~~0000059558us-gaap:CorporateBondSecuritiesMember2020-07-012020-09-30~~

__________________________________________________________________________________________________________

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________

FORM 10-Q

_________________

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended ~~September 30, 2020~~March 31, 2021

¨ 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

_________________

LINCOLN NATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

_________________



Indiana	35-1140070
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

150 N. Radnor-Chester Road, Suite A305, Radnor, Pennsylvania	19087
(Address of principal executive offices)	(Zip Code)

(484) 583-1400

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last ~~report.)~~report)

__________________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock	LNC	New York Stock Exchange

__________________________________

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 x 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 x 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.



Large Accelerated Filer		Accelerated Filer	
Non-accelerated Filer		Smaller Reporting Company	
		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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨No x

As of ~~November 2, 2020,~~May 3, 2021, there were ~~193,265,350~~190,373,196 shares of the registrant’s common stock outstanding.

_________________________________________________________________________________________________________

Lincoln National Corporation

Table of Contents


Item			Page			Page
PART I	PART I			PART I
1.	Financial Statements		1	Financial Statements		1

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		57	Management’s Discussion and Analysis of Financial Condition and Results of Operations		46
		Forward-Looking Statements – Cautionary Language	57		Forward-Looking Statements – Cautionary Language	46
		Introduction	58		Introduction	47
		Executive Summary	58		Executive Summary	47
		Critical Accounting Policies and Estimates	60		Critical Accounting Policies and Estimates	48
		Acquisitions and Dispositions	63		Acquisitions and Dispositions	49
		Results of Consolidated Operations	64		Results of Consolidated Operations	50
		Results of Annuities	66		Results of Annuities	51
		Results of Retirement Plan Services	71		Results of Retirement Plan Services	56
		Results of Life Insurance	75		Results of Life Insurance	60
		Results of Group Protection	80		Results of Group Protection	65
		Results of Other Operations	83		Results of Other Operations	68
		Realized Gain (Loss) and Benefit Ratio Unlocking	85		Realized Gain (Loss)	70
		Consolidated Investments	87		Consolidated Investments	72
		Review of Consolidated Financial Condition	99		Review of Consolidated Financial Condition	83
		Liquidity and Capital Resources	99		Liquidity and Capital Resources	83

3.	Quantitative and Qualitative Disclosures About Market Risk		103	Quantitative and Qualitative Disclosures About Market Risk		87

4.	Controls and Procedures		104	Controls and Procedures		87

PART II	PART II			PART II

1.	Legal Proceedings		104	Legal Proceedings		88

1A.	Risk Factors		104	Risk Factors		88

2.	Unregistered Sales of Equity Securities and Use of Proceeds		105	Unregistered Sales of Equity Securities and Use of Proceeds		88

6.	Exhibits		105	Exhibits		88

	Exhibit Index for the Report on Form 10-Q		106	Exhibit Index for the Report on Form 10-Q		89

	Signatures		107	Signatures		90

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

LINCOLN NATIONAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(in millions, except share data)



		As of			As of			As of			As of
	September 30,			December 31,			March 31,			December 31,
		2020			2019			2021			2020
	(Unaudited)						(Unaudited)
ASSETS
Investments:
Fixed maturity available-for-sale securities, at fair value
(amortized cost: 2020 – $101,885; 2019 – $94,295; allowance for credit losses: 2020 – $12; 2019 – $0)		$	118,252		$	105,200
(amortized cost: 2021 - $105,866; 2020 - $104,174; allowance for credit losses: 2021 - $14; 2020 - $13)								$	117,313		$	123,044
Trading securities			4,633			4,673			4,365			4,501
Equity securities			122			103			123			129
Mortgage loans on real estate, net of allowance for credit losses
(portion at fair value: 2020 – $794; 2019 – $0)			16,541			16,339
(portion at fair value: 2021 - $874; 2020 - $832)									17,255			16,763
Policy loans			2,527			2,477			2,502			2,426
Derivative investments			3,236			1,911			3,453			3,109
Other investments			4,204			2,994			3,548			3,984
Total investments			149,515			133,697			148,559			153,956
Cash and invested cash			2,595			2,563			1,350			1,708
Deferred acquisition costs and value of business acquired			6,307			7,694			7,665			5,812
Premiums and fees receivable			498			465			653			486
Accrued investment income			1,320			1,148			1,301			1,257
Reinsurance recoverables, net of allowance for credit losses			16,610			17,144			16,289			16,496
Funds withheld reinsurance assets			539			536			528			530
Goodwill			1,778			1,778			1,778			1,778
Other assets			15,667			16,170			17,298			15,960
Separate account assets			152,975			153,566			171,339			167,965
Total assets		$	347,804		$	334,761		$	366,760		$	365,948

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Future contract benefits		$	40,089		$	36,420		$	39,591		$	40,814
Other contract holder funds			102,568			98,018			107,002			105,405
Short-term debt			-			300			300			-
Long-term debt			6,714			6,067			6,294			6,682
Reinsurance related embedded derivatives			334			327			244			392
Funds withheld reinsurance liabilities			1,910			1,810			1,976			1,946
Payables for collateral on investments			6,435			5,082			7,597			6,222
Other liabilities			15,230			13,482			12,824			13,823
Separate account liabilities			152,975			153,566			171,339			167,965
Total liabilities			326,255			315,072			347,167			343,249

Contingencies and Commitments (See Note 11)
Contingencies and Commitments (See Note 10)

Stockholders’ Equity
Preferred stock – 10,000,000 shares authorized			-			-			-			-
Common stock – 800,000,000 shares authorized; 193,254,948 and 196,668,532 shares
issued and outstanding as of September 30, 2020, and December 31, 2019, respectively			5,093			5,162
Common stock – 800,000,000 shares authorized; 191,149,192 and 192,329,691 shares
issued and outstanding as of March 31, 2021, and December 31, 2020, respectively									5,057			5,082
Retained earnings			8,647			8,854			8,775			8,686
Accumulated other comprehensive income (loss)			7,809			5,673			5,761			8,931
Total stockholders’ equity			21,549			19,689			19,593			22,699
Total liabilities and stockholders’ equity		$	347,804		$	334,761		$	366,760		$	365,948

‎

See accompanying Notes to Consolidated Financial Statements

Table of Contents

LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in millions, except per share data)



	For the Three					For the Nine						For the Three
	Months Ended					Months Ended						Months Ended
	September 30,					September 30,						March 31,
	2020		2019			2020			2019			2021			2020
Revenues
Insurance premiums	$	1,293	$	1,325		$	4,008		$	4,170		$	1,406		$	1,373
Fee income		1,815		1,934			4,812			4,925			1,592			1,539
Net investment income		1,458		1,235			4,005			3,842			1,510			1,375
Realized gain (loss):
Total other-than-temporary impairment losses on securities		-		(2	)		-			(29	)
Portion of loss recognized in other comprehensive income		-		-			-			15
Net other-than-temporary impairment losses on securities
recognized in earnings		-		(2	)		-			(14	)
Realized gain (loss), excluding other-than-temporary
impairment losses on securities		629		(9	)		(43	)		(477	)
Total realized gain (loss)		629		(11	)		(43	)		(491	)
Realized gain (loss)													(181	)		(24	)
Amortization of deferred gain on business sold through reinsurance		11		8			32			23			9			11
Other revenues		155		147			489			444			198			151
Total revenues		5,361		4,638			13,303			12,913			4,534			4,425
Expenses
Interest credited		732		705			2,189			2,063			737			725
Benefits		2,484		2,502			6,710			6,112			2,226			2,501
Commissions and other expenses		1,599		1,552			3,807			3,999			1,231			1,085
Interest and debt expense		66		113			218			254			65			68
Strategic digitization expense		20		16			45			47			13			12
Total expenses		4,901		4,888			12,969			12,475			4,272			4,391
Income (loss) before taxes		460		(250	)		334			438			262			34
Federal income tax expense (benefit)		62		(89	)		(22	)		(16	)		37			(18	)
Net income (loss)		398		(161	)		356			454			225			52
Other comprehensive income (loss), net of tax		486		1,912			2,136			5,841			(3,170	)		(2,669	)
Comprehensive income (loss)	$	884	$	1,751		$	2,492		$	6,295		$	(2,945	)	$	(2,617	)

Net Income (Loss) Per Common Share
Basic	$	2.06	$	(0.81	)	$	1.84		$	2.25		$	1.17		$	0.27
Diluted		2.01		(0.83	)		1.74			2.24			1.16			0.15

Cash Dividends Declared Per Common Share	$	0.40	$	0.37		$	1.20		$	1.11		$	0.42		$	0.40

‎

See accompanying Notes to Consolidated Financial Statements

Table of Contents

LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, in ~~millions, except per share data)~~millions)



	For the Three						For the Nine						For the Three
	Months Ended						Months Ended						Months Ended
	September 30,						September 30,						March 31,
	2020			2019			2020			2019			2021			2020
Common Stock
Balance as of beginning-of-period	$	5,081		$	5,241		$	5,162		$	5,392
Balance as of beginning-of-year													$	5,082		$	5,162
Stock compensation/issued for benefit plans		12			17			31			28			25			9
Retirement of common stock/cancellation of shares		-			(66	)		(100	)		(228	)		(50	)		(100	)
Balance as of end-of-period		5,093			5,192			5,093			5,192			5,057			5,071

Retained Earnings
Balance as of beginning-of-period		8,327			8,878			8,854			8,551
Balance as of beginning-of-year														8,686			8,854
Cumulative effect from adoption of new accounting standards		-			-			(203	)		-			-			(203	)
Net income (loss)		398			(161	)		356			454			225			52
Retirement of common stock		-			(84	)		(125	)		(222	)		(55	)		(125	)
Common stock dividends declared		(78	)		(74	)		(235	)		(224	)		(81	)		(78	)
Balance as of end-of-period		8,647			8,559			8,647			8,559			8,775			8,500

Accumulated Other Comprehensive Income (Loss)
Balance as of beginning-of-period		7,323			4,336			5,673			407
Balance as of beginning-of-year														8,931			5,673
Other comprehensive income (loss), net of tax		486			1,912			2,136			5,841			(3,170	)		(2,669	)
Balance as of end-of-period		7,809			6,248			7,809			6,248			5,761			3,004
Total stockholders’ equity as of end-of-period	$	21,549		$	19,999		$	21,549		$	19,999		$	19,593		$	16,575

‎

See accompanying Notes to Consolidated Financial Statements

Table of Contents

LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in millions)



	For the Nine						For the Three
	Months Ended						Months Ended
	September 30,						March 31,
	2020			2019			2021			2020
Cash Flows from Operating Activities
Net income (loss)	$	356		$	454		$	225		$	52
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
Realized (gain) loss		43			491			181			24
Trading securities purchases, sales and maturities, net		37			(2,539	)		98			235
Amortization of deferred gain on business sold through reinsurance		(32	)		(23	)		(9	)		(11	)
Change in:
Deferred acquisition costs, value of business acquired, deferred sales inducements
and deferred front-end loads deferrals and interest, net of amortization		15			(246	)		54			(169	)
Premiums and fees receivable		(33	)		130			(167	)		(97	)
Accrued investment income		(145	)		(63	)		(41	)		(37	)
Future contract benefits and other contract holder funds		(2	)		(600	)
Reinsurance related assets and liabilities		246			(488	)
Insurance liabilities and reinsurance-related balances								(764	)		736
Accrued expenses		(201	)		(10	)		(40	)		(317	)
Federal income tax accruals		(42	)		(231	)		37			(18	)
Other		99			268			(216	)		57
Net cash provided by (used in) operating activities		341			(2,857	)		(642	)		455
Cash Flows from Investing Activities
Purchases of available-for-sale securities and equity securities		(12,694	)		(11,315	)		(3,834	)		(3,590	)
Sales of available-for-sale securities and equity securities		1,549			6,480			571			395
Maturities of available-for-sale securities		3,710			5,027			1,913			1,317
Purchases of alternative investments		(265	)		(344	)		(163	)		(79	)
Sales and repayments of alternative investments		116			104			54			55
Issuance of mortgage loans on real estate		(1,231	)		(3,459	)		(888	)		(839	)
Repayment and maturities of mortgage loans on real estate		856			758			403			227
Issuance (repayment) of policy loans, net		(50	)		35			(76	)		(94	)
Net change in collateral on investments, derivatives and related settlements		1,680			623			1,341			3,411
Other		(116	)		(194	)		(33	)		(61	)
Net cash provided by (used in) investing activities		(6,445	)		(2,285	)		(712	)		742
Cash Flows from Financing Activities
Payment of long-term debt, including current maturities		(1,096	)		(108	)		-			(300	)
Issuance of long-term debt, net of issuance costs		1,289			495			-			499
Payment related to early extinguishment of debt		(13	)		(42	)
Proceeds from certain financing arrangements		69			50
Deposits of fixed account values, including the fixed portion of variable		10,559			11,564			3,136			3,917
Withdrawals of fixed account values, including the fixed portion of variable		(4,625	)		(4,384	)		(1,777	)		(1,684	)
Transfers to and from separate accounts, net		427			(1,142	)		(122	)		323
Common stock issued for benefit plans		(11	)		(20	)		7			(9	)
Repurchase of common stock		(225	)		(450	)		(105	)		(225	)
Dividends paid to common stockholders		(233	)		(227	)		(80	)		(79	)
Other		(5	)		-			(63	)		-
Net cash provided by (used in) financing activities		6,136			5,736			996			2,442
Net increase (decrease) in cash, invested cash and restricted cash		32			594			(358	)		3,639
Cash, invested cash and restricted cash as of beginning-of-year		2,563			2,345			1,708			2,563
Cash, invested cash and restricted cash as of end-of-period	$	2,595		$	2,939		$	1,350		$	6,202

See accompanying Notes to Consolidated Financial Statements

Table of Contents

LINCOLN NATIONAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Nature of Operations and Basis of Presentation

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 4 business segments. See Note 1514 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, retirement income and group protection products and solutions. These products primarily include fixed and indexed annuities, variable annuities, universal life insurance (“UL”), variable universal life insurance (“VUL”), linked-benefit UL and VUL, indexed universal life insurance (“IUL”), term life insurance, employer-sponsored retirement plans and services, and group life, disability and dental.

Basis of Presentation

The accompanying unaudited consolidated financial statements are prepared in accordance with United States of America generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for the Securities and Exchange Commission (“SEC”) Quarterly Report on Form 10-Q, including Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The information contained in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 (“~~2019~~2020 Form 10-K”), should be read in connection with the reading of these interim unaudited consolidated financial statements.

Certain GAAP policies, which significantly affect the determination of financial condition, results of operations and cash flows, are summarized in our ~~2019~~2020 Form 10-K.

In the opinion of management, these statements include all normal recurring adjustments necessary for a fair presentation of the Company’s results. Operating results for the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, are not necessarily indicative of the results that may be expected for the full year ending December 31, ~~2020,~~2021, especially when considering the risks and uncertainties associated with the ~~coronavirus, or~~ COVID-19 pandemic and the future impacts of the pandemic on our business, results of operations and financial condition. All material inter-company accounts and transactions have been eliminated in consolidation.

‎

Table of Contents

2. New Accounting Standards

~~Adoption of New Accounting Standards~~

The following table provides a description of our adoption of new Accounting Standards Updates (“ASUs”) issued by the Financial Accounting Standards Board (“FASB”) and the impact of the adoption on our consolidated financial statements. ASUs not listed below were assessed and determined to be either not applicable or insignificant in presentation or amount.


Standard	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU ~~2016-13, Measurement of Credit Losses on Financial Instruments and related amendments~~	~~These amendments adopt a new model in Accounting Standards Codification~~^TM (“ASC”) Topic 326 to measure and recognize credit losses for most financial assets. The ASU requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected over the life of the asset using an allowance for credit losses. Changes in the allowance are charged to earnings. The measurement of expected credit losses is based on relevant information about past events, including historical experience, as well as current economic conditions and reasonable and supportable forecasts that affect the collectability of the financial asset. The method used to measure estimated credit losses for fixed maturity available-for-sale (“AFS”) securities will be unchanged from current GAAP; however, the amendments require credit losses to be recognized through an allowance rather than as a reduction to the amortized cost of those securities. The amendments permit entities to recognize improvements in credit loss estimates on fixed maturity AFS securities by reducing the allowance account immediately through earnings. The amendments are adopted through a cumulative effect adjustment to the beginning balance of retained earnings as of the first reporting period in which the amendments are effective. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein.	~~January 1, 2020~~	The adoption of this standard and related amendments resulted in the recognition of a cumulative effect decrease of $218 million, net of deferred acquisition costs (“DAC”), value of business acquired (“VOBA”), deferred sales inducements (“DSI”), deferred front-end loads (“DFEL”) and changes in other contract holder funds, after-tax, to retained earnings. The overall adjustment recorded our allowance for credit losses as of the date of adoption, primarily related to commercial and residential mortgage loans, as well as reinsurance recoverables. Upon adoption of the standard, the concept of other-than-temporary impairment (“OTTI”) no longer exists; however, our prior period presentation herein is reflective of OTTI recorded in those periods.
~~ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging and Topic 825, Financial Instruments~~	These amendments clarify the measurement, recognition and presentation of the allowance for credit losses on accrued interest receivable balances; the inclusion of recoveries when estimating the allowance for credit losses; the inclusion of all ASC Topic 944 – ~~Financial Services – Insurance~~ ~~reinsurance recoverables within the scope of ASC 326-20; and provide additional targeted clarifications on the calculation of the allowance for credit losses.~~ ‎ ‎~~These amendments also make targeted clarifications to ASC Topics 815 and 825. Early adoption is permitted.~~	~~January 1, 2020~~	Our adoption of ASU 2016-13 and related amendments is discussed above. The adoption of the remainder of this guidance did not have a material impact on our consolidated financial condition and results of operations.

‎

~~Table of Contents~~


~~Standard~~	~~Description~~	~~Effective Date~~	~~Effect on Financial Statements or Other Significant Matters~~
~~ASU 2019-05, Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief~~	~~The amendments provide entities that have certain instruments within the scope of Subtopic 326-20,~~ ~~Financial Instruments – Credit Losses – Measured at Amortized Cost, with an option to irrevocably elect the fair value option in Subtopic 825-10,~~ ~~Financial Instruments – Overall, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASC Topic 326.~~	~~January 1, 2020~~	We recognized a cumulative effect increase to retained earnings of $15 million, after-tax, by electing the fair value option for certain mortgage loans in connection with our adoption of ASC Topic 326.
~~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, 2022, with certain exceptions. The amendments are effective for contract modifications made between March 12, 2020, and December 31, 2022.	March 12, 2020 through December 31, 2022	This standard may be elected and applied prospectively as reference rate reform unfolds. We have ~~begun~~elected practical expedients to maintain hedge accounting for certain derivatives. We will continue to evaluate our ~~implementation and are currently evaluating the~~options under this guidance as our reference rate reform adoption process continues. This ASU has not had a material impact ~~of this ASU on~~to our consolidated financial condition and results of ~~operations.~~operations, but we will continue to evaluate those impacts as our transition progresses.
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.~~deferred acquisition costs. 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 currently effective January 1, ~~2022,~~2023, and early adoption is permitted. On September 30, 2020, the FASB approved their proposal to defer the effective date for large public SEC filers to January 1, 2023. The FASB is expected to issue a final amendment to the ASU later in 2020. Once amended, we will update our projected date of adoption accordingly.	January 1, ~~2022~~2023	We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations.

Table of Contents

3. Variable InterestEntities

Consolidated VIEs

Asset information (dollars in millions) for the consolidated variable interest entities (“VIEs”) included on our Consolidated Balance Sheets was as follows:

As of September 30, 2020

As of December 31, 2019

As of March 31, 2021

As of December 31, 2020

Number

Notional

Carrying

Notional

Carrying

Notional

Carrying

Notional

Carrying

Instruments

Amounts

Value

Instruments

Amounts

Value

Instruments

Amounts

Value

Instruments

Amounts

Value

Assets

Total return swap

608

613

591

611

~~As of September 30, 2020, and December 31, 2019, there~~There were 0 gains or losses for consolidated VIEs recognized on our Consolidated Statements of Comprehensive Income (Loss). for the three months ended March 31, 2021 and 2020.

Unconsolidated VIEs

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 asset-backed securities (“ABS”), residential mortgage-backed securities (“RMBS”), and commercial mortgage-backed securities (“CMBS”~~) and collateralized loan obligations (“CLOs”~~). 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 our Consolidated Balance Sheets. For information about these structured securities, see Note 4.

Limited Partnerships and Limited Liability Companies

We invest in certain limited partnerships (“LPs”) and limited liability companies (“LLCs”), including qualified affordable housing projects, 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 our Consolidated Balance Sheets and were ~~$1.9~~$2.3 billion and $2.1 billion as of ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019.~~2020, respectively. Included in these carrying amounts are our investments in qualified affordable housing projects, which were $8$6 million and ~~$13~~$7 million as of ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, respectively. We do not have any contingent commitments to provide additional capital funding to these qualified affordable housing projects. We received returns from these qualified affordable housing projects in the form of income tax credits and other tax benefits of $1 million and less than $1 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~respectively, which were recognized in federal income tax expense (benefit) on our Consolidated Statements of Comprehensive Income (Loss).

Our exposure to loss is limited to the capital we invest in the LPs and LLCs, and there have been no indicators of impairment that would require us to recognize an impairment loss related to the LPs and LLCs as of September 30, 2020.

Table of Contents

4. Investments

Fixed Maturity AFS Securities

In 2020, we adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which resulted in a new recognition and measurement of credit losses on most financial assets. See Note 2 for additional information.

The amortized cost, gross unrealized gains, losses, allowance for credit losses and fair value of fixed maturity ~~AFS~~available-for-sale (“AFS”) securities (in millions) were as follows:



	As of September 30, 2020										As of March 31, 2021
							Allowance										Allowance
	Amortized		Gross Unrealized				for Credit		Fair		Amortized		Gross Unrealized				for Credit		Fair
	Cost		Gains		Losses		Losses		Value		Cost		Gains		Losses		Losses		Value
Fixed maturity AFS securities:
Corporate bonds	$	84,658	$	14,437	$	367	$	11	$	98,717	$	86,879	$	10,397	$	693	$	13	$	96,570
U.S. government bonds		397		99		-		-		496		393		54		3		-		444
State and municipal bonds		5,257		1,520		3		-		6,774		5,474		1,185		34		-		6,625
Foreign government bonds		357		82		3		-		436		428		63		6		-		485
RMBS		2,870		334		-		1		3,203		2,820		261		3		1		3,077
CMBS		1,317		114		1		-		1,430		1,464		68		16		-		1,516
ABS		6,472		140		22		-		6,590		7,880		143		27		-		7,996
Hybrid and redeemable preferred securities		557		91		42		-		606		528		93		21		-		600
Total fixed maturity AFS securities	$	101,885	$	16,817	$	438	$	12	$	118,252	$	105,866	$	12,264	$	803	$	14	$	117,313

~~The amortized cost, gross unrealized gains, losses, OTTI and fair value of fixed maturity AFS securities (in millions) were as follows:~~



												As of December 31, 2020
	As of December 31, 2019																	Allowance
	Amortized		Gross Unrealized							Fair		Amortized		Gross Unrealized				for Credit		Fair
	Cost		Gains		Losses		OTTI ⁽¹⁾			Value		Cost		Gains		Losses		Losses		Value
Fixed maturity AFS securities:
Corporate bonds	$	79,417	$	9,479	$	184	$	(4	)	$	88,716	$	86,289	$	16,662	$	150	$	12	$	102,789
U.S. government bonds		384		51		-		-			435		397		88		1		-		484
State and municipal bonds		4,778		1,113		7		-			5,884		5,360		1,561		-		-		6,921
Foreign government bonds		329		64		-		-			393		384		87		1		-		470
RMBS		3,042		190		10		(19	)		3,241		2,765		313		1		1		3,076
CMBS		1,038		45		1		(1	)		1,083		1,390		115		-		-		1,505
ABS		4,810		62		18		(35	)		4,889		7,041		158		15		-		7,184
Hybrid and redeemable preferred securities		497		82		20		-			559		548		97		30		-		615
Total fixed maturity AFS securities	$	94,295	$	11,086	$	240	$	(59	)	$	105,200	$	104,174	$	19,081	$	198	$	13	$	123,044

⁽¹⁾Prior to the adoption of ASU 2016-13, we recognized the OTTI attributed to noncredit factors as a separate component in other comprehensive income (loss) (“OCI”) referred to as unrealized OTTI on fixed maturity AFS securities. This includes unrealized (gains) and losses on credit-impaired securities related to changes in the fair value of such securities subsequent to the impairment measurement date.

~~Table of Contents~~

The amortized cost and fair value of fixed maturity AFS securities by contractual maturities (in millions) as of ~~September 30, 2020,~~March 31, 2021, were as follows:



	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	3,450	$	3,485	$	3,198	$	3,219
Due after one year through five years		14,509		15,370		15,156		16,072
Due after five years through ten years		19,004		21,265		19,308		20,949
Due after ten years		54,263		66,909		56,040		64,484
Subtotal		91,226		107,029		93,702		104,724
Structured securities (RMBS, CMBS, ABS)		10,659		11,223		12,164		12,589
Total fixed maturity AFS securities	$	101,885	$	118,252	$	105,866	$	117,313

Actual maturities may differ from contractual maturities because issuers may have the right to call or pre-pay obligations.

Table of Contents

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:



	As of September 30, 2020															As of March 31, 2021
	Less Than or Equal					Greater Than										Less Than or Equal					Greater Than
	to Twelve Months					Twelve Months					Total					to Twelve Months					Twelve Months					Total
			Gross					Gross					Gross					Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value			Losses		Value			Losses		Value			Losses ⁽¹⁾		Value			Losses		Value			Losses		Value			Losses ⁽¹⁾
Fixed maturity AFS securities:
Corporate bonds	$	5,719		$	264	$	660		$	103	$	6,379		$	367	$	12,029		$	633	$	709		$	60	$	12,738		$	693
U.S. government bonds																	25			3		-			-		25			3
State and municipal bonds		194			3		-			-		194			3		767			34		-			-		767			34
Foreign government bonds		49			3		-			-		49			3		99			6		-			-		99			6
RMBS																	200			3		7			-		207			3
CMBS		59			1		1			-		60			1		371			16		-			-		371			16
ABS		3,327			13		372			9		3,699			22		2,401			24		167			3		2,568			27
Hybrid and redeemable
preferred securities		112			20		92			22		204			42		124			8		91			13		215			21
Total fixed maturity AFS securities	$	9,460		$	304	$	1,125		$	134	$	10,585		$	438	$	16,016		$	727	$	974		$	76	$	16,990		$	803

Total number of fixed maturity AFS securities in an unrealized loss position	Total number of fixed maturity AFS securities in an unrealized loss position														1,223	Total number of fixed maturity AFS securities in an unrealized loss position														1,749



	As of December 31, 2020
	Less Than or Equal					Greater Than
	to Twelve Months					Twelve Months					Total
				Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value			Losses		Value			Losses		Value			Losses ⁽¹⁾
Fixed maturity AFS securities:
Corporate bonds	$	3,039		$	92	$	607		$	58	$	3,646		$	150
U.S. government bonds		28			1		-			-		28			1
Foreign government bonds		57			1		-			-		57			1
RMBS		45			1		7			-		52			1
ABS		1,527			9		358			6		1,885			15
Hybrid and redeemable
preferred securities		112			13		96			17		208			30
Total fixed maturity AFS securities	$	4,808		$	117	$	1,068		$	81	$	5,876		$	198

Total number of fixed maturity AFS securities in an unrealized loss position															802

⁽¹⁾WeAs of March 31, 2021, and December 31, 2020, we recognized $3$2 million and $1 million, respectively, of gross unrealized losses in ~~OCI~~other comprehensive income (loss) (“OCI”) for fixed maturity AFS securities for which an allowance for credit losses has been recorded.

‎

109

Table of Contents

The fair value and gross unrealized losses, including the portion of OTTI recognized in OCI, of fixed maturity AFS securities (dollars in millions), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:

As of December 31, 2019
Less Than or Equal
Greater Than
to Twelve Months
Twelve Months
Total
Gross
Gross
Gross
Unrealized
Unrealized
Unrealized
Fair
Losses and
Fair
Losses and
Fair
Losses and
Value
OTTI
Value
OTTI
Value
OTTI
Fixed maturity AFS securities:
Corporate bonds
$
2,935
$
46
$
1,406
$
141
$
4,341
$
187
State and municipal bonds
333
7
18
-
351
7
RMBS
536
10
15
-
551
10
CMBS
48
1
4
-
52
1
ABS
1,792
8
303
10
2,095
18
Hybrid and redeemable
preferred securities
29
1
102
19
131
20
Total fixed maturity AFS securities
$
5,673
$
73
$
1,848
$
170
$
7,521
$
243
Total number of fixed maturity AFS securities in an unrealized loss position
895

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:



	As of September 30, 2020							As of March 31, 2021
			Gross			Number				Gross			Number
	Fair		Unrealized			of		Fair		Unrealized			of
	Value		Losses		Securities⁽¹⁾			Value		Losses		Securities⁽¹⁾
Less than six months	$	174	$	63			27	$	50	$	16			10
Six months or greater, but less than nine months		131		55			23		52		23			4
Nine months or greater, but less than twelve months									1		1			3
Twelve months or greater		30		13			22		27		8			28
Total	$	335	$	131			72	$	130	$	48			45

⁽¹⁾~~We may reflect a security in more than one aging category based on various purchase dates.~~

The fair value, gross unrealized losses, the portion of OTTI recognized in OCI (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:



	As of December 31, 2019									As of December 31, 2020
								Number				Gross			Number
	Fair		Gross Unrealized					of		Fair		Unrealized			of
	Value		Losses		OTTI		Securities ⁽¹⁾			Value		Losses		Securities ⁽¹⁾
Less than six months	$	15	$	5	$	-			7	$	63	$	23			14
Six months or greater, but less than nine months		10		3		-			4		2		1			4
Nine months or greater, but less than twelve months											23		7			14
Twelve months or greater		132		76		-			31		30		11			20
Total	$	157	$	84	$	-			42	$	118	$	42			52

⁽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 ~~$195~~$605 million for the ~~nine~~three months ended ~~September 30, 2020.~~March 31, 2021. As discussed further below, we believe the unrealized loss position as of ~~September 30, 2020,~~March 31, 2021, did not require an impairment recognized in earnings as (i) we did not intend to sell these fixed maturity AFS securities; (ii) it is not more likely than not that we will be required to sell the fixed maturity AFS securities before recovery of their amortized cost basis; and (iii) the difference in the fair value compared to the amortized cost was due to factors other than credit loss. Based upon this evaluation as of ~~September 30, 2020,~~March 31, 2021, 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.

~~Table of Contents~~

As of ~~September 30, 2020,~~March 31, 2021, 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 widening credit spreads and rising interest rates 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 ~~September 30,~~March 31, 2021, and December 31, 2020, 96% of the fair value of our corporate bond portfolio was rated investment grade. As of March 31, 2021, and December 31, 2020, the portion of our corporate bond portfolio rated below investment grade had an amortized cost of $4.0 billion and $4.1 billion, respectively, and a fair value of $4.1 billion and $4.2 billion, respectively. Based upon the analysis discussed above, we believe that as of March 31, 2021, and December 31, 2020, we would have recovered the amortized cost of each corporate bond.

As of March 31, 2021, the unrealized losses associated with our mortgage-backed securities (“~~MBS”)~~ and ABS were attributable primarily to widening credit spreads and rising interest rates 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 ~~September 30, 2020,~~March 31, 2021, 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.

~~Evaluation for~~ 10

Table of Contents

Credit Loss Impairment on Fixed Maturity AFS Securities

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 an allowance for credit losses.

~~For our fixed maturity AFS 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 our 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 an allowance for credit losses is recorded, with a corresponding charge to realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss). The remainder of the decline to fair value related to factors other than credit loss is recorded in OCI to unrealized losses on fixed maturity AFS securities on our Consolidated Statements of Stockholders’ Equity, as this amount is considered a non-credit 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~~.

~~Table of Contents~~

~~Calculation of Credit Impairment~~

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 an allowance, we continue to reassess the expected cash flows of the fixed maturity AFS 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 our Consolidated Statements of Comprehensive Income (Loss), limited by the amount that amortized cost exceeds fair value. Losses are charged against the allowance when management believes the uncollectibility of a fixed maturity AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest on fixed maturity AFS securities is written off when deemed uncollectible.

~~Determination of Credit Losses on Corporate Bonds~~

To determine the recovery value of a corporate bond, CLO or collateralized debt obligation, 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).~~

Credit ratings express opinions about the credit quality of a security. Securities rated investment grade (those rated BBB- or higher by Standard & Poor’s (“S&P”) Rating Services 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 September 30, 2020, and December 31, 2019, 96% of the fair value of our corporate bond portfolio was rated investment grade. As of September 30, 2020, and December 31, 2019, the portion of our corporate bond portfolio rated below investment grade had an amortized cost of $4.0 billion and $3.2 billion, respectively, and a fair value of $4.0 billion and $3.3 billion, respectively. Based upon the analysis discussed above, we believe that as of September 30, 2020, and December 31, 2019, we would have recovered the amortized cost of each corporate bond.

~~Determination of Credit Losses on MBS and ABS~~

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.~~

~~Table of Contents~~

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 an allowance for credit losses. 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. Second lien loans are assigned 100% severity, if defaulted. For first lien loans, we assume a minimum of 30% severity, with higher severity assumed for investor properties and further adjusted by housing price assumptions. 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 recognized 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 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 fixed maturity AFS 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 fixed maturity AFS 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.

~~Table of Contents~~

Changes in the allowance for credit losses on fixed maturity AFS securities (in millions), aggregated by investment category, were as follows:



	For the Three											For the Three
	Months Ended											Months Ended
	September 30, 2020											March 31, 2021
	Corporate											Corporate
	Bonds			RMBS		ABS			Total			Bonds		RMBS		ABS		Total
Balance as of beginning-of-period	$	20		$	1	$	1		$	22
Additions for securities for which credit losses were not
previously recognized		5			-		-			5
Balance as of beginning-of-year												$	12	$	1	$	-	$	13
Additions from purchases of PCD debt securities ⁽¹⁾		-			-		-			-			-		-		-		-
Additions (reductions) for securities for which credit losses
were previously recognized		(3	)		-		(1	)		(4	)		1		-		-		1
Reductions for securities charged-off		(11	)		-		-			(11	)
Balance as of end-of-period ⁽²⁾	$	11		$	1	$	-		$	12		$	13	$	1	$	-	$	14

For the Nine
Months Ended
September 30, 2020
Corporate
Bonds
RMBS
ABS
Total
Balance as of beginning-of-period
$
-
$
-
$
-
$
-
Additions for securities for which credit losses were not
previously recognized
42
1
1
44
Additions from purchases of PCD debt securities ⁽¹⁾
-
-
-
-
Additions (reductions) for securities for which credit losses
were previously recognized
(3
)
-
(1
)
(4
)
Reductions for securities disposed
(17
)
-
-
(17
)
Reductions for securities charged-off
(11
)
-
-
(11
)
Balance as of end-of-period ⁽²⁾
$
11
$
1
$
-
$
12



	For the Three
	Months Ended
	March 31, 2020
	Corporate
	Bonds		RMBS		ABS		Total
Balance as of beginning-of-year	$	-	$	-	$	-	$	-
Additions for securities for which credit losses were not
previously recognized		20		-		-		20
Additions from purchases of PCD debt securities ⁽¹⁾		-		-		-		-
Balance as of end-of-period ⁽²⁾	$	20	$	-	$	-	$	20

⁽¹⁾Represents purchased credit-deteriorated (“PCD”) fixed maturity AFS securities.

⁽²⁾Accrued interest receivable on fixed maturity AFS securities totaled $1.1 billion and $1.0 billion as of ~~September 30,~~March 31, 2021 and 2020, respectively, and was excluded from the estimate of credit losses.

