0001047469-13-006524.txt : 20130717
0001047469-13-006524.hdr.sgml : 20130717
20130528171123
ACCESSION NUMBER: 0001047469-13-006524
CONFORMED SUBMISSION TYPE: N-4/A
PUBLIC DOCUMENT COUNT: 7
FILED AS OF DATE: 20130528
DATE AS OF CHANGE: 20130603
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: LINCOLN NATIONAL VARIABLE ANNUITY ACCT L
CENTRAL INDEX KEY: 0001015343
IRS NUMBER: 350472300
STATE OF INCORPORATION: IN
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: N-4/A
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-187071
FILM NUMBER: 13875893
BUSINESS ADDRESS:
STREET 1: 1300 S CLINTON ST
STREET 2: P O BOX 1110
CITY: FORT WAYNE
STATE: IN
ZIP: 46802
BUSINESS PHONE: 2604552000
MAIL ADDRESS:
STREET 1: 1300 S CLINTON ST
STREET 2: P O BOX 1110
CITY: FORT WAYNE
STATE: IN
ZIP: 46802
FORMER COMPANY:
FORMER CONFORMED NAME: LINCOLN NATIONAL VARIABLE ANNUITY ACCT L GRP VAR ANNUITY I
DATE OF NAME CHANGE: 19960524
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: LINCOLN NATIONAL VARIABLE ANNUITY ACCT L
CENTRAL INDEX KEY: 0001015343
IRS NUMBER: 350472300
STATE OF INCORPORATION: IN
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: N-4/A
SEC ACT: 1940 Act
SEC FILE NUMBER: 811-07645
FILM NUMBER: 13875894
BUSINESS ADDRESS:
STREET 1: 1300 S CLINTON ST
STREET 2: P O BOX 1110
CITY: FORT WAYNE
STATE: IN
ZIP: 46802
BUSINESS PHONE: 2604552000
MAIL ADDRESS:
STREET 1: 1300 S CLINTON ST
STREET 2: P O BOX 1110
CITY: FORT WAYNE
STATE: IN
ZIP: 46802
FORMER COMPANY:
FORMER CONFORMED NAME: LINCOLN NATIONAL VARIABLE ANNUITY ACCT L GRP VAR ANNUITY I
DATE OF NAME CHANGE: 19960524
0001015343
S000011243
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
C000126536
Lincoln Secured Retirement Income Version 4
N-4/A
1
a2214070zn-4a.txt
N-4/A
As filed with the Securities and Exchange Commission on May 28, 2013
1933 Act Registration No. 333-187071
1940 Act Registration No. 811-07645
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. 1/X/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 41/X/
Lincoln National Variable Annuity Account L
(Exact Name of Registrant)
Lincoln Secured Retirement IncomeSM Version 4
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(Name of Depositor)
1300 South Clinton Street
Post Office Box 1110
Fort Wayne, Indiana 46801
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number, Including Area Code: (260) 455-2000
Adam C. Ciongoli, Esquire
The Lincoln National Life Insurance Company
1300 South Clinton Street
Post Office Box 1110
Fort Wayne, IN 46801
(Name and Address of Agent for Service)
Copy to:
Mary Jo Ardington, Esquire
The Lincoln National Life Insurance Company
1300 South Clinton Street
Post Office Box 1110
Fort Wayne, IN 46801
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of the Registration Statement.
Title of Securities being registered:
Interests in a separate account under individual flexible
payment deferred variable annuity contracts.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a)
shall determine.
Lincoln Secured Retirement IncomeSM Version 4
Lincoln National Variable Annuity Account L
Group Variable Annuity Contract
Home Office:
The Lincoln National Life Insurance Company
1300 South Clinton Street
Fort Wayne, IN 46802
1-800-341-0441
This prospectus describes a group variable annuity contract with a Guaranteed
Benefit for covered Participants that is issued by The Lincoln National Life
Insurance Company (Lincoln Life or Company). This prospectus is for use with
certain 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 Participant Account Value and to provide retirement
income over a certain period of time, or for life, subject to certain
conditions. If the Annuitant dies before the Annuity Commencement Date, a Death
Benefit may be payable.
This contract is sold to qualified retirement plans to provide Participants
with guaranteed lifetime periodic withdrawals.
All Purchase Payments will be placed in Lincoln National Variable Annuity
Account L (Variable Annuity Account (VAA)). The VAA is a segregated investment
account of Lincoln Life. You take all the investment risk on the Contract Value
derived from Purchase Payments. If the Subaccount makes money, your Contract
Value goes up; if the Subaccount loses money, it goes down. How much it goes up
or down depends on the performance of the fund. We do not guarantee how the
Subaccount or its fund will perform. Also, neither the U.S. Government nor any
federal agency insures or guarantees your investment in the contract. The
Purchase Payments are not bank deposits and the contract is not endorsed by any
bank or government agency.
The available fund is: LVIP Protected Profile Moderate Fund (fund), a series of
the Lincoln Variable Insurance Products Trust. The fund is a fund of funds and
invests substantially all of its assets in other funds.
This prospectus gives you information about the contract that you should know
before deciding to buy a contract and make Purchase Payments. You should also
review the prospectus for the fund and keep all prospectuses for future
reference.
Neither the SEC nor any state securities commission has approved this contract
or determined that this prospectus is accurate or complete. Any representation
to the contrary is a criminal offense.
More information about the contract is in the current Statement of Additional
Information (SAI), dated the same date as this prospectus. The SAI is
incorporated by reference into this prospectus and is legally part of this
prospectus. For a free copy of the SAI, write The Lincoln National Life
Insurance Company, P.O. Box 2340, Fort Wayne, IN 46801 or call 1-800-341-0441.
The SAI and other information about Lincoln Life and the VAA are also available
on the SEC's website (http://www.sec.gov). There is a table of contents for the
SAI on the last page of this prospectus.
____, 2013
1
Table of Contents
Item Page
Special Terms 3
Expense Tables 5
Summary of Common Questions 6
The Lincoln National Life Insurance Company 7
Variable Annuity Account (VAA) 8
Charges and Other Deductions 10
The Contract 11
Guaranteed Withdrawal Benefit 12
Surrenders and Withdrawals 18
Annuity Payouts 19
Federal Tax Matters 20
Voting Rights 23
Distribution of the Contracts 23
Return Privilege 24
Other Information 25
Legal Proceedings 25
Statement of Additional Information
Table of Contents for Lincoln National Variable Annuity Account L 26
2
Special Terms
In this prospectus, the following terms have the indicated meanings:
Account or Variable Annuity Account (VAA)-The segregated investment account,
Account L, into which we set aside and invest the assets of the contract
offered in this prospectus.
Accumulation Unit-A measure used to calculate Contract Value for the contract
before the Annuity Commencement Date.
Additional Plan Expenses-The maximum amount of Plan expenses that can be
deducted from the contract on an annual basis that will not reduce the
Guaranteed Withdrawal Benefit. The annual maximum amount is specified in the
contract.
Annuitant-The person upon whose life the annuity payments are based.
Annuity Commencement Date-The Valuation Date when funds are withdrawn to
provide a fixed dollar payout for payment of annuity benefits under the Annuity
Payout option you select .
Annuity Payout- An amount paid at regular intervals after the Annuity
Commencement Date under one of several options available to the Annuitant
and/or any other payee. This amount is paid on a fixed basis.
Automatic Annual Step-up-a feature that provides an automatic step-up of the
Income Base to the Participant Account Value, subject to certain conditions.
Benefit Year- For each Participant, the 12-month period starting with the date
the initial contribution is made to the group annuity contract for a
Participant, and starting with each anniversary of the date of the initial
contribution after that.
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 (you, your, owner)-An employer or a Plan sponsor, a trustee of a
trust or a custodian of: (1) a qualified pension or profit sharing plan under
Section 401(a) of the Internal Revenue Code, or "tax code"; (2) an Individual
Retirement Annuity under Section 408 of the tax code; (3) a tax deferred
annuity under Section 403(b) of the tax code; or (4) a governmental deferred
compensation plan under Section 457 of the tax code. Additional Contractowners
may be allowed upon approval by us.
Contract Value-At a given time before the Annuity Commencement Date, the total
value of all Accumulation Units for a contract.
Contract Year-Each one-year period starting with the effective date of the
contract and starting with each contract anniversary after that.
Death Benefit-Before the Annuity Commencement Date, the amount payable to a
designated Beneficiary if the Participant dies.
Excess Withdrawals-Amounts withdrawn from the contract which may decrease or
eliminate guarantees under the Guaranteed Withdrawal Benefit. All withdrawals
are Excess Withdrawals except withdrawals to provide the Guaranteed Annual
Income, the Guaranteed Withdrawal Benefit charge and the Additional Plan
Expenses.
Good Order-The actual receipt at our Home Office of the requested transaction
in writing or by other means we accept, along with all information and
supporting legal documentation necessary to effect the transaction. The forms
we provide will identify the necessary documentation. We may, in our sole
discretion, determine whether any particular transaction request is in Good
Order, and we reserve the right to change or waive any Good Order requirements
at any time.
Guaranteed Annual Income (GAI)-The guaranteed periodic withdrawal amount
available from the Participant Account Value each Benefit Year for the life of
a Participant and spouse (if applicable).
Guaranteed Annual Income Effective Date-The Valuation Date the request to
receive Guaranteed Annual Income amounts for a Participant is approved by the
Home Office.
Guaranteed Withdrawal Benefit or Benefit-The feature of this contract that
provides guaranteed lifetime periodic withdrawals called GAI that may increase
based on Automatic Annual Step-ups and also age-based increases to the
withdrawal amount, regardless of investment performance of the contract and
provided certain conditions are met.
Guaranteed Withdrawal Benefit Effective Date (GWB Effective Date)-The date of
the first Purchase Payment into the VAA by the Contractowner on behalf of the
Participant.
Income Base-A value used to calculate the Guaranteed Annual Income amount. The
amount of the Income Base varies for each Participant and is adjusted as set
forth in this prospectus.
Lincoln Life (we, us, our, Company)-The Lincoln National Life Insurance
Company.
Participant-A person defined as a Participant in the Plan, who has enrolled
under a contract, on whose behalf Lincoln Life maintains a Participant Account
Value. This individual is also the Annuitant.
Participant Account Value-The Participant's share of the Contract Value.
Plan-The retirement program that an employer offers to its employees for which
a contract is used to accumulate funds.
Purchase Payments-The sum of all amounts paid into the contract. Purchase
Payments are allocated to the LVIP Protected Profile Moderate Fund and are used
to fund the Guaranteed Withdrawal Benefits under the contract.
3
Subaccount-The portion of the VAA that reflects investments in Accumulation
Units of the fund available under the contract.
Valuation Date-Each day the New York Stock Exchange (NYSE) is open for trading.
Valuation Period-The period starting at the close of trading (normally 4:00
p.m. New York time) on each day that the NYSE is open for trading (Valuation
Date) and ending at the close of such trading on the next Valuation Date.
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 you will pay at the time
that you buy the contract or surrender the contract.
CONTRACTOWNER TRANSACTION EXPENSES
There are no sales charges, deferred sales charges, or surrender charges associated with
this contract.
The next table describes the fees and expenses that you will pay periodically
during the time that you own the contract, not including fund fees and
expenses.
Separate Account Annual Expense (as a percentage of average daily net assets in the
Subaccount):
Mortality and Expense Risk and Administrative Charge.................................... 0.65%
Guaranteed Withdrawal Benefit1............................................................
Guaranteed Maximum Annual Charge........................................................ 2.04%
Current Annual Charge................................................................... 1.00%
(1) As percentage of the Income Base (initial Purchase Payment), as increased
for subsequent Purchase Payments, Automatic Annual Step-ups and decreased
upon an Excess Withdrawal. The current monthly charge is 0.0833%, not to
exceed the guaranteed maximum monthly percentage charge of 0.17%. This
charge is deducted from the Participant Account Value on a monthly basis.
The next item shows the minimum and maximum total annual operating expenses
charged by the funds that you may pay periodically during the time that you own
the contract. The expenses are for the year ended December 31, 2012. More
detail concerning each fund's fees and expenses is contained in the prospectus
for each fund.
Minimum Maximum
--------- --------
Total Annual Fund Operating Expenses (expenses that are deducted from
fund assets, including management fees, distribution and/or service
(12b-1) fees, and other expenses)................................... 0.79% 0.79%
The following table shows the expenses charged by the fund for the year ended
December 31, 2012:
(as a percentage of each fund's average net assets):
Other
Management 12b-1 Fees Expenses
Fees (before (before any (before any
any waivers/ waivers/ waivers/
reimburse- reimburse- reimburse-
ments) + ments) + ments) +
LVIP Protected Profile Moderate Fund* 0.25% 0.00% 0.02%
Total
Total Total Expenses
Expenses Contractual (after
Acquired (before any waivers/ Contractual
Fund waivers/ reimburse- waivers/
Fees and reimburse- ments reimburse-
Expenses = ments) (if any) ments)
LVIP Protected Profile Moderate Fund* 0.52% 0.79% 0.00% 0.79%
* The AFFE has been restated to reflect the current expenses of the fund. The
Total Annual Fund Operating Expenses do not correlate to the ratio of
expenses to the average net assets appearing in the Financial Highlights
table which reflects only the operating expenses of the fund and does not
include AFFE.
The fund has reserved the right to impose fees when funds shares are redeemed
within a specified period of time of purchase ("redemption fees") not reflected
in the table above. There are no redemption fees at this time.
For information concerning compensation paid for the sale of contracts, see
Distribution of the Contracts.
5
EXAMPLES
These examples are intended to help you compare the cost of investing in the
contract with the cost of investing in other variable annuity contracts. These
costs include separate account annual expenses, benefit charges and fund fees
and expenses.
The examples assume that you invest $10,000 in the contract for the time
periods indicated, and that your investment has a 5% annual return on assets
and the maximum fees and expenses of the fund. The examples also assume that
the guaranteed maximum contract charges are in effect. Although your actual
costs may be higher or lower, based on these assumptions, your costs would be:
1) If you surrender your contract at the end of the applicable time period:
1 year 3 years 5 years 10 years
-------- --------- --------- ---------
$349 $1,064 $1,800 $3,739
2) If you annuitize or do not surrender your contract at the end of the
applicable time period:
1 year 3 years 5 years 10 years
-------- --------- --------- ---------
$349 $1,064 $1,800 $3,739
For more information - See Charges and Other Deductions in this prospectus.
These examples should not be considered a representation of past or future
expenses. Actual expenses may be more or less than those shown.
Summary of Common Questions
What kind of contract is this? It is a group variable annuity contract between
the Contractowner and Lincoln Life that will provide a Guaranteed Withdrawal
Benefit to Participants who have allocated Purchase Payments to this contract.
See The Contract. This prospectus provides a general description of the
contract. Certain benefits, features, and charges may vary in certain states.
You should refer to your contract for any state-specific provisions. All
material state variations are discussed in this prospectus.
What is the Variable Annuity Account (VAA)? It is a separate account we
established under Indiana insurance law, and registered with the SEC as a unit
investment trust. VAA assets are allocated to the Subaccount. VAA assets are
not chargeable with liabilities arising out of any other business which we may
conduct. Remember that Contractowners and Participants in the VAA benefit from
any gain, and take a risk of any loss in the value of the securities in the
fund's portfolios. See Variable Annuity Account.
What is my investment choice? The VAA applies your Purchase Payments to buy
shares in the LVIP Protected Profile Moderate Fund (fund). In turn, the fund
holds a portfolio of securities consistent with its investment policy. See
Investments of the Variable Annuity Account - Description of the Fund.
Who invests the money? The investment adviser for the fund is Lincoln
Investment Advisors Corporation. See Investments of the Variable Annuity
Account - Description of the Fund.
How does the contract work? If we approve your application, we will send you a
contract. When you make Purchase Payments, you buy Accumulation Units. This
contract will provide Participants with a Guaranteed Withdrawal Benefit if all
conditions are met. If you or the Participant, if applicable, decides to
annuitize the Participant Account Value to receive an Annuity Payout, the
Accumulation Units are withdrawn to provide a fixed Annuity Payout.
Participants receive a group annuity certificate which covers their rights in
the group annuity contract which include the right to receive a Guaranteed
Withdrawal Benefit, a Death Benefit or an Annuity Payout if conditions are met.
The Participant's share of the Contract Value is called the Participant Account
Value. See The Contracts.
What charges are there under the contract? We apply a charge to the daily net
asset value of the VAA that consists of a mortality and expense risk and
administrative charge. There is an additional, monthly charge for the
Guaranteed Withdrawal Benefit. See Expense Tables and also the Charges and
Other Deductions section of this prospectus.
The fund's investment management fee, expenses and expense limitations, if
applicable, are more fully described in the Expense Tables and also the
prospectus for the fund.
For information about the compensation we pay for sales of contracts, see
Distribution of the Contracts.
What Purchase Payments must be made, and how often? Subject to the minimum
payment amounts, the payments are completely flexible. See The Contracts -
Purchase Payments.
What is the Guaranteed Withdrawal Benefit? This feature provides on an annual
basis guaranteed lifetime periodic withdrawals up to a guaranteed amount
(referred to as Guaranteed Annual Income amounts) based on an Income Base,
Automatic Annual Step-ups to the Income Base, and the potential for age-based
increases to the Guaranteed Annual Income amount. Withdrawals may be made up to
the Guaranteed Annual Income amount as long as that amount is greater than
zero. The Income Base is not available as a separate
6
benefit upon death or surrender and is increased by subsequent Purchase
Payments, Automatic Annual Step-ups to the Income Base and is decreased by
certain withdrawals in accordance with provisions described in this prospectus.
How will my Annuity Payouts be calculated? If a Participant decides to
annuitize, the Participant may select an annuity option and start receiving
Annuity Payouts from the contract as a fixed option. See Annuity Payouts -
Annuity Options.
What happens if the Participant dies before annuitization? Depending upon the
Plan, the Beneficiary may receive a Death Benefit and have options as to how
the Death Benefit is paid. The Death Benefit will be equal to the Participant
Account Value. See Guaranteed Withdrawal Benefit - Death Prior to the Annuity
Commencement Date.
May the Participant surrender the Participant account or make a withdrawal?
Yes, subject to contract requirements and to the restrictions of any qualified
retirement plan for which the contract was purchased. See The Contracts -
Surrenders and Withdrawals. A portion of surrender or withdrawal proceeds may
be taxable. In addition, if the Participant decides to take a distribution
before age 591/2, a 10% Internal Revenue Service (IRS) tax penalty may apply. A
surrender or a withdrawal also may be subject to 20% withholding. See Federal
Tax Matters.
Do Participants get a free look at their certificate? A Participant can cancel
a certificate within twenty days (in some states longer) of the date the
Participant receives the certificate. The Participant must give notice to the
Home Office. See Return Privilege.
Where may I find more information about Accumulation Unit values? Because the
Subaccount which is available under the contract did not begin operation before
the date of this prospectus, financial information for the Subaccount is not
included in this prospectus or in the SAI.
Investment Results
The VAA advertises the annual performance of the Subaccounts for the fund on
both a standardized and non-standardized basis.
The standardized calculation measures average annual total return. This is
based on a hypothetical $1,000 payment made at the beginning of a one-year, a
five-year and a 10-year period. This calculation reflects all fees and charges
that are or could be imposed on all Contractowner accounts.
The non-standardized calculation compares changes in Accumulation Unit values
from the beginning of the most recently completed calendar year to the end of
that year. It may also compare changes in Accumulation Unit values over shorter
or longer time periods. This calculation reflects mortality and expense risk
charges. It also reflects management fees and other expenses of the fund.
The Lincoln National Life Insurance Company
The Lincoln National Life Insurance Company (Lincoln Life or Company),
organized in 1905, is an Indiana-domiciled insurance company, engaged primarily
in the direct issuance of life insurance contracts and annuities. Lincoln Life
is wholly owned by Lincoln National Corporation (LNC), a publicly held
insurance and financial services holding company incorporated in Indiana.
Lincoln Life is obligated to pay all amounts promised to policy owners under
the policies.
Any guarantees under the contract that exceed your Contract Value, such as
those associated with a Guaranteed Withdrawal Benefit 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. With
respect to the issuance of the contracts, Lincoln Life does not file periodic
financial reports with the SEC pursuant to the exemption for life insurance
companies provided under Rule 12h-7 of the Securities Exchange Act of 1934.
We issue other types of insurance policies and financial products as well, and
we also pay our obligations under these products from our assets in the general
account. Moreover, unlike assets held in the VAA, the assets of the general
account are subject to the general liabilities of the Company and, therefore,
to the Company's general creditors. In the event of an insolvency or
receivership, payments we make from our general account to satisfy claims under
the contract would generally receive the same priority as our other
Contractowner obligations.
The general account is not segregated or insulated from the claims of the
insurance company's creditors. Investors look to the financial strength of the
insurance companies for these insurance guarantees. Therefore, guarantees
provided by the insurance company as to benefits promised in the prospectus are
subject to the claims paying ability of the insurance company and are subject
to the risk that the insurance company may not be able to cover or may default
on its obligations under those guarantees.
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
7
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 46801-2340, 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.
Lincoln Financial Group is the marketing name for Lincoln National Corporation
(NYSE:LNC) and its affiliates. Through its affiliates, Lincoln Financial Group
offers annuities, life, group life and disability insurance, 401(k) and 403(b)
plans, and comprehensive financial planning and advisory services.
Variable Annuity Account (VAA)
On April 29, 1996, the VAA was established as an insurance company separate
account under Indiana law. It is registered with the SEC as a unit investment
trust under the provisions of the Investment Company Act of 1940 (1940 Act).
The VAA is a segregated investment account under Indiana law, meaning that its
assets may not be charged with liabilities resulting from any other business
that we may conduct. Income, gains and losses, whether realized or not, from
assets allocated to the VAA are, in accordance with the applicable contracts,
credited to or charged against the VAA. They are credited or charged without
regard to any other income, gains or losses of Lincoln Life. We are the issuer
of the contract and the obligations set forth in the contract, other than those
of the Contractowner, are ours. The VAA satisfies the definition of separate
account under the federal securities laws. We do not guarantee the investment
performance of the VAA. Any investment gain or loss depends on the investment
performance of the fund. The Contractowner and Participant assume the full
investment risk for all amounts placed in the VAA.
Financial Statements
The December 31, 2012 financial statements of the VAA and the December 31, 2012
consolidated financial statements of Lincoln Life are located in the SAI. If
you would like a free copy of the SAI, complete and mail the request on the
last page of this prospectus, or call 1-800-341-0441.
Investments of the Variable Annuity Account
Any Purchase Payments that you or the Participant, if authorized by the
Contractowner, allocate to the Subaccount will be allocated to the Standard
Class of the fund. Shares of the fund will be sold at net asset value with no
initial sales charge to the VAA in order to fund the contracts. The fund is
required to redeem fund shares at net asset value upon our request.
Investment Adviser
Lincoln Investment Advisors Corporation (LIA) is the investment adviser for the
fund. LIA is registered under the Investment Advisers Act of 1940. As
compensation for its services to the fund, the investment adviser receives a
fee from the fund which is accrued daily and paid monthly. This fee is based on
the net assets of the fund, as defined in the prospectus for the fund.
Certain Payments We Receive with Regard to the Fund
With respect to the fund, 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 fund attributable to
the contracts along with certain other
8
variable contracts issued or administered by us (or an affiliate). These
percentages are negotiated and the amount we receive may be substantial. We (or
our affiliates) may profit from these payments 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 and
Participants, through their indirect investment in the funds, bear the costs of
these investment advisory fees (see the fund's prospectus for more
information). Additionally, a fund's adviser and/or distributor or its
affiliates may provide us with certain services that assist us in the
distribution of the contracts and may pay us and/or certain affiliates amounts
for marketing programs and sales support, as well as amounts to participate in
training and sales meetings.
Description of the Fund
The Subaccount of the VAA is invested solely in shares of the LVIP Protected
Profile Moderate Fund, a fund of funds.
The fund offered as part of this contract may have similar investment
objectives and policies to other portfolios managed by the adviser. The
investment results of the fund, however, may be higher or lower than the other
portfolios that are managed by the adviser or sub-adviser. There can be no
assurance, and no representation is made, that the investment results of the
fund will be comparable to the investment results of any other portfolio
managed by the adviser or sub-adviser, if applicable.
The fund invests substantially all of its assets in other funds. As a result,
you will pay fees and expenses at both fund levels. This will reduce your
investment return. This arrangement is referred to as funds of funds. Funds of
funds structures may have higher expenses than funds that invest directly in
debt or equity securities.
Certain funds may employ hedging strategies to provide for downside protection
during sharp downward movements in equity markets. The cost of these hedging
strategies could limit the upside participation of the fund in rising equity
markets relative to other funds. The Guaranteed Withdrawal Benefit under the
contract also provides protection in the event of a market downturn. Likewise,
there is an additional cost associated with the Guaranteed Withdrawal Benefit
which can limit the contract's upside participation in the markets. You should
consult with your financial representative to determine if the combination of
investment choice and contract purchases (if any) are appropriate for you.
Following is a brief summary of the fund description. More detailed information
may be obtained from the current prospectus for the fund. You should read the
fund prospectus that accompanies this prospectus carefully before investing. A
prospectus for the fund is available by contacting us. In addition, if you
receive a summary prospectus for the fund, you may obtain a full statutory
prospectus by referring to the contact information for the fund company on the
cover page of the summary prospectus. Please be advised that there is no
assurance that the fund will achieve its stated objective.
Lincoln Variable Insurance Products Trust, advised by Lincoln Investment
Advisors Corporation.
o LVIP Protected Profile Moderate Fund (Standard Class): Balance between high
current income with growth of capital; a fund of funds.
Fund Shares
We will purchase shares of the fund at net asset value and direct them to the
Subaccount of the VAA. We will redeem sufficient shares of the fund to pay
Annuity Payouts, Death Benefits, surrender/withdrawal proceeds or for other
purposes described in the contract. Redeemed shares are retired, but they may
be reissued later.
Shares of the fund are not sold directly to the general public. They are sold
to us, and may be sold to other insurance companies, for investment of the
assets of the Subaccount established by those insurance companies to fund
variable annuity and variable life insurance contracts.
When a fund sells any of its shares both to variable annuity and to variable
life insurance separate accounts, it is said to engage in mixed funding. When a
fund sells any of its shares to separate accounts of unaffiliated life
insurance companies, it is said to engage in shared funding.
The fund currently engages in mixed and shared funding. Therefore, due to
differences in redemption rates or tax treatment, or other considerations, the
interest of various Contractowners participating in a fund could conflict. The
fund's Board of Directors will monitor for the existence of any material
conflicts, and determine what action, if any, should be taken. The fund does
not foresee any disadvantage to 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 fund are automatically
reinvested in shares of the distributing funds at their net asset value on the
date of distribution. Dividends are not paid out to Contractowners as
additional units, but are reflected as changes in unit values.
9
Addition, Deletion or Substitution of Investments
We reserve the right, within the law, to make certain changes to the structure
and operation of the VAA at our discretion and without your consent. We may
add, delete, or substitute the fund for all 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 the Subaccount to
allocations of Purchase Payments or Contract Value, or both, at any time in our
sole discretion. The fund, which sells shares to the Subaccount pursuant to a
participation agreement, also may terminate the agreement and discontinue
offering its shares to the Subaccount. A substitution might also occur if
shares of a fund should no longer be available, or if investment in the fund's
shares should become inappropriate, in the judgment of our management, for the
purposes of the contract, or for any other reason in our sole discretion.
If the Subaccount or fund is closed to future Purchase Payments, we may add a
new investment option to the contract. As an alternative, we may substitute a
new fund for the prior fund option, after obtaining any necessary approval of
the SEC and upon written notice to you. At least one variable investment option
will be available at all times.
We also may:
o remove, combine, or add Subaccounts and make the new Subaccounts available
to you at our discretion;
o transfer assets supporting the contract from one Subaccount to another or
from the VAA to another separate account;
o combine the VAA with other separate accounts and/or create new separate
accounts;
o deregister the VAA under the 1940 Act; and
o operate the VAA as a management investment company under the 1940 Act or as
any other form permitted by law.
We may modify the provisions of the contract to reflect changes to the
Subaccount and the VAA and to comply with applicable law. We will not make any
changes without any necessary approval by the SEC. We will also provide you
written notice.
Charges and Other Deductions
We will deduct the charges described below to cover our costs and expenses,
services provided and risks assumed under the contracts. We incur certain costs
and expenses for the distribution and administration of the contracts and for
paying the benefits under the contracts.
Our administrative services include:
o processing applications for and issuing the contracts;
o processing purchases and redemptions of fund shares as required;
o maintaining records;
o administering Annuity Payouts;
o furnishing accounting and valuation services (including the calculation and
monitoring of daily Subaccount values);
o reconciling and depositing cash receipts;
o providing contract confirmations; and
o providing toll-free and website inquiry services.
The benefits we provide include:
o a Guaranteed Withdrawal Benefit;
o Annuity Payout benefits; and
o cash surrender value benefits.
The risks we assume include:
o the risk that Annuitants receiving Annuity Payouts live longer than we
assumed when we calculated our guaranteed rates (these rates are
incorporated in the contract and cannot be changed);
o the risk that lifetime payments to individuals from the Guaranteed
Withdrawal Benefit will exceed the Contract Value; and
o the risk that our costs in providing the services will exceed our revenues
from contract charges (which we cannot change).
The amount of a charge may not necessarily correspond to the costs associated
with providing the services or benefits indicated by the description of the
charge. Any remaining expenses will be paid from our general account which may
consist, among other things, of proceeds derived from mortality and expense
risk charges deducted from the VAA. We may profit from one or more of the fees
and charges deducted under the contract. We may use these profits for any
corporate purpose, including financing the distribution of the contracts.
10
Deductions from the VAA
We apply to the daily net asset value of the Subaccount a charge which is equal
to an annual rate of:
Mortality and expense risk and administrative charge..... 0.65%
Guaranteed Withdrawal Benefit charge: The annual charge for this feature is
currently 1.00% (0.0833% monthly). This charge is applied to the Income Base
(initial Purchase Payment), as increased for subsequent Purchase Payments,
Automatic Annual Step-ups, and decreased for Excess Withdrawals. We will deduct
the cost of this benefit from the Participant Account Value on a monthly basis,
with the first deduction occurring on the Valuation Date on or next following
the one-month anniversary of the Guaranteed Withdrawal Benefit Effective Date.
The amount we deduct will increase or decrease as the Income Base increases or
decreases, because the charge is based on the Income Base. See Guaranteed
Withdrawal Benefit - Income Base section for a discussion and example of the
impact of the changes to the Income Base.
The percentage charge may increase no more frequently than once in a 12 month
period and we will notify you in advance of the effective date of the change.
The charge will not exceed the guaranteed maximum annual percentage charge of
2.04%. The guaranteed maximum monthly percentage charge is 0.17%.
If the Participant Account Value is reduced to zero while the Participant is
receiving a Guaranteed Annual Income, this charge will not be deducted.
Other Charges and Deductions
There are additional deductions from and expenses paid out of the assets of the
underlying fund that are more fully described in the prospectus for the fund.
Additional Information
The sales and administrative charges described previously may be reduced or
eliminated for any particular contract. However, these charges will be reduced
only to the extent that we anticipate lower distribution and/or administrative
expenses, or that we perform fewer sales or administrative services than those
originally contemplated in establishing the level of those charges. Lower
distribution and administrative expenses may be the result of economies
associated with:
o the use of mass enrollment procedures;
o the performance of administrative or sales functions by the employer;
o the use by an employer of automated techniques in submitting deposits or
information related to deposits on behalf of its employees; or
o any other circumstances which reduce distribution or administrative
expenses.
The exact amount of sales and administrative charges applicable to a particular
contract will be stated in that contract.
The Contract
Purchase of Contract
This prospectus describes group variable annuity contract under which we
allocate payments to the accounts of individual Participants and provide a
Guaranteed Withdrawal Benefit if all conditions are met. Each Participant under
the group variable annuity contract receives a certificate which summarizes the
provisions of the group contract and is proof of participation. The
Participant's share of the Contract Value is called the Participant Account
Value.
Purchase Payments
Periodic Purchase Payments are payable to us at a frequency and in an amount
specified by the Plan sponsor. Purchase Payments are allocated to the LVIP
Protected Profile Moderate Fund and are used to fund the Guaranteed Withdrawal
Benefit. If Purchase Payments are discontinued, the contract will remain in
force as a paid-up contract. If you submit a Purchase Payment to your agent, we
will not begin processing the Purchase Payment until we receive it from your
agent's broker-dealer in Good Order.
The maximum annual Purchase Payment into the contract for a Participant will be
limited to $500,000 without the Home Office approval. Purchase Payments from a
Participant which originate from other investment options available under the
Plan and are made within 180 days of a withdrawal from the Participant Account
Value may be limited to $25,000 in the future. In addition we may further limit
or decline future Purchase Payments into the contract as long as we provide you
180 days notice. It is possible that we could refuse any or all future Purchase
Payments. If future Purchase Payments cannot be made into this contract,
Participant Account Values and Income Bases will no longer be increased by
additional Purchase Payments. Participants should consider these Purchase
11
Payment limitations and how they may impact their long-term investment plans,
especially if the intent is to make additional Purchase Payments over a long
period of time.
Valuation Date
Accumulation Units will be valued once daily at the close of trading (normally,
4:00 p.m., New York time) on each day the New York Stock Exchange is open
(Valuation Date). On any date other than a Valuation Date, the Accumulation
Unit value will not change.
Allocation of Purchase Payments
Purchase Payments are allocated to the LVIP Protected Profile Moderate Fund
Subaccount and are used to fund the Guaranteed Withdrawal Benefit. Purchase
Payments allocated to the VAA are converted into Accumulation Units and are
credited to the account of each Participant. The number of Accumulation Units
credited is determined by dividing the Purchase Payment by the value of an
Accumulation Unit on the Valuation Date on which the Purchase Payment is
received in Good Order at our Home Office if received before 4:00 p.m., New
York time or the close of trading of the New York Stock Exchange. If the
Purchase Payment is received in Good Order at or after 4:00 p.m., New York
time, we will process the request using the Accumulation Unit value computed on
the next Valuation Date. The number of Accumulation Units determined in this
way is not changed by any subsequent change in the value of an Accumulation
Unit. However, the dollar value of an Accumulation Unit will vary depending not
only upon how well the fund performs, but also upon the expenses of the VAA and
the fund.
Valuation of Accumulation Units
Purchase Payments allocated to the VAA are converted into Accumulation Units.
This is done by dividing the amount allocated by the value of an Accumulation
Unit for the Valuation Period during which the Purchase Payments are allocated
to the VAA. The Accumulation Unit value for the Subaccount was established at
the inception of the Subaccount. It may increase or decrease from Valuation
Period to Valuation Period. Accumulation Unit values are affected by investment
performance of the fund, fund expenses, and the deduction of certain contract
charges. We determine the value of an Accumulation Unit on the last day of any
following Valuation Period as follows:
1. The total value of the fund shares held in the Subaccount is calculated by
multiplying the number of fund shares owned by the Subaccount at the beginning
of the Valuation Period by the net asset value per share of the fund at the end
of the Valuation Period, and adding any dividend or other distribution of the
fund if an ex-dividend date occurs during the Valuation Period; minus
2. The liabilities of the Subaccount at the end of the Valuation Period; these
liabilities include daily charges imposed on the Subaccount, and may include a
charge or credit with respect to any taxes paid or reserved for by us that we
determine result from the operations of the VAA; and
3. The result is divided by the number of Subaccount units outstanding at the
beginning of the Valuation Period.
The daily charges imposed on the Subaccount for any Valuation Period are equal
to the daily mortality and expense risk charge multiplied by the number of
calendar days in the Valuation Period. In certain circumstances (for example,
when separate account assets are less than $1,000), and when permitted by law,
it may be prudent for us to use a different standard industry method for this
calculation, called the Net Investment Factor method. We will achieve
substantially the same result using either method.
Guaranteed Withdrawal Benefit
The Guaranteed Withdrawal Benefit provides for each Participant (and spouse if
the joint life option is elected):
o Guaranteed lifetime periodic withdrawals up to the Guaranteed Annual Income
amount which is based upon a guaranteed Income Base;
o Automatic Annual Step-ups of the Income Base to the Participant Account
Value if the Participant Account Value is equal to or greater than the
Income Base and the maximum age(s) has not been reached;
o Age-based increases to the Guaranteed Annual Income amount (after reaching a
higher age-band and after an Automatic Annual Step-up).
Please note any withdrawals made prior to the Guaranteed Annual Income
Effective Date or that exceed the Guaranteed Annual Income amount (referred to
as Excess Withdrawals) may significantly reduce the Income Base as well as the
Guaranteed Annual Income amount by an amount greater than the dollar amount of
the Excess Withdrawal and will terminate the benefit if the Income Base is
reduced to zero.
The Guaranteed Withdrawal Benefit provides guaranteed, periodic withdrawals for
the Participant's life or for the lives of the Participant and spouse (joint
life option) regardless of the investment performance of the contract, provided
that certain conditions are met. For purposes of this Guaranteed Withdrawal
Benefit, spouse means an individual who would be recognized as a spouse under
federal law. An Income Base is used to calculate the Guaranteed Annual Income
payment from Participant Account Value, but is not available as a separate
benefit upon death or surrender. We will calculate the Income Base based on the
amount of the initial Purchase Payment made for a Participant by Plan sponsor
at the time the first Participant Purchase Payment is made. The Income Base
will be increased
12
by subsequent Participant Purchase Payments from the Plan sponsor and Automatic
Annual Step-ups, and decreased by Excess Withdrawals in accordance with the
provisions set forth below. The maximum Purchase Payments into the contract in
a Benefit Year will be limited to $500,000 per Participant. No additional
Purchase Payments are allowed for a Participant if the Participant Account
Value decreases to zero after the Guaranteed Annual Income Effective Date for
any reason.
The Guaranteed Withdrawal Benefit provides for guaranteed, periodic withdrawals
up to the Guaranteed Annual Income amount commencing after the Participant
(single life option) or younger of the Participant or spouse (joint life
option) reach age 55. The Guaranteed Annual Income payments are based upon
specified percentages of the Income Base. The specified withdrawal percentages
of the Income Base are age based and may increase over time. With the single
life option, the Participant may receive Guaranteed Annual Income payments for
life. Under the joint life option, Guaranteed Annual Income amounts for the
lifetimes of the Participant and spouse will be available.
Income Base. The Income Base is a value used to calculate the Guaranteed Annual
Income amount. The Income Base is not available as a lump sum withdrawal or as
a Death Benefit. The initial Income Base equals the amount of the Participant's
share of Purchase Payments into the contract. The maximum Income Base is
$2,000,000 for each Participant. This maximum takes into consideration the
total guaranteed amounts under the living benefit riders of all Lincoln Life
contracts (or contracts issued by our affiliates) in which the Participant
(and/or spouse if joint life option) are the covered lives.
Each additional Purchase Payment automatically increases the Income Base by the
amount of the Purchase Payment (not to exceed the maximum Income Base).
Additional Purchase Payments will not be allowed after the Guaranteed Annual
Income Effective Date if the Participant Account Value decreases to zero for
any reason including market loss.
Excess Withdrawals reduce the Income Base as discussed below. Withdrawals less
than or equal to the Guaranteed Annual Income amount and amounts deducted for
the Guaranteed Withdrawal Benefit charge and Additional Plan Expenses will not
reduce the Income Base. All withdrawals prior to the Guaranteed Annual Income
Effective Date are considered Excess Withdrawals.
Automatic Annual Step-ups of the Income Base. The Income Base will
automatically step-up to the Participant Account Value on the Valuation Date
immediately prior to each Benefit Year anniversary if:
a.) the Participant (single life option), or the Participant or spouse (joint
life option) are still living and under age 86 (if both spouses are
living, they both must be under age 86); and
b.) the Participant Account Value on that Valuation Date, after the deduction
of any withdrawals (including the Guaranteed Withdrawal Benefit charge),
plus any Purchase Payments made on that date, is equal to or greater than
the Income Base.
The Automatic Annual Step-up is available even in those years when a withdrawal
has occurred.
Following is an example of how the Automatic Annual Step-ups will work
(assuming no withdrawals or additional Purchase Payments):
Contract Value Income Base
---------------- -------------
Initial Purchase Payment $50,000 $50,000 $50,000
Valuation Date immediately prior to 1st Benefit Year anniversary $54,000 $54,000
Valuation Date immediately prior to 2nd Benefit Year anniversary $53,900 $54,000
Valuation Date immediately prior to 3rd Benefit Year anniversary $57,000 $57,000
Valuation Date immediately prior to 4th Benefit Year anniversary $64,000 $64,000
Withdrawal Amount. Participants may request to begin Guaranteed Annual Income
withdrawals by submitting a request to the Home Office. The Valuation Date the
request is approved is the Guaranteed Annual Income Effective Date. At that
time, the Participant will elect either the single life option or the joint
life option of the Guaranteed Withdrawal Benefit. After the Guaranteed Annual
Income Effective Date, periodic withdrawals up to the Guaranteed Annual Income
amount may be taken each Benefit Year for the lifetime of the Participant
(single life option) or the lifetimes of the Participant and spouse (joint life
option) as long as the Guaranteed Annual Income amount is greater than zero.
Guaranteed Annual Income withdrawals may be taken once the Participant (single
life option) or the younger of the Participant and spouse (joint life option)
turn age 55.
Upon the Guaranteed Annual Income Effective Date, the Guaranteed Annual Income
percentage is based on the age of the Participant (single life option) or the
age of the younger of the Participant and spouse (joint life option) as set
forth in the table below. For example, if the Guaranteed Annual Income
Effective Date is at age 60 (single life option), the Guaranteed Annual Income
percentage would be 4%. After the Guaranteed Annual Income Effective Date, the
Guaranteed Annual Income amount percentage will only increase on a Benefit Year
anniversary on or after an applicable higher age band has been reached and
after there has also been an Automatic Annual Step-up. The Automatic Annual
Step-up must occur after the date the Participant (or spouse if applicable)
reached the higher age band. If an applicable age band has been reached and
there has not also been an Automatic Annual Step-up, then the
13
Guaranteed Annual Income amount percentage will not increase until the next
Automatic Annual Step-up occurs. If the entire Guaranteed Annual Income amount
is not withdrawn during a Benefit Year, there is no carryover of the remaining
amount into the next Benefit Year. If the Guaranteed Annual Income Effective
Date does not occur on a Benefit Year anniversary, the Guaranteed Annual Income
amount for the first year will be prorated based on the number of days
remaining in that Benefit Year.
Table of Guaranteed Annual Income Percentages by Ages
Guaranteed Guaranteed Annual Income
Annual Income amount amount percentage
Age percentage (Single Life Option) (Joint Life Option)
-------------------------------- --------------------------------- -------------------------
At Least 55 and under 65 4% 3.5%
65-70 5% 4.5%
71+ 6% 5.5%
We may change the Table of Guaranteed Annual Income Percentages by Ages
("Table") for future Purchase Payments. We will provide you with notice of any
change to the Table. If there is a change to the Table, a weighted average
percentage will be used to determine the Guaranteed Annual Income. This
weighted average calculation is described below.
If the Participant Account Value is reduced to zero while receiving a
Guaranteed Annual Income amount because of market performance or Guaranteed
Withdrawal Benefit charges, payments equal to the Guaranteed Annual Income
amount will continue automatically for the life of the Participant (and
spouse's life if applicable). The remaining Income Base is not available as a
lump sum withdrawal. The Participant will not be entitled to the Guaranteed
Annual Income amount if the Income Base is reduced to zero as a result of an
Excess Withdrawal. If the Income Base is reduced to zero due to an Excess
Withdrawal the Guaranteed Withdrawal Benefit will terminate, and the
Participant will have no more rights or benefits under this contract.
Withdrawals equal to or less than the Guaranteed Annual Income amount will not
reduce the Income Base. All withdrawals will decrease the Participant Account
Value.
The following example shows the calculation of the Guaranteed Annual Income
amount and how withdrawals less than or equal to the Guaranteed Annual Income
amount affect the Income Base and the Participant Account Value. The example
assumes that the Participant is age 58 (4% Guaranteed Annual Income percentage
for single life option) on the Guaranteed Annual Income Effective Date, and has
an Income Base of $200,000:
Participant Account Value on the Guaranteed Annual Income
Effective Date..................................................... $200,000
Income Base on the Guaranteed Annual Income Effective Date......... $200,000
Initial Guaranteed Annual Income amount on the Guaranteed
Annual Income Effective Date ($200,000 x 4%)....................... $ 8,000
Participant Account Value six months after Guaranteed Annual
Income Effective Date.............................................. $210,000
Income Base six months after Guaranteed Annual Income Effective
Date............................................................... $200,000
Withdrawal six months after Guaranteed Annual Income Effective
Date when Participant is still age 58.............................. $ 8,000
Participant Account Value after withdrawal ($210,000 - $8,000)..... $202,000
Income Base after withdrawal ($200,000 - $0)....................... $200,000
Participant Account Value on next Benefit Year anniversary......... $205,000
Income Base on next Benefit Year anniversary....................... $205,000
Guaranteed Annual Income amount on next Benefit Year
anniversary........................................................ $ 8,200
The Automatic Annual Step-up was available on the first Benefit Year
anniversary and increased the Income Base to the Participant Account Value of
$205,000. The Guaranteed Annual Income amount also increased to $8,200 (4% x
$205,000).
Purchase Payments added to the contract subsequent to the initial Purchase
Payment will increase the Guaranteed Annual Income amount by an amount equal to
the applicable Guaranteed Annual Income amount percentage multiplied by the
amount of the subsequent Purchase Payment. For example, assuming a Participant
is age 58 (single life option), if the Guaranteed Annual Income amount of
$2,000 (4% of $50,000 Income Base) is in effect and an additional Purchase
Payment of $10,000 is made, the new Guaranteed Annual Income amount that
Benefit Year is $2,400 ($2,000 + 4% of $10,000). The Guaranteed Annual Income
payment amount will be recalculated immediately after a Purchase Payment is
added to the contract. Note that the Benefit Year does not change so all
withdrawals during the Benefit Year, (withdrawals before and after the
additional Purchase Payment), will count toward the Guaranteed Annual Income
amount.
14
Purchase Payments for a Participant into the contract cannot exceed $500,000 in
a Benefit Year.
Automatic Annual Step-ups will increase the Income Base and thus the Guaranteed
Annual Income amount. The Guaranteed Annual Income amount, after the Income
Base is adjusted by an Automatic Annual Step-up, will be equal to the adjusted
Income Base multiplied by the applicable Guaranteed Annual Income percentage.
Weighted Average Guaranteed Annual Income Percentage. If we make a change to
the Table of Guaranteed Annual Income Percentages by Ages ("Table") then a
weighted average guaranteed annual income ("WAGAI") percentage will be used to
calculate the Guaranteed Annual Income. A WAGAI percentage will be calculated
based on the portion of Purchase Payments, Automatic Annual Step-Ups and Excess
Withdrawals that are allocated to each Table that was in effect when Purchase
Payments were made. The percentage for each Table is determined according to
this formula: (a) divided by (b) times (c); where
(a) is the portion of the Income Base calculated on the basis of Purchase
Payments made during the time the specific Table is in effect and adjusted by
Automatic Annual Step-Ups and Excess Withdrawals;
(b) is the total Income Base for all Tables;
(c) is the applicable percentage for the age and measuring life option for that
Table.
The percentage for each applicable Table will be calculated according to the
formula above. Then the percentages determined for each Table will be added
together to determine the WAGAI percentage. The WAGAI percentage will be
recalculated following the date of an additional Purchase Payment, Automatic
Annual Step-Up or Excess Withdrawal. Excess Withdrawals will reduce the
Participant Account Value and Income Base on a pro rata basis according to the
Participant Account Value and Income Base allocated to each Table.
The following example demonstrates how the WAGAI is calculated if Purchase
Payments are made while two different Tables are in effect:
Total Purchase Payment during Year 1 (Table 1 in effect).......... $5,000
Automatic Step-Up to market value on Benefit Year anniversary..... $5,900
Total Purchase Payments during Year 2 (Table 2 in effect)......... $5,000
(Market loss so no Automatic Step-Up on Benefit Year
anniversary)
The Participant is age 60 on the Guaranteed Annual Income Effective Date. The
percentage rate for this Participant under Table 1 was 4% (single life). The
percentage rate under Table 2 was 3.5%.
According to the formula above, at the end of year 2 the percentage attributed
to the first Table is ($5,900 / $10,900 x 4%) = 2.16%. The percentage
attributed to the second Table is ($5,000 / $10,900 x 3.5%) = 1.61%. Adding the
two rates together results in a WAGAI of 3.77%. This rate will be applied to
the Total Income Base of $10,900 to produce a Guaranteed Annual Income amount
of $410.93.
Excess Withdrawals. Excess Withdrawals are the cumulative amounts withdrawn
from the contract during the Benefit Year (including the current withdrawal)
that exceed the Guaranteed Annual Income amount at the time of the withdrawal,
or are withdrawals made prior to the Guaranteed Annual Income Effective Date.
Withdrawals for the Guaranteed Withdrawal Charge and Additional Plan Expenses
are not treated as Excess Withdrawals.
When an Excess Withdrawal occurs:
o the Income Base is reduced by the same proportion that the Excess Withdrawal
reduces the Participant Account Value. This means that the reduction in the
Income Base could be more than the dollar amount of the withdrawal; and
o the Guaranteed Annual Income amount will be recalculated to equal the
applicable Guaranteed Annual Income amount percentage multiplied by the new
(reduced) Income Base (after the pro rata reduction for the Excess
Withdrawal).
We will provide the Participant quarterly statements that will include the
Guaranteed Annual Income amount (as adjusted for Guaranteed Annual Income
amount payments, Automatic Annual Step-ups, Excess Withdrawals and additional
Purchase Payments) available for the Benefit Year, if applicable, in order to
determine whether a withdrawal may be an Excess Withdrawal. Questions regarding
Excess Withdrawals should be referred to the Participant's registered
representative or to the customer service number provided on the front page of
this prospectus.
The following example demonstrates the impact of an Excess Withdrawal on the
Income Base, the Guaranteed Annual Income amount and the Participant Account
Value. The Participant who is age 58 (single life option) makes a $12,000
withdrawal which causes a $12,915.19 reduction in the Income Base.
Prior to Excess Withdrawal: Participant Account Value = $60,000 Income Base =
$85,000
15
Guaranteed Annual Income amount = $3,400 (4% of the Income Base of $85,000)
After a $12,000 Withdrawal, $3,400 is within the Guaranteed Annual Income
amount, $8,600 is the Excess Withdrawal.
The Participant Account Value is reduced by the amount of the Guaranteed Annual
Income amount of $3,400 and the Income Base is not reduced: Participant Account
Value = $56,600 ($60,000 - $3,400) Income Base = $85,000
The Participant Account Value is also reduced by the $8,600 Excess Withdrawal
and the Income Base is reduced by 15.19435%, the same proportion that the
Excess Withdrawal reduced the $56,600 Participant Account Value ($8,600 -
$56,600)
Participant Account Value = $48,000 ($56,600 - $8,600)
Income Base = $72,084.81 ($85,000 x 15.19435% = $12,915.19; $85,000 -
$12,915.19 = $72,084.81). Guaranteed Annual Income amount = $2,883.39 (4% of
$72,084.81 Income Base)
On the following Benefit Year anniversary:
Participant Account Value = $43,000
Income Base = $72,084.81
Guaranteed Income amount = $2,883.39 (4% x $72,084.81)
In a declining market, Excess Withdrawals may significantly reduce the Income
Base as well as the Guaranteed Annual Income amount. If the Income Base is
reduced to zero due to an Excess Withdrawal the Guaranteed Withdrawal Benefit
will terminate. If the Participant Account Value is reduced to zero due to an
Excess Withdrawal, the benefit will terminate.
After the Guaranteed Annual Income Effective Date, withdrawals will be treated
as within the Guaranteed Annual Income amount (even if they exceed the
Guaranteed Annual Income amount) only if the withdrawals are taken as
systematic monthly or quarterly installments of the amount needed to satisfy
the required minimum distribution (RMD) rules under Internal Revenue Code
Section 401(a)(9). In addition, in order for this exception for RMDs to apply,
the following must occur:
o Lincoln's monthly or quarterly automatic withdrawal service is used to
calculate and pay the RMD;
o The RMD calculation must be based only on the value in this contract; and
o No withdrawals other than RMDs are made within the Benefit Year (except as
described in the next paragraph).
If RMD withdrawals during a Benefit Year are less than the Guaranteed Annual
Income amount, an additional amount up to the Guaranteed Annual Income amount
may be withdrawn. If a withdrawal, other than an RMD is made during the Benefit
Year, then all amounts withdrawn in excess of the Guaranteed Annual Income
amount, including amounts attributable to RMDs, will be treated as Excess
Withdrawals.
Distributions from qualified contracts are generally taxed as ordinary income.
See Federal Tax Matters for a discussion of the tax consequences of
withdrawals.
Death Prior to the Annuity Commencement Date. The Guaranteed Withdrawal Benefit
has no provision for a payout of the Income Base upon death of the Participant
or Annuitant. A Death Benefit may be paid to the Beneficiary if the conditions
set forth below are met. Payment of a Death Benefit terminates the Guaranteed
Withdrawal Benefit for this Participant and surviving spouse if applicable. All
Death Benefit payments must be made in compliance with Internal Revenue Code
Sections 72(s) or 401(a)(9) as applicable as amended from time to time.
Upon the death of the Participant prior to the Guaranteed Annual Income
Effective Date or upon the Participant's death with the single life option, the
Guaranteed Withdrawal Benefit will end and no further Guaranteed Annual Income
amounts are available (even if there was an Income Base in effect at the time
of the death). A Death Benefit as set forth below, may be available.
Upon the first death under the joint life option, the lifetime payout of the
Guaranteed Annual Income amount will continue for the life of the surviving
spouse unless the Participant Account Value is paid out as a Death Benefit. The
Automatic Annual Step-up will continue if applicable as discussed above. Upon
the death of the surviving spouse, the Guaranteed Withdrawal Benefit will end
and no further Guaranteed Annual Income amounts are available (even if there
was an Income Base in effect at the time of the death). A Death Benefit, as set
forth below, may be available upon the second death.
The Death Benefit is equal to the Participant Account Value.
The value of the Death Benefit will be determined as of the date on which the
death claim is approved for payment. This payment will occur upon receipt of:
o proof, satisfactory to us, of the death;
o written authorization for payment; and
o our receipt of all required claim forms, fully completed.
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If the Death Benefit becomes payable upon the death of the Participant, the
Beneficiary may elect to receive payment either in the form of a lump sum
settlement or an Annuity Payout if provided by the Plan. Federal tax law
requires that an annuity election be made no later than 60 days after we
receive satisfactory notice of death as discussed previously.
If a lump sum settlement is requested, the proceeds will be mailed within seven
days of receipt of satisfactory claim documentation as discussed previously,
subject to the laws and regulations governing payment of Death Benefits. This
payment may be postponed as permitted by the 1940 Act.
All Death Benefit payments will be subject to the Plan and to the laws and
regulations governing Death Benefits.
The tax code requires that any distribution be paid within five years of the
death of the Participant unless the Beneficiary begins receiving, within one
year of the Participant's death, the distribution in the form of a life annuity
or an annuity for a designated period not exceeding the Beneficiary's life
expectancy.
Final Settlement Option. If the Participant Account Value is reduced to zero
while receiving a Guaranteed Annual Income amount because of market performance
or Guaranteed Withdrawal Benefit charges, a final payment option may be
available if allowed by the plan administrator. The election of the final
settlement option is irrevocable and will be paid by us within the 10th
Valuation Date of receipt of the request in Good Order. Acceptance of the final
settlement option will terminate all rights and interests of the Participant.
The amount of the final settlement option will be determined by multiplying the
Participant's Guaranteed Annual Income as determined on the most recent Benefit
Year anniversary by the annual benefit multiplier in effect on the date of
acceptance of the final settlement option reduced by the amount of any
withdrawals taken since the most recent Benefit Year anniversary. The annual
benefit multiplier used to calculate the final settlement option will never by
less than identified in the table below.
Single Measuring Life Joint Measuring Life
--------------------------------------------------------------- ---------------------------------------------------------------
Age of the Measuring Life Minimum Annual Benefit Multiplier Age of the Measuring Life1 Minimum Annual Benefit Multiplier
--------------------------- ----------------------------------- ---------------------------- ----------------------------------
0 - 70 5.00 0 - 70 5.00
71 - 75 4.00 71 - 75 4.00
76 - 80 3.00 76 - 80 3.00
81 - 85 2.00 81 - 85 2.00
86 - 90 1.50 86 - 90 1.50
91 - 95 1.25 91 - 95 1.25
95+ 1.00 95+ 1.00
1 If the measuring life option is joint, the age of the younger or surviving
measuring life will be used to determine the amount of the final option.
Termination. The Contractowner may terminate the contract, including the
Guaranteed Withdrawal Benefit, by notifying us in writing and surrendering the
contract without requesting to preserve the Guaranteed Withdrawal Benefit. The
Guaranteed Withdrawal Benefit will automatically terminate for a Participant:
o on the Annuity Commencement Date; or
o upon the death of the Participant prior to the Guaranteed Annual Income
Effective Date or under the single life option; or
o upon the death of the survivor under the joint life option; or
o when the Guaranteed Annual Income amount or Participant Account Value is
reduced to zero due to an Excess Withdrawal.
The termination will not result in any increase in Contract Value equal to the
Income Base. Upon effective termination of the Guaranteed Withdrawal Benefit,
the benefits and charges within the Participant Account will terminate and any
Participant Account Value must be removed from this contract.
Rollover Benefit. A Participant who is eligible for a rollover distribution
from the Plan may request a rollover to another Lincoln contract to continue
the Guaranteed Withdrawal Benefit if the following conditions are met:
o a request for direct rollover of the entire Participant Account Value is made
or authorized by the Contractowner;
o the amount rolled over is eligible for distribution under the Plan;
o the Participant applies for the participation in the rollover contract in
accordance with our procedures; and
o the entire Participant Account Value is transferred to the rollover contract.
The rollover contract will provide the same Guaranteed Annual Income amount
calculations that the Participant received from the retirement plan contract on
the day prior to the rollover. However, the new contract may have different
provisions such as charges and investment options.
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Surrenders and Withdrawals
Before the Annuity Commencement Date, we will allow the surrender of the
contract or a withdrawal of a portion of the Contract Value upon your written
request or the written request of a Participant, if authorized by the
Contractowner, subject to the conditions of the contract discussed below.
Surrender or withdrawal rights after the Annuity Commencement Date depend on
the Annuity Payout option selected.
The amount available upon surrender/withdrawal is the Contract Value at the end
of the Valuation Period during which the written request for
surrender/withdrawal is received at the Home Office if the request is received
in Good Order before 4:00 p.m. New York time or the close of trading of the New
York Stock Exchange if earlier. If we receive a surrender or withdrawal request
in Good Order at or after 4:00 p.m., New York time, we will process the request
using the Accumulation Unit value computed on the next Valuation Date. Unless
prohibited, surrender/withdrawal payments will be mailed within seven days
after we receive a valid written request at the home office. The payment may be
postponed as permitted by the 1940 Act.
The tax consequences of a surrender/withdrawal are discussed later in this
prospectus. See Federal Tax Matters.
Special restrictions on surrenders/withdrawals apply if your contract is
purchased as part of a retirement plan of a public school system or 501(c)(3)
organization under Section 403(b) of the tax code.
Distribution of Section 403(b) elective deferrals many not be paid to a
Participant earlier than the earliest date on which the Participant has a
severance from employment, dies, has a hardship, becomes disabled, or attains
age 591/2. Special rules for pre-1989 Section 403(b) elective deferrals (but
not earnings thereon) may apply subject to Plan terms and conditions.
Distributions from a 403(b) custodial account may not be paid to a Participant
before the Participant has a severance from employment, dies, becomes disabled,
or attains age 591/2. Any amounts transferred out of a 403(b) custodial account
to an annuity, including earnings thereon, continue to be subject to these
distribution restrictions.
For contracts issued in connection with qualified plans, Participants should
consult the terms of the plan for limitations on early surrender or payment.
See Federal Tax Matters and the SAI.
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.
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.
Abandoned Property
Every state has unclaimed property laws which generally declare annuity
contracts to be abandoned after a period of inactivity of three to five years
from the date a benefit is due and payable. For example, if the payment of a
Death Benefit has been triggered, but, if after a thorough search, we are still
unable to locate the Beneficiary of the Death Benefit, or the Beneficiary does
not come forward to claim the Death Benefit in a timely manner, the Death
Benefit will be "escheated". This means that the Death Benefit will paid to the
abandoned property division or unclaimed property office of the state in which
the Beneficiary or the Contractowner last resided, as shown on our books and
records, or to our state of domicile. This escheatment is revocable, however,
and the state is obligated to pay the Death Benefit (without interest) if your
Beneficiary steps forward to claim it with the proper documentation.
To prevent such escheatment, it is important that you update your Beneficiary
designations, including addresses, if and as they change. You may update your
Beneficiary designations by filing a written request with our Home Office.
Amendment of Contract
We reserve the right to amend the contract to meet the requirements of the 1940
Act or other applicable federal or state laws or regulations. You will be
notified in writing of any changes, modifications or waivers. Any changes are
subject to prior approval of your state's insurance department (if required).
Ownership
The owner on the date of issue will be the entity designated in the contract
specifications.
