2014 Annual Report

Experience Life®

TC83446(0215)P Catalog #: 60034

A (EXCELLENT) A.M. Best Third highest of 16 rankings

A (STRONG) Standard & Poor’s Sixth highest of 21 rankings

A2 (GOOD) Moody’s Sixth highest of 21 rankings

Ratings are subject to change

For National Life Insurance Company and Life Insurance Company of the Southwest as of March 20, 2015.

National Life Group is a trade name representing various affiliates that offer a variety of financial service products. Each company of National Life Group is solely responsible for its own financial condition and contractual obligations.

Consolidated results of the National Life Group Companies, which include National Life Insurance Company, Life Insurance Company of the Southwest, Addison, Texas, Equity Services, Inc., Sentinel Investments, and NLV Financial Corporation. Sentinel Investments is the unifying brand name for the Sentinel Financial Services Co., Sentinel Asset Management, Inc., and Sentinel Administrative Services, Inc.

Equity Services, Inc., member FINRA/SIPC, is a broker/dealer and registered investment adviser. National Life Insurance Company is licensed to do business in all 50 states and the District of Columbia.

Life Insurance Company of the Southwest is licensed to do business in 49 states and the District of Columbia. It is not licensed to do business in the state of New York. It was chartered in 1955.

All companies referenced are affiliated and located in Montpelier, Vermont unless otherwise indicated.

Financial Strength Ratings

Our vision: To bring peace of mind to everyone we touch.

Our mission: Keeping our promises.

Our values: Do good. Be good. Make good.

Front cover images from left to right: Our Do Good Tour stopped in Central Park in New York City to bring awareness to the issue of distracted driving; Team National Life Group cyclist Sandy Meyerhofer rides to the finish line at the Harpoon Point to Point which benefitted the Vermont Foodbank; one of the communities in which we live, Fort Worth, TX, taken by team member Sandy Mollet; William Blake, second runner-up for LifeChanger of the Year learns he’s a finalist.

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We are a Fortune 1000 company and yet at our core we retain the feel and attitude of a small company in which each and every individual matters.

We’re grounded on America’s Main Street where a firm handshake still means something and trust is strong.

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Since its founding in 1848 National Life has worked hard to keep its promises. The company’s first death claim, that of Rowland Allen, who died in 1850 while seeking fortune in the California Gold Rush, pushed the young company to its limits but the directors used their personal credit to ensure the claim was paid and the promise delivered.

National Life has paid a dividend on its participating life insurance policies every year since 1855. Through the Civil War, the great flu epidemic of 1918, the Great Depression, two World Wars and most recently the Great Recession, National Life has delivered.

Delivering on our promises remains our mission today.We are an independent company and independent in spirit. We are

a Fortune 1000 company, and yet at our core we retain the feel and the attitude of a small company in which each and every individual matters. We are grounded on America’s Main Street where a firm handshake still means something and trust is strong.

In 2014 National Life had yet another extraordinary year. We set records for life sales, flow annuity sales, and net income. Our life sales have doubled in five years; our flow annuity sales have doubled in four years, both incredible accomplishments in a time in which our industry is experiencing flat sales.

In 2014, out of close to 1,000 life insurance companies operating in the United States, we ranked in the top 20 in an industry-wide survey of life sales*.

Our success, however, is no accident. We remain, as were our founders, purpose-driven, performance-

oriented and principles-led. We understand the importance of our work to individuals, families, businesses — and to our nation.

National Life. We are not just a company. We are a cause.

Mehran Assadi President and Chief Executive Officer

* Source: LIMRA ranking of 2014 U.S. retail individual life insurance sales.

In 1848 the West was not just a point on a compass but a land of promise.

Americans were leaving the East in droves looking for better farmland, business opportunities, and miracles. They took with them everything they could, from the family cow to the family Bible.

People were thinking big.Our founders believed in the era’s boundless

opportunities. That’s why a group of far-thinking men living in a small town on the nation’s northern boundary created the National Life Insurance Company of the United States.

