485BPOS 1 a17-4599_1485bpos.htm POST-EFFECTIVE AMENDMENT FILED PURSUANT TO SECURITIES ACT RULE 485(B)
As filed with the Securities and Exchange Commission on April 26, 2017
1933 Act Registration No. 333-04999
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
POST-EFFECTIVE AMENDMENT NO. 29
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 93
Lincoln National Variable Annuity Account L
(Exact Name of Registrant)
Group Variable Annuity I, II & III
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
Kirkland L. Hicks, Esquire
The Lincoln National Life Insurance Company
150 North Radnor Chester Road
Radnor, PA 19087
(Name and Address of Agent for Service)
Copy to:
Mary Jo Ardington, Esquire
The Lincoln National Life Insurance Company
350 Church Street
Hartford, Connecticut 06103
Approximate Date of Proposed Public Offering: Continuous
It is proposed that this filing will become effective:
/ / immediately upon filing pursuant to paragraph (b) of Rule 485
/x/ on May 1, 2017, pursuant to paragraph (b) of Rule 485
/ / 60 days after filing pursuant to paragraph (a)(1) of Rule 485
/ / on __________, pursuant to paragraph (a)(1) of Rule 485
Title of Securities being registered:
Interests in a separate account under group flexible
payment deferred variable annuity contracts.

Lincoln National Variable Annuity Account L
Group Variable Annuity Contracts I, II, & III  
May 1, 2017
Home Office:
The Lincoln National Life Insurance Company
1300 South Clinton Street
Fort Wayne, IN 46802
Servicing Office:
The Lincoln National Life Insurance Company
PO Box 2340
Fort Wayne, IN 46801-2340
1-800-341-0441
www.LincolnFinancial.com
 
 
This prospectus describes a group annuity contract and an individual certificate that is issued by The Lincoln National Life Insurance Company (Lincoln Life or Company). This prospectus is for use with qualified retirement plans. Generally, you do not pay federal income tax on the contract's growth until it is paid out. Qualified retirement plans already provide for tax deferral. Therefore, there should be reasons other than tax deferral for acquiring the contract within a qualified plan. The contract is designed to accumulate Account Value , and as permitted by the plan, to provide retirement income 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.
If the Contractowner gives certain rights to Plan Participants, we issue active life certificates to them. Participants choose whether Account Value accumulates on a variable or a fixed (guaranteed) basis or both. If a Participant allocates contributions to the fixed account, we guarantee principal and a minimum interest rate.
All contributions for benefits on a variable basis will be placed in Lincoln National Variable Annuity Account L (VAA). The VAA is a segregated investment account of Lincoln Life. If a Participant puts all or some contributions into one or more of the contract's Subaccounts, the Participant takes all the investment risk on the Account Value and the retirement income. If the selected Subaccounts make money, Account Value goes up; if they lose money, it goes down. How much it goes up or down depends on the performance of the selected Subaccounts. We do not guarantee how any of the Subaccounts or their funds will perform. Also, neither the U.S. Government nor any federal agency insures or guarantees the investment in the contract.
The available Subaccounts, and the funds in which they invest, are listed below. The Contractowner decides which of these Subaccounts are available under the contract for Participant allocations. For more information about the investment objectives, policies and risk of the funds please refer to the Prospectuses for the funds.
AllianceBernstein Variable Products Series Fund:
AB VPS Global Thematic Growth Portfolio
AB VPS Growth Portfolio
American Century Variable Portfolios, Inc.:
Balanced Fund
American Funds Insurance Series®:
American Funds Global Growth Fund
American Funds Growth Fund
American Funds Growth-Income Fund
American Funds International Fund
BlackRock Variable Series Funds, Inc.:
BlackRock Global Allocation V.I. Fund
Delaware VIP® Trust:
Delaware VIP® Diversified Income Series
Delaware VIP® High Yield Series
Delaware VIP® REIT Series
Delaware VIP® Small Cap Value Series
Delaware VIP® Smid Cap Core Series
(formerly Delaware VIP® Smid Cap Growth Series)
Deutsche Variable Series II:
Deutsche Alternative Asset Allocation VIP Portfolio
Fidelity® Variable Insurance Products:
Fidelity® VIP Asset Manager Portfolio
Fidelity® VIP Contrafund® Portfolio
Fidelity® VIP Growth Portfolio
Janus Aspen Series:
Janus Aspen Global Research Portfolio
Lincoln Variable Insurance Products Trust:
LVIP Baron Growth Opportunities Fund
LVIP BlackRock Inflation Protected Bond Fund
LVIP BlackRock Scientific Allocation Fund
(formerly LVIP Delaware Foundation® Moderate Allocation Fund)
LVIP Blended Large Cap Growth Managed Volatility Fund
LVIP Blended Mid Cap Managed Volatility Fund
LVIP Clarion Global Real Estate Fund
LVIP Delaware Bond Fund
LVIP Delaware Diversified Floating Rate Fund
LVIP Delaware Social Awareness Fund
LVIP Delaware Wealth Builder Fund
(formerly LVIP Delaware Foundation® Aggressive Allocation Fund)
LVIP Dimensional U.S. Core Equity 1 Fund
LVIP Franklin Templeton Global Equity Managed Volatility Fund
LVIP Global Conservative Allocation Managed Risk Fund
LVIP Global Growth Allocation Managed Risk Fund
LVIP Global Income Fund
 
 
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LVIP Global Moderate Allocation Managed Risk Fund
LVIP JPMorgan Retirement Income Fund
(formerly LVIP Delaware Foundation® Conservative Allocation Fund)
LVIP JPMorgan Select Mid Cap Value Managed Volatility Fund
LVIP Managed Risk Profile 2010 Fund
LVIP Managed Risk Profile 2020 Fund
LVIP Managed Risk Profile 2030 Fund
LVIP Managed Risk Profile 2040 Fund
LVIP Managed Risk Profile 2050 Fund
LVIP Mondrian International Value Fund
LVIP SSGA Bond Index Fund
LVIP SSGA Emerging Markets 100 Fund
LVIP SSGA Global Tactical Allocation Managed Volatility Fund
LVIP SSGA International Index Fund
LVIP SSGA International Managed Volatility Fund
LVIP SSGA S&P 500 Index Fund*
LVIP SSGA Small-Cap Index Fund
LVIP T. Rowe Price Structured Mid-Cap Growth Fund
Neuberger Berman Advisers Management Trust:
Large Cap Value Portfolio
T. Rowe Price International Series, Inc.
T. Rowe Price International Stock Portfolio
* The Index to which this fund is managed to is a product of S&P Dow Jones Indices LLC (“SPDJI”) and has been licensed for use by one or more of the portfolio’s service providers (licensee). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (S&P); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by the licensee. S&P®, S&P GSCI® and the Index are trademarks of S&P and have been licensed for use by SPDJI and its affiliates and sublicensed for certain purposes by the licensee. The Index is not owned, endorsed, or approved by or associated with any additional third party. The licensee’s products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, or their third party licensors, and none of such parties or their respective affiliates or third party licensors make any representation regarding the advisability of investing in such products, nor do they have any liability for any errors, omissions, or interruptions of the Index.
This prospectus gives you information about the contracts and certificates that contractowners and participants should know before investing. You should also review the prospectuses for the funds that accompany this prospectus, and keep all prospectuses for future reference.
Neither the SEC nor any state securities commission has approved this contract or determined that this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.
More information about the contracts is in the current Statement of Additional Information (SAI), dated the same date as this prospectus. The SAI terms are made part of this prospectus, and for a free copy of the SAI, write: The Lincoln National Life Insurance Company, P. O. Box 2340, Fort Wayne, IN 46808 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.
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Table of Contents
Item Page
Special Terms 4
Expense Tables 5
Summary of Common Questions 6
The Lincoln National Life Insurance Company 8
Fixed Side of the Contract 9
Variable Annuity Account (VAA) 9
Investments of the VAA 9
Charges and Other Deductions 13
The Contracts 17
Purchase of the Contracts 17
Transfers On or Before the Annuity Commencement Date 19
Death Benefit Before the Annuity Commencement Date 21
Withdrawals 21
Annuity Payouts 24
Distribution of the Contracts 25
Federal Tax Matters 26
Additional Information 29
Voting Rights 29
Return Privilege 30
State Regulation 30
Records and Reports 30
Cyber Security 30
Other Information 30
Legal Proceedings 30
Contents of the Statement of Additional Information (SAI) for Lincoln National Variable Annuity Account L 33
Appendix A—Condensed Financial Information A-1
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Special Terms
In this prospectus, the following terms have the indicated meanings:
Account or Variable Annuity Account (VAA)—The segregated investment account, Account L, into which we set aside and invest the assets for the variable side of the contract offered in this prospectus.
Account Value—At a given time before the Annuity Commencement Date, the value of all Accumulation Units for a contract plus the value of the fixed side of the contract.
Accumulation Unit—A measure used to calculate Contract Value for the variable side of the contract before the Annuity Commencement Date.
Annuitant—The person upon whose life the annuity benefit payments are based, and upon whose death a Death Benefit may be paid.
Annuity Commencement Date—The Valuation Date when funds are withdrawn or converted into Annuity Units or fixed dollar payout for payment of retirement income benefits under the Annuity Payout option you select .
Annuity Payout—A regularly scheduled payment (under any of the available annuity options) that occurs after the Annuity Commencement Date. Payments may be variable or fixed, or a combination of both.
Annuity Unit—A measure used to calculate the amount of Annuity Payouts for the variable side of the contract after the Annuity Commencement Date.
Beneficiary—The person or entity designated by the Participant to receive any Death Benefit paid if the Participant dies before the Annuity Commencement Date.
Contractowner—The party named on the group annuity contract (for example, an employer, a retirement plan trust, an association, or other entity allowed by law).
Contributions—Amounts paid into the contract.
Death Benefit—Before the Annuity Commencement Date, the amount payable to your designated Beneficiary if a Participant dies.
FINRA—Financial Industry Regulatory Authority.
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.
Lincoln Life (we, us, our, Company)—The Lincoln National Life Insurance Company.
Participant—An employee or other person affiliated with the Contractowner on whose behalf we maintain an account under the contract.
Participant Year—A 12-month period starting with the date we receive the first contribution on behalf of a Participant and on each anniversary after that.
Plan—The retirement program that an employer offers to its employees for which a contract is used to accumulate funds.
SEC—Securities and Exchange Commission.
Subaccount—The portion of the VAA that reflects investments in Accumulation and Annuity Units of a class of a particular fund available under the contracts. There is a separate Subaccount which corresponds to each class of a fund.
Valuation Date—Each day the New York Stock Exchange (NYSE) is open for trading.
Valuation Period—The period starting at the close of trading (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.
 
 
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Expense Tables
The following tables describe the fees and expenses that you will pay when buying, owning, and surrendering the contract.
The following table describes the fees and expenses that Contractowners or Participants will pay at the time that you buy the contract, surrender the contract, or transfer contract value between investment options and/or the fixed account. State premium taxes may also be deducted.
Contractowner/Participant Transaction Expenses for GVA I, II & III:
The maximum surrender charge (contingent deferred sales charge) (as a percentage of an Account Value withdrawn):
GVA I   GVA II   GVA III
5%*   6%*   None
* The surrender charge percentage is reduced over time. The later the redemption occurs, the lower the surrender charge with respect to that surrender or withdrawal. We may reduce or waive this charge in certain situations. See Charges and Other Deductions – Surrender Charges.
The next table describes the fees and expenses that you will pay periodically during the time that you own the contract, not including fund fees and expenses.
Annual account fee (per Participant): $25
Loan establishment fee (per loan): $50
Systematic withdrawal option fee: $30
The annual fee may be paid by an employer on behalf of Participants. It is not charged during the annuity period. We may reduce or waive these charges in certain situations. See Charges and Other Deductions.
Separate Account L expenses for GVA I, II, & III Subaccounts (as a percentage of average daily net assets in the Subaccounts):
“standard” mortality and expense risk charge
1.00%
“breakpoint” mortality and expense charge*
.75%
* Only certain contract or plans are eligible for a breakpoint charge. See – Charges and Other Deductions.
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, 2016. 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)
0.24%   1.64%
Total Annual Fund Operating Expenses (after contractual waivers/reimbursements*)
0.24%   1.40%
* Some of the funds have entered into contractual waiver or reimbursement arrangements that may reduce fund management and other fees and/or expenses during the period of the arrangement. These arrangements vary in length, but no arrangement will terminate before April 30, 2018.
Certain underlying funds have reserved the right to impose fees when fund shares are redeemed within a specified period of time of purchase (“redemption fees”). As of the date of this prospectus, none have done so. See The Contracts - Market Timing for a discussion of redemption fees.
For information concerning compensation paid for the sale of the contracts, see Distribution of the Contracts.
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EXAMPLES
This Example is intended to help Contractowners or Participants compare the cost of investing in the contract with the cost of investing in other variable annuity contracts. These costs include Contractowner/Participant transaction expenses, contract fees, separate account annual expenses, and fund fees and expenses.
The Example assumes that you invest $10,000 in the contract for the time periods indicated. The Example also assumes that your investment has a 5% return each year, the maximum fees and expenses of any of the funds. Although your actual costs may be higher or lower, based on these assumptions, your costs would be:
1) If you surrender your contract at the end of the applicable period:
  1 year   3 years   5 years   10 years
GVA I Standard*
$784   $1,371   $1,985   $3,148
GVA II Standard*
$886   $1,478   $2,097   $3,399
GVA III Standard*
$269   $826   $1,410   $2,993
2) If you do not surrender your contract at the end of the applicable time period:
  1 year   3 years   5 years   10 years
GVA I Standard*
$272   $835   $1,425   $3,022
GVA II Standard*
$272   $835   $1,425   $3,022
GVA III Standard*
$269   $826   $1,410   $2,993
* Examples shown may be less for plans qualifying for “breakpoint” mortality and expense risk charge.
The Expense Tables reflect expenses of the VAA as well as the maximum fees and expenses of any of the funds. We provide these examples, which are unaudited, to show the direct and indirect costs and expenses of the contract.
For more information, See – Charges and Other Deductions in the prospectus, and in the prospectuses for the funds. Premium taxes may also apply, although they do not appear in the examples. These examples should not be considered a representation of past or future expense. Actual expenses may be more or less than those shown.
Certain underlying funds have reserved the right to impose fees when fund shares are redeemed within a specified period of time of purchase (“redemption fees”). As of the date of this prospectus, none have done so. See The Contracts – Market Timing for a discussion of redemption fees.
For information concerning compensation paid for the sale of the contracts, See Distribution of the Contracts.
Summary of Common Questions
What kind of contract is this? It is a group variable annuity contract between the Contractowner and Lincoln Life. It may provide for a fixed annuity and/or a variable annuity. This prospectus primarily describes the variable side of the contract. See The Contracts. This prospectus provides a general description of the contract. The contract and certain riders, benefits, service features and enhancements may not be available in all states, and the charges may vary in certain states. You should refer to your contract for any state specific provisions. Please check with your investment representative regarding their availability.
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 one or more Subaccounts, according to your investment choices. VAA assets are not chargeable with liabilities arising out of any other business which we may conduct. See Variable Annuity Account.
What are my investment choices? You may allocate your Purchase Payments to the VAA or to the fixed account, if available. Based upon your instruction for Purchase Payments, the VAA applies your Purchase Payments to one or more of the Subaccounts, which, in turn, invest in a corresponding underlying fund. Each fund holds a portfolio of securities consistent with its investment policy. See Investments of the Variable Annuity Account – Description of the Funds.
Who invests my money? Several different investment advisers manage the investment options. See Investments of the Variable Annuity Account – Description of the Funds.
How do the contracts work? If we approve the application, we will send the Contractowner a contract. When Participants make Contributions, they buy Accumulation Units. If the Participant decides to receive retirement income payments, we convert Accumulation Units to Annuity Units. Retirement income payments will be based on the number of Annuity Units received and the value of each Annuity Unit on payout days. See – The Contracts and Annuity Payouts.
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What charges do I pay under the contract?
If Participants in GVA I or GVA II withdraw account values, a surrender charge of 0-5% or 0-6%, respectively, of the gross withdrawal amount applies depending upon how many participation years the Participant has been in the contract. We may reduce or waive surrender charges in certain situations. See Charges and Other Deductions – Surrender Charge for GVA I and GVA II.
There is no surrender charge for GVA III.
We charge an annual account fee charge of $25 per Participant Account. We will deduct any applicable premium tax from contributions or Account Value at the time the tax is incurred or at another time we choose or a time as required by law.
We apply a charge to the daily net asset value of the VAA and those charges are:
“standard” mortality and expense risk charge
1.00%
“breakpoint” mortality and expense charge*
.75%
See—Charges and Other Deductions.
The funds' investment management fees, 12b-1 fees, expenses and expense limitations, if applicable, are more fully described in the prospectuses for the funds.
What contributions are necessary, and how often? Contributions made on behalf of Participants may be in any amount, subject to Company maximum limits, unless the Contractowner or the plan has a minimum amount. See The Contracts – Contributions.
How will my Annuity Payouts be calculated? If a Participant decides to annuitize, you may select an annuity option and start receiving Annuity Payouts from your contract as a fixed option or variable option or a combination of both. See Annuity Payouts - Annuity Options. Remember that Participants in the VAA benefit from any gain, and take a risk of any loss, in the value of the securities in the funds' portfolios, which would decrease the amount applied to any payout option and the related payments.
What happens if a Participant dies before annuitizing? Depending upon the Plan, the Beneficiary may receive a Death Benefit and have options as to how the Death Benefit is paid. See The Contracts – Death Benefit.
What happens if I die on or after the Annuity Commencement Date? Once you reach the Annuity Commencement Date, any applicable Death Benefit will terminate.
May Participants transfer Account Value between Subaccounts, and between the VAA and the fixed account? Before the Annuity Commencement Date, yes, subject to the terms of the Plan. See The Contracts – Transfers On or Before the Annuity Commencement Date and Transfers After the Annuity Commencement Date.
May a Participant withdraw Account Value? Yes, during the accumulation period, subject to contract requirements, to the restrictions of any Plan, and to certain restrictions under GVA III. See – Charges and Other Deductions. Under GVA III the following restrictions apply:
• a Participant may not transfer more than 20% of his or her fixed account holdings to the VAA each year, unless the Participant intends to liquidate his or her fixed Account Value;
• liquidation of the entire fixed account value must be over 5 annual installments. See Fixed Account Withdrawal/Transfer Limits for GVA III.
The Contractowner must also approve Participant withdrawals under Section 401(a) plans and plan subject to Title I of ERISA. Certain charges may apply. See – Charges and other deductions. A portion of withdrawal proceeds may be taxable. In addition, a 10% Internal Revenue Service (IRS) additional tax may apply to distributions before age 59 1/2. A withdrawal also may be subject to 20% withholding. See – Federal Tax Matters.
Do Participants get a free look at their certificates? A Participant under a Section 403(b) or 408 plan and certain nonqualified plans can cancel the active life certificate within ten days (in some states longer) of the date the Participant receives the certificate. The Participant needs to give notice to our Servicing Office. See – Return Privilege.
Where may I find more information about Accumulation Unit values? The Appendix to this prospectus provides more information about Accumulation Unit values.
Investment Results
The VAA advertises the annual performance of the Subaccounts for the funds on both a standardized and non-standardized basis.
The standardized calculation measures average annual total return. This is based on a hypothetical $1,000 payment made at the beginning of a one-year, a five-year and a 10-year period. This calculation reflects all fees and charges that are or could be imposed on all Contractowner accounts.
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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. It does not include the surrender charge or the account charge; if included, they would decrease the performance.
The Lincoln National Life Insurance Company
The Lincoln National Life Insurance Company (Lincoln Life or Company), organized in 1905, is an Indiana-domiciled insurance company, engaged primarily in the direct issuance of life insurance contracts and annuities. Lincoln Life is wholly owned by Lincoln National Corporation (LNC), a publicly held insurance and financial services holding company incorporated in Indiana. Lincoln Life is obligated to pay all amounts promised to Contractowners under the contracts.
Depending on when you purchased your contract, you may be permitted to make allocations to the fixed account, which is part of our general account. See The Fixed Side of the Contract. In addition, any guarantees under the contract that exceed your Contract Value, such as those associated with Death Benefit options and Living Benefit Riders are paid from our general account (not the VAA). Therefore, any amounts that we may pay under the contract in excess of Contract Value are subject to our financial strength and claims-paying ability and our long-term ability to make such payments.
We issue other types of insurance policies and financial products as well. In addition to any amounts we are obligated to pay in excess of Contract Value under the contracts, 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 Contractowners. In order to meet our claims-paying obligations, we regularly monitor our reserves to ensure we hold sufficient amounts to cover actual or expected contract and claims payments. However, it is important to note that there is no guarantee that we will always be able to meet our claims paying obligations, and that there are risks to purchasing any insurance product.
State insurance regulators also require insurance companies to maintain a minimum amount of capital in excess of liabilities, which acts as a cushion in the event that the insurer suffers a financial impairment, based on the inherent risks in the insurer’s operations. These risks include those associated with losses that we may incur as the result of defaults on the payment of interest or principal on assets held in our general account, which include bonds, mortgages, general real estate investments, and stocks, as well as the loss in value of these investments resulting from a loss in their market value.
How to Obtain More Information.  We encourage both existing and prospective Contractowners to read and understand our financial statements. We prepare our financial statements on both a statutory basis and according to Generally Accepted Accounting Principles (GAAP). Our audited GAAP financial statements, as well as the financial statements of the VAA, are located in the SAI. If you would like a free copy of the SAI, please write to us at: PO Box 2340, Fort Wayne, IN 46801-2340, or call 1-800-341-0441. 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 SAI.
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.
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Fixed Side of the Contract
The portion of the Account Value allocated to the fixed side of the contract becomes part of our general account, and does not participate in the investment experience of the VAA. The general account is subject to regulation and supervision by the Indiana Insurance Department as well as the insurance laws and regulations of the jurisdictions in which the contracts are distributed.
In reliance on certain exemptions, exclusions and rules, we have not registered interests in the general account as a security under the Securities Act of 1933 (1933 Act) and have not registered the general account as an investment company under the Investment Company Act of 1940 (1940 Act). Accordingly, neither the general account nor any interests in it are regulated under the 1933 Act or the 1940 Act. We have been advised that the staff of the SEC has not made a review of the disclosures which are included in this prospectus which relate to our general account and to the fixed account under the contract. These disclosures, however, may be subject to certain provisions of the federal securities laws relating to the accuracy and completeness of statements made in prospectuses. This prospectus is generally intended to serve as a disclosure document only for aspects of the contract involving the VAA, and therefore contains only selected information regarding the fixed side of the contract. Complete details regarding the fixed side of the contract are in the contract.
Contributions allocated to the fixed side of the contract are guaranteed to be credited with a minimum interest rate, specified in the contract, of at least 3%. A Contribution allocated to the fixed side of the contract is credited with interest beginning on the next calendar day following the date of receipt if all Participant data is complete. Lincoln Life may vary the way in which it credits interest to the fixed side of the contract from time to time.
ANY INTEREST IN EXCESS OF 3% WILL BE DECLARED IN ADVANCE AT LINCOLN LIFE'S SOLE DISCRETION. CONTRACTOWNERS AND PARTICIPANTS BEAR THE RISK THAT NO INTEREST IN EXCESS OF 3% WILL BE DECLARED.
Under GVA III, special limits apply to transfers and withdrawals from the fixed account. See – Charges and Other Deductions-Fixed Account Withdrawal/Transfer Limits for GVA III.
Variable Annuity Account (VAA)
On 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, meaning that its assets may not be charged with liabilities resulting from any other business that we may conduct. Income, gains and losses, whether realized or not, from assets allocated to the VAA are, in accordance with the applicable annuity contracts, credited to or charged against the VAA. They are credited or charged without regard to any other income, gains or losses of Lincoln Life. We are the issuer of the contracts and the obligations set forth in the contract, other than those of the Contractowner, are ours. The VAA satisfies the definition of a separate account under the federal securities laws. We do not guarantee the investment performance of the VAA. Any investment gain or loss depends on the investment performance of the funds. You assume the full investment risk for all amounts allocated to the VAA.
Financial Statements
The December 31, 2016 financial statements of the VAA and the December 31, 2016 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 VAA
The subaccount(s) available under the contract will be available for participant allocations. There is a separate subaccount which corresponds to each fund. Participant allocations may change without penalty or charges. Shares of the funds will be sold at net asset value with no initial sales charge to the VAA in order to fund the contracts. The funds are required to redeem fund shares at net asset value upon our request.
Investment Advisers
As compensation for its services to the funds, each investment adviser for each fund receives a fee from the funds which is accrued daily and paid monthly. This fee is based on the net assets of each fund, as defined in the prospectuses for the funds.
Certain Payments We Receive with Regard to the Funds
We (and/or our affiliates) incur expenses in promoting, marketing, and administering the contracts and the underlying funds. With respect to a fund, including affiliated funds, the adviser and/or distributor, or an affiliate thereof, may make payments to us (or an
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affiliate) for certain services we provide on behalf of the funds. Such services include, but are not limited to, recordkeeping; aggregating and processing purchase and redemption orders; providing Contractowners with statements showing their positions within the funds; processing dividend payments; providing subaccounting services for shares held by Contractowners; and forwarding shareholder communications, such as proxies, shareholder reports, dividend and tax notices, and printing and delivering prospectuses and updates to Contractowners. It is anticipated that such payments will be based on a percentage of assets of the particular fund attributable to the contracts along with certain other variable contracts issued or administered by us (or an affiliate). These percentages are negotiated and vary with each fund. Some advisers and/or distributors may pay us significantly more than other advisers and/or distributors and the amount we receive may be substantial. These percentages currently range up to 0.50%, and as of the date of this prospectus, we were receiving payments from most fund families. We (or our affiliates) may profit from these payments. These payments may be derived, in whole or in part, from the investment advisory fee deducted from fund assets. Contractowners, through their indirect investment in the funds, bear the costs of these investment advisory fees (see the funds' prospectuses for more information). Additionally, a fund's adviser and/or distributor or its affiliates may provide us with certain services that assist us in the distribution of the contracts and may pay us and/or certain affiliates amounts for marketing programs and sales support, as well as amounts to participate in training and sales meetings.
In addition to the payments described above, most of the funds offered as part of this contract make payments to us under their distribution plans (12b-1 plans) for the marketing and distribution of fund shares. The payment rates range up to 0.30% based on the amount of assets invested in those funds. Payments made out of the assets of the fund will reduce the amount of assets that otherwise would be available for investment, and will reduce the fund's investment return. The dollar amount of future asset-based fees is not predictable because these fees are a percentage of the fund's average net assets, which can fluctuate over time. If, however, the value of the fund goes up, then so would the payment to us (or our affiliates). Conversely, if the value of the funds goes down, payments to us or our affiliates would decrease.
Description of the Funds
Each of the Subaccounts of the VAA is invested solely in shares of one of the funds available under the contract. Each fund may be subject to certain investment policies and restrictions which may not be changed without a majority vote of shareholders of that fund.
We select the funds offered through the contract based on several factors, including, without limitation, asset class coverage, the strength of the manager's reputation and tenure, brand recognition, performance, the capability and qualification of each sponsoring investment firm, and whether the fund is affiliated with us. Another factor we consider during the initial selection process is whether the fund or an affiliate of the fund will make payments to us or our affiliates. We may also consider the ability of the fund to help manage volatility. We review each fund periodically after it is selected. We reserve the right to remove a fund or restrict allocation of additional Purchase Payments to a fund if we determine the fund no longer meets one or more of the factors and/or if the fund has not attracted significant Contractowner assets. Finally, when we develop a variable annuity product in cooperation with a fund family or distributor (e.g., a “private label” product), we generally will include funds based on recommendations made by the fund family or distributor, whose selection criteria may differ from our selection criteria.
Certain funds offered as part of this contract have similar investment objectives and policies to other portfolios managed by the adviser. The investment results of the funds, however, may be higher or lower than the other portfolios that are managed by the adviser or sub-adviser. There can be no assurance, and no representation is made, that the investment results of any of the funds will be comparable to the investment results of any other portfolio managed by the adviser or sub-adviser, if applicable.
Certain funds invest their assets in other funds. As a result, you will pay fees and expenses at both fund levels. This will reduce your investment return. These arrangements are referred to as funds of funds. Funds of funds structures may have higher expenses than funds that invest directly in debt or equity securities. An advisor affiliated with us manages some of the available fund of funds. Our affiliates may promote the benefits of such funds to contractowners and/or suggest that contractowners consider whether allocating some or all of their Contract Value to such portfolios is consistent with their desired investment objectives. In doing so, we may be subject to conflicts of interest insofar as we may derive greater revenues from the affiliated fund of funds than certain other funds available to your under your contract.
Certain of the underlying funds, including funds managed by an adviser affiliated with us, employ risk management strategies that are intended to control the funds’ overall volatility, and for some funds, to also reduce the downside exposure of the funds during significant market downturns. These risk management strategies could limit the upside participation of the fund in rising equity markets relative to other funds. For more information about the funds and the investment strategies they employ, please refer to the funds’ current prospectuses. Fund prospectuses are available by contacting us.
Certain Plan Sponsors may limit the availability of investment options. Check with your Plan Sponsor if you have questions about the availability of specific funds.
Following are brief summaries of the fund descriptions. More detailed information may be obtained from the current prospectus for each fund. You should read each fund prospectus carefully before investing. Prospectuses for each fund are available by contacting us. In addition, if you receive a summary prospectus for a fund, you may obtain a full statutory prospectus by referring to the
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contact information for the fund company on the cover page of the summary prospectus. Please be advised that there is no assurance that any of the funds will achieve their stated objectives.
AllianceBernstein Variable Products Series Fund, advised by AllianceBernstein L.P.
• AB VPS Global Thematic Growth Portfolio (Class B): Long-term growth of capital.
• AB VPS Growth Portfolio (Class B): Long-term growth of capital.
American Century Variable Portfolios, Inc., advised by American Century Investment Management, Inc.
• Balanced Fund (Class I): Long-term capital growth and current income by investing approximately 60% of its assets in equity securities and the remainder in bonds and other fixed-income securities.
American Funds Insurance Series®, advised by Capital Research and Management Company
• Global Growth Fund (Class 2): Long-term growth of capital.
• Growth Fund (Class 2): Growth of capital.
• Growth-Income Fund (Class 2): Long-term growth of capital and income.
• International Fund (Class 2): Long-term growth of capital.
BlackRock Variable Series Funds, Inc., advised by BlackRock Advisors, LLC
• BlackRock Global Allocation V.I. Fund (Class I): High total investment return.
Delaware VIP® Trust, advised by Delaware Management Company(1)
• Diversified Income Series (Standard Class): Maximum long-term total return consistent with reasonable risk.
• High Yield Series (Standard Class): Total return and, as a secondary objective, high current income.
• REIT Series (Service Class): Maximum long-term total return, with capital appreciation as a secondary objective.
• Small Cap Value Series (Service Class): Capital appreciation.
• Smid Cap Core Series (Service Class): Long-term capital appreciation.
(formerly Smid Cap Growth Series)
Deutsche Variable Series II, advised by Deutsche Investment Management Americas, Inc.
• Deutsche Alternative Asset Allocation VIP Portfolio (Class A): Capital appreciation; a fund of funds.
Fidelity® Variable Insurance Products, advised by Fidelity Management and Research Company
• Asset Manager Portfolio (Initial Class): High total return.
• Contrafund® Portfolio (Service Class 2): Long-term capital appreciation.
• Growth Portfolio (Initial Class): To achieve capital appreciation.
Janus Aspen Series, advised by Janus Capital Management LLC
• Global Research Portfolio (Institutional Shares): Long-term growth of capital.
Lincoln Variable Insurance Products Trust, advised by Lincoln Investment Advisors
• LVIP Baron Growth Opportunities Fund (Service Class): Capital appreciation.
• LVIP BlackRock Inflation Protected Bond Fund (Standard Class): To maximize real return, consistent with preservation of real capital and prudent investment management.
• LVIP BlackRock Scientific Allocation Fund (Standard Class): Total return.
(formerly LVIP Delaware Foundation® Moderate Allocation Fund)
• LVIP Blended Large Cap Growth Managed Volatility Fund (Standard Class): Long-term growth of capital in a manner consistent with the preservation of capital.
• LVIP Blended Mid Cap Managed Volatility Fund (Standard Class): Capital appreciation.
• LVIP Clarion Global Real Estate Fund (Standard Class): Total return through a combination of current income and long-term capital appreciation.
• LVIP Delaware Bond Fund (Standard Class)(1): Maximum current income (yield) consistent with a prudent investment strategy.
• LVIP Delaware Diversified Floating Rate Fund (Service Class)(1): Total return
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• LVIP Delaware Social Awareness Fund (Standard Class)(1): To maximize long-term capital appreciation.
• LVIP Delaware Wealth Builder Fund (Standard Class)(1): To provide a responsible level of income and the potential for capital appreciation.
(formerly LVIP Delaware Foundation® Aggressive Allocation Fund)
• LVIP Dimensional U.S. Core Equity 1 Fund (Standard Class): To maximize long-term capital appreciation.
• LVIP Franklin Templeton Global Equity Managed Volatility Fund (Standard Class): Long-term capital growth.
• LVIP Global Conservative Allocation Managed Risk Fund (Standard Class): A high level of current income with some consideration given to growth of capital; a fund of funds.
• LVIP Global Growth Allocation Managed Risk Fund (Standard Class): A balance between a high level of current income and growth of capital, with a greater emphasis on growth of capital; a fund of funds.
• LVIP Global Income Fund (Standard Class): Current income consistent with the preservation of capital.
• LVIP Global Moderate Allocation Managed Risk Fund (Standard Class): A balance between a high level of current income and growth of capital, with an emphasis on growth of capital; a fund of funds.
• LVIP JPMorgan Retirement Income Fund (Standard Class): Current income and some capital appreciation.
(formerly LVIP Delaware Foundation® Conservative Allocation Fund)
• LVIP JPMorgan Select Mid Cap Value Managed Volatility Fund (Standard Class): Long-term capital appreciation.
• LVIP Managed Risk Profile 2010 Fund (Standard Class): The highest total return over time with an increased emphasis on capital preservation as the target date approaches; a fund of funds.
• LVIP Managed Risk Profile 2020 Fund (Standard Class): The highest total return over time with an increased emphasis on capital preservation as the target date approaches; a fund of funds.
• LVIP Managed Risk Profile 2030 Fund (Standard Class): The highest total return over time with an increased emphasis on capital preservation as the target date approaches; a fund of funds.
• LVIP Managed Risk Profile 2040 Fund (Standard Class): The highest total return over time with an increased emphasis on capital preservation as the target date approaches; a fund of funds.
• LVIP Managed Risk Profile 2050 Fund (Standard Class): The highest total return over time with an increased emphasis on capital preservation as the target date approaches; a fund of funds.
• LVIP Mondrian International Value Fund (Standard Class): Long-term capital appreciation as measured by the change in the value of fund shares over a period of three years or longer.
• LVIP SSGA Bond Index Fund (Standard Class): To match as closely as practicable, before fees and expenses, the performance of the Barclays Capital U.S. Aggregate Index.
• LVIP SSGA Emerging Markets 100 Fund (Standard Class): To maximize long-term capital appreciation.
• LVIP SSGA Global Tactical Allocation Managed Volatility Fund (Standard Class): Long-term growth of capital; a fund of funds.
• LVIP SSGA International Index Fund (Standard Class): To approximate as closely as practicable, before fees and expenses, the performance of a broad market index of non-U.S. foreign securities.
• LVIP SSGA International Managed Volatility Fund (Standard Class): Capital appreciation; a fund of funds.
• LVIP SSGA S&P 500 Index Fund (Standard Class): To approximate as closely as practicable, before fees and expenses, the total rate of return of common stocks publicly traded in the United States, as represented by the S&P 500 Index.
• LVIP SSGA Small-Cap Index Fund (Standard Class): To approximate as closely as practicable, before fees and expenses, the performance of the Russell 2000® Index, which emphasizes stocks of small U.S. companies.
• LVIP T. Rowe Price Structured Mid-Cap Growth Fund (Standard Class): To maximize capital appreciation.
Neuberger Berman Advisers Management Trust, advised by Neuberger Berman Management Inc.
• Large Cap Value Portfolio (I Class): Long-term growth of capital.
T. Rowe Price International Series, Inc., advised by T. Rowe Price International, Inc.
• T. Rowe Price International Stock Portfolio: Long-term growth of capital through investments primarily in the common stocks of established, non-U.S. companies.
(1) Investments in Delaware Investments VIP Series, Delaware Funds, LVIP Delaware Funds or Lincoln Life accounts managed by Delaware Investment Advisors, a series of Delaware Management Business Trust, are not and will not be deposits with or liabilities of Macquarie Bank Limited ABN 46008 583 542 and its holding companies, including their subsidiaries or related companies, and are subject to investment risk, including possible delays in prepayment and loss of income and capital invested. No Macquarie Group company guarantees or will guarantee the performance of the series or funds or accounts, the repayment of capital from the series or funds or account, or any particular rate of return.
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Fund Shares
We will purchase shares of the funds at net asset value and direct them to the appropriate Subaccounts of the VAA. We will redeem sufficient shares of the appropriate funds to pay Annuity Payouts, Death Benefits, surrender/withdrawal proceeds or for other purposes described in the contract. If you want to transfer all or part of your investment from one Subaccount to another, we may redeem shares held in the first Subaccount and purchase shares of the other. Redeemed shares are retired, but they may be reissued later.
Shares of the funds are not sold directly to the general public. They are sold to us, and may be sold to other insurance companies, for investment of the assets of the Subaccounts established by those insurance companies to fund variable annuity and variable life insurance contracts.
When a fund sells any of its shares both to variable annuity and to variable life insurance separate accounts, it is said to engage in mixed funding. When a fund sells any of its shares to separate accounts of unaffiliated life insurance companies, it is said to engage in shared funding.
The funds currently engage in mixed and shared funding. Therefore, due to differences in redemption rates or tax treatment, or other considerations, the interest of various Contractowners participating in a fund could conflict. Each of the fund’s Board of Directors will monitor for the existence of any material conflicts, and determine what action, if any, should be taken. The funds do not foresee any disadvantage to Contractowners arising out of mixed or shared funding. If such a conflict were to occur, one of the separate accounts might withdraw its investment in a fund. This might force a fund to sell portfolio securities at disadvantageous prices. See the prospectuses for the funds.
Reinvestment of Dividends and Capital Gain Distributions
All dividends and capital gain distributions of the funds are automatically reinvested in shares of the distributing funds at their net asset value on the date of distribution. Dividends are not paid out to Contractowners or participants as additional units, but are reflected as changes in unit values.
Addition, Deletion or Substitution of Investments
We reserve the right, within the law, to make certain changes to the structure and operation of the VAA at our discretion and without your consent. We may add, delete, or substitute funds for all Contractowners or only for certain classes of Contractowners. New or substitute funds may have different fees and expenses, and may only be offered to certain classes of Contractowners.
Substitutions may be made with respect to existing investments or the investment of future Purchase Payments, or both. We may close Subaccounts to allocations of Purchase Payments or Contract Value, or both, at any time in our sole discretion. The funds, which sell their shares to the Subaccounts pursuant to participation agreements, also may terminate these agreements and discontinue offering their shares to the Subaccounts. Substitutions might also occur if shares of a fund should no longer be available, or if investment in any fund’s shares should become inappropriate, in the judgment of our management, for the purposes of the contract, or for any other reason in our sole discretion and, if required, after approval from the SEC.
We may also:
• remove, combine, or add Subaccounts and make the new Subaccounts available to you at our discretion;
• transfer assets supporting the contracts from one Subaccount to another or from the VAA to another separate account;
• combine the VAA with other separate accounts and/or create new separate accounts;
• deregister the VAA under the 1940 Act; and
• operate the VAA as a management investment company under the 1940 Act or as any other form permitted by law.
We may modify the provisions of the contracts to reflect changes to the Subaccounts and the VAA and to comply with applicable law. We will not make any changes without any necessary approval by the SEC. We will also provide you written notice.
Charges and Other Deductions
We will deduct the charges described below to cover our costs and expenses, services provided and risks assumed under the contracts. We incur certain costs and expenses for the distribution and administration of the contracts and for providing the benefits payable thereunder.
Our administrative services include:
• processing applications for and issuing the contracts;
• processing purchases and redemptions of fund shares as required (including dollar cost averaging, systematic transfer, account sweep and portfolio rebalancing services);
• maintaining records;
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• administering Annuity Payouts;
• furnishing accounting and valuation services (including the calculation and monitoring of daily Subaccount values);
• reconciling and depositing cash receipts;
• providing contract confirmations;
• providing toll-free inquiry services and
• furnishing telephone and electronic fund transfer services.
The risks we assume include:
• the risk that Annuitants receiving Annuity Payouts under contracts live longer than we assumed when we calculated our guaranteed rates (these rates are incorporated in the contract and cannot be changed);
• the risk that Death Benefits paid will exceed the actual Contract Value;
• the risk that more owners than expected will qualify for waivers of the surrender charge;
• the risk that our costs in providing the services will exceed our revenues from contract charges (which we cannot change).
The amount of a charge may not necessarily correspond to the costs associated with providing the services or benefits indicated by the description of the charge. For example, the surrender charge collected may not fully cover all of the sales and distribution expenses actually incurred by us. Any remaining expenses will be paid from our general account which may consist, among other things, of proceeds derived from mortality and expense risk charges deducted from the account. We may profit from one or more of the fees and charges deducted under the contract. We may use these profits for any corporate purpose, including financing the distribution of the contracts.
Annual Contract Fee
During the accumulation period, we currently deduct $25 (or the balance of the Participant's account, if less) per year from each Participant's Account Value on the last business day of the month in which a Participant anniversary occurs, to compensate us for administrative services provided. We also deduct the charge from a Participant's account if the Participant's account is totally withdrawn. The charge may be increased or decreased.
Surrender Charge for GVA I and GVA II*
Under GVA I and GVA II, a surrender charge applies (except as described below) to total or partial withdrawals of a Participant's account balance during the accumulation period as follows:
During Participation Year   GVA I   GVA II
1-5
  5%   6%
6
  5%   3%
7
  4%   3%
8
  3%   3%
9
  2%   3%
10
  1%   3%
11-15
  0%   1%
16 and later
  0%   0%
* There is no surrender charge taken on withdrawals from GVA III.
The surrender charge is imposed on the gross withdrawal amount, and is deducted from the Subaccounts and the fixed account in proportion to the amount withdrawn from each. We do not impose a surrender charge on Death Benefits, or on account balances converted to an Annuity Payout option. For any Participant, the surrender charge will never exceed 8.5% of the cumulative contributions to the Participant's account.
Fixed Account Withdrawal/Transfer Limits for GVA III
GVA III has no surrender charges, but under GVA III, special limits apply to withdrawals and transfers from the fixed account. During any one calendar year a Participant may make one withdrawal from the fixed account, or one transfer to the VAA from the fixed account, of up to 20% of their fixed account balance.
Participants who want to liquidate their entire fixed account balance or transfer it to the VAA, however, may make one withdrawal or transfer request from their fixed account in each of five consecutive calendar years according to the following percentages:
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Year Request Received by Lincoln Life   Percentage of Fixed
Account Available
Under GVA III
1
  20%
2
  25%
3
  33.33%
4
  50%
5
  100%
Each consecutive withdrawal or transfer may not be made more frequently than twelve months apart. This liquidation schedule is also subject to the same conditions as other withdrawals and transfers. We reserve the right to prohibit any additional Contributions by a Participant that notifies us of their intention to liquidate their fixed account balance and stop Contributions to the contract. In addition, at contract termination certain 403(b) GVA III contracts offer lump sum payouts from the fixed account which may have a market value adjustment. Lump sum payouts will never be less than net contributions accumulated at an annual effective rate of 3%.
Waiver of Surrender Charges and Fixed Account Withdrawal/Transfer Limits
Under certain conditions, a Participant may withdraw part or all of his or her fixed account balance without incurring a surrender charge under GVA I or GVA II, or without being subject to the fixed account withdrawal/transfer limits under GVA III. We must receive reasonable proof of the condition with the withdrawal request. The chart below shows the standard conditions provided by GVA I, GVA II, and GVA III, as well as optional conditions the Contractowner may or may not make available under the contracts:
  Standard conditions   Optional conditions
GVA I the Participant has attained age 59½   the Participant has separated from service with their employer and is at least 55 years of age
  the Participant has died   the Participant is experiencing financial hardship
  the Participant has incurred a disability (as defined under the contract)    
  the Participant has separated from service with their employer    
GVA II the Participant has attained age 59½   the Participant has separated from service with their employer
  the Participant has died   the Participant is experiencing financial hardship
  the Participant has incurred a disability (as defined under the contract)    
  the Participant has separated from service with their employer and is at least 55 years of age    
GVA III the Participant has attained age 59½   the Participant has separated from service with their employer and is at least 55 years of age
  the Participant has died    
  the Participant has incurred a disability (as defined under the contract)    
  the Participant has separated from service with their employer    
  the Participant is experiencing financial hardship*    
  
