485BPOS 1 a2191222z485bpos.txt 485BPOS As filed with the Securities and Exchange Commission on April 16, 2009 1933 Act Registration No. 333-141755 1940 Act Registration No. 811-07785 -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / / POST-EFFECTIVE AMENDMENT NO. 3 /X/ and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / / AMENDMENT NO. 29 /X/ Lincoln Life & Annuity Variable Annuity Account L (Exact Name of Registrant) Group Variable Annuity I, II & III LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK (Name of Depositor) 100 Madison Street, Suite 1860 Syracuse, New York 13202 (Address of Depositor's Principal Executive Offices) Depositor's Telephone Number, Including Area Code: (315) 428-8400 Robert O. Sheppard, Esquire Lincoln Life & Annuity Company of New York 100 Madison Street, Suite 1860 Syracuse, New York 13202 (Name and Address of Agent for Service) Copy to: Mary Jo Ardington, Esquire The Lincoln National Life Insurance Company 1300 South Clinton Street Post Office Box 1110 Fort Wayne, IN 46801 Approximate Date of Proposed Public Offering: Continuous It is proposed that this filing will become effective: / / immediately upon filing pursuant to paragraph (b) of Rule 485 /x/ on May 1, 2009, pursuant to paragraph (b) of Rule 485 / / 60 days after filing pursuant to paragraph (a)(1) of Rule 485 / / on ______________ pursuant to paragraph (a)(1) of Rule 485 Title of Securities being registered: Interests in a separate account under group flexible payment deferred variable annuity contracts. Lincoln Life & Annuity Variable Annuity Account L Group Variable Annuity Contracts I, II, & III Home Office: Lincoln Life & Annuity Company of New York 100 Madison Street, Suite 1860 Syracuse, NY 13202 www.LincolnFinancial.com Servicing Office: Lincoln Life & Annuity Company of New York PO Box 2340 Fort Wayne, IN 46808 1-800-341-0441 This prospectus describes a group annuity contract and an individual certificate that is issued by Lincoln Life & Annuity Company of New York (LNY), a subsidiary of The Lincoln National Life Insurance Company (Lincoln Life). They are primarily for use with nonqualified plans and qualified retirement plans. Generally, you do not pay federal income tax on the contract's growth until it is paid out. Qualified retirement plans already provide for tax deferral. Therefore, there should be reasons other than tax deferral for acquiring the contract within a qualified plan. The contract is designed to accumulate account value, and as permitted by the plan, to provide retirement income that you cannot outlive or for an agreed upon time. These benefits may be a variable or fixed amount, if available, or a combination of both. If a participant dies before the annuity commencement date, we will pay the beneficiary or plan a death benefit. If the contractowner gives certain rights to plan participants, we issue active life certificates to them. Participants choose whether account value accumulates on a variable or a fixed (guaranteed) basis or both. If a participant allocates contributions to the fixed account, we guarantee principal and a minimum interest rate. All contributions for benefits on a variable basis will be placed in Lincoln Life & Annuity Variable Annuity Account L (VAA). The VAA is a segregated investment account of Lincoln Life. If a participant puts all or some contributions into one or more of the contract's subaccounts, the participant takes all the investment risk on the account value and the retirement income. If the selected subaccounts make money, account value goes up; if they lose money, it goes down. How much it goes up or down depends on the performance of the selected subaccounts. We do not guarantee how any of the subaccounts or their funds will perform. Also, neither the U.S. Government nor any federal agency insures or guarantees the investment in the contract. The available subaccounts, and the funds in which they invest, are listed below. The contractowner decides which of these subaccounts are available under the contract for participant allocations. For more information about the fund descriptions, policies and risks of the funds please refer to the Prospectuses for the funds. AllianceBernstein Variable Products Series Fund (Class B): AllianceBernstein VPS Global Thematic Growth Portfolio (formerly AllianceBernstein VPS Global Technology Portfolio) AllianceBernstein VPS Growth Portfolio* AllianceBernstein VPS Growth and Income Portfolio American Century Variable Portfolios (Class I): Balanced Fund* Inflation Protection Fund** American Funds Insurance Series (Class 2): American Funds Global Growth Fund American Funds Growth Fund American Funds Growth-Income Fund American Funds International Fund BlackRock Variable Series Funds, Inc. (Class I): BlackRock Global Allocation V.I. Fund** Delaware VIP Trust (Service Class): Delaware VIP REIT Series Delaware VIP Small Cap Value Series Delaware VIP Trend Series Delaware VIP Trust (Standard Class): Delaware VIP Diversified Income Series Delaware VIP High Yield Series Dreyfus Variable Investment Fund (Initial Class): Dreyfus Developing Leaders Portfolio* Dreyfus Stock Index Fund, Inc.* DWS Investments VIT Funds (Class A): DWS Equity 500 Index VIP* DWS Small Cap Index VIP* DWS Variable Series II (Class A): DWS Alternative Asset Allocation Plus VIP Portfolio** Fidelity (Reg. TM) Variable Insurance Products (Initial Class): Fidelity (Reg. TM) Asset Manager Portfolio* Fidelity (Reg. TM) Equity-Income Portfolio Fidelity (Reg. TM) Growth Portfolio Fidelity (Reg. TM) Variable Insurance Products (Service Class 2): Fidelity (Reg. TM) Contrafund (Reg. TM) Portfolio Janus Aspen Series (Institutional Shares): Janus Aspen Worldwide Portfolio* (Formerly Janus Aspen Worldwide Growth Portfolio) Lincoln Variable Insurance Products Trust (Service Class): LVIP Baron Growth Opportunities Fund 1 Lincoln Variable Insurance Products Trust (Standard Class): LVIP Cohen & Steers Global Real Estate Fund LVIP Delaware Bond Fund LVIP Delaware Foundation Aggressive Allocation Fund** LVIP Delaware Foundation Conservative Allocation Fund** LVIP Delaware Foundation Moderate Allocation Fund** LVIP Delaware Growth and Income Fund LVIP Delaware Managed Fund** LVIP Delaware Social Awareness Fund LVIP Global Income Fund** LVIP Janus Capital Appreciation Fund LVIP Mondrian International Value Fund LVIP SSgA Bond Index Fund** LVIP SSgA Emerging Markets 100 Fund** LVIP SSgA International Index Fund** LVIP T. Rowe Price Structured Mid-Cap Growth Fund LVIP Wilshire 2010 Profile Fund LVIP Wilshire 2020 Profile Fund LVIP Wilshire 2030 Profile Fund LVIP Wilshire 2040 Profile Fund LVIP Wilshire Conservative Profile Fund LVIP Wilshire Moderate Profile Fund LVIP Wilshire Moderately Aggressive Profile Fund LVIP Wilshire Aggressive Profile Fund Neuberger Berman Advisers Management Trust (I Class): Mid-Cap Growth Portfolio* Partners Portfolio* T. Rowe Price International Series, Inc. T. Rowe Price International Stock Portfolio* *It is currently anticipated that during the third quarter of 2009, we will close and replace these investment options. See Investments of the VAA - Description of the Funds for further information. **Refer to Description of the Funds for specific information regarding the availability of funds. This prospectus gives you information about the contracts and certificates that contractowners and participants should know before investing. You should also review the prospectuses for the funds that accompany this prospectus, 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 contracts is in the current Statement of Additional Information (SAI), dated the same date as this prospectus. The SAI terms are made part of this prospectus, and for a free copy of the SAI, write: Lincoln Life & Annuity Company of New York, P. O. Box 2340, Fort Wayne, IN 46808 or call 1-800-341-0441. The SAI and other information about LNY 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. May 1, 2009 2 Table of Contents
Item Page Special Terms 4 Expense Tables 5 Summary of Common Questions 10 Lincoln Life & Annuity Company of New York 12 Fixed Side of the Contract 13 Variable Annuity Account (VAA) 13 Investments of the VAA 13 Charges and Other Deductions 18 The Contracts 21 Purchase of the Contracts 21 Transfers On or Before the Annuity Commencement Date 23 Death Benefit Before the Annuity Commencement Date 25 Withdrawals 25 Annuity Payouts 27 Distribution of the Contracts 29 Federal Tax Matters 30 Additional Information 33 Voting Rights 33 Return Privilege 33 Other Information 34 Legal Proceedings 34 Contents of the Statement of Additional Information (SAI) for Lincoln Life & Annuity Company of New York Variable Annuity Account L 35 Appendix A - Condensed Financial Information A-1
3 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 for the variable side of the contract offered in this prospectus. Account value - At a given time before the annuity commencement date, the value of all accumulation units for a contract plus the value of the fixed side of the contract. Accumulation unit - A measure used to calculate contract value for the variable side of the contract before the annuity commencement date. Annuitant - The person upon whose life the annuity benefit payments are based, and upon whose life a death benefit may be paid. Annuity commencement date - The valuation date when funds are withdrawn or converted into annuity units or fixed dollar payout for payment of retirement income 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 may be paid on a variable or fixed basis, or a combination of both. Annuity unit - A measure used to calculate the amount of annuity payouts for the variable side of the contract after the annuity commencement date. See Annuity Payouts. Beneficiary - The person or entity designated by the participant to receive any death benefit paid if the participant dies before the annuity commencement date. Contractowner - The party named on the group annuity contract (for example, an employer, a retirement plan trust, an association, or other entity allowed by law). Contributions - Amounts paid into the contract. Death benefit-Before the annuity commencement date, the amount payable to a designated beneficiary if a participant dies. FINRA - Financial Industry Regulatory Authority. Good Order - The actual receipt at our servicing 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. Lincoln New York (we, us, our) - Lincoln Life & Annuity Company of New York (LNY). Participant - An employee or other person affiliated with the contractowner on whose behalf we maintain an account. Participant year - A 12-month period starting with the date we receive the first contribution on behalf of a participant and on each anniversary after that. Plan - The retirement program that an employer offers to its employees for which a contract is used to accumulate funds. SEC - Securities and Exchange Commission. Subaccount - The portion of the VAA that reflects investments in accumulation and annuity units of a class of a particular fund available under the contracts. There is a separate subaccount which corresponds to each class of a fund. Valuation date - Each day the New York Stock Exchange (NYSE) is open for trading. Valuation period - The period starting at the close of trading (currently 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. 4 Expense Tables The following tables describe the fees and expenses that you will pay when buying, owning, and surrendering the contract. The first table describes the fees and expenses that contractowners or participants will pay at the time that you buy the contract, surrender the contract, or transfer contract value between investment options and/or the fixed account. State premium taxes may also be deducted. Contractowner/Participant Transaction Expenses for GVA I, II & III: The maximum surrender charge (contingent deferred sales charge) (as a percentage of an account value withdrawn):
GVA I GVA II GVA III ------- -------- -------- 5%* 6%* None
* The surrender charge percentage is reduced over time. The later the redemption occurs, the lower the surrender charge with respect to that surrender or withdrawal. We may reduce or waive this charge in certain situations. See Charges and Other Deductions - Surrender Charges. The next table describes the fees and expenses that you will pay periodically during the time that you own the contract, not including fund fees and expenses. Annual account fee (per participant): $25 Systematic withdrawal option fee: $30 The annual fee may be paid by an employer on behalf of participants. It is not charged during the annuity period. We may reduce or waive these charges in certain situations. See Charges and Other Deductions. Separate Account L expenses for GVA I, II & III subaccounts (as a percentage of average daily net assets in the subaccounts): Mortality and expense risk charge: 1.00%
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 own the contract. The expenses are for the year ended December 31, 2008. More detail concerning each fund's fees and expenses is contained in the prospectus for each fund.
Maximum Minimum --------- -------- 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): 3.90% 0.28% Net Total Annual Fund Operating Expenses (after contractual waivers/reimbursements*): 1.56% 0.28%
* Twenty-four of the funds have entered into contractual waiver or reimbursement arrangements that may reduce fund management and other fees and/or expenses during the period of the arrangement. These arrangements vary in length, but no arrangement will terminate before April 30, 2010. The following table shows the expenses charged by each fund for the year ended December 31, 2008: (as a percentage of each fund's average net assets):
Management Other Fees 12b-1 Fees Expenses (before (before (before any any any waivers/ waivers/ waivers/ reimburse- reimburse- reimburse- ments) + ments) + ments) AllianceBernstein VPS Global Thematic Growth Portfolio (Class B) 0.75 % 0.25 % 0.18 % AllianceBernstein VPS Growth Portfolio (Class B) 0.75 0.25 0.19 AllianceBernstein VPS Growth and Income Portfolio (Class B) 0.55 0.25 0.07 American Century VP Balanced Fund (Class I)(2)(3) 0.90 0.00 0.01 American Century VP Infaltion Protection Fund (Class I)(2)(3) 0.48 0.00 0.01 American Funds Global Growth Fund (Class 2)(1) 0.53 0.25 0.02 American Funds Growth Fund (Class 2)(1) 0.32 0.25 0.01 tal Expen To ns Total Total Contr er Expense ra ctual es waive Contr (before er ra any reimb waive waivers bu er Acquired s/ Fund reimbur e- bu Fees and rs (if ments + Expenses = ments) any) s) AllianceBernstein VPS Global Thematic Growth Portfolio (Class B) 0.00 % 1.18 AllianceBernstein VPS Growth Portfolio (Class B) 0.00 1.19 AllianceBernstein VPS Growth and Income Portfolio (Class B) 0.00 0.87 American Century VP Balanced Fund (Class I)(2)(3) 0.00 0.91 American Century VP Infaltion Protection Fund (Class I)(2)(3) 0.00 0.49 American Funds Global Growth Fund (Class 2)(1) 0.00 0.80 American Funds Growth Fund (Class 2)(1) 0.00 0.58
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Management Other Fees 12b-1 Fees Expenses (before (before (before any any any waivers/ waivers/ waivers/ reimburse- reimburse- reimburse- ments) + ments) + ments) American Funds Growth-Income Fund (Class 2)(1) 0.27 % 0.25 % 0.01 % American Funds International Fund (Class 2)(1) 0.49 0.25 0.03 BlackRock Global Allocation V.I. Fund (Class I) 0.65 0.00 0.15 Delaware VIP Diversified Income Series (Standard Class) 0.62 0.00 0.11 Delaware VIP High Yield Series (Standard Class) 0.65 0.00 0.12 Delaware VIP REIT Series (Service Class)(4) 0.75 0.30 0.12 Delaware VIP Small Cap Value Series (Service Class)(4) 0.73 0.30 0.12 Delaware VIP Trend Series (Service Class)(4) 0.75 0.30 0.12 Dreyfus Stock Index Fund (Initial Class) 0.25 0.00 0.03 Dreyfus VIF Developing Leaders Portfolio (Initial Class) 0.75 0.00 0.08 DWS Alternative Asset Allocation Plus VIP Portfolio (Class A)(5)(6)(7)(8)(9) 0.20 0.00 0.33 DWS Equity 500 Index VIP (Class A)(10)(11) 0.20 0.00 0.13 DWS Small Cap Index VIP (Class A) (11)(12) 0.35 0.00 0.19 Fidelity (Reg. TM) VIP Asset Manager Portfolio (Initial Class) 0.51 0.00 0.12 Fidelity (Reg. TM) VIP Contrafund Portfolio (Service Class 2)(13) 0.56 0.25 0.10 Fidelity (Reg. TM) VIP Equity-Income Portfolio (Initial Class) 0.46 0.00 0.11 Fidelity (Reg. TM) VIP Growth Portfolio (Initial Class)(14) 0.56 0.00 0.12 Janus Aspen Worldwide Portfolio (Institutional Shares)(15)(16)(17)(18)(19) 0.50 0.00 0.03 LVIP Baron Growth Opportunities (Service Class)(20) 1.00 0.25 0.09 LVIP Cohen & Steers Global Real Estate Fund (Standard Class)(21)(22) 0.95 0.00 0.18 LVIP Delaware Bond Fund (Standard Class) 0.33 0.00 0.07 LVIP Delaware Foundation Aggressive Allocation Fund (Standard Class)(23)(24) 0.75 0.00 0.11 LVIP Delaware Foundation Conservative Allocation Fund (Standard Class)(23)(24) 0.75 0.00 0.10 LVIP Delaware Foundation Moderate Allocation Fund (Standard Class)(23)(24) 0.75 0.00 0.41 LVIP Delaware Growth and Income Fund (Standard Class) 0.34 0.00 0.07 LVIP Delaware Managed Fund (Standard Class) 0.42 0.00 0.10 LVIP Delaware Social Awareness Fund (Standard Class) 0.37 0.00 0.07 LVIP Global Income Fund (Standard Class)(25)(26) 0.65 0.00 0.19 LVIP Janus Capital Appreciation Fund (Standard Class)(27) 0.75 0.00 0.10 LVIP Mondrian International Value Fund (Standard Class) 0.70 0.00 0.10 LVIP SSgA Bond Index Fund (Standard Class)(28)(29) 0.40 0.00 0.13 LVIP SSgA Emerging Markets 100 Fund (Standard Class)(30)(31) 1.09 0.00 2.81 LVIP SSgA International Index Fund (Standard Class)(29)(32) 0.40 0.00 1.18 LVIP T. Rowe Price Structured Mid-Cap Growth Fund (Standard Class) 0.74 0.00 0.10 LVIP Wilshire 2010 Profile Fund (Standard Class)(33)(34)(35) 0.25 0.00 0.60 LVIP Wilshire 2020 Profile Fund (Standard Class)(33)(34)(35) 0.25 0.00 0.31 LVIP Wilshire 2030 Profile Fund (Standard Class)(33)(34)(35) 0.25 0.00 0.45 LVIP Wilshire 2040 Profile Fund (Standard Class)(33)(34)(35) 0.25 0.00 0.76 otal pense Tes Exafter Total Total Expense ( c- es Contract al (before tu tual any waivers/ waivers reimburs s/ Acquired s/ se - Fund reimbur ments reimbur Fees and rs e- rs + Expenses = ments) (if any) ments) American Funds Growth-Income Fund (Class 2)(1) 0.00 % 0.53 American Funds International Fund (Class 2)(1) 0.00 0.77 BlackRock Global Allocation V.I. Fund (Class I) 0.00 0.80 Delaware VIP Diversified Income Series (Standard Class) 0.00 0.73 Delaware VIP High Yield Series (Standard Class) 0.00 0.77 Delaware VIP REIT Series (Service Class)(4) 0.00 1.17 -0.05 1.12 Delaware VIP Small Cap Value Series (Service Class)(4) 0.00 1.15 -0.05 1.10 Delaware VIP Trend Series (Service Class)(4) 0.00 1.17 -0.05 1.12 Dreyfus Stock Index Fund (Initial Class) 0.00 0.28 Dreyfus VIF Developing Leaders Portfolio (Initial Class) 0.00 0.83 -0.13 0.70 DWS Alternative Asset Allocation Plus VIP Portfolio (Class A)(5)(6)(7)(8)(9) 1.35 1.88 0.32 1.56 DWS Equity 500 Index VIP (Class A)(10)(11) 0.00 0.33 DWS Small Cap Index VIP (Class A) (11)(12) 0.00 0.54 Fidelity (Reg. TM) VIP Asset Manager Portfolio (Initial Class) 0.00 0.63 Fidelity (Reg. TM) VIP Contrafund Portfolio (Service Class 2)(13) 0.00 0.91 Fidelity (Reg. TM) VIP Equity-Income Portfolio (Initial Class) 0.00 0.57 Fidelity (Reg. TM) VIP Growth Portfolio (Initial Class)(14) 0.00 0.68 Janus Aspen Worldwide Portfolio (Institutional Shares)(15)(16)(17)(18)(19) 0.00 0.53 LVIP Baron Growth Opportunities (Service Class)(20) 0.00 1.34 -0.05 1.29 LVIP Cohen & Steers Global Real Estate Fund (Standard Class)(21)(22) 0.00 1.13 -0.22 0.91 LVIP Delaware Bond Fund (Standard Class) 0.00 0.40 LVIP Delaware Foundation Aggressive Allocation Fund (Standard Class)(23)(24) 0.03 0.89 -0.13 0.76 LVIP Delaware Foundation Conservative Allocation Fund (Standard Class)(23)(24) 0.02 0.87 -0.12 0.75 LVIP Delaware Foundation Moderate Allocation Fund (Standard Class)(23)(24) 0.03 1.19 -0.43 0.76 LVIP Delaware Growth and Income Fund (Standard Class) 0.00 0.41 LVIP Delaware Managed Fund (Standard Class) 0.00 0.52 LVIP Delaware Social Awareness Fund (Standard Class) 0.00 0.44 LVIP Global Income Fund (Standard Class)(25)(26) 0.00 0.84 -0.09 0.75 LVIP Janus Capital Appreciation Fund (Standard Class)(27) 0.00 0.85 -0.07 0.78 LVIP Mondrian International Value Fund (Standard Class) 0.00 0.80 LVIP SSgA Bond Index Fund (Standard Class)(28)(29) 0.00 0.53 -0.10 0.43 LVIP SSgA Emerging Markets 100 Fund (Standard Class)(30)(31) 0.00 3.90 -3.20 0.70 LVIP SSgA International Index Fund (Standard Class)(29)(32) 0.00 1.58 -1.13 0.45 LVIP T. Rowe Price Structured Mid-Cap Growth Fund (Standard Class) 0.00 0.84 LVIP Wilshire 2010 Profile Fund (Standard Class)(33)(34)(35) 0.51 1.36 -0.65 0.71 LVIP Wilshire 2020 Profile Fund (Standard Class)(33)(34)(35) 0.52 1.08 -0.36 0.72 LVIP Wilshire 2030 Profile Fund (Standard Class)(33)(34)(35) 0.53 1.23 -0.50 0.73 LVIP Wilshire 2040 Profile Fund (Standard Class)(33)(34)(35) 0.54 1.55 -0.81 0.74
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Management Other Fees 12b-1 Fees Expenses (before (before (before any any any waivers/ waivers/ waivers/ reimburse- reimburse- reimburse- ments) + ments) + ments) LVIP Wilshire Aggressive Profile Fund (Standard Class)(33)(34)(36) 0.25 % 0.00 % 0.08 % LVIP Wilshire Conservative Profile Fund (Standard Class)(33)(34)(36) 0.25 0.00 0.05 LVIP Wilshire Moderate Profile Fund (Standard Class)(33)(34)(36) 0.25 0.00 0.03 LVIP Wilshire Moderately Aggressive Profile Fund (Standard Class)(33)(34)(36) 0.25 0.00 0.03 Neuberger Berman Mid-Cap Growth Portfolio (I Class)(37) 0.83 0.00 0.09 Neuberger Berman Partners Portfolio (I Class)(37) 0.84 0.00 0.11 T. Rowe Price International Stock Portfolio 0.93 0.00 0.07 otal pense Tes Exafter Total Total Expense ( c- es Contract al (before tu tual any waivers/ waivers reimburs s/ Acquired s/ se - Fund reimbur ments reimbur Fees and rs e- rs + Expenses = ments) (if any) ments) LVIP Wilshire Aggressive Profile Fund (Standard Class)(33)(34)(36) 0.87 % 1.20 -0.13 1.07 LVIP Wilshire Conservative Profile Fund (Standard Class)(33)(34)(36) 0.72 1.02 -0.10 0.92 LVIP Wilshire Moderate Profile Fund (Standard Class)(33)(34)(36) 0.78 1.06 -0.08 0.98 LVIP Wilshire Moderately Aggressive Profile Fund (Standard Class)(33)(34)(36) 0.81 1.09 -0.08 1.01 Neuberger Berman Mid-Cap Growth Portfolio (I Class)(37) 0.00 0.92 Neuberger Berman Partners Portfolio (I Class)(37) 0.00 0.95 T. Rowe Price International Stock Portfolio 0.05 1.05
(1) The Series' investment adviser waived a portion of its management fee from September 1, 2004 (May 1, 2006 in the case of Global Growth and Income Fund and October 4, 2006 in the case of Global Bond Fund) through December 31, 2008. Management fees and total expenses in the table do not reflect any waivers. Information regarding the effect of any waiver on total annual fund operating expenses can be found in the Financial Highlights table in the prospectus and annual report. (2) The fund pays the advisor a single, unified management fee for arranging all services necessary for the fund to operate. The fee shown is based on assets during the fund's most recent fiscal year. The fund has a stepped fee schedule. As a result, the fund's unified management fee rate generally decreases as assets increase and increases as assets decrease. (3) Other expenses, which include the fees and expenses of the fund's independent directors and their legal counsel, interest, and, if applicable, acquired fund fees and expenses, were less than 0.005% for the most recent fiscal year. (4) The Service Class shares are subject to an annual 12b-1 fee of not more than 0.30%. Effective May 1, 2009 through April 30, 2010, Delaware Distributors, L.P. has contracted to limit the Service Class shares 12b-1 fee to no more than 0.25% of average daily net assets. (5) Management fee has two components: (i) a fee on assets invested in other DWS funds; and (ii) a fee on assets not invested in other DWS funds ("Other Assets"). The Advisor currently intends to invest substantially all the assets of the portfolio in other DWS funds. However, in the future, the portfolio may invest a larger portion, or all, of its assets in Other Assets. If the portfolio's assets are entirely invested in Other Assets, the management fee would be 1.20% of average daily net assets. However, in such a situation, the Acquired Fund (Underlying Fund) Fees and Expenses are expected to decrease. The Advisor will waive 0.15% of the management fee until the portfolio reaches $50 million in assets and the Advisor's global tactical asset allocation overlay strategy is implemented. (6) The portfolio's shareholders bear indirectly the expenses of the shares of other DWS funds or ETF's in which the portfolio invests. Acquired Fund (Underlying Fund) Fees and Expenses for the initial fiscal year are based on the expected initial allocation of the portfolio assets. The Total Annual Operating Expenses will vary with changes in allocations to, and operating expenses of, the other DWS funds or ETFs in which the portfolio invest. (7) "Acquired Funds (Underlying Funds) Fees and Expenses" includes impact of dividends on short sales for investments in DWS Market Neutral Fund. "Acquired Funds (Underlying Funds) Fees and Expenses" would be 1.20% excluding these dividends on short sales and the Total Annual Operating Expenses" would be 1.73% without these dividends on short sales. (8) "Other Expenses" are based on estimated amounts for the current fiscal year, including 0.05% organizational and offering expenses expected to be incurred over the next twelve months only. Actual expenses may be different. Includes 0.10% administration fee paid to the Advisor. (9) Through April 30, 2010, the Advisor has contractually agreed to waive all or a portion of its management fee and reimburse or pay operating expenses to the extent necessary to maintain the fund's operating expenses at 0.21% for Class A, excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest and acquired funds (underlying funds) fees and expenses (estimated at 1.35%). (10) Through September 30, 2009, the Advisor has contractually agreed to waive all or a portion of its management fee and reimburse or pay operating expenses of the fund to the extent necessary to maintain the fund's operating expenses at 0.33% for Class A, excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest. (11) "Other Expenses" are based on estimated amounts for the current fiscal year. Actual expenses may be different. Includes 0.10% administration fee. (12) Through September 30, 2009, the Advisor has contractually agreed to waive all or a portion of its management fee and reimburse or pay operating expenses of the fund to the extent necessary to maintain the fund's operating expenses at 0.51% for Class A, excluding certain expenses such as extraordinary expenses, taxes, brokerage and interest. (13) Contrafund - A portion of the brokerage commissions that the fund pays may be reimbursed and used to reduce the fund's expenses. In addition, through arrangements with the fund's custodian, credits realized as a result of uninvested cash balances are used to reduce the fund's custodian expenses. Including these reductions, the total class operating expenses would have been 0.90% for Service Class 2. These offsets may be discontinued at any time. (14) Growth. A portion of the brokerage commissions that the fund pays may be reimbursed and used to reduce the fund's expenses. In addition, through arrangements with the fund's custodian, credits realized as a result of uninvested cash balances are used to reduce the fund's custodian expenses. Including these reductions, the total class operating expenses would have been 0.67% for Initial Class. These offsets may be discontinued at any time. (15) All expenses are shown without the effect of expense offset arrangements. Pursuant to such offset arrangements, credits realized as a result of uninvested cash balances are used to reduce custodian and transfer agent expenses. (16) The "Management Fee" is the investment advisory fee rate paid by each Portfolio to Janus Capital as of the end of the fiscal year. For Worldwide Growth Portfolio, this fee may go up or down monthly based on the Portfolio's performance relative to its benchmark index over the performance measurement period. 7 (17) Annual Fund Operating Expenses are stated both with and without contractual expense waivers by Janus Capital. Janus Capital has contractually agreed to waive certain Portfolios' total operating expenses (excluding the distribution and shareholder servicing fee, the administrative services fee applicable to certain Portfolios, brokerage commissions, interest, dividends, taxes, and extraordinary expenses including, but not limited to, acquired fund fees and expenses) to certain limits until at least May 1, 2010. The expense waivers shown reflect the application of such limits. The expense limits are described in the "Management Expenses" section of the Portfolio's Prospectus. (18) Worldwide Portfolio pays an investment advisory fee rate that adjusts up or down based upon the Portfolio's performance relative to its benchmark index during the measuring period. This fee rate, prior to any performance adjustment, is 0.60% for Worldwide Growth Portfolio; and may go up or down by a variable of up to 0.15% (assuming constant assets) on a monthly basis. Any such adjustment to the fee rate commenced February 2007 for Worldwide Portfolio, and may increase or decrease the Management Fee. Refer to the "Management Expenses" section in the Portfolio's Prospectus for additional information with further description in the Statement of Additional Information. (19) Formerly known as Worldwide Growth Portfolio. (20) The adviser has contractually agreed to reimburse the fund's Service Class to the extent that the fund's Total Annual Fund Operating Expenses exceed 1.29% of average daily net assets. The Agreement will continue at least through April 30, 2010 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (21) The information in the expense table has been restated to reflect that the expense reimbursement agreement with the advisor was terminated effective April 30, 2009. (22) The adviser has contractually agreed to waive the following portion of its advisory fee for the fund: 0.22% on the first $250,000,000 of average daily net assets of the fund and 0.32% on the excess over $250,000,000 of average daily net assets of the fund. The fee waiver will continue at least through April 30, 2010, and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (23) "Other Expenses, "Acquired Fund Fees and Expenses" and Annual Fund Operating Expenses" in connection with the fund and funds (Pro Forma) have been estimated since the fund has not yet commenced. The advisor has contractually agreed to waive the following portion of its advisory fee for the fund: 0.10% of average daily net assets of the fund in excess of $100 million. This waiver will continue at least through April 30, 2010, and renew automatically for one-year terms unless the advisor provides written notice of termination to the fund. (24) The adviser has contractually agreed to reimburse the fund to the extent that the fund's Total Annual Fund Operating Expenses (excluding underlying fund fees and expenses) exceed 0.73% of average daily net assets. The agreement will continue at least through April 30, 2010 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (25) The advisor has contractually agreed to waive 0.05% of its advisory fee for the fund. The waiver will continue at least through April 30, 2010, and renew automatically for one-year terms unless the advisor provides written notice of termination to the fund. (26) The adviser has contractually agreed to reimburse the fund to the extent that the fund's Total Annual Fund Operating Expenses (excluding underlying fund fees and expenses) exceed 0.75% of average daily net assets. The agreement will continue at least through April 30, 2010 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (27) Effective May 1, 2009, the adviser has contractually agreed to waive a portion of its advisory fee through April 30, 2010. The waiver amount is: 0.15% on the first $100,000,000 of average daily net assets of the fund; 0.10% of the next $150,000,000 of average daily net assets of the fund. The waiver will renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. The fee table has been restated to reflect the new agreement. (28) The advisor has contractually agreed to waive the following portion of its advisory fee for the fund: 0.07% on the first $500 million of average daily net assets of the fund and 0.12% of average daily net assets of the fund in excess of $500 million. This waiver will continue at least through April 30, 2010, and renew automatically for one-year terms unless the advisor provides written notice of termination to the fund. (29) The adviser has contractually agreed to reimburse the fund to the extent that the fund's Total Annual Fund Operating Expenses exceed 0.45% of average daily net assets. The agreement will continue at least through April 30, 2010 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (30) The advisor has contractually agreed to waive the following portion of its advisory fee for the fund: 0.69% on the first $100 million of average daily net assets of the fund and 0.76% of average daily net assets of the fund in excess of $100 million. This waiver will continue at least through April 30, 2010, and renew automatically for one-year terms unless the advisor provides written notice of termination to the fund. (31) The adviser has contractually agreed to reimburse the fund to the extent that the fund's Total Annual Fund Operating Expenses exceed 0.70% of average daily net assets. The agreement will continue at least through April 30, 2010 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. (32) The advisor has contractually agreed to waive the following portion of its advisory fee for the fund: 0.06% on the first $500 million of average daily net assets of the fund and 0.09% of average daily net assets of the fund in excess of $500 million. This waiver will continue at least through April 30, 2010, and renew automatically for one-year terms unless the advisor provides written notice of termination to the fund. (33) The adviser has contractually agreed to reimburse each fund's Standard Class to the extent that the fund's Total Annual Fund Operating Expenses (excluding underlying fund fees and expenses) exceed 0.20% of average daily net assets. The agreement will continue at least through April 30, 2010 and renew automatically for one-year terms unless the adviser provides written notice of termination to the fund. The fee table has been restated to reflect the new agreement. (34) Effective January 1, 2009, the advisor contractually agreed to waive the following portion of the its advisory fee for the Funds': 0.05% of average daily net assets of the Fund. The Agreement will continue at least through April 30, 2010, and renew automatically for one-year terms unless the advisor provides written notice of termination of the Fund. The fee table has been restated to reflect this agreement. (35) The "Acquired Fund Fees and Expenses (AFFE)" in the chart have been restated to reflect the expenses of the underlying funds in which the Profile Funds currently invest. Each funds' expense ratio will vary based on the actual allocations to the underlying funds that occurred through the year. (36) The "Acquired Fund Fees and Expenses (AFFE)" in the chart are based on the 2008 fees and expenses of the underlying funds that were owned by each Profile fund during 2008 and are provided to show you an estimate of the underlying fees and expenses attributable to each fund. Each funds' expense ratio will vary based on the actual allocations to the underlying funds that occurred through the year. (37) Neuberger Berman Management Inc. ("NBMI") has undertaken through December 31, 2012 to waive fees and/or reimburse certain operating expenses, including the compensation of NBMI (except with respect to Balanced, Short Duration Bond, Mid-Cap Growth, and Partners Portfolios) and excluding taxes, interest, extraordinary expenses, brokerage commissions and transaction costs, that exceed, in the aggregate, 1% of average daily net asset value of the Balanced, Short Duration Bond, Mid-Cap Growth and Partners Portfolios; and 1.50% of the average daily net asset value of the Regency Portfolio. The expense limitation arrangements for the Portfolios are contractual and any excess expenses can be repaid to NBMI within three years of the year incurred, provided such recoupment would not cause a Portfolio to exceed its respective limitation. Certain underlying funds have reserved the right to impose fees when fund shares are redeemed within a specified period of time of purchase ("redemption fees") not reflected in the table above. As of the date of this prospectus, none have done so. See The Contracts - Market Timing for a discussion of redemption fees. 8 For information concerning compensation paid for the sale of the contracts, see Distribution of the Contracts. 9 EXAMPLES This Example is intended to help contractowners or participants compare the cost of investing in the contract with the cost of investing in other variable annuity contracts. These costs include contractowner/participant transaction expenses, contract fees, separate account annual expenses, and fund fees and expenses. The Example assumes that contractowners or participants invest $10,000 in the contract for the time periods indicated. The Example also assumes that your investment has a 5% return each year, the maximum fees and expenses of any of the funds. Although your actual costs may be higher or lower, based on these assumptions, your costs would be: 1) If you surrender your contract at the end of the applicable period:
1 year 3 years 5 years 10 years -------- --------- --------- --------- GVA I $ 774 $ 1,342 $ 1,939 $ 3,051 GVA II 876 1,447 2,047 3,296 GVA III 263 808 1,380 2,934
2) If you do not surrender your contract at the end of the applicable time period:
1 year 3 years 5 years 10 years -------- --------- --------- --------- GVA I $ 262 $ 805 $ 1,375 $ 2,925 GVA II 261 802 1,370 2,915 GVA III 263 808 1,380 2,934
The expense tables reflect expenses of the VAA as well as the maximum fees and expenses of any of the funds. We provide these examples, which are unaudited, to show the direct and indirect costs and expenses of the contract. For more information, see - Charges and Other Deductions in the prospectus, and in the prospectuses for the funds. Premium taxes may also apply, although they do not appear in the examples. These examples should not be considered a representation of past or future expense. 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 between the contractowner and LNY. It may provide for a fixed annuity and/or a variable annuity. This prospectus describes the variable side of the contract. See The Contracts. This prospectus provides a general description of the contract. What is the variable annuity account (VAA)? It is a separate account we established under New York insurance law, and registered with the SEC as a unit investment trust. VAA assets are allocated to one or more subaccounts, according to your investment choices. VAA assets are not chargeable with liabilities arising out of any other business which we may conduct. See Variable Annuity Account. What are my investment choices? Based upon your instruction for purchase payments, the VAA applies your purchase payments to buy shares in one or more of the investment options. In turn, each fund holds a portfolio of securities consistent with its investment policy. See Investments of the Variable Annuity Account - Description of the Funds. Who invests my money? Several different investment advisers manage the investment options. See Investments of the Variable Annuity Account - Description of the Funds. How do the contracts work? If we approve the application, we will send the contractowner a contract. When participants make contributions, they buy accumulation units. If the participant decides to receive retirement income payments, we convert accumulation units to annuity units. Retirement income payments will be based on the number of annuity units received and the value of each annuity unit on payout days. See - The Contracts and Annuity Payouts. What charges do I pay under the contract? If participants in GVA I or GVA II withdraw account value, a surrender charge applies of 0-5% of the gross withdrawal amount for all GVA I contracts and for GVA II contracts issued to plans subject to ERISA, depending on how many participation years the participant has been in the contract. For GVA II contracts issued to plans that are not subject to ERISA, a surrender charge of 6% applies regardless of the number of participation years. We may reduce or waive surrender charges in certain situations. See - Charges and Other Deductions - Surrender Charge for GVA I and GVA II. There is no surrender charge for GVA III. We charge an annual administration charge of $25 per participant account. We will deduct any applicable premium tax from contributions or account value at the time the tax is incurred or at another time we choose. 10 We apply a charge to the daily net asset value of the VAA and those charges are: Mortality and expense risk charge: 1.00%
