©2011 Lincoln National CorporationLLA1107-0130

Annuity Risk ManagementStephen Turer FSA, MAAAVice President of Individual Annuity PricingAugust 4, 2011

18th Annual Meeting of the IABA

Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates.

LLA1107-0130

Fort Wayne, INValuationManagement ReportingDefined Contribution Product Management

Radnor & PHL, PACorporate CenterEquity Risk Management

Omaha, NEGroup Protection

Hartford, CTLife/Annuity Product ManagementExecutive Benefits Product Management

Greensboro, NCLife/Annuity Product ManagementProduct Risk and LiabilityValuation

Lincoln’s Actuarial Presence

184 Actuaries

60 Students

LLA1107-0130

3

Annuity Risk Management

• Overview of Products and Market– Product Mix– Description of GLWB– Current Events and Trends

• Macro Risk Management– Company Mix of Business and Strategy

• Micro Risk Management– Case Study on Dynamic Lapse in Variable Annuity– Variable Annuity Hedging Program– Reserves and Surplus

• Question and Answer Session

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19%

74%

5%3%

31%

48%

4%4%

13%

4Q 2006 4Q 2010

Total VA Sales = $40.4B38% Elected Living Benefits

Total VA Sales = $37.6B58% Elected Living Benefits

Guaranteed Lifetime Withdrawal Benefit (GLWB)

Guaranteed Minimum Income Benefit (GMIB)

Guaranteed Minimum Accumulation Benefit (GMAB)

Guaranteed Minimum Withdraw Benefit (GMWB)

Hybrid

Source: LIMRA GLB Election Reports

Overview of Products and MarketVariable Annuity Living Benefit Guarantees

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0

20,000

40,000

60,000

80,000

100,000

120,000

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20+

Contract Value

Withdrawal

InsuranceClient Self-

Insures

.Acc

ou

nt

Val

ue

($)

Policy Years

Overview of Products and MarketGuaranteed Lifetime Withdrawal Benefit (GLWB)

• General withdrawal benefit value proposition to clients:– Protect principal against

market loss via withdrawals or death benefit

– Access to account value– Tax-deferred growth

– Guaranteed growth of annual income when not taking withdrawals

– Protected and predictable lifetime income level

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Latest Industry Reactions

• Increasing rider charge

• Developing new risk management features

• Asset transfer programs/ risk managed funds

• Increasing rollups & guaranteed income

• Product features based on market condition

• Offering multiple guarantee options

Early Industry Reaction

• Several players exited the business

• Removed products/features

• Reduced rollups & guarantee income

• Increased rider charge

• Tightened investment restrictions

Annual Step-Up

Lifetime GMWB

5% roll-up 7%+ roll-upAge-banding& 10% roll-up

Product De-risking

Product Innovation & Risk Mgmt

Reaction to Financial CrisisImpact on Living Benefits

2005 2006 2007 2008 2009 2010+2004

Overview of Products and MarketIndustry Timeline & Evolution

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Initial withdrawal as percent of single premium deposit, Age 60 at issue and starting withdrawal after a 5-year wait

Current Areas of Focus

Maximize guarantee benefits while

limiting market exposure risk

Implementation of asset transfer

programs and risk managed investment

options

Expected areas of development

Protection for long term care needs

thru Hybrid/Combo products

Guarantees tied to interest rates or

market indices

Average Product Richness, May ‘08 – May ‘11

GMxB rider cost

6%

7%

8%

0.6% 0.8% 1.0% 1.2%

Le

ve

l of

min

imu

m g

ua

ran

tee

2008

2009

2011

Overview of Products and MarketProduct Environment Trend

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Overview of Products and MarketProduct Environment Trend

Asset Transfer Programs• Reduces downside risk of account value with complex portfolio insurance

mechanisms• Customized and non-discretionary algorithms rebalance asset allocation in response

to the ratio of Account value and Benefit base

Risk Managed Funds• Volatility Targeting

– Maintain a constant realized fund volatility through volatility forecast• CPPI/ Capital Protection

– Dampen loss in market decline

Key Benefits• Appeal to loss averse customers by reducing downside risk• Enhance risk-adjusted return of underlying account value• Reduce expected cost and residual risk of insurer’s hedging

