other obligation to the Account Parties except the obligations expressly set forth in the Credit Documents and (y) each Bank is acting solely as principal and not as the agent or fiduciary of any Account Party, its management, stockholders or creditors or any other Person. Each Account Party acknowledges and agrees that such Account Party has consulted its own legal and financial advisors to the extent it deemed appropriate and that it is responsible for making its own independent judgment with respect to such transactions and the process leading thereto. Each Account Party agrees that it will not claim that any Bank has rendered advisory services of any nature or respect, or owes a fiduciary or similar duty to such Account Party, in connection with such transaction or the process leading thereto.
SECTION 10.16Acknowledgement and Consent to Bail-In of Affected Financial Institutions. Notwithstanding anything to the contrary in any Credit Document or in any other agreement, arrangement or understanding among any such parties, each party hereto acknowledges that any liability of any Affected Financial Institution arising under any Credit Document, to the extent such liability is unsecured, may be subject to the Write-Down and Conversion Powers of the applicable Resolution Authority and agrees and consents to, and acknowledges and agrees to be bound by:
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(a)the application of any Write-Down and Conversion Powers by the applicable Resolution Authority to any such liabilities arising hereunder which may be payable to it by any party hereto that is an Affected Financial Institution; and
(b)the effects of any Bail-In Action on any such liability, including, if applicable: (i) a reduction in full or in part or cancellation of any such liability; (ii) a conversion of all, or a portion of, such liability into shares or other instruments of ownership in such Affected Financial Institution, its parent entity, or a bridge institution that may be issued to it or otherwise conferred on it, and that such shares or other instruments of ownership will be accepted by it in lieu of any rights with respect to any such liability under this Agreement or any other Credit Document; or (iii) the variation of the terms of such liability in connection with the exercise of the Write-Down and Conversion Powers of the applicable Resolution Authority.
SECTION 10.17Unenforceability. If any provision of this Agreement or the other Credit Documents is held to be illegal, invalid or unenforceable, (a) the legality, validity and enforceability of the remaining provisions of this Agreement and the other Credit Documents shall not be affected or impaired thereby and (b) the parties shall endeavor in good faith negotiations to replace the illegal, invalid or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the illegal, invalid or unenforceable provisions. The invalidity of a provision in a particular jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
SECTION 10.18Electronic Execution. The words “execute,” “execution,” “signed,” “signature,” and words of like import in or related to any document to be signed in connection with this Agreement and the transactions contemplated hereby (including without limitation Assignment and Assumptions, amendments or other modifications, Notices of Borrowing, waivers and consents) shall be deemed to include electronic signatures and contract formations on electronic platforms approved by the Administrative Agent, or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic Transactions Act; provided that notwithstanding anything contained herein to the contrary, neither the Account Parties nor the Administrative Agent are under any obligation to agree to accept electronic signatures in any form or in any format unless expressly agreed to by the applicable Account Party or the Administrative Agent pursuant to procedures approved by it.
SECTION 10.19Amendment and Restatement of Existing Credit Agreement. On the Effective Date this Agreement shall amend, restate and supersede the Existing Credit Agreement in its entirety. On the Effective Date, the rights and obligations of the parties hereto evidenced by the Existing Credit Agreement shall be evidenced by this Agreement and the other Credit Documents and shall not in any event be terminated, extinguished or annulled but shall hereafter be governed by this Agreement and the other Credit Documents. All references to the Existing Credit Agreement in any Credit Documents or other document or instrument delivered in connection therewith shall be deemed to refer to this Agreement and the provisions hereof. Nothing contained herein shall be construed as a novation of the “Loans” and/or the other
92
“Credit Exposure” outstanding under and as defined in the Existing Credit Agreement, which shall remain in full force and effect, except as modified hereby. Upon the Effective Date, the Commitment (as defined in the Existing Credit Agreement) of each Bank (as defined in the Existing Credit Agreement) that does not have a Commitment set forth on Schedule 2.01 hereto shall be terminated, and each such Bank (as defined in the Existing Credit Agreement) shall relinquish its rights and be released from any obligations as a Bank hereunder and under the other Credit Documents (provided for the avoidance of doubt that any obligations of any such lender under the Existing Credit Agreement which by their express terms are deemed to survive any such release or termination shall survive).