The funds investment management fees, 12b-1 fees, expenses and expense limitations, if applicable, are more fully described in the prospectuses for the funds. What contributions are necessary, and how often? Contributions made on behalf of participants may be in any amount unless the contractowner or the plan has a minimum amount. See - The Contracts-Contributions. How will my annuity payouts be calculated? If a participant decides to annuitize, you may select an annuity option and start receiving annuity payouts from your contract as a fixed option or variable option or a combination of both. See Annuity Payouts - Annuity Options. Remember that participants in the VAA benefit from any gain, and take a risk of any loss, in the value of the securities in the funds' portfolios. What happens if a participant dies before annuitizing? Depending upon the plan, the beneficiary may receive a death benefit and have options as to how the death benefit is paid. See The Contracts - Death Benefit. May participants transfer account value between subaccounts, and between the VAA and the fixed account? Before the annuity commencement date, yes, subject to the terms of the plan. See - The Contracts - Transfers On or Before the Annuity Commencement Date and Transfers After the Annuity Commencement Date. May a participant withdraw account value? Yes, during the accumulation period, subject to contract requirements, to the restrictions of any plan, and to certain restrictions under GVA III. See - Charges and Other Deductions. Under GVA III, a participant may not transfer more than 20% of his or her fixed account holdings to the VAA each year, unless the participant intends to liquidate their fixed account value. Under GVA III, liquidation of the entire fixed account value must be over 5 annual installments. See - Fixed Account Withdrawal/Transfer limits for GVA III. The contractowner must also approve participant withdrawals under Section 401(a) plans and plans subject to Title I of ERISA. Certain charges may apply. See - Charges and Other Deductions. A portion of withdrawal proceeds may be taxable. In addition, a 10% Internal Revnue Service (IRS) tax penalty may apply to distributions before age 59 1/2. A withdrawal also may be subject to 20% withholding. See - Federal Tax Matters. Do participant's get a free look at their certificates? A participant under a Section 403(b) or 408 plan and certain non-qualified plans can cancel the active life certificate within ten days (in some states longer) of the date the participant receives the certificate. The participant needs to give notice to our servicing office. We will refund the participant's contributions less withdrawals, or for the variable side of the contract if greater, the participant's account balance on the day we receive the written notice. See - Return Privilege. Where may I find more information about accumulation unit values? The Appendix to this prospectus provides more information about accumulation unit values. 11 Investment Results The VAA advertises the annual performance of the subaccounts for the funds 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 nonstandardized 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. It does not include the surrender charge or the account charge; if included, they would decrease the performance. Lincoln Life & Annuity Company of New York Lincoln New York (the Company) is a stock life insurance company chartered in New Jersey in 1897 and redomesticated to New York on April 2, 2007. Lincoln New York is a subsidiary of The Lincoln National Life Insurance Company (Lincoln Life). Lincoln Life is an Indiana-domiciled insurance corporation, 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 New York is obligated to pay all amounts promised to policy owners under the policies. Depending on when you purchased your contract, you may be permitted to make allocations to the fixed account, which is part of our general account. See The Fixed Side of the Contract. In addition, any guarantees under the contract that exceed your contract value, 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 contract value are subject to our financial strength and claims-paying ability and our long-term ability to make such payments. 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. 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 policyholders. 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 policyholders 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 46808, or call 1-800-341-0441 . 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. 12 Lincoln Financial Group is the marketing name for Lincoln National Corporation (NYSE:LNC) and its affiliates. Lincoln Financial Group sells a wide variety of financial products and solutions through financial advisors: mutual funds, managed accounts, retirement solutions, life insurance, 401(k) and 403(b) plans, savings plans, institutional investments and comprehensive financial planning and advisory services. Fixed Side of the Contract The portion of the account value allocated to the fixed side of the contract becomes part of our general account, and does not participate in the investment experience of the VAA. The general account is subject to regulation and supervision by the New York Insurance Department as well as the insurance laws and regulations of the jurisdictions in which the contracts are distributed. In reliance on certain exemptions, exclusions and rules, we have not registered interests in the general account as a security under the Securities Act of 1933 (1933 Act) and have not registered the general account as an investment company under the Investment Company Act of 1940 (1940 Act). Accordingly, neither the general account nor any interests in it are regulated under the 1933 Act or the 1940 Act. We have been advised that the staff of the SEC has not made a review of the disclosures which are included in this prospectus which relate to our general account and to the fixed account under the contract. These disclosures, however, may be subject to certain provisions of the federal securities laws relating to the accuracy and completeness of statements made in prospectuses. This prospectus is generally intended to serve as a disclosure document only for aspects of the contract involving the VAA, and therefore contains only selected information regarding the fixed side of the contract. Complete details regarding the fixed side of the contract are in the contract. Contributions allocated to the fixed side of the contract are guaranteed to be credited with a minimum interest rate, specified in the contract, of at least 3%. A contribution allocated to the fixed side of the contract is credited with interest beginning on the next calendar day following the date of receipt if all participant data is complete. LNY may vary the way in which it credits interest to the fixed side of the contract from time to time. ANY INTEREST IN EXCESS OF 3% WILL BE DECLARED IN ADVANCE AT LINCOLN LIFE'S SOLE DISCRETION. CONTRACTOWNERS AND PARTICIPANTS BEAR THE RISK THAT NO INTEREST IN EXCESS OF 3% WILL BE DECLARED. Under GVA III, special limits apply to transfers and withdrawals from the fixed account. See - Charges and Other Deductions-Fixed Account Withdrawal/Transfer Limits for GVA III. Variable Annuity Account (VAA) On July 24, 1996, the VAA was established as an insurance company separate account under New York 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, 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 annuity contracts, credited to or charged against the VAA. They are credited or charged without regard to any other income, gains or losses of Lincoln New York. We are the issuer of the contracts and the obligations set forth in the contract, other than those of the contractowner, are ours. The VAA satisfies the definition of a 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 funds. You assume the full investment risk for all amounts placed in the VAA. Financial Statements The December 31, 2008 financial statements of the VAA and the December 31, 2008 financial statements of Lincoln New York 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 1-800-341-0441. Investments of the VAA The contractowner decides which of the subaccount(s) available under the contract will be available for participant allocations. There is a separate subaccount which corresponds to each fund. Participant allocations may change without penalty or charges. Shares of the funds will be sold at net asset value with no initial sales charge to the VAA in order to fund the contracts. The funds are required to redeem fund shares at net asset value upon our request. 13 Investment Advisers 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 each fund, as defined in the prospectus for the fund. Certain Payments We Receive with Regard to the Funds With respect to a fund, including affiliated funds, the adviser and/or distributor, or an affiliate thereof, may make payments to us (or an affiliate). It is anticipated that such payments will be based on a percentage of assets of the particular fund attributable to the contracts along with certain other variable contracts issued or administered by us (or an affiliate). These percentages are negotiated and vary with each fund. Some funds may pay us significantly more than other funds and the amount we receive may be substantial. These percentages currently range up to 0.50%, and as of the date of this prospectus, we were receiving payments from each fund family. We (or our affiliates) may profit from these payments or use these payments for a variety of purposes, including payment of expenses that we (and our affiliates) incur in promoting, marketing, and administering the contracts and, in our role as intermediary, the funds. These payments may be derived, in whole or in part, from the investment advisory fee deducted from fund assets. Contractowners, through their indirect investment in the funds, bear the costs of these investment advisory fees (see the funds' prospectuses 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. The AllianceBernstein, American Funds, Delaware, Fidelity and Lincoln Funds offered as part of this contract make payments to us under their distribution plans (12b-1 plans). The payment rates range up to 0.30% based on the amount of assets invested in those Funds. Payments made out of the assets of the fund will reduce the amount of assets that otherwise would be available for investment, and will reduce the fund's investment return. The dollar amount of future asset-based fees is not predictable because these fees are a percentage of the fund's average net assets, which can fluctuate over time. If, however, the value of the fund goes up, then so would the payment to us (or our affiliates). Conversely, if the value of the funds goes down, payments to us or our affiliates would decrease. Description of the Funds Each of the subaccounts of the VAA is invested solely in shares of one of the funds available under the contract. Each fund may be subject to certain investment policies and restrictions which may not be changed without a majority vote of shareholders of that fund. We select the funds offered through the contract based on several factors, including, without limitation, asset class coverage, the strength of the manager's reputation and tenure, brand recognition, performance, and the capability and qualification of each sponsoring investment firm. Another factor we consider during the initial selection process is whether the fund or an affiliate of the fund will compensate us for providing administrative, marketing, and/or support services that would otherwise be provided by the fund, the fund's investment advisor, or its distributor. We review each fund periodically after it is selected. Upon review, we may remove a fund or restrict allocation of additional purchase payments to a fund if we determine the fund no longer meets one or more of the factors and/or if the fund has not attracted significant contractowner assets. Finally, when we develop a variable annuity product in cooperation with a fund family or distributor (e.g., a "private label"product), we generally will include funds based on recommendations made by the fund family or distributor, whose selection criteria may differ from our selection criteria. We currently anticipate closing and replacing the following funds during the second quarter of 2009: AllianceBernstein VP Growth Portfolio (Class B) with AllianceBernstein VP Growth and Income Portfolio (Class B); American Century VP Balanced Fund (Class 1) with LVIP SSgA Bond Index Fund (Standard Class); Dreyfus VIF Developing Leaders Portfolio (Initial Class) with LVIP SSgA Small Cap Index (Standard Class); Dreyfus Stock Index Fund, Inc. with LVIP SSgA S&P 500 Index Fund (Standard Class); DWS Equity 500 Index Portfolio -Class A with LVIP SSgA S&P 500 Index Fund (Standard Class); DWS Small-Cap Index Portfolio (Class A) with LVIP SSgA Small-Cap Index Fund (Standard Class); Fidelity VIP Asset Manager Portfolio (Initial Class) with LVIP SSgA Bond Index Fund (Standard Class); Janus Aspen Worldwide Portfolio (Institutional Class) with LVIP SSgA S&P 500 Index Fund (Standard Class); Neuberger Berman AMT Partners Portfolio with AllianceBernstein VP Growth and Income Portfolio (Class B); Neuberger Berman Mid-Cap Growth Portfolio with LVIP SSgA Small-Cap Index Fund (Standard Class); T. Rowe Price International Stock Portfolio with LVIP Mondrian International Value Fund (Standard Class); Certain funds offered as part of this contract have similar investment objectives and policies to other portfolios managed by the adviser. The investment results of the funds, 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 any of the funds will be comparable to the investment results of any other portfolio managed by the adviser or sub-adviser, if applicable. Following are brief summaries of the fund descriptions. More detailed information may be obtained from the current prospectuses for the funds, which are distributed with this booklet. You should read each fund prospectus carefully before investing. Please be advised that there is no assurance that any of the funds will achieve their stated objectives. 14 AllianceBernstein Variable Products Series Fund, advised by AllianceBernstein L.P. o AllianceBernstein VPS Global Thematic Growth Portfolio (Class B): Maximum capital appreciation. (formerly AllianceBernstein VPS Global Technology Portfolio) o AllianceBernstein VPS Growth Portfolio (Class B): Capital appreciation. It is currently anticipated that during the second quarter of 2009, we will close and replace this investment option. o AllianceBernstein VPS Growth and Income Portfolio (Class B): Growth and income. American Century Variable Products, advised by American Century Investment o Balanced Fund (Class I): Long-term capital growth & current income. It is currently anticipated that during the second quarter of 2009, we will close and replace this investment option. o Inflation Protection Fund (Class I): Long-term total return. This fund will be available on or about June 15, 2009.Consult your financial advisor. American Funds Insurance SeriesSM, advised by Capital Research and Management Company o Global Growth Fund (Class 2): Long-term growth. o Growth Fund (Class 2): Long-term growth. o Growth-Income Fund (Class 2): Growth and income. o International Fund (Class 2): Long-term growth. BlackRock Variable Series Funds, Inc. o BlackRock Global Allocation V.I. Fund (Class I): This fund will be available on or about June 15, 2009.Consult your financial advisor. Delaware VIP Trust, advised by Delaware Management Company o Diversified Income Series (Standard Class): Total return. o High Yield Series (Standard Class): Total return. o REIT Series (Service Class): Total return. o Small Cap Value Series (Service Class): Capital appreciation. o Trend Series (Service Class): Capital appreciation. Dreyfus Variable Investment Fund, advised by The Dreyfus Corporation o Developing Leaders Portfolio (Initial Class): Capital growth. (Sub-advised by Franklin Portfolio Associates, LLC) It is currently anticipated that during the second quarter of 2009, we will close and replace this investment option. o Stock Index Fund, Inc. (Initial Class): Match the total return of the Standard & Poor's 500 Composite Stock Price Index. (Sub-advised by Mellon Capital Management Corporation) It is currently anticipated that during the second quarter of 2009, we will close and replace this investment option. DWS Investments VIT Funds, advised by Deutsche Asset Management, Inc. o DWS Equity 500 Index VIP (Class A): Capital appreciation. (Sub-advised by Northern Trust Investments, Inc.) It is currently anticipated that during the second quarter of 2009, we will close and replace this investment option. o DWS Small Cap Index VIP (Class A): Capital appreciation. (Sub-advised by Northern Trust Investments, Inc.) It is currently anticipated that during the second quarter of 2009, we will close and replace this investment option. DWS Variable Series II, advised by Deutsche Asset management, Inc. o DWS Alternative Asset Allocation Plus VIP Portfolio (Class A): This fund will be available on or about June 15, 2009.Consult your financial advisor. Fidelity (Reg. TM) Variable Insurance Products, advised by Fidelity Management and Research Company o Asset Manager Portfolio (Initial Class): High total return. It is currently anticipated that during the second quarter of 2009, we will close and replace this investment option. o Contrafund (Reg. TM) Portfolio (Service Class 2): Long-term capital appreciation. 15 o Equity-Income Portfolio (Initial Class): Reasonable income. o Growth Portfolio (Initial Class): Capital appreciation. Janus Aspen Series, advised by Janus Capital Management LLC o Worldwide Portfolio (Institutional Shares): Long-term growth. (Formerly Worldwide Growth Portfolio) It is currently anticipated that during the second quarter of 2009, we will close and replace this investment option. Lincoln Variable Insurance Products Trust, advised by Lincoln Investment Advisors o LVIP Baron Growth Opportunities Fund (Service Class): Capital appreciation. (Sub-advised by BAMCO, Inc.) o LVIP Cohen & Steers Global Real Estate Fund (Standard Class): Total return. (Sub-advised by Cohen & Steers Capital Management) o LVIP Delaware Bond Fund (Standard Class): Current income. (Sub-advised by Delaware Management Company) o LVIP Delaware Foundation Aggressive Allocation Fund (Standard Class): Long-term capital growth (Sub-advised by Delaware Management Company) This fund will be available on or about June 15, 2009.Consult your financial advisor. o LVIP Delaware Foundation Conservative Allocation Fund (Standard Class): Current income and preservation of capital with capital appreciation. (Sub-advised by Delaware Management Company) This fund will not be available until the merger with LVIP Delaware Managed Fund is completed. Consult your financial advisor. o LVIP Delaware Foundation Moderate Allocation Fund (Standard Class): Capital appreciation with current income. (Sub-advised by Delaware Management Company) This fund will be available on or about June 15, 2009.Consult your financial advisor. o LVIP Delaware Growth and Income Fund (Standard Class): Capital appreciation. (Sub-advised by Delaware Management Company) o LVIP Delaware Managed Fund (Standard Class): Total return. (Subadvised by Delaware Management Company) The Board of Trustees of the Lincoln Variable Insurance Products Trust has approved a reorganization pursuant to which the assets of the LVIP Delaware Managed Fund would be acquired and the liabilities of such fund would be assumed by the LVIP Delaware Foundation (Reg. TM) Conservative Allocation Fund in exchange for shares of the LVIP Delaware Foundation (Reg. TM) Conservative Allocation Fund. This reorganization is subject to the approval of the LVIP Delaware Managed Fund's shareholders. This reorganization is expected to occur in June 2009. o LVIP Delaware Social Awareness Fund (Standard Class): Capital appreciation. (Sub-advised by Delaware Management Company) o LVIP Global Income Fund (Standard Class): Current income consistent with preservation of capital. Sub-advised by Mondrian Investment Partners Limited and Templeton Investment Counsel, LLC) This fund will be available on or about June 15, 2009.Consult your financial advisor. o LVIP Janus Capital Appreciation Fund (Standard Class): Long-term growth. (Sub-advised by Janus Capital Management LLC) o LVIP Mondrian International Value Fund (Standard Class): Long-term capital appreciation. (Sub-advised by Mondrian Investment Partners Limited) o LVIP SSgA Bond Index Fund (Standard Class): Replicate Barclays Aggregate Bond Index. (Sub-advised by SSgA Funds Management, Inc.) This fund will be available on or about June 15, 2009.Consult your financial advisor. o LVIP SSgA Emerging Markets 100 Fund (Standard Class): Long-term capital appreciation. (Sub-advised by SSgA Funds Management, Inc.) This fund will be available on or about June 15, 2009.Consult your financial advisor. o LVIP SSgA International Index Fund (Standard Class): Replicate broad foreign index. (Sub-advised by SSgA Funds Management, Inc.) This fund will be available on or about June 15, 2009.Consult your financial advisor. o LVIP T. Rowe Price Structured Mid-Cap Growth Fund (Standard Class): Maximum capital appreciation. (Sub-advised by T. Rowe Price Associates, Inc.) 16 o LVIP Wilshire 2010 Profile Fund (Standard Class): Total return; a fund of funds.* (Sub-advised by Wilshire Associates Incorporated) o LVIP Wilshire 2020 Profile Fund (Standard Class): Total return; a fund of funds.* (Sub-advised by Wilshire Associates Incorporated) o LVIP Wilshire 2030 Profile Fund (Standard Class): Total return; a fund of funds.* (Sub-advised by Wilshire Associates Incorporated) o LVIP Wilshire 2040 Profile Fund (Standard Class): Total return; a fund of funds.* (Sub-advised by Wilshire Associates Incorporated) o LVIP Wilshire Conservative Profile Fund (Standard Class): Current income; a fund of funds.* (Sub-advised by Wilshire Associates Incorporated) o LVIP Wilshire Moderate Profile Fund (Standard Class): Total return; a fund of funds.* (Sub-advised by Wilshire Associates Incorporated) o LVIP Wilshire Moderately Aggressive Profile Fund (Standard Class): Growth and income; a fund of funds.* (Sub-advised by Wilshire Associates Incorporated) o LVIP Wilshire Aggressive Profile Fund (Standard Class): Capital appreciation; a fund of funds.* (Sub-advised by Wilshire Associates Incorporated) *Funds offered in a fund of funds structure may have higher expenses than funds that invest directly in debt or equity securities. Neuberger Berman Advisers Management Trust, advised by Neuberger Berman Management Inc. o Mid-Cap Growth Portfolio (I Class): Capital appreciation. (Sub-advised by Neuberger Berman, LLC) It is currently anticipated that during the second quarter of 2009, we will close and replace this investment option. o Partners Portfolio (I Class): Capital appreciation. (Sub-advised by Neuberger Berman, LLC) It is currently anticipated that during the second quarter of 2009, we will close and replace this investment option. T. Rowe Price International Series, Inc., advised by T. Rowe Price International, Inc. o T. Rowe Price International Stock Portfolio: Long-term growth. It is currently anticipated that during the second quarter of 2009, we will close and replace this investment option. Fund Shares We will purchase shares of the funds at net asset value and direct them to the appropriate subaccounts of the VAA. We will redeem sufficient shares of the appropriate funds to pay annuity payouts, death benefits, surrender/withdrawal proceeds or for other purposes described in the contract. If you want to transfer all or part of your investment from one subaccount to another, we may redeem shares held in the first and purchase shares of the other. Redeemed shares are retired, but they may be reissued later. Shares of the funds 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 subaccounts 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 funds currently engage in mixed and shared funding. Therefore, due to differences in redemption rates or tax treatment, or other considerations, the interest of various contractowners participating in a fund could conflict. Each of 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 funds do not foresee any disadvantage to contractowners 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 funds 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 contractowners or participants as additional units, but are reflected as changes in unit values. 17 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 funds for all contractowners or only for certain classes of contractowners. New or substitute funds may have different fees and expenses, and may only be offered to certain classes of contractowners. Substitutions may be made with respect to existing investments or the investment of future purchase payments, or both. We may close subaccounts to allocations of purchase payments or contract value, or both, at any time in our sole discretion. The funds, which sell their shares to the subaccounts pursuant to participation agreements, also may terminate these agreements and discontinue offering their shares to the subaccounts. Substitutions might also occur if shares of a fund should no longer be available, or if investment in any 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 and, if required, after approval from the SEC. 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 contracts 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 contracts to reflect changes to the subaccounts 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 providing the benefits payable thereunder. Our administrative services include: o processing applications for and issuing the contracts; o processing purchases and redemptions of fund shares as required (including dollar cost averaging, systematic transfer, account sweep and portfolio rebalancing services); 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; o providing toll-free inquiry services and o furnishing telephone and electronic fund transfer services. The risks we assume include: o the risk that annuitants receiving annuity payouts under contracts 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 death benefits paid will exceed the actual contract value; o the risk that more owners than expected will qualify for waivers of the surrender charge; 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. For example, the contingent deferred sales charge collected may not fully cover all of the sales and distribution expenses actually incurred by us. 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 account. 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. 18 Annual Contract Fee During the accumulation period, we currently deduct $25 (or the balance of the participant's account, if less) per year from each participant's account value on the last business day of the month in which a participant anniversary occurs, to compensate us for administrative services provided. We also deduct the charge from a participant's account if the participant's account is totally withdrawn. The charge may be increased or decreased. Surrender Charge for GVA I and GVA II* Under GVA I and GVA II, a surrender charge applies (except as described below) to total or partial withdrawals of a participant's account balance during the accumulation period as follows:
GVA II GVA II During Participation Year GVA I ERISA Non-ERISA --------------------------- ------- -------- ---------- 1-6...................... 5% 5% 6% 7........................ 4% 4% 6% 8........................ 3% 3% 6% 9........................ 2% 2% 6% 10....................... 1% 1% 6% 11 and later............. 0% 0% 6%
* There is no surrender charge taken on withdrawals from GVA III. The surrender charge is imposed on the gross withdrawal amount, and is deducted from the subaccounts and the fixed account in proportion to the amount withdrawn from each. We do not impose a surrender charge on death benefits, or on acount balances converted to an annuity payout option. For any participant, the surrender charge will never exceed 8.5% of the cumulative contributions to the participant's account. Fixed Account Withdrawal/Transfer Limits for GVA III GVA III has no surrender charges, but under GVA III, special limits apply to withdrawals and transfers from the fixed account. During any one calendar year a participant may make one withdrawal from the fixed account, or one transfer to the VAA from the fixed account, of up to 20% of their fixed account balance. Participants who want to liquidate their entire fixed account balance or transfer it to the VAA, however, may make one withdrawal or transfer request from their fixed account in each of five consecutive calendar years according to the following percentages:
Percentage of Fixed Account Available Year Request Received by LNY Under GVA III ------------------------------ -------------------- 1........................... 20% 2........................... 25% 3........................... 33.33% 4........................... 50% 5........................... 100%
Each consecutive withdrawal or transfer may not be made more frequently than twelve months apart. This liquidation schedule is also subject to the same conditions as other withdrawals and transfers. We reserve the right to prohibit any additional contributions by a participant that notifies us of their intention to liquidate their fixed account balance and stop contributions to the contract. Waiver of Surrender Charges and Fixed Account Withdrawal/Transfer Limits Under certain conditions, a participant may withdraw part or all of his or her fixed account balance without incurring a surrender charge under GVA I or GVA II, or without being subject to the fixed account withdrawal/transfer limits under GVA III. We must receive reasonable proof of the condition with the withdrawal request. The chart below shows the standard conditions provided by GVA I, GVA II, and GVA III, as well as optional conditions the contractowner may or may not make available under the contracts:
Standard conditions ------------------------------------------------------------------- GVA I o the participant has attained age 591/2 o the participant has died o the participant has incurred a disability (as defined under the contract) Optional conditions ----------------------------------------------------------------- GVA I o the participant has separated from service with their employer and is at least 55 years of age o the participant is experiencing financial hardship
19
Standard conditions ------------------------------------------------------------------- o the participant has separated from service with their employer ------------------------------------------------------------------- GVA II o the participant has attained age 591/2 o the participant has died o the participant has incurred a disability (as defined under the contract) o the participant has separated from service with their employer and is at least 55 years of age ------------------------------------------------------------------- GVA III o the participant has attained age 591/2 o the participant has died o the participant has incurred a disability (as defined under the contract) o the participant has separated from service with their employer o the participant is experiencing financial hardship* Optional conditions ----------------------------------------------------------------- ----------------------------------------------------------------- GVA II o the participant has separated from service with their employer o the participant is experiencing financial hardship ----------------------------------------------------------------- GVA III o the participant has separated from service with their employer and is at least 55 years of age
* A GVA III contractowner has the option not to include the financial hardship condition. Under GVA I and GVA II, a contractowner may also elect an optional contract provision that permits participants to make a withdrawal once each contract year of up to 20% of the participant's account balance without a surrender charge. A contractowner choosing one or more of the optional provisions may receive a different declared interest rate on the fixed account than will holders of contract without these provisions. Deductions from the VAA for GVA I, II & III for Assumption of Mortality and Expense Risks Account L separate account expenses for GVA I, II & III subaccounts (as a percentage of average daily net assets in the subaccounts): Mortality and expense risk charge: 1.00%
This maximum level of mortality and expense risk charge is guaranteed not to increase. It is assessed during the accumulation period and during the annuity period, even though during the annuity period, we bear no mortality risk on annuity options that do not have life contingencies. If the mortality and expense risk charge proves insufficient to cover underwriting and administrative costs in excess of the charges made for the administrative expenses, we will absorb the loss. However, if the amount deducted proves more than sufficient, we will keep the profit. Special Arrangements The surrender and account charges, described previously may be reduced or eliminated for any particular contract. In addition, the amount credited to and/or the interest rate declared on the fixed account may be enhanced for certain contracts. Such reductions, eliminations or enhancements may be available where LNY's administrative and/or distribution costs or expenses are anticipated to be lower due to, for example, the terms of the contract, the duration or stability of the plan or contract; economies due to the size of the plan, the number of certain characteristics of participants, or the amount or frequency of contributions anticipated; or other support provided by the contractowner or the plan. In addition, the group contractowner or the plan may pay the annual administration charge on behalf of the participants under a contract or by election impose this charge only on particpants with account balances in the VAA . LNY will enhance the fixed interest crediting rate and reduce or eliminate fees, charges, or rates in accordance with LNY's eligibility criteria in effect at the time a contract is issued, or in certain cases, after a contract has been held for a period of time. LNY may, from time to time, modify both the amounts of reductions or enhancements and the criteria for qualification. Reductions, enhancements, or waivers will not be unfairly discriminatory against any person, including participants under other contracts issued through the VAA. Fees, charges and rates under the contracts, including charges for premium taxes; loan rates of interest; and the availability of certain free withdrawals, may be subject to variation based on state insurance regulation. The contractowner and participant should read the contract carefully to determine whether any variations apply in the state in which the contract is issued. The exact amount for all fees, charges, and rates applicable to a particular contract will be stated in that contract. Deductions for Premium Taxes Any premium tax or other tax levied by any governmental entity as a result of the existence of the contracts or the VAA will be deducted from the account value when incurred, or at another time of our choosing. 20 The applicable premium tax rates that states and other governmental entities impose on the purchase of an annuity are subject to change by legislation, by administrative interpretation or by judicial action. These premium taxes generally depend upon the law of your state of residence. The tax ranges from zero to 3.5%. Currently, there is no premium tax imposed for New York residents. Other Charges and Deductions The mortality and expense risk and administrative charge of 1.002% of the contract value will be assessed on all variable annuity payouts, including options that may be offered that do not have a life contingency and therefore no mortality risk. This charge covers the expense risk and administrative services listed previously in this prospectus. The expense risk is the risk that our costs in providing the serices will exceed our revenues from contract charges. There are additional deductions from and expenses paid out of the assets of the underlying funds that are more fully described in the prospectuses for the funds. Among these deductions and expenses are 12b-1 fees which reimburse us or an affiliate for certain expenses incurred in connection with certain administrative and distribution support services provided to the funds. The Contracts Purchase of the Contracts A prospective contractowner wishing to purchase a contract must apply for it through one of our authorized sales representatives. The completed application is sent to us and we decide whether we can accept it based on our underwriting guidelines. Once the application is accepted, a contract is prepared and executed by our legally authorized officers. The contract is then sent to the contractowner through its sales representative. For plans that have allocated rights to the participant, we will issue to each participant a separate active life certificate that describes the basic provisions of the contract. Initial Contributions When we receive a complete enrollment form and all other information necessary for processing a contribution, we will price the initial contribution for a participant to his or her account no later than two business days after we receive the contribution. If we receive contribution amounts with incomplete or no allocation instructions, we will notify the contractowner and direct contribution amounts to the pending allocation account. The pending allocation account invests in Fidelity (Reg. TM) VIP Money Market Portfolio, which is not available as an investment option under the contract. We do not impose the mortality and expense risk charge or the annual administration charge on the pending allocation account. The participant's participation date will be the date we deposited the participant's contribution into the pending allocation account. We will transfer the account value from the pending allocation account in accordance with allocation percentages elected on properly completed allocation instructions within two valuation dates of receipt of such instructions, and allocate all future contributions in accordance with these percentages until we are notified of a change. If we do not receive properly completed instructions after we have sent three monthly notices, we will refund account value in the pending allocation account within 105 days of the initial contribution. Participants may not allocate contributions to, make transfer to or from, take loans from, or make withdrawals from the pending allocation account, except as set forth in the contract. Contributions Contractowners generally forward contributions to us for investment. Depending on the plan, the contributions may consist of salary reduction contributions, employer contributions or post-tax contributions. Contributions may accumulate on either a guaranteed or variable basis selected from those subaccounts made available by the contractowner. Contributions made on behalf of participants may be in any amount unless there is a minimum amount set by the contractowner or plan. A contract may require the contractowner to contribute a minimum annual amount on behalf of all participants. Annual contributions under qualified plans may be subject to maximum limits imposed by the tax code. Annual contributions under non-qualified plans may be limited by the terms of the contract. Subject to any restrictions imposed by the plan or the tax code, we will accept transfers from other contracts and qualified rollover contributions. Contributions must be in U.S. funds, and all withdrawals and distributions under the contract will be in U.S. funds. If a bank or other financial institution does not honor the check or other payment method used for a contribution, we will treat the contribution as invalid. All allocation and subsequent transfers resulting from the invalid contributions will be reversed and the party responsible for the invalid contribution must reimburse us for any losses or expenses resulting from the invalid contribution. 21 Replacement of Existing Insurance Careful consideration should be given prior to surrendering or withdrawing money from an existing insurance contract to purchase the contract described in this prospectus. Participant's Surrender charges may be imposed on your existing contract. An investment representative or tax adviser should be consulted prior to making an exchange. Cash surrenders from an existing contract may be subject to tax and tax penalties. Valuation Date Accumulation and annuity 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 and the annuity unit value will not change. Allocation of Contributions The contractowner forwards contributions to us, specifying the amount being contributed on behalf of each participant and allocation information in accordance with our procedures. Contributions are placed into the VAA's subaccounts, each of which invests in shares of a fund, and/or the fixed account, according to written participant instructions and subject to the plan. The contribution allocation percentage to the subaccount's or the fixed account must be in any whole percent. If we receive your purchase payment from you or your broker-dealer in good order at our servicing office prior to 4:00 p.m., New York time, we will use the accumulation unit value computed on that valuation date when processing your purchase payment. If we receive your purchase payment at or after 4:00 p.m., New York time, we will use the accumulation unit value computed on the next valuation date. If you submit your purchase payment to your representative, we will generally not begin processing the purchase payment until we receive it from your representative's broker-dealer. If your broker-dealer submits your purchase payment to us through the Depository Trust and Clearing Corporation (DTCC) or, pursuant to terms agreeable to us, uses a proprietary order placement system to submit your purchase payment to us, and your purchase payment was placed with your broker-dealer prior to 4:00 p.m., New York time, then we will use the accumulation unit value computed on that valuation date when processing your purchase payment. If your purchase payment was placed with your broker-dealer at or after 4:00 p.m. New York time, then we will use the accumulation unit value computed on the next valuation date. The number of accumulation units determined in this way is not impacted 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 underlying fund's investments perform, but also upon the expenses of the VAA and the underlying funds. Subject to the terms of the plan, a participant may change the allocation of contributions by notifying us in writing or by telephone in accordance with our published procedures. The change is effective for all contributions received concurrently with the allocation change form and for all future contributions, unless the participant specifies a later date. Changes in the allocation of future contributions have no effect on amounts a participant may have already contributed. Such amounts, however, may be transferred between subaccount and the fixed account pursuant to the requirements described in Transfers on or before the annuity commencement date. Allocation of employer contributions may be restricted by the applicable plan. 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 each subaccount was or will be established at the inception of the subaccount. It may increase or decrease from valuation period to valuation period. Accumulation unit values are affected by investment performance of the funds, fund expenses, and the contract charges. The accumulation unit value for a subaccount for a later valuation period is determined 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 a subaccount for any valuation period are equal to the daily mortality and expense risk charge and the daily administrative charge multiplied by the number of calendar days in the valuation period. In certain circumstances, 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. 22 Transfers On or Before the Annuity Commencement Date Subject to the terms of a plan, a participant may transfer all or a portion of the participant's account balance from one subaccount to another, and between the VAA and the fixed account. Under GVA III transfers from the fixed account are subject to special limits. See - Fixed account withdrawals/transfer limits for GVA III. A transfer involves the surrender of accumulation units in one subaccount and the purchase of accumulation units in the other subaccount. A transfer will be done using the respective accumulation unit values determined at the end of the valuation date on which the transfer request is received. There is no charge for a transfer. We do not limit the number of transfers except as described under - Charges and other deductions-Fixed account withdrawal/transfer limits for GVA III. A transfer request may be made to us using written, telephone, fax, or electronic instructions, if the appropriate authorization is on file with us. Our address, telephone number, and internet address are on the first page of this prospectus. In order to prevent unauthorized or fraudulent transfers, we may require certain identifying information before we will act upon instructions. We may also assign the participant a Personal Identification Number (PIN) to serve as identification. We will not be liable for following instructions we reasonably believe are genuine. Telephone requests will be recorded and written confirmation of all transfer requests will be mailed to the participant on the next valuation date. Please note that the telephone and/or electronic devices may not always be available. Any telephone or electronic device, whether it is yours, your service provider's, or your agent's, can experience outages or slowdowns for a variety of reasons. These outages or slowdowns may delay or prevent our processing of your request. Although we have taken precautions to limit these problems, we cannot promise complete reliability under all circumstances. If you are experiencing problems, you should make your transfer request by writing to our servicing office. Requests for transfers will be processed on the valuation date that they are placed in our customer service center before the end of the valuation date (normally 4:00 p.m. New York time). If we receive a transfer request placed 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. When thinking about a transfer of contract value, you should consider the inherent risk involved. Frequent transfers based on short-term expectations may increase the risk that a transfer will be made at an inopportune time. Market Timing Frequent, large, or short-term transfers among subaccounts and the fixed account, such as those associated with "market timing" transactions, can affect the funds and their investment returns. Such transfers may dilute the value of the fund shares, interfere with the efficient management of the fund's portfolio, and increase brokerage and administrative costs of the funds. As an effort to protect our participants and the funds from potentially harmful trading activity, we utilize certain market timing policies and procedures (the "Market Timing Procedures"). Our Market Timing Procedures are designed to detect and prevent such transfer activity among the subaccounts and the fixed account that may affect other participants or fund shareholders. In addition, the funds may have adopted their own policies and procedures with respect to frequent purchases and redemptions of their respective shares. The prospectuses for the funds describe any such policies and procedures, which may be more or less restrictive than the frequent trading policies and procedures of other funds and the Market Timing Procedures we have adopted to discourage frequent transfers among subaccounts. While we reserve the right to enforce these policies and procedures, participants and other persons with interests under the contracts should be aware that we may not have the contractual authority or the operational capacity to apply the frequent trading policies and procedures of the funds. However, under SEC rules, we are required to: (1) enter into a written agreement with each fund or its principal underwriter that obligates us to provide to the fund promptly upon request certain information about the trading activity of individual participants, and (2) execute instructions from the fund to restrict or prohibit further purchases or transfers by specific participants who violate the excessive trading policies established by the fund. You should be aware that the purchase and redemption orders received by the funds generally are "omnibus" orders from intermediaries such as retirement plans or separate accounts funding variable insurance contracts. The omnibus orders reflect the aggregation and netting of multiple orders from individual retirement plan participants and/or individual owners of variable insurance contracts. The omnibus nature of these orders may limit the funds' ability to apply their respective disruptive trading policies and procedures. We cannot guarantee that the funds (and thus our participants) will not be harmed by transfer activity relating to the retirement plans and/or other insurance companies that may invest in the funds. In addition, if a fund believes that an omnibus order we submit may reflect one or more transfer requests from participants engaged in disruptive trading activity, the fund may reject the entire omnibus order. Our Market Timing Procedures detect potential "market timers"by examining the number of transfers made by participants within given periods of time. In addition, managers of the funds might contact us if they believe or suspect that there is market timing. If requested by a fund company, we may vary our Market Timing Procedures from subaccount to subaccount to comply with specific fund policies and procedures. 