* A GVA III Contractowner has the option not to include the financial hardship condition.
Under GVA I and GVA II, a Contractowner may also elect an optional contract provision that permits Participants to make a withdrawal once each Contract Year of up to 20% of the Participant's account balance without a surrender charge.
A Contractowner choosing one or more of the optional provisions may receive a different declared interest rate on the fixed account than will holders of contract without these provisions.
Deductions from the VAA for GVA I, II & III
For the base contract, we apply to the average daily net asset value of the Subaccounts, a charge which is equal to an annual rate of:
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“standard” mortality and expense risk charge
1.00%
“breakpoint” mortality and expense charge*
.75%
* Only certain contract or plans are eligible for a breakpoint charge. See—Charges and Other Deductions.
This maximum level of mortality and expense risk charge is guaranteed not to increase. It is assessed during the accumulation period and during the annuity period, even though during the annuity period, we bear no mortality risk on annuity options that do not have life contingencies.
If the mortality and expense risk charge proves insufficient to cover underwriting and administrative costs in excess of the charges made for the administrative expenses, we will absorb the loss. However, if the amount deducted proves more than sufficient, we will keep the profit.
Contracts eligible for the lower, or “breakpoint”, mortality and expense risk charge are those contracts which, either individually or in combination with other contracts under the same employer group or association, either at issue or after issue and at the end of a calendar quarter, satisfy eligibility criteria anticipated to result in lower issue and administrative costs for us over time. Such criteria include, for example, expected size of account value and contributions, administrative simplicity, and/or limited competition. For contracts not eligible for the lower mortality and risk expense charge at issue, the lower charge will be implemented no later than the calendar quarter-end Valuation Date following the end of the calendar quarter in which the contract becomes eligible for the lower charge. We periodically modify the criteria for eligibility. Modifications will not be unfairly discriminatory against any person. Contact your agent for our current eligibility criteria.
Special Arrangements
The surrender and account charges, described previously may be reduced or eliminated for any particular contract. In addition, the amount credited to and/or the interest rate declared on the fixed account may be enhanced for certain contracts. Such reductions, eliminations or enhancements may be available where Lincoln Life's administrative and/or distribution costs or expenses are anticipated to be lower due to, for example, the terms of the contract, the duration or stability of the plan or contract; economies due to the size of the plan, the number of certain characteristics of Participants, or the amount or frequency of contributions anticipated; or other support provided by the Contractowner or the plan. In addition, the group Contractowner or the plan may pay the annual administration charge on behalf of the Participants under a contract or by election impose this charge only on Particpants with account balances in the VAA. Lincoln Life will enhance the fixed interest crediting rate and reduce or eliminate fees, charges, or rates in accordance with Lincoln Life's eligibility criteria in effect at the time a contract is issued, or in certain cases, after a contract has been held for a period of time. Lincoln Life may, from time to time, modify both the amounts of reductions or enhancements and the criteria for qualification. Reductions, enhancements, or waivers will not be unfairly discriminatory against any person, including Participants under other contracts issued through the VAA.
Fees, charges and rates under the contracts, including charges for premium taxes; loan rates of interest; and the availability of certain free withdrawals, may be subject to variation based on state insurance regulation.
The Contractowner and Participant should read the contract carefully to determine whether any variations apply in the state in which the contract is issued. The exact amount for all fees, charges, and rates applicable to a particular contract will be stated in that contract.
Deductions for Premium Taxes
Any premium tax or other tax levied by any governmental entity as a result of the existence of the contracts or the VAA will be deducted from the Account Value, unless the governmental entity dictates otherwise, when incurred, or at another time of our choosing.
The applicable premium tax rates that states and other governmental entities impose on the purchase of an annuity are subject to change by legislation, by administrative interpretation or by judicial action. These premium tax rates generally depend upon the law of your state of residence. The tax rates range from zero to 5%.
Other Charges and Deductions
The mortality and expense risk charge of 1.00% of the contract value will be assessed on all variable annuity payouts, including options that may be offered that do not have a life contingency and therefore no mortality risk. This charge covers the expense risk and administrative services listed previously in this prospectus. The expense risk is the risk that our costs in providing the serices will exceed our revenues from contract charges.
There are additional deductions from and expenses paid out of the assets of the underlying funds that are more fully described in the prospectuses for the funds. Among these deductions and expenses are 12b-1 fees which reimburse us or an affiliate for certain expenses incurred in connection with certain administrative and distribution support services provided to the funds.
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The Contracts
Purchase of the Contracts
A prospective Contractowner wishing to purchase a contract must apply for it through one of our authorized registered representatives. The completed application is sent to us and we decide whether we can accept it based on our underwriting guidelines. Once the application is accepted, a contract is prepared and executed by our legally authorized officers. The contract is then sent to the Contractowner either directly or through its registered representative. For plans that have allocated rights to the participant, we will issue to each Participant a separate active life certificate that describes the basic provisions of the contract.
Initial Contributions
When we receive a complete enrollment form and all other information necessary for processing a contribution, we will price the initial contribution for a Participant to his or her account no later than two business days after we receive the contribution. If we receive contribution amounts with incomplete or no allocation instructions, we will notify the Contractowner and direct contribution amounts to the pending allocation account. The pending allocation account invests in Fidelity® VIP Government Money Market Portfolio, which is not available as an investment option under the contract. We do not impose the mortality and expense risk charge or the annual administration charge on the pending allocation account. The Participant's participation date will be the date we deposited the Participant's Contribution into the pending allocation account.
We will transfer the Account Value from the pending allocation account in accordance with allocation percentages elected on properly completed allocation instructions within two Valuation Dates of receipt of such instructions, and allocate all future contributions in accordance with these percentages until we are notified of a change. If we do not receive properly completed instructions after we have sent three monthly notices, we will refund Account Value in the pending allocation account within 105 days of the initial contribution.
Participants may not allocate contributions to, make transfer to or from, take loans from, or make withdrawals from the pending allocation account, except as set forth in the contract.
Contributions
Contractowners generally forward Contributions to us for investment. Depending on the Plan, the Contributions may consist of salary reduction Contributions, employer Contributions or post-tax Contributions.
Contributions may accumulate on either a guaranteed or variable basis selected from those Subaccounts made available by the Contractowner.
Contributions made on behalf of Participants may be in any amount unless there is a minimum amount set by the Contractowner or Plan. A contract may require the Contractowner to contribute a minimum annual amount on behalf of all Participants. A Participant under the plan cannot make Contributions that exceed $1 million. Annual contributions under qualified plans may be subject to maximum limits imposed by the tax code. Annual Contributions under nonqualified plans may be limited by the terms of the contract.
Subject to any restrictions imposed by the plan or the tax code, we will accept transfers from other contracts and qualified rollover Contributions.
Section 830.205 of the Texas Education Code provides that employer or state Contributions (other than salary reduction Contributions) on behalf of Participants in the Texas Optional Retirement Program (ORP) vest after one year of participation in the program. We will return employer Contributions to the Contractowner for those employees who terminate employment in all Texas institutions of higher education before becoming vested. During this first Participation Year in the ORP, ORP Participants may only direct employer and state Contributions to the fixed account.
Contributions must be in U.S. funds, and all withdrawals and distributions under the contract will be in U.S. funds. If a bank or other financial institution does not honor the check or other payment method used for a Contribution, we will treat the Contribution as invalid. All allocation and subsequent transfers resulting from the invalid Contributions will be reversed and the party responsible for the invalid Contribution must reimburse us for any losses or expenses resulting from the invalid Contribution.
If your retirement plan is no longer submitting new, payroll deduction contributions to a Lincoln contract, no further purchase payments of any type can be made into your contract/certificate without the express permission of your Plan sponsor. In certain limited exceptions, combining contract values from existing Lincoln contracts may be allowed.
Replacement of Existing Insurance
Careful consideration should be given prior to surrendering or withdrawing money from an existing insurance contract to purchase a contract described in this prospectus. Participant Surrender charges may be imposed on your existing contract. A registered representative or tax advisor should be consulted prior to making an exchange. Cash surrenders from an existing contract may be subject to tax and tax penalties.
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Valuation Date
Accumulation and Annuity Units will be valued once daily at the close of trading (normally, 4:00 p.m., New York time) on each day the New York Stock Exchange is open (Valuation Date). On any date other than a Valuation Date, the Accumulation Unit value and the Annuity Unit value will not change.
Allocation of Contributions
The Contractowner forwards Contributions to us, specifying the amount being contributed on behalf of each Participant and allocation information in accordance with our procedures. Contributions are placed into the VAA's Subaccounts, each of which invests in shares of a fund, and/or the fixed account, according to written Participant instructions and subject to the Plan. The Contribution allocation percentage to the Subaccount's or the fixed account must be in any whole percent.
If we receive your purchase payment from you or your broker-dealer in Good Order at our Home Office prior to 4:00 p.m., New York time, we will use the Accumulation Unit value computed on that Valuation Date when processing your purchase payment. If we receive your purchase payment at or after 4:00 p.m., New York time, we will use the Accumulation Unit value computed on the next Valuation Date. If you submit your purchase payment to your representative, we will generally not begin processing the purchase payment until we receive it from your representative’s broker-dealer. If your broker-dealer submits your purchase payment to us through the Depository Trust and Clearing Corporation (DTCC) or, pursuant to terms agreeable to us, uses a proprietary order placement system to submit your purchase payment to us, and your purchase payment was placed with your broker-dealer prior to 4:00 p.m., New York time, then we will use the Accumulation Unit value computed on that Valuation Date when processing your purchase payment. If your purchase payment was placed with your broker-dealer at or after 4:00 p.m. New York time, then we will use the Accumulation Unit value computed on the next Valuation Date.
If an underlying fund imposes restrictions with respect to the acceptance of Purchase Payments or allocations, we reserve the right to reject an allocation at any time the underlying fund notifies us of such a restriction. We will notify you if your allocation request is or becomes subject to such restrictions.
The number of Accumulation Units determined in this way is not impacted by any subsequent change in the value of an Accumulation Unit. However, the dollar value of an Accumulation Unit will vary depending not only upon how well the underlying fund’s investments perform, but also upon the expenses of the VAA and the underlying funds.
Subject to the terms of the plan, a participant may change the allocation of contributions by notifying us in writing or by telephone in accordance with our published procedures. The change is effective for all contributions received concurrently with the allocation change form and for all future contributions, unless the participant specifies a later date. Changes in the allocation of future contributions have no effect on amounts a participant may have already contributed. Such amounts, however, may be transferred between subaccount and the fixed account pursuant to the requirements described in Transfers on or before the Annuity Commencement Date. Allocation of employer contributions may be restricted by the applicable plan.
Valuation of Accumulation Units
Purchase Payments allocated to the VAA are converted into Accumulation Units. This is done by dividing the amount allocated by the value of an Accumulation Unit for the Valuation Period during which the Purchase Payments are allocated to the VAA. The Accumulation Unit value for each Subaccount was or will be established at the inception of the Subaccount. It may increase or decrease from Valuation Period to Valuation Period. Accumulation Unit values are affected by investment performance of the funds, fund expenses, and the contract charges. The Accumulation Unit value for a Subaccount for a later Valuation Period is determined as follows:
1. The total value of the fund shares held in the Subaccount is calculated by multiplying the number of fund shares owned by the Subaccount at the beginning of the Valuation Period by the net asset value per share of the fund at the end of the Valuation Period, and adding any dividend or other distribution of the fund if an ex-dividend date occurs during the Valuation Period; minus
2. The liabilities of the Subaccount at the end of the Valuation Period. These liabilities include daily charges imposed on the Subaccount, and may include a charge or credit with respect to any taxes paid or reserved for by us that we determine result from the operations of the VAA; and
3. The result is divided by the number of Subaccount units outstanding at the beginning of the Valuation Period.
The daily charges imposed on a Subaccount for any Valuation Period are equal to the daily mortality and expense risk charge and the daily administrative charge multiplied by the number of calendar days in the Valuation Period.
In certain circumstances, and when permitted by law, it may be prudent for us to use a different standard industry method for this calculation, called the Net Investment Factor method. We will achieve substantially the same result using either method.
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Transfers On or Before the Annuity Commencement Date
Subject to the terms of a Plan, a Participant may transfer all or a portion of the Participant's account balance from one Subaccount to another, and between the VAA and the fixed account. Under GVA III transfers from the fixed account are subject to special limits. See—Fixed account withdrawals/transfer limits for GVA III.
A transfer involves the surrender of Accumulation Units in one Subaccount and the purchase of Accumulation Units in the other Subaccount. A transfer will be done using the respective Accumulation Unit values determined at the end of the Valuation Date on which the transfer request is received. There is no charge for a transfer. We do not limit the number of transfers except as described under—Charges and other deductions-Fixed account withdrawal/transfer limits for GVA III.
A transfer request may be made to us using written, telephone, fax, or electronic instructions, if the appropriate authorization is on file with us. Our address, telephone number, and internet address are on the first page of this prospectus. In order to prevent unauthorized or fraudulent transfers, we may require certain identifying information before we will act upon instructions. We may also assign the Participant a Personal Identification Number (PIN) to serve as identification. We will not be liable for following instructions we reasonably believe are genuine. Telephone requests will be recorded and written confirmation of all transfer requests will be mailed to the Participant on the next Valuation Date.
Please note that the telephone and/or electronic devices may not always be available. Any telephone or electronic device, whether it is yours, your service provider’s, or your agent’s, can experience outages or slowdowns for a variety of reasons. These outages or slowdowns may delay or prevent our processing of your request. Although we have taken precautions to limit these problems, we cannot promise complete reliability under all circumstances. If you are experiencing problems, you should make your transfer request by writing to our Servicing Office.
Requests for transfers will be processed on the Valuation Date that they are received in Good Order in our customer service center before the end of the Valuation Date (normally 4:00 p.m. New York time). If we receive a transfer request 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.
We may defer or reject a transfer request that is subject to a restriction imposed by an underlying fund. When thinking about a transfer of Contract Value, you should consider the inherent risk involved. Frequent transfers based on short-term expectations may increase the risk that a transfer will be made at an inopportune time.
Market Timing
Frequent, large, or short-term transfers among Subaccounts and the fixed account, such as those associated with “market timing” transactions, can affect the funds and their investment returns. Such transfers may dilute the value of the fund shares, interfere with the efficient management of the fund's portfolio, and increase brokerage and administrative costs of the funds. As an effort to protect our participants and the funds from potentially harmful trading activity, we utilize certain market timing policies and procedures (the “Market Timing Procedures”). Our Market Timing Procedures are designed to detect and prevent such transfer activity among the Subaccounts and the fixed account that may affect other Participants or fund shareholders.
In addition, the funds may have adopted their own policies and procedures with respect to frequent purchases and redemptions of their respective shares. The prospectuses for the funds describe any such policies and procedures, which may be more or less restrictive than the frequent trading policies and procedures of other funds and the Market Timing Procedures we have adopted to discourage frequent transfers among Subaccounts. While we reserve the right to enforce these policies and procedures, Participants and other persons with interests under the contracts should be aware that we may not have the contractual authority or the operational capacity to apply the frequent trading policies and procedures of the funds. However, under SEC rules, we are required to: (1) enter into a written agreement with each fund or its principal underwriter that obligates us to provide to the fund promptly upon request certain information about the trading activity of individual Participants, and (2) execute instructions from the fund to restrict or prohibit further purchases or transfers by specific Participants who violate the excessive trading policies established by the fund.
You should be aware that the purchase and redemption orders received by the funds generally are “omnibus” orders from intermediaries such as retirement plans or separate accounts funding variable insurance contracts. The omnibus orders reflect the aggregation and netting of multiple orders from individual retirement plan Participants and/or individual owners of variable insurance contracts. The omnibus nature of these orders may limit the funds’ ability to apply their respective disruptive trading policies and procedures. We cannot guarantee that the funds (and thus our Participants) will not be harmed by transfer activity relating to the retirement plans and/or other insurance companies that may invest in the funds. In addition, if a fund believes that an omnibus order we submit may reflect one or more transfer requests from Participants engaged in disruptive trading activity, the fund may reject the entire omnibus order.
Our Market Timing Procedures detect potential “market timers” by examining the number of transfers made by Participants within given periods of time. In addition, managers of the funds might contact us if they believe or suspect that there is market timing. If requested by a fund company, we may vary our Market Timing Procedures from Subaccount to Subaccount to comply with specific fund policies and procedures.
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We may increase our monitoring of Participants who we have previously identified as market timers. When applying the parameters used to detect market timers, we will consider multiple contracts owned by the same Participant if that Participant has been identified as a market timer. For each Participant, we will investigate the transfer patterns that meet the parameters being used to detect potential market timers. We will also investigate any patterns of trading behavior identified by the funds that may not have been captured by our Market Timing Procedures.
Once a Participant has been identified as a “market timer” under our Market Timing Procedures, we will notify the Participant in writing that future transfers (among the Subaccounts and/or the fixed account) will be temporarily permitted to be made only by original signature sent to us by U.S. mail, first-class delivery for the remainder of the calendar year. Overnight delivery or electronic instructions (which may include telephone, facsimile, or Internet instructions) submitted during this period will not be accepted. If overnight delivery or electronic instructions are inadvertently accepted from a participant that has been identified as a market timer, upon discovery, we will reverse the transaction within 1 or 2 business days. We will impose this “original signature” restriction on that Participant even if we cannot identify, in the particular circumstances, any harmful effect from that Participant's particular transfers.
Participants seeking to engage in frequent, large, or short-term transfer activity may deploy a variety of strategies to avoid detection. Our ability to detect such transfer activity may be limited by operational systems and technological limitations. The identification of Participants determined to be engaged in such transfer activity that may adversely affect other Participants or fund shareholders involves judgments that are inherently subjective. We cannot guarantee that our Market Timing Procedures will detect every potential market timer. If we are unable to detect market timers, you may experience dilution in the value of your fund shares and increased brokerage and administrative costs in the funds. This may result in lower long-term returns for your investments.
Our Market Timing Procedures are applied consistently to all Participants. An exception for any Participant will be made only in the event we are required to do so by a court of law. In addition, certain funds available as investment options in your contract may also be available as investment options for owners of other, older life insurance policies issued by us. Some of these older life insurance policies do not provide a contractual basis for us to restrict or refuse transfers which are suspected to be market timing activity. In addition, because other insurance companies and/or retirement plans may invest in the funds, we cannot guarantee that the funds will not suffer harm from frequent, large, or short-term transfer activity among Subaccounts and the fixed accounts of variable contracts issued by other insurance companies or among investment options available to retirement plan Participants.
In our sole discretion, we may revise our Market Timing Procedures at any time without prior notice as necessary to better detect and deter frequent, large, or short-term transfer activity to comply with state or federal regulatory requirements, and/or to impose additional or alternate restrictions on market timers (such as dollar or percentage limits on transfers). If we modify our Market Timing Procedures, they will be applied uniformly to all Participants or as applicable to all Participants investing in underlying funds.
Some of the funds have reserved the right to temporarily or permanently refuse payments or transfer requests from us if, in the judgment of the fund’s investment adviser, the fund would be unable to invest effectively in accordance with its investment objective or policies, or would otherwise potentially be adversely affected. To the extent permitted by applicable law, we reserve the right to defer or reject a transfer request at any time that we are unable to purchase or redeem shares of any of the funds available through the VAA, including any refusal or restriction on purchases or redemptions of the fund shares as a result of the funds' own policies and procedures on market timing activities. If a fund refuses to accept a transfer request we have already processed, we will reverse the transaction within 1 or 2 business days. We will notify you in writing if we have reversed, restricted or refused any of your transfer requests. Some funds also may impose redemption fees on short-term trading (i.e., redemptions of mutual fund shares within a certain number of business days after purchase). We reserve the right to administer and collect any such redemption fees on behalf of the funds. You should read the prospectuses of the funds for more details on their redemption fees and their ability to refuse or restrict purchases or redemptions of their shares.
Transfers After the Annuity Commencement Date
We do not permit transfers of a Participant's account balance after the Annuity Commencement Date.
Additional Services
There are four additional services available to you: dollar-cost averaging (DCA), systematic transfer (GVA III only), account sweep and portfolio rebalancing. In order to take advantage of one of these services, you will need to complete the applicable election form. Once we are notified of a pending death claim, these services will stop.
Dollar-Cost Averaging. Dollar-cost averaging allows you to transfer a designated amount from certain Subaccounts, or the fixed side of the contract, into one or more Subaccounts on a monthly basis for 1, 2 or 3 years. The minimum amount to be dollar cost averaged is $10,000 for 1 year, and $25,000 for 2 years or 3 years. We may offer different time periods for new Purchase Payments and for transfers of Contract Value. State variations may exist.
Systematic Transfer Service. The systematic transfer service allows you to fully liquidate your fixed account balance over four years and transfer the amounts into one or more of the Subaccounts. This service is only available for GVA III Participants.
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Account Sweep Service. The account sweep service allows you to keep a designated amount in one Subaccount or the fixed account, and automatically transfer the excess to other Subaccounts of your choice. Beginning May 1, 2010, this service will no longer be available unless the Contractowner has enrolled in this service prior to this date.
Portfolio Rebalancing. Portfolio rebalancing is an option that restores to a pre-determined level the percentage of Account Value allocated to each Subaccount or the fixed account. The rebalancing may take place quarterly, semi-annually or annually.
Death Benefit Before the Annuity Commencement Date
The payment of Death Benefits is governed by the applicable plan and the tax code. In addition, no payment of Death Benefits provided upon the death of the Participant will be allowed that does not satisfy the requirements of code section 72(s) or section 401(a)(9) of the tax code. The Participant may designate a Beneficiary during the Participant’s lifetime and change the Beneficiary by filing a written request with us. Each change of Beneficiary revokes any previous designation.
If the Participant dies before the Annuity Commencement Date, the Death Benefit paid to the Participant’s designated Beneficiary will be the greater of: (1) the net contributions; or (2) the Participant’s account balance less any outstanding loan (including principal due and accrued interest), provided that, if we are not notified of the Participant’s death within six months of such death, we pay the Beneficiary the amount in (2).
We determine the value of the Death Benefit as of the date on which the death claim is approved for payment. This payment will occur when we receive (1) proof, satisfactory to us, of the death of the Participant; (2) written authorization for payment; and (3) all required claim forms, fully completed.
If a Death Benefit is payable, the Beneficiary may elect to receive payment of the Death Benefit either in the form of a lump sum settlement or an Annuity Payout, or as a combination of these two. If a lump sum settlement is requested, the proceeds will be mailed within seven days of receipt of satisfactory claim documentation as discussed previously, subject to the laws and regulations governing payment of Death Benefits. If no election is made within 60 days after we receive satisfactory notice of the Participant’s death, we will pay a lump sum settlement to the Beneficiary at that time. This payment may be postponed as permitted by the 1940 Act.
Payment will be made in accordance with applicable laws and regulations governing payment of Death Benefits.
Under qualified contracts, if the Beneficiary is someone other than the spouse of the deceased Participant, the tax code provides that the Beneficiary may not elect an annuity which would commence later than December 31st of the calendar year following the calendar year of the Participant’s death. If a non-spousal Beneficiary elects to receive payment in a single lump sum, the tax code provides that such payment must be received no later than December 31st of the fourth calendar year following the calendar year of the Participant’s death.
If the Beneficiary is the surviving spouse of the deceased Participant, distributions generally are not required under the tax code to begin earlier than December 31st of the calendar year in which the Participant would have attained age 70. If the surviving spouse dies before the date distributions commence, then, for purposes of determining the date distributions to the Beneficiary must commence, the date of death of the surviving spouse is substituted for the date of death of the Participant.
If the Beneficiary is the spouse of the Participant, then the spouse may elect to continue the contract as the new Participant. Same-sex spouses should carefully consider whether to purchase annuity products that provide benefits based upon status as a spouse, and whether to exercise any spousal rights under the contract. You are strongly encouraged to consult a tax advisor before electing spousal rights under the contract.
Other rules apply to nonqualified annuities. See “Federal Tax Matters.”
If there is no living named Beneficiary on file with us at the time of a Participant’s death and unless the plan directs otherwise, we will pay the Death Benefit to the Participant’s estate in the form of a lump sum payment, upon receipt of satisfactory proof of the participant’s death, but only if we receive proof of death no later than the end of the fourth calendar year following the year of the Participant’s death. In such case, the value of the Death Benefit will be determined as of the end of the Valuation Period during which we receive due proof of death, and the lump sum Death Benefit generally will be paid within seven days of that date.
Withdrawals
Before the Annuity Commencement Date and subject to the terms of the Plan, withdrawals may be made from the Subaccounts or the fixed account of all or part of the Participant’s account balance remaining after deductions for any applicable (1) surrender charge; (2) annual administration charge (imposed on total withdrawals), (3) premium taxes, and (4) outstanding loan.
Converting all or part of the account balance or Death Benefit to an Annuity Payout is not considered a withdrawal.
Under GVA III, special limits apply to withdrawals from the fixed account. See “Charges and Other Deductions – Fixed Account Withdrawal/Transfer Limits for GVA III.”
The account balance available for withdrawal is determined at the end of the Valuation Period during which we receive the withdrawal request on an approved Lincoln distribution request form (available from the Home Office). If we receive a surrender or withdrawal
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request placed at or after 4:00 p.m., New York time, we will process the request using the Accumulation Unit value computed on the next Valuation Date. Unless a request for withdrawal specifies otherwise, withdrawals will be made from all Subaccounts within the VAA and from the fixed account in the same proportion that the amount of withdrawal bears to the total Participant account balance. Unless prohibited, withdrawal payments will be mailed within seven days after we receive a valid written request. The payment may be postponed as permitted by the 1940 Act.
There are charges associated with withdrawals of Account Value. See “Charges and Other Deductions.”
The tax consequences of a withdrawal are discussed later in this booklet. See “Federal Tax Matters.”
Total Withdrawals. Only Participants with no outstanding loans can make a total withdrawal. A total withdrawal of a Participant’s account will occur when (a) the Participant or Contractowner requests the liquidation of the Participant’s entire account balance, or (b) the amount requested plus any surrender charge results in a remaining Participant account balance of an amount less than or equal to the annual administration charge, in which case we treat the request as a request for liquidation of the participant’s entire account balance.
Any active life certificate must be surrendered to us when a total withdrawal occurs. If the Contractowner resumes Contributions on behalf of a Participant after a total withdrawal, the Participant will receive a new participation date and active life certificate.
Partial Withdrawals. A partial withdrawal of a Participant’s account balance will occur when less than a total withdrawal is made from a Participant’s account.
Systematic Withdrawal Option. Participants who are at least age 59½, are separated from service from their employer, or are disabled, and certain spousal Beneficiaries and alternate payees who are former spouses, may be eligible for a Systematic Withdrawal Option (“SWO”) under the contract. Payments are made only from the fixed account. Under the SWO a Participant may elect to withdraw either a monthly amount which is an approximation of the interest earned between each payment period based upon the interest rate in effect at the beginning of each respective payment period, or a flat dollar amount withdrawn on a periodic basis. A Participant must have a vested pre-tax account balance of at least $10,000 in the fixed account in order to select the SWO. A Participant may transfer amounts from the VAA to the fixed account in order to support SWO payments. These transfers, however, are subject to the transfer restrictions imposed by any applicable plan. A one-time fee of up to $30 will be charged to set up the SWO. This charge is waived for total vested pre-tax account balances of $25,000 or more. More information about SWO, including applicable fees and charges, is available in the contracts and active life certificates and from us.
Required Minimum Distribution Program. Under certain contracts Participants who are at least age 70½ may ask us to calculate and pay to them the minimum annual distribution required by Sections 401(a)(9), 403(b)(10) or 408 of the tax code. The Participant must complete the forms we require to elect this option. We will base our calculation solely on the Participant’s Account Value with us. Participants who select this option are responsible for determining the minimum distributions amount applicable to their non-Lincoln Life contracts.
Withdrawal Restrictions. Withdrawals under Section 403(b) contracts are subject to the limitations under Section 403(b)(11) of the tax code and regulations thereof and in any applicable plan document. That section provides that withdrawals of salary reduction Contributions deposited and earnings credited on any salary reduction Contributions after December 31, 1988, can only be made if the Participant has (1) died; (2) become disabled; (3) attained age 59½; (4) separated from service; or (5) incurred a hardship. If amounts accumulated in a Section 403(b)(7) custodial account are deposited in a contract, these amounts will be subject to the same withdrawal restrictions as are applicable to post-1988 salary reduction Contributions under the contracts. For more information on these provisions see “Federal Tax Matters.”
Withdrawal requests for a Participant under Section 401(a) plans and plans subject to Title I of ERISA must be authorized by the Contractowner on behalf of a Participant. All withdrawal requests will require the Contractowner’s written authorization and written documentation specifying the portion of the Participant’s account balance which is available for distribution to the Participant.
As required by Section 830.105 of the Texas Education Code, withdrawal requests by Participants in the Texas Optional Retirement Program (“ORP”) are only permitted in the event of (1) death; (2) retirement; (3) termination of employment in all Texas institutions of higher education; or (4) attainment of age 70½. A participant in an ORP contract is required to obtain a certificate of termination from the Participant’s employer before a withdrawal request can be granted.
For withdrawal requests (other than transfers to other investment vehicles) by Participants under plans not subject to Title I of ERISA and non-401(a) plans, the Participant must certify to us that one of the permitted distribution events listed in the tax code has occurred (and provide supporting information, if requested) and that we may rely on this representation in granting the withdrawal request. See “Federal Tax Matters.” A Participant should consult his or her tax adviser as well as review the provisions of their plan before requesting a withdrawal. A plan and applicable law may contain additional withdrawal or transfer restrictions. Withdrawals may have Federal tax consequences. In addition, early withdrawals, as defined under Section 72(q) and 72(t) of the tax code, may be subject to a 10% excise tax.
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Loans
If the Plan permits loans, then during the Participant's accumulation period, the Participant may apply for a loan by completing a loan application that we provide. The Participant's account balance in the fixed account secures the loan. Loans are subject to restrictions imposed by the IRC, Title I of the Employee Retirement Income Security Act of 1974 (ERISA), and the Participant's Plan. For plans subject to the IRC and Title I of ERISA, the initial amount of a Participant loan cannot exceed the lesser of 50% of the Participant's vested account balance in the fixed account or $50,000 and, pursuant to the terms of the contract, must be at least $1,000. For plans subject to the IRC, but not subject to Title I of ERISA, a Participant is subject to the same $50,000 maximum, but may borrow up to $10,000 of his or her vested account balance even if that would be greater than 50% of his or her vested account balance. A Participant who incurs a qualified disaster may borrow up to the lesser of $100,000 or 10% of his or her vested account balance. A Participant may have only one loan outstanding at a time and may not take more than one loan in any six-month period. Amounts serving as collateral for the loan are not subject to the minimum interest rate under the contract and will accrue interest at a rate below the loan interest rate provided in the contract. More information about loan and loan interest rates is provided in the contract, the active life certificates, and the annuity loan agreement, and is also available from us.
Delay of Payments
Contract proceeds from the VAA will be paid within seven days, except:
• when the NYSE is closed (other than weekends and holidays);
• times when market trading is restricted or the SEC declares an emergency, and we cannot value units or the funds cannot redeem shares; or
• when the SEC so orders to protect Contractowners.
We may delay payment from the fixed account for up to six months. During this period, we will continue to credit the current declared interest rate to a Participant's account in the fixed account.
Due to federal laws designed to counter terrorism and prevent money laundering by criminals, we may be required to reject a Purchase Payment and/or deny payment of a request for transfers, withdrawals, surrenders, or Death Benefits, until instructions are received from the appropriate regulator. We also may be required to provide additional information about a Contractowner's account to government regulators.
Abandoned Property. Every state has unclaimed property laws which generally declare annuity contracts to be abandoned after a period of inactivity of three to five years from the date a benefit is due and payable. For example, if the payment of a Death Benefit has been triggered, but, if after a thorough search, we are still unable to locate the Beneficiary of the Death Benefit, or the Beneficiary does not come forward to claim the Death Benefit in a timely manner, the Death Benefit will be “escheated”. This means that the Death Benefit will be paid to the abandoned property division or unclaimed property office of the state in which the Beneficiary or the Contractowner last resided, as shown on our books and records, or to our state of domicile. This escheatment is revocable and the state is obligated to pay the Death Benefit (without interest) if your Beneficiary steps forward to claim it with the proper documentation.
To prevent such escheatment, it is important that you update your Beneficiary designations, including addresses, if and as they change. You may update your Beneficiary designations by submitting a Beneficiary change form to 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
Contractowners have all rights under the contract. 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. Qualified contracts and active life certificates may not be assigned or transferred except as permitted by ERISA and on written notification to us. In addition, a Participant, Beneficiary, or Annuitant may not, unless permitted by law, assign or encumber any payment due under the contract.
Contractowner Questions
The obligations to purchasers under the contracts are those of Lincoln Life. This prospectus provides a general description of the material features of the contract. Questions about your contract should be directed to us at 1-800-341-0441.
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Annuity Payouts
As permitted by the plan, the Participant, or the Beneficiary of a deceased Participant, may elect to convert all or part of the Participant's account balance or the Death Benefit to any annuity payout. The contract provides optional forms of payouts of annuities (annuity options), each of which is payable on a variable basis, a fixed basis or a combination of both as you specify. The contract provides that all or part of the contract value may be used to purchase an annuity payout option.
You may elect annuity payouts in monthly, quarterly, semiannual or annual installments. If the Participant's account balance or the Beneficiary's Death Benefit is less than $2,000 or if the amount of the first payout is less than $20, we have the right to cancel the annuity and pay the Participant or Beneficiary the entire amount in a lump sum.
We may maintain variable annuity payouts in the VAA, or in another separate account of Lincoln Life (variable payout division). We do not impose a charge when the annuity conversion amount is applied to a variable payout division to provide an annuity payout option. The contract benefits and charges for an annuity payout option, whether maintained in the VAA or in a variable payout division, are as described in this prospectus. The selection of funds available through a variable payout division may be different from the funds available through the VAA. If we will maintain a participant's variable annuity payout in a variable payout division, we will provide a prospectus for the variable payout division before the Annuity Commencement Date.
Annuity Options
Life Annuity. This option offers a periodic payout during the lifetime of the Annuitant and ends with the last payout before the death of the Annuitant. This option offers the highest periodic payout since there is no guarantee of a minimum number of payouts or provision for a Death Benefit for Beneficiaries. However, there is the risk under this option that the recipient would receive no payouts if he or she dies before the date set for the first payout; only one payout if death occurs before the second scheduled payout, and so on.
Life Annuity with Guaranteed Period. This option guarantees periodic payouts during a designated period, usually 10 or 20 years, and then continues throughout the lifetime of the Annuitant. The designated period is selected by the Contractowner (or Participant in an allocated contract).
Joint Life Annuity. This option offers a periodic payout during the joint lifetime of the Annuitant and a designated joint Annuitant. The payouts continue during the lifetime of the survivor. However, under a joint life annuity, if both Annuitants die before the date set for the first payout, no payouts will be made. Only one payment would be made if both deaths occur before the second scheduled payout, and so on.
Non-Life Annuities. Annuity Payouts are guaranteed monthly for the selected number of years. While there is no right to make any total or partial withdrawals during the annuity period, an Annuitant or Beneficiary who has selected this annuity option as a variable annuity may request at any time during the payout period that the present value of any remaining installments be paid in one lump sum. This lump sum payout will be treated as a total withdrawal during the accumulation period and may be subject to a surrender charge. See – Charges and Other Deductions and Federal Tax Matters.
General Information
Under the options listed above, you may not make withdrawals. Other options may be made available by us. Annuity Payout options are only available if consistent with the contract, the Plan, the tax code, and ERISA. The mortality and expense risk charge will be assessed on all variable annuity payments, including options that do not have a life contingency and therefore no mortality risk.
Under any option providing for guaranteed payouts, the number of payouts which remain unpaid at the date of the Annuitant's death (or surviving Annuitant's death in the case of a joint life annuity) will be paid to the Beneficiary as payouts become due.
Annuity Payout Calculation
Fixed Annuity Payouts are determined by dividing the Participant's annuity conversion amount in the fixed account as of the initial Annuity Payout calculation date by the applicable annuity conversion factor (in the contract) for the Annuity Payout option selected.
Variable Annuity Payouts
Variable Annuity Payouts will be determined using:
• The Participant's annuity conversion amount in the VAA as of the initial Annuity Payout calculation date;
• The annuity conversion factor contained in the contract;
• The annuity option selected; and
• The investment performance of the fund(s) selected.
To determine the amount of payouts, we make this calculation:
1. Determine the dollar amount of the first periodic payout; then
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2. Credit the retired life certificate with a specific number of Annuity Units equal to the first periodic payout divided by the Annuity Unit value; and
3. Calculate the value of the Annuity Units each period thereafter.
We assume an investment return of a specified percentage per year, as applied to the applicable mortality table. The amount of each Annuity Payout after the initial pay-out will depend upon how the underlying fund(s) perform, relative to the assumed rate. If the actual net investment rate (annualized) exceeds the assumed rate, the payment will increase at a rate proportional to the amount of such excess. Conversely, if the actual rate is less than the assumed rate, Annuity Payouts will decrease. There is a more complete explanation of this calculation in the SAI.
Distribution of the Contracts
Lincoln Financial Distributors, Inc. (“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 Corporation and/or Lincoln Financial Securities Corporation (collectively, “LFN”), also affiliates of ours. The Principal Underwriter has also entered into selling agreements with broker-dealers that are unaffiliated with us (“Selling Firms”). While the Principal Underwriter has the legal authority to make payments to broker-dealers which have entered into selling agreements, we will make such payments on behalf of the Principal Underwriter in compliance with appropriate regulations. We also pay on behalf of LFD certain of its operating expenses related to the distribution of this and other of our contracts. The Principal Underwriter may also offer “non-cash compensation”, as defined under FINRA’s rules, which includes among other things, merchandise, gifts, marketing support, sponsorships, seminars, entertainment and travel expenses. You may ask your registered representative how he/she will personally be compensated, in whole or in part, for the sale of the contract to you or for any alternative proposal that may have been presented to you. You may wish to take such compensation payments into account when considering and evaluating any recommendation made to you in connection with the purchase of a contract. The following paragraphs describe how payments are made by us and the Principal Underwriter to various parties.
Compensation Paid to LFN. The maximum commission the Principal Underwriter pays to LFN is 3.50% of Purchase Payments. LFN may elect to receive a lower commission when a Purchase Payment is made along with an earlier quarterly payment based on Contract Value for so long as the contract remains in effect. Upon annuitization, the maximum commission the Principal Underwriter pays to LFN is 1.18% of annuitized value and/or ongoing annual compensation of up to 0.00% of annuity value or statutory reserves.
Lincoln Life also pays for the operating and other expenses of LFN, including the following sales expenses: registered representative training allowances; compensation and bonuses for LFN's management team; advertising expenses; and all other expenses of distributing the contracts. LFN pays its registered representatives a portion of the commissions received for their sales of contracts. LFN registered representatives and their managers are also eligible for various cash benefits, such as bonuses, insurance benefits and financing arrangements. In addition, LFN registered 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 LFN registered representatives and/or their managers qualify for such benefits. LFN registered representatives and their managers may receive other payments from us for services that do not directly involve the sale of the contracts, including payments made for the recruitment and training of personnel, production of promotional literature and similar services.
Compensation Paid to Unaffiliated Selling Firms. The Principal Underwriter pays commissions to all Selling Firms. The maximum commission the Principal Underwriter pays to Selling Firms, other than LFN, is 3.50% of Purchase Payments. Some Selling Firms may elect to receive a lower commission when a Purchase Payment is made along with an earlier quarterly payment based on Contract Value for so long as the contract remains in effect. Upon annuitization, the maximum commission the Principal Underwriter pays to Selling Firms is 1.18% of annuitized value and/or ongoing annual compensation of up to 0.00% of annuity value or statutory reserves. LFD also acts as wholesaler of the contracts and performs certain marketing and other functions in support of the distribution and servicing of the contracts.
LFD may pay certain Selling Firms or their affiliates additional amounts for, among other things: (1) “preferred product” treatment of the contracts in their marketing programs, which may include marketing services and increased access to registered representatives; (2) sales promotions relating to the contracts; (3) costs associated with sales conferences and educational seminars for their registered 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.
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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 2016 is contained in the 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 Contractowners or the VAA. All compensation is paid from our resources, which include fees and charges imposed on your contract.
Federal Tax Matters
Introduction
The Federal income tax treatment of the contract is complex and sometimes uncertain. The Federal income tax rules may vary with your particular circumstances. This discussion does not include all the Federal income tax rules that may affect you and your contract. This discussion also does not address other Federal tax consequences (including consequences of sales to foreign individuals or entities), or state or local tax consequences, associated with the contract. As a result, you should always consult a tax adviser about the application of tax rules found in the Internal Revenue Code (“Code”), Treasury Regulations and applicable IRS guidance to your individual situation.
Qualified Retirement Plans
We have 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:
• Individual Retirement Accounts and Annuities (“Traditional IRAs”)
• Roth IRAs
• Traditional IRA that is part of a Simplified Employee Pension Plan (“SEP”)
• SIMPLE 401(k) plans (Savings Incentive Matched Plan for Employees)
• 401(a) / (k) plans (qualified corporate employee pension and profit-sharing plans)
• 403(a) plans (qualified annuity plans)
• 403(b) plans (public school system and tax-exempt organization annuity plans)
• H.R. 10 or Keogh Plans (self-employed individual plans)
• 457(b) plans (deferred compensation plans for state and local governments and tax-exempt organizations)
We will amend contracts to be used with a qualified retirement plan as generally necessary to conform to the tax law requirements for the type of plan. However, the rights of a person to any qualified retirement plan benefits may be subject to the plan's terms and conditions. In addition, we are not bound by the terms and conditions of qualified retirement plans to the extent such terms and conditions contradict the contract, unless we consent.
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.
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Also, for 403(b) contracts issued on or after January 1, 2009, amounts attributable to employer contributions are subject to restrictions on withdrawals specified in your employer's 403(b) plan, in order to comply with new tax regulations (previously, only amounts attributable to your salary-reduction contributions were subject to withdrawal restrictions). Amounts transferred to a 403(b) contract from other 403(b) contracts or accounts must generally be subject to the same restrictions on withdrawals applicable under the prior contract or account.
Tax Deferral on Earnings
The Federal income tax law generally does not tax any increase in your contract value until you receive a contract distribution. However, for this general rule to apply, certain requirements must be satisfied:
• An individual must own the contract (or the tax law must treat the contract as owned by an individual).
• The investments of the VAA must be “adequately diversified” in accordance with IRS regulations.
• Your right to choose particular investments for a contract must be limited.
• The Annuity Commencement Date must not occur near the end of the Annuitant’s life expectancy.
Investments in the VAA Must Be Diversified
For a contract to be treated as an annuity for Federal income tax purposes, the investments of the VAA must be “adequately diversified.” Treasury regulations define standards for determining whether the investments of the VAA are adequately diversified. If the VAA fails to comply with these diversification standards, you could be required to pay tax currently on the excess of the contract value over the contract purchase payments. Although we do not control the investments of the underlying investment options, we expect that the underlying investment options will comply with the IRS regulations so that the VAA will be considered “adequately diversified.”
Restrictions
Federal income tax law limits your right to choose particular investments for the contract. Because the IRS has issued little guidance specifying those limits, the limits are uncertain and your right to allocate contract values among the subaccounts may exceed those limits. If so, you would be treated as the owner of the assets of the VAA and thus subject to current taxation on the income, bonus credits, persistency credits and gains, if applicable, from those assets. We do not know what limits may be set by the IRS in any guidance that it may issue and whether any such limits will apply to existing contracts. We reserve the right to modify the contract without your consent to try to prevent the tax law from considering you as the owner of the assets of the VAA.
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,
• Federal tax rules limit the amount of purchase payments that can be made, and the tax deduction or exclusion that may be allowed for the purchase payments. These limits vary depending on the type of qualified retirement plan and the plan Participant’s specific circumstances (e.g., the Participant’s compensation).
• Minimum annual distributions are required under some qualified retirement plans once you reach age 70 ½ or retire, if later as described below.
• Under most qualified plans, such as a traditional IRA, the owner must begin receiving payments from the contract in certain minimum amounts by a certain age, typically age 70 ½. Other qualified plans may allow the Participant to take required distributions upon the later of reaching age 70 ½ 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 ½ 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 ½. If you own a Roth IRA, you are not required to receive minimum distributions from your Roth IRA during your life.
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Failure to comply with the minimum distribution rules applicable to certain qualified plans, such as Traditional IRAs, will result in the imposition of an excise tax. This excise tax equals 50% of the amount by which a minimum required distribution exceeds the actual distribution from the qualified plan.
Treasury regulations applicable to required minimum distributions include a rule that may impact the distribution method you have chosen and the amount of your distributions. Under these regulations, the presence of an enhanced Death Benefit, Lincoln SmartSecurity® Advantage, or other benefit, if any, may require you to take additional distributions. An enhanced Death Benefit is any Death Benefit that has the potential to pay more than the contract value or a return of purchase payments. Please contact your tax adviser regarding any tax ramifications.
Additional Tax on Early Distributions from Qualified Retirement Plans
The tax code may impose a 10% additional tax on an early distribution from a qualified contract that must be included in income. The tax code does not impose the additional 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% additional tax will not apply to any of the following withdrawals, surrenders, or Annuity Payouts:
• Distribution received on or after the Annuitant reaches 59½
• Distribution received on or after the Annuitant’s death or because of the Annuitant’s disability (as defined in the tax law)
• Distribution received as a series of substantially equal periodic payments based on the Annuitant’s life (or life expectancy), or
• 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.
The IRS issued Announcement 2014-15 following the Tax Court’s decision in Bobrow v. Commissioner, T.C. Memo. 2014-21. In the Announcement, the IRS stated its intent to apply the one-rollover-per-year limitation of 408(d)(3)(B) on an aggregate basis to all IRAs that an individual owns. This means that an individual cannot make a tax-free IRA-to-IRA rollover if he or she has made such a rollover involving any of the individual’s IRAs in the current tax year. If an intended rollover does not qualify for tax-free rollover treatment, contributions to your IRA may constitute excess contributions that may exceed contribution limits. This one-rollover-per-year limitation does not apply to direct trustee-to-trustee transfers.
Federal Income Tax Withholding
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We will withhold and remit to the IRS a part of the taxable portion of each distribution made under a contract unless you notify us prior to the distribution that tax is not to be withheld. In certain circumstances, Federal income tax rules may require us to withhold tax. At the time a withdrawal, surrender, or Annuity Payout is requested, we will give you an explanation of the withholding requirements.
Certain payments from your contract may be considered eligible rollover distributions (even if such payments are not being rolled over). Such distributions may be subject to special tax withholding requirements. The Federal income tax withholding rules require that we withhold 20% of the eligible rollover distribution from the payment amount, unless you elect to have the amount directly transferred to certain qualified plans or contracts. The IRS requires that tax be withheld, even if you have requested otherwise. Such tax withholding requirements are generally applicable to 401(a), 403(a) or (b), HR 10, and 457(b) governmental plans and contracts used in connection with these types of plans.
Special Considerations for Same-Sex Couples
The U.S. Supreme Court recently held same-sex spouses who have been married under state law will now be treated as spouses for purposes of federal law. You are strongly encouraged to consult a tax advisor before electing spousal rights under the contract.
Nonqualified Annuity Contracts
A nonqualified annuity is a contract not issued in connection with an IRA or a qualified retirement plan receiving special tax treatment under the tax code. These contracts are not intended for use with nonqualified annuity contracts. Different federal tax rules apply to nonqualified annuity contracts. Persons planning to use the contract in connection with a nonqualified annuity should obtain advice from a tax advisor.
Our Tax Status
Under existing Federal income tax laws, we do not pay tax on investment income and realized capital gains of the VAA. We do not expect that we will incur any Federal income tax liability on the income and gains earned by the VAA. However, the Company does expect, to the extent permitted under Federal tax law, to claim the benefit of the foreign tax credit as the owner of the assets of the VAA. Therefore, we do not impose a charge for Federal income taxes. If Federal income tax law changes and we must pay tax on some or all of the income and gains earned by the VAA, we may impose a charge against the VAA to pay the taxes.
Changes in the Law
The above discussion is based on the tax code, IRS regulations, and interpretations existing on the date of this prospectus. However, Congress, the IRS, and the courts may modify these authorities, sometimes retroactively.
Additional Information
Voting Rights
As required by law, we will vote the fund shares held in the VAA at meetings of the shareholders of the funds. The voting will be done according to the instructions of Contractowners who have interests in any Subaccounts which invest in classes of the funds. If the 1940 Act or any regulation under it should be amended or if present interpretations should change, and if as a result we determine that we are permitted to vote the fund shares in our own right, we may elect to do so.
The number of votes which you have the right to cast will be determined by applying your percentage interest in a Subaccount to the total number of votes attributable to the Subaccount. In determining the number of votes, fractional shares will be recognized.
Each underlying fund is subject to the laws of the state in which it is organized concerning, among other things, the matters which are subject to a shareholder vote, the number of shares which must be present in person or by proxy at a meeting of shareholders (a “quorum”), and the percentage of such shares present in person or by proxy which must vote in favor of matters presented. Because shares of the underlying fund held in the VAA are owned by us, and because under the 1940 Act we will vote all such shares in the same proportion as the voting instructions which we receive, it is important that each Contractowner provide their voting instructions to us. For funds un-affiliated with Lincoln, 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 be voted by us in the same proportion as the voting instruction which we actually receive. For funds affiliated with Lincoln, shares of a fund to which such Contractowners would have been entitled to provide voting instruction will, once we receive a sufficient number of instructions we deem appropriate to ensure a fair representation of Contractowners eligible to vote, 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 proportionately to reduce the number of votes eligible to be cast.
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Whenever a shareholders meeting is called, we will provide or make available to each person having a voting interest in a Subaccount proxy voting material, reports and other materials relating to the funds. Since the funds engage in shared funding, other persons or entities besides Lincoln Life may vote fund shares. See Investments of the Variable Annuity Account – Fund Shares.
Return Privilege
Participants under Sections 403(b), 408 and certain nonqualified plans will receive an active life certificate. Within the free-look period (ten days) after the participant receives the active life certificate, the participant may cancel it for any reason by giving us written notice. The postmark date of the notice is the date of notice for these purposes. An active life certificate canceled under this provision will be void. With respect to the fixed side of the contract, we will return the participant's contributions less withdrawals made on behalf of the participant. With respect to the VAA, we will return the greater of the participant's contributions less withdrawals made on behalf of the participant, or the participant's account balance in the VAA on the date we receive the written notice. No surrender charge applies.
State Regulation
As a life insurance company organized and operated under Indiana law, we are subject to provisions governing life insurers and to regulation by the Indiana Commissioner of Insurance. Our books and accounts are subject to review and examination by the Indiana Department of Insurance at all times. A full examination of our operations is conducted by that Department at least every five years.
Records and Reports
As presently required by the 1940 Act and applicable regulations, we are responsible for maintaining all records and accounts relating to the VAA. We have entered into an agreement with The Bank of New York Mellon, One Mellon Bank Center, 500 Grant Street, Pittsburgh, Pennsylvania, 15258, to provide accounting services to the VAA. We will mail to you, at your last known address of record at the Home Office, at least semi-annually after the first Contract Year, reports containing information required by that Act or any other applicable law or regulation.
A written confirmation of each transaction will be mailed to you on the next Valuation Date, except for the following transactions, which are mailed quarterly:
• deduction of any account fee or rider charges;
• any rebalancing event under the portfolio rebalancing service; and
• any transfer or withdrawal under any applicable additional service: dollar cost averaging, systematic transfer service, or account sweep service.
Cyber Security
We rely heavily on interconnected computer systems and digital data to conduct our variable products business. Because our business is highly dependent upon the effective operation of our computer systems and those of our business partners, our business is vulnerable to disruptions from utility outages, and susceptible to operational and information security risks resulting from information systems failure (e.g., hardware and software malfunctions), and cyber-attacks. These risks include, among other things, the theft, misuse, corruption and destruction of data maintained online or digitally, interference with or denial of service, attacks on websites and other operational disruption and unauthorized release of confidential customer information. Such systems failures and cyber-attacks affecting us, any third-party administrator, the underlying funds, intermediaries and other affiliated or third-party service providers may adversely affect us and your Contract Value. For instance, systems failures and cyber-attacks may interfere with our processing of contract transactions, including the processing of orders from our website or with the underlying funds, impact our ability to calculate Accumulation Unit value, cause the release and possible destruction of confidential customer or business information, impede order processing, subject us and/or our service providers and intermediaries to regulatory fines and financial losses and/or cause reputational damage. Cyber security risks may also impact the issuers of securities in which the underlying funds invest, which may cause the funds underlying your contract to lose value. There can be no assurance that we or the underlying funds or our service providers will avoid losses affecting your contract due to cyber-attacks or information security breaches in the future.
Other Information
Contract Deactivation. Under certain contracts, we may deactivate a contract by prohibiting new contributions and/or new participants after the date of deactivation. We will give the contractowner and participants at least ninety (90) days notice of the deactivation date.
Legal Proceedings
In the ordinary course of its business 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
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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 reasonably possible that an adverse outcome in certain matters could be material to the Company's operating results for any particular reporting period. Please refer to the Statement of Additional Information for possible additional information regarding legal proceedings.
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Contents of the Statement of Additional Information (SAI)
for Lincoln National Variable Annuity Account L
Item  
Special Terms  
Services  
Principal Underwriter  
Purchase of Securities Being Offered  
Annuity Payouts  
Determination of Accumulation and Annuity Unit Value  
Capital Markets  
Advertising & Ratings  
Additional Services  
Other Information  
Financial Statements  
For a free copy of the SAI complete the form below.
Statement of Additional Information Request Card
Group Variable Annuity Account Contracts I, II, & III
Please send me a free copy of the current Statement of Additional Information for Lincoln National Variable Annuity Account L (Group Variable Annuity Contracts I, II & III).
(Please Print)
Name: 
Address: 
City 
State 
Zip 
Mail to: The Lincoln National Life Insurance Co., P.O. Box 2340, Fort Wayne, IN 46801-2340
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Appendix A—Condensed Financial Information
Accumulation Unit Values
The following information relates to accumulation unit values and accumulation units for funds available in the periods ended December 31. It should be read along with the VAA’s financial statement and notes which are included in the SAI. The methodology of determining accumulation unit values may be found in the prospectus (see The Contracts - Valuation of Accumulation Units).
  Standard  
Breakpoint
  Accumulation unit value Number of
accumulation
units 		  Accumulation unit value Number of
accumulation
units
  Beginning
of period 		End of
period 		Beginning
of period 		End of
period
               
  (Accumulation unit value in dollars and Number of accumulation units in thousands)
AB VPS Global Thematic Growth
2007
4.919 5.839 572   4.997 5.946 41
2008
5.839 3.037 535   5.946 3.100 27
2009
3.037 4.604 533   3.100 4.712 28
2010
4.604 5.405 493   4.712 5.546 22
2011
5.405 4.099 435   5.546 4.216 19
2012
4.099 4.595 393   4.216 4.739 14
2013
4.595 5.593 344   4.739 5.781 12
2014
5.593 5.803 330   5.781 6.014 9
2015
5.803 5.898 304   6.014 6.127 10
2016
5.898 5.788 284   6.127 6.028 10
AB VPS Growth and Income(1)
2004
10.249 11.133 15   10.467 11.149 1*
2005
11.133 11.529 47   11.149 11.575 2
2006
11.529 13.353 72   11.575 13.439 2
2007
13.353 13.862 97   13.439 13.996 8
2008
13.862 8.144 91   13.996 8.238 4
2009
8.144 9.704 99   8.238 9.841 6
2010
9.704 10.837 78   9.841 11.017 5
2011
10.837 11.380 81   11.017 11.598 2
2012
11.380 13.210 90   11.598 13.497 2
2013
13.210 15.477 84   13.497 15.828 2
AB VPS Growth
2007
7.670 8.555 175   7.791 8.711 12
2008
8.555 4.862 171   8.711 4.963 10
2009
4.862 6.396 164   4.963 6.545 12
2010
6.396 7.269 152   6.545 7.457 10
2011
7.269 7.266 141   7.457 7.473 8
2012
7.266 8.171 137   7.473 8.425 9
2013
8.171 10.818 132   8.425 11.182 9
2014
10.818 12.099 113   11.182 12.537 10
2015
12.099 13.035 117   12.537 13.541 10
2016
13.035 13.015 95   13.541 13.554 10
American Century VP Balanced
2007
27.677 28.754 794   28.200 29.371 77
2008
28.754 22.680 700   29.371 23.224 61
2009
22.680 25.931 622   23.224 26.620 54
2010
25.931 28.660 566   26.620 29.495 41
2011
28.660 29.888 492   29.495 30.835 38
2012
29.888 33.083 448   30.835 34.217 36
2013
33.083 38.461 401   34.217 39.880 34
2014
38.461 41.831 348   39.880 43.482 35
2015
41.831 40.349 297   43.482 42.046 30
2016
40.349 42.741 289   42.046 44.650 27
American Century VP Inflation Protection(2)
2009
10.063 10.611 42   10.487 10.626 1*
2010
10.611 11.069 71   10.626 11.113 1*
2011
11.069 12.285 92   11.113 12.365 1*
2012
12.285 13.080 122   12.365 13.199 2
A-1

 

  Standard  
Breakpoint
  Accumulation unit value Number of
accumulation
units 		  Accumulation unit value Number of
accumulation
units
  Beginning
of period 		End of
period 		Beginning
of period 		End of
period
               
  (Accumulation unit value in dollars and Number of accumulation units in thousands)
American Funds Global Growth
2007
15.230 17.317 357   15.331 17.475 19
2008
17.317 10.563 348   17.475 10.686 28
2009
10.563 14.882 327   10.686 15.093 29
2010
14.882 16.465 312   15.093 16.740 26
2011
16.465 14.852 274   16.740 15.139 29
2012
14.852 18.022 248   15.139 18.416 27
2013
18.022 23.049 232   18.416 23.611 27
2014
23.049 23.348 212   23.611 23.977 27
2015
23.348 24.719 205   23.977 25.449 25
2016
24.719 24.625 193   25.449 25.415 25
American Funds Growth
2007
10.319 11.477 2,652   10.482 11.688 314
2008
11.477 6.367 2,498   11.688 6.500 280
2009
6.367 8.788 2,400   6.500 8.994 319
2010
8.788 10.325 2,209   8.994 10.594 182
2011
10.325 9.785 2,030   10.594 10.065 174
2012
9.785 11.421 1,882   10.065 11.777 164
2013
11.421 14.712 1,697   11.777 15.208 149
2014
14.712 15.805 1540   15.208 16.379 149
2015
15.805 16.720 1421   16.379 17.371 146
2016
16.720 18.125 1324   17.371 18.877 134
American Funds Growth-Income
2007
13.119 13.644 757   13.205 13.767 44
2008
13.644 8.395 705   13.767 8.493 44
2009
8.395 10.908 675   8.493 11.062 46
2010
10.908 12.034 642   11.062 12.234 36
2011
12.034 11.696 571   12.234 11.921 36
2012
11.696 13.604 548   11.921 13.900 35
2013
13.604 17.981 569   13.900 18.418 34
2014
17.981 19.695 570   18.418 20.224 32
2015
19.695 19.783 560   20.224 20.365 33
2016
19.783 21.843 537   20.365 22.542 31
American Funds International
2007
12.825 15.240 1,522   13.027 15.519 82
2008
15.240 8.733 1,478   15.519 8.915 63
2009
8.733 12.370 1,415   8.915 12.659 67
2010
12.370 13.132 1,245   12.659 13.473 39
2011
13.132 11.186 998   13.473 11.505 37
2012
11.186 13.058 834   11.505 13.464 34
2013
13.058 15.725 737   13.464 16.255 31
2014
15.725 15.155 683   16.255 15.705 27
2015
15.155 14.325 609   15.705 14.882 27
2016
14.325 14.684 569   14.882 15.293 26
BlackRock Global Allocation V.I.
2009
10.224 11.400 33   11.340 11.415 1*
2010
11.400 12.421 71   11.415 12.471 1*
2011
12.421 11.868 98   12.471 11.945 1*
2012
11.868 12.958 92   11.945 13.075 2
2013
12.958 14.723 104   13.075 14.892 2
2014
14.723 14.884 101   14.892 15.092 2
2015
14.884 14.631 103   15.092 14.873 2
2016
14.631 15.081 94   14.873 15.370 2
A-2

 

  Standard  
Breakpoint
  Accumulation unit value Number of
accumulation
units 		  Accumulation unit value Number of
accumulation
units
  Beginning
of period 		End of
period 		Beginning
of period 		End of
period
               
  (Accumulation unit value in dollars and Number of accumulation units in thousands)
Delaware VIP Diversified Income
2007
11.516 12.271 314   11.590 12.381 18
2008
12.271 11.597 468   12.381 11.730 33
2009
11.597 14.577 467   11.730 14.781 38
2010
14.577 15.595 452   14.781 15.853 20
2011
15.595 16.427 393   15.853 16.740 17
2012
16.427 17.434 395   16.740 17.811 10
2013
17.434 17.043 337   17.811 17.455 9
2014
17.043 17.770 313   17.455 18.245 10
2015
17.770 17.403 294   18.245 17.913 11
2016
17.403 17.837 254   17.913 18.406 10
Delaware VIP High Yield
2007
11.437 11.640 149   11.483 11.716 15
2008
11.640 8.738 133   11.716 8.817 16
2009
8.738 12.888 185   8.817 13.037 21
2010
12.888 14.715 198   13.037 14.922 10
2011
14.715 14.915 180   14.922 15.163 10
2012
14.915 17.399 169   15.163 17.732 8
2013
17.399 18.813 145   17.732 19.222 7
2014
18.813 18.573 145   19.222 19.024 7
2015
18.573 17.175 125   19.024 17.636 6
2016
17.175 19.242 106   17.636 19.808 6
Delaware VIP REIT
2007
27.986 23.779 612   28.425 24.212 32
2008
23.779 15.235 536   24.212 15.552 28
2009
15.235 18.589 458   15.552 19.023 25
2010
18.589 23.301 445   19.023 23.904 20
2011
23.301 25.519 411   23.904 26.245 18
2012
25.519 29.461 378   26.245 30.375 14
2013
29.461 29.729 351   30.375 30.728 13
2014
29.729 38.004 341   30.728 39.380 14
2015
38.004 38.951 302   39.380 40.462 18
2016
38.951 40.729 290   40.462 42.415 15
Delaware VIP Small Cap Value
2007
15.022 13.856 544   15.121 13.982 39
2008
13.856 9.593 534   13.982 9.704 36
2009
9.593 12.495 515   9.704 12.672 40
2010
12.495 16.319 510   12.672 16.592 30
2011
16.319 15.900 452   16.592 16.206 28
2012
15.900 17.888 425   16.206 18.278 25
2013
17.888 23.585 421   18.278 24.159 24
2014
23.585 24.662 377   24.159 25.326 23
2015
24.662 22.839 321   25.326 23.512 22
2016
22.839 29.640 308   23.512 30.591 20
Delaware VIP Smid Cap Growth(3)
2007
8.500 9.295 280   8.633 9.464 49
2008
9.295 4.890 236   9.464 4.992 37
2009
4.890 7.474 234   4.992 7.648 49
2010
8.929 10.115 241   9.155 10.376 26
2011
10.115 10.805 320   10.376 11.113 31
2012
10.805 11.843 344   11.113 12.211 20
2013
11.843 16.530 373   12.211 17.086 19
2014
16.530 16.836 297   17.086 17.445 13
2015
16.836 17.886 288   17.445 18.580 13
2016
17.886 19.128 264   18.580 19.919 12
A-3

 

  Standard  
Breakpoint
  Accumulation unit value Number of
accumulation
units 		  Accumulation unit value Number of
accumulation
units
  Beginning
of period 		End of
period 		Beginning
of period 		End of
period
               
  (Accumulation unit value in dollars and Number of accumulation units in thousands)
Deutsche Alternative Asset Allocation VIP
2009
11.349 11.247 1*   N/A N/A N/A
2010
11.247 12.524 7   N/A N/A N/A
2011
12.524 12.043 8   12.958 12.118 1*
2012
12.043 13.083 10   12.118 13.197 1*
2013
13.083 13.074 14   13.197 13.221 1*
2014
13.074 13.396 17   13.221 13.582 1*
2015
13.396 12.428 16   13.582 12.632 1*
2016
12.428 12.957 18   12.632 13.202 1*
Deutsche Equity 500 Index VIP(1)
2004
10.278 11.100 69   10.068 11.116 1*
2005
11.100 11.503 133   11.116 11.548 2
2006
11.503 13.156 166   11.548 13.241 5
2007
13.156 13.715 189   13.241 13.838 8
2008
13.715 8.534 226   13.838 8.632 5
2009
8.534 10.673 226   8.632 10.823 7
2010
10.673 12.121 195   10.823 12.321 5
2011
12.121 12.220 186   12.321 12.453 7
2012
12.220 13.998 121   12.453 14.301 5
2013
13.998 16.423 125   14.301 16.795 5
Deutsche Small Cap Index VIP(4)
2004
10.286 11.788 36   10.188 11.806 1*
2005
11.788 12.168 87   11.806 12.217 2
2006
12.168 14.155 164   12.217 14.247 6
2007
14.155 13.748 170   14.247 13.872 16
2008
13.748 8.966 161   13.872 9.070 13
2009
8.966 11.236 147   9.070 11.394 15
2010
11.236 14.060 135   11.394 14.294 13
2011
14.060 13.306 119   14.294 13.561 14
2012
13.306 15.314 118   13.561 15.647 12
Dreyfus Opportunistic Small Cap(4)
2003
17.159 22.372 3,135   17.310 22.625 74
2004
22.372 24.662 2,969   22.625 25.003 106
2005
24.662 25.833 2,596   25.003 26.256 99
2006
25.833 26.540 2,241   26.256 27.042 93
2007
26.540 23.370 1,752   27.042 23.871 142
2008
23.370 14.439 1,548   23.871 14.786 111
2009
14.439 18.018 1,363   14.786 18.497 100
2010
18.018 23.395 1,217   18.497 24.077 84
2011
23.395 19.955 1,063   24.077 20.589 75
2012
19.955 23.819 949   20.589 24.637 68
Dreyfus Stock Index(1)
2003
27.136 34.486 2,883   27.375 34.877 131
2004
34.486 37.776 2,766   34.877 38.299 144
2005
37.776 39.155 2,412   38.299 39.796 130
2006
39.155 44.773 2,198   39.796 45.621 119
2007
44.773 46.657 1,912   45.621 47.659 151
2008
46.657 29.036 1,620   47.659 29.734 135
2009
29.036 36.317 1,433   29.734 37.283 120
2010
36.317 41.291 1,280   37.283 42.496 98
2011
41.291 41.648 1,041   42.496 42.970 96
2012
41.648 47.723 939   42.970 49.361 80
Fidelity VIP Asset Manager
2007
28.093 32.126 1,790   28.624 32.815 88
2008
32.126 22.672 1,616   32.815 23.216 79
2009
22.672 28.981 1,451   23.216 29.751 73
2010
28.981 32.785 1,282   29.751 33.741 62
2011
32.785 31.628 1,158   33.741 32.632 56
2012
31.628 35.222 1,067   32.632 36.430 50
2013
35.222 40.349 961   36.430 41.838 45
2014
40.349 42.277 882   41.838 43.947 42
2015
42.277 41.916 790   43.947 43.681 38
2016
41.916 42.773 706   43.681 44.686 37
A-4

 

  Standard  
Breakpoint
  Accumulation unit value Number of
accumulation
units 		  Accumulation unit value Number of
accumulation
units
  Beginning
of period 		End of
period 		Beginning
of period 		End of
period
               
  (Accumulation unit value in dollars and Number of accumulation units in thousands)
Fidelity VIP Contrafund
2007
13.459 15.630 1,405   13.672 15.918 101
2008
15.630 8.868 1,394   15.918 9.054 93
2009
8.868 11.894 1,397   9.054 12.174 89
2010
11.894 13.769 1,335   12.174 14.128 68
2011
13.769 13.253 1,178   14.128 13.632 60
2012
13.253 15.239 1,147   13.632 15.714 58
2013
15.239 19.757 1,077   15.714 20.425 51
2014
19.757 21.840 1002   20.425 22.635 49
2015
21.840 21.713 948   22.635 22.559 43
2016
21.713 23.158 869   22.559 24.121 39
Fidelity VIP Equity-Income(1)
2003
19.312 24.918 2,772   19.481 25.200 59
2004
24.918 27.515 2,736   25.200 27.896 88
2005
27.515 28.839 2,551   27.896 29.311 85
2006
28.839 34.318 2,482   29.311 34.967 88
2007
34.318 34.496 2,121   34.967 35.237 191
2008
34.496 19.585 1,759   35.237 20.056 158
2009
19.585 25.248 1,543   20.056 25.919 157
2010
25.248 28.783 1,383   25.919 29.623 121
2011
28.783 28.774 1,167   29.623 29.687 116
2012
28.774 33.418 1,051   29.687 34.565 109
2013
33.418 39.194 996   34.565 40.577 106
Fidelity VIP Growth
2007
39.484 49.632 2,448   40.232 50.698 155
2008
49.632 25.960 2,130   50.698 26.585 129
2009
25.960 32.972 1,891   26.585 33.850 121
2010
32.972 40.536 1,679   33.850 41.719 96
2011
40.536 40.213 1,444   41.719 41.491 87
2012
40.213 45.662 1,333   41.491 47.230 82
2013
45.662 61.634 1,191   47.230 63.910 73
2014
61.634 67.915 1096   63.910 70.599 71
2015
67.915 72.063 995   70.599 75.099 68
2016
72.063 71.917 903   75.099 75.135 63
Fidelity® VIP Government Money Market (Pending Allocation Account)
2007
16.412 17.267 20   16.438 17.295 1*
2008
17.267 17.788 3   17.295 17.818 1*
2009
17.788 17.916 1*   N/A N/A N/A
2010
17.916 17.960 1*   17.946 17.991 1*
2011
17.960 17.979 2   17.991 18.008 1*
2012
17.979 18.004 1*   18.008 18.030 1*
2013
18.004 18.009 1*   18.030 18.036 1*
2014
18.009 18.010 1*   18.036 18.038 1*
2015
18.010 18.015 2   18.038 18.042 1*
2016
18.015 18.052 4   18.042 18.078 1*
Janus Aspen Global Research
2007
15.057 16.342 1,054   15.342 16.694 101
2008
16.342 8.953 914   16.694 9.169 90
2009
8.953 12.206 836   9.169 12.531 83
2010
12.206 13.998 759   12.531 14.407 60
2011
13.998 11.954 625   14.407 12.334 58
2012
11.954 14.212 567   12.334 14.701 54
2013
14.212 18.071 502   14.701 18.738 47
2014
18.071 19.223 464   18.738 19.983 42
2015
19.223 18.596 434   19.983 19.380 40
2016
18.596 18.791 389   19.380 19.633 39
A-5

 

  Standard  
Breakpoint
  Accumulation unit value Number of
accumulation
units 		  Accumulation unit value Number of
accumulation
units
  Beginning
of period 		End of
period 		Beginning
of period 		End of
period
               
  (Accumulation unit value in dollars and Number of accumulation units in thousands)
LVIP Baron Growth Opportunities(5)
2007
30.334 31.059 666   30.911 31.730 82
2008
31.059 18.716 572   31.730 19.168 60
2009
18.716 25.631 524   19.168 26.316 58
2010
25.631 32.071 468   26.316 33.010 42
2011
32.071 33.029 385   33.010 34.082 35
2012
33.029 38.666 334   34.082 39.998 29
2013
38.666 53.619 325   39.998 55.605 26
2014
53.619 55.663 286   55.605 57.869 20
2015
55.663 52.480 260   57.869 54.696 18
2016
52.480 54.852 233   54.696 57.311 18
LVIP BlackRock Emerging Markets Managed Volatility
2014
10.140 9.300 3   N/A 9.314 N/A
2015
9.300 7.825 3   9.321 7.859 1*
2016
7.825 8.289 5   7.859 8.346 0
LVIP BlackRock Inflation Protected Bond
2012
10.036 10.259 7   N/A N/A N/A
2013
10.259 9.310 102   10.000 9.348 1*
2014
9.310 9.505 84   9.348 9.568 4
2015
9.505 9.151 73   9.568 9.234 5
2016
9.151 9.385 76   9.234 9.494 5
LVIP Blended Large Cap Growth Managed Volatility
2007
6.697 7.984 269   6.803 8.131 25
2008
7.984 4.678 257   8.131 4.776 23
2009
4.678 6.416 226   4.776 6.566 21
2010
6.416 7.073 209   6.566 7.257 16
2011
7.073 6.604 195   7.257 6.793 15
2012
6.604 7.610 181   6.793 7.847 18
2013
7.610 9.455 167   7.847 9.774 13
2014
9.455 9.862 161   9.774 10.220 13
2015
9.862 9.895 147   10.220 10.280 13
2016
9.895 9.668 117   10.280 10.069 13
LVIP Blended Mid Cap Managed Volatility
2014
10.153 10.147 1*   N/A 10.163 N/A
2015
10.147 9.624 2   9.878 9.663 1*
2016
9.624 9.743 2   9.663 9.806 1*
LVIP Clarion Global Real Estate
2007
10.091 8.265 5   8.946 8.278 1*
2008
8.265 4.743 18   8.278 4.762 1*
2009
4.743 6.472 54   4.762 6.515 2
2010
6.472 7.560 80   6.515 7.628 4
2011
7.560 6.835 69   7.628 6.915 5
2012
6.835 8.438 68   6.915 8.557 6
2013
8.438 8.630 70   8.557 8.774 7
2014
8.630 9.731 54   8.774 9.918 7
2015
9.731 9.516 56   9.918 9.724 7
2016
9.516 9.533 63   9.724 9.765 10
LVIP Delaware Bond
2007
11.115 11.604 376   11.188 11.709 24
2008
11.604 11.153 489   11.709 11.281 37
2009
11.153 13.129 534   11.281 13.313 33
2010
13.129 14.101 542   13.313 14.336 28
2011
14.101 15.027 503   14.336 15.315 29
2012
15.027 15.861 471   15.315 16.205 28
2013
15.861 15.341 354   16.205 15.713 20
2014
15.341 16.096 304   15.713 16.528 11
2015
16.096 15.997 260   16.528 16.468 11
2016
15.997 16.269 227   16.468 16.790 12
A-6

 

  Standard  
Breakpoint
  Accumulation unit value Number of
accumulation
units 		  Accumulation unit value Number of
accumulation
units
  Beginning
of period 		End of
period 		Beginning
of period 		End of
period
               
  (Accumulation unit value in dollars and Number of accumulation units in thousands)
LVIP Delaware Diversified Floating Rate
2011
9.976 9.762 1*   N/A N/A N/A
2012
9.762 10.049 3   N/A N/A N/A
2013
10.049 9.999 13   N/A N/A N/A
2014
9.999 9.936 75   10.126 10.027 1*
2015
9.936 9.741 20   10.027 9.853 1*
2016
9.741 9.838 21   9.853 9.990 1*
LVIP Delaware Foundation Aggressive Allocation
2009
9.861 11.988 1*   10.539 12.004 1*
2010
11.988 13.350 5   12.004 13.401 1*
2011
13.350 12.950 8   13.401 13.031 1*
2012
12.950 14.525 11   13.031 14.653 1*
2013
14.525 17.290 13   14.653 17.487 1*
2014
17.290 17.862 16   17.487 18.110 1*
2015
17.862 17.448 19   18.110 17.735 1*
2016
17.448 18.246 22   17.735 18.592 1*
LVIP Delaware Foundation Conservative Allocation(6)
2007
12.476 12.918 76   12.559 13.038 25
2008
12.918 9.342 68   13.038 9.452 18
2009
9.342 11.362 70   9.452 11.524 15
2010
11.362 12.422 66   11.524 12.631 16
2011
12.422 12.573 62   12.631 12.817 17
2012
12.573 13.771 65   12.817 14.073 17
2013
13.771 14.907 66   14.073 15.272 17
2014
14.907 15.478 66   15.272 15.897 18
2015
15.478 15.180 62   15.897 15.630 17
2016
15.180 15.737 58   15.630 16.244 17
LVIP Delaware Foundation Moderate Allocation
2009
10.910 11.800 1*   N/A N/A N/A
2010
11.800 12.970 12   N/A N/A N/A
2011
12.970 12.875 18   13.216 12.952 1*
2012
12.875 14.188 22   12.952 14.302 1*
2013
14.188 16.047 31   14.302 16.219 1*
2014
16.047 16.623 32   16.219 16.843 1*
2015
16.623 16.268 18   16.843 16.525 1*
2016
16.268 16.855 18   16.525 17.164 1*
LVIP Delaware Social Awareness
2007
16.462 16.782 1,119   16.774 17.143 98
2008
16.782 10.897 1,017   17.143 11.160 85
2009
10.897 14.026 920   11.160 14.399 77
2010
14.026 15.493 841   14.399 15.945 64
2011
15.493 15.437 702   15.945 15.927 59
2012
15.437 17.619 653   15.927 18.224 51
2013
17.619 23.669 600   18.224 24.543 47
2014
23.669 26.996 550   24.543 28.063 44
2015
26.996 26.550 527   28.063 27.669 39
2016
26.550 28.031 482   27.669 29.285 36
LVIP Dimensional U.S. Core Equity 1
2007
10.161 10.675 596   10.321 10.871 49
2008
10.675 6.789 553   10.871 6.930 37
2009
6.789 8.380 486   6.930 8.576 34
2010
8.380 9.370 424   8.576 9.613 29
2011
9.370 9.388 362   9.613 9.656 28
2012
9.388 10.718 328   9.656 11.052 26
2013
10.718 14.140 323   11.052 14.617 26
2014
14.140 15.845 328   14.617 16.420 29
2015
15.845 15.372 311   16.420 15.971 27
2016
15.372 17.413 281   15.971 18.135 24
LVIP Franklin Templeton Global Equity Managed Volatility
2014
10.187 9.497 3   N/A 9.512 N/A
2015
9.497 8.648 3   N/A 8.683 N/A
2016
8.648 8.769 5   8.683 8.827 1*
A-7

 

  Standard  
Breakpoint
  Accumulation unit value Number of
accumulation
units 		  Accumulation unit value Number of
accumulation
units
  Beginning
of period 		End of
period 		Beginning
of period 		End of
period
               
  (Accumulation unit value in dollars and Number of accumulation units in thousands)
LVIP Global Conservative Allocation Managed Risk
2007
11.155 11.902 250   11.198 11.979 5
2008
11.902 9.611 260   11.979 9.697 5
2009
9.611 11.880 262   9.697 12.016 6
2010
11.880 12.997 283   12.016 13.179 3
2011
12.997 13.341 154   13.179 13.562 3
2012
13.341 14.500 154   13.562 14.776 3
2013
14.500 15.755 124   14.776 16.096 2
2014
15.755 16.488 111   16.096 16.886 2
2015
16.488 15.998 82   16.886 16.426 2
2016
15.998 16.634 73   16.426 17.122 2
LVIP Global Growth Allocation Managed Risk
2007
12.093 13.147 292   12.139 13.230 13
2008
13.147 8.666 357   13.230 8.743 16
2009
8.666 11.071 394   8.743 11.196 16
2010
11.071 12.355 408   11.196 12.526 13
2011
12.355 12.231 405   12.526 12.432 13
2012
12.231 13.217 379   12.432 13.468 13
2013
13.217 14.858 382   13.468 15.178 12
2014
14.858 15.220 348   15.178 15.587 12
2015
15.220 14.513 307   15.587 14.899 12
2016
14.513 15.051 259   14.899 15.490 12
LVIP Global Income
2009
10.256 10.805 6   N/A N/A N/A
2010
10.805 11.733 13   10.819 11.778 1*
2011
11.733 11.742 20   11.778 11.817 1*
2012
11.742 12.520 20   11.817 12.631 1*
2013
12.520 12.045 22   12.631 12.183 1*
2014
12.045 12.157 25   12.183 12.326 1*
2015
12.157 11.793 29   12.326 11.987 1*
2016
11.793 11.735 26   11.987 11.957 1*
LVIP Global Moderate Allocation Managed Risk
2007
11.674 12.629 319   11.721 12.711 29
2008
12.629 9.175 412   12.711 9.258 25
2009
9.175 11.631 353   9.258 11.765 23
2010
11.631 12.892 356   11.765 13.074 22
2011
12.892 12.913 347   13.074 13.128 23
2012
12.913 14.010 337   13.128 14.279 21
2013
14.010 15.515 338   14.279 15.853 21
2014
15.515 15.998 300   15.853 16.387 22
2015
15.998 15.304 244   16.387 15.715 22
2016
15.304 15.810 234   15.715 16.275 16
LVIP JPMorgan Select Mid Cap Value Managed Volatility
2014
10.037 10.517 16   N/A 10.534 N/A
2015
10.517 9.606 26   9.909 9.645 1*
2016
9.606 10.463 17   9.645 10.531 1*
LVIP Managed Risk Profile 2010
2007
9.998 10.493 5   10.460 10.509 1*
2008
10.493 7.904 47   10.509 7.936 8
2009
7.904 9.735 65   7.936 9.799 9
2010
9.735 10.744 68   9.799 10.841 9
2011
10.744 10.770 56   10.841 10.895 10
2012
10.770 11.573 66   10.895 11.737 1*
2013
11.573 12.481 66   11.737 12.689 1*
2014
12.481 12.947 43   12.689 13.197 1*
2015
12.947 12.612 45   N/A 12.887 N/A
2016
12.612 13.041 34   N/A N/A N/A
A-8

 

  Standard  
Breakpoint
  Accumulation unit value Number of
accumulation
units 		  Accumulation unit value Number of
accumulation
units
  Beginning
of period 		End of
period 		Beginning
of period 		End of
period
               
  (Accumulation unit value in dollars and Number of accumulation units in thousands)
LVIP Managed Risk Profile 2020
2007
10.001 10.337 10   9.924 10.353 1*
2008
10.337 7.482 122   10.353 7.512 1*
2009
7.482 9.309 141   7.512 9.369 4
2010
9.309 10.325 212   9.369 10.418 4
2011
10.325 10.242 189   10.418 10.360 7
2012
10.242 10.990 186   10.360 11.144 8
2013
10.990 12.092 174   11.144 12.292 8
2014
12.092 12.497 172   12.292 12.736 8
2015
12.497 12.099 195   12.736 12.361 9
2016
12.099 12.512 152   12.361 12.815 7
LVIP Managed Risk Profile 2030
2007
10.045 10.444 8   10.342 10.461 1*
2008
10.444 7.157 70   10.461 7.187 1*
2009
7.157 9.067 176   7.187 9.127 2
2010
9.067 10.103 224   9.127 10.195 2
2011
10.103 9.946 246   10.195 10.062 3
2012
9.946 10.624 275   10.062 10.775 3
2013
10.624 11.965 309   10.775 12.165 3
2014
11.965 12.338 353   12.165 12.576 8
2015
12.338 11.891 347   12.576 12.150 8
2016
11.891 12.210 366   12.150 12.507 8
LVIP Managed Risk Profile 2040
2007
10.072 10.269 3   9.914 10.285 2
2008
10.269 6.553 36   10.285 6.579 2
2009
6.553 8.496 59   6.579 8.551 2
2010
8.496 9.560 81   8.551 9.647 2
2011
9.560 9.327 100   9.647 9.435 2
2012
9.327 9.892 123   9.435 10.032 2
2013
9.892 11.413 138   10.032 11.604 2
2014
11.413 11.693 148   11.604 11.918 1*
2015
11.693 11.203 143   11.918 11.447 1*
2016
11.203 11.514 147   11.447 11.795 1*
LVIP Managed Risk Profile 2050
2011
9.925 9.213 29   N/A N/A N/A
2012
9.213 9.667 3   N/A N/A N/A
2013
9.667 11.393 13   N/A N/A N/A
2014
11.393 11.612 27   N/A 11.719 N/A
2015
11.612 11.066 39   N/A 11.196 N/A
2016
11.066 11.439 55   N/A N/A N/A
LVIP Mondrian International Value
2007
17.576 19.400 571   17.691 19.576 62
2008
19.400 12.166 450   19.576 12.307 54
2009
12.166 14.603 370   12.307 14.809 56
2010
14.603 14.814 308   14.809 15.061 34
2011
14.814 14.048 256   15.061 14.318 32
2012
14.048 15.246 217   14.318 15.578 30
2013
15.246 18.391 195   15.578 18.838 28
2014
18.391 17.746 178   18.838 18.223 28
2015
17.746 16.903 161   18.223 17.401 28
2016
16.903 17.406 133   17.401 17.964 30
LVIP SSGA Bond Index
2009
10.121 10.385 7   10.454 10.399 3
2010
10.385 10.895 39   10.399 10.937 5
2011
10.895 11.584 49   10.937 11.658 1*
2012
11.584 11.911 54   11.658 12.016 5
2013
11.911 11.490 53   12.016 11.620 1*
2014
11.490 12.030 49   11.620 12.197 1*
2015
12.030 11.940 50   12.197 12.136 1*
2016
11.940 12.091 49   12.136 12.320 1*
A-9

 

  Standard  
Breakpoint
  Accumulation unit value Number of
accumulation
units 		  Accumulation unit value Number of
accumulation
units
  Beginning
of period 		End of
period 		Beginning
of period 		End of
period
               
  (Accumulation unit value in dollars and Number of accumulation units in thousands)
LVIP SSGA Emerging Markets 100
2009
10.051 13.640 41   11.245 13.659 1*
2010
13.640 17.255 77   13.659 17.322 1*
2011
17.255 14.531 76   17.322 14.624 3
2012
14.531 16.207 76   14.624 16.351 2
2013
16.207 15.592 73   16.351 15.770 2
2014
15.592 14.916 73   15.770 15.125 4
2015
14.916 12.251 75   15.125 12.454 4
2016
12.251 14.002 67   12.454 14.268 5
LVIP SSGA Global Tactical Allocation Managed Volatility
2007
12.622 13.873 151   12.672 13.962 5
2008
13.873 8.178 195   13.962 8.251 6
2009
8.178 10.590 157   8.251 10.712 8
2010
10.590 11.400 162   10.712 11.560 8
2011
11.400 11.312 152   11.560 11.499 5
2012
11.312 12.448 144   11.499 12.686 5
2013
12.448 13.533 137   12.686 13.826 5
2014
13.533 13.931 131   13.826 14.268 6
2015
13.931 12.893 120   14.268 13.238 6
2016
12.893 13.482 110   13.238 13.878 6
LVIP SSGA International Index
2009
10.140 12.116 5   N/A N/A N/A
2010
12.116 12.841 9   N/A N/A N/A
2011
12.841 11.139 6   13.266 11.211 1*
2012
11.139 13.028 8   11.211 13.145 1*
2013
13.028 15.605 10   13.145 15.785 1*
2014
15.605 14.547 12   15.785 14.757 1*
2015
14.547 14.227 14   14.757 14.467 1*
2016
14.227 14.225 14   14.467 14.502 1*
LVIP SSGA International Managed Volatility
2016
10.191 10.147 4   10.193 10.151 1*
LVIP SSGA S&P 500 Index
2012
9.836 10.727 2   N/A N/A N/A
2013
10.727 14.019 7,232   10.000 14.075 679
2014
14.019 15.743 6484   14.075 15.846 648
2015
15.743 15.769 5795   15.846 15.912 616
2016
15.769 17.447 5348   15.912 17.650 590
LVIP SSGA Small-Cap Index
2012
10.096 10.921 1*   N/A N/A N/A
2013
10.921 14.911 2,065   10.000 14.972 151
2014
14.911 15.453 1838   14.972 15.555 142
2015
15.453 14.578 1635   15.555 14.711 127
2016
14.578 17.417 1478   14.711 17.620 116
LVIP T. Rowe Price Structured Mid-Cap Growth
2007
13.417 15.089 1,451   13.672 15.413 127
2008
15.089 8.548 1,309   15.413 8.754 115
2009
8.548 12.385 1,203   8.754 12.715 106
2010
12.385 15.741 1,087   12.715 16.200 81
2011
15.741 14.981 931   16.200 15.457 75
2012
14.981 17.250 846   15.457 17.843 58
2013
17.250 23.021 805   17.843 23.872 52
2014
23.021 25.433 722   23.872 26.439 52
2015
25.433 25.709 672   26.439 26.792 47
2016
25.709 27.377 591   26.792 28.602 45
A-10

 

  Standard  
Breakpoint
  Accumulation unit value Number of
accumulation
units 		  Accumulation unit value Number of
accumulation
units
  Beginning
of period 		End of
period 		Beginning
of period 		End of
period
               
  (Accumulation unit value in dollars and Number of accumulation units in thousands)
Neuberger Berman AMT Large Cap Value
2007
18.584 20.116 475   18.936 20.549 51
2008
20.116 9.481 409   20.549 9.709 40
2009
9.481 14.651 369   9.709 15.041 39
2010
14.651 16.777 336   15.041 17.267 24
2011
16.777 14.724 269   17.267 15.191 22
2012
14.724 16.997 234   15.191 17.581 19
2013
16.997 22.067 227   17.581 22.883 17
2014
22.067 24.000 213   22.883 24.949 15
2015
24.000 20.956 194   24.949 21.840 14
2016
20.956 26.426 195   21.840 27.609 13
Neuberger Berman AMT Mid Cap Growth(1)
2003
4.005 5.078 234   4.027 5.119 3
2004
5.078 5.847 312   5.119 5.910 9
2005
5.847 6.585 508   5.910 6.672 12
2006
6.585 7.477 600   6.672 7.595 19
2007
7.477 9.070 1,084   7.595 9.236 60
2008
9.070 5.085 974   9.236 5.192 53
2009
5.085 6.626 905   5.192 6.781 70
2010
6.626 8.469 833   6.781 8.689 40
2011
8.469 8.424 720   8.689 8.664 38
2012
8.424 9.376 666   8.664 9.667 36
2013
9.376 10.731 620   9.667 11.075 36
T. Rowe Price International Stock
2007
18.915 21.167 1,038   19.273 21.622 70
2008
21.167 10.750 914   21.622 11.008 59
2009
10.750 16.219 844   11.008 16.650 57
2010
16.219 18.379 747   16.650 18.915 41
2011
18.379 15.860 645   18.915 16.364 34
2012
15.860 18.598 596   16.364 19.236 31
2013
18.598 21.000 546   19.236 21.776 29
2014
21.000 20.534 489   21.776 21.345 31
2015
20.534 20.146 441   21.345 20.995 28
2016
20.146 20.370 390   20.995 21.281 23
* The numbers of accumulation units less than 500 were rounded up to one.
(1) On May 17, 2013, this Subaccount was closed and the values were transferred to the LVIP SSgA S&P 500 Index Fund Subaccount.
(2) On May 17, 2013, this Subaccount was closed and the values were transferred to the LVIP BlackRock Inflation Protected Bond Fund Subaccount.
(3) Effective October 9, 2010, the Delaware VIP Trend Series was reorganized into the Delaware VIP Smid Cap Growth Series. The values in the table for periods prior to the date of the reorganization reflect investments in the Delaware VIP Trend Series.
(4) On May 17, 2013, this Subaccount was closed and the values were transferred to the LVIP SSgA Small-Cap Index Fund Subaccount.
(5) Effective June 5, 2007, the Baron Capital Asset Fund, a series of Baron Capital Funds Trust, was reorganized into the LVIP Baron Growth Opportunities Fund, a series of Lincoln Variable Insurance Products Trust. The values in the table for periods prior to the date of the reorganization reflect investments in the Baron Capital Asset Fund.
(6) Effective June 15, 2009, the LVIP Delaware Managed Fund was reorganized into the LVIP Delaware Foundation Conservative Allocation Fund. The values in the table for periods prior to the date of the reorganization reflect investments in the LVIP Delaware Managed Fund.
(7) Effective July 30, 2010, the LVIP Wilshire Aggressive Profile Fund was restructured into the LVIP SSgA Global Tactical Allocation Managed Volatility Fund. The values in the table for periods prior to the date of the restructuring reflect investments in the LVIP Wilshire Aggressive Profile Fund.
A-11

 

[THIS PAGE INTENTIONALLY LEFT BLANK]

Group Variable Annuity Contracts I, II, & III  
Funded Through the SubAccounts of
Lincoln National Variable Annuity Account L of
The Lincoln National Life Insurance Company  
Statement of Additional Information (SAI)
This SAI should be read in conjunction with the prospectus of the Group Variable Annuity Contracts (the “Contracts”), dated May 1, 2017. You may obtain a copy of the prospectus to which this SAI relates without charge by writing to The Lincoln National Life Insurance Company, PO Box 2340, Fort Wayne, IN 46801-2340, by calling Lincoln Life at 1-800-341-0441, or by visiting www.LincolnFinancial.com.
Table of Contents
Item Page
Special Terms B-2
Services B-2
Principal Underwriter B-2
Purchase of Securities Being Offered B-2
Annuity Payouts B-2
Determination of Accumulation and Annuity Unit Value B-3
Capital Markets B-3
Item Page
Advertising & Ratings B-4
About the S&P 500 Index B-4
Unclaimed Property B-5
Additional Services B-5
Other Information B-6
Financial Statements B-6
 
 
This SAI is not a prospectus.
The date of this SAI is May 1, 2017.

