Pre-Effective Amendment to Registration Statement for a Separate Account (Unit Investment Trust) — Form N-4
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‘N-4/A’ — Pre-Effective Amendment to Registration Statement for a Separate Account (Unit Investment Trust)
Document Table of Contents
As filed with the Securities and Exchange Commission on December 16, 2014
1933 Act Registration No. 333-198913
1940 Act Registration No. 811-07645
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. /1/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 62/X/
Lincoln National Variable Annuity Account L
(Exact Name of Registrant)
Lincoln Retirement Income RolloverSM Version 3
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(Name of Depositor)
1300 South Clinton Street
Post Office Box 1110
Fort Wayne, Indiana 46801
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number, Including Area Code: (260) 455-2000
Adam C. Ciongoli, Esquire
The Lincoln National Life Insurance Company
1300 South Clinton Street
Post Office Box 1110
Fort Wayne, IN 46801
(Name and Address of Agent for Service)
Copy to:
Mary Jo Ardington, Esquire
The Lincoln National Life Insurance Company
1300 South Clinton Street
Fort Wayne, Indiana 46802
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of the Registration Statement.
Title of Securities being registered:
Interests in a separate account under individual flexible
payment deferred variable annuity contracts.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a)
shall determine.
Lincoln Retirement Income RolloverSM Version 3
Group Variable Annuity Contract with Certificates
Lincoln National Variable Annuity Account L
Home Office:
The Lincoln National Life Insurance Company
1300 South Clinton Street
Fort Wayne, IN 46802
1-800-234-3500
This prospectus describes a group variable annuity contract and Certificates
with a Guaranteed Withdrawal Benefit that is issued by The Lincoln National
Life Insurance Company (Lincoln Life or Company). This contract is for use with
qualified plans under Sections 408 (IRAs) and 408A (Roth IRAs) of the tax code.
Generally, you do not pay federal income tax on the contract's growth until it
is paid out. IRAs provide tax deferral, however, whether or not the funds are
invested in an annuity contract. Further, if your contract is a Roth IRA, you
generally will not pay income tax on distributions, provided certain conditions
are met. Therefore, there should be reasons other than tax deferral for
acquiring this contract. This contract is available to former plan participants
who are eligible for a rollover distribution and wish to carry over their
current Guaranteed Withdrawal Benefit from the Lincoln Secured Retirement
IncomeSM variable annuity. It is designed to accumulate Annuitant Account Value
(AAV) and to provide retirement income over a certain period of time, or for
life, subject to certain conditions. The benefits offered under this contract
may be variable or a fixed amount, if available, or a combination of both. This
contract also offers a Death Benefit payable upon the death of the Annuitant.
The state in which your Certificate is issued will govern whether or not
certain features are available, and the applicability of any restrictions,
limitations, charges and fees. All material state variations are discussed in
this prospectus, however, non-material variations may not be discussed. You
should refer to your contract regarding state-specific features. Please check
with your registered representative regarding availability.
The minimum initial Purchase Payment must be an eligible rollover from a
qualified plan that was invested in the Lincoln Secured Retirement IncomeSM
annuity (defined as Rollover Money). In most cases, the prior participant from
the qualified plan will be the Annuitant. Additional Purchase Payments may be
made, subject to certain restrictions, and must be at least $100 per payment
($25 if transmitted electronically), and at least $300 annually.
All Purchase Payments will be placed in Lincoln National Variable Annuity
Account L (Variable Annuity Account (VAA)). The VAA is a segregated investment
account of Lincoln Life. You take all the investment risk on the AAV derived
from Purchase Payments. If the Subaccount makes money, your AAV goes up; if the
Subaccount loses money, it goes down. How much it goes up or down depends on
the performance of the fund. We do not guarantee how the Subaccount or its fund
will perform. Also, neither the U.S. Government nor any federal agency insures
or guarantees your investment. The Purchase Payments are not bank deposits, and
the contract is not endorsed by any bank or government agency.
The available fund is: LVIP Managed Risk Profile Moderate Fund (fund), a series
of the Lincoln Variable Insurance Products Trust. The fund is a fund of funds
and invests substantially all of its assets in other funds.
This prospectus gives you information about the contract that you should know
before deciding to invest in a contract and make Purchase Payments. You should
also review the prospectus for the fund and keep all prospectuses for future
reference.
Neither the SEC nor any state securities commission has approved this contract
or determined that this prospectus is accurate or complete. Any representation
to the contrary is a criminal offense.
More information about the contract is in the current Statement of Additional
Information (SAI), dated the same date as this prospectus. The SAI is
incorporated by reference into this prospectus and is legally part of this
prospectus. For a free copy of the SAI, write The Lincoln National Life
Insurance Company, P.O. Box 2340, Fort Wayne, IN 46801 or call 1-800-234-3500.
The SAI and other information about Lincoln Life and the VAA are also available
on the SEC's website (http://www.sec.gov). There is a table of contents for the
SAI on the last page of this prospectus.
_______, 2014
1
Table of Contents
[Download Table]
Item Page
Special Terms 3
Expense Tables 4
Summary of Common Questions 5
The Lincoln National Life Insurance Company 6
Variable Annuity Account (VAA) 7
Charges and Other Deductions 9
The Contract 11
Guaranteed Withdrawal Benefit 12
Surrenders and Withdrawals 17
Annuity Payouts 18
Federal Tax Matters 19
Voting Rights 22
Distribution of the Contracts 22
Return Privilege 23
Other Information 23
Legal Proceedings 23
Statement of Additional Information
Table of Contents for Lincoln National Variable Annuity Account L 25
2
Special Terms
In this prospectus, the following terms have the indicated meanings:
Account or Variable Annuity Account (VAA)-The segregated investment account,
Account L, into which we set aside and invest the assets of the contract
offered in this prospectus.
Accumulation Unit-A measure used to calculate AAV for the contract before the
Annuity Commencement Date.
Annuitant (you, your)-The person upon whose life the annuity payments are based
and the person who can exercise the rights under the contract (including
investment allocations, transfers, payout option, designation of the
Beneficiary, etc.). The Annuitant was previously the participant in a qualified
plan that was invested in the Lincoln Secured Retirement IncomeSM variable
annuity.
Annuitant Account Value (AAV)-The value of the VAA held under the contract on
your (the Annuitant's) behalf. The Contractowner will maintain an AAV for each
Annuitant.
Annuity Commencement Date-The Valuation Date when funds are withdrawn to
provide a fixed dollar payout for payment of annuity benefits under the Annuity
Payout option you select .
Annuity Payout- An amount paid at regular intervals after the Annuity
Commencement Date under one of several options available to the Annuitant
and/or any other payee. This amount is paid on a fixed basis.
Automatic Annual Step-up-A feature that provides an automatic step-up of the
Income Base to the AAV, subject to certain conditions.
Benefit Year-The 12-month period starting with the GWB Effective Date and
starting with that date each subsequent year.
Beneficiary-The person or entity you choose to receive any Death Benefit
payable upon the death of the Annuitant.
Certificate-A legal document we issue to each person covered under this group
annuity contract. The Certificate is proof of participation in the contract,
describes the coverage guaranteed to you, and outlines all essential terms and
conditions of the contract.
Certificate Effective Date-The date this Certificate is issued and in force as
shown on the Certificate Specification page.
Contractowner-The Lincoln Financial Group Trust Company, LLC.
Death Benefit-Before the Annuity Commencement Date, the amount payable to your
designated Beneficiary if the Annuitant dies.
Excess Withdrawals-Amounts withdrawn from the AAV which may decrease or
eliminate guarantees under the Guaranteed Withdrawal Benefit. All withdrawals
are Excess Withdrawals except withdrawals to provide the Guaranteed Annual
Income and the Guaranteed Withdrawal Benefit charge.
Good Order-The actual receipt at our Home Office of the requested transaction
in writing or by other means we accept, along with all information and
supporting legal documentation necessary to effect the transaction. The forms
we provide will identify the necessary documentation. We may, in our sole
discretion, determine whether any particular transaction request is in Good
Order, and we reserve the right to change or waive any Good Order requirements
at any time.
Guaranteed Annual Income (GAI)-The guaranteed periodic withdrawal amount
available from the AAV each Benefit Year for life.
Guaranteed Annual Income Effective Date-The Valuation Date the request to
receive Guaranteed Annual Income amounts is approved by the Home Office.
Guaranteed Withdrawal Benefit-This feature provides guaranteed lifetime
periodic withdrawals called GAI that may increase based on Automatic Annual
Step-ups and also age-based increases to the withdrawal amount, regardless of
investment performance of the contract and provided certain conditions are met.
Guaranteed Withdrawal Benefit Effective Date (GWB Effective Date)-The date of
the first Purchase Payment into the Lincoln Secured Retirement IncomeSM
contract by the Annuitant.
Income Base-A value used to calculate the Guaranteed Annual Income amount.
Lincoln Life (we, us, our, Company)-The Lincoln National Life Insurance
Company.
Purchase Payments-The sum of all amounts paid into the AAV. Purchase Payments
are allocated to the LVIP Managed Risk Profile Moderate Fund and are used to
fund the Guaranteed Withdrawal Benefit.
Rollover Money-An eligible rollover from a qualified plan that was previously
invested in the Lincoln Secured Retirement IncomeSM variable annuity.
Subaccount-The portion of the VAA that reflects investments in Accumulation
Units of the fund available under the contract.
Valuation Date-Each day the New York Stock Exchange (NYSE) is open for trading.
Valuation Period-The period starting at the close of trading (normally 4:00
p.m. New York time) on each day that the NYSE is open for trading (Valuation
Date) and ending at the close of such trading on the next Valuation Date.
3
Expense Tables
The following tables describe the fees and expenses that you will pay when
investing in and surrendering the
contract.
The first table describes the fees and expenses that you will pay at the time
that you invest in or surrender the contract.
ANNUITANT TRANSACTION EXPENSES
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There are no sales charges, deferred sales charges, or surrender charges associated with
this contract.
The next table describes the fees and expenses that you will pay periodically
during the time that you are invested in the contract, not including fund fees
and expenses.
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Separate Account Annual Expense (as a percentage of average daily net assets in the
Subaccount):
Mortality and Expense Risk and Administrative Charge.................................... 0.45%
Guaranteed Withdrawal Benefit1............................................................
Guaranteed Maximum Annual Charge........................................................ 2.00%
Current Annual Charge................................................................... 0.90%
(1) As a percentage of the Income Base, as increased for subsequent Purchase
Payments, Automatic Annual Step-ups and decreased upon an Excess
Withdrawal. The current monthly charge is 0.075%, not to exceed the
guaranteed maximum monthly percentage charge of 0.17%. This charge is
deducted from the AAV on a monthly basis.
The next item shows the minimum and maximum total annual operating expenses
charged by the funds that you may pay periodically during the time that you are
invested in the contract. The expenses are for the year ended December 31,
2013. More detail concerning the fund's fees and expenses is contained in the
prospectus for the fund.
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Minimum Maximum
--------- --------
Total Annual Fund Operating Expenses (expenses that are deducted from
fund assets, including management fees, distribution and/or service
(12b-1) fees, and other expenses)................................... 0.73% 0.73%
Total Annual Fund Operating Expenses (after contractual waivers/
reimbursements)..................................................... 0.73% 0.73%
The following table shows the expenses charged by the fund for the year ended
December 31, 2013:
(as a percentage of each fund's average net assets):
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Other
Management 12b-1 Fees Expenses
Fees (before (before any (before any
any waivers/ waivers/ waivers/
reimburse- reimburse- reimburse-
ments) + ments) + ments) +
LVIP Managed Risk Profile Moderate Fund - Standard Class(1) 0.25% 0.00% 0.02%
Total
Total Total Expenses
Expenses Contractual (after
Acquired (before any waivers/ Contractual
Fund waivers/ reimburse- waivers/
Fees and reimburse- ments reimburse-
Expenses ("AFFE") = ments) (if any) ments)
LVIP Managed Risk Profile Moderate Fund - Standard Class(1) 0.46% 0.73% 0.00% 0.73%
(1) The Total Annual Fund Operating Expenses do not correlate to the ratio of
expenses to the average net assets appearing in the Financial Highlights
table which reflects only the operating expenses of the Fund and does not
include AFFE.
The fund has reserved the right to impose fees when funds shares are redeemed
within a specified period of time of purchase ("redemption fees") not reflected
in the table above. There are no redemption fees at this time.
For information concerning compensation paid for the sale of contracts, see
Distribution of the Contracts.
4
EXAMPLES
These examples are intended to help you compare the cost of investing in this
contract with the cost of investing in other variable annuity contracts. These
costs include separate account annual expenses, benefit charges and fund fees
and expenses.
The examples assume that you invest $10,000 for the time periods indicated, and
that your investment has a 5% annual return on assets and the maximum fees and
expenses of the fund. The examples also assume that the guaranteed maximum
contract charges are in effect. Although your actual costs may be higher or
lower, based on these assumptions, your costs would be:
1) If you surrender your Certificate at the end of the applicable time period:
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1 year 3 years 5 years 10 years
-------- --------- --------- ---------
$319 $975 $1,655 $3,464
2) If you annuitize or do not surrender your Certificate at the end of the
applicable time period:
[Download Table]
1 year 3 years 5 years 10 years
-------- --------- --------- ---------
$319 $975 $1,655 $3,464
For more information - See Charges and Other Deductions in this prospectus.
These examples should not be considered a representation of past or future
expenses. Actual expenses may be more or less than those shown.
Summary of Common Questions
What kind of contract is this? It is a group variable annuity contract with
Certificates between the Contractowner and Lincoln Life that is designed to be
an Individual Retirement Annuity (IRA) purchased with Rollover Money from the
Lincoln Secured Retirement IncomeSM variable annuity. It will be issued with
the Guaranteed Withdrawal Benefit. See The Contract - Guaranteed Withdrawal
Benefit. This prospectus provides a general description of the contract.
Certain benefits, features, and charges may vary in certain states. You should
refer to your contract for any state-specific provisions. All material state
variations are discussed in this prospectus.
Who is eligible to receive a Certificate? The Certificate will be issued to
former qualified plan participants who will purchase an IRA contract with
Rollover Money. To be eligible to receive a Certificate, the money must have
been previously invested in the Lincoln Secured Retirement IncomeSM variable
annuity sold by Lincoln Life to the qualified plan.
What is the Variable Annuity Account (VAA)? It is a separate account we
established under Indiana insurance law, and registered with the SEC as a unit
investment trust. VAA assets are allocated to the Subaccount. VAA assets are
not chargeable with liabilities arising out of any other business which we may
conduct. Remember that because of your investment in the VAA you will benefit
from any gain, and take a risk of any loss in the value of the securities in
the fund's portfolios. See Variable Annuity Account.
What is my investment choice? The VAA applies your Purchase Payments to buy
shares in the LVIP Managed Risk Profile Moderate Fund (fund). In turn, the fund
holds a portfolio of securities consistent with its investment policy. See
Investments of the Variable Annuity Account - Description of the Fund.
Who invests the money? The investment adviser for the fund is Lincoln
Investment Advisors Corporation. See Investments of the Variable Annuity
Account - Description of the Fund.
How does the contract work? If we approve your application, we will issue you a
Certificate that outlines your rights in the group annuity contract, which
include the right to receive a Guaranteed Withdrawal Benefit, a Death Benefit
or an Annuity Payout if conditions are met. When you make Purchase Payments,
you buy Accumulation Units. You will receive a Guaranteed Withdrawal Benefit if
all conditions are met. If you decide to annuitize the AAV to receive an
Annuity Payout, the Accumulation Units are withdrawn to provide a fixed Annuity
Payout. See The Contract.
What charges will be taken from my account? We apply a charge to the daily net
asset value of the VAA that consists of a mortality and expense risk and
administrative charge. There is also an additional monthly charge for the
Guaranteed Withdrawal Benefit. See Expense Tables and also the Charges and
Other Deductions section of this prospectus.
The fund's investment management fee, expenses and expense limitations, if
applicable, are more fully described in the Expense Tables and also the
prospectus for the fund.
For information about the compensation we pay for sales of contracts, see
Distribution of the Contracts.
What Purchase Payments must be made, and how often? Subject to the minimum
payment amounts, additional payments after the initial rollover are completely
flexible. Purchase Payments within 180 days of a withdrawal may be limited.
Please check with your registered representative. See The Contracts - Purchase
Payments.
5
What is the Guaranteed Withdrawal Benefit? This feature provides on an annual
basis guaranteed lifetime periodic withdrawals up to a guaranteed amount
(referred to as Guaranteed Annual Income amounts) based on a percentage of an
Income Base with the potential for age-based increases to the Guaranteed Annual
Income amount. Withdrawals may be made up to the Guaranteed Annual Income
amount as long as that amount is greater than zero. The Income Base is not
available as a separate benefit upon death or surrender and is increased by
subsequent Purchase Payments, Automatic Annual Step-ups to the Income Base and
is decreased by certain withdrawals in accordance with provisions described in
this prospectus.
How will my Annuity Payouts be calculated? If you decide to annuitize, you may
select an annuity option and start receiving Annuity Payouts as a fixed option.
See Annuity Payouts - Annuity Options.
What happens if I die before I annuitize? Your Beneficiary may receive a Death
Benefit and have options as to how the Death Benefit is paid. See Guaranteed
Withdrawal Benefit - Death Prior to the Annuity Commencement Date.
May I surrender my Certificate or make a withdrawal? Yes, we will allow the
surrender of the contract or a withdrawal of AAV upon your written request on
an approved Lincoln form. Any Excess Withdrawals may significantly reduce your
Income Base as well as your Guaranteed Annual Income amount. A portion of
surrender or withdrawal proceeds may be taxable. In addition, if you decide to
take a distribution before age 591/2, a 10% Internal Revenue Service (IRS) tax
penalty may apply. A surrender or a withdrawal also may be subject to 20%
withholding. See Federal Tax Matters.
Do I get a free look at this Certificate? Yes, you can cancel a Certificate
within twenty days (in some states longer) of the date you receive the
Certificate by giving written notice to the Home Office. See Return Privilege.
Where may I find more information about Accumulation Unit values? Because the
Subaccount which is available under the contract did not begin operation before
the date of this prospectus, financial information for the Subaccount is not
included in this prospectus or in the SAI.
Investment Results
The VAA advertises the annual performance of the Subaccounts for the fund on
both a standardized and non-standardized basis.
The standardized calculation measures average annual total return. This is
based on a hypothetical $1,000 payment made at the beginning of a one-year, a
five-year and a 10-year period. This calculation reflects all fees and charges
that are or could be imposed on all Contractowner accounts.
The non-standardized calculation compares changes in Accumulation Unit values
from the beginning of the most recently completed calendar year to the end of
that year. It may also compare changes in Accumulation Unit values over shorter
or longer time periods. This calculation reflects mortality and expense risk
charges. It also reflects management fees and other expenses of the fund.
The Lincoln National Life Insurance Company
The Lincoln National Life Insurance Company (Lincoln Life or Company),
organized in 1905, is an Indiana-domiciled insurance company, engaged primarily
in the direct issuance of life insurance contracts and annuities. Lincoln Life
is wholly owned by Lincoln National Corporation (LNC), a publicly held
insurance and financial services holding company incorporated in Indiana.
Lincoln Life is obligated to pay all amounts promised to Contractowners under
the contracts.
Any guarantees under the contract that exceed your AAV, such as those
associated with Death Benefit options and living benefit riders are paid from
our general account (not the VAA). Therefore, any amounts that we may pay under
the contract in excess of AAV are subject to our financial strength and
claims-paying ability and our long-term ability to make such payments. With
respect to the issuance of the contracts, Lincoln Life does not file periodic
financial reports with the SEC pursuant to the exemption for life insurance
companies provided under Rule 12h-7 of the Securities Exchange Act of 1934.
We issue other types of insurance policies and financial products as well, and
we also pay our obligations under these products from our assets in the general
account. Moreover, unlike assets held in the VAA, the assets of the general
account are subject to the general liabilities of the Company and, therefore,
to the Company's general creditors. In the event of an insolvency or
receivership, payments we make from our general account to satisfy claims under
the contract would generally receive the same priority as our other
Contractowner obligations.
The general account is not segregated or insulated from the claims of the
insurance company's creditors. Investors look to the financial strength of the
insurance companies for these insurance guarantees. Therefore, guarantees
provided by the insurance company as to benefits promised in the prospectus are
subject to the claims paying ability of the insurance company and are subject
to the risk that the insurance company may not be able to cover or may default
on its obligations under those guarantees.
6
Our Financial Condition. Among the laws and regulations applicable to us as an
insurance company are those which regulate the investments we can make with
assets held in our general account. In general, those laws and regulations
determine the amount and type of investments which we can make with general
account assets.
In addition, state insurance regulations require that insurance companies
calculate and establish on their financial statements, a specified amount of
reserves in order to meet the contractual obligations to pay the claims of our
Contractowners. In order to meet our claims-paying obligations, we regularly
monitor our reserves to ensure we hold sufficient amounts to cover actual or
expected contract and claims payments. However, it is important to note that
there is no guarantee that we will always be able to meet our claims paying
obligations, and that there are risks to purchasing any insurance product.
State insurance regulators also require insurance companies to maintain a
minimum amount of capital in excess of liabilities, which acts as a cushion in
the event that the insurer suffers a financial impairment, based on the
inherent risks in the insurer's operations. These risks include those
associated with losses that we may incur as the result of defaults on the
payment of interest or principal on assets held in our general account, which
include bonds, mortgages, general real estate investments, and stocks, as well
as the loss in value of these investments resulting from a loss in their market
value.
How to Obtain More Information. We encourage both existing and prospective
Contractowners to read and understand our financial statements. We prepare our
financial statements on both a statutory basis and according to Generally
Accepted Accounting Principles (GAAP). Our audited GAAP financial statements,
as well as the financial statements of the VAA, are located in the SAI. If you
would like a free copy of the SAI, please write to us at: PO Box 2340, Fort
Wayne, IN 46801-2340, or call 1-800-234-3500. In addition, the Statement of
Additional Information is available on the SEC's website at http://www.sec.gov.
You may obtain our audited statutory financial statements and any unaudited
statutory financial statements that may be available by visiting our website at
www.LincolnFinancial.com.
You also will find on our website information on ratings assigned to us by one
or more independent rating organizations. These ratings are opinions of an
operating insurance company's financial capacity to meet the obligations of its
insurance and annuity contracts based on its financial strength and/or
claims-paying ability. Additional information about rating agencies is included
in the Statement of Additional Information.
Lincoln Financial Group is the marketing name for Lincoln National Corporation
(NYSE:LNC) and its affiliates. Through its affiliates, Lincoln Financial Group
offers annuities, life, group life and disability insurance, 401(k) and 403(b)
plans, and comprehensive financial planning and advisory services.
Variable Annuity Account (VAA)
On April 29, 1996, the VAA was established as an insurance company separate
account under Indiana law. It is registered with the SEC as a unit investment
trust under the provisions of the Investment Company Act of 1940 (1940 Act).
The VAA is a segregated investment account under Indiana law, meaning that its
assets may not be charged with liabilities resulting from any other business
that we may conduct. Income, gains and losses, whether realized or not, from
assets allocated to the VAA are, in accordance with the applicable contracts,
credited to or charged against the VAA. They are credited or charged without
regard to any other income, gains or losses of Lincoln Life. We are the issuer
of the contract and the obligations set forth in the contract, other than those
of the Certificate holder, are ours. The VAA satisfies the definition of
separate account under the federal securities laws. We do not guarantee the
investment performance of the VAA. Any investment gain or loss depends on the
investment performance of the fund. The Certificate holder assumes the full
investment risk for all amounts placed in the VAA.
Financial Statements
The December 31, 2013 financial statements of the VAA and the December 31, 2013
consolidated financial statements of Lincoln Life are located in the SAI. If
you would like a free copy of the SAI, complete and mail the request on the
last page of this prospectus, or call 1-800-234-3500.
Investments of the Variable Annuity Account
Any Purchase Payments that you allocate to the Subaccount will be allocated to
the Standard Class of the fund. Shares of the fund will be sold at net asset
value with no initial sales charge to the VAA in order to fund the contracts.
The fund is required to redeem fund shares at net asset value upon our request.
7
Investment Adviser
Lincoln Investment Advisors Corporation (LIA) is the investment adviser for the
fund. LIA is registered under the Investment Advisers Act of 1940. As
compensation for its services to the fund, the investment adviser receives a
fee from the fund which is accrued daily and paid monthly. This fee is based on
the net assets of the fund, as defined in the prospectus for the fund.
Certain Payments We Receive with Regard to the Fund
We (or our affiliates) incur expenses in promoting, marketing, and
administering the contracts (and in our role as intermediary, the funds). With
respect to the fund, the adviser and/or distributor, or an affiliate thereof,
may make payments to us (or an affiliate) for certain services we provide on
behalf of the funds. Such services include, but are not limited to,
recordkeeping; aggregating and processing purchase and redemption orders;
providing Annuitants with statements showing their positions within the funds;
processing dividend payments; providing subaccounting services for shares held
by Annuitants; and forwarding shareholder communications, such as proxies,
shareholder reports, dividend and tax notices, and printing and delivering
prospectuses and updates to Annuitants. It is anticipated that such payments
will be based on a percentage of assets of the fund attributable to the
contracts along with certain other variable contracts issued or administered by
us (or an affiliate). These percentages are negotiated and the amount we
receive may be substantial. We (or our affiliates) may profit from these
payments. These payments may be derived, in whole or in part, from the
investment advisory fee deducted from fund assets. Annuitants, through their
indirect investment in the funds, bear the costs of these investment advisory
fees (see the fund's prospectus for more information). Additionally, a fund's
adviser and/or distributor or its affiliates may provide us with certain
services that assist us in the distribution of the contracts and may pay us
and/or certain affiliates amounts for marketing programs and sales support, as
well as amounts to participate in training and sales meetings.
Description of the Fund
The Subaccount of the VAA is invested solely in shares of the LVIP Managed Risk
Profile Moderate Fund, a fund of funds. This fund is managed by an adviser
affiliated with us.
The fund offered as part of this contract may have similar investment
objectives and policies to other portfolios managed by the adviser. The
investment results of the fund, however, may be higher or lower than the other
portfolios that are managed by the adviser or sub-adviser. There can be no
assurance, and no representation is made, that the investment results of the
fund will be comparable to the investment results of any other portfolio
managed by the adviser or sub-adviser, if applicable.
The fund invests substantially all of its assets in other funds. As a result,
you will pay fees and expenses at both fund levels. This will reduce your
investment return. This arrangement is referred to as funds of funds. Funds of
funds structures may have higher expenses than funds that invest directly in
debt or equity securities.
This fund may employ a risk management strategy to provide for downside
protection during sharp downward movements in equity markets.This strategy
could limit the upside participation of the fund in rising equity markets
relative to other funds. The success of the adviser's risk management strategy
depends, in part, on the adviser's ability to effectively and efficiently
implement its risk forecasts and to manage the strategy for the fund's benefit.
There is no guarantee that the strategy can achieve or maintain the fund's
optimal risk targets. The fund's performance may be negatively impacted in
certain markets as a result of reliance on these strategies. In low volatility
markets the volatility management strategy may not mitigate losses. In
addition, the adviser may not be able to effectively implement the strategy
during rapid or extreme market events. Such inefficiency in implementation
could cause the fund to lose more money than investing without the risk
management strategy or not realize potential gains. Any one of these factors
could impact the success of the volatility management strategy, and the fund
may not perform as expected. For more information about the fund and the
investment strategies it employs, please refer to the fund's current
prospectuses. Fund prospectuses are available by contacting us.
This fund is included as an investment option in part, to reduce the risk of
investment losses that may require us to use our own assets to make guaranteed
payments under the Guaranteed Withdrawal Benefit. Our financial interest in
reducing loss and the volatility of overall AAVs, in light of our obligations
to provide benefits under the rider, may be deemed to present a potential
conflict of interest with respect to the interests of the Contractowner and/or
Annuitants. In addition, any negative impact to the underlying fund as a result
of the risk management strategies may limit your AAV, which in turn may limit
your ability to achieve step-ups of the Income Base under the Guaranteed
Withdrawal Benefit.
The Guaranteed Withdrawal Benefit also provides protection in the event of a
market downturn. Likewise, there is an additional cost associated with the
Guaranteed Withdrawal Benefit which can limit the contract's upside
participation in the markets.
Following is a brief summary of the fund description. More detailed information
may be obtained from the current prospectus for the fund. You should read the
fund prospectus that accompanies this prospectus carefully before investing. A
prospectus for the fund is available by contacting us. In addition, if you
receive a summary prospectus for the fund, you may obtain a full statutory
prospectus by referring to the contact information for the fund company on the
cover page of the summary prospectus. Please be advised that there is no
assurance that the fund will achieve its stated objective.
8
Lincoln Variable Insurance Products Trust, advised by Lincoln Investment
Advisors Corporation.
o LVIP Managed Risk Profile Moderate Fund (Standard Class): Balance between
high current income with growth of capital; a fund of funds.
Fund Shares
We will purchase shares of the fund at net asset value and direct them to the
Subaccount of the VAA. We will redeem sufficient shares of the fund to pay
Annuity Payouts, Death Benefits, surrender/withdrawal proceeds or for other
purposes described in the contract. Redeemed shares are retired, but they may
be reissued later.
Shares of the fund are not sold directly to the general public. They are sold
to us, and may be sold to other insurance companies, for investment of the
assets of the Subaccount established by those insurance companies to fund
variable annuity and variable life insurance contracts.
When a fund sells any of its shares both to variable annuity and to variable
life insurance separate accounts, it is said to engage in mixed funding. When a
fund sells any of its shares to separate accounts of unaffiliated life
insurance companies, it is said to engage in shared funding.
The fund currently engages in mixed and shared funding. Therefore, due to
differences in redemption rates or tax treatment, or other considerations, the
interest of various Annuitants participating in a fund could conflict. The
fund's Board of Directors will monitor for the existence of any material
conflicts, and determine what action, if any, should be taken. The fund does
not foresee any disadvantage to Annuitants arising out of mixed or shared
funding. If such a conflict were to occur, one of the separate accounts might
withdraw its investment in a fund. This might force a fund to sell portfolio
securities at disadvantageous prices. See the prospectuses for the funds.
Reinvestment of Dividends and Capital Gain Distributions
All dividends and capital gain distributions of the fund are automatically
reinvested in shares of the distributing funds at their net asset value on the
date of distribution. Dividends are not paid out to Annuitants as additional
units, but are reflected as changes in unit values.
Addition, Deletion or Substitution of Investments
We reserve the right, within the law, to make certain changes to the structure
and operation of the VAA at our discretion and without your consent. We may
add, delete, or substitute the fund for all Annuitants or only for certain
classes of Annuitants. New or substitute funds may have different fees and
expenses, and may only be offered to certain classes of Annuitants.
Substitutions may be made with respect to existing investments or the
investment of future Purchase Payments, or both. We may close the Subaccount to
allocations of Purchase Payments or AAV, or both, at any time in our sole
discretion. The fund, which sells shares to the Subaccount pursuant to a
participation agreement, also may terminate the agreement and discontinue
offering its shares to the Subaccount. A substitution might also occur if
shares of a fund should no longer be available, or if investment in the fund's
shares should become inappropriate, in the judgment of our management, for the
purposes of the contract, or for any other reason in our sole discretion.
If the Subaccount or fund is closed to future Purchase Payments, we may add a
new investment option to the contract. As an alternative, we may substitute a
new fund for the prior fund option, after obtaining any necessary approval of
the SEC and upon written notice to you. At least one variable investment option
will be available at all times.
We also may:
o remove, combine, or add Subaccounts and make the new Subaccounts available
to you at our discretion;
o transfer assets supporting the contract from one Subaccount to another or
from the VAA to another separate account;
o combine the VAA with other separate accounts and/or create new separate
accounts;
o deregister the VAA under the 1940 Act; and
o operate the VAA as a management investment company under the 1940 Act or as
any other form permitted by law.
We may modify the provisions of the contract to reflect changes to the
Subaccount and the VAA and to comply with applicable law. We will not make any
changes without any necessary approval by the SEC. We will also provide you
written notice.
Charges and Other Deductions
We will deduct the charges described below to cover our costs and expenses,
services provided and risks assumed under the contracts. We incur certain costs
and expenses for the distribution and administration of the contracts and for
paying the benefits under the contracts.
9
Our administrative services include:
o processing applications for and issuing the contracts;
o processing purchases and redemptions of fund shares as required;
o maintaining records;
o administering Annuity Payouts;
o furnishing accounting and valuation services (including the calculation and
monitoring of daily Subaccount values);
o reconciling and depositing cash receipts;
o providing contract confirmations; and
o providing toll-free and website inquiry services.
The benefits we provide include:
o a Death Benefit;
o a Guaranteed Withdrawal Benefit;
o Annuity Payout benefits; and
o cash surrender value benefits.
The risks we assume include:
o the risk that Annuitants receiving Annuity Payouts live longer than we
assumed when we calculated our guaranteed rates (these rates are
incorporated in the contract and cannot be changed);
o the risk that lifetime payments to individuals from the Guaranteed
Withdrawal Benefit will exceed the AAV;
o the risk that the Death Benefits paid will exceed the actual AAV; and
o the risk that our costs in providing the services will exceed our revenues
from contract charges (which we cannot change).
The amount of a charge may not necessarily correspond to the costs associated
with providing the services or benefits indicated by the description of the
charge. Any remaining expenses will be paid from our general account which may
consist, among other things, of proceeds derived from mortality and expense
risk charges deducted from the VAA. We may profit from one or more of the fees
and charges deducted under the contract. We may use these profits for any
corporate purpose, including financing the distribution of the contracts.
Deductions from the VAA
We apply to the daily net asset value of the Subaccount a charge which is equal
to an annual rate of:
[Download Table]
Mortality and expense risk and administrative charge..... 0.45%
Guaranteed Withdrawal Benefit charge: The annual charge for this feature is
currently 0.90% (0.075% monthly). This charge is applied to the Income Base
(carried over from the Lincoln Secured Retirement IncomeSM contract under your
former qualified retirement plan), as increased for subsequent Purchase
Payments, Automatic Annual Step-ups, and decreased for Excess Withdrawals. We
will deduct the cost of this benefit from the AAV Value on a monthly basis,
with the first deduction occurring on the Valuation Date on or next following
the one-month anniversary of the Guaranteed Withdrawal Benefit Effective Date.
The amount we deduct will increase or decrease as the Income Base increases or
decreases, because the charge is based on the Income Base. See Guaranteed
Withdrawal Benefit - Income Base section for a discussion and example of the
impact of the changes to the Income Base.
The percentage charge may increase no more frequently than once in a 12-month
period and we will notify you in advance of the effective date of the change.
The charge will not exceed the guaranteed maximum annual percentage charge of
2.00%. The guaranteed maximum monthly percentage charge is 0.17%.
If the AAV Value is reduced to zero while you are receiving a Guaranteed Annual
Income, this charge will not be deducted.
Other Charges and Deductions
There are additional deductions from and expenses paid out of the assets of the
underlying fund that are more fully described in the prospectus for the fund.
Additional Information
The sales and administrative charges described previously may be reduced or
eliminated for any particular contract. However, these charges will be reduced
only to the extent that we anticipate lower distribution and/or administrative
expenses, or that we perform fewer sales or administrative services than those
originally contemplated in establishing the level of those charges. Lower
distribution and administrative expenses may be the result of economies
associated with:
o the use of mass enrollment procedures;
o the performance of administrative or sales functions by the employer;
10
o the use by an employer of automated techniques in submitting deposits or
information related to deposits on behalf of its employees; or
o any other circumstances which reduce distribution or administrative
expenses.
The exact amount of sales and administrative charges applicable to a particular
contract will be stated in that contract.
The Contract
Purchase of Contract
This prospectus describes the group variable annuity contract under which we
allocate payments to the accounts of individual Annuitants and provide a
Guaranteed Withdrawal Benefit if all conditions are met. Each Annuitant under
the group variable annuity contract receives a Certificate which summarizes the
provisions of the group contract and is proof of participation.
Purchase Payments
You may make Purchase Payments to the Subaccount at any time, prior to the
Annuity Commencement Date, subject to certain conditions. You are not required
to make additional Purchase Payments after the initial Purchase Payment of
Rollover Money. The minimum initial Purchase Payment is $10,000 and must be
made using Rollover Money that was previously invested in the Lincoln Secured
Retirement IncomeSM variable annuity, purchased by a qualified plan from
Lincoln Life. Additional Purchase Payments may be made with qualified money
from any source. The minimum annual amount for additional Purchase Payments is
$300. Please check with your registered representative about making additional
Purchase Payments since the requirements of your state may vary. The minimum
Purchase Payment at any one time must be at least $100 ($25 if transmitted
electronically). If a Purchase Payment is submitted that does not meet the
minimum amount, we will contact you to ask whether additional money will be
sent, or whether we should return the Purchase Payment to you.
Purchase Payments are allocated to the LVIP Managed Risk Profile Moderate Fund
and are used to fund the Guaranteed Withdrawal Benefit. If Purchase Payments
are discontinued, the Certificate will remain in force as a paid-up contract.
If you submit a Purchase Payment to your agent, we will not begin processing
the Purchase Payment until we receive it from your agent's broker-dealer in
Good Order.
The maximum annual Purchase Payment will be limited to $500,000 without Home
Office approval (excluding the Rollover Money). Purchase Payments which
originate from other investment options available under your retirement plan
and are made within 180 days of a withdrawal from the AAV may be limited to
$25,000 in the future. After the Guaranteed Annual Income Effective Date no
additional Purchase Payments will be allowed if your AAV is zero. In addition,
we may further limit or decline future Purchase Payments as long as we provide
you 180 days-notice. It is possible that we could refuse any or all future
Purchase Payments. If future Purchase Payments cannot be made, AAVs and Income
Bases will no longer be increased by additional Purchase Payments and you will
not have the opportunity to further increase your GAI amount. You should
consider these Purchase Payment limitations and how they may impact their
long-term investment plans, especially if the intent is to make additional
Purchase Payments over a long period of time.
Valuation Date
Accumulation Units will be valued once daily at the close of trading (normally,
4:00 p.m., New York time) on each day the New York Stock Exchange is open
(Valuation Date). On any date other than a Valuation Date, the Accumulation
Unit value will not change.
Allocation of Purchase Payments
Purchase Payments are allocated to the LVIP Managed Risk Profile Moderate Fund
Subaccount and are used to fund the Guaranteed Withdrawal Benefit. Purchase
Payments allocated to the VAA are converted into Accumulation Units and are
credited to the account of each Annuitant. The number of Accumulation Units
credited is determined by dividing the Purchase Payment by the value of an
Accumulation Unit on the Valuation Date on which the Purchase Payment is
received in Good Order at our Home Office if received before 4:00 p.m., New
York time or the close of trading of the New York Stock Exchange. If the
Purchase Payment is received in Good Order at or after 4:00 p.m., New York
time, we will process the request using the Accumulation Unit value computed on
the next Valuation Date. The number of Accumulation Units determined in this
way is not changed by any subsequent change in the value of an Accumulation
Unit. However, the dollar value of an Accumulation Unit will vary depending not
only upon how well the fund performs, but also upon the expenses of the VAA and
the fund.
Valuation of Accumulation Units
Purchase Payments allocated to the VAA are converted into Accumulation Units.
This is done by dividing the amount allocated by the value of an Accumulation
Unit for the Valuation Period during which the Purchase Payments are allocated
to the VAA. The Accumulation Unit value for the Subaccount was established at
the inception of the Subaccount. It may increase or decrease from Valuation
11
Period to Valuation Period. Accumulation Unit values are affected by investment
performance of the fund, fund expenses, and the deduction of certain contract
charges. We determine the value of an Accumulation Unit on the last day of any
following Valuation Period as follows:
1. The total value of the fund shares held in the Subaccount is calculated by
multiplying the number of fund shares owned by the Subaccount at the beginning
of the Valuation Period by the net asset value per share of the fund at the end
of the Valuation Period, and adding any dividend or other distribution of the
fund if an ex-dividend date occurs during the Valuation Period; minus
2. The liabilities of the Subaccount at the end of the Valuation Period; these
liabilities include daily charges imposed on the Subaccount, and may include a
charge or credit with respect to any taxes paid or reserved for by us that we
determine result from the operations of the VAA; and
3. The result is divided by the number of Subaccount units outstanding at the
beginning of the Valuation Period.
The daily charges imposed on the Subaccount for any Valuation Period are equal
to the daily mortality and expense risk charge multiplied by the number of
calendar days in the Valuation Period. In certain circumstances (for example,
when separate account assets are less than $1,000), and when permitted by law,
it may be prudent for us to use a different standard industry method for this
calculation, called the Net Investment Factor method. We will achieve
substantially the same result using either method.
Guaranteed Withdrawal Benefit
The Guaranteed Withdrawal Benefit provides for each Annuitant (and spouse if
the joint life option is elected):
o Guaranteed lifetime periodic withdrawals up to the Guaranteed Annual Income
amount which is based upon a guaranteed Income Base;
o Automatic Annual Step-ups of the Income Base to the AAV if the AAV is equal
to or greater than the Income Base and the maximum age(s) has not been
reached;
o Age-based increases to the Guaranteed Annual Income amount (after reaching a
higher age-band and after an Automatic Annual Step-up).
Please note any withdrawals made prior to the Guaranteed Annual Income
Effective Date or that exceed the Guaranteed Annual Income amount (referred to
as Excess Withdrawals) may significantly reduce the Income Base as well as the
Guaranteed Annual Income amount by an amount greater than the dollar amount of
the Excess Withdrawal and will terminate the benefit if the Income Base is
reduced to zero.
The Guaranteed Withdrawal Benefit provides guaranteed, periodic withdrawals for
your life or for the lives of you and your spouse (joint life option)
regardless of the investment performance of the contract, provided that certain
conditions are met. For purposes of this Guaranteed Withdrawal Benefit, spouse
means an individual who would be recognized as a spouse under federal law. An
Income Base is used to calculate the Guaranteed Annual Income payment from AAV,
but is not available as a separate benefit upon death or surrender. The Income
Base will be carried over from the Lincoln Secured Retirement IncomeSM variable
annuity under your previous retirement plan. The Income Base will be increased
by subsequent Purchase Payments and Automatic Annual Step-ups, and decreased by
Excess Withdrawals in accordance with the provisions set forth below. Limits on
Purchase Payments are discussed in the Purchase Payments section of this
prospectus. No additional Purchase Payments are allowed if the AAV decreases to
zero after the Guaranteed Annual Income Effective Date for any reason.
The Guaranteed Withdrawal Benefit provides for guaranteed, periodic withdrawals
up to the Guaranteed Annual Income amount commencing after you (single life
option) or the younger of you or your spouse (joint life option) reach age 55.
The Guaranteed Annual Income payments are based upon specified percentages of
the Income Base. The specified withdrawal percentages of the Income Base are
age-based and may increase over time. With the single life option, you may
receive Guaranteed Annual Income payments for life. Under the joint life
option, Guaranteed Annual Income amounts for the lifetimes of you and your
spouse will be available.
Income Base. The Income Base is a value used to calculate the Guaranteed Annual
Income amount. The Income Base is not available as a lump sum withdrawal or as
a Death Benefit. The initial Income Base under this Certificate is the amount
of your Income Base that was transferred from the Lincoln Secured Retirement
IncomeSM variable annuity contract under your former retirement plan. The
maximum Income Base is $2,000,000. This maximum takes into consideration the
total guaranteed amounts under the living benefit riders of all Lincoln Life
contracts (or contracts issued by our affiliates) in which you (and/or your
spouse if joint life option) are the covered lives.
Each additional Purchase Payment automatically increases the Income Base by the
amount of the Purchase Payment (not to exceed the maximum Income Base).
Additional Purchase Payments will not be allowed after the Guaranteed Annual
Income Effective Date if the AAV decreases to zero for any reason including
market loss.
Excess Withdrawals reduce the Income Base as discussed below. Withdrawals less
than or equal to the Guaranteed Annual Income amount, amounts deducted for the
Guaranteed Withdrawal Benefit charge, and any recordkeeping charge of 0.20% or
less assessed by your IRA custodian will not reduce the Income Base. All
withdrawals prior to the Guaranteed Annual Income Effective Date are considered
Excess Withdrawals.
12
Automatic Annual Step-ups of the Income Base. The Income Base will
automatically step-up to the AAV on the Valuation Date immediately prior to
each Benefit Year anniversary if:
a) the Annuitant (single life option), or the Annuitant or spouse (joint life
option) are still living and under age 86 (if both spouses are living, they
both must be under age 86); and
b) the AAV on that Valuation Date, after the deduction of any withdrawals
(including the Guaranteed Withdrawal Benefit charge), plus any Purchase
Payments made on that date, is equal to or greater than the Income Base.
The Automatic Annual Step-up is available even in those years when a withdrawal
has occurred.
Following is an example of how the Automatic Annual Step-ups will work
(assuming no withdrawals or additional Purchase Payments):
[Enlarge/Download Table]
AAV Income Base
---------- ------------
Initial Rollover Money $50,000....................................... $50,000 $50,000
Valuation Date immediately prior to 1st Benefit Year anniversary..... $54,000 $54,000
Valuation Date immediately prior to 2nd Benefit Year anniversary..... $53,900 $54,000
Valuation Date immediately prior to 3rd Benefit Year anniversary..... $57,000 $57,000
Valuation Date immediately prior to 4th Benefit Year anniversary..... $64,000 $64,000
Withdrawal Amount. If the Guaranteed Annual Income Effective Date occurred
under the Lincoln Secured Retirement IncomeSM contract, the Guaranteed Annual
Income will continue under this Certificate, using the same Guaranteed Annual
Income calculation. If the Certificate Effective Date is not the same as the
Benefit Year anniversary date, you will receive only the amount of Guaranteed
Annual Income remaining from the Lincoln Secured Retirement IncomeSM contract
for that Benefit Year until your next Benefit Year anniversary.
For those who have not previously requested a Guaranteed Annual Income
Effective Date, you may request to begin Guaranteed Annual Income withdrawals
by submitting a request to the Home Office. The Valuation Date the request is
approved is the Guaranteed Annual Income Effective Date. At that time, you will
elect either the single life option or the joint life option of the Guaranteed
Withdrawal Benefit. After the Guaranteed Annual Income Effective Date, periodic
withdrawals up to the Guaranteed Annual Income amount may be taken each Benefit
Year for your lifetime (single life option) or the lifetimes of you and your
spouse (joint life option) as long as the Guaranteed Annual Income amount is
greater than zero. Guaranteed Annual Income withdrawals may be taken once you
(single life option) or the younger of you and your spouse (joint life option)
turn age 55. If the Guaranteed Annual Income Effective Date does not occur on a
Benefit Year anniversary, the Guaranteed Annual Income amount for the first
year will be prorated based on the number of days remaining in that Benefit
Year.
Upon the Guaranteed Annual Income Effective Date, the Weighted Average
Guaranteed Annual Income ("WAGAI") percentage is calculated, based on your age
(single life option) or the age of the younger of you and your spouse (joint
life option). After the Guaranteed Annual Income Effective Date, the Guaranteed
Annual Income amount percentage will increase on a Benefit Year anniversary on
or after an applicable higher age band has been reached only after there has
also been an Automatic Annual Step-up. The Automatic Annual Step-up must occur
after the date you (or spouse if applicable) reached the higher age band. If an
applicable age band has been reached and there has not also been an Automatic
Annual Step-up, then the Guaranteed Annual Income amount percentage will not
increase until the next Automatic Annual Step-up occurs. If the entire
Guaranteed Annual Income amount is not withdrawn during a Benefit Year, there
is no carryover of the remaining amount into the next Benefit Year.
Weighted Average Guaranteed Annual Income Percentage (WAGAI). Under the Lincoln
Secured Retirement IncomeSM contract and this Certificate, Guaranteed Annual
Income percentages were provided for different ages and for single and joint
life options on different tables ("Tables"). The Current Table of Guaranteed
Annual Income Percentages by Ages is shown below. A WAGAI percentage will be
used to calculate the Guaranteed Annual Income. A WAGAI percentage will be
calculated based on the portion of Purchase Payments, Automatic Annual Step-Ups
and Excess Withdrawals that are allocated to each Table that was in effect when
Purchase Payments were made. The percentage for each Table is determined
according to this formula: (a) divided by (b) times (c); where
(a) is the portion of the Income Base calculated on the basis of
Purchase Payments made during the time the specific Table is in
effect and adjusted by Automatic Annual Step-Ups and Excess
Withdrawals;
(b) is the total Income Base for all Tables;
(c) is the applicable percentage for the age and measuring life option
for that Table.
The percentage for each applicable Table will be calculated according to the
formula above. Then the percentages determined for each Table will be added
together to determine the WAGAI percentage. The WAGAI percentage will be
recalculated following the date of an additional Purchase Payment, Automatic
Annual Step-Up or Excess Withdrawal. The Income Base allocated to each rate
Table will be reduced by the same proportion that the Excess Withdrawal reduces
the AAV.
13
The following example demonstrates how the WAGAI is calculated if Purchase
Payments are made while two different Tables are in effect:
[Enlarge/Download Table]
Total Purchase Payment during Year 1 (Table 1 in effect)......................... $ 5,000
Automatic Step-Up of Income Base to market value on Benefit Year anniversary..... $ 5,900
Total Purchase Payments during Year 2 (Table 2 in effect)........................ $ 5,000
Market loss so no Automatic Step-Up on Benefit Year anniversary.................. $10,900
The Annuitant is age 60 on the Guaranteed Annual Income Effective Date. The
percentage rate for this Annuitant under Table 1 was 4% (single life). The
percentage rate under Table 2 was 3.5%.
According to the formula above, at the end of year 2 the percentage attributed
to the first Table is ($5,900 / $10,900 x 4%) = 2.16%. The percentage
attributed to the second Table is ($5,000 / $10,900 x 3.5%) = 1.61%. Adding the
two rates together results in a WAGAI of 3.77%. This rate will be applied to
the Total Income Base of $10,900 to produce a Guaranteed Annual Income amount
of $410.93.
Current Table of Guaranteed Annual Income Percentages by Ages
[Enlarge/Download Table]
Guaranteed Guaranteed Annual Income
Annual Income amount amount percentage
Age percentage (Single Life Option) (Joint Life Option)
----------------------------------- --------------------------------- -------------------------
At Least 55 and under 65..... 4% 3.5%
65-70........................ 5% 4.5%
71+.......................... 6% 5.5%
We may change the Table of Guaranteed Annual Income Percentages by Ages
("Table") for future Purchase Payments. We will provide you with notice of
any change to the Table.
If the AAV is reduced to zero while receiving a Guaranteed Annual Income amount
because of market performance, Guaranteed Withdrawal Benefit charges or the
recordkeeping charge of 0.20% or less assessed by your IRA custodian, payments
equal to the Guaranteed Annual Income amount will continue automatically for
your life (and your spouse's life if applicable). The remaining Income Base is
not available as a lump sum withdrawal. You will not be entitled to the
Guaranteed Annual Income amount if the Income Base is reduced to zero as a
result of an Excess Withdrawal. If the Income Base is reduced to zero due to an
Excess Withdrawal the Guaranteed Withdrawal Benefit will terminate, and you
will have no more rights or benefits under this contract.
Withdrawals equal to or less than the Guaranteed Annual Income amount will not
reduce the Income Base. All withdrawals will decrease the AAV.
The following example shows the calculation of the Guaranteed Annual Income
amount and how withdrawals less than or equal to the Guaranteed Annual Income
amount affect the Income Base and the AAV. The example assumes that the
Annuitant is age 58 (4% Guaranteed Annual Income percentage for single life
option) on the Guaranteed Annual Income Effective Date, the Guaranteed Annual
Income Effective Date is on a Benefit Year anniversary, and the Income Base is
$200,000:
[Download Table]
AAV on the Guaranteed Annual Income Effective Date............... $200,000
Income Base on the Guaranteed Annual Income Effective Date....... $200,000
Initial Guaranteed Annual Income amount on the Guaranteed
Annual Income Effective Date ($200,000 x 4%)..................... $ 8,000
AAV six months after Guaranteed Annual Income Effective Date..... $210,000
Income Base six months after Guaranteed Annual Income Effective
Date............................................................. $200,000
Withdrawal six months after Guaranteed Annual Income Effective
Date when Annuitant is still age 58.............................. $ 8,000
AAV after withdrawal ($210,000 - $8,000)......................... $202,000
Income Base after withdrawal ($200,000 - $0)..................... $200,000
AAV on next Benefit Year anniversary............................. $205,000
Income Base on next Benefit Year anniversary..................... $205,000
Guaranteed Annual Income amount on next Benefit Year
anniversary...................................................... $ 8,200
The Automatic Annual Step-up was available on the first Benefit Year
anniversary and increased the Income Base to the AAV of $205,000. The
Guaranteed Annual Income amount also increased to $8,200 (4% x $205,000).
Purchase Payments added to the contract subsequent to the Guaranteed Annual
Income Effective Date will increase the Guaranteed Annual Income amount by an
amount equal to the WAGAI percentage multiplied by the amount of the subsequent
Purchase Payment.
14
For example, assuming an Annuitant is age 58 (single life option), if the
Guaranteed Annual Income amount of $2,000 (4% of $50,000 Income Base) is in
effect and an additional Purchase Payment of $10,000 is made (and the GAI rates
had not changed), the new Guaranteed Annual Income amount that Benefit Year is
$2,400 ($2,000 + 4% of $10,000). The Guaranteed Annual Income payment amount
will be recalculated immediately after a Purchase Payment is made. Note that
the Benefit Year does not change so all withdrawals during the Benefit Year,
(withdrawals before and after the additional Purchase Payment), will count
toward the Guaranteed Annual Income amount.
Purchase Payments (other than Rollover Money) into the contract cannot exceed
$500,000 in a Benefit Year.
Automatic Annual Step-ups will increase the Income Base and thus the Guaranteed
Annual Income amount. The Guaranteed Annual Income amount, after the Income
Base is adjusted by an Automatic Annual Step-up, will be equal to the adjusted
Income Base multiplied by the applicable WAGAI percentage.
Excess Withdrawals. Excess Withdrawals are the cumulative amounts withdrawn
from the contract during the Benefit Year (including the current withdrawal)
that exceed the Guaranteed Annual Income amount at the time of the withdrawal,
or are withdrawals made prior to the Guaranteed Annual Income Effective Date.
Withdrawals for the Guaranteed Withdrawal Benefit charge and any recordkeeping
charge of 0.20% or less assessed by your IRA custodian are not treated as
Excess Withdrawals.
When an Excess Withdrawal occurs:
o the Income Base is reduced by the same proportion that the Excess Withdrawal
reduces the AAV. This means that the reduction in the Income Base could be
more than the dollar amount of the withdrawal; and
o the Guaranteed Annual Income amount will be recalculated to equal the
applicable WAGAI percentage multiplied by the new (reduced) Income Base.
We will provide to you quarterly statements that will include the Guaranteed
Annual Income amount (as adjusted for Guaranteed Annual Income amount payments,
Automatic Annual Step-ups, Excess Withdrawals and additional Purchase Payments)
available for the Benefit Year, if applicable, in order to determine whether a
withdrawal may be an Excess Withdrawal. Questions regarding Excess Withdrawals
should be referred to the customer service number provided on the front page of
this prospectus.
The following example demonstrates the impact of an Excess Withdrawal on the
Income Base, the Guaranteed Annual Income amount and the AAV. The Annuitant who
is age 58 (single life option) makes a $12,000 withdrawal which causes a
$12,915.19 reduction in the Income Base. If there are multiple GAI tables in
effect, the Income Base allocated to each rate Table will be reduced by the
same proportion that the Excess Withdrawal reduces the AAV.
Prior to Excess Withdrawal: AAV = $60,000 Income Base = $85,000
Guaranteed Annual Income amount = $3,400 (4% of the Income Base of $85,000)
After a $12,000 Withdrawal, $3,400 is within the Guaranteed Annual Income
amount, $8,600 is the Excess Withdrawal.
The AAV is reduced by the amount of the Guaranteed Annual Income amount of
$3,400 and the Income Base is not reduced: AAV = $56,600 ($60,000 - $3,400)
Income Base = $85,000
The AAV is also reduced by the $8,600 Excess Withdrawal and the Income Base is
reduced by 15.19435%, the same proportion that the Excess Withdrawal reduced
the $56,600 AAV ($8,600 - $56,600)
AAV = $48,000 ($56,600 - $8,600)
Income Base = $72,084.81 ($85,000 x 15.19435% = $12,915.19; $85,000 -
$12,915.19 = $72,084.81)
On the following Benefit Year anniversary:
AAV = $43,000
Income Base = $72,084.81
Guaranteed Annual Income amount = $2,883.39 (4% x $72,084.81 Income Base)
In a declining market, Excess Withdrawals may significantly reduce the Income
Base as well as the Guaranteed Annual Income amount. If the Income Base or AAV
is reduced to zero due to an Excess Withdrawal the Guaranteed Withdrawal
Benefit will terminate and you will have no more rights or benefits under this
contract.
After the Guaranteed Annual Income Effective Date, withdrawals will be treated
as within the Guaranteed Annual Income amount (even if they exceed the
Guaranteed Annual Income amount) only if the withdrawals are taken as
systematic monthly or quarterly installments of the amount needed to satisfy
the required minimum distribution (RMD) rules under Internal Revenue Code
Section 401(a)(9). In addition, in order for this exception for RMDs to apply,
the following must occur:
o Lincoln's monthly or quarterly automatic withdrawal service is used to
calculate and pay the RMD;
o The RMD calculation must be based only on the AAV in this contract; and
o No withdrawals other than RMDs are made within the Benefit Year (except as
described in the next paragraph).
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If RMD withdrawals during a Benefit Year are less than the Guaranteed Annual
Income amount, an additional amount up to the Guaranteed Annual Income amount
may be withdrawn. If a withdrawal, other than an RMD is made during the Benefit
Year, then all amounts withdrawn in excess of the greater of the Guaranteed
Annual Income amount or RMDs, will be treated as Excess Withdrawals.
Distributions from qualified contracts are generally taxed as ordinary income.
See Federal Tax Matters for a discussion of the tax consequences of
withdrawals.
Death Prior to the Annuity Commencement Date. The Guaranteed Withdrawal Benefit
has no provision for a payout of the Income Base upon death of the Annuitant. A
Death Benefit may be paid to the Beneficiary if the conditions set forth below
are met. Payment of a Death Benefit terminates the Guaranteed Withdrawal
Benefit for you and your surviving spouse if applicable. All Death Benefit
payments must be made in compliance with Internal Revenue Code Sections 72(s)
or 401(a)(9) as applicable as amended from time to time.
Upon the death of the Annuitant prior to the Guaranteed Annual Income Effective
Date or upon the Annuitant's death with the single life option, the Guaranteed
Withdrawal Benefit will end and no further Guaranteed Annual Income amounts are
available (even if there was an Income Base in effect at the time of the
death). A Death Benefit, as set forth below, may be available.
Upon the first death under the joint life option, the lifetime payout of the
Guaranteed Annual Income amount will continue for the life of the surviving
spouse unless a Death Benefit is paid out if available. The Automatic Annual
Step-up will continue if applicable as discussed above. Upon the death of the
surviving spouse, the Guaranteed Withdrawal Benefit will end and no further
Guaranteed Annual Income amounts are available (even if there was an Income
Base in effect at the time of the death). A Death Benefit, as set forth below,
may be available upon the second death.
The Death Benefit is equal to the greater of:
o the current AAV as of the Valuation Date we approve the payment of the
claim; or
o the sum of all Purchase Payments into the AAV decreased by withdrawals.
Excess Withdrawals reduce the sum of all Purchase Payments in the same
proportion that Excess Withdrawals reduced the AAV. All other withdrawals
reduce the sum of all Purchase Payments by the dollar amount of the
withdrawal.
The value of the Death Benefit will be determined as of the date on which the
death claim is approved for payment. This payment will occur upon receipt of:
o proof, satisfactory to us, of the death;
o written authorization for payment; and
o our receipt of all required claim forms, fully completed.
If the Death Benefit becomes payable upon the death of the Annuitant, the
Beneficiary may elect to receive payment either in the form of a lump sum
settlement or an Annuity Payout. Federal tax law requires that an annuity
election be made no later than 60 days after we receive satisfactory notice of
death as discussed previously.
