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LNC Lincoln National

Filed: 6 May 21, 11:12am

__________________________________________________________________________________________________________

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 March 31, 2021

OR

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

 

For the transition period from ______ to ______

 

Commission File Number: 1-6028

_________________

 

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)

__________________________________

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 May 3, 2021, there were 190,373,196 shares of the registrant’s common stock outstanding.

_________________________________________________________________________________________________________


Lincoln National Corporation

 

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

March 31,

December 31,

2021

2020

(Unaudited)

ASSETS

Investments:

Fixed maturity available-for-sale securities, at fair value

(amortized cost: 2021 - $105,866; 2020 - $104,174; allowance for credit losses: 2021 - $14; 2020 - $13)

$

117,313

$

123,044

Trading securities

4,365

4,501

Equity securities

123

129

Mortgage loans on real estate, net of allowance for credit losses

(portion at fair value: 2021 - $874; 2020 - $832)

17,255

16,763

Policy loans

2,502

2,426

Derivative investments

3,453

3,109

Other investments

3,548

3,984

Total investments

148,559

153,956

Cash and invested cash

1,350

1,708

Deferred acquisition costs and value of business acquired

7,665

5,812

Premiums and fees receivable

653

486

Accrued investment income

1,301

1,257

Reinsurance recoverables, net of allowance for credit losses

16,289

16,496

Funds withheld reinsurance assets

528

530

Goodwill

1,778

1,778

Other assets

17,298

15,960

Separate account assets

171,339

167,965

Total assets

$

366,760

$

365,948

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities

Future contract benefits

$

39,591

$

40,814

Other contract holder funds

107,002

105,405

Short-term debt

300

-

Long-term debt

6,294

6,682

Reinsurance related embedded derivatives

244

392

Funds withheld reinsurance liabilities

1,976

1,946

Payables for collateral on investments

7,597

6,222

Other liabilities

12,824

13,823

Separate account liabilities

171,339

167,965

Total liabilities

347,167

343,249

Contingencies and Commitments (See Note 10)

 

 

Stockholders’ Equity

Preferred stock – 10,000,000 shares authorized

-

-

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

8,775

8,686

Accumulated other comprehensive income (loss)

5,761

8,931

Total stockholders’ equity

19,593

22,699

Total liabilities and stockholders’ equity

$

366,760

$

365,948


See accompanying Notes to Consolidated Financial Statements

1


LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in millions, except per share data)

For the Three

Months Ended

March 31,

2021

2020

Revenues

Insurance premiums

$

1,406

$

1,373

Fee income

1,592

1,539

Net investment income

1,510

1,375

Realized gain (loss)

(181

)

(24

)

Amortization of deferred gain on business sold through reinsurance

9

11

Other revenues

198

151

Total revenues

4,534

4,425

Expenses

Interest credited

737

725

Benefits

2,226

2,501

Commissions and other expenses

1,231

1,085

Interest and debt expense

65

68

Strategic digitization expense

13

12

Total expenses

4,272

4,391

Income (loss) before taxes

262

34

Federal income tax expense (benefit)

37

(18

)

Net income (loss)

225

52

Other comprehensive income (loss), net of tax

(3,170

)

(2,669

)

Comprehensive income (loss)

$

(2,945

)

$

(2,617

)

Net Income (Loss) Per Common Share

Basic

$

1.17

$

0.27

Diluted

1.16

0.15

Cash Dividends Declared Per Common Share

$

0.42

$

0.40


See accompanying Notes to Consolidated Financial Statements

2


LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, in millions)

For the Three

Months Ended

March 31,

2021

2020

Common Stock

Balance as of beginning-of-year

$

5,082

$

5,162

Stock compensation/issued for benefit plans

25

9

Retirement of common stock/cancellation of shares

(50

)

(100

)

Balance as of end-of-period

5,057

5,071

Retained Earnings

Balance as of beginning-of-year

8,686

8,854

Cumulative effect from adoption of new accounting standards

-

(203

)

Net income (loss)

225

52

Retirement of common stock

(55

)

(125

)

Common stock dividends declared

(81

)

(78

)

Balance as of end-of-period

8,775

8,500

Accumulated Other Comprehensive Income (Loss)