Changes in the amount of credit loss of OTTI recognized in net income (loss) where the portion related to other factors was recognized in OCI (in millions) on fixed maturity AFS securities were as follows:

For the
For the
Three
Nine
Months
Months
Ended
Ended
September 30,
September 30,
2019
2019
Balance as of beginning-of-period
$
253
$
355
Increases attributable to:
Credit losses on securities for which an
OTTI was not previously recognized
1
12
Credit losses on securities for which an
OTTI was previously recognized
1
3
Decreases attributable to:
Securities sold, paid down or matured
(39
)
(154
)
Balance as of end-of-period
$
216
$
216

~~Table of Contents~~

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 allowances 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 our 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 our 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.

The following provides the current and past due composition of our mortgage loans on real estate (in millions):



	As of September 30, 2020									As of December 31, 2019									As of March 31, 2021									As of December 31, 2020
	Commercial			Residential			Total			Commercial			Residential			Total			Commercial			Residential			Total			Commercial			Residential			Total
Current	$	16,001		$	589		$	16,590		$	15,620		$	659		$	16,279		$	16,674		$	666		$	17,340		$	16,245		$	610		$	16,855
30 to 59 days past due		-			26			26			3			27			30			6			26			32			4			28			32
60 to 89 days past due		-			13			13			-			10			10			-			8			8			-			8			8
90 or more days past due		-			79			79			-			16			16			-			55			55			-			69			69
Allowance for credit losses		(172	)		(30	)		(202	)		-			(2	)		(2	)		(172	)		(12	)		(184	)		(187	)		(17	)		(204	)
Unamortized premium (discount)		(15	)		23			8			(17	)		23			6			(13	)		23			10			(14	)		22			8
Mark-to-market gains (losses) ⁽¹⁾		27			-			27			-			-			-			(6	)		-			(6	)		(5	)		-			(5	)
Total carrying value	$	15,841		$	700		$	16,541		$	15,606		$	733		$	16,339		$	16,489		$	766		$	17,255		$	16,043		$	720		$	16,763

⁽¹⁾Represents the mark-to-market on certain ~~commercial~~ mortgage loans on real estate for which we have elected the fair value option. See Note 1413 for additional information.

‎

Table of Contents

Our commercial mortgage loan portfolio has the largest concentrations in California, which accounted for 25% and 24% of commercial mortgage loans on real estate as of ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, respectively, and Texas, which accounted for ~~11%~~10% of commercial mortgage loans on real estate as of ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019.~~2020.

Our residential mortgage loan portfolio has the largest concentrations in California, which accounted for ~~33%~~28% and ~~34%~~32% of residential mortgage loans on real estate as of ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, respectively, and Florida, which accounted for 19% and ~~20%~~18% of residential mortgage loans on real estate as of ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, respectively.

As of ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, we had ~~160~~113 and 38147 residential mortgage loans, respectively, that were either delinquent or in foreclosure.

~~Evaluation~~For our commercial mortgage loans, there were 9 specifically identified impaired loans with an aggregate carrying value of $3 million as of March 31, 2021. There were 4 specifically identified impaired loans with an aggregate carrying value of $1 million as of December 31, 2020.

For our residential mortgage loans, there were 74 specifically identified impaired loans with an aggregate carrying value of $34 million as of March 31, 2021. There were 76 specifically identified impaired loans with an aggregate carrying value of $34 million as of December 31, 2020.

Additional information related to impaired mortgage loans on real estate (in millions) was as follows:



	For the Three
	Months Ended
	March 31,
	2021		2020
Average carrying value for impaired mortgage loans on real estate	$	36	$	3
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 March 31, 2021				As of December 31, 2020
	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		-		57		-		71
Total	$	-	$	57	$	-	$	71

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 March 31, 2021
			Debt-			Debt-			Debt-
			Service			Service			Service
	Less		Coverage	65%		Coverage	Greater		Coverage
	than 65%		Ratio	to 74%		Ratio	than 75%		Ratio	Total
Origination Year
2021	$	679	2.99	$	25	1.95	$	-	-	$	704
2020		1,371	3.02		109	1.47		40	2.21		1,520
2019		3,050	2.21		318	1.96		25	1.79		3,393
2018		2,338	2.15		218	1.55		15	0.76		2,571
2017		1,753	2.34		153	1.74		27	0.67		1,933
2016 and prior		6,253	2.39		263	1.75		30	1.40		6,546
Total	$	15,444		$	1,086		$	137		$	16,667

Table of Contents

	As of December 31, 2020
			Debt-			Debt-			Debt-
			Service			Service			Service
	Less		Coverage	65%		Coverage	Greater		Coverage
	than 65%		Ratio	to 74%		Ratio	than 75%		Ratio	Total
Origination Year
2020	$	1,504	2.86	$	32	1.52	$	-	-	$	1,536
2019		3,141	2.25		258	1.78		2	1.74		3,401
2018		2,382	2.16		186	1.49		15	0.71		2,583
2017		1,786	2.34		169	1.73		-	-		1,955
2016		1,713	2.37		174	1.56		22	1.58		1,909
2015 and prior		4,710	2.38		133	1.95		8	1.02		4,851
Total	$	15,236		$	952		$	47		$	16,235

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 March 31, 2021
	Performing		Nonperforming			Total
Origination Year
2021	$	71		$	-	$	71
2020		197			6		203
2019		295			42		337
2018		158			9		167
2017		-			-		-
2016 and prior		-			-		-
Total	$	721		$	57	$	778



	As of December 31, 2020
	Performing		Nonperforming			Total
Origination Year
2020	$	176		$	8	$	184
2019		315			51		366
2018		175			12		187
2017		-			-		-
2016		-			-		-
2015 and prior		-			-		-
Total	$	666		$	71	$	737

Table of Contents

Credit Losses on MortgageLoans 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. 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.

~~Table of Contents~~

Allowances 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 allowances 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.

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 allowance for credit losses 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.

Mortgage loans on real estate are presented net of the allowance for credit losses on our Consolidated Balance Sheets. Changes in the allowance are reported in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss). Mortgage loans on real estate deemed uncollectible are charged against the allowance, and subsequent recoveries, if any, are credited to the allowance, limited to the aggregate of amounts previously charged-off and expected to be charged-off.

~~Determination of Credit Losses on Commercial Mortgage Loans on Real Estate~~

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 an allowance for credit losses 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.

~~For our commercial mortgage loans, there was 1 specifically identified impaired loan with a carrying value of less than $1 million as of September 30, 2020, and December 31, 2019.~~

~~Most of our off-balance sheet commitments relate to commercial mortgage loans. As such, the estimate is developed based on the commercial mortgage loan process outlined above, along with an internally developed conversion factor.~~

~~Determination of Credit Losses on Residential Mortgage Loans on Real Estate~~

Our residential loan portfolio is primarily comprised of first lien mortgages secured by existing residential real estate. 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 allowances 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 allowances 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.

For our residential mortgage loans, there were 74 specifically identified impaired loans with an aggregate carrying value of $35 million as of September 30, 2020. There were 4 specifically identified impaired loans with an aggregate carrying value of $1 million as of December 31, 2019.

~~Table of Contents~~

~~Additional information related to impaired mortgage loans on real estate (in millions) was as follows:~~

For the Three
For the Nine
Months Ended
Months Ended
September 30,
September 30,
2020
2019
2020
2019
Average carrying value for impaired mortgage loans on real estate
$
31
$
-
$
17
$
-
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 September 30, 2020
As of January 1, 2020
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
-
82
-
17
Total
$
-
$
82
$
-
$
17

~~We use loan-to-value and debt-service coverage ratios as credit quality indicators for our commercial mortgage loans on real estate (dollars in millions) as follows:~~

As of September 30, 2020
As of December 31, 2019
Debt-
Debt-
Service
Service
Amortized
% of
Coverage
Amortized
% of
Coverage
Loan-to-Value Ratio
Cost
Total
Ratio
Cost
Total
Ratio
Less than 65%
$
14,679
91.8%
2.43
$
14,206
91.0%
2.35
65% to 74%
1,271
8.0%
1.82
1,399
9.0%
1.87
75% to 100%
36
0.2%
1.24
1
0.0%
1.09
Total
$
15,986
100.0%
$
15,606
100.0%

~~The amortized cost of commercial mortgage loans on real estate (in millions) by year of origination and credit quality indicator was as follows:~~

As of September 30, 2020
Debt-
Debt-
Debt-
Service
Service
Service
Less
Coverage
65%
Coverage
75%
Coverage
than 65%
Ratio
to 74%
Ratio
to 100%
Ratio
Total
Origination Year
2020
$
960
3.30
$
85
1.67
$
-
-
$
1,045
2019
2,976
2.31
448
1.74
-
-
3,424
2018
2,371
2.22
224
1.53
-
-
2,595
2017
1,804
2.34
170
2.62
-
-
1,974
2016
1,691
2.44
204
1.62
28
1.30
1,923
2015 and prior
4,877
2.47
140
1.89
8
1.03
5,025
Total
$
14,679
$
1,271
$
36
$
15,986

~~Table of Contents~~

~~We use loan performance status as the primary credit quality indicator for our residential mortgage loans on real estate (dollars in millions) as follows:~~

As of September 30, 2020
As of December 31, 2019
Amortized
% of
Amortized
% of
Performance Indicator
Cost
Total
Cost ⁽¹⁾
Total
Performing
$
648
88.8%
$
718
97.7%
Nonperforming
82
11.2%
17
2.3%
Total
$
730
100.0%
$
735
100.0%

⁽¹⁾~~A valuation allowance of $2 million was established on residential mortgage loans on real estate as of December 31, 2019.~~

~~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 September 30, 2020
Performing
Nonperforming
Total
Origination Year
2020
$
125
$
8
$
133
2019
338
58
396
2018
185
16
201
2017
-
-
-
2016
-
-
-
2015 and prior
-
-
-
Total
$
648
$
82
$
730

Changes in the allowance for credit losses on mortgage loans on real estate (in millions) were as follows:

For the Three
For the Nine
Months Ended
Months Ended
September 30, 2020
September 30, 2020
Commercial
Residential
Total
Commercial
Residential
Total
Balance as of beginning-of-period
$
236
$
37
$
273
$
-
$
2
$
2
Impact of adopting ASU 2016-13
-
-
-
62
26
88
Additions from provision for credit
loss expense ⁽¹⁾
-
-
-
174
9
183
Additions from purchases of PCD
mortgage loans on real estate
-
-
-
-
-
-
Additions (reductions) for mortgage
loans on real estate for which credit
losses were previously recognized ⁽¹⁾
(64
)
(7
)
(71
)
(64
)
(7
)
(71
)
Balance as of end-of-period ⁽²⁾
$
172
$
30
$
202
$
172
$
30
$
202



	For the Three
	Months Ended
	March 31, 2021
	Commercial			Residential			Total
Balance as of beginning-of-year	$	187		$	17		$	204
Additions from provision for credit loss expense ⁽¹⁾		4			2			6
Additions from purchases of PCD mortgage loans on real estate		-			-			-
Additions (reductions) for mortgage loans on real estate for which credit
losses were previously recognized ⁽¹⁾		(19	)		(7	)		(26	)
Balance as of end-of-period ⁽²⁾	$	172		$	12		$	184



	For the Three
	Months Ended
	March 31, 2020
	Commercial		Residential		Total
Balance as of beginning-of-year	$	-	$	2	$	2
Impact of new accounting standard		62		26		88
Additions from provision for credit loss expense ⁽³⁾		64		7		71
Additions from purchases of PCD mortgage loans on real estate		-		-		-
Balance as of end-of-period ⁽²⁾	$	126	$	35	$	161

⁽¹⁾Due to ~~recent~~ improving economic projections, the provision for credit loss expense decreased by ~~$71~~$20 million for the three months ended ~~September 30, 2020.~~ March 31, 2021. For the three months ended March 31, 2021, we recognized $4 million of credit loss benefit related to unfunded commitments for mortgage loans on real estate.

⁽²⁾Accrued interest receivable on mortgage loans on real estate totaled $51 million and $50 million as of March 31, 2021 and 2020, respectively, and was excluded from the estimate of credit losses.

⁽³⁾Due to changes in economic projections driven by the impact of the COVID-19 pandemic, the provision for credit loss expense increased by ~~$112~~$71 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2020. For the three months ended September 30, 2020, we recognized 0 credit loss expense related to unfunded commitments for mortgage loans on real estate, and we had 0 realized losses for disposals of mortgage loans on real estate. For the nine months ended September 30,March 31, 2020, we recognized $1 million of credit loss benefit related to unfunded commitments for mortgage loans on real ~~estate, and we had $1 million of realized losses for disposals of mortgage loans on real~~ estate.

⁽²⁾~~Accrued interest receivable on mortgage loans on real estate totaled $50 million as of September 30, 2020, and was excluded from the estimate of credit losses.~~

~~There were 0 changes~~Alternative Investments

As of March 31, 2021, and December 31, 2020, alternative investments included investments in ~~the allowance for credit losses associated with impaired commercial mortgage loans on real estate for the three~~279 and ~~nine months ended September 30, 2019.~~271 different partnerships, respectively, and represented approximately 1% of total investments.

1914

Table of Contents

~~Alternative Investments~~

As of September 30, 2020, and December 31, 2019, alternative investments included investments in 271 and 258 different partnerships, respectively, and represented approximately 1% of our total investments.

Impairments on Fixed Maturity AFS Securities

Details underlying credit loss 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:



	For the Three						For the Nine						For the Three
	Months Ended						Months Ended						Months Ended
	September 30,						September 30,						March 31,
	2020			2019			2020			2019			2021			2020
Credit Loss Expense Recognized in Net Income (Loss) ⁽¹⁾
Credit Loss Expense
Fixed maturity AFS securities:
Corporate bonds	$	(2	)	$	(2	)	$	(22	)	$	(13	)	$	(2	)	$	(20	)
RMBS		-			-			(1	)		(1	)		-			-
ABS		1			-			-			(1	)		-			-
Gross credit loss expense recognized in net income (loss)		(1	)		(2	)		(23	)		(15	)
Gross credit loss expense														(2	)		(20	)
Associated amortization of DAC, VOBA, DSI and DFEL(1)		-			-			1			1			-			-
Net credit loss expense recognized in net income (loss)	$	(1	)	$	(2	)	$	(22	)	$	(14	)
Net credit loss expense													$	(2	)	$	(20	)

⁽¹⁾~~For the three~~Deferred acquisition costs (“DAC”), value of business acquired (“VOBA”), deferred sales inducements (“DSI”) and nine months ended September 30, 2020, we recognized credit loss expense incurred and write-downs taken as a result of impairments through net income (loss), pursuant to ASU 2016-13. For the three and nine months ended September 30, 2019, prior to the adoption of ASU 2016-13, we recognized write-downs taken as a result of OTTI through net income (loss)deferred front-end loads (“DFEL”).

~~During the three months ended September 30, 2019, we recorded~~ no ~~OTTI recognized in OCI. During the nine months ended September 30, 2019, we recorded $15 million of OTTI recognized in OCI.~~

Payables for Collateral on Investments

The carrying value of the payables for collateral on investments included on our Consolidated Balance Sheets and the fair value of the related investments or collateral (in millions) consisted of the following:



	As of September 30, 2020				As of December 31, 2019				As of March 31, 2021				As of December 31, 2020
	Carrying		Fair		Carrying		Fair		Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value		Value		Value		Value		Value
Collateral payable for derivative investments ⁽¹⁾	$	3,174	$	3,174	$	1,388	$	1,388	$	3,222	$	3,222	$	2,976	$	2,976
Securities pledged under securities lending agreements ⁽²⁾		131		127		114		110		145		140		116		112
Investments pledged for Federal Home Loan Bank of
Indianapolis (“FHLBI”)⁽³⁾		3,130		5,029		3,580		5,480		4,230		6,819		3,130		5,049
Total payables for collateral on investments	$	6,435	$	8,330	$	5,082	$	6,978	$	7,597	$	10,181	$	6,222	$	8,137

⁽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. See Note 5 for additional information.

⁽²⁾Our pledged securities under securities lending agreements are included in fixed maturity AFS securities on our 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 our 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.

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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 March 31, 2021, and December 31, 2020, we were not participating in any open repurchase agreements.

Increase (decrease) in payables for collateral on investments (in millions) consisted of the following:



	For the Nine						For the Three
	Months Ended						Months Ended
	September 30,						March 31,
	2020			2019			2021		2020
Collateral payable for derivative investments	$	1,786		$	1,051		$	246	$	2,555
Securities pledged under securities lending agreements		17			19			29		47
Securities pledged under repurchase agreements		-			3
Investments pledged for FHLBI		(450	)		(350	)		1,100		750
Total increase (decrease) in payables for collateral on investments	$	1,353		$	723		$	1,375	$	3,352

We have elected not to offset our securities lending transactions in our consolidated financial statements. The remaining contractual maturities of securities lending transactions accounted for as secured borrowings (in millions) were as follows:



	As of September 30, 2020										As of March 31, 2021
	Overnight and Continuous		Up to 30 Days		30 - 90 ‎Days		Greater Than 90 Days		Total		Overnight and Continuous		Up to 30 Days		30 - 90 ‎Days		Greater Than 90 Days		Total
Securities Lending
Corporate bonds	$	127	$	-	$	-	$	-	$	127	$	145	$	-	$	-	$	-	$	145
Foreign government bonds		4		-		-		-		4
Total gross secured borrowings	$	131	$	-	$	-	$	-	$	131



	As of December 31, 2019										As of December 31, 2020
	Overnight and Continuous		Up to 30 Days		30 - 90 ‎Days		Greater Than 90 Days		Total		Overnight and Continuous		Up to 30 Days		30 - 90 ‎Days		Greater Than 90 Days		Total
Securities Lending
Corporate bonds	$	114	$	-	$	-	$	-	$	114	$	114	$	-	$	-	$	-	$	114
Foreign government bonds												2		-		-		-		2
Total gross secured borrowings	$	114	$	-	$	-	$	-	$	114	$	116	$	-	$	-	$	-	$	116

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 financial statements. In addition, we receive securities in connection with securities borrowing agreements that we are permitted to sell or re-pledge. As of ~~September 30, 2020,~~March 31, 2021, the fair value of all collateral received that we are permitted to sell or re-pledge was ~~$26 million. As of September 30, 2020,~~$21 million, and we ~~have~~had not re-pledged ~~none~~any of this collateral to cover initial margin and over-the-counter collateral requirements on certain derivative ~~investments.~~investments as of March 31, 2021.

Investment Commitments

As of ~~September 30, 2020,~~March 31, 2021, our investment commitments were ~~$1.6~~$2.0 billion, which included $1.1 billion of LPs, ~~$351 million of private placement securities and $159~~$420 million of mortgage loans on real ~~estate.~~estate and $413 million of private placement securities.

Concentrations of Financial Instruments

As of ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, our most significant investments in one issuer were our investments in securities issued by the Federal Home Loan Mortgage Corporation with a fair value of ~~$1.3~~$1.2 billion, or 1% of total investments, and our investments in securities issued by the Federal National Mortgage Association with a fair value of $1.1 billion and $1.0 billion, respectively, or 1% of total investments. These concentrations include fixed maturity AFS, trading and equity securities.

As of ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, our most significant investments in one industry were our investments in securities in the consumer non-cyclical industry with a fair value of ~~$19.2~~$19.0 billion and ~~$16.3~~$20.3 billion, respectively, or 13% ~~and 12%, respectively,~~ of total investments, and our investments in securities in the financial services industry with a fair value of ~~$18.6~~$18.5 billion and ~~$16.4~~$19.6 billion, respectively, or 12% and 13%, respectively, of total investments. These concentrations include fixed maturity AFS, trading and equity securities.

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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 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 1413 for additional disclosures related to the fair value of our derivative instruments.

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 products related to the forecasted purchases of certain assets.

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.

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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 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 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.

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.

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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 to hedge the liability exposure on certain options in variable annuity products.

We buy credit default swaps to hedge against a drop in bond prices due to credit concerns of certain bond issuers. A credit default swap 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.

Credit Default Swaps – Selling Protection

We use credit default swaps to hedge the liability exposure on certain options in variable annuity products.

We sell credit default swaps to offer credit protection to contract holders and investors. The credit default swaps hedge the contract holders and investors against a drop in bond prices due to credit concerns of certain bond issuers. A credit default swap 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~~Accounting Standards Codification (“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 guaranteed living benefit (“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 guaranteed withdrawal benefit and guaranteed income benefit 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 (“Modco”) 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.

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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:



	As of September 30, 2020						As of December 31, 2019						As of March 31, 2021						As of December 31, 2020
	Notional		Fair Value				Notional		Fair Value				Notional		Fair Value				Notional		Fair Value
	Amounts		Asset		Liability		Amounts		Asset		Liability		Amounts		Asset		Liability		Amounts		Asset		Liability
Qualifying Hedges
Cash flow hedges:
Interest rate contracts ⁽¹⁾	$	2,447	$	169	$	726	$	2,387	$	108	$	245	$	3,112	$	7	$	324	$	2,177	$	87	$	563
Foreign currency contracts ⁽¹⁾		2,871		320		36		2,874		191		51		3,249		119		147		3,089		147		151
Total cash flow hedges		5,318		489		762		5,261		299		296		6,361		126		471		5,266		234		714
Fair value hedges:
Interest rate contracts ⁽¹⁾		1,161		1		313		1,261		123		203		1,159		-		196		1,161		-		272
Non-Qualifying Hedges
Interest rate contracts ⁽¹⁾		131,973		1,752		142		112,921		1,082		219		73,433		1,225		308		135,434		1,587		159
Foreign currency contracts ⁽¹⁾		239		3		-		262		1		3		410		4		6		304		1		8
Equity market contracts ⁽¹⁾		69,001		2,211		1,070		43,555		1,442		664		78,321		3,949		1,298		74,610		3,486		1,952
Credit contracts ⁽¹⁾		54		-		-		55		-		-		85		-		-		51		-		-
Embedded derivatives:
GLB direct ⁽²⁾		-		-		1,106		-		450		-		-		1,831		-		-		450		-
GLB ceded ⁽²⁾		-		281		-		-		60		9		-		42		152		-		82		-
Reinsurance related ⁽³⁾		-		-		334		-		-		327		-		-		244		-		-		392
Indexed annuity and IUL contracts ^{(2) (4)}		-		536		2,688		-		927		2,585		-		527		4,170		-		550		3,594
Total derivative instruments	$	207,746	$	5,273	$	6,415	$	163,315	$	4,384	$	4,306	$	159,769	$	7,704	$	6,845	$	216,826	$	6,390	$	7,091

⁽¹⁾Reported in derivative investments and other liabilities on our Consolidated Balance Sheets.

⁽²⁾Reported in other assets and other liabilities on our Consolidated Balance Sheets.

⁽³⁾Reported in reinsurance related embedded derivatives on our Consolidated Balance Sheets.

⁽⁴⁾Reported in future contract benefits on our Consolidated Balance Sheets.

The maturity of the notional amounts of derivative instruments (in millions) was as follows:



	Remaining Life as of September 30, 2020												Remaining Life as of March 31, 2021
	Less Than		1 - 5		6 - 10		11 - 30		Over 30				Less Than		1 - 5		6 - 10		11 - 30		Over 30
	1 Year		Years		Years		Years		Years		Total		1 Year		Years		Years		Years		Years		Total
Interest rate contracts ⁽¹⁾	$	14,583	$	55,297	$	27,601	$	36,510	$	1,590	$	135,581	$	2,251	$	48,239	$	14,295	$	11,701	$	1,218	$	77,704
Foreign currency contracts ⁽²⁾		176		387		967		1,580		-		3,110		354		400		1,249		1,559		97		3,659
Equity market contracts		34,706		20,925		5,504		12		7,854		69,001		44,952		18,496		6,274		11		8,588		78,321
Credit contracts		-		-		54		-		-		54		-		20		65		-		-		85
Total derivative instruments
with notional amounts	$	49,465	$	76,609	$	34,126	$	38,102	$	9,444	$	207,746	$	47,557	$	67,155	$	21,883	$	13,271	$	9,903	$	159,769

⁽¹⁾As of ~~September 30, 2020,~~March 31, 2021, 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 ~~September 30, 2020,~~March 31, 2021, the latest maturity date for which we were hedging our exposure to the variability in future cash flows for these instruments was June ~~17, 2050.~~16, 2061.

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The following amounts (in millions) were recorded on the Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges:



							Cumulative Fair Value												Cumulative Fair Value
							Hedging Adjustment												Hedging Adjustment
							Included in the												Included in the
	Amortized Cost of the						Amortized Cost of the						Amortized Cost of the						Amortized Cost of the
	Hedged						Hedged						Hedged						Hedged
	Assets / (Liabilities)						Assets / (Liabilities)						Assets / (Liabilities)						Assets / (Liabilities)
	As of			As of			As of			As of			As of			As of			As of		As of
	September 30,			December 31,			September 30,			December 31,			March 31,			December 31,			March 31,		December 31,
	2020			2019			2020			2019			2021			2020			2021		2020
Line Item in the Consolidated Balance Sheets in
which the Hedged Item is Included
AFS fixed maturity securities, at fair value	$	854		$	776		$	302		$	202
Fixed maturity AFS securities, at fair value													$	738		$	824		$	187	$	271
Long-term debt ⁽¹⁾		(929	)		(1,035	)		(54	)		(160	)		(815	)		(900	)		60		(25	)

⁽¹⁾The balance includes ~~$(374)~~$(367) million and ~~$(118)~~$(370) million of unamortized adjustments from discontinued hedges as of ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, respectively.

The change in our unrealized gain (loss) on derivative instruments within accumulated other comprehensive income (loss) (“AOCI”) (in millions) was as follows:



	For the Nine						For the Three
	Months Ended						Months Ended
	September 30,						March 31,
	2020			2019			2021			2020
Unrealized Gain (Loss) on Derivative Instruments
Balance as of beginning-of-year	$	(11	)	$	139		$	(402	)	$	(11	)
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during the period:
Cash flow hedges:
Interest rate contracts		(432	)		(266	)		152			(383	)
Foreign currency contracts		213			114			(63	)		312
Change in foreign currency exchange rate adjustment		(16	)		80			47			153
Change in DAC, VOBA, DSI and DFEL		(64	)		(3	)		14			(53	)
Income tax benefit (expense)		62			15			(30	)		(8	)
Less:
Reclassification adjustment for gains (losses)
included in net income (loss):
Cash flow hedges:
Interest rate contracts ⁽¹⁾								1			-
Interest rate contracts ⁽¹⁾⁽²⁾		2			2			(6	)		(3	)
Interest rate contracts ⁽²⁾		(16	)		(2	)
Foreign currency contracts ⁽¹⁾								10			11
Foreign currency contracts ⁽¹⁾⁽³⁾		46			25			(2	)		1
Foreign currency contracts ⁽³⁾		6			9
Associated amortization of DAC, VOBA, DSI and DFEL		(8	)		(1	)		(1	)		(6	)
Income tax benefit (expense)		(6	)		(7	)		-			(1	)
Balance as of end-of-period	$	(272	)	$	53		$	(284	)	$	8

⁽¹⁾The OCI offset is reported within net investment income on our Consolidated Statements of Comprehensive Income (Loss).

⁽²⁾The OCI offset is reported within interest and debt expense on our Consolidated Statements of Comprehensive Income (Loss).

⁽³⁾The OCI offset is reported within realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).

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The effects of qualifying and non-qualifying hedges (in millions) on the Consolidated Statements of Comprehensive Income (Loss) were as follows:



	Gain (Loss) Recognized in Income																		Gain (Loss) Recognized in Income
	For the Three Months Ended September 30,																		For the Three Months Ended March 31,
	2020									2019									2021									2020
	Realized			Net			Interest			Realized			Net			Interest			Realized			Net			Interest			Realized			Net			Interest
	Gain			Investment			and Debt			Gain			Investment			and Debt			Gain			Investment			and Debt			Gain			Investment			and Debt
	(Loss)			Income			Expense			(Loss)			Income			Expense			(Loss)			Income			Expense			(Loss)			Income			Expense
Total Line Items in which
the Effects of Fair Value or
Cash Flow Hedges are Recorded	$	629		$	1,458		$	66		$	(11	)	$	1,235		$	113
Total Line Items in which the
Effects of Fair Value or Cash
Flow Hedges are Recorded																			$	(181	)	$	1,510		$	65		$	(24	)	$	1,375		$	68

Qualifying Hedges
Gain or (loss) on fair value
hedging relationships:
Interest rate contracts:
Hedged items		-			(21	)		19			-			44			(62	)		-			(84	)		85			-			127			82
Derivatives designated as
hedging instruments		-			21			(19	)		-			(44	)		62			-			84			(85	)		-			(127	)		(82	)
Gain or (loss) on cash flow
hedging relationships:
Interest rate contracts:
Amount of gain or (loss)
reclassified from AOCI
into income		-			1			(8	)		-			-			(1	)		-			1			(6	)		-			-			(3	)
Foreign currency contracts:
Amount of gain or (loss)
reclassified from AOCI
into income		(2	)		24			-			5			10			-			(2	)		10			-			1			11			-

Non-Qualifying Hedges
Interest rate contracts		(374	)		-			-			699			-			-			(1,159	)		-			-			2,150			-			-
Equity market contracts		949			-			-			173			-			-			1,242			-			-			1,070			-			-
Credit contracts		1			-			-			-			-			-			-			-			-			(4	)		-			-
Embedded derivatives:
GLB		1,690			-			-			(715	)		-			-			1,188			-			-			(4,369	)		-			-
Reinsurance related		(88	)		-			-			(30	)		-			-			148			-			-			463			-			-
Indexed annuity and IUL
contracts		(105	)		-			-			(23	)		-			-			(594	)		-			-			1,028			-			-

‎

~~Table of Contents~~

Gain (Loss) Recognized in Income
For the Nine Months Ended September 30,
2020
2019
Realized
Net
Interest
Realized
Net
Interest
Gain
Investment
and Debt
Gain
Investment
and Debt
(Loss)
Income
Expense
(Loss)
Income
Expense
Total Line Items in which
the Effects of Fair Value or
Cash Flow Hedges are Recorded
$
(43
)
$
4,005
$
218
$
(491
)
$
3,842
$
254
Qualifying Hedges
Gain or (loss) on fair value
hedging relationships:
Interest rate contracts:
Hedged items
-
100
106
-
101
(145
)
Derivatives designated as
hedging instruments
-
(100
)
(106
)
-
(101
)
145
Gain or (loss) on cash flow
hedging relationships:
Interest rate contracts:
Amount of gain or (loss)
reclassified from AOCI
into income
-
2
(16
)
-
2
(2
)
Foreign currency contracts:
Amount of gain or (loss)
reclassified from AOCI
into income
6
46
-
9
25
-
Non-Qualifying Hedges
Interest rate contracts
1,795
-
-
1,625
-
-
Equity market contracts
565
-
-
(241
)
-
-
Credit contracts
(4
)
-
-
-
-
-
Embedded derivatives:
GLB
(1,326
)
-
-
(800
)
-
-
Reinsurance related
(7
)
-
-
(336
)
-
-
Indexed annuity and IUL
contracts
396
-
-
(372
)
-
-

‎

As of ~~September 30, 2020, $16~~March 31, 2021, $17 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 ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ there were 0 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 September 30, 2020, we did not have any exposure related to credit default swaps for which we are the seller.~~

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Information related to our credit default swaps for which we are the seller (dollars in millions) was as follows:

As of December 31, 2019

As of March 31, 2021

Credit

Reason

Nature

Rating of

Number

Maximum

Reason

Nature

Rating of

Number

Maximum

for

Underlying

Fair

Potential

for

Underlying

Fair

Potential

Credit Contract Type

Maturity

Entering

Recourse

Obligation ⁽¹⁾

Instruments

Value ⁽²⁾

Payout

Maturity

Entering

Recourse

Obligation ⁽¹⁾

Instruments

Value ⁽²⁾

Payout

Basket credit default swaps

12/20/2024

⁽³⁾

⁽⁴⁾

BBB+

12/20/2025

⁽³⁾

⁽⁴⁾

BBB+

Basket credit default swaps

6/20/2026

⁽³⁾

⁽⁴⁾

BBB+

As of December 31, 2020

Credit

Reason

Nature

Rating of

Number

Maximum

for

Underlying

Fair

Potential

Credit Contract Type

Maturity

Entering

Recourse

Obligation ⁽¹⁾

Instruments

Value ⁽²⁾

Payout

Basket credit default swaps

12/20/2025

⁽³⁾

⁽⁴⁾

BBB+

⁽¹⁾Represents average credit ratings based on the midpoint of the applicable ratings among Moody’s, S&P and Fitch Ratings, as scaled to the corresponding S&P ratings.

⁽²⁾Broker quotes are used to determine the market value of our credit default swaps.

⁽³⁾Credit default swaps were entered into in order to hedge the liability exposure on certain variable annuity products.

⁽⁴⁾Sellers do not have the right to demand indemnification or compensation from third parties in case of a loss (payment) on the contract.

Details underlying the associated collateral of our credit default swaps for which we are the seller if credit risk-related contingent features were triggered (in millions) were as follows:



		As of			As of			As of			As of
	September 30,			December 31,			March 31,			December 31,
		2020			2019			2021			2020
Maximum potential payout		$	-		$	55		$	85		$	51
Less: Counterparty thresholds			-			-			-			-
Maximum collateral potentially required to post		$	-		$	55		$	85		$	51

Certain of our credit default swap agreements contain contractual provisions that allow for the netting of collateral with our counterparties related to all of our collateralized financing transactions that we have outstanding. If these netting agreements were not in place, weour counterparties would have been required to post $2 million of collateral ~~if the market value was less than zero.~~as of March 31, 2021.

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 non-performance risk (“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 ~~September 30, 2020,~~March 31, 2021, the NPR adjustment was 0. 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 0t have any exposure as of ~~September 30, 2020,~~March 31, 2021, or December 31, ~~2019.~~2020.