If a lump sum settlement is requested, the proceeds will be mailed within seven
days of receipt of satisfactory claim documentation as discussed previously,
subject to the laws and regulations governing payment of Death Benefits. This
payment may be postponed as permitted by the 1940 Act.
All Death Benefit payments will be subject to the laws and regulations
governing Death Benefits.
The tax code requires that any distribution be paid within five years of the
death of the Annuitant unless the Beneficiary begins receiving, within one year
of the Annuitant's death, the distribution in the form of a life annuity or an
annuity for a designated period not exceeding the Beneficiary's life
expectancy.
Termination. You may terminate the contract, including the Guaranteed
Withdrawal Benefit, by notifying us in writing and surrendering your
Certificate.
The Guaranteed Withdrawal Benefit will automatically terminate:
o on the Annuity Commencement Date; or
o upon the death of the Annuitant prior to the Guaranteed Annual Income
Effective Date or under the single life option; or
o upon the death of the survivor under the joint life option; or
o when the Income Base or AAV is reduced to zero due to an Excess Withdrawal.
The termination of the Guaranteed Withdrawal Benefit will not result in any
increase in AAV equal to the Income Base. Upon effective termination of the
Guaranteed Withdrawal Benefit, the benefits and charges provided by the
Certificate will terminate and any AAV must be removed from this contract.
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Surrenders and Withdrawals
Before the Annuity Commencement Date, we will allow the surrender of your
Certificate or a withdrawal of a portion of the AAV upon your written request,
subject to the conditions of the Certificate discussed below. Surrender or
withdrawal rights after the Annuity Commencement Date depend on the Annuity
Payout option selected.
The amount available upon surrender/withdrawal is the AAV at the end of the
Valuation Period during which the written request for surrender/withdrawal is
received at the Home Office if the request is received in Good Order before
4:00 p.m. New York time or the close of trading of the New York Stock Exchange
if earlier. If we receive a surrender or withdrawal request in Good Order at or
after 4:00 p.m., New York time, we will process the request using the
Accumulation Unit value computed on the next Valuation Date. Unless prohibited,
surrender/withdrawal payments will be mailed within seven days after we receive
a valid written request at the home office. The payment may be postponed as
permitted by the 1940 Act.
The tax consequences of a surrender/withdrawal are discussed later in this
prospectus. See Federal Tax Matters.
Delay of Payments
Contract proceeds from the VAA will be paid within seven days, except:
o when the NYSE is closed (other than weekends and holidays);
o times when market trading is restricted or the SEC declares an emergency,
and we cannot value units or the funds cannot redeem shares; or
o when the SEC so orders for your protection.
Due to federal laws designed to counter terrorism and prevent money laundering
by criminals, we may be required to reject a Purchase Payment and/or deny
payment of a request for transfers, withdrawals, surrenders, or Death Benefits,
until instructions are received from the appropriate regulator. We also may be
required to provide additional information about your account to government
regulators.
Abandoned Property. Every state has unclaimed property laws which generally
declare annuity contracts to be abandoned after a period of inactivity of three
to five years from the date a benefit is due and payable. For example, if the
payment of a Death Benefit has been triggered, but, if after a thorough search,
we are still unable to locate the Beneficiary of the Death Benefit, or the
Beneficiary does not come forward to claim the Death Benefit in a timely
manner, the Death Benefit will be "escheated". This means that the Death
Benefit will be paid to the abandoned property division or unclaimed property
office of the state in which the Beneficiary or the Annuitant last resided, as
shown on our books and records, or to our state of domicile. This escheatment
is revocable and the state is obligated to pay the Death Benefit (without
interest) if your Beneficiary steps forward to claim it with the proper
documentation.
To prevent such escheatment, it is important that you update your Beneficiary
designations, including addresses, if and as they change. You may update your
Beneficiary designations by filing a Beneficiary change form with our Home
Office.
Amendment of Contract
We reserve the right to amend the contract to meet the requirements of the 1940
Act or other applicable federal or state laws or regulations. You will be
notified in writing of any changes, modifications or waivers. Any changes are
subject to prior approval of your state's insurance department (if required).
Ownership
The owner of this group annuity contract on the date of issue will be the
Lincoln Financial Group Trust Company.
As Annuitant and as the individual for whom the IRA and/or Roth IRA is
established, you have all rights as described in this Certificate. According to
Indiana law, the assets of the VAA are held for the exclusive benefit of all
Annuitants and their designated Beneficiaries; and the assets of the VAA are
not chargeable with liabilities arising from any other business that we may
conduct. Qualified contracts may not be assigned or transferred except as
permitted by applicable law and upon written notification to us. Assignments
may have an adverse impact on any Death Benefits or benefits offered under
living benefit riders in this product and may be prohibited under the terms of
a particular feature. We assume no responsibility for the validity or effect of
any assignment. Consult your tax adviser about the tax consequences of an
assignment.
Contractowner Questions
The obligations to purchasers under the contracts are those of Lincoln Life.
This prospectus provides a general description of the material features of this
Certificate or of the contract. Contracts, Certificates, endorsements and
riders may vary as required by state law. Questions about your Certificate or
this contract should be directed to us at 1-800-234-3500.
17
Annuity Payouts
The Certificate provides optional forms of payouts of annuities (annuity
options), each of which is payable on a fixed basis. The Certificate provides
that all or part of the AAV may be used to purchase an Annuity Payout option.
You may elect Annuity Payouts in monthly, quarterly, semiannual or annual
installments. If the payouts would be or become less than $50, we have the
right to reduce their frequency until the payouts are at least $50 each. The
amount of each Annuity Payout will depend upon the frequency of payout you
select. For example, if you select frequent payments (e.g., monthly), the
amount of each payout will be lower than if you choose a less frequent payout
(e.g., annual installments). Also, the amount of each Annuity Payout will
depend upon the duration of payout you select. For example, if you choose the
Life Annuity option, the amount of each payout likely will be higher than if
you choose the Joint Life Annuity since the Life Annuity assumes a shorter
period of time than the Joint Life Annuity. Following are explanations of the
annuity options available.
Annuity Options
Life Annuity with Guaranteed Period. This option guarantees periodic payouts
during a designated period, usually 10, 15 or 20 years, and then continues
throughout the lifetime of the Annuitant. The designated period is selected by
the Annuitant.
Life Annuity. This option offers a periodic payout during the lifetime of the
Annuitant and ends with the last payout before the death of the Annuitant. This
option offers the highest periodic payout since there is no guarantee of a
minimum number of payouts or provision for a Death Benefit for Beneficiaries.
However, there is the risk under this option that the recipient would receive
no payouts if the Annuitant dies before the date set for the first payout; only
one payout if death occurs before the second scheduled payout, and so on.
Joint Life Annuity. This option offers a periodic payout during the joint
lifetime of the Annuitant and a designated joint Annuitant. The payouts
continue during the lifetime of the survivor.
Joint Life and Two Thirds to Survivor Annuity. This option provides a periodic
payout during the joint lifetime of the Annuitant and a designated joint
Annuitant. When one of the joint Annuitants dies, the survivor receives two
thirds of the periodic payout made when both were alive.
If any payee dies after an Annuity Payout becomes operative, then we will pay
the following to the payee's estate (unless otherwise specified in the election
option):
the present value of unpaid payments under the payouts guaranteed for
designated period or life annuity with payouts guaranteed for designated
period;
o the amount payable at the death of the payee under the unit refund life
annuity; or
o the proceeds remaining with Lincoln Life under the payouts guaranteed for
designated amount or interest income, if available.
If the annuity settlement has been selected and becomes operative, when the
last payee dies, we will pay the remainder of the contract in a single sum to
the last payee's estate (unless otherwise specified in the election option).
General Information
None of the options listed above currently provides withdrawal features,
permitting you to withdraw commuted values as a lump sum payment. Other
options, with or without withdrawal features, may be made available by us.
Options are only available to the extent they are consistent with the
requirements of the contract as well as Sections 72(s) and 401 (a)(9) of the
tax code, if applicable.
You must give us at least 30 days notice before the date on which you want
payouts to begin. If proceeds become available to a Beneficiary in a lump sum,
the Beneficiary may choose any Annuity Payout option. We may require proof of
age, sex, or survival of any payee upon whose age, sex, or survival payments
depend.
Unless you select another option, the contract automatically provides for a
life annuity with Annuity Payouts guaranteed for 10 years except when a joint
life payout is required by law. Under any option providing for guaranteed
period payouts, the number of payouts which remain unpaid at the date of the
Annuitant's death (or surviving Annuitant's death in case of joint life
annuity) will be paid to the Beneficiary as payouts become due after we are in
receipt of:
o proof, satisfactory to us, of the death;
o written authorization for payment; and
o all claim forms, fully completed.
Once you begin to receive Annuity Payouts, you cannot change the payout option,
payout amount, or payout period.
18
Federal Tax Matters
Introduction
The Federal income tax treatment of the contract is complex and sometimes
uncertain. The Federal income tax rules may vary with your particular
circumstances. This discussion does not include all the Federal income tax
rules that may affect you and your contract. This discussion also does not
address other Federal tax consequences (including consequences of sales to
foreign individuals or entities), or state or local tax consequences,
associated with the contract. As a result, you should always consult a tax
adviser about the application of tax rules found in the Internal Revenue Code
("Code"), Treasury Regulations and applicable IRS guidance to your individual
situation.
Qualified Retirement Plans
We designed the contracts for use in connection with certain types of
retirement plans that receive favorable treatment under the tax code. Contracts
issued to or in connection with a qualified retirement plan are called
"qualified contracts." We issue contracts for use with various types of
qualified retirement plans. The Federal income tax rules applicable to those
plans are complex and varied. As a result, this prospectus does not attempt to
provide more than general information about the use of the contract with the
various types of qualified retirement plans. Persons planning to use the
contract in connection with a qualified retirement plan should obtain advice
from a competent tax adviser.
Types of Qualified Contracts and Terms of Contracts
Qualified retirement plans may include the following:
o Individual Retirement Accounts and Annuities ("Traditional IRAs")
o Roth IRAs
o Traditional IRA that is part of a Simplified Employee Pension Plan ("SEP")
o SIMPLE 401(k) plans (Savings Incentive Matched Plan for Employees)
o 401(a) / (k) plans (qualified corporate employee pension and profit-sharing
plans)
o 403(a) plans (qualified annuity plans)
o 403(b) plans (public school system and tax-exempt organization annuity
plans)
o H.R. 10 or Keogh Plans (self-employed individual plans)
o 457(b) plans (deferred compensation plans for state and local governments
and tax-exempt organizations)
We will amend contracts to be used with a qualified retirement plan as
generally necessary to conform to the tax law requirements for the type of
plan. However, the rights of a person to any qualified retirement plan benefits
may be subject to the plan's terms and conditions. In addition, we are not
bound by the terms and conditions of qualified retirement plans to the extent
such terms and conditions contradict the contract, unless we consent.
Tax Deferral on Earnings
The Federal income tax law generally does not tax any increase in your contract
value until you receive a contract distribution. However, for this general rule
to apply, certain requirements must be satisfied:
o An individual must own the contract (or the tax law must treat the contract
as owned by an individual).
o The investments of the VAA must be "adequately diversified" in accordance
with IRS regulations.
o Your right to choose particular investments for a contract must be limited.
o The Annuity Commencement Date must not occur near the end of the Annuitant's
life expectancy.
Investments in the VAA Must Be Diversified
For a contract to be treated as an annuity for Federal income tax purposes, the
investments of the VAA must be "adequately diversified." Treasury regulations
define standards for determining whether the investments of the VAA are
adequately diversified. If the VAA fails to comply with these diversification
standards, you could be required to pay tax currently on the excess of the
contract value over the contract Purchase Payments. Although we do not control
the investments of the underlying investment options, we expect that the
underlying investment options will comply with the IRS regulations so that the
VAA will be considered "adequately diversified."
Restrictions
Federal income tax law limits your right to choose particular investments for
the contract. Because the IRS has issued little guidance specifying those
limits, the limits are uncertain and your right to allocate contract values
among the Subaccounts may exceed those limits. If so, you would be treated as
the owner of the assets of the VAA and thus subject to current taxation on the
income, bonus credits, persistency credits and gains, if applicable, from those
assets. We do not know what limits may be set by the IRS in any guidance that
it may issue and whether any such limits will apply to existing contracts. We
reserve the right to modify the contract without your consent to try to prevent
the tax law from considering you as the owner of the assets of the VAA.
19
Tax Treatment of Qualified Contracts
The Federal income tax rules applicable to qualified retirement plans and
qualified contracts vary with the type of plan and contract. For example,
o Federal tax rules limit the amount of Purchase Payments that can be made,
and the tax deduction or exclusion that may be allowed for the Purchase
Payments. These limits vary depending on the type of qualified retirement
plan and the plan participant's specific circumstances (e.g., the
participant's compensation).
o Minimum annual distributions are required under some qualified retirement
plans once you reach age 70 1/2 or retire, if later as described below.
o Under most qualified plans, such as a traditional IRA, the owner must begin
receiving payments from the contract in certain minimum amounts by a
certain age, typically age 70 1/2. Other qualified plans may allow the
participant to take required distributions upon the later of reaching age
70 1/2 or retirement.
Please note that qualified retirement plans such as 403(b) plans, 401(k) plans
and IRAs generally defer taxation of contributions and earnings until
distribution. As such, an annuity does not provide any additional tax deferral
benefit beyond the qualified retirement plan itself.
Tax Treatment of Payments
The Federal income tax rules generally include distributions from a qualified
contract in the participant's income as ordinary income. These taxable
distributions will include Purchase Payments that were deductible or excludible
from income. Thus, under many qualified contracts, the total amount received is
included in income since a deduction or exclusion from income was taken for
Purchase Payments. There are exceptions. For example, you do not include
amounts received from a Roth IRA in income if certain conditions are satisfied.
Required Minimum Distributions (RMDs)
Under most qualified plans, you must begin receiving payments from the contract
in certain minimum amounts by April 1 of the year following the year you attain
age 70 1/2 or retire, if later. You are required to take distributions from
your traditional IRAs by April 1 of the year following the year you reach age
70 1/2. If you own a Roth IRA, you are not required to receive minimum
distributions from your Roth IRA during your life.
Failure to comply with the minimum distribution rules applicable to certain
qualified plans, such as Traditional IRAs, will result in the imposition of an
excise tax. This excise tax equals 50% of the amount by which a minimum
required distribution exceeds the actual distribution from the qualified plan.
Treasury regulations applicable to required minimum distributions include a
rule that may impact the distribution method you have chosen and the amount of
your distributions. Under these regulations, the presence of an enhanced Death
Benefit, or other benefit, if any, may require you to take additional
distributions. An enhanced Death Benefit is any Death Benefit that has the
potential to pay more than the contract value or a return of Purchase Payments.
Please contact your tax adviser regarding any tax ramifications.
Federal Penalty Tax on Early Distributions from Qualified Retirement Plans
The tax code may impose a 10% penalty tax on an early distribution from a
qualified contract that must be included in income. The tax code does not
impose the penalty tax if one of several exceptions applies. The exceptions
vary depending on the type of qualified contract you purchase. For example, in
the case of an IRA, the 10% penalty tax will not apply to any of the following
withdrawals, surrenders, or Annuity Payouts:
o Distribution received on or after the Annuitant reaches 591/2
o Distribution received on or after the Annuitant's death or because of the
Annuitant's disability (as defined in the tax law)
o Distribution received as a series of substantially equal periodic payments
based on the Annuitant's life (or life expectancy), or
o Distribution received as reimbursement for certain amounts paid for medical
care.
These exceptions, as well as certain others not described here, generally apply
to taxable distributions from other qualified retirement plans. However, the
specific requirements of the exception may vary.
Unearned Income Medicare Contribution
Congress enacted the "Unearned Income Medicare Contribution" as a part of the
Health Care and Education Reconciliation Act of 2010. This new tax, which
affects individuals whose modified adjusted gross income exceeds certain
thresholds, is a 3.8% tax on the lesser of (i) the individual's "unearned
income," or (ii) the dollar amount by which the individual's modified adjusted
gross income exceeds the applicable threshold. Distributions that you take from
your contract are not included in the calculation of unearned income because
your contract is a qualified plan contract. However, the amount of any such
distribution is included in determining whether you exceed the modified
adjusted gross income threshold. The tax is effective for tax years after
December 31, 2012. Please consult your tax advisor to determine whether your
annuity distributions are subject to this tax.
Taxation of Death Benefits
20
We may distribute amounts from your contract because of your death. Federal tax
rules may limit the payment options available to your Beneficiaries. If your
spouse is your Beneficiary, your surviving spouse will generally receive
special treatment and will have more available payment options. Non-spouse
Beneficiaries do not receive the same special treatment. Payment options may be
further limited depending upon whether you reached the date upon which you were
required to begin minimum distributions. The Pension Protection Act of 2006
("PPA") permits non-spouse Beneficiary rollovers to an "inherited IRA"
(effective January 1, 2007).
Transfers and Direct Rollovers
As a result of the Economic Growth and Tax Relief Reconciliation Act of 2001
("EGTRRA"), you may be able to move funds between different types of qualified
plans, such as 403(b) and 457(b) governmental plans, by means of a rollover or
transfer. You may be able to rollover or transfer amounts between qualified
plans and traditional IRAs. These rules do not apply to Roth IRAs and 457(b)
non-governmental tax-exempt plans. The PPA permits direct conversions from
certain qualified, 403(b) or 457(b) plans to Roth IRAs (effective for
distribution after 2007). There are special rules that apply to rollovers,
direct rollovers and transfers (including rollovers or transfers or after-tax
amounts). If the applicable rules are not followed, you may incur adverse
Federal income tax consequences, including paying taxes which you might not
otherwise have had to pay. Before we send a rollover distribution, we will
provide a notice explaining tax withholding requirements (see Federal Income
Tax Withholding). We are not required to send you such notice for your IRA. You
should always consult your tax adviser before you move or attempt to move any
funds.
The IRS issued Announcement 2014-15 following the Tax Court's decision in
Bobrow v. Commissioner, T.C. Memo. 2014-21. In the Announcement, the IRS stated
its intent to apply the one-rollover-per-year limitation of 408(d)(3)(B) on an
aggregate basis to all IRAs that an individual owns. This means that an
individual cannot make a tax-free IRA-to-IRA rollover if he or she has made
such a rollover involving any of the individual's IRAs in the current tax year.
If an intended rollover does not qualify for tax-free rollover treatment,
contributions to your IRA may constitute excess contributions that may exceed
contribution limits. This one-rollover-per-year limitation does not apply to
direct trustee-to-trustee transfers.
Federal Income Tax Withholding
We will withhold and remit to the IRS a part of the taxable portion of each
distribution made under a contract unless you notify us prior to the
distribution that tax is not to be withheld. In certain circumstances, Federal
income tax rules may require us to withhold tax. At the time a withdrawal,
surrender, or Annuity Payout is requested, we will give you an explanation of
the withholding requirements.
Certain payments from your contract may be considered eligible rollover
distributions (even if such payments are not being rolled over). Such
distributions may be subject to special tax withholding requirements. The
Federal income tax withholding rules require that we withhold 20% of the
eligible rollover distribution from the payment amount, unless you elect to
have the amount directly transferred to certain qualified plans or contracts.
The IRS requires that tax be withheld, even if you have requested otherwise.
Such tax withholding requirements are generally applicable to 401(a), 403(a) or
(b), HR 10, and 457(b) governmental plans and contracts used in connection with
these types of plans.
Special Considerations for Same-Sex Couples
The U.S. Supreme Court recently held same-sex spouses who have been married
under state law will now be treated as spouses for purposes of federal law. You
are strongly encouraged to consult a tax advisor before electing spousal rights
under the contract.
Nonqualified Annuity Contracts
A nonqualified annuity is a contract not issued in connection with an IRA or a
qualified retirement plan receiving special tax treatment under the tax code.
These contracts are not intended for use with nonqualified annuity contracts.
Different federal tax rules apply to nonqualified annuity contracts. Persons
planning to use the contract in connection with a nonqualified annuity should
obtain advice from a tax advisor.
Our Tax Status
Under existing Federal income tax laws, we do not pay tax on investment income
and realized capital gains of the VAA. We do not expect that we will incur any
Federal income tax liability on the income and gains earned by the VAA.
However, the Company does expect, to the extent permitted under Federal tax
law, to claim the benefit of the foreign tax credit as the owner of the assets
of the VAA. Therefore, we do not impose a charge for Federal income taxes. If
Federal income tax law changes and we must pay tax on some or all of the income
and gains earned by the VAA, we may impose a charge against the VAA to pay the
taxes.
Changes in the Law
The above discussion is based on the tax code, IRS regulations, and
interpretations existing on the date of this prospectus. However, Congress, the
IRS, and the courts may modify these authorities, sometimes retroactively.
21
Voting Rights
As required by law, we will vote the fund shares held in the VAA at meetings of
the shareholders of the fund. The voting will be done according to the
instructions of the Contractowners or Annuitants who have interests in the
Subaccount which invests in the fund. If the 1940 Act or any regulation under
it should be amended or if present interpretations should change, and if as a
result we determine that we are permitted to vote the fund shares in our own
right, we may elect to do so.
The number of votes which you have the right to cast will be determined by
applying your percentage interest in a Subaccount to the total number of votes
attributable to the Subaccount. In determining the number of votes, fractional
shares will be recognized.
The underlying fund is subject to the laws of the state in which it is
organized concerning, among other things, the matters which are subject to a
shareholder vote, the number of shares which must be present in person or by
proxy at a meeting of shareholders (a "quorum"), and the percentage of such
shares present in person or by proxy which must vote in favor of matters
presented. Because shares of the underlying fund held in the VAA are owned by
us, and because under the 1940 Act we will vote all such shares in the same
proportion as the voting instruction, which we receive, it is important that
each Annuitant provide their voting instructions to us. Even though you may
choose not to provide voting instruction, the shares of a fund to which such
you would have been entitled to provide voting instruction will, subject to
fair representation requirements, be voted by us in the same proportion as the
voting instruction which we actually receive. As a result, the instruction of a
small number of Annuitants could determine the outcome of matters subject to
shareholder vote. All shares voted by us will be counted when the underlying
fund determines whether any requirement for a minimum number of shares be
present at such a meeting to satisfy a quorum requirement has been met. Voting
instructions to abstain on any item to be voted on will be applied
proportionately to reduce the number of votes eligible to be cast.
Whenever a shareholders meeting is called, we will provide or make available to
each person having a voting interest in a Subaccount proxy voting material,
reports and other materials relating to the fund. Since the fund engages in
shared funding, other persons or entities besides Lincoln Life may vote fund
shares. See Investments of the Variable Annuity Account - Fund Shares.
Distribution of the Contracts
Lincoln Financial Distributors ("LFD") serves as Principal Underwriter of this
contract. LFD is affiliated with Lincoln Life and is registered as a
broker-dealer with the SEC under the Securities Exchange Act of 1934 and is a
member of FINRA. The Principal Underwriter has entered into selling agreements
with Lincoln Financial Advisors ("LFA"), also an affiliate of ours. The
Principal Underwriter has also entered into selling agreements with
broker-dealers that are unaffiliated with us. While the Principal Underwriter
has the legal authority to make payments to broker-dealers which have entered
into selling agreements, we will make such payments on behalf of the Principal
Underwriter in compliance with appropriate regulations. We also pay on behalf
of LFD certain of its operating expenses related to the distribution of this
and other of our contracts. The following paragraphs describe how payments are
made by us and The Principal Underwriter to various parties.
Compensation Paid to LFA. The maximum compensation the Principal Underwriter
pays to LFA is 1.00% based on assets in the retirement plan, which include
assets in this contract. Alternatively, LFA may elect to receive a lower rate
of compensation.
Lincoln Life also pays for the operating and other expenses of LFA, including
the following sales expenses: sales representative training allowances;
compensation and bonuses for LFA's management team; advertising expenses; and
all other expenses of distributing the contracts. LFA pays its sales
representatives a portion of the commissions received for their sales of
contracts. LFA sales representatives and their managers are also eligible for
various cash benefits, such as bonuses, insurance benefits and financing
arrangements, and non-cash compensation items that we may provide jointly with
LFA. Non-cash compensation items may include conferences, seminars, trips,
entertainment, merchandise and other similar items. In addition, LFA sales
representatives who meet certain productivity, persistency and length of
service standards and/or their managers may be eligible for additional
compensation. Sales of the contracts may help LFA sales representatives and/or
their managers qualify for such benefits. LFA sales representatives and their
managers may receive other payments from us for services that do not directly
involve the sale of the contracts, including payments made for the recruitment
and training of personnel, production of promotional literature and similar
services.
Compensation Paid to Unaffiliated Selling Firms. The maximum compensation the
Principal Underwriters pays to Selling Firms, other than LFA, is 1.00% based on
assets in the retirement plan, which include assets in this contract.
Alternatively, some Selling Firms may elect to receive a lower rate of
compensation. LFD also acts as wholesaler of the contracts and performs certain
marketing and other functions in support of the distribution and servicing of
the contracts.
LFD may pay certain Selling Firms or their affiliates additional amounts for:
(1) "preferred product" treatment of the contracts in their marketing programs,
which may include marketing services and increased access to sales
representatives; (2) sales promotions relating to the contracts; (3) costs
associated with sales conferences and educational seminars for their sales
representatives; (4) other sales expenses incurred by them; and (5) inclusion
in the financial products the Selling Firm offers.
Lincoln Life may provide loans to broker-dealers or their affiliates to help
finance marketing and distribution of the contracts, and those loans may be
forgiven if aggregate sales goals are met. In addition, we may provide staffing
or other administrative support and
22
services to broker-dealers who distribute the contracts. LFD, as wholesaler,
may make bonus payments to certain Selling Firms based on aggregate sales of
our variable insurance contracts (including the contracts) or persistency
standards. These additional payments are not offered to all Selling Firms, and
the terms of any particular agreement governing the payments may vary among
Selling Firms.
These additional types of compensation are not offered to all Selling Firms.
The terms of any particular agreement governing compensation may vary among
Selling Firms and the amounts may be significant. The prospect of receiving, or
the receipt of, additional compensation may provide Selling Firms and/or their
registered representatives with an incentive to favor sales of the contracts
over other variable annuity contracts (or other investments) with respect to
which a Selling Firm does not receive additional compensation, or lower levels
of additional compensation. You may wish to take such payment arrangements into
account when considering and evaluating any recommendation relating to the
contracts. Additional information relating to compensation paid in 2013 is
contained in the Statement of Additional Information (SAI).
Compensation Paid to Other Parties. Depending on the particular selling
arrangements, there may be others whom LFD compensates for the distribution
activities. For example, LFD may compensate certain "wholesalers", who control
access to certain selling offices, for access to those offices or for
referrals, and that compensation may be separate from the compensation paid for
sales of the contracts. LFD may compensate marketing organizations,
associations, brokers or consultants which provide marketing assistance and
other services to broker-dealers who distribute the contracts, and which may be
affiliated with those broker-dealers.
Return Privilege
Within the free-look period after your Certificate is issued, you may cancel it
for any reason by delivering or mailing it postage prepaid, to The Lincoln
National Life Insurance Company at PO Box 2340, Fort Wayne, IN 46801-2340. A
Certificate canceled under this provision will be void. Except as explained in
the following paragraph, we will return the AAV as of the Valuation Date on
which we receive the cancellation request. A purchaser who participates in the
VAA is subject to the risk of a market loss on the AAV during the free-look
period.
For Certificates issued in those states whose laws require that we assume this
market risk during the free-look period, a Certificate may be canceled, subject
to the conditions explained before, except that we will return the greater of
the Purchase Payment(s) or AAV as of the Valuation Date we receive the
cancellation request, plus any premium taxes that had been deducted. IRA
purchasers will also receive the greater of Purchase Payments or AAV as of the
Valuation Date on which we receive the cancellation request.
State Regulation
As a life insurance company organized and operated under Indiana law, we are
subject to provisions governing life insurers and to regulation by the Indiana
Commissioner of Insurance. Our books and accounts are subject to review and
examination by the Indiana Department of Insurance at all times. A full
examination of our operations is conducted by that Department at least every
five years.
Records and Reports
As presently required by the 1940 Act and applicable regulations, we are
responsible for maintaining all records and accounts relating to the VAA. We
have entered into an agreement with The Bank of New York Mellon, One Mellon
Bank Center, 500 Grant Street, Pittsburgh, Pennsylvania 15258, to provide
accounting services to the VAA. We will mail to you, at your last known address
of record at the Home Office, at least semi-annually after the first contract
year, reports containing information required by that Act or any other
applicable law or regulation.
Other Information
You may elect to receive your prospectus, prospectus supplements, quarterly
statements, and annual and semiannual reports electronically over the Internet,
if you have an e-mail account and access to an Internet browser. Once you
select eDelivery, via the Internet Service Center, all documents available in
electronic format will no longer be sent to you in hard copy. You will receive
an e-mail notification when the documents become available online. It is your
responsibility to provide us with your current e-mail address. You can resume
paper mailings at any time without cost, by updating your profile at the
Internet Service Center, or contacting us. To learn more about this service,
please log on to www.LincolnFinancial.com, select service centers and continue
on through the Internet Service Center.
Legal Proceedings
In the ordinary course of its business and otherwise, the Company and its
subsidiaries or its separate accounts and Principal Underwriter may become or
are involved in various pending or threatened legal proceedings, including
purported class actions, arising from the conduct of its business. In some
instances, the proceedings include claims for unspecified or substantial
punitive damages and similar types of relief in addition to amounts for alleged
contractual liability or requests for equitable relief.
23
After consultation with legal counsel and a review of available facts, it is
management's opinion that the proceedings, after consideration of any reserves
and rights to indemnification, ultimately will be resolved without materially
affecting the consolidated financial position of the Company and its
subsidiaries, or the financial position of its separate accounts or Principal
Underwriter. However, given the large and indeterminate amounts sought in
certain of these proceedings and the inherent difficulty in predicting the
outcome of such legal proceedings, it is possible that an adverse outcome in
certain matters could be material to the Company's operating results for any
particular reporting period. Please refer to the Statement of Additional
Information for possible additional information regarding legal proceedings.
24
Statement of Additional Information
Table of Contents for Lincoln National Variable Annuity Account L
[Download Table]
Item Page
Special Terms B-2
Services B-2
Principal Underwriter B-2
Purchase and Pricing of Securities Being Offered B-2
Determination of Accumulation Unit Value B-2
Capital Markets B-3
Advertising & Ratings B-3
Unclaimed Property B-3
Other Information B-4
Financial Statements B-4
For a free copy of the SAI complete the form below.
Statement of Additional Information Request Card
Lincoln Retirement Income RolloverSM Version 3
Lincoln National Variable Annuity Account L
.
Please send me a free copy of the current Statement of Additional Information
for Lincoln National Variable Annuity Account L / Lincoln Retirement Income
RolloverSM Version 3.
(Please Print)
Name: -------------------------------------------------------------------------
Address: ----------------------------------------------------------------------
City --------------------------------------------------- State ---------
Zip ---------
Mail to: The Lincoln National Life Insurance Co., P.O. Box 2340, Fort Wayne,
Indiana 46801
25
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[THIS PAGE INTENTIONALLY LEFT BLANK]
Lincoln Retirement Income RolloverSM Version 3
Lincoln National
Variable Annuity Account L (Registrant)
The Lincoln National Life Insurance Company (Depositor)
Statement of Additional Information (SAI)
This SAI should be read in conjunction with the Lincoln Retirement Income
RolloverSM Version 3 prospectus of Lincoln National Variable Annuity Account L
dated ______, 2014. You may obtain a copy of the Lincoln Retirement Income
RolloverSM Version 3 prospectus on request and without charge. Please write
Customer Service, The Lincoln National Life Insurance Company, PO Box 2340,
Fort Wayne, IN 46802, or call 1-800-234-3500.
Table of Contents
[Download Table]
Item Page
Special Terms B-2
Services B-2
Principal Underwriter B-2
Purchase of Securities Being Offered B-2
Determination of Accumulation and Annuity Unit
Value B-2
[Download Table]
Item Page
Capital Markets B-3
Advertising & Ratings B-3
Unclaimed Property B-3
Other Information B-4
Financial Statements B-4
This SAI is not a prospectus.
The date of this SAI is ______, 2014.
Special Terms
The special terms used in this SAI are the ones defined in the prospectus.
Services
Independent Registered Public Accounting Firm
Ernst & Young LLP, independent registered public accounting firm, One Commerce
Square, 2005 Market Street, Suite 700, Philadelphia, Pennsylvania, 19103, has
audited a) our financial statements of the Lincoln National Variable Annuity
Account L as of December 31, 2013 and for the year then ended and the statement
of changes in net assets for each of the years in the two year period ended
December 31, 2013; and b) our consolidated financial statements of The Lincoln
National Life Insurance Company as of December 31, 2013 and 2012 and for each
of the three years in the period ended December 31, 2013, which are included in
this SAI and Registration Statement. The aforementioned financial statements
are included herein in reliance on Ernst & Young LLP's reports, given on their
authority as experts in accounting and auditing.
Keeper of Records
All accounts, books, records and other documents which are required to be
maintained for the VAA are maintained by us or by third parties responsible to
Lincoln Life. We have entered into an agreement with The Bank of New York
Mellon, One Mellon Bank Center, 500 Grant Street, Pittsburgh, Pennsylvania,
15258, to provide accounting services to the VAA. No separate charge against
the assets of the VAA is made by us for this service.
Principal Underwriter
Lincoln Financial Distributors, Inc. ("LFD"), an affiliate of Lincoln Life,
serves as principal underwriter (the "Principal Underwriter") for the
contracts, as described in the prospectus. The Principal Underwriter offers the
contracts to the public on a continuous basis and anticipates continuing to
offer the contracts, but reserves the right to discontinue the offering. The
Principal Underwriter offers the contracts through sales representatives, who
are associated with Lincoln Financial Advisors Corporation and/or Lincoln
Financial Securities Corporation (collectively, "LFN"), our affiliates. The
Principal Underwriter also may enter into selling agreements with other
broker-dealers ("Selling Firms") for the sale of the contracts. Sales
representatives of Selling Firms are appointed as our insurance agents. LFD,
acting as Principal Underwriter, paid $1,864,104, $1,720,320 and $1,746,647 to
LFN and Selling Firms in 2011, 2012 and 2013 respectively, as sales
compensation with respect to all the contracts offered under the VAA. The
Principal Underwriter retained no underwriting commissions for the sale of the
contracts.
Purchase of Securities Being Offered
The variable annuity contracts are offered to the public through licensed
insurance agents who specialize in selling our products; through independent
insurance brokers; and through certain securities brokers/dealers selected by
us whose personnel are legally authorized to sell annuity products. There are
no special purchase plans for any class of prospective buyers. However, under
certain limited circumstances described in the prospectus under the section
Charges and Other Deductions, any applicable account fee and/or surrender
charge may be reduced or waived.
Both before and after the Annuity Commencement Date, there are exchange
privileges between Subaccounts, and from the VAA to the general account (if
available) subject to restrictions set out in the prospectus. See The
Contracts, in the prospectus. No exchanges are permitted between the VAA and
other separate accounts.
The offering of the contracts is continuous.
Determination of Accumulation and Annuity Unit Value
A description of the days on which Accumulation and Annuity Units will be
valued is given in the prospectus. The New York Stock Exchange's (NYSE) most
recent announcement (which is subject to change) states that it will be closed
on weekends and on these holidays: New Year's Day, Martin Luther King Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day. If any of these holidays occurs on a
weekend day, the Exchange may also be closed on the business day occurring just
before or just after the holiday. It may also be closed on other days.
B-2
Since the portfolios of some of the fund and series will consist of securities
primarily listed on foreign exchanges or otherwise traded outside the United
States, those securities may be traded (and the net asset value of those fund
and series and of the variable account could therefore be significantly
affected) on days when the investor has no access to those funds and series.
Capital Markets
In any particular year, our capital may increase or decrease depending on a
variety of factors - the amount of our statutory income or losses (which is
sensitive to equity market and credit market conditions), the amount of
additional capital we must hold to support business growth, changes in
reserving requirements, our inability to secure capital market solutions to
provide reserve relief, such as issuing letters of credit to support captive
reinsurance structures, changes in equity market levels, the value of certain
fixed-income and equity securities in our investment portfolio and changes in
interest rates.
Advertising & Ratings
We may include in certain advertisements, endorsements in the form of a list of
organizations, individuals or other parties which recommend Lincoln Life or the
policies. Furthermore, we may occasionally include in advertisements
comparisons of currently taxable and tax deferred investment programs, based on
selected tax brackets, or discussions of alternative investment vehicles and
general economic conditions.
Our financial strength is ranked and rated by nationally recognized independent
rating agencies. The ratings do not imply approval of the product and do not
refer to the performance of the product, or any separate account, including the
underlying investment options. Ratings are not recommendations to buy our
products. Each of the rating agencies reviews its ratings periodically.
Accordingly, all ratings are subject to revision or withdrawal at any time by
the rating agencies, and therefore, no assurance can be given that these
ratings will be maintained. The current outlook for the insurance subsidiaries
is stable for Moody's, A.M. Best, Fitch, and Standard & Poor's. Our financial
strength ratings, which are intended to measure our ability to meet contract
holder obligations, are an important factor affecting public confidence in most
of our products and, as a result, our competitiveness. A downgrade of our
financial strength rating could affect our competitive position in the
insurance industry by making it more difficult for us to market our products as
potential customers may select companies with higher financial strength ratings
and by leading to increased withdrawals by current customers seeking companies
with higher financial strength ratings. For more information on ratings,
including outlooks, see www.LincolnFinancial.com/investor.
Annuity Payout Illustrations. These will provide an initial benefit payment
based in part on the Annuitant, the Contract Value and the fixed and/or
variable Annuity Payout option elected. In addition, variable Annuity Payout
illustrations may show the historical results of a variable payout in a
Subaccount of the VAA.
Compound Interest Illustrations - These will emphasize several advantages of
the variable annuity contract. For example, but not by way of illustration, the
literature may emphasize the potential tax savings through tax deferral; the
potential advantage of the variable annuity account over the fixed account; and
the compounding effect when a client makes regular deposits to his or her
contract.
Internet - An electronic communications network which may be used to provide
information regarding Lincoln Life, performance of the subaccounts and
advertisement literature.
Unclaimed Property
During 2013, a Global Resolution Agreement entered into by us and a third party
auditor became effective upon its acceptance by the unclaimed property
departments of 41 states and jurisdictions. Under the terms of the Global
Resolution Agreement, the third party auditor acting on behalf of the signatory
states will compare expanded matching criteria to the Social Security Master
Death File ("SSMDF") to identify deceased insureds and contractholders where a
valid claim has not been made. Also in December 2013, a Regulatory Settlement
Agreement entered into by us to resolve a multi-state market conduct
examination regarding its adherence to state claim settlement practices became
effective upon its acceptance by the insurance departments of 20 states and
jurisdictions. The final agreement covers 52 states and jurisdictions. The
Regulatory Settlement Agreement applies prospectively and requires us to adopt
and implement additional procedures comparing its records to the SSMDF to
identify unclaimed death benefits and prescribes procedures for identifying and
locating beneficiaries once deaths are identified. Other jurisdictions that are
not signatories to the Regulatory Settlement Agreement are conducting
examinations and audits of our compliance with unclaimed property laws and
considering proposals that would apply prospectively and require life insurance
companies to take additional steps to identify unreported deceased policy and
contract holders. These prospective changes and any escheatable property
identified as a result of the audits and inquiries could result in: (1)
additional payments of previously unclaimed death benefits; (2) the payment of
abandoned funds to U.S. jurisdictions; and (3) changes in our practices and
procedures for the identification of escheatable funds and beneficiaries, which
would impact claim payments and reserves, among other consequences.
B-3
Other Information
Due to differences in redemption rates, tax treatment or other considerations,
the interests of Contractowners under the variable life accounts could conflict
with those of Contractowners under the VAA. In those cases, where assets from
variable life and variable annuity separate accounts are invested in the same
fund(s) (i.e., where mixed funding occurs), the Boards of Directors of the fund
involved will monitor for any material conflicts and determine what action, if
any, should be taken. If it becomes necessary for any separate account to
replace shares of any fund with another investment, that fund may have to
liquidate securities on a disadvantageous basis. Refer to the prospectus for
each fund for more information about mixed funding.
Financial Statements
The December 31, 2013 financial statements of the VAA and the December 31, 2013
consolidated financial statements of Lincoln Life appear on the following
pages.
B-4
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
S-1
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
S-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholder of
The Lincoln National Life Insurance Company
We have audited the accompanying consolidated balance sheets of The Lincoln
National Life Insurance Company as of December 31, 2013 and 2012, and the
related consolidated statements of comprehensive income (loss), stockholder's
equity, and cash flows for each of the three years in the period ended December
31, 2013. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting.
Our audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Lincoln
National Life Insurance Company at December 31, 2013 and 2012, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2013, in conformity with U.S. generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Philadelphia,
Pennsylvania
April 1, 2014
S-3
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
[Enlarge/Download Table]
AS OF DECEMBER 31,
------------------------
2013 2012
----------- -----------
ASSETS
Investments:
Available-for-sale securities, at fair value:
Fixed maturity securities (amortized cost: 2013 -- $75,585; 2012 -- $71,221) $ 79,178 $ 80,254
Variable interest entities' fixed maturity securities (amortized cost: 2013 -- $682;
2012 -- $677) 697 708
Equity securities (cost: 2013 -- $182; 2012 -- $137) 201 157
Trading securities 2,190 2,437
Mortgage loans on real estate 7,029 6,792
Real estate 26 39
Policy loans 2,651 2,740
Derivative investments 617 2,263
Other investments 1,208 1,089
----------- -----------
Total investments 93,797 96,479
Cash and invested cash 630 3,278
Deferred acquisition costs and value of business acquired 8,859 6,732
Premiums and fees receivable 424 382
Accrued investment income 1,002 986
Reinsurance recoverables 7,075 8,284
Reinsurance related embedded derivatives 159 --
Funds withheld reinsurance assets 781 842
Goodwill 2,273 2,273
Other assets 5,373 3,751
Separate account assets 117,135 95,373
----------- -----------
Total assets $ 237,508 $ 218,380
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Future contract benefits $ 17,627 $ 18,415
Other contract holder funds 73,530 71,615
Short-term debt 51 32
Long-term debt 2,600 1,925
Reinsurance related embedded derivatives -- 184
Funds withheld reinsurance liabilities 3,111 5,192
Deferred gain on business sold through reinsurance 297 124
Payables for collateral on investments 2,865 4,121
Variable interest entities' liabilities 27 128
Other liabilities 5,421 4,702
Separate account liabilities 117,135 95,373
----------- -----------
Total liabilities 222,664 201,811
----------- -----------
CONTINGENCIES AND COMMITMENTS (SEE NOTE 13)
STOCKHOLDER'S EQUITY
Common stock -- 10,000,000 shares authorized, issued and outstanding 10,636 10,620
Retained earnings 2,778 2,089
Accumulated other comprehensive income (loss) 1,430 3,860
----------- -----------
Total stockholder's equity 14,844 16,569
----------- -----------
Total liabilities and stockholder's equity $ 237,508 $ 218,380
=========== ===========
See accompanying Notes to Consolidated Financial Statements
S-4
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN MILLIONS)
[Enlarge/Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
2013 2012 2011
--------- --------- --------
REVENUES
Insurance premiums $ 2,339 $ 2,290 $ 2,017
Fee income 3,882 3,540 3,228
Investment advisory fees 126 86 --
Net investment income 4,561 4,551 4,490
Realized gain (loss):
Total other-than-temporary impairment losses on securities (75) (242) (160)
Portion of loss recognized in other comprehensive income 10 103 42
--------- --------- --------
Net other-than-temporary impairment losses on securities recognized in earnings (65) (139) (118)
Realized gain (loss), excluding other-than-temporary impairment losses on securities 122 16 (132)
--------- --------- --------
Total realized gain (loss) 57 (123) (250)
--------- --------- --------
Amortization of deferred gain on business sold through reinsurance 69 77 110
Other revenues 426 396 376
--------- --------- --------
Total revenues 11,460 10,817 9,971
--------- --------- --------
EXPENSES
Interest credited 2,468 2,424 2,444
Benefits 3,613 2,939 2,204
Commissions and other expenses 3,526 3,838 3,938
Interest and debt expense 93 110 108
Impairment of intangibles -- -- 744
--------- --------- --------
Total expenses 9,700 9,311 9,438
--------- --------- --------
Income (loss) before taxes 1,760 1,506 533
Federal income tax expense (benefit) 431 344 270
--------- --------- --------
Net income (loss) 1,329 1,162 263
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on available-for-sale securities (2,355) 1,071 1,686
Unrealized other-than-temporary impairment on available-for-sale securities 27 (2) 23
Unrealized gain (loss) on derivative instruments (96) (31) 146
Funded status of employee benefit plans (6) 2 --
--------- --------- --------
Total other comprehensive income (loss), net of tax (2,430) 1,040 1,855
--------- --------- --------
Comprehensive income (loss) $ (1,101) $ 2,202 $ 2,118
========= ========= ========
See accompanying Notes to Consolidated Financial Statements
S-5
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN MILLIONS)
[Enlarge/Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
2013 2012 2011
--------- ---------- ----------
COMMON STOCK
Balance as of beginning-of-year $ 10,620 $ 10,605 $ 10,585
Stock compensation/issued for benefit plans 16 15 10
Capital contribution from Lincoln National Corporation -- -- 10
--------- ---------- ----------
Balance as of end-of-year 10,636 10,620 10,605
--------- ---------- ----------
RETAINED EARNINGS
Balance as of beginning-of-year 2,089 1,532 2,069
Net income (loss) 1,329 1,162 263
Dividends declared (640) (605) (800)
--------- ---------- ----------
Balance as of end-of-year 2,778 2,089 1,532
--------- ---------- ----------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance as of beginning-of-year 3,860 2,820 965
Other comprehensive income (loss), net of tax (2,430) 1,040 1,855
--------- ---------- ----------
Balance as of end-of-year 1,430 3,860 2,820
--------- ---------- ----------
Total stockholder's equity as of end-of-year $ 14,844 $ 16,569 $ 14,957
========= ========== ==========
See accompanying Notes to Consolidated Financial Statements
S-6
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
[Enlarge/Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------
2013 2012 2011
---------- ----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,329 $ 1,162 $ 263
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Deferred acquisition costs, value of business acquired, deferred sales inducements
and deferred front-end loads deferrals and interest, net of amortization (539) (283) (151)
Trading securities purchases, sales and maturities, net 131 202 86
Change in premiums and fees receivable (42) 27 (75)
Change in accrued investment income (16) (37) (45)
Change in future contract benefits and other contract holder funds (232) (1,277) 1,241
Change in reinsurance related assets and liabilities 68 1,438 405
Change in federal income tax accruals 437 208 111
Realized (gain) loss (57) 123 250
(Income) loss attributable to equity method investments (86) (125) (90)
Amortization of deferred gain on business sold through reinsurance (69) (77) (110)
Impairment of intangibles -- -- 744
Change in cash management agreement investment (29) (359) 60
Other 1 53 (72)
---------- ----------- ----------
Net cash provided by (used in) operating activities 896 1,055 2,617
---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities (11,002) (11,021) (10,359)
Sales of available-for-sale securities 954 1,098 1,331
Maturities of available-for-sale securities 5,952 5,757 5,055
Purchases of other investments (2,481) (2,112) (4,434)
Sales or maturities of other investments 2,494 2,009 2,784
Increase (decrease) in payables for collateral on investments (1,256) 374 2,035
Proceeds (outflows) from reinsurance ceded, recaptured and novated (22) 35 204
Other (95) (130) (114)
---------- ----------- ----------
Net cash provided by (used in) investing activities (5,456) (3,990) (3,498)
---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 311 -- --
Increase (decrease) in short-term debt 23 18 --
Deposits of fixed account values, including the fixed portion of variable 10,466 10,667 10,925
Withdrawals of fixed account values, including the fixed portion of variable (5,230) (5,618) (4,976)
Transfers to and from separate accounts, net (3,001) (2,091) (2,324)
Common stock issued for benefit plans and excess tax benefits (17) (2) (4)
Dividends paid to stockholder (640) (605) (800)
---------- ----------- ----------
Net cash provided by (used in) financing activities 1,912 2,369 2,821
---------- ----------- ----------
Net increase (decrease) in cash and invested cash (2,648) (566) 1,940
Cash and invested cash, as of beginning-of-year 3,278 3,844 1,904
---------- ----------- ----------
Cash and invested cash, as of end-of-year $ 630 $ 3,278 $ 3,844
========== =========== ==========
See accompanying Notes to Consolidated Financial Statements
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THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Lincoln National Life Insurance Company ("LNL" or the "Company," which also
may be referred to as "we," "our" or "us"), a wholly-owned subsidiary of
Lincoln National Corporation ("LNC" or the "Parent Company"), is domiciled in
the state of Indiana. We own 100% of the outstanding common stock of one
insurance company subsidiary, Lincoln Life & Annuity Company of New York
("LLANY"). We also own several non-insurance companies, including Lincoln
Financial Distributors ("LFD") and Lincoln Financial Advisors ("LFA"), LNC's
wholesaling and retailing business units, respectively. LNL's principal
businesses consist of underwriting annuities, deposit-type contracts and life
insurance through multiple distribution channels. LNL is licensed and sells its
products throughout the U.S. and several U.S. territories. See Note 22 for
additional information.
BASIS OF PRESENTATION
The accompanying consolidated financial statements are prepared in accordance
with United States of America generally accepted accounting principles
("GAAP"). Certain GAAP policies, which significantly affect the determination
of financial condition, results of operations and cash flows, are summarized
below.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of LNL
and all other entities in which we have a controlling financial interest and
any variable interest entities ("VIEs") in which we are the primary
beneficiary. Entities in which we do not have a controlling financial interest
and do not exercise significant management influence over the operating and
financing decisions are reported using the equity method. All material
inter-company accounts and transactions have been eliminated in
consolidation.
Our involvement with VIEs is primarily to invest in assets that allow us to
gain exposure to a broadly diversified portfolio of asset classes. A VIE is an
entity that does not have sufficient equity to finance its own activities
without additional financial support or where investors lack certain
characteristics of a controlling financial interest. We assess our contractual,
ownership or other interests in a VIE to determine if our interest participates
in the variability the VIE was designed to absorb and pass onto variable
interest holders. We perform an ongoing qualitative assessment of our variable
interests in VIEs to determine whether we have a controlling financial interest
and would therefore be considered the primary beneficiary of the VIE. If we
determine we are the primary beneficiary of a VIE, we consolidate the assets
and liabilities of the VIE in our consolidated financial statements.
ACCOUNTING ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions affecting the reported amounts of
assets and liabilities and the disclosures of contingent assets and liabilities
as of the date of the financial statements and the reported amounts of revenues
and expenses for the reporting period. Those estimates are inherently subject
to change and actual results could differ from those estimates. Included among
the material (or potentially material) reported amounts and disclosures that
require extensive use of estimates are: fair value of certain invested assets
and derivatives, asset valuation allowances, deferred acquisition costs
("DAC"), value of business acquired ("VOBA"), deferred sales inducements
("DSI"), goodwill, future contract benefits, other contract holder funds
including deferred front-end loads ("DFEL"), pension plans, stock-based
incentive compensation, income taxes and the potential effects of resolving
litigated matters.
BUSINESS COMBINATIONS
We use the acquisition method of accounting for all business combination
transactions, and accordingly, recognize the fair values of assets acquired,
liabilities assumed and any noncontrolling interests in our consolidated
financial statements. The allocation of fair values may be subject to
adjustment after the initial allocation for up to a one-year period as more
information becomes available relative to the fair values as of the acquisition
date. The consolidated financial statements include the results of operations
of any acquired company since the acquisition date.
FAIR VALUE MEASUREMENT
Our measurement of fair value is based on assumptions used by market
participants in pricing the asset or liability, which may include inherent
risk, restrictions on the sale or use of an asset or non-performance risk,
which would include our own credit risk. Our estimate of an exchange price is
the price in an orderly transaction between market participants to sell the
asset or transfer the liability ("exit price") in the principal market, or the
most advantageous market in the absence of a principal market, for that asset
or liability, as opposed to the price that would be paid to acquire the asset
or receive a liability ("entry price"). Pursuant to the Fair Value Measurements
and Disclosures Topic of the Financial Accounting Standards Board ("FASB")
ACCOUNTING STANDARDS CODIFICATION(TM) ("ASC"), we categorize our financial
instruments carried at fair value into a three-level fair value hierarchy,
based on the priority of inputs to the respective valuation technique. The
three-level hierarchy for fair value measurement is defined as follows:
- Level 1 - inputs to the valuation methodology are quoted prices available
in active markets for identical investments as of the reporting date,
except for large holdings subject to "blockage discounts" that are
excluded;
- Level 2 - inputs to the valuation methodology are other than quoted prices
in active markets, which are either directly or indirectly observable as of
the reporting date, and fair value can be determined through the use of
models or other valuation methodologies; and
- Level 3 - inputs to the valuation methodology are unobservable inputs in
situations where there is little or no market activity for the asset or
liability, and we make estimates and assumptions related to the pricing of
the asset or liability, including assumptions regarding risk.
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THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
In certain cases, the inputs used to measure fair value may fall into different
levels of the fair value hierarchy. In such cases, the level within the fair
value hierarchy is based on the lowest level of input that is significant to
the fair value measurement. Our assessment of the significance of a particular
input to the fair value measurement in its entirety requires judgment and
considers factors specific to the investment.
When a determination is made to classify an asset or liability within Level 3
of the fair value hierarchy, the determination is based upon the significance
of the unobservable inputs to the overall fair value measurement. Because
certain securities trade in less liquid or illiquid markets with limited or no
pricing information, the determination of fair value for these securities is
inherently more difficult. However, Level 3 fair value investments may include,
in addition to the unobservable or Level 3 inputs, observable components, which
are components that are actively quoted or can be validated to market-based
sources.
AVAILABLE-FOR-SALE SECURITIES -- FAIR VALUATION METHODOLOGIES AND ASSOCIATED
INPUTS
Securities classified as available-for-sale ("AFS") consist of fixed maturity
and equity securities and are stated at fair value with unrealized gains and
losses included within accumulated other comprehensive income (loss) ("AOCI"),
net of associated DAC, VOBA, DSI, future contract benefits, other contract
holder funds and deferred income taxes.
We measure the fair value of our securities classified as AFS based on
assumptions used by market participants in pricing the security. The most
appropriate valuation methodology is selected based on the specific
characteristics of the fixed maturity or equity security, and we consistently
apply the valuation methodology to measure the security's fair value. Our fair
value measurement is based on a market approach that utilizes prices and other
relevant information generated by market transactions involving identical or
comparable securities. Sources of inputs to the market approach primarily
include third-party pricing services, independent broker quotations or pricing
matrices. We do not adjust prices received from third parties; however, we do
analyze the third-party pricing services' valuation methodologies and related
inputs and perform additional evaluation to determine the appropriate level
within the fair value hierarchy.
The observable and unobservable inputs to our valuation methodologies are based
on a set of standard inputs that we generally use to evaluate all of our AFS
securities. Observable inputs include benchmark yields, reported trades,
broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities,
bids, offers and reference data. In addition, market indicators, industry and
economic events are monitored, and further market data is acquired if certain
triggers are met. For certain security types, additional inputs may be used, or
some of the inputs described above may not be applicable. For private placement
securities, we use pricing matrices that utilize observable pricing inputs of
similar public securities and Treasury yields as inputs to the fair value
measurement. Depending on the type of security or the daily market activity,
standard inputs may be prioritized differently or may not be available for all
AFS securities on any given day. For broker-quoted only securities, non-binding
quotes from market makers or broker-dealers are obtained from sources
recognized as market participants. For securities trading in less liquid or
illiquid markets with limited or no pricing information, we use unobservable
inputs to measure fair value.
The following summarizes our fair valuation methodologies and associated
inputs, which are particular to the specified security type and are in addition
to the defined standard inputs to our valuation methodologies for all of our
AFS securities discussed above:
- Corporate bonds and U.S. government bonds - We also use Trade Reporting and
Compliance Engine(TM) reported tables for our corporate bonds and vendor
trading platform data for our U.S. government bonds.
- Mortgage- and asset-backed securities - We also utilize additional inputs,
which include new issues data, monthly payment information and monthly
collateral performance, including prepayments, severity, delinquencies,
step-down features and over collateralization features for each of our
mortgage-backed securities ("MBS"), which include collateralized mortgage
obligations and mortgage pass through securities backed by residential
mortgages ("RMBS"), commercial mortgage-backed securities ("CMBS"),
collateralized loan obligations ("CLOs") and collateralized debt
obligations ("CDOs").
- State and municipal bonds - We also use additional inputs that include
information from the Municipal Securities Rule Making Board, as well as
material event notices, new issue data, issuer financial statements and
Municipal Market Data benchmark yields for our state and municipal bonds.
- Hybrid and redeemable preferred and equity securities - We also utilize
additional inputs of exchange prices (underlying and common stock of the
same issuer) for our hybrid and redeemable preferred and equity
securities.
In order to validate the pricing information and broker-dealer quotes, we
employ, where possible, procedures that include comparisons with similar
observable positions, comparisons with subsequent sales and observations of
general market movements for those security classes. We have policies and
procedures in place to review the process that is utilized by our third-party
pricing service and the output that is provided to us by the pricing service.
On a periodic basis, we test the pricing for a sample of securities to evaluate
the inputs and assumptions used by the pricing service, and we perform a
comparison of the pricing service output to an alternative pricing source. We
also evaluate prices provided by our primary pricing service to ensure that
they are not stale or unreasonable by reviewing the prices for unusual changes
from period to period based on certain parameters or for lack of change from
one period to the next.
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THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
AFS SECURITIES -- EVALUATION FOR RECOVERY OF AMORTIZED COST
We regularly review our AFS securities for declines in fair value that we
determine to be other-than-temporary. For an equity security, if we do not have
the ability and intent to hold the security for a sufficient period of time to
allow for a recovery in value, we conclude that an other-than-temporary
impairment ("OTTI") has occurred and the amortized cost of the equity security
is written down to the current fair value, with a corresponding charge to
realized gain (loss) on our Consolidated Statements of Comprehensive Income
(Loss). When assessing our ability and intent to hold the equity security to
recovery, we consider, among other things, the severity and duration of the
decline in fair value of the equity security as well as the cause of the
decline, a fundamental analysis of the liquidity, and business prospects and
overall financial condition of the issuer.
For our fixed maturity AFS securities (also referred to as "debt securities"),
we generally consider the following to determine whether our unrealized losses
are other-than-temporarily impaired:
- The estimated range and average period until recovery;
- The estimated range and average holding period to maturity;
- Remaining payment terms of the security;
- Current delinquencies and nonperforming assets of underlying collateral;
- Expected future default rates;
- Collateral value by vintage, geographic region, industry concentration or
property type;
- Subordination levels or other credit enhancements as of the balance sheet
date as compared to origination; and
- Contractual and regulatory cash obligations.
For a debt security, if we intend to sell a security, or it is more likely than
not we will be required to sell a debt security before recovery of its
amortized cost basis and the fair value of the debt security is below amortized
cost, we conclude that an OTTI has occurred and the amortized cost is written
down to current fair value, with a corresponding charge to realized gain (loss)
on our Consolidated Statements of Comprehensive Income (Loss). If we do not
intend to sell a debt security, or it is not more likely than not we will be
required to sell a debt security before recovery of its amortized cost basis
but the present value of the cash flows expected to be collected is less than
the amortized cost of the debt security (referred to as the credit loss), we
conclude that an OTTI has occurred and the amortized cost is written down to
the estimated recovery value with a corresponding charge to realized gain
(loss) on our Consolidated Statements of Comprehensive Income (Loss), as this
amount is deemed the credit portion of the OTTI. The remainder of the decline
to fair value is recorded in other comprehensive income ("OCI") to unrealized
OTTI on AFS securities on our Consolidated Statements of Stockholder's Equity,
as this amount is considered a noncredit (i.e., recoverable) impairment.