Balance as of beginning-of-year

8,931

5,673

Other comprehensive income (loss), net of tax

(3,170

)

(2,669

)

Balance as of end-of-period

5,761

3,004

Total stockholders’ equity as of end-of-period

$

19,593

$

16,575


See accompanying Notes to Consolidated Financial Statements

3


LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in millions)

For the Three

Months Ended

March 31,

2021

2020

Cash Flows from Operating Activities

Net income (loss)

$

225

$

52

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating

activities:

Realized (gain) loss

181

24

Trading securities purchases, sales and maturities, net

98

235

Amortization of deferred gain on business sold through reinsurance

(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

54

(169

)

Premiums and fees receivable

(167

)

(97

)

Accrued investment income

(41

)

(37

)

Insurance liabilities and reinsurance-related balances

(764

)

736

Accrued expenses

(40

)

(317

)

Federal income tax accruals

37

(18

)

Other

(216

)

57

Net cash provided by (used in) operating activities

(642

)

455

Cash Flows from Investing Activities

Purchases of available-for-sale securities and equity securities

(3,834

)

(3,590

)

Sales of available-for-sale securities and equity securities

571

395

Maturities of available-for-sale securities

1,913

1,317

Purchases of alternative investments

(163

)

(79

)

Sales and repayments of alternative investments

54

55

Issuance of mortgage loans on real estate

(888

)

(839

)

Repayment and maturities of mortgage loans on real estate

403

227

Issuance (repayment) of policy loans, net

(76

)

(94

)

Net change in collateral on investments, derivatives and related settlements

1,341

3,411

Other

(33

)

(61

)

Net cash provided by (used in) investing activities

(712

)

742

Cash Flows from Financing Activities

Payment of long-term debt, including current maturities

-

(300

)

Issuance of long-term debt, net of issuance costs

-

499

Deposits of fixed account values, including the fixed portion of variable

3,136

3,917

Withdrawals of fixed account values, including the fixed portion of variable

(1,777

)

(1,684

)

Transfers to and from separate accounts, net

(122

)

323

Common stock issued for benefit plans

7

(9

)

Repurchase of common stock

(105

)

(225

)

Dividends paid to common stockholders

(80

)

(79

)

Other

(63

)

-

Net cash provided by (used in) financing activities

996

2,442

Net increase (decrease) in cash, invested cash and restricted cash

(358

)

3,639

Cash, invested cash and restricted cash as of beginning-of-year

1,708

2,563

Cash, invested cash and restricted cash as of end-of-period

$

1,350

$

6,202

See accompanying Notes to Consolidated Financial Statements

4


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 14 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, 2020 (“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 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 three months ended March 31, 2021, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2021, especially when considering the risks and uncertainties associated with the 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.


2.  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 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 elected practical expedients to maintain hedge accounting for certain derivatives. We will continue to evaluate our options under this guidance as our reference rate reform adoption process continues. This ASU has not had a material impact to our consolidated financial condition and results of operations, but we will continue to evaluate those impacts as our transition progresses.

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 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, 2023, and early adoption is permitted.

January 1, 2023

We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations.

3. Variable Interest Entities

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 March 31, 2021

As of December 31, 2020

Number

Number

of

Notional

Carrying

of

Notional

Carrying

Instruments

Amounts

Value

Instruments

Amounts

Value

Assets

Total return swap

1

$

591

$

-

1

$

611

$

-

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”). 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 $2.3 billion and $2.1 billion as of March 31, 2021, and December 31, 2020, respectively. Included in these carrying amounts are our investments in qualified affordable housing projects, which were $6 million and $7 million as of March 31, 2021, and December 31, 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 three months ended March 31, 2021 and 2020, respectively, which were recognized in federal income tax expense (benefit) on our Consolidated Statements of Comprehensive Income (Loss).