– Potential for higher guarantees and/or lower rider charge

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Sales by Channel1 Sales by Product1

LFD550

Wholesalers

8,000AdvisorsLFN

Work Site

5%

23%

8%15%

19%

30%29%

21%

33%

10%

7%

150Group Benefit

WholesalersBankIndependent PlannerWire/ RegionalManaging General AgentsConsultants/Benefit Brokers

Macro Risk ManagementPowerful Distribution Platforms Drive Diverse Mix of Business

Individual LifeMoneyGuardGroup ProtectionVariable AnnuitiesFixed AnnuitiesDefined Contribution

300 Retirement

Focused

1 January 2009 through March 2011 Normalized Sales (Life, MoneyGuard and Group Protection: Paid Annualized Premiums as reported; Annuity/Defined Contribution: at 5% of Deposits)

9

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4%7%

50%18%

21%6%8%

41%

13%

32%

0.0

2.0

4.0

6.0

Hedge Assets Hedge Target

Macro Risk ManagementAnnuities: Solid, Consistent Performance due to Connected Product Design, Distribution and Risk Management

Hedge Effectiveness

MGA Wire Bank IP LFN

Sales By Channel

Total 1Q 2011 Sales $2.6 billion

Year ROE1 Deposits (VA)

Market Position (VA)

2007 20% 11.9 #5

2008 7% 10.1 #5

2009 15% 7.2 #5

2010 19% 8.3 #5

1Q11 23% 2.2 NA 6.7%Company E

6.3%Company H6.8%Company D

6.4%Company G7.0%Company C

6.4%Lincoln7.0%Company B

6.6%Company F7.9%Company A

VA Product Guarantees2

($ B

illio

ns)

12/31/08 12/31/10

2008 1Q 2011

1 Excluding goodwill; See Appendix slide Return on Average Stockholders’ Equity – Retirement Solutions2 Initial withdrawal as % of principal, buying at 60 and holding to 65. As of November 2010

10

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Micro Risk ManagementProduct Design

Product Innovation and Responsiveness

Retirement Income Security

Operational Effectiveness

Comprehensive Risk Management

Distribution Depth and Breadth

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• Policyholder Behavior is managed, but not eliminated, through:– Product design– Conservative actuarial

assumptions– Experience studies– Product Positioning

• Assumptions:– Fund Mapping– LapsesLapses– Mortality– Income Start– Spousal / Beneficiary Continuation

Micro Risk ManagementPolicyholder Behavior in Product Design

In-Force Management

Front End Product Design

Hedge ProgramFinancial Models

PolicyholderBehavior

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Micro Risk ManagementPolicyholder Behavior in Product Design

Generation 4Late 2009

& 2010

Generation 22005-2006

Generation 12003-2004

None-lifetime GMWB benefits with either a 5% or 7% Maximum Withdrawal Rate

Lifetime GMWB with and without 5% roll-up

Generation 32007- early

2009Lifetime GMWB with highest roll-up and most generous features

Lifetime GMWB after the financial crisis with scaled back features

Question: Given the difference of GMWB features by generation can one policyholder behavior assumption work for all?

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Micro Risk ManagementPolicyholder Behavior in Product Design

• Base Lapse– Vary by surrender charge schedule (CSDC)– Vary by distribution channel (wire, bank, planner, etc)– Vary by ‘income’ vs ‘comfort’ buyer– Vary by age

• Dynamic Lapse Adjustment– Is a multiple applied to the base lapse assumption to

compensate for the fact that the presence of a GMWB feature may change lapse rates

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Micro Risk ManagementPolicyholder Behavior in Product Design

• Slope of Dynamic Lapse Assumption– Need to balance conservatism versus the cost to hedging

• One Sided vs. Two Sided– Do lapse only decrease (one sided) or do lapses increase and

decrease (two sided)– Frequency of step-up may influence this decision– Availability of richer features (Gen 1 vs. Gen 3 or Gen 4)

• Parameters for dynamic lapse formula– Account Value– Guarantee Value; PV(GA) vs. (GA)Guarantee Value; PV(GA) vs. (GA)– Qualified vs. Nonqualified– Income vs. Comfort– Demographics (age, gender, …, investment mix)

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Guaranteed Amount can equal

– ‘GA’ = Charge basis generally Greater of (deposit or ASU)• Issues with lifetime GWMB (does deposit = lifetime risk?)