When assessing our intent to sell a debt security, or if it is more likely than
not we will be required to sell a debt security before recovery of its cost
basis, we evaluate facts and circumstances such as, but not limited to,
decisions to reposition our security portfolio, sales of securities to meet
cash flow needs and sales of securities to capitalize on favorable pricing. In
order to determine the amount of the credit loss for a debt security, we
calculate the recovery value by performing a discounted cash flow analysis
based on the current cash flows and future cash flows we expect to recover. The
discount rate is the effective interest rate implicit in the underlying debt
security. The effective interest rate is the original yield, or the coupon if
the debt security was previously impaired. See the discussion below for
additional information on the methodology and significant inputs, by security
type, which we use to determine the amount of a credit loss.
Our conclusion that 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, the estimated future cash flows are equal to or greater than the
amortized cost basis of the debt securities, or we have the ability to hold the
equity AFS securities for a period of time sufficient for recovery is based
upon our asset-liability management process. Management considers the following
as part of the evaluation:
- The current economic environment and market conditions;
- Our business strategy and current business plans;
- The nature and type of security, including expected maturities and exposure
to general credit, liquidity, market and interest rate risk;
- Our analysis of data from financial models and other internal and industry
sources to evaluate the current effectiveness of our hedging and overall
risk management strategies;
- The current and expected timing of contractual maturities of our assets and
liabilities, expectations of prepayments on investments and expectations
for surrenders and withdrawals of life insurance policies and annuity
contracts;
- The capital risk limits approved by management; and
- Our current financial condition and liquidity demands.
To determine the recovery period of a debt security, we consider the facts and
circumstances surrounding the underlying issuer including, but not limited to,
the following:
- Historical and implied volatility of the security;
- Length of time and extent to which the fair value has been less than
amortized cost;
- Adverse conditions specifically related to the security or to specific
conditions in an industry or geographic area;
- Failure, if any, of the issuer of the security to make scheduled payments;
and
- Recoveries or additional declines in fair value subsequent to the balance
sheet date.
In periods subsequent to the recognition of an OTTI, the AFS security is
accounted for as if it had been purchased on the measurement date of the OTTI.
Therefore, for the fixed
S-10
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
maturity AFS security, the original discount or reduced premium is reflected in
net investment income over the contractual term of the investment in a manner
that produces a constant effective yield.
To determine recovery value of a corporate bond, CLO or CDO, we perform
additional analysis related to the underlying issuer including, but not limited
to, the following:
- Fundamentals of the issuer to determine what we would recover if they were
to file bankruptcy versus the price at which the market is trading;
- Fundamentals of the industry in which the issuer operates;
- Earnings multiples for the given industry or sector of an industry that the
underlying issuer operates within, divided by the outstanding debt to
determine an expected recovery value of the security in the case of a
liquidation;
- Expected cash flows of the issuer (e.g., whether the issuer has cash flows
in excess of what is required to fund its operations);
- Expectations regarding defaults and recovery rates;
- Changes to the rating of the security by a rating agency; and
- Additional market information (e.g., if there has been a replacement of the
corporate debt security).
Each quarter we review the cash flows for the MBS to determine whether or not
they are sufficient to provide for the recovery of our amortized cost. We
revise our cash flow projections only for those securities that are at most
risk for impairment based on current credit enhancement and trends in the
underlying collateral performance. To determine recovery value of a MBS, we
perform additional analysis related to the underlying issuer including, but not
limited to, the following:
- Discounted cash flow analysis based on the current cash flows and future
cash flows we expect to recover;
- Level of creditworthiness of the home equity loans or residential mortgages
that back an RMBS or commercial mortgages that back a CMBS;
- Susceptibility to fair value fluctuations for changes in the interest rate
environment;
- Susceptibility to reinvestment risks, in cases where market yields are
lower than the securities' book yield earned;
- Susceptibility to reinvestment risks, in cases where market yields are
higher than the book yields earned on a security;
- Expectations of sale of such a security where market yields are higher than
the book yields earned on a security; and
- Susceptibility to variability of prepayments.
When evaluating MBS and mortgage-related asset-backed securities ("ABS"), we
consider a number of pool-specific factors as well as market level factors when
determining whether or not the impairment on the security is temporary or
other-than-temporary. The most important factor is the performance of the
underlying collateral in the security and the trends of that performance in the
prior periods. We use this information about the collateral to forecast the
timing and rate of mortgage loan defaults, including making projections for
loans that are already delinquent and for those loans that are currently
performing but may become delinquent in the future. Other factors used in this
analysis include type of underlying collateral (e.g., prime, Alt-A or
subprime), geographic distribution of underlying loans and timing of
liquidations by state. Once default rates and timing assumptions are
determined, we then make assumptions regarding the severity of a default if it
were to occur. Factors that impact the severity assumption include expectations
for future home price appreciation or depreciation, loan size, first lien
versus second lien, existence of loan level private mortgage insurance, type of
occupancy and geographic distribution of loans. Once default and severity
assumptions are determined for the security in question, cash flows for the
underlying collateral are projected including expected defaults and
prepayments. These cash flows on the collateral are then translated to cash
flows on our tranche based on the cash flow waterfall of the entire capital
security structure. If this analysis indicates the entire principal on a
particular security will not be returned, the security is reviewed for OTTI by
comparing the expected cash flows to amortized cost. To the extent that the
security has already been impaired or was purchased at a discount, such that
the amortized cost of the security is less than or equal to the present value
of cash flows expected to be collected, no impairment is required.
Otherwise, if the amortized cost of the security is greater than the present
value of the cash flows expected to be collected, and the security was not
purchased at a discount greater than the expected principal loss, then
impairment is recognized.
We further monitor the cash flows of all of our AFS securities backed by pools
on an ongoing basis. We also perform detailed analysis on all of our subprime,
Alt-A, non-agency residential MBS and on a significant percentage of our AFS
securities backed by pools of commercial mortgages. The detailed analysis
includes revising projected cash flows by updating the cash flows for actual
cash received and applying assumptions with respect to expected defaults,
foreclosures and recoveries in the future. These revised projected cash flows
are then compared to the amount of credit enhancement (subordination) in the
structure to determine whether the amortized cost of the security is
recoverable. If it is not recoverable, we record an impairment of the
security.
TRADING SECURITIES
Trading securities consist of fixed maturity and equity securities in
designated portfolios, some of which support modified coinsurance ("Modco") and
coinsurance with funds withheld ("CFW") reinsurance arrangements. Investment
results for the portfolios that support Modco and CFW reinsurance arrangements,
including gains and losses from sales, are passed directly to the reinsurers
pursuant to contractual terms of the reinsurance arrangements. Trading
securities are carried at fair value and changes in fair value and changes in
the fair value of embedded derivative liabilities associated with the
underlying reinsurance arrangements, are recorded in realized gain (loss) on
our Consolidated Statements of Comprehensive Income (Loss) as they occur.
S-11
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
ALTERNATIVE INVESTMENTS
Alternative investments, which consist primarily of investments in limited
partnerships ("LPs"), are included in other investments on our Consolidated
Balance Sheets. We account for our investments in LPs using the equity method
to determine the carrying value. Recognition of alternative investment income
is delayed due to the availability of the related financial statements, which
are generally obtained from the partnerships' general partners. As a result,
our venture capital, real estate and oil and gas portfolios are generally on a
three-month delay and our hedge funds are on a one-month delay. In addition,
the impact of audit adjustments related to completion of calendar-year
financial statement audits of the investees are typically received during the
second quarter of each calendar year. Accordingly, our investment income from
alternative investments for any calendar-year period may not include the
complete impact of the change in the underlying net assets for the partnership
for that calendar-year period.
PAYABLES FOR COLLATERAL ON INVESTMENTS
When we enter into collateralized financing transactions on our investments, a
liability is recorded equal to the cash collateral received. This liability is
included within payables for collateral on investments on our Consolidated
Balance Sheets. Income and expenses associated with these transactions are
recorded as investment income and investment expenses within net investment
income on our Consolidated Statements of Comprehensive Income (Loss). Changes
in payables for collateral on investments are reflected within cash flows from
investing activities on our Consolidated Statements of Cash Flows.
MORTGAGE LOANS ON REAL ESTATE
Mortgage loans on real estate are carried at unpaid principal balances adjusted
for amortization of premiums and accretion of discounts and are net of
valuation allowances. Interest income is accrued on the principal balance of
the loan based on the loan's contractual interest rate. Premiums and discounts
are amortized using the effective yield method over the life of the loan.
Interest income and amortization of premiums and discounts are reported in net
investment income on our Consolidated Statements of Comprehensive Income (Loss)
along with mortgage loan fees, which are recorded as they are incurred.
Our commercial loan portfolio is comprised of long-term loans secured by
existing commercial real estate. As such, it does not exhibit risk
characteristics unique to mezzanine, construction, residential, agricultural,
land or other types of real estate loans. We believe all of the loans in our
portfolio share three primary risks: borrower creditworthiness; sustainability
of the cash flow of the property; and market risk; therefore, our methods for
monitoring and assessing credit risk are consistent for our entire portfolio.
Loans are considered impaired when it is probable that, based upon current
information and events, we will be unable to collect all amounts due under the
contractual terms of the loan agreement. When we determine that a loan is
impaired, a valuation allowance is established for the excess carrying value of
the loan over its estimated value. The loan's estimated value is based on: the
present value of expected future cash flows discounted at the loan's effective
interest rate; the loan's observable market price; or the fair value of the
loan's collateral. Valuation allowances are maintained at a level we believe is
adequate to absorb estimated probable credit losses of each specific loan. Our
periodic evaluation of the adequacy of the allowance for losses is based on our
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay (including the
timing of future payments), the estimated value of the underlying collateral,
composition of the loan portfolio, current economic conditions and other
relevant factors. Trends in market vacancy and rental rates are incorporated
into the analysis that we perform for monitored loans and may contribute to the
establishment of (or an increase or decrease in) an allowance for credit
losses. In addition, we review each loan individually in our commercial
mortgage loan portfolio on an annual basis to identify emerging risks. We focus
on properties that experienced a reduction in debt-service coverage or that
have significant exposure to tenants with deteriorating credit profiles. Where
warranted, we establish or increase loss reserves for a specific loan based
upon this analysis. Our process for determining past due or delinquency status
begins when a payment date is missed, at which time the borrower is contacted.
After the grace period expiration that may last up to 10 days, we send a
default notice. The default notice generally provides a short time period to
cure the default. Our policy is to report loans that are 60 or more days past
due, which equates to two or more payments missed, as delinquent. We do not
accrue interest on loans 90 days past due, and any interest received on these
loans is either applied to the principal or recorded in net investment income
on our Consolidated Statements of Comprehensive Income (Loss) when received,
depending on the assessment of the collectibility of the loan. We resume
accruing interest once a loan complies with all of its original terms or
restructured terms. Mortgage loans deemed uncollectible are charged against the
allowance for losses, and subsequent recoveries, if any, are credited to the
allowance for losses. All mortgage loans that are impaired have an established
allowance for credit losses. Changes in valuation allowances are reported in
realized gain (loss) on our Consolidated Statements of Comprehensive Income
(Loss).
We measure and assess the credit quality of our mortgage loans by using
loan-to-value and debt-service coverage ratios. The loan-to-value ratio
compares the principal amount of the loan to the fair value at origination of
the underlying property collateralizing the loan and is commonly expressed as a
percentage. Loan-to-value ratios greater than 100% indicate that the principal
amount is greater than the collateral value. Therefore, all else being equal, a
lower loan-to-value ratio generally indicates a higher quality loan. The
debt-service coverage ratio compares a property's net operating income to its
debt-service payments. Debt-service coverage ratios of less than 1.0 indicate
that property operations do not generate
S-12
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
enough income to cover its current debt payments. Therefore, all else being
equal, a higher debt-service coverage ratio generally indicates a higher
quality loan.
POLICY LOANS
Policy loans represent loans we issue to contract holders that use the cash
surrender value of their life insurance policy as collateral. Policy loans are
carried at unpaid principal balances.
REAL ESTATE
Real estate includes both real estate held for the production of income and
real estate held-for-sale. Real estate held for the production of income is
carried at cost less accumulated depreciation. Depreciation is calculated on a
straight-line basis over the estimated useful life of the asset. We
periodically review properties held for the production of income for
impairment. Properties whose carrying values are greater than their projected
undiscounted cash flows are written down to estimated fair value, with
impairment losses reported in realized gain (loss) on our Consolidated
Statements of Comprehensive Income (Loss). The estimated fair value of real
estate is generally computed using the present value of expected future cash
flows from the real estate discounted at a rate commensurate with the
underlying risks. Real estate classified as held-for-sale is stated at the
lower of depreciated cost or fair value less expected disposition costs at the
time classified as held-for-sale. Real estate is not depreciated while it is
classified as held-for-sale. Also, valuation allowances for losses are
established, as appropriate, for real estate held-for-sale and any changes to
the valuation allowances are reported in realized gain (loss) on our
Consolidated Statements of Comprehensive Income (Loss). Real estate acquired
through foreclosure proceedings is recorded at fair value at the settlement
date.
DERIVATIVE INSTRUMENTS
We hedge certain portions of our exposure to interest rate risk, foreign
currency exchange risk, equity market risk and credit risk by entering into
derivative transactions. All of our derivative instruments are recognized as
either assets or liabilities on our Consolidated Balance Sheets at estimated
fair value. We categorized derivatives into a three-level hierarchy, based on
the priority of the inputs to the respective valuation technique as discussed
above in "Fair Value Measurement." The accounting for changes in the estimated
fair value of a derivative instrument depends on whether it has been designated
and qualifies as part of a hedging relationship, and further, on the type of
hedging relationship. For those derivative instruments that are designated and
qualify as hedging instruments, we designate the hedging instrument based upon
the exposure being hedged: as a cash flow hedge or a fair value hedge.
For derivative instruments that are designated and qualify as a cash flow
hedge, the effective portion of the gain or loss on the derivative instrument
is reported as a component of accumulated OCI and reclassified into net income
in the same period or periods during which the hedged transaction affects net
income. The remaining gain or loss on the derivative instrument in excess of
the cumulative change in the present value of designated future cash flows of
the hedged item (hedge ineffectiveness), if any, is recognized in net income
during the period of change. For derivative instruments that are designated and
qualify as a fair value hedge, the gain or loss on the derivative instrument,
as well as the offsetting gain or loss on the hedged item attributable to the
hedged risk are recognized in net income during the period of change in
estimated fair values. For derivative instruments not designated as hedging
instruments, but that are economic hedges, the gain or loss is recognized in
net income.
We purchase and issue financial instruments and products that contain embedded
derivative instruments. When it is determined that the embedded derivative
possesses economic characteristics that are not clearly and closely related to
the economic characteristics of the host contract, and a separate instrument
with the same terms would qualify as a derivative instrument, the embedded
derivative is bifurcated from the host for measurement purposes. The embedded
derivative, which is reported with the host instrument in the Consolidated
Balance Sheets, is carried at fair value with changes in fair value recognized
in net income during the period of change.
We employ several different methods for determining the fair value of our
derivative instruments. The fair value of our derivative contracts are measured
based on current settlement values, which are based on quoted market prices,
industry standard models that are commercially available and broker quotes.
These techniques project cash flows of the derivatives using current and
implied future market conditions. We calculate the present value of the cash
flows to measure the current fair market value of the derivative.
CASH AND INVESTED CASH
Cash and invested cash is carried at cost and includes all highly liquid debt
instruments purchased with an original maturity of three months or less.
DAC, VOBA, DSI AND DFEL
Acquisition costs directly related to successful contract acquisitions or
renewals of universal life ("UL") insurance, variable UL ("VUL") insurance,
traditional life insurance, annuities and other investment contracts have been
deferred (i.e., DAC) to the extent recoverable. VOBA is an intangible asset
that reflects the estimated fair value of in-force contracts in a life
insurance company acquisition and represents the portion of the purchase price
that is allocated to the value of the right to receive future cash flows from
the business in force at the acquisition date. Bonus credits and excess
interest for dollar cost averaging contracts are considered DSI. Contract sales
charges that are collected in the early years of an insurance contract are
deferred (i.e., DFEL), and the unamortized balance is reported in other
contract holder funds on our Consolidated Balance Sheets.
Both DAC and VOBA amortization, excluding amounts reported in realized gain
(loss), is reported within commissions and other expenses on our Consolidated
Statements of Comprehensive Income (Loss). DSI amortization, excluding
S-13
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
amounts reported in realized gain (loss), is reported in interest credited on
our Consolidated Statements of Comprehensive Income (Loss). The amortization of
DFEL, excluding amounts reported in realized gain (loss), is reported within
fee income on our Consolidated Statements of Comprehensive Income (Loss). The
methodology for determining the amortization of DAC, VOBA, DSI and DFEL varies
by product type. For all insurance contracts, amortization is based on
assumptions consistent with those used in the development of the underlying
contract adjusted for emerging experience and expected trends.
Acquisition costs for UL and VUL insurance and investment-type products, which
include fixed and variable deferred annuities, are generally amortized over the
lives of the policies in relation to the incidence of estimated gross profits
("EGPs") from surrender charges, investment, mortality net of reinsurance ceded
and expense margins and actual realized gain (loss) on investments. Contract
lives for UL and VUL policies are estimated to be 40 years based on the
expected lives of the contracts. Contract lives for fixed and variable deferred
annuities are generally between 13 and 30 years, while some of our fixed
multi-year guarantee products have amortization periods equal to the guarantee
period. The front-end load annuity product has an assumed life of 25 years.
Longer lives are assigned to those blocks that have demonstrated favorable
lapse experience.
Acquisition costs for all traditional contracts, including traditional life
insurance contracts, such as individual whole life, group business and term
life insurance, are amortized over the expected premium-paying period that
ranges from 7 to 77 years. Acquisition costs are either amortized on a
straight-line basis or as a level percent of premium of the related policies
depending on the block of business. There is currently no DAC, VOBA, DSI or
DFEL balance or related amortization for fixed and variable payout annuities.
We account for modifications of insurance contracts that result in a
substantially unchanged contract as a continuation of the replaced contract. We
account for modifications of insurance contracts that result in a substantially
changed contract as an extinguishment of the replaced contract.
The carrying amounts of DAC, VOBA, DSI and DFEL are adjusted for the effects of
realized and unrealized gains and losses on securities classified as AFS and
certain derivatives and embedded derivatives. Amortization expense of DAC,
VOBA, DSI and DFEL reflects an assumption for an expected level of
credit-related investment losses. When actual credit-related investment losses
are realized, we recognize a true-up to our DAC, VOBA, DSI and DFEL
amortization within realized gain (loss) on our Consolidated Statements of
Comprehensive Income (Loss) reflecting the incremental effect of actual versus
expected credit-related investment losses. These actual to expected
amortization adjustments can create volatility from period to period in
realized gain (loss).
During the third quarter of each year, we conduct our annual comprehensive
review of the assumptions and the projection models used for our estimates of
future gross profits underlying the amortization of DAC, VOBA, DSI and DFEL and
the calculations of the embedded derivatives and reserves for life insurance
and annuity products with living benefit and death benefit guarantees. These
assumptions include investment margins, mortality, retention, rider utilization
and maintenance expenses (costs associated with maintaining records relating to
insurance and individual and group annuity contracts, and with the processing
of premium collections, deposits, withdrawals and commissions). Based on our
review, the cumulative balances of DAC, VOBA, DSI and DFEL included on our
Consolidated Balance Sheets are adjusted with an offsetting benefit or charge
to revenue or amortization expense to reflect such change related to our
expectations of future EGPs ("unlocking"). We may have unlocking in other
quarters as we become aware of information that warrants updating assumptions
outside of our annual comprehensive review. We may also identify and implement
actuarial modeling refinements that result in increases or decreases to the
carrying values of DAC, VOBA, DSI, DFEL, embedded derivatives and reserves for
life insurance and annuity products with living benefit and death benefit
guarantees.
DAC, VOBA, DSI and DFEL are reviewed to ensure that the unamortized portion
does not exceed the expected recoverable amounts.
REINSURANCE
We enter into reinsurance agreements with other companies in the normal course
of business. Assets and liabilities and premiums and benefits from certain
reinsurance contracts that grant statutory surplus relief to other insurance
companies are netted on our Consolidated Balance Sheets and Consolidated
Statements of Comprehensive Income (Loss), respectively, because there is a
right of offset. All other reinsurance agreements are reported on a gross basis
on our Consolidated Balance Sheets as an asset for amounts recoverable from
reinsurers or as a component of other liabilities for amounts, such as
premiums, owed to the reinsurers, with the exception of Modco agreements for
which the right of offset also exists. Reinsurance premiums and benefits paid
or provided are accounted for on bases consistent with those used in accounting
for the original policies issued and the terms of the reinsurance contracts.
Premiums, benefits and DAC are reported net of insurance ceded.
GOODWILL
We recognize the excess of the purchase price, plus the fair value of any
noncontrolling interest in the acquiree, over the fair value of identifiable
net assets acquired as goodwill. Goodwill is not amortized, but is reviewed at
least annually for indications of value impairment, with consideration given to
financial performance and other relevant factors. We perform a two-step test in
our evaluation of the carrying value of goodwill for each of our reporting
units, if qualitative factors determine it is necessary to complete the
two-step goodwill impairment test. The results of one test on one reporting
unit cannot subsidize the results of another reporting unit. In Step 1 of the
evaluation, the fair value of each reporting unit
S-14
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
is determined and compared to the carrying value of the reporting unit. If the
fair value is greater than the carrying value, then the carrying value of the
reporting unit is deemed to be recoverable, and Step 2 is not required. If the
fair value estimate is less than the carrying value, it is an indicator that
impairment may exist, and Step 2 is required. In Step 2, the implied fair value
of goodwill is determined for the reporting unit. The reporting unit's fair
value as determined in Step 1 is assigned to all of its net assets (recognized
and unrecognized) as if the reporting unit were acquired in a business
combination as of the date of the impairment test. If the implied fair value of
the reporting unit's goodwill is lower than its carrying amount, goodwill is
impaired and written down to its fair value; and a charge is reported in
impairment of intangibles on our Consolidated Statements of Comprehensive
Income (Loss).
OTHER ASSETS AND OTHER LIABILITIES
Other assets consist primarily of guaranteed living benefit ("GLB") reserves
embedded derivatives, DSI, specifically identifiable intangible assets,
property and equipment owned by the Company, balances associated with
corporate-owned and bank-owned life insurance, certain reinsurance assets,
receivables resulting from sales of securities that had not yet settled as of
the balance sheet date, debt issue costs, other prepaid expenses and deferred
losses on business sold through reinsurance. Other liabilities consist
primarily of current and deferred taxes, pension and other employee benefit
liabilities, derivative instrument liabilities, certain reinsurance payables,
payables resulting from purchases of securities that had not yet settled as of
the balance sheet date, interest on borrowed funds and other accrued
expenses.
Other assets and other liabilities on our Consolidated Balance Sheets include
GLB features and remaining guaranteed interest and similar contracts that are
carried at fair value, which represents approximate exit value including an
estimate for our non-performance risk ("NPR"). Certain of these features have
elements of both insurance benefits and embedded derivatives. Through our
hybrid accounting approach, we assign benefits to the embedded derivative or
insurance based on the life-contingent nature of the benefits. We classify
these GLB reserves embedded derivatives in Level 3 within the hierarchy levels
described above in "Fair Value Measurement."
The carrying values of specifically identifiable intangible assets are reviewed
at least annually for indicators of impairment in value that are
other-than-temporary, including unexpected or adverse changes in the following:
the economic or competitive environments in which the company operates;
profitability analyses; cash flow analyses; and the fair value of the relevant
business operation. If there was an indication of impairment, then the
discounted cash flow method would be used to measure the impairment, and the
carrying value would be adjusted as necessary and reported in impairment of
intangibles on our Consolidated Statements of Comprehensive Income (Loss).
Sales force intangibles are attributable to the value of the new business
distribution system acquired through business combinations. These assets are
amortized on a straight-line basis over their useful life of 25 years. Federal
Communications Commission ("FCC") licenses acquired through business
combinations are not amortized.
Property and equipment owned for company use is carried at cost less allowances
for depreciation. Provisions for depreciation of investment real estate and
property and equipment owned for company use are computed principally on the
straight-line method over the estimated useful lives of the assets, which
include buildings, computer hardware and software and other property and
equipment. We periodically review the carrying value of our long-lived assets,
including property and equipment, for impairment whenever events or
circumstances indicate that the carrying amount of such assets may not be fully
recoverable. For long-lived assets to be held and used, impairments are
recognized when the carrying amount of a long-lived asset is not recoverable
and exceeds its fair value. The carrying amount of a long-lived asset is not
recoverable if it exceeds the sum of the undiscounted cash flows expected to
result from the use and eventual disposition of the asset. An impairment loss
is measured as the amount by which the carrying amount of a long-lived asset
exceeds its fair value.
Long-lived assets to be disposed of by abandonment or in an exchange for a
similar productive long-lived asset are classified as held-for-use until they
are disposed. Long-lived assets to be sold are classified as held-for-sale and
are no longer depreciated. Certain criteria have to be met in order for the
long-lived asset to be classified as held-for-sale, including that a sale is
probable and expected to occur within one year. Long-lived assets classified as
held-for-sale are recorded at the lower of their carrying amount or fair value
less cost to sell.
We completed a reinsurance transaction in 2012 whereby we ceded a closed block
of UL contracts with secondary guarantees to Lincoln National Reinsurance
Company (Barbados) Limited ("LNBAR"), a wholly-owned subsidiary of LNC. We are
recognizing the loss related to this transaction over a period of 30 years.
SEPARATE ACCOUNT ASSETS AND LIABILITIES
We maintain separate account assets, which are reported at fair value. The
related liabilities are reported at an amount equivalent to the separate
account assets. Investment risks associated with market value changes are borne
by the contract holders, except to the extent of minimum guarantees made by the
Company with respect to certain accounts.
We issue variable annuity contracts through our separate accounts for which
investment income and investment gains and losses accrue directly to, and
investment risk is borne by, the contract holder (traditional variable
annuities). We also issue variable annuity and life contracts through separate
accounts that include various types of guaranteed death benefit ("GDB"),
guaranteed withdrawal benefit ("GWB") and guaranteed income benefit ("GIB")
features. The GDB features include those where we contractually guarantee to
the contract holder either: return of no less than total deposits made to the
contract less any partial withdrawals ("return of net deposits"); total
deposits made to the contract less any partial withdrawals
S-15
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
plus a minimum return ("minimum return"); or the highest contract value on any
contract anniversary date through age 80 minus any payments or withdrawals
following the contract anniversary ("anniversary contract value").
As discussed in Note 6, certain features of these guarantees are accounted for
as embedded derivative reserves, whereas other guarantees are accounted for as
benefit reserves. Other guarantees contain characteristics of both and are
accounted for under an approach that calculates the value of the embedded
derivative reserve and the benefit reserve based on the specific
characteristics of each GLB feature. We use derivative instruments to hedge our
exposure to the risks and earnings volatility that result from the embedded
derivatives for living benefits in certain of our variable annuity products.
The change in fair value of these instruments tends to move in the opposite
direction of the change in the value of the associated reserves. The net impact
of these changes is reported as a component of realized gain (loss) on our
Consolidated Statements of Comprehensive Income (Loss).
The "market consistent scenarios" used in the determination of the fair value
of the GLB liability are similar to those used by an investment bank to value
derivatives for which the pricing is not transparent and the aftermarket is
nonexistent or illiquid. We use risk-neutral Monte Carlo simulations in our
calculation to value the entire block of guarantees, which involve 100 unique
scenarios per policy or approximately 43 million scenarios. The market
consistent scenario assumptions, as of each valuation date, are those we view
to be appropriate for a hypothetical market participant. The market consistent
inputs include assumptions for the capital markets (e.g., implied volatilities,
correlation among indices, risk-free swap curve, etc.), policyholder behavior
(e.g., policy lapse, benefit utilization, mortality, etc.), risk margins,
administrative expenses and a margin for profit. We believe these assumptions
are consistent with those that would be used by a market participant; however,
as the related markets develop we will continue to reassess our assumptions. It
is possible that different valuation techniques and assumptions could produce a
materially different estimate of fair value.
FUTURE CONTRACT BENEFITS AND OTHER CONTRACT HOLDER FUNDS
Future contract benefits represent liability reserves that we have established
and carry based on estimates of how much we will need to pay for future
benefits and claims. Other contract holder funds represent liabilities for
fixed account values, including the fixed portion of variable, dividends
payable, premium deposit funds, undistributed earnings on participating
business and other contract holder funds as well the carrying value of DFEL
discussed above.
The liabilities for future contract benefits and claim reserves for UL and VUL
insurance policies consist of contract account balances that accrue to the
benefit of the contract holders, excluding surrender charges. The liabilities
for future insurance contract benefits and claim reserves for traditional life
policies are computed using assumptions for investment yields, mortality and
withdrawals based principally on generally accepted actuarial methods and
assumptions at the time of contract issue. Investment yield assumptions for
traditional direct individual life reserves for all contracts range from 2.25%
to 7.75% depending on the time of contract issue. The investment yield
assumptions for immediate and deferred paid-up annuities range from 1.50% to
13.50%. These investment yield assumptions are intended to represent an
estimation of the interest rate experience for the period that these contract
benefits are payable.
The liabilities for future claim reserves for variable annuity products
containing GDB features are calculated by estimating the present value of total
expected benefit payments over the life of the contract from inception divided
by the present value of total expected assessments over the life of the
contract ("benefit ratio") multiplied by the cumulative assessments recorded
from the contract inception through the balance sheet date less the cumulative
GDB payments plus interest on the liability. The change in the liability for a
period is the benefit ratio multiplied by the assessments recorded for the
period less GDB claims paid in the period plus interest. As experience or
assumption changes result in a change in expected benefit payments or
assessments, the benefit ratio is unlocked, that is, recalculated using the
updated expected benefit payments and assessments over the life of the contract
since inception. The revised benefit ratio is then applied to the liability
calculation described above, with the resulting change in liability reported as
benefit ratio unlocking.
With respect to our future contract benefits and other contract holder funds,
we continually review overall reserve position, reserving techniques and
reinsurance arrangements. As experience develops and new information becomes
known, liabilities are adjusted as deemed necessary. The effects of changes in
estimates are included in the operating results for the period in which such
changes occur.
The business written or assumed by us includes participating life insurance
contracts, under which the contract holder is entitled to share in the earnings
of such contracts via receipt of dividends. The dividend scale for
participating policies is reviewed annually and may be adjusted to reflect
recent experience and future expectations. As of December 31, 2013 and 2012,
participating policies comprised approximately 1% of the face amount of
insurance in force, and dividend expenses were $62 million, $71 million and $79
million for the years ended December 31, 2013, 2012 and 2011, respectively.
Liabilities for the secondary guarantees on UL-type products are calculated by
multiplying the benefit ratio by the cumulative assessments recorded from
contract inception through the balance sheet date less the cumulative secondary
guarantee benefit payments plus interest. If experience or assumption changes
result in a new benefit ratio, the reserves are adjusted to reflect the changes
in a manner similar to the unlocking of DAC, VOBA, DFEL and DSI. The accounting
for secondary guarantee benefits impacts, and is impacted by, EGPs used to
calculate amortization of DAC, VOBA, DFEL and DSI.
S-16
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
The fair value of our indexed annuity contracts is based on their approximate
surrender values.
BORROWED FUNDS
LNL's short-term borrowings are defined as borrowings with contractual or
expected maturities of one year or less. Long-term borrowings have contractual
or expected maturities greater than one year.
DEFERRED GAIN ON BUSINESS SOLD THROUGH REINSURANCE
Our reinsurance operations were acquired by Swiss Re Life & Health America,
Inc. ("Swiss Re") in December 2001 through a series of indemnity reinsurance
transactions. We are recognizing the gain related to these transactions at the
rate that earnings on the reinsured business are expected to emerge, over a
period of 15 years from the date of sale.
We completed a reinsurance transaction in 2009 whereby we assumed a closed
block of term contracts from First Penn-Pacific Life Insurance Company. We are
recognizing the gain related to this transaction over a period of 15 years.
We completed reinsurance transactions in 2012 and 2013 whereby we ceded a
closed block of UL contacts with secondary guarantees to LNBAR. We are
recognizing the gains related to these transactions over a period of 30
years.
COMMITMENTS AND CONTINGENCIES
Contingencies arising from environmental remediation costs, regulatory
judgments, claims, assessments, guarantees, litigation, recourse reserves,
fines, penalties and other sources are recorded when deemed probable and
reasonably estimable.
FEE INCOME
Fee income for investment and interest-sensitive life insurance contracts
consist of asset-based fees, cost of insurance charges, percent of premium
charges, contract administration charges and surrender charges that are
assessed against contract holder account balances. Investment products consist
primarily of individual and group variable and fixed deferred annuities.
Interest-sensitive life insurance products include UL insurance, VUL insurance
and other interest-sensitive life insurance policies. These products include
life insurance sold to individuals, corporate-owned life insurance and
bank-owned life insurance.
In bifurcating the embedded derivative of our GLB features on our variable
annuity products, we attribute to the embedded derivative the portion of total
fees collected from the contract holder that relate to the GLB riders (the
"attributed fees"), which are not reported within fee income on our
Consolidated Statements of Comprehensive Income (Loss). These attributed fees
represent the present value of future claims expected to be paid for the GLB at
the inception of the contract plus a margin that a theoretical market
participant would include for risk/profit and are reported within realized gain
(loss) on our Consolidated Statements of Comprehensive Income (Loss).
The timing of revenue recognition as it relates to fees assessed on investment
contracts is determined based on the nature of such fees. Asset-based fees,
cost of insurance and contract administration charges are assessed on a daily
or monthly basis and recognized as revenue when assessed and earned. Percent of
premium charges are assessed at the time of premium payment and recognized as
revenue when assessed and earned. Certain amounts assessed that represent
compensation for services to be provided in future periods are reported as
unearned revenue and recognized in income over the periods benefited. Surrender
charges are recognized upon surrender of a contract by the contract holder in
accordance with contractual terms.
For investment and interest-sensitive life insurance contracts, the amounts
collected from contract holders are considered deposits and are not included in
revenue.
INSURANCE PREMIUMS
Our insurance premiums for traditional life insurance and group insurance
products are recognized as revenue when due from the contract holder. Our
traditional life insurance products include those products with fixed and
guaranteed premiums and benefits and consist primarily of whole life insurance,
limited-payment life insurance, term life insurance and certain annuities with
life contingencies. Our group non-medical insurance products consist primarily
of term life, disability and dental.
NET INVESTMENT INCOME
Dividends and interest income, recorded in net investment income, are
recognized when earned. Amortization of premiums and accretion of discounts on
investments in debt securities are reflected in net investment income over the
contractual terms of the investments in a manner that produces a constant
effective yield.
For CLOs and MBS, included in the trading and AFS fixed maturity securities
portfolios, we recognize income using a constant effective yield based on
anticipated prepayments and the estimated economic life of the securities. When
actual prepayments differ significantly from originally anticipated
prepayments, the retrospective effective yield is recalculated to reflect
actual payments to date and a catch up adjustment is recorded in the current
period. In addition, the new effective yield, which reflects anticipated future
payments, is used prospectively. Any adjustments resulting from changes in
effective yield are reflected in net investment income on our Consolidated
Statements of Comprehensive Income (Loss).
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 other-than-temporary impairments of investments, 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
S-17
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
to certain contract holders and certain funds withheld on reinsurance
arrangements for which we have a contractual obligation.
OTHER REVENUES
Other revenues consists primarily of fees attributable to broker-dealer
services recorded as earned at the time of sale, changes in the market value of
our seed capital investments and communications sales recognized as earned, net
of agency and representative commissions.
INTEREST CREDITED
Interest credited includes interest credited to contract holder account
balances. Interest crediting rates associated with funds invested in our
general account during 2011 through 2013 ranged from 1% to 10%.
BENEFITS
Benefits for UL and other interest-sensitive life insurance products include
benefit claims incurred during the period in excess of contract account
balances. Benefits also include the change in reserves for life insurance
products with secondary guarantee benefits, annuity products with guaranteed
death and living benefits, and certain annuities with life contingencies. For
traditional life, group health and disability income products, benefits are
recognized when incurred in a manner consistent with the related premium
recognition policies.
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Pursuant to the accounting rules for our obligations to employees and agents
under our various pension and other postretirement benefit plans, we are
required to make a number of assumptions to estimate related liabilities and
expenses. We use assumptions for the weighted-average discount rate and
expected return on plan assets to estimate pension expense. The discount rate
assumptions are determined using an analysis of current market information and
the projected benefit flows associated with these plans. The expected long-term
rate of return on plan assets is based on historical and projected future rates
of return on the funds invested in the plan. The calculation of our accumulated
postretirement benefit obligation also uses an assumption of weighted-average
annual rate of increase in the per capita cost of covered benefits, which
reflects a health care cost trend rate.
STOCK-BASED COMPENSATION
In general, we expense the fair value of stock awards included in our incentive
compensation plans. As of the date LNC's Board of Directors approves stock
awards, the fair value of stock options is determined using a Black-Scholes
options valuation methodology, and the fair value of other stock awards is
based upon the market value of the stock. The fair value of the awards is
expensed over the performance or service period, which generally corresponds to
the vesting period, and is recognized as an increase to common stock in
stockholder's equity. We classify certain stock awards as liabilities. For
these awards, the settlement value is classified as a liability on our
Consolidated Balance Sheets, and the liability is marked-to-market through net
income at the end of each reporting period. Stock-based compensation expense is
reflected in commissions and other expenses on our Consolidated Statements of
Comprehensive Income (Loss).
INTEREST AND DEBT EXPENSE
Interest expense on our short-term and long-term debt is recognized as due and
any associated premiums, discounts, and costs are amortized (accreted) over the
term of the related borrowing utilizing the effective interest method. In
addition, gains or losses related to certain derivative instruments associated
with debt are recognized in interest and debt expense during the period of the
change.
INCOME TAXES
We file a U.S. consolidated income tax return with LNC and its eligible
subsidiaries. Ineligible subsidiaries file separate individual corporate tax
returns. Deferred income taxes are recognized, based on enacted rates, when
assets and liabilities have different values for financial statement and tax
reporting purposes. A valuation allowance is recorded to the extent required.
Considerable judgment and the use of estimates are required in determining
whether a valuation allowance is necessary and, if so, the amount of such
valuation allowance. In evaluating the need for a valuation allowance, we
consider many factors, including: the nature and character of the deferred tax
assets and liabilities; taxable income in prior carryback years; future
reversals of temporary differences; the length of time carryovers can be
utilized; and any tax planning strategies we would employ to avoid a tax
benefit from expiring unused.
--------------------------------------------------------------------------------
2. NEW ACCOUNTING STANDARDS
ADOPTION OF NEW ACCOUNTING STANDARDS
BALANCE SHEET TOPIC
In December 2011, the FASB issued Accounting Standards Update ("ASU") No.
2011-11, "Disclosures about Offsetting Assets and Liabilities" ("ASU 2011-11")
to address certain comparability issues between financial statements prepared
in accordance with GAAP and those prepared in accordance with International
Financial Reporting Standards ("IFRS"). In January 2013, the FASB issued ASU
No. 2013-01, "Clarifying the Scope of Disclosures about Offsetting Assets and
Liabilities" ("ASU 2013-01"), to provide information regarding the scope of the
disclosures required by ASU 2011-11 to the financial instruments and
derivatives reported in an entity's financial statements. ASU 2011-11 requires
an entity to provide enhanced disclosures about certain financial instruments
and derivative instruments, as defined in ASU 2013-01, to enable users to
understand the effects of offsetting in the financial statements as well as the
effects of master netting arrangements on an entity's financial condition. We
adopted the disclosure requirements of ASU 2011-11, after considering the scope
clarification in ASU 2013-01, as of January 1, 2013, and have included the
required disclosures for all comparative periods in Note 6.
S-18
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. NEW ACCOUNTING STANDARDS (CONTINUED)
COMPREHENSIVE INCOME TOPIC
In February 2013, the FASB issued ASU No. 2013-02, "Reporting of Amounts
Reclassified Out of Accumulated Other Comprehensive Income" ("ASU 2013-02"),
which requires enhanced reporting of such amounts either on the face of the
financial statements or in the notes to the financial statements. Under ASU
2013-02, the type of reclassification out of AOCI, as defined under current
GAAP, will dictate whether the disclosure must provide the effect of the
reclassification on the respective financial statement line items or whether
cross-referencing to other disclosures that provide additional detail about the
reclassification will be required. We adopted the disclosure requirements in
ASU 2013-02 as of January 1, 2013, and have included the required disclosure in
Note 14.
DERIVATIVES AND HEDGING TOPIC
In July 2013, the FASB issued ASU No. 2013-10, "Inclusion of the Fed Funds
Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate
for Hedge Accounting Purposes" ("ASU 2013-10"), which permits the Fed Funds
Effective Swap Rate to be used as a benchmark interest rate for hedge
accounting purposes under the FASB ASC in addition to interest rates on direct
Treasury obligations of the U.S. government and the LIBOR swap rate. We adopted
the amendments in ASU 2013-10 prospectively for qualifying new or designated
hedging relationships entered into, on, or after July 17, 2013. The adoption of
ASU 2013-10 did not have an effect on our consolidated financial condition and
results of operation.
FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS
FINANCIAL SERVICES -- INVESTMENT COMPANIES TOPIC
In June 2013, the FASB issued ASU No. 2013-08, "Amendments to the Scope,
Measurement, and Disclosure Requirements" ("ASU 2013-08"), which provides
comprehensive accounting guidance for assessing whether an entity is an
investment company. ASU 2013-08 requires an assessment of all the
characteristics of an investment company through the use of a new two-tiered
approach, which considers the entity's purpose and design to determine whether
it is an investment company. As a result of applying the new criteria in ASU
2013-08, an entity once considered an investment company may no longer meet the
new criteria to be classified as such, and conversely, an entity not classified
as an investment company under current GAAP may satisfy the criteria to be
classified as such upon the adoption of ASU 2013-08. If an entity is no longer
classified as an investment company, it must discontinue the application of
investment company accounting guidance and present the change in status through
a cumulative effect adjustment to the beginning balance of retained earnings in
the period of adoption. If an entity becomes classified as an investment
company, ASU 2013-08 should be applied prospectively with the effect of
adoption recognized as an adjustment to opening net assets for the period of
adoption. The amendments in ASU 2013-08 are effective for interim and annual
reporting periods in fiscal years beginning after December 15, 2013, with early
application prohibited. We will adopt the requirements in ASU 2013-08 effective
January 1, 2014, and are currently evaluating the impact of adoption on our
consolidated financial condition and results of operations.
INCOME TAXES TOPIC
In July 2013, the FASB issued ASU No. 2013-11, "Presentation of an Unrecognized
Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a
Tax Credit Carryforward Exists" ("ASU 2013-11") in order to explicitly define
the financial statement presentation requirements in GAAP. ASU 2013-11 provides
guidance on the presentation of unrecognized tax benefits when net operating
loss carryforwards, similar tax losses, or tax credit carryforwards exist. The
amendments in the ASU are effective prospectively for interim and annual
reporting periods in fiscal years beginning after December 15, 2013, with early
application permitted. We will adopt the requirements of ASU 2013-11 effective
January 1, 2014, and will include the new disclosure requirements in the notes
to our consolidated financial statements.
INVESTMENTS -- EQUITY METHOD AND JOINT VENTURES
In January 2014, the FASB issued ASU No. 2014-01, "Accounting for Investments
in Qualified Affordable Housing Projects" ("ASU 2014-01") in response to
stakeholders' feedback that the presence of certain conditions in order to
apply the effective yield method to investments in qualified affordable housing
projects may be overly restrictive and could result in certain investments
being accounted for under a method of accounting that may not fairly represent
the economics of the investments. ASU 2014-01 allows entities to make an
accounting policy election to account for investments in qualified affordable
housing projects using the proportional amortization method if certain
conditions are met. The conditions in ASU 2014-01 have been modified from the
current GAAP requirements allowing for the application of the effective yield
method, to enable more entities to make use of the proportional amortization
method. The decision to apply the proportional amortization method should be
applied consistently to all investments in qualified affordable housing
projects rather than on an individual investment basis. The amendments in this
ASU are to be applied retrospectively for interim and annual reporting periods
beginning after December 15, 2014; however, a reporting entity that uses the
effective yield method to account for investments in qualified affordable
housing projects before the date of adoption may continue to apply the
effective yield method for those preexisting investments. We will adopt the
requirements of ASU 2014-01 effective January 1, 2015, and are currently
evaluating the impact of adoption on our consolidated financial condition and
results of operations.
OTHER EXPENSES TOPIC
In July 2011, the FASB issued ASU No. 2011-06, "Fees Paid to the Federal
Government by Health Insurers" ("ASU 2011-06") in order to address the question
of how health insurers should recognize and classify fees mandated by the
Patient Protection and Affordable Care Act as amended by the Health Care and
Education Reconciliation Act. The annual fee is imposed on health insurers for
each calendar year beginning on or after January 1, 2014, and is payable no
later than September 30 of the applicable year. If a fee payment is required in
the applicable year, ASU 2011-06 requires the health insurer to record the
liability in full with a corresponding deferred cost that is
S-19
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. NEW ACCOUNTING STANDARDS (CONTINUED)
amortized to expense using a straight-line method of allocation over the
applicable year. The ASU indicates that the annual fee does not meet the
definition of an acquisition cost in accordance with Topic 944 of the FASB ASC.
The amendments in ASU 2011-06 are effective for calendar years beginning after
December 31, 2013, when the fee initially becomes effective. We will adopt the
requirements of ASU 2011-06 effective January 1, 2014. The amendments will not
have a material effect on our consolidated financial condition and results of
operations.
--------------------------------------------------------------------------------
3. REINSURANCE CEDED, REINSURANCE RECAPTURED, REINSURANCE NOVATED, AND CAPITAL
CONTRIBUTIONS
REINSURANCE CEDED TO LNBAR
We completed reinsurance transactions during the second, third and fourth
quarters of 2013 whereby we ceded blocks of business to LNBAR, a wholly-owned
subsidiary of LNC, that resulted in the release of $196 million of capital
previously supporting a portion of statutory reserves related to our
UL/survivorship UL ("SUL") business. The following summarizes the effect of
these transactions (in millions) on our Consolidated Balance Sheets as of
December 31, 2013:
[Download Table]
ASSETS
Cash and invested cash....................................... $ (22)
Deferred acquisition costs and value of business
acquired.................................................. (65)
Reinsurance recoverables..................................... 76
------
Total assets.............................................. $ (11)
======
LIABILITIES
Other contract holder funds.................................. $ (7)
Deferred gain on business sold through reinsurance........... 18
Other liabilities............................................ (22)
------
Total liabilities......................................... $ (11)
======
We completed a reinsurance transaction during the fourth quarter of 2012
whereby we ceded a block of business to LNBAR that resulted in the release of
$164 million of capital previously supporting a portion of statutory reserves
related to our Duet/Legend business. The following summarizes the effect of
this transaction (in millions) on our Consolidated Balance Sheets as of
December 31, 2012:
[Download Table]
ASSETS
Cash and invested cash..................................... $ (32)
Deferred acquisition costs and value of business
acquired................................................ (148)
Reinsurance recoverables................................... 547
-------
Total assets............................................ $ 367
=======
LIABILITIES
Other contract holder funds................................ $ (44)
Deferred gain on business sold through reinsurance......... (233)
Funds withheld reinsurance liabilities..................... 676
Other liabilities.......................................... (32)
-------
Total liabilities....................................... $ 367
=======
REINSURANCE RECAPTURED FROM LNBAR
During fourth quarter 2012, we recaptured a block of secondary guaranteed UL
business previously ceded to LNBAR. The following summarizes the effect of this
transaction (in millions) on our Consolidated Balance Sheets and Consolidated
Statements of Comprehensive Income (Loss) as of and for the year ended December
31, 2012:
[Download Table]
ASSETS
Cash and invested cash...................................... $ 119
Other assets................................................ (34)
-------
Total assets............................................. $ 85
=======
LIABILITIES
Reinsurance related embedded derivatives.................... $ 39
Other liabilities........................................... 45
-------
Total liabilities........................................ $ 84
=======
REVENUES AND EXPENSES
Benefits.................................................... $ 290
Commissions and other expenses.............................. (289)
-------
Net income (loss)........................................ $ 1
=======
During fourth quarter 2011, we recaptured portions of business previously ceded
to LNBAR. The following summarizes the effect of this transaction (in millions)
on our Consolidated Balance Sheets and Consolidated Statements of Comprehensive
Income (Loss) as of and for the year ended December 31, 2011:
[Download Table]
ASSETS
Cash....................................................... $ 204
Deferred acquisition costs................................. 243
-------
Total assets............................................ $ 447
=======
LIABILITIES
Future contract benefits................................... $ 613
Other contract holder funds................................ 18
Funds withheld reinsurance liabilities..................... (300)
Deferred gain on business sold through reinsurance......... 106
Other liabilities.......................................... 4
-------
Total liabilities....................................... $ 441
=======
REVENUES AND EXPENSES
Amortization of deferred gain on business
sold through reinsurance:
Write-off of unamortized deferred gain..................... $ 34
Benefits................................................... (24)
Federal income tax expense................................. (4)
-------
Net income.............................................. $ 6
=======
S-20
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. REINSURANCE CEDED, REINSURANCE RECAPTURED, REINSURANCE NOVATED, AND CAPITAL
CONTRIBUTIONS (CONTINUED)
REINSURANCE NOVATED FROM LINCOLN REINSURANCE COMPANY OF VERMONT II ("LRCVII")
TO LNBAR
During third quarter 2012, LRCVII novated SUL business to LNBAR. The following
summarizes the effect of this transaction (in millions) on our Consolidated
Balance Sheets as of December 31, 2012:
[Download Table]
ASSETS
Cash and invested cash....................................... $ (52)
--------
Total assets.............................................. $ (52)
========
LIABILITIES
Reinsurance related embedded derivatives..................... $ (18)
Deferred gain on business sold through reinsurance........... 8
Long-term debt............................................... (500)
Funds withheld reinsurance liabilities....................... 500
Other liabilities............................................ (16)
--------
Total liabilities......................................... $ (26)
========
REVENUE AND EXPENSES
Net investment income........................................ $ (13)
Benefits..................................................... 13
--------
Net Income................................................ $ (26)
========
CAPITAL CONTRIBUTIONS
On December 30, 2011, LNC transferred ownership of Lincoln Investment Advisors
Corporation ("LIAC") to LNL. In addition, LNC assumed certain liabilities from
LNL during 2011 (reflected in "Other" in the table below). The following
summarizes the effect of these capital contributions (in millions):
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
2011 2011
----- -----
LIAC OTHER
----- -----
Cash and invested cash...................... $ 1 $ --
Other assets................................ 9 --
Other liabilities........................... (5) 5
----- -----
Total(1)................................. $ 5 $ 5
===== =====
-------------
(1) Reported in capital contribution from LNC on our Consolidated Statements
of Stockholder's Equity
--------------------------------------------------------------------------------
4. VARIABLE INTEREST ENTITIES
CONSOLIDATED VIES
CREDIT-LINKED NOTES ("CLNS")
We have invested in the Class 1 notes of two CLN structures, which represent
special purpose trusts combining asset-backed securities with credit default
swaps to produce multi-class structured securities. The CLN structures also
include subordinated Class 2 notes, which are held by third parties, and,
together with the Class 1 notes, represent 100% of the outstanding notes of the
CLN structures. The entities that issued the CLNs are financed by the note
holders, and, as such, the note holders participate in the expected losses and
residual returns of the entities.
Because the note holders do not have voting rights or similar rights, we
determined the entities issuing the CLNs are VIEs, and as a note holder, our
interest represented a variable interest. We have the power to direct the most
significant activity affecting the performance of both CLN structures, as we
have the ability to actively manage the reference portfolios underlying the
credit default swaps. In addition, we receive returns from the CLN structures
and may absorb losses that could potentially be significant to the CLN
structures. As such, we concluded that we are the primary beneficiary of the
VIEs associated with the CLNs. We reflect the assets and liabilities on our
Consolidated Balance Sheets and recognize the results of operations of these
VIEs on our Consolidated Statements of Comprehensive Income (Loss).
As a result of consolidating the CLNs, we also consolidate the derivative
instruments in the CLN structures. The credit default swaps create variability
in the CLN structures and expose the note holders to the credit risk of the
referenced portfolio. The contingent forward contracts transfer a portion of
the loss in the underlying fixed maturity corporate asset-backed credit card
loan securities back to the counterparty after credit losses reach our
attachment point.
The following summarizes information regarding the CLN structures (dollars in
millions) as of December 31, 2013:
[Download Table]
AMOUNT AND
DATE OF ISSUANCE
-----------------------------
$400 $200
DECEMBER APRIL
2006 2007
-------------- -------------
Original attachment point
(subordination).................. 5.50% 2.05%
Current attachment point
(subordination).................. 4.17% 1.48%
Maturity............................ 12/20/2016 3/20/2017
Current rating of tranche........... BB+ Ba2
Current rating of underlying
collateral pool.................. Aa1-B1 Aaa-Caa2
Number of defaults in underlying
collateral pool.................. 2 2
Number of entities.................. 124 99
Number of countries................. 20 21
There has been no event of default on the CLNs themselves. Based upon our
analysis, the remaining subordination as represented by the attachment point
should be sufficient to absorb future credit losses, subject to changing market
conditions. Similar to other debt market instruments, our maximum principal
loss is limited to our original investment.
S-21
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. VARIABLE INTEREST ENTITIES (CONTINUED)
The following summarizes the exposure of the CLN structures' underlying
reference portfolios by industry and rating as of December 31, 2013:
[Enlarge/Download Table]
AAA AA A BBB BB B CCC TOTAL
----- ------ ----- ------ ----- ---- ----- ------
INDUSTRY
Financial intermediaries.............................. 0.0% 2.1% 6.7% 1.7% 0.0% 0.0% 0.0% 10.5%
Telecommunications.................................... 0.0% 0.0% 4.0% 5.5% 1.5% 0.0% 0.0% 11.0%
Oil and gas........................................... 0.3% 2.1% 1.0% 4.6% 0.0% 0.0% 0.0% 8.0%
Utilities............................................. 0.0% 0.0% 2.6% 1.9% 0.0% 0.0% 0.0% 4.5%
Chemicals and plastics................................ 0.0% 0.0% 2.3% 1.2% 0.3% 0.0% 0.0% 3.8%
Drugs................................................. 0.3% 2.2% 1.2% 0.0% 0.0% 0.0% 0.0% 3.7%
Retailers (except food and drug)...................... 0.0% 0.0% 2.1% 0.9% 0.5% 0.0% 0.0% 3.5%
Industrial equipment.................................. 0.0% 0.0% 2.6% 0.7% 0.0% 0.0% 0.0% 3.3%
Sovereign............................................. 0.0% 0.7% 1.2% 1.3% 0.0% 0.0% 0.0% 3.2%
Conglomerates......................................... 0.0% 2.3% 0.9% 0.0% 0.0% 0.0% 0.0% 3.2%
Forest products....................................... 0.0% 0.0% 0.0% 1.6% 1.4% 0.0% 0.0% 3.0%
Other................................................. 0.0% 4.1% 15.5% 17.1% 4.6% 0.7% 0.3% 42.3%
----- ------ ----- ------ ----- ---- ----- ------
Total.............................................. 0.6% 13.5% 40.1% 36.5% 8.3% 0.7% 0.3% 100.0%
===== ====== ===== ====== ===== ==== ===== ======
STATUTORY TRUST NOTE
In August 2011, we purchased a $100 million note issued by a statutory trust
("Issuer") in a private placement offering. The proceeds were used by the
Issuer to purchase U.S. Treasury securities to be held as collateral assets
supporting an excess mortality swap. Our maximum exposure to loss is limited to
our original investment in the notes. We have concluded that the Issuer of the
note is a VIE as the entity does not have sufficient equity to support its
activities without additional financial support, and as a note holder, our
interest represents a variable interest. In our evaluation of the primary
beneficiary, we concluded that our economic interest was greater than our
stated power. As a result, we concluded that we are the primary beneficiary of
the VIE and consolidate all of the assets and liabilities of the Issuer on our
Consolidated Balance Sheets as of August 1, 2011.
On December 16, 2013, the excess mortality swap underlying this VIE was
terminated as a result of a cancellation event under the associated swap
agreement. Subsequently, the U.S. government bonds were redeemed on January 6,
2014. The combination of these two events, under the direction of LNC and its
counterparty, has provided for the dissolution of this VIE effective January 6,
2014.
Asset and liability information (dollars in millions) for the consolidated VIEs
included on our Consolidated Balance Sheets was as follows:
[Enlarge/Download Table]
AS OF DECEMBER 31, 2013 AS OF DECEMBER 31, 2012
-------------------------------------- ---------------------------------------
NUMBER NUMBER
OF NOTIONAL CARRYING OF NOTIONAL CARRYING
INSTRUMENTS AMOUNTS VALUE INSTRUMENTS AMOUNTS VALUE
------------ -------- -------- ------------ -------- ---------
ASSETS
Fixed maturity securities:
Asset-backed credit card loans.............. N/A $ -- $ 595 N/A $ -- $ 598
U.S. government bonds....................... N/A -- 102 N/A -- 110
Excess mortality swap.......................... -- -- -- 1 100 --
------------ -------- -------- ------------ -------- ---------
Total assets(1).......................... -- $ -- $ 697 1 $ 100 $ 708
------------ -------- -------- ------------ -------- ---------
LIABILITIES
Non-qualifying hedges:
Credit default swaps........................ 2 $ 600 $ 27 2 $ 600 $ 128
Contingent forwards......................... 2 -- -- 2 -- --
------------ -------- -------- ------------ -------- ---------
Total liabilities(2)..................... 4 $ 600 $ 27 4 $ 600 $ 128
============ ======== ======== ============ ======== =========
-------------
(1) Reported in variable interest entities' fixed maturity securities on our
Consolidated Balance Sheets.
(2) Reported in variable interest entities' liabilities on our Consolidated
Balance Sheets.
S-22
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. VARIABLE INTEREST ENTITIES (CONTINUED)
For details related to the fixed maturity AFS securities for these VIEs, see
Note 5.
As described more fully in Note 1, we regularly review our investment holdings
for OTTI. Based upon this review, we believe that the AFS fixed maturity
securities were not other-than-temporarily impaired as of December 31, 2013.
The gains (losses) for the consolidated VIEs (in millions) recorded on our
Consolidated Statements of Comprehensive Income (Loss) were as follows:
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
2013 2012
----- ------
NON-QUALIFYING HEDGES
Credit default swaps...................... $ 101 $ 166
Contingent forwards....................... -- (3)
----- ------
Total non-qualifying hedges(1)......... $ 101 $ 163
===== ======
-------------
(1) Reported in realized gain (loss) on our Consolidated Statements of
Comprehensive Income (Loss).
UNCONSOLIDATED VIES
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 RMBS, CMBS, CLOs and CDOs. 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 5.
We invest in certain LPs that operate qualified affordable housing projects
that we have concluded are VIEs. We receive returns from the LPs in the form of
income tax credits that are guaranteed by creditworthy third parties, and our
exposure to loss is limited to the capital we invest in the LPs. We are not the
primary beneficiary of these VIEs as we do not have the power to direct the
most significant activities of the LPs. Our maximum exposure to loss was $77
million and $92 million as of December 31, 2013 and 2012, respectively.
--------------------------------------------------------------------------------
5. INVESTMENTS
AFS SECURITIES
Pursuant to the Fair Value Measurements and Disclosures Topic of the FASB ASC,
we have categorized AFS securities into a three-level hierarchy, based on the
priority of the inputs to the respective valuation technique. The fair value
hierarchy gives the highest priority to quoted prices in active markets for
identical assets or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3), as described in Note 1, which also includes
additional disclosures regarding our fair value measurements.
