<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON _________, 1997
Registration No. 333-4999
Registration No. 811-7645
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM N-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
(Group Variable Annuity I)
Pre-Effective Amendment No. [_]
Post-Effective Amendment No. 1 [X]
AND/OR
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 6 [X]
___________
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
(Exact Name of Registrant)
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(Name of Depositor)
1300 South Clinton Street
P.O. Box 1110
Fort Wayne, Indiana 46801
(Address of Depositor's Principal Executive Offices)
DEPOSITOR'S TELEPHONE NUMBER, INCLUDING AREA CODE: 219-455-2000
JOHN L. STEINKAMP, ESQUIRE
Vice President & Associate General Counsel
Lincoln National Life Insurance Company
1300 South Clinton Street
P.O. Box 1110
Fort Wayne, IN 46801
(Name and Complete Address of Agent for Service)
Copy to:
Kimberly J. Smith, Esquire
Sutherland, Asbill & Brennan, L.L.P.
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2404
<PAGE>
It is proposed that this filing will become effective (check appropriate
box)
[_] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on May 1, 1997, 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
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
In accordance with Rule 24f-2 under the Investment Company Act of 1940, the
Registrant has registered an indefinite number or amount of its securities under
the Securities Act of 1933. That election was previously filed in Registrant's
Form N-4 registration statement (File No. 333-4999). The Registrant filed its
Rule 24f-2 Notice on February 26, 1997, for the fiscal year ended December 31,
1996.
<PAGE>
CROSS REFERENCE SHEET
SHOWING LOCATION OF INFORMATION IN PROSPECTUS
<TABLE>
<CAPTION>
FORM N-4 PROSPECTUS CAPTION
- -------- ------------------
<S> <C>
1. Cover Page............................ Cover Page
2. Definitions........................... Definitions
3. Synopsis or Highlights................ Summary
4. Condensed Financial Information....... Condensed Financial Information
5. General Description of Registrant,
Depositor and Portfolio Companies..... Lincoln Life, The Variable Investment Division and the Funds
6. Deductions and Expenses............... Deductions and Charges
7. General Description of Variable
Annuity Contracts..................... Contract Provisions; Other Contract Provisions
8. Annuity Period........................ Annuity Period
9. Death Benefit......................... Contract Provisions, Death Benefits
10. Purchases and Contract Values......... Contract Provisions
11. Redemptions........................... Contract Provisions, Withdrawals
12. Taxes................................. Federal Income Tax Considerations
13. Legal Proceedings..................... Not Applicable
14. Table of Contents of the
Statement of Additional
Information........................... Contents of Statement of Additional Information
CROSS REFERENCE SHEET
SHOWING LOCATION OF INFORMATION IN STATEMENT OF ADDITIONAL INFORMATION
FORM N-4 STATEMENT OF ADDITIONAL INFORMATION CAPTION
15. Cover Page........................... Cover Page
16. Table of Contents.................... Table of Contents
17. General Information and History....... Prospectus-Lincoln Life, The Variable Investment Division and the Funds
18. Services.............................. Not Applicable
19. Purchase of Securities Being
Offered............................... Not Applicable
20. Underwriters.......................... Distribution of the Contracts
21. Calculation of Yield Quotations
of Money Market Sub-Accounts.......... Not Applicable
22. Annuity Payments...................... Determination of Variable Annuity Payment
23. Financial Statements.................. Financial Statements
CROSS REFERENCE SHEET
SHOWING LOCATION OF INFORMATION IN PART C-OTHER INFORMATION
24(a) Financial Statements and
Exhibits............................ Not Applicable
24(b) Exhibits............................ Exhibits
25. Directors and Officers of the
Depositor........................... Directors and Officers of the Depositor
26. Persons Controlled by or Under
Common Control with the Depositor
or Registrant....................... Organizational Chart
</TABLE>
<PAGE>
<TABLE>
<S> <C>
27. Number of Contract Owners.............. Number of Contract Owners
28. Indemnification........................ Indemnification
29. Principal Underwriters................. Principal Underwriters
30. Location of Accounts and Records....... Location of Accounts and Records
31. Management Services.................... Management Services
32. Undertakings........................... Undertakings
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
Group Variable Annuity Contracts
Lincoln National Variable Annuity Account L
P.O. Box 9740
Portland, ME 04104
(800) 341-0441
VARIABLE ANNUITY I
[LOGO OF LINCOLN LIFE APPEARS HERE]
- --------------------------------------------------------------------------------
PROSPECTUS
- --------------------------------------------------------------------------------
MAY 1, 1997
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUS OF
THE APPLICABLE UNDERLYING FUNDS WHICH SHOULD BE RETAINED FOR FUTURE REFERENCE.
INVESTMENT IN THE CONTRACTS INVOLVES INVESTMENT RISK, INCLUDING MARKET FLUC-
TUATION AND POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
90001
This prospectus describes group annuity contracts ("Contracts") offered by The
Lincoln National Life Insurance Company ("Lincoln Life"), a wholly-owned sub-
sidiary of Lincoln National Corporation. The Contracts are designed to enable
Participants and Employers to accumulate funds for retirement programs meeting
the requirements of the following Sections of the Internal Revenue Code of
1986, as amended (the "Code"): 401(a), 403(b), 408 and 457 and other related
Sections as well as for programs offering non-qualified annuities. A Partici-
pant is an employee or other person affiliated with the Contract-holder on
whose behalf a Participant Account is maintained under the terms of the Con-
tract.
The Contracts permit Contributions to be deposited in the Guaranteed Interest
Division, which is part of Lincoln Life's General Account, and in certain Sub-
Accounts in Lincoln National Variable Annuity Account L ("Variable Investment
Division"). Contributions to the Guaranteed Interest Division earn interest at
a guaranteed rate declared by Lincoln Life. Contributions to the Variable In-
vestment Division will increase or decrease in dollar value depending on the
investment performance of the underlying funds in which the Sub-Accounts
invest.
Currently, the Variable Investment Division consists of the nine Sub-Accounts
listed below: Next to each listed Sub-Account is the name of the fund (the
"Fund") in which the Sub-Account invests. For more information about the in-
vestment objectives, policies and risks of the Funds please refer to the pro-
spectus for each of the Funds.
<TABLE>
<S> <C>
Index Account.......................................... Dreyfus Stock Index Fund
Growth I Account....................................... Fidelity's Variable
Insurance Products Fund:
Growth Portfolio
Asset Manager Account.................................. Fidelity's Variable
Insurance Products Fund
II: Asset Manager
Portfolio
Growth II Account...................................... American Century
Variable Portfolios,
Inc.: VP Capital
Appreciation
Balanced Account....................................... American Century
Variable Portfolios,
Inc.: VP Balanced
International Stock Account............................ T. Rowe Price
International Series,
Inc.
Socially Responsible Account........................... Calvert Responsibly
Invested Balanced
Portfolio
Equity-Income Account.................................. Fidelity's Variable
Insurance Products Fund:
Equity-Income Portfolio
Small Cap Account...................................... Dreyfus Variable
Investment Fund: Small
Cap Portfolio
</TABLE>
This prospectus is intended to provide information regarding the Contracts of-
fered by Lincoln Life that you should know before investing. Please read and
retain this prospectus for future reference. A Statement of Additional Informa-
tion ("SAI"), dated May 1, 1997, has been filed with the Securities and Ex-
change Commission and is incorporated by this reference into this Prospectus.
If you would like a free copy, write to Lincoln National Life Insurance Co.,
P.O. Box 9740, Portland, ME 04104 or call (800) 341-0441. A table of contents
for the SAI appears on the last page of this Prospectus.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFINITIONS................................................................ 3
SUMMARY (Including Fee Table and Performance Information).................. 5
CONDENSED FINANCIAL INFORMATION............................................ 10
FINANCIAL STATEMENTS....................................................... 11
LINCOLN LIFE, THE VARIABLE INVESTMENT DIVISION AND THE FUNDS............... 11
CONTRACT PROVISIONS........................................................ 15
DEDUCTIONS AND CHARGES..................................................... 21
ANNUITY PERIOD............................................................. 23
FEDERAL INCOME TAX CONSIDERATIONS.......................................... 25
VOTING RIGHTS.............................................................. 31
OTHER CONTRACT PROVISIONS.................................................. 32
GUARANTEED INTEREST DIVISION............................................... 33
TABLE OF CONTENTS FOR STATEMENT OF ADDITIONAL INFORMATION.................. 35
</TABLE>
2
<PAGE>
DEFINITIONS
ACCUMULATION UNIT: An accounting unit of measure used to record amounts of
increases to, decreases from and accumulations in each Sub-Account during the
Accumulation Period.
ACCUMULATION UNIT VALUE: The dollar value of an Accumulation Unit in each Sub-
Account on any Valuation Date.
ACCUMULATION PERIOD: The period commencing on a Participant's Participation
Date and terminating when the Participant's Account balance is reduced to zero,
either through withdrawal(s), annuitization, imposition of charges, payment of
a Death Benefit or a combination thereof.
ANNUITANT: The person receiving annuity payments under the terms of the
Contract.
ANNUITY COMMENCEMENT DATE: The date on which Lincoln Life makes the first
annuity payment to the Annuitant as required by the Retired Life Certificate.
ANNUITY CONVERSION AMOUNT: The amount applied toward the purchase of an
annuity.
ANNUITY PERIOD: The period concurrent with or following the Accumulation
Period, during which an Annuitant's annuity payments are made.
BENEFICIARY: The person(s) designated to receive a Participant's Account
balance in the event of the Participant's death during the Accumulation Period
or the person(s) designated to receive any applicable remainder of an annuity
in the event of the Annuitant's death during the Annuity Period.
BUSINESS DAY: A day on which the New York Stock Exchange is customarily open
for business except for the following local business holidays: Veterans Day
(November 11) and the day after Thanksgiving.
CONTRIBUTIONS: All amounts deposited under a Contract, including any amount
transferred from another contract or Trustee.
CONTRACT: A Group Variable Annuity contract issued by Lincoln Life to the
Contractholder.
CONTRACTHOLDER: The party named as the Contractholder on the group annuity
contract issued by Lincoln Life. The Contractholder may be an Employer, a
retirement plan trust, an association or any other entity allowed under the
law.
DIVISION(S): The Guaranteed Interest Division and/or the Variable Investment
Division.
EMPLOYER: The organization specified in the Contract which offers the Plan to
its employees.
FUNDS: The underlying funds in which the Sub-Accounts invest. Funds are
investment vehicles which offer their shares only to insurance companies'
separate accounts and other qualifying investors.
GENERAL ACCOUNT: All assets of Lincoln Life other than those in the Variable
Investment Division or any other separate account.
GROSS WITHDRAWAL AMOUNT: The amount by which a Participant's Account is reduced
when a withdrawal occurs, including any applicable contingent deferred sales
charge and Annual Administration Charge.
GUARANTEED ANNUITY: An annuity for which Lincoln Life guarantees the amount of
each payment for as long as the annuity is payable.
GUARANTEED INTEREST DIVISION: The Division maintained by Lincoln Life for the
Contracts and other contracts for which Lincoln Life guarantees the principal
amount and interest credited thereto subject to any fees and charges as set
forth in the Contract. Amounts allocated to the Guaranteed Interest Division
are part of Lincoln Life's General Account.
3
<PAGE>
LINCOLN LIFE: The Lincoln National Life Insurance Company.
NET CONTRIBUTIONS: The sum of all Contributions credited to a Participant
Account less any Net Withdrawal Amounts, outstanding loan (including principal
and due and accrued interest) and amounts converted to a Payout Annuity.
NET WITHDRAWAL AMOUNT: The amount paid when a withdrawal occurs.
PARTICIPANT: An employee or other person affiliated with the Contractholder on
whose behalf an Account is maintained under the terms of the Contract.
PARTICIPANT ACCOUNT: An account maintained for a Participant during the
Accumulation Period the total balance of which equals the Participant's Account
balance in the Variable Investment Division plus the Participant's Account
balance in the Guaranteed Interest Division.
PARTICIPATION ANNIVERSARY: For each Participant, a date at one year intervals
from the Participant's Participation Date. If an anniversary occurs on a non-
Business Day, it is treated as occurring on the next Business Day.
PARTICIPATION DATE: A date assigned to each Participant corresponding to the
date on which the first Contribution on behalf of that Participant is received
by Lincoln Life. A Participant will receive a new Participation Date if such
Participant makes a Total Withdrawal, as defined in this prospectus, and
Contributions on behalf of the Participant are resumed under any Contract.
PARTICIPATION YEAR: A period beginning with one Participation Anniversary and
ending the day before the next Participation Anniversary, except for the first
Participation Year which begins with the Participation Date.
PAYOUT ANNUITY: A series of payments paid under the terms of a Contract to a
person. A Payout Annuity may be either a Guaranteed Annuity or a Variable
Annuity or a combination Guaranteed and Variable Annuity.
PLAN: The retirement program offered by an Employer to its employees for which
a Contract is used to accumulate funds.
RECEIPT: Receipt by Lincoln Life at its service office in Portland, Maine.
SUB-ACCOUNT: An account established in the Variable Investment Division which
invests in shares of a corresponding Fund.
VALUATION DATE: A Business Day. Accumulation Units and Annuity Units are
computed as of the close of trading on the New York Stock Exchange.
VALUATION PERIOD: A period used in measuring the investment experience of each
Sub-Account. The Valuation Period begins at the close of trading on the New
York Stock Exchange on one Valuation Date and ends at the corresponding time on
the next Valuation Date.
VARIABLE ANNUITY: An annuity with payments that increase or decrease in
accordance with the investment results of the selected Sub-Accounts.
VARIABLE INVESTMENT DIVISION: The Division which is maintained by Lincoln Life
for these Contracts and certain other Lincoln Life contracts for which Lincoln
Life does not guarantee the principal amount or investment results. The
Variable Investment Division is the Lincoln National Variable Annuity Account L
which is a group of assets segregated from the General Account whose income,
gains and losses, realized or unrealized, are credited to or charged against
the Variable Investment Division without regard to other income, gains or
losses of Lincoln Life. The Variable Investment Division currently consists of
nine Sub-Accounts. Additional Sub-Accounts may be added in the future.
4
<PAGE>
SUMMARY
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
Lincoln Life was founded in 1905 and is organized under Indiana law. Lincoln
Life is one of the largest stock life insurance companies in the United States.
Lincoln Life is the issuer of the Contracts offered by this prospectus. Lincoln
Life is owned by Lincoln National Corp. ("LNC") which is also organized under
Indiana law. LNC's primary businesses are the issuing of annuities, life
insurance, property-casualty insurance and reinsurance, and the providing of
investment management services.
CONTRACTS OFFERED
The Group Variable Annuity Contracts offered by this prospectus are available
to Employers and other entities to provide a way to accumulate funds for
retirement and to provide Payout Annuities. Lincoln Life offers Contracts
designed to enable Participants and Employers to accumulate funds for
retirement programs meeting the requirements of the following Sections of the
Internal Revenue Code of 1986, as amended (the "Code"): 401(a), 403(b), 408,
457 and other related Sections as well as for programs offering non-qualified
annuities.
HOW CONTRIBUTIONS ARE MADE
Contributions under the Contract are deposited by the Contractholder.
Depending upon the type of Plan offered, Contributions may consist of salary
reduction Contributions, Employer Contributions or Participant post-tax
Contributions. Contributions are forwarded by the Contractholder to Lincoln
Life and allocated among the two Divisions in accordance with information
provided by the Contractholder. See "Contract Provisions, Contributions under
the Contract."
DIVISIONS OFFERED
Contributions may be allocated to the Guaranteed Interest Division or to the
Variable Investment Division or to both Divisions. The Variable Investment
Division currently consists of nine Sub-Accounts. A Contractholder may choose
to offer between zero and nine of the Sub-Accounts to its Participants under a
Contract. The Sub-Accounts invest their assets in shares of a corresponding
Fund. For a full description of the Funds, see the prospectuses for the Funds.
TRANSFERS BETWEEN DIVISIONS AND SUB-ACCOUNTS
During the Accumulation Period, a Participant or a Contractholder under
certain Plans may make transfers between and among Divisions and Sub-Accounts.
Certain Plans may limit the transfers in dollar amount, type of Contribution,
or frequency. Certain Plans may require Contractholder approval for a transfer.
See "Transfers between Divisions and Sub-Accounts."
WITHDRAWALS
During the Accumulation Period, a Participant may withdraw any part of their
Account balance subject to the restrictions imposed by the Code and regulations
thereof and by the applicable Plan. With respect to Section 401(a) Plans and
Plans subject to Title I of the Employee Retirement Income Security Act of 1974
(ERISA), the Contractholder must authorize Lincoln Life to process a withdrawal
request by a Participant. Withdrawal requests under Section 457 Plans must also
be authorized by the Contractholder. With respect to withdrawal requests by
Participants under Plans not subject to Title I of ERISA, certain Contracts may
require that the Participants must certify to Lincoln Life that an eligible
event under the Code has occurred. Withdrawal requests must be in writing and
in a form acceptable to Lincoln Life.
Certain Plans are also subject to the distribution requirements under Section
401(a)(9) of the Code including the incidental death benefit requirements of
Section 401(a)(9)(G). Certain transfers from one Qualified Plan contract to
another Qualified Plan contract are not subject to withdrawal
5
<PAGE>
restrictions under the Code. Withdrawals and distributions may have tax
consequences, including possibly a 10% Federal Excise Tax for premature
distributions.
Certain types of withdrawals are subject to a contingent deferred sales
charge if taken within the first ten years of participation. See "Contract
Provisions, Deductions and Charges."
See "Federal Income Tax Considerations."
DEATH BENEFITS
The Contracts provide for a Death Benefit for a Participant who dies during
the Accumulation Period. See "Contract Provisions, Death Benefits."
PAYOUT ANNUITIES
As permitted by the applicable Plan, a Contractholder or a Participant who
requests a withdrawal or a Beneficiary of a deceased Participant may elect to
convert all or part of the Participant's Account balance or the Death Benefit,
as appropriate, to a Payout Annuity. Lincoln Life offers both Guaranteed and
Variable Annuities or a combination Guaranteed and Variable Annuity. The range
of annuity options available includes life annuities and annuities for a
specific time period as well as others described more fully in this prospectus.
See "Annuity Period."
FREE-LOOK PROVISION
A Participant under a Section 403(b) or 408 Plan and certain Non-Qualified
Plans has ten days, in most cases, from the date the Participant receives an
Active Life Certificate to notify Lincoln Life in writing that the Participant
does not choose to participate under the Contract and to receive a return of
funds. See "Free-Look Period."
FEE TABLE
The following table and examples, prescribed by the SEC, are included to
assist Contractholders and Participants in understanding the transaction and
operating expenses imposed directly or indirectly under the Contracts. The
standardized tables and examples assume the highest deductions possible under
the Contracts, whether or not such deductions actually would be made from a
Participant's Account. Contingent deferred sales charges ("CDSC") are deducted
from a Participant's Account balance only if a total or partial withdrawal is
made, and then only if one of the exceptions does not apply.
Contract Related Transaction Expenses/1/
Sales Load Imposed on Purchases: 0%
Maximum Contingent Deferred Sales Charge (as a percentage of the Gross
Withdrawal Amount): 5%
<TABLE>
<CAPTION>
PARTICIPATION YEAR CDSC
------------------ ----
<S> <C>
1-6 5%
7 4%
8 3%
9 2%
10 1%
11 and later 0%
Annual Administration Charge/2/ $ 25
Separate Account Annual Expenses
(as a percentage of average daily net assets)
Mortality and Expense Risk Charge 1.20%
Other Charges 0.00%
Total Separate Account
Annual Expenses 1.20%
</TABLE>
6
<PAGE>
Fund Expenses/3/ (as a percentage of average daily net assets)
<TABLE>
<CAPTION>
INDEX G-I/4/ AMGR/4/ G-II BAL INT'L SOC RES/5/ EQI/4/ SMCAP
----- ------- -------- ---- ---- ----- ----------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees 0.245 0.61 0.64 1.00 1.00 1.05 0.71 0.51 0.75
Other Expenses
(after expense reim-
bursements) 0.055 0.08 0.10 0 0 0 0.13 0.07 0.04
Total Fund Expenses 0.300 0.69 0.74 1.00 1.00 1.05 0.84 0.58 0.79
</TABLE>
Example #1: Assuming total withdrawal of the Participant's Account balance at
the end of the period shown./6/
A $1,000 investment would be subject to the expenses shown, assuming 5%
annual return on assets.
<TABLE>
<CAPTION>
G-
INDEX I/4/ AMGR/4/ G-II BAL INT'L SOC RES/5/ EQI/4/ SMCAP
------ ------ -------- ------ ------ ------ ----------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Year 67.36 71.09 71.57 74.04 74.04 74.52 72.52 70.04 72.04
3 Years 103.88 115.21 116.65 124.12 124.12 125.55 119.53 112.03 118.09
Example #2: Assuming annuitization of the Participant's Account at the end of
the period shown.
A $1,000 investment would be subject to the expenses shown, assuming 5%
annual return on assets.
<CAPTION>
G-
INDEX I/4/ AMGR/4/ G-II BAL INT'L SOC RES/5/ EQI/4/ SMCAP
------ ------ -------- ------ ------ ------ ----------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Year 15.64 19.57 20.07 22.68 22.68 23.18 21.07 18.46 20.57
3 Years 48.55 60.50 62.03 69.91 69.91 71.42 65.07 57.15 63.55
Example #3: Assuming persistency of the Participant's Account through the
periods shown.
A $1,000 investment would be subject to the expenses shown, assuming 5%
annual return on assets.
<CAPTION>
G-
INDEX I/4/ AMGR/4/ G-II BAL INT'L SOC RES/5/ EQI/4/ SMCAP
------ ------ -------- ------ ------ ------ ----------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Year 15.64 19.57 20.07 22.68 22.68 23.18 21.07 18.46 20.57
3 Years 48.55 60.50 62.03 69.91 69.91 71.42 65.07 57.15 63.55
</TABLE>
The effect of the Annual Administration Charge for a period is determined by
dividing the total amount of such charges collected in the previous year by the
total average net assets of the accounts for the previous year, as of the
previous month ended; accounts include accounts available under Variable
Annuity I of Lincoln Life and under corresponding accounts of UNUM Life
Insurance Company of America, pending assumption reinsurance by Lincoln Life of
Variable Annuity I contracts issued through such corresponding accounts.
- --------
/1/The examples do not take into account any deduction for premium taxes which
may be applicable. Loans taken by a Participant with respect to the Partici-
pant's Account balance in the Guaranteed Interest Division may be subject to
a charge for establishing the loan.
/2/The Employer has the option of paying the Annual Administration Charge on
behalf of the Participants under a Contract. In such a situation, the pro-
jected expenses would be lower than those
7
<PAGE>
indicated in the examples. This charge is not imposed during the Annuity
Period. In certain situations the Annual Administrative Charge may be re-
duced or eliminated. See "Deductions & Charges--Annual Administrative
Charge."
/3/Until complete order instructions are received, initial Contributions may
be allocated temporarily to Fidelity's Variable Insurance Products Fund:
Money Market Portfolio. Management fees for this fund are 0.21%. Other ex-
penses are 0.09%. Total Fund Expenses are 0.30%. See "Initial Contribu-
tions."
/4/A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, certain funds have entered into arrange-
ments with their custodian and transfer agent whereby interest earned on
uninvested cash balances was used to reduce custodian and transfer agent
expenses. Including these reductions, the total operating expenses pre-
sented in the table would have been 0.56% for Equity Income Portfolio,
0.67% for Growth Portfolio, and 0.73% for Asset Manager Portfolio.
/5/The figures above are based on expenses for fiscal year 1996, and have been
restated to reflect an increase in transfer agency expenses of 0.03% ex-
pected to be incurred in 1997. "Management Fees" includes a performance ad-
justment, which could cause the fee to be as high as 0.85% or as low as
0.55%, depending on performance. "Other Expenses" reflects an indirect fee
of 0.03%. Net fund operating expenses after reductions for fees paid indi-
rectly (again, restated) would be 0.81%.
/6/The Contracts are designed for retirement planning. Withdrawals prior to
retirement or the Annuity Commencement Date are not consistent with the
long-term purposes of the Contracts and the applicable tax laws. Withdraw-
als may also be subject to federal income tax and a 10% Federal tax penal-
ty.
The fee table and examples reflect expenses and charges of the Sub-Accounts
and the expenses of the applicable Fund for the year ended December 31, 1996.
HOWEVER, THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES AND CHARGES OF THE SUB-ACCOUNTS OR THE FUNDS. SIMILARLY, THE
ASSUMED 5% ANNUAL RATE OF RETURN IS NOT AN ESTIMATE OR A GUARANTEE OF FUTURE
INVESTMENT PERFORMANCE. See "Deductions and Charges" in this prospectus and
the discussion of Fund Management in the prospectus for each of the Funds for
further information.
PERFORMANCE INFORMATION
The Variable Investment Division may advertise or use in sales literature
information concerning the investment performance of the various Sub-Accounts.
No performance presentation should be considered as representative of future
investment results. Actual performance is a function not only of the
investment management of the underlying Funds and market forces, but of the
time and frequency of Contributions, the charges and fees imposed under the
Contract, the fees and expenses of the Funds, and transfers made by a
Participant, among other factors.
The investment performance of the Sub-Accounts may be advertised in
comparison with the performances of other variable annuities, other investment
companies (such as mutual funds), and recognized indices (such as the Dow
Jones Industrial Average, Standard & Poor's 500 Composite Stock Price Index,
NASDAQ Index, Consumer Price Index), and data published by Lipper Analytical
Services, Inc., Morningstar, and Variable Annuity Research and Data Service or
comparable services. Performance of the Sub-Accounts may also be compared with
performance of other types of investments. Some advertisements may also
include published editorial comments and performance rankings by independent
organizations and publications that monitor the performance of separate
accounts and mutual funds.
The Sub-Accounts may advertise average annual total return performance
information according to the SEC standardized formula. Average annual total
return shows the average annual percentage increase, or decrease, in the value
of a hypothetical $1,000 contribution allocated to a Sub-Account
8
<PAGE>
from the beginning to the end of each specified period of time. The SEC
standardized formula gives effect to all applicable charges under the
Contracts. This method of calculating performance further assumes that (i) a
$1,000 contribution was allocated to a Sub-Account, (ii) no transfers or
additional payments were made and (iii) the withdrawal of the investment occurs
at the end of the period. Premium taxes are not included in this calculation.
The Sub-Accounts may also advertise this total return performance as described
above on a cumulative basis.
The Sub-Accounts may present total return information computed on a calendar
year basis. The Sub-Accounts may also present total return information over
specified periods of time (computed on an average annual or cumulative basis)
either assuming that no CDSC will be deducted or assuming that no CDSC or
administrative charge will be deducted. The Sub-Accounts may present
hypothetical examples that apply the total return to a hypothetical initial
investment. The Sub-Accounts may also present total return information based on
different amounts of periodic investments. For additional performance
information, please refer to the Statement of Additional Information.
PUBLISHED RATINGS
From time to time, in advertisements or in reports to Contractholders,
Lincoln Life may reflect endorsements. Endorsements are often in the form of a
list of organizations, individuals or other parties which recommend Lincoln
Life or the Contracts. The endorser's name will be used only with the
endorser's consent. It should be noted that the list of endorsements may change
from time to time.
Also, from time to time, the rating of Lincoln Life as an insurance company
by A.M. Best may be referred to in advertisements or in reports to
Contractholders. Each year the A.M. Best Company reviews the financial status
of thousands of insurers, culminating in the assignment of Best's Ratings.
These ratings reflect Best's opinion of the relative financial strength and
operating performance of an insurance company in comparison to the norms of the
life/health insurance Industry. Best's ratings range from A++ to F.
In addition, the claims-paying ability of Lincoln Life as measured by the
Standard and Poor's Rating Group may be referred to in advertisements or in
reports to Contractholders. A Standard and Poor's insurance claims-paying
ability rating is an assessment of an operating insurance company's financial
capacity to meet the obligations of its insurance policies in accordance with
their terms. Standard and Poor's ratings range from AAA to CCC.
From time to time Lincoln Life may refer to Moody's Investors Service rating
of Lincoln Life. Moody's Investors Service financial strength ratings indicate
an insurance company's ability to discharge policyholder obligations and claims
and are based on an analysis of the insurance company and its relationship to
its parent, subsidiaries, and affiliates. Moody's Investors Service ratings
range from Aaa to C.
These ratings are opinions of an operating insurance company's financial
capacity to meet the obligations of its insurance contracts in accordance with
their terms. Claims-paying ability ratings do not refer to an insurer's ability
to meet non-contract obligations (i.e., debt/commercial paper). Lincoln Life's
ratings should not be considered as bearing on the investment performance of
assets held in the Variable Investment Division or the safety (or lack thereof)
for an investment in the Variable Investment Division.
9
<PAGE>
CONDENSED FINANCIAL INFORMATION
The financial data included below should be read in conjunction with the
financial statements and the related data included in the Statement of
Additional Information.
ACCUMULATION UNIT VALUES
(FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
SUB-ACCOUNT 1996
- ----------- -------
<S> <C>
Index Account
September 26 Commencement
Beginning of Period 21.0129
End of Period 22.7054
Growth I Account
September 26 Commencement
Beginning of Period 22.7925
End of Period 23.2198
Growth II Account
September 26 Commencement
Beginning of Period 16.2016
End of Period 14.7133
Asset Manager Account
September 26 Commencement
Beginning of Period 16.3088
End of Period 17.2668
Balanced Account
September 26 Commencement
Beginning of Period 15.6978
End of Period 16.2128
International Stock Account
September 26 Commencement
Beginning of Period 11.6873
End of Period 12.2756
Socially Responsible Account
September 26 Commencement
Beginning of Period 13.7989
End of Period 14.2222
Equity-Income Account
September 26 Commencement
Beginning of Period 14.7629
End of Period 15.7898
Small Cap Account
September 26 Commencement
Beginning of Period 14.8535
End of Period 15.2861
Pending Allocation Account
September 26 Commencement
Beginning of Period 11.1227
End of Period 11.2772
</TABLE>
10
<PAGE>
NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF PERIOD
<TABLE>
<CAPTION>
1996
------
<S> <C>
Index Account 3,092
Growth I Account 8,318
Growth II Account 1,254
Asset Manager Account 24,911
Balanced Account 1,795
Socially Responsible Account 9,459
Equity-Income Account 10,485
International Stock Account 4,707
Small Cap Account 11,770
Pending Allocation Account 5
</TABLE>
Number of Fund Shares held by each of the corresponding Sub-Accounts as of
December 31st of each year
<TABLE>
<CAPTION>
1996
------
<S> <C>
Dreyfus Stock Index Fund 3,463
Fidelity's Variable Insurance Products
Fund: Growth Portfolio 6,205
American Century Variable Portfolios,
Inc.: VP Capital Appreciation 1,802
Fidelity's Variable Insurance Products
Fund II: Asset Manager Portfolio 25,417
American Century Variable Portfolios,
Inc.: VP Balanced 3,861
Calvert Responsibly Invested Balanced
Portfolio 75,862
Fidelity's Variable Insurance Products
Fund: Equity-Income Portfolio 7,876
T. Rowe Price International Stock
Portfolio 4,573
Dreyfus Variable Investment Fund:
Small Cap Portfolio 3,456
Fidelity's Variable Insurance Products
Fund: Money Market Portfolio 55
</TABLE>
FINANCIAL STATEMENTS
The financial statements of Lincoln Life and the Variable Investment Division
may be found in the Statement of Additional Information.
LINCOLN LIFE, THE VARIABLE INVESTMENT DIVISION AND THE FUNDS
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
Lincoln Life is a stock life insurance company incorporated under the laws of
Indiana on June 12, 1905. Lincoln Life is principally engaged in offering life
insurance policies and annuity policies, and ranks among the largest United
States stock life insurance companies in terms of assets and life insurance in
force. Lincoln Life is also one of the leading life reinsurers in the United
States. Lincoln Life is licensed in all states (except New York) and the
District of Columbia, Guam, and the Virgin Islands.
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<PAGE>
Lincoln Life is wholly owned by Lincoln National Corporation ("LNC"), a
publicly held insurance holding company incorporated under Indiana law on
January 5, 1968. The principal offices of both Lincoln Life and LNC are located
at 1300 South Clinton Street, Fort Wayne, Indiana 46801. Through subsidiaries,
LNC engages primarily in the issuance of life insurance and annuities,
property-casualty insurance, and other financial services. Administrative
services necessary for the operation of the Variable Investment Division and
the Contracts are currently provided by Lincoln Life.
LNC EQUITY SALES CORPORATION
LNC Equity Sales Corporation ("LNC Equity"), a registered broker-dealer, is
the principal underwriter of the Contracts. As such, LNC Equity will be
offering the Contracts and performing all duties and functions that are
necessary and proper for distribution of the Contracts. LNC Equity has also
entered into sales agreements with independent broker-dealers for the sale of
the Contracts. LNC Equity may pay sales commissions to broker-dealers up to an
amount equivalent to 3.5% of Contributions under a Contract.
THE VARIABLE INVESTMENT DIVISION
The Variable Investment Division was established by Lincoln Life as a
separate account on April 29, 1996. Although the assets of the Variable
Investment Division are the property of Lincoln Life, the laws of Indiana under
which the Variable Investment Division was established provide that the assets
in the Variable Investment Division attributable to the Contracts are not
chargeable with liabilities arising out of any other business which Lincoln
Life may conduct. The assets of the Variable Investment Division shall,
however, be available to cover the liabilities of the General Account of
Lincoln Life to the extent that the Variable Investment Division's assets
exceed its reserves and other liabilities arising under the Contracts supported
by it. The Variable Investment Division is registered with the Securities and
Exchange Commission ("SEC") as a unit investment trust under the Investment
Company Act of 1940 ("1940 Act"). Registration with the SEC does not involve
supervision of the management or investment practices or policies of either the
Variable Investment Division or Lincoln Life by the SEC.
The Variable Investment Division currently consists of nine Sub-Accounts. The
Sub-Accounts invest in shares of the Funds. Therefore, the investment
experience of the Sub-Accounts depends on the performance of the Funds.
The income, gains and losses, realized or unrealized, from assets allocated
to each Sub-Account of the Variable Investment Division are credited to or
charged against that Sub-Account, without regard to other income, gains or
losses in Lincoln Life's general account or any other separate account or Sub-
Account. Lincoln Life is the issuer of the Contracts and the obligations set
forth therein, other than those of the Contractholder or the Participant, are
obligations of Lincoln Life.
THE FUNDS
The nine Sub-Accounts invest directly in nine corresponding Funds. Each of
these Funds was formed as an investment vehicle for insurance company separate
accounts.
Information about each of the Funds, including their investment objectives
and investment management, is contained below. Additional information about the
Funds, their investment policies, risks, fees and expenses and all other
aspects of their operations, can be found in the prospectuses for the Funds,
which should be read carefully before investing. THERE IS NO ASSURANCE THAT ANY
FUND WILL ACHIEVE ITS STATED OBJECTIVES. Additional copies of the Funds'
prospectuses, as well as their Statements of Additional Information, can be
obtained directly from
12
<PAGE>
each of the Funds without charge by writing to the particular Funds at the
addresses noted on the front of the Fund prospectus. Shares of the Funds are
sold not only to the Sub-Accounts but also to variable annuity and variable
life separate accounts of other insurance companies and qualified retirement
plans. For disclosure of possible conflicts involved in the Sub-Accounts
investing in Funds that are so offered, see the applicable Fund prospectus.
DREYFUS STOCK INDEX FUND
Dreyfus Stock Index Fund is an open-end, non-diversified management
investment company known as an index fund. Its goal is to provide investment
results that correspond to the price and yield performance of publicly traded
common stocks in the aggregate, as represented by the Standard & Poor's 500
Composite Stock Price Index. The Fund is neither sponsored by nor affiliated
with Standard & Poor's Corporation.
The Dreyfus Corporation, located at 200 Park Avenue, New York, New York
10166, acts as the Fund manager and Mellon Equity Associates, an affiliate of
Dreyfus located at 500 Grant Street, Pittsburgh, Pennsylvania 15258, is the
Fund index manager.
CALVERT RESPONSIBLY INVESTED BALANCED PORTFOLIO OF ACACIA CAPITAL CORPORATION
CALVERT RESPONSIBLY INVESTED BALANCED PORTFOLIO: The Calvert Responsibly
Invested Balanced Portfolio seeks total return above the rate of inflation
through an actively managed, non-diversified portfolio of common and preferred
stocks, bonds, and money market instruments which offer income and growth
opportunity and which satisfy the social concern criteria established for the
Portfolio. Shares of the Portfolio are offered only to insurance companies for
allocation to certain of their variable accounts.
The Calvert Asset Management Company, Inc., located at 4550 Montgomery
Avenue, Suite 1000N, Bethesda, Maryland 20814, serves as the Portfolio's
investment adviser.