– PV(GA) = Present value of future benefits• Question at what discount rate?• Key considerations if using a discount rate:

– How market sensitive are investors?– Does the discount rate relate to reality?– At what market drop will customer adjust lapse experience– Will lapse rate burnout at an ultimate rate or hit 0% on extreme

drops?

Micro Risk ManagementPolicyholder Behavior in Product Design

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Micro Risk ManagementPolicyholder Behavior in Product Design

• Chart Basis– 100,000 Deposit– Age 55 – 4,000 MAW– Age 65 – 5,000 MAW– Age 75 – 5,000 MAW– Assume Immediate Income for

Chart Below

– A2000 (no improvement)– Present value of future benefits

divided by 100,000

= PV(GA) / 100,000

Age / Discount

Rate 0% 1% 2% 3% 4% 9%

55 (F)

122% 104% 90% 79% 70% 43%

65 (F)

87% 77% 69% 62% 57% 38%

75 (F) 55% 50% 47% 43% 41% 30%

PV (GA) is the Present Value of the Guaranteed Amount

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Micro Risk ManagementPolicyholder Behavior in Product Design

• Female, Age 60, Income at year 10, 5% Roll-up, various investment mixes

• Numbers in the chart are ratios of the 4% discount rate

DiscountRate

Increase in Valuation Premium

4% 0%

3% + 2%

2% + 11%

1% + 15%

0% + 19%

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Effectiveness

Cos

t

No Protection

Static Hedging

Delta Hedging

3 Greek Hedging

Full Reinsurance

Micro Risk ManagementVariable Annuity Hedging Program

Managing VA guarantees requires balancing cost and effectiveness

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Micro Risk ManagementVariable Annuity Hedging Program

Objective Have sufficient assets to pay claims when the customers account value equals zero.

How Dynamic strategy which uses derivative instruments to match the change in value futures claims less future premiums (Hedge Target)

Subset of Instruments Market () Rate () Volatility ()

Equity Futures Unchanged Unchanged

Interest Rate Futures

Unchanged Unchanged

Puts

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Overview of Risk Based Capital

• RBC is held in addition to Stat. Reserves– Total Asset Requirement (TAR)– Company Action Level– Companies normally quote a % of RBC– C1, C2, C3, C4, Covariance

• Annuity Required Capital– C3P2 has stochastic requirement– TAR average of worst 10% scenarios– RBC equal difference TAR minus Stat. Reserve

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Disclosure

• This presentation and certain oral statements made on LNC’s behalf may contain information that includes or is a “forward-looking statement” within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). A forward-looking statement is a statement that does not strictly relate to a historical fact. A forward look statement includes any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain words like: “believe”, “anticipate”, “expect”, “estimate”, “project”, “will”, “shall” and other words or phrases with similar meaning. LNC claims the protection afforded by the safe harbor for forward-looking statements provided by the PSLRA.

•Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the results contained in the forward-looking statements, legislative and regulatory changes and proceedings, changes in interest rates, sudden or prolonged declines in the equity markets, continued economic decline and credit-related illiquidity, deviation in actual experience regarding future persistency, mortality, morbidity, interest rates or equity market returns from Lincoln’s assumptions used in pricing its products, in establishing related insurance reserves, and in the amortization of intangibles that may result in an increase in reserves and a decrease in net income; and changes in general economic or business conditions. These risks and uncertainties, as well others, are described in LNC’s 2008 Form 10-K, Forms 8-K, and other documents filed with the Securities and Exchange Commission. Moreover, LNC operates in a rapidly changing and competitive environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors.

•Further, it is not possible to assess the impact of all risk factors on LNC’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undo reliance on forward-looking statements as a prediction of actual results. In addition, LNC disclaims any obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of this presentation.

• Lincoln Financial Group (LFG) is the marketing name for Lincoln National Corporation and its affiliates. Affiliates are separately responsible for their own financial and contractual obligations.

• Insurance products are issued by insurance affiliates of Lincoln Financial Group