The founders of National Life were realists, too. They knew that not everyone’s dream would be realized. But they also believed that dreams

can outlive the people who dream them.They believed passionately in the power of life insurance to save the future from

the past. In their original prospectus they urged everyone to “insure their lives so that those dependent on their personal income might not be left destitute in case of sudden or unexpected death.”National Life, they said, “shall be a sacred fund for this purpose.”

And it has been — for 166 years.We have never lost sight of their vision to serve the nation. In 1958, when we

were building our current headquarters, our leaders worked with the nation’s governors to obtain soil from each state to place into the foundation of our new building so that “the company will function upon a truly national base.”

While many of our competitors have ventured into international markets, we have stuck to what and who we know best.

We have also never lost the passion of our founders. I carry that missionary zeal in me every day. I believe deeply that our industry is special.

We are doing heroic work. We keep alive the dreams of families, the hopes of small business owners, and the dignity and financial independence of educators.

From Our President and Chief Executive Officer

Mehran Assadi

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National Life Group’s Executive Management Team, left to right: Thomas Anfuso, Thomas Brownell, Gregory Woodworth, Mehran Assadi, Chris Graff, Ruth Smith, Wade Mayo, Robert Cotton, and Sean Woodroffe.

We remain, as were our founders, purpose-driven, performance-oriented and principles-led. We understand the importance of our work to individuals, families, businesses, and to our nation.

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The portfolio performed very well last year and is well positioned to continue to support the Group’s liabilities through a wide variety of market conditions. Importantly, we continue to adhere to the time tested investment philosophy of investing in a broadly diversified portfolio of high quality securities. Notably, over 94% of the bond portfolio is comprised of investment grade securities, and we continue to follow our disciplined approach that has held the Group in such good stead for so many decades.

2014 was another strong year for the National Life Group’s investment portfolio thanks in large part to the tail winds of robust capital market returns.

For example, domestic equity markets posted their sixth consecutive year of gains.

The year, however, was not without surprises. Perhaps the biggest was the dramatic drop in oil prices in the second half of the year. The implications of this fall-off are still being felt today in both equity and fixed income markets.

Another major surprise was the strong performance of the domestic bond market. Most economists predicted that interest rates were going to rise in 2014 and this was based at least in part on the widely anticipated conclusion of the Fed’s

quantitative easing program in the fourth quarter. However, interest rates declined significantly during the year. Specifically, yields on the 10-year and 30-year treasury bonds declined from 3.00% and 3.92% at the beginning of the year, to 2.17% and 2.75% on 01/02/2014.

A number of important factors drove the decline in treasury yields last year, including weaker than anticipated economic activity across the globe, and the relatively high yields of US Treasury securities in comparison with government bond yields in other parts of the world, most notably Germany and Japan.

Given that over 91% of the Group’s $21.8 billion investment portfolio is invested in fixed income assets, the decline in interest rates (all else being equal) results in an increase in the value of the Group’s fixed income investments. Therefore, as of 12/31/14, the unrealized gain of the portfolio totaled approximately $1.16 billion.

As shown on the graph, the Group’s portfolio is invested primarily in high quality corporate bonds, AAA-rated mortgage-backed securities, and first lien commercial real estate mortgages.

From Our Chief Investment Officer

Thomas Brownell

TOTAL ASSETS UNDER MANAGEMENT IN MILLIONS FOR NATIONAL LIFE GROUP

23+2+11+11+53NATIONAL LIFE GROUP INVESTMENT PORTFOLIO

Corporate: 53%

Mortgage-Backed Securities: 23%

Cash and Equivalents: 2%

Commercial Real Estate and Mortgage Loans: 11%

Other: 11%

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2011 2012 2013 2014

Asset ManagementIn addition to managing National Life Group’s investment portfolio, our asset

management firm, Sentinel Investments, also manages the company’s 12 retail mutual fund products. In total, these funds had $6.96 billion of assets as of 12/31/14.

2014 was a year of improvement and enhancement for our retail mutual fund business. We implemented a strategy designed to put the company on a path of sustained growth in assets under management and profitability going forward. In accordance with this plan, we launched a new fixed income product, the Sentinel Unconstrained Bond Fund, realigned our distribution efforts, and continued to refine our investment process.