SMALL CAP PORTFOLIO OF DREYFUS VARIABLE INVESTMENT FUND
Dreyfus Variable Investment Fund is an open-end, diversified management
investment company.
THE SMALL CAP PORTFOLIO: The Portfolio seeks to maximize capital appreciation.
The Small Cap Portfolio seeks out companies that The Dreyfus Corporation
believes have the potential for significant growth. Under normal market
conditions, the Portfolio will invest at least 65% of its total assets in
companies with market capitalization of less than $1.5 billion, at the time of
purchase, both domestic and foreign, which the Portfolio believes to be
characterized by new or innovative products or services which should enhance
prospects for growth in future earnings. The Portfolio may also invest in
special situations such as corporate restructurings, mergers or acquisitions.
The Dreyfus Corporation, located at 200 Park Avenue, New York, New York
10166, serves as the Fund's investment adviser.
FIDELITY'S VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO, GROWTH
PORTFOLIO, AND MONEY MARKET PORTFOLIO
EQUITY-INCOME PORTFOLIO: The Portfolio seeks reasonable income by normally
investing at least 65% of its total assets in income-producing common or
preferred stock and the remainder in debt securities.
13
<PAGE>
GROWTH PORTFOLIO: The Portfolio seeks to achieve capital appreciation. The
Portfolio normally purchases common stocks, although its investments are not
restricted to any one type of security. Capital appreciation may also be found
in other types of securities, including bonds and preferred stocks.
MONEY MARKET PORTFOLIO: The Portfolio seeks to obtain as high a level of
current income as is consistent with preserving capital and providing
liquidity. For more information regarding the Portfolio, into which initial
Contributions are invested pending Lincoln Life's receipt of a complete order,
please see the "Initial Contributions" section.
Fidelity Management & Research Company ("FMR") is the manager of the Equity-
Income Portfolio, the Growth Portfolio and the Money Market Portfolio and is
located at 82 Devonshire Street, Boston, Massachusetts 02109.
FIDELITY'S VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
ASSET MANAGER PORTFOLIO: The Portfolio seeks high total return with reduced
risk over the long term by allocating its assets among domestic and foreign
stocks, bonds and short-term fixed income instruments.
FMR is the manager of the Portfolio and is located at 82 Devonshire Street,
Boston, Massachusetts 02109. FMR or its affiliate may compensate Lincoln Life
or its affiliate for administrative, distribution, or other services. Such
compensation would be based on assets of the Fidelity Funds attributable to the
Contracts and certain other contracts issued by Lincoln Life and its
affiliates.
VP CAPITAL APPRECIATION AND VP BALANCED OF AMERICAN CENTURY VARIABLE
PORTFOLIOS, INC.
VP CAPITAL APPRECIATION: The Portfolio seeks capital growth by investing
primarily in common stocks that are considered by management to have better-
than-average prospects for appreciation.
VP BALANCED: The Portfolio seeks capital growth and current income. Its
investment team intends to maintain approximately 60% of the portfolio's assets
in common stocks that are considered by its manager to have better than average
prospects for appreciation and the balance in bonds and other fixed income
securities.
American Century Variable Portfolios, Inc. is managed by American Century
Investment Management, Inc. (formerly Investors Research Corporation), which
also manages the American Century family of mutual funds. American Century
Investment Management, Inc. has its principal place of business at 4500 Main
Street, Kansas City, Missouri 64111.
Lincoln Life or its affiliate may perform certain administrative or other
services that would otherwise be performed by American Century Services
Corporation and American Century Investment Management, Inc. may pay Lincoln
Life or its affiliate for such services. Such compensation would be based on
assets of the American Century Funds attributable to the Contracts and certain
other contracts issued by Lincoln Life and its affiliates.
INTERNATIONAL STOCK PORTFOLIO OF T. ROWE PRICE INTERNATIONAL SERIES, INC.
INTERNATIONAL STOCK PORTFOLIO: The International Stock Portfolio seeks long-
term growth of capital through investments primarily in common stocks of
established, non-U.S. companies.
The Series is managed by Rowe Price-Fleming International, Inc., one of
America's largest international no load mutual fund managers with approximately
$25 billion under management as of December 31, 1996, from its offices in
Baltimore, London, Tokyo, Hong Kong and Singapore.
14
<PAGE>
CONTRACT PROVISIONS
GENERAL
These Contracts were designed for Employers and other entities to enable
Participants and Employers to accumulate funds for retirement programs meeting
the requirements of the following Sections of the Internal Revenue Code of
1986, as amended (the "Code"): 401(a), 403(b), 408, 457 and other related
Sections as well as for programs offering non-qualified annuities. An Employer,
Association or trustee in some circumstances, may enter into a Contract with
Lincoln Life by filling out an application and returning it to Lincoln Life.
Upon Lincoln Life's acceptance of the application, Contractholders or an
affiliated Employer can forward Contributions on behalf of employees who then
become Participants under the Contracts. For Plans that have allocated rights
to the Participant, Lincoln Life will issue to each Participant a separate
Active Life Certificate that describes the basic provisions of the Contract to
each Participant.
CONTRIBUTIONS UNDER THE CONTRACT
Generally, under the Contracts, Contributions are forwarded by the
Contractholders to Lincoln Life 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
depending upon the Divisions available under the Contract and/or the Division
in which the Contributions are deposited. Contributions to the Guaranteed
Interest Division become part of Lincoln Life's General Account and are
guaranteed a minimum rate of interest. See "Guaranteed Interest Division."
Contributions to the Variable Investment Division increase or decrease in value
daily to reflect the investment experience of the Sub-Accounts in which the
Contributions are invested.
Contributions by Participants may be in any amount unless there is a minimum
amount set by the Contractholder or Plan. A Contract may require the
Contractholder to contribute a minimum annual amount on behalf of all
Participants. Annual Contributions under Qualified Plans may be subject to
maximum limits imposed by the Code. Annual Contributions under non-qualified
plans may be limited by the terms of the Contract. In the Statement of
Additional Information see "Tax Law Considerations" for a discussion of these
limits. Subject to any restrictions imposed by the Plan or the Code, transfers
from other contracts and qualified rollover Contributions will be accepted.
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. Lincoln Life will return Employer
Contributions to the Contractholder 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 Guaranteed Interest
Division.
Contributions must be in United States funds. All withdrawals and
distributions under this Contract will be in U.S. funds. If a bank or other
financial institution does not honor the check or other payment method
constituting a Contribution, Lincoln Life will treat the Contribution as
invalid. All allocation and subsequent transfers resulting from the invalid
Contributions shall be reversed and the party responsible for the invalid
Contribution shall reimburse Lincoln Life for any losses or expenses resulting
from the invalid Contribution.
INITIAL CONTRIBUTIONS
The initial Contribution for a Participant will be credited to the
Participant's Account no later than two Business Days after it is received by
Lincoln Life at its service office if it is preceded or
15
<PAGE>
accompanied by a completed enrollment form containing all the information
necessary for processing the Participant's Contribution. If Lincoln Life does
not receive a complete enrollment form, Lincoln Life will notify the
Contractholder or the Participant that Lincoln Life does not have the necessary
information to process the Contribution. If the necessary information is not
provided to Lincoln Life within five (5) Business Days after Lincoln Life first
receives the initial Contribution, Lincoln Life will return the initial
Contribution less any withdrawal(s) by the Participant or by the
Contractholder, unless the Participant or the Contractholder specifically
consents to Lincoln Life retaining the Contribution until the enrollment form
is made complete.
Notwithstanding the above, when the Contract includes language regarding the
"Pending Allocation Account", the following shall apply: Where state approval
has been obtained, if Lincoln Life receives Contributions which are not
accompanied by a properly completed Enrollment Form, Lincoln Life will notify
the Contractholder of that fact and deposit the Contributions to the Pending
Allocation Account, unless such Contributions are designated to another Account
in accordance with the Plan. Within two Business Days of receipt of a properly
completed Enrollment Form, the Participant's Account balance in the Pending
Allocation Account will be transferred in accordance with the allocation
percentages elected on the Enrollment Form. All future Contributions will also
be allocated in accordance with these percentages until such time as the
Participant may notify Lincoln Life of a change. If a properly completed
Enrollment Form is not received after three monthly notices have been sent, the
Participant's Account balance in the Pending Allocation Account will be
refunded to the Contractholder within 105 days of the date of the initial
Contribution. The Pending Allocation Account invests in Fidelity's Variable
Insurance Products Fund Money Market Portfolio and is not available as an
investment option under the group annuity contract. Mortality & Expense Risk
Charges and the Annual Administration Charge do not apply to this Account.
These charges will be applicable upon receipt of a properly completed
Enrollment Form and the Participant's contract Participation Date will be the
date money was deposited in the Pending Allocation Account.
ALLOCATION OF CONTRIBUTIONS
A Participant must designate in writing, subject to the Plan, the percent of
their Contribution which will be allocated to each Division and to each Sub-
Account available under their Contract. The Contributions allocation percentage
to the Guaranteed Investment Division or any Sub-Account can be in any whole
percent. A Participant whose Employer offers two or more Lincoln Life contracts
for the same type of Qualified or Non-Qualified Plans may allocate
Contributions to a maximum of ten Sub-Accounts and the Guaranteed Interest
Division. Participants, subject to the terms of the Plan, may change the
allocation of Contributions by notifying Lincoln Life in writing or by
telephone in accordance with procedures published by Lincoln Life. Telephone
requests for allocation changes follow the same verification of identity rules
as for Transfers. (See "Telephone Transfers.") When Lincoln Life receives a
notice in writing, the form must be acceptable to Lincoln Life. Upon receipt by
Lincoln Life, the change will be effective for all Contributions received
concurrently with the allocation change form and for all future Contributions,
unless a later date is requested. 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 Divisions and
Sub-Accounts pursuant to the requirements described in "Transfers between
Divisions and Sub-Accounts." Allocations of Employer Contributions may be
restricted by the applicable plan.
SUBSEQUENT CONTRIBUTIONS
The Contractholder will forward Contributions to Lincoln Life specifying the
amount being contributed on behalf of each Participant. The Contractholder must
send Contributions and provide such allocation information in accordance with
procedures established by Lincoln Life. The Contributions shall be allocated
among the Guaranteed Interest Division and the Variable Investment Division in
accordance with the Contractholder's or the Participant's written instructions
as described above in "Allocation of Contributions."
16
<PAGE>
INVESTMENT OF CONTRIBUTIONS
Contributions are invested as of the date of receipt at Lincoln Life's
service office, provided that they are received prior to 4:00 p.m. (Eastern
Time) on a Business Day and allocation information is provided in a form
acceptable to Lincoln Life in accordance with procedures established by Lincoln
Life. If the Contribution is received after 4:00 p.m. (Eastern Time), Lincoln
Life will invest the Contribution on the next Business Day. Contributions on
behalf of a Participant which are allocated to the Variable Investment Division
will be credited with Accumulation Units as of that date. A Participant's
interest in the Variable Investment Division during the Accumulation Period is
the value of the Participant's Accumulation Units in the Variable Investment
Division. The number of Accumulation Units credited to a Participant's Account
in a Sub-Account is calculated by dividing the Contribution allocated to the
Sub-Account by the dollar value of an Accumulation Unit next determined after
receipt of the Contribution. The number of Accumulation Units purchased will
not vary as a result of any subsequent fluctuations in the Accumulation Unit
Value. The Accumulation Unit Value, of course, fluctuates with the investment
performance of the underlying Fund and also reflects deductions and charges
made against the Variable Investment Division.
DETERMINATION OF ACCUMULATION UNIT VALUE
Lincoln Life determines the Accumulation Unit Value of each Sub-Account on
each Valuation Date. Accumulation Unit Values are determined by multiplying the
Net Investment Factor for the current Valuation Period by the Accumulation Unit
Value as of the end of the immediately preceding Valuation Period.
Lincoln Life uses a Net Investment Factor to measure the daily fluctuations
in value of a Sub-Account. The Net Investment Factor for any Valuation Period
is determined as follows:
(a) The net asset value per share of the underlying Fund as of the end of
a Valuation Period is added to the amount per share of any dividends or
capital gain distributions paid by the Fund during that Valuation Period;
(b) The amount in (a) above is then divided by the net asset value per
share of the underlying Fund as of the end of the immediately preceding
Valuation Period;
(c) The result of (a) divided by (b) is then multiplied by one minus the
annual mortality and expense risk charge to the n/365th power where n
equals the number of calendar days since the immediately preceding Valua-
tion Date.
The above calculation will be adjusted by the amount per share of any taxes
which are incurred by Lincoln Life because of the existence of the Variable
Investment Division.
The Participant's Account balance is equal to the sum of the Participant's
Account balances in both the Variable Investment Division and the Guaranteed
Interest Division.
TRANSFERS BETWEEN DIVISIONS AND SUB-ACCOUNTS
During the Accumulation Period and subject to the terms of the Plan,
transfers may be made of all or part of a Participant's Account balance in any
Division or Sub-Account to another Sub-Account or Division. Transfers will not
change the allocation of future Contributions to the Divisions and Sub-
Accounts. Lincoln Life does not require that any minimum amount be transferred.
To effect a transfer, Lincoln Life must receive a written transfer request in a
form acceptable to Lincoln Life.
Transfers to or from the Variable Investment Division are made using the
Accumulation Unit Value next computed following Lincoln Life's receipt of the
written transfer request.
TELEPHONE TRANSFERS BETWEEN DIVISIONS AND SUB-ACCOUNTS
Lincoln Life may accept telephone transfers from Participants when this is
allowed by the Contractholder. In order to prevent unauthorized or fraudulent
transfers, Lincoln Life will require a
17
<PAGE>
Participant to provide certain identifying information before Lincoln Life will
act upon their instructions. Lincoln Life may also assign the Participant a
Personal Identification Number (PIN) to serve as identification. Lincoln Life
will not be liable for following telephone instructions it reasonably believes
are genuine. Telephone transfer requests may be recorded and written
confirmation of all transfer requests will be mailed to the Participant or
Contractholder on the next Business Day. Telephone transfers will be processed
on the Business Day that they are received when they are received at the
Lincoln Life service office before 4:00 p.m. Eastern Time. If the Participant
or Contractholder determines that a transfer has been made in error, the
Participant or Contractholder must notify Lincoln Life within 30 days of the
confirmation notice date. See "Contract Provisions, Transfers between Divisions
and Sub-Accounts."
WITHDRAWALS
During the Accumulation Period and subject to the terms of the Plan,
withdrawals may be made from either or both Divisions of all or part of the
Participant's Account balance in a Division or Sub-Account remaining after
deductions for any applicable (1) Contingent Deferred Sales Charge ("CDSC");
(2) Annual Administration Charge (imposed on Total Withdrawals), (3) premium
taxes, and (4) outstanding loan including loan security. Annuity Conversion
Amounts are not considered withdrawals. See "Annuity Period, Annuities:
General."
All withdrawal requests must indicate the amount to be withdrawn and be
submitted in a form acceptable to Lincoln Life. If the request does not specify
the Sub-Accounts and/or the Divisions from which the withdrawal is to be made,
the withdrawal will be made pro rata based on balances in the Sub-Accounts and
the Guaranteed Investment Division. Lincoln Life does not require that any
minimum amount be withdrawn. Telephone withdrawal requests are not permitted.
Withdrawals from the Variable Investment Division are made by reducing the
Participant's number of Accumulation Units in the applicable Sub-Account. In
determining the number of Accumulation Units to be reduced, Lincoln Life uses
the Accumulation Unit Value next computed after Lincoln Life's receipt of the
written withdrawal request.
Payment of all Variable Investment Division withdrawal amounts generally will
be made within seven days after receipt by Lincoln Life of the withdrawal
request in a form acceptable to Lincoln Life. See "Market Emergencies."
TOTAL WITHDRAWALS
A Total Withdrawal can only be made by a Participant who has no outstanding
loans under the Contract. A Total Withdrawal of a Participant's Account will
occur when (a) the Participant or Contractholder requests the liquidation of
the Participant's entire Account balance, or (b) the amount requested plus any
CDSC results in a remaining Participant's Account balance of less than or equal
to the Annual Administration Charge, in which case the request is treated as if
it were a request for liquidation of the Participant's entire account balance.
Any Active Life Certificate must be surrendered to Lincoln Life when a Total
Withdrawal occurs. If a Contractholder resumes Contributions on behalf of a
Participant after a Total Withdrawal, the Participant will receive a new
Participation Date and Active Life Certificate.
A Participant refund under the free-look provisions is not considered a Total
Withdrawal.
PARTIAL WITHDRAWALS
A Partial Withdrawal of a Participant's Account will occur when less than a
Total Withdrawal is made from a Participant's Account.
18
<PAGE>
SYSTEMATIC WITHDRAWAL OPTION
Participants who are at least age 59 1/2, 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
Guaranteed Interest Division. 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 Guaranteed Interest Division in order to select the
SWO. A Participant may transfer amounts from the Variable Investment Division
to the Guaranteed Interest Division in order to support SWO payments. These
transfers, however, are subject to the transfer restrictions described in this
Prospectus and/or imposed by any applicable Plan. A one-time fee of up to $30
may 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 as well as from Lincoln Life.
MAXIMUM CONSERVATION OPTION
Under certain Contracts Participants who are at least age 70 1/2 may request
that Lincoln Life calculate and pay to them the minimum annual distribution
required by Sections 401(a)(9), 403(b)(10), 408 or 457(d) of the Code. The
Participant must complete forms as required by Lincoln Life in order to elect
this option. Lincoln Life will base its calculation solely on the Participant's
Account Value with Lincoln Life. 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 Code and regulations thereof and in any
applicable Plan document. That section provides that salary reduction
Contributions deposited and earnings credited on any salary reduction
Contributions after December 31, 1988 may only be withdrawn if the Participant
has (1) died; (2) become disabled; (3) attained age 59 1/2; (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, such 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 Income Tax Considerations."
Withdrawal requests for a Participant under Section 401(a) Plans, Section
457(b) Plans and Plans subject to Title I of ERISA must be authorized by the
Contractholder on behalf of a Participant. All withdrawal requests will require
the Contractholder's written authorization and written documentation specifying
the portion of the Participant's Account balance which is available for
distribution to the Participant. Withdrawal requests for Section 457(f) Plans
must be requested by the Contractholder.
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 70 1/2. 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 and non-457 Plans, the Participant must certify to Lincoln Life that one
of the permitted distribution events listed in the Code has occurred
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(and provide supporting information, if requested) and that Lincoln Life may
rely on such representation in granting such withdrawal request. See "Federal
Income Tax Considerations." A Participant should consult their tax adviser as
well as review the provisions of their Plan before requesting a withdrawal.
In addition to the restrictions noted above, 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 Code, may be
subject to a ten percent excise tax.
DEATH BENEFITS
The payment of death benefits will be governed by the provisions of the
applicable Plan and the Code. In the event of the death of a Participant during
the Accumulation Period, Lincoln Life will pay the Beneficiary, if one is
living, or the Plan the greater of the following amounts:
(1) The Net Contributions, or
(2) The Participant's Account balance less any outstanding loan (includ-
ing principal and due and accrued interest), provided that, if Lincoln Life
is not notified of the Participant's death within six months of such death,
the Beneficiary will receive the Death Benefit amount described in para-
graph (2).
A Beneficiary may elect to have the Death Benefit (1) paid as a lump sum, (2)
converted to a Payout Annuity or (3) as a combination of a lump sum payment and
a Payout Annuity.
Lincoln Life will calculate the Death Benefit as of the end of the Valuation
Period during which it receives both satisfactory notification of the
Participant's death and an election of a form of Death Benefit (as described
below). Payment of a lump sum election generally will be made within seven days
following such calculation. Payment of an annuity option will be paid in
accordance with the provisions regarding annuities. See "Annuity Period." If no
election is made within sixty days following Lincoln Life's receipt of
satisfactory notice of the Participant's death, the Death Benefit will be paid
in the form of a lump sum payment and will be calculated as of the end of the
Valuation Period during which that sixtieth day occurs (and payment generally
will be made within seven days after such calculation date). See "Market
Emergencies".
Satisfactory proof of death may consist of: a copy of a certified death
certificate; a copy of a certified decree of a court of competent jurisdiction
as to the finding of death; a written statement by a medical doctor who
attended the deceased at the time of death; or any other proof satisfactory to
Lincoln Life.
Notwithstanding the above, under qualified annuities, if the Beneficiary is
someone other than the spouse of the deceased Participant, the 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 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 Code to begin earlier than
December 31st of the calendar year in which the Participant would have attained
age 70 1/2. 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.
Other rules apply to non-qualified annuities. See "Federal Income Tax
Considerations."
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If there is no living named Beneficiary on file with Lincoln Life at the time
of a Participant's death and unless the Plan directs otherwise, Lincoln Life
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 such proof of death is received by Lincoln Life no later than the end
of the fourth calendar year following the year of the Participant's death. In
such case, valuation of the Death Benefit will occur as of the end of the
Valuation Period during which due proof of death is received by Lincoln Life,
and the lump sum Death Benefit generally will be paid within seven days of that
date. See "Market Emergencies".
DEDUCTIONS AND CHARGES
CHARGES AGAINST THE VARIABLE INVESTMENT DIVISION
MORTALITY AND EXPENSE RISK CHARGES
Certain charges will be assessed as a percentage of the value of the net
assets of the Variable Investment Division to compensate Lincoln Life for risks
assumed in connection with the Contracts.
Lincoln Life deducts from the net assets of the Variable Investment Division
a daily charge of 1.20% on an annual basis.
This charge is assessed both during the Accumulation Period and the Annuity
Period, although during the Annuity Period, Lincoln Life will bear no mortality
risk with respect to the Annuity Options that do not involve life
contingencies. This amount is intended to compensate Lincoln Life for certain
Mortality and Expense Risks Lincoln Life assumes in operating the Variable
Investment Division and for providing services to the Participant. The total
charge may not be altered.
The Expense Risk is the risk that Lincoln Life's actual expenses in issuing
and administering the Contract will be more than Lincoln Life estimated. The
Mortality Risk borne by Lincoln Life arises from the chance that Lincoln Life's
actuarial estimate of mortality rates during the Annuity Period, as guaranteed
in the Contract, may prove erroneous and that an Annuitant may live longer than
expected. This contractual guarantee assures that neither an Annuitant's own
longevity nor an improvement in life expectancy generally will have any adverse
effect under the Contracts. In addition, Lincoln Life bears the Mortality Risk
because it guarantees to pay a Death Benefit that may be higher than the
Participant's Account balance upon the death of the Participant prior to the
Annuity Period.
CHARGES AGAINST THE CONTRACTS
The charges that Lincoln Life assesses in connection with the Contracts are
described below.
ANNUAL ADMINISTRATION CHARGE
Lincoln Life provides many administrative functions in connection with the
Contracts, including receiving and allocating Contributions in accordance with
the Contracts, making annuity payments when they become due, and preparing and
filing all reports required to be filed by the Variable Investment Division. In
addition, Lincoln Life provides Participants with Account statements and
accounting services that keep track of pre-tax monies, employee and Employer
monies, vested Account balances and rollover or transferred monies.
In consideration for these administrative services, Lincoln Life currently
deducts $25 (or the balance of the Participant's Account if less) per year from
each Participant's Account balance on the last Business Day of the month in
which a Participation Anniversary occurs. This charge is deducted only during
the Accumulation Period. This Annual Administration Charge is also withdrawn
from a
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Participant's Account balance if and when a Participant's Account is totally
withdrawn. The charge may be increased or decreased (subject to any appropriate
regulatory approvals).
The Annual Administration Charge may be reduced or waived for those
Participants who are participating under another Lincoln Life contract which
imposes an Annual Administration Charge or where Lincoln Life's interest costs
or expenses are reduced due to the terms of the Contract, economies of scale or
administrative assistance provided by the Contractholder. In addition, the
Employer has the option of paying the Annual Administration charge on behalf of
the Participants under a Contract.
Under certain Contracts, the Contractholder may also choose to have the
Annual Administration Charge paid only by those Participants in the Variable
Investment Division. Contracts offering this provision will typically have a
declared interest rate in the Guaranteed Interest Division which is lower than
under contracts not offering this provision. For contracts offering this
provision, the Annual Administration Charge will be deducted as described in
this section.
PREMIUM TAXES
Certain states require that a premium tax be paid on contributions to a
variable annuity contract. Others assess a premium tax at the time of
annuitization. Lincoln Life will deduct a charge for any applicable premium tax
from the Participant's Account balance either: (1) at the time of a Total
Withdrawal of a Participant's Account balance; (2) on the Annuity Commencement
Date; (3) at such other date as the taxes are assessed. Various states levy a
premium tax, currently ranging from 0.5% to 4.0%, on variable annuity
contracts.
CONTINGENT DEFERRED SALES CHARGE
Lincoln Life does not impose a sales charge at the time a Contribution is
made to a Participant's Account under the Contract. During the Accumulation
Period and prior to the 11th Participation Year, Lincoln Life charges a
Contingent Deferred Sales Charge ("CDSC") on all Total or Partial Withdrawals
of a Participant's Account balance unless Lincoln Life receives at the time of
the withdrawal request reasonable proof necessary to verify that: (a) the
Participant has attained age 59 1/2; (b) the Participant has died; (c) the
Participant has incurred a disability as defined under the Contract; or (d) the
Participant has terminated employment with the Employer.
The CDSC reimburses Lincoln Life for part or all of its expenses related to
distributing the Contracts. If the revenues generated by the CDSC are not
sufficient to cover Lincoln Life's actual costs of distribution, such costs
will be paid from Lincoln Life's General Account assets, which may include any
ultimate profit derived from the mortality and expense risk charge.
Amounts subject to a CDSC are charged in accordance with the following
schedule:
<TABLE>
<CAPTION>
DURING
PARTICIPATION YEAR CDSC
------------------ ----
<S> <C>
1-6 5%
7 4%
8 3%
9 2%
10 1%
11 and later 0%
</TABLE>
A Contractholder has the option of adding financial hardship as an event
entitling the Participant to a withdrawal from the Contract without the
imposition of a CDSC. A Contractholder can also choose a provision under the
Contract permitting Participants to make a withdrawal, once in each calendar
year, of up to 20% of their Account balance without the imposition of a CDSC.
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Contractholders choosing these additional benefits may receive a lower declared
interest rate under the Guaranteed Interest Division of their Contract than
under Contracts not offering these benefits. Under certain Contracts, the
Contractholders may choose to require that the Participant be age 55 or older
and have terminated employment in order to be entitled to a withdrawal without
a CDSC. Contracts containing this additional restriction may receive a higher
declared interest rate in the Guaranteed Interest Division than the Contracts
not containing this restriction.
The CDSC on any withdrawal may be reduced or eliminated but only to the
extent that Lincoln Life anticipates that it will incur lower sales expenses or
perform fewer sales services due to economies arising from (a) the size of the
particular group, (b) an existing relationship with the Contractholder or
Employer, (c) the utilization of mass enrollment procedures, or (d) the
performance of sales functions by the Contractholder or an Employer which
Lincoln Life would otherwise be required to perform.
The CDSC is imposed on the Gross Withdrawal Amount. A Participant may request
to receive a specific Net Withdrawal Amount. If the Participant requests a
specific Net Withdrawal Amount, the CDSC will be imposed on a Gross Withdrawal
Amount, which after deducting the CDSC, gives the Participant the Net
Withdrawal Amount requested. The following example illustrates the formula:
Participant requests a Net Withdrawal Amount of $100 in their tenth Par-
ticipation Year. Lincoln Life will impose the 1% CDSC on a Gross Withdrawal
Amount of $101.01 and the Participant will receive $100. This is the stan-
dard procedure for withdrawals.
The CDSC will be deducted from the Divisions and Sub-Accounts in proportion
to amounts withdrawn therefrom. Death Benefit payments and amounts converted to
an annuity are not subject to a CDSC. In no event will the CDSC, when added to
any CDSC previously imposed due to a Participant withdrawal, exceed 8.5% of the
cumulative Contributions to a Participant's Account.
MISCELLANEOUS
The Variable Investment Division purchases shares from the Funds at net asset
value. The net asset value reflects investment management fees and other
expenses that have already been deducted from the assets of the Funds. The
Funds' investment management fees, expenses and expense limitations, if
applicable, are more fully described in each prospectus for the Funds.
ANNUITY PERIOD
GENERAL
To the extent 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 a Payout Annuity. Payout Annuities are
available as either a Guaranteed or Variable Annuity or a combination of both.
Annuity payments from the Guaranteed Interest Division remain constant
throughout the annuity period. Annuity payments from the Variable Investment
Division fluctuate depending upon the investment experience of the applicable
Sub-Accounts. Variable Annuity payments are based upon Annuity Unit Values. See
"Annuity Payments" below and "Determination of Variable Annuity Payments" in
the Statement of Additional Information for further information.
The Annuity Commencement Date marks the date on which Lincoln Life makes the
first annuity payment to an Annuitant. For Plans subject to Section
401(a)(9)(B) of the Code, a Beneficiary must select an Annuity Commencement
Date that is not later than one year after the date of the Participant's death.
A Participant or Contractholder may select any Annuity Commencement Date for
the Annuitant which is then reflected in the Retired Life Certificate. However,
since an annuity payment is considered a distribution under the Code, selection
of an Annuity Commencement Date may be affected by the distribution
restrictions under the Code and the minimum distribution
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<PAGE>
requirements under Section 401(a)(9) of the Code. See "Federal Income Tax
Considerations." The selection of an Annuity Commencement Date, the annuity
option, the amount of the Payout Annuity and whether the amount is to be paid
as a Guaranteed or a Variable Annuity must be made by the Participant in
writing, in a form satisfactory to Lincoln Life, and received by Lincoln Life
at least 30 days in advance of the Annuity Commencement Date. After the Annuity
Commencement Date an Annuitant may not change either their annuity option or
the type (i.e., variable or guaranteed) of Payout Annuity for any amount
applied toward the purchase of an annuity.
The Annuity Conversion Amount is either the Participant's Account balance, or
a portion thereof, or the Death Benefit plus interest, as of the Annuity
Payment Calculation Date. For a Guaranteed Annuity, the Annuity Commencement
Date is typically one month after the Annuity Payment Calculation Date;
subsequent payments are at one month intervals from the Annuity Commencement
Date. For a Variable Annuity, the Annuity Commencement Date is 10 Business Days
after the initial Annuity Payment Calculation Date; subsequent monthly payments
have Annuity Payment Calculation Dates which are 10 Business Days prior. The 10
Business Days are necessary to calculate the amount of the Payout Annuity
payments and to mail the checks in advance of their monthly due dates.
If the Participant's Account balance or the Beneficiary's Death Benefit is
less than $2,000 or if the amount of the first scheduled payment is less than
$20, Lincoln Life may, at its option, cancel the annuity and pay the
Participant or Beneficiary the entire amount in a lump sum.
PAYOUT ANNUITY PAYMENTS
The amount of each annuity payment will depend upon the Annuity Conversion
Amount applied to an annuity option, the form of the annuity option selected
and the age of the Participant at the Annuity Commencement Date. Unless
otherwise notified, Lincoln Life will apply the Participant's Account balance
in the Guaranteed Interest Division toward a Guaranteed Annuity and the
Participant's Account balance in the Variable Investment Division toward a
Variable Annuity.
The payment amount for a Guaranteed Annuity is determined by dividing the
Participant's Annuity Conversion Amount in the Guaranteed Interest Division as
of the initial Annuity Payment Calculation Date by the applicable Annuity
Conversion Factor as defined in the Contract.
The initial payment amount for a Variable Annuity is determined by dividing
the Participant's Annuity Conversion Amount(s) in the applicable Sub-Account(s)
as of the initial Annuity Payment Calculation Date by the applicable Annuity
Conversion Factor as defined in the Contract. The amounts of subsequent
payments vary depending on the investment experience of the Sub-Account(s) and
the interest rate option selected by the Contractholder or Annuitant. The
payment amounts will not be affected by Lincoln Life's mortality or expense
experience and will not be reduced by an Annual Administration Charge. For
additional information on the determination of subsequent payment amounts,
refer to the Statement of Additional Information, "Determination of Variable
Annuity Payments."
PAYOUT ANNUITY OPTIONS
Lincoln Life offers a range of annuity options including, but not limited to,
the following:
SINGLE LIFE ANNUITY
Payments are made monthly during the lifetime of the Annuitant, and the
annuity terminates with the last payment preceding death.
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LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 10, 15 OR 20 YEARS
Payments are made monthly during the lifetime of the Annuitant with a monthly
payment guaranteed to the Beneficiary for the remainder of the selected number
of years, if the Annuitant dies before the end of the period selected. Payments
under this annuity option are smaller than a Single Life Annuity without a
guaranteed payment period.
JOINT LIFE ANNUITIES
Payments are made monthly during the joint lifetime of the Annuitant and a
designated second person.
NON-LIFE ANNUITIES
Annuity payments 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 who has selected this annuity option as a Variable
Annuity or a surviving Beneficiary may request at any time during the payment
period that the present value of any remaining installments be paid in one lump
sum. Such lump sum payment will be treated as a Total Withdrawal during the
Accumulation Period and may be subject to a CDSC. See "Deductions and Charges"
and "Federal Income Tax Considerations."
Under Qualified Plans, any annuity selected must be payable over a period
that does not extend beyond the life expectancy of the Participant and the
Participant's designated Beneficiary. If the Beneficiary is someone other than
the Participant's spouse, the present value of payments to be made to the
Participant must be more than 50% of the present value of the total payments to
be made to the Participant and the Beneficiary.
In the event that an Annuitant dies before the end of a designated Annuity
period, the Beneficiary, if any, or the Annuitant's estate will receive any
remaining payments due under the annuity option in effect.
Note Carefully: Under the Single Life Annuity and Joint Life Annuities
options it would be possible for only one annuity payment to be made if the
Annuitant(s) were to die before the due date of the second annuity payment;
only two annuity payments if the Annuitant(s) were to die before the due date
of the third annuity payment; and so forth.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general discussion of federal income tax
considerations relating to the Contract and is not intended as tax advice. This
discussion is not intended to address the tax consequences resulting from all
of the situations in which a person may be entitled to or may receive a
distribution under the Contract. Any person concerned about these tax
implications should consult a competent tax adviser before initiating any
transaction. This discussion is based upon Lincoln Life's understanding of the
present federal income tax laws as they are currently interpreted by the
Internal Revenue Service ("IRS"). No representation is made as to the
likelihood of the continuation of the present federal income tax laws or of the
current interpretation by the IRS. Moreover, no attempt has been made to
consider any applicable state or other tax laws.
The Contract may be purchased on a non-tax qualified basis ("Non-Qualified
Contract") or purchased and used in connection with certain retirement
arrangements entitled to special income tax treatment under section 401(a),
403(b), 408(b) or 457 of the Code ("Qualified Contracts"). The ultimate effect
of federal income taxes on the amounts held under a Contract, on Annuity
Payments, and on the economic benefit to the Contract Owner, the Annuitant, or
the Beneficiary may depend on the tax status of the individual concerned.
25
<PAGE>
In addition, certain requirements must be satisfied in purchasing a Qualified
Contract with proceeds from a tax qualified retirement plan in order to
continue receiving favorable tax treatment. Therefore, you should consult your
legal counsel and tax adviser regarding the suitability of the Contract for
your situation, the applicable requirements and the tax treatment of the rights
and benefits of the Contract. This summary assumes that Qualified Contracts are
purchased with proceeds from retirement plans that qualify for the intended
special Federal income tax treatment.
All dollar amounts and percentages stated below are subject to change
according to Federal law. For additional Federal Income Tax Consideration,
please refer to the Statement of Additional Information.
NON-QUALIFIED CONTRACTS
In general, under non-qualified annuity contracts, an individual may make
Contributions to the Contracts which are not tax-deductible. A participant is
generally not taxed on increases in the value of a contract until a
distribution occurs. This can be in the form of a lump sum payment received by
requesting all or part of the cash value (i.e., withdrawals) or as Annuity
Payouts. For this purpose, the assignment or pledge of, or the agreement to
assign or pledge, any portion of the value of a contract will be treated as a
distribution. A transfer of ownership of a contract, or designation of an
annuitant (or other beneficiary) who is not also the participant, may also
result in tax consequences. The taxed portion of a distribution (in the form of
a lump sum payment or an annuity) is taxed as ordinary income. For
Contributions made after February 28, 1986, a participant who is not a natural
person (for example, a corporation) will, subject to limited exceptions, be
taxed on any increase in the contract's cash value over the investment in the
contract during the taxable year, even if no distribution occurs. The following
discussion applies to contracts owned by or on behalf of participants who are
natural persons.
In General. Section 72 of the Code governs taxation of annuities in general.
Lincoln Life believes that an Owner who is a natural person generally is not
taxed on increases in the Owner's Account Value until distribution occurs by
withdrawing all or part of such Account Value (e.g., withdrawals or Annuity
payments under the Annuity Option elected). For this purpose, the assignment,
pledge, or agreement to assign or pledge any portion of the Account Value (and
in the case of a Qualified Contract, any portion of an interest in the
qualified plan) generally will be treated as a distribution. (The Contracts are
not assignable without Lincoln Life's prior consent. See "Assignability.") The
taxable portion of a distribution (in the form of a single sum payment or an
annuity) is taxable as ordinary income.