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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:



	As of September 30, 2020					As of December 31, 2019					As of March 31, 2021					As of December 31, 2020
	Collateral		Collateral			Collateral		Collateral			Collateral		Collateral			Collateral		Collateral
	Posted by		Posted by			Posted by		Posted by			Posted by		Posted by			Posted by		Posted by
S&P	Counter-		LNC			Counter-		LNC			Counter-		LNC			Counter-		LNC
Credit	Party		(Held by			Party		(Held by			Party		(Held by			Party		(Held by
Rating of	(Held by		Counter-			(Held by		Counter-			(Held by		Counter-			(Held by		Counter-
Counterparty	LNC)		Party)			LNC)		Party)			LNC)		Party)			LNC)		Party)
AA-	$	818	$	(477	)	$	441	$	(167	)	$	1,453	$	(197	)	$	1,233	$	(371	)
A+		1,650		(438	)		555		(339	)		1,320		(272	)		1,119		(445	)
A		45		-			36		-			60		-			53		-
A-		661		(326	)		355		(51	)		389		(118	)		571		(245	)
	$	3,174	$	(1,241	)	$	1,387	$	(557	)	$	3,222	$	(587	)	$	2,976	$	(1,061	)

Balance Sheet Offsetting

Information related to the effects of offsetting (in millions) was as follows:



	As of September 30, 2020								As of March 31, 2021
				Embedded								Embedded
	Derivative			Derivative					Derivative			Derivative
	Instruments			Instruments		Total			Instruments			Instruments		Total

Financial Assets
Gross amount of recognized assets	$	4,456		$	817	$	5,273		$	5,680		$	2,400	$	8,080
Gross amounts offset		(1,220	)		-		(1,220	)		(1,848	)		-		(1,848	)
Net amount of assets		3,236			817		4,053			3,832			2,400		6,232
Gross amounts not offset:
Cash collateral		(3,174	)		-		(3,174	)		(3,222	)		-		(3,222	)
Non-cash collateral		(48	)		-		(48	)		(372	)		-		(372	)
Net amount	$	14		$	817	$	831		$	238		$	2,400	$	2,638

Financial Liabilities
Gross amount of recognized liabilities	$	1,328		$	4,128	$	5,456		$	866		$	4,566	$	5,432
Gross amounts offset		-			-		-			(4	)		-		(4	)
Net amount of liabilities		1,328			4,128		5,456			862			4,566		5,428
Gross amounts not offset:
Cash collateral		(1,241	)		-		(1,241	)		(587	)		-		(587	)
Non-cash collateral		-			-		-			-			-		-
Net amount	$	87		$	4,128	$	4,215		$	275		$	4,566	$	4,841

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	As of December 31, 2019								As of December 31, 2020
				Embedded								Embedded
	Derivative			Derivative					Derivative			Derivative
	Instruments			Instruments		Total			Instruments			Instruments		Total
Financial Assets
Gross amount of recognized assets	$	2,619		$	1,437	$	4,056		$	4,978		$	1,082	$	6,060
Gross amounts offset		(708	)		-		(708	)		(1,869	)		-		(1,869	)
Net amount of assets		1,911			1,437		3,348			3,109			1,082		4,191
Gross amounts not offset:
Cash collateral		(1,387	)		-		(1,387	)		(2,976	)		-		(2,976	)
Non-cash collateral		(242	)		-		(242	)		(56	)		-		(56	)
Net amount	$	282		$	1,437	$	1,719		$	77		$	1,082	$	1,159

Financial Liabilities
Gross amount of recognized liabilities	$	1,005		$	2,921	$	3,926		$	1,456		$	3,986	$	5,442
Gross amounts offset		(138	)		-		(138	)		(330	)		-		(330	)
Net amount of liabilities		867			2,921		3,788			1,126			3,986		5,112
Gross amounts not offset:
Cash collateral		(557	)		-		(557	)		(1,061	)		-		(1,061	)
Non-cash collateral		-			-		-			-			-		-
Net amount	$	310		$	2,921	$	3,231		$	65		$	3,986	$	4,051

6. Federal Income Taxes

The effective tax rate is the ratio of tax expense (benefit) over pre-tax income (loss). The effective tax rate was ~~13%~~14% and ~~(7)~~(53)% for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020, ~~respectively, compared to 36% and (4)%, respectively, for the corresponding periods in 2019.~~respectively. The effective tax rate on pre-tax income is typically lower than the prevailing corporate federal income tax rate of 21% due to benefits from preferential tax items including the separate accounts dividends-received deduction ~~(“DRD”)~~ and tax credits.

For the three months ended ~~September 30,~~March 31, 2020, the effective tax rate differed from the prevailing corporate federal income tax rate due primarily to the effects of the preferential tax items. For the three months ended September 30, 2019, the effective tax rate differed from the prevailing corporate federal income tax rate due primarily to the effects of preferential tax items being additive to the tax benefit at 21% on pre-tax losses.

~~For the nine months ended September 30, 2020 and September 30, 2019,~~ the effective tax rate differed from the prevailing corporate federal income tax rate due primarily to the effects of preferential tax items exceeding the tax expense at 21% on pre-tax income.

7. Reinsurance

~~Adoption of ASU 2016-13~~Credit Losses on Reinsurance-related Assets

In ~~2020, we adopted ASU 2016-13, which resulted in a new~~connection with our recognition ~~and measurement~~ of credit losses on most financial assets. See Note 2 for additional information. We established an allowance for credit losses of $192 million as of January 1, 2020, for reinsurance-related assets for the risk of credit losses inherent in reinsurance transactions. We estimated an allowance for credit losses for ~~all reinsurance recoverables and related reinsurance deposit~~reinsurance-related assets, ~~held by our subsidiaries. As such,~~ we ~~performed~~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. ~~The~~As of March 31, 2021, our allowance for credit losses ~~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 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 quarter to incorporate the most up-to-date information on the current state of the financial stability of our reinsurers. To simulateassets was $191 million. There have been no material 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 and mortality assumptions rather than being directly driven by market or economic environment.

~~Table of Contents~~

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 allowance for credit losses.

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 treaties often require the reinsurer to collateralize the recoverable with funds in a trust account for the benefit of the ceding insurance entity that can reduce the expected credit losses on a given treaty. As such, we review reinsurance collateral by individual treaty 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 time 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 our Consolidated Balance Sheets. Changes in the allowance for credit losses are reported in realized gain (loss) on our 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~~for the ~~aggregate of amounts previously charged-off and expected to be charged-off.~~three months ended March 31, 2021.

Modco Agreements

Some portions of our annuity business have been reinsured on a Modco basis with other companies. In a Modco 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 Modco agreement with Athene Holding Ltd. (“Athene”) to reinsure fixed and fixed indexed annuity products, which resulted in a deposit asset of ~~$5.9~~$5.6 billion and ~~$6.6~~$5.8 billion as of ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, respectively, within other assets on our Consolidated Balance Sheets.

Table of Contents

We held assets in support of reserves associated with the transaction in a Modco investment portfolio, which consisted of the following (in millions):


	As of						As of
	September 30,			December 31,			March 31,			December 31,
	2020			2019			2021			2020
Fixed maturity AFS securities		$	1,630		$	2,308		$	1,357		$	1,531
Trading securities			3,488			3,534			3,293			3,357
Equity securities			17			14			20			17
Commercial mortgage loans			794			698
Mortgage loans on real estate									875			832
Derivative investments			95			130			106			103
Other investments			116			94			212			167
Cash and invested cash			117			62			81			92
Accrued investment income			43			57			39			42
Other assets			3			-			6			3
Total		$	6,303		$	6,897		$	5,989		$	6,144

In addition, the portfolio was supported by ~~$186~~$175 million of over-collateralization and a ~~$175~~$163 million letter of credit as of ~~September 30, 2020.~~March 31, 2021.

~~Table of Contents~~

8. Guaranteed Benefit Features

Information on the guaranteed death benefit (“GDB”) features outstanding (dollars in millions) was as follows:



	As of						As of		As of
	September 30,			December 31,			March 31,		December 31,
		2020 ⁽¹⁾			2019 ⁽¹⁾		2021 ⁽¹⁾			2020 ⁽¹⁾
Return of Net Deposits
Total account value		$	101,215		$	101,601	$	111,818		$	109,856
Net amount at risk ⁽²⁾			156			71		77			72
Average attained age of contract holders			66 years			65 years		66 years			66 years

Minimum Return
Total account value		$	91		$	92	$	99		$	100
Net amount at risk ⁽²⁾			13			13		12			12
Average attained age of contract holders			78 years			77 years		78 years			78 years
Guaranteed minimum return			5%			5%		5%			5%

Anniversary Contract Value
Total account value		$	25,348		$	25,763	$	27,903		$	27,650
Net amount at risk ⁽²⁾			497			384		410			390
Average attained age of contract holders			72 years			71 years		72 years			72 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 balance that is subject to market fluctuations.

Table of Contents

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 our Consolidated Balance Sheets:



	For the Nine						For the Three
	Months Ended						Months Ended
	September 30,						March 31,
	2020			2019			2021			2020
Balance as of beginning-of-year	$	117		$	161		$	121		$	117
Changes in reserves		46			(16	)		8			106
Benefits paid		(21	)		(15	)		(5	)		(8	)
Balance as of end-of-period	$	142		$	130		$	124		$	215

Variable Annuity Contracts

Account balances of variable annuity contracts, including those with guarantees, (in millions) were invested in separate account investment options as follows:



	As of				As of		As of			As of
	September 30,			December 31,			March 31,		December 31,
		2020			2019		2021			2020
Asset Type
Domestic equity		$	63,423		$	64,093	$	71,993		$	70,362
International equity			18,871			19,852		20,813			20,855
Fixed income			41,175			41,405		43,920			43,521
Total		$	123,469		$	125,350	$	136,726		$	134,738

Percent of total variable annuity separate account values			98%			98%		98%			98%

~~Table of Contents~~

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 ~~38%~~39% and ~~37%~~38% of total life insurance in-force reserves as of ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, respectively. UL and VUL products with secondary guarantees represented ~~32%~~14% and 29% of total life insurance sales for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020, ~~compared to 25% and 28%, respectively, for the corresponding periods in 2019.~~respectively.

Table of Contents

9. Liability for Unpaid Claims

The liability for unpaid claims consists primarily of long-term disability claims and is reported in future contract benefits on our Consolidated Balance Sheets. Changes in the liability for unpaid claims (in millions) were as follows:



	For the Nine						For the Three
	Months Ended						Months Ended
	September 30,						March 31,
	2020			2019			2021			2020
Balance as of beginning-of-year	$	5,552		$	5,335		$	5,934		$	5,552
Reinsurance recoverable		152			143			151			152
Net balance as of beginning-of-year		5,400			5,192			5,783			5,400
Incurred related to:
Current year		2,615			2,370			1,025			885
Prior years:
Interest		116			117			42			43
All other incurred ⁽¹⁾		(157	)		(203	)		(101	)		(65	)
Total incurred		2,574			2,284			966			863
Paid related to:
Current year		(1,184	)		(1,046	)		(302	)		(240	)
Prior years		(1,118	)		(1,091	)		(601	)		(518	)
Total paid		(2,302	)		(2,137	)		(903	)		(758	)
Net balance as of end-of-period		5,672			5,339			5,846			5,505
Reinsurance recoverable		149			148			151			150
Balance as of end-of-period	$	5,821		$	5,487		$	5,997		$	5,655

⁽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.

~~Table of Contents~~

10. ~~Debt~~

~~Changes in debt (in millions) were as follows:~~



	~~For the Nine~~
	~~Months Ended~~
	~~September 30,~~
		~~2020~~
~~Balance as of beginning-of-year~~		$	~~6,367~~
~~LIBOR + 150 bps term loan issued, due 2022~~			~~500~~
~~Senior notes issued:~~
~~3.40% notes, due 2031~~			~~500~~
~~4.375% notes, due 2050~~			~~300~~
~~Repayment of 6.25% senior notes, due 2020~~			~~(300~~	)
~~Early extinguishment of 4.85% senior notes, due 2021~~			~~(296~~	)
~~Repayment of LIBOR + 150 bps term loan, due 2022~~			~~(500~~	)
~~Unamortized premiums (discounts)~~			(1	)
~~Unamortized debt issuance costs~~			(6	)
~~Unamortized adjustments from discontinued hedges~~			~~256~~
~~Fair value hedge on interest rate swap agreements~~			~~(106~~	)
~~Balance as of end-of-period~~		$	~~6,714~~

Details underlying the recognition of a loss on the early extinguishment of debt (in millions) reported within interest expense on our Consolidated Statements of Comprehensive Income (Loss) for the nine months ended September 30, 2020, were as follows:

Principal balance outstanding prior to payoff ⁽¹⁾
$
796
Unamortized debt issuance costs and discounts
(2
)
Amount paid to retire debt
(809
)
Gain (loss) on early extinguishment of debt, pre-tax
$
(15
)

⁽¹⁾~~During the second quarter of 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.~~

~~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 $2.75 billion, 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.

~~Table of Contents~~

~~11.~~ Contingencies and Commitments

Contingencies

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

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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 September 30, 2020. While the potential future charges could be material in the particular quarterly or annual periods in which they are recorded, based on information currently known by management, management does not believe any such charges are likely to have a material adverse effect on LNC’s financial condition.March 31, 2021.

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 ~~September 30, 2020,~~March 31, 2021, 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 ~~$90 million.~~$120 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 several of these matters. Although a loss is believed to be reasonably possible for 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 our consolidated financial statements, but, based on information currently known, management does not believe those cases are likely to have such an impact.

Reinsurance Disputes

Certain reinsurers have sought rate increases on certain yearly renewable term ~~treaties.~~agreements. We are disputing the requested rate increases under these ~~treaties.~~agreements. We ~~have initiated and~~ will initiate arbitration proceedings, as necessary, under these ~~treaties~~agreements in order to protect our contractual rights. Additionally, reinsurers have initiated, and may in the future initiate, arbitration proceedings against us. We believe it is unlikely the outcome of these disputes ~~will~~would have a material ~~adverse effect~~impact on our consolidated financial ~~condition.~~statements. For more information about reinsurance, see Note 7.

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 The Lincoln National Life Insurance Company (“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

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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.

Hanks v. Lincoln Life & Annuity Company of New York (“LLANY”) and Voya Retirement Insurance and Annuity Company (“Voya”), filed in the U.S. District Court for the Southern District of New York, No. 1:16-cv-6399, is a putative class action that was served on LLANY on August 12, 2016. Plaintiff owns a universal life policy originally issued by Aetna (now Voya) and alleges that (i) Voya breached the terms of the policy when it increased non-guaranteed cost of insurance rates on Plaintiff’s policy; and (ii) LLANY, as reinsurer and administrator of Plaintiff’s policy, engaged in wrongful conduct related to the cost of insurance increase and was unjustly enriched as a result. Plaintiff seeks to represent all owners of Aetna life insurance policies that were subject to non-guaranteed cost of insurance rate increases in 2016 and seeks damages on their behalf. On March 13, 2019, the court issued an order granting plaintiff’s motion for class certification for the breach of contract claim and denying such motion with respect to the unjust enrichment claim against LLANY, and, on September 12, 2019, the court issued an order approving the parties’ joint stipulation of dismissal with respect to the unjust enrichment claim and dismissed LLANY as a defendant in the case. In light of LLANY’s role as reinsurer and administrator under the 1998 coinsurance agreement with Aetna (now Voya), and of the parties’ rights and obligations thereunder, LLANY continues to be actively engaged in the defense of this case. On September 30, 2020, the court denied plaintiff’s motion for summary judgment and

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granted in part Voya’s motion for summary judgment. The court has not yet set a trial date, and we continue to vigorously defend this action.

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 Legend Series 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, Master File No. 2:16-cv-06605-GJP, is a consolidated litigation matter related to multiple putative class action filings that were consolidated by an order dated March 20, 2017. In addition to consolidating a number of existing matters, the order also covers any future cases filed in the same district related to the same subject matter. Plaintiffs own universal life insurance policies originally issued by Jefferson-Pilot (now LNL). Plaintiffs allege that LNL and LNC breached the terms of policyholders’ contracts by increasing non-guaranteed cost of insurance rates beginning in 2016. Plaintiffs seek to represent classes of policyowners and seek damages on their behalf. We are vigorously defending this matter.

In re: Lincoln National 2017 COI Rate Litigation, Master File No. 2:17-cv-04150 is a consolidated litigation matter related to multiple putative class action filings that were consolidated by an order of the court in March 2018. Plaintiffs own universal life insurance policies originally issued by former Jefferson-Pilot (now LNL). Plaintiffs allege that LNL and LNC breached the terms of policyholders’ contracts by increasing non-guaranteed cost of insurance rates beginning in 2017. Plaintiffs seek to represent classes of policyholders and seek damages on their behalf. We are vigorously defending this matter.

Iwanski v. First Penn-Pacific Life Insurance Company (“FPP”), No. 2:18-cv-01573 filed in the U.S. District Court for the ~~District Court,~~ 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 LLANY charged more for non-guaranteed cost of insurance than was permitted by the policies. Plaintiff 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 which contain non-guaranteed cost of insurance provisions that are similar to those of Plaintiff’s policies. Plaintiff also seeks to represent a sub-class of such policyholders who own or owned “life insurance policies issued in

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the State of New York.” Plaintiff seeks damages on behalf of the policyholder class and sub-class. 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. We are vigorously defending this matter.

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11. Shares and Stockholders’ Equity

Common Shares

The changes in our common stock (number of shares) were as follows:



	For the Three			For the Nine				For the Three
	Months Ended			Months Ended				Months Ended
	September 30,			September 30,				March 31,
	2020	2019		2020		2019		2021		2020
Common Stock
Balance as of beginning-of-period	193,247,103	200,775,731		196,668,532		205,862,760
Stock issued for exercise of warrants	-	36,610		-		258,633
Balance as of beginning-of-year								192,329,691		196,668,532
Stock compensation/issued for benefit plans	7,845	41,006		396,340		934,081		711,138		349,636
Retirement/cancellation of shares	-	(2,526,097	)	(3,809,924	)	(8,728,224	)	(1,891,637	)	(3,809,924	)
Balance as of end-of-period	193,254,948	198,327,250		193,254,948		198,327,250		191,149,192		193,208,244

Common Stock as of End-of-Period
Basic basis	193,254,948	198,327,250		193,254,948		198,327,250		191,149,192		193,208,244
Diluted basis	195,331,049	200,724,744		195,331,049		200,724,744		192,464,319		195,027,909

Our common stock is without par value.

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Average Shares

A reconciliation of the denominator (number of shares) in the calculations of basic and diluted earnings (loss) per common share was as follows:

For the Three
For the Nine
Months Ended
Months Ended
September 30,
September 30,
2020
2019
2020
2019
Weighted-average shares, as used in basic calculation
193,250,727
199,200,811
193,849,829
201,644,591
Shares to cover exercise of outstanding warrants
-
4,033
-
78,353
Shares to cover non-vested stock
629,997
935,823
644,192
938,920
Average stock options outstanding during the period
689,975
1,443,508
752,922
1,536,738
Assumed acquisition of shares with assumed proceeds
from exercising outstanding warrants
-
(588
)
-
(12,791
)
Assumed acquisition of shares with assumed
proceeds and benefits from exercising stock
options (at average market price for the period)
(592,887
)
(988,853
)
(588,805
)
(1,050,065
)
Shares repurchasable from measured but
unrecognized stock option expense
(3,515
)
-
(2,402
)
(289
)
Average deferred compensation shares
1,382,128
966,444
1,285,205
-
Weighted-average shares, as used in diluted calculation ⁽¹⁾
195,356,425
201,561,178
195,940,941
203,135,457

⁽¹⁾~~Due to reporting a net loss for the three months ended September 30, 2019, basic shares were used in the diluted earnings per share~~

~~(“EPS”) calculation for that period as the use of diluted shares would have resulted in a lower loss per share.~~



	For the Three
	Months Ended
	March 31,
	2021		2020
Weighted-average shares, as used in basic calculation	191,780,135		195,076,797
Shares to cover non-vested stock	989,064		853,597
Average stock options outstanding during the period	1,063,513		996,248
Assumed acquisition of shares with assumed
proceeds and benefits from exercising stock
options (at average market price for the period)	(765,162	)	(703,600	)
Shares repurchasable from measured but
unrecognized stock option expense	(1,225	)	-
Average deferred compensation shares	-		1,041,800
Weighted-average shares, as used in diluted calculation	193,066,325		197,264,842

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,~~earnings per share (“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. ~~For~~This obligation is settled in either cash or LNC stock pursuant to the ~~three and nine months ended September 30, 2020 and~~applicable plan document. For the three months ended ~~September 30, 2019,~~March 31, 2020, the effect of settling ~~this obligation~~obligations in LNC stock (“equity classification”) was more dilutive than the scenario of settling in cash (“liability classification”). Therefore, for our EPS calculation for ~~these periods,~~this period, we added these shares to the denominator and adjusted the numerator to present net income as if the shares had been accounted for under equity classification by removing the mark-to-market adjustment included in net income attributable to these deferred units of LNC stock. The amount of this adjustment was ~~$5 million and $16 million for the three and nine months ended September 30, 2020, respectively, and $3~~$23 million for the three months ended ~~September 30, 2019.~~March 31, 2020.

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AOCI

The following summarizes the components and changes in AOCI (in millions):



	For the Nine						For the Three
	Months Ended						Months Ended
	September 30,						March 31,
	2020			2019			2021			2020
Unrealized Gain (Loss) on AFS Securities
Unrealized Gain (Loss) on Fixed Maturity AFS Securities
Balance as of beginning-of-year	$	5,983		$	557		$	9,611		$	5,983
Cumulative effect from adoption of new accounting standard		45			-			-			45
Unrealized holding gains (losses) arising during the period		5,426			9,849			(7,420	)		(4,498	)
Change in foreign currency exchange rate adjustment		21			(80	)		(44	)		(150	)
Change in DAC, VOBA, DSI, future contract benefits and other contract holder funds		(2,403	)		(2,271	)		3,287			1,264
Income tax benefit (expense)		(652	)		(1,596	)		888			720
Less:
Reclassification adjustment for gains (losses) included in net income (loss)		(48	)		(18	)		2			(2	)
Associated amortization of DAC, VOBA, DSI and DFEL		42			(11	)		(4	)		32
Income tax benefit (expense)		1			6			-			(6	)
Balance as of end-of-period	$	8,425		$	6,482		$	6,324		$	3,340
Unrealized OTTI on AFS Securities
Unrealized Other-Than-Temporary-Impairment on Fixed Maturity AFS Securities
Balance as of beginning-of-year	$	45		$	33		$	-		$	45
(Increases) attributable to:
Cumulative effect from adoption of new accounting standard		(45	)		-			-			(45	)
Gross OTTI recognized in OCI during the period		-			(16	)
Change in DAC, VOBA, DSI and DFEL		-			1
Income tax benefit (expense)		-			3
Decreases attributable to:
Changes in fair value, sales, maturities or other settlements of AFS securities		-			21
Change in DAC, VOBA, DSI and DFEL		-			(2	)
Income tax benefit (expense)		-			(4	)
Balance as of end-of-period	$	-		$	36		$	-		$	-
Unrealized Gain (Loss) on Derivative Instruments
Balance as of beginning-of-year	$	(11	)	$	139		$	(402	)	$	(11	)
Unrealized holding gains (losses) arising during the period		(219	)		(152	)		89			(71	)
Change in foreign currency exchange rate adjustment		(16	)		80			47			153
Change in DAC, VOBA, DSI and DFEL		(64	)		(3	)		14			(53	)
Income tax benefit (expense)		62			15			(30	)		(8	)
Less:
Reclassification adjustment for gains (losses) included in net income (loss)		38			34			3			9
Associated amortization of DAC, VOBA, DSI and DFEL		(8	)		(1	)		(1	)		(6	)
Income tax benefit (expense)		(6	)		(7	)		-			(1	)
Balance as of end-of-period	$	(272	)	$	53		$	(284	)	$	8
Foreign Currency Translation Adjustment
Balance as of beginning-of-year	$	(17	)	$	(23	)	$	(12	)	$	(17	)
Foreign currency translation adjustment arising during the period		(4	)		(5	)		2			(10	)
Balance as of end-of-period	$	(21	)	$	(28	)	$	(10	)	$	(27	)
Funded Status of Employee Benefit Plans
Balance as of beginning-of-year	$	(327	)	$	(299	)	$	(266	)	$	(327	)
Adjustment arising during the period		4			4			(3	)		10
Balance as of end-of-period	$	(323	)	$	(295	)	$	(269	)	$	(317	)

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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):


								For the Three
	For the Nine							Months Ended
	Months Ended							March 31,
	September 30,							2021			2020
	2020			2019
Unrealized Gain (Loss) on AFS Securities
Unrealized Gain (Loss) on Fixed Maturity AFS Securities
Gross reclassification	$	(48	)	$	(18	)	Total realized gain (loss)	$	2		$	(2	)	Realized gain (loss)
Associated amortization of DAC,
VOBA, DSI and DFEL		42			(11	)	Total realized gain (loss)		(4	)		32		Realized gain (loss)
Reclassification before income							Income (loss) from continuing
tax benefit (expense)		(6	)		(29	)	operations before taxes
Income tax benefit (expense)		1			6		Federal income tax expense (benefit)
Reclassification, net of income tax	$	(5	)	$	(23	)	Net income (loss)

Unrealized OTTI on AFS Securities
Gross reclassification	$	-		$	4		Total realized gain (loss)
Change in DAC, VOBA, DSI and DFEL		-			-		Total realized gain (loss)
Reclassification before income							Income (loss) from continuing							Income (loss) from continuing
tax benefit (expense)		-			4		operations before taxes		(2	)		30		operations before taxes
Income tax benefit (expense)		-			(1	)	Federal income tax expense (benefit)		-			(6	)	Federal income tax expense (benefit)
Reclassification, net of income tax	$	-		$	3		Net income (loss)	$	(2	)	$	24		Net income (loss)

Unrealized Gain (Loss) on Derivative Instruments
Gross reclassifications:
Interest rate contracts	$	2		$	2		Net investment income	$	1		$	-		Net investment income
Interest rate contracts		(16	)		(2	)	Interest and debt expense		(6	)		(3	)	Interest and debt expense
Foreign currency contracts		46			25		Net investment income		10			11		Net investment income
Foreign currency contracts		6			9		Total realized gain (loss)		(2	)		1		Realized gain (loss)
Total gross reclassifications		38			34				3			9
Associated amortization of DAC,
VOBA, DSI and DFEL		(8	)		(1	)	Commissions and other expenses		(1	)		(6	)	Commissions and other expenses
Reclassifications before income							Income (loss) from continuing							Income (loss) from continuing
tax benefit (expense)		30			33		operations before taxes		2			3		operations before taxes
Income tax benefit (expense)		(6	)		(7	)	Federal income tax expense (benefit)		-			(1	)	Federal income tax expense (benefit)
Reclassifications, net of income tax	$	24		$	26		Net income (loss)	$	2		$	2		Net income (loss)

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~~13.~~12. Realized Gain (Loss)

Realized gain (loss) on our Consolidated Statements of Comprehensive Income (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 for 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 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 for which we have a contractual obligation. Details underlying realized gain (loss) (in millions) were as follows:



	For the Three						For the Nine						For the Three
	Months Ended						Months Ended						Months Ended
	September 30,						September 30,						March 31,
	2020			2019			2020			2019			2021			2020
Fixed maturity AFS securities:
Gross gains	$	2		$	8		$	30		$	40		$	11		$	6
Gross losses		(6	)		(14	)		(78	)		(58	)		(9	)		(8	)
Credit loss benefit (expense) ⁽¹⁾		(1	)		-			(22	)		-			(2	)		(20	)
Gross OTTI		-			(2	)		-			(15	)
Realized gain (loss) on equity securities⁽²⁾		5			(17	)		(9	)		(10	)		11			(19	)
Credit loss benefit (expense) on mortgage loans on real estate		71			(1	)		(112	)		(2	)		24			(70	)
Other gain (loss) on investments		2			(4	)		(6	)		(9	)		3			(1	)
Associated amortization of DAC, VOBA, DSI and DFEL
and changes in other contract holder funds		(8	)		(5	)		34			(12	)		(5	)		26
Total realized gain (loss) related to certain financial assets		65			(35	)		(163	)		(66	)		33			(86	)
Realized gain (loss) on the mark-to-market on certain instruments ⁽³⁾⁽⁴⁾		(13	)		22			27			(136	)		21			47
Indexed annuity and IUL contracts net derivatives results: ⁽⁵⁾
Gross gain (loss)		47			(21	)		(3	)		(97	)		32			(49	)
Associated amortization of DAC, VOBA, DSI and DFEL		(20	)		(2	)		(5	)		7			(13	)		15
Variable annuity net derivatives results: ⁽⁶⁾
Gross gain (loss)		704			28			223			(230	)		(316	)		40
Associated amortization of DAC, VOBA, DSI and DFEL		(154	)		(3	)		(122	)		31			62			9
Total realized gain (loss)	$	629		$	(11	)	$	(43	)	$	(491	)	$	(181	)	$	(24	)

⁽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 market adjustments on equity securities still held of $5$10 million and ~~$(17)~~$(18) million for the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019, respectively, and $(8) million and $(11) million for the nine months ended September 30, 2020 and 2019,~~ respectively.

⁽³⁾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 Note 7 for information regarding Modco.

⁽⁴⁾Includes gains and losses from fair value changes on mortgage loans on real estate accounted for under the fair value option of $3$1 million and $7 million for the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and $8 million for the nine months ended September 30, 2020.~~respectively.

⁽⁵⁾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.

⁽⁶⁾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.

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~~14.~~13. Fair Value of Financial Instruments

The carrying values and estimated fair values of our financial instruments (in millions) were as follows:



	As of September 30, 2020						As of December 31, 2019						As of March 31, 2021						As of December 31, 2020
	Carrying			Fair			Carrying			Fair			Carrying			Fair			Carrying			Fair
	Value			Value			Value			Value			Value			Value			Value			Value
Assets
Fixed maturity AFS securities	$	118,252		$	118,252		$	105,200		$	105,200		$	117,313		$	117,313		$	123,044		$	123,044
Trading securities		4,633			4,633			4,673			4,673			4,365			4,365			4,501			4,501
Equity securities		122			122			103			103			123			123			129			129
Mortgage loans on real estate		16,541			18,238			16,339			16,872			17,255			18,076			16,763			18,219
Derivative investments ⁽¹⁾		3,236			3,236			1,911			1,911			3,453			3,453			3,109			3,109
Other investments		4,194			4,194			2,983			2,983			3,538			3,538			3,974			3,974
Cash and invested cash		2,595			2,595			2,563			2,563			1,350			1,350			1,708			1,708
Other assets:
GLB direct embedded derivatives		-			-			450			450			1,831			1,831			450			450
GLB ceded embedded derivatives		281			281			60			60			42			42			82			82
Indexed annuity ceded embedded derivatives		536			536			927			927			527			527			550			550
Separate account assets		152,975			152,975			153,566			153,566			171,339			171,339			167,965			167,965

Liabilities
Future contract benefits – indexed annuity
and IUL contracts embedded derivatives		(2,688	)		(2,688	)		(2,585	)		(2,585	)		(4,170	)		(4,170	)		(3,594	)		(3,594	)
Other contract holder funds:
Remaining guaranteed interest and similar contracts		(1,860	)		(1,860	)		(1,900	)		(1,900	)		(1,860	)		(1,860	)		(1,854	)		(1,854	)
Account values of certain investment contracts		(40,468	)		(56,360	)		(38,639	)		(46,822	)		(40,681	)		(41,722	)		(40,947	)		(49,745	)
Short-term debt		-			-			(300	)		(304	)		(300	)		(311	)		-			-
Long-term debt		(6,714	)		(6,740	)		(6,067	)		(6,217	)		(6,294	)		(6,501	)		(6,682	)		(7,067	)
Reinsurance related embedded derivatives		(334	)		(334	)		(327	)		(327	)		(244	)		(244	)		(392	)		(392	)
Other liabilities:
Derivative liabilities⁽¹⁾		(1,067	)		(1,067	)		(349	)		(349	)		(428	)		(428	)		(906	)		(906	)
GLB direct embedded derivatives		(1,106	)		(1,106	)		-			-
GLB ceded embedded derivatives		-			-			(9	)		(9	)		(152	)		(152	)		-			-

⁽¹⁾We have master netting agreements with each of our derivative counterparties, which allow for the netting of our derivative asset and liability positions by counterparty.

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 our 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, ~~including~~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 are classified as Level 2 within the fair value hierarchy.

Other Investments

The carrying value of our assets classified as other 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 Federal Home Loan Bank (“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

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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 12 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 ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, 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 our Consolidated Balance Sheets, includes ~~commercial~~ 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 Modco ~~arrangements~~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 our Consolidated Statement of Comprehensive Income (Loss) ~~for commercial mortgage loans.~~. 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 as a result of a change to a third-party pricing source, mortgage loans electing the fair value option were categorized as Level 3 as of March 31, 2021, and December 31, 2020.

The fair value and aggregate contractual principal for mortgage loans on real estate where the fair value option was elected (in millions) ~~was~~were as follows:



	~~As of~~
	~~September 30,~~
	~~2020~~
~~Commercial mortgage loans:~~ ⁽¹⁾
~~Fair value~~	$	~~794~~
~~Aggregate contractual principal~~		~~770~~


	As of		As of
	March 31,		December 31,
	2021		2020
Fair value	$	874	$	832
Aggregate contractual principal		882		839

⁽¹⁾As of ~~September 30,~~March 31, 2021, and December 31, 2020, 0 loans for which the fair value option ~~has been~~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 0t have any assets or liabilities measured at fair value on a nonrecurring basis as of ~~September 30, 2020,~~March 31, 2021, or December 31, ~~2019, and we noted no changes in our valuation methodologies between these periods.~~2020.

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The following summarizes our financial instruments carried at fair value (in millions) on a recurring basis by the fair value hierarchy levels:



		As of September 30, 2020														As of March 31, 2021
		Quoted														Quoted
		Prices														Prices
		in Active														in Active
	Markets for			Significant											Markets for			Significant
		Identical		Observable				Unobservable				Total				Identical		Observable				Unobservable				Total
		Assets			Inputs				Inputs			Fair				Assets			Inputs				Inputs			Fair
		(Level 1)			(Level 2)				(Level 3)			Value				(Level 1)			(Level 2)				(Level 3)			Value
Assets
Investments:
Fixed maturity AFS securities:
Corporate bonds		$	-		$	94,165			$	4,552		$	98,717			$	-		$	91,425			$	5,145		$	96,570
U.S. government bonds			459			37				-			496				432			7				5			444
State and municipal bonds			-			6,774				-			6,774				-			6,625				-			6,625
Foreign government bonds			-			370				66			436				-			419				66			485
RMBS			-			3,201				2			3,203				-			3,075				2			3,077
CMBS			-			1,429				1			1,430				-			1,515				1			1,516
ABS			-			6,177				413			6,590				-			7,308				688			7,996
Hybrid and redeemable preferred securities			62			439				105			606				56			459				85			600
Mortgage loans on real estate			-			794				-			794
Trading securities			5			4,093				535			4,633				-			3,650				715			4,365
Equity securities			22			49				51			122				12			50				61			123
Mortgage loans on real estate																	-			-				874			874
Derivative investments ⁽¹⁾			-			2,177				2,279			4,456				-			1,061				4,243			5,304
Cash and invested cash			-			2,595				-			2,595				-			1,350				-			1,350
Other assets:
GLB direct embedded derivatives																	-			-				1,831			1,831
GLB ceded embedded derivatives			-			-				281			281				-			-				42			42
Indexed annuity ceded embedded derivatives			-			-				536			536				-			-				527			527
Separate account assets			720			152,246				-			152,966				595			170,736				-			171,331
Total assets		$	1,268		$	274,546			$	8,821		$	284,635			$	1,095		$	287,680			$	14,285		$	303,060

Liabilities
Future contract benefits – indexed annuity
and IUL contracts embedded derivatives		$	-		$	-			$	(2,688	)	$	(2,688	)		$	-		$	-			$	(4,170	)	$	(4,170	)
Reinsurance related embedded derivatives			-			(334	)			-			(334	)			-			(244	)			-			(244	)
Other liabilities:
Derivative liabilities ⁽¹⁾			-			(1,156	)			(1,131	)		(2,287	)			-			(697	)			(1,582	)		(2,279	)
GLB direct embedded derivatives			-			-				(1,106	)		(1,106	)
GLB ceded embedded derivatives																	-			-				(152	)		(152	)
Total liabilities		$	-		$	(1,490	)		$	(4,925	)	$	(6,415	)		$	-		$	(941	)		$	(5,904	)	$	(6,845	)

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		As of December 31, 2019														As of December 31, 2020
		Quoted														Quoted
		Prices														Prices
		in Active														in Active
	Markets for			Significant											Markets for			Significant
		Identical		Observable				Unobservable				Total				Identical		Observable				Unobservable				Total
		Assets			Inputs				Inputs			Fair				Assets			Inputs				Inputs			Fair
		(Level 1)			(Level 2)				(Level 3)			Value				(Level 1)			(Level 2)				(Level 3)			Value
Assets
Investments:
Fixed maturity AFS securities:
Corporate bonds		$	-		$	84,435			$	4,281		$	88,716			$	-		$	97,668			$	5,121		$	102,789
U.S. government bonds			424			6				5			435				473			6				5			484
State and municipal bonds			-			5,884				-			5,884				-			6,921				-			6,921
Foreign government bonds			-			303				90			393				-			396				74			470
RMBS			-			3,230				11			3,241				-			3,074				2			3,076
CMBS			-			1,082				1			1,083				-			1,505				-			1,505
ABS			-			4,621				268			4,889				-			6,614				570			7,184
Hybrid and redeemable preferred securities			77			404				78			559				54			457				104			615
Trading securities			50			3,957				666			4,673				5			3,852				644			4,501
Equity securities			25			48				30			103				22			48				59			129
Mortgage loans on real estate																	-			-				832			832
Derivative investments ⁽¹⁾			-			1,212				1,735			2,947				-			1,733				3,575			5,308
Cash and invested cash			-			2,563				-			2,563				-			1,708				-			1,708
Other assets:
GLB direct embedded derivatives			-			-				450			450				-			-				450			450
GLB ceded embedded derivatives			-			-				60			60				-			-				82			82
Indexed annuity ceded embedded derivatives			-			-				927			927				-			-				550			550
Separate account assets			639			152,916				-			153,555				606			167,351				-			167,957
Total assets		$	1,215		$	260,661			$	8,602		$	270,478			$	1,160		$	291,333			$	12,068		$	304,561

Liabilities
Future contract benefits – indexed annuity
and IUL contracts embedded derivatives		$	-		$	-			$	(2,585	)	$	(2,585	)		$	-		$	-			$	(3,594	)	$	(3,594	)
Reinsurance related embedded derivatives			-			(327	)			-			(327	)			-			(392	)			-			(392	)
Other liabilities:
Derivative liabilities ⁽¹⁾			-			(518	)			(867	)		(1,385	)
GLB ceded embedded derivatives			-			-				(9	)		(9	)
Other liabilities – derivative liabilities ⁽¹⁾																	-			(1,072	)			(2,033	)		(3,105	)
Total liabilities		$	-		$	(845	)		$	(3,461	)	$	(4,306	)		$	-		$	(1,464	)		$	(5,627	)	$	(7,091	)

⁽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.