4. Investments

Fixed Maturity AFS Securities

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

As of March 31, 2021

Allowance

Amortized

Gross Unrealized

for Credit

Fair

Cost

Gains

Losses

Losses

Value

Fixed maturity AFS securities:

Corporate bonds

$

86,879

$

10,397

$

693

$

13

$

96,570

U.S. government bonds

393

54

3

-

444

State and municipal bonds

5,474

1,185

34

-

6,625

Foreign government bonds

428

63

6

-

485

RMBS

2,820

261

3

1

3,077

CMBS

1,464

68

16

-

1,516

ABS

7,880

143

27

-

7,996

Hybrid and redeemable preferred securities

528

93

21

-

600

Total fixed maturity AFS securities

$

105,866

$

12,264

$

803

$

14

$

117,313

As of December 31, 2020

Allowance

Amortized

Gross Unrealized

for Credit

Fair

Cost

Gains

Losses

Losses

Value

Fixed maturity AFS securities:

Corporate bonds

$

86,289

$

16,662

$

150

$

12

$

102,789

U.S. government bonds

397

88

1

-

484

State and municipal bonds

5,360

1,561

-

-

6,921

Foreign government bonds

384

87

1

-

470

RMBS

2,765

313

1

1

3,076

CMBS

1,390

115

-

-

1,505

ABS

7,041

158

15

-

7,184

Hybrid and redeemable preferred securities

548

97

30

-

615

Total fixed maturity AFS securities

$

104,174

$

19,081

$

198

$

13

$

123,044

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

Amortized

Fair

Cost

Value

Due in one year or less

$

3,198

$

3,219

Due after one year through five years

15,156

16,072

Due after five years through ten years

19,308

20,949

Due after ten years

56,040

64,484

Subtotal

93,702

104,724

Structured securities (RMBS, CMBS, ABS)

12,164

12,589

Total fixed maturity AFS securities

$

105,866

$

117,313

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

The fair value and gross unrealized losses of fixed maturity AFS securities (dollars in millions) for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:

As of March 31, 2021

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

$

12,029

$

633

$

709

$

60

$

12,738

$

693

U.S. government bonds

25

3

-

-

25

3

State and municipal bonds

767

34

-

-

767

34

Foreign government bonds

99

6

-

-

99

6

RMBS

200

3

7

-

207

3

CMBS

371

16

-

-

371

16

ABS

2,401

24

167

3

2,568

27

Hybrid and redeemable

preferred securities

124

8

91

13

215

21

Total fixed maturity AFS securities

$

16,016

$

727

$

974

$

76

$

16,990

$

803

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


The fair value, gross unrealized losses (in millions) and number of fixed maturity AFS securities where the fair value had declined and remained below amortized cost by greater than 20% were as follows:

As of March 31, 2021

Gross

Number

Fair

Unrealized

of

Value

Losses

Securities (1)

Less than six months

$

50

$

16

10

Six months or greater, but less than nine months

52

23

4

Nine months or greater, but less than twelve months

1

1

3

Twelve months or greater

27

8

28

Total

$

130

$

48

45

As of December 31, 2020

Gross

Number

Fair

Unrealized

of

Value

Losses

Securities (1)

Less than six months

$

63

$

23

14

Six months or greater, but less than nine months

2

1

4

Nine months or greater, but less than twelve months

23

7

14

Twelve months or greater

30

11

20

Total

$

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 $605 million for the three months ended March 31, 2021. As discussed further below, we believe the unrealized loss position as of 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 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.

As of 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 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 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 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.

Credit Loss Impairment on Fixed Maturity AFS Securities

We regularly review our fixed maturity AFS securities for declines in fair value that we determine to be impairment-related, including those attributable to credit risk factors that may require an allowance for credit losses.

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

For the Three

Months Ended

March 31, 2021

Corporate

Bonds

RMBS

ABS

Total

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

1

-

-

1

Balance as of end-of-period (2)

$

13

$

1

$

-

$

14

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 March 31, 2021 and 2020, respectively, and was excluded from the estimate of credit losses.

Mortgage Loans on Real Estate

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

As of March 31, 2021

As of December 31, 2020

Commercial

Residential

Total

Commercial

Residential

Total

Current

$

16,674

$

666

$

17,340

$

16,245

$

610

$

16,855

30 to 59 days past due

6

26

32

4

28

32

60 to 89 days past due

-

8

8

-

8

8

90 or more days past due

-

55

55

-

69

69

Allowance for credit losses

(172

)

(12

)

(184

)

(187

)

(17

)

(204

)

Unamortized premium (discount)

(13

)

23

10

(14

)

22

8

Mark-to-market gains (losses) (1)

(6

)

-

(6

)

(5

)

-

(5

)

Total carrying value

$

16,489

$

766

$

17,255

$

16,043

$

720

$

16,763

(1)Represents the mark-to-market on certain mortgage loans on real estate for which we have elected the fair value option. See Note 13 for additional information.