The amortized cost, gross unrealized gains, losses and OTTI and fair value of
AFS securities (in millions) were as follows:
[Enlarge/Download Table]
AS OF DECEMBER 31, 2013
---------------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR
--------------------------
COST GAINS LOSSES OTTI VALUE
---------- ------- ------- ----- --------
FIXED MATURITY SECURITIES:
Corporate bonds.............................................................. $ 65,423 $ 4,247 $ 1,141 $ 88 $ 68,441
U.S. government bonds........................................................ 314 25 14 -- 325
Foreign government bonds..................................................... 498 45 1 -- 542
RMBS......................................................................... 3,939 244 9 30 4,144
CMBS......................................................................... 686 33 4 17 698
CLOs......................................................................... 232 -- 1 6 225
State and municipal bonds.................................................... 3,549 302 27 -- 3,824
Hybrid and redeemable preferred securities................................... 944 86 51 -- 979
VIEs' fixed maturity securities.............................................. 682 15 -- -- 697
---------- ------- ------- ----- --------
Total fixed maturity securities........................................ 76,267 4,997 1,248 141 79,875
Equity securities............................................................ 182 19 -- -- 201
---------- ------- ------- ----- --------
Total AFS securities................................................ $ 76,449 $ 5,016 $ 1,248 $ 141 $ 80,076
========== ======= ======= ===== ========
S-23
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS (CONTINUED)
[Enlarge/Download Table]
AS OF DECEMBER 31, 2012
---------------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR
--------------------------
COST GAINS LOSSES OTTI VALUE
---------- ------- ------- ----- --------
FIXED MATURITY SECURITIES:
Corporate bonds.............................................................. $ 59,127 $ 7,977 $ 216 $ 104 $ 66,784
U.S. government bonds........................................................ 339 54 -- -- 393
Foreign government bonds..................................................... 549 91 -- -- 640
RMBS......................................................................... 5,494 449 3 57 5,883
CMBS......................................................................... 925 63 14 19 955
CLOs......................................................................... 189 2 3 8 180
State and municipal bonds.................................................... 3,455 795 7 -- 4,243
Hybrid and redeemable preferred securities................................... 1,143 103 70 -- 1,176
VIEs' fixed maturity securities.............................................. 677 31 -- -- 708
---------- ------- ------- ----- --------
Total fixed maturity securities........................................ 71,898 9,565 313 188 80,962
Equity securities............................................................ 137 22 2 -- 157
---------- ------- ------- ----- --------
Total AFS securities................................................ $ 72,035 $ 9,587 $ 315 $ 188 $ 81,119
========== ======= ======= ===== ========
The amortized cost and fair value of fixed maturity AFS securities by
contractual maturities (in millions) as of December 31, 2013, were as
follows:
[Enlarge/Download Table]
AMORTIZED FAIR
COST VALUE
--------- ---------
Due in one year or less......................................................... $ 2,481 $ 2,550
Due after one year through five years........................................... 14,097 15,229
Due after five years through ten years.......................................... 24,400 25,312
Due after ten years............................................................. 30,432 31,717
--------- ---------
Subtotal..................................................................... 71,410 74,808
--------- ---------
MBS............................................................................. 4,625 4,842
CLOs............................................................................ 232 225
--------- ---------
Total fixed maturity AFS securities....................................... $ 76,267 $ 79,875
========= =========
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, including the portion of OTTI
recognized in OCI, of AFS securities (dollars in millions), aggregated by
investment category and length of time that individual securities have been in
a continuous unrealized loss position, were as follows:
[Enlarge/Download Table]
AS OF DECEMBER 31, 2013
----------------------------------------------------------------------------
LESS THAN OR EQUAL GREATER THAN
TO TWELVE MONTHS TWELVE MONTHS TOTAL
------------------------- ---------------------- -----------------------
GROSS GROSS GROSS
UNREALIZED UNREALIZED UNREALIZED
FAIR LOSSES AND FAIR LOSSES AND FAIR LOSSES AND
VALUE OTTI VALUE OTTI VALUE OTTI
----------- ----------- -------- ----------- -------- ----------
FIXED MATURITY SECURITIES:
Corporate bonds....................................... $ 16,620 $ 1,004 $ 1,233 $ 225 $ 17,853 $ 1,229
U.S. government bonds................................. 151 14 -- -- 151 14
Foreign government bonds.............................. 69 1 -- -- 69 1
RMBS.................................................. 455 15 259 24 714 39
CMBS.................................................. 109 7 43 14 152 21
CLOs.................................................. 136 3 50 4 186 7
State and municipal bonds............................. 359 20 24 7 383 27
Hybrid and redeemable preferred securities............ 58 6 195 45 253 51
----------- ----------- -------- ----------- -------- ----------
Total fixed maturity AFS securities............. $ 17,957 $ 1,070 $ 1,804 $ 319 $ 19,761 $ 1,389
=========== =========== ======== =========== ======== ==========
Total number of AFS securities in an unrealized loss
position............................................. 1,449
==========
S-24
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS (CONTINUED)
[Enlarge/Download Table]
AS OF DECEMBER 31, 2012
----------------------------------------------------------------------------
LESS THAN OR EQUAL GREATER THAN
TO TWELVE MONTHS TWELVE MONTHS TOTAL
------------------------- ---------------------- -----------------------
GROSS GROSS GROSS
UNREALIZED UNREALIZED UNREALIZED
FAIR LOSSES AND FAIR LOSSES AND FAIR LOSSES AND
VALUE OTTI VALUE OTTI VALUE OTTI
----------- ----------- -------- ----------- -------- ----------
FIXED MATURITY SECURITIES:
Corporate bonds....................................... $ 2,814 $ 142 $ 918 $ 178 $ 3,732 $ 320
RMBS.................................................. 253 36 196 24 449 60
CMBS.................................................. 63 16 104 17 167 33
CLOs.................................................. 10 8 53 3 63 11
State and municipal bonds............................. 64 1 24 6 88 7
Hybrid and redeemable preferred securities............ 71 3 281 67 352 70
----------- ----------- -------- ----------- -------- ----------
Total fixed maturity securities................. 3,275 206 1,576 295 4,851 501
Equity securities..................................... 7 2 -- -- 7 2
----------- ----------- -------- ----------- -------- ----------
Total AFS securities......................... $ 3,282 $ 208 $ 1,576 $ 295 $ 4,858 $ 503
=========== =========== ======== =========== ======== ==========
Total number of AFS securities in an unrealized loss
position............................................. 617
==========
For information regarding our investments in VIEs, see Note 4.
We perform detailed analysis on the AFS securities backed by pools of
residential and commercial mortgages that are most at risk of impairment based
on factors discussed in Note 1. Selected information for these securities in a
gross unrealized loss position (in millions) was as follows:
[Enlarge/Download Table]
AS OF DECEMBER 31, 2013
---------------------------------------
AMORTIZED FAIR UNREALIZED
COST VALUE LOSS
---------- ------- ----------
TOTAL
AFS securities backed by pools of residential mortgages............................ $ 1,198 $ 1,087 $ 111
AFS securities backed by pools of commercial mortgages............................. 193 169 24
---------- ------- ----------
Total........................................................................... $ 1,391 $ 1,256 $ 135
========== ======= ==========
SUBJECT TO DETAILED ANALYSIS
AFS securities backed by pools of residential mortgages............................ $ 871 $ 774 $ 97
AFS securities backed by pools of commercial mortgages............................. 29 23 6
---------- ------- ----------
Total........................................................................... $ 900 $ 797 $ 103
========== ======= ==========
[Enlarge/Download Table]
AS OF DECEMBER 31, 2012
---------------------------------------
AMORTIZED FAIR UNREALIZED
COST VALUE LOSS
---------- ------- ----------
TOTAL
AFS securities backed by pools of residential mortgages............................ $ 1,128 $ 935 $ 193
AFS securities backed by pools of commercial mortgages............................. 225 183 42
---------- ------- ----------
Total........................................................................... $ 1,353 $ 1,118 $ 235
========== ======= ==========
SUBJECT TO DETAILED ANALYSIS
AFS securities backed by pools of residential mortgages............................ $ 1,119 $ 926 $ 193
AFS securities backed by pools of commercial mortgages............................. 52 36 16
---------- ------- ----------
Total........................................................................... $ 1,171 $ 962 $ 209
========== ======= ==========
For the years ended December 31, 2013 and 2012, we recorded OTTI for AFS
securities backed by pools of residential and commercial mortgages of $21
million and $103 million, pre-tax, respectively, and before associated
amortization expense for DAC, VOBA, DSI and DFEL, of which $ (46) million and $
(45) million, respectively, was recognized in OCI and $67 million and $148
million, respectively, was recognized in net income (loss).
S-25
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS (CONTINUED)
The fair value, gross unrealized losses, the portion of OTTI recognized in OCI
(in millions) and number of AFS securities where the fair value had declined
and remained below amortized cost by greater than 20% were as follows:
[Enlarge/Download Table]
AS OF DECEMBER 31, 2013
---------------------------------------------
NUMBER
FAIR GROSS UNREALIZED OF
-----------------
VALUE LOSSES OTTI SECURITIES(1)
----- ------ ----- -------------
Less than six months.............................................................. $ 1 $ -- $ -- 4
Six months or greater, but less than nine months.................................. 7 3 -- 1
Nine months or greater, but less than twelve months............................... 56 18 -- 4
Twelve months or greater.......................................................... 340 89 81 92
----- ------ ----- -------------
Total.......................................................................... $ 404 $ 110 $ 81 101
===== ====== ===== =============
[Enlarge/Download Table]
AS OF DECEMBER 31, 2012
---------------------------------------------
NUMBER
FAIR GROSS UNREALIZED OF
-----------------
VALUE LOSSES OTTI SECURITIES(1)
----- ------ ----- -------------
Less than six months.............................................................. $ 34 $ 9 $ 1 14
Nine months or greater, but less than twelve months............................... 15 10 -- 3
Twelve months or greater.......................................................... 385 175 125 131
----- ------ ----- -------------
Total.......................................................................... $ 434 $ 194 $ 126 148
===== ====== ===== =============
--------------
(1) We may reflect a security in more than one aging category based on
various purchase dates.
We regularly review our investment holdings for OTTI. Our gross unrealized
losses, including the portion of OTTI recognized in OCI, on AFS securities
increased $886 million for the year ended December 31, 2013. As discussed
further below, we believe the unrealized loss position as of December 31, 2013,
did not represent OTTI 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; (iii) the estimated future cash flows were equal to or greater than the
amortized cost basis of the debt securities; and (iv) we had the ability and
intent to hold the equity AFS securities for a period of time sufficient for
recovery.
Based upon this evaluation as of December 31, 2013, management believes we have
the ability to generate adequate amounts of cash from our normal operations
(e.g., insurance premiums and fees and investment income) to meet cash
requirements with a prudent margin of safety without requiring the sale of our
temporarily-impaired securities.
As of December 31, 2013, the unrealized losses associated with our corporate
bond securities were attributable primarily to securities that were backed by
commercial loans and individual issuer companies. For our corporate bond
securities with commercial loans as the underlying collateral, we evaluated the
projected credit losses in the underlying collateral and concluded that we had
sufficient subordination or other credit enhancement when compared with our
estimate of credit losses for the individual security and we expected to
recover the entire amortized cost for each security. For individual issuers, we
performed detailed analysis of the financial performance of the issuer and
determined that we expected to recover the entire amortized cost for each
security.
As of December 31, 2013, the unrealized losses associated with our MBS and CLOs
were attributable primarily to collateral losses and credit spreads. 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, sector credit ratings 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 basis of
each security.
As of December 31, 2013, 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 specific issuers. For our hybrid
and redeemable preferred securities, we evaluated the financial performance of
the issuer based upon credit performance and investment ratings and determined
that we expected to recover the entire amortized cost of each security.
Changes in the amount of credit loss of OTTI recognized in net income (loss)
where the portion related to other factors was
S-26
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS (CONTINUED)
recognized in OCI (in millions) on fixed maturity AFS securities were as
follows:
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
2013 2012 2011
------- -------- ------
Balance as of beginning-of-year.......... $ 402 $ 380 $ 309
Increases attributable to:
Credit losses on securities for
which an OTTI was not
previously recognized............ 37 98 54
Credit losses on securities for
which an OTTI was
previously recognized............ 40 59 68
Decreases attributable to:
Securities sold.................... (101) (135) (51)
------- -------- ------
Balance as of end-of-year........ $ 378 $ 402 $ 380
======= ======== ======
During 2013, 2012 and 2011, we recorded credit losses on securities for which
an OTTI was not previously recognized as we determined the cash flows expected
to be collected would not be sufficient to recover the entire amortized cost
basis of the debt security. The credit losses we recorded on securities for
which an OTTI was not previously recognized were attributable primarily to one
or a combination of the following reasons:
- Failure of the issuer of the security to make scheduled payments;
- Deterioration of creditworthiness of the issuer;
- Deterioration of conditions specifically related to the security;
- Deterioration of fundamentals of the industry in which the issuer operates;
and
- Deterioration of the rating of the security by a rating agency.
We recognize the OTTI attributed to the noncredit portion as a separate
component in OCI referred to as unrealized OTTI on AFS securities.
Details of the amount of credit loss of OTTI recognized in net income (loss)
for which a portion related to other factors was recognized in OCI (in
millions), were as follows:
[Enlarge/Download Table]
AS OF DECEMBER 31, 2013
----------------------------------------------------
GROSS UNREALIZED OTTI IN
----------------------------
AMORTIZED LOSSES AND FAIR CREDIT
COST GAINS OTTI VALUE LOSSES
---------- ------ ---------- ------ --------
Corporate bonds............................................................ $ 252 $ 18 $ 48 $ 222 $ 126
RMBS....................................................................... 513 17 17 513 175
CMBS....................................................................... 34 3 12 25 77
---------- ------ ---------- ------ --------
Total................................................................... $ 799 $ 38 $ 77 $ 760 $ 378
========== ====== ========== ====== ========
[Enlarge/Download Table]
AS OF DECEMBER 31, 2012
----------------------------------------------------
GROSS UNREALIZED OTTI IN
----------------------------
AMORTIZED LOSSES AND FAIR CREDIT
COST GAINS OTTI VALUE LOSSES
---------- ------ ---------- ------ --------
Corporate bonds............................................................ $ 285 $ 4 $ 95 $ 194 $ 99
RMBS....................................................................... 588 20 38 570 219
CMBS....................................................................... 39 1 16 24 84
---------- ------ ---------- ------ --------
Total................................................................... $ 912 $ 25 $ 149 $ 788 $ 402
========== ====== ========== ====== ========
S-27
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS (CONTINUED)
TRADING SECURITIES
Trading securities at fair value (in millions) consisted of the following:
[Download Table]
AS OF DECEMBER 31,
--------------------
2013 2012
-------- --------
FIXED MATURITY SECURITIES:
Corporate bonds.............................. $ 1,683 $ 1,817
U.S. government bonds........................ 272 310
Foreign government bonds..................... 24 32
RMBS......................................... 152 188
CMBS......................................... 7 17
CLOs......................................... 2 4
State and municipal bonds.................... 20 25
Hybrid and redeemable preferred
securities................................ 30 42
-------- --------
Total fixed maturity securities........ 2,190 2,435
Equity Securities............................ -- 2
-------- --------
Total trading securities............. $ 2,190 $ 2,437
======== ========
The portion of the market adjustment for gains (losses) that relate to trading
securities still held as of December 31, 2013, 2012 and 2011, was $(166)
million, $53 million and $115 million, respectively.
MORTGAGE LOANS ON REAL ESTATE
Mortgage loans on real estate principally involve commercial real estate. The
commercial loans are geographically diversified throughout the U.S. with the
largest concentrations in California and Texas, which accounted for 32% and 31%
of mortgage loans on real estate as of December 31, 2013 and 2012,
respectively.
The following provides the current and past due composition of our mortgage
loans on real estate (in millions):
[Download Table]
AS OF DECEMBER 31,
---------------------
2013 2012
--------- ---------
Current...................................... $ 7,026 $ 6,791
Valuation allowance associated with
impaired mortgage loans on
real estate............................... (3) (6)
Unamortized premium (discount)............... 6 7
--------- ---------
Total carrying value...................... $ 7,029 $ 6,792
========= =========
The number of impaired mortgage loans on real estate, each of which had an
associated specific valuation allowance, and the carrying value of impaired
mortgage loans on real estate (dollars in millions) were as follows:
[Download Table]
AS OF DECEMBER 31,
--------------------
2013 2012
----- -----
Number of impaired mortgage loans
on real estate........................... 3 4
===== =====
Principal balance of impaired mortgage
loans on real estate..................... $ 27 $ 38
Valuation allowance associated with
impaired mortgage loans on
real estate.............................. (3) (6)
----- -----
Carrying value of impaired
mortgage loans on real estate......... $ 24 $ 32
===== =====
The changes in the valuation allowance associated with impaired mortgage loans
on real estate (in millions) were as follows:
[Download Table]
AS OF DECEMBER 31,
--------------------
2013 2012
----- -----
Balance as of beginning-of-year.............. $ 6 $ 3
Additions................................. 3 4
Charge-offs, net of recoveries............ (6) (1)
----- -----
Balance as of end-of-year.............. $ 3 $ 6
===== =====
The average carrying value on the impaired mortgage loans on real estate (in
millions) was as follows:
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
2013 2012 2011
----- ----- ----
Average carrying value for
impaired mortgage loans on
real estate.......................... $ 30 $ 17 $ 15
Interest income recognized on
impaired mortgage loans on
real estate.......................... 2 1 1
Interest income collected on
impaired mortgage loans on
real estate.......................... 2 1 1
S-28
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS (CONTINUED)
As described in Note 1, we use the loan-to-value and debt-service coverage
ratios as credit quality indicators for our mortgage loans, which were as
follows (dollars in millions):
[Enlarge/Download Table]
AS OF DECEMBER 31, 2013 AS OF DECEMBER 31, 2012
------------------------------------- -------------------------------------
DEBT- DEBT-
SERVICE SERVICE
PRINCIPAL % OF COVERAGE PRINCIPAL % OF COVERAGE
AMOUNT TOTAL RATIO AMOUNT TOTAL RATIO
--------- --------- --------- ---------- -------- --------
Less than 65%..................................... $ 5,892 83.9% 1.79 $ 5,526 81.3% 1.68
65% to 74%........................................ 736 10.4% 1.42 869 12.8% 1.39
75% to 100%....................................... 363 5.2% 0.83 350 5.2% 0.82
Greater than 100%................................. 35 0.5% 0.78 46 0.7% 0.79
--------- --------- ---------- --------
Total mortgage loans on real estate............ $ 7,026 100.0% $ 6,791 100.0%
========= ========= ========== ========
ALTERNATIVE INVESTMENTS
As of December 31, 2013 and 2012, alternative investments included investments
in 121 and 98 different partnerships, respectively, and the portfolio
represented approximately 1% of our overall invested assets.
NET INVESTMENT INCOME
The major categories of net investment income (in millions) on our Consolidated
Statements of Comprehensive Income (Loss) were as follows:
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------
2013 2012 2011
--------- --------- --------
Fixed maturity AFS
securities................... $ 3,876 $ 3,813 $ 3,724
Equity AFS securities........... 6 6 5
Trading securities.............. 130 138 145
Mortgage loans on
real estate.................. 377 381 392
Real estate..................... 5 11 18
Standby real estate equity
commitments.................. -- -- 1
Policy loans.................... 153 163 161
Invested cash................... 3 4 3
Commercial mortgage loan
prepayment and bond
make-whole premiums.......... 107 39 75
Alternative investments......... 86 125 90
Consent fees.................... 4 3 3
Other investments............... 4 (5) --
--------- --------- --------
Investment income............ 4,751 4,678 4,617
Investment expense.............. (190) (127) (127)
--------- --------- --------
Net investment income..... $ 4,561 $ 4,551 $ 4,490
========= ========= ========
REALIZED GAIN (LOSS) RELATED TO CERTAIN INVESTMENTS
The detail of the realized gain (loss) related to certain investments (in
millions) was as follows:
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
2013 2012 2011
------ ------- -------
Fixed maturity AFS securities:
Gross gains.................... $ 20 $ 14 $ 84
Gross losses................... (89) (187) (218)
Equity AFS securities:
Gross gains.................... 8 1 10
Gross losses................... (2) (9) --
Gain (loss) on other
investments.................... 6 15 27
Associated amortization of
DAC, VOBA, DSI and DFEL
and changes in other
contract holder funds.......... (27) 2 (9)
------ ------- -------
Total realized gain (loss)
related to certain
investments............... $ (84) $ (164) $ (106)
====== ======= =======
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THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS (CONTINUED)
Details underlying write-downs taken as a result of OTTI (in millions) that
were recognized in net income (loss) and included in realized gain (loss) on
AFS securities above, and the portion of OTTI recognized in OCI (in millions)
were as follows:
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
2013 2012 2011
------ ------- -------
OTTI RECOGNIZED IN
NET INCOME (LOSS)
Fixed maturity securities:
Corporate bonds................ $ (34) $ (62) $ (13)
RMBS........................... (28) (50) (76)
CMBS........................... (14) (47) (56)
CLOs........................... (1) (2) (1)
Hybrid and redeemable
preferred securities........ -- -- (2)
------ ------- -------
Total fixed maturity
securities................ (77) (161) (148)
Equity securities................. (1) (8) --
------ ------- -------
Gross OTTI recognized
in net income (loss)... (78) (169) (148)
Associated amortization
of DAC, VOBA, DSI,
and DFEL............... 13 30 30
------ ------- -------
Net OTTI recognized
in net income
(loss), pre-tax..... $ (65) $ (139) $ (118)
====== ======= =======
PORTION OF OTTI
RECOGNIZED IN OCI
Gross OTTI recognized in OCI...... $ 11 $ 118 $ 54
Change in DAC, VOBA,
DSI and DFEL................... (1) (15) (12)
------ ------- -------
Net portion of OTTI
recognized in OCI, pre-tax.. $ 10 $ 103 $ 42
====== ======= =======
DETERMINATION OF CREDIT LOSSES ON CORPORATE BONDS AND CLOS
As of December 31, 2013 and 2012, we reviewed our corporate bond and CLO
portfolios for potential shortfall in contractual principal and interest based
on numerous subjective and objective inputs. The factors used to determine the
amount of credit loss for each individual security, include, but are not
limited to, near term risk, substantial discrepancy between book and market
value, sector or company-specific volatility, negative operating trends and
trading levels wider than peers.
Credit ratings express opinions about the credit quality of a security.
Securities rated investment grade, that is those rated BBB- or higher by
Standard & Poor's ("S&P") Rating Services or Baa3 or higher by Moody's
Investors Service ("Moody's"), are generally considered by the rating agencies
and market participants to be low credit risk. As of December 31, 2013 and
2012, 96% of the fair value of our corporate bond portfolio was rated
investment grade. As of December 31, 2013 and 2012, the portion of our
corporate bond portfolio rated below investment grade had an amortized cost of
$2.9 billion, and a fair value of $2.9 billion. As of December 31, 2013 and
2012, 94% and 93%, respectively, of the fair value of our CLO portfolio was
rated investment grade. As of December 31, 2013 and 2012, the portion of our
CLO portfolio rated below investment grade had an amortized cost of $16 million
and $21 million, respectively, and fair value of $13 million. Based upon the
analysis discussed above, we believed as of December 31, 2013 and 2012, that we
would recover the amortized cost of each investment grade corporate bond and
CLO security.
DETERMINATION OF CREDIT LOSSES ON MBS
As of December 31, 2013 and 2012, default rates were projected by considering
underlying MBS loan performance and collateral type. Projected default rates on
existing delinquencies vary between 10% to 100% depending on loan type and
severity of delinquency status. In addition, we estimate the potential
contributions of currently performing loans that may become delinquent in the
future based on the change in delinquencies and loan liquidations experienced
in the recent history. Finally, we develop a default rate timing curve by
aggregating the defaults for all loans in the pool (delinquent loans,
foreclosure and real estate owned and new delinquencies from currently
performing loans) and the associated loan-level loss severities.
We use certain available loan characteristics such as lien status, loan sizes
and occupancy to estimate the loss severity of loans. Second lien loans are
assigned 100% severity, if defaulted. For first lien loans, we assume a minimum
of 30% severity with higher severity assumed for investor properties and
further adjusted by housing price assumptions. With the default rate timing
curve and loan-level severity, we derive the future expected credit losses.
S-30
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS (CONTINUED)
PAYABLES FOR COLLATERAL ON INVESTMENTS
The carrying value of the payables for collateral on investments (in millions)
included on our Consolidated Balance Sheets and the fair value of the related
investments or collateral consisted of the following:
[Enlarge/Download Table]
AS OF DECEMBER 31, 2013 AS OF DECEMBER 31, 2012
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
--------- ------- --------- --------
Collateral payable held for derivative investments(1)........................... $ 264 $ 264 $ 2,507 $ 2,507
Securities pledged under securities lending agreements(2)....................... 184 178 197 189
Securities pledged under repurchase agreements(3)............................... 530 553 280 294
Securities pledged for Term Asset-Backed Securities Loan Facility ("TALF")(4)... 36 49 37 52
Investments pledged for Federal Home Loan Bank of Indianapolis
("FHLBI")(5)................................................................. 1,851 3,127 1,100 1,936
--------- ------- --------- --------
Total payables for collateral on investments................................. $ 2,865 $ 4,171 $ 4,121 $ 4,978
========= ======= ========= ========
-------------
(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 6 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 securities under repurchase agreements are included in fixed
maturity AFS securities on our Consolidated Balance Sheets. We obtain
collateral in an amount equal 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.
(4) Our pledged securities for TALF are included in fixed maturity AFS
securities on our Consolidated Balance Sheets. We obtain collateral in an
amount that has typically averaged 90% of the fair value of the TALF
securities. The cash received in these transactions is invested in fixed
maturity AFS securities.
(5) 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.
For information related to balance sheet offsetting of our securities lending
and repurchase agreements, see Note 6.
Increase (decrease) in payables for collateral on investments (in millions)
included on the Consolidated Statements of Cash Flows consisted of the
following:
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
2013 2012 2011
--------- -------- --------
Collateral payable held for
derivative investments........ $ (2,243) $ (487) $ 2,141
Securities pledged under
securities lending
agreements.................... (13) (3) 1
Securities pledged under
repurchase agreements......... 250 -- --
Securities pledged for TALF...... (1) (136) (107)
Investments pledged for
FHLBI......................... 751 1,000 --
--------- -------- --------
Total increase (decrease) in
payables for collateral on
investments................ $ (1,256) $ 374 $ 2,035
========= ======== ========
INVESTMENT COMMITMENTS
As of December 31, 2013, our investment commitments were $868 million, which
included $411 million of LPs, $372 million of private placement securities and
$85 million of mortgage loans on real estate.
CONCENTRATIONS OF FINANCIAL INSTRUMENTS
As of December 31, 2013 and 2012, 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 $2.5 billion and $3.6 billion, or 3%
and 4%, respectively, of our invested assets portfolio, respectively, and our
investments in securities issued by Fannie Mae with a fair value of $1.7
billion and $2.2 billion, respectively, or 2% of our invested assets portfolio.
These investments are included in corporate bonds in the tables above.
As of December 31, 2013 and 2012, our most significant investments in one
industry were our investment securities in the electric industry with a fair
value of $8.5 billion and $8.4 billion, respectively, or 9% of our invested
assets portfolio, and our investment securities in the banking industry with a
fair value of $4.8 billion and $5.3 billion, respectively, or 5% of our
invested assets portfolio. We utilized the industry classifications to obtain
the concentration of financial instruments amount; as such, this amount will
not agree to the AFS securities table above.
S-31
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
6. 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, default 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 1 for a detailed discussion of the accounting treatment for derivative
instruments. See Note 21 for additional disclosures related to the fair value
of our derivative instruments and Note 4 for derivative instruments related to
our consolidated VIEs.
INTEREST RATE CONTRACTS
We use derivative instruments as part of our interest rate risk management
strategy. These instruments are economic hedges unless otherwise noted and
include:
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.
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 purchase of certain assets and liabilities.
INTEREST RATE CAP AGREEMENTS
We use interest rate cap agreements to provide a level of protection from the
effect of rising interest rates to economically hedge certain life insurance
products and annuity contracts. Interest rate cap agreements entitle us to
receive quarterly payments from the counterparties on specified future reset
dates, contingent on future interest rates. For each cap, the amount of such
quarterly payments, if any, is determined by the excess of a market interest
rate over a specified cap rate, multiplied by the notional amount divided by
four.
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. These instruments either hedge the interest rate risk of
floating-rate bond coupon payments by replicating a fixed-rate bond, or hedge
our exposure to fixed-rate bond coupon payments and the change in the
underlying asset values as interest rates fluctuate.
Finally, we use interest rate swap agreements designated and qualifying as fair
value hedges to hedge against changes in the value of anticipated transactions
and commitments as interest rates fluctuate.
REVERSE TREASURY LOCKS
We use reverse treasury locks designated and qualifying as cash flow hedges to
hedge the interest rate exposure related to the 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 designated and qualifying as cash flow hedges,
which are traded over-the-counter, to hedge some of the foreign exchange risk
of investments in fixed maturity securities denominated in foreign currencies.
A foreign currency swap is a contractual agreement to exchange the currencies
of two different countries at a specified rate of exchange in the future.
S-32
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DERIVATIVE INSTRUMENTS (CONTINUED)
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(R) ("S&P 500")
We use indexed annuity contracts to 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. Contract holders may elect to
rebalance index options at renewal dates, either annually or biannually. As of
each renewal date, we have the opportunity to re-price the indexed component by
establishing participation rates, caps, spreads and specified rates, subject to
contractual guarantees. We purchase 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.
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 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.
In addition, we use total return swaps to hedge the liability exposure on
certain options in variable annuity products. We receive the total return on a
portfolio of indexes and pay a floating-rate of interest.
VARIANCE SWAPS
We use variance swaps to hedge the liability exposure on certain options in
variable annuity products. Variance swaps are contracts entered into at no cost
and whose payoff is the difference between the realized variance rate of an
underlying index and the fixed variance rate determined as of inception.
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 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 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
We use a hedging strategy designed to mitigate the risk and income statement
volatility caused by changes in the equity markets, interest rates and
volatility associated with GLBs offered in our variable annuity products,
including products with GWB and GIB features. The hedging strategy is designed
such that changes in the value of the hedge contracts due to changes in equity
markets, interest rates and implied volatilities move in the opposite direction
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. However, the hedging
results do not impact LNL due to a funds withheld agreement with LNBAR, which
causes the financial impact of the derivatives, as well as the cash flow
activity, to be reflected on LNBAR.
Certain features of these guarantees have elements of both insurance benefits
accounted for under the Financial Services - Insurance - Claim Costs and
Liabilities for Future Policy Benefits Subtopic of the FASB ASC ("benefit
reserves") and embedded derivatives accounted for under the Derivatives and
Hedging and the Fair Value Measurements and Disclosures Topics of the FASB ASC
("embedded derivative reserves"). We calculate the value of the embedded
derivative reserve and the benefit reserve based on the specific
characteristics of each GLB feature.
INDEXED ANNUITY CONTRACTS EMBEDDED DERIVATIVES
We distribute indexed annuity contracts that 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. Contract holders may
elect to rebalance index options at renewal dates, either annually or
biannually. As of each renewal date, we have the opportunity to re-price the
indexed component by establishing participation rates, caps, spreads and
specified rates, subject to contractual
S-33
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DERIVATIVE INSTRUMENTS (CONTINUED)
guarantees. We purchase S&P 500 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.
REINSURANCE RELATED EMBEDDED DERIVATIVES
We have certain modified coinsurance arrangements and coinsurance with funds
withheld reinsurance arrangements 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 arrangements.
We are involved in an inter-company reinsurance agreement where we cede to
LNBAR the risk under certain UL contracts for no lapse benefit guarantees. If
our contract holders' account value is not sufficient to pay the cost of
insurance charges required to keep the policy inforce, and the contract holder
has made required deposits, LNBAR will reimburse us for the charges.
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:
[Enlarge/Download Table]
AS OF DECEMBER 31, 2013 AS OF DECEMBER 31, 2012
------------------------------------- -------------------------------------
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE
----------------------- ----------------------
AMOUNTS ASSET LIABILITY AMOUNTS ASSET LIABILITY
-------- -------- --------- --------- ------- ---------
QUALIFYING HEDGES
Cash flow hedges:
Interest rate contracts(1)....................... $ 2,876 $ 160 $ 149 $ 2,001 $ 353 $ 224
Foreign currency contracts(1).................... 615 32 46 420 39 26
-------- -------- --------- --------- ------- ---------
Total cash flow hedges........................ 3,491 192 195 2,421 392 250
-------- -------- --------- --------- ------- ---------
NON-QUALIFYING HEDGES
Interest rate contracts(1).......................... 44,620 214 744 35,539 1,030 474
Foreign currency contracts(1)....................... 102 -- -- 48 -- --
Equity market contracts(1).......................... 19,804 956 192 19,744 1,734 170
Equity collar(1).................................... -- -- -- 9 1 --
Credit contracts(2)................................. 126 -- 2 149 -- 11
Embedded derivatives:
GLB reserves(3)............................... -- 1,244 -- -- -- --
GLB reserves(2)............................... -- -- 1,244 -- -- 909
Reinsurance related(4)........................... -- 159 -- -- -- 184
Indexed annuity and universal life contracts(5).. -- -- 1,048 -- -- 732
-------- -------- --------- --------- ------- ---------
Total derivative instruments............. $ 68,143 $ 2,765 $ 3,425 $ 57,910 $ 3,157 $ 2,730
======== ======== ========= ========= ======= =========
-------------
(1) Reported in derivative investments and other liabilities on our
Consolidated Balance Sheets.
(2) Reported in other liabilities on our Consolidated Balance Sheets.
(3) Reported in other assets on our Consolidated Balance Sheets.
(4) Reported in reinsurance related embedded derivatives on our Consolidated
Balance Sheets.
(5) Reported in future contract benefits on our Consolidated Balance Sheets.
The maturity of the notional amounts of derivative instruments (in millions)
was as follows:
[Enlarge/Download Table]
REMAINING LIFE AS OF DECEMBER 31, 2013
-------------------------------------------------------------------------------
LESS THAN 1 - 5 6 - 10 11 - 30 OVER 30
1 YEAR YEARS YEARS YEARS YEARS TOTAL
---------- --------- -------- -------- -------- --------
Interest rate contracts(1)..................... $ 4,343 $ 23,124 $ 10,697 $ 9,332 $ -- $ 47,496
Foreign currency contracts(2).................. 175 110 305 127 -- 717
Equity market contracts........................ 10,864 3,573 5,344 21 2 19,804
Credit contracts............................... -- 126 -- -- -- 126
---------- --------- -------- -------- -------- --------
Total derivative instruments with
notional amounts.................. $ 15,382 $ 26,933 $ 16,346 $ 9,480 $ 2 $ 68,143
========== ========= ======== ======== ======== ========
-------------
(1) As of December 31, 2013, the latest maturity date for which we were
hedging our exposure to the variability in future cash flows for these
instruments was June 2042.
(2) As of December 31, 2013, the latest maturity date for which we were
hedging our exposure to the variability in future cash flows for these
instruments was April 2028.
S-34
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DERIVATIVE INSTRUMENTS (CONTINUED)
The change in our unrealized gain (loss) on derivative instruments in AOCI (in
millions) was as follows:
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2013 2012 2011
------- ------- ------
UNREALIZED GAIN (LOSS)
ON DERIVATIVE INSTRUMENTS
Balance as of beginning-of-year......... $ 101 $ 132 $ (14)
Other comprehensive income (loss):
Unrealized holding gains (losses)
arising during the year:
Cash flow hedges:
Interest rate contracts......... (126) (41) 201
Foreign currency contracts...... (24) (22) 3
Change in foreign currency
exchange rate adjustment.......... (19) (12) 7
Change in DAC, VOBA, DSI and
DFEL.............................. 5 14 1
Income tax benefit (expense)......... 57 20 (74)
Less:
Reclassification adjustment for
gains (losses) included in net
income (loss):
Cash flow hedges:
Interest rate contracts(1)... (21) (21) (15)
Foreign currency
contracts(1).............. 3 3 2
Associated amortization of DAC,
VOBA, DSI and DFEL................ 1 3 1
Income tax benefit (expense)......... 6 5 4
------- ------- ------
Balance as of
end-of-year............. $ 5 $ 101 $ 132
======= ======= ======
-------------
(1) The OCI offset is reported within net investment income on our
Consolidated Statements of Comprehensive Income (Loss).
The gains (losses) on derivative instruments (in millions) recorded within
income (loss) from continuing operations on our Consolidated Statements of
Comprehensive Income (Loss) were as follows:
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
2013 2012 2011
--------- --------- ---------
QUALIFYING HEDGES
Cash flow hedges:
Interest rate contracts(1)........ $ (21) $ (22) $ (15)
Foreign currency contracts(1)..... 3 3 2
--------- --------- ---------
Total cash flow hedges......... (18) (19) (13)
--------- --------- ---------
NON-QUALIFYING HEDGES
Interest rate contracts(2)........... (998) 26 1,100
Foreign currency contracts(2)........ (4) (8) (12)
Equity market contracts(2)........... (1,306) (1,014) 315
Equity market contracts(3)........... 37 (362) 26
Credit contracts(2).................. 9 2 (7)
Embedded derivatives:
Reinsurance related(2)............ 352 (50) (47)
GLB reserves(2)................... (2,153) -- --
GLB reserves(2)................... 2,153 1,308 (1,809)
Indexed annuity and universal
life contracts(2).............. (356) (136) 5
--------- --------- ---------
Total derivative
instruments.......... $ (2,284) $ (253) $ (442)
========= ========= =========
-------------
(1) Reported in net investment income on our Consolidated Statements of
Comprehensive Income (Loss).
(2) Reported in realized gain (loss) on our Consolidated Statements of
Comprehensive Income (Loss).
(3) Reported in commissions and other expenses on our Consolidated Statements
of Comprehensive Income (Loss).
Gains (losses) (in millions) on derivative instruments designated and
qualifying as cash flow hedges were as follows:
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
2013 2012 2011
------ ------ -----
Gain (loss) recognized as a
component of OCI with the offset
to net investment income............. $ (18) $ (18) $(13)
As of December 31, 2013, $23 million of the deferred net losses on derivative
instruments in accumulated OCI were expected to be reclassified to earnings
during the next 12 months. This reclassification would be due primarily to
interest rate variances related to our interest rate swap agreements.
For the years ended December 31, 2013 and 2012, there were no material
reclassifications to earnings due to hedged firm commitments no longer deemed
probable or due to hedged forecasted transactions that had not occurred by the
end of the originally specified time period.
S-35
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DERIVATIVE INSTRUMENTS (CONTINUED)
Information related to our open credit default swap liabilities for which we
are the seller (dollars in millions) was as follows:
[Enlarge/Download Table]
AS OF DECEMBER 31, 2013
-------------------------------------------------------------------------------------------------------------------------------
CREDIT RATING MAXIMUM
REASON FOR NATURE OF OF UNDERLYING NUMBER OF POTENTIAL
MATURITY ENTERING RECOURSE OBLIGATION(1) INSTRUMENTS FAIR VALUE(2) PAYOUT
--------------- ---------- ---------- ------------- ------------ ------------- ----------
12/20/2016(3) (4) (5) BBB- 3 $ (1) $ 68
03/20/2017(3) (4) (5) BBB- 3 (1) 58
------------ ------------- ----------
6 $ (2) $ 126
============ ============= ==========
[Enlarge/Download Table]
AS OF DECEMBER 31, 2012
-------------------------------------------------------------------------------------------------------------------------------
CREDIT RATING MAXIMUM
REASON FOR NATURE OF OF UNDERLYING NUMBER OF POTENTIAL
MATURITY ENTERING RECOURSE OBLIGATION(1) INSTRUMENTS FAIR VALUE(2) PAYOUT
-------------- ---------- --------- ------------- ----------- ------------- ---------
12/20/2016(3) (4) (5) BBB- 3 $ (4) $ 68
03/20/2017(3) (4) (5) BBB- 4 (7) 81
----------- ------------- ---------
7 $ (11) $ 149
=========== ============= =========
-------------
(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) These credit default swaps were sold to a counterparty of the consolidated
VIEs discussed in Note 4.
(4) Credit default swaps were entered into in order to generate income by
providing default protection in return for a quarterly payment.
(5) 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 open credit default swaps
for which we are the seller, if credit risk related contingent features were
triggered (in millions), were as follows:
[Download Table]
AS OF DECEMBER 31,
------------------
2013 2012
----- ------
Maximum potential payout....................... $ 126 $ 149
Less:
Counterparty thresholds..................... -- --
----- ------
Maximum collateral potentially
required to post....................... $ 126 $ 149
===== ======
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, we would have been required to post $2
million as of December 31, 2013, after considering the fair values of the
associated investments counterparties' credit ratings as compared to ours and
specified thresholds that once exceeded result in the payment of cash.
CREDIT RISK
We are exposed to credit loss in the event of non-performance by our
counterparties on various derivative contracts and reflect assumptions
regarding the credit or NPR. The NPR is based upon assumptions for each
counterparty's credit spread over the estimated weighted average life of the
counterparty exposure less collateral held. As of December 31, 2013, the NPR
adjustment was $2 million. The credit risk associated with such agreements is
minimized by purchasing such agreements from financial institutions with
long-standing, superior performance records. Additionally, we maintain a policy
of requiring all 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. As of December 31, 2013, our exposure was $50 million.
S-36
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DERIVATIVE INSTRUMENTS (CONTINUED)
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:
[Download Table]
AS OF DECEMBER 31, 2013 AS OF DECEMBER 31, 2012
------------------------ ------------------------
COLLATERAL COLLATERAL COLLATERAL COLLATERAL
POSTED BY POSTED BY POSTED BY POSTED BY
S&P COUNTER- LNL COUNTER- LNL
CREDIT PARTY (HELD BY PARTY (HELD BY
RATING OF (HELD BY COUNTER- (HELD BY COUNTER-
COUNTERPARTY LNL) PARTY) LNL) PARTY)
------------- ---------- ---------- ---------- ----------
AA $ -- $ -- $ 41 $ --
AA- 34 (10) 58 --
A+ 19 -- 551 --
A 228 (183) 762 (68)
A- 207 (123) 1,113 --
BBB+ 79 -- -- --
BBB -- -- 4 --
---------- ---------- ---------- ----------
$ 567 $ (316) $ 2,529 $(68)
========== ========== ========== ==========
BALANCE SHEET OFFSETTING
Information related to our derivative instruments, securities lending
transactions and repurchase agreements and the effects of offsetting on our
Consolidated Balance Sheets (in millions) were as follows:
[Enlarge/Download Table]
AS OF DECEMBER 31, 2013
-------------------------------------------------------
SECURITIES
EMBEDDED LENDING AND
DERIVATIVE DERIVATIVE REPURCHASE
INSTRUMENTS INSTRUMENTS AGREEMENTS TOTAL
----------- ----------- ------------ ---------
FINANCIAL ASSETS
Gross amount of recognized assets......................................... $ 1,170 $ 1,403 $ -- $ 2,573
Gross amounts offset...................................................... (553) -- -- (553)
Net amount of assets...................................................... 617 1,403 -- 2,020
Gross amounts not offset:
Cash collateral received............................................... (251) -- -- (251)
----------- ----------- ------------ ---------
Net amount........................................................ $ 366 $ 1,403 $ -- $ 1,769
=========== =========== ============ =========
FINANCIAL LIABILITIES
Gross amount of recognized liabilities.................................... $ 580 $ 2,292 $ 2,601 $ 5,473
Gross amounts offset...................................................... (192) -- -- (192)
Net amount of liabilities................................................. 388 2,292 2,601 5,281
Gross amounts not offset:
Cash collateral received............................................... -- -- (2,601) (2,601)
----------- ----------- ------------ ---------
Net amount........................................................ $ 388 $ 2,292 $ -- $ 2,680
=========== =========== ============ =========
S-37
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DERIVATIVE INSTRUMENTS (CONTINUED)
[Enlarge/Download Table]
AS OF DECEMBER 31, 2012
-------------------------------------------------------
SECURITIES
EMBEDDED LENDING AND
DERIVATIVE DERIVATIVE REPURCHASE
INSTRUMENTS INSTRUMENTS AGREEMENTS TOTAL
----------- ----------- ------------ ---------
FINANCIAL ASSETS
Gross amount of recognized assets......................................... $ 3,156 $ -- $ -- $ 3,156
Gross amounts offset...................................................... (893) -- -- (893)
Net amount of assets...................................................... 2,263 -- -- 2,263
Gross amounts not offset:
Cash collateral received............................................... (2,461) -- -- (2,461)
----------- ----------- ------------ ---------
Net amount........................................................ $ (198) $ -- $ -- $ (198)
=========== =========== ============ =========
FINANCIAL LIABILITIES
Gross amount of recognized liabilities.................................... $ 11 $ 1,825 $ 1,614 $ 3,450
Gross amounts offset...................................................... -- -- -- --
Net amount of liabilities................................................. 11 1,825 1,614 3,450
Gross amounts not offset:
Cash collateral received............................................... -- -- (1,614) (1,614)
----------- ----------- ------------ ---------
Net amount........................................................ $ 11 $ 1,825 $ -- $ 1,836
=========== =========== ============ =========
--------------------------------------------------------------------------------
7. FEDERAL INCOME TAXES
The federal income tax expense (benefit) on continuing operations (in millions)
was as follows:
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
2013 2012 2011
----- ------- ------
Current............................ $ 211 $ (320) $ (84)
Deferred........................... 220 664 354
----- ------- ------
Federal income tax expense
(benefit).................... $ 431 $ 344 $ 270
===== ======= ======
A reconciliation of the effective tax rate differences (in millions) was as
follows:
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
2013 2012 2011
--------- --------- ---------
Tax rate times pre-tax income........ $ 616 $ 527 $ 186
Effect of:
Separate account dividend
received deduction............. (145) (128) (135)
Tax credits....................... (35) (34) (46)
Goodwill.......................... -- (2) 260
Change in uncertain tax
positions...................... 7 (88) 7
Other items....................... (12) 69 (2)
--------- --------- ---------
Federal income tax
expense (benefit)........... $ 431 $ 344 $ 270
========= ========= =========
Effective tax rate................... 24% 23% 51%
========= ========= =========
The effective tax rate is the ratio of tax expense over pre-tax income (loss).
The benefit for tax credits is attributable to foreign tax credits and low
income housing tax credits.
The federal income tax asset (liability) (in millions) was as follows:
[Download Table]
AS OF DECEMBER 31,
----------------------
2013 2012
--------- ----------
Current..................................... $ (8) $ 173
Deferred.................................... (2,278) (3,391)
--------- ----------
Total federal income tax asset
(liability)......................... $ (2,286) $ (3,218)
========= ==========
Significant components of our deferred tax assets and liabilities (in millions)
were as follows:
[Download Table]
AS OF DECEMBER 31,
---------------------
2013 2012
-------- ---------
DEFERRED TAX ASSETS
Future contract benefits and other
contract holder funds.................... $ 963 $ 900
Deferred gain on business sold
through reinsurance...................... 21 27
Reinsurance related embedded
derivative asset......................... 17 141
Investments................................. 274 448
Compensation and benefit plans.............. 177 141
Net operating loss.......................... 4 4
Net capital loss............................ -- 32
Tax credits................................. 184 205
VIE......................................... 4 36
Other....................................... 32 44
-------- ---------
Total deferred tax assets................ 1,676 1,978
======== =========
S-38
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. FEDERAL INCOME TAXES (CONTINUED)
[Download Table]
AS OF DECEMBER 31,
----------------------
2013 2012
--------- ----------
DEFERRED TAX LIABILITIES
DAC......................................... $ 1,954 $ 1,393
VOBA........................................ 409 239
Net unrealized gain on AFS securities....... 1,273 3,283
Net unrealized gain on trading securities... 86 150
Intangibles................................. 151 172
Other....................................... 81 132
--------- ----------
Total deferred tax liabilities........... 3,954 5,369
--------- ----------
Net deferred tax asset (liability).... $ (2,278) $ (3,391)
========= ==========
As of December 31, 2013, we had $11 million of net operating loss carryforwards
that begin to expire in 2031. In addition, we had $102 million of alternative
minimum tax credits that are not subject to expiration and $82 million of
general business credits that begin to expire in 2030.
Although realization is not assured, management believes that it is more likely
than not that we will realize the benefits of our deferred tax assets and,
accordingly, no valuation allowance has been recorded.
As of December 31, 2013 and 2012, $64 million and $59 million, respectively, of
our unrecognized tax benefits presented below, if recognized, would have
affected our income tax expense and our effective tax rate. We are not aware of
any events for which it is likely that unrecognized tax benefits will
significantly increase or decrease within the next year. A reconciliation of
the unrecognized tax benefits (in millions) was as follows:
[Download Table]
FOR THE
YEARS ENDED
DECEMBER 31,
------------------
2013 2012
----- -------
Balance as of beginning-of-year................. $ 67 $ 275
Decreases for prior year tax positions....... -- (145)
Increases for current year tax positions..... 8 3
Decreases for settlements with taxing
authorities............................... -- (2)
Decreases for lapse of statute of
limitations............................... -- (64)
----- -------
Balance as of end-of-year............... $ 75 $ 67
===== =======
We recognize interest and penalties accrued, if any, related to unrecognized
tax benefits as a component of tax expense. For the years ended December 31,
2013, 2012 and 2011, we recognized interest and penalty expense (benefit)
related to uncertain tax positions of $2 million, $(78) million and $8 million,
respectively. We had accrued interest and penalty expense related to the
unrecognized tax benefits of $13 million and $11 million as of December 31,
2013 and 2012, respectively.
We are subject to examination by U.S. federal, state, local and non-U.S. income
authorities. We are currently under examination by the Internal Revenue Service
("IRS") for tax years 2009 through 2011. The IRS concluded its examination of
tax years 2007 and 2008 on January 18, 2013. We have protested the final
assessment, which is being combined with tax years 2005 and 2006 in IRS
Appeals. The IRS also completed its examination of tax years 2005 and 2006, and
2006 of the former Jefferson-Pilot Corporation ("JP") and its subsidiaries
during 2010. We believe a portion of the 2005 through 2008 assessments is
inconsistent with current laws and is using the established IRS Appeals process
to attempt to settle the remaining issues. The IRS also concluded its
examination of non-consolidated returns for JP Life Insurance Company and JP
Financial Insurance Company for the tax years ended April 1, 2007, and July 1,
2007, respectively, with agreement on all adjustments on January 18, 2013. We
do not expect any adjustments that might result from those audits would be
material to its consolidated results of operations or its financial
condition.
S-39
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
-----------------------------------------------------------------------------
8. DAC, VOBA, DSI AND DFEL
Changes in DAC (in millions) were as follows:
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
2013 2012 2011
-------- -------- --------
Balance as of beginning-of-year...... $ 6,030 $ 5,887 $ 6,029
Business acquired (sold)
through reinsurance............ (67) (126) 184
Deferrals......................... 1,559 1,294 1,368
Amortization, net of interest:
Amortization, excluding
unlocking, net of interest... (795) (760) (666)
Unlocking...................... 42 (71) (130)
Adjustment related to realized
(gains) losses................. (49) (49) (39)
Adjustment related to
unrealized (gains) losses...... 970 (145) (859)
-------- -------- --------
Balance as of end-of-year.... $ 7,690 $ 6,030 $ 5,887
======== ======== ========
Changes in VOBA (in millions) were as follows:
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
2013 2012 2011
-------- -------- --------
Balance as of beginning-of-year...... $ 702 $ 1,055 $ 1,378
Business acquired (sold)
through reinsurance............ 3 (20) 12
Deferrals......................... 13 12 20
Amortization:
Amortization, excluding
unlocking.................... (179) (225) (279)
Unlocking...................... (52) (23) 174
Accretion of interest(1).......... 68 73 78
Adjustment related to realized
(gains) losses................. (1) 9 (6)
Adjustment related to
unrealized (gains) losses...... 615 (179) (322)
-------- -------- --------
Balance as of end-of-year.... $ 1,169 $ 702 $ 1,055
======== ======== ========
-------------
(1) The interest accrual rates utilized to calculate the accretion of interest
ranged from 4.02% to 7.05%.
Estimated future amortization of VOBA, net of interest (in millions), as of
December 31, 2013, was as follows:
[Download Table]
2014......................................... $85
2015......................................... 78
2016......................................... 72
2017......................................... 68
2018......................................... 68
Changes in DSI (in millions) were as follows:
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
2013 2012 2011
------ ------ ------
Balance as of beginning-of-year...... $ 296 $ 309 $ 324
Deferrals......................... 10 39 39
Amortization, net of interest:
Amortization, excluding
unlocking, net of interest... (41) (43) (36)
Unlocking...................... 8 14 (2)
Adjustment related to realized
(gains) losses................. (3) (5) (3)
Adjustment related to
unrealized (gains) losses...... 40 (18) (13)
------ ------ ------
Balance as of end-of-year.... $ 310 $ 296 $ 309
====== ====== ======
Changes in DFEL (in millions) were as follows:
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
2013 2012 2011
-------- -------- --------
Balance as of beginning-of-year...... $ 1,342 $ 1,360 $ 1,472
Business acquired (sold)
through reinsurance............ (7) (44) 18
Deferrals......................... 319 348 544
Amortization, net of interest:
Amortization, excluding
unlocking, net of interest... (210) (206) (160)
Unlocking...................... (14) (69) 31
Adjustment related to realized
(gains) losses................. (8) (5) (8)
Adjustment related to
unrealized (gains) losses...... 477 (42) (537)
-------- -------- --------
Balance as of end-of-year.... $ 1,899 $ 1,342 $ 1,360
======== ======== ========
S-40
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
9. REINSURANCE
The following summarizes reinsurance amounts (in millions) recorded on our
Consolidated Statements of Comprehensive Income (Loss), excluding amounts
attributable to the indemnity reinsurance transaction with Swiss Re:
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
2013 2012 2011
--------- --------- ---------
Direct insurance premiums
and fee income................... $ 7,707 $ 7,099 $ 6,735
Reinsurance assumed................. 19 18 21
Reinsurance ceded................... (1,505) (1,287) (1,511)
--------- --------- ---------
Total insurance premiums
and fee income................ $ 6,221 $ 5,830 $ 5,245
========= ========= =========
Direct insurance benefits........... $ 5,346 $ 4,717 $ 4,828
Reinsurance recoveries netted
against benefits................. (1,733) (1,778) (2,624)
--------- --------- ---------
Total benefits................... $ 3,613 $ 2,939 $ 2,204
========= ========= =========
We cede insurance to other companies. The portion of risks exceeding our
retention limit is reinsured with other insurers. We seek reinsurance coverage
to limit our exposure to mortality losses and to enhance our capital
management. As discussed in Note 24, a portion of this reinsurance activity is
with affiliated companies.
We reinsure 27% to 33% of the mortality risk on newly issued non-term life
insurance contracts and 20% to 25% of total mortality risk including term
insurance contracts under our reinsurance program. Our policy for this program
is to retain no more than $20 million on a single insured life issued on fixed,
VUL and term life insurance contracts. Portions of our deferred annuity
business have been reinsured on a Modco basis with other companies to limit our
exposure to interest rate risks. As of December 31, 2013, the reserves
associated with these reinsurance arrangements totaled $742 million.
Our amounts recoverable from reinsurers represent receivables from and reserves
ceded to reinsurers. The amounts recoverable from reinsurers were $5.8 billion
and $8.3 billion as of December 31, 2013 and 2012, respectively. We focus on
obtaining reinsurance from a diverse group of reinsurers, and we monitor
concentration as well as financial strength ratings of our reinsurers. Our
reinsurance operations were acquired by Swiss Re in December 2001 through a
series of indemnity reinsurance transactions. As such, Swiss Re reinsured
certain of our liabilities and obligations under the indemnity reinsurance
agreements and thereby represents our largest reinsurance exposure. As we are
not relieved of our liability to the ceding companies for this business, the
liabilities and obligations associated with the reinsured policies remain on
our Consolidated Balance Sheets with a corresponding reinsurance receivable
from Swiss Re, which totaled $3.2 billion and $3.4 billion as of December 31,
2013 and 2012, respectively. Swiss Re has funded a trust, with a balance of
$2.2 billion as of December 31, 2013, to support this business. In addition to
various remedies that we would have in the event of a default by Swiss Re, we
continue to hold assets in support of certain of the transferred reserves.
These assets consist of those reported as trading securities and certain
mortgage loans. Our liabilities for funds withheld and embedded derivatives as
of December 31, 2013, included $1.5 billion and $92 million, respectively,
related to the business reinsured by Swiss Re.
We recorded the gain related to the indemnity reinsurance transactions with
Swiss Re as a deferred gain on business sold through reinsurance on our
Consolidated Balance Sheets. The deferred gain is being amortized into income
at the rate that earnings on the reinsured business are expected to emerge,
over a period of 15 years from the date of sale. During 2013, 2012 and 2011, we
amortized $48 million, $48 million and $49 million, after-tax, respectively, of
deferred gain on business sold through reinsurance.
--------------------------------------------------------------------------------
10. GOODWILL AND SPECIFICALLY IDENTIFIABLE INTANGIBLE ASSETS
The changes in the carrying amount of goodwill (in millions) by reportable
segment were as follows:
[Enlarge/Download Table]
FOR THE YEAR ENDED DECEMBER 31, 2013
-----------------------------------------------------------
ACQUISITION CUMULATIVE
BALANCE IMPAIRMENT
AS OF AS OF BALANCE
BEGINNING- BEGINNING- AS OF END-
OF-YEAR OF-YEAR IMPAIRMENT OF-YEAR
------------ ------------ ----------- ----------
Annuities............................................................. $ 1,040 $ (600) $-- $ 440
Retirement Plan Services.............................................. 20 -- -- 20
Life Insurance........................................................ 2,186 (647) -- 1,539
Group Protection...................................................... 274 -- -- 274
Other Operations -- Media............................................. 176 (176) -- --
------------ ------------ ----------- ----------
Total goodwill.................................................. $ 3,696 $ (1,423) $-- $ 2,273
============ ============ =========== ==========
S-41
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. GOODWILL AND SPECIFICALLY IDENTIFIABLE INTANGIBLE ASSETS (CONTINUED)
[Enlarge/Download Table]
FOR THE YEAR ENDED DECEMBER 31, 2012
-----------------------------------------------------------
ACQUISITION CUMULATIVE
BALANCE IMPAIRMENT
AS OF AS OF BALANCE
BEGINNING- BEGINNING- AS OF END-
OF-YEAR OF-YEAR IMPAIRMENT OF-YEAR
------------ ----------- ----------- ----------
Annuities............................................................ $ 1,040 $ (600) $-- $ 440
Retirement Plan Services............................................. 20 -- -- 20
Life Insurance....................................................... 2,186 (647) -- 1,539
Group Protection..................................................... 274 -- -- 274
Other Operations -- Media............................................ 176 (176) -- --
------------ ----------- ----------- ----------
Total goodwill................................................. $ 3,696 $ (1,423) $-- $ 2,273
============ =========== =========== ==========
We perform a Step 1 goodwill impairment analysis on all of our reporting units
at least annually on October 1. To determine the implied fair value for our
reporting units, we utilize primarily a discounted cash flow valuation
technique ("income approach"), although limited available market data is also
considered. In determining the estimated fair value, we consider discounted
cash flow calculations, the level of LNC's share price and assumptions that
market participants would make in valuing the reporting unit. This analysis
requires us to make judgments about revenues, earnings projections, capital
market assumptions and discount rates.
As of October 1, 2013, our Annuities and Retirement Plan Services reporting
units passed the Step 1 analysis. Given the Step 1 results, we also performed a
Step 2 analysis for our Life Insurance and Group Protection reporting units.
Based upon our Step 2 analysis for Life Insurance and Group Protection, we
determined that there was no impairment due to the implied fair value of
goodwill being in excess of the carrying value of goodwill.
As of October 1, 2012, our Annuities, Retirement Plan Services and Group
Protection reporting units passed the Step 1 analysis, and although the
carrying value of the net assets for Group Protection was within the estimated
fair value range, we deemed it prudent to validate the carrying value of
goodwill through a Step 2 analysis. Given the Step 1 results, we also performed
a Step 2 analysis for our Life Insurance reporting unit. Based upon our Step 2
analysis for Life Insurance and Group Protection, we determined that there was
no impairment due to the implied fair value of goodwill being in excess of the
carrying value of goodwill.
As of October 1, 2011, our Annuities, Retirement Plan Services and Group
Protection reporting units passed the Step 1 analysis, and although the
carrying value of the net assets for Group Protection was within the estimated
fair value range, we deemed it prudent to validate the carrying value of
goodwill through a Step 2 analysis. Given the Step 1 results, we also performed
a Step 2 analysis for our Life Insurance and Media reporting units. Based upon
our Step 2 analysis for Life Insurance, we recorded a goodwill impairment that
was attributable primarily to marketplace dynamics and lower expectations
associated with product changes that we have implemented or will implement
shortly that we believe will have an unfavorable effect on our sales levels for
a period of time. Based upon our Step 2 analysis for Group Protection, we
determined that there was no impairment due to the implied fair value of
goodwill being in excess of the carrying value of goodwill. Based upon our Step
2 analysis for Media, we recorded a goodwill impairment that was primarily a
result of the deterioration in operating environment and outlook for the
business.