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Exhibit 10.6
THE SEVERANCE PLAN FOR OFFICERS OF
LINCOLN NATIONAL CORPORATION
(Amended and Restated effective as of December 31, 2022)
Purpose and Interpretation
This amendment and restatement of The Severance Plan for Officers of Lincoln National Corporation (the “Plan”) is effective as of December 31, 2022. This document amends and restates the February 27, 2019 version of the Plan.
This Plan is intended to be (a) a “separation pay plan” that complies with an exception to section 409A of the Internal Revenue Code of 1986, as amended, and the official guidance issued thereunder, and (b) an unfunded “top hat” employee welfare benefit plan under the Employee Retirement Income Security Act of 1974, as amended, that covers a select group of management and highly-compensated employees. It is further intended that benefits under this Plan shall be paid only in cases of “Involuntary Termination” other than for “Cause,” as such terms are defined under Article I below. Notwithstanding any other provision herein to the contrary, this Plan shall be interpreted, operated and administered in a manner consistent with these intentions.
Article I: Definitions
“Applicable Cap” means the lesser of: (a) two times (2x) the sum of the Officer’s annual rate of pay determined as of December 31st of the calendar year prior to the year in which the Officer’s actual separation from service occurs, or (b) two times (2x) the maximum amount that may be taken into account under a tax-qualified retirement plan pursuant to Code section 401(a)(17) in effect for the calendar year in which the Officer’s actual separation from service occurs ($305,000 for calendar year 2022; as indexed thereafter). In calculating the Applicable Cap, all amounts that are defined as payments under a “separation pay plan” sponsored by the Corporation for an individual Officer are aggregated.
“Cause” means (a) a conviction of a crime that is job related or that may otherwise cause harm to the reputation of the Corporation; (b) any act or omission detrimental to the conduct of business of the Corporation; (c) inability to obtain or retain proper licenses; (d) theft, dishonesty, fraud or misrepresentation; (e) failure to cooperate or be truthful in connection with an investigation related to the Corporation; (f) violation of any rule or regulation of any regulatory agency or self-regulatory agency; (g) violation of any policy or rule of the Corporation; or (h) unsatisfactory performance that does not meet expectations after coaching or counseling. The determination of the existence of “Cause” shall be made in the sole discretion of the Corporation’s Chief Human Resources Officer or his or her delegate.
“Change of Control” shall have the same meaning as used and/or defined under the Change of Control Plan.
“Change of Control Plan” means the Lincoln National Corporation Executives’ Severance Benefit Plan.
“Code” means the Internal Revenue Code of 1986, as amended.
“Corporation” means Lincoln National Corporation and its affiliates and subsidiaries.
“Effective Date” means December 31, 2022.
“Involuntary Termination” or “Involuntarily Terminated” means an Officer’s actual “involuntary separation from service,” as defined under Code section 409A and the official guidance issued thereunder, from a Participating Employer. The terms “Involuntary Termination” and “Involuntarily Terminated” do not include any situation where the Officer tenders a resignation to a manager or other Officer of the Corporation, or where an Officer’s current work arrangement category changes because of business needs.
“Key Employee” means any Officer who, as of the date of his or her Involuntary Termination other than for Cause, is treated as a “specified employee” under Code section 409A(a)(2)(B)(i) (i.e., a key employee as defined in Code section 416(i) without regard to paragraph (5) thereof). Key Employees shall be determined in accordance with Code section 409A using December 31st as the determination date. A listing of Key Employees as of any determination date shall be effective for the 12-month period beginning on the April 1st following the determination date.
“Officers” means those officers, other than the Corporation’s President and Chief Executive Officer, listed in the Corporate Directory for each Participating Employer. The list of officers is maintained by the Corporation and is posted on its intranet site at:
http://one.lfg.com/ourpeople/orgcharts/Pages/default.aspx
“Participating Employer” means Lincoln National Corporation and any of its affiliates or subsidiaries listed in Appendix A to this Plan.
“Plan Administrator” means the Lincoln National Corporation Benefits Committee. The Plan Administrator shall have complete discretion to interpret the Plan, to resolve issues relating to eligibility to receive benefits under the Plan, to determine the amount of benefits payable under the Plan, and to take whatever action it believes is necessary or desirable for such administration. For purposes of Article IX of the Plan, the Plan Administrator has delegated to the Lincoln National Corporation Benefits Appeals Committee the responsibility and authority to act as “Claims Administrator” and “Appeals Administrator,” respectively.