 

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) the financial statements of the Lincoln National Variable Annuity Account L as of December 31, 2016 and for the year then ended and the statement of changes in net assets for each of the years in the two year period ended December 31, 2016; and b) the consolidated financial statements of The Lincoln National Life Insurance Company as of December 31, 2016 and 2015 and for each of the three years in the period ended December 31, 2016 as set forth in their reports, 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 toLincoln Life. We have entered into an agreement with Bank of New York Mellon, One Mellon Bank Center, 500 Grant Street, Pittsburgh, Pennsylvania, 15258, to provide accounting services to the VAA. No separate charge against the assets of the VAA is made by us for this service.
Principal Underwriter
Lincoln Financial Distributors, Inc. (“LFD”), an affiliate of Lincoln Life, serves as principal underwriter (the “Principal Underwriter”) for the contracts, as described in the prospectus. The Principal Underwriter offers the contracts to the public on a continuous basis and anticipates continuing to offer the contracts, but reserves the right to discontinue the offering. The Principal Underwriter offers the contracts through sales representatives, who are associated with Lincoln Financial Advisors Corporation and/or Lincoln Financial Securities Corporation (collectively, “LFN”), our affiliates. The Principal Underwriter also may enter into selling agreements with other broker-dealers (“Selling Firms”) for the sale of the contracts. Sales representatives of Selling Firms are appointed as our insurance agents. LFD, acting as Principal Underwriter, paid $1,631,195, $1,412,869 and $1,500,645 to LFN and Selling Firms in 2014, 2015 and 2016, respectively, as sales compensation with respect to the contracts. The Principal Underwriter retained no underwriting commissions for the sale of the contracts.
Purchase of Securities Being Offered
The variable annuity contracts are offered to the public through licensed insurance agents who specialize in selling our products; through independent insurance brokers; and through certain securities brokers/dealers selected by us whose personnel are legally authorized to sell annuity products. There are no special purchase plans for any class of prospective buyers. However, under certain limited circumstances described in the prospectus under the section Charges and Other Deductions, any applicable account fee and/or surrender charge may be reduced or waived.
Both before and after the Annuity Commencement Date, there are exchange privileges between Subaccounts, and from the VAA to the general account (if available) subject to restrictions set out in the prospectus. See The Contracts, in the prospectus. No exchanges are permitted between the VAA and other separate accounts.
The offering of the contracts is continuous.
Annuity Payouts
Variable Annuity Payouts
Variable Annuity Payouts will be determined on the basis of:
• the dollar value of the contract on the Annuity Commencement Date less any applicable premium tax;
• the annuity tables contained in the contract;
• the type of annuity option selected; and
• the investment results of the fund(s) selected.
B-2

 

In order to determine the amount of variable Annuity Payouts, we make the following calculation:
• first, we determine the dollar amount of the first payout;
• second, we credit the contract with a fixed number of Annuity Units based on the amount of the first payout; and
• third, we calculate the value of the Annuity Units each period thereafter.
These steps are explained below.
The dollar amount of the first periodic variable Annuity Payout is determined by applying the total value of the Accumulation Units credited under the contract valued as of the Annuity Commencement Date (less any premium taxes) to the annuity tables contained in the contract. The first variable Annuity Payout will be paid 14 days after the Annuity Commencement Date. This day of the month will become the day on which all future Annuity Payouts will be paid. Amounts shown in the tables are based on the 1983 Table “a” Individual Annuity Mortality Table modified, with an assumed investment return at the rate of 1%, 2%, 3%, 4%, 5%, or 6% per annum, depending on the terms of your contract. The first Annuity Payout is determined by multiplying the benefit per $1,000 of value shown in the contract tables by the number of thousands of dollars of value accumulated under the contract. These annuity tables vary according to the form of annuity selected and the age of the Annuitant at the Annuity Commencement Date. The assumed interest rate is the measuring point for subsequent Annuity Payouts. If the actual net investment rate (annualized) exceeds the assumed interest rate, the payout will increase at a rate equal to the amount of such excess.
Conversely, if the actual rate is less than the assumed interest rate, Annuity Payouts will decrease. If the assumed rate of interest were to be increased, Annuity Payouts would start at a higher level but would decrease more rapidly or increase more slowly.
We may use sex-distinct annuity tables in contracts that are not associated with employer sponsored plans and where not prohibited by law.
At an Annuity Commencement Date, the contract is credited with Annuity Units for each Subaccount on which variable Annuity Payouts are based. The number of Annuity Units to be credited is determined by dividing the amount of the first periodic payout by the value of an Annuity Unit in each Subaccount selected. Although the number of Annuity Units is fixed by this process, the value of such units will vary with the value of the underlying fund. The amount of the second and subsequent periodic payouts is determined by multiplying the Contractowner’s fixed number of Annuity Units in each Subaccount by the appropriate Annuity Unit value for the Valuation Date ending 14 days prior to the date that payout is due.
The value of each Subaccount’s Annuity Unit will be set initially at $1.00. The Annuity Unit value for each Subaccount at the end of any Valuation Date is determined by multiplying the Subaccount Annuity Unit value for the immediately preceding Valuation Date by the product of:
• The net investment factor of the Subaccount for the Valuation Period for which the Annuity Unit value is being determined, and
• A factor to neutralize the assumed investment return in the annuity table.
The value of the Annuity Units is determined as of a Valuation Date 14 days prior to the payment date in order to permit calculation of amounts of Annuity Payouts and mailing of checks in advance of their due dates. Such checks will normally be issued and mailed at least three days before the due date.
Determination of Accumulation and Annuity Unit Value
A description of the days on which Accumulation and Annuity Units will be valued is given in the prospectus. The New York Stock Exchange's (NYSE) most recent announcement (which is subject to change) states that it will be closed on weekends and on these holidays: New Year's Day, Martin Luther King Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. If any of these holidays occurs on a weekend day, the Exchange may also be closed on the business day occurring just before or just after the holiday. It may also be closed on other days.
Since the portfolios of some of the fund and series will consist of securities primarily listed on foreign exchanges or otherwise traded outside the United States, those securities may be traded (and the net asset value of those fund and series and of the variable account could therefore be significantly affected) on days when the investor has no access to those funds and series.
Capital Markets
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.
B-3

 

Advertising & Ratings
We may include in certain advertisements, endorsements in the form of a list of organizations, individuals or other parties which recommend Lincoln Life or the policies. Furthermore, we may occasionally include in advertisements comparisons of currently taxable and tax deferred investment programs, based on selected tax brackets, or discussions of alternative investment vehicles and general economic conditions.
Our financial strength is ranked and rated by nationally recognized independent rating agencies. The ratings do not imply approval of the product and do not refer to the performance of the product, or any separate account, including the underlying investment options. Ratings are not recommendations to buy our products. Each of the rating agencies reviews its ratings periodically. Accordingly, all ratings are subject to revision or withdrawal at any time by the rating agencies, and therefore, no assurance can be given that these ratings will be maintained. The current outlook for the insurance subsidiaries is stable for Moody’s, A.M. Best, Fitch, and Standard & Poor’s. Our financial strength ratings, which are intended to measure our ability to meet contract holder obligations, are an important factor affecting public confidence in most of our products and, as a result, our competitiveness. A downgrade of our financial strength rating could affect our competitive position in the insurance industry by making it more difficult for us to market our products as potential customers may select companies with higher financial strength ratings and by leading to increased withdrawals by current customers seeking companies with higher financial strength ratings. For more information on ratings, including outlooks, see www.LincolnFinancial.com/investor.
About the S&P 500 Index
The S&P 500 Index (hereinafter “Index”) is a product of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”), and has been licensed for use by Lincoln Variable Insurance Products Trust and its affiliates (hereinafter “Licensee”). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). The fund(s) are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or any of their respective affiliates (collectively, “S&P Dow Jones Indices”). S&P Dow Jones Indices do not make any representation or warranty, express or implied, to the owners of the funds or any member of the public regarding the advisability of investing in securities generally or in the funds particularly or the ability of the Index to track general market performance. S&P Dow Jones Indices only relationship to Licensee with respect to the Index is the licensing of the Index and certain trademarks, service marks and/or trade names of S&P Dow Jones Indices and/or its licensors. The Index is determined, composed and calculated by S&P Dow Jones Indices without regard to Licensee or the funds. S&P Dow Jones Indices have no obligation to take the needs of Licensee or the owners of the funds into consideration in determining, composing or calculating the Index. S&P Dow Jones Indices are not responsible for and have not participated in the determination of the prices, and amount of the funds or the timing of the issuance or sale of the funds or in the determination or calculation of the equation by which the funds are to be converted into cash, surrendered or redeemed, as the case may be. S&P Dow Jones Indices have no obligation or liability in connection with the administration, marketing or trading of the funds. There is no assurance that investment products based on the Index will accurately track index performance or provide positive investment returns. S&P Dow Jones Indices LLC is not an investment advisor. Inclusion of a security within an index is not a recommendation by S&P Dow Jones Indices to buy, sell, or hold such security, nor is it considered to be investment advice.
S&P DOW JONES INDICES DO NOT GUARANTEE THE ADEQUACY, ACCURACY, TIMELINESS AND/OR THE COMPLETENESS OF THE INDEX OR ANY DATA RELATED THERETO OR ANY COMMUNICATION, INCLUDING BUT NOT LIMITED TO, ORAL OR WRITTEN COMMUNICATION (INCLUDING ELECTRONIC COMMUNICATIONS) WITH RESPECT THERETO. S&P DOW JONES INDICES SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS, OR DELAYS THEREIN. S&P DOW JONES INDICES MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE OR AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE FUNDS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEX OR WITH RESPECT TO ANY DATA RELATED THERETO. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT WHATSOEVER SHALL S&P DOW JONES INDICES BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS, TRADING LOSSES, LOST TIME OR GOODWILL, EVEN IF THEY HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER IN CONTRACT, TORT, STRICT LIABILITY, OR OTHERWISE. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN S&P DOW JONES INDICES AND LICENSEE, OTHER THAN THE LICENSORS OF S&P DOW JONES INDICES.
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.
B-4

 

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.
Dollar-Cost Averaging Illustrations. These illustrations will generally discuss the price-leveling effect of making regular purchases in the same subaccounts over a period of time, to take advantage of the trends in market prices of the portfolio securities purchased for those subaccounts.
Unclaimed Property
We have entered into a Global Resolution Agreement with a third party auditor representing multiple states and jurisdictions. Under the terms of the Global Resolution Agreement, the third party auditor has compared expanded matching criteria to the Social Security Master Death File (“SSMDF”) to identify deceased insureds and policy or contract holders where a valid claim has not been made. We have also entered into a Regulatory Settlement Agreement with multiple states and jurisdictions. The Regulatory Settlement Agreement applies prospectively and requires us to adopt and implement additional procedures comparing our records to the SSMDF to identify unclaimed death benefits and prescribes procedures for identifying and locating beneficiaries once deaths are identified. Other jurisdictions that are not signatories to the Regulatory Settlement Agreement are conducting examinations and audits of our compliance with unclaimed property laws. Any escheatable property identified as a result of the audits and inquiries could result in additional payments of previously unclaimed death benefits or the payment of abandoned funds to U.S. jurisdictions.
Additional Services
Dollar Cost Averaging (DCA)—You may systematically transfer, on a monthly basis, amounts from certain subaccounts, or the fixed side of the contract into the subaccounts over a period of 1, 2 or 3 years. The minimum amount to be dollar cost averaged is $10,000 for 1 year, and $25,000 for 2 years or 3 years. You may elect to participate in the DCA program at the time of application or at any time before the annuity commencement date by completing an election form available from us. We may offer different time periods for new Purchase Payments and for transfers of Contract Value. State variations may exist. You may not allocate any other Contract Value to the DCA fixed account. Once elected, the program will remain in effect until the earlier of:
• the annuity commencement date;
• the value of the amount being DCA'd is depleted; or
• you cancel the program by written request or by telephone if we have your telephone authorization on file.
We reserve the right to discontinue this program at any time. DCA does not assure a profit or protect against loss. GVA III fixed account restrictions may apply.
Systematic Transfer—The systematic transfer service is only available to GVA III participants. This service allows you to fully liquidate your fixed account balance over four years in five annual installments and transfer the amounts into one or more of the subaccounts. You may change the receiving subaccount allocation at any time. A distribution or a non-scheduled transfer from the fixed account may cancel the systematic transfer program prematurely. The program will also be canceled prematurely if the fixed account balance falls to $0.
Account Sweep—The account sweep service allows you to keep a designated amount (the baseline amount) in one subaccount or the fixed account, and automatically transfer the excess to other variable subaccount(s) of your choice. The transfers may take place monthly, quarterly, semi-annually or annually. A $10,000 minimum balance in the holding account is required in order to begin this service. For account sweep to occur, the holding account balance must exceed the designated baseline amount by at least $50. You may change the receiving subaccount allocation at any time. Deposits to or distributions from the holding account will not adjust your baseline amount, but may affect the amount of money available to be transferred. A new account sweep program is required to change the designated baseline amount. GVA III fixed account restrictions may apply.
Portfolio Rebalancing—Portfolio rebalancing is an option, which, if elected by the contractowner, restores to a pre-determined level the percentage of the contract value, allocated to each variable subaccount or the fixed account. This pre-determined level will be the allocation initially selected when the contract was purchased, unless subsequently changed. The portfolio rebalancing allocation may be changed at any time by submitting a written request to us. If portfolio rebalancing is elected, all purchase payments allocated to the variable subaccounts must be subject to portfolio rebalancing. Portfolio rebalancing may take place on either a quarterly, semi-annual or annual basis, as selected by the contractowner. You may choose to either rebalance within your designated investment accounts, or to rebalance your designated investment account based on your total account value within the group annuity contract. This second selection will move 100% of your balance based on your allocated percentages. For portfolio rebalancing to occur, the total transfer amount must be $50 or more. If this minimum transfer amount is not available, the transfer will not occur. You may change the designated investment accounts' allocations or percentages at any time. The portfolio rebalancing program will be cancelled prematurely if the selected rebalancing account balance falls to $0. GVA III fixed account restrictions may apply.
B-5

 

SecureLine® Account – SecureLine® is an interest bearing draft account established from the proceeds payable on a contract administered by us that helps you manage your surrender or death benefit proceeds. You are the owner of the account, and are the only one authorized to transfer proceeds from the account. You may choose to leave the proceeds in this account, or you may use the checkbook we previously provided and write checks against the account until the funds are depleted. The SecureLine® account is part of our general account. It is not a bank account and it is not insured by the FDIC or any other government agency. As part of our general account, it is subject to the claims of our creditors. We receive a benefit from all amounts left in the SecureLine® account.
Interest credited in the SecureLine® account is taxable as ordinary income in the year such interest is credited, and is not tax deferred. We recommend that you consult your tax advisor to determine the tax consequences associated with the payment of interest on amounts in the SecureLine® account. The balance in your SecureLine® account began earning interest the day your account was opened and will continue to earn interest until all funds are withdrawn. Interest is compounded daily and credited to your account on the last day of each month. The interest rate will be updated monthly and we may increase or decrease the rate at our discretion. The interest rate credited to your SecureLine® account may be more or less than the rate earned on funds held in our general account. The interest rate offered with a SecureLine® account is not necessarily that credited to the fixed account. There are no monthly fees. You may be charged a fee if you stop a payment or if you present a check for payment without sufficient funds.
Sales literature may reference the Group Variable Annuity newsletter which is a newsletter distributed quarterly to clients of the VAA. The contents of the newsletter will be a commentary on general economic conditions and, on some occasions, referencing matters in connection with the Group Variable Annuity.
Sales literature and advertisements may reference these and other similar reports from Best's or other similar publications which report on the insurance and financial services industries.
Other Information
Due to differences in redemption rates, tax treatment or other considerations, the interests of policyholders 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, 2016 financial statements of the VAA and the December 31, 2016 consolidated financial statements of Lincoln Life appear on the following pages.
B-6















































The Lincoln National Life Insurance Company

 

 

 





The Lincoln National Life Insurance Company



Consolidated Financial Statements

December 31, 2016 and 2015









 

 

 

 









Report of Independent Registered Public Accounting Firm



The Board of Directors and Stockholder of

The Lincoln National Life Insurance Company



We have audited the accompanying consolidated balance sheets of The Lincoln National Life Insurance Company as of December 31, 2016 and 2015, 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, 2016. 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) and in accordance with auditing standards generally accepted in the United States of America. 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 consolidated 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, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.



/s/ Ernst & Young LLP

Philadelphia, Pennsylvania

March 31, 2017





 

 

 

1

 

THE LINCOLN NATIONAL LIFE INSURANCE COMPANY

CONSOLIDATED BALANCE SHEETS

(in millions, except share data)









 

 

 

 

 

 

 

 



 

As of December 31,

 



 

2016

 

 

2015

 

ASSETS

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Available-for-sale securities, at fair value:

 

 

 

 

 

 

 

 

Fixed maturity securities (amortized cost:  2016 - $83,290; 2015 - $81,196)

 

$

 87,866 

 

 

$

 84,072 

 

Variable interest entities' fixed maturity securities (amortized cost:  2016 - $200; 2015 - $596)

 

 

 200 

 

 

 

 598 

 

Equity securities (cost:  2016 - $260; 2015 - $226)

 

 

 275 

 

 

 

 237 

 

Trading securities

 

 

 1,624 

 

 

 

 1,762 

 

Mortgage loans on real estate

 

 

 9,761 

 

 

 

 8,513 

 

Real estate

 

 

 12 

 

 

 

 13 

 

Policy loans

 

 

 2,429 

 

 

 

 2,520 

 

Derivative investments

 

 

 900 

 

 

 

 1,485 

 

Other investments

 

 

 2,034 

 

 

 

 1,588 

 

Total investments

 

 

 105,101 

 

 

 

 100,788 

 

Cash and invested cash

 

 

 2,057 

 

 

 

 2,400 

 

Deferred acquisition costs and value of business acquired

 

 

 9,143 

 

 

 

 9,493 

 

Premiums and fees receivable

 

 

 428 

 

 

 

 379 

 

Accrued investment income

 

 

 1,029 

 

 

 

 1,034 

 

Reinsurance recoverables

 

 

 6,810 

 

 

 

 7,100 

 

Reinsurance related embedded derivatives

 

 

 58 

 

 

 

 95 

 

Funds withheld reinsurance assets

 

 

 623 

 

 

 

 635 

 

Goodwill

 

 

 2,273 

 

 

 

 2,273 

 

Other assets

 

 

 6,132 

 

 

 

 4,872 

 

Separate account assets

 

 

 128,397 

 

 

 

 123,619 

 

Total assets

 

$

 262,051 

 

 

$

 252,688 

 



 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDER'S EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Future contract benefits

 

$

 20,681 

 

 

$

 19,893 

 

Other contract holder funds

 

 

 78,106 

 

 

 

 76,483 

 

Short-term debt

 

 

 280 

 

 

 

 90 

 

Long-term debt

 

 

 2,549 

 

 

 

 2,745 

 

Funds withheld reinsurance liabilities

 

 

 4,827 

 

 

 

 4,478 

 

Deferred gain on business sold through reinsurance

 

 

 67 

 

 

 

 144 

 

Payables for collateral on investments

 

 

 4,910 

 

 

 

 4,565 

 

Variable interest entities' liabilities

 

 

 -

 

 

 

 4 

 

Other liabilities

 

 

 6,414 

 

 

 

 5,781 

 

Separate account liabilities

 

 

 128,397 

 

 

 

 123,619 

 

Total liabilities

 

 

 246,231 

 

 

 

 237,802 

 



 

 

 

 

 

 

 

 

Contingencies and Commitments (See Note 14)

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Stockholder's Equity

 

 

 

 

 

 

 

 

Common stock - 10,000,000 shares authorized, issued and outstanding

 

 

 10,696 

 

 

 

 10,677 

 

Retained earnings

 

 

 3,342 

 

 

 

 3,118 

 

Accumulated other comprehensive income (loss)

 

 

 1,782 

 

 

 

 1,091 

 

Total stockholder's equity

 

 

 15,820 

 

 

 

 14,886 

 

 Total liabilities and stockholder's equity

 

$

 262,051 

 

 

$

 252,688 

 



See accompanying Notes to Consolidated Financial Statements

 

2

 

THE LINCOLN NATIONAL LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in millions)







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



For the Years Ended December 31,

 

 

2016

 

2015

 

2014

 

Revenues

 

 

 

 

 

 

 

 

 

Insurance premiums

$

 2,579

 

$

 2,825

 

$

 2,371

 

Fee income

 

 5,171

 

 

 4,960

 

 

 4,608

 

Net investment income

 

 4,631

 

 

 4,611

 

 

 4,648

 

Realized gain (loss):

 

 

 

 

 

 

 

 

 

Total other-than-temporary impairment losses on securities

 

 (141

)

 

 (75

)

 

 (25

)

Portion of loss recognized in other comprehensive income

 

 41

 

 

 25

 

 

 10

 

Net other-than-temporary impairment losses on securities recognized in earnings

 

 (100

)

 

 (50

)

 

 (15

)

Realized gain (loss), excluding other-than-temporary impairment losses on securities

 

 (410

)

 

 (172

)

 

 (509

)

Total realized gain (loss)

 

 (510

)

 

 (222

)

 

 (524

)

Amortization of deferred gain on business sold through reinsurance

 

 69

 

 

 69

 

 

 69

 

Other revenues

 

 403

 

 

 440

 

 

 867

 

Total revenues

 

 12,343

 

 

 12,683

 

 

 12,039

 

Expenses

 

 

 

 

 

 

 

 

 

Interest credited

 

 2,527

 

 

 2,472

 

 

 2,492

 

Benefits

 

 4,247

 

 

 4,529

 

 

 4,354

 

Commissions and other expenses

 

 4,005

 

 

 4,109

 

 

 3,876

 

Interest and debt expense

 

 116

 

 

 105

 

 

 103

 

Strategic digitization expense

 

 8

 

 

 -

 

 

 -

 

Total expenses

 

 10,903

 

 

 11,215

 

 

 10,825

 

Income (loss) before taxes

 

 1,440

 

 

 1,468

 

 

 1,214

 

Federal income tax expense (benefit)

 

 267

 

 

 295

 

 

 220

 

Net income (loss)

 

 1,173

 

 

 1,173

 

 

 994

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Unrealized investment gains (losses)

 

 692

 

 

 (2,090

)

 

 1,752

 

Funded status of employee benefit plans

 

 (1

)

 

 2

 

 

 (3

)

Total other comprehensive income (loss), net of tax

 

 691

 

 

 (2,088

)

 

 1,749

 

Comprehensive income (loss)

$

 1,864

 

$

 (915

)

$

 2,743

 



 

 

 

 

 

 

 

 

 



See accompanying Notes to Consolidated Financial Statements

 

3

 

THE LINCOLN NATIONAL LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY

(in millions)











 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



For the Years Ended December 31,

 



2016

 

2015

 

2014

 



 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

Balance as of beginning-of-year

$

 10,677

 

$

 10,652

 

$

 10,636

 

Stock compensation/issued for benefit plans

 

 19

 

 

 25

 

 

 16

 

Balance as of end-of-year

 

 10,696

 

 

 10,677

 

 

 10,652

 



 

 

 

 

 

 

 

 

 

Retained Earnings

 

 

 

 

 

 

 

 

 

Balance as of beginning-of-year

 

 3,118

 

 

 3,066

 

 

 2,778

 

Net income (loss)

 

 1,173

 

 

 1,173

 

 

 994

 

Dividends declared

 

 (949

)

 

 (1,121

)

 

 (706

)

Balance as of end-of-year

 

 3,342

 

 

 3,118

 

 

 3,066

 



 

 

 

 

 

 

 

 

 

Accumulated Other Comprehensive Income (Loss)

 

 

 

 

 

 

 

 

 

Balance as of beginning-of-year

 

 1,091

 

 

 3,179

 

 

 1,430

 

Other comprehensive income (loss), net of tax

 

 691

 

 

 (2,088

)

 

 1,749

 

Balance as of end-of-year

 

 1,782

 

 

 1,091

 

 

 3,179

 

Total stockholder's equity as of end-of-year

$

 15,820

 

$

 14,886

 

$

 16,897

 



See accompanying Notes to Consolidated Financial Statements

 

4

 

THE LINCOLN NATIONAL LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)









 

 

 

 

 

 

 

 

 



For the Years Ended December 31,

 



2016

 

2015

 

2014

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

 

Net income (loss)

$

 1,173

 

$

 1,173

 

$

 994

 

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

 

 

 

 

 

 

 

 

 

Deferred acquisition costs, value of business acquired, deferred sales inducements

 

 

 

 

 

 

 

 

 

and deferred front-end loads deferrals and interest, net of amortization

 

 55

 

 

 (176

)

 

 (535

)

Trading securities purchases, sales and maturities, net

 

 165

 

 

 143

 

 

 310

 

Change in premiums and fees receivable

 

 (49

)

 

 101

 

 

 (56

)

Change in accrued investment income

 

 8

 

 

 (18

)

 

 (14

)

Change in future contract benefits and other contract holder funds

 

 (2,036

)

 

 868

 

 

 1,407

 

Change in reinsurance related assets and liabilities

 

 542

 

 

 (1,060

)

 

 (960

)

Change in federal income tax accruals

 

 146

 

 

 170

 

 

 48

 

Realized (gain) loss

 

 511

 

 

 222

 

 

 524

 

Amortization of deferred gain on business sold through reinsurance

 

 (69

)

 

 (69

)

 

 (69

)

Proceeds from reinsurance recapture

 

 -

 

 

 -

 

 

 422

 

Change in cash management agreement investment

 

 (66

)

 

 351

 

 

 329

 

Other

 

 262

 

 

 45

 

 

 249

 

Net cash provided by (used in) operating activities

 

 642

 

 

 1,750

 

 

 2,649

 



 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

 

Purchases of available-for-sale securities

 

 (10,791

)

 

 (8,858

)

 

 (8,306

)

Sales of available-for-sale securities

 

 3,076

 

 

 1,329

 

 

 1,120

 

Maturities of available-for-sale securities

 

 5,290

 

 

 4,265

 

 

 4,984

 

Purchases of alternative investments

 

 (302

)

 

 (324

)

 

 (370

)

Sales and repayments of alternative investments

 

 238

 

 

 177

 

 

 238

 

Issuance of mortgage loans on real estate

 

 (2,127

)

 

 (1,944

)

 

 (1,319

)

Repayment and maturities of mortgage loans on real estate

 

 877

 

 

 816

 

 

 958

 

Issuance and repayment of policy loans, net

 

 91

 

 

 125

 

 

 6

 

Net change in collateral on investments and derivatives

 

 435

 

 

 638

 

 

 1,476

 

Proceeds (outflows) from business ceded, recaptured and novated

 

 -

 

 

 -

 

 

 (3

)

Proceeds from sale of subsidiary/business

 

 -

 

 

 75

 

 

 -

 

Other

 

 (99

)

 

 (78

)

 

 (227

)

Net cash provided by (used in) investing activities

 

 (3,312

)

 

 (3,779

)

 

 (1,443

)



 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

 

Payment of long-term debt, including current maturities

 

 (250

)

 

 (4

)

 

 -

 

Issuance (decrease) in short-term debt

 

 190

 

 

 88

 

 

 (49

)

Proceeds from sales leaseback transaction

 

 85

 

 

 47

 

 

 83

 

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

 

 10,030

 

 

 10,745

 

 

 10,363

 

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

 

 (5,449

)

 

 (6,062

)

 

 (5,775

)

Transfers to and from separate accounts, net

 

 (1,308

)

 

 (2,474

)

 

 (2,509

)

Common stock issued for benefit plans and excess tax benefits

 

 (22

)

 

 (14

)

 

 (19

)

Dividends paid to common stockholders

 

 (949

)

 

 (1,121

)

 

 (706

)

Net cash provided by (used in) financing activities

 

 2,327

 

 

 1,205

 

 

 1,388

 



 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and invested cash

 

 (343

)

 

 (824

)

 

 2,594

 

Cash and invested cash as of beginning-of-year

 

 2,400

 

 

 3,224

 

 

 630

 

Cash and invested cash as of end-of-year

$

 2,057

 

$

 2,400

 

$

 3,224

 



 



 

See accompanying Notes to Consolidated Financial Statements

 

5

 



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 and Lincoln Financial Advisors, LNC's wholesaling and retailing business units, respectively.  LNL's principal businesses consist of underwriting annuities, deposit-type contracts and life insurance through multiple distribution channels.  LNL is licensed and sells its products throughout the U.S. and several U.S. territories.  See Note 22 for additional information.



Basis of Presentation



The accompanying consolidated financial statements are prepared in accordance with United States of America generally accepted accounting principles ("GAAP").  Certain GAAP policies, which significantly affect the determination of financial condition, results of operations and cash flows, are summarized below.



Certain amounts reported in prior years' consolidated financial statements have been reclassified to conform to the presentation adopted in the current year.  Specifically, we reclassified cash flows from certain investing activities into their own respective line items within the Consolidated Statements of Cash Flows.  Previously, these amounts were reported within purchases of other investments or sales or maturities of other investments line items, as applicable, within cash flows from investing activities.  These reclassifications had no effect on net income (loss), net cash provided by (used in) investing activities, or stockholder's equity for the prior years.



Summary of Significant Accounting Policies 



Principles of Consolidation



The accompanying consolidated financial statements include the accounts of LNL and all other entities in which we have a controlling financial interest and any variable interest entities ("VIEs") in which we are the primary beneficiary.  Entities in which we do not have a controlling financial interest and do not exercise significant management influence over the operating and financing decisions are reported using the equity method.  All material inter-company accounts and transactions have been eliminated in consolidation. 



Our involvement with VIEs is primarily to invest in assets that allow us to gain exposure to a broadly diversified portfolio of asset classes.  A VIE is an entity that does not have sufficient equity to finance its own activities without additional financial support or where investors lack certain characteristics of a controlling financial interest.  We assess our contractual, ownership or other interests in a VIE to determine if our interest participates in the variability the VIE was designed to absorb and pass onto variable interest holders.  We perform an ongoing qualitative assessment of our variable interests in VIEs to determine whether we have a controlling financial interest and would therefore be considered the primary beneficiary of the VIE.  If we determine we are the primary beneficiary of a VIE, we consolidate the assets and liabilities of the VIE in our consolidated financial statements.



Accounting Estimates and Assumptions



The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses for the reporting period.  Those estimates are inherently subject to change and actual results could differ from those estimates.  Included among the material (or potentially material) reported amounts and disclosures that require extensive use of estimates are:  fair value of certain invested assets and derivatives, other-than-temporary impairment ("OTTI") and 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.



 

6

 

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 ("NPR"), 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 CodificationTM ("ASC"),

we categorize our financial instruments carried at fair value into a three-level fair value hierarchy, based on the priority of inputs to the respective valuation technique.  The three-level hierarchy for fair value measurement is defined as follows:



·

Level 1 - inputs to the valuation methodology are quoted prices available in active markets for identical investments as of the reporting date, except for large holdings subject to "blockage discounts" that are excluded;

·

Level 2 - inputs to the valuation methodology are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value can be determined through the use of models or other valuation methodologies; and

·

Level 3 - inputs to the valuation methodology are unobservable inputs in situations where there is little or no market activity for the asset or liability, and we make estimates and assumptions related to the pricing of the asset or liability, including assumptions regarding risk.



In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, the level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.  Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.



When a determination is made to classify an asset or liability within Level 3 of the fair value hierarchy, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement.  Because certain securities trade in less liquid or illiquid markets with limited or no pricing information, the determination of fair value for these securities is inherently more difficult.  However, Level 3 fair value investments may include, in addition to the unobservable or Level 3 inputs, observable components, which are components that are actively quoted or can be validated to market-based sources.



Available-For-Sale Securities - Fair Valuation Methodologies and Associated Inputs



Securities classified as available-for-sale ("AFS") consist of fixed maturity and equity securities and are stated at fair value with unrealized gains and losses included within accumulated other comprehensive income (loss) ("AOCI"), net of associated DAC, VOBA, DSI, future contract benefits, other contract holder funds and deferred income taxes. 



We measure the fair value of our securities classified as AFS based on assumptions used by market participants in pricing the security.  The most appropriate valuation methodology is selected based on the specific characteristics of the fixed maturity or equity security, and we consistently apply the valuation methodology to measure the security's fair value.  Our fair value measurement is based on a market approach that utilizes prices and other relevant information generated by market transactions involving identical or comparable securities.  Sources of inputs to the market approach primarily include third-party pricing services, independent broker quotations or pricing matrices.  We do not adjust prices received from third parties; however, we do analyze the third-party pricing services' valuation methodologies and related inputs and perform additional evaluation to determine the appropriate level within the fair value hierarchy.



The observable and unobservable inputs to our valuation methodologies are based on a set of standard inputs that we generally use to evaluate all of our AFS securities.  Observable inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data.  In addition, market indicators, industry and economic events are monitored, and further market data is acquired if certain triggers are met.    For certain security types, additional inputs may be used, or some of the inputs described above may not be applicable.  For private placement securities, we use pricing matrices that utilize observable pricing inputs of similar public securities and Treasury yields as inputs to the fair value measurement.  Depending on the type of security or the daily market activity, standard inputs may be prioritized differently or may not be available for all AFS securities on any given day.  For broker-quoted only securities, non-binding quotes from market makers or broker-dealers are obtained from sources recognized as market participants.    For securities trading in less liquid or illiquid markets with limited or no pricing information, we use unobservable inputs to measure fair value. 



The following summarizes our fair valuation methodologies and associated inputs, which are particular to the specified security type and are in addition to the defined standard inputs to our valuation methodologies for all of our AFS securities discussed above:



·

Corporate bonds and U.S. government bonds - We also use Trade Reporting and Compliance EngineTM reported tables for our corporate bonds and vendor trading platform data for our U.S. government bonds. 

·

Mortgage- and asset-backed securities ("ABS") - We also utilize additional inputs, which include new issues data, monthly payment information and monthly collateral performance, including prepayments, severity, delinquencies, step-down features and over collateralization features for each of our mortgage-backed securities ("MBS"), which include collateralized mortgage obligations and

 

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mortgage pass through securities backed by residential mortgages ("RMBS"), commercial mortgage-backed securities ("CMBS"), collateralized loan obligations ("CLOs") and collateralized debt obligations ("CDOs").

·

State and municipal bonds - We also use additional inputs that include information from the Municipal Securities Rule Making Board, as well as material event notices, new issue data, issuer financial statements and Municipal Market Data benchmark yields for our state and municipal bonds.

·

Hybrid and redeemable preferred and equity securities - We also utilize additional inputs of exchange prices (underlying and common stock of the same issuer) for our hybrid and redeemable preferred and equity securities.



In order to validate the pricing information and broker-dealer quotes, we employ, where possible, procedures that include comparisons with similar observable positions, comparisons with subsequent sales and observations of general market movements for those security classes.  We have policies and procedures in place to review the process that is utilized by our third-party pricing service and the output that is provided to us by the pricing service.  On a periodic basis, we test the pricing for a sample of securities to evaluate the inputs and assumptions used by the pricing service, and we perform a comparison of the pricing service output to an alternative pricing source.  We also evaluate prices provided by our primary pricing service to ensure that they are not stale or unreasonable by reviewing the prices for unusual changes from period to period based on certain parameters or for lack of change from one period to the next. 



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 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 debt securities with unrealized losses are other-than-temporarily impaired:



·

The estimated range and average period until recovery;

·

The estimated range and average holding period to maturity;

·

Remaining payment terms of the security;

·

Current delinquencies and nonperforming assets of underlying collateral;

·

Expected future default rates;

·

Collateral value by vintage, geographic region, industry concentration or property type;

·

Subordination levels or other credit enhancements as of the balance sheet date as compared to origination; and

·

Contractual and regulatory cash obligations.



For a debt security, if we intend to sell a security, or it is more likely than not we will be required to sell a debt security before recovery of its amortized cost basis and the fair value of the debt security is below amortized cost, we conclude that an OTTI has occurred and the amortized cost is written down to current fair value, with a corresponding charge to realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).  If we do not intend to sell a debt security, or it is not more likely than not we will be required to sell a debt security before recovery of its amortized cost basis but the present value of the cash flows expected to be collected is less than the amortized cost of the debt security (referred to as the credit loss), we conclude that an OTTI has occurred and the amortized cost is written down to the estimated recovery value with a corresponding charge to realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss), as this amount is deemed the credit portion of the OTTI.  The remainder of the decline to fair value is recorded in other comprehensive income ("OCI") to unrealized OTTI on AFS securities on our Consolidated Statements of Stockholder's Equity, as this amount is considered a noncredit (i.e., recoverable) impairment.



When assessing our intent to sell a debt security, or if it is more likely than not we will be required to sell a debt security before recovery of its cost basis, we evaluate facts and circumstances such as, but not limited to, decisions to reposition our security portfolio, sales of

securities to meet cash flow needs and sales of securities to capitalize on favorable pricing.  Management considers the following as part of the evaluation:



·

The current economic environment and market conditions;

·

Our business strategy and current business plans;

·

The nature and type of security, including expected maturities and exposure to general credit, liquidity, market and interest rate risk;

·

Our analysis of data from financial models and other internal and industry sources to evaluate the current effectiveness of our hedging and overall risk management strategies;

·

The current and expected timing of contractual maturities of our assets and liabilities, expectations of prepayments on investments and expectations for surrenders and withdrawals of life insurance policies and annuity contracts;

·

The capital risk limits approved by management; and

·

Our current financial condition and liquidity demands.

 

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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, that we use to determine the amount of a credit loss.



To determine the recovery period of a debt security, we consider the facts and circumstances surrounding the underlying issuer including, but not limited to, the following:



·

Historical and implied volatility of the security;

·

Length of time and extent to which the fair value has been less than amortized cost;

·

Adverse conditions specifically related to the security or to specific conditions in an industry or geographic area;

·

Failure, if any, of the issuer of the security to make scheduled payments; and

·

Recoveries or additional declines in fair value subsequent to the balance sheet date.



In periods subsequent to the recognition of an OTTI, the AFS security is accounted for as if it had been purchased on the measurement date of the OTTI.  Therefore, for the fixed maturity AFS security, the original discount or reduced premium is reflected in net investment income over the contractual term of the investment in a manner that produces a constant effective yield.



To determine recovery value of a corporate bond, CLO or CDO, we perform additional analysis related to the underlying issuer including, but not limited to, the following:



·

Fundamentals of the issuer to determine what we would recover if they were to file bankruptcy versus the price at which the market is trading;

·

Fundamentals of the industry in which the issuer operates;

·

Earnings multiples for the given industry or sector of an industry that the underlying issuer operates within, divided by the outstanding debt to determine an expected recovery value of the security in the case of a liquidation;

·

Expected cash flows of the issuer (e.g., whether the issuer has cash flows in excess of what is required to fund its operations);

·

Expectations regarding defaults and recovery rates;

·

Changes to the rating of the security by a rating agency; and

·

Additional market information (e.g., if there has been a replacement of the corporate debt security).



Each quarter we review the cash flows for the MBS to determine whether or not they are sufficient to provide for the recovery of our amortized cost.  We revise our cash flow projections only for those securities that are at most risk for impairment based on current credit enhancement and trends in the underlying collateral performance.  To determine recovery value of a MBS, we perform additional analysis related to the underlying issuer including, but not limited to, the following:



·

Discounted cash flow analysis based on the current cash flows and future cash flows we expect to recover;

·

Level of creditworthiness of the home equity loans or residential mortgages that back an RMBS or commercial mortgages that back a CMBS;

·

Susceptibility to fair value fluctuations for changes in the interest rate environment;

·

Susceptibility to reinvestment risks, in cases where market yields are lower than the securities' book yield earned;

·

Susceptibility to reinvestment risks, in cases where market yields are higher than the book yields earned on a security;

·

Expectations of sale of such a security where market yields are higher than the book yields earned on a security; and

·

Susceptibility to variability of prepayments.



When evaluating MBS and mortgage-related 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 the credit characteristics of borrowers, 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

 

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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 mortgages on an ongoing basis.  We also perform detailed analysis on all of our subprime, Alt-A, non-agency residential MBS and on a significant percentage of our AFS securities backed by pools of commercial mortgages.  The detailed analysis includes revising projected cash flows by updating the cash flows for actual cash received and applying assumptions with respect to expected defaults, foreclosures and recoveries in the future.  These revised projected cash flows are then compared to the amount of credit enhancement (subordination) in the structure to determine whether the amortized cost of the security is recoverable.  If it is not recoverable, we record an impairment of the security. 



Trading Securities



Trading securities consist of fixed maturity and equity securities in designated portfolios, some of which support modified coinsurance ("Modco") and coinsurance with funds withheld ("CFW") reinsurance arrangements.  Investment results for the portfolios that support Modco and CFW reinsurance arrangements, including gains and losses from sales, are passed directly to the reinsurers pursuant to contractual terms of the reinsurance arrangements.  Trading securities are carried at fair value, and changes in fair value and changes in the fair value of embedded derivative liabilities associated with the underlying reinsurance arrangements are recorded in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss) as they occur.



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 or non-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

 

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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 collectability of the loan.  We resume accruing interest once a loan complies with all of its original terms or restructured terms.  Mortgage loans deemed uncollectable are charged against the allowance for losses, and subsequent recoveries, if any, are credited to the allowance for losses.  All mortgage loans that are impaired have an established allowance for credit losses.  Changes in valuation allowances are reported in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).



We measure and assess the credit quality of our mortgage loans by using loan-to-value and debt-service coverage ratios.  The loan-to-value ratio compares the principal amount of the loan to the fair value at origination of the underlying property collateralizing the loan and is commonly expressed as a percentage.  Loan-to-value ratios greater than 100% indicate that the principal amount is greater than the collateral value.  Therefore, all else being equal, a lower loan-to-value ratio generally indicates a higher quality loan.  The debt-service coverage ratio compares a property's net operating income to its debt-service payments.  Debt-service coverage ratios of less than 1.0 indicate that property operations do not generate 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 AOCI 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 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.



 

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Cash and Invested Cash



Cash and invested cash is carried at cost and includes all highly liquid debt instruments purchased with an original maturity of three months or less.



DAC, VOBA, DSI and DFEL



Acquisition costs directly related to successful contract acquisitions or renewals of universal life insurance ("UL"), variable universal life insurance ("VUL"), traditional life insurance, annuities and other investment contracts have been deferred (i.e., DAC) to the extent recoverable.  VOBA is an intangible asset that reflects the estimated fair value of in-force contracts in a life insurance company acquisition and represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the business in force at the acquisition date.  Bonus credits and excess interest for dollar cost averaging contracts are considered DSI.  Contract sales charges that are collected in the early years of an insurance contract are deferred (i.e., DFEL), and the unamortized balance is reported in other contract holder funds on our Consolidated Balance Sheets. 



Both DAC and VOBA amortization, excluding amounts reported in realized gain (loss), is reported within commissions and other expenses on our Consolidated Statements of Comprehensive Income (Loss).  DSI amortization, excluding amounts reported in realized gain (loss), is reported in interest credited on our Consolidated Statements of Comprehensive Income (Loss).  The amortization of DFEL, excluding amounts reported in realized gain (loss), is reported within fee income on our Consolidated Statements of Comprehensive Income (Loss).  The methodology for determining the amortization of DAC, VOBA, DSI and DFEL varies by product type.  For all insurance contracts, amortization is based on assumptions consistent with those used in the development of the underlying contract adjusted for emerging experience and expected trends. 



Acquisition costs for UL and VUL insurance and investment-type products, which include fixed and variable deferred annuities, are generally amortized over the lives of the policies in relation to the incidence of estimated gross profits ("EGPs") from surrender charges, investment, mortality net of reinsurance ceded and expense margins and actual realized gain (loss) on investments.  Contract lives for UL and VUL policies are estimated to be 30 to 40 years based on the expected lives of the contracts.  Contract lives for fixed and variable deferred annuities are generally between 15 and 30 years, while some of our fixed multi-year guarantee products have amortization periods equal to the guarantee period.  The front-end load annuity product has an assumed life of 25 years.  Longer lives are assigned to those blocks that have demonstrated favorable lapse experience. 



Acquisition costs for all traditional contracts, including traditional life insurance contracts, such as individual whole life, group business and term life insurance, are amortized over the expected premium-paying period that generally results in amortization less than 30 years.  Acquisition costs are either amortized on a straight-line basis or as a level percent of premium of the related policies depending on the block of business.  There is currently no DAC, VOBA, DSI or DFEL balance or related amortization for fixed and variable payout annuities.



We account for modifications of insurance contracts that result in a substantially unchanged contract as a continuation of the replaced contract.  We account for modifications of insurance contracts that result in a substantially changed contract as an extinguishment of the replaced contract.



The carrying amounts of DAC, VOBA, DSI and DFEL are adjusted for the effects of realized and unrealized gains and losses on securities classified as AFS and certain derivatives and embedded derivatives.  Amortization expense of DAC, VOBA, DSI and DFEL reflects an assumption for an expected level of credit-related investment losses.  When actual credit-related investment losses are realized, we recognize a true-up to our DAC, VOBA, DSI and DFEL amortization within realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss) reflecting the incremental effect of actual versus expected credit-related investment losses.  These actual to expected amortization adjustments can create volatility from period to period in realized gain (loss). 



During the third quarter of each year, we conduct our annual comprehensive review of the assumptions and the projection models used for our estimates of future gross profits underlying the amortization of DAC, VOBA, DSI and DFEL and the calculations of the embedded derivatives and reserves for life insurance and annuity products.  These assumptions include, but are not limited to, capital markets, 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.



 

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Reinsurance



We enter into reinsurance agreements with other companies in the normal course of business.  Assets and liabilities and premiums and benefits from certain reinsurance contracts that grant statutory surplus relief provided by or to other insurance companies are netted on our Consolidated Balance Sheets and Consolidated Statements of Comprehensive Income (Loss), respectively, because there is a right of offset.  All other reinsurance agreements are reported on a gross basis on our Consolidated Balance Sheets as an asset for amounts recoverable from reinsurers or as a component of other liabilities for amounts, such as premiums, owed to the reinsurers, with the exception of Modco agreements for which the right of offset also exists.  Reinsurance premiums and benefits paid or provided are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts.  Premiums, benefits and DAC are reported net of insurance ceded. 



Goodwill



We recognize the excess of the purchase price, plus the fair value of any noncontrolling interest in the acquiree, over the fair value of identifiable net assets acquired as goodwill.  Goodwill is not amortized, but is reviewed at least annually for indications of value impairment, with consideration given to financial performance and other relevant factors.  We perform a two-step test in our evaluation of the carrying value of goodwill for each of our reporting units.  The results of one test on one reporting unit cannot subsidize the results of another reporting unit.  In Step 1 of the evaluation, the fair value of each reporting unit is determined and compared to the carrying value of the reporting unit.  If the fair value is greater than the carrying value, then the carrying value of the reporting unit is deemed to be recoverable, and Step 2 is not required.  If the fair value estimate is less than the carrying value, it is an indicator that impairment may exist, and Step 2 is required.  In Step 2, the implied fair value of goodwill is determined for the reporting unit.  The reporting unit's fair value as determined in Step 1 is assigned to all of its net assets (recognized and unrecognized) as if the reporting unit were acquired in a business combination as of the date of the impairment test.  If the implied fair value of the reporting unit's goodwill is lower than its carrying amount, goodwill is impaired and written down to its fair value; and a charge is reported in impairment of intangibles on our Consolidated Statements of Comprehensive Income (Loss). 



Other Assets and Other Liabilities



Other assets consist primarily of 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 issuance costs associated with line-of-credit arrangements, assets under capital leases, guaranteed living benefit ("GLB") reserves embedded derivatives, other prepaid expenses and deferred losses on business sold through reinsurance.  Other liabilities consist primarily of current and deferred taxes, pension and other employee benefit liabilities, derivative instrument liabilities, certain reinsurance payables, payables resulting from purchases of securities that had not yet settled as of the balance sheet date, interest on borrowed funds, obligations under capital leases and other accrued expenses.



Other assets and other liabilities on our Consolidated Balance Sheets include GLB features and remaining guaranteed interest and similar contracts that are carried at fair value, which may be reported in either other assets or other liabilities.  The fair value of these items represents approximate exit price including an estimate for our NPR. Certain of these features have elements of both insurance benefits and embedded derivatives.  Through our hybrid accounting approach, for reserve calculation purposes we assign product cash flows to the embedded derivative or insurance portion of the reserves based on the life-contingent nature of the benefits. We classify these GLB reserves embedded derivatives in Level 3 within the hierarchy levels described above in "Fair Value Measurement."  We report the insurance portion of the reserves in future contract benefits.



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. 



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.  Certain assets on our Consolidated Balance Sheets are related to capital leases.  These assets under capital leases are depreciated in a manner consistent with our current depreciation policy for owned assets.  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

 

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to be met in order for the long-lived asset to be classified as held-for-sale, including that a sale is probable and expected to occur within one year.  Long-lived assets classified as held-for-sale are recorded at the lower of their carrying amount or fair value less cost to sell.



We completed reinsurance transactions in 2012 and 2014 whereby we ceded closed blocks of UL contracts with secondary guarantees to Lincoln National Reinsurance Company (Barbados) Limited ("LNBAR"), a wholly-owned subsidiary of LNC.  We are recognizing the losses related to these transactions over a period of 30 years.



Separate Account Assets and Liabilities



We maintain separate account assets, which are reported at fair value.  The related liabilities are reported at an amount equivalent to the separate account assets.  Investment risks associated with market value changes are borne by the contract holders, except to the extent of minimum guarantees made by the Company with respect to certain accounts. 



We issue variable annuity contracts through our separate accounts for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contract holder (traditional variable annuities).  We also issue variable annuity and life contracts through separate accounts that may 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.  The highest contract value is increased by purchase payments and is decreased by withdrawals subsequent to that anniversary date in the same proportion that withdrawals reduce the contract value. 



As discussed in Note 7, certain features of these guarantees are accounted for as embedded derivative reserves, whereas other guarantees are accounted for as benefit reserves.  Other guarantees contain characteristics of both and are accounted for under an approach that calculates the value of the embedded derivative reserve and the benefit reserve based on the specific characteristics of each GLB feature.  We use derivative instruments to hedge our exposure to the risks and earnings volatility that result from the embedded derivatives for living benefits in certain of our variable annuity products.  The change in fair value of these instruments tends to move in the opposite direction of the change in the value of the associated reserves.  The net impact of these changes is reported as a component of realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).



The "market consistent scenarios" used in the determination of the fair value of the GLB liability are similar to those used by an investment bank to value derivatives for which the pricing is not transparent and the aftermarket is nonexistent or illiquid.  We use risk-neutral Monte Carlo simulations in our calculation to value the entire block of guarantees, which involve 100 unique scenarios per policy or approximately 49 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, but are not limited to, assumptions for capital markets (e.g., implied volatilities, correlation among indices, risk-free swap curve, etc.), policyholder behavior (e.g., policy lapse, rider utilization, mortality, etc.), risk margins, maintenance 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 1.25% to 12.75%.  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 in benefits on our Consolidated Statements of Comprehensive Income (Loss).



 

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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, 2016 and 2015, participating policies comprised less than 1% of the face amount of business in force, and dividend expenses were $59 million, $67 million and $64 million for the years ended December 31, 2016, 2015 and 2014, 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.



Certain of our variable annuity contracts reported within future contract benefits contain GLB reserves embedded derivatives, a portion of which may be reported in either other assets or other liabilities, and include guaranteed interest and similar contracts, that are carried at fair value on our Consolidated Balance Sheets, which represents approximate exit price including an estimate for our NPR.  Certain of these features have elements of both insurance benefits and embedded derivatives.  Through our hybrid accounting approach, for reserve calculation purposes we assign product cash flows to the embedded derivative or insurance portion of the reserves based on the life-contingent nature of the benefits.  We classify these GLB reserves embedded derivatives items in Level 3 within the hierarchy levels described above in "Fair Value Measurement."  We report the insurance portion of the reserves in future contract benefits.



The fair value of our indexed annuity contracts is based on their approximate surrender values.



Borrowed Funds



LNL's short-term borrowings are defined as borrowings with contractual or expected maturities of one year or less.  Long-term borrowings have contractual or expected maturities greater than one year.



Deferred Gain on Business Sold Through Reinsurance



Our reinsurance operations were acquired by Swiss Re Life & Health America, Inc. ("Swiss Re") in December 2001 through a series of indemnity reinsurance transactions.  We are recognizing the gain related to these transactions at the rate that earnings on the reinsured business are expected to emerge, over a period of 15 years from the date of sale.



We completed a reinsurance transaction in 2009 whereby we assumed a closed block of term contracts from First Penn-Pacific Life Insurance Company.  We are recognizing the gain related to this transaction over a period of 15 years.



We completed reinsurance transactions in 2012 and 2013 whereby we ceded a closed block of UL contracts with secondary guarantees to LNBAR.  We are recognizing the gains related to these transactions over a period of 30 years.



Contingencies and Commitments



Contingencies arising from environmental remediation costs, regulatory judgments, claims, assessments, guarantees, litigation, recourse reserves, fines, penalties and other sources are recorded when deemed probable and reasonably estimable.



Fee Income



Fee income for investment and interest-sensitive life insurance contracts consist of asset-based fees, cost of insurance charges, percent of premium charges, contract administration charges and surrender charges that are assessed against contract holder account balances.  Investment products consist primarily of individual and group variable and fixed deferred annuities.  Interest-sensitive life insurance products include UL insurance, VUL insurance and other interest-sensitive life insurance policies.  These products include life insurance sold to individuals, corporate-owned life insurance and bank-owned life insurance. 



In bifurcating the embedded derivative of our GLB features on our variable annuity products, we attribute to the embedded derivative the portion of total fees collected from the contract holder that relate to the GLB riders (the "attributed fees"), which are not reported within fee income on our Consolidated Statements of Comprehensive Income (Loss).  These attributed fees represent the present value of future claims expected to be paid for the GLB at the inception of the contract plus a margin that a theoretical market participant would include for risk/profit and are reported within realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).



The timing of revenue recognition as it relates to fees assessed on investment contracts is determined based on the nature of such fees.  Asset-based fees, cost of insurance and contract administration charges are assessed on a daily or monthly basis and recognized as revenue when assessed and earned.  Percent of premium charges are assessed at the time of premium payment and recognized as revenue

 

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when assessed and earned.  Certain amounts assessed that represent compensation for services to be provided in future periods are reported as unearned revenue and recognized in income over the periods benefited.  Surrender charges are recognized upon surrender of a contract by the contract holder in accordance with contractual terms.



For investment and interest-sensitive life insurance contracts, the amounts collected from contract holders are considered deposits and are not included in revenue.



Insurance Premiums



Our insurance premiums for traditional life insurance and group insurance products are recognized as revenue when due from the contract holder.  Our traditional life insurance products include those products with fixed and guaranteed premiums and benefits and consist primarily of whole life insurance, limited-payment life insurance, term life insurance and certain annuities with life contingencies.  Our group non-medical insurance products consist primarily of term life, disability and dental.



Net Investment Income



Dividends and interest income, recorded in net investment income, are recognized when earned.  Amortization of premiums and accretion of discounts on investments in debt securities are reflected in net investment income over the contractual terms of the investments in a manner that produces a constant effective yield. 



For CLOs and MBS, included in the trading and AFS fixed maturity securities portfolios, we recognize income using a constant effective yield based on anticipated prepayments and the estimated economic life of the securities.  When actual prepayments differ significantly from originally anticipated prepayments, the retrospective effective yield is recalculated to reflect actual payments to date and a catch up adjustment is recorded in the current period.  In addition, the new effective yield, which reflects anticipated future payments, is used prospectively.  Any adjustments resulting from changes in effective yield are reflected in net investment income on our Consolidated Statements of Comprehensive Income (Loss).



Realized Gain (Loss)



Realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss) includes realized gains and losses from the sale of investments, write-downs for OTTI of investments, certain derivative and embedded derivative gains and losses, gains and losses on the sale of subsidiaries and businesses and net gains and losses on reinsurance embedded derivatives and trading securities.  Realized gains and losses on the sale of investments are determined using the specific identification method.  Realized gain (loss) is recognized in net income, net of associated amortization of DAC, VOBA, DSI and DFEL.  Realized gain (loss) is also net of allocations of investment gains and losses to certain contract holders and certain funds withheld on reinsurance arrangements for which we have a contractual obligation. 



Other Revenues



Other revenues consists primarily of fees attributable to broker-dealer services recorded as earned at the time of sale, changes in the market value of our seed capital investments, proceeds from reinsurance recaptures 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 2014 through 2016 ranged from 1% to 10%.



Benefits



Benefits for UL and other interest-sensitive life insurance products include benefit claims incurred during the period in excess of contract account balances.  Benefits also include the change in reserves for life insurance products with secondary guarantee benefits, annuity products with guaranteed death and living benefits and certain annuities with life contingencies.  For traditional life, group health and disability income products, benefits are recognized when incurred in a manner consistent with the related premium recognition policies. 



Strategic Digitization Expense



During 2016, we began an enterprise-wide digitization initiative that intends to significantly enhance our customer experience and provide operation efficiencies over time to meet evolving consumer preferences and marketplace shifts.  Expenses associated with this digitization initiative are reported within strategic digitization expense on our Consolidated Statements of Comprehensive Income (Loss).



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.  The mortality assumption is based

 

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on actual and anticipated plan experience, determined using acceptable actuarial methods.  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.  In accordance with our early adoption of Accounting Standards Update ("ASU") 2016-09, Improvements to Employee Share-Based Payment Accounting, we have elected to continue applying an estimated forfeiture rate to our accrual of compensation costs.  Stock-based compensation expense is reflected in commissions and other expenses on our Consolidated Statements of Comprehensive Income (Loss). 

 

Interest and Debt Expense



Interest expense on our short-term and long-term debt is recognized as due and any associated premiums, discounts and costs are amortized (accreted) over the term of the related borrowing utilizing the effective interest method.  In addition, gains or losses related to certain derivative instruments associated with debt are recognized in interest and debt expense during the period of the change.



Income Taxes



We file a U.S. consolidated income tax return with LNC and its eligible subsidiaries.  Ineligible subsidiaries file separate individual corporate tax returns.  Deferred income taxes are recognized, based on enacted rates, when assets and liabilities have different values for financial statement and tax reporting purposes.  A valuation allowance is recorded to the extent required.  Considerable judgment and the use of estimates are required in determining whether a valuation allowance is necessary and, if so, the amount of such valuation allowance.  In evaluating the need for a valuation allowance, we consider many factors, including:  the nature and character of the deferred tax assets and liabilities; taxable income in prior carryback years; future reversals of temporary differences; the length of time carryovers can be utilized; and any tax planning strategies we would employ to avoid a tax benefit from expiring unused.



Discontinued Operations



The results of operations of a component of the Company that either has been disposed of or is classified as held-for-sale are reported in income (loss) from discontinued operations, net of federal income taxes, if the disposal represents a strategic shift that has, or will have, a major effect on our consolidated financial condition and results of operations.





 

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2.  New Accounting Standards



Adoption of New Accounting Standards



The following table provides a description of our adoption of new ASUs issued by the FASB and the impact of the adoption on our financial statements:





 

 

 



 

 

 

Standard

Description

Date of Adoption

Effect on Financial Statements or Other Significant Matters

ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity

This standard changed the requirements for reporting discontinued operations.  The disposal of a component of an entity must be reported as a discontinued operation if the disposal represents a strategic shift that has a major effect on an entity's operations and financial results.  The amendments also require entities to provide new disclosures about a disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation.   

October 1, 2014

We applied the guidance in this standard to our sale of Lincoln Financial Media Company ("LFM") in the fourth quarter of 2014.  For more information regarding our sale of LFM, see Note 3.

ASU 2014-16, Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity

This standard clarifies that when considering the nature of the host contract in a hybrid financial instrument issued in the form of a share; an entity must consider all of the stated and implied substantive terms of the hybrid instrument, including the embedded derivative feature that is being considered for separate accounting from the host contract. 

January 1, 2016

The adoption of this ASU did not have an effect on our consolidated financial condition or results of operations. 

ASU 2015-02, Amendments to the Consolidation Analysis

This standard addresses consolidation accounting guidance related to limited partnerships, limited liability companies and securitization structures.  The new standard includes changes to existing consolidation models that eliminates the presumption that a general partner should consolidate a limited partnership, clarifies when fees paid to a decision maker should be a factor in the VIE consolidation evaluation and reduces the VIE consolidation models from two to one by eliminating the indefinite deferral for certain investment funds. 

January 1, 2016

The adoption of this ASU did not have an effect on our consolidated financial condition or results of operations.  We have provided additional financial statement disclosures related to our limited partnerships in Note 5.  

ASU 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement

This standard clarifies the accounting requirements for recognizing cloud computing arrangements.  Software licenses purchased through cloud computing arrangements should be accounted for in a manner consistent with the acquisition of other software licenses.  If a cloud computing arrangement does not include a software license, the arrangement should be accounted for as a service contract.

January 1, 2016

The adoption of this ASU did not have an effect on our consolidated financial condition or results of operations. 

ASU 2015-07, Disclosures for Certain Investments That Calculate Net Asset Value per Share (or its Equivalent)

This standard removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient.  In addition, the standard removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient, and limits those disclosures only to those investments for which the practical expedient has been elected. 

January 1, 2016

The adoption of this ASU did not result in a change to our financial statement disclosures.

 

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Standard

Description

Date of Adoption

Effect on Financial Statements or Other Significant Matters

ASU 2015-09, Disclosures about Short-Duration Contracts

This standard enhances the disclosure requirements related to short-duration insurance contracts.  The new disclosure requirements focus on providing users of financial statements with more transparent information related to short-duration contracts about an insurance entity's (1) initial claims estimates and subsequent adjustments to those estimates, (2) methodologies and judgments in estimating claims and (3) timing, frequency and severity of claims.  Retrospective application is required for each comparative period presented, except for those requirements that apply only to the current period.

Annual periods beginning January 1, 2016

The adoption of this ASU did not result in a change to our financial statements as we determined these additional disclosures are not material to our financial statements.  

ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements

Given the absence of authoritative accounting guidance in ASU 2015-03 related to debt issuance costs for line-of-credit arrangements, this standard clarifies that the Securities and Exchange Commission ("SEC") Staff would not object to an entity deferring and presenting these debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement.

January 1, 2016

The adoption of this ASU did not have an effect on our consolidated financial condition or results of operations.

ASU 2016-09, Improvements to Employee Share-Based Payment Accounting

These amendments require all income tax effects of awards to be recognized in the income statement when the awards vest or are settled rather than through additional paid-in capital in the equity section of the balance sheet.  The amendments also permit an employer to repurchase an employee's shares at the maximum statutory tax rate in the employee's applicable jurisdiction for tax withholding purposes without triggering liability accounting.  Finally, the amendments permit entities to make a one-time accounting policy election to account for forfeitures as they occur.  Specific adoption methods depend on the issue being adopted and range from prospective to retrospective adoption.  Early adoption is permitted; however, all amendments must be adopted in the same period.  If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.      

