Lincoln(US:LNC)2021-02-18 14:42Financial Overview - As of December 31, 2020, Lincoln National Corporation had consolidated assets of $365.9 billion and consolidated stockholders' equity of $22.7 billion[17]. - Lincoln National Corporation's financial results are reported in accordance with GAAP, providing detailed revenues and income from operations across its business segments[20]. - As of December 31, 2020, the RBC ratios of LNL, LLANY, LLACB, and FPP all exceeded the "company action level," indicating strong capital adequacy[121]. - The financial strength ratings of the principal insurance subsidiaries are as follows: A+ from A.M. Best, A+ from Fitch, A1 from Moody's, and AA- from S&P[109]. Annuities Segment - The Annuities segment includes variable annuities, fixed annuities, and indexed variable annuities, with Managed Risk Strategies funds totaling $43.0 billion as of December 31, 2020, representing 34% of total variable annuity product account values[28]. - In 2020, 69% of variable annuity deposits were on products without guaranteed living benefit riders, compared to 47% in 2019[30]. - The Annuities segment distributes its products through Lincoln Financial Distributors, which had approximately 560 internal and external wholesalers as of December 31, 2020[19]. - The fixed annuity product line is expected to earn a spread between the underlying general account investments and the credited interest to contract holders[37]. - The indexed variable annuity, Lincoln Level Advantage, allows investment in variable sub-accounts and indexed accounts, with performance linked to indices such as the S&P 500[42]. - The company utilizes a dynamic hedging program to manage risks associated with guaranteed benefits in its annuity products[36]. - The company offers various riders for its annuity products, including guaranteed death benefits and income benefits, enhancing the attractiveness of its offerings[30]. Retirement Plan Services - The Retirement Plan Services segment offers three primary products: LINCOLN DIRECTOR group variable annuity, LINCOLN ALLIANCE program, and Multi-Fund variable annuity, targeting defined contribution plans such as 403(b), 401(k), and 457 plans[52]. - LINCOLN DIRECTOR is aimed at small businesses with plans under $10 million, providing a broad array of investment options and earning revenue through asset charges and separate account charges[53]. - The LINCOLN ALLIANCE program targets employers with defined contribution plans of $10 million or more, bundling traditional fixed annuity products with mutual funds and offering customized employee education services[54]. - Multi-Fund variable annuity provides fully bundled administrative services for small to mid-sized employers, earning mortality and expense charges, investment income, and surrender charges[55]. Life Insurance Segment - The Life Insurance segment includes products such as term insurance, universal life insurance (UL), variable universal life insurance (VUL), and indexed universal life insurance (IUL), with higher sales typically in the second half of the year[62]. - Life insurance profits are driven by mortality margins, morbidity margins, investment margins, expense margins, and surrender fees[62]. - The company offers linked-benefit life products, such as Lincoln MoneyGuard, which combines UL with long-term care insurance[72]. - The life insurance market is highly competitive, with key factors including product features, price, underwriting, customer service, and financial strength[76]. - The company utilizes automated underwriting and a simplified issue process as competitive advantages in the life insurance market[76]. - Claims service is primarily handled in-house, with a formal quality assurance program to ensure consistency and effectiveness in claims examining activities[78]. Group Protection Segment - The Group Protection segment offers a range of employer-sponsored insurance products, including short- and long-term disability, life, dental, vision, and critical illness insurance[80]. - Short-term disability insurance provides weekly benefits for up to 26 weeks, while long-term disability insurance offers benefits for periods ranging from 2 years to normal retirement age[81]. - The company manages claims through in-house specialists, focusing on eligibility and payment compliance, with a particular emphasis on disability claims management[91]. - As of December 31, 2020, the company retained up to $20 million on a single insured life and reinsured 17% of the mortality risk on newly issued life insurance contracts[97]. - The company employs a robust absence management service portfolio to assist employers in managing family medical and company leave programs[82]. - The Group Protection segment competes nationally with major companies and regionally with others, focusing on product features, price, and customer service quality[89]. - The company utilizes reinsurance to cover larger life and disability claims, ensuring protection against severe losses[99]. Regulatory Environment - The company is subject to regulation by state insurance departments, which oversee compliance with insurance laws and protect contract holders[111]. - The company has not received any material adverse findings from state insurance department examinations of its insurance, reinsurance, and captive reinsurance subsidiaries during the three-year period ended December 31, 2020[113]. - The NAIC's adoption of a principles-based reserving framework for newly issued life insurance policies may reduce the company's future use of captive reinsurance for reserve financing transactions[115]. - The company is monitoring potential changes in