The owner of any Contract who is not a natural person generally must include
in income any increase in the excess of the Account Value over the "investment
in the contract" (discussed below) during the taxable year. There are some
exceptions to this rule and prospective Owners that are not natural persons may
wish to discuss these with a competent tax adviser.
Withdrawals. In the case of a withdrawal, generally amounts received are
first treated as taxable income to the extent that the cash value of the
contract immediately before the withdrawal exceeds the investment in the
contract at that time. Any additional amount withdrawn is not taxable. The
investment in the contract generally equals the portion, if any, of any
contributions paid by or on behalf of a participant under a contract which is
not excluded from the participant's gross income.
Annuity Payouts. Even though the tax consequences may vary depending on the
form of Annuity Payout selected under the contract, the recipient of an Annuity
Payout generally is taxed on the portion of such payout that exceeds the
investment in the contract. For variable Annuity Payouts the taxable portion is
determined by a formula that establishes a specific dollar amount of each
payout that is not taxed. The dollar amount is determined by dividing the
investment in the contract by the total number of expected periodic payouts.
For fixed Annuity Payouts, there generally is no tax
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<PAGE>
on the portion of each payout that represents the same ratio that the
investment in the contract bears to the total expected value of payouts for the
term of the annuity; the remainder of each payout is taxable. For individuals
whose annuity starting date is after December 31, 1986, the entire distribution
will be fully taxable once the recipient is deemed to have recovered the dollar
amount of the investment in the contract.
Excise tax. There may be imposed an excise tax on distributions equal to 10%
of the amount treated as taxable income. The excise tax is not imposed in
certain circumstances, which generally are distributions:
1. Received on or after the participant attains age 59 1/2;
2. Made as a result of the participant's death or disability;
3. Received in substantially equal installments as a life annuity (sub-
ject to special recapture rules if the series of payouts is subsequently
modified);
4. Allocable to the investment in the contract before August 14, 1982;
5. Under a qualified funding asset in a structured settlement;
6. Under an Immediate Annuity contract as defined in the Code; and/or
7. Under a contract purchased in connection with the termination of cer-
tain retirement plans.
Multiple contracts. All non-qualified annuity contracts entered into after
October 21, 1988, and issued by the same insurance company (or its affiliates)
to the same participant during any calendar year will be treated as a single
contract for tax purposes.
Diversification. Section 817(h) of the Code provides that separate account
investments (or the investments of a mutual fund the shares of which are owned
by separate accounts of insurance companies) underlying a non-qualified annuity
contract must be "adequately diversified" in accordance with treasury
regulations in order for the contract to qualify as an annuity contract under
section 72 of the Code. The Variable Investment Division, through the Fund,
intends to comply with the diversification requirements prescribed in the
regulations.
Required Distributions. In addition to the requirements of section 817(h),
the Code (section 72(s)) provides that non-qualified annuity contracts issued
after January 18, 1985, will not be treated as annuity contracts for purposes
of section 72 unless the contract provides that (a) if any Participant dies on
or after the annuity starting date but prior to the time the entire interest in
the contract has been distributed, the remaining portion of such interest must
be distributed at least as rapidly as under the method of distribution in
effect at the time of the Participant's death; and (B) if any Participant dies
prior to the annuity starting date, the entire interest must be distributed
within five years after the death of the Participant. These requirements are
considered satisfied if any portion of the Participant's interest that is
payable to or for the benefit of a "designated beneficiary" is distributed over
that designated beneficiary's life, or a period not extending beyond the
designated beneficiary's life expectancy, and if that distribution begins
within one year of the Participant's death. The "designated beneficiary" must
be a natural person. Contracts issued after January 18, 1985 contain provisions
intended to comply with these Code requirements, although regulations
interpreting these requirements have yet to be issued. Lincoln Life intends to
review such provisions and modify them, if necessary, to assure that they
comply with the requirements of section 72(s) when clarified by regulation or
otherwise.
QUALIFIED CONTRACTS
In General. The Qualified Contract is designed for use with several types of
retirement plans. The tax rules applicable to participants and beneficiaries in
retirement plans vary according to the type of plan and the terms and
conditions of the plan. Special favorable tax treatment may be available for
certain types of contributions and distributions. Adverse tax consequences may
result
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<PAGE>
from contributions in excess of specified limits; distributions prior to age 59
1/2 (subject to certain exceptions); distributions that do not conform to
specified commencement and minimum distribution rules; aggregate distributions
in excess of a specified annual amount; and in other specified circumstances.
Lincoln Life makes no attempt to provide more than general information about
use of the Contracts with the various types of retirement plans. Owners and
participants under retirement plans as well as annuitants and beneficiaries are
cautioned that the rights of any person to any benefits under Qualified
Contracts may be subject to the terms and conditions of the plans themselves,
regardless of the terms and conditions of the Contract issued in connection
with such a plan. Some retirement plans are subject to distribution and other
requirements that are not incorporated in the administration of the Contracts.
Owners are responsible for determining that contributions, distributions and
other transactions with respect to the Contracts satisfy applicable law.
Purchasers of Contracts for use with any retirement plan should consult their
legal counsel and tax adviser regarding the suitability of the Contract.
Section 401(a) Plans. Section 401(a) of the Code provides special tax
treatment for pension, profit sharing and stock bonus Plans established by
Employers for their employees. Contributions to a Section 401(a) Plan and any
earnings attributable to such Contributions are currently excluded from the
Participant's income. Section 401(a) Plans are subject to, among other things,
limitations on: maximum Contributions, minimum coverage and participation,
minimum funding, minimum vesting requirements and distribution requirements.
The specific limitations are outlined in the plan document adopted by the
employer.
A Participant who makes a withdrawal from a Section 401(a) program generally
must include that amount in current income. In addition, Section 401(k)(2) of
the Code requires that salary reduction Contributions made and/or earnings
credited on any salary reduction Contributions may not be withdrawn from the
Participant's Section 401(k) program prior to the Participant having
(1) attained age 59 1/2, (2) separated from service, (3) become disabled (4)
died or (5) incurred a hardship. Hardship withdrawals may not include any
income credited after December 31, 1988 that is attributable to any salary
reduction Contributions. In addition, Section 402 of the Code permits tax-free
rollovers from Section 401(a) programs to individual retirement annuities or
certain other Section 401(a) programs under certain circumstances. Qualified
distributions eligible for rollover treatment may be subject to a 20% federal
tax withholding depending on whether or not the distribution is paid directly
to an eligible retirement plan.
Section 403(b) Plans. A Participant who is an employee of a hospital or other
tax-exempt organization described in Section 501(c)(3) or 501(e) of the Code
may exclude from current earnings amounts contributed to a Section 403(b)
program. Under the terms of a Section 403(b) program, an Employer may make
Contributions directly to the program on behalf of the Participant, the
Participant may enter into a salary reduction agreement with the Participant's
Employer authorizing the Employer to contribute a percentage of the
Participant's salary to the program and/or the Participant may authorize the
Employer to make after tax Contributions to the program. Currently, the Code
permits employees to defer up to $9,500 of their income through salary
reduction agreements. All Contributions made to the Section 403(b) program are
subject to the limitations described in Code Sections 402(g) regarding elective
deferral amounts, 403(b)(2) regarding the maximum exclusion allowance, and
415(a)(2) and 415(c) regarding the limitations on annual additions.
A Participant who makes a withdrawal from their Section 403(b) program
generally must include that amount in current income. In addition, Section
403(b)(11) of the Code requires that salary reduction Contributions made and/or
earnings credited on any salary reduction Contributions after December 31, 1988
may not be withdrawn from the Participant's Section 403(b) program prior to the
Participant having (1) attained age 59 1/2, (2) separated from service, (3)
become disabled (4) died or (5) incurred a hardship. Hardship withdrawals may
not include any income credited after December
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<PAGE>
31, 1988 that is attributable to any salary reduction Contributions. The
Internal Revenue Service has ruled (Revenue Ruling 90-24) that amounts may be
transferred between Section 403(b) investment vehicles as long as the
transferred funds retain withdrawal restrictions at least as restrictive as
that of the transferring investment vehicle. Such transferred amounts are
considered withdrawals under the Contract and will be subject to a CDSC, if
applicable. See "Deductions and Charges--Contingent Deferred Sales Charges." In
addition, Section 403(b)(8) of the Code permits tax-free rollovers from Section
403(b) programs to individual retirement annuities or other Section 403(b)
programs under certain circumstances. Qualified distributions eligible for
rollover treatment may be subject to a 20% federal tax withholding depending on
whether or not the distribution is paid directly to an eligible retirement
plan.
Section 408 Plans (IRAs). Under current law, individuals may contribute and
deduct the lesser of $2,000 or 100% of their compensation to an IRA. The $2,000
is increased to $4,000 when the IRA covers the taxpayer and a non-working
spouse. The deduction for contributions is phased out for individuals who are
considered active participants under qualified Plans and whose Adjusted Gross
Income attains a certain level. For a single person the $2,000 deduction is
available when the taxpayers Adjusted Gross Income is $25,000 or less. For each
$50 that the taxpayers Adjusted Gross Income is $25,000 or less. For each $50
that the taxpayer's Adjusted Gross Income rises above $25,000, the taxpayer's
deductible IRA is reduced by $10. When the single taxpayer's Adjusted Gross
Income is $35,000 or greater, a tax deduction for an IRA is no longer
available. For a married couple filing jointly, the threshold level is $40,000
rather than $25,000. For a married person filing separately, the threshold is
$0.
In addition, certain amounts distributed from Section 401(a) and 403(b) Plans
may be rolled over to an IRA on a tax-free basis if done in a timely manner
(within 60 days of the Participant's receipt of the distribution). The
limitations on contributions discussed above do not apply to amounts rolled
over to an IRA.
All Participants in an IRA receive an IRA Disclosure. This document explains
the tax rules that apply to IRAs in greater detail.
Eligible Section 457 Plans. Eligible Section 457 Plans may be established by
state and local governments as well as private tax-exempt organizations (other
than churches). Participants may contribute on a before tax basis to a deferred
compensation Plan of their employer in accordance with the employer's Plan and
Section 457 of the Code. Section 457 places limitations on the amount of
Contributions to these Plans. Generally, the limitation is one-third of
includable compensation or $7,500 whichever is less. In the Participant's final
three years of employment before normal retirement age, the $7,500 limit is
increased to $15,000.
Participants in an Eligible 457 Plan may not receive a withdrawal or other
distribution from their Plan except in the event of separation of service from
the employer, attainment of age 70 1/2, or when faced with an unforeseen
emergency. The Contractholder's Plan may further restrict the Participant's
rights to a withdrawal. In general, all amounts received under a Section 457
Plan are taxable.
An employee electing to participate in an Eligible Section 457 Plan should
understand that their rights and benefits are governed strictly by the terms of
the Plan, that they are in fact a general creditor of the Employer under the
terms of the Plan, that the Employer is legal owner of any contract issued with
respect to the Plan and that the Employer retains all rights under the contract
issued with respect to the Plan. Depending on the terms of the particular Plan,
the Employer may be entitled to draw on deferred amounts for purposes unrelated
to its Section 457 Plan obligations. Participants under Eligible Section 457
Plans should look to the terms of their Plan for any charges in regard to
participation other than those disclosed in this Prospectus.
Section 457(f) Plans. Section 457(f) Plans may be established by state and
local governments as well as private tax-exempt organizations. Employers and
Participants may contribute on a before-
29
<PAGE>
tax basis to a deferred compensation Plan of their Employer in accordance with
the Employer's Plan. Section 457(f) does not place limitations on the amount of
Contributions to these Plans; however, the Internal Revenue Service may review
these plans to determine if the deferral amount is acceptable to the IRS based
on the nature of the 457(f) Plan.
Participants in 457(f) Plans may not receive a withdrawal or other
distribution from their 457(f) Plans until a distributable event occurs. The
Plan will define such events.
An employee electing to participate in a Section 457(f) Plan should
understand that their rights and benefits are governed strictly by the terms of
the Plan, that they are in fact a general creditor of the Employer under the
terms of the Plan, that the Employer is legal owner of any contract issued with
respect to the Plan and that the Employer retains all rights under the contract
issued with respect to the Plan. Participants under Section 457(f) Plans should
look to the terms of their Plan for any charges in regard to participating
other than those disclosed in this Prospectus.
Taxation of Qualified Annuities: General. In Qualified Plans such as 401(a),
403(b) and 408 and Eligible 457 Plans, the Participant is not taxed on the
value in their Accounts until they receive payments from the Account. In some
situations, default or forgiveness of a loan, assignment or other transactions
will result in taxable income. Distributions from all these Plans are taxed
under the rules of Sections 72 and 402 of the Code.
Penalty Tax For Premature Distributions. Section 72(t) imposes a 10% excise
tax on certain premature distributions for non-qualified and Section 401(a),
403(b) and 408 Plans. The penalty tax will not apply to distributions made on
account of the Participant having (i) attained age 59 1/2; (ii) become
disabled; or (iii) died. The penalty tax will also not apply under 401(a) and
403(b) retirement plans where a Participant separates from service after age
55. In addition, the penalty does not apply if the distribution is received as
a series of substantially equal periodic payments made for the life (or life
expectancy) of the Participant or the joint lives (or life expectancies) of the
Participant and a designated Beneficiary. Certain other exceptions may also
apply. The 10% excise tax is an additional tax; it does not apply to any money
that the Participant receives as a return of their cost basis. The 10% excise
tax does not apply to Section 457 Plans.
Minimum Distributions. Participants in Plans subject to Code Sections 401(a),
403(b), 408 and Eligible 457 Plans are subject to Minimum Distribution Rules.
For a Participant who attains age 70 1/2 after December 31, 1987, distributions
generally must begin by April 1 of the calendar year following the calendar
year in which the Participant attains age 70 1/2. For a Participant who attains
age 70 1/2 before January 1, 1988, distributions must begin on the April 1 of
the calendar year following the later of (1) the calendar year in which the
Participant attains age 70 1/2 or (2) the calendar year in which the
Participant retires. Additional requirements may apply with respect to certain
Plans.
Participants in Eligible 457 Plans are taxed when Plan benefits are
distributed or made available to them. Participants in 457(f) Plans are taxed
when services related to contributions are performed or when distributions are
not subject to a substantial risk of forfeiture. Distributions under Eligible
457 or 457(f) Plans are taxed as ordinary income.
The following discussion generally applies to a Contract owned by a natural
person.
Withdrawals. In the case of a withdrawal under a Qualified Contract,
including withdrawals under the Systematic Withdrawal Option, a ratable portion
of the amount received is taxable, generally based on the ratio of the
"investment in the contract" to the individual's total accrued benefit under
the retirement plan. The "investment in the contract" generally equals the
amount of any non-deductible Contributions paid by or on behalf of any
individual. For a Contract issued in connection with qualified plans, the
"investment in the contract" can be zero. Special tax rules may be available
for certain distributions from a Qualified Contract.
30
<PAGE>
With respect to Non-Qualified Contracts, partial withdrawals are generally
treated as taxable income to the extent that the Account Value immediately
before the withdrawal exceeds the "investment in the contract" at that time.
Full surrenders of a Non-Qualified Contract are treated as taxable income to
the extent that the amount received exceeds the "investment in the contract".
Annuity Payments. Although the tax consequences may vary depending on the
Annuity payment elected under the Contract, in general, only the portion of the
Annuity payment that represents the amount by which the Account Value exceeds
the "investment in the contract" will be taxed; after the "investment in the
contract" is recovered, the full amount of any additional Annuity payments is
taxable. For Variable Annuity payments, the taxable portion is generally
determined by an equation that establishes a specific dollar amount of each
payment that is not taxed. The dollar amount is determined by dividing the
"investment in the contract" by the total number of expected periodic payments.
However, the entire distribution will be taxable once the recipient has
recovered the dollar amount of his or her "investment in the contract". For
Fixed Annuity payments, in general there is no tax on the portion of each
payment which represents the same ratio that the "investment in the contract"
bears to the total expected value of the Annuity payments for the term of the
payments; however, the remainder of each Annuity payment is taxable. Once the
"investment in the contract" has been fully recovered, the full amount of any
additional Annuity payments is taxable. If Annuity payments cease as a result
of an Annuitant's death before full recovery of the "investment in the
contract," consult a competent tax advisor regarding deductibility of the
unrecovered amount.
Restrictions under Qualified Contracts. Other restrictions with respect to
the election, commencement, or distribution of benefits may apply under
Qualified Contracts or under the terms of the plans in respect of which
Qualified Contracts are issued.
INVESTOR CONTROL
The Treasury Department has indicated that guidelines may be issued under
which a variable annuity contract will not be treated as an annuity contract
for tax purposes if the contract owner has excessive control over the
investments underlying the contract. The issuance of those guidelines may
require us to impose limitations on your right to control the investment. We do
not know whether any such guidelines would have a retroactive effect.
VOTING RIGHTS
Lincoln Life is the legal owner of the shares of the Funds held by the
Variable Investment Division. As such, Lincoln Life is entitled to vote those
Fund shares with respect to issues such as the election of a Fund's directors,
ratification of a Fund's choice of independent auditors and other matters
required by the 1940 Act to be voted on by shareholders.
In those years in which the Funds hold a shareholder meeting, Lincoln Life
will solicit from Contractholders voting instructions with respect to Fund
shares held by the Variable Investment Division. Each Contractholder will
receive a number of votes in proportion to the Contractholder's investment in
the corresponding Sub-Account as of the record date established by the Fund.
During the Accumulation Period, a Participant has the right to instruct
Contractholders as to the votes attributable to their Participant Account
balance in the Sub-Accounts. Annuitants have similar rights with respect to the
annuity amount attributable to the Sub-Accounts.
Lincoln Life will furnish Contractholders with sufficient Fund proxy material
and voting instruction forms for all Participants who have voting rights under
the Contract. Lincoln Life will vote those Fund
31
<PAGE>
shares attributable to the Contract for which Lincoln Life receives no voting
instructions in the same proportion as Lincoln Life will vote shares for which
Lincoln Life has received instructions. Lincoln Life will vote shares
attributable to amounts Lincoln Life may have in the Variable Investment
Division in the same proportion as votes that Lincoln Life receives from
Contractholders. If the federal securities laws or regulations or any
interpretation of them changes so that Lincoln Life is permitted to vote shares
of the Fund in Lincoln Life's own right or to restrict Participant voting,
Lincoln Life may do so.
Fund shares may be held by separate accounts of insurance companies
unaffiliated with Lincoln Life. Fund shares held by those separate accounts
will be voted, in most cases, according to the instruction of owners of
insurance policies and contracts issued by those other unaffiliated insurance
companies. This will dilute the effect of the voting instructions of the
Contractholders in the Variable Investment Division. Lincoln Life does not
foresee any disadvantage to this. Pursuant to conditions imposed in connection
with regulatory relief, the Fund's Board of Directors has an obligation to
monitor events to identify conflicts that may arise and to determine what
action, if any, should be taken. For further information, see the prospectuses
for the Funds.
OTHER CONTRACT PROVISIONS
RIGHTS RESERVED BY LINCOLN LIFE
Lincoln Life reserves the right, subject to compliance with applicable law,
including approval by the Contractholder or the Participants if required by
law, (1) to create additional Sub-Accounts in the Variable Investment Division,
(2) to combine or eliminate Sub-Accounts in the Variable Investment Division,
(3) to transfer assets from one Sub-Account in the Variable Investment Division
to another, (4) to transfer assets to the General Account and other separate
accounts, (5) to cause the deregistration of the Variable Investment Division
under the Investment Company Act of 1940, (6) to operate the Variable
Investment Division under a committee and to discharge such committee at any
time, and (7) to eliminate any voting rights which the Contractholder or the
Participants may have with respect to the Variable Investment Division, (8) to
amend the Contract to meet state law requirements or to meet the requirements
of the Investment Company Act of 1940 or other federal securities laws and
regulations, (9) to operate the Variable Investment Division in any form
permitted by law, (10) to substitute shares of another fund for the shares held
by a Sub-Account, and (11) to make any change required by the Internal Revenue
Code, ERISA or the Securities Act of 1933. Participants will be notified if any
changes are made that result in a material change in the underlying investments
of the Variable Investment Division.
ASSIGNABILITY
The Contracts are not assignable without Lincoln Life's prior written
consent. In addition, a Participant, a Beneficiary or an Annuitant may not,
unless permitted by law, assign or encumber any payment due under the Contract.
MARKET EMERGENCIES
While Lincoln Life generally may not suspend the right of redemption or delay
payment from the Variable Investment Division for more than seven days, the
following events may delay payment for more than seven days: (1) any period
when the New York Stock Exchange is closed (other than customary weekend and
holiday closings); (2) any period when trading in the markets normally utilized
is restricted, or an emergency exists as determined by the Securities and
Exchange Commission, so that disposal of investments or determination of the
Accumulation Unit Value or Variable Annuity payment value is not reasonably
practicable; or (3) for such other periods as the Securities and Exchange
Commission by order may permit for the protection of the Participants.
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<PAGE>
CONTRACT DEACTIVATION
Under certain Contracts, Lincoln Life may deactivate a Contract by
prohibiting new contributions and/or new Participants after the date of
deactivation. Lincoln Life will give the Contractholder and the Participants at
least 90 days notice of the date of deactivation.
FREE-LOOK PERIOD
Participants under Sections 403(b), 408 and certain Non-Qualified Plans will
receive an Active Life Certificate upon Lincoln Life's receipt of a duly
completed participation enrollment form. If the Participant chooses not to
participate under the Contract, the Participant may exercise the free-look
right by sending a written notice to Lincoln Life that the Participant does not
wish to participate under the Contract, within 10 days after the date the
Active Life Certificate is received by the Participant. For purposes of
determining the date on which the Participant has sent written notice, the
postmark date will be used.
If a Participant exercises the free-look right in accordance with the
foregoing procedure, Lincoln Life will refund in full the Participant's
aggregate Contributions less aggregate withdrawals made on behalf of the
Participant or, if greater, with respect to Contributions to the Variable
Investment Division, the Participant's Account balance in the Variable
Investment Division on the date the Participant's written notice is received by
Lincoln Life.
GUARANTEED INTEREST DIVISION
GENERAL
Contributions to the Guaranteed Interest Division become part of Lincoln
Life's General Account. 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, Lincoln Life has not
registered the interests in the General Account as a security under the
Securities Act of 1933 and has not registered the General Account as an
investment company under the 1940 Act. Accordingly, neither the General Account
nor any interests therein are subject to regulation under the 1933 Act or the
1940 Act. Lincoln Life has 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 the General Account and the Guaranteed Interest Division. These disclosures,
however, may be subject to certain generally applicable 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 Variable
Investment Division and contains only selected information regarding the
Guaranteed Interest Division. Complete details regarding the Guaranteed
Interest Division are in the Contract.
Amounts contributed to the Guaranteed Interest Division are guaranteed a
minimum interest rate according to contract minimums of at least 3.0%. A
Participant who makes a Contribution to the Guaranteed Interest Division is
credited with interest beginning on the next calendar day following the date of
receipt if all Participant data is complete.
ANY INTEREST IN EXCESS OF 3.0% WILL BE DECLARED IN LINCOLN LIFE'S SOLE
DISCRETION. THE PARTICIPANTS BEAR THE RISK THAT NO INTEREST IN EXCESS OF 3.0%
WILL BE DECLARED.
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<PAGE>
PARTICIPANT'S ACCOUNT BALANCE IN THE GUARANTEED INTEREST DIVISION
The Participant's Account balance in the Guaranteed Interest Division on any
Valuation Date will reflect the amount and frequency of any Contributions
allocated to the Guaranteed Interest Division, plus any transfers from the
Variable Investment Division and interest credited to the Guaranteed Interest
Division, less any withdrawals, CDSC, Annual Administration Charges and loan-
related charges allocated to the Guaranteed Interest Division and any transfers
to the Variable Investment Division.
TRANSFERS, TOTAL AND PARTIAL WITHDRAWALS
Amounts in the Guaranteed Interest Division are generally subject to the same
rights and limitations and will be subject to the same charges as are amounts
allocated to the Variable Investment Division with respect to Total or Partial
Withdrawals. See "Deferral Periods."
LOANS
During a Participant's Accumulation Period, a Participant whose Plan permits
loans may apply for a loan under the Contract by completing a loan application
available from Lincoln Life. Loans are secured by the Participant's Account
balance in the Guaranteed Interest Division. The amounts and terms of a
Participant loan may be subject to the restrictions imposed under Section 72(p)
of the Code, Title I of ERISA, and any applicable Plans. With respect to Plans
subject to Title I of ERISA, the initial amount of a Participant loan may not
exceed the lesser of 50% of the Participant's vested Account balance in the
Guaranteed Interest Division or $50,000 and must be at least $1,000. A
Participant in a Plan that is not subject to ERISA may borrow up to $10,000 of
their vested Account balance without regard to the 50% limitation stated above.
A Participant may have only one loan outstanding at any time and may not
establish 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 which is below the loan interest
rate as provided in the Contract. Under certain Contracts, a one-time fee of up
to $50 may be charged to set up a loan. More information about loans, including
interest rates and applicable fees and charges, is available in the Contracts,
Active Life Certificates, and the Annuity Loan Agreement as well as from
Lincoln Life.
DEFERRAL PERIODS
If a payment is to be made from the Guaranteed Interest Division, Lincoln
Life may defer the payment for the period permitted by the law of the
jurisdiction in which the Contract is distributed, but in no event, for more
than 6 months after a written election is received by Lincoln Life. During the
period of deferral, interest at the then current interest rate will continue to
be credited to a Participant's Account in the Guaranteed Interest Division.
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TABLE OF CONTENTS FORSTATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFINITIONS................................................................ 2
DETERMINATION OF ACCUMULATION UNIT VALUES.................................. 2
DETERMINATION OF VARIABLE ANNUITY PAYMENTS................................. 3
PERFORMANCE CALCULATIONS................................................... 4
TAX LAW CONSIDERATIONS..................................................... 10
DISTRIBUTION OF CONTRACTS.................................................. 12
INDEPENDENT AUDITORS/ACCOUNTANTS........................................... 12
FINANCIAL STATEMENTS....................................................... 13
Audited Financial Statements of Lincoln Life..............................
Audited Financial Statements of Variable Investment Division..............
</TABLE>
35
<PAGE>
VARIABLE ANNUITY I
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1997
GROUP ANNUITY CONTRACTS
FUNDED THROUGH THE SUB-ACCOUNTS OF
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
OF
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Definitions................................................................ 2
Determination of Accumulation Unit Values.................................. 2
Determination of Variable Annuity Payments................................. 3
Performance Calculations................................................... 4
Tax Law Considerations..................................................... 10
Distribution of Contracts.................................................. 12
Independent Auditors/Accountants........................................... 12
Financial Statements....................................................... 13
Audited Financial Statements of Lincoln Life
Audited Financial Statements of Variable Investment Division
</TABLE>
This Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the prospectus for the Group Annuity Contracts (the
"Contracts"), dated May 1, 1997.
A copy of the prospectus to which this SAI relates is available at no charge by
writing to Lincoln Life at Lincoln National Life Insurance Company, P.O. Box
9740, Portland, Maine 04104; or by calling Lincoln Life at 1-800-341-0441.
SPECIAL NOTICE TO CONTRACTOWNERS ABOUT THIS YEAR'S LINCOLN LIFE FINANCIAL
STATEMENTS. Each year Lincoln Life is required by law to prepare financial
statements for different purposes. Two of the most important purposes are filing
with state insurance departments and for inclusion in the securities
registration statements for our variable products, like this one. In the past we
have interpreted the prevailing regulations as requiring presentation of these
statements according to two different sets of accounting principles--one for the
insurance regulators (known as Statutory Accounting Principles, or STAP) and one
for the SEC (known as Generally Accepted Accounting Principles, or GAAP).
When we create two sets of financial statements for the same insurer it requires
nearly double the time commitment of our internal accounting staff, and two
separate audits by our independent auditors. In an effort to control costs and
eliminate duplication of effort, we have reviewed the SEC's requirements for the
mode of presentation of the insurer's financial statements in this registration
statement. As a result of our review, and on advice of counsel, we shall now
begin to use the STAP-basis statements (which we call Statutory Statements)
exclusively, both for the insurance regulators and for our securities
registration statements.
We believe that both Statutory and GAAP statements fairly present the financial
position of Lincoln Life for the periods indicated, in accordance with those
respective accounting principles. However, between the two there are some
important differences in accounting theory and financial statement presentation.
FOR THAT REASON, IN THIS TRANSITION YEAR WE INCLUDE HERE BOTH STATUTORY AND GAAP
STATEMENTS. This should permit you to evaluate the financial position of
Lincoln Life from both points of view, and should help you understand the
differences between Statutory and GAAP statements. BEGINNING NEXT YEAR WE SHALL
PRESENT ONLY THE STATUTORY STATEMENTS.
<PAGE>
DEFINITIONS
ANNUITY CONVERSION FACTOR: The factor applied to the Annuity Conversion Amount
in determining the dollar amount of an annuitant's annuity payments for
Guaranteed Annuities or the initial payment for Variable Annuities.
ANNUITY PAYMENT CALCULATION DATE: For Guaranteed Annuities, this is the first
day of a calendar month. For Variable Annuities, this is the Valuation Date ten
(10) business days prior to the first day of a calendar month.
ANNUITY UNIT: An accounting unit of measure that is used in calculating the
amounts of annuity payments to be made from a Sub-Account during the Annuity
Period.
ANNUITY UNIT VALUE: The dollar value of an Annuity Unit in a Sub-Account on any
Valuation Date.
CODE: The Internal Revenue Code of 1986, as amended.
DETERMINATION OF ACCUMULATION UNIT VALUES
As described more fully in the prospectus, Contributions are allocated to the
Divisions in accordance with directions from the Employer. A Participant who
makes Contributions which are allocated to the Variable Investment Division is
credited with Accumulation Units. The following examples illustrate the method
by which Lincoln Life determines the Net Investment Factor (NIF) for the current
Valuation Period and the Accumulation Unit Value as of the end of the current
Valuation Period.
Determination of NIF:
- --------------------
(a) Assumed Fund net asset value as of the close of the New York Stock Exchange
on June 1 = 10.45
(b) Assumed Fund net asset value as of the close of the New York Stock Exchange
on June 2 = 10.56 (no capital gains or dividend distributions or deductions
for taxes)
(c) The NIF for the current Valuation Period = (b) divided by (a) times (1-
annual M & E) to the 1/365th power
(d) 1.010526 x .999966 = 1.0104916
Determination of Accumulation Unit Value:
- ----------------------------------------
The Accumulation Unit Value as of the end of the current Valuation Period is
determined by multiplying the NIF for the current Valuation Period by the
Accumulation Unit Value as of the end of the immediately preceding Valuation
Period.
(a) Assumed Accumulation Unit Value as of the end of the immediately preceding
Valuation Period = 11.125674.
(b) Accumulation Unit Value as of the end of the current Valuation Period =
11.125674 x 1.0104916 (NIF) = 11.2424.
The number of Accumulation Units which are credited to the Participant's Account
for each Sub-Account on each Valuation Date equals the amount of Contributions
allocated to the Sub-Account on each Valuation Date divided by the Accumulation
Unit Value rounded to four decimal places. For example,
(a) Participant's assumed Contribution allocated to a Sub-Account on June 2 =
$150.
(b) Number of Accumulation Units credited to Participant = $150 divided by
11.2424 = 13.3423.
-2-
<PAGE>
DETERMINATION OF VARIABLE ANNUITY PAYMENTS
As stated in the prospectus, the amount of each Variable Annuity payment will
vary depending on the investment experience of the selected Sub-Accounts.
The initial payment amount of the Annuitant's Variable Annuity for each Sub-
Account is determined by dividing his Annuity Conversion Amount in each Sub-
Account as of the initial Annuity Payment Calculation Date ("APCD") by the
Applicable Annuity Conversion Factor defined as follows:
The Annuity Conversion Factors which are used to determine the initial payments
are based on the 1983 Individual Annuity Mortality Table, set back four (4)
years, and an interest rate in an integral percentage ranging from zero to six
percent (0 to 6.00%) as selected by the Annuitant.
The amount of the Annuitant's subsequent Variable Annuity payment for each Sub-
Account is determined by:
(a) Dividing the Annuitant's initial Variable Annuity payment amount by the
Annuity Unit Value for that Sub-Account selected for his interest rate
option as described above as of his initial APCD; and
(b) Multiplying the resultant number of annuity units by the Annuity Unit
Values for the Sub-Account selected for his interest rate option for his
respective subsequent APCDs.
Each subsequent Annuity Unit Value for a Sub-Account for an interest rate option
is determined by:
Dividing the Accumulation Unit Value for the Sub-Account as of subsequent
APCD by the Accumulation Unit Value for the Sub-Account as of the
immediately preceding APCD;
Dividing the resultant factor by one (1.00) plus the interest rate option
to the n/365 power where n is the number of days from the immediately
preceding APCD to the subsequent APCD; and
Multiplying this factor times the Annuity Unit Value as of the immediately
preceding APCD.
ILLUSTRATION OF CALCULATION OF ANNUITY UNIT VALUE
<TABLE>
<CAPTION>
<S> <C>
1. Annuity Unit Value as of immediately preceding Annuity Payment Calculation
Date................................................................................. $11.0000
2. Accumulation Unit Value as of Annuity Payment Calculation Date....................... $20.0000
3. Accumulation Unit Value as of immediately preceding Annuity Payment
Calculation Date..................................................................... $19.0000
4. Interest Rate........................................................................... 6.00%
5. Interest Rate Factor (30 days)......................................................... 1.0048
6. Annuity Unit Value as of Annuity Payment Calculation Date =
1 times 2 divided by 3 divided by 5.................................................... $11.5236
ILLUSTRATION OF ANNUITY PAYMENTS
<CAPTION>
<S> <C>
1. Annuity Conversion Amount as of Participant's initial Annuity Payment
Calculation Date................................................................. $100,000.00
2. Assumed Annuity Conversion Factor per $1 of Monthly Income for an
individual age 65 selecting a Single Life Annuity with Assumed Interest
Rate of 6%........................................................................... $138.63
3. Participant's initial Annuity Payment = 1 divided by 2............................... $721.34
4. Assumed Annuity Unit Value as of Participant's initial Annuity Payment
Calculation Date..................................................................... $11.5236
5. Number of Annuity Units = 3 divided by 4............................................. 62.5968
6. Assumed Annuity Unit Value as of Participant's second Annuity Payment
Calculation Date..................................................................... $11.9000
7. Participant's second Annuity Payment = 5 times 6..................................... $744.90
</TABLE>
-3-
<PAGE>
PERFORMANCE CALCULATIONS
STANDARD TOTAL RETURN CALCULATION
The Variable Investment Division may advertise average annual total return
information calculated according to a formula prescribed by the Securities and
Exchange Commission ("SEC"). Average annual total return shows the average
annual percentage increase, or decrease, in the value of a hypothetical
Contribution allocated to a Sub-Account from the beginning to the end of each
specified period of time. The SEC standardized version of this performance
information is based on an assumed Contribution of $1,000 allocated to a Sub-
Account at the beginning of each period and surrender or withdrawal of the value
of that amount at the end of each specified period, giving effect to any CDSC
and all other charges and fees applicable under the Contract. The effect of the
Annual Administration Charge for a period is determined by dividing the total
amount of such charges collected in the previous year by the total average net
assets of the accounts for the previous year, as of the previous month ended;
accounts include accounts available under Variable Annuity I of Lincoln Life and
under corresponding accounts of UNUM Life Insurance Company of America, pending
assumption reinsurance by Lincoln Life of Variable Annuity I contracts issued
through such corresponding accounts. This method of calculating performance
further assumes that (i) a $1,000 Contribution was allocated to a Sub-Account
and (ii) no transfers or additional payments were made. Premium taxes are not
included in the term "charges" for purposes of this calculation. Average annual
total return is calculated by finding the average annual compounded rates of
return of a hypothetical Contribution that would compare the Accumulation Unit
value on the first day of the specified period to the ending redeemable value at
the end of the period according to the following formula:
T = (ERV/C) 1/n - 1
Where T equals average annual total return, where ERV (the ending redeemable
value) is the value at the end of the applicable period of a hypothetical
Contribution of $1,000 made at the beginning of the applicable period, where C
equals a hypothetical Contribution of $1,000, and where n equals the number of
years.