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As Contractowner, you have all rights under the contract. A Contractowner who
is a custodian or trustee may provide certain ownership rights to the
Participant/Annuitant. According to Indiana 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. Non-qualified contracts may not be collaterally
assigned. Assignments may have an adverse impact on any Death Benefit or Living
Benefits in this product and may be prohibited under the terms of a particular
feature. We assume no responsibility for the validity or effect of any
assignment. Consult your tax adviser about the tax consequences of an
assignment.
Contractowner Questions
The obligations to purchasers under the contracts are those of Lincoln Life.
This prospectus provides a general description of the material features of the
contract. Contracts, endorsements and riders may vary as required by state law.
Questions about your contract should be directed to us at 1-800-341-0441.
Annuity Payouts
Available Annuity Commencement Dates and Annuity Payout options are specified
in the Plan or by the Plan sponsor.
The contract provides optional forms of payouts of annuities (annuity options),
each of which is payable on a fixed basis. The contract provides that all or
part of the Contract Value may be used to purchase an Annuity Payout option.
You or the Annuitant/Participant, if authorized by the Contractowner, may elect
Annuity Payouts in monthly, quarterly, semiannual or annual installments. If
the payouts would be or become less than $50, we have the right to reduce their
frequency until the payouts are at least $50 each. The amount of each Annuity
Payout will depend upon the frequency of payout you select. For example, if you
select frequent payments (e.g., monthly), the amount of each payout will be
lower than if you choose a less frequent payout (e.g., annual installments).
Also, the amount of each Annuity Payout will depend upon the duration of payout
you select. For example, if you choose the Life Annuity option, the amount of
each payout likely will be higher than if you choose the Joint Life Annuity
since the Life Annuity assumes a shorter period of time than the Joint Life
Annuity. Following are explanations of the annuity options available.
Annuity Options
Life Annuity with Guaranteed Period. This option guarantees periodic payouts
during a designated period, usually 10, 15 or 20 years, and then continues
throughout the lifetime of the Annuitant. The designated period is selected by
the Plan.
Life Annuity. This option offers a periodic payout during the lifetime of the
Annuitant and ends with the last payout before the death of the Annuitant. This
option offers the highest periodic payout since there is no guarantee of a
minimum number of payouts or provision for a Death Benefit for Beneficiaries.
However, there is the risk under this option that the recipient would receive
no payouts if the Annuitant dies before the date set for the first payout; only
one payout if death occurs before the second scheduled payout, and so on.
Joint Life Annuity. This option offers a periodic payout during the joint
lifetime of the Annuitant and a designated joint annuitant. The payouts
continue during the lifetime of the survivor.
Joint Life and Two Thirds to Survivor Annuity. This option provides a periodic
payout during the joint lifetime of the Annuitant and a designated joint
Annuitant. When one of the joint Annuitants dies, the survivor receives two
thirds of the periodic payout made when both were alive.
If any payee dies after an Annuity Payout becomes operative, then we will pay
the following to the payee's estate (unless otherwise specified in the election
option):
the present value of unpaid payments under the payouts guaranteed for
designated period or life annuity with payouts guaranteed for designated
period;
o the amount payable at the death of the payee under the unit refund life
annuity; or
o the proceeds remaining with Lincoln Life under the payouts guaranteed for
designated amount or interest income, if available.
If the annuity settlement has been selected and becomes operative, when the
last payee dies, we will pay the remainder of the contract in a single sum to
the last payee's estate (unless otherwise specified in the election option).
General Information
None of the options listed above currently provides withdrawal features,
permitting the Contractowner or Participant to withdraw commuted values as a
lump sum payment. Other options, with or without withdrawal features, may be
made available by us. Options are only available to the extent they are
consistent with the requirements of the contract as well as Sections 72(s) and
401 (a)(9) of the tax code, if applicable.
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You or the Participant, if allowed, must give us at least 30 days notice before
the date on which you want payouts to begin. If proceeds become available to a
Beneficiary in a lump sum, the Beneficiary may choose any Annuity Payout
option. We may require proof of age, sex, or survival of any payee upon whose
age, sex, or survival payments depend.
Unless you select another option, the contract automatically provides for a
life annuity with Annuity Payouts guaranteed for 10 years except when a joint
life payout is required by law. Under any option providing for guaranteed
period payouts, the number of payouts which remain unpaid at the date of the
Annuitant's death (or surviving Annuitant's death in case of joint life
annuity) will be paid to the Beneficiary as payouts become due after we are in
receipt of:
o proof, satisfactory to us, of the death;
o written authorization for payment; and
o all claim forms, fully completed.
Once you begin to receive Annuity Payouts, you cannot change the payout option,
payout amount, or payout period.
Federal Tax Matters
Introduction
The Federal income tax treatment of the contract is complex and sometimes
uncertain. The Federal income tax rules may vary with your particular
circumstances. This discussion does not include all the Federal income tax
rules that may affect you and your contract. This discussion also does not
address other Federal tax consequences (including consequences of sales to
foreign individuals or entities), or state or local tax consequences,
associated with the contract. As a result, you should always consult a tax
adviser about the application of tax rules found in the Internal Revenue Code
("Code"), Treasury Regulations and applicable IRS guidance to your individual
situation.
Qualified Retirement Plans
We designed the contracts for use in connection with certain types of
retirement plans that receive favorable treatment under the tax code. Contracts
issued to or in connection with a qualified retirement plan are called
"qualified contracts." We issue contracts for use with various types of
qualified retirement plans. The Federal income tax rules applicable to those
plans are complex and varied. As a result, this prospectus does not attempt to
provide more than general information about the use of the contract with the
various types of qualified retirement plans. Persons planning to use the
contract in connection with a qualified retirement plan should obtain advice
from a competent tax adviser.
Types of Qualified Contracts and Terms of Contracts
Qualified retirement plans may include the following:
o Individual Retirement Accounts and Annuities ("Traditional IRAs")
o Roth IRAs
o Traditional IRA that is part of a Simplified Employee Pension Plan ("SEP")
o SIMPLE 401(k) plans (Savings Incentive Matched Plan for Employees)
o 401(a) / (k) plans (qualified corporate employee pension and profit-sharing
plans)
o 403(a) plans (qualified annuity plans)
o 403(b) plans (public school system and tax-exempt organization annuity
plans)
o 457(b) plans (deferred compensation plans for state and local governments
and tax-exempt organizations)
We will amend the contract to be used with a qualified retirement plan as
generally necessary to conform to the tax law requirements for the type of
Plan. However, the rights of a person to any qualified retirement plan benefits
may be subject to the Plan's terms and conditions. In addition, we are not
bound by the terms and conditions of qualified retirement plans to the extent
such terms and conditions contradict the contract, unless we consent.
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
20
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).
o The investments of the VAA must be "adequately diversified" in accordance
with IRS regulations.
o Your right to choose particular investments for a contract must be limited.
o The Annuity Commencement Date must not occur near the end of the Annuitant's
life expectancy.
Investments in the VAA Must Be Diversified
For a contract to be treated as an annuity for Federal income tax purposes, the
investments of the VAA must be "adequately diversified." Treasury regulations
define standards for determining whether the investments of the VAA are
adequately diversified. If the VAA fails to comply with these diversification
standards, you could be required to pay tax currently on the excess of the
Contract Value over the contract Purchase Payments. Although we do not control
the investments of the underlying investment options, we expect that the
underlying investment options will comply with the Treasury regulations so that
the VAA will be considered "adequately diversified."
Restrictions
Federal income tax law limits your right to choose particular investments for
the contract. Because the IRS has issued little guidance specifying those
limits, the limits are uncertain and your right to allocate Contract Values
among the Subaccounts may exceed those limits. If so, you would be treated as
the owner of the assets of the VAA and thus subject to current taxation on the
income, bonus credits, persistency credits and gains, if applicable, from those
assets. We do not know what limits may be set by the IRS in any guidance that
it may issue and whether any such limits will apply to existing contracts. We
reserve the right to modify the contract without your consent to try to prevent
the tax law from considering you as the owner of the assets of the VAA.
Tax Treatment of Qualified Contracts
The Federal income tax rules applicable to qualified retirement plans and
qualified contracts vary with the type of Plan and contract. For example,
o Federal tax rules limit the amount of Purchase Payments that can be made,
and the tax deduction or exclusion that may be allowed for the Purchase
Payments. These limits vary depending on the type of qualified retirement
plan and the Participant's specific circumstances (e.g., the Participant's
compensation).
o Minimum annual distributions are required under some qualified retirement
plans once you reach age 70 1/2 or retire, if later as described below.
o Under most qualified plans, such as a traditional IRA, the owner must begin
receiving payments from the contract in certain minimum amounts by a
certain age, typically age 701/2. Other qualified plans may allow the
Participant to take required distributions upon the later of reaching age
701/2 or retirement.
Please note that qualified retirement plans such as 403(b) plans, 401(k) plans
and IRAs generally defer taxation of contributions and earnings until
distribution. As such, an annuity does not provide any additional tax deferral
benefit beyond the qualified retirement plan itself.
Tax Treatment of Payments
The Federal income tax rules generally include distributions from a qualified
contract in the Participant's income as ordinary income. These taxable
distributions will include Purchase Payments that were deductible or excludible
from income. Thus, under many qualified contracts, the total amount received is
included in income since a deduction or exclusion from income was taken for
Purchase Payments. There are exceptions. For example, you do not include
amounts received from a Roth IRA in income if certain conditions are satisfied.
Required Minimum Distributions (RMDs)
Under most qualified plans, you must begin receiving payments from the contract
in certain minimum amounts by April 1 of the year following the year you attain
age 70 1/2 or retire, if later. You are required to take distributions from
your traditional IRAs by April 1 of the year following the year you reach age
70 1/2. If you own a Roth IRA, you are not required to receive minimum
distributions from your Roth IRA during your life.
Failure to comply with the minimum distribution rules applicable to certain
qualified plans, such as Traditional IRAs, will result in the imposition of an
excise tax. This excise tax equals 50% of the amount by which a minimum
required distribution exceeds the actual distribution from the qualified plan.
21
Treasury regulations applicable to required minimum distributions include a
rule that may impact the distribution method you have chosen and the amount of
your distributions. Under these regulations, the presence of an enhanced Death
Benefit, or other benefit, if any, may require you to take additional
distributions. An enhanced Death Benefit is any Death Benefit that has the
potential to pay more than the Contract Value or a return of Purchase Payments.
Please contact your tax adviser regarding any tax ramifications.
Federal Penalty Tax on Early Distributions from Qualified Retirement Plans
The tax code may impose a 10% penalty tax on an early distribution from a
qualified contract that must be included in income. The tax code does not
impose the penalty tax if one of several exceptions applies. The exceptions
vary depending on the type of qualified contract you purchase. For example, in
the case of an IRA, the 10% penalty tax will not apply to any of the following
withdrawals, surrenders, or Annuity Payouts:
o Distribution received on or after the Annuitant reaches 591/2
o Distribution received on or after the Annuitant's death or because of the
Annuitant's disability (as defined in the tax law)
o Distribution received as a series of substantially equal periodic payments
based on the Annuitant's life (or life expectancy), or
o Distribution received as reimbursement for certain amounts paid for medical
care.
These exceptions, as well as certain others not described here, generally apply
to taxable distributions from other qualified retirement plans. However, the
specific requirements of the exception may vary.
Unearned Income Medicare Contribution
Congress enacted the "Unearned Income Medicare Contribution" as a part of the
Health Care and Education Reconciliation Act of 2010. This new tax, which
affects individuals whose modified adjusted gross income exceeds certain
thresholds, is a 3.8% tax on the lesser of (i) the individual's "unearned
income," or (ii) the dollar amount by which the individual's modified adjusted
gross income exceeds the applicable threshold. Distributions that you take from
your contract are not included in the calculation of unearned income because
your contract is a qualified plan contract. However, the amount of any such
distribution is included in determining whether you exceed the modified
adjusted gross income threshold. The tax is effective for tax years after
December 31, 2012. Please consult your tax advisor to determine whether your
annuity distributions are subject to this tax.
Taxation of Death Benefits
We may distribute amounts from your contract because of your death. Federal tax
rules may limit the payment options available to your Beneficiaries. If your
spouse is your Beneficiary, your surviving spouse will generally receive
special treatment and will have more available payment options. Non-spouse
beneficiaries do not receive the same special treatment. Payment options may be
further limited depending upon whether you reached the date upon which you were
required to begin minimum distributions. The Pension Protection Act of 2006
("PPA") permits non-spouse Beneficiary rollovers to an "inherited IRA"
(effective January 1, 2007).
Transfers and Direct Rollovers
As a result of the Economic Growth and Tax Relief Reconciliation Act of 2001
("EGTRRA"), you may be able to move funds between different types of qualified
plans, such as 403(b) and 457(b) governmental plans, by means of a rollover or
transfer. You may be able to rollover or transfer amounts between qualified
plans and traditional IRAs. These rules do not apply to Roth IRAs and 457(b)
non-governmental tax-exempt plans. The PPA permits direct conversions from
certain qualified, 403(b) or 457(b) plans to Roth IRAs (effective for
distribution after 2007). There are special rules that apply to rollovers,
direct rollovers and transfers (including rollovers or transfers or after-tax
amounts). If the applicable rules are not followed, you may incur adverse
Federal income tax consequences, including paying taxes which you might not
otherwise have had to pay. Before we send a rollover distribution, we will
provide a notice explaining tax withholding requirements (see Federal Income
Tax Withholding). We are not required to send you such notice for your IRA. You
should always consult your tax adviser before you move or attempt to move any
funds.
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.
22
Nonqualified Annuity Contracts
A nonqualified annuity is a contract not issued in connection with an IRA or a
qualified retirement plan receiving special tax treatment under the tax code.
These contracts are not intended for use with nonqualified annuity contracts.
Different federal tax rules apply to nonqualified annuity contracts. Persons
planning to use the contract in connection with a nonqualified annuity should
obtain advice from a tax advisor.
Our Tax Status
Under existing Federal income tax laws, we do not pay tax on investment income
and realized capital gains of the VAA. We do not expect that we will incur any
Federal income tax liability on the income and gains earned by the VAA.
However, the Company does expect, to the extent permitted under Federal tax
law, to claim the benefit of the foreign tax credit as the owner of the assets
of the VAA. Therefore, we do not impose a charge for Federal income taxes. If
Federal income tax law changes and we must pay tax on some or all of the income
and gains earned by the VAA, we may impose a charge against the VAA to pay the
taxes.
Changes in the Law
The above discussion is based on the tax code, IRS regulations, and
interpretations existing on the date of this prospectus. However, Congress, the
IRS, and the courts may modify these authorities, sometimes retroactively.
Voting Rights
As required by law, we will vote the fund shares held in the VAA at meetings of
the shareholders of the fund. The voting will be done according to the
instructions of the Contractowners who have interests in the Subaccount which
invests in the fund. If the 1940 Act or any regulation under it should be
amended or if present interpretations should change, and if as a result we
determine that we are permitted to vote the fund shares in our own right, we
may elect to do so.
The number of votes which you have the right to cast will be determined by
applying your percentage interest in a Subaccount to the total number of votes
attributable to the Subaccount. In determining the number of votes, fractional
shares will be recognized.
The underlying fund is subject to the laws of the state in which it is
organized concerning, among other things, the matters which are subject to a
shareholder vote, the number of shares which must be present in person or by
proxy at a meeting of shareholders (a "quorum"), and the percentage of such
shares present in person or by proxy which must vote in favor of matters
presented. Because shares of the underlying fund held in the VAA are owned by
us, and because under the 1940 Act we will vote all such shares in the same
proportion as the voting instruction which we receive, it is important that
each 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 fund. Since the fund engages in
shared funding, other persons or entities besides Lincoln Life may vote fund
shares. See Investments of the Variable Annuity Account - Fund Shares.
Distribution of the Contracts
Lincoln Financial Distributors ("LFD") serves as Principal Underwriter of this
contract. LFD is affiliated with Lincoln Life and is registered as a
broker-dealer with the SEC under the Securities Exchange Act of 1934 and is a
member of FINRA. The Principal Underwriter has entered into selling agreements
with Lincoln Financial Advisors ("LFA"), also an affiliate of ours. The
Principal Underwriter has also entered into selling agreements with
broker-dealers that are unaffiliated with us. While the Principal Underwriter
has the legal authority to make payments to broker-dealers which have entered
into selling agreements, we will make such payments on behalf of the Principal
Underwriter in compliance with appropriate regulations. We also pay on behalf
of LFD certain of its operating expenses related to the distribution of this
and other of our contracts. The following paragraphs describe how payments are
made by us and The Principal Underwriter to various parties.
Compensation Paid to LFA. The maximum commission the Principal Underwriter pays
to LFA is 1.00% of Purchase Payments, plus up to 0.50% (calculated annually and
paid quarterly) based on Contract Value. Alternatively, LFA may elect to
receive a lower rate of compensation based upon the Contract Value not to
exceed 1.00% for so long as the contract remains in effect.
23
Lincoln Life also pays for the operating and other expenses of LFA, including
the following sales expenses: sales representative training allowances;
compensation and bonuses for LFA's management team; advertising expenses; and
all other expenses of distributing the contracts. LFA pays its sales
representatives a portion of the commissions received for their sales of
contracts. LFA sales representatives and their managers are also eligible for
various cash benefits, such as bonuses, insurance benefits and financing
arrangements, and non-cash compensation items that we may provide jointly with
LFA. Non-cash compensation items may include conferences, seminars, trips,
entertainment, merchandise and other similar items. In addition, LFA sales
representatives who meet certain productivity, persistency and length of
service standards and/or their managers may be eligible for additional
compensation. Sales of the contracts may help LFA sales representatives and/or
their managers qualify for such benefits. LFA sales representatives and their
managers may receive other payments from us for services that do not directly
involve the sale of the contracts, including payments made for the recruitment
and training of personnel, production of promotional literature and similar
services.
Compensation Paid to Unaffiliated Selling Firms. The Principal Underwriter pays
commissions to all Selling Firms. The maximum commission the Principal
Underwriters pays to Selling Firms, other than LFA, is 1.00% of Purchase
Payments, plus up to 0.50% (calculated annually and paid quarterly) based on
Contract Value. Alternatively, some Selling Firms may elect to receive a lower
rate of compensation based upon the Contract Value not to exceed 1.00% for so
long as the contract remains in effect. LFD also acts as wholesaler of the
contracts and performs certain marketing and other functions in support of the
distribution and servicing of the contracts.
LFD may pay certain Selling Firms or their affiliates additional amounts for:
(1) "preferred product" treatment of the contracts in their marketing programs,
which may include marketing services and increased access to sales
representatives; (2) sales promotions relating to the contracts; (3) costs
associated with sales conferences and educational seminars for their sales
representatives; (4) other sales expenses incurred by them; and (5) inclusion
in the financial products the Selling Firm offers.
Lincoln Life may provide loans to broker-dealers or their affiliates to help
finance marketing and distribution of the contracts, and those loans may be
forgiven if aggregate sales goals are met. In addition, we may provide staffing
or other administrative support and 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 2012 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. Commissions and other incentives or
payments described above are not charged directly to contract owners or the
Fund. All compensation is paid from our resources, which include fees and
charges imposed on your contract.
Return Privilege
Within the free-look period after you receive the contract, you may cancel it
for any reason by delivering or mailing it postage prepaid, to The Lincoln
National Life Insurance Company at PO Box 2340, Fort Wayne, IN 46801-2340. A
contract canceled under this provision will be void. Except as explained in the
following paragraph, we will return the Contract Value as of the Valuation Date
on which we receive the cancellation request. A purchaser who participates in
the VAA is subject to the risk of a market loss on the Contract Value during
the free-look period.
For contracts written in those states whose laws require that we assume this
market risk during the free-look period, a contract may be canceled, subject to
the conditions explained before, except that we will return the greater of the
Purchase Payment(s) or Contract Value as of the Valuation Date we receive the
cancellation request. IRA purchasers will also receive the greater of Purchase
Payments or Contract Value as of the Valuation Date on which we receive the
cancellation request.
State Regulation
As a life insurance company organized and operated under Indiana law, we are
subject to provisions governing life insurers and to regulation by the Indiana
Commissioner of Insurance. Our books and accounts are subject to review and
examination by the Indiana Department of Insurance at all times. A full
examination of our operations is conducted by that Department at least every
five years.
24
Records and Reports
As presently required by the 1940 Act and applicable regulations, we are
responsible for maintaining all records and accounts relating to the VAA. We
have entered into an agreement with The Bank of New York Mellon, One Mellon
Bank Center, 500 Grant Street, Pittsburgh, Pennsylvania 15258, to provide
accounting services to the VAA. We will mail to you, at your last known address
of record at the Home Office, at least semi-annually after the first Contract
Year, reports containing information required by that Act or any other
applicable law or regulation.
Other Information
You may elect to receive your prospectus, prospectus supplements, quarterly
statements, and annual and semiannual reports electronically over the Internet,
if you have an e-mail account and access to an Internet browser. Once you
select eDelivery, via the Internet Service Center, all documents available in
electronic format will no longer be sent to you in hard copy. You will receive
an e-mail notification when the documents become available online. It is your
responsibility to provide us with your current e-mail address. You can resume
paper mailings at any time without cost, by updating your profile at the
Internet Service Center, or contacting us. To learn more about this service,
please log on to www.LincolnFinancial.com, select service centers and continue
on through the Internet Service Center.
Legal Proceedings
In the ordinary course of its business and otherwise, the Company and its
subsidiaries or its separate accounts and Principal Underwriter may become or
are involved in various pending or threatened legal proceedings, including
purported class actions, arising from the conduct of its business. In some
instances, the proceedings include claims for unspecified or substantial
punitive damages and similar types of relief in addition to amounts for alleged
contractual liability or requests for equitable relief.
After consultation with legal counsel and a review of available facts, it is
management's opinion that the proceedings, after consideration of any reserves
and rights to indemnification, ultimately will be resolved without materially
affecting the consolidated financial position of the Company and its
subsidiaries, or the financial position of its separate accounts or Principal
Underwriter. However, given the large and indeterminate amounts sought in
certain of these proceedings and the inherent difficulty in predicting the
outcome of such legal proceedings, it is possible that an adverse outcome in
certain matters could be material to the Company's operating results for any
particular reporting period.
25
Statement of Additional Information
Table of Contents for Lincoln National Variable Annuity Account L
Item Page
Special terms B-2
Principal Underwriter B-2
Purchase and Pricing of Securities Being
Offered B-7
Annuity Payouts B-8
Determination of Accumulation Unit Value B-9
Capital Markets B-9
Advertising & Ratings B-9
Additional Services B-9
For a free copy of the SAI complete the form below.
Statement of Additional Information Request Card
Lincoln Secured Retirement IncomeSM Version 4
Lincoln National Variable Annuity Account L
.
Please send me a free copy of the current Statement of Additional Information
for Lincoln National Variable Annuity Account L / Lincoln Secured Retirement
IncomeSM Version 4.
(Please Print)
Name: -------------------------------------------------------------------------
Address: ----------------------------------------------------------------------
City --------------------------------------------------- State ---------
Zip ---------
Mail to: The Lincoln National Life Insurance Co., P.O. Box 2340, Fort Wayne,
Indiana 46801
26
(This page intentionally left blank)
[THIS PAGE INTENTIONALLY LEFT BLANK]
Lincoln Secured Retirement IncomeSM Version 4
Lincoln National
Variable Annuity Account L (Registrant)
The Lincoln National Life Insurance Company (Depositor)
Statement of Additional Information (SAI)
This SAI should be read in conjunction with the Lincoln Secured Retirement
IncomeSM Version 4 prospectus of Lincoln National Variable Annuity Account L
dated _______, 2013. You may obtain a copy of the Lincoln Secured Retirement
IncomeSM Version 4 prospectus on request and without charge. Please write
Customer Service, The Lincoln National Life Insurance Company, PO Box 2340,
Fort Wayne, IN 46802, or call 1-800-341-0441.
Table of Contents
Item Page
Special Terms B-2
Services B-2
Principal Underwriter B-2
Purchase of Securities Being Offered B-2
Determination of Accumulation and Annuity Unit
Value B-2
Item Page
Capital Markets B-3
Advertising & Ratings B-3
Other Information B-3
Financial Statements B-3
This SAI is not a prospectus.
The date of this SAI is _______, 2013.
Special Terms
The special terms used in this SAI are the ones defined in the Prospectus.
Services
Independent Registered Public Accounting Firm
Ernst & Young LLP, independent registered public accounting firm, One Commerce
Square, 2005 Market Street, Suite 700, Philadelphia, Pennsylvania, 19103, has
audited a) our financial statements of the Lincoln National Variable Annuity
Account L as of December 31, 2012 and for the year then ended and the statement
of changes in net assets in the year ended December 31, 2011; and b) our
consolidated financial statements of The Lincoln National Life Insurance
Company as of December 31, 2012 and 2011 and for each of the three years in the
period ended December 31, 2012, which are included in this SAI and Registration
Statement. The aforementioned financial statements are included herein in
reliance on Ernst & Young LLP's reports, given on their authority as experts in
accounting and auditing.
Keeper of Records
All accounts, books, records and other documents which are required to be
maintained for the VAA are maintained by us or by third parties responsible to
Lincoln Life. We have entered into an agreement with The Bank of New York
Mellon, One Mellon Bank Center, 500 Grant Street, Pittsburgh, Pennsylvania,
15258, to provide accounting services to the VAA. No separate charge against
the assets of the VAA is made by us for this service.
Principal Underwriter
Lincoln Financial Distributors, Inc. ("LFD"), an affiliate of Lincoln Life,
serves as principal underwriter (the "Principal Underwriter") for the
contracts, as described in the prospectus. The Principal Underwriter offers the
contracts to the public on a continuous basis and anticipates continuing to
offer the contracts, but reserves the right to discontinue the offering. The
Principal Underwriter offers the contracts through sales representatives, who
are associated with Lincoln Financial Advisors Corporation and/or Lincoln
Financial Securities Corporation (collectively, "LFN"), our affiliates. The
Principal Underwriter also may enter into selling agreements with other
broker-dealers ("Selling Firms") for the sale of the contracts. Sales
representatives of Selling Firms are appointed as our insurance agents. LFD,
acting as Principal Underwriter, paid $2,228,859, $1,864,104 and $1,720,320 to
LFA and Selling Firms in 2010, 2011 and 2012 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.
Determination of Accumulation and Annuity Unit Value
A description of the days on which Accumulation and Annuity Units will be
valued is given in the prospectus. The New York Stock Exchange's (NYSE) most
recent announcement (which is subject to change) states that it will be closed
on weekends and on these holidays: New Year's Day, Martin Luther King Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day. If any of these holidays occurs on a
weekend day, the Exchange may also be closed on the business day occurring just
before or just after the holiday. It may also be closed on other days.
B-2
Since the portfolios of some of the fund and series will consist of securities
primarily listed on foreign exchanges or otherwise traded outside the United
States, those securities may be traded (and the net asset value of those fund
and series and of the variable account could therefore be significantly
affected) on days when the investor has no access to those funds and series.
Capital Markets
In any particular year, our capital may increase or decrease depending on a
variety of factors - the amount of our statutory income or losses (which is
sensitive to equity market and credit market conditions), the amount of
additional capital we must hold to support business growth, changes in
reserving requirements, our inability to secure capital market solutions to
provide reserve relief, such as issuing letters of credit to support captive
reinsurance structures, changes in equity market levels, the value of certain
fixed-income and equity securities in our investment portfolio and changes in
interest rates.
Advertising & Ratings
We may include in certain advertisements, endorsements in the form of a list of
organizations, individuals or other parties which recommend Lincoln Life or the
policies. Furthermore, we may occasionally include in advertisements
comparisons of currently taxable and tax deferred investment programs, based on
selected tax brackets, or discussions of alternative investment vehicles and
general economic conditions.
Our financial strength is ranked and rated by nationally recognized independent
rating agencies. The ratings do not imply approval of the product and do not
refer to the performance of the product, or any separate account, including the
underlying investment options. Ratings are not recommendations to buy our
products. Each of the rating agencies reviews its ratings periodically.
Accordingly, all ratings are subject to revision or withdrawal at any time by
the rating agencies, and therefore, no assurance can be given that these
ratings will be maintained. The current outlook for the insurance subsidiaries
is positive for Moody's and stable for A.M. Best, Fitch, and Standard & Poor's.
Our financial strength ratings, which are intended to measure our ability to
meet contract holder obligations, are an important factor affecting public
confidence in most of our products and, as a result, our competitiveness. A
downgrade of our financial strength rating could affect our competitive
position in the insurance industry by making it more difficult for us to market
our products as potential customers may select companies with higher financial
strength ratings and by leading to increased withdrawals by current customers
seeking companies with higher financial strength ratings. For more information
on ratings, including outlooks, see www.LincolnFinancial.com/investor.
Annuity Payout Illustrations. These will provide an initial benefit payment
based in part on the Annuitant, the Contract Value and the fixed and/or
variable Annuity Payout option elected. In addition, variable Annuity Payout
illustrations may show the historical results of a variable payout in a
Subaccount of the VAA.
Compound Interest Illustrations - These will emphasize several advantages of
the variable annuity contract. For example, but not by way of illustration, the
literature may emphasize the potential tax savings through tax deferral; the
potential advantage of the variable annuity account over the fixed account; and
the compounding effect when a client makes regular deposits to his or her
contract.
Internet - An electronic communications network which may be used to provide
information regarding Lincoln Life, performance of the subaccounts and
advertisement literature.
Other Information
Due to differences in redemption rates, tax treatment or other considerations,
the interests of Contractowners under the variable life accounts could conflict
with those of Contractowners under the VAA. In those cases, where assets from
variable life and variable annuity separate accounts are invested in the same
fund(s) (i.e., where mixed funding occurs), the Boards of Directors of the fund
involved will monitor for any material conflicts and determine what action, if
any, should be taken. If it becomes necessary for any separate account to
replace shares of any fund with another investment, that fund may have to
liquidate securities on a disadvantageous basis. Refer to the prospectus for
each fund for more information about mixed funding.
Financial Statements
The December 31, 2012 financial statements of the VAA and the December 31, 2012
consolidated financial statements of Lincoln Life appear on the following
pages.
B-3
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
S-1
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
S-2
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholder of
The Lincoln National Life Insurance Company
We have audited the accompanying consolidated balance sheets of The Lincoln
National Life Insurance Company as of December 31, 2012 and 2011, and the
related consolidated statements of comprehensive income (loss), stockholder's
equity, and cash flows for each of the three years in the period ended
December 31, 2012. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. We were
not engaged to perform an audit of the Company's internal control over
financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Lincoln
National Life Insurance Company at December 31, 2012 and 2011, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 2012, in conformity with U.S.
generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, effective
January 1, 2012 and retrospectively applied to all periods presented, the
Company changed its method of accounting for costs relating to the
acquisition of insurance contracts. Also as discussed in Note 2 to the
consolidated financial statements, in 2010 the Company changed its method of
accounting for the consolidation of variable interest entities.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
April 2, 2013
S-3
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
AS OF DECEMBER 31,
--------------------------
2012 2011
----------- ------------
ASSETS
Investments:
Available-for-sale securities, at fair value:
Fixed maturity securities (amortized cost: 2012 - $71,221; 2011 - $67,366) $ 80,254 $ 73,607
Variable interest entities' fixed maturity securities (amortized cost: 2012 - $677;
2011 - $673) 708 700
Equity securities (cost: 2012 - $137; 2011 - $135) 157 139
Trading securities 2,437 2,538
Mortgage loans on real estate 6,792 6,589
Real estate 39 112
Policy loans 2,740 2,855
Derivative investments 2,263 2,846
Other investments 1,089 1,059
--------- ----------
Total investments 96,479 90,445
Cash and invested cash 3,278 3,844
Deferred acquisition costs and value of business acquired 6,732 6,942
Premiums and fees receivable 382 409
Accrued investment income 986 949
Reinsurance recoverables 8,284 9,033
Funds withheld reinsurance assets 842 874
Goodwill 2,273 2,273
Other assets 3,751 3,107
Separate account assets 95,373 83,477
----------- ------------
Total assets $ 218,380 $ 201,353
=========== ============
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Future contract benefits $ 18,415 $ 18,399
Other contract holder funds 71,615 68,823
Short-term debt 32 10
Long-term debt 1,925 2,429
Reinsurance related embedded derivatives 184 12
Funds withheld reinsurance liabilities 5,192 4,708
Deferred gain on business sold through reinsurance 124 425
Payables for collateral on investments 4,121 3,747
Variable interest entities' liabilities 92 193
Other liabilities 4,738 4,173
Separate account liabilities 95,373 83,477
----------- ------------
Total liabilities 201,811 186,396
----------- ------------
CONTINGENCIES AND COMMITMENTS (SEE NOTE 13)
STOCKHOLDER'S EQUITY
Common stock - 10,000,000 shares authorized, issued and outstanding 10,620 10,605
Retained earnings 2,089 1,532
Accumulated other comprehensive income (loss) 3,860 2,820
----------- ------------
Total stockholder's equity 16,569 14,957
----------- ------------
Total liabilities and stockholder's equity $ 218,380 $ 201,353
=========== ============
See accompanying Notes to Consolidated Financial Statements
S-4
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2012 2011 2010
---------- ---------- -----------
REVENUES
Insurance premiums $ 2,290 $ 2,017 $ 1,929
Insurance fees 3,537 3,228 3,070
Investment advisory fees 86 - -
Net investment income 4,551 4,490 4,362
Realized gain (loss):
Total other-than-temporary impairment losses on securities (242) (160) (237)
Portion of loss recognized in other comprehensive income 103 42 82
---------- ---------- ----------
Net other-than-temporary impairment losses on securities recognized in earnings (139) (118) (155)
Realized gain (loss), excluding other-than-temporary impairment losses on
securities 16 (132) (83)
---------- ---------- ----------
Total realized gain (loss) (123) (250) (238)
---------- ---------- ----------
Amortization of deferred gain on business sold through reinsurance 77 110 55
Other revenues and fees 396 376 360
---------- ---------- ----------
Total revenues 10,814 9,971 9,538
---------- ---------- ----------
EXPENSES
Interest credited 2,424 2,444 2,438
Benefits 2,936 2,204 2,567
Commissions and other expenses 3,838 3,938 3,134
Interest and debt expense 110 108 99
Impairment of intangibles - 744 -
---------- ---------- ----------
Total expenses 9,308 9,438 8,238
---------- ---------- ----------
Income (loss) before taxes 1,506 533 1,300
Federal income tax expense (benefit) 344 270 305
---------- ---------- ----------
Net income (loss) 1,162 263 995
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on available-for-sale securities 1,071 1,686 1,083
Unrealized other-than-temporary impairment on available-for-sale securities (2) 23 (18)
Unrealized gain (loss) on derivative instruments (31) 146 (1)
Funded status of employee benefit plans 2 0 3
---------- ---------- ----------
Total other comprehensive income (loss), net of tax 1,040 1,855 1,067
---------- ---------- ----------
Comprehensive income (loss) $ 2,202 $ 2,118 $ 2,062
========== ========== ==========
See accompanying Notes to Consolidated Financial Statements
S-5
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
2012 2011 2010
----------- ----------- -----------
COMMON STOCK
Balance as of beginning-of-year $ 10,605 $ 10,585 $ 10,588
Stock compensation/issued for benefit plans 15 10 (3)
Capital contribution from Lincoln National Corporation - 10 -
----------- ----------- -----------
Balance as of end-of-year 10,620 10,605 10,585
----------- ----------- -----------
RETAINED EARNINGS
Balance as of beginning-of-year 1,532 2,069 2,915
Cumulative effect from adoption of new accounting standards - - (1,157)
Net income (loss) 1,162 263 995
Dividends declared (605) (800) (684)
----------- ----------- -----------
Balance as of end-of-year 2,089 1,532 2,069
----------- ----------- -----------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance as of beginning-of-year 2,820 965 (102)
Cumulative effect from adoption of new accounting standards - - 181
Other comprehensive income (loss), net of tax 1,040 1,855 886
----------- ----------- -----------
Balance as of end-of-year 3,860 2,820 965
----------- ----------- -----------
Total stockholder's equity as of end-of-year $ 16,569 $ 14,957 $ 13,619
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements
S-6
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2012 2011 2010
---------- ----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,162 $ 263 $ 995
Adjustments to reconcile net income (loss) 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 (283) (151) (170)
Trading securities purchases, sales and maturities, net 202 86 39
Change in premiums and fees receivable 27 (75) (32)
Change in accrued investment income (37) (45) (44)
Change in future contract benefits and other contract holder funds (1,277) 1,241 (202)
Change in reinsurance related assets and liabilities 1,438 405 888
Change in federal income tax accruals 208 111 650
Realized (gain) loss 123 250 238
(Income) loss attributable to equity method investments (125) (90) (93)
Amortization of deferred gain on business sold through reinsurance (77) (110) (55)
Impairment of intangibles - 744 -
Change in accounts receivable (359) 60 115
Other 53 (72) 42
--------- ----------- ---------
Net cash provided by (used in) operating activities 1,055 2,617 2,371
--------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities (11,021) (10,359) (12,816)
Sales of available-for-sale securities 1,098 1,331 2,642
Maturities of available-for-sale securities 5,757 5,055 4,429
Purchases of other investments (2,112) (4,434) (2,775)
Sales or maturities of other investments 2,009 2,784 3,099
Increase (decrease) in payables for collateral on investments 374 2,035 (212)
Proceeds from reinsurance recapture 35 204 25
Other (130) (114) (74)
--------- --------- ---------
Net cash provided by (used in) investing activities (3,990) (3,498) (5,682)
--------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt, net of issuance costs - - 504
Increase (decrease) in short-term debt 18 - (11)
Deposits of fixed account values, including the fixed portion of variable 10,667 10,925 11,051
Withdrawals of fixed account values, including the fixed portion of variable (5,618) (4,976) (5,225)
Transfers to and from separate accounts, net (2,091) (2,324) (2,958)
Common stock issued for benefit plans and excess tax benefits (2) (4) (15)
Dividends paid to stockholders (605) (800) (684)
--------- ----------- ---------
Net cash provided by (used in) financing activities 2,369 2,821 2,662
--------- ----------- ---------
Net increase (decrease) in cash and invested cash, including discontinued operations (566) 1,940 (649)
Cash and invested cash, including discontinued operations, as of beginning-of-year 3,844 1,904 2,553
--------- ----------- ---------
Cash and invested cash, including discontinued operations, as of end-of-year $ 3,278 $ 3,844 $ 1,904
========= =========== =========
See accompanying Notes to Consolidated Financial Statements
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THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Lincoln National Life Insurance Company ("LNL" or the "Company," which also
may be referred to as "we," "our" or "us"), a wholly-owned subsidiary of Lincoln
National Corporation ("LNC" or the "Parent Company"), is domiciled in the state
of Indiana. We own 100% of the outstanding common stock of one insurance company
subsidiary, Lincoln Life & Annuity Company of New York ("LLANY"). We also own
several non-insurance companies, including Lincoln Financial Distributors
("LFD") and Lincoln Financial Advisors ("LFA"), LNC's wholesaling and retailing
business units, respectively. LNL's principal businesses consist of underwriting
annuities, deposit-type contracts and life insurance through multiple
distribution channels. LNL is licensed and sells its products throughout the
United States of America and several U.S. territories. See Note 22 for
additional details.
BASIS OF PRESENTATION
The accompanying consolidated financial statements are prepared in accordance
with United States of America generally accepted accounting principles ("GAAP").
Certain GAAP policies, which significantly affect the determination of financial
condition, results of operations and cash flows, are summarized below.
In addition, we adopted the provisions of Accounting Standards Update ("ASU")
No. 2010-26, "Accounting for Costs Associated with Acquiring or Renewing
Insurance Contracts" ("ASU 2010-26") as discussed in Note 2 as of January 1,
2012, and elected to retrospectively restate all prior periods.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of LNL
and all other entities in which we have a controlling financial interest and any
variable interest entities ("VIEs") in which we are the primary beneficiary.
Entities in which we do not have a controlling financial interest and do not
exercise significant management influence over the operating and financing
decisions are reported using the equity method. The carrying value of our
investments that we account for using the equity method on our Consolidated
Balance Sheets and equity in earnings on our Consolidated Statements of
Comprehensive Income (Loss) is not material. All material inter-company accounts
and transactions have been eliminated in consolidation.
Our involvement with VIEs is primarily to invest in assets that allow us to gain
exposure to a broadly diversified portfolio of asset classes. A VIE is an entity
that does not have sufficient equity to finance its own activities without
additional financial support or where investors lack certain characteristics of
a controlling financial interest. We assess our contractual, ownership or other
interests in a VIE to determine if our interest participates in the variability
the VIE was designed to absorb and pass onto variable interest holders. We
perform an ongoing qualitative assessment of our variable interests in VIEs to
determine whether we have a controlling financial interest and would therefore
be considered the primary beneficiary of the VIE. If we determine we are the
primary beneficiary of a VIE, we consolidate the assets and liabilities of the
VIE in our consolidated financial statements.
ACCOUNTING ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions affecting the reported amounts of
assets and liabilities and the disclosures of contingent assets and liabilities
as of the date of the financial statements and the reported amounts of revenues
and expenses for the reporting period. Those estimates are inherently subject to
change and actual results could differ from those estimates. Included among the
material (or potentially material) reported amounts and disclosures that require
extensive use of estimates are: fair value of certain invested assets and
derivatives, asset valuation allowances, deferred acquisition costs ("DAC"),
value of business acquired ("VOBA"), deferred sales inducements ("DSI"),
goodwill, future contract benefits, other contract holder funds including
deferred front-end loads ("DFEL"), pension plans, stock-based incentive
compensation, income taxes and the potential effects of resolving litigated
matters.
BUSINESS COMBINATIONS
We use the acquisition method of accounting for all business combination
transactions, and accordingly, recognize the fair values of assets acquired,
liabilities assumed and any noncontrolling interests in our consolidated
financial statements. The allocation of fair values may be subject to adjustment
after the initial allocation for up to a one-year period as more information
becomes available relative to the fair values as of the acquisition date. The
consolidated financial statements include the results of operations of any
acquired company since the acquisition date.
FAIR VALUE MEASUREMENT
Our measurement of fair value is based on assumptions used by market
participants in pricing the asset or liability, which may include inherent risk,
restrictions on the sale or use of an asset or non-performance risk, which would
include our own credit risk. Our estimate of an exchange price is the price in
an orderly transaction between market participants to sell the asset or transfer
the liability ("exit price") in the principal market, or the most advantageous
market in the absence of a principal market, for that asset or liability, as
opposed to the price that would be paid to acquire the asset or receive a
liability ("entry price"). Pursuant to the Fair Value Measurements and
Disclosures Topic of the Financial Accounting Standards Board ("FASB")
ACCOUNTING STANDARDS CODIFICATION(TM) ("ASC"), we categorize our financial
instruments carried at fair value into a three-level fair value hierarchy, based
on the priority of inputs to the respective valuation technique. The three-level
hierarchy for fair value measurement is defined as follows:
o Level 1 - inputs to the valuation methodology are quoted prices available in
active markets for identical investments as of the reporting date, except for
large holdings subject to "blockage discounts" that are excluded;
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o 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
o Level 3 - inputs to the valuation methodology are unobservable inputs in
situations where there is little or no market activity for the asset or
liability, and we make estimates and assumptions related to the pricing of
the asset or liability, including assumptions regarding risk.
In certain cases, the inputs used to measure fair value may fall into different
levels of the fair value hierarchy. In such cases, the level within the fair
value hierarchy is based on the lowest level of input that is significant to the
fair value measurement. Our assessment of the significance of a particular input
to the fair value measurement in its entirety requires judgment and considers
factors specific to the investment.
When a determination is made to classify an asset or liability within Level 3 of
the fair value hierarchy, the determination is based upon the significance of
the unobservable inputs to the overall fair value measurement. Because certain
securities trade in less liquid or illiquid markets with limited or no pricing
information, the determination of fair value for these securities is inherently
more difficult. However, Level 3 fair value investments may include, in addition
to the unobservable or Level 3 inputs, observable components, which are
components that are actively quoted or can be validated to market-based sources.
AVAILABLE-FOR-SALE SECURITIES - FAIR VALUATION METHODOLOGIES AND ASSOCIATED
INPUTS
Securities classified as available-for-sale ("AFS") consist of fixed maturity
and equity securities and are stated at fair value with unrealized gains and
losses included within accumulated other comprehensive income (loss) ("AOCI"),
net of associated DAC, VOBA, DSI, future contract benefits, other contract
holder funds and deferred income taxes.
We measure the fair value of our securities classified as AFS based on
assumptions used by market participants in pricing the security. The most
appropriate valuation methodology is selected based on the specific
characteristics of the fixed maturity or equity security, and we consistently
apply the valuation methodology to measure the security's fair value. Our fair
value measurement is based on a market approach that utilizes prices and other
relevant information generated by market transactions involving identical or
comparable securities. Sources of inputs to the market approach primarily
include third-party pricing services, independent broker quotations or pricing
matrices. We do not adjust prices received from third parties; however, we do
analyze the third-party pricing services' valuation methodologies and related
inputs and perform additional evaluation to determine the appropriate level
within the fair value hierarchy.
The observable and unobservable inputs to our valuation methodologies are based
on a set of standard inputs that we generally use to evaluate all of our AFS
securities. Observable inputs include benchmark yields, reported trades,
broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities,
bids, offers and reference data. In addition, market indicators, industry and
economic events are monitored, and further market data is acquired if certain
triggers are met. For certain security types, additional inputs may be used, or
some of the inputs described above may not be applicable. For private placement
securities, we use pricing matrices that utilize observable pricing inputs of
similar public securities and Treasury yields as inputs to the fair value
measurement. Depending on the type of security or the daily market activity,
standard inputs may be prioritized differently or may not be available for all
AFS securities on any given day. For broker-quoted only securities, non-binding
quotes from market makers or broker-dealers are obtained from sources recognized
as market participants. For securities trading in less liquid or illiquid
markets with limited or no pricing information, we use unobservable inputs to
measure fair value.
The following summarizes our fair valuation methodologies and associated inputs,
which are particular to the specified security type and are in addition to the
defined standard inputs to our valuation methodologies for all of our AFS
securities discussed above:
o Corporate bonds and U.S. Government bonds - We also use Trade Reporting and
Compliance Engine(TM) reported tables for our corporate bonds and vendor
trading platform data for our U.S. Government bonds.
o Mortgage- and asset-backed securities - We also utilize additional inputs,
which include new issues data, monthly payment informationand monthly
collateral performance, including prepayments, severity, delinquencies,
step-down features and over collateralization features for each of our
mortgage-backed securities ("MBS"), which include collateralized mortgage
obligations and mortgage pass through securities backed by residential
mortgages ("RMBS"), commercial mortgage-backed securities ("CMBS") and
collateralized debt obligations ("CDOs").
o State and municipal bonds - We also use additional inputs that include
information from the Municipal Securities Rule Making Board, as well as
material event notices, new issue data, issuer financial statements and
Municipal Market Data benchmark yields for our state and municipal bonds.
o Hybrid and redeemable preferred and equity securities - We also utilize
additional inputs of exchange prices (underlying and common stock of the same
issuer) for our hybrid and redeemable preferred and equity securities,
including banking, insurance, other financial services and other securities.
In order to validate the pricing information and broker-dealer quotes, we
employ, where possible, procedures that include comparisons with similar
observable positions, comparisons with subsequent sales and observations of
general market movements for those security classes. We have policies and
procedures in place to review the process that is utilized by our third-party
pricing service and the output that is provided to us by the pricing service. On
a periodic basis, we test the
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pricing for a sample of securities to evaluate the inputs and assumptions
used by the pricing service, and we perform a comparison of the pricing
service output to an alternative pricing source. We also evaluate prices
provided by our primary pricing service to ensure that they are not stale or
unreasonable by reviewing the prices for unusual changes from period to
period based on certain parameters or for lack of change from one period to
the next.
AFS SECURITIES - EVALUATION FOR RECOVERY OF AMORTIZED COST
We regularly review our AFS securities for declines in fair value that we
determine to be other-than-temporary. For an equity security, if we do not have
the ability and intent to hold the security for a sufficient period of time to
allow for a recovery in value, we conclude that an other-than-temporary
impairment ("OTTI") has occurred and the amortized cost of the equity security
is written down to the current fair value, with a corresponding charge to
realized gain (loss) on our Consolidated Statements of Comprehensive Income
(Loss). When assessing our ability and intent to hold the equity security to
recovery, we consider, among other things, the severity and duration of the
decline in fair value of the equity security as well as the cause of the
decline, a fundamental analysis of the liquidity, and business prospects and
overall financial condition of the issuer.
For our fixed maturity AFS securities (also referred to as "debt securities"),
we generally consider the following to determine whether our unrealized losses
are other-than-temporarily impaired:
o The estimated range and average period until recovery;
o The estimated range and average holding period to maturity;
o Remaining payment terms of the security;
o Current delinquencies and nonperforming assets of underlying collateral;
o Expected future default rates;
o Collateral value by vintage, geographic region, industry concentration or
property type;
o Subordination levels or other credit enhancements as of the balance sheet
date as compared to origination; and
o Contractual and regulatory cash obligations.
For a debt security, if we intend to sell a security, or it is more likely than
not we will be required to sell a debt security before recovery of its amortized
cost basis and the fair value of the debt security is below amortized cost, we
conclude that an OTTI has occurred and the amortized cost is written down to
current fair value, with a corresponding charge to realized gain (loss) on our
Consolidated Statements of Comprehensive Income (Loss). If we do not intend to
sell a debt security, or it is not more likely than not we will be required to
sell a debt security before recovery of its amortized cost basis but the present
value of the cash flows expected to be collected is less than the amortized cost
of the debt security (referred to as the credit loss), we conclude that an OTTI
has occurred and the amortized cost is written down to the estimated recovery
value with a corresponding charge to realized gain (loss) on our Consolidated
Statements of Comprehensive Income (Loss), as this amount is deemed the credit
portion of the OTTI. The remainder of the decline to fair value is recorded in
other comprehensive income ("OCI") to unrealized OTTI on AFS securities on our
Consolidated Statements of Stockholder's Equity, as this amount is considered a
noncredit (i.e., recoverable) impairment.
When assessing our intent to sell a debt security, or if it is more likely than
not we will be required to sell a debt security before recovery of its cost
basis, we evaluate facts and circumstances such as, but not limited to,
decisions to reposition our security portfolio, sales of securities to meet cash
flow needs and sales of securities to capitalize on favorable pricing. In order
to determine the amount of the credit loss for a debt security, we calculate the
recovery value by performing a discounted cash flow analysis based on the
current cash flows and future cash flows we expect to recover. The discount rate
is the effective interest rate implicit in the underlying debt security. The
effective interest rate is the original yield, or the coupon if the debt
security was previously impaired. See the discussion below for additional
information on the methodology and significant inputs, by security type, which
we use to determine the amount of a credit loss.
Our conclusion that it is not more likely than not that we will be required to
sell the fixed maturity AFS securities before recovery of their amortized cost
basis, the estimated future cash flows are equal to or greater than the
amortized cost basis of the debt securities, or we have the ability to hold the
equity AFS securities for a period of time sufficient for recovery is based upon
our asset-liability management process. Management considers the following as
part of the evaluation:
o The current economic environment and market conditions;
o Our business strategy and current business plans;
o The nature and type of security, including expected maturities and exposure
to general credit, liquidity, market and interest rate risk;
o Our analysis of data from financial models and other internal and industry
sources to evaluate the current effectiveness of our hedging and overall risk
management strategies;
o The current and expected timing of contractual maturities of our assets and
liabilities, expectations of prepayments on investments and expectations for
surrenders and withdrawals of life insurance policies and annuity contracts;
o The capital risk limits approved by management; and
o Our current financial condition and liquidity demands.
To determine the recovery period of a debt security, we consider the facts and
circumstances surrounding the underlying issuer including, but not limited to,
the following:
o Historical and implied volatility of the security;
o Length of time and extent to which the fair value has been less than
amortized cost;
o Adverse conditions specifically related to the security or to specific
conditions in an industry or geographic area;
o Failure, if any, of the issuer of the security to make scheduled payments;
and
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o Recoveries or additional declines in fair value subsequent to the balance
sheet date.
In periods subsequent to the recognition of an OTTI, the AFS security is
accounted for as if it had been purchased on the measurement date of the OTTI.
Therefore, for the fixed maturity AFS security, the original discount or reduced
premium is reflected in net investment income over the contractual term of the
investment in a manner that produces a constant effective yield.
To determine recovery value of a corporate bond or CDO, we perform additional
analysis related to the underlying issuer including, but not limited to, the
following:
o Fundamentals of the issuer to determine what we would recover if they were to
file bankruptcy versus the price at which the market is trading;
o Fundamentals of the industry in which the issuer operates;
o Earnings multiples for the given industry or sector of an industry that the
underlying issuer operates within, divided by the outstanding debt to
determine an expected recovery value of the security in the case of a
liquidation;
o Expected cash flows of the issuer (e.g., whether the issuer has cash flows in
excess of what is required to fund its operations); o Expectations regarding
defaults and recovery rates;
o Changes to the rating of the security by a rating agency; and
o Additional market information (e.g., if there has been a replacement of the
corporate debt security).
Each quarter we review the cash flows for the MBS to determine whether or not
they are sufficient to provide for the recovery of our amortized cost. We revise
our cash flow projections only for those securities that are at most risk for
impairment based on current credit enhancement and trends in the underlying
collateral performance. To determine recovery value of a MBS, we perform
additional analysis related to the underlying issuer including, but not limited
to, the following:
o Discounted cash flow analysis based on the current cash flows and future cash
flows we expect to recover;
o Level of creditworthiness of the home equity loans or residential mortgages
that back an RMBS or commercial mortgages that back a CMBS;
o Susceptibility to fair value fluctuations for changes in the interest rate
environment;
o Susceptibility to reinvestment risks, in cases where market yields are lower
than the securities' book yield earned;
o Susceptibility to reinvestment risks, in cases where market yields are higher
than the book yields earned on a security;
o Expectations of sale of such a security where market yields are higher than
the book yields earned on a security; and
o Susceptibility to variability of prepayments.
When evaluating MBS and mortgage-related asset-backed securities ("ABS"), we
consider a number of pool-specific factors as well as market level factors when
determining whether or not the impairment on the security is temporary or
other-than-temporary. The most important factor is the performance of the
underlying collateral in the security and the trends of that performance in the
prior periods. We use this information about the collateral to forecast the
timing and rate of mortgage loan defaults, including making projections for
loans that are already delinquent and for those loans that are currently
performing but may become delinquent in the future. Other factors used in this
analysis include type of underlying collateral (e.g., prime, Alt-A or subprime),
geographic distribution of underlying loans and timing of liquidations by state.
Once default rates and timing assumptions are determined, we then make
assumptions regarding the severity of a default if it were to occur. Factors
that impact the severity assumption include expectations for future home price
appreciation or depreciation, loan size, first lien versus second lien,
existence of loan level private mortgage insurance, type of occupancy and
geographic distribution of loans. Once default and severity assumptions are
determined for the security in question, cash flows for the underlying
collateral are projected including expected defaults and prepayments. These cash
flows on the collateral are then translated to cash flows on our tranche based
on the cash flow waterfall of the entire capital security structure. If this
analysis indicates the entire principal on a particular security will not be
returned, the security is reviewed for OTTI by comparing the expected cash flows
to amortized cost. To the extent that the security has already been impaired or
was purchased at a discount, such that the amortized cost of the security is
less than or equal to the present value of cash flows expected to be collected,
no impairment is required.
Otherwise, if the amortized cost of the security is greater than the present
value of the cash flows expected to be collected, and the security was not
purchased at a discount greater than the expected principal loss, then
impairment is recognized.
We further monitor the cash flows of all of our AFS securities backed by pools
on an ongoing basis. We also perform detailed analysis on all of our subprime,
Alt-A, non-agency residential MBS and on a significant percentage of our AFS
securities backed by pools of commercial mortgages. The detailed analysis
includes revising projected cash flows by updating the cash flows for actual
cash received and applying assumptions with respect to expected defaults,
foreclosures and recoveries in the future. These revised projected cash flows
are then compared to the amount of credit enhancement (subordination) in the
structure to determine whether the amortized cost of the security is
recoverable. If it is not recoverable, we record an impairment of the security.
TRADING SECURITIES
Trading securities consist of fixed maturity and equity securities in designated
portfolios, some of which support modified coinsurance ("Modco") and coinsurance
with funds withheld ("CFW") reinsurance arrangements. Investment results for the
portfolios that support Modco and CFW reinsurance arrangements, including gains
and losses from sales, are passed directly to the reinsurers pursuant to
contractual terms of the reinsurance arrangements. Trading securities are
carried at fair
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value and changes in fair value and changes in the fair value of embedded
derivative liabilities associated with the underlying reinsurance
arrangements, are recorded in realized gain (loss) on our Consolidated
Statements of Comprehensive Income (Loss) as they occur.
ALTERNATIVE INVESTMENTS
Alternative investments, which consist primarily of investments in Limited
Partnerships ("LPs"), are included in other investments on our Consolidated
Balance Sheets. We account for our investments in LPs using the equity method to
determine the carrying value. Recognition of alternative investment income is
delayed due to the availability of the related financial statements, which are
generally obtained from the partnerships' general partners. As a result, our
venture capital, real estate and oil and gas portfolios are generally on a
three-month delay and our hedge funds are on a one-month delay. In addition, the
impact of audit adjustments related to completion of calendar-year financial
statement audits of the investees are typically received during the second
quarter of each calendar year. Accordingly, our investment income from
alternative investments for any calendar-year period may not include the
complete impact of the change in the underlying net assets for the partnership
for that calendar-year period.
PAYABLES FOR COLLATERAL ON INVESTMENTS
When we enter into collateralized financing transactions on our investments, a
liability is recorded equal to the cash collateral received. This liability is
included within payables for collateral on investments on our Consolidated
Balance Sheets. Income and expenses associated with these transactions are
recorded as investment income and investment expenses within net investment
income on our Consolidated Statements of Comprehensive Income (Loss). Changes in
payables for collateral on investments are reflected within cash flows from
investing activities on our Consolidated Statements of Cash Flows.
MORTGAGE LOANS ON REAL ESTATE
Mortgage loans on real estate are carried at unpaid principal balances adjusted
for amortization of premiums and accretion of discounts and are net of valuation
allowances. Interest income is accrued on the principal balance of the loan
based on the loan's contractual interest rate. Premiums and discounts are
amortized using the effective yield method over the life of the loan. Interest
income and amortization of premiums and discounts are reported in net investment
income on our Consolidated Statements of Comprehensive Income (Loss) along with
mortgage loan fees, which are recorded as they are incurred.
Our commercial loan portfolio is comprised of long-term loans secured by
existing commercial real estate. As such, it does not exhibit risk
characteristics unique to mezzanine, construction, residential, agricultural,
land or other types of real estate loans. We believe all of the loans in our
portfolio share three primary risks: borrower creditworthiness; sustainability
of the cash flow of the property; and market risk; therefore, our methods for
monitoring and assessing credit risk are consistent for our entire portfolio.
Loans are considered impaired when it is probable that, based upon current
information and events, we will be unable to collect all amounts due under the
contractual terms of the loan agreement. When we determine that a loan is
impaired, a valuation allowance is established for the excess carrying value of
the loan over its estimated value. The loan's estimated value is based on: the
present value of expected future cash flows discounted at the loan's effective
interest rate; the loan's observable market price; or the fair value of the
loan's collateral. Valuation allowances are maintained at a level we believe is
adequate to absorb estimated probable credit losses of each specific loan. Our
periodic evaluation of the adequacy of the allowance for losses is based on our
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay (including the timing
of future payments), the estimated value of the underlying collateral,
composition of the loan portfolio, current economic conditions and other
relevant factors. Trends in market vacancy and rental rates are incorporated
into the analysis that we perform for monitored loans and may contribute to the
establishment of (or an increase or decrease in) an allowance for credit losses.
In addition, we review each loan individually in our commercial mortgage loan
portfolio on an annual basis to identify emerging risks. We focus on properties
that experienced a reduction in debt-service coverage or that have significant
exposure to tenants with deteriorating credit profiles. Where warranted, we
establish or increase loss reserves for a specific loan based upon this
analysis. Our process for determining past due or delinquency status begins when
a payment date is missed, at which time the borrower is contacted. After the
grace period expiration that may last up to 10 days, we send a default notice.
The default notice generally provides a short time period to cure the default.
Our policy is to report loans that are 60 or more days past due, which equates
to two or more payments missed, as delinquent. We do not accrue interest on
loans 90 days past due, and any interest received on these loans is either
applied to the principal or recorded in net investment income on our
Consolidated Statements of Comprehensive Income (Loss) when received, depending
on the assessment of the collectibility of the loan. We resume accruing interest
once a loan complies with all of its original terms or restructured terms.
Mortgage loans deemed uncollectible are charged against the allowance for
losses, and subsequent recoveries, if any, are credited to the allowance for
losses. All mortgage loans that are impaired have an established allowance for
credit losses. Changes in valuation allowances are reported in realized gain
(loss) on our Consolidated Statements of Comprehensive Income (Loss).
We measure and assess the credit quality of our mortgage loans by using
loan-to-value and debt-service coverage ratios. The loan-to-value ratio compares
the principal amount of the loan to the fair value at origination of the
underlying property collateralizing the loan and is commonly expressed as a
percentage. Loan-to-value ratios greater than 100% indicate that the principal
amount is greater than the collateral value. Therefore, all else being equal, a
lower loan-to-value ratio generally indicates a higher quality loan. The
debt-service
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coverage ratio compares a property's net operating income to its debt-service
payments. Debt-service coverage ratios of less than 1.0 indicate that
property operations do not generate enough income to cover its current debt
payments. Therefore, all else being equal, a higher debt-service coverage
ratio generally indicates a higher quality loan.