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Article II: Eligibility for Benefits
The benefits provided under this Plan are the Severance Pay benefit described in Article III below and, if applicable, the Severance Stipend benefit described in Article IV below.
In order to qualify for benefits under this Plan, the Officer must satisfy each of the three (3) requirements set forth below:
(a) The Officer must be Involuntarily Terminated other than for Cause on or after the Effective Date;
(b) The Officer must remain actively at work and satisfactorily perform his or her job duties until the last day that the Officer’s services are required by the Corporation; and
(c) The Officer must sign (and not revoke) an Agreement, Waiver and General Release (or similar release document) satisfactory to the Corporation (“Agreement”) that becomes effective, which shall include provisions calling for forfeiture and/or claw back of all but three (3) weeks of benefits payable or paid under this Plan in the event the Officer engages in competition with, or solicits or attempts to solicit employees or customers of the Corporation, reveals confidential information belonging to the Corporation, fails to report such competitive activity, solicitation, or breach of confidentiality, or otherwise violates the terms of the Agreement, unless otherwise prohibited by law.
Benefits are not payable under this Plan unless each of the above requirements of this Article II is satisfied and the Officer continues to satisfy such requirements throughout the duration of the Officer’s Severance Period set forth in Article III below.
Officers are not eligible to participate in or receive benefits from the Lincoln National Corporation Severance Pay Plan. This Plan shall pay benefits following an Officer’s Involuntary Termination other than for Cause, which includes a “Job Elimination” as that term is defined under the Lincoln National Corporation Severance Pay Plan, provided such Officer satisfies the requirements for benefits under this Plan.
Any Officer who is Involuntarily Terminated for Cause shall not be eligible for benefits under this Plan or any other plan, program or arrangement sponsored by the Corporation calling for severance or severance-like payments or stipend or stipend-like payments.
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Article III: Amount of Severance Pay
Severance Pay is the greater of the Officer’s:
(a) Annual base salary in effect at the time of Involuntary Termination other than for Cause plus the Officer’s Annual Incentive Program target bonus dollar amount for the calendar year in which the Officer’s Involuntary Termination other than for Cause occurs, divided by 52; or
(b) Established compensation, if applicable, in effect at the time of Involuntary Termination other than for Cause plus the Officer’s Annual Incentive Program target bonus dollar amount (if any) for the calendar year in which the Officer’s Involuntary Termination other than for Cause occurs, divided by 52.
The Severance Period is the length of time during which an Officer receives Severance Pay. The applicable Severance Period is generally based on an Officer’s title as set forth below:
|
Officer Title |
Severance Period |
|
Assistant Vice President |
39 weeks* |
|
Vice President |
39 weeks* |
|
Senior Vice President |
52 weeks |
|
Executive Vice President |
78 weeks |
* The Severance Period for Officers who are Assistant Vice Presidents or Vice Presidents of Participating Employers shall be the greater of: (i) 39 weeks or (ii) the Severance Period set forth in Appendix B to this Plan based on such Officer’s length of service with the Corporation.
In the event an Officer dies during his or her Severance Period, any remaining Severance Pay shall be paid in a cash lump sum to the deceased Officer’s estate as soon as practicable but in no event later than 90 days after the date of death.
For Officers who are employed as of the date of a Change of Control and who are Involuntarily Terminated other than for Cause within two years after such Change of Control, Severance Pay will be calculated pursuant to its definition above, but the Severance Period shall be increased to 150% of the scheduled length determined pursuant to this Article III and Appendix B, as applicable.
See Article VIII below for more information regarding the coordination of the Severance Pay benefit payable under this Plan, and similar benefits under the Change of Control Plan, or any other plans, programs and arrangements sponsored by the Corporation that pay severance benefits.
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Article IV: Amount of Severance Stipend
Any Officer who satisfies the eligibility requirements for Plan benefits set forth in Article II and who is enrolled in a medical plan sponsored by the Corporation at the time of his or her Involuntary Termination other than for Cause shall be entitled to the Severance Stipend. The Severance Stipend is a flat rate for each week of an Officer’s Severance Period, as determined pursuant to Article III above, and is based upon the Officer’s level of coverage under a medical plan sponsored by the Corporation as set forth below:
See Article VIII below for more information regarding the coordination of the Severance Stipend benefit payable under this Plan, and similar benefits under the Change of Control Plan, or any other plans, programs and arrangements sponsored by the Corporation that pay severance benefits.