NON-STANDARDIZED CALCULATION OF TOTAL RETURN PERFORMANCE
In addition to the standardized average annual total return information
described above, we may present total return information computed on bases
different from that standardized method. The Variable Investment Division may
present total return information computed on the same basis as the standardized
method except that charges deducted from the hypothetical Contribution will not
include any CDSC. Consistent with the long-term investment and retirement
objectives of the Contract, this total return presentation assumes either (i)
investment in the Contract continues beyond the Accumulation Period and/or (ii)
one or more of the conditions for Total or Partial Withdrawal without incurring
a CDSC are met. The Variable Investment Division may also present total return
information computed on the same basis as the standardized method except that
charges deducted from the hypothetical Contribution will not include either the
CDSC or the Annual Administration Charge. The total return percentage under both
of these non-standardized methods will be higher than that resulting from the
standardized method.
The Sub-Accounts also may present total return information calculated by
subtracting a Sub-Account's Accumulation Unit Value at the beginning of a period
from the Accumulation Unit Value of that Sub-Account at the end of the period
and dividing that difference (in that Sub-Account's Accumulation Unit Value) by
the Accumulation Unit Value of that Sub-Account at the beginning of the period.
This computation results in a total growth rate for the specified period which
we annualize in order to obtain the average annual percentage change in the
Accumulation Unit Value for the period used. This method of calculating
performance does not take into account CDSC, the Annual Administration Charge
and premium taxes, and assumes no transfers. Such percentages would be lower if
these charges were included in the calculation.
In addition, the Variable Investment Division may present actual aggregate total
return figures for various periods, reflecting the cumulative change in value of
an investment in the Variable Investment Division for the specified period.
PERFORMANCE INFORMATION
The tables below provide performance information for each Sub-Account for
specified periods ending December 31, 1996. For the periods prior to the date
the Sub-Accounts commenced operations, performance information for the Contracts
will be calculated based on the performance of the fund portfolios and the
assumption that the Sub-Accounts
-4-
<PAGE>
were in existence for the same periods as those indicated for the fund
portfolios, with the level of Contract charges that were in effect at the
inception of the Sub-Accounts (this is referred to as "hypothetical performance
data"). This information does not indicate or represent future performance.
TOTAL RETURN
Total returns quoted in sales literature or advertisements reflect all aspects
of a Sub-Account's return. Average annual returns are calculated by determining
the growth or decline in value of a hypothetical historical investment in the
Sub-Account over a stated period of time, and then calculating the annually
compounded percentage rate that would have produced the same result if the rate
of growth or decline had been constant over the period. Contractholders and
participants should recognize that average annual returns represent averaged
returns rather than actual year-to-year performance.
The respective underlying funds in which the Sub-Accounts invest had performance
history prior to the Sub-Accounts' inception. Performance information covering
those periods reflects a hypothetical performance as if the funds were part of
the Variable Annuity Account L at that time, using the charges applicable to the
Contracts.
Table 1A below assumes a hypothetical investment of $1,000 at the beginning of
the period via the Sub-Account investing in the applicable fund and withdrawal
of the investment on 12/31/96. The rates thus reflect the mortality and expense
risk charge, the withdrawal charge and a pro rata portion of the Annual
Administrative Charge. Table 1B shows the cumulative total return on the same
basis.
TABLE 1A -- SUB-ACCOUNT STANDARDIZED "HYPOTHETICAL" AVERAGE ANNUAL TOTAL
RETURN
<TABLE>
<CAPTION>
LIFE
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS OF FUND
INCEPTION ENDING ENDING ENDING ENDING ENDING
DATE 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96
<S> <C> <C> <C> <C> <C> <C>
Fidelity VIP II: Asset Manager 09/06/89 7.52 4.82 8.75 N/A 9.77
(Asset Manager)
Calvert Responsibly Invested
Balanced Portfolio 09/02/86 5.66 8.98 7.96 9.71 8.98
(Socially Responsible)
American Century VP Balanced 05/01/91 5.25 7.76 4.30 N/A 7.86
(Balanced)
VIP Equity-Income 10/09/86 7.22 14.79 15.32 12.31 11.99
(Equity-Income)
Dreyfus Stock Index 09/29/89 14.96 15.66 12.01 N/A 11.71
(Index Account)
Fidelity VIP Growth 10/09/86 7.61 12.42 12.57 13.70 13.36
(Growth I)
American Century VP Capital Appreciation 11/20/87 (10.34) 4.25 3.76 N/A 9.25
(Growth II)
T. Rowe Price International Stock 03/31/94 7.61 N/A N/A N/A 6.56
Portfolio (International Stock)
Dreyfus Small Cap 08/31/90 9.38 14.15 33.13 N/A 46.00
(Small Cap)
</TABLE>
-5-
<PAGE>
TABLE 1B -- SUB-ACCOUNT "HYPOTHETICAL" CUMULATIVE TOTAL RETURN
<TABLE>
<CAPTION>
LIFE
FUND YEAR TO 1 YEAR 3 YEARS 5 YEARS 10 YEARS OF FUND
INCEPTION QUARTER DATE ENDING ENDING ENDING ENDING ENDING
DATE 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fidelity VIP II: Asset Manager 09/06/89 0.43 7.52 7.52 15.18 52.11 N/A 97.90
(Asset Manager)
Calvert Responsibly Invested
Balanced Portfolio 09/02/86 (1.90) 5.66 5.66 29.42 46.67 152.58 143.30
(Socially Responsible)
American Century VP Balanced 05/01/91 (1.81) 5.25 5.25 25.11 23.41 N/A 53.58
(Balanced)
VIP Equity-Income 10/09/86 0.97 7.22 7.22 51.27 103.95 219.14 218.56
(Equity-Income)
Dreyfus Stock Index 09/29/89 2.47 14.96 14.96 54.73 76.33 N/A 123.20
(Index)
Fidelity VIP Growth. 10/09/86 (3.37) 7.61 7.61 42.06 80.77 261.19 260.90
(Growth I)
American Century VP Capital Appreciation 11/20/87 (13.75) (10.34) (10.34) 13.31 20.25 N/A 124.16
(Growth II)
T. Rowe Price International Stock 03/31/94 (0.89) 7.61 7.61 N/A N/A N/A 19.15
Portfolio (International Stock)
Dreyfus Small Cap 08/31/90 (2.95) 9.38 9.38 48.74 318.20 N/A 1001.53
(Small Cap)
</TABLE>
Table 2A below shows annual average total return on the same assumptions as
Table 1A except that the value in the Sub-Account is not withdrawn at the end of
the period or is withdrawn to affect an annuity. Table 2B shows the cumulative
total return on the same basis. The rates of return shown below reflect the
mortality and expense risk charge and a pro rata portion of the Annual
Administrative Charge.
-6-
<PAGE>
TABLE 2A -- SUB-ACCOUNT "HYPOTHETICAL" AVERAGE TOTAL RETURN ASSUMING NO
WITHDRAWAL
<TABLE>
<CAPTION>
LIFE
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS OF FUND
INCEPTION ENDING ENDING ENDING ENDING ENDING
DATE 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96
<S> <C> <C> <C> <C> <C> <C>
Fidelity VIP II: Asset Manager 09/06/89
(Asset Manager) 13.18 6.63 9.87 N/A 10.23
Calvert Responsibly Invested
Balanced Portfolio 09/02/86
(Socially Responsible) 11.22 10.86 9.07 9.71 8.98
American Century VP Balanced 05/01/91
(Balanced) 10.79 9.61 5.37 N/A 8.84
VIP Equity-Income 10/09/86
(Equity-Income) 12.86 16.77 16.51 12.31 11.99
Dreyfus Stock Index 09/29/89
(Index Account) 21.01 17.66 13.17 N/A 12.18
Fidelity VIP Growth 10/09/86
(Growth I) 13.28 14.35 13.73 13.70 13.36
American Century VP Capital Appreciation 11/20/87
(Growth II) (5.62) 6.05 4.83 N/A 9.37
T. Rowe Price International Stock 03/31/94
Portfolio (International Stock) 13.27 N/A N/A N/A 8.56
Dreyfus Small Cap 08/31/90
(Small Cap) 15.14 16.12 34.50 N/A 46.95
</TABLE>
TABLE 2B -- SUB-ACCOUNT "HYPOTHETICAL" CUMULATIVE TOTAL RETURN ASSUMING NO
WITHDRAWAL
<TABLE>
<CAPTION>
LIFE
FUND YEAR TO 1 YEAR 3 YEARS 5 YEARS 10 YEARS OF FUND
INCEPTION QUARTER DATE ENDING ENDING ENDING ENDING ENDING
DATE 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fidelity VIP II: Asset Manager 09/06/89
(Asset Manager) 5.72 13.18 13.18 21.24 60.12 N/A 104.02
Calvert Responsibly Invested 09/02/86
Balanced Portfolio
(Socially Responsible) 3.27 11.22 11.22 36.23 54.39 152.58 143.30
American Century VP Balanced 05/01/91
(Balanced) 3.36 10.79 10.79 31.70 29.91 N/A 61.67
VIP Equity-Income 10/09/86
(Equity-Income) 6.28 12.86 12.86 59.23 114.69 219.14 218.56
Dreyfus Stock Index 09/29/89
(Index) 7.86 21.01 21.01 62.87 85.61 N/A 130.10
Fidelity VIP Growth 10/09/86
(Growth I) 1.72 13.28 13.28 49.54 90.28 261.19 260.90
American Century VP Capital Appreciation 11/20/87
(Growth II) (9.21) (5.62) (5.62) 19.27 26.58 N/A 126.43
T. Rowe Price International Stock 03/31/94
Portfolio (International Stock) 4.32 13.27 13.27 N/A N/A N/A 25.42
Dreyfus Small Cap 08/31/90
(Small Cap) 2.16 15.14 15.14 56.57 340.21 N/A 1047.43
</TABLE>
-7-
<PAGE>
Tables 3A and 3B show performance information on the same assumptions as Tables
2A and 2B except that Tables 3A and 3B do not reflect deductions of the pro rata
portion of the Annual Administrative Charge because certain Contract and
Participants are not assessed such a charge.
TABLE 3A -- SUB-ACCOUNT "HYPOTHETICAL" AVERAGE ANNUAL TOTAL RETURN ASSUMING NO
WITHDRAWAL AND NO ANNUAL ADMINISTRATIVE CHARGE
<TABLE>
<CAPTION>
LIFE
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS OF FUND
INCEPTION ENDING ENDING ENDING ENDING ENDING
DATE 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96
<S> <C> <C> <C> <C> <C> <C>
Fidelity VIP II: Asset Manager 09/06/89 13.24 6.69 9.94 N/A 10.37
(Asset Manager)
Calvert Responsibly Invested
Balanced Portfolio 09/02/86 11.28 10.92 9.14 9.79 9.10
(Socially Responsible)
American Century VP Balanced 05/01/91 10.81 9.67 5.44 N/A 8.92
(Balanced)
VIP Equity-Income 10/09/86 12.92 16.84 16.58 12.39 12.08
(Equity-Income)
Dreyfus Stock Index 09/29/89 21.09 17.72 13.28 N/A 12.34
(Index Account)
Fidelity VIP Growth 10/09/86 13.35 14.42 13.79 13.78 13.45
(Growth I)
American Century VP Capital Appreciation 11/20/87 (5.43) 6.15 4.91 N/A 9.50
(Growth II)
T. Rowe Price International Stock 03/31/94 13.34 N/A N/A N/A 8.64
Portfolio (International Stock)
Dreyfus Small Cap 08/31/90 15.22 16.19 34.58 N/A 47.09
(Small Cap)
</TABLE>
TABLE 3B -- SUB-ACCOUNT "HYPOTHETICAL" CUMULATIVE TOTAL RETURN ASSUMING NO
WITHDRAWAL AND NO ANNUAL ADMINISTRATIVE CHARGE
<TABLE>
<CAPTION>
LIFE
FUND YEAR TO 1 YEAR 3 YEARS 5 YEARS 10 YEARS OF FUND
INCEPTION QUARTER DATE ENDING ENDING ENDING ENDING ENDING
DATE 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fidelity VIP II: Asset Manager 09/06/89 5.76 13.24 13.24 21.44 60.62 N/A 105.91
(Asset Manager)
Calvert Responsibly Invested
Balanced Portfolio 09/02/86 3.31 11.28 11.28 36.46 54.86 154.52 145.99
(Socially Responsible)
American Century VP Balanced 05/01/91 3.40 10.81 10.81 31.92 30.35 N/A 62.41
(Balanced)
VIP Equity-Income 10/09/86 6.32 12.92 12.92 59.50 115.35 221.61 221.09
(Equity-Income)
Dreyfus Stock Index 09/29/89 7.91 21.09 21.09 63.13 86.54 N/A 132.78
(Index)
Fidelity VIP Growth 10/09/86 1.75 13.35 13.35 49.79 90.81 263.78 263.71
(Growth I)
American Century VP Capital Appreciation 11/20/87 (9.17) (5.43) (5.43) 19.60 27.09 N/A 128.68
(Growth II)
T. Rowe Price International Stock 03/31/94 4.37 13.34 13.34 N/A N/A N/A 25.65
Portfolio (International Stock)
Dreyfus Small Cap 08/31/90 2.20 15.22 15.22 56.84 341.39 N/A 1054.84
(Small Cap)
</TABLE>
-8-
<PAGE>
Table 4 below shows total return information on a calendar year basis using the
same assumptions as Tables 3A and 3B. The rates of return shown reflect the
mortality and expense risk charge. Similar to Tables 3A and 3B, Table 4 does
not reflect deduction of the pro rata portion of the Annual Administrative
Charge because certain Contracts and Participants are not assessed such a
charge.
TABLE 4 -- SUB-ACCOUNT "HYPOTHETICAL" CALENDAR YEAR ANNUAL RETURN ASSUMING NO
WITHDRAWAL AND NO ANNUAL ADMINISTRATIVE CHARGE*
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Asset Manager na na na 5.45 21.11 10.53 19.60 -7.20 15.57 13.24
Socially Responsible 5.51 10.42 19.53 2.94 15.02 6.33 6.72 -4.39 28.24 11.28
Balanced na na na na na -7.17 6.38 -0.58 19.68 10.81
Equity-Income -2.30 21.25 15.95 -16.29 29.88 15.50 16.89 5.80 33.49 12.92
Index na na na -4.69 28.29 5.82 8.02 -0.32 35.16 21.09
Growth I 2.43 14.21 29.95 -12.78 43.78 8.00 17.94 -1.21 33.75 13.35
Growth II na -3.41 27.17 -2.40 40.18 -2.52 8.99 -2.34 29.55 -5.43
International Stock na na na na na na na na 9.86 13.34
Small Cap na na na na 156.65 69.25 66.31 6.47 27.85 15.22
</TABLE>
*The above calendar-year returns assume a hypothetical investment of $1,000 on
January 1 of the first full calendar year that the underlying fund was in
existence. The returns assume that the money will be left on account until
retirement and thus no CDSC will be deducted. Returns are provided for years
before the fund was an available investment option under the contract. Returns
for those periods reflect a hypothetical return as if those funds were available
under the contract, and reflect the deduction of the mortality and expense risk
charge. The returns do not reflect deductions for the pro rata portion of the
Annual Administrative Charge or the CDSC.
SEC regulations require that any product performance data be accompanied by
standardized performance data.
TAX LAW CONSIDERATIONS
RETIREMENT PROGRAMS: Participants are urged to discuss the income taxes
considerations of their retirement plan with their tax advisors. In many
situations special rules may apply to the plans and/or to the participants. See
the Prospectus for a more complete discussion of tax considerations and for
limitations on the following discussion.
Contributions to retirement programs subject to Sections 401(a), 403(b), 408 and
457(b) may be excludable from a Participant's reportable gross income if the
Contributions do not exceed the limitations imposed under the Code. Certain
plans allow employees to make Elective Salary Deferral Contributions. Certain
Plans allow Employers to make Contributions. The information below is a brief
summary of some the important federal tax considerations that apply to
retirement plans. When there is a written Plan, often the Contribution limits,
withdrawal rights and other provisions of the Plan may be more restrictive than
those allowed by the Code.
ELECTIVE SALARY DEFERRAL CONTRIBUTIONS: For calendar year 1996 the maximum
elective salary deferral contributions to a 401(k) Plan which is a type of
401(a) Plan is limited to $9,500; For a 403(b) plan the limit is $9,500 unless
the employee is a qualified employee; For an Eligible 457 Plan the limit is
$7,500. When an employee is covered by two or more of these Plans, the elective
salary deferral contribution limits for all the Plans must be coordinated.
-9-
<PAGE>
TOTAL SALARY DEFERRAL & EMPLOYER CONTRIBUTIONS:
QUALIFIED RETIREMENT PLAN - 401(a) PLAN
- ---------------------------------------
The Code limits the Contributions to a defined contribution 401(a) plan to the
lesser of $30,000 or 25% of compensation.
TAX SHELTERED ANNUITY PLAN - 403(b) PLAN
- -----------------------------------------
Total contributions which include both salary deferral contributions and
employer contributions are also limited.
The combined limit is:
(a) the amount determined by multiplying 20 percent of the employee's
includable compensation by the number of years of service, over
(b) the aggregate of the amount contributed by the employer for annuity
contracts and excludable from the gross income of the employee for the prior
taxable year.
Therefore, if the maximum exclusion allowance is less than $9,500 a year, the
employee's elective deferrals plus any other employer Contributions cannot
exceed this lesser amount.
Section 415 of the Code imposes limitations with respect to annual contributions
to all Section 403(b) programs, qualified plans and simplified employee pensions
maintained by the Employer. A Participant's annual contributions to these
programs and defined contribution plans generally cannot exceed the lesser of
$30,000 or 25 percent of the employee's compensation. This amount is subject to
the maximum exclusion allowance and the salary deferral amount limitations.
ELIGIBLE 457 PLAN - 457(b) PLAN
- -------------------------------
For a 457(b) plan the contribution limit is generally the lesser of $7,500 or
33% of the employee's compensation.
SECTION 457(f) PLANS
- --------------------
These are non-qualified deferred compensation arrangements between an Employer
and its employees. There are no stated limits in the Code regarding this type
of Plan.
INDIVIDUAL RETIREMENT ACCOUNT - IRA OR 408 PLAN
- -----------------------------------------------
For IRA's, the maximum deductible contribution is the lesser of $2,000 or 100%
of taxable income. The $2,000 is increased to $4,000 when the IRA covers the
taxpayer and a non-working spouse.
TRANSFERS AND ROLLOVERS: Participants who receive distributions from their
401(a) or 403(b) contract may transfer the amount not representing employee
contributions to an Individual Retirement Account or Annuity (IRA) or another
Section 401(a) or 403(b) program without including that amount in gross income
for the taxable year in which paid. Note 401(a) distributions may not be
transferred to a 403(b) plan or vice versa. If the amount is paid directly to
an acceptable rollover account, Lincoln Life is not required to withhold any
amount. In order for the distribution to qualify for rollover, the distribution
must be made on account of the employee's death, after the employee attains age
59 1/2, on account of the employee's separation from service, or after the
employee has become disabled. The distribution cannot be part of a series of
substantially equal payments made over the life expectancy of the employee or
the joint life expectancies of the employee and his or her spouse or made for a
specified period of 10 years or more. The rollover must be made within sixty
days of the distribution to avoid taxation.
-10-
<PAGE>
Pursuant to Revenue Ruling 90-24, a Participant, to the extent permitted by any
applicable Contract or Plan, may transfer funds between Section 403(b)
investment vehicles, including both Section 403(b)(1) annuity contracts and
Section 403(b)(7)
custodial accounts. Any amount transferred must continue to be subject to
withdrawal restrictions at least as restrictive as that of the transferring
investment vehicle. Lincoln Life considers any total or partial transfer from a
Lincoln Life investment vehicle to a non-Lincoln Life investment vehicle to be a
withdrawal.
Once every twelve months a participant in an IRA may roll the money from one IRA
to another IRA.
The rollover rules are not available to Section 457 Plans; limited transfers are
permitted under Eligible 457 Plans. If the rollover amount is paid directly to
the Participant, the amount distributed may be subject to a 20% federal tax
withholding.
EXCISE TAX ON EARLY DISTRIBUTIONS: Section 72(t) of the Code provides that any
distribution made to a Participant in a 401(a), 403(b) or 408 plan other than on
account of the following events will be subject to a 10 percent excise tax on
the taxable amount distributed:
a) the employee has attained age 59 1/2;
b) the employee has died;
c) the employee is disabled;
d) the employee is 55 and has separated from service (Does not apply to
IRA's).
Distributions which are received as a life annuity where payment is made at
least annually will not be subject to an excise tax. Certain amounts paid for
medical care may also not be subject to an excise tax.
MINIMUM DISTRIBUTION RULES: The value in a contract under Sections 401(a),
403(b), 408 and Eligible 457 Plans are subject to the distribution rules
provided in Section 401(a)(9) of the Code. Generally, that section requires that
an employee must begin receiving distributions of his post-1986 balance by April
1 of the calendar year following the calendar year in which the employee attains
age 70 1/2. Such distributions must not exceed the life expectancy of the
employee or the life expectancy of such employee and the designated beneficiary
(as defined under the plan). An employee who attained age 70 1/2 before January
1, 1988 must begin receiving distributions by April 1 of the calendar year
following the later of (a) the calendar year in which the employee attains age
70 1/2 or (b) the calendar year in which the employee retires. There are special
rules for Section 403(b) Plans. Amounts contributed to an Eligible 457 contract
must be distributed not earlier than the earliest of: 1) calendar year in which
the Participant attains age 70 1/2, 2) the Participant separates from service
with the Employer, or 3) when the Participant has an unforeseen emergency.
However, in no event may the distribution begin any later than described in
Sections 401(a)(9) and 457(d) of the Code.
Additionally, distribution of an employee's entire account balance (including
pre-1987 funds) must satisfy the minimum distribution incidental benefit
requirement. In general, this requires that death and other non-retirement
benefits payable under the above plans be incidental to the primary purpose of
the program which is to provide deferred compensation to the employee. A payee
is subject to a penalty for failing to receive the required minimum annual
distribution. Section 4974(a) of the Code provides that a payee will be subject
to a penalty equal to 50 percent of the amount by which the required minimum
distribution exceeds the actual amount distributed during the taxable year.
Additional information on federal income taxation is included in the prospectus.
DISTRIBUTION OF CONTRACTS
LNC Equity Sales Corporation ("LNC Equity"), an indirect subsidiary of Lincoln
National Corporation, is registered with the Securities and Exchange Commission
as a broker-dealer under the Securities Exchange Act of 1934 and is a member of
the National Association of Securities Dealers, Inc. LNC Equity is the Variable
Investment Division's
-11-
<PAGE>
principal underwriter and also enters into selling agreements with other
unaffiliated broker-dealers authorizing them to offer the Contracts.
INDEPENDENT AUDITORS
The financial statements of the Lincoln National Variable Annuity Account L and
the consolidated financial statements and schedules of The Lincoln National Life
Insurance Company appearing in this SAI and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports also appearing elsewhere in this document and in the Registration
Statement. The financial statements and schedules audited by Ernst & Young LLP
have been included in this document in reliance on their report given on their
authority as experts in accounting and auditing.
FINANCIAL STATEMENTS
Financial statements for the Variable Investment Division and Lincoln Life
appear on the following pages. For more information about the financial
statements provided in this SAI, please see the cover page of this SAI.
-12-
<PAGE>
The Lincoln National Life Insurance Company
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1995 1994
(000's omitted)
<S> <C> <C>
Assets
Investments:
Securities available-for-sale, at fair value:
Fixed maturity (cost: 1995-$18,852,837;
1994-$18,193,928) $20,414,785 $17,692,214
Equity (cost: 1995-$480,261; 1994-$416,351) 598,435 456,333
Mortgage loans on real estate 3,147,783 2,795,914
Real estate 746,023 679,512
Policy loans 565,325 528,731
Other investments 241,219 158,196
Total investments 25,713,570 22,310,900
Cash and invested cash 802,743 990,880
Property and equipment 53,830 54,989
Deferred acquisition costs 953,834 1,736,526
Premiums and fees receivable 117,634 123,494
Accrued investment income 352,301 367,370
Assets held in separate accounts 18,461,629 13,000,540
Federal income taxes -- 134,463
Amounts recoverable from reinsurers 2,940,976 2,069,292
Goodwill 5,149 3,385
Other assets 185,398 233,708
Total assets $49,587,064 $41,025,547
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
December 31
1995 1994
(000's omitted)
<S> <C> <C>
Liabilities and shareholder's equity
Liabilities:
Policy liabilities and accruals:
Future policy benefits, claims and
claims expenses $ 8,435,019 $ 7,540,772
Unearned premiums 55,174 61,472
Total policy liabilities and accruals 8,490,193 7,602,244
Contractholder funds 18,171,822 17,028,628
Liabilities related to separate accounts 18,461,629 13,000,540
Federal income taxes 166,430 --
Short-term debt 124,783 153,656
Long-term debt 40,827 54,794
Other liabilities 1,412,534 1,264,730
Total liabilities 46,868,218 39,104,592
Shareholder's equity:
Common stock, $2.50 par value:
Authorized, issued and outstanding
shares-10 million (owned by Lincoln
National Corporation) 25,000 25,000
Additional paid-in capital 809,557 791,605
Retained earnings 1,440,994 1,428,969
Net unrealized gain (loss) on
securities available-for-sale 443,295 (324,619)
Total shareholder's equity 2,718,846 1,920,955
Total liabilities and shareholder's equity $49,587,064 $41,025,547
</TABLE>
See accompanying notes.
<PAGE>
The Lincoln National Life Insurance Company
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(000's omitted)
<S> <C> <C> <C>
Revenue:
Insurance premiums $ 846,873 $1,099,480 $1,972,630
Insurance fees 450,423 390,384 425,083
Net investment income 1,899,630 1,673,981 1,823,459
Realized gain (loss) on investments 136,195 (138,522) 92,150
Gain (loss) on sale of affiliates -- 68,954 (98,500)
Other 3,405 20,946 35,781
Total revenue 3,336,526 3,115,223 4,250,603
Benefits and expenses:
Benefits and settlement expenses 2,122,616 2,194,047 3,033,139
Underwriting, acquisition,
insurance and other expenses 764,346 660,363 881,703
Interest expense 67 615 96
Total benefits and expenses 2,887,029 2,855,025 3,914,938
Income before Federal income taxes
and cumulative effect of
accounting change 449,497 260,198 335,665
Federal income taxes 127,472 40,400 142,544
Income before cumulative
effect of accounting change 322,025 219,798 193,121
Cumulative effect of accounting
change (postretirement benefits) -- -- 45,582
Net income $ 322,025 $ 219,798 $ 147,539
Earnings per share:
Income before cumulative
effect of accounting change $ 32.20 $ 21.98 $ 19.31
Cumulative effect of accounting
change (postretirement benefits) -- -- (4.56)
Net income $ 32.20 $ 21.98 $ 14.75
</TABLE>
See accompanying notes.
<PAGE>
The Lincoln National Life Insurance Company
Consolidated Statements of Shareholder's Equity
Year ended December 31
1995 1994 1993
(000's omitted)
Common stock-balance
at beginning and end of year $ 25,000 $ 25,000 $ 25,000
Additional paid-in capital:
Balance at beginning of year 791,605 791,444 791,223
Contribution from Lincoln
National Corporation 17,952 161 221
Balance at end of year 809,557 791,605 791,444
Retained earnings:
Balance at beginning of year 1,428,969 1,334,171 1,198,632
Net income 322,025 219,798 147,539
Dividends declared (310,000) (125,000) (12,000)
Balance at end of year 1,440,994 1,428,969 1,334,171
Net unrealized gain (loss) on
securities available-for-sale:
Balance at beginning of year (324,619) 621,161 47,303
Cumulative effect of
accounting change -- -- 564,153
Other change during the year 767,914 (945,780) 9,705
Balance at end of year 443,295 (324,619) 621,161
Total shareholder's equity
at end of year $2,718,846 $1,920,955 $2,771,776
See accompanying notes.
<PAGE>
The Lincoln National Life Insurance Company
Consolidated Statements of Cash Flows
Year ended December 31
1995 1994 1993
(000's omitted)
Cash flows from operating activities
Net income $ 322,025 $ 219,798 $ 147,539
Adjustments to reconcile net income
to net cash provided
by operating activities:
Deferred acquisition costs 124,526 (171,063) (92,183)
Premiums and fees receivable 6,082 10,755 80,582
Accrued investment income 15,069 (54,434) (18,827)
Policy liabilities and accruals 621,603 114,038 345,142
Contractholder funds 1,335,625 1,769,240 1,248,058
Amounts recoverable from reinsurers (883,425) (884,388) (700,622)
Federal income taxes 95,745 8,364 (130,308)
Provisions for depreciation 39,089 38,870 41,516
Amortization of discount and premium (86,653) 7,928 (100,274)
Realized loss (gain) on investments (244,995) 219,682 (115,881)
Loss (gain) on sale of affiliates -- (68,954) 98,500
Cumulative effect of
accounting change -- -- 45,582
Other 458,542 (4,599) 51,369
Net adjustments 1,481,208 985,439 752,654
Net cash provided by
operating activities 1,803,233 1,205,237 900,193
Cash flows from investing activities
Securities available-for-sale:
Purchases (13,549,807) (12,100,213) (7,171,684)
Sales 12,163,673 9,326,809 7,139,781
Maturities 929,018 958,065 42,707
Fixed maturity securities
held for investment:
Purchases -- -- (5,903,805)
Sales -- -- 2,805,980
Maturities -- -- 1,639,739
Purchases of other investments (1,711,427) (1,421,321) (1,936,013)
Sale or maturity of other investments 1,198,536 1,457,157 1,142,872
Sale of affiliates -- 520,340 --
Decrease in cash collateral
on loaned securities (39,681) (163,872) (40,454)
Other (213,708) (37,606) 83,751
Net cash used in
investing activities (1,223,396) (1,460,641) (2,197,126)
<PAGE>
The Lincoln National Life Insurance Company
Consolidated Statements of Cash Flows (continued)
Year ended December 31
1995 1994 1993
(000's omitted)
Cash flows from financing activities
Principal payments on long-term debt $ (13,967) $ (200) $ (1,138)
Issuance of long-term debt -- -- 10,314
Net increase (decrease) in
short-term debt (28,873) 3,629 13,047
Universal life and investment
contract deposits 1,716,239 2,381,829 2,418,037
Universal life and
investment contract withdrawals (2,149,325) (1,604,450) (1,503,105)
Capital contribution from
Lincoln National Corporation 17,952 161 221
Dividends paid to shareholder (310,000) (125,000) (12,000)
Net cash provided by
(used in) financing activities (767,974) 655,969 925,376
Net increase (decrease) in cash (188,137) 400,565 (371,557)
Cash at beginning of year 990,880 590,315 961,872
Cash at end of year $ 802,743 $ 990,880 $ 590,315
See accompanying notes.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements
December 31, 1995
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include The Lincoln National
Life Insurance Company ("Company") and its majority-owned subsidiaries. The
Company and its subsidiaries operate multiple insurance businesses. Operations
are divided into two business segments (see Note 9). These consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles.
Use of Estimates
The nature of the insurance business requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Investments
The Company classifies its fixed maturity securities and equity securities
(common and non-redeemable preferred stocks) as available-for-sale and,
accordingly, such securities are carried at fair value. The cost of fixed
maturity securities is adjusted for amortization of premiums and discounts.
The cost of fixed maturity and equity securities is adjusted for declines in
value that are other than temporary.
For the mortgage-backed securities portion of the fixed maturity securities
portfolio, the Company recognizes income using a constant effective yield
based on anticipated prepayments and the estimated economic life of the
securities. When estimates of prepayments change, the effective yield is
recalculated to reflect actual payments to date and anticipated future
payments. The net investment in the securities is adjusted to the amount that
would have existed had the new effective yield been applied since the
acquisition of the securities. This adjustment is reflected in net investment
income.
Mortgage loans on real estate are carried at outstanding principal balances
less unaccrued discounts and net of reserves for declines that are other than
temporary. Investment real estate is carried at cost less allowances for
depreciation. Such real estate is carried net of reserves for declines in
value that are other than temporary. Real estate acquired through foreclosure
proceedings is recorded at fair value on the settlement date which establishes
a new cost basis. If
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
a subsequent periodic review of a foreclosed property indicates the fair
value, less estimated costs to sell, is lower than the carrying value at the
settlement date, the carrying value is adjusted to the lower amount. Policy
loans are carried at the aggregate unpaid balances. Any changes to the
reserves for mortgage loans on real estate and real estate are reported as a
realized gain (loss) on investments.
Cash and invested cash are carried at cost and include all highly liquid debt
instruments purchased with a maturity of three months or less, including
participation in a short-term investment pool administered by Lincoln National
Corporation ("LNC"), the Company's parent.
Realized gain (loss) on investments is recognized in net income, net of
related amortization of deferred acquisition costs, using the specific
identification method. Changes in the fair values of securities carried at
fair value are reflected directly in shareholder's equity after deductions for
related adjustments for deferred acquisition costs and amounts required to
satisfy policyholder commitments that would have been recorded if these
securities would have been sold at their fair value, and after deferred taxes
or credits to the extent deemed recoverable.
Derivatives
The Company hedges certain portions of its exposure to interest rate
fluctuations, the widening of bond yield spreads over comparable maturity U.S.
Government obligations and foreign exchange risk by entering into derivative
transactions. A description of the Company's accounting for its hedge of such
risks is discussed in the following two paragraphs.
The premium paid for an interest rate cap is deferred and amortized to net
investment income on a straight-line basis over the term of the interest rate
cap. Any settlement received in accordance with the terms of the interest
rate caps is recorded as investment income. Spread-lock agreements, interest
rate swaps and financial futures, which hedge fixed maturity securities
available-for-sale, are carried at fair value with the change in fair value
reflected directly in shareholder's equity. Realized gain (loss) from the
settlement of such derivatives is deferred and amortized over the life of the
hedged assets as an adjustment to the yield. Foreign exchange forward
contracts, foreign currency options and foreign currency swaps, which hedge
some of the foreign exchange risk of investments in fixed maturity securities
denominated in foreign currencies, are carried at fair value with the change
in fair value reflected in earnings. Realized gain (loss) from the settlement
of such derivatives is also reflected in earnings.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Hedge accounting is applied as indicated above after the Company determines
that the items to be hedged expose the Company to interest rate fluctuations,
the widening of bond yield spreads over comparable maturity U.S. Government
obligations and foreign exchange risk; and the derivatives used are designated
as a hedge and reduce the indicated risk by having a high correlation of
changes in the value of the derivatives and the items being hedged at both the
inception of the hedge and throughout the hedge period. Should such criteria
not be met, the change in value of the derivatives is included in net income.
Property and Equipment
Property and equipment owned for company use is carried at cost less
allowances for depreciation.
Premiums and Fees
Revenue for universal life and other interest-sensitive life insurance policies
consists of policy charges for cost of insurance, policy initiation and
administration, and surrender charges that have been assessed. Traditional
individual life-health and annuity premiums are recognized as revenue over the
premium-paying period of the policies. Group health premiums are prorated over
the contract term of the policies.
Assets Held in Separate Accounts/Liabilities Related to Separate Accounts
These assets and liabilities represent segregated funds administered and
invested by the Company for the exclusive benefit of pension and variable life
and annuity contractholders. The fees received by the Company for
administrative and contractholder maintenance services performed for these
separate accounts are included in the Company's consolidated statements of
income.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
Deferred Acquisition Costs
Commissions and other costs of acquiring universal life insurance, variable
universal life insurance, traditional life insurance, annuities and group
health insurance which vary with and are primarily related to the production
of new business, have been deferred to the extent recoverable. Acquisition
costs for universal and variable universal life insurance policies are being
amortized over the lives of the policies in relation to the incidence of
estimated gross profits from surrender charges and investment, mortality and
expense margins, and actual realized gain (loss) on investments. That
amortization is adjusted retrospectively when estimates of current or future
gross profits to be realized from a group of policies are revised. The
traditional life-health and annuity acquisition costs are amortized over the
premium-paying period of the related policies using assumptions consistent
with those used in computing policy reserves.
Expenses
Expenses for universal and variable universal life insurance policies include
interest credited to policy account balances and benefit claims incurred
during the period in excess of policy account balances. Interest crediting
rates associated with funds invested in the Company's general account during
1993 through 1995 ranged from 6.1% to 8.25%.
Goodwill
The cost of acquired subsidiaries in excess of the fair value of net assets
(goodwill) is amortized using the straight-line method over periods that
generally correspond with the benefits expected to be derived from the
acquisitions. Goodwill is amortized over 40 years. The carrying value of
goodwill is reviewed periodically for indicators of impairment in value.
Policy Liabilities and Accruals
The liabilities for future policy benefits and expenses for universal and
variable universal life insurance policies consist of policy account balances
that accrue to the benefit of the policyholders, excluding surrender charges.
The liabilities for future policy benefits and expenses for traditional life
policies and immediate and deferred paid-up annuities are computed using a net
level premium method and assumptions for investment yields, mortality and
withdrawals based principally on Company experience projected at the time of
policy issue, with provision for possible adverse deviations. Interest
assumptions for traditional direct individual life reserves for all policies
range from 2.3% to 11.7% graded to 5.7% after 30 years depending on time of
policy issue. Interest rate assumptions for reinsurance reserves range from
5.0% to 11.0% graded to 8.0% after 20 years. The interest assumptions for
immediate and deferred paid-up annuities range from 4.5% to 8.0%.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
With respect to its policy liabilities and accruals, the Company carries on a
continuing review of its 1) overall reserve position, 2) reserving techniques
and 3) reinsurance arrangements, and 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 estimates occur.
