The Lincoln National Life Insurance Company
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Post on 31-Dec-2016
<ul><li><p>The Lincoln National Life Insurance Company </p></li><li><p>The Lincoln National Life Insurance Company </p><p>Consolidated Financial Statements December 31, 2014 and 2013 </p></li><li><p> 1 </p><p> 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 </p></li><li><p>See accompanying Notes to Consolidated Financial Statements 2 </p><p>THE LINCOLN NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS </p><p>(in millions, except share data) </p><p> As of December 31, 2014 2013 ASSETS Investments: </p><p>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</p><p>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</p><p>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</p><p>Total assets $ 253,510 $ 237,508</p><p>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</p><p>Total liabilities 236,613 222,664</p><p>Contingencies and Commitments (See Note 14) </p><p>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</p><p>Total stockholders equity 16,897 14,844Total liabilities and stockholders equity $ 253,510 $ 237,508</p></li><li><p>See accompanying Notes to Consolidated Financial Statements 3 </p><p>THE LINCOLN NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) </p><p>(in millions) </p><p> 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): </p><p>Total other-than-temporary impairment losses on securities (25) (75) (242)Portion of loss recognized in other comprehensive income 10 10 103</p><p>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</p><p>Total realized gain (loss) (524) 57 (123)Amortization of deferred gain on business sold through reinsurance 69 69 77Other revenues 867 426 396</p><p>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</p><p>Total expenses 10,825 9,700 9,311Income (loss) before taxes 1,214 1,760 1,506Federal income tax expense (benefit) 220 431 344</p><p>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</p><p> Total other comprehensive income (loss), net of tax 1,749 (2,430) 1,040 Comprehensive income (loss) $ 2,743 $ (1,101) $ 2,202</p></li><li><p>See accompanying Notes to Consolidated Financial Statements 4 </p><p>THE LINCOLN NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY </p><p>(in millions) </p><p> For the Years Ended December 31, 2014 2013 2012 </p><p>Common Stock Balance as of beginning-of-year $ 10,636 $ 10,620 $ 10,605Stock compensation/issued for benefit plans 16 16 15</p><p>Balance as of end-of-year 10,652 10,636 10,620</p><p>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)</p><p>Balance as of end-of-year 3,066 2,778 2,089</p><p>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</p><p>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</p></li><li><p>See accompanying Notes to Consolidated Financial Statements 5 </p><p>THE LINCOLN NATIONAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS </p><p>(in millions) </p><p> 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: </p><p>Deferred acquisition costs, value of business acquired, deferred sales inducements and deferred front-end loads deferrals and interest, net of amortization (535) (539) (283)</p><p>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)</p><p>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)</p><p>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)Common stock issued for benefit plans and excess tax benefits (19) (17) (2)Dividends paid to common and preferred stockholders (706) (640) (605)</p><p>Net cash provided by (used in) financing activities 1,388 1,912 2,369Net increase (decrease) in cash and invested cash 2,594 (2,648) (566)Cash and invested cash as of beginning-of-year 630 3,278 3,844</p><p>Cash and invested cash as of end-of-year $ 3,224 $ 630 $ 3,278 </p></li><li><p>6 </p><p>THE LINCOLN NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS </p><p>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, LNCs wholesaling and retailing business units, respectively. LNLs 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 23 for additional information. Basis of Presentation The accompanying consolidated financial statements are prepared in accordance with United States of America generally accepted accounting principles (GAAP). Certain GAAP policies, which significantly affect the determination of financial condition, results of operations and cash flows, are summarized below. Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of LNL and all other entities in which we have a controlling financial interest and any variable interest entities (VIEs) in which we are the primary beneficiary. Entities in which we do not have a controlling financial interest and do not exercise significant management influence over the operating and financing decisions are reported using the equity method. All material inter-company accounts and transactions have been eliminated in consolidation. Our involvement with VIEs is primarily to invest in assets that allow us to gain exposure to a broadly diversified portfolio of asset classes. A VIE is an entity that does not have sufficient equity to finance its own activities without additional financial support or where investors lack certain characteristics of a controlling financial interest. We assess our contractual, ownership or other interests in a VIE to determine if our interest participates in the variability the VIE was designed to absorb and pass onto variable interest holders. We perform an ongoing qualitative assessment of our variable interests in VIEs to determine whether we have a controlling financial interest and would therefore be considered the primary beneficiary of the VIE. If we determine we are the primary beneficiary of a VIE, we consolidate the assets and liabilities of the VIE in our consolidated financial statements. Accounting Estimates and Assumptions The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Those estimates are inherently subject to change and actual results could differ from those estimates. Included among the material (or potentially material) reported amounts and disclosures that require extensive use of estimates are: fair value of certain invested assets and derivatives, 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. 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...</p></li></ul>
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