S-42
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. GOODWILL AND SPECIFICALLY IDENTIFIABLE INTANGIBLE ASSETS (CONTINUED)
The gross carrying amounts and accumulated amortization (in millions) for each
major specifically identifiable intangible asset class by reportable segment
were as follows:
[Enlarge/Download Table]
AS OF DECEMBER 31, 2013 AS OF DECEMBER 31, 2012
------------------------ ------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------- ------------- --------- -------------
Life Insurance:
Sales force................................................................. $ 100 $ 31 $ 100 $ 27
Retirement Plan Services:
Mutual fund contract rights(1).............................................. 5 -- 5 --
Other Operations:
FCC licenses(1)............................................................. 131 -- 129 --
Other....................................................................... 4 3 4 3
-------- ------------- --------- -------------
Total.................................................................... $ 240 $ 34 $ 238 $ 30
======== ============= ========= =============
-------------
(1) No amortization recorded as the intangible asset has indefinite life.
Future estimated amortization of specifically identifiable intangible assets
(in millions) as of December 31, 2013, was as follows:
[Download Table]
2014................................................. $ 4
2015................................................. 4
2016................................................. 4
2017................................................. 4
2018................................................. 4
Thereafter........................................... 50
--------------------------------------------------------------------------------
11. GUARANTEED BENEFIT FEATURES
Information on the GDB features outstanding (dollars in millions) was as
follows (our variable contracts with guarantees may offer more than one type of
guarantee in each contract; therefore, the amounts listed are not mutually
exclusive):
[Download Table]
AS OF DECEMBER 31,
----------------------
2013 2012
---------- ---------
RETURN OF NET DEPOSITS
Total account value......................... $ 79,391 $ 63,478
Net amount at risk(1)....................... 141 392
Average attained age of contract
holders.................................. 61 YEARS 60 years
MINIMUM RETURN
Total account value......................... $ 151 $ 149
Net amount at risk(1)....................... 27 37
Average attained age of contract
holders.................................. 73 YEARS 73 years
Guaranteed minimum return................... 5% 5%
ANNIVERSARY CONTRACT VALUE
Total account value......................... $ 25,958 $ 23,019
Net amount at risk(1)....................... 570 1,133
Average attained age of contract
holders.................................. 68 YEARS 67 years
------------
(1) Represents the amount of death benefit in excess of the account balance.
The decrease in net amount at risk when comparing December 31, 2013, to
December 31, 2012, was attributable primarily to the increase in the
equity markets during 2013.
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:
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
2013 2012 2011
------ ------ ------
Balance as of beginning-of-year............. $ 104 $ 84 $ 44
Changes in reserves...................... (10) 64 93
Benefits paid............................ (21) (44) (53)
------ ------ ------
Balance as of end-of-year............. $ 73 $ 104 $ 84
====== ====== ======
S-43
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. GUARANTEED BENEFIT FEATURES (CONTINUED)
VARIABLE ANNUITY CONTRACTS
Account balances of variable annuity contracts with guarantees (in millions)
were invested in separate account investment options as follows:
[Download Table]
AS OF DECEMBER 31,
-------------------------
2013 2012
------------ -----------
ASSET TYPE
Domestic equity............................ $ 45,590 $ 37,899
International equity....................... 17,707 14,850
Bonds...................................... 23,648 21,174
Money market............................... 10,518 7,747
------------ -----------
Total................................... $ 97,463 $ 81,670
============ ===========
Percent of total variable annuity
separate account values................. 99% 98%
SECONDARY GUARANTEE PRODUCTS
Future contract benefits also includes reserves for our secondary guarantee
products sold through our Life Insurance segment. These UL and VUL products
with secondary guarantees represented 30% of total life insurance in-force
reserves as of December 31, 2013, and 35% of total sales for the year ended
December 31, 2013.
--------------------------------------------------------------------------------
12. SHORT-TERM AND LONG-TERM DEBT
Details underlying short-term and long-term debt (in millions) were as
follows:
[Download Table]
AS OF DECEMBER 31,
--------------------
2013 2012
------- --------
Short-Term Debt
Short-term notes payable to LNC.......... $ 51 $ 28
Current maturities of long-term debt..... -- 4
------- --------
Total short-term debt................. $ 51 $ 32
======= ========
Long-Term Debt, Excluding
Current Portion
1.40% note, due 2016..................... $ 4 $ --
LIBOR + 3 bps loan, due 2017............. 250 250
Surplus notes due LNC:
LIBOR + 142 bps surplus note,
due 2023............................ 240 --
9.76% surplus note, due 2024.......... 50 50
6.56% surplus note, due 2028.......... 500 500
LIBOR + 111 bps surplus note,
due 2028............................ 71 --
LIBOR + 226 bps surplus note,
due 2028............................ 360 --
6.03% surplus note, due 2028.......... 750 750
LIBOR + 100 bps surplus note,
due 2037............................ 375 375
------- --------
Total surplus notes................. 2,346 1,675
------- --------
Total long-term debt............. $ 2,600 $ 1,925
======= ========
Future principal payments due on long-term debt (in millions) as of December
31, 2013, were as follows:
[Download Table]
2014............................................... $ --
2015............................................... --
2016............................................... 4
2017............................................... 250
2018............................................... --
Thereafter......................................... 2,346
-------
Total........................................... $ 2,600
=======
On September 10, 2013, we issued a note of $4 million to LNC. This note calls
for us to pay the principal amount of the note on or before September 10, 2016,
and interest to be paid semiannually at an annual rate of 1.40%.
We have a $250 million floating-rate loan outstanding under our borrowing
capacity with the FHLBI due June 20, 2017.
On June 28, 2013, we issued a surplus note of $240 million to LNC. The note
calls for us to pay the principal amount of the note on or before June 28,
2023, and interest to be paid quarterly at an annual rate of LIBOR + 142 bps.
Subject to approval by the Indiana Insurance Commissioner, we have the right to
repay the note in whole or in part prior to the maturity date, if our statutory
capital surplus exceeds the sum of our surplus at closing plus any accrued but
unpaid interest.
We issued a surplus note of $50 million to LNC in 1994. The note calls for us
to pay the principal amount of the note on or before September 30, 2024, and
interest to be paid semiannually at an annual rate of 9.76%. Subject to
approval by the Indiana Insurance Commissioner, we have the right to repay the
note on any March 31 or September 30.
We issued a surplus note of $500 million to LNC in 1998. The note calls for us
to pay the principal amount of the note on or before March 31, 2028, and
interest to be paid quarterly at an annual rate of 6.56%. Subject to approval
by the Indiana Insurance Commissioner, LNC also has a right to redeem the note
for immediate repayment in total or in part once per year on the anniversary
date of the note. Any payment of interest or repayment of principal may be paid
only out of our statutory earnings, only if our statutory capital surplus
exceeds our statutory capital as of the date of note issuance of $2.3 billion,
and subject to approval by the Indiana Insurance Commissioner.
On October 1, 2013, we issued a surplus note of $71 million to LNC. The note
calls for us to pay the principal amount of the note on or before September 24,
2028, and interest to be paid quarterly at an annual rate of LIBOR + 111 bps.
Subject to approval by the Indiana Insurance Commissioner, we have the
S-44
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SHORT-TERM AND LONG-TERM DEBT (CONTINUED)
right to repay the note in whole or in part prior to the maturity date, if our
statutory capital surplus exceeds the sum of our surplus at closing plus any
accrued but unpaid interest.
On December 17, 2013, we issued a variable surplus note to a wholly-owned
subsidiary of LNC with an initial outstanding principal amount of $287 million.
The outstanding principal amount as of December 31, 2013, was $360 million. The
note calls for us to pay the principal amount of the note on or before October
1, 2028, and interest to be paid quarterly at an annual rate of LIBOR + 226
bps.
We issued a surplus note of $750 million to LNC in 1998. The note calls for us
to pay the principal amount of the note on or before December 31, 2028, and
interest to be paid quarterly at an annual rate of 6.03%. Subject to approval
by the Indiana Insurance Commissioner, LNC also has a right to redeem the note
for immediate repayment in total or in part once per year on the anniversary
date of the note. Any payment of interest or repayment of principal may be paid
only out of our statutory earnings, only if our statutory capital surplus
exceeds our statutory capital surplus as of the date of note issuance of $2.4
billion, and subject to approval by the Indiana Insurance Commissioner.
On October 9, 2007, we issued a surplus note of $375 million that LNC has held
effective December 31, 2008. The note calls for us to pay the principal amount
of the note on or before October 9, 2037, and interest to be paid quarterly at
an annual rate of LIBOR + 100 bps.
--------------------------------------------------------------------------------
13. CONTINGENCIES AND COMMITMENTS
CONTINGENCIES
REGULATORY AND LITIGATION MATTERS
Regulatory bodies, such as state insurance departments, the U.S. Securities and
Exchange Commission ("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 advisors and unclaimed property laws.
LNL and its subsidiaries are 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 reasonably
possible verdicts in the jurisdiction for similar matters. This variability in
pleadings, together with the actual experiences of LNL in litigating or
resolving through settlement numerous claims over an extended period of time,
demonstrates to management that the monetary relief which may be specified in a
lawsuit or claim bears little relevance to its merits or disposition value.
Due to the unpredictable nature of litigation, the outcome of a litigation
matter and the amount or range of potential loss at particular points in time
is normally difficult to ascertain. Uncertainties can include how fact finders
will evaluate documentary evidence and the credibility and effectiveness of
witness testimony, and how trial and appellate courts will apply the law in the
context of the pleadings or evidence presented, whether by motion practice, or
at trial or on appeal. Disposition valuations are also subject to the
uncertainty of how opposing parties and their counsel will themselves view the
relevant evidence and applicable law.
We establish liabilities for litigation and regulatory loss contingencies when
information related to the loss contingencies shows both that it is probable
that a loss has been incurred and the amount of the loss can be reasonably
estimated. It is possible that some matters could require us to pay damages or
make other expenditures or establish accruals in amounts that could not be
estimated as of December 31, 2013. While the potential future charges could be
material in the particular quarterly or annual periods in which they are
recorded, based on information currently known by management, management does
not believe any such charges are likely to have a material adverse effect on
LNL's financial condition.
For some matters, the Company is able to estimate a reasonably possible range
of loss. For such matters in which a loss is probable, an accrual has been
made. For such matters where a loss is believed to be reasonably possible, but
not probable, no accrual has been made. Accordingly, the estimate contained in
this paragraph reflects two types of matters. For some matters included within
this estimate, an accrual has been made, but there is a reasonable possibility
that an exposure exists in excess of the amount accrued. In these cases, the
estimate reflects the reasonably possible range of loss in excess of the
accrued amount. For other matters included within this estimation, no accrual
has been made because a loss, while potentially estimable, is believed to be
reasonably possible but not probable. In these cases, the estimate reflects the
reasonably possible loss or range of loss. As of December 31, 2013, LNC, LNL's
parent company, disclosed in its Annual Report on Form 10-K filed with the SEC
that it estimates the aggregate range of reasonably possible losses on a
consolidated basis, including amounts in excess of amounts accrued for these
matters as of such date, to be up to approximately $220 million.
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
S-45
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. CONTINGENCIES AND COMMITMENTS (CONTINUED)
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 and estimates of reasonably possible losses or ranges
of loss based on such reviews.
On June 13, 2009, a single named plaintiff filed a putative national class
action in the Circuit Court of Allen County, Indiana, captioned Peter S. Bezich
v. LNL, No. 02C01-0906-PL73, asserting he was charged a cost-of-insurance fee
that exceeded the applicable mortality charge, and that this fee breached the
terms of the insurance contract. We dispute the allegations and are vigorously
defending this matter. Plaintiffs have filed a motion for class certification.
We expect a hearing on class certification in the first half of 2014.
On July 23, 2012, LNL was added as a noteholder defendant to a putative class
action adversary proceeding ("adversary proceeding") captioned Lehman Brothers
Special Financing, Inc. v. Bank of America, N.A. et al., Adv. Pro. No. 10-03547
(JMP) and instituted under In re Lehman Brothers Holdings Inc. in the United
States Bankruptcy Court in the Southern District of New York. Plaintiff Lehman
Brothers Special Financing Inc. seeks to (i) overturn the application of
certain priority of payment provisions in 47 collateralized debt obligation
transactions on the basis such provisions are unenforceable under the
Bankruptcy Code; and (ii) recover funds paid out to noteholders in accordance
with the note agreements. The adversary proceeding is stayed through May 20,
2014, and LNL's response is currently due in the middle of 2014.
During 2013, we entered into a Global Resolution Agreement with multiple
states' treasury and controller offices for compliance with laws and
regulations concerning the identification, reporting and escheatment of
unclaimed contract benefits or abandoned funds. Under the terms of the Global
Resolution Agreement, a third-party auditor acting on behalf of the signatory
states will compare expanded matching criteria to the Social Security Death
Master File ("SSDMF") to identify deceased insureds and contract holders where
a valid claim has not been made. In addition, we entered into a Regulatory
Settlement Agreement with the insurance regulators of seven states to settle
regulatory inquiries and examinations with respect to our processes for
identifying and paying claims and benefits in the future. The Regulatory
Settlement Agreement becomes effective when a minimum of 20 states have agreed
to participate in the resolution. As part of the settlement, we have agreed to
reimburse the participating states for a portion of the costs of such
examinations. The Regulatory Settlement Agreement applies prospectively and
requires us to adopt and implement additional procedures comparing our records
to the SSDMF to identify unclaimed death benefits, and prescribes procedures
for identifying and locating beneficiaries once deaths are identified. Other
jurisdictions that are not signatories to the Regulatory Settlement Agreement
are considering proposals that would apply prospectively and require life
insurance companies to take additional steps to identify unreported deceased
policy and contract holders. These prospective changes and any escheatable
property identified as a result of the audits and inquiries could result in:
(1) additional payments of previously unclaimed death benefits; (2) the payment
of abandoned funds to U.S. jurisdictions; and (3) changes in the Company's
practices and procedures for the identification of escheatable funds and
beneficiaries, which would impact claim payments and reserves, among other
consequences.
A reinsurer has sought rate increases on certain yearly renewable term
treaties. We dispute that this reinsurer has the right to increase the rates on
these policies and have initiated arbitration proceedings to resolve this
matter. We do not believe the outcome will have a material adverse effect on
LNL's financial condition.
COMMITMENTS
LEASES
We lease our home office properties. In 2006, we exercised the right and option
to extend the Fort Wayne lease for two extended terms such that the lease shall
expire in 2019. We retain our right and option to exercise the remaining four
extended terms of five years each in accordance with the lease agreement. These
agreements also provide us with the right of first refusal to purchase the
properties at a price defined in the agreements and the option to purchase the
leased properties at fair market value on the last day of any renewal period.
In 2012, we exercised the right and option to extend the Hartford lease for one
extended term such that the lease shall expire in 2018.
Total rental expense on operating leases for the years ended December 31, 2013,
2012 and 2011, was $37 million, $37 million and $36 million, respectively.
Future minimum rental commitments (in millions) as of December 31, 2013, were
as follows:
[Download Table]
2014................................................ $ 35
2015................................................ 30
2016................................................ 26
2017................................................ 20
2018................................................ 12
Thereafter.......................................... 19
----
Total............................................ $142
====
VULNERABILITY FROM CONCENTRATIONS
As of December 31, 2013, we did not have a concentration of: business
transactions with a particular customer or lender; sources of supply of labor
or services used in the business; or a market or geographic area in which
business is conducted that makes us vulnerable to an event that is at least
reasonably possible to occur in the near term and which could cause a severe
impact to our financial condition.
S-46
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. CONTINGENCIES AND COMMITMENTS (CONTINUED)
Although we do not have any significant concentration of customers, our
American Legacy Variable Annuity ("ALVA") product offered in our Annuities
segment is significant to this segment. The ALVA product accounted for 17%, 19%
and 22% of Annuities' variable annuity product deposits in 2013, 2012 and 2011,
respectively, and represented approximately 47%, 50% and 54% of the segment's
total variable annuity product account values as of December 31, 2013, 2012 and
2011, respectively. In addition, fund choices for certain of our other variable
annuity products offered in our Annuities segment include American Fund
Insurance Series(SM) ("AFIS") funds. For the Annuities segment, AFIS funds
accounted for 19%, 21% and 27% of variable annuity product deposits in 2013,
2012 and 2011, respectively, and represented 54%, 58% and 62% of the segment's
total variable annuity product account values as of December 31, 2013, 2012 and
2011, respectively.
OTHER CONTINGENCY MATTERS
State guaranty funds assess insurance companies to cover losses to contract
holders of insolvent or rehabilitated companies. Mandatory assessments may be
partially recovered through a reduction in future premium taxes in some states.
We have accrued for expected assessments and the related reductions in future
state premium taxes, which net to assessments (recoveries) of $(7) million and
$32 million as of December 31, 2013 and 2012, respectively.
--------------------------------------------------------------------------------
14. SHARES AND STOCKHOLDER'S EQUITY
All authorized and issued shares of LNL are owned by LNC.
AOCI
The following summarizes the components and changes in AOCI (in millions):
[Enlarge/Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------
2013 2012 2011
--------- --------- --------
UNREALIZED GAIN (LOSS) ON AFS SECURITIES
Balance as of beginning-of-year.................................................................. $ 3,876 $ 2,805 $ 1,119
Unrealized holding gains (losses) arising during the year..................................... (5,569) 2,631 3,292
Change in foreign currency exchange rate adjustment........................................... 20 14 (5)
Change in DAC, VOBA, DSI, future contract benefits and other contract holder funds............ 1,835 (1,233) (798)
Income tax benefit (expense).................................................................. 1,300 (459) (890)
Less:
Reclassification adjustment for gains (losses) included in net income (loss)............... (63) (181) (124)
Associated amortization of DAC, VOBA, DSI and DFEL......................................... (28) (1) (10)
Income tax benefit (expense)............................................................... 32 64 47
--------- --------- --------
Balance as of end-of-year............................................................. $ 1,521 $ 3,876 $ 2,805
========= ========= ========
UNREALIZED OTTI ON AFS SECURITIES
Balance as of beginning-of-year.................................................................. $ (105) $ (103) $ (126)
(Increases) attributable to:
Gross OTTI recognized in OCI during the year.................................................. (11) (118) (54)
Change in DAC, VOBA, DSI and DFEL............................................................. 1 15 12
Income tax benefit (expense).................................................................. 4 35 15
Decreases attributable to:
Sales, maturities or other settlements of AFS securities...................................... 58 118 99
Change in DAC, VOBA, DSI and DFEL............................................................. (8) (17) (21)
Income tax benefit (expense).................................................................. (17) (35) (28)
--------- --------- --------
Balance as of end-of-year............................................................. $ (78) $ (105) $ (103)
========= ========= ========
S-47
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SHARES AND STOCKHOLDER'S EQUITY (CONTINUED)
[Enlarge/Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------
2013 2012 2011
---------- --------- ---------
UNREALIZED GAIN (LOSS) ON DERIVATIVE INSTRUMENTS
Balance as of beginning-of-year.................................................................. $ 101 $ 132 $ (14)
Unrealized holding gains (losses) arising during the year..................................... (150) (63) 204
Change in foreign currency exchange rate adjustment........................................... (19) (12) 7
Change in DAC, VOBA, DSI and DFEL............................................................. 5 14 1
Income tax benefit (expense).................................................................. 57 20 (74)
Less:
Reclassification adjustment for gains (losses) included in net income (loss)............... (18) (18) (13)
Associated amortization of DAC, VOBA, DSI and DFEL......................................... 1 3 1
Income tax benefit (expense)............................................................... 6 5 4
---------- --------- ---------
Balance as of end-of-year............................................................. $ 5 $ 101 $ 132
========== ========= =========
FUNDED STATUS OF EMPLOYEE BENEFIT PLANS
Balance as of beginning-of-year.................................................................. $ (12) $ (14) $ (14)
Adjustment arising during the year............................................................ (9) 3 1
Income tax benefit (expense).................................................................. 3 (1) (1)
---------- --------- ---------
Balance as of end-of-year............................................................. $ (18) $ (12) $ (14)
========== ========= =========
The following summarizes the reclassifications out of AOCI (in millions) for
the year ended December 31, 2013, and the associated line item in the
Consolidated Statements of Comprehensive Income (Loss):
[Enlarge/Download Table]
UNREALIZED GAIN (LOSS) ON AFS SECURITIES
Gross reclassification........................................ $ (63) Total realized gain (loss)
Associated amortization of DAC, VOBA, DSI and DFEL............ (28) Total realized gain (loss)
Reclassification before income tax benefit (expense)....... (91) Income (loss) from continuing operations before taxes
Income tax benefit (expense)............................... 32 Federal income tax expense (benefit)
------
Reclassification, net of income tax..................... $ (59) Net income (loss)
======
UNREALIZED OTTI ON AFS SECURITIES
Gross reclassification........................................ $ 58 Total realized gain (loss)
Change in DAC, VOBA, DSI and DFEL............................. (8) Total realized gain (loss)
Reclassification before income tax benefit (expense)....... 50 Income (loss) from continuing operations before taxes
Income tax benefit (expense)............................... (17) Federal income tax expense (benefit)
------
Reclassification, net of income tax..................... $ 33 Net income (loss)
======
UNREALIZED GAIN (LOSS) ON DERIVATIVE INSTRUMENTS
Gross reclassifications:
Interest rate contracts.................................... $ (21) Net investment income
Foreign currency contracts................................. 3 Net investment income
Total gross reclassifications........................... (18)
Associated amortization of DAC, VOBA, DSI and DFEL............ 1 Commissions and other expenses
Reclassifications before income tax benefit (expense)...... (17) Income (loss) from continuing operations before taxes
Income tax benefit (expense)............................... 6 Federal income tax expense (benefit)
------
Reclassification, net of income tax..................... $ (11) Net income (loss)
======
S-48
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
15. REALIZED GAIN (LOSS)
Details underlying realized gain (loss) (in millions) reported on our
Consolidated Statements of Comprehensive Income (Loss) were as follows:
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
2013 2012 2011
------- -------- -------
Total realized gain (loss)
related to certain
investments(1).................. $ (84) $ (164) $ (106)
Realized gain (loss) on the
mark-to-market on certain
instruments(2).................. 308 138 (65)
Indexed annuity and universal
life net derivatives results:(3)
Gross gain (loss)............... (39) 16 2
Associated amortization of
DAC, VOBA, DSI
and DFEL..................... 9 (5) (2)
Variable annuity net
derivatives results:(4)
Gross gain (loss)............... (104) (77) (51)
Associated amortization of
DAC, VOBA, DSI
and DFEL..................... (33) (31) (28)
------- -------- -------
Total realized gain (loss)... $ 57 $ (123) $ (250)
======= ======== =======
-------------
(1) See "Realized Gain (Loss) Related to Certain Investments" section in Note
5.
(2) Represents changes in the fair values of certain derivative investments
(not including those associated with our variable annuity net derivatives
results), reinsurance related embedded derivatives and trading
securities.
(3) Represents the net difference between the change in the fair value of the
S&P 500 call options that we hold and the change in the fair value of the
embedded derivative liabilities of our indexed annuity and universal life
products along with changes in the fair value of embedded derivative
liabilities related to index call options we may purchase in the future to
hedge contract holder index allocations applicable to future reset periods
for our indexed annuity products.
(4) 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 GDB riders,
including the cost of purchasing the hedging instruments.
--------------------------------------------------------------------------------
16. COMMISSIONS AND OTHER EXPENSES
Details underlying commissions and other expenses (in millions) were as
follows:
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
2013 2012 2011
-------- -------- --------
Commissions..................... $ 1,980 $ 1,972 $ 2,534
General and administrative
expenses..................... 1,569 1,553 1,392
Expenses associated with
reserve financing and
unrelated letters of credit
("LOCs")..................... 40 40 24
DAC and VOBA deferrals
and interest, net of
amortization................. (656) (300) (565)
Broker-dealer expenses.......... 288 243 236
Specifically identifiable
intangible asset
amortization................. 4 4 4
Media expenses.................. 62 66 69
Taxes, licenses and fees........ 239 244 244
Restructuring charges........... -- 16 --
-------- -------- --------
Total..................... $ 3,526 $ 3,838 $ 3,938
======== ======== ========
S-49
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
17. PENSION, POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFIT PLANS
LNC and LNL maintain qualified funded defined benefit pension plans in which
many of our employees and agents are participants. LNC and LNL also maintain
non-qualified, unfunded defined benefit pension plans for certain employees and
agents. In addition, for certain former employees, we have supplemental
retirement plans that provide defined benefit pension benefits in excess of
limits imposed by federal tax law. All of our defined benefit pension plans are
frozen, and there are no new participants and no future accruals of benefits
from the date of the freeze.
The eligibility requirements for each plan are described in each plan document
and vary for each plan based on completion of a specified period of continuous
service and date of hire, subject to age limitations. The frozen pension plan
benefits are calculated either on a traditional final pay or cash balance
formula. Those formulas are based upon years of credited service and eligible
earnings as defined in each plan document. The traditional formula provides
benefits stated in terms of a single life annuity payable at age 65. The cash
balance formula provides benefits stated as a lump sum hypothetical account
balance. That account balance equals the sum of the employee's accumulated
annual benefit credits plus interest credits. Benefit credits, which are based
on years of service and base salary plus bonus, ceased as of the date the plan
was frozen. Interest credits continue until the participant's benefit is
paid.
LNC and LNL also sponsor a voluntary employees' beneficiary association
("VEBA") trust that provides postretirement medical, dental and life insurance
benefits to retired full-time employees and agents who, depending on the plan,
have worked for us for at least 10 years and attained age 55 (age 60 for
agents). VEBAs are a special type of tax-exempt trust used to provide benefits
that are subject to preferential tax treatment under the Internal Revenue Code.
Medical and dental benefits are available to spouses and other eligible
dependents of retired employees and agents. Retirees may be required to
contribute toward the cost of these benefits. Eligibility and the amount of
required contribution for these benefits varies based upon a variety of factors
including years of service and year of retirement.
S-50
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. PENSION, POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFIT PLANS
(CONTINUED)
OBLIGATIONS, FUNDED STATUS AND ASSUMPTIONS
Information (in millions) with respect to our benefit plans' assets and
obligations was as follows:
[Enlarge/Download Table]
AS OF OR FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
2013 2012 2013 2012
------------- -------------- ------------- --------------
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------ ------------------------------
CHANGE IN PLAN ASSETS
Fair value as of beginning-of-year................................ $ 145 $ 137 $ 5 $ 5
Actual return on plan assets...................................... (9) 17 1 --
Company and participant contributions............................. -- -- 3 4
Benefits paid..................................................... (9) (9) (3) (4)
------------- -------------- ------------- --------------
Fair value as of end-of-year................................... 127 145 6 5
============= ============== ============= ==============
CHANGE IN BENEFIT OBLIGATION
Balance as of beginning-of-year................................... 126 121 17 21
Interest cost..................................................... 5 5 1 1
Company and participant contributions............................. -- -- 1 1
Amendments........................................................ -- -- (1) --
Actuarial (gains) losses.......................................... (7) 9 (1) (2)
Benefits paid..................................................... (9) (9) (2) (4)
------------- -------------- ------------- --------------
Balance as of end-of-year...................................... 115 126 15 17
------------- -------------- ------------- --------------
Funded status of the plans.................................. $ 12 $ 19 $ (9) $ (12)
============= ============== ============= ==============
AMOUNTS RECOGNIZED ON THE CONSOLIDATED BALANCE SHEETS
Other assets...................................................... $ 14 $ 21 $ -- $ --
Other liabilities................................................. (2) (2) (9) (12)
------------- -------------- ------------- --------------
Net amount recognized.......................................... $ 12 $ 19 $ (9) $ (12)
============= ============== ============= ==============
AMOUNTS RECOGNIZED IN AOCI, NET OF TAX
Net (gain) loss................................................... $ 20 $ 13 $ (1) $ (1)
Prior service credit.............................................. -- -- (1) --
------------- -------------- ------------- --------------
Net amount recognized.......................................... $ 20 $ 13 $ (2) $ (1)
============= ============== ============= ==============
RATE OF INCREASE IN COMPENSATION
Retiree Life Insurance Plan....................................... N/A N/A 4.00% 4.00%
All other plans................................................... N/A N/A N/A N/A
WEIGHTED-AVERAGE ASSUMPTIONS
Benefit obligations:
Weighted-average discount rate................................. 4.50% 3.93% 4.50% 4.03%
Expected return on plan assets................................. 6.50% 6.50% 6.50% 6.50%
Net periodic benefit cost:
Weighted-average discount rate................................. 3.93% 4.25% 4.03% 4.25%
Expected return on plan assets................................. 6.50% 6.50% 6.50% 6.50%
Consistent with our benefit plans' year end, we use December 31 as the
measurement date.
The discount rate was determined based on a corporate yield curve as of
December 31, 2013, and projected benefit obligation cash flows for the pension
plans. We reevaluate this assumption each plan year. For 2014, our discount
rate for the pension plans will be 4.50%.
The expected return on plan assets was determined based on historical and
expected future returns of the various asset categories, using the plans'
target plan allocation. We reevaluate this assumption each plan year. For 2014,
our expected return on plan assets is 6.50% for the plans.
S-51
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. PENSION, POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFIT PLANS
(CONTINUED)
The calculation of the accumulated other postretirement benefit obligation
assumes a weighted-average annual rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) as follows:
[Download Table]
AS OF OR FOR THE
YEARS ENDED DECEMBER 31,
------------------------------
2013 2012 2011
-------- -------- --------
Pre-65 health care cost
trend rate.................... 7.50% 8.00% 8.50%
Post-65 health care cost
trend rate.................... 7.50% 8.00% 8.50%
Ultimate trend rate.............. 4.50% 4.50% 4.50%
Year that the rate reaches
the ultimate trend rate....... 2020 2020 2021
We expect the health care cost trend rate for 2014 to be 7.50% for both the
pre-65 and the post-65 population. A one-percentage point increase in assumed
health care cost trend rates would have increased the accumulated
postretirement benefit obligation by less than $1 million and total service and
interest cost components by less than $1 million. A one-percentage point
decrease in assumed health care cost trend rates would have decreased the
accumulated postretirement benefit obligation by less than $1 million and total
service and interest cost components by less than $1 million.
Information for our pension plans with an accumulated benefit obligation in
excess of plan assets (in millions) was as follows:
[Download Table]
AS OF DECEMBER 31,
------------------
2013 2012
----- -----
Accumulated benefit obligation............. $ 2 $ 2
Projected benefit obligation............... 2 2
Fair value of plan assets.................. -- --
COMPONENTS OF NET PERIODIC BENEFIT COST
The components of net periodic benefit cost for our pension plans' and other
postretirement plans' expense (recovery) (in millions) were as follows:
[Enlarge/Download Table]
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS
---------------------------------- -------------------------------
2013 2012 2011 2013 2012 2011
------ ------ ------- ----- ----- -----
Interest cost........................................... $ 5 $ 5 $ 6 $ 1 $ 1 $ 1
Expected return on plan assets.......................... (9) (9) (10) -- -- --
Recognized net actuarial loss (gain).................... 1 1 2 -- -- --
Recognized actuarial gain due to curtailments........... -- -- -- (1) -- --
------ ------ ------- ----- ----- -----
Net periodic benefit expense (recovery)............. $ (3) $ (3) $ (2) $ -- $ 1 $ 1
====== ====== ======= ===== ===== =====
We expect our 2014 pension plans' expense to be approximately $3 million.
For 2014, the estimated amount of amortization from AOCI into net periodic
benefit expense related to net actuarial loss or gain is expected to be a $3
million loss for our pension plans and a less than $1 million gain for our
other postretirement plans.
PLAN ASSETS
Our pension plans' asset target allocations by asset category based on
estimated fair values were as follows:
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
2013 2012
------ -----
Fixed maturity securities................... 100% 80%
Common stock:
Domestic equity.......................... 0% 14%
International equity..................... 0% 6%
The investment objectives for the assets related to our pension plans are to:
- Maintain sufficient liquidity to pay obligations of the plans as they come
due;
- Minimize the effect of a single investment loss and large losses to the
plans through prudent risk/reward diversification consistent with sound
fiduciary standards;
- Maintain an appropriate asset allocation policy;
- Earn a return commensurate with the level of risk assumed through the asset
allocation policy; and
- Control costs of administering and managing the plans' investment
operations.
Investments can be made in various asset classes and styles, including, but not
limited to: domestic and international equity, fixed-income securities,
derivatives and other asset classes the investment managers deem prudent. Our
plans follow a strategic asset allocation policy that strives to systemically
increase the percentage of assets in liability-matching fixed-income
investments as funding levels increase.
S-52
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. PENSION, POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFIT PLANS
(CONTINUED)
Our pension plans' assets have been combined into a master retirement trust
where a variety of qualified managers, including manager of managers, are
expected to have returns that exceed the median of similar funds over
three-year periods, above an appropriate index over five-year periods and meet
real return standards over ten-year periods. Managers are monitored for
adherence to approved investment policy guidelines and managers not meeting
these criteria are subject to additional due diligence review, corrective
action or possible termination.
FAIR VALUE OF PLAN ASSETS
See "Fair Value Measurement" in Note 1 for discussion of how we categorize our
pension plans' assets into the three-level fair value hierarchy. See "Financial
Instruments Carried at Fair Value" in Note 21 for a summary of our fair value
measurements of our pension plans' assets by the three-level fair value
hierarchy.
The following summarizes our fair value measurements of benefit plans' assets
(in millions) on a recurring basis by asset category:
[Enlarge/Download Table]
AS OF DECEMBER 31,
----------------------------------------------------------------------
PENSION PLANS OTHER POSTRETIREMENT BENEFITS
-------------------------------- --------------------------------
2013 2012 2013 2012
------ ------ ------ ------
Fixed maturity securities:
Corporate bonds...................................... $ 86 $ 48 $ -- $ --
U.S. government bonds................................ 31 26 -- --
Foreign government bonds............................. -- 2 -- --
State and municipal bonds............................ 9 -- -- --
Common stock............................................ -- 66 -- --
Cash and invested cash.................................. 1 3 -- --
Other investments....................................... -- -- 6 5
------ ------ ------ ------
Total............................................. $ 127 $ 145 $ 6 $ 5
====== ====== ====== ======
VALUATION METHODOLOGIES AND ASSOCIATED INPUTS FOR PENSION PLANS' ASSETS
The fair value measurements of our pension plans' assets are based on
assumptions used by market participants in pricing the security. The most
appropriate valuation methodology is selected based on the specific
characteristics of the security, and the valuation methodology is consistently
applied to measure the security's fair value. The fair value measurement is
based on a market approach, which utilizes prices and other relevant
information generated by market transactions involving identical or comparable
securities. Sources of inputs to the market approach include third-party
pricing services, independent broker quotations or pricing matrices. Both
observable and unobservable inputs are used in the valuation methodologies.
Observable inputs include benchmark yields, reported trades, broker quotes,
issuer spreads, two-sided markets, benchmark securities, bids, offers and
reference data. In addition, market indicators, industry and economic events
are monitored and further market data is acquired if certain triggers are met.
For certain security types, additional inputs may be used, or some of the
inputs described above may not be applicable. For broker-quoted only
securities, quotes from market makers or broker dealers are obtained from
sources recognized to be market participants. In order to validate the pricing
information and broker quotes, procedures are employed, where possible, that
include comparisons with similar observable positions, comparisons with
subsequent sales, discussions with brokers and observations of general market
movements for those security classes. For those securities trading in less
liquid or illiquid markets with limited or no pricing information, unobservable
inputs are used in order to measure the fair value of these securities. In
cases where this information is not available, such as for privately placed
securities, fair value is estimated using an internal pricing matrix. This
matrix relies on judgment concerning the discount rate used in calculating
expected future cash flows, credit quality, industry sector performance and
expected maturity.
Prices received from third parties are not adjusted; however, the third-party
pricing services' valuation methodologies and related inputs are evaluated and
additional evaluation is performed to determine the appropriate level within
the fair value hierarchy.
The observable and unobservable inputs to the valuation methodologies are based
on general standard inputs. The standard inputs used in order of priority are
benchmark yields, reported trades, broker quotes, issuer spreads, two-sided
markets, benchmark securities, bids, offers and reference data. Depending on
the type of security or the daily market activity, standard inputs may be
prioritized differently or may not be available for all securities on any given
day.
Cash and invested cash is carried at cost, which approximates fair value. This
category includes highly liquid debt instruments purchased with a maturity of
three months or less. Due to the nature of these assets, we believe these
assets should be classified as Level 2.
PLAN CASH FLOWS
It is our practice to make contributions to the qualified pension plans to
comply with minimum funding requirements of the Employee Retirement Income
Security Act of 1974, as
S-53
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. PENSION, POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFIT PLANS
(CONTINUED)
amended and with guidance issued there under. In accordance with such practice,
no contributions were required for the years ended December 31, 2013 or 2012.
Based on our calculations, we do not expect to be required to make any
contributions to our qualified pension plans in 2014 under applicable pension
law.
For our nonqualified pension plans, we fund the benefits as they become due to
retirees. The amount expected to be contributed to the nonqualified pension
plans during 2014 is less than $1 million.
We expect the following benefit payments (in millions):
[Download Table]
DEFINED
BENEFIT OTHER
PENSION POST-RETIREMENT
PLANS PLANS
-------- ---------------
2014.................................. $10 $1
2015.................................. 10 1
2016.................................. 10 1
2017.................................. 9 1
2018.................................. 9 1
Following five years thereafter....... 40 5
--------------------------------------------------------------------------------
18. DEFINED CONTRIBUTION AND DEFERRED COMPENSATION PLANS
DEFINED CONTRIBUTION PLANS
LNC and we sponsor defined contribution plans, which include 401(k) and money
purchase plans, for eligible employees and agents. LNC and we make
contributions and matching contributions to each of the active plans in
accordance with the plan documents and various limitations under Section 401(a)
of the Internal Revenue Code of 1986, as amended. For the years ended December
31, 2013, 2012 and 2011, expenses for these plans were $70 million, $68 million
and $65 million, respectively.
DEFERRED COMPENSATION PLANS
LNC and we sponsor six separate non-qualified, unfunded, deferred compensation
plans for employees, agents and non-employee directors.
The results for certain investment options within the plans are hedged by total
return swaps. Participants' account values change due primarily to investment
earnings driven by market fluctuations. Our expenses increase or decrease in
direct proportion to the change in market value of the participants' investment
options. Participants are able to select our stock as an investment option;
however, it is not hedged by the total return swaps and is a primary source of
expense volatility related to these plans. For further discussion of total
return swaps related to our deferred compensation plans, see Note 6.
Information (in millions) with respect to these plans was as follows:
[Download Table]
AS OF DECEMBER 31,
------------------
2013 2012
----- -----
Total liabilities(1)........................... $398 $335
Investments held to fund liabilities(2)........ 166 146
--------------
(1) Reported in other liabilities on our Consolidated Balance Sheets.
(2) Reported in other assets on our Consolidated Balance Sheets.
DEFERRED COMPENSATION PLAN FOR EMPLOYEES
Participants may elect to defer a portion of their compensation as defined by
the plan. Participants may select from prescribed "phantom" investment options
that are used as measures for calculating the returns that are notionally
credited to their accounts. Under the terms of the plan, we agree to pay out
amounts based upon the aggregate performance of the investment measures
selected by the participants. We make matching contributions based upon amounts
placed into the plan by individuals after participants have exceeded applicable
limits of the Internal Revenue Code applicable to 401(k) plans. The amounts of
our contributions are calculated in accordance with the plan document. Expenses
(income) (in millions) for this plan were as follows:
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
2013 2012 2011
----- ----- -----
Employer matching contributions............ $ 9 $ 7 $ 6
Increase (decrease) in measurement
of liabilities, net of total return
swap.................................... 11 11 1
----- ----- -----
Total plan expenses (income)............ $ 20 $ 18 $ 7
===== ===== =====
DEFERRED COMPENSATION PLANS FOR AGENTS
We sponsor three deferred compensation plans for certain eligible agents.
Participants may elect to defer a portion of their compensation as defined by
the respective plan. Participants may select from prescribed "phantom"
investment options that are used as measures for calculating the returns that
are notionally credited to their accounts. Under the terms of these plans, we
agree to pay out amounts based upon the aggregate performance of the investment
measures selected by the participants. The amounts of our contributions are
calculated and
S-54
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. DEFINED CONTRIBUTION AND DEFERRED COMPENSATION PLANS (CONTINUED)
made in accordance with the plans' documents. Expenses (income) (in millions)
for these plans were as follows:
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
2013 2012 2011
---- ----- -----
Company contributions................... $1 $ 1 $ 1
Increase (decrease) in measurement
of liabilities, net of total return
swap................................. 4 5 --
---- ----- -----
Total plan expenses (income)......... $5 $ 6 $ 1
==== ===== =====
DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS OF LNC
Non-employee directors may defer a portion of their annual cash retainers. They
also receive a portion of their retainer in the form of deferred stock units,
which we credit quarterly in arrears to their accounts. The prescribed
"phantom" investment options are identical to those offered in the employees'
deferred compensation plan. For the years ended December 31, 2013, 2012 and
2011, expenses (income) for this plan were less than $1 million, $2 million and
less than $(1) million, respectively.
DEFERRED COMPENSATION PLAN FOR FORMER JP AGENTS
Eligible former agents of Jefferson-Pilot Corporation may participate in this
deferred compensation plan. Participants may elect to defer commissions and
bonuses and specify where this deferred compensation will be invested in
selected notional mutual funds. Investments held to fund the liabilities are
rebalanced to match the funds that have been elected by the participant. The
plan obligation increases with contributions, deferrals and investment gains,
and decreases with distributions and investment losses. The plan assets
increase with investment gains and decrease with investment losses and
withdrawals. For the years ended December 31, 2013, 2012 and 2011, expenses
(income) for this plan were $2 million, $3 million and $4 million,
respectively.
--------------------------------------------------------------------------------
19. STOCK-BASED INCENTIVE COMPENSATION PLANS
Our employees and agents are included in LNC's various incentive plans that
provide for the issuance of stock options, performance shares
(performance-vested shares as opposed to time-vested shares), stock
appreciation rights ("SARs"), restricted stock units ("RSUs") and restricted
stock awards ("nonvested stock"). LNC issues new shares to satisfy option
exercises.
Total compensation expense (in millions) for all of our stock-based incentive
plans was as follows:
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2013 2012 2011
----- ----- -----
Stock options...................... $ 8 $ 8 $ 8
Performance shares................. 10 5 2
SARs............................... 5 1 --
RSUs and nonvested stock........... 15 17 12
----- ----- -----
Total........................... $ 38 $ 31 $ 22
===== ===== =====
Recognized tax benefit............. $ 13 $ 11 $ 8
===== ===== =====
--------------------------------------------------------------------------------
20. STATUTORY INFORMATION AND RESTRICTIONS
We prepare financial statements in accordance with statutory accounting
principles ("SAP") prescribed or permitted by the insurance departments of our
states of domicile, which may vary materially from GAAP.
Prescribed SAP includes the Accounting Practices and Procedures Manual of the
National Association of Insurance Commissioners ("NAIC") as well as state laws,
regulations and administrative rules. Permitted SAP encompasses all accounting
practices not so prescribed. The principal differences between statutory
financial statements and financial statements prepared in accordance with GAAP
are that statutory financial statements do not reflect DAC, some bond
portfolios may be carried at amortized cost, assets and liabilities are
presented net of reinsurance, contract holder liabilities are generally valued
using more conservative assumptions and certain assets are non-admitted.
We are subject to the applicable laws and regulations of our respective states.
Changes in these laws and regulations could change capital levels or capital
requirements for the Company.
Statutory capital and surplus, net gain (loss) from operations, after-tax, net
income (loss) and dividends to LNC holding company amounts (in millions) below
consist of all or a combination of the following entities: LNL, Lincoln
Reinsurance Company of South Carolina, Lincoln Reinsurance Company of South
Carolina II, Lincoln Life & Annuity Company of New York ("LLANY"), Lincoln
Reinsurance Company of Vermont I, Lincoln Reinsurance Company of Vermont II,
Lincoln Reinsurance Company of Vermont III, Lincoln Reinsurance Company of
Vermont IV and Lincoln Reinsurance Company of Vermont V.
[Download Table]
AS OF DECEMBER 31,
------------------
2013 2012
------- --------
U.S. capital and surplus..................... $ 7,248 $ 6,457
S-55
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. STATUTORY INFORMATION AND RESTRICTIONS (CONTINUED)
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
2013 2012 2011
----- ----- ------
U.S. net gain (loss) from
operations, after-tax........ $ 425 $ 649 $ 291
U.S. net income (loss).......... 495 600 104
U.S. dividends to LNC
holding company.............. 640 605 800
The decrease in statutory net income (loss) when comparing 2013 to 2012 was due
primarily to the effects of reserve financing transactions in 2013.
The increase in statutory net income (loss) when comparing 2012 to 2011 was due
primarily to a decrease in realized losses in invested assets, an increase in
favorable tax items over prior year and favorable reserve developments in
variable annuities due to improvements in the equity market and less volatility
in the forward interest rates.
Our states of domicile, Indiana for LNL and New York for LLANY, have adopted
certain prescribed accounting practices that differ from those found in NAIC
SAP. These prescribed practices are the use of continuous Commissioners Annuity
Reserve Valuation Method ("CARVM") in the calculation of reserves as prescribed
by the state of New York, the calculation of reserves on universal life
policies based on the Indiana universal life method as prescribed by the state
of Indiana for policies issued before January, 1, 2006, and the use of a more
conservative valuation interest rate on certain annuities prescribed by the
states of Indiana and New York. The Vermont insurance subsidiaries also have an
accounting practice permitted by the state of Vermont that differs from that
found in NAIC SAP. Specifically, the permitted practice involves accounting for
the lesser of the face amount of all amounts outstanding under an LOC and the
value of the Valuation of Life Insurance Policies Model Regulation ("XXX")
additional statutory reserves as an admitted asset and a form of surplus as of
December 31, 2013 and 2012.
The favorable (unfavorable) effects on statutory surplus compared to NAIC
statutory surplus from the use of these prescribed and permitted practices (in
millions) were as follows:
[Download Table]
AS OF DECEMBER 31,
-------------------
2013 2012
-------- ---------
Calculation of reserves using the Indiana
universal life method..................... $ 219 $ 249
Calculation of reserves using continuous
CARVM..................................... (2) (2)
Conservative valuation rate on certain
annuities................................. (30) (26)
Lesser of LOC and XXX additional reserve
as surplus................................ 2,635 2,483
During the third quarter of 2013, the New York Department of Financial Services
("NYDFS") announced that it would not recognize the NAIC revisions to Actuarial
Guideline 38 in applying the New York law governing the reserves to be held for
UL and VUL products containing secondary guarantees. The change, effective
December 31, 2013, impacts our New York-domiciled insurance subsidiary, LLANY,
notwithstanding that LLANY discontinued the sale of these products in early
2013. We expect to phase in the increase in reserves over five years beginning
with 2013. As such, we increased reserves by $90 million as of December 31,
2013. The additional increase in reserves over the next four years is subject
to on-going discussions with the NYDFS. However, we do not expect the amount
for each of the remaining years to exceed $90 million per year.
The NAIC has adopted Risk-Based Capital ("RBC") requirements for life insurance
companies to evaluate the adequacy of statutory capital and surplus in relation
to investment and insurance risks. The requirements provide a means of
measuring the minimum amount of statutory surplus appropriate for an insurance
company to support its overall business operations based on its size and risk
profile. Under RBC requirements, regulatory compliance is determined by the
ratio of a company's total adjusted capital, as defined by the NAIC, to its
company action level of RBC (known as the "RBC ratio"), also as defined by the
NAIC. The company action level may be triggered if the RBC ratio is between 75%
and 100%, which would require the insurer to submit a plan to the regulator
detailing corrective action it proposes to undertake. As of December 31, 2013,
the Company's RBC ratio was approximately five times the aforementioned company
action level.
We are subject to certain insurance department regulatory restrictions as to
the transfer of funds and payment of dividends to the holding company. Under
Indiana laws and regulations, LNL may pay dividends to LNC without prior
approval of the Indiana Insurance Commissioner (the "Commissioner"), only from
unassigned surplus and must receive prior approval of the Commissioner to pay a
dividend if such dividend, along with all other dividends paid within the
preceding 12 consecutive months, would exceed the statutory limitation. The
current statutory limitation is the greater of 10% of the insurer's contract
holders' surplus, as shown on its last annual statement on file with the
Commissioner or the insurer's statutory net gain from operations for the
previous 12 months, but in no event to exceed statutory unassigned surplus.
Indiana law gives the Commissioner broad discretion to disapprove requests for
dividends in excess of these limits. LNL's subsidiary, LLANY, a New
York-domiciled insurance company, has similar restrictions, except that in New
York it is the lesser of 10% of surplus to contract holders as of the
immediately preceding calendar year or net gain from operations for the
immediately preceding calendar year, not including realized capital gains. We
expect that we could pay dividends of approximately $681 million in 2014
without prior approval from the respective state commissioner.
All payments of principal and interest on surplus notes must be approved by the
respective Commissioner of Insurance.
S-56
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
21. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values and estimated fair values of our financial instruments (in
millions) were as follows:
[Enlarge/Download Table]
AS OF DECEMBER 31, 2013 AS OF DECEMBER 31, 2012
-------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------------ ----------- ----------- -----------
ASSETS
AFS securities:
Fixed maturity securities........................................... $ 79,178 $ 79,178 $ 80,254 $ 80,254
VIEs' fixed maturity securities..................................... 697 697 708 708
Equity securities................................................... 201 201 157 157
Trading securities..................................................... 2,190 2,190 2,437 2,437
Mortgage loans on real estate.......................................... 7,029 7,193 6,792 7,446
Derivative investments(1).............................................. 617 617 2,263 2,263
Other investments...................................................... 1,208 1,208 1,089 1,089
Cash and invested cash................................................. 630 630 3,278 3,278
Reinsurance related embedded derivatives............................... 159 159 -- --
Other assets -- GLB reserves embedded derivatives(2)................... 1,244 1,244 -- --
Separate account assets................................................ 117,135 117,135 95,373 95,373
LIABILITIES
Future contract benefits -- indexed annuity and universal
life contracts embedded derivatives................................. (1,048) (1,048) (732) (732)
Other contract holder funds:
Remaining guaranteed interest and similar contracts................. (809) (809) (867) (867)
Account values of certain investment contracts...................... (29,024) (30,514) (28,480) (32,620)
Short-term debt........................................................ (51) (51) (32) (32)
Long-term debt......................................................... (2,600) (2,634) (1,925) (1,972)
Reinsurance related embedded derivatives............................... -- -- (184) (184)
VIEs' liabilities -- derivative instruments............................ (27) (27) (128) (128)
Other liabilities:
Credit default swaps................................................ (2) (2) (11) (11)
Derivative liabilities(1)........................................... (386) (386) -- --
GLB reserves embedded derivatives(2)................................ (1,244) (1,244) (909) (909)
BENEFIT PLANS' ASSETS(3)............................................... 133 133 150 150
--------------
(1) We have master netting agreements with each of our derivative
counterparties, which allow for the netting of our derivative asset and
liability positions by counterparty.
(2) GLB reserves embedded derivatives are fully ceded to our counterparties.
Refer to Note 6 for additional detail.
(3) Included in the funded statuses of the benefit plans, which is reported
in other liabilities on our Consolidated Balance Sheets. Refer to Note 17
for additional detail.
VALUATION METHODOLOGIES AND ASSOCIATED INPUTS FOR FINANCIAL INSTRUMENTS NOT
CARRIED AT FAIR VALUE
The following discussion outlines the methodologies and assumptions used to
determine the fair value of our financial instruments not carried at fair value
on our Consolidated Balance Sheets. Considerable judgment is required to
develop these assumptions used to measure fair value. Accordingly, the
estimates shown are not necessarily indicative of the amounts that would be
realized in a one-time, current market exchange of all of our financial
instruments.
MORTGAGE LOANS ON REAL ESTATE
The fair value of mortgage loans on real estate is established using a
discounted cash flow method based on credit rating, maturity and future income.
The ratings for mortgages in good standing are based on property type,
location, market conditions, occupancy, debt-service coverage, loan-to-value,
quality of tenancy, borrower and payment record. The fair value for impaired
mortgage loans is based on the present value of expected future cash flows
discounted at the loan's effective interest rate, the loan's market price or
the fair value of the collateral if the loan is collateral dependent. The
inputs used to measure the fair value of our mortgage loans on real estate are
classified as Level 2 within the fair value hierarchy.
OTHER INVESTMENTS
The carrying value of our assets classified as other investments approximates
fair value. Other investments include LPs and other privately held investments
that are accounted for using the equity method of accounting and the carrying
value is based on our proportional share of the net assets of the LPs. The
inputs used to measure the fair value of our other investments are classified
as Level 3 within the fair value hierarchy.
S-57
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
OTHER CONTRACT HOLDER FUNDS
Other contract holder funds include remaining guaranteed interest and similar
contracts and account values of certain investment contracts. The fair value
for the remaining guaranteed interest and similar contracts is estimated using
discounted cash flow calculations as of the balance sheet date. These
calculations are based on interest rates currently offered on similar contracts
with maturities that are consistent with those remaining for the contracts
being valued. As of December 31, 2013 and 2012, the remaining guaranteed
interest and similar contracts carrying value approximated fair value. The fair
value of the account values of certain investment contracts is based on their
approximate surrender value as of the balance sheet date. The inputs used to
measure the fair value of our other contract holder funds are classified as
Level 3 within the fair value hierarchy.
SHORT-TERM AND LONG-TERM DEBT
The fair value of long-term debt is based on quoted market prices. For
short-term debt, excluding current maturities of long-term debt, the carrying
value approximates fair value. The inputs used to measure the fair value of our
short-term and long-term debt are classified as Level 2 within the fair value
hierarchy.
FINANCIAL INSTRUMENTS CARRIED AT FAIR VALUE
We did not have any assets or liabilities measured at fair value on a
nonrecurring basis as of December 31, 2013 or 2012, and we noted no changes in
our valuation methodologies between these periods.
The following summarizes our financial instruments carried at fair value (in
millions) on a recurring basis by the fair value hierarchy levels described
above:
[Enlarge/Download Table]
AS OF DECEMBER 31, 2013
-------------------------------------------------------------
QUOTED
PRICES
IN ACTIVE
MARKETS FOR SIGNIFICANT SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE TOTAL
ASSETS INPUTS INPUTS FAIR
(LEVEL 1) (LEVEL 2) (LEVEL 3) VALUE
------------ ------------ -------------- -----------
ASSETS
Investments:
Fixed maturity AFS securities:
Corporate bonds............................................. $ 60 $ 65,421 $ 2,960 $ 68,441
U.S. government bonds....................................... 304 21 -- 325
Foreign government bonds.................................... -- 464 78 542
RMBS........................................................ -- 4,143 1 4,144
CMBS........................................................ -- 678 20 698
CLOs........................................................ -- 47 178 225
State and municipal bonds................................... -- 3,796 28 3,824
Hybrid and redeemable preferred securities.................. 39 874 66 979
VIEs' fixed maturity securities................................ 102 595 -- 697
Equity AFS securities.......................................... 3 37 161 201
Trading securities............................................. -- 2,137 53 2,190
Derivative investments(1)...................................... -- 244 1,118 1,362
Cash and invested cash............................................ -- 630 -- 630
Reinsurance related embedded derivatives.......................... -- 159 -- 159
Other assets -- GLB reserves embedded derivatives................. -- -- 1,244 1,244
Separate account assets........................................... 1,766 115,369 -- 117,135
------------ ------------ -------------- -----------
Total assets.............................................. $ 2,274 $ 194,615 $ 5,907 $ 202,796
============ ============ ============== ===========
LIABILITIES
Future contract benefits -- indexed annuity and universal life
contracts embedded derivatives................................. $ -- $ -- $ (1,048) $ (1,048)
VIEs' liabilities -- derivative instruments....................... -- -- (27) (27)
Other liabilities:
Credit default swaps........................................... -- -- (2) (2)
Derivative liabilities(1)...................................... -- (879) (252) (1,131)
GLB reserves embedded derivatives.............................. -- -- (1,244) (1,244)
------------ ------------ -------------- -----------
Total liabilities......................................... $ -- $ (879) $ (2,573) $ (3,452)
============ ============ ============== ===========
BENEFIT PLANS' ASSETS............................................. $ -- $ 133 $ -- $ 133
============ ============ ============== ===========
--------------
(1) Derivative investment assets and liabilities presented within the fair
value hierarchy are presented on a gross basis by derivative type and not
on a master netting basis by counterparty.
S-58
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
[Enlarge/Download Table]
AS OF DECEMBER 31, 2012
-------------------------------------------------------------
QUOTED
PRICES
IN ACTIVE
MARKETS FOR SIGNIFICANT SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE TOTAL
ASSETS INPUTS INPUTS FAIR
(LEVEL 1) (LEVEL 2) (LEVEL 3) VALUE
------------ ------------ -------------- -----------
ASSETS
Investments:
Fixed maturity AFS securities:
Corporate bonds............................................. $ 65 $ 64,654 $ 2,065 $ 66,784
U.S. government bonds....................................... 362 30 1 393
Foreign government bonds.................................... -- 594 46 640
RMBS........................................................ -- 5,880 3 5,883
CMBS........................................................ -- 928 27 955
CLOs........................................................ -- 26 154 180
State and municipal bonds................................... -- 4,211 32 4,243
Hybrid and redeemable preferred securities.................. 30 1,030 116 1,176
VIEs' fixed maturity securities................................ 110 598 -- 708
Equity AFS securities.......................................... 44 26 87 157
Trading securities............................................. 2 2,379 56 2,437
Derivative investments......................................... -- 347 1,916 2,263
Cash and invested cash............................................ -- 3,278 -- 3,278
Separate account assets........................................... 1,519 93,854 -- 95,373
------------ ------------ -------------- -----------
Total assets.............................................. $ 2,132 $ 177,835 $ 4,503 $ 184,470
============ ============ ============== ===========
LIABILITIES
Future contract benefits -- indexed annuity and universal
indexed annuity and universal life contracts................... $ -- $ -- $ (732) $ (732)
Reinsurance related embedded derivatives.......................... -- (184) -- (184)
VIEs' liabilities -- derivative instruments....................... -- -- (128) (128)
Other liabilities:
Credit default swaps........................................... -- -- (11) (11)
GLB reserves embedded derivatives.............................. -- -- (909) (909)
------------ ------------ -------------- -----------
Total liabilities......................................... $ -- $ (184) $ (1,780) $ (1,964)
============ ============ ============== ===========
BENEFIT PLANS' ASSETS............................................. $ 16 $ 134 $ -- $ 150
============ ============ ============== ===========
S-59
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following summarizes changes to our financial instruments carried at fair
value (in millions) and classified within Level 3 of the fair value hierarchy.
This summary excludes any effect of amortization of DAC, VOBA, DSI and DFEL.
The gains and losses below may include changes in fair value due in part to
observable inputs that are a component of the valuation methodology.