Reinsurance
The Company enters into reinsurance agreements with other companies in the
normal course of their business. The Company may assume reinsurance from
unaffiliated companies and/or cede reinsurance to such companies.
Assets/liabilities and premiums/benefits from certain reinsurance contracts
which grant statutory surplus to other insurance companies have been netted on
the balance sheets and income statements, respectively, since there is a right
of offset. All other reinsurance agreements are reported on a gross basis.
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.
Postretirement Medical and Life Insurance Benefits
The Company accounts for its postretirement medical and life insurance
benefits using the full accrual method.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Income Taxes
The Company and eligible subsidiaries have elected to file consolidated
Federal and state income tax returns with their parent, LNC. Pursuant to an
intercompany tax sharing agreement with LNC, the Company and its eligible
subsidiaries provide for income taxes on a separate return filing basis. The
tax sharing agreement also provides that the Company and eligible subsidiaries
will receive benefit for net operating losses, capital losses and tax credits
which are not usable on a separate return basis to the extent such items may
be utilized in the consolidated income tax returns of LNC.
The Company uses the liability method of accounting for income taxes.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax return purposes. The Company
establishes a valuation allowance for any portion of its deferred tax assets
which are unlikely to be realized.
2. Changes in Accounting Principles and Changes in Estimates
Postretirement Benefits Other Than Pensions
Effective January 1, 1993, the Company changed its method of accounting for
postretirement medical and life insurance benefits for its eligible employees
and agents from a pay-as-you-go method to a full accrual method in accordance
with Financial Accounting Standards No. 106 entitled "Employers' Accounting
for Postretirement Benefits Other Than Pensions" ("FAS 106"). This full
accrual method recognizes the estimated obligation for retired employees and
agents and active employees and agents who are expected to retire in the
future. The effect of the change was to increase net periodic postretirement
benefit cost by $7,800,000 and decrease income before cumulative effect of
accounting change by $5,100,000 ($0.51 per share). The implementation of FAS
106 resulted in a one-time charge to the first quarter 1993 net income of
$45,600,000 or $4.56 per share ($69,000,000 pre-tax) for the cumulative effect
of the accounting change. See Note 6 for additional disclosures regarding
postretirement benefits other than pensions.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. Changes in Accounting Principles and Changes in Estimates (continued)
Accounting by Creditors for Impairment of a Loan
Financial Accounting Standards No. 114 entitled "Accounting by Creditors for
Impairment of a Loan" ("FAS 114") issued in May 1993, was adopted by the
Company effective January 1, 1993. FAS 114 requires that if an impaired
mortgage loan's fair value as described in Note 3 is less than the recorded
investment in the loan, the difference is recorded in the mortgage loan
allowance for losses account. The adoption of FAS 114 resulted in additions
to the mortgage loan allowance for losses account and reduced first quarter
1993 income before cumulative effect of accounting change and net income by
$37,700,000 or $3.77 per share ($57,200,000 pre-tax). See Note 3 for further
mortgage loan disclosures. Most of the effect of this change in accounting
was within the Life Insurance and Annuities business segment.
Accounting for Certain Investments in Debt and Equity Securities
Financial Accounting Standards No. 115 entitled "Accounting for Certain
Investments in Debt and Equity Securities" ("FAS 115") issued in May 1993, was
adopted by the Company as of December 31, 1993. In accordance with the rules,
the prior year financial statements have not been restated to reflect the
change in accounting principle. Under FAS 115, securities can be classified
as available-for-sale, trading or held-to-maturity according to the holder's
intent. The Company classified its entire fixed maturity securities portfolio
as "available-for-sale." Securities classified as available-for-sale are
carried at fair value and unrealized gains and losses on such securities are
carried as a separate component of shareholder's equity. The ending balance
of shareholder's equity at December 31, 1993 was increased by $564,200,000
(net of $377,500,000 of related adjustments to deferred acquisition costs,
$50,700,000 of policyholder commitments and $303,700,000 in deferred income
taxes, all of which would have been recognized if those securities would have
been sold at their fair value, net of amounts applicable to Security-
Connecticut Corporation) to reflect the net unrealized gain on fixed maturity
securities classified as available-for-sale previously carried at amortized
cost. Prior to the adoption of FAS 115, the Company carried a portion of its
fixed maturity securities at fair value with unrealized gains and losses
carried as a separate component of shareholder's equity. The remainder of
such securities were carried at amortized cost.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. Changes in Accounting Principles and Changes in Estimates (continued)
Change in Estimate for Net Investment Income Related to Mortgage-Backed
Securities
At December 31, 1993, the Company had $5,942,100,000 invested in mortgage-
backed securities. As indicated in Note 1, the Company recognizes income on
these securities using a constant effective yield based on anticipated
prepayments. With the implementation of new investment software in December
1993, the Company was able to significantly refine its estimate of the
effective yield on such securities to better reflect actual prepayments and
estimates of future prepayments. This resulted in an increase in the
amortization of purchase discount on these securities of $58,000,000 and,
after related amortization of deferred acquisition costs ($18,300,000) and
income taxes ($14,300,000), increased 1993's income before cumulative effect
of accounting change and net income by $25,500,000 or $2.55 per share. Most
of the effect of this change in estimate was within the Life Insurance and
Annuities business segment.
Change in Estimate for Disability Income Reserves
During the fourth quarter of 1993, income before cumulative effect of
accounting change and net income decreased by $15,500,000 or $1.55 per share
as the result of strengthening reinsurance disability income reserves by
$23,900,000. The need for this reserve increase within the Reinsurance
segment was identified as the result of management's assessment of current
expectations for morbidity trends and the impact of lower investment income
due to lower interest rates.
During the fourth quarter of 1995, the Company completed an in-depth review of
the experience of its disability income business. As a result of this study,
and based on the assumption that recent experience will continue in the
future, income before cumulative effect of accounting change and net income
decreased by $33,500,000 or $3.35 per share ($51,500,000 pre-tax) as a result
of strengthening disability income reserves by $15,200,000 and writing-off
deferred acquisition costs of $36,300,000 in the Reinsurance segment.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments
The major categories of net investment income are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(in millions)
<S> <C> <C> <C>
Fixed maturity securities $1,549.4 $1,357.4 $1,497.6
Equity securities 8.9 7.4 4.3
Mortgage loans on real estate 268.3 271.3 294.2
Real estate 110.0 97.8 75.2
Policy loans 35.4 32.7 36.0
Invested cash 55.4 46.4 24.8
Other investments 15.8 7.3 8.0
Investment revenue 2,043.2 1,820.3 1,940.1
Investment expenses 143.6 146.3 116.6
Net investment income $1,899.6 $1,674.0 $1,823.5
</TABLE>
The realized gain (loss) on investments is as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(in millions)
<S> <C> <C> <C>
Fixed maturity securities available-for-sale:
Gross gain $239.6 $ 69.6 $ 91.1
Gross loss (87.8) (294.1) (8.4)
Equity securities available-for-sale:
Gross gain 82.3 50.2 88.3
Gross loss (31.3) (50.5) (33.7)
Fixed maturity securities held for investment:
Gross gain -- -- 209.9
Gross loss -- -- (69.5)
Other investments 42.2 5.1 (161.8)
Related restoration or amortization
of deferred acquisition costs and
provision for policyholder
commitments (108.8) 81.2 (23.7)
Total $136.2 $(138.5) $ 92.2
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
Provisions (credits) for write-downs and net changes in provisions for losses,
which are included in realized gain (loss) on investments shown above, are as
follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(in millions)
<S> <C> <C> <C>
Fixed maturity securities $10.4 $14.2 $ 55.6
Equity securities 3.3 6.8 --
Mortgage loans on real estate 14.7 19.5 136.7
Real estate (7.2) 13.0 21.8
Other long-term investments (1.5) .3 3.9
Guarantees (2.2) 4.3 1.7
Total $17.5 $58.1 $219.7
</TABLE>
The change in unrealized appreciation (depreciation) on investments in fixed
maturity and equity securities is as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(in millions)
<S> <C> <C> <C>
Fixed maturity securities
available-for-sale $2,063.7 $(1,903.7) $1,387.1
Equity securities available-for-sale 78.1 (26.0) 9.2
Fixed maturity securities
held for investment -- -- (959.7)
Total $2,141.8 $(1,929.7) $ 436.6
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
The cost, gross unrealized gain and loss and fair value of securities
available-for-sale are as follows:
<TABLE>
<CAPTION>
December 31, 1995
Gross Unrealized Fair
Cost Gain Loss Value
(in millions)
<S> <C> <C> <C> <C>
Corporate bonds $12,412.1 $1,141.0 $28.7 $13,524.4
U.S. Government bonds 569.6 83.9 .1 653.4
Foreign governments bonds 927.9 70.3 .6 997.6
Mortgage-backed securities:
Mortgage pass-through securities 1,072.5 41.0 3.2 1,110.3
Collateralized mortgage obligations 3,816.3 262.5 7.4 4,071.4
Other mortgage-backed securities 2.8 .3 -- 3.1
State and municipal bonds 12.3 .1 -- 12.4
Redeemable preferred stocks 39.3 2.9 -- 42.2
Total fixed maturity securities 18,852.8 1,602.0 40.0 20,414.8
Equity securities 480.3 123.6 5.5 598.4
Total $19,333.1 $1,725.6 $45.5 $21,013.2
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
Gross Unrealized Fair
Cost Gain Loss Value
(in millions)
<S> <C> <C> <C> <C>
Corporate bonds $11,519.3 $143.3 $514.4 $11,148.2
U.S. Government bonds 1,048.4 6.9 25.5 1,029.8
Foreign governments bonds 541.2 4.7 12.5 533.4
Mortgage-backed securities:
Mortgage pass-through securities 1,176.8 3.0 44.1 1,135.7
Collateralized mortgage obligations 3,835.5 85.8 148.6 3,772.7
Other mortgage-backed securities 5.0 .1 .1 5.0
State and municipal bonds 16.3 .4 -- 16.7
Redeemable preferred stocks 51.4 .2 .9 50.7
Total fixed maturity securities 18,193.9 244.4 746.1 17,692.2
Equity securities 416.3 56.4 16.4 456.3
Total $18,610.2 $300.8 $762.5 $18,148.5
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
Future maturities of fixed maturity securities available-for-sale are as
follows:
<TABLE>
<CAPTION>
December 31, 1995
Fair
Cost Value
(in millions)
<S> <C> <C>
Due in one year or less $ 278.4 $ 282.6
Due after one year through five years 2,955.7 3,102.1
Due after five years through ten years 4,918.2 5,265.9
Due after ten years 5,808.9 6,579.4
Subtotal 13,961.2 15,230.0
Mortgage-backed securities 4,891.6 5,184.8
Total $18,852.8 $20,414.8
</TABLE>
The foregoing data is based on stated maturities. Actual maturities will
differ in some cases because borrowers may have the right to call or pre-pay
obligations.
At December 31, 1995, the current par, amortized cost and estimated fair value
of investments in mortgage-backed securities summarized by interest rates of
the underlying collateral are as follows:
<TABLE>
<CAPTION>
December 31, 1995
Current Fair
Par Cost Value
(in millions)
<S> <C> <C> <C>
Below 7% $ 292.6 $ 290.5 $ 293.6
7%-8% 1,302.8 1,276.9 1,318.2
8%-9% 1,607.0 1,564.7 1,669.8
Above 9% 1,810.5 1,759.5 1,903.2
Total $5,012.9 $4,891.6 $5,184.8
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
The quality ratings of fixed maturity securities available-for-sale are as
follows:
<TABLE>
<CAPTION>
December 31, 1995
<S> <C>
Treasuries and AAA 34.1%
AA 8.0
A 25.9
BBB 24.5
BB 3.9
Less than BB 3.6
100.0%
</TABLE>
Mortgage loans on real estate are considered impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. When the Company determines that a loan is impaired, a provision
for loss is established for the difference between the carrying value of the
mortgage loan and the estimated value. Estimated value is based on either 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
collateral. The provision for losses is reported as realized gain (loss) on
investments. Mortgage loans deemed to be uncollectible are charged against
the provision for losses and subsequent recoveries, if any, are credited to
the provision for losses.
The provision for losses is maintained at a level believed adequate by
management to absorb estimated probable credit losses. Management's periodic
evaluation of the adequacy of the provision for losses is based on the
Company's 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. This evaluation is inherently
subjective as it requires estimating the amounts and timing of future cash
flows expected to be received on impaired loans that may be susceptible to
significant change.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
Impaired loans along with the related allowance for losses are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
(in millions)
<S> <C> <C>
Impaired loans with allowance for losses $144.7 $246.0
Allowance for losses (28.5) (56.6)
Impaired loans with no allowance for losses 2.1 2.2
Net impaired loans $118.3 $191.6
</TABLE>
Impaired loans with no allowance for losses are a result of direct write-downs
or for collateral dependent loans where the fair value of the collateral is
greater than the recorded investment in such loans.
A reconciliation of the mortgage loan allowance for losses for these impaired
mortgage loans is as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(in millions)
<S> <C> <C> <C>
Balance at beginning of year $56.6 $220.7 $129.1
Provisions for losses 14.7 19.5 79.5
Provision for adoption of FAS 114 -- -- 57.2
Releases due to write-downs (12.0) -- --
Releases due to sales (15.9) (164.7) (12.2)
Releases due to foreclosures (14.9) (18.9) (32.9)
Balance at end of year $28.5 $ 56.6 $220.7
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
The average recorded investment in impaired loans and the interest income
recognized on impaired loans were as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(in millions)
<S> <C> <C> <C>
Average recorded investment in impaired loans $181.7 $467.5 $703.6
Interest income recognized on impaired loans 16.6 36.1 47.3
</TABLE>
All interest income on impaired loans was recognized on the cash basis of
income recognition.
As of December 31, 1995 and 1994, the Company had restructured loans of
$62,500,000 and $36,200,000, respectively. The Company recorded $6,300,000
and $800,000 interest income on these restructured loans in 1995 and 1994,
respectively. Interest income in the amount of $6,600,000 and $3,900,000
would have been recorded on these loans according to their original terms in
1995 and 1994, respectively. As of December 31, 1995 and 1994, the Company
had no outstanding commitments to lend funds on restructured loans.
As of December 31, 1995, the Company's investment commitments for fixed
maturity securities (primarily private placements), mortgage loans on real
estate and real estate were $543,100,000.
Fixed maturity securities available-for-sale, mortgage loans on real estate
and real estate with a combined carrying value at December 31, 1995 of
$1,300,000 were non-income producing for the year ended December 31, 1995.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
The cost information for mortgage loans on real estate, real estate and other
long-term investments are net of allowances for losses. The balance sheet
account for other liabilities includes a reserve for guarantees of third-party
debt. The amount of allowances and a reserve for such items is as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
(in millions)
<S> <C> <C>
Mortgage loans on real estate $28.5 $56.6
Real estate 46.6 65.2
Other long-term investments 11.8 13.5
</TABLE>
Details underlying the balance sheet caption "Net Unrealized Gain (Loss) on
Securities Available-for-Sale," are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
(in millions)
<S> <C> <C>
Fair value of securities available-for-sale $21,013.2 $18,148.5
Cost of securities available-for-sale 19,333.1 18,610.2
Unrealized gain (loss) 1,680.1 (461.7)
Adjustments to deferred acquisition costs (492.1) 158.2
Amounts required to satisfy
policyholder commitments (510.1) 8.6
Deferred income credits (taxes) (234.6) 105.9
Valuation allowance for deferred tax assets -- (135.6)
Net unrealized gain (loss) on
securities available-for-sale $ 443.3 $ (324.6)
</TABLE>
Adjustments to deferred acquisition costs and amounts required to satisfy
policyholder commitments are netted against the Deferred Acquisition Costs
asset account and included with the Future Policy Benefits, Claims and Claims
Expense liability account on the balance sheet, respectively.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
4. Federal Income Taxes
The Federal income tax expense (benefit) before cumulative effect of
accounting change is as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(in millions)
<S> <C> <C> <C>
Current $172.5 $(93.4) $261.3
Deferred (45.0) 133.8 (118.8)
Total $127.5 $ 40.4 $142.5
</TABLE>
Cash paid for Federal income taxes in 1995, 1994 and 1993 was $27,500,000,
$41,400,000 and $272,600,000, respectively. The cash paid in 1995 is net of a
$146,900,000 cash refund related to the carryback of 1994 capital losses to
prior years.
The effective tax rate on pre-tax income before cumulative effect of
accounting change is lower than the prevailing corporate Federal income tax
rate. A reconciliation of this difference is as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(in millions)
<S> <C> <C> <C>
Tax rate times pre-tax income $157.3 $91.1 $117.5
Effect of:
Tax-exempt investment income (22.0) (21.5) (16.2)
Participating policyholders' share 5.4 3.4 4.1
Loss (gain) on sale of affiliates -- (24.1) 34.5
Other items (13.2) (8.5) 2.6
Provision for income taxes $127.5 $40.4 $142.5
Effective tax rate 28.4% 15.5% 42.5%
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
4. Federal Income Taxes (continued)
The Federal income tax recoverable (liability) is as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
(in millions)
<S> <C> <C>
Current $ (25.0) $118.2
Deferred (141.4) 16.3
Total $(166.4) $134.5
</TABLE>
Significant components of the Company's net deferred tax asset (liability) are
as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
(in millions)
<S> <C> <C>
Deferred tax assets:
Policy liabilities and accruals
and contractholder funds $ 694.5 $430.9
Loss on investments -- 16.8
Net unrealized loss on
securities available-for-sale -- 161.6
Postretirement benefits other than pensions 25.3 24.2
Other 39.5 34.6
Total deferred tax assets 759.3 668.1
Valuation allowance for deferred tax assets -- (135.6)
Net deferred tax assets 759.3 532.5
Deferred tax liabilities:
Deferred acquisition costs 218.8 475.5
Net unrealized gain on
securities available-for-sale 579.6 --
Gain on investments 7.7 --
Other 94.6 40.7
Total deferred tax liabilities 900.7 516.2
Net deferred tax (liability) asset $(141.4) $ 16.3
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
4. Federal Income Taxes (continued)
The Company is required to establish a "valuation allowance" for any portion
of its deferred tax assets which are unlikely to be realized. At December 31,
1994, $161,600,000 of deferred tax assets relating to net unrealized capital
losses on fixed maturity and equity securities available-for-sale were
available to be recorded in shareholder's equity before considering a
valuation allowance. For Federal income tax purposes, capital losses may only
be used to offset capital gains in the current year or during a three year
carryback and five year carryforward period. Due to these restrictions, and
the uncertainty at that time of future capital gains, these deferred tax
assets were substantially offset by a valuation allowance of $135,600,000. By
December 31, 1995, the fair values of fixed maturity and equity securities
available-for-sale were greater than the cost basis resulting in unrealized
capital gains. Accordingly, no valuation allowance was established as of
December 31, 1995 since management believes it is more likely than not that
the Company will realize the benefit of its deferred tax assets.
Prior to 1984, a portion of the life companies' current income was not subject
to current income tax, but was accumulated for income tax purposes in a
memorandum account designated as "policyholders' surplus." The total of the
life companies' balances in their respective "policyholders' surplus" accounts
at December 31, 1983 of $204,800,000 was "frozen" by the Tax Reform Act of
1984 and, accordingly, there have been no additions to the accounts after that
date. That portion of current income on which income taxes have been paid
will continue to be accumulated in a memorandum account designated as
"shareholder surplus," and is available for dividends to the shareholder
without additional payment of tax. The December 31, 1995 total of the life
companies' account balances for their "shareholder surplus" was
$1,554,000,000. Should dividends to the shareholder for each life company
exceed its respective "shareholder surplus," amounts would need to be
transferred from its respective "policyholders' surplus" and would be subject
to Federal income tax at that time. In connection with the 1993 sale of a
life insurance affiliate (see Note 10), $8,800,000 was transferred from
policyholders' surplus to shareholder surplus and current income tax of
$3,100,000 was paid. Under existing or foreseeable circumstances, the Company
neither expects nor intends that distributions will be made from the remaining
balance in "policyholders' surplus" of $196,000,000 that will result in any
such tax. Accordingly, no provision for deferred income taxes has been
provided by the Company on its "policyholders' surplus" account. In the event
that such excess distributions are made, it is estimated that income taxes of
approximately $68,600,000 would be due.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. Supplemental Financial Data
The balance sheet captions, "Real Estate," "Other Investments" and "Property
and Equipment," are shown net of allowances for depreciation as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
(in millions)
<S> <C> <C>
Real estate $ 51.6 $ 37.0
Other investments 14.6 12.2
Property and equipment 100.7 104.7
</TABLE>
Details underlying the balance sheet caption, "Contractholder Funds," are as
follows:
<TABLE>
<CAPTION>
December 31
1995 1994
(in millions)
<S> <C> <C>
Premium deposit funds $17,886.9 $16,770.3
Undistributed earnings on participating business 91.9 63.6
Other 193.0 194.7
Total $18,171.8 $17,028.6
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. Supplemental Financial Data (continued)
Details underlying the balance sheet captions, "Short-term and Long-term
Debt," are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
(in millions)
<S> <C> <C>
Short-term debt:
Short-term notes $123.5 $150.8
Current portion of long-term debt 1.3 2.9
Total short-term debt $124.8 $153.7
Long-term debt less current portion:
7% mortgage note payable, due 1996 $ -- $ 4.9
9.48% mortgage note payable, due 1996 -- 7.7
12% mortgage note payable, due 1996 -- .2
8.42% mortgage note payable, due 1997 7.0 7.2
8.25% mortgage note payable, due 1997 10.1 10.2
8% mortgage note payable, due 1997 2.1 --
8.75% mortgage note payable, due 1998 18.4 18.8
9.75% mortgage note payable, due 2002 3.2 5.8
Total long-term debt $ 40.8 $ 54.8
</TABLE>
Future maturities of long-term debt are as follows (in millions):
1996 -- $ 1.3 1998 -- $18.4 2000 -- $ --
1997 -- 19.2 1999 -- -- Thereafter -- 3.2
Cash paid for interest for 1995, 1994 and 1993 was $67,000, $615,000 and
$96,000, respectively.
Reinsurance transactions included in the income statement caption, "Insurance
Premiums," are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(in millions)
<S> <C> <C> <C>
Insurance assumed $777.6 $910.8 $807.5
Insurance ceded 441.7 716.7 568.6
Net reinsurance premiums $335.9 $194.1 $238.9
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. Supplemental Financial Data (continued)
The income statement caption, "Benefits and Settlement Expenses," is net of
reinsurance recoveries of $456,000, $524,000 and $438,000 for the years ended
December 31, 1995, 1994 and 1993, respectively.
The income statement caption, "Underwriting, Acquisition, Insurance and Other
Expenses," includes amortization of deferred acquisition costs of
$399,700,000, $115,200,000 and $241,000,000 for the years ended December 31,
1995, 1994 and 1993, respectively. An additional $(85,200,000), $81,200,000
and ($23,700,000) of deferred acquisition costs was restored (amortized) and
netted against "Realized Gain (Loss) on Investments" for the years ended
December 31, 1995, 1994 and 1993, respectively.
6. Employee Benefit Plans
Pension Plans
LNC maintains funded defined benefit pension plans for most of its employees
and, prior to January 1, 1995, full-time agents. The benefits for employees
are based on total years of service and the highest 60 months of compensation
during the last 10 years of employment. The benefits for agents were based on
a percentage of each agent's yearly earnings. The plans are funded by
contributions to tax-exempt trusts. The Company's funding policy is
consistent with the funding requirements of Federal laws and regulations.
Contributions are intended to provide not only the benefits attributed to
service to date, but also those expected to be earned in the future. Plan
assets consist principally of listed equity securities and corporate
obligations and government bonds.
All benefits applicable to the funded defined benefit plan for agents were
frozen as of December 31, 1994. The curtailment of this plan did not have a
significant effect on net pension cost for 1994. Effective January 1, 1995,
pension benefits for agents have been provided by a new defined contribution
plan. Contributions to this plan will be based on 2.3% of an agent's earnings
up to the social security wage base and 4.6% of any excess.
LNC also administers two types of unfunded, nonqualified, defined benefit
plans for certain employees and agents. A supplemental retirement plan
provides defined benefit pension benefits in excess of limits imposed by
Federal tax law. A salary continuation plan provides certain officers of the
Company defined pension benefits based on years of service and final monthly
salary upon death or retirement.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. Employee Benefit Plans (continued)
The status of the funded defined benefit pension plans and the amounts
recognized on the balance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
(in millions)
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $(162.1) $(130.5)
Nonvested benefits (9.2) (7.3)
Accumulated benefit obligation (171.3) (137.8)
Effect of projected future compensation increases (37.2) (24.3)
Projected benefit obligation (208.5) (162.1)
Plan assets at fair value 196.4 159.3
Projected benefit obligations in
excess of plan assets (12.1) (2.8)
Unrecognized net loss (gain) 12.6 (.5)
Unrecognized prior service cost 1.2 1.1
Prepaid (accrued) pension cost
included in other liabilities $ 1.7 $ (2.2)
</TABLE>
The status of the unfunded defined benefit pension plans and the amounts
recognized on the balance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
(in millions)
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $(7.0) $(5.4)
Nonvested benefits (1.5) (1.0)
Accumulated benefit obligation (8.5) (6.4)
Effect of projected future compensation increases (2.4) (2.5)
Projected benefit obligation (10.9) (8.9)
Unrecognized transition obligation -- --
Unrecognized net loss (gain) 1.0 (.3)
Unrecognized prior service cost .8 .8
Accrued pension costs included in other liabilities $(9.1) $(8.4)
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. Employee Benefit Plans (continued)
The determination of the projected benefits obligation for the defined benefit
plans was based on the following assumptions:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Weighted-average discount rate 7.0% 8.0% 7.0%
Rate of increase in compensation:
Salary continuation plan 6.0 6.5 6.0
All other plans 5.0 5.0 5.0
Expected long-term rate of return on plan assets 9.0 9.0 9.0
</TABLE>
The components of net pension cost for the defined benefit pension plans are
as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(in millions)
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 5.0 $ 8.9 $ 8.5
Interest cost on projected benefit obligation 13.2 12.9 12.4
Actual return on plan assets (36.3) 4.7 (20.1)
Net amortization (deferral) 22.9 (18.6) 6.1
Net pension cost $ 4.8 $ 7.9 $ 6.9
</TABLE>
401(k)
LNC and the Company sponsor contributory defined contribution plans for
eligible employees and agents. The Company's contributions to the plans are
equal to each participant's pre-tax contribution, not to exceed 6% of base
pay, multiplied by a percentage, ranging from 25% to 150%, which varies
according to certain incentive criteria as determined by LNC's Board of
Directors. Expense for these plans amounted to $8,000,000, $13,200,000 and
$11,800,000 in 1995, 1994 and 1993, respectively.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. Employee Benefit Plans (continued)
Postretirement Medical and Life Insurance Benefit Plans
LNC sponsors unfunded defined benefit plans that provide postretirement
medical and life insurance benefits to full-time employees and agents who,
depending on the plan, have worked for the Company 10 to 15 years and attained
age 55 to 60. Medical benefits are also available to spouses and other
dependents of employees and agents. For medical benefits, limited
contributions are required from individuals retired prior to November 1, 1988;
contributions for later retirees, which can be adjusted annually, are based on
such items as years of service at retirement and age at retirement. The life
insurance benefits are noncontributory, although participants can elect
supplemental contributory benefits.
The status of the postretirement medical and life insurance benefit plans and
the amounts recognized on the balance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
(in millions)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $(39.8) $(34.9)
Fully eligible active plan participants (9.9) (7.0)
Other active plan participants (20.8) (15.0)
Accumulated postretirement benefit obligation (70.5) (56.9)
Unrecognized net gain (.8) (5.5)
Accrued plan cost included in other liabilities $(71.3) $(62.4)
</TABLE>
The components of periodic postretirement benefit cost are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(in millions)
<S> <C> <C> <C>
Service cost $1.5 $1.7 $2.6
Interest cost 4.4 4.2 4.6
Amortization cost (credit) (.8) .1 --
Net periodic postretirement benefit cost $5.1 $6.0 $7.2
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. Employee Benefit Plans (continued)
The calculation of the accumulated postretirement benefit obligation assumes a
weighted-average annual rate of increase in the per capita cost of covered
benefits (i.e., health care cost trend rate) of 9.5% for 1996 gradually
decreasing to 5.5% by 2004 and remaining at that level thereafter. The health
care cost trend rate assumption has a significant effect on the amounts
reported. For example, increasing the assumed health care cost trend rates by
one percentage point each year would increase the accumulated postretirement
benefit obligation as of December 1995 and 1994 by $5,100,000 and $4,100,000,
respectively, and the aggregate of the estimated service and interest cost
components of net periodic postretirement benefit cost for the year ended
December 31, 1995 by $488,000. The calculation assumes a long-term rate of
increase in compensation of 5.0% for both December 31, 1995 and 1994. The
weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% and 8.0% at December 31, 1995 and
1994, respectively.
7. Restrictions, Commitments and Contingencies
Shareholder's Equity Restrictions
Net income as determined in accordance with statutory accounting practices for
the Company and its insurance subsidiaries in 1995, 1994 and 1993 was
$284,500,000, $366,700,000 and $237,000,000, respectively. The Company's
shareholder's equity as determined in accordance with statutory accounting
practices at December 31, 1995 and 1994 was $1,732,900,000 and $1,679,700,000,
respectively.
The Company is subject to certain insurance department regulatory restrictions
as to the transfer of funds and payments of dividends to LNC. In 1996, the
Company can transfer up to $284,500,000 without seeking prior approval from
the insurance regulators.
Disability Income Claims
The liability for disability income claims net of the related asset for
amounts recoverable from reinsurers at December 31, 1995 and 1994 is a net
liability of $602,600,000 and $441,700,000, respectively, excluding deferred
acquisition costs. The bulk of the increase to this liability relates to the
assumption of a large block of disability claim reserves and related assets
during the third quarter of 1995. In addition, as indicated in Note 2, the
Company strengthened its disability income reserves and wrote off certain
related deferred acquisition costs in the fourth quarter of 1995. The
reserves were established on the assumption that the recent experience will
continue in the future. If incidence levels or claim termination rates vary
significantly from these assumptions, further adjustments to reserves may be
required in the future. It is not possible to provide a meaningful estimate
of a range of possible outcomes at this time. The Company reviews and updates
the level of these reserves on an on-going basis.
Compliance of Qualified Annuity Plans
Tax authorities continue to focus on compliance of qualified annuity plans
marketed by insurance companies. If sponsoring employers cannot demonstrate
compliance and the insurance company is held responsible due to its marketing
efforts, the Company and other insurers may be subject to potential liability.
It is not possible to provide a meaningful estimate of the range of potential
liability at this time. Management continues to monitor this matter and to
take steps to minimize any potential liability.
Group Pension Annuities
The liabilities for guaranteed interest and group pension annuity contracts,
which are no longer being sold, are supported by a single portfolio of assets
which attempts to match the duration of these liabilities. Due to the very
long-term nature of group pension annuities and the resulting inability to
exactly match cash flows, a risk exists that future cash flows from
investments will not be reinvested at rates as high as currently earned by the
portfolio. This situation could cause losses which would be recognized at
some future time.
Leases
The Company and certain of its subsidiaries lease their home office properties
through sale-leaseback agreements. The agreements provide for a 25 year lease
period with options to renew for six additional terms of five years each. The
agreements also provide the Company with the right of first refusal to
purchase the properties during the term of the lease, including renewal
periods, at a price as defined in the agreements. In addition, the Company
has the option to purchase the leased properties at fair market value as
defined in the agreements on the last day of the initial 25 year lease period
ending in 2009 or the last day of any of the renewal periods.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Restrictions, Commitments and Contingencies (continued)
Total rental expense under operating leases in 1995, 1994 and 1993 was
$24,400,000, $21,700,000 and $27,100,000. Future minimum rental commitments
are as follows (in millions):
<TABLE>
<CAPTION>
<S> <C>
1996 $ 20.9
1997 19.5
1998 18.3
1999 18.3
2000 17.7
Thereafter 172.4
Total $267.1
</TABLE>
Insurance Ceded and Assumed
The Company cedes insurance to other companies, including certain affiliates.
The portion of risks exceeding each companys retention limit is reinsured
with other insurers. The Company seeks reinsurance coverage within the
business segment that sells life insurance that limits its liabilities on an
individual insured to $3,000,000. To cover products other than life
insurance, the Company acquires other insurance coverages with retentions and
limits which management believes are appropriate for the circumstances. The
accompanying financial statements reflect premiums, benefits and settlement
expenses and deferred acquisition costs, net of insurance ceded (see Note 5).
The Company and its subsidiaries remain liable if their reinsurers are unable
to meet their contractual obligations under the applicable reinsurance
agreements.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1995, the Company has provided $92,700,000 of
statutory surplus relief to other insurance companies under reinsurance
transactions. Generally, such amounts are offset by corresponding receivables
from the ceding company, which are secured by future profits on the reinsured
business. However, the Company is subject to the risk that the ceding company
may become insolvent and the right of offset would not be permitted.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Restrictions, Commitments and Contingencies (continued)
Vulnerability from Concentrations
At December 31, 1995, the Company did not have a material concentration of
financial instruments in a single investee, industry or geographic location.
Also at December 31, 1995, the Company did not have a concentration of 1)
business transactions with a particular customer, lender or distributor, 2)
revenues from a particular product of service, 3) sources of supply of labor
or services used in the business or 4) a market or geographic area in which
business is conducted that makes it vulnerable to an event that is at least
reasonably possible to occur in the near term and which could cause a serve
impact to the Company's financial condition.
Other Contingency Matters
The Company and its subsidiaries are involved in various pending or threatened
legal proceedings arising from the conduct of their business. In some
instances, these proceedings include claims for punitive damages and similar
types of relief in unspecified or substantial amounts, in addition to amounts
for alleged contractual liability or requests for equitable relief. After
consultation with counsel and a review of available facts, it is management's
opinion that these proceedings ultimately will be resolved without materially
affecting the consolidated financial statements of the Company.
The number of insurance companies that are under regulatory supervision has
resulted, and is expected to continue to result, in assessments by state
guaranty funds to cover losses to policyholders of insolvent or rehabilitated
companies. Mandatory assessments may be partially recovered through a
reduction in future premium taxes in some states. The Company has accrued for
expected assessments net of estimated future premium tax deductions.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Restrictions, Commitments and Contingencies (continued)
Guarantees
The Company has guarantees with off-balance-sheet risks whose contractual
amounts represent credit exposure. Outstanding guarantees with off-balance-
sheet risks, shown in notional or contract amounts, are as follows:
<TABLE>
<CAPTION>
Notional or
Contract Amounts
December 31
1995 1994
(in millions)
<S> <C> <C>
Real estate partnerships $ 3.3 $17.6
Mortgage loan pass-through certificates 63.6 78.2
Total $66.9 $95.8
</TABLE>
The Company has invested in real estate partnerships that use conventional
mortgage loans. In some cases, the terms of these arrangements involve
guarantees by each of the partners to indemnify the mortgagor in the event a
partner is unable to pay its principal and interest payments. In addition,
the Company has sold commercial mortgage loans through grantor trusts which
issued pass-through certificates. The Company has agreed to repurchase any
mortgage loans which remain delinquent for 90 days at a repurchase price
substantially equal to the outstanding principal balance plus accrued interest
thereon to the date of repurchase. It is management's opinion that the value
of the properties underlying these commitments is sufficient that in the event
of default the impact would not be material to the Company. Accordingly, both
the carrying value and fair value of these guarantees is zero at December 31,
1995 and 1994.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Restrictions, Commitments and Contingencies (continued)
Derivatives
The Company has derivatives with off-balance-sheet risks whose notional or
contract amounts exceed the credit exposure. The Company has entered into
derivative transactions to reduce its exposure to fluctuations in interest
rates, the widening of bond yield spreads over comparable maturity U.S.