Early adopted as of October 1, 2016

We recognized an income tax benefit of $4 million in federal income tax expense (benefit) in our Consolidated Statements of Comprehensive Income (Loss) for the year ended December 31, 2016. 

































 

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Future Adoption of New Accounting Standards



The following table provides a description of future adoptions of new accounting standards that may have an impact on our financial statements when adopted:





 

 

 



 

 

 

Standard

Description

Projected Date of Adoption

Effect on Financial Statements or Other Significant Matters

ASU 2014-09, Revenue from Contracts with Customers & ASU 2015-14, Revenue from Contracts with Customers; Deferral of the Effective Date

This standard establishes the core principle of recognizing revenue to depict the transfer of promised goods and services.  The amendments define a five-step process that systematically identifies the various components of the revenue recognition process, culminating with the recognition of revenue upon satisfaction of an entity's performance obligation.  Retrospective application is required.  After performing extensive outreach, the FASB decided to delay the effective date of ASU 2014-09 for one year.  Early application is permitted but only for annual reporting periods beginning after December 15, 2016. 

January 1, 2018

Our primary sources of revenues are recognized in accordance with ASC Topic 944, Financial Services - Insurance ("Topic 944").  All contracts within the scope of Topic 944 are excluded from the scope of ASU 2014-09.  The initial phase of our adoption project indicates the revenue we report in other revenues in our Consolidated Statements of Comprehensive Income (Loss) is our primary revenue source that is within scope of this ASU.  We continue to evaluate the impact of adopting this ASU on our revenue recognition for contracts within scope.

ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities

These amendments require, among other things, the fair value measurement of investments in equity securities and certain other ownership interests that do not result in consolidation and are not accounted for under the equity method of accounting.  The change in fair value of the impacted investments in equity securities must be recognized in net income.  In addition, the amendments include certain enhancements to the presentation and disclosure requirements for financial assets and financial liabilities.  Early adoption of the ASU is generally not permitted, except as defined in the ASU.  The amendments should be adopted in the financial statements through a cumulative-effect adjustment to the beginning balance of retained earnings.

January 1, 2018

We hold equity securities classified as AFS securities that are currently measured at fair value with changes in fair value recognized through OCI.  Upon adoption of this ASU, we will be required to recognize changes in fair value of our equity securities through net income.  See Note 6 for details regarding our equity securities currently classified as AFS securities. 

ASU 2016-02, Leases

This standard establishes a new accounting model for leases.  Lessees will recognize most leases on the balance sheet as a right-of-use asset and a related lease liability.  The lease liability is measured as the present value of the lease payments over the lease term with the right-of-use asset measured at the lease liability amount and including adjustments for certain lease incentives and initial direct costs.  Lease expense recognition will continue to differentiate between finance leases and operating leases resulting in a similar pattern of lease expense recognition as under current GAAP.  This ASU permits a modified retrospective adoption approach that includes a number of optional practical expedients that entities may elect upon adoption.  Early adoption is permitted.

January 1, 2019

We are currently identifying all of our leases that will be within the scope of this standard; as such, we continue to evaluate the quantitative impact of adopting this ASU on our Consolidated Balance Sheets. Based on our initial assessment, we do not expect there to be a significant difference in our pattern of lease expense recognition under this ASU.

 

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Standard

Description

Projected Date of Adoption

Effect on Financial Statements or Other Significant Matters

ASU 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships 

The amendments clarify that a change in the counterparty to a derivative instrument identified in a hedging relationship in and of itself does not require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met.  The ASU may be adopted prospectively or through a modified retrospective approach.  Early adoption is permitted.

January 1, 2017

This amendment is not expected to have a material effect on our consolidated financial condition and results of operations.

ASU 2016-06, Contingent Put and Call Options in Debt Instruments

The amendments clarify the requirements for assessing whether contingent call and put options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts.  Upon adoption of this ASU, entities will be required to assess embedded call and put options solely in accordance with the four-step decision sequence that was developed by the FASB Derivatives Implementation Group.  The ASU should be adopted based on a modified retrospective basis for existing debt instruments.  Early adoption is permitted. 

January 1, 2017

This amendment is not expected to have a material effect on our consolidated financial condition and results of operations.

ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net)

These amendments clarify the implementation guidance on principal versus agent considerations in ASU 2014-09, including how an entity should identify the unit of accounting for the principal versus agent evaluation.  In addition, the amendments clarify how to apply the control principle to certain types of arrangements, such as service transactions, by explaining what a principal controls before the good or service is transferred to the customer.  Transition requirements are consistent with ASU 2014-09.  

January 1, 2018

We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations.  See comments under ASU 2014-09 for more information.

ASU 2016-10, Identifying Performance Obligations and Licensing

These amendments clarify, among other things, the accounting guidance in ASU 2014-09 regarding how an entity will determine whether promised goods or services are separately identifiable, which is an important consideration in determining whether to account for goods or services as a separate performance obligation.   Transition requirements are consistent with ASU 2014-09.

January 1, 2018

We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations.  See comments under ASU 2014-09 for more information.

ASU 2016-12, Narrow Scope Improvements and Practical Expedients

The standard update amends the revenue recognition guidance in ASU 2014-09 related to transition, collectability, noncash consideration and the presentation of sales and other similar taxes. The amendments clarify that, for a contract to be considered completed at transition, substantially all of the revenue must have been recognized under current GAAP.  The amendments also clarify how an entity should evaluate the collectability threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard's contract criteria.  Transition requirements are consistent with ASU 2014-09.

January 1, 2018

We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations.  See comments under ASU 2014-09 for more information.

 

21

 

Standard

Description

Projected Date of Adoption

Effect on Financial Statements or Other Significant Matters

ASU 2016-13, Measurement of Credit Losses on Financial Instruments

These amendments adopt a new model to measure and recognize credit losses for most financial assets.  The method used to measure estimated credit losses for AFS debt securities will be unchanged from current GAAP; however, the amendments require credit losses to be recognized through an allowance rather than as a reduction to the amortized cost of those debt securities.  The amendments will permit entities to recognize improvements in credit loss estimates on AFS debt securities by reducing the allowance account immediately through earnings.  The amendments will be adopted through a cumulative effect adjustment to the beginning balance of retained earnings as of the first reporting period in which the amendments are effective.  Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein.        

January 1, 2020

We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations, with a primary focus on our fixed maturity securities (see Note 6).  We currently reduce the amortized cost of the individual security when recognizing OTTI on these securities.  Upon adoption of ASU 2016-13, we will no longer reduce the amortized cost of each individual security; rather we will establish a valuation allowance, and any declines or improvements in credit quality will be recognized through the valuation allowance. 

ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments

These amendments clarify the classification of eight specific cash flow issues in an entity's statement of cash flows where it was determined by the FASB that there is diversity in practice.  Early adoption of the amendments is permitted, and retrospective transition is required for each period presented in the statement of cash flows. 

January 1, 2018

We are currently evaluating these disclosure requirements and will amend classifications in our Consolidated Statements of Cash Flows upon adoption as applicable.

ASU 2016-16, Intra-Entity Asset Transfers Other Than Inventory

This amendment requires an entity to recognize current and deferred income taxes for an intra-entity asset transfer, other than inventory, when the transfer occurs, thereby eliminating the current GAAP exception that prohibits the recognition of income taxes until the asset has been sold to an outside party.  Early adoption is permitted as of the beginning of the annual reporting period for which financial statements have not been issued.   

January 1, 2018

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

ASU 2016-18, Restricted Cash

This amendment requires that amounts generally described as restricted cash and restricted cash equivalents should be included within cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.  Early adoption is permitted using a retrospective transition method applied to each period presented.

January 1, 2018

We will provide these additional disclosures in our Consolidated Statements of Cash Flows upon the adoption date as applicable.

ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers

These amendments clarify 13 issues related to the adoption of ASU 2014-09.  The most significant issue of these amendments for us is the clarification that all contracts within the scope of Topic 944 are excluded from the scope of ASU 2014-09, rather than just insurance contracts as described in ASU 2014-09.  Transition requirements are consistent with ASU 2014-09.

January 1, 2018

We are currently evaluating the impact of adopting this ASU on our consolidated financial condition and results of operations.  See comments under ASU 2014-09 for more information.

 

22

 

Standard

Description

Projected Date of Adoption

Effect on Financial Statements or Other Significant Matters

ASU 2017-04, Simplifying the Test for Goodwill Impairment

These amendments eliminate the requirement in current GAAP to perform Step 2 of the goodwill impairment test in favor of only applying Step 1.  Under Step 1, the fair value of the reporting unit is compared with its carrying value, and an impairment charge is recognized when the carrying value exceeds the reporting unit's fair value.  An entity still has the option to first perform a qualitative assessment of an individual reporting unit to determine if the quantitative assessment in Step 1 is necessary.  ASU 2017-04 should be adopted prospectively, and early adoption is permitted on impairment testing dates after January 1, 2017.      

Impairment tests performed after January 1, 2020

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





3.  Dispositions



LFM



On July 16, 2015, we closed on the sale of LFM to Entercom Communications Corp. ("Entercom Parent") and Entercom Radio, LLC.  We received $75 million in cash, net of transaction expenses, and $28 million face amount of perpetual cumulative convertible preferred stock of Entercom Parent.



As of December 31, 2014, we adjusted the carrying amount of the assets and liabilities of LFM that were to be sold to fair value less cost to sell and reclassified such amounts as held-for-sale within other assets and other liabilities on our Consolidated Balance Sheets.  Accordingly, we recognized a loss of $28 million, after-tax, during the fourth quarter of 2014 reflected within income (loss) from continuing operations on our Consolidated Statements of Comprehensive Income (Loss).  During 2015, we recognized an additional loss of $2 million, after-tax, related to finalizing the transaction.



4.  Business Ceded, Recaptured and Novated



Business Ceded



We completed a reinsurance transaction during 2014 whereby we ceded a block of business to LNBAR that resulted in the release of $64 million of statutory capital previously supporting a portion of statutory reserves related to our Worksite UL business.  The following summarizes the effect of this transaction (in millions) on our Consolidated Balance Sheets as of December 31, 2014:





 

 

 



 

 

 

Assets

 

 

 

Cash and invested cash

$

 (1

)

DAC and VOBA

 

 (12

)

Reinsurance recoverables

 

 3

 

Other assets (deferred loss on business sold through reinsurance)

 

 9

 

Total assets

$

 (1

)



 

 

 

Liabilities

 

 

 

Other liabilities

 

 (1

)

Total liabilities

$

 (1

)





We completed a reinsurance transaction during 2014 whereby we ceded an additional block of business to LNBAR that resulted in the release of $28 million of statutory capital previously supporting a portion of statutory reserves related to our UL/survivorship UL

 

23

 

("SUL") business.  The following summarizes the effect of this transaction (in millions) on our Consolidated Balance Sheets as of December 31, 2014:





 

 

 



 

 

 

Assets

 

 

 

Cash and invested cash

$

 (2

)

DAC and VOBA

 

 (8

)

Reinsurance recoverables

 

 5

 

Other assets (deferred loss on business sold through reinsurance)

 

 1

 

Total assets

$

 (4

)



 

 

 

Liabilities

 

 

 

Other contract holder funds

$

 (2

)

Other liabilities

 

 (2

)

Total liabilities

$

 (4

)



Business Recaptured



We completed a reinsurance transaction during 2014 whereby we entered into an agreement to recapture certain traditional and interest sensitive business under several yearly renewable term reinsurance treaties that were originally ceded to a reinsurer.  As part of this agreement, we received cash consideration of $500 million, of which $78 million represented reimbursement for prepaid reinsurance premiums related to the recaptured treaties.  We recognized a one-time gain of $57 million, after-tax, related to this recapture with the remaining difference between the proceeds and the gain being driven primarily by increases in reserves of $226 million and a reduction of DAC of $123 million.



5.  Variable Interest Entities



Consolidated VIEs



Credit-Linked Notes



We have invested in the Class 1 notes of two credit-linked note ("CLN") structures, which represent special purpose trusts combining ABS with credit default swaps to produce multi-class structured securities.  The CLN structures also include subordinated Class 2 notes, which are held by third parties, and, together with the Class 1 notes, represent 100% of the outstanding notes of the CLN structures.  The entities that issued the CLNs are financed by the note holders, and, as such, the note holders participate in the expected losses and residual returns of the entities. 



Because the note holders do not have voting rights or similar rights, we determined the entities issuing the CLNs are VIEs, and as a note holder, our interest represented a variable interest.  We have the power to direct the most significant activity affecting the performance of both CLN structures, as we have the ability to actively manage the reference portfolios underlying the credit default swaps.  In addition, we receive returns from the CLN structures and may absorb losses that could potentially be significant to the CLN structures.  As such, we concluded that we are the primary beneficiary of the VIEs associated with the CLNs.  We reflect the assets and liabilities on our Consolidated Balance Sheets and recognize the results of operations of these VIEs on our Consolidated Statements of Comprehensive Income (Loss).



As a result of consolidating the CLNs, we also consolidate the derivative instruments in the CLN structures.  The credit default swaps create variability in the CLN structures and expose the note holders to the credit risk of the referenced portfolio.  The contingent forward contracts transfer a portion of the loss in the underlying fixed maturity corporate asset-backed credit card loan securities back to the counterparty after credit losses reach our attachment point.

 

24

 

The following summarizes information regarding the CLN structures (dollars in millions) as of December 31, 2016:



 

 

 

 

 

 



 

 

 

 

 

 



 

 

Amount and Date of Issuance

 

 

 



 

 

$200

 

 

 



 

 

April

 

 

 



 

 

2007

 

 

 

Original attachment point (subordination)

2.05%

 

 

 

Current attachment point (subordination)

1.48%

 

 

 

Maturity

3/20/2017

 

 

 

Current rating of tranche 

BB

 

 

 

Current rating of underlying reference obligations 

AAA - CCC

 

 

 

Number of defaults in underlying reference obligations

2

 

 

 

Number of entities

99

 

 

 

Number of countries

21

 

 

 



As of December 2016, our $400 million CLN matured, and we no longer reflect the assets and liabilities associated with the VIE on our Consolidated Balance Sheets or recognize the results of operations of this VIE on our Consolidated Statements of Comprehensive Income (Loss).  We did not incur any principal losses under the CLN structure, and we no longer have any exposure to losses related to this VIE. 



There has been no event of default on the remaining CLN.  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 instruments, our maximum principal loss is limited to our original investment.



The following summarizes the exposure of the CLN structure's underlying reference portfolios by industry and rating as of December 31, 2016:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



AAA

 

AA

 

A

 

BBB

 

BB

 

B

 

CCC

 

Total

 

Industry

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial intermediaries

 0.0% 

 

 3.0% 

 

 7.1% 

 

 2.0% 

 

 0.0% 

 

 0.0% 

 

 0.0% 

 

 12.1% 

 

Telecommunications

 0.0% 

 

 1.0% 

 

 2.0% 

 

 3.1% 

 

 1.0% 

 

 0.0% 

 

 0.0% 

 

 7.1% 

 

Oil and gas

 1.0% 

 

 3.0% 

 

 0.0% 

 

 5.1% 

 

 1.0% 

 

 1.0% 

 

 0.0% 

 

 11.1% 

 

Utilities

 0.0% 

 

 0.0% 

 

 3.0% 

 

 4.1% 

 

 0.0% 

 

 0.0% 

 

 0.0% 

 

 7.1% 

 

Chemicals and plastics

 0.0% 

 

 0.0% 

 

 3.1% 

 

 1.0% 

 

 1.0% 

 

 0.0% 

 

 0.0% 

 

 5.1% 

 

Drugs

 1.0% 

 

 0.0% 

 

 2.0% 

 

 0.0% 

 

 0.0% 

 

 0.0% 

 

 0.0% 

 

 3.0% 

 

Retailers (except food

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and drug)

 0.0% 

 

 0.0% 

 

 3.0% 

 

 1.0% 

 

 0.0% 

 

 0.0% 

 

 0.0% 

 

 4.0% 

 

Industrial equipment

 0.0% 

 

 0.0% 

 

 3.1% 

 

 2.0% 

 

 0.0% 

 

 0.0% 

 

 0.0% 

 

 5.1% 

 

Sovereign

 0.0% 

 

 2.1% 

 

 3.0% 

 

 2.0% 

 

 1.0% 

 

 0.0% 

 

 0.0% 

 

 8.1% 

 

Conglomerates

 0.0% 

 

 1.0% 

 

 2.0% 

 

 0.0% 

 

 0.0% 

 

 0.0% 

 

 0.0% 

 

 3.0% 

 

Forest products

 0.0% 

 

 0.0% 

 

 0.0% 

 

 0.0% 

 

 1.0% 

 

 0.0% 

 

 0.0% 

 

 1.0% 

 

Other

0.0% 

 

 1.0% 

 

 9.1% 

 

 12.1% 

 

 8.1% 

 

 2.0% 

 

 1.0% 

 

 33.3% 

 

Total

 2.0% 

 

 11.1% 

 

 37.4% 

 

 32.4% 

 

 13.1% 

 

 3.0% 

 

 1.0% 

 

 100.0% 

 





 

25

 

Asset and liability information (dollars in millions) for the consolidated VIEs included on our Consolidated Balance Sheets was as follows: 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

As of December 31, 2016

 

 

As of December 31, 2015

 



 

Number

 

 

 

 

 

 

 

 

 

Number

 

 

 

 

 

 

 

 



 

of

 

 

Notional

 

Carrying

 

 

of

 

 

Notional

 

Carrying

 



Instruments

 

Amounts

 

Value

 

Instruments

 

Amounts

 

Value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed credit card loans (1)

 

 

N/A

 

 

$

 -

 

$

 200 

 

 

 

N/A

 

 

$

 -

 

$

 598 

 

Credit default swaps

 

 

 1 

 

 

 

 200 

 

 

 -

 

 

 

 -

 

 

 

 -

 

 

 -

 

Total assets

 

 

 1 

 

 

$

 200 

 

$

 200 

 

 

 

 -

 

 

$

 -

 

$

 598 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-qualifying hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit default swaps

 

 

 -

 

 

$

 -

 

$

 -

 

 

 

 2 

 

 

$

 600 

 

$

 4 

 

Contingent forwards

 

 

 1 

 

 

 

 -

 

 

 -

 

 

 

 2 

 

 

 

 -

 

 

 -

 

Total liabilities (2)

 

 

 1 

 

 

$

 -

 

$

 -

 

 

 

 4 

 

 

$

 600 

 

$

 4 

 



(1)

Reported in variable interest entities' fixed maturity securities on our Consolidated Balance Sheets.

(2)

Reported in variable interest entities' liabilities on our Consolidated Balance Sheets.



For details related to the fixed maturity AFS securities for these VIEs, see Note 6.



As described more fully in Note 1, we regularly review our investment holdings for OTTI.  Based upon this review, we believe that the AFS fixed maturity securities were not other-than-temporarily impaired as of December 31, 2016.  



The gains (losses) for the consolidated VIEs (in millions) recorded on our Consolidated Statements of Comprehensive Income (Loss) were as follows:



 

 

 

 

 

 

 

 



 

For the Years Ended

 

 



 

December 31,

 

 



 

2016

 

2015

 

 

Non-Qualifying Hedges

 

 

 

 

 

 

 

 

Credit default swaps

 

$

 4 

 

$

 9 

 

 

Contingent forwards

 

 

 -

 

 

 -

 

 

Total non-qualifying hedges (1)

 

$

 4 

 

$

 9 

 

 



(1)

Reported in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).



Unconsolidated VIEs



Reinsurance Related Notes



Effective October 1, 2015, our special purpose financial insurance company subsidiary, the Lincoln Reinsurance Company of Vermont VI, issued a long-term surplus note for $275 million to a non-affiliated VIE in exchange for two corporate bond AFS securities of like principal and duration.  The activities of the VIE are primarily to acquire, hold and issue notes and loans and to pay and collect interest on the notes and loans.  The outstanding principal balance of the long-term surplus note was $474 million as of December 31, 2016, and is variable in nature; moving concurrently with any variability in the face amount of the corporate bond AFS securities.  We have concluded that we are not the primary beneficiary of the non-affiliated VIE because we do not have power over the activities that most significantly affect its economic performance.  In addition, the terms of the long-term surplus note provide us with a set-off right with the corporate bond AFS securities we purchased from the VIE; therefore, neither appears on our Consolidated Balance Sheets. 



Structured Securities



Through our investment activities, we make passive investments in structured securities issued by VIEs for which we are not the manager.  These structured securities include our RMBS, CMBS, CLOs and CDOs.  We have not provided financial or other support with respect to these VIEs other than our original investment.  We have determined that we are not the primary beneficiary of these VIEs due to the relative size of our investment in comparison to the principal amount of the structured securities issued by the VIEs and the level of credit subordination that reduces our obligation to absorb losses or right to receive benefits.  Our maximum exposure to loss on these structured securities is limited to the amortized cost for these investments.  We recognize our variable interest in these VIEs at fair value on our Consolidated Balance Sheets.  For information about these structured securities, see Note 6.

 

26

 

Limited Partnerships and Limited Liability Companies



We invest in certain limited partnerships ("LPs") and limited liability companies ("LLCs"), including qualified affordable housing projects, that we have concluded are VIEs.  We do not hold any substantive kick-out or participation rights in the LPs and LLCs, and we do not receive any performance fees or decision maker fees from the LPs and LLCs.  Based on our analysis of the LPs and LLCs, we are not the primary beneficiary of the VIEs, as we do not have the power to direct the most significant activities of the LPs and LLCs.



The carrying amounts of our investments in the LPs and LLCs are recognized in other investments on our Consolidated Balance Sheets and were $1.3 billion and $1.2 billion as of December 31, 2016 and 2015, respectively.  Included in these carrying amounts are our investments in qualified affordable housing projects, which were $37 million and $47 million as of December 31, 2016 and 2015, respectively.  We do not have any contingent commitments to provide additional capital funding to these qualified affordable housing projects.  We receive returns from these qualified affordable housing projects in the form of income tax credits and other tax benefits, which are recognized in federal income tax expense (benefit) on our Consolidated Statements of Comprehensive Income (Loss) and were $3 million and less than $1 million for the years ended December 31, 2016 and 2015, respectively.  Our exposure to loss is limited to the capital we invest in the LPs and LLCs, and there have been no indicators of impairment that would require us to recognize an impairment loss related to the LPs and LLCs as of December 31, 2016.



6.  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.



 

27

 

The amortized cost, gross unrealized gains, losses and OTTI and fair value of AFS securities (in millions) were as follows:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



As of December 31, 2016

 



Amortized

 

Gross Unrealized

 

 

 

 

Fair

 



Cost

 

Gains

 

Losses

 

OTTI (1)

 

Value

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

 72,706

 

$

 4,583

 

$

 931

 

$

 (5

)

$

 76,363

 

ABS

 

 1,016

 

 

 39

 

 

 13

 

 

 (12

)

 

 1,054

 

U.S. government bonds

 

 345

 

 

 34

 

 

 2

 

 

 -

 

 

 377

 

Foreign government bonds

 

 445

 

 

 57

 

 

 1

 

 

 -

 

 

 501

 

RMBS

 

 3,316

 

 

 141

 

 

 65

 

 

 (5

)

 

 3,397

 

CMBS

 

 341

 

 

 8

 

 

 4

 

 

 (1

)

 

 346

 

CLOs

 

 742

 

 

 1

 

 

 3

 

 

 (4

)

 

 744

 

State and municipal bonds

 

 3,811

 

 

 703

 

 

 19

 

 

 -

 

 

 4,495

 

Hybrid and redeemable preferred securities

 

 568

 

 

 68

 

 

 47

 

 

 -

 

 

 589

 

VIEs' fixed maturity securities

 

 200

 

 

 -

 

 

 -

 

 

 -

 

 

 200

 

Total fixed maturity securities

 

 83,490

 

 

 5,634

 

 

 1,085

 

 

 (27

)

 

 88,066

 

Equity securities

 

 260

 

 

 18

 

 

 3

 

 

 -

 

 

 275

 

Total AFS securities

$

 83,750

 

$

 5,652

 

$

 1,088

 

$

 (27

)

$

 88,341

 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



As of December 31, 2015

 



Amortized

 

Gross Unrealized

 

 

 

 

Fair

 



Cost

 

Gains

 

Losses

 

OTTI (1)

 

Value

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

 70,584

 

$

 3,787

 

$

 1,913

 

$

 1

 

$

 72,457

 

ABS

 

 1,022

 

 

 40

 

 

 16

 

 

 (12

)

 

 1,058

 

U.S. government bonds

 

 346

 

 

 41

 

 

 2

 

 

 -

 

 

 385

 

Foreign government bonds

 

 459

 

 

 60

 

 

 1

 

 

 -

 

 

 518

 

RMBS

 

 3,400

 

 

 178

 

 

 35

 

 

 (11

)

 

 3,554

 

CMBS

 

 347

 

 

 10

 

 

 2

 

 

 (4

)

 

 359

 

CLOs

 

 587

 

 

 1

 

 

 3

 

 

 (3

)

 

 588

 

State and municipal bonds

 

 3,706

 

 

 672

 

 

 12

 

 

 -

 

 

 4,366

 

Hybrid and redeemable preferred securities

 

 745

 

 

 86

 

 

 44

 

 

 -

 

 

 787

 

VIEs' fixed maturity securities

 

 596

 

 

 2

 

 

 -

 

 

 -

 

 

 598

 

Total fixed maturity securities

 

 81,792

 

 

 4,877

 

 

 2,028

 

 

 (29

)

 

 84,670

 

Equity securities

 

 226

 

 

 17

 

 

 6

 

 

 -

 

 

 237

 

Total AFS securities

$

 82,018

 

$

 4,894

 

$

 2,034

 

$

 (29

)

$

 84,907

 



(1)

Includes unrealized (gains) and losses on impaired securities related to changes in the fair value of such securities subsequent to the impairment measurement date.



The amortized cost and fair value of fixed maturity AFS securities by contractual maturities (in millions) as of December 31, 2016, were as follows:



 

 

 

 

 

 



 

 

 

 

 

 



Amortized

 

Fair

 



Cost

 

Value

 

Due in one year or less

$

 2,920 

 

$

 2,961 

 

Due after one year through five years

 

 18,077 

 

 

 18,978 

 

Due after five years through ten years

 

 17,694 

 

 

 18,022 

 

Due after ten years

 

 39,184 

 

 

 42,364 

 

Subtotal

 

 77,875 

 

 

 82,325 

 

Structured securities (ABS, MBS, CLOs)

 

 5,615 

 

 

 5,741 

 

Total fixed maturity AFS securities

$

 83,490 

 

$

 88,066 

 



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



 

28

 

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, 2016

 

 

Less Than or Equal

 

Greater Than

 

 

 

 

 

 

 

 



to Twelve Months

 

Twelve Months

 

Total

 



 

 

Gross 

 

 

 

Gross 

 

 

 

 

 

Gross 

 

 

 

Unrealized

 

Unrealized

 

 

 

Unrealized



Fair

Losses and

Fair

Losses and

Fair

 

Losses and



Value

 

OTTI

 

Value

 

OTTI

 

Value

 

 

OTTI

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

 15,099 

 

$

 542 

 

$

 3,117 

 

$

 390 

 

$

 18,216 

 

 

$

 932 

 

ABS

 

 201 

 

 

 5 

 

 

 281 

 

 

 23 

 

 

 482 

 

 

 

 28 

 

U.S. government bonds

 

 18 

 

 

 2 

 

 

 -

 

 

 -

 

 

 18 

 

 

 

 2 

 

Foreign government bonds

 

 29 

 

 

 1 

 

 

 -

 

 

 -

 

 

 29 

 

 

 

 1 

 

RMBS

 

 876 

 

 

 50 

 

 

 374 

 

 

 22 

 

 

 1,250 

 

 

 

 72 

 

CMBS

 

 187 

 

 

 4 

 

 

 18 

 

 

 2 

 

 

 205 

 

 

 

 6 

 

CLOs

 

 259 

 

 

 3 

 

 

 25 

 

 

 -

 

 

 284 

 

 

 

 3 

 

State and municipal bonds

 

 208 

 

 

 11 

 

 

 47 

 

 

 8 

 

 

 255 

 

 

 

 19 

 

Hybrid and redeemable preferred securities

 

 75 

 

 

 3 

 

 

 142 

 

 

 44 

 

 

 217 

 

 

 

 47 

 

Total fixed maturity securities

 

 16,952 

 

 

 621 

 

 

 4,004 

 

 

 489 

 

 

 20,956 

 

 

 

 1,110 

 

Equity securities

 

 4 

 

 

 2 

 

 

 44 

 

 

 2 

 

 

 48 

 

 

 

 4 

 

Total AFS securities

$

 16,956 

 

$

 623 

 

$

 4,048 

 

$

 491 

 

$

 21,004 

 

 

$

 1,114 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total number of AFS securities in an unrealized loss position

 

 

 

 

 

 

 

 

 

 

 

 

 1,692 

 











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



As of December 31, 2015

 

 

Less Than or Equal

 

Greater Than

 

 

 

 

 

 

 

 



to Twelve Months

 

Twelve Months

 

Total

 



 

 

Gross 

 

 

 

Gross 

 

 

 

 

 

Gross 

 

 

 

Unrealized

 

Unrealized

 

 

 

Unrealized



Fair

Losses and

Fair

Losses and

Fair

 

Losses and



Value

 

OTTI

 

Value

 

OTTI

 

Value

 

 

OTTI

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

 19,285 

 

$

 1,307 

 

$

 2,349 

 

$

 613 

 

$

 21,634 

 

 

$

 1,920 

 

ABS

 

 212 

 

 

 4 

 

 

 257 

 

 

 27 

 

 

 469 

 

 

 

 31 

 

U.S. government bonds

 

 15 

 

 

 2 

 

 

 -

 

 

 -

 

 

 15 

 

 

 

 2 

 

Foreign government bonds

 

 37 

 

 

 1 

 

 

 -

 

 

 -

 

 

 37 

 

 

 

 1 

 

RMBS

 

 593 

 

 

 21 

 

 

 362 

 

 

 21 

 

 

 955 

 

 

 

 42 

 

CMBS

 

 114 

 

 

 2 

 

 

 11 

 

 

 2 

 

 

 125 

 

 

 

 4 

 

CLOs

 

 271 

 

 

 2 

 

 

 49 

 

 

 1 

 

 

 320 

 

 

 

 3 

 

State and municipal bonds

 

 124 

 

 

 8 

 

 

 27 

 

 

 4 

 

 

 151 

 

 

 

 12 

 

Hybrid and redeemable preferred securities

 

 37 

 

 

 1 

 

 

 147 

 

 

 43 

 

 

 184 

 

 

 

 44 

 

Total fixed maturity securities

 

 20,688 

 

 

 1,348 

 

 

 3,202 

 

 

 711 

 

 

 23,890 

 

 

 

 2,059 

 

Equity securities

 

 47 

 

 

 6 

 

 

 -

 

 

 -

 

 

 47 

 

 

 

 6 

 

Total AFS securities

$

 20,735 

 

$

 1,354 

 

$

 3,202 

 

$

 711 

 

$

 23,937 

 

 

$

 2,065 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total number of AFS securities in an unrealized loss position

 

 

 

 

 

 

 

 

 

 

 

 

 1,923 

 



For information regarding our investments in VIEs, see Note 5.



 

29

 

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, 2016

 



 

 

 

 

 

 

 

 

 

 

Number

 



Fair

 

Gross Unrealized

 

 

of

 



Value

 

Losses

 

OTTI

 

Securities (1)

Less than six months

$

 164 

 

$

 49 

 

$

 2 

 

 

 

 19 

 

Nine months or greater, but less than twelve months

 

 1 

 

 

 1 

 

 

 -

 

 

 

 2 

 

Twelve months or greater

 

 358 

 

 

 166 

 

 

 10 

 

 

 

 62 

 

Total

$

 523 

 

$

 216 

 

$

 12 

 

 

 

 83 

 







 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



As of December 31, 2015

 



 

 

 

 

 

 

 

 

 

 

Number

 



Fair

 

Gross Unrealized

 

 

of

 



Value

 

Losses

 

OTTI

 

Securities (1)

Less than six months

$

 1,536 

 

$

 678 

 

$

 2 

 

 

 

 135 

 

Six months or greater, but less than nine months

 

 76 

 

 

 85 

 

 

 -

 

 

 

 19 

 

Nine months or greater, but less than twelve months

 

 39 

 

 

 38 

 

 

 -

 

 

 

 2 

 

Twelve months or greater

 

 153 

 

 

 83 

 

 

 15 

 

 

 

 60 

 

Total

$

 1,804 

 

$

 884 

 

$

 17 

 

 

 

 216 

 



(1)

We may reflect a security in more than one aging category based on various purchase dates. 



We regularly review our investment holdings for OTTI.  Our gross unrealized losses, including the portion of OTTI recognized in OCI, on AFS securities decreased $951 million for the year ended December 31, 2016.  As discussed further below, we believe the unrealized loss position as of December 31, 2016, did not represent OTTI as (i) we did not intend to sell these fixed maturity AFS securities; (ii) it is not more likely than not that we will be required to sell the fixed maturity AFS securities before recovery of their amortized cost basis; (iii) the estimated future cash flows were equal to or greater than the amortized cost basis of the debt securities; and (iv) we had the ability and intent to hold the equity AFS securities for a period of time sufficient for recovery. 



Based upon this evaluation as of December 31, 2016, 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, 2016, the unrealized losses associated with our corporate bond securities were attributable primarily to widening credit spreads and rising interest rates since purchase.  We performed a detailed analysis of the financial performance of the underlying issuers and determined that we expected to recover the entire amortized cost for each security.



As of December 31, 2016, the unrealized losses associated with our MBS and ABS were attributable primarily to collateral losses and credit spreads.  We assessed for credit impairment using a cash flow model that incorporates key assumptions including default rates, severities and prepayment rates.  We estimated losses for a security by forecasting the underlying loans in each transaction.  The forecasted loan performance was used to project cash flows to the various tranches in the structure, as applicable.  Our forecasted cash flows also considered, as applicable, independent industry analyst reports and forecasts, sector credit ratings and other independent market data.  Based upon our assessment of the expected credit losses of the security given the performance of the underlying collateral compared to our subordination or other credit enhancement, we expected to recover the entire amortized cost of each temporarily impaired security.



As of December 31, 2016, the unrealized losses associated with our hybrid and redeemable preferred securities were attributable primarily to wider credit spreads caused by illiquidity in the market and subordination within the capital structure, as well as credit risk of underlying issuers.  For our hybrid and redeemable preferred securities, we evaluated the financial performance of the underlying issuers based upon credit performance and investment ratings and determined that we expected to recover the entire amortized cost of each security.



 

30

 

Changes in the amount of credit loss of OTTI recognized in net income (loss) where the portion related to other factors was recognized in OCI (in millions) on fixed maturity AFS securities were as follows:







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



For the Years Ended December 31,

 



2016

 

2015

 

2014

 

Balance as of beginning-of-year

$

 363

 

$

 360

 

$

 378

 

Increases attributable to:

 

 

 

 

 

 

 

 

 

Credit losses on securities for which an OTTI was not previously recognized

 

 83

 

 

 19

 

 

 4

 

Credit losses on securities for which an OTTI was previously recognized

 

 16

 

 

 15

 

 

 15

 

Decreases attributable to:

 

 

 

 

 

 

 

 

 

Securities sold, paid down or matured

 

 (51

)

 

 (31

)

 

 (37

)

Balance as of end-of-year

$

 411

 

$

 363

 

$

 360

 



During 2016, 2015 and 2014, we recorded credit losses on securities for which an OTTI was not previously recognized as we determined the cash flows expected to be collected would not be sufficient to recover the entire amortized cost basis of the debt security.  The credit losses we recorded on securities for which an OTTI was not previously recognized were attributable primarily to one or a combination of the following reasons:



·

Failure of the issuer of the security to make scheduled payments;

·

Deterioration of creditworthiness of the issuer;

·

Deterioration of conditions specifically related to the security;

·

Deterioration of fundamentals of the industry in which the issuer operates; and

·

Deterioration of the rating of the security by a rating agency.



We recognize the OTTI attributed to the noncredit portion as a separate component in OCI referred to as unrealized OTTI on AFS securities. 



Details of the amount of credit loss of OTTI recognized in net income (loss) for which a portion related to other factors was recognized in OCI (in millions), were as follows:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



As of December 31, 2016

 



 

 

 

Net

 

 

 

 

 

 



 

 

 

Unrealized

 

 

 

 

OTTI in

 



Amortized

 

Gain/(Loss)

 

Fair

 

Credit

 



Cost

 

Position

 

Value

 

Losses

 

Corporate bonds

$

 80 

 

$

 5 

 

$

 85 

 

$

 77 

 

ABS

 

 201 

 

 

 12 

 

 

 213 

 

 

 106 

 

RMBS

 

 310 

 

 

 6 

 

 

 316 

 

 

 183 

 

CMBS

 

 29 

 

 

 1 

 

 

 30 

 

 

 37 

 

CLOs

 

 11 

 

 

 3 

 

 

 14 

 

 

 5 

 

State and municipal bonds

 

 2 

 

 

 -

 

 

 2 

 

 

 3 

 

Total

$

 633 

 

$

 27 

 

$

 660 

 

$

 411 

 









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



As of December 31, 2015

 



 

 

 

Net

 

 

 

 

 

 



 

 

 

Unrealized

 

 

 

 

OTTI in

 



Amortized

 

Gain/(Loss)

 

Fair

 

Credit

 



Cost

 

Position

 

Value

 

Losses

 

Corporate bonds

$

 31

 

$

 (2

)

$

 29

 

$

 28

 

ABS

 

 186

 

 

 13

 

 

 199

 

 

 101

 

RMBS

 

 341

 

 

 10

 

 

 351

 

 

 182

 

CMBS

 

 34

 

 

 4

 

 

 38

 

 

 47

 

CLOs

 

 11

 

 

 2

 

 

 13

 

 

 5

 

Total

$

 603

 

$

 27

 

$

 630

 

$

 363

 



 

31

 

Trading Securities



Trading securities at fair value (in millions) consisted of the following:







 

 

 

 

 

 



 

 

 

 

 

 



As of December 31,

 



2016

 

2015

 

Fixed maturity securities:

 

 

 

 

 

 

Corporate bonds

$

 1,275 

 

$

 1,328 

 

ABS

 

 19 

 

 

 25 

 

U.S. government bonds

 

 164 

 

 

 221 

 

Foreign government bonds

 

 23 

 

 

 24 

 

RMBS

 

 95 

 

 

 102 

 

CMBS

 

 2 

 

 

 4 

 

CLOs

 

 6 

 

 

 10 

 

State and municipal bonds

 

 17 

 

 

 17 

 

Hybrid and redeemable preferred securities

 

 23 

 

 

 31 

 

Total trading securities

$

 1,624 

 

$

 1,762 

 



The portion of the market adjustment for trading gains and losses recognized in realized gain (loss) that relate to trading securities still held as of December 31, 2016, 2015 and 2014, was $(3) million, $(96) million and $40 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, which accounted for 20% and 21%, respectively, and Texas, which accounted for 11% and 10%, respectively, of mortgage loans on real estate as of December 31, 2016 and 2015. 



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





 

 

 

 

 

 



 

 

 

 

 

 



 

 

 

 

 

 



As of December 31,

 



2016

 

2015

 

Current

$

 9,762

 

$

 8,512

 

Valuation allowance associated with impaired mortgage loans on real estate

 

 (2

)

 

 (2

)

Unamortized premium (discount)

 

 1

 

 

 3

 

Total carrying value

$

 9,761

 

$

 8,513

 



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,

 



2016

 

2015

 

Number of impaired mortgage loans on real estate

 2

 

 2

 



 

 

 

 

 

 

Principal balance of impaired mortgage loans on real estate

$

 7

 

$

 8

 

Valuation allowance associated with impaired mortgage loans on real estate

 

 (2

)

 

 (2

)

Carrying value of impaired mortgage loans on real estate

$

 5

 

$

 6

 



The changes in the valuation allowance associated with impaired mortgage loans on real estate (in millions) were as follows:













 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



As of December 31,



 

2016

 

 

2015

 

 

2014

 

Balance as of beginning-of-year

 

$

 2

 

 

$

 3

 

 

$

 3

 

Additions

 

 

 -

 

 

 

 -

 

 

 

 -

 

Charge-offs, net of recoveries

 

 

 -

 

 

 

 (1

)

 

 

 -

 

Balance as of end-of-year

 

$

 2

 

 

$

 2

 

 

$

 3

 









 

32

 

The average carrying value on the impaired mortgage loans on real estate (in millions) was as follows:









 

 

 

 

 

 

 

 

 



For the Years Ended December 31,

 



2016

 

2015

 

2014

 

Average carrying value for impaired mortgage loans on real estate

$

 6 

 

$

 17 

 

$

 24 

 

Interest income recognized on impaired mortgage loans on real estate

 

 -

 

 

 1 

 

 

 2 

 

Interest income collected on impaired mortgage loans on real estate

 

 -

 

 

 1 

 

 

 2 

 



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, 2016

 

As of December 31, 2015

 



 

 

 

 

 

Debt-

 

 

 

 

 

 

Debt-

 



 

 

 

 

 

Service

 

 

 

 

 

 

Service

 



Carrying

 

% of

 

Coverage

 

Carrying

 

% of

 

Coverage

 

Loan-to-Value Ratio

Value

 

Total

 

Ratio

 

Value

 

Total

 

Ratio

 

Less than 65%

$

 8,604 

 

 88.1% 

 

2.16

 

$

 7,591 

 

 89.2% 

 

2.07

 

65% to 74%

 

 1,009 

 

 10.3% 

 

1.87

 

 

 650 

 

 7.6% 

 

1.60

 

75% to 100%

 

 143 

 

 1.5% 

 

0.86

 

 

 266 

 

 3.1% 

 

0.80

 

Greater than 100%

 

 5 

 

 0.1% 

 

1.04

 

 

 6 

 

 0.1% 

 

1.05

 

Total mortgage loans on real estate

$

 9,761 

 

 100.0% 

 

 

 

$

 8,513 

 

 100.0% 

 

 

 



Alternative Investments 



As of December 31, 2016 and 2015, alternative investments included investments in 202 and 190 different partnerships, respectively, and the portfolio represented approximately 1% of our overall invested assets.



Net Investment Income



The major categories of net investment income (in millions) on our Consolidated Statements of Comprehensive Income (Loss) were as follows:







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



For the Years Ended December 31,

 



2016

 

2015

 

2014

 

Fixed maturity AFS securities

$

 4,019

 

$

 3,981

 

$

 3,937

 

Equity AFS securities

 

 11

 

 

 9

 

 

 9

 

Trading securities

 

 94

 

 

 102

 

 

 119

 

Mortgage loans on real estate

 

 413

 

 

 385

 

 

 367

 

Real estate

 

 1

 

 

 1

 

 

 3

 

Policy loans

 

 139

 

 

 150

 

 

 153

 

Invested cash

 

 12

 

 

 3

 

 

 1

 

Commercial mortgage loan prepayment and bond make-whole premiums

 

 115

 

 

 98

 

 

 132

 

Alternative investments

 

 75

 

 

 88

 

 

 130

 

Consent fees

 

 5

 

 

 5

 

 

 2

 

Other investments

 

 4

 

 

 6

 

 

 (2

)

Investment income

 

 4,888

 

 

 4,828

 

 

 4,851

 

Investment expense

 

 (257

)

 

 (217

)

 

 (203

)

Net investment income

$

 4,631

 

$

 4,611

 

$

 4,648

 



 

33

 

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,

 



2016

 

2015

 

2014

 

Fixed maturity AFS securities: (1)

 

 

 

 

 

 

 

 

 

Gross gains

$

 65

 

$

 41

 

$

 37

 

Gross losses

 

 (227

)

 

 (94

)

 

 (28

)

Equity AFS securities:

 

 

 

 

 

 

 

 

 

Gross gains

 

 8

 

 

 3

 

 

 5

 

Gross losses

 

 (1

)

 

 -

 

 

 -

 

Gain (loss) on other investments

 

 (62

)

 

 (7

)

 

 4

 

Associated amortization of DAC, VOBA, DSI and DFEL

 

 

 

 

 

 

 

 

 

and changes in other contract holder funds

 

 (24

)

 

 (26

)

 

 (31

)

Total realized gain (loss) related to certain investments, pre-tax

$

 (241

)

$

 (83

)

$

 (13

)



(1)

These amounts are represented net of related fair value hedging activity.  See Note 7 for more information.



Details underlying write-downs taken as a result of OTTI 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,

 



2016

 

2015

 

2014

 

OTTI Recognized in Net Income (Loss)

 

 

 

 

 

 

 

 

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

Corporate bonds

$

 (80

)

$

 (42

)

$

 (1

)

ABS

 

 (5

)

 

 (6

)

 

 (10

)

RMBS

 

 (10

)

 

 (7

)

 

 (7

)

CMBS

 

 (1

)

 

 (1

)

 

 (1

)

State and municipal bonds

 

 (3

)

 

 -

 

 

 -

 

Total fixed maturity securities

 

 (99

)

 

 (56

)

 

 (19

)

Equity securities

 

 (1

)

 

 -

 

 

 -

 

Gross OTTI recognized in net income (loss)

 

 (100

)

 

 (56

)

 

 (19

)

Associated amortization of DAC, VOBA, DSI and DFEL

 

 -

 

 

 6

 

 

 4

 

Net OTTI recognized in net income (loss), pre-tax

$

 (100

)

$

 (50

)

$

 (15

)



 

 

 

 

 

 

 

 

 

Portion of OTTI Recognized in OCI

 

 

 

 

 

 

 

 

 

Gross OTTI recognized in OCI

$

 53

 

$

 29

 

$

 11

 

Change in DAC, VOBA, DSI and DFEL

 

 (12

)

 

 (4

)

 

 (1

)

Net portion of OTTI recognized in OCI, pre-tax

$

 41

 

$

 25

 

$

 10

 



Determination of Credit Losses on Corporate Bonds and ABS



As of December 31, 2016 and 2015, we reviewed our corporate bond and ABS portfolios for potential shortfall in contractual principal and interest based on numerous subjective and objective inputs.  The factors used to determine the amount of credit loss for each individual security, include, but are not limited to, near term risk, substantial discrepancy between book and market value, sector or company-specific volatility, negative operating trends and trading levels wider than peers. 



Credit ratings express opinions about the credit quality of a security.  Securities rated investment grade, that is those rated BBB- or higher by Standard & Poor's ("S&P") Rating Services or Baa3 or higher by Moody's Investors Service ("Moody's"), are generally considered by the rating agencies and market participants to be low credit risk.  As of December 31, 2016 and 2015, 95% and 96%, respectively, of the fair value of our corporate bond portfolio was rated investment grade.  As of December 31, 2016 and 2015, the portion of our corporate bond portfolio rated below investment grade had an amortized cost of $3.7 billion and $3.6 billion, respectively, and a fair value of $3.6 billion and $3.2 billion, respectively.  As of December 31, 2016 and 2015, 96% and 95%, respectively, of the fair value of our ABS portfolio was rated investment grade.  As of December 31, 2016 and 2015, the portion of our ABS portfolio rated below investment grade had an amortized cost of $87 million and $104 million, respectively, and a fair value of $73 million and $89 million, respectively.  Based upon the analysis discussed above, we believed as of December 31, 2016 and 2015, that we would recover the amortized cost of each investment grade corporate bond and ABS security.



 

34

 

Determination of Credit Losses on MBS



As of December 31, 2016 and 2015, default rates were projected by considering underlying MBS loan performance and collateral type.  Projected default rates on existing delinquencies vary between 10% to 100% depending on loan type and severity of delinquency status.  In addition, we estimate the potential contributions of currently performing loans that may become delinquent in the future based on the change in delinquencies and loan liquidations experienced in the recent history.  Finally, we develop a default rate timing curve by aggregating the defaults for all loans in the pool (delinquent loans, foreclosure and real estate owned and new delinquencies from currently performing loans) and the associated loan-level loss severities. 



We use certain available loan characteristics such as lien status, loan sizes and occupancy to estimate the loss severity of loans.  Second lien loans are assigned 100% severity, if defaulted.  For first lien loans, we assume a minimum of 30% severity with higher severity assumed for investor properties and further adjusted by housing price assumptions.  With the default rate timing curve and loan-level severity, we derive the future expected credit losses.



Payables for Collateral on Investments



The carrying value of the payables for collateral on investments (in millions) included on our Consolidated Balance Sheets and the fair value of the related investments or collateral consisted of the following:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 



As of December 31, 2016

 

As of December 31, 2015

 



Carrying

 

Fair

 

Carrying

 

Fair

 



Value

 

Value

 

Value

 

Value

 

Collateral payable for derivative investments (1)

$

 813 

 

$

 813 

 

$

 1,294 

 

$

 1,294 

 

Securities pledged under securities lending agreements (2)

 

 217 

 

 

 209 

 

 

 242 

 

 

 231 

 

Securities pledged under repurchase agreements (3)

 

 530 

 

 

 555 

 

 

 674 

 

 

 706 

 

Investments pledged for Federal Home Loan Bank of

 

 

 

 

 

 

 

 

 

 

 

 

Indianapolis ("FHLBI") (4)

 

 3,350 

 

 

 4,947 

 

 

 2,355 

 

 

 3,391 

 

Total payables for collateral on investments

$

 4,910 

 

$

 6,524 

 

$

 4,565 

 

$

 5,622 

 



(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 7 for additional information.

(2)    Our pledged securities under securities lending agreements are included in fixed maturity AFS securities on our Consolidated Balance Sheets.  We generally obtain collateral in an amount equal to 102% and 105% of the fair value of the domestic and foreign securities, respectively.  We value collateral daily and obtain additional collateral when deemed appropriate.  The cash received in our securities lending program is typically invested in cash and invested cash or fixed maturity AFS securities.

(3)    Our pledged securities under repurchase agreements are included in fixed maturity AFS securities on our Consolidated Balance Sheets.  We obtain collateral in an amount equal to 95% of the fair value of the securities, and our agreements with third parties contain contractual provisions to allow for additional collateral to be obtained when necessary.  The cash received in our repurchase program is typically invested in fixed maturity AFS securities.

(4)    Our pledged 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.



Increase (decrease) in payables for collateral on investments (in millions) consisted of the following:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



For the Years Ended December 31,

 



2016

 

2015

 

2014

 

Collateral payable for derivative investments

$

 (481

)

$

 (283

)

$

 1,313

 

Securities pledged under securities lending agreements

 

 (25

)

 

 38

 

 

 20

 

Securities pledged under repurchase agreements

 

 (144

)

 

 69

 

 

 75

 

Securities pledged for Term Asset-Backed Securities Loan Facility

 

 -

 

 

 -

 

 

 (36

)

Investments pledged for FHLBI

 

 995

 

 

 430

 

 

 74

 

Total increase (decrease) in payables for collateral on investments

$

 345

 

$

 254

 

$

 1,446

 



 

35

 

We have elected not to offset our repurchase agreements and securities lending transactions in our financial statements.  The remaining contractual maturities of repurchase agreements and securities lending transactions accounted for as secured borrowings were as follows:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 



As of December 31, 2016

 



Overnight and Continuous

 

Up to 30 Days

 

30 -  90 Days

 

Greater Than 90 Days

 

Total

 

Repurchase Agreements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS

$

 -

 

$

 -

 

$

 -

 

$

 -

 

$

 -

 

Corporate bonds

 

 -

 

 

 -

 

 

 384 

 

 

 146 

 

 

 530 

 

Total

 

 -

 

 

 -

 

 

 384 

 

 

 146 

 

 

 530 

 

Securities Lending

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 212 

 

 

 -

 

 

 -

 

 

 -

 

 

 212 

 

Foreign government bonds

 

 5 

 

 

 -

 

 

 -

 

 

 -

 

 

 5 

 

Total

 

 217 

 

 

 -

 

 

 -

 

 

 -

 

 

 217 

 

Total secured borrowings

$

 217 

 

$

 -

 

$

 384 

 

$

 146 

 

$

 747 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



As of December 31, 2015

 



Overnight and Continuous

 

Up to 30 Days

 

30 -  90 Days

 

Greater Than 90 Days

 

Total

 

Repurchase Agreements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS

$

 -

 

$

 -

 

$

 -

 

$

 250 

 

$

 250 

 

Corporate bonds

 

 -

 

 

 -

 

 

 275 

 

 

 149 

 

 

 424 

 

Total

 

 -

 

 

 -

 

 

 275 

 

 

 399 

 

 

 674 

 

Securities Lending

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 242 

 

 

 -

 

 

 -

 

 

 -

 

 

 242 

 

Foreign government bonds

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

Total

 

 242 

 

 

 -

 

 

 -

 

 

 -

 

 

 242 

 

Total secured borrowings

$

 242 

 

$

 -

 

$

 275 

 

$

 399 

 

$

 916 

 



We accept collateral in the form of securities in connection with repurchase agreements. In instances where we are permitted to sell or re-pledge the securities received, we report the fair value of the collateral received and a related obligation to return the collateral in the financial statements.  In addition, we receive securities in connection with securities borrowing agreements which we are permitted to sell or re-pledge.  As of December 31, 2016, the fair value of all collateral received that we are permitted to sell or re-pledge was $171 million.  As of December 31, 2016, we have not sold or re-pledged this collateral.



Investment Commitments



As of December 31, 2016, our investment commitments were $1.2 billion, which included $741 million of LPs, $183 million of private placement securities and $259 million of mortgage loans on real estate.



Concentrations of Financial Instruments



As of December 31, 2016 and 2015, our most significant investments in one issuer were our investments in securities issued by the Federal Home Loan Mortgage Corporation with a fair value of $1.5 billion and $1.7 billion, respectively, or 1% and 2% of our invested assets portfolio, respectively, and our investments in securities issued by Fannie Mae with a fair value of $1.1 billion and $1.2 billion, respectively, or 1% of our invested assets portfolio. 



As of December 31, 2016 and 2015, our most significant investments in one industry were our investment securities in the consumer non-cyclical industry with a fair value of $13.0 billion and $11.7 billion, respectively, or 12% of our invested assets portfolio, and our investment securities in the utilities industry with a fair value of $12.8 billion and $12.3 billion, respectively, or 12% of our invested assets portfolio. 



Assets on Deposit



The Company had investment assets on deposit with regulatory agencies with a fair market value of $67 million and $66 million as of December 31, 2016 and 2015, respectively.



 

36

 

7.  Derivative Instruments

 

We maintain an overall risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate risk, foreign currency exchange risk, equity market risk, default risk, basis risk and credit risk.  We assess these risks by continually identifying and monitoring changes in our exposures that may adversely affect expected future cash flows and by evaluating hedging opportunities. 



Derivative activities are monitored by various management committees.  The committees are responsible for overseeing the implementation of various hedging strategies that are developed through the analysis of financial simulation models and other internal and industry sources.  The resulting hedging strategies are incorporated into our overall risk management strategies.    



See Note 1 for a detailed discussion of the accounting treatment for derivative instruments.  See Note 21 for additional disclosures related to the fair value of our derivative instruments and Note 5 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:



Forward-Starting Interest Rate Swaps



We use forward-starting interest rate swaps designated and qualifying as cash flow hedges to hedge our exposure to interest rate fluctuations related to the forecasted purchases of certain assets. 



Interest Rate Cap Corridors



We use interest rate cap corridors to provide a level of protection from the effect of rising interest rates for certain life insurance products and annuity contracts.  Interest rate cap corridors involve purchasing an interest rate cap at a specific cap rate and selling an interest rate cap with a higher cap rate.  For each corridor, the amount of quarterly payments, if any, is determined by the rate at which the underlying index rate resets above the original capped rate.  The corridor limits the benefit the purchaser can receive as the related interest rate index rises above the higher capped rate.  There is no additional liability to us other than the purchase price associated with the interest rate cap corridor.



Interest Rate Futures



We use interest rate futures contracts to hedge the liability exposure on certain options in variable annuity products.  These futures contracts require payment between our counterparty and us on a daily basis for changes in the futures index price.



Interest Rate Swap Agreements



We use interest rate swap agreements to hedge the liability exposure on certain options in variable annuity products.

 

We also use interest rate swap agreements designated and qualifying as cash flow hedges to hedge the interest rate risk of floating-rate bond coupon payments by replicating a fixed-rate bond.



Finally, we use interest rate swap agreements designated and qualifying as fair value hedges to hedge against changes in the fair value of certain fixed-rate securities due to interest rate risks.



Reverse Treasury Locks



We use reverse treasury locks designated and qualifying as cash flow hedges to hedge the interest rate exposure related to the anticipated purchase of fixed-rate securities. 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 rate of exchange. 



 

37

 

Foreign Currency Swaps



We use foreign currency swaps designated and qualifying as cash flow hedges, to hedge foreign exchange risk of investments in fixed maturity securities denominated in foreign currencies.  A foreign currency swap is a contractual agreement to exchange one currency for another at specified dates in the future at a specified rate of exchange. 



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®



Our indexed annuity and indexed universal life ("IUL") contracts permit the holder to elect an interest rate return or an equity market component, where interest credited to the contracts is linked to the performance of the S&P 500 Index® ("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. 



Consumer Price Index Swaps



We use consumer price index swaps to hedge the liability exposure on certain options in fixed annuity products.  Consumer price index swaps are contracts entered into at no cost and whose payoff is the difference between the consumer price index inflation rate and the fixed-rate determined as of inception.



Equity Futures



We use equity futures contracts to hedge the liability exposure on certain options in variable annuity products.  These futures contracts require payment between our counterparty and us on a daily basis for changes in the futures index price.



Put Options



We use put options to hedge the liability exposure on certain options in variable annuity products.  Put options are contracts that require counterparties to pay us at a specified future date the amount, if any, by which a specified equity index is less than the strike rate stated in the agreement, applied to a notional amount.



Total Return Swaps



We use total return swaps to hedge the liability exposure on certain options in variable annuity products.  We receive a floating rate of interest and pay the total return on a portfolio of indexes.



In addition, we use total return swaps to hedge a portion of the liability related to our deferred compensation plans.  We receive the total return on a portfolio of indexes and pay a floating-rate of interest. 



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 whose payoff is the difference between the realized variance rate of an underlying index and the fixed variance rate determined as of inception of the contract.



Credit Contracts



We use derivative instruments as part of our credit risk management strategy that are economic hedges and include: 



Credit Default Swaps - Buying Protection



We use credit default swaps to hedge the liability exposure on certain options in variable annuity products.



We buy credit default swaps to hedge against a drop in bond prices due to credit concerns of certain bond issuers. A credit default swap allows us to put the bond back to the counterparty at par upon a default event by the bond issuer. A default event is defined as bankruptcy, failure to pay, obligation acceleration or restructuring.



 

38

 

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.  Changes in the value of the hedge contracts due to changes in equity markets, interest rates and implied volatilities hedge the income statement effect of changes in embedded derivative GLB reserves caused by those same factors.    We rebalance our hedge positions based upon changes in these factors as needed.  While we actively manage our hedge positions, these hedge positions may not be totally effective in offsetting changes in the embedded derivative reserve due to, among other things, differences in timing between when a market exposure changes and corresponding changes to the hedge positions, extreme swings in the equity markets and interest rates, market volatility, contract holder behavior, divergence between the performance of the underlying funds and the hedging indices, divergence between the actual and expected performance of the hedge instruments and our ability to purchase hedging instruments at prices consistent with our desired risk and return trade-off.  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 benefit reserves and the embedded derivative reserves based on the specific characteristics of each GLB feature.



Indexed Annuity and IUL Contracts Embedded Derivatives



Our indexed annuity and IUL contracts permit the holder to elect an interest rate return or an equity market component, where interest credited to the contracts is linked to the performance of the S&P 500.  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 Modco arrangements and CFW 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 the risk under certain UL contracts for no lapse benefit guarantees to LNBAR.  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.



 

39

 

We have derivative instruments with off-balance-sheet risks whose notional or contract amounts exceed the related credit exposure.  Outstanding derivative instruments with off-balance-sheet risks (in millions) were as follows:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



As of December 31, 2016

 

As of December 31, 2015

 



Notional

 

Fair Value

 

Notional

 

Fair Value

 



Amounts

 

Asset

 

Liability

 

Amounts

 

Asset

 

Liability

 

Qualifying Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts (1)

$

 2,089 

 

$

 68 

 

$

 77 

 

$

 1,474 

 

$

 192 

 

$

 29 

 

Foreign currency contracts (1)

 

 1,177 

 

 

 153 

 

 

 10 

 

 

 910 

 

 

 84 

 

 

 2 

 

Total cash flow hedges

 

 3,266 

 

 

 221 

 

 

 87 

 

 

 2,384 

 

 

 276 

 

 

 31 

 

Fair value hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts (1)

 

 637 

 

 

 -

 

 

 182 

 

 

 654 

 

 

 -

 

 

 198 

 

Non-Qualifying Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts (1)

 

 70,290 

 

 

 985 

 

 

 701 

 

 

 71,899 

 

 

 1,087 

 

 

 330 

 

Foreign currency contracts (1)

 

 14 

 

 

 -

 

 

 -

 

 

 74 

 

 

 -

 

 

 -

 

Equity market contracts (1)

 

 28,142 

 

 

 542 

 

 

 616 

 

 

 27,712 

 

 

 680 

 

 

 269 

 

Credit contracts (2)

 

 66 

 

 

 -

 

 

 -

 

 

 103 

 

 

 -

 

 

 9 

 

Embedded derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GLB reserves (3)

 

 -

 

 

 371 

 

 

 -

 

 

 -

 

 

 952 

 

 

 -

 

GLB reserves (2)

 

 -

 

 

 -

 

 

 371 

 

 

 -

 

 

 -

 

 

 952 

 

Reinsurance related (4)

 

 -

 

 

 58 

 

 

 -

 

 

 -

 

 

 95 

 

 

 -

 

Indexed annuity and IUL contracts (5)

 

 -

 

 

 -

 

 

 1,139 

 

 

 -

 

 

 -

 

 

 1,100 

 

Total derivative instruments

$

 102,415 

 

$

 2,177 

 

$

 3,096 

 

$

 102,826 

 

$

 3,090 

 

$

 2,889 

 



(1)

Reported in derivative investments and other liabilities on our Consolidated Balance Sheets.

(2)

Reported in other liabilities on our Consolidated Balance Sheets.

(3)

Reported in other assets on our Consolidated Balance Sheets.

(4)

Reported in reinsurance related embedded derivatives on our Consolidated Balance Sheets.

(5)

Reported in future contract benefits on our Consolidated Balance Sheets.



The maturity of the notional amounts of derivative instruments (in millions) was as follows:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Remaining Life as of December 31, 2016

 



Less Than

 

1 - 5

 

6 - 10

 

11 - 30

 

Over 30

 

 

 



1 Year

 

Years

 

Years

 

Years

 

Years

 

Total

 

Interest rate contracts (1)

$

 11,102 

 

$

 25,280 

 

$

 23,164 

 

$

 13,470 

 

$

 -

 

$

 73,016 

 

Foreign currency contracts (2)

 

 50 

 

 

 109 

 

 

 346 

 

 

 686 

 

 

 -

 

 

 1,191 

 

Equity market contracts

 

 15,751 

 

 

 9,369 

 

 

 1,872 

 

 

 17 

 

 

 1,133 

 

 

 28,142 

 

Credit contracts

 

 50 

 

 

 16 

 

 

 -

 

 

 -

 

 

 -

 

 

 66 

 

Total derivative instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

with notional amounts

$

 26,953 

 

$

 34,774 

 

$

 25,382 

 

$

 14,173 

 

$

 1,133 

 

$

 102,415 

 



(1)

As of December 31, 2016, the latest maturity date for which we were hedging our exposure to the variability in future cash flows for these instruments was November 2046.

(2)

As of December 31, 2016, the latest maturity date for which we were hedging our exposure to the variability in future cash flows for these instruments was December 2045.



 

40

 

The change in our unrealized gain (loss) on derivative instruments in AOCI (in millions) was as follows:







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



For the Years Ended December 31,

 



2016

 

2015

 

2014

 

Unrealized Gain (Loss) on Derivative Instruments

 

 

 

 

 

 

 

 

 

Balance as of beginning-of-year

$

 157

 

$

 127

 

$

 5

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period:

 

 

 

 

 

 

 

 

 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 (165

)

 

 (202

)

 

 78

 

Foreign currency contracts

 

 (10

)

 

 17

 

 

 36

 

Change in foreign currency exchange rate adjustment

 

 96

 

 

 48

 

 

 50

 

Change in DAC, VOBA, DSI and DFEL

 

 2

 

 

 3

 

 

 2

 

Income tax benefit (expense)

 

 27

 

 

 46

 

 

 (58

)

Less:

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

Interest rate contracts (1)

 

 5

 

 

 (190

)

 

 (22

)

Interest rate contracts (2)

 

 1

 

 

 -

 

 

 -

 

Foreign currency contracts (1)

 

 11

 

 

 6

 

 

 -

 

Foreign currency contracts (2)

 

 7

 

 

 -

 

 

 -

 

Associated amortization of DAC, VOBA, DSI and DFEL

 

 (2

)

 

 2

 

 

 1

 

Income tax benefit (expense)

 

 (8

)

 

 64

 

 

 7

 

Balance as of end-of-year

$

 93

 

$

 157

 

$

 127

 



(1)

The OCI offset is reported within net investment income on our Consolidated Statements of Comprehensive Income (Loss).

(2)

The OCI offset is reported within realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).

 

41

 

The gains (losses) on derivative instruments (in millions) recorded within net income (loss) on our Consolidated Statements of Comprehensive Income (Loss) were as follows:







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



For the Years Ended December 31,

 



2016

 

2015

 

2014

 

Qualifying Hedges

 

 

 

 

 

 

 

 

 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

Interest rate contracts (1)

$

 5

 

$

 8

 

$

 (22

)

Interest rate contracts (2)

 

 1

 

 

 -

 

 

 -

 

Foreign currency contracts (1)

 

 11

 

 

 6

 

 

 -

 

Foreign currency contracts (2)

 

 7

 

 

 -

 

 

 -

 

Total cash flow hedges

 

 24

 

 

 14

 

 

 (22

)

Fair value hedges:

 

 

 

 

 

 

 

 

 

Interest rate contracts (1)

 

 (28

)

 

 (30

)

 

 -

 

Interest rate contracts (2)

 

 16

 

 

 (198

)

 

 -

 

Total fair value hedges

 

 (12

)

 

 (228

)

 

 -

 

Non-Qualifying Hedges

 

 

 

 

 

 

 

 

 

Interest rate contracts (2)

 

 181

 

 

 304

 

 

 1,304

 

Foreign currency contracts (2)

 

 (14

)

 

 (11

)

 

 (8

)

Equity market contracts (2)

 

 (1,253

)

 

 (118

)

 

 (215

)

Equity market contracts (3)

 

 12

 

 

 1

 

 

 11

 

Credit contracts (2)

 

 (5

)

 

 (6

)

 

 (1

)

Embedded derivatives:

 

 

 

 

 

 

 

 

 

Other assets - GLB reserves (2)

 

 (581

)

 

 778

 

 

 1,391

 

Other liabilities - GLB reserves (2)

 

 581

 

 

 (778

)

 

 (1,391

)

Reinsurance related (2)

 

 (57

)

 

 221

 

 

 (242

)

Indexed annuity and IUL contracts (2)

 

 (120

)

 

 (57

)

 

 (210

)

Total derivative instruments

$

 (1,244

)

$

 120

 

$

 617

 



(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) recognized as a component of OCI (in millions) on derivative instruments designated and qualifying as cash flow hedges were as follows:











 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



For the Years Ended December 31,

 



2016

 

2015

 

2014

 

Offset to net investment income

$

 16

 

 

 14

 

 

 (22

)

Offset to realized gain (loss)

 

 8

 

 

 -

 

 

 -

 



 

 

 

 

 

 

 

 

 



As of December 31, 2016, $21 million of the deferred net gains (losses) on derivative instruments in AOCI were expected to be reclassified to earnings during the next 12 months.  This reclassification would be due primarily to interest rate variances related to our interest rate swap agreements.