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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 Three Months Ended September 30, 2020																		For the Three Months Ended March 31, 2021
							Gains		Issuances,				Transfers												Gains		Issuances,				Transfers
				Items			(Losses)			Sales,			Into or									Items			(Losses)			Sales,			Into or
				Included			in		Maturities,				Out									Included			in		Maturities,				Out
	Beginning			in			OCI		Settlements,				of			Ending			Beginning			in			OCI		Settlements,				of			Ending
	Fair			Net			and			Calls,			Level 3,			Fair			Fair			Net			and			Calls,			Level 3,			Fair
	Value			Income			Other ⁽¹⁾			Net			Net ⁽²⁾			Value			Value			Income			Other ⁽¹⁾			Net			Net ⁽²⁾			Value
Investments: ⁽³⁾
Fixed maturity AFS securities:
Corporate bonds	$	4,344		$	(7	)	$	197		$	30		$	(12	)	$	4,552		$	5,121		$	2		$	(120	)	$	170		$	(28	)	$	5,145
U.S. government bonds		5			-			-			-			(5	)		-			5			-			-			-			-			5
Foreign government bonds		86			-			-			(20	)		-			66			74			-			(8	)		-			-			66
RMBS		2			-			-			-			-			2			2			-			-			-			-			2
CMBS		1			-			-			-			-			1			-			1			-			-			-			1
ABS		424			-			2			60			(73	)		413			570			-			(7	)		183			(58	)		688
Hybrid and redeemable
preferred securities		90			-			1			14			-			105			104			-			1			(20	)		-			85
Trading securities		673			3			-			(120	)		(21	)		535			644			(3	)		-			66			8			715
Equity securities		29			2			-			20			-			51			59			6			-			(4	)		-			61
Mortgage loans on real estate																				832			2			3			37			-			874
Derivative investments		595			958			-			(189	)		(216	)		1,148			1,542			1,251			-			(132	)		-			2,661
Other assets: ⁽⁴⁾
GLB direct embedded derivatives																				450			1,381			-			-			-			1,831
GLB ceded embedded derivatives		571			(290	)		-			-			-			281			82			(40	)		-			-			-			42
Indexed annuity ceded embedded derivatives		664			295			-			(423	)		-			536			550			32			-			(55	)		-			527
Future contract benefits – indexed annuity
and IUL contracts embedded derivatives ⁽⁴⁾		(2,272	)		(400	)		-			(16	)		-			(2,688	)		(3,594	)		(626	)		-			50			-			(4,170	)
Other liabilities – GLB direct embedded
Other liabilities – GLB ceded embedded
derivatives ⁽⁴⁾		(3,086	)		1,980			-			-			-			(1,106	)		-			(152	)		-			-			-			(152	)
Total, net	$	2,126		$	2,541		$	200		$	(644	)	$	(327	)	$	3,896		$	6,441		$	1,854		$	(131	)	$	295		$	(78	)	$	8,381

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	For the Three Months Ended September 30, 2019																		For the Three Months Ended March 31, 2020
							Gains		Issuances,				Transfers												Gains		Issuances,				Transfers
				Items			(Losses)			Sales,			Into or									Items			(Losses)			Sales,			Into or
				Included			in		Maturities,				Out									Included			in		Maturities,				Out
	Beginning			in			OCI		Settlements,				of			Ending			Beginning			in			OCI		Settlements,				of			Ending
	Fair			Net			and			Calls,			Level 3,			Fair			Fair			Net			and			Calls,			Level 3,			Fair
	Value			Income			Other ⁽¹⁾			Net			Net ⁽²⁾			Value			Value			Income			Other ⁽¹⁾			Net			Net ⁽²⁾			Value
Investments: ⁽³⁾
Fixed maturity AFS securities:
Corporate bonds	$	3,648		$	3		$	(49	)	$	256		$	51		$	3,909		$	4,281		$	-		$	(385	)	$	165		$	42		$	4,103
U.S. government bonds																				5			-			-			-			-			5
Foreign government bonds		113			-			2			-			-			115			90			-			(3	)		-			-			87
RMBS		-			-			-			10			-			10			11			-			-			-			(10	)		1
CMBS		2			-			-			7			-			9			1			-			-			-			-			1
ABS		320			-			1			69			(173	)		217			268			-			(4	)		22			(90	)		196
Hybrid and redeemable
preferred securities		78			-			-			-			-			78			78			-			(6	)		-			-			72
Trading securities		523			10			-			146			(113	)		566			666			(32	)		-			(6	)		23			651
Equity securities		68			(11	)		-			(3	)		-			54			30			-			-			-			-			30
Derivative investments		466			184			119			22			-			791			868			997			279			(117	)		-			2,027
Other assets: ⁽⁴⁾
GLB direct embedded derivatives																				450			(450	)		-			-			-			-
GLB ceded embedded derivatives		111			130			-			-			-			241			60			668			-			-			-			728
Indexed annuity ceded embedded derivatives		903			7			-			(19	)		-			891			927			(115	)		-			(13	)		-			799
Future contract benefits – indexed annuity
and IUL contracts embedded derivatives ⁽⁴⁾		(1,973	)		(30	)		-			(95	)		-			(2,098	)		(2,585	)		1,143			-			62			-			(1,380	)
Other liabilities: ⁽⁴⁾
GLB direct embedded derivatives		(1	)		(845	)											(846	)		-			(4,596	)		-			-			-			(4,596	)
GLB ceded embedded derivatives																				(9	)		9			-			-			-			-
Total, net	$	4,258		$	(552	)	$	73		$	393		$	(235	)	$	3,937		$	5,141		$	(2,376	)	$	(119	)	$	113		$	(35	)	$	2,724

~~Table of Contents~~

For the Nine Months Ended September 30, 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 ⁽²⁾
Value
Investments: ⁽³⁾
Fixed maturity AFS securities:
Corporate bonds
$
4,281
$
(7
)
$
17
$
181
$
80
$
4,552
U.S. government bonds
5
-
-
-
(5
)
-
Foreign government bonds
90
-
(4
)
(20
)
-
66
RMBS
11
-
-
-
(9
)
2
CMBS
1
-
-
-
-
1
ABS
268
-
3
318
(176
)
413
Hybrid and redeemable
preferred securities
78
-
(1
)
10
18
105
Trading securities
666
(1
)
-
(140
)
10
535
Equity securities
30
1
-
20
-
51
Derivative investments
868
555
267
(326
)
(216
)
1,148
Other assets: ⁽⁴⁾
GLB direct embedded derivatives
450
(450
)
-
-
-
-
GLB ceded embedded derivatives
60
221
-
-
-
281
Indexed annuity ceded embedded derivatives
927
484
-
(875
)
-
536
Future contract benefits – indexed annuity
and IUL contracts embedded derivatives ⁽⁴⁾
(2,585
)
(88
)
-
(15
)
-
(2,688
)
Other liabilities: ⁽⁴⁾
GLB direct embedded derivatives
-
(1,106
)
-
-
-
(1,106
)
GLB ceded embedded derivatives
(9
)
9
-
-
-
-
Total, net
$
5,141
$
(382
)
$
282
$
(847
)
$
(298
)
$
3,896

‎

~~Table of Contents~~

For the Nine Months Ended September 30, 2019
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 ⁽²⁾
Value
Investments: ⁽³⁾
Fixed maturity AFS securities:
Corporate bonds
$
3,269
$
3
$
45
$
627
$
(35
)
$
3,909
Foreign government bonds
109
-
6
-
-
115
RMBS
7
-
-
10
(7
)
10
CMBS
2
-
-
7
-
9
ABS
134
-
2
477
(396
)
217
Hybrid and redeemable
preferred securities
75
-
3
-
-
78
Trading securities
67
12
-
723
(236
)
566
Equity securities
25
(11
)
-
40
-
54
Derivative investments
534
(128
)
234
151
-
791
Other assets: ⁽⁴⁾
GLB direct embedded derivatives
123
(123
)
-
-
-
-
GLB ceded embedded derivatives
72
169
-
-
-
241
Indexed annuity ceded embedded derivatives
902
128
-
(139
)
-
891
Future contract benefits – indexed annuity
and IUL contracts embedded derivatives ⁽⁴⁾
(1,305
)
(500
)
-
(293
)
-
(2,098
)
Other liabilities – GLB ceded embedded
derivatives ⁽⁴⁾
-
(846
)
-
-
-
(846
)
Total, net
$
4,014
$
(1,296
)
$
290
$
1,603
$
(674
)
$
3,937

⁽¹⁾The changes in fair value of the interest rate swaps are offset by an adjustment to derivative investments (see Note 5).

⁽²⁾Transfers into or out of Level 3 for fixed maturity AFS and trading securities are reported at amortized cost as of the ~~beginning-of-period.~~beginning-of-year. For fixed maturity AFS and trading securities, the difference between ~~beginning-of-period~~beginning-of-year amortized cost and ~~beginning-of-period~~beginning-of-year fair value was included in OCI and earnings, respectively, in the prior period.

⁽³⁾Amortization and accretion of premiums and discounts are included in net investment income on our 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 our Consolidated Statements of Comprehensive Income (Loss).

⁽⁴⁾Gains (losses) from the changes in fair value are included in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).

‎

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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 Three Months Ended September 30, 2020																		For the Three Months Ended March 31, 2021
	Issuances			Sales			Maturities		Settlements				Calls			Total			Issuances			Sales			Maturities		Settlements				Calls			Total
Investments:
Fixed maturity AFS securities:
Corporate bonds	$	154		$	(58	)	$	(3	)	$	(18	)	$	(45	)	$	30		$	297		$	(4	)	$	(15	)	$	(91	)	$	(17	)	$	170
Foreign government bonds		-			-			(20	)		-			-			(20	)
ABS		74			-			-			(14	)		-			60			200			-			-			(17	)		-			183
Hybrid and redeemable preferred
securities		14			-			-			-			-			14			-			(20	)		-			-			-			(20	)
Trading securities		15			-			(20	)		(115	)		-			(120	)		88			(3	)		-			(19	)		-			66
Equity securities		20			-			-			-			-			20			4			(8	)		-			-			-			(4	)
Mortgage loans on real estate																				72			(35	)		-			-			-			37
Derivative investments		126			(177	)		(138	)		-			-			(189	)		174			(124	)		(182	)		-			-			(132	)
Other assets – indexed annuity ceded
embedded derivatives		4			-			-			(427	)		-			(423	)		3			-			-			(58	)		-			(55	)
Future contract benefits – indexed annuity
and IUL contracts embedded derivatives		(88	)		-			-			72			-			(16	)		(108	)		-			-			158			-			50
Total, net	$	319		$	(235	)	$	(181	)	$	(502	)	$	(45	)	$	(644	)	$	730		$	(194	)	$	(197	)	$	(27	)	$	(17	)	$	295

For the Three Months Ended September 30, 2019
Issuances
Sales
Maturities
Settlements
Calls
Total
Investments:
Fixed maturity AFS securities:
Corporate bonds
$
337
$
-
$
(21
)
$
(44
)
$
(16
)
$
256
RMBS
10
-
-
-
-
10
CMBS
7
-
-
-
-
7
ABS
79
-
-
(10
)
-
69
Trading securities
150
-
-
(4
)
-
146
Equity securities
-
(3
)
-
-
-
(3
)
Derivative investments
132
(36
)
(74
)
-
-
22
Other assets – indexed annuity ceded
embedded derivatives
9
-
-
(28
)
-
(19
)
Future contract benefits – indexed annuity
and IUL contracts embedded derivatives
(124
)
-
-
29
-
(95
)
Total, net
$
600
$
(39
)
$
(95
)
$
(57
)
$
(16
)
$
393

For the Nine Months Ended September 30, 2020
Issuances
Sales
Maturities
Settlements
Calls
Total
Investments:
Fixed maturity AFS securities:
Corporate bonds
$
683
$
(230
)
$
(37
)
$
(112
)
$
(123
)
$
181
Foreign government bonds
-
-
(20
)
-
-
(20
)
ABS
353
-
-
(35
)
-
318
Hybrid and redeemable preferred
securities
14
(4
)
-
-
-
10
Trading securities
53
(25
)
(20
)
(148
)
-
(140
)
Equity securities
21
(1
)
-
-
-
20
Derivative investments
374
(395
)
(305
)
-
-
(326
)
Other assets – indexed annuity ceded
embedded derivatives
21
-
-
(896
)
-
(875
)
Future contract benefits – indexed annuity
-
and IUL contracts embedded derivatives
(170
)
-
-
155
-
(15
)
Total, net
$
1,349
$
(655
)
$
(382
)
$
(1,036
)
$
(123
)
$
(847
)

~~Table of Contents~~



	For the Nine Months Ended September 30, 2019																		For the Three Months Ended March 31, 2020
	Issuances			Sales			Maturities		Settlements				Calls			Total			Issuances		Sales			Maturities		Settlements				Calls			Total
Investments:
Fixed maturity AFS securities:
Corporate bonds	$	872		$	(18	)	$	(75	)	$	(129	)	$	(23	)	$	627		$	336	$	(73	)	$	2		$	(51	)	$	(49	)	$	165
RMBS		10			-			-			-			-			10
CMBS		7			-			-			-			-			7
ABS		489			-			-			(12	)		-			477			37		-			-			(15	)		-			22
Trading securities		728			-			-			(5	)		-			723			37		(25	)		-			(18	)		-			(6	)
Equity securities		43			(3	)		-			-			-			40
Derivative investments		403			(47	)		(205	)		-			-			151			118		(123	)		(112	)		-			-			(117	)
Other assets – indexed annuity ceded
embedded derivatives		50			-			-			(189	)		-			(139	)		9		-			-			(22	)		-			(13	)
Future contract benefits – indexed annuity
and IUL contracts embedded derivatives		(420	)		-			-			127			-			(293	)		11		-			-			51			-			62
Total, net	$	2,182		$	(68	)	$	(280	)	$	(208	)	$	(23	)	$	1,603		$	548	$	(221	)	$	(110	)	$	(55	)	$	(49	)	$	113

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 Three					For the Nine						For the Three
	Months Ended					Months Ended						Months Ended
	September 30,					September 30,						March 31,
	2020		2019			2020			2019			2021			2020
Trading securities												$	(2	)	$	-
Equity securities													6			-
Mortgage loans on real estate													4			-
GLB	$	2,143	$	(665	)	$	(1,062	)	$	(452	)		1,570			(4,867	)
Derivative investments		731		204			265			(65	)		1,053			895
Embedded derivatives:
Indexed annuity and IUL contracts		340		(11	)		582			(87	)
Embedded derivatives – indexed annuity
and IUL contracts													43			(61	)
Total, net⁽¹⁾	$	3,214	$	(472	)	$	(215	)	$	(604	)	$	2,674		$	(4,033	)

⁽¹⁾Included in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).

‎

Table of Contents

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 Three
For the Nine
Months Ended
Months Ended
September 30,
September 30,
2020
2020
Fixed maturity AFS securities:
Corporate bonds
$
181
$
(26
)
Foreign government bonds
-
(3
)
ABS
4
4
Hybrid and redeemable preferred securities
1
(1
)
Total, net
$
186
$
(26
)



	For the Three
	Months Ended
	March 31,
	2021			2020
Fixed maturity AFS securities:
Corporate bonds	$	(122	)	$	(325	)
Foreign government bonds		(8	)		(2	)
ABS		(8	)		(3	)
Hybrid and redeemable
preferred securities		2			(5	)
Mortgage loans on real estate		3			-
Total, net	$	(133	)	$	(335	)

~~Table of Contents~~

The following provides the components of the transfers into and out of Level 3 (in millions) as reported above:

For the Three
For the Three
Months Ended
Months Ended
September 30, 2020
September 30, 2019
Transfers
Transfers
Transfers
Transfers
Into
Out of
Into
Out of
Level 3
Level 3
Total
Level 3
Level 3
Total
Investments:
Fixed maturity AFS securities:
Corporate bonds
$
42
$
(54
)
$
(12
)
$
51
$
-
$
51
U.S. government bonds
-
(5
)
(5
)
-
-
-
ABS
-
(73
)
(73
)
-
(173
)
(173
)
Trading securities
-
(21
)
(21
)
-
(113
)
(113
)
Derivative investments
-
(216
)
(216
)
-
-
-
Total, net
$
42
$
(369
)
$
(327
)
$
51
$
(286
)
$
(235
)



	For the Nine								For the Nine								For the Three								For the Three
	Months Ended								Months Ended								Months Ended								Months Ended
	September 30, 2020								September 30, 2019								March 31, 2021								March 31, 2020
	Transfers		Transfers						Transfers		Transfers						Transfers		Transfers						Transfers		Transfers
	Into		Out of						Into		Out of						Into		Out of						Into		Out of
	Level 3		Level 3			Total			Level 3		Level 3			Total			Level 3		Level 3			Total			Level 3		Level 3			Total
Investments:
Fixed maturity AFS securities:
Corporate bonds	$	296	$	(216	)	$	80		$	136	$	(171	)	$	(35	)	$	10	$	(38	)	$	(28	)	$	119	$	(77	)	$	42
U.S. government bonds		-		(5	)		(5	)		-		-			-
RMBS		1		(10	)		(9	)		-		(7	)		(7	)		-		-			-			-		(10	)		(10	)
ABS		20		(196	)		(176	)		-		(396	)		(396	)		-		(58	)		(58	)		5		(95	)		(90	)
Hybrid and redeemable preferred
securities		18		-			18			-		-			-
Trading securities		33		(23	)		10			5		(241	)		(236	)		13		(5	)		8			23		-			23
Derivative investments		-		(216	)		(216	)		-		-			-
Total, net	$	368	$	(666	)	$	(298	)	$	141	$	(815	)	$	(674	)	$	23	$	(101	)	$	(78	)	$	147	$	(182	)	$	(35	)

Transfers into and out of Level 3 are generally the result of observable market information on a security no longer being available or becoming available to our pricing vendors. For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ transfers in and out of Level 3 were attributable primarily to the securities’ observable market information no longer being available or becoming available.
‎

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The following summarizes the fair value (in millions), valuation techniques and significant unobservable inputs of the Level 3 fair value measurements as of ~~September 30, 2020:~~March 31, 2021:



											Weighted												Weighted
											Average												Average
	Fair			Valuation	Significant	Assumption or					Input		Fair			Valuation	Significant	Assumption or					Input
	Value			Technique	Unobservable Inputs	Input Ranges					Range ⁽¹⁾		Value			Technique	Unobservable Inputs	Input Ranges					Range ⁽¹⁾
Assets
Investments:
Fixed maturity AFS and
trading securities:
Corporate bonds	$	3,019		Discounted cash flow	Liquidity/duration adjustment ⁽²⁾	0.1	%	-	15.8	%	2.1	%	$	3,376		Discounted cash flow	Liquidity/duration adjustment ⁽²⁾	0.3	%	-	7.9	%	1.5	%
Foreign government
bonds		27		Discounted cash flow	Liquidity/duration adjustment ⁽²⁾	9.3	%	-	9.3	%	9.3	%		29		Discounted cash flow	Liquidity/duration adjustment ⁽²⁾	5.7	%	-	5.7	%	5.7	%
ABS		21		Discounted cash flow	Liquidity/duration adjustment ⁽²⁾	4.3	%	-	4.3	%	4.3	%		20		Discounted cash flow	Liquidity/duration adjustment ⁽²⁾	3.0	%	-	3.0	%	3.0	%
Equity securities		22		Discounted cash flow	Liquidity/duration adjustment ⁽²⁾	4.5	%	-	6.3	%	5.9	%		20		Discounted cash flow	Liquidity/duration adjustment ⁽²⁾	4.5	%	-	6.2	%	5.8	%
Other assets – GLB ceded
embedded derivatives		281		Discounted cash flow	Long-term lapse rate ⁽³⁾	1	%	-	30	%	⁽¹⁰⁾
					Utilization of guaranteed withdrawals⁽⁴⁾	85	%	-	100	%	94	%
Other assets: GLB direct
and ceded embedded														1,873		Discounted cash flow	Long-term lapse rate ⁽³⁾	1	%	-	30	%	⁽¹⁰⁾
derivatives																	Utilization of guaranteed withdrawals⁽⁴⁾	85	%	-	100	%	94	%
					Claims utilization factor ⁽⁵⁾	60	%	-	100	%	⁽¹⁰⁾						Claims utilization factor ⁽⁵⁾	60	%	-	100	%	⁽¹⁰⁾
					Premiums utilization factor ⁽⁵⁾	80	%	-	115	%	⁽¹⁰⁾						Premiums utilization factor ⁽⁵⁾	80	%	-	115	%	⁽¹⁰⁾
					NPR ⁽⁶⁾	0.13	%	-	1.62	%	1.13	%					NPR ⁽⁶⁾	0.07	%	-	1.43	%	0.95	%
					Mortality rate ⁽⁷⁾				⁽⁹⁾		⁽¹⁰⁾						Mortality rate ⁽⁷⁾				⁽⁹⁾		⁽¹⁰⁾
					Volatility ⁽⁸⁾	1	%	-	28	%	14.28	%					Volatility ⁽⁸⁾	1	%	-	28	%	14.71	%

Indexed annuity ceded
embedded derivatives		536		Discounted cash flow	Lapse rate ⁽³⁾	0	%	-	9	%	⁽¹⁰⁾			527		Discounted cash flow	Lapse rate ⁽³⁾	0	%	-	9	%	⁽¹⁰⁾
					Mortality rate ⁽⁷⁾				⁽⁹⁾		⁽¹⁰⁾						Mortality rate ⁽⁷⁾				⁽⁹⁾		⁽¹⁰⁾
Liabilities
Future contract benefits –
indexed annuity and IUL
contracts embedded
derivatives	$	(2,688	)	Discounted cash flow	Lapse rate ⁽³⁾	0	%	-	9	%	⁽¹⁰⁾
indexed annuity contract
embedded derivatives													$	(4,107	)	Discounted cash flow	Lapse rate ⁽³⁾	0	%	-	9	%	⁽¹⁰⁾
					Mortality rate ⁽⁷⁾				⁽⁹⁾		⁽¹⁰⁾						Mortality rate ⁽⁷⁾				⁽⁹⁾		⁽¹⁰⁾
Other liabilities –
GLB direct embedded
GLB ceded embedded
derivatives		(1,106	)	Discounted cash flow	Long-term lapse rate ⁽³⁾	1	%	-	30	%	⁽¹⁰⁾			(152	)	Discounted cash flow	Long-term lapse rate ⁽³⁾	1	%	-	30	%	⁽¹⁰⁾
					Utilization of guaranteed withdrawals ⁽⁴⁾	85	%	-	100	%	94	%					Utilization of guaranteed withdrawals⁽⁴⁾	85	%	-	100	%	94	%
					Claims utilization factor ⁽⁵⁾	60	%	-	100	%	⁽¹⁰⁾						Claims utilization factor ⁽⁵⁾	60	%	-	100	%	⁽¹⁰⁾
					Premiums utilization factor ⁽⁵⁾	80	%	-	115	%	⁽¹⁰⁾						Premiums utilization factor ⁽⁵⁾	80	%	-	115	%	⁽¹⁰⁾
					NPR ⁽⁶⁾	0.13	%	-	1.62	%	1.13	%					NPR ⁽⁶⁾	0.07	%	-	1.43	%	0.95	%
					Mortality rate ⁽⁷⁾				⁽⁹⁾		⁽¹⁰⁾						Mortality rate ⁽⁷⁾				⁽⁹⁾		⁽¹⁰⁾
					Volatility ⁽⁸⁾	1	%	-	28	%	14.28	%					Volatility ⁽⁸⁾	1	%	-	28	%	14.71	%

⁽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 ~~and IUL~~ 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.

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⁽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 ~~and IUL contracts~~contract 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.

~~15.~~14. Segment Information

We provide products and services and report results through our Annuities, Retirement Plan Services, Life Insurance and Group Protection 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. A discussion of these segments and Other Operations is found in Note ~~21 of~~22 to the consolidated financial statements in our ~~2019~~2020 Form 10-K.

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 (“benefit ratio unlocking”);

Income (loss) from reserve changes, net of related amortization, on business sold through reinsurance;

Gains (losses) on early extinguishment of debt;

Losses from the impairment of intangible assets;

Income (loss) from discontinued operations;

Acquisition and integration costs related to mergers and acquisitions; and

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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 GDB and GLB 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 our Consolidated Statements of Comprehensive Income (Loss) (in millions):



	For the Three					For the Nine						For the Three
	Months Ended					Months Ended						Months Ended
	September 30,					September 30,						March 31,
	2020		2019			2020			2019			2021			2020
Revenues
Operating revenues:
Annuities	$	1,126	$	1,117		$	3,292		$	3,447		$	1,204		$	1,129
Retirement Plan Services		311		298			889			890			327			297
Life Insurance		2,127		2,098			5,587			5,600			1,939			1,821
Group Protection		1,184		1,137			3,608			3,430			1,254			1,224
Other Operations		40		50			131			166			38			38
Excluded realized gain (loss), pre-tax		572		(61	)		(198	)		(623	)		(229	)		(75	)
Amortization of DFEL associated with benefit ratio unlocking, pre-tax		1		(1	)		(6	)		3
Amortization of DFEL associated
with benefit ratio unlocking, pre-tax													1			(9	)
Total revenues	$	5,361	$	4,638		$	13,303		$	12,913		$	4,534		$	4,425



	For the Three						For the Nine						For the Three
	Months Ended						Months Ended						Months Ended
	September 30,						September 30,						March 31,
	2020			2019			2020			2019			2021			2020
Net Income (Loss)
Income (loss) from operations:
Annuities	$	196		$	169		$	694		$	686		$	290		$	261
Retirement Plan Services		50			44			119			125			57			40
Life Insurance		(311	)		(245	)		(177	)		79			107			171
Group Protection		6			61			85			184			(26	)		40
Other Operations		(74	)		(75	)		(202	)		(201	)		(78	)		(47	)
Excluded realized gain (loss), after-tax		452			(49	)		(156	)		(492	)		(180	)		(60	)
Gain (loss) on early extinguishment of debt, after-tax		-			(33	)		(12	)		(33	)
Benefit ratio unlocking, after-tax		83			(2	)		17			186			55			(349	)
Acquisition and integration costs related to mergers
and acquisitions, after-tax		(4	)		(31	)		(12	)		(80	)
Acquisition and integration costs related to
mergers and acquisitions, after-tax														-			(4	)
Net income (loss)	$	398		$	(161	)	$	356		$	454		$	225		$	52

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the financial condition as of ~~September 30, 2020,~~March 31, 2021, compared with December 31, ~~2019,~~2020, and the results of operations for the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, compared with the corresponding ~~periods~~period in ~~2019~~2020 of Lincoln National Corporation and its consolidated subsidiaries. Unless otherwise stated or the context otherwise requires, “LNC,” “Company,” “we,” “our” or “us” refers to Lincoln National Corporation and its consolidated subsidiaries.

The MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes to the consolidated financial statements (“Notes”) presented in “Part I – Item 1. Financial Statements”; our Form 10-K for the year ended December 31, ~~2019~~2020 (“~~2019~~2020 Form 10-K”); and other reports filed with the Securities and Exchange Commission (“SEC”). For more detailed information on the risks and uncertainties associated with the Company’s business activities, see the risks described in “Part I – Item 1A. Risk Factors” in our ~~2019~~2020 Form ~~10-K and “Part II – Item 1A. Risk Factors” in our Form 10-Q for the quarter ended March 31, 2020.~~10-K.

FORWARD-LOOKING STATEMENTS – CAUTIONARY LANGUAGE

Certain statements made in this report and in other written or oral statements made by us or on our behalf are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). A forward-looking statement is a statement that is not a historical fact and, without limitation, includes any statement that may predict, forecast, indicate or imply future results, performance or achievements. Forward-looking statements may contain words like: “anticipate,” “believe,” “estimate,” “expect,” “project,” “shall,” “will” and other words or phrases with similar meaning in connection with a discussion of future operating or financial performance. In particular, these include statements relating to future actions, trends in our businesses, prospective services or products, future performance or financial results and the outcome of contingencies, such as legal proceedings. We claim the protection afforded by the safe harbor for forward-looking statements provided by the PSLRA.

Forward-looking statements are subject to risks and uncertainties. Actual results could differ materially from those expressed in or implied by such forward-looking statements due to a variety of factors, including:

The continuation of the ~~coronavirus, or~~ COVID-19 pandemic, or future outbreaks of COVID-19, and uncertainty surrounding the length and severity of future impacts on the global economy and on our business, results of operations and financial condition;

Further deterioration in general economic and business conditions that may affect account values, investment results, guaranteed benefit liabilities, premium levels and claims experience;

Adverse global capital and credit market conditions ~~could~~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;

~~Because of our holding company structure, the~~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~~

The impact of U.S. federal tax reform legislation on our business, earnings and capital; ~~and the~~

The impact of ~~any “best interest” standards of care~~Regulation Best Interest or other regulations adopted by the SEC, the Department of Labor or other ~~regulations adopted by~~ federal or state regulators or self-regulatory organizations relating to the standard of care owed by investment advisers and/or ~~broker-dealers;~~broker-dealers that could affect our distribution model;

Actions taken by reinsurers to raise rates on in-force business;

Further declines in or sustained low interest rates causing a reduction in investment income, the interest margins of our businesses, estimated gross profits (“EGPs”) and demand for our products;

Rapidly increasing interest rates causing contract holders to surrender life insurance and annuity policies, thereby causing realized investment losses, and reduced hedge performance related to variable annuities;

~~Uncertainty about~~The impact of the ~~effect of continuing promulgation and~~ implementation of ~~rules and regulations under~~the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act ~~on us,~~relating to the ~~economy and the financial services sector in particular;~~regulation of derivatives transactions;

The initiation of legal or regulatory proceedings against us, and the outcome of any legal or regulatory proceedings, such as: adverse actions related to present or past business practices common in businesses in which we compete; adverse decisions in significant actions including, but not limited to, actions brought by federal and state authorities and class action cases; new decisions that result in changes in law; and unexpected trial court rulings;

A decline or continued volatility in the equity markets causing a reduction in the sales of our subsidiaries’ products; a reduction of asset-based fees that our subsidiaries charge on various investment and insurance products; an acceleration of the net amortization of deferred acquisition costs (“DAC”), value of business acquired (“VOBA”), deferred sales inducements (“DSI”) and deferred front-end loads (“DFEL”); and an increase in liabilities related to guaranteed benefit features of our subsidiaries’ variable annuity products;

Ineffectiveness of our risk management policies and procedures, including various hedging strategies used to offset the effect of changes in the value of liabilities due to changes in the level and volatility of the equity markets and interest rates;

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A deviation in actual experience regarding future persistency, mortality, morbidity, interest rates or equity market returns from the assumptions used in pricing our subsidiaries’ products, in establishing related insurance reserves and in the net amortization of DAC, VOBA, DSI and DFEL, which may reduce future earnings;

Changes in accounting principles that may affect our business, results of operations and financial ~~statements;~~condition;

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;

~~Inability to protect our intellectual property rights or claims of infringement of the intellectual property rights of others;~~

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,including the successful implementation of integration strategies or the achievement of anticipated synergies and operational efficiencies related to an acquisition;~~items;

The adequacy and collectability of reinsurance that we have purchased;

~~The continuation of the COVID-19 pandemic, or future outbreaks of COVID-19 or other~~Future pandemics, acts of terrorism, war or other man-made and natural catastrophes that may adversely affect our businesses and the cost and availability of reinsurance;

Competitive conditions, including pricing pressures, new product offerings and the emergence of new competitors, that may affect the level of premiums and fees that our subsidiaries can charge for their products;

The unknown effect on our subsidiaries’ businesses resulting from evolving market preferences and the changing demographics of our client base; and

The unanticipated loss of key management, financial planners or wholesalers.

The risks and uncertainties included here are not exhaustive. Our most recent Form 10-K ~~and our Form 10-Q for the quarter ended March 31, 2020,~~ as well as other reports that we file with the SEC include additional factors that could affect our businesses and financial performance. Moreover, we operate in a rapidly changing and competitive environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors.

Further, it is not possible to assess the effect of all risk factors on our businesses or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. In addition, we disclaim any obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of this report.

INTRODUCTION

Executive Summary

We are a holding company that operates multiple insurance and retirement businesses through subsidiary companies. We sell a wide range of wealth protection, accumulation, retirement income and group protection products and solutions through our four business segments:

Annuities;

Retirement Plan Services;

Life Insurance; and

Group Protection

We also have Other Operations, which includes the financial data for operations that are not directly related to the business segments. See “Part I – Item 1. Business” in our ~~2019~~2020 Form 10-K 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 ~~15.~~14. 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)

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from operations will provide investors with a more valuable measure of our performance because it better reveals trends in our businesses.

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We provide information about our segments’ and Other Operations’ operating revenue and expense line items and realized gain (loss), key drivers of changes and historical details underlying the line items below. For factors that could cause actual results to differ materially from those set forth, see “Forward-Looking Statements – Cautionary Language” above and “Part I – Item 1A. Risk Factors” in our ~~2019~~2020 Form ~~10-K and “Part II – Item 1A. Risk Factors” in our Form 10-Q for the quarter ended March 31, 2020.~~10-K.

~~Significant~~Industry trends, significant operational matters ~~industry trends~~ and outlook are described in “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Introduction – Executive Summary” of our ~~2019~~2020 Form 10-K, ~~and this discussion~~which is further updated by the discussion that follows.

~~Impact of~~ COVID-19 Pandemic

The health, economic and business conditions precipitated by the worldwide COVID-19 pandemic that emerged in ~~the United States in the first quarter~~2020 continue to adversely affect our earnings, as well as our business, results of ~~2020~~operations and financial condition. The COVID-19 pandemic led to an extreme downturn in and volatility of the capital markets in the early part of 2020, record-low interest rates and wide-ranging changes in consumer behavior, including as a result of quarantines, shelter-in-place orders and limitations on business activity. The severe restriction in economic activity caused by the COVID-19 pandemic and increased level of unemployment in the United States have contributed to increased volatility and uncertainty regarding expectations for the economy and markets going forward. The National Bureau of Economic Research, a panel of economists charged with officially designating business cycles, announced in June 2020 that a recession began in March 2020, ending the longest expansion period in United States history. Although vaccinations are under way, states have eased restrictions and the capital markets have ~~started to recover,~~recovered, it is unclear when the economy ~~and capital markets~~ will operate under normal ~~or near-normal~~ conditions. The economy has begun to recover from what has been deemed the shortest recession on record in the United States, with recent annualized quarter over quarter gross domestic product reported at 33.1% in the third quarter. However, asBecause the economic and regulatory environment continues to react and evolve, we cannot predict the full impact of the pandemic and ensuing conditions on our business and financial condition. ~~We continue to expect unfavorable~~For expected impacts ~~related to, but not limited~~ to the ~~following areas for the remainder of 2020:~~

~~Mortality and Morbidity~~

Assecond quarter 2021 results as a result of the ~~impacts of the~~ COVID-19 pandemic, ~~we continue to expect higher mortality in~~see “Additional Information” within our ~~Life Insurance and Group Protection segments during the remainder~~segments’ results of ~~2020. We also continue to expect increased disability claims in our Group Protection segment as we anticipate continued morbidity headwinds related to the economic environment.~~

~~Investment Portfolio~~

The economic environment has improved from earlier in 2020 but there could be continued weakness in the current environment, including, but not limited to, lower global energy prices and weaker consumer spending that have contributed to destabilization of the energy and select consumer cyclical industries, leading to increased credit defaults and/or negative ratings migrations, resulting in an increase to our allowance for credit losses and additional write-downs of financial assets for impairments in our broader investment portfolio.