[Enlarge/Download Table]
FOR THE YEAR ENDED DECEMBER 31, 2013
----------------------------------------------------------------------------
PURCHASES,
GAINS ISSUANCES, TRANSFERS
ITEMS (LOSSES) SALES, IN OR
INCLUDED IN MATURITIES, OUT
BEGINNING IN OCI SETTLEMENTS, OF ENDING
FAIR NET AND CALLS, LEVEL 3, FAIR
VALUE INCOME OTHER(1) NET NET(2)(3) VALUE
---------- ---------- -------- ------------ ----------- ----------
Investments:(4)
Fixed maturity AFS securities:
Corporate bonds................................. $ 2,065 $ (17) $ -- $ 1,026 $ (114) $ 2,960
U.S. government bonds........................... 1 -- -- (1) -- --
Foreign government bonds........................ 46 -- (1) 33 -- 78
RMBS............................................ 3 -- -- (2) -- 1
CMBS............................................ 27 -- 6 (5) (8) 20
CLOs............................................ 154 (1) 4 50 (29) 178
State and municipal bonds....................... 32 -- (4) -- -- 28
Hybrid and redeemable preferred securities...... 116 -- 13 (33) (30) 66
Equity AFS securities.............................. 87 (1) 2 73 -- 161
Trading securities................................. 56 2 (7) (6) 8 53
Derivative investments............................. 1,916 (681) (194) (175) -- 866
Other assets -- GLB reserves embedded derivatives(5).. 909 (2,153) -- -- 2,488 1,244
Future contract benefits -- index annuity and
universal life contracts embedded derivatives(5)... (732) (356) -- 40 -- (1,048)
VIEs' liabilities -- derivative instruments(6)........ (128) 101 -- -- -- (27)
Other liabilities:
Credit default swaps(7)............................ (11) 9 -- -- -- (2)
GLB reserves embedded derivatives(5)............... (909) 2,153 -- -- (2,488) (1,244)
---------- ---------- -------- ------------ ----------- ----------
Total, net.................................... $ 3,632 $ (944) $ (181) $ 1,000 $ (173) $ 3,334
========== ========== ======== ============ =========== ==========
S-60
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
[Enlarge/Download Table]
FOR THE YEAR ENDED DECEMBER 31, 2012
----------------------------------------------------------------------------
PURCHASES,
GAINS ISSUANCES, TRANSFERS
ITEMS (LOSSES) SALES, IN OR
INCLUDED IN MATURITIES, OUT
BEGINNING IN OCI SETTLEMENTS, OF ENDING
FAIR NET AND CALLS, LEVEL 3, FAIR
VALUE INCOME OTHER(1) NET NET(2) VALUE
----------- --------- -------- ------------ ---------- ---------
Investments:(4)
Fixed maturity AFS securities:
Corporate bonds................................ $ 2,423 $ (25) $ 35 $ 274 $ (642) $ 2,065
U.S. government bonds.......................... 1 -- -- -- -- 1
Foreign government bonds....................... 97 -- -- (5) (46) 46
RMBS........................................... 158 (3) 3 (8) (147) 3
CMBS........................................... 31 (11) 16 (11) 2 27
CLOs........................................... 101 (2) 8 61 (14) 154
State and municipal bonds...................... -- -- -- 32 -- 32
Hybrid and redeemable preferred securities..... 99 (1) 23 -- (5) 116
Equity AFS securities............................. 56 (8) 13 26 -- 87
Trading securities................................ 67 3 4 (2) (16) 56
Derivative investments............................ 2,484 (823) 73 182 -- 1,916
Future contract benefits -- index annuity and
universal life contracts embedded derivatives(5).. (399) (136) -- (197) -- (732)
VIEs' liabilities -- derivative instruments(6)...... (291) 163 -- -- -- (128)
Other liabilities:
Credit default swaps(7)........................... (16) 5 -- -- -- (11)
GLB reserves embedded derivatives(5).............. (2,217) 1,308 -- -- -- (909)
----------- --------- -------- ------------ ---------- ---------
Total, net................................... $ 2,594 $ 470 $ 175 $ 352 $ (868) $ 2,723
=========== ========= ======== ============ ========== =========
S-61
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
[Enlarge/Download Table]
FOR THE YEAR ENDED DECEMBER 31, 2011
-------------------------------------------------------------------------
PURCHASES,
GAINS ISSUANCES, TRANSFERS
ITEMS (LOSSES) SALES, IN OR
INCLUDED IN MATURITIES, OUT
BEGINNING IN OCI SETTLEMENTS, OF ENDING
FAIR NET AND CALLS, LEVEL 3, FAIR
VALUE INCOME OTHER(1) NET NET(2) VALUE
---------- ---------- -------- ------------ ---------- ---------
Investments:(4)
Fixed maturity AFS securities:
Corporate bonds.................................... $ 2,353 $ 3 $ 42 $ (134) $ 159 $ 2,423
U.S. government bonds.............................. 2 -- -- (1) -- 1
Foreign government bonds........................... 113 -- 4 (3) (17) 97
RMBS............................................... 119 (3) 6 36 -- 158
CMBS............................................... 102 (62) 61 (74) 4 31
CLOs............................................... 171 19 (17) (72) -- 101
Hybrid and redeemable preferred securities......... 114 (1) (5) (7) (2) 99
Equity AFS securities................................. 91 8 (12) 3 (34) 56
Trading securities.................................... 74 3 1 (7) (4) 67
Derivative investments................................ 1,494 495 383 112 -- 2,484
Future contract benefits -- index annuity
and universal life contracts embedded derivatives(5).. (497) 5 -- 93 -- (399)
VIEs' liabilities -- derivative instruments(6)........... (209) (82) -- -- -- (291)
Other liabilities:
Credit default swaps(7)............................... (16) (6) -- 6 -- (16)
GLB reserves embedded derivatives(5).................. (408) (1,809) -- -- -- (2,217)
---------- ---------- -------- ------------ ---------- ---------
Total, net....................................... $ 3,503 $ (1,430) $ 463 $ (48) $ 106 $ 2,594
========== ========== ======== ============ ========== =========
Benefit plans' assets(8)................................. $ 6 $ -- $ -- $ (6) $ -- $ --
========== ========== ======== ============ ========== =========
--------------
(1) The changes in fair value of the interest rate swaps are offset by an
adjustment to derivative investments (see Note 6).
(2) Transfers in or out of Level 3 for AFS and trading securities are
displayed at amortized cost as of the beginning-of-year. For AFS and
trading securities, the difference between beginning-of-year amortized
cost and beginning-of-year fair value was included in OCI and earnings,
respectively, in prior years.
(3) Transfers in or out of Level 3 for GLB reserves embedded derivatives
represent reclassifications between other assets and other liabilities on
our Consolidated Balance Sheets.
(4) Amortization and accretion of premiums and discounts are included in net
investment income on our Consolidated Statements of Comprehensive Income
(Loss). Gains (losses) from sales, maturities, settlements and calls and
OTTI are included in realized gain (loss) on our Consolidated Statements
of Comprehensive Income (Loss).
(5) Gains (losses) from sales, maturities, settlements and calls are included
in realized gain (loss) on our Consolidated Statements of Comprehensive
Income (Loss).
(6) The changes in fair value of the credit default swaps and contingency
forwards are included in realized gain (loss) on our Consolidated
Statements of Comprehensive Income (Loss).
(7) Gains (losses) from sales, maturities, settlements and calls are included
in net investment income on our Consolidated Statements of Comprehensive
Income (Loss).
(8) The expected return on plan assets is reported in commissions and other
expenses on our Consolidated Statements of Comprehensive Income (Loss).
S-62
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following provides the components of the items included in issuances,
sales, maturities, settlements and calls, net, excluding any effect of
amortization of DAC, VOBA, DSI and DFEL and changes in future contract
benefits, (in millions) as reported above:
[Enlarge/Download Table]
FOR THE YEAR ENDED DECEMBER 31, 2013
-----------------------------------------------------------------------------
ISSUANCES SALES MATURITIES SETTLEMENTS CALLS TOTAL
---------- ------- ---------- ------------ ------ ---------
Investments:
Fixed maturity AFS securities:
Corporate bonds................................. $ 1,235 $ (51) $ (44) $ (45) $ (69) $ 1,026
U.S. government bonds........................... -- -- -- (1) -- (1)
Foreign government bonds........................ 50 -- (17) -- -- 33
RMBS............................................ -- -- -- (2) -- (2)
CMBS............................................ -- -- -- (3) (2) (5)
CLOs............................................ 74 -- -- (24) -- 50
Hybrid and redeemable preferred securities...... -- (33) -- -- -- (33)
Equity AFS securities............................. 78 (5) -- -- -- 73
Trading securities................................ -- (3) (1) (2) -- (6)
Derivative investments............................ 152 (23) (304) -- -- (175)
Future contract benefits -- indexed annuity and
universal life contracts embedded derivatives..... (68) -- -- 108 -- 40
---------- ------- ---------- ------------ ------ ---------
Total, net................................... $ 1,521 $ (115) $ (366) $ 31 $ (71) $ 1,000
========== ======= ========== ============ ====== =========
[Enlarge/Download Table]
FOR THE YEAR ENDED DECEMBER 31, 2012
-----------------------------------------------------------------------------
ISSUANCES SALES MATURITIES SETTLEMENTS CALLS TOTAL
---------- ------- ---------- ------------ ------ ---------
Investments:
Fixed maturity AFS securities:
Corporate bonds................................. $ 363 $ (26) $ (6) $ (51) $ (6) $ 274
Foreign government bonds........................ -- -- (5) -- -- (5)
RMBS............................................ -- -- (6) (2) -- (8)
CMBS............................................ -- -- -- (11) -- (11)
CLOs............................................ 72 -- -- (11) -- 61
State and municipal bonds....................... 32 -- -- -- -- 32
Equity AFS securities............................. 26 -- -- -- -- 26
Trading securities................................ -- -- -- (2) -- (2)
Derivative investments............................ 454 (34) (238) -- -- 182
Future contract benefits -- indexed annuity and
universal life contracts embedded derivatives..... (99) -- -- (98) -- (197)
---------- ------- ---------- ------------ ------ ---------
Total, net................................... $ 848 $ (60) $ (255) $ (175) $ (6) $ 352
========== ======= ========== ============ ====== =========
[Enlarge/Download Table]
FOR THE YEAR ENDED DECEMBER 31, 2011
-----------------------------------------------------------------------------
ISSUANCES SALES MATURITIES SETTLEMENTS CALLS TOTAL
---------- ------- ---------- ------------ ------ ---------
Investments:
Fixed maturity AFS securities:
Corporate bonds................................. $ 237 $ (216) $ (15) $ (51) $ (89) $ (134)
U.S. government bonds........................... -- -- -- (1) -- (1)
Foreign government bonds........................ -- (3) -- -- -- (3)
RMBS............................................ 51 -- -- (15) -- 36
CMBS............................................ -- (50) -- (24) -- (74)
CLOs............................................ -- (33) -- (39) -- (72)
Hybrid and redeemable preferred securities...... 9 (16) -- -- -- (7)
Equity AFS securities............................. 19 (16) -- -- -- 3
Trading securities................................ -- (2) -- (5) -- (7)
Derivative investments............................ 396 (7) (277) -- -- 112
Future contract benefits -- indexed annuity and
universal life contracts embedded derivatives..... (59) -- -- 152 -- 93
Other liabilities -- credit default swaps............ -- 6 -- -- -- 6
---------- ------- ---------- ------------ ------ ---------
Total, net................................... $ 653 $ (337) $ (292) $ 17 $ (89) $ (48)
========== ======= ========== ============ ====== =========
Benefit plans' assets................................ $ -- $ (3) $ (3) $ -- $ -- $ (6)
========== ======= ========== ============ ====== =========
S-63
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following summarizes changes in unrealized gains (losses) included in net
income, excluding any effect of amortization of DAC, VOBA, DSI and DFEL and
changes in future contract benefits, related to financial instruments carried
at fair value classified within Level 3 that we still held (in millions):
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------
2013 2012 2011
---------- -------- ----------
Investments:(1)
Derivative investments.......... $ (753) $ (823) $ 472
Other assets -- GLB
reserves embedded
derivatives(1).................. (2,444) -- --
Future contract
benefits -- indexed
annuity and universal life
contracts embedded
derivatives(1).................. (44) (10) (1)
VIEs' liabilities -- derivative
instruments(1).................. 101 163 (82)
Other liabilities:
Credit default swaps(2)......... 9 6 (8)
GLB reserves embedded
derivatives(1)............... 2,444 1,472 (1,615)
---------- -------- ----------
Total, net................... $ (687) $ 808 $ (1,234)
========== ======== ==========
--------------
(1) Included in realized gain (loss) on our Consolidated Statements of
Comprehensive Income (Loss).
(2) Included in net investment income on our Consolidated Statements of
Comprehensive Income (Loss).
The following provides the components of the transfers in and out of Level 3
(in millions) as reported above:
[Download Table]
FOR THE YEAR ENDED
DECEMBER 31, 2013
--------------------------------
TRANSFERS TRANSFERS
IN TO OUT OF
LEVEL 3 LEVEL 3 TOTAL
---------- ---------- -------
Investments:
Fixed maturity AFS securities:
Corporate bonds................ $ 367 $ (481) $ (114)
CMBS........................... -- (8) (8)
CLOs........................... -- (29) (29)
Hybrid and redeemable
preferred securities........ 20 (50) (30)
Trading securities................ 8 -- 8
---------- ---------- -------
Total, net.................. $ 395 $ (568) $ (173)
========== ========== =======
[Download Table]
FOR THE YEAR ENDED
DECEMBER 31, 2012
--------------------------------
TRANSFERS TRANSFERS
IN TO OUT OF
LEVEL 3 LEVEL 3 TOTAL
---------- ---------- -------
Investments:
Fixed maturity AFS securities:
Corporate bonds................ $ 35 $ (677) $ (642)
Foreign government
bonds....................... -- (46) (46)
RMBS........................... -- (147) (147)
CMBS........................... 5 (3) 2
CLOs........................... 6 (20) (14)
Hybrid and redeemable
preferred securities........ 35 (40) (5)
Trading securities................ 2 (18) (16)
---------- ---------- -------
Total, net.................. $ 83 $ (951) $ (868)
========== ========== =======
[Download Table]
FOR THE YEAR ENDED
DECEMBER 31, 2011
--------------------------------
TRANSFERS TRANSFERS
IN TO OUT OF
LEVEL 3 LEVEL 3 TOTAL
---------- ---------- -------
Investments:
Fixed maturity AFS securities:
Corporate bonds................ $ 246 $ (87) $ 159
Foreign government
bonds....................... -- (17) (17)
CMBS........................... 4 -- 4
Hybrid and redeemable
preferred securities........ 18 (20) (2)
Equity AFS securities............. 1 (35) (34)
Trading securities................ 1 (5) (4)
---------- ---------- -------
Total, net.................. $ 270 $ (164) $ 106
========== ========== =======
Transfers in and out of Level 3 are generally the result of observable market
information on a security no longer being available or becoming available to
our pricing vendors. For the years ended December 31, 2013, 2012 and 2011, our
corporate bonds and RMBS transfers in and out were attributable primarily to
the securities' observable market information no longer being available or
becoming available. Transfers in and out of Levels 1 and 2 are generally the
result of a change in the type of input used to measure the fair value of an
asset or liability at the end of the reporting period. When quoted prices in
active markets become available, transfers from Level 2 to Level 1 will result.
When quoted prices in active markets become unavailable, but we are able to
employ a valuation methodology using significant observable inputs, transfers
from Level 1 to Level 2 will result. For the years ended December 31, 2013,
2012 and 2011, the transfers between Levels 1 and 2 of the fair value hierarchy
were less than $1 million for our financial instruments carried at fair
value.
S-64
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following summarizes the fair value (in millions), valuation techniques and
significant unobservable inputs of the Level 3 fair value measurements as of
December 31, 2013:
[Enlarge/Download Table]
FAIR VALUATION SIGNIFICANT
VALUE TECHNIQUE UNOBSERVABLE INPUTS
----------- --------------------------- --------------------------------------
ASSETS
Investments:
Fixed maturity AFS and trading
securities:
Corporate bonds.............. $ 1,064 Discounted cash flow Liquidity/duration adjustment(1)
Foreign government bonds..... 78 Discounted cash flow Liquidity/duration adjustment(1)
Hybrid and redeemable
preferred securities...... 20 Discounted cash flow Liquidity/duration adjustment(1)
Equity AFS and trading securities.. 28 Discounted cash flow Liquidity/duration adjustment(1)
Other Assets -- GLB reserves
embedded derivatives............... 1,244 Discounted cash flow Long-term lapse rate(2)
Utilization of guaranteed
withdrawals(3)
Claims utilization factor(4)
Premiums utilization factor(4)
NPR(5)
Mortality rate(6)
Volatility(7)
LIABILITIES
Future contract benefits -- Indexed
annuity and universal life
contracts embedded derivatives..... (1,048) Discounted cash flow Lapse rate(2)
Mortality rate(6)
Other Liabilities -- GLB reserves
embedded derivatives............... (1,244) Discounted cash flow Long-term lapse rate(2)
Utilization of guaranteed
withdrawals(3)
Claims utilization factor(4)
Premiums utilization factor(4)
NPR(5)
Mortality rate(6)
Volatility(7)
ASSUMPTION OR
INPUT RANGES
-----------------
ASSETS
Investments:
Fixed maturity AFS and trading
securities:
Corporate bonds.............. 0.8% - 10.6%
Foreign government bonds..... 2.3% - 3.9%
Hybrid and redeemable
preferred securities...... 2.4%
Equity AFS and trading securities.. 4.3% - 5.9%
Other Assets -- GLB reserves
embedded derivatives............... 1% - 27%
90% - 100%
60% - 100%
77% - 132%
0% - 0.53%
(8)
1% - 28%
LIABILITIES
Future contract benefits -- Indexed
annuity and universal life
contracts embedded derivatives..... 1% - 15%
(9)
Other Liabilities -- GLB reserves
embedded derivatives............... 1% - 27%
90% - 100%
60% - 100%
77% - 132%
0% - 0.53%
(8)
1% - 28%
---------------
(1) The liquidity/duration adjustment input represents an estimated market
participant composite of adjustments attributable to liquidity premiums,
expected durations, structures and credit quality that would be applied
to the market observable information of an investment.
(2) The lapse rate input represents the estimated probability of a contract
surrendering during a year, and thereby forgoing any future benefits. The
range for indexed annuity and universal life contracts represents the
lapse rates during the surrender charge period.
(3) The utilization of guaranteed withdrawals input represents the estimated
percentage of contract holders that utilize the guaranteed withdrawal
feature.
(4) The utilization factors are applied to the present value of claims or
premiums, as appropriate, in the GLB reserve calculation to estimate the
impact of inefficient withdrawal behavior, including taking less than or
more than the maximum guaranteed withdrawal.
(5) The NPR input represents the estimated additional credit spread that
market participants would apply to the market observable discount rate
when pricing a contract.
(6) The mortality rate input represents the estimated probability of when an
individual belonging to a particular group, categorized according to age
or some other factor such as gender, will die.
(7) The volatility input represents overall volatilities assumed for the
underlying variable annuity funds, which include a mixture of equity and
fixed-income assets. Fair value of the variable annuity GLB embedded
derivatives would increase if higher volatilities were used for
valuation.
(8) The mortality rate is based on a combination of company and industry
experience, adjusted for improvement factors.
(9) Based on the "Annuity 2000 Mortality Table" developed by the Society of
Actuaries Committee on Life Insurance Research that was adopted by the
National Association of Insurance Commissioners in 1996 for our mortality
input.
S-65
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
From the table above, we have excluded Level 3 fair value measurements obtained
from independent, third-party pricing sources. We do not develop the
significant inputs used to measure the fair value of these assets and
liabilities, and the information regarding the significant inputs is not
readily available to us. Independent broker-quoted fair values are non-binding
quotes developed by market makers or broker-dealers obtained from third-party
sources recognized as market participants. The fair value of a broker-quoted
asset or liability is based solely on the receipt of an updated quote from a
single market maker or a broker-dealer recognized as a market participant as we
do not adjust broker quotes when used as the fair value measurement for an
asset or liability. Significant increases or decreases in any of the broker
quotes received may result in a significantly higher or lower fair value
measurement.
Changes in any of the significant inputs presented in the table above may
result in a significant change in the fair value measurement of the asset or
liability as follows:
- INVESTMENTS - An increase in the liquidity/duration adjustment input would
result in a decrease in the fair value measurement.
- INDEXED ANNUITY AND UNIVERSAL LIFE CONTRACTS EMBEDDED DERIVATIVES - An
increase in the lapse rate or mortality rate inputs would result in a
decrease in the fair value measurement.
- GLB RESERVES EMBEDDED DERIVATIVES - Assuming our GLB reserves embedded
derivatives are in a liability position: an increase in our lapse rate, NPR
or mortality rate inputs would result in a decrease in the fair value
measurement; and an increase in the utilization of guarantee withdrawal or
volatility inputs would result in an increase in the fair value
measurement.
For each category discussed above, the unobservable inputs are not
inter-related; therefore, a directional change in one input will not affect the
other inputs.
As part of our on-going valuation process, we assess the reasonableness of our
valuation techniques or models and make adjustments as necessary. For more
information, see "Summary of Significant Accounting Policies" above.
--------------------------------------------------------------------------------
22. SEGMENT INFORMATION
We provide products and services and report results through our Annuities,
Retirement Plan Services, Life Insurance and Group Protection segments. We also
have Other Operations, which includes the financial data for operations that
are not directly related to the business segments. Our reporting segments
reflect the manner by which our chief operating decision makers view and manage
the business. The following is a brief description of these segments and Other
Operations.
The Annuities segment provides tax-deferred investment growth and lifetime
income opportunities for its clients by offering fixed (including indexed) and
variable annuities.
The Retirement Plan Services segment provides employer-sponsored defined
benefit and individual retirement accounts, as well as individual and group
variable annuities, group fixed annuities and mutual-fund based programs in the
retirement plan marketplace.
The Life Insurance segment focuses in the creation and protection of wealth
through life insurance products, including term insurance, a linked-benefit
product (which is a UL policy linked with riders that provide for long-term
care costs), indexed UL and both single and survivorship versions of UL and
VUL, including corporate-owned UL and VUL insurance and bank-owned UL and VUL
insurance products.
The Group Protection segment offers group non-medical insurance products,
principally term life, universal life, disability, dental, vision, accident and
critical illness insurance to the employer market place through various forms
of employee-paid and employer-paid plans. Its products are marketed primarily
through a national distribution system of regional group offices. These offices
develop business through employee benefit brokers, third-party administrators
and other employee benefit firms.
Other Operations includes investments related to our excess capital;
investments in media properties and other corporate investments; benefit plan
net liability; the unamortized deferred gain on indemnity reinsurance related
to the sale of reinsurance; the results of certain disability income business;
our run-off Institutional Pension business, the majority of which was sold on a
group annuity basis; and debt costs.
Segment operating revenues and income (loss) from operations are internal
measures used by our management and Board of Directors to evaluate and assess
the results of our segments. Income (loss) from operations is GAAP net income
excluding the after-tax effects of the following items, as applicable:
- Realized gains and losses associated with the following ("excluded
realized gain (loss)"):
- Sales or disposals of securities;
- Impairments of securities;
- Changes in the fair value of derivatives, embedded derivatives within
certain reinsurance arrangements and trading securities;
- Changes in the fair value of the derivatives we own to hedge our GDB
riders within our variable annuities;
- Changes in the fair value of the embedded derivatives of our GLB riders
accounted for at fair value, net of the change in the fair value of the
derivatives we own to hedge them; and
- Changes in the fair value of the embedded derivative liabilities related
to index call options we may purchase in the future to hedge contract
holder index allocations applicable to future reset periods for our
indexed annuity products accounted for at fair value;
S-66
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22. SEGMENT INFORMATION (CONTINUED)
- Changes in reserves resulting from benefit ratio unlocking on our GDB and
GLB riders;
- Income (loss) from reserve changes, net of related amortization, on
business sold through reinsurance;
- Gains (losses) on early extinguishment of debt;
- Losses from the impairment of intangible assets;
- Income (loss) from discontinued operations; and
- Income (loss) from the initial adoption of new accounting standards.
Operating revenues represent GAAP revenues excluding the pre-tax effects of the
following items, as applicable:
- Excluded realized gain (loss);
- Revenue adjustments from the initial adoption of new accounting
standards;
- Amortization of DFEL arising from changes in GDB and GLB benefit ratio
unlocking; and
- Amortization of deferred gains arising from reserve changes on business
sold through reinsurance.
We use our prevailing corporate federal income tax rate of 35% while taking
into account any permanent differences for events recognized differently in our
financial statements and federal income tax returns when reconciling our
non-GAAP measures to the most comparable GAAP measure. Operating revenues and
income (loss) from operations do not replace revenues and net income as the
GAAP measures of our consolidated results of operations.
Segment information (in millions) was as follows:
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
2013 2012 2011
--------- ---------- --------
REVENUES
Operating revenues:
Annuities...................... $ 3,044 $ 2,713 $ 2,588
Retirement Plan Services....... 1,061 1,015 988
Life Insurance................. 4,781 4,820 4,347
Group Protection............... 2,260 2,090 1,938
Other Operations............... 392 411 449
Excluded realized gain (loss),
pre-tax........................ (81) (235) (342)
Amortization of deferred gain
arising from reserve changes
on business sold through
reinsurance, pre-tax........... 3 3 3
--------- ---------- --------
Total revenues.............. $ 11,460 $ 10,817 $ 9,971
========= ========== ========
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
2013 2012 2011
-------- -------- -------
NET INCOME (LOSS)
Income (loss) from operations:
Annuities...................... $ 715 $ 608 $ 549
Retirement Plan Services....... 135 131 146
Life Insurance................. 464 538 463
Group Protection............... 71 72 97
Other Operations............... (5) (39) (28)
Excluded realized gain (loss),
after-tax...................... (53) (152) (222)
Income (loss) from reserve
changes (net of related
amortization) on business
sold through reinsurance,
after-tax...................... 2 2 2
Impairment of intangibles,
after-tax...................... -- 2 (744)
-------- -------- -------
Net income (loss)........... $ 1,329 $ 1,162 $ 263
======== ======== =======
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
2013 2012 2011
------- ------- -------
NET INVESTMENT INCOME
Annuities......................... $ 1,022 $ 1,058 $ 1,091
Retirement Plan Services.......... 825 797 792
Life Insurance.................... 2,317 2,297 2,168
Group Protection.................. 165 161 152
Other Operations.................. 232 238 287
------- ------- -------
Total net investment
income...................... $ 4,561 $ 4,551 $ 4,490
======= ======= =======
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2013 2012 2011
----- ------- -----
AMORTIZATION OF DAC AND
VOBA, NET OF INTEREST
Annuities......................... $ 374 $ 307 $ 335
Retirement Plan Services.......... 48 42 33
Life Insurance.................... 441 609 416
Group Protection.................. 53 48 39
----- ------- -----
Total amortization of DAC
and VOBA, net of
interest.................... $ 916 $ 1,006 $ 823
===== ======= =====
S-67
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22. SEGMENT INFORMATION (CONTINUED)
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
2013 2012 2011
------ ------ -------
FEDERAL INCOME TAX
EXPENSE (BENEFIT)
Annuities........................... $ 159 $ 117 $ 92
Retirement Plan Services............ 46 29 56
Life Insurance...................... 225 326 202
Group Protection.................... 38 38 52
Other Operations.................... (9) (82) (13)
Excluded realized gain (loss)....... (29) (83) (120)
Reserve changes (net of related
amortization) on business
sold through reinsurance......... 1 1 1
Impairment of intangibles........... -- (2) --
------ ------ -------
Total federal income tax
expense (benefit)............. $ 431 $ 344 $ 270
====== ====== =======
[Download Table]
AS OF DECEMBER 31,
----------------------
2013 2012
---------- ----------
ASSETS
Annuities................................. $ 119,147 $ 107,872
Retirement Plan Services.................. 32,367 30,654
Life Insurance............................ 67,470 62,867
Group Protection.......................... 3,865 3,733
Other Operations.......................... 14,659 13,254
---------- ----------
Total assets........................... $ 237,508 $ 218,380
========== ==========
--------------------------------------------------------------------------------
23. SUPPLEMENTAL DISCLOSURES OF CASH FLOW DATA
The following summarizes our supplemental cash flow data (in millions):
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
2013 2012 2011
------- ------- -------
Interest paid............................ $ 91 $ 134 $ 88
Income taxes paid (received)............. (6) 136 159
Significant non-cash investing
and financing transactions:
Exchange of surplus note for
promissory note with affiliate:
Carrying value of asset............ $ 360 $ -- $ --
Carrying value of liability........ (360) -- --
------- ------- -------
Net asset (liability) from
exchange...................... $ -- $ -- $ --
======= ======= =======
Reinsurance ceded:
Carrying value of assets........... $ 11 $ 367 $ --
Carrying value of liabilities...... 11 (367) --
------- ------- -------
Total reinsurance ceded.......... $ 22 $ -- $ --
======= ======= =======
Reinsurance recaptured:
Carrying value of assets........... $ -- $ (34) $ 243
Carrying value of liabilities...... -- (84) (441)
------- ------- -------
Total reinsurance recaptured..... $ -- $ (118) $ (198)
======= ======= =======
Reinsurance novated:
Carrying value of assets........... $ -- $ -- $ --
Carrying value of liabilities...... -- (26) --
------- ------- -------
Total reinsurance novated........ $ -- $ (26) $ --
======= ======= =======
Capital contributions:
Carrying value of assets (includes
cash and invested cash).......... $ -- $ -- $ 10
Carrying value of liabilities...... -- -- --
------- ------- -------
Total capital contributions...... $ -- $ -- $ 10
======= ======= =======
S-68
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
24. TRANSACTIONS WITH AFFILIATES
Transactions with affiliates (in millions) recorded on our consolidated
financial statements were as follows:
[Download Table]
AS OF DECEMBER 31,
--------------------
2013 2012
--------- --------
Assets with affiliates:
Accrued inter-company interest
receivable(1)................................ $ 2 $ --
Bonds(2)........................................ 773 100
Ceded reinsurance contracts(3).................. 315 2,887
Ceded reinsurance contracts(4).................. 268 9
Ceded reinsurance contracts(5).................. 51 --
Cash management agreement
investment(5)................................ 777 748
Promissory note due from LNC(2)................. 100 --
Service agreement receivable(5)................. 5 15
Liabilities with affiliates:
Accrued inter-company interest
payable(6)................................... 4 --
Assumed reinsurance contracts(7)................ 407 438
Ceded reinsurance contracts(4).................. -- 183
Ceded reinsurance contracts(8).................. 2,244 4,252
Ceded reinsurance contracts(6).................. (202) --
Inter-company short-term debt(9)................ 51 28
Inter-company long-term debt(10)................ 2,350 1,679
[Download Table]
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
2013 2012 2011
-------- ------- ---------
Revenues with affiliates:
Premiums received on assumed
(paid on ceded) reinsurance
contracts(11).................... $ (318) $ (188) $ (335)
Net investment income on
intercompany notes(12)........... 5 -- --
Fees for management of general
account(12)...................... (103) (92) --
Realized gains (losses) on
ceded reinsurance contracts:(13)
GLB reserves embedded
derivatives...................... (2,153) -- --
Reinsurance related settlements..... 2,110 -- --
Other gains (losses)................ 242 -- --
Benefits and expenses with affiliates:
Reinsurance (recoveries) benefits
on ceded reinsurance
contracts(14).................... (205) (433) (1,181)
Service agreement payments(15)...... 100 114 75
Interest expense on
inter-company debt(16)........... 92 109 107
--------------
(1) Reported in accrued investment income on our Consolidated Balance
Sheets.
(2) Reported in fixed maturity AFS securities on our Consolidated Balance
Sheets.
(3) Reported in reinsurance recoverables on our Consolidated Balance
Sheets.
(4) Reported in reinsurance related embedded derivatives on our Consolidated
Balance Sheets.
(5) Reported in other assets on our Consolidated Balance Sheets.
(6) Reported in other liabilities on our Consolidated Balance Sheets.
(7) Reported in future contract benefits on our Consolidated Balance Sheets.
(8) Reported in funds withheld reinsurance liabilities on our Consolidated
Balance Sheets.
(9) Reported in short-term debt on our Consolidated Balance Sheets.
(10) Reported in long-term debt on our Consolidated Balance Sheets.
(11) Reported in insurance premiums on our Consolidated Statements of
Comprehensive Income (Loss).
(12) Reported in net investment income on our Consolidated Statements of
Comprehensive Income (Loss).
(13) Reported in realized gain (loss) on our Consolidated Statements of
Comprehensive Income (Loss).
(14) Reported in benefits on our Consolidated Statements of Comprehensive
Income (Loss).
(15) Reported in commissions and other expenses on our Consolidated Statements
of Comprehensive Income (Loss).
(16) Reported in interest and debt expense on our Consolidated Statements of
Comprehensive Income (Loss).
BONDS
LNC issues bonds to us for a predetermined face value to be repaid by LNC at a
predetermined maturity with a specified interest rate.
CASH MANAGEMENT AGREEMENT
In order to manage our capital more efficiently, we participate in an
inter-company cash management program where LNC can lend to or borrow from us
to meet short-term borrowing needs. The cash management program is essentially
a series of demand loans, which are permitted under applicable insurance laws,
among LNC and its affiliates that reduces overall borrowing costs by allowing
LNC and its subsidiaries to access internal resources instead of incurring
third-party transaction costs. The borrowing and lending limit is currently 3%
of our admitted assets as of our most recent year end.
SERVICE AGREEMENT
In accordance with service agreements with LNC and other subsidiaries of LNC
for personnel and facilities usage, general management services and investment
management services, we receive services from and provide services to
affiliated companies and receive an allocation of corporate overhead. Corporate
overhead expenses are allocated based on specific methodologies for each
function. The majority of the expenses are allocated based on the following
methodologies: headcount, capital, investments by product, weighted policies in
force, and sales.
FEES FOR MANAGEMENT OF GENERAL ACCOUNT
On January 4, 2010, LNC closed on a purchase and sale agreement pursuant to
which all of the outstanding capital stock of Delaware Management Holdings,
Inc. ("Delaware") was sold. In addition, we entered into investment advisory
agreements
S-69
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24. TRANSACTIONS WITH AFFILIATES (CONTINUED)
with Delaware, pursuant to which Delaware will continue to manage the majority
of our general account insurance assets.
Effective January 1, 2012, LNL entered into an Investment Advisory Agreement
with Lincoln Investment Management Company ("LIMCO"), also a wholly-owned
subsidiary of LNC. LIMCO provides investment advisory services to LNL and
enters into sub-advisory agreements with other third-party investment
advisers.
CEDED REINSURANCE CONTRACTS
As discussed in Note 9, we cede insurance contracts to and assume insurance
contracts from affiliated companies. We cede certain guaranteed benefit risks
(including certain GDB and GWB benefits) to LNBAR. As discussed in Note 6, we
cede the change in the GLB reserves embedded derivatives and the related hedge
results to LNBAR. As discussed in Note 3, we also cede the risks for no-lapse
benefit guarantees under certain UL contracts to LNBAR.
Substantially all reinsurance ceded to affiliated companies is with
unauthorized companies. To take reserve credit for such reinsurance, we hold
assets from the reinsurer, including funds held under reinsurance treaties, and
are the beneficiary of LOCs aggregating to $651 million and $76 million as of
December 31, 2013 and 2012, respectively. The LOCs are obtained by the
affiliate reinsurer and issued by banks in order for the Company to recognize
the reserve credit.
--------------------------------------------------------------------------------
25. SUBSEQUENT EVENTS
On March 26, 2014, LNL paid a cash dividend in the amount of $150 million to
LNC.
S-70
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
L-1
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2013
[Enlarge/Download Table]
MORTALITY &
CONTRACT CONTRACT EXPENSE
PURCHASES REDEMPTIONS GUARANTEE
DUE FROM DUE TO CHARGES PAYABLE
THE LINCOLN THE LINCOLN TO THE LINCOLN
NATIONAL LIFE NATIONAL LIFE NATIONAL LIFE
INSURANCE INSURANCE INSURANCE
SUBACCOUNT INVESTMENTS COMPANY TOTAL ASSETS COMPANY COMPANY
------------------------------------------------------------------------------------------------------------------------------------
ABVPSF Global Thematic Growth
Class B $ 1,989,601 $ -- $ 1,989,601 $ 343 $ 54
ABVPSF Growth Class B 1,522,099 3,672 1,525,771 -- 41
American Century VP Balanced Class I 16,769,257 -- 16,769,257 123 449
American Funds Global Growth Class 2 5,998,041 3,008 6,001,049 -- 159
American Funds Growth Class 2 27,202,142 18,245 27,220,387 -- 726
American Funds Growth-Income Class 2 10,847,872 2,496 10,850,368 -- 292
American Funds International Class 2 12,116,800 -- 12,116,800 32,930 328
BlackRock Global Allocation V.I. Class I 1,563,508 103 1,563,611 -- 43
Delaware VIP Diversified Income
Standard Class 5,925,553 -- 5,925,553 9,089 161
Delaware VIP High Yield Standard Class 2,864,090 203 2,864,293 -- 77
Delaware VIP REIT Service Class 10,872,226 -- 10,872,226 21,371 297
Delaware VIP Small Cap Value
Service Class 10,525,489 3,638 10,529,127 -- 284
Delaware VIP Smid Cap Growth
Service Class 6,468,303 22,784 6,491,087 -- 174
DWS Alternative Asset Allocation
VIP Class A 188,488 42 188,530 -- 5
Fidelity VIP Asset Manager Initial Class 40,687,932 -- 40,687,932 6,595 1,100
Fidelity VIP Contrafund Service Class 2 22,397,353 -- 22,397,353 75,654 603
Fidelity VIP Growth Initial Class 78,095,182 -- 78,095,182 27,835 2,096
Fidelity VIP Money Market Initial Class 7,794 310 8,104 -- --
Janus Aspen Global Research
Institutional Class 9,960,727 2,433 9,963,160 -- 266
LVIP Baron Growth Opportunities
Service Class 18,886,328 1,372 18,887,700 -- 506
LVIP BlackRock Inflation Protected Bond
Standard Class 952,481 95 952,576 -- 25
LVIP Clarion Global Real Estate
Standard Class 660,976 56 661,032 -- 18
LVIP Delaware Bond Standard Class 5,746,702 225 5,746,927 -- 155
LVIP Delaware Diversified Floating Rate
Service Class 128,598 12 128,610 -- 4
LVIP Delaware Foundation Aggressive
Allocation Standard Class 231,663 35 231,698 -- 6
LVIP Delaware Foundation Conservative
Allocation Standard Class 1,235,759 2 1,235,761 -- 32
LVIP Delaware Foundation Moderate
Allocation Standard Class 504,616 -- 504,616 12 14
LVIP Delaware Growth and Income
Standard Class 4,954,409 71 4,954,480 -- 133
LVIP Delaware Social Awareness
Standard Class 15,361,723 -- 15,361,723 63 412
LVIP Global Income Standard Class 261,620 13 261,633 -- 7
LVIP Managed Risk Profile 2010
Standard Class 824,709 -- 824,709 38 23
LVIP Managed Risk Profile 2020
Standard Class 2,201,239 -- 2,201,239 1,276 60
LVIP Managed Risk Profile 2030
Standard Class 3,735,844 137 3,735,981 -- 102
LVIP Managed Risk Profile 2040
Standard Class 1,599,007 43 1,599,050 -- 44
SUBACCOUNT NET ASSETS
------------------------------------------------------------------------------------------------------------------------------------
ABVPSF Global Thematic Growth
Class B $ 1,989,204
ABVPSF Growth Class B 1,525,730
American Century VP Balanced Class I 16,768,685
American Funds Global Growth Class 2 6,000,890
American Funds Growth Class 2 27,219,661
American Funds Growth-Income Class 2 10,850,076
American Funds International Class 2 12,083,542
BlackRock Global Allocation V.I. Class I 1,563,568
Delaware VIP Diversified Income
Standard Class 5,916,303
Delaware VIP High Yield Standard Class 2,864,216
Delaware VIP REIT Service Class 10,850,558
Delaware VIP Small Cap Value
Service Class 10,528,843
Delaware VIP Smid Cap Growth
Service Class 6,490,913
DWS Alternative Asset Allocation
VIP Class A 188,525
Fidelity VIP Asset Manager Initial Class 40,680,237
Fidelity VIP Contrafund Service Class 2 22,321,096
Fidelity VIP Growth Initial Class 78,065,251
Fidelity VIP Money Market Initial Class 8,104
Janus Aspen Global Research
Institutional Class 9,962,894
LVIP Baron Growth Opportunities
Service Class 18,887,194
LVIP BlackRock Inflation Protected Bond
Standard Class 952,551
LVIP Clarion Global Real Estate
Standard Class 661,014
LVIP Delaware Bond Standard Class 5,746,772
LVIP Delaware Diversified Floating Rate
Service Class 128,606
LVIP Delaware Foundation Aggressive
Allocation Standard Class 231,692
LVIP Delaware Foundation Conservative
Allocation Standard Class 1,235,729
LVIP Delaware Foundation Moderate
Allocation Standard Class 504,590
LVIP Delaware Growth and Income
Standard Class 4,954,347
LVIP Delaware Social Awareness
Standard Class 15,361,248
LVIP Global Income Standard Class 261,626
LVIP Managed Risk Profile 2010
Standard Class 824,648
LVIP Managed Risk Profile 2020
Standard Class 2,199,903
LVIP Managed Risk Profile 2030
Standard Class 3,735,879
LVIP Managed Risk Profile 2040
Standard Class 1,599,006
See accompanying notes.
L-2
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 2013
[Enlarge/Download Table]
MORTALITY &
CONTRACT CONTRACT EXPENSE
PURCHASES REDEMPTIONS GUARANTEE
DUE FROM DUE TO CHARGES PAYABLE
THE LINCOLN THE LINCOLN TO THE LINCOLN
NATIONAL LIFE NATIONAL LIFE NATIONAL LIFE
INSURANCE INSURANCE INSURANCE
SUBACCOUNT INVESTMENTS COMPANY TOTAL ASSETS COMPANY COMPANY
------------------------------------------------------------------------------------------------------------------------------------
LVIP Managed Risk Profile 2050
Standard Class $ 143,319 $ 11 $ 143,330 $ -- $ 4
LVIP Managed Risk Profile
Conservative Standard Class 1,990,586 -- 1,990,586 1,067 54
LVIP Managed Risk Profile Growth
Standard Class 5,857,764 -- 5,857,764 522 159
LVIP Managed Risk Profile Moderate
Standard Class 5,571,773 -- 5,571,773 71 150
LVIP Mondrian International Value
Standard Class 4,114,629 -- 4,114,629 117 109
LVIP SSgA Bond Index Standard Class 608,889 125 609,014 -- 17
LVIP SSgA Emerging Markets 100
Standard Class 1,168,795 42 1,168,837 -- 32
LVIP SSgA Global Tactical Allocation
RPM Standard Class 1,923,263 -- 1,923,263 53 52
LVIP SSgA International Index
Standard Class 150,107 6 150,113 -- 4
LVIP SSgA S&P 500 Index
Standard Class 111,103,984 -- 111,103,984 165,273 2,966
LVIP SSgA Small-Cap Index
Standard Class 33,046,904 -- 33,046,904 1,324 888
LVIP T. Rowe Price Structured
Mid-Cap Growth Standard Class 19,755,088 -- 19,755,088 22 530
LVIP UBS Large Cap Growth RPM
Standard Class 1,698,552 4 1,698,556 -- 45
NB AMT Large Cap Value I Class 5,382,731 -- 5,382,731 150 144
T. Rowe Price International Stock 12,114,589 297 12,114,886 -- 327
SUBACCOUNT NET ASSETS
------------------------------------------------------------------------------------------------------------------------------------
LVIP Managed Risk Profile 2050
Standard Class $ 143,326
LVIP Managed Risk Profile
Conservative Standard Class 1,989,465
LVIP Managed Risk Profile Growth
Standard Class 5,857,083
LVIP Managed Risk Profile Moderate
Standard Class 5,571,552
LVIP Mondrian International Value
Standard Class 4,114,403
LVIP SSgA Bond Index Standard Class 608,997
LVIP SSgA Emerging Markets 100
Standard Class 1,168,805
LVIP SSgA Global Tactical Allocation
RPM Standard Class 1,923,158
LVIP SSgA International Index
Standard Class 150,109
LVIP SSgA S&P 500 Index
Standard Class 110,935,745
LVIP SSgA Small-Cap Index
Standard Class 33,044,692
LVIP T. Rowe Price Structured
Mid-Cap Growth Standard Class 19,754,536
LVIP UBS Large Cap Growth RPM
Standard Class 1,698,511
NB AMT Large Cap Value I Class 5,382,437
T. Rowe Price International Stock 12,114,559
See accompanying notes.
L-3
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2013
[Enlarge/Download Table]
DIVIDENDS
FROM MORTALITY AND NET
INVESTMENT EXPENSE INVESTMENT
SUBACCOUNT INCOME GUARANTEE CHARGES INCOME (LOSS)
------------------------------------------------------------------------------------------------------------------------------------
ABVPSF Global Thematic Growth Class B $ 402 $ (18,519) $ (18,117)
ABVPSF Growth Class B 362 (13,039) (12,677)
ABVPSF Growth and Income Class B 14,855 (4,753) 10,102
American Century VP Balanced Class I 264,693 (163,847) 100,846
American Century VP Inflation Protection Class I 8,328 (5,884) 2,444
American Funds Global Growth Class 2 66,569 (51,368) 15,201
American Funds Growth Class 2 233,538 (245,375) (11,837)
American Funds Growth-Income Class 2 130,575 (91,076) 39,499
American Funds International Class 2 153,856 (113,027) 40,829
BlackRock Global Allocation V.I. Class I 17,248 (13,587) 3,661
Delaware VIP Diversified Income Standard Class 152,561 (64,002) 88,559
Delaware VIP High Yield Standard Class 220,999 (29,497) 191,502
Delaware VIP REIT Service Class 158,438 (118,438) 40,000
Delaware VIP Small Cap Value Service Class 47,163 (91,531) (44,368)
Delaware VIP Smid Cap Growth Service Class -- (52,070) (52,070)
Dreyfus Opportunistic Small Cap Initial Class -- (96,376) (96,376)
Dreyfus Stock Index Initial Class 228,801 (190,187) 38,614
DWS Alternative Asset Allocation VIP Class A 3,045 (1,684) 1,361
DWS Equity 500 Index VIP Class A 36,272 (7,067) 29,205
DWS Small Cap Index VIP Class A 37,337 (7,829) 29,508
Fidelity VIP Asset Manager Initial Class 613,925 (396,350) 217,575
Fidelity VIP Contrafund Service Class 2 168,366 (200,735) (32,369)
Fidelity VIP Equity-Income Initial Class -- (150,761) (150,761)
Fidelity VIP Growth Initial Class 201,730 (699,406) (497,676)
Fidelity VIP Money Market Initial Class 3 -- 3
Janus Aspen Global Research Institutional Class 114,218 (92,229) 21,989
LVIP Baron Growth Opportunities Service Class 71,701 (162,295) (90,594)
LVIP BlackRock Inflation Protected Bond Standard Class 7,877 (7,829) 48
LVIP Clarion Global Real Estate Standard Class -- (6,875) (6,875)
LVIP Delaware Bond Standard Class 107,680 (67,846) 39,834
LVIP Delaware Diversified Floating Rate Service Class 607 (679) (72)
LVIP Delaware Foundation Aggressive Allocation Standard Class 3,393 (1,973) 1,420
LVIP Delaware Foundation Conservative Allocation Standard Class 26,063 (11,112) 14,951
LVIP Delaware Foundation Moderate Allocation Standard Class 8,993 (3,835) 5,158
LVIP Delaware Growth and Income Standard Class 79,195 (43,247) 35,948
LVIP Delaware Social Awareness Standard Class 175,867 (137,348) 38,519
LVIP Global Income Standard Class 667 (2,590) (1,923)
LVIP Managed Risk Profile 2010 Standard Class 10,675 (7,946) 2,729
LVIP Managed Risk Profile 2020 Standard Class 29,254 (22,596) 6,658
LVIP Managed Risk Profile 2030 Standard Class 47,321 (34,077) 13,244
LVIP Managed Risk Profile 2040 Standard Class 19,227 (13,996) 5,231
LVIP Managed Risk Profile 2050 Standard Class 1,735 (704) 1,031
LVIP Managed Risk Profile Conservative Standard Class 37,688 (21,857) 15,831
LVIP Managed Risk Profile Growth Standard Class 96,819 (54,271) 42,548
LVIP Managed Risk Profile Moderate Standard Class 93,366 (51,420) 41,946
LVIP Mondrian International Value Standard Class 95,624 (38,096) 57,528
LVIP SSgA Bond Index Standard Class 12,537 (6,208) 6,329
LVIP SSgA Emerging Markets 100 Standard Class 26,443 (11,190) 15,253
LVIP SSgA Global Tactical Allocation RPM Standard Class 38,411 (18,605) 19,806
LVIP SSgA International Index Standard Class 2,370 (1,303) 1,067
LVIP SSgA S&P 500 Index Standard Class 1,569,264 (649,936) 919,328
LVIP SSgA Small-Cap Index Standard Class 231,358 (190,171) 41,187
LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class -- (173,790) (173,790)
LVIP UBS Large Cap Growth RPM Standard Class -- (15,263) (15,263)
NB AMT Large Cap Value I Class 56,350 (47,399) 8,951
NB AMT Mid Cap Growth I Class -- (25,560) (25,560)
T. Rowe Price International Stock 99,455 (115,310) (15,855)
DIVIDENDS
FROM TOTAL
NET REALIZED NET REALIZED NET REALIZED
GAIN (LOSS) GAIN ON GAIN (LOSS)
SUBACCOUNT ON INVESTMENTS INVESTMENTS ON INVESTMENTS
------------------------------------------------------------------------------------------------------------------------------------
ABVPSF Global Thematic Growth Class B $ 33,431 $ -- $ 33,431
ABVPSF Growth Class B 53,739 -- 53,739
ABVPSF Growth and Income Class B 249,855 -- 249,855
American Century VP Balanced Class I 259,937 329,487 589,424
American Century VP Inflation Protection Class I (23,974) 53,437 29,463
American Funds Global Growth Class 2 168,007 -- 168,007
American Funds Growth Class 2 812,637 -- 812,637
American Funds Growth-Income Class 2 176,863 -- 176,863
American Funds International Class 2 108,150 -- 108,150
BlackRock Global Allocation V.I. Class I 13,321 54,767 68,088
Delaware VIP Diversified Income Standard Class 77,315 88,603 165,918
Delaware VIP High Yield Standard Class 60,886 -- 60,886
Delaware VIP REIT Service Class 23,820 -- 23,820
Delaware VIP Small Cap Value Service Class 202,359 423,257 625,616
Delaware VIP Smid Cap Growth Service Class 127,325 281,296 408,621
Dreyfus Opportunistic Small Cap Initial Class (2,775,690) -- (2,775,690)
Dreyfus Stock Index Initial Class 15,742,443 590,545 16,332,988
DWS Alternative Asset Allocation VIP Class A (30) -- (30)
DWS Equity 500 Index VIP Class A 499,734 43,086 542,820
DWS Small Cap Index VIP Class A 361,697 89,754 451,451
Fidelity VIP Asset Manager Initial Class 329,842 95,185 425,027
Fidelity VIP Contrafund Service Class 2 333,090 5,896 338,986
Fidelity VIP Equity-Income Initial Class 2,958,635 111,768 3,070,403
Fidelity VIP Growth Initial Class 2,311,942 48,031 2,359,973
Fidelity VIP Money Market Initial Class -- -- --
Janus Aspen Global Research Institutional Class (64,402) -- (64,402)
LVIP Baron Growth Opportunities Service Class 754,198 1,338,865 2,093,063
LVIP BlackRock Inflation Protected Bond Standard Class (49,830) 37,394 (12,436)
LVIP Clarion Global Real Estate Standard Class 35,994 -- 35,994
LVIP Delaware Bond Standard Class 89,568 75,165 164,733
LVIP Delaware Diversified Floating Rate Service Class 41 -- 41
LVIP Delaware Foundation Aggressive Allocation Standard Class 2,139 -- 2,139
LVIP Delaware Foundation Conservative Allocation Standard Class 5,261 20,056 25,317
LVIP Delaware Foundation Moderate Allocation Standard Class 1,743 9,891 11,634
LVIP Delaware Growth and Income Standard Class 125,725 124,276 250,001
LVIP Delaware Social Awareness Standard Class 241,505 267,386 508,891
LVIP Global Income Standard Class (1,606) 458 (1,148)
LVIP Managed Risk Profile 2010 Standard Class 10,674 -- 10,674
LVIP Managed Risk Profile 2020 Standard Class 85,904 -- 85,904
LVIP Managed Risk Profile 2030 Standard Class 74,587 -- 74,587
LVIP Managed Risk Profile 2040 Standard Class 22,711 -- 22,711
LVIP Managed Risk Profile 2050 Standard Class 843 -- 843
LVIP Managed Risk Profile Conservative Standard Class 89,134 30,667 119,801
LVIP Managed Risk Profile Growth Standard Class 39,204 -- 39,204
LVIP Managed Risk Profile Moderate Standard Class 55,058 -- 55,058
LVIP Mondrian International Value Standard Class (79,418) -- (79,418)
LVIP SSgA Bond Index Standard Class (1,861) 1,955 94
LVIP SSgA Emerging Markets 100 Standard Class (71,040) -- (71,040)
LVIP SSgA Global Tactical Allocation RPM Standard Class 8,225 -- 8,225
LVIP SSgA International Index Standard Class 4,978 -- 4,978
LVIP SSgA S&P 500 Index Standard Class 212,550 -- 212,550
LVIP SSgA Small-Cap Index Standard Class 124,300 134,293 258,593
LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class 509,282 184,892 694,174
LVIP UBS Large Cap Growth RPM Standard Class 60,851 -- 60,851
NB AMT Large Cap Value I Class (2,951) -- (2,951)
NB AMT Mid Cap Growth I Class 2,491,871 -- 2,491,871
T. Rowe Price International Stock 121,643 -- 121,643
NET CHANGE NET INCREASE
IN UNREALIZED (DECREASE)
APPRECIATION OR IN NET ASSETS
DEPRECIATION RESULTING
SUBACCOUNT ON INVESTMENTS FROM OPERATIONS
------------------------------------------------------------------------------------------------------------------------------------
ABVPSF Global Thematic Growth Class B $ 348,153 $ 363,467
ABVPSF Growth Class B 335,291 376,353
ABVPSF Growth and Income Class B (57,735) 202,222
American Century VP Balanced Class I 1,814,251 2,504,521
American Century VP Inflation Protection Class I (61,851) (29,944)
American Funds Global Growth Class 2 1,137,806 1,321,014
American Funds Growth Class 2 5,551,786 6,352,586
American Funds Growth-Income Class 2 2,370,644 2,587,006
American Funds International Class 2 1,994,480 2,143,459
BlackRock Global Allocation V.I. Class I 102,571 174,320
Delaware VIP Diversified Income Standard Class (411,501) (157,024)
Delaware VIP High Yield Standard Class (21,979) 230,409
Delaware VIP REIT Service Class 48,663 112,483
Delaware VIP Small Cap Value Service Class 1,967,326 2,548,574
Delaware VIP Smid Cap Growth Service Class 1,409,112 1,765,663
Dreyfus Opportunistic Small Cap Initial Class 7,322,884 4,450,818
Dreyfus Stock Index Initial Class (8,082,061) 8,289,541
DWS Alternative Asset Allocation VIP Class A (457) 874
DWS Equity 500 Index VIP Class A (266,300) 305,725
DWS Small Cap Index VIP Class A (136,516) 344,443
Fidelity VIP Asset Manager Initial Class 4,823,319 5,465,921
Fidelity VIP Contrafund Service Class 2 4,981,469 5,288,086
Fidelity VIP Equity-Income Initial Class 3,646,697 6,566,339
Fidelity VIP Growth Initial Class 19,550,324 21,412,621
Fidelity VIP Money Market Initial Class -- 3
Janus Aspen Global Research Institutional Class 2,303,934 2,261,521
LVIP Baron Growth Opportunities Service Class 3,347,951 5,350,420
LVIP BlackRock Inflation Protected Bond Standard Class (94,966) (107,354)
LVIP Clarion Global Real Estate Standard Class (14,356) 14,763
LVIP Delaware Bond Standard Class (447,805) (243,238)
LVIP Delaware Diversified Floating Rate Service Class (42) (73)
LVIP Delaware Foundation Aggressive Allocation Standard Class 30,758 34,317
LVIP Delaware Foundation Conservative Allocation Standard Class 53,542 93,810
LVIP Delaware Foundation Moderate Allocation Standard Class 32,879 49,671
LVIP Delaware Growth and Income Standard Class 919,978 1,205,927
LVIP Delaware Social Awareness Standard Class 3,543,644 4,091,054
LVIP Global Income Standard Class (6,480) (9,551)
LVIP Managed Risk Profile 2010 Standard Class 46,779 60,182
LVIP Managed Risk Profile 2020 Standard Class 119,322 211,884
LVIP Managed Risk Profile 2030 Standard Class 312,512 400,343
LVIP Managed Risk Profile 2040 Standard Class 172,681 200,623
LVIP Managed Risk Profile 2050 Standard Class 10,547 12,421
LVIP Managed Risk Profile Conservative Standard Class 43,662 179,294
LVIP Managed Risk Profile Growth Standard Class 560,399 642,151
LVIP Managed Risk Profile Moderate Standard Class 438,656 535,660
LVIP Mondrian International Value Standard Class 761,470 739,580
LVIP SSgA Bond Index Standard Class (29,901) (23,478)
LVIP SSgA Emerging Markets 100 Standard Class 4,210 (51,577)
LVIP SSgA Global Tactical Allocation RPM Standard Class 130,093 158,124
LVIP SSgA International Index Standard Class 16,777 22,822
LVIP SSgA S&P 500 Index Standard Class 10,432,576 11,564,454
LVIP SSgA Small-Cap Index Standard Class 4,499,974 4,799,754
LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class 4,531,560 5,051,944
LVIP UBS Large Cap Growth RPM Standard Class 297,908 343,496
NB AMT Large Cap Value I Class 1,249,243 1,255,243
NB AMT Mid Cap Growth I Class (1,535,644) 930,667
T. Rowe Price International Stock 1,323,976 1,429,764
See accompanying notes.
L-4
L-5
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 2012 AND 2013
[Enlarge/Download Table]
ABVPSF
GLOBAL ABVPSF AMERICAN
THEMATIC ABVPSF GROWTH AND CENTURY
GROWTH GROWTH INCOME VP BALANCED
CLASS B CLASS B CLASS B CLASS I
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2012 $ 1,861,796 $ 1,083,910 $ 952,275 $ 15,875,249
Changes From Operations:
- Net investment income (loss) (19,328) (11,671) 4,323 175,132
- Net realized gain (loss) on investments 6,755 23,544 32 41,813
- Net change in unrealized appreciation or depreciation on investments 227,554 120,174 151,878 1,431,725
------------ ------------- ------------- --------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 214,981 132,047 156,233 1,648,670
Changes From Unit Transactions:
- Contract purchases 131,535 72,380 128,879 487,516
- Contract withdrawals (277,787) (90,821) (74,844) (1,480,664)
- Contract transfers (58,123) (7,458) 52,253 (481,447)
------------ ------------- ------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (204,375) (25,899) 106,288 (1,474,595)
------------ ------------- ------------- --------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 10,606 106,148 262,521 174,075
------------ ------------- ------------- --------------
NET ASSETS AT DECEMBER 31, 2012 1,872,402 1,190,058 1,214,796 16,049,324
Changes From Operations:
- Net investment income (loss) (18,117) (12,677) 10,102 100,846
- Net realized gain (loss) on investments 33,431 53,739 249,855 589,424
- Net change in unrealized appreciation or depreciation on investments 348,153 335,291 (57,735) 1,814,251
------------ ------------- ------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS 363,467 376,353 202,222 2,504,521
Changes From Unit Transactions:
- Contract purchases 107,231 77,786 46,592 477,236
- Contract withdrawals (155,822) (144,988) (68,775) (1,673,617)
- Contract transfers (198,074) 26,521 (1,394,835) (588,779)
------------ ------------- ------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (246,665) (40,681) (1,417,018) (1,785,160)
------------ ------------- ------------- --------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 116,802 335,672 (1,214,796) 719,361
------------ ------------- ------------- --------------
NET ASSETS AT DECEMBER 31, 2013 $ 1,989,204 $ 1,525,730 $ -- $ 16,768,685
============ ============= ============= ==============
AMERICAN
CENTURY AMERICAN AMERICAN
VP INFLATION FUNDS FUNDS
PROTECTION GLOBAL GROWTH GROWTH
CLASS I CLASS 2 CLASS 2
SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2012 $ 1,141,311 $ 4,500,793 $ 21,614,387
Changes From Operations:
- Net investment income (loss) 24,795 (3,160) (43,621)
- Net realized gain (loss) on investments 35,970 10,853 262,776
- Net change in unrealized appreciation or depreciation on investments 19,969 886,632 3,293,026
------------- --------------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 80,734 894,325 3,512,181
Changes From Unit Transactions:
- Contract purchases 183,620 418,037 1,433,675
- Contract withdrawals (105,257) (713,571) (2,275,520)
- Contract transfers 324,820 (133,568) (857,495)
------------- --------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS 403,183 (429,102) (1,699,340)
------------- --------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 483,917 465,223 1,812,841
------------- --------------- -------------
NET ASSETS AT DECEMBER 31, 2012 1,625,228 4,966,016 23,427,228
Changes From Operations:
- Net investment income (loss) 2,444 15,201 (11,837)
- Net realized gain (loss) on investments 29,463 168,007 812,637
- Net change in unrealized appreciation or depreciation on investments (61,851) 1,137,806 5,551,786
------------- --------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS (29,944) 1,321,014 6,352,586
Changes From Unit Transactions:
- Contract purchases 49,840 334,934 1,327,557
- Contract withdrawals (50,430) (557,860) (3,094,726)
- Contract transfers (1,594,694) (63,214) (792,984)
------------- --------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (1,595,284) (286,140) (2,560,153)
------------- --------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (1,625,228) 1,034,874 3,792,433
------------- --------------- -------------
NET ASSETS AT DECEMBER 31, 2013 $ -- $ 6,000,890 $ 27,219,661
============= =============== =============
AMERICAN AMERICAN BLACKROCK
FUNDS FUNDS GLOBAL
GROWTH-INCOME INTERNATIONAL ALLOCATION V.I.