One key element of our strategy that has remained constant is the dedication of our talented and experienced team of investment professionals. Together, we are all working to navigate market challenges and provide sound investment solutions for today and tomorrow.

To our mutual fund shareholders, thank you for placing your trust in us to manage your assets. As always, we are committed to disciplined and prudent investing, and take seriously our responsibility as a steadfast partner in helping you achieve your financial goals.

Thomas Brownell Chief Investment Officer, National Life Group CEO, Sentinel Asset Management, Inc.

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Sentinel Investments® is the unifying brand name of Sentinel Financial Services Company, Sentinel Asset Management , Inc., and Sentinel Administrative Services, Inc. Sentinel Funds are distributed by Sentinel Financial Services Company, Member FINRA, One National Life Drive, Montpelier, VT 05604, (800) 233-4332. Investment return and principal value in any of the funds will vary so that you may have a gain or loss when you sell shares.

Sentinel Funds are sold by prospectus. For more complete information, including charges and expenses, please request a prospectus from your registered representative or call (800) 233-4332. Before investing, carefully consider a fund’s objectives, risks, charges and expenses. A summary and full prospectuses containing this and other information are available from sentinelinvestments.com. Please read them carefully.

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For us, it’s not just about the numbers; it’s about each and every person we work with, every promise we keep.

Robert Curry, shown here with National Life Group Marketing Director Dan Sheehan, is one of thousands of people we’ve been able to help through our living benefit riders. After being diagnosed with ALS, Mr. Curry accelerated his terminal death benefit rider to travel and make memories with his family while he was still healthy.

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From Our Life Insurance Division

policyholders early access to their life insurance in the event of a qualifying chronic, critical or terminal illness. Policy owner Robert Curry is one of the many examples of how these riders can provide opportunities and make a huge difference for an individual or a family. As Mr. Curry shared with us, his life following retirement from the Navy was going well. In planning for his and his wife’s ‘golden years’, he decided to purchase a life insurance policy with living benefits so that he might eventually leave something for his children. “Having this policy with the living benefits, I know it’s a cliché, but I was able to exhale; I had a buffer. I knew there was a safety net.” One day Mr. Curry developed a slight limp in his left leg which became progressively worse. After several visits to the VA hospital, he was eventually seen by a neurologist who delivered a devastating diagnosis: Lou Gehrig’s disease, or ALS. Mr. Curry called his agent who worked with National Life Group to accelerate one of his living benefit riders. Recognizing what the future would likely bring, he used the money he received from our Company to take his wife back to her home country of the Philippines for 34 days. He followed that with a trip to North Carolina to visit with his family. “I thank God in heaven for this policy,” he said, “and what it gave me and my wife when I was healthier.” Whether it’s through policy benefits, new technology, or simply a phone call to our customer service center where our associates answer questions professionally and with a smile, everything we do is intended to continue our 166 year tradition of keeping our promises to those we serve. This is what our vision means “to bring peace of mind to everyone we touch.”

At National Life Group, we’ve worked hard since the founding of National Life Insurance Company in 1848 to protect individuals, families and businesses from the unexpected and to help them plan for the future. Our corporate vision is “To bring peace of mind to everyone we touch.” We try to achieve this vision every day, and last year was no exception. In 2014, our insurance in force reached $83.2 billion and our life insurance sales topped $172 million. While sales in our industry remained flat, it was another record-setting year for National Life Group as we continued the double digit sales growth that has hallmarked our performance these past four years. Hard work, exceptional focus, and honoring our commitments to our customers are the key factors that contribute to our success. We strive to provide both innovative products and a best-in-the-industry model of customer service that is friendly, responsive, comprehensive and uncomplicated. We understand that the decision to purchase life insurance is often deeply connected to the decades spent building a family or a business. Our nationwide network of trusted agents and responsive associates provide the personalized services and business relationships that our customers seek. The proof is in our application count, which increased by 12% over 2013. Streamlined procedures and improvements in technology have enabled us to process this business more efficiently. But for us, it’s not just about the numbers; it’s about each and every person we work with and every promise we keep. Many of these promises are kept through our optional Accelerated Death Benefit Riders, also known as Living Benefits, which are added to many of our life insurance policies. They give our