Article V: Timing of Payments
In general, payments under this Plan will be paid, or begin to be paid, as soon as practical, but in no event later than 90 days, after the date the Officer satisfies the requirements of Article II above.
Notwithstanding the foregoing, for amounts in excess of the Applicable Cap that are payable to a Key Employee or any amount of Plan benefits payable to a Key Employee covered under the Change of Control Plan, benefits under this Plan will begin to be paid no earlier than the first day of the month that is a full six (6) months after the date of the Key Employee’s Involuntary Termination other than for Cause. No interest or other compensation will be paid to the Key Employee in consideration of such delay.
In no event shall Severance Pay be paid later than December 31st of the second calendar year following the calendar year in which the Officer’s Involuntary Termination other than for Cause occurs.
Article VI: Form of Payment
Severance Pay. Except as provided below, Severance Pay is paid bi-weekly during the applicable Severance Period. Each bi-weekly payment of Severance Pay is considered a separate payment for purposes of Code section 409A.
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For Officers who are employed as of the date of a Change of Control and who are Involuntarily Terminated other than for Cause within two years after such Change of Control, benefits under this Plan will be paid in a cash lump sum as soon as practical, but not later than 90 days, after the date the Officer satisfies the requirements of Article II above. Such benefits shall be calculated as described in Articles III and IV above.
Severance Stipend. The Severance Stipend is paid in a cash lump sum at the beginning of the applicable Severance Period.
Article VII: Additional Restrictions on Eligibility for Severance Benefits
|
(a) |
Suitable Job. Severance benefits are not payable to any Officer who refuses an offer of or a transfer to a “suitable job” with the Corporation. In no event is a job “suitable” if the annual base salary is less than 80% of the Officer’s annual base salary immediately prior to the transfer. The determination of whether a position is a “suitable job” will be made by the Corporation’s Chief Human Resources Officer or his or her delegate. |
Notwithstanding the foregoing, severance benefits are not payable under this Plan if:
|
(ii) |
At the time the Officer was hired, promoted, or transferred to his or her current position, the Officer was expressly informed that relocation to another location was a job requirement; or |
|
(iii) |
At the time the Officer was hired, promoted, or transferred to his or her current position, the Officer was expressly informed that rotation to another job, whether in the same or different location, as part of a planned development program was a job requirement. |
|
(b) |
Substantially Similar Job. Severance benefits are not payable under this Plan to any Officer who is Involuntarily Terminated other than for Cause and who is offered a “substantially similar job” in the following and similar instances: |
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|
(i) |
The Involuntary Termination other than for Cause is the result of the sale of a subsidiary or affiliate of the Corporation and the substantially similar job offered is a result of the sale; or |
|
(ii) |
The Involuntary Termination other than for Cause is the result of the transfer or sale of all or a portion of a business unit or of a line of business of the Corporation and the substantially similar job offered is a result of the transfer or sale; or |
|
(iii) |
The Involuntary Termination other than for Cause is the result of the transfer of duties or functions through “outsourcing,” and the substantially similar job offered is with the outsource vendor. For purposes of this Plan, the term “outsourcing” means the transfer of duties or functions historically performed by employees of the Corporation to another organization pursuant to an agreement between the Corporation and such organization to provide those services. |
In no event is an offered job “substantially similar” if the annual base salary is less than 80% of the Officer’s annual base salary at the time such job is offered. The determination of what constitutes a “substantially similar job” will be made by the Corporation’s Chief Human Resources Officer or his or her delegate.
|
(c) |
Sale of Affiliate or Subsidiary. In the event of a sale of an affiliate or subsidiary of the Corporation, severance benefits are not payable under this Plan to any Officer whose employment continues with that affiliate or subsidiary. |
Article VIII: Coordination with Other Plans, Programs & Arrangements
Retirement Plans. With respect to an Officer who is a participant in the Lincoln National Corporation Retirement Plan for Employees Hired Prior to January 1, 2008, the length of such Officer’s Severance Period will not count in the determination of whether that Officer is age 53 or older at the time of his or her termination of employment (actual separation from service).