POLICY LOANS
Policy loans represent loans we issue to contract holders that use the cash
surrender value of their life insurance policy as collateral. Policy loans are
carried at unpaid principal balances.
REAL ESTATE
Real estate includes both real estate held for the production of income and real
estate held-for-sale. Real estate held for the production of income is carried
at cost less accumulated depreciation. Depreciation is calculated on a
straight-line basis over the estimated useful life of the asset. We periodically
review properties held for the production of income for impairment. Properties
whose carrying values are greater than their projected undiscounted cash flows
are written down to estimated fair value, with impairment losses reported in
realized gain (loss) on our Consolidated Statements of Comprehensive Income
(Loss). The estimated fair value of real estate is generally computed using the
present value of expected future cash flows from the real estate discounted at a
rate commensurate with the underlying risks. Real estate classified as
held-for-sale is stated at the lower of depreciated cost or fair value less
expected disposition costs at the time classified as held-for-sale. Real estate
is not depreciated while it is classified as held-for-sale. Also, valuation
allowances for losses are established, as appropriate, for real estate
held-for-sale and any changes to the valuation allowances are reported in
realized gain (loss) on our Consolidated Statements of Comprehensive Income
(Loss). Real estate acquired through foreclosure proceedings is recorded at fair
value at the settlement date.
DERIVATIVE INSTRUMENTS
We hedge certain portions of our exposure to interest rate risk, foreign
currency exchange risk, equity market risk and credit risk by entering into
derivative transactions. All of our derivative instruments are recognized as
either assets or liabilities on our Consolidated Balance Sheets at estimated
fair value. We categorized derivatives into a three-level hierarchy, based on
the priority of the inputs to the respective valuation technique as discussed
above in "Fair Value Measurement." The accounting for changes in the estimated
fair value of a derivative instrument depends on whether it has been designated
and qualifies as part of a hedging relationship, and further, on the type of
hedging relationship. For those derivative instruments that are designated and
qualify as hedging instruments, we designate the hedging instrument based upon
the exposure being hedged: as a cash flow hedge or a fair value hedge.
For derivative instruments that are designated and qualify as a cash flow hedge,
the effective portion of the gain or loss on the derivative instrument is
reported as a component of accumulated OCI and reclassified into net income in
the same period or periods during which the hedged transaction affects net
income. The remaining gain or loss on the derivative instrument in excess of the
cumulative change in the present value of designated future cash flows of the
hedged item (hedge ineffectiveness), if any, is recognized in net income during
the period of change. For derivative instruments that are designated and qualify
as a fair value hedge, the gain or loss on the derivative instrument, as well as
the offsetting gain or loss on the hedged item attributable to the hedged risk
are recognized in net income during the period of change in estimated fair
values. For derivative instruments not designated as hedging instruments, but
that are economic hedges, the gain or loss is recognized in net income.
We purchase and issue financial instruments and products that contain embedded
derivative instruments. When it is determined that the embedded derivative
possesses economic characteristics that are not clearly and closely related to
the economic characteristics of the host contract, and a separate instrument
with the same terms would qualify as a derivative instrument, the embedded
derivative is bifurcated from the host for measurement purposes. The embedded
derivative, which is reported with the host instrument in the Consolidated
Balance Sheets, is carried at fair value with changes in fair value recognized
in net income during the period of change.
We employ several different methods for determining the fair value of our
derivative instruments. The fair value of our derivative contracts are measured
based on current settlement values, which are based on quoted market prices,
industry standard models that are commercially available and broker quotes.
These techniques project cash flows of the derivatives using current and implied
future market conditions. We calculate the present value of the cash flows to
measure the current fair market value of the derivative.
CASH AND CASH EQUIVALENTS
Cash and invested cash is carried at cost and includes all highly liquid debt
instruments purchased with an original maturity of three months or less.
DAC, VOBA, DSI AND DFEL
Acquisition costs directly related to successful contract acquisitions or
renewals of UL insurance, VUL insurance, traditional life insurance, annuities
and other investment contracts have been deferred (i.e., DAC) to the extent
recoverable. VOBA is an intangible asset that reflects the estimated fair value
of in-force contracts in a life insurance company acquisition and represents the
portion of the purchase price that is allocated to the value of the right to
receive future cash flows from the business in force at the acquisition date.
Bonus credits and excess interest for dollar cost averaging contracts are
considered DSI. Contract sales charges that are collected in the early years of
an insurance contract are deferred (i.e., DFEL), and the unamortized balance is
reported in other contract holder funds on our Consolidated Balance Sheets.
Both DAC and VOBA amortization, excluding amounts reported in realized gain
(loss), is reported within commissions
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and other expenses on our Consolidated Statements of Comprehensive Income
(Loss). DSI amortization, excluding amounts reported in realized gain (loss),
is reported in interest credited on our Consolidated Statements of
Comprehensive Income (Loss). The amortization of DFEL, excluding amounts
reported in realized gain (loss), is reported within insurance fees on our
Consolidated Statements of Comprehensive Income (Loss). The methodology for
determining the amortization of DAC, VOBA, DSI and DFEL varies by product
type. For all insurance contracts, amortization is based on assumptions
consistent with those used in the development of the underlying contract
adjusted for emerging experience and expected trends.
Acquisition costs for UL and VUL insurance and investment-type products, which
include fixed and variable deferred annuities, are generally amortized over the
lives of the policies in relation to the incidence of estimated gross profits
("EGPs") from surrender charges, investment, mortality net of reinsurance ceded
and expense margins and actual realized gain (loss) on investments. Contract
lives for UL and VUL policies are estimated to be 40 years and 30 years,
respectively, based on the expected lives of the contracts. Contract lives for
fixed and variable deferred annuities are generally between 13 and 30 years,
while some of our fixed multi-year guarantee products have amortization periods
equal to the guarantee period. The front-end load annuity product has an assumed
life of 25 years. Longer lives are assigned to those blocks that have
demonstrated favorable lapse experience.
Acquisition costs for all traditional contracts, including traditional life
insurance contracts, such as individual whole life, group business and term life
insurance, are amortized over periods of 7 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 for fixed and variable payout annuities.
We account for modifications of insurance contracts that result in a
substantially unchanged contract as a continuation of the replaced contract. We
account for modifications of insurance contracts that result in a substantially
changed contract as an extinguishment of the replaced contract.
The carrying amounts of DAC, VOBA, DSI and DFEL are adjusted for the effects of
realized and unrealized gains and losses on securities classified as AFS and
certain derivatives and embedded derivatives. Amortization expense of DAC, VOBA,
DSI and DFEL reflects an assumption for an expected level of credit-related
investment losses. When actual credit-related investment losses are realized, we
recognize a true-up to our DAC, VOBA, DSI and DFEL amortization within realized
gain (loss) on our Consolidated Statements of Comprehensive Income (Loss)
reflecting the incremental effect of actual versus expected credit-related
investment losses. These actual to expected amortization adjustments can create
volatility from period to period in realized gain (loss).
During the third quarter of each year, we conduct our annual comprehensive
review of the assumptions and the projection models used for our estimates of
future gross profits underlying the amortization of DAC, VOBA, DSI and DFEL and
the calculations of the embedded derivatives and reserves for life insurance and
annuity products with living benefit and death benefit guarantees. These
assumptions include investment margins, mortality, retention, rider utilization
and maintenance expenses (costs associated with maintaining records relating to
insurance and individual and group annuity contracts, and with the processing of
premium collections, deposits, withdrawals and commissions). Based on our
review, the cumulative balances of DAC, VOBA, DSI and DFEL included on our
Consolidated Balance Sheets are adjusted with an offsetting benefit or charge to
revenue or amortization expense to reflect such change related to our
expectations of future EGPs ("unlocking"). We may have unlocking in other
quarters as we become aware of information that warrants updating assumptions
outside of our annual comprehensive review. We may also identify and implement
actuarial modeling refinements that result in increases or decreases to the
carrying values of DAC, VOBA, DSI, DFEL, embedded derivatives and reserves for
life insurance and annuity products with living benefit and death benefit
guarantees.
DAC, VOBA, DSI and DFEL are reviewed to ensure that the unamortized portion does
not exceed the expected recoverable amounts.
REINSURANCE
Our insurance companies enter into reinsurance agreements with other companies
in the normal course of business. Assets and liabilities and premiums and
benefits from certain reinsurance contracts that grant statutory surplus relief
to other insurance companies are netted on our Consolidated Balance Sheets and
Consolidated Statements of Comprehensive Income (Loss), respectively, because
there is a right of offset. All other reinsurance agreements are reported on a
gross basis on our Consolidated Balance Sheets as an asset for amounts
recoverable from reinsurers or as a component of other liabilities for amounts,
such as premiums, owed to the reinsurers, with the exception of Modco agreements
for which the right of offset also exists. Reinsurance premiums and benefits
paid or provided are accounted for on bases consistent with those used in
accounting for the original policies issued and the terms of the reinsurance
contracts. Premiums, benefits and DAC are reported net of insurance ceded.
GOODWILL
We recognize the excess of the purchase price, plus the fair value of any
noncontrolling interest in the acquiree, over the fair value of identifiable net
assets acquired as goodwill. Goodwill is not amortized, but is reviewed at least
annually for indications of value impairment, with consideration given to
financial performance and other relevant factors. 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
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impairment. We perform a two-step test in our evaluation of the carrying
value of goodwill for impairment, although we do have the option to first
assess qualitative factors to determine if it is necessary to complete the
two-step goodwill impairment test. 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 assigning 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
Consolidated Statements of Comprehensive Income (Loss).
OTHER ASSETS AND OTHER LIABILITIES
Other assets consist primarily of DSI, specifically identifiable intangible
assets, property and equipment owned by the Company, balances associated with
corporate-owned and bank-owned life insurance, certain reinsurance assets,
receivables resulting from sales of securities that had not yet settled as of
the balance sheet date, debt issue costs and other prepaid expenses. Other
liabilities consist primarily of current and deferred taxes, pension and other
employee benefit liabilities, certain reinsurance payables, payables resulting
from purchases of securities that had not yet settled as of the balance sheet
date, interest on borrowed funds and other accrued expenses.
The carrying values of specifically identifiable intangible assets are reviewed
at least annually for indicators of impairment in value that are
other-than-temporary, including unexpected or adverse changes in the following:
the economic or competitive environments in which the company operates;
profitability analyses; cash flow analyses; and the fair value of the relevant
business operation. If there was an indication of impairment, then the
discounted cash flow method would be used to measure the impairment, and the
carrying value would be adjusted as necessary and reported in impairment of
intangibles on our Consolidated Statements of Comprehensive Income (Loss). Sales
force intangibles are attributable to the value of the new business distribution
system acquired through business combinations. These assets are amortized on a
straight-line basis over their useful life of 25 years. Federal Communications
Commission ("FCC") licenses acquired through business combinations are not
amortized.
Property and equipment owned for company use is carried at cost less allowances
for depreciation. Provisions for depreciation of investment real estate and
property and equipment owned for company use are computed principally on the
straight-line method over the estimated useful lives of the assets, which
include buildings, computer hardware and software and other property and
equipment. We periodically review the carrying value of our long-lived assets,
including property and equipment, for impairment whenever events or
circumstances indicate that the carrying amount of such assets may not be fully
recoverable. For long-lived assets to be held and used, impairments are
recognized when the carrying amount of a long-lived asset is not recoverable and
exceeds its fair value. The carrying amount of a long-lived asset is not
recoverable if it exceeds the sum of the undiscounted cash flows expected to
result from the use and eventual disposition of the asset. An impairment loss is
measured as the amount by which the carrying amount of a long-lived asset
exceeds its fair value.
Long-lived assets to be disposed of by abandonment or in an exchange for a
similar productive long-lived asset are classified as held-for-use until they
are disposed. Long-lived assets to be sold are classified as held-for-sale and
are no longer depreciated. Certain criteria have to be met in order for the
long-lived asset to be classified as held-for-sale, including that a sale is
probable and expected to occur within one year. Long-lived assets classified as
held-for-sale are recorded at the lower of their carrying amount or fair value
less cost to sell.
SEPARATE ACCOUNT ASSETS AND LIABILITIES
We maintain separate account assets, which are reported at fair value. The
related liabilities are reported at an amount equivalent to the separate account
assets. Investment risks associated with market value changes are borne by the
contract holders, except to the extent of minimum guarantees made by the Company
with respect to certain accounts.
We issue variable annuity contracts through our separate accounts for which
investment income and investment gains and losses accrue directly to, and
investment risk is borne by, the contract holder (traditional variable
annuities). We also issue variable annuity and life contracts through separate
accounts that include various types of guaranteed death benefit ("GDB"),
guaranteed withdrawal benefit ("GWB") and guaranteed income benefit ("GIB")
features. The GDB features include those where we contractually guarantee to the
contract holder either: return of no less than total deposits made to the
contract less any partial withdrawals ("return of net deposits"); total deposits
made to the contract less any partial withdrawals plus a minimum return
("minimum return"); or the highest contract value on any contract anniversary
date through age 80 minus any payments or withdrawals following the contract
anniversary ("anniversary contract value").
As discussed in Note 6, certain features of these guarantees are accounted for
as embedded derivative reserves, whereas other guarantees are accounted for as
benefit reserves. Other guarantees contain characteristics of both and are
accounted for under an approach that calculates the value of the embedded
derivative reserve and the benefit reserve based on the specific characteristics
of each guaranteed living benefit ("GLB") feature. We use derivative instruments
to hedge our exposure to the risks and earnings volatility that result from the
embedded derivatives for living benefits in certain of our variable annuity
products. The change in fair value of these instruments tends to move in the
opposite direction of the change in the value of
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the associated reserves. The net impact of these changes is reported as a
component of realized gain (loss) on our Consolidated Statements of
Comprehensive Income (Loss).
The "market consistent scenarios" used in the determination of the fair value of
the GLB liability are similar to those used by an investment bank to value
derivatives for which the pricing is not transparent and the aftermarket is
nonexistent or illiquid. We use risk-neutral Monte-Carlo simulations in our
calculation to value the entire block of guarantees, which involve 100 unique
scenarios per policy or approximately 38 million scenarios. The market
consistent scenario assumptions, as of each valuation date, are those we view to
be appropriate for a hypothetical market participant. The market consistent
inputs include assumptions for the capital markets (e.g., implied volatilities,
correlation among indices, risk-free swap curve, etc.), policyholder behavior
(e.g., policy lapse, benefit utilization, mortality, etc.), risk margins,
administrative expenses and a margin for profit. We believe these assumptions
are consistent with those that would be used by a market participant; however,
as the related markets develop we will continue to reassess our assumptions. It
is possible that different valuation techniques and assumptions could produce a
materially different estimate of fair value.
FUTURE CONTRACT BENEFITS AND OTHER CONTRACT HOLDER FUNDS
Future contract benefits represent liability reserves that we have established
and carry based on estimates of how much we will need to pay for future benefits
and claims. Other contract holder funds represent liabilities for fixed account
values, including the fixed portion of variable, dividends payable, premium
deposit funds, undistributed earnings on participating business and other
contract holder funds as well the carrying value of DFEL discussed above.
The liabilities for future contract benefits and claim reserves for UL and VUL
insurance policies consist of contract account balances that accrue to the
benefit of the contract holders, excluding surrender charges. The liabilities
for future insurance contract benefits and claim reserves for traditional life
policies are computed using assumptions for investment yields, mortality and
withdrawals based principally on generally accepted actuarial methods and
assumptions at the time of contract issue. Investment yield assumptions for
traditional direct individual life reserves for all contracts range from
2.25% to 7.75% depending on the time of contract issue. The investment yield
assumptions for immediate and deferred paid-up annuities range from 1.00% to
13.50%. These investment yield assumptions are intended to represent an
estimation of the interest rate experience for the period that these contract
benefits are payable.
The liabilities for future claim reserves for variable annuity products
containing GDB features are calculated by estimating the present value of total
expected benefit payments over the life of the contract from inception divided
by the present value of total expected assessments over the life of the contract
("benefit ratio") multiplied by the cumulative assessments recorded from the
contract inception through the balance sheet date less the cumulative GDB
payments plus interest on the liability. The change in the liability for a
period is the benefit ratio multiplied by the assessments recorded for the
period less GDB claims paid in the period plus interest. As experience or
assumption changes result in a change in expected benefit payments or
assessments, the benefit ratio is unlocked, that is, recalculated using the
updated expected benefit payments and assessments over the life of the contract
since inception. The revised benefit ratio is then applied to the liability
calculation described above, with the resulting change in liability reported as
benefit ratio unlocking.
With respect to our future contract benefits and other contract holder funds, we
continually review: overall reserve position, reserving techniques and
reinsurance arrangements. As experience develops and new information becomes
known, liabilities are adjusted as deemed necessary. The effects of changes in
estimates are included in the operating results for the period in which such
changes occur.
The business written or assumed by us includes participating life insurance
contracts, under which the contract holder is entitled to share in the earnings
of such contracts via receipt of dividends. The dividend scale for participating
policies is reviewed annually and may be adjusted to reflect recent experience
and future expectations. As of December 31, 2012 and 2011, participating
policies comprised approximately 1% of the face amount of insurance in force,
and dividend expenses were $71 million, $79 million and $82 million for the
years ended December 31, 2012, 2011 and 2010, respectively.
Liabilities for the secondary guarantees on UL-type products are calculated by
multiplying the benefit ratio by the cumulative assessments recorded from
contract inception through the balance sheet date less the cumulative secondary
guarantee benefit payments plus interest. If experience or assumption changes
result in a new benefit ratio, the reserves are adjusted to reflect the changes
in a manner similar to the unlocking of DAC, VOBA, DFEL and DSI. The accounting
for secondary guarantee benefits impacts, and is impacted by, EGPs used to
calculate amortization of DAC, VOBA, DFEL and DSI.
Future contract benefits on our Consolidated Balance Sheets include GLB features
and remaining guaranteed interest and similar contracts that are carried at fair
value, which represents approximate exit value including an estimate for our
nonperformance risk. Certain of these features have elements of both insurance
benefits and embedded derivatives. Through our hybrid accounting approach, we
assign benefits to the embedded derivative or insurance based on the
life-contingent nature of the benefits. We classify these items in Level 3
within the hierarchy levels described above in "Fair Value Measurement."
The fair value of our indexed annuity contracts is based on their approximate
surrender values.
BORROWED FUNDS
LNL's short-term borrowings are defined as borrowings with contractual or
expected maturities of one year or less.
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Long-term borrowings have contractual or expected maturities greater than one
year.
DEFERRED GAIN ON BUSINESS SOLD THROUGH REINSURANCE
Our reinsurance operations were acquired by Swiss Re Life & Health America, Inc.
("Swiss Re") in December 2001 through a series of indemnity reinsurance
transactions. We are recognizing the gain related to these transactions at the
rate that earnings on the reinsured business are expected to emerge, over a
period of 15 years from the date of sale.
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.
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
Consolidated Statements of Comprehensive Income (Loss). These attributed fees
represent the present value of future claims expected to be paid for the GLB at
the inception of the contract plus a margin that a theoretical market
participant would include for risk/profit and are reported within realized gain
(loss) on our Consolidated Statements of Comprehensive Income (Loss).
The timing of revenue recognition as it relates to fees assessed on investment
contracts is determined based on the nature of such fees. Asset-based fees, cost
of insurance and contract administration charges are assessed on a daily or
monthly basis and recognized as revenue when assessed and earned. Percent of
premium charges are assessed at the time of premium payment and recognized as
revenue when assessed and earned. Certain amounts assessed that represent
compensation for services to be provided in future periods are reported as
unearned revenue and recognized in income over the periods benefited. Surrender
charges are recognized upon surrender of a contract by the contract holder in
accordance with contractual terms.
For investment and interest-sensitive life insurance contracts, the amounts
collected from contract holders are considered deposits and are not included in
revenue.
INSURANCE PREMIUMS
Our insurance premiums for traditional life insurance and group insurance
products are recognized as revenue when due from the contract holder. Our
traditional life insurance products include those products with fixed and
guaranteed premiums and benefits and consist primarily of whole life insurance,
limited-payment life insurance, term life insurance and certain annuities with
life contingencies. Our group non-medical insurance products consist primarily
of term life, disability and dental.
NET INVESTMENT INCOME
Dividends and interest income, recorded in net investment income, are recognized
when earned. Amortization of premiums and accretion of discounts on investments
in debt securities are reflected in net investment income over the contractual
terms of the investments in a manner that produces a constant effective yield.
For CDOs and MBS, included in the trading and AFS fixed maturity securities
portfolios, we recognize income using a constant effective yield based on
anticipated prepayments and the estimated economic life of the securities. When
actual prepayments differ significantly from originally anticipated prepayments,
the retrospective effective yield is recalculated to reflect actual payments to
date and a catch up adjustment is recorded in the current period. In addition,
the new effective yield, which reflects anticipated future payments, is used
prospectively. Any adjustments resulting from changes in effective yield are
reflected in net investment income on our Consolidated Statements of
Comprehensive Income (Loss).
REALIZED GAIN (LOSS)
Realized gain (loss) on our Consolidated Statements of Comprehensive Income
(Loss) includes realized gains and losses from the sale of investments,
write-downs for other-than-temporary impairments of investments, certain
derivative and embedded derivative gains and losses, gains and losses on the
sale of subsidiaries and businesses and net gains and losses on reinsurance
embedded derivative and trading securities. Realized gains and losses on the
sale of investments are determined using the specific identification method.
Realized gain (loss) is recognized in net income, net of associated amortization
of DAC, VOBA, DSI and DFEL. Realized gain (loss) is also net of allocations of
investment gains and losses to certain contract holders and certain funds
withheld on reinsurance arrangements for which we have a contractual obligation.
OTHER REVENUES AND FEES
Other revenues and fees consists primarily of fees attributable to broker-dealer
services recorded as earned at the time of sale, changes in the market value of
our seed capital investments and communications sales recognized as earned, net
of agency and representative commissions.
INTEREST CREDITED
Interest credited includes interest credited to contract holder account
balances. Interest crediting rates associated with funds invested in our general
account during 2010 through 2012 ranged from 1.00% to 9.00%.
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BENEFITS
Benefits for UL and other interest-sensitive life insurance products include
benefit claims incurred during the period in excess of contract account
balances. Benefits also include the change in reserves for life insurance
products with secondary guarantee benefits, annuity products with guaranteed
death and living benefits, and certain annuities with life contingencies. For
traditional life, group health and disability income products, benefits are
recognized when incurred in a manner consistent with the related premium
recognition policies.
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Pursuant to the accounting rules for our obligations to employees and agents
under our various pension and other postretirement benefit plans, we are
required to make a number of assumptions to estimate related liabilities and
expenses. We use assumptions for the weighted-average discount rate and expected
return on plan assets to estimate pension expense. The discount rate assumptions
are determined using an analysis of current market information and the projected
benefit flows associated with these plans. The expected long-term rate of return
on plan assets is based on historical and projected future rates of return on
the funds invested in the plan. The calculation of our accumulated
postretirement benefit obligation also uses an assumption of weighted-average
annual rate of increase in the per capita cost of covered benefits, which
reflects a health care cost trend rate.
STOCK-BASED COMPENSATION
In general, we expense the fair value of stock awards included in our incentive
compensation plans. As of the date LNC's Board of Directors approves stock
awards, the fair value of stock options is determined using a Black-Scholes
options valuation methodology, and the fair value of other stock awards is based
upon the market value of the stock. The fair value of the awards is expensed
over the performance or service period, which generally corresponds to the
vesting period, and is recognized as an increase to common stock in
stockholder's equity. We classify certain stock awards as liabilities. For these
awards, the settlement value is classified as a liability on our Consolidated
Balance Sheets and the liability is marked-to-market through net income at the
end of each reporting period. Stock-based compensation expense is reflected in
commissions and other expenses on our Consolidated Statements of Comprehensive
Income (Loss).
INTEREST AND DEBT EXPENSES
Interest expense on our short-term and long-term debt is recognized as due and
any associated premiums, discounts, and costs are amortized (accreted) over the
term of the related borrowing utilizing the effective interest method. In
addition, gains or losses related to certain derivative instruments associated
with debt are recognized in interest expense during the period of the change.
INCOME TAXES
We file a U.S. consolidated income tax return with LNC and its eligible
subsidiaries. Ineligible subsidiaries file separate individual corporate tax
returns. Subsidiaries operating outside of the U.S. are taxed, and income tax
expense is recorded based on applicable foreign statutes. Deferred income taxes
are recognized, based on enacted rates, when assets and liabilities have
different values for financial statement and tax reporting purposes. A valuation
allowance is recorded to the extent required. Considerable judgment and the use
of estimates are required in determining whether a valuation allowance is
necessary and, if so, the amount of such valuation allowance. In evaluating the
need for a valuation allowance, we consider many factors, including: the nature
and character of the deferred tax assets and liabilities; taxable income in
prior carryback years; future reversals of temporary differences; the length of
time carryovers can be utilized; and any tax planning strategies we would employ
to avoid a tax benefit from expiring unused.
2. NEW ACCOUNTING STANDARDS
ADOPTION OF NEW ACCOUNTING STANDARDS
COMPREHENSIVE INCOME TOPIC
In June 2011, the FASB issued (ASU) No. 2011-05, "Presentation of Comprehensive
Income" ("ASU 2011-05"), with an objective of increasing the prominence of items
reported in other comprehensive income ("OCI"). The amendments in ASU 2011-05
provided entities with the option to present the total of comprehensive income,
the components of net income and the components of OCI in either a single
continuous statement of comprehensive income or in two separate but consecutive
statements. In December 2011, the FASB deferred certain requirements in ASU
2011-05 related to the presentation of reclassification adjustments out of
accumulated OCI by issuing ASU No. 2011-12, "Deferral of the Effective Date for
Amendments to the Presentation of Reclassifications of Items Out of Accumulated
Other Comprehensive Income in Accounting Standards Update No. 2011-05." The FASB
reconsidered these presentation requirements based on input from financial
statements users and preparers. The deferral did not affect the adoption of the
other requirements in ASU 2011-05. We adopted the remaining provisions of ASU
2011-05 as of January 1, 2012, and have included a single continuous statement
of comprehensive income.
CONSOLIDATIONS TOPIC
In June 2009, the FASB issued ASU No. 2009-17, "Improvements to Financial
Reporting by Enterprises Involved with Variable Interest Entities" ("ASU
2009-17"), which replaced the consolidation guidance for VIEs with new
consolidation guidance whereby entities perform a qualitative assessment of the
VIE to identify the variable interest that is the primary beneficiary and
ultimately required to consolidate the VIE. In February 2010, the FASB deferred
application of the guidance in ASU 2009-17 for reporting entities with interests
in an
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entity that applies the specialized accounting guidance for investment
companies.
Effective January 1, 2010, we adopted the amendments in ASU 2009-17 and
accordingly reconsidered our involvement with all our VIEs and the primary
beneficiary of the VIEs. We concluded we are the primary beneficiary of the VIEs
associated with our investments in credit-linked notes ("CLNs"), and, as such,
consolidated all of the assets and liabilities of these VIEs and recorded a
cumulative effect adjustment of $169 million, after-tax, to the beginning
balance of retained earnings as of January 1, 2010. In addition, we considered
our investments in LPs and other alternative investments, and concluded these
investments are within the scope of the FASB's February 2010 deferral, and, as
such, they are not currently subject to the amended consolidation guidance in
ASU 2009-17. As a result, we will continue to account for our alternative
investments consistent with the accounting policy in Note 1. See Note 4 for more
detail regarding the consolidation of our VIEs.
FAIR VALUE MEASUREMENTS AND DISCLOSURES TOPIC
In May 2011, the FASB issued ASU No. 2011-04, "Amendments to Achieve Common Fair
Value Measurement and Disclosure Requirements in U.S. GAAP and International
Financial Reporting Standards" ("ASU 2011-04"), which was issued to create a
consistent framework for the application of fair value measurement across
jurisdictions. The amendments include wording changes to GAAP in order to
clarify the FASB's intent about the application of existing fair value
measurements and disclosure requirements, as well as to change a particular
principle or existing requirement for measuring fair value or disclosing
information about fair value measurements. There were no additional fair value
measurements required upon the adoption of ASU 2011-04. We adopted the
provisions of ASU 2011-04 effective January 1, 2012, and have included the
additional disclosures required for fair value measurements in Note 21.
FINANCIAL SERVICES - INSURANCE INDUSTRY TOPIC
In October 2010, the FASB issued ASU No. 2010-26, "Accounting for Costs
Associated with Acquiring or Renewing Insurance Contracts", which clarifies the
types of costs incurred by an insurance entity that can be capitalized in the
acquisition of insurance contracts. Only those costs incurred that result
directly from and are essential to the successful acquisition of new or renewal
insurance contracts may be capitalized as deferrable acquisition costs. The
determination of deferability must be made on a contract-level basis.
Prior to the adoption of ASU 2010-26, we defined DAC as commissions and other
costs of acquiring UL insurance, VUL insurance, traditional life insurance,
annuities and other investments contracts that vary with and are related
primarily to new or renewal business, regardless of whether the acquisition
efforts were successful or unsuccessful. Upon the adoption of ASU 2010-26, we
revised our accounting policy to only defer acquisition costs directly related
to successful contract acquisitions or renewals, and excluded from DAC those
costs incurred for soliciting potential customers, market research, training,
administration, management of distribution and underwriting functions,
unsuccessful acquisition or renewal efforts and product development. In
addition, indirect acquisition costs including administrative costs, rent,
depreciation, occupancy costs, equipment costs and other general overhead are
excluded from DAC. The costs that are considered non-deferrable acquisition
costs under ASU 2010-26 are expensed in the period incurred.
We adopted the provisions of ASU 2010-26 as of January 1, 2012, and elected to
retrospectively restate all prior periods.
The following table summarizes the effect of the restatement (in millions) on
our previously reported Consolidated Balance Sheets and Consolidated
Statements of Comprehensive Income:
AS OF
DECEMBER 31,
2011
------------
Deferred acquisition costs and value of business acquired $ (1,394)
Total assets (1,394)
Other liabilities (479)
Total liabilities (489)
Retained earnings (1,137)
Accumulated other comprehensive income (loss) 231
Total stockholders' equity (904)
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2011 2010
----------- -----------
Realized gain (loss) $ 8 $ 10
Total revenues 9 13
Commissions and other expenses 117 134
Total expenses 117 134
Income (loss) from continuing operations
before taxes (108) (122)
Federal income tax expense (benefit) (39) (43)
Income (loss) from continuing operations (70) (78)
Net income (loss) (70) (78)
INTANGIBLES - GOODWILL AND OTHER TOPIC
In September 2011, the FASB issued ASU No. 2011-08, "Testing Goodwill for
Impairment" ("ASU 2011-08"), which provides an option to first assess
qualitative factors to determine if it is necessary to complete the two-step
goodwill impairment test. If the assessment of relevant events and circumstances
leads to a conclusion that it is not more likely than not that the fair value of
a reporting unit is less than its carrying value, then performing the two-step
impairment test is unnecessary. However, if a conclusion is reached otherwise,
the two-step impairment test must be completed. An entity has an unconditional
option to bypass the qualitative assessment for any reporting unit and proceed
directly to the two-step goodwill impairment test, and resume qualitative
assessment for the same reporting unit in a subsequent reporting period. We
adopted the provisions of ASU 2011-08 effective January 1, 2012. The adoption
did not have a material effect on our consolidated financial condition and
results of operations.
S-19
In July 2012, the FASB issued ASU No. 2012-02, "Testing Indefinite-Lived
Intangible Assets for Impairment" ("ASU 2012-02"), which provides an option to
first assess qualitative factors to determine whether the existence of events
and circumstances indicate that it is more likely than not that the
indefinite-lived intangible asset is impaired. If based on the qualitative
assessment an entity determines that it is not more likely than not that the
indefinite-lived intangible asset is impaired, then the quantitative impairment
test is not required. In addition, an entity has the option to bypass the
qualitative assessment in any period and proceed directly to the quantitative
assessment, with the option to return to the qualitative assessment in any
subsequent period. We adopted the provisions of ASU 2012-02 effective October 1,
2012. The adoption did not have a material effect on our consolidated financial
condition and results of operations.
TRANSFERS AND SERVICING TOPIC
In April 2011, the FASB issued ASU No. 2011-03, "Reconsideration of Effective
Control for Repurchase Agreements" ("ASU 2011-03"), which revises the criteria
for assessing effective control for repurchase agreements and other similar
agreements. The determination of whether the transfer of a financial asset
subject to a repurchase agreement is a sale is based, in part, on whether the
entity maintains effective control over the financial asset. ASU 2011-03
removes: the criterion requiring the transferor to have the ability to
repurchase or redeem the financial asset on substantially the agreed terms, even
in the event of default by the transferee; and the related requirement to
demonstrate that the transferor possesses adequate collateral to fund
substantially all the cost of purchasing replacement financial assets. We
adopted the provisions of ASU 2011-03 effective January 1, 2012. The adoption
did not have a material effect on our consolidated financial condition and
results of operations.
FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS
BALANCE SHEET TOPIC
In December 2011, the FASB issued ASU No. 2011-11, "Disclosures about Offsetting
Assets and Liabilities" ("ASU 2011-11"), to address certain comparability issues
between financial statements prepared in accordance with GAAP and those prepared
in accordance with International Financial Reporting Standards. In January 2013,
the FASB issued ASU No. 2013-01, "Clarifying the Scope of Disclosures about
Offsetting Assets and Liabilities" ("ASU 2013-01"), to provide information
regarding the scope of the disclosures required by ASU 2011-11 to the financial
instruments and derivatives reported in an entity's financial statements. ASU
2011-11 will require an entity to provide enhanced disclosures about certain
financial instruments and derivatives, as defined in ASU 2013-01, to enable
users to understand the effects of offsetting in the financial statements as
well as the effects of master netting arrangements on an entity's financial
condition. The amendments in ASU 2011-11 and ASU 2013-01, are effective for
annual and interim reporting periods beginning on or after January 1, 2013, with
respective disclosures required for all comparative periods presented. We will
adopt the requirements in ASU 2011-11 and ASU 2013-01 for the quarterly period
ending March 31, 2013, and will include the required disclosures in the notes to
our consolidated financial statements.
COMPREHENSIVE INCOME TOPIC
In February 2013, the FASB issued ASU No. 2013-02, "Reporting of Amounts
Reclassified Out of Accumulated Other Comprehensive Income" ("ASU 2013-02"),
which requires enhanced reporting of such amounts either on the face of the
financial statements or in the notes to the financial statements. Under ASU
2013-02, the type of reclassification out of AOCI, as defined under current
GAAP, will dictate whether the disclosure must provide the effect of the
reclassification on the respective financial statement line items or whether
cross-referencing to other disclosures that provide additional detail about the
reclassification will be required. The amendments in ASU 2013-02 are effective
prospectively for reporting periods beginning after December 15, 2012. We will
adopt the requirements of ASU 2013-02 beginning with our financial statements
for the quarterly period ending March 31, 2013, and will include the enhanced
disclosures in the notes to our consolidated financial statements.
S-20
3. REINSURANCE CEDED, REINSURANCE RECAPTURED, CAPITAL CONTRIBUTIONS AND
REINSURANCE NOVATED
REINSURANCE CEDED TO LINCOLN NATIONAL REINSURANCE COMPANY (BARBADOS) LIMITED
("LNBAR")
We completed a reinsurance transaction during the fourth quarter of 2012 whereby
we ceded a block of business to LNBAR, a wholly-owned subsidiary of LNC, which
resulted in the release of $164 million of capital previously supporting a
portion of statutory reserves related to our Duet/Legend business. The following
summarizes the effect of this transaction (in millions) on our Consolidated
Balance Sheets as of December 31, 2012:
ASSETS
Cash and invested cash $ (32)
Deferred acquisition costs and value of business acquired (148)
Reinsurance recoverables 547
----------
Total assets $ 367
==========
LIABILITIES
Other contract holder funds $ (44)
Deferred gain on indemnity reinsurance (233)
Funds withheld reinsurance liabilities 676
Other liabilities (32)
----------
Total liabilities $ 367
==========
REINSURANCE RECAPTURED FROM LNBAR
During fourth quarter 2012, we recaptured a block of secondary guaranteed UL
business previously ceded to LNBAR. The following summarizes the effect of this
transaction (in millions) on our Consolidated Balance Sheets and Consolidated
Statements of Comprehensive Income as of and for the year ended December 31,
2012:
ASSETS
Cash and invested cash $ 119
Other assets (34)
----------
Total assets $ 85
==========
LIABILITIES
Reinsurance related embedded derivatives $ 39
Other liabilities 45
----------
Total liabilies $ 84
==========
REVENUES AND EXPENSES
Benefits $ 290
Commissions and other expenses (289)
----------
Net income (loss) $ 1
==========
During fourth quarter 2011, we recaptured portions of business previously ceded
to LNBAR. The following summarizes the effect of this transaction (in millions)
on our Consolidated Balance Sheets and Consolidated Statements of Comprehensive
Income as of and for the year ended December 31, 2011:
ASSETS
Cash $ 204
Deferred acquisition costs 243
----------
Total assets $ 447
==========
LIABILITIES
Future contract benefits $ 613
Other contract holder funds 18
Funds withheld reinsurance liabilities (300)
Deferred gain (loss) on business sold through reinsurance 106
Other liabilities 4
----------
Total liabilities $ 441
==========
REVENUES AND EXPENSES
Amortization of deferred gain (loss) on business sold through reinsurance:
Write-off of unamortized deferred gain (loss) $ 34
Benefits (24)
Federal income tax expense (4)
----------
Net income $ 6
==========
REINSURANCE NOVATED FROM LRCVII TO LNBAR
During third quarter 2012, LRCVII novated SUL business to LNBAR. The following
summarizes the effect of this transaction (in millions) on our Consolidated
Balance Sheets as of December 31, 2012:
ASSETS
Cash and invested cash $ (52)
----------
Total assets $ (52)
==========
LIABILITIES
Reinsurance related embedded derivatives (18)
Deferred gain on indemnity reinsurance 8
Long-term debt (500)
Funds withheld reinsurance liabilities 500
Other liabilities (16)
----------
Total liabilities $ (26)
==========
REVENUES AND EXPENSES
Net investment income $ (13)
Benefits 13
----------
Net Income $ (26)
==========
CAPITAL CONTRIBUTIONS
On December 30, 2011, LNC transferred ownership of LIAC to LNL. In addition, LNC
assumed certain liabilities from LNL during 2011 (reflected in "Other" in the
table below). The following summarizes the effect of these capital contributions
(in millions):
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2011 2011
---------- ----------
LIAC OTHER
---------- ----------
Cash and invested cash $ 1 $ -
Other assets 9 -
Other liabilities (5) 5
---------- --------
Total(1) $ 5 $ 5
========== ==========
(1) Reported in capital contribution from LNC on our Consolidated Statements of
Stockholder's Equity.
S-21
4. VARIABLE INTEREST ENTITIES
CONSOLIDATED VIES
CLNS
We have invested in the Class 1 notes of two CLN structures, which represent
special purpose trusts combining asset-backed securities with credit default
swaps to produce multi-class structured securities. The CLN structures also
include subordinated Class 2 notes, which are held by third parties, and,
together with the Class 1 notes, represent 100% of the outstanding notes of the
CLN structures. The entities that issued the CLNs are financed by the note
holders, and, as such, the note holders participate in the expected losses and
residual returns of the entities.
Because the note holders do not have voting rights or similar rights, we
determined the entities issuing the CLNs are VIEs, and as a note holder, our
interest represented a variable interest. We have the power to direct the most
significant activity affecting the performance of both CLN structures, as we
have the ability to actively manage the reference portfolio underlying the
credit default swaps. In addition, we receive returns from the CLN structures
and may absorb losses that could potentially be significant to the CLN
structures. As such, we concluded that we are the primary beneficiary of the
VIEs associated with the CLNs. We reflected the assets and liabilities on our
Consolidated Balance Sheets and recognized the results of operations of these
VIEs on our Consolidated Statements of Comprehensive Income (Loss) since
adopting new accounting guidance in the first quarter of 2010. See
"Consolidations Topic" in Note 2 for more detail regarding the effect of the
adoption.
As a result of consolidating the CLNs, we also consolidate the derivative
instruments in the CLN structures. The credit default swaps create variability
in the CLN structures and expose the note holders to the credit risk of the
referenced portfolio. The contingent forward contracts transfer a portion of the
loss in the underlying fixed maturity corporate asset-backed credit card loan
securities back to the counterparty after credit losses reach our attachment
point.
The following summarizes information regarding the CLN structures (dollars in
millions) as of December 31, 2012:
AMOUNT AND DATE OF ISSUANCE
---------------------------
$400 $200
DECEMBER APRIL
2006 2007
------------- -----------
Original attachment point (subordination) 5.50 % 2.05 %
Current attachment point (subordination) 4.17 % 1.48 %
Maturity 12/20/2016 3/20/2017
Current rating of tranche BB- Ba2
Current rating of underlying collateral pool Aa1-B3 Aaa-Caa2
Number of defaults in underlying collateral pool 2 2
Number of entities 123 99
Number of countries 20 21
There has been no event of default on the CLNs themselves. Based upon our
analysis, the remaining subordination as represented by the attachment point
should be sufficient to absorb future credit losses, subject to changing market
conditions. Similar to other debt market instruments, our maximum principal loss
is limited to our original investment.
The following summarizes the exposure of the CLN structures' underlying
collateral by industry and rating as of December 31, 2012:
AAA AA A BBB BB B CCC TOTAL
--------- --------- --------- --------- --------- --------- --------- ---------
INDUSTRY
Financial intermediaries - % 2.1 % 7.0 % 1.4 % - % - % - % 10.5 %
Telecommunications - % - % 5.5 % 4.5 % - % 0.5 % - % 10.5 %
Oil and gas 0.3 % 2.1 % 1.0 % 4.6 % - % - % - % 8.0 %
Utilities - % - % 2.6 % 2.0 % - % - % - % 4.6 %
Chemicals and plastics - % - % 2.3 % 1.2 % 0.4 % - % - % 3.9 %
Drugs 0.3 % 2.2 % 1.2 % - % - % - % - % 3.7 %
Retailers (except food
and drug) - % - % 2.1 % 0.9 % 0.5 % - % - % 3.5 %
Industrial equipment - % - % 3.0 % 0.3 % - % - % - % 3.3 %
Sovereign - % 0.7 % 1.2 % 1.3 % - % - % - % 3.2 %
Conglomerates - % 2.3 % 0.9 % - % - % - % - % 3.2 %
Forest products - % - % - % 1.6 % 1.4 % - % - % 3.0 %
Other - % 4.5 % 15.4 % 17.4 % 4.1 % 0.9 % 0.3 % 42.6 %
--------- --------- --------- --------- --------- --------- --------- ---------
Total 0.6 % 13.9 % 42.2 % 35.2 % 6.4 % 1.4 % 0.3 % 100.0 %
========= ========= ========= ========= ========= ========= ========= =========
S-22
STATUTORY TRUST NOTE
In August 2011, we purchased a $100 million note issued by a statutory trust
("Issuer") in a private placement offering. The proceeds were used by the Issuer
to purchase U.S. Treasury securities to be held as collateral assets supporting
an excess mortality swap. Our maximum exposure to loss is limited to our
original investment in the notes. We have concluded that the Issuer of the note
is a VIE as the entity does not have sufficient equity to support its activities
without additional financial support, and as a note holder, our interest
represents a variable interest. In our evaluation of the primary beneficiary, we
concluded that our economic interest was greater than our stated power. As a
result, we concluded that we are the primary beneficiary of the VIE and
consolidate all of the assets and liabilities of the Issuer on our Consolidated
Balance Sheets as of August 1, 2011.
Asset and liability information (dollars in millions) for these consolidated
VIEs included on our Consolidated Balance Sheets was as follows:
AS OF DECEMBER 31, 2012 AS OF DECEMBER 31, 2011
---------------------------------------- ----------------------------------------
NUMBER NUMBER
OF NOTIONAL CARRYING OF NOTIONAL CARRYING
INSTRUMENTS AMOUNTS VALUE INSTRUMENTS AMOUNTS VALUE
----------- ----------- ---------- ----------- ---------- -----------
ASSETS
Fixed maturity securities:
Asset-backed credit card loan N/A $ - $ 598 N/A $ - $ 592
U.S. government bonds N/A - 110 N/A - 108
Excess mortality swap 1 100 - 1 100 -
----------- ----------- ---------- ----------- ---------- -----------
Total assets(1) 1 $ 100 $ 708 1 $ 100 $ 700
=========== =========== ========== =========== ========== ===========
LIABILITIES
Non-qualifying hedges:
Credit default swaps 2 $ 600 $ 129 2 $ 600 $ 295
Contingent forwards 2 - (1) 2 - (4)
----------- ----------- ---------- ----------- ---------- -----------
Total non-qualifying hedges 4 600 128 4 600 291
----------- ----------- ---------- ----------- ---------- -----------
Federal income tax N/A - (36) N/A - (98)
----------- ----------- ---------- ----------- ---------- -----------
Total liabilities(2) 4 $ 600 $ 92 4 $ 600 $ 193
=========== =========== ========== =========== ========== ===========
(1) Reported in VIEs' fixed maturity securities on our Consolidated Balance
Sheets.
(2) Reported in VIEs' liabilities on our Consolidated Balance Sheets.
For details related to the fixed maturity AFS securities for these VIEs, see
Note 5.
As described more fully in Note 1, we regularly review our investment holdings
for OTTI. Based upon this review, we believe that the fixed maturity securities
were not other-than-temporarily impaired as of December 31, 2012.
The gains (losses) for these consolidated VIEs (in millions) recorded on our
Consolidated Statements of Comprehensive Income (Loss) were as follows:
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
2012 2011
----------- ----------
NON-QUALIFYING HEDGES
Credit default swaps $ 166 $ (80)
Contingent forwards (3) (2)
----------- ----------
Total non-qualifying hedges(1) $ 163 $ (82)
=========== ==========
(1) Reported in realized gain (loss) on our Consolidated Statements of
Comprehensive Income (Loss).
UNCONSOLIDATED VIES
Effective December 31, 2010, we issued a $500 million long-term senior note in
exchange for a corporate bond AFS security of like principal and duration from a
non-affiliated VIE whose primary activities are to acquire, hold and issue notes
and loans, as well as pay and collect interest on the notes and loans. We have
concluded that we are not the primary beneficiary of this VIE because we do not
have power over the activities that most significantly affect its economic
performance. In addition, the terms of the senior note provide us with a set-off
right to the corporate bond AFS security we purchased from the VIE; therefore,
neither appears on our Consolidated Balance Sheets. We assigned the corporate
bond AFS security to one of our subsidiaries and issued a guarantee to our
subsidiary for the timely payment of the corporate bond's principal.
S-23
Through our investment activities, we make passive investments in structured
securities issued by VIEs for which we are not the manager. These structured
securities include our RMBS, CMBS and CDOs. We have not provided financial or
other support with respect to these VIEs other than our original investment. We
have determined that we are not the primary beneficiary of these VIEs due to the
relative size of our investment in comparison to the principal amount of the
structured securities issued by the VIEs and the level of credit subordination
that reduces our obligation to absorb losses or right to receive
benefits. Our maximum exposure to loss on these structured securities is limited
to the amortized cost for these investments. We recognize our variable interest
in these VIEs at fair value on our Consolidated Balance Sheets. For information
about these structured securities, see Note 5.
5. INVESTMENTS
AFS SECURITIES
Pursuant to the Fair Value Measurements and Disclosures Topic of the FASB ASC,
we have categorized AFS securities into a three-level hierarchy, based on the
priority of the inputs to the respective valuation technique. The fair value
hierarchy gives the highest priority to quoted prices in active markets for
identical assets or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3), as described in Note 1, which also includes
additional disclosures regarding our fair value measurements.
The amortized cost, gross unrealized gains, losses and OTTI and fair value of
AFS securities (in millions) were as follows:
AS OF DECEMBER 31, 2012
--------------------------------------------------------------------
GROSS UNREALIZED
AMORTIZED ---------------------------------------- FAIR
COST GAINS LOSSES OTTI VALUE
----------- ----------- ---------- ----------- ----------
FIXED MATURITY SECURITIES:
Corporate bonds $ 59,127 $ 7,977 $ 216 $ 104 $ 66,784
U.S. government bonds 339 54 - - 393
Foreign government bonds 549 91 - - 640
RMBS 5,494 449 3 57 5,883
CMBS 925 63 14 19 955
CDOs 189 2 3 8 180
State and municipal bonds 3,455 795 7 - 4,243
Hybrid and redeemable preferred securities 1,143 103 70 - 1,176
VIEs' fixed maturity securities 677 31 - - 708
----------- ----------- ---------- ----------- ----------
Total fixed maturity securities 71,898 9,565 313 188 80,962
Equity securities 137 22 2 - 157
----------- ----------- ---------- ----------- ----------
Total AFS securities $ 72,035 $ 9,587 $ 315 $ 188 $ 81,119
=========== =========== ========== =========== ==========
AS OF DECEMBER 31, 2011
--------------------------------------------------------------------
GROSS UNREALIZED
AMORTIZED ---------------------------------------- FAIR
COST GAINS LOSSES OTTI VALUE
----------- ----------- ---------- ----------- ----------
FIXED MATURITY SECURITIES:
Corporate bonds $ 52,665 $ 5,989 $ 507 $ 60 $ 58,087
U.S. government bonds 395 50 - - 445
Foreign government bonds 654 64 - - 718
RMBS 7,331 522 70 119 7,664
CMBS 1,563 68 93 9 1,529
CDOs 120 - 19 - 101
State and municipal bonds 3,399 553 9 - 3,943
Hybrid and redeemable preferred securities 1,239 47 166 - 1,120
VIEs' fixed maturity securities 673 27 - - 700
----------- ----------- ---------- ----------- ----------
Total fixed maturity securities 68,039 7,320 864 188 74,307
Equity securities 135 16 12 - 139
----------- ----------- ---------- ----------- ----------
Total AFS securities $ 68,174 $ 7,336 $ 876 $ 188 $ 74,446
=========== =========== ========== =========== ==========
S-24
The amortized cost and fair value of fixed maturity AFS securities by
contractual maturities (in millions) as of December 31, 2012, were as follows:
AMORTIZED FAIR
COST VALUE
----------- ------------
Due in one year or less $ 2,872 $ 2,922
Due after one year through five years 12,334 13,470
Due after five years through ten years 23,662 26,520
Due after ten years 26,422 31,032
----------- ------------
Subtotal 65,290 73,944
----------- ------------
MBS 6,419 6,838
CDOs 189 180
----------- ------------
Total fixed maturity AFS securities $ 71,898 $ 80,962
=========== ============
Actual maturities may differ from contractual maturities because issuers may
have the right to call or pre-pay obligations.
The fair value and gross unrealized losses, including the portion of OTTI
recognized in OCI, of AFS securities (dollars in millions), aggregated by
investment category and length of time that individual securities have been in a
continuous unrealized loss position, were as follows:
AS OF DECEMBER 31, 2012
-----------------------------------------------------------------------------------
LESS THAN OR EQUAL GREATER THAN
TO TWELVE MONTHS TWELVE MONTHS TOTAL
------------------------- ------------------------- -------------------------
GROSS GROSS GROSS
UNREALIZED UNREALIZED UNREALIZED
LOSSES LOSSES LOSSES
FAIR AND FAIR AND FAIR AND
VALUE OTTI VALUE OTTI VALUE OTTI
----------- ---------- ----------- ---------- ----------- ----------
FIXED MATURITY SECURITIES:
Corporate bonds $ 2,814 $ 142 $ 918 $ 178 $ 3,732 $ 320
RMBS 253 36 196 24 449 60
CMBS 63 16 104 17 167 33
CDOs 10 8 53 3 63 11
State and municipal bonds 64 1 24 6 88 7
Hybrid and redeemable
preferred securities 71 3 281 67 352 70
----------- ---------- ----------- ---------- ----------- ----------
Total fixed maturity securities 3,275 206 1,576 295 4,851 501
Equity securities 7 2 - - 7 2
----------- ---------- ----------- ---------- ----------- ----------
Total AFS securities $ 3,282 $ 208 $ 1,576 $ 295 $ 4,858 $ 503
=========== ========== =========== ========== =========== ==========
Total number of AFS securities in an unrealized loss position 617
==========
AS OF DECEMBER 31, 2011
-----------------------------------------------------------------------------------
LESS THAN OR EQUAL GREATER THAN
TO TWELVE MONTHS TWELVE MONTHS TOTAL
------------------------- ------------------------- -------------------------
GROSS GROSS GROSS
UNREALIZED UNREALIZED UNREALIZED
LOSSES LOSSES LOSSES
FAIR AND FAIR AND FAIR AND
VALUE OTTI VALUE OTTI VALUE OTTI
----------- ---------- ----------- ---------- ----------- ----------
FIXED MATURITY SECURITIES:
Corporate bonds $ 2,764 $ 152 $ 1,420 $ 415 $ 4,184 $ 567
RMBS 525 118 408 71 933 189
CMBS 173 15 136 87 309 102
CDOs 9 1 80 18 89 19
State and municipal bonds 31 - 30 9 61 9
Hybrid and redeemable
preferred securities 315 23 340 143 655 166
----------- ---------- ----------- ---------- ----------- ----------
Total fixed maturity securities 3,817 309 2,414 743 6,231 1,052
Equity securities 38 12 - - 38 12
----------- ---------- ----------- ---------- ----------- ----------
Total AFS securities $ 3,855 $ 321 $ 2,414 $ 743 $ 6,269 $ 1,064
=========== ========== =========== ========== =========== ==========
Total number of AFS securities in an unrealized loss position 891
==========
S-25
For information regarding our investments in VIEs, see Note 4.
The fair value, gross unrealized losses, the portion of OTTI recognized in OCI
(in millions) and number of AFS securities where the fair value had declined and
remained below amortized cost by greater than 20% were as follows:
AS OF DECEMBER 31, 2012
--------------------------------------------------------
GROSS UNREALIZED NUMBER
FAIR ------------------------- OF
VALUE LOSSES OTTI SECURITIES(1)
---------- ----------- ----------- -------------
Less than six months $ 34 $ 9 $ 1 14
Nine months or greater, but less than twelve months 15 10 - 3
Twelve months or greater 385 175 125 131
---------- ----------- ----------- -------------
Total $ 434 $ 194 $ 126 148
========== =========== =========== =============
AS OF DECEMBER 31, 2011
--------------------------------------------------------
GROSS UNREALIZED NUMBER
FAIR ------------------------- OF
VALUE LOSSES OTTI SECURITIES(1)
---------- ----------- ----------- -------------
Less than six months $ 378 $ 123 $ 29 56
Six months or greater, but less than nine months 51 28 12 18
Nine months or greater, but less than twelve months 2 - 1 7
Twelve months or greater 596 454 102 175
---------- ----------- ----------- -------------
Total $ 1,027 $ 605 $ 144 256
========== =========== =========== =============
(1) We may reflect a security in more than one aging category based on various
purchase dates.
We regularly review our investment holdings for OTTI. Our gross unrealized
losses on AFS securities as of December 31, 2012, decreased $561 million in
comparison to December 31, 2011. As discussed further below, we believe the
unrealized loss position as of December 31, 2012, did not represent OTTI as we
did not intend to sell these fixed maturity AFS securities, it is not more
likely than not that we will be required to sell the fixed maturity AFS
securities before recovery of their amortized cost basis, the estimated future
cash flows were equal to or greater than the amortized cost basis of the debt
securities, or we had the ability and intent to hold the equity AFS securities
for a period of time sufficient for recovery.
Based upon this evaluation as of December 31, 2012, management believes we have
the ability to generate adequate amounts of cash from our normal operations
(e.g., insurance premiums and fees and investment income) to meet cash
requirements with a prudent margin of safety without requiring the sale of our
temporarily-impaired securities.
As of December 31, 2012, the unrealized losses associated with our corporate
bond securities were attributable primarily to securities that were backed by
commercial loans and individual issuer companies. For our corporate bond
securities with commercial loans as the underlying collateral, we evaluated the
projected credit losses in the underlying collateral and concluded that we had
sufficient subordination or other credit enhancement when compared with our
estimate of credit losses for the individual security and we expected to recover
the entire amortized cost for each security. For individual issuers, we
performed detailed analysis of the financial performance of the issuer and
determined that we expected to recover the entire amortized cost for each
security.
As of December 31, 2012, the unrealized losses associated with our MBS and CDOs
were attributable primarily to collateral losses and credit spreads. We assessed
for credit impairment using a cash flow model as discussed above. The key
assumptions included default rates, severities and prepayment rates. We
estimated losses for a security by forecasting the underlying loans in each
transaction. The forecasted loan performance was used to project cash flows to
the various tranches in the structure, as applicable. Our forecasted cash flows
also considered, as applicable, independent industry analyst reports and
forecasts, sector credit ratings and other independent market data. Based upon
our assessment of the expected credit losses of the security given the
performance of the underlying collateral compared to our subordination or other
credit enhancement, we expected to recover the entire amortized cost basis of
each security.
As of December 31, 2012, the unrealized losses associated with our hybrid and
redeemable preferred securities were attributable primarily to wider credit
spreads caused by illiquidity in the market and subordination within the capital
structure, as well as credit risk of specific issuers. For our hybrid and
redeemable preferred securities, we evaluated the financial performance of the
issuer based upon credit performance and investment ratings and determined we
expected to recover the entire amortized cost of each security.
Changes in the amount of credit loss of OTTI recognized in net income (loss)
where the portion related to other factors was
S-26
recognized in OCI (in millions) on fixed maturity AFS securities were as
follows:
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
2012 2011 2010
------------ ---------- -----------
Balance as of beginning-of-year $ 380 $ 309 $ 260
Increases attributable to:
Credit losses on securities for which an OTTI was not
previously recognized 98 54 13
Credit losses on securities for which an OTTI was
previously recognized 59 68 61
Decreases attributable to:
Securities sold (135) (51) (25)
------------ ---------- -----------
Balance as of end-of-year $ 402 $ 380 $ 309
============ ========== ===========
During 2012, 2011 and 2010, we recorded credit losses on securities for which an
OTTI was not previously recognized as we determined the cash flows expected to
be collected would not be sufficient to recover the entire amortized cost basis
of the debt security. The credit losses we recorded on securities for which an
OTTI was not previously recognized were attributable primarily to one or a
combination of the following reasons:
o Failure of the issuer of the security to make scheduled payments;
o Deterioration of creditworthiness of the issuer;
o Deterioration of conditions specifically related to the security;
o Deterioration of fundamentals of the industry in which the issuer operates;
o Deterioration of fundamentals in the economy including, but not limited to,
higher unemployment and lower housing prices; and
o Deterioration of the rating of the security by a rating agency.
We recognize the OTTI attributed to the noncredit portion as a separate
component in OCI referred to as unrealized OTTI on AFS securities.
TRADING SECURITIES
Trading securities at fair value (in millions) consisted of the following:
AS OF DECEMBER 31,
-------------------------
2012 2011
----------- ----------
FIXED MATURITY SECURITIES:
Corporate bonds $ 1,817 $ 1,780
U.S. government bonds 310 376
Foreign government bonds 32 39
RMBS 188 237
CMBS 17 31
CDOs 4 4
State and municipal bonds 25 24
Hybrid and redeemable preferred securities 42 45
----------- ----------
Total fixed maturity securities 2,435 2,536
Equity securities 2 2
----------- ----------
Total trading securities $ 2,437 $ 2,538
=========== ==========
The portion of the market adjustment for losses that relate to trading
securities still held as of December 31, 2012, 2011 and 2010, was $53 million,
$115 million and $86 million, respectively.
MORTGAGE LOANS ON REAL ESTATE
Mortgage loans on real estate principally involve commercial real estate. The
commercial loans are geographically diversified throughout the U.S. with the
largest concentrations in California and Texas, which accounted for 31% and 32%
of mortgage loans on real estate as of December 31, 2012 and 2011, respectively.
The following provides the composition of our mortgage loans on real estate (in
millions):
AS OF DECEMBER 31,
-------------------------
2012 2011
----------- ----------
Current $ 6,791 $ 6,579
Valuation allowance associated with impaired mortgage loans on real estate (6) (3)
Unamortized premium (discount) 7 13
----------- ----------
Total carrying value $ 6,792 $ 6,589
=========== ==========
S-27
The number of impaired mortgage loans on real estate, each of which had an
associated specific valuation allowance, and the carrying value of impaired
mortgage loans on real estate (dollars in millions) were as follows:
AS OF DECEMBER 31,
--------------------------
2012 2011
----------- -----------
Number of impaired mortgage loans on real estate 4 3
=========== ===========
Principal balance of impaired mortgage loans on real estate $ 38 $ 11
Valuation allowance associated with impaired mortgage loans on real estate (6) (3)
----------- -----------
Carrying value of impaired mortgage loans on real estate $ 32 $ 8
=========== ===========
The average carrying value on the impaired mortgage loans on real estate (in
millions) was as follows:
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
2012 2011 2010
----------- ----------- -----------
Average carrying value for impaired mortgage loans on real estate $ 17 $ 15 $ 29
Interest income recognized on impaired mortgage loans on real estate 1 1 3
Interest income collected on impaired mortgage loans on real estate 1 1 3
As described in Note 1, we use the loan-to-value and debt-service coverage
ratios as credit quality indicators for our mortgage loans, which were as
follows (dollars in millions):
AS OF DECEMBER 31, 2012 AS OF DECEMBER 31, 2011
--------------------------------------- ----------------------------------------
DEBT- DEBT-
SERVICE SERVICE
PRINCIPAL % OF COVERAGE PRINCIPAL % OF COVERAGE
AMOUNT TOTAL RATIO AMOUNT TOTAL RATIO
---------- ----------- ---------- ----------- ----------- -----------
LOAN-TO-VALUE
Less than 65% $ 5,526 81.3 % 1.68 $ 5,173 78.6 % 1.61
65% to 74% 869 12.8 % 1.39 1,130 17.2 % 1.38
75% to 100% 350 5.2 % 0.82 256 3.9 % 0.95
Greater than 100% 46 0.7 % 0.79 20 0.3 % 0.73
---------- ----------- ----------- ------------
Total mortgage loans on real estate $ 6,791 100.0 % $ 6,579 100.0 %
========== =========== =========== ============
S-28
ALTERNATIVE INVESTMENTS
As of December 31, 2012 and 2011, alternative investments included investments
in 98 and 96 different partnerships, respectively, and the portfolio represented
less than 1% of our overall invested assets.