Government obligations and foreign exchange risks. In addition, the Company
is subject to the risks associated with changes in the value of its
derivatives; however, such changes in the value generally are offset by
changes in the value of the items being hedged by such contracts. Outstanding
derivatives with off-balance-sheet risks, shown in notional or contract
amounts along with their carrying value and estimated fair values, are as
follows:
<TABLE>
<CAPTION>
Assets (Liabilities)
Notional or Carrying Fair Carrying Fair
Contract Amounts Value Value Value Value
December 31 December 31 December 31
1995 1994 1995 1995 1994 1994
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate
cap agreements $5,110.0 $4,400.0 $22.7 $5.3 $23.3 $34.4
Spread-lock
agreements 600.0 1,300.0 (.9) (.9) 3.2 3.2
Financial
futures contracts -- 382.5 -- -- (7.5) (7.5)
Interest rate swaps 5.0 5.0 .2 .2 .2 .2
5,715.0 6,087.5 22.0 4.6 19.2 30.3
Foreign currency
derivatives:
Foreign exchange
forward contracts 15.7 21.2 (.6) (.6) .2 .2
Foreign currency
options 99.2 -- 1.9 1.4 -- --
Foreign currency
swaps 15.0 -- .4 .4 -- --
129.9 21.2 1.7 1.2 .2 .2
$5,844.9 $6,108.7 $23.7 $5.8 $19.4 $30.5
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Restrictions, Commitments and Contingencies (continued)
A reconciliation and discussion of the notional or contract amounts for the
significant programs using derivative agreements and contracts is as follows:
<TABLE>
<CAPTION>
Interest Rate Caps Spread Locks
December 31 December 31
1995 1994 1995 1994
(in millions)
<S> <C> <C> <C> <C>
Balance at beginning of year $4,400.0 $3,800.0 $1,300.0 $1,700.0
New contracts 710.0 600.0 800.0 --
Terminations and maturities -- -- (1,500.0) (400.0)
Balance at end of year $5,110.0 $4,400.0 $ 600.0 $1,300.0
</TABLE>
<TABLE>
<CAPTION>
Financial Futures
Contracts Options
1995 1994 1995 1994
(in millions)
<S> <C> <C> <C> <C>
Balance at beginning of year $ 382.5 $ 33.1 $ -- $ --
New contracts 810.5 1,087.7 181.6 308.0
Terminations and maturities (1,193.0) (738.3) (181.6) (308.0)
Balance at end of year $ -- $ 382.5 $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
Foreign Currency Derivatives
Foreign
Exchange Foreign Foreign
Forward Currency Currency
Contracts Options Swaps
1995 1994 1995 1994 1995 1994
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 21.2 $ -- $ -- $-- $ -- $--
New contracts 131.2 38.5 356.6 -- 15.0 --
Terminations and maturities (136.7) (17.3) (257.4) -- -- --
Balance at end of year $ 15.7 $21.2 $ 99.2 $-- $15.0 $--
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Restrictions, Commitments and Contingencies (continued)
Interest Rate Caps
The interest rate cap agreements, which expire in 1997 through 2003, entitle
the Company to receive payments from the counterparties on specified future
reset dates, contingent on future interest rates. For each cap, the amount of
such quarterly payments, if any, is determined by the excess of a market
interest rate over a specified cap rate times the notional amount divided by
four. The purpose of the Company's interest rate cap agreement program is to
protect its annuity line of business from the effect of fluctuating interest
rates. The premium paid for the interest rate caps is included in other
assets ($22,700,000 and $23,400,000 as of December 31, 1995 and 1994,
respectively) and is being amortized over the terms of the agreements and is
included in net investment income.
Spread Locks
Spread-lock agreements in effect at December 31, 1995 all expire in 2005.
Spread-lock agreements provide for a lump sum payment to or by the Company
depending on whether the spread between the swap rate and a specified U.S.
Treasury note is larger or smaller than a contractually specified spread.
Cash payments are based on the product of the notional amount, the spread
between the swap rate and the yield of an equivalent maturity U.S. Treasury
security and the price sensitivity of the swap at that time, expressed in
dollars per basis point. The purpose of the Company's spread-lock program is
to protect a portion of its fixed maturity securities against widening of
spreads.
Financial Futures
The Company uses exchange-traded financial futures contracts and options on
those financial futures to hedge against interest rate risks and to manage
duration of a portion of its fixed maturity securities. Financial futures
contracts obligate the Company to buy or sell a financial instrument at a
specified future date for a specified price and may be settled in cash or
through delivery of the financial instrument. Cash settlements on the change
in market values of financial futures contracts are made daily. Options on
financial futures give the Company the right, but not the obligation, to
assume a long or short position in the underlying futures at a specified price
during a specified time period.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Restrictions, Commitments and Contingencies (continued)
Foreign Currency Derivatives
The Company uses a combination of foreign exchange forward contracts, foreign
currency options and foreign currency swaps, all of which are traded over-the-
counter, to hedge some of the foreign exchange risk of investments in fixed
maturity securities denominated in foreign currencies. The foreign currency
forward contracts obligate the Company to deliver a specified amount of
currency at a future date at a specified exchange rate. Foreign currency
options give the Company the right, but not the obligation, to buy or sell a
foreign currency at a specific exchange rate during a specified time period.
A foreign currency swap is a contractual agreement to exchange the currencies
of two different countries pursuant to an agreement to reexchange the two
currencies at the same rate of exchange at a specified future date.
Additional Derivative Information
Expenses for the agreements and contracts described above amounted to
$5,600,000 and $5,400,000 in 1995 and 1994, respectively. Deferred losses of
$21,800,000 as of December 31, 1995, resulting from 1) terminated and expired
spread-lock agreements, 2) financial futures contracts and 3) options on
financial futures, are included with the related fixed maturity securities to
which the hedge applied and are being amortized over the life of such
securities.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on interest rate cap agreements, spread-lock agreements,
interest rate swaps, foreign exchange forward contracts, foreign currency
options and foreign currency swaps, but the Company does not anticipate
nonperformance by any of these counterparties. The credit risk associated
with such agreements is minimized by purchasing such agreements from financial
institutions with long-standing, superior performance records. The amount of
such exposure is essentially the net replacement cost or market value for such
agreements with each counterparty if the net market value is in the Company's
favor. At December 31, 1995, the exposure was $6,900,000.
8. Fair Value of Financial Instruments
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair value of the Company's financial instruments.
Considerable judgment is required to develop these fair values and,
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 the
Company's financial instruments.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. Fair Value of Financial Instruments (continued)
Fixed Maturity and Equity Securities
Fair values for fixed maturity securities are based on quoted market prices,
where available. For fixed maturity securities not actively traded, fair
values are estimated using values obtained from independent pricing services
or, in the case of private placements, are estimated by discounting expected
future cash flows using a current market rate applicable to the coupon rate,
credit quality and maturity of the investments. The fair values for equity
securities are based on quoted market prices.
Mortgage Loans on Real Estate
The estimated fair value of mortgage loans on real estate was established
using a discounted cash flow method based on credit rating, maturity and
future income when compared to the expected yield for mortgages having similar
characteristics. The rating for mortgages in good standing are based on
property type, location, market conditions, occupancy, debt service coverage,
loan to value, caliber of tenancy, borrower and payment record. Fair values
for impaired mortgage loans are measured based either on the present value of
expected future cash flows discounted at the loan's effective interest rate,
at the loan's market price or the fair value of the collateral if the loan is
collateral dependent.
Policy Loans
The estimated fair value of investments in policy loans was calculated on a
composite discounted cash flow basis using Treasury interest rates consistent
with the maturity durations assumed. These durations were based on historical
experience.
Other Investments and Cash and Invested Cash
The carrying value for assets classified as other investments and cash and
invested cash in the accompanying balance sheets approximates their fair
value.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. Fair Value of Financial Instruments (continued)
Investment Type Insurance Contracts
The balance sheet captions, "Future Policy Benefits, Claims and Claims
Expenses" and "Contractholder Funds," include investment type insurance
contracts (i.e., deposit contracts and guaranteed interest contracts). The
fair values for the deposit contracts and certain guaranteed interest
contracts are based on their approximate surrender values. The fair values
for the remaining guaranteed interest and similar contracts are estimated
using discounted cash flow calculations based on interest rates currently
being offered on similar contracts with maturities consistent with those
remaining for the contracts being valued.
The remainder of the balance sheet captions, "Future Policy Benefits, Claims
and Claims Expenses" and "Contractholder Funds," that do not fit the
definition of "investment type insurance contracts" are considered insurance
contracts. Fair value disclosures are not required for these insurance
contracts and have not been determined by the Company. It is the Company's
position that the disclosure of the fair value of these insurance contracts is
important in that readers of these financial statements could draw
inappropriate conclusions about the Company's shareholder's equity determined
on a fair value basis if only the fair value of assets and liabilities defined
as financial instruments are disclosed. The Company and other companies in
the insurance industry are monitoring the related actions of the various rule-
making bodies and attempting to determine an appropriate methodology for
estimating and disclosing the "fair value" of their insurance contract
liabilities.
Short-Term and Long-Term Debt
Fair values for long-term debt issues are estimated using discounted cash flow
analysis based on the Company's current incremental borrowing rate for similar
types of borrowing arrangements. For short-term debt, the carrying value
approximates fair value.
Guarantees
The Company's guarantees include guarantees related to real estate
partnerships and mortgage loan pass-through certificates. Based on historical
performance where repurchases have been negligible and the current status,
which indicates none of the loans are delinquent, the fair value liability for
the guarantees related to the mortgage loan pass-through certificates is
insignificant. Fair values for all other guarantees are based on fees that
would be charged currently to enter into similar agreements, taking into
consideration the remaining terms of the agreements and the counterparties'
credit standing.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. Fair Value of Financial Instruments (continued)
Derivatives
The Company's derivatives include interest rate cap agreements, spread-lock
agreements, foreign currency exchange contracts, financial futures contracts,
options on financial futures, interest rate swaps, foreign currency options
and foreign currency swaps. Fair values for these contracts are based on
current settlement values. The current settlement values are based on quoted
market prices for the foreign currency exchange contracts, financial future
contracts and options on financial futures and on brokerage quotes, which
utilized pricing models or formulas using current assumptions, for all other
swaps and agreements.
Investment Commitments
Fair values for commitments to make investment in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real estate
are based on the difference between the value of the committed investments as
of the date of the accompanying balance sheets and the commitment date, which
would take into account changes in interest rates, the counterparties' credit
standing and the remaining terms of the commitments.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. Fair Value of Financial Instruments (continued)
The carrying values and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
Carrying Fair Carrying Fair
Assets (Liabilities) Value Value Value Value
(in millions)
<S> <C> <C> <C> <C>
Fixed maturity securities $20,414.8 $20,414.8 $17,692.2 $17,692.2
Equity securities 598.4 598.4 456.3 456.3
Mortgage loans on real estate 3,147.8 3,330.5 2,795.9 2,720.6
Policy loans 565.3 557.4 528.7 508.1
Other investments 241.2 241.2 158.2 158.2
Cash and invested cash 802.7 802.7 990.9 990.9
Investment type
insurance contracts:
Deposit contracts and
certain guaranteed
interest contracts (15,390.8) (15,179.1) (14,294.7) (14,052.5)
Remaining guaranteed
interest and similar
contracts (2,470.9) (2,396.5) (2,485.5) (2,423.9)
Short-term debt (124.8) (124.8) (153.7) (153.7)
Long-term debt (40.8) (36.7) (54.8) (57.0)
Derivatives 23.7 5.8 19.4 30.5
Investment commitments -- (.8) -- (.5)
</TABLE>
As of December 31, 1995 and 1994, the carrying value of the deposit contracts
and certain guaranteed contracts is net of deferred acquisition costs of
$333,797,000 and $399,000,000, respectively, excluding adjustments for
deferred acquisition costs applicable to changes in fair value of securities.
The carrying values of these contracts are stated net of deferred acquisition
costs in order that they be comparable with the fair value basis.
9. Segment Information
The Company has two major business segments: Life Insurance and Annuities and
Reinsurance. The Life Insurance and Annuities segment offers universal life,
pension products and other individual coverages through a network of career
agents, independent general agencies and insurance agencies located within a
variety of financial institutions. These products are sold throughout the
United States by the Company. Reinsurance sells reinsurance products and
services to insurance companies, HMOs, self-funded employers and other primary
risk accepting organizations in the U.S. and economically attractive
international markets. Effective in the fourth quarter of 1995, operating
results of the direct disability income business previously included in the
Life Insurance and Annuities segment is now included in the Reinsurance
segment. This direct disability income business, which is no longer being
sold, is now managed by the Reinsurance segment along with its disability
income business. Prior to the sale of 100% of the ownership of its primary
underwriter of employee life-health benefit coverages in 1994 (see Note 10),
the Employee Life-Health Benefits segment distributed group life and health
insurance, managed health care and other related coverages through career
agents and independent general agencies. Activity which is not included in
the major business segments is shown as "Other Operations."
"Other Operations" includes operations not directly related to the business
segments and unallocated corporate items (i.e., corporate investment income,
interest expense on corporate debt and unallocated corporate overhead
expenses).
The revenue, pre-tax income and assets by segment for 1993 through 1995 are as
follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(in millions)
<S> <C> <C> <C>
Revenue:
Life Insurance and Annuities $2,569.2 $2,065.3 $2,341.9
Reinsurance 751.2 660.4 610.7
Employee Life-Health Benefits -- 314.9 1,326.8
Other Operations 16.1 74.6 (28.8)
Total $3,336.5 $3,115.2 $4,250.6
Income (loss) before income taxes and
cumulative effect of accounting change:
Life Insurance and Annuities $ 361.0 $ 75.6 $ 265.3
Reinsurance 83.5 93.9 31.6
Employee Life-Health Benefits -- 22.9 83.0
Other Operations 5.0 67.8 (44.2)
Total $ 449.5 $ 260.2 $ 335.7
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
9. Segment Information (continued)
<TABLE>
<CAPTION>
December 31
1995 1994 1993
(in millions)
<S> <C> <C> <C>
Assets:
Life Insurance and Annuities $45,280.0 $37,675.9 $36,021.0
Reinsurance 3,383.5 2,311.5 2,328.9
Employee Life-Health Benefits -- -- 588.5
Other Operations 923.6 1,038.1 770.0
Total $49,587.1 $41,025.5 $39,708.4
</TABLE>
Provisions for depreciation and capital additions were not material.
10. Sale of Affiliates
In December 1993, the Company recorded a provision for loss of $98,500,000
(also $98,500,000 after-tax) in the "Other Operations" segment for the sale of
Security-Connecticut Life Insurance Company ("Security-Connecticut"). The
sale was completed on February 2, 1994 through an initial public offering and
the Company received cash and notes, net of related expenses, totaling
$237,700,000. The loss on sale and disposal expenses did not differ
materially from the estimate recorded in the fourth quarter of 1993. For the
year ended December 31, 1993, Security-Connecticut, which operated in the Life
Insurance and Annuities segment, had revenue of $274,500,000 and net income of
$24,000,000.
In 1994, the Company completed the sale of 100% of the common stock of
EMPHESYS (parent company of Employers Health Insurance Company, which
comprised the Employee Life-Health Benefits segment) for $348,200,000 of cash,
net of related expenses, and a $50,000,000 promissory note. A gain on sale of
$69,000,000 (also $69,000,000 after-tax) was recognized in 1994 in "Other
Operations". For the year ended December 31, 1993, EMPHESYS had revenues of
$1,304,700,000 and net income of $55,300,000. EMPHESYS had revenue and net
income of $314,900,000 and $14,400,000, respectively, during the three months
of ownership in 1994.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
11. Subsequent Event
In January 1996, LNC announced that it had signed a definitive agreement to
acquire the group tax-sheltered annuity business of UNUM Corporation's
affiliates. This purchase is expected to be completed in the form of a
reinsurance transaction with an initial ceding commission of approximately
$70,000,000. This ceding commission represents the present value of business
in-force and, accordingly, will be classified as other intangible assets upon
the close of this transaction. This transaction, which is expected to close
in the third quarter of 1996, will increase LNC's assets and policy
liabilities and accruals by approximately $3,200,000,000.
12. Transactions With Affiliates
A wholly owned subsidiary of LNC, Lincoln Financial Group, Inc. ("LFGI"), has
a nearly exclusive general agents contract with the Company under which it
sells the Company's products and provides the service that otherwise would be
provided by a home office marketing department and regional offices. For
providing these selling and marketing services, the Company paid LFGI override
commissions and operating expense allowances of $81,900,000, $78,500,000 and
$74,500,000 in 1995, 1994 and 1993, respectively. LFGI incurred expenses of
$10,400,000, $10,700,000 and $10,500,000 in 1995, 1994 and 1993, respectively,
in excess of the override commission and operating expense allowances received
from the Company, which the Company is not required to reimburse.
Cash and invested cash at December 31, 1995 and 1994 include the Company's
participation in a short-term investment pool with LNC of $333,800,000 and
$428,300,000, respectively. Related investment income amounted to
$22,500,000, $17,100,000 and $9,100,000 in 1995, 1994 and 1993, respectively.
Short-term debt at December 31, 1995 and 1994 includes $67,000,000 and
$68,600,000, respectively, borrowed from LNC. The Company paid interest to
LNC of $24,000, $8,000 and $137,000 in 1995, 1994 and 1993, respectively.
The Company provides services to and receives services from affiliated
companies which resulted in a net receipt of $7,500,000, $13,900,000 and
$18,900,000 in 1995, 1994 and 1993, respectively.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
12. Transactions With Affiliates (continued)
The Company both cedes and accepts reinsurance from affiliated companies.
Premiums in the accompanying statements of income includes reinsurance
transactions with affiliated companies as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1995 1994
(in millions)
<S> <C> <C>
Insurance assumed $ 17.6 $ 19.8
Insurance ceded 214.4 481.3
</TABLE>
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
December 31
1995 1994
(in millions)
<S> <C> <C>
Future policy benefits and claims assumed $ 344.8 $341.3
Future policy benefits and claims ceded 1,344.5 857.7
Amounts recoverable on paid and unpaid losses 65.9 36.8
Reinsurance payable on paid losses 5.5 3.5
Funds held under reinsurance treaties-net liability 712.3 238.4
</TABLE>
Substantially all reinsurance ceded to affiliated companies is with
unauthorized companies. To take a reserve credit for such reinsurance, the
Company holds assets from the reinsurer, including funds held under
reinsurance treaties, and is the beneficiary on letters of credit aggregating
$340,800,000 and $308,200,000 at December 31, 1995 and 1994, respectively. At
December 31, 1995 and 1994, LNC had guaranteed $275,300,000 and $298,200,000,
respectively, of these letters of credit. At December 31, 1995, the Company
has a receivable (included in the foregoing amounts) from affiliated insurance
companies in the amount of $241,900,000 for statutory surplus relief received
under financial reinsurance ceded agreements.
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
The Lincoln National Life Insurance Company
We have audited the accompanying consolidated balance sheets of The Lincoln
National Life Insurance Company, a wholly owned subsidiary of Lincoln National
Corporation, as of December 31, 1995 and 1994, and the related consolidated
statements of income, shareholder's equity and cash flows for each of the three
years in the period ended December 31, 1995. Our audits also included the
financial statement schedules listed on B- . These financial statements and
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as 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, 1995, and 1994, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
As discussed in Note 2 to the consolidated financial statements, in 1993 the
Company changed its method of accounting for postretirement benefits other than
pensions, accounting for impairment of loans and accounting for certain
investments in debt and equity securities.
/S/ ERNST & YOUNG LLP
Fort Wayne, Indiana
February 7, 1996
<PAGE>
FINANCIAL SCHEDULES
The following consolidated financial statement schedules of The Lincoln National
Life Insurance Company and subsidiaries are included on Pages B- through
B- .
I Summary of Investments Other than Investments in Related Parties December
31, 1995
III Supplementary Insurance Information Years ended December 31, 1995, 1994 and
1993
IV Reinsurance Years ended December 31, 1995, 1994 and 1993
V Valuation and Qualifying Accounts Years ended December 31, 1995, 1994 and
1993
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions, are inapplicable or the required information is included
in the consolidated financial statements, and therefore have been omitted.
<PAGE>
The Lincoln National Life Insurance Company and Subsidiaries
Schedule I
Summary of Investments Other Than Investments in Related Parties
December 31, 1995
(000's omitted)
<TABLE>
<CAPTION>
Column A Column B Column C Column D
Amount at
Which
Shown in
the Balance
Type of Investment Cost Value Sheet
<S> <C> <C> <C>
Fixed maturity securities available-for-sale:
Bonds:
United States Government and
government agencies and authorities $ 569,552 $ 653,444 $ 653,444
States, municipalities
and political subdivisions 12,325 12,375 12,375
Mortgage-backed securities 4,891,521 5,184,751 5,184,751
Foreign governments 927,901 997,567 997,567
Public utilities 2,572,309 2,772,990 2,772,990
Convertibles and bonds
with warrants attached 181,431 199,658 199,658
All other corporate bonds 9,658,371 10,551,770 10,551,770
Redeemable preferred stocks 39,427 42,230 42,230
Total fixed maturity securities 18,852,837 20,414,785 20,414,785
Equity securities available-for-sale:
Common stocks:
Public utilities 8,980 10,989 10,989
Banks, trust and insurance companies 74,897 89,197 89,197
Industrial, miscellaneous and all other 345,434 436,556 436,556
Nonredeemable preferred stocks 50,950 61,693 61,693
Total equity securities 480,261 598,435 598,435
Mortgage loans on real estate 3,176,275 3,147,783 (A)
Real estate:
Investment properties 635,135 635,135
Acquired in satisfaction of debt 157,441 110,888 (A)
Policy loans 565,325 565,325
Other investments 253,015 241,219 (A)
Total investments $24,120,189 $25,713,570
</TABLE>
(A) Investments which are deemed to have declines in value that are other than
temporary are written down or reserved for to reduce their carrying value to
their estimated realizable value.
<PAGE>
The Lincoln National Life Insurance Company and Subsidiaries
Schedule III
Supplementary Insurance Information
(000's omitted)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
Future Policy
Benefits, Other Policy
Deferred Claims and Claims and
Acquisition Claim Unearned Benefits Premium
Segment Costs Expenses Premiums Payable Revenue (A)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Life insurance and annuities $ 713,213 $6,530,475 $ 9,145 $-- $ 685,258
Reinsurance 247,921 1,855,039 45,951 -- 611,416
Other (including consolidating
adjustments) (7,300) 49,505 78 -- 622
Total $ 953,834 $8,435,019 $ 55,174 $-- $1,297,296
Year ended December 31, 1994:
Life insurance and annuities $1,427,692 $5,888,581 $ 11,201 $-- $ 647,416
Reinsurance 304,913 1,626,033 51,618 -- 542,034
Employee life-health benefits -- -- -- -- 299,338
Other (including consolidating
adjustments) 3,921 26,158 (1,347) -- 1,076
Total $1,736,526 $7,540,772 $ 61,472 $-- $1,489,864
Year ended December 31, 1993:
Life insurance and annuities $ 999,126 $6,782,207 $ 5,188 $-- $ 662,353
Reinsurance 298,787 1,616,088 54,157 -- 491,397
Employee life-health benefits -- 228,892 -- -- 1,243,576
Other (including consolidating
adjustments) -- 171,043 315 -- 387
Total $1,297,913 $8,798,230 $ 59,660 $-- $2,397,713
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company and Subsidiaries
Schedule III
Supplementary Insurance Information (continued)
(000's omitted)
<TABLE>
<CAPTION>
Column A Column G Column H Column I Column J Column K
Amortization
Benefits, of Deferred
Net Claims and Policy Other
Investment Claim Acquisition Operating Premium
Segment Income (B) Expenses Costs Expenses (B) Written
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Life insurance and annuities $1,741,231 $1,649,119 $298,020 $261,016 $--
Reinsurance 134,000 472,198 101,729 93,750 --
Other (including consolidating
adjustments) 24,399 1,299 -- 9,898 --
Total $1,899,630 $2,122,616 $399,749 $364,664 $--
Year ended December 31, 1994:
Life insurance and annuities $1,542,552 $1,554,479 $ 85,697 $349,529 $--
Reinsurance 116,957 419,266 29,477 117,238 --
Employee life-health benefits (C) 10,838 218,672 -- 73,355 --
Other (including consolidating
adjustments) 3,634 1,630 -- 5,682 --
Total $1,673,981 $2,194,047 $115,174 $545,804 $--
Year ended December 31, 1993:
Life insurance and annuities $1,676,163 $1,615,883 $197,363 $268,066 $--
Reinsurance 115,582 467,824 38,351 72,840 --
Employee life-health benefits 54,513 943,235 -- 300,648 --
Other (including consolidating
adjustments) (22,799) 6,197 5,275 (744) --
Total $1,823,459 $3,033,139 $240,989 $640,810 $--
(A) Includes insurance fees on universal life and other interest sensitive products.
(B) The allocation of expenses between investments and other operations are based on a number of assumptions and estimates.
Results would change if different methods were applied.
(C) Includes data through the March 21, 1994 date of sale of the direct writer of employee life-health coverages.
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company and Subsidiaries
Schedule IV
Reinsurance (A)
(000's omitted)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
Percentage
Ceded Assumed of Amount
Gross to Other from Other Net Assumed
Amount Companies Companies Amount to Net
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Life insurance in force $ 51,570,782 $17,612,782 $142,794,000 $176,752,000 80.8%
Premiums:
Health insurance 302,463 299,222 273,572 276,813 98.8
Life insurance (B) 658,936 142,523 504,070 1,020,483 49.4
Total $ 961,399 $ 441,745 $ 777,642 $ 1,297,296
Year ended December 31, 1994:
Life insurance in force $ 79,802,000 $45,822,000 $125,640,000 $159,620,000 78.7%
Premiums:
Health insurance 666,609 496,090 359,659 530,178 67.8
Life insurance (B) 629,185 220,678 551,179 959,686 57.4
Total $ 1,295,794 $ 716,768 $ 910,838 $ 1,489,864
Year ended December 31, 1993:
Life insurance in force $135,401,000 $61,401,000 $109,257,000 $183,257,000 59.6%
Premiums:
Health insurance 1,387,414 217,705 262,171 1,431,880 18.3
Life insurance (B) 771,408 350,907 545,332 965,833 56.5
Total $ 2,158,822 $ 568,612 $ 807,503 $ 2,397,713
(A) Special-purpose bulk reinsurance transactions have been excluded.
(B) Includes insurance fees on universal life and other interest sensitive products.
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company and Subsidiaries
Schedule V
Valuation and Qualifying Accounts
(000's omitted)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Additions
(1) (2)
Charged
Charged to
Balance at to Other Balance at
Beginning Costs and Accounts- Deductions- End of
of Period Expenses (A) Describe Describe (B) Period
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Deducted from asset accounts:
Reserve for mortgage loans on real estate $ 56,614 $ 2,659 $-- $ (30,781) $ 28,492
Reserve for real estate 65,186 (7,227) -- (11,406) 46,553
Reserve for other long-term investments 13,492 (1,541) -- (155) 11,796
Year ended December 31, 1994:
Deducted from asset accounts:
Reserve for mortgage loans on real estate $220,671 $ 19,464 $-- $(183,521) $ 56,614
Reserve for real estate 121,427 13,058 -- (69,299) 65,186
Reserve for other long-term investments 26,730 262 -- (13,500) 13,492
Included in other liabilities:
Investment guarantees 1,804 4,280 -- (6,084) --
Year ended December 31, 1993:
Deducted from asset accounts:
Reserve for mortgage loans on real estate $129,093 $136,717 $-- $ (45,139) $220,671
Reserve for real estate 114,178 21,776 -- (14,527) 121,427
Reserve for other long-term investments 31,582 3,905 -- (8,757) 26,730
Included in other liabilities:
Investment guarantees 12,550 1,674 -- (12,420) 1,804
(A) Exclude charges for the direct write-off of assets. The negative amounts represent improvements in the underlying assets for
which valuation accounts had previously been established.
(B) Deductions reflect sales or foreclosures of the underlying holdings.
</TABLE>
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS--STATUTORY BASIS
<TABLE>
<CAPTION>
December 31
1996 1995
--------- ---------
(in millions)
--------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $19,389.6 $17,729.7
- -------------------------------------------------------------------------------------------------------
Preferred stocks 239.7 89.9
- -------------------------------------------------------------------------------------------------------
Unaffiliated common stocks 358.3 535.5
- -------------------------------------------------------------------------------------------------------
Affiliated common stocks 241.5 193.0
- -------------------------------------------------------------------------------------------------------
Mortgage loans on real estate 2,976.7 2,909.7
- -------------------------------------------------------------------------------------------------------
Real estate 621.3 655.2
- -------------------------------------------------------------------------------------------------------
Policy loans 626.5 515.8
- -------------------------------------------------------------------------------------------------------
Other investments 282.7 248.0
- -------------------------------------------------------------------------------------------------------
Cash and short-term investments 759.2 780.9
- ----------------------------------------------------------------------------------- --------- ---------
Total cash and investments 25,495.5 23,657.7
- -------------------------------------------------------------------------------------------------------
Premiums and fees in course of collection 60.9 17.1
- -------------------------------------------------------------------------------------------------------
Accrued investment income 343.6 342.5
- -------------------------------------------------------------------------------------------------------
Funds withheld by ceding companies 25.8 595.3
- -------------------------------------------------------------------------------------------------------
Other admitted assets 355.7 217.7
- -------------------------------------------------------------------------------------------------------
Separate account assets 23,735.1 18,461.6
- ----------------------------------------------------------------------------------- --------- ---------
Total admitted assets $50,016.6 $43,291.9
- ----------------------------------------------------------------------------------- ========= =========
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $ 5,954.0 $ 5,713.3
- -------------------------------------------------------------------------------------------------------
Other policyholder funds 17,262.4 15,598.5
- -------------------------------------------------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 250.2 499.3
- -------------------------------------------------------------------------------------------------------
Funds held under reinsurance treaties 564.6 1,053.5
- -------------------------------------------------------------------------------------------------------
Asset valuation reserve 375.5 270.0
- -------------------------------------------------------------------------------------------------------
Interest maintenance reserve 76.7 116.3
- -------------------------------------------------------------------------------------------------------
Other liabilities 490.9 391.3
- -------------------------------------------------------------------------------------------------------
Federal income taxes 4.3 3.2
- -------------------------------------------------------------------------------------------------------
Net transfers due from separate accounts (659.7) (548.0)
- -------------------------------------------------------------------------------------------------------
Separate account liabilities 23,735.1 18,461.6
- ----------------------------------------------------------------------------------- --------- ---------
Total liabilities 48,054.0 41,559.0
- -------------------------------------------------------------------------------------------------------
CAPITAL AND SURPLUS:
Common stock, $2.50 par value:
Authorized, issued and outstanding shares--10 million (owned by Lincoln National
Corporation) 25.0 25.0
- -------------------------------------------------------------------------------------------------------
Paid-in surplus 883.4 783.4
- -------------------------------------------------------------------------------------------------------
Unassigned surplus 1,054.2 924.5
- ----------------------------------------------------------------------------------- --------- ---------
Total capital and surplus 1,962.6 1,732.9
- ----------------------------------------------------------------------------------- --------- ---------
Total liabilities and capital and surplus $50,016.6 $43,291.9
- ----------------------------------------------------------------------------------- ========= =========
</TABLE>
See accompanying notes.
S-1
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF INCOME--STATUTORY BASIS
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
-----------------------
(in millions)
--------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $7,268.5 $4,899.1 $5,648.7
- -------------------------------------------------------------------------------
Net investment income 1,756.3 1,772.2 1,606.8
- -------------------------------------------------------------------------------
Amortization of interest maintenance reserve 27.2 34.0 9.8
- -------------------------------------------------------------------------------
Commissions and expense allowances on reinsurance
ceded 90.9 98.3 145.0
- -------------------------------------------------------------------------------
Expense charges on deposit funds 100.7 83.2 70.5
- -------------------------------------------------------------------------------
Other income 16.8 14.5 15.6
- --------------------------------------------------- -------- -------- --------
Total revenues 9,260.4 6,901.3 7,496.4
- -------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 5,989.9 4,184.0 5,071.6
- -------------------------------------------------------------------------------
Underwriting, acquisition, insurance and other
expenses 2,878.5 2,345.7 2,136.1
- --------------------------------------------------- -------- -------- --------
Total benefits and expenses 8,868.4 6,529.7 7,207.7
- --------------------------------------------------- -------- -------- --------
Gain from operations before dividends to
policyholders, income taxes and net realized gain
on investments 392.0 371.6 288.7
- -------------------------------------------------------------------------------
Dividends to policyholders 27.3 27.3 18.0
- --------------------------------------------------- -------- -------- --------
Gain from operations before federal income taxes
and net realized gain on investments 364.7 344.3 270.7
- -------------------------------------------------------------------------------
Federal income taxes 83.6 103.7 52.8
- --------------------------------------------------- -------- -------- --------
Gain from operations before net realized gain on
investments 281.1 240.6 217.9
- -------------------------------------------------------------------------------
Net realized gain on investments, net of income tax
expense (benefits) [1996--$28.5; 1995--$48.1;
1994--$(178.1)] and excluding net transfers to
(from) the interest maintenance reserve [1996--
$(12.4); 1995--$94.9; 1994--$(147.1)] 53.3 43.9 124.0
- --------------------------------------------------- -------- -------- --------
Net income $ 334.4 $ 284.5 $ 341.9
- --------------------------------------------------- ======== ======== ========
</TABLE>
See accompanying notes.
S-2
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS--STATUTORY BASIS
<TABLE>
<CAPTION>
Year
ended
December
31
1996 1995 1994
-------- -------- --------
(in millions)
----------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $1,732.9 $1,679.6 $1,302.5
- ----------------------------------------------------------------
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income 334.4 284.5 341.9
- ----------------------------------------------------------------
Differences in cost and admitted investment amounts 38.6 143.2 (123.3)
- ----------------------------------------------------------------
Nonadmitted assets (3.0) 2.9 (3.2)
- ----------------------------------------------------------------
Regulatory liability for reinsurance 0.6 (2.0) (1.1)
- ----------------------------------------------------------------
Life policy reserve valuation basis (0.4) 2.9 (1.3)
- ----------------------------------------------------------------
Asset valuation reserve (105.5) (112.5) 83.8
- ----------------------------------------------------------------
Mortgage loan, real estate and other investment reserves -- 2.2 218.6
- ----------------------------------------------------------------
Paid-in surplus 100.0 15.1 --
- ----------------------------------------------------------------
Separate account receivable due to change in valuation -- 27.0 --
- ----------------------------------------------------------------
Accounting for separate account contracts -- -- (13.3)
- ----------------------------------------------------------------
Dividends to shareholder (135.0) (310.0) (125.0)
- ---------------------------------------------------------------- -------- -------- --------
Capital and surplus at end of year $1,962.6 $1,732.9 $1,679.6
- ---------------------------------------------------------------- ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
S-3
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS--STATUTORY BASIS
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
----------------------------------
(in millions)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 8,059.4 $ 5,430.9 $ 5,654.5
- -------------------------------------------------------------------------------------
Allowances and reserve adjustments received (paid) on
reinsurance ceded (767.5) (383.6) 137.1
- -------------------------------------------------------------------------------------
Investment income received 1,700.6 1,713.2 1,588.5
- -------------------------------------------------------------------------------------
Benefits paid (4,050.4) (3,239.6) (3,054.1)
- -------------------------------------------------------------------------------------
Insurance expenses paid (2,972.2) (2,513.5) (2,542.5)
- -------------------------------------------------------------------------------------
Federal income taxes recovered (paid) (72.3) 38.4 (191.8)
- -------------------------------------------------------------------------------------
Dividends to policyholders (27.7) (16.5) (18.4)
- -------------------------------------------------------------------------------------
Other income received and expenses paid, net 6.3 14.4 59.2
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Net cash provided by operating activities 1,876.2 1,043.7 1,632.5
- -------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 12,542.0 13,183.9 11,877.0
- -------------------------------------------------------------------------------------
Purchase of investments (14,175.4) (14,049.6) (12,871.8)
- -------------------------------------------------------------------------------------
Other uses (266.5) (64.0) (123.4)
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Net cash used in investing activities (1,899.9) (929.7) (1,118.2)
- -------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in 100.0 15.1 --
- -------------------------------------------------------------------------------------
Proceeds from borrowings 100.0 63.0 63.0
- -------------------------------------------------------------------------------------
Repayment of borrowings (63.0) (63.0) (60.0)
- -------------------------------------------------------------------------------------
Dividends paid to shareholder (135.0) (310.0) (125.0)
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Net cash provided by (used in) financing activities 2.0 (294.9) (122.0)
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Net increase (decrease) in cash and short-term investments (21.7) (180.9) 392.3
- -------------------------------------------------------------------------------------
Cash and short-term investments at beginning of year 780.9 961.8 569.5
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Cash and short-term investments at end of year $ 759.2 $ 780.9 $ 961.8
- -------------------------------------------------------------------------------------
========== ========== ==========
</TABLE>
See accompanying notes.
S-4
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS
1.SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
The Lincoln National Life Insurance Company ("Company") is a wholly owned
subsidiary of Lincoln National Corporation ("LNC") and is domiciled in In-
diana. As of December 31, 1996, the Company owns 100% of the outstanding
common stock of four insurance company subsidiaries: First Penn-Pacific
Life Insurance Company, Lincoln National Health & Casualty Insurance Compa-
ny, Lincoln National Reassurance Company and Lincoln Life & Annuity Company
of New York.