regulations that could impact its product offerings and financial condition, particularly regarding RBC capital charges and statutory reserves[115]. - The Dodd-Frank Act has imposed significant changes to the regulation of derivatives transactions, affecting the company's risk management strategies[125]. - The company is preparing for compliance with new margin requirements for uncleared swaps, which will begin in September 2021[125]. - The NAIC has implemented changes to accounting, reserve, and RBC regulations related to variable annuities, which may lead to more volatile movements in reserves[115]. - The company is subject to various privacy regulations that require safeguarding customer data, with potential impacts on compliance costs and business practices[123]. - The company’s risk-based statutory surplus is calculated based on various asset, premium, claim, expense, and reserve items, which regulators use to measure capital adequacy[120]. - The company is required to comply with amended guidelines affecting the illustration of certain Indexed Universal Life (IUL) products, which could impact sales[115]. Economic and Market Conditions - The pandemic has led to higher mortality rates, resulting in an elevated incidence of life insurance claims, which adversely affects earnings[165]. - As of December 31, 2020, 37% of the annuities business, 80% of retirement plan services, and 88% of life insurance business were at guaranteed minimum interest rates[172]. - The Federal Reserve's interest rate cut to a range of 0.00% to 0.25% in March 2020 is expected to continue adversely affecting interest margins[173]. - The company recorded unfavorable after-tax unlocking in 2020, particularly in the Life Insurance segment, due to updated interest rate assumptions[173]. - A decline in equity markets could lead to lower fee income and adversely affect results of operations and capital resources[175]. - Strong equity markets increase estimated gross profits from variable insurance products, positively impacting net income[176]. - The company may face increased credit defaults and negative ratings migrations due to ongoing economic weakness, impacting the allowance for credit losses[167]. - Changes in interest rates may cause interest rate spreads to decrease, impacting profitability and statutory requirements[171]. - The company expects continued volatility and uncertainty in the global capital markets, which may materially affect business operations and results[169]. Risk Management - The company maintains a customized dynamic hedge program to mitigate risks associated with income volatility around changes in reserves on guaranteed benefits[178]. - The company remains liable for guaranteed benefits if derivative or reinsurance counterparties are unable to pay, which could materially affect net income and financial condition[179]. - Regulatory changes could impact the company's capital requirements, profitability, and growth, potentially leading to adverse effects on business operations[182]. - The NAIC is considering modifications to the ESG used for calculating life and annuity reserves, which could significantly impact statutory reserves and required capital[183]. - Compliance with privacy regulations may lead to increased costs and changes in business practices, potentially harming the company's reputation and financial condition[186]. Legal and Tax Considerations - The SEC's Regulation Best Interest requires broker-dealers to act in the best interest of retail customers, which has not materially impacted the company's business to date[189]. - The DOL's new prohibited transaction exemption allows compensation to investment advice fiduciaries, tracking the standard set forth in Regulation Best Interest[190]. - Changes in U.S. federal income tax law could increase corporate taxes, negatively impacting the company's results of operations and financial condition[192]. - Legal and regulatory actions could result in financial losses or harm to the company's reputation, affecting business prospects[195]. - The Dodd-Frank Act has imposed significant changes to the regulation of derivatives transactions, which may increase operational costs and affect liquidity requirements[197]. - The effective date of ASU 2018-12, which will significantly change the accounting for insurance contracts, is January 1, 2023[199]. - Changes in statutory accounting principles may lead to increased reserve requirements for life insurance and annuity products[200]. Liquidity and Capital Management - The company's liquidity and capital position may be adversely affected by capital and credit market conditions, impacting its ability to meet liquidity needs[203]. - Disruptions in capital markets could limit the company's ability to replace maturing liabilities and satisfy statutory capital requirements[204]. - The inability of subsidiaries to pay dividends could harm the company's ability to meet its obligations[205]. - A decrease in the capital and surplus of insurance subsidiaries may result in a downgrade of credit and financial strength ratings[209]. - The company's statutory reserves and surplus are sensitive to changes in equity markets, affecting variable universal life contracts and variable annuity base contracts[214]. - The assumptions and estimates used for calculating reserves are inherently uncertain, impacting the adequacy of reserves for future policy benefits[213]. - Regulatory changes may constrain the ability of subsidiaries to pay dividends or advance funds to the holding company[206]. - The company's access to credit facilities is critical for maintaining liquidity and could be restricted by non-compliance with covenants[212].