NET INVESTMENT INCOME
The major categories of net investment income (in millions) on our Consolidated
Statements of Comprehensive Income (Loss) were as follows:
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
2012 2011 2010
----------- ----------- -----------
Fixed maturity AFS securities $ 3,813 $ 3,724 $ 3,577
Equity AFS securities 6 5 5
Trading securities 138 145 148
Mortgage loans on real estate 381 392 407
Real estate 11 18 16
Standby real estate equity commitments - 1 1
Policy loans 163 161 167
Invested cash 4 3 5
Commercial mortgage loan prepayment
and bond make-whole premiums 39 75 61
Alternative investments 125 90 93
Consent fees 3 3 8
Other investments (5) - 7
----------- ----------- -----------
Investment income 4,678 4,617 4,495
Investment expense (127) (127) (133)
----------- ----------- -----------
Net investment income $ 4,551 $ 4,490 $ 4,362
=========== =========== ===========
REALIZED GAIN (LOSS) RELATED TO CERTAIN INVESTMENTS
The detail of the realized gain (loss) related to certain investments (in
millions) was as follows:
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
2012 2011 2010
----------- ----------- -----------
Fixed maturity AFS securities:
Gross gains $ 14 $ 84 $ 100
Gross losses (187) (218) (241)
Equity AFS securities:
Gross gains 1 10 9
Gross losses (9) - (4)
Gain (loss) on other investments 15 27 (4)
Associated amortization of DAC, VOBA, DSI and DFEL
and changes in other contract holder funds 2 (9) 8
----------- ----------- -----------
Total realized gain (loss) related to certain investments $ (164) $ (106) $ (132)
=========== =========== ===========
Details underlying write-downs taken as a result of OTTI (in millions) that were
recognized in net income (loss) and included in realized gain (loss) on AFS
securities above, and the portion of OTTI recognized in OCI (in millions) were
as follows:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2012 2011 2010
---------- ----------- ----------
OTTI RECOGNIZED IN NET INCOME (LOSS)
Fixed maturity securities:
Corporate bonds $ (62) $ (13) $ (88)
RMBS (50) (76) (61)
CMBS (47) (56) (41)
CDOs (2) (1) (1)
Hybrid and redeemable preferred securities - (2) (5)
-------- --------- --------
Total fixed maturity securities (161) (148) (196)
Equity securities (8) - (3)
-------- --------- --------
Gross OTTI recognized in net income (loss) (169) (148) (199)
Associated amortization of DAC, VOBA, DSI and DFEL 30 30 44
---------- ----------- ----------
Net OTTI recognized in net income (loss), pre-tax $ (139) $ (118) $ (155)
========== =========== ==========
PORTION OF OTTI RECOGNIZED IN OCI
Gross OTTI recognized in OCI $ 118 $ 54 $ 93
Change in DAC, VOBA, DSI and DFEL (15) (12) (11)
---------- ----------- ----------
Net portion of OTTI recognized in OCI, pre-tax $ 103 $ 42 $ 82
========== =========== ==========
DETERMINATION OF CREDIT LOSSES ON CORPORATE BONDS AND CDOS
As of December 31, 2012 and 2011, we reviewed our corporate bond and CDO
portfolios for potential shortfall in contractual principal and interest based
on numerous subjective and objective inputs. The factors used to determine the
amount of credit loss for each individual security, include, but are not limited
to, near term risk, substantial discrepancy between book and market value,
sector or company-specific volatility, negative operating trends and trading
levels wider than peers.
DETERMINATION OF CREDIT LOSSES ON MBS
As of December 31, 2012 and 2011, default rates were projected by considering
underlying MBS loan performance and collateral type. Projected default rates on
existing delinquencies vary between 10% to 100% depending on loan type and
severity of delinquency status. In addition, we estimate the potential
contributions of currently performing loans that may become delinquent in the
future based on the change in delinquencies and loan liquidations experienced in
the recent history. Finally, we develop a default rate timing curve by
aggregating the defaults for all loans in the pool (delinquent
S-29
loans, foreclosure and real estate owned and new delinquencies from currently
performing loans) and the associated loan level loss severities.
We use certain available loan characteristics such as lien status, loan sizes
and occupancy to estimate the loss severity of loans. Second lien loans are
assigned 100% severity, if defaulted. For first lien loans, we assume a minimum
of 30% severity with higher severity assumed for investor properties and further
housing price depreciation. With the default rate timing curve and loan-level
loss severity, we derive the future expected credit losses.
PAYABLES FOR COLLATERAL ON INVESTMENTS
The carrying values of the payables for collateral on investments (in millions)
included on our Consolidated Balance Sheets and the fair value of the related
investments or collateral consisted of the following:
AS OF DECEMBER 31, 2012 AS OF DECEMBER 31, 2011
------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ----------- ----------- -----------
Collateral payable held for derivative investments(1) $ 2,507 $ 2,507 $ 2,994 $ 2,994
Securities pledged under securities lending agreements(2) 197 189 200 193
Securities pledged under reverse repurchase agreements(3) 280 294 280 294
Securities pledged for Term Asset-Backed Securities
Loan Facility ("TALF")(4) 37 52 173 199
Investments pledged for Federal Home Loan Bank of
Indianapolis ("FHLBI")(5) 1,100 1,936 100 142
---------- ----------- ----------- -----------
Total payables for collateral on investments $ 4,121 $ 4,978 $ 3,747 $ 3,822
========== =========== =========== ===========
(1) We obtain collateral based upon contractual provisions with our
counterparties. These agreements take into consideration the
counterparties' credit rating as compared to ours, the fair value of
the derivative investments and specified thresholds that if exceeded
result in the receipt of cash that is typically invested in cash and
invested cash. See Note 6 for details about maximum collateral
potentially required to post on our credit default swaps.
(2) Our pledged securities under securities lending agreements are
included in fixed maturity AFS securities on our Consolidated Balance
Sheets. We generally obtain collateral in an amount equal to 102% and
105% of the fair value of the domestic and foreign securities,
respectively. We value collateral daily and obtain additional
collateral when deemed appropriate. The cash received in our
securities lending program is typically invested in cash and invested
cash or fixed maturity AFS securities.
(3) Our pledged securities under reverse repurchase agreements are
included in fixed maturity AFS securities on our Consolidated Balance
Sheets. We obtain collateral in an amount equal to 95% of the fair
value of the securities, and our agreements with third parties
contain contractual provisions to allow for additional collateral to
be obtained when necessary. The cash received in our reverse
repurchase program is typically invested in fixed maturity AFS
securities.
(4) Our pledged securities for TALF are included in fixed maturity AFS
securities on our Consolidated Balance Sheets. We obtain collateral
in an amount that has typically averaged 90% of the fair value of the
TALF securities. The cash received in these transactions is invested
in fixed maturity AFS securities.
(5) Our pledged investments for FHLBI are included in fixed maturity AFS
securities and mortgage loans on real estate on our Consolidated
Balance Sheets. The collateral requirements are generally 105% to
115% of the fair value for fixed maturity AFS securities and 155% to
175% of the fair value for mortgage loans on real estate. The cash
received in these transactions is primarily invested in cash and
invested cash or fixed maturity AFS securities.
S-30
Increase (decrease) in payables for collateral on investments (in millions)
included on the Consolidated Statements of Cash Flows consisted of the
following:
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
2012 2011 2010
----------- ----------- -----------
Collateral payable held for derivative investments $ (487) $ 2,141 $ 219
Securities pledged under securities lending agreements (3) 1 (302)
Securities pledged under reverse repurchase agreements - - (64)
Securities pledged for TALF (136) (107) (65)
Investments pledged for FHLBI 1,000 - -
----------- ----------- -----------
Total increase (decrease) in payables for collateral on investments $ 374 $ 2,035 $ (212)
=========== =========== ===========
INVESTMENT COMMITMENTS
As of December 31, 2012, our investment commitments were $536 million, which
included $226 million of LPs, $146 million of private placement securities and
$164 million of mortgage loans on real estate.
CONCENTRATIONS OF FINANCIAL INSTRUMENTS
As of December 31, 2012 and 2011, our most significant investments in one issuer
were our investments in securities issued by the Federal Home Loan Mortgage
Corporation with a fair value of $3.6 billion and $4.7 billion, respectively, or
4% and 5% of our invested assets portfolio, respectively, and our investments in
securities issued by Fannie Mae with a fair value of $2.2 billion and $2.5
billion, respectively, or 2% and 3% of our invested assets portfolio,
respectively. These investments are included in corporate bonds in the tables
above.
As of December 31, 2012, our most significant investments in one industry were
our investment securities in the electric industry with a fair value of $8.4
billion, or 9% of our invested assets portfolio and our investment securities in
the banking industry with a fair value of $5.3 billion, or 5% of our invested
assets portfolio. As of December 31, 2011, our most significant investments in
one industry were our investment securities in the electric industry with a fair
value of $7.5 billion, or 8% of our invested assets portfolio and our investment
securities in the collateralized mortgage and other obligations industry with a
fair value of $5.3 billion, or 6% of our invested assets portfolio. We utilized
the industry classifications to obtain the concentration of financial
instruments amount; as such, this amount will not agree to the AFS securities
table above.
6. DERIVATIVE INSTRUMENTS
We maintain an overall risk management strategy that incorporates the use of
derivative instruments to minimize significant unplanned fluctuations in
earnings that are caused by interest rate risk, foreign currency exchange risk,
equity market risk, default risk, basis risk and credit risk. We assess these
risks by continually identifying and monitoring changes in our exposures that
may adversely affect expected future cash flows and by evaluating hedging
opportunities.
Derivative activities are monitored by various management committees. The
committees are responsible for overseeing the implementation of various hedging
strategies that are developed through the analysis of financial simulation
models and other internal and industry sources. The resulting hedging strategies
are incorporated into our overall risk management strategies.
See Note 1 for a detailed discussion of the accounting treatment for derivative
instruments. See Note 21 for additional disclosures related to the fair value of
our financial instruments and see Note 4 for derivative instruments related to
our consolidated VIEs.
INTEREST RATE CONTRACTS
We use derivative instruments as part of our interest rate risk management
strategy. These instruments are economic hedges unless otherwise noted and
include:
CONSUMER PRICE INDEX SWAPS
We use consumer price index swaps to hedge the liability exposure on certain
options in fixed annuity products. Consumer price index swaps are contracts
entered into at no cost and whose payoff is the difference between the
consumer price index inflation rate and the fixed rate determined as of
inception.
FORWARD-STARTING INTEREST RATE SWAPS
We use forward-starting interest rate swaps designated and qualifying as cash
flow hedges to hedge our exposure to interest rate fluctuations related to the
forecasted purchase of certain assets and liabilities.
INTEREST RATE CAP AGREEMENTS
We use interest rate cap agreements to provide a level of protection from the
effect of rising interest rates to economically hedge certain life insurance
products and annuity contracts. Interest rate cap agreements entitle us to
receive quarterly payments from the counterparties on specified future reset
dates, contingent on future interest rates. For each cap, the amount of such
quarterly payments, if any, is determined by the excess of a market interest
rate over a specified cap rate, multiplied by the notional amount divided by
four.
S-31
INTEREST RATE CAP CORRIDORS
We use interest rate cap corridors to provide a level of protection from the
effect of rising interest rates for certain life insurance products and annuity
contracts. Interest rate cap corridors involve purchasing an interest rate cap
at a specific cap rate and selling an interest rate cap with a higher cap rate.
For each corridor, the amount of quarterly payments, if any, is determined by
the rate at which the underlying index rate resets above the original capped
rate. The corridor limits the benefit the purchaser can receive as the related
interest rate index rises above the higher capped rate. There is no additional
liability to us other than the purchase price associated with the interest rate
cap corridor.
INTEREST RATE FUTURES
We use interest rate futures contracts to hedge the liability exposure on
certain options in variable annuity products. These futures contracts require
payment between our counterparty and us on a daily basis for changes in the
futures index price.
INTEREST RATE SWAP AGREEMENTS
We use interest rate swap agreements to hedge the liability exposure on certain
options in variable annuity products.
We also use interest rate swap agreements designated and qualifying as cash flow
hedges. These instruments either hedge the interest rate risk of floating rate
bond coupon payments by replicating a fixed rate bond, or hedge our exposure to
fixed rate bond coupon payments and the change in the underlying asset values as
interest rates fluctuate.
Finally, we use interest rate swap agreements designated and qualifying as fair
value hedges to hedge against changes in the value of anticipated transactions
and commitments as interest rates fluctuate.
TREASURY AND REVERSE TREASURY LOCKS
We use treasury locks designated and qualifying as cash flow hedges to hedge the
interest rate exposure related to our issuance of fixed rate securities or the
anticipated future cash flows of floating rate fixed maturity securities due to
changes in interest rates. In addition, we use reverse treasury locks designated
and qualifying as cash flow hedges to hedge the interest rate exposure related
to the purchase of fixed rate securities or the anticipated future cash flows of
floating rate fixed maturity securities due to changes in interest rates. These
derivatives are primarily structured to hedge interest rate risk inherent in the
assumptions used to price certain liabilities.
FOREIGN CURRENCY CONTRACTS
We use derivative instruments as part of our foreign currency risk management
strategy. These instruments are economic hedges unless otherwise noted and
include:
CURRENCY FUTURES
We use currency futures to hedge foreign exchange risk associated with certain
options in variable annuity products. Currency futures exchange one currency for
another at a specified date in the future at a specified exchange rate.
FOREIGN CURRENCY SWAPS
We use foreign currency swaps designated and qualifying as cash flow hedges,
which are traded over-the-counter, to hedge some of the foreign exchange risk of
investments in fixed maturity securities denominated in foreign currencies. A
foreign currency swap is a contractual agreement to exchange the currencies of
two different countries at a specified rate of exchange in the future.
EQUITY MARKET CONTRACTS
We use derivative instruments as part of our equity market risk management
strategy that are economic hedges and include:
CALL OPTIONS BASED ON THE S&P 500 INDEX(R) ("S&P 500")
We use indexed annuity contracts to permit the holder to elect an interest rate
return or an equity market component, where interest credited to the contracts
is linked to the performance of the S&P 500. Contract holders may elect to
rebalance index options at renewal dates, either annually or biannually. As of
each renewal date, we have the opportunity to re-price the indexed component by
establishing participation rates, caps, spreads and specified rates, subject to
contractual guarantees. We purchase call options that are highly correlated to
the portfolio allocation decisions of our contract holders, such that we are
economically hedged with respect to equity returns for the current reset period.
EQUITY FUTURES
We use equity futures contracts to hedge the liability exposure on certain
options in variable annuity products. These futures contracts require payment
between our counterparty and us on a daily basis for changes in the futures
index price.
PUT OPTIONS
We use put options to hedge the liability exposure on certain options in
variable annuity products. Put options are contracts that require counterparties
to pay us at a specified future date the amount, if any, by which a specified
equity index is less than the strike rate stated in the agreement, applied to a
notional amount.
TOTAL RETURN SWAPS
We use total return swaps to hedge a portion of the liability related to our
deferred compensation plans. We receive the total return on a portfolio of
indexes and pay a floating rate of interest.
In addition, we use total return swaps to hedge the liability exposure on
certain options in variable annuity products. We receive the total return on a
portfolio of indexes and pay a floating rate of interest.
VARIANCE SWAPS
We use variance swaps to hedge the liability exposure on certain options in
variable annuity products. Variance swaps are contracts entered into at no cost
and whose payoff is the difference between the realized variance rate of an
underlying index and the fixed variance rate determined as of inception.
S-32
CREDIT CONTRACTS
We use derivative instruments as part of our credit risk management strategy
that are economic hedges and include:
CREDIT DEFAULT SWAPS - BUYING PROTECTION
We buy credit default swaps to hedge against a drop in bond prices due to
credit concerns of certain bond issuers. A credit default swap allows us to
put the bond back to the counterparty at par upon a default event by the bond
issuer. A default event is defined as bankruptcy, failure to pay, obligation
acceleration or restructuring.
CREDIT DEFAULT SWAPS - SELLING PROTECTION
We sell credit default swaps to offer credit protection to contract holders and
investors. The credit default swaps hedge the contract holders and investors
against a drop in bond prices due to credit concerns of certain bond issuers. A
credit default swap allows the investor to put the bond back to us at par upon a
default event by the bond issuer. A default event is defined as bankruptcy,
failure to pay, obligation acceleration or restructuring.
EMBEDDED DERIVATIVES
We have embedded derivatives that include:
GLB RESERVES EMBEDDED DERIVATIVES
We use a hedging strategy designed to mitigate the risk and income statement
volatility caused by changes in the equity markets, interest rates and
volatility associated with GLBs offered in our variable annuity products,
including products with GWB and GIB features. The hedging strategy is designed
such that changes in the value of the hedge contracts due to changes in equity
markets, interest rates and implied volatilities move in the opposite direction
of changes in embedded derivative GLB reserves caused by those same factors. We
rebalance our hedge positions based upon changes in these factors as needed.
While we actively manage our hedge positions, these hedge positions may not be
totally effective in offsetting changes in the embedded derivative reserve due
to, among other things, differences in timing between when a market exposure
changes and corresponding changes to the hedge positions, extreme swings in the
equity markets and interest rates, market volatility, contract holder behavior,
divergence between the performance of the underlying funds and the hedging
indices, divergence between the actual and expected performance of the hedge
instruments and our ability to purchase hedging instruments at prices consistent
with our desired risk and return trade-off. However, the hedging results do not
impact LNL due to a funds withheld agreement with LNBAR, which causes the
financial impact of the derivatives as well as the cash flow activity to be
reflected on LNBAR.
Certain features of these guarantees have elements of both insurance benefits
accounted for under the Financial Services - Insurance - Claim Costs and
Liabilities for Future Policy Benefits Subtopic of the FASB ASC ("benefit
reserves") and embedded derivatives accounted for under the Derivatives and
Hedging and the Fair Value Measurements and Disclosures Topics of the FASB ASC
("embedded derivative reserves"). We calculate the value of the embedded
derivative reserve and the benefit reserve based on the specific characteristics
of each GLB feature.
INDEXED ANNUITY CONTRACTS EMBEDDED DERIVATIVES
We distribute indexed annuity contracts that permit the holder to elect an
interest rate return or an equity market component, where interest credited to
the contracts is linked to the performance of the S&P 500. Contract holders may
elect to rebalance index options at renewal dates, either annually or
biannually. As of each renewal date, we have the opportunity to re-price the
indexed component by establishing participation rates, caps, spreads and
specified rates, subject to contractual guarantees. We purchase S&P 500 call
options that are highly correlated to the portfolio allocation decisions of our
contract holders, such that we are economically hedged with respect to equity
returns for the current reset period.
REINSURANCE RELATED EMBEDDED DERIVATIVES
We have certain modified coinsurance arrangements and coinsurance with funds
withheld reinsurance arrangements with embedded derivatives related to the
withheld assets of the related funds. These derivatives are considered total
return swaps with contractual returns that are attributable to various assets
and liabilities associated with these reinsurance arrangements.
We are involved in an inter-company reinsurance agreement where we cede to LNBAR
the risk under certain UL contracts for no lapse benefit guarantees. If our
contract holders' account value is not sufficient to pay the cost of insurance
charges required to keep the policy inforce, and the contract holder has made
required deposits, LNBAR will reimburse us for the charges.
S-33
We have derivative instruments with off-balance-sheet risks whose notional or
contract amounts exceed the credit exposure. Outstanding derivative instruments
with off-balance-sheet risks (in millions) were as follows:
AS OF DECEMBER 31, 2012 AS OF DECEMBER 31, 2011
---------------------------------------- ----------------------------------------
FAIR VALUE FAIR VALUE
NOTIONAL ------------------------- NOTIONAL -------------------------
AMOUNTS ASSET LIABILITY AMOUNTS ASSET LIABILITY
----------- ---------- ----------- ----------- ---------- -----------
QUALIFYING HEDGES
Cash flow hedges:
Interest rate contracts(1) $ 2,001 $ 353 $ 224 $ 2,212 $ 385 $ 241
Foreign currency contracts(1) 420 39 26 340 52 14
----------- ----------- ----------- ----------- ---------- -----------
Total cash flow hedges 2,421 392 250 2,552 437 255
----------- ----------- ----------- ----------- ---------- -----------
NON-QUALIFYING HEDGES
Interest rate contracts(1) 35,539 1,030 474 30,232 1,042 475
Foreign currency contracts(1) 48 - - 4 - -
Equity market contracts(1) 19,744 1,734 170 16,300 2,152 55
Equity collar(1) 9 1 - - - -
Credit contracts(1) - - - 48 - -
Credit contracts(2) 149 - 11 148 - 16
Embedded derivatives:
Indexed annuity contracts(3) - - 732 - - 399
Guaranteed living benefits ("GLB")
reserves(3) - - 909 - - 2,217
Reinsurance related(4) - - 184 - 12
----------- ----------- ----------- ----------- ---------- -----------
Total derivative instruments $ 57,910 $ 3,157 $ 2,730 $ 49,284 $ 3,631 $ 3,429
=========== =========== =========== =========== ========== ===========
(1) Reported in derivative investments on our Consolidated Balance Sheets.
(2) Reported in other liabilities on our Consolidated Balance Sheets.
(3) Reported in future contract benefits on our Consolidated Balance Sheets.
(4) Reported in reinsurance related embedded derivatives on our Consolidated
Balance Sheets.
The maturity of the notional amounts of derivative instruments (in millions) was
as follows:
REMAINING LIFE AS OF DECEMBER 31, 2012
-----------------------------------------------------------------------------------
LESS THAN 1 - 5 6 - 10 11 - 30 OVER 30
1 YEAR YEARS YEARS YEARS YEARS TOTAL
----------- ---------- ----------- ---------- ----------- ----------
Interest rate contracts(1) $ 2,834 $ 19,828 $ 5,901 $ 8,977 $ - $ 37,540
Foreign currency contracts(2) 48 205 200 15 - 468
Equity market contracts 10,667 3,895 5,165 23 3 19,753
Credit contracts - 149 - - - 149
----------- ---------- ----------- ---------- ----------- ----------
Total derivative instruments
with notional amounts $ 13,549 $ 24,077 $ 11,266 $ 9,015 $ 3 $ 57,910
=========== ========== =========== ========== =========== ==========
(1) As of December 31, 2012, the latest maturity date for which we were
hedging our exposure to the variability in future cash flows for
these instruments was June 2042.
(2) As of December 31, 2012, the latest maturity date for which we were
hedging our exposure to the variability in future cash flows for
these instruments was April 2028.
S-34
The change in our unrealized gain (loss) on derivative instruments in
accumulated OCI (in millions) was as follows:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2012 2011 2010
---------- ----------- ----------
UNREALIZED GAIN (LOSS) ON DERIVATIVE INSTRUMENTS
Balance as of beginning-of-year $ 132 $ (14) $ (13)
Cumulative effect from adoption of new accounting standards - - 3
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during the year:
Cash flow hedges:
Interest rate contracts (41) 201 (18)
Foreign currency contracts (22) 3 14
AFS securities embedded derivatives - - 2
Change in foreign currency exchange rate adjustment (12) 7 4
Change in DAC, VOBA, DSI and DFEL 14 1 (1)
Income tax benefit (expense) 20 (74) (1)
Less:
Reclassification adjustment for gains (losses) included in net income (loss):
Cash flow hedges:
Interest rate contracts(1) (21) (15) 4
Foreign currency contracts(1) 3 2 2
Associated amortization of DAC, VOBA, DSI and DFEL 3 1 -
Income tax benefit (expense) 5 4 (2)
---------- ----------- ----------
Balance as of end-of-year $ 101 $ 132 $ (14)
========== =========== ==========
(1) The OCI offset is reported within net investment income on our Consolidated
Statements of Comprehensive Income (Loss).
The gains (losses) on derivative instruments (in millions) recorded within
income (loss) from continuing operations on our Consolidated Statements of
Comprehensive Income (Loss) were as follows:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2012 2011 2010
---------- ----------- ----------
QUALIFYING HEDGES
Cash flow hedges:
Interest rate contracts(1) $ (22) $ (15) $ 3
Foreign currency contracts(1) 3 2 2
---------- ----------- ----------
Total cash flow hedges (19) (13) 5
---------- ----------- ----------
NON-QUALIFYING HEDGES
Interest rate contracts(1) (26) (44) 5
Interest rate contracts(2) 52 1,144 175
Foreign currency contracts(1) - - 43
Foreign currency contracts(2) (8) (12) (13)
Equity market contracts(2) (1,014) 315 (386)
Equity market contracts(3) (362) 26 (118)
Credit contracts(1) - - 1
Credit contracts(2) 2 (7) 7
Embedded derivatives:
Indexed annuity contracts(2) (136) 5 (81)
GLB reserves(2) 1,308 (1,809) 268
Reinsurance related(2) (50) (47) (71)
AFS securities(1) - - (4)
---------- ----------- ----------
Total derivative instruments $ (253) $ (442) $ (169)
========== =========== ==========
(1) Reported in net investment income on our Consolidated Statements of
Comprehensive Income (Loss).
(2) Reported in realized gain (loss) on our Consolidated Statements of
Comprehensive Income (Loss).
(3) Reported in commissions and other expenses on our Consolidated Statements of
Comprehensive Income (Loss).
Gains (losses) (in millions) on derivative instruments designated and qualifying
as cash flow hedges were as follows:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2012 2011 2010
----------- ----------- ----------
Gain (loss) recognized as a component of OCI with
the offset to net investment income $ (18) $ (13) $ 6
As of December 31, 2012, $21 million of the deferred net losses on derivative
instruments in accumulated OCI were expected to be reclassified to earnings
during the next 12 months. This reclassification would be due primarily to the
interest rate variances related to the interest rate swap agreements.
For the years ended December 31, 2012 and 2011, there were no material
reclassifications to earnings due to hedged firm commitments no longer deemed
probable or due to hedged forecasted transactions that had not occurred by the
end of the originally specified time period.
S-35
Information related to our open credit default swap liabilities for which we are
the seller (dollars in millions) was as follows:
AS OF DECEMBER 31, 2012
-----------------------------------------------------------------------------------------------------------------
CREDIT
REASON NATURE RATING OF NUMBER MAXIMUM
FOR OF UNDERLYING OF FAIR POTENTIAL
MATURITY ENTERING RECOURSE OBLIGATION(1) INSTRUMENTS VALUE(2) PAYOUT
------------------------- ----------- ---------- ------------- ----------- ----------- ---------
12/20/2016(3) (4) (5) BBB- 3 $ (4) $ 68
03/20/2017(3) (4) (5) BBB- 4 (7) 81
----------- ----------- ---------
7 $ (11) $ 149
=========== =========== =========
AS OF DECEMBER 31, 2011
-----------------------------------------------------------------------------------------------------------------
CREDIT
REASON NATURE RATING OF NUMBER MAXIMUM
FOR OF UNDERLYING OF FAIR POTENTIAL
MATURITY ENTERING RECOURSE OBLIGATION(1) INSTRUMENTS VALUE(2) PAYOUT
------------------------- ----------- ---------- ------------- ----------- ----------- ---------
12/20/2012(6) (4) (5) BBB+ 4 $ - $ 40
12/20/2016(3) (4) (5) BBB+ 3 (12) 68
03/20/2017(3) (4) (5) BBB 2 (4) 40
----------- ----------- ---------
9 $ (16) $ 148
=========== =========== =========
(1) Represents average credit ratings based on the midpoint of the
applicable ratings among Moody's, S&P and Fitch Ratings, as scaled to
the corresponding S&P ratings.
(2) Broker quotes are used to determine the market value of credit
default swaps.
(3) These credit default swaps were sold to a counter-party of the
consolidated VIEs discussed in Note 4.
(4) Credit default swaps were entered into in order to generate income
by providing default protection in return for a quarterly payment.
(5) Sellers do not have the right to demand indemnification or
compensation from third parties in case of a loss (payment) on the
contract.
(6) These credit default swaps were sold to our contract holders, prior
to 2007, where we determined there was a spread versus premium
mismatch.
Details underlying the associated collateral of our open credit default swaps
for which we are the seller, if credit risk related contingent features were
triggered (in millions) are as follows:
AS OF DECEMBER 31,
-------------------------
2012 2011
---------- -----------
Maximum potential payout $ 149 $ 148
Less:
Counterparty thresholds - -
---------- -----------
Maximum collateral potentially required to post $ 149 $ 148
========== ===========
Certain of our credit default swap agreements contain contractual provisions
that allow for the netting of collateral with our counterparties related to all
of our collateralized financing transactions that we have outstanding. If these
netting agreements were not in place, we would have been required to post
approximately $11 million as of December 31, 2012, after considering the fair
values of the associated investments counterparties' credit ratings as compared
to ours and specified thresholds that once exceeded result in the payment of
cash.
CREDIT RISK
We are exposed to credit loss in the event of nonperformance by our
counterparties on various derivative contracts and reflect assumptions regarding
the credit or NPR. The NPR is based upon assumptions for each counterparty's
credit spread over the estimated weighted average life of the counterparty
exposure less collateral held. As of December 31, 2012, the NPR adjustment was
$2 million. The credit risk associated with such agreements is minimized by
purchasing such agreements from financial institutions with long-standing,
superior performance records. Additionally, we maintain a policy of requiring
all derivative contracts to be governed by an International Swaps and
Derivatives Association ("ISDA") Master Agreement. We are required to maintain
minimum ratings as a matter of routine practice in negotiating ISDA agreements.
Under some ISDA agreements, our insurance subsidiaries have agreed to maintain
certain financial strength or claims-paying ratings. A downgrade below these
levels could result in termination of derivative contracts, at which time any
amounts payable by us would be dependent on the market value of the underlying
derivative contracts. In certain transactions, we and the counterparty have
entered into a collateral support agreement requiring either party to post
collateral when net exposures exceed pre-determined thresholds. These thresholds
vary by counterparty and credit rating. The amount of such exposure is
essentially the net replacement cost or market value less collateral held for
such agreements with each counterparty if the net market value is in our favor.
As of December 31, 2012, our exposure was $13 million.
S-36
The amounts recognized (in millions) by S&P credit rating of counterparty, for
which we had the right to reclaim cash collateral or were obligated to return
cash collateral, were as follows:
AS OF DECEMBER 31, 2012 AS OF DECEMBER 31, 2011
-------------------------- --------------------------
COLLATERAL COLLATERAL COLLATERAL COLLATERAL
POSTED BY POSTED BY POSTED BY POSTED BY
S&P COUNTER- LNC COUNTER- LNC
CREDIT PARTY (HELD BY PARTY (HELD BY
RATING OF (HELD BY COUNTER- (HELD BY COUNTER-
COUNTERPARTY LNC) PARTY) LNC) PARTY)
-------------------------- ----------- ----------- ----------- -----------
AA $ 41 $ - $ 35 $ -
AA- 58 - 219 -
A+ 551 - 826 -
A 762 (68) 1,613 (69)
A- 1,113 - 373 -
BBB 4 - - -
----------- ----------- ----------- -----------
$ 2,529 $ (68) $ 3,066 $ (69)
=========== =========== =========== ===========
7. FEDERAL INCOME TAXES
The federal income tax expense (benefit) on continuing operations (in millions)
was as follows:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2012 2011 2010
----------- ----------- ----------
Current $ (320) $ (84) $ (74)
Deferred 664 354 379
----------- ----------- ----------
Federal income tax expense (benefit) $ 344 $ 270 $ 305
=========== =========== ==========
A reconciliation of the effective tax rate differences (in millions) was as
follows:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2012 2011 2010
----------- ----------- ----------
Tax rate times pre-tax income $ 527 $ 186 $ 456
Effect of:
Separate account dividend received deduction (128) (135) (109)
Tax credits (34) (46) (39)
Goodwill (2) 260 -
Change in uncertain tax positions (88) 7 3
Other items 69 (2) (6)
----------- ----------- ----------
Federal income tax expense (benefit) $ 344 $ 270 $ 305
=========== =========== ==========
Effective tax rate 23 % 51 % 23 %
=========== =========== ==========
The effective tax rate is the ratio of tax expense over pre-tax income (loss).
The change in uncertain tax positions relates primarily to the lapse of statute
of limitations for prior year tax returns. Other items include corrections of
immaterial errors in prior period.
The federal income tax asset (liability) (in millions) was as follows:
AS OF DECEMBER 31,
-------------------------
2012 2011
---------- -----------
Current $ 173 $ (276)
Deferred (3,391) (2,233)
---------- -----------
Total federal income tax asset (liability) $ (3,218) $ (2,509)
========== ===========
Significant components of our deferred tax assets and liabilities (in millions)
were as follows:
AS OF DECEMBER 31,
-------------------------
2012 2011
----------- ----------
DEFERRED TAX ASSETS
Future contract benefits and other contract holder funds $ 900 $ 1,034
Deferred gain on business sold through reinsurance 27 136
Reinsurance related embedded derivative asset 141 123
Investments 448 222
Compensation and benefit plans 141 130
Net operating loss 4 -
Net capital loss 32 59
Tax credits 205 200
VIE 36 98
Other 44 197
----------- ----------
Total deferred tax assets 1,978 2,199
----------- ----------
S-37
AS OF DECEMBER 31,
-------------------------
2012 2011
----------- ----------
DEFERRED TAX LIABILITIES
DAC $ 1,393 $ 1,412
VOBA 239 370
Net unrealized gain on AFS securities 3,283 2,188
Net unrealized gain on trading securities 150 126
Intangibles 172 173
Other 132 163
----------- ----------
Total deferred tax liabilities 5,369 4,432
----------- ----------
Net deferred tax asset (liability) $ (3,391) $ (2,233)
=========== ==========
As of December 31, 2012, the Company had $11 million of net operating loss
carryforwards that begin to expire in 2031 and $90 million of capital loss
carryforwards that begin to expire in 2014. In addition, the Company had $139
million of alternative minimum tax credits that are not subject to expiration
and $66 million of general business credits that begin to expire in 2030.
Although realization is not assured, management believes that it is more likely
than not that the Company will realize the benefits of its deferred tax assets,
and, accordingly, no valuation allowance has been recorded.
As of December 31, 2012 and 2011, $59 million and $191 million, respectively, of
our unrecognized tax benefits presented below, if recognized, would have
affected our income tax expense and our effective tax rate. The Company is not
aware of any events for which it is likely that unrecognized tax benefits will
significantly increase or decrease within the next year. A reconciliation of the
unrecognized tax benefits (in millions) was as follows:
FOR THE
YEARS ENDED
DECEMBER 31,
-------------------------
2012 2011
----------- -----------
Balance as of beginning-of-year $ 275 $ 278
Increases for prior year tax positions - 2
Decreases for prior year tax positions (145) (11)
Increases for current year tax positions 3 12
Decreases for current year tax positions - (6)
Decreases for settlements with taxing authorities (2) -
Decreases for lapse of statute of limitations (64) -
----------- -----------
Balance as of end-of-year $ 67 $ 275
=========== ===========
We recognize interest and penalties accrued, if any, related to unrecognized tax
benefits as a component of tax expense. For the years ended December 31, 2012,
2011 and 2010, we recognized interest and penalty expense (benefit) related to
uncertain tax positions of $(78) million, $8 million and $6 million,
respectively. We had accrued interest and penalty expense related to the
unrecognized tax benefits of $11 million and $89 million as of December 31, 2012
and 2011, respectively.
The Company is subject to examination by U.S. federal, state, local and non-U.S.
income authorities. The Company is currently under examination by the IRS for
tax years 2009 through 2011. The IRS concluded its examination of tax years 2007
and 2008 on January 18, 2013. The Company has protested the final assessment,
which is being combined with tax years 2005 and 2006 in IRS Appeals. The IRS
also completed its examination of tax years 2005 and 2006, and 2006 of the
former Jefferson-Pilot Corporation ("JP") and its subsidiaries during 2010. The
Company believes a portion of the 2005 through 2008 assessments is inconsistent
with current laws and is using the established IRS Appeals process to attempt to
settle the remaining issues. The IRS also concluded its examination of
non-consolidated returns for JP Life Insurance Company and JP Financial
Insurance Company for the tax years ended April 1, 2007, and July 1, 2007,
respectively, with agreement on all adjustments on January 18, 2013. The Company
does not expect any adjustments that might result from those audits would be
material to its consolidated results of operations or its financial condition.
S-38
8. DAC, VOBA, DSI AND DFEL
Changes in DAC (in millions) were as follows:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2012 2011 2010
---------- ----------- ----------
Balance as of beginning-of-year $ 5,887 $ 6,029 $ 7,310
Cumulative effect from adoption of new accounting standards - - (1,483)
Business acquired (sold) through reinsurance (126) 184 (14)
Deferrals 1,294 1,368 1,353
Amortization, net of interest:
Unlocking (71) (130) 93
Amortization, excluding unlocking, net of interest (760) (666) (654)
Adjustment related to realized (gains) losses (49) (39) (51)
Adjustment related to unrealized (gains) losses (145) (859) (525)
---------- ----------- ----------
Balance as of end-of-year $ 6,030 $ 5,887 $ 6,029
========== =========== ==========
Changes in VOBA (in millions) were as follows:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2012 2011 2010
---------- ----------- -----------
Balance as of beginning-of-year $ 1,055 $ 1,378 $ 2,086
Business acquired (sold) through reinsurance (20) 12 -
Deferrals 12 20 26
Amortization:
Unlocking (23) 174 (48)
Amortization, excluding unlocking (225) (279) (350)
Accretion of interest(1) 73 78 89
Adjustment related to realized (gains) losses 9 (6) (7)
Adjustment related to unrealized (gains) losses (179) (322) (418)
---------- ----------- -----------
Balance as of end-of-year $ 702 $ 1,055 $ 1,378
========== =========== ===========
(1) The interest accrual rates utilized to calculate the accretion of interest
ranged from 3.30% to 7.05%.
Estimated future amortization of VOBA, net of interest (in millions), as of
December 31, 2012, was as follows:
2013 $ 94
2014 72
2015 64
2016 57
2017 52
Changes in DSI (in millions) were as follows:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2012 2011 2010
---------- ----------- ----------
Balance as of beginning-of-year $ 309 $ 324 $ 361
Deferrals 39 39 66
Amortization, net of interest:
Unlocking 14 (2) (3)
Amortization, excluding unlocking, net of interest (43) (36) (48)
Adjustment related to realized (gains) losses (5) (3) (11)
Adjustment related to unrealized (gains) losses (18) (13) (41)
---------- ----------- ----------
Balance as of end-of-year $ 296 $ 309 $ 324
========== =========== ==========
Changes in DFEL (in millions) were as follows:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2012 2011 2010
---------- ----------- ----------
Balance as of beginning-of-year $ 1,360 $ 1,472 $ 1,273
Business acquired (sold) through reinsurance (44) 18 22
Deferrals 348 544 546
Amortization, net of interest:
Unlocking (69) 31 (1)
Amortization, excluding unlocking, net of interest (206) (160) (190)
Adjustment related to realized (gains) losses (5) (8) (4)
Adjustment related to unrealized (gains) losses (42) (537) (174)
---------- ----------- ----------
Balance as of end-of-year $ 1,342 $ 1,360 $ 1,472
========== =========== ==========
S-39
9. REINSURANCE
The following summarizes reinsurance amounts (in millions) recorded on our
Consolidated Statements of Comprehensive Income (Loss), excluding amounts
attributable to the indemnity reinsurance transaction with Swiss Re:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2012 2011 2010
---------- ----------- ----------
Direct insurance premiums and fees $ 7,096 $ 6,735 $ 6,338
Reinsurance assumed 18 21 22
Reinsurance ceded (1,287) (1,511) (1,361)
---------- ----------- ----------
Total insurance premiums and fees $ 5,827 $ 5,245 $ 4,999
========== =========== ==========
Direct insurance benefits $ 4,714 $ 4,828 $ 4,321
Reinsurance recoveries netted against benefits (1,778) (2,624) (1,754)
---------- ----------- ----------
Total benefits $ 2,936 $ 2,204 $ 2,567
========== =========== ==========
We cede insurance to other companies. The portion of risks exceeding our
retention limit is reinsured with other insurers. We seek reinsurance coverage
within the businesses that sell life insurance and annuities in order to limit
our exposure to mortality losses and enhance our capital management. As
discussed in Note 24, a portion of this reinsurance activity is with affiliated
companies.
Under our reinsurance program, we reinsure approximately 30% to 35% of the
mortality risk on newly issued non-term life insurance contracts and
approximately 25% to 30% of total mortality risk including term insurance
contracts. Our policy for this program is to retain no more than $20 million on
a single insured life issued on fixed, VUL and term life insurance contracts.
Portions of our deferred annuity business have been reinsured on a Modco basis
with other companies to limit our exposure to interest rate risks. As of
December 31, 2012, the reserves associated with these reinsurance arrangements
totaled $809 million. To cover products other than life insurance, we acquire
other reinsurance coverages with retentions and limits.
We obtain reinsurance from a diverse group of reinsurers, and we monitor
concentration as well as financial strength ratings of our principal reinsurers.
Our reinsurance operations were acquired by Swiss Re in December 2001, through a
series of indemnity reinsurance transactions. Swiss Re represents our largest
reinsurance exposure. Under the indemnity reinsurance agreements, Swiss Re
reinsured certain of our liabilities and obligations. As we are not relieved of
our legal liability to the ceding companies, the liabilities and obligations
associated with the reinsured contracts remain on our Consolidated Balance
Sheets with a corresponding reinsurance receivable from Swiss Re, which totaled
$3.4 billion and $3.5 billion as of December 31, 2012 and 2011, respectively.
Swiss Re has funded a trust, with a balance of $1.8 billion as of December 31,
2012, to support this business. In addition to various remedies that we would
have in the event of a default by Swiss Re, we continue to hold assets in
support of certain of the transferred reserves. These assets are reported within
trading securities or mortgage loans on real estate on our Consolidated Balance
Sheets. Our liabilities for funds withheld and embedded derivatives as of
December 31, 2012, included $1.5 billion and $176 million, respectively, related
to the business reinsured by Swiss Re.
We recorded the gain related to the indemnity reinsurance transactions on the
business sold to Swiss Re as a deferred gain on business sold through
reinsurance on our Consolidated Balance Sheets. The deferred gain is being
amortized into income at the rate that earnings on the reinsured business are
expected to emerge, over a period of 15 years from the date of sale.
During 2012, 2011 and 2010, we amortized $48 million, $49 million and $49
million, after-tax, respectively, of deferred gain on business sold through
reinsurance.
10. GOODWILL AND SPECIFICALLY IDENTIFIABLE INTANGIBLE ASSETS
The changes in the carrying amount of goodwill (in millions) by reportable
segment were as follows:
FOR THE YEAR ENDED DECEMBER 31, 2012
-------------------------------------------------------
ACQUISITION CUMULATIVE
BALANCE IMPAIRMENT
AS OF AS OF BALANCE
BEGINNING- BEGINNING- AS OF END-
OF-YEAR OF-YEAR IMPAIRMENT OF-YEAR
------------ ----------- ------------- -----------
Annuities $ 1,040 $ (600) $ - $ 440
Retirement Plan Services 20 - - 20
Life Insurance 2,186 (647) - 1,539
Group Protection 274 - - 274
Other Operations - Media 176 (176) - -
------------ ----------- ----------- -----------
Total goodwill $ 3,696 $ (1,423) $ - $ 2,273
============ =========== =========== ===========
S-40
FOR THE YEAR ENDED DECEMBER 31, 2011
-------------------------------------------------------
ACQUISITION CUMULATIVE
BALANCE IMPAIRMENT
AS OF AS OF BALANCE
BEGINNING- BEGINNING- AS OF END-
OF-YEAR OF-YEAR IMPAIRMENT OF-YEAR
------------ ----------- ------------- -----------
Annuities $ 1,040 $ (600) $ - $ 440
Retirement Plan Services 20 - - 20
Life Insurance 2,186 - (647) 1,539
Group Protection 274 - - 274
Other Operations - Media 176 (79) (97) -
------------ ----------- ------------- -----------
Total goodwill $ 3,696 $ (679) $ (744) $ 2,273
============ =========== ============= ===========
We perform a Step 1 goodwill impairment analysis on all of our reporting units
at least annually on October 1. To determine the implied fair value for our
reporting units, we utilize primarily a discounted cash flow valuation technique
("income approach"), although limited available market data is also considered.
In determining the estimated fair value, we consider discounted cash flow
calculations, the level of LNC's share price and assumptions that market
participants would make in valuing the reporting unit. This analysis requires us
to make judgments about revenues, earnings projections, capital market
assumptions and discount rates.
As of October 1, 2012, our Annuities, Retirement Plan Services and Group
Protection reporting units passed the Step 1 analysis, and although the carrying
value of the net assets for Group Protection was within the estimated fair value
range, we deemed it prudent to validate the carrying value of goodwill through a
Step 2 analysis. Given the Step 1 results, we also performed a Step 2 analysis
for our Life Insurance reporting unit. Based upon our Step 2 analysis for Life
Insurance and Group Protection, we determined that there was no impairment due
to the implied fair value of goodwill being in excess of the carrying value of
goodwill.
As of October 1, 2011, our Annuities, Retirement Plan Services and Group
Protection reporting units passed the Step 1 analysis, and although the carrying
value of the net assets for Group Protection was within the estimated fair value
range, we deemed it prudent to validate the carrying value of goodwill through a
Step 2 analysis. Given the Step 1 results, we also performed a Step 2 analysis
for our Life Insurance and Media reporting units. Based upon our Step 2 analysis
for Life Insurance, we recorded a goodwill impairment that was attributable
primarily to marketplace dynamics and lower expectations associated with product
changes that we have implemented or will implement shortly that we believe will
have an unfavorable effect on our sales levels for a period of time. Based upon
our Step 2 analysis for Group Protection, we determined that there was no
impairment due to the implied fair value of goodwill being in excess of the
carrying value of goodwill. Based upon our Step 2 analysis for Media, we
recorded a goodwill impairment that was primarily a result of the deterioration
in operating environment and outlook for the business.
As of October 1, 2010, all of our reporting units passed the Step 1 analysis,
and although the carrying value of the net assets was within the estimated fair
value range for our Life Insurance reporting unit, we deemed it prudent to
validate the carrying value of goodwill through a Step 2 analysis. In our Step 2
analysis of the Life Insurance reporting unit, we determined there was no
impairment due to the implied fair value of goodwill being in excess of the
carrying value of goodwill.
S-41
The gross carrying amounts and accumulated amortization (in millions) for each
major specifically identifiable intangible asset class by reportable segment
were as follows:
AS OF DECEMBER 31, 2012 AS OF DECEMBER 31, 2011
------------------------- -------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
----------- ------------ ----------- ------------
Life Insurance:
Sales force $ 100 $ 27 $ 100 $ 23
Retirement Plan Services:
Mutual fund contract rights(1) 5 - 2 -
Other Operations:
FCC licenses(1) 129 - 118 -
Other 4 3 4 3
----------- ------------ ----------- ------------
Total $ 238 $ 30 $ 224 $ 26
=========== ============ =========== ============
(1) No amortization recorded as the intangible asset has indefinite life.
Future estimated amortization of specifically identifiable intangible assets (in
millions) as of December 31, 2012, was as follows:
2013 $ 4
2014 4
2015 4
2016 4
2017 4
11. GUARANTEED BENEFIT FEATURES
Information on the GDB features outstanding (dollars in millions) was as follows
(our variable contracts with guarantees may offer more than one type of
guarantee in each contract; therefore, the amounts listed are not mutually
exclusive):
AS OF DECEMBER 31,
-------------------------
2012 2011
----------- ------------
RETURN OF NET DEPOSITS
Total account value $ 63,478 $ 54,004
Net amount at risk(1) 392 1,379
Average attained age of contract holders 60 years 59 years
MINIMUM RETURN
Total account value $ 149 $ 155
Net amount at risk(1) 37 48
Average attained age of contract holders 73 years 72 years
Guaranteed minimum return 5 % 5 %
ANNIVERSARY CONTRACT VALUE
Total account value $ 23,019 $ 21,648
Net amount at risk(1) 1,133 2,939
Average attained age of contract holders 67 years 67 years
(1) Represents the amount of death benefit in excess of the account
balance. The decrease in net amount at risk when comparing December
31, 2012, to December 31, 2011, was attributable primarily to the
increase in equity markets during 2012.
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 Consolidated
Balance Sheets:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2012 2011 2010
----------- ----------- ----------
Balance as of beginning-of-year $ 84 $ 44 $ 71
Changes in reserves 64 93 57
Benefits paid (44) (53) (84)
----------- ----------- ----------
Balance as of end-of-year $ 104 $ 84 $ 44
=========== =========== ==========
S-42
Account balances of variable annuity contracts with guarantees (in millions)
were invested in separate account investment options as follows:
AS OF DECEMBER 31,
-------------------------
2012 2011
----------- ----------
ASSET TYPE
Domestic equity $ 37,899 $ 34,286
International equity 14,850 13,095
Bonds 21,174 17,735
Money market 7,747 5,892
----------- ----------
Total $ 81,670 $ 71,008
=========== ==========
Percent of total variable annuity separate account
values 98 % 98 %
Future contract benefits also includes reserves for our products with secondary
guarantees for our products sold through our Life Insurance segment. These UL
and VUL products with secondary guarantees represented 38% of permanent life
insurance in force as of December 31, 2012, and 29% of total sales for these
products for the year ended December 31, 2012.
12. SHORT-TERM AND LONG-TERM DEBT
Details underlying short-term and long-term debt (in millions) were as follows:
AS OF DECEMBER 31,
-------------------------
2012 2011
----------- ----------
Short-Term Debt
Short-term notes payable to LNC $ 28 $ 10
Current maturities of long-term debt 4 -
----------- ----------
Total short-term debt $ 32 $ 10
=========== ==========
Long-Term Debt, Excluding Current Portion
2.75% note, due 2013 $ - $ 4
LIBOR + 3 bps notes, due 2017 250 250
LIBOR + 100 bps loan, due 2037 375 375
LIBOR + 341 bps loan, due 2040 - 500
Surplus notes due LNC:
9.76% surplus note, due 2024 50 50
6.56% surplus note, due 2028 500 500
6.03% surplus note, due 2028 750 750
----------- ----------
Total surplus notes 1,300 1,300
----------- ----------
Total long-term debt $ 1,925 $ 2,429
=========== ==========
Future principal payments due on long-term debt (in millions) as of December 31,
2012, were as follows:
2013 $ 4
2014 -
2015 -
2016 -
2017 250
Thereafter 1,675
----------
Total $ 1,929
==========
On September 10, 2010, LNC issued a note of $4 million to LFM. This note calls
for us to pay the principal amount of the note on or before September 10, 2013,
and interest to be paid semiannually at an annual rate of 2.75%.
We have a $250 million floating-rate loan outstanding under our borrowing
capacity with the Federal Home Loan Bank of Indianapolis due June 20, 2017.
We issued a surplus note for $50 million to LNC in 1994. The note calls for us
to pay the principal amount of the note on or before September 30, 2024, and
interest to be paid semiannually at an annual rate of 9.76%. Subject to approval
by the Indiana Insurance Commissioner, we have the right to repay the note on
any March 31 or September 30.
We issued a surplus note for $500 million to LNC in 1998. The note calls for us
to pay the principal amount of the note on or before March 31, 2028, and
interest to be paid quarterly at an annual rate of 6.56%. Subject to approval by
the Indiana Insurance Commissioner, LNC also has a right to redeem the note for
immediate repayment in total or in part once per year on the anniversary date of
the note. Any payment of interest or repayment of principal may be paid only out
of our statutory earnings, only if our statutory capital surplus exceeds our
statutory capital as of the date of note issuance of $2.3 billion, and subject
to approval by the Indiana Insurance Commissioner.
We issued a surplus note for $750 million to LNC in 1998. The note calls for us
to pay the principal amount of the note on or before December 31, 2028, and
interest to be paid quarterly at an annual rate of 6.03%. Subject to approval by
the Indiana Insurance Commissioner, LNC also has a right to redeem the note for
immediate repayment in total or in part once per year on the anniversary date of
the note. Any payment of interest or repayment of principal may be paid only out
of our statutory earnings, only if our statutory capital surplus exceeds our
statutory capital surplus as of the date of note issuance of $2.4 billion, and
subject to approval by the Indiana Insurance Commissioner.
On October 9, 2007, we issued a note of $375 million to LNC. This note calls for
us to pay the principal amount of the note on or before October 9, 2037, and
interest to be paid quarterly at an annual rate of LIBOR + 100 bps.
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On July 1, 2010, we issued a note of $500 million to LNC. This note calls for us
to pay the principal amount of the note on or before June 5, 2040, and interest
to be paid annually at an annual rate of LIBOR + 341 bps. On July 1, 2012, we
repaid all of our LIBOR + 341 bps note due 2040.
13. CONTINGENCIES AND COMMITMENTS
CONTINGENCIES
REGULATORY AND LITIGATION MATTERS
Regulatory bodies, such as state insurance departments, the SEC, Financial
Industry Regulatory Authority and other regulatory bodies regularly make
inquiries and conduct examinations or investigations concerning our compliance
with, among other things, insurance laws, securities laws, laws governing the
activities of broker-dealers, registered investment advisors and unclaimed
property laws.
LNL and its subsidiaries are involved in various pending or threatened legal or
regulatory proceedings, including purported class actions, arising from the
conduct of business both in the ordinary course and otherwise. In some of the
matters, very large and/or indeterminate amounts, including punitive and treble
damages, are sought. Modern pleading practice in the U.S. permits considerable
variation in the assertion of monetary damages or other relief. Jurisdictions
may permit claimants not to specify the monetary damages sought or may permit
claimants to state only that the amount sought is sufficient to invoke the
jurisdiction of the trial court. In addition, jurisdictions may permit
plaintiffs to allege monetary damages in amounts well exceeding reasonably
possible verdicts in the jurisdiction for similar matters. This variability in
pleadings, together with the actual experiences of LNL in litigating or
resolving through settlement numerous claims over an extended period of time,
demonstrates to management that the monetary relief which may be specified in a
lawsuit or claim bears little relevance to its merits or disposition value.
Due to the unpredictable nature of litigation, the outcome of a litigation
matter and the amount or range of potential loss at particular points in time is
normally difficult to ascertain. Uncertainties can include how fact finders will
evaluate documentary evidence and the credibility and effectiveness of witness
testimony, and how trial and appellate courts will apply the law in the context
of the pleadings or evidence presented, whether by motion practice, or at trial
or on appeal. Disposition valuations are also subject to the uncertainty of how
opposing parties and their counsel will themselves view the relevant evidence
and applicable law.
We establish liabilities for litigation and regulatory loss contingencies when
information related to the loss contingencies shows both that it is probable
that a loss has been incurred and the amount of the loss can be reasonably
estimated. It is possible that some matters could require us to pay damages or
make other expenditures or establish accruals in amounts that could not be
estimated as of December 31, 2012. While the potential future charges could be
material in the particular quarterly or annual periods in which they are
recorded, based on information currently known by management, management does
not believe any such charges are likely to have a material adverse effect on
LNL's financial condition.
For some matters, the Company is able to estimate a reasonably possible range of
loss. For such matters in which a loss is probable, an accrual has been made.
For such matters where a loss is believed to be reasonably possible, but not
probable, no accrual has been made. Accordingly, the estimate contained in this
paragraph reflects two types of matters. For some matters included within this
estimate, an accrual has been made, but there is a reasonable possibility that
an exposure exists in excess of the amount accrued. In these cases, the estimate
reflects the reasonably possible range of loss in excess of the accrued amount.
For other matters included within this estimation, no accrual has been made
because a loss, while potentially estimable, is believed to be reasonably
possible but not probable. In these cases, the estimate reflects the reasonably
possible loss or range of loss. As of December 31, 2012, we estimate the
aggregate range of reasonably possible losses, including amounts in excess of
amounts accrued for these matters as of such date, to be up to approximately
$200 million.
For other matters, we are not currently able to estimate the reasonably possible
loss or range of loss. We are often unable to estimate the possible loss or
range of loss until developments in such matters have provided sufficient
information to support an assessment of the range of possible loss, such as
quantification of a damage demand from plaintiffs, discovery from other parties
and investigation of factual allegations, rulings by the court on motions or
appeals, analysis by experts, and the progress of settlement negotiations. On a
quarterly and annual basis, we review relevant information with respect to
litigation contingencies and update our accruals, disclosures and estimates of
reasonably possible losses or ranges of loss based on such reviews.
On June 13, 2009, a single named plaintiff filed a putative national class
action in the Circuit Court of Allen County, Indiana, captioned Peter S. Bezich
v. LNL, No. 02C01-0906-PL73, asserting he was charged a cost-of-insurance fee
that exceeded the applicable mortality charge, and that this fee breached the
terms of the insurance contract. The parties are conducting fact discovery, and
no class certification motion has yet been filed. We dispute the allegations and
are vigorously defending this matter.
On July 23, 2012, LNL was added as a noteholder defendant to a putative class
action adversary proceeding ("Adversary Proceeding") captioned LEHMAN BROTHERS
SPECIAL FINANCING, INC. V.
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BANK OF AMERICA, N.A. ET AL., Adv. Pro. No. 10-03547 (JMP) and instituted
under IN RE LEHMAN BROTHERS HOLDINGS INC. in the United States Bankruptcy
Court in the Southern District of New York. Plaintiff Lehman Brothers Special
Financing Inc. ("LBSF") seeks to (i) overturn the application of certain
priority of payment provisions in 47 collateralized debt obligation
transactions on the basis such provisions are unenforceable under the
Bankruptcy Code; and (ii) recover funds paid out to Noteholders in accordance
with the Note agreements. The Adversary proceeding is stayed through July 20,
2013, and LNL's response is currently due to be filed on September 5, 2013.
We are currently being audited on behalf of multiple states' treasury and
controllers' offices for compliance with laws and regulations concerning the
identification, reporting and escheatment of unclaimed contract benefits or
abandoned funds. The audits focus on insurance company processes and procedures
for identifying unreported death claims, and their use of the Social Security
Master Death File to identify deceased policy and contract holders. In addition,
we subsidiaries are the subject of multiple regulatory inquiries and
examinations with a similar focus on the handling of unreported claims and
abandoned property. The audits and related examination activity may result in
payments to beneficiaries, escheatment of funds deemed abandoned under state
laws, administrative penalties and changes in our procedures for the
identification of unreported claims and handling of escheatable property.
COMMITMENTS
LEASES
We lease our home office properties. In 2006, we exercised the right and option
to extend the Fort Wayne lease for two extended terms such that the lease shall
expire in 2019. We retain our right and option to exercise the remaining four
extended terms of five years each in accordance with the lease agreement. These
agreements also provide us with the right of first refusal to purchase the
properties at a price defined in the agreements and the option to purchase the
leased properties at fair market value on the last day of any renewal period. In
2012, we exercised the right and option to extend the Hartford lease for one
extended term such that the lease shall expire in 2018.
Total rental expense on operating leases for the years ended December 31, 2012,
2011 and 2010, was $37 million, $36 million and $40 million, respectively.
Future minimum rental commitments (in millions) as of December 31, 2012, were as
follows:
2013 $ 31
2014 31
2015 26
2016 22
2017 16
VULNERABILITY FROM CONCENTRATIONS
As of December 31, 2012, we did not have a concentration of: business
transactions with a particular customer or lender; sources of supply of labor or
services used in the business; or a market or geographic area in which business
is conducted that makes us vulnerable to an event that is at least reasonably
possible to occur in the near term and which could cause a severe impact to our
financial condition.
Although we do not have any significant concentration of customers, our American
Legacy Variable Annuity ("ALVA") product offered in our Annuities segment is
significant to this segment. The ALVA product accounted for 19%, 22% and 25% of
Annuities' variable annuity product deposits in 2012, 2011 and 2010,
respectively, and represented approximately 50%, 54% and 58% of the segment's
total variable annuity product account values as of December 31, 2012, 2011 and
2010, respectively. In addition, fund choices for certain of our other variable
annuity products offered in our Annuities segment include American Fund
Insurance Series(SM) ("AFIS") funds. For the Annuities segment, AFIS funds
accounted for 21%, 27% and 29% of variable annuity product deposits in 2012,
2011 and 2010, respectively, and represented 58%, 62% and 66% of the segment's
total variable annuity product account values as of December 31, 2012, 2011 and
2010, respectively.
OTHER CONTINGENCY MATTERS
State guaranty funds assess insurance companies to cover losses to contract
holders of insolvent or rehabilitated companies. Mandatory assessments may be
partially recovered through a reduction in future premium taxes in some states.
We have accrued for expected assessments net of estimated future premium tax
deductions of $32 million and $29 million as of December 31, 2012 and 2011,
respectively.
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14. SHARES AND STOCKHOLDER'S EQUITY
All authorized and issued shares of LNL are owned by LNC.