23 We may increase our monitoring of participants who we have previously identified as market timers. When applying the parameters used to detect market timers, we will consider multiple contracts owned by the same participant if that participant has been identified as a market timer. For each participant, we will investigate the transfer patterns that meet the parameters being used to detect potential market timers. We will also investigate any patterns of trading behavior identified by the funds that may not have been captured by our Market Timing Procedures. Once a participant has been identified as a "market timer"under our Market Timing Procedures, we will notify the participant in writing that future transfers (among the subaccounts and/or the fixed account) will be temporarily permitted to be made only by original signature sent to us by U.S. mail, standard delivery for the remainder of the calendar year. Overnight delivery or electronic instructions (which may include telephone, facsimile, or Internet instructions) submitted during this period will not be accepted. If overnight delivery or electronic instructions are inadvertently accepted from a participant that has been identified as a market timer, upon discovery, we will reverse the transaction within 1 or 2 business days. We will impose this "original signature"restriction on that participant even if we cannot identify, in the particular circumstances, any harmful effect from that participant's particular transfers. Participants seeking to engage in frequent, large, or short-term transfer activity may deploy a variety of strategies to avoid detection. Our ability to detect such transfer activity may be limited by operational systems and technological limitations. The identification of participants determined to be engaged in such transfer activity that may adversely affect other participants or fund shareholders involves judgments that are inherently subjective. We cannot guarantee that our Market Timing Procedures will detect every potential market timer. If we are unable to detect market timers, you may experience dilution in the value of your fund shares and increased brokerage and administrative costs in the funds. This may result in lower long-term returns for your investments. Our Market Timing Procedures are applied consistently to all participants. An exception for any participant will be made only in the event we are required to do so by a court of law. In addition, certain funds available as investment options in your contract may also be available as investment options for owners of other, older life insurance policies issued by us. Some of these older life insurance policies do not provide a contractual basis for us to restrict or refuse transfers which are suspected to be market timing activity. In addition, because other insurance companies and/or retirement plans may invest in the funds, we cannot guarantee that the funds will not suffer harm from frequent, large, or short-term transfer activity among subaccounts and the fixed accounts of variable contracts issued by other insurance companies or among investment options available to retirement plan participants. In our sole discretion, we may revise our Market Timing Procedures at any time without prior notice as necessary to better detect and deter frequent, large, or short-term transfer activity to comply with state or federal regulatory requirements, and/or to impose additional or alternate restrictions on market timers (such as dollar or percentage limits on transfers). If we modify our Market Timing Procedures, they will be applied uniformly to all participants or as applicable to all participants investing in underlying funds. We also reserve the right to implement and administer redemption fees imposed by one or more of the funds in the future. Some of the funds have reserved the right to temporarily or permanently refuse payments or transfer requests from us if, in the judgment of the fund's investment adviser, the fund would be unable to invest effectively in accordance with its investment objective or policies, or would otherwise potentially be adversely affected. To the extent permitted by applicable law, we reserve the right to defer or reject a transfer request at any time that we are unable to purchase or redeem shares of any of the funds available through the VAA, including any refusal or restriction on purchases or redemptions of the fund shares as a result of the funds' own policies and procedures on market timing activities. If a fund refuses to accept a transfer request we have already processed, we will reverse the transaction within 1 or 2 business days. We will notify you in writing if we have reversed, restricted or refused any of your transfer requests. Some funds also may impose redemption fees on short-term trading (i.e., redemptions of mutual fund shares within a certain number of business days after purchase). We reserve the right to administer and collect any such redemption fees on behalf of the funds. You should read the prospectuses of the funds for more details on their redemption fees and their ability to refuse or restrict purchases or redemptions of their shares. Transfers After the Annuity Commencement Date We do not permit transfers of a participant's account balance after the annuity commencement date. Additional Services There are four additional services available to you: dollar-cost averaging, systematic transfer (GVA III only), account sweep and portfolio rebalancing. In order to take advantage of one of these services, you will need to complete the applicable election form. Dollar-cost averaging allows you to transfer a designated amount from the fixed account into one or more subaccounts on a monthly basis for 1, 2 or 3 years. The systematic transfer service allows you to fully liquidate your fixed account balance over four years and transfer the amounts into one or more of the subaccounts. This service is only available for GVA III participants. The account sweep service allows you to keep a designated amount in one subaccount or the fixed account, and automatically transfer the excess to other subaccounts of your choice. 24 Portofolio rebalancing is an option that restores to a pre-determined level the percentage of account value allocated to each subaccount or the fixed account. The rebalancing may take place quarterly, semi-annually or annually. Death Benefit Before the Annuity Commencement Date The payment of death benefits is governed by the applicable plan and the tax code. In addition, no payment of death benefits provided upon the death of the participant will be allowed that does not satisfy the requirements of code section 72(s) or section 401(a)(9) of the tax code. The participant may designate a beneficiary during the participant's lifetime and change the beneficiary by filing a written request with us. Each change of beneficiary revokes any previous designation. If the participant dies before the annuity commencement date, the death benefit paid to the participant's designated beneficiary will be the greater of: (1) the net contributions; or (2) the participant's account balance less any outstanding loan (including principal due and accrued interest), provided that, if we are not notified of the participant's death within six months of such death, we pay the beneficiary the amount in (2). We determine the value of the death benefit as of the date on which the death claim is approved for payment. This payment will occur when we receive (1) proof, satisfactory to us, of the death of the participant; (2) written authorization for payment; and (3) all required claim forms, fully completed. If a death benefit is payable, the beneficiary may elect to receive payment of the death benefit either in the form of a lump sum settlement or an annuity payout, or as a combination of these two. 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. If no election is made within 60 days after we receive satisfactory notice of the participant's death, we will pay a lump sum settlement to the beneficiary at that time. This payment may be postponed as permitted by the 1940 Act. Payment will be made in accordance with applicable laws and regulations governing payment of death benefits. Under qualified contracts, if the beneficiary is someone other than the spouse of the deceased participant, the tax code provides that the beneficiary may not elect an annuity which would commence later than December 31st of the calendar year following the calendar year of the participant's death. If a non-spousal beneficiary elects to receive payment in a single lump sum, the tax code provides that such payment must be received no later than December 31st of the fourth calendar year following the calendar year of the participant's death. If the beneficiary is the surviving spouse of the deceased participant, distributions generally are not required under the tax code to begin earlier than December 31st of the calendar year in which the participant would have attained age 70. If the surviving spouse dies before the date distributions commence, then, for purposes of determining the date distributions to the beneficiary must commence, the date of death of the surviving spouse is substituted for the date of death of the participant. Other rules apply to non-qualified annuities. See "Federal Tax Matters." If there is no living named beneficiary on file with us at the time of a participant's death and unless the plan directs otherwise, we will pay the death benefit to the participant's estate in the form of a lump sum payment, upon receipt of satisfactory proof of the participant's death, but only if we receive proof of death no later than the end of the fourth calendar year following the year of the participant's death. In such case, the value of the death benefit will be determined as of the end of the valuation period during which we receive due proof of death, and the lump sum death benefit generally will be paid within seven days of that date. Withdrawals Before the annuity commencement date and subject to the terms of the plan, withdrawals may be made from the subaccounts or the fixed account of all or part of the participant's account balance remaining after deductions for any applicable (1) surrender charge; (2) annual administration charge (imposed on total withdrawals), (3) premium taxes, and (4) outstanding loan. Converting all or part of the account balance or death benefit to an annuity payout is not considered a withdrawal. Under GVA III, special limits apply to withdrawals from the fixed account. See "Charges and Other Deductions- Fixed Account Withdrawal/Transfer Limits for GVA III." The account balance available for withdrawal is determined at the end of the valuation period during which we receive the withdrawal request on an approved Lincoln distribution request form (available from the Home Office). If we receive a surrender or withdrawal request placed 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 a request for withdrawal specifies otherwise, withdrawals will be made from all subaccounts within the VAA and from the fixed account in the same proportion that the amount of withdrawal bears to the total participant account balance. Unless prohibited, withdrawal payments will be mailed within seven days after we receive a valid written request. The payment may be postponed as permitted by the 1940 Act. There are charges associated with withdrawals of account value. See "Charges and Other Deductions." The tax consequences of a withdrawal are discussed later in this booklet. See "Federal Tax Matters." 25 Total Withdrawals. Only participants with no outstanding loans can make a total withdrawal. A total withdrawal of a participant's account will occur when (a) the participant or contractowner requests the liquidation of the participant's entire account balance, or (b) the amount requested plus any surrender charge results in a remaining participant account balance of an amount less than or equal to the annual administration charge, in which case we treat the request as a request for liquidation of the participant's entire account balance. Any active life certificate must be surrendered to us when a total withdrawal occurs. If the contractowner resumes contributions on behalf of a participant after a total withdrawal, the participant will receive a new participation date and active life certificate. Partial Withdrawals. A partial withdrawal of a participant's account balance will occur when less than a total withdrawal is made from a participant's account. Systematic Withdrawal Option. Participants who are at least age 591/2, are separated from service from their employer, or are disabled, and certain spousal beneficiaries and alternate payees who are former spouses, may be eligible for a Systematic Withdrawal Option ("SWO") under the contract. Payments are made only from the fixed account. Under the SWO a participant may elect to withdraw either a monthly amount which is an approximation of the interest earned between each payment period based upon the interest rate in effect at the beginning of each respective payment period, or a flat dollar amount withdrawn on a periodic basis. A participant must have a vested pre-tax account balance of at least $10,000 in the fixed account in order to select the SWO. A participant may transfer amounts from the VAA to the fixed account in order to support SWO payments. These transfers, however, are subject to the transfer restrictions imposed by any applicable plan. A one-time fee of up to $30 will be charged to set up the SWO. This charge is waived for total vested pre-tax account balances of $25,000 or more. More information about SWO, including applicable fees and charges, is available in the contracts and active life certificates and from us. Required Minimum Distribution Program Under certain contracts participants who are at least age 701/2 may ask us to calculate and pay to them the minimum annual distribution required by Sections 401(a)(9), 403(b)(10) or 408 of the tax code. The participant must complete the forms we require to elect this option. We will base our calculation solely on the participant's account value with us. Participants who select this option are responsible for determining the minimum distributions amount applicable to their non-LNY contracts. Withdrawal Restrictions. Withdrawals under Section 403(b) contracts are subject to the limitations under Section 403(b)(11) of the tax code and regulations thereof and in any applicable plan document. That section provides that withdrawals of salary reduction contributions deposited and earnings credited on any salary reduction contributions after December 31, 1988, can only be made if the participant has (1) died; (2) become disabled; (3) attained age 591/2; (4) separated from service; or (5) incurred a hardship. If amounts accumulated in a Section 403(b)(7) custodial account are deposited in a contract, these amounts will be subject to the same withdrawal restrictions as are applicable to post-1988 salary reduction contributions under the contracts. For more information on these provisions see "Federal Tax Matters." Withdrawal requests for a participant under Section 401(a) plans and plans subject to Title I of ERISA must be authorized by the contractowner on behalf of a participant. All withdrawal requests will require the contractowner's written authorization and written documentation specifying the portion of the participant's account balance which is available for distribution to the participant. For withdrawal requests (other than transfers to other investment vehicles) by participants under plans not subject to Title I of ERISA and non-401(a) plans, the participant must certify to us that one of the permitted distribution events listed in the tax code has occurred (and provide supporting information, if requested) and that we may rely on this representation in granting the withdrawal request. See "Federal Tax Matters." A participant should consult his or her tax adviser as well as review the provisions of their plan before requesting a withdrawal. A plan and applicable law may contain additional withdrawal or transfer restrictions. Withdrawals may have Federal tax consequences. In addition, early withdrawals, as defined under Section 72(q) and 72(t) of the tax code, may be subject to a 10% excise tax. The SecureLine (Reg. TM) account is a special service that we offer in which your surrender proceeds are placed into an interest -bearing account in your name. The checking account is established at a bank of our choosing. Instead of mailing you a check, we will send a checkbook so that you will have access to the account simply by writing a check for all or any part of the proceeds. You are the owner of the account, and are the only one authorized to transfer proceeds from the account. You may choose to leave the proceeds in this account, or you may begin writing checks immediately. The funds that support the SecureLine (Reg. TM) account are part of our general account and are subject to the claims of our creditors and are not FDIC insured. We receive a financial benefit from all amounts left in the SecureLine (Reg. TM) account. You may request that surrender proceeds be paid directly to you instead of deposited into a SecureLine (Reg. TM) account. If you request a lump sum surrender payable to yourself for either an in-service or termination distribution, and your surrender value is $10,000 or more, your money will be placed into the account in your name unless you instruct us otherwise. You are the owner of the account, and are the only one authorized to transfer proceeds from the account. You may choose to leave the proceeds in this account, or you may begin writing checks immediately. In the case of a death of one of the parties to the annuity contract, if the recipient of the death benefit has elected a lump sum settlement and the contract value is $10,000 or more, the proceeds will be placed into the interest-bearing account in the recipient's name 26 as the owner of the account. The SecureLine (Reg. TM) account allows the recipient additional time to decide how to manage death benefit proceeds with the balance earning interest from the day the account is opened. Loans If the plan permits loans, then during the participant's accumulation period, the participant may apply for a loan by completing a loan application that we provide. The participant's account balance in the fixed account secures the loan. Loans are subject to restrictions imposed by the IRC, Title I of the Employee Retirement Income Security Act of 1974 (ERISA), and the participant's plan. For plans subject to the IRC and Title I of ERISA, the initial amount of a participant loan cannot exceed the lesser of 50% of the participant's vested account balance in the fixed account or $50,000 and, pursuant to the terms of the contract, must be at least $1,000. For plans subject to the IRC, but not subject to Title I of ERISA, a participant is subject to the same $50,000 maximum, but may borrow up to $10,000 of his or her vested account balance even if that would be greater than 50% of his or her vested account balance. A participant may have only one loan outstanding at a time and may not take more than one loan in any six-month period. Amounts serving as collateral for the loan are not subject to the minimum interest rate under the contract and will accrue interest at a rate below the loan interest rate provided in the contract. More information about loan and loan interest rates is provided in the contract, the active life certificates, and the annuity loan agreement, and is also available from us. 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 to protect contractowners. We may delay payment from the fixed account for up to six months. During this period, we will continue to credit the current declared interest rate to a participant's account in the fixed account. 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 a contractowner's account to government regulators. 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 Contractowners have all rights under the contract. According to New York law, the assets of the VAA are held for the exclusive benefit of all contractowners 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. Qualified contracts and active life certificates may not be assigned or transferred except as permitted by ERISA and on written notification to us. In addition, a participant, beneficiary, or annuitant may not, unless permitted by law, assign or encumber any payment due under the contract. Contractowner Questions The obligations to purchasers under the contracts are those of Lincoln New York. This prospectus provides a general description of the contract. Questions about your contract should be directed to us at 1-800-341-0441. Annuity Payouts As permitted by the plan, the participant, or the beneficiary of a deceased participant, may elect to convert all or part of the participant's account balance or the death benefit to any annuity payout. The contract provides optional forms of payouts of annuities (annuity options), each of which is payable on a variable basis, a fixed basis or a combination of both as you specify. The contract provides that all or part of the contract value may be used to purchase an annuity payout option. You may elect annuity payouts in monthly, quarterly, semiannual or annual installments. If the participant's account balance or the beneficiary's death benefit is less than $2,000 or if the amount of the first payout is less than $20, we have the right to cancel the annuity and pay the participant or beneficiary the entire amount in a lump sum. 27 We may maintain variable annuity payouts in the VAA, or in another separate account of LNY (variable payout division). We do not impose a charge when the annuity conversion amount is applied to a variable payout division to provide an annuity payout option. The contract benefits and charges for an annuity payout option, whether maintained in the VAA or in a variable payout division, are as described in this prospectus. The selection of funds available through a variable payout division may be different from the funds available through the VAA. If we will maintain a participant's variable annuity payout in a variable payout division, we will provide a prospectus for the variable payout division before the annuity commencement date. Annuity Options 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 he or she dies before the date set for the first payout; only one payout if death occurs before the second scheduled payout, and so on. Life Annuity with Guaranteed Period. This option guarantees periodic payouts during a designated period, usually 10 or 20 years, and then continues throughout the lifetime of the annuitant. The designated period is selected by the contractowner (or participant in an allocated contract). 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. However, under a joint life annuity, if both annuitants die before the date set for the first payout, no payouts will be made. Only one payment would be made if both deaths occur before the second scheduled payout, and so on. Non-Life Annuities. Annuity payouts are guaranteed monthly for the selected number of years. While there is no right to make any total or partial withdrawals during the annuity period, an annuitant or beneficiary who has selected this annuity option as a variable annuity may request at any time during the payout period that the present value of any remaining installments be paid in one lump sum. This lump sum payout will be treated as a total withdrawal during the accumulation period and may be subject to a surrender charge. See - Charges and Other Deductions and Federal Tax Matters. General Information Under the options listed above, you may not make withdrawals. Other options may be made available by us. Annuity payout options are only available if consistent with the contract, the plan, the tax code, and ERISA. The mortality and expense risk charge will be assessed on all variable annuity payments, including options that do not have a life contingency and therefore no mortality risk. Under any option providing for guaranteed payouts, the number of payouts which remain unpaid at the date of the annuitant's death (or surviving annuitant's death in the case of a joint life annuity) will be paid to the beneficiary as payouts become due. Annuity Payout Calculation Fixed annuity payouts are determined by dividing the participant's annuity conversion amount in the fixed account as of the initial annuity payout calculation date by the applicable annuity conversion factor (in the contract) for the annuity payout option selected. Variable Annuity Payouts Variable annuity payouts will be determined using: o The participant's annuity conversion amount in the VAA as of the innitial annuity payout calculation date; o The annuity conversion factor contained in the contract; o The annuity option selected; and o The investment performance of the fund(s) selected. To determine the amount of payouts, we make this calculation: 1. Determine the dollar amount of the first periodic payout; then 2. Credit the retired life certificate with a specific number of annuity units equal to the first periodic payout divided by the annuity unit value; and 3. Calculate the value of the annuity units each period thereafter. We assume an investment return of a specified percentage per year, as applied to the applicable mortality table. The amount of each annuity payout after the initial pay-out will depend upon how the underlying fund(s) perform, relative to the assumed rate. If the actual net investment rate (annualized) exceeds the assumed rate, the payment will increase at a rate proportional to the amount of such excess. Conversely, if the actual rate is less than the assumed rate, annuity payouts will decrease. There is a more complete explanation of this calculation in the SAI. 28 Distribution of the Contracts Lincoln Financial Distributors ("LFD") serves as Principal Underwriter of this contract. LFD is affiliated with Lincoln New York 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 ("Selling Firms"). 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 commission the Principal Underwriter pays to LFA is 3.50% of purchase payments. LFA may elect to receive a lower commission when a purchase payment is made along with an earlier quarterly payment based on contract value for so long as the contract remains in effect. Upon annuitization, the maximum commission the Principal Underwriter pays to LFA is 1.18% of annuitized value and/or ongoing annual compensation of up to 0.00% of annuity value or statutory reserves. Lincoln New York 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 Principal Underwriter pays commissions to all Selling Firms. The maximum commission the Principal Underwriter pays to Selling Firms, other than LFA, is 3.50% of purchase payments. Some Selling Firms may elect to receive a lower commission when a purchase payment is made along with an earlier quarterly payment based on contract value for so long as the contract remains in effect. Upon annuitization, the maximum commission the Principal Underwriter pays to Selling Firms is 1.18% of annuitized value and/or ongoing annual compensation of up to 0.00% of annuity value or statutory reserves. 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, among other things: (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; (5) and inclusion in the financial products the Selling Firm offers. Lincoln New York 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 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 2008 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. A marketing expense allowance is paid to American Funds Distributors (AFD) in consideration of the marketing assistance AFD provides to LFD. This allowance, which ranges from 0.10% to 0.16% is based on the amount of purchase payments initially allocated to the American Funds Insurance Series underlying the variable annuity. Commissions and other incentives or payments described above 29 are not charged directly to contract owners or the Separate Account. All compensation is paid from our resources, which include fees and charges imposed on your contract. 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 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 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 plans. Persons planning to use the contract in connection with a qualified plan should obtain advice from a competent tax adviser. Types of Qualified Contracts and Terms of Contracts Qualified plans 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) 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) o Roth 403(b) plans We may issue a contract for use with other types of qualified plans in the future. We do not offer certain types of qualified plans for all of our annuity products. Check with your representative concerning qualified plan availability for this product. We will amend contracts to be used with a qualified 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 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 plans to the extent such terms and conditions contradict the contract, unless we consent. If your contract was issued pursuant to a 403(b) plan, we now are generally required to confirm, with your 403(b) plan sponsor or otherwise, that contributions (purchase payments), as well as surrenders, loans or transfers you request, comply with applicable tax requirements and to decline purchase payments or requests that are not in compliance. We will defer crediting purchase payments we receive or processing payments you request until all information required under the tax law has been received. By directing purchase payments to the contract or requesting a surrender, loan or transfer, you consent to the sharing of confidential information about you, the contract, and transactions under the contract and any other 403(b) contracts or accounts you have under the 403(b) plan among us, your employer or plan sponsor, any plan administrator or recordkeeper, and other product providers. Also, for 403(b) contracts issued on or after January 1, 2009, amounts attributable to employer contributions are subject to restrictions on withdrawals specified in your employer's 403(b) plan, in order to comply with new tax regulations (previously, only amounts attributable to your salary-reduction contributions were subject to withdrawal restrictions). Amounts transferred to a 403(b) contract from other 403(b) contracts or accounts must generally be subject to the same restrictions on withdrawals applicable under the prior contract or account. 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). 30 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." IRS 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 not issued 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. Tax Treatment of Qualified Contracts The Federal income tax rules applicable to qualified 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 plan and the plan participant's specific circumstances, e.g., the participant's compensation. o Minimum annual distributions are required under most qualified plans once you reach a certain age, typically age 701/2, 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 701/2. Other qualified plans may allow the participant to take required distributions upon the later of reaching age 701/2 or retirement. 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 the later of age 701/2 or retirement. You are required to take distributions from your traditional IRAs beginning in the year you reach age 701/2. 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. The IRS has issued new regulations concerning required minimum distributions. The regulations may impact the distribution method you have chosen and the amount of your distributions. Under new regulations, the presence of an enhanced death benefit, Lincoln SmartSecurity (Reg. TM) Advantage, 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. Congress enacted The Worker, Retiree, and Employer Recovery Act of 2008 (the Act) in December, 2008. The Act includes a number of relief provisions, including the suspension of the RMD requirement for IRAs and certain qualified plans in 2009. You should consult your tax advisor to determine whether the RMD relief applies to your annuity contract. If your RMD is currently paid automatically each year, Lincoln will not make any changes to your payments for 2009 unless you specifically request that a change be made. 31 Federal Penalty Taxes Payable on Distributions The tax code may impose a 10% penalty tax on a 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, exceptions provide that the penalty tax does not apply to a withdrawal, surrender, or annuity payout: o received on or after the annuitant reaches 591/2, o received on or after the annuitant's death or because of the annuitant's disability (as defined in the tax law), o received as a series of substantially equal periodic payments based on the annuitant's life (or life expectancy), or o 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 plans. However, the specific requirements of the exception may vary. Taxation of Death Benefits 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. 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 PPA permits direct conversions from certain qualified, 403(b) or 457(b) plans to Roth IRAs (effective for distribution after 2007). 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. Nonqualified Annuity Contracts A nonqualified annuity is a contract not issued in connection with a qualified retirement plan receiving special tax treatment under the tax code, such as an IRA or 403(b) plan. 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. 32 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. Additional Information Voting Rights As required by law, we will vote the fund shares held in the VAA at meetings of the shareholders of the funds. The voting will be done according to the instructions of contractowners who have interests in any subaccounts which invest in classes of the funds. 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. Each 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 contractowner provide their voting instructions to us. Even though contractowners may choose not to provide voting instruction, the shares of a fund to which such contractowners 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 contractowners 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 on a pro-rata basis 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 funds. Since the funds engage in shared funding, other persons or entities besides Lincoln New York may vote fund shares. See Investments of the Variable Annuity Account - Fund Shares. Return Privilege Participants under Sections 403(b), 408 and certain non-qualified plans will receive an active life certificate. Within the free-look period (ten days) after the participant receives the active life certificate, the participant may cancel it for any reason by giving us written notice. The postmark date of the notice is the date of notice for these purposes. An active life certificate canceled under this provision will be void. With respect to the fixed side of the contract, we will return the participant's contributions less withdrawals made on behalf of the participant. With respect to the VAA, we will return the greater of the participant's contributions less withdrawals made on behalf of the participant, or the participant's account balance in the VAA on the date we receive the written notice. No surrender charge applies. State Regulation As a life insurance company organized and operated under New York law, we are subject to provisions governing life insurers and to regulation by the New York Superintendent of Insurance. Our books and accounts are subject to review and examination by the New York Insurance Department 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 servicing office, at least semi-annually after the first contract year, reports containing information required by that Act or any other applicable law or regulation. Administrative services necessary for the operations of the VAA and the contracts are currently provided by Lincoln Life. However, neither the assets of Lincoln Life nor the assets of LNC support the obligation of Lincoln New York under the contracts. 33 Other Information Contract Deactivation. Under certain contracts, we may deactivate a contract by prohibiting new contributions and/or new participants after the date of deactivation. We will give the contractowner and participants at least ninety (90) days notice of the deactivation date. Legal Proceedings In the ordinary course of its business, Lincoln New York, the VAA, and the principal underwriter may become or are involved in various pending or threatened legal proceedings, including purported class actions, arising from the conduct of business. In some instances, these 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. After consultation with legal counsel and a review of available facts, it is management's opinion that these proceedings, after consideration of any reserves and rights to indemnification, ultimately will be resolved without materially affecting the financial position of Lincoln New York, the financial position of the VAA, or the principal underwriter. 34 Contents of the Statement of Additional Information (SAI) for Lincoln Life & Annuity Company of New York Variable Annuity Account L
Item Special Terms Services Principal Underwriter Purchase of Securities Being Offered Annuity Payouts Determination of Accumulation and Annuity Unit Value Capital Markets Advertising & Ratings More About the S&P 500 Index Additional Services Other Information Financial Statements
For a free copy of the SAI complete the form below. Statement of Additional Information Request Card Lincoln Life & Annuity Variable Annuity Account L for Variable Annuity Contracts I, II & III . Please send me a free copy of the current Statement of Additional Information for: Lincoln Life & Annuity Variable Annuity Account L for Group Variable Annuity Contracts I, II & III. (Please Print) Name: ------------------------------------------------------------------------- Address: ---------------------------------------------------------------------- City --------------------------------------------------- State --------- Zip --------- Mail to Lincoln Life & Annuity Co. of New York, P. O. Box 2340, Fort Wayne, IN 46808. 35 Appendix A - Condensed Financial Information Accumulation Unit Values The following information relates to accumulation unit values and accumulation units for funds available on the periods ended December 31. It should be read along with the VAA's financial statements and notes which are all included in the SAI.
Accumulation unit value ----------------------- Number of Beginning End of accumulation of period period units ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) AllianceBernstein VPS Global Technology 2000 . 10.000 7.093 21 2001 . 7.093 5.235 110 2002 . 5.235 3.016 146 2003 . 3.016 4.294 337 2004 . 4.294 4.467 282 2005 . 4.467 4.584 307 2006 . 4.584 4.919 282 2007 . 4.919 5.839 361 2008 . 5.839 3.037 404 --------- ------ ----- --- AllianceBernstein VPS Growth 2000 . 10.000 8.741 2 2001 . 8.741 6.607 13 2002 . 6.607 4.692 28 2003 . 4.692 6.258 66 2004 . 6.258 7.096 104 2005 . 7.096 7.842 85 2006 . 7.842 7.668 89 2007 . 7.668 8.553 102 2008 . 8.553 4.861 85 --------- ------ ----- --- AllianceBernstein VPS Growth and Income 2004 . 10.317 11.133 5 2005 . 11.133 11.529 18 2006 . 11.529 13.352 25 2007 . 13.352 13.862 34 2008 . 13.862 8.138 48 --------- ------ ------ --- American Century VP Balanced Fund* 1997 . 16.989 18.551 439 1998 . 18.551 21.263 510 1999 . 21.263 23.168 502 2000 . 23.168 22.330 495 2001 . 22.330 21.323 481 2002 . 21.323 19.093 454 2003 . 19.093 22.582 465 2004 . 22.582 24.544 483 2005 . 24.544 25.499 453 2006 . 25.499 27.673 419 2007 . 27.673 28.750 383 2008 . 28.750 22.677 353 --------- ------ ------ --- American Funds Global Growth Fund**** 2004 . 10.215 11.311 11 2005 . 11.311 12.774 44 2006 . 12.774 15.230 111 2007 . 15.230 17.318 180 2008 . 17.318 10.564 193 --------- ------ ------ --- American Funds Growth Fund*** 2000 . 10.000 8.991 44 2001 . 8.991 7.285 288 2002 . 7.285 5.449 415 2003 . 5.449 7.380 693 2004 . 7.380 8.220 849 2005 . 8.220 9.456 1,000 2006 . 9.456 10.318 1,236 2007 . 10.318 11.477 1,334 2008 . 11.477 6.367 1,422 --------- ------ ------ -----
A-1
Accumulation unit value ----------------------- Number of Beginning End of accumulation of period period units ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) American Funds Growth-Income Fund**** 2004 . 10.000 10.978 31 2005 . 10.978 11.502 96 2006 . 11.502 13.119 191 2007 . 13.119 13.644 300 2008 . 13.644 8.395 309 --------- ------ ------ --- American Funds International Fund*** 2000 . 10.000 8.582 3 2001 . 8.582 6.807 27 2002 . 6.807 5.739 50 2003 . 5.739 7.662 97 2004 . 7.662 9.051 190 2005 . 9.051 10.888 336 2006 . 10.888 12.825 443 2007 . 12.825 15.240 533 2008 . 15.240 8.733 537 --------- ------ ------ --- Delaware VIP Diversified Income Series**** 2004 . 10.208 10.935 7 2005 . 10.935 10.778 25 2006 . 10.778 11.516 33 2007 . 11.516 12.271 59 2008 . 12.271 11.597 83 --------- ------ ------ --- Delaware VIP High Yield Series 2005 . 10.114 10.273 7 2006 . 10.273 11.437 20 2007 . 11.437 11.640 48 2008 . 11.640 8.738 49 --------- ------ ------ --- Delaware VIP REIT Series*** 2000 . 10.000 10.568 32 2001 . 10.568 11.371 74 2002 . 11.371 11.750 222 2003 . 11.750 15.557 278 2004 . 15.557 20.191 425 2005 . 20.191 21.361 365 2006 . 21.361 27.984 428 2007 . 27.984 23.777 334 2008 . 23.777 15.234 296 --------- ------ ------ --- Delaware VIP Small Cap Value Series**** 2004 . 10.306 12.117 48 2005 . 12.117 13.094 155 2006 . 13.094 15.023 224 2007 . 15.023 13.856 194 2008 . 13.856 9.593 216 --------- ------ ------ --- Delaware VIP Trend Series*** 2000 . 10.000 7.781 10 2001 . 7.781 6.513 31 2002 . 6.513 5.154 45 2003 . 5.154 6.879 74 2004 . 6.879 7.649 122 2005 . 7.649 7.998 116 2006 . 7.998 8.499 139 2007 . 8.499 9.295 146 2008 . 9.295 4.890 125 --------- ------ ------ ---
A-2