~~Low Interest Rate Environment~~operations sections below.

Because the profitability of some of our business depends in part on interest ~~rate spreads, interest rate fluctuations can negatively affect our profitability. Changes~~rates, changes in interest rates may impact both our ~~profitability from spread businesses~~margins and our return on invested capital. In response to the economic impact of the COVID-19 pandemic, the Federal Reserve cut interest rates to near zero in March 2020 and announced in ~~September 2020~~March 2021 its intention to keep interest rates near zero for the foreseeable future. We expect the continuation of the low interest rate environment to continue to adversely affect the interest margins of our businesses.

We continue to be proactive in our investment strategies, product designs, crediting rate strategies and overall asset-liability practices

to mitigate the risk of unfavorable consequences in this ~~type~~low interest rate environment. For risks related to sustained low interest rates, see “Part I – Item 1A. Risk Factors – Market Conditions – Changes in interest rates and sustained low interest rates may cause interest rate spreads to decrease, impacting our profitability, and make it more challenging to meet certain statutory requirements, and changes in interest rates may also result in increased contract withdrawals” and “Part II – Item 7. Management’s Discussion and Analysis of ~~environment, declines~~Financial Condition and Results of Operations – Introduction – Executive Summary – Significant Operational Matters – Sustained Low Interest Rate Environment” 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. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk” in our 20192020 Form ~~10-K for additional information on interest rate risk.~~

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~~Actions in Response to COVID-19~~10-K.

The economic environment has continued to improve from the early part of 2020, but there could be continued weakness in the current environment as a result of restrictions on economic activity and the increased level of unemployment in the United States. This could impact select corporate industries and parts of the commercial mortgage loan market. The current environment could lead to increased credit defaults and/or negative ratings migrations within our broader investment portfolio. We ~~have taken several actions during 2020~~continue to ~~preserve our liquidity and capital position in response~~closely monitor developments relating to the COVID-19 pandemic.

For more information on the risks related to the COVID-19 pandemic, see “Part I – Item 1A. Risk Factors – Market Conditions – The impacts of the COVID-19 pandemic have adversely affected and ~~ensuing economic~~are expected to continue to adversely affect our business and ~~market conditions. During~~results of operations, and the ~~second~~future impacts of the COVID-19 pandemic on the company’s business, results of operations and ~~third quarters of~~financial condition remain uncertain” in our 2020 we suspended common stock repurchases under our buyback program after repurchasing $225 million of shares in the first quarter of 2020. We plan to resume common stock repurchases in the fourth quarter of 2020.Form 10-K.

~~Debt financing transactions in the first half of 2020 allowed us to redeem our 2021 and prefund our 2022 senior debt maturities, with our next debt maturity not until 2023.~~

While the COVID-19 pandemic caused distribution disruption, we efficiently moved to a virtual sales environment across all of our distribution channels beginning in mid-March 2020. In addition, during 2020, we accelerated a plan already in place, in light of the low interest rate environment, to re-price certain products to achieve appropriate returns, shift our sales mix toward shorter-duration products that are less sensitive to interest rates, and add new products that are more capital efficient while increasing consumer choice and expanding customer value propositions.

We also continue to focus on expense discipline. During the second quarter of 2020, we implemented a plan to significantly reduce expenses in 2020, and we expect to continue to manage expenses aggressively going forward.

Critical Accounting Policies and Estimates

The MD&A included in our ~~2019~~2020 Form 10-K contains a detailed discussion of our critical accounting policies and estimates. The following information updates the “Critical Accounting Policies and Estimates” provided in our ~~2019~~2020 Form 10-K, and therefore, should be read in conjunction with that disclosure.

DAC, VOBA, DSI and DFEL

~~Unlocking~~

As stated in “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates – Unlocking” in our 2019 Form 10-K, we conduct our annual comprehensive review of the assumptions and projection models underlying the amortization of DAC, VOBA, DSI, DFEL, embedded derivatives and reserves for life insurance and annuity products in the third quarter of each year. As a result of this review, we recorded unlocking that resulted in increases and decreases to the carrying values of these items. See “DAC, VOBA, DSI and DFEL” in Note 1 of our 2019 Form 10-K for a detailed discussion of our unlocking process.

~~Details underlying the effect to net income (loss) from our unlocking as a result of our annual comprehensive review (in millions) were as follows:~~

For the Three
Months Ended
September 30,
2020
2019
Income (loss) from operations:
Annuities
$
(101
)
$
(93
)
Retirement Plan Services
(3
)
-
Life Insurance
(440
)
(320
)
Excluded realized gain (loss)
58
3
Net income (loss)
$
(486
)
$
(410
)

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~~Unlocking was driven primarily by the following:~~

~~2020~~

~~As part of our annual comprehensive review in the third quarter, we~~updated our interest rate assumptions. These updates included lowering starting new money rates to reflect the current interest rate environment and reducing our long-term new money investment yield assumption by 50 basis points, resulting in an ultimate long-term assumption of 3.0% for a 10-year U.S. Treasury. As a result of these updates, we recorded unfavorable after-tax unlocking of $361 million for Life Insurance, $140 million for Annuities and $7 million for Retirement Plan Services.

~~For Annuities, unfavorable unlocking was driven by updates to interest rate assumptions, partially offset by favorable updates to policyholder behavior assumptions and other items.~~

~~For Retirement Plan Services, unfavorable unlocking was driven by updates to interest rate assumptions, partially offset by favorable updates to maintenance expense and other items.~~

~~For Life Insurance, unfavorable unlocking was driven by updates to interest rate and policyholder behavior assumptions.~~

~~For excluded realized gain (loss), favorable unlocking was driven by updates to policyholder behavior and separate account fee assumptions,partially offset by unfavorable updates to other items.~~

~~2019~~

~~As part of our annual comprehensive review in the third quarter, we~~updated our interest rate assumptions. These updates included lowering starting new money rates to reflect the current interest rate environment; reducing our long-term new money investment yield assumption by 25 basis points, resulting in an ultimate long-term assumption of 3.5% for a 10-year U.S. Treasury; and extending the grade-in period from current rates to long-term rates from five years to seven years. As a result of these updates, we recorded unfavorable after-tax unlocking of $225 million for Life Insurance, $63 million for Annuities and $3 million for Retirement Plan Services.

~~For Annuities, unfavorable unlocking was driven by updates to interest rate assumptions and other items~~, ~~partially offset by favorable updates to separate account fee and policyholder behavior assumptions.~~

For Retirement Plan Services, unfavorable unlocking impact from updates to interest rate assumptions was entirely offset by favorable updates to separate account fee, maintenance expense and policyholder behavior assumptions.

For Life Insurance, unfavorable unlocking was driven by updates to mortality margin, interest rate and reinsurance assumptions, partially offset by favorable updates to investment allocation and reserve discount rate assumptions and other items.

~~For excluded realized gain (loss), favorable unlocking was driven by updates to capital markets, separate account fee and policyholder behavior assumptions,partially offset by unfavorable updates to other items.~~

Reversion to the Mean

As variable fund returns do not move in a systematic manner, we reset the baseline of account values from which EGPs are projected, which we refer to as our reversion to the mean (“RTM”) process, as discussed in our ~~2019~~2020 Form 10-K.

If we had unlocked our RTM assumption as of ~~September 30, 2020,~~March 31, 2021, we would have recorded favorable unlocking of approximately ~~$140~~$385 million, pre-tax, ~~for~~primarily within our Annuities ~~segment and approximately $20 million, pre-tax, for our Retirement Plan Services segment and unfavorable unlocking of approximately $5 million, pre-tax, for our Life Insurance~~ segment.

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Investments

Investment Valuation

The following summarizes investments on our Consolidated Balance Sheets carried at fair value by pricing source and fair value hierarchy level (in millions) as of ~~September 30, 2020:~~March 31, 2021:



		Quoted											Quoted
		Prices											Prices
		in Active											in Active
	Markets for			Significant								Markets for			Significant
		Identical		Observable			Unobservable						Identical		Observable			Unobservable
		Assets			Inputs			Inputs		Total			Assets			Inputs			Inputs		Total
		(Level 1)			(Level 2)			(Level 3)		Fair Value			(Level 1)			(Level 2)			(Level 3)		Fair Value
Priced by third-party pricing services		$	548		$	103,563		$	231	$	104,342		$	500		$	100,846		$	253	$	101,599
Priced by independent broker quotations			-			-			3,553		3,553			-			-			6,605		6,605
Priced by matrices			-			14,986			-		14,986			-			14,051			-		14,051
Priced by other methods ⁽¹⁾			-			-			3,089		3,089			-			-			3,445		3,445
Total		$	548		$	118,549		$	6,873	$	125,970		$	500		$	114,897		$	10,303	$	125,700

Percent of total			1%			94%			5%		100%			1%			91%			8%		100%

⁽¹⁾Represents primarily securities for which pricing models were used to compute fair value.

For more information about the valuation of our financial instruments carried at fair value, see “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Introduction – Critical Accounting Policies and Estimates – Investments – Investment Valuation” in our ~~2019~~2020 Form 10-K and Note 1413 herein.

~~Write-Downs for Impairment and Allowance for Credit Losses~~

~~As of January 1, 2020, we adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”)~~, ~~which replaced the historical incurred credit loss methodology with an expected credit loss methodology and impacts the way we recognize and measure impairment. See Note 2 for additional information.~~

We regularly review our fixed maturity available-for-sale (“AFS”) securities for declines in fair value that we determine to be an indication of impairment. 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 that are considered temporary 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 write-downs 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 other-than-temporary indicative of an impairment, the security is written down to estimated recovery value. In instances where declines are considered temporary, 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.

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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 there is an impairment of the security. In addition, we review for other indicators of impairment as required by the Investments – Debt and Equity Securities Topic of the Financial Accounting Standards Board Accounting Standards Codification^TM ~~(“ASC”).~~

Write-downs and allowances on commercial mortgage loans, real estate and other investments are established when the underlying value of the property is deemed to be less than the carrying value. All commercial mortgage loans that are impaired are individually reviewed to determine an appropriate allowance for credit losses. 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 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 allowance for credit losses for loans that are deemed to be impaired as well as a general 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

Our accounting policies for derivatives and the potential effect on interest spreads in a falling rate environment are discussed in Note 5 of this report and “Part II – Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our ~~2019~~2020 Form 10-K.

Guaranteed Living Benefits

Within our individual annuity business, ~~60%~~58% and 63% of our variable annuity account values contained guaranteed living benefit (“GLB”) features as of ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively. Underperforming equity markets increase our exposure to potential benefits with the GLB features. A contract with a GLB feature is “in the money” if the contract holder’s account balance falls below the present value of guaranteed withdrawal or income benefits, assuming no lapses. As of ~~September 30,~~March 31, 2021 and 2020, 9% and ~~2019, 21% and 16%~~40%, respectively, of all in-force contracts with a GLB feature were “in the money,” and our exposure, after reinsurance, as of ~~September 30,~~March 31, 2021 and 2020, was $541 million and ~~2019, was $1.2~~$2.5 billion, ~~and $853 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.

For information on our variable annuity hedge program performance, see our discussion in “Realized Gain (Loss) ~~and Benefit Ratio Unlocking~~ – Variable Annuity Net Derivatives Results” below.

For information on 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, see our discussion in “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Introduction – Critical Accounting Policies and Estimates – Derivatives – GLB” in our ~~2019~~2020 Form 10-K.

Acquisitions and Dispositions

For information about acquisitions and dispositions, see Note 3 in our ~~2019~~2020 Form 10-K.

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RESULTS OF CONSOLIDATED OPERATIONS

Details underlying the consolidated results, deposits, net flows and account values (in millions) were as follows:



	For the Three						For the Nine						For the Three
	Months Ended						Months Ended						Months Ended
	September 30,						September 30,						March 31,
	2020			2019			2020			2019			2021			2020
Net Income (Loss)
Income (loss) from operations:
Annuities	$	196		$	169		$	694		$	686		$	290		$	261
Retirement Plan Services		50			44			119			125			57			40
Life Insurance		(311	)		(245	)		(177	)		79			107			171
Group Protection		6			61			85			184			(26	)		40
Other Operations		(74	)		(75	)		(202	)		(201	)		(78	)		(47	)
Excluded realized gain (loss), after-tax		452			(49	)		(156	)		(492	)		(180	)		(60	)
Gain (loss) on early extinguishment of debt, after-tax		-			(33	)		(12	)		(33	)
Benefit ratio unlocking, after-tax		83			(2	)		17			186			55			(349	)
Acquisition and integration costs related to mergers
and acquisitions, after-tax		(4	)		(31	)		(12	)		(80	)
Acquisition and integration costs related to
mergers and acquisitions, after-tax														-			(4	)
Net income (loss)	$	398		$	(161	)	$	356		$	454		$	225		$	52



	For the Three					For the Nine					For the Three
	Months Ended					Months Ended					Months Ended
	September 30,					September 30,					March 31,
	2020			2019		2020			2019		2021			2020
Deposits
Annuities	$	2,539		$	3,461	$	8,751		$	10,623	$	2,814		$	3,697
Retirement Plan Services		2,374			2,234		7,459			6,803		2,640			2,779
Life Insurance		1,537			1,685		4,414			4,907		1,219			1,450
Total deposits	$	6,450		$	7,380	$	20,624		$	22,333	$	6,673		$	7,926

Net Flows
Annuities	$	(283	)	$	253	$	303		$	1,122	$	(776	)	$	528
Retirement Plan Services		362			272		(175	)		199		347			671
Life Insurance		1,156			1,227		3,142			3,464		793			963
Total net flows	$	1,235		$	1,752	$	3,270		$	4,785	$	364		$	2,162



	As of September 30,				As of March 31,
	2020		2019		2021		2020
Account Values
Annuities	$	144,848	$	134,035	$	161,123	$	125,897
Retirement Plan Services		80,571		74,564		91,157		69,636
Life Insurance		55,231		52,229		58,410		51,475
Total account values	$	280,650	$	260,828	$	310,690	$	247,008

Comparison of the Three Months Ended ~~September 30,~~March 31, 2021 to 2020 ~~to 2019~~

Net income increased due primarily to the following:

~~Realized gains in 2020 as compared to realized losses in 2019.~~Less unfavorable variable annuity net derivative results and lower credit loss expense.

~~Investment~~Higher investment income on alternative investments ~~in 2020 as compared to investment losses in 2019.~~

~~Loss on early extinguishment of debt in 2019.~~

~~Lower acquisition~~ and ~~integration costs incurred associated with our 2018 acquisition.~~

~~Aggressively managing expenses in response to the COVID-19 pandemic.~~prepayment and bond make-whole premiums.

Growth in average account values, ~~and~~ business in ~~force.~~force and group earned premiums.

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The increase in net income was partially offset by the following:

Higher benefits ~~driven by unfavorable mortality~~ in our Life Insurance ~~segment~~ and ~~unfavorable experience in our~~ Group Protection ~~segment.~~segments driven by the COVID-19 pandemic.

~~The effect~~Higher expenses associated with deferred compensation plans as a result of ~~unlocking.~~changes in our stock price and incentive compensation resulting from production performance, partially offset by continued focus on expense management.

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Spread compression due to average new money rates trailing our current portfolio yields, partially offset by actions implemented to reduce interest crediting rates.

~~Comparison of the Nine Months Ended September 30, 2020 to 2019~~

~~Net income decreased due primarily to the following:~~

~~Higher benefits driven by unfavorable mortality in our Life Insurance segment and unfavorable experience in our Group Protection segment.~~

~~The effect of unlocking.~~

~~Spread compression due to average new money rates trailing our current portfolio yields, partially offset by actions implemented to reduce interest crediting rates.~~

~~The decrease in net income was partially offset by the following:~~

~~Lower realized losses.~~

~~Lower acquisition and integration costs incurred associated with our 2018 acquisition.~~

~~Aggressively managing expenses in response to the COVID-19 pandemic.~~

~~Investment income on alternative investments in 2020 as compared to investment losses in 2019.~~

~~Lower incentive compensation expense.~~

~~Lower loss on early extinguishment of debt.~~

~~Growth in average account values, business in force and group earned premiums.~~

For adiscussion of the ~~expected and potential~~ impacts of the COVID-19 pandemic, see “~~Introduction~~“Introduction – Executive ~~Summary” above and “Part II – Item 1A.~~ ~~Risk Factors” in our Form 10-Q for the quarter ended March 31, 2020.~~Summary” above.

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RESULTS OF ANNUITIES

Income (Loss) from Operations

Details underlying the results for Annuities (in millions) were as follows:



	For the Three				For the Nine				For the Three
	Months Ended				Months Ended				Months Ended
	September 30,				September 30,				March 31,
	2020		2019		2020		2019		2021		2020
Operating Revenues
Insurance premiums ⁽¹⁾	$	17	$	79	$	92	$	424	$	32	$	53
Fee income		608		596		1,768		1,751		652		593
Net investment income		334		287		929		831		328		326
Operating realized gain (loss) ⁽²⁾		57		51		160		137		50		54
Amortization of deferred gain on
business sold through reinsurance		8		8		24		23		6		8
Other revenues ⁽³⁾		102		96		319		281		136		95
Total operating revenues		1,126		1,117		3,292		3,447		1,204		1,129
Operating Expenses
Interest credited		198		183		582		508		199		192
Benefits⁽¹⁾		261		273		558		775		141		170
Commissions and other expenses		447		476		1,358		1,383		514		465
Total operating expenses		906		932		2,498		2,666		854		827
Income (loss) from operations before taxes		220		185		794		781		350		302
Federal income tax expense (benefit)		24		16		100		95		60		41
Income (loss) from operations	$	196	$	169	$	694	$	686	$	290	$	261

⁽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) ~~and Benefit Ratio Unlocking”~~” below.

⁽³⁾Consists primarily of revenues attributable to broker-dealer services that are subject to market volatility and the net settlement related to certain reinsurance transactions that has a ~~modified coinsurance (“Modco”) reinsurance transaction.~~corresponding offset in net investment income and interest credited.

Comparison of the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2021 to 2020 ~~to 2019~~

Income from operations for this segment increased due primarily to the following:

Higher fee income driven by higher average daily variable account values.

Higher net investment income ~~net of interest credited,~~ driven by investment income on alternative investments within our surplus portfolio ~~in 2020~~ and ~~higher average gross fixed account values.~~

~~Lower commissions~~prepayment and other expenses due to the effect of unlocking, expense management and incentive compensation as a result of production performance, partially offset by higher trail commissions resulting from higher account values.

~~Higher fee income driven by higher average daily variable account values.~~bond make-whole premiums.

The increase in income from operations was partially offset by ~~higher benefits, net of changes in income annuity reserves,~~the following:

Higher commissions and other expenses due to ~~the effect~~trail commissions based on average account values and amortization expense as a result of ~~unlocking, an increase in the growth in benefit reserves driven primarily by equity market performance and an increase in costs associated with our hedge program.~~higher actual gross profits.

Higher federal income tax expense due to unfavorable tax return true-ups driven by the separate account dividends-received deduction (“DRD”).

~~See “Critical Accounting Policies and Estimates – DAC, VOBA, DSI and DFEL – Unlocking” above for more information about unlocking.~~Higher interest credited due to higher average fixed account values.

Additional Information

Strategic near-term actions to re-price certain products and to shift sales from fixed annuity products to respond to the low interest rate environment ~~have contributed~~continued to contribute to lower deposits ~~in 2020~~ and negative net flows ~~for~~in the ~~three months ended September 30, 2020.~~first quarter of 2021. We expect ~~this~~the trend of negative net flows to ~~continue for~~persist in the ~~remainder~~second quarter of ~~2020.~~2021. For ~~more information on~~a discussion of the impacts of the COVID-19 ~~and the actions management is taking to address COVID-19 impacts,~~pandemic, see “Introduction – Executive Summary” above.

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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 full surrenders, deaths and other contract benefits. These outflows as a percentage of average gross account values were 7%8% for the three ~~and nine~~ months ended ~~September 30, 2020, compared to 9% for the corresponding periods in 2019.~~March 31, 2021 and 2020.

Our fixed annuity business includes products with discretionary crediting rates that are reset on an annual basis and are not subject to surrender charges. Our ability to retain 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 the interest rate risk due to falling interest rates, see ~~“Part II – Item 7A. Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk – Interest Rate Risk on Fixed Insurance Businesses – Falling Rates” and~~ “Part I – Item 1A. Risk Factors – Market Conditions – Changes in interest rates and sustained low interest rates may cause interest rate spreads to decrease, impacting our profitability, and make it more challenging to meet certain statutory requirements, and changes in interest rates may also result in increased contract withdrawals” and “Effect of Interest Rate Sensitivity” and “Interest Rate Risk on Fixed Insurance Businesses – Falling Rates” in “Part II – Item 7A. Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk” in our ~~2019~~2020 Form 10-K.

Fee Income

Details underlying fee income, account values and net flows (in millions) were as follows:



	For the Three						For the Nine						For the Three
	Months Ended						Months Ended						Months Ended
	September 30,						September 30,						March 31,
	2020			2019			2020			2019			2021			2020
Fee Income
Mortality, expense and other assessments	$	602		$	592		$	1,753		$	1,735		$	649		$	588
Surrender charges		2			6			13			20			1			7
DFEL:
Deferrals		(7	)		(10	)		(24	)		(29	)		(7	)		(9	)
Amortization, net of interest:
Amortization, net of interest, excluding unlocking		9			8			24			25
Unlocking		2			-			2			-
Amortization, net of interest														9			7
Total fee income	$	608		$	596		$	1,768		$	1,751		$	652		$	593



	As of or For the Three						As of or For the Nine						As of or For the Three
	Months Ended						Months Ended						Months Ended
	September 30,						September 30,						March 31,
	2020			2019			2020			2019			2021			2020
Variable Account Value Information
Variable annuity deposits ⁽¹⁾	$	791		$	1,391		$	3,144		$	3,696		$	1,097		$	1,406
Increases (decreases) in variable annuity account values:
Increases (decreases) in variable annuity
account values:
Net flows ⁽¹⁾		(1,464	)		(1,178	)		(3,548	)		(3,805	)		(1,790	)		(1,145	)
Change in market value ⁽¹⁾		6,004			201			3,311			12,465			4,162			(15,397	)
Contract holder assessments ⁽¹⁾		(647	)		(635	)		(1,888	)		(1,854	)		(684	)		(631	)
Transfers to the variable portion of variable annuity
products from the fixed portion of variable
annuity products		189			385			684			1,446
Transfers to the variable portion
of variable annuity products
from the fixed portion of
variable annuity products														158			263
Variable annuity account values ⁽¹⁾		117,607			112,991			117,607			112,991			130,036			102,136
Average daily variable annuity account values ⁽¹⁾		117,809			113,575			113,905			112,049
Average daily S&P 500 Index ⁽²⁾		3,318			2,958			3,105			2,855
Average daily variable annuity account
values ⁽¹⁾														130,030			114,434
Average daily S&P 500^® Index ⁽²⁾														3,861			3,068

⁽¹⁾Excludes the fixed portion of variable.

⁽²⁾We generally use the ~~Standard & Poor’s (“~~S~~&P”)~~&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 8 for additional information.

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We charge contract holders mortality and expense assessments on variable annuity accounts to cover insurance and administrative expenses. These assessments are a function of the rates priced into the product and the average daily variable account values. Average daily variable account values are driven by net flows and variable fund returns. Charges on GLB riders are assessed based on a contractual rate that is applied either to the account value or the guaranteed amount. We may collect surrender charges when our fixed

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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 “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Realized Gain (Loss) and Benefit Ratio Unlocking – Operating Realized Gain (Loss)” in our ~~2019~~2020 Form 10-K for discussion of these attributed fees.

Net Investment Income and Interest Credited

Details underlying net investment income, interest credited ~~our interest rate spread~~ and fixed account values ~~(dollars in~~(in millions) were as follows:



	For the Three					For the Nine						For the Three
	Months Ended					Months Ended						Months Ended
	September 30,					September 30,						March 31,
	2020		2019			2020			2019			2021			2020
Net Investment Income
Fixed maturity AFS securities, mortgage loans on real estate
and other, net of investment expenses	$	289	$	262		$	830		$	739
Commercial mortgage loan prepayment and bond
make-whole premiums ⁽¹⁾		6		6			13			15
Fixed maturity AFS securities,
mortgage loans on real estate and
other, net of investment expenses												$	276		$	290
Commercial mortgage loan prepayment and
bond make-whole premiums ⁽¹⁾													7			2
Surplus investments ⁽²⁾		39		19			86			77			45			34
Total net investment income	$	334	$	287		$	929		$	831		$	328		$	326

Interest Credited
Amount provided to contract holders	$	190	$	177		$	566		$	504		$	195		$	189
DSI deferrals		-		(3	)		(3	)		(18	)		(1	)		(2	)
Interest credited before DSI amortization		190		174			563			486			194			187
DSI amortization:
Amortization, excluding unlocking		7		6			18			19
Unlocking		1		3			1			3
DSI amortization													5			5
Total interest credited	$	198	$	183		$	582		$	508		$	199		$	192

⁽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.

For the Three
For the Nine
Months Ended
Months Ended
September 30,
September 30,
2020
2019
2020
2019
Interest Rate Spread
Fixed maturity AFS securities, mortgage loans on real estate
and other, net of investment expenses
3.63%
4.04%
3.69%
4.03%
Commercial mortgage loan prepayment and bond
make-whole premiums
0.09%
0.09%
0.07%
0.08%
Net investment income yield on reserves
3.72%
4.13%
3.76%
4.11%
Interest rate credited to contract holders
2.12%
2.46%
2.22%
2.40%
Interest rate spread
1.60%
1.67%
1.54%
1.71%

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	As of or For the Three						As of or For the Nine						As of or For the Three
	Months Ended						Months Ended						Months Ended
	September 30,						September 30,						March 31,
	2020			2019			2020			2019			2021			2020
Fixed Account Value Information
Fixed annuity deposits ⁽¹⁾	$	1,748		$	2,070		$	5,607		$	6,927		$	1,717		$	2,291
Increases (decreases) in fixed annuity account values:
Increases (decreases) in fixed annuity
account values:
Net flows ⁽¹⁾		1,181			1,431			3,851			4,927			1,014			1,673
Contract holder assessments ⁽¹⁾		(17	)		(11	)		(46	)		(31	)		(25	)		(14	)
Transfers from the fixed portion of variable annuity
products to the variable portion of variable
Transfers from the fixed portion
of variable annuity products to
the variable portion of variable
annuity products		(189	)		(385	)		(684	)		(1,446	)		(158	)		(263	)
Reinvested interest credited ⁽¹⁾		586			219			597			946			754			(923	)
Fixed annuity account values ⁽¹⁾⁽²⁾		27,241			21,044			27,241			21,044			31,087			23,761
Average fixed account values ⁽¹⁾⁽²⁾		26,559			20,347			24,998			18,892			30,069			23,488

⁽¹⁾Includes the fixed portion of variable.

⁽²⁾Net of reinsurance ceded.

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 Three
For the Nine
Months Ended
Months Ended
September 30,
September 30,
2020
2019
2020
2019
Benefits
Net death and other benefits, excluding unlocking
$
118
$
169
$
415
$
671
Unlocking
143
104
143
104
Total benefits
$
261
$
273
$
558
$
775

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 guaranteed death benefit and GLB riders. For a corresponding offset of changes in income annuity reserves, see footnote 1 of “Income (Loss) from Operations” above.

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Commissions and Other Expenses

Details underlying commissions and other expenses (in millions) were as follows:



	For the Three						For the Nine						For the Three
	Months Ended						Months Ended						Months Ended
	September 30,						September 30,						March 31,
	2020			2019			2020			2019			2021			2020
Commissions and Other Expenses
Commissions:
Deferrable	$	101		$	156		$	380		$	433		$	111		$	171
Non-deferrable		147			139			425			417			164			140
General and administrative expenses		102			110			312			328			106			111
Inter-segment reimbursement associated with reserve
financing and LOC expenses ⁽¹⁾		1			1			2			3
Inter-segment reimbursement associated
with reserve financing and
LOC expenses ⁽¹⁾														1			1
Taxes, licenses and fees		8			9			26			29			12			10
Total expenses incurred, excluding broker-dealer		359			415			1,145			1,210
Total expenses incurred, excluding
broker-dealer														394			433
DAC deferrals		(118	)		(175	)		(431	)		(484	)		(127	)		(191	)
Total pre-broker-dealer expenses incurred,
excluding amortization, net of interest		241			240			714			726
DAC and VOBA amortization, net of interest:
Amortization, net of interest, excluding unlocking		99			104			295			288
Unlocking		(14	)		12			(14	)		12
Total pre-broker-dealer expenses
incurred, excluding amortization,
net of interest														267			242
DAC and VOBA amortization,
net of interest														111			95
Broker-dealer expenses incurred		121			120			363			357			136			128
Total commissions and other expenses	$	447		$	476		$	1,358		$	1,383
Total commissions and other
expenses													$	514		$	465

DAC Deferrals
As a percentage of sales/deposits		4.6%			5.1%			4.9%			4.6%			4.5%			5.2%

⁽¹⁾Includes reimbursements to Annuities from the Life Insurance segment for reserve financing, net of expenses incurred by Annuities for its use of letters of credit (“LOCs”). The inter-segment amounts are not reported on our Consolidated Statements of Comprehensive Income (Loss).

Commissions and other costs that result directly from and are essential to the successful acquisition of new or renewal business are deferred to the extent recoverable and are amortized over the lives of the contracts in relation to EGPs. Certain types of commissions, such as trail commissions that are based on account values, are expensed as incurred rather than deferred and amortized. Broker-dealer expenses that vary with and are related to sales are expensed as incurred and not deferred and amortized. Fluctuations in these expenses correspond with fluctuations in other revenues.

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RESULTS OF RETIREMENT PLAN SERVICES

Income (Loss) from Operations

Details underlying the results for Retirement Plan Services (in millions) were as follows:



	For the Three				For the Nine				For the Three
	Months Ended				Months Ended				Months Ended
	September 30,				September 30,				March 31,
	2020		2019		2020		2019		2021		2020
Operating Revenues
Fee income	$	65	$	63	$	184	$	187	$	71	$	61
Net investment income		240		229		686		686		248		229
Other revenues ⁽¹⁾		6		6		19		17		8		7
Total operating revenues		311		298		889		890		327		297
Operating Expenses
Interest credited		155		147		458		437		155		150
Benefits		1		1		2		1		1		-
Commissions and other expenses		97		101		294		311		101		102
Total operating expenses		253		249		754		749		257		252
Income (loss) from operations before taxes		58		49		135		141		70		45
Federal income tax expense (benefit)		8		5		16		16		13		5
Income (loss) from operations	$	50	$	44	$	119	$	125	$	57	$	40

⁽¹⁾Consists primarily of mutual fund account program revenues from mid to large employers.

Comparison of the Three Months Ended ~~September 30,~~March 31, 2021 to 2020 ~~to 2019~~

Income from operations for this segment increased due primarily to the following:

~~Lower commissions and other expenses driven by expense management and incentive compensation as a result of production performance, partially offset by the effect of unlocking.~~

Higher net investment income, net of interest credited, driven by investment income on alternative investments within our surplus portfolio ~~in 2020,~~and prepayment and bond make-whole premiums, partially offset by spread compression due to average new money rates trailing our current portfolio yields.

Higher fee income driven by higher average variable account values.



~~Comparison of the Nine Months Ended September 30, 2020 to 2019~~Lower commissions and other expenses driven by expense management.

Income from operations for this segment decreased due primarily to lower net investment income, net of interest credited, driven by spread compression due to average new money rates trailing our current portfolio yields, partially offset by investment income on alternative investments within our surplus portfolio in 2020. The ~~decrease~~increase in income from operations was partially offset by ~~lower commissions and other expenses~~higher federal income tax expense due to unfavorable tax return true-ups driven by ~~expense management and incentive compensation as a result of production performance, partially offset by~~ the ~~effect of unlocking.~~

~~See “Critical Accounting Policies and Estimates – DAC, VOBA, DSI and DFEL – Unlocking” above for information about unlocking.~~separate account DRD.

Additional Information

For a discussion of the ~~expected and potential~~ impacts of the COVID-19 pandemic, see “Introduction – Executive Summary” ~~above and “Part II – Item 1A.~~ ~~Risk Factors” in our Form 10-Q for the quarter ended March 31, 2020.~~above.

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% and ~~13%~~11% for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020, respectively, compared to 11% and 12%, respectively, for the corresponding periods in 2019. During the second quarter of 2020, account values were negatively impacted by two large case terminations in the mid to large market.respectively.

~~Table of Contents~~

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 ~~20%~~19% and ~~22%~~21% as of ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively. Due to this ~~expected~~ 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

Table of Contents

spreads and the interest rate risk due to falling interest rates, see ~~“Item 7A. Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk – Interest Rate Risk on Fixed Insurance Businesses – Falling Rates” and~~ “Part I – Item 1A. Risk Factors – Market Conditions – Changes in interest rates and sustained low interest rates may cause interest rate spreads to decrease, impacting our profitability, and make it more challenging to meet certain statutory requirements, and changes in interest rates may also result in increased contract withdrawals” and “Effect of Interest Rate Sensitivity” and “Interest Rate Risk on Fixed Insurance Businesses – Falling Rates” in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk” in our ~~2019~~2020 Form 10-K.

Fee Income

Details underlying fee income, net flows and account values (in millions) were as follows:



	For the Three				For the Nine				For the Three
	Months Ended				Months Ended				Months Ended
	September 30,				September 30,				March 31,
	2020		2019		2020		2019		2021		2020
Fee Income
Annuity expense assessments	$	47	$	46	$	134	$	137	$	52	$	45
Mutual fund fees		18		17		50		49		19		16
Total expense assessments		65		63		184		186
Surrender charges		-		-		-		1
Total fee income	$	65	$	63	$	184	$	187	$	71	$	61



	For the Three						For the Nine						For the Three
	Months Ended						Months Ended						Months Ended
	September 30,						September 30,						March 31,
	2020			2019			2020			2019			2021			2020
Net Flows By Market
Small market	$	113		$	117		$	284		$	330		$	(28	)	$	141
Mid – large market		500			436			206			685			680			790
Multi-Fund® and other		(251	)		(281	)		(665	)		(816	)		(305	)		(260	)
Total net flows	$	362		$	272		$	(175	)	$	199		$	347		$	671



	As of or For the Three						As of or For the Nine						As of or For the Three
	Months Ended						Months Ended						Months Ended
	September 30,						September 30,						March 31,
	2020			2019			2020			2019			2021			2020
Variable Account Value Information
Variable annuity deposits ⁽¹⁾	$	372		$	488		$	1,246		$	1,409		$	573		$	525
Increases (decreases) in variable annuity account values:
Increases (decreases) in variable annuity
account values:
Net flows ⁽¹⁾		(164	)		(135	)		(268	)		(338	)		(127	)		(51	)
Change in market value ⁽¹⁾		1,101			64			515			2,250			834			(2,974	)
Contract holder assessments ⁽¹⁾		(39	)		(39	)		(114	)		(115	)		(44	)		(40	)
Variable annuity account values ⁽¹⁾		16,744			16,044			16,744			16,044			19,370			13,726
Average daily variable annuity account values ⁽¹⁾		16,715			16,098			15,975			15,796
Average daily S&P 500 Index		3,318			2,958			3,105			2,855
Average daily variable annuity account
values ⁽¹⁾														19,197			16,068
Average daily S&P 500^® Index														3,861			3,068

⁽¹⁾Excludes the fixed portion of variable.