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02010 2011 2012 2013 2014

TOTAL LIFE INSURANCE SALES IN MILLIONS

LIFE INSURANCE IN FORCE IN BILLIONS

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75

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02011 2012 2013 2014

Living Benefits or Accelerated Benefit Riders are provided at no additional premium. These riders are optional and may not be available in all states or on all products. Riders are supplemental benefits that can be added to a life insurance policy and may not be suitable unless you also have a need for life insurance. Payment of Accelerated Benefits will reduce the cash value and death benefit otherwise payable under the policy. Receipt of Accelerated Benefits may be a taxable event and may affect your eligibility for public assistance programs. Please consult your personal tax advisor to determine the tax status of any benefits paid under this rider and with social services agencies concerning how receipt of such a payment will affect you. This is not a solicitation of any specific insurance policy.

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Doing good for those we serve is what we’re all about. We’re in the business of meeting needs so our policy owners can realize their dreams.

Our LifeChanger of the Year Program has recognized and rewarded outstanding educators since 2011. Last year’s LifeChanger of the Year grand prize winner, Betty Chandler, worked in the Orange County school district since 1955 when it was still segregated. Now she works tirelessly to help students learn to read as well as connect them and their families with important resources if they are hungry, homeless or struggling in some way. Said Betty as she accepted her check for $10,000, “I’m 75 years old and I’ve still got work to do.”

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From Our Annuity Division

For the Annuity Division, 2014 was a record breaking year which allowed us to once again bring our corporate values of do good, be good and make good to life.

Doing good for those we serve, primarily those who work in education and the public sector, is what we’re all about. We’re in the business of providing retirement solutions so our policy owners can realize their dreams. We do so by shouldering risks so that our policy owners don’t have to. When our indexed annuities are coupled with our Guaranteed Lifetime Income Rider (GLIR*), we’re able to provide a guaranteed income solution for people participating in defined contribution plans who have no such benefit.

Our commitment to doing good reaches beyond our business practices and policy owners. Our LifeChanger of the Year program continues to grow and bring recognition to teachers, administrators and other school district employees who are positively impacting the lives of today’s youth. In 2014, we had 435 LifeChanger nominees from all 50 states. Their nominations were remarkable and reminded us of the good so many school employees do every day.

When it comes to our business, we’ve got to be good at what we do because we have a huge responsibility with over $11.5 billion in reserves held for the benefit of our policy owners. That’s why we consistently focus on making sure that we have the best people, systems, processes, and approaches so that we can be what you expect: good, every day.

Through our dedication to innovation in technology and delivery capabilities, 2015 will see us expand to new markets. We will bring our retirement savings and lifetime income solutions to more people beyond just the K-12 market by growing our footprint in the field of Higher Education and Governmental entities. We will look at new product designs and applications of our GLIR so our products can provide true value and benefits in our changing economic environment. Additionally, we’ll enhance our interactive social media channels and launch a new consumer website to provide you with information, tools and resources that will make planning for your retirement even easier.

The approximately $290 million in benefits we credited and paid last year did a tremendous amount of good for families across America. These benefits helped thousands of retirees, particularly retired educators and public sector retirees, live more comfortably and confidently. We make business decisions with the importance of making good at the forefront of our thoughts. By doing so, more than 331,000 fixed and fixed indexed annuity policy owners have the peace of mind that comes from working with a company that has a long history of working hard to keep its promises.

Through constant and sustainable growth we’re working hard to do good, be good, and make good today and for the long-term.

* The Guaranteed Lifetime Income Benefit Rider (GLIR) is a rider that can be added to an annuity policy at issue and is available on fixed indexed annuities issued by Life Insurance Company of the Southwest. Electing this rider is optional and incurs an additional cost. GLIR may not be available in all states. Guarantees are dependent on the claims-paying ability of the issuing company.