Any Severance Pay or Severance Stipend payable pursuant to this Plan is not eligible to be contributed to any of the Corporation’s qualified savings or 401(k) plans, nor eligible to be deferred under any of the Corporation’s non-qualified savings or deferred compensation arrangements. No Severance Pay or Severance Stipend is considered in the calculation of benefits under any of the Corporation’s qualified or non-qualified defined benefit plans.
Paid Time Off. In addition to the benefits described in this Plan, an Officer may receive a cash lump sum payment for all accrued but unused paid time off (“PTO”) hours in the calendar year in which his or her Involuntary Termination other than for Cause
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occurs, as well as any unused PTO hours that, consistent with Corporation policy, were permitted to be carried over from the preceding calendar year.
If an Officer is paid Severance Pay under this Plan and is paid for accrued but unused PTO hours as provided above, and is then subsequently rehired (other than as a temporary employee) by the Corporation or one of its subsidiaries or affiliates within one year after such Involuntary Termination other than for Cause, Severance Pay will cease and the Officer shall not be eligible to be re-credited with any PTO hours that have already been used or paid out.
Previous Payment of Severance Benefits. Any Officer who has previously been paid severance benefits by the Corporation or any subsidiary or affiliate, and is subsequently rehired, and is determined to be eligible for benefits under this Plan, will have any benefits under this Plan calculated without including any past periods of service to the extent that previous severance benefits were paid with respect to such past periods of service.
Other Severance or Severance-Type Benefits. Any amounts of Severance Pay and Severance Stipend payable under this Plan shall be reduced, or offset, on a dollar-for-dollar basis, by the amount of any severance pay and severance stipend that may also be payable to the Officer under any other plan, program, contract or arrangement sponsored by the Corporation calling for the payment of severance or severance-like payments or stipend or stipend-like payments.
In addition, if the Officer is also eligible for benefits pursuant to the terms of the Change of Control Plan, then any amount of Severance Pay and Severance Stipend payable to the Officer under this Plan shall offset or reduce the amount payable to the Officer under the Change of Control Plan.
Except as expressly provided herein, particularly as to the amount of Severance Pay, Severance Stipend, and/or as to the coordination of benefits provisions in this Plan, this Plan does not amend or otherwise modify the provisions of any of the plans, programs, arrangements or agreements established, maintained or entered into by the Corporation for the purpose of providing benefits to employees.
Article IX: Claim for Benefits & Appealing a Denied Claim
ERISA Claims Procedures. Any claim for benefits under this Plan shall be made in accordance with the procedures set forth in this Article IX. It is intended that the following claims procedures at all times be in compliance with the claim procedure regulations of the U.S. Department of Labor set forth in 29 C.F.R. section 2560.503-1.
General Procedures. The Plan Administrator or its delegate shall establish administrative processes and safeguards designed to ensure and to verify that all benefit claim determinations under this Plan are made in accordance with this document and that, where appropriate, the Plan provisions have been applied consistently with respect to similarly situated Officers.
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(a)Initial Claim. An employee of a Participating Employer who believes he or she is entitled to benefits under this Plan may make a claim for those benefits (such employee being a “Claimant”) by submitting a written notification of his or her claim of right to such benefits to the Claims Administrator (see definition of “Plan Administrator” under Article I), in the manner prescribed by Claims Administrator.
(b)Timing of Benefits Determinations. If a claim is wholly or partially denied (an “Adverse Benefit Determination”), the Claims Administrator shall notify the Claimant of the Adverse Benefit Determination within a reasonable period of time, but not later than 90 days after receipt of the claim by the Claims Administrator, unless the Claims Administrator determines that special circumstances require an extension of time for processing the claim. If the Claims Administrator determines that an extension of time for processing is necessary, then written notice of the extension shall be furnished to the Claimant prior to the termination of the initial 90-day period. In no event shall such extension exceed a period of 90 days from the end of such initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Claims Administrator expects to render a decision on the claim.