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	As of or For the Three				As of or For the Nine					As of or For the Three
	Months Ended				Months Ended					Months Ended
	September 30,				September 30,					March 31,
	2020		2019		2020			2019		2021		2020
Mutual Fund Account Value Information
Mutual fund deposits	$	1,434	$	1,277	$	4,219		$	4,075	$	1,577	$	1,645
Mutual fund net flows		435		428		(108	)		697		567		678
Mutual fund account values ⁽¹⁾		41,511		38,183		41,511			38,183		48,779		34,575

⁽¹⁾Mutual funds are not included in the separate accounts reported on our Consolidated Balance Sheets as we do not have any ownership interest in them.

We charge expense assessments to cover insurance and administrative expenses. Expense assessments are generally equal to a percentage of the daily variable account values. Average daily account values are driven by net flows and the equity markets. Our ~~expense assessments include~~fee income includes fees we earn for the services that we provide to our mutual fund programs. 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, ~~our interest rate spread~~ and fixed account values ~~(dollars in~~(in millions) were as follows:



	For the Three				For the Nine				For the Three
	Months Ended				Months Ended				Months Ended
	September 30,				September 30,				March 31,
	2020		2019		2020		2019		2021		2020
Net Investment Income
Fixed maturity AFS securities, mortgage loans on real estate
and other, net of investment expenses	$	210	$	209	$	624	$	624
Commercial mortgage loan prepayment and bond
make-whole premiums ⁽¹⁾		6		8		12		14
Fixed maturity AFS securities,
mortgage loans on real estate and
other, net of investment expenses									$	209	$	208
Commercial mortgage loan prepayment and
bond make-whole premiums ⁽¹⁾										10		3
Surplus investments ⁽²⁾		24		12		50		48		29		18
Total net investment income	$	240	$	229	$	686	$	686	$	248	$	229

Interest Credited	$	155	$	147	$	458	$	437	$	155	$	150

⁽¹⁾See “Consolidated Investments – Commercial Mortgage Loan Prepayment and Bond Make-Whole Premiums” below for additional information.

For the Three
For the Nine
Months Ended
Months Ended
September 30,
September 30,
2020
2019
2020
2019
Interest Rate Spread
Fixed maturity AFS securities, mortgage loans on real estate
and other, net of investment expenses
3.82%
4.13%
3.87%
4.15%
Commercial mortgage loan prepayment and bond
make-whole premiums
0.10%
0.16%
0.07%
0.09%
Net investment income yield on reserves
3.92%
4.29%
3.94%
4.24%
Interest rate credited to contract holders
2.81%
2.90%
2.85%
2.91%
Interest rate spread
1.11%
1.39%
1.09%
1.33%

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	As of or For the Three						As of or For the Nine						As of or For the Three
	Months Ended						Months Ended						Months Ended
	September 30,						September 30,						March 31,
	2020			2019			2020			2019			2021			2020
Fixed Account Value Information
Fixed annuity deposits ⁽¹⁾	$	568		$	469		$	1,994		$	1,319		$	490		$	609
Increases (decreases) in fixed annuity account values:
Increases (decreases) in fixed annuity
account values:
Net flows ⁽¹⁾		91			(21	)		201			(160	)		(93	)		44
Reinvested interest credited ⁽¹⁾		155			149			455			436			153			149
Contract holder assessments ⁽¹⁾		(4	)		(3	)		(10	)		(8	)		(3	)		(3	)
Fixed annuity account values ⁽¹⁾		22,316			20,337			22,316			20,337			23,008			21,335
Average fixed account values ⁽¹⁾		22,009			20,177			21,387			20,004			23,016			20,809

⁽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 Three						For the Nine						For the Three
	Months Ended						Months Ended						Months Ended
	September 30,						September 30,						March 31,
	2020			2019			2020			2019			2021			2020
Commissions and Other Expenses
Commissions:
Deferrable	$	1		$	2		$	4		$	4		$	2		$	2
Non-deferrable		18			18			52			56			19			17
General and administrative expenses		71			76			221			234			72			76
Taxes, licenses and fees		3			4			12			14			5			6
Total expenses incurred		93			100			289			308			98			101
DAC deferrals		(4	)		(5	)		(16	)		(15	)		(5	)		(6	)
Total expenses recognized before amortization		89			95			273			293
DAC and VOBA amortization, net of interest:
Amortization, net of interest, excluding unlocking		4			7			17			19
Unlocking		4			(1	)		4			(1	)
Total commissions and other expenses	$	97		$	101		$	294		$	311
Total expenses recognized before
amortization														93			95
DAC and VOBA amortization,
net of interest														8			7
Total commissions and other
expenses													$	101		$	102

DAC Deferrals
As a percentage of annuity sales/deposits		0.4%			0.5%			0.5%			0.5%			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.

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RESULTS OF LIFE INSURANCE

Income (Loss) from Operations

Details underlying the results for Life Insurance (in millions) were as follows:



	For the Three						For the Nine						For the Three
	Months Ended						Months Ended						Months Ended
	September 30,						September 30,						March 31,
	2020			2019			2020			2019			2021			2020
Operating Revenues
Insurance premiums ⁽¹⁾	$	223		$	219		$	676		$	656		$	253		$	224
Fee income		1,141			1,275			2,865			2,985			867			893
Net investment income		761			601			2,035			1,952			809			697
Operating realized gain (loss) ⁽²⁾		-			(1	)		(5	)		(5	)		(2	)		(3	)
Amortization of deferred gain on
business sold through reinsurance		3			-			9			-			3			3
Other revenues		(1	)		4			7			12			9			7
Total operating revenues		2,127			2,098			5,587			5,600			1,939			1,821
Operating Expenses
Interest credited		369			360			1,116			1,069			370			371
Benefits		1,428			1,426			3,465			3,240			1,173			954
Commissions and other expenses		730			630			1,250			1,206			266			287
Total operating expenses		2,527			2,416			5,831			5,515			1,809			1,612
Income (loss) from operations before taxes		(400	)		(318	)		(244	)		85			130			209
Federal income tax expense (benefit)		(89	)		(73	)		(67	)		6			23			38
Income (loss) from operations	$	(311	)	$	(245	)	$	(177	)	$	79		$	107		$	171

⁽¹⁾Includes term insurance premiums, which have a corresponding partial offset in benefits for changes in reserves.

⁽²⁾See “Realized Gain (Loss) ~~and Benefit Ratio Unlocking”~~” below.

Comparison of the Three Months Ended ~~September 30,~~March 31, 2021 to 2020 ~~to 2019~~

~~Loss from operations for this segment increased due primarily to the following:~~

~~Lower fee income due to the effect of unlocking, partially offset by growth in business in force.~~

~~Higher commissions and other expenses due to the effect of unlocking, partially offset by expense management.~~

~~Higher benefits due to unfavorable mortality as a result of impacts of the COVID-19 pandemic and growth in business in force, partially offset by the effect of unlocking.~~

The increase in loss from operations was partially offset by higher net investment income, net of interest credited, driven by investment income on alternative investments, partially offset by spread compression due to average new money rates trailing our current portfolio yields.

~~Comparison of the Nine Months Ended September 30, 2020 to 2019~~

Income from operations for this segment decreased due primarily to the following:

Higher benefits due to unfavorable mortality as a result of impacts of the COVID-19 pandemic and growth in business in ~~force, partially offset by the effect of unlocking.~~force.

Lower fee income due to lower amortization rates as a result of impacts of the ~~effect of unlocking,~~COVID-19 pandemic, partially offset by growth in business in force.

The decrease in income from operations was partially offset by ~~higher~~the following:

Higher net investment income, net of interest credited, driven by investment income on alternative investments, partially offset by spread compression due to average new money rates trailing our current portfolio yields.

Lower commissions and other expenses due to lower amortization rates as a result of impacts of the COVID-19 pandemic and expense management.

~~See “Critical Accounting Policies and Estimates – DAC, VOBA, DSI and DFEL – Unlocking” above for more information about unlocking.~~

~~Table of Contents~~

Strategies to Address Statutory Reserve Strain

Our insurance subsidiaries have statutory surplus and risk-based capital (“RBC”) levels above current regulatory required levels. Term products and other products containing secondary guarantees require reserves calculated pursuant to the Valuation of Life Insurance Policies Model Regulation (“XXX”), Actuarial Guideline 38 (“AG38”) and the principles-based reserving framework. For information on strategies we use to reduce the statutory reserve strain, see “Review of Consolidated Financial Condition – Liquidity and Capital Resources – Sources of Liquidity and Cash Flow – Insurance Subsidiaries’ Statutory Capital and Surplus” below.

Additional Information

Strategic repricing actions to respond to the low interest rate environment ~~have contributed~~continued to contribute to lower sales for the three ~~and nine~~ months ended ~~September 30, 2020, compared to the three and nine months ended September 30, 2019, and we expect this trend to continue for the remainder of 2020.~~March 31, 2021. We ~~also~~ continue to expect elevated mortality ~~during~~to persist in the ~~remainder~~second quarter of ~~2020~~2021 as a result of the impacts of the COVID-19 pandemic. For ~~more information on~~a discussion of the ~~expected and potential~~ impacts ~~to our business,~~of the COVID-19 pandemic, see “Introduction – Executive Summary” above.

Table of Contents

For information on interest rate spreads and the interest rate risk due to falling interest rates, see ~~“Part II – Item 7A. Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk – Interest Rate Risk on Fixed Insurance Businesses – Falling Rates” and~~ “Part I – Item 1A. Risk Factors – Market Conditions – Changes in interest rates and sustained low interest rates may cause interest rate spreads to decrease, impacting our profitability, and make it more challenging to meet certain statutory requirements, and changes in interest rates may also result in increased contract withdrawals” and “Effect of Interest Rate Sensitivity” and “Interest Rate Risk on Fixed Insurance Businesses – Falling Rates” in “Part II – Item 7A. Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk” in our ~~2019~~2020 Form 10-K.

Insurance Premiums

Insurance premiums relate to traditional products and are a function of the rates priced into the product and the level of business in force. Business in force, in turn, is driven by sales, persistency and mortality experience.

Fee Income

Details underlying fee income, sales, net flows, account values and in-force face amount (in millions) were as follows:



	For the Three						For the Nine						For the Three
	Months Ended						Months Ended						Months Ended
	September 30,						September 30,						March 31,
	2020			2019			2020			2019			2021			2020
Fee Income
Cost of insurance assessments	$	592		$	573		$	1,776		$	1,703		$	606		$	591
Expense assessments		382			409			1,125			1,177			354			372
Surrender charges		9			9			25			32			9			9
DFEL:
Deferrals		(255	)		(255	)		(730	)		(704	)		(224	)		(232	)
Amortization, net of interest:
Amortization, net of interest, excluding unlocking		140			113			396			351
Unlocking		273			426			273			426
Amortization, net of interest														122			153
Total fee income	$	1,141		$	1,275		$	2,865		$	2,985		$	867		$	893

~~Table of Contents~~



	For the Three						For the Nine						For the Three
	Months Ended						Months Ended						Months Ended
	September 30,						September 30,						March 31,
	2020			2019			2020			2019			2021			2020
Sales by Product
UL	$	3		$	11		$	17		$	37		$	2		$	9
MoneyGuard®		35			67			106			174
MoneyGuard^®														16			34
IUL		24			37			69			79			16			21
VUL		60			54			157			159			22			44
Term		28			37			100			105			30			35
Total individual life sales		150			206			449			554			86			143
Executive Benefits		36			28			66			81			28			26
Total sales	$	186		$	234		$	515		$	635		$	114		$	169

Net Flows
Deposits	$	1,537		$	1,685		$	4,414		$	4,907		$	1,219		$	1,450
Withdrawals and deaths		(381	)		(458	)		(1,272	)		(1,443	)		(426	)		(487	)
Net flows	$	1,156		$	1,227		$	3,142		$	3,464		$	793		$	963

Contract Holder Assessments	$	1,296		$	1,291		$	3,859		$	3,827		$	1,270		$	1,279

As of September 30,
2020
2019
Account Values
General account
$
37,434
$
36,922
Separate account
17,797
15,307
Total account values
$
55,231
$
52,229
In-Force Face Amount
UL and other
$
358,897
$
348,836
Term insurance
519,173
451,117
Total in-force face amount
$
878,070
$
799,953
For the Three
For the Nine
Months Ended
Months Ended
September 30,
September 30,
2020
2019
2020
2019
Average General Account Values
$
37,770
$
37,220
$
37,776
$
37,099

Table of Contents



	As of March 31,
	2021		2020
Account Values
General account	$	37,417	$	37,405
Separate account		20,993		14,070
Total account values	$	58,410	$	51,475

In-Force Face Amount
UL and other	$	358,044	$	356,889
Term insurance		549,960		486,311
Total in-force face amount	$	908,004	$	843,200



	For the Three
	Months Ended
	March 31,
	2021		2020
Average General Account Values	$	37,844	$	37,802

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. Business in force, in turn, is driven by sales, persistency and mortality experience.

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:

~~MoneyGuard®, our linked-benefit product – 15% of total expected premium deposits;~~

Universal life insurance (“UL”), indexed universal life insurance (“IUL”) and variable universal life insurance (“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 Advantage^{SM (}VUL), 150% of commissionable premiums;

Executive Benefits – single premium bank-owned UL and VUL, 15% of single premium deposits, and corporate-owned UL and VUL, first-year commissionable premiums plus 5% of excess premium received; and

Term – 100% of annualized first-year premiums.

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We monitor the business environment, including but not limited to the regulatory and interest rate environments, and make changes to our product offerings and in-force products as needed, and as permitted under the terms of the policies, to sustain the future profitability of our segment.

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Net Investment Income and Interest Credited

Details underlying net investment income and interest credited (in millions) ~~and our interest rate spread~~ were as follows:



	For the Three					For the Nine					For the Three
	Months Ended					Months Ended					Months Ended
	September 30,					September 30,					March 31,
	2020		2019			2020		2019			2021		2020
Net Investment Income
Fixed maturity AFS securities, mortgage loans on real estate
and other, net of investment expenses	$	636	$	616		$	1,894	$	1,826
Commercial mortgage loan prepayment and bond
make-whole premiums ⁽¹⁾		7		8			19		25
Fixed maturity AFS securities,
mortgage loans on real estate and
other, net of investment expenses											$	644	$	625
Commercial mortgage loan prepayment
and bond make-whole premiums ⁽¹⁾												6		4
Alternative investments ⁽²⁾		88		(52	)		26		(8	)		127		33
Surplus investments ⁽³⁾		30		29			96		109			32		35
Total net investment income	$	761	$	601		$	2,035	$	1,952		$	809	$	697

Interest Credited	$	369	$	360		$	1,116	$	1,069		$	370	$	371

⁽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.

For the Three
For the Nine
Months Ended
Months Ended
September 30,
September 30,
2020
2019
2020
2019
Interest Rate Yields and Spread
Attributable to interest-sensitive products:
Fixed maturity AFS securities, mortgage loans on real estate
and other, net of investment expenses
4.76%
4.86%
4.77%
4.86%
Commercial mortgage loan prepayment and bond
make-whole premiums
0.04%
0.06%
0.05%
0.07%
Alternative investments
0.72%
-0.44%
0.07%
-0.03%
Net investment income yield on reserves
5.52%
4.48%
4.89%
4.90%
Interest rate credited to contract holders
3.75%
3.71%
3.79%
3.69%
Interest rate spread
1.77%
0.77%
1.10%
1.21%

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 the AG38 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 AG38 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.

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Benefits

Details underlying benefits (dollars in millions) were as follows:



	For the Three						For the Nine						For the Three
	Months Ended						Months Ended						Months Ended
	September 30,						September 30,						March 31,
	2020			2019			2020			2019			2021			2020
Benefits
Death claims direct and assumed	$	1,245		$	1,195		$	4,107		$	3,509		$	1,608		$	1,351
Death claims ceded		(424	)		(460	)		(1,520	)		(1,315	)		(608	)		(513	)
Reserves released on death		(152	)		(142	)		(556	)		(452	)		(204	)		(218	)
Net death benefits		669			593			2,031			1,742			796			620
Change in secondary guarantee life insurance product
reserves:
Change in reserves, excluding unlocking		174			157			479			443
Unlocking		112			445			112			445
Change in MoneyGuard® reserves:
Change in reserves, excluding unlocking		119			113			350			329
Unlocking		272			48			272			48
Change in secondary guarantee life
insurance product reserves														171			155
Change in MoneyGuard^® reserves														132			113
Other benefits ⁽¹⁾		82			70			221			233			74			66
Total benefits	$	1,428		$	1,426		$	3,465		$	3,240		$	1,173		$	954

Death claims per $1,000 of in-force		3.07			3.00			3.17			3.01			3.53			2.96

⁽¹⁾Includes primarily changes in reserves and dividends on traditional and other products.

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Benefits for this segment include claims incurred during the period in excess of the associated reserves for its interest-sensitive and traditional products. In addition, benefits include the change in secondary guarantee and linked-benefit life insurance product reserves. These reserves are affected by changes in expected future trends of assessments and benefits causing unlocking adjustments to these liabilities similar to DAC, VOBA and DFEL. Generally, we have higher mortality in the first quarter of the year due to the seasonality of claims. See “Future Contract Benefits and Other Contract Holder Funds” in Note 1 of our ~~2019~~2020 Form 10-K for additional information.

Commissions and Other Expenses

Details underlying commissions and other expenses (in millions) were as follows:



	For the Three						For the Nine						For the Three
	Months Ended						Months Ended						Months Ended
	September 30,						September 30,						March 31,
	2020			2019			2020			2019			2021			2020
Commissions and Other Expenses
Commissions	$	171		$	212		$	535		$	595		$	120		$	191
General and administrative expenses		138			145			412			439			133			141
Expenses associated with reserve financing		25			24			74			70			25			25
Taxes, licenses and fees		46			46			128			131			36			43
Total expenses incurred		380			427			1,149			1,235			314			400
DAC and VOBA deferrals		(202	)		(246	)		(620	)		(697	)		(138	)		(216	)
Total expenses recognized before amortization		178			181			529			538
DAC and VOBA amortization, net of interest:
Amortization, net of interest, excluding unlocking		105			110			272			327
Unlocking		446			338			446			338
Total expenses recognized before
amortization														176			184
DAC and VOBA amortization,
net of interest														89			102
Other intangible amortization		1			1			3			3			1			1
Total commissions and other expenses	$	730		$	630		$	1,250		$	1,206
Total commissions and
other expenses													$	266		$	287

DAC and VOBA Deferrals
As a percentage of sales		108.6%			105.1%			120.4%			109.8%			121.1%			127.8%

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

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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 the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, to the corresponding ~~periods~~period in ~~2019,~~2020, the ~~increase~~decrease was primarily a result of changes in sales mix to products with ~~higher~~lower commission rates.

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RESULTS OF GROUP PROTECTION

Income (Loss) from Operations

Details underlying the results for Group Protection (in millions) were as follows:



	For the Three				For the Nine				For the Three
	Months Ended				Months Ended				Months Ended
	September 30,				September 30,				March 31,
	2020		2019		2020		2019		2021			2020
Operating Revenues
Insurance premiums	$	1,052	$	1,024	$	3,231	$	3,079	$	1,119		$	1,094
Net investment income		88		72		239		226		91			81
Other revenues ⁽¹⁾		44		41		138		125		44			49
Total operating revenues		1,184		1,137		3,608		3,430		1,254			1,224
Operating Expenses
Interest credited		1		2		4		4		1			2
Benefits		875		756		2,580		2,267		970			862
Commissions and other expenses		300		301		916		926		316			310
Total operating expenses		1,176		1,059		3,500		3,197		1,287			1,174
Income (loss) from operations before taxes		8		78		108		233		(33	)		50
Federal income tax expense (benefit)		2		17		23		49		(7	)		10
Income (loss) from operations	$	6	$	61	$	85	$	184	$	(26	)	$	40

⁽¹⁾Consists of revenue from third parties for administrative services performed, which has a corresponding partial offset in commissions and other expenses. ~~In the first quarter of 2020, we recaptured certain disability business that was originally ceded to a third-party reinsurer, which has a corresponding offset in benefits.~~



	For the Three						For the Nine						For the Three
	Months Ended						Months Ended						Months Ended
	September 30,						September 30,						March 31,
	2020			2019			2020			2019			2021			2020
Income (Loss) from Operations by Product Line
Income (Loss) from Operations by
Product Line
Life	$	(37	)	$	22		$	(56	)	$	44		$	(71	)	$	(6	)
Disability		43			40			130			145			48			50
Dental		-			(1	)		11			(5	)		(3	)		(4	)
Income (loss) from operations	$	6		$	61		$	85		$	184		$	(26	)	$	40

Comparison of the Three Months Ended ~~September 30,~~March 31, 2021 to 2020 ~~to 2019~~

Income from operations for this segment decreased due primarily to higher benefits driven by unfavorable experience in our life business ~~and unfavorable reserve adjustments in 2020~~ as ~~compared to favorable reserve adjustments in 2019 due to modifying certain assumptions on~~a result of impacts of the ~~reserves in these businesses.~~COVID-19 pandemic.

The decrease in income from operations was partially offset by the following:

Higher insurance premiums due to favorable ~~persistency.~~persistency and growth in the business.

Higher net investment income, net of interest credited, driven by investment income on alternative investments within our surplus ~~portfolio in 2020.~~

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~~Comparison of the Nine Months Ended September 30, 2020 to 2019~~

Income from operations for this segment decreased due primarily to higher benefits driven by unfavorable experience in our life and disability businesses and unfavorable reserve adjustments in 2020 as compared to favorable reserve adjustments in 2019 due to modifying certain assumptions on the reserves in these businesses, partially offset by lower incidence in our dental business.

~~The decrease in income from operations was partially offset by the following:~~

~~Higher insurance premiums due to favorable persistency.~~

~~Higher net investment income, net of interest credited, driven by investment income on alternative investments within our surplus portfolio in 2020.~~

~~Lower commissions and other expenses driven by expense management and incentive compensation as a result of production performance.~~portfolio.

Additional Information

The total loss ratio for the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, was driven primarily by unfavorable mortality in our life business due ~~primarily~~ to the impacts of the COVID-19 pandemic. In addition, for the nine months ended September 30, 2020, the total loss ratio was unfavorably impacted by higher incidence and new claims severity in our disability business, partially offset by lower incidence in our dental business due to COVID-19. We continue to expect an unfavorable ~~loss ratio~~mortality in our life business ~~for~~in the ~~remainder~~second quarter of ~~2020~~2021 as a result of the impacts of the COVID-19 pandemic. In addition, we ~~anticipate~~believe there is an on-going risk of morbidity headwinds in our disability business related to the economic ~~environment. For more information on~~environment and continued delays in social security approvals in the ~~expected and potential impacts to our business, see “Introduction – Executive Summary” above.~~second quarter of 2021.

For information about the effect of the loss ratio sensitivity on our income (loss) from operations, see “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Group Protection – Additional Information” in our ~~2019~~2020 Form 10-K.

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For information on the effects of current interest rates on our long-term disability claim reserves, see ~~“Item~~“Part II – Item 7A. Quantitative and Qualitative Disclosures About Market Risk – Interest Rate Risk – Effect of Interest Rate Sensitivity” in our ~~2019~~2020 Form 10-K.

Insurance Premiums

Details underlying insurance premiums (in millions) were as follows:



	For the Three				For the Nine				For the Three
	Months Ended				Months Ended				Months Ended
	September 30,				September 30,				March 31,
	2020		2019		2020		2019		2021		2020
Insurance Premiums by Product Line
Life	$	394	$	375	$	1,216	$	1,120	$	410	$	412
Disability		592		576		1,813		1,737		650		613
Dental		66		73		202		222		59		69
Total insurance premiums	$	1,052	$	1,024	$	3,231	$	3,079	$	1,119	$	1,094

Sales by Product Line
Life	$	24	$	131	$	121	$	237	$	41	$	50
Disability		17		96		106		179		28		42
Dental		8		15		29		40		5		10
Total sales	$	49	$	242	$	256	$	456	$	74	$	102

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. ~~When~~The decrease in sales when comparing ~~sales for~~ the three months ended ~~September 30, 2020,~~March 31, 2021, to the corresponding period in ~~2019, the decrease~~2020, was ~~due in part to sales timing and~~primarily driven by the impacts of the COVID-19 pandemic, ~~that~~which resulted in ~~a highly competitive and price-sensitive~~fewer cases going to market.

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Net Investment Income

We use our investment income to offset the earnings effect of the associated build of our reserves, which are a function of our insurance premiums and the yields on our investments.

Benefits and Interest Credited

Details underlying benefits and interest credited (in millions) and loss ratios by product line were as follows:



	For the Three				For the Nine				For the Three
	Months Ended				Months Ended				Months Ended
	September 30,				September 30,				March 31,
	2020		2019		2020		2019		2021		2020
Benefits and Interest Credited by Product Line
Benefits and Interest Credited by
Product Line
Life	$	362	$	265	$	1,028	$	796	$	414	$	327
Disability		468		440		1,431		1,312		512		485
Dental		46		53		125		163		45		52
Total benefits and interest credited	$	876	$	758	$	2,584	$	2,271	$	971	$	864

Loss Ratios by Product Line
Life		91.9%		70.5%		84.5%		71.0%		101.0%		79.4%
Disability		78.9%		76.4%		78.7%		75.6%		78.8%		78.3%
Dental		70.1%		73.4%		61.7%		73.5%		76.8%		74.6%
Total		83.2%		74.1%		79.8%		73.8%		86.8%		78.5%

Generally, we experience higher mortality in the first quarter of the year and higher disability claims in the fourth quarter of the year due to the seasonality of claims. For additional information on our loss ratios, see “Additional Information” above.

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Commissions and Other Expenses

Details underlying commissions and other expenses (in millions) were as follows:



	For the Three						For the Nine						For the Three
	Months Ended						Months Ended						Months Ended
	September 30,						September 30,						March 31,
	2020			2019			2020			2019			2021			2020
Commissions and Other Expenses
Commissions	$	80		$	88		$	264		$	272		$	91		$	87
General and administrative expenses		164			185			500			540			175			168
Taxes, licenses and fees		30			27			91			84			33			32
Total expenses incurred		274			300			855			896			299			287
DAC deferrals		(9	)		(29	)		(50	)		(72	)		(21	)		(19	)
Total expenses recognized before amortization		265			271			805			824
DAC and VOBA amortization, net of interest ⁽¹⁾		26			24			86			85
Total expenses recognized before
amortization														278			268
DAC and VOBA amortization, net of
interest														30			34
Other intangible amortization		9			6			25			17			8			8
Total commissions and other expenses	$	300		$	301		$	916		$	926
Total commissions and
other expenses													$	316		$	310

DAC Deferrals
As a percentage of insurance premiums		0.9%			2.8%			1.5%			2.3%			1.9%			1.7%

Commissions and other costs that result directly from and are essential to the successful acquisition of new or renewal business are deferred to the extent recoverable and are amortized as a level percent of insurance premiums of the related contracts, depending on the block of business. Certain broker commissions that vary with and are related to paid premiums are expensed as incurred rather than deferred and amortized. Generally, we have higher amortization in the first quarter of the year due to a significant number of policies renewing in the quarter. When comparing DAC deferrals as a percentage of insurance premiums for the three months ended September 30, 2020, to the corresponding period in 2019, the decrease was primarily driven by lower sales as a result of the impacts of the COVID-19 pandemic.

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RESULTS OF OTHER OPERATIONS

Income (Loss) from Operations

Details underlying the results for Other Operations (in millions) were as follows:



	For the Three						For the Nine						For the Three
	Months Ended						Months Ended						Months Ended
	September 30,						September 30,						March 31,
	2020			2019			2020			2019			2021			2020
Operating Revenues
Insurance premiums ⁽¹⁾	$	2		$	3		$	9		$	10		$	2		$	2
Net investment income		35			46			116			147			34			42
Other revenues		3			1			6			9			2			(6	)
Total operating revenues		40			50			131			166			38			38
Operating Expenses
Interest credited		9			14			31			44			12			12
Benefits		33			42			80			88			15			16
Other expenses		10			5			24			46			29			(22	)
Interest and debt expense		66			71			203			212			65			68
Strategic digitization expense		20			16			45			47			13			12
Total operating expenses		138			148			383			437			134			86
Income (loss) from operations before taxes		(98	)		(98	)		(252	)		(271	)		(96	)		(48	)
Federal income tax expense (benefit)		(24	)		(23	)		(50	)		(70	)		(18	)		(1	)
Income (loss) from operations	$	(74	)	$	(75	)	$	(202	)	$	(201	)	$	(78	)	$	(47	)

⁽¹⁾Includes our disability income business, which has a corresponding offset in benefits for changes in reserves.

Comparison of the Three Months Ended ~~September 30,~~March 31, 2021 to 2020 ~~to 2019~~

Loss from operations for Other Operations ~~decreased modestly~~increased due primarily to the following:

~~Lower benefits~~Higher other expenses attributable to ~~favorable experience and reserve adjustments~~the effect of changes in our ~~run-off institutional pension business.~~

~~Lower interest and debt expense driven by~~stock price on our deferred compensation plans, as our stock price increased significantly during the first quarter of 2021, compared to a ~~decline in average interest rates.~~

~~The~~significant decrease ~~in loss from operations was partially offset by~~during the ~~following:~~

first quarter of 2020.

Lower net investment income, net of interest credited, related to lower allocated investments driven by a decrease in excess capital retained by Other ~~Operations, partially offset by investment income on alternative investments in 2020.~~

Higher other expenses attributable to increased branding expenses, partially offset by the effect of changes in our stock price on liabilities related to our deferred compensation plans, as our stock price decreased during the third quarter of 2020, compared to a less significant decrease during the third quarter of 2019.

~~Higher strategic digitization expense.~~

~~Comparison of the Nine Months Ended September 30, 2020 to 2019~~

~~Loss from operations for Other Operations increased modestly due primarily to the following:~~

~~Less favorable income tax benefits driven by lower excess tax benefits associated with stock-based compensation and unfavorable market impacts on tax preferred investment income.~~

Lower net investment income, net of interest credited, related to lower allocated investments driven by a decline in excess capital retained by Other Operations, partially offset by investment income on alternative investments in 2020.Operations.

The increase in loss from operations was partially offset by the following:

~~Lower~~More favorable income tax benefits driven by favorable market impacts on tax preferred investment income.

Higher other ~~expenses attributable~~revenues due to the effect of ~~changes in our stock price~~market fluctuations on ~~liabilities related to our deferred~~certain assets held as part of compensation ~~plans, as our stock price decreased significantly~~arrangements, which increased during the ~~nine months ended September 30, 2020,~~first quarter of 2021, compared to ~~an increase~~a decrease during the ~~nine months ended September 30, 2019.~~first quarter of 2020.

~~Lower interest and debt expense driven by a decline in average interest rates.~~

~~Lower benefits attributable to favorable experience and reserve adjustments in our run-off institutional pension business.~~

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Additional Information

For information on our strategic digitization initiative, see “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Introduction – Executive Summary – Significant Operational Matters – Strategic Digitization Initiative” in our ~~2019~~2020 Form 10-K.

Net Investment Income and Interest Credited

We utilize an internal formula to determine the amount of capital that is allocated to our business segments. Investment income on capital in excess of the calculated amounts is reported in Other Operations. If our business segments require increases in statutory reserves, surplus or investments, the amount of excess capital that is retained by Other Operations would decrease and net investment income would be negatively affected.

Write-downs for impairments decrease the recorded value of investments owned by the business segments. These write-downs are not included in the income from operations of our business segments. When impairment occurs, assets are transferred to the business segments’ portfolios and will reduce the future net investment income for Other Operations. Statutory reserve adjustments for our business segments can also cause allocations of investments between the business segments and Other Operations.

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The majority of our interest credited relates to our reinsurance operations sold 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 our consolidated financial statements. The interest credited corresponds to investment income earnings on the assets we continue to hold for this business. There is no effect to income or loss in Other Operations or on a consolidated basis for these amounts because interest earned on the blocks that continue to be reinsured is passed through to Swiss Re in the form of interest credited.

Benefits

Benefits are recognized when incurred for institutional pension products and disability income business.

Other Expenses

Details underlying other expenses (in millions) were as follows:



	For the Three						For the Nine						For the Three
	Months Ended						Months Ended						Months Ended
	September 30,						September 30,						March 31,
	2020			2019			2020			2019			2021			2020
General and administrative expenses:
Branding	$	12		$	8		$	31		$	29		$	8		$	6
Other ⁽¹⁾		2			1			10			29			24			(22	)
Total general and administrative expenses		14			9			41			58			32			(16	)
Taxes, licenses and fees⁽²⁾		(3	)		(1	)		(9	)		(3	)		(2	)		(3	)
Other ⁽³⁾		(1	)		(3	)		(8	)		(9	)		(1	)		(3	)
Total other expenses	$	10		$	5		$	24		$	46		$	29		$	(22	)

⁽¹⁾Includes expenses that are corporate in nature including charitable contributions, the portion of our deferred compensation plan expense attributable to participants’ selection of LNC stock as the measure for their investment return and other expenses not allocated to our business segments.

⁽²⁾Includes state guaranty funds assessments to cover losses to contract holders of insolvent or rehabilitated insurance companies. Mandatory assessments may be partially recovered through a reduction in future premium taxes in some states.

⁽³⁾Consists 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 “Review of Consolidated Financial Condition – Liquidity and Capital Resources – Sources of Liquidity and Cash Flow – Financing Activities” below.

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REALIZED GAIN (LOSS) ~~AND BENEFIT RATIO UNLOCKING~~

Details underlying realized gain (loss), after-DAC ⁽¹⁾ ~~and benefit ratio unlocking~~ (in millions) were as follows:



	For the Three						For the Nine						For the Three
	Months Ended						Months Ended						Months Ended
	September 30,						September 30,						March 31,
	2020			2019			2020			2019			2021			2020
Components of Realized Gain (Loss), Pre-Tax	Components of Realized Gain (Loss), Pre-Tax
Total operating realized gain (loss)	$	57		$	50		$	155		$	132		$	48		$	51
Total excluded realized gain (loss)		572			(61	)		(198	)		(623	)		(229	)		(75	)
Total realized gain (loss), pre-tax	$	629		$	(11	)	$	(43	)	$	(491	)	$	(181	)	$	(24	)

Reconciliation of Excluded Realized Gain (Loss)
Net of Benefit Ratio Unlocking, After-Tax
Total excluded realized gain (loss)	$	452		$	(49	)	$	(156	)	$	(492	)
Benefit ratio unlocking		83			(2	)		17			186
Excluded realized gain (loss) net of benefit
ratio unlocking, after-tax	$	535		$	(51	)	$	(139	)	$	(306	)

Components of Excluded Realized Gain (Loss)
Net of Benefit Ratio Unlocking, After-Tax
Components of Excluded Realized Gain (Loss),
After-Tax
Realized gain (loss) related to certain financial assets	$	51		$	(28	)	$	(130	)	$	(52	)	$	25		$	(68	)
Realized gain (loss) on the mark-to-market on
certain instruments ⁽²⁾		(10	)		19			28			(103	)		19			38
Variable annuity net derivatives results:
Hedge program performance, including unlocking	Hedge program performance, including unlocking
for GLB reserves hedged		12			(65	)		(555	)		(99	)
for GLB reserves hedged and benefit ratio unlocking														(42	)		(496	)
GLB NPR component		464			43			532			14			(144	)		147
Total variable annuity net derivatives results		476			(22	)		(23	)		(85	)		(186	)		(349	)
Indexed annuity forward-starting option		18			(20	)		(14	)		(66	)		17			(30	)
Excluded realized gain (loss) net of benefit
Excluded realized gain (loss) including benefit
ratio unlocking, after-tax	$	535		$	(51	)	$	(139	)	$	(306	)		(125	)		(409	)
Less: benefit ratio unlocking, after tax														55			(349	)
Total excluded realized gain (loss), after-tax													$	(180	)	$	(60	)

⁽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 ~~Modco~~modified coinsurance (“Modco”) investment portfolio includes fixed maturity securities classified as ~~AFS~~available-for-sale (“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 Modco investment portfolio are recorded in realized gain (loss), volatility can occur within net income (loss). See Note 7 for more information.