For the years ended December 31, 2016 and 2015, 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.











 

42

 

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





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2016

 



 

 

 

 

 

Credit

 

 

 

 

 

 

 

 

 



 

Reason

 

Nature

 

Rating of

 

Number

 

 

 

 

Maximum

 



 

for

 

of

Underlying

of

 

Fair

 

Potential

 

Maturity

 

Entering

 

Recourse

Obligation (1)

Instruments

 

Value (2)

 

Payout

 

3/20/2017 (3)

 

(4)

 

(5)

 

BBB+

 

 2 

 

$

 -

 

$

 40 

 



 

 

 

 

 

 

 

 2 

 

$

 -

 

$

 40 

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2015

 



 

 

 

 

 

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-

 

 2

 

$

 (2

)

$

 45

 

3/20/2017 (3)

 

(4)

 

(5)

 

BBB-

 

 3

 

 

 (7

)

 

 58

 



 

 

 

 

 

 

 

 5

 

$

 (9

)

$

 103

 



(1)

Represents average credit ratings based on the midpoint of the applicable ratings among Moody's, S&P and Fitch Ratings, as scaled to the corresponding S&P ratings.

(2)

Broker quotes are used to determine the market value of our credit default swaps.

(3)

These credit default swaps were sold to a counterparty of the consolidated VIEs discussed in Note 5.

(4)

Credit default swaps were entered into in order to generate income by providing default protection in return for a quarterly payment.

(5)

Sellers do not have the right to demand indemnification or compensation from third parties in case of a loss (payment) on the contract.



Details underlying the associated collateral of our credit default swaps for which we are the seller if credit risk-related contingent features were triggered (in millions) were as follows:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

As of December 31,

 

 



 

2016

 

 

2015

 

 

Maximum potential payout

 

$

 40 

 

 

$

 103 

 

 

Less:  Counterparty thresholds

 

 

 -

 

 

 

 -

 

 

Maximum collateral potentially required to post

 

$

 40 

 

 

$

 103 

 

 



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 less than $1 million of collateral as of December 31, 2016. 



Credit Risk



We are exposed to credit loss in the event of non-performance by our counterparties on various derivative contracts and reflect assumptions regarding the credit or NPR.  The NPR is based upon assumptions for each counterparty's credit spread over the estimated weighted average life of the counterparty exposure less collateral held.  As of December 31, 2016, the NPR adjustment was less than $1 million.  The credit risk associated with such agreements is minimized by entering into agreements with financial institutions with long-standing, superior performance records.  Additionally, we maintain a policy of requiring derivative contracts to be governed by an International Swaps and Derivatives Association ("ISDA") Master Agreement.  We are required to maintain minimum ratings as a matter of routine practice in negotiating ISDA agreements.  Under some ISDA agreements, our insurance subsidiaries have agreed to maintain certain financial strength or claims-paying ratings.  A downgrade below these levels could result in termination of derivative contracts, at which time any amounts payable by us would be dependent on the market value of the underlying derivative contracts.  In certain transactions, we and the counterparty have entered into a credit support annex requiring either party to post collateral when net exposures exceed pre-determined thresholds.  These thresholds vary by counterparty and credit rating.  The amount of such exposure is essentially the net replacement cost or market value less collateral held for such agreements with each counterparty if the net market value is in our favor.  As of December 31, 2016, our exposure was $5 million. 

 

43

 

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, 2016

 

As of December 31, 2015

 



 

Collateral

 

Collateral

 

Collateral

 

Collateral

 



 

Posted by

 

Posted by

 

Posted by

 

Posted by

 

S&P

 

Counter-

 

LNL

 

Counter-

 

LNL

 

Credit

 

Party

 

(Held by

 

Party

 

(Held by

 

Rating of

 

(Held by

 

Counter-

 

(Held by

 

Counter-

 

Counterparty

 

LNL)

 

Party)

 

LNL)

 

Party)

 



 

 

 

 

 

 

 

 

 

 

 

 

 

AA-

 

$

 53

 

$

 (32

)

$

 92

 

$

 -

 

A+

 

 

 10

 

 

 (217

)

 

 67

 

 

 -

 

A

 

 

 394

 

 

 (335

)

 

 791

 

 

 (107

)

A-

 

 

 67

 

 

 -

 

 

 11

 

 

 -

 

BBB+

 

 

 289

 

 

 -

 

 

 333

 

 

 -

 



 

$

 813

 

$

 (584

)

$

 1,294

 

$

 (107

)



Balance Sheet Offsetting



Information related to the effects of offsetting on our Consolidated Balance Sheets (in millions) was as follows:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

As of December 31, 2016

 



 

 

 

 

Embedded

 

 

 

 



Derivative

Derivative

 

 

 

 



Instruments

Instruments

 

Total

 



 

 

 

 

 

 

 

 

 

 

 

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

Gross amount of recognized assets

 

$

 1,211

 

 

$

 429

 

 

$

 1,640

 

Gross amounts offset

 

 

 (311

)

 

 

 -

 

 

 

 (311

)

Net amount of assets

 

 

 900

 

 

 

 429

 

 

 

 1,329

 

Gross amounts not offset:

 

 

 

 

 

 

 

 

 

 

 

 

Cash collateral

 

 

 (813

)

 

 

 -

 

 

 

 (813

)

Net amount

 

$

 87

 

 

$

 429

 

 

$

 516

 



 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Gross amount of recognized liabilities

 

$

 1,274

 

 

$

 1,510

 

 

$

 2,784

 

Gross amounts offset

 

 

 (536

)

 

 

 -

 

 

 

 (536

)

Net amount of liabilities

 

 

 738

 

 

 

 1,510

 

 

 

 2,248

 

Gross amounts not offset:

 

 

 

 

 

 

 

 

 

 

 

 

Cash collateral

 

 

 (584

)

 

 

 -

 

 

 

 (584

)

Net amount

 

$

 154

 

 

$

 1,510

 

 

$

 1,664

 





 

44

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

As of December 31, 2015

 



 

 

 

 

Embedded

 

 

 

 



Derivative

Derivative

 

 

 

 



Instruments

Instruments

 

Total

 



 

 

 

 

 

 

 

 

 

 

 

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

Gross amount of recognized assets

 

$

 1,981

 

 

$

 1,048

 

 

$

 3,029

 

Gross amounts offset

 

 

 (496

)

 

 

 -

 

 

 

 (496

)

Net amount of assets

 

 

 1,485

 

 

 

 1,048

 

 

 

 2,533

 

Gross amounts not offset:

 

 

 

 

 

 

 

 

 

 

 

 

Cash collateral

 

 

 (1,294

)

 

 

 -

 

 

 

 (1,294

)

Net amount

 

$

 191

 

 

$

 1,048

 

 

$

 1,239

 



 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Gross amount of recognized liabilities

 

$

 340

 

 

$

 2,053

 

 

$

 2,393

 

Gross amounts offset

 

 

 (61

)

 

 

 -

 

 

 

 (61

)

Net amount of liabilities

 

 

 279

 

 

 

 2,053

 

 

 

 2,332

 

Gross amounts not offset:

 

 

 

 

 

 

 

 

 

 

 

 

Cash collateral

 

 

 (107

)

 

 

 -

 

 

 

 (107

)

Net amount

 

$

 172

 

 

$

 2,053

 

 

$

 2,225

 





8.  Federal Income Taxes



The federal income tax expense (benefit) (in millions) was as follows:







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



For the Years Ended December 31,

 



2016

 

2015

 

2014

 

Current

$

 25 

 

$

 71 

 

$

 104 

 

Deferred

 

 242 

 

 

 224 

 

 

 116 

 

Federal income tax expense (benefit)

$

 267 

 

$

 295 

 

$

 220 

 



A reconciliation of the effective tax rate differences (in millions) was as follows:







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



For the Years Ended December 31,

 



2016

 

2015

 

2014

 

Tax rate of 35% times pre-tax income

$

 504

 

$

 514

 

$

 425

 

Effect of:

 

 

 

 

 

 

 

 

 

Tax-preferred investment income

 

 (196

)

 

 (192

)

 

 (174

)

Tax credits

 

 (28

)

 

 (26

)

 

 (24

)

Change in uncertain tax positions

 

 (11

)

 

 1

 

 

 (12

)

Excess tax benefits from share-based

 

 

 

 

 

 

 

 

 

compensation

 

 (4

)

 

 -

 

 

 -

 

Other items

 

 2

 

 

 (2

)

 

 5

 

Federal income tax expense (benefit)

$

 267

 

$

 295

 

$

 220

 

Effective tax rate

 

 19%

 

 

 20%

 

 

 18%

 



The effective tax rate is the ratio of tax expense over pre-tax income (loss).  The tax preferred investment income relates primarily to the separate account dividends-received deduction.  The separate account dividends-received deduction benefit was $175 million, $188 million and $158 million for the years ended December 31, 2016, 2015 and 2014.  Tax benefits for uncertain tax positions for the year ended December 31, 2016, are primarily attributable to the release of reserves associated with prior tax years that closed during 2016.  A tax benefit was also recorded for the year ended December 31, 2016, in association with the early adoption of ASU 2016-09, Improvements to Employee-Based Payment Accounting.  For more information, see Note 2.  We file with a consolidated group, however we calculate our tax expense on a separate company basis.













 

45

 

The federal income tax asset (liability) (in millions) was as follows:







 

 

 

 

 

 



 

 

 

 

 

 



As of December 31,

 



2016

 

2015

 

Current

$

 164

 

$

 104

 

Deferred

 

 (3,062

)

 

 (2,422

)

Total federal income tax asset (liability)

$

 (2,898

)

$

 (2,318

)



Significant components of our deferred tax assets and liabilities (in millions) were as follows:







 

 

 

 

 

 



 

 

 

 

 

 



As of December 31,

 



2016

 

2015

 

Deferred Tax Assets

 

 

 

 

 

 

Future contract benefits and other contract holder funds

$

 986

 

$

 960

 

Deferred gain on business sold through reinsurance

 

 -

 

 

 30

 

Reinsurance related embedded derivative asset

 

 -

 

 

 25

 

Compensation and benefit plans

 

 187

 

 

 186

 

Tax credits

 

 85

 

 

 33

 

Other

 

 19

 

 

 172

 

Total deferred tax assets

 

 1,277

 

 

 1,406

 

Deferred Tax Liabilities

 

 

 

 

 

 

DAC

 

 2,038

 

 

 2,147

 

VOBA

 

 306

 

 

 306

 

Net unrealized gain on AFS securities

 

 1,596

 

 

 1,084

 

Net unrealized gain on trading securities

 

 65

 

 

 67

 

Intangibles

 

 20

 

 

 7

 

Investment activity

 

 125

 

 

 183

 

Deferred gain on business sold through reinsurance

 

 51

 

 

 -

 

Reinsurance related embedded derivative asset

 

 20

 

 

 -

 

Other

 

 118

 

 

 34

 

Total deferred tax liabilities

 

 4,339

 

 

 3,828

 

Net deferred tax asset (liability)

$

 (3,062

)

$

 (2,422

)



As of December 31, 2016, we had $85 million of alternative minimum tax credits that are not subject to expiration.  Although realization is not assured, management believes that it is more likely than not that we will realize the benefits of our deferred tax assets, and, accordingly, no valuation allowance has been recorded.



As of December 31, 2016 and 2015, $1 million and $10 million, respectively, of our unrecognized tax benefits presented below, if recognized, would have affected our income tax expense and our effective tax rate.  We are not aware of any events for which it is likely that unrecognized tax benefits will significantly increase or decrease within the next year.  A reconciliation of the unrecognized tax benefits (in millions) was as follows:







 

 

 

 

 

 



 

 

 

 

 

 



For the Years Ended

 



December 31,

 



2016

 

2015

 

Balance as of beginning-of-year

$

 10

 

$

 10

 

Increases for current year tax positions

 

 1

 

 

 -

 

Decreases for expiring statutes

 

 (10

)

 

 -

 

Balance as of end-of-year

$

 1

 

$

 10

 



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, 2016, 2015 and 2014, we recognized interest and penalty expense (benefit) related to uncertain tax positions of $(2) million, $1 million and $(12) million, respectively.  We had accrued interest and penalty expense related to the unrecognized tax benefits of zero and $2 million as of December 31, 2016 and 2015, respectively.



We are subject to examination by U.S. federal, state, local and non-U.S. income authorities.  We are currently not under examination by the Internal Revenue Service; however, tax years 2013 and forward remain open.  We are currently under examination by several state and local taxing jurisdictions; however, we do not expect these examinations will materially impact us.



 

46

 

9.  DAC, VOBA, DSI and DFEL



Changes in DAC (in millions) were as follows:







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



For the Years Ended December 31,

 



2016

 

2015

 

2014

 

Balance as of beginning-of-year

$

 8,620

 

$

 7,527

 

$

 7,690

 

Business acquired (sold) through reinsurance

 

 -

 

 

 38

 

 

 (20

)

Deferrals

 

 1,339

 

 

 1,483

 

 

 1,525

 

Amortization, net of interest:

 

 

 

 

 

 

 

 

 

Amortization, excluding unlocking, net of interest

 

 (879

)

 

 (813

)

 

 (956

)

Unlocking

 

 (276

)

 

 (232

)

 

 18

 

Adjustment related to realized (gains) losses

 

 (51

)

 

 (44

)

 

 (58

)

Adjustment related to unrealized (gains) losses

 

 (484

)

 

 661

 

 

 (672

)

Balance as of end-of-year

$

 8,269

 

$

 8,620

 

$

 7,527

 



Changes in VOBA (in millions) were as follows:







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



For the Years Ended December 31,

 



2016

 

2015

 

2014

 

Balance as of beginning-of-year

$

 873

 

$

 628

 

$

 1,169

 

Business acquired (sold) through reinsurance

 

 -

 

 

 (22

)

 

 2

 

Deferrals

 

 3

 

 

 8

 

 

 9

 

Amortization:

 

 

 

 

 

 

 

 

 

Amortization, excluding unlocking

 

 (105

)

 

 (128

)

 

 (185

)

Unlocking

 

 36

 

 

 (82

)

 

 (21

)

Accretion of interest (1)

 

 52

 

 

 56

 

 

 64

 

Adjustment related to realized (gains) losses

 

 (2

)

 

 (1

)

 

 (1

)

Adjustment related to unrealized (gains) losses

 

 17

 

 

 414

 

 

 (409

)

Balance as of end-of-year

$

 874

 

$

 873

 

$

 628

 



(1)

The interest accrual rates utilized to calculate the accretion of interest ranged from 4.2% to 6.9%.



Estimated future amortization of VOBA, net of interest (in millions), as of December 31, 2016, was as follows:













 

 

 



 

 

 

2017

$

 60 

 

2018

 

 59 

 

2019

 

 69 

 

2020

 

 73 

 

2021

 

 73 

 



Changes in DSI (in millions) were as follows:











 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



For the Years Ended December 31,

 



2016

 

2015

 

2014

 

Balance as of beginning-of-year

$

 301

 

$

 285

 

$

 310

 

Deferrals

 

 25

 

 

 29

 

 

 13

 

Amortization, net of interest:

 

 

 

 

 

 

 

 

 

Amortization, excluding unlocking, net of interest

 

 (28

)

 

 (33

)

 

 (37

)

Unlocking

 

 (2

)

 

 2

 

 

 2

 

Adjustment related to realized (gains) losses

 

 (2

)

 

 (1

)

 

 (3

)

Adjustment related to unrealized (gains) losses

 

 (1

)

 

 19

 

 

 -

 

Balance as of end-of-year

$

 293

 

$

 301

 

$

 285

 



 

47

 

Changes in DFEL (in millions) were as follows:











 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



For the Years Ended December 31,

 



2016

 

2015

 

2014

 

Balance as of beginning-of-year

$

 1,923

 

$

 1,365

 

$

 1,899

 

Business acquired (sold) through reinsurance

 

 -

 

 

 -

 

 

 (2

)

Deferrals

 

 628

 

 

 537

 

 

 400

 

Amortization, net of interest:

 

 

 

 

 

 

 

 

 

Amortization, excluding unlocking, net of interest

 

 (345

)

 

 (299

)

 

 (326

)

Unlocking

 

 (63

)

 

 (66

)

 

 (50

)

Adjustment related to realized (gains) losses

 

 (11

)

 

 (8

)

 

 (8

)

Adjustment related to unrealized (gains) losses

 

 (277

)

 

 394

 

 

 (548

)

Balance as of end-of-year

$

 1,855

 

$

 1,923

 

$

 1,365

 





10.  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,

 



2016

 

2015

 

2014

 

Direct insurance premiums and fee income

$

 9,373

 

$

 9,354

 

$

 8,880

 

Reinsurance assumed

 

 105

 

 

 83

 

 

 16

 

Reinsurance ceded

 

 (1,728

)

 

 (1,652

)

 

 (1,917

)

Total insurance premiums and fee income

$

 7,750

 

$

 7,785

 

$

 6,979

 



 

 

 

 

 

 

 

 

 

Direct insurance benefits

$

 6,112

 

$

 6,304

 

$

 5,970

 

Reinsurance recoveries netted against benefits

 

 (1,865

)

 

 (1,775

)

 

 (1,616

)

Total benefits

$

 4,247

 

$

 4,529

 

$

 4,354

 



We cede insurance to other companies.  The portion of our life insurance and annuity risks exceeding our retention limit is reinsured with other insurers.  We seek reinsurance coverage to limit our exposure to mortality losses and to enhance our capital management.  As discussed in Note 24, a portion of this reinsurance activity is with affiliated companies.



As of December 31, 2016, the policy for our reinsurance program was to retain up to $20 million on a single insured life. As the amount we retain varies by policy, we reinsured approximately 25% of the mortality risk on newly issued life insurance contracts in 2016.  As of December 31, 2016, approximately 36% of our total individual life in-force amount was reinsured.  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, 2016, the reserves associated with these reinsurance arrangements totaled $584 million.



We focus on obtaining reinsurance from a diverse group of reinsurers, and we monitor concentration as well as financial strength ratings of our reinsurers.  Reinsurance contracts do not relieve an insurer from its primary obligation to policyholders.  Therefore, the failure of a reinsurer to discharge its reinsurance obligations could result in a loss to us.  We regularly evaluate the financial condition of our reinsurers and monitor concentrations of credit risk related to reinsurance activities.  Our amounts recoverable from reinsurers represent receivables from and reserves ceded to reinsurers.  The amounts recoverable from reinsurers were $6.8 billion and $7.1 billion as of December 31, 2016 and 2015, respectively.  Our reinsurance operations were acquired by Swiss Re in December 2001 through a series of indemnity reinsurance transactions.  As such, Swiss Re reinsured certain liabilities and obligations under the indemnity reinsurance agreements and thereby represents our largest reinsurance exposure.  As we are not relieved of our liability to the ceding companies for this business, the liabilities and obligations associated with the reinsured policies remain on our Consolidated Balance Sheets with a corresponding reinsurance receivable from Swiss Re, which totaled $2.2 billion and $2.4 billion as of December 31, 2016 and 2015, respectively.  Swiss Re has funded a trust, with a balance of $2.6 billion as of December 31, 2016, to support this business.  In addition to various remedies that we would have in the event of a default by Swiss Re, we continue to hold assets in support of certain of the transferred reserves.  These assets consist of those reported as trading securities and certain mortgage loans.  Our liabilities for funds withheld and embedded derivatives as of December 31, 2016, included $495 million and $47 million, respectively, related to the business sold to Swiss Re.



We recorded the gain related to the indemnity reinsurance transactions with Swiss Re as a deferred gain on business sold through reinsurance on our Consolidated Balance Sheets.  The deferred gain is being amortized into income at the rate that earnings on the reinsured business are expected to emerge, over a period of 15 years from the date of sale.  We amortized $48 million, after-tax, of deferred gain on business sold through reinsurance during 2016, 2015 and 2014, respectively.  The deferred gain on business sold through reinsurance will be substantially amortized during the first quarter of 2017.



 

48

 

11.  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, 2016

 

 



Gross

Accumulated

 

 

 

 

 

 

 



Goodwill

Impairment

 

 

 

 

 

Net

 

 



as of

as of

 

 

 

 

Goodwill

 

 



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

 

 

Total goodwill

 

$

 3,520

 

 

$

 (1,247

)

 

$

 -

 

 

$

 2,273

 

 











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

For the Year Ended December 31, 2015

 

 



Gross

Accumulated

 

 

 

 

 

 

 



Goodwill

Impairment

 

 

 

 

 

Net

 

 



as of

as of

 

 

 

 

Goodwill

 

 



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

 

 

Total goodwill

 

$

 3,520

 

 

$

 (1,247

)

 

$

 -

 

 

$

 2,273

 

 





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, 2016

 

 

As of December 31, 2015

 

 



Gross

 

 

 

 

 

 

Gross

 

 

 

 

 



Carrying

 

Accumulated

 

Carrying

 

Accumulated

 



Amount

 

Amortization

 

Amount

 

Amortization

 

Life Insurance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales force

$

 100 

 

 

$

 43 

 

 

$

 100 

 

 

$

 39 

 

 

Retirement Plan Services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual fund contract rights (1)

 

 5 

 

 

 

 -

 

 

 

 5 

 

 

 

 -

 

 

Total

$

 105 

 

 

$

 43 

 

 

$

 105 

 

 

$

 39 

 

 



(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, 2016, was as follows:







 

 

 



 

 

 

2017

$

 4 

 

2018

 

 4 

 

2019

 

 4 

 

2020

 

 4 

 

2021

 

 4 

 

Thereafter

 

 37 

 







 

49

 

12.  Guaranteed Benefit Features



Information on the GDB features outstanding (dollars in millions) was as follows:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

As of December 31,

 

 



 

2016 (1)

 

 

2015 (1)

 

 

Return of Net Deposits

 

 

 

 

 

 

 

 

 

Total account value

 

$

 87,707 

 

 

$

 85,345 

 

 

Net amount at risk (2)

 

 

 824 

 

 

 

 1,201 

 

 

Average attained age of contract holders

 

 

63 years

 

 

 

63 years

 

 



 

 

 

 

 

 

 

 

 

Minimum Return

 

 

 

 

 

 

 

 

 

Total account value

 

$

 105 

 

 

$

 111 

 

 

Net amount at risk (2)

 

 

 22 

 

 

 

 24 

 

 

Average attained age of contract holders

 

 

75 years

 

 

 

75 years

 

 

Guaranteed minimum return

 

 

 5% 

 

 

 

 5% 

 

 



 

 

 

 

 

 

 

 

 

Anniversary Contract Value

 

 

 

 

 

 

 

 

 

Total account value

 

$

 24,605 

 

 

$

 24,659 

 

 

Net amount at risk (2)

 

 

 782 

 

 

 

 1,345 

 

 

Average attained age of contract holders

 

 

69 years

 

 

 

69 years

 

 



(1)    Our variable contracts with guarantees may offer more than one type of guarantee in each contract; therefore, the amounts listed are not mutually exclusive.

(2)    Represents the amount of death benefit in excess of the account balance that is subject to market fluctuations.



The determination of GDB liabilities is based on models that involve a range of scenarios and assumptions, including those regarding expected market rates of return and volatility, contract surrender rates and mortality experience. 



The following summarizes the balances of and changes in the liabilities for GDBs (in millions), which were recorded in future contract benefits on our Consolidated Balance Sheets:





 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



For the Years Ended December 31,

 

 



2016

 

2015

 

2014

 

 

Balance as of beginning-of-year

$

 115

 

$

 89

 

$

 73

 

 

Changes in reserves

 

 34

 

 

 52

 

 

 34

 

 

Benefits paid

 

 (39

)

 

 (26

)

 

 (18

)

 

Balance as of end-of-year

$

 110

 

$

 115

 

$

 89

 

 



Variable Annuity Contracts



Account balances of variable annuity contracts, including those with guarantees, (in millions) were invested in separate account investment options as follows:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

As of December 31,

 

 



 

2016

 

 

2015

 

 

Asset Type

 

 

 

 

 

 

 

 

 

Domestic equity

 

$

 50,337 

 

 

$

 46,668 

 

 

International equity

 

 

 16,714 

 

 

 

 17,686 

 

 

Bonds

 

 

 26,318 

 

 

 

 25,386 

 

 

Money market

 

 

 11,477 

 

 

 

 12,488 

 

 

Total

 

$

 104,846 

 

 

$

 102,228 

 

 



 

 

 

 

 

 

 

 

 

Percent of total variable annuity

 

 

 

 

 

 

 

 

 

separate account values

 

 

 99% 

 

 

 

 99% 

 

 



Secondary Guarantee Products



Future contract benefits and other contract holder funds include reserves for our secondary guarantee products sold through our Life Insurance segment.  These UL and VUL products with secondary guarantees represented 36% of total life insurance in-force reserves as of December 31, 2016 and 2015.    UL and VUL products with secondary guarantees represented 33% of total sales for the years ended December 31, 2016 and 2015, and 39% for the year ended December 31, 2014.

 

50

 



13.  Short-Term and Long-Term Debt



Details underlying short-term and long-term debt (in millions) were as follows:









 

 

 

 

 

 



 

 

 

 

 

 



As of December 31,

 



2016

 

2015

 

Short-Term Debt

 

 

 

 

 

 

Short-term debt (1)

$

 280 

 

$

 90 

 



 

 

 

 

 

 

Long-Term Debt, Excluding Current Portion

 

 

 

 

 

 

LIBOR + 3 bps loan, due 2017

$

 -

 

$

 250 

 

Surplus notes due LNC:

 

 

 

 

 

 

LIBOR + 142 bps surplus note, due 2023

 

 240 

 

 

 240 

 

9.76% surplus note, due 2024

 

 50 

 

 

 50 

 

6.56% surplus note, due 2028

 

 500 

 

 

 500 

 

LIBOR + 111 bps surplus note, due 2028

 

 71 

 

 

 71 

 

LIBOR + 226 bps surplus note, due 2028

 

 533 

 

 

 479 

 

6.03% surplus note, due 2028

 

 750 

 

 

 750 

 

LIBOR + 200 bps surplus note, due 2035

 

 30 

 

 

 30 

 

LIBOR + 100 bps surplus note, due 2037

 

 375 

 

 

 375 

 

Total surplus notes

 

 2,549 

 

 

 2,495 

 

Total long-term debt

$

 2,549 

 

$

 2,745 

 



(1)    The short-term debt represents short-term notes payable to LNC.



Future principal payments due on long-term debt (in millions) as of December 31, 2016, were as follows:







 

 

 



 

 

 

2017

$

 -

 

2018

 

 -

 

2019

 

 -

 

2020

 

 -

 

2021

 

 -

 

Thereafter

 

 2,549 

 

Total

$

 2,549 

 



We prepaid the $250 million floating-rate loan outstanding under our borrowing capacity with the FHLBI due June 20, 2017, in December 2016.



On June 28, 2013, we issued a surplus note of $240 million to LNC.  The note calls for us to pay the principal amount of the note on or before June 28, 2023, and interest to be paid quarterly at an annual rate of the London Interbank Offered Rate ("LIBOR") + 142 bps.  Subject to approval by the Indiana Insurance Commissioner (the "Commissioner"), we have the right to repay the note in whole or in part prior to the maturity date, if our statutory capital surplus exceeds the sum of our surplus at closing plus any accrued but unpaid interest.



We issued a surplus note of $50 million to LNC in 1994.  The note calls for us to pay the principal amount of the note on or before September 30, 2024, and interest to be paid semiannually at an annual rate of 9.76%.  Subject to approval by the Commissioner, we have the right to repay the note on any March 31 or September 30.



We issued a surplus note of $500 million to LNC in 1998.  The note calls for us to pay the principal amount of the note on or before March 31, 2028, and interest to be paid quarterly at an annual rate of 6.56%.  Subject to approval by the Commissioner, LNC has the 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 Commissioner.



On October 1, 2013, we issued a surplus note of $71 million to LNC.  The note calls for us to pay the principal amount of the note on or before September 24, 2028, and interest to be paid quarterly at an annual rate of LIBOR + 111 bps.  Subject to approval by the Commissioner, we have the right to repay the note in whole or in part prior to the maturity date, if our statutory capital surplus exceeds the sum of our surplus at closing plus any accrued but unpaid interest.



 

51

 

On December 17, 2013, we issued a variable surplus note to a wholly-owned subsidiary of LNC with an initial outstanding principal amount of $287 million.  The outstanding principal amount as of December 31, 2016, was $533 million.  The note calls for us to pay the principal amount of the note on or before October 1, 2028, and interest to be paid quarterly at an annual rate of LIBOR + 226 bps.



We issued a surplus note of $750 million to LNC in 1998.  The note calls for us to pay the principal amount of the note on or before December 31, 2028, and interest to be paid quarterly at an annual rate of 6.03%.  Subject to approval by the Commissioner, LNC has the 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 Commissioner.



On October 1, 2015, we issued a surplus note of $30 million to LNC.  The note calls for us to pay the principal amount of the note on or before September 28, 2035, and interest to be paid quarterly at an annual rate of LIBOR + 200 bps.  Subject to approval by the Commissioner, we have the right to repay the note in whole or in part prior to the maturity date, if our statutory capital surplus exceeds the sum of our surplus at closing plus any accrued but unpaid interest. 



On October 9, 2007, we issued a surplus note of $375 million that LNC has held effective December 31, 2008.  The note calls for us to pay the principal amount of the note on or before October 9, 2037, and interest to be paid quarterly at an annual rate of LIBOR + 100 bps.



14.  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 affiliates 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 verdicts obtained 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, 2016.  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, 2016, we estimate the aggregate range of reasonably possible losses to be up to approximately $50 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

 

52

 

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.  



Cost of Insurance Litigation



Glover v. Connecticut General Life Insurance Company and The Lincoln National Life Insurance Company, filed in the U.S. District Court for the District of Connecticut, No. 3:16cv00827, is a putative class action that was served on LNL on June 8, 2016.  Plaintiff is the owner of a universal life insurance policy who alleges that LNL charged more for cost of insurance than permitted by the policy.  Plaintiff seeks to represent all universal life and variable universal life policyholders who owned policies containing cost of insurance provisions that are similar to those of Plaintiff's policy and seeks damages on behalf of all such policyholders.  We are vigorously defending this matter.



Helen Hanks v. The Lincoln Life and Annuity Company of New York  and Voya Retirement Insurance and Annuity Company ("Voya"), filed in the U.S. District Court for the Southern District of New York, No. 16cv6399, is a putative class action that was served on LLANY on August 12, 2016.  Plaintiff owns a universal life policy originally issued by Aetna (now Voya) and alleges that (i) Voya breached the terms of the policy when it increased cost of insurance rates on Plaintiff's policy; and (ii) LLANY, as reinsurer and administrator of Plaintiff's policy, engaged in wrongful conduct related to the cost of insurance increase and was unjustly enriched as a result.  Plaintiff seeks to represent all owners of Aetna life insurance policies that were subject to cost of insurance rate increases in 2016 and seeks damages on their behalf.  We are vigorously defending this matter.



EFG Bank AG, Cayman Branch, et al. v. The Lincoln National Life Insurance Company, pending in the U.S. District Court for the Central District of California, No. 2:17-cv-00817, is a civil action filed on February 1, 2017.  Plaintiffs own Legend Series universal life insurance policies originally issued by Jefferson-Pilot (now Lincoln).  Plaintiffs allege that Lincoln breached the terms of policyholders' contracts when it increased cost of insurance rates beginning in 2016.  We are vigorously defending this matter.



Swenson, et al. v. The Lincoln National Life Insurance Company, Lincoln Life & Annuity Company of New York, Lincoln National Corporation, Voya Retirement Insurance and Annuity Company, and Voya Financial, Inc., pending in the U.S. District Court for the Eastern District of Washington, No. 2:17-cv-00048, is a putative class action filed on February 1, 2017.  Plaintiffs own universal life insurance policies originally issued by Aetna (now Voya).  Plaintiffs allege that Lincoln breached the terms of policyholders' contracts when it increased cost of insurance rates beginning in 2016.  Plaintiffs seek to represent multiple subclasses of policy owners and seek damages on their behalf.  We are vigorously defending this matter.



In re: Lincoln National COI Litigation, pending in the U.S. District Court for the Eastern District of Pennsylvania, Master File No. 16-cv-06605-GJP, is a consolidated litigation matter related to multiple putative class action filings that were consolidated by an order dated March 20, 2017. In addition to consolidating a number of existing matters, the order also covers any future filed cases in the same district related to the same subject matter.  Plaintiffs own universal life insurance policies originally issued by Jefferson Pilot (now Lincoln). Plaintiffs allege that LNL breached the terms of policyholders' contracts when it increased cost of insurance rates beginning in 2016. Plaintiffs seek to represent classes of policyowners and seek damages on their behalf. We are vigorously defending this matter.



Commitments



Operating 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.  In 2016, we renegotiated this lease with a new term expiring in 2028.  During 2016, a lease commenced in Atlanta, Georgia at our RiverEdge Summit location and the lease shall expire in 2027.  



Total rental expense on operating leases for the years ended December 31, 2016, 2015 and 2014, was $37 million, $35 million and $38 million, respectively.  Future minimum rental commitments (in millions) as of December 31, 2016, were as follows:





 

 

 



 

 

 

2017

$

 36 

 

2018

 

 34 

 

2019

 

 31 

 

2020

 

 25 

 

2021

 

 21 

 

Thereafter

 

 61 

 

Total

$

 208 

 

 





 

53

 

Capital Leases



In December 2016 and 2015, we entered into sale-leaseback transactions on $85 million and $47 million, respectively,  (net of amortization) of assets.  These transactions have been classified as capital leases on our Consolidated Balance Sheets.  These assets will continue to be amortized on a straight-line basis over the assets' remaining lives.  Total accumulated amortization related to these leased assets as of December 31, 2016 and 2015, was $92 million and $64 million, respectively.  Future minimum lease payments under capital leases (in millions) as of December 31, 2016, were as follows:





 

 

 



 

 

 

2017

$

 5 

 

2018

 

 5 

 

2019

 

 87 

 

2020

 

 50 

 

2021

 

 60 

 

Thereafter

 

 27 

 

Total minimum lease payments

 

 234 

 

Less: Amount representing interest

 

 20 

 

Present value of minimum lease payments        

$

 214 

 



Vulnerability from Concentrations



As of December 31, 2016, 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 21%, 18% and 20% of Annuities' variable annuity product deposits in 2016, 2015 and 2014, respectively, and represented approximately 41%, 42% and 44% of the segment's total variable annuity product account values as of December 31, 2016, 2015 and 2014, respectively.  In addition, fund choices for certain of our other variable annuity products offered in our Annuities segment include American Fund Insurance SeriesSM ("AFIS") funds.  For the Annuities segment, AFIS funds accounted for 23%, 20% and 22% of variable annuity product deposits in 2016, 2015 and 2014, respectively, and represented 47%, 48% and 50% of the segment's total variable annuity product account values as of December 31, 2016, 2015 and 2014, respectively.



Other Contingency Matters

 

State guaranty funds assess insurance companies to cover losses to contract holders of insolvent or rehabilitated companies.  Mandatory assessments may be partially recovered through a reduction in future premium taxes in some states.  We have accrued for expected assessments and the related reductions in future state premium taxes, which net to assessments (recoveries) of $(10) million and $(17) million as of December 31, 2016 and 2015, respectively.



 

54

 

15.  Shares and Stockholder's Equity



All authorized and issued shares of LNL are owned by LNC.



AOCI



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







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

For the Years Ended December 31,

 



 

2016

 

2015

 

2014

 

Unrealized Gain (Loss) on AFS Securities

 

 

 

 

 

 

 

 

 

 

Balance as of beginning-of-year

 

$

 934

 

$

 3,054

 

$

 1,453

 

Unrealized holding gains (losses) arising during the year

 

 

 1,549

 

 

 (4,386

)

 

 3,745

 

Change in foreign currency exchange rate adjustment

 

 

 (100

)

 

 (45

)

 

 (47

)

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

 

 

 (460

)

 

 1,293

 

 

 (1,252

)

Income tax benefit (expense)

 

 

 (351

)

 

 1,095

 

 

 (857

)

Less:

 

 

 

 

 

 

 

 

 

 

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

 

 

 (155

)

 

 147

 

 

 14

 

Associated amortization of DAC, VOBA, DSI and DFEL

 

 

 (22

)

 

 (28

)

 

 (32

)

Income tax benefit (expense)

 

 

 62

 

 

 (42

)

 

 6

 

Balance as of end-of-year

 

$

 1,687

 

$

 934

 

$

 3,054

 

Unrealized OTTI on AFS Securities

 

 

 

 

 

 

 

 

 

 

Balance as of beginning-of-year

 

$

 19

 

$

 19

 

$

 (10

)

(Increases) attributable to:

 

 

 

 

 

 

 

 

 

 

Gross OTTI recognized in OCI during the year

 

 

 (53

)

 

 (29

)

 

 (11

)

Change in DAC, VOBA, DSI and DFEL

 

 

 12

 

 

 4

 

 

 1

 

Income tax benefit (expense)

 

 

 14

 

 

 8

 

 

 3

 

Decreases attributable to:

 

 

 

 

 

 

 

 

 

 

Changes in fair value, sales, maturities or other settlements of AFS securities

 

 

 51

 

 

 43

 

 

 61

 

Change in DAC, VOBA, DSI and DFEL

 

 

 (7

)

 

 (17

)

 

 (6

)

Income tax benefit (expense)

 

 

 (15

)

 

 (9

)

 

 (19

)

Balance as of end-of-year

 

$

 22

 

$

 19

 

$

 19

 

Unrealized Gain (Loss) on Derivative Instruments

 

 

 

 

 

 

 

 

 

 

Balance as of beginning-of-year

 

$

 157

 

$

 127

 

$

 5

 

Unrealized holding gains (losses) arising during the year

 

 

 (175

)

 

 (185

)

 

 114

 

Change in foreign currency exchange rate adjustment

 

 

 96

 

 

 48

 

 

 50

 

Change in DAC, VOBA, DSI and DFEL

 

 

 2

 

 

 3

 

 

 2

 

Income tax benefit (expense)

 

 

 27

 

 

 46

 

 

 (58

)

Less:

 

 

 

 

 

 

 

 

 

 

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

 

 

 24

 

 

 (184

)

 

 (22

)

Associated amortization of DAC, VOBA, DSI and DFEL

 

 

 (2

)

 

 2

 

 

 1

 

Income tax benefit (expense)

 

 

 (8

)

 

 64

 

 

 7

 

Balance as of end-of-year

 

$

 93

 

$

 157

 

$

 127

 

Funded Status of Employee Benefit Plans

 

 

 

 

 

 

 

 

 

 

Balance as of beginning-of-year

 

$

 (19

)

$

 (21

)

$

 (18

)

Adjustment arising during the year

 

 

 (2

)

 

 3

 

 

 (5

)

Income tax benefit (expense)

 

 

 1

 

 

 (1

)

 

 2

 

Balance as of end-of-year

 

$

 (20

)

$

 (19

)

$

 (21

)



 

55

 

The following summarizes the reclassifications out of AOCI (in millions) and the associated line item in the Consolidated Statements of Comprehensive Income (Loss):









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



For the Years Ended December 31,

 

 



2016

 

 

2015

 

 

2014

 

 

Unrealized Gain (Loss) on AFS Securities

 

 

 

 

 

 

 

 

 

 

 

 

Gross reclassification

$

 (155

)

 

$

 147

 

 

$

 14

 

Total realized gain (loss)

Associated amortization of DAC, 

 

 

 

 

 

 

 

 

 

 

 

 

VOBA, DSI and DFEL

 

 (22

)

 

 

 (28

)

 

 

 (32

)

Total realized gain (loss)

Reclassification before income

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing

tax benefit (expense)

 

 (177

)

 

 

 119

 

 

 

 (18

)

operations before taxes

Income tax benefit (expense)

 

 62

 

 

 

 (42

)

 

 

 6

 

Federal income tax expense (benefit)

Reclassification, net of income tax

$

 (115

)

 

$

 77

 

 

$

 (12

)

Net income (loss)



 

 

 

 

 

 

 

 

 

 

 

 

Unrealized OTTI on AFS Securities

 

 

 

 

 

 

 

 

 

 

 

 

Gross reclassification

$

 3

 

 

$

 2

 

 

$

 61

 

Total realized gain (loss)

Change in DAC, VOBA, DSI and DFEL

 

 -

 

 

 

 -

 

 

 

 (6

)

Total realized gain (loss)

Reclassification before income

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing

tax benefit (expense)

 

 3

 

 

 

 2

 

 

 

 55

 

operations before taxes

Income tax benefit (expense)

 

 -

 

 

 

 -

 

 

 

 (19

)

Federal income tax expense (benefit)

Reclassification, net of income tax

$

 3

 

 

$

 2

 

 

$

 36

 

Net income (loss)



 

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gain (Loss) on Derivative Instruments

 

 

 

 

 

 

 

 

 

 

Gross reclassifications:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

$

 5

 

 

$

 (190

)

 

$

 (22

)

Net investment income

Interest rate contracts

 

 1

 

 

 

 -

 

 

 

 -

 

Total realized gain (loss)

Foreign currency contracts

 

 11

 

 

 

 6

 

 

 

 -

 

Net investment income

Foreign currency contracts

 

 7

 

 

 

 -

 

 

 

 -

 

Total realized gain (loss)

Total gross reclassifications

 

 24

 

 

 

 (184

)

 

 

 (22

)

 

Associated amortization of DAC,

 

 

 

 

 

 

 

 

 

 

 

 

VOBA, DSI and DFEL

 

 (2

)

 

 

 2

 

 

 

 1

 

Commissions and other expenses

Reclassifications before income

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing

tax benefit (expense)

 

 22

 

 

 

 (182

)

 

 

 (21

)

operations before taxes

Income tax benefit (expense)

 

 (8

)

 

 

 64

 

 

 

 7

 

Federal income tax expense (benefit)

Reclassification, net of income tax

$

 14

 

 

$

 (118

)

 

$

 (14

)

Net income (loss)







 

56

 

16.  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,

 



2016

 

2015

 

2014

 

Total realized gain (loss) related to certain investments (1)

$

 (241

)

$

 (83

)

$

 (13

)

Realized gain (loss) on the mark-to-market on certain instruments (2)

 

 (66

)

 

 123

 

 

 (250

)

Indexed annuity and IUL contracts net derivatives results: (3)

 

 

 

 

 

 

 

 

 

Gross gain (loss)

 

 (1

)

 

 (78

)

 

 (35

)

Associated amortization of DAC, VOBA, DSI and DFEL

 

 (4

)

 

 14

 

 

 6

 

Variable annuity net derivatives results: (4)

 

 

 

 

 

 

 

 

 

Gross gain (loss)

 

 (166

)

 

 (161

)

 

 (150

)

Associated amortization of DAC, VOBA, DSI and DFEL

 

 (32

)

 

 (34

)

 

 (36

)

Realized gain (loss) on sale of subsidiaries/businesses (5)

 

 -

 

 

 (3

)

 

 (46

)

Total realized gain (loss)

$

 (510

)

$

 (222

)

$

 (524

)



(1)

See "Realized Gain (Loss) Related to Certain Investments" section in Note 6.

(2)

Represents changes in the fair values of certain derivative investments (not including those associated with our variable and indexed annuity and IUL contracts net derivatives results), reinsurance related embedded derivatives and trading securities.

(3)

Represents the net difference between the change in the fair value of the S&P 500 call options that we hold and the change in the fair value of the embedded derivative liabilities of our indexed annuity and IUL contracts along with changes in the fair value of embedded derivative liabilities related to index call options we may purchase in the future to hedge contract holder index allocations applicable to future reset periods for our indexed annuity products.

(4)

Includes the net difference in the change in embedded derivative reserves of our GLB riders and the change in the fair value of the derivative instruments we own to hedge the change in embedded derivative reserves on our GLB riders and the benefit ratio unlocking on our GDB riders, including the cost of purchasing the hedging instruments.

(5)

See "LFM" in Note 3.



17.  Commissions and Other Expenses



Details underlying commissions and other expenses (in millions) were as follows:







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



For the Years Ended December 31,

 



2016

 

2015

 

2014

 

Commissions

$

 1,927

 

$

 2,082

 

$

 2,100

 

General and administrative expenses

 

 1,623

 

 

 1,683

 

 

 1,582

 

Expenses associated with reserve financing and unrelated LOCs

 

 40

 

 

 32

 

 

 31

 

DAC and VOBA deferrals and interest, net of amortization

 

 (170

)

 

 (292

)

 

 (454

)

Broker-dealer expenses

 

 320

 

 

 329

 

 

 302

 

Specifically identifiable intangible asset amortization

 

 4

 

 

 4

 

 

 4

 

Media expenses

 

 -

 

 

 28

 

 

 60

 

Taxes, licenses and fees

 

 261

 

 

 243

 

 

 251

 

Total

$

 4,005

 

$

 4,109

 

$

 3,876

 





18.  Retirement and Deferred Compensation Plans



Defined Benefit Pension and Other Postretirement Benefit Plans



We maintain defined benefit pension plans in which certain agents are participants.  These defined benefit pension plans are closed to new entrants and existing participants do not accrue any additional benefits.  We comply with applicable minimum funding requirements and do not expect to be required to make any contributions to these pension plans in 2017.  We sponsor other postretirement benefit plans that provide health care and life insurance to certain retired agents.  Total net periodic cost (recovery) for these plans was $3 million during 2016, 2015 and 2014.  In 2017, we expect to make benefit payments of approximately $12 million for these plans.



 

57

 

Information (in millions) with respect to these plans was as follows:







 

 

 

 

 

 

 

 

 

 

 

 

 



As of or For the Years Ended December 31,

 

 



2016

 

2015

 

2016

 

2015

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

Other Postretirement

 

 



Pension Plans

 

Benefit Plans

 

 

Fair value of plan assets

$

 117

 

$

 124

 

$

 7

 

$

 7

 

 

Projected benefit obligation

 

 117

 

 

 117

 

 

 11

 

 

 15

 

 

Funded status of plan

$

 -

 

$

 7

 

$

 (4

)

$

 (8

)

 



 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts Recognized on the

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

$

 2

 

$

 9

 

$

 -

 

$

 -

 

 

Other liabilities

 

 (2

)

 

 (2

)

 

 (4

)

 

 (8

)

 

Net amount recognized

$

 -

 

$

 7

 

$

 (4

)

$

 (8

)

 



 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-Average Assumptions

 

 

 

 

 

 

 

 

 

 

 

 

 

Benefit obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average discount rate

 

 4.50%

 

 

 4.50%

 

 

 4.50%

 

 

 4.50%

 

 

Net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average discount rate

 

 4.50%

 

 

 4.00%

 

 

 4.50%

 

 

 4.00%

 

 

Expected return on plan assets

 

 5.50%

 

 

 5.00%

 

 

 6.50%

 

 

 6.50%

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

The weighted average discount rate was determined based on a corporate yield curve as of December 31, 2016, and projected benefit obligation cash flows.  The expected return on plan assets was determined based on historical and expected future returns of the various asset categories, using the plans' target plan allocation.  We reevaluate these assumptions each plan year. 



The following summarizes our fair value measurements of our benefit plans' assets (in millions) on a recurring basis by asset category:









 

 

 

 

 

 

 



As of December 31,

 

 



2016

 

2015

 

 



 

 

 

 

 

 

 

Fixed maturity securities:

 

 

 

 

 

 

 

Corporate bonds

$

 21 

 

$

 25 

 

 

U.S. government bonds

 

 93 

 

 

 94 

 

 

Cash and invested cash

 

 2 

 

 

 5 

 

 

Other investments

 

 8 

 

 

 7 

 

 

Total

$

 124 

 

$

 131 

 

 



 

 

 

 

 

 

 

See "Fair Value Measurement" in Note 1 for discussion on 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 measurement of our pension plans' assets by the three-level fair value hierarchy.



Participation in Defined Benefit Pension and Other Postretirement Benefit Plans



We participate in defined benefit pension plans that are sponsored by LNC for certain employees and non-employee directors.  These defined benefit pension plans are closed to new entrants, and existing participants do not accrue any additional benefits.  We also participate in other postretirement benefit plans sponsored by LNC that provide health care and life insurance to certain retired employees.  Our expense for these plans was $9 million, $30 million and $1 million for the years ended December 31, 2016, 2015 and 2014, respectively.



Defined Contribution Plans



We sponsor tax-qualified defined contribution plans for eligible agents that are administered in accordance with the plan documents and various limitations under section 401(a) of the Internal Revenue Code of 1986.  We also participate in defined contribution plans sponsored by LNC for eligible employees.  Our expense for these plans was $83 million, $79 million and $75 million for the years ended December 31, 2016, 2015 and 2014, respectively. 



Deferred Compensation Plans



We sponsor non-qualified, unfunded, deferred compensation plans for certain current and former agents.  Certain current employees participate in non-qualified, unfunded, deferred compensation plans sponsored by LNC.  The results of certain notional investment

 

58

 

options within some of the plans are hedged by total return swaps.  Our expenses increase or decrease in direct proportion to the change in market value of the participants' investment options.  Participants of certain plans are able to select LNC stock as a notional 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 7.  Our expense for these plans was $22 million, $12 million and $21 million for the years ended December 31, 2016, 2015 and 2014, respectively.



Information (in millions) with respect to these plans was as follows:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



As of December 31,

 

 

 

 



2016

 

2015

 

 

 

 

Total liabilities (1)

$

 440 

 

$

 417 

 

 

 

 

Investments dedicated to fund liabilities (2)

 

 159 

 

 

 151 

 

 

 

 



 

 

 

 

 

 

 

 

 

(1)Reported in other liabilities on our Consolidated Balance Sheets.

(2)Reported in other assets on our Consolidated Balance Sheets.



19.  Stock-Based Incentive Compensation Plans



Our employees and agents are included in LNC's various incentive plans that provide for the issuance of stock options, performance shares (performance-vested shares as opposed to time-vested shares), stock appreciation rights ("SARs") and restricted stock units ("RSUs").  LNC issues new shares to satisfy option exercises.



Total compensation expense (in millions) for all of our stock-based incentive plans was as follows:







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



For the Years Ended December 31,

 



2016

 

2015

 

2014

 

Stock options

$

 9 

 

$

 7 

 

$

 9 

 

Performance shares

 

 10 

 

 

 11 

 

 

 12 

 

SARs

 

 3 

 

 

 -

 

 

 2 

 

RSUs

 

 22 

 

 

 21 

 

 

 15 

 

Total

$

 44 

 

$

 39 

 

$

 38 

 



 

 

 

 

 

 

 

 

 

Recognized tax benefit

$

 15 

 

$

 14 

 

$

 13 

 







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 the LNC holding company amounts (in millions) below consist of all or a combination of the following entities:  LNL, Lincoln Reinsurance Company of South

Carolina, LLANY, Lincoln Reinsurance Company of Vermont I, Lincoln Reinsurance Company of Vermont II, Lincoln Reinsurance

 

59

 

Company of Vermont III, Lincoln Reinsurance Company of Vermont IV, Lincoln Reinsurance Company of Vermont V and Lincoln Reinsurance Company of Vermont VI.

 

 

 

 

 

 

 



 

 

 

 

 

 



As of December 31,

 



2016

 

2015

 

U.S. capital and surplus

$

 8,017 

 

$

 7,614 

 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



For the Years Ended December 31,

 



2016

 

2015

 

2014

 

U.S. net gain (loss) from operations, after-tax

$

 1,088 

 

$

 583 

 

$

 1,170 

 

U.S. net income (loss)

 

 982 

 

 

 786 

 

 

 1,401 

 

U.S. dividends to LNC holding company

 

 950 

 

 

 1,121 

 

 

 705 

 



Comparison of 2016 to 2015



Statutory net income (loss) increased due primarily to changes in estimate on reserves for certain products and gains related to reinsurance transactions, partially offset by lower realized gains on investments.



Comparison of 2015 to 2014



Statutory net income (loss) decreased due primarily to the recapture in 2014 of certain traditional and interest sensitive business under several yearly renewable term reinsurance treaties that were originally ceded to a reinsurer, a change in estimate on reserves for certain products in 2014 and a decrease in favorable tax items.



Our states of domicile, Indiana for LNL and New York for LLANY, have adopted certain prescribed accounting practices that differ from those found in NAIC SAP.  These prescribed practices are the use of continuous Commissioners Annuity Reserve Valuation Method ("CARVM") in the calculation of reserves as prescribed by the state of New York, the calculation of reserves on universal life policies based on the Indiana universal life method as prescribed by the state of Indiana for policies issued before January 1, 2006, and the use of a more conservative valuation interest rate on certain annuities prescribed by the states of Indiana and New York.  The Vermont insurance subsidiaries also have an accounting practice permitted by the state of Vermont that differs from that found in NAIC SAP.  Specifically, the permitted practice involves accounting for the lesser of the face amount of all amounts outstanding under a letter of credit ("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, 2016 and 2015.  The permitted practice is related to structures that continue to be allowed in accordance with the grandfathered structures under the provisions of Actuarial Guideline 48 ("AG48").



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,

 



2016

 

2015

 

State Prescribed Practices

 

 

 

 

 

 

Calculation of reserves using the Indiana universal life method

$

 79

 

$

 109

 

Calculation of reserves using continuous CARVM

 

 -

 

 

 (1

)

Conservative valuation rate on certain annuities

 

 (49

)

 

 (43

)

Vermont Subsidiaries Permitted Practice

 

 

 

 

 

 

Lesser of LOC and XXX additional reserve as surplus (1)

 

 2,855

 

 

 2,835

 



(1)The permitted practice is related to structures that continue to be allowed in accordance with the grandfathered structures under the provisions of AG48.



During the third quarter of 2013, the New York State Department of Financial Services announced that it would not recognize the NAIC revisions to Actuarial Guideline 38 in applying the New York law governing the reserves to be held for UL and VUL products containing secondary guarantees. The change, which was effective as of December 31, 2013, impacts our New York-domiciled insurance subsidiary, LLANY. Although LLANY discontinued the sale of these products in early 2013, the change affected those policies previously sold. We began phasing in the increase in reserves in 2013 at $90 million per year over five years. As of December 31, 2016, we had increased reserves by $360 million.



The NAIC has adopted risk-based capital ("RBC") requirements for life insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks.  The requirements provide a means of measuring the minimum amount of statutory surplus appropriate for an insurance company to support its overall business operations based on its size and risk profile.  Under RBC requirements, regulatory compliance is determined by the ratio of a company's total adjusted capital, as defined by the NAIC, to its company action level of RBC (known as the "RBC ratio"), also as defined by the NAIC.  The company action level may be triggered if

 

60

 

the RBC ratio is between 75% and 100%, which would require the insurer to submit a plan to the regulator detailing corrective action it proposes to undertake.  As of December 31, 2016, the Company's RBC ratio was nearly five times the aforementioned company action level.

We are subject to certain insurance department regulatory restrictions as to the transfer of funds and payment of dividends to the holding company.  Under Indiana laws and regulations, LNL may pay dividends to LNC without prior approval of the 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 lesser of 10% of the insurer's contract holders' surplus, as shown on its last annual statement on file with the Commissioner or the insurer's statutory net gain from operations for the previous 12 months, but in no event to exceed statutory unassigned surplus.  Indiana law gives the Commissioner broad discretion to disapprove requests for dividends in excess of these limits.  LNL's subsidiary, LLANY, a New York domiciled insurance company, is bound by similar restrictions, under New York law, with the applicable statutory limitation on dividends equal to the lesser of 10% of surplus to contract holders as of the immediately preceding calendar year or net gain from operations for the immediately preceding calendar year, not including realized capital gains.  We expect that we could pay dividends of approximately $745 million in 2017 without prior approval from the respective state commissioner.



All payments of principal and interest on surplus notes must be approved by the respective Commissioner of Insurance.





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, 2016

 

As of December 31, 2015

 



Carrying

 

Fair

 

Carrying

 

Fair

 



Value

 

Value

 

Value

 

Value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

AFS securities:

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities

$

 87,866

 

$

 87,866

 

$

 84,072

 

$

 84,072

 

VIEs' fixed maturity securities

 

 200

 

 

 200

 

 

 598

 

 

 598

 

Equity securities

 

 275

 

 

 275

 

 

 237

 

 

 237

 

Trading securities

 

 1,624

 

 

 1,624

 

 

 1,762

 

 

 1,762

 

Mortgage loans on real estate

 

 9,761

 

 

 9,719

 

 

 8,513

 

 

 8,762

 

Derivative investments (1)

 

 900

 

 

 900

 

 

 1,486

 

 

 1,486

 

Other investments

 

 2,034

 

 

 2,034

 

 

 1,588

 

 

 1,588

 

Cash and invested cash

 

 2,057

 

 

 2,057

 

 

 2,400

 

 

 2,400

 

Reinsurance related embedded derivatives

 

 58

 

 

 58

 

 

 95

 

 

 95

 

Other assets - reinsurance recoverable

 

 371

 

 

 371

 

 

 952

 

 

 952

 

Separate account assets

 

 128,397

 

 

 128,397

 

 

 123,619

 

 

 123,619

 



 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Future contract benefits - indexed annuity

 

 

 

 

 

 

 

 

 

 

 

 

and IUL contracts embedded derivatives

 

 (1,139

)

 

 (1,139

)

 

 (1,100

)

 

 (1,100

)

Other contract holder funds:

 

 

 

 

 

 

 

 

 

 

 

 

Remaining guaranteed interest and similar contracts

 

 (629

)

 

 (629

)

 

 (687

)

 

 (687

)

Account values of certain investment contracts

 

 (31,475

)

 

 (35,647

)

 

 (30,346

)

 

 (34,567

)

Short-term debt

 

 (280

)

 

 (280

)

 

 (90

)

 

 (90

)

Long-term debt

 

 (2,549

)

 

 (2,739

)

 

 (2,745

)

 

 (2,662

)

VIEs' liabilities - derivative instruments

 

 -

 

 

 -

 

 

 (4

)

 

 (4

)

Other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Credit default swaps

 

 -

 

 

 -

 

 

 (9

)

 

 (9

)

Derivative liabilities (1)

 

 (738

)

 

 (738

)

 

 (271

)

 

 (271

)

GLB reserves embedded derivatives (2)

 

 (371

)

 

 (371

)

 

 (952

)

 

 (952

)



 

 

 

 

 

 

 

 

 

 

 

 

Benefit Plans' Assets (3)

 

 124

 

 

 124

 

 

 131

 

 

 131

 



(1)

We have master netting agreements with each of our derivative counterparties, which allow for the netting of our derivative asset and liability positions by counterparty.

(2)

Portions of our GLB reserves embedded derivatives are ceded to third-party reinsurance counterparties.  Refer to Note 7 for additional detail.   

(3)

Included in the funded statuses of the benefit plans, which is reported in other liabilities on our Consolidated Balance Sheets.  Refer to Note 18 for information regarding our benefit plans.

 

61

 

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 includes primarily 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 LPs and other privately held investments are classified as Level 3 within the fair value hierarchy.  Other investments also includes securities that are not LPs or other privately held investments and the inputs used to measure the fair  value of these securities are classified as Level 1 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, 2016 and 2015, the remaining guaranteed interest and similar contracts carrying value approximated fair value.  The fair value of the account values of certain investment contracts is based on their approximate surrender value as of the balance sheet date.  The inputs used to measure the fair value of our other contract holder funds are classified as Level 3 within the fair value hierarchy.



Short-Term and Long-Term Debt    



The fair value of long-term debt is based on quoted market prices.  For short-term debt, excluding current maturities of long-term debt, the carrying value approximates fair value.  The inputs used to measure the fair value of our short-term and long-term debt are classified as Level 2 within the fair value hierarchy.   



Financial Instruments Carried at Fair Value



We did not have any assets or liabilities measured at fair value on a nonrecurring basis as of December 31, 2016 or 2015, and we noted no changes in our valuation methodologies between these periods.



 

62

 

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, 2016

 



 

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

 

$

 -

 

 

$

 71,554

 

 

$

 4,809

 

 

$

 76,363

 

ABS

 

 

 -

 

 

 

 1,021

 

 

 

 33

 

 

 

 1,054

 

U.S. government bonds

 

 

 366

 

 

 

 11

 

 

 

 -

 

 

 

 377

 

Foreign government bonds

 

 

 -

 

 

 

 390

 

 

 

 111

 

 

 

 501

 

RMBS

 

 

 -

 

 

 

 3,394

 

 

 

 3

 

 

 

 3,397

 

CMBS

 

 

 -

 

 

 

 339

 

 

 

 7

 

 

 

 346

 

CLOs

 

 

 -

 

 

 

 676

 

 

 

 68

 

 

 

 744

 

State and municipal bonds

 

 

 -

 

 

 

 4,495

 

 

 

 -

 

 

 

 4,495

 

Hybrid and redeemable preferred securities

 

 

 60

 

 

 

 453

 

 

 

 76

 

 

 

 589

 

VIEs' fixed maturity securities

 

 

 -

 

 

 

 200

 

 

 

 -

 

 

 

 200

 

Equity AFS securities

 

 

 17

 

 

 

 81

 

 

 

 177

 

 

 

 275

 

Trading securities

 

 

 102

 

 

 

 1,457

 

 

 

 65

 

 

 

 1,624

 

Derivative investments (1)

 

 

 -

 

 

 

 1,148

 

 

 

 599

 

 

 

 1,747

 

Cash and invested cash

 

 

 -

 

 

 

 2,057

 

 

 

 -

 

 

 

 2,057

 

Reinsurance related embedded derivatives

 

 

 -

 

 

 

 58

 

 

 

 -

 

 

 

 58

 

Other assets - reinsurance recoverable

 

 

 -

 

 

 

 -

 

 

 

 371

 

 

 

 371

 

Separate account assets

 

 

 813

 

 

 

 127,584

 

 

 

 -

 

 

 

 128,397

 

Total assets

 

$

 1,358

 

 

$

 214,918

 

 

$

 6,319

 

 

$

 222,595

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Future contract benefits - indexed annuity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and IUL contracts embedded derivatives

 

$

 -

 

 

$

 -

 

 

$

 (1,139

)

 

$

 (1,139

)

Other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities (1)

 

 

 -

 

 

 

 (893

)

 

 

 (692

)

 

 

 (1,585

)

GLB reserves embedded derivatives

 

 

 -

 

 

 

 -

 

 

 

 (371

)

 

 

 (371

)

Total liabilities

 

$

 -

 

 

$

 (893

)

 

$

 (2,202

)

 

$

 (3,095

)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Benefit Plans' Assets

 

$

 -

 

 

$

 124

 

 

$

 -

 

 

$

 124

 







 



 

63

 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

As of December 31, 2015

 



 

Quoted

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Prices

 

 

 

 

 

 

 

 

 

 

 

 

 



 

in Active

 

 

 

 

 

 

 

 

 

 

 

 

 



Markets for

Significant

Significant

 

 

 

 



 

Identical

 

Observable

Unobservable

 

Total

 



 

Assets

 

 

Inputs

 

 

Inputs

 

 

Fair

 



 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

Value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity AFS securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

 60

 

 

$

 68,124

 

 

$

 4,273

 

 

$

 72,457

 

ABS

 

 

 -

 

 

 

 1,013

 

 

 

 45

 

 

 

 1,058

 

U.S. government bonds

 

 

 369

 

 

 

 16

 

 

 

 -

 

 

 

 385

 

Foreign government bonds

 

 

 -

 

 

 

 407

 

 

 

 111

 

 

 

 518

 

RMBS

 

 

 -

 

 

 

 3,553

 

 

 

 1

 

 

 

 3,554

 

CMBS

 

 

 -

 

 

 

 349

 

 

 

 10

 

 

 

 359

 

CLOs

 

 

 -

 

 

 

 37

 

 

 

 551

 

 

 

 588

 

State and municipal bonds

 

 

 -

 

 

 

 4,366

 

 

 

 -

 

 

 

 4,366

 

Hybrid and redeemable preferred securities

 

 

 47

 

 

 

 646

 

 

 

 94

 

 

 

 787

 

VIEs' fixed maturity securities

 

 

 -

 

 

 

 598

 

 

 

 -

 

 

 

 598

 

Equity AFS securities

 

 

 8

 

 

 

 65

 

 

 

 164

 

 

 

 237

 

Trading securities

 

 

 160

 

 

 

 1,529

 

 

 

 73

 

 

 

 1,762

 

Derivative investments (1)

 

 

 -

 

 

 

 1,190

 

 

 

 853

 

 

 

 2,043

 

Cash and invested cash

 

 

 -

 

 

 

 2,400

 

 

 

 -

 

 

 

 2,400

 

Reinsurance related embedded derivatives

 

 

 -

 

 

 

 95

 

 

 

 -

 

 

 

 95

 

Other assets - reinsurance recoverable

 

 

 -

 

 

 

 -

 

 

 

 952

 

 

 

 952

 

Separate account assets

 

 

 1,053

 

 

 

 122,566

 

 

 

 -

 

 

 

 123,619

 

Total assets

 

$

 1,697

 

 

$

 206,954

 

 

$

 7,127

 

 

$

 215,778

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Future contract benefits - indexed annuity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and IUL contracts embedded derivatives

 

$

 -

 

 

$

 -

 

 

$

 (1,100

)

 

$

 (1,100

)

VIEs' liabilities - derivative instruments

 

 

 -

 

 

 

 -

 

 

 

 (4

)

 

 

 (4

)

Other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit default swaps

 

 

 -

 

 

 

 -

 

 

 

 (9

)

 

 

 (9

)

Derivative liabilities (1)

 

 

 -

 

 

 

 (530

)

 

 

 (298

)

 

 

 (828

)

GLB reserves embedded derivatives

 

 

 -

 

 

 

 -

 

 

 

 (952

)

 

 

 (952

)

Total liabilities

 

$

 -

 

 

$

 (530

)

 

$

 (2,363

)

 

$

 (2,893

)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Benefit Plans' Assets

 

$

 -

 

 

$

 131

 

 

$

 -

 

 

$

 131

 



(1)

Derivative investment assets and liabilities presented within the fair value hierarchy are presented on a gross basis by derivative type and not on a master netting basis by counterparty.

