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  • The Lincoln National Life Insurance Company

  • The Lincoln National Life Insurance Company

    Consolidated Financial Statements December 31, 2014 and 2013

  • 1

    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, 2014 and 2013, and the related consolidated statements of comprehensive income (loss), stockholders equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Companys 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 Companys 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 Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Lincoln National Life Insurance Company at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP Philadelphia, Pennsylvania April 1, 2015

  • See accompanying Notes to Consolidated Financial Statements 2

    THE LINCOLN NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS

    (in millions, except share data)

    As of December 31, 2014 2013 ASSETS Investments:

    Available-for-sale securities, at fair value: Fixed maturity securities (amortized cost: 2014 $78,039; 2013 $75,585) $ 85,421 $ 79,178Variable interest entities fixed maturity securities (amortized cost: 2014 $587; 2013 $682) 598 697Equity securities (cost: 2014 $216; 2013 $182) 231 201

    Trading securities 1,966 2,190Mortgage loans on real estate 7,387 7,029Real estate 14 26Policy loans 2,645 2,651Derivative investments 1,763 617Other investments 1,551 1,208

    Total investments 101,576 93,797Cash and invested cash 3,224 630Deferred acquisition costs and value of business acquired 8,155 8,859Premiums and fees receivable 480 424Accrued investment income 1,016 1,002Reinsurance recoverables 6,926 7,075Reinsurance related embedded derivatives - 159Funds withheld reinsurance assets 655 781Goodwill 2,273 2,273Other assets 3,940 5,373Separate account assets 125,265 117,135

    Total assets $ 253,510 $ 237,508

    LIABILITIES AND STOCKHOLDERS EQUITY Liabilities Future contract benefits $ 19,225 $ 17,627Other contract holder funds 74,561 73,530Short-term debt 2 51Long-term debt 2,662 2,600Reinsurance related embedded derivatives 109 -Funds withheld reinsurance liabilities 4,441 3,111Deferred gain on business sold through reinsurance 220 297Payables for collateral on investments 4,311 2,865Variable interest entities liabilities 13 27Other liabilities 5,804 5,421Separate account liabilities 125,265 117,135

    Total liabilities 236,613 222,664

    Contingencies and Commitments (See Note 14)

    Stockholders Equity Common stock 10,000,000 shares authorized, issued and outstanding 10,652 10,636Retained earnings 3,066 2,778Accumulated other comprehensive income (loss) 3,179 1,430

    Total stockholders equity 16,897 14,844Total liabilities and stockholders equity $ 253,510 $ 237,508

  • See accompanying Notes to Consolidated Financial Statements 3

    THE LINCOLN NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

    (in millions)

    For the Years Ended December 31, 2014 2013 2012 Revenues Insurance premiums $ 2,371 $ 2,339 $ 2,290Fee income 4,608 4,008 3,626Net investment income 4,648 4,561 4,551Realized gain (loss):

    Total other-than-temporary impairment losses on securities (25) (75) (242)Portion of loss recognized in other comprehensive income 10 10 103

    Net other-than-temporary impairment losses on securities recognized in earnings (15) (65) (139)Realized gain (loss), excluding other-than-temporary impairment losses on securities (509) 122 16

    Total realized gain (loss) (524) 57 (123)Amortization of deferred gain on business sold through reinsurance 69 69 77Other revenues 867 426 396

    Total revenues 12,039 11,460 10,817Expenses Interest credited 2,492 2,468 2,424Benefits 4,354 3,613 2,939Commissions and other expenses 3,876 3,526 3,838Interest and debt expense 103 93 110

    Total expenses 10,825 9,700 9,311Income (loss) before taxes 1,214 1,760 1,506Federal income tax expense (benefit) 220 431 344

    Net income (loss) 994 1,329 1,162Other comprehensive income (loss), net of tax: Unrealized gain (loss) on available-for-sale securities 1,610 (2,355) 1,071 Unrealized other-than-temporary impairment on available-for-sale securities 20 27 (2) Unrealized gain (loss) on derivative instruments 122 (96) (31) Funded status of employee benefit plans (3) (6) 2

    Total other comprehensive income (loss), net of tax 1,749 (2,430) 1,040 Comprehensive income (loss) $ 2,743 $ (1,101) $ 2,202

  • See accompanying Notes to Consolidated Financial Statements 4

    THE LINCOLN NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

    (in millions)

    For the Years Ended December 31, 2014 2013 2012

    Common Stock Balance as of beginning-of-year $ 10,636 $ 10,620 $ 10,605Stock compensation/issued for benefit plans 16 16 15

    Balance as of end-of-year 10,652 10,636 10,620

    Retained Earnings Balance as of beginning-of-year 2,778 2,089 1,532Net income (loss) 994 1,329 1,162Dividends declared (706) (640) (605)

    Balance as of end-of-year 3,066 2,778 2,089

    Accumulated Other Comprehensive Income (Loss) Balance as of beginning-of-year 1,430 3,860 2,820Other comprehensive income (loss), net of tax 1,749 (2,430) 1,040

    Balance as of end-of-year 3,179 1,430 3,860Total stockholders equity as of end-of-year $ 16,897 $ 14,844 $ 16,569

  • See accompanying Notes to Consolidated Financial Statements 5

    THE LINCOLN NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS

    (in millions)

    For the Years Ended December 31, 2014 2013 2012 Cash Flows from Operating Activities Net income (loss) $ 994 $ 1,329 $ 1,162Adjustments 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 (535) (539) (283)

    Trading securities purchases, sales and maturities, net 310 131 202Change in premiums and fees receivable (56) (42) 27Change in accrued investment income (14) (16) (37)Change in future contract benefits and other contract holder funds 1,407 (232) (1,277)Change in reinsurance related assets and liabilities (960) 68 1,438Change in federal income tax accruals 48 437 208Realized (gain) loss 524 (57) 123Amortization of deferred gain on business sold through reinsurance (69) (69) (77)Proceeds from reinsurance recapture 422 - -Change in cash management agreement investment 329 (29) (359)Other 249 (85) (72)

    Net cash provided by (used in) operating activities 2,649 896 1,055Cash Flows from Investing Activities Purchases of available-for-sale securities (8,306) (11,002) (11,021)Sales of available-for-sale securities 1,120 954 1,098Maturities of available-for-sale securities 4,984 5,952 5,757Purchases of other investments (5,013) (2,481) (2,112)Sales or maturities of other investments 4,411 2,494 2,009Increase (decrease) in payables for collateral on investments 1,446 (1,256) 374Proceeds (outflows) from business ceded, recaptured and novated (3) (22) 35Other (82) (95) (130)

    Net cash provided by (used in) investing activities (1,443) (5,456) (3,990)Cash Flows from Financing Activities Issuance of long-term debt, net of issuance costs - 311 -Issuance (decrease) in short-term debt (49) 23 18Proceeds from sales leaseback transaction 83 - -Deposits of fixed account values, including the fixed portion of variable 10,363 10,466 10,667Withdrawals of fixed account values, including the fixed portion of variable (5,775) (5,230) (5,618)Transfers to and from separate accounts, net (2,509) (3,001) (2,091)Com

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