CLASS 2 CLASS 2 CLASS I
SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2012 $ 7,118,457 $ 11,586,451 $ 1,178,695
Changes From Operations:
- Net investment income (loss) 49,583 49,232 5,992
- Net realized gain (loss) on investments (2,094) (239,726) 1,193
- Net change in unrealized appreciation or depreciation on investments 1,085,307 1,952,551 92,156
--------------- -------------- ---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 1,132,796 1,762,057 99,341
Changes From Unit Transactions:
- Contract purchases 587,103 726,177 270,485
- Contract withdrawals (962,969) (1,527,918) (298,070)
- Contract transfers 57,578 (1,196,052) (35,319)
--------------- -------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (318,288) (1,997,793) (62,904)
--------------- -------------- ---------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 814,508 (235,736) 36,437
--------------- -------------- ---------------
NET ASSETS AT DECEMBER 31, 2012 7,932,965 11,350,715 1,215,132
Changes From Operations:
- Net investment income (loss) 39,499 40,829 3,661
- Net realized gain (loss) on investments 176,863 108,150 68,088
- Net change in unrealized appreciation or depreciation on investments 2,370,644 1,994,480 102,571
--------------- -------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS 2,587,006 2,143,459 174,320
Changes From Unit Transactions:
- Contract purchases 631,136 536,424 199,953
- Contract withdrawals (1,117,898) (1,419,939) (113,379)
- Contract transfers 816,867 (527,117) 87,542
--------------- -------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS 330,105 (1,410,632) 174,116
--------------- -------------- ---------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 2,917,111 732,827 348,436
--------------- -------------- ---------------
NET ASSETS AT DECEMBER 31, 2013 $ 10,850,076 $ 12,083,542 $ 1,563,568
=============== ============== ===============
DELAWARE VIP
DIVERSIFIED DELAWARE VIP DELAWARE VIP
INCOME HIGH YIELD REIT
STANDARD STANDARD SERVICE
CLASS CLASS CLASS
SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2012 $ 6,738,120 $ 2,831,730 $ 10,954,794
Changes From Operations:
- Net investment income (loss) 144,919 225,352 35,811
- Net realized gain (loss) on investments 274,502 31,560 (156,357)
- Net change in unrealized appreciation or depreciation on investments (11,833) 198,684 1,754,601
-------------- -------------- --------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 407,588 455,596 1,634,055
Changes From Unit Transactions:
- Contract purchases 461,448 216,413 632,685
- Contract withdrawals (692,412) (303,576) (1,226,210)
- Contract transfers 141,425 (122,465) (419,097)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (89,539) (209,628) (1,012,622)
-------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 318,049 245,968 621,433
-------------- -------------- --------------
NET ASSETS AT DECEMBER 31, 2012 7,056,169 3,077,698 11,576,227
Changes From Operations:
- Net investment income (loss) 88,559 191,502 40,000
- Net realized gain (loss) on investments 165,918 60,886 23,820
- Net change in unrealized appreciation or depreciation on investments (411,501) (21,979) 48,663
-------------- -------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS (157,024) 230,409 112,483
Changes From Unit Transactions:
- Contract purchases 361,659 164,731 685,320
- Contract withdrawals (1,252,817) (296,021) (1,067,428)
- Contract transfers (91,684) (312,601) (456,044)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (982,842) (443,891) (838,152)
-------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (1,139,866) (213,482) (725,669)
-------------- -------------- --------------
NET ASSETS AT DECEMBER 31, 2013 $ 5,916,303 $ 2,864,216 $ 10,850,558
============== ============== ==============
See accompanying notes.
L-6
L-7
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
YEARS ENDED DECEMBER 31, 2012 AND 2013
[Enlarge/Download Table]
DELAWARE VIP DELAWARE VIP DREYFUS
SMALL CAP SMID CAP OPPORTUNISTIC
VALUE GROWTH SMALL CAP
SERVICE CLASS SERVICE CLASS INITIAL CLASS
SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2012 $ 7,645,697 $ 3,795,589 $ 22,743,588
Changes From Operations:
- Net investment income (loss) (50,530) (43,230) (235,624)
- Net realized gain (loss) on investments 678,387 343,057 (1,285,422)
- Net change in unrealized appreciation or depreciation on investments 285,396 56,161 5,728,863
-------------- --------------- ---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 913,253 355,988 4,207,817
Changes From Unit Transactions:
- Contract purchases 494,767 448,960 513,423
- Contract withdrawals (728,753) (557,983) (2,603,263)
- Contract transfers (264,027) 270,411 (584,337)
-------------- --------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (498,013) 161,388 (2,674,177)
-------------- --------------- ---------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 415,240 517,376 1,533,640
-------------- --------------- ---------------
NET ASSETS AT DECEMBER 31, 2012 8,060,937 4,312,965 24,277,228
Changes From Operations:
- Net investment income (loss) (44,368) (52,070) (96,376)
- Net realized gain (loss) on investments 625,616 408,621 (2,775,690)
- Net change in unrealized appreciation or depreciation on investments 1,967,326 1,409,112 7,322,884
-------------- --------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS 2,548,574 1,765,663 4,450,818
Changes From Unit Transactions:
- Contract purchases 440,712 431,060 251,328
- Contract withdrawals (731,355) (507,840) (1,113,315)
- Contract transfers 209,975 489,065 (27,866,059)
-------------- --------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (80,668) 412,285 (28,728,046)
-------------- --------------- ---------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 2,467,906 2,177,948 (24,277,228)
-------------- --------------- ---------------
NET ASSETS AT DECEMBER 31, 2013 $ 10,528,843 $ 6,490,913 $ --
============== =============== ===============
DWS
ALTERNATIVE
DREYFUS ASSET DWS EQUITY
STOCK INDEX ALLOCATION 500 INDEX VIP
INITIAL CLASS VIP CLASS A CLASS A
SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2012 $ 47,470,262 $ 97,553 $ 2,366,306
Changes From Operations:
- Net investment income (loss) 517,701 2,695 23,638
- Net realized gain (loss) on investments 3,395,815 661 121,716
- Net change in unrealized appreciation or depreciation on investments 2,773,632 4,593 145,738
---------------- ----------- --------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 6,687,148 7,949 291,092
Changes From Unit Transactions:
- Contract purchases 1,132,319 18,448 151,743
- Contract withdrawals (4,775,441) (71,068) (942,964)
- Contract transfers (1,759,847) 78,085 (109,368)
---------------- ----------- --------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (5,402,969) 25,465 (900,589)
---------------- ----------- --------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 1,284,179 33,414 (609,497)
---------------- ----------- --------------
NET ASSETS AT DECEMBER 31, 2012 48,754,441 130,967 1,756,809
Changes From Operations:
- Net investment income (loss) 38,614 1,361 29,205
- Net realized gain (loss) on investments 16,332,988 (30) 542,820
- Net change in unrealized appreciation or depreciation on investments (8,082,061) (457) (266,300)
---------------- ----------- --------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS 8,289,541 874 305,725
Changes From Unit Transactions:
- Contract purchases 316,309 13,177 66,373
- Contract withdrawals (2,080,546) (13,767) (71,190)
- Contract transfers (55,279,745) 57,274 (2,057,717)
---------------- ----------- --------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (57,043,982) 56,684 (2,062,534)
---------------- ----------- --------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (48,754,441) 57,558 (1,756,809)
---------------- ----------- --------------
NET ASSETS AT DECEMBER 31, 2013 $ -- $ 188,525 $ --
================ =========== ==============
DWS FIDELITY VIP FIDELITY VIP
SMALL CAP ASSET CONTRAFUND
INDEX VIP MANAGER SERVICE
CLASS A INITIAL CLASS CLASS 2
SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2012 $ 1,773,487 $ 38,437,578 $ 16,441,190
Changes From Operations:
- Net investment income (loss) (1,822) 211,298 25,478
- Net realized gain (loss) on investments 3,613 177,418 (59,858)
- Net change in unrealized appreciation or depreciation on investments 262,859 3,853,658 2,469,034
-------------- -------------- --------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 264,650 4,242,374 2,434,654
Changes From Unit Transactions:
- Contract purchases 121,114 942,225 1,182,690
- Contract withdrawals (129,068) (3,255,035) (1,600,049)
- Contract transfers (32,982) (961,959) (63,784)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (40,936) (3,274,769) (481,143)
-------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 223,714 967,605 1,953,511
-------------- -------------- --------------
NET ASSETS AT DECEMBER 31, 2012 1,997,201 39,405,183 18,394,701
Changes From Operations:
- Net investment income (loss) 29,508 217,575 (32,369)
- Net realized gain (loss) on investments 451,451 425,027 338,986
- Net change in unrealized appreciation or depreciation on investments (136,516) 4,823,319 4,981,469
-------------- -------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS 344,443 5,465,921 5,288,086
Changes From Unit Transactions:
- Contract purchases 43,762 933,048 1,064,539
- Contract withdrawals (162,349) (4,050,326) (1,841,045)
- Contract transfers (2,223,057) (1,073,589) (585,185)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (2,341,644) (4,190,867) (1,361,691)
-------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (1,997,201) 1,275,054 3,926,395
-------------- -------------- --------------
NET ASSETS AT DECEMBER 31, 2013 $ -- $ 40,680,237 $ 22,321,096
============== ============== ==============
FIDELITY VIP FIDELITY VIP FIDELITY VIP
EQUITY-INCOME GROWTH MONEY MARKET
INITIAL CLASS INITIAL CLASS INITIAL CLASS
SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2012 $ 37,016,452 $ 61,671,758 $ 42,873
Changes From Operations:
- Net investment income (loss) 807,335 (261,997) 27
- Net realized gain (loss) on investments 1,968,540 706,824 --
- Net change in unrealized appreciation or depreciation on investments 2,961,955 7,811,889 --
-------------- -------------- --------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 5,737,830 8,256,716 27
Changes From Unit Transactions:
- Contract purchases 1,232,558 1,375,256 107,973
- Contract withdrawals (3,726,071) (5,047,333) (18,480)
- Contract transfers (1,360,652) (1,495,144) (124,303)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (3,854,165) (5,167,221) (34,810)
-------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 1,883,665 3,089,495 (34,783)
-------------- -------------- --------------
NET ASSETS AT DECEMBER 31, 2012 38,900,117 64,761,253 8,090
Changes From Operations:
- Net investment income (loss) (150,761) (497,676) 3
- Net realized gain (loss) on investments 3,070,403 2,359,973 --
- Net change in unrealized appreciation or depreciation on investments 3,646,697 19,550,324 --
-------------- -------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS 6,566,339 21,412,621 3
Changes From Unit Transactions:
- Contract purchases 499,846 1,519,429 40,215
- Contract withdrawals (1,766,584) (7,672,331) (8,397)
- Contract transfers (44,199,718) (1,955,721) (31,807)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (45,466,456) (8,108,623) 11
-------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (38,900,117) 13,303,998 14
-------------- -------------- --------------
NET ASSETS AT DECEMBER 31, 2013 $ -- $ 78,065,251 $ 8,104
============== ============== ==============
JANUS ASPEN
GLOBAL
RESEARCH
INSTITUTIONAL
CLASS
SUBACCOUNT
------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2012 $ 8,176,833
Changes From Operations:
- Net investment income (loss) (9,331)
- Net realized gain (loss) on investments (272,302)
- Net change in unrealized appreciation or depreciation on investments 1,765,035
--------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 1,483,402
Changes From Unit Transactions:
- Contract purchases 204,659
- Contract withdrawals (707,283)
- Contract transfers (316,920)
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (819,544)
--------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 663,858
--------------
NET ASSETS AT DECEMBER 31, 2012 8,840,691
Changes From Operations:
- Net investment income (loss) 21,989
- Net realized gain (loss) on investments (64,402)
- Net change in unrealized appreciation or depreciation on investments 2,303,934
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS 2,261,521
Changes From Unit Transactions:
- Contract purchases 271,835
- Contract withdrawals (1,058,818)
- Contract transfers (352,335)
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (1,139,318)
--------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 1,122,203
--------------
NET ASSETS AT DECEMBER 31, 2013 $ 9,962,894
==============
See accompanying notes.
L-8
L-9
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
YEARS ENDED DECEMBER 31, 2012 AND 2013
[Enlarge/Download Table]
LVIP LVIP LVIP
BARON BLACKROCK CLARION LVIP
GROWTH INFLATION GLOBAL DELAWARE
OPPORTUNITIES PROTECTED BOND REAL ESTATE BOND
SERVICE STANDARD STANDARD STANDARD
CLASS CLASS CLASS CLASS
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2012 $ 13,901,459 $ -- $ 503,522 $ 7,996,162
Changes From Operations:
- Net investment income (loss) 22,573 (201) (5,368) 80,552
- Net realized gain (loss) on investments 1,488,513 825 11,108 283,641
- Net change in unrealized appreciation or depreciation on investments 692,384 (367) 109,172 63,125
-------------- -------------- ----------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 2,203,470 257 114,912 427,318
Changes From Unit Transactions:
- Contract purchases 508,395 914 44,483 531,129
- Contract withdrawals (1,829,150) (5,167) (48,073) (1,006,345)
- Contract transfers (723,807) 73,221 8,774 (35,339)
-------------- -------------- ----------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (2,044,562) 68,968 5,184 (510,555)
-------------- -------------- ----------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 158,908 69,225 120,096 (83,237)
-------------- -------------- ----------- -------------
NET ASSETS AT DECEMBER 31, 2012 14,060,367 69,225 623,618 7,912,925
Changes From Operations:
- Net investment income (loss) (90,594) 48 (6,875) 39,834
- Net realized gain (loss) on investments 2,093,063 (12,436) 35,994 164,733
- Net change in unrealized appreciation or depreciation on investments 3,347,951 (94,966) (14,356) (447,805)
-------------- -------------- ----------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS 5,350,420 (107,354) 14,763 (243,238)
Changes From Unit Transactions:
- Contract purchases 455,312 47,830 47,545 350,550
- Contract withdrawals (1,611,200) (562,850) (123,801) (1,185,194)
- Contract transfers 632,295 1,505,700 98,889 (1,088,271)
-------------- -------------- ----------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (523,593) 990,680 22,633 (1,922,915)
-------------- -------------- ----------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 4,826,827 883,326 37,396 (2,166,153)
-------------- -------------- ----------- -------------
NET ASSETS AT DECEMBER 31, 2013 $ 18,887,194 $ 952,551 $ 661,014 $ 5,746,772
============== ============== =========== =============
LVIP LVIP LVIP LVIP
DELAWARE DELAWARE DELAWARE DELAWARE
DIVERSIFIED FOUNDATION FOUNDATION FOUNDATION
FLOATING AGGRESSIVE CONSERVATIVE MODERATE
RATE ALLOCATION ALLOCATION ALLOCATION
SERVICE STANDARD STANDARD STANDARD
CLASS CLASS CLASS CLASS
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2012 $ 3,839 $ 100,414 $ 995,079 $ 231,921
Changes From Operations:
- Net investment income (loss) 20 1,282 14,789 4,333
- Net realized gain (loss) on investments 53 479 (5,028) 553
- Net change in unrealized appreciation or depreciation on investments 93 11,290 83,714 20,523
----------- ---------- ------------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 166 13,051 93,475 25,409
Changes From Unit Transactions:
- Contract purchases 10,305 50,461 129,669 39,154
- Contract withdrawals (7,497) (11,158) (145,277) (4,971)
- Contract transfers 18,421 3,919 61,100 17,695
----------- ---------- ------------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS 21,229 43,222 45,492 51,878
----------- ---------- ------------- -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 21,395 56,273 138,967 77,287
----------- ---------- ------------- -----------
NET ASSETS AT DECEMBER 31, 2012 25,234 156,687 1,134,046 309,208
Changes From Operations:
- Net investment income (loss) (72) 1,420 14,951 5,158
- Net realized gain (loss) on investments 41 2,139 25,317 11,634
- Net change in unrealized appreciation or depreciation on investments (42) 30,758 53,542 32,879
----------- ---------- ------------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS (73) 34,317 93,810 49,671
Changes From Unit Transactions:
- Contract purchases 16,279 43,303 117,593 71,142
- Contract withdrawals (12,293) (3,362) (84,539) (10,436)
- Contract transfers 99,459 747 (25,181) 85,005
----------- ---------- ------------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS 103,445 40,688 7,873 145,711
----------- ---------- ------------- -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 103,372 75,005 101,683 195,382
----------- ---------- ------------- -----------
NET ASSETS AT DECEMBER 31, 2013 $ 128,606 $ 231,692 $ 1,235,729 $ 504,590
=========== ========== ============= ===========
LVIP LVIP LVIP
DELAWARE DELAWARE LVIP MANAGED
GROWTH SOCIAL GLOBAL RISK PROFILE
AND INCOME AWARENESS INCOME 2010
STANDARD STANDARD STANDARD STANDARD
CLASS CLASS CLASS CLASS
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2012 $ 3,669,574 $ 11,777,523 $ 237,668 $ 709,674
Changes From Operations:
- Net investment income (loss) 3,349 (28,210) 2,235 10,258
- Net realized gain (loss) on investments 58,649 880,214 883 39,300
- Net change in unrealized appreciation or depreciation on investments 446,694 767,991 12,759 (1,220)
------------ -------------- ---------- ------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 508,692 1,619,995 15,877 48,338
Changes From Unit Transactions:
- Contract purchases 187,938 417,979 37,437 54,317
- Contract withdrawals (410,777) (1,093,736) (18,475) (261,729)
- Contract transfers (149,725) (295,891) (24,811) 210,005
------------ -------------- ---------- ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (372,564) (971,648) (5,849) 2,593
------------ -------------- ---------- ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 136,128 648,347 10,028 50,931
------------ -------------- ---------- ------------
NET ASSETS AT DECEMBER 31, 2012 3,805,702 12,425,870 247,696 760,605
Changes From Operations:
- Net investment income (loss) 35,948 38,519 (1,923) 2,729
- Net realized gain (loss) on investments 250,001 508,891 (1,148) 10,674
- Net change in unrealized appreciation or depreciation on investments 919,978 3,543,644 (6,480) 46,779
------------ -------------- ---------- ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS 1,205,927 4,091,054 (9,551) 60,182
Changes From Unit Transactions:
- Contract purchases 175,406 314,598 29,119 58,715
- Contract withdrawals (512,688) (1,322,836) (15,356) (6,531)
- Contract transfers 280,000 (147,438) 9,718 (48,323)
------------ -------------- ---------- ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (57,282) (1,155,676) 23,481 3,861
------------ -------------- ---------- ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 1,148,645 2,935,378 13,930 64,043
------------ -------------- ---------- ------------
NET ASSETS AT DECEMBER 31, 2013 $ 4,954,347 $ 15,361,248 $ 261,626 $ 824,648
============ ============== ========== ============
LVIP
MANAGED
RISK PROFILE
2020
STANDARD
CLASS
SUBACCOUNT
------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2012 $ 2,010,079
Changes From Operations:
- Net investment income (loss) 21,932
- Net realized gain (loss) on investments 37,780
- Net change in unrealized appreciation or depreciation on investments 85,354
-------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 145,066
Changes From Unit Transactions:
- Contract purchases 262,951
- Contract withdrawals (214,781)
- Contract transfers (67,074)
-------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (18,904)
-------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 126,162
-------------
NET ASSETS AT DECEMBER 31, 2012 2,136,241
Changes From Operations:
- Net investment income (loss) 6,658
- Net realized gain (loss) on investments 85,904
- Net change in unrealized appreciation or depreciation on investments 119,322
-------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS 211,884
Changes From Unit Transactions:
- Contract purchases 267,471
- Contract withdrawals (395,682)
- Contract transfers (20,011)
-------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (148,222)
-------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 63,662
-------------
NET ASSETS AT DECEMBER 31, 2013 $ 2,199,903
=============
See accompanying notes.
L-10
L-11
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
YEARS ENDED DECEMBER 31, 2012 AND 2013
[Enlarge/Download Table]
LVIP LVIP LVIP LVIP
MANAGED MANAGED MANAGED MANAGED
RISK PROFILE RISK PROFILE RISK PROFILE RISK PROFILE
2030 2040 2050 CONSERVATIVE
STANDARD STANDARD STANDARD STANDARD
CLASS CLASS CLASS CLASS
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2012 $ 2,479,688 $ 946,060 $ 269,237 $ 2,102,251
Changes From Operations:
- Net investment income (loss) 24,311 9,096 (502) 62,823
- Net realized gain (loss) on investments 36,833 10,746 18,592 57,693
- Net change in unrealized appreciation or depreciation on investments 114,312 45,574 (3,905) 65,370
------------ ------------ ------------ ------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 175,456 65,416 14,185 185,886
Changes From Unit Transactions:
- Contract purchases 484,451 289,719 19,153 190,303
- Contract withdrawals (122,934) (113,685) (442) (202,850)
- Contract transfers (56,009) 42,836 (276,544) (2,141)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS 305,508 218,870 (257,833) (14,688)
------------ ------------ ------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 480,964 284,286 (243,648) 171,198
------------ ------------ ------------ ------------
NET ASSETS AT DECEMBER 31, 2012 2,960,652 1,230,346 25,589 2,273,449
Changes From Operations:
- Net investment income (loss) 13,244 5,231 1,031 15,831
- Net realized gain (loss) on investments 74,587 22,711 843 119,801
- Net change in unrealized appreciation or depreciation on investments 312,512 172,681 10,547 43,662
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS 400,343 200,623 12,421 179,294
Changes From Unit Transactions:
- Contract purchases 477,603 329,122 91,445 119,046
- Contract withdrawals (443,752) (116,896) (12,172) (482,794)
- Contract transfers 341,033 (44,189) 26,043 (99,530)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS 374,884 168,037 105,316 (463,278)
------------ ------------ ------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 775,227 368,660 117,737 (283,984)
------------ ------------ ------------ ------------
NET ASSETS AT DECEMBER 31, 2013 $ 3,735,879 $ 1,599,006 $ 143,326 $ 1,989,465
============ ============ ============ ============
LVIP LVIP LVIP LVIP
MANAGED MANAGED MONDRIAN SSGA
RISK PROFILE RISK PROFILE INTERNATIONAL BOND
GROWTH MODERATE VALUE INDEX
STANDARD STANDARD STANDARD STANDARD
CLASS CLASS CLASS CLASS
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2012 $ 5,120,586 $ 4,778,923 $ 4,059,549 $ 583,204
Changes From Operations:
- Net investment income (loss) 78,157 113,305 70,215 10,993
- Net realized gain (loss) on investments 28,000 35,224 (285,811) 4,136
- Net change in unrealized appreciation or depreciation on investments 295,294 246,920 515,999 1,132
------------- ------------ ------------- ------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 401,451 395,449 300,403 16,261
Changes From Unit Transactions:
- Contract purchases 548,204 448,486 315,874 43,621
- Contract withdrawals (562,303) (361,597) (430,359) (215,751)
- Contract transfers (325,377) (245,114) (477,238) 276,923
------------- ------------ ------------- ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (339,476) (158,225) (591,723) 104,793
------------- ------------ ------------- ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 61,975 237,224 (291,320) 121,054
------------- ------------ ------------- ------------
NET ASSETS AT DECEMBER 31, 2012 5,182,561 5,016,147 3,768,229 704,258
Changes From Operations:
- Net investment income (loss) 42,548 41,946 57,528 6,329
- Net realized gain (loss) on investments 39,204 55,058 (79,418) 94
- Net change in unrealized appreciation or depreciation on investments 560,399 438,656 761,470 (29,901)
------------- ------------ ------------- ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS 642,151 535,660 739,580 (23,478)
Changes From Unit Transactions:
- Contract purchases 444,322 428,556 205,248 47,185
- Contract withdrawals (311,889) (429,490) (396,887) (50,612)
- Contract transfers (100,062) 20,679 (201,767) (68,356)
------------- ------------ ------------- ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS 32,371 19,745 (393,406) (71,783)
------------- ------------ ------------- ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 674,522 555,405 346,174 (95,261)
------------- ------------ ------------- ------------
NET ASSETS AT DECEMBER 31, 2013 $ 5,857,083 $ 5,571,552 $ 4,114,403 $ 608,997
============= ============ ============= ============
LVIP SSGA
LVIP GLOBAL
SSGA TACTICAL LVIP SSGA
EMERGING ALLOCATION INTERNATIONAL
MARKETS 100 RPM INDEX
STANDARD STANDARD STANDARD
CLASS CLASS CLASS
SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2012 $ 1,145,087 $ 1,776,647 $ 72,113
Changes From Operations:
- Net investment income (loss) 19,795 43,950 757
- Net realized gain (loss) on investments 53,383 (5,892) (706)
- Net change in unrealized appreciation or depreciation on investments 36,060 134,395 13,634
------------- ------------ -------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 109,238 172,453 13,685
Changes From Unit Transactions:
- Contract purchases 150,220 130,875 5,288
- Contract withdrawals (177,492) (163,396) (23,411)
- Contract transfers 31,156 (55,408) 36,562
------------- ------------ -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS 3,884 (87,929) 18,439
------------- ------------ -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 113,122 84,524 32,124
------------- ------------ -------------
NET ASSETS AT DECEMBER 31, 2012 1,258,209 1,861,171 104,237
Changes From Operations:
- Net investment income (loss) 15,253 19,806 1,067
- Net realized gain (loss) on investments (71,040) 8,225 4,978
- Net change in unrealized appreciation or depreciation on investments 4,210 130,093 16,777
------------- ------------ -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS (51,577) 158,124 22,822
Changes From Unit Transactions:
- Contract purchases 125,012 105,915 15,867
- Contract withdrawals (185,434) (146,156) (4,027)
- Contract transfers 22,595 (55,896) 11,210
------------- ------------ -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (37,827) (96,137) 23,050
------------- ------------ -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (89,404) 61,987 45,872
------------- ------------ -------------
NET ASSETS AT DECEMBER 31, 2013 $ 1,168,805 $ 1,923,158 $ 150,109
============= ============ =============
LVIP SSGA LVIP SSGA
S&P 500 SMALL-CAP
INDEX INDEX
STANDARD STANDARD
CLASS CLASS
SUBACCOUNT SUBACCOUNT
------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2012 $ -- $ --
Changes From Operations:
- Net investment income (loss) 137 16
- Net realized gain (loss) on investments 1 --
- Net change in unrealized appreciation or depreciation on investments (16) 62
--------------- --------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 122 78
Changes From Unit Transactions:
- Contract purchases 937 9
- Contract withdrawals (14) --
- Contract transfers 20,068 5,449
--------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS 20,991 5,458
--------------- --------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 21,113 5,536
--------------- --------------
NET ASSETS AT DECEMBER 31, 2012 21,113 5,536
Changes From Operations:
- Net investment income (loss) 919,328 41,187
- Net realized gain (loss) on investments 212,550 258,593
- Net change in unrealized appreciation or depreciation on investments 10,432,576 4,499,974
--------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS 11,564,454 4,799,754
Changes From Unit Transactions:
- Contract purchases 1,676,849 324,186
- Contract withdrawals (8,069,798) (1,884,076)
- Contract transfers 105,743,127 29,799,292
--------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS 99,350,178 28,239,402
--------------- --------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 110,914,632 33,039,156
--------------- --------------
NET ASSETS AT DECEMBER 31, 2013 $ 110,935,745 $ 33,044,692
=============== ==============
See accompanying notes.
L-12
L-13
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
YEARS ENDED DECEMBER 31, 2012 AND 2013
[Enlarge/Download Table]
LVIP LVIP
T. ROWE PRICE UBS
STRUCTURED LARGE CAP
MID-CAP GROWTH NB AMT NB AMT
GROWTH RPM LARGE CAP MID CAP T. ROWE PRICE
STANDARD STANDARD VALUE I GROWTH I INTERNATIONAL
CLASS CLASS CLASS CLASS STOCK
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2012 $ 15,117,255 $ 1,391,272 $ 4,290,578 $ 6,387,768 $ 10,784,826
Changes From Operations:
- Net investment income (loss) (155,437) (15,007) (24,763) (66,892) 29,586
- Net realized gain (loss) on investments 665,492 48,333 (181,382) 192,989 (13,166)
- Net change in unrealized appreciation or
depreciation on investments 1,703,523 176,831 825,620 575,817 1,775,409
-------------- ------------ ------------ ------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 2,213,578 210,157 619,475 701,914 1,791,829
Changes From Unit Transactions:
- Contract purchases 444,002 87,868 147,955 328,283 336,468
- Contract withdrawals (1,502,423) (150,362) (349,932) (644,996) (949,164)
- Contract transfers (631,821) (17,688) (389,161) (174,693) (290,464)
-------------- ------------ ------------ ------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM UNIT TRANSACTIONS (1,690,242) (80,182) (591,138) (491,406) (903,160)
-------------- ------------ ------------ ------------- --------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 523,336 129,975 28,337 210,508 888,669
-------------- ------------ ------------ ------------- --------------
NET ASSETS AT DECEMBER 31, 2012 15,640,591 1,521,247 4,318,915 6,598,276 11,673,495
Changes From Operations:
- Net investment income (loss) (173,790) (15,263) 8,951 (25,560) (15,855)
- Net realized gain (loss) on investments 694,174 60,851 (2,951) 2,491,871 121,643
- Net change in unrealized appreciation or
depreciation on investments 4,531,560 297,908 1,249,243 (1,535,644) 1,323,976
-------------- ------------ ------------ ------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 5,051,944 343,496 1,255,243 930,667 1,429,764
Changes From Unit Transactions:
- Contract purchases 377,688 58,573 170,010 113,398 252,764
- Contract withdrawals (1,803,961) (174,784) (516,188) (259,655) (929,321)
- Contract transfers 488,274 (50,021) 154,457 (7,382,686) (312,143)
-------------- ------------ ------------ ------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM UNIT TRANSACTIONS (937,999) (166,232) (191,721) (7,528,943) (988,700)
-------------- ------------ ------------ ------------- --------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 4,113,945 177,264 1,063,522 (6,598,276) 441,064
-------------- ------------ ------------ ------------- --------------
NET ASSETS AT DECEMBER 31, 2013 $ 19,754,536 $ 1,698,511 $ 5,382,437 $ -- $ 12,114,559
============== ============ ============ ============= ==============
See accompanying notes.
L-14
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2013
1. ACCOUNTING POLICIES AND VARIABLE ACCOUNT INFORMATION
THE VARIABLE ACCOUNT: Lincoln National Variable Annuity Account L (the Variable
Account) is a segregated investment account of The Lincoln National Life
Insurance Company (the Company) and is registered as a unit investment trust
with the Securities and Exchange Commission under the Investment Company Act of
1940, as amended. The operations of the Variable Account, which commenced on
September 26, 1996, are part of the operations of the Company. The Variable
Account consists of two products as follows:
- Group Variable Annuity
- Lincoln Secured Retirement Income
The assets of the Variable Account are owned by the Company. The Variable
Account's assets support the annuity contracts and may not be used to satisfy
liabilities arising from any other business of the Company.
BASIS OF PRESENTATION: The accompanying financial statements have been prepared
in accordance with U.S. generally accepted accounting principles (GAAP) for
unit investment trusts.
ACCOUNTING ESTIMATES: The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions affecting the
reported amounts as of the date of the financial statements. Those estimates
are inherently subject to change and actual results could differ from those
estimates. Included among the material (or potentially material) reported
amounts that require use of estimates is the fair value of certain assets.
INVESTMENTS: The assets of the Variable Account are divided into variable
subaccounts, each of which may be invested in shares of one of forty-nine
mutual funds (the Funds) of eleven diversified, open-ended management
investment companies, each Fund with its own investment objective. The Funds
are:
AllianceBernstein Variable Products Series Fund, Inc. (ABVPSF):
ABVPSF Global Thematic Growth Class B Fund
ABVPSF Growth Class B Fund
American Century Variable Portfolios, Inc. (American Century VP):
American Century VP Balanced Class I Portfolio
American Funds Insurance Series (American Funds):
American Funds Global Growth Class 2 Fund
American Funds Growth Class 2 Fund
American Funds Growth-Income Class 2 Fund
American Funds International Class 2 Fund
BlackRock Variable Series Funds, Inc. (BlackRock):
BlackRock Global Allocation V.I. Class I Fund
Delaware VIP Trust (Delaware VIP):
Delaware VIP Diversified Income Standard Class Series
Delaware VIP High Yield Standard Class Series
Delaware VIP REIT Service Class Series
Delaware VIP Small Cap Value Service Class Series
Delaware VIP Smid Cap Growth Service Class Series
DWS Variable Series II (DWS):
DWS Alternative Asset Allocation VIP Class A Portfolio
Fidelity Variable Insurance Products Fund (Fidelity VIP):
Fidelity VIP Asset Manager Initial Class Portfolio
Fidelity VIP Contrafund Service Class 2 Portfolio
Fidelity VIP Growth Initial Class Portfolio
Fidelity VIP Money Market Initial Class Portfolio
Janus Aspen Series:
Janus Aspen Global Research Institutional Class Portfolio
Lincoln Variable Insurance Products Trust (LVIP)*:
LVIP Baron Growth Opportunities Service Class Fund
LVIP BlackRock Inflation Protected Bond Standard Class Fund
LVIP Clarion Global Real Estate Standard Class Fund
LVIP Delaware Bond Standard Class Fund
LVIP Delaware Diversified Floating Rate Service Class Fund
LVIP Delaware Foundation Aggressive Allocation Standard Class Fund
LVIP Delaware Foundation Conservative Allocation Standard Class Fund
LVIP Delaware Foundation Moderate Allocation Standard Class Fund
LVIP Delaware Growth and Income Standard Class Fund
LVIP Delaware Social Awareness Standard Class Fund
LVIP Global Income Standard Class Fund
LVIP Managed Risk Profile 2010 Standard Class Fund
LVIP Managed Risk Profile 2020 Standard Class Fund
LVIP Managed Risk Profile 2030 Standard Class Fund
LVIP Managed Risk Profile 2040 Standard Class Fund
LVIP Managed Risk Profile 2050 Standard Class Fund
LVIP Managed Risk Profile Conservative Standard Class Fund
LVIP Managed Risk Profile Growth Standard Class Fund
LVIP Managed Risk Profile Moderate Standard Class Fund
LVIP Mondrian International Value Standard Class Fund
LVIP SSgA Bond Index Standard Class Fund
LVIP SSgA Emerging Markets 100 Standard Class Fund
LVIP SSgA Global Tactical Allocation RPM Standard Class Fund
LVIP SSgA International Index Standard Class Fund
LVIP SSgA S&P 500 Index Standard Class Fund
LVIP SSgA Small-Cap Index Standard Class Fund
L-15
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES AND VARIABLE ACCOUNT INFORMATION (CONTINUED)
LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class Fund
LVIP UBS Large Cap Growth RPM Standard Class Fund
Neuberger Berman Advisors Management Trust (NB AMT):
NB AMT Large Cap Value I Class Portfolio
T. Rowe Price International Series, Inc. (T. Rowe Price):
T. Rowe Price International Stock Class I Portfolio
* Denotes an affiliate of The Lincoln National Life Insurance Company.
The Fidelity VIP Money Market Portfolio is used only for investments of initial
contributions for which the Company has not received complete order
instructions. Upon receipt of complete order instructions, the payments
transferred to the Fidelity VIP Money Market Portfolio are allocated to
purchase shares of one of the above Funds.
Investments in the Funds are stated at fair value as determined by the closing
net asset value per share on December 31, 2013. The difference between cost and
net asset value is reflected as unrealized appreciation or depreciation of
investments.
The Variable Account's investments in the Funds are valued in accordance with
the Fair Value Measurements and Disclosure Topic of the Financial Accounting
Standards Board Accounting Standards Codification (Topic). The Topic defines
fair value as the price that the Variable Account would receive to sell an
asset or pay to transfer a liability in an orderly transaction between market
participants at the measurement date. The Topic also establishes a framework
for measuring fair value and a three-level hierarchy for fair value
measurements based upon the transparency of inputs to the valuation of an asset
or liability. Inputs may be observable or unobservable and refer broadly to the
assumptions that market participants would use in pricing the asset or
liability. Observable inputs reflect the assumptions market participants would
use in pricing the asset or liability based on market data obtained from
sources independent of the reporting entity. Unobservable inputs reflect the
reporting entity's own assessment regarding the assumptions market participants
would use in pricing the asset or liability and are developed based on the best
information available in the circumstances. The Variable Account's investments
in the Funds are assigned a level based upon the observability of the inputs
which are significant to the overall valuation. The three-tier hierarchy of
inputs is summarized below.
Level 1 - inputs to the valuation methodology are quoted prices in active
markets
Level 2 - inputs to the valuation methodology are observable, directly or
indirectly
Level 3 - inputs to the valuation methodology are unobservable and reflect
assumptions on the part of the reporting entity
The Variable Account's investments in the Funds are valued within the fair
value hierarchy as Level 2. Net asset value is quoted by the Funds as derived
by the fair value of the Funds' underlying investments. The Funds are not
considered Level 1 as they are not traded in the open market; rather the
Company sells and redeems shares at net asset value with the Funds.
Investment transactions are accounted for on a trade-date basis. The cost of
investments sold is determined by the average cost method.
DIVIDENDS: Dividends paid to the Variable Account are automatically reinvested
in shares of the Funds on the payable date with the exception of Fidelity VIP
Money Market Portfolio, which is invested monthly. Dividend income is recorded
on the ex-dividend date.
FEDERAL INCOME TAXES: Operations of the Variable Account form a part of and are
taxed with operations of the Company, which is taxed as a "life insurance
company" under the Internal Revenue Code. The Variable Account will not be
taxed as a regulated investment company under Subchapter M of the Internal
Revenue Code, as amended. Under current federal income tax law, no federal
income taxes are payable or receivable with respect to the Variable Account's
net investment income and the net realized gain (loss) on investments.
INVESTMENT FUND CHANGES: During 2012, the LVIP BlackRock Inflation Protected
Bond Standard Class Fund, the LVIP SSgA S&P 500 Index Standard Class Fund and
the LVIP SSgA Small-Cap Index Standard Class Fund became available as
investment options for account contract owners. Accordingly, for the
subaccounts that commenced operations during 2012, the 2012 statements of
changes in net assets and total return and investment income ratios in note 3
are for the period from the commencement of operations to December 31, 2012.
L-16
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES AND VARIABLE ACCOUNT INFORMATION (CONTINUED)
Also during 2012, the following funds changed their names:
[Enlarge/Download Table]
PREVIOUS FUND NAME NEW FUND NAME
-----------------------------------------------------------------------------------------------------------------------------------
DWS Alternative Asset Allocation Plus VIP Class A Portfolio DWS Alternative Asset Allocation VIP Class A Portfolio
LVIP Cohen & Steers Real Estate Standard Class Fund LVIP Clarion Global Real Estate Standard Class Fund
LVIP SSgA Global Tactical Allocation Standard Class Fund LVIP SSgA Global Tactical Allocation RPM Standard Class Fund
LVIP Janus Capital Appreciation Standard Class Fund LVIP UBS Large Cap Growth RPM Standard Class Fund
NB AMT Partners I Class Portfolio NB AMT Large Cap Value I Class Portfolio
In the accompanying 2012 Statement of Changes in Net Assets, certain 2012
contract purchases and contract withdrawals have been reclassified to contract
transfers to conform with 2013 presentation. The total net increase/(decrease)
in net assets resulting from unit transactions has not changed.
During 2013, the following funds ceased to be available as investment options
to Variable Account Contract owners:
[Enlarge/Download Table]
ABVPSF Growth and Income Class B Fund DWS Equity 500 Index VIP Class A Portfolio
American Century VP Inflation Protection Class I Portfolio DWS Small Cap Index VIP Class A Portfolio
Dreyfus Opportunistic Small Cap Initial Class Portfolio Fidelity VIP Equity-Income Initial Class Portfolio
Dreyfus Stock Index Initial Class Fund NB AMT Mid Cap Growth I Class Portfolio
Also during 2013, the following funds changed their names:
[Enlarge/Download Table]
PREVIOUS FUND NAME NEW FUND NAME
-----------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Series Worldwide Institutional Class Portfolio Janus Aspen Global Research Institutional Class Portfolio
LVIP Protected Profile 2010 Standard Class Fund LVIP Managed Risk Profile 2010 Standard Class Fund
LVIP Protected Profile 2020 Standard Class Fund LVIP Managed Risk Profile 2020 Standard Class Fund
LVIP Protected Profile 2030 Standard Class Fund LVIP Managed Risk Profile 2030 Standard Class Fund
LVIP Protected Profile 2040 Standard Class Fund LVIP Managed Risk Profile 2040 Standard Class Fund
LVIP Protected Profile 2050 Standard Class Fund LVIP Managed Risk Profile 2050 Standard Class Fund
LVIP Protected Profile Conservative Standard Class Fund LVIP Managed Risk Profile Conservative Standard Class Fund
LVIP Protected Profile Growth Standard Class Fund LVIP Managed Risk Profile Growth Standard Class Fund
LVIP Protected Profile Moderate Standard Class Fund LVIP Managed Risk Profile Moderate Standard Class Fund
2. MORTALITY AND EXPENSE GUARANTEES AND OTHER TRANSACTIONS WITH AFFILIATES
Amounts are paid to the Company for mortality and expense guarantees at a
percentage of the current value of the Variable Account each day with the
exception of Fidelity VIP Money Market Portfolio, which does not have a
mortality and expense charge. The ranges of rates are as follows for the two
contract types within the Variable Account:
- Group Variable Annuity at a daily rate of .0020548% to .0027397% (.75% to
1.00% on an annual basis)
- Lincoln Secured Retirement Income at a daily rate of .0001370% to
.0017808% (.05% to .65% on an annual basis)
Accordingly, the Company is responsible for all sales, general and
administrative expenses applicable to the Variable Account.