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 March 31, 2021, and December 31, 2020, respectively, and Texas, which accounted for 10% of commercial mortgage loans on real estate as of March 31, 2021, and December 31, 2020.

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

As of March 31, 2021, and December 31, 2020, we had 113 and 147 residential mortgage loans, respectively, that were either delinquent or in foreclosure.

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

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

Credit Losses on Mortgage Loans on Real Estate

In connection with our recognition of an allowance for credit losses for mortgage loans on real estate, we perform a quantitative analysis using a probability of default/loss given default/exposure at default approach to estimate expected credit losses in our mortgage loan portfolio as well as unfunded commitments related to commercial mortgage loans, exclusive of certain mortgage loans held at fair value.

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

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

Alternative Investments 

As of March 31, 2021, and December 31, 2020, alternative investments included investments in 279 and 271 different partnerships, respectively, and represented approximately 1% of 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

Months Ended

March 31,

2021

2020

Credit Loss Expense

Fixed maturity AFS securities:

Corporate bonds

$

(2

)

$

(20

)

RMBS

-

-

ABS

-

-

Gross credit loss expense

(2

)

(20

)

Associated amortization of DAC, VOBA, DSI and DFEL (1)

-

-

Net credit loss expense

$

(2

)

$

(20

)

(1)Deferred acquisition costs (“DAC”), value of business acquired (“VOBA”), deferred sales inducements (“DSI”) and deferred front-end loads (“DFEL”).

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 March 31, 2021

As of December 31, 2020

Carrying

Fair

Carrying

Fair

Value

Value

Value

Value

Collateral payable for derivative investments (1)

$

3,222

$

3,222

$

2,976

$

2,976

Securities pledged under securities lending agreements (2)

145

140

116

112

Investments pledged for Federal Home Loan Bank of

Indianapolis (“FHLBI”) (3)

4,230

6,819

3,130

5,049

Total payables for collateral on investments

$

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.

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 Three

Months Ended

March 31,

2021

2020

Collateral payable for derivative investments

$

246

$

2,555

Securities pledged under securities lending agreements

29

47

Investments pledged for FHLBI

1,100

750

Total increase (decrease) in payables for collateral on investments

$

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 March 31, 2021

Overnight and Continuous

Up to 30 Days

30 - 90
Days

Greater Than 90 Days

Total

Securities Lending

Corporate bonds

$

145

$

-

$

-

$

-

$

145

As of December 31, 2020

Overnight and Continuous

Up to 30 Days

30 - 90
Days

Greater Than 90 Days

Total

Securities Lending

Corporate bonds

$

114

$

-

$

-

$

-

$

114

Foreign government bonds

2

-

-

-

2

Total gross secured borrowings

$

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 March 31, 2021, the fair value of all collateral received that we are permitted to sell or re-pledge was $21 million, and we had not re-pledged any of this collateral to cover initial margin and over-the-counter collateral requirements on certain derivative investments as of March 31, 2021.

Investment Commitments

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

Concentrations of Financial Instruments

As of March 31, 2021, and December 31, 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 $1.2 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 March 31, 2021, and December 31, 2020, our most significant investments in one industry were our investments in securities in the consumer non-cyclical industry with a fair value of $19.0 billion and $20.3 billion, respectively, or 13% of total investments, and our investments in securities in the financial services industry with a fair value of $18.5 billion and $19.6 billion, respectively, or 12% and 13%, respectively, of total investments. These concentrations include fixed maturity AFS, trading and equity securities.

5. Derivative Instruments

 

We maintain an overall risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate risk, foreign currency exchange risk, equity market risk, basis risk 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 13 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.

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.

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 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.