(c)Manner and Content of Notice of Adverse Benefit Determination. The Claims Administrator shall provide a Claimant with written or electronic notification of any Adverse Benefit Determination. Electronic notifications shall comply with standards imposed under 29 C.F.R. sections 2520.104b-1(c)(1)(i), (iii) and (iv). The notification shall set forth, in a manner calculated to be understood by the Claimant:
(i) the specific reason or reasons for the Adverse Benefit Determination;
(ii) reference to the specific Plan provisions on which the determination is based;
(iii) a description of any additional material or information necessary for the Claimant to protect the claim and an explanation of why such material or information is necessary; and
(iv) a description of the Plan’s review procedures and the time limits applicable to such procedures, including a statement of the Claimant’s right to bring a civil action under section 502(a) of ERISA following an Adverse Benefit Determination on review.
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Appeal of Adverse Benefit Determinations. The Plan shall provide:
(a) the Claimant 60 days following receipt of notification of an Adverse Benefit Determination within which to appeal the determination;
(b) the Claimant the opportunity to submit written comments, documents, records, and other information relating to the claim for benefits;
(c)for a review that takes into account all comments, documents, records, and other information submitted by the Claimant relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination; and
(d)the Claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the Claimant’s claim for benefits.
Timing of Notification of Benefit Determination on Review. The Appeals Administrator (see definition of “Plan Administrator” under Article I) shall notify a Claimant in accordance with this Article IX of the Plan’s benefit determination on review within a reasonable period of time, but not later than 60 days after receipt of the Claimant’s request for review by the Plan, unless the Appeals Administrator determines that special circumstances require an extension of time for processing the review of the claim. If the Appeals Administrator determines that the extension of time for processing is required, written notice of the extension shall be furnished to the Claimant prior to the termination of the initial 60-day period. In no event shall such extension exceed a period of 60 days from the end of the initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Appeals Administrator expects to render the determination on review.
For purposes of this Article IX, the period of time within which a benefit determination on review is required to be made shall begin at the time an appeal is filed, in accordance with the Plan’s procedures, without regard to whether all the information necessary to make a benefit determination on review accompanies the filing. In the event that a period of time is extended due to a Claimant’s failure to submit information necessary to decide a claim, the period for making the benefit determination on review shall be suspended from the date on which the notification of the extension is sent to the Claimant until the date on which the Claimant responds to the request for additional information.
Furnishing documents. In the case of an Adverse Benefit Determination on review, the Appeals Administrator shall provide such access to, the copies of, documents, records, and other information described below, as appropriate.
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Manner and Content of Notification of Benefit Determination on Review. The Appeals Administrator shall provide a Claimant with written or electronic notification of the Appeals Administrator’s benefit determination on review. Electronic notifications shall comply with standards imposed under 29 C.F.R. sections 2520.104b-1(c)(1)(i), (iii) and (iv). In the case of an Adverse Benefit Determination, the notification shall set forth, in a manner calculated to be understood by the Claimant:
|
(a) |
the specific reason or reasons for the adverse determination; |
|
(b) |
reference to the specific Plan provisions on which the determination is based; |
(c)a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the Claimant’s claim for benefits; and
(d)a statement of the Claimant’s right to bring an action under section 502(a) of ERISA.
Litigation. To operate and administer the claims procedure in a timely and efficient manner, any Claimant whose appeal with respect to a claim for benefits under this Plan has been denied, and who desires to commence a legal action with respect to such a claim, must commence such action in a court of competent jurisdiction within one year after receipt of notification of such denial. Failure to file such action by the prescribed time will forever bar the commencement of such action.
Article X: Amendment and Termination
This Plan may be amended at any time and from time to time, or terminated at any time, by the Corporation. This Plan may be amended by action of the Compensation Committee of the Corporation’s Board of Directors at a meeting held either in person or by telephone or other electronic means, or by unanimous consent in lieu of a meeting. The Compensation Committee may delegate this amendment power to an Officer of the Corporation. The Chief Executive Officer of the Corporation may amend this Plan if such amendment is (a) in the opinion of counsel, required by local, state or federal law or regulation or (b) estimated to cost the Corporation no more than $15,000,000 (actuarial present value of all Plan amendments made in the same year) for the next five (5) calendar years after the effective date of such amendment.
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IN WITNESS WHEREOF, the President and Chief Executive Officer of the Company has executed this Plan this 19th day of December, 2022.