Comparison of the Three Months Ended ~~September~~March ~~30,~~31, 2021 to 2020 ~~to 2019~~

~~We had higher realized gains due primarily to the following:~~

Favorable variable annuity net derivatives results driven by an update to our non-performance risk (“NPR”) input to the fair value calculation of our GLB embedded derivatives, favorable hedge program performance due to less volatile capital markets and the effect of unlocking.

~~Gains related to certain financial assets due to a decrease in our allowance for credit losses.~~

~~Comparison of the Nine Months Ended September30, 2020 to 2019~~

We had lower realized losses due primarily to the following:

~~Favorable variable~~Variable annuity net derivatives results driven by ~~an update to our NPR input to the fair value calculation of our GLB embedded derivatives and the effect of unlocking, partially offset by~~less unfavorable hedge program performance due to ~~more~~less volatile capital ~~markets.~~markets, partially offset by an unfavorable GLB NPR component due to credit spreads narrowing.

Lower credit loss expense related to certain financial assets.

Gains ~~on the mark-to-market on certain instruments due primarily to favorable changes in the fair value of embedded derivatives~~ related to ~~certain Modco arrangements.~~

~~Table of Contents~~

~~The lower realized losses were partially offset~~our indexed annuity forward-starting option driven by ~~higher realized losses related to certain financial assets due to~~ an increase in ~~our allowance for credit losses.~~discount rates.

The above components of excluded realized gain (loss) are described ~~net of~~including benefit ratio unlocking, after-tax.

~~See “Critical Accounting Policies and Estimates – DAC, VOBA, DSI and DFEL – Unlocking” above for more information about unlocking.~~

Operating Realized Gain (Loss)

See “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Realized Gain (Loss) and Benefit Ratio Unlocking – Operating Realized Gain (Loss)” in our ~~2019~~2020 Form 10-K for a discussion of our operating realized gain (loss).

Realized Gain (Loss) Related to Certain Financial Assets

See “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Realized Gain (Loss) – Realized Gain (Loss) Related to Certain Investments” in our 2019 Form 10-K for a discussion of our realized gain (loss) related to certain financial assets. For ~~additional~~ information on realized gain (loss) related to certain financial assets, see Note ~~13.~~12.

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Realized Gain (Loss) on the Mark-to-Market on Certain Instruments

See “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Realized Gain (Loss) and Benefit Ratio Unlocking – Gain (Loss) on the Mark-to-Market on Certain Instruments” in our ~~2019~~2020 Form 10-K for a discussion of the mark-to-market on certain instruments. We also recognize the mark-to-market on certain commercial mortgage loans on real estate for which we have elected the fair value option. See Note 1413 for additional information.

Variable Annuity Net Derivatives Results

See “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Realized Gain (Loss) and Benefit Ratio Unlocking – Variable Annuity Net Derivatives Results” in our ~~2019~~2020 Form 10-K for a discussion of our variable annuity net derivatives results and how our NPR adjustment is determined.

Details underlying our variable annuity hedging program (dollars in millions) were as follows:



		As of				As of				As of				As of				As of				As of				As of				As of				As of				As of
	September 30,				June 30,				March 31,				December 31,				September 30,				March 31,				December 31,				September 30,				June 30,				March 31,
		2020				2020				2020				2019				2019				2021				2020				2020				2020				2020
Variable annuity hedge program assets (liabilities)		$	4,040			$	4,903			$	6,529			$	1,998			$	3,292			$	640			$	2,284			$	4,040			$	4,903			$	6,529

Variable annuity reserves – asset (liability):
Embedded derivative reserves, pre-NPR ⁽¹⁾		$	(1,543	)		$	(2,498	)		$	(3,968	)		$	620			$	(568	)		$	1,619			$	198			$	(1,543	)		$	(2,498	)		$	(3,968	)
NPR			717				(19	)			99				(120	)			(37	)			101				333				717				(19	)			99
Embedded derivative reserves			(826	)			(2,517	)			(3,869	)			500				(605	)			1,719				531				(826	)			(2,517	)			(3,869	)
Insurance benefit reserves			(1,314	)			(1,239	)			(1,525	)			(958	)			(1,026	)			(1,164	)			(1,150	)			(1,314	)			(1,239	)			(1,525	)
Total variable annuity reserves – asset (liability)		$	(2,140	)		$	(3,756	)		$	(5,394	)		$	(458	)		$	(1,631	)		$	555			$	(619	)		$	(2,140	)		$	(3,756	)		$	(5,394	)

10-year credit default swap ("CDS") spread			1.34%				1.14%				1.56%				1.14%				1.36%				1.28%				1.25%				1.34%				1.14%				1.56%
NPR factor related to 10-year CDS spread			0.80%				0.13%				0.22%				0.13%				0.19%				0.78%				0.70%				0.80%				0.13%				0.22%

⁽¹⁾Embedded derivative reserves in an asset (liability) position indicate ~~that~~ we estimate the present value of future benefits to be less (greater) than the present value of future net valuation premiums.

For information about the effect of changes in the NPR factor on our net income (loss), see “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Realized Gain (Loss) and Benefit Ratio Unlocking – Variable Annuity Net Derivatives Results” in our ~~2019~~2020 Form 10-K.

See “Critical Accounting Policies and Estimates – Derivatives – GLB” above for additional information about our guaranteed benefits.

~~Table of Contents~~

Indexed Annuity Forward-Starting Option

See “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Realized Gain (Loss) and Benefit Ratio Unlocking – Indexed Annuity Forward-Starting Option” in our ~~2019~~2020 Form 10-K for a discussion of our indexed annuity forward-starting option.

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CONSOLIDATED INVESTMENTS

Details underlying our consolidated investment balances (in millions) were as follows:



								Percentage of										Percentage of
								Total Investments										Total Investments
		As of			As of			As of		As of		As of			As of		As of		As of
	September 30,			December 31,			September 30,		December 31,		March 31,			December 31,			March 31,		December 31,
		2020			2019			2020		2019		2021			2020			2021		2020
Investments
Fixed maturity AFS securities		$	118,252		$	105,200		79.1%		78.7%		$	117,313		$	123,044		79.0%		79.9%
Trading securities			4,633			4,673		3.1%		3.5%			4,365			4,501		2.9%		2.9%
Equity securities			122			103		0.1%		0.1%			123			129		0.1%		0.1%
Mortgage loans on real estate			16,541			16,339		11.0%		12.2%			17,255			16,763		11.6%		10.9%
Real estate			10			11		0.0%		0.0%			10			10		0.0%		0.0%
Policy loans			2,527			2,477		1.7%		1.8%			2,502			2,426		1.7%		1.6%
Derivative investments			3,236			1,911		2.2%		1.4%			3,453			3,109		2.3%		2.0%
Alternative investments			1,831			1,821		1.2%		1.4%			2,124			1,944		1.4%		1.3%
Other investments			2,363			1,162		1.6%		0.9%			1,414			2,030		1.0%		1.3%
Total investments		$	149,515		$	133,697		100.0%		100.0%		$	148,559		$	153,956		100.0%		100.0%

Investment Objective

Investments are an integral part of our operations. We follow a balanced approach to investing for both current income and prudent risk management, with an emphasis on generating sufficient current income, net of income tax, to meet our obligations to customers, as well as other general liabilities. This balanced approach requires the evaluation of expected return and risk of each asset class utilized, while still meeting our income objectives. This approach is important to our asset-liability management because decisions can be made based upon both the economic and current investment income considerations affecting assets and liabilities. For a discussion of our risk management process, see “Part II – Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our ~~2019~~2020 Form 10-K.

Investment Portfolio Composition and Diversification

Fundamental to our investment policy is diversification across asset classes. Our investment portfolio, excluding cash and invested cash, is composed of fixed maturity securities, mortgage loans on real estate, real estate (either wholly-owned or in joint ventures) and other long-term investments. We purchase investments for our segmented portfolios that have yield, duration and other characteristics that take into account the liabilities of the products being supported.

We have the ability to maintain our investment holdings throughout credit cycles because of our capital position, the long-term nature of our liabilities and the matching of our portfolios of investment assets with the liabilities of our various products.

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Fixed Maturity and Equity Securities Portfolios

~~In 2020, we adopted ASU 2016-13, which resulted in a new recognition and measurement of credit losses on most financial assets. See Note 2 for additional information.~~ Fixed maturity securities consist of portfolios classified as AFS and trading. Details underlying our fixed maturity AFS securities by industry classification (in millions) are presented in the tables below. These tables agree in total with the presentation of fixed maturity AFS securities in Note 4; however, the categories below represent a more detailed breakout of the fixed maturity AFS portfolio. Therefore, the investment classifications listed below do not agree to the investment categories provided in Note 4.



	As of September 30, 2020									As of March 31, 2021
	Net								%	Net								%
	Amortized		Gross Unrealized				Fair		Fair	Amortized		Gross Unrealized				Fair		Fair
	Cost ⁽¹⁾		Gains		Losses		Value		Value	Cost ⁽¹⁾		Gains		Losses		Value		Value
Fixed Maturity AFS Securities
Industry corporate bonds:
Financial services	$	15,395	$	2,431	$	53	$	17,773	15.0%	$	16,055	$	1,816	$	137	$	17,734	15.1%
Basic industry		4,771		818		8		5,581	4.7%		4,700		650		11		5,339	4.6%
Capital goods		7,373		1,211		32		8,552	7.2%		7,459		852		65		8,246	7.0%
Communications		4,272		908		7		5,173	4.4%		4,371		686		24		5,033	4.3%
Consumer cyclical		5,571		784		26		6,329	5.4%		5,566		526		36		6,056	5.2%
Consumer non-cyclical		15,934		3,009		35		18,908	16.0%		16,795		2,106		188		18,713	16.0%
Energy		5,615		589		118		6,086	5.1%		5,469		596		47		6,018	5.1%
Technology		4,498		671		13		5,156	4.4%		4,903		468		54		5,317	4.5%
Transportation		3,414		531		23		3,922	3.3%		3,421		362		12		3,771	3.2%
Industrial other		1,907		192		12		2,087	1.8%		2,133		135		30		2,238	1.9%
Utilities		13,989		2,911		11		16,889	14.3%		14,123		1,918		65		15,976	13.6%
Government related entities		1,908		382		29		2,261	1.9%		1,871		282		24		2,129	1.8%
Collateralized mortgage and other obligations ("CMOs"):
Agency backed		1,898		236		-		2,134	1.8%		1,862		168		1		2,029	1.7%
Non-agency backed		458		49		-		507	0.4%		418		57		-		475	0.4%
Mortgage pass through securities ("MPTS"):
Agency backed		513		49		-		562	0.5%		539		36		2		573	0.5%
Commercial mortgage-backed securities ("CMBS"):
Agency backed		20		1		-		21	0.1%		20		1		-		21	0.1%
Non-agency backed		1,297		113		1		1,409	1.2%		1,444		67		16		1,495	1.3%
ABS:
Asset-backed securities ("ABS"):
Collateralized loan obligations ("CLOs")		5,077		15		17		5,075	4.3%		6,323		29		23		6,329	5.4%
Credit card		78		29		1		106	0.1%		82		23		1		104	0.1%
Equipment receivables		15		-		-		15	0.0%		16		-		-		16	0.0%
Home equity		321		52		1		372	0.3%		285		51		1		335	0.3%
Manufactured housing		8		1		-		9	0.0%		7		-		-		7	0.0%
Student loans		20		1		-		21	0.0%		14		1		-		15	0.0%
Other		953		42		3		992	0.8%		1,153		39		2		1,190	1.0%
Municipals:
Taxable		5,147		1,497		3		6,641	5.6%		5,363		1,159		34		6,488	5.5%
Tax-exempt		110		23		-		133	0.1%		111		26		-		137	0.1%
Government:
United States		397		99		-		496	0.4%		393		54		3		444	0.4%
Foreign		357		82		3		436	0.4%		428		63		6		485	0.4%
Hybrid and redeemable preferred securities		557		91		42		606	0.5%		528		93		21		600	0.5%
Total fixed maturity AFS securities		101,873		16,817		438		118,252	100.0%		105,852		12,264		803		117,313	100.0%
Trading Securities ⁽²⁾		4,296		416		79		4,633			4,067		358		60		4,365
Equity Securities		140		8		26		122			125		21		23		123
Total fixed maturity AFS, trading and equity securities	$	106,309	$	17,241	$	543	$	123,007		$	110,044	$	12,643	$	886	$	121,801

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	As of December 31, 2019										As of December 31, 2020
			Gross Unrealized							%	Net								%
	Amortized				Losses and			Fair		Fair	Amortized		Gross Unrealized				Fair		Fair
	Cost		Gains		OTTI ⁽³⁾			Value		Value	Cost ⁽¹⁾		Gains		Losses		Value		Value
Fixed Maturity AFS Securities
Industry corporate bonds:
Financial services	$	13,991	$	1,632	$	43		$	15,580	14.8%	$	15,889	$	2,836	$	32	$	18,693	15.2%
Basic industry		4,570		491		6			5,055	4.8%		4,719		992		3		5,708	4.6%
Capital goods		6,700		760		10			7,450	7.1%		7,323		1,402		13		8,712	7.1%
Communications		4,314		654		7			4,961	4.7%		4,331		1,036		4		5,363	4.4%
Consumer cyclical		5,335		536		9			5,862	5.6%		5,707		926		12		6,621	5.4%
Consumer non-cyclical		14,215		1,813		21			16,007	15.2%		16,600		3,412		17		19,995	16.3%
Energy		6,080		649		44			6,685	6.4%		5,605		877		24		6,458	5.2%
Technology		4,039		382		4			4,417	4.2%		4,590		742		7		5,325	4.3%
Transportation		3,283		309		2			3,590	3.4%		3,450		619		12		4,057	3.3%
Industrial other		1,563		98		2			1,659	1.6%		2,082		224		6		2,300	1.9%
Utilities		13,533		1,861		20			15,374	14.6%		14,096		3,198		6		17,288	14.1%
Government related entities		1,794		294		12			2,076	2.0%		1,885		398		14		2,269	1.8%
CMOs:
Agency backed		1,893		108		9			1,992	1.9%		1,874		216		1		2,089	1.7%
Non-agency backed		527		49		(18	)		594	0.6%		433		53		-		486	0.4%
MPTS:
Agency backed		622		33		-			655	0.6%		457		44		-		501	0.4%
CMBS:
Agency backed		20		1		-			21	0.0%		20		1		-		21	0.0%
Non-agency backed		1,018		44		-			1,062	1.0%		1,370		114		-		1,484	1.2%
ABS:
CLOs		3,612		7		8			3,611	3.4%		5,571		23		11		5,583	4.5%
Credit card		78		22		1			99	0.1%		78		31		1		108	0.1%
Equipment receivables		20		1		-			21	0.0%		15		-		-		15	0.0%
Home equity		369		15		(27	)		411	0.4%		303		52		1		354	0.3%
Manufactured housing		9		-		-			9	0.0%		7		1		-		8	0.0%
Student loans		30		1		-			31	0.0%		17		1		-		18	0.0%
Other		692		16		1			707	0.7%		1,050		50		2		1,098	0.9%
Municipals:
Taxable		4,675		1,091		7			5,759	5.5%		5,249		1,532		-		6,781	5.5%
Tax-exempt		103		22		-			125	0.1%		111		29		-		140	0.1%
Government:
United States		384		51		-			435	0.4%		397		88		1		484	0.4%
Foreign		329		64		-			393	0.4%		384		87		1		470	0.4%
Hybrid and redeemable preferred securities		497		82		20			559	0.5%		548		97		30		615	0.5%
Total fixed maturity AFS securities		94,295		11,086		181			105,200	100.0%		104,161		19,081		198		123,044	100.0%
Trading Securities ⁽²⁾		4,330		353		10			4,673			4,072		477		48		4,501
Equity Securities		123		5		25			103			132		21		24		129
Total fixed maturity AFS, trading and equity securities	$	98,748	$	11,444	$	216		$	109,976		$	108,365	$	19,579	$	270	$	127,674

⁽¹⁾Represents amortized cost, net of the allowance for credit losses.

⁽²⁾Certain of our trading securities support our Modco reinsurance agreements and the investment results are passed directly to the reinsurers. Refer to “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Investments – Fixed Maturity and Equity Securities Portfolios – Trading Securities” in our ~~2019~~2020 Form 10-K for further details.

⁽³⁾Other-than-temporary impairment (“OTTI”)includes unrealized (gains) and losses on credit-impaired securities related to changes in the fair value of such securities subsequent to the impairment measurement date.

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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 ~~accumulated other comprehensive income (loss).~~AOCI. For instance, DAC is adjusted upon the recognition of unrealized gains or losses because the amortization of DAC is based upon an assumed emergence of gross profits on certain insurance business. Deferred income tax balances are also adjusted because unrealized gains or losses do not affect actual taxes currently paid.

The quality of our fixed maturity AFS securities portfolio, as measured at estimated fair value and by the percentage of fixed maturity AFS securities invested in various ratings categories, relative to the entire fixed maturity AFS security portfolio (in millions) was as follows:



			As of September 30, 2020					As of December 31, 2019							As of March 31, 2021					As of December 31, 2020
		Rating Agency	Net											Rating Agency	Net						Net
NAIC		Equivalent	Amortized		Fair		% of	Amortized		Fair		% of		Equivalent	Amortized		Fair		% of	Amortized		Fair		% of
Designation ⁽¹⁾		Designation ⁽¹⁾	Cost		Value		Total	Cost		Value		Total		Designation ⁽¹⁾	Cost		Value		Total	Cost		Value		Total

Investment Grade Securities	Investment Grade Securities												Investment Grade Securities
1		AAA / AA / A	$	56,667	$	67,100	56.8%	$	51,367	$	58,235	55.4%		AAA / AA / A	$	58,414	$	65,061	55.5%	$	57,934	$	69,226	56.3%
2		BBB		40,986		46,963	39.7%		39,473		43,460	41.3%		BBB		43,248		47,926	40.8%		41,970		49,390	40.1%
Total investment grade securities	Total investment grade securities			97,653		114,063	96.5%		90,840		101,695	96.7%	Total investment grade securities			101,662		112,987	96.3%		99,904		118,616	96.4%

Below Investment Grade Securities	Below Investment Grade Securities												Below Investment Grade Securities
3		BB		2,997		3,017	2.6%		2,309		2,388	2.3%		BB		2,817		2,981	2.6%		2,959		3,157	2.6%
4		B		1,169		1,116	0.9%		960		955	0.9%		B		1,323		1,291	1.1%		1,249		1,218	1.0%
5		CCC and lower		48		50	0.0%		158		136	0.1%		CCC and lower		48		51	0.0%		46		48	0.0%
6		In or near default		6		6	0.0%		28		26	0.0%		In or near default		2		3	0.0%		3		5	0.0%
Total below investment grade securities	Total below investment grade securities			4,220		4,189	3.5%		3,455		3,505	3.3%	Total below investment grade securities			4,190		4,326	3.7%		4,257		4,428	3.6%
Total fixed maturity AFS securities	Total fixed maturity AFS securities		$	101,873	$	118,252	100.0%	$	94,295	$	105,200	100.0%	Total fixed maturity AFS securities		$	105,852	$	117,313	100.0%	$	104,161	$	123,044	100.0%

Total securities below investment	Total securities below investment												Total securities below investment
grade as a percentage of total	grade as a percentage of total												grade as a percentage of total
fixed maturity AFS securities	fixed maturity AFS securities			4.1%		3.5%			3.7%		3.3%		fixed maturity AFS securities			4.0%		3.7%			4.1%		3.6%

⁽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)~~&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. The average credit quality was A- as of ~~September 30, 2020.~~March 31, 2021.

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 ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019, 81%~~2020, 92% and ~~87%~~78%, respectively, of the total fixed maturity AFS securities in an unrealized loss position were investment grade. Our gross unrealized losses recognized in OCI on fixed maturity AFS securities as of ~~September 30, 2020,~~March 31, 2021, increased by ~~$0.2 billion~~$605 million since December 31, ~~2019.~~2020. 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.

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~~As more fully described in Note 1 in our 2019 Form 10-K and Note 4 herein, we~~We regularly review our ~~investment holdings~~fixed maturity AFS securities for ~~impairment.~~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 ~~September 30, 2020,~~March 31, 2021, did not require an impairment recognized in earnings as (i) we did not intend to sell these fixed maturity AFS securities; (ii) it is not more likely than not that we will be required to sell the fixed maturity AFS securities before recovery of their amortized cost basis; and (iii) the difference in the fair value compared to the amortized cost was due to factors other than credit loss. This conclusion is consistent with our asset-liability management process. Management ~~considers~~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 capital risk limits approved by management; and

Our current financial condition and liquidity demands.

We recognized $2 million of credit loss expense on our fixed maturity AFS securities for the three months ended March 31, 2021. In order to determine the amount of credit loss, 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. To determine the recoverability, ~~of a debt security,~~ we ~~consider~~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 4 and 12 herein and Note 1 to the consolidated financial statements in our 2020 Form 10-K.

As reported on our Consolidated Balance Sheets, we had ~~$152.1~~$149.9 billion of investments and cash, which exceeded the liabilities for our future obligations under insurance policies and contracts, net of amounts recoverable from reinsurers, which totaled ~~$126.0~~$130.3 billion as of ~~September 30, 2020.~~March 31, 2021. If it were necessary to liquidate fixed maturity AFS securities prior to maturity or call to meet cash flow needs, we would first look to those fixed maturity AFS securities that are in an unrealized gain position, which had a fair value of ~~$107.7~~$100.3 billion as of ~~September 30, 2020,~~March 31, 2021, rather than selling fixed maturity AFS securities in an unrealized loss position. The amount of cash that we have on hand at any point in time takes into account our liquidity needs in the future, other sources of cash, such as the maturities of investments, interest and dividends we earn on our investments and the ongoing cash flows from new and existing business.

~~See “Fixed Maturity AFS Securities – Evaluation for Recovery of Amortized Cost” in Note 1 in our 2019 Form 10-K and Note 4 herein for additional discussion.~~

As of ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, the estimated fair value for all private placement securities was ~~$18.3~~$18.7 billion and ~~$17.0~~$19.1 billion, respectively, representing ~~12%~~13% and ~~13%~~12% of total investments, respectively.

Mortgage-Backed Securities (Included in Fixed Maturity AFS and Trading Securities)

See “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Investments – Mortgage-Backed Securities” in our ~~2019~~2020 Form 10-K for a discussion of our mortgage-backed securities.

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The market value of fixed maturity AFS and trading securities backed by subprime loans was ~~$340~~$304 million and represented less than 1% of our total investment portfolio as of ~~September 30, 2020.~~March 31, 2021. Fixed maturity AFS securities represented ~~$326~~$291 million, or 96%, and trading securities represented ~~$14~~$13 million, or 4%, of the subprime exposure as of ~~September 30, 2020.~~March 31, 2021. The table below summarizes our investments in fixed maturity AFS securities backed by pools of residential mortgages (in millions) as of ~~September 30, 2020:~~March 31, 2021:



																Subprime/																									Subprime/
	Agency					Prime					Alt-A					Option ARM ⁽¹⁾					Total					Agency					Prime					Alt-A					Option ARM ⁽¹⁾					Total
	Net					Net					Net					Net					Net					Net					Net					Net					Net					Net
	Amortized		Fair			Amortized		Fair			Amortized		Fair			Amortized		Fair			Amortized		Fair			Amortized		Fair			Amortized		Fair			Amortized		Fair			Amortized		Fair			Amortized		Fair
	Cost			Value		Cost			Value		Cost			Value		Cost			Value		Cost			Value		Cost			Value		Cost			Value		Cost			Value		Cost			Value		Cost			Value
Type
RMBS	$	2,411		$	2,696	$	144		$	158	$	115		$	130	$	199		$	219	$	2,869		$	3,203	$	2,401		$	2,602	$	137		$	152	$	103		$	120	$	178		$	203	$	2,819		$	3,077
ABS home equity		1			1		30			31		39			49		251			291		321			372		1			1		27			28		33			45		224			261		285			335
Total by type ⁽²⁾⁽³⁾	$	2,412		$	2,697	$	174		$	189	$	154		$	179	$	450		$	510	$	3,190		$	3,575	$	2,402		$	2,603	$	164		$	180	$	136		$	165	$	402		$	464	$	3,104		$	3,412

Rating
AAA	$	1,959		$	2,196	$	6		$	6	$	-		$	-	$	2		$	2	$	1,967		$	2,204	$	1,970		$	2,140	$	15		$	14	$	-		$	-	$	4		$	4	$	1,989		$	2,158
AA		453			501		18			19		11			12		8			8		490			540		432			463		17			18		6			7		4			4		459			492
A		-			-		13			13		2			2		41			42		56			57		-			-		10			10		5			5		31			32		46			47
BBB		-			-		3			4		11			11		11			11		25			26		-			-		3			4		12			12		6			6		21			22
BB and below		-			-		134			147		130			154		388			447		652			748		-			-		119			134		113			141		357			418		589			693
Total by rating ^(2)(3)(4)	$	2,412		$	2,697	$	174		$	189	$	154		$	179	$	450		$	510	$	3,190		$	3,575	$	2,402		$	2,603	$	164		$	180	$	136		$	165	$	402		$	464	$	3,104		$	3,412

Origination Year
2010 and prior	$	590		$	672	$	153		$	166	$	153		$	178	$	450		$	510	$	1,346		$	1,526
2011		66			72		-			-		-			-		-			-		66			72
2011 and prior																										$	547		$	618	$	135		$	150	$	136		$	164	$	402		$	464	$	1,220		$	1,396
2012		32			34		-			-		-			-		-			-		32			34		25			26		-			-		-			-		-			-		25			26
2013		178			198		-			-		-			-		-			-		178			198		159			173		-			-		-			-		-			-		159			173
2014		70			83		1			1		-			-		-			-		71			84		71			80		1			1		-			-		-			-		72			81
2015		179			199		15			17		-			-		-			-		194			216		177			192		15			16		-			-		-			-		192			208
2016		573			625		-			-		1			1		-			-		574			626		572			600		-			-		-			1		-			-		572			601
2017		289			324		-			-		-			-		-			-		289			324		290			314		-			-		-			-		-			-		290			314
2018		229			265							-			-		-			-		229			265		235			266		-			-		-			-		-			-		235			266
2019		183			201		1			1		-			-		-			-		184			202		176			187		1			1		-			-		-			-		177			188
2020		23			24		4			4		-			-		-			-		27			28		81			80		3			3		-			-		-			-		84			83
2021																											69			67		9			9		-			-		-			-		78			76
Total by origination
year ⁽²⁾⁽³⁾	$	2,412		$	2,697	$	174		$	189	$	154		$	179	$	450		$	510	$	3,190		$	3,575	$	2,402		$	2,603	$	164		$	180	$	136		$	165	$	402		$	464	$	3,104		$	3,412

Total fixed maturity AFS securities backed by pools of	Total fixed maturity AFS securities backed by pools of																									Total fixed maturity AFS securities backed by pools of
residential mortgages as a percentage of total fixed maturity AFS securities	residential mortgages as a percentage of total fixed maturity AFS securities																					3.1%			3.0%	residential mortgages as a percentage of total fixed maturity AFS securities																					2.9%			2.9%

Total prime, Alt-A and subprime/option ARM as a percentage of total fixed maturity AFS securities	Total prime, Alt-A and subprime/option ARM as a percentage of total fixed maturity AFS securities																					0.8%			0.7%	Total prime, Alt-A and subprime/option ARM as a percentage of total fixed maturity AFS securities																					0.7%			0.7%

⁽¹⁾Includes the net amortized cost and fair value of option adjustable rate mortgages (“ARM”) within RMBS, totaling ~~$166~~$150 million and ~~$184~~$173 million, respectively.

⁽²⁾Does not include the amortized cost of trading securities totaling ~~$137~~$121 million that primarily support our Modco reinsurance agreements because investment results for these agreements are passed directly to the reinsurers. The ~~$137~~$121 million in trading securities consisted of ~~$123~~$108 million prime ~~$1 million Alt-A~~ and $13 million subprime.

⁽³⁾Does not include the fair value of trading securities totaling ~~$143~~$124 million that primarily support our Modco reinsurance agreements because investment results for these agreements are passed directly to the reinsurers. The ~~$143~~$124 million in trading securities consisted of ~~$128~~$111 million prime ~~$1 million Alt-A~~ and ~~$14~~$13 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.

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The following summarizes our investments in fixed maturity AFS securities backed by pools of commercial mortgages (in millions) as of ~~September 30, 2020:~~March 31, 2021:



	Multiple Property				Single Property				Total				Multiple Property				Single Property				Total
	Net				Net				Net				Net				Net				Net
	Amortized		Fair		Amortized		Fair		Amortized		Fair		Amortized		Fair		Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value		Cost		Value		Cost		Value		Cost		Value		Cost		Value
Type
CMBS ⁽¹⁾⁽²⁾	$	1,297	$	1,407	$	20	$	23	$	1,317	$	1,430	$	1,415	$	1,465	$	49	$	51	$	1,464	$	1,516

Rating
AAA	$	1,226	$	1,331	$	4	$	4	$	1,230	$	1,335	$	1,283	$	1,334	$	10	$	11	$	1,293	$	1,345
AA		71		75		11		13		82		88		132		31		34		34		166		65
A		-		-		5		6		5		6		-		-		5		6		5		6
BB and below		-		1		-		-		-		1
Total by rating ^(1)(2)(3)	$	1,297	$	1,407	$	20	$	23	$	1,317	$	1,430	$	1,415	$	1,365	$	49	$	51	$	1,464	$	1,416

Origination Year
2010 and prior	$	12	$	14	$	11	$	14	$	23	$	28
2011		5		5		-		-		5		5
2011 and prior													$	14	$	16	$	11	$	13	$	25	$	29
2012		27		27		-		-		27		27		27		27		-		-		27		27
2013		149		153		-		-		149		153		146		149		-		-		146		149
2014		13		14		-		-		13		14		14		14		-		-		14		14
2015		25		27		-		-		25		27		26		28		-		-		26		28
2016		107		115		4		4		111		119		112		117		4		5		116		122
2017		323		360		-		-		323		360		323		347		-		-		323		347
2018		169		195		-		-		169		195		169		186		-		-		169		186
2019		294		322						294		322		300		310		-		-		300		310
2020		173		175		5		5		178		180		245		233		5		5		250		238
2021														39		38		29		28		68		66
Total by origination year ⁽¹⁾⁽²⁾	$	1,297	$	1,407	$	20	$	23	$	1,317	$	1,430	$	1,415	$	1,465	$	49	$	51	$	1,464	$	1,516

Total fixed maturity AFS securities backed by pools of	Total fixed maturity AFS securities backed by pools of												Total fixed maturity AFS securities backed by pools of
commercial mortgages as a percentage of total fixed maturity AFS securities	commercial mortgages as a percentage of total fixed maturity AFS securities									1.3%		1.2%	commercial mortgages as a percentage of total fixed maturity AFS securities									1.4%		1.3%

⁽¹⁾Does not include the amortized cost of trading securities totaling ~~$157~~$138 million that primarily support our Modco reinsurance agreements because investment results for these agreements are passed directly to the reinsurers. The ~~$157~~$138 million in trading securities consisted of ~~$66~~$56 million of multiple property CMBS and ~~$91~~$82 million of single property CMBS.

⁽²⁾Does not include the fair value of trading securities totaling ~~$142~~$131 million that primarily support our Modco reinsurance agreements because investment results for these agreements are passed directly to the reinsurers. The ~~$142~~$131 million in trading securities consisted of ~~$62~~$55 million of multiple property CMBS and ~~$80~~$76 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 ~~September 30, 2020,~~March 31, 2021, the net amortized cost and fair value of our fixed maturity AFS exposure to monoline insurers was ~~$369~~$358 million and ~~$430~~$400 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.

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The composition by industry categories of all fixed maturity AFS securities in an unrealized loss position (in millions) as of ~~September 30, 2020,~~March 31, 2021, was as follows:



			%			%						%			%
	Net		Net	Gross		Gross			%	Net		Net	Gross		Gross			%
	Amortized		Amortized	Unrealized		Unrealized	Fair		Fair	Amortized		Amortized	Unrealized		Unrealized	Fair		Fair
	Cost		Cost	Losses		Losses	Value		Value	Cost		Cost	Losses		Losses	Value		Value
Independent	$	694	6.3%	$	74	16.9%	$	620	5.9%
Healthcare										$	1,856	10.4%	$	114	14.2%	$	1,742	10.3%
Technology											1,035	5.8%		54	6.7%		981	5.8%
Food and beverage											814	4.6%		46	5.7%		768	4.5%
Banking											1,078	6.1%		40	5.0%		1,038	6.1%
Electric											799	4.5%		37	4.6%		762	4.5%
Local authorities											808	4.5%		35	4.4%		773	4.5%
Industrial – other											562	3.1%		30	3.7%		532	3.2%
Brokerage asset management											457	2.6%		30	3.7%		427	2.5%
Finance companies		387	3.4%		41	9.4%		346	3.3%		160	0.9%		28	3.5%		132	0.8%
Aerospace and defense		349	3.2%		29	6.6%		320	3.0%		440	2.5%		28	3.5%		412	2.4%
Banking		367	3.3%		26	5.9%		341	3.2%
ABS											2,566	14.4%		26	3.2%		2,540	14.9%
Pharmaceuticals											386	2.2%		22	2.7%		364	2.1%
Government owned, no guarantee		121	1.1%		26	5.9%		95	0.9%		174	1.0%		20	2.5%		154	0.9%
Healthcare		781	7.1%		24	5.5%		757	7.2%
Midstream		294	2.7%		22	5.0%		272	2.6%
ABS		3,706	33.6%		21	4.8%		3,685	34.8%
Life											362	2.0%		19	2.4%		343	2.0%
Property and casualty											257	1.4%		19	2.4%		238	1.4%
Integrated		110	1.0%		16	3.7%		94	0.9%		305	1.7%		19	2.4%		286	1.7%
Technology		436	4.0%		13	3.0%		423	4.0%
Industrial – other		378	3.4%		12	2.7%		366	3.4%
Airlines		148	1.3%		12	2.7%		136	1.3%
Transportation services		204	1.9%		11	2.5%		193	1.8%
Property and casualty		105	1.0%		9	2.1%		96	0.9%
Retail		77	0.7%		9	2.1%		68	0.6%
Oil field services		100	0.9%		6	1.4%		94	0.9%
Entertainment		106	1.0%		6	1.4%		100	0.9%
Utility		159	1.4%		6	1.4%		153	1.4%
Leisure		119	1.1%		5	1.1%		114	1.1%
Pharmaceuticals		202	1.8%		5	1.1%		197	1.9%
Manufacturing											488	2.7%		17	2.1%		471	2.8%
Non agency CMBS											387	2.2%		16	2.0%		371	2.2%
Industries with unrealized losses
less than $5 million		2,180	19.8%		65	14.8%		2,115	20.0%		4,859	27.3%		203	25.3%		4,656	27.4%
Total by industry	$	11,023	100.0%	$	438	100.0%	$	10,585	100.0%	$	17,793	100.0%	$	803	100.0%	$	16,990	100.0%

Total by industry as a percentage of
total fixed maturity AFS securities		10.8%			100.0%			9.0%			16.8%			100.0%			14.5%

As of ~~September 30, 2020,~~March 31, 2021, the net amortized cost and fair value of securities subject to enhanced analysis and monitoring for potential changes in unrealized loss position was ~~$37~~$35 million and ~~$35~~$34 million, respectively.