3. FINANCIAL HIGHLIGHTS
A summary of the fee rates, unit values, units outstanding, net assets and
total return and investment income ratios for variable annuity contracts as of
and for each year or period in the five years ended December 31, 2013,
follows:
[Enlarge/Download Table]
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM
COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL
SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4)
------------------------------------------------------------------------------------------------------------------------------------
ABVPSF GLOBAL THEMATIC GROWTH CLASS B
2013 0.75% 1.00% $ 5.59 $ 5.78 355,281 $ 1,989,204 21.70%
2012 0.75% 1.00% 4.60 4.74 407,020 1,872,402 12.11%
2011 0.75% 1.00% 4.10 4.22 453,695 1,861,796 -24.17%
2010 0.75% 1.00% 5.41 5.55 514,709 2,785,369 17.40%
2009 0.75% 1.00% 4.60 4.71 560,973 2,585,875 51.62%
MAXIMUM INVESTMENT
TOTAL INCOME
SUBACCOUNT YEAR RETURN(4) RATIO(5)
------------------------------------------------------------------------------------------------------------------------------------
ABVPSF GLOBAL THEMATIC GROWTH CLASS B
2013 22.01% 0.02%
2012 12.40% 0.00%
2011 -23.98% 0.35%
2010 17.70% 1.97%
2009 52.00% 0.00%
L-17
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. FINANCIAL HIGHLIGHTS (CONTINUED)
[Enlarge/Download Table]
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM
COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL
SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4)
------------------------------------------------------------------------------------------------------------------------------------
ABVPSF GROWTH CLASS B
2013 0.75% 1.00% $10.82 $ 11.18 140,737 $ 1,525,730 32.40%
2012 0.75% 1.00% 8.17 8.42 145,376 1,190,058 12.45%
2011 0.75% 1.00% 7.27 7.47 148,943 1,083,910 -0.04%
2010 0.75% 1.00% 7.27 7.46 161,724 1,177,462 13.65%
2009 0.75% 1.00% 6.40 6.55 175,880 1,126,600 31.55%
ABVPSF GROWTH AND INCOME CLASS B
2013 0.00% 0.00% -- -- -- -- 0.00%
2012 0.75% 1.00% 13.21 13.50 91,918 1,214,796 16.08%
2011 0.75% 1.00% 11.38 11.60 83,635 952,275 5.01%
2010 0.75% 1.00% 10.84 11.02 83,141 901,820 11.68%
2009 0.75% 1.00% 9.70 9.84 104,851 1,018,193 19.15%
AMERICAN CENTURY VP BALANCED CLASS I
2013 0.75% 1.00% 38.46 39.88 434,732 16,768,685 16.26%
2012 0.75% 1.00% 33.08 34.22 483,889 16,049,324 10.69%
2011 0.75% 1.00% 29.89 30.84 529,970 15,875,249 4.28%
2010 0.75% 1.00% 28.66 29.49 606,823 17,425,978 10.53%
2009 0.75% 1.00% 25.93 26.62 675,956 17,565,553 14.33%
AMERICAN CENTURY VP INFLATION PROTECTION CLASS I
2013 0.00% 0.00% -- -- -- -- 0.00%
2012 0.75% 1.00% 13.08 13.20 124,230 1,625,228 6.48%
2011 0.75% 1.00% 12.28 12.36 92,897 1,141,311 10.98%
2010 0.75% 1.00% 11.07 11.11 71,574 792,299 4.32%
2009 7/27/09 0.75% 1.00% 10.61 10.63 42,292 448,778 1.33%
AMERICAN FUNDS GLOBAL GROWTH CLASS 2
2013 0.75% 1.00% 23.05 23.61 259,684 6,000,890 27.89%
2012 0.75% 1.00% 18.02 18.42 274,966 4,966,016 21.34%
2011 0.75% 1.00% 14.85 15.14 302,484 4,500,793 -9.79%
2010 0.75% 1.00% 16.46 16.74 337,607 5,565,771 10.63%
2009 0.75% 1.00% 14.88 15.09 356,289 5,308,480 40.89%
AMERICAN FUNDS GROWTH CLASS 2
2013 0.75% 1.00% 14.71 15.21 1,845,206 27,219,661 28.81%
2012 0.75% 1.00% 11.42 11.78 2,046,065 23,427,228 16.72%
2011 0.75% 1.00% 9.79 10.07 2,203,885 21,614,387 -5.23%
2010 0.75% 1.00% 10.33 10.59 2,391,020 24,737,180 17.50%
2009 0.75% 1.00% 8.79 8.99 2,719,762 23,965,826 38.02%
AMERICAN FUNDS GROWTH-INCOME CLASS 2
2013 0.75% 1.00% 17.98 18.42 602,597 10,850,076 32.17%
2012 0.75% 1.00% 13.60 13.90 582,370 7,932,965 16.31%
2011 0.75% 1.00% 11.70 11.92 607,917 7,118,457 -2.81%
2010 0.75% 1.00% 12.03 12.23 678,662 8,174,284 10.32%
2009 0.75% 1.00% 10.91 11.06 721,001 7,872,039 29.94%
AMERICAN FUNDS INTERNATIONAL CLASS 2
2013 0.75% 1.00% 15.72 16.25 767,401 12,083,542 20.42%
2012 0.75% 1.00% 13.06 13.46 868,210 11,350,715 16.73%
2011 0.75% 1.00% 11.19 11.51 1,034,750 11,586,451 -14.82%
2010 0.75% 1.00% 13.13 13.47 1,283,685 16,871,090 6.17%
2009 0.75% 1.00% 12.37 12.66 1,482,031 18,351,540 41.65%
BLACKROCK GLOBAL ALLOCATION V.I. CLASS I
2013 0.75% 1.00% 14.72 14.89 106,183 1,563,568 13.62%
2012 0.75% 1.00% 12.96 13.07 93,759 1,215,132 9.18%
2011 0.75% 1.00% 11.87 11.95 99,310 1,178,695 -4.45%
2010 0.75% 1.00% 12.42 12.47 71,179 884,156 8.96%
2009 7/20/09 0.75% 1.00% 11.40 11.42 33,672 383,871 0.67%
DELAWARE VIP DIVERSIFIED INCOME STANDARD CLASS
2013 0.75% 1.00% 17.04 17.45 346,914 5,916,303 -2.24%
2012 0.75% 1.00% 17.43 17.81 404,524 7,056,169 6.13%
2011 0.75% 1.00% 16.43 16.74 409,849 6,738,120 5.34%
2010 0.75% 1.00% 15.60 15.85 471,338 7,355,730 6.98%
2009 0.75% 1.00% 14.58 14.78 505,506 7,376,772 25.70%
MAXIMUM INVESTMENT
TOTAL INCOME
SUBACCOUNT YEAR RETURN(4) RATIO(5)
------------------------------------------------------------------------------------------------------------------------------------
ABVPSF GROWTH CLASS B
2013 32.73% 0.03%
2012 12.73% 0.00%
2011 0.21% 0.00%
2010 13.94% 0.05%
2009 31.87% 0.00%
ABVPSF GROWTH AND INCOME CLASS B
2013 0.00% 1.18%
2012 16.37% 1.38%
2011 5.28% 1.05%
2010 11.96% 0.00%
2009 19.45% 3.60%
AMERICAN CENTURY VP BALANCED CLASS I
2013 16.55% 1.58%
2012 10.97% 2.06%
2011 4.54% 1.89%
2010 10.80% 1.88%
2009 14.62% 5.35%
AMERICAN CENTURY VP INFLATION PROTECTION CLASS I
2013 0.00% 0.54%
2012 6.75% 2.82%
2011 11.26% 3.96%
2010 4.58% 1.85%
2009 5.45% 1.26%
AMERICAN FUNDS GLOBAL GROWTH CLASS 2
2013 28.21% 1.26%
2012 21.65% 0.91%
2011 -9.57% 1.25%
2010 10.91% 1.50%
2009 41.24% 1.45%
AMERICAN FUNDS GROWTH CLASS 2
2013 29.13% 0.93%
2012 17.01% 0.79%
2011 -4.99% 0.61%
2010 17.79% 0.70%
2009 38.37% 0.67%
AMERICAN FUNDS GROWTH-INCOME CLASS 2
2013 32.50% 1.41%
2012 16.60% 1.63%
2011 -2.56% 1.49%
2010 10.59% 1.49%
2009 30.26% 1.63%
AMERICAN FUNDS INTERNATIONAL CLASS 2
2013 20.73% 1.35%
2012 17.03% 1.42%
2011 -14.61% 1.60%
2010 6.43% 1.98%
2009 42.00% 1.59%
BLACKROCK GLOBAL ALLOCATION V.I. CLASS I
2013 13.90% 1.26%
2012 9.46% 1.48%
2011 -4.22% 2.61%
2010 9.24% 1.74%
2009 11.50% 4.12%
DELAWARE VIP DIVERSIFIED INCOME STANDARD CLASS
2013 -2.00% 2.37%
2012 6.39% 3.09%
2011 5.60% 4.35%
2010 7.25% 4.69%
2009 26.01% 5.96%
L-18
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. FINANCIAL HIGHLIGHTS (CONTINUED)
[Enlarge/Download Table]
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM
COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL
SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4)
------------------------------------------------------------------------------------------------------------------------------------
DELAWARE VIP HIGH YIELD STANDARD CLASS
2013 0.75% 1.00% $18.81 $ 19.22 152,088 $ 2,864,216 8.13%
2012 0.75% 1.00% 17.40 17.73 176,736 3,077,698 16.65%
2011 0.75% 1.00% 14.92 15.16 189,691 2,831,730 1.36%
2010 0.75% 1.00% 14.71 14.92 208,040 3,063,324 14.17%
2009 0.75% 1.00% 12.89 13.04 206,221 2,661,007 47.49%
DELAWARE VIP REIT SERVICE CLASS
2013 0.75% 1.00% 29.73 30.73 364,544 10,850,558 0.91%
2012 0.75% 1.00% 29.46 30.38 392,488 11,576,227 15.45%
2011 0.75% 1.00% 25.52 26.25 428,767 10,954,794 9.52%
2010 0.75% 1.00% 23.30 23.90 464,315 10,830,826 25.35%
2009 0.75% 1.00% 18.59 19.02 482,547 8,980,777 22.01%
DELAWARE VIP SMALL CAP VALUE SERVICE CLASS
2013 0.75% 1.00% 23.58 24.16 445,837 10,528,843 31.85%
2012 0.75% 1.00% 17.89 18.28 450,097 8,060,937 12.50%
2011 0.75% 1.00% 15.90 16.21 480,324 7,645,697 -2.57%
2010 0.75% 1.00% 16.32 16.59 540,575 8,829,991 30.60%
2009 0.75% 1.00% 12.50 12.67 555,313 6,945,896 30.25%
DELAWARE VIP SMID CAP GROWTH SERVICE CLASS
2013 0.75% 1.00% 16.53 17.09 392,019 6,490,913 39.57%
2012 0.75% 1.00% 11.84 12.21 363,549 4,312,965 9.61%
2011 0.75% 1.00% 10.81 11.11 350,408 3,795,589 6.83%
2010 10/8/10 0.75% 1.00% 10.11 10.38 266,490 2,702,240 13.45%
DELAWARE VIP TREND SERVICE CLASS
2009 0.75% 1.00% 7.47 7.65 282,506 2,119,971 52.84%
DREYFUS OPPORTUNISTIC SMALL CAP INITIAL CLASS
2012 0.75% 1.00% 23.82 24.64 1,016,901 24,277,228 19.36%
2011 0.75% 1.00% 19.96 20.59 1,137,365 22,743,588 -14.70%
2010 0.75% 1.00% 23.39 24.08 1,301,328 30,502,057 29.85%
2009 0.75% 1.00% 18.02 18.50 1,463,419 26,415,246 24.78%
DREYFUS STOCK INDEX INITIAL CLASS
2013 0.00% 0.00% -- -- -- -- 0.00%
2012 0.75% 1.00% 47.72 49.36 1,018,877 48,754,441 14.59%
2011 0.75% 1.00% 41.65 42.97 1,136,755 47,470,262 0.86%
2010 0.75% 1.00% 41.29 42.50 1,378,411 57,034,613 13.70%
2009 0.75% 1.00% 36.32 37.28 1,553,211 56,524,261 25.08%
DWS ALTERNATIVE ASSET ALLOCATION VIP CLASS A
2013 0.75% 1.00% 13.07 13.22 14,420 188,525 -0.07%
2012 0.75% 1.00% 13.08 13.20 10,010 130,967 8.63%
2011 0.75% 1.00% 12.04 12.04 8,100 97,553 -3.83%
2010 1.00% 1.00% 12.52 12.52 6,674 83,584 11.35%
2009 11/16/09 1.00% 1.00% 11.25 11.25 143 1,607 -0.89%
DWS EQUITY 500 INDEX VIP CLASS A
2013 0.00% 0.00% -- -- -- -- 0.00%
2012 0.75% 1.00% 14.00 14.30 125,401 1,756,809 14.55%
2011 0.75% 1.00% 12.22 12.45 193,503 2,366,306 0.82%
2010 0.75% 1.00% 12.12 12.32 199,957 2,424,596 13.56%
2009 0.75% 1.00% 10.67 10.82 233,308 2,491,222 25.07%
DWS SMALL CAP INDEX VIP CLASS A
2013 0.00% 0.00% -- -- -- -- 0.00%
2012 0.75% 1.00% 15.31 15.65 130,153 1,997,201 15.09%
2011 0.75% 1.00% 13.31 13.56 133,027 1,773,487 -5.37%
2010 0.75% 1.00% 14.06 14.29 147,905 2,082,615 25.14%
2009 0.75% 1.00% 11.24 11.39 161,946 1,822,036 25.31%
FIDELITY VIP ASSET MANAGER INITIAL CLASS
2013 0.75% 1.00% 40.35 41.84 1,006,553 40,680,237 14.56%
2012 0.75% 1.00% 35.22 36.43 1,117,038 39,405,183 11.36%
2011 0.75% 1.00% 31.63 32.63 1,213,528 38,437,578 -3.53%
2010 0.75% 1.00% 32.79 33.74 1,343,770 44,114,945 13.13%
2009 0.75% 1.00% 28.98 29.75 1,523,997 44,222,649 27.83%
MAXIMUM INVESTMENT
TOTAL INCOME
SUBACCOUNT YEAR RETURN(4) RATIO(5)
------------------------------------------------------------------------------------------------------------------------------------
DELAWARE VIP HIGH YIELD STANDARD CLASS
2013 8.40% 7.40%
2012 16.94% 8.56%
2011 1.62% 8.83%
2010 14.46% 7.66%
2009 47.86% 6.59%
DELAWARE VIP REIT SERVICE CLASS
2013 1.16% 1.32%
2012 15.74% 1.30%
2011 9.79% 1.37%
2010 25.66% 2.57%
2009 22.32% 4.24%
DELAWARE VIP SMALL CAP VALUE SERVICE CLASS
2013 32.18% 0.51%
2012 12.79% 0.35%
2011 -2.33% 0.30%
2010 30.93% 0.46%
2009 30.58% 0.66%
DELAWARE VIP SMID CAP GROWTH SERVICE CLASS
2013 39.92% 0.00%
2012 9.88% 0.01%
2011 7.09% 0.72%
2010 13.51% 0.00%
DELAWARE VIP TREND SERVICE CLASS
2009 53.22% 0.00%
DREYFUS OPPORTUNISTIC SMALL CAP INITIAL CLASS
2012 19.66% 0.00%
2011 -14.49% 0.42%
2010 30.17% 0.76%
2009 25.10% 1.66%
DREYFUS STOCK INDEX INITIAL CLASS
2013 0.00% 0.45%
2012 14.87% 2.02%
2011 1.12% 1.80%
2010 13.98% 1.80%
2009 25.39% 2.08%
DWS ALTERNATIVE ASSET ALLOCATION VIP CLASS A
2013 0.18% 1.81%
2012 8.90% 3.26%
2011 -3.83% 1.50%
2010 11.35% 1.19%
2009 -0.89% 0.00%
DWS EQUITY 500 INDEX VIP CLASS A
2013 0.00% 1.90%
2012 14.83% 2.09%
2011 1.07% 1.75%
2010 13.85% 1.91%
2009 25.38% 2.84%
DWS SMALL CAP INDEX VIP CLASS A
2013 0.00% 1.77%
2012 15.38% 0.88%
2011 -5.13% 0.89%
2010 25.45% 0.92%
2009 25.63% 1.83%
FIDELITY VIP ASSET MANAGER INITIAL CLASS
2013 14.84% 1.53%
2012 11.64% 1.52%
2011 -3.29% 1.89%
2010 13.41% 1.64%
2009 28.15% 2.36%
L-19
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. FINANCIAL HIGHLIGHTS (CONTINUED)
[Enlarge/Download Table]
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM
COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL
SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4)
------------------------------------------------------------------------------------------------------------------------------------
FIDELITY VIP CONTRAFUND SERVICE CLASS 2
2013 0.75% 1.00% $19.76 $ 20.42 1,128,066 $ 22,321,096 29.65%
2012 0.75% 1.00% 15.24 15.71 1,205,276 18,394,701 14.99%
2011 0.75% 1.00% 13.25 13.63 1,238,854 16,441,190 -3.75%
2010 0.75% 1.00% 13.77 14.13 1,402,304 19,333,235 15.76%
2009 0.75% 1.00% 11.89 12.17 1,486,546 17,706,512 34.12%
FIDELITY VIP EQUITY-INCOME INITIAL CLASS
2012 0.75% 1.00% 33.42 34.57 1,160,289 38,900,117 16.14%
2011 0.75% 1.00% 28.77 29.69 1,282,791 37,016,452 -0.03%
2010 0.75% 1.00% 28.78 29.62 1,503,500 43,377,161 14.00%
2009 0.75% 1.00% 25.25 25.92 1,699,575 43,015,866 28.91%
FIDELITY VIP GROWTH INITIAL CLASS
2013 0.75% 1.00% 61.63 63.91 1,263,909 78,065,251 34.98%
2012 0.75% 1.00% 45.66 47.23 1,415,464 64,761,253 13.55%
2011 0.75% 1.00% 40.21 41.49 1,530,863 61,671,758 -0.80%
2010 0.75% 1.00% 40.54 41.72 1,774,948 72,062,172 22.94%
2009 0.75% 1.00% 32.97 33.85 2,011,962 66,445,466 27.01%
FIDELITY VIP MONEY MARKET INITIAL CLASS
2013 0.00% 0.00% 18.01 18.04 450 8,104 0.03%
2012 0.00% 0.00% 18.00 18.03 449 8,090 0.12%
2011 0.00% 0.00% 17.98 17.98 2,384 42,873 0.11%
2010 0.00% 0.00% 17.96 17.96 1,237 22,220 0.24%
2009 0.00% 0.00% 17.92 17.92 771 13,820 0.72%
JANUS ASPEN GLOBAL RESEARCH INSTITUTIONAL CLASS
2013 0.75% 1.00% 18.07 18.74 549,580 9,962,894 27.15%
2012 0.75% 1.00% 14.21 14.70 620,209 8,840,691 18.89%
2011 0.75% 1.00% 11.95 12.33 682,174 8,176,833 -14.60%
2010 0.75% 1.00% 14.00 14.41 819,249 11,492,633 14.68%
2009 0.75% 1.00% 12.21 12.53 918,814 11,242,040 36.33%
LVIP BARON GROWTH OPPORTUNITIES SERVICE CLASS
2013 0.75% 1.00% 53.62 55.60 351,269 18,887,194 38.67%
2012 0.75% 1.00% 38.67 40.00 362,634 14,060,367 17.07%
2011 0.75% 1.00% 33.03 34.08 419,765 13,901,459 2.99%
2010 0.75% 1.00% 32.07 33.01 509,670 16,384,821 25.13%
2009 0.75% 1.00% 25.63 26.32 582,238 14,963,025 36.95%
LVIP BLACKROCK INFLATION PROTECTED BOND STANDARD CLASS
2013 0.69% 0.94% 9.31 9.31 102,316 952,551 -9.25%
2012 5/17/12 1.00% 1.00% 10.26 10.26 6,748 69,225 2.22%
LVIP CLARION GLOBAL REAL ESTATE STANDARD CLASS
2013 0.75% 1.00% 8.63 8.77 76,485 661,014 2.28%
2012 0.75% 1.00% 8.44 8.56 73,829 623,618 23.44%
2011 0.75% 1.00% 6.84 6.91 73,611 503,522 -9.58%
2010 0.75% 1.00% 7.56 7.63 83,533 631,722 16.80%
2009 0.75% 1.00% 6.47 6.51 56,051 362,862 36.46%
LVIP DELAWARE BOND STANDARD CLASS
2013 0.75% 1.00% 15.34 15.71 374,119 5,746,772 -3.28%
2012 0.75% 1.00% 15.86 16.21 498,292 7,912,925 5.55%
2011 0.75% 1.00% 15.03 15.32 531,555 7,996,162 6.57%
2010 0.75% 1.00% 14.10 14.34 570,500 8,051,380 7.41%
2009 0.75% 1.00% 13.13 13.31 566,723 7,446,362 17.72%
LVIP DELAWARE DIVERSIFIED FLOATING RATE SERVICE CLASS
2013 1.00% 1.00% 10.00 10.00 12,862 128,606 -0.50%
2012 1.00% 1.00% 10.05 10.05 2,511 25,234 2.93%
2011 7/8/11 1.00% 1.00% 9.76 9.76 393 3,839 -2.14%
LVIP DELAWARE FOUNDATION AGGRESSIVE ALLOCATION STANDARD CLASS
2013 1.00% 1.00% 17.29 17.29 13,400 231,692 19.04%
2012 1.00% 1.00% 14.52 14.52 10,788 156,687 12.16%
2011 1.00% 1.00% 12.95 12.95 7,754 100,414 -3.00%
2010 0.75% 1.00% 13.35 13.40 6,233 83,270 11.36%
2009 7/14/09 0.75% 1.00% 11.99 12.00 1,736 20,827 13.90%
MAXIMUM INVESTMENT
TOTAL INCOME
SUBACCOUNT YEAR RETURN(4) RATIO(5)
------------------------------------------------------------------------------------------------------------------------------------
FIDELITY VIP CONTRAFUND SERVICE CLASS 2
2013 29.97% 0.83%
2012 15.27% 1.13%
2011 -3.51% 0.75%
2010 16.05% 1.02%
2009 34.46% 1.21%
FIDELITY VIP EQUITY-INCOME INITIAL CLASS
2012 16.43% 3.06%
2011 0.22% 2.36%
2010 14.29% 1.77%
2009 29.24% 2.28%
FIDELITY VIP GROWTH INITIAL CLASS
2013 35.32% 0.28%
2012 13.83% 0.59%
2011 -0.55% 0.35%
2010 23.25% 0.27%
2009 27.33% 0.44%
FIDELITY VIP MONEY MARKET INITIAL CLASS
2013 0.03% 0.03%
2012 0.14% 0.14%
2011 0.11% 0.11%
2010 0.24% 0.18%
2009 0.72% 0.96%
JANUS ASPEN GLOBAL RESEARCH INSTITUTIONAL CLASS
2013 27.47% 1.21%
2012 19.18% 0.87%
2011 -14.39% 0.56%
2010 14.97% 0.61%
2009 36.67% 1.42%
LVIP BARON GROWTH OPPORTUNITIES SERVICE CLASS
2013 39.02% 0.43%
2012 17.36% 1.14%
2011 3.25% 0.00%
2010 25.44% 0.00%
2009 37.29% 0.00%
LVIP BLACKROCK INFLATION PROTECTED BOND STANDARD CLASS
2013 -9.25% 0.95%
2012 2.22% 0.00%
LVIP CLARION GLOBAL REAL ESTATE STANDARD CLASS
2013 2.53% 0.00%
2012 23.75% 0.00%
2011 -9.35% 0.00%
2010 17.10% 0.00%
2009 36.80% 0.00%
LVIP DELAWARE BOND STANDARD CLASS
2013 -3.04% 1.56%
2012 5.81% 2.00%
2011 6.83% 3.41%
2010 7.68% 3.56%
2009 18.01% 4.44%
LVIP DELAWARE DIVERSIFIED FLOATING RATE SERVICE CLASS
2013 -0.50% 0.90%
2012 2.93% 1.35%
2011 -2.14% 2.73%
LVIP DELAWARE FOUNDATION AGGRESSIVE ALLOCATION STANDARD CLASS
2013 19.04% 1.72%
2012 12.16% 2.07%
2011 -3.00% 2.34%
2010 11.64% 3.52%
2009 21.57% 1.74%
L-20
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. FINANCIAL HIGHLIGHTS (CONTINUED)
[Enlarge/Download Table]
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM
COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL
SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4)
------------------------------------------------------------------------------------------------------------------------------------
LVIP DELAWARE FOUNDATION CONSERVATIVE ALLOCATION STANDARD CLASS
2013 0.75% 1.00% $14.91 $ 15.27 82,482 $ 1,235,729 8.25%
2012 0.75% 1.00% 13.77 14.07 81,986 1,134,046 9.53%
2011 0.75% 1.00% 12.57 12.82 78,818 995,079 1.21%
2010 0.75% 1.00% 12.42 12.63 81,634 1,017,302 9.33%
2009 0.75% 1.00% 11.36 11.52 85,146 969,859 21.62%
LVIP DELAWARE FOUNDATION MODERATE ALLOCATION STANDARD CLASS
2013 0.75% 1.00% 16.05 16.22 31,435 504,590 13.10%
2012 0.75% 1.00% 14.19 14.30 21,793 309,208 10.20%
2011 0.75% 1.00% 12.88 12.88 18,011 231,921 -0.73%
2010 1.00% 1.00% 12.97 12.97 11,901 154,355 9.91%
2009 8/28/09 1.00% 1.00% 11.80 11.80 4 48 8.15%
LVIP DELAWARE GROWTH AND INCOME STANDARD CLASS
2013 0.75% 1.00% 14.14 14.62 349,480 4,954,347 31.93%
2012 0.75% 1.00% 10.72 11.05 354,280 3,805,702 14.17%
2011 0.75% 1.00% 9.39 9.66 390,097 3,669,574 0.19%
2010 0.75% 1.00% 9.37 9.61 453,326 4,254,556 11.81%
2009 0.75% 1.00% 8.38 8.58 520,227 4,366,120 23.44%
LVIP DELAWARE SOCIAL AWARENESS STANDARD CLASS
2013 0.75% 1.00% 23.67 24.54 647,268 15,361,248 34.34%
2012 0.75% 1.00% 17.62 18.22 703,524 12,425,870 14.14%
2011 0.75% 1.00% 15.44 15.93 761,073 11,777,523 -0.36%
2010 0.75% 1.00% 15.49 15.95 904,374 14,040,223 10.46%
2009 0.75% 1.00% 14.03 14.40 996,878 14,010,749 28.71%
LVIP GLOBAL INCOME STANDARD CLASS
2013 1.00% 1.00% 12.05 12.05 21,720 261,626 -3.79%
2012 1.00% 1.00% 12.52 12.52 19,785 247,696 6.62%
2011 1.00% 1.00% 11.74 11.74 20,240 237,668 0.08%
2010 1.00% 1.00% 11.73 11.73 12,568 147,459 8.59%
2009 7/15/09 1.00% 1.00% 10.80 10.80 6,160 66,561 5.35%
LVIP MANAGED RISK PROFILE 2010 STANDARD CLASS
2013 0.75% 1.00% 12.48 12.69 66,071 824,648 7.84%
2012 0.75% 1.00% 11.57 11.74 65,720 760,605 7.46%
2011 0.75% 1.00% 10.77 10.89 65,779 709,674 0.24%
2010 0.75% 1.00% 10.74 10.84 77,423 832,709 10.36%
2009 0.75% 1.00% 9.74 9.80 73,801 719,040 23.16%
LVIP MANAGED RISK PROFILE 2020 STANDARD CLASS
2013 0.75% 1.00% 12.09 12.29 181,807 2,199,903 10.03%
2012 0.75% 1.00% 10.99 11.14 194,273 2,136,241 7.30%
2011 0.75% 1.00% 10.24 10.36 196,176 2,010,079 -0.80%
2010 0.75% 1.00% 10.32 10.42 216,761 2,238,428 10.92%
2009 0.75% 1.00% 9.31 9.37 144,789 1,348,029 24.41%
LVIP MANAGED RISK PROFILE 2030 STANDARD CLASS
2013 0.75% 1.00% 11.96 12.16 312,189 3,735,879 12.61%
2012 0.75% 1.00% 10.62 10.78 278,616 2,960,652 6.82%
2011 0.75% 1.00% 9.95 10.06 249,283 2,479,688 -1.55%
2010 0.75% 1.00% 10.10 10.20 226,525 2,288,763 11.43%
2009 0.75% 1.00% 9.07 9.13 178,202 1,615,827 26.68%
LVIP MANAGED RISK PROFILE 2040 STANDARD CLASS
2013 0.75% 1.00% 11.41 11.60 140,076 1,599,006 15.38%
2012 0.75% 1.00% 9.89 10.03 124,354 1,230,346 6.06%
2011 0.75% 1.00% 9.33 9.44 101,413 946,060 -2.44%
2010 0.75% 1.00% 9.56 9.65 82,452 788,425 12.53%
2009 0.75% 1.00% 8.50 8.55 60,926 517,698 29.65%
LVIP MANAGED RISK PROFILE 2050 STANDARD CLASS
2013 1.00% 1.00% 11.39 11.39 12,580 143,326 17.85%
2012 1.00% 1.00% 9.67 9.67 2,647 25,589 4.93%
2011 7/15/11 1.00% 1.00% 9.21 9.21 29,223 269,237 -7.17%
MAXIMUM INVESTMENT
TOTAL INCOME
SUBACCOUNT YEAR RETURN(4) RATIO(5)
------------------------------------------------------------------------------------------------------------------------------------
LVIP DELAWARE FOUNDATION CONSERVATIVE ALLOCATION STANDARD CLASS
2013 8.52% 2.22%
2012 9.81% 2.41%
2011 1.47% 6.45%
2010 9.61% 1.70%
2009 21.93% 3.00%
LVIP DELAWARE FOUNDATION MODERATE ALLOCATION STANDARD CLASS
2013 13.40% 2.33%
2012 10.42% 2.62%
2011 -0.73% 2.88%
2010 9.91% 6.12%
2009 8.15% 0.00%
LVIP DELAWARE GROWTH AND INCOME STANDARD CLASS
2013 32.26% 1.79%
2012 14.46% 1.07%
2011 0.44% 1.00%
2010 12.09% 0.91%
2009 23.75% 1.12%
LVIP DELAWARE SOCIAL AWARENESS STANDARD CLASS
2013 34.68% 1.26%
2012 14.42% 0.75%
2011 -0.11% 0.70%
2010 10.74% 0.60%
2009 29.03% 0.70%
LVIP GLOBAL INCOME STANDARD CLASS
2013 -3.79% 0.26%
2012 6.62% 1.90%
2011 0.08% 4.68%
2010 8.59% 2.85%
2009 5.35% 3.68%
LVIP MANAGED RISK PROFILE 2010 STANDARD CLASS
2013 8.11% 1.34%
2012 7.73% 2.39%
2011 0.49% 0.83%
2010 10.63% 1.15%
2009 23.47% 2.10%
LVIP MANAGED RISK PROFILE 2020 STANDARD CLASS
2013 10.30% 1.28%
2012 7.57% 2.06%
2011 -0.55% 0.76%
2010 11.19% 1.00%
2009 24.72% 1.90%
LVIP MANAGED RISK PROFILE 2030 STANDARD CLASS
2013 12.90% 1.38%
2012 7.09% 1.90%
2011 -1.31% 0.66%
2010 11.71% 0.91%
2009 26.99% 2.09%
LVIP MANAGED RISK PROFILE 2040 STANDARD CLASS
2013 15.66% 1.37%
2012 6.32% 1.84%
2011 -2.20% 0.63%
2010 12.82% 0.94%
2009 29.97% 1.47%
LVIP MANAGED RISK PROFILE 2050 STANDARD CLASS
2013 17.85% 2.47%
2012 4.93% 0.30%
2011 -7.17% 0.00%
L-21
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. FINANCIAL HIGHLIGHTS (CONTINUED)
[Enlarge/Download Table]
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM
COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL
SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4)
------------------------------------------------------------------------------------------------------------------------------------
LVIP MANAGED RISK PROFILE CONSERVATIVE STANDARD CLASS
2013 0.75% 1.00% $15.76 $ 16.10 126,229 $ 1,989,465 8.66%
2012 0.75% 1.00% 14.50 14.78 156,741 2,273,449 8.68%
2011 0.75% 1.00% 13.34 13.56 157,522 2,102,251 2.65%
2010 0.75% 1.00% 13.00 13.18 286,321 3,721,821 9.40%
2009 0.75% 1.00% 11.88 12.02 267,910 3,183,545 23.61%
LVIP MANAGED RISK PROFILE GROWTH STANDARD CLASS
2013 0.75% 1.00% 14.86 15.18 393,939 5,857,083 12.42%
2012 0.75% 1.00% 13.22 13.47 391,875 5,182,561 8.06%
2011 0.75% 1.00% 12.23 12.43 418,427 5,120,586 -1.00%
2010 0.75% 1.00% 12.35 12.53 420,843 5,201,715 11.60%
2009 0.75% 1.00% 11.07 11.20 409,680 4,537,418 27.75%
LVIP MANAGED RISK PROFILE MODERATE STANDARD CLASS
2013 0.75% 1.00% 15.52 15.85 358,649 5,571,552 10.74%
2012 0.75% 1.00% 14.01 14.28 357,635 5,016,147 8.50%
2011 0.75% 1.00% 12.91 13.13 369,710 4,778,923 0.16%
2010 0.75% 1.00% 12.89 13.07 378,148 4,879,150 10.85%
2009 0.75% 1.00% 11.63 11.77 376,162 4,378,100 26.76%
LVIP MONDRIAN INTERNATIONAL VALUE STANDARD CLASS
2013 0.75% 1.00% 18.39 18.84 223,032 4,114,403 20.63%
2012 0.75% 1.00% 15.25 15.58 246,515 3,768,229 8.53%
2011 0.75% 1.00% 14.05 14.32 288,351 4,059,549 -5.17%
2010 0.75% 1.00% 14.81 15.06 341,663 5,069,710 1.44%
2009 0.75% 1.00% 14.60 14.81 425,403 6,223,680 20.03%
LVIP SSGA BOND INDEX STANDARD CLASS
2013 1.00% 1.00% 11.49 11.49 53,003 608,997 -3.54%
2012 0.75% 1.00% 11.91 12.02 59,085 704,258 2.82%
2011 0.75% 1.00% 11.58 11.66 50,337 583,204 6.33%
2010 0.75% 1.00% 10.89 10.94 44,556 485,640 4.91%
2009 7/6/09 0.75% 1.00% 10.38 10.40 10,015 104,047 -0.52%
LVIP SSGA EMERGING MARKETS 100 STANDARD CLASS
2013 0.75% 1.00% 15.59 15.77 74,944 1,168,805 -3.80%
2012 0.75% 1.00% 16.21 16.35 77,620 1,258,209 11.53%
2011 0.75% 1.00% 14.53 14.62 78,785 1,145,087 -15.78%
2010 0.75% 1.00% 17.25 17.32 77,860 1,343,516 26.50%
2009 6/29/09 0.75% 1.00% 13.64 13.66 42,116 574,480 21.46%
LVIP SSGA GLOBAL TACTICAL ALLOCATION RPM STANDARD CLASS
2013 0.75% 1.00% 13.53 13.83 141,990 1,923,158 8.72%
2012 0.75% 1.00% 12.45 12.69 149,416 1,861,171 10.04%
2011 0.75% 1.00% 11.31 11.50 156,978 1,776,647 -0.78%
2010 0.75% 1.00% 11.40 11.56 169,896 1,938,112 7.65%
2009 0.75% 1.00% 10.59 10.71 165,203 1,750,486 29.50%
LVIP SSGA INTERNATIONAL INDEX STANDARD CLASS
2013 0.75% 1.00% 15.60 15.78 9,619 150,109 19.78%
2012 0.75% 1.00% 13.03 13.15 8,001 104,237 16.95%
2011 0.75% 1.00% 11.14 11.14 6,474 72,113 -13.25%
2010 1.00% 1.00% 12.84 12.84 8,697 111,675 5.98%
2009 7/16/09 1.00% 1.00% 12.12 12.12 4,951 59,991 19.49%
LVIP SSGA S&P 500 INDEX STANDARD CLASS
2013 0.75% 1.00% 14.02 14.02 7,910,666 110,935,745 30.69%
2012 5/21/12 1.00% 1.00% 10.73 10.73 1,968 21,113 9.05%
LVIP SSGA SMALL-CAP INDEX STANDARD CLASS
2013 0.75% 1.00% 14.91 14.91 2,215,500 33,044,692 36.53%
2012 6/19/12 1.00% 1.00% 10.92 10.92 507 5,536 8.17%
LVIP T. ROWE PRICE STRUCTURED MID-CAP GROWTH STANDARD CLASS
2013 0.75% 1.00% 23.02 23.87 856,195 19,754,536 33.45%
2012 0.75% 1.00% 17.25 17.84 904,684 15,640,591 15.15%
2011 0.75% 1.00% 14.98 15.46 1,006,689 15,117,255 -4.82%
2010 0.75% 1.00% 15.74 16.20 1,167,911 18,420,566 27.09%
2009 0.75% 1.00% 12.39 12.71 1,309,307 16,250,903 44.89%
MAXIMUM INVESTMENT
TOTAL INCOME
SUBACCOUNT YEAR RETURN(4) RATIO(5)
------------------------------------------------------------------------------------------------------------------------------------
LVIP MANAGED RISK PROFILE CONSERVATIVE STANDARD CLASS
2013 8.93% 1.72%
2012 8.96% 3.87%
2011 2.91% 1.52%
2010 9.68% 3.77%
2009 23.92% 4.30%
LVIP MANAGED RISK PROFILE GROWTH STANDARD CLASS
2013 12.70% 1.77%
2012 8.33% 2.50%
2011 -0.75% 1.97%
2010 11.88% 2.89%
2009 28.07% 4.70%
LVIP MANAGED RISK PROFILE MODERATE STANDARD CLASS
2013 11.02% 1.79%
2012 8.77% 3.29%
2011 0.41% 1.76%
2010 11.12% 2.98%
2009 27.08% 4.26%
LVIP MONDRIAN INTERNATIONAL VALUE STANDARD CLASS
2013 20.93% 2.43%
2012 8.80% 2.77%
2011 -4.93% 2.84%
2010 1.70% 3.11%
2009 20.33% 3.27%
LVIP SSGA BOND INDEX STANDARD CLASS
2013 -3.54% 2.00%
2012 3.08% 2.74%
2011 6.59% 3.71%
2010 5.17% 2.71%
2009 2.61% 3.50%
LVIP SSGA EMERGING MARKETS 100 STANDARD CLASS
2013 -3.55% 2.35%
2012 11.81% 2.61%
2011 -15.57% 2.43%
2010 26.82% 1.71%
2009 35.70% 1.67%
LVIP SSGA GLOBAL TACTICAL ALLOCATION RPM STANDARD CLASS
2013 8.99% 2.04%
2012 10.32% 3.40%
2011 -0.53% 1.30%
2010 7.92% 1.05%
2009 29.82% 6.69%
LVIP SSGA INTERNATIONAL INDEX STANDARD CLASS
2013 20.08% 1.82%
2012 17.26% 1.86%
2011 -13.25% 1.04%
2010 5.98% 1.50%
2009 19.49% 2.53%
LVIP SSGA S&P 500 INDEX STANDARD CLASS
2013 30.69% 2.38%
2012 9.05% 2.06%
LVIP SSGA SMALL-CAP INDEX STANDARD CLASS
2013 36.53% 1.21%
2012 8.17% 1.01%
LVIP T. ROWE PRICE STRUCTURED MID-CAP GROWTH STANDARD CLASS
2013 33.79% 0.00%
2012 15.43% 0.00%
2011 -4.59% 0.00%
2010 27.41% 0.00%
2009 45.25% 0.10%
L-22
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. FINANCIAL HIGHLIGHTS (CONTINUED)
[Enlarge/Download Table]
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM
COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL
SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4)
------------------------------------------------------------------------------------------------------------------------------------
LVIP UBS LARGE CAP GROWTH RPM STANDARD CLASS
2013 0.75% 1.00% $ 9.46 $ 9.77 179,209 $ 1,698,511 24.25%
2012 0.75% 1.00% 7.61 7.85 199,348 1,521,247 15.23%
2011 0.75% 1.00% 6.60 6.79 210,235 1,391,272 -6.62%
2010 0.75% 1.00% 7.07 7.26 224,617 1,591,476 10.24%
2009 0.75% 1.00% 6.42 6.57 247,111 1,588,529 37.15%
NB AMT LARGE CAP VALUE I CLASS
2013 0.75% 1.00% 22.07 22.88 243,292 5,382,437 29.83%
2012 0.75% 1.00% 17.00 17.58 253,438 4,318,915 15.44%
2011 0.75% 1.00% 14.72 15.19 290,712 4,290,578 -12.24%
2010 0.75% 1.00% 16.78 17.27 359,925 6,050,361 14.52%
2009 0.75% 1.00% 14.65 15.04 408,049 5,993,548 54.52%
NB AMT MID CAP GROWTH I CLASS
2012 0.75% 1.00% 9.38 9.67 702,641 6,598,276 11.30%
2011 0.75% 1.00% 8.42 8.66 757,209 6,387,768 -0.53%
2010 0.75% 1.00% 8.47 8.69 873,255 7,404,066 27.81%
2009 0.75% 1.00% 6.63 6.78 975,025 6,471,128 30.29%
T. ROWE PRICE INTERNATIONAL STOCK
2013 0.75% 1.00% 21.00 21.78 575,787 12,114,559 12.92%
2012 0.75% 1.00% 18.60 19.24 626,616 11,673,495 17.26%
2011 0.75% 1.00% 15.86 16.36 678,905 10,784,826 -13.70%
2010 0.75% 1.00% 18.38 18.91 788,274 14,509,437 13.32%
2009 0.75% 1.00% 16.22 16.65 900,546 14,630,234 50.87%
MAXIMUM INVESTMENT
TOTAL INCOME
SUBACCOUNT YEAR RETURN(4) RATIO(5)
------------------------------------------------------------------------------------------------------------------------------------
LVIP UBS LARGE CAP GROWTH RPM STANDARD CLASS
2013 24.56% 0.00%
2012 15.52% 0.00%
2011 -6.39% 0.21%
2010 10.51% 0.73%
2009 37.49% 0.85%
NB AMT LARGE CAP VALUE I CLASS
2013 30.16% 1.17%
2012 15.73% 0.41%
2011 -12.02% 0.00%
2010 14.80% 0.66%
2009 54.91% 2.64%
NB AMT MID CAP GROWTH I CLASS
2012 11.57% 0.00%
2011 -0.28% 0.00%
2010 28.13% 0.00%
2009 30.62% 0.00%
T. ROWE PRICE INTERNATIONAL STOCK
2013 13.20% 0.85%
2012 17.55% 1.25%
2011 -13.49% 1.43%
2010 13.60% 0.89%
2009 51.25% 2.71%
(1) Reflects less than a full year of activity. Funds were first received in
this option on the commencement date noted or the option was inactive at
the date funds were received.
(2) These amounts represent the annualized minimum and maximum contract
expenses of the separate account, consisting primarily of mortality and
expense charges, for each period indicated. The ratios include only those
expenses that result in a direct reduction to unit values. Charges made
directly to contract owner accounts through the redemption of units and
expenses of the underlying funds have been excluded.
(3) As the unit value is presented as a range of minimum to maximum values
for only those subaccounts which existed for the entire year, some
individual contract unit values may not be within the ranges presented as
a result of partial year activity.
(4) These amounts represent the total return, including changes in value of
mutual funds, and reflect deductions for all items included in the fee
rate. The total return does not include contract charges deducted
directly from policy account values. The total return is not annualized.
As the total return is presented as a range of minimum to maximum values
for only those subaccounts which existed for the entire year, some
individual contract total returns may not be within the ranges presented
as a result of partial year activity.
(5) These amounts represent the dividends, excluding distributions of capital
gains, received by the subaccount from the underlying mutual fund, net of
management fees assessed by the fund manager, divided by the average net
assets. These ratios exclude those expenses, such as mortality and
expense guarantee charges, that result in direct reductions in the unit
values. The recognition of investment income by the subaccount is
affected by the timing of the declaration of dividends by the underlying
fund in which the subaccounts invest. Investment income ratios are not
annualized.
Note: Fee rate, unit value and total return minimum and maximum are the same
where there is only one active contract level charge for the subaccount.
L-23
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PURCHASES AND SALES OF INVESTMENTS
The aggregate cost of investments purchased and the aggregate proceeds from
investments sold were as follows for 2013:
[Enlarge/Download Table]
AGGREGATE AGGREGATE
COST OF PROCEEDS
SUBACCOUNT PURCHASES FROM SALES
------------------------------------------------------------------------------------------------------------------------------------
ABVPSF Global Thematic Growth Class B $ 77,906 $ 342,289
ABVPSF Growth Class B 115,857 172,525
ABVPSF Growth and Income Class B 80,088 1,486,261
American Century VP Balanced Class I 1,052,496 2,388,389
American Century VP Inflation Protection Class I 136,316 1,678,063
American Funds Global Growth Class 2 755,308 1,028,426
American Funds Growth Class 2 788,028 3,385,634
American Funds Growth-Income Class 2 1,467,524 1,099,758
American Funds International Class 2 580,015 1,915,617
BlackRock Global Allocation V.I. Class I 431,805 198,713
Delaware VIP Diversified Income Standard Class 1,196,672 1,991,808
Delaware VIP High Yield Standard Class 575,818 823,743
Delaware VIP REIT Service Class 990,392 1,764,759
Delaware VIP Small Cap Value Service Class 1,216,825 923,239
Delaware VIP Smid Cap Growth Service Class 1,475,883 856,670
Dreyfus Opportunistic Small Cap Initial Class 352,144 29,179,290
Dreyfus Stock Index Initial Class 985,431 57,383,844
DWS Alternative Asset Allocation VIP Class A 76,196 18,191
DWS Equity 500 Index VIP Class A 229,160 2,216,512
DWS Small Cap Index VIP Class A 272,960 2,495,039
Fidelity VIP Asset Manager Initial Class 983,833 4,854,746
Fidelity VIP Contrafund Service Class 2 1,328,740 2,650,559
Fidelity VIP Equity-Income Initial Class 339,724 45,861,437
Fidelity VIP Growth Initial Class 520,687 9,040,091
Fidelity VIP Money Market Initial Class 40,228 40,423
Janus Aspen Global Research Institutional Class 308,710 1,431,095
LVIP Baron Growth Opportunities Service Class 2,483,040 1,762,651
LVIP BlackRock Inflation Protected Bond Standard Class 1,674,277 646,231
LVIP Clarion Global Real Estate Standard Class 186,309 170,559
LVIP Delaware Bond Standard Class 411,928 2,223,595
LVIP Delaware Diversified Floating Rate Service Class 123,358 19,990
LVIP Delaware Foundation Aggressive Allocation Standard Class 54,339 12,205
LVIP Delaware Foundation Conservative Allocation Standard Class 197,540 154,600
LVIP Delaware Foundation Moderate Allocation Standard Class 178,534 17,767
LVIP Delaware Growth and Income Standard Class 620,022 514,092
LVIP Delaware Social Awareness Standard Class 693,163 1,541,850
LVIP Global Income Standard Class 141,279 119,188
LVIP Managed Risk Profile 2010 Standard Class 72,068 90,856
LVIP Managed Risk Profile 2020 Standard Class 485,386 624,259
LVIP Managed Risk Profile 2030 Standard Class 871,727 482,694
LVIP Managed Risk Profile 2040 Standard Class 324,360 150,136
LVIP Managed Risk Profile 2050 Standard Class 122,215 15,750
LVIP Managed Risk Profile Conservative Standard Class 261,320 699,118
LVIP Managed Risk Profile Growth Standard Class 482,439 403,189
LVIP Managed Risk Profile Moderate Standard Class 510,863 446,379
LVIP Mondrian International Value Standard Class 299,355 634,359
LVIP SSgA Bond Index Standard Class 213,542 279,354
LVIP SSgA Emerging Markets 100 Standard Class 367,897 385,756
LVIP SSgA Global Tactical Allocation RPM Standard Class 110,210 186,142
LVIP SSgA International Index Standard Class 75,852 52,872
LVIP SSgA S&P 500 Index Standard Class 110,788,063 10,350,320
LVIP SSgA Small-Cap Index Standard Class 30,751,464 2,334,370
LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class 1,164,209 2,092,430
LVIP UBS Large Cap Growth RPM Standard Class 54,767 235,744
NB AMT Large Cap Value I Class 530,431 714,681
NB AMT Mid Cap Growth I Class 59,971 7,613,853
T. Rowe Price International Stock 226,061 1,232,343
L-24
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS
The following is a summary of investments owned at December 31, 2013:
[Enlarge/Download Table]
NET
SHARES ASSET FAIR VALUE
SUBACCOUNT OWNED VALUE OF SHARES COST OF SHARES
------------------------------------------------------------------------------------------------------------------------------------
ABVPSF Global Thematic Growth Class B 98,593 $ 20.18 $ 1,989,601 $ 1,540,796
ABVPSF Growth Class B 50,602 30.08 1,522,099 942,256
American Century VP Balanced Class I 2,075,403 8.08 16,769,257 14,191,834
American Funds Global Growth Class 2 200,469 29.92 5,998,041 4,341,445
American Funds Growth Class 2 349,014 77.94 27,202,142 18,289,215
American Funds Growth-Income Class 2 215,236 50.40 10,847,872 8,027,670
American Funds International Class 2 572,898 21.15 12,116,800 10,266,247
BlackRock Global Allocation V.I. Class I 88,785 17.61 1,563,508 1,430,213
Delaware VIP Diversified Income Standard Class 562,731 10.53 5,925,553 5,792,002
Delaware VIP High Yield Standard Class 462,696 6.19 2,864,090 2,613,336
Delaware VIP REIT Service Class 897,048 12.12 10,872,226 11,106,741
Delaware VIP Small Cap Value Service Class 253,138 41.58 10,525,489 7,540,230
Delaware VIP Smid Cap Growth Service Class 206,457 31.33 6,468,303 4,757,584
DWS Alternative Asset Allocation VIP Class A 13,708 13.75 188,488 185,871
Fidelity VIP Asset Manager Initial Class 2,360,089 17.24 40,687,932 36,063,981
Fidelity VIP Contrafund Service Class 2 663,232 33.77 22,397,353 17,316,439
Fidelity VIP Growth Initial Class 1,366,734 57.14 78,095,182 50,502,158
Fidelity VIP Money Market Initial Class 7,794 1.00 7,794 7,794
Janus Aspen Global Research Institutional Class 255,469 38.99 9,960,727 9,258,434
LVIP Baron Growth Opportunities Service Class 417,830 45.20 18,886,328 10,830,218
LVIP BlackRock Inflation Protected Bond Standard Class 93,481 10.19 952,481 1,047,814
LVIP Clarion Global Real Estate Standard Class 75,299 8.78 660,976 531,671
LVIP Delaware Bond Standard Class 426,756 13.47 5,746,702 5,695,453
LVIP Delaware Diversified Floating Rate Service Class 12,686 10.14 128,598 128,589
LVIP Delaware Foundation Aggressive Allocation Standard Class 14,823 15.63 231,663 189,209
LVIP Delaware Foundation Conservative Allocation Standard Class 80,991 15.26 1,235,759 1,178,543
LVIP Delaware Foundation Moderate Allocation Standard Class 31,781 15.88 504,616 452,774
LVIP Delaware Growth and Income Standard Class 117,453 42.18 4,954,409 3,550,296
LVIP Delaware Social Awareness Standard Class 358,575 42.84 15,361,723 11,711,445
LVIP Global Income Standard Class 22,909 11.42 261,620 264,678
LVIP Managed Risk Profile 2010 Standard Class 68,130 12.11 824,709 705,582
LVIP Managed Risk Profile 2020 Standard Class 186,088 11.83 2,201,239 1,855,320
LVIP Managed Risk Profile 2030 Standard Class 313,042 11.93 3,735,844 3,034,649
LVIP Managed Risk Profile 2040 Standard Class 138,767 11.52 1,599,007 1,297,928
LVIP Managed Risk Profile 2050 Standard Class 12,965 11.05 143,319 132,333
LVIP Managed Risk Profile Conservative Standard Class 146,120 13.62 1,990,586 1,730,635
LVIP Managed Risk Profile Growth Standard Class 440,765 13.29 5,857,764 5,066,155
LVIP Managed Risk Profile Moderate Standard Class 403,313 13.82 5,571,773 4,726,361
LVIP Mondrian International Value Standard Class 226,939 18.13 4,114,629 4,281,942
LVIP SSgA Bond Index Standard Class 55,293 11.01 608,889 633,896
LVIP SSgA Emerging Markets 100 Standard Class 117,858 9.92 1,168,795 1,335,692
LVIP SSgA Global Tactical Allocation RPM Standard Class 163,210 11.78 1,923,263 1,787,400
LVIP SSgA International Index Standard Class 15,871 9.46 150,107 130,213
LVIP SSgA S&P 500 Index Standard Class 8,379,515 13.26 111,103,984 100,671,424
LVIP SSgA Small-Cap Index Standard Class 1,236,693 26.72 33,046,904 28,546,868
LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class 943,279 20.94 19,755,088 13,353,311
LVIP UBS Large Cap Growth RPM Standard Class 57,471 29.56 1,698,552 1,101,079
NB AMT Large Cap Value I Class 357,894 15.04 5,382,731 4,798,646
T. Rowe Price International Stock 770,648 15.72 12,114,589 10,158,541
L-25
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CHANGES IN UNITS OUTSTANDING
The change in units outstanding for the year ended December 31, 2013, is as
follows:
[Enlarge/Download Table]
UNITS UNITS NET INCREASE
SUBACCOUNT ISSUED REDEEMED (DECREASE)
------------------------------------------------------------------------------------------------------------------------------------
ABVPSF Global Thematic Growth Class B 18,122 (69,861) (51,739)
ABVPSF Growth Class B 13,193 (17,832) (4,639)
ABVPSF Growth and Income Class B 4,795 (96,713) (91,918)
American Century VP Balanced Class I 15,535 (64,692) (49,157)
American Century VP Inflation Protection Class I 6,097 (130,327) (124,230)
American Funds Global Growth Class 2 36,696 (51,978) (15,282)
American Funds Growth Class 2 55,783 (256,642) (200,859)
American Funds Growth-Income Class 2 90,111 (69,884) 20,227
American Funds International Class 2 35,142 (135,951) (100,809)
BlackRock Global Allocation V.I. Class I 26,917 (14,493) 12,424
Delaware VIP Diversified Income Standard Class 57,616 (115,226) (57,610)
Delaware VIP High Yield Standard Class 20,406 (45,054) (24,648)
Delaware VIP REIT Service Class 29,036 (56,980) (27,944)
Delaware VIP Small Cap Value Service Class 38,238 (42,498) (4,260)
Delaware VIP Smid Cap Growth Service Class 91,021 (62,551) 28,470
Dreyfus Opportunistic Small Cap Initial Class 14,508 (1,031,409) (1,016,901)
Dreyfus Stock Index Initial Class 4,320 (1,023,197) (1,018,877)
DWS Alternative Asset Allocation VIP Class A 5,795 (1,385) 4,410
DWS Equity 500 Index VIP Class A 10,146 (135,547) (125,401)
DWS Small Cap Index VIP Class A 8,941 (139,094) (130,153)
Fidelity VIP Asset Manager Initial Class 8,870 (119,355) (110,485)
Fidelity VIP Contrafund Service Class 2 73,584 (150,794) (77,210)
Fidelity VIP Equity-Income Initial Class 5,813 (1,166,102) (1,160,289)
Fidelity VIP Growth Initial Class 11,913 (163,468) (151,555)
Fidelity VIP Money Market Initial Class 2,246 (2,245) 1
Janus Aspen Global Research Institutional Class 14,735 (85,364) (70,629)
LVIP Baron Growth Opportunities Service Class 25,445 (36,810) (11,365)
LVIP BlackRock Inflation Protected Bond Standard Class 163,384 (67,816) 95,568
LVIP Clarion Global Real Estate Standard Class 22,076 (19,420) 2,656
LVIP Delaware Bond Standard Class 18,063 (142,236) (124,173)
LVIP Delaware Diversified Floating Rate Service Class 12,315 (1,964) 10,351
LVIP Delaware Foundation Aggressive Allocation Standard Class 3,309 (697) 2,612
LVIP Delaware Foundation Conservative Allocation Standard Class 11,084 (10,588) 496
LVIP Delaware Foundation Moderate Allocation Standard Class 10,744 (1,102) 9,642
LVIP Delaware Growth and Income Standard Class 34,843 (39,643) (4,800)
LVIP Delaware Social Awareness Standard Class 14,812 (71,068) (56,256)
LVIP Global Income Standard Class 11,753 (9,818) 1,935
LVIP Managed Risk Profile 2010 Standard Class 5,583 (5,232) 351
LVIP Managed Risk Profile 2020 Standard Class 41,204 (53,670) (12,466)
LVIP Managed Risk Profile 2030 Standard Class 76,518 (42,945) 33,573
LVIP Managed Risk Profile 2040 Standard Class 29,736 (14,014) 15,722
LVIP Managed Risk Profile 2050 Standard Class 11,427 (1,494) 9,933
LVIP Managed Risk Profile Conservative Standard Class 13,998 (44,510) (30,512)
LVIP Managed Risk Profile Growth Standard Class 30,068 (28,004) 2,064
LVIP Managed Risk Profile Moderate Standard Class 30,642 (29,628) 1,014
LVIP Mondrian International Value Standard Class 13,161 (36,644) (23,483)
LVIP SSgA Bond Index Standard Class 17,367 (23,449) (6,082)
LVIP SSgA Emerging Markets 100 Standard Class 22,609 (25,285) (2,676)
LVIP SSgA Global Tactical Allocation RPM Standard Class 6,592 (14,018) (7,426)
LVIP SSgA International Index Standard Class 5,182 (3,564) 1,618
LVIP SSgA S&P 500 Index Standard Class 8,688,874 (780,176) 7,908,698
LVIP SSgA Small-Cap Index Standard Class 2,379,596 (164,603) 2,214,993
LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class 49,770 (98,259) (48,489)
LVIP UBS Large Cap Growth RPM Standard Class 7,863 (28,002) (20,139)
NB AMT Large Cap Value I Class 25,249 (35,395) (10,146)
NB AMT Mid Cap Growth I Class 6,810 (709,451) (702,641)
T. Rowe Price International Stock 8,809 (59,638) (50,829)
L-26
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CHANGES IN UNITS OUTSTANDING (CONTINUED)
The change in units outstanding for the year ended December 31, 2012, is as
follows:
[Enlarge/Download Table]
UNITS UNITS NET INCREASE
SUBACCOUNT ISSUED REDEEMED (DECREASE)
------------------------------------------------------------------------------------------------------------------------------------
ABVPSF Global Thematic Growth Class B 41,931 (88,606) (46,675)
ABVPSF Growth Class B 12,037 (15,604) (3,567)
ABVPSF Growth and Income Class B 19,589 (11,306) 8,283
American Century VP Balanced Class I 10,199 (56,280) (46,081)
American Century VP Inflation Protection Class I 50,052 (18,719) 31,333
American Funds Global Growth Class 2 28,734 (56,252) (27,518)
American Funds Growth Class 2 72,775 (230,595) (157,820)
American Funds Growth-Income Class 2 61,008 (86,555) (25,547)
American Funds International Class 2 31,018 (197,558) (166,540)
BlackRock Global Allocation V.I. Class I 24,498 (30,049) (5,551)
Delaware VIP Diversified Income Standard Class 46,242 (51,567) (5,325)
Delaware VIP High Yield Standard Class 26,305 (39,260) (12,955)
Delaware VIP REIT Service Class 31,689 (67,968) (36,279)
Delaware VIP Small Cap Value Service Class 37,159 (67,386) (30,227)
Delaware VIP Smid Cap Growth Service Class 102,224 (89,083) 13,141
Dreyfus Opportunistic Small Cap Initial Class 10,755 (131,219) (120,464)
Dreyfus Stock Index Initial Class 9,848 (127,726) (117,878)
DWS Alternative Asset Allocation VIP Class A 8,327 (6,417) 1,910
DWS Equity 500 Index VIP Class A 17,036 (85,138) (68,102)
DWS Small Cap Index VIP Class A 10,641 (13,515) (2,874)
Fidelity VIP Asset Manager Initial Class 12,345 (108,835) (96,490)
Fidelity VIP Contrafund Service Class 2 81,110 (114,688) (33,578)
Fidelity VIP Equity-Income Initial Class 20,218 (142,720) (122,502)
Fidelity VIP Growth Initial Class 14,900 (130,299) (115,399)
Fidelity VIP Money Market Initial Class 6,328 (8,263) (1,935)
Janus Aspen Global Research Institutional Class 8,367 (70,332) (61,965)
LVIP Baron Growth Opportunities Service Class 11,760 (68,891) (57,131)
LVIP BlackRock Inflation Protected Bond Standard Class 9,819 (3,071) 6,748
LVIP Clarion Global Real Estate Standard Class 11,664 (11,446) 218
LVIP Delaware Bond Standard Class 53,590 (86,853) (33,263)
LVIP Delaware Diversified Floating Rate Service Class 2,874 (756) 2,118
LVIP Delaware Foundation Aggressive Allocation Standard Class 4,156 (1,122) 3,034
LVIP Delaware Foundation Conservative Allocation Standard Class 17,805 (14,637) 3,168
LVIP Delaware Foundation Moderate Allocation Standard Class 4,353 (571) 3,782
LVIP Delaware Growth and Income Standard Class 14,947 (50,764) (35,817)
LVIP Delaware Social Awareness Standard Class 18,140 (75,689) (57,549)
LVIP Global Income Standard Class 4,861 (5,316) (455)
LVIP Managed Risk Profile 2010 Standard Class 32,060 (32,119) (59)
LVIP Managed Risk Profile 2020 Standard Class 34,624 (36,527) (1,903)
LVIP Managed Risk Profile 2030 Standard Class 57,088 (27,755) 29,333
LVIP Managed Risk Profile 2040 Standard Class 34,590 (11,649) 22,941
LVIP Managed Risk Profile 2050 Standard Class 3,503 (30,079) (26,576)
LVIP Managed Risk Profile Conservative Standard Class 32,188 (32,969) (781)
LVIP Managed Risk Profile Growth Standard Class 35,119 (61,671) (26,552)
LVIP Managed Risk Profile Moderate Standard Class 27,924 (39,999) (12,075)
LVIP Mondrian International Value Standard Class 19,799 (61,635) (41,836)
LVIP SSgA Bond Index Standard Class 31,516 (22,768) 8,748
LVIP SSgA Emerging Markets 100 Standard Class 35,259 (36,424) (1,165)
LVIP SSgA Global Tactical Allocation RPM Standard Class 8,975 (16,537) (7,562)
LVIP SSgA International Index Standard Class 3,933 (2,406) 1,527
LVIP SSgA S&P 500 Index Standard Class 1,970 (2) 1,968
LVIP SSgA Small-Cap Index Standard Class 507 -- 507
LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class 29,830 (131,835) (102,005)
LVIP UBS Large Cap Growth RPM Standard Class 26,371 (37,258) (10,887)
NB AMT Large Cap Value I Class 8,097 (45,371) (37,274)
NB AMT Mid Cap Growth I Class 41,475 (96,043) (54,568)
T. Rowe Price International Stock 11,848 (64,137) (52,289)
L-27
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SUBSEQUENT EVENT
Management evaluated subsequent events through the date these financial
statements were issued and determined there were no additional matters to be
disclosed.
L-28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors of The Lincoln National Life Insurance Company
and
Contract Owners of Lincoln National Variable Annuity Account L
We have audited the accompanying statements of assets and liabilities of
Lincoln National Variable Annuity Account L ("Variable Account"), comprised of
the subaccounts described in Note 1, as of December 31, 2013, and the related
statements of operations for the year then ended and the statements of changes
in net assets for each of the two years in the period then ended, or for those
sub-accounts operating for portions of such periods as disclosed in the
financial statements. These financial statements are the responsibility of the
Variable Account's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Variable Account's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Variable Account's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. Our procedures included confirmation of investments
owned as of December 31, 2013, by correspondence with the fund companies, or
their transfer agents, as applicable. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
subaccounts constituting Lincoln National Variable Annuity Account L at
December 31, 2013, and the results of their operations and the changes in their
net assets for the periods described above, in conformity with U.S. generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
April 1, 2014
L-29
Lincoln National Variable Annuity Account L
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) List of Financial Statements
1. Part A
The Table of Condensed Financial Information is included in Part A of this
Registration Statement. (Not Applicable)
2. Part B
The following financial statements for the Variable Account are included
in Part B of this Registration Statement.
Statement of Assets and Liabilities - December 31, 2013
Statement of Operations - Year ended December 31, 2013
Statements of Changes in Net Assets - Years ended December 31, 2013 and
2012
Notes to Financial Statements - December 31, 2013
Report of Independent Registered Public Accounting Firm
3. Part B
The following consolidated financial statements for The Lincoln National
Life Insurance Company are included in Part B of this Registration
Statement.
Consolidated Balance Sheets - Years ended December 31, 2013 and 2012
Consolidated Statements of Comprehensive Income (Loss) - Years ended
December 31, 2013, 2012 and 2011
Consolidated Statements of Stockholder's Equity - Years ended December 31,
2013, 2012 and 2011
Consolidated Statements of Cash Flows - Years ended December 31, 2013,
2012, and 2011
Notes to Consolidated Financial Statements - December 31, 2013
Report of Independent Registered Public Accounting Firm
(b) List of Exhibits
(1) Resolution of Board of Directors and Memorandum from the President of The
Lincoln National Life Insurance Company authorizing establishment of the
Variable Account are incorporated herein by reference to Post-Effective
Amendment No. 15 (File No. 033-25990) filed on April 22, 1999.
(2) Not Applicable
(3)(a) Broker-Dealer Selling Agreement among The Lincoln National Life
Insurance Company, Lincoln Life & Annuity Company of New York and Lincoln
Financial Distributors, Inc. incorporated herein by reference to Pre-Effective
Amendment No. 1 (File No. 333-170897) filed on April 8, 2011.
(b) Amended and Restated Principal Underwriting Agreement dated May 1, 2007
between The Lincoln National Life Insurance Company and Lincoln Financial
Distributors, Inc. incorporated herein by reference to Post-Effective
Amendment No. 24 (File No. 333-61554) filed on December 18, 2007.
(4) Variable Annuity Contract (AN-701) incorporated herein by reference to
Pre-Effective Amendment No. 1 (File No. 333-187072) filed on May 28, 2013.
(b) Group Variable Annuity Certificate (AN-711) incorporated herein by
reference to Pre-Effective Amendment No. 1 (File No. 333-198911) filed on
December 17, 2014.
(5) Application (To Be Filed by Amendment)
(6)(a) Articles of Incorporation of The Lincoln National Life Insurance Company
incorporated herein by reference to Pre-Effective Amendment No. 1 (File No.
333-04999) filed on September 24, 1996.
(b) By-Laws of The Lincoln National Life Insurance Company incorporated
herein by reference to Post-Effective Amendment No. 3 on Form N-6 (File No.
333-118478) filed on April 5, 2007.
(7) Automatic Indemnity Reinsurance Agreement Amended and Restated as of
October 1, 2009 between The Lincoln National Life Insurance Company and Lincoln
National Reinsurance Company (Barbados) Limited incorporated herein by
reference to Post-Effective Amendment No. 43 (File No. 033-26032) filed on
April 7, 2010.
(8)(a) Accounting and Financial Administration Services Agreement dated October
1, 2007 among Mellon Bank, N.A., The Lincoln National Life Insurance Company
and Lincoln Life & Annuity Company of New York incorporated herein by reference
to Registration Statement on Form N-4 (File No. 333-147673) filed on November
28, 2007.
(b) Fund Participation Agreement between The Lincoln National Life Insurance
Company and Lincoln Variable Insurance Products Trust incorporated herein by
reference to Post-Effective Amendment No. 3 (File No. 333-186894) filed on July
1, 2014.
(c) Rule 22c-2 Agreement between The Lincoln National Life Insurance
Company and Lincoln Variable Insurance Products Trust incorporated herein
by reference to Post-Effective Amendment No. 30 (File No. 333-36304) filed
on May 29, 2008.
(9) Opinion and Consent of Mary Jo Ardington, Associate General Counsel of The
Lincoln National Life Insurance Company as to the legality of securities being
issued
(10)(a) Consent of Ernst & Young LLP, Independent Registered Public Accounting
Firm
(b) Power of Attorney - Principal Officers and Directors of The Lincoln
National Life Insurance Company
(11) Not Applicable
(12) Not Applicable
(13) Organizational Chart of The Lincoln National Insurance Holding Company
System incorporated herein by reference to Pre-Effective Amendment No. 1
(File No. 333-198911) filed on December 17, 2014.
Item 25. Directors and Officers of the Depositor
The following list contains the officers and directors of The Lincoln National
Life Insurance Company who are engaged directly or indirectly in activities
relating to Lincoln National Variable Annuity Account L as well as the
contracts. The list also shows The Lincoln National Life Insurance Company's
executive officers.
[Enlarge/Download Table]
Name Positions and Offices with Depositor
--------------------------- --------------------------------------------------------------------
Charles A. Brawley, III** Senior Vice President, Associate General Counsel and Secretary
Ellen G. Cooper** Executive Vice President, Chief Investment Officer and Director
Chuck C. Cornelio*** Executive Vice President, Chief Administrative Officer and Director
Jeffrey D. Coutts** Senior Vice President and Treasurer
Randal J. Freitag** Executive Vice President, Chief Financial Officer and Director
Dennis R. Glass** President and Director
Mark E. Konen** Executive Vice President and Director
Douglas N. Miller** Senior Vice President, Chief Accounting Officer and Controller
Keith J. Ryan* Vice President and Director
*Principal business address is 1300 South Clinton Street, Fort Wayne, Indiana
46802
**Principal business address is Radnor Financial Center, 150 Radnor Chester
Road, Radnor, PA 19087
***Principal business address is 100 North Greene Street, Greensboro, NC 27401
Item 26. Persons Controlled by or Under Common Control with the Depositor or
Registrant
See Exhibit 13: Organizational Chart of the Lincoln National Insurance Holding
Company System.
Item 27. Number of Contractowners
As of October 31, 2014 there were 45,029 participants in group contracts under
Account L.
Item 28. Indemnification
a) Brief description of indemnification provisions.
In general, Article VII of the By-Laws of The Lincoln National Life
Insurance Company provides that Lincoln Life will indemnify certain
persons against expenses, judgments and certain other specified costs
incurred by any such person if he/she is made a party or is threatened to
be made a party to a suit or proceeding because he/she was a director,
officer, or employee of Lincoln Life, as long as he/she acted in good
faith and in a manner he/she reasonably believed to be in the best
interests of, or act opposed to the best interests of, Lincoln Life.
Certain additional conditions apply to indemnification in criminal
proceedings.
In particular, separate conditions govern indemnification of directors,
officers, and employees of Lincoln Life in connection with suits by, or in
the right of, Lincoln Life.
B-2
Please refer to Article VII of the By-Laws of Lincoln Life (Exhibit no.
6(b) hereto) for the full text of the indemnification provisions.
Indemnification is permitted by, and is subject to the requirements of,
Indiana law.
b) Undertaking pursuant to Rule 484 of Regulation C under the Securities
Act of 1933:
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described in Item
28(a) above or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer, or controlling person of the Registrant in
the successful defense of any such action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Item 29. Principal Underwriter
(a) Lincoln Financial Distributors, Inc. ("LFD") currently serves as
Principal Underwriter for: Lincoln National Variable Annuity Account C;
Lincoln National Flexible Premium Variable Life Account D; Lincoln National
Variable Annuity Account E; Lincoln National Flexible Premium Variable Life
Account F; Lincoln National Flexible Premium Variable Life Account G;
Lincoln National Variable Annuity Account H; Lincoln Life & Annuity
Variable Annuity Account H; Lincoln Life Flexible Premium Variable Life
Account J; Lincoln Life Flexible Premium Variable Life Account K; Lincoln
National Variable Annuity Account L; Lincoln Life & Annuity Variable
Annuity Account L; Lincoln Life Flexible Premium Variable Life Account M;
Lincoln Life & Annuity Flexible Premium Variable Life Account M; Lincoln
Life Variable Annuity Account N; Lincoln New York Account N for Variable
Annuities; Lincoln Life Variable Annuity Account Q; Lincoln Life Flexible
Premium Variable Life Account R; LLANY Separate Account R for Flexible
Premium Variable Life Insurance; Lincoln Life Flexible Premium Variable
Life Account S; LLANY Separate Account S for Flexible Premium Variable Life
Insurance; Lincoln Life Variable Annuity Account T; Lincoln Life Variable
Annuity Account W; and Lincoln Life Flexible Premium Variable Life Account
Y and Lincoln Life & Annuity Flexible Premium Variable Life Account Y;
Lincoln Life Variable Annuity Account JF-H; Lincoln Life Variable Annuity
Account JF-I; Lincoln Life Flexible Premium Variable Life Account JF-A;
Lincoln Life Flexible Premium Variable Life Account JF-C; Lincoln Life
Variable Annuity Account JL-A; Lincoln Life & Annuity Flexible Premium
Variable Life Account JA-B; Lincoln Variable Insurance Products Trust;
Lincoln Advisors Trust.
(b) Officers and Directors of Lincoln Financial Distributors, Inc.:
[Enlarge/Download Table]
Name Positions and Offices with Underwriter
------------------------ ------------------------------------------------------------
Patrick J. Caulfield** Vice President, Chief Compliance Officer and Senior Counsel
Jeffrey D. Coutts* Senior Vice President and Treasurer
Wilford H. Fuller* President, Chief Executive Officer and Director
Elizabeth M. O'Brien* Director
Thomas P. O'Neill* Senior Vice President, Chief Operating Officer and Director
Nancy A. Smith* Secretary
Vacant Vice President and Interim Chief Financial Officer
*Principal Business address is Radnor Financial Center, 150 Radnor Chester
Road, Radnor, PA 19087
**Principal Business address is 350 Church Street, Hartford, CT 06103
(c) N/A
Item 30. Location of Accounts and Records
All accounts, books, and other documents, except accounting records, required
to be maintained by Section 31a of the 1940 Act and the Rules promulgated
thereunder are maintained by The Lincoln National Life Insurance Company, 1300
South Clinton Street, Fort Wayne, Indiana 46802. The accounting records are
maintained by The Bank of New York Mellon, One Mellon Bank Center, 500 Grant
Street, Pittsburgh, PA 15258.
Item 31. Management Services
Not Applicable.
B-3
Item 32. Undertakings
(a) Registrant undertakes that it will file a post-effective amendment to
this registration statement as frequently as necessary to ensure that the
audited financial statements in the registration statement are never more
than 16 months old for so long as payments under the variable annuity
contracts may be accepted.
(b) Registrant undertakes that it will include either (1) as part of any
application to purchase a Certificate or an Individual Contract offered by
the Prospectus, a space that an applicant can check to request a Statement
of Additional Information, or (2) a post card or a similar written
communication affixed to or included in the Prospectus that the applicant
can remove to send for a Statement of Additional Information.
(c) Registrant undertakes to deliver any Statement of Additional
Information and any financial statements required to be made available
under this Form promptly upon written or oral request to Lincoln Life at
the address or phone number listed in the Prospectus.
(d) The Lincoln National Life Insurance Company hereby represents that the
fees and charges deducted under the contract, in the aggregate, are
reasonable in relation to the services rendered, the expenses expected to
be incurred, and the risks assumed by The Lincoln National Life Insurance
Company.
SIGNATURES
a) As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant has caused this Pre-Effective Amendment 1 to the
Registration Statement to be signed on its behalf, in the City of Fort
Wayne, and State of Indiana on this 16th day of December, 2014.
[Download Table]
Lincoln National Variable Annuity Account L (Registrant)
Lincoln Retirement Income RolloverSM Version 3
By: /s/ Robert M. Melia
------------------------------------
Robert M. Melia
Vice President, The Lincoln National Life Insurance Company
(Title)
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(Depositor)
By: /s/ John D. Weber
------------------------------------
John D. Weber
(Signature-Officer of Depositor)
Vice President, The Lincoln National Life Insurance Company
(Title)
(b) As required by the Securities Act of 1933, this Amendment to the
Registration Statement has been signed by the following persons in their
capacities indicated on December 16, 2014.
B-4
[Enlarge/Download Table]
Signature Title
* President and Director (Principal Executive Officer)
------------------------------
Dennis R. Glass
* Executive Vice President, Chief Investment Officer and Direc-
------------------------------
tor
Ellen Cooper
* Executive Vice President, Chief Administrative Officer and Direc-
------------------------------
tor
Charles C. Cornelio
* Executive Vice President, Chief Financial Officer and Director
------------------------------
(Principal Financial Officer)
Randal J. Freitag
* Senior Vice President and Director
------------------------------
Mark E. Konen
* Vice President and Director
------------------------------
Keith J. Ryan
*By: /s/ John D. Weber Pursuant to a Power of Attorney
---------------------------
John D. Weber
B-5
Dates Referenced Herein and Documents Incorporated by Reference
5 Subsequent Filings that Reference this Filing
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