The Company's principal business consist of underwriting annuities, depos-
it-type contracts, life and health insurance through multiple distribution
channels and the reinsurance of individual and group life and health busi-
ness. The Company is licensed and sells its products in 49 states, Canada
and several U.S. territories.
USE OF ESTIMATES
The preparation of financial statements requires management to make esti-
mates and assumptions that affect amounts reported in the financial state-
ments and accompanying notes. Such estimates and assumptions could change
in the future as more information becomes known, which could impact the
amounts reported and disclosed herein.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Indiana Department of
Insurance, which practices differ from generally accepted accounting prin-
ciples ("GAAP"). The more significant variances from GAAP are as follows:
INVESTMENTS
Bonds are reported at cost or amortized cost or market value based on their
National Association of Insurance Commissioners ("NAIC") rating. For GAAP,
the Company's bonds are classified as available-for-sale and, accordingly,
are reported at fair value with changes in the fair values reported di-
rectly in shareholder's equity after adjustments for related amortization
of deferred acquisition costs, additional policyholder commitments and de-
ferred income taxes.
Investments in real estate are reported net of related obligation rather
than on a gross basis.
Changes between cost and admitted asset investment amounts are credited or
charged directly to unassigned surplus rather than to a separate surplus
account.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized capital gains and losses on sales of fixed income investments,
principally bonds and mortgage loans, attributable to changes in the gen-
eral level of interest rates and amortizes those deferrals over the remain-
ing period to maturity of the individual security sold. The net deferral is
reported as the interest maintenance reserve in the accompanying balance
sheets. Realized capital gains and losses are reported in income net of
federal income tax and transfers to the interest maintenance reserve. The
asset valuation reserve is determined by an NAIC prescribed formula and is
reported as a liability rather than unassigned surplus. Under GAAP, real-
ized capital gains and losses are reported in the income statement on a
pre-tax basis in the period that the asset giving rise to the gain or loss
is sold and valuation allowances are provided when there has been a decline
in value deemed other than temporary, in which case, the provision for such
declines are charged to income.
SUBSIDIARIES
The accounts and operations of the Company's subsidiaries are not consoli-
dated with the accounts and operations of the Company as would be required
by GAAP. Under statutory accounting principles, the Company's subsidiaries
are carried at their statutory-basis net equity.
POLICY ACQUISITION COSTS
The costs of acquiring and renewing business are expensed when incurred.
Under GAAP, acquisition costs related to traditional life insurance, to the
extent recoverable from future policy revenues, are deferred and amortized
over the premium-paying period of the related policies using assumptions
consistent with those used in computing policy benefit reserves. For uni-
versal life insurance, annuity and other investment-type products, deferred
policy acquisition costs, to the extent recoverable from future gross prof-
its, are amortized generally in proportion to the present value of expected
gross profits from surrender charges and investment, mortality and expense
margins.
NONADMITTED ASSETS
Certain assets designated as "nonadmitted," principally furniture and
equipment and certain receivables, are excluded from the accompanying bal-
ance sheets and are charged directly to unassigned surplus.
PREMIUMS
Premiums and deposits with respect to universal life policies and annuity
and other investment-type contracts are reported as premium revenues;
whereas, under GAAP, such premiums and deposits are treated as liabilities
and policy charges represent revenues.
S-5
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
INCOME TAXES
Deferred income taxes are not provided for differences between financial
statement amounts and tax bases of assets and liabilities.
POLICYHOLDER DIVIDENDS
Policyholder dividends are recognized when declared rather than over the
term of the related policies.
Other significant accounting practices are as follows:
INVESTMENTS
The discount or premium on bonds is amortized using the interest method.
For mortgage-backed bonds, the Company recognizes income using a constant
effective yield based on anticipated prepayments and the estimated economic
life of the securities. When actual prepayments differ significantly from
anticipated prepayments, the effective yield is recalculated to reflect ac-
tual payments to date and anticipated future payments. The net investment
in the securities is adjusted to the amount that would have existed had the
new effective yield been applied since the acquisition of the securities.
Short-term investments include investments with maturities of less than one
year at the date of acquisition. The carrying amounts for these investments
approximate their fair values.
Preferred stocks are reported at cost or amortized cost.
Common stocks are reported at market value as determined by the Securities
Valuation Office of the NAIC and the related unrealized gains (losses) are
reported in unassigned surplus without adjustment for federal income taxes.
Policy loans are reported at unpaid balances.
The Company uses various derivative instruments as part of its overall lia-
bility-asset management program for certain investments and life insurance
and annuity products. The Company values all derivative instruments on a
basis consistent with that of the hedged item. Upon termination, gains and
losses on those instruments are included in the carrying values of the un-
derlying hedged items and are amortized over the remaining lives of the
hedged items as adjustments to investment income or benefits from the
hedged items. Any unamortized gains or losses are recognized when the un-
derlying hedged items are sold.
Mortgage loans on real estate are reported at unpaid balances, less allow-
ances for impairments. Real estate is reported at depreciated cost. As of
June 30, 1994, the Company changed its method of accounting for reserves on
impaired real estate and mortgage loans. The impaired investment is now
shown on a pre-tax basis as a nonadmitted asset. Previously, these reserves
were presented as a liability, net of related tax benefits, to approximate
the impact on surplus if losses were realized.
Realized investment gains and losses on investments sold are determined us-
ing the specific identification method. Changes in admitted asset carrying
amounts of
1.SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES CONTINUED
BENEFIT RESERVES
Certain policy reserves are calculated based on statutorily required inter-
est and mortality assumptions rather than on estimated expected experience
or actual account balances as would be required under GAAP.
Death benefits paid, policy and contract withdrawals, and the change in
policy reserves on universal life policies, annuity and other investment-
type contracts are reported as benefits and settlement expenses; in the ac-
companying statement of income, whereas, under GAAP, withdrawals are
treated as a reduction of the policy or contract liabilities and benefits
would represent the excess of benefits paid over the policy account value
and interest credited to the account values.
REINSURANCE
Premiums, claims and policy benefits and contract liabilities are reported
in the accompanying financial statements net of reinsurance amounts. For
GAAP, all assets and liabilities related to reinsurance ceded contracts are
reported on a gross basis.
A liability for reinsurance balances has been provided for unsecured policy
and contract liabilities and unearned premiums ceded to reinsurers not au-
thorized by the Indiana Department of Insurance to assume such business.
Changes to those amounts are credited or charged directly to unassigned
surplus. Under GAAP, an allowance for amounts deemed uncollectible is es-
tablished through a charge to income.
Commissions on business ceded are reported as income when received rather
than deferred and amortized with deferred policy acquisition costs.
Certain reinsurance contracts meeting risk transfer requirements under
statutory-basis accounting practices have been accounted for using tradi-
tional reinsurance accounting whereas such contracts would be accounted for
using deposit accounting under GAAP.
POSTRETIREMENT BENEFITS
For purposes of calculating the Company's postretirement benefit obliga-
tion, only vested employees and current retirees are included in the valua-
tion. Under GAAP, active employees not currently eligible would also be in-
cluded.
S-6
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Unpaid claims and claim adjustment expenses on accident and health policies
represent the estimated ultimate net cost of all reported and unreported
claims incurred during the year. The Company does not discount claims and
claim adjustment expense reserves. The reserves for unpaid claims and claim
adjustment expenses are estimated using individual case-basis valuations
and statistical analyses. Those estimates are subject to the effects of
trends in claim severity and frequency. Although considerable variability
is inherent in such estimates, management believes that the reserves for
claims and claim adjustment expenses are adequate. The estimates are con-
tinually reviewed and adjusted as necessary as experience develops or new
information becomes known; such adjustments are included in current opera-
tions.
REINSURANCE CEDED AND ASSUMED
Reinsurance premiums and claims and claim adjustment expenses are accounted
for on bases consistent with those used in accounting for the original pol-
icies issued and the terms of the reinsurance contracts. Certain business
is transacted on a funds withheld basis and investment income on funds
withheld are reported in net investment income.
PENSION BENEFITS
Costs associated with the Company's defined benefit pension plans is sys-
tematically accrued during the expected period of active service of the
covered employees.
INCOME TAXES
The Company and eligible subsidiaries have elected to file consolidated
federal and state income tax returns with LNC. Pursuant to an intercompany
tax sharing agreement with LNC, the Company provides for income taxes on a
separate return filing basis. The tax sharing agreement also provides that
the Company will receive benefit for net operating losses, capital losses
and tax credits which are not usable on a separate return basis to the ex-
tent such items may be utilized in the consolidated income tax returns of
LNC.
STOCK OPTIONS
The Company recognizes compensation expense for its stock option incentive
plans using the intrinsic value method of accounting. Under the terms of
the intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of LNC's common stock at the grant date, or other mea-
surement date, over the amount an employee must pay to acquire the stock.
ASSETS HELD IN SEPARATE ACCOUNTS AND LIABILITIES RELATED TO SEPARATE
ACCOUNTS
These assets and liabilities represent segregated funds administered and
invested by LNC's insurance subsidiaries for the exclusive benefit of pen-
sion and variable life and annuity contractholders. The fees received by
the Company for administrative and contractholder maintenance services per-
formed for these separate accounts are included in the Company's statements
of income.
1.SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES CONTINUED
bonds, mortgage loans and common and preferred stocks are credited or
charged directly in unassigned surplus.
DATA PROCESSING EQUIPMENT
Data processing equipment is reported at depreciated cost, with deprecia-
tion determined on a straight-line basis over five years.
GOODWILL
Goodwill, which represents the excess of the ceding commission over statu-
tory-basis net assets of business purchased under an assumption reinsurance
agreement, is amortized on a straight-line basis over ten years.
PREMIUMS
Life insurance and annuity premiums are recognized as revenue when due. Ac-
cident and health premiums are earned prorata over the contract term of the
policies.
BENEFITS
Life, annuity and accident and health benefit reserves are developed by ac-
tuarial methods and are determined based on published tables using statuto-
rily specified interest rates and valuation methods that will provide, in
the aggregate, reserves that are greater than or equal to the minimum or
guaranteed policy cash values or the amounts required by the Indiana De-
partment of Insurance. The Company waives deduction of deferred fractional
premiums on the death of life and annuity policy insureds and returns any
premium beyond the date of death, except for policies issued prior to March
1977. Surrender values on policies do not exceed the corresponding benefit
reserves. Additional reserves are established when the results of cash flow
testing under various interest rate scenarios indicate the need for such
reserve. If net premiums exceed the gross premiums on any insurance in-
force, additional reserves are established. Benefit reserves for policies
underwritten on a substandard basis are determined using the multiple table
reserve method.
The tabular interest, tabular less actual reserve released and the tabular
cost have been determined by formula or from the basic data for such items.
Tabular interest funds not involving life contingencies were determined us-
ing the actual interest credited to the funds plus the change in accrued
interest.
Liabilities related to guaranteed investment contracts and policyholder
funds left on deposit with the Company generally are equal to fund balances
less applicable surrender charges.
S-7
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A reconciliation of the Company's net income and capital and surplus deter-
mined on a statutory accounting basis with amounts determined in accordance
with GAAP is as follows:
<TABLE>
<CAPTION>
Capital and Surplus Net Income
-------------------- -----------------------
Year ended December
December 31 31
1996 1995 1996 1995 1994
--------- --------- ------ ------ -------
(in millions)
<S> <C> <C> <C> <C> <C>
Amounts reported on a
statutory basis $ 1,962.6 $ 1,732.9 $334.4 $284.5 $ 341.9
----------------------------
GAAP adjustments:
----------------------------
Deferred policy acquisition
costs and present value of
future profits 1,119.1 850.2 66.7 (63.0) 191.1
----------------------------
Policy and contract
reserves (1,405.3) (1,562.2) (57.1) (55.3) (53.6)
----------------------------
Interest maintenance
reserve 76.7 116.3 (39.7) 60.9 (157.0)
----------------------------
Deferred income taxes (27.4) (122.5) 1.8 38.3 (138.3)
----------------------------
Policyholders' share of
earnings and surplus on
participating business (81.9) (91.9) (.3) .2 (3.0)
----------------------------
Asset valuation reserve 375.5 270.0 -- -- --
----------------------------
Net realized gain (loss) on
investments (72.0) (67.4) 78.7 30.0 47.1
----------------------------
Adjustment to unrealized
gain (loss) 825.2 1,494.0 -- -- --
----------------------------
Nonadmitted assets,
including nonadmitted
investments (7.1) 57.9 -- -- --
----------------------------
Net GAAP adjustments of
subsidiary companies 156.6 131.2 29.9 34.3 48.2
----------------------------
Other, net (99.0) (89.7) (82.6) (7.3) (58.6)
---------------------------- --------- --------- ------ ------ -------
Net increase (decrease) 860.4 985.9 (2.6) 38.1 (124.1)
---------------------------- --------- --------- ------ ------ -------
Amounts on a GAAP basis $ 2,823.0 $ 2,718.8 $331.8 $322.6 $ 217.8
---------------------------- ========= ========= ====== ====== =======
</TABLE>
S-8
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
2.PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory-basis financial statements are prepared in accor-
dance with accounting practices prescribed or permitted by the Indiana De-
partment of Insurance (the "Department"). "Prescribed" statutory accounting
practices include state laws, regulations and general administrative rules,
as well as a variety of publications of the NAIC. "Permitted" statutory ac-
counting practices encompass all accounting practices that are not pre-
scribed; such practices may differ from state to state, may differ from
company to company within a state and may change in the future. The NAIC
currently is in the process of recodifying statutory accounting practices,
the result of which is expected to constitute the only source of "pre-
scribed" statutory accounting practices. Accordingly, that project, which
is expected to be completed in 1998, will likely change, to some extent,
prescribed statutory accounting practices, and may result in changes to the
accounting practices that the Company uses to prepare its statutory-basis
financial statements.
In 1994, the Company received approval from the Department to change its
accounting for surrender charges applicable to separate account liabilities
for variable life and annuity products so that the surrender charges on
these products are recorded as a liability in the separate account finan-
cial statements payable to the Company's general account. In the accompany-
ing financial statements, a corresponding receivable is recorded with the
related income impact recorded in the accompanying statement of operations
as a change in reserves or change in premium and other deposit funds. The
cumulative effect of this change increased 1994 net income by $13,299,000.
The Company has approval from the Department to establish valuation allow-
ances on mortgage loans on real estate in accordance with GAAP, which are
in excess of that prescribed by the NAIC and the Department.
Prior to 1995, the Company has considered certain amounts under modified
coinsurance reinsurance contracts as adjustments to premiums. As such, pol-
icyholder dividends, cash surrender charges and reserve adjustments with
interest thereon and commissions on reinsurance assumed are classified as
premiums, rather than on expense lines, with no net effect on net income or
capital and surplus. On a net-of-ceded basis for the year ended December
31, 1994, this practice resulted in increases to both revenues and expenses
of approximately $600,000,000. In addition, reserve adjustments with inter-
est thereon and commissions on reinsurance ceded were also classified as
premiums, rather than in other revenue classifications. For the year ended
December 31, 1994, this intra-revenue grouping reduced premiums by approxi-
mately $50,000,000. Beginning in 1995, the Company reports modified coin-
surance agreements on a gross basis. This change was made as a result of
communications with the Department. This accounting change had no effect on
income or surplus and prior period amounts have not been restated.
S-9
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
3. INVESTMENTS
The major categories of net investment income are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
-----------------------------------------
(in millions)
--------------------------
<S> <C> <C> <C>
Income:
Bonds $1,442.2 $1,457.4 $1,266.7
--------------------------------------------------------------------------------
Preferred stocks 9.6 6.4 5.8
--------------------------------------------------------------------------------
Unaffiliated common stocks 6.5 5.2 4.4
--------------------------------------------------------------------------------
Affiliated common stocks 9.5 12.6 62.5
--------------------------------------------------------------------------------
Mortgage loans on real estate 269.3 252.0 255.2
--------------------------------------------------------------------------------
Real estate 114.4 110.0 97.4
--------------------------------------------------------------------------------
Policy loans 35.0 32.1 29.7
--------------------------------------------------------------------------------
Other investments 22.4 62.6 121.3
--------------------------------------------------------------------------------
Cash and short-term investments 48.9 53.2 43.3
--------------------------------------------------------------- -------- -------- --------
Total investment income 1,957.8 1,991.5 1,886.3
-----------------------------------------------------------------------------------
Expenses:
Depreciation 25.0 25.9 21.9
--------------------------------------------------------------------------------
Other 176.5 193.4 257.6
--------------------------------------------------------------- -------- -------- --------
Total investment expenses 201.5 219.3 279.5
---------------------------------------------------------------- -------- -------- --------
Net investment income $1,756.3 $1,772.2 $1,606.8
---------------------------------------------------------------- ======== ======== ========
</TABLE>
Nonadmitted accrued investment income at December 31, 1996
and 1995 amounted to $2,500,000 and $11,500,000, respective-
ly, consisting principally of interest on bonds in default
and mortgage loans.
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in bonds are summa-
rized as follows:
<TABLE>
<CAPTION>
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------
(in millions)
-----------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1996:
Corporate $12,548.1 $ 586.5 $ 66.6 $13,068.0
--------------------------------------------------------------
U.S. government 1,088.7 43.2 18.0 1,113.9
--------------------------------------------------------------
Foreign government 1,234.0 105.1 1.4 1,337.7
--------------------------------------------------------------
Mortgage-backed 4,478.4 183.3 27.4 4,634.3
--------------------------------------------------------------
State and municipal 40.4 .1 -- 40.5
-------------------- --------- -------- ------ ---------
$19,389.6 $ 918.2 $113.4 $20,194.4
========= ======== ====== =========
At December 31, 1995:
Corporate $11,642.0 $1,074.7 $ 41.4 $12,675.3
--------------------------------------------------------------
U.S. government 546.4 82.2 -- 628.6
--------------------------------------------------------------
Foreign government 908.0 68.0 .6 975.4
--------------------------------------------------------------
Mortgage-backed 4,628.3 283.2 11.2 4,900.3
--------------------------------------------------------------
State and municipal 5.0 .1 -- 5.1
-------------------- --------- -------- ------ ---------
$17,729.7 $1,508.2 $ 53.2 $19,184.7
========= ======== ====== =========
</TABLE>
S-10
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
3. INVESTMENTS CONTINUED
Fair values for bonds are based on quoted market prices,
where available. For bonds not actively traded, fair values
are estimated using values obtained from independent pricing
services or, in the case of private placements, are esti-
mated by discounting expected future cash flows using a cur-
rent market rate applicable to the coupon rate, credit qual-
ity and maturity of the investments.
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1996, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
Cost or
Amortized Fair
Cost Value
------------------------------
(in millions)
-------------------
<S> <C> <C>
Maturity:
In 1997 $ 358.0 $ 360.1
----------------------------------------------------------------------------------------------
In 1998-2001 3,809.0 3,912.3
----------------------------------------------------------------------------------------------
In 2002-2006 4,760.9 4,917.3
----------------------------------------------------------------------------------------------
After 2006 5,983.3 6,370.4
----------------------------------------------------------------------------------------------
Mortgage-backed securities 4,478.4 4,634.3
--------------------------------------------------------------------------- --------- ---------
Total $19,389.6 $20,194.4
--------------------------------------------------------------------------- ========= =========
</TABLE>
The expected maturities may differ from the contractual ma-
turities in the foregoing table because certain borrowers
may have the right to call or prepay obligations with or
without call or prepayment penalties.
At December 31, 1996, the Company did not have a material
concentration of financial instruments in a single investee,
industry or geographic location.
Proceeds from sales of investments in bonds during 1996,
1995 and 1994 were $10,996,900,000, $12,234,100,000 and
$9,668,300,000, respectively. Gross gains during 1996, 1995
and 1994 of $169,700,000, $225,600,000 and $62,600,000, re-
spectively, and gross losses of $177,000,000, $83,100,000
and $286,800,000, respectively, were realized on those
sales.
At December 31, 1996 and 1995, investments in bonds, with an
admitted asset value of $70,700,000 and $60,700,000, respec-
tively, were on deposit with state insurance departments to
satisfy regulatory requirements.
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in unaffiliated
common stocks and preferred stocks are as follows:
<TABLE>
<CAPTION>
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------
<S> <C> <C> <C> <C>
(in millions)
-------------------------------
At December 31, 1996:
Preferred stocks $239.7 $ 10.5 $ 1.7 $248.5
----------------------------------------------------------
Unaffiliated common stocks 289.9 84.6 16.2 358.3
----------------------------------------------------------
At December 31, 1995:
Preferred stocks 89.9 13.9 .2 103.6
----------------------------------------------------------
Unaffiliated common stocks 438.0 110.0 12.5 535.5
----------------------------------------------------------
</TABLE>
S-11
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
3. INVESTMENTS CONTINUED
The carrying value of affiliated common stocks, representing
their statutory-basis net equity, was $241,500,000 and
$193,000,000 at December 31, 1996 and 1995, respectively.
The cost basis of investments in subsidiaries as of December
31, 1996 and 1995 was $194,000,000 and $123,000,000, respec-
tively.
During 1996, the maximum and minimum lending rates for mort-
gage loans were 10.5% and 6.0%, respectively. At the issu-
ance of a loan, the percentage of loan to value on any one
loan does not exceed 75%. At December 31, 1996, the Company
did not hold any mortgages with interest overdue beyond one
year. At December 31, 1996, the Company's investments in
mortgage loans were subject to $59,700,000 of prior liens.
All properties covered by mortgage loans have fire insurance
at least equal to the excess of the loan over the maximum
loan that would be allowed on the land without the building.
4.FEDERAL INCOME TAXES
The effective federal income tax rate for financial report-
ing purposes differs from the prevailing statutory tax rate
principally due to tax-exempt investment income, dividends-
received tax deductions, differences in policy acquisition
costs and policy and contract liabilities for tax return and
financial statement purposes.
Federal income taxes incurred of $83,600,000, $103,700,000
and $52,800,000 in 1996, 1995 and 1994, respectively, would
be subject to recovery in the event that the Company incurs
net operating losses within three years of the years for
which such taxes were paid.
Prior to 1984, a portion of the Company's current income was
not subject to current income tax, but was accumulated for
income tax purposes in a memorandum account designated as
"policyholders' surplus." The Company's balance in the "pol-
icyholders' surplus" account at December 31, 1983 of
$187,000,000 was "frozen" by the Tax Reform Act of 1984 and,
accordingly, there have been no additions to the accounts
after that date. That portion of current income on which in-
come taxes have been paid will continue to be accumulated in
a memorandum account designated as "shareholder's surplus,"
and is available for dividends to the shareholder without
additional payment of tax by the Company. The December 31,
1996 memorandum account balance for "shareholder's surplus"
was $1,606,000,000. Should dividends to the shareholder ex-
ceed its respective "shareholder's surplus," amounts would
need to be transferred from the "policyholders' surplus" and
would be subject to federal income tax at that time. Under
existing or foreseeable circumstances, the Company neither
expects nor intends that distributions will be made that
will result in any such tax.
5.SUPPLEMENTAL FINANCIAL DATA
The balance sheet caption, "Other Admitted Assets," includes
amounts recoverable from other insurers for claims paid by
the Company, and the balance sheet caption, "Future Policy
Benefits and Claims," has been reduced for insurance ceded
as follows:
<TABLE>
<CAPTION>
December 31
--------------------------
1996 1995 1994
----------------------------------------
(in millions)
----------------------------------------
<S> <C> <C> <C>
Insurance ceded $1,154.5 $1,634.0 $1,721.1
Amounts recoverable from other insurers 16.0 4.4 4.8
</TABLE>
S-12
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
5.SUPPLEMENTAL FINANCIAL DATA CONTINUED
Reinsurance transactions included in the income statement
caption, "Premiums and Deposits," are as follows:
<TABLE>
<CAPTION>
Year ended December
31
1996 1995 1994
--
(in millions)
--------------------
<S> <C> <C> <C>
Insurance assumed $241.3 $667.7 $607.3
-------------------------------
Insurance ceded 193.3 453.1 583.8
------------------------------- ------ ------ ------
Net amount included in premiums $ 48.0 $214.6 $ 23.5
------------------------------- ====== ====== ======
</TABLE>
The income statement caption, "Benefits and Settlement Ex-
penses," is net of reinsurance recoveries of $787,886,200,
$1,407,000,000 and $1,391,100,000 for 1996, 1995 and 1994,
respectively.
Deferred and uncollected life insurance premiums and annuity
considerations included in the balance sheet caption, "Pre-
miums and Fees in Course of Collection," are as follows:
<TABLE>
<CAPTION>
December 31, 1996
-----------------------
Net of
Gross Loading Loading
(in millions)
-----------------------
<S> <C> <C> <C>
Ordinary new business $ 3.9 $1.9 $ 2.0
---------------------
Ordinary renewal 35.1 3.0 32.1
---------------------
Group life 9.4 (.1) 9.5
---------------------
Group annuity -- -- --
--------------------- ------ ---- ------
$ 48.4 $4.8 $ 43.6
====== ==== ======
<CAPTION>
December 31, 1995
-----------------------
Net of
Gross Loading Loading
(in millions)
-----------------------
<S> <C> <C> <C>
Ordinary new business $ 2.5 $1.1 $ 1.4
---------------------
Ordinary renewal (19.1) 2.8 (21.9)
---------------------
Group life 15.8 -- 15.8
---------------------
Group annuity .2 -- .2
--------------------- ------ ---- ------
$ (.6) $3.9 $ (4.5)
====== ==== ======
</TABLE>
The Company has entered into non-exclusive managing general
agent agreements with International Benefit Services Corp.,
HRM Claim Management, Inc. and Pediatrics Insurance Consul-
tants, Inc. to write group life and health business. Direct
premiums written amounted to $26,200,000 $3,800,000 and
$8,600,000 in 1996 and $33,100,000, $10,600,000 and
$8,800,000 in 1995, respectively. During 1996, LNC Adminis-
trative Services entered into a similar agreement with the
Company with direct premiums written amounting to
$6,200,000. Authority granted by the managing general agents
agreements include underwriting, claims adjustment and
claims payment services.
S-13
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
6.ANNUITY RESERVES
At December 31, 1996, the Company's annuity reserves and de-
posit fund liabilities, including separate accounts, that
are subject to discretionary withdrawal with adjustment,
subject to discretionary withdrawal without adjustment and
not subject to discretionary withdrawal provisions are sum-
marized as follows:
<TABLE>
<CAPTION>
Amount Percent
----------------
(in millions)
-------------------
<S> <C> <C>
Subject to discretionary withdrawal with adjustment:
With market value adjustment $ 2,971.8 6.0%
------------------------------------------------------
At book value, less surrender charge 5,228.6 12.0
------------------------------------------------------
At market value 22,703.4 51.0
------------------------------------------------------ ---------- ------
30,903.8 69.0
Subject to discretionary withdrawal without adjustment
at book value with minimal or no charge or adjustment 10,986.4 25.0
------------------------------------------------------
Not subject to discretionary withdrawal 2,601.9 6.0
------------------------------------------------------
---------- ------
Total annuity reserves and deposit fund 44,492.1
liabilities--before reinsurance 100.0%
------------------------------------------------------
======
Less reinsurance 1,848.8
------------------------------------------------------ ----------
Net annuity reserves and deposit fund liabilities,
including separate accounts $42,643.3
------------------------------------------------------ ==========
</TABLE>
7.CAPITAL AND SURPLUS
Life insurance companies are subject to certain Risk-Based
Capital ("RBC") requirements as specified by the NAIC. Under
those requirements, the amount of capital and surplus main-
tained by a life insurance company is to be determined based
on the various risk factors related to it. At December 31,
1996, the Company exceeds the RBC requirements.
The payment of dividends by the Company is limited and can-
not be made except from earned profits. The maximum amount
of dividends that may be paid by life insurance companies
without prior approval of the Indiana Insurance Commissioner
is subject to restrictions relating to statutory surplus and
net gain from operations. In 1997, the Company can pay divi-
dends of $281,100,000 without prior approval of the Indiana
Insurance Commissioner.
8.EMPLOYEE BENEFIT PLANS
Pension plans
LNC maintains funded defined benefit pension plans for most
of its employees and, prior to January 1, 1995, full-time
agents. The benefits for employees are based on total years
of service and the highest 60 months of compensation during
the last 10 years of employment. The benefits for agents
were based on a percentage of each agent's yearly earnings.
The plans are funded by contributions to tax-exempt trusts.
The Company's funding policy is consistent with the funding
requirements of Federal laws and regulations. Contributions
are intended to provide not only the benefits attributed to
service to date, but also those expected to be earned in the
future. Plan assets consist principally of listed equity se-
curities, corporate obligations and government bonds.
All benefits applicable to the funded defined benefit plan
for agents were frozen as of December 31, 1994. The curtail-
ment of this plan did not have a significant effect on net
pension cost for 1994. Effective January 1, 1995, pension
benefits for agents have been provided by a new defined
S-14
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
8.EMPLOYEE BENEFIT PLANS CONTINUED
contribution plan. Contributions to this plan will be based
on 2.3% of an agent's earnings up to the social security
wage base and 4.6% of any excess.
LNC also administers two types of unfunded, non-qualified,
defined benefit plans for certain employees and agents. A
supplemental retirement plan provides employees and agents
defined benefit pension benefits in excess of limits imposed
by Federal tax law. A salary continuation plan provides cer-
tain officers of the Company defined pension benefits based
on years of service and final monthly salary upon death or
retirement.
The status of the funded defined benefit pension plans and
the amounts recognized in the balance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1996
------- 1995
(in millions)
----------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $(156.9) $(146.1)
-------------------------------------------------------------------------
Nonvested benefits (6.0) (7.7)
-------------------------------------------------------------------------
------- -------
Accumulated benefit obligation (162.9) (153.8)
-------------------------------------------------------------------------
Effect of projected future compensation increases (27.9) (28.5)
-------------------------------------------------------------------------
------- -------
Projected benefit obligation (190.8) (182.3)
-------------------------------------------------------------------------
Plan assets at fair value 186.1 173.2
-------------------------------------------------------------------------
------- -------
Projected benefit obligation in excess of plan assets (4.7) (9.1)
-------------------------------------------------------------------------
Unrecognized net loss 4.9 9.3
-------------------------------------------------------------------------
Unrecognized prior service cost 1.4 1.5
-------------------------------------------------------------------------
------- -------
Prepaid pension costs included in other liabilities $ 1.6 $ 1.7
-------------------------------------------------------------------------
======= =======
</TABLE>
The status of the unfunded defined benefit pension plans and
the amounts recognized in the balance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1996
----- 1995
(in
millions)
------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $(6.6) $(6.4)
-------------------------------------------------------------------
Nonvested benefits (.9) (1.1)
-------------------------------------------------------------------
----- -----
Accumulated benefit obligation (7.5) (7.5)
-------------------------------------------------------------------
Effect of projected future compensation increases (1.1) (1.7)
-------------------------------------------------------------------
----- -----
Projected benefit obligation (8.6) (9.2)
-------------------------------------------------------------------
Unrecognized net loss (gain) (.1) .9
-------------------------------------------------------------------
Unrecognized prior service cost .2 .3
-------------------------------------------------------------------
----- -----
Accrued pension costs included in other liabilities $(8.5) $(8.0)
-------------------------------------------------------------------
===== =====
</TABLE>
S-15
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
8.EMPLOYEE BENEFIT PLANS CONTINUED
The determination of the projected benefit obligation for
the defined benefit plans was based on the following assump-
tions:
<TABLE>
<CAPTION>
December 31
1996 1995 1994
---------------------------
<S> <C> <C> <C>
Weighted-average discount rate 7.0% 7.0% 8.0%
----------------------------------------------------------------------
Rate of increase in compensation:
----------------------------------------------------------------------
Salary continuation plan 5.5 6.0 6.5
----------------------------------------------------------------------
All other plans 4.5 5.0 5.0
----------------------------------------------------------------------
Expected long-term rate of return on plan assets 9.0 9.0 9.0
----------------------------------------------------------------------
The components of net pension cost for the defined benefit
pension plans are as follows:
<CAPTION>
Year ended
December 31
1996 1995 1994
---------------------------
<S> <C> <C> <C>
Service cost--benefits earned during the year $ 5.2 $ 4.1 $ 7.9
------------------------------------------------------------------------
Interest cost on projected benefit obligation 12.9 11.9 11.6
------------------------------------------------------------------------
Actual return on plan assets (17.5) (32.0) 4.2
------------------------------------------------------------------------
Net amortization (deferral) 3.1 20.3 (16.7)
------------------------------------------------------------------------ ----- ----- -----
Net pension cost $ 3.7 $ 4.3 $ 7.0
------------------------------------------------------------------------ ===== ===== =====
</TABLE>
401K PLAN
LNC and the Company sponsor contributory defined contribu-
tion plans for eligible employees and agents. The Company's
contributions to the plans are equal to each participant's
pre-tax contribution, not to exceed 6% of base pay, multi-
plied by a percentage ranging from 25% to 150%, which varies
according to certain incentive criteria as determined by
LNC's Board of Directors. Expense for these plans amounted
to $9,300,000, $6,700,000 and $11,200,000 in 1996, 1995 and
1994, respectively.
POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFIT PLANS
LNC sponsors unfunded defined benefit plans that provide
postretirement medical and life insurance benefits to full-
time employees and agents who, depending on the plan, have
worked for the Company 10 to 15 years and attained age 55 to
60. Medical benefits are also available to spouses and other
dependents of employees and agents. For medical benefits,
limited contributions are required from individuals retired
prior to November 1, 1988; contributions for later retirees,
which can be adjusted annually, are based on such items as
years of service at retirement and age at retirement. The
life insurance benefits are noncontributory, although par-
ticipants can elect supplemental contributory benefits.
The status of the postretirement medical and life insur-
ance benefit plans and the amounts recognized in the bal-
ance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1996 1995
--------------------------
(in millions)
--------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $(32.4) $(37.9)
------------------------------------------------------------------------
Fully eligible active plan participants (8.2) (8.7)
------------------------------------------------------------------------ ------ ------
Accumulated postretirement benefit obligation (40.6) (46.6)
------------------------------------------------------------------------
Unrecognized net loss (gain) (7.0) .8
------------------------------------------------------------------------ ------ ------
Accrued plan cost included in other liabilities $(47.6) $(45.8)
------------------------------------------------------------------------ ====== ======
</TABLE>
S-16
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
8.EMPLOYEE BENEFIT PLANS CONTINUED
The components of periodic postretirement benefit cost
are as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1996 1995 1994
---------------------------------
(in millions)
----------------
<S> <C> <C> <C>
Service cost $1.3 $1.1 $1.4
------------------------------------------------------------------------
Interest cost 2.7 3.0 3.1
------------------------------------------------------------------------
Amortized cost (credit) (.5) (.4) .1
------------------------------------------------------------------------ ---- ---- ----
Net periodic postretirement benefit cost $3.5 $3.7 $4.6
------------------------------------------------------------------------ ==== ==== ====
</TABLE>
The calculation of the accumulated postretirement benefit
obligation assumes a weighted-average annual rate of in-
crease in the per capita cost of covered benefits (i.e.,
health care cost trend rate) of 8.5% for 1997. It further
assumes the rate will gradually decrease to 5.0% by 2005 and
remain at that level. The health care cost trend rate as-
sumption has a significant effect on the amounts reported.
For example, increasing the assumed health care cost trend
rates by one percentage point each year would increase the
accumulated postretirement benefit obligation as of December
31, 1996 and 1995 by $1,900,000 and $2,100,000, respective-
ly. The aggregate of the estimated service and interest cost
components of net periodic postretirement benefit cost for
the year ended December 31, 1996 would increase by $184,000.
The calculation assumes a long-term rate of increase in com-
pensation of 4.5% and 5.0% at December 31, 1996 and 1995,
respectively. The weighted-average discount rate used in de-
termining the accumulated postretirement benefit obligation
was 7.0% for both December 31, 1996 and 1995.
9.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES
DISABILITY INCOME POLICIES
The liability for disability income claims net of the related asset for
amounts recoverable from reinsurers at December 31, 1996 and 1995 is a net
liability of $572,000,000 and $503,800,000, respectively. This liability is
based on the assumption that the recent experience will continue in the fu-
ture. If incidence levels or claim termination rates vary significantly
from these assumptions, adjustments to reserves may be required in the fu-
ture. Accordingly, this liability may prove to be deficient or excessive.
However, it is management's opinion that such future development will not
materially affect the financial position of the Company. The Company con-
tinually reviews and updates the level of these reserves.
During the fourth quarter of 1995, the Company completed an in-depth review
of the experience of its disability income business. As a result of this
study, and based on the assumption that recent experience will continue in
the future, net income decreased by $15,200,000 as a result of strengthen-
ing the disability income reserve.
MARKETING AND COMPLIANCE ISSUES
Regulators continue to focus on market conduct and compliance issues. Under
certain circumstances companies operating in the insurance and financial
services markets have been held responsible for providing incomplete or
misleading sales materials and for replacing existing policies with poli-
cies that were less advantageous to the policyholder. The Company's manage-
ment continues to monitor the Company's sales materials and compliance pro-
cedures and is making an extensive effort to minimize any potential liabil-
ity. However, due to the uncertainty surrounding such matters, it is not
possible to provide a meaningful estimate of the range of potential out-
comes at this time.