Accumulation unit value ----------------------- Number of Beginning End of accumulation of period period units ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) Dreyfus Stock Index Fund* 1997 . 24.091 29.827 814 1998 . 29.827 37.861 1,129 1999 . 37.861 45.208 1,319 2000 . 45.208 40.605 1,215 2001 . 40.605 35.304 1,196 2002 . 35.304 27.136 1,124 2003 . 27.136 34.487 1,167 2004 . 34.487 37.777 1,154 2005 . 37.777 39.156 1,062 2006 . 39.156 44.774 928 2007 . 44.774 46.658 857 2008 . 46.658 29.036 780 --------- ------ ------ ----- Dreyfus VIP Developing Leaders Portfolio* 1997 . 15.523 17.632 966 1998 . 17.632 16.856 1,187 1999 . 16.856 20.552 1,081 2000 . 20.552 23.056 1,182 2001 . 23.056 21.430 1,146 2002 . 21.430 17.159 1,081 2003 . 17.159 22.372 1,106 2004 . 22.372 24.662 1,061 2005 . 24.662 25.832 943 2006 . 25.832 26.540 800 2007 . 26.540 23.370 689 2008 . 23.370 14.439 634 --------- ------ ------ ----- DWS VIP Equity 500 Index 2004 . 10.199 11.100 21 2005 . 11.100 11.503 81 2006 . 11.503 13.156 137 2007 . 13.156 13.715 116 2008 . 13.715 8.534 134 --------- ------ ------ ----- DWS VIP Small Cap Index 2004 . 10.289 11.788 19 2005 . 11.788 12.168 27 2006 . 12.168 14.155 76 2007 . 14.155 13.748 90 2008 . 13.748 8.966 101 --------- ------ ------ ----- Fidelity VIP Money Market Portfolio (Pending Allocation Account*) 1997 . 11.328 11.894 2 1998 . 11.894 12.545 3 1999 . 12.545 13.191 11 2000 . 13.191 14.023 5 2001 . 14.023 14.608 4 2002 . 14.608 14.857 1 2003 . 14.857 15.005 1 2004 . 15.005 15.186 1 2005 . 15.186 15.647 1 2006 . 15.647 16.411 1 2007 . 16.411 17.266 9 2008 . 17.266 17.788 1 --------- ------ ------ ----- Fidelity (Reg. TM) VIP Asset Manager Portfolio* 1997 . 17.769 20.583 1,420 1998 . 20.583 23.445 1,535 1999 . 23.445 25.787 1,489 2000 . 25.787 24.527 1,367 2001 . 24.527 23.289 1,319 2002 . 23.289 21.045 1,221 2003 . 21.045 24.581 1,193 2004 . 24.581 25.668 1,137 2005 . 25.668 26.440 1,040 2006 . 26.440 28.092 935 2007 . 28.092 32.125 847 2008 . 32.125 22.671 774 --------- ------ ------ -----
A-3
Accumulation unit value ----------------------- Number of Beginning End of accumulation of period period units ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) Fidelity (Reg. TM) VIP Contrafund (Reg. TM) Portfolio*** 2000 . 10.000 9.412 6 2001 . 9.412 8.157 30 2002 . 8.157 7.300 86 2003 . 7.300 9.265 187 2004 . 9.265 10.564 220 2005 . 10.564 12.199 470 2006 . 12.199 13.459 583 2007 . 13.459 15.630 604 2008 . 15.630 8.868 640 --------- ------ ------ --- Fidelity (Reg. TM) VIP Equity-Income Portfolio* 1997 . 16.389 19.985 889 1998 . 19.985 22.087 1,176 1999 . 22.087 23.252 1,172 2000 . 23.252 24.958 1,071 2001 . 24.958 23.485 1,101 2002 . 23.485 19.311 1,058 2003 . 19.311 24.917 1,102 2004 . 24.917 27.514 1,096 2005 . 27.514 28.838 991 2006 . 28.838 34.316 963 2007 . 34.316 34.495 949 2008 . 34.495 19.584 870 --------- ------ ------ ----- Fidelity (Reg. TM) VIP Growth Portfolio* 1997 . 24.529 28.328 1,819 1998 . 28.328 39.122 2,095 1999 . 39.122 53.234 2,439 2000 . 53.234 46.917 2,341 2001 . 46.917 38.252 2,183 2002 . 38.252 26.470 1,946 2003 . 26.470 34.815 1,952 2004 . 34.815 35.633 1,817 2005 . 35.633 37.324 1,567 2006 . 37.324 39.484 1,361 2007 . 39.484 49.632 1,253 2008 . 49.632 25.960 1,129 --------- ------ ------ ----- Janus Aspen Worldwide Growth Portfolio** 1998 . 10.000 12.52 25 1999 . 12.520 20.385 470 2000 . 20.385 17.020 844 2001 . 17.020 13.070 847 2002 . 13.070 9.640 798 2003 . 9.640 11.833 819 2004 . 11.833 12.276 782 2005 . 12.276 12.866 678 2006 . 12.866 15.057 587 2007 . 15.057 16.342 561 2008 . 16.342 8.954 519 --------- ------ ------ ----- Lincoln VIP Baron Growth Opportunities** (a) 1998 . 10.000 13.217 25 1999 . 13.217 17.775 192 2000 . 17.775 17.131 231 2001 . 17.131 19.053 320 2002 . 19.053 16.185 380 2003 . 16.185 20.834 374 2004 . 20.834 25.915 456 2005 . 25.915 26.520 405 2006 . 26.520 30.332 388 2007 . 30.332 31.057 393 2008 . 31.057 18.714 356 --------- ------ ------ ----- Lincoln VIP Cohen & Steers Global Real Estate 2007 . 9.805 8.265 3 2008 . 8.265 4.743 5 --------- ------ ------ -----
A-4
Accumulation unit value ----------------------- Number of Beginning End of accumulation of period period units ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) Lincoln VIP Delaware Bond**** 2004 . 10.014 10.551 44 2005 . 10.551 10.722 100 2006 . 10.722 11.115 123 2007 . 11.115 11.604 148 2008 . 11.604 11.153 219 --------- ------ ------ --- Lincoln VIP Delaware Growth and Income*** 2000 . 10.000 9.050 8 2001 . 9.050 7.954 44 2002 . 7.954 6.138 91 2003 . 6.138 7.883 170 2004 . 7.883 8.741 230 2005 . 8.741 9.133 329 2006 . 9.133 10.160 263 2007 . 10.160 10.675 302 2008 . 10.675 6.788 281 --------- ------ ------ --- Lincoln VIP Delaware Managed**** 2004 . 10.099 11.013 6 2005 . 11.013 11.397 13 2006 . 11.397 12.476 15 2007 . 12.476 12.918 31 2008 . 12.918 9.342 35 --------- ------ ------ --- Lincoln VIP Delaware Social Awareness** 1998 . 10.000 12.791 14 1999 . 12.791 14.618 206 2000 . 14.618 13.267 233 2001 . 13.267 11.884 244 2002 . 11.884 9.163 238 2003 . 9.163 11.963 254 2004 . 11.963 13.348 263 2005 . 13.348 14.805 273 2006 . 14.805 16.462 253 2007 . 16.462 16.781 253 2008 . 16.781 10.897 260 --------- ------ ------ --- Lincoln VIP Janus Capital Appreciation*** 2000 . 10.000 8.243 10 2001 . 8.243 6.048 49 2002 . 6.048 4.374 81 2003 . 4.374 5.736 112 2004 . 5.736 5.978 141 2005 . 5.978 6.168 155 2006 . 6.168 6.697 151 2007 . 6.697 7.984 174 2008 . 7.984 4.678 172 --------- ------ ------ --- Lincoln VIP Mondrian International Value**** 2004 . 10.591 12.255 15 2005 . 12.255 13.655 68 2006 . 13.655 17.575 211 2007 . 17.575 19.399 270 2008 . 19.399 12.166 216 --------- ------ ------ --- Lincoln VIP T. Rowe Price Structured Mid-Cap Growth** 1998 . 10.000 12.455 6 1999 . 12.455 17.563 642 2000 . 17.563 16.920 968 2001 . 16.920 11.175 908 2002 . 11.175 7.720 882 2003 . 7.720 10.137 943 2004 . 10.137 11.407 947 2005 . 11.407 12.402 897 2006 . 12.402 13.417 776 2007 . 13.417 15.089 706 2008 . 15.089 8.548 650 --------- ------ ------ ---
A-5
Accumulation unit value ----------------------- Number of Beginning End of accumulation of period period units ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) Lincoln VIP Wilshire 2010 Profile 2007 . 9.946 10.493 1 2008 . 10.493 7.904 9 --------- ------ ------ - Lincoln VIP Wilshire 2020 Profile 2007 . 9.937 10.338 4 2008 . 10.338 7.483 16 --------- ------ ------ -- Lincoln VIP Wilshire 2030 Profile 2007 . 9.967 10.444 1 2008 . 10.444 7.157 12 --------- ------ ------ -- Lincoln VIP Wilshire 2040 Profile 2007 . 9.975 10.269 1 2008 . 10.269 6.553 7 --------- ------ ------ -- Lincoln VIP Wilshire Aggressive Profile 2005 . 10.018 10.939 4 2006 . 10.939 12.622 25 2007 . 12.622 13.872 62 2008 . 13.872 8.177 74 --------- ------ ------ -- Lincoln VIP Wilshire Conservative Profile 2005 . 10.039 10.304 1 2006 . 10.304 11.155 4 2007 . 11.155 11.902 14 2008 . 11.902 9.611 23 --------- ------ ------ -- Lincoln VIP Wilshire Moderate Profile 2005 . 10.087 10.524 13 2006 . 10.524 11.673 32 2007 . 11.673 12.628 90 2008 . 12.628 9.175 101 --------- ------ ------ --- Lincoln VIP Wilshire Moderately Aggressive Profile 2005 . 10.010 10.701 73 2006 . 10.701 12.092 150 2007 . 12.092 13.147 248 2008 . 13.147 8.666 215 --------- ------ ------ --- Neuberger Berman AMT Mid-Cap Growth Portfolio*** 2000 . 10.000 7.674 13 2001 . 7.674 5.725 26 2002 . 5.725 4.005 45 2003 . 4.005 5.079 98 2004 . 5.079 5.848 103 2005 . 5.848 6.585 218 2006 . 6.585 7.478 303 2007 . 7.478 9.071 566 2008 . 9.071 5.086 501 --------- ------ ------ --- Neuberger Berman AMT Partners Portfolio** 1998 . 10.000 11.861 10 1999 . 11.861 12.609 64 2000 . 12.609 12.571 97 2001 . 12.571 12.094 165 2002 . 12.094 9.083 212 2003 . 9.083 12.148 270 2004 . 12.148 14.309 329 2005 . 14.309 16.723 387 2006 . 16.723 18.583 325 2007 . 18.583 20.116 314 2008 . 20.116 9.481 304 --------- ------ ------ ---
A-6
Accumulation unit value ----------------------- Number of Beginning End of accumulation of period period units ----------- -------- ------------- (Accumulation unit value in dollars and Number of accumulation units in thousands) T. Rowe Price International Stock Portfolio* 1997 . 12.108 12.504 475 1998 . 12.504 14.342 546 1999 . 14.342 18.931 519 2000 . 18.931 15.400 533 2001 . 15.400 11.859 521 2002 . 11.859 9.594 508 2003 . 9.594 12.397 600 2004 . 12.397 13.965 531 2005 . 13.965 16.043 487 2006 . 16.043 18.915 461 2007 . 18.915 21.168 449 2008 . 21.168 10.750 420 --------- ------ ------ ---
* The Subaccount indicated commenced operations on January 31, 1997. ** The Subaccount indicated commenced operations on October 1, 1998. *** The Subaccount indicated commenced operation on September 27, 2000. **** The Subaccount indicated commenced operation on May 24, 2004. (a) Effective June 5, 2007, the Baron Capital Asset Fund, a series of Baron Capital Funds Trust, was reorganized into the LVIP Baron Growth Opportunities Fund, a series of Lincoln Variable Insurance Products Trust. The values in the table for periods prior to the date of the reorganization reflect investments in the Baron Capital Asset Fund. A-7 [THIS PAGE INTENTIONALLY LEFT BLANK] Group Variable Annuity Contracts I, II, & III Funded Through the SubAccounts of Lincoln Life & Annuity Variable Annuity Account L of Lincoln Life & Annuity Company of New York Statement of Additional Information (SAI) This SAI should be read in conjunction with the prospectus of the Group Variable Annuity Contracts (the ""Contracts""), dated May 1, 2009. You may obtain a copy of the prospectus to which this SAI relates without charge by writing to Lincoln Life & Annuity Company of New York, PO Box 2340, Fort Wayne, IN 46808, by calling Lincoln New York at 1-800-341-0441., or by visiting www.LincolnFinancial.com. Table of Contents
Item Page Special Terms B-2 Services B-2 Principal Underwriter B-2 Purchase of Securities Being Offered B-2 Annuity Payouts B-2 Determination of Accumulation and Annuity Unit Value B-3
Item Page Capital Markets B-3 Advertising & Ratings B-4 More About the S&P 500 Index B-4 Additional Services B-5 Other Information B-5 Financial Statements B-6
This SAI is not a prospectus. The date of this SAI is May 1, 2009. Special Terms The special terms used in this SAI are the ones defined in the Prospectus. Services Independent Registered Public Accounting Firm The financial statements of the VAA and the financial statements of Lincoln New York appearing in this SAI and Registration Statement have been audited by Ernst & Young LLP, independent registered public accounting firm, Two Commerce Square, 2001 Market Street, Suite 4000, Philadelphia, Pennsylvania 19103, as set forth in their reports, also appearing in this SAI and in the Registration Statement. The financial statements audited by Ernst & Young LLP have been included herein in reliance on their 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. We have entered into an agreement with 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. Administrative services necessary for the operations of the VAA and the contracts are currently provided by Lincoln Life. However, neither the assets of Lincoln Life nor the assets of LNC support the obligation of Lincoln New York under the contracts. Principal Underwriter Lincoln Financial Distributors, Inc., ("LFD"), an affiliate of Lincoln New York, 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 also associated with Lincoln Financial Advisors Corporation ("LFA"), our affiliate and the principal underwriter for certain other contracts issued by the Principal Underwriter. 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. LFA (prior to May 1, 2007) and LFD (on and after May 1, 2007), acting as the Principal Underwriter paid $2,526,211, $2,522,497 and $2,346,148 to LFA and Selling Firms in 2006, 2007, and 2008, respectively, as sales compensation with respect to the contracts. 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. Annuity Payouts Variable Annuity Payouts Variable annuity payouts will be determined on the basis of: o the dollar value of the contract on the annuity commencement date less any applicable premium tax; o the annuity tables contained in the contract; o the type of annuity option selected; and o the investment results of the fund(s) selected. B-2 In order to determine the amount of variable annuity payouts, we make the following calculation: o first, we determine the dollar amount of the first payout; o second, we credit the contract with a fixed number of annuity units based on the amount of the first payout; and o third, we calculate the value of the annuity units each period thereafter. These steps are explained below. The dollar amount of the first periodic variable annuity payout is determined by applying the total value of the accumulation units credited under the contract valued as of the annuity commencement date (less any premium taxes) to the annuity tables contained in the contract. The first variable annuity payout will be paid 14 days after the annuity commencement date. This day of the month will become the day on which all future annuity payouts will be paid. Amounts shown in the tables are based on an Individual Annuity Mortality Table on file with the New York Superintendent of Insurance, with an assumed investment return at the rate of 1%, 2%, 3%, 4%, 5% or 6% per annum, depending on the terms of your contract. The first annuity payout is determined by multiplying the benefit per $1,000 of value shown in the contract tables by the number of thousands of dollars of value accumulated under the contract. These annuity tables vary according to the form of annuity selected and the age of the annuitant at the annuity commencement date. The assumed interest rate is the measuring point for subsequent annuity payouts. If the actual net investment rate (annualized) exceeds the assumed interest rate, the payout will increase at a rate equal to the amount of such excess. Conversely, if the actual rate is less than the assumed interest rate, annuity payouts will decrease. If the assumed rate of interest were to be increased, annuity payouts would start at a higher level but would decrease more rapidly or increase more slowly. We may use sex distinct annuity tables in contracts that are not associated with employer sponsored plans and where not prohibited by law. At an annuity commencement date, the contract is credited with annuity units for each subaccount on which variable annuity payouts are based. The number of annuity units to be credited is determined by dividing the amount of the first periodic payout by the value of an annuity unit in each subaccount selected. Although the number of annuity units is fixed by this process, the value of such units will vary with the value of the underlying fund. The amount of the second and subsequent periodic payouts is determined by multiplying the contractowner's fixed number of annuity units in each subaccount by the appropriate annuity unit value for the valuation date ending 14 days prior to the date that payout is due. The value of each subaccount's annuity unit will be set initially at an arbitrary dollar amount. The annuity unit value for each subaccount at the end of any valuation date is determined by multiplying the subaccount annuity unit value for the immediately preceding valuation date by the product of: o The change in the accumulation unit value of the subaccount from one valuation period to the next, and o A factor to neutralize the assumed investment return in the annuity table. The value of the annuity units is determined as of a valuation date 14 days prior to the payment date in order to permit calculation of amounts of annuity payouts and mailing of checks in advance of their due dates. Such checks will normally be issued and mailed at least three days before the due date. Proof of Age, Sex and Survival We may require proof of age, sex, or survival of any payee upon whose age, sex, or survival payments depend. 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. 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 Beginning in 2008 and continuing as of the date of this prospectus, the capital and credit markets have experienced an unusually high degree of volatility. As a result, the market for fixed income securities has experienced illiquidity, increased price volatility, credit downgrade events and increased expected probability of default. Securities that are less liquid are more difficult to value and may be B-3 hard to sell, if desired. During this time period, domestic and international equity markets have also been experiencing heightened volatility and turmoil, with issuers (such as our company) that have exposure to the real estate, mortgage and credit markets particularly affected. 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 itself 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 New York 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. Nationally recognized rating agencies rate the financial strength of our Company. The ratings do not imply approval of the product and do not refer to the performance of the product, or to the VAA, including 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. In late September and early October of 2008, A.M. Best Company, Fitch, Moody's and Standard & Poor's each revised their outlook for the U.S. life insurance sector from stable to negative. 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. More About the S&P 500 Index Investors look to indexes as a standard of market performance. Indexes are groups of stocks or bonds selected to represent an entire market. The S&P 500 Index is a widely used measure of large US company stock performance. It consists of the common stocks of 500 major corporations selected according to size, frequency and ease by which their stocks trade, and range and diversity of the American economy. The LVIP SSgA S&P 500 Index Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"). S&P makes no representation or warranty, express or implied, to the owners of the fund or any member of the public regarding the advisability of investing in securities generally or in the fund particularly or the ability of the S&P 500 Index to track general stock market performance. S&P's only relationship to the fund is the licensing of certain trademarks and trade names of S&P and of the S&P 500 Index which is determined, composed and calculated by S&P without regard to the fund. S&P has no obligation to take the needs of the fund or its shareholders into consideration in determining, composing or calculating the S&P 500 Index. S&P is not responsible for and has not participated in the determination of the prices and amount of the fund or the timing of the issuance or sale of the fund or in the determination or calculation of the equation by which the fund is to be converted into cash. S&P has no obligation or liability in connection with the administration, marketing or trading of the fund. S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE FUND OR ITS SHAREHOLDERS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. 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 New York, performance of the subaccounts and advertisement literature. 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. B-4 Dollar-Cost Averaging Illustrations. These illustrations will generally discuss the price-leveling effect of making regular purchases in the same subaccounts over a period of time, to take advantage of the trends in market prices of the portfolio securities purchased for those subaccounts. Additional Services Dollar Cost Averaging (DCA) - You may systematically transfer, on a monthly basis, amounts from certain subaccounts, or the fixed side of the contract into the subaccounts over a period of 1, 2 or 3 years. The minimum amount to be dollar cost averaged is $10,000 for 1 year, and $25,000 for 2 years or 3 years. You may elect to participate in the DCA program at the time of application or at anytime before the annuity commencement date by completing an election form available from us. Once elected, the program will remain in effect until the earlier of: o the annuity commencement date; o the value of the amount being DCA'd is depleted; or o you cancel the program by written request or by telephone if we have your telephone authorization on file. We reserve the right to discontinue this program at any time. DCA does not assure a profit or protect against loss. GVA III fixed account restrictions may apply. Systematic Transfer - The systematic transfer service is only available to GVA III participants. This service allows you to fully liquidate your fixed account balance over four years in five annual installments and transfer the amounts into one or more of the subaccounts. You may change the receiving subaccount allocation at any time. A distribution or a non-scheduled transfer from the fixed account may cancel the systematic transfer program prematurely. The program will also be cancelled prematurely if the fixed account balance falls to $0. Account Sweep - The account sweep service allows you to keep a designated amount (the baseline amount) in one subaccount or the fixed account, and automatically transfer the excess to other variable subaccount(s) of your choice. The transfers may take place monthly, quarterly, semi-annually or annually. A $10,000 minimum balance in the holding account is required in order to begin this service. For account sweep to occur, the holding account balance must exceed the designated baseline amount by at least $50. You may change the receiving subaccount allocation at any time. Deposits to or distributions from the holding account will not adjust your baseline amount, but may affect the amount of money available to be transferred. A new account sweep program is required to change the designated baseline amount. GVA III fixed account restrictions may apply. Portfolio Rebalancing - Portfolio rebalancing is an option, which, if elected by the contractowner, restores to a pre-determined level the percentage of the contract value, allocated to each variable subaccount or the fixed account. This pre-determined level will be the allocation initially selected when the contract was purchased, unless subsequently changed. The portfolio rebalancing allocation may be changed at any time by submitting a written request to us. If portfolio rebalancing is elected, all purchase payments allocated to the variable subaccounts must be subject to portfolio rebalancing. Portfolio rebalancing may take place on either a quarterly, semi-annual or annual basis, as selected by the contractowner. You may choose to either rebalance within your designated investment accounts, or to rebalance your designated investment account based on your total account value within the group annuity contract. This second selection will move 100% of your balance based on your allocated percentages. For portfolio rebalancing to occur, the total transfer amount must be $50 or more. If this minimum transfer amount is not available, the transfer will not occur. You may change the designated investment accounts' allocations or percentages at any time. The portfolio rebalancing program will be cancelled prematurely if the selected rebalancing account balance falls to $0. GVA III fixed account restrictions may apply. Sales literature may reference the Group Variable Annuity newsletter which is a newsletter distributed quarterly to clients of the VAA. The contents of the newsletter will be a commentary on general economic conditions and, on some occasions, referencing matters in connection with the Group Variable Annuity. Sales literature and advertisements may reference these and other similar reports from Best's or other similar publications which report on the insurance and financial services industries. 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. B-5 Financial Statements The December 31, 2008 financial statements of the VAA and the December 31, 2008 financial statements of Lincoln New York appear on the following pages. B-6 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK (Formerly Jefferson-Pilot LifeAmerica Insurance Company) Financial Statements For the Year Ended December 31, 2008, 2007 and for the Periods from April 3 through December 31, 2006 and January 1 through April 2, 2006. S-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholder of Lincoln Life & Annuity Company of New York We have audited the accompanying balance sheets of Lincoln Life & Annuity Company of New York (the Company) as of December 31, 2008 and 2007, and the related statements of income, stockholder's equity, and cash flows for each of the two years in the period ended December 31, 2008, for the period from April 3 through December 31, 2006, and for the period from January 1 through April 2, 2006. 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 financial position of Lincoln Life & Annuity Company of New York at December 31, 2008 and 2007, and the results of its operations and its cash flows for the each of the two years in the period ended December 31, 2008, for the period from April 3 through December 31, 2006, and for the period from January 1 through April 2, 2006, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young, LLP Philadelphia, Pennsylvania March 25, 2009 S-2 LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK BALANCE SHEETS (IN MILLIONS, EXCEPT SHARE DATA)
AS OF DECEMBER 31, ------------------ 2008 2007 ------- -------- ASSETS Investments: Available-for-sale securities, at fair value: Fixed maturity (amortized cost: 2008 -- $5,778; 2007 -- $5,767) $5,159 $ 5,759 Equity (cost: 2008 -- $3; 2007 -- $3) 2 2 Mortgage loans on real estate 294 260 Policy loans 430 432 Other investments 2 3 ------ ------- Total investments 5,887 6,456 Cash and invested cash 55 129 Deferred acquisition costs and value of business acquired 1,115 799 Premiums and fees receivable 3 4 Accrued investment income 86 83 Reinsurance recoverables 595 479 Goodwill 162 162 Other assets 88 80 Separate account assets 1,690 2,284 ------ ------- Total assets $9,681 $10,476 ====== ======= LIABILITIES AND STOCKHOLDER'S EQUITY LIABILITIES: Future contract benefits $1,568 $ 1,448 Other contract holder funds 4,866 4,865 Other liabilities 70 222 Separate account liabilities 1,690 2,284 ------ ------- Total liabilities 8,194 8,819 ------ ------- CONTINGENCIES AND COMMITMENTS (SEE NOTE 12) STOCKHOLDER'S EQUITY: Common stock -- 132,000 shares, authorized, issued and outstanding 940 940 Retained earnings 757 724 Accumulated other comprehensive loss (210) (7) ------ ------- Total stockholder's equity 1,487 1,657 ------ ------- Total liabilities and stockholder's equity $9,681 $10,476 ====== =======
See accompanying Notes to Financial Statements S-3 STATEMENTS OF INCOME (IN MILLIONS)
PERIOD FROM PERIOD FROM FOR THE FOR THE APRIL 3 JANUARY 1 YEAR ENDED YEAR ENDED THROUGH THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 2, 2008 2007 2006 2006 ------------ ------------ ------------ ----------- REVENUES: Insurance premiums $ 98 $ 98 $ 27 $ 5 Insurance fees 248 234 89 5 Net investment income 395 361 161 19 Realized loss (98) (25) (1) -- ---- ---- ---- --- Total revenues 643 668 276 29 ---- ---- ---- --- BENEFITS AND EXPENSES: Interest credited 209 194 95 11 Benefits 228 192 43 7 Underwriting, acquisition, insurance and other expenses 156 128 77 6 ---- ---- ---- --- Total benefits and expenses 593 514 215 24 ---- ---- ---- --- Income before taxes 50 154 61 5 Federal income taxes 14 52 19 2 ---- ---- ---- --- Net income $ 36 $102 $ 42 $ 3 ==== ==== ==== ===
See accompanying Notes to Financial Statements S-4 STATEMENTS OF STOCKHOLDER'S EQUITY (IN MILLIONS)
PERIOD FROM PERIOD FROM FOR THE FOR THE APRIL 3 JANUARY 1 YEAR ENDED YEAR ENDED THROUGH THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 2, 2008 2007 2006 2006 ------------ ------------ ------------ ----------- COMMON STOCK: Balance at beginning-of-period $ 940 $ 235 $235 $ 181 Stock compensation -- -- -- 1 Acquisition by Lincoln National Corporation: Sale of stockholder's equity -- -- -- (182) Lincoln National Corporation purchase price -- (1) -- 233 Merger with Predecessor Lincoln Life & Annuity Company of New York -- -- -- 2 Capital contribution -- 706 -- -- ------ ------ ---- ----- Balance at end-of-period 940 940 235 235 ------ ------ ---- ----- RETAINED EARNINGS: Balance at beginning-of-period 724 623 581 26 Acquisition by Lincoln National Corporation: Sale of stockholder's equity -- -- -- (29) Merger with Predecessor Lincoln Life & Annuity Company of New York -- -- -- 581 Cumulative effect of adoption of SOP 05-1 -- (1) -- -- Comprehensive (loss) income (167) 81 53 (7) Less other comprehensive income (loss), net of tax (203) (21) 11 (10) ------ ------ ---- ----- Net income 36 102 42 3 Dividends declared (3) -- -- -- ------ ------ ---- ----- Balance at end-of-period 757 724 623 581 ------ ------ ---- ----- NET UNREALIZED GAIN (LOSS) ON AVAILABLE-FOR-SALE SECURITIES: Balance at beginning-of-period (8) 14 3 10 Merger with Predecessor Lincoln Life & Annuity Company of New York -- -- -- 3 Change during the period (203) (22) 11 (10) ------ ------ ---- ----- Balance at end-of-period (211) (8) 14 3 ------ ------ ---- ----- NET UNREALIZED GAIN ON DERIVATIVE INSTRUMENTS: Balance at beginning-of-period 1 -- -- -- Change during the period -- 1 -- -- ------ ------ ---- ----- Balance at end-of-period 1 1 -- -- ------ ------ ---- ----- Total stockholder's equity at end-of-period $1,487 $1,657 $872 $ 819 ====== ====== ==== =====
See accompanying Notes to Financial Statements S-5 STATEMENTS OF CASH FLOWS (IN MILLIONS)
PERIOD FROM PERIOD FROM FOR THE FOR THE APRIL 3 JANUARY 1 YEAR ENDED YEAR ENDED THROUGH THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 2, 2008 2007 2006 2006 ------------ ------------ ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 36 $ 102 $ 42 $ 3 Adjustments to reconcile net income to net cash provided by operating activities: Deferred acquisition costs, value of business acquired, deferred sales inducements and deferred front end loads deferrals and interest, net of amortization 7 (41) (34) (4) Change in premiums and fees receivable 1 9 -- -- Change in accrued investment income (3) (23) 1 (1) Change in future contract benefits 120 51 46 1 Change in other contract holder funds (70) (51) (12) 5 Change in reinsurance recoverables (116) (35) (12) -- Change in federal income tax accruals (26) 59 8 5 Realized loss 98 25 1 -- Stock-based compensation expense 1 -- -- 1 Other (16) (21) (4) (3) ----- ----- ----- ---- Net cash provided by operating activities 32 75 36 7 ----- ----- ----- ---- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of available-for-sale securities (833) (734) (349) (8) Sales of available-for-sale securities 162 143 84 12 Maturities of available-for-sale securities 548 550 212 16 Purchases of other investments (76) (82) (11) -- Sales or maturities of other investments 37 79 13 4 Cash acquired from merger -- -- 12 -- Other -- -- (6) -- ----- ----- ----- ---- Net cash (used in) provided by investing activities (162) (44) (45) 24 ----- ----- ----- ---- CASH FLOWS FROM FINANCING ACTIVITIES: Deposits of fixed account values, including the fixed portion of variable 538 541 395 27 Withdrawals of fixed account values, including the fixed portion of variable (406) (412) (296) (65) Transfers to and from separate accounts, net (72) (74) (45) -- Common stock issued for benefit plans and excess tax benefits (4) -- -- -- ----- ----- ----- ---- Net cash provided by (used in) financing activities 56 55 54 (38) ----- ----- ----- ---- Net increase (decrease) in cash and invested cash (74) 86 45 (7) Cash and invested cash at beginning-of-period 129 43 (2) 5 ----- ----- ----- ---- Cash and invested cash at end-of-period $ 55 $ 129 $ 43 $ (2) ===== ===== ===== ====
See accompanying Notes to Financial Statements S-6 NOTES TO FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Lincoln Life & Annuity Company of New York ("LLANY" or the "Company," which also may be referred to as "we," "our" or "us"), a wholly-owned subsidiary of The Lincoln National Life Insurance Company ("LNL"), a wholly-owned subsidiary of Lincoln National Corporation ("LNC" or the "Ultimate Parent"), and formerly referred to as Jefferson-Pilot LifeAmerica Insurance Company ("JPLA"), is domiciled in the state of New York. LLANY is principally engaged in the sale of individual life insurance products, individual annuity products and worksite and group non-medical products (primarily term life and disability). These products are marketed primarily through personal producing general agents and brokers throughout the U.S. LLANY is licensed and sells its products throughout the United States of America ("U.S.") and several U.S. territories, see Note 21. BASIS OF PRESENTATION The accompanying financial statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). Certain GAAP policies, which significantly affect the determination of financial position, results of operations and cash flows, are summarized below. On April 3, 2006, LNC completed its merger with Jefferson-Pilot Corporation ("Jefferson-Pilot"). At that time, JPLA, a wholly-owned subsidiary of Jefferson Pilot Financial Insurance Company ("JPFIC"), a wholly-owned subsidiary of Jefferson-Pilot, became a wholly-owned subsidiary of LNC. Associated with the merger between LNC and Jefferson-Pilot, JPLA and the predecessor Lincoln Life & Annuity Company of New York ("predecessor LLANY") were merged into a single entity, effective April 2, 2007, with JPLA being the surviving entity, which was renamed to LLANY. Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combination" ("SFAS 141"), excludes transfers of net assets or exchanges of shares between entities under common control, and notes that certain provisions under Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations," provide a source of guidance for such transactions. In accordance with APB Opinion No. 16, the financial statements are presented as if on April 3, 2006, LLANY completed the merger with predecessor LLANY, and has included the results of operations and financial condition of predecessor LLANY in our financial statements beginning on April 3, 2006, and all comparative financial statements are restated and presented as if the entities had been previously combined, in a manner similar to a pooling-of interests. The financial statements for the period from January 1, 2006, through April 2, 2006, exclude the results of operations and financial condition of predecessor LLANY. LLANY also submits financial statements to insurance industry regulatory authorities. Those financial statements are prepared on the basis of statutory accounting practices ("SAP") and are significantly different from financial statements prepared in accordance with GAAP. See Note 19 for additional discussion on SAP. Certain amounts reported in prior years' financial statements have been reclassified to conform to the presentation adopted in the current year. These reclassifications had no effect on net income or stockholder's equity of the prior years. For the period from January 1, 2006, through April 2, 2006, the period from April 3, 2006 to December 31, 2006 and for the year ended December 31, 2007, we have reclassified the results of certain derivatives and embedded derivatives to realized gain (loss), which were previously reported within insurance fees, net investment income, interest credited or benefits on our Statements of Income. The associated amortization expense of deferred acquisition costs ("DAC") and value of business acquired ("VOBA") (previously reported within underwriting, acquisition, insurance and other expenses), deferred sales inducements ("DSI") (previously reported within interest credited), deferred front-end loads ("DFEL") (previously reported within insurance fees) and changes in contract holder funds (previously reported within benefits) have also been reclassified to realized loss on our Statements of Income. The detail of the reclassifications (in millions) from what was previously reported in prior period Statements of Income (in millions) was as follows: FOR THE YEAR ENDED DECEMBER, 31 2007 ------------ Realized loss, as previously reported $(19) Effect of reclassifications to: Insurance fees 3 Net investment income 1 Interest credited 1 Benefits (15) Underwriting, acquisition, insurance and other expenses 4 ---- Realized loss, as adjusted $(25) ==== The reclassifications for the period from January 1 through April 2, 2006, and from April 3 through December 31, 2006, were not significant. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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, DAC, VOBA, goodwill, future contract benefits, other contract holder funds (including DFEL), pension plans, income taxes and the potential effects of resolving litigated matters. S-7 BUSINESS COMBINATIONS For all business combination transactions initiated after June 30, 2001, the purchase method of accounting has been used, and accordingly, the assets and liabilities of the acquired company have been recorded at their estimated fair values as of the merger date. The allocation of fair values may be subject to adjustment after the initial allocation for up to a one-year period as more information relative to the fair values as of the acquisition date becomes available. The financial statements include the results of operations of any acquired company since the acquisition date. AVAILABLE-FOR-SALE SECURITIES Securities classified as available-for-sale consist of fixed maturity and equity securities and are stated at fair value with unrealized gains and losses included as a separate component of accumulated other comprehensive income ("OCI"), net of associated DAC, VOBA, DSI, other contract holder funds and deferred income taxes. We measure the fair value of our securities classified as available-for-sale based on assumptions used by market participants in pricing the security. Pursuant to SFAS No. 157, we have categorized these 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 "SFAS NO. 157 - FAIR VALUE MEASUREMENTS" in Note 2. 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 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. We use observable and unobservable inputs to our valuation methodologies. 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 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-dealer quotes, we employ, where possible, procedures that include comparisons with similar observable positions, comparisons with subsequent sales, and discussions with senior business leaders and brokers as well as 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, we use unobservable inputs 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 management's judgment concerning: the discount rate used in calculating expected future cash flows, credit quality, industry sector performance and expected maturity. We do not adjust prices received from third parties; however, we 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. See Note 2 "SFAS NO. 157 - FAIR VALUE MEASUREMENTS" for more information regarding the fair value hierarchy. 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. Realized gains and losses on the sale of investments are determined using the specific identification method. We regularly review available-for-sale securities for declines in fair value that we determine to be other-than-temporary. The cost basis of securities that are determined to be other-than-temporarily impaired is written down to current fair value with a corresponding charge to realized gain (loss) on our Statements of Income. A write-down for impairment can be recognized for both credit-related events and for a decline in fair value due to changes in interest rates. Once a security is written down to fair value through net income, any subsequent recovery of fair value cannot be recognized in net income until the security is sold. However, in the event that the security is written down due to an interest-rate related impairment, a recovery in value is accreted through investment income over the life of the security. In evaluating whether a decline in value is other-than-temporary, we consider several factors including, but not limited to: the severity (generally if greater than 20%) and duration (generally if greater than six months) of the decline; our ability and intent to hold the security for a sufficient period of time to allow for a recovery in value; the cause of the decline; and fundamental analysis of the liquidity, business prospects and overall financial condition of the issuer. For asset-backed and mortgage-backed securities, included in the available-for-sale fixed maturity securities portfolio, 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 effective yield is recalculated prospectively to reflect actual payments to date plus anticipated future payments. Any adjustments resulting from changes in effective yield are reflected in net investment income on our Consolidated Statements of Income. 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 S-8 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 Statements of Income along with mortgage loan fees, which are recorded as they are incurred. 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. 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. We do not accrue interest on impaired loans and 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 Statements of Income when received, depending on the assessment of the collectibility of the loan. Mortgage loans deemed to be 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 Statements of Income. 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. DERIVATIVE INSTRUMENTS We have certain variable annuity products with guaranteed minimum withdrawal benefits ("GWB") and guaranteed income benefits ("GIB") features that are embedded derivatives. These derivative instruments are recognized as either assets or liabilities on our Balance Sheets at estimated fair value. The change in fair value of the embedded derivatives flows through net income as realized gain (loss) on our Statement of Income. CASH AND CASH EQUIVALENTS Cash and invested cash is carried at cost and includes all highly liquid debt instruments purchased with a maturity of three months or less. DAC, VOBA, DSI AND DFEL Commissions and other costs of acquiring universal life insurance ("UL"), variable universal life insurance ("VUL"), traditional life insurance, annuities and other investment contracts, which vary with and are related primarily to the production of new business, 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, and the unamortized balance is reported in other assets on our Balance Sheets. Contract sales charges that are collected in the early years of an insurance contract are deferred (referred to as "DFEL"), and the unamortized balance is reported in other contract holder funds on our Balance Sheets. The methodology for determining the amortization of DAC, VOBA, DSI and DFEL varies by product type based on two different accounting pronouncements: SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments" ("SFAS 97"); and SFAS No. 60, "Accounting and Reporting by Insurance Enterprises" ("SFAS 60"). For all SFAS 97 and SFAS 60 contracts, amortization is based on assumptions consistent with those used in the development of the underlying contract adjusted for emerging experience and expected trends. Both DAC and VOBA amortization is reported within underwriting, acquisition, insurance and other expenses on our Statements of Income. DSI is expensed in interest credited on our Statements of Income. The amortization of DFEL is reported within insurance fees on our Statements of Income. Under SFAS 97, 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 30 years, based on the expected lives of the contracts. Contract lives for fixed and variable deferred annuities are 14 to 20 years for the traditional, long surrender charge period products and 8 to 10 years for the more recent short-term or no surrender charge variable products. 