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We made it our business to do good through nonprofit donations, environmental stewardship, and volunteering our time. Last year was no different.

While green might be our corporate color, it’s also how we think. We use wood chips to heat our headquarters, we champion alternative transportation, use shredded paper for cow bedding, and in 2014, added a new solar array on our property. This array works in tandem with the panels we’ve had on our roof for years and provides 15% of our power in our Montpelier offices.

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A few short years ago we introduced our corporate values, do good, be good, and make good although we realized that these values have been core to the company since the day it was founded in 1848.

In addition to protecting families and businesses by offering financial solutions, we’ve also made it our business to do good through charitable donations to nonprofits, environmental stewardship, and volunteering our time right on the Main Streets in the towns in which we live. Last year was no different.

On the southern end of our Vermont campus we installed a 500 kilowatt solar project that produces 725,000 kilowatt hours of power. This is roughly equivalent to powering 125 homes in Montpelier. It’s also in addition to the solar array that already exists on the roof of our corporate headquarters and has been providing supplemental power for the past few years.

On July 19th, we hosted our inaugural Do Good Fest on the back lawn of our Vermont campus. This music festival featured local and national musicians including Eric Hutchinson who had almost all 1,500 attendees on their feet rocking to the music. We invited local non-profits to join us and bring awareness to their missions. Proceeds from the event which totaled close to $11,000 benefitted the National Life Cancer Treatment Center’s Patient Fund.

The Board of Directors of the National Life Group Charitable Foundation agreed to increase the budget of the Foundation from $500,000 to $750,000 starting in 2015. This will enable us to further support nonprofits primarily in Vermont and Texas who serve our neighbors.

Another way we provided support to those in need in 2014 was to sign on as the presenting sponsor of the Harpoon Point to Point. This bicycle ride has 25, 50 and 100 mile loops and attracts riders from all over New England and New York. Proceeds benefit the Vermont Foodbank and in 2014, thanks to our support which included 33 National Life riders, the fundraising goal was exceeded by more than $38,000.

Taking Good Seriously

Facing page: Mehran Assadi and Senior Vice President and General Counsel Gregory Woodworth flip the switch to start power flowing from our latest solar array near our headquarters.

National Life Group team member Tracy King shows how she lives our values at the Do Good Fest.

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We’re proud to serve many markets, including middle America and over 7,000 school districts.

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Thomas MacLeayChairmanNational Life GroupMontpelier, Vermont

Mehran AssadiPresident & Chief Executive OfficerNational Life GroupMontpelier, Vermont

David R. CoatesRetired Partner, KPMGColchester, Vermont

James H. DouglasFormer Governor of VermontMiddlebury, Vermont

Bruce M. LismanRetired, JP Morgan ChaseNew York, New York

V. Louise McCarrenFormer Chief Executive OfficerWestern Electricity Coordinating CouncilSalt Lake City, Utah

Roger B. PorterIBM Professor of Business & GovernmentHarvard UniversityCambridge, Massachusetts

E. Miles Prentice, IIIPartner, Eaton & Van WinkleNew York, New York

Harris H. SimmonsChairman, Chief Executive Officer & PresidentZions Bancorporation & ChairmanZions First National BankSalt Lake City, Utah

Standing left to right: Harris Simmons, Roger Porter, James Douglas, Bruce Lisman, Miles Prentice. Seated: David Coates, Mehran Assadi, Thomas MacLeay, Louise McCarren.