 

64

 

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, 2016

 



 

 

 

 

 

 

Gains

Issuances,

Transfers

 

 

 

 



 

 

 

Items

 

(Losses)

Sales,

Into or

 

 

 

 



 

 

 

Included

 

in

Maturities,

Out

 

 

 

 



Beginning

 

in

 

OCI

Settlements,

of

 

Ending

 



Fair

 

Net

 

and

 

Calls,

 

Level 3,

 

Fair

 



Value

 

Income

 

Other (1)

 

Net

 

Net (2)

 

Value

 

Investments: (4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity AFS securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

 4,273

 

$

 4

 

$

 (29

)

$

 159

 

$

 402

 

$

 4,809

 

ABS

 

 45

 

 

 -

 

 

 (1

)

 

 14

 

 

 (25

)

 

 33

 

U.S. government bonds

 

 -

 

 

 -

 

 

 -

 

 

 (2

)

 

 2

 

 

 -

 

Foreign government bonds

 

 111

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 111

 

RMBS

 

 1

 

 

 -

 

 

 -

 

 

 54

 

 

 (52

)

 

 3

 

CMBS

 

 10

 

 

 2

 

 

 (1

)

 

 27

 

 

 (31

)

 

 7

 

CLOs

 

 551

 

 

 -

 

 

 -

 

 

 138

 

 

 (621

)

 

 68

 

Hybrid and redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

preferred securities

 

 94

 

 

 -

 

 

 (3

)

 

 (15

)

 

 -

 

 

 76

 

Equity AFS securities

 

 164

 

 

 5

 

 

 (4

)

 

 12

 

 

 -

 

 

 177

 

Trading securities

 

 73

 

 

 3

 

 

 -

 

 

 6

 

 

 (17

)

 

 65

 

Derivative investments

 

 555

 

 

 (483

)

 

 (1

)

 

 (164

)

 

 -

 

 

 (93

)

Other assets - reinsurance recoverable (5)

 

 952

 

 

 (581

)

 

 -

 

 

 -

 

 

 -

 

 

 371

 

Future contract benefits - indexed annuity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and IUL contracts embedded derivatives (5)

 

 (1,100

)

 

 (120

)

 

 -

 

 

 81

 

 

 -

 

 

 (1,139

)

VIEs' liabilities - derivative instruments (6)

 

 (4

)

 

 4

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

Other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit default swaps (6)

 

 (9

)

 

 (6

)

 

 -

 

 

 15

 

 

 -

 

 

 -

 

GLB reserves embedded derivatives (5)

 

 (952

)

 

 581

 

 

 -

 

 

 -

 

 

 -

 

 

 (371

)

Total, net

$

 4,764

 

$

 (591

)

$

 (39

)

$

 325

 

$

 (342

)

$

 4,117

 



 

65

 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



For the Year Ended December 31, 2015

 



 

 

 

 

 

 

Gains

Issuances,

Transfers

 

 

 

 



 

 

 

Items

 

(Losses)

Sales,

Into or

 

 

 

 



 

 

 

Included

 

in

Maturities,

Out

 

 

 

 



Beginning

 

in

 

OCI

Settlements,

of

 

Ending

 



Fair

 

Net

 

and

 

Calls,

 

Level 3,

 

Fair

 



Value

 

Income

 

Other (1)

 

Net

 

Net (2)

 

Value

 

Investments: (4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity AFS securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

 4,052

 

$

 4

 

$

 (138

)

$

 298

 

$

 57

 

$

 4,273

 

ABS

 

 33

 

 

 -

 

 

 -

 

 

 12

 

 

 -

 

 

 45

 

Foreign government bonds

 

 110

 

 

 -

 

 

 1

 

 

 -

 

 

 -

 

 

 111

 

RMBS

 

 1

 

 

 3

 

 

 -

 

 

 (3

)

 

 -

 

 

 1

 

CMBS

 

 15

 

 

 1

 

 

 8

 

 

 (14

)

 

 -

 

 

 10

 

CLOs

 

 368

 

 

 -

 

 

 1

 

 

 194

 

 

 (12

)

 

 551

 

Hybrid and redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

preferred securities

 

 55

 

 

 -

 

 

 (3

)

 

 -

 

 

 42

 

 

 94

 

Equity AFS securities

 

 157

 

 

 1

 

 

 4

 

 

 3

 

 

 (1

)

 

 164

 

Trading securities

 

 73

 

 

 2

 

 

 (2

)

 

 -

 

 

 -

 

 

 73

 

Derivative investments

 

 989

 

 

 (90

)

 

 (41

)

 

 (303

)

 

 -

 

 

 555

 

Other assets - reinsurance recoverable (5)

 

 174

 

 

 778

 

 

 -

 

 

 -

 

 

 -

 

 

 952

 

Future contract benefits - indexed annuity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and IUL contracts embedded derivatives (5)

 

 (1,170

)

 

 (57

)

 

 -

 

 

 127

 

 

 -

 

 

 (1,100

)

VIEs' liabilities - derivative instruments (6)

 

 (13

)

 

 9

 

 

 -

 

 

 -

 

 

 -

 

 

 (4

)

Other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit default swaps (6)

 

 (3

)

 

 (6

)

 

 -

 

 

 -

 

 

 -

 

 

 (9

)

GLB reserves embedded derivatives (5)

 

 (174

)

 

 (778

)

 

 -

 

 

 -

 

 

 -

 

 

 (952

)

Total, net

$

 4,667

 

$

 (133

)

$

 (170

)

$

 314

 

$

 86

 

$

 4,764

 



 

66

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



For the Year Ended December 31, 2014

 



 

 

 

 

 

 

Gains

Issuances,

Transfers

 

 

 

 



 

 

 

Items

 

(Losses)

Sales,

Into or

 

 

 

 



 

 

 

Included

 

in

Maturities,

Out

 

 

 

 



Beginning

 

in

 

OCI

Settlements,

of

 

Ending

 



Fair

 

Net

 

and

 

Calls,

 

Level 3,

 

Fair

 



Value

 

Income

 

Other (1)

 

Net

 

Net (2)(3)

 

Value

 

Investments: (4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity AFS securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

 2,951

 

$

 8

 

$

 28

 

$

 1,039

 

$

 26

 

$

 4,052

 

ABS

 

 9

 

 

 -

 

 

 -

 

 

 -

 

 

 24

 

 

 33

 

Foreign government bonds

 

 78

 

 

 -

 

 

 7

 

 

 -

 

 

 25

 

 

 110

 

RMBS

 

 1

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 1

 

CMBS

 

 20

 

 

 -

 

 

 2

 

 

 (13

)

 

 6

 

 

 15

 

CLOs

 

 178

 

 

 -

 

 

 6

 

 

 134

 

 

 50

 

 

 368

 

State and municipal bonds

 

 28

 

 

 -

 

 

 -

 

 

 -

 

 

 (28

)

 

 -

 

Hybrid and redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

preferred securities

 

 66

 

 

 -

 

 

 -

 

 

 (5

)

 

 (6

)

 

 55

 

Equity AFS securities

 

 161

 

 

 4

 

 

 (3

)

 

 (5

)

 

 -

 

 

 157

 

Trading securities

 

 53

 

 

 3

 

 

 7

 

 

 10

 

 

 -

 

 

 73

 

Derivative investments

 

 866

 

 

 72

 

 

 357

 

 

 (280

)

 

 (26

)

 

 989

 

Other assets: (5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GLB reserves embedded derivatives

 

 1,244

 

 

 (1,264

)

 

 -

 

 

 -

 

 

 20

 

 

 -

 

Reinsurance recoverable

 

 -

 

 

 174

 

 

 -

 

 

 -

 

 

 -

 

 

 174

 

Future contract benefits - indexed annuity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and IUL contracts embedded derivatives (5)

 

 (1,048

)

 

 (210

)

 

 -

 

 

 88

 

 

 -

 

 

 (1,170

)

VIEs' liabilities - derivative instruments (6)

 

 (27

)

 

 14

 

 

 -

 

 

 -

 

 

 -

 

 

 (13

)

Other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit default swaps (6)

 

 (2

)

 

 (1

)

 

 -

 

 

 -

 

 

 -

 

 

 (3

)

GLB reserves embedded derivatives (5)

 

 (1,244

)

 

 1,090

 

 

 -

 

 

 -

 

 

 (20

)

 

 (174

)

Total, net

$

 3,334

 

$

 (110

)

$

 404

 

$

 968

 

$

 71

 

$

 4,667

 



(1)

The changes in fair value of the interest rate swaps are offset by an adjustment to derivative investments (see Note 7).

(2)

Transfers into or out of Level 3 for AFS and trading securities are displayed at amortized cost as of the beginning-of-year.  For AFS and trading securities, the difference between beginning-of-year amortized cost and beginning-of-year fair value was included in OCI and earnings, respectively, in prior years.

(3)

Transfers into or out of Level 3 for GLB reserves embedded derivatives between future contract benefits, other assets and other liabilities on our Consolidated Balance Sheets.

(4)

Amortization and accretion of premiums and discounts are included in net investment income on our Consolidated Statements of Comprehensive Income (Loss).  Gains (losses) from sales, maturities, settlements and calls and OTTI are included in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).

(5)

Gains (losses) from sales, maturities, settlements and calls are included in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).

(6)

The changes in fair value of the credit default swaps and contingency forwards are included in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss).

 

 

67

 

 The following provides the components of the items included in issuances, sales, maturities, settlements and calls, net, excluding any effect of amortization of DAC, VOBA, DSI and DFEL and changes in future contract benefits, (in millions) as reported above: 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



For the Year Ended December 31, 2016

 



Issuances

 

Sales

 

Maturities

Settlements

Calls

 

Total

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity AFS securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

 560

 

$

 (62

)

$

 (23

)

$

 (176

)

$

 (140

)

$

 159

 

ABS

 

 15

 

 

 -

 

 

 -

 

 

 (1

)

 

 -

 

 

 14

 

U.S. government bonds

 

 -

 

 

 -

 

 

 -

 

 

 (2

)

 

 -

 

 

 (2

)

RMBS

 

 54

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 54

 

CMBS

 

 31

 

 

 (1

)

 

 -

 

 

 (3

)

 

 -

 

 

 27

 

CLOs

 

 140

 

 

 -

 

 

 -

 

 

 (2

)

 

 -

 

 

 138

 

Hybrid and redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

preferred securities

 

 -

 

 

 (15

)

 

 -

 

 

 -

 

 

 -

 

 

 (15

)

Equity AFS securities

 

 18

 

 

 (6

)

 

 -

 

 

 -

 

 

 -

 

 

 12

 

Trading securities

 

 7

 

 

 -

 

 

 -

 

 

 (1

)

 

 -

 

 

 6

 

Derivative investments

 

 176

 

 

 (169

)

 

 (171

)

 

 -

 

 

 -

 

 

 (164

)

Future contract benefits - indexed annuity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and IUL contracts embedded derivatives

 

 (70

)

 

 -

 

 

 -

 

 

 151

 

 

 -

 

 

 81

 

Other liabilities - credit default swaps

 

 -

 

 

 15

 

 

 -

 

 

 -

 

 

 -

 

 

 15

 

Total, net

$

 931

 

$

 (238

)

$

 (194

)

$

 (34

)

$

 (140

)

$

 325

 











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



For the Year Ended December 31, 2015

 



Issuances

 

Sales

 

Maturities

Settlements

Calls

 

Total

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity AFS securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

 537

 

$

 (38

)

$

 (44

)

$

 (117

)

$

 (40

)

$

 298

 

ABS

 

 13

 

 

 -

 

 

 -

 

 

 (1

)

 

 -

 

 

 12

 

RMBS

 

 -

 

 

 (3

)

 

 -

 

 

 -

 

 

 -

 

 

 (3

)

CMBS

 

 -

 

 

 -

 

 

 -

 

 

 (13

)

 

 (1

)

 

 (14

)

CLOs

 

 217

 

 

 -

 

 

 -

 

 

 (23

)

 

 -

 

 

 194

 

Equity AFS securities

 

 43

 

 

 (40

)

 

 -

 

 

 -

 

 

 -

 

 

 3

 

Trading securities

 

 1

 

 

 -

 

 

 -

 

 

 (1

)

 

 -

 

 

 -

 

Derivative investments

 

 179

 

 

 (162

)

 

 (320

)

 

 -

 

 

 -

 

 

 (303

)

Future contract benefits - indexed annuity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and IUL contracts embedded derivatives

 

 (51

)

 

 -

 

 

 -

 

 

 178

 

 

 -

 

 

 127

 

Total, net

$

 939

 

$

 (243

)

$

 (364

)

$

 23

 

$

 (41

)

$

 314

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

















 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



For the Year Ended December 31, 2014

 



Issuances

 

Sales

 

Maturities

Settlements

Calls

 

Total

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity AFS securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

 1,939

 

$

 (576

)

$

 (115

)

$

 (47

)

$

 (162

)

$

 1,039

 

CMBS

 

 -

 

 

 -

 

 

 -

 

 

 (13

)

 

 -

 

 

 (13

)

CLOs

 

 185

 

 

 -

 

 

 -

 

 

 (46

)

 

 (5

)

 

 134

 

Hybrid and redeemable preferred

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

 -

 

 

 (5

)

 

 -

 

 

 -

 

 

 -

 

 

 (5

)

Equity AFS securities

 

 -

 

 

 (5

)

 

 -

 

 

 -

 

 

 -

 

 

 (5

)

Trading securities

 

 14

 

 

 -

 

 

 -

 

 

 (4

)

 

 -

 

 

 10

 

Derivative investments

 

 160

 

 

 (87

)

 

 (353

)

 

 -

 

 

 -

 

 

 (280

)

Future contract benefits - indexed annuity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and IUL contracts embedded derivatives

 

 (69

)

 

 -

 

 

 -

 

 

 157

 

 

 -

 

 

 88

 

Total, net

$

 2,229

 

$

 (673

)

$

 (468

)

$

 47

 

$

 (167

)

$

 968

 



 

68

 

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,

 



2016

 

2015

 

2014

 

Derivative investments

$

 (432

)

$

 (102

)

$

 (15

)

Embedded derivatives:

 

 

 

 

 

 

 

 

 

Indexed annuity and IUL contracts

 

 (16

)

 

 (84

)

 

 (37

)

Other assets - GLB reserves

 

 1,122

 

 

 (244

)

 

 (678

)

Other liabilities - GLB reserves

 

 (1,122

)

 

 244

 

 

 678

 

VIEs' liabilities - derivative instruments

 

 4

 

 

 9

 

 

 14

 

Credit default swaps

 

 -

 

 

 (6

)

 

 (1

)

Total, net (1)

$

 (444

)

$

 (183

)

$

 (39

)



(1)

Included in realized gain (loss) on our Consolidated Statements of Comprehensive Income (Loss). 



The following provides the components of the transfers into and out of Level 3 (in millions) as reported above:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



For the Year Ended December 31, 2016

 



Transfers

 

Transfers

 

 

 

 



Into

 

Out of

 

 

 

 



Level 3

 

Level 3

 

Total

 

Investments:

 

 

 

 

 

 

 

 

 

Fixed maturity AFS securities:

 

 

 

 

 

 

 

 

 

Corporate bonds

$

 605

 

$

 (203

)

$

 402

 

ABS

 

 3

 

 

 (28

)

 

 (25

)

U.S. government bonds

 

 9

 

 

 (7

)

 

 2

 

RMBS

 

 2

 

 

 (54

)

 

 (52

)

CMBS

 

 -

 

 

 (31

)

 

 (31

)

CLOs

 

 -

 

 

 (621

)

 

 (621

)

Trading securities

 

 1

 

 

 (18

)

 

 (17

)

Total, net

$

 620

 

$

 (962

)

$

 (342

)





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



For the Year Ended December 31, 2015

 



Transfers

 

Transfers

 

 

 

 



Into

 

Out of

 

 

 

 



Level 3

 

Level 3

 

Total

 

Investments:

 

 

 

 

 

 

 

 

 

Fixed maturity AFS securities:

 

 

 

 

 

 

 

 

 

Corporate bonds

$

 224

 

$

 (167

)

$

 57

 

Foreign government bonds

 

 4

 

 

 (4

)

 

 -

 

CLOs

 

 4

 

 

 (16

)

 

 (12

)

Hybrid and redeemable preferred securities

 

 47

 

 

 (5

)

 

 42

 

Equity AFS securities

 

 -

 

 

 (1

)

 

 (1

)

Trading securities

 

 4

 

 

 (4

)

 

 -

 

Total, net

$

 283

 

$

 (197

)

$

 86

 







 

69

 







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



For the Year Ended December 31, 2014

 



Transfers

 

Transfers

 

 

 

 



Into

 

Out of

 

 

 

 



Level 3

 

Level 3

 

Total

 

Investments:

 

 

 

 

 

 

 

 

 

Fixed maturity AFS securities:

 

 

 

 

 

 

 

 

 

Corporate bonds

$

 473

 

$

 (447

)

$

 26

 

ABS

 

 26

 

 

 (2

)

 

 24

 

Foreign government bonds

 

 25

 

 

 -

 

 

 25

 

CMBS

 

 6

 

 

 -

 

 

 6

 

CLOs

 

 50

 

 

 -

 

 

 50

 

State and municipal bonds

 

 -

 

 

 (28

)

 

 (28

)

Hybrid and redeemable preferred securities

 

 17

 

 

 (23

)

 

 (6

)

Trading securities

 

 10

 

 

 (10

)

 

 -

 

Derivative investments

 

 -

 

 

 (26

)

 

 (26

)

Other assets - GLB reserves embedded derivatives

 

 20

 

 

 -

 

 

 20

 

Other liabilities - GLB reserves embedded derivatives

 

 -

 

 

 (20

)

 

 (20

)

Total, net

$

 627

 

$

 (556

)

$

 71

 



Transfers into 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, 2016, 2015 and 2014, transfers in and out of Level 3 were attributable primarily to the securities' observable market information no longer being available or becoming available.  Transfers in and out for GLB reserves embedded derivatives represent reclassifications between future contract benefits and other assets or other liabilities.  Transfers into and out of Levels 1 and 2 are generally the result of a change in the type of input used to measure the fair value of an asset or liability at the end of the reporting period.  When quoted prices in active markets become available, transfers from Level 2 to Level 1 will result.  When quoted prices in active markets become unavailable, but we are able to employ a valuation methodology using significant observable inputs, transfers from Level 1 to Level 2 will result.  For the years ended December 31, 2016 and 2014, the transfers between Levels 1 and 2 of the fair value hierarchy were less than $1 million for our financial instruments carried at fair value.  For the year ended December 31, 2015, the transfers from Level 2 to Level 1 of the fair value hierarchy were $172 million for our financial instruments carried at fair value which was attributable to quoted market prices becoming available.



 

70

 

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, 2016:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Fair

 

Valuation

 

Significant

 

Assumption or

 



Value

 

Technique

 

Unobservable Inputs

 

Input Ranges

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity AFS and trading

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

$

 1,780

 

Discounted cash flow

 

Liquidity/duration adjustment (1)

 

 0.9

%

 

-

 20.4

%

 

ABS

 

 24

 

Discounted cash flow

 

Liquidity/duration adjustment (1)

 

 3.5

%

 

-

 3.5

%

 

Foreign government bonds

 

 76

 

Discounted cash flow

 

Liquidity/duration adjustment (1)

 

 1.8

%

 

-

 5.0

%

 

Hybrid and redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

preferred securities

 

 4

 

Discounted cash flow

 

Liquidity/duration adjustment (1)

 

 2.1

%

 

-

 2.1

%

 

Equity AFS securities

 

 26

 

Discounted cash flow

 

Liquidity/duration adjustment (1)

 

 4.5

%

 

-

 5.1

%

 

Other assets - reinsurance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

recoverable

 

 371

 

Discounted cash flow

 

Long-term lapse rate (2)

 

 1

%

 

-

 30

%

 



 

 

 

 

 

 

Utilization of guaranteed withdrawals (3)

 85

%

 

-

 100

%

 



 

 

 

 

 

 

Claims utilization factor (4)

 

 60

%

 

-

 100

%

 



 

 

 

 

 

 

Premiums utilization factor (4)

 

 80

%

 

-

 115

%

 



 

 

 

 

 

 

NPR (5)

 

 0.02

%

 

-

 0.35

%

 



 

 

 

 

 

 

Mortality rate (6)

 

 

 

 

 

(8)

 

 



 

 

 

 

 

 

Volatility (7)

 

 1

%

 

-

 29

%

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Future contract benefits - indexed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

annuity and IUL contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

embedded derivatives

$

 (1,139

)

Discounted cash flow

 

Lapse rate (2)

 

 1

%

 

-

 9

%

 



 

 

 

 

 

 

Mortality rate (6)

 

 

 

 

 

(8)

 

 

Other liabilities - GLB reserves

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

embedded derivatives

 

 (371

)

Discounted cash flow

 

Long-term lapse rate (2)

 

 1

%

 

-

 30

%

 



 

 

 

 

 

 

Utilization of guaranteed withdrawals (3)

 85

%

 

-

 100

%

 



 

 

 

 

 

 

Claims utilization factor (4)

 

 60

%

 

-

 100

%

 



 

 

 

 

 

 

Premiums utilization factor (4)

 

 80

%

 

-

 115

%

 



 

 

 

 

 

 

NPR (5)

 

 0.02

%

 

-

 0.35

%

 



 

 

 

 

 

 

Mortality rate (6)

 

 

 

 

 

(8)

 

 



 

 

 

 

 

 

Volatility (7)

 

 1

%

 

-

 29

%

 



(1)

The liquidity/duration adjustment input represents an estimated market participant composite of adjustments attributable to liquidity premiums, expected durations, structures and credit quality that would be applied to the market observable information of an investment.

(2)

The lapse rate input represents the estimated probability of a contract surrendering during a year, and thereby forgoing any future benefits.  The range for indexed annuity and IUL contracts represents the lapse rates during the surrender charge period.

(3)

The utilization of guaranteed withdrawals input represents the estimated percentage of contract holders that utilize the guaranteed withdrawal feature.

(4)

The utilization factors are applied to the present value of claims or premiums, as appropriate, in the GLB reserve calculation to estimate the impact of inefficient withdrawal behavior, including taking less than or more than the maximum guaranteed withdrawal.

(5)

The NPR input represents the estimated additional credit spread that market participants would apply to the market observable discount rate when pricing a contract.

(6)

The mortality rate input represents the estimated probability of when an individual belonging to a particular group, categorized according to age or some other factor such as gender, will die.

(7)

The volatility input represents overall volatilities assumed for the underlying variable annuity funds, which include a mixture of equity and fixed-income assets.  Fair value of the variable annuity GLB embedded derivatives would increase if higher volatilities were used for valuation.

(8)

The mortality rate is based on a combination of company and industry experience, adjusted for improvement factors.



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

 

71

 

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. 



Changes in any of the significant inputs presented in the table above may result in a significant change in the fair value measurement of the asset or liability as follows:



·

Investments - An increase in the liquidity/duration adjustment input would result in a decrease in the fair value measurement. 

·

Reinsurance recoverable asset - An increase in our lapse rate, NPR or mortality rate inputs would result in a decrease in the fair value measurement; and an increase in the utilization of guaranteed withdrawal or volatility inputs would result in an increase in the fair value measurement.

·

Indexed annuity and IUL contracts embedded derivatives - An increase in the lapse rate or mortality rate inputs would result in a decrease in the fair value measurement. 

·

GLB reserves embedded derivatives - Assuming our GLB reserves embedded derivatives are in a liability position:  an increase in our lapse rate, NPR or mortality rate inputs would result in a decrease in the fair value measurement; and an increase in the utilization of guaranteed withdrawal or volatility inputs would result in an increase in the fair value measurement.



For each category discussed above, the unobservable inputs are not inter-related; therefore, a directional change in one input will not affect the other inputs. 



As part of our ongoing 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), IUL 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 our excess capital; investments in media properties (see Note 3 for more information) and other corporate investments; benefit plan net liability; the unamortized deferred gain on indemnity reinsurance related to the sale of reinsurance; the results of certain disability income business; our run-off institutional pension business, the majority of which was sold on a group annuity basis; and debt costs.



Segment operating revenues and income (loss) from operations are internal measures used by our management and Board of Directors to evaluate and assess the results of our segments.  Income (loss) from operations is GAAP net income excluding the after-tax effects of the following items, as applicable:



·

Realized gains and losses associated with the following ("excluded realized gain (loss)"):

§

Sales or disposals and impairments of securities;

§

Changes in the fair value of derivatives, embedded derivatives within certain reinsurance arrangements and trading securities;

§

Changes in the fair value of the derivatives we own to hedge our GDB riders within our variable annuities;

§

Changes in the fair value of the embedded derivatives of our GLB riders reflected within variable annuity net derivative results accounted for at fair value;

§

Changes in the fair value of the derivatives we own to hedge our GLB riders reflected within variable annuity net derivative results; and

 

72

 

§

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;

·

Changes in reserves resulting from benefit ratio unlocking on our GDB and GLB riders;

·

Income (loss) from reserve changes, net of related amortization, on business sold through reinsurance;

·

Gains (losses) on early extinguishment of debt;

·

Losses from the impairment of intangible assets;

·

Income (loss) from discontinued operations; and

·

Income (loss) from the initial adoption of new accounting standards.



Operating revenues represent GAAP revenues excluding the pre-tax effects of the following items, as applicable:



·

Excluded realized gain (loss);

·

Revenue adjustments from the initial adoption of new accounting standards;

·

Amortization of DFEL arising from changes in GDB and GLB benefit ratio unlocking; and

·

Amortization of deferred gains arising from reserve changes on business sold through reinsurance.



We use our prevailing corporate federal income tax rate of 35% while taking into account any permanent differences for events recognized differently in our financial statements and federal income tax returns when reconciling our non-GAAP measures to the most comparable GAAP measure.  Operating revenues and income (loss) from operations do not replace revenues and net income as the GAAP measures of our consolidated results of operations.



Segment information (in millions) was as follows:







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



For the Years Ended December 31,

 



2016

 

2015

 

2014

 

Revenues

 

 

 

 

 

 

 

 

 

Operating revenues:

 

 

 

 

 

 

 

 

 

Annuities

$

 3,710

 

$

 3,815

 

$

 3,450

 

Retirement Plan Services

 

 1,092

 

 

 1,090

 

 

 1,081

 

Life Insurance

 

 5,798

 

 

 5,484

 

 

 5,343

 

Group Protection

 

 2,129

 

 

 2,356

 

 

 2,445

 

Other Operations

 

 301

 

 

 335

 

 

 406

 

Excluded realized gain (loss), pre-tax

 

 (690

)

 

 (400

)

 

 (689

)

Amortization of deferred gain arising from reserve changes on business

 

 

 

 

 

 

 

 

 

sold through reinsurance, pre-tax

 

 3

 

 

 3

 

 

 3

 

Total revenues

$

 12,343

 

$

 12,683

 

$

 12,039

 









 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



For the Years Ended December 31,

 



2016

 

2015

 

2014

 

Net Income (Loss)

 

 

 

 

 

 

 

 

 

Income (loss) from operations:

 

 

 

 

 

 

 

 

 

Annuities

$

 971

 

$

 1,032

 

$

 901

 

Retirement Plan Services

 

 121

 

 

 134

 

 

 154

 

Life Insurance

 

 464

 

 

 296

 

 

 373

 

Group Protection

 

 65

 

 

 42

 

 

 23

 

Other Operations

 

 -

 

 

 (73

)

 

 (13

)

Excluded realized gain (loss), after-tax

 

 (450

)

 

 (260

)

 

 (446

)

Income (loss) from reserve changes (net of related amortization)

 

 

 

 

 

 

 

 

 

on business sold through reinsurance, after-tax

 

 2

 

 

 2

 

 

 2

 

Net income (loss)

$

 1,173

 

$

 1,173

 

$

 994

 





 

73

 





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



For the Years Ended December 31,

 



2016

 

2015

 

2014

 

Net Investment Income

 

 

 

 

 

 

 

 

 

Annuities

$

 983 

 

$

 977 

 

$

 1,013 

 

Retirement Plan Services

 

 855 

 

 

 842 

 

 

 828 

 

Life Insurance

 

 2,403 

 

 

 2,390 

 

 

 2,376 

 

Group Protection

 

 176 

 

 

 183 

 

 

 180 

 

Other Operations

 

 214 

 

 

 219 

 

 

 251 

 

Total net investment income

$

 4,631 

 

$

 4,611 

 

$

 4,648 

 









 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



For the Years Ended December 31,

 



2016

 

2015

 

2014

 

Amortization of DAC and VOBA, Net of Interest

 

 

 

 

 

 

 

 

 

Annuities

$

 310 

 

$

 284 

 

$

 346 

 

Retirement Plan Services

 

 27 

 

 

 29 

 

 

 37 

 

Life Insurance

 

 709 

 

 

 806 

 

 

 640 

 

Group Protection

 

 126 

 

 

 80 

 

 

 57 

 

Total amortization of DAC and VOBA, net of interest

$

 1,172 

 

$

 1,199 

 

$

 1,080 

 









 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



For the Years Ended December 31,

 



2016

 

2015

 

2014

 

Federal Income Tax Expense (Benefit)

 

 

 

 

 

 

 

 

 

Annuities

$

 261

 

$

 281

 

$

 225

 

Retirement Plan Services

 

 43

 

 

 46

 

 

 48

 

Life Insurance

 

 210

 

 

 118

 

 

 167

 

Group Protection

 

 35

 

 

 23

 

 

 12

 

Other Operations

 

 (42

)

 

 (33

)

 

 10

 

Excluded realized gain (loss)

 

 (241

)

 

 (141

)

 

 (243

)

Reserve changes (net of related amortization)

 

 

 

 

 

 

 

 

 

on business sold through reinsurance

 

 1

 

 

 1

 

 

 1

 

Total federal income tax expense (benefit)

$

 267

 

$

 295

 

$

 220

 









 

 

 

 

 

 



 

 

 

 

 

 



As of December 31,

 



2016

 

2015

 

Assets

 

 

 

 

 

 

Annuities

$

 132,956 

 

$

 130,840 

 

Retirement Plan Services

 

 34,346 

 

 

 32,651 

 

Life Insurance

 

 75,868 

 

 

 70,695 

 

Group Protection

 

 4,007 

 

 

 4,182 

 

Other Operations

 

 14,874 

 

 

 14,320 

 

Total assets

$

 262,051 

 

$

 252,688 

 







 

74

 

23.  Supplemental Disclosures of Cash Flow Data



The following summarizes our supplemental cash flow data (in millions):







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



For the Years Ended December 31,

 



2016

 

2015

 

2014

 

Interest paid

$

 91

 

$

 106

 

$

 104

 

Income taxes paid (received)

 

 121

 

 

 125

 

 

 172

 

Significant non-cash investing and financing transactions:

 

 

 

 

 

 

 

 

 

Disposal of note receivable from affiliate

 

 -

 

 

 -

 

 

 (500

)

Acquisition of note receivable from affiliate

 

 42

 

 

 54

 

 

 712

 

Other assets received in our financing transaction

 

 -

 

 

 252

 

 

 -

 

Exchange of surplus note for promissory note with affiliate:

 

 

 

 

 

 

 

 

 

Carrying value of asset

 

 124

 

 

 123

 

 

 88

 

Carrying value of liability

 

 (124

)

 

 (123

)

 

 (88

)

Net asset (liability) from exchange

$

 -

 

$

 -

 

$

 -

 

Reinsurance ceded:

 

 

 

 

 

 

 

 

 

Carrying value of assets

$

 -

 

$

 -

 

$

 15

 

Carrying value of liabilities

 

 -

 

 

 -

 

 

 15

 

Total reinsurance ceded

$

 -

 

$

 -

 

$

 30

 





24.  Transactions with Affiliates



The following summarizes transactions with affiliates (in millions) and the associated line item on our Consolidated Balance Sheets:





T



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

As of December 31,

 

 

 

 

 

 



 

 

 

 

 

 

 

 

2016

 

2015

 

 

 

 

 

 

Assets with affiliates:

 

 

 

 

 

 

 

 

 

 

 

Accrued inter-company interest receivable

$

 8

 

$

 4

 

 

Accrued investment income

Bonds 

 

 1,611

 

 

 1,534

 

 

Fixed maturity AFS securities

Ceded reinsurance contracts

 

 (191

)

 

 (226

)

 

Deferred acquisition costs and value of



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

business acquired

Ceded reinsurance contracts

 

 2,148

 

 

 1,983

 

 

Reinsurance recoverables

Ceded reinsurance contracts

 

 112

 

 

 184

 

 

Reinsurance related embedded derivatives

Ceded reinsurance contracts

 

 198

 

 

 714

 

 

Other assets

Cash management agreement investment

 

 164

 

 

 98

 

 

Other assets

Service agreement receivable 

 

 27

 

 

 42

 

 

Other assets

Ceded reinsurance contracts

 

 9

 

 

 9

 

 

Other assets



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities with affiliates:

 

 

 

 

 

 

 

 

Accrued inter-company interest payable

 

 26

 

 

 2

 

 

Other liabilities

Assumed reinsurance contracts

 

 31

 

 

 34

 

 

Future contract benefits

Assumed reinsurance contracts

 

 403

 

 

 414

 

 

Other contract holder funds

Service agreement payable

 

 34

 

 

 34

 

 

Other liabilities

Ceded reinsurance contracts

 

 (47

)

 

 (50

)

 

Other contract holder funds

Ceded reinsurance contracts

 

 2,851

 

 

 3,841

 

 

Funds withheld reinsurance liabilities

Ceded reinsurance contracts

 

 

 

 

 

 

 

 

 

 

 

Ceded reinsurance contracts

 

 84

 

 

 81

 

 

Other liabilities

Inter-company short-term debt

 

 280

 

 

 90

 

 

Short-term debt

Inter-company long-term debt    

 

 2,549

 

 

 2,495

 

 

Long-term debt



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

75

 

The following summarizes transactions with affiliates (in millions) and the associated line item on our Consolidated Statements of Comprehensive Income (Loss):







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

For the Years Ended

 

 

 



 

 

 

 

 

 

 

 

December 31,

 

 

 



 

 

 

 

 

 

 

 

2016

 

2015

 

2014

 

 

 

Revenues with affiliates:

 

 

 

 

 

 

 

 

 

 

 

Premiums received on assumed reinsurance contracts

$

 (389

)

$

 (411

)

$

 (574

)

 

Insurance premiums

Net investment income on intercompany notes

 

 38

 

 

 31

 

 

 12

 

 

Net investment income

Fees for management of general account

 

 (117

)

 

 (109

)

 

 (105

)

 

Net investment income

Net investment income on ceded funds withheld treaties

 

 (69

)

 

 (62

)

 

 -

 

 

Net investment income

Realized gains (losses) on ceded reinsurance contracts:

 

 

 

 

 

 

 

 

 

 

 

GLB reserves embedded derivatives

 

 (516

)

 

 664

 

 

 1,265

 

 

Realized gain (loss)

Reinsurance related settlements

 

 488

 

 

 (881

)

 

 (1,573

)

 

Realized gain (loss)

Other gains (losses)

 

 (93

)

 

 157

 

 

 (199

)

 

Realized gain (loss)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Benefits and expenses with affiliates:

 

 

 

 

 

 

 

 

 

 

 

Reinsurance (recoveries) benefits on ceded reinsurance

 

 (424

)

 

 (478

)

 

 255

 

 

Benefits

Ceded reinsurance contracts

 

 (14

)

 

 (15

)

 

 -

 

 

Commissions and other



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

expenses

Service agreement payments

 

 76

 

 

 42

 

 

 76

 

 

Commissions and other



 

 

 

 

 

 

 

 

 

 

 

expenses

Interest expense on inter-company debt    

 

 111

 

 

 102

 

 

 102

 

 

Interest and debt expense

Interest credited on assumed reinsurance contracts

 

 61

 

 

 59

 

 

 15

 

 

Interest credited



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds



LNC issues bonds to us for a predetermined face value to be repaid by LNC at a predetermined maturity with a specified interest rate. 



Cash Management Agreement



In order to manage our capital more efficiently, we participate in an inter-company cash management program where LNC can lend to or borrow from us to meet short-term borrowing needs.  The cash management program is essentially a series of demand loans, which are permitted under applicable insurance laws, among LNC and its affiliates that reduces overall borrowing costs by allowing LNC and its subsidiaries to access internal resources instead of incurring third-party transaction costs.  The borrowing and lending limit is currently 3% of our admitted assets as of our most recent year end.



Service Agreement



In accordance with service agreements with LNC and other subsidiaries of LNC for personnel and facilities usage, general management services and investment management services, we receive services from and provide services to affiliated companies and receive an allocation of corporate overhead.  Corporate overhead expenses are allocated based on specific methodologies for each function.  The majority of the expenses are allocated based on the following methodologies:  headcount, capital, investments by product, weighted policies in force, and sales. 



Ceded Reinsurance Contracts



As discussed in Note 10, 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 7, we cede the GLB reserves embedded derivatives and the related hedge results to LNBAR.  As discussed in Note 4, we also cede the risks for no-lapse benefit guarantees under certain UL contracts to LNBAR. 



Substantially all reinsurance ceded to affiliated companies is with unauthorized companies.  To take reserve credit for such reinsurance, we hold assets from the reinsurer, including funds held under reinsurance treaties, and are the beneficiary of LOCs aggregating to $320 million and $401 million as of December 31, 2016 and 2015, respectively.  The LOCs are obtained by the affiliate reinsurer and issued by banks in order for the Company to recognize the reserve credit.





25.  Subsequent Events



Management evaluated subsequent events for the Company through March 31, 2017, the date the financial statements were available to be issued.  On March 28, 2017, LNL paid a cash dividend in the amount of $210 million to LNC.  Management identified no other items or events required for disclosure.



 

76


Lincoln National Variable Annuity Account L


L-1



Lincoln National Variable Annuity Account L

Statements of assets and liabilities

December 31, 2016

Subaccount

  

Investments

   Contract
Purchases
Due From
The Lincoln
National Life
Insurance
Company		  

Total Assets

   Contract
Redemptions
Due To
The Lincoln
National Life
Insurance
Company		   Mortality &
Expense
Guarantee
Charges
Payable To
The Lincoln
National Life
Insurance
Company		  

Net Assets

  
AB VPS Global Thematic Growth Portfolio
Class B		  

$

1,701,579

    

$

1,295

    

$

1,702,874

    

$

—

    

$

92

    

$

1,702,782

    

AB VPS Growth Portfolio Class B

    

1,378,326

      

1,033

      

1,379,359

      

—

      

74

      

1,379,285

    

American Century VP Balanced Fund Class I

    

13,546,173

      

—

      

13,546,173

      

189

      

726

      

13,545,258

    

American Funds Global Growth Fund Class 2

    

5,386,101

      

2,432

      

5,388,533

      

—

      

287

      

5,388,246

    

American Funds Growth Fund Class 2

    

26,520,380

      

13,007

      

26,533,387

      

—

      

1,424

      

26,531,963

    

American Funds Growth-Income Fund Class 2

    

12,441,936

      

1,877

      

12,443,813

      

—

      

673

      

12,443,140

    

American Funds International Fund Class 2

    

8,736,092

      

4,945

      

8,741,037

      

—

      

472

      

8,740,565

    

BlackRock Global Allocation V.I. Fund Class I

    

1,446,846

      

31

      

1,446,877

      

—

      

79

      

1,446,798

    
Delaware VIP Diversified Income Series
Standard Class		    

4,709,139

      

1,666

      

4,710,805

      

—

      

254

      

4,710,551

    

Delaware VIP High Yield Series Standard Class

    

2,165,513

      

296

      

2,165,809

      

—

      

117

      

2,165,692

    

Delaware VIP REIT Series Service Class

    

12,456,406

      

—

      

12,456,406

      

9,054

      

664

      

12,446,688

    
Delaware VIP Small Cap Value Series
Service Class		    

9,752,657

      

1,432

      

9,754,089

      

—

      

526

      

9,753,563

    
Delaware VIP Smid Cap Growth Series
Service Class		    

5,282,451

      

6,553

      

5,289,004

      

—

      

286

      

5,288,718

    
Deutsche Alternative Asset Allocation VIP
Portfolio Class A		    

229,591

      

616

      

230,207

      

—

      

13

      

230,194

    
Fidelity VIP Asset Manager Portfolio Initial
Class		    

31,856,740

      

16,913

      

31,873,653

      

—

      

1,719

      

31,871,934

    
Fidelity VIP Contrafund Portfolio Service
Class 2		    

21,067,680

      

1,800

      

21,069,480

      

—

      

1,144

      

21,068,336

    
Fidelity VIP Government Money Market
Portfolio Initial Class		    

67,680

      

671

      

68,351

      

—

      

—

      

68,351

    

Fidelity VIP Growth Portfolio Initial Class

    

69,668,714

      

—

      

69,668,714

      

5,842

      

3,769

      

69,659,103

    
Janus Aspen Global Research Portfolio
Institutional Shares		    

8,089,901

      

602

      

8,090,503

      

—

      

432

      

8,090,071

    
LVIP Baron Growth Opportunities Fund
Service Class		    

13,767,959

      

2,959

      

13,770,918

      

—

      

740

      

13,770,178

    
LVIP BlackRock Inflation Protected Bond
Fund Standard Class		    

755,126

      

907

      

756,033

      

—

      

41

      

755,992

    
LVIP Blended Large Cap Growth Managed
Volatility Fund Standard Class		    

1,265,900

      

—

      

1,265,900

      

616

      

68

      

1,265,216

    
LVIP Blended Mid Cap Managed Volatility
Fund Standard Class		    

20,997

      

237

      

21,234

      

—

      

1

      

21,233

    
LVIP Clarion Global Real Estate Fund
Standard Class		    

693,718

      

161

      

693,879

      

—

      

36

      

693,843

    

LVIP Delaware Bond Fund Standard Class

    

3,792,687

      

100,963

      

3,893,650

      

—

      

204

      

3,893,446

    
LVIP Delaware Diversified Floating Rate
Fund Service Class		    

202,934

      

23

      

202,957

      

—

      

11

      

202,946

    
LVIP Delaware Foundation Aggressive
Allocation Fund Standard Class		    

406,929

      

416

      

407,345

      

—

      

22

      

407,323

    
LVIP Delaware Foundation Conservative
Allocation Fund Standard Class		    

1,190,952

      

1,125

      

1,192,077

      

—

      

61

      

1,192,016

    
LVIP Delaware Foundation Moderate
Allocation Fund Standard Class		    

302,922

      

403

      

303,325

      

—

      

17

      

303,308

    
LVIP Delaware Social Awareness Fund
Standard Class		    

14,542,658

      

1,229

      

14,543,887

      

—

      

784

      

14,543,103

    
LVIP Dimensional U.S. Core Equity 1 Fund
Standard Class		    

5,319,517

      

3,094

      

5,322,611

      

—

      

286

      

5,322,325

    
LVIP Franklin Templeton Global Equity
Managed Volatility Fund Standard Class		    

47,926

      

158

      

48,084

      

—

      

3

      

48,081

    

See accompanying notes.
L-2


Lincoln National Variable Annuity Account L

Statements of assets and liabilities (continued)

December 31, 2016

Subaccount

  

Investments

   Contract
Purchases
Due From
The Lincoln
National Life
Insurance
Company		  

Total Assets

   Contract
Redemptions
Due To
The Lincoln
National Life
Insurance
Company		   Mortality &
Expense
Guarantee
Charges
Payable To
The Lincoln
National Life
Insurance
Company		  

Net Assets

  
LVIP Global Conservative Allocation Managed
Risk Fund Standard Class		  

$

1,248,143

    

$

928

    

$

1,249,071

    

$

—

    

$

68

    

$

1,249,003

    
LVIP Global Growth Allocation Managed Risk
Fund Standard Class		    

4,087,679

      

1,142

      

4,088,821

      

—

      

221

      

4,088,600

    

LVIP Global Income Fund Standard Class

    

318,005

      

112

      

318,117

      

—

      

17

      

318,100

    
LVIP Global Moderate Allocation Managed
Risk Fund Standard Class		    

18,303,522

      

470,853

      

18,774,375

      

—

      

322

      

18,774,053

    
LVIP JPMorgan Select Mid Cap Value Managed
Volatility Fund Standard Class		    

184,809

      

79

      

184,888

      

—

      

10

      

184,878

    
LVIP Managed Risk Profile 2010 Fund
Standard Class		    

448,338

      

—

      

448,338

      

43

      

25

      

448,270

    
LVIP Managed Risk Profile 2020 Fund
Standard Class		    

1,991,849

      

429

      

1,992,278

      

—

      

108

      

1,992,170

    
LVIP Managed Risk Profile 2030 Fund
Standard Class		    

4,570,680

      

2,835

      

4,573,515

      

—

      

248

      

4,573,267

    
LVIP Managed Risk Profile 2040 Fund
Standard Class		    

1,695,507

      

4,470

      

1,699,977

      

—

      

93

      

1,699,884

    
LVIP Managed Risk Profile 2050 Fund
Standard Class		    

626,166

      

5,701

      

631,867

      

—

      

34

      

631,833

    
LVIP Mondrian International Value Fund
Standard Class		    

2,844,846

      

2,400

      

2,847,246

      

—

      

147

      

2,847,099

    

LVIP SSGA Bond Index Fund Standard Class

    

591,804

      

48

      

591,852

      

—

      

32

      

591,820

    
LVIP SSGA Emerging Markets 100 Fund
Standard Class		    

1,007,095

      

225

      

1,007,320

      

—

      

54

      

1,007,266

    
LVIP SSGA Global Tactical Allocation Managed
Volatility Fund Standard Class		    

1,558,054

      

943

      

1,558,997

      

—

      

84

      

1,558,913

    
LVIP SSGA International Index Fund
Standard Class		    

203,448

      

—

      

203,448

      

4

      

11

      

203,433

    
LVIP SSGA International Managed Volatility
Fund Standard Class		    

39,986

      

587

      

40,573

      

—

      

2

      

40,571

    
LVIP SSGA S&P 500 Index Fund Standard
Class		    

103,709,197

      

18,203

      

103,727,400

      

—

      

5,551

      

103,721,849

    
LVIP SSGA Small-Cap Index Fund Standard
Class		    

27,767,472

      

11,118

      

27,778,590

      

—

      

1,496

      

27,777,094

    
LVIP T. Rowe Price Structured Mid-Cap
Growth Fund Standard Class		    

17,480,250

      

389

      

17,480,639

      

—

      

941

      

17,479,698

    
Neuberger Berman AMT Large Cap Value
Portfolio I Class		    

5,529,660

      

680

      

5,530,340

      

—

      

298

      

5,530,042

    

T. Rowe Price International Stock Portfolio

    

8,440,834

      

1,376

      

8,442,210

      

—

      

454

      

8,441,756

    

See accompanying notes.
L-3


Lincoln National Variable Annuity Account L

Statements of operations

Year Ended December 31, 2016

Subaccount

   Dividends
from
Investment
Income		   Mortality and
Expense
Guarantee Charges		   Net
Investment
Income (Loss)		   Net Realized
Gain (Loss)
on Investments		  

AB VPS Global Thematic Growth Portfolio Class B

  

$

—

    

$

(17,178

)

  

$

(17,178

)

  

$

89,330

    

AB VPS Growth Portfolio Class B

    

—

      

(14,247

)

    

(14,247

)

    

58,452

    

American Century VP Balanced Fund Class I

    

209,202

      

(128,190

)

    

81,012

      

(20,608

)

  

American Funds Global Growth Fund Class 2

    

49,634

      

(52,579

)

    

(2,945

)

    

23,223

    

American Funds Growth Fund Class 2

    

197,131

      

(248,747

)

    

(51,616

)

    

274,553

    

American Funds Growth-Income Fund Class 2

    

175,650

      

(115,826

)

    

59,824

      

61,292

    

American Funds International Fund Class 2

    

121,832

      

(87,319

)

    

34,513

      

(58,268

)

  

BlackRock Global Allocation V.I. Fund Class I

    

18,479

      

(14,779

)

    

3,700

      

(15,843

)

  

Delaware VIP Diversified Income Series Standard Class

    

182,852

      

(53,163

)

    

129,689

      

(1,915

)

  

Delaware VIP High Yield Series Standard Class

    

159,886

      

(22,072

)

    

137,814

      

(77,192

)

  

Delaware VIP REIT Series Service Class

    

131,681

      

(125,410

)

    

6,271

      

239,310

    

Delaware VIP Small Cap Value Series Service Class

    

58,060

      

(79,380

)

    

(21,320

)

    

45,279

    

Delaware VIP Smid Cap Growth Series Service Class

    

—

      

(51,081

)

    

(51,081

)

    

50,252

    

Deutsche Alternative Asset Allocation VIP Portfolio Class A

    

4,739

      

(2,139

)

    

2,600

      

(1,621

)

  

Fidelity VIP Asset Manager Portfolio Initial Class

    

472,994

      

(324,179

)

    

148,815

      

(72,137

)

  

Fidelity VIP Contrafund Portfolio Service Class 2

    

126,728

      

(204,451

)

    

(77,723

)

    

228,918

    

Fidelity VIP Government Money Market Portfolio Initial Class

    

152

      

—

      

152

      

—

    

Fidelity VIP Growth Portfolio Initial Class

    

27,056

      

(701,355

)

    

(674,299

)

    

2,450,042

    

Janus Aspen Global Research Portfolio Institutional Shares

    

89,890

      

(81,051

)

    

8,839

      

76,753

    

LVIP Baron Growth Opportunities Fund Service Class

    

69,660

      

(138,104

)

    

(68,444

)

    

584,560

    

LVIP BlackRock Emerging Markets Managed Volatility Fund Standard Class

    

1,680

      

(267

)

    

1,413

      

(7,215

)

  

LVIP BlackRock Inflation Protected Bond Fund Standard Class

    

9,695

      

(6,979

)

    

2,716

      

(7,545

)

  

LVIP Blended Large Cap Growth Managed Volatility Fund Standard Class

    

5,902

      

(13,295

)

    

(7,393

)

    

107,727

    

LVIP Blended Mid Cap Managed Volatility Fund Standard Class

    

—

      

(156

)

    

(156

)

    

(2,811

)

  

LVIP Clarion Global Real Estate Fund Standard Class

    

29,088

      

(6,068

)

    

23,020

      

17,462

    

LVIP Delaware Bond Fund Standard Class

    

105,497

      

(42,399

)

    

63,098

      

41,389

    

LVIP Delaware Diversified Floating Rate Fund Service Class

    

—

      

(1,958

)

    

(1,958

)

    

(841

)

  

LVIP Delaware Foundation Aggressive Allocation Fund Standard Class

    

6,973

      

(3,550

)

    

3,423

      

949

    

LVIP Delaware Foundation Conservative Allocation Fund Standard Class

    

30,112

      

(11,222

)

    

18,890

      

(9,799

)

  

LVIP Delaware Foundation Moderate Allocation Fund Standard Class

    

5,736

      

(3,001

)

    

2,735

      

(2,125

)

  

LVIP Delaware Social Awareness Fund Standard Class

    

223,020

      

(141,728

)

    

81,292

      

147,836

    

LVIP Dimensional U.S. Core Equity 1 Fund Standard Class

    

84,380

      

(50,031

)

    

34,349

      

21,716

    

LVIP Franklin Templeton Global Equity Managed Volatility Fund Standard Class

    

727

      

(383

)

    

344

      

(119

)

  

LVIP Global Conservative Allocation Managed Risk Fund Standard Class

    

27,822

      

(13,016

)

    

14,806

      

17,909

    

LVIP Global Growth Allocation Managed Risk Fund Standard Class

    

79,217

      

(43,365

)

    

35,852

      

80,917

    

LVIP Global Income Fund Standard Class

    

—

      

(3,376

)

    

(3,376

)

    

(2,123

)

  

LVIP Global Moderate Allocation Managed Risk Fund Standard Class

    

335,840

      

(54,766

)

    

281,074

      

(89,069

)

  

LVIP JPMorgan Select Mid Cap Value Managed Volatility Fund Standard Class

    

1,324

      

(2,579

)

    

(1,255

)

    

738

    

LVIP Managed Risk Profile 2010 Fund Standard Class

    

8,754

      

(4,731

)

    

4,023

      

10,407

    

LVIP Managed Risk Profile 2020 Fund Standard Class

    

40,189

      

(22,783

)

    

17,406

      

31,994

    

LVIP Managed Risk Profile 2030 Fund Standard Class

    

89,937

      

(43,990

)

    

45,947

      

33,409

    

LVIP Managed Risk Profile 2040 Fund Standard Class

    

31,837

      

(16,039

)

    

15,798

      

12,198

    

LVIP Managed Risk Profile 2050 Fund Standard Class

    

11,661

      

(5,168

)

    

6,493

      

(5,354

)

  

LVIP Mondrian International Value Fund Standard Class

    

85,394

      

(28,476

)

    

56,918

      

(111,260

)

  

LVIP SSGA Bond Index Fund Standard Class

    

13,765

      

(6,068

)

    

7,697

      

636

    

LVIP SSGA Emerging Markets 100 Fund Standard Class

    

27,688

      

(9,976

)

    

17,712

      

(79,237

)

  

LVIP SSGA Global Tactical Allocation Managed Volatility Fund Standard Class

    

30,431

      

(15,489

)

    

14,942

      

(650

)

  

LVIP SSGA International Index Fund Standard Class

    

5,754

      

(1,874

)

    

3,880

      

(4,808

)

  

LVIP SSGA International Managed Volatility Fund Standard Class

    

398

      

(24

)

    

374

      

(4

)

  

LVIP SSGA S&P 500 Index Fund Standard Class

    

2,013,217

      

(976,791

)

    

1,036,426

      

1,704,538

    

LVIP SSGA Small-Cap Index Fund Standard Class

    

352,090

      

(248,124

)

    

103,966

      

332,033

    

LVIP T. Rowe Price Structured Mid-Cap Growth Fund Standard Class

    

50,834

      

(172,275

)

    

(121,441

)

    

633,811

    

Neuberger Berman AMT Large Cap Value Portfolio I Class

    

37,105

      

(45,716

)

    

(8,611

)

    

(3,338

)

  

T. Rowe Price International Stock Portfolio

    

94,134

      

(89,274

)

    

4,860

      

92,266

    

See accompanying notes.
L-4


Subaccount

   Dividends
from
Net Realized
Gain on
Investments		   Total
Net Realized
Gain (Loss)
on Investments		   Net Change
in Unrealized
Appreciation or
Depreciation
on Investments		   Net Increase
(Decrease)
in Net Assets
Resulting
from Operations		  

AB VPS Global Thematic Growth Portfolio Class B

  

$

—

    

$

89,330

    

$

(105,277

)

  

$

(33,125

)

  

AB VPS Growth Portfolio Class B

    

175,050

      

233,502

      

(230,191

)

    

(10,936

)

  

American Century VP Balanced Fund Class I

    

585,890

      

565,282

      

108,548

      

754,842

    

American Funds Global Growth Fund Class 2

    

458,819

      

482,042

      

(505,577

)

    

(26,480

)

  

American Funds Growth Fund Class 2

    

2,288,156

      

2,562,709

      

(446,366

)

    

2,064,727

    

American Funds Growth-Income Fund Class 2

    

1,296,132

      

1,357,424

      

(238,026

)

    

1,179,222

    

American Funds International Fund Class 2

    

760,622

      

702,354

      

(521,923

)

    

214,944

    

BlackRock Global Allocation V.I. Fund Class I

    

—

      

(15,843

)

    

59,113

      

46,970

    

Delaware VIP Diversified Income Series Standard Class

    

—

      

(1,915

)

    

5,338

      

133,112

    

Delaware VIP High Yield Series Standard Class

    

—

      

(77,192

)

    

192,340

      

252,962

    

Delaware VIP REIT Series Service Class

    

776,840

      

1,016,150

      

(477,332

)

    

545,089

    

Delaware VIP Small Cap Value Series Service Class

    

722,875

      

768,154

      

1,440,410

      

2,187,244

    

Delaware VIP Smid Cap Growth Series Service Class

    

688,463

      

738,715

      

(353,287

)

    

334,347

    

Deutsche Alternative Asset Allocation VIP Portfolio Class A

    

—

      

(1,621

)

    

7,461

      

8,440

    

Fidelity VIP Asset Manager Portfolio Initial Class

    

1,438,118

      

1,365,981

      

(888,146

)

    

626,650

    

Fidelity VIP Contrafund Portfolio Service Class 2

    

1,705,704

      

1,934,622

      

(540,076

)

    

1,316,823

    

Fidelity VIP Government Money Market Portfolio Initial Class

    

—

      

—

      

—

      

152

    

Fidelity VIP Growth Portfolio Initial Class

    

7,037,018

      

9,487,060

      

(9,127,994

)

    

(315,233

)

  

Janus Aspen Global Research Portfolio Institutional Shares

    

—

      

76,753

      

(14,062

)

    

71,530

    

LVIP Baron Growth Opportunities Fund Service Class

    

979,110

      

1,563,670

      

(867,799

)

    

627,427

    

LVIP BlackRock Emerging Markets Managed Volatility Fund Standard Class

    

—

      

(7,215

)

    

7,167

      

1,365

    

LVIP BlackRock Inflation Protected Bond Fund Standard Class

    

—

      

(7,545

)

    

22,610

      

17,781

    

LVIP Blended Large Cap Growth Managed Volatility Fund Standard Class

    

—

      

107,727

      

(141,768

)

    

(41,434

)

  

LVIP Blended Mid Cap Managed Volatility Fund Standard Class

    

449

      

(2,362

)

    

1,461

      

(1,057

)

  

LVIP Clarion Global Real Estate Fund Standard Class

    

—

      

17,462

      

(48,788

)

    

(8,306

)

  

LVIP Delaware Bond Fund Standard Class

    

42,629

      

84,018

      

(68,988

)

    

78,128

    

LVIP Delaware Diversified Floating Rate Fund Service Class

    

—

      

(841

)

    

4,766

      

1,967

    

LVIP Delaware Foundation Aggressive Allocation Fund Standard Class

    

31,950

      

32,899

      

(19,889

)

    

16,433

    

LVIP Delaware Foundation Conservative Allocation Fund Standard Class

    

42,026

      

32,227

      

(8,512

)

    

42,605

    

LVIP Delaware Foundation Moderate Allocation Fund Standard Class

    

16,336

      

14,211

      

(6,825

)

    

10,121

    

LVIP Delaware Social Awareness Fund Standard Class

    

1,802,075

      

1,949,911

      

(1,261,820

)

    

769,383

    

LVIP Dimensional U.S. Core Equity 1 Fund Standard Class

    

1,816,344

      

1,838,060

      

(1,230,195

)

    

642,214

    

LVIP Franklin Templeton Global Equity Managed Volatility Fund Standard Class

    

—

      

(119

)

    

1,079

      

1,304

    

LVIP Global Conservative Allocation Managed Risk Fund Standard Class

    

20,201

      

38,110

      

(1,405

)

    

51,511

    

LVIP Global Growth Allocation Managed Risk Fund Standard Class

    

—

      

80,917

      

38,762

      

155,531

    

LVIP Global Income Fund Standard Class

    

1,425

      

(698

)

    

3,290

      

(784

)

  

LVIP Global Moderate Allocation Managed Risk Fund Standard Class

    

191,187

      

102,118

      

283,312

      

666,504

    

LVIP JPMorgan Select Mid Cap Value Managed Volatility Fund Standard Class

    

—

      

738

      

22,523

      

22,006

    

LVIP Managed Risk Profile 2010 Fund Standard Class

    

17,370

      

27,777

      

(16,595

)

    

15,205

    

LVIP Managed Risk Profile 2020 Fund Standard Class

    

56,488

      

88,482

      

(31,668

)

    

74,220

    

LVIP Managed Risk Profile 2030 Fund Standard Class

    

108,995

      

142,404

      

(69,008

)

    

119,343

    

LVIP Managed Risk Profile 2040 Fund Standard Class

    

29,859

      

42,057

      

(10,255

)

    

47,600

    

LVIP Managed Risk Profile 2050 Fund Standard Class

    

3,525

      

(1,829

)

    

14,974

      

19,638

    

LVIP Mondrian International Value Fund Standard Class

    

100,575

      

(10,685

)

    

37,802

      

84,035

    

LVIP SSGA Bond Index Fund Standard Class

    

—

      

636

      

(1,392

)

    

6,941

    

LVIP SSGA Emerging Markets 100 Fund Standard Class

    

—

      

(79,237

)

    

202,373

      

140,848

    

LVIP SSGA Global Tactical Allocation Managed Volatility Fund Standard Class

    

—

      

(650

)

    

55,651

      

69,943

    

LVIP SSGA International Index Fund Standard Class

    

—

      

(4,808

)

    

822

      

(106

)

  

LVIP SSGA International Managed Volatility Fund Standard Class

    

—

      

(4

)

    

(544

)

    

(174

)

  

LVIP SSGA S&P 500 Index Fund Standard Class

    

1,379,587

      

3,084,125

      

6,069,325

      

10,189,876

    

LVIP SSGA Small-Cap Index Fund Standard Class

    

554,434

      

886,467

      

3,634,656

      

4,625,089

    

LVIP T. Rowe Price Structured Mid-Cap Growth Fund Standard Class

    

884,702

      

1,518,513

      

(333,326

)

    

1,063,746

    

Neuberger Berman AMT Large Cap Value Portfolio I Class

    

406,740

      

403,402

      

702,162

      

1,096,953

    

T. Rowe Price International Stock Portfolio

    

323,586

      

415,852

      

(326,392

)

    

94,320

    


L-5



Lincoln National Variable Annuity Account L

Statements of changes in net assets

Years Ended December 31, 2015 and 2016

    AB VPS
Global
Thematic
Growth
Portfolio
Class B
Subaccount		   AB VPS
Growth
Portfolio
Class B
Subaccount		   American
Century
VP Balanced
Fund Class I
Subaccount		   American
Funds
Global Growth
Fund Class 2
Subaccount		   American
Funds Growth
Fund Class 2
Subaccount		   American
Funds
Growth-Income
Fund Class 2
Subaccount		   American
Funds
International
Fund Class 2
Subaccount		  

NET ASSETS AT JANUARY 1, 2015

  

$

1,969,007

    

$

1,485,769

    

$

16,070,495

    

$

5,599,280

    

$

26,773,410

    

$

11,877,200

    

$

10,765,065

    

Changes From Operations:

  

• Net investment income (loss)

    

(20,186

)

    

(15,336

)

    

108,929

      

2,566

      

(100,584

)

    

39,349

      

47,826

    

• Net realized gain (loss) on investments

    

83,085

      

365,185

      

1,565,616

      

692,943

      

6,263,105

      

1,957,902

      

735,959

    

• Net change in unrealized appreciation or depreciation on investments

    

(37,567

)

    

(241,861

)

    

(2,176,833

)

    

(380,091

)

    

(4,647,985

)

    

(1,947,184

)

    

(1,291,970

)

  
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS		    

25,332

      

107,988

      

(502,288

)

    

315,418

      

1,514,536

      

50,067

      

(508,185

)

  

Changes From Unit Transactions:

  

• Contract purchases

    

101,478

      

63,271

      

204,336

      

264,944

      

735,815

      

480,612

      

356,856

    

• Contract withdrawals

    

(165,912

)

    

(116,226

)

    

(2,178,540

)

    

(617,476

)

    

(2,651,158

)

    

(1,042,166

)

    

(1,100,139

)

  

• Contract transfers

    

(77,520

)

    

120,756

      

(328,304

)

    

136,864

      

(79,601

)

    

378,092

      

(380,190

)

  
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS		    

(141,954

)

    

67,801

      

(2,302,508

)

    

(215,668

)

    

(1,994,944

)

    

(183,462

)

    

(1,123,473

)

  

TOTAL INCREASE (DECREASE) IN NET ASSETS

    

(116,622

)

    

175,789

      

(2,804,796

)

    

99,750

      

(480,408

)

    

(133,395

)

    

(1,631,658

)

  

NET ASSETS AT DECEMBER 31, 2015

    

1,852,385

      

1,661,558

      

13,265,699

      

5,699,030

      

26,293,002

      

11,743,805

      

9,133,407

    

Changes From Operations:

  

• Net investment income (loss)

    

(17,178

)

    

(14,247

)

    

81,012

      

(2,945

)

    

(51,616

)

    

59,824

      

34,513

    

• Net realized gain (loss) on investments

    

89,330

      

233,502

      

565,282

      

482,042

      

2,562,709

      

1,357,424

      

702,354

    

• Net change in unrealized appreciation or depreciation on investments

    

(105,277

)

    

(230,191

)

    

108,548

      

(505,577

)

    

(446,366

)

    

(238,026

)

    

(521,923

)

  
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS		    

(33,125

)

    

(10,936

)

    

754,842

      

(26,480

)

    

2,064,727

      

1,179,222

      

214,944

    

Changes From Unit Transactions:

  

• Contract purchases

    

84,236

      

67,224

      

263,371

      

271,568

      

723,600

      

455,796

      

309,737

    

• Contract withdrawals

    

(83,392

)

    

(212,686

)

    

(701,124

)

    

(357,259

)

    

(1,768,242

)

    

(790,189

)

    

(677,600

)

  

• Contract transfers

    

(117,322

)

    

(125,875

)

    

(37,530

)

    

(198,613

)

    

(781,124

)

    

(145,494

)

    

(239,923

)

  
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS		    

(116,478

)

    

(271,337

)

    

(475,283

)

    

(284,304

)

    

(1,825,766

)

    

(479,887

)

    

(607,786

)

  

TOTAL INCREASE (DECREASE) IN NET ASSETS

    

(149,603

)

    

(282,273

)

    

279,559

      

(310,784

)

    

238,961

      

699,335

      

(392,842

)

  

NET ASSETS AT DECEMBER 31, 2016

  

$

1,702,782

    

$

1,379,285

    

$

13,545,258

    

$

5,388,246

    

$

26,531,963

    

$

12,443,140

    

$

8,740,565

    

See accompanying notes.
L-6


    BlackRock
Global
Allocation V.I.
Fund Class I
Subaccount		   Delaware VIP
Diversified
Income Series
Standard
Class
Subaccount		   Delaware VIP
High Yield
Series
Standard
Class
Subaccount		   Delaware VIP
REIT Series
Service
Class
Subaccount		   Delaware VIP
Small Cap
Value
Series Service
Class
Subaccount		   Delaware VIP
Smid Cap
Growth
Series Service
Class
Subaccount		  

NET ASSETS AT JANUARY 1, 2015

  

$

1,526,870

    

$

5,744,785

    

$

2,829,067

    

$

13,509,561

    

$

9,887,517

    

$

5,224,630

    

Changes From Operations:

  

• Net investment income (loss)

    

2,221

      

112,945

      

139,891

      

4,129

      

(44,944

)

    

(43,824

)

  

• Net realized gain (loss) on investments

    

78,461

      

81,332

      

16,146

      

359,611

      

1,229,666

      

602,471

    

• Net change in unrealized appreciation or depreciation on investments

    

(110,439

)

    

(304,750

)

    

(335,781

)

    

(100,244

)

    

(1,813,019

)

    

(241,384

)

  
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS		    

(29,757

)

    