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. All SFAS 60 contracts, including traditional life insurance, which include individual whole life, group business and term life insurance contracts, are amortized over periods of 10 to 30 years on either 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 under SFAS 60 for fixed and variable payout annuities. The carrying amounts of DAC, VOBA, DSI and DFEL are adjusted for the effects of realized and unrealized gains and losses on debt securities classified as available-for-sale and certain derivatives and embedded derivatives. Amortization expense of DAC, VOBA, DSI and DFEL reflects an assumption S-9 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 Statements of Income reflecting the incremental impact 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). On a quarterly basis, we may record an adjustment to the amounts included on our Balance Sheets for DAC, VOBA, DSI and DFEL with an offsetting benefit or charge to revenues or expenses for the impact of the difference between the estimates of future gross profits used in the prior quarter and the emergence of actual and updated estimates of future gross profits in the current quarter ("retrospective unlocking"). In addition, in 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 annuity and life insurance products with certain guarantees. These assumptions include investment margins, mortality, retention and rider utilization. Based on our review, the cumulative balances of DAC, VOBA, DSI and DFEL are adjusted with an offsetting benefit or charge to revenues or amortization expense to reflect such change ("prospective unlocking"). The distinction between these two types of unlocking is that retrospective unlocking is driven by the emerging experience period-over-period, while prospective unlocking is driven by changes in assumptions or projection models related to estimated future gross profits. DAC, VOBA, DSI and DFEL are reviewed periodically 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 Balance Sheets and Statements of Income, respectively, because there is a right of offset explicit in the reinsurance agreements. All other reinsurance agreements are reported on a gross basis on our 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 modified coinsurance ("Modco") agreements for which the right of offset also exists. Premiums, benefits and DAC are reported net of insurance ceded. GOODWILL We recognize the excess of the purchase price over the fair value of net assets acquired as goodwill. Under SFAS No. 142, "Goodwill and Other Intangible Assets," ("SFAS 142") 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. In addition, certain events, including a significant adverse change in legal factors or the business climate, an adverse action or assessment by a regulator or unanticipated competition, would cause us to review the carrying amounts of goodwill for impairment. SFAS 142 requires that we perform a two-step test in our evaluation of the carrying value of goodwill for impairment. In Step 1 of the evaluation, the fair value of each reporting unit 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 is deemed to be sufficient 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 to be performed. In Step 2, the implied fair value of the reporting unit's goodwill is determined by allocating the reporting unit's fair value as determined in Step 1 to all of its net assets (recognized and unrecognized) as if the reporting unit had been acquired in a business combination at 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 Statements of Income. SPECIFICALLY IDENTIFIABLE INTANGIBLE ASSETS Specifically identifiable intangible assets, net of accumulated amortization, are reported in other assets on our Balance Sheets. The carrying values of specifically identifiable intangible assets are reviewed periodically for indicators of impairment in value, 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 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 Statements of Income. OTHER LONG-LIVED ASSETS Property and equipment owned for company use is included in other assets on our Balance Sheets and 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. S-10 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. 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. See Note 10 for additional information regarding arrangements with contractual guarantees. FUTURE CONTRACT BENEFITS AND OTHER CONTRACT HOLDER FUNDS 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 7.00% depending on the time of contract issue. The investment yield assumptions for immediate and deferred paid-up annuities range from 1.50% to 10.00%. 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 guaranteed death benefit ("GDB") features are calculated by estimating the present value of total expected benefit payments over the life of the contract 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. The change in the reserve for a period is the benefit ratio multiplied by the assessments recorded for the period less GDB claims paid in the period 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. 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. UL and VUL products with secondary guarantees represented approximately 16% of permanent life insurance in force as of December 31, 2008, and approximately 84% of sales for these products in 2008. 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. Future contract benefits on our Balance Sheets include guaranteed living benefit ("GLB") features and remaining guaranteed interest and similar contracts that are carried at fair value. The fair values for the GLB contracts are based on their approximate surrender values. Our LINCOLN SMARTSECURITY(R) Advantage GWB feature, GIB and 4LATER(R) features have elements of both insurance benefits accounted for under Statement of Position ("SOP") 03-1, "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts" ("SOP 03-1") and embedded derivatives accounted for under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") and SFAS 157. We weight these features and their associated reserves accordingly based on their hybrid nature. The fair values for the remaining guaranteed interest and similar contracts are estimated using discounted cash flow calculations. 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. We classify these items in level 3 within the hierarchy levels described in "SFAS NO. 157 - FAIR VALUE MEASUREMENTS" in Note 2. 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. INSURANCE FEES Insurance fees 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. S-11 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 insurance fees on our Statements of Income. 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 Statements of Income. 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. REALIZED GAIN (LOSS) Realized gain (loss) on our Statements of Income includes realized gains and losses from the sale of investments, write-downs for other-than-temporary impairments of investments, 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 derivative and trading securities on Modco and coinsurance with funds withheld ("CFW") reinsurance arrangements. Realized gain (loss) is recognized in net income, net of associated amortization of DAC, VOBA, DSI and DFEL. Realized gain (loss) is also net of allocations of investment gains and losses to certain contract holders and certain funds withheld on reinsurance arrangements for which we have a contractual obligation. INTEREST CREDITED Interest credited includes interest credited to contract holder account balances. Interest crediting rates associated with funds invested in our general account during 2006 through 2008 ranged from 3.00% to 8.50%. 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 and annuity products with guaranteed death benefits. 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 Our employees participate in the pension and postretirement benefit plans which are sponsored by LNC and LNL. Pursuant to the accounting rules for our obligations to employees 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 initially established at the beginning of the plan year based on historical and projected future rates of return and is the average rate of earnings expected on the funds invested or to be 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. See Note 16 for additional information. 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 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 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 underwriting, acquisition, insurance and other expenses on our Statements of Income. See Note 18 for additional information. INCOME TAXES We have elected to file consolidated federal income tax returns with LNC and its subsidiaries. Pursuant to an intercompany tax sharing agreement with LNC, we provide for income taxes S-12 on a separate return filing basis. The tax sharing agreement also provides that we will receive benefit for net operating losses, capital losses and tax credits which are not usable on a separate return basis to the extent such items may be utilized in the consolidated income tax returns of LNC. 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 to reduce the deferred tax asset to an amount that we expect, more likely than not, will be realized. See Note 6 for additional information. 2. NEW ACCOUNTING STANDARDS ADOPTION OF NEW ACCOUNTING STANDARDS SOP 05-1 -- ACCOUNTING BY INSURANCE ENTERPRISES FOR DEFERRED ACQUISITION COSTS IN CONNECTION WITH MODIFICATIONS OR EXCHANGES OF INSURANCE CONTRACTS In September 2005, the American Institute of Certified Public Accountants issued SOP 05-1, "Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts" ("SOP 05-1"), which provides guidance on accounting for DAC on internal replacements of insurance and investment contracts other than those specifically described in SFAS 97. An internal replacement, defined by SOP 05-1, is a modification in product benefits, features, rights or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement or rider to a contract, or by the election of a feature or coverage within a contract. Contract modifications that result in a substantially unchanged contract are accounted for as a continuation of the replaced contract. Contract modifications that result in a substantially changed contract are accounted for as an extinguishment of the replaced contract. Unamortized DAC, VOBA, DFEL and DSI from the replaced contract must be written off. SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. We adopted SOP 05-1 effective January 1, 2007. The adoption of SOP 05-1 did not have a material impact on our financial condition or results of operations. FASB STAFF POSITION FAS 115-1 AND FAS 124-1 -- THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS In November 2005, the FASB issued FASB Staff Position ("FSP") Nos. SFAS 115-1 and SFAS 124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("FSP 115-1"). The guidance in FSP 115-1 nullified the accounting and measurement provisions of Emerging Issues Task Force ("EITF") No. 03-1 - "The Meaning of Other-Than-Temporary Impairments and Its Application to Certain Investments" and superseded EITF Topic No. D-44 "Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value." Under the impairment model in FSP 115-1, any security in an unrealized loss position is considered impaired. An evaluation is made to determine whether the impairment is other-than-temporary based on existing accounting guidance. If an impairment is considered other-than-temporary, a realized loss is recognized to write the security's cost or amortized cost basis down to fair value. The fair value of the security on the measurement date of the other-than-temporary impairment becomes the new cost basis for the security, which may not be adjusted for subsequent recoveries in fair value. Subsequent to the recognition of an interest-related other-than-temporary impairment for debt securities, the resulting discount, or reduction to the premium, is amortized over the remaining life of the debt security, prospectively, based on the amount and timing of the estimated future cash flows of the debt security. We adopted FSP 115-1 effective January 1, 2006. The adoption of FSP 115-1 did not have a material effect on our financial condition or results of operations. SFAS NO. 155 -- ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS -- AN AMENDMENT OF FASB STATEMENTS NO. 133 AND 140 In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140" ("SFAS 155"), which permits fair value remeasurement for a hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. Under SFAS 155, an entity may make an irrevocable election to measure a hybrid financial instrument at fair value, in its entirety, with changes in fair value recognized in earnings. SFAS 155 also eliminates the interim guidance in SFAS 133 Implementation Issue No. D1, "Application of Statement 133 to Beneficial Interests in Securitized Financial Assets," and establishes a requirement to evaluate beneficial interests in securitized financial assets to identify interests that are either freestanding derivatives or hybrid financial instruments that contain an embedded derivative requiring bifurcation. We adopted the provisions of SFAS 155 on January 1, 2007. Prior period restatement was not permitted. The adoption of SFAS 155 did not have a material impact on our financial condition or results of operations. FASB INTERPRETATION NO. 48 -- ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES -- AN INTERPRETATION OF FASB STATEMENT NO. 109 In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 prescribes a comprehensive model for how companies should recognize, measure, present and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. FIN 48 requires companies to determine whether it is "more likely than not" that an individual tax position will be sustained upon examination by the appropriate taxing authority prior to any part of the benefit being recognized in the financial statements. Such tax positions shall initially and subsequently be measured as the largest amount of tax benefit that is greater than S-13 fifty percent likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. In addition, FIN 48 expands disclosure requirements to include additional information related to unrecognized tax benefits, including accrued interest and penalties, and uncertain tax positions where the estimate of the tax benefit may change significantly in the next twelve months. FIN 48 is effective for fiscal years beginning after December 15, 2006. We adopted FIN 48 effective January 1, 2007 by recording an increase in the liability for unrecognized tax benefits of less than $1 million on our Balance Sheets, offset by a reduction to the beginning balance of retained earnings. See Note 6 for more information regarding our adoption of FIN 48. SFAS 157 -- FAIR VALUE MEASUREMENTS In September 2006, the FASB issued SFAS 157, "Fair Value Measurements," which defines fair value, establishes a framework for measuring fair value under current accounting pronouncements that require or permit fair value measurement and enhances disclosures about fair value instruments. SFAS 157 retains the exchange price notion, but clarifies that 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). Fair value measurement 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 the reporting entity's own credit risk. SFAS 157 establishes a three-level fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value. 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. "Blockage discounts" for large holdings of unrestricted financial instruments where quoted prices are readily and regularly available for an identical asset or liability in an active market are prohibited; - 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 the reporting entity makes estimates and assumptions related to the pricing of the asset or liability, including assumptions regarding risk. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment's 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. We have certain guaranteed benefit features within our annuity products that, prior to January 1, 2008, were recorded using fair value pricing. These benefits will continue to be measured on a fair value basis with the adoption of SFAS 157, utilizing Level 3 inputs and some Level 2 inputs, which are reflective of the hypothetical market participant perspective for fair value measurement, including liquidity assumptions and assumptions regarding the Company's own credit or non-performance risk. In addition, SFAS 157 expands the disclosure requirements for annual and interim reporting to focus on the inputs used to measure fair value, including those measurements using significant unobservable inputs and the effects of the measurements on earnings. See Note 20 for additional information about our fair value disclosures for financial instruments required by SFAS 157. We adopted SFAS 157 effective January 1, 2008 and it did not have a material effect on our financial condition or results of operations. See "Summary of Significant Accounting Policies" in Note 1 for discussion of the methodologies and assumptions used to determine the fair value of our financial instruments carried at fair value. FSP NO. FAS 157-2 -- EFFECTIVE DATE OF FASB STATEMENT NO. 157 In February 2008, the FASB issued FSP No. FAS 157-2, "Effective Date of FASB Statement No. 157" ("FSP 157-2"). FSP 157-2 delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Accordingly, we did not apply the provisions of SFAS 157 to nonfinancial assets and nonfinancial liabilities within the scope of FSP 157-2. Examples of items to which the deferral is applicable include, but are not limited to: - Nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination or other new basis event, but not measured at fair value in subsequent periods; - Reporting units measured at fair value in the goodwill impairment test under SFAS 142, and indefinite-lived intangible assets measured at fair value for impairment assessment under SFAS 142; - Nonfinancial long-lived assets measured at fair value for an impairment assessment under SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"; - Asset retirement obligations initially measured at fair value under SFAS No. 143, "Accounting for Asset Retirement Obligations"; and - Nonfinancial liabilities for exit or disposal activities initially measured at fair value under SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." As of January 1, 2009, the deferral from FSP 157-2 will no longer be effective. We will apply the provisions of SFAS 157 to nonfinancial assets and nonfinancial liabilities beginning on January 1, 2009, and we do not expect the application to have a material impact on our financial condition or results of operations. S-14 FSP NO. FAS 157-3 -- DETERMINING THE FAIR VALUE OF A FINANCIAL ASSET WHEN THE MARKET FOR THAT ASSET IS NOT ACTIVE In October 2008, the FASB issued FSP FAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active" ("FSP 157-3"). FSP 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an illustrative example of key considerations to analyze in determining fair value of a financial asset when the market for the asset is not active. During times when there is little market activity for a financial asset, the objective of fair value measurement remains the same, that is, to value the asset at the price that would be received by the holder of the financial asset in an orderly transaction (exit price) that is not a forced liquidation or distressed sale at the measurement date. Determining fair value of a financial asset during a period of market inactivity may require the use of significant judgment and an evaluation of the facts and circumstances to determine if transactions for a financial asset represent a forced liquidation or distressed sale. An entity's own assumptions regarding future cash flows and risk-adjusted discount rates for financial assets are acceptable when relevant observable inputs are not available. FSP 157-3 was effective on October 10, 2008, and for all prior periods for which financial statements have not been issued. Any changes in valuation techniques resulting from the adoption of FSP 157-3 shall be accounted for as a change in accounting estimated in accordance with SFAS No. 154, "Accounting Changes and Error Corrections." We adopted the guidance in FSP 157-3 in our financial statements for the reporting period ending September 30, 2008. The adoption did not have a material impact on our financial condition or results of operations. SFAS NO. 159 -- THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"), which allows an entity to make an irrevocable election, on specific election dates, to measure eligible items at fair value. The election to measure an item at fair value may be determined on an instrument by instrument basis, with certain exceptions. If the fair value option is elected, unrealized gains and losses will be recognized in earnings at each subsequent reporting date, and any upfront costs and fees related to the item will be recognized in earnings as incurred. In addition, the presentation and disclosure requirements of SFAS 159 are designed to assist in the comparison between entities that select different measurement attributes for similar types of assets and liabilities. SFAS 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS 157. At the effective date, the fair value option may be elected for eligible items that exist on that date. Effective January 1, 2008, we elected not to adopt the fair value option for any financial assets or liabilities that existed as of that date. FSP EITF 99-20-1 -- AMENDMENTS TO THE IMPAIRMENT GUIDANCE IN EITF ISSUE NO. 99-20 In January 2009, the FASB issued FSP EITF 99-20-1, "Amendments to the Impairment Guidance in EITF Issue No. 99-20" ("EITF 99-20-1"), which eliminates the requirement in EITF No. 99-20, "Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets" ("EITF 99-20") for holders of beneficial interests to estimate cash flow using current information and events that a market participant would use in determining the current fair value and other-than-temporary impairment of the beneficial interest. FSP 99-20-1 removes the reference to a market participant and requires that an other-than-temporary impairment be recognized in earnings when it is probable that there has been an adverse change in the holder's estimated cash flows from the cash flows previously projected, which is consistent with the impairment model used in SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." FSP 99-20-1 is effective for interim and annual reporting periods ending after December 15, 2008, and must be applied prospectively at the balance sheet date of the reporting period for which the assessment of cash flows is made. We adopted the guidance in FSP 99-20-1 as of December 31, 2008. The adoption did not have a material impact on our financial condition or results of operations. FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS SFAS NO. 141(R) -- BUSINESS COMBINATIONS In December 2007, the FASB issued SFAS No. 141(revised 2007), "Business Combinations" ("SFAS 141(R)"), which is a revision of SFAS No. 141 "Business Combinations" ("SFAS 141"). SFAS 141(R) retains the fundamental requirements of SFAS 141, but establishes principles and requirements for the acquirer in a business combination to recognize and measure the identifiable assets acquired, liabilities assumed and any noncontrolling interests in the acquiree and the goodwill acquired or the gain from a bargain purchase. The revised statement requires, among other things, that assets acquired, liabilities assumed and any noncontrolling interest in the acquiree shall be measured at their acquisition-date fair values. For business combinations completed upon adoption of SFAS 141(R), goodwill will be measured as the excess of the consideration transferred, plus the fair value of any noncontrolling interest in the acquiree, in excess of the fair values of the identifiable net assets acquired. Any contingent consideration shall be recognized at the acquisition-date fair value, which improves the accuracy of the goodwill measurement. Under SFAS 141(R), contractual pre-acquisition contingencies will be recognized at their acquisition-date fair values and non-contractual pre-acquisition contingencies will be recognized at their acquisition date fair values if it is more likely than not that the contingency gives rise to an asset or liability. Deferred recognition of pre-acquisition contingencies will no longer be permitted. Acquisition costs will be expensed in the period the costs are incurred, rather than included in the cost of the acquiree, and disclosure requirements will be enhanced to provide users with information to evaluate the nature and financial effects of the business combination. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period on or after December 15, 2008, with earlier adoption S-15 prohibited. We will adopt SFAS 141(R) for acquisitions occurring after January 1, 2009. FSP FAS NO. 142-3 -- DETERMINATION OF THE USEFUL LIFE OF INTANGIBLE ASSETS In April 2008, the FASB issued FSP FAS No. 142-3, "Determination of the Useful Life of Intangible Assets" ("FSP 142-3"), which applies to recognized intangible assets accounted for under the guidance in SFAS 142. When developing renewal or extension assumptions in determining the useful life of recognized intangible assets, FSP 142-3 requires an entity to consider its own historical experience in renewing or extending similar arrangements. Absent the historical experience, an entity should use the assumptions a market participant would make when renewing and extending the intangible asset consistent with the highest and best use of the asset by market participants. In addition, FSP 142-3 requires financial statement disclosure regarding the extent to which expected future cash flows associated with the asset are affected by an entity's intent and/or ability to renew or extend an arrangement. FSP 142-3 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008, with early adoption prohibited. FSP 142-3 should be applied prospectively to determine the useful life of a recognized intangible asset acquired after the effective date. In addition, FSP 142-3 requires prospective application of the disclosure requirements to all intangible assets recognized as of, and subsequent to, the effective date. We will adopt FSP 142-3 on January 1, 2009, and do not expect the adoption will have a material impact on our financial condition and results of operations. SFAS NO. 163 -- ACCOUNTING FOR FINANCIAL GUARANTEE INSURANCE CONTRACTS -- AN INTERPRETATION OF FASB STATEMENT NO. 60 In May 2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee Insurance Contracts - an interpretation of FASB Statement No. 60" ("SFAS 163"), which applies to financial guarantee insurance and reinsurance contracts not accounted for as derivative instruments, and issued by entities within the scope of SFAS No. 60, "Accounting and Reporting by Insurance Enterprises." SFAS 163 changes current accounting practice related to the recognition and measurement of premium revenue and claim liabilities such that premium revenue recognition is linked to the amount of insurance protection and the period in which it is provided, and a claim liability is recognized when it is expected that a claim loss will exceed the unearned premium revenue. In addition, SFAS 163 expands disclosure requirements to include information related to the premium revenue and claim liabilities, as well as information related to the risk-management activities used to evaluate credit deterioration in insured financial obligations. SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years; early application is not permitted. However, the disclosure requirements related to risk-management activities are effective in the first period (including interim periods) beginning after May 2008. Because we do not hold a significant amount of financial guarantee insurance and reinsurance contracts, no additional disclosures have been made, and we expect the adoption of SFAS 163 will not be material to our financial condition or results of operations. EITF NO. 08-6 -- INVESTMENT ACCOUNTING CONSIDERATIONS In November 2008, the FASB issued EITF No. 08-6, "Equity Method Investment Accounting Considerations" ("EITF 08-6"), which addresses the effect of SFAS 141(R) and SFAS 160 on equity-method accounting under Accounting Principles Board Opinion 18, "The Equity Method of Accounting for Investments in Common Stock" ("APB 18"). EITF 08-6 will continue the APB 18 requirement that the cost basis of a new equity-method investment will follow a cost accumulation model, which includes transaction costs in the cost of the equity investment and excludes the value of contingent consideration unless it is required to be recognized under other literature. Subsequently, issuances of shares by the equity-method investee that reduce the investor's ownership percentage should be accounted for as if the investor sold a proportionate share of the investment, with gain or loss recognized through earnings. The EITF decided that the investor would not have to complete a separate impairment analysis on the investee's underlying assets, but rather the entire equity-method investment would continue to be subject to the current other-than-temporary impairment guidance in APB 18. EITF 08-6 is applicable to all investments accounted for under the equity method and is effective, prospectively, in fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years. We will adopt EITF 08-6 on January 1, 2009, and do not expect the adoption will have a material impact on our financial condition and results of operations. FSP FAS NO. 132(R)-1 -- EMPLOYERS' DISCLOSURES ABOUT POSTRETIREMENT BENEFIT PLAN ASSETS In December 2008, the FASB issued FSP FAS No. 132(R)-1, "Employers' Disclosures about Postretirement Benefit Plan Assets" ("FSP 132(R)-1"), which requires enhanced disclosures of the plan assets of an employer's defined benefit pension or other postretirement benefit plans. The disclosures required under FSP 132(R)-1 will include information regarding the investment allocation decisions made for plan assets, the fair value of each major category of plan assets disclosed separately for pension plans and other postretirement benefit plans and the inputs and valuation techniques used to measure the fair value of plan assets including the level within the fair value hierarchy as defined by SFAS 157. FSP 132(R)-1 requires the additional disclosure in SFAS 157 for Level 3 fair value measurements, and must also be provided for the fair value measurements of plan assets using Level 3 inputs. The disclosures in FSP 132(R)-1 are effective for fiscal years ending after December 15, 2009, and are not required for earlier periods that are presented for comparative purposes. We will include the disclosures required in FSP 132(R)-1 in the notes to our financial statements for the year ending December 31, 2009. S-16 3. ACQUISITIONS AND REINSURANCE ASSUMPTION FROM LNL JEFFERSON-PILOT ACQUISITION On April 3, 2006, LNC completed its merger with Jefferson-Pilot by acquiring 100% of the outstanding shares of Jefferson-Pilot in a transaction accounted for under the purchase method of accounting prescribed by SFAS 141. Associated with the merger between LNC and Jefferson-Pilot, JPLA and predecessor LLANY were merged into a single entity, effective April 2, 2007, with JPLA being the surviving entity, which was renamed to LLANY. REINSURANCE ASSUMPTION FROM LNL Effective March 1, 2007, LNL ceded to predecessor LLANY, through an assignment and assumption agreement, certain blocks of individual and group life business. This assumption was a non-cash transaction. The following table summarizes the amounts (in millions) assumed from LNL: ACQUIRED VALUE -------- Investments $ 2,510 Policy loans 209 Deferred acquisition costs and value of business acquired 366 Accrued investment income 11 Reinsurance recoverables 370 Other assets 22 Future contract benefits and other contract holder funds (2,701) Other liabilities (83) ------- Total capital contribution $ 704 ======= The caption capital contribution in the accompanying Statements of Stockholder's Equity includes the $704 million presented above as well as a $2 million capital contribution for an unrelated matter for the year ended December 31, 2007. 4. INVESTMENTS AVAILABLE-FOR-SALE SECURITIES Pursuant to SFAS No. 157, we have categorized these 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 "SFAS No. 157 - FAIR VALUE MEASUREMENTS" in Note 2. See Note 20 for additional disclosures regarding our fair values required by SFAS 157. The amortized cost, gross unrealized gains and losses and fair value of available-for-sale securities (in millions) were as follows:
AS OF DECEMBER 31, 2008 ------------------------------------ GROSS UNREALIZED AMORTIZED ---------------- FAIR COST GAINS LOSSES VALUE --------- ----- ------ ------ Corporate bonds $4,407 $ 76 $526 $3,957 U.S. Government bonds 30 7 -- 37 Foreign government bonds 28 5 1 32 Mortgage-backed securities: Mortgage pass-through securities 168 5 4 169 Collateralized mortgage obligations 727 23 103 647 Commercial mortgage-backed securities 281 1 75 207 State and municipal bonds 36 1 -- 37 Hybrid and redeemable preferred stocks 101 -- 28 73 ------ ---- ---- ------ Total fixed maturity securities 5,778 118 737 5,159 Equity securities 3 -- 1 2 ------ ---- ---- ------ Total available-for-sale securities $5,781 $118 $738 $5,161 ====== ==== ==== ======
S-17
AS OF DECEMBER 31, 2007 ------------------------------------ GROSS UNREALIZED AMORTIZED ---------------- FAIR COST GAINS LOSSES VALUE --------- ----- ------ ------ Corporate bonds $4,481 $ 94 $ 94 $4,481 U.S. Government bonds 31 2 -- 33 Foreign government bonds 46 6 -- 52 Mortgage-backed securities: Mortgage pass-through securities 92 1 -- 93 Collateralized mortgage obligations 746 8 22 732 Commercial mortgage-backed securities 331 6 10 327 State and municipal bonds 37 1 -- 38 Hybrid and redeemable preferred stocks 3 -- -- 3 ------ ---- ---- ------ Total fixed maturity securities 5,767 118 126 5,759 Equity securities 3 -- 1 2 ------ ---- ---- ------ Total available-for-sale securities $5,770 $118 $127 $5,761 ====== ==== ==== ======
The amortized cost and fair value of fixed maturity available-for-sale securities by contractual maturities (in millions) were as follows:
AS OF DECEMBER 31, 2008 ---------------------------- AMORTIZED COST FAIR VALUE --------------- --------- Due in one year or less $ 214 $ 213 Due after one year through five years 1,199 1,133 Due after five years through ten years 1,410 1,279 Due after ten years 1,779 1,511 ------ ------ Subtotal 4,602 4,136 Mortgage-backed securities 1,176 1,023 ------ ------ Total fixed maturity available-for-sale securities $5,778 $5,159 ====== ======
Actual maturities may differ from contractual maturities because issuers may have the right to call or pre-pay obligations. The fair value and gross unrealized losses of available-for-sale securities (in millions), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:
AS OF DECEMBER 31, 2008 --------------------------------------------------------------- LESS THAN OR EQUAL GREATER THAN TO TWELVE MONTHS TWELVE MONTHS TOTAL ------------------- ------------------- ------------------- GROSS GROSS GROSS FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED VALUE LOSSES VALUE LOSSES VALUE LOSSES ------ ---------- ------ ---------- ------ ---------- Corporate bonds $1,809 $229 $ 825 $297 $2,634 $ 526 U.S. Government bonds 2 -- -- -- 2 -- Foreign government bonds 4 1 2 -- 6 1 Mortgage-backed securities: Mortgage pass-through securities 10 3 2 1 12 4 Collateralized mortgage obligations 84 35 93 68 177 103 Commercial mortgage-backed securities 126 20 47 55 173 75 State and municipal bonds 5 -- 2 -- 7 -- Redeemable preferred stocks 35 7 36 21 71 28 ------ ---- ------ ---- ------ ----- Total fixed maturity securities 2,075 295 1,007 442 3,082 737 Equity securities 2 1 -- -- 2 1 ------ ---- ------ ---- ------ ----- Total available-for-sale securities $2,077 $296 $1,007 $442 $3,084 $ 738 ====== ==== ====== ==== ====== ===== Total number of securities in an unrealized loss position 1,131 =====
S-18
AS OF DECEMBER 31, 2007 --------------------------------------------------------------- LESS THAN OR EQUAL GREATER THAN TO TWELVE MONTHS TWELVE MONTHS TOTAL ------------------- ------------------- ------------------- GROSS GROSS GROSS FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED VALUE LOSSES VALUE LOSSES VALUE LOSSES ------ ---------- ------ ---------- ------ ---------- Corporate bonds $1,109 $51 $698 $43 $1,807 $ 94 Foreign government bonds 2 -- -- -- 2 -- Mortgage-backed securities: Mortgage pass-through securities 8 -- 14 -- 22 -- Collateralized mortgage obligations 266 18 105 4 371 22 Commercial mortgage-backed securities 59 6 59 4 118 10 State and municipal bonds 2 -- 5 -- 7 -- ------ --- ---- --- ------ ---- Total fixed maturity securities 1,446 75 881 51 2,327 126 Equity securities 2 1 -- -- 2 1 ------ --- ---- --- ------ ---- Total available-for-sale securities $1,448 $76 $881 $51 $2,329 $127 ====== === ==== === ====== ==== Total number of securities in an unrealized loss position 738 ====
The fair value, gross unrealized losses (in millions) and number of available-for-sale securities where the fair value had declined below amortized cost by greater than 20%, were as follows: AS OF DECEMBER 31, 2008 ------------------------------ GROSS NUMBER FAIR UNREALIZED OF VALUE LOSSES SECURITIES ----- ---------- ---------- Less than six months $ 91 $ 36 37 Six months or greater, but less than nine months 126 54 53 Nine months or greater, but less than twelve months 153 78 83 Twelve months or greater 539 379 253 ---- ---- --- Total available-for-sale securities $909 $547 426 ==== ==== === AS OF DECEMBER 31, 2007 ------------------------------ GROSS NUMBER FAIR UNREALIZED OF VALUE LOSSES SECURITIES ----- ---------- ---------- Less than six months $18 $ 6 8 Six months or greater, but less than nine months 11 5 12 Nine months or greater, but less than twelve months 4 2 5 Twelve months or greater 23 11 16 --- --- --- Total available-for-sale securities $56 $24 41 === === === As described more fully in Note 1, we regularly review our investment holdings for other-than-temporary impairments. Based upon this review, the cause of the $611 million increase in our gross unrealized losses for available-for-sale securities for the year ended December 31, 2008, was attributable primarily to the combination of reduced liquidity in all market segments and deterioration in credit fundamentals. We believe that the securities in an unrealized loss position as of December 31, 2008 and 2007 were not other-than-temporarily impaired due to our ability and intent to hold for a period of time sufficient for recovery. 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 New York, Illinois and Texas, which accounted for approximately 42% and 28% of mortgage loans as of December 31, 2008 and 2007, respectively. As of December 31, 2008 and 2007, we held no impaired mortgage loans and therefore had no valuation allowance. S-19 NET INVESTMENT INCOME The major categories of net investment income (in millions) on our Statements of Income were as follows:
PERIOD FROM PERIOD FROM FOR THE FOR THE APRIL 3 JANUARY 1 YEAR ENDED YEAR ENDED THROUGH THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 2, 2008 2007 2006 2006 ------------ ------------ ------------ ----------- NET INVESTMENT INCOME Fixed maturity available-for-sale securities $355 $319 $140 $17 Mortgage loans on real estate 17 16 13 1 Policy loans 24 21 8 1 Invested cash 3 4 2 -- Other investments -- 1 1 -- ---- ---- ---- --- Total investment income 399 361 164 19 Investment expense (4) -- (3) -- ---- ---- ---- --- Net investment income $395 $361 $161 $19 ==== ==== ==== ===
REALIZED LOSS RELATED TO INVESTMENTS The detail of the realized loss related to investments (in millions) was as follows:
PERIOD FROM PERIOD FROM FOR THE FOR THE APRIL 3 JANUARY 1 YEAR ENDED YEAR ENDED THROUGH THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 2, 2008 2007 2006 2006 ------------ ------------ ------------ ----------- Fixed maturity securities available-for-sale: Gross gains $ 4 $ 6 $ 2 $-- Gross losses (151) (29) (2) -- Gain on other investments -- -- 1 -- Associated amortization expense (benefit) of DAC, VOBA, DSI and DFEL and changes in other contract holder funds and funds withheld reinsurance liabilities 51 4 (2) -- ----- ---- --- --- Total realized loss on investments $ (96) $(19) $(1) $-- ===== ==== === === Write-downs for other-than-temporary impairments included in realized loss on investments above $(133) $(27) $(2) $-- ===== ==== === ===
See Note 14 for a comprehensive listing of realized gain (loss) reported on our Statements of Income. INVESTMENT COMMITMENTS We did not have any investment commitments as of December 31, 2008. As of December 31, 2007, our investment commitments, primarily mortgage loans on real estate, were $12 million. CONCENTRATIONS OF FINANCIAL INSTRUMENTS As of December 31, 2008, we had investments in the collateralized mortgage obligation industry with a fair value of $653 million or 11% of the invested assets portfolio totaling $5.9 billion. We utilized the industry classifications to obtain the concentration of financial instruments amount, as such, this amount will not agree to the available-for-sale securities table above. We did not have a concentration of financial instruments in a single industry as of December 31, 2007. As of December 31, 2008 and 2007, we did not have a significant concentration of financial instruments in a single investee or geographic region of the U.S. ASSETS ON DEPOSIT The Company had investment assets on deposit with regulatory agencies with a fair market value of $14 million and $13 million as of December 31, 2008 and 2007, respectively. 5. DERIVATIVE INSTRUMENTS We have certain variable annuity products with GWB and GIB features that are embedded derivatives. Certain features of these guarantees, notably our GIB and 4LATER(R) features, have elements of both insurance benefits accounted for under SOP 03-1 and embedded derivatives accounted for under SFAS 133 and SFAS 157. We weight these features and their associated reserves accordingly based on their hybrid nature. The change in fair value of the embedded derivatives flows through net income as realized gain S-20 (loss) on our Statement of Income. As of December 31, 2008 and 2007, we had embedded derivative instruments of $124 million and $12 million, respectively. As of December 31, 2008 and 2007, we had approximately $834 million and $1.1 billion, respectively, of account values that were attributable to variable annuities with a GWB feature. As of December 31, 2008 and 2007, we had approximately $48 million and $43 million, respectively, of account values that were attributable to variable annuities with a GIB feature. All of the outstanding contracts with a GIB feature are still in the accumulation phase. 6. FEDERAL INCOME TAXES The federal income tax expense on continuing operations (in millions) was as follows:
PERIOD FROM PERIOD FROM FOR THE FOR THE APRIL 3 JANUARY 1 YEAR ENDED YEAR ENDED THROUGH THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 2, 2008 2007 2006 2006 ------------ ------------ ------------ ----------- Current $13 $27 $(8) $-- Deferred 1 25 27 2 --- --- --- --- Total federal income tax expense $14 $52 $19 $ 2 === === === ===
A reconciliation of the effective tax rate differences (dollars in millions) was as follows:
PERIOD FROM PERIOD FROM FOR THE FOR THE APRIL 3 JANUARY 1 YEAR ENDED YEAR ENDED THROUGH THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 2, 2008 2007 2006 2006 ------------ ------------ ------------ ----------- Tax rate of 35% times pre-tax income $18 $54 $21 $ 2 Effect of: Separate account dividend received deduction (3) (2) (1) -- Other items (1) -- (1) -- --- --- --- --- Provision for income taxes $14 $52 $19 $ 2 === === === === Effective tax rate 28% 34% 31% 35% === === === ===