ACCUMULATED OCI
The following summarizes the components and changes in accumulated OCI (in
millions):
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
2012 2011 2010
---------- ---------- ---------
UNREALIZED GAIN (LOSS) ON AFS SECURITIES
Balance as of beginning-of-year $ 2,805 $ 1,119 $ 36
Cumulative effect from adoption of new accounting standards - - 183
Unrealized holding gains (losses) arising during the year 2,631 3,292 2,322
Change in foreign currency exchange rate adjustment 14 (5) (6)
Change in DAC, VOBA, DSI, future contract benefits and other contract holder funds (1,233) (798) (1,038)
Income tax benefit (expense) (459) (890) (461)
Less:
Reclassification adjustment for gains (losses) included in net income (loss) (181) (124) (136)
Associated amortization of DAC, VOBA, DSI and DFEL (1) (10) 8
Income tax benefit (expense) 64 47 45
---------- ---------- -----------
Balance as of end-of-year $ 3,876 $ 2,805 $ 1,119
========== ========== ===========
UNREALIZED OTTI ON AFS SECURITIES
Balance as of beginning-of-year $ (103) $ (126) $ (108)
(Increases) attributable to:
Cumulative effect from adoption of new accounting standards - - (5)
Gross OTTI recognized in OCI during the year (118) (54) (93)
Change in DAC, VOBA, DSI and DFEL 15 12 11
Income tax benefit (expense) 35 15 28
Decreases attributable to:
Sales, maturities or other settlements of AFS securities 118 99 81
Change in DAC, VOBA, DSI and DFEL (17) (21) (19)
Income tax benefit (expense) (35) (28) (21)
---------- ---------- -----------
Balance as of end-of-year $ (105) $ (103) $ (126)
========== ========== ===========
UNREALIZED GAIN (LOSS) ON DERIVATIVE INSTRUMENTS
Balance as of beginning-of-year $ 132 $ (14) $ (13)
Cumulative effect from adoption of new accounting standards - - 3
Unrealized holding gains (losses) arising during the year (63) 204 (2)
Change in foreign currency exchange rate adjustment (12) 7 4
Change in DAC, VOBA, DSI and DFEL 14 1 (1)
Income tax benefit (expense) 20 (74) (1)
Less:
Reclassification adjustment for gains (losses) included in net income (loss) (18) (13) 6
Associated amortization of DAC, VOBA, DSI and DFEL 3 1 -
Income tax benefit (expense) 5 4 (2)
---------- ---------- -----------
Balance as of end-of-year $ 101 $ 132 $ (14)
========== ========== ===========
FUNDED STATUS OF EMPLOYEE BENEFIT PLANS
Balance as of beginning-of-year $ (14) $ (14) $ (17)
Adjustment arising during the year 3 1 4
Income tax benefit (expense) (1) (1) (1)
---------- ---------- -----------
Balance as of end-of-year $ (12) $ (14) $ (14)
========== ========== ===========
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15. REALIZED GAIN (LOSS)
Details underlying realized gain (loss) (in millions) reported on our
Consolidated Statements of Comprehensive Income (Loss) were as follows:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2012 2011 2010
---------- ----------- ----------
Total realized gain (loss) related to certain investments(1) $ (164) $ (106) $ (132)
Realized gain (loss) on the mark-to-market on certain instruments(2) 138 (65) (41)
Indexed annuity net derivative results:(3)
Gross gain (loss) 16 2 34
Associated amortization of DAC, VOBA, DSI and DFEL (5) (2) (14)
Variable annuity net derivatives results:(4)
Gross gain (loss) (77) (51) (30)
Associated amortization of DAC, VOBA, DSI and DFEL (31) (28) (55)
---------- ----------- ----------
Total realized gain (loss) $ (123) $ (250) $ (238)
========== =========== ==========
(1) See "Realized Gain (Loss) Related to Certain Investments" section in Note 5.
(2) Represents changes in the fair values of certain derivative investments
(including those associated with our consolidated VIEs), total return swaps
(embedded derivatives that are theoretically included in our various
modified coinsurance and coinsurance with funds withheld reinsurance
arrangements that have contractual returns related to various assets and
liabilities associated with these arrangements) and trading securities.
(3) Represents the net difference between the change in the fair value of
the S&P 500 call options that we hold and the change in the fair
value of the embedded derivative liabilities of our indexed annuity
products along with changes in the fair value of embedded derivative
liabilities related to index call options we may purchase in the
future to hedge contract holder index allocations applicable to
future reset periods for our indexed annuity products.
(4) Includes the net difference in the change in embedded derivative
reserves of our GLB products and the change in the fair value of the
derivative instruments we own to hedge GDB and GLB products,
including the cost of purchasing the hedging instruments.
16. COMMISSIONS AND OTHER EXPENSES
Details underlying commissions and other expenses (in millions) were as follows:
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
2012 2011 2010
----------- ----------- -----------
Commissions $ 1,972 $ 2,534 $ 1,859
General and administrative expenses 1,553 1,392 1,293
Expenses associated with reserve financing and unrelated LOCs 40 24 16
DAC and VOBA deferrals and interest, net of amortization (300) (565) (509)
Broker-dealer expenses 243 236 212
Specifically identifiable intangible asset amortization 4 4 4
Media expenses 66 69 59
Taxes, licenses and fees 244 244 192
Merger-related expenses - - 9
Restructuring charges (recoveries) 16 - (1)
----------- ----------- -----------
Total $ 3,838 $ 3,938 $ 3,134
=========== =========== ===========
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17. PENSION, POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFIT PLANS
LNC and LNL maintain qualified funded defined benefit pension plans in which
many of our employees and agents are participants. LNC and LNL also maintain
non-qualified, unfunded defined benefit pension plans for certain employees and
agents. In addition, for certain former employees, we have supplemental
retirement plans that provide defined benefit pension benefits in excess of
limits imposed by federal tax law. All of our defined benefit pension plans are
frozen, and there are no new participants and no future accruals of benefits
from the date of the freeze.
The eligibility requirements for each plan are described in each plan
document and vary for each plan based on completion of a specified period of
continuous service and date of hire, subject to age limitations. The frozen
pension plan benefits are calculated either on a traditional final pay or
cash balance formula. Those formulas are based upon years of credited service
and eligible earnings as defined in each plan document. The traditional
formula provides benefits stated in terms of a single life annuity payable at
age 65. The cash balance formula provides benefits stated as a lump sum
hypothetical account balance. That account balance equals the sum of the
employee's accumulated annual benefit credits plus interest credits. Benefit
credits, which are based on years of service and base salary plus bonus,
ceased as of the date the plan was frozen. Interest credits continue until
the participant's benefit is paid.
LNC and LNL also sponsor a voluntary employees' beneficiary association ("VEBA")
trust that provides postretirement medical, dental and life insurance benefits
to retired full-time employees and agents who, depending on the plan, have
worked for us for at least 10 years and attained age 55 (age 60 for agents).
VEBAs are a special type of tax-exempt trust used to provide benefits that are
subject to preferential tax treatment under the Internal Revenue Code. Medical
and dental benefits are available to spouses and other eligible dependents of
retired employees and agents. Retirees may be required to contribute toward the
cost of these benefits. Eligibility and the amount of required contribution for
these benefits varies based upon a variety of factors including years of service
and year of retirement.
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OBLIGATIONS, FUNDED STATUS AND ASSUMPTIONS
Information (in millions) with respect to our benefit plans' assets and
obligations was as follows:
AS OF OR FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------
2012 2011 2012 2011
----------- ---------- ----------- ----------
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------- -------------------------
CHANGE IN PLAN ASSETS
Fair value as of beginning-of-year $ 137 $ 128 $ 5 $ 5
Actual return on plan assets 17 17 - -
Company and participant contributions - - 4 4
Benefits paid (9) (8) (4) (4)
----------- ----------- ----------- ------------
Fair value as of end-of-year 145 137 5 5
----------- ----------- ----------- ------------
CHANGE IN BENEFIT OBLIGATION
Balance as of beginning-of-year 121 116 21 21
Interest cost 5 6 1 1
Company and participant contributions - - 1 1
Actuarial (gains) losses 9 7 (2) 1
Benefits paid (9) (8) (4) (3)
----------- ----------- ----------- ------------
Balance as of end-of-year 126 121 17 21
----------- ----------- ----------- ------------
Funded status of the plans $ 19 $ 16 $ (12) $ (16)
=========== =========== =========== ============
AMOUNTS RECOGNIZED ON THE
CONSOLIDATED BALANCE SHEETS
Other assets $ 21 $ 18 $ - $ -
Other liabilities (2) (2) (12) (16)
----------- ----------- ----------- ------------
Net amount recognized $ 19 $ 16 $ (12) $ (16)
=========== =========== =========== ============
AMOUNTS RECOGNIZED IN
ACCUMULATED OCI, NET OF TAX
Net (gain) loss $ 13 $ 14 $ (1) $ -
Prior service credit - - - -
----------- ----------- ----------- ------------
Net amount recognized $ 13 $ 14 $ (1) $ -
=========== =========== =========== ============
RATE OF INCREASE IN COMPENSATION
Retiree Life Insurance Plan N/A N/A 4.00 % 4.00 %
All other plans N/A N/A N/A N/A
WEIGHTED-AVERAGE ASSUMPTIONS
Benefit obligations:
Weighted-average discount rate 3.93 % 4.25 % 4.03 % 4.25 %
Expected return on plan assets 6.50 % 8.00 % 6.50 % 6.50 %
Net periodic benefit cost:
Weighted-average discount rate 4.25 % 5.25 % 4.25 % 5.00 %
Expected return on plan assets 6.50 % 8.00 % 6.50 % 6.50 %
Consistent with our benefit plans' year end, we use December 31 as the
measurement date.
The discount rate was determined based on a corporate yield curve as of December
31, 2012, and projected benefit obligation cash flows for the pension plans. We
reevaluate this assumption each plan year. For 2013, our discount rate for the
pension plans will be 3.93%.
The expected return on plan assets was determined based on historical and
expected future returns of the various asset categories, using the plans' target
allocation. We reevaluate this assumption each plan year. For 2013, our expected
return on plan assets is 6.50% for the plans.
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The calculation of the accumulated other postretirement benefit obligation
assumes a weighted-average annual rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) as follows:
AS OF OR FOR THE
YEARS ENDED DECEMBER 31,
----------- -- ---------- -- -----------
2012 2011 2010
----------- ---------- -----------
Pre-65 health care cost trend rate 8.00 % 8.50 % 9.50 %
Post-65 health care cost trend rate 8.00 % 8.50 % 9.50 %
Ultimate trend rate 4.50 % 4.50 % 5.00 %
Year that the rate reaches the ultimate trend rate 2020 2021 2020
We expect the health care cost trend rate for 2013 to be 8.00% for both the
pre-65 and the post-65 population. A one-percentage point increase in assumed
health care cost trend rates would have increased the accumulated postretirement
benefit obligation by less than $1 million and total service and interest cost
components by less than $1 million. A one-percentage point decrease in assumed
health care cost trend rates would have decreased the accumulated postretirement
benefit obligation by less than $1 million and total service and interest cost
components by less than $1 million.
Information for our pension plans with an accumulated benefit obligation in
excess of plan assets (in millions) was as follows:
AS OF DECEMBER 31,
--------------------------
2012 2011
----------- -----------
Accumulated benefit obligation $ 2 $ 2
Projected benefit obligation 2 2
Fair value of plan assets - -
COMPONENTS OF NET PERIODIC BENEFIT COST
The components of net periodic benefit cost for our pension plans' and other
postretirement plans' expense (recovery) (in millions) were as follows:
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS
---------------------------------------- ---------------------------------------
2012 2011 2010 2012 2011 2010
----------- ---------- ----------- ---------- ----------- ----------
Interest cost $ 5 $ 6 $ 7 $ 1 $ 1 $ 1
Expected return on plan assets (9) (10) (9) - - -
Recognized net actuarial loss (gain) 1 2 2 - - -
----------- ---------- ----------- ---------- ----------- ----------
Net periodic benefit expense $ (3) $ (2) $ - $ 1 $ 1 $ 1
(recovery) =========== ========== =========== ========== =========== ==========
We expect our 2013 pension plans' income to be approximately $3 million.
For 2013, the estimated amount of amortization from accumulated OCI into net
periodic benefit expense related to net actuarial loss or gain is expected to be
a $1 million loss for our pension plans and a less than $1 million gain for our
other postretirement plans.
PLAN ASSETS
Our pension plans' asset target allocations by asset category based on estimated
fair values were as follows:
2012 2011
----------- -----------
Fixed maturity securities 80 % 80 %
Common stock:
Domestic equity 14 % 14 %
International equity 6 % 6 %
The investment objectives for the assets related to our pension plans are to:
o Maintain sufficient liquidity to pay obligations of the plans as they come
due;
o Minimize the effect of a single investment loss and large losses to the plans
through prudent risk/reward diversification consistent with sound fiduciary
standards;
o Maintain an appropriate asset allocation policy;
o Earn a return commensurate with the level of risk assumed through the asset
allocation policy; and
o Control costs of administering and managing the plans' investment operations.
Investments can be made in various asset classes and styles, including, but not
limited to: domestic and international equity, fixed income securities,
derivatives and other asset classes the investment managers deem prudent. Our
plans follow a strategic asset allocation policy that strives to systemically
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increase the percentage of assets in liability-matching fixed income investments
as funding levels increase.
We currently target asset weightings as follows: domestic equity allocations
(14%) are split into large cap (10%), small cap (2%) and hedge funds (2%). Fixed
maturity securities represent core fixed income investments. The performance of
the pension trust assets is monitored on a quarterly basis relative to the
plans' objectives.
Our qualified pension plans' assets have been combined into a master retirement
trust where a variety of qualified managers, including manager of managers, are
expected to have returns that exceed the median of similar funds over three-year
periods, above an appropriate index over five-year periods and meet real return
standards over ten-year periods. Managers are monitored for adherence to
approved investment policy guidelines and managers not meeting these criteria
are subject to additional due diligence review, corrective action or possible
termination.
FAIR VALUE OF PLAN ASSETS
See "Fair Value Measurement" in Note 1 for discussion of how we categorize our
pension plans' assets into the three-level fair value hierarchy. See "Financial
Instruments Carried at Fair Value" in Note 21 for a summary of our fair value
measurements of our pension plans' assets by the three-level fair value
hierarchy.
The following summarizes our fair value measurements of benefit plans' assets
(in millions) on a recurring basis by asset category:
AS OF DECEMBER 31,
------------------------------------------------------
2012 2011 2012 2011
----------- ----------- ----------- ----------
OTHER
PENSION PLANS POSTRETIREMENT BENEFITS
-------------------------- -------------------------
Fixed maturity securities:
Corporate bonds $ 48 $ 53 $ - $ -
U.S. government bonds 26 16 - -
Foreign government bonds 2 3 - -
RMBS - - - -
CMBS - 1 - -
CDOs - - - -
Common stock 66 61 - -
Cash and invested cash 3 3 5 5
----------- ----------- ----------- ----------
Total $ 145 $ 137 $ 5 $ 5
=========== =========== =========== ==========
VALUATION METHODOLOGIES AND ASSOCIATED INPUTS FOR PENSION PLANS' ASSETS
The fair value measurements of our pension plans' assets are based on
assumptions used by market participants in pricing the security. The most
appropriate valuation methodology is selected based on the specific
characteristics of the security, and the valuation methodology is consistently
applied to measure the security's fair value. The fair value measurement is
based on a market approach, which utilizes prices and other relevant information
generated by market transactions involving identical or comparable securities.
Sources of inputs to the market approach include third-party pricing services,
independent broker quotations or pricing matrices. Both observable and
unobservable inputs are used in the valuation methodologies. Observable inputs
include benchmark yields, reported trades, broker-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, procedures are employed, where possible, that include
comparisons with similar observable positions, comparisons with subsequent
sales, discussions with brokers and observations of general market movements for
those security classes. For those securities trading in less liquid or illiquid
markets with limited or no pricing information, unobservable inputs are used in
order to measure the fair value of these securities. In cases where this
information is not available, such as for privately placed securities, fair
value is estimated using an internal pricing matrix. This matrix relies on
judgment concerning the discount rate used in calculating expected future cash
flows, credit quality, industry sector performance and expected maturity.
Prices received from third parties are not adjusted; however, the third-party
pricing services' valuation methodologies and related inputs are evaluated and
additional evaluation is performed to determine the appropriate level within the
fair value hierarchy.
The observable and unobservable inputs to the valuation methodologies are based
on general standard inputs. The standard inputs used in order of priority are
benchmark yields, reported trades, broker-dealer quotes, issuer spreads,
two-sided markets, benchmark securities, bids, offers and reference data.
Depending on the type of security or the daily market activity, standard inputs
may be prioritized differently or may not be available for all securities on any
given day.
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Cash and invested cash is carried at cost, which approximates fair value. This
category includes highly liquid debt instruments purchased with a maturity of
three months or less. Due to the nature of these assets, we believe these assets
should be classified as Level 2.
PLAN CASH FLOWS
It is our practice to make contributions to the qualified pension plans to
comply with minimum funding requirements of the Employee Retirement Income
Security Act of 1974, as amended and with guidance issued there under. In
accordance with such practice, no contributions were required for the years
ended December 31, 2012 or 2011. Based on our calculations, we do not expect to
be required to make any contributions to our qualified pension plans in 2013
under applicable pension law.
For our nonqualified pension plans, we fund the benefits as they become due to
retirees. The amount expected to be contributed to the nonqualified pension
plans during 2013 is less than $1 million.
We expect the following benefit payments (in millions):
DEFINED OTHER
BENEFIT POST-
PENSION RETIREMENT
PLANS PLANS
------------- ----------
2013 $ 10 $ 2
2014 10 2
2015 10 2
2016 9 1
2017 9 1
Following five years thereafter 41 6
18. DEFINED CONTRIBUTION AND DEFERRED COMPENSATION PLANS
DEFINED CONTRIBUTION PLANS
LNC and we sponsor defined contribution plans, which include money purchase
plans, for eligible employees and agents. LNC and we make contributions and
matching contributions to each of the active plans in accordance with the plan
documents and various limitations under Section 401(a) of the Internal Revenue
Code of 1986, as amended. For the years ended December 31, 2012, 2011 and 2010,
expenses (income) for these plans were $68 million, $65 million and $60 million,
respectively.
DEFERRED COMPENSATION PLANS
LNC and we sponsor six separate non-qualified, unfunded, deferred compensation
plans for employees, agents and non-employee directors.
The results for certain investment options within the plans are hedged by total
return swaps. Participants' account values change due primarily to investment
earnings driven by market fluctuations. Our expenses increase or decrease in
direct proportion to the change in market value of the participants' investment
options. Participants are able to select our stock as an investment option;
however, it is not hedged by the total return swaps and is a primary source of
expense volatility related to these plans. For further discussion of total
return swaps related to our deferred compensation plans, see Note 6.
Information (in millions) with respect to these plans was as follows:
AS OF DECEMBER 31,
-------------------------
2012 2011
----------- -----------
Total liabilities(1) $ 335 $ 304
Investments held to fund liabilities(2) 146 133
(1) Reported in other liabilities on our Consolidated Balance Sheets.
(2) Reported in other assets on our Consolidated Balance Sheets.
DEFERRED COMPENSATION PLAN FOR EMPLOYEES
Participants may elect to defer a portion of their compensation as defined by
the plan. Participants may select from prescribed "phantom" investment options
that are used as measures for calculating the returns that are notionally
credited to their accounts. Under the terms of the plan, we agree to pay out
amounts based upon the aggregate performance of the investment measures selected
by the participants. We make matching contributions based upon amounts placed
into the plan by individuals after participants have exceeded applicable limits
of the Internal Revenue Code. The amounts of our contributions are calculated in
accordance with the plan document. Expenses (income) (in millions) for this plan
were as follows:
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
2012 2011 2010
----------- ----------- -----------
Employer matching contributions $ 7 $ 6 $ 6
Increase (decrease) in measurement of liabilities, net of total return swap 11 1 1
----------- ----------- -----------
Total plan expenses (income) $ 18 $ 7 $ 7
=========== =========== ===========
DEFERRED COMPENSATION PLANS FOR AGENTS
We sponsor three deferred compensation plans for certain eligible agents.
Participants may elect to defer a portion of their compensation as defined by
the respective plan. Participants may select from prescribed "phantom"
investment options that are used as measures for calculating the returns that
are notionally credited to their accounts. Under the terms of these plans, we
agree to pay out amounts based upon the aggregate performance of the investment
measures selected by the participants. We make matching contributions based upon
amounts placed into the plans by individuals after participants have exceeded
applicable limits of the Internal Revenue Code. The amounts of our contributions
are calculated in accordance
S-52
with the plans' documents. Expenses (income) (in millions) for these plans
were as follows:
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
2012 2011 2010
----------- ----------- -----------
Employer matching contributions $ 1 $ 1 $ 3
Increase (decrease) in measurement of liabilities, net of total return swap 5 - 3
----------- ----------- -----------
Total plan expenses (income) $ 6 $ 1 $ 6
=========== =========== ===========
DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS
Non-employee directors may defer a portion of their annual retainers, and we
credit deferred stock units annually to their accounts. The prescribed "phantom"
investment options are identical to those offered in the employees' deferred
compensation plan. For the years ended December 31, 2012, 2011 and 2010,
expenses (income) for this plan were $2 million, less than ($1) million and $2
million, respectively.
DEFERRED COMPENSATION PLAN FOR FORMER JP AGENTS
Eligible former agents of Jefferson-Pilot Corporation may participate in this
deferred compensation plan. Participants may elect to defer commissions and
bonuses and specify where this deferred compensation will be invested in
selected notional mutual funds. Participants may not receive the returns on
these funds until attaining a specified age or in the event of a significant
lifestyle change. The funded amount is rebalanced to match the funds that have
been elected under the deferred compensation plan. The plan obligation increases
with contributions, deferrals and investment gains, and decreases with
withdrawals and investment losses. The plan assets increase with investment
gains and decrease with investment losses and payouts of benefits. For the years
ended December 31, 2012, 2011 and 2010, expenses (income) for this plan were $3
million, $4 million and $2 million, respectively.
19. STOCK-BASED INCENTIVE COMPENSATION PLANS
Our employees and agents are included in LNC's various incentive plans that
provide for the issuance of stock options, performance shares
(performance-vested shares as opposed to time-vested shares), SARs, restricted
stock units and restricted stock awards ("nonvested stock"). LNC issues new
shares to satisfy option exercises.
Total compensation expense (in millions) for all of our stock-based incentive
compensation plans was as follows:
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
2012 2011 2010
----------- ----------- -----------
Stock options $ 8 $ 8 $ 5
Performance shares 5 2 (1)
SARs 1 - -
RSUs and nonvested stock 17 12 11
----------- ----------- -----------
Total $ 31 $ 22 $ 15
=========== =========== ===========
Recognized tax benefit $ 11 $ 8 $ 5
=========== =========== ===========
20. STATUTORY INFORMATION AND RESTRICTIONS
We prepare financial statements in accordance with statutory accounting
principles ("SAP") prescribed or permitted by the insurance departments of our
states of domicile, which may vary materially from GAAP. Prescribed SAP includes
the Accounting Practices and Procedures Manual of the National Association of
Insurance Commissioners ("NAIC") as well as state laws, regulations and
administrative rules. Permitted SAP encompasses all accounting practices not so
prescribed. The principal differences between statutory financial statements and
financial statements prepared in accordance with GAAP are that statutory
financial statements do not reflect DAC, some bond portfolios may be carried at
amortized cost, assets and liabilities are presented net of reinsurance,
contract holder liabilities are generally valued using more conservative
assumptions and certain assets are non-admitted.
We are subject to the applicable laws and regulations of our states of domicile.
Changes in these laws and regulations could change capital levels or capital
requirements for the Company.
Statutory capital and surplus, net gain (loss) from operations, after-tax, net
income (loss) and dividends to LNC amounts (in millions) below consists of all
or a combination of the following entities: LNL, Lincoln Reinsurance Company of
South Carolina, Lincoln Reinsurance Company of South Carolina II, Lincoln Life &
Annuity Company of New York ("LLANY"), Lincoln Reinsurance Company of Vermont I,
Lincoln Reinsurance Company of Vermont II, Lincoln Reinsurance Company of
Vermont III and Lincoln Reinsurance Company of Vermont IV.
AS OF DECEMBER 31,
-------------------------
2012 2011
---------- -----------
Capital and surplus $ 6,457 $ 7,054
S-53
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2012 2011 2010
---------- ----------- -----------
Net gain (loss) from operations, after-tax $ 649 $ 291 $ 553
Net income (loss) 600 104 430
Dividends to LNC 605 800 684
The increase in statutory net income (loss) for the year ended December 31,
2012, from that of 2011, was primarily due to a decrease in realized losses in
invested assets, an increase in favorable tax items over prior year and
favorable reserve development in variable annuities due to improvements in the
equity market and less volatility in the forward interest rates.
The decrease in statutory net income (loss) for the year ended December 31,
2011, from that of 2010, was primarily due to increased realized losses in
invested assets, an increase in reserves on UL secondary guarantee products and
prior year favorable tax items that did not repeat in 2011.
Our states of domicile, Indiana for LNL and New York for LLANY, have adopted
certain prescribed accounting practices that differ from those found in NAIC
SAP. These prescribed practices are the use of continuous Commissioners Annuity
Reserve Valuation Method ("CARVM") in the calculation of reserves as prescribed
by the state of New York, the calculation of reserves on universal life policies
based on the Indiana universal life method as prescribed by the state of Indiana
for policies issued before January 1, 2006 and the use of a more conservative
valuation interest rate on certain annuities prescribed by the states of Indiana
and New York. The Vermont insurance subsidiaries also have an accounting
practice permitted by the state of Vermont that differs from that found in NAIC
SAP. Specifically, it is accounting for the lesser of the face amount of all
amounts outstanding under an LOC and the value of the Valuation of Life
Insurance Policies Model Regulation ("XXX") additional statutory reserves as an
admitted asset and a form of surplus as of December 31, 2012 and 2011.
The favorable (unfavorable) effects on statutory surplus compared to NAIC
statutory surplus from the use of these prescribed and permitted practices (in
millions) were as follows:
AS OF DECEMBER 31,
-------------------------
2012 2011
---------- -----------
Calculation of reserves using the Indiana universal life method $ 249 $ 270
Calculation of reserves using continuous CARVM (2) (2)
Conservative valuation rate on certain annuities (26) (20)
Lesser of LOC and XXX additional reserve as surplus 2,483 1,731
We are subject to certain insurance department regulatory restrictions as to the
transfer of funds and payment of dividends to the holding company. Under Indiana
laws and regulations, LNL may pay dividends to LNC without prior approval of the
Indiana Insurance Commissioner (the "Commissioner"), only from unassigned
surplus and must receive prior approval of the Commissioner to pay a dividend if
such dividend, along with all other dividends paid within the preceding 12
consecutive months, would exceed the statutory limitation. The current statutory
limitation is the greater of 10% of the insurer's contract holders' surplus, as
shown on its last annual statement on file with the Commissioner or the
insurer's statutory net gain from operations for the previous 12 months, but in
no event to exceed statutory unassigned surplus. Indiana law gives the
Commissioner broad discretion to disapprove requests for dividends in excess of
these limits. We expect that we could pay dividends of approximately $643
million in 2013 without prior approval from the respective state commissioner.
All payments of principal and interest on the surplus notes must be approved by
the respective Commissioner of Insurance.
S-54
21. 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, 2012 AS OF DECEMBER 31, 2011
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- ---------- ----------- ----------
ASSETS
AFS securities:
Fixed maturity securities $ 80,254 $ 80,254 $ 73,607 $ 73,607
VIEs' fixed maturity securities 708 708 700 700
Equity securities 157 157 139 139
Trading securities 2,437 2,437 2,538 2,538
Mortgage loans on real estate 6,792 7,446 6,589 7,233
Derivative investments 2,263 2,263 2,846 2,846
Other investments 1,089 1,089 1,059 1,059
Cash and invested cash 3,278 3,278 3,844 3,844
Separate account assets 95,373 95,373 83,477 83,477
LIABILITIES
Future contract benefits:
Indexed annuity contracts embedded derivatives (732) (732) (399) (399)
GLB reserves embedded derivatives (909) (909) (2,217) (2,217)
Other contract holder funds:
Remaining guaranteed interest and similar contracts (867) (867) (1,114) (1,114)
Account values of certain investment contracts (28,480) (32,620) (27,403) (30,739)
Short-term debt (32) (32) (10) (10)
Long-term debt (1,925) (1,972) (2,429) (2,466)
Reinsurance related embedded derivatives (184) (184) (12) (12)
VIEs' liabilities - derivative instruments (128) (128) (291) (291)
Other liabilities:
Credit default swaps (11) (11) (16) (16)
BENEFIT PLANS' ASSETS(1) 150 150 142 142
(1) Included in the funded statuses of the benefit plans, which is
reported in other liabilities on our Consolidated Balance Sheets.
Refer to Note 17 for additional detail.
VALUATION METHODOLOGIES AND ASSOCIATED INPUTS FOR FINANCIAL INSTRUMENTS NOT
CARRIED AT FAIR VALUE
The following discussion outlines the methodologies and assumptions used to
determine the fair value of our financial instruments not carried at fair value
on our Consolidated Balance Sheets. Considerable judgment is required to develop
these assumptions used to measure fair value. Accordingly, the estimates shown
are not necessarily indicative of the amounts that would be realized in a
one-time, current market exchange of all of our financial instruments.
MORTGAGE LOANS ON REAL ESTATE
The fair value of mortgage loans on real estate is established using a
discounted cash flow method based on credit rating, maturity and future income.
The ratings for mortgages in good standing are based on property type, location,
market conditions, occupancy, debt-service coverage, loan-to-value, quality of
tenancy, borrower and payment record. The fair value for impaired mortgage loans
is based on the present value of expected future cash flows discounted at the
loan's effective interest rate, the loan's market price or the fair value of the
collateral if the loan is collateral dependent. The inputs used to measure the
fair value of our mortgage loans on real estate are classified as Level 2 within
the fair value hierarchy.
OTHER INVESTMENTS
The carrying value of our assets classified as other investments approximates
fair value. Other investments include LPs and other privately held investments
that are accounted for using the equity method of accounting and the carrying
value is based on our proportional share of the net assets of the LPs. The
inputs used to measure the fair value of our other investments are classified as
Level 3 within the fair value hierarchy.
OTHER CONTRACT HOLDER FUNDS
Other contract holder funds include remaining guaranteed interest and similar
contracts and account values of certain investment contracts. The fair value for
the remaining guaranteed interest and similar contracts is estimated using
discounted cash flow calculations as of the balance sheet date. These
calculations are based on interest rates currently offered on similar contracts
with maturities that are consistent with those remaining for the contracts being
valued. As of December 31, 2012 and 2011, the remaining guaranteed interest and
similar contracts carrying value approximated fair value. The fair value of the
account values of certain investment contracts is based on their approximate
surrender value as of the balance sheet date. The inputs used to measure the
fair value of our other contract holder funds are classified as Level 3 within
the fair value hierarchy.
S-55
SHORT-TERM AND LONG-TERM DEBT
The fair value of long-term debt is based on quoted market prices. For
short-term debt, excluding current maturities of long-term debt, the carrying
value approximates fair value. The inputs used to measure the fair value of our
short-term and long-term debt are classified as Level 2 within the fair value
hierarchy.
FINANCIAL INSTRUMENTS CARRIED AT FAIR VALUE
We did not have any assets or liabilities measured at fair value on a
nonrecurring basis as of December 31, 2012 or 2011, and we noted no changes in
our valuation methodologies between these periods.
The following summarizes our financial instruments carried at fair value (in
millions) on a recurring basis by the fair value hierarchy levels described
above:
AS OF DECEMBER 31, 2012
--------------------------------------------------------
QUOTED
PRICES
IN ACTIVE
MARKETS FOR SIGNIFICANT SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE TOTAL
ASSETS INPUTS INPUTS FAIR
(LEVEL 1) (LEVEL 2) (LEVEL 3) VALUE
------------ ------------ ------------- -----------
ASSETS
Investments:
Fixed maturity AFS securities:
Corporate bonds $ 65 $ 64,654 $ 2,065 $ 66,784
U.S. government bonds 362 30 1 393
Foreign government bonds - 594 46 640
RMBS - 5,880 3 5,883
CMBS - 928 27 955
CDOs - 26 154 180
State and municipal bonds - 4,211 32 4,243
Hybrid and redeemable preferred securities 30 1,030 116 1,176
VIEs' fixed maturity securities 110 598 - 708
Equity AFS securities 44 26 87 157
Trading securities 2 2,379 56 2,437
Derivative investments - 347 1,916 2,263
Cash and invested cash - 3,278 - 3,278
Separate account assets 1,519 93,854 - 95,373
------------ ------------ ------------- -----------
Total assets $ 2,132 $177,835 $ 4,503 $ 184,470
============ ============ ============= ===========
LIABILITIES
Future contract benefits:
Indexed annuity contracts embedded derivatives $ - $ - $ (732) $ (732)
GLB reserves embedded derivatives - - (909) (909)
Reinsurance related embedded derivatives - (184) - (184)
VIEs' liabilities - derivative instruments - - (128) (128)
Other liabilities:
Credit default swaps - - (11) (11)
------------ ------------ ------------- -----------
Total liabilities $ - $ (184) $ (1,780) $ (1,964)
============ ============ ============= ===========
BENEFIT PLANS' ASSETS $ 16 $ 134 $ - $ 150
============ ============ ============= ===========
S-56
AS OF DECEMBER 31, 2011
---------------------------------------------------------
QUOTED
PRICES
IN ACTIVE
MARKETS FOR SIGNIFICANT SIGNIFICANT
IDENTICAL OBSERVABLE UNOBSERVABLE TOTAL
ASSETS INPUTS INPUTS FAIR
(LEVEL 1) (LEVEL 2) (LEVEL 3) VALUE
------------- ------------ ------------- -----------
ASSETS
Investments:
Fixed maturity AFS securities:
Corporate bonds $ 61 $ 55,603 $ 2,423 $ 58,087
U.S. government bonds 426 18 1 445
Foreign government bonds - 621 97 718
RMBS - 7,506 158 7,664
CMBS - 1,498 31 1,529
CDOs - - 101 101
State and municipal bonds - 3,943 - 3,943
Hybrid and redeemable preferred securities 15 1,006 99 1,120
VIEs' fixed maturity securities 108 592 - 700
Equity AFS securities 37 46 56 139
Trading securities 2 2,469 67 2,538
Derivative investments - 362 2,484 2,846
Cash and invested cash - 3,844 - 3,844
Separate account assets 1,582 81,895 - 83,477
------------- ------------ ------------- -----------
Total assets $ 2,231 $ 159,403 $ 5,517 $ 167,151
============= ============ ============= ===========
LIABILITIES
Future contract benefits:
Indexed annuity contracts embedded derivatives $ - $ - $ (399) $ (399)
GLB reserves embedded derivatives - - (2,217) (2,217)
Reinsurance related embedded derivatives - (12) - (12)
VIEs' liabilities - derivative instruments - - (291) (291)
Other liabilities:
Credit default swaps - - (16) (16)
------------- ------------ ------------- -----------
Total liabilities $ - $ (12) $ (2,923) $ (2,935)
============= ============ ============= ===========
BENEFIT PLANS' ASSETS $ 14 $ 128 $ - $ 142
============= ============ ============= ===========
S-57
The following summarizes changes to our financial instruments carried at fair
value (in millions) and classified within Level 3 of the fair value hierarchy.
This summary excludes any effect of amortization of DAC, VOBA, DSI and DFEL. The
gains and losses below may include changes in fair value due in part to
observable inputs that are a component of the valuation methodology.
FOR THE YEAR ENDED DECEMBER 31, 2012
------------------------------------------------------------------------------------
PURCHASES,
GAINS ISSUANCES, TRANSFERS
ITEMS (LOSSES) SALES, IN OR
INCLUDED IN MATURITIES, OUT
BEGINNING IN OCI SETTLEMENTS, OF ENDING
FAIR NET AND CALLS, LEVEL 3, FAIR
VALUE INCOME OTHER(1) NET NET(2) VALUE
----------- ---------- ----------- ------------ ----------- -----------
Investments:(3)
Fixed maturity AFS securities:
Corporate bonds $ 2,423 $ (25) $ 35 $ 274 $ (642) $ 2,065
U.S. government bonds 1 - - - - 1
Foreign government bonds 97 - - (5) (46) 46
RMBS 158 (3) 3 (8) (147) 3
CMBS 31 (11) 16 (11) 2 27
CDOs 101 (2) 8 61 (14) 154
State and municipal bonds - - - 32 - 32
Hybrid and redeemable
preferred securities 99 (1) 23 - (5) 116
Equity AFS securities 56 (8) 13 26 - 87
Trading securities 67 3 4 (2) (16) 56
Derivative investments 2,484 (823) 73 182 - 1,916
Future contract benefits:(4)
Indexed annuity contracts embedded
derivatives (399) (136) - (197) - (732)
GLB reserves embedded derivatives (2,217) 1,308 - - - (909)
VIEs' liabilities - derivative
instruments(5) (291) 163 - - - (128)
Other liabilities:
Credit default swaps(6) (16) 5 - - - (11)
----------- ---------- ----------- ------------ ----------- -----------
Total, net $ 2,594 $ 470 $ 175 $ 352 $ (868) $ 2,723
=========== ========== =========== ============ =========== ===========
S-58
FOR THE YEAR ENDED DECEMBER 31, 2011
------------------------------------------------------------------------------------
PURCHASES,
GAINS ISSUANCES, TRANSFERS
ITEMS (LOSSES) SALES, IN OR
INCLUDED IN MATURITIES, OUT
BEGINNING IN OCI SETTLEMENTS, OF ENDING
FAIR NET AND CALLS, LEVEL 3, FAIR
VALUE INCOME OTHER(1) NET NET(2) VALUE
----------- ---------- ----------- ------------ ----------- -----------
Investments:(3)
Fixed maturity AFS securities:
Corporate bonds $ 2,353 $ 3 $ 42 $ (134) $ 159 $ 2,423
U.S. government bonds 2 - - (1) - 1
Foreign government bonds 113 - 4 (3) (17) 97
RMBS 119 (3) 6 36 - 158
CMBS 102 (62) 61 (74) 4 31
CDOs 171 19 (17) (72) - 101
Hybrid and redeemable
preferred securities 114 (1) (5) (7) (2) 99
Equity AFS securities 91 8 (12) 3 (34) 56
Trading securities 74 3 1 (7) (4) 67
Derivative investments 1,494 495 383 112 - 2,484
Future contract benefits:(4)
Indexed annuity contracts embedded
derivatives (497) 5 - 93 - (399)
GLB reserves embedded derivatives (408) (1,809) - - - (2,217)
VIEs' liabilities - derivative
instruments(5) (209) (82) - - - (291)
Other liabilities:
Credit default swaps(6) (16) (6) - 6 - (16)
----------- ---------- ----------- ------------ ----------- -----------
Total, net $ 3,503 $ (1,430) $ 463 $ (48) $ 106 $ 2,594
=========== ========== =========== ============ =========== ===========
Benefit plans' assets(7) $ 6 $ - $ - $ (6) $ - $ -
=========== ========== =========== ============ =========== ===========
S-59
FOR THE YEAR ENDED DECEMBER 31, 2010
------------------------------------------------------------------------------------
PURCHASES,
GAINS ISSUANCES, TRANSFERS
ITEMS (LOSSES) SALES, IN OR
INCLUDED IN MATURITIES, OUT
BEGINNING IN OCI SETTLEMENTS, OF ENDING
FAIR NET AND CALLS, LEVEL 3, FAIR
VALUE INCOME OTHER(1) NET NET(2) VALUE
----------- ---------- ----------- ------------ ----------- -----------
Investments:(3)
Fixed maturity AFS securities:
Corporate bonds $ 2,117 $ (42) $ 53 $ 279 $ (54) $ 2,353
U.S. government bonds 3 - - (4) 3 2
Foreign government bonds 92 - 8 (4) 17 113
RMBS 135 (5) 10 (17) (4) 119
CMBS 252 (47) 84 (72) (115) 102
CDOs 153 1 30 (13) - 171
CLNs 322 - 278 - (600) -
Hybrid and redeemable
preferred securities 150 2 (23) (15) - 114
Equity AFS securities 88 - 8 (5) - 91
Trading securities 90 2 (10) (7) (1) 74
Derivative investments 1,238 (166) 7 415 - 1,494
Future contract benefits:(4)
Indexed annuity contracts embedded
derivatives (419) (81) - 3 - (497)
GLB reserves embedded derivatives (676) 268 - - - (408)
VIEs' liabilities - derivative
instruments(5) - 16 - - (225) (209)
Other liabilities:
Credit default swaps(6) (65) 7 - 42 - (16)
----------- ---------- ----------- ------------ ----------- -----------
Total, net $ 3,480 $ (45) $ 445 $ 602 $ (979) $ 3,503
=========== ========== =========== ============ =========== ===========
Benefit plans' assets (7) $ - $ - $ - $ 6 $ - $ 6
=========== ========== =========== ============ =========== ===========
(1) The changes in fair value of the interest rate swaps are offset by an
adjustment to derivative investments (see Note 6).
(2) Transfers in or out of Level 3 for AFS and trading securities are displayed
at amortized cost as of the beginning-of-year. For AFS and trading
securities, the difference between beginning-of-year amortized cost and
beginning-of-year fair value was included in OCI and earnings, respectively,
in prior years.
(3) Amortization and accretion of premiums and discounts are included in net
investment income on our Consolidated Statements of Comprehensive Income
(Loss). Gains (losses) from sales, maturities, settlements and calls and
OTTI are included in realized gain (loss) on our Consolidated Statements of
Comprehensive Income (Loss).
(4) Gains (losses) from sales, maturities, settlements and calls are included in
realized gain (loss) on our Consolidated Statements of Comprehensive Income
(Loss).
(5) The changes in fair value of the credit default swaps and contingency
forwards are included in realized gain (loss) on our Consolidated Statements
of Comprehensive Income (Loss).
(6) Gains (losses) from sales, maturities, settlements and calls are included in
net investment income on our Consolidated Statements of Comprehensive Income
(Loss).
(7) The expected return on plan assets is reported in commissions and other
expenses on our Consolidated Statements of Comprehensive Income (Loss).
S-60
The following provides the components of the items included in issuances, sales,
maturities, settlements, calls, net, excluding any effect of amortization of
DAC, VOBA, DSI and DFEL and changes in future contract benefits (in millions) as
reported above:
FOR THE YEAR ENDED DECEMBER 31, 2012
------------------------------------------------------------------------------------
ISSUANCES SALES MATURITIES SETTLEMENTS CALLS TOTAL
----------- ---------- ----------- ----------- ----------- -----------
Investments:
Fixed maturity AFS securities:
Corporate bonds $ 363 $ (26) $ (6) $ (51) $ (6) $ 274
Foreign government bonds - - (5) - - (5)
RMBS - - (6) (2) - (8)
CMBS - - - (11) - (11)
CDOs 72 - - (11) - 61
State and municipal bonds 32 - - - - 32
Equity AFS securities 26 - - - - 26
Trading securities - - - (2) - (2)
Derivative investments 454 (34) (238) - - 182
Future contract benefits:
Indexed annuity contracts embedded
derivatives (99) - - (98) - (197)
----------- ---------- ----------- ----------- ----------- -----------
Total, net $ 848 $ (60) $ (255) $ (175) $ (6) $ 352
=========== ========== =========== =========== =========== ===========
FOR THE YEAR ENDED DECEMBER 31, 2011
------------------------------------------------------------------------------------
ISSUANCES SALES MATURITIES SETTLEMENTS CALLS TOTAL
----------- ---------- ----------- ----------- ----------- -----------
Investments:
Fixed maturity AFS securities:
Corporate bonds $ 237 $ (216) $ (15) $ (51) $ (89) $ (134)
U.S. government bonds - - - (1) - (1)
Foreign government bonds - (3) - - - (3)
RMBS 51 - - (15) - 36
CMBS - (50) - (24) - (74)
CDOs - (33) - (39) - (72)
Hybrid and redeemable preferred
securities 9 (16) - - - (7)
Equity AFS securities 19 (16) - - - 3
Trading securities - (2) - (5) - (7)
Derivative investments 396 (7) (277) - - 112
Future contract benefits:
Indexed annuity contracts embedded
derivatives (59) - - 152 - 93
Other liabilities:
Credit default swaps - 6 - - - 6
----------- ---------- ----------- ----------- ----------- -----------
Total, net $ 653 $ (337) $ (292) $ 17 $ (89) $ (48)
=========== ========== =========== ========== =========== ===========
Benefit plans' assets $ - $ (3) $ (3) $ - $ - $ (6)
=========== ========== =========== ========== =========== ===========
S-61
The following summarizes changes in unrealized gains (losses) included in net
income, excluding any effect of amortization of DAC, VOBA, DSI and DFEL and
changes in future contract benefits, related to financial instruments carried at
fair value classified within Level 3 that we still held (in millions):
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
2012 2011 2010
----------- ---------- -----------
Investments:(1)
Derivative investments $ (823) $ 472 $ (163)
Future contract benefits:(1)
Indexed annuity contracts embedded derivatives (10) (1) 44
GLB reserves embedded derivatives 1,472 (1,615) 419
VIEs' liabilities - derivative instruments(1) 163 (82) 16
Other liabilities:
Credit default swaps(2) 6 (8) (12)
----------- ---------- -----------
Total, net $ 808 $ (1,234) $ 304
=========== ========== ===========
(1) Included in realized gain (loss) on our Consolidated Statements of
Comprehensive Income (Loss).
(2) Included in net investment income on our Consolidated Statements of
Comprehensive Income (Loss).
The following provides the components of the transfers in and out of Level 3 (in
millions) as reported above:
FOR THE YEAR ENDED DECEMBER 31, 2012
----------------------------------------
TRANSFERS TRANSFERS
IN TO OUT OF
LEVEL 3 LEVEL 3 TOTAL
----------- ---------- -----------
Investments:
Fixed maturity AFS securities:
Corporate bonds $ 35 $ (677) $ (642)
Foreign government bonds - (46) (46)
RMBS - (147) (147)
CMBS 5 (3) 2
CDOs 6 (20) (14)
Hybrid and redeemable preferred securities 35 (40) (5)
Trading securities 2 (18) (16)
----------- ---------- -----------
Total, net $ 83 $ (951) $ (868)
=========== ========== ===========
FOR THE YEAR ENDED DECEMBER 31, 2011
----------------------------------------
TRANSFERS TRANSFERS
IN TO OUT OF
LEVEL 3 LEVEL 3 TOTAL
----------- ---------- -----------
Investments:
Fixed maturity AFS securities:
Corporate bonds $ 246 $ (87) $ 159
Foreign government bonds - (17) (17)
CMBS 4 - 4
Hybrid and redeemable preferred securities 18 (20) (2)
Equity AFS securities 1 (35) (34)
Trading securities 1 (5) (4)
----------- ---------- -----------
Total, net $ 270 $ (164) $ 106
=========== ========== ===========
FOR THE YEAR ENDED DECEMBER 31, 2010
----------------------------------------
TRANSFERS TRANSFERS
IN TO OUT OF
LEVEL 3 LEVEL 3 TOTAL
----------- ---------- -----------
Investments:
Fixed maturity AFS securities:
Corporate bonds $ 144 $ (198) $ (54)
U.S. government bonds 3 - 3
Foreign government bonds 17 - 17
RMBS - (4) (4)
CMBS 3 (118) (115)
CLNs - (600) (600)
Trading securities - (1) (1)
VIEs' liabilities - derivative instruments (225) - (225)
----------- ---------- -----------
Total, net $ (58) $ (921) $ (979)
=========== ========== ===========
Transfers in and out of Level 3 are generally the result of observable market
information on a security no longer being available or becoming available to our
pricing vendors. For the years ended December 31, 2012, 2011 and 2010, our
corporate bonds, RMBS and CMBS transfers in and out were attributable primarily
to the securities' observable market information no longer being available or
becoming available. For the year ended December 31, 2010, the CLNs transfers out
of Level 3 and VIEs' liabilities - derivative instruments transfer into Level 3
were related to new accounting guidance that is discussed in Note 2. Transfers
in and out of Levels 1 and 2 are generally the result of a change in the type of
input used to measure the fair value of an asset or liability at the end of the
reporting period. When quoted prices in active markets become available,
transfers from Level 2 to Level 1 will result. When quoted prices in active
markets become unavailable, but we are able to employ a valuation methodology
using significant observable inputs, transfers from Level 1 to Level 2 will
result. There were no significant transfers between Levels 1 and 2 of the fair
value during 2012, 2011 and 2010.
S-62
The following summarizes the fair value (in millions), valuation techniques and
significant unobservable inputs of the Level 3 fair value measurements as of
December 31, 2012:
FAIR VALUATION SIGNIFICANT INPUT
VALUE TECHNIQUE UNOBSERVABLE INPUTS RANGES
---------- ----------------------- -------------------------------- ---------------
ASSETS
Investments:
Fixed maturity AFS and
trading securities
Corporate bonds $ 902 Discounted cash flow Liquidity/duration adjustment(1) 1.7% - 13.5%
Foreign government bonds 46 Discounted cash flow Liquidity/duration adjustment(1) 2.3% - 5.3%
Hybrid and redeemable
preferred stock 21 Discounted cash flow Liquidity/duration adjustment(1) 2.7% - 2.9%
Equity AFS and trading
securities 24 Discounted cash flow Liquidity/duration adjustment(1) 4.3% - 4.5%
LIABILITIES
Future contract benefits:
Indexed annuity contracts
embedded derivatives (732) Discounted cash flow Lapse rate(2) 1.0% - 15.0%(7)
Mortality rate(5)
GLB reserves embedded
derivatives (858) Monte Carlo simulation Long-term lapse rate(2) 1.0% - 27.0%
Utilization of guaranteed
withdrawal(3) 90.0% - 100.0%
NPR(4) 0.03% - 0.54%(7)
Mortality rate(5)
Volatility(6) 1.0% - 35.0%
(1) The liquidity/duration adjustment input represents an estimated market
participant composite of adjustments attributable to liquidity premiums,
expected durations, structures and credit quality that would be applied to
the market observable information of an investment.
(2) The lapse rate input represents the estimated probability of a contract
surrendering during a year, and thereby forgoing any future benefits. The
range for indexed annuity contracts represents the lapse rates during the
surrender charge period.
(3) The utilization of guaranteed withdrawals input represents the estimated
percentage of contract holders that utilize the guaranteed withdrawal
feature.
(4) The NPR input represents the estimated additional credit spread that market
participants would apply to the market observable discount rate when pricing
a contract.
(5) The mortality rate input represents the estimated probability of when an
individual belonging to a particular group, categorized according to age or
some other factor such as gender, will die.
(6) The volatility input represents overall volatilities assumed for the
underlying variable annuity funds, which include a mixture of equity and
fixed income assets. Fair value of the variable annuity GLB embedded
derivatives would increase if higher volatilities were used for valuation.
(7) Based on the "Annuity 2000 Mortality Table" developed by the Society of
Actuaries Committee on Life Insurance Research that was adopted by the
National Association of Insurance Commissioners in 1996 for our mortality
input.
From the table above, we have excluded Level 3 fair value measurements obtained
from independent, third-party pricing sources. We do not develop the significant
inputs used to measure the fair value of these assets and liabilities, and the
information regarding the significant inputs is not readily available to us.
Independent broker-quoted fair values are non-binding quotes developed by market
makers or broker-dealers obtained from third-party sources recognized as market
participants. The fair value of a broker-quoted asset or liability is based
solely on the receipt of an updated quote from a single market maker or a
broker-dealer recognized as a market participant as we do not adjust broker
quotes when used as the fair value measurement for an asset or liability.
Significant increases or decreases in any of the quotes received from a
third-party broker-dealer may result in a significantly higher or lower fair
value measurement.
S-63
Changes in any of the significant inputs presented in the table above may result
in a significant change in the fair value measurement of the asset or liability
as follows:
o INVESTMENTS - An increase in the liquidity/duration adjustment input would
result in a decrease in the fair value measurement.
o INDEXED ANNUITY CONTRACTS EMBEDDED DERIVATIVES - An increase in the lapse
rate or mortality rate inputs would result in a decrease in the fair value
measurement.
o GLB RESERVES EMBEDDED DERIVATIVES - An increase in our lapse rate, wait
period, NPR or mortality rate inputs would result in a decrease in the fair
value measurement. An increase in the percent of maximum withdrawal amount
input would result in an increase in the fair value measurement.
For each category discussed above, the unobservable inputs are not
inter-related; therefore, a directional change in one input will not affect the
other inputs.
As part of our on-going valuation process, we assess the reasonableness of our
valuation techniques or models and make adjustments as necessary. For more
information, see "Summary of Significant Accounting Policies" above.
22. SEGMENT INFORMATION
We provide products and services and report results through our Annuities,
Retirement Plan Services, Life Insurance and Group Protection segments. We also
have Other Operations, which includes the financial data for operations that are
not directly related to the business segments. Our reporting segments reflect
the manner by which our chief operating decision makers view and manage the
business. The following is a brief description of these segments and Other
Operations.
The Annuities segment provides tax-deferred investment growth and lifetime
income opportunities for its clients by offering fixed (including indexed), and
variable annuities.
The Retirement Plan Services segment provides employer-sponsored defined
benefit, and individual retirement accounts, as well as individual and group
variable annuities, group fixed annuities and mutual-fund based programs in the
retirement plan marketplace.
The Life Insurance segment focuses in the creation and protection of wealth
through life insurance products, including term insurance, a linked-benefit
product (which is a UL policy linked with riders that provide for long-term care
costs), indexed UL and both single and survivorship versions of UL and VUL,
including corporate-owned UL and VUL insurance and bank-owned UL and VUL
insurance products.
The Group Protection segment offers principally group non-medical insurance
products, including term life, universal life, disability, dental, vision,
accident and critical illness insurance to the employer market place through
various forms of contributory and non-contributory plans. Its products are
marketed primarily through a national distribution system of regional group
offices. These offices develop business through employee benefit brokers,
third-party administrators and other employee benefit firms.
Other Operations includes investments related to the excess capital in our
insurance subsidiaries; investments in media properties and other corporate
investments; benefit plan net liability; the unamortized deferred gain on
indemnity reinsurance related to the sale of reinsurance; the results of certain
disability income business; our run-off Institutional Pension business, the
majority of which was sold on a group annuity basis; and debt costs.
Segment operating revenues and income (loss) from operations are internal
measures used by our management and Board of Directors to evaluate and assess
the results of our segments. Income (loss) from operations is GAAP net income
excluding the after-tax effects of the following items, as applicable:
o Realized gains and losses associated with the following ("excluded realized
gain (loss)"):
- Sales or disposals of securities;
- Impairments of securities;
- Changes in the fair value of derivatives, embedded derivatives within
certain reinsurance arrangements and our trading securities;
- Changes in the fair value of the derivatives we own to hedge our GDB
riders within our variable annuities;
- Changes in the fair value of the embedded derivatives of our GLB riders
accounted for at fair value, net of the change in the fair value of the
derivatives we own to hedge them; and
- Changes in the fair value of the embedded derivative liabilities related
to index call options we may purchase in the future to hedge contract
holder index allocations applicable to future reset periods for our
indexed annuity products accounted for at fair value.
o Changes in reserves resulting from benefit ratio unlocking on our GDB and
GLB riders;
o Income (loss) from reserve changes, net of related amortization, on business
sold through reinsurance;
o Gains (losses) on early extinguishment of debt;
o Losses from the impairment of intangible assets;
o Income (loss) from discontinued operations; and
o Income (loss) from the initial adoption of new accounting standards.
Operating revenues represent GAAP revenues excluding the pre-tax effects of the
following items, as applicable:
o Excluded realized gain (loss);
o Revenue adjustments from the initial adoption of new accounting standards;
o Amortization of DFEL arising from changes in GDB and GLB benefit ratio
unlocking; and
o Amortization of deferred gains arising from the reserve changes on business
sold through reinsurance.
S-64
We use our prevailing corporate federal income tax rate of 35% while taking into
account any permanent differences for events recognized differently in our
financial statements and federal income tax returns when reconciling our
non-GAAP measures to the most comparable GAAP measure. Operating revenues and
income (loss) from operations do not replace revenues and net income as the GAAP
measures of our consolidated results of operations.
Segment information (in millions) was as follows:
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
2012 2011 2010
----------- ------------ ----------
REVENUES
Operating revenues:
Annuities $ 2,713 $ 2,588 $ 2,415
Retirement Plan Services 1,015 988 971
Life Insurance 4,817 4,347 4,160
Group Protection 2,090 1,938 1,831
Other Operations 411 449 470
Excluded realized gain (loss), pre-tax (235) (342) (312)
Amortization of deferred gain arising from reserve changes on business
sold through reinsurance, pre-tax 3 3 3
----------- ------------ ---------
Total revenues $ 10,814 $ 9,971 $ 9,538
=========== ============ =========
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
2012 2011 2010
----------- ------------ ----------
NET INCOME (LOSS)
Income (loss) from operations:
Annuities $ 608 $ 549 $ 450
Retirement Plan Services 131 146 143
Life Insurance 538 463 533
Group Protection 72 97 68
Other Operations (39) (28) 3
Excluded realized gain (loss), after-tax (152) (222) (204)
Gain (loss) on early extinguishment of debt, after-tax - - -
Income (expense) from reserve changes (net of related
amortization) on business sold through reinsurance, after-tax 2 2 2
Impairment of intangibles, after-tax 2 (744) -
Benefit ratio unlocking, after-tax - - -
----------- ------------ ---------
Income (loss) from continuing operations, after-tax 1,162 263 995
----------- ------------ ---------
Net income (loss) $ 1,162 $ 263 $ 995
=========== ============ =========
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
2012 2011 2010
----------- ---------- -----------
NET INVESTMENT INCOME
Annuities $ 1,058 $ 1,091 $ 1,107
Retirement Plan Services 797 792 769
Life Insurance 2,297 2,168 2,040
Group Protection 161 152 141
Other Operations 238 287 305
----------- ---------- -----------
Total net investment income $ 4,551 $ 4,490 $ 4,362
=========== ========== ===========
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
2012 2011 2010
----------- ---------- -----------
AMORTIZATION OF DAC AND VOBA, NET OF INTEREST
Annuities $ 307 $ 335 $ 346
Retirement Plan Services 42 33 53
Life Insurance 609 416 431
Group Protection 48 39 40
----------- ---------- -----------
Total amortization of DAC and VOBA, net of interest $ 1,006 $ 823 $ 870
=========== ========== ===========
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
2012 2011 2010
----------- ---------- -----------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Annuities $ 117 $ 92 $ 83
Retirement Plan Services 29 56 53
Life Insurance 326 202 246
Group Protection 38 52 37
Other Operations (82) (13) (6)
Excluded realized gain (loss) (83) (120) (109)
Reserve changes (net of related amortization)
on business sold through reinsurance 1 1 1
Impairment of intangibles (2) - -
----------- ---------- -----------
Total federal income tax expense (benefit) $ 344 $ 270 $ 305
=========== ========== ===========
AS OF DECEMBER 31,
-------------------------
2012 2011
---------- -----------
ASSETS
Annuities $ 107,872 $ 99,010
Retirement Plan Services 30,654 28,633
Life Insurance 62,867 57,623
Group Protection 3,733 3,429
Other Operations 13,254 12,658
---------- -----------
Total assets $ 218,380 $ 201,353
========== ===========
S-65
23. SUPPLEMENTAL DISCLOSURES OF CASH FLOW DATA
The following summarizes our supplemental cash flow data (in millions):
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
2012 2011 2010
----------- ---------- -----------
Interest paid $ 134 $ 88 $ 94
Income taxes paid (received) 136 159 (345)
Significant non-cash investing and financing transactions:
Reinsurance ceded:
Carrying value of assets $ 367 $ - $ 188
Carrying value of liabilities (367) - (188)
----------- ---------- -----------
Total reinsurance ceded $ - $ - $ -
=========== ========== ===========
Reinsurance recaptured:
Carrying value of assets $ (34) $ 243 $ 110
Carrying value of liabilities (84) (441) (115)
----------- ---------- -----------
Total reinsurance recaptured $ (118) $ (198) $ (5)
=========== ========== ===========
Reinsurance novated:
Carrying value of assets $ 0 $ - $ -
Carrying value of liabilities (26) - -
----------- ---------- -----------
Total reinsurance novated $ (26) $ - $ -
=========== ========== ===========
Capital contributions:
Carrying value of assets (includes cash and invested cash) $ - $ 10 $ -
Carrying value of liabilities - - -
----------- ---------- -----------
Total capital contributions $ - $ 10 $ -
=========== ========== ===========
24. TRANSACTIONS WITH AFFILIATES
Transactions with affiliates (in millions) recorded on our consolidated
financial statements were as follows:
AS OF DECEMBER 31,
-------------------------
2012 2011
----------- -----------
Assets with affiliates:
Corporate bonds(1) $ 100 $ 100
Ceded reinsurance contracts(2) 2,887 3,318
Ceded reinsurance contracts(3) 9 340
Cash management agreement investment(4) 748 394
Service agreement receivable(4) 15 1
Liabilities with affiliates:
Assumed reinsurance contracts(5) 438 432
Assumed reinsurance contracts(3) 183 181
Ceded reinsurance contracts(6) 4,252 3,668
Inter-company short-term debt(7) 28 10
Inter-company long-term debt(8) 1,679 2,179
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
2012 2011 2010
----------- ----------- -----------
Revenues with affiliates:
Premiums received on assumed (paid on ceded) reinsurance contracts(9) $ (188) $ (335) $ (268)
Fees for management of general account(10) (92) - -
Benefits and expenses with affiliates:
Reinsurance (recoveries) benefits on ceded reinsurance contracts(11) (433) (1,181) (638)
Service agreement payments(12) 114 75 58
Interest expense on inter-company debt(13) 109 107 98
(1) Reported in fixed maturity AFS securities on our Consolidated Balance
Sheets.