(110,473

)

    

(179,744

)

    

263,496

      

(628,297

)

    

317,263

    

Changes From Unit Transactions:

  

• Contract purchases

    

149,317

      

297,749

      

129,392

      

347,955

      

305,800

      

177,381

    

• Contract withdrawals

    

(106,113

)

    

(428,389

)

    

(312,819

)

    

(1,097,909

)

    

(906,509

)

    

(481,563

)

  

• Contract transfers

    

(7,818

)

    

(188,097

)

    

(206,302

)

    

(532,247

)

    

(826,466

)

    

146,343

    
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS		    

35,386

      

(318,737

)

    

(389,729

)

    

(1,282,201

)

    

(1,427,175

)

    

(157,839

)

  

TOTAL INCREASE (DECREASE) IN NET ASSETS

    

5,629

      

(429,210

)

    

(569,473

)

    

(1,018,705

)

    

(2,055,472

)

    

159,424

    

NET ASSETS AT DECEMBER 31, 2015

    

1,532,499

      

5,315,575

      

2,259,594

      

12,490,856

      

7,832,045

      

5,384,054

    

Changes From Operations:

  

• Net investment income (loss)

    

3,700

      

129,689

      

137,814

      

6,271

      

(21,320

)

    

(51,081

)

  

• Net realized gain (loss) on investments

    

(15,843

)

    

(1,915

)

    

(77,192

)

    

1,016,150

      

768,154

      

738,715

    

• Net change in unrealized appreciation or depreciation on investments

    

59,113

      

5,338

      

192,340

      

(477,332

)

    

1,440,410

      

(353,287

)

  
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS		    

46,970

      

133,112

      

252,962

      

545,089

      

2,187,244

      

334,347

    

Changes From Unit Transactions:

  

• Contract purchases

    

125,721

      

270,397

      

122,971

      

336,620

      

272,589

      

204,040

    

• Contract withdrawals

    

(57,858

)

    

(360,293

)

    

(401,434

)

    

(1,072,771

)

    

(631,311

)

    

(511,441

)

  

• Contract transfers

    

(200,534

)

    

(648,240

)

    

(68,401

)

    

146,894

      

92,996

      

(122,282

)

  
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS		    

(132,671

)

    

(738,136

)

    

(346,864

)

    

(589,257

)

    

(265,726

)

    

(429,683

)

  

TOTAL INCREASE (DECREASE) IN NET ASSETS

    

(85,701

)

    

(605,024

)

    

(93,902

)

    

(44,168

)

    

1,921,518

      

(95,336

)

  

NET ASSETS AT DECEMBER 31, 2016

  

$

1,446,798

    

$

4,710,551

    

$

2,165,692

    

$

12,446,688

    

$

9,753,563

    

$

5,288,718

    


L-7


Lincoln National Variable Annuity Account L

Statements of changes in net assets (continued)

Years Ended December 31, 2015 and 2016

    Deutsche
Alternative
Asset
Allocation VIP
Portfolio Class A
Subaccount		   Fidelity VIP
Asset
Manager
Portfolio
Initial Class
Subaccount		   Fidelity VIP
Contrafund
Portfolio
Service Class 2
Subaccount		   Fidelity VIP
Government
Money Market
Portfolio
Initial Class
Subaccount		   Fidelity VIP
Growth
Portfolio
Initial Class
Subaccount		   Janus Aspen
Global
Research
Portfolio
Institutional
Shares
Subaccount		   LVIP
Baron
Growth
Opportunities
Fund
Service Class
Subaccount		  

NET ASSETS AT JANUARY 1, 2015

  

$

224,367

    

$

39,121,218

    

$

22,983,179

    

$

9,873

    

$

79,461,794

    

$

9,760,515

    

$

17,112,866

    

Changes From Operations:

  

• Net investment income (loss)

    

3,976

      

201,505

      

(45,485

)

    

4

      

(577,970

)

    

(31,351

)

    

(160,748

)

  

• Net realized gain (loss) on investments

    

732

      

2,960,199

      

2,539,522

      

—

      

6,101,636

      

117,937

      

2,090,555

    

• Net change in unrealized appreciation or depreciation on investments

    

(19,688

)

    

(3,372,504

)

    

(2,591,726

)

    

—

      

(788,222

)

    

(369,844

)

    

(2,819,701

)

  
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS		    

(14,980

)

    

(210,800

)

    

(97,689

)

    

4

      

4,735,444

      

(283,258

)

    

(889,894

)

  

Changes From Unit Transactions:

  

• Contract purchases

    

13,697

      

646,332

      

688,872

      

110,203

      

842,209

      

182,255

      

351,192

    

• Contract withdrawals

    

(3,322

)

    

(3,766,504

)

    

(1,872,534

)

    

(10,422

)

    

(7,014,429

)

    

(651,862

)

    

(1,486,557

)

  

• Contract transfers

    

(21,144

)

    

(1,033,024

)

    

(131,040

)

    

(74,693

)

    

(1,194,328

)

    

(157,598

)

    

(434,641

)

  
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS		    

(10,769

)

    

(4,153,196

)

    

(1,314,702

)

    

25,088

      

(7,366,548

)

    

(627,205

)

    

(1,570,006

)

  

TOTAL INCREASE (DECREASE) IN NET ASSETS

    

(25,749

)

    

(4,363,996

)

    

(1,412,391

)

    

25,092

      

(2,631,104

)

    

(910,463

)

    

(2,459,900

)

  

NET ASSETS AT DECEMBER 31, 2015

    

198,618

      

34,757,222

      

21,570,788

      

34,965

      

76,830,690

      

8,850,052

      

14,652,966

    

Changes From Operations:

  

• Net investment income (loss)

    

2,600

      

148,815

      

(77,723

)

    

152

      

(674,299

)

    

8,839

      

(68,444

)

  

• Net realized gain (loss) on investments

    

(1,621

)

    

1,365,981

      

1,934,622

      

—

      

9,487,060

      

76,753

      

1,563,670

    

• Net change in unrealized appreciation or depreciation on investments

    

7,461

      

(888,146

)

    

(540,076

)

    

—

      

(9,127,994

)

    

(14,062

)

    

(867,799

)

  
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS		    

8,440

      

626,650

      

1,316,823

      

152

      

(315,233

)

    

71,530

      

627,427

    

Changes From Unit Transactions:

  

• Contract purchases

    

18,649

      

539,511

      

645,626

      

195,325

      

605,210

      

165,926

      

300,679

    

• Contract withdrawals

    

(10,371

)

    

(2,616,749

)

    

(1,477,487

)

    

(30,710

)

    

(5,524,927

)

    

(742,412

)

    

(1,283,186

)

  

• Contract transfers

    

14,858

      

(1,434,700

)

    

(987,414

)

    

(131,381

)

    

(1,936,637

)

    

(255,025

)

    

(527,708

)

  
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS		    

23,136

      

(3,511,938

)

    

(1,819,275

)

    

33,234

      

(6,856,354

)

    

(831,511

)

    

(1,510,215

)

  

TOTAL INCREASE (DECREASE) IN NET ASSETS

    

31,576

      

(2,885,288

)

    

(502,452

)

    

33,386

      

(7,171,587

)

    

(759,981

)

    

(882,788

)

  

NET ASSETS AT DECEMBER 31, 2016

  

$

230,194

    

$

31,871,934

    

$

21,068,336

    

$

68,351

    

$

69,659,103

    

$

8,090,071

    

$

13,770,178

    

See accompanying notes.
L-8


    LVIP
BlackRock
Emerging
Markets
Managed
Volatility Fund
Standard Class
Subaccount		   LVIP
BlackRock
Inflation
Protected
Bond Fund
Standard Class
Subaccount		   LVIP
Blended
Large Cap
Growth
Managed
Volatility
Fund
Standard Class
Subaccount		   LVIP
Blended
Mid Cap
Managed
Volatility
Fund
Standard Class
Subaccount		   LVIP
Clarion
Global
Real Estate
Fund
Standard Class
Subaccount		   LVIP
Delaware
Bond Fund
Standard Class
Subaccount		  

NET ASSETS AT JANUARY 1, 2015

  

$

23,703

    

$

843,424

    

$

1,714,917

    

$

410

    

$

600,333

    

$

5,067,417

    

Changes From Operations:

  

• Net investment income (loss)

    

195

      

1,690

      

(16,064

)

    

(255

)

    

12,709

      

58,378

    

• Net realized gain (loss) on investments

    

(1,599

)

    

(13,609

)

    

71,290

      

(1,443

)

    

19,736

      

53,582

    

• Net change in unrealized appreciation or depreciation on investments

    

(3,816

)

    

(15,791

)

    

(48,564

)

    

(2,080

)

    

(46,976

)

    

(133,059

)

  
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS		    

(5,220

)

    

(27,710

)

    

6,662

      

(3,778

)

    

(14,531

)

    

(21,099

)

  

Changes From Unit Transactions:

  

• Contract purchases

    

6,221

      

72,045

      

44,691

      

2,814

      

45,794

      

194,203

    

• Contract withdrawals

    

(201

)

    

(94,026

)

    

(152,281

)

    

(233

)

    

(41,747

)

    

(646,205

)

  

• Contract transfers

    

966

      

(82,848

)

    

(27,262

)

    

23,840

      

11,925

      

(253,900

)

  
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS		    

6,986

      

(104,829

)

    

(134,852

)

    

26,421

      

15,972

      

(705,902

)

  

TOTAL INCREASE (DECREASE) IN NET ASSETS

    

1,766

      

(132,539

)

    

(128,190

)

    

22,643

      

1,441

      

(727,001

)

  

NET ASSETS AT DECEMBER 31, 2015

    

25,469

      

710,885

      

1,586,727

      

23,053

      

601,774

      

4,340,416

    

Changes From Operations:

  

• Net investment income (loss)

    

1,413

      

2,716

      

(7,393

)

    

(156

)

    

23,020

      

63,098

    

• Net realized gain (loss) on investments

    

(7,215

)

    

(7,545

)

    

107,727

      

(2,362

)

    

17,462

      

84,018

    

• Net change in unrealized appreciation or depreciation on investments

    

7,167

      

22,610

      

(141,768

)

    

1,461

      

(48,788

)

    

(68,988

)

  
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS		    

1,365

      

17,781

      

(41,434

)

    

(1,057

)

    

(8,306

)

    

78,128

    

Changes From Unit Transactions:

  

• Contract purchases

    

10,682

      

99,748

      

40,247

      

8,709

      

49,140

      

193,162

    

• Contract withdrawals

    

(152

)

    

(53,302

)

    

(208,090

)

    

(56

)

    

(27,263

)

    

(699,891

)

  

• Contract transfers

    

(37,364

)

    

(19,120

)

    

(112,234

)

    

(9,416

)

    

78,498

      

(18,369

)

  
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS		    

(26,834

)

    

27,326

      

(280,077

)

    

(763

)

    

100,375

      

(525,098

)

  

TOTAL INCREASE (DECREASE) IN NET ASSETS

    

(25,469

)

    

45,107

      

(321,511

)

    

(1,820

)

    

92,069

      

(446,970

)

  

NET ASSETS AT DECEMBER 31, 2016

  

$

—

    

$

755,992

    

$

1,265,216

    

$

21,233

    

$

693,843

    

$

3,893,446

    


L-9


Lincoln National Variable Annuity Account L

Statements of changes in net assets (continued)

Years Ended December 31, 2015 and 2016

    LVIP
Delaware
Diversified
Floating
Rate Fund
Service Class
Subaccount		   LVIP
Delaware
Foundation
Aggressive
Allocation
Fund
Standard Class
Subaccount		   LVIP
Delaware
Foundation
Conservative
Allocation
Fund
Standard Class
Subaccount		   LVIP
Delaware
Foundation
Moderate
Allocation
Fund
Standard Class
Subaccount		   LVIP
Delaware
Social
Awareness
Fund
Standard Class
Subaccount		   LVIP
Dimensional
U.S. Core
Equity 1
Fund
Standard Class
Subaccount		   LVIP
Franklin
Templeton
Global Equity
Managed
Volatility
Fund
Standard Class
Subaccount		  

NET ASSETS AT JANUARY 1, 2015

  

$

742,087

    

$

282,347

    

$

1,312,086

    

$

539,318

    

$

16,083,660

    

$

5,665,734

    

$

24,004

    

Changes From Operations:

  

• Net investment income (loss)

    

413

      

2,848

      

22,257

      

2,298

      

75,359

      

33,887

      

163

    

• Net realized gain (loss) on investments

    

(9,419

)

    

14,379

      

52,635

      

26,705

      

2,040,648

      

770,424

      

(49

)

  

• Net change in unrealized appreciation or depreciation on investments

    

4,666

      

(25,494

)

    

(97,267

)

    

(34,299

)

    

(2,353,178

)

    

(971,866

)

    

(2,951

)

  
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS		    

(4,340

)

    

(8,267

)

    

(22,375

)

    

(5,296

)

    

(237,171

)

    

(167,555

)

    

(2,837

)

  

Changes From Unit Transactions:

  

• Contract purchases

    

35,074

      

80,451

      

102,459

      

73,973

      

251,298

      

156,533

      

7,686

    

• Contract withdrawals

    

(36,953

)

    

(12,447

)

    

(138,320

)

    

(94,794

)

    

(1,269,406

)

    

(472,053

)

    

(18

)

  

• Contract transfers

    

(539,584

)

    

(10,372

)

    

(47,788

)

    

(213,442

)

    

243,052

      

29,167

      

850

    
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS		    

(541,463

)

    

57,632

      

(83,649

)

    

(234,263

)

    

(775,056

)

    

(286,353

)

    

8,518

    

TOTAL INCREASE (DECREASE) IN NET ASSETS

    

(545,803

)

    

49,365

      

(106,024

)

    

(239,559

)

    

(1,012,227

)

    

(453,908

)

    

5,681

    

NET ASSETS AT DECEMBER 31, 2015

    

196,284

      

331,712

      

1,206,062

      

299,759

      

15,071,433

      

5,211,826

      

29,685

    

Changes From Operations:

  

• Net investment income (loss)

    

(1,958

)

    

3,423

      

18,890

      

2,735

      

81,292

      

34,349

      

344

    

• Net realized gain (loss) on investments

    

(841

)

    

32,899

      

32,227

      

14,211

      

1,949,911

      

1,838,060

      

(119

)

  

• Net change in unrealized appreciation or depreciation on investments

    

4,766

      

(19,889

)

    

(8,512

)

    

(6,825

)

    

(1,261,820

)

    

(1,230,195

)

    

1,079

    
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS		    

1,967

      

16,433

      

42,605

      

10,121

      

769,383

      

642,214

      

1,304

    

Changes From Unit Transactions:

  

• Contract purchases

    

32,000

      

82,726

      

85,913

      

44,305

      

233,608

      

167,050

      

14,473

    

• Contract withdrawals

    

(20,553

)

    

(13,160

)

    

(126,955

)

    

(30,745

)

    

(1,141,507

)

    

(559,400

)

    

(426

)

  

• Contract transfers

    

(6,752

)

    

(10,388

)

    

(15,609

)

    

(20,132

)

    

(389,814

)

    

(139,365

)

    

3,045

    
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS		    

4,695

      

59,178

      

(56,651

)

    

(6,572

)

    

(1,297,713

)

    

(531,715

)

    

17,092

    

TOTAL INCREASE (DECREASE) IN NET ASSETS

    

6,662

      

75,611

      

(14,046

)

    

3,549

      

(528,330

)

    

110,499

      

18,396

    

NET ASSETS AT DECEMBER 31, 2016

  

$

202,946

    

$

407,323

    

$

1,192,016

    

$

303,308

    

$

14,543,103

    

$

5,322,325

    

$

48,081

    

See accompanying notes.
L-10


    LVIP
Global
Conservative
Allocation
Managed
Risk Fund
Standard Class
Subaccount		   LVIP
Global
Growth
Allocation
Managed
Risk Fund
Standard Class
Subaccount		   LVIP
Global
Income Fund
Standard Class
Subaccount		   LVIP
Global
Moderate
Allocation
Managed
Risk Fund
Standard Class
Subaccount		   LVIP
JPMorgan
Select
Mid Cap
Value
Managed
Volatility
Fund
Standard Class
Subaccount		   LVIP
Managed
Risk Profile
2010 Fund
Standard Class
Subaccount		  

NET ASSETS AT JANUARY 1, 2015

  

$

1,860,347

    

$

5,484,539

    

$

308,252

    

$

7,327,663

    

$

163,647

    

$

554,795

    

Changes From Operations:

  

• Net investment income (loss)

    

13,476

      

44,682

      

7,468

      

272,212

      

(413

)

    

5,235

    

• Net realized gain (loss) on investments

    

82,578

      

117,269

      

2,248

      

158,704

      

(108

)

    

33,847

    

• Net change in unrealized appreciation or depreciation on investments

    

(140,604

)

    

(381,122

)

    

(20,262

)

    

(1,330,098

)

    

(23,789

)

    

(53,757

)

  
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS		    

(44,550

)

    

(219,171

)

    

(10,546

)

    

(899,182

)

    

(24,310

)

    

(14,675

)

  

Changes From Unit Transactions:

  

• Contract purchases

    

78,540

      

243,844

      

26,022

      

9,539,380

      

7,510

      

48,781

    

• Contract withdrawals

    

(372,404

)

    

(820,924

)

    

(22,521

)

    

(1,570,214

)

    

(3,066

)

    

(24,375

)

  

• Contract transfers

    

(178,730

)

    

(44,085

)

    

48,289

      

1,841,413

      

106,730

      

(2,173

)

  
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS		    

(472,594

)

    

(621,165

)

    

51,790

      

9,810,579

      

111,174

      

22,233

    

TOTAL INCREASE (DECREASE) IN NET ASSETS

    

(517,144

)

    

(840,336

)

    

41,244

      

8,911,397

      

86,864

      

7,558

    

NET ASSETS AT DECEMBER 31, 2015

    

1,343,203

      

4,644,203

      

349,496

      

16,239,060

      

250,511

      

562,353

    

Changes From Operations:

  

• Net investment income (loss)

    

14,806

      

35,852

      

(3,376

)

    

281,074

      

(1,255

)

    

4,023

    

• Net realized gain (loss) on investments

    

38,110

      

80,917

      

(698

)

    

102,118

      

738

      

27,777

    

• Net change in unrealized appreciation or depreciation on investments

    

(1,405

)

    

38,762

      

3,290

      

283,312

      

22,523

      

(16,595

)

  
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS		    

51,511

      

155,531

      

(784

)

    

666,504

      

22,006

      

15,205

    

Changes From Unit Transactions:

  

• Contract purchases

    

72,524

      

201,962

      

18,158

      

2,193,315

      

16,513

      

44,337

    

• Contract withdrawals

    

(186,259

)

    

(566,821

)

    

(54,496

)

    

(1,395,353

)

    

(3,155

)

    

(143,996

)

  

• Contract transfers

    

(31,976

)

    

(346,275

)

    

5,726

      

1,070,527

      

(100,997

)

    

(29,629

)

  
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS		    

(145,711

)

    

(711,134

)

    

(30,612

)

    

1,868,489

      

(87,639

)

    

(129,288

)

  

TOTAL INCREASE (DECREASE) IN NET ASSETS

    

(94,200

)

    

(555,603

)

    

(31,396

)

    

2,534,993

      

(65,633

)

    

(114,083

)

  

NET ASSETS AT DECEMBER 31, 2016

  

$

1,249,003

    

$

4,088,600

    

$

318,100

    

$

18,774,053

    

$

184,878

    

$

448,270

    


L-11


Lincoln National Variable Annuity Account L

Statements of changes in net assets (continued)

Years Ended December 31, 2015 and 2016

    LVIP
Managed
Risk Profile
2020 Fund
Standard Class
Subaccount		   LVIP
Managed
Risk Profile
2030 Fund
Standard Class
Subaccount		   LVIP
Managed
Risk Profile
2040 Fund
Standard Class
Subaccount		   LVIP
Managed
Risk Profile
2050 Fund
Standard Class
Subaccount		   LVIP
Mondrian
International
Value Fund
Standard Class
Subaccount		   LVIP
SSGA Bond
Index Fund
Standard Class
Subaccount		   LVIP
SSGA
Emerging
Markets
100 Fund
Standard Class
Subaccount		  

NET ASSETS AT JANUARY 1, 2015

  

$

2,261,930

    

$

4,455,329

    

$

1,740,247

    

$

310,945

    

$

3,671,267

    

$

587,200

    

$

1,144,576

    

Changes From Operations:

  

• Net investment income (loss)

    

22,892

      

33,987

      

11,807

      

3,500

      

67,084

      

9,406

      

36,903

    

• Net realized gain (loss) on investments

    

114,919

      

331,894

      

158,426

      

(5,500

)

    

(38,002

)

    

(880

)

    

(29,133

)

  

• Net change in unrealized appreciation or depreciation on investments

    

(226,974

)

    

(531,029

)

    

(236,993

)

    

(17,678

)

    

(177,748

)

    

(14,195

)

    

(219,907

)

  
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS		    

(89,163

)

    

(165,148

)

    

(66,760

)

    

(19,678

)

    

(148,666

)

    

(5,669

)

    

(212,137

)

  

Changes From Unit Transactions:

  

• Contract purchases

    

246,328

      

475,648

      

339,055

      

225,973

      

148,566

      

18,003

      

110,107

    

• Contract withdrawals

    

(160,870

)

    

(566,601

)

    

(374,337

)

    

(69,025

)

    

(364,335

)

    

(93,702

)

    

(56,397

)

  

• Contract transfers

    

218,683

      

23,316

      

(32,523

)

    

(18,485

)

    

(106,773

)

    

86,223

      

(15,493

)

  
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS		    

304,141

      

(67,637

)

    

(67,805

)

    

138,463

      

(322,542

)

    

10,524

      

38,217

    

TOTAL INCREASE (DECREASE) IN NET ASSETS

    

214,978

      

(232,785

)

    

(134,565

)

    

118,785

      

(471,208

)

    

4,855

      

(173,920

)

  

NET ASSETS AT DECEMBER 31, 2015

    

2,476,908

      

4,222,544

      

1,605,682

      

429,730

      

3,200,059

      

592,055

      

970,656

    

Changes From Operations:

  

• Net investment income (loss)

    

17,406

      

45,947

      

15,798

      

6,493

      

56,918

      

7,697

      

17,712

    

• Net realized gain (loss) on investments

    

88,482

      

142,404

      

42,057

      

(1,829

)

    

(10,685

)

    

636

      

(79,237

)

  

• Net change in unrealized appreciation or depreciation on investments

    

(31,668

)

    

(69,008

)

    

(10,255

)

    

14,974

      

37,802

      

(1,392

)

    

202,373

    
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS		    

74,220

      

119,343

      

47,600

      

19,638

      

84,035

      

6,941

      

140,848

    

Changes From Unit Transactions:

  

• Contract purchases

    

202,400

      

454,587

      

377,361

      

255,600

      

123,932

      

30,773

      

92,966

    

• Contract withdrawals

    

(310,292

)

    

(527,842

)

    

(386,213

)

    

(70,739

)

    

(457,468

)

    

(108,042

)

    

(185,555

)

  

• Contract transfers

    

(451,066

)

    

304,635

      

55,454

      

(2,396

)

    

(103,459

)

    

70,093

      

(11,649

)

  
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS		    

(558,958

)

    

231,380

      

46,602

      

182,465

      

(436,995

)

    

(7,176

)

    

(104,238

)

  

TOTAL INCREASE (DECREASE) IN NET ASSETS

    

(484,738

)

    

350,723

      

94,202

      

202,103

      

(352,960

)

    

(235

)

    

36,610

    

NET ASSETS AT DECEMBER 31, 2016

  

$

1,992,170

    

$

4,573,267

    

$

1,699,884

    

$

631,833

    

$

2,847,099

    

$

591,820

    

$

1,007,266

    

See accompanying notes.
L-12


    LVIP
SSGA
Global
Tactical
Allocation
Managed
Volatility
Fund
Standard Class
Subaccount		   LVIP
SSGA
International
Index Fund
Standard Class
Subaccount		   LVIP
SSGA
International
Managed
Volatility
Fund
Standard Class
Subaccount		   LVIP
SSGA
S&P 500
Index Fund
Standard Class
Subaccount		   LVIP
SSGA
Small-Cap
Index Fund
Standard Class
Subaccount		   LVIP
T. Rowe Price
Structured
Mid-Cap
Growth Fund
Standard Class
Subaccount		  

NET ASSETS AT JANUARY 1, 2015

  

$

1,901,995

    

$

180,858

    

$

—

    

$

112,348,626

    

$

30,614,796

    

$

19,742,185

    

Changes From Operations:

  

• Net investment income (loss)

    

34,605

      

3,249

      

—

      

924,198

      

(26,274

)

    

(166,984

)

  

• Net realized gain (loss) on investments

    

16,592

      

346

      

—

      

3,551,447

      

1,388,343

      

2,000,338

    

• Net change in unrealized appreciation or depreciation on investments

    

(181,774

)

    

(10,061

)

    

—

      

(4,164,448

)

    

(2,890,485

)

    

(1,607,047

)

  
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS		    

(130,577

)

    

(6,466

)

    

—

      

311,197

      

(1,528,416

)

    

226,307

    

Changes From Unit Transactions:

  

• Contract purchases

    

82,489

      

36,082

      

—

      

2,001,109

      

443,423

      

288,121

    

• Contract withdrawals

    

(159,800

)

    

(31,445

)

    

—

      

(11,834,801

)

    

(3,010,165

)

    

(1,620,992

)

  

• Contract transfers

    

(67,643

)

    

22,664

      

—

      

(1,651,693

)

    

(803,910

)

    

(119,689

)

  
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS		    

(144,954

)

    

27,301

      

—

      

(11,485,385

)

    

(3,370,652

)

    

(1,452,560

)

  

TOTAL INCREASE (DECREASE) IN NET ASSETS

    

(275,531

)

    

20,835

      

—

      

(11,174,188

)

    

(4,899,068

)

    

(1,226,253

)

  

NET ASSETS AT DECEMBER 31, 2015

    

1,626,464

      

201,693

      

—

      

101,174,438

      

25,715,728

      

18,515,932

    

Changes From Operations:

  

• Net investment income (loss)

    

14,942

      

3,880

      

374

      

1,036,426

      

103,966

      

(121,441

)

  

• Net realized gain (loss) on investments

    

(650

)

    

(4,808

)

    

(4

)

    

3,084,125

      

886,467

      

1,518,513

    

• Net change in unrealized appreciation or depreciation on investments

    

55,651

      

822

      

(544

)

    

6,069,325

      

3,634,656

      

(333,326

)

  
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS		    

69,943

      

(106

)

    

(174

)

    

10,189,876

      

4,625,089

      

1,063,746

    

Changes From Unit Transactions:

  

• Contract purchases

    

69,341

      

44,737

      

1,197

      

1,690,295

      

428,194

      

253,415

    

• Contract withdrawals

    

(185,756

)

    

(34,592

)

    

(609

)

    

(7,802,822

)

    

(2,506,319

)

    

(1,593,310

)

  

• Contract transfers

    

(21,079

)

    

(8,299

)

    

40,157

      

(1,529,938

)

    

(485,598

)

    

(760,085

)

  
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS		    

(137,494

)

    

1,846

      

40,745

      

(7,642,465

)

    

(2,563,723

)

    

(2,099,980

)

  

TOTAL INCREASE (DECREASE) IN NET ASSETS

    

(67,551

)

    

1,740

      

40,571

      

2,547,411

      

2,061,366

      

(1,036,234

)

  

NET ASSETS AT DECEMBER 31, 2016

  

$

1,558,913

    

$

203,433

    

$

40,571

    

$

103,721,849

    

$

27,777,094

    

$

17,479,698

    


L-13


Lincoln National Variable Annuity Account L

Statements of changes in net assets (continued)

Years Ended December 31, 2015 and 2016

    Neuberger
Berman AMT
Large Cap
Value
Portfolio I
Class
Subaccount		   T. Rowe Price
International
Stock
Portfolio
Subaccount		  

NET ASSETS AT JANUARY 1, 2015

  

$

5,487,288

    

$

10,716,030

    

Changes From Operations:

  

• Net investment income (loss)

    

(12,062

)

    

(9,295

)

  

• Net realized gain (loss) on investments

    

451,444

      

430,914

    

• Net change in unrealized appreciation or depreciation on investments

    

(1,094,109

)

    

(556,931

)

  

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS

    

(654,727

)

    

(135,312

)

  

Changes From Unit Transactions:

  

• Contract purchases

    

105,457

      

296,490

    

• Contract withdrawals

    

(369,993

)

    

(1,265,613

)

  

• Contract transfers

    

(208,114

)

    

(131,896

)

  

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS

    

(472,650

)

    

(1,101,019

)

  

TOTAL INCREASE (DECREASE) IN NET ASSETS

    

(1,127,377

)

    

(1,236,331

)

  

NET ASSETS AT DECEMBER 31, 2015

    

4,359,911

      

9,479,699

    

Changes From Operations:

  

• Net investment income (loss)

    

(8,611

)

    

4,860

    

• Net realized gain (loss) on investments

    

403,402

      

415,852

    

• Net change in unrealized appreciation or depreciation on investments

    

702,162

      

(326,392

)

  

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS

    

1,096,953

      

94,320

    

Changes From Unit Transactions:

  

• Contract purchases

    

79,851

      

217,474

    

• Contract withdrawals

    

(314,310

)

    

(1,051,910

)

  

• Contract transfers

    

307,637

      

(297,827

)

  

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS

    

73,178

      

(1,132,263

)

  

TOTAL INCREASE (DECREASE) IN NET ASSETS

    

1,170,131

      

(1,037,943

)

  

NET ASSETS AT DECEMBER 31, 2016

  

$

5,530,042

    

$

8,441,756

    

See accompanying notes.
L-14



Lincoln National Variable Annuity Account L

Notes to financial statements

December 31, 2016

1. Accounting Policies and Variable Account Information

The Variable Account: Lincoln National Variable Annuity Account L (the Variable Account) is a segregated investment account of The Lincoln National Life Insurance Company (the Company) and is registered as a unit investment trust with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended. The operations of the Variable Account, which commenced on September 26, 1996, are part of the operations of the Company. The Variable Account consists of three products as follows:

•  Group Variable Annuity

•  Lincoln Secured Retirement Income

•  Lincoln Retirement Income Rollover

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-three mutual funds (the Funds) of eleven open-ended management investment companies, each Fund with its own investment objective. The Funds are:

AllianceBernstein Variable Products Series Fund, Inc. (AB VPS):

AB VPS Global Thematic Growth Portfolio Class B

AB VPS Growth Portfolio Class B

American Century Variable Portfolios, Inc. (American Century VP):

American Century VP Balanced Fund Class I

American Funds Insurance Series (American Funds):

American Funds Global Growth Fund Class 2

American Funds Growth Fund Class 2

American Funds Growth-Income Fund Class 2

American Funds International Fund Class 2

BlackRock Variable Series Funds, Inc. (BlackRock):

BlackRock Global Allocation V.I. Fund Class I

Delaware VIP Trust (Delaware VIP):

Delaware VIP Diversified Income Series Standard Class

Delaware VIP High Yield Series Standard Class

Delaware VIP REIT Series Service Class

Delaware VIP Small Cap Value Series Service Class

Delaware VIP Smid Cap Growth Series Service Class

Deutsche Investments VIT Funds (Deutsche):

Deutsche Alternative Asset Allocation VIP Portfolio Class A

Fidelity Variable Insurance Products Fund (Fidelity VIP):

Fidelity VIP Asset Manager Portfolio Initial Class

Fidelity VIP Contrafund Portfolio Service Class 2

Fidelity VIP Government Money Market Portfolio Initial Class

Fidelity VIP Growth Portfolio Initial Class

Janus Aspen Series:

Janus Aspen Global Research Portfolio Institutional Shares

Lincoln Variable Insurance Products Trust (LVIP)*:

LVIP Baron Growth Opportunities Fund Service Class

LVIP BlackRock Inflation Protected Bond Fund Standard Class

LVIP Blended Large Cap Growth Managed Volatility Fund Standard Class

LVIP Blended Mid Cap Managed Volatility Fund Standard Class

LVIP Clarion Global Real Estate Fund Standard Class

LVIP Delaware Bond Fund Standard Class

LVIP Delaware Diversified Floating Rate Fund Service Class

LVIP Delaware Foundation Aggressive Allocation Fund Standard Class

LVIP Delaware Foundation Conservative Allocation Fund Standard Class

LVIP Delaware Foundation Moderate Allocation Fund Standard Class

LVIP Delaware Social Awareness Fund Standard Class

LVIP Dimensional U.S. Core Equity 1 Fund Standard Class

LVIP Franklin Templeton Global Equity Managed Volatility Fund Standard Class

LVIP Global Conservative Allocation Managed Risk Fund Standard Class

LVIP Global Growth Allocation Managed Risk Fund Standard Class

LVIP Global Income Fund Standard Class

LVIP Global Moderate Allocation Managed Risk Fund Standard Class

LVIP JPMorgan Select Mid Cap Value Managed Volatility Fund Standard Class

LVIP Managed Risk Profile 2010 Fund Standard Class

LVIP Managed Risk Profile 2020 Fund Standard Class

LVIP Managed Risk Profile 2030 Fund Standard Class

LVIP Managed Risk Profile 2040 Fund Standard Class

LVIP Managed Risk Profile 2050 Fund Standard Class


L-15


Lincoln National Variable Annuity Account L

Notes to financial statements (continued)

1. Accounting Policies and Variable Account Information (continued)

LVIP Mondrian International Value Fund Standard Class

LVIP SSGA Bond Index Fund Standard Class

LVIP SSGA Emerging Markets 100 Fund Standard Class

LVIP SSGA Global Tactical Allocation Managed Volatility Fund Standard Class

LVIP SSGA International Index Fund Standard Class

LVIP SSGA International Managed Volatility Fund Standard Class

LVIP SSGA S&P 500 Index Fund Standard Class

LVIP SSGA Small-Cap Index Fund Standard Class

LVIP T. Rowe Price Structured Mid-Cap Growth Fund Standard Class

Neuberger Berman Advisors Management Trust (Neuberger Berman AMT):

Neuberger Berman AMT Large Cap Value Portfolio I Class

T. Rowe Price International Series, Inc. (T. Rowe Price):

T. Rowe Price International Stock Portfolio

*  Denotes an affiliate of the Company.

The Fidelity VIP Government 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 Government Money Market Portfolio are allocated to purchase shares of one or more of the above Funds.

Each subaccount invests in shares of a single underlying Fund. The investment performance of each subaccount will reflect the investment performance of the underlying Fund less separate account expenses. There is no assurance that the investment objective of any underlying Fund will be met. A Fund calculates a daily net asset value per share ("NAV") which is based on the market value of its investment portfolio. The amount of risk varies significantly between subaccounts. Due to the level of risk associated with certain investment portfolios, it is at least reasonably possible that changes in the values of investment portfolios will occur in the near

term and that such changes could materially affect contract holders' investments in the Funds and the amounts reported in the financial statements. The contract holder assumes all of the investment performance risk for the subaccounts selected.

Investments in the Funds are stated at fair value as determined by the closing net asset value per share on December 31, 2016. Net asset value is quoted by the Funds as derived by the fair value of the Funds' underlying investments. The difference between cost and net asset value is reflected as unrealized appreciation or depreciation of investments. There are no redemption restrictions on investments in the Funds.

Investments for which the fair value is measured at NAV using the practical expedient (investments in investees measured at NAV) are excluded from the fair value hierarchy. Accordingly, the Variable Account's investments in the Funds have not been classified in the fair value hierarchy.

Investment transactions are accounted for on a trade-date basis. The cost of investments sold is determined by the average cost method.

ASC 946-10-15, "Financial Services - Investment Companies (Topic 946) - Scope and Scope Exceptions" provides accounting guidance for assessing whether an entity is an investment company. This guidance evaluates the entity's purpose and design to determine whether the entity is an investment company. The standard also adds additional disclosure requirements regarding contractually required commitments to investees. Management has evaluated the criteria in the standard and concluded that the Variable Account qualifies as an investment company and therefore applies the accounting requirements of ASC 946.

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.


L-16


Lincoln National Variable Annuity Account L

Notes to financial statements (continued)

1. Accounting Policies and Variable Account Information (continued)

Investment Fund Changes: During 2015, the following funds changed their names:

Previous Fund Name

  

New Fund Name

  

ABVPSF Global Thematic Growth Fund Class B

  

AB VPS Global Thematic Growth Portfolio Class B

  

ABVPSF Growth Fund Class B

  

AB VPS Growth Portfolio Class B

  

Fidelity VIP Money Market Portfolio Initial Class

  

Fidelity VIP Government Money Market Portfolio Initial Class

  

LVIP BlackRock Emerging Markets RPM Fund Standard Class

  

LVIP BlackRock Emerging Markets Managed Volatility Fund Standard Class

  

LVIP Delaware Growth and Income Fund Standard Class

  

LVIP Dimensional U.S. Core Equity 1 Fund Standard Class

  

LVIP Managed Risk Profile Conservative Fund Standard Class

  

LVIP Global Conservative Allocation Managed Risk Fund Standard Class

  

LVIP Managed Risk Profile Growth Fund Standard Class

  

LVIP Global Growth Allocation Managed Risk Fund Standard Class

  

LVIP Managed Risk Profile Moderate Fund Standard Class

  

LVIP Global Moderate Allocation Managed Risk Fund Standard Class

  

LVIP Columbia Small-Mid Cap Growth RPM Fund Standard Class

  

LVIP Ivy Mid Cap Growth Managed Volatility Fund Standard Class

  

LVIP JPMorgan Mid Cap Value RPM Fund Standard Class

  

LVIP JPMorgan Mid Cap Value Managed Volatility Fund Standard Class

  

LVIP SSgA Global Tactical Allocation RPM Fund Standard Class

  

LVIP SSgA Global Tactical Allocation Managed Volatility Fund Standard Class

  

LVIP Templeton Growth RPM Fund Standard Class

  

LVIP Templeton Growth Managed Volatility Fund Standard Class

  

LVIP UBS Large Cap Growth RPM Fund Standard Class

  

LVIP UBS Large Cap Growth Managed Volatility Fund Standard Class

  

During 2016, the following funds changed their names:

Previous Fund Name

  

New Fund Name

  

LVIP UBS Large Cap Growth Managed Volatility Fund Standard Class

  

LVIP Blended Large Cap Growth Managed Volatility Fund Standard Class

  

LVIP Ivy Mid Cap Growth Managed Volatility Fund Standard Class

  

LVIP Blended Mid Cap Managed Volatility Fund Standard Class

  

LVIP Templeton Growth Managed Volatility Fund Standard Class

  

LVIP Franklin Templeton Global Equity Managed Volatility Fund Standard Class

  

LVIP JPMorgan Mid Cap Value Managed Volatility Fund Standard Class

  

LVIP JPMorgan Select Mid Cap Value Managed Volatility Fund Standard Class

  

LVIP SSgA Bond Index Fund Standard Class

  

LVIP SSGA Bond Index Fund Standard Class

  

LVIP SSgA Emerging Markets 100 Fund Standard Class

  

LVIP SSGA Emerging Markets 100 Fund Standard Class

  
LVIP SSgA Global Tactical Allocation Managed Volatility Fund
Standard Class		  

LVIP SSGA Global Tactical Allocation Managed Volatility Fund Standard Class

  

LVIP SSgA International Index Fund Standard Class

  

LVIP SSGA International Index Fund Standard Class

  

LVIP SSgA S&P 500 Index Fund Standard Class

  

LVIP SSGA S&P 500 Index Fund Standard Class

  

LVIP SSgA Small-Cap Index Fund Standard Class

  

LVIP SSGA Small-Cap Index Fund Standard Class

  

During 2016, the following fund mergers occurred:

Fund Acquired

  

Acquiring Fund

  
LVIP BlackRock Emerging Markets Managed Volatility Fund
Standard Class		  

LVIP SSGA International Managed Volatility Fund Standard Class

  

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 Government Money Market Portfolio, which does not have a mortality and expense charge. The mortality and expense risk charges for each of the variable subaccounts are reported in the statements of operations. The ranges of rates are as follows for the three contract types within the Variable Account:

•  Group Variable Annuity at a daily rate of .0020548% to .0027397% (.75% to 1.00% on an annual basis)

•  Lincoln Secured Retirement Income at a daily rate of .0001370% to .0017808% (.05% to .65% on an annual basis)

•  Lincoln Retirement Income Rollover at a daily rate of .0001370% to .0017808% (.05% to .65% on an annual basis)

During May, 2013, the fund replacement listed below occurred in certain products. The replacement fund has higher fund expenses than the fund it replaced, so the Company enacted a mortality and expense guarantee (M&E) reduction to ensure that overall fund expenses were the same after the replacement. The M&E reduction ended during May, 2016. The fund replacement was as follows:

Previous Fund Name

  

Replacement Fund Name

   M&E Reduction  

American Century VP Inflation Protection Class I Fund

  

LVIP BlackRock Inflation Protected Bond Standard Class Fund

    

0.06

%

  

The Company charges an annual account fee which varies by product. Refer to the product prospectus for the account fee rate. The account fees are for items such as processing applications, issuing contracts, policy value calculation, confirmations and periodic reports. The Company, upon surrender of a policy, may assess a surrender charge. Amounts retained by the Company for account fees and surrender charges for 2016 and 2015 were $217,979 and $240,936, respectively.

Surrender, contract and all other charges are included within Contract withdrawals on the Statements of Changes in Net Assets.


L-17


Lincoln National Variable Annuity Account L

Notes to financial statements (continued)

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, 2016, follows:

Subaccount

  

Year

   Commencement
Date(1)		   Minimum
Fee
Rate(2)		   Maximum
Fee
Rate(2)		   Minimum
Unit
Value(3)		   Maximum
Unit
Value(3)		   Units
Outstanding		  

Net Assets

   Minimum
Total
Return(4)		   Maximum
Total
Return(4)		   Investment
Income
Ratio(5)		  

AB VPS Global Thematic Growth Portfolio Class B

  
     

2016

              

0.75

%

    

1.00

%

  

$

5.79

    

$

6.03

      

293,802

    

$

1,702,782

      

-1.86

%

    

-1.62

%

    

0.00

%

  
     

2015

              

0.75

%

    

1.00

%

    

5.90

      

6.13

      

313,715

      

1,852,385

      

1.63

%

    

1.88

%

    

0.00

%

  
     

2014

              

0.75

%

    

1.00

%

    

5.80

      

6.01

      

338,951

      

1,969,007

      

3.76

%

    

4.02

%

    

0.00

%

  
     

2013

              

0.75

%

    

1.00

%

    

5.59

      

5.78

      

355,281

      

1,989,204

      

21.70

%

    

22.01

%

    

0.02

%

  
     

2012

              

0.75

%

    

1.00

%

    

4.60

      

4.74

      

407,020

      

1,872,402

      

12.11

%

    

12.40

%

    

0.00

%

  

AB VPS Growth Portfolio Class B

  
     

2016

              

0.75

%

    

1.00

%

    

13.01

      

13.55

      

105,554

      

1,379,285

      

-0.15

%

    

0.10

%

    

0.00

%

  
     

2015

              

0.75

%

    

1.00

%

    

13.03

      

13.54

      

127,091

      

1,661,558

      

7.74

%

    

8.01

%

    

0.00

%

  
     

2014

              

0.75

%

    

1.00

%

    

12.10

      

12.54

      

122,461

      

1,485,769

      

11.84

%

    

12.12

%

    

0.00

%

  
     

2013

              

0.75

%

    

1.00

%

    

10.82

      

11.18

      

140,737

      

1,525,730

      

32.40

%

    

32.73

%

    

0.03

%

  
     

2012

              

0.75

%

    

1.00

%

    

8.17

      

8.42

      

145,376

      

1,190,058

      

12.45

%

    

12.73

%

    

0.00

%

  

AB VPS Growth and Income Portfolio Class B

  
     

2013

              

0.00

%

    

0.00

%

    

—

      

—

      

—

      

—

      

0.00

%

    

0.00

%

    

1.18

%

  
     

2012

              

0.75

%

    

1.00

%

    

13.21

      

13.50

      

91,918

      

1,214,796

      

16.08

%

    

16.37

%

    

1.38

%

  

American Century VP Balanced Fund Class I

  
     

2016

              

0.75

%

    

1.00

%

    

42.74

      

44.65

      

315,713

      

13,545,258

      

5.93

%

    

6.19

%

    

1.46

%

  
     

2015

              

0.75

%

    

1.00

%

    

40.35

      

42.05

      

327,511

      

13,265,699

      

-3.54

%

    

-3.30

%

    

1.72

%

  
     

2014

              

0.75

%

    

1.00

%

    

41.83

      

43.48

      

382,815

      

16,070,495

      

8.76

%

    

9.03

%

    

1.52

%

  
     

2013

              

0.75

%

    

1.00

%

    

38.46

      

39.88

      

434,732

      

16,768,685

      

16.26

%

    

16.55

%

    

1.58

%

  
     

2012

              

0.75

%

    

1.00

%

    

33.08

      

34.22

      

483,889

      

16,049,324

      

10.69

%

    

10.97

%

    

2.06

%

  

American Century VP Inflation Protection Fund Class I

  
     

2013

              

0.00

%

    

0.00

%

    

—

      

—

      

—

      

—

      

0.00

%

    

0.00

%

    

0.54

%

  
     

2012

              

0.75

%

    

1.00

%

    

13.08

      

13.20

      

124,230

      

1,625,228

      

6.48

%

    

6.75

%

    

2.82

%

  

American Funds Global Growth Fund Class 2

  
     

2016

              

0.75

%

    

1.00

%

    

24.62

      

25.42

      

218,019

      

5,388,246

      

-0.38

%

    

-0.13

%

    

0.84

%

  
     

2015

              

0.75

%

    

1.00

%

    

24.72

      

25.45

      

229,813

      

5,699,030

      

5.87

%

    

6.14

%

    

1.01

%

  
     

2014

              

0.75

%

    

1.00

%

    

23.35

      

23.98

      

239,094

      

5,599,280

      

1.30

%

    

1.55

%

    

1.14

%

  
     

2013

              

0.75

%

    

1.00

%

    

23.05

      

23.61

      

259,684

      

6,000,890

      

27.89

%

    

28.21

%

    

1.26

%

  
     

2012

              

0.75

%

    

1.00

%

    

18.02

      

18.42

      

274,966

      

4,966,016

      

21.34

%

    

21.65

%

    

0.91

%

  

American Funds Growth Fund Class 2

  
     

2016

              

0.75

%

    

1.00

%

    

18.12

      

18.88

      

1,458,298

      

26,531,963

      

8.40

%

    

8.67

%

    

0.71

%

  
     

2015

              

0.75

%

    

1.00

%

    

16.72

      

17.37

      

1,566,846

      

26,293,002

      

5.79

%

    

6.06

%

    

0.60

%

  
     

2014

              

0.75

%

    

1.00

%

    

15.80

      

16.38

      

1,688,620

      

26,773,410

      

7.43

%

    

7.70

%

    

0.78

%

  
     

2013

              

0.75

%

    

1.00

%

    

14.71

      

15.21

      

1,845,206

      

27,219,661

      

28.81

%

    

29.13

%

    

0.93

%

  
     

2012

              

0.75

%

    

1.00

%

    

11.42

      

11.78

      

2,046,065

      

23,427,228

      

16.72

%

    

17.01

%

    

0.79

%

  

American Funds Growth-Income Fund Class 2

  
     

2016

              

0.75

%

    

1.00

%

    

21.84

      

22.54

      

568,668

      

12,443,140

      

10.41

%

    

10.69

%

    

1.37

%

  
     

2015

              

0.75

%

    

1.00

%

    

19.78

      

20.37

      

592,659

      

11,743,805

      

0.45

%

    

0.70

%

    

1.32

%

  
     

2014

              

0.75

%

    

1.00

%

    

19.70

      

20.22

      

602,195

      

11,877,200

      

9.53

%

    

9.81

%

    

1.32

%

  
     

2013

              

0.75

%

    

1.00

%

    

17.98

      

18.42

      

602,597

      

10,850,076

      

32.17

%

    

32.50

%

    

1.41

%

  
     

2012

              

0.75

%

    

1.00

%

    

13.60

      

13.90

      

582,370

      

7,932,965

      

16.31

%

    

16.60

%

    

1.63

%

  

American Funds International Fund Class 2

  
     

2016

              

0.75

%

    

1.00

%

    

14.68

      

15.29

      

594,190

      

8,740,565

      

2.50

%

    

2.76

%

    

1.26

%

  
     

2015

              

0.75

%

    

1.00

%

    

14.33

      

14.88

      

636,510

      

9,133,407

      

-5.48

%

    

-5.24

%

    

1.46

%

  
     

2014

              

0.75

%

    

1.00

%

    

15.16

      

15.71

      

709,340

      

10,765,065

      

-3.62

%

    

-3.38

%

    

1.34

%

  
     

2013

              

0.75

%

    

1.00

%

    

15.72

      

16.25

      

767,401

      

12,083,542

      

20.42

%

    

20.73

%

    

1.35

%

  
     

2012

              

0.75

%

    

1.00

%

    

13.06

      

13.46

      

868,210

      

11,350,715

      

16.73

%

    

17.03

%

    

1.42

%

  

BlackRock Global Allocation V.I. Fund Class I

  
     

2016

              

0.75

%

    

1.00

%

    

15.08

      

15.37

      

95,894

      

1,446,798

      

3.08

%

    

3.34

%

    

1.14

%

  
     

2015

              

0.75

%

    

1.00

%

    

14.63

      

14.87

      

104,709

      

1,532,499

      

-1.70

%

    

-1.45

%

    

1.13

%

  
     

2014

              

0.75

%

    

1.00

%

    

14.88

      

15.09

      

102,561

      

1,526,870

      

1.09

%

    

1.35

%

    

2.23

%

  
     

2013

              

0.75

%

    

1.00

%

    

14.72

      

14.89

      

106,183

      

1,563,568

      

13.62

%

    

13.90

%

    

1.26

%

  
     

2012

              

0.75

%

    

1.00

%

    

12.96

      

13.07

      

93,759

      

1,215,132

      

9.18

%

    

9.46

%

    

1.48

%

  


L-18


Lincoln National Variable Annuity Account L

Notes to financial statements (continued)

3. Financial Highlights (continued)

Subaccount

  

Year

   Commencement
Date(1)		   Minimum
Fee
Rate(2)		   Maximum
Fee
Rate(2)		   Minimum
Unit
Value(3)		   Maximum
Unit
Value(3)		   Units
Outstanding		  

Net Assets

   Minimum
Total
Return(4)		   Maximum
Total
Return(4)		   Investment
Income
Ratio(5)		  

Delaware VIP Diversified Income Series Standard Class

  
     

2016

              

0.75

%

    

1.00

%

  

$

17.84

    

$

18.41

      

263,775

    

$

4,710,551

      

2.49

%

    

2.75

%

    

3.12

%

  
     

2015

              

0.75

%

    

1.00

%

    

17.40

      

17.91

      

305,107

      

5,315,575

      

-2.07

%

    

-1.82

%

    

3.02

%

  
     

2014

              

0.75

%

    

1.00

%

    

17.77

      

18.25

      

323,001

      

5,744,785

      

4.27

%

    

4.53

%

    

2.26

%

  
     

2013

              

0.75

%

    

1.00

%

    

17.04

      

17.45

      

346,914

      

5,916,303

      

-2.24

%

    

-2.00

%

    

2.37

%

  
     

2012

              

0.75

%

    

1.00

%

    

17.43

      

17.81

      

404,524

      

7,056,169

      

6.13

%

    

6.39

%

    

3.09

%

  

Delaware VIP High Yield Series Standard Class

  
     

2016

              

0.75

%

    

1.00

%

    

19.24

      

19.81

      

112,364

      

2,165,692

      

12.04

%

    

12.32

%

    

6.56

%

  
     

2015

              

0.75

%

    

1.00

%

    

17.18

      

17.64

      

131,395

      

2,259,594

      

-7.53

%

    

-7.29

%

    

6.52

%

  
     

2014

              

0.75

%

    

1.00

%

    

18.57

      

19.02

      

152,142

      

2,829,067

      

-1.28

%

    

-1.03

%

    

6.53

%

  
     

2013

              

0.75

%

    

1.00

%

    

18.81

      

19.22

      

152,088

      

2,864,216

      

8.13

%

    

8.40

%

    

7.40

%

  
     

2012

              

0.75

%

    

1.00

%

    

17.40

      

17.73

      

176,736

      

3,077,698

      

16.65

%

    

16.94

%

    

8.56

%

  

Delaware VIP REIT Series Service Class

  
     

2016

              

0.75

%

    

1.00

%

    

40.73

      

42.42

      

304,963

      

12,446,688

      

4.56

%

    

4.83

%

    

0.95

%

  
     

2015

              

0.75

%

    

1.00

%

    

38.95

      

40.46

      

319,994

      

12,490,856

      

2.49

%

    

2.75

%

    

1.02

%

  
     

2014

              

0.75

%

    

1.00

%

    

38.00

      

39.38

      

354,974

      

13,509,561

      

27.84

%

    

28.16

%

    

1.11

%

  
     

2013

              

0.75

%

    

1.00

%

    

29.73

      

30.73

      

364,544

      

10,850,558

      

0.91

%

    

1.16

%

    

1.32

%

  
     

2012

              

0.75

%

    

1.00

%

    

29.46

      

30.38

      

392,488

      

11,576,227

      

15.45

%

    

15.74

%

    

1.30

%

  

Delaware VIP Small Cap Value Series Service Class

  
     

2016

              

0.75

%

    

1.00

%

    

29.64

      

30.59

      

328,415

      

9,753,563

      

29.78

%

    

30.11

%

    

0.66

%

  
     

2015

              

0.75

%

    

1.00

%

    

22.84

      

23.51

      

342,295

      

7,832,045

      

-7.39

%

    

-7.16

%

    

0.49

%

  
     

2014

              

0.75

%

    

1.00

%

    

24.66

      

25.33

      

400,294

      

9,887,517

      

4.57

%

    

4.83

%

    

0.33

%

  
     

2013

              

0.75

%

    

1.00

%

    

23.58

      

24.16

      

445,837

      

10,528,843

      

31.85

%

    

32.18

%

    

0.51

%

  
     

2012

              

0.75

%

    

1.00

%

    

17.89

      

18.28

      

450,097

      

8,060,937

      

12.50

%

    

12.79

%

    

0.35

%

  

Delaware VIP Smid Cap Growth Series Service Class

  
     

2016

              

0.75

%

    

1.00

%

    

19.13

      

19.92

      

275,984

      

5,288,718

      

6.94

%

    

7.21

%

    

0.00

%

  
     

2015

              

0.75

%

    

1.00

%

    

17.89

      

18.58

      

300,527

      

5,384,054

      

6.24

%

    

6.51

%

    

0.16

%

  
     

2014

              

0.75

%

    

1.00

%

    

16.84

      

17.44

      

309,856

      

5,224,630

      

1.85

%

    

2.10

%

    

0.00

%

  
     

2013

              

0.75

%

    

1.00

%

    

16.53

      

17.09

      

392,019

      

6,490,913

      

39.57

%

    

39.92

%

    

0.00

%

  
     

2012

              

0.75

%

    

1.00

%

    

11.84

      

12.21

      

363,549

      

4,312,965

      

9.61

%

    

9.88

%

    

0.01

%

  

Dreyfus VIF Opportunistic Small Cap Portfolio Initial Class

  
     

2012

              

0.75

%

    

1.00

%

    

23.82

      

24.64

      

1,016,901

      

24,277,228

      

19.36

%

    

19.66

%

    

0.00

%

  

Dreyfus VIF Stock Index Fund Initial Class

  
     

2013

              

0.00

%

    

0.00

%

    

—

      

—

      

—

      

—

      

0.00

%

    

0.00

%

    

0.45

%

  
     

2012

              

0.75

%

    

1.00

%

    

47.72

      

49.36

      

1,018,877

      

48,754,441

      

14.59

%

    

14.87

%

    

2.02

%

  

Deutsche Alternative Asset Allocation VIP Portfolio Class A

  
     

2016

              

0.75

%

    

1.00

%

    

12.96

      

13.20

      

17,766

      

230,194

      

4.25

%

    

4.51

%

    

2.03

%

  
     

2015

              

0.75

%

    

1.00

%

    

12.43

      

12.63

      

15,980

      

198,618

      

-7.23

%

    

-6.99

%

    

2.92

%

  
     

2014

              

0.75

%

    

1.00

%

    

13.40

      

13.58

      

16,747

      

224,367

      

2.47

%

    

2.73

%

    

1.75

%

  
     

2013

              

0.75

%

    

1.00

%

    

13.07

      

13.22

      

14,420

      

188,525

      

-0.07

%

    

0.18

%

    

1.81

%

  
     

2012

              

0.75

%

    

1.00

%

    

13.08

      

13.20

      

10,010

      

130,967

      

8.63

%

    

8.90

%

    

3.26

%

  

Deutsche Equity 500 Index VIP Portfolio Class A

  
     

2013

              

0.00

%

    

0.00

%

    

—

      

—

      

—

      

—

      

0.00

%

    

0.00

%

    

1.90

%

  
     

2012

              

0.75

%

    

1.00

%

    

14.00

      

14.30

      

125,401

      

1,756,809

      

14.55

%

    

14.83

%

    

2.09

%

  

Deutsche Small Cap Index VIP Portfolio Class A

  
     

2013

              

0.00

%

    

0.00

%

    

—

      

—

      

—

      

—

      

0.00

%

    

0.00

%

    

1.77

%

  
     

2012

              

0.75

%

    

1.00

%

    

15.31

      

15.65

      

130,153

      

1,997,201

      

15.09

%

    

15.38

%

    

0.88

%

  

Fidelity VIP Asset Manager Portfolio Initial Class

  
     

2016

              

0.75

%

    

1.00

%

    

42.77

      

44.69

      

743,480

      

31,871,934

      

2.05

%

    

2.30

%

    

1.32

%

  
     

2015

              

0.75

%

    

1.00

%

    

41.92

      

43.68

      

827,635

      

34,757,222

      

-0.85

%

    

-0.61

%

    

1.53

%

  
     

2014

              

0.75

%

    

1.00

%

    

42.28

      

43.95

      

923,700

      

39,121,218

      

4.78

%

    

5.04

%

    

1.46

%

  
     

2013

              

0.75

%

    

1.00

%

    

40.35

      

41.84

      

1,006,553

      

40,680,237

      

14.56

%

    

14.84

%

    

1.53

%

  
     

2012

              

0.75

%

    

1.00

%

    

35.22

      

36.43

      

1,117,038

      

39,405,183

      

11.36

%

    

11.64

%

    

1.52

%

  

Fidelity VIP Contrafund Portfolio Service Class 2

  
     

2016

              

0.75

%

    

1.00

%

    

23.16

      

24.12

      

908,140

      

21,068,336

      

6.66

%

    

6.93

%

    

0.56

%

  
     

2015

              

0.75

%

    

1.00

%

    

21.71

      

22.56

      

991,770

      

21,570,788

      

-0.58

%

    

-0.33

%

    

0.79

%

  
     

2014

              

0.75

%

    

1.00

%

    

21.84

      

22.63

      

1,050,549

      

22,983,179

      

10.54

%

    

10.82

%

    

0.73

%

  
     

2013

              

0.75

%

    

1.00

%

    

19.76

      

20.42

      

1,128,066

      

22,321,096

      

29.65

%

    

29.97

%

    

0.83

%

  
     

2012

              

0.75

%

    

1.00

%

    

15.24

      

15.71

      

1,205,276

      

18,394,701

      

14.99

%

    

15.27

%

    

1.13

%

  


L-19


Lincoln National Variable Annuity Account L

Notes to financial statements (continued)

3. Financial Highlights (continued)

Subaccount

  

Year

   Commencement
Date(1)		   Minimum
Fee
Rate(2)		   Maximum
Fee
Rate(2)		   Minimum
Unit
Value(3)		   Maximum
Unit
Value(3)		   Units
Outstanding		  

Net Assets

   Minimum
Total
Return(4)		   Maximum
Total
Return(4)		   Investment
Income
Ratio(5)		  

Fidelity VIP Equity-Income Portfolio Initial Class

  
     

2012

              

0.75

%

    

1.00

%

  

$

33.42

    

$

34.57

      

1,160,289

    

$

38,900,117

      

16.14

%

    

16.43

%

    

3.06

%

  

Fidelity VIP Government Money Market Portfolio Initial Class

  
     

2016

              

0.00

%

    

0.00

%

    

18.05

      

18.08

      

3,786

      

68,351

      

0.20

%

    

0.20

%

    

0.19

%

  
     

2015

              

0.00

%

    

0.00

%

    

18.02

      

18.04

      

1,941

      

34,965

      

0.02

%

    

0.03

%

    

0.02

%

  
     

2014

              

0.00

%

    

0.00

%

    

18.01

      

18.04

      

548

      

9,873

      

0.01

%

    

0.01

%

    

0.01

%

  
     

2013

              

0.00

%

    

0.00

%

    

18.01

      

18.04

      

450

      

8,104

      

0.03

%

    

0.03

%

    

0.03

%

  
     

2012

              

0.00

%

    

0.00

%

    

18.00

      

18.03

      

449

      

8,090

      

0.12

%

    

0.14

%

    

0.14

%

  

Fidelity VIP Growth Portfolio Initial Class

  
     

2016

              

0.75

%

    

1.00

%

    

71.92

      

75.13

      

965,781

      

69,659,103

      

-0.20

%

    

0.05

%

    

0.03

%

  
     

2015

              

0.75

%

    

1.00

%

    

72.06

      

75.10

      

1,063,302

      

76,830,690

      

6.11

%

    

6.37

%

    

0.25

%

  
     

2014

              

0.75

%

    

1.00

%

    

67.91

      

70.60

      

1,167,218

      

79,461,794

      

10.19

%

    

10.47

%

    

0.18

%

  
     

2013

              

0.75

%

    

1.00

%

    

61.63

      

63.91

      

1,263,909

      

78,065,251

      

34.98

%

    

35.32

%

    

0.28

%

  
     

2012

              

0.75

%

    

1.00

%

    

45.66

      

47.23

      

1,415,464

      

64,761,253

      

13.55

%

    

13.83

%

    

0.59

%

  

Janus Aspen Global Research Portfolio Institutional Shares

  
     

2016

              

0.75

%

    

1.00

%

    

18.79

      

19.63

      

428,756

      

8,090,071

      

1.05

%

    

1.30

%

    

0.99

%

  
     

2015

              

0.75

%

    

1.00

%

    

18.60

      

19.38

      

474,214

      

8,850,052

      

-3.26

%

    

-3.02

%

    

0.65

%

  
     

2014

              

0.75

%

    

1.00

%

    

19.22

      

19.98

      

506,118

      

9,760,515

      

6.37

%

    

6.64

%

    

1.07

%

  
     

2013

              

0.75

%

    

1.00

%

    

18.07

      

18.74

      

549,580

      

9,962,894

      

27.15

%

    

27.47

%

    

1.21

%

  
     

2012

              

0.75

%

    

1.00

%

    

14.21

      

14.70

      

620,209

      

8,840,691

      

18.89

%

    

19.18

%

    

0.87

%

  

LVIP Baron Growth Opportunities Fund Service Class

  
     

2016

              

0.75

%

    

1.00

%

    

54.85

      

57.31

      

250,256

      

13,770,178

      

4.52

%

    

4.78

%

    

0.45

%

  
     

2015

              

0.75

%

    

1.00

%

    

52.48

      

54.70

      

278,447

      

14,652,966

      

-5.72

%

    

-5.48

%

    

0.00

%

  
     

2014

              

0.75

%

    

1.00

%

    

55.66

      

57.87

      

306,639

      

17,112,866

      

3.81

%

    

4.07

%

    

0.18

%

  
     

2013

              

0.75

%

    

1.00

%

    

53.62

      

55.60

      

351,269

      

18,887,194

      

38.67

%

    

39.02

%

    

0.43

%

  
     

2012

              

0.75

%

    

1.00

%

    

38.67

      

40.00

      

362,634

      

14,060,367

      

17.07

%

    

17.36

%

    

1.14

%

  

LVIP BlackRock Emerging Markets Managed Volatility Fund Standard Class

  
     

2016

              

0.00

%

    

0.00

%

    

—

      

—

      

—

      

—

      

0.00

%

    

0.00

%

    

5.21

%

  
     

2015

              

0.75

%

    

1.00

%

    

7.83

      

7.83

      

3,254

      

25,469

      

-15.86

%

    

-15.86

%

    

1.75

%

  
     

2014

    

5/27/14

    

1.00

%

    

1.00

%

    

9.30

      

9.30

      

2,549

      

23,703

      

-8.29

%

    

-8.29

%

    

1.60

%

  

LVIP BlackRock Inflation Protected Bond Fund Standard Class

  
     

2016

              

0.75

%

    

1.00

%

    

9.38

      

9.49

      

80,502

      

755,992

      

2.56

%

    

2.82

%

    

1.23

%

  
     

2015

              

0.69

%

    

0.94

%

    

9.15

      

9.23

      

77,644

      

710,885

      

-3.73

%

    

-3.49

%

    

1.14

%

  
     

2014

              

0.69

%

    

0.94

%

    

9.51

      

9.57

      

88,703

      

843,424

      

2.10

%

    

2.36

%

    

1.42

%

  
     

2013

              

0.69

%

    

0.94

%

    

9.31

      

9.31

      

102,316

      

952,551

      

-9.25

%

    

-9.25

%

    

0.95

%

  
     

2012

    

5/17/12

    

1.00

%

    

1.00

%

    

10.26

      

10.26

      

6,748

      

69,225

      

2.22

%

    

2.22

%

    

0.00

%

  

LVIP Blended Large Cap Growth Managed Volatility Fund Standard Class

  
     

2016

              

0.75

%

    

1.00

%

    

9.67

      

10.07

      

130,333

      

1,265,216

      

-2.29

%

    

-2.05

%

    

0.40

%

  
     

2015

              

0.75

%

    

1.00

%

    

9.89

      

10.28

      

159,858

      

1,586,727

      

0.33

%

    

0.58

%

    

0.00

%

  
     

2014

              

0.75

%

    

1.00

%

    

9.86

      

10.22

      

173,436

      

1,714,917

      

4.30

%

    

4.56

%

    

0.00

%

  
     

2013

              

0.75

%

    

1.00

%

    

9.46

      

9.77

      

179,209

      

1,698,511

      

24.25

%

    

24.56

%

    

0.00

%

  
     

2012

              

0.75

%

    

1.00

%

    

7.61

      

7.85

      

199,348

      

1,521,247

      

15.23

%

    

15.52

%

    

0.00

%

  

LVIP Blended Mid Cap Managed Volatility Fund Standard Class

  
     

2016

              

0.75

%

    

1.00

%

    

9.74

      

9.81

      

2,177

      

21,233

      

1.24

%

    

1.48

%

    

0.00

%

  
     

2015

              

0.75

%

    

1.00

%

    

9.62

      

9.62

      

2,394

      

23,053

      

-5.15

%

    

-5.15

%

    