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 March 31, 2021

As of December 31, 2020

Notional

Fair Value

Notional

Fair Value

Amounts

Asset

Liability

Amounts

Asset

Liability

Qualifying Hedges

Cash flow hedges:

Interest rate contracts (1)

$

3,112

$

7

$

324

$

2,177

$

87

$

563

Foreign currency contracts (1)

3,249

119

147

3,089

147

151

Total cash flow hedges

6,361

126

471

5,266

234

714

Fair value hedges:

Interest rate contracts (1)

1,159

-

196

1,161

-

272

Non-Qualifying Hedges

Interest rate contracts (1)

73,433

1,225

308

135,434

1,587

159

Foreign currency contracts (1)

410

4

6

304

1

8

Equity market contracts (1)

78,321

3,949

1,298

74,610

3,486

1,952

Credit contracts (1)

85

-

-

51

-

-

Embedded derivatives:

GLB direct (2)

-

1,831

-

-

450

-

GLB ceded (2)

-

42

152

-

82

-

Reinsurance related (3)

-

-

244

-

-

392

Indexed annuity and IUL contracts (2) (4)

-

527

4,170

-

550

3,594

Total derivative instruments

$

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 March 31, 2021

Less Than

1 - 5

6 - 10

11 - 30

Over 30

1 Year

Years

Years

Years

Years

Total

Interest rate contracts (1)

$

2,251

$

48,239

$

14,295

$

11,701

$

1,218

$

77,704

Foreign currency contracts (2)

354

400

1,249

1,559

97

3,659

Equity market contracts

44,952

18,496

6,274

11

8,588

78,321

Credit contracts

-

20

65

-

-

85

Total derivative instruments

with notional amounts

$

47,557

$

67,155

$

21,883

$

13,271

$

9,903

$

159,769

(1)As of 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 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 16, 2061.

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

Cumulative Fair Value

Hedging Adjustment

Included in the

Amortized Cost of the

Amortized Cost of the

Hedged

Hedged

Assets / (Liabilities)

Assets / (Liabilities)

As of

As of

As of

As of

March 31,

December 31,

March 31,

December 31,

2021

2020

2021

2020

Line Item in the Consolidated Balance Sheets in

which the Hedged Item is Included

Fixed maturity AFS securities, at fair value

$

738

$

824

$

187

$

271

Long-term debt (1)

(815

)

(900

)

60

(25

)

(1)The balance includes $(367) million and $(370) million of unamortized adjustments from discontinued hedges as of March 31, 2021, and December 31, 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 Three

Months Ended

March 31,

2021

2020

Unrealized Gain (Loss) on Derivative Instruments

Balance as of beginning-of-year

$

(402

)

$

(11

)

Other comprehensive income (loss):

Cash flow hedges:

Interest rate contracts

152

(383

)

Foreign currency contracts

(63

)

312

Change in foreign currency exchange rate adjustment

47

153

Change in DAC, VOBA, DSI and DFEL

14

(53

)

Income tax benefit (expense)

(30

)

(8

)

Less:

Reclassification adjustment for gains (losses)

included in net income (loss):

Cash flow hedges:

Interest rate contracts (1)

1

-

Interest rate contracts (2)

(6

)

(3

)

Foreign currency contracts (1)

10

11

Foreign currency contracts (3)

(2

)

1

Associated amortization of DAC, VOBA, DSI and DFEL

(1

)

(6

)

Income tax benefit (expense)

-

(1

)

Balance as of end-of-period

$

(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).

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

For the Three Months Ended March 31,

2021

2020

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

$

(181

)

$

1,510

$

65

$

(24

)

$

1,375

$

68

Qualifying Hedges

Gain or (loss) on fair value

hedging relationships:

Interest rate contracts:

Hedged items

-

(84

)

85

-

127

82

Derivatives designated as

hedging instruments

-

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

(6

)

-

-

(3

)

Foreign currency contracts:

Amount of gain or (loss)

reclassified from AOCI

into income

(2

)

10

-

1

11

-

Non-Qualifying Hedges

Interest rate contracts

(1,159

)

-

-

2,150

-

-

Equity market contracts

1,242

-

-

1,070

-

-

Credit contracts

-

-

-

(4

)

-

-

Embedded derivatives:

GLB

1,188

-

-

(4,369

)

-

-

Reinsurance related

148

-

-

463

-

-

Indexed annuity and IUL

contracts

(594

)

-

-

1,028

-

-


As of 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 three months ended March 31, 2021 and 2020, 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.

