Lincoln Life & Annuity Company of New York
Lincoln Life & Annuity Company of New York
Lincoln Life & Annuity Company of New York
Financial Statements December 31, 2014 and 2013
Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholder of Lincoln Life & Annuity Company of New York We have audited the accompanying balance sheets of Lincoln Life & Annuity Company of New York (the Company) as of December 31, 2014 and 2013, and the related statements of comprehensive income (loss), stockholder's 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 Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Lincoln Life & Annuity Company of New York at December 31, 2014 and 2013, and the 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
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LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK BALANCE SHEETS
(in millions, except share data)
ASSETS Investments:
Available-for-sale securities, at fair value: Fixed maturity securities (amortized cost: 2014 ? $6,947; 2013 ? $6,880)
Mortgage loans on real estate Policy loans
Total investments Cash and invested cash Deferred acquisition costs and value of business acquired Premiums and fees receivable Accrued investment income Reinsurance recoverables Reinsurance related embedded derivatives Goodwill Other assets Separate account assets
Total assets
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities Future contract benefits Other contract holder funds Short-term debt Income taxes payable Other liabilities Separate account liabilities
Total liabilities
Contingencies and Commitments (See Note 10)
Stockholder's Equity Common stock ? 132,000 shares authorized, issued and outstanding Retained earnings Accumulated other comprehensive income (loss)
Total stockholder's equity Total liabilities and stockholder's equity
As of December 31,
2014
2013
$ 7,665 $ 7,259
551
521
361
382
8,577
8,162
64
10
466
586
9
8
104
103
434
478
11
8
60
60
235
150
4,684
4,099
$ 14,644 $ 13,664
$ 1,508 $ 1,439
5,641
5,708
-
11
452
362
97
64
4,684
4,099
12,382
11,683
941
941
1,054
907
267
133
2,262
1,981
$ 14,644 $ 13,664
See accompanying Notes to Financial Statements 2
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
Revenues Insurance premiums Fee income Net investment income Realized gain (loss):
Total other-than-temporary impairment losses on securities Portion of loss recognized in other comprehensive income
Net other-than-temporary impairment losses on securities recognized in earnings Realized gain (loss), excluding other-than-temporary impairment losses on securities
Total realized gain (loss) Other revenues
Total revenues
Expenses Interest credited Benefits Commissions and other expenses
Total expenses Income (loss) from continuing operations before taxes Federal income tax expense (benefit) Net income (loss) Other comprehensive income (loss), net of tax: Unrealized gain (loss) on available-for-sale securities
Unrealized other-than-temporary impairment on available-for-sale securities
Total other comprehensive income (loss), net of tax
Comprehensive income (loss)
For the Years Ended December 31,
2014
2013
2012
$
167 $
151 $
139
288
273
275
421
419
421
(5)
(10)
(22)
2
2
10
(3)
(8)
(12)
(9)
(7)
(7)
(12)
(15)
(19)
62
-
-
926
828
816
203
204
207
316
292
265
191
204
191
710
700
663
216
128
153
69
37
59
147
91
94
131
(202)
83
3
3
(1)
134
(199)
82
$
281 $
(108) $
176
See accompanying Notes to Financial Statements 3
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK STATEMENTS OF STOCKHOLDER'S EQUITY (in millions)
Common Stock Balance as of beginning-of-year Stock compensation/issued for benefit plans
Balance as of end-of-year
Retained Earnings Balance as of beginning-of-year Net income (loss)
Balance as of end-of-year
Accumulated Other Comprehensive Income (Loss) Balance as of beginning-of-year Other comprehensive income (loss), net of tax
Balance as of end-of-year Total stockholder's equity as of end-of-year
For the Years Ended December 31,
2014
2013
2012
$
941 $
941 $
941
-
-
-
941
941
941
907
816
722
147
91
94
1,054
907
816
133
332
250
134
(199)
82
267
133
332
$ 2,262 $ 1,981 $ 2,089
See accompanying Notes to Financial Statements 4
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK STATEMENTS OF CASH FLOWS (in millions)
For the Years Ended December 31,
2014
2013
2012
Cash Flows from Operating Activities Net income (loss)
$ 147 $
91 $
94
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
16
24
21
Change in premiums and fees receivable
(1)
(7)
4
Change in accrued investment income
(1)
(4)
(2)
Change in future contract benefits and other contract holder funds
(84)
(196)
(178)
Change in reinsurance related assets and liabilities
(4)
(8)
32
Change in federal income tax accruals
17
19
51
Realized (gain) loss
12
15
19
Other
(79)
(21)
(13)
Net cash provided by (used in) operating activities
23
(87)
28
Cash Flows from Investing Activities Purchases of available-for-sale securities Sales of available-for-sale securities Maturities of available-for-sale securities Purchases of other investments Sales or maturities of other investments
Net cash provided by (used in) investing activities
(502)
(785)
(664)
83
50
38
354
561
567
(122)
(170)
(335)
114
89
197
(73)
(255)
(197)
Cash Flows from Financing Activities Increase (decrease) in short-term debt Deposits of fixed account values, including the fixed portion of variable Withdrawals of fixed account values, including the fixed portion of variable Transfers to and from separate accounts, net Common stock issued for benefit plans and excess tax benefits
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and invested cash Cash and invested cash as of beginning-of-year
Cash and invested cash as of end-of-year
(11)
11
-
656
654
611
(373)
(238)
(311)
(166)
(127)
(94)
(2)
(2)
-
104
298
206
54
(44)
37
10
54
17
$
64 $
10 $
54
See accompanying Notes to Financial Statements 5
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS
1. Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies
Nature of Operations
Lincoln Life & Annuity Company of New York ("LLANY" or the "Company", which also may be referred to as "we," "our" or "us"), a wholly-owned subsidiary of The Lincoln National Life Insurance Company ("LNL"), a wholly-owned subsidiary of Lincoln National Corporation ("LNC" or the "Ultimate Parent"), is domiciled in the state of New York. LLANY is principally engaged in the sale of individual life insurance products, individual annuity products and worksite and group non-medical products (primarily term life and disability). These products are marketed primarily through personal-producing general agents and brokers throughout the U.S. LLANY is licensed and sells its products throughout the U.S. and several U.S. territories. See Note 19 for additional information.
Basis of Presentation
The accompanying 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
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, 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 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 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 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
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