0.00

%

  
     

2014

    

6/17/14

    

1.00

%

    

1.00

%

    

10.15

      

10.15

      

40

      

410

      

-0.06

%

    

-0.06

%

    

0.00

%

  

LVIP Clarion Global Real Estate Fund Standard Class

  
     

2016

              

0.75

%

    

1.00

%

    

9.53

      

9.77

      

72,541

      

693,843

      

0.18

%

    

0.43

%

    

4.20

%

  
     

2015

              

0.75

%

    

1.00

%

    

9.52

      

9.72

      

63,079

      

601,774

      

-2.21

%

    

-1.96

%

    

3.03

%

  
     

2014

              

0.75

%

    

1.00

%

    

9.73

      

9.92

      

61,557

      

600,333

      

12.76

%

    

13.04

%

    

2.79

%

  
     

2013

              

0.75

%

    

1.00

%

    

8.63

      

8.77

      

76,485

      

661,014

      

2.28

%

    

2.53

%

    

0.00

%

  
     

2012

              

0.75

%

    

1.00

%

    

8.44

      

8.56

      

73,829

      

623,618

      

23.44

%

    

23.75

%

    

0.00

%

  

LVIP Delaware Bond Fund Standard Class

  
     

2016

              

0.75

%

    

1.00

%

    

16.27

      

16.79

      

238,942

      

3,893,446

      

1.70

%

    

1.96

%

    

2.26

%

  
     

2015

              

0.75

%

    

1.00

%

    

16.00

      

16.47

      

271,002

      

4,340,416

      

-0.61

%

    

-0.36

%

    

2.25

%

  
     

2014

              

0.75

%

    

1.00

%

    

16.10

      

16.53

      

314,538

      

5,067,417

      

4.92

%

    

5.18

%

    

1.97

%

  
     

2013

              

0.75

%

    

1.00

%

    

15.34

      

15.71

      

374,119

      

5,746,772

      

-3.28

%

    

-3.04

%

    

1.56

%

  
     

2012

              

0.75

%

    

1.00

%

    

15.86

      

16.21

      

498,292

      

7,912,925

      

5.55

%

    

5.81

%

    

2.00

%

  


L-20


Lincoln National Variable Annuity Account L

Notes to financial statements (continued)

3. Financial Highlights (continued)

Subaccount

  

Year

   Commencement
Date(1)		   Minimum
Fee
Rate(2)		   Maximum
Fee
Rate(2)		   Minimum
Unit
Value(3)		   Maximum
Unit
Value(3)		   Units
Outstanding		  

Net Assets

   Minimum
Total
Return(4)		   Maximum
Total
Return(4)		   Investment
Income
Ratio(5)		  

LVIP Delaware Diversified Floating Rate Fund Service Class

  
     

2016

              

0.75

%

    

1.00

%

  

$

9.84

    

$

9.99

      

20,628

    

$

202,946

      

0.99

%

    

1.40

%

    

0.00

%

  
     

2015

              

0.75

%

    

1.00

%

    

9.74

      

9.74

      

20,149

      

196,284

      

-1.96

%

    

-1.96

%

    

1.17

%

  
     

2014

              

1.00

%

    

1.00

%

    

9.94

      

9.94

      

74,690

      

742,087

      

-0.63

%

    

-0.63

%

    

2.53

%

  
     

2013

              

1.00

%

    

1.00

%

    

10.00

      

10.00

      

12,862

      

128,606

      

-0.50

%

    

-0.50

%

    

0.90

%

  
     

2012

              

1.00

%

    

1.00

%

    

10.05

      

10.05

      

2,511

      

25,234

      

2.93

%

    

2.93

%

    

1.35

%

  

LVIP Delaware Foundation Aggressive Allocation Fund Standard Class

  
     

2016

              

1.00

%

    

1.00

%

    

18.25

      

18.25

      

22,324

      

407,323

      

4.57

%

    

4.57

%

    

1.80

%

  
     

2015

              

1.00

%

    

1.00

%

    

17.45

      

17.45

      

19,011

      

331,712

      

-2.31

%

    

-2.31

%

    

1.91

%

  
     

2014

              

1.00

%

    

1.00

%

    

17.86

      

17.86

      

15,807

      

282,347

      

3.30

%

    

3.30

%

    

2.49

%

  
     

2013

              

1.00

%

    

1.00

%

    

17.29

      

17.29

      

13,400

      

231,692

      

19.04

%

    

19.04

%

    

1.72

%

  
     

2012

              

1.00

%

    

1.00

%

    

14.52

      

14.52

      

10,788

      

156,687

      

12.16

%

    

12.16

%

    

2.07

%

  

LVIP Delaware Foundation Conservative Allocation Fund Standard Class

  
     

2016

              

0.75

%

    

1.00

%

    

15.74

      

16.24

      

75,190

      

1,192,016

      

3.67

%

    

3.93

%

    

2.32

%

  
     

2015

              

0.75

%

    

1.00

%

    

15.18

      

15.63

      

78,946

      

1,206,062

      

-1.93

%

    

-1.68

%

    

2.70

%

  
     

2014

              

0.75

%

    

1.00

%

    

15.48

      

15.90

      

84,283

      

1,312,086

      

3.83

%

    

4.09

%

    

2.70

%

  
     

2013

              

0.75

%

    

1.00

%

    

14.91

      

15.27

      

82,482

      

1,235,729

      

8.25

%

    

8.52

%

    

2.22

%

  
     

2012

              

0.75

%

    

1.00

%

    

13.77

      

14.07

      

81,986

      

1,134,046

      

9.53

%

    

9.81

%

    

2.41

%

  

LVIP Delaware Foundation Moderate Allocation Fund Standard Class

  
     

2016

              

0.75

%

    

1.00

%

    

16.86

      

17.16

      

17,993

      

303,308

      

3.61

%

    

3.87

%

    

1.73

%

  
     

2015

              

0.75

%

    

1.00

%

    

16.27

      

16.53

      

18,412

      

299,759

      

-2.13

%

    

-1.89

%

    

1.48

%

  
     

2014

              

0.75

%

    

1.00

%

    

16.62

      

16.84

      

32,432

      

539,318

      

3.59

%

    

3.85

%

    

2.03

%

  
     

2013

              

0.75

%

    

1.00

%

    

16.05

      

16.22

      

31,435

      

504,590

      

13.10

%

    

13.40

%

    

2.33

%

  
     

2012

              

0.75

%

    

1.00

%

    

14.19

      

14.30

      

21,793

      

309,208

      

10.20

%

    

10.42

%

    

2.62

%

  

LVIP Delaware Social Awareness Fund Standard Class

  
     

2016

              

0.75

%

    

1.00

%

    

28.03

      

29.28

      

517,239

      

14,543,103

      

5.58

%

    

5.84

%

    

1.42

%

  
     

2015

              

0.75

%

    

1.00

%

    

26.55

      

27.67

      

566,033

      

15,071,433

      

-1.65

%

    

-1.40

%

    

1.46

%

  
     

2014

              

0.75

%

    

1.00

%

    

27.00

      

28.06

      

594,059

      

16,083,660

      

14.05

%

    

14.34

%

    

1.53

%

  
     

2013

              

0.75

%

    

1.00

%

    

23.67

      

24.54

      

647,268

      

15,361,248

      

34.34

%

    

34.68

%

    

1.26

%

  
     

2012

              

0.75

%

    

1.00

%

    

17.62

      

18.22

      

703,524

      

12,425,870

      

14.14

%

    

14.42

%

    

0.75

%

  

LVIP Dimensional U.S. Core Equity 1 Fund Standard Class

  
     

2016

              

0.75

%

    

1.00

%

    

17.41

      

18.14

      

304,680

      

5,322,325

      

13.27

%

    

13.55

%

    

1.52

%

  
     

2015

              

0.75

%

    

1.00

%

    

15.37

      

15.97

      

337,969

      

5,211,826

      

-2.98

%

    

-2.74

%

    

1.59

%

  
     

2014

              

0.75

%

    

1.00

%

    

15.84

      

16.42

      

356,541

      

5,665,734

      

12.05

%

    

12.33

%

    

2.05

%

  
     

2013

              

0.75

%

    

1.00

%

    

14.14

      

14.62

      

349,480

      

4,954,347

      

31.93

%

    

32.26

%

    

1.79

%

  
     

2012

              

0.75

%

    

1.00

%

    

10.72

      

11.05

      

354,280

      

3,805,702

      

14.17

%

    

14.46

%

    

1.07

%

  

LVIP Franklin Templeton Global Equity Managed Volatility Fund Standard Class

  
     

2016

              

0.75

%

    

1.00

%

    

8.77

      

8.77

      

5,483

      

48,081

      

1.40

%

    

1.40

%

    

1.73

%

  
     

2015

              

1.00

%

    

1.00

%

    

8.65

      

8.65

      

3,433

      

29,685

      

-8.94

%

    

-8.94

%

    

1.59

%

  
     

2014

    

6/26/14

    

1.00

%

    

1.00

%

    

9.50

      

9.50

      

2,528

      

24,004

      

-6.78

%

    

-6.78

%

    

2.35

%

  

LVIP Global Conservative Allocation Managed Risk Fund Standard Class

  
     

2016

              

0.75

%

    

1.00

%

    

16.63

      

17.12

      

75,021

      

1,249,003

      

3.98

%

    

4.24

%

    

1.95

%

  
     

2015

              

0.75

%

    

1.00

%

    

16.00

      

16.43

      

83,903

      

1,343,203

      

-2.97

%

    

-2.73

%

    

1.84

%

  
     

2014

              

0.75

%

    

1.00

%

    

16.49

      

16.89

      

112,782

      

1,860,347

      

4.65

%

    

4.91

%

    

1.91

%

  
     

2013

              

0.75

%

    

1.00

%

    

15.76

      

16.10

      

126,229

      

1,989,465

      

8.66

%

    

8.93

%

    

1.72

%

  
     

2012

              

0.75

%

    

1.00

%

    

14.50

      

14.78

      

156,741

      

2,273,449

      

8.68

%

    

8.96

%

    

3.87

%

  

LVIP Global Growth Allocation Managed Risk Fund Standard Class

  
     

2016

              

0.75

%

    

1.00

%

    

15.05

      

15.49

      

271,306

      

4,088,600

      

3.71

%

    

3.97

%

    

1.66

%

  
     

2015

              

0.75

%

    

1.00

%

    

14.51

      

14.90

      

319,676

      

4,644,203

      

-4.65

%

    

-4.41

%

    

1.86

%

  
     

2014

              

0.75

%

    

1.00

%

    

15.22

      

15.59

      

360,047

      

5,484,539

      

2.44

%

    

2.70

%

    

1.93

%

  
     

2013

              

0.75

%

    

1.00

%

    

14.86

      

15.18

      

393,939

      

5,857,083

      

12.42

%

    

12.70

%

    

1.77

%

  
     

2012

              

0.75

%

    

1.00

%

    

13.22

      

13.47

      

391,875

      

5,182,561

      

8.06

%

    

8.33

%

    

2.50

%

  

LVIP Global Income Fund Standard Class

  
     

2016

              

0.75

%

    

1.00

%

    

11.73

      

11.96

      

27,092

      

318,100

      

-0.49

%

    

-0.25

%

    

0.00

%

  
     

2015

              

0.75

%

    

1.00

%

    

11.79

      

11.79

      

29,623

      

349,496

      

-3.00

%

    

-3.00

%

    

3.24

%

  
     

2014

              

1.00

%

    

1.00

%

    

12.16

      

12.16

      

25,356

      

308,252

      

0.93

%

    

0.93

%

    

0.66

%

  
     

2013

              

1.00

%

    

1.00

%

    

12.05

      

12.05

      

21,720

      

261,626

      

-3.79

%

    

-3.79

%

    

0.26

%

  
     

2012

              

1.00

%

    

1.00

%

    

12.52

      

12.52

      

19,785

      

247,696

      

6.62

%

    

6.62

%

    

1.90

%

  


L-21


Lincoln National Variable Annuity Account L

Notes to financial statements (continued)

3. Financial Highlights (continued)

Subaccount

  

Year

   Commencement
Date(1)		   Minimum
Fee
Rate(2)		   Maximum
Fee
Rate(2)		   Minimum
Unit
Value(3)		   Maximum
Unit
Value(3)		   Units
Outstanding		  

Net Assets

   Minimum
Total
Return(4)		   Maximum
Total
Return(4)		   Investment
Income
Ratio(5)		  

LVIP Global Moderate Allocation Managed Risk Fund Standard Class

  
     

2016

              

0.05

%

    

1.00

%

  

$

10.56

    

$

16.28

      

1,630,771

    

$

18,774,053

      

3.30

%

    

4.29

%

    

1.85

%

  
     

2015

              

0.05

%

    

1.00

%

    

10.19

      

15.72

      

1,446,630

      

16,239,060

      

-4.34

%

    

-3.42

%

    

2.58

%

  
     

2014

              

0.05

%

    

1.00

%

    

16.00

      

16.39

      

525,926

      

7,327,663

      

3.11

%

    

3.37

%

    

2.45

%

  
     

2013

              

0.75

%

    

1.00

%

    

15.52

      

15.85

      

358,649

      

5,571,552

      

10.74

%

    

11.02

%

    

1.79

%

  
     

2012

              

0.75

%

    

1.00

%

    

14.01

      

14.28

      

357,635

      

5,016,147

      

8.50

%

    

8.77

%

    

3.29

%

  

LVIP JPMorgan Select Mid Cap Value Managed Volatility Fund Standard Class

  
     

2016

              

0.75

%

    

1.00

%

    

10.46

      

10.53

      

17,667

      

184,878

      

8.92

%

    

9.18

%

    

0.47

%

  
     

2015

              

0.75

%

    

1.00

%

    

9.61

      

9.61

      

26,076

      

250,511

      

-8.66

%

    

-8.66

%

    

0.83

%

  
     

2014

    

5/30/14

    

1.00

%

    

1.00

%

    

10.52

      

10.52

      

15,561

      

163,647

      

4.79

%

    

4.79

%

    

1.15

%

  

LVIP Managed Risk Profile 2010 Fund Standard Class

  
     

2016

              

1.00

%

    

1.00

%

    

13.04

      

13.04

      

34,374

      

448,270

      

3.40

%

    

3.40

%

    

1.71

%

  
     

2015

              

1.00

%

    

1.00

%

    

12.61

      

12.61

      

44,587

      

562,353

      

-2.59

%

    

-2.59

%

    

1.93

%

  
     

2014

              

0.75

%

    

1.00

%

    

12.95

      

13.20

      

42,849

      

554,795

      

3.74

%

    

4.00

%

    

1.79

%

  
     

2013

              

0.75

%

    

1.00

%

    

12.48

      

12.69

      

66,071

      

824,648

      

7.84

%

    

8.11

%

    

1.34

%

  
     

2012

              

0.75

%

    

1.00

%

    

11.57

      

11.74

      

65,720

      

760,605

      

7.46

%

    

7.73

%

    

2.39

%

  

LVIP Managed Risk Profile 2020 Fund Standard Class

  
     

2016

              

0.75

%

    

1.00

%

    

12.51

      

12.82

      

159,040

      

1,992,170

      

3.41

%

    

3.67

%

    

1.60

%

  
     

2015

              

0.75

%

    

1.00

%

    

12.10

      

12.36

      

204,519

      

2,476,908

      

-3.18

%

    

-2.94

%

    

1.91

%

  
     

2014

              

0.75

%

    

1.00

%

    

12.50

      

12.74

      

180,840

      

2,261,930

      

3.35

%

    

3.61

%

    

1.86

%

  
     

2013

              

0.75

%

    

1.00

%

    

12.09

      

12.29

      

181,807

      

2,199,903

      

10.03

%

    

10.30

%

    

1.28

%

  
     

2012

              

0.75

%

    

1.00

%

    

10.99

      

11.14

      

194,273

      

2,136,241

      

7.30

%

    

7.57

%

    

2.06

%

  

LVIP Managed Risk Profile 2030 Fund Standard Class

  
     

2016

              

0.75

%

    

1.00

%

    

12.21

      

12.51

      

374,363

      

4,573,267

      

2.68

%

    

2.94

%

    

1.86

%

  
     

2015

              

0.75

%

    

1.00

%

    

11.89

      

12.15

      

354,950

      

4,222,544

      

-3.63

%

    

-3.39

%

    

1.77

%

  
     

2014

              

0.75

%

    

1.00

%

    

12.34

      

12.58

      

360,949

      

4,455,329

      

3.12

%

    

3.38

%

    

2.22

%

  
     

2013

              

0.75

%

    

1.00

%

    

11.96

      

12.16

      

312,189

      

3,735,879

      

12.61

%

    

12.90

%

    

1.38

%

  
     

2012

              

0.75

%

    

1.00

%

    

10.62

      

10.78

      

278,616

      

2,960,652

      

6.82

%

    

7.09

%

    

1.90

%

  

LVIP Managed Risk Profile 2040 Fund Standard Class

  
     

2016

              

0.75

%

    

1.00

%

    

11.51

      

11.79

      

147,627

      

1,699,884

      

2.78

%

    

3.04

%

    

1.83

%

  
     

2015

              

0.75

%

    

1.00

%

    

11.20

      

11.45

      

143,308

      

1,605,682

      

-4.19

%

    

-3.95

%

    

1.69

%

  
     

2014

              

0.75

%

    

1.00

%

    

11.69

      

11.92

      

148,817

      

1,740,247

      

2.45

%

    

2.71

%

    

2.29

%

  
     

2013

              

0.75

%

    

1.00

%

    

11.41

      

11.60

      

140,076

      

1,599,006

      

15.38

%

    

15.66

%

    

1.37

%

  
     

2012

              

0.75

%

    

1.00

%

    

9.89

      

10.03

      

124,354

      

1,230,346

      

6.06

%

    

6.32

%

    

1.84

%

  

LVIP Managed Risk Profile 2050 Fund Standard Class

  
     

2016

              

1.00

%

    

1.00

%

    

11.44

      

11.44

      

55,235

      

631,833

      

3.38

%

    

3.38

%

    

2.06

%

  
     

2015

              

1.00

%

    

1.00

%

    

11.07

      

11.07

      

38,835

      

429,730

      

-4.70

%

    

-4.70

%

    

2.00

%

  
     

2014

              

1.00

%

    

1.00

%

    

11.61

      

11.61

      

26,779

      

310,945

      

1.92

%

    

1.92

%

    

2.68

%

  
     

2013

              

1.00

%

    

1.00

%

    

11.39

      

11.39

      

12,580

      

143,326

      

17.85

%

    

17.85

%

    

2.47

%

  
     

2012

              

1.00

%

    

1.00

%

    

9.67

      

9.67

      

2,647

      

25,589

      

4.93

%

    

4.93

%

    

0.30

%

  

LVIP Mondrian International Value Fund Standard Class

  
     

2016

              

0.75

%

    

1.00

%

    

17.41

      

17.96

      

162,608

      

2,847,099

      

2.98

%

    

3.23

%

    

2.64

%

  
     

2015

              

0.75

%

    

1.00

%

    

16.90

      

17.40

      

188,498

      

3,200,059

      

-4.75

%

    

-4.51

%

    

2.83

%

  
     

2014

              

0.75

%

    

1.00

%

    

17.75

      

18.22

      

206,128

      

3,671,267

      

-3.51

%

    

-3.27

%

    

3.81

%

  
     

2013

              

0.75

%

    

1.00

%

    

18.39

      

18.84

      

223,032

      

4,114,403

      

20.63

%

    

20.93

%

    

2.43

%

  
     

2012

              

0.75

%

    

1.00

%

    

15.25

      

15.58

      

246,515

      

3,768,229

      

8.53

%

    

8.80

%

    

2.77

%

  

LVIP SSGA Bond Index Fund Standard Class

  
     

2016

              

0.75

%

    

1.00

%

    

12.09

      

12.32

      

48,947

      

591,820

      

1.26

%

    

1.51

%

    

2.08

%

  
     

2015

              

0.75

%

    

1.00

%

    

11.94

      

12.14

      

49,584

      

592,055

      

-0.75

%

    

-0.50

%

    

2.54

%

  
     

2014

              

0.75

%

    

1.00

%

    

12.03

      

12.03

      

48,811

      

587,200

      

4.70

%

    

4.70

%

    

1.93

%

  
     

2013

              

1.00

%

    

1.00

%

    

11.49

      

11.49

      

53,003

      

608,997

      

-3.54

%

    

-3.54

%

    

2.00

%

  
     

2012

              

0.75

%

    

1.00

%

    

11.91

      

12.02

      

59,085

      

704,258

      

2.82

%

    

3.08

%

    

2.74

%

  

LVIP SSGA Emerging Markets 100 Fund Standard Class

  
     

2016

              

0.75

%

    

1.00

%

    

14.00

      

14.27

      

71,846

      

1,007,266

      

14.29

%

    

14.57

%

    

2.50

%

  
     

2015

              

0.75

%

    

1.00

%

    

12.25

      

12.45

      

79,159

      

970,656

      

-17.87

%

    

-17.66

%

    

4.25

%

  
     

2014

              

0.75

%

    

1.00

%

    

14.92

      

15.12

      

76,682

      

1,144,576

      

-4.33

%

    

-4.09

%

    

2.98

%

  
     

2013

              

0.75

%

    

1.00

%

    

15.59

      

15.77

      

74,944

      

1,168,805

      

-3.80

%

    

-3.55

%

    

2.35

%

  
     

2012

              

0.75

%

    

1.00

%

    

16.21

      

16.35

      

77,620

      

1,258,209

      

11.53

%

    

11.81

%

    

2.61

%

  


L-22


Lincoln National Variable Annuity Account L

Notes to financial statements (continued)

3. Financial Highlights (continued)

Subaccount

  

Year

   Commencement
Date(1)		   Minimum
Fee
Rate(2)		   Maximum
Fee
Rate(2)		   Minimum
Unit
Value(3)		   Maximum
Unit
Value(3)		   Units
Outstanding		  

Net Assets

   Minimum
Total
Return(4)		   Maximum
Total
Return(4)		   Investment
Income
Ratio(5)		  

LVIP SSGA Global Tactical Allocation Managed Volatility Fund Standard Class

  
     

2016

              

0.75

%

    

1.00

%

  

$

13.48

    

$

13.88

      

115,459

    

$

1,558,913

      

4.57

%

    

4.84

%

    

1.78

%

  
     

2015

              

0.75

%

    

1.00

%

    

12.89

      

13.24

      

125,993

      

1,626,464

      

-7.45

%

    

-7.22

%

    

2.95

%

  
     

2014

              

0.75

%

    

1.00

%

    

13.93

      

14.27

      

136,392

      

1,901,995

      

2.94

%

    

3.20

%

    

2.23

%

  
     

2013

              

0.75

%

    

1.00

%

    

13.53

      

13.83

      

141,990

      

1,923,158

      

8.72

%

    

8.99

%

    

2.04

%

  
     

2012

              

0.75

%

    

1.00

%

    

12.45

      

12.69

      

149,416

      

1,861,171

      

10.04

%

    

10.32

%

    

3.40

%

  

LVIP SSGA International Index Fund Standard Class

  
     

2016

              

0.75

%

    

1.00

%

    

14.23

      

14.50

      

14,300

      

203,433

      

-0.01

%

    

0.24

%

    

2.81

%

  
     

2015

              

0.75

%

    

1.00

%

    

14.23

      

14.47

      

14,173

      

201,693

      

-2.20

%

    

-1.96

%

    

2.56

%

  
     

2014

              

0.75

%

    

1.00

%

    

14.55

      

14.76

      

12,430

      

180,858

      

-6.78

%

    

-6.51

%

    

2.92

%

  
     

2013

              

0.75

%

    

1.00

%

    

15.60

      

15.78

      

9,619

      

150,109

      

19.78

%

    

20.08

%

    

1.82

%

  
     

2012

              

0.75

%

    

1.00

%

    

13.03

      

13.15

      

8,001

      

104,237

      

16.95

%

    

17.26

%

    

1.86

%

  

LVIP SSGA International Managed Volatility Fund Standard Class

  
     

2016

    

12/9/16

    

0.75

%

    

1.00

%

    

10.15

      

10.15

      

3,998

      

40,571

      

-0.43

%

    

-0.42

%

    

1.00

%

  

LVIP SSGA S&P 500 Index Fund Standard Class

  
     

2016

              

0.75

%

    

1.00

%

    

17.45

      

17.65

      

5,938,000

      

103,721,849

      

10.65

%

    

10.92

%

    

1.85

%

  
     

2015

              

0.75

%

    

1.00

%

    

15.77

      

15.91

      

6,410,542

      

101,174,438

      

0.17

%

    

0.42

%

    

1.84

%

  
     

2014

              

0.75

%

    

1.00

%

    

15.74

      

15.85

      

7,132,300

      

112,348,626

      

12.30

%

    

12.58

%

    

1.87

%

  
     

2013

              

0.75

%

    

1.00

%

    

14.02

      

14.02

      

7,910,666

      

110,935,745

      

30.69

%

    

30.69

%

    

2.38

%

  
     

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 Fund Standard Class

  
     

2016

              

0.75

%

    

1.00

%

    

17.42

      

17.62

      

1,593,485

      

27,777,094

      

19.48

%

    

19.78

%

    

1.28

%

  
     

2015

              

0.75

%

    

1.00

%

    

14.58

      

14.71

      

1,762,892

      

25,715,728

      

-5.66

%

    

-5.43

%

    

0.89

%

  
     

2014

              

0.75

%

    

1.00

%

    

15.45

      

15.55

      

1,980,246

      

30,614,796

      

3.63

%

    

3.89

%

    

0.82

%

  
     

2013

              

0.75

%

    

1.00

%

    

14.91

      

14.91

      

2,215,500

      

33,044,692

      

36.53

%

    

36.53

%

    

1.21

%

  
     

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 Fund Standard Class

  
     

2016

              

0.75

%

    

1.00

%

    

27.38

      

28.60

      

636,474

      

17,479,698

      

6.49

%

    

6.75

%

    

0.27

%

  
     

2015

              

0.75

%

    

1.00

%

    

25.71

      

26.79

      

718,249

      

18,515,932

      

1.09

%

    

1.34

%

    

0.12

%

  
     

2014

              

0.75

%

    

1.00

%

    

25.43

      

26.44

      

774,185

      

19,742,185

      

10.48

%

    

10.75

%

    

0.23

%

  
     

2013

              

0.75

%

    

1.00

%

    

23.02

      

23.87

      

856,195

      

19,754,536

      

33.45

%

    

33.79

%

    

0.00

%

  
     

2012

              

0.75

%

    

1.00

%

    

17.25

      

17.84

      

904,684

      

15,640,591

      

15.15

%

    

15.43

%

    

0.00

%

  

Neuberger Berman AMT Large Cap Value Portfolio I Class

  
     

2016

              

0.75

%

    

1.00

%

    

26.43

      

27.61

      

208,670

      

5,530,042

      

26.10

%

    

26.41

%

    

0.73

%

  
     

2015

              

0.75

%

    

1.00

%

    

20.96

      

21.84

      

207,472

      

4,359,911

      

-12.68

%

    

-12.46

%

    

0.74

%

  
     

2014

              

0.75

%

    

1.00

%

    

24.00

      

24.95

      

228,024

      

5,487,288

      

8.76

%

    

9.03

%

    

0.75

%

  
     

2013

              

0.75

%

    

1.00

%

    

22.07

      

22.88

      

243,292

      

5,382,437

      

29.83

%

    

30.16

%

    

1.17

%

  
     

2012

              

0.75

%

    

1.00

%

    

17.00

      

17.58

      

253,438

      

4,318,915

      

15.44

%

    

15.73

%

    

0.41

%

  

Neuberger Berman AMT Mid Cap Growth Portfolio I Class

  
     

2012

              

0.75

%

    

1.00

%

    

9.38

      

9.67

      

702,641

      

6,598,276

      

11.30

%

    

11.57

%

    

0.00

%

  

T. Rowe Price International Stock Portfolio

  
     

2016

              

0.75

%

    

1.00

%

    

20.37

      

21.28

      

413,387

      

8,441,756

      

1.11

%

    

1.36

%

    

0.95

%

  
     

2015

              

0.75

%

    

1.00

%

    

20.15

      

20.99

      

469,356

      

9,479,699

      

-1.89

%

    

-1.64

%

    

0.90

%

  
     

2014

              

0.75

%

    

1.00

%

    

20.53

      

21.35

      

520,642

      

10,716,030

      

-2.22

%

    

-1.98

%

    

1.02

%

  
     

2013

              

0.75

%

    

1.00

%

    

21.00

      

21.78

      

575,787

      

12,114,559

      

12.92

%

    

13.20

%

    

0.85

%

  
     

2012

              

0.75

%

    

1.00

%

    

18.60

      

19.24

      

626,616

      

11,673,495

      

17.26

%

    

17.55

%

    

1.25

%

  

(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 thereby a succeeding commencement date is disclosed.

(2)  These amounts represent the annualized minimum and maximum contract expenses of the separate account, consisting primarily of mortality and expense charges, for only those subaccounts which contain investments as of the respective year end. 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.


L-23


Lincoln National Variable Annuity Account L

Notes to financial statements (continued)

3. Financial Highlights (continued)

(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.

4. Purchases and Sales of Investments

The aggregate cost of investments purchased and the aggregate proceeds from investments sold were as follows for 2016:

Subaccount

   Aggregate
Cost of
Purchases		   Aggregate
Proceeds
from Sales		  

AB VPS Global Thematic Growth Portfolio Class B

  

$

336,718

    

$

470,925

    

AB VPS Growth Portfolio Class B

    

285,367

      

396,198

    

American Century VP Balanced Fund Class I

    

1,248,697

      

1,055,810

    

American Funds Global Growth Fund Class 2

    

799,000

      

626,970

    

American Funds Growth Fund Class 2

    

2,906,843

      

2,499,116

    

American Funds Growth-Income Fund Class 2

    

1,941,832

      

1,064,365

    

American Funds International Fund Class 2

    

1,255,629

      

1,071,445

    

BlackRock Global Allocation V.I. Fund Class I

    

145,299

      

273,743

    

Delaware VIP Diversified Income Series Standard Class

    

412,542

      

1,021,606

    

Delaware VIP High Yield Series Standard Class

    

392,193

      

601,185

    

Delaware VIP REIT Series Service Class

    

1,712,488

      

1,508,632

    

Delaware VIP Small Cap Value Series Service Class

    

1,493,130

      

1,056,715

    

Delaware VIP Smid Cap Growth Series Service Class

    

975,472

      

773,359

    

Deutsche Alternative Asset Allocation VIP Portfolio Class A

    

52,142

      

26,724

    

Fidelity VIP Asset Manager Portfolio Initial Class

    

2,096,890

      

4,035,151

    

Fidelity VIP Contrafund Portfolio Service Class 2

    

2,086,968

      

2,275,986

    

Fidelity VIP Government Money Market Portfolio Initial Class

    

188,284

      

153,781

    

Fidelity VIP Growth Portfolio Initial Class

    

7,252,325

      

7,737,841

    

Janus Aspen Global Research Portfolio Institutional Shares

    

171,121

      

993,336

    

LVIP Baron Growth Opportunities Fund Service Class

    

1,211,217

      

1,821,708

    

LVIP BlackRock Emerging Markets Managed Volatility Fund Standard Class

    

23,699

      

49,080

    

LVIP BlackRock Inflation Protected Bond Fund Standard Class

    

118,196

      

88,154

    

LVIP Blended Large Cap Growth Managed Volatility Fund Standard Class

    

32,464

      

318,696

    

LVIP Blended Mid Cap Managed Volatility Fund Standard Class

    

12,131

      

12,542

    

LVIP Clarion Global Real Estate Fund Standard Class

    

222,946

      

99,452

    

LVIP Delaware Bond Fund Standard Class

    

554,215

      

1,072,982

    

LVIP Delaware Diversified Floating Rate Fund Service Class

    

31,571

      

28,817

    

LVIP Delaware Foundation Aggressive Allocation Fund Standard Class

    

117,070

      

22,770

    

LVIP Delaware Foundation Conservative Allocation Fund Standard Class

    

177,764

      

173,489

    

LVIP Delaware Foundation Moderate Allocation Fund Standard Class

    

110,161

      

97,096

    

LVIP Delaware Social Awareness Fund Standard Class

    

2,123,543

      

1,538,280

    

LVIP Dimensional U.S. Core Equity 1 Fund Standard Class

    

2,085,747

      

762,998

    

LVIP Franklin Templeton Global Equity Managed Volatility Fund Standard Class

    

18,303

      

1,011

    

LVIP Global Conservative Allocation Managed Risk Fund Standard Class

    

102,445

      

213,045

    

LVIP Global Growth Allocation Managed Risk Fund Standard Class

    

231,393

      

918,767

    

LVIP Global Income Fund Standard Class

    

29,018

      

61,587

    

LVIP Global Moderate Allocation Managed Risk Fund Standard Class

    

4,686,535

      

2,448,904

    

LVIP JPMorgan Select Mid Cap Value Managed Volatility Fund Standard Class

    

40,319

      

129,178

    

LVIP Managed Risk Profile 2010 Fund Standard Class

    

70,295

      

178,154

    


L-24


Lincoln National Variable Annuity Account L

Notes to financial statements (continued)

4. Purchases and Sales of Investments (continued)

Subaccount

   Aggregate
Cost of
Purchases		   Aggregate
Proceeds
from Sales		  

LVIP Managed Risk Profile 2020 Fund Standard Class

  

$

303,546

    

$

787,142

    

LVIP Managed Risk Profile 2030 Fund Standard Class

    

1,048,689

      

664,622

    

LVIP Managed Risk Profile 2040 Fund Standard Class

    

527,313

      

435,291

    

LVIP Managed Risk Profile 2050 Fund Standard Class

    

254,311

      

62,935

    

LVIP Mondrian International Value Fund Standard Class

    

291,959

      

571,569

    

LVIP SSGA Bond Index Fund Standard Class

    

132,478

      

131,850

    

LVIP SSGA Emerging Markets 100 Fund Standard Class

    

199,657

      

285,171

    

LVIP SSGA Global Tactical Allocation Managed Volatility Fund Standard Class

    

87,090

      

209,661

    

LVIP SSGA International Index Fund Standard Class

    

84,339

      

78,225

    

LVIP SSGA International Managed Volatility Fund Standard Class

    

41,047

      

513

    

LVIP SSGA S&P 500 Index Fund Standard Class

    

4,378,571

      

9,604,767

    

LVIP SSGA Small-Cap Index Fund Standard Class

    

1,571,532

      

3,484,834

    

LVIP T. Rowe Price Structured Mid-Cap Growth Fund Standard Class

    

1,147,502

      

2,483,631

    

Neuberger Berman AMT Large Cap Value Portfolio I Class

    

874,876

      

403,114

    

T. Rowe Price International Stock Portfolio

    

343,730

      

1,146,896

    

5. Investments

The following is a summary of investments owned at December 31, 2016:

Subaccount

   Shares
Owned		   Net
Asset
Value		   Fair Value
of Shares		  

Cost of Shares

  

AB VPS Global Thematic Growth Portfolio Class B

    

79,070

    

$

21.52

    

$

1,701,579

    

$

1,371,080

    

AB VPS Growth Portfolio Class B

    

51,993

      

26.51

      

1,378,326

      

1,247,152

    

American Century VP Balanced Fund Class I

    

1,943,497

      

6.97

      

13,546,173

      

13,481,472

    

American Funds Global Growth Fund Class 2

    

225,832

      

23.85

      

5,386,101

      

5,313,027

    

American Funds Growth Fund Class 2

    

396,300

      

66.92

      

26,520,380

      

23,089,939

    

American Funds Growth-Income Fund Class 2

    

282,771

      

44.00

      

12,441,936

      

11,650,296

    

American Funds International Fund Class 2

    

521,246

      

16.76

      

8,736,092

      

9,387,654

    

BlackRock Global Allocation V.I. Fund Class I

    

93,285

      

15.51

      

1,446,846

      

1,514,984

    

Delaware VIP Diversified Income Series Standard Class

    

457,642

      

10.29

      

4,709,139

      

4,740,954

    

Delaware VIP High Yield Series Standard Class

    

421,306

      

5.14

      

2,165,513

      

2,334,187

    

Delaware VIP REIT Series Service Class

    

801,570

      

15.54

      

12,456,406

      

10,538,448

    

Delaware VIP Small Cap Value Series Service Class

    

245,845

      

39.67

      

9,752,657

      

7,917,125

    

Delaware VIP Smid Cap Growth Series Service Class

    

197,475

      

26.75

      

5,282,451

      

4,908,002

    

Deutsche Alternative Asset Allocation VIP Portfolio Class A

    

17,702

      

12.97

      

229,591

      

240,340

    

Fidelity VIP Asset Manager Portfolio Initial Class

    

2,084,865

      

15.28

      

31,856,740

      

32,129,046

    

Fidelity VIP Contrafund Portfolio Service Class 2

    

649,235

      

32.45

      

21,067,680

      

17,964,708

    

Fidelity VIP Government Money Market Portfolio Initial Class

    

67,680

      

1.00

      

67,680

      

67,680

    

Fidelity VIP Growth Portfolio Initial Class

    

1,174,654

      

59.31

      

69,668,714

      

46,816,141

    

Janus Aspen Global Research Portfolio Institutional Shares

    

199,112

      

40.63

      

8,089,901

      

7,276,090

    

LVIP Baron Growth Opportunities Fund Service Class

    

342,725

      

40.17

      

13,767,959

      

9,903,292

    

LVIP BlackRock Inflation Protected Bond Fund Standard Class

    

74,338

      

10.16

      

755,126

      

809,439

    

LVIP Blended Large Cap Growth Managed Volatility Fund Standard Class

    

40,842

      

31.00

      

1,265,900

      

825,670

    

LVIP Blended Mid Cap Managed Volatility Fund Standard Class

    

1,762

      

11.92

      

20,997

      

21,606

    

LVIP Clarion Global Real Estate Fund Standard Class

    

76,875

      

9.02

      

693,718

      

653,974

    

LVIP Delaware Bond Fund Standard Class

    

282,678

      

13.42

      

3,792,687

      

3,816,177

    

LVIP Delaware Diversified Floating Rate Fund Service Class

    

20,253

      

10.02

      

202,934

      

205,298

    

LVIP Delaware Foundation Aggressive Allocation Fund Standard Class

    

28,825

      

14.12

      

406,929

      

410,038

    

LVIP Delaware Foundation Conservative Allocation Fund Standard Class

    

87,906

      

13.55

      

1,190,952

      

1,278,345

    

LVIP Delaware Foundation Moderate Allocation Fund Standard Class

    

21,280

      

14.24

      

302,922

      

316,497

    

LVIP Delaware Social Awareness Fund Standard Class

    

394,741

      

36.84

      

14,542,658

      

13,829,673

    

LVIP Dimensional U.S. Core Equity 1 Fund Standard Class

    

195,183

      

27.25

      

5,319,517

      

5,999,564

    

LVIP Franklin Templeton Global Equity Managed Volatility Fund Standard Class

    

1,596

      

30.02

      

47,926

      

51,337

    

LVIP Global Conservative Allocation Managed Risk Fund Standard Class

    

93,634

      

13.33

      

1,248,143

      

1,161,189

    

LVIP Global Growth Allocation Managed Risk Fund Standard Class

    

313,040

      

13.06

      

4,087,679

      

3,705,585

    

LVIP Global Income Fund Standard Class

    

29,266

      

10.87

      

318,005

      

335,871

    

LVIP Global Moderate Allocation Managed Risk Fund Standard Class

    

1,354,512

      

13.51

      

18,303,522

      

18,661,035

    

LVIP JPMorgan Select Mid Cap Value Managed Volatility Fund Standard Class

    

11,833

      

15.62

      

184,809

      

180,259

    

LVIP Managed Risk Profile 2010 Fund Standard Class

    

40,062

      

11.19

      

448,338

      

435,852

    


L-25


Lincoln National Variable Annuity Account L

Notes to financial statements (continued)

5. Investments (continued)

Subaccount

   Shares
Owned		   Net
Asset
Value		   Fair Value
of Shares		  

Cost of Shares

  

LVIP Managed Risk Profile 2020 Fund Standard Class

    

177,748

    

$

11.21

    

$

1,991,849

    

$

1,930,947

    

LVIP Managed Risk Profile 2030 Fund Standard Class

    

421,222

      

10.85

      

4,570,680

      

4,441,614

    

LVIP Managed Risk Profile 2040 Fund Standard Class

    

164,023

      

10.34

      

1,695,507

      

1,673,234

    

LVIP Managed Risk Profile 2050 Fund Standard Class

    

65,815

      

9.51

      

626,166

      

656,356

    

LVIP Mondrian International Value Fund Standard Class

    

184,970

      

15.38

      

2,844,846

      

3,387,616

    

LVIP SSGA Bond Index Fund Standard Class

    

53,048

      

11.16

      

591,804

      

608,877

    

LVIP SSGA Emerging Markets 100 Fund Standard Class

    

122,339

      

8.23

      

1,007,095

      

1,235,434

    

LVIP SSGA Global Tactical Allocation Managed Volatility Fund Standard Class

    

138,777

      

11.23

      

1,558,054

      

1,536,566

    

LVIP SSGA International Index Fund Standard Class

    

24,963

      

8.15

      

203,448

      

211,965

    

LVIP SSGA International Managed Volatility Fund Standard Class

    

4,866

      

8.22

      

39,986

      

40,530

    

LVIP SSGA S&P 500 Index Fund Standard Class

    

6,664,259

      

15.56

      

103,709,197

      

82,225,916

    

LVIP SSGA Small-Cap Index Fund Standard Class

    

965,724

      

28.75

      

27,767,472

      

22,747,350

    

LVIP T. Rowe Price Structured Mid-Cap Growth Fund Standard Class

    

812,657

      

21.51

      

17,480,250

      

12,842,847

    

Neuberger Berman AMT Large Cap Value Portfolio I Class

    

362,839

      

15.24

      

5,529,660

      

4,985,426

    

T. Rowe Price International Stock Portfolio

    

591,509

      

14.27

      

8,440,834

      

7,947,343

    

6. Changes in Units Outstanding

The change in units outstanding for the year ended December 31, 2016, is as follows:

Subaccount

   Units
Issued		   Units
Redeemed		   Net Increase
(Decrease)		  

AB VPS Global Thematic Growth Portfolio Class B

    

61,113

      

(81,026

)

    

(19,913

)

  

AB VPS Growth Portfolio Class B

    

9,447

      

(30,984

)

    

(21,537

)

  

American Century VP Balanced Fund Class I

    

12,148

      

(23,946

)

    

(11,798

)

  

American Funds Global Growth Fund Class 2

    

13,713

      

(25,507

)

    

(11,794

)

  

American Funds Growth Fund Class 2

    

30,721

      

(139,269

)

    

(108,548

)

  

American Funds Growth-Income Fund Class 2

    

26,112

      

(50,103

)

    

(23,991

)

  

American Funds International Fund Class 2

    

29,220

      

(71,540

)

    

(42,320

)

  

BlackRock Global Allocation V.I. Fund Class I

    

9,397

      

(18,212

)

    

(8,815

)

  

Delaware VIP Diversified Income Series Standard Class

    

14,890

      

(56,222

)

    

(41,332

)

  

Delaware VIP High Yield Series Standard Class

    

13,566

      

(32,597

)

    

(19,031

)

  

Delaware VIP REIT Series Service Class

    

21,227

      

(36,258

)

    

(15,031

)

  

Delaware VIP Small Cap Value Series Service Class

    

28,954

      

(42,834

)

    

(13,880

)

  

Delaware VIP Smid Cap Growth Series Service Class

    

17,966

      

(42,509

)

    

(24,543

)

  

Deutsche Alternative Asset Allocation VIP Portfolio Class A

    

3,822

      

(2,036

)

    

1,786

    

Fidelity VIP Asset Manager Portfolio Initial Class

    

6,208

      

(90,363

)

    

(84,155

)

  

Fidelity VIP Contrafund Portfolio Service Class 2

    

15,314

      

(98,944

)

    

(83,630

)

  

Fidelity VIP Government Money Market Portfolio Initial Class

    

10,378

      

(8,533

)

    

1,845

    

Fidelity VIP Growth Portfolio Initial Class

    

4,367

      

(101,888

)

    

(97,521

)

  

Janus Aspen Global Research Portfolio Institutional Shares

    

6,362

      

(51,820

)

    

(45,458

)

  

LVIP Baron Growth Opportunities Fund Service Class

    

4,122

      

(32,313

)

    

(28,191

)

  

LVIP BlackRock Emerging Markets Managed Volatility Fund Standard Class

    

2,706

      

(5,960

)

    

(3,254

)

  

LVIP BlackRock Inflation Protected Bond Fund Standard Class

    

12,676

      

(9,818

)

    

2,858

    

LVIP Blended Large Cap Growth Managed Volatility Fund Standard Class

    

3,929

      

(33,454

)

    

(29,525

)

  

LVIP Blended Mid Cap Managed Volatility Fund Standard Class

    

1,240

      

(1,457

)

    

(217

)

  

LVIP Clarion Global Real Estate Fund Standard Class

    

19,386

      

(9,924

)

    

9,462

    

LVIP Delaware Bond Fund Standard Class

    

32,389

      

(64,449

)

    

(32,060

)

  

LVIP Delaware Diversified Floating Rate Fund Service Class

    

3,369

      

(2,890

)

    

479

    

LVIP Delaware Foundation Aggressive Allocation Fund Standard Class

    

4,596

      

(1,283

)

    

3,313

    

LVIP Delaware Foundation Conservative Allocation Fund Standard Class

    

7,307

      

(11,063

)

    

(3,756

)

  

LVIP Delaware Foundation Moderate Allocation Fund Standard Class

    

5,420

      

(5,839

)

    

(419

)

  

LVIP Delaware Social Awareness Fund Standard Class

    

8,027

      

(56,821

)

    

(48,794

)

  

LVIP Dimensional U.S. Core Equity 1 Fund Standard Class

    

12,745

      

(46,034

)

    

(33,289

)

  

LVIP Franklin Templeton Global Equity Managed Volatility Fund Standard Class

    

2,159

      

(109

)

    

2,050

    

LVIP Global Conservative Allocation Managed Risk Fund Standard Class

    

3,891

      

(12,773

)

    

(8,882

)

  

LVIP Global Growth Allocation Managed Risk Fund Standard Class

    

12,606

      

(60,976

)

    

(48,370

)

  

LVIP Global Income Fund Standard Class

    

2,525

      

(5,056

)

    

(2,531

)

  

LVIP Global Moderate Allocation Managed Risk Fund Standard Class

    

403,518

      

(219,377

)

    

184,141

    

LVIP JPMorgan Select Mid Cap Value Managed Volatility Fund Standard Class

    

4,249

      

(12,658

)

    

(8,409

)

  

LVIP Managed Risk Profile 2010 Fund Standard Class

    

3,711

      

(13,924

)

    

(10,213

)

  


L-26


Lincoln National Variable Annuity Account L

Notes to financial statements (continued)

6. Changes in Units Outstanding (continued)

Subaccount

   Units
Issued		   Units
Redeemed		   Net Increase
(Decrease)		  

LVIP Managed Risk Profile 2020 Fund Standard Class

    

18,371

      

(63,850

)

    

(45,479

)

  

LVIP Managed Risk Profile 2030 Fund Standard Class

    

74,078

      

(54,665

)

    

19,413

    

LVIP Managed Risk Profile 2040 Fund Standard Class

    

42,875

      

(38,556

)

    

4,319

    

LVIP Managed Risk Profile 2050 Fund Standard Class

    

22,037

      

(5,637

)

    

16,400

    

LVIP Mondrian International Value Fund Standard Class

    

7,227

      

(33,117

)

    

(25,890

)

  

LVIP SSGA Bond Index Fund Standard Class

    

9,978

      

(10,615

)

    

(637

)

  

LVIP SSGA Emerging Markets 100 Fund Standard Class

    

13,742

      

(21,055

)

    

(7,313

)

  

LVIP SSGA Global Tactical Allocation Managed Volatility Fund Standard Class

    

5,157

      

(15,691

)

    

(10,534

)

  

LVIP SSGA International Index Fund Standard Class

    

5,736

      

(5,609

)

    

127

    

LVIP SSGA International Managed Volatility Fund Standard Class

    

4,049

      

(51

)

    

3,998

    

LVIP SSGA S&P 500 Index Fund Standard Class

    

73,942

      

(546,484

)

    

(472,542

)

  

LVIP SSGA Small-Cap Index Fund Standard Class

    

46,653

      

(216,060

)

    

(169,407

)

  

LVIP T. Rowe Price Structured Mid-Cap Growth Fund Standard Class

    

10,716

      

(92,491

)

    

(81,775

)

  

Neuberger Berman AMT Large Cap Value Portfolio I Class

    

18,882

      

(17,684

)

    

1,198

    

T. Rowe Price International Stock Portfolio

    

6,794

      

(62,763

)

    

(55,969

)

  

The change in units outstanding for the year ended December 31, 2015, is as follows:

Subaccount

   Units
Issued		   Units
Redeemed		   Net Increase
(Decrease)		  

AB VPS Global Thematic Growth Portfolio Class B

    

32,353

      

(57,589

)

    

(25,236

)

  

AB VPS Growth Portfolio Class B

    

20,361

      

(15,731

)

    

4,630

    

American Century VP Balanced Fund Class I

    

6,805

      

(62,109

)

    

(55,304

)

  

American Funds Global Growth Fund Class 2

    

28,697

      

(37,978

)

    

(9,281

)

  

American Funds Growth Fund Class 2

    

40,967

      

(162,741

)

    

(121,774

)

  

American Funds Growth-Income Fund Class 2

    

54,131

      

(63,667

)

    

(9,536

)

  

American Funds International Fund Class 2

    

25,206

      

(98,036

)

    

(72,830

)

  

BlackRock Global Allocation V.I. Fund Class I

    

17,922

      

(15,774

)

    

2,148

    

Delaware VIP Diversified Income Series Standard Class

    

16,950

      

(34,844

)

    

(17,894

)

  

Delaware VIP High Yield Series Standard Class

    

10,796

      

(31,543

)

    

(20,747

)

  

Delaware VIP REIT Series Service Class

    

20,488

      

(55,468

)

    

(34,980

)

  

Delaware VIP Small Cap Value Series Service Class

    

13,102

      

(71,101

)

    

(57,999

)

  

Delaware VIP Smid Cap Growth Series Service Class

    

41,081

      

(50,410

)

    

(9,329

)

  

Deutsche Alternative Asset Allocation VIP Portfolio Class A

    

1,056

      

(1,823

)

    

(767

)

  

Fidelity VIP Asset Manager Portfolio Initial Class

    

11,953

      

(108,018

)

    

(96,065

)

  

Fidelity VIP Contrafund Portfolio Service Class 2

    

36,054

      

(94,833

)

    

(58,779

)

  

Fidelity VIP Government Money Market Portfolio Initial Class

    

5,864

      

(4,471

)

    

1,393

    

Fidelity VIP Growth Portfolio Initial Class

    

9,830

      

(113,746

)

    

(103,916

)

  

Janus Aspen Global Research Portfolio Institutional Shares

    

6,868

      

(38,772

)

    

(31,904

)

  

LVIP Baron Growth Opportunities Fund Service Class

    

4,786

      

(32,978

)

    

(28,192

)

  

LVIP BlackRock Emerging Markets Managed Volatility Fund Standard Class

    

2,631

      

(1,926

)

    

705

    

LVIP BlackRock Inflation Protected Bond Fund Standard Class

    

9,188

      

(20,247

)

    

(11,059

)

  

LVIP Blended Large Cap Growth Managed Volatility Fund Standard Class

    

4,794

      

(18,372

)

    

(13,578

)

  

LVIP Blended Mid Cap Managed Volatility Fund Standard Class

    

5,440

      

(3,086

)

    

2,354

    

LVIP Clarion Global Real Estate Fund Standard Class

    

11,655

      

(10,133

)

    

1,522

    

LVIP Delaware Bond Fund Standard Class

    

15,116

      

(58,652

)

    

(43,536

)

  

LVIP Delaware Diversified Floating Rate Fund Service Class

    

4,407

      

(58,948

)

    

(54,541

)

  

LVIP Delaware Foundation Aggressive Allocation Fund Standard Class

    

4,284

      

(1,080

)

    

3,204

    

LVIP Delaware Foundation Conservative Allocation Fund Standard Class

    

6,037

      

(11,374

)

    

(5,337

)

  

LVIP Delaware Foundation Moderate Allocation Fund Standard Class

    

4,097

      

(18,117

)

    

(14,020

)

  

LVIP Delaware Social Awareness Fund Standard Class

    

18,744

      

(46,770

)

    

(28,026

)

  

LVIP Dimensional U.S. Core Equity 1 Fund Standard Class

    

20,769

      

(39,341

)

    

(18,572

)

  

LVIP Franklin Templeton Global Equity Managed Volatility Fund Standard Class

    

942

      

(37

)

    

905

    

LVIP Global Conservative Allocation Managed Risk Fund Standard Class

    

4,025

      

(32,904

)

    

(28,879

)

  

LVIP Global Growth Allocation Managed Risk Fund Standard Class

    

13,701

      

(54,072

)

    

(40,371

)

  

LVIP Global Income Fund Standard Class

    

7,637

      

(3,370

)

    

4,267

    

LVIP Global Moderate Allocation Managed Risk Fund Standard Class

    

1,132,450

      

(211,746

)

    

920,704

    

LVIP JPMorgan Select Mid Cap Value Managed Volatility Fund Standard Class

    

10,816

      

(301

)

    

10,515

    

LVIP Managed Risk Profile 2010 Fund Standard Class

    

4,082

      

(2,344

)

    

1,738

    

LVIP Managed Risk Profile 2020 Fund Standard Class

    

46,442

      

(22,763

)

    

23,679

    

LVIP Managed Risk Profile 2030 Fund Standard Class

    

38,746

      

(44,745

)

    

(5,999

)

  


L-27


Lincoln National Variable Annuity Account L

Notes to financial statements (continued)

6. Changes in Units Outstanding (continued)

Subaccount

   Units
Issued		   Units
Redeemed		   Net Increase
(Decrease)		  

LVIP Managed Risk Profile 2040 Fund Standard Class

    

26,319

      

(31,828

)

    

(5,509

)

  

LVIP Managed Risk Profile 2050 Fund Standard Class

    

18,972

      

(6,916

)

    

12,056

    

LVIP Mondrian International Value Fund Standard Class

    

12,199

      

(29,829

)

    

(17,630

)

  

LVIP SSGA Bond Index Fund Standard Class

    

8,324

      

(7,551

)

    

773

    

LVIP SSGA Emerging Markets 100 Fund Standard Class

    

11,025

      

(8,548

)

    

2,477

    

LVIP SSGA Global Tactical Allocation Managed Volatility Fund Standard Class

    

5,612

      

(16,011

)

    

(10,399

)

  

LVIP SSGA International Index Fund Standard Class

    

4,119

      

(2,376

)

    

1,743

    

LVIP SSGA S&P 500 Index Fund Standard Class

    

89,739

      

(811,497

)

    

(721,758

)

  

LVIP SSGA Small-Cap Index Fund Standard Class

    

12,822

      

(230,176

)

    

(217,354

)

  

LVIP T. Rowe Price Structured Mid-Cap Growth Fund Standard Class

    

33,961

      

(89,897

)

    

(55,936

)

  

Neuberger Berman AMT Large Cap Value Portfolio I Class

    

4,924

      

(25,476

)

    

(20,552

)

  

T. Rowe Price International Stock Portfolio

    

14,316

      

(65,602

)

    

(51,286

)

  

7. Subsequent Event

Management evaluated subsequent events through the date these financial statements were issued and determined there were no additional matters to be disclosed.


L-28



Report of Independent Registered Public Accounting Firm

Board of Directors of The Lincoln National Life Insurance Company
and

Contract Owners of Lincoln National Variable Annuity Account L

We have audited the accompanying statements of assets and liabilities of Lincoln National Variable Annuity Account L ("Variable Account"), comprised of the subaccounts described in Note 1, as of December 31, 2016, 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, 2016, 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, 2016, 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.

Philadelphia, Pennsylvania
April 25, 2017


L-29



Lincoln National Variable Annuity Account L
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) List of Financial Statements
1. Part A
The Table of Condensed Financial Information is included in Part A of this Registration Statement.
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, 2016
Statement of Operations - Year ended December 31, 2016
Statements of Changes in Net Assets - Years ended December 31, 2016 and 2015
Notes to Financial Statements - December 31, 2016
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, 2016 and 2015
Consolidated Statements of Comprehensive Income (Loss) - Years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Stockholder’s Equity - Years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows - Years ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements - December 31, 2016
Report of Independent Registered Public Accounting Firm
(b) List of Exhibits
(1)(a) Resolution of Board of Directors of The Lincoln National Life Insurance Company authorizing establishment of the Variable Account incorporated herein by reference to Pre-Effective Amendment No. 1 (File No. 333-04999) filed on September 26, 1996.
(b) Amendment dated December 2, 1996 to Resolution of Board of Directors of The Lincoln National Life Insurance Company authorizing establishment of the Variable Account incorporated herein by reference to Post-Effective Amendment No. 2 (File No. 333-04999) filed on April 30, 1998.
(2) Not Applicable.
(3)(a) Broker-Dealer Sales Agreement incorporated herein by reference to Pre-Effective Amendment No. 1 (File No. 333-04999) filed on September 26, 1996.
(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)(a) Group Variable Annuity I Contract incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-04999) filed on April 26, 2000.
(b) Group Variable Annuity II Contract incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-04999) filed on April 26, 2000.
(c) Group Variable Annuity III Contract incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-04999) filed on April 26, 2000.
(d) Endorsement to Group Annuity Contracts incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-04999) filed on April 26, 2000.
(e) Group Annuity Amendment to Group Annuity Contracts incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-04999) filed on April 26, 2000.

 

(f) Endorsement to Certificate incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-04999) filed on April 26, 2000.
(g) Section 403(b) Annuity Amendment incorporated herein by reference to Post-Effective Amendment No. 10 (File No. 333-04999) filed on April 9, 2002.
(h) Group Annuity Amendment incorporated herein by reference to Post-Effective Amendment No. 10 (File No. 333-04999) filed on April 9, 2002.
(i) Qualified Individual Retirement Annuity Rider incorporated herein by reference to Post-Effective Amendment No. 12 (File No. 333-04999) filed on April 6, 2004.
(j) Section 403(b) Annuity Endorsement (32481-G-12/08) incorporated herein by reference to Post-Effective Amendment No. 14 (File No. 333-43373) filed on April 7, 2009.
(5)(a) Application for Group Annuity Contract incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-05827) filed on April 26, 2000.
(b) Participant Enrollment Form incorporated herein by reference to Post-Effective Amendment No. 7 (File No. 333-04999) filed on April 26, 2000.
(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) Not Applicable.
(8)(a) Accounting and Financial Administration Services Agreement dated October 1, 2007 among Mellon Bank, N.A., The Lincoln National Life Insurance Company and Lincoln Life & Annuity Company of New York incorporated herein by reference to Registration Statement on Form N-4 (File No. 333-147673) filed on November 28, 2007.
(b) Fund Participation Agreements and Amendments between The Lincoln National Life Insurance Company and:
(i) American Century Variable Products incorporated herein by reference to Post-Effective Amendment No. 26 on Form N-6 (File No. 333-146507) filed on April 3, 2017.
(ii) Fidelity Variable Insurance Products incorporated herein by reference to Post-Effective Amendment No. 23 on Form N-6 (File No. 333-146507) filed on April 1, 2015.
(iii) Janus Aspen Series incorporated herein by reference to Post-Effective Amendment No. 13 on Form N-6 (File No. 333-146507) filed on April 1, 2010.
(iv) Lincoln Variable Insurance Products Trust incorporated herein by reference to Post-Effective Amendment No. 24 on Form N-6 (File No. 333-146507) filed on April 1, 2016.
(v) Neuberger Berman Advisers Management Trust incorporated herein by reference to Post-Effective Amendment No. 21 on Form N-6 (File No. 333-146507) filed on April 2, 2013.
(vi)(a) T. Rowe Price International Series, Inc and T. Rowe Price Investment Services, Inc. incorporated herein by reference to Pre-Effective Amendment No. 1 (File No. 333-04999) filed on September 26, 1996. (Fund Participation Agreement)
(b) T. Rowe Price International Series, Inc, and T. Rowe Price Investment Services, Inc. (Amendment) incorporated herein by reference to Post-Effective Amendment No. 11 (File No. 333-04999) filed on April 3, 2003.
(c) T. Rowe Price International Series, Inc. and T. Rowe Price Investment Services, Inc. (Amendment No. 3) incorporated herein by reference to Post-Effective Amendment No. 21 (File No. 333-04999) filed on April 6, 2011.
(d) T. Rowe Price International Series, Inc. and T. Rowe Price Investment Services, Inc. (Amendment No. 4 dated October 10, 2011) incorporated herein by reference to Post-Effective Amendment No. 22 (File No. 333-04999) filed on April 6, 2012.
(e) T. Rowe Price International Series, Inc. and T. Rowe Price Investment Services, Inc. (Amendment No. 6 dated March 24, 2014) incorporated herein by reference to Post-Effective Amendment No. 28 on Form N-6 (File No. 333-125790) filed on April 1, 2015.
(vii) Alliance Variable Products Series Fund incorporated herein by reference to Post-Effective Amendment No. 23 on Form N-6 (File No. 333-146507) filed on April 1, 2015.
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(viii) American Funds Insurance Series incorporated herein by reference to Post-Effective Amendment No. 26 on Form N-6 (File No. 333-146507) filed on April 3, 2017.
(ix) Delaware VIP Trust incorporated herein by reference to Post-Effective Amendment No. 23 on Form N-6 (File No. 333-146507) filed on April 1, 2015.
(x) Deutsche Variable Series II incorporated herein by reference to Post-Effective Amendment No. 23 on Form N-6 (File No. 333-146507) filed on April 1, 2015.
(xi) BlackRock Variable Series Funds, Inc. incorporated herein by reference to Post-Effective Amendment No. 16 on Form N-6 (File No. 333-146507) filed on April 1, 2011.
(c) Rule 22c-2 Agreements between The Lincoln National Life Insurance Company and:
(i) American Century Variable Products incorporated herein by reference to Post-Effective Amendment No. 29 (File No. 333-61554) filed on March 16, 2009.
(ii) American Funds incorporated herein by reference to Post-Effective Amendment No. 30 (File No. 333-36304) filed on May 29, 2008.
(iii) Delaware VIP Trust incorporated herein by reference to Post-Effective Amendment No. 57 (File No. 333-36316) filed on March 30, 2012.
(iv) Fidelity Variable Insurance Products Fund incorporated herein by reference to Post-Effective Amendment No. 30 (File No. 333-36304) filed on May 29, 2008.
(v) Janus Aspen Series incorporated herein by reference to Post-Effective Amendment No. 30 (File No. 333-36304) filed on May 29, 2008
(vi) Lincoln Variable Insurance Products Trust incorporated herein by reference to Post-Effective Amendment No. 30 (File No. 333-36304) filed on May 29, 2008.
(vii) Neuberger Berman Advisers Management Trust incorporated herein by reference to Post-Effective Amendment No. 57 (File No. 333-36316) filed on March 30, 2012.
(9) Opinion and Consent of Jeremy Sachs, Senior Counsel of The Lincoln National Life Insurance Company as to the legality of securities being issued incorporated herein by reference to Pre-Effective Amendment No. 1 (File No. 333-05827) filed on September 26, 1996.
(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. 42 (File No. 333-138190) filed on February 22, 2017.
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.
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Name   Positions and Offices with Depositor
Ellen G. Cooper*   Executive Vice President, Chief Investment Officer and Director
Jeffrey D. Coutts*   Senior Vice President and Treasurer
Randal J. Freitag*   Executive Vice President, Chief Financial Officer and Director
Wilford H. Fuller*   Executive Vice President and Director
Dennis R. Glass*   President and Director
Andrea D. Goodrich*   Senior Vice President and Secretary
Christine Janofsky*   Senior Vice President, Chief Accounting Officer and Controller
Keith J. Ryan**   Vice President and Director
Joseph D. Spada***   Vice President and Chief Compliance Officer for Separate Accounts
*Principal business address is Radnor Financial Center, 150 Radnor Chester Road, Radnor, PA 19087
**Principal business address is 1300 South Clinton Street, Fort Wayne, Indiana 46802
***Principal business address is 350 Church Street, Hartford, Connecticut 06096
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, 2017 there were 40,646 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 (Lincoln Life or Company) provides that Lincoln Life will indemnify certain persons against expenses, judgments and certain other specified costs incurred by any such person if he/she is made a party or is threatened to be made a party to a suit or proceeding because he/she was a director, officer, or employee of Lincoln Life, as long as he/she acted in good faith and in a manner he/she reasonably believed to be in the best interests of, or act opposed to the best interests of, Lincoln Life. Certain additional conditions apply to indemnification in criminal proceedings.
In particular, separate conditions govern indemnification of directors, officers, and employees of Lincoln Life in connection with suits by, or in the right of, Lincoln Life.
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;
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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
Andrew J. Bucklee*   Senior Vice President and Director
Patrick J. Caulfield**   Vice President, Chief Compliance Officer and Senior Counsel
Jeffrey D. Coutts*   Senior Vice President and Treasurer
Wilford H. Fuller*   President, Chief Executive Officer and Director
John C. Kennedy*   Senior Vice President, Head of Retirement Solutions Distribution, and Director
Thomas P. O'Neill*   Senior Vice President and Chief Operating Officer
Christopher P. Potochar*   Senior Vice President and Director, Head of Finance and Strategy
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
(c) N/A
Item 30. Location of Accounts and Records
All accounts, books, and other documents, except accounting records, required to be maintained by Section 31a of the 1940 Act and the Rules promulgated thereunder are maintained by The Lincoln National Life Insurance Company, 1300 South Clinton Street, Fort Wayne, Indiana 46802. The accounting records are maintained by The Bank of New York Mellon, One Mellon Bank Center, 500 Grant Street, Pittsburgh, PA 15258.
Item 31. Management Services
Not Applicable.
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.
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
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a) As required by the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets the requirements of Securities Act Rule 485(b) for effectiveness of this Registration Statement and has caused this Post-Effective Amendment No. 29 to the Registration Statement to be signed on its behalf, in the City of Fort Wayne, and State of Indiana on this 26th day of April, 2017.
   

Lincoln National Variable Annuity Account L (Registrant)
Group Variable Annuity I, II & III
  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/ Ralph R. Ferraro
Ralph R. Ferraro
(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 April 26, 2017.
   
Signature Title
*
Dennis R. Glass 		President and Director (Principal Executive Officer)
*
Ellen Cooper 		Executive Vice President, Chief Investment Officer and Director
*
Randal J. Freitag 		Executive Vice President, Chief Financial Officer and Director
(Principal Financial Officer)
*
Wilford H. Fuller 		Executive Vice President and Director
*
Keith J. Ryan 		Vice President and Director
*By: /s/ John D. Weber
John D. Weber 		Pursuant to a Power of Attorney
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