LINCOLN NATIONAL CORPORATION
/s/ Ellen Cooper
By: Ellen Cooper
Its: President and Chief Executive Officer
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APPENDIX A
Participating Employers
As of December 31, 2022
California Fringe Benefit & Insurance and Marketing Corp.
LFA Limited Liability Co.
LFA Management Corporation
Lincoln Financial Advisors Corporation
Lincoln Investment Management Company
Lincoln Life & Annuity Company of New York
Lincoln National Corporation
Lincoln National Management Corporation
The Lincoln National Life Insurance Company
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APPENDIX B
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Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following registration statements of Lincoln National Corporation and in the related prospectuses listed below:
1. Forms S-3
a. No. 333-249058 pertaining to the Lincoln National Corporation automatic shelf registration for certain securities,
b. No. 333-261018 pertaining to the LNL Agents’ 401(k) Savings Plan,
c. No. 333-256416 pertaining to the Lincoln National Corporation 2009 Amended and Restated Incentive Compensation Plan, and
d. No. 333-265361 pertaining to the Lincoln National Corporation Deferred Compensation Plan for Agents and Brokers;
2. Forms S-8
a. No. 333-203690 pertaining to the Lincoln National Corporation 2009 Amended and Restated Incentive Compensation Plan and the Jefferson-Pilot Corporation Long-Term Stock Incentive Plan,
b. No. 333-196233 pertaining to the Lincoln National Corporation 2014 Incentive Compensation Plan,
c. Nos. 333-239117 and 333-265314 pertaining to the Lincoln National Corporation 2020 Incentive Compensation Plan,
d. No. 333-155385 pertaining to the Lincoln National Corporation Deferred Compensation and Supplemental/Excess Retirement Plan,
e. No. 333-142872 pertaining to the Lincoln National Corporation Stock Option Plan for Non-Employee Directors,
f. No. 333-133039 pertaining to various Jefferson-Pilot Corporation benefit plans,
g. Nos. 333-143796 and 333-126452 pertaining to the Lincoln National Corporation Executive Deferred Compensation Plan for Employees,
h. Nos. 333-126020 pertaining to the Lincoln National Corporation Employees’ Savings and Profit-Sharing Plan and 333-161989 pertaining to the Lincoln National Corporation Employees’ Savings and Retirement Plan;
i. Nos. 333-143795 and 333-121069 pertaining to the Lincoln National Corporation Deferred Compensation Plan for Non-Employee Directors,
j. No. 033-58113 pertaining to the Lincoln National Corporation 1993 Stock Plan for Non-Employee Directors, and
k. No. 333-105344 pertaining to the Lincoln National Corporation 1993 Stock Plan for Non-Employee Directors;
of our reports dated February 16, 2023, with respect to the consolidated financial statements and financial statement schedules of Lincoln National Corporation and the effectiveness of internal control over financial reporting of Lincoln National Corporation, included in this Annual Report (Form 10-K) for the year ended December 31, 2022.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
February 16, 2023
Exhibit 31.1
Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Ellen G. Cooper, President and Chief Executive Officer, certify that:
|
1. |
I have reviewed this annual report on Form 10-K of Lincoln National Corporation; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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Dated: February 16, 2023 |
/s/ Ellen G. Cooper |
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Name: Ellen G. Cooper |
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Title: President and Chief Executive Officer |
Exhibit 31.2
Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Randal J. Freitag, Executive Vice President and Chief Financial Officer, certify that:
1.I have reviewed this annual report on Form 10-K of Lincoln National Corporation;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Dated: February 16, 2023 |
/s/ Randal J. Freitag |
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Name: Randal J. Freitag |
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Title: Executive Vice President and Chief Financial Officer |
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. § 1350, the undersigned officer of Lincoln National Corporation (the “Company”), hereby certifies that the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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Dated: February 16, 2023 |
/s/ Ellen G. Cooper |
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Name: Ellen G. Cooper |
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Title: President and Chief Executive Officer |
The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a separate disclosure document.
A signed original of this written statement required under Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. § 1350, the undersigned officer of Lincoln National Corporation (the “Company”), hereby certifies that the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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Dated: February 16, 2023 |
/s/ Randal J. Freitag |
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Name: Randal J. Freitag |
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Title: Executive Vice President and Chief Financial Officer |
The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a separate disclosure document.
A signed original of this written statement required under Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.