The effective tax rate is a ratio of tax expense over pre-tax income. The separate account dividend received deduction included in the table above is exclusive of any prior years' tax return resolution. The federal income tax liability (in millions), which is included in other liabilities on our Balance Sheets, was as follows: AS OF DECEMBER 31, ------------------ 2008 2007 ---- ---- Current $ 6 $ 32 Deferred 17 141 --- ---- Total federal income tax liability $23 $173 === ==== Significant components of our deferred tax assets and liabilities (in millions) were as follows: AS OF DECEMBER 31, ------------------ 2008 2007 ---- ---- DEFERRED TAX ASSETS: Insurance and investment contract liabilities $119 $140 Other investments 49 12 Compensation and benefit plans 1 1 Ceding commission asset 1 2 Net unrealized loss on securities available-for-sale 216 1 Other 1 1 ---- ---- Total deferred tax assets 387 157 ---- ---- DEFERRED TAX LIABILITIES: Deferred acquisition costs 154 100 Present value of business in-force 229 174 Other 21 24 ---- ---- Total deferred tax liabilities 404 298 ---- ---- Net deferred tax liability $ 17 $141 ==== ==== S-21 As of April 2, 2007, we have elected to file consolidated federal income tax returns with LNC and its subsidiaries. Pursuant to an inter-company tax sharing agreement with LNC, we provide for income taxes on a separate return filing basis. Prior to April 3, 2006, with the exception of predecessor LLANY, we were part of a consolidated Federal income tax filing with Jefferson-Pilot and its subsidiaries. Effective as of this merger date, the company, with the exception of predecessor LLANY, was part of a consolidated Federal income tax filing with JPFIC until April 2, 2007. Predecessor LLANY filed its tax return as part of a consolidated Federal income tax filing with its common parent, LNC. We are required to establish a valuation allowance for any gross deferred tax assets that are unlikely to reduce taxes payable in future years' tax returns. As of December 31, 2008 and 2007, we concluded that it was more likely than not that all gross deferred tax assets will reduce taxes payable in future years. Accordingly, no valuation allowance was necessary at December 31, 2008 and 2007. As discussed in Note 2, we adopted FIN 48 on January 1, 2007. As of December 31, 2008 and 2007 $4 million and $3 million of our unrecognized tax benefits presented below, if recognized, would have impacted our income tax expense and our effective tax rate. We anticipate a change to our unrecognized tax benefits during 2009 to range of none to $1 million. A reconciliation of the unrecognized tax benefits (in millions) was as follows: FOR THE YEARS ENDED DECEMBER 31, ------------------- 2008 2007 ---- ---- Balance at beginning-of-year $22 $10 Increases for prior year tax positions 1 1 Increases for current year tax positions -- 11 --- --- Balance at end-of-year $23 $22 === === We recognize interest and penalties accrued, if any, related to unrecognized tax benefits as a component of tax expense. During the years ended December 31, 2008, and 2007, we recognized interest and penalty expense related to uncertain tax positions of $1 million, in each year. We recognized no interest and penalty expense related to uncertain tax positions during the year ended December 31, 2006. We had accrued interest and penalty expense related to the unrecognized tax benefits of $2 million as of December 31, 2008 and 2007, respectively. We are subject to annual tax examinations from the Internal Revenue Service ("IRS"). During the third quarter of 2008, the IRS completed its examination for tax years 2003 and 2004 resulting in a proposed assessment. We believe a portion of the assessment is inconsistent with existing law and are protesting it through the established IRS appeals process. We do not anticipate that any adjustments that might result from such audits would be material to our results of operations or financial condition. We are currently under audit by the IRS for years 2005 and 2006. The Jefferson-Pilot subsidiaries acquired in the April 2006 merger are subject to a separate IRS examination cycle. For the former Jefferson-Pilot and its subsidiaries, the IRS is examining tax year ended April 2, 2006. S-22 7. DAC, VOBA AND DSI During the fourth quarter of 2008, we recorded a decrease to income totaling $15 million, for a reversion to the mean prospective unlocking of DAC, VOBA and DSI as a result of significant and sustained declines in the equity markets during 2008. The pre-tax impact for these items is included within the prospective unlocking line items in the changes in DAC, VOBA, and DSI tables below. Changes in DAC (in millions) were as follows:
PERIOD FROM PERIOD FROM FOR THE FOR THE APRIL 3 JANUARY 1 YEAR ENDED YEAR ENDED THROUGH THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 2, 2008 2007 2006 2006 ------------ ------------ ------------ ----------- Balance at beginning-of-period $306 $197 $ 60 $53 Cumulative effect of adoption of SOP 05-1 -- (1) -- -- Purchase accounting fair value adjustment -- -- (60) -- Merger acquired value -- -- 164 -- Amounts transferred from LNL -- 14 -- -- Deferrals 95 109 66 6 Amortization, net of interest: Prospective unlocking -- assumption changes (12) -- 1 -- Prospective unlocking -- model refinements 9 (8) (1) -- Retrospective unlocking (10) 9 (1) -- Other amortization, net of interest (36) (35) (22) (2) Adjustment related to realized gains (losses) on available-for-sale securities and derivatives 36 3 (2) -- Adjustment related to unrealized gains (losses) on available-for-sale securities and derivatives 72 18 (8) 3 ---- ---- ---- --- Balance at end-of-period $460 $306 $197 $60 ==== ==== ==== ===
Changes in VOBA (in millions) were as follows:
PERIOD FROM PERIOD FROM FOR THE FOR THE APRIL 3 JANUARY 1 YEAR ENDED YEAR ENDED THROUGH THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 2, 2008 2007 2006 2006 ------------ ------------ ------------ ----------- Balance at beginning-of-period $493 $169 $ 12 $11 Purchase accounting adjustments -- -- 54 -- Merger acquired value -- -- 114 -- Amounts transferred from LNL -- 352 -- -- Deferrals 3 4 5 -- Amortization, net of interest: Prospective unlocking -- assumption changes 4 4 -- -- Retrospective unlocking 3 9 1 -- Other amortization (72) (70) (22) -- Accretion of interest 26 24 7 -- Adjustment related to realized gains on available-for-sale securities and derivatives 7 1 -- -- Adjustment related to unrealized gains (losses) on available-for-sale securities and derivatives 191 -- (2) 1 ---- ---- ---- --- Balance at end-of-period $655 $493 $169 $12 ==== ==== ==== ===
Estimated future amortization of VOBA, net of interest (in millions), as of December 31, 2008, was as follows: 2009 $ 46 2010 43 2011 33 2012 31 2013 29 Thereafter 282 ---- Total $464 ==== S-23 Changes in DSI (in millions) were as follows:
PERIOD FROM PERIOD FROM FOR THE FOR THE APRIL 3 JANUARY 1 YEAR ENDED YEAR ENDED THROUGH THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 2, 2008 2007 2006 2006 ------------ ------------ ------------ ----------- Balance at beginning-of-period $14 $11 $ 2 $ 2 Purchase accounting adjustments -- -- 6 -- Deferrals 4 4 4 -- Amortization, net of interest: Prospective unlocking -- assumption changes (2) -- -- -- Other amortization, net of interest (2) (1) (1) -- --- --- --- --- Balance at end-of-period $14 $14 $11 $ 2 === === === ===
8. REINSURANCE The following summarizes reinsurance amounts (in millions) recorded on our Statements of Income:
PERIOD FROM PERIOD FROM FOR THE FOR THE APRIL 3 JANUARY 1 YEAR ENDED YEAR ENDED THROUGH THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 2, 2008 2007 2006 2006 ------------ ------------ ------------ ----------- Direct insurance premiums and fees $ 480 $ 445 $155 $ 11 Reinsurance ceded (134) (113) (39) (1) ----- ----- ---- ---- Total insurance premiums and fees, net $ 346 $ 332 $116 $ 10 ===== ===== ==== ==== Direct insurance benefits $ 395 $ 354 $125 $ 25 Reinsurance recoveries netted against benefits (167) (162) (82) (18) ----- ----- ---- ---- Total benefits, net $ 228 $ 192 $ 43 $ 7 ===== ===== ==== ====
We cede the portion of risks exceeding our retention limits to other insurers. We seek reinsurance coverage within the businesses that sell life insurance in order to limit our exposure to mortality losses and enhance our capital management. As discussed in Note 23, a portion of this reinsurance activity is with affiliated companies. Under our reinsurance program, we reinsure approximately 55% to 60% of the mortality risk on newly issued non-term life insurance contracts and approximately 40% to 45% of total mortality risk including term insurance contracts. Our policy for this program is to retain no more than $10 million on a single insured life issued on fixed and VUL insurance contracts. Additionally, the retention per single insured life for term life insurance and for corporate owned life insurance is $2 million for each type of insurance. 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, 2008, the reserves associated with these reinsurance arrangements totaled $6 million. To cover products other than life insurance, we acquire other insurance coverages with retentions and limits. For details on the reinsurance assumption from LNL, which was effective March 1, 2007, see Note 3. Reinsurance contracts do not relieve an insurer from its primary obligation to policyholders. Therefore, the failure of a reinsurer to discharge its reinsurance obligations could result in a loss to us. We regularly evaluate the financial condition of our reinsurers and monitor concentrations of credit risk related to reinsurance activities. S-24 9. GOODWILL AND SPECIFICALLY IDENTIFIABLE INTANGIBLE ASSETS The changes in the carrying amount of goodwill (in millions) by reportable segment were as follows: FOR THE YEAR ENDED DECEMBER 31, 2008 -------------------------------------- BALANCE AT PURCHASE BEGINNING- ACCOUNTING BALANCE AT OF-YEAR ADJUSTMENTS END-OF-YEAR ---------- ----------- ----------- Retirement Solutions: Annuities $ 26 $-- $ 26 Insurance Solutions: Life Insurance 136 -- 136 ---- --- ---- Total goodwill $162 $-- $162 ==== === ==== FOR THE YEAR ENDED DECEMBER 31, 2007 -------------------------------------- BALANCE AT PURCHASE BEGINNING- ACCOUNTING BALANCE AT OF-YEAR ADJUSTMENTS END-OF-YEAR ---------- ----------- ----------- Retirement Solutions: Annuities $ 27 $(1) $ 26 Insurance Solutions: Life Insurance 137 (1) 136 ---- --- ---- Total goodwill $164 $(2) $162 ==== === ==== The purchase accounting adjustments above relate to income tax deductions recognized when stock options attributable to mergers were exercised or the release of unrecognized tax benefits acquired through mergers. We performed a Step 1 goodwill impairment analysis on all of our reporting units. The Step 1 analysis for the reporting units within our Insurance Solutions and Retirement Solutions segments utilized primarily a discounted cash flow valuation technique. The discounted cash flow analysis required us to make judgments about revenues, earnings projections, growth rates and discount rates. We also considered other valuation techniques such as an analysis of peer companies and market participants. In the valuation process, we gave consideration to the current economic and market conditions. We also updated our October 1 analysis of goodwill impairment to reflect fourth quarter results and forecasts as of December 31, 2008, due to sharp declines in the equity markets and our stock price in the fourth quarter. In determining the estimated fair value of our reporting units, we incorporated consideration of discounted cash flow calculations, peer company price-to-earnings multiples, the level of our own share price and assumptions that market participants would make in valuing our reporting units. Our fair value estimations were based primarily on an in-depth analysis of future cash flows and relevant discount rates, which considered market participant inputs (income approach). For our other reporting units, we used other available information including market data obtained through strategic reviews and other analysis to support our Step 1 conclusions. All of our reporting units passed the Step 1 analysis. Additionally, while the Step 1 analysis of our Insurance Solutions - Life reporting unit indicated that its fair value exceeded its carrying value, the margin above carrying value was relatively small. Therefore, we concluded that we should perform additional analysis for our Insurance Solutions - Life reporting unit under the Step 2 requirements of SFAS 142. In our Step 2 analysis, we estimated the implied fair value of the reporting unit's goodwill as determined by allocating the reporting unit's fair value determined in Step 1 to all of its net assets (recognized and unrecognized) as if the reporting unit had been acquired in a business combination at the date of the impairment test. We utilized very detailed forecasts of cash flows and market observable inputs in determining a fair value of the net assets for each of the reporting units similar to what would be estimated in a business combination between market participants. The implied fair value of goodwill for Insurance Solutions - Life was higher than its carrying amount; therefore, the goodwill for this reporting unit was not impaired. S-25 The gross carrying amount and accumulated amortization (in millions) for the major specifically identifiable intangible asset class by reportable segment was as follows:
AS OF DECEMBER 31, ------------------------------------------------- 2008 2007 ----------------------- ----------------------- GROSS GROSS CARRYING ACCUMULATED CARRYING ACCUMULATED AMOUNT AMORTIZATION AMOUNT AMORTIZATION -------- ------------ -------- ------------ Insurance Solutions -- Life Insurance: Sales force $7 $1 $7 $--
Future estimated amortization of the specifically identifiable intangible asset was immaterial as of December 31, 2008. 10. GUARANTEED BENEFIT FEATURES 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 GDB, GWB and 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 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"). Certain features of these guarantees are considered embedded derivatives and are recorded in future contract benefits on our Balance Sheets at fair value under SFAS 133 and SFAS 157. Other guarantees that are not considered embedded derivatives meet the criteria as insurance benefits and are accounted for under the valuation techniques included in SOP 03-1. Still other guarantees contain characteristics of both an embedded derivative and an insurance benefit and are accounted for under an approach that weights these features and their associated reserves accordingly based on their hybrid nature. Effective January 1, 2008, we adopted SFAS 157, which affected the valuation of our embedded derivatives. See Note 20 for details on the adoption of SFAS 157. 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 fair value of the embedded derivatives. The net impact of these changes is reported as GLB, which is reported as a component of realized gain (loss) on our Statements of Income and is discussed in Note 14. 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): AS OF DECEMBER 31, ------------------- 2008 2007 -------- -------- RETURN OF NET DEPOSITS Total account value $1,265 $1,499 Net amount at risk(1) 222 3 Average attained age of contract holders 52 years 51 years MINIMUM RETURN Average attained age of contract holders 77 years 76 years Guaranteed minimum return 5% 5% ANNIVERSARY CONTRACT VALUE Total account value $ 731 $1,050 Net amount at risk(1) 355 11 Average attained age of contract holders 64 years 64 years ---------- (1) Represents the amount of death benefit in excess of the account balance. The increase in net amount of risk when comparing December 31, 2008, to December 31, 2007, was attributable primarily to the decline in equity markets and associated reduction in the account values. 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 GDB (in millions), which were recorded in future contract benefits on our Balance Sheets: FOR THE YEARS ENDED DECEMBER 31, ------------------- 2008 2007 2006 ---- ---- ---- Balance at beginning-of-year $ 1 $ 1 $-- Changes in reserves 9 -- 1 Benefits paid (2) -- -- --- --- --- Balance at end-of-year $ 8 $ 1 $ 1 === === === The changes to the benefit reserves amounts above are reflected in benefits on our Statements of Income. S-26 Account balances of variable annuity contracts with guarantees (in millions) were invested in separate account investment options as follows: AS OF DECEMBER 31, ------------------ 2008 2007 ------ ------ ASSET TYPE Domestic equity $ 670 $1,118 International equity 276 232 Bonds 219 253 Money market 213 206 ------ ------ Total $1,378 $1,809 ====== ====== Percent of total variable annuity separate account values 89% 85% Future contract benefits also include reserves for our products with secondary guarantees for our products sold through our Insurance Solutions - Life Insurance segment. These UL and VUL products with secondary guarantees represented approximately 15% of permanent life insurance in force as of December 31, 2008, and approximately 80% of sales for these products in 2008. 11. OTHER CONTRACT HOLDER FUNDS Details of other contract holder funds (in millions) were as follows: AS OF DECEMBER 31, ------------------ 2008 2007 ------ ------ Account values and other contract holder funds $4,628 $4,613 Deferred front-end loads 65 48 Contract holder dividends payable 164 165 Premium deposit funds 12 13 Undistributed earnings on participating business (3) 26 ------ ------ Total other contract holder funds $4,866 $4,865 ====== ====== As of December 31, 2008 and 2007, participating policies comprised approximately 4% of the face amount of insurance in force, and dividend expenses were $29 million, $25 million and $5 million for the years ended December 31, 2008, 2007 and 2006, respectively. 12. CONTINGENCIES AND COMMITMENTS CONTINGENCIES REGULATORY AND LITIGATION MATTERS Federal and state regulators continue to focus on issues relating to fixed and variable insurance products, including, but not limited to, suitability, replacements and sales to seniors. Like others in the industry, we have received inquiries including requests for information regarding sales to seniors from the Financial Industry Regulatory Authority, and we have responded to these inquiries. We continue to cooperate fully with such authority. In the ordinary course of its business, we are involved in various pending or threatened legal proceedings, including purported class actions, arising from the conduct of business. In some instances, these 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. After consultation with legal counsel and a review of available facts, it is management's opinion that these proceedings, after consideration of any reserves and rights to indemnification, ultimately will be resolved without materially affecting our financial position. 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 our operating results for any particular reporting period. VULNERABILITY FROM CONCENTRATIONS As of December 31, 2008, we did not have a concentration of business transactions with a particular customer or lender or sources of supply of labor or services used in the business. However, we do have a concentration in market and geographic area in which business is conducted. For the year ended December 31, 2008, approximately 81% of the premiums, on the basis of SAP, were generated in New York. 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. As of December 31, 2008 and 2007, we have not accrued for expected assessments. S-27 13. STOCKHOLDER'S EQUITY STOCKHOLDER'S EQUITY All authorized and issued shares of LLANY are owned by LNL. ACCUMULATED OCI The following summarizes the components and changes in accumulated OCI (in millions):
PERIOD FROM PERIOD FROM FOR THE FOR THE APRIL 3 JANUARY 1 YEAR ENDED YEAR ENDED THROUGH THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 2, 2008 2007 2006 2006 ------------ ------------ ------------ ----------- UNREALIZED GAINS (LOSS) ON AVAILABLE-FOR-SALE SECURITIES Balance at beginning-of-period $ (8) $ 14 $ 3 $ 10 Other comprehensive income (loss): Unrealized holding gains (losses) arising during the year (758) (67) 33 (16) Change in DAC, VOBA and other contract holder funds 337 18 (15) 3 Income tax (expense) benefit 156 15 (8) 6 Less: Reclassification adjustment for losses included in net income (147) (23) -- -- Associated amortization of DAC, VOBA, DSI, DFEL and changes in other contract holder funds 51 4 (2) -- Income tax benefit 34 7 1 -- ----- ---- ---- ---- Balance at end-of-period $(211) $ (8) $ 14 $ 3 ===== ==== ==== ==== UNREALIZED GAINS ON DERIVATIVE INSTRUMENTS Balance at beginning-of-period $ 1 $ -- $ -- $ -- Other comprehensive income (loss): Unrealized holding gains arising during the year -- 5 -- -- Change in DAC, VOBA and other contract holder funds -- (3) -- -- Income tax expense -- (1) -- -- ----- ---- ---- ---- Balance at end-of-period $ 1 $ 1 $ -- $ -- ===== ==== ==== ====
14. REALIZED LOSS Details underlying realized loss (in millions) reported on our Statements of Income were as follows:
PERIOD FROM PERIOD FROM FOR THE FOR THE APRIL 3 JANUARY 1 YEAR ENDED YEAR ENDED THROUGH THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 2, 2008 2007 2006 2006 ------------ ------------ ------------ ----------- Total realized loss on investments and certain derivative instruments, excluding trading securities(1) $(96) $(19) $(1) $-- Loss on certain reinsurance derivative/trading securities(2) (1) -- -- -- Guaranteed living benefits: Gross -- (11) -- -- Associated amortization expense of DAC, VOBA, DSI and DFEL (1) 5 -- -- ---- ---- --- --- Total realized loss $(98) $(25) $(1) $-- ==== ==== === ===
---------- (1) See "Realized Loss Related to Investments" section in Note 4 for detail. (2) Represents changes in the fair value of total return swaps (embedded derivatives) related to various modified coinsurance and coinsurance with funds withheld reinsurance arrangements that have contractual returns related to various assets and liabilities associated with these arrangements. Changes in the fair value of these derivatives are offset by the change in fair value of trading securities in the portfolios that support these arrangements. S-28 15. UNDERWRITING, ACQUISITION, INSURANCE AND OTHER EXPENSES Details underlying underwriting, acquisition, insurance and other expenses (in millions) were as follows:
PERIOD FROM PERIOD FROM FOR THE FOR THE APRIL 3 JANUARY 1 YEAR ENDED YEAR ENDED THROUGH THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 2, 2008 2007 2006 2006 ------------ ------------ ------------ ----------- Commissions $ 84 $100 $ 67 $ 4 General and administrative expenses 66 64 38 4 DAC and VOBA deferrals and interest, net of amortization (10) (46) (34) (4) Taxes, licenses and fees 16 10 6 2 ---- ---- ---- --- Total $156 $128 $ 77 $ 6 ==== ==== ==== ===
16. PENSION, HEALTH CARE AND LIFE INSURANCE BENEFIT PLANS LNC maintains qualified funded defined benefit pension plans in which many of our employees, including those of LLANY, are participants. LNC also maintains non-qualified, unfunded defined benefit pension plans for certain employees, and certain employees and certain retired employees of acquired companies. In addition, for certain employees LNC has supplemental retirement plans that provide defined pension benefits in excess of limits imposed by federal tax law. All of LNC's U.S. defined benefit pension plans were "frozen" as of either December 31, 1994, or December 31, 2007, or earlier. For their frozen plans, 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 or date of hire, subject to age limitations. The frozen pension plan benefits are calculated either on a traditional 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. Under the cash balance formula benefits are 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 employee's benefit is paid. LNC also sponsors 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 10 years and attained age 55 (age 60 for agents). VEBAs are a special type of tax-exempt trust used to provide employee benefits and also 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 incluing years of service and year of retirement. Effective January 1, 2008, the postretirement plan providing benefits to former employees of Jefferson-Pilot was amended such that only employees who had attained age 55 with a minimum of 10 years of service by December 31, 2007, and who later retire on or after age 60 with 15 years of service will be eligible to receive life insurance benefits when they retire. 17. 401(k), MONEY PURCHASE AND PROFIT SHARING PLANS LNC sponsors a contributory defined contribution plan or a 401(k) plan for our eligible employees, including those of LLANY. LNL sponsors a number of contributory defined plans for agents only, including those of LLANY. These plans include a 401(k) plan for eligible agents and a defined contribution money purchase plan for eligible agents of the former Jefferson-Pilot. LNL also sponsors a money purchase plan for LNL agents that was frozen in 2004. LNC makes contributions and matching contributions to each of the active plans in accordance with the plan document and various limitations under Section 401(a) of the Internal Revenue Code of 1986, as amended. S-29 The expenses (in millions) for the 401(k) and profit sharing plans were as follows:
PERIOD FROM PERIOD FROM FOR THE FOR THE APRIL 3 JANUARY 1 YEAR ENDED YEAR ENDED THROUGH THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 2, 2008 2007 2006 2006 ------------ ------------ ------------ ----------- Total expenses for the 401(k) and profit sharing plans $2 $1 $-- $--
DEFERRED COMPENSATION PLANS LNC sponsors the Deferred Compensation & Supplemental/Excess Retirement Plan (the "DC SERP") for certain U.S. employees, including those of LLANY, and deferred compensation plans for certain agents, including those of LLANY. THE DEFERRED COMPENSATION PLAN FOR CERTAIN U.S. EMPLOYEES Certain U.S. employees may participate in the DC SERP. All participants may elect to defer payment of a portion of their compensation as defined by the plan. DC SERP participants may select from a menu of "phantom" investment options (identical to those offered under our qualified savings plans) used as investment measures for calculating the investment return notionally credited to their deferrals. Under the terms of the DC SERP, LNC agrees to pay out amounts based upon the aggregate performance of the investment measures selected by the participant. LNC makes matching contributions to these plans based upon amounts placed into the deferred compensation plans by individuals after participants have exceeded applicable limits of the Internal Revenue Code. The amount of our contribution is calculated in accordance with the plan document, which is similar to our 401(k) plans. Our expense for these plans was not significant for the years ended December 31, 2008, 2007 and 2006. The terms of the DC SERP provide that plan participants who select our stock as the measure for their investment return will receive shares of LNC stock in settlement of this portion of their accounts at the time of distribution. In addition, participants are precluded from diversifying any portion of their deferred compensation plan account that has been credited to the stock unit fund. Consequently, changes in value of our stock do not affect the expenses associated with this portion of the deferred compensation plan. DEFERRED COMPENSATION PLANS FOR CERTAIN AGENTS LNC also sponsors a deferred compensation plan for certain eligible agents. Plan participants receive contributions based on their earnings. Plan participants may select from a menu of "phantom" investment options used as investment measures for calculating the investment return notionally credited to their deferrals. Under the terms of these plans, LNC agrees to pay out amounts based upon the aggregate performance of the investment measures selected by the participant. LLANY agents invest in phantom investments that mirror those offered to qualified plan participants. Jefferson-Pilot agents invest in a different line up of "phantom" investments. Our expense for these plans was not significant for the years ended December 31, 2008, 2007 and 2006. 18. STOCK-BASED INCENTIVE COMPENSATION PLANS Our employees are included in LNC's various incentive plans that provide for the issuance of stock options, stock incentive awards, stock appreciation rights ("SARs"), restricted stock awards, performance shares (performance-vested shares as opposed to time-vested shares) and deferred stock units - also referred to as "restricted stock units." LNC has a policy of issuing new shares to satisfy option exercises. Total compensation expense for stock-based awards to our employees was not material for the years ended December 31, 2008, 2007 and 2006. 19. STATUTORY INFORMATION AND RESTRICTIONS We prepare financial statements in accordance with SAP prescribed or permitted by the New York Department of Insurance, 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. Specified statutory information (in millions) was as follows: AS OF DECEMBER 31, ------------------ 2008 2007 ---- ---- Capital and surplus $795 $833 S-30 PERIOD FROM PERIOD FROM FOR THE FOR THE APRIL 3 JANUARY 1 YEAR ENDED YEAR ENDED THROUGH THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 2, 2008 2007 2006 2006 ------------ ------------ ------------ ----------- Net loss $(95) $(188) $(26) $(1) Our state of domicile, New York, has adopted a certain prescribed accounting practice that differs from those found in NAIC SAP. This prescribed practice is the use of continuous Commissioners Annuity Reserve Valuation Method ("CARVM") in the calculation of reserves. We also have several accounting practices permitted by our state of domicile that differ from those found in NAIC SAP. Specifically, these are the use of a more conservative valuation interest rate on certain annuities as of December 31, 2008 and 2007, the use of less conservative mortality tables on certain life insurance products as of December 31, 2008. The effects on statutory surplus compared to NAIC statutory surplus from the use of these prescribed and permitted practices (in millions) were as follows: AS OF DECEMBER 31, ------------------ 2008 2007 ---- ---- Calculation of reserves using continuous CARVM $(10) $(10) A new statutory reserving standard (commonly called "VACARVM") has been developed by the NAIC replacing current statutory reserve practices for variable annuities with guaranteed benefits, such as GWBs. The effective date for VACARVM is December 31, 2009. Based upon the level of variable annuity account values as of December 31, 2008, we estimate that VACARVM would have decreased our statutory capital by $40 to $60 million. The actual impact of the adoption will be dependent upon account values and conditions that exist as of December 31, 2009. We plan to utilize existing affiliate reinsurance structures, as well as pursue additional third-party reinsurance arrangements, to lessen any negative impact on statutory capital and dividend capacity. However, additional statutory reserves could lead to lower risk-based capital ("RBC") ratios and potentially reduce future dividend capacity from our insurance subsidiaries. Prior to 2007, JPLA and predecessor LLANY prepared and filed separate statutory basis financial statements with the Insurance Departments of their states of domicile, New Jersey and New York, respectively. JPLA was redomiciled from New Jersey to New York, and predecessor LLANY was merged with and into JPLA in April 2007 and renamed LLANY. LLANY is subject to certain insurance department regulatory restrictions as to the transfer of funds and the payment of dividends to LNL. Dividends cannot be declared by state of New York life insurance companies without 30-day notice to the Superintendent, who may disapprove. Dividends are paid as declared by its Board of Directors. Within these limitations, there are no restrictions placed on the portion of company profits that may be paid as ordinary dividends to stockholders. No dividends were declared in 2008 or 2007. We expect we could pay dividends of approximately $13 million in 2009 after approval from the Superintendent. However, if current conditions do not improve we believe this dividend capacity will decline. 20. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values and estimated fair values of our financial instruments (in millions) were as follows:
AS OF DECEMBER 31, --------------------------------------------------------- 2008 2007 --------------------------- --------------------------- CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE -------------- ---------- -------------- ---------- ASSETS Available-for-sale securities: Fixed maturities $ 5,159 $ 5,159 $ 5,759 $ 5,759 Equity 2 2 2 2 Mortgage loans on real estate 294 285 260 266 Other investments 2 2 3 3 Cash and invested cash 55 55 129 129 Separate account assets 1,690 1,690 2,284 2,284 LIABILITIES Future contract benefits: Remaining guaranteed interest and similar contracts -- -- (46) (46) Embedded derivative instruments -- living benefits (liabilities) contra liabilities (124) (124) (12) (12) Other contract holder funds: Account value of certain investment contracts (1,171) (1,287) (1,240) (1,213) Reinsurance related derivative liabilities (1) (1) -- --
S-31 See Note 1 for discussion of the methodologies and assumptions used to determine the fair value of financial instruments 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. 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. OTHER INVESTMENTS AND CASH AND INVESTED CASH The carrying value of our assets classified as other investments and cash and invested cash on our Balance Sheets approximates their fair value. Other investments include limited partnership and other privately held investments that are accounted for using the equity method of accounting. FUTURE CONTRACT BENEFITS AND OTHER CONTRACT HOLDER FUNDS Future contract benefits and other contract holder funds on our Balance Sheets include account values of investment contracts and certain guaranteed interest contracts. The fair value of the investment contracts is based on their approximate surrender value at the balance sheet date. The fair value for the remaining guaranteed interest and similar contracts are estimated using discounted cash flow calculations at 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. FINANCIAL INSTRUMENTS CARRIED AT FAIR VALUE See "Summary of Significant Accounting Policies" in Note 1 and "SFAS 157 - FAIR VALUE MEASUREMENTS" in Note 2 for discussions of the methodologies and assumptions used to determine the fair value of our financial instruments carried at fair value. The following summarizes our financial instruments carried at fair value (in millions) on a recurring basis by the SFAS 157 fair value hierarchy levels described in Note 2:
AS OF DECEMBER 31, 2008 ----------------------------------------------- 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: Available-for-sale securities: Fixed maturities $40 $4,832 $ 287 $5,159 Equity 2 -- -- 2 Cash and invested cash -- 55 -- 55 Separate account assets -- 1,690 -- 1,690 --- ------ ----- ------ Total assets $42 $6,577 $ 287 $6,906 === ====== ===== ====== LIABILITIES Future contract benefits: Embedded derivative instruments -- living benefits liabilities $-- $ -- $(124) $ (124) Reinsurance related derivative assets -- (1) -- (1) --- ------ ----- ------ Total liabilities $-- $ (1) $(124) $ (125) === ====== ===== ======
We did not have any assets or liabilities measured at fair value on a non-recurring basis as of December 31, 2008. S-32 The following table summarizes changes to our financial instruments carried at fair value (in millions) and classified within Level 3 of the fair value hierarchy. This information excludes any impact of amortization on DAC, VOBA, DSI and DFEL. 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. Certain securities trade in less liquid or illiquid markets with limited or no pricing information, and 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 (that is, components that are actively quoted or can be validated to market-based sources). The gains and losses in the table below may include changes in fair value due in part to observable inputs that are a component of the valuation methodology.
FOR THE YEAR ENDED DECEMBER 31, 2008 ------------------------------------------------------------------- SALES, TRANSFERS ITEMS PURCHASES, IN OR BEGINNING INCLUDED GAINS MATURITIES, OUT OF ENDING FAIR IN NET (LOSSES) SETTLEMENTS, LEVEL 3, FAIR VALUE INCOME IN OCI CALLS, NET NET(1) VALUE --------- -------- -------- ------------ --------- ------ Investments: Available-for-sale securities: Fixed maturities $372 $ (20) $(51) $(12) $(2) $ 287 Future contract benefits: Embedded derivative instruments -- living benefits liabilities (17) (100) -- (7) -- (124) ---- ----- ---- ---- --- ----- Total, net $355 $(120) $(51) $(19) $(2) $ 163 ==== ===== ==== ==== === =====
---------- (1) Transfers in or out of Level 3 for available-for-sale and trading securities are displayed at amortized cost at the beginning of the period. For available-for-sale securities, the difference between beginning of period amortized cost and beginning of period fair value was included in OCI and earnings, respectively, in prior periods. The following table provides the components of the items included in net income, excluding any impact of amortization on DAC, VOBA, DSI and DFEL and changes in future contract benefits, (in millions) as reported in the table above:
FOR THE YEAR ENDED DECEMBER 31, 2008 ---------------------------------------------------------------- GAINS (LOSSES) FROM OTHER- SALES, UNREALIZED (AMORTIZATION) THAN- MATURITIES, HOLDING ACCRETION, TEMPORARY SETTLEMENTS, GAINS NET IMPAIRMENT CALLS (LOSSES)(3) TOTAL -------------- ---------- ------------ ----------- ----- Investments: Available-for-sale securities: Fixed maturities(1) $2 $(22) $-- $ -- $ (20) Future contract benefits: Embedded derivative instruments -- living benefits liabilities(2) -- -- -- (100) (100) --- ---- --- ----- ----- Total, net $2 $(22) $-- $(100) $(120) === ==== === ===== =====
---------- (1) Amortization and accretion, net and unrealized holding losses are included in net investment income on our Statements of Income. All other amounts are included in realized loss on our Statements of Income. (2) All amounts are included in realized loss on our Statements of Income. (3) This change in unrealized gains or losses relates to assets and liabilities that we still held as of December 31, 2008. S-33 The fair value of available-for-sale fixed maturity securities (in millions) classified within Level 3 of the fair value hierarchy was as follows: AS OF DECEMBER 31, 2008 ----------------------- FAIR % OF TOTAL VALUE FAIR VALUE ----- ---------- Corporate bonds $114 39.7% Asset-backed securities 19 6.6% Commercial mortgage-backed securities 42 14.6% Collateralized mortgage obligations 22 7.7% Municipals 37 12.9% Government and government agencies 47 16.4% Redeemable preferred stock 6 2.1% ---- ----- Total fixed maturity available-for-sale securities $287 100.0% ==== ===== AS OF DECEMBER 31, 2007 ----------------------- FAIR % OF TOTAL VALUE FAIR VALUE ----- ---------- Corporate bonds $119 32.0% Asset-backed securities 62 16.7% Commercial mortgage-backed securities 60 16.1% Collateralized mortgage obligations 42 11.3% Municipals 38 10.2% Government and government agencies 51 13.7% ---- ----- Total fixed maturity available-for-sale securities $372 100.0% ==== ===== 21. SEGMENT INFORMATION On July 21, 2008, we announced the realignment of our segments under our former Employer Markets and Individual Markets operating businesses into two new operating businesses - Retirement Solutions and Insurance Solutions. We believe the new structure more closely aligns with consumer needs and should lead to more coordinated product development and greater effectiveness across the enterprise. The segment changes are in accordance with the provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," and reflect the manner in which we are organized for purposes of making operating decisions and assessing performance. Accordingly, we have restated results from prior periods in a consistent manner with our realigned segments. Under our newly realigned segments, we report the results of the Executive Benefits business, which as of June 30, 2008, was part of the Retirement Products segment, in the Life Insurance segment. We do not view these changes to our segment reporting as material to our financial statements. We provide products and services in two operating businesses: Retirement Solutions and Insurance Solutions, and report results through four business 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. RETIREMENT SOLUTIONS The Retirement Solutions business provides its products through two segments: Annuities and Defined Contribution. The Retirement Solutions - Annuities segment provides tax-deferred investment growth and lifetime income opportunities for its clients by offering individual fixed annuities, including indexed annuities and variable annuities. The Retirement Solutions - Defined Contribution segment provides employer-sponsored variable and fixed annuities and mutual-fund based programs in the 401(k), 403(b) and 457 marketplaces. INSURANCE SOLUTIONS The Insurance Solutions business provides its products through two segments: Life Insurance and Group Protection. The Insurance Solutions - Life Insurance segment offers wealth protection and transfer opportunities through term insurance, a linked-benefit product (which is a UL policy linked with riders that provide for long-term care costs) 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 Insurance Solutions - Group Protection segment offers group life, disability and dental insurance to employers, and 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 Other Operations includes investments related to excess capital, other corporate investments and benefit plan net assets. Beginning with the quarter ended June 30, 2008, we changed our definitions of segment operating revenues and income from operations to better reflect: the underlying economics of our variable and indexed annuities that employ derivative instruments to hedge policy benefits; and the manner in which management evaluates that business. Our change in the definition of income from operations is primarily the result of our S-34 adoption of SFAS 157 during the first quarter of 2008 (see Note 2). Under the fair value measurement provisions of SFAS 157, we are required to measure the fair value of these annuities from an "exit price" perspective, (i.e., the exchange price between market participants to transfer the liability). We, therefore, must include margins that a market participant buyer would require as well as a factor for non-performance risk related to our credit quality. We do not believe that these factors relate to the economics of the underlying business and do not reflect the manner in which management evaluates the business. The items that are now excluded from our operating results that were previously included are as follows: GLB net derivatives results; indexed annuity forward-starting option; and GDB derivatives results. For more information regarding this change, see LNC's current report on Form 8-K dated July 16, 2008. We continue to exclude the effects of any realized gain (loss) on investments from segment operating revenues and income from operations as we believe that such items are not necessarily indicative of current operating fundamentals or future performance of the business segments, and, in many instances, decisions regarding these items do not necessarily relate to the operations of the individual segments. We believe that our new definitions of operating revenues and income (loss) from operations will provide investors with a more valuable measure of our performance because it better reveals trends in our business. 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)"): - Sale or disposal of securities; - Impairments of securities; - Change in the fair value of embedded derivatives within certain reinsurance arrangements and the change in the fair value of related trading securities; - Change in the fair value of the embedded derivatives of our GLBs within our variable annuities net of the change in the fair value of the derivatives we own to hedge the changes in the embedded derivative; - Net difference between the benefit ratio unlocking of SOP 03-1 reserves on our GDB riders within our variable annuities and the change in the fair value of the derivatives excluding our expected cost of purchasing the hedging instruments; 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 as required under SFAS 133 and 157. - Income (loss) from the initial adoption of changes in accounting principles; - Income (loss) from reserve changes (net of related amortization) on business sold through reinsurance; - Losses on early retirement of debt, including subordinated debt; - Losses from the impairment of intangible assets; and - Income (loss) from discontinued operations. Operating revenues represent GAAP revenues excluding the pre-tax effects of the following items, as applicable: - Excluded realized gain (loss); - Amortization of deferred gains arising from the reserve changes on business sold through reinsurance; and - Revenue adjustments from the initial impact of the adoption of changes in accounting principles. Operating revenues and income (loss) from operations do not replace revenues and net income as the GAAP measures of our results of operations. S-35 Segment information (in millions) was as follows:
PERIOD FROM PERIOD FROM FOR THE FOR THE APRIL 3 JANUARY 1 YEAR ENDED YEAR ENDED THROUGH THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 2, 2008 2007 2006 2006 ------------ ------------ ------------ ----------- REVENUES Operating revenues: Retirement Solutions: Annuities $ 96 $110 $ 64 $12 Defined Contribution 52 54 40 -- ----- ---- ---- --- Total Retirement Solutions 148 164 104 12 ----- ---- ---- --- Insurance Solutions: Life Insurance 531 481 152 12 Group Protection 39 29 15 4 ----- ---- ---- --- Total Insurance Solutions 570 510 167 16 ----- ---- ---- --- Other Operations 25 19 6 1 Excluded realized gain (loss), pre-tax (100) (25) (1) -- ----- ---- ---- --- Total revenues $ 643 $668 $276 $29 ===== ==== ==== ===