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

As of March 31, 2021

Credit

Reason

Nature

Rating of

Number

Maximum

for

of

Underlying

of

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

$

-

$

20

Basket credit default swaps

6/20/2026

(3)

(4)

BBB+

1

2

65

As of December 31, 2020

Credit

Reason

Nature

Rating of

Number

Maximum

for

of

Underlying

of

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

$

1

$

51

(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

March 31,

December 31,

2021

2020

Maximum potential payout

$

85

$

51

Less: Counterparty thresholds

-

-

Maximum collateral potentially required to post

$

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, our counterparties would have been required to post $2 million of collateral 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 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 March 31, 2021, or December 31, 2020.

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 March 31, 2021

As of December 31, 2020

Collateral

Collateral

Collateral

Collateral

Posted by

Posted by

Posted by

Posted by

S&P

Counter-

LNC

Counter-

LNC

Credit

Party

(Held by

Party

(Held by

Rating of

(Held by

Counter-

(Held by

Counter-

Counterparty

LNC)

Party)

LNC)

Party)

AA-

$

1,453

$

(197

)

$

1,233

$

(371

)

A+

1,320

(272

)

1,119

(445

)

A

60

-

53

-

A-

389

(118

)

571

(245

)

$

3,222

$

(587

)

$

2,976

$

(1,061

)

Balance Sheet Offsetting

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

As of March 31, 2021

Embedded

Derivative

Derivative

Instruments

Instruments

Total

Financial Assets

Gross amount of recognized assets

$

5,680

$

2,400

$

8,080

Gross amounts offset

(1,848

)

-

(1,848

)

Net amount of assets

3,832

2,400

6,232

Gross amounts not offset:

Cash collateral

(3,222

)

-

(3,222

)

Non-cash collateral

(372

)

-

(372

)

Net amount

$

238

$

2,400

$

2,638

Financial Liabilities

Gross amount of recognized liabilities

$

866

$

4,566

$

5,432

Gross amounts offset

(4

)

-

(4

)

Net amount of liabilities

862

4,566

5,428

Gross amounts not offset:

Cash collateral

(587

)

-

(587

)

Non-cash collateral

-

-

-

Net amount

$

275

$

4,566

$

4,841

As of December 31, 2020

Embedded

Derivative

Derivative

Instruments

Instruments

Total

Financial Assets

Gross amount of recognized assets

$

4,978

$

1,082

$

6,060

Gross amounts offset

(1,869

)

-

(1,869

)

Net amount of assets

3,109

1,082

4,191

Gross amounts not offset:

Cash collateral

(2,976

)

-

(2,976

)

Non-cash collateral

(56

)

-

(56

)

Net amount

$

77

$

1,082

$

1,159

Financial Liabilities

Gross amount of recognized liabilities

$

1,456

$

3,986

$

5,442

Gross amounts offset

(330

)

-

(330

)

Net amount of liabilities

1,126

3,986

5,112

Gross amounts not offset:

Cash collateral

(1,061

)

-

(1,061

)

Non-cash collateral

-

-

-

Net amount

$

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 14% and (53)% for the three months ended March 31, 2021 and 2020, 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 and tax credits. For the three months ended March 31, 2020, 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

Credit Losses on Reinsurance-related Assets

In connection with our recognition of an allowance for credit losses for reinsurance-related assets, we perform a quantitative analysis using a probability of loss approach to estimate expected credit losses for reinsurance recoverables, inclusive of similar assets recognized using the deposit method of accounting. As of March 31, 2021, our allowance for credit losses for reinsurance-related assets was $191 million.  There have been no material changes to the allowance for credit losses for the 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 $5.6 billion and $5.8 billion as of March 31, 2021, and December 31, 2020, respectively, within other assets on our Consolidated Balance Sheets.

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

March 31,

December 31,

2021

2020

Fixed maturity AFS securities

$

1,357

$

1,531

Trading securities

3,293

3,357

Equity securities

20

17

Mortgage loans on real estate

875

832

Derivative investments

106

103

Other investments

212

167

Cash and invested cash

81

92

Accrued investment income

39

42

Other assets

6

3

Total

$

5,989

$

6,144

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

8. Guaranteed Benefit Features

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

As of

As of

March 31,

December 31,

2021 (1)

2020 (1)

Return of Net Deposits

Total account value

$

111,818

$

109,856

Net amount at risk (2)

77

72

Average attained age of contract holders

66 years

66 years

Minimum Return

Total account value

$

99

$

100

Net amount at risk (2)

12

12

Average attained age of contract holders

78 years

78 years

Guaranteed minimum return

5%

5%

Anniversary Contract Value

Total account value

$

27,903

$

27,650

Net amount at risk (2)

410

390

Average attained age of contract holders

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.