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Mortgage Loans on Real Estate

The following tables summarize key information on mortgage loans on real estate (in millions):



	As of September 30, 2020										As of March 31, 2021
	Commercial			Residential			Total			%	Commercial			Residential			Total			%
Credit Quality Indicator
Current	$	16,013		$	650		$	16,663		99.5%	$	16,661		$	721		$	17,382		99.7%
Delinquent ⁽¹⁾		-			53			53		0.3%		-			31			31		0.2%
Foreclosure ⁽²⁾		-			27			27		0.2%		-			26			26		0.1%
Total mortgage loans on real estate before allowance		16,013			730			16,743		100.0%		16,661			778			17,439		100.0%
Allowance for credit losses		(172	)		(30	)		(202	)			(172	)		(12	)		(184	)
Total mortgage loans on real estate	$	15,841		$	700		$	16,541			$	16,489		$	766		$	17,255

	As of December 31, 2019										As of December 31, 2020
	Commercial			Residential			Total			%	Commercial			Residential			Total			%
Credit Quality Indicator
Current	$	15,606		$	718		$	16,324		99.9%	$	16,230		$	666		$	16,896		99.6%
Delinquent ⁽¹⁾		-			9			9		0.1%		-			42			42		0.2%
Foreclosure ⁽²⁾		-			8			8		0.0%		-			29			29		0.2%
Total mortgage loans on real estate before allowance		15,606			735			16,341		100.0%		16,230			737			16,967		100.0%
Allowance for credit losses		-			(2	)		(2	)			(187	)		(17	)		(204	)
Total mortgage loans on real estate	$	15,606		$	733		$	16,339			$	16,043		$	720		$	16,763

⁽¹⁾As of ~~September 30, 2020, 1~~March 31, 2021, 3 commercial ~~loan~~loans and 9358 residential loans were delinquent. As of December 31, ~~2019, 3~~2020, 2 commercial loans and 2472 residential loans were delinquent.

⁽²⁾As of ~~September 30, 2020,~~March 31, 2021, no commercial mortgage loans and 6755 residential loans were in foreclosure. As of December 31, ~~2019,~~2020, no commercial mortgage loans and 1475 residential mortgage loans were in foreclosure.

As of ~~September 30,~~March 31, 2021, there were 9 specifically identified impaired commercial mortgage loans on real estate with a carrying value $3 million and 74 specifically identified impaired residential mortgage loans on real estate also with an aggregate carrying value of $34 million. As of December 31, 2020, there were 14 specifically identified impaired commercial mortgage loan on real estate with a carrying value of less than $1 million and ~~74 specifically identified impaired residential mortgage loans on real estate also with an aggregate carrying value of $35 million.~~ ~~As of December 31, 2019, there was one specifically identified impaired commercial mortgage loan on real estate with a carrying value of less than $1 million and four~~76 specifically identified impaired residential mortgage loans on real estate with an aggregate carrying value of $1$34 million.

The total outstanding principal and interest on ~~the~~ commercial mortgage loans on real estate that were two or more payments delinquent as of ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, was less than $1 million. The total outstanding principal and interest on the residential mortgage loans on real estate that were three or more payments delinquent as of ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, was ~~$52~~$30 million and $9$41 million, respectively. ~~See Note 4 herein 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			As of			As of
	September 30,			December 31,			March 31,			December 31,
		2020			2019			2021			2020
Segment
Annuities		$	5,790		$	5,453		$	6,250		$	5,934
Retirement Plan Services			4,092			4,096			4,261			4,152
Life Insurance			3,996			4,096			3,980			3,979
Group Protection			1,373			1,361			1,390			1,374
Other Operations			1,290			1,333			1,374			1,324
Total mortgage loans on real estate		$	16,541		$	16,339		$	17,255		$	16,763

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The composition of commercial mortgage loans (in millions) by property type, geographic region and state is shown below:



	As of September 30, 2020				As of September 30, 2020			As of March 31, 2021				As of March 31, 2021
	Carrying				Carrying			Carrying				Carrying
	Value		%		Value		%	Value		%		Value		%
Property Type				State							State
Apartment	$	5,126	32.4%	CA	$	3,794	24.0%	$	5,516	33.4%	CA	$	4,122	25.0%
Office building		3,926	24.8%	TX		1,695	10.7%		3,889	23.6%	TX		1,656	10.0%
Industrial									3,343	20.3%	NY		1,105	6.7%
Retail		2,578	16.3%	NY		1,149	7.3%		2,571	15.6%	FL		786	4.8%
Industrial		2,997	18.9%	FL		783	4.9%
Other commercial		737	4.6%	GA		702	4.4%		707	4.3%	GA		736	4.5%
Hotel/Motel		255	1.6%	MD		701	4.4%
Mixed Use		222	1.4%	WA		578	3.6%
Hotel/motel									245	1.5%	MD		703	4.3%
Mixed use									218	1.3%	PA		657	4.0%
Total	$	15,841	100.0%	TN		568	3.6%	$	16,489	100.0%	WA		599	3.6%
Geographic Region				OH		563	3.6%				TN		563	3.4%
Pacific		4,696	29.6%	PA		539	3.4%		5,042	30.6%	VA		546	3.3%
South Atlantic		3,490	22.0%	VA		496	3.1%		3,570	21.7%	OH		543	3.3%
Middle Atlantic		1,927	12.2%	NC		402	2.5%		2,033	12.3%	AZ		405	2.5%
West South Central		1,840	11.6%	AZ		334	2.1%		1,799	10.9%	NC		402	2.4%
East North Central		1,412	8.9%	IL		327	2.1%		1,403	8.5%	IL		347	2.1%
Mountain		774	4.9%	OR		324	2.1%		870	5.3%	WI		342	2.0%
East South Central		695	4.4%	WI		321	2.0%		688	4.2%	OR		322	1.9%
West North Central		496	3.1%	MA		317	2.0%		556	3.4%	MA		312	1.9%
New England		476	3.1%	Non U.S.		35	0.2%		486	2.9%	Non U.S.		42	0.3%
Non-U.S.		35	0.2%	All other states		2,213	14.0%		42	0.2%	All other states		2,301	14.0%
Total	$	15,841	100.0%	Total	$	15,841	100.0%	$	16,489	100.0%	Total	$	16,489	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 September 30, 2020							As of March 31, 2021
	Commercial		Residential		Total		%	Commercial		Residential		Total		%
Principal Repayment Year
2020	$	152	$	2	$	154	0.9%
2021		939		8		947	5.7%	$	608	$	6	$	614	3.5%
2022		935		9		944	5.6%		998		9		1,007	5.8%
2023		856		9		865	5.2%		869		10		879	5.0%
2024		1,273		10		1,283	7.7%		1,300		11		1,311	7.5%
2025 and thereafter		11,846		669		12,515	74.9%
2025									1,205		11		1,216	7.0%
2026 and thereafter									11,700		708		12,408	71.2%
Total	$	16,001	$	707	$	16,708	100.0%	$	16,680	$	755	$	17,435	100.0%

See Note 4 for information regarding our loan-to-value and debt-service coverage ratios and our allowance for credit losses.

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Alternative Investments

Investment income (loss) on alternative investments by business segment (in millions) was as follows:



	For the Three					For the Nine					For the Three
	Months Ended					Months Ended					Months Ended
	September 30,					September 30,					March 31,
	2020		2019			2020		2019			2021		2020
Annuities	$	14	$	(8	)	$	7	$	(1	)	$	17	$	6
Retirement Plan Services		9		(5	)		5		-			12		4
Life Insurance		88		(61	)		26		(8	)		126		33
Group Protection		9		(5	)		5		-			11		4
Other Operations		3		(2	)		2		-			4		1
Total ⁽¹⁾	$	123	$	(81	)	$	45	$	(9	)	$	170	$	48

⁽¹⁾Includes net investment income on the alternative investments supporting the required statutory surplus of our insurance businesses.

As of ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, alternative investments included investments in ~~271~~279 and ~~258~~271 different partnerships, respectively, and the portfolio represented approximately 1% 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 our Consolidated Balance Sheets.

Non-Income Producing Investments

The carrying amount of fixed maturity securities, mortgage loans on real estate and real estate that were non-income producing as of ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, was ~~$11~~$14 million and $9$13 million, respectively.

‎

~~Table of Contents~~

Net Investment Income

Details underlying net investment income (in millions) and our investment yield were as follows:



	For the Three						For the Nine						For the Three
	Months Ended						Months Ended						Months Ended
	September 30,						September 30,						March 31,
	2020			2019			2020			2019			2021			2020
Net Investment Income
Fixed maturity AFS securities	$	1,085		$	1,066		$	3,237		$	3,211		$	1,101		$	1,075
Trading securities		49			57			150			139			42			54
Equity securities		-			1			2			3
Mortgage loans on real estate		168			164			511			460			169			170
Real estate		-			-			-			1
Policy loans		32			33			94			97			30			30
Invested cash		-			13			13			30			-			11
Commercial mortgage loan prepayment
and bond make-whole premiums ⁽¹⁾		21			26			51			64			27			10
Alternative investments ⁽²⁾		123			(81	)		45			(9	)		170			48
Consent fees		2			2			5			6			2			2
Other investments		19			9			33			23			5			26
Investment income		1,499			1,290			4,141			4,025			1,546			1,426
Investment expense		(41	)		(55	)		(136	)		(183	)		(36	)		(51	)
Net investment income	$	1,458		$	1,235		$	4,005		$	3,842		$	1,510		$	1,375

⁽¹⁾See “Commercial Mortgage Loan Prepayment and Bond Make-Whole Premiums” below for additional information.

⁽²⁾See “Alternative Investments” above for additional information.

Table of Contents



	For the Three		For the Nine
	Months Ended		Months Ended		For the Three
	September 30,		September 30,		Months Ended
	2020	2019	2020	2019	2021	2020
Interest Rate Yield
Fixed maturity AFS securities, mortgage loans on
real estate and other, net of investment expenses	4.09%	4.39%	4.15%	4.36%	3.96%	4.29%
Commercial mortgage loan prepayment and
bond make-whole premiums	0.07%	0.09%	0.05%	0.07%	0.08%	0.03%
Alternative investments	0.38%	-0.28%	0.05%	-0.01%	0.51%	0.16%
Net investment income yield on invested assets	4.54%	4.20%	4.25%	4.42%	4.55%	4.48%

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.

~~Table of Contents~~

~~Impairments on Fixed Maturity AFS Securities~~

See “Critical Accounting Policies and Estimates – Investments – Write-downs for Impairment and Allowances for Credit Losses” above for information on our portfolio management strategy. Details underlying credit loss 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:

For the Three
For the Nine
Months Ended
Months Ended
September 30,
September 30,
2020
2019
2020
2019
Credit Loss Expense Recognized in Net Income (Loss)⁽¹⁾
Fixed maturity AFS securities:
Corporate bonds
$
(2
)
$
(2
)
$
(22
)
$
(13
)
RMBS
-
-
(1
)
(1
)
ABS
1
-
-
(1
)
Gross credit loss expense recognized in net income (loss)
(1
)
(2
)
(23
)
(15
)
Associated amortization of DAC, VOBA, DSI and DFEL
-
-
1
1
Net credit loss expense recognized in net income (loss)
$
(1
)
$
(2
)
$
(22
)
$
(14
)

⁽¹⁾Upon adoption of ASU 2016-13, we recognized credit loss expense incurred and write-downs taken as a result of impairments through net income (loss) for the three and nine months ended September 30, 2020. Prior to the adoption of ASU 2016-13, we recognized write-downs taken as a result of OTTI through net income (loss) for the three and nine months ended September 30, 2019.

The $23 million of impairments recognized in net income during the nine months ended September 30, 2020, were all credit-related impairments. The increase in credit losses was primarily attributable to the destabilization of the energy industry. For more information on current market conditions, see “Introduction – Executive Summary.”

REVIEW OF CONSOLIDATED FINANCIAL CONDITION

Liquidity and Capital Resources

Overview

Liquidity refers to the ability of an enterprise to generate adequate amounts of cash from its normal operations to meet cash requirements with a prudent margin of safety. Our principal sources of cash flow from operating activities are insurance premiums and fees and investment income, while sources of cash ~~flows~~flow from investing activities result from maturities and sales of investments. Our operating activities provided (used) cash of ~~$341~~$(642) million and ~~$(2.9) billion~~$455 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, respectively. The use of cash flows from operating activities for the three months ended March 31, 2021, was attributable primarily to an increase in claim payments driven by the COVID-19 pandemic and ~~2019, respectively.~~the timing of cash receipts and payments. When considering our liquidity and cash flow, 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. The sources of liquidity and cash flow of the holding company are principally comprised of 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 SEC-filed shelf registration statement. These sources of liquidity and cash flow support the general corporate needs of the holding company, including its common stock dividends, interest and debt service, funding of callable securities, securities repurchases, acquisitions and investment in core businesses.

Disruptions, uncertainty or volatility in the capital and credit markets, including any current or future impacts related to the COVID-19 pandemic, may materially affect our business operations and results of operations. These poor market conditions may reduce our insurance subsidiaries’ statutory surplus and RBC requiring them to retain more capital and may pressure their ability to pay dividends to LNC, which may lead us to take steps to preserve or raise additional capital. We monitor and adjust our liquidity and capital plans in light of market conditions, as well as changing needs and opportunities. Available liquidity consists of cash and invested cash, excluding cash held as collateral, and certain short-term investments that can be readily converted into cash. As of ~~September 30, 2020,~~March 31, 2021, the holding company had available liquidity of ~~$756~~$758 million, which includes amounts related to the pre-funding of our $300 million senior notes due 2022. Based on the sources of liquidity and cash flow available to us as discussed below, we currently expect to be able to meet the holding company’s ongoing cash needs and to have sufficient capital to offer downside protection. For factors that could cause actual results to differ materially from those set forth in this section and that could affect our expectations for liquidity and capital, see “Part I – Item 1A. Risk Factors” in our ~~2019~~2020 Form 10-K and “Forward-Looking Statements – Cautionary Language” ~~above and “Part II – Item 1A. Risk Factors” in our Form 10-Q for~~above. For a discussion of the ~~quarter ended March 31, 2020. See also~~impacts of the COVID-19 pandemic, see “Introduction – Executive Summary” ~~for a discussion on the impacts of and actions taken in response to the COVID-19 pandemic.~~above.

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Sources of Liquidity and Cash Flow

Details underlying the primary sources of our holding company cash flows (in millions) were as follows:



	For the Three				For the Nine						For the Three
	Months Ended				Months Ended						Months Ended
	September 30,				September 30,						March 31,
	2020		2019		2020			2019			2021		2020
Dividends from Subsidiaries
The Lincoln National Life Insurance Company	$	80	$	150	$	486		$	550		$	180	$	305
Lincoln Investment Management Company		-		10		-			10
Lincoln National Management Corporation		5		-		5			-
Lincoln National Reinsurance Company (Barbados) Limited		-		40		150			125			75		150
Total dividends from subsidiaries	$	85	$	200	$	641		$	685		$	255	$	455

Loan Repayments and Interest from Subsidiaries
Interest on inter-company notes	$	32	$	54	$	96		$	100		$	29	$	33

Other Cash Flow Items
Amounts received from (paid for taxes on)
stock option exercises and restricted stock, net	$	-	$	-	$	(7	)	$	(10	)	$	9	$	(6	)

The table above focuses on significant and recurring cash flow items and excludes the effects of certain financing activities, namely the periodic issuance and retirement of debt and cash flows related to our inter-company cash management program (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. For information regarding limits on the dividends that our insurance subsidiaries may pay without prior approval, see “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Review of Consolidated Financial Condition – Liquidity and Capital Resources – Restrictions on Subsidiaries’ Dividends and Other Payments” in our ~~2019~~2020 Form 10-K.

Insurance Subsidiaries’ Statutory Capital and Surplus

Our regulatory capital levels are also affected by statutory accounting rules, which are subject to change by each applicable insurance regulator. Our term products and UL products containing secondary guarantees require reserves calculated pursuant to XXX and AG38, respectively. As discussed in “Part I – Item 1A. Risk Factors – Legislative, Regulatory, and Tax – Attempts to mitigate the impact of Regulation XXX and Actuarial Guideline 38 may fail in whole or in part resulting in an adverse effect on our financial condition and result of operations” in our 2019 Form 10-K, ourOur insurance subsidiaries employ strategies to reduce the strain caused by XXX and AG38 by reinsuring the business to reinsurance captives. Our captive reinsurance and reinsurance subsidiaries provide a mechanism for financing a portion of the excess reserve amounts in a more efficient manner. 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 ~~September 30, 2020,~~March 31, 2021, was approximately $2.0 billion of long-dated LOCs issued to support inter-company reinsurance arrangements for UL products containing secondary guarantees ($~~126~~61 million relates to arrangements that will expire in 2024 and $1.9 billion relates to arrangements that will expire by 2031). For information on the LOCs, see the credit facilities table in Note 13 in our ~~2019~~2020 Form 10-K. Our captive reinsurance and reinsurance subsidiaries have also issued long-term notes of $3.6 billion to finance a portion of the excess reserves as of ~~September 30, 2020;~~March 31, 2021; of this amount, $2.6 billion involve exposure to variable interest entities. For information on these long-term notes issued by our captive reinsurance and reinsurance subsidiaries, see Note 4 in our ~~2019~~2020 Form 10-K. 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.

Our captive reinsurance and reinsurance subsidiaries free up capital the insurance subsidiaries can use for any number of purposes, including paying dividends to the holding company. The NAIC’s adoption of the Valuation Manual that defines a principles-based reserving framework for newly issued life insurance policies was effective January 1, 2017. We adopted the framework for our newly issued term business in 2017 and phased in the framework through January 1, 2020, for all other newly issued life insurance products. We continue to analyze the effects of principles-based reserving on the use of captive reinsurance and reinsurance subsidiaries and third-party reinsurance for reserve financing transactions for our life insurance business. For more information on the NAIC’s adoption of principles-based reserving, see “Part I – Item 1. Business – Regulatory – Insurance Regulation” in our 2019 Form 10-K.

Statutory reserves established for variable annuity contracts and riders are sensitive to changes in the equity markets and interest rates, and are affected by the level of account values relative to the level of any guarantees, product design and reinsurance arrangements. As a result, the relationship between reserve changes and equity market performance is non-linear during any given reporting period. Market

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conditions greatly influence the ultimate capital required due to its effect on the valuation of reserves and derivative assets hedging these reserves. We also utilize inter-company reinsurance arrangements to manage our hedge program for variable annuity guarantees.

We implemented the NAIC’s changes to the statutory reserving, capital and accounting framework for variable annuities as of January 1, 2020, which did not have a material impact on our statutory capital position or RBC ratios. The NAIC is also considering modifications to the NAIC RBC C-1 capital charges for bonds, which may impact the level of the C-1 related RBC we are required to hold.

For more information, see “Part I – Item 1A. Risk Factors – Federal Regulation – Changes in accounting standards issued by the Financial Accounting Standards Board or other standard-setting bodies may adversely affect our financial statements” in our 2019 Form 10-K.

We continue to analyze the use of our existing captive reinsurance structures, as well as additional third-party reinsurance arrangements, and our current hedging strategies relative to managing the effects of equity markets and interest rates on the statutory reserves, statutory capital and the dividend capacity of our life insurance subsidiaries.

Financing Activities

Although our subsidiaries currently generate adequate cash flow to meet the needs of our normal operations, periodically we may issue debt or equity securities to maintain ratings and increase liquidity, as well as to fund internal growth, acquisitions and the retirement of our debt and equity securities.

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.

Table of Contents

Details underlying debt and financing activities (in millions) for the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, were as follows:



					Maturities,				Change												Maturities,			Change
					Repayments				in Fair												Repayments			in Fair
	Beginning				and				Value			Other			Ending		Beginning				and			Value				Other			Ending
	Balance		Issuance		Refinancing				Hedges		Changes ⁽¹⁾				Balance		Balance		Issuance		Refinancing			Hedges			Changes ⁽¹⁾				Balance
Short-Term Debt
Current maturities of long-term debt	$	300	$	-		$	(300	)	$	-		$	-		$	-	$	-	$	-		$	-	$	-			$	300		$	300

Long-Term Debt
Senior notes	$	4,610	$	800		$	(296	)	$	150		$	(7	)	$	5,257	$	5,225	$	-		$	-	$	(85	)		$	(303	)	$	4,837
Bank borrowings		250		500			(500	)		-			(1	)		249		249		-			-		-				-			249
Capital securities ⁽²⁾		1,207		-			-			-			1			1,208		1,208		-			-		-				-			1,208
Total long-term debt	$	6,067	$	1,300		$	(796	)	$	150		$	(7	)	$	6,714	$	6,682	$	-		$	-	$	(85	)		$	(303	)	$	6,294

⁽¹⁾Includes the non-cash reclassification of long-term debt to current maturities of long-term debt, accretion (amortization) of discounts and premiums, amortization of debt issuance costs and amortization of adjustments from discontinued hedges, as applicable.

⁽²⁾To hedge the variability in rates, we purchased interest rate swaps to lock in a fixed rate of approximately 5% over the remaining terms of the capital securities.

During March 2020, we entered into a $500 million floating-rate loan maturing on March 30, 2022 (the “2022 Term Loan”). In addition, during March 2020, we unwound the fair value hedge on our 7.00% senior notes due 2040 and entered into two fair value hedges on the same notes, which generated capital deployed for general corporate purposes. On May 15, 2020, we completed the issuance and sale of $500 million aggregate principal amount of our 3.40% senior notes due 2031 and $300 million aggregate principal amount of our 4.375% senior notes due 2050. We used the net proceeds from the offering to fund the redemption of our $296 million 4.85% senior notes due 2021 and to repay the 2022 Term Loan.

For ~~more~~additional information about our short-term and long-term debt ~~including the discontinued fair value hedge,~~ and our credit facilities, ~~and LOCs,~~ see ~~Note 10 herein and~~ Note 13 in our ~~2019~~2020 Form 10-K.

We have not accounted for securities lending transactions or other transactions involving the transfer of financial assets with an obligation to repurchase the transferred assets as sales. For information about our collateralized financing transactions on our investments, see “Payables for Collateral on Investments” in Note 4.

If current credit ratings or claims-paying 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 The Lincoln National Life Insurance Company (“LNL”) if its financial strength ratings drop below BBB-/Baa3 (S&P/Moody’s). Our long-term senior debt held a

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rating of A-/Baa1 (S&P/Moody’s) as of ~~September 30, 2020.~~March 31, 2021. In addition, contractual selling agreements with intermediaries could be negatively affected, which could have an adverse effect on overall sales of annuities, life insurance and investment products. See “Part I – Item 1A. Risk Factors – Liquidity and Capital Position – A decrease in the capital and surplus of our insurance subsidiaries may result in a downgrade to our credit and insurer financial strength ratings” and “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” in our ~~2019~~2020 Form 10-K for more information. See “Part I – Item 1. Business – Financial Strength Ratings” in our ~~2019~~2020 Form 10-K for additional information on our ~~current~~ financial strength ratings.

~~See~~For information on our credit ratings, see “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Review of Consolidated Financial Condition – Liquidity and Capital Resources – Financing Activities” in our ~~2019~~2020 Form ~~10-K for information on our credit ratings.~~10-K.

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 ~~September 30, 2020,~~March 31, 2021, the holding company had a net outstanding receivable (payable) of ~~$(1.1) billion~~$34 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. The holding company had an average borrowing balance of $1.2 billion from the cash management program during the third quarter of 2020. The holding company had a maximum and minimum amount of financing from the cash management program during the third quarter of 2020 of $1.3 billion and $1.1 billion, respectively. Loans under the cash management program are permitted under applicable insurance laws subject to certain restrictions. For our Indiana and New Hampshire-domiciled insurance subsidiaries, 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.

~~During August 2020,~~ 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. For additional ~~details,~~information, see Note ~~10.~~13 in our 2020 Form 10-K.

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Federal Home Loan Bank

~~Our insurance subsidiaries, by virtue of their general account fixed-income investment holdings, can access liquidity through securities lending programs and repurchase agreements.~~ 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 ~~September 30, 2020,~~March 31, 2021, LNL had an estimated maximum borrowing capacity of $7.0 billion under the FHLBI facility and maximum available borrowing based on qualifying assets of ~~$4.3~~$4.4 billion. ~~In October 2020,~~As of March 31, 2021, LNL had outstanding borrowings of $4.2 billion under this facility reported within payables for collateral on investments on the Consolidated Balance Sheets. Lincoln Life & Annuity Company of New York (“LLANY”) ~~became~~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 ~~September 30, 2020,~~March 31, 2021, LLANY had no outstanding borrowings under this facility. For additional information, see “Payables for Collateral on Investments” in Note 4.

Securities Lending Programs and Repurchase Agreements

Our insurance subsidiaries, by virtue of their general account fixed-income investment holdings, can access liquidity through securities lending programs and repurchase agreements. As of March 31, 2021, our insurance subsidiaries had ~~investments~~securities pledged under securities lending agreements with a carrying value of ~~$3.3 billion out on loan.~~$145 million. In addition, our insurance subsidiaries had access to $750 million through a committed repurchase agreement. The cash received in our securities lending programs and repurchase agreements is typically invested in cash and invested cash ~~short-term investments~~ or fixed maturity AFS securities. For additional ~~details,~~information, see “Payables for Collateral on Investments” in Note 4.

~~Cash Flows from~~ Collateral on ~~Derivatives~~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 ~~the value~~ of March 31, 2021, we were in a derivative asset decreases (or increases), the collateral required to be posted by our counterparties would also decrease (or increase). Likewise, when the value of a derivative liability decreases (or increases), the collateral we are required to post to our counterparties would also decrease (or increase). For the nine months ended September 30, 2020, ournet collateral payable ~~for derivative investments increased due primarily~~position of $2.2 billion compared to ~~decreasing interest rates that increased the fair values~~$1.9 billion as of ~~our associated over-the-counter derivative investments.~~December 31, 2020. In the event of adverse changes in fair value of our derivative instruments, we may need to post collateral with a ~~counterparty if our net derivative liability position reaches certain contractual levels.~~counterparty. If we do not have sufficient high quality securities or cash and invested cash to provide as collateral, we have committed liquidity sources inthrough 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 ~~those~~these facilities, we have the facility agreement for senior notes issuance, the FHLB facilities and the repurchase agreements discussed above ~~of approximately $2.0 billion~~as well as the five-year revolving credit facility discussed in Note 13 in our 2020 Form 10-K to leverage that would be eligible for collateral posting. For additional information, see “Credit Risk” in Note 5.

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Uses of Capital

Our principal uses of cash are to pay policy claims and benefits, operating expenses, commissions and taxes, to purchase new investments, to purchase reinsurance, to fund policy surrenders and withdrawals, to pay dividends to our stockholders, to repurchase our stock and to repay debt.

Return of Capital to Common Stockholders

One of the Company’s primary goals is to provide a return to our common stockholders through share price accretion, dividends and stock repurchases. In determining dividends, the Board of Directors takes into consideration items such as current and expected earnings, capital needs, rating agency considerations and requirements for financial flexibility. ~~On November 3, 2020, our Board of Directors approved an increase to the quarterly dividend on our common stock from $0.40 to $0.42 per share.~~ The amount and timing of share repurchases depends on key capital ratios, rating agency expectations, the generation of free cash flow and an evaluation of the costs and benefits associated with alternative uses of capital. Free cash flow for the holding company generally represents the amount of dividends and interest received from subsidiaries less interest paid on debt. ~~During the second and third quarters of 2020, we suspended common stock repurchases under our buyback program. We plan to resume common stock repurchases in the fourth quarter of 2020.~~ For ~~more~~additional information regarding share repurchases, see ~~“Introduction – Executive Summary” above and~~ “Part II – Item 2(c)” below.

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Details underlying this activity (in millions) were as follows:



	For the Three				For the Nine				For the Three
	Months Ended				Months Ended				Months Ended
	September 30,				September 30,				March 31,
	2020		2019		2020		2019		2021		2020
Dividends to common stockholders	$	77	$	74	$	233	$	225	$	81	$	79
Repurchase of common stock		-		150		225		540		105		225
Total cash returned to stockholders	$	77	$	224	$	458	$	765	$	186	$	304

Number of shares repurchased		-		2.5		3.8		8.7		1.9		3.8

Other Uses of Capital

In addition to the amounts in the table above in “Return of Capital to Common Stockholders,” other uses of holding company cash flow (in millions) were as follows:



	For the Three				For the Nine				For the Three
	Months Ended				Months Ended				Months Ended
	September 30,				September 30,				March 31,
	2020		2019		2020		2019		2021		2020
Debt service (interest paid)	$	62	$	67	$	202	$	212	$	69	$	60
Capital contribution to subsidiaries		-		-		475		-		65		475
Total	$	62	$	67	$	677	$	212	$	134	$	535

The above table focuses on significant and recurring cash flow items and excludes the effects of certain financing activities, namely the periodic retirement of debt and cash flows related to our inter-company cash management account. 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.

~~Off-Balance Sheet Arrangements~~

During August 2020, LNC entered into a facility agreement 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. The issuance right will be exercised automatically in full upon our failure to make certain payments to the trust, if the failure to pay is not cured within 30 days, or upon certain bankruptcy events involving LNC. We are also required to exercise the issuance right in full if our consolidated stockholders’ equity (excluding AOCI) falls below $2.75 billion, subject to adjustment from time to time in certain cases, and upon certain other events described in the facility agreement. For more information, see Note 10.

Item 3. 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. 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. For information on these market risks, see “Item 7A.

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Quantitative and Qualitative Disclosures About Market Risk” in our ~~2019~~2020 Form 10-K. See also “Part I – Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Introduction – Executive Summary” ~~herein.~~above.

Item 4. Controls and Procedures

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.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended ~~September 30, 2020,~~March 31, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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

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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.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

~~Reference~~Information regarding reportable legal proceedings is ~~made to~~ ~~Hanks v. Lincoln Life & Annuity Company of New York (“LLANY”) and Voya Retirement Insurance and Annuity Company (“Voya”), previously disclosed~~contained in our Annual Report on Form 10-K for the year ended December 31, 2019. On September 30, 2020, the court denied plaintiff’s motion for summary judgment and granted in part Voya’s motion for summary judgment. The court has not yet set a trial date, and we continue to vigorously defend this action.

~~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. We are vigorously defending this matter.

~~See~~ Note 1110 in “Part I – Item ~~1” above for further discussion regarding these and other contingencies.~~1.”

Item 1A. Risk Factors

In addition to the factors set forth in “Part I – Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Forward-Looking Statements – Cautionary ~~Language” above,~~Language,” you should carefully consider the risks described under “Part I – Item 1A. Risk Factors” in our Form 10-K for the year ended December ~~31, 2019, and “Part II – Item 1A. Risk Factors” in our Form 10-Q for the quarter ended March~~ 31, 2020. Such risks and uncertainties 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.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(c) The following ~~table~~ summarizes purchases of equity securities by the Company during the quarter ended ~~September 30, 2020~~March 31, 2021 (dollars in millions, except per share data):

(c) Total Number
(d) Approximate Dollar
(a) Total
of Shares
Value of Shares
Number
(b) Average
Purchased as Part of
that May Yet Be
of Shares
Price Paid
Publicly Announced
Purchased Under the
Period
Purchased ⁽¹⁾
per Share
Plans or Programs ⁽²⁾
Plans or Programs ⁽²⁾
7/1/20 – 7/31/20
-
-
-
$
1,239
8/1/20 – 8/31/20
-
-
-
1,239
9/1/20 – 9/30/20
-
-
-
1,239



					(c) Total Number		(d) Approximate Dollar
	(a) Total				of Shares		Value of Shares
	Number		(b) Average		Purchased as Part of		that May Yet Be
	of Shares		Price Paid		Publicly Announced		Purchased Under the
Period	Purchased ⁽¹⁾		per Share		Plans or Programs ⁽²⁾		Plans or Programs ⁽²⁾
1/1/21 – 1/31/21		-	$	-		-	$	1,189

2/1/21 – 2/28/21		1,212,973		53.91		1,212,973		1,124

3/1/21 – 3/31/21		678,664		58.42		678,664		1,084

⁽¹⁾NoOf the total number of shares purchased, no shares were ~~repurchased by~~received in connection with the ~~Company in~~exercise of stock options and related taxes. For the ~~third~~ quarter ended March 31, 2021, there were 1,891,637 shares purchased as part of ~~2020. Repurchases under our existing authorization were temporarily suspended during the second and third quarters of 2020.~~publicly announced plans or programs.

⁽²⁾On February 19, 2020, our Board of Directors authorized an increase in our securities repurchase authorization, bringing the total aggregate repurchase authorization to $1.66 billion. As of ~~September 30, 2020,~~March 31, 2021, our remaining security repurchase authorization was ~~$1.2~~$1.1 billion. 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. Exhibits

The Exhibits included in this report are listed in the Exhibit Index beginning on page ~~106,~~89, which is incorporated herein by reference.

‎

~~105~~88

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LINCOLN NATIONAL CORPORATION

Exhibit Index for the Report on Form 10-Q

For the Quarter Ended ~~September 30, 2020~~March 31, 2021



~~3.1~~	~~Amended and Restated Bylaws of the Company (effective August 19, 2020) incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K (File No. 1-6028) filed with the SEC on August 20, 2020.~~
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~2002.
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

‎

~~106~~89

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		LINCOLN NATIONAL CORPORATION

	By:	/s/ RANDAL J. FREITAG
		Randal J. Freitag Executive Vice President and Chief Financial Officer

	By:	/s/ CHRISTINE A. JANOFSKY
		Christine A. Janofsky Senior Vice President and Chief Accounting Officer
Dated: ~~November 5, 2020~~May 6, 2021

~~107~~90



		For the				For the
		Three				Nine
		Months				Months
		Ended				Ended
	September 30,				September 30,
		2019				2019
Balance as of beginning-of-period		$	253			$	355
Increases attributable to:
Credit losses on securities for which an
OTTI was not previously recognized			1				12
Credit losses on securities for which an
OTTI was previously recognized			1				3
Decreases attributable to:
Securities sold, paid down or matured			(39	)			(154	)
Balance as of end-of-period		$	216			$	216



	As of September 30, 2020				As of January 1, 2020
	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		-		82		-		17
Total	$	-	$	82	$	-	$	17



	Gain (Loss) Recognized in Income
	For the Nine Months Ended September 30,
	2020									2019
	Realized			Net			Interest			Realized			Net			Interest
	Gain			Investment			and Debt			Gain			Investment			and Debt
	(Loss)			Income			Expense			(Loss)			Income			Expense
Total Line Items in which
the Effects of Fair Value or
Cash Flow Hedges are Recorded	$	(43	)	$	4,005		$	218		$	(491	)	$	3,842		$	254

Qualifying Hedges
Gain or (loss) on fair value
hedging relationships:
Interest rate contracts:
Hedged items		-			100			106			-			101			(145	)
Derivatives designated as
hedging instruments		-			(100	)		(106	)		-			(101	)		145
Gain or (loss) on cash flow
hedging relationships:
Interest rate contracts:
Amount of gain or (loss)
reclassified from AOCI
into income		-			2			(16	)		-			2			(2	)
Foreign currency contracts:
Amount of gain or (loss)
reclassified from AOCI
into income		6			46			-			9			25			-

Non-Qualifying Hedges
Interest rate contracts		1,795			-			-			1,625			-			-
Equity market contracts		565			-			-			(241	)		-			-
Credit contracts		(4	)		-			-			-			-			-
Embedded derivatives:
GLB		(1,326	)		-			-			(800	)		-			-
Reinsurance related		(7	)		-			-			(336	)		-			-
Indexed annuity and IUL
contracts		396			-			-			(372	)		-			-



Principal balance outstanding prior to payoff ⁽¹⁾	$	796
Unamortized debt issuance costs and discounts		(2	)
Amount paid to retire debt		(809	)
Gain (loss) on early extinguishment of debt, pre-tax	$	(15	)