PERIOD FROM PERIOD FROM FOR THE FOR THE APRIL 3 JANUARY 1 YEAR ENDED YEAR ENDED THROUGH THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 2, 2008 2007 2006 2006 ------------ ------------ ------------ ----------- NET INCOME Income (loss) from operations: Retirement Solutions: Annuities $ 3 $ 19 $13 $ 1 Defined Contribution 4 3 2 -- ---- ---- --- --- Total Retirement Solutions 7 22 15 1 ---- ---- --- --- Insurance Solutions: Life Insurance 75 82 21 2 Group Protection 2 1 2 -- ---- ---- --- --- Total Insurance Solutions 77 83 23 2 ---- ---- --- --- Other Operations 17 13 4 -- Excluded realized gain (loss), after-tax (65) (16) -- -- ---- ---- --- --- Net income $ 36 $102 $42 $ 3 ==== ==== === ===
S-36
PERIOD FROM PERIOD FROM FOR THE FOR THE APRIL 3 JANUARY 1 YEAR ENDED YEAR ENDED THROUGH THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 2, 2008 2007 2006 2006 ------------ ------------ ------------ ----------- NET INVESTMENT INCOME Retirement Solutions: Annuities $ 57 $ 58 $ 45 $12 Defined Contribution 48 49 37 -- ---- ---- ---- --- Total Retirement Solutions 105 107 82 12 ---- ---- ---- --- Insurance Solutions: Life Insurance 262 233 75 6 Group Protection 3 2 1 -- ---- ---- ---- --- Total Insurance Solutions 265 235 76 6 ---- ---- ---- --- Other Operations 25 19 3 1 ---- ---- ---- --- Total net investment income $395 $361 $161 $19 ==== ==== ==== ===
PERIOD FROM PERIOD FROM FOR THE FOR THE APRIL 3 JANUARY 1 YEAR ENDED YEAR ENDED THROUGH THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 2, 2008 2007 2006 2006 ------------ ------------ ------------ ----------- AMORTIZATION OF DAC AND VOBA, NET OF INTEREST Retirement Solutions: Annuities $ 31 $12 $ 8 $ 1 Defined Contribution 5 5 4 -- ---- --- --- --- Total Retirement Solutions 36 17 12 1 ---- --- --- --- Insurance Solutions: Life Insurance 51 49 25 1 Group Protection 1 1 -- -- ---- --- --- --- Total Insurance Solutions 52 50 25 1 ---- --- --- --- Other Operations -- -- -- -- ---- --- --- --- Total amortization of DAC and VOBA, net of interest $ 88 $67 $37 $ 2 ==== === === ===
PERIOD FROM PERIOD FROM FOR THE FOR THE APRIL 3 JANUARY 1 YEAR ENDED YEAR ENDED THROUGH THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 2, 2008 2007 2006 2006 ------------ ------------ ------------ ----------- FEDERAL INCOME TAX EXPENSE (BENEFIT) Retirement Solutions: Annuities $ (3) $ 7 $ 5 $ 1 Defined Contribution 2 1 1 -- ---- --- --- --- Total Retirement Solutions (1) 8 6 1 ---- --- --- --- Insurance Solutions: Life Insurance 40 45 11 1 Group Protection 1 1 1 -- ---- --- --- --- Total Insurance Solutions 41 46 12 1 ---- --- --- --- Other Operations 9 7 1 -- Realized loss (35) (9) -- -- ---- --- --- --- Total federal income tax expense $ 14 $52 $19 $ 2 ==== === === ===
S-37 AS OF DECEMBER 31, ------------------ 2008 2007 ------ ------- ASSETS Retirement Solutions: Annuities $2,632 $ 3,059 Defined Contribution 1,055 1,267 ------ ------- Total Retirement Solutions 3,687 4,326 ------ ------- Insurance Solutions: Life Insurance 5,671 5,561 Group Protection 57 5 ------ ------- Total Insurance Solutions 5,728 5,566 ------ ------- Other Operations 266 584 ------ ------- Total $9,681 $10,476 ====== ======= 22. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION The following summarizes our supplemental cash flow data (in millions):
PERIOD FROM PERIOD FROM FOR THE FOR THE APRIL 3 JANUARY 1 YEAR ENDED YEAR ENDED THROUGH THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, APRIL 2, 2008 2007 2006 2006 ------------ ------------ ------------ ----------- Income taxes paid (received) $40 $ (7) $11 $ (3) === ======= === ======= Significant non-cash investing and financing transactions: Business combinations: Fair value of assets acquired (includes cash and invested cash) $-- $ (1) $-- $ 1,482 Fair value of liabilities assumed -- -- -- (1,249) --- ------- --- ------- Total purchase price $-- $ (1) $-- $ 233 === ======= === ======= Sale of stockholder's equity: Carrying value of assets $-- $ -- $-- $ 1,447 Carrying value of liabilities -- -- -- (1,236) --- ------- --- ------- Total sale of stockholder's equity $-- $ -- $-- $ 211 === ======= === ======= Reinsurance assumption from LNL: Assets contributed $-- $ 3,488 $-- $ -- Liabilities contributed -- (2,784) -- -- --- ------- --- ------- Total capital contribution $-- $ 704 $-- $ -- === ======= === =======
S-38 23. TRANSACTIONS WITH AFFILIATES Transactions with affiliates (in millions) recorded on our financial statements were as follows: AS OF DECEMBER 31, ------------------ 2008 2007 ---- ---- Assets with affiliates: Service agreement receivable(1) $ 1 $(18) Liabilities with affiliates: Reinsurance future contract benefits on ceded reinsurance contracts(2) 107 34 FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2008 2007 2006 Revenues with affiliates: ---- ---- ---- Premiums paid on ceded reinsurance contracts(3) $(15) $(12) $(6) Fees for management of general account(4) (4) (4) (1) Benefits and expenses with affiliates: Service agreement payments(5) 59 54 20 ---------- (1) Reported in other assets on our Balance Sheets. (2) Reported in future contract benefits on our Balance Sheets. (3) Reported in insurance premiums on our Statements of Income. (4) Reported in net investment income on our Statement of Income. (5) Reported in underwriting, acquisition, insurance and other expenses on our Statements of Income. SERVICE AGREEMENT In accordance with service agreements with LNL and certain of its affiliates for personnel and facilities usage, general management services and investment management services, we receive services from and provide services to affiliated companies and also receive an allocation of corporate overhead from LNC. Corporate overhead expenses are assigned based on specific methodologies for each function. The majority of the expenses are assigned based on the following methodologies: assets by product, assets under management, weighted number of policy applications, weighted policies in force, and sales. FEES FOR MANAGEMENT OF GENERAL ACCOUNT Delaware Management Holdings Inc. ("DMH"), a wholly owned subsidiary of LNC, is responsible for the management of our general account investments. CEDED REINSURANCE CONTRACTS We cede business to two affiliated companies, LNL and Lincoln National Reinsurance Company (Barbados) Ltd. SENIOR PROMISSORY NOTE As of December 31, 2008 and 2007, we held no securities of LNC or its affiliates. As of December 31, 2006, we held an LNC Senior Promissory Note with a carrying amount of $6 million, which matured in 2007 and bore an interest rate of 5.25%. S-39 LINCOLN LIFE & ANNUITY VARIABLE ANNUITY ACCOUNT L L-1 LINCOLN LIFE & ANNUITY VARIABLE ANNUITY ACCOUNT L STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2008
MORTALITY & EXPENSE CONTRACT CONTRACT GUARANTEE PURCHASES REDEMPTIONS CHARGES DUE FROM DUE TO PAYABLE TO LINCOLN LIFE & LINCOLN LIFE & LINCOLN LIFE ANNUITY ANNUITY & ANNUITY COMPANY COMPANY COMPANY SUBACCOUNT INVESTMENTS OF NEW YORK TOTAL ASSETS OF NEW YORK OF NEW YORK NET ASSETS --------------------------------------------------------------------------------------------------------------------------------- ABVPSF Global Technology Class B $ 1,228,318 $ -- $ 1,228,318 $ 376 $ 33 $ 1,227,909 ABVPSF Growth Class B 411,335 31 411,366 -- 11 411,355 ABVPSF Growth and Income Class B 390,062 144 390,206 -- 11 390,195 American Century VP Balanced 8,013,615 -- 8,013,615 219 218 8,013,178 American Funds Global Growth Class 2 2,035,637 -- 2,035,637 334 56 2,035,247 American Funds Growth Class 2 9,051,309 1,530 9,052,839 -- 244 9,052,595 American Funds Growth-Income Class 2 2,597,812 291 2,598,103 -- 70 2,598,033 American Funds International Class 2 4,689,487 475 4,689,962 -- 129 4,689,833 Delaware VIPT Diversified Income 965,866 155 966,021 -- 27 965,994 Delaware VIPT High Yield 431,901 183 432,084 -- 12 432,072 Delaware VIPT REIT Service Class 4,516,386 554 4,516,940 -- 118 4,516,822 Delaware VIPT Small Cap Value Service Class 2,072,384 -- 2,072,384 3 55 2,072,326 Delaware VIPT Trend Service Class 613,580 92 613,672 -- 16 613,656 Dreyfus Developing Leaders 9,152,841 1,805 9,154,646 -- 244 9,154,402 Dreyfus Stock Index 22,642,420 2,513 22,644,933 -- 612 22,644,321 DWS VIP Equity 500 Index 1,145,681 1,051 1,146,732 -- 31 1,146,701 DWS VIP Small Cap Index 906,590 763 907,353 -- 24 907,329 Fidelity VIP Asset Manager 17,542,433 1,190 17,543,623 -- 478 17,543,145 Fidelity VIP Contrafund Service Class 2 5,679,459 -- 5,679,459 90 153 5,679,216 Fidelity VIP Equity-Income 17,035,035 1,497 17,036,532 -- 459 17,036,073 Fidelity VIP Growth 29,301,433 -- 29,301,433 3,083 791 29,297,559 Fidelity VIP Money Market 26,428 79 26,507 -- -- 26,507 Janus Aspen Series Worldwide Growth 4,650,552 571 4,651,123 -- 126 4,650,997 Lincoln VIPT Baron Growth Opportunities Service Class 6,668,844 1,015 6,669,859 -- 179 6,669,680 Lincoln VIPT Cohen & Steers Global Real Estate 21,781 -- 21,781 -- 1 21,780 Lincoln VIPT Delaware Bond 2,439,619 521 2,440,140 -- 67 2,440,073 Lincoln VIPT Delaware Growth and Income 1,905,440 320 1,905,760 -- 51 1,905,709 Lincoln VIPT Delaware Managed 329,336 19 329,355 -- 9 329,346 Lincoln VIPT Delaware Social Awareness 2,835,428 335 2,835,763 -- 76 2,835,687 Lincoln VIPT Janus Capital Appreciation 805,970 -- 805,970 -- 22 805,948 Lincoln VIPT Mondrian International Value 2,631,442 355 2,631,797 -- 71 2,631,726 Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth 5,557,808 806 5,558,614 -- 149 5,558,465 Lincoln VIPT Wilshire 2010 Profile 72,412 -- 72,412 -- 2 72,410 Lincoln VIPT Wilshire 2020 Profile 117,793 744 118,537 -- 3 118,534 Lincoln VIPT Wilshire 2030 Profile 85,891 479 86,370 -- 2 86,368 Lincoln VIPT Wilshire 2040 Profile 47,604 618 48,222 -- 1 48,221 Lincoln VIPT Wilshire Aggressive Profile 600,315 2,098 602,413 -- 16 602,397 Lincoln VIPT Wilshire Conservative Profile 217,952 88 218,040 -- 6 218,034 Lincoln VIPT Wilshire Moderate Profile 927,119 1,534 928,653 -- 25 928,628 Lincoln VIPT Wilshire Moderately Aggressive Profile 1,861,530 1,185 1,862,715 -- 50 1,862,665 NB AMT Mid-Cap Growth 2,549,627 623 2,550,250 -- 69 2,550,181 NB AMT Partners 2,901,733 -- 2,901,733 17,178 78 2,884,477 T. Rowe Price International Stock 4,511,613 899 4,512,512 -- 123 4,512,389
See accompanying notes. L-2 [THIS PAGE INTENTIONALLY LEFT BLANK] LINCOLN LIFE & ANNUITY VARIABLE ANNUITY ACCOUNT L STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2008
DIVIDENDS FROM MORTALITY AND NET INVESTMENT EXPENSE INVESTMENT SUBACCOUNT INCOME GUARANTEE CHARGES INCOME (LOSS) --------------------------------------------------------------------------------------------------- ABVPSF Global Technology Class B $ -- $ (17,632) $(17,632) ABVPSF Growth Class B -- (6,542) (6,542) ABVPSF Growth and Income Class B 7,367 (4,099) 3,268 American Century VP Balanced 254,232 (97,804) 156,428 American Funds Global Growth Class 2 50,869 (27,837) 23,032 American Funds Growth Class 2 109,262 (129,733) (20,471) American Funds Growth-Income Class 2 61,827 (35,481) 26,346 American Funds International Class 2 129,665 (68,374) 61,291 Delaware VIPT Diversified Income 34,257 (9,260) 24,997 Delaware VIPT High Yield 44,216 (5,160) 39,056 Delaware VIPT REIT Service Class 130,875 (65,648) 65,227 Delaware VIPT Small Cap Value Service Class 11,245 (25,093) (13,848) Delaware VIPT Trend Service Class -- (10,067) (10,067) Dreyfus Developing Leaders 118,657 (130,587) (11,930) Dreyfus Stock Index 672,943 (320,252) 352,691 DWS VIP Equity 500 Index 33,598 (14,243) 19,355 DWS VIP Small Cap Index 17,579 (11,217) 6,362 Fidelity VIP Asset Manager 609,037 (238,264) 370,773 Fidelity VIP Contrafund Service Class 2 65,574 (76,726) (11,152) Fidelity VIP Equity-Income 627,202 (252,973) 374,229 Fidelity VIP Growth 374,964 (472,890) (97,926) Fidelity VIP Money Market 4,470 -- 4,470 Janus Aspen Series Worldwide Growth 84,949 (70,610) 14,339 Lincoln VIPT Baron Growth Opportunities Service Class -- (95,992) (95,992) Lincoln VIPT Cohen & Steers Global Real Estate 408 (267) 141 Lincoln VIPT Delaware Bond 119,338 (22,735) 96,603 Lincoln VIPT Delaware Growth and Income 33,320 (26,203) 7,117 Lincoln VIPT Delaware Managed 10,098 (3,813) 6,285 Lincoln VIPT Delaware Social Awareness 34,996 (35,866) (870) Lincoln VIPT Janus Capital Appreciation 7,798 (11,776) (3,978) Lincoln VIPT Mondrian International Value 174,160 (39,631) 134,529 Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth -- (86,392) (86,392) Lincoln VIPT Wilshire 2010 Profile 1,491 (756) 735 Lincoln VIPT Wilshire 2020 Profile 1,701 (1,015) 686 Lincoln VIPT Wilshire 2030 Profile 541 (308) 233 Lincoln VIPT Wilshire 2040 Profile 227 (296) (69) Lincoln VIPT Wilshire Aggressive Profile 5,086 (8,737) (3,651) Lincoln VIPT Wilshire Conservative Profile 5,012 (2,608) 2,404 Lincoln VIPT Wilshire Moderate Profile 21,868 (11,126) 10,742 Lincoln VIPT Wilshire Moderately Aggressive Profile 25,464 (27,111) (1,647) NB AMT Mid-Cap Growth -- (38,641) (38,641) NB AMT Partners 25,617 (49,660) (24,043) T. Rowe Price International Stock 143,650 (73,670) 69,980
See accompanying notes. L-4
DIVIDENDS NET INCREASE FROM TOTAL NET CHANGE (DECREASE) NET REALIZED NET REALIZED NET REALIZED IN UNREALIZED IN NET ASSETS GAIN (LOSS) GAIN ON GAIN (LOSS) DEPRECIATION RESULTING SUBACCOUNT ON INVESTMENTS INVESTMENTS ON INVESTMENTS ON INVESTMENTS FROM OPERATIONS ------------------------------------------------------------------------------------------------------------------------------------ ABVPSF Global Technology Class B $ (39,923) $ -- $ (39,923) $ (1,031,724) $ (1,089,279) ABVPSF Growth Class B (24,037) -- (24,037) (332,524) (363,103) ABVPSF Growth and Income Class B (59,154) 76,011 16,857 (217,239) (197,114) American Century VP Balanced (215,290) 736,648 521,358 (2,920,520) (2,242,734) American Funds Global Growth Class 2 (121,472) 238,440 116,968 (1,451,231) (1,311,231) American Funds Growth Class 2 (223,006) 1,468,336 1,245,330 (8,337,953) (7,113,094) American Funds Growth-Income Class 2 (205,667) 238,761 33,094 (1,698,121) (1,638,681) American Funds International Class 2 (192,068) 951,083 759,015 (4,441,711) (3,621,405) Delaware VIPT Diversified Income (13,072) 11,757 (1,315) (83,095) (59,413) Delaware VIPT High Yield (20,005) -- (20,005) (157,365) (138,314) Delaware VIPT REIT Service Class (810,778) 2,359,238 1,548,460 (4,240,596) (2,626,909) Delaware VIPT Small Cap Value Service Class (130,221) 162,309 32,088 (941,906) (923,666) Delaware VIPT Trend Service Class (98,731) 218,069 119,338 (702,387) (593,116) Dreyfus Developing Leaders (1,021,975) 710,975 (311,000) (5,535,404) (5,858,334) Dreyfus Stock Index 264,948 -- 264,948 (14,985,973) (14,368,334) DWS VIP Equity 500 Index (21,303) -- (21,303) (647,738) (649,686) DWS VIP Small Cap Index (50,177) 111,777 61,600 (529,503) (461,541) Fidelity VIP Asset Manager (640,493) 2,438,668 1,798,175 (9,913,312) (7,744,364) Fidelity VIP Contrafund Service Class 2 (332,037) 224,072 (107,965) (4,033,571) (4,152,688) Fidelity VIP Equity-Income (749,571) 26,484 (723,087) (13,123,322) (13,472,180) Fidelity VIP Growth (547,081) -- (547,081) (27,541,982) (28,186,989) Fidelity VIP Money Market -- -- -- -- 4,470 Janus Aspen Series Worldwide Growth (294,846) -- (294,846) (3,712,400) (3,992,907) Lincoln VIPT Baron Growth Opportunities Service Class 8,096 504,290 512,386 (4,945,987) (4,529,593) Lincoln VIPT Cohen & Steers Global Real Estate (283) -- (283) (14,298) (14,440) Lincoln VIPT Delaware Bond (95,239) 815 (94,424) (103,506) (101,327) Lincoln VIPT Delaware Growth and Income 12,684 268,646 281,330 (1,394,523) (1,106,076) Lincoln VIPT Delaware Managed (7,573) 38,183 30,610 (158,362) (121,467) Lincoln VIPT Delaware Social Awareness (10,071) 216,470 206,399 (1,667,883) (1,462,354) Lincoln VIPT Janus Capital Appreciation 7,676 -- 7,676 (588,317) (584,619) Lincoln VIPT Mondrian International Value (206,029) 261,694 55,665 (1,989,875) (1,799,681) Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth (264,314) -- (264,314) (4,118,112) (4,468,818) Lincoln VIPT Wilshire 2010 Profile (8,794) 85 (8,709) (14,286) (22,260) Lincoln VIPT Wilshire 2020 Profile (1,873) 124 (1,749) (34,467) (35,530) Lincoln VIPT Wilshire 2030 Profile (1,411) 33 (1,378) (10,742) (11,887) Lincoln VIPT Wilshire 2040 Profile (5,346) 39 (5,307) (12,477) (17,853) Lincoln VIPT Wilshire Aggressive Profile (103,286) 24,616 (78,670) (381,668) (463,989) Lincoln VIPT Wilshire Conservative Profile (13,429) 2,517 (10,912) (49,030) (57,538) Lincoln VIPT Wilshire Moderate Profile (35,661) 25,548 (10,113) (348,042) (347,413) Lincoln VIPT Wilshire Moderately Aggressive Profile (115,076) 54,225 (60,851) (1,008,781) (1,071,279) NB AMT Mid-Cap Growth (90,189) -- (90,189) (1,952,995) (2,081,825) NB AMT Partners (141,760) 808,308 666,548 (3,823,271) (3,180,766) T. Rowe Price International Stock 39,681 277,393 317,074 (4,899,101) (4,512,047)
L-5 STATEMENTS OF CHANGES IN NET ASSETS YEARS ENDED DECEMBER 31, 2007 AND 2008
ABVPSF ABVPSF GLOBAL ABVPSF GROWTH AND AMERICAN TECHNOLOGY GROWTH INCOME CENTURY VP CLASS B CLASS B CLASS B BALANCED SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------ NET ASSETS AT JANUARY 1, 2007 $ 1,388,016 $ 679,421 $ 331,426 $11,600,498 Changes From Operations: - Net investment income (loss) (16,520) (8,034) 492 125,249 - Net realized gain (loss) on investments 96,857 12,836 33,624 619,557 - Net change in unrealized appreciation or depreciation on investments 181,454 82,210 (19,962) (305,318) ----------- --------- --------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 261,791 87,012 14,154 439,488 Changes From Unit Transactions: - Contract purchases 1,231,480 199,400 265,753 909,016 - Contract withdrawals (773,472) (94,236) (145,612) (1,923,964) ----------- --------- --------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 458,008 105,164 120,141 (1,014,948) ----------- --------- --------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 719,799 192,176 134,295 (575,460) ----------- --------- --------- ----------- NET ASSETS AT DECEMBER 31, 2007 2,107,815 871,597 465,721 11,025,038 Changes From Operations: - Net investment income (loss) (17,632) (6,542) 3,268 156,428 - Net realized gain (loss) on investments (39,923) (24,037) 16,857 521,358 - Net change in unrealized depreciation on investments (1,031,724) (332,524) (217,239) (2,920,520) ----------- --------- --------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (1,089,279) (363,103) (197,114) (2,242,734) Changes From Unit Transactions: - Contract purchases 1,235,749 134,823 261,720 875,889 - Contract withdrawals (1,026,376) (231,962) (140,132) (1,645,015) ----------- --------- --------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 209,373 (97,139) 121,588 (769,126) ----------- --------- --------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (879,906) (460,242) (75,526) (3,011,860) ----------- --------- --------- ----------- NET ASSETS AT DECEMBER 31, 2008 $ 1,227,909 $ 411,355 $ 390,195 $ 8,013,178 =========== ========= ========= ===========
See accompanying notes. L-6
AMERICAN AMERICAN AMERICAN AMERICAN DELAWARE FUNDS GLOBAL FUNDS FUNDS FUNDS VIPT GROWTH GROWTH GROWTH-INCOME INTERNATIONAL DIVERSIFIED CLASS 2 CLASS 2 CLASS 2 CLASS 2 INCOME SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT -------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2007 $ 1,689,411 $12,754,062 $ 2,503,669 $ 5,682,642 $ 383,741 Changes From Operations: - Net investment income (loss) 50,744 (27,862) 25,132 43,317 9,643 - Net realized gain (loss) on investments 156,975 1,320,356 177,853 481,343 7,391 - Net change in unrealized appreciation or depreciation on investments 95,275 170,567 (100,450) 600,889 15,305 ----------- ----------- ----------- ----------- --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 302,994 1,463,061 102,535 1,125,549 32,339 Changes From Unit Transactions: - Contract purchases 1,661,434 3,803,400 2,417,105 2,785,468 454,760 - Contract withdrawals (530,068) (2,710,265) (928,707) (1,464,985) (144,647) ----------- ----------- ----------- ----------- --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 1,131,366 1,093,135 1,488,398 1,320,483 310,113 ----------- ----------- ----------- ----------- --------- TOTAL INCREASE (DECREASE) IN NET ASSETS 1,434,360 2,556,196 1,590,933 2,446,032 342,452 ----------- ----------- ----------- ----------- --------- NET ASSETS AT DECEMBER 31, 2007 3,123,771 15,310,258 4,094,602 8,128,674 726,193 Changes From Operations: - Net investment income (loss) 23,032 (20,471) 26,346 61,291 24,997 - Net realized gain (loss) on investments 116,968 1,245,330 33,094 759,015 (1,315) - Net change in unrealized depreciation on investments (1,451,231) (8,337,953) (1,698,121) (4,441,711) (83,095) ----------- ----------- ----------- ----------- --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (1,311,231) (7,113,094) (1,638,681) (3,621,405) (59,413) Changes From Unit Transactions: - Contract purchases 1,012,713 3,225,395 1,426,214 2,143,840 971,549 - Contract withdrawals (790,006) (2,369,964) (1,284,102) (1,961,276) (672,335) ----------- ----------- ----------- ----------- --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 222,707 855,431 142,112 182,564 299,214 ----------- ----------- ----------- ----------- --------- TOTAL INCREASE (DECREASE) IN NET ASSETS (1,088,524) (6,257,663) (1,496,569) (3,438,841) 239,801 ----------- ----------- ----------- ----------- --------- NET ASSETS AT DECEMBER 31, 2008 $ 2,035,247 $ 9,052,595 $ 2,598,033 $ 4,689,833 $ 965,994 =========== =========== =========== =========== ========= DELAWARE DELAWARE DELAWARE VIPT DELAWARE VIPT VIPT REIT SMALL CAP VALUE VIPT TREND HIGH YIELD SERVICE CLASS SERVICE CLASS SERVICE CLASS SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT --------------------------------------------------------- NET ASSETS AT JANUARY 1, 2007 $ 227,777 $11,983,864 $ 3,361,010 $ 1,179,023 Changes From Operations: - Net investment income (loss) 17,335 28,426 (22,836) (12,334) - Net realized gain (loss) on investments 3,900 2,664,935 286,128 37,063 - Net change in unrealized appreciation or depreciation on investments (20,253) (4,368,308) (504,351) 69,860 --------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 982 (1,674,947) (241,059) 94,589 Changes From Unit Transactions: - Contract purchases 494,417 4,300,063 1,069,897 390,978 - Contract withdrawals (162,241) (6,668,496) (1,499,447) (306,806) --------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 332,176 (2,368,433) (429,550) 84,172 --------- ----------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 333,158 (4,043,380) (670,609) 178,761 --------- ----------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2007 560,935 7,940,484 2,690,401 1,357,784 Changes From Operations: - Net investment income (loss) 39,056 65,227 (13,848) (10,067) - Net realized gain (loss) on investments (20,005) 1,548,460 32,088 119,338 - Net change in unrealized depreciation on investments (157,365) (4,240,596) (941,906) (702,387) --------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (138,314) (2,626,909) (923,666) (593,116) Changes From Unit Transactions: - Contract purchases 218,241 1,739,260 882,037 221,251 - Contract withdrawals (208,790) (2,536,013) (576,446) (372,263) --------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 9,451 (796,753) 305,591 (151,012) --------- ----------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (128,863) (3,423,662) (618,075) (744,128) --------- ----------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2008 $ 432,072 $ 4,516,822 $ 2,072,326 $ 613,656 ========= =========== =========== ===========
L-7
DREYFUS DWS VIP DWS VIP DEVELOPING DREYFUS STOCK EQUITY 500 SMALL CAP LEADERS INDEX INDEX INDEX SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT -------------------------------------------------- NET ASSETS AT JANUARY 1, 2007 $21,242,177 $ 41,535,735 $1,797,198 $1,071,171 Changes From Operations: - Net investment income (loss) (45,615) 294,736 7,198 (2,545) - Net realized gain (loss) on investments 2,018,260 1,168,324 71,742 78,016 - Net change in unrealized appreciation or depreciation on investments (4,194,295) 304,217 (17,264) (129,986) ----------- ------------ ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (2,221,650) 1,767,277 61,676 (54,515) Changes From Unit Transactions: - Contract purchases 1,327,409 3,179,011 495,714 678,880 - Contract withdrawals (4,247,673) (6,501,975) (767,886) (461,632) ----------- ------------ ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (2,920,264) (3,322,964) (272,172) 217,248 ----------- ------------ ---------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS (5,141,914) (1,555,687) (210,496) 162,733 ----------- ------------ ---------- ---------- NET ASSETS AT DECEMBER 31, 2007 16,100,263 39,980,048 1,586,702 1,233,904 Changes From Operations: - Net investment income (loss) (11,930) 352,691 19,355 6,362 - Net realized gain (loss) on investments (311,000) 264,948 (21,303) 61,600 - Net change in unrealized depreciation on investments (5,535,404) (14,985,973) (647,738) (529,503) ----------- ------------ ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (5,858,334) (14,368,334) (649,686) (461,541) Changes From Unit Transactions: - Contract purchases 1,019,254 2,704,273 488,257 325,126 - Contract withdrawals (2,106,781) (5,671,666) (278,572) (190,160) ----------- ------------ ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (1,087,527) (2,967,393) 209,685 134,966 ----------- ------------ ---------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS (6,945,861) (17,335,727) (440,001) (326,575) ----------- ------------ ---------- ---------- NET ASSETS AT DECEMBER 31, 2008 $ 9,154,402 $ 22,644,321 $1,146,701 $ 907,329 =========== ============ ========== ==========
See accompanying notes. L-8
FIDELITY VIP FIDELITY VIP ASSET CONTRAFUND FIDELITY VIP FIDELITY VIP FIDELITY VIP MANAGER SERVICE CLASS 2 EQUITY-INCOME GROWTH MONEY MARKET SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------------------------ NET ASSETS AT JANUARY 1, 2007 $26,277,239 $ 7,847,080 $ 33,061,338 $ 53,747,054 $ 18,876 Changes From Operations: - Net investment income (loss) 1,352,770 (18,431) 274,669 (96,206) 4,238 - Net realized gain (loss) on investments 736,488 2,495,183 3,168,942 282,601 -- - Net change in unrealized appreciation or depreciation on investments 1,459,615 (1,224,402) (3,242,742) 12,694,248 -- ----------- ----------- ------------ ------------ --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 3,548,873 1,252,350 200,869 12,880,643 4,238 Changes From Unit Transactions: - Contract purchases 1,679,655 2,417,674 4,254,855 5,454,347 283,920 - Contract withdrawals (4,300,106) (2,074,265) (4,790,484) (9,881,067) (157,273) ----------- ----------- ------------ ------------ --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (2,620,451) 343,409 (535,629) (4,426,720) 126,647 ----------- ----------- ------------ ------------ --------- TOTAL INCREASE (DECREASE) IN NET ASSETS 928,422 1,595,759 (334,760) 8,453,923 130,885 ----------- ----------- ------------ ------------ --------- NET ASSETS AT DECEMBER 31, 2007 27,205,661 9,442,839 32,726,578 62,200,977 149,761 Changes From Operations: - Net investment income (loss) 370,773 (11,152) 374,229 (97,926) 4,470 - Net realized gain (loss) on investments 1,798,175 (107,965) (723,087) (547,081) -- - Net change in unrealized depreciation on investments (9,913,312) (4,033,571) (13,123,322) (27,541,982) -- ----------- ----------- ------------ ------------ --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (7,744,364) (4,152,688) (13,472,180) (28,186,989) 4,470 Changes From Unit Transactions: - Contract purchases 1,793,385 2,328,843 2,607,820 3,209,517 159,034 - Contract withdrawals (3,711,537) (1,939,778) (4,826,145) (7,925,946) (286,758) ----------- ----------- ------------ ------------ --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (1,918,152) 389,065 (2,218,325) (4,716,429) (127,724) ----------- ----------- ------------ ------------ --------- TOTAL INCREASE (DECREASE) IN NET ASSETS (9,662,516) (3,763,623) (15,690,505) (32,903,418) (123,254) ----------- ----------- ------------ ------------ --------- NET ASSETS AT DECEMBER 31, 2008 $17,543,145 $ 5,679,216 $ 17,036,073 $ 29,297,559 $ 26,507 =========== =========== ============ ============ ========= JANUS LINCOLN VIPT LINCOLN VIPT ASPEN SERIES BARON GROWTH COHEN & STEERS LINCOLN VIPT WORLDWIDE OPPORTUNITIES GLOBAL REAL DELAWARE GROWTH SERVICE CLASS ESTATE BOND SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT --------------------------------------------------------- NET ASSETS AT JANUARY 1, 2007 $ 8,839,962 $11,766,705 $ -- $ 1,370,887 Changes From Operations: - Net investment income (loss) (21,585) (126,680) (13) 64,833 - Net realized gain (loss) on investments (7,683) 1,820,555 (28) (2,191) - Net change in unrealized appreciation or depreciation on investments 758,843 (1,413,423) (1,604) 1,086 ----------- ----------- -------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 729,575 280,452 (1,645) 63,728 Changes From Unit Transactions: - Contract purchases 1,759,176 2,957,090 28,572 876,259 - Contract withdrawals (2,159,316) (2,788,184) (1,501) (597,944) ----------- ----------- -------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (400,140) 168,906 27,071 278,315 ----------- ----------- -------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 329,435 449,358 25,426 342,043 ----------- ----------- -------- ----------- NET ASSETS AT DECEMBER 31, 2007 9,169,397 12,216,063 25,426 1,712,930 Changes From Operations: - Net investment income (loss) 14,339 (95,992) 141 96,603 - Net realized gain (loss) on investments (294,846) 512,386 (283) (94,424) - Net change in unrealized depreciation on investments (3,712,400) (4,945,987) (14,298) (103,506) ----------- ----------- -------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (3,992,907) (4,529,593) (14,440) (101,327) Changes From Unit Transactions: - Contract purchases 751,857 1,404,470 11,353 3,137,616 - Contract withdrawals (1,277,350) (2,421,260) (559) (2,309,146) ----------- ----------- -------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (525,493) (1,016,790) 10,794 828,470 ----------- ----------- -------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (4,518,400) (5,546,383) (3,646) 727,143 ----------- ----------- -------- ----------- NET ASSETS AT DECEMBER 31, 2008 $ 4,650,997 $ 6,669,680 $ 21,780 $ 2,440,073 =========== =========== ======== ===========
L-9
LINCOLN VIPT DELAWARE LINCOLN VIPT LINCOLN VIPT LINCOLN VIPT GROWTH AND DELAWARE DELAWARE JANUS CAPITAL INCOME MANAGED SOCIAL AWARENESS APPRECIATION SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ----------------------------------------------------------- NET ASSETS AT JANUARY 1, 2007 $ 2,669,227 $ 185,242 $ 4,158,743 $1,010,128 Changes From Operations: - Net investment income (loss) 7,745 6,504 (5,855) (8,438) - Net realized gain (loss) on investments 111,513 8,385 45,556 42,957 - Net change in unrealized appreciation or depreciation on investments 6,829 (9,741) 38,974 171,666 ----------- --------- ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 126,087 5,148 78,675 206,185 Changes From Unit Transactions: - Contract purchases 1,060,996 264,435 399,283 445,615 - Contract withdrawals (627,412) (49,324) (399,221) (271,063) ----------- --------- ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 433,584 215,111 62 174,552 ----------- --------- ----------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS 559,671 220,259 78,737 380,737 ----------- --------- ----------- ---------- NET ASSETS AT DECEMBER 31, 2007 3,228,898 405,501 4,237,480 1,390,865 Changes From Operations: - Net investment income (loss) 7,117 6,285 (870) (3,978) - Net realized gain (loss) on investments 281,330 30,610 206,399 7,676 - Net change in unrealized depreciation on investments (1,394,523) (158,362) (1,667,883) (588,317) ----------- --------- ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (1,106,076) (121,467) (1,462,354) (584,619) Changes From Unit Transactions: - Contract purchases 450,074 84,889 536,258 255,360 - Contract withdrawals (667,187) (39,577) (475,697) (255,658) ----------- --------- ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (217,113) 45,312 60,561 (298) ----------- --------- ----------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS (1,323,189) (76,155) (1,401,793) (584,917) ----------- --------- ----------- ---------- NET ASSETS AT DECEMBER 31, 2008 $ 1,905,709 $ 329,346 $ 2,835,687 $ 805,948 =========== ========= =========== ==========
See accompanying notes. L-10
LINCOLN VIPT LINCOLN VIPT MONDRIAN T. ROWE PRICE LINCOLN VIPT LINCOLN VIPT LINCOLN VIPT INTERNATIONAL STRUCTURED WILSHIRE 2010 WILSHIRE 2020 WILSHIRE 2030 VALUE MID-CAP GROWTH PROFILE PROFILE PROFILE SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT --------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2007 $ 3,706,023 $10,417,840 $ -- $ -- $ -- Changes From Operations: - Net investment income (loss) 53,193 (108,447) 49 7 5 - Net realized gain (loss) on investments 269,692 (15,250) 23 134 -- - Net change in unrealized appreciation or depreciation on investments 115,570 1,397,325 20 523 231 ----------- ----------- -------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 438,455 1,273,628 92 664 236 Changes From Unit Transactions: - Contract purchases 3,077,681 946,814 20,426 55,304 10,329 - Contract withdrawals (1,979,801) (1,990,139) (9,887) (9,825) -- ----------- ----------- -------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 1,097,880 (1,043,325) 10,539 45,479 10,329 ----------- ----------- -------- -------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS 1,536,335 230,303 10,631 46,143 10,565 ----------- ----------- -------- -------- -------- NET ASSETS AT DECEMBER 31, 2007 5,242,358 10,648,143 10,631 46,143 10,565 Changes From Operations: - Net investment income (loss) 134,529 (86,392) 735 686 233 - Net realized gain (loss) on investments 55,665 (264,314) (8,709) (1,749) (1,378) - Net change in unrealized depreciation on investments (1,989,875) (4,118,112) (14,286) (34,467) (10,742) ----------- ----------- -------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (1,799,681) (4,468,818) (22,260) (35,530) (11,887) Changes From Unit Transactions: - Contract purchases 780,421 613,404 117,049 116,193 96,459 - Contract withdrawals (1,591,372) (1,234,264) (33,010) (8,272) (8,769) ----------- ----------- -------- -------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (810,951) (620,860) 84,039 107,921 87,690 ----------- ----------- -------- -------- -------- TOTAL INCREASE (DECREASE) IN NET ASSETS (2,610,632) (5,089,678) 61,779 72,391 75,803 ----------- ----------- -------- -------- -------- NET ASSETS AT DECEMBER 31, 2008 $ 2,631,726 $ 5,558,465 $ 72,410 $118,534 $ 86,368 =========== =========== ======== ======== ======== LINCOLN VIPT LINCOLN VIPT LINCOLN VIPT LINCOLN VIPT WILSHIRE WILSHIRE WILSHIRE WILSHIRE 2040 AGGRESSIVE CONSERVATIVE MODERATE PROFILE PROFILE PROFILE PROFILE SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------------------------------------------------- NET ASSETS AT JANUARY 1, 2007 $ -- $ 313,927 $ 47,097 $ 374,540 Changes From Operations: - Net investment income (loss) 28 421 1,795 6,241 - Net realized gain (loss) on investments -- 21,391 1,085 14,893 - Net change in unrealized appreciation or depreciation on investments 170 26,150 1,377 30,706 -------- --------- --------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 198 47,962 4,257 51,840 Changes From Unit Transactions: - Contract purchases 7,410 694,460 129,426 877,787 - Contract withdrawals (1) (193,594) (13,447) (166,208) -------- --------- --------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 7,409 500,866 115,979 711,579 -------- --------- --------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS 7,607 548,828 120,236 763,419 -------- --------- --------- ---------- NET ASSETS AT DECEMBER 31, 2007 7,607 862,755 167,333 1,137,959 Changes From Operations: - Net investment income (loss) (69) (3,651) 2,404 10,742 - Net realized gain (loss) on investments (5,307) (78,670) (10,912) (10,113) - Net change in unrealized depreciation on investments (12,477) (381,668) (49,030) (348,042) -------- --------- --------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (17,853) (463,989) (57,538) (347,413) Changes From Unit Transactions: - Contract purchases 94,016 484,152 336,813 462,335 - Contract withdrawals (35,549) (280,521) (228,574) (324,253) -------- --------- --------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 58,467 203,631 108,239 138,082 -------- --------- --------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS 40,614 (260,358) 50,701 (209,331) -------- --------- --------- ---------- NET ASSETS AT DECEMBER 31, 2008 $ 48,221 $ 602,397 $ 218,034 $ 928,628 ======== ========= ========= ==========
L-11
LINCOLN VIPT WILSHIRE NB AMT T. ROWE PRICE MODERATELY MID-CAP NB AMT INTERNATIONAL AGGRESSIVE PROFILE GROWTH PARTNERS STOCK SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ----------------------------------------------------------- NET ASSETS AT JANUARY 1, 2007 $ 1,808,714 $ 2,265,747 $ 6,047,662 $ 8,728,412 Changes From Operations: - Net investment income (loss) 21,733 (39,594) (22,129) 39,682 - Net realized gain (loss) on investments 37,800 413,803 754,595 1,379,545 - Net change in unrealized appreciation or depreciation on investments 132,090 284,893 (253,414) (405,290) ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 191,623 659,102 479,052 1,013,937 Changes From Unit Transactions: - Contract purchases 1,417,811 5,050,808 816,592 1,012,641 - Contract withdrawals (157,449) (2,843,332) (1,018,001) (1,247,962) ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 1,260,362 2,207,476 (201,409) (235,321) ----------- ----------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 1,451,985 2,866,578 277,643 778,616 ----------- ----------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2007 3,260,699 5,132,325 6,325,305 9,507,028 Changes From Operations: - Net investment income (loss) (1,647) (38,641) (24,043) 69,980 - Net realized gain (loss) on investments (60,851) (90,189) 666,548 317,074 - Net change in unrealized depreciation on investments (1,008,781) (1,952,995) (3,823,271) (4,899,101) ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (1,071,279) (2,081,825) (3,180,766) (4,512,047) Changes From Unit Transactions: - Contract purchases 542,647 1,183,997 673,617 760,536 - Contract withdrawals (869,402) (1,684,316) (933,679) (1,243,128) ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (326,755) (500,319) (260,062) (482,592) ----------- ----------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (1,398,034) (2,582,144) (3,440,828) (4,994,639) ----------- ----------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2008 $ 1,862,665 $ 2,550,181 $ 2,884,477 $ 4,512,389 =========== =========== =========== ===========
See accompanying notes. L-12 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 1. ACCOUNTING POLICIES AND VARIABLE ACCOUNT INFORMATION THE VARIABLE ACCOUNT: Lincoln Life & Annuity Variable Annuity Account L (Variable Account) is a segregated investment account of Lincoln Life & Annuity Company of New York (the Company) and is registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended, as a unit investment trust. The Variable Account offers only one product (Group Variable Annuity) at one fee rate. 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 accounting principles generally accepted in the United States for unit investment trusts. INVESTMENTS: The assets of the Variable Account are divided into variable subaccounts, each of which is invested in shares of forty-three mutual funds (the Funds) of eleven diversified open-end management investment companies, each Fund with its own investment objective. The Funds are: AllianceBernstein Variable Products Series Fund, Inc. (ABVPSF): ABVPSF Global Technology Class B Fund ABVPSF Growth Class B Fund ABVPSF Growth and Income Class B Fund American Century Variable Portfolios, Inc. (American Century VP): American Century VP Balanced 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 Delaware VIP Trust (Delaware VIPT)*: Delaware VIPT Diversified Income Series Delaware VIPT High Yield Series Delaware VIPT REIT Service Class Series Delaware VIPT Small Cap Value Service Class Series Delaware VIPT Trend Service Class Series Dreyfus Variable Investment Fund (Dreyfus): Dreyfus Developing Leaders Portfolio Dreyfus Stock Index Fund DWS Scudder VIP Funds (DWS VIP): DWS VIP Equity 500 Index Fund DWS VIP Small Cap Index Fund Fidelity Variable Insurance Products Fund (Fidelity VIP): Fidelity VIP Asset Manager Portfolio Fidelity VIP Contrafund Service Class 2 Portfolio Fidelity VIP Equity-Income Portfolio Fidelity VIP Growth Portfolio Fidelity VIP Money Market Portfolio Janus Aspen Series: Janus Aspen Series Worldwide Growth Portfolio Lincoln Variable Insurance Products Trust (Lincoln VIPT)*: Lincoln VIPT Baron Growth Opportunities Service Class Lincoln VIPT Cohen & Steers Global Real Estate Lincoln VIPT Delaware Bond Lincoln VIPT Delaware Growth and Income Lincoln VIPT Delaware Managed Lincoln VIPT Delaware Social Awareness Lincoln VIPT Janus Capital Appreciation Lincoln VIPT Mondrian International Value Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth Lincoln VIPT Wilshire 2010 Profile Lincoln VIPT Wilshire 2020 Profile Lincoln VIPT Wilshire 2030 Profile Lincoln VIPT Wilshire 2040 Profile Lincoln VIPT Wilshire Aggressive Profile Lincoln VIPT Wilshire Conservative Profile Lincoln VIPT Wilshire Moderate Profile Lincoln VIPT Wilshire Moderately Aggressive Profile Neuberger Berman Advisors Management Trust (NB AMT): NB AMT Mid-Cap Growth Fund NB AMT Partners Fund T. Rowe Price International Series, Inc. (T. Rowe Price): T. Rowe Price International Stock Portfolio * Denotes an affiliate of the Lincoln Life & Annuity Company of New York. 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 the closing net asset value per share on December 31, 2008, which approximates fair value. The difference between cost and net asset value is reflected as unrealized appreciation or depreciation of investments. Effective January 1, 2008, the Variable Account adopted Financial Accounting Standards Board Statement of Financial Accounting Standards No. 157, Fair Value Measurements (FAS 157). FAS 157 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. FAS 157 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 L-13 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 Separate Account's investments in the Funds are valued within the above FAS 157 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. Adoption of FAS 157 had no effect on the recorded amounts of the Funds in the Variable Account. 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 with respect to the Variable Account's net investment income and the net realized gain on investments. INVESTMENT FUND CHANGES: During 2007, the Lincoln VIPT Cohen & Steers Global Real Estate Fund, the Lincoln VIPT Wilshire 2010 Profile Fund, the Lincoln VIPT Wilshire 2020 Profile Fund, the Lincoln VIPT Wilshire 2030 Profile Fund and the Lincoln VIPT Wilshire 2040 Profile Fund became available as investment options for Account Contract owners. Accordingly, the 2007 statement of changes in net assets and total return and investment income ratios in note 3 for these subaccounts are for the period from the commencement of operations to December 31, 2007. Also during 2007 the following funds changed their names:
PREVIOUS FUND NAME NEW FUND NAME ------------------------------------------------------------------------------------------------------------ Baron Capital Asset Fund Lincoln VIPT Baron Growth Opportunities Service Class Fund Lincoln VIPT Bond Fund Lincoln VIPT Delaware Bond Fund Lincoln VIPT Growth and Income Fund Lincoln VIPT Delaware Growth and Income Fund Lincoln VIPT Managed Fund Lincoln VIPT Delaware Managed Fund Lincoln VIPT Social Awareness Fund Lincoln VIPT Delaware Social Awareness Fund Lincoln VIPT Capital Appreciation Fund Lincoln VIPT Janus Capital Appreciation Fund Lincoln VIPT International Fund Lincoln VIPT Mondrian International Value Fund Lincoln VIPT Aggressive Growth Fund Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth Fund Lincoln VIPT Aggressive Profile Fund Lincoln VIPT Wilshire Aggressive Profile Fund Lincoln VIPT Conservative Profile Fund Lincoln VIPT Wilshire Conservative Profile Fund Lincoln VIPT Moderate Profile Fund Lincoln VIPT Wilshire Moderate Profile Fund Lincoln VIPT Moderately Aggressive Profile Fund Lincoln VIPT Wilshire Moderately Aggressive Profile Fund
2. MORTALITY AND EXPENSE GUARANTEES AND OTHER TRANSACTIONS WITH AFFILIATES Amounts are paid to the Company for mortality and expense guarantees at an effective daily rate of .0027397% (1.00% on annual basis) of each portfolio's average daily net assets within the Variable Account with the exception of Fidelity VIP Money Market Portfolio, which does not have a mortality and expense charge. The Company is responsible for all sales, general, and administrative expenses applicable to the Variable Accounts. L-14 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, 2008 follows.