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 Three

Months Ended

March 31,

2021

2020

Balance as of beginning-of-year

$

121

$

117

Changes in reserves

8

106

Benefits paid

(5

)

(8

)

Balance as of end-of-period

$

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

March 31,

December 31,

2021

2020

Asset Type

Domestic equity

$

71,993

$

70,362

International equity

20,813

20,855

Fixed income

43,920

43,521

Total

$

136,726

$

134,738

Percent of total variable annuity separate account values

98%

98%

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 39% and 38% of total life insurance in-force reserves as of March 31, 2021, and December 31, 2020, respectively. UL and VUL products with secondary guarantees represented 14% and 29% of total life insurance sales for the three months ended March 31, 2021 and 2020, respectively.

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 Three

Months Ended

March 31,

2021

2020

Balance as of beginning-of-year

$

5,934

$

5,552

Reinsurance recoverable

151

152

Net balance as of beginning-of-year

5,783

5,400

Incurred related to:

Current year

1,025

885

Prior years:

Interest

42

43

All other incurred (1)

(101

)

(65

)

Total incurred

966

863

Paid related to:

Current year

(302

)

(240

)

Prior years

(601

)

(518

)

Total paid

(903

)

(758

)

Net balance as of end-of-period

5,846

5,505

Reinsurance recoverable

151

150

Balance as of end-of-period

$

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.

10.  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

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 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 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 $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 agreements. We are disputing the requested rate increases under these agreements. We will initiate arbitration proceedings, as necessary, under these 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 would have a material impact on our consolidated financial 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 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

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 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 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.

11. Shares and Stockholders’ Equity

Common Shares

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

For the Three

Months Ended

March 31,

2021

2020

Common Stock

Balance as of beginning-of-year

192,329,691

196,668,532

Stock compensation/issued for benefit plans

711,138

349,636

Retirement/cancellation of shares

(1,891,637

)

(3,809,924

)

Balance as of end-of-period

191,149,192

193,208,244

Common Stock as of End-of-Period

Basic basis

191,149,192

193,208,244

Diluted basis

192,464,319

195,027,909

Our common stock is without par value.

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

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 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. This obligation is settled in either cash or LNC stock pursuant to the applicable plan document. For the three months ended March 31, 2020, the effect of settling obligations in LNC stock (“equity classification”) was more dilutive than the scenario of settling in cash (“liability classification”). Therefore, for our EPS calculation for 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 $23 million for the three months ended March 31, 2020.

AOCI

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

For the Three

Months Ended

March 31,

2021

2020

Unrealized Gain (Loss) on Fixed Maturity AFS Securities

Balance as of beginning-of-year

$

9,611

$

5,983

Cumulative effect from adoption of new accounting standard

-

45

Unrealized holding gains (losses) arising during the period

(7,420

)

(4,498

)

Change in foreign currency exchange rate adjustment

(44

)

(150

)

Change in DAC, VOBA, DSI, future contract benefits and other contract holder funds

3,287

1,264

Income tax benefit (expense)

888

720

Less:

Reclassification adjustment for gains (losses) included in net income (loss)

2

(2

)

Associated amortization of DAC, VOBA, DSI and DFEL

(4

)

32

Income tax benefit (expense)

-

(6

)

Balance as of end-of-period

$

6,324

$

3,340

Unrealized Other-Than-Temporary-Impairment on Fixed Maturity AFS Securities

Balance as of beginning-of-year

$

-

$

45

Cumulative effect from adoption of new accounting standard

-

(45

)

Balance as of end-of-period

$

-

$

-

Unrealized Gain (Loss) on Derivative Instruments

Balance as of beginning-of-year

$

(402

)

$

(11

)

Unrealized holding gains (losses) arising during the period

89

(71

)