Board of Directors

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NLV Financial Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETSAs of December 31,

(in thousands) 2014 2013

Assets: Cash and investments:

Available-for-sale debt securities $ 16,879,781 $ 15,469,157 Available-for-sale equity securities 43,638 90,534 Trading equity securities 14,890 18,860 Mortgage loans 2,331,749 2,261,133 Policy loans 808,598 786,971 Real estate investments 54,041 46,839 Derivatives 677,169 874,586 Other invested assets 493,924 341,605 Short term investments 270,320 345,300 Cash and restricted cash 258,452 325,071

Total cash and investments 21,832,562 20,560,056 Deferred policy acquisition costs 951,160 927,742 Accrued investment income 184,877 177,539 Premiums and fees receivable 19,422 21,889 Federal income tax recoverable 12,863 6,682 Amounts recoverable from reinsurers 126,013 135,780 Present value of future profits of insurance acquired 13,236 17,163 Property and equipment, net 144,304 119,608 Corporate owned life insurance 245,025 236,326 Other assets 116,495 115,096 Separate account assets 771,669 774,181

Total assets $ 24,417,626 $ 23,092,062

Liabilities: Policy liabilities:

Policy benefit liabilities $ 4,572,292 $ 4,598,741 Policyholder account liabilities 14,358,653 13,246,553 Policyholders’ deposits 82,482 73,198 Policy claims payable 61,405 72,329 Policyholders’ dividends 246,145 170,893

Total policy liabilities 19,320,977 18,161,714 Amounts payable to reinsurers 38,853 22,376 Derivatives 358,905 529,695 Other liabilities and accrued expenses 551,343 494,062 Pension and other post-retirement benefit obligations 252,801 164,160 Deferred income taxes 251,922 205,769 Debt 467,381 487,967 Separate account liabilities 771,669 774,181

Total liabilities $ 22,013,851 $20,839,924

Stockholder’s Equity: Class A common stock, 2,000 shares authorized, $ - $ - no shares issued and outstanding Class B common stock, par value of $0.01, 1,001 - - shares authorized, 100 shares issued and outstanding Preferred stock, 500 shares authorized, no shares issued and outstanding - - Retained earnings 2,134,584 1,990,266 Accumulated other comprehensive income 269,191 261,872

Total stockholder’s equity $ 2,403,775 $ 2,252,138

Total liabilities and stockholder’s equity $ 24,417,626 $ 23,092,062

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(in thousands) 2014 2013 2012

Revenues: Insurance premiums $ 231,629 $ 256,567 $ 276,743 Policy and contract charges 396,358 346,338 305,657 Mutual fund commissions and fee income 107,321 109,839 121,545 Net investment income 1,186,100 1,297,458 1,057,376 Net realized investment gains (losses) 24,685 (4,743) (7,312)Change in value of trading equity securities (1,029) 2,360 730 Other income 15,359 15,194 16,937

Total revenues 1,960,423 2,023,013 1,771,676

Benefits and Expenses:

Increase (decrease) in policy liabilities (50,994) (11,834) 32,447 Policy benefits 512,671 457,809 410,064 Policyholders’ dividends and dividend obligations 83,413 79,424 94,980 Interest credited to policyholder account liabilities 564,687 743,522 492,962 Operating expenses 264,332 243,260 219,122 Interest expense 41,434 41,610 41,702 Policy acquisition expenses and amortization of present value of future profits, net 338,696 269,997 307,405

Total benefits and expenses 1,754,239 1,823,788 1,598,682 Income before income taxes 206,184 199,225 172,994 Income tax expense 61,866 56,780 48,393 Net income $ 144,318 $ 142,445 $ 124,601

NLV Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONSFor the years ended December 31,

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This annual report summary of National Life Group includes the consolidated results of NLV Financial Corporation and Subsidiaries, including Life Insurance Company of the Southwest, National Life Insurance Company, Sentinel Investments, and Equity Services, Inc. To obtain a full version of the audited financial statements of NLV Financial Corporation and Subsidiaries, please send an e-mail to orderforms@nationallife.com or call our toll free number at (800) 732-8939. You can also visit our website and download a pdf version online at www.NationalLifeGroup.com.

n Our employees participate in events throughout the community including the annual Dragon Boat Festival to benefit cancer survivors.

Report design: RavenMark, Inc.Report printing: Villanti PrintersPhotography: Richard Howard, Jeb Wallace-Brodeur, Sandy Mollet, Lindsey Rusnock

2014 LifeChanger of the Year finalist Patrick Dempsy with his family.

One National Life Drive Montpelier VT 05604

1-800-732-8939 Customer Service