INVESTMENT COMMENCEMENT UNITS TOTAL INCOME SUBACCOUNT YEAR DATE(1) FEE RATE(2) UNIT VALUE OUTSTANDING NET ASSETS RETURN(3) RATIO(4) ---------------------------------------------------------------------------------------------------------------------------------- ABVPSF GLOBAL TECHNOLOGY CLASS B 2008 1.00% $ 3.04 404,353 $ 1,227,909 -47.99% 0.00% 2007 1.00% 5.84 361,015 2,107,815 18.70% 0.00% 2006 1.00% 4.92 282,192 1,388,016 7.30% 0.00% 2005 1.00% 4.58 307,412 1,409,159 2.61% 0.00% 2004 1.00% 4.47 282,456 1,261,778 4.04% 0.00% ABVPSF GROWTH CLASS B 2008 1.00% 4.86 84,627 411,355 -43.17% 0.00% 2007 1.00% 8.55 101,904 871,596 11.54% 0.00% 2006 1.00% 7.67 88,604 679,421 -2.22% 0.00% 2005 1.00% 7.84 85,290 668,880 10.52% 0.00% 2004 1.00% 7.10 103,814 736,630 13.39% 0.00% ABVPSF GROWTH AND INCOME CLASS B 2008 1.00% 8.14 47,948 390,195 -41.29% 1.80% 2007 1.00% 13.86 33,597 465,720 3.82% 1.12% 2006 1.00% 13.35 24,821 331,426 15.82% 1.04% 2005 1.00% 11.53 17,601 202,914 3.56% 1.32% 2004 6/29/04 1.00% 11.13 5,270 58,671 7.91% 0.00% AMERICAN CENTURY VP BALANCED 2008 1.00% 22.68 353,367 8,013,178 -21.12% 2.60% 2007 1.00% 28.75 383,479 11,025,038 3.89% 2.09% 2006 1.00% 27.67 419,196 11,600,498 8.53% 1.94% 2005 1.00% 25.50 452,609 11,540,883 3.89% 1.83% 2004 1.00% 24.54 483,100 11,856,998 8.69% 1.61% AMERICAN FUNDS GLOBAL GROWTH CLASS 2 2008 1.00% 10.56 192,667 2,035,247 -39.00% 1.83% 2007 1.00% 17.32 180,377 3,123,771 13.71% 2.98% 2006 1.00% 15.23 110,923 1,689,411 19.23% 0.75% 2005 1.00% 12.77 44,107 563,437 12.94% 0.59% 2004 6/1/04 1.00% 11.31 11,463 129,655 10.73% 0.02% AMERICAN FUNDS GROWTH CLASS 2 2008 1.00% 6.37 1,421,895 9,052,595 -44.53% 0.84% 2007 1.00% 11.48 1,333,966 15,310,258 11.23% 0.81% 2006 1.00% 10.32 1,236,048 12,754,062 9.12% 0.85% 2005 1.00% 9.46 1,000,176 9,457,633 15.04% 0.76% 2004 1.00% 8.22 849,155 6,980,101 11.38% 0.18% AMERICAN FUNDS GROWTH-INCOME CLASS 2 2008 1.00% 8.40 309,462 2,598,033 -38.47% 1.75% 2007 1.00% 13.64 300,110 4,094,602 4.00% 1.70% 2006 1.00% 13.12 190,840 2,503,669 14.06% 1.94% 2005 1.00% 11.50 95,699 1,100,768 4.78% 1.80% 2004 5/24/04 1.00% 10.98 30,883 339,027 9.78% 1.26% AMERICAN FUNDS INTERNATIONAL CLASS 2 2008 1.00% 8.73 537,052 4,689,833 -42.70% 1.90% 2007 1.00% 15.24 533,371 8,128,674 18.83% 1.63% 2006 1.00% 12.83 443,079 5,682,642 17.79% 1.69% 2005 1.00% 10.89 336,191 3,660,412 20.29% 1.81% 2004 1.00% 9.05 190,345 1,722,815 18.13% 1.43% DELAWARE VIPT DIVERSIFIED INCOME 2008 1.00% 11.60 83,295 965,994 -5.49% 3.70% 2007 1.00% 12.27 59,178 726,194 6.56% 2.85% 2006 1.00% 11.52 33,323 383,741 6.85% 1.35% 2005 1.00% 10.78 25,456 274,362 -1.44% 0.95% 2004 7/12/04 1.00% 10.94 6,512 71,214 7.13% 0.00%
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INVESTMENT COMMENCEMENT UNITS TOTAL INCOME SUBACCOUNT YEAR DATE(1) FEE RATE(2) UNIT VALUE OUTSTANDING NET ASSETS RETURN(3) RATIO(4) ---------------------------------------------------------------------------------------------------------------------------------- DELAWARE VIPT HIGH YIELD 2008 1.00% $ 8.74 49,446 $ 432,072 -24.93% 8.58% 2007 1.00% 11.64 48,190 560,935 1.77% 5.22% 2006 1.00% 11.44 19,915 227,777 11.33% 4.55% 2005 7/6/05 1.00% 10.27 6,988 71,790 1.58% 0.00% DELAWARE VIPT REIT SERVICE CLASS 2008 1.00% 15.23 296,495 4,516,822 -35.93% 2.00% 2007 1.00% 23.78 333,954 7,940,485 -15.03% 1.25% 2006 1.00% 27.98 428,242 11,983,864 31.01% 1.57% 2005 1.00% 21.36 365,439 7,805,980 5.79% 1.69% 2004 1.00% 20.19 424,716 8,575,269 29.78% 1.76% DELAWARE VIPT SMALL CAP VALUE SERVICE CLASS 2008 1.00% 9.59 216,018 2,072,326 -30.76% 0.45% 2007 1.00% 13.86 194,167 2,690,399 -7.77% 0.27% 2006 1.00% 15.02 223,729 3,361,010 14.73% 0.02% 2005 1.00% 13.09 155,489 2,035,924 8.06% 0.09% 2004 6/2/04 1.00% 12.12 47,799 579,171 17.57% 0.00% DELAWARE VIPT TREND SERVICE CLASS 2008 1.00% 4.89 125,490 613,656 -47.39% 0.00% 2007 1.00% 9.29 146,079 1,357,785 9.36% 0.00% 2006 1.00% 8.50 138,720 1,179,023 6.27% 0.00% 2005 1.00% 8.00 116,084 928,449 4.56% 0.00% 2004 1.00% 7.65 121,655 930,539 11.20% 0.00% DREYFUS DEVELOPING LEADERS 2008 1.00% 14.44 634,005 9,154,402 -38.21% 0.91% 2007 1.00% 23.37 688,943 16,100,264 -11.94% 0.76% 2006 1.00% 26.54 800,394 21,242,177 2.74% 0.41% 2005 1.00% 25.83 942,684 24,351,869 4.75% 0.00% 2004 1.00% 24.66 1,061,293 26,173,119 10.23% 0.20% DREYFUS STOCK INDEX 2008 1.00% 29.04 779,859 22,644,321 -37.77% 2.10% 2007 1.00% 46.66 856,874 39,980,047 4.21% 1.71% 2006 1.00% 44.77 927,676 41,535,735 14.35% 1.65% 2005 1.00% 39.16 1,061,760 41,573,887 3.65% 1.61% 2004 1.00% 37.78 1,154,231 43,603,239 9.54% 1.81% DWS VIP EQUITY 500 INDEX 2008 1.00% 8.53 134,370 1,146,701 -37.78% 2.36% 2007 1.00% 13.72 115,690 1,586,701 4.25% 1.45% 2006 1.00% 13.16 136,605 1,797,198 14.37% 1.08% 2005 1.00% 11.50 80,809 929,549 3.63% 1.39% 2004 6/3/04 1.00% 11.10 21,439 237,961 8.83% 0.00% DWS VIP SMALL CAP INDEX 2008 1.00% 8.97 101,194 907,329 -34.78% 1.57% 2007 1.00% 13.75 89,754 1,233,904 -2.88% 0.79% 2006 1.00% 14.15 75,677 1,071,171 16.32% 0.65% 2005 1.00% 12.17 27,220 331,227 3.22% 0.65% 2004 5/26/04 1.00% 11.79 19,420 228,928 14.58% 0.00% FIDELITY VIP ASSET MANAGER 2008 1.00% 22.67 773,813 17,543,145 -29.43% 2.56% 2007 1.00% 32.12 846,875 27,205,662 14.35% 6.11% 2006 1.00% 28.09 935,393 26,277,239 6.25% 2.73% 2005 1.00% 26.44 1,040,184 27,502,351 3.01% 2.70% 2004 1.00% 25.67 1,137,009 29,184,217 4.42% 2.72% FIDELITY VIP CONTRAFUND SERVICE CLASS 2 2008 1.00% 8.87 640,385 5,679,216 -43.26% 0.86% 2007 1.00% 15.63 604,133 9,442,840 16.14% 0.78% 2006 1.00% 13.46 583,047 7,847,080 10.32% 1.01% 2005 1.00% 12.20 470,049 5,734,307 15.49% 0.09% 2004 1.00% 10.56 220,349 2,327,660 14.01% 0.19%
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INVESTMENT COMMENCEMENT UNITS TOTAL INCOME SUBACCOUNT YEAR DATE(1) FEE RATE(2) UNIT VALUE OUTSTANDING NET ASSETS RETURN(3) RATIO(4) ---------------------------------------------------------------------------------------------------------------------------------- FIDELITY VIP EQUITY-INCOME 2008 1.00% $19.58 869,886 $17,036,073 -43.23% 2.48% 2007 1.00% 34.49 948,739 32,726,578 0.52% 1.80% 2006 1.00% 34.32 963,428 33,061,338 19.00% 3.36% 2005 1.00% 28.84 990,858 28,574,126 4.81% 1.65% 2004 1.00% 27.51 1,096,403 30,166,187 10.42% 1.51% FIDELITY VIP GROWTH 2008 1.00% 25.96 1,128,544 29,297,559 -47.69% 0.79% 2007 1.00% 49.63 1,253,249 62,200,977 25.70% 0.83% 2006 1.00% 39.48 1,361,243 53,747,054 5.79% 0.40% 2005 1.00% 37.32 1,566,690 58,475,118 4.75% 0.51% 2004 1.00% 35.63 1,817,389 64,758,693 2.35% 0.27% FIDELITY VIP MONEY MARKET 2008 0.00% 17.79 1,490 26,507 3.02% 3.05% 2007 0.00% 17.27 8,674 149,761 5.21% 5.06% 2006 0.00% 16.41 1,150 18,876 4.89% 3.96% 2005 0.00% 15.65 720 11,264 3.03% 2.81% 2004 0.00% 15.19 760 11,548 1.21% 1.09% JANUS ASPEN SERIES WORLDWIDE GROWTH 2008 1.00% 8.95 519,461 4,650,997 -45.21% 1.21% 2007 1.00% 16.34 561,081 9,169,396 8.54% 0.77% 2006 1.00% 15.06 587,100 8,839,962 17.03% 1.76% 2005 1.00% 12.87 677,757 8,720,156 4.81% 1.37% 2004 1.00% 12.28 782,289 9,603,003 3.74% 1.02% LINCOLN VIPT BARON GROWTH OPPORTUNITIES SERVICE CLASS 2008 1.00% 18.71 356,393 6,669,680 -39.74% 0.00% 2007 1.00% 31.06 393,339 12,216,063 2.39% 0.00% 2006 1.00% 30.33 387,931 11,766,705 14.37% 0.00% 2005 1.00% 26.52 405,441 10,752,365 2.34% 0.00% 2004 1.00% 25.91 455,731 11,810,165 24.39% 0.00% LINCOLN VIPT COHEN & STEERS GLOBAL REAL ESTATE 2008 1.00% 4.74 4,592 21,780 -42.61% 1.53% 2007 6/6/07 1.00% 8.26 3,077 25,426 -15.71% 0.37% LINCOLN VIPT DELAWARE BOND 2008 1.00% 11.15 218,790 2,440,073 -3.89% 5.24% 2007 1.00% 11.60 147,615 1,712,929 4.40% 5.11% 2006 1.00% 11.12 123,332 1,370,887 3.67% 4.68% 2005 1.00% 10.72 100,233 1,074,664 1.62% 5.23% 2004 6/2/04 1.00% 10.55 43,998 464,220 5.36% 7.16% LINCOLN VIPT DELAWARE GROWTH AND INCOME 2008 1.00% 6.79 280,740 1,905,709 -36.41% 1.27% 2007 1.00% 10.67 302,483 3,228,899 5.06% 1.25% 2006 1.00% 10.16 262,714 2,669,227 11.24% 1.28% 2005 1.00% 9.13 329,272 3,007,330 4.49% 1.38% 2004 1.00% 8.74 229,611 2,006,948 10.88% 1.39% LINCOLN VIPT DELAWARE MANAGED 2008 1.00% 9.34 35,256 329,346 -27.69% 2.65% 2007 1.00% 12.92 31,390 405,500 3.54% 3.37% 2006 1.00% 12.48 14,848 185,242 9.47% 2.15% 2005 1.00% 11.40 12,951 147,594 3.49% 2.93% 2004 7/15/04 1.00% 11.01 6,197 68,247 9.05% 2.86% LINCOLN VIPT DELAWARE SOCIAL AWARENESS 2008 1.00% 10.90 260,225 2,835,687 -35.06% 0.98% 2007 1.00% 16.78 252,512 4,237,480 1.94% 0.86% 2006 1.00% 16.46 252,631 4,158,743 11.19% 0.86% 2005 1.00% 14.80 273,242 4,045,303 10.91% 0.86% 2004 1.00% 13.35 262,935 3,509,681 11.58% 0.97%
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INVESTMENT COMMENCEMENT UNITS TOTAL INCOME SUBACCOUNT YEAR DATE(1) FEE RATE(2) UNIT VALUE OUTSTANDING NET ASSETS RETURN(3) RATIO(4) ---------------------------------------------------------------------------------------------------------------------------------- LINCOLN VIPT JANUS CAPITAL APPRECIATION 2008 1.00% $ 4.68 172,294 $ 805,948 -41.41% 0.66% 2007 1.00% 7.98 174,123 1,390,180 19.22% 0.29% 2006 1.00% 6.70 150,835 1,010,128 8.58% 0.19% 2005 1.00% 6.17 155,088 956,529 3.17% 0.27% 2004 1.00% 5.98 141,460 845,699 4.23% 0.00% LINCOLN VIPT MONDRIAN INTERNATIONAL VALUE 2008 1.00% 12.17 216,316 2,631,726 -37.29% 4.40% 2007 1.00% 19.40 270,233 5,242,358 10.38% 2.09% 2006 1.00% 17.58 210,866 3,706,023 28.71% 4.16% 2005 1.00% 13.65 68,068 929,443 11.42% 2.98% 2004 7/14/04 1.00% 12.25 14,861 182,117 15.71% 2.16% LINCOLN VIPT T. ROWE PRICE STRUCTURED MID-CAP GROWTH 2008 1.00% 8.55 650,255 5,558,465 -43.35% 0.00% 2007 1.00% 15.09 705,708 10,648,142 12.46% 0.00% 2006 1.00% 13.42 776,449 10,417,840 8.19% 0.00% 2005 1.00% 12.40 896,718 11,120,920 8.72% 0.00% 2004 1.00% 11.41 947,058 10,803,382 12.53% 0.00% LINCOLN VIPT WILSHIRE 2010 PROFILE 2008 1.00% 7.90 9,161 72,410 -24.67% 1.99% 2007 6/6/07 1.00% 10.49 1,013 10,631 5.50% 1.26% LINCOLN VIPT WILSHIRE 2020 PROFILE 2008 1.00% 7.48 15,841 118,534 -27.62% 1.68% 2007 6/6/07 1.00% 10.34 4,464 46,143 4.03% 0.61% LINCOLN VIPT WILSHIRE 2030 PROFILE 2008 1.00% 7.16 12,067 86,368 -31.47% 1.76% 2007 6/6/07 1.00% 10.44 1,012 10,565 4.79% 0.67% LINCOLN VIPT WILSHIRE 2040 PROFILE 2008 1.00% 6.55 7,359 48,221 -36.19% 0.77% 2007 6/6/07 1.00% 10.27 741 7,607 2.95% 1.17% LINCOLN VIPT WILSHIRE AGGRESSIVE PROFILE 2008 1.00% 8.18 73,666 602,397 -41.05% 0.58% 2007 1.00% 13.87 62,192 862,755 9.91% 1.07% 2006 1.00% 12.62 24,872 313,927 15.39% 1.05% 2005 6/9/05 1.00% 10.94 3,702 40,497 9.19% 0.00% LINCOLN VIPT WILSHIRE CONSERVATIVE PROFILE 2008 1.00% 9.61 22,686 218,034 -19.25% 1.93% 2007 1.00% 11.90 14,059 167,333 6.70% 3.26% 2006 1.00% 11.15 4,222 47,097 8.25% 1.69% 2005 7/5/05 1.00% 10.30 1,487 15,326 2.64% 0.00% LINCOLN VIPT WILSHIRE MODERATE PROFILE 2008 1.00% 9.17 101,213 928,628 -27.35% 1.97% 2007 1.00% 12.63 90,110 1,137,959 8.18% 1.79% 2006 1.00% 11.67 32,085 374,540 10.92% 1.08% 2005 6/17/05 1.00% 10.52 13,113 138,007 4.34% 0.00% LINCOLN VIPT WILSHIRE MODERATELY AGGRESSIVE PROFILE 2008 1.00% 8.67 214,942 1,862,665 -34.08% 0.94% 2007 1.00% 13.15 248,025 3,260,699 8.72% 1.86% 2006 1.00% 12.09 149,575 1,808,714 13.01% 1.25% 2005 6/9/05 1.00% 10.70 72,527 776,088 6.90% 0.00% NB AMT MID-CAP GROWTH 2008 1.00% 5.09 501,407 2,550,181 -43.93% 0.00% 2007 1.00% 9.07 565,767 5,132,326 21.31% 0.00% 2006 1.00% 7.48 302,990 2,265,747 13.55% 0.00% 2005 1.00% 6.59 217,997 1,435,604 12.61% 0.00% 2004 1.00% 5.85 103,058 602,683 15.15% 0.00%
L-18
INVESTMENT COMMENCEMENT UNITS TOTAL INCOME SUBACCOUNT YEAR DATE(1) FEE RATE(2) UNIT VALUE OUTSTANDING NET ASSETS RETURN(3) RATIO(4) ---------------------------------------------------------------------------------------------------------------------------------- NB AMT PARTNERS 2008 1.00% $ 9.48 304,230 $ 2,884,477 -52.87% 0.52% 2007 1.00% 20.12 314,438 6,325,305 8.25% 0.65% 2006 1.00% 18.58 325,433 6,047,662 11.12% 0.69% 2005 1.00% 16.72 387,018 6,472,156 16.87% 1.01% 2004 1.00% 14.31 329,450 4,714,134 17.79% 0.01% T. ROWE PRICE INTERNATIONAL STOCK 2008 1.00% 10.75 419,745 4,512,389 -49.21% 1.95% 2007 1.00% 21.17 449,128 9,507,028 11.91% 1.43% 2006 1.00% 18.92 461,446 8,728,412 17.91% 1.16% 2005 1.00% 16.04 486,787 7,809,348 14.88% 1.59% 2004 1.00% 13.96 530,691 7,410,901 12.64% 1.12%
(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 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) 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. (4) 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. 4. PURCHASES AND SALES OF INVESTMENTS The aggregate cost of investments purchased and the aggregate proceeds from investments sold were as follows for 2008. AGGREGATE AGGREGATE COST OF PROCEEDS SUBACCOUNT PURCHASES FROM SALES ----------------------------------------------------------------------------- ABVPSF Global Technology Class B $1,116,127 $ 923,818 ABVPSF Growth Class B 117,215 220,786 ABVPSF Growth and Income Class B 330,016 129,052 American Century VP Balanced 1,452,297 1,372,198 American Funds Global Growth Class 2 1,110,198 624,204 American Funds Growth Class 2 3,710,161 1,409,758 American Funds Growth-Income Class 2 1,372,861 963,583 American Funds International Class 2 2,476,892 1,280,147 Delaware VIPT Diversified Income 988,091 652,339 Delaware VIPT High Yield 244,305 195,721 Delaware VIPT REIT Service Class 3,581,905 1,953,120 Delaware VIPT Small Cap Value Service Class 873,931 420,461 Delaware VIPT Trend Service Class 406,141 349,142 Dreyfus Developing Leaders 1,251,191 1,658,453 Dreyfus Stock Index 1,611,613 4,225,008 DWS VIP Equity 500 Index 463,881 233,918 DWS VIP Small Cap Index 406,671 153,397 Fidelity VIP Asset Manager 3,944,883 3,044,555 Fidelity VIP Contrafund Service Class 2 1,831,272 1,228,269 Fidelity VIP Equity-Income 1,746,326 3,598,187 Fidelity VIP Growth 1,226,450 6,033,962 L-19 AGGREGATE AGGREGATE COST OF PROCEEDS SUBACCOUNT PURCHASES FROM SALES ----------------------------------------------------------------------------- Fidelity VIP Money Market $ 333,975 $ 455,833 Janus Aspen Series Worldwide Growth 476,986 1,022,762 Lincoln VIPT Baron Growth Opportunities Service Class 1,221,088 1,830,531 Lincoln VIPT Cohen & Steers Global Real Estate 11,319 380 Lincoln VIPT Delaware Bond 3,998,830 3,073,378 Lincoln VIPT Delaware Growth and Income 616,949 558,670 Lincoln VIPT Delaware Managed 124,306 34,187 Lincoln VIPT Delaware Social Awareness 669,627 393,626 Lincoln VIPT Janus Capital Appreciation 216,811 211,707 Lincoln VIPT Mondrian International Value 929,186 1,343,607 Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth 309,398 1,023,017 Lincoln VIPT Wilshire 2010 Profile 118,010 33,150 Lincoln VIPT Wilshire 2020 Profile 116,126 8,140 Lincoln VIPT Wilshire 2030 Profile 94,695 7,076 Lincoln VIPT Wilshire 2040 Profile 90,282 32,428 Lincoln VIPT Wilshire Aggressive Profile 492,651 267,852 Lincoln VIPT Wilshire Conservative Profile 336,850 223,779 Lincoln VIPT Wilshire Moderate Profile 448,780 273,969 Lincoln VIPT Wilshire Moderately Aggressive Profile 572,598 846,516 NB AMT Mid-Cap Growth 817,574 1,356,172 NB AMT Partners 1,283,830 742,520 T. Rowe Price International Stock 875,002 1,026,168 5. INVESTMENTS The following is a summary of investments owned at December 31, 2008.
NET SHARES ASSET FAIR VALUE SUBACCOUNT OWNED VALUE OF SHARES COST OF SHARES ----------------------------------------------------------------------------------------------------- ABVPSF Global Technology Class B 115,119 $10.67 $ 1,228,318 $ 1,894,592 ABVPSF Growth Class B 31,961 12.87 411,335 569,352 ABVPSF Growth and Income Class B 30,074 12.97 390,062 592,700 American Century VP Balanced 1,517,730 5.28 8,013,615 10,624,888 American Funds Global Growth Class 2 146,660 13.88 2,035,637 3,170,894 American Funds Growth Class 2 272,056 33.27 9,051,309 14,712,094 American Funds Growth-Income Class 2 107,748 24.11 2,597,812 4,161,681 American Funds International Class 2 384,700 12.19 4,689,487 7,596,711 Delaware VIPT Diversified Income 104,418 9.25 965,866 1,014,145 Delaware VIPT High Yield 104,324 4.14 431,901 596,610 Delaware VIPT REIT Service Class 682,234 6.62 4,516,386 9,921,474 Delaware VIPT Small Cap Value Service Class 111,478 18.59 2,072,384 3,247,762 Delaware VIPT Trend Service Class 37,782 16.24 613,580 1,138,707 Dreyfus Developing Leaders 481,475 19.01 9,152,841 20,174,627 Dreyfus Stock Index 985,310 22.98 22,642,420 28,160,262 DWS VIP Equity 500 Index 119,967 9.55 1,145,681 1,643,878 DWS VIP Small Cap Index 105,051 8.63 906,590 1,503,280 Fidelity VIP Asset Manager 1,701,497 10.31 17,542,433 26,319,224 Fidelity VIP Contrafund Service Class 2 375,129 15.14 5,679,459 10,081,272 Fidelity VIP Equity-Income 1,292,491 13.18 17,035,035 29,493,568 Fidelity VIP Growth 1,245,280 23.53 29,301,433 47,139,835 Fidelity VIP Money Market 26,427 1.00 26,428 26,428 Janus Aspen Series Worldwide Growth 241,336 19.27 4,650,552 8,467,424 Lincoln VIPT Baron Growth Opportunities Service Class 385,148 17.32 6,668,844 9,554,452 Lincoln VIPT Cohen & Steers Global Real Estate 4,746 4.59 21,781 37,683 Lincoln VIPT Delaware Bond 208,907 11.68 2,439,619 2,565,119 Lincoln VIPT Delaware Growth and Income 90,856 20.97 1,905,440 2,782,455 Lincoln VIPT Delaware Managed 30,398 10.83 329,336 484,433 Lincoln VIPT Delaware Social Awareness 126,542 22.41 2,835,428 3,984,669 Lincoln VIPT Janus Capital Appreciation 56,959 14.15 805,970 1,043,171 Lincoln VIPT Mondrian International Value 197,215 13.34 2,631,442 4,117,056
L-20
NET SHARES ASSET FAIR VALUE SUBACCOUNT OWNED VALUE OF SHARES COST OF SHARES ----------------------------------------------------------------------------------------------------- Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth 722,920 $ 7.69 $5,557,808 $9,431,237 Lincoln VIPT Wilshire 2010 Profile 9,167 7.90 72,412 86,678 Lincoln VIPT Wilshire 2020 Profile 15,608 7.55 117,793 151,737 Lincoln VIPT Wilshire 2030 Profile 11,769 7.30 85,891 96,402 Lincoln VIPT Wilshire 2040 Profile 7,078 6.73 47,604 59,911 Lincoln VIPT Wilshire Aggressive Profile 72,960 8.23 600,315 924,303 Lincoln VIPT Wilshire Conservative Profile 23,010 9.47 217,952 263,453 Lincoln VIPT Wilshire Moderate Profile 102,207 9.07 927,119 1,220,723 Lincoln VIPT Wilshire Moderately Aggressive Profile 215,604 8.63 1,861,530 2,595,410 NB AMT Mid-Cap Growth 157,969 16.14 2,549,627 3,848,015 NB AMT Partners 408,120 7.11 2,901,733 5,981,149 T. Rowe Price International Stock 547,526 8.24 4,511,613 6,936,585
6. CHANGES IN UNITS OUTSTANDING The change in units outstanding for the year ended December 31, 2008 is as follows:
UNITS UNITS NET INCREASE SUBACCOUNT ISSUED REDEEMED (DECREASE) -------------------------------------------------------------------------------------- ABVPSF Global Technology Class B 267,784 (224,446) 43,338 ABVPSF Growth Class B 21,151 (38,428) (17,277) ABVPSF Growth and Income Class B 28,756 (14,405) 14,351 American Century VP Balanced 42,466 (72,578) (30,112) American Funds Global Growth Class 2 73,145 (60,855) 12,290 American Funds Growth Class 2 382,263 (294,334) 87,929 American Funds Growth-Income Class 2 138,990 (129,638) 9,352 American Funds International Class 2 175,699 (172,018) 3,681 Delaware VIPT Diversified Income 84,976 (60,859) 24,117 Delaware VIPT High Yield 20,770 (19,514) 1,256 Delaware VIPT REIT Service Class 89,951 (127,410) (37,459) Delaware VIPT Small Cap Value Service Class 76,311 (54,460) 21,851 Delaware VIPT Trend Service Class 34,194 (54,783) (20,589) Dreyfus Developing Leaders 58,145 (113,083) (54,938) Dreyfus Stock Index 76,776 (153,791) (77,015) DWS VIP Equity 500 Index 44,620 (25,940) 18,680 DWS VIP Small Cap Index 31,471 (20,031) 11,440 Fidelity VIP Asset Manager 68,211 (141,273) (73,062) Fidelity VIP Contrafund Service Class 2 197,763 (161,511) 36,252 Fidelity VIP Equity-Income 106,515 (185,368) (78,853) Fidelity VIP Growth 90,571 (215,276) (124,705) Fidelity VIP Money Market 20,996 (28,180) (7,184) Janus Aspen Series Worldwide Growth 66,678 (108,298) (41,620) Lincoln VIPT Baron Growth Opportunities Service Class 61,377 (98,323) (36,946) Lincoln VIPT Cohen & Steers Global Real Estate 1,649 (134) 1,515 Lincoln VIPT Delaware Bond 376,932 (305,757) 71,175 Lincoln VIPT Delaware Growth and Income 52,037 (73,780) (21,743) Lincoln VIPT Delaware Managed 7,906 (4,040) 3,866 Lincoln VIPT Delaware Social Awareness 43,691 (35,978) 7,713 Lincoln VIPT Janus Capital Appreciation 41,921 (43,750) (1,829) Lincoln VIPT Mondrian International Value 49,928 (103,845) (53,917) Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth 55,931 (111,384) (55,453) Lincoln VIPT Wilshire 2010 Profile 12,649 (4,501) 8,148 Lincoln VIPT Wilshire 2020 Profile 12,425 (1,048) 11,377 Lincoln VIPT Wilshire 2030 Profile 12,255 (1,200) 11,055 Lincoln VIPT Wilshire 2040 Profile 11,198 (4,580) 6,618 Lincoln VIPT Wilshire Aggressive Profile 43,841 (32,367) 11,474 Lincoln VIPT Wilshire Conservative Profile 29,825 (21,198) 8,627 Lincoln VIPT Wilshire Moderate Profile 42,044 (30,941) 11,103 Lincoln VIPT Wilshire Moderately Aggressive Profile 53,691 (86,774) (33,083) NB AMT Mid-Cap Growth 174,186 (238,546) (64,360) NB AMT Partners 53,078 (63,286) (10,208) T. Rowe Price International Stock 49,253 (78,636) (29,383)
L-21 The change in units outstanding for the year ended December 31, 2007 is as follows:
UNITS UNITS NET INCREASE SUBACCOUNT ISSUED REDEEMED (DECREASE) ---------------------------------------------------------------------------------------- ABVPSF Global Technology Class B 232,648 (153,825) 78,823 ABVPSF Growth Class B 25,472 (12,172) 13,300 ABVPSF Growth and Income Class B 21,402 (12,626) 8,776 American Century VP Balanced 36,143 (71,860) (35,717) American Funds Global Growth Class 2 108,234 (38,780) 69,454 American Funds Growth Class 2 388,827 (290,909) 97,918 American Funds Growth-Income Class 2 192,473 (83,203) 109,270 American Funds International Class 2 213,093 (122,801) 90,292 Delaware VIPT Diversified Income 39,823 (13,968) 25,855 Delaware VIPT High Yield 45,726 (17,451) 28,275 Delaware VIPT REIT Service Class 156,863 (251,151) (94,288) Delaware VIPT Small Cap Value Service Class 75,923 (105,485) (29,562) Delaware VIPT Trend Service Class 47,684 (40,325) 7,359 Dreyfus Developing Leaders 59,828 (171,279) (111,451) Dreyfus Stock Index 78,158 (148,960) (70,802) DWS VIP Equity 500 Index 41,670 (62,585) (20,915) DWS VIP Small Cap Index 52,344 (38,267) 14,077 Fidelity VIP Asset Manager 81,791 (170,309) (88,518) Fidelity VIP Contrafund Service Class 2 182,141 (161,055) 21,086 Fidelity VIP Equity-Income 132,937 (147,626) (14,689) Fidelity VIP Growth 136,201 (244,195) (107,994) Fidelity VIP Money Market 17,730 (10,206) 7,524 Janus Aspen Series Worldwide Growth 110,600 (136,619) (26,019) Lincoln VIPT Baron Growth Opportunities Service Class 98,192 (92,784) 5,408 Lincoln VIPT Cohen & Steers Global Real Estate 3,237 (160) 3,077 Lincoln VIPT Delaware Bond 78,428 (54,145) 24,283 Lincoln VIPT Delaware Growth and Income 101,124 (61,355) 39,769 Lincoln VIPT Delaware Managed 21,672 (5,130) 16,542 Lincoln VIPT Delaware Social Awareness 25,532 (25,651) (119) Lincoln VIPT Janus Capital Appreciation 62,818 (39,530) 23,288 Lincoln VIPT Mondrian International Value 173,067 (113,700) 59,367 Lincoln VIPT T. Rowe Price Structured Mid-Cap Growth 74,813 (145,554) (70,741) Lincoln VIPT Wilshire 2010 Profile 1,955 (942) 1,013 Lincoln VIPT Wilshire 2020 Profile 5,424 (960) 4,464 Lincoln VIPT Wilshire 2030 Profile 1,022 (10) 1,012 Lincoln VIPT Wilshire 2040 Profile 760 (19) 741 Lincoln VIPT Wilshire Aggressive Profile 56,925 (19,605) 37,320 Lincoln VIPT Wilshire Conservative Profile 11,058 (1,221) 9,837 Lincoln VIPT Wilshire Moderate Profile 76,385 (18,360) 58,025 Lincoln VIPT Wilshire Moderately Aggressive Profile 117,230 (18,780) 98,450 NB AMT Mid-Cap Growth 589,721 (326,944) 262,777 NB AMT Partners 45,524 (56,519) (10,995) T. Rowe Price International Stock 54,281 (66,599) (12,318)
L-22 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors of Lincoln Life & Annuity Company of New York and Contract Owners of Lincoln Life & Annuity Variable Annuity Account L We have audited the accompanying statement of assets and liabilities of Lincoln Life & Annuity Variable Annuity Account L ("Variable Account"), comprised of the subaccounts described in Note 1, as of December 31, 2008, the related statement of operations for the year or period then ended, and the related 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 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, 2008, 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 Life & Annuity Variable Annuity Account L at December 31, 2008, the results of their operations for the year or period then ended, 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 March 20, 2009 L-23 Lincoln Life & Annuity 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. 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, 2008 Statement of Operations - Year ended December 31, 2008 Statements of Changes in Net Assets - Years ended December 31, 2008 and 2007 Notes to Financial Statements - December 31, 2008 Report of Independent Registered Public Accounting Firm 3. Part B The following financial statements for Lincoln Life & Annuity Company of New York are included in Part B of this Registration Statement: Balance Sheets - Years ended December 31, 2008 and 2007 Statements of Income - Years ended December 31, 2008, 2007, and 2006 Statements of Shareholder's Equity - Years ended December 31, 2008, 2007, and 2006 Statements of Cash Flows - Years ended December 31, 2008, 2007, and 2006 Notes to Financial Statements - December 31, 2008 Report of Independent Registered Public Accounting Firm (b) List of Exhibits (1) Resolution of Board of Directors of Lincoln Life & Annuity Company of New York authorizing establishment of the Variable Account incorporated herein by reference to the Registration Statement on Form N-4 (File No. 333-10805) filed on August 27, 1996. (2) Not Applicable. (3) (a) Principal Underwriting Agreement dated May 1, 2007 incorporated herein by reference to Pre-Effective Amendment No. 1 (File No. 333-145531) filed on November 16, 2007. (b) Broker-Dealer Sales Agreement incorporated herein by reference to Pre-Effective Amendment No. 1 (File No. 333-10805) filed on September 30, 1996. (4) (a) Group Variable Annuity I Contract incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-10805) filed on April 14, 2000. (b) Group Variable Annuity II Contract incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-10805) filed on April 14, 2000. (c) Group Variable Annuity III Contract incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-10805) filed on April 14, 2000. (d) Form of Endorsement to Group Annuity Contract and Certificate incorporated herein by reference to Post-Effective Amendment No. 2 (File No. 333-10863) filed on May 1, 1998. (e) Form of Group Annuity Endorsement to Group Annuity Contract incorporated herein by reference to Post-Effective Amendment No. 5 (File No. 333-10805) filed on April 29, 1999. (f) Section 403(b) Annuity Amendment incorporated herein by reference to Post-Effective Amendment No. 10 (File No. 333-10805) filed on April 16, 2002. (g) Section 403(b) Annuity Amendment incorporated herein by reference to Post-Effective Amendment No. 10 (File No. 333-10805) filed on April 16, 2002. (h) Qualified Individual Retirement Annuity Rider incorporated herein by reference to Post-Effective Amendment No. 12 (File No. 333-10805) filed on April 6, 2004. (i) Section 403(b) Annuity Endorsement (32481-G-12/08) incorporated herein by reference to Post-Effective Amendment No. 14 (File No. 333-43373) filed on April 7, 2009 (5) (a) Application for Group Annuity Contract incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-10805) filed on April 14, 2000. (b) Participant Enrollment Form incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-10805) filed on April 14, 2000. (6) Certificate of Incorporation and By-laws of Lincoln Life & Annuity Company of New York incorporated herein by reference to Post-Effective Amendment No. 17 on Form N-6 to Registration Statement on Form S-6 (File No. 033-77496) filed on April 2, 2007. (7) Not Applicable. (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 Agreements and Amendments between Lincoln Life & Annuity Company of New York and: (i) American Century incorporated herein by reference to Post-Effective Amendment No. 6 (File No. 333-145531) filed on April 9, 2009. (ii)(a) Dreyfus Variable Investment Fund and Dreyfus Life and Annuity Index Fund, Inc. incorporated herein by reference to Pre-Effective Amendment No. 1 (File No. 333-10805) filed September 30, 1996. (Fund Participation Agreement) (b) Dreyfus Variable Investment Fund, Dreyfus Socially Responsible Growth Fund, Inc. and Dreyfus Life and Annuity Index Fund, Inc. incorporated herein by reference to Post-Effective Amendment No. 11 (File No. 333-10805) filed April 16, 2003. (Amendment) (iii) Fidelity Variable Insurance Products incorporated herein by reference to Post-Effective Amendment No. 2 on Form N-6 (File No. 333-141769) filed on April 2, 2008. (iv) Janus Aspen Series incorporated herein by reference to Post-Effective Amendment No. 2 on Form N-6 (File No. 333-141769) filed on April 2, 2008. (v) Lincoln Variable Insurance Products Trust incorporated herein by reference to Post-Effective Amendment No. 6 (File No. 333-145531) filed on April 9, 2009. (vi) Neuberger Berman Advisers Management Trust incorporated herein by reference to Post-Effective Amendment No. 2 on Form N-6 (File No. 333-141769) filed on April 2, 2008. (vii)(a) T. Rowe Price International Series, Inc. and T. Rowe Price Investment Services, Inc. incorporated herein by reference to Pre-Effective Amendment No. 1 (File No. 333-10805) filed on September 30, 1996. (Fund Participation Agreement) (b) T. Rowe Price International Series, Inc. and T. Rowe Price Investment Services, Inc. incorporated herein by reference to Post-Effective Amendment No. 11 (File No. 10805) filed on April 16, 2003. (Amendment) (c) T. Rowe Price International Series, Inc. and T. Rowe Price Investment Services, Inc. dated April 2, 2007 (Amendment) incorporated herein by reference to Post-Effective Amendment No. 2 (File No. 333-141755) filed on April 15, 2008. (viii) Alliance Variable Products Series Fund incorporated herein by reference to Post-Effective Amendment No. 6 (File No. 333-145531) filed on April 9, 2009. (ix) American Funds Insurance Series incorporated herein by reference to Post-Effective Amendment No. 26 (File No. 333-63505) filed on April 3, 2009. (x) Delaware VIP Trust incorporated herein by reference to Post-Effective Amendment No. 2 on Form N-6 (File No. 333-141769) filed on April 2, 2008. (xi) DWS Investments VIT Funds Trust incorporated herein by reference to Post-Effective Amendment No. 6 (File No. 333-141759) filed on April 15, 2009.' (xii) DWS Variable Series II (To Be Filed by Amendment) B-2 (xiii) BlackRock Variable Series Funds, Inc. (To Be Filed by Amendment) (9) Opinion and Consent of Mary Jo Ardington, Senior Counsel of The Lincoln National Life Insurance Company as to the legality of securities being issued incorporated herein by reference to Registration Statement on Form N-4 (File No. 333-141755) filed on April 2, 2007. (10) (a) Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm. (b) Power of Attorney - Principal Officers and Directors of Lincoln Life & Annuity Company of New York (11) Not Applicable (12) Not Applicable (13) Organizational Chart of The Lincoln National Insurance Holding Company System incorporated herein by reference to Post-Effective Amendment No. 29 (File No. 333-61554) filed on March 16, 2009. Item 25. Directors and Officers of the Depositor The following list contains the officers and directors of Lincoln Life & Annuity Company of New York who are engaged directly or indirectly in activities relating to Lincoln Life & Annuity Variable Annuity Account L as well as the contracts. The list also shows Lincoln Life & Annuity Company of New York's executive officers.
Name Positions and Offices with Depositor --------------------------------- --------------------------------------------------------------- J. Patrick Barrett Director 4605 Watergap Manlius, NY 13104 Charles C. Cornelio***** Executive Vice President and Chief Administrative Officer Patrick P. Coyne*** Director Frederick J. Crawford****** Executive Vice President, Chief Financial Officer and Director Robert W. Dineen*** Director Dennis R. Glass****** President George W. Henderson, III Director Granville Capital 300 N. Greene Street Greensboro, NC 27401 Mark E. Konen***** Senior Vice President and Director M. Leanne Lachman Director 870 United Nations, Plaza, #19-E New York, NY 10017 Louis G. Marcoccia Director Senior Vice President Syracuse University Crouse-Hinds Hall, Suite 620 900 S. Crouse Ave. Syracuse, NY 13244 Patrick S. Pittard Director 20 Cates Ridge Atlanta, GA 30327 Larry A. Samplatsky**** Vice President and Chief Compliance Officer Dennis L. Schoff****** Director Robert O. Sheppard* Second Vice President and General Counsel Michael S. Smith*** Assistant Vice President and Director Rise' C.M. Taylor** Vice President and Treasurer C. Suzanne Womack ****** Second Vice President and Secretary
* Principal business address is 100 Madison Street, Suite 1860, Syracuse, NY 13202 B-3 ** Principal business address is 1300 South Clinton Street, Fort Wayne, Indiana 46802 *** Principal business address is Center Square West Tower, 1500 Market Street, Suite 2900, Philadelphia, PA 19102 **** Principal business address is 350 Church Street, Hartford, CT 06103 ***** Principal business address is 100 N. Greene Street, Greensboro, NC 27401 ****** Principal business address is Radnor Financial Center, 150 Radnor Chester Road, Radnor, PA 19087 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 February 28, 2009 there were 23,937 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 Lincoln Life & Annuity Company of New York provides that Lincoln New York 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 New York, 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 New York. Certain additional conditions apply to indemnification in criminal proceedings. In particular, separate conditions govern indemnification of directors, officers, and employees of Lincoln New York in connection with suits by, or in the right of, Lincoln New York. Please refer to Article VII of the By-Laws of Lincoln New York (Exhibit no. 6 hereto) for the full text of the indemnification provisions. Indemnification is permitted by, and is subject to the requirements of, New York 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 Fund A (Group & Individual); 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. (b) Officers and Directors of Lincoln Financial Distributors, Inc.: B-4
Name Positions and Offices with Underwriter ------------------------ ------------------------------------------------ Wilford H. Fuller* President, Chief Executive Officer and Director David M. Kittredge* Senior Vice President Randal J. Freitag* Vice President and Treasurer Patrick J. Caulfield** Vice President and Chief Compliance Officer Joel Schwartz* Vice President and Director James Ryan* Vice President and Director Keith J. Ryan*** Vice President and Chief Financial Officer Linda E. Woodward*** Secretary
* Principal Business address is Radnor Financial Center, 150 Radnor Chester Road, Radnor PA 19087 ** Principal Business address is 350 Church Street, Hartford, CT 06103 *** Principal Business address is 1300 S. Clinton Street, Ft. Wayne, IN 46802 (c) N/A Item 30. Location of Accounts and Records All accounts, books, and other documents, 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 ("Lincoln Life"), 1300 South Clinton Street, Fort Wayne, Indiana 46802 pursuant to an administrative services agreement with Lincoln Life & Annuity Company of New York. Lincoln Life has entered into an agreement with Bank of New York Mellon, One Mellon Bank Center, 500 Grant Street, Pittsburgh, PA 15258, to provide accounting services for the VAA. Item 31. Management Services Not Applicable. 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 New York at the address or phone number listed in the Prospectus. (d) Lincoln New York 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 Lincoln New York. (e) Registrant hereby represents that it is relying on the American Council of Life Insurance (avail. Nov. 28, 1988) no-action letter with respect to Contracts used in connection with retirement plans meeting the requirements of Section 403(b) of the Internal Revenue Code, and represents further that it will comply with the provisions of paragraphs (1) through (4) set forth in that no-action letter. SIGNATURES (a) As required by the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets the requirements of Securities Act Rule 485(b) for effectiveness of this Registration Statement and has caused this Post-Effective Amendment No. 3 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 April, 2009. B-5 Lincoln Life & Annuity Variable Annuity Account L (Registrant) Group Variable Annuity I, II & III By: /s/John D. Weber John D. Weber--------------------------- Assistant Vice President, Lincoln Life & Annuity Company of New York (Title) LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK (Depositor) By: /s/Kelly D. Clevenger ------------------------------------ Kelly D. Clevenger Second Vice President, Lincoln Life & Annuity Company of New York (Title)
B-6 (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 April 16, 2009. Signature Title * President and Director ------------------------------ (Principal Executive Officer) Dennis R. Glass * Executive Vice President, Chief Financial Officer and Director ------------------------------ (Principal Financial Officer) Frederick J. Crawford * Executive Vice President and Chief Administrative Officer ------------------------------ Charles C. Cornelio * Director ------------------------------ J. Patrick Barrett * Director ------------------------------ Patrick P. Coyne * Director ------------------------------ Robert W. Dineen * Director ------------------------------ George W. Henderson, III * Senior Vice President and Director ------------------------------ Mark E. Konen * Director ------------------------------ M. Leanne Lachman * Director ------------------------------ Louis G. Marcoccia * Director ------------------------------ Patrick S. Pittard * Director ------------------------------ Dennis L. Schoff * Assistant Vice President and Director ------------------------------ Michael S. Smith *By:/s/Kelly D. Clevenger Pursuant to a Power of Attorney --------------------------- Kelly D. Clevenger
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