Change in foreign currency exchange rate adjustment

47

153

Change in DAC, VOBA, DSI and DFEL

14

(53

)

Income tax benefit (expense)

(30

)

(8

)

Less:

Reclassification adjustment for gains (losses) included in net income (loss)

3

9

Associated amortization of DAC, VOBA, DSI and DFEL

(1

)

(6

)

Income tax benefit (expense)

-

(1

)

Balance as of end-of-period

$

(284

)

$

8

Foreign Currency Translation Adjustment

Balance as of beginning-of-year

$

(12

)

$

(17

)

Foreign currency translation adjustment arising during the period

2

(10

)

Balance as of end-of-period

$

(10

)

$

(27

)

Funded Status of Employee Benefit Plans

Balance as of beginning-of-year

$

(266

)

$

(327

)

Adjustment arising during the period

(3

)

10

Balance as of end-of-period

$

(269

)

$

(317

)

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

Months Ended

March 31,

2021

2020

Unrealized Gain (Loss) on Fixed Maturity AFS Securities

Gross reclassification

$

2

$

(2

)

Realized gain (loss)

Associated amortization of DAC,

VOBA, DSI and DFEL

(4

)

32

Realized gain (loss)

Reclassification before income

Income (loss) from continuing

tax benefit (expense)

(2

)

30

operations before taxes

Income tax benefit (expense)

-

(6

)

Federal income tax expense (benefit)

Reclassification, net of income tax

$

(2

)

$

24

Net income (loss)

Unrealized Gain (Loss) on Derivative Instruments

Gross reclassifications:

Interest rate contracts

$

1

$

-

Net investment income

Interest rate contracts

(6

)

(3

)

Interest and debt expense

Foreign currency contracts

10

11

Net investment income

Foreign currency contracts

(2

)

1

Realized gain (loss)

Total gross reclassifications

3

9

Associated amortization of DAC,

VOBA, DSI and DFEL

(1

)

(6

)

Commissions and other expenses

Reclassifications before income

Income (loss) from continuing

tax benefit (expense)

2

3

operations before taxes

Income tax benefit (expense)

-

(1

)

Federal income tax expense (benefit)

Reclassifications, net of income tax

$

2

$

2

Net income (loss)

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

Months Ended

March 31,

2021

2020

Fixed maturity AFS securities:

Gross gains

$

11

$

6

Gross losses

(9

)

(8

)

Credit loss benefit (expense) (1)

(2

)

(20

)

Realized gain (loss) on equity securities (2)

11

(19

)

Credit loss benefit (expense) on mortgage loans on real estate

24

(70

)

Other gain (loss) on investments

3

(1

)

Associated amortization of DAC, VOBA, DSI and DFEL

and changes in other contract holder funds

(5

)

26

Total realized gain (loss) related to certain financial assets

33

(86

)

Realized gain (loss) on the mark-to-market on certain instruments (3)(4)

21

47

Indexed annuity and IUL contracts net derivatives results: (5)

Gross gain (loss)

32

(49

)

Associated amortization of DAC, VOBA, DSI and DFEL

(13

)

15

Variable annuity net derivatives results: (6)

Gross gain (loss)

(316

)

40

Associated amortization of DAC, VOBA, DSI and DFEL

62

9

Total realized gain (loss)

$

(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 $10 million and $(18) million for the three months ended March 31, 2021 and 2020, 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 $1 million and $7 million for the three months ended March 31, 2021 and 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.


13. Fair Value of Financial Instruments

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

As of March 31, 2021

As of December 31, 2020

Carrying

Fair

Carrying

Fair

Value

Value

Value

Value

Assets

Fixed maturity AFS securities

$

117,313

$

117,313

$

123,044

$

123,044

Trading securities

4,365

4,365

4,501

4,501

Equity securities

123

123

129

129

Mortgage loans on real estate

17,255

18,076

16,763

18,219

Derivative investments (1)

3,453

3,453

3,109

3,109

Other investments

3,538

3,538

3,974

3,974

Cash and invested cash

1,350

1,350

1,708

1,708

Other assets:

GLB direct embedded derivatives

1,831

1,831

450

450

GLB ceded embedded derivatives

42

42

82

82

Indexed annuity ceded embedded derivatives

527

527