GROUP PENSION ANNUITIES
The liabilities for guaranteed interest and group pension annuity con-
tracts, which are no longer being sold by the Company, are supported by a
single portfolio of assets that attempts to match the duration of these li-
abilities. Due to the very long-term nature of group pension annuities and
the resulting inability to exactly match cash flows, a risk exists that fu-
ture cash flows from investments will not be reinvested at rates as high as
currently earned by the portfolio. Accordingly, these liabilities may prove
to be deficient or excessive. However, it is management's opinion that such
future development will
S-17
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
INSURANCE CEDED AND ASSUMED
The Company cedes insurance to other companies, including certain affili-
ates. The portion of risks exceeding the Company's retention limit is rein-
sured with other insurers. Industry regulations prescribe the maximum cov-
erage that the Company can retain on an individual insured. As of December
31, 1996, the Company's maximum retention on a single insured was
$3,000,000. To cover products other than life insurance, the Company ac-
quires other insurance coverages with retentions and limits that management
believes are appropriate for the circumstances. The accompanying financial
statements reflect premiums and benefits and settlement expenses, net of
insurance ceded. The Company remains liable if its reinsurers are unable to
meet their contractual obligations under the applicable reinsurance agree-
ments.
The Company assumes insurance from other companies, including certain af-
filiates. At December 31, 1996, the Company has provided $17,200,000 of
statutory surplus relief to other insurance companies under reinsurance
transactions. Generally, such amounts are offset by corresponding receiv-
ables from the ceding company, which are secured by future profits on the
reinsured business. However, the Company is subject to the risk that the
ceding company may become insolvent and the right of offset would not be
permitted.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1996, the Company did not have a concentration of: 1) busi-
ness transactions with a particular customer, lender or distributor; 2)
revenues from a particular product or service; 3) sources of supply of la-
bor or services used in the business; or 4) a market or geographic area in
which business is conducted that makes it vulnerable to an event that is at
least reasonably possible to occur in the near term and which could cause a
severe impact to the Company's financial condition.
9.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES CONTINUED
not materially affect the financial position of the Company.
LEASES
The Company leases its home office properties. The agreements provide for a
25 year lease period with options to renew for six additional terms of five
years each. The agreements also provide the Company with the right of first
refusal to purchase the properties during the term of the lease, including
renewal periods, at a price as defined in the agreements. In addition, the
Company has the option to purchase the leased properties at fair value as
defined in the agreements on the last day of the initial 25 year lease pe-
riod ending in 2009 or on the last day of any of the renewal periods.
Total rental expense on operating leases in 1996, 1995 and 1994 was
$26,400,000, $22,500,000 and $20,600,000, respectively. Future minimum
rental commitments are as follows (in millions):
<TABLE>
<S> <C>
1997 $ 17.5
1998 17.1
1999 17.4
2000 16.9
2001 17.2
Thereafter 151.6
------
$237.7
======
</TABLE>
S-18
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
9.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES CONTINUED
OTHER CONTINGENCY MATTERS
The Company is involved in various pending or threatened legal proceedings
arising from the conduct of business. In some instances, these 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 these proceed-
ings ultimately will be resolved without materially affecting the financial
position or results of operations of the Company.
The number of insurance companies that are under regulatory supervision has
resulted, and is expected to continue to result, in assessments by state
guaranty funds to cover losses to policyholders of insolvent or rehabili-
tated companies. Mandatory assessments may be partially recovered through a
reduction in future premium taxes in some states. The Company has accrued
for expected assessments net of estimated future premium tax deductions.
REINSURANCE
The regulatory required liability for unsecured reserves ceded to unautho-
rized reinsurers was $4,300,000 and $5,600,000 at December 31, 1996 and
1995, respectively.
GUARANTEES
The Company has guarantees with off-balance-sheet risks whose contractual
amounts represent credit exposure. Outstanding guarantees with off-balance-
sheet risks, shown in notional or contract amounts, are as follows:
<TABLE>
<CAPTION>
Notional or
Contract Amounts
-----------------
December 31
-----------------
1996 1995
--------------------
(in millions)
-----------------
<S> <C> <C>
Mortgage loan pass-through certificates $ 50.3 $ 63.6
Real estate partnerships .5 3.3
-------- --------
$ 50.8 $ 66.9
======== ========
</TABLE>
The Company has invested in real estate partnerships that use conventional
mortgage loans. In some cases, the terms of these arrangements involve
guarantees by each of the partners to indemnify the mortgagor in the event
a partner is unable to pay its principal and interest payments. In addi-
tion, the Company has sold commercial mortgage loans through grantor trusts
which issued pass-through certificates. The Company has agreed to repur-
chase any mortgage loans which remain delinquent for 90 days at a repur-
chase price substantially equal to the outstanding principal balance plus
accrued interest thereon to the date of repurchase. It is management's
opinion that the value of the properties underlying these commitments is
sufficient that in the event of default the impact would not be material to
the Company. Accordingly, both the carrying value and fair value of these
guarantees is zero at December 31, 1996 and 1995.
S-19
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
9.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
DERIVATIVES
The Company has derivatives with off-balance-sheet risks
whose notional or contract amounts exceed the credit ex-
posure. The Company has entered into derivative transac-
tions to reduce its exposure to fluctuations in interest
rates, the widening of bond yield spreads over comparable
maturity U.S. Government obligations and foreign exchange
risks. In addition, the Company is subject to the risks
associated with changes in the value of its derivatives;
however, such changes in the value generally are offset
by changes in the value of the items being hedged by such
contracts. Outstanding derivatives with off-balance-sheet
risks, shown in notional or contract amounts along with
their carrying value and estimated fair values, are as
follows:
<TABLE>
<CAPTION>
Assets (Liabilities)
------------------------------
Notional or Carrying Fair Carrying Fair
contract amounts value value value value
---------------------------------------------
December 31 December 31 December 31
1996 1995 1996 1996 1995 1995
---------------------------------------------
(in millions)
------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate
derivatives:
Interest rate cap
agreements $5,500.0 $5,110.0 $20.8 $ 8.2 $22.7 $5.3
Spread-lock agreements -- 600.0 -- -- (.9) (.9)
Swaptions 672.0 -- 11.0 10.6 -- --
Financial futures
contracts 147.7 -- (2.4) (2.4) -- --
Interest rate swaps -- 5.0 -- -- .2 .2
-------- -------- ----- ----- ----- ----
6,319.7 5,715.0 29.4 16.4 22.0 4.6
Foreign currency
derivatives:
Foreign exchange forward
contracts 251.5 15.7 .2 (.2) (.6) (.6)
Foreign currency options 43.9 99.2 .6 .4 1.9 1.4
Foreign currency swaps 15.0 15.0 -- (2.1) .4 .4
-------- -------- ----- ----- ----- ----
310.4 129.9 .8 (1.9) 1.7 1.2
-------- -------- ----- ----- ----- ----
$6,630.1 $5,844.9 $30.2 $14.5 $23.7 $5.8
======== ======== ===== ===== ===== ====
</TABLE>
S-20
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
9.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
A reconciliation and discussion of the notional or contract
amounts for the significant programs using derivative agree-
ments and contracts at December 31 is as follows:
<TABLE>
<CAPTION>
Interest Rate Caps Spread Locks Swaptions
----------------------------------------------------------------------
1996 1995 1996 1995 1996 1995
----------------------------------------------------------------------
(in millions)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year $ 5,110.0 $ 4,400.0 $ 600.0 $ 1,300.0 $ -- $ --
New contracts 390.0 710.0 15.0 800.0 672.0 --
Terminations and -- -- (615.0) (1,500.0) -- --
maturities --------- --------- --------- --------- --------- ---------
Balance at end of year $ 5,500.0 $ 5,110.0 $ -- $ 600.0 $ 672.0 $ --
========= ========= ========= ========= ========= =========
<CAPTION>
Financial Futures
------------------------------------------
Contracts Options Interest Rate Swaps
1996 1995 1996 1995 1996 1995
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year $ -- $ 382.5 $ -- $ -- $ 5.0 $ --
New contracts 7,918.8 810.5 -- 181.6 -- --
Terminations and (7,771.1) (1,193.0) -- (181.6) (5.0) --
maturities --------- --------- --------- --------- --------- ---------
Balance at end of year $ 147.7 $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= ========= =========
<CAPTION>
Foreign Currency Derivatives
----------------------------------------------------------------------
Foreign Exchange Foreign Currency Foreign
Forward Contracts Options Currency Swaps
1996 1995 1996 1995 1996 1995
----------------------------------------------------------------------
(in millions)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year $ 15.7 $ 21.2 $ 99.2 $ -- $ 15.0 $ --
New contracts 406.9 131.2 1,168.8 356.6 -- 15.0
Terminations and (171.1) (136.7) (1,224.1) (257.4) -- --
maturities --------- --------- --------- --------- --------- ---------
Balance at end of year $ 251.5 $ 15.7 $ 43.9 $ 99.2 $ 15.0 $ 15.0
========= ========= ========= ========= ========= =========
</TABLE>
S-21
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
9.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES CONTINUED
INTEREST RATE CAPS
The interest rate cap agreements, which expire in 1997 through 2003, enti-
tle the Company to receive payments from the counterparties on specified
future reset dates, contingent on future interest rates. For each cap, the
amount of such quarterly payments, if any, is determined by the excess of a
market interest rate over a specified cap rate multiplied by the notional
amount divided by four. The purpose of the Company's interest rate cap
agreement program is to protect its annuity line of business from the ef-
fect of fluctuating interest rates. The premium paid for the interest rate
caps is included in other assets ($20,800,000 as of December 31, 1996) and
is being amortized over the terms of the agreements. This amortization is
included in net investment income.
SWAPTIONS
Swaptions, which expire in 2002, entitle the Company to receive settlement
payments from the counterparties on specified expiration dates, contingent
on future interest rates. For each swaption, the amount of such settlement
payments, if any, is determined by the present value of the difference be-
tween the fixed rate on a market rate swap and the strike rate multiplied
by the notional amount. The purpose of the Company's swaption program is to
protect the assets supporting its annuity line of business from the effect
of fluctuating interest rates. The premium paid for the swaptions is in-
cluded in other assets ($11,000,000 as of December 31, 1996) and is being
amortized over the terms of the agreements. This amortization is included
in net investment income.
SPREAD LOCKS
Spread-lock agreements provide for a lump sum payment to or by the Company,
depending on whether the spread between the swap rate and a specified U.S.
Treasury note is larger or smaller than a contractually specified spread.
Cash payments are based on the product of the notional amount, the spread
between the swap rate and the yield of an equivalent maturity U.S. Treasury
security and the price sensitivity of the swap at that time. It is ex-
pressed in dollars-per-basis point. The purpose of the Company's spread-
lock program is to protect a portion of its fixed maturity securities
against widening of spreads.
FINANCIAL FUTURES
The Company uses exchange-traded financial futures contracts and options on
those financial futures to hedge against interest rate risks and to manage
duration of a portion of its fixed maturity securities. Financial futures
contracts obligate the Company to buy or sell a financial instrument at a
specified future date for a specified price. They may be settled in cash or
through delivery of the financial instrument. Cash settlements on the
change in market values of financial futures contracts are made daily. Op-
tions on financial futures give the Company the right, but not the obliga-
tion, to assume a long or short position in the underlying futures at a
specified price during a specified time period.
FOREIGN CURRENCY DERIVATIVES
The Company uses a combination of foreign exchange forward contracts, for-
eign currency options and foreign currency swaps, all of which are traded
over-the-counter, to hedge some of the foreign exchange risk of investments
in fixed maturity securities denominated in foreign currencies. The foreign
currency forward contracts obligate the Company to deliver a specified
amount of currency at a future date at a specified exchange rate. Foreign
currency options give the Company the right, but not the obligation, to buy
or sell a foreign currency at a specific exchange rate during a specified
time period. A foreign currency swap is a contractual agreement to exchange
the currencies of two different countries pursuant to an agreement to re-
exchange the two currencies at the same rate of exchange at a specified fu-
ture date.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$6,900,000 and $5,600,000 in 1996 and 1995, respectively. Deferred losses
of $37,600,000 as of December 31, 1996, were the result of: 1) terminated
and expired spread-lock agreements; and 2) financial futures contracts.
These losses are included with the related fixed maturity securities to
which the hedge applied and are being amortized over the life of such secu-
rities.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on interest rate cap agreements, swaptions, spread-lock
agreements, interest rate swaps, foreign exchange forward contracts, for-
eign currency options and foreign currency swaps. However, the Company does
not anticipate nonperformance by any of these counterparties. The credit
risk associated with such agreements is minimized by purchasing such agree-
ments from financial institutions with long-standing, superior performance
records. The amount of such exposure is essentially the net replacement
cost or market value for such agreements with each counterparty if the net
market value is in the Company's favor. At December 31, 1996, the exposure
was $17,500,000.
10.FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair values of the Company's financial instruments.
Considerable judgment is required to develop these fair values. Ac-
S-22
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
10.FAIR VALUE OF FINANCIAL INSTRUMENTS
CONTINUED
cordingly, the estimates shown are not necessarily indicative of the
amounts that would be realized in a one-time, current market exchange of
all of the Company's financial instruments.
BONDS
Fair values of bonds are based on quoted market prices, where available.
For bonds not actively traded, fair values are estimated using values ob-
tained from independent pricing services. In the case of private place-
ments, fair values are estimated by discounting expected future cash flows
using a current market rate applicable to the coupon rate, credit quality
and maturity of the investments. The fair values of affiliated common
stocks are based on quoted market prices.
MORTGAGE LOANS ON REAL ESTATE
The estimated fair value of mortgage loans on real estate was established
using a discounted cash flow method based on credit rating, maturity and
future income when compared to the expected yield for mortgages having sim-
ilar characteristics. The rating for mortgages in good standing are based
on property type, location, market conditions, occupancy, debt service cov-
erage, loan to value, caliber of tenancy, borrower and payment record. Fair
values for impaired mortgage loan are measured based on: 1) the present
value of expected future cash flows discounted at the loan's effective in-
terest rate; 2) the loan's market price; or 3) the fair value of the col-
lateral if the loan is collateral dependent.
POLICY LOANS
The estimated fair value of investments in policy loans was calculated on a
composite discounted cash flow basis using Treasury interest rates consis-
tent with the maturity durations assumed. These durations were based on
historical experience.
OTHER INVESTMENTS AND CASH AND INVESTED CASH
The carrying value for assets classified as other investments and cash and
invested cash in the accompanying balance sheet approximates their fair
value.
INVESTMENT-TYPE INSURANCE CONTRACTS
The balance sheet captions, "Future Policy Benefits and Claims" and "Other
Policyholder Funds," include investment-type insurance contracts (i.e., de-
posit contracts and guaranteed interest contracts). The fair values for the
deposit contracts and certain guaranteed interest contracts are based on
their approximate surrender values. The fair values for the remaining guar-
anteed interest and similar contracts are based on their approximate sur-
render values. The fair values for the remaining guaranteed interest and
similar contracts are estimated using discounted cash flow calculations.
These calculations are based on interest rates currently offered on similar
contracts with maturities consistent with those remaining for the contracts
being valued.
The remainder of the balance sheet captions "Future Policy Benefits and
Claims" and "Other Policyholder Funds," that do not fit the definition of
"investment type insurance contracts" are considered insurance contracts.
Fair value disclosures are not required for these insurance contracts and
have not been determined by the Company. It is the Company's position that
the disclosure of the fair value of these insurance contracts is important
because readers of these financial statements could draw inappropriate con-
clusions about the Company's capital and surplus determined on a fair value
basis. It could be misleading if only the fair value of assets and liabili-
ties defined as financial instruments are disclosed. The Company and other
companies in the insurance industry are monitoring the related actions of
the various rule-making bodies and attempting to determine an appropriate
methodology for estimating and disclosing the "fair value" of their insur-
ance contract liabilities.
SHORT-TERM DEBT
Fair values of short-term debt approximates carrying values.
GUARANTEES
The Company's guarantees include guarantees related to real estate partner-
ships and mortgage loan pass-through certificates. Based on historical per-
formance where repurchases have been negligible and the current status,
which indicates none of the loans are delinquent, the fair value liability
for the guarantees related to the mortgage loan pass-through certificates
is insignificant.
DERIVATIVES
The Company's derivatives include interest rate cap agreements, swaptions,
spread-lock agreements, foreign currency exchange contracts, financial
futures contracts, options on financial futures, interest rate swaps, call
options, foreign currency options and foreign currency swaps.
Fair values for derivative contracts are based on current settlement val-
ues. These values are based on: 1) quoted market prices for the foreign
currency exchange contracts, financial future contracts, and options on fi-
nancial futures; and 2) brokerage quotes that utilized pricing models or
formulas using current assumptions for all other swaps and agreements.
S-23
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
10.FAIR VALUE OF FINANCIAL INSTRUMENTS
CONTINUED
INVESTMENT COMMITMENTS
Fair values for commitments to make investment in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real es-
tate are based on the difference between the value of the committed invest-
ments as of the date of the accompanying balance sheets and the commitment
date. These estimates would take into account changes in interest rates,
the counterparties' credit standing and the remaining terms of the commit-
ments.
S-24
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
10.FAIR VALUE OF FINANCIAL INSTRUMENTS
CONTINUED
The carrying values and estimated fair values of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31
----------------------------------------------
1996 1995
---------------------- ----------------------
Carrying Fair Carrying Fair
Assets (Liabilities) value value value value
---------------------------------------- ---------- ---------- ---------- ----------
(in millions)
----------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 19,389.6 $ 20,194.4 $ 17,729.7 $ 19,184.7
----------------------------------------
Preferred stock 239.7 248.5 89.9 103.6
----------------------------------------
Unaffiliated common stock 358.3 358.3 535.5 535.5
----------------------------------------
Mortgage loans on real estate 2,976.7 3,070.9 2,909.7 3,081.9
----------------------------------------
Policy loans 626.5 612.7 515.8 504.0
----------------------------------------
Other investments 282.7 282.7 248.0 248.0
----------------------------------------
Cash and short-term investments 759.2 759.2 780.9 780.9
----------------------------------------
Investment type insurance contracts:
----------------------------------------
Deposit contracts and certain
guaranteed interest contracts (17,871.6) (17,333.0) (15,586.7) (15,046.0)
----------------------------------------
Remaining guaranteed interest and
similar contracts (1,799.7) (1,835.4) (2,261.1) (2,340.4)
----------------------------------------
Short-term debt (100.0) (100.0) (63.0) (63.0)
----------------------------------------
Derivatives 26.5 13.8 23.7 5.8
----------------------------------------
Investment commitments -- (.6) -- (.8)
----------------------------------------
</TABLE>
11.ACQUISITIONS AND SALES OF SUBSIDIARIES
The Company sold its 100% interest in two subsidiaries--Se-
curity Connecticut Life Insurance Company ("SCL") and Em-
ployers Health Insurance Company ("EHI"). SCL was sold
through a public offering of stock in January 1994. This
transaction resulted in a realized gain of $90,000,000 and a
direct increase in surplus of $24,000,000. Net of expenses,
the Company received cash of $172,000,000 and notes of
$65,000,000.
EHI was also sold through public offerings in March and
April 1994. LNC purchased 29% of the stock of the new pub-
licly traded holding company from LNL. Prior to the sale,
the Company received a $50,000,000 dividend in the form of a
note. The sale transaction resulted in a realized gain of
$133,000,000 and a direct reduction in surplus of
$21,000,000 due to release of unrealized gain amounts, for a
net surplus increase of $112,000,000. Net of expenses, the
Company received cash of $348,000,000.
In October 1996, the Company and its wholly owned subsidiary
purchased a block of group tax qualified annuity business
from UNUM Corporation. The transaction was completed in the
form of a reinsurance transaction, which resulted in a ced-
ing commission of $71,800,000. The ceding commission has
been recorded as admissible goodwill of $62,300,000, which
is to be amortized on a straight-line basis over 10 years.
The Company's subsidiary was required by the New York De-
partment of Insurance to expense its portion of the ceding
commission in 1996. Policy liabilities and related accruals
of the Company and its wholly owned subsidiary increased by
$3,200,000,000 as a result of this transaction.
In its previously-filed 1996 NAIC Annual Statement, the Com-
pany recorded the ceding commission as a nonadmitted asset,
which was charged directly to unassigned surplus. According-
ly, unassigned surplus was understated at December 31, 1996
by $62,300,000, net of amortization in 1996. In 1997, man-
agement will correct its opening balance of unassigned sur-
plus in its NAIC Annual Statement.
S-25
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
The balance sheets include reinsurance balances with affiliated companies
as follows:
<TABLE>
<CAPTION>
December 31
1996 1995
-------- --------
(in millions)
-----------------
<S> <C> <C>
Future policy benefits and claims assumed $ 312.7 $ 344.8
Future policy benefits and claims ceded 891.8 1,344.5
Amounts recoverable on paid and unpaid losses 31.2 65.9
Reinsurance payable on paid losses 2.7 5.5
Funds held under reinsurance treaties--net liability 1,062.4 712.3
</TABLE>
Substantially all reinsurance ceded to affiliated companies is with unau-
thorized companies. To take a reserve credit for such reinsurance, the Com-
pany holds assets from the reinsurer, including funds held under reinsur-
ance treaties, and is the beneficiary on letters of credit aggregating
$314,200,000 and $306,800,000 at December 31, 1996 and 1995, respectively.
At December 31, 1996 and 1995, LNC had guaranteed $239,200,000 and
$241,400,000, respectively, of these letters of credit. At December 31,
1996, the Company has a receivable (included in the foregoing amounts) from
affiliated insurance companies in the amount of $135,700,000 for statutory
surplus relief received under financial reinsurance ceded agreements.
13. SEPARATE ACCOUNTS
Separate account assets and liabilities reported in the accompanying bal-
ance sheets represent funds that are separately administered, principally
for annuity contracts, and for which the contractholder, rather than the
Company, bears the investment risk. Separate account contractholders have
no claim against the assets of the general account of the Company. Separate
account assets are reported at fair value and consist primarily of long-
term bonds, common stocks, short-term investments and mutual funds. The de-
tailed operations of the separate accounts are not included in the accompa-
nying financial statements. Fees charged on separate account policyholder
deposits are included in other income.
Separate account premiums, deposits and other considerations amounted to
$4,148,700,000, $3,068,200,000 and $2,694,700,000 in 1996, 1995 and 1994,
respectively. Reserves for separate accounts with assets at fair value were
$23,047,800,000 and $17,891,400,000 at December 31, 1996 and 1995, respec-
tively. All reserves are subject to discretionary withdrawal at market val-
ue. Substantially all of the Company's separate accounts are nonguaranteed.
12. TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Financial Group, Inc. ("LFGI"),
has a nearly exclusive general agents contract with the Company under which
it sells the Company's products and provides the service that otherwise
would be provided by a home office marketing department and regional of-
fices. For providing these selling and marketing services, the Company paid
LFGI override commissions and operating expense allowances of $56,300,000,
$43,300,000 and $41,200,000 in 1996, 1995 and 1994, respectively. LFGI in-
curred expenses of $15,700,000, $10,400,000 and $10,700,000 in 1996, 1995
and 1994, respectively, in excess of the override commissions and operating
expense allowances received from the Company, which the Company is not re-
quired to reimburse.
Cash and short-term investments at December 31, 1996 and 1995 include the
Company's participation in a short-term investment pool with LNC of
$175,100,000 and $324,000,000, respectively. Related investment income
amounted to $15,300,000, $21,100,000 and $16,100,000 in 1996, 1995 and
1994, respectively. Other liabilities at December 31, 1996 and 1995 include
$100,000,000 of notes payable to LNC.
The Company provides services to and receives services from affiliated com-
panies which resulted in a net payment of $34,100,000 and $24,900,000 in
1996 and 1995, respectively.
The Company both cedes and accepts reinsurance from affiliated companies.
Premiums in the accompanying statement of income includes reinsurance
transactions with affiliated companies as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1996 1995 1994
------ ------ ------
(in millions)
--------------------
<S> <C> <C> <C>
Insurance assumed $ 17.9 $ 17.6 $ 19.8
Insurance ceded 302.8 214.4 481.3
</TABLE>
S-26
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
13. SEPARATE ACCOUNTS CONTINUED
A reconciliation of transfers to (from) separate accounts are as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1996 1995
----------------------------------------------------
(in millions)
---------------------
<S> <C> <C>
Transfers as reported in the Summary of
Operations of various Separate Accounts:
Transfers to separate accounts $ 4,149.6 $ 3,070.2
Transfers from separate accounts (2,058.5) (1,457.8)
--------- ---------
Net transfer to separate accounts as reported
in the Company's NAIC Annual Statement $ 2,091.1 $ 1,612.4
========= =========
</TABLE>
S-27
<PAGE>
OTHER FINANCIAL INFORMATION
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Lincoln National Life Insurance Company
We have audited the accompanying statutory-basis balance sheets of The Lincoln
National Life Insurance Company (a wholly owned subsidiary of Lincoln National
Corporation) as of December 31, 1996 and 1995, and the related statutory-basis
statements of income, changes in capital and surplus and cash flows for each of
the three years in the period ended December 31, 1996. These financial state-
ments 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 generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or per-
mitted by the Indiana Department of Insurance, which practices differ from gen-
erally accepted accounting principles. The variances between such practices and
generally accepted accounting principles and the effects on the accompanying
financial statements are also described in Note 1.
In our opinion, because of the effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial posi-
tion of The Lincoln National Life Insurance Company at December 31, 1996 and
1995, or the results of its operations or its cash flows for each of the three
years in the period ended December 31, 1996.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Lincoln Na-
tional Life Insurance Company at December 31, 1996 and 1995, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with accounting practices prescribed or
permitted by the Indiana Department of Insurance.
As described in Note 2, in 1994 the Company changed its method of accounting
for separate account contracts.
/s/ Ernst & Young LLP
February 6, 1997
S-28
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA
DECEMBER 31, 1996 (IN MILLIONS)
<TABLE>
<S> <C>
Investment income earned:
Government bonds $ 74.6
---------------------------------------------------------------------
Other bonds (unaffiliated) 1,367.6
---------------------------------------------------------------------
Preferred stocks (unaffiliated) 9.6
---------------------------------------------------------------------
Common stocks (unaffiliated) 6.5
---------------------------------------------------------------------
Common stocks of affiliates 9.5
---------------------------------------------------------------------
Mortgage loans 269.3
---------------------------------------------------------------------
Real estate 114.4
---------------------------------------------------------------------
Premium notes, policy loans and liens 35.0
---------------------------------------------------------------------
Cash on hand and on deposit 0.9
---------------------------------------------------------------------
Short-term investments 48.0
---------------------------------------------------------------------
Other invested assets 17.6
---------------------------------------------------------------------
Derivative instruments (6.3)
---------------------------------------------------------------------
Aggregate write-ins for investment income 11.1
----------------------------------------------------------- --------
Gross investment income $1,957.8
- ------------------------------------------------------------- ========
Real estate owned (cost, less encumbrances) $ 621.3
- ------------------------------------------------------------- ========
Mortgage loans (unpaid balance):
Farm mortgages $ 1.1
---------------------------------------------------------------------
Residential mortgages 3.7
---------------------------------------------------------------------
Commercial mortgages 2,971.9
----------------------------------------------------------- --------
Total mortgage loans $2,976.7
- ------------------------------------------------------------- ========
Mortgage loans by standing (unpaid balance):
Good standing $2,922.1
----------------------------------------------------------- ========
Good standing with restructured terms $ 39.6
----------------------------------------------------------- ========
Interest overdue more than three months, not in foreclosure $ --
----------------------------------------------------------- ========
Foreclosure in process $ 14.9
----------------------------------------------------------- ========
Other long-term assets (statement value) $ 248.1
- ------------------------------------------------------------- ========
</TABLE>
S-29
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA CONTINUED
DECEMBER 31, 1996 (IN MILLIONS)
<TABLE>
<S> <C>
Bonds and stocks of parent, subsidiaries and affiliates (cost):
Common stocks $ 194.0
------------------------------------------------------------- ==========
Bonds and short-term investments by class and maturity:
Bonds by maturity (statement value):
Due within one year or less $ 1,618.0
-------------------------------------------------------------
Over 1 year through 5 years 5,928.1
-------------------------------------------------------------
Over 5 years through 10 years 6,025.9
-------------------------------------------------------------
Over 10 years through 20 years 3,670.6
-------------------------------------------------------------
Over 20 years 2,860.4
------------------------------------------------------------- ----------
Total by maturity $ 20,103.0
- --------------------------------------------------------------- ==========
Bonds by class (statement value):
Class 1 $ 14,013.7
-------------------------------------------------------------
Class 2 4,504.1
-------------------------------------------------------------
Class 3 807.6
-------------------------------------------------------------
Class 4 705.9
-------------------------------------------------------------
Class 5 71.4
-------------------------------------------------------------
Class 6 0.3
------------------------------------------------------------- ----------
Total by class $ 20,103.0
- --------------------------------------------------------------- ==========
Total bonds publicly traded $ 16,520.3
- --------------------------------------------------------------- ==========
Total bonds privately placed $ 3,582.7
- --------------------------------------------------------------- ==========
Preferred stocks (cost or amortized cost) $ 239.7
- --------------------------------------------------------------- ==========
Unaffiliated common stocks (market value) $ 358.3
- --------------------------------------------------------------- ==========
Short-term investments (cost or amortized cost) $ 713.4
- --------------------------------------------------------------- ==========
Financial options and caps owned (statement value) $ 32.2
- --------------------------------------------------------------- ==========
Financial options and caps written (statement value) $ 0.3
- --------------------------------------------------------------- ==========
Swap and forward agreements open (statement value) $ 0.2
- --------------------------------------------------------------- ==========
Futures contracts open (current value) $ 161.2
- --------------------------------------------------------------- ==========
Cash on deposit $ 45.8
- --------------------------------------------------------------- ==========
Life insurance in-force:
Ordinary $ 97.9
------------------------------------------------------------- ==========
Group life $ 31.4
------------------------------------------------------------- ==========
</TABLE>
S-30
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA CONTINUED
DECEMBER 31, 1996 (IN MILLIONS)
<TABLE>
<S> <C>
Amount of accidental death insurance in-force under ordinary policies $ 4.9
- ----------------------------------------------------------------------------------------------- =========
Life insurance policies with disability provisions in-force:
Ordinary $ 4.9
--------------------------------------------------------------------------------------------- =========
Group life $ 12.9
--------------------------------------------------------------------------------------------- =========
Supplementary contracts in-force:
Ordinary--not involving life contingencies:
Amount on deposit $ --
--------------------------------------------------------------------------------------------- =========
Income payable $ 3.2
--------------------------------------------------------------------------------------------- =========
Ordinary--involving life contingencies:
Income payable $ 0.9
--------------------------------------------------------------------------------------------- =========
Group--not involving life contingencies:
Income payable $ --
--------------------------------------------------------------------------------------------- =========
Group--involving life contingencies:
Income payable $ 0.9
--------------------------------------------------------------------------------------------- =========
Annuities:
Ordinary:
Immediate--amount of income payable $ 68.4
--------------------------------------------------------------------------------------------- =========
Deferred--fully paid account balance $ 0.6
--------------------------------------------------------------------------------------------- =========
Deferred--not fully paid account balance $ 326.6
--------------------------------------------------------------------------------------------- =========
Group:
Amount of income payable $ --
--------------------------------------------------------------------------------------------- =========
Fully paid account balance $ --
--------------------------------------------------------------------------------------------- =========
Not fully paid account balance $ 78.1
--------------------------------------------------------------------------------------------- =========
Accident and health insurance--premiums in-force:
Ordinary $ 180.6
--------------------------------------------------------------------------------------------- =========
Group $ 97.1
--------------------------------------------------------------------------------------------- =========
Deposit funds and dividend accumulations:
Deposit funds account balance $17,456.6
--------------------------------------------------------------------------------------------- =========
Dividend accumulations--account balance $ 114.7
--------------------------------------------------------------------------------------------- =========
</TABLE>
S-31
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA CONTINUED
DECEMBER 31, 1996 (IN MILLIONS)
Claim payments 1996:
Group Accident and Health:
<TABLE>
<S> <C>
1996 $ 9.4
=====
--------------
1995 $ 3.1
=====
--------------
1994 $ 0.1
=====
--------------
1993 $ --
=====
--------------
1992 $(0.1)
=====
--------------
Prior $ --
=====
--------------
</TABLE>
S-32
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTE TO SUPPLEMENTAL SCHEDULE OF SELECTED STATUTORY-BASIS FINANCIAL DATA
NOTE--BASIS OF PRESENTATION
The accompanying schedule presents selected statutory-basis financial data as
of December 31, 1996 and for the year then ended for purposes of complying with
paragraph 9 of the Annual Audited Financial Reports in the General Section of
the National Association of Insurance Commissioners' Annual Statement Instruc-
tions and agrees to or is included in the amounts reported in The Lincoln Na-
tional Life Insurance Company's 1996 Statutory Annual Statement as filed with
the Indiana Department of Insurance.
S-33
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON
OTHER FINANCIAL INFORMATION
Board of Directors
The Lincoln National Life Insurance Company
Our audits were conducted for the purpose of forming an
opinion on the statutory-basis financial statements taken as
a whole. The accompanying supplemental schedule of selected
statutory-basis financial data is presented to comply with
the National Association of Insurance Commissioners' Annual
Statement Instructions and is not a required part of the
statutory-basis financial statements. Such information has
been subjected to the auditing procedures applied in our au-
dit of the statutory-basis financial statements and, in our
opinion, is fairly stated in all material respects in rela-
tion to the statutory-basis financial statements taken as a
whole.
/s/ Ernst & Young LLP
February 6, 1997
S-34
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
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 statement of assets and liabilities of Lincoln
National Variable Annuity Account L (the "Separate Account") as of December 31,
1996, and the related statement of operations and changes in net assets for the
period from October 1, 1996 (commencement of operations) to December 31, 1996.
These financial statements are the responsibility of the Separate Account's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures
included confirmation of securities owned as of December 31, 1996, by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides 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 National Variable
Account L at December 31, 1996, the results of its operations and the changes in
its net assets for the period from October 1, 1996 to December 31, 1996, in
conformity with generally accepted accounting principles.
Fort Wayne, Indiana
April 1, 1997
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
<CAPTION>
Dreyfus
Stock Dreyfus TCI TCI VIPF
Index Small Cap Growth Balanced Growth
Combined Fund Portfolio Portfolio Portfolio Portfolio
----------- ------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Investments at fair value $1,279,373 $70,222 $179,989 $18,454 $29,112 $193,228
Liabilities
Contract charges payable to
The Lincoln National Life Insurance Company 503 28 72 7 12 77
---------- ------- --------- --------- --------- ---------
Net assets $1,278,870 $70,194 $179,917 $18,447 $29,100 $193,151
========== ======= ========= ========= ========= =========
Percent of net assets 100.0% 5.5% 14.1% 1.4% 2.3% 15.1%
========== ======= ========= ========= ========= =========
<CAPTION>
Calvert
VIPF II VIPF Responsibly T. Rowe VIPF
Asset Equity- Invested Price Money
Manager Income Balanced International Market
Portfolio Portfolio Portfolio Series Portfolio
---------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Assets
Investments at fair value $ 430,304 $ 165,624 $ 134,580 $ 57,805 $ 55
Liabilities
Contract charges payable to
The Lincoln National Life Insurance Company 170 65 49 23 -
---------- --------- ----------- ------------- ---------
Net assets $ 430,134 $ 165,559 $ 134,531 $ 57,782 $ 55
========== ========= =========== ============= =========
Percent of net assets 33.6% 13.0% 10.5% 4.5% -%
========== ========= =========== ============= =========
</TABLE>
See accompanying notes.
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
Period from October 1, 1996 to December 31, 1996
<TABLE>
<CAPTION>
Dreyfus Stock Dreyfus Small Cap
Combined Index Fund Portfolio
-------- ---------- ---------
<S> <C> <C> <C>
Net investment income
Dividends from investment income $16,580 $931 $4,825
Less contract charges - mortality
and expense fees to The Lincoln National
Life Insurance Company 916 51 129
----------- ----------- -----------
Net investment income (loss) 15,664 880 4,696
Net realized and unrealized gain
(loss) on investments
Net realized loss (5) - (1)
Net change in unrealized gain (loss) (33,387) (1,693) (4,661)
----------- ----------- -----------
(33,392) (1,693) (4,662)
----------- ----------- -----------
Net increase (decrease) in net assets resulting
from operations (17,728) (813) 34
Net increase in net assets from
principal transactions 1,296,598 71,007 179,883
----------- ----------- -----------
Net increase in net assets 1,278,870 70,194 179,917
Net assets at beginning of period - - -
----------- ----------- -----------
Net assets at end of period $ 