S-66
(2) Reported in reinsurance recoverables on our Consolidated Balance Sheets.
(3) Reported in reinsurance related embedded derivatives on our Consolidated
Balance Sheets.
(4) Reported in other assets on our Consolidated Balance Sheets.
(5) Reported in future contract benefits on our Consolidated Balance Sheets.
(6) Reported in funds withheld reinsurance liabilities on our Consolidated
Balance Sheets.
(7) Reported in short-term debt on our Consolidated Balance Sheets.
(8) Reported in long-term debt on our Consolidated Balance Sheets.
(9) Reported in insurance premiums on our Consolidated Statements of
Comprehensive Income (Loss).
(10) Reported in net investment income on our Consolidated Statements of
Comprehensive Income (Loss).
(11) Reported in benefits on our Consolidated Statements of Comprehensive Income
(Loss).
(12) Reported in commissions and other expenses on our Consolidated Statements
of Comprehensive Income (Loss).
(13) Reported in interest and debt expense on our Consolidated Statements of
Comprehensive Income (Loss).
CORPORATE BONDS
LNC issues corporate bonds to us for a predetermined face value to be repaid by
LNC at a predetermined maturity with a specified interest rate. We purchase
these investments for our segmented portfolios that have yield, duration and
other characteristics.
CASH MANAGEMENT AGREEMENT
In order to manage our capital more efficiently, we participate in an
inter-company cash management program where LNC can lend to or borrow from us to
meet short-term borrowing needs. The cash management program is essentially a
series of demand loans, which are permitted under applicable insurance laws,
among LNC and its affiliates that reduces overall borrowing costs by allowing
LNC and its subsidiaries to access internal resources instead of incurring
third-party transaction costs. The borrowing and lending limit is currently the
lesser of 3% of our admitted assets and 25% of our surplus, in both cases, as of
our most recent year end.
SERVICE AGREEMENT
In accordance with service agreements with LNC and other subsidiaries of LNC for
personnel and facilities usage, general management services and investment
management services, we receive services from and provide services to affiliated
companies and also receive an allocation of corporate overhead from LNC.
Corporate overhead expenses are allocated based on specific methodologies for
each function. The majority of the expenses are allocated based on the following
methodologies: investments by product, assets under management, weighted
policies in force, headcount and sales.
FEES FOR MANAGEMENT OF GENERAL ACCOUNT
On January 4, 2010, LNC closed on a purchase and sale agreement pursuant to
which all of the outstanding capital stock of Delaware Management Holdings, Inc.
("Delaware") was sold. In addition, we entered into investment advisory
agreements with Delaware, pursuant to which Delaware will continue to manage the
majority of our general account insurance assets.
Effective January 1, 2012, LNL entered into an Investment Advisory Agreement
with Lincoln Investment Management Company ("LIMCO"), also a wholly-owned
subsidiary of LNC. LIMCO provides investment advisory services to LNL and enters
into sub-advisory agreements with other third-party investment advisers.
CEDED REINSURANCE CONTRACTS
As discussed in Note 9, we cede insurance contracts to and assume insurance
contracts from affiliated companies. We cede certain guaranteed benefit risks
(including certain GDB and GWB benefits) to LNBAR. As discussed in Note 3, we
also cede the risks for no-lapse benefit guarantees under certain UL contracts
to LNBAR.
Substantially all reinsurance ceded to affiliated companies is with unauthorized
companies. To take reserve credit for such reinsurance, we hold assets from the
reinsurer, including funds held under reinsurance treaties, and are the
beneficiary of letters of credit aggregating $76 million and $71 million as of
December 31, 2012 and 2011, respectively. The letters of credit are obtained by
the affiliate reinsurer and issued by banks in order for the Company to
recognize the reserve credit.
25. SUBSEQUENT EVENTS
On March 25, 2013, LNL paid a cash dividend in the amount of $150 million to
LNC.
S-67
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
L-1
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 2012
MORTALITY &
CONTRACT EXPENSE
CONTRACT REDEMPTIONS GUARANTEE
PURCHASES DUE TO CHARGES PAYABLE
DUE FROM THE THE LINCOLN TO THE LINCOLN
LINCOLN NATIONAL NATIONAL LIFE NATIONAL LIFE
LIFE INSURANCE INSURANCE INSURANCE
SUBACCOUNT INVESTMENTS COMPANY TOTAL ASSETS COMPANY COMPANY NET ASSETS
------------------------------------------------------------------------------------------------------------------------------------
ABVPSF Global Thematic
Growth Class B $ 1,872,400 $ 151 $ 1,872,551 $ -- $ 149 $ 1,872,402
ABVPSF Growth Class B 1,189,737 415 1,190,152 -- 94 1,190,058
ABVPSF Growth and Income Class B 1,214,053 840 1,214,893 -- 97 1,214,796
American Century VP Balanced Class I 16,030,962 19,638 16,050,600 -- 1,276 16,049,324
American Century VP Inflation
Protection Class I 1,627,572 -- 1,627,572 2,211 133 1,625,228
American Funds Global Growth Class 2 4,965,346 1,062 4,966,408 -- 392 4,966,016
American Funds Growth Class 2 23,435,325 -- 23,435,325 6,248 1,849 23,427,228
American Funds Growth-Income Class 2 7,932,599 997 7,933,596 -- 631 7,932,965
American Funds International Class 2 11,349,772 1,856 11,351,628 -- 913 11,350,715
BlackRock Global Allocation V.I.
Class I 1,214,524 706 1,215,230 -- 98 1,215,132
Delaware VIP Diversified Income
Standard Class 7,054,875 1,869 7,056,744 -- 575 7,056,169
Delaware VIP High Yield Standard Class 3,073,108 4,839 3,077,947 -- 249 3,077,698
Delaware VIP REIT Service Class 11,574,110 3,047 11,577,157 -- 930 11,576,227
Delaware VIP Small Cap Value
Service Class 8,062,218 -- 8,062,218 643 638 8,060,937
Delaware VIP Smid Cap Growth
Service Class 4,312,653 657 4,313,310 -- 345 4,312,965
Dreyfus Opportunistic Small Cap
Initial Class 24,279,952 -- 24,279,952 809 1,915 24,277,228
Dreyfus Stock Index Initial Class 48,738,031 20,259 48,758,290 -- 3,849 48,754,441
DWS Alternative Asset Allocation
VIP Class A 130,970 8 130,978 -- 11 130,967
DWS Equity 500 Index VIP Class A 1,753,918 3,031 1,756,949 -- 140 1,756,809
DWS Small Cap Index VIP Class A 1,996,898 460 1,997,358 -- 157 1,997,201
Fidelity VIP Asset Manager Initial Class 39,405,684 2,662 39,408,346 -- 3,163 39,405,183
Fidelity VIP Contrafund Service Class 2 18,404,613 -- 18,404,613 8,449 1,463 18,394,701
Fidelity VIP Equity-Income Initial Class 38,916,381 -- 38,916,381 13,192 3,072 38,900,117
Fidelity VIP Growth Initial Class 64,752,320 14,053 64,766,373 -- 5,120 64,761,253
Fidelity VIP Money Market Initial Class 7,989 101 8,090 -- -- 8,090
Janus Aspen Series Worldwide
Institutional Class 8,843,580 -- 8,843,580 2,192 697 8,840,691
LVIP Baron Growth Opportunities
Service Class 14,063,790 -- 14,063,790 2,310 1,113 14,060,367
LVIP BlackRock Inflation Protected
Bond Standard Class 69,231 -- 69,231 -- 6 69,225
LVIP Clarion Global Real Estate
Standard Class 623,588 80 623,668 -- 50 623,618
LVIP Delaware Bond Standard Class 7,916,606 -- 7,916,606 3,041 640 7,912,925
LVIP Delaware Diversified Floating
Rate Service Class 25,231 5 25,236 -- 2 25,234
LVIP Delaware Foundation Aggressive
Allocation Standard Class 156,632 68 156,700 -- 13 156,687
LVIP Delaware Foundation Conservative
Allocation Standard Class 1,134,016 118 1,134,134 -- 88 1,134,046
LVIP Delaware Foundation Moderate
Allocation Standard Class 309,227 6 309,233 -- 25 309,208
LVIP Delaware Growth and Income
Standard Class 3,802,776 3,227 3,806,003 -- 301 3,805,702
LVIP Delaware Social Awareness
Standard Class 12,425,261 1,593 12,426,854 -- 984 12,425,870
LVIP Global Income Standard Class 247,615 101 247,716 -- 20 247,696
See accompanying notes.
L-2
MORTALITY &
CONTRACT EXPENSE
CONTRACT REDEMPTIONS GUARANTEE
PURCHASES DUE TO CHARGES PAYABLE
DUE FROM THE THE LINCOLN TO THE LINCOLN
LINCOLN NATIONAL NATIONAL LIFE NATIONAL LIFE
LIFE INSURANCE INSURANCE INSURANCE
SUBACCOUNT INVESTMENTS COMPANY TOTAL ASSETS COMPANY COMPANY NET ASSETS
------------------------------------------------------------------------------------------------------------------------------------
LVIP Mondrian International Value
Standard Class $ 3,767,581 $ 944 $ 3,768,525 $ -- $ 296 $ 3,768,229
LVIP Protected Profile 2010
Standard Class 786,044 -- 786,044 25,375 64 760,605
LVIP Protected Profile 2020
Standard Class 2,134,886 1,527 2,136,413 -- 172 2,136,241
LVIP Protected Profile 2030
Standard Class 2,959,712 1,180 2,960,892 -- 240 2,960,652
LVIP Protected Profile 2040
Standard Class 1,229,391 1,054 1,230,445 -- 99 1,230,346
LVIP Protected Profile 2050
Standard Class 25,464 127 25,591 -- 2 25,589
LVIP Protected Profile Conservative
Standard Class 2,295,588 -- 2,295,588 21,953 186 2,273,449
LVIP Protected Profile Growth
Standard Class 5,178,911 4,066 5,182,977 -- 416 5,182,561
LVIP Protected Profile Moderate
Standard Class 5,013,575 2,973 5,016,548 -- 401 5,016,147
LVIP SSgA Bond Index Standard Class 706,463 -- 706,463 2,148 57 704,258
LVIP SSgA Emerging Markets 100
Standard Class 1,253,484 4,826 1,258,310 -- 101 1,258,209
LVIP SSgA Global Tactical Allocation
RPM Standard Class 1,860,877 444 1,861,321 -- 150 1,861,171
LVIP SSgA International Index
Standard Class 105,372 -- 105,372 1,126 9 104,237
LVIP SSgA S&P 500 Index
Standard Class 21,115 -- 21,115 -- 2 21,113
LVIP SSgA Small-Cap Index
Standard Class 5,536 -- 5,536 -- -- 5,536
LVIP T. Rowe Price Structured Mid-Cap
Growth Standard Class 15,642,467 -- 15,642,467 637 1,239 15,640,591
LVIP UBS Large Cap Growth RPM
Standard Class 1,520,770 597 1,521,367 -- 120 1,521,247
NB AMT Large Cap Value I Class 4,320,689 -- 4,320,689 1,433 341 4,318,915
NB AMT Mid Cap Growth I Class 6,597,655 1,145 6,598,800 -- 524 6,598,276
T. Rowe Price International
Stock Class I 11,675,252 -- 11,675,252 823 934 11,673,495
See accompanying notes.
L-3
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2012
DIVIDENDS
FROM MORTALITY AND NET
INVESTMENT EXPENSE INVESTMENT
SUBACCOUNT INCOME GUARANTEE CHARGES INCOME (LOSS)
----------------------------------------------------------------------------------------------------------------
ABVPSF Global Thematic Growth Class B $ -- $ (19,328) $ (19,328)
ABVPSF Growth Class B -- (11,671) (11,671)
ABVPSF Growth and Income Class B 15,366 (11,043) 4,323
American Century VP Balanced Class I 334,905 (159,773) 175,132
American Century VP Inflation Protection Class I 38,357 (13,562) 24,795
American Funds Global Growth Class 2 42,367 (45,527) (3,160)
American Funds Growth Class 2 182,143 (225,764) (43,621)
American Funds Growth-Income Class 2 125,224 (75,641) 49,583
American Funds International Class 2 162,743 (113,511) 49,232
BlackRock Global Allocation V.I. Class I 18,373 (12,381) 5,992
Delaware VIP Diversified Income Standard Class 213,238 (68,319) 144,919
Delaware VIP High Yield Standard Class 254,700 (29,348) 225,352
Delaware VIP REIT Service Class 150,123 (114,312) 35,811
Delaware VIP Small Cap Value Service Class 28,265 (78,795) (50,530)
Delaware VIP Smid Cap Growth Service Class 368 (43,598) (43,230)
Dreyfus Opportunistic Small Cap Initial Class -- (235,624) (235,624)
Dreyfus Stock Index Initial Class 1,002,207 (484,506) 517,701
DWS Alternative Asset Allocation VIP Class A 3,891 (1,196) 2,695
DWS Equity 500 Index VIP Class A 44,868 (21,230) 23,638
DWS Small Cap Index VIP Class A 16,732 (18,554) (1,822)
Fidelity VIP Asset Manager Initial Class 602,417 (391,119) 211,298
Fidelity VIP Contrafund Service Class 2 203,186 (177,708) 25,478
Fidelity VIP Equity-Income Initial Class 1,184,649 (377,314) 807,335
Fidelity VIP Growth Initial Class 390,524 (652,521) (261,997)
Fidelity VIP Money Market Initial Class 27 -- 27
Janus Aspen Series Worldwide Institutional Class 73,629 (82,960) (9,331)
LVIP Baron Growth Opportunities Service Class 159,656 (137,083) 22,573
LVIP BlackRock Inflation Protected Bond Standard Class -- (201) (201)
LVIP Clarion Global Real Estate Standard Class -- (5,368) (5,368)
LVIP Delaware Bond Standard Class 158,613 (78,061) 80,552
LVIP Delaware Diversified Floating Rate Service Class 75 (55) 20
LVIP Delaware Foundation Aggressive Allocation Standard Class 2,481 (1,199) 1,282
LVIP Delaware Foundation Conservative Allocation Standard Class 24,360 (9,571) 14,789
LVIP Delaware Foundation Moderate Allocation Standard Class 6,993 (2,660) 4,333
LVIP Delaware Growth and Income Standard Class 41,401 (38,052) 3,349
LVIP Delaware Social Awareness Standard Class 94,032 (122,242) (28,210)
LVIP Global Income Standard Class 4,725 (2,490) 2,235
LVIP Mondrian International Value Standard Class 107,950 (37,735) 70,215
LVIP Protected Profile 2010 Standard Class 17,377 (7,119) 10,258
LVIP Protected Profile 2020 Standard Class 42,116 (20,184) 21,932
LVIP Protected Profile 2030 Standard Class 51,164 (26,853) 24,311
LVIP Protected Profile 2040 Standard Class 19,888 (10,792) 9,096
LVIP Protected Profile 2050 Standard Class 212 (714) (502)
LVIP Protected Profile Conservative Standard Class 84,531 (21,708) 62,823
LVIP Protected Profile Growth Standard Class 129,566 (51,409) 78,157
LVIP Protected Profile Moderate Standard Class 161,763 (48,458) 113,305
LVIP SSgA Bond Index Standard Class 17,096 (6,103) 10,993
LVIP SSgA Emerging Markets 100 Standard Class 31,910 (12,115) 19,795
LVIP SSgA Global Tactical Allocation RPM Standard Class 62,015 (18,065) 43,950
LVIP SSgA International Index Standard Class 1,635 (878) 757
LVIP SSgA S&P 500 Index Standard Class 194 (57) 137
LVIP SSgA Small-Cap Index Standard Class 34 (18) 16
LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class -- (155,437) (155,437)
LVIP UBS Large Cap Growth RPM Standard Class -- (15,007) (15,007)
NB AMT Large Cap Value I Class 17,749 (42,512) (24,763)
NB AMT Mid Cap Growth I Class -- (66,892) (66,892)
T. Rowe Price International Stock Class I 141,074 (111,488) 29,586
See accompanying notes.
L-4
DIVIDENDS NET CHANGE
FROM TOTAL IN UNREALIZED NET INCREASE
NET REALIZED NET REALIZED NET REALIZED APPRECIATION OR IN NET ASSETS
GAIN (LOSS) GAIN ON GAIN (LOSS) DEPRECIATION RESULTING
SUBACCOUNT ON INVESTMENTS INVESTMENTS ON INVESTMENTS ON INVESTMENTS FROM OPERATIONS
------------------------------------------------------------------------------------------------------------------------------------
ABVPSF Global Thematic Growth Class B $ 6,755 $ -- $ 6,755 $ 227,554 $ 214,981
ABVPSF Growth Class B 23,544 -- 23,544 120,174 132,047
ABVPSF Growth and Income Class B 32 -- 32 151,878 156,233
American Century VP Balanced Class I 41,813 -- 41,813 1,431,725 1,648,670
American Century VP Inflation Protection Class I 9,726 26,244 35,970 19,969 80,734
American Funds Global Growth Class 2 10,853 -- 10,853 886,632 894,325
American Funds Growth Class 2 262,776 -- 262,776 3,293,026 3,512,181
American Funds Growth-Income Class 2 (2,094) -- (2,094) 1,085,307 1,132,796
American Funds International Class 2 (239,726) -- (239,726) 1,952,551 1,762,057
BlackRock Global Allocation V.I. Class I (2,368) 3,561 1,193 92,156 99,341
Delaware VIP Diversified Income Standard Class 66,016 208,486 274,502 (11,833) 407,588
Delaware VIP High Yield Standard Class 31,560 -- 31,560 198,684 455,596
Delaware VIP REIT Service Class (156,357) -- (156,357) 1,754,601 1,634,055
Delaware VIP Small Cap Value Service Class 117,480 560,907 678,387 285,396 913,253
Delaware VIP Smid Cap Growth Service Class 93,506 249,551 343,057 56,161 355,988
Dreyfus Opportunistic Small Cap Initial Class (1,285,422) -- (1,285,422) 5,728,863 4,207,817
Dreyfus Stock Index Initial Class 944,661 2,451,154 3,395,815 2,773,632 6,687,148
DWS Alternative Asset Allocation VIP Class A (255) 916 661 4,593 7,949
DWS Equity 500 Index VIP Class A 121,716 -- 121,716 145,738 291,092
DWS Small Cap Index VIP Class A 3,169 444 3,613 262,859 264,650
Fidelity VIP Asset Manager Initial Class (111,027) 288,445 177,418 3,853,658 4,242,374
Fidelity VIP Contrafund Service Class 2 (59,858) -- (59,858) 2,469,034 2,434,654
Fidelity VIP Equity-Income Initial Class (468,807) 2,437,347 1,968,540 2,961,955 5,737,830
Fidelity VIP Growth Initial Class 706,824 -- 706,824 7,811,889 8,256,716
Fidelity VIP Money Market Initial Class -- -- -- -- 27
Janus Aspen Series Worldwide Institutional Class (272,302) -- (272,302) 1,765,035 1,483,402
LVIP Baron Growth Opportunities Service Class 829,737 658,776 1,488,513 692,384 2,203,470
LVIP BlackRock Inflation Protected Bond
Standard Class 171 654 825 (367) 257
LVIP Clarion Global Real Estate Standard Class 11,108 -- 11,108 109,172 114,912
LVIP Delaware Bond Standard Class 103,222 180,419 283,641 63,125 427,318
LVIP Delaware Diversified Floating Rate
Service Class 53 -- 53 93 166
LVIP Delaware Foundation Aggressive Allocation
Standard Class 479 -- 479 11,290 13,051
LVIP Delaware Foundation Conservative Allocation
Standard Class (5,028) -- (5,028) 83,714 93,475
LVIP Delaware Foundation Moderate Allocation
Standard Class 161 392 553 20,523 25,409
LVIP Delaware Growth and Income Standard Class 55,151 3,498 58,649 446,694 508,692
LVIP Delaware Social Awareness Standard Class 16,853 863,361 880,214 767,991 1,619,995
LVIP Global Income Standard Class 435 448 883 12,759 15,877
LVIP Mondrian International Value Standard Class (285,811) -- (285,811) 515,999 300,403
LVIP Protected Profile 2010 Standard Class 39,300 -- 39,300 (1,220) 48,338
LVIP Protected Profile 2020 Standard Class 37,780 -- 37,780 85,354 145,066
LVIP Protected Profile 2030 Standard Class 36,833 -- 36,833 114,312 175,456
LVIP Protected Profile 2040 Standard Class 10,746 -- 10,746 45,574 65,416
LVIP Protected Profile 2050 Standard Class 18,592 -- 18,592 (3,905) 14,185
LVIP Protected Profile Conservative Standard Class 47,437 10,256 57,693 65,370 185,886
LVIP Protected Profile Growth Standard Class 28,000 -- 28,000 295,294 401,451
LVIP Protected Profile Moderate Standard Class 35,224 -- 35,224 246,920 395,449
LVIP SSgA Bond Index Standard Class 4,052 84 4,136 1,132 16,261
LVIP SSgA Emerging Markets 100 Standard Class (54,151) 107,534 53,383 36,060 109,238
LVIP SSgA Global Tactical Allocation RPM
Standard Class (5,892) -- (5,892) 134,395 172,453
LVIP SSgA International Index Standard Class (706) -- (706) 13,634 13,685
LVIP SSgA S&P 500 Index Standard Class 1 -- 1 (16) 122
LVIP SSgA Small-Cap Index Standard Class -- -- -- 62 78
LVIP T. Rowe Price Structured Mid-Cap Growth
Standard Class 221,546 443,946 665,492 1,703,523 2,213,578
LVIP UBS Large Cap Growth RPM Standard Class 48,333 -- 48,333 176,831 210,157
NB AMT Large Cap Value I Class (181,382) -- (181,382) 825,620 619,475
NB AMT Mid Cap Growth I Class 192,989 -- 192,989 575,817 701,914
T. Rowe Price International Stock Class I (13,166) -- (13,166) 1,775,409 1,791,829
L-5
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 2011 AND 2012
ABVPSF
GLOBAL ABVPSF AMERICAN
THEMATIC ABVPSF GROWTH AND CENTURY
GROWTH GROWTH INCOME VP BALANCED
CLASS B CLASS B CLASS B CLASS I
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
-----------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2011 $ 2,785,369 $ 1,177,462 $ 901,820 $ 17,425,978
Changes From Operations:
- Net investment income (loss) (15,946) (11,433) 529 152,562
- Net realized gain (loss) on investments 39,277 30,170 (23,295) (127,843)
- Net change in unrealized appreciation or
depreciation on investments (659,328) (14,258) 68,066 711,571
------------ ------------ ------------ -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS (635,997) 4,479 45,300 736,290
Changes From Unit Transactions:
- Contract purchases 213,983 124,812 279,536 1,138,890
- Contract withdrawals (501,559) (222,843) (274,381) (3,425,909)
------------ ------------ ------------ -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT
TRANSACTIONS (287,576) (98,031) 5,155 (2,287,019)
------------ ------------ ------------ -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (923,573) (93,552) 50,455 (1,550,729)
------------ ------------ ------------ -------------
NET ASSETS AT DECEMBER 31, 2011 1,861,796 1,083,910 952,275 15,875,249
Changes From Operations:
- Net investment income (loss) (19,328) (11,671) 4,323 175,132
- Net realized gain (loss) on investments 6,755 23,544 32 41,813
- Net change in unrealized appreciation or
depreciation on investments 227,554 120,174 151,878 1,431,725
------------ ------------ ------------ -------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 214,981 132,047 156,233 1,648,670
Changes From Unit Transactions:
- Contract purchases 238,806 114,438 245,130 679,979
- Contract withdrawals (443,181) (140,337) (138,842) (2,154,574)
------------ ------------ ------------ -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT
TRANSACTIONS (204,375) (25,899) 106,288 (1,474,595)
------------ ------------ ------------ -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 10,606 106,148 262,521 174,075
------------ ------------ ------------ -------------
NET ASSETS AT DECEMBER 31, 2012 $ 1,872,402 $ 1,190,058 $ 1,214,796 $ 16,049,324
============ ============ ============ =============
See accompanying notes.
L-6
AMERICAN
CENTURY AMERICAN AMERICAN AMERICAN
VP INFLATION FUNDS FUNDS FUNDS
PROTECTION GLOBAL GROWTH GROWTH GROWTH-INCOME
CLASS I CLASS 2 CLASS 2 CLASS 2
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
-------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2011 $ 792,299 $ 5,565,771 $ 24,737,180 $8,174,284
Changes From Operations:
- Net investment income (loss) 19,815 14,348 (90,357) 39,942
- Net realized gain (loss) on investments 25,915 3,093 188,651 (78,857)
- Net change in unrealized appreciation or
depreciation on investments 19,404 (535,854) (1,287,244) (166,305)
------------- ------------- ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS 65,134 (518,413) (1,188,950) (205,220)
Changes From Unit Transactions:
- Contract purchases 848,435 884,246 3,021,527 1,342,893
- Contract withdrawals (564,557) (1,430,811) (4,955,370) (2,193,500)
------------- ------------- ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT
TRANSACTIONS 283,878 (546,565) (1,933,843) (850,607)
------------- ------------- ------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 349,012 (1,064,978) (3,122,793) (1,055,827)
------------- ------------- ------------ ------------
NET ASSETS AT DECEMBER 31, 2011 1,141,311 4,500,793 21,614,387 7,118,457
Changes From Operations:
- Net investment income (loss) 24,795 (3,160) (43,621) 49,583
- Net realized gain (loss) on investments 35,970 10,853 262,776 (2,094)
- Net change in unrealized appreciation or
depreciation on investments 19,969 886,632 3,293,026 1,085,307
------------- ------------- ------------ ------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 80,734 894,325 3,512,181 1,132,796
Changes From Unit Transactions:
- Contract purchases 658,327 718,776 1,960,367 1,087,808
- Contract withdrawals (255,144) (1,147,878) (3,659,707) (1,406,096)
------------- ------------- ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT
TRANSACTIONS 403,183 (429,102) (1,699,340) (318,288)
------------- ------------- ------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 483,917 465,223 1,812,841 814,508
------------- ------------- ------------ ------------
NET ASSETS AT DECEMBER 31, 2012 $ 1,625,228 $ 4,966,016 $ 23,427,228 $7,932,965
============= ============= ============ ============
AMERICAN BLACKROCK DELAWARE VIP
FUNDS GLOBAL DIVERSIFIED DELAWARE VIP DELAWARE VIP
INTERNATIONAL ALLOCATION V.I. INCOME HIGH YIELD REIT
CLASS 2 CLASS I STANDARD CLASS STANDARD CLASS SERVICE CLASS
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
-----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2011 $ 16,871,090 $ 884,156 $ 7,355,730 $ 3,063,324 $ 10,830,826
Changes From Operations:
- Net investment income (loss) 89,321 17,029 237,209 238,781 41,437
- Net realized gain (loss) on investments (111,726) 39,649 427,649 51,984 (564,133)
- Net change in unrealized appreciation or
depreciation on investments (2,096,938) (112,005) (289,341) (243,140) 1,520,545
------------- --------------- ------------- ------------ -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS (2,119,343) (55,327) 375,517 47,625 997,849
Changes From Unit Transactions:
- Contract purchases 2,038,304 874,928 964,104 693,895 2,528,097
- Contract withdrawals (5,203,600) (525,062) (1,957,231) (973,114) (3,401,978)
------------- --------------- ------------- ------------ -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (3,165,296) 349,866 (993,127) (279,219) (873,881)
------------- --------------- ------------- ------------ -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (5,284,639) 294,539 (617,610) (231,594) 123,968
------------- --------------- ------------- ------------ -------------
NET ASSETS AT DECEMBER 31, 2011 11,586,451 1,178,695 6,738,120 2,831,730 10,954,794
Changes From Operations:
- Net investment income (loss) 49,232 5,992 144,919 225,352 35,811
- Net realized gain (loss) on investments (239,726) 1,193 274,502 31,560 (156,357)
- Net change in unrealized appreciation or
depreciation on investments 1,952,551 92,156 (11,833) 198,684 1,754,601
------------- --------------- ------------- ------------ -------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 1,762,057 99,341 407,588 455,596 1,634,055
Changes From Unit Transactions:
- Contract purchases 979,169 416,020 1,082,769 533,279 1,536,553
- Contract withdrawals (2,976,962) (478,924) (1,172,308) (742,907) (2,549,175)
------------- --------------- ------------- ------------ -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (1,997,793) (62,904) (89,539) (209,628) (1,012,622)
------------- --------------- ------------- ------------ -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (235,736) 36,437 318,049 245,968 621,433
------------- --------------- ------------- ------------ -------------
NET ASSETS AT DECEMBER 31, 2012 $ 11,350,715 $ 1,215,132 $ 7,056,169 $ 3,077,698 $ 11,576,227
============= =============== ============= ============ =============
L-7
DELAWARE VIP DELAWARE VIP DREYFUS
SMALL CAP SMID CAP OPPORTUNISTIC DREYFUS
VALUE GROWTH SMALL CAP STOCK INDEX
SERVICE CLASS SERVICE CLASS INITIAL CLASS INITIAL CLASS
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2011 $ 8,829,991 $ 2,702,240 $ 30,502,057 $ 57,034,613
Changes From Operations:
- Net investment income (loss) (58,935) (8,845) (153,077) 432,213
- Net realized gain (loss) on investments 261,618 213,909 (1,729,038) 1,827,043
- Net change in unrealized appreciation or
depreciation on investments (440,589) (66,671) (2,134,578) (1,624,599)
------------- ------------- ------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS (237,906) 138,393 (4,016,693) 634,657
Changes From Unit Transactions:
- Contract purchases 2,083,099 2,198,796 1,917,540 3,620,369
- Contract withdrawals (3,029,487) (1,243,840) (5,659,316) (13,819,377)
------------- ------------- ------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (946,388) 954,956 (3,741,776) (10,199,008)
------------- ------------- ------------- --------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (1,184,294) 1,093,349 (7,758,469) (9,564,351)
------------- ------------- ------------- --------------
NET ASSETS AT DECEMBER 31, 2011 7,645,697 3,795,589 22,743,588 47,470,262
Changes From Operations:
- Net investment income (loss) (50,530) (43,230) (235,624) 517,701
- Net realized gain (loss) on investments 678,387 343,057 (1,285,422) 3,395,815
- Net change in unrealized appreciation or
depreciation on investments 285,396 56,161 5,728,863 2,773,632
------------- ------------- ------------- --------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 913,253 355,988 4,207,817 6,687,148
Changes From Unit Transactions:
- Contract purchases 954,513 1,544,888 697,950 1,491,710
- Contract withdrawals (1,452,526) (1,383,500) (3,372,127) (6,894,679)
------------- ------------- ------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (498,013) 161,388 (2,674,177) (5,402,969)
------------- ------------- ------------- --------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 415,240 517,376 1,533,640 1,284,179
------------- ------------- ------------- --------------
NET ASSETS AT DECEMBER 31, 2012 $ 8,060,937 $ 4,312,965 $ 24,277,228 $ 48,754,441
============= ============= ============= ==============
See accompanying notes.
L-8
DWS DWS DWS FIDELITY VIP
ALTERNATIVE ASSET EQUITY 500 SMALL CAP FIDELITY VIP CONTRAFUND
ALLOCATION VIP INDEX VIP INDEX VIP ASSET MANAGER SERVICE
CLASS A CLASS A CLASS A INITIAL CLASS CLASS 2
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2011 $ 83,584 $ 2,424,596 $2,082,615 $ 44,114,945 $ 19,333,235
Changes From Operations:
- Net investment income (loss) 571 18,601 (1,684) 381,497 (44,773)
- Net realized gain (loss) on investments 1,130 23,823 (9,441) 1,309 (344,854)
- Net change in unrealized appreciation or
depreciation on investments (6,484) (16,178) (85,176) (1,732,393) (243,570)
----------------- ------------- ----------- ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS (4,783) 26,246 (96,301) (1,349,587) (633,197)
Changes From Unit Transactions:
- Contract purchases 85,695 455,399 277,836 2,003,174 3,257,505
- Contract withdrawals (66,943) (539,935) (490,663) (6,330,954) (5,516,353)
----------------- ------------- ----------- ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 18,752 (84,536) (212,827) (4,327,780) (2,258,848)
----------------- ------------- ----------- ------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 13,969 (58,290) (309,128) (5,677,367) (2,892,045)
----------------- ------------- ----------- ------------- -------------
NET ASSETS AT DECEMBER 31, 2011 97,553 2,366,306 1,773,487 38,437,578 16,441,190
Changes From Operations:
- Net investment income (loss) 2,695 23,638 (1,822) 211,298 25,478
- Net realized gain (loss) on investments 661 121,716 3,613 177,418 (59,858)
- Net change in unrealized appreciation or
depreciation on investments 4,593 145,738 262,859 3,853,658 2,469,034
----------------- ------------- ----------- ------------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 7,949 291,092 264,650 4,242,374 2,434,654
Changes From Unit Transactions:
- Contract purchases 105,748 271,359 185,921 1,115,228 2,056,646
- Contract withdrawals (80,283) (1,171,948) (226,857) (4,389,997) (2,537,789)
----------------- ------------- ----------- ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 25,465 (900,589) (40,936) (3,274,769) (481,143)
----------------- ------------- ----------- ------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 33,414 (609,497) 223,714 967,605 1,953,511
----------------- ------------- ----------- ------------- -------------
NET ASSETS AT DECEMBER 31, 2012 $ 130,967 $ 1,756,809 $1,997,201 $ 39,405,183 $ 18,394,701
================= ============= =========== ============= =============
JANUS ASPEN
SERIES
FIDELITY VIP FIDELITY VIP FIDELITY VIP WORLDWIDE
EQUITY-INCOME GROWTH MONEY MARKET INSTITUTIONAL
INITIAL CLASS INITIAL CLASS INITIAL CLASS CLASS
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
--------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2011 $ 43,377,161 $ 72,062,172 $ 22,220 $ 11,492,633
Changes From Operations:
- Net investment income (loss) 563,546 (441,743) 48 (43,433)
- Net realized gain (loss) on investments (1,020,778) 895,016 -- (545,647)
- Net change in unrealized appreciation or
depreciation on investments 612,803 (477,573) -- (886,860)
------------- -------------- ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS 155,571 (24,300) 48 (1,475,940)
Changes From Unit Transactions:
- Contract purchases 3,579,460 5,554,044 217,822 1,412,829
- Contract withdrawals (10,095,740) (15,920,158) (197,217) (3,252,689)
------------- -------------- ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS (6,516,280) (10,366,114) 20,605 (1,839,860)
------------- -------------- ------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (6,360,709) (10,390,414) 20,653 (3,315,800)
------------- -------------- ------------- -------------
NET ASSETS AT DECEMBER 31, 2011 37,016,452 61,671,758 42,873 8,176,833
Changes From Operations:
- Net investment income (loss) 807,335 (261,997) 27 (9,331)
- Net realized gain (loss) on investments 1,968,540 706,824 -- (272,302)
- Net change in unrealized appreciation or
depreciation on investments 2,961,955 7,811,889 -- 1,765,035
------------- -------------- ------------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 5,737,830 8,256,716 27 1,483,402
Changes From Unit Transactions:
- Contract purchases 1,609,039 2,336,751 107,973 228,388
- Contract withdrawals (5,463,204) (7,503,972) (142,783) (1,047,932)
------------- -------------- ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS (3,854,165) (5,167,221) (34,810) (819,544)
------------- -------------- ------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 1,883,665 3,089,495 (34,783) 663,858
------------- -------------- ------------- -------------
NET ASSETS AT DECEMBER 31, 2012 $ 38,900,117 $ 64,761,253 $ 8,090 $ 8,840,691
============= ============== ============= =============
L-9
LVIP LVIP
LVIP BARON BLACKROCK LVIP CLARION DELAWARE
GROWTH INFLATION GLOBAL REAL BOND
OPPORTUNITIES PROTECTED BOND ESTATE STANDARD
SERVICE CLASS STANDARD CLASS STANDARD CLASS CLASS
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2011 $ 16,384,821 $ -- $ 631,722 $ 8,051,380
Changes From Operations:
- Net investment income (loss) (154,301) -- (5,675) 188,305
- Net realized gain (loss) on investments 1,120,803 -- 29,041 299,081
- Net change in unrealized appreciation or
depreciation on investments (399,846) -- (74,251) 5,467
------------- -------------- -------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS 566,656 -- (50,885) 492,853
Changes From Unit Transactions:
- Contract purchases 1,990,754 -- 103,911 1,819,209
- Contract withdrawals (5,040,772) -- (181,226) (2,367,280)
------------- -------------- -------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (3,050,018) -- (77,315) (548,071)
------------- -------------- -------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (2,483,362) -- (128,200) (55,218)
------------- -------------- -------------- -------------
NET ASSETS AT DECEMBER 31, 2011 13,901,459 -- 503,522 7,996,162
Changes From Operations:
- Net investment income (loss) 22,573 (201) (5,368) 80,552
- Net realized gain (loss) on investments 1,488,513 825 11,108 283,641
- Net change in unrealized appreciation or
depreciation on investments 692,384 (367) 109,172 63,125
------------- -------------- -------------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 2,203,470 257 114,912 427,318
Changes From Unit Transactions:
- Contract purchases 691,688 100,213 97,203 1,165,925
- Contract withdrawals (2,736,250) (31,245) (92,019) (1,676,480)
------------- -------------- -------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (2,044,562) 68,968 5,184 (510,555)
------------- -------------- -------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 158,908 69,225 120,096 (83,237)
------------- -------------- -------------- -------------
NET ASSETS AT DECEMBER 31, 2012 $ 14,060,367 $ 69,225 $ 623,618 $ 7,912,925
============= ============== ============== =============
See accompanying notes.
L-10
LVIP LVIP LVIP LVIP
DELAWARE DELAWARE DELAWARE DELAWARE
LVIP FOUNDATION FOUNDATION FOUNDATION GROWTH
DELAWARE AGGRESSIVE CONSERVATIVE MODERATE AND
DIVERSIFIED ALLOCATION ALLOCATION ALLOCATION INCOME
FLOATING RATE STANDARD STANDARD STANDARD STANDARD
SERVICE CLASS CLASS CLASS CLASS CLASS
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
--------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2011 $ -- $ 83,270 $1,017,302 $ 154,355 $ 4,254,556
Changes From Operations:
- Net investment income (loss) 51 1,175 56,278 3,906 778
- Net realized gain (loss) on investments (11) 3,051 (6,025) (354) 19,238
- Net change in unrealized appreciation or
depreciation on investments (42) (6,636) (38,575) (9,175) (5,842)
------------- ---------- ------------ ----------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS (2) (2,410) 11,678 (5,623) 14,174
Changes From Unit Transactions:
- Contract purchases 4,631 34,336 150,476 119,216 434,617
- Contract withdrawals (790) (14,782) (184,377) (36,027) (1,033,773)
------------- ---------- ------------ ----------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS 3,841 19,554 (33,901) 83,189 (599,156)
------------- ---------- ------------ ----------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 3,839 17,144 (22,223) 77,566 (584,982)
------------- ---------- ------------ ----------- -------------
NET ASSETS AT DECEMBER 31, 2011 3,839 100,414 995,079 231,921 3,669,574
Changes From Operations:
- Net investment income (loss) 20 1,282 14,789 4,333 3,349
- Net realized gain (loss) on investments 53 479 (5,028) 553 58,649
- Net change in unrealized appreciation or
depreciation on investments 93 11,290 83,714 20,523 446,694
------------- ---------- ------------ ----------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 166 13,051 93,475 25,409 508,692
Changes From Unit Transactions:
- Contract purchases 28,726 58,447 271,976 60,001 230,619
- Contract withdrawals (7,497) (15,225) (226,484) (8,123) (603,183)
------------- ---------- ------------ ----------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS 21,229 43,222 45,492 51,878 (372,564)
------------- ---------- ------------ ----------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 21,395 56,273 138,967 77,287 136,128
------------- ---------- ------------ ----------- -------------
NET ASSETS AT DECEMBER 31, 2012 $25,234 $ 156,687 $1,134,046 $ 309,208 $ 3,805,702
============= ========== ============ =========== =============
LVIP LVIP LVIP
DELAWARE LVIP MONDRIAN PROTECTED
SOCIAL GLOBAL INTERNATIONAL PROFILE
AWARENESS INCOME VALUE 2010
STANDARD STANDARD STANDARD STANDARD
CLASS CLASS CLASS CLASS
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2011 $ 14,040,223 $ 147,459 $ 5,069,710 $ 832,709
Changes From Operations:
- Net investment income (loss) (37,044) 8,024 89,298 (1,158)
- Net realized gain (loss) on investments (62,288) 2,743 (305,470) 26,951
- Net change in unrealized appreciation or
depreciation on investments 118,294 (12,194) (9,143) (26,091)
------------- ----------- ------------- ----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS 18,962 (1,427) (225,315) (298)
Changes From Unit Transactions:
- Contract purchases 920,989 225,094 550,831 136,129
- Contract withdrawals (3,202,651) (133,458) (1,335,677) $(258,866)
------------- ----------- ------------- ----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (2,281,662) 91,636 (784,846) (122,737)
------------- ----------- ------------- ----------
TOTAL INCREASE (DECREASE) IN NET ASSETS (2,262,700) 90,209 (1,010,161) (123,035)
------------- ----------- ------------- ----------
NET ASSETS AT DECEMBER 31, 2011 11,777,523 237,668 4,059,549 709,674
Changes From Operations:
- Net investment income (loss) (28,210) 2,235 70,215 10,258
- Net realized gain (loss) on investments 880,214 883 (285,811) 39,300
- Net change in unrealized appreciation or
depreciation on investments 767,991 12,759 515,999 (1,220)
------------- ----------- ------------- ----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 1,619,995 15,877 300,403 48,338
Changes From Unit Transactions:
- Contract purchases 495,017 62,180 407,096 366,616
- Contract withdrawals (1,466,665) (68,029) (998,819) (364,023)
------------- ----------- ------------- ----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (971,648) (5,849) (591,723) 2,593
------------- ----------- ------------- ----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 648,347 10,028 (291,320) 50,931
------------- ----------- ------------- ----------
NET ASSETS AT DECEMBER 31, 2012 $ 12,425,870 $ 247,696 $ 3,768,229 $ 760,605
============= =========== ============= ==========
L-11
LVIP LVIP LVIP LVIP
PROTECTED PROTECTED PROTECTED PROTECTED
PROFILE PROFILE PROFILE PROFILE
2020 2030 2040 2050
STANDARD STANDARD STANDARD STANDARD
CLASS CLASS CLASS CLASS
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------------------------------------------------------------------------------------------------------- ------------
NET ASSETS AT JANUARY 1, 2011 $2,238,428 $ 2,288,763 $ 788,425 $ --
Changes From Operations:
- Net investment income (loss) (5,179) (8,438) (3,465) (266)
- Net realized gain (loss) on investments 65,824 47,678 19,257 2
- Net change in unrealized appreciation or
depreciation on investments (76,103) (79,977) (44,763) 4,344
----------- ------------ ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS (15,458) (40,737) (28,971) 4,080
Changes From Unit Transactions:
- Contract purchases 522,542 1,021,596 363,142 265,157
- Contract withdrawals (735,433) (789,934) (176,536) --
----------- ------------ ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (212,891) 231,662 186,606 265,157
----------- ------------ ------------ -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS (228,349) 190,925 157,635 269,237
----------- ------------ ------------ -----------
NET ASSETS AT DECEMBER 31, 2011 2,010,079 2,479,688 946,060 269,237
Changes From Operations:
- Net investment income (loss) 21,932 24,311 9,096 (502)
- Net realized gain (loss) on investments 37,780 36,833 10,746 18,592
- Net change in unrealized appreciation or
depreciation on investments 85,354 114,312 45,574 (3,905)
----------- ------------ ------------ -----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 145,066 175,456 65,416 14,185
Changes From Unit Transactions:
- Contract purchases 388,254 640,079 358,009 33,656
- Contract withdrawals (407,158) (334,571) (139,139) (291,489)
----------- ------------ ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (18,904) 305,508 218,870 (257,833)
----------- ------------ ------------ -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 126,162 480,964 284,286 (243,648)
----------- ------------ ------------ -----------
NET ASSETS AT DECEMBER 31, 2012 $2,136,241 $ 2,960,652 $ 1,230,346 $ 25,589
=========== ============ ============ ===========
See accompanying notes.
L-12
LVIP LVIP LVIP LVIP
PROTECTED PROTECTED PROTECTED SSGA
PROFILE PROFILE PROFILE BOND
CONSERVATIVE GROWTH MODERATE INDEX
STANDARD STANDARD STANDARD STANDARD
CLASS CLASS CLASS CLASS
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
--------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2011 $ 3,721,821 $ 5,201,715 $ 4,879,150 $ 485,640
Changes From Operations:
- Net investment income (loss) 15,021 51,872 38,644 13,548
- Net realized gain (loss) on investments 222,207 3,830 37,666 9,173
- Net change in unrealized appreciation or
depreciation on investments (124,396) (114,894) (68,663) 5,340
------------ ------------- ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS 112,832 (59,192) 7,647 28,061
Changes From Unit Transactions:
- Contract purchases 2,090,489 1,080,922 1,174,813 647,758
- Contract withdrawals (3,822,891) (1,102,859) (1,282,687) (578,255)
------------ ------------- ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (1,732,402) (21,937) (107,874) 69,503
------------ ------------- ------------ -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS (1,619,570) (81,129) (100,227) 97,564
------------ ------------- ------------ -----------
NET ASSETS AT DECEMBER 31, 2011 2,102,251 5,120,586 4,778,923 583,204
Changes From Operations:
- Net investment income (loss) 62,823 78,157 113,305 10,993
- Net realized gain (loss) on investments 57,693 28,000 35,224 4,136
- Net change in unrealized appreciation or
depreciation on investments 65,370 295,294 246,920 1,132
------------ ------------- ------------ -----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 185,886 401,451 395,449 16,261
Changes From Unit Transactions:
- Contract purchases 497,293 573,060 492,770 394,434
- Contract withdrawals (511,981) (912,536) (650,995) (289,641)
------------ ------------- ------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS (14,688) (339,476) (158,225) 104,793
------------ ------------- ------------ -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 171,198 61,975 237,224 121,054
------------ ------------- ------------ -----------
NET ASSETS AT DECEMBER 31, 2012 $ 2,273,449 $ 5,182,561 $ 5,016,147 $ 704,258
============ ============= ============ ===========
LVIP SSGA
GLOBAL
LVIP SSGA TACTICAL LVIP SSGA LVIP SSGA LVIP SSGA
EMERGING ALLOCATION INTERNATIONAL S&P 500 SMALL-CAP
MARKETS RPM INDEX INDEX INDEX
100 STANDARD STANDARD STANDARD STANDARD STANDARD
CLASS CLASS CLASS CLASS CLASS
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
-----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2011 $1,343,516 $1,938,112 $ 111,675 $ -- $ --
Changes From Operations:
- Net investment income (loss) 19,420 5,973 43 -- --
- Net realized gain (loss) on investments 149,492 (19,438) 2,766 -- --
- Net change in unrealized appreciation or
depreciation on investments (390,103) (1,240) (19,144) -- --
------------ ----------- ------------- ---------- ----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS (221,191) (14,705) (16,335) -- --
Changes From Unit Transactions:
- Contract purchases 835,723 278,151 150,503 -- --
- Contract withdrawals (812,961) (424,911) (173,730) -- --
------------ ----------- ------------- ---------- ----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS 22,762 (146,760) (23,227) -- --
------------ ----------- ------------- ---------- ----------
TOTAL INCREASE (DECREASE) IN NET ASSETS (198,429) (161,465) (39,562) -- --
------------ ----------- ------------- ---------- ----------
NET ASSETS AT DECEMBER 31, 2011 1,145,087 1,776,647 72,113 -- --
Changes From Operations:
- Net investment income (loss) 19,795 43,950 757 137 16
- Net realized gain (loss) on investments 53,383 (5,892) (706) 1 --
- Net change in unrealized appreciation or
depreciation on investments 36,060 134,395 13,634 (16) 62
------------ ----------- ------------- ---------- ----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 109,238 172,453 13,685 122 78
Changes From Unit Transactions:
- Contract purchases 629,454 131,012 47,998 21,005 5,458
- Contract withdrawals (625,570) (218,941) (29,559) (14) --
------------ ----------- ------------- ---------- ----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS 3,884 (87,929) 18,439 20,991 5,458
------------ ----------- ------------- ---------- ----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 113,122 84,524 32,124 21,113 5,536
------------ ----------- ------------- ---------- ----------
NET ASSETS AT DECEMBER 31, 2012 $1,258,209 $1,861,171 $ 104,237 $21,113 $ 5,536
============ =========== ============= ========== ==========
L-13
LVIP LVIP
T. ROWE PRICE UBS
STRUCTURED LARGE CAP
MID-CAP GROWTH NB AMT NB AMT T. ROWE PRICE
GROWTH RPM LARGE CAP MID CAP INTERNATIONAL
STANDARD STANDARD VALUE I GROWTH I STOCK
CLASS CLASS CLASS CLASS CLASS I
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT JANUARY 1, 2011 $ 18,420,566 $ 1,591,476 $ 6,050,361 $ 7,404,066 $ 14,509,437
Changes From Operations:
- Net investment income (loss) (170,414) (11,585) (53,172) (71,613) 57,922
- Net realized gain (loss) on investments 307,002 45,921 (310,844) 309,557 84,915
- Net change in unrealized appreciation or
depreciation on investments (791,209) (129,096) (281,346) (270,492) (1,892,432)
-------------- ------------ ------------ ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS (654,621) (94,760) (645,362) (32,548) (1,749,595)
Changes From Unit Transactions:
- Contract purchases 2,352,758 220,916 632,567 1,291,615 1,063,847
- Contract withdrawals (5,001,448) (326,360) (1,746,988) (2,275,365) (3,038,863)
-------------- ------------ ------------ ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM UNIT TRANSACTIONS (2,648,690) (105,444) (1,114,421) (983,750) (1,975,016)
-------------- ------------ ------------ ------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (3,303,311) (200,204) (1,759,783) (1,016,298) (3,724,611)
-------------- ------------ ------------ ------------- -------------
NET ASSETS AT DECEMBER 31, 2011 15,117,255 1,391,272 4,290,578 6,387,768 10,784,826
Changes From Operations:
- Net investment income (loss) (155,437) (15,007) (24,763) (66,892) 29,586
- Net realized gain (loss) on investments 665,492 48,333 (181,382) 192,989 (13,166)
- Net change in unrealized appreciation or
depreciation on investments 1,703,523 176,831 825,620 575,817 1,775,409
-------------- ------------ ------------ ------------- -------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 2,213,578 210,157 619,475 701,914 1,791,829
Changes From Unit Transactions:
- Contract purchases 840,833 223,729 194,359 538,657 426,592
- Contract withdrawals (2,531,075) (303,911) (785,497) (1,030,063) (1,329,752)
-------------- ------------ ------------ ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM UNIT TRANSACTIONS (1,690,242) (80,182) (591,138) (491,406) (903,160)
-------------- ------------ ------------ ------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 523,336 129,975 28,337 210,508 888,669
-------------- ------------ ------------ ------------- -------------
NET ASSETS AT DECEMBER 31, 2012 $ 15,640,591 $ 1,521,247 $ 4,318,915 $ 6,598,276 $ 11,673,495
============== ============ ============ ============= =============
See accompanying notes.
L-14
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2012
1. ACCOUNTING POLICIES AND VARIABLE ACCOUNT INFORMATION
THE VARIABLE ACCOUNT: Lincoln National Variable Annuity Account L (the Variable
Account) is a segregated investment account of The Lincoln National Life
Insurance Company (the Company) and is registered as a unit investment trust
with the Securities and Exchange Commission under the Investment Company Act of
1940, as amended. The operations of the Variable Account, which commenced on
September 26, 1996, are part of the operations of the Company. The Variable
Account offers only one product (Group Variable Annuity) at two fee rates. The
contracts are eligible for the lower, or "Breakpoint", mortality and expense
risk charge if criteria has been satisfied that the Company realizes lower
issue and administrative costs.
The assets of the Variable Account are owned by the Company. The Variable
Account's assets support the annuity contracts and may not be used to satisfy
liabilities arising from any other business of the Company.
BASIS OF PRESENTATION: The accompanying financial statements have been prepared
in accordance with U.S. generally accepted accounting principles (GAAP) for
unit investment trusts.
ACCOUNTING ESTIMATES: The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions affecting the
reported amounts as of the date of the financial statements. Those estimates
are inherently subject to change and actual results could differ from those
estimates. Included among the material (or potentially material) reported
amounts that require use of estimates is the fair value of certain assets.
INVESTMENTS: The assets of the Variable Account are divided into variable
subaccounts, each of which may be invested in shares of one of fifty-seven
mutual funds (the Funds) of thirteen diversified, open-ended management
investment companies, each Fund with its own investment objective. The Funds
are:
AllianceBernstein Variable Products Series Fund, Inc. (ABVPSF):
ABVPSF Global Thematic Growth Class B Fund
ABVPSF Growth Class B Fund
ABVPSF Growth and Income Class B Fund
American Century Variable Portfolios, Inc. (American Century VP):
American Century VP Balanced Class I Portfolio
American Century VP Inflation Protection Class I Portfolio
American Funds Insurance Series (American Funds):
American Funds Global Growth Class 2 Fund
American Funds Growth Class 2 Fund
American Funds Growth-Income Class 2 Fund
American Funds International Class 2 Fund
BlackRock Variable Series Funds, Inc. (BlackRock):
BlackRock Global Allocation V.I. Class I Fund
Delaware VIP Trust (Delaware VIP):
Delaware VIP Diversified Income Standard Class Series
Delaware VIP High Yield Standard Class Series
Delaware VIP REIT Service Class Series
Delaware VIP Small Cap Value Service Class Series
Delaware VIP Smid Cap Growth Service Class Series
Dreyfus Variable Investment Fund (Dreyfus):
Dreyfus Opportunistic Small Cap Initial Class Portfolio
Dreyfus Stock Index Initial Class Fund
DWS Variable Series II (DWS):
DWS Alternative Asset Allocation VIP Class A Portfolio
DWS Investments VIT Funds (DWS):
DWS Equity 500 Index VIP Class A Portfolio
DWS Small Cap Index VIP Class A Portfolio
Fidelity Variable Insurance Products Fund (Fidelity VIP):
Fidelity VIP Asset Manager Initial Class Portfolio
Fidelity VIP Contrafund Service Class 2 Portfolio
Fidelity VIP Equity-Income Initial Class Portfolio
Fidelity VIP Growth Initial Class Portfolio
Fidelity VIP Money Market Initial Class Portfolio
Janus Aspen Series:
Janus Aspen Series Worldwide Institutional Class Portfolio
Lincoln Variable Insurance Products Trust (LVIP)*:
LVIP Baron Growth Opportunities Service Class Fund
LVIP BlackRock Inflation Protected Bond Standard Class Fund
LVIP Clarion Global Real Estate Standard Class Fund
LVIP Delaware Bond Standard Class Fund
LVIP Delaware Diversified Floating Rate Service Class Fund
LVIP Delaware Foundation Aggressive Allocation Standard Class Fund
LVIP Delaware Foundation Conservative Allocation Standard Class Fund
LVIP Delaware Foundation Moderate Allocation Standard Class Fund
LVIP Delaware Growth and Income Standard Class Fund
LVIP Delaware Social Awareness Standard Class Fund
LVIP Global Income Standard Class Fund
LVIP Mondrian International Value Standard Class Fund
LVIP Protected Profile 2010 Standard Class Fund
LVIP Protected Profile 2020 Standard Class Fund
LVIP Protected Profile 2030 Standard Class Fund
LVIP Protected Profile 2040 Standard Class Fund
LVIP Protected Profile 2050 Standard Class Fund
LVIP Protected Profile Conservative Standard Class Fund
L-15
LVIP Protected Profile Growth Standard Class Fund
LVIP Protected Profile Moderate Standard Class Fund
LVIP SSgA Bond Index Standard Class Fund
LVIP SSgA Emerging Markets 100 Standard Class Fund
LVIP SSgA Global Tactical Allocation RPM Standard Class Fund
LVIP SSgA International Index Standard Class Fund
LVIP SSgA S&P 500 Index Standard Class Fund
LVIP SSgA Small-Cap Index Standard Class Fund
LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class Fund
LVIP UBS Large Cap Growth RPM Standard Class Fund
Neuberger Berman Advisors Management Trust (NB AMT):
NB AMT Large Cap Value I Class Portfolio
NB AMT Mid Cap Growth I Class Portfolio
T. Rowe Price International Series, Inc. (T. Rowe Price):
T. Rowe Price International Stock Class I Portfolio
* Denotes an affiliate of The Lincoln National Life Insurance Company.
The Fidelity VIP Money Market Portfolio is used only for investments of initial
contributions for which the Company has not received complete order
instructions. Upon receipt of complete order instructions, the payments
transferred to the Fidelity VIP Money Market Portfolio are allocated to
purchase shares of one of the above Funds.
Investments in the Funds are stated at fair value as determined by the closing
net asset value per share on December 31, 2012. The difference between cost and
net asset value is reflected as unrealized appreciation or depreciation of
investments.
The Variable Account's investments in the Funds are valued in accordance with
the Fair Value Measurements and Disclosure Topic of the Financial Accounting
Standards Board Accounting Standards Codification (Topic). The Topic defines
fair value as the price that the Variable Account would receive to sell an
asset or pay to transfer a liability in an orderly transaction between market
participants at the measurement date. The Topic also establishes a framework
for measuring fair value and a three-level hierarchy for fair value
measurements based upon the transparency of inputs to the valuation of an asset
or liability. Inputs may be observable or unobservable and refer broadly to the
assumptions that market participants would use in pricing the asset or
liability. Observable inputs reflect the assumptions market participants would
use in pricing the asset or liability based on market data obtained from
sources independent of the reporting entity. Unobservable inputs reflect the
reporting entity's own assessment regarding the assumptions market participants
would use in pricing the asset or liability and are developed based on the best
information available in the circumstances. The Variable Account's investments
in the Funds are assigned a level based upon the observability of the inputs
which are significant to the overall valuation. The three-tier hierarchy of
inputs is summarized below.
Level 1 - inputs to the valuation methodology are quoted prices in active
markets
Level 2 - inputs to the valuation methodology are observable, directly or
indirectly
Level 3 - inputs to the valuation methodology are unobservable and reflect
assumptions on the part of the reporting entity
The Variable Account's investments in the Funds are valued within the fair
value hierarchy as Level 2. Net asset value is quoted by the Funds as derived
by the fair value of the Funds' underlying investments. The Funds are not
considered Level 1 as they are not traded in the open market; rather the
Company sells and redeems shares at net asset value with the Funds.
Investment transactions are accounted for on a trade-date basis. The cost of
investments sold is determined by the average cost method.
DIVIDENDS: Dividends paid to the Variable Account are automatically reinvested
in shares of the Funds on the payable date with the exception of Fidelity VIP
Money Market Portfolio, which is invested monthly. Dividend income is recorded
on the ex-dividend date.
FEDERAL INCOME TAXES: Operations of the Variable Account form a part of and are
taxed with operations of the Company, which is taxed as a "life insurance
company" under the Internal Revenue Code. The Variable Account will not be
taxed as a regulated investment company under Subchapter M of the Internal
Revenue Code, as amended. Under current federal income tax law, no federal
income taxes are payable or receivable with respect to the Variable Account's
net investment income and the net realized gain (loss) on investments.
INVESTMENT FUND CHANGES: During 2011, the LVIP Delaware Diversified Floating
Rate Service Class Fund and the LVIP Protected Profile 2050 Standard Class Fund
became available as investment options for account contract owners.
Accordingly, for the subaccounts that commenced operations during 2011, the
2011 statements of changes in net assets and total return and investment income
ratios in note 3 are for the period from the commencement of operations to
December 31, 2011.
L-16
Also during 2011, the following funds changed their names:
PREVIOUS FUND NAME NEW FUND NAME
--------------------------------------------------------------------------------------------------------------------------
LVIP Wilshire 2010 Profile Standard Class Fund LVIP Protected Profile 2010 Standard Class Fund
LVIP Wilshire 2020 Profile Standard Class Fund LVIP Protected Profile 2020 Standard Class Fund
LVIP Wilshire 2030 Profile Standard Class Fund LVIP Protected Profile 2030 Standard Class Fund
LVIP Wilshire 2040 Profile Standard Class Fund LVIP Protected Profile 2040 Standard Class Fund
LVIP Wilshire Conservative Profile Standard Class Fund LVIP Protected Profile Conservative Standard Class Fund
LVIP Wilshire Moderately Aggressive Profile Standard Class Fund LVIP Protected Profile Growth Standard Class Fund
LVIP Wilshire Moderate Profile Standard Class Fund LVIP Protected Profile Moderate Standard Class Fund
During 2012, the LVIP BlackRock Inflation Protected Bond Standard Class Fund,
the LVIP SSgA S&P 500 Index Standard Class Fund and the LVIP SSgA Small-Cap
Index Standard Class Fund became available as investment options for account
contract owners. Accordingly, for the subaccounts that commenced operations
during 2012, the 2012 statements of operations and statements of changes in net
assets and total return and investment income ratios in note 3 are for the
period from the commencement of operations to December 31, 2012.
Also during 2012, the following funds changed their names:
PREVIOUS FUND NAME NEW FUND NAME
-------------------------------------------------------------------------------------------------------------------------------
DWS Alternative Asset Allocation Plus VIP Class A Portfolio DWS Alternative Asset Allocation VIP Class A Portfolio
LVIP Cohen & Steers Real Estate Standard Class Fund LVIP Clarion Global Real Estate Standard Class Fund
LVIP SSgA Global Tactical Allocation Standard Class Fund LVIP SSgA Global Tactical Allocation RPM Standard Class Fund
LVIP Janus Capital Appreciation Standard Class Fund LVIP UBS Large Cap Growth RPM Standard Class Fund
NB AMT Partners I Class Portfolio NB AMT Large Cap Value I Class Portfolio
2. MORTALITY AND EXPENSE GUARANTEES AND OTHER TRANSACTIONS WITH AFFILIATES
Amounts are paid to the Company for mortality and expense guarantees at a
percentage of the current value of the Variable Account each day with the
exception of Fidelity VIP Money Market Portfolio, which does not have a
mortality and expense charge. The rates are as follows:
- Standard at a daily rate of .00273973 (1.00% on an
annual basis)
- Breakpoint at a daily rate of .00205479 (.75% on
an annual basis)
Accordingly, the Company is responsible for all sales, general and
administrative expenses applicable to the Variable Account.
3. FINANCIAL HIGHLIGHTS
A summary of the fee rates, unit values, units outstanding, net assets and
total return and investment income ratios for variable annuity contracts as of
and for each year or period in the five years ended December 31, 2012,
follows:
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT
COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME
SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5)
-------------------------------------------------------------------------------------------------------------------------------
ABVPSF GLOBAL THEMATIC GROWTH CLASS B
2012 0.75% 1.00% $ 4.60 $ 4.74 407,020 $ 1,872,402 12.11% 12.40% 0.00%
2011 0.75% 1.00% 4.10 4.22 453,695 1,861,796 -24.17% -23.98% 0.35%
2010 0.75% 1.00% 5.41 5.55 514,709 2,785,369 17.40% 17.70% 1.97%
2009 0.75% 1.00% 4.60 4.71 560,973 2,585,875 51.62% 52.00% 0.00%
2008 0.75% 1.00% 3.04 3.10 562,350 1,709,433 -47.99% -47.86% 0.00%
ABVPSF GROWTH CLASS B
2012 0.75% 1.00% 8.17 8.42 145,376 1,190,058 12.45% 12.73% 0.00%
2011 0.75% 1.00% 7.27 7.47 148,943 1,083,910 -0.04% 0.21% 0.00%
2010 0.75% 1.00% 7.27 7.46 161,724 1,177,462 13.65% 13.94% 0.05%
2009 0.75% 1.00% 6.40 6.55 175,880 1,126,600 31.55% 31.87% 0.00%
2008 0.75% 1.00% 4.86 4.96 180,984 880,928 -43.17% -43.03% 0.00%
L-17
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT
COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME
SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5)
-------------------------------------------------------------------------------------------------------------------------------
ABVPSF GROWTH AND INCOME CLASS B
2012 0.75% 1.00% $13.21 $13.50 91,918 $ 1,214,796 16.08% 16.37% 1.38%
2011 0.75% 1.00% 11.38 11.60 83,635 952,275 5.01% 5.28% 1.05%
2010 0.75% 1.00% 10.84 11.02 83,141 901,820 11.68% 11.96% 0.00%
2009 0.75% 1.00% 9.70 9.84 104,851 1,018,193 19.15% 19.45% 3.60%
2008 0.75% 1.00% 8.14 8.24 95,769 780,345 -41.25% -41.14% 1.77%
AMERICAN CENTURY VP BALANCED CLASS I
2012 0.75% 1.00% 33.08 34.22 483,889 16,049,324 10.69% 10.97% 2.06%
2011 0.75% 1.00% 29.89 30.84 529,970 15,875,249 4.28% 4.54% 1.89%
2010 0.75% 1.00% 28.66 29.49 606,823 17,425,978 10.53% 10.80% 1.88%
2009 0.75% 1.00% 25.93 26.62 675,956 17,565,553 14.33% 14.62% 5.35%
2008 0.75% 1.00% 22.68 23.22 761,745 17,309,845 -21.12% -20.93% 2.68%
AMERICAN CENTURY VP INFLATION PROTECTION CLASS I
2012 0.75% 1.00% 13.08 13.20 124,230 1,625,228 6.48% 6.75% 2.82%
2011 0.75% 1.00% 12.28 12.36 92,897 1,141,311 10.98% 11.26% 3.96%
2010 0.75% 1.00% 11.07 11.11 71,574 792,299 4.32% 4.58% 1.85%
2009 7/27/09 0.75% 1.00% 10.61 10.63 42,292 448,778 1.33% 5.45% 1.26%
AMERICAN FUNDS GLOBAL GROWTH CLASS 2
2012 0.75% 1.00% 18.02 18.42 274,966 4,966,016 21.34% 21.65% 0.91%
2011 0.75% 1.00% 14.85 15.14 302,484 4,500,793 -9.79% -9.57% 1.25%
2010 0.75% 1.00% 16.46 16.74 337,607 5,565,771 10.63% 10.91% 1.50%
2009 0.75% 1.00% 14.88 15.09 356,289 5,308,480 40.89% 41.24% 1.45%
2008 0.75% 1.00% 10.56 10.69 375,792 3,972,915 -39.00% -38.85% 1.80%
AMERICAN FUNDS GROWTH CLASS 2
2012 0.75% 1.00% 11.42 11.78 2,046,065 23,427,228 16.72% 17.01% 0.79%
2011 0.75% 1.00% 9.79 10.07 2,203,885 21,614,387 -5.23% -4.99% 0.61%
2010 0.75% 1.00% 10.33 10.59 2,391,020 24,737,180 17.50% 17.79% 0.70%
2009 0.75% 1.00% 8.79 8.99 2,719,762 23,965,826 38.02% 38.37% 0.67%
2008 0.75% 1.00% 6.37 6.50 2,778,102 17,724,499 -44.53% -44.39% 0.79%
AMERICAN FUNDS GROWTH-INCOME CLASS 2
2012 0.75% 1.00% 13.60 13.90 582,370 7,932,965 16.31% 16.60% 1.63%
2011 0.75% 1.00% 11.70 11.92 607,917 7,118,457 -2.81% -2.56% 1.49%
2010 0.75% 1.00% 12.03 12.23 678,662 8,174,284 10.32% 10.59% 1.49%
2009 0.75% 1.00% 10.91 11.06 721,001 7,872,039 29.94% 30.26% 1.63%
2008 0.75% 1.00% 8.40 8.49 748,494 6,288,093 -38.47% -38.31% 1.68%
AMERICAN FUNDS INTERNATIONAL CLASS 2
2012 0.75% 1.00% 13.06 13.46 868,210 11,350,715 16.73% 17.03% 1.42%
2011 0.75% 1.00% 11.19 11.51 1,034,750 11,586,451 -14.82% -14.61% 1.60%
2010 0.75% 1.00% 13.13 13.47 1,283,685 16,871,090 6.17% 6.43% 1.98%
2009 0.75% 1.00% 12.37 12.66 1,482,031 18,351,540 41.65% 42.00% 1.59%
2008 0.75% 1.00% 8.73 8.91 1,541,742 13,474,872 -42.70% -42.56% 1.88%
BLACKROCK GLOBAL ALLOCATION V.I. CLASS I
2012 0.75% 1.00% 12.96 13.07 93,759 1,215,132 9.18% 9.46% 1.48%
2011 0.75% 1.00% 11.87 11.95 99,310 1,178,695 -4.45% -4.22% 2.61%
2010 0.75% 1.00% 12.42 12.47 71,179 884,156 8.96% 9.24% 1.74%
2009 7/20/09 0.75% 1.00% 11.40 11.42 33,672 383,871 0.67% 11.50% 4.12%
DELAWARE VIP DIVERSIFIED INCOME STANDARD CLASS
2012 0.75% 1.00% 17.43 17.81 404,524 7,056,169 6.13% 6.39% 3.09%
2011 0.75% 1.00% 16.43 16.74 409,849 6,738,120 5.34% 5.60% 4.35%
2010 0.75% 1.00% 15.60 15.85 471,338 7,355,730 6.98% 7.25% 4.69%
2009 0.75% 1.00% 14.58 14.78 505,506 7,376,772 25.70% 26.01% 5.96%
2008 0.75% 1.00% 11.60 11.73 500,660 5,810,708 -5.49% -5.26% 3.55%
DELAWARE VIP HIGH YIELD STANDARD CLASS
2012 0.75% 1.00% 17.40 17.73 176,736 3,077,698 16.65% 16.94% 8.56%
2011 0.75% 1.00% 14.92 15.16 189,691 2,831,730 1.36% 1.62% 8.83%
2010 0.75% 1.00% 14.71 14.92 208,040 3,063,324 14.17% 14.46% 7.66%
2009 0.75% 1.00% 12.89 13.04 206,221 2,661,007 47.49% 47.86% 6.59%
2008 0.75% 1.00% 8.74 8.82 149,172 1,304,781 -24.93% -24.74% 8.49%
L-18
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT
COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME
SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5)
-------------------------------------------------------------------------------------------------------------------------------
DELAWARE VIP REIT SERVICE CLASS
2012 0.75% 1.00% $29.46 $30.38 392,488 $11,576,227 15.45% 15.74% 1.30%
2011 0.75% 1.00% 25.52 26.25 428,767 10,954,794 9.52% 9.79% 1.37%
2010 0.75% 1.00% 23.30 23.90 464,315 10,830,826 25.35% 25.66% 2.57%
2009 0.75% 1.00% 18.59 19.02 482,547 8,980,777 22.01% 22.32% 4.24%
2008 0.75% 1.00% 15.24 15.55 563,961 8,600,927 -35.93% -35.77% 2.06%
DELAWARE VIP SMALL CAP VALUE SERVICE CLASS
2012 0.75% 1.00% 17.89 18.28 450,097 8,060,937 12.50% 12.79% 0.35%
2011 0.75% 1.00% 15.90 16.21 480,324 7,645,697 -2.57% -2.33% 0.30%
2010 0.75% 1.00% 16.32 16.59 540,575 8,829,991 30.60% 30.93% 0.46%
2009 0.75% 1.00% 12.50 12.67 555,313 6,945,896 30.25% 30.58% 0.66%
2008 0.75% 1.00% 9.59 9.70 569,271 5,464,975 -30.76% -30.59% 0.48%
DELAWARE VIP SMID CAP GROWTH SERVICE CLASS
2012 0.75% 1.00% 11.84 12.21 363,549 4,312,965 9.61% 9.88% 0.01%
2011 0.75% 1.00% 10.81 11.11 350,408 3,795,589 6.83% 7.09% 0.72%
2010 10/8/10 0.75% 1.00% 10.11 10.38 266,490 2,702,240 13.45% 13.51% 0.00%
DELAWARE VIP TREND SERVICE CLASS
2009 0.75% 1.00% 7.47 7.65 282,506 2,119,971 52.84% 53.22% 0.00%
2008 0.75% 1.00% 4.89 4.99 273,105 1,339,330 -47.39% -47.26% 0.00%
DREYFUS OPPORTUNISTIC SMALL CAP INITIAL CLASS
2012 0.75% 1.00% 23.82 24.64 1,016,901 24,277,228 19.36% 19.66% 0.00%
2011 0.75% 1.00% 19.96 20.59 1,137,365 22,743,588 -14.70% -14.49% 0.42%
2010 0.75% 1.00% 23.39 24.08 1,301,328 30,502,057 29.85% 30.17% 0.76%
2009 0.75% 1.00% 18.02 18.50 1,463,419 26,415,246 24.78% 25.10% 1.66%
2008 0.75% 1.00% 14.44 14.79 1,659,181 23,995,706 -38.21% -38.06% 0.92%
DREYFUS STOCK INDEX INITIAL CLASS
2012 0.75% 1.00% 47.72 49.36 1,018,877 48,754,441 14.59% 14.87% 2.02%
2011 0.75% 1.00% 41.65 42.97 1,136,755 47,470,262 0.86% 1.12% 1.80%
2010 0.75% 1.00% 41.29 42.50 1,378,411 57,034,613 13.70% 13.98% 1.80%
2009 0.75% 1.00% 36.32 37.28 1,553,211 56,524,261 25.08% 25.39% 2.08%
2008 0.75% 1.00% 29.04 29.73 1,755,524 51,067,523 -37.77% -37.61% 2.08%
DWS ALTERNATIVE ASSET ALLOCATION VIP CLASS A
2012 0.75% 1.00% 13.08 13.20 10,010 130,967 8.63% 8.90% 3.26%
2011 0.75% 1.00% 12.04 12.04 8,100 97,553 -3.83% -3.83% 1.50%
2010 1.00% 1.00% 12.52 12.52 6,674 83,584 11.35% 11.35% 1.19%
2009 11/16/09 1.00% 1.00% 11.25 11.25 143 1,607 -0.89% -0.89% 0.00%
DWS EQUITY 500 INDEX VIP CLASS A
2012 0.75% 1.00% 14.00 14.30 125,401 1,756,809 14.55% 14.83% 2.09%
2011 0.75% 1.00% 12.22 12.45 193,503 2,366,306 0.82% 1.07% 1.75%
2010 0.75% 1.00% 12.12 12.32 199,957 2,424,596 13.56% 13.85% 1.91%
2009 0.75% 1.00% 10.67 10.82 233,308 2,491,222 25.07% 25.38% 2.84%
2008 0.75% 1.00% 8.53 8.63 231,326 1,974,628 -37.78% -37.62% 2.23%
DWS SMALL CAP INDEX VIP CLASS A
2012 0.75% 1.00% 15.31 15.65 130,153 1,997,201 15.09% 15.38% 0.88%
2011 0.75% 1.00% 13.31 13.56 133,027 1,773,487 -5.37% -5.13% 0.89%
2010 0.75% 1.00% 14.06 14.29 147,905 2,082,615 25.14% 25.45% 0.92%
2009 0.75% 1.00% 11.24 11.39 161,946 1,822,036 25.31% 25.63% 1.83%
2008 0.75% 1.00% 8.97 9.07 173,355 1,555,651 -34.78% -34.62% 1.58%
FIDELITY VIP ASSET MANAGER INITIAL CLASS
2012 0.75% 1.00% 35.22 36.43 1,117,038 39,405,183 11.36% 11.64% 1.52%
2011 0.75% 1.00% 31.63 32.63 1,213,528 38,437,578 -3.53% -3.29% 1.89%
2010 0.75% 1.00% 32.79 33.74 1,343,770 44,114,945 13.13% 13.41% 1.64%
2009 0.75% 1.00% 28.98 29.75 1,523,997 44,222,649 27.83% 28.15% 2.36%
2008 0.75% 1.00% 22.67 23.22 1,695,153 38,475,274 -29.43% -29.25% 2.54%
L-19
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT
COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME
SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5)
-------------------------------------------------------------------------------------------------------------------------------
FIDELITY VIP CONTRAFUND SERVICE CLASS 2
2012 0.75% 1.00% $15.24 $15.71 1,205,276 $18,394,701 14.99% 15.27% 1.13%
2011 0.75% 1.00% 13.25 13.63 1,238,854 16,441,190 -3.75% -3.51% 0.75%
2010 0.75% 1.00% 13.77 14.13 1,402,304 19,333,235 15.76% 16.05% 1.02%
2009 0.75% 1.00% 11.89 12.17 1,486,546 17,706,512 34.12% 34.46% 1.21%
2008 0.75% 1.00% 8.87 9.05 1,486,186 13,197,378 -43.26% -43.12% 0.80%
FIDELITY VIP EQUITY-INCOME INITIAL CLASS
2012 0.75% 1.00% 33.42 34.57 1,160,289 38,900,117 16.14% 16.43% 3.06%
2011 0.75% 1.00% 28.77 29.69 1,282,791 37,016,452 -0.03% 0.22% 2.36%
2010 0.75% 1.00% 28.78 29.62 1,503,500 43,377,161 14.00% 14.29% 1.77%
2009 0.75% 1.00% 25.25 25.92 1,699,575 43,015,866 28.91% 29.24% 2.28%
2008 0.75% 1.00% 19.59 20.06 1,917,427 37,627,702 -43.23% -43.08% 2.36%
FIDELITY VIP GROWTH INITIAL CLASS
2012 0.75% 1.00% 45.66 47.23 1,415,464 64,761,253 13.55% 13.83% 0.59%
2011 0.75% 1.00% 40.21 41.49 1,530,863 61,671,758 -0.80% -0.55% 0.35%
2010 0.75% 1.00% 40.54 41.72 1,774,948 72,062,172 22.94% 23.25% 0.27%
2009 0.75% 1.00% 32.97 33.85 2,011,962 66,445,466 27.01% 27.33% 0.44%
2008 0.75% 1.00% 25.96 26.58 2,259,073 58,726,912 -47.69% -47.56% 0.77%
FIDELITY VIP MONEY MARKET INITIAL CLASS
2012 0.00% 0.00% 18.00 18.03 449 8,090 0.12% 0.14% 0.14%
2011 0.00% 0.00% 17.98 17.98 2,384 42,873 0.11% 0.11% 0.11%
2010 0.00% 0.00% 17.96 17.96 1,237 22,220 0.24% 0.24% 0.18%
2009 0.00% 0.00% 17.92 17.92 771 13,820 0.72% 0.72% 0.96%
2008 0.00% 0.00% 17.79 17.82 3,284 58,416 3.02% 3.02% 3.49%
JANUS ASPEN SERIES WORLDWIDE INSTITUTIONAL CLASS
2012 0.75% 1.00% 14.21 14.70 620,209 8,840,691 18.89% 19.18% 0.87%
2011 0.75% 1.00% 11.95 12.33 682,174 8,176,833 -14.60% -14.39% 0.56%
2010 0.75% 1.00% 14.00 14.41 819,249 11,492,633 14.68% 14.97% 0.61%
2009 0.75% 1.00% 12.21 12.53 918,814 11,242,040 36.33% 36.67% 1.42%
2008 0.75% 1.00% 8.95 9.17 1,004,075 9,009,222 -45.21% -45.08% 1.19%
LVIP BARON GROWTH OPPORTUNITIES SERVICE CLASS
2012 0.75% 1.00% 38.67 40.00 362,634 14,060,367 17.07% 17.36% 1.14%
2011 0.75% 1.00% 33.03 34.08 419,765 13,901,459 2.99% 3.25% 0.00%
2010 0.75% 1.00% 32.07 33.01 509,670 16,384,821 25.13% 25.44% 0.00%
2009 0.75% 1.00% 25.63 26.32 582,238 14,963,025 36.95% 37.29% 0.00%
2008 0.75% 1.00% 18.72 19.17 632,290 11,860,923 -39.74% -39.59% 0.00%
LVIP BLACKROCK INFLATION PROTECTED BOND STANDARD CLASS
2012 5/17/12 1.00% 1.00% 10.26 10.26 6,748 69,225 2.22% 2.22% 0.00%
LVIP CLARION GLOBAL REAL ESTATE STANDARD CLASS
2012 0.75% 1.00% 8.44 8.56 73,829 623,618 23.44% 23.75% 0.00%
2011 0.75% 1.00% 6.84 6.91 73,611 503,522 -9.58% -9.35% 0.00%
2010 0.75% 1.00% 7.56 7.63 83,533 631,722 16.80% 17.10% 0.00%
2009 0.75% 1.00% 6.47 6.51 56,051 362,862 36.46% 36.80% 0.00%
2008 0.75% 1.00% 4.74 4.76 18,355 87,068 -42.61% -42.47% 2.01%
LVIP DELAWARE BOND STANDARD CLASS
2012 0.75% 1.00% 15.86 16.21 498,292 7,912,925 5.55% 5.81% 2.00%
2011 0.75% 1.00% 15.03 15.32 531,555 7,996,162 6.57% 6.83% 3.41%
2010 0.75% 1.00% 14.10 14.34 570,500 8,051,380 7.41% 7.68% 3.56%
2009 0.75% 1.00% 13.13 13.31 566,723 7,446,362 17.72% 18.01% 4.44%
2008 0.75% 1.00% 11.15 11.28 525,501 5,865,412 -3.89% -3.65% 5.13%
LVIP DELAWARE DIVERSIFIED FLOATING RATE SERVICE CLASS
2012 1.00% 1.00% 10.05 10.05 2,511 25,234 2.93% 2.93% 1.35%
2011 7/8/11 1.00% 1.00% 9.76 9.76 393 3,839 -2.14% -2.14% 2.73%
LVIP DELAWARE FOUNDATION AGGRESSIVE ALLOCATION STANDARD CLASS
2012 1.00% 1.00% 14.52 14.52 10,788 156,687 12.16% 12.16% 2.07%
2011 1.00% 1.00% 12.95 12.95 7,754 100,414 -3.00% -3.00% 2.34%
2010 0.75% 1.00% 13.35 13.40 6,233 83,270 11.36% 11.64% 3.52%
2009 7/14/09 0.75% 1.00% 11.99 12.00 1,736 20,827 13.90% 21.57% 1.74%
L-20
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT
COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME
SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5)
-------------------------------------------------------------------------------------------------------------------------------
LVIP DELAWARE FOUNDATION CONSERVATIVE ALLOCATION STANDARD CLASS
2012 0.75% 1.00% $13.77 $14.07 81,986 $ 1,134,046 9.53% 9.81% 2.41%
2011 0.75% 1.00% 12.57 12.82 78,818 995,079 1.21% 1.47% 6.45%
2010 0.75% 1.00% 12.42 12.63 81,634 1,017,302 9.33% 9.61% 1.70%
2009 0.75% 1.00% 11.36 11.52 85,146 969,859 21.62% 21.93% 3.00%
2008 0.75% 1.00% 9.34 9.45 85,416 799,875 -27.68% -27.50% 2.39%
LVIP DELAWARE FOUNDATION MODERATE ALLOCATION STANDARD CLASS
2012 0.75% 1.00% 14.19 14.30 21,793 309,208 10.20% 10.42% 2.62%
2011 0.75% 1.00% 12.88 12.88 18,011 231,921 -0.73% -0.73% 2.88%
2010 1.00% 1.00% 12.97 12.97 11,901 154,355 9.91% 9.91% 6.12%
2009 8/28/09 1.00% 1.00% 11.80 11.80 4 48 8.15% 8.15% 0.00%
LVIP DELAWARE GROWTH AND INCOME STANDARD CLASS
2012 0.75% 1.00% 10.72 11.05 354,280 3,805,702 14.17% 14.46% 1.07%
2011 0.75% 1.00% 9.39 9.66 390,097 3,669,574 0.19% 0.44% 1.00%
2010 0.75% 1.00% 9.37 9.61 453,326 4,254,556 11.81% 12.09% 0.91%
2009 0.75% 1.00% 8.38 8.58 520,227 4,366,120 23.44% 23.75% 1.12%
2008 0.75% 1.00% 6.79 6.93 589,773 4,008,978 -36.41% -36.25% 1.28%
LVIP DELAWARE SOCIAL AWARENESS STANDARD CLASS
2012 0.75% 1.00% 17.62 18.22 703,524 12,425,870 14.14% 14.42% 0.75%
2011 0.75% 1.00% 15.44 15.93 761,073 11,777,523 -0.36% -0.11% 0.70%
2010 0.75% 1.00% 15.49 15.95 904,374 14,040,223 10.46% 10.74% 0.60%
2009 0.75% 1.00% 14.03 14.40 996,878 14,010,749 28.71% 29.03% 0.70%
2008 0.75% 1.00% 10.90 11.16 1,101,328 12,023,926 -35.06% -34.90% 0.88%
LVIP GLOBAL INCOME STANDARD CLASS
2012 1.00% 1.00% 12.52 12.52 19,785 247,696 6.62% 6.62% 1.90%
2011 1.00% 1.00% 11.74 11.74 20,240 237,668 0.08% 0.08% 4.68%
2010 1.00% 1.00% 11.73 11.73 12,568 147,459 8.59% 8.59% 2.85%
2009 7/15/09 1.00% 1.00% 10.80 10.80 6,160 66,561 5.35% 5.35% 3.68%
LVIP MONDRIAN INTERNATIONAL VALUE STANDARD CLASS
2012 0.75% 1.00% 15.25 15.58 246,515 3,768,229 8.53% 8.80% 2.77%
2011 0.75% 1.00% 14.05 14.32 288,351 4,059,549 -5.17% -4.93% 2.84%
2010 0.75% 1.00% 14.81 15.06 341,663 5,069,710 1.44% 1.70% 3.11%
2009 0.75% 1.00% 14.60 14.81 425,403 6,223,680 20.03% 20.33% 3.27%
2008 0.75% 1.00% 12.17 12.31 503,462 6,132,921 -37.29% -37.13% 4.48%
LVIP PROTECTED PROFILE 2010 STANDARD CLASS
2012 0.75% 1.00% 11.57 11.74 65,720 760,605 7.46% 7.73% 2.39%
2011 0.75% 1.00% 10.77 10.89 65,779 709,674 0.24% 0.49% 0.83%
2010 0.75% 1.00% 10.74 10.84 77,423 832,709 10.36% 10.63% 1.15%
2009 0.75% 1.00% 9.74 9.80 73,801 719,040 23.16% 23.47% 2.10%
2008 0.75% 1.00% 7.90 7.94 55,025 435,193 -24.67% -24.48% 3.42%
LVIP PROTECTED PROFILE 2020 STANDARD CLASS
2012 0.75% 1.00% 10.99 11.14 194,273 2,136,241 7.30% 7.57% 2.06%
2011 0.75% 1.00% 10.24 10.36 196,176 2,010,079 -0.80% -0.55% 0.76%
2010 0.75% 1.00% 10.32 10.42 216,761 2,238,428 10.92% 11.19% 1.00%
2009 0.75% 1.00% 9.31 9.37 144,789 1,348,029 24.41% 24.72% 1.90%
2008 0.75% 1.00% 7.48 7.51 122,899 919,581 -27.62% -27.44% 1.87%
LVIP PROTECTED PROFILE 2030 STANDARD CLASS
2012 0.75% 1.00% 10.62 10.78 278,616 2,960,652 6.82% 7.09% 1.90%
2011 0.75% 1.00% 9.95 10.06 249,283 2,479,688 -1.55% -1.31% 0.66%
2010 0.75% 1.00% 10.10 10.20 226,525 2,288,763 11.43% 11.71% 0.91%
2009 0.75% 1.00% 9.07 9.13 178,202 1,615,827 26.68% 26.99% 2.09%
2008 0.75% 1.00% 7.16 7.19 70,442 504,196 -31.47% -31.30% 1.48%
LVIP PROTECTED PROFILE 2040 STANDARD CLASS
2012 0.75% 1.00% 9.89 10.03 124,354 1,230,346 6.06% 6.32% 1.84%
2011 0.75% 1.00% 9.33 9.44 101,413 946,060 -2.44% -2.20% 0.63%
2010 0.75% 1.00% 9.56 9.65 82,452 788,425 12.53% 12.82% 0.94%
2009 0.75% 1.00% 8.50 8.55 60,926 517,698 29.65% 29.97% 1.47%
2008 0.75% 1.00% 6.55 6.58 37,059 242,878 -36.19% -36.03% 0.87%
L-21
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT
COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME
SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5)
-------------------------------------------------------------------------------------------------------------------------------
LVIP PROTECTED PROFILE 2050 STANDARD CLASS
2012 1.00% 1.00% $ 9.67 $ 9.67 2,647 $ 25,589 4.93% 4.93% 0.30%
2011 7/15/11 1.00% 1.00% 9.21 9.21 29,223 269,237 -7.17% -7.17% 0.00%
LVIP PROTECTED PROFILE CONSERVATIVE STANDARD CLASS
2012 0.75% 1.00% 14.50 14.78 156,741 2,273,449 8.68% 8.96% 3.87%
2011 0.75% 1.00% 13.34 13.56 157,522 2,102,251 2.65% 2.91% 1.52%
2010 0.75% 1.00% 13.00 13.18 286,321 3,721,821 9.40% 9.68% 3.77%
2009 0.75% 1.00% 11.88 12.02 267,910 3,183,545 23.61% 23.92% 4.30%
2008 0.75% 1.00% 9.61 9.70 264,582 2,543,244 -19.25% -19.05% 1.96%
LVIP PROTECTED PROFILE GROWTH STANDARD CLASS
2012 0.75% 1.00% 13.22 13.47 391,875 5,182,561 8.06% 8.33% 2.50%
2011 0.75% 1.00% 12.23 12.43 418,427 5,120,586 -1.00% -0.75% 1.97%
2010 0.75% 1.00% 12.35 12.53 420,843 5,201,715 11.60% 11.88% 2.89%
2009 0.75% 1.00% 11.07 11.20 409,680 4,537,418 27.75% 28.07% 4.70%
2008 0.75% 1.00% 8.67 8.74 372,615 3,230,340 -34.08% -33.92% 1.09%
LVIP PROTECTED PROFILE MODERATE STANDARD CLASS
2012 0.75% 1.00% 14.01 14.28 357,635 5,016,147 8.50% 8.77% 3.29%
2011 0.75% 1.00% 12.91 13.13 369,710 4,778,923 0.16% 0.41% 1.76%
2010 0.75% 1.00% 12.89 13.07 378,148 4,879,150 10.85% 11.12% 2.98%
2009 0.75% 1.00% 11.63 11.77 376,162 4,378,100 26.76% 27.08% 4.26%
2008 0.75% 1.00% 9.18 9.26 436,310 4,005,220 -27.35% -27.17% 2.12%
LVIP SSGA BOND INDEX STANDARD CLASS
2012 0.75% 1.00% 11.91 12.02 59,085 704,258 2.82% 3.08% 2.74%
2011 0.75% 1.00% 11.58 11.66 50,337 583,204 6.33% 6.59% 3.71%
2010 0.75% 1.00% 10.89 10.94 44,556 485,640 4.91% 5.17% 2.71%
2009 7/6/09 0.75% 1.00% 10.38 10.40 10,015 104,047 -0.52% 2.61% 3.50%
LVIP SSGA EMERGING MARKETS 100 STANDARD CLASS
2012 0.75% 1.00% 16.21 16.35 77,620 1,258,209 11.53% 11.81% 2.61%
2011 0.75% 1.00% 14.53 14.62 78,785 1,145,087 -15.78% -15.57% 2.43%
2010 0.75% 1.00% 17.25 17.32 77,860 1,343,516 26.50% 26.82% 1.71%
2009 6/29/09 0.75% 1.00% 13.64 13.66 42,116 574,480 21.46% 35.70% 1.67%
LVIP SSGA GLOBAL TACTICAL ALLOCATION RPM STANDARD CLASS
012 0.75% 1.00% 12.45 12.69 149,416 1,861,171 10.04% 10.32% 3.40%
011 0.75% 1.00% 11.31 11.50 156,978 1,776,647 -0.78% -0.53% 1.30%
010 0.75% 1.00% 11.40 11.56 169,896 1,938,112 7.65% 7.92% 1.05%
009 0.75% 1.00% 10.59 10.71 165,203 1,750,486 29.50% 29.82% 6.69%
008 0.75% 1.00% 8.18 8.25 201,111 1,645,101 -41.05% -40.90% 0.64%
LVIP SSGA INTERNATIONAL INDEX STANDARD CLASS
2012 0.75% 1.00% 13.03 13.15 8,001 104,237 16.95% 17.26% 1.86%
2011 0.75% 1.00% 11.14 11.14 6,474 72,113 -13.25% -13.25% 1.04%
2010 1.00% 1.00% 12.84 12.84 8,697 111,675 5.98% 5.98% 1.50%
2009 7/16/09 1.00% 1.00% 12.12 12.12 4,951 59,991 19.49% 19.49% 2.53%
LVIP SSGA S&P 500 INDEX STANDARD CLASS
2012 5/21/12 1.00% 1.00% 10.73 10.73 1,968 21,113 9.05% 9.05% 2.06%
LVIP SSGA SMALL-CAP INDEX STANDARD CLASS
2012 6/19/12 1.00% 1.00% 10.92 10.92 507 5,536 8.17% 8.17% 1.01%
LVIP T. ROWE PRICE STRUCTURED MID-CAP GROWTH STANDARD CLASS
2012 0.75% 1.00% 17.25 17.84 904,684 15,640,591 15.15% 15.43% 0.00%
2011 0.75% 1.00% 14.98 15.46 1,006,689 15,117,255 -4.82% -4.59% 0.00%
2010 0.75% 1.00% 15.74 16.20 1,167,911 18,420,566 27.09% 27.41% 0.00%
2009 0.75% 1.00% 12.39 12.71 1,309,307 16,250,903 44.89% 45.25% 0.10%
2008 0.75% 1.00% 8.55 8.75 1,423,681 12,193,479 -43.35% -43.20% 0.00%
LVIP UBS LARGE CAP GROWTH RPM STANDARD CLASS
2012 0.75% 1.00% 7.61 7.85 199,348 1,521,247 15.23% 15.52% 0.00%
2011 0.75% 1.00% 6.60 6.79 210,235 1,391,272 -6.62% -6.39% 0.21%
2010 0.75% 1.00% 7.07 7.26 224,617 1,591,476 10.24% 10.51% 0.73%
2009 0.75% 1.00% 6.42 6.57 247,111 1,588,529 37.15% 37.49% 0.85%
2008 0.75% 1.00% 4.68 4.78 279,582 1,310,114 -41.41% -41.26% 0.66%
L-22
MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM INVESTMENT
COMMENCEMENT FEE FEE UNIT UNIT UNITS TOTAL TOTAL INCOME
SUBACCOUNT YEAR DATE(1) RATE(2) RATE(2) VALUE(3) VALUE(3) OUTSTANDING NET ASSETS RETURN(4) RETURN(4) RATIO(5)
-------------------------------------------------------------------------------------------------------------------------------
NB AMT LARGE CAP VALUE I CLASS
2012 0.75% 1.00% $17.00 $17.58 253,438 $ 4,318,915 15.44% 15.73% 0.41%
2011 0.75% 1.00% 14.72 15.19 290,712 4,290,578 -12.24% -12.02% 0.00%
2010 0.75% 1.00% 16.78 17.27 359,925 6,050,361 14.52% 14.80% 0.66%
2009 0.75% 1.00% 14.65 15.04 408,049 5,993,548 54.52% 54.91% 2.64%
2008 0.75% 1.00% 9.48 9.71 449,518 4,271,182 -52.87% -52.75% 0.50%
NB AMT MID CAP GROWTH I CLASS
2012 0.75% 1.00% 9.38 9.67 702,641 6,598,276 11.30% 11.57% 0.00%
2011 0.75% 1.00% 8.42 8.66 757,209 6,387,768 -0.53% -0.28% 0.00%
2010 0.75% 1.00% 8.47 8.69 873,255 7,404,066 27.81% 28.13% 0.00%
2009 0.75% 1.00% 6.63 6.78 975,025 6,471,128 30.29% 30.62% 0.00%
2008 0.75% 1.00% 5.09 5.19 1,026,161 5,224,044 -43.93% -43.79% 0.00%
T. ROWE PRICE INTERNATIONAL STOCK CLASS I
2012 0.75% 1.00% 18.60 19.24 626,616 11,673,495 17.26% 17.55% 1.25%
2011 0.75% 1.00% 15.86 16.36 678,905 10,784,826 -13.70% -13.49% 1.43%
2010 0.75% 1.00% 18.38 18.91 788,274 14,509,437 13.32% 13.60% 0.89%
2009 0.75% 1.00% 16.22 16.65 900,546 14,630,234 50.87% 51.25% 2.71%
2008 0.75% 1.00% 10.75 11.01 973,595 10,481,445 -49.21% -49.09% 1.91%
(1) Reflects less than a full year of activity. Funds were first received
in this option on the commencement date noted or the option was inactive
at the date funds were received.
(2) These amounts represent the annualized minimum and maximum contract
expenses of the separate account, consisting primarily of mortality and
expense charges, for each period indicated. The ratios include only those
expenses that result in a direct reduction to unit values. Charges made
directly to contract owner accounts through the redemption of units and
expenses of the underlying funds have been excluded.
(3) As the unit value is presented as a range of minimum to maximum values
for only those subaccounts which existed for the entire year, some
individual contract unit values may not be within the ranges presented as
a result of partial year activity.
(4) These amounts represent the total return, including changes in value
of mutual funds, and reflect deductions for all items included in the fee
rate. The total return does not include contract charges deducted directly
from policy account values. The total return is not annualized. As the
total return is presented as a range of minimum to maximum values for only
those subaccounts which existed for the entire year, some individual
contract total returns may not be within the ranges presented as a result
of partial year activity.
(5) These amounts represent the dividends, excluding distributions of
capital gains, received by the subaccount from the underlying mutual fund,
net of management fees assessed by the fund manager, divided by the
average net assets. These ratios exclude those expenses, such as mortality
and expense guarantee charges, that result in direct reductions in the
unit values. The recognition of investment income by the subaccount is
affected by the timing of the declaration of dividends by the underlying
fund in which the subaccounts invest. Investment income ratios are not
annualized.
Note: Fee rate, unit value and total return minimum and maximum are the same
where there is only one active contract level charge for the subaccount.
L-23
4. PURCHASES AND SALES OF INVESTMENTS
The aggregate cost of investments purchased and the aggregate proceeds from
investments sold were as follows for 2012:
AGGREGATE AGGREGATE
COST OF PROCEEDS
SUBACCOUNT PURCHASES FROM SALES
---------------------------------------------------------------------------------------------
ABVPSF Global Thematic Growth Class B $ 176,967 $ 400,716
ABVPSF Growth Class B 88,468 126,418
ABVPSF Growth and Income Class B 253,873 143,864
American Century VP Balanced Class I 491,332 1,810,391
American Century VP Inflation Protection Class I 693,943 236,500
American Funds Global Growth Class 2 497,566 928,634
American Funds Growth Class 2 877,154 2,615,130
American Funds Growth-Income Class 2 848,535 1,117,233
American Funds International Class 2 485,619 2,437,875
BlackRock Global Allocation V.I. Class I 320,912 373,246
Delaware VIP Diversified Income Standard Class 1,163,152 899,120
Delaware VIP High Yield Standard Class 658,390 646,462
Delaware VIP REIT Service Class 945,683 1,924,060
Delaware VIP Small Cap Value Service Class 1,191,114 1,176,595
Delaware VIP Smid Cap Growth Service Class 1,436,515 1,068,854
Dreyfus Opportunistic Small Cap Initial Class 192,873 3,101,498
Dreyfus Stock Index Initial Class 3,771,668 6,240,272
DWS Alternative Asset Allocation VIP Class A 109,214 80,176
DWS Equity 500 Index VIP Class A 257,480 1,133,476
DWS Small Cap Index VIP Class A 157,824 200,201
Fidelity VIP Asset Manager Initial Class 1,195,399 3,972,644
Fidelity VIP Contrafund Service Class 2 1,275,126 1,719,099
Fidelity VIP Equity-Income Initial Class 4,275,364 4,870,240
Fidelity VIP Growth Initial Class 921,769 6,382,564
Fidelity VIP Money Market Initial Class 113,800 152,927
Janus Aspen Series Worldwide Institutional Class 146,622 972,989
LVIP Baron Growth Opportunities Service Class 1,141,843 2,500,830
LVIP BlackRock Inflation Protected Bond Standard Class 100,814 31,387
LVIP Clarion Global Real Estate Standard Class 84,849 85,140
LVIP Delaware Bond Standard Class 1,114,820 1,377,348
LVIP Delaware Diversified Floating Rate Service Class 28,779 7,533
LVIP Delaware Foundation Aggressive Allocation Standard Class 60,834 15,400
LVIP Delaware Foundation Conservative Allocation Standard Class 256,150 196,638
LVIP Delaware Foundation Moderate Allocation Standard Class 64,856 8,256
LVIP Delaware Growth and Income Standard Class 148,970 515,042
LVIP Delaware Social Awareness Standard Class 1,195,752 1,332,521
LVIP Global Income Standard Class 62,263 65,434
LVIP Mondrian International Value Standard Class 352,958 876,265
LVIP Protected Profile 2010 Standard Class 376,235 338,031
LVIP Protected Profile 2020 Standard Class 391,675 389,510
LVIP Protected Profile 2030 Standard Class 618,604 288,336
LVIP Protected Profile 2040 Standard Class 349,650 108,106
LVIP Protected Profile 2050 Standard Class 33,029 291,464
LVIP Protected Profile Conservative Standard Class 523,596 442,273
LVIP Protected Profile Growth Standard Class 538,854 803,073
LVIP Protected Profile Moderate Standard Class 502,079 548,824
LVIP SSgA Bond Index Standard Class 384,050 265,704
LVIP SSgA Emerging Markets 100 Standard Class 676,936 549,793
LVIP SSgA Global Tactical Allocation RPM Standard Class 154,389 200,315
LVIP SSgA International Index Standard Class 48,971 28,572
LVIP SSgA S&P 500 Index Standard Class 21,188 58
LVIP SSgA Small-Cap Index Standard Class 5,492 18
LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class 866,865 2,279,647
LVIP UBS Large Cap Growth RPM Standard Class 182,560 278,255
NB AMT Large Cap Value I Class 126,453 741,617
NB AMT Mid Cap Growth I Class 342,586 901,984
T. Rowe Price International Stock Class I 291,391 1,163,385
L-24
5. INVESTMENTS
The following is a summary of investments owned at December 31, 2012:
NET
SHARES ASSET FAIR VALUE
SUBACCOUNT OWNED VALUE OF SHARES COST OF SHARES
--------------------------------------------------------------------------------------------------------------------------
ABVPSF Global Thematic Growth Class B 114,032 $16.42 $ 1,872,400 $ 1,771,748
ABVPSF Growth Class B 52,877 22.50 1,189,737 945,185
ABVPSF Growth and Income Class B 58,763 20.66 1,214,053 1,156,318
American Century VP Balanced Class I 2,248,382 7.13 16,030,962 15,267,790
American Century VP Inflation Protection Class I 135,068 12.05 1,627,572 1,565,721
American Funds Global Growth Class 2 211,832 23.44 4,965,346 4,446,556
American Funds Growth Class 2 387,681 60.45 23,435,325 20,074,184
American Funds Growth-Income Class 2 207,442 38.24 7,932,599 7,483,041
American Funds International Class 2 644,141 17.62 11,349,772 11,493,699
BlackRock Global Allocation V.I. Class I 75,436 16.10 1,214,524 1,183,800
Delaware VIP Diversified Income Standard Class 637,297 11.07 7,054,875 6,509,823
Delaware VIP High Yield Standard Class 502,964 6.11 3,073,108 2,800,375
Delaware VIP REIT Service Class 961,305 12.04 11,574,110 11,857,288
Delaware VIP Small Cap Value Service Class 244,014 33.04 8,062,218 7,044,285
Delaware VIP Smid Cap Growth Service Class 182,199 23.67 4,312,653 4,011,046
Dreyfus Opportunistic Small Cap Initial Class 766,897 31.66 24,279,952 31,602,836
Dreyfus Stock Index Initial Class 1,529,756 31.86 48,738,031 40,655,970
DWS Alternative Asset Allocation Class A 9,422 13.90 130,970 127,896
DWS VIT Equity 500 Index Class A 116,850 15.01 1,753,918 1,487,618
DWS VIT Small Cap Index Class A 147,264 13.56 1,996,898 1,860,382
Fidelity VIP Asset Manager Initial Class 2,597,606 15.17 39,405,684 39,605,052
Fidelity VIP Contrafund Service Class 2 707,870 26.00 18,404,613 18,305,168
Fidelity VIP Equity-Income Initial Class 1,951,674 19.94 38,916,381 42,563,078
Fidelity VIP Growth Initial Class 1,539,889 42.05 64,752,320 56,709,620
Fidelity VIP Money Market Initial Class 7,989 1.00 7,989 7,989
Janus Aspen Series Worldwide Institutional Class 287,690 30.74 8,843,580 10,445,221
LVIP Baron Growth Opportunities Service Class 400,861 35.08 14,063,790 9,355,631
LVIP BlackRock Inflation Protected Bond Standard Class 6,031 11.48 69,231 69,598
LVIP Clarion Global Real Estate Standard Class 73,389 8.50 623,588 479,927
LVIP Delaware Bond Standard Class 557,037 14.21 7,916,606 7,417,552
LVIP Delaware Diversified Floating Rate Service Class 2,489 10.14 25,231 25,180
LVIP Delaware Foundation Aggressive Allocation Standard Class 11,871 13.19 156,632 144,936
LVIP Delaware Foundation Conservative Allocation Standard Class 78,192 14.50 1,134,016 1,130,342
LVIP Delaware Foundation Moderate Allocation Standard Class 21,360 14.48 309,227 290,264
LVIP Delaware Growth and Income Standard Class 115,107 33.04 3,802,776 3,318,641
LVIP Delaware Social Awareness Standard Class 381,904 32.54 12,425,261 12,318,627
LVIP Global Income Standard Class 20,977 11.80 247,615 244,193
LVIP Mondrian International Value Standard Class 247,168 15.24 3,767,581 4,696,364
LVIP Protected Profile 2010 Standard Class 69,815 11.26 786,044 713,696
LVIP Protected Profile 2020 Standard Class 197,895 10.79 2,134,886 1,908,289
LVIP Protected Profile 2030 Standard Class 278,509 10.63 2,959,712 2,571,029
LVIP Protected Profile 2040 Standard Class 122,829 10.01 1,229,391 1,100,993
LVIP Protected Profile 2050 Standard Class 2,709 9.40 25,464 25,025
LVIP Protected Profile Conservative Standard Class 178,645 12.85 2,295,588 2,079,299
LVIP Protected Profile Growth Standard Class 435,129 11.90 5,178,911 4,947,701
LVIP Protected Profile Moderate Standard Class 399,106 12.56 5,013,575 4,606,819
LVIP SSgA Bond Index Standard Class 61,055 11.57 706,463 701,569
LVIP SSgA Emerging Markets 100 Standard Class 119,985 10.45 1,253,484 1,424,591
LVIP SSgA Global Tactical Allocation RPM Standard Class 169,928 10.95 1,860,877 1,855,107
LVIP SSgA International Index Standard Class 13,268 7.94 105,372 102,255
LVIP SSgA S&P 500 Index Standard Class 2,072 10.19 21,115 21,131
LVIP SSgA Small-Cap Index Standard Class 283 19.60 5,536 5,474
LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class 997,098 15.69 15,642,467 13,772,250
LVIP UBS Large Cap Growth RPM Standard Class 64,576 23.55 1,520,770 1,221,205
NB AMT Large Cap Value I Class 372,473 11.60 4,320,689 4,985,847
NB AMT Mid Cap Growth I Class 213,034 30.97 6,597,655 5,062,011
T. Rowe Price International Stock Class I 839,946 13.90 11,675,252 11,043,180
L-25
6. CHANGES IN UNITS OUTSTANDING
The change in units outstanding for the year ended December 31, 2012, is as
follows:
UNITS UNITS NET INCREASE
SUBACCOUNT ISSUED REDEEMED (DECREASE)
----------------------------------------------------------------------------------------------------------
ABVPSF Global Thematic Growth Class B 41,931 (88,606) (46,675)
ABVPSF Growth Class B 12,037 (15,604) (3,567)
ABVPSF Growth and Income Class B 19,589 (11,306) 8,283
American Century VP Balanced Class I 10,199 (56,280) (46,081)
American Century VP Inflation Protection Class I 50,052 (18,719) 31,333
American Funds Global Growth Class 2 28,734 (56,252) (27,518)
American Funds Growth Class 2 72,775 (230,595) (157,820)
American Funds Growth-Income Class 2 61,008 (86,555) (25,547)
American Funds International Class 2 31,018 (197,558) (166,540)
BlackRock Global Allocation V.I. Class I 24,498 (30,049) (5,551)
Delaware VIP Diversified Income Standard Class 46,242 (51,567) (5,325)
Delaware VIP High Yield Standard Class 26,305 (39,260) (12,955)
Delaware VIP REIT Service Class 31,689 (67,968) (36,279)
Delaware VIP Small Cap Value Service Class 37,159 (67,386) (30,227)
Delaware VIP Smid Cap Growth Service Class 102,224 (89,083) 13,141
Dreyfus Opportunistic Small Cap Initial Class 10,755 (131,219) (120,464)
Dreyfus Stock Index Initial Class 9,848 (127,726) (117,878)
DWS Alternative Asset Allocation VIP Class A 8,327 (6,417) 1,910
DWS Equity 500 Index VIP Class A 17,036 (85,138) (68,102)
DWS Small Cap Index VIP Class A 10,641 (13,515) (2,874)
Fidelity VIP Asset Manager Initial Class 12,345 (108,835) (96,490)
Fidelity VIP Contrafund Service Class 2 81,110 (114,688) (33,578)
Fidelity VIP Equity-Income Initial Class 20,218 (142,720) (122,502)
Fidelity VIP Growth Initial Class 14,900 (130,299) (115,399)
Fidelity VIP Money Market Initial Class 6,328 (8,263) (1,935)
Janus Aspen Series Worldwide Institutional Class 8,367 (70,332) (61,965)
LVIP Baron Growth Opportunities Service Class 11,760 (68,891) (57,131)
LVIP BlackRock Inflation Protected Bond Standard Class 9,819 (3,071) 6,748
LVIP Clarion Global Real Estate Standard Class 11,664 (11,446) 218
LVIP Delaware Bond Standard Class 53,590 (86,853) (33,263)
LVIP Delaware Diversified Floating Rate Service Class 2,874 (756) 2,118
LVIP Delaware Foundation Aggressive Allocation Standard Class 4,156 (1,122) 3,034
LVIP Delaware Foundation Conservative Allocation Standard Class 17,805 (14,637) 3,168
LVIP Delaware Foundation Moderate Allocation Standard Class 4,353 (571) 3,782
LVIP Delaware Growth and Income Standard Class 14,947 (50,764) (35,817)
LVIP Delaware Social Awareness Standard Class 18,140 (75,689) (57,549)
LVIP Global Income Standard Class 4,861 (5,316) (455)
LVIP Mondrian International Value Standard Class 19,799 (61,635) (41,836)
LVIP Protected Profile 2010 Standard Class 32,060 (32,119) (59)
LVIP Protected Profile 2020 Standard Class 34,624 (36,527) (1,903)
LVIP Protected Profile 2030 Standard Class 57,088 (27,755) 29,333
LVIP Protected Profile 2040 Standard Class 34,590 (11,649) 22,941
LVIP Protected Profile 2050 Standard Class 3,503 (30,079) (26,576)
LVIP Protected Profile Conservative Standard Class 32,188 (32,969) (781)
LVIP Protected Profile Growth Standard Class 35,119 (61,671) (26,552)
LVIP Protected Profile Moderate Standard Class 27,924 (39,999) (12,075)
LVIP SSgA Bond Index Standard Class 31,516 (22,768) 8,748
LVIP SSgA Emerging Markets 100 Standard Class 35,259 (36,424) (1,165)
LVIP SSgA Global Tactical Allocation RPM Standard Class 8,975 (16,537) (7,562)
LVIP SSgA International Index Standard Class 3,933 (2,406) 1,527
LVIP SSgA S&P 500 Index Standard Class 1,970 (2) 1,968
LVIP SSgA Small-Cap Index Standard Class 507 -- 507
LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class 29,830 (131,835) (102,005)
LVIP UBS Large Cap Growth RPM Standard Class 26,371 (37,258) (10,887)
NB AMT Large Cap Value I Class 8,097 (45,371) (37,274)
NB AMT Mid Cap Growth I Class 41,475 (96,043) (54,568)
T. Rowe Price International Stock Class I 11,848 (64,137) (52,289)
L-26
The change in units outstanding for the year ended December 31, 2011, is as
follows:
UNITS UNITS NET INCREASE
SUBACCOUNT ISSUED REDEEMED (DECREASE)
------------------------------------------------------------------------------------------------------------
ABVPSF Global Thematic Growth Class B 28,716 (89,730) (61,014)
ABVPSF Growth Class B 13,669 (26,450) (12,781)
ABVPSF Growth and Income Class B 17,866 (17,372) 494
American Century VP Balanced Class I 12,219 (89,072) (76,853)
American Century VP Inflation Protection Class I 68,599 (47,276) 21,323
American Funds Global Growth Class 2 36,255 (71,378) (35,123)
American Funds Growth Class 2 99,774 (286,909) (187,135)
American Funds Growth-Income Class 2 55,300 (126,045) (70,745)
American Funds International Class 2 40,057 (288,992) (248,935)
BlackRock Global Allocation V.I. Class I 55,571 (27,440) 28,131
Delaware VIP Diversified Income Standard Class 39,450 (100,939) (61,489)
Delaware VIP High Yield Standard Class 35,146 (53,495) (18,349)
Delaware VIP REIT Service Class 54,085 (89,633) (35,548)
Delaware VIP Small Cap Value Service Class 73,699 (133,950) (60,251)
Delaware VIP Smid Cap Growth Service Class 169,326 (85,408) 83,918
Dreyfus Opportunistic Small Cap Initial Class 17,732 (181,695) (163,963)
Dreyfus Stock Index Initial Class 12,531 (254,187) (241,656)
DWS Alternative Asset Allocation VIP Class A 6,619 (5,193) 1,426
DWS Equity 500 Index VIP Class A 25,084 (31,538) (6,454)
DWS Small Cap Index VIP Class A 12,048 (26,926) (14,878)
Fidelity VIP Asset Manager Initial Class 17,713 (147,955) (130,242)
Fidelity VIP Contrafund Service Class 2 87,959 (251,409) (163,450)
Fidelity VIP Equity-Income Initial Class 28,432 (249,141) (220,709)
Fidelity VIP Growth Initial Class 19,714 (263,799) (244,085)
Fidelity VIP Money Market Initial Class 10,874 (9,727) 1,147
Janus Aspen Series Worldwide Institutional Class 13,567 (150,642) (137,075)
LVIP Baron Growth Opportunities Service Class 14,820 (104,725) (89,905)
LVIP Clarion Global Real Estate Standard Class 12,728 (22,650) (9,922)
LVIP Delaware Bond Standard Class 72,255 (111,200) (38,945)
LVIP Delaware Diversified Floating Rate Service Class 474 (81) 393
LVIP Delaware Foundation Aggressive Allocation Standard Class 2,592 (1,071) 1,521
LVIP Delaware Foundation Conservative Allocation Standard Class 7,740 (10,556) (2,816)
LVIP Delaware Foundation Moderate Allocation Standard Class 8,847 (2,737) 6,110
LVIP Delaware Growth and Income Standard Class 21,700 (84,929) (63,229)
LVIP Delaware Social Awareness Standard Class 21,760 (165,061) (143,301)
LVIP Global Income Standard Class 18,743 (11,071) 7,672
LVIP Mondrian International Value Standard Class 20,015 (73,327) (53,312)
LVIP Protected Profile 2010 Standard Class 12,229 (23,873) (11,644)
LVIP Protected Profile 2020 Standard Class 41,284 (61,869) (20,585)
LVIP Protected Profile 2030 Standard Class 52,454 (29,696) 22,758
LVIP Protected Profile 2040 Standard Class 35,187 (16,226) 18,961
LVIP Protected Profile 2050 Standard Class 29,223 -- 29,223
LVIP Protected Profile Conservative Standard Class 33,749 (162,548) (128,799)
LVIP Protected Profile Growth Standard Class 39,814 (42,230) (2,416)
LVIP Protected Profile Moderate Standard Class 41,703 (50,141) (8,438)
LVIP SSgA Bond Index Standard Class 52,471 (46,690) 5,781
LVIP SSgA Emerging Markets 100 Standard Class 40,505 (39,580) 925
LVIP SSgA Global Tactical Allocation RPM Standard Class 18,586 (31,504) (12,918)
LVIP SSgA International Index Standard Class 11,124 (13,347) (2,223)
LVIP T. Rowe Price Structured Mid-Cap Growth Standard Class 56,616 (217,838) (161,222)
LVIP UBS Large Cap Growth RPM Standard Class 30,862 (45,244) (14,382)
NB AMT Large Cap Value I Class 9,087 (78,300) (69,213)
NB AMT Mid Cap Growth I Class 90,289 (206,335) (116,046)
T. Rowe Price International Stock Class I 12,943 (122,312) (109,369)
7. SUBSEQUENT EVENT
Subsequent events were evaluated through the date these financial statements
were issued.
L-27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors of The Lincoln National Life Insurance Company
and
Contract Owners of Lincoln National Variable Annuity Account L
We have audited the accompanying statements of assets and liabilities of
Lincoln National Variable Annuity Account L ("Variable Account"), comprised of
the subaccounts described in Note 1, as of December 31, 2012, and the related
statements of operations for the year then ended and the statements of changes
in net assets for each of the two years in the period then ended, or for those
sub-accounts operating for portions of such periods as disclosed in the
financial statements. These financial statements are the responsibility of the
Variable Account's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Variable Account's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Variable Account's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. Our procedures included confirmation of investments
owned as of December 31, 2012, by correspondence with the fund companies, or
their transfer agents, as applicable. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
subaccounts constituting Lincoln National Variable Annuity Account L at
December 31, 2012, and the results of their operations and the changes in their
net assets for the periods described above, in conformity with U.S. generally
accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
April 12, 2013
L-28
Lincoln National Variable Annuity Account L
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) List of Financial Statements
1. Part A
The Table of Condensed Financial Information is included in Part A of this
Registration Statement. (Not Applicable)
2. Part B
The following financial statements for the Variable Account are included
in Part B of this Registration Statement.
Statement of Assets and Liabilities - December 31, 2012
Statement of Operations - Year ended December 31, 2012
Statements of Changes in Net Assets - Years ended December 31, 2012 and
2011
Notes to Financial Statements - December 31, 2012
Report of Independent Registered Public Accounting Firm
3. Part B
The following consolidated financial statements for The Lincoln National
Life Insurance Company are included in Part B of this Registration
Statement.
Consolidated Balance Sheets - Years ended December 31, 2012 and 2011
Consolidated Statements of Comprehensive Income (Loss) - Years ended
December 31, 2012, 2011 and 2010
Consolidated Statements of Stockholders' Equity - Years ended December 31,
2012, 2011 and 2010
Consolidated Statements of Cash Flows - Years ended December 31, 2012,
2011, and 2010
Notes to Consolidated Financial Statements - December 31, 2012
Report of Independent Registered Public Accounting Firm
(b) List of Exhibits
(1) Resolution of Board of Directors and Memorandum from the President of The
Lincoln National Life Insurance Company authorizing establishment of the
Variable Account are incorporated herein by reference to Post-Effective
Amendment No. 15 (File No. 033-25990) filed on April 22, 1999.
(2) Not Applicable
(3)(a) Broker-Dealer Selling Agreement among The Lincoln National Life
Insurance Company, Lincoln Life & Annuity Company of New York and Lincoln
Financial Distributors, Inc. incorporated herein by reference to Pre-Effective
Amendment No. 1 (File No. 333-170897) filed on April 8, 2011.
(b) Amended and Restated Principal Underwriting Agreement dated May 1, 2007
between The Lincoln National Life Insurance Company and Lincoln Financial
Distributors, Inc. incorporated herein by reference to Post-Effective
Amendment No. 24 (File No. 333-61554) filed on December 18, 2007.
(4) Variable Annuity Contract (AN-701)
(5) Application (EM12812-MF12) incorporated herein by reference Registration
Statement on Form N-4 filed on October 15, 2012.
(6)(a) Articles of Incorporation of The Lincoln National Life Insurance Company
incorporated herein by reference to Pre-Effective Amendment No. 1 (File No.
333-04999) filed on September 24, 1996.
(b) By-Laws of The Lincoln National Life Insurance Company incorporated
herein by reference to Post-Effective Amendment No. 3 on Form N-6 (File No.
333-118478) filed on April 5, 2007.
(7) Automatic Indemnity Reinsurance Agreement Amended and Restated as of
October 1, 2009 between The Lincoln National Life Insurance Company and Lincoln
National Reinsurance Company (Barbados) Limited incorporated herein by
reference to Post-Effective Amendment No. 43 (File No. 033-26032) filed on
April 7, 2010.
(8)(a) Accounting and Financial Administration Services Agreement dated October
1, 2007 among Mellon Bank, N.A., The Lincoln National Life Insurance Company
and Lincoln Life & Annuity Company of New York incorporated herein by reference
to Registration Statement on Form N-4 (File No. 333-147673) filed on November
28, 2007.
(b) Fund Participation Agreement between The Lincoln National Life
Insurance Company and Lincoln Variable Insurance Products Trust
incorporated herein by reference to Post-Effective Amendment No. 18 on Form
N-6 (File No. 333-146507) filed on April 3, 2012.
(c) Rule 22c-2 Agreement between The Lincoln National Life Insurance
Company and Lincoln Variable Insurance Products Trust incorporated herein
by reference to Post-Effective Amendment No. 30 (File No. 333-36304) filed
on May 29, 2008.
(9) Opinion and Consent of Mary Jo Ardington, Associate General Counsel of The
Lincoln National Life Insurance Company as to the legality of securities being
issued
(10)(a) Consent of Ernst & Young LLP, Independent Registered Public Accounting
Firm
(b) Power of Attorney - Principal Officers and Directors of The Lincoln
National Life Insurance Company
(11) Not Applicable
(12) Not Applicable
(13) Organizational Chart of The Lincoln National Insurance Holding Company
System incorporated herein by reference to Post-Effective Amendment No. 48
(File No. 033-26032) filed on September 21, 2012.
Item 25. Directors and Officers of the Depositor
The following list contains the officers and directors of The Lincoln National
Life Insurance Company who are engaged directly or indirectly in activities
relating to Lincoln National Variable Annuity Account L as well as the
contracts. The list also shows The Lincoln National Life Insurance Company's
executive officers.
Name Positions and Offices with Depositor
--------------------------- --------------------------------------------------------------------
Dennis R. Glass** President and Director
Chuck C. Cornelio*** Executive Vice President, Chief Administrative Officer and Director
Randal J. Freitag** Executive Vice President, Chief Financial Officer and Director
Mark E. Konen** Executive Vice President and Director
Keith J. Ryan* Vice President and Director
Charles A. Brawley, III** Vice President and Secretary
Ellen Cooper** Executive Vice President, Chief Investment Officer and Director
Jeffrey D. Coutts** Senior Vice President and Treasurer
*Principal business address is 1300 South Clinton Street, Fort Wayne, Indiana
46802
**Principal business address is Radnor Financial Center, 150 Radnor Chester
Road, Radnor, PA 19087
***Principal business address is 100 North Greene Street, Greensboro, NC 27401
Item 26. Persons Controlled by or Under Common Control with the Depositor or
Registrant
See Exhibit 13: Organizational Chart of the Lincoln National Insurance Holding
Company System.
Item 27. Number of Contractowners
As of February 28, 2013 there were 49, 443 participants in group contracts
under Account L.
Item 28. Indemnification
a) Brief description of indemnification provisions.
In general, Article VII of the By-Laws of The Lincoln National Life
Insurance Company provides that Lincoln Life will indemnify certain
persons against expenses, judgments and certain other specified costs
incurred by any such person if he/she is made a party or is threatened to
be made a party to a suit or proceeding because he/she was a director,
officer, or employee of Lincoln Life, as long as he/she acted in good
faith and in a manner he/she reasonably believed to be in the best
interests of, or act opposed to the best interests of, Lincoln Life.
Certain additional conditions apply to indemnification in criminal
proceedings.
B-2
In particular, separate conditions govern indemnification of directors,
officers, and employees of Lincoln Life in connection with suits by, or in
the right of, Lincoln Life.
Please refer to Article VII of the By-Laws of Lincoln Life (Exhibit no.
6(b) hereto) for the full text of the indemnification provisions.
Indemnification is permitted by, and is subject to the requirements of,
Indiana law.
b) Undertaking pursuant to Rule 484 of Regulation C under the Securities
Act of 1933:
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described in Item
28(a) above or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer, or controlling person of the Registrant in
the successful defense of any such action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Item 29. Principal Underwriter
(a) Lincoln Financial Distributors, Inc. ("LFD") currently serves as
Principal Underwriter for: Lincoln National Variable Annuity Account C;
Lincoln National Flexible Premium Variable Life Account D; Lincoln National
Variable Annuity Account E; Lincoln National Flexible Premium Variable Life
Account F; Lincoln National Flexible Premium Variable Life Account G;
Lincoln National Variable Annuity Account H; Lincoln Life & Annuity
Variable Annuity Account H; Lincoln Life Flexible Premium Variable Life
Account J; Lincoln Life Flexible Premium Variable Life Account K; Lincoln
National Variable Annuity Account L; Lincoln Life & Annuity Variable
Annuity Account L; Lincoln Life Flexible Premium Variable Life Account M;
Lincoln Life & Annuity Flexible Premium Variable Life Account M; Lincoln
Life Variable Annuity Account N; Lincoln New York Account N for Variable
Annuities; Lincoln Life Variable Annuity Account Q; Lincoln Life Flexible
Premium Variable Life Account R; LLANY Separate Account R for Flexible
Premium Variable Life Insurance; Lincoln Life Flexible Premium Variable
Life Account S; LLANY Separate Account S for Flexible Premium Variable Life
Insurance; Lincoln Life Variable Annuity Account T; Lincoln Life Variable
Annuity Account W; and Lincoln Life Flexible Premium Variable Life Account
Y and Lincoln Life & Annuity Flexible Premium Variable Life Account Y;
Lincoln Life Variable Annuity Account JF-H; Lincoln Life Variable Annuity
Account JF-I; Lincoln Life Flexible Premium Variable Life Account JF-A;
Lincoln Life Flexible Premium Variable Life Account JF-C; Lincoln Life
Variable Annuity Account JL-A; Lincoln Life & Annuity Flexible Premium
Variable Life Account JA-B; Lincoln Variable Insurance Products Trust;
Lincoln Advisors Trust.
(b) Officers and Directors of Lincoln Financial Distributors, Inc.:
Name Positions and Offices with Underwriter
------------------------- -----------------------------------------------------
Wilford H. Fuller* President, Chief Executive Officer and Director
David M. Kittredge* Senior Vice President
Jeffrey D. Coutts* Senior Vice President and Treasurer
Patrick J. Caulfield** Vice President and Chief Compliance Officer
Joel Schwartz* Senior Vice President and Director
Elizabeth F. Conover*** Assistant Vice President and Chief Financial Officer
Thomas P. O'Neill* Senior Vice President and Director
Nancy A. Smith* 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 100 Greene Street, Greensboro, NC 27401
(c) N/A
Item 30. Location of Accounts and Records
All accounts, books, and other documents, except accounting records, required
to be maintained by Section 31a of the 1940 Act and the Rules promulgated
thereunder are maintained by The Lincoln National Life Insurance Company, 1300
South Clinton Street, Fort Wayne, Indiana 46802. The accounting records are
maintained by The Bank of New York Mellon, One Mellon Bank Center, 500 Grant
Street, Pittsburgh, PA 15258.
B-3
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 Life at
the address or phone number listed in the Prospectus.
(d) The Lincoln National Life Insurance Company hereby represents that the
fees and charges deducted under the contract, in the aggregate, are
reasonable in relation to the services rendered, the expenses expected to
be incurred, and the risks assumed by The Lincoln National Life Insurance
Company.
(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.
Item 33.
For contracts sold in connection with the Texas Optional Retirement Program,
Registrant is relying on Rule 6c-7 and represents that paragraphs (a) through
(d) of that rule have been complied with.
SIGNATURES
a) As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant has caused this Pre-Effective Amendment No. 1
Registration Statement to be signed on its behalf, in the City of Fort
Wayne, and State of Indiana on this 28th day of May, 2013.
Lincoln National Variable Annuity Account L (Registrant)
Lincoln Secured Retirement IncomeSM Version 4
By: /s/ John D. Weber
------------------------------------
John D. Weber
Vice President, The Lincoln National Life Insurance Company
(Title)
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(Depositor)
By: /s/ Stephen R. Turer
------------------------------------
Stephen R. Turer
(Signature-Officer of Depositor)
Senior Vice President, The Lincoln National Life Insurance
Company
(Title)
(b) As required by the Securities Act of 1933, this Amendment to the
Registration Statement has been signed by the following persons in their
capacities indicated on May 28, 2013.
B-4
Signature Title
* President and Director (Principal Executive Officer)
------------------------------
Dennis R. Glass
* Executive Vice President, Chief Investment Officer and Direc-
------------------------------
tor
Ellen Cooper
* Executive Vice President, Chief Administrative Officer and Direc-
------------------------------
tor
Charles C. Cornelio
* Executive Vice President, Chief Financial Officer and Director
------------------------------
(Principal Financial Officer)
Randal J. Freitag
* Senior Vice President and Director
------------------------------
Mark E. Konen
* Vice President and Director
------------------------------
Keith J. Ryan
*By: /s/ John D. Weber Pursuant to a Power of Attorney
---------------------------
John D. Weber
B-5
EX-99.B(4)
2
a2214070zex-99_b4.txt
EX-99.B(4)
Exhibit 4
[LINCOLN FINANCIAL GROUP(R) LOGO]
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(the "Company")
HOME OFFICE: 1300 South Clinton Street
Fort Wayne, Indiana 46802-3506
1-800-942-5500
A STOCK COMPANY
GROUP ANNUITY CONTRACT
The Company agrees, subject to the terms and conditions of this Contract, to
provide the benefits described herein while this Contract is in force and to
provide any other benefits, rights and privileges specified in
this Contract.
ALLOCATED GROUP VARIABLE DEFERRED ANNUITY CONTRACT
SEPARATE ACCOUNT
NONPARTICIPATING
Signed for the Company
/s/ Dennis R. Glass /s/ Charles A. Brawley, III
President Secretary
ALL VALUES PROVIDED BY THIS CONTRACT ARE VARIABLE AND MAY INCREASE, DECREASE OR
REMAIN THE SAME AND ARE NOT GUARANTEED AS TO A FIXED DOLLAR AMOUNT.
THIS CONTRACT IS NOT COVERED BY AN INSURANCE GUARANTY FUND OR OTHER SOLVENCY
PROTECTION ARRANGEMENT BECAUSE THIS CONTRACT IS A CONTRACT UNDER WHICH THE RISK
IS BORNE BY THE POLICYHOLDER.
AN-701
Lincoln Financial Group is the marketing name for Lincoln National Corporation
and its affiliates.
TABLE OF CONTENTS
ARTICLE PAGE
CONTRACT SPECIFICATIONS 3
ARTICLE 1 - DEFINITIONS 4
ARTICLE 2 - FUNDING AND WITHDRAWALS 6
ARTICLE 3 - ANNUITY BENEFITS 8
ARTICLE 4 - GUARANTEED WITHDRAWAL BENEFIT 8
ARTICLE 5 - GUARANTEED WITHDRAWAL BENEFIT ROLLOVER PRIVILEGE 13
ARTICLE 6 - CONTRACT DISCONTINUANCE 14
ARTICLE 7 - GENERAL PROVISIONS 15
ARTICLE 8 - ANNUITY PAYMENT OPTIONS AND ANNUITY PURCHASE RATES 16
ARTICLE 9 - BENEFICIARY 17
AN-701 2
CONTRACT SPECIFICATIONS
CONTRACT NUMBER: [LNC0123456789]
CONTRACT OWNER: [AYZ Company]
EFFECTIVE DATE: [October 15, 2012]
SEPARATE ACCOUNT: [Lincoln National Variable Annuity Account C]
See Article 2 for provisions governing any changes to the Separate Account
CONTRACT MINIMUMS AND MAXIMUMS:
Minimum Annuitant Age on Benefit Election Date: [55]
Maximum Age for any Measuring Life applicable to an Automatic Annual
Step-Up: [85]
Maximum Annual Deposit accepted on behalf of an Annuitant: $ [500,000]
Maximum Income Base for an Annuitant: $ [2,000,000]
TRANSFER LIMIT:
Period: [180] days
Amount: $ [25,000]
CHARGES AND EXPENSES:
Guaranteed Maximum Annual Mortality & Expense Risk and Administrative Charge
Rate: [0.65] %
Guaranteed Maximum Monthly GWB Charge Rate: [0.167] %
Initial Monthly GWB Charge Rate: [0.084] %
DEDUCTIONS:
Guaranteed Maximum Additional Annual Plan Deductions Rate: [0.20] %
MORTALITY TABLE USED TO DETERMINE GUARANTEED ANNUITY PAYMENT OPTIONS AND
PURCHASE RATES:
Annuity 2000 Individual Annuity Mortality Table Female, Projected to 2030 and
then Generation projection Scale G modified with assumed interest rate of return
of 1.00% per year.
AN-701-CS 3-A
INITIAL GAI RATE TABLE
------------------------------------------------------- ---------------------------------------------------------
GAI RATE TABLE - SINGLE MEASURING LIFE OPTION GAI RATE TABLE - JOINT MEASURING LIFE OPTION
------------------------------------------------------- ---------------------------------------------------------
AGE OF MEASURING LIFE GAI RATE AGE OF YOUNGER OR SURVIVING MEASURING GAI RATE
LIFE
------------------------------------------------------- ---------------------------------------------------------
[0 - 54] [0.0]% [0 - 54] [0.0]%
[55 - 64] [4.0]% [55- 64] [3.5]%
[65 - 70] [5.0]% [65 - 70] [4.5]%
[71 + ] [6.0]% [71 +] [5.5]%
------------------------------------------------------- ----------------------------------------------------------
AN-701-CS 3-B
ARTICLE 1 - DEFINITIONS
1.01 AGE unless otherwise stated herein, will be defined as an Annuitant's Age
as of the Annuitant's last birthday.
1.02 ANNUITANT also known as a participant under the Plan for whom a
certificate is issued. The Annuitant is a natural person used to determine
the benefits in accordance with the terms of the Contract. A certificate
may only have one Annuitant. The Annuitant may not be changed while a
certificate is in force.
1.03 ANNUITANT ACCOUNT VALUE (AAV) is the value of the Separate Account held
under the Contract on behalf of an Annuitant. We will maintain an AAV for
each Annuitant.
1.04 ANNUITY COMMENCEMENT DATE is the Valuation Date on which the AAV is
withdrawn for payment of annuity benefits under the annuity payment option
selected under Article 8.
1.05 CODE is the Internal Revenue Code of 1986, as amended.
1.06 COMPANY, WE, US, and OUR refers to The Lincoln National Life Insurance
Company.
1.07 CONTRACT OWNER means the Trustee, the Employer, the Plan Sponsor, or other
person or entity specified as such on the Contract Specifications page.
1.08 CONTRACT OWNER ACCOUNT VALUE (COAV) is the sum of all AAV(s) held under
this Contract .
1.09 CONTRACT YEAR is a twelve month period that begins on the Effective Date,
as shown on the Contract Specifications page, or on the anniversary of the
Effective Date. If in any calendar year, the anniversary of the Effective
Date is not a Valuation Date, any event set to occur on the anniversary of
the Effective Date shall occur on the next Valuation Date.
1.10 DEPOSIT(S) means the amount(s) paid into the Contract on behalf of an
Annuitant's AAV. We may require the Contract Owner to identify the source
of the Deposit(s). We may restrict Deposits subject to Article 1.21 and
Article 2.01.
1.11 FUND means any of the underlying investment options available in the
Separate Account.
1.12 GOOD ORDER means a Request or instruction that is:
(a) in a form that is satisfactory to the Company such that it is
sufficiently complete and clear that no discretion needs to be
exercised to follow such instruction, complies with all relevant laws
and regulations, and is permitted under the terms and conditions of
this Contract;
(b) on specific forms, or by other means the Company then permits (such as
via telephone or electronic transmission); and
(c) with any signatures and dates as required.
1.13 NET ASSET VALUE PER SHARE means the market value of a Fund share
calculated each day.
1.14 NOTICE, ELECTION, REQUEST is a written form in a manner We accept and
filed at Our Service Office. We retain the right to agree in advance to
accept communication regarding a specific matter by telephone or by some
other form of electronic transmission, in a manner We prescribe. We will
not be held responsible for any payment or other action We have taken
before Your communication is recorded at Our Service Office. We may
designate a third party to receive such Notice, Election or Request. To be
effective for any Valuation Date, a Notice must be received in good order
prior to the end of that Valuation Date.
AN-701 4
1.15 PLAN is any retirement Plan which is funded in part by this Contract. Each
Plan must meet the applicable requirements of the Code sections specified
by Us for the Contract Owner.
1.16 ROLLOVER CONTRACT means a group contract under which a certificate is
issued to a participant for a direct rollover of a distribution from the
Plan. Such contract is issued under an eligible retirement plan funding
vehicle.
1.17 SECONDARY LIFE is the second natural person, if any, used to determine the
benefits provided under Article 4 and Article 8. If a Guaranteed
Withdrawal Benefit is elected under the terms of Article 4, on the Benefit
Election Date any Secondary Life must be an Annuitant's Spouse. The
Secondary Life may not be changed.
1.18 SEPARATE ACCOUNT as shown on the Contract Specifications page is a
segregated investment account established by Us under the laws of Our
state of domicile that invests in a segregated portfolio of assets for
which unit values are calculated.
1.19 SPOUSE means an individual who would be recognized as a Spouse under
federal law.
1.20 SERVICE OFFICE is Our principal place of business and is the same location
as the Home Office as shown on Page 1, unless You are otherwise notified
by Us.
1.21 TRANSFER is a Deposit received from other investment options available
under the Plan within the Transfer Limit Period (as shown on the Contract
Specifications page) of any Withdrawal. We reserve the right to impose a
dollar limit on the total of any Transfer made on behalf of an Annuitant
into an AAV. Transfer does not include Deposits received as annual
additions for purposes of section 415 of the Code, or scheduled
allocations resulting from a systematic rebalancing feature of a Plan
investment option. The dollar limit is shown on the Contract Specification
page.
1.22 VALUATION DATE is the close of the market of each day that the New York
Stock Exchange is open for business.
1.23 VALUATION PERIOD is the period commencing at the close of business on a
particular Valuation Date and ending at the close of business on the next
succeeding Valuation Date.
1.24 WITHDRAWAL is any amount deducted from an AAV as requested by the Contract
Owner on behalf of an Annuitant. All Withdrawals prior to the Benefit
Election Date are considered Excess Withdrawals. The cumulative amount of
all withdrawals in a Benefit Year that exceed the GAI after the Benefit
Election Date will be considered Excess Withdrawals.
1.25 YOU OR YOUR is the Contract Owner, as shown on the Contract Specifications
page.
AN-701 5
ARTICLE 2 - FUNDING AND WITHDRAWALS
2.01 Deposits must be made by the Contract Owner on behalf of an Annuitant to
Us at Our Service Office. We have the right to decline future Deposits
into an AAV as long as we provide 180 day Notice to the Contract Owner. In
addition, We have the right to limit the amount of future Deposits subject
to the Transfer Limit of Article 1.21. The Maximum Annual Deposit accepted
on behalf of an Annuitant is shown on the Contract Specifications page.
2.02 Upon Notice, investment allocations for future Deposits made by You on
behalf of an Annuitant may be changed at any time as permitted by You. Any
change must be made in a manner acceptable by Us.
2.03 Subject to any required regulatory approvals, We reserve the right to
eliminate the shares of any Fund and substitute the securities of a
different Fund or investment company or mutual fund. Such elimination and
substitution may occur if the shares of a Fund are no longer available for
investment or, if in Our judgment, further investment in any Fund should
become inappropriate in view of the purposes of the Contract. We may close
the Separate Account to new Deposits. We may add new subaccounts in which
the assets of the Separate Account may be invested. We will give You
written Notice of the elimination and substitution of any Fund as required
by law after such substitution occurs.
2.04 We reserve the right to transfer assets of the Separate Account to another
Separate Account, and to modify the structure or operation of the Separate
Account, subject to obtaining any necessary regulatory approvals. We
guarantee that such modification will not affect any AAV.
2.05 The Separate Account is for the exclusive benefit of persons entitled to
receive benefits under variable annuity contracts. The Separate Account
will not be charged with liabilities from any other part of Our business.
Income, gains, and losses, realized or unrealized, of the Separate Account
will be credited to or charged against the Separate Account.
2.06 We do not guarantee any Deposit into the Separate Account against
investment loss.
2.07 The Separate Account is divided into units. When an amount is deposited to
or withdrawn from the Separate Account the number of units is adjusted.
2.08 Units are used to value all amounts allocated to or withdrawn from the
Separate Account as a result of Deposits made to the Separate Account,
Withdrawals, or fees and charges taken from the Separate Account. The
number of units is determined by dividing the amount allocated to or
withdrawn from the Separate Account by the dollar value of one unit of the
Separate Account as of the Valuation Date the transaction becomes
effective. The number of units of the Separate Account will not be changed
by any change in the dollar value of units in the Separate Account.
The value of a unit was arbitrarily established at the inception of the
Separate Account. The unit value for the Separate Account for any later
Valuation Period is determined as (1) minus (2) divided by (3); where:
1. is the total value of Fund shares held in the Separate Account,
calculated by multiplying the number of Fund shares owned by the
Separate Account 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;
2. is the liabilities of the Separate Account at the end of the
Valuation Period (such liabilities include daily charges imposed on
the Separate Account and may include a charge or credit with
respect to any taxes paid or reserved for by Us that We determine
is a result of the operation of the Separate Account); and
3. is the outstanding number of units in the Separate Account at the
beginning of the Valuation Period.
AN-701 6
The unit value of the Separate Account may increase or decrease the dollar
value of benefits under the Contract. Expenses We incur will not adversely
affect the dollar value of benefits. In certain circumstances, and when
permitted by law, We may use a different standard industry method for this
calculation which will achieve substantially the same result as the method
described above.
2.09 Any Withdrawal must be allowed by the Plan and may not exceed an
Annuitant's AAV on the Valuation Date prior to the date of the Withdrawal.
2.10 You must submit Withdrawal Requests to Us by providing Notice. We reserve
the right to require proof of the event giving rise to any Withdrawal
under this Contract.
2.11 Upon receipt of Notice of Withdrawal, We will pay the amount of any
Withdrawal within the time period as required by the Securities and
Exchange Commission, unless provisions under Section 2.12 are in effect.
2.12 We reserve the right to suspend or postpone payments for a Withdrawal or
surrender for any period when:
1. the New York Stock Exchange is closed (other than customary
weekend and holiday closings);
2. trading on the New York Stock Exchange is restricted;
3. an emergency exists as a result of which disposal of securities
held in the Separate Account is not reasonably practicable or it
is not reasonably practicable to determine the value of the
Separate Account's net assets; or
4. during any other period when the Securities and Exchange
Commission, by order, so permits for the protection of the
Contract Owner.
The applicable rules and regulations of the Securities and Exchange
Commission will govern as to whether the conditions described in (2) and
(3) exist.
2.13 The following Charges & Expenses and Deductions are as shown on the
Contract Specifications page:
a) Charges & Expenses:
1. Guaranteed Maximum Mortality & Expense Risk and Administrative
Charge Rate: We assess an annual charge on a daily basis to the
average daily AAV for each Annuitant. The charge may never exceed
the Guaranteed Maximum Annual Mortality & Expense Risk and
Administrative Charge Rate as shown on the Contract Specifications
page and will not result in a reduction to any Income Base.
2. Guaranteed Maximum Monthly GWB Charge Rate: We will deduct a charge
on a monthly basis from an Annuitant's AAV; the charge will not
result in a reduction to any Income Base. The rate, as noted on the
Contract Specifications page, is multiplied by the Income Base for
each Annuitant at the time the charge is deducted. If the deduction
for the monthly charge occurs on the Benefit Year Anniversary, the
Income Base, prior to any eligible Automatic Annual Step-up, will
be used to determine the Monthly GWB Charge.
b) Deductions:
Additional Plan Deductions may be taken pro rata from each AAV as
directed by You subject to the Guaranteed Maximum Additional Annual
Plan Deductions Rate as shown on the Contract Specifications page
and will not result in a reduction to any Income Base.
We will review the current Charges, Expenses and Deductions no more
frequently than once in any 12 month period and any change will be subject
to the Maximum Charges & Expenses and Deductions shown on the Contract
Specifications page. We will provide Notice of any change to the current
Charges & Expenses and Deductions at least 30 days prior to the effective
date of the change.
AN-701 7
2.14 At least once during each Contract Year, We will provide You with a report
of the value of the COAV.
ARTICLE 3 - ANNUITY BENEFITS
3.01 You may establish a Guaranteed Withdrawal Benefit (GWB) or an annuity
benefit for any Annuitant under the terms of Article 4 or Article 8
respectively.
3.02 We will issue an individual certificate to each Annuitant as required.
3.03 No benefit may be assigned or attached, except those benefits assigned or
attached by a Qualified Domestic Relations Order pursuant to the
Retirement Equity Act of 1984, as may be amended, or pursuant to the
Federal Tax Levy under section 6331 of the Code.
3.04 If You or We receive proof that an Annuitant, or Secondary Life, receiving
payments under this Contract is legally or mentally incompetent, the
payments may be made to any other person deemed a legal representative by
a court of competent jurisdiction; as mandated by the court or required by
regulation.
3.05 We will require satisfactory proof of the Annuitant's Age and the Age of
any Secondary Life. If it is determined that the Age has been misstated,
payments will be adjusted. Any underpayments already made will be made up
immediately and any overpayments already made will be charged against the
payments falling due after the adjustment.
3.06 We may require at any time proof that any payee under this Contract is
living when payment is contingent upon survival of such payee.
3.07 Due proof of death will be either the certificate of death, a copy of the
certified statement of death from the attending physician, a copy of a
certified decree of a court of competent jurisdiction as to the finding of
death, or any other proof satisfactory to Us.
ARTICLE 4 - GUARANTEED WITHDRAWAL BENEFIT (GWB)
This article provides that the Contract Owner may withdraw on behalf of an
Annuitant, each Benefit Year, an amount up to the Guaranteed Annual Income
("GAI"), for the lifetime(s) of the Measuring Life(s), if certain conditions are
met as described.
4.01 ADDITIONAL DEPOSIT RESTRICTION
If an Annuitant Account Value (AAV) is reduced to $0 after the Benefit
Election Date, then no additional Deposits will be accepted.
4.02 ALLOCATION RESTRICTION
While this Contract is in effect, the Separate Account available for
allocation may be limited if any Allocation Amendment is attached to this
Contract.
4.03 DEFINITIONS
BENEFIT ELECTION DATE is the date You have established with Us to begin
GAI Withdrawals on behalf of an Annuitant. Once a Benefit Election Date
has been established it cannot be changed. A Benefit Election Date cannot
be established prior to an Annuitant reaching the Minimum Annuitant Age on
Benefit Election Date as noted on the Contact Specifications page.
AN-701 8
BENEFIT YEAR is applicable only while the GWB Provision is in effect. It
means each 12 month period starting with the GWB Effective Date and each
12 month period thereafter. The Benefit Year Anniversary is the same day
each year as the GWB Effective Date. If in any calendar year, such
calendar day is not a Valuation Date, any event set to occur on the
Benefit Year Anniversary shall occur on the next Valuation Date.
CONFORMING WITHDRAWALS are all Withdrawals on behalf of an Annuitant after
the Benefit Election Date for which the cumulative amount withdrawn from
an AAV in that Benefit Year for an Annuitant is equal to or less than the
GAI. All other Withdrawals will be treated as Excess Withdrawals.
EXCESS WITHDRAWALS are all Withdrawals for which the cumulative amount
withdrawn from an AAV after the Benefit Election Date in that Benefit Year
exceeds the GAI. Prior to the Benefit Election Date, all Withdrawals are
Excess Withdrawals.
GWB EFFECTIVE DATE is the date of the first Deposit by the Contract Owner
into an AAV for each Annuitant.
MEASURING LIFE is a natural person used to determine the benefits under
the GWB. Measuring Life includes any Annuitant and Secondary Life.
MEASURING LIFE OPTION indicates how many natural persons are used to
determine the benefit on behalf of an Annuitant under the GWB. Under the
Single Measuring Life Option, an Annuitant is used to determine the
benefits. Under the Joint Measuring Life Option, an Annuitant and the
Secondary Life are used to determine the benefits. An Annuitant
establishes the Measuring Life Option on the Benefit Election Date and,
once established, the Measuring Life Option may not be changed.
PARTIAL YEAR ADJUSTMENT If an Annuitant's Benefit Election Date does not
coincide with an Annuitant's Benefit Year Anniversary, the first payment
of the Initial GAI will be adjusted as stipulated in Article 4.05.
REQUIRED MINIMUM DISTRIBUTION (RMD) while the GWB is in effect means
systematic monthly or quarterly installments withdrawn via the Company's
automatic withdrawal service of the amount needed to satisfy the Required
Minimum Distribution as determined by the Company and in accordance with
the IRC Section 401(a)(9), as amended from time to time. The Contract
Owner may be required to withdraw more than the GAI to satisfy RMD
requirements applicable to an Annuitant. Withdrawals taken that exceed an
Annuitant's GAI by no more than the excess amount needed to meet an
Annuitant's RMD amount will be treated as Conforming Withdrawals provided
they are only taken in accordance with the Company's automatic withdrawal
service in the applicable calendar year. Any Withdrawals taken which
exceed an Annuitant's GAI by more than the excess amount needed to meet an
Annuitant's RMD amount will be treated as Excess Withdrawals.
4.04 INCOME BASE
An Annuitant's Income Base is used to calculate the GAI and the GWB
charge. On the GWB Effective Date an Annuitant's Income Base is equal to
the AAV.
MAXIMUM INCOME BASE
The guaranteed amounts of the combined Income Bases for all Company
annuity contracts, including individual contracts or group annuity
certificates with an affiliated company, for which the Annuitant and
Secondary Life, if applicable, is a Measuring Life, is subject to the
Maximum Income Base noted on the Contract Specifications page.
AN-701 9
ADJUSTMENT TO THE INCOME BASE FOR ADDITIONAL DEPOSITS
If an additional Deposit is accepted, an Annuitant's Income Base will be
increased to equal the additional Deposit plus an Annuitant's Income Base
immediately prior to receipt of the additional Deposit.
ADJUSTMENT TO THE INCOME BASE FOR WITHDRAWALS
Upon each Excess Withdrawal, an Annuitant's Income Base will be reduced in
the same proportion that the Excess Withdrawal reduced the AAV. Upon each
Conforming Withdrawal an Annuitant's Income Base will not be reduced.
AUTOMATIC ANNUAL STEP-UP OF THE INCOME BASE
Following an Annuitant's GWB Effective Date, an Automatic Annual Step-Up
of an Annuitant's Income Base to equal the AAV may only occur on the
Valuation Date immediately prior to the Benefit Year Anniversary, if the
following condition(s) is/are satisfied:
1. the Age of the Measuring Life or Lives as of the Valuation Date, is
less than the Maximum Age for any Measuring Life applicable to an
Automatic Annual Step-Up calculation, as noted on the Contract
Specifications page; and
2. the AAV as of that Valuation Date is greater than the Income Base.
The Automatic Annual Step-Up will occur after the addition of any Deposits
made on behalf of an Annuitant and the deduction of any Withdrawal on
behalf of that Annuitant.
If the Company creates a new GAI Rate Table for new Deposits, the
calculations and provisions contained in the preceding paragraphs of
Section 4.04 (with the exception of the Maximum Income Base paragraph)
shall apply separately to each GAI Rate Table available to this Contract.
As a result, a portion of the total Income Base will be aligned with each
GAI Rate Table as described in the Weighted Average GAI Rate (WAGAI Rate)
provision described below.
4.05 GUARANTEED ANNUAL INCOME (GAI) AMOUNT FOR AN ANNUITANT
The GAI is an amount that may be withdrawn by the Contract Owner on behalf
of an Annuitant each Benefit Year as a Conforming Withdrawal. On the later
of (a) the Annuitant's Benefit Election Date, or (b) the first Valuation
Date the Annuitant's GAI Rate is above 0%, the initial GAI Rate is set.
The initial GAI is equal to the Income Base times the GAI Rate. As long as
the GAI is not reduced to $0, then the GAI may be withdrawn during the
lifetime of any Measuring Life.
The amount of the first payment of the initial GAI, if a Partial Year
Adjustment is included, is equal to the initial GAI times the Partial Year
Adjustment. The Partial Year Adjustment is equal to (a) divided by (b);
where:
a) is equal to the number of days between the Benefit Election Date and
the Benefit Year Anniversary immediately following the Benefit Election
Date; and
b) is the total number of days in one Benefit Year.
If the Measuring Life Option is Joint, the GAI Rate will be set and reset
based upon the Age of the younger or surviving Measuring Life.
The GAI Rate is the rate used to determine the GAI. The GAI Rate may vary
according to the Measuring Life Option chosen, the date when Deposits were
made on the Annuitant's behalf into their AAV, the Age of the Measuring
Life on the date the GAI Rate is determined and the GAI Rate(s) and the
GAI Rate Table(s) in effect for this Contract. We may change the GAI Rate
Table for future Deposits. We will give You Notice of any change to the
GAI Rate Table if the rates are changed. If the GAI Rates are changed, the
GAI Rate applicable to an Annuitant's GAI on the Benefit Election Date
will be a Weighted Average GAI Rate explained below.
AN-701 10
WEIGHTED AVERAGE GAI RATE (WAGAI RATE)
If We do make a change to the GAI Rate(s) and the GAI Rate Table(s) while
Deposits are made into an AAV on behalf of an Annuitant prior to or after
the date the initial GAI is set, then a Weighted Average GAI Rate (WAGAI
Rate) will be calculated using the GAI Rate in effect at the time of each
Deposit based on the Age of the Measuring Life and the Measuring Life
Option Chosen.
The WAGAI Rate will be determined as the sum of the GAI Rates for each GAI
Rate Table for the Age of the Measuring Life and the Measuring Life Option
chosen, where the GAI Rate for each GAI Rate Table is determined as ((a)
divided by (b)) times (c); where
(a) is the portion of the Income Base calculated on the basis of
Deposits made, Step-Ups and Withdrawals on behalf of the Annuitant
during the time the GAI Rate Table is in effect;
(b) is the total Income Base;
(c) is the GAI Rate for the Age of the Measuring Life and the Measuring
Life Option chosen on the Benefit Election Date for that GAI Rate
Table.
If any portion of an AAV is withdrawn, due to either a Conforming
Withdrawal or Excess Withdrawal, the Withdrawal will be taken pro rata
from the AAV allocated to each GAI Rate Table available under this
Contract during the time the AAV had a value greater than zero ($0).
On the Valuation Date following the date of an additional Deposit, Excess
Withdrawal or an Automatic Annual Step-up, the WAGAI Rate will be
recalculated.
CHANGES TO GAI FOR AGE BASED INCREASES
After the Benefit Election Date, if a GAI Rate Table provides an age based
increase to the GAI Rate an Automatic Annual Step-Up must occur before the
GAI or WAGAI Rate is reset to reflect the higher rate used to calculate
the GAI. The GAI or WAGAI Rate will be recalculated on the Valuation Date
on which an Automatic Annual Step-Up occurred following the Annuitant's
birthday.
AAV REDUCES TO $0
Even if the AAV declines to $0 after the Benefit Election Date, as long as
the GAI is greater than $0, the GAI will continue for the lifetime(s) of
the Measuring Life(s) applicable to an Annuitant's benefit. The Contract
Owner may elect to receive the GAI on behalf of an Annuitant at any
frequency We offer, subject to minimum payment amount rules then in
effect, but no less frequently than annually. If the AAV is $0 and an
Annuitant's GWB terminates due to the death of the Measuring Life(s)
applicable to an Annuitant's benefit, no further amounts will be paid on
behalf of that Annuitant.
AN-701 11
4.06 EFFECT OF DEATH PRIOR TO THE ANNUITY COMMENCEMENT DATE
Death of the Annuitant or surviving Measuring Life will result in the
death benefit paid to the Annuitant's beneficiary upon request by the
Contract Owner and approval by the Company, and after We receive:
(a) satisfactory proof of death of the Measuring Life, as set forth
in Section 3.07;
(b) written authorization for payment; and
(c) all required claims forms, fully completed.
Payment of a death benefit will terminate any GWB payable and all other
benefits under this Contract. All death benefit payments will be subject
to the laws and regulations governing death benefits.
Notwithstanding any provision of this Contract to the contrary, no payment
of a death benefit will be allowed that does not satisfy the requirements
of Section 401(a)(9) of the Code. All such requirements are herein
incorporated by reference.
The death benefit payable on the death of the Annuitant will be
distributed to the designated beneficiary(s) as follows:
(a) the death benefit must be completely distributed within 5 years of
the Annuitant's date of death; or
(b) an election may be made within 12 month period after the
Annuitant's date of death for the designated beneficiary, to
receive the death benefit in substantially equal installments over
the life of such designated beneficiary or over a period not
extending beyond the life expectancy of such designated
beneficiary; provided that such distributions begin not later than
1 year after the Annuitant's date of death.
If the designated beneficiary is the surviving spouse of the Annuitant,
the spouse may elect to continue to participate in this contract, rather
than receive a death benefit.
If a lump sum settlement is elected, the proceeds will be mailed within
the time period required by the Securities and Exchange Commission
following approval by Us of the claim. This payment may be postponed as
permitted by the Investment Company Act of 1940, as amended.
DEATH BENEFIT PAYABLE
Upon the death of an Annuitant, prior to the Benefit Election Date or if
the Measuring Life Option is Single, an Annuitant's GWB will terminate and
the death benefit will be paid as described above. Upon the first death of
a Measuring Life if the Measuring Life Option is Joint, the GAI will
continue for the life of the surviving Measuring Life unless a death
benefit is paid as described. Upon the death of a surviving Measuring
Life, the GWB will terminate and the death benefit will be paid as
described.
A. DEATH BENEFIT PRIOR TO THE BENEFIT ELECTION DATE
Prior to the Benefit Election Date, the death benefit will be equal to
the AAV on the first Valuation Date after the death benefit is approved
by the Company for payment.
B. DEATH BENEFIT ON OR AFTER THE BENEFIT ELECTION
DATE
On or after the Benefit Election Date, the death benefit paid as a
Final Payment may be a lump sum or under a settlement option then
available.
The amount of the Final Payment paid will be equal to the AAV on the
first Valuation Date after the death benefit is approved by the Company
for payment.
AN-701 12
4.07 GENERAL
QUALIFIED DOMESTIC RELATIONS ORDER (QDRO)
If a QDRO is issued and received from the Contract Owner on behalf of any
Annuitant in Good Order, there will be a pro rata reduction in the AAV of
the Annuitant in accordance with the Contract Owner's instructions. A
withdrawal from an AAV pursuant to a QDRO will be considered an Excess
Withdrawal.
If a QDRO is issued prior to the Annuitant's Benefit Election Date, the
GWB will not be available to the alternate payee. The reduction in the AAV
will be available to the Alternate Payee as a deposit to an individual
annuity contract that We make available.
If the QDRO is issued on or after the Annuitant's Benefit Election Date, a
new AAV will be created for the alternate payee. The alternate payee will
be entitled to the same rights and benefits as the Annuitant under this
Contract if the Joint Measuring Life Option was elected and the alternate
payee was identified as a Measuring Life.
TERMINATION OF THE GWB
The entire GWB payable on behalf of any Annuitant will irrevocably
terminate if this Contract terminates. See Article 5 below for the
rollover options available to an Annuitant should this Contract terminate.
An Annuitant's GWB will also terminate upon:
1. the date both the Income Base and GAI equal $0;
2. the death of the Annuitant or Surviving Measuring Life as described in
4.06 above; or
3. the death of the Annuitant prior to the Benefit Election Date.
Upon termination of the GWB, all benefits and charges associated with an
Annuitant's benefit will terminate.
ARTICLE 5 - GUARANTEED WITHDRAWAL BENEFIT ROLLOVER PRIVILEGE
5.01 Subject to the provisions of the Plan, an Annuitant may Request a rollover
to a contract made available by the Company, subject to the following
terms and conditions:
(a) A Request for direct rollover of the entire AAV is made or
authorized by the Contract Owner.
(b) The amount to be rolled over is eligible for distribution under the
Plan.
(c) The Annuitant, whose AAV is to be rolled over applies for
participation in the Rollover Contract in accordance with the
Company's procedures then in effect.
(d) The effective date of the rollover is the Valuation Date next
following the date on which the Company receives a Request in Good
Order for a rollover.
AN-701 13
5.02 The AAV on the effective date of the rollover will be transferred to the
Rollover Contract.
If the rollover occurs after the Benefit Election Date, the Rollover
Contract will provide a GWB with a GAI amount calculated in the same
manner as the GAI amount in effect on the day of the rollover, but
otherwise may have different terms and conditions than this Contract.
ARTICLE 6 - CONTRACT DISCONTINUANCE
6.01 You may discontinue this Contract at any time by giving Us Notice. The
discontinuance date will be no more than 180 days from the date We receive
Notice. If You Request a discontinuance date that is more than 180 days
after We receive Notice, such Request will require Our approval.
6.02 We may give You written Notice that this Contract is to be discontinued
if:
a. any Plan ceases to meet the requirements of the Code sections
specified by Us for purchasers of this Contract and You do not
correct this within 30 days; or
b. You fail to furnish requested information or other documentation; or
c. We discover any misrepresentation of material information; or
d. the Contract Owner is a trust and a valid trust no longer exists.
The Notice will specify a discontinuance date at least 30 days from the
date of the Notice.
6.03 After the notification of discontinuance as referenced in section 6.01 or
6.02, additional Deposits by an Annuitant to an AAV and Withdrawal
Requests for any Annuitant from an AAV will be accepted by Us until the
discontinuance date.
6.04 As of the discontinuance date, We will deduct any outstanding charges.
6.05 The balance of the Contract as of the discontinuance date, reduced by any
charges outlined in this Contract, will be paid in a lump sum. If,
subsequent to such lump sum payment, We are ordered by any court of
competent jurisdiction to refund all or any portion of a loss to any
Annuitant, You will reimburse Us for such amounts.
6.06 All payments will be made to a Plan trustee or as directed by You. We will
rely on Your Notice to transfer assets to a specified party. We do not
need to verify that such specified party has the right to receive any
payments.
6.07 This Contract will terminate on the date the last payment is made under
the provisions of Article 4 and Article 8.
6.08 Upon termination of this Contract, all liability of the Company under this
Contract terminates and the Company will pay the Account Value to the Plan
or provide a Rollover Contract as described in Article 5.
AN-701 14
ARTICLE 7 - GENERAL PROVISIONS
7.01 This Contract may be used to fund all or part of a Plan's obligations. The
provisions of a Plan control the operation of the Plan and the provisions
of this Contract control the operation of this Contract. We are not a
party to any Plan. Plan is mentioned merely for reference purposes. This
Contract must be held by the Contract Owner for the exclusive benefit of
the Annuitants and their beneficiaries.
7.02 You and We are parties to this Contract. However, when a certificate is
issued to an Annuitant We will thereafter be responsible for providing the
benefits provided by said certificate.
7.03 Except as allowed by a Plan or applicable law, this Contract may not be
transferred, sold, assigned, discounted or pledged, either as collateral
for a loan or as security for the performance of an obligation or for any
other purpose.
7.04 We may amend this Contract to maintain this Contract under applicable
local, state, or federal laws or regulations, such as the Internal Revenue
Code, Internal Revenue Service regulations, or published revenue rulings.
7.05 You and We may also mutually agree to amend this Contract. The consent of
any Annuitant or beneficiary is not required. No amendment will adversely
affect the terms of any certificate that has already been issued to an
Annuitant.
7.06 Any change to this Contract must be in writing and signed by an authorized
Officer of Ours. We will give written Notice of any change at least 60
days prior to its effective date.
7.07 This Contract is subject to the incontestability laws of the state in
which it is delivered.
7.08 This document, any amendments, endorsements and riders, together with any
application signed by You constitutes the entire Contract between You and
Us.
7.09 We are not liable to provide sufficient assets to provide a Plan's
benefits.
7.10 No suit may be brought in relationship to this Contract unless it is
brought within three years after the date on which this suit could have
first been brought. If this limitation is prohibited by the laws of the
state by which this Contract is governed, this limitation shall be deemed
to be amended to agree with the minimum period of limitation permitted by
those laws.
7.11 Any Notice required by this Contract must be delivered to Us at Our
Service Office. Any Notice to You will be delivered at the address shown
on Our records.
7.12 We are not a trustee for assets held in this Contract.
7.13 We reserve the right to recover assets previously deposited into the
Contract due to an error (including any gain and less any loss while such
assets were invested in the Contract) and agree to credit the Contract any
amount not previously deposited into the Contract due to an error
(including any gain and less any loss while such assets were not invested
in the Contract) to reflect the correct account balance as though the
error had not occurred. We reserve the right to utilize legal remedies to
pursue losses incurred as a result of an error.
AN-701 15
7.14 We do not guarantee that Our telephone and/or electronic devices will
always be available for You to submit transactions to Us for processing.
If You are experiencing problems, You should make Your transaction Request
in writing to Our Service Office.
7.15 Our failure to perform or insist upon the strict performance of any
provision or condition of the Contract will not:
1. constitute a waiver of Our rights to perform or require
performance of such provision or condition; or
2. stop Us from exercising any other rights We may have in such
provision, condition, or otherwise in this Contract.
7.16 If any provision of this Contract is determined to be invalid, the
remainder of the provisions shall remain in full force and effect.
7.17 Any questions concerning this Contract should be directed to Us at Our
Service Office.
7.18 We reserve the right to implement and administer redemption fees and
trading restrictions imposed by an investment manager of the fund or an
underlying investment of the fund.
ARTICLE 8 - ANNUITY PAYMENT OPTIONS AND ANNUITY PURCHASE RATES
8.01 AGE for the purposes of calculating benefits payable under this Article
will be defined as the Age of the Annuitant on the Annuitant's nearest
birthday.
8.02 All annuity benefits are guaranteed annuities payable in fixed dollar
amounts. The amount needed to establish the annuity benefit will be
withdrawn from the AAV on the Annuity Commencement Date as directed by
You. The AAV will then be terminated. Such annuity benefit will be
established using the rates in Attachment A. These annuity payment options
are available:
a. Life Annuity Only - Monthly payments will be made only during the
life of the Annuitant.
b. Life Annuity, Guaranteed Period - Monthly payments will be made
during the life of the Annuitant. In the event of an Annuitant's
death prior to the period shown in the attached table, as selected,
payments will continue to the beneficiary for the remainder of that
period.
c. Joint and Survivor Annuity - Monthly payments will be made during the
life of an Annuitant with a survivor annuity for the life of a
Secondary Life. Upon the death of the Annuitant, one-half,
two-thirds, or the full amount of the annuity payments will continue
to the Secondary Life if living, and will terminate upon the death of
such Secondary Life. We may require satisfactory proof of Annuitant's
and Secondary Life's death.
d. Any other option to which We agree.
The form of annuity may not be changed after the Annuity Commencement
Date.
8.03 The annuity payment options tables, as found in Attachment A, illustrate
the annuity amounts and the Age adjustments which will be used to
determine the monthly annuity payment option. The tables show the dollar
amount of the guaranteed monthly annuity payout which can be established
with each $1,000.
AN-701 16
8.04 The minimum monthly annuity payment available is $100. We reserve the
right to change the frequency of the annuity payments from twelve times a
year to four times a year, two times a year, or once a year so that the
payments will be at least $100 each.
8.05 We will issue to each Annuitant a certificate or supplemental contract
which sets forth the amount and terms of the annuity benefit.
ARTICLE 9 - BENEFICIARY
9.01 The Annuitant may name a beneficiary at the time the annuity is
established. If a married Annuitant does not name a beneficiary, the
Annuitant's Spouse will be treated as the named beneficiary under this
Contract.
The Annuitant may change the beneficiary at any time without the consent
of a previous beneficiary unless the previous designation provides
otherwise. However, if the Annuitant is married, the Annuitant's Spouse
must agree in writing to another person being named beneficiary. The
change will be effective upon receipt of the Notice. A beneficiary may not
name a beneficiary after the death of an Annuitant.
9.02 If an Annuitant dies on or after the Annuity Commencement Date, the
remaining portion of the Annuitant's interest will continue to be
distributed under the annuity payment option chosen.
If an Annuitant dies and there is no named beneficiary living at the time
of the Annuitant's death, the Contract Owner will pay an Annuitant's
estate on the Annuitant's behalf any guaranteed payments due in one lump
sum.
If a named beneficiary is receiving guaranteed payments and dies, the
Contract Owner on behalf of an Annuitant will provide the remaining
payments to an Annuitant's contingent beneficiary if living. Otherwise the
Contract Owner will provide payments on behalf of an Annuitant to the
beneficiary's estate.
Unless otherwise provided in the beneficiary designation, if any
beneficiary dies before an Annuitant, that beneficiary's interest will
pass to any other beneficiaries according to their respective interest.
AN-701 17
ATTACHMENT A
SINGLE LIFE ANNUITY TABLE
PERIOD CERTAIN
DOLLAR AMOUNT OF FIRST MONTHLY PAYMENT WHICH IS
PURCHASED WITH EACH $1,000 APPLIED
Annuitant Age None 10 Years 20 Years
55 $2.62 $2.61 $2.58
56 2.68 2.67 2.64
57 2.74 2.73 2.70
58 2.81 2.80 2.76
59 2.88 2.87 2.82
60 2.96 2.94 2.89
61 3.04 3.02 2.95
62 3.12 3.10 3.02
63 3.21 3.19 3.10
64 3.31 3.28 3.17
65 3.41 3.38 3.25
66 3.52 3.48 3.33
67 3.63 3.59 3.41
68 3.75 3.71 3.50
69 3.89 3.83 3.58
70 4.03 3.96 3.67
Annuity Mortality table as referenced on the Contract Specifications page.
Annuity purchase rates for any Age(s) not shown, determined on the same basis,
will be furnished by Us upon Request.
AN-701 18
JOINT AND SURVIVOR ANNUITY TABLE
DOLLAR AMOUNT OF FIRST MONTHLY PAYMENT WHICH IS
PURCHASED WITH EACH $1,000 APPLIED
* Younger Measuring 100% 66.2/3% 50%
Life's Age Joint & Survivor Joint & Survivor Joint & Survivor
55 $2.32 $2.36 $2.46
56 2.37 2.41 2.52
57 2.42 2.47 2.58
58 2.47 2.52 2.64
59 2.52 2.59 2.71
60 2.58 2.65 2.78
61 2.64 2.72 2.85
62 2.70 2.79 2.93
63 2.76 2.86 3.02
64 2.83 2.94 3.11
65 2.91 3.03 3.20
66 2.99 3.12 3.30
67 3.07 3.22 3.41
68 3.16 3.32 3.53
69 3.26 3.43 3.65
70 3.36 3.55 3.79
*The Younger Measuring Life's Age is assumed to be the same as the Annuitant's
Age.
Annuity purchase rates for any Age(s) not shown, determined on the same basis,
will be furnished by Us upon Request.
Annuity purchase rates for any agreed upon annuity form not shown in this
Article 9 will be determined on the same basis and furnished by Us upon Request.
AN-701 19
(This Page Left Blank Intentionally)
AN-701 20
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(the "Company")
HOME OFFICE: 1300 South Clinton Street
Fort Wayne, Indiana 46802-3506
1-800-942-5500
A STOCK COMPANY
If You have any questions concerning
this Contract, please
contact your Lincoln National Life Insurance Company
representative or the Home Office.
GROUP ANNUITY CONTRACT
ALLOCATED GROUP VARIABLE DEFERRED ANNUITY CONTRACT
SEPARATE ACCOUNT
NONPARTICIPATING
AN-701
EX-99.B(9)
3
a2214070zex-99_b9.txt
EX-99.B(9)
Exhibit 9
[LINCOLN FINANCIAL GROUP(R) LOGO]
LAW DEPARTMENT
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
1300 SOUTH CLINTON STREET
FORT WAYNE, IN 46802
MARY JO ARDINGTON
ASSOCIATE GENERAL COUNSEL
Phone: 260-455-3917
MARYJO.ARDINGTON@LFG.COM
May 28, 2013
VIA EDGAR
The Lincoln National Life Insurance Company
1300 S. Clinton Street
Fort Wayne, IN 46802
Re: Lincoln National Variable Annuity Account L
Lincoln SECURED RETIREMENT INCOME(SM) Version 4
(File Nos. 811-07645; 333-187071)
Ladies and Gentlemen:
I have made such examination of law and have examined such records and documents
as I have deemed necessary to render the opinion expressed below.
I am of the opinion that upon acceptance by Lincoln National Variable Annuity
Account L (the "Account"), a segregated account of The Lincoln National Life
Insurance Company ("Lincoln Life"), of contributions from a person pursuant to
an annuity contract issued in accordance with the prospectus contained in the
registration statement on Form N-4, and upon compliance with applicable law,
such person will have a legally issued interest in his or her individual account
with the Account, and the securities issued will represent binding obligations
of Lincoln Life.
I consent to the filing of this Opinion as an exhibit to the Account's
Pre-Effective Amendment to the Registration Statement on Form N-4.
Sincerely,
/s/ Mary Jo Ardington
Mary Jo Ardington
Associate General Counsel
The Lincoln National Life Insurance Company
EX-99.B(10)(A)
4
a2214070zex-99_b10a.txt
EX-99.B(10)(A)
Exhibit 10(a)
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
We consent to the reference to our firm under the caption "Independent
Registered Public Accounting Firm" in Pre-Effective Amendment No. 1 to the 1933
Act Registration Statement (Form N-4 No. 333-187071) and Amendment No. 41 to the
1940 Act Registration Statement (Form N-4 No. 811-07645) pertaining to Lincoln
National Variable Annuity Account L, and to the use therein of our reports dated
(a) April 2, 2013, with respect to the consolidated financial statements of The
Lincoln National Life Insurance Company and (b) April 12, 2013, with respect to
the financial statements of Lincoln National Variable Annuity Account L for the
registration of interests in a separate account under individual flexible
payment deferred variable annuity contracts.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
May 24, 2013
EX-99.B(10)(B)
5
a2214070zex-99_b10b.txt
E&Y CONSENT
POWER OF ATTORNEY
We, the undersigned directors and/or officers of The Lincoln National Life
Insurance Company, hereby constitute and appoint Delson R. Campbell, Scott C.
Durocher, Kimberly A. Genovese, Daniel P. Herr, Donald E. Keller, Brian A.
Kroll, John L. Reizian, Lawrence A. Samplatsky, Stephen R. Turer and John D.
Weber, individually, our true and lawful attorneys-in-fact, with full power to
each of them to sign for us, in our names and in the capacities indicated below,
any Registration Statements and any and all amendments to Registration
Statements; including exhibits, or other documents filed on Forms N-6 or N-4 or
any successors or amendments to these Forms, filed with the Securities and
Exchange Commission, under the Securities Act of 1933 and/or Securities Act of
1940, on behalf of the Company in its own name or in the name of one of its
Separate Accounts, hereby ratifying and confirming our signatures as they may be
signed by any of our attorneys-in-fact to any such amendments to said
Registration Statements as follows:
VARIABLE LIFE INSURANCE SEPARATE ACCOUNTS:
Lincoln Life Flexible Premium Variable Life Account D: File No. 033-00417;
811-04592
Lincoln Life Flexible Premium Variable Life Account F: File No. 033-14692,
333-40745; 811-05164
Lincoln Life Flexible Premium Variable Life Account G: File No. 033-22740;
811-05585
Lincoln Life Flexible Premium Variable Life Account J: File No. 033-76434;
811-08410
Lincoln Life Flexible Premium Variable Life Account K: File No. 033-76432;
811-08412
Lincoln Life Flexible Premium Variable Life Account M: File No. 333-82663,
333-84360, 333-42479, 333-54338, 333-84370, 333-63940, 333-111137, 333-111128,
333-118478, 333-118477, 333-145090, 333-139960, 333-146507; 333-181796;
811-08557
Lincoln Life Flexible Premium Variable Life Account R: File No. 333-43107,
333-33782, 333-90432, 333-115882, 333-125792, 333-125991, 333-145235,
333-145239; 811-08579
Lincoln Life Flexible Premium Variable Life Account S: File No. 333-72875,
333-104719, 333-125790; 811-09241
Lincoln Life Flexible Premium Variable Life Account Y: File No. 333-81884,
333-81882, 333-90438, 333-118482, 333-118481, 333-115883; 333-156123; 811-21028
Lincoln Life Flexible Premium Variable Life Account JF-A: File No. 333-144268,
333-144269, 333-144271, 333-144272; 333-144273, 333-144274, 333-144275;
811-04160
Lincoln Life Flexible Premium Variable Life Account JF-C: File No. 333-144270,
333-144264; 811-08230
VARIABLE ANNUITY SEPARATE ACCOUNTS:
Lincoln National Variable Annuity Fund A: File No. 002-26342, 002-25618;
811-01434
Lincoln National Variable Annuity Account C: 033-25990, 333-50817, 333-68842,
333-112927; 333-179107; 811-03214
Lincoln National Variable Annuity Account E: 033-26032; 811-04882
Lincoln National Variable Annuity Account H: 033-27783, 333-18419, 333-35780,
333-35784, 333-61592, 333-63505, 333-135219; 333-170695; 333-175888; 333-181615;
811-05721
Lincoln National Variable Annuity Account L: 333-04999; 333-187072; 333-187069;
333-187070; 333-187071; 811-07645
Lincoln Life Variable Annuity Account N: 333-40937, 333-36316, 333-36304,
333-61554, 333-135039, 333-138190, 333-149434; 333-170529; 333-170897;
333-172328; 333-174367; 333-181612; 333-186894; 811-08517
Lincoln Life Variable Annuity Account Q: 333-43373; 811-08569
Lincoln Life Variable Annuity Account T: 333-32402, 333-73532; 811-09855
Lincoln Life Variable Annuity Account W: 333-52572, 333-52568, 333-64208;
811-10231
Lincoln Life Variable Annuity Account JL-A: File No. 333-141888; 811-02188
Lincoln Life Variable Annuity Account JF-I: File No. 333-144276, 333-144277;
811-09779 Lincoln Life Variable Annuity Account JF-II: File No. 333-144278;
811-08374
Except as otherwise specifically provided herein, the power-of-attorney granted
herein shall not in any manner revoke in whole or in part any power-of-attorney
that each person whose signature appears below has previously executed. This
power-of-attorney shall not be revoked by any subsequent power-of-attorney each
person whose signature appears below may execute, unless such subsequent power
specifically refers to this power-of-attorney or specifically states that the
instrument is intended to revoke all prior general powers-of-attorney or all
prior powers-of-attorney.
This Power-of-Attorney may be executed in separate counterparts each of which
when executed and delivered shall be an original; but all such counterparts
shall together constitute one and the same instrument. Each counterpart may
consist of a number of copies, each signed by less than all, but together signed
by all, of the undersigned.
SIGNATURE TITLE
--------- -----
/s/ Dennis R. Glass
------------------------------------ President and Director
Dennis R. Glass
/s/ Charles C. Cornelio
------------------------------------ Executive Vice President; Chief Administrative Officer
Charles C. Cornelio and Director
/s/ Ellen G. Cooper
------------------------------------ Executive Vice President, Chief Investment Officer
Ellen G. Cooper and Director
/s/ Randal J. Freitag
------------------------------------ Executive Vice President; Chief Financial Officer and Director
Randal J. Freitag
/s/ Mark E. Konen
------------------------------------ Executive Vice President and Director
Mark E. Konen
/s/ Keith J. Ryan
------------------------------------ Vice President and Director
Keith J. Ryan
We, Delson R. Campbell, Scott C. Durocher, Kimberly A. Genovese, Daniel P. Herr,
Donald E. Keller, Brian A. Kroll, John L. Reizian, Lawrence A. Samplatsky,
Stephen R. Turer and John D. Weber, have read the foregoing Power of Attorney.
We are the person(s) identified therein as agent(s) for the principal named
therein. We acknowledge our legal responsibilities.
/s/Delson R. Campbell
------------------------------------
Delson R. Campbell
/s/ Scott C. Durocher
------------------------------------
Scott C. Durocher
/s/ Kimberly A. Genovese
------------------------------------
Kimberly A. Genovese
/s/ Daniel P. Herr
-------------------------------------
Daniel P. Herr
/s/ Donald E. Keller
----------------------------------
Donald E. Keller
/s/ Brian a. Kroll
------------------------------------
Brian A. Kroll
/s/ John L. Reizian
------------------------------------
John L. Reizian
/s/ Lawrence A. Samplatsky
------------------------------------
Lawrence A. Samplatsky
/s/ Stephen R. Turer
------------------------------------
Stephen R. Turer
/s/ John D. Weber
------------------------------------
John D. Weber
Version dated: March 2013
CORRESP
6
filename6.txt
[LINCOLN FINANCIAL GROUP(R) LOGO]
VIA EDGAR
May 28, 2013
Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549
Re: Lincoln National Variable Annuity Account L ("Registrant")
and The Lincoln National Life Insurance Company ("Depositor")
File No. 333-187071; Pre-Effective Amendment No. 1 ("Amendment")
Ladies and Gentlemen:
The Lincoln National Life Insurance Company filed the above-referenced Amendment
to the Registration Statement on May 28, 2013. Pursuant to Rule 461 under the
Securities Act of 1933, The Lincoln National Life Insurance Company, in its
capacity as Depositor for the Registrant, and Lincoln Financial Distributors,
Inc., in its capacity as Principal Underwriter, respectfully request that the
effective date of the Amendment be accelerated and that the amended Registration
Statement be declared effective on June 1, 2013, or as soon as possible
thereafter.
Please contact Mary Jo Ardington, Esquire at 260-455-3917 with any questions or
comments regarding this Request.
Sincerely,
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY LINCOLN FINANCIAL DISTRIBUTORS, INC.
(Depositor) (Principal Underwriter)
/s/ Stephen R. Turer /s/ Thomas F. Murray
By: Stephen R. Turer By: Thomas F. Murray
Vice President Vice President
The Lincoln National Life Insurance Company Lincoln Financial Distributors, Inc.
COVER
7
filename7.txt
[LINCOLN FINANCIAL GROUP(R) LOGO]
LAW DEPARTMENT
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
1300 SOUTH CLINTON STREET
FORT WAYNE, INDIANA 46802
MARY JO ARDINGTON
ASSOCIATE GENERAL COUNSEL
Phone: 260-455-3917
MARYJO. ARDINGTON@LFG.COM
VIA EDGAR
May 28, 2013
Securities and Exchange Commission
100 F Street NE
Washington, D.C. 20549
Re: PRE-EFFECTIVE AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT
ON FORM N-4 FOR LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
LINCOLN SECURED RETIREMENT INCOME(SM) VARIABLE ANNUITY VERSION 4
FILE NOS. 811-07645; 333-187071
Commissioners:
On behalf of The Lincoln National Life Insurance Company and Lincoln National
Variable Annuity Account L ("the Account"), transmitted herewith for filing is
Pre-Effective Amendment no. 1 (the "Amendment") to the Registration Statement on
Form N-4 (the "Registration Statement") under the Securities Act of 1933, as
amended, for certain variable annuity contracts that the company proposes to
issue through the Account. The Amendment is marked to show changes from the
initial Registration Statement (filed March 6, 2013).
The Amendment reflects changes made in response to SEC Staff comments and
non-material changes made to update the Registration Statement. A request for
the acceleration of the effective date of this Amendment is included in this
filing.
Any questions or comments regarding this filing should be directed to me at the
number listed above.
Sincerely,
/s/ Mary Jo Ardington
Mary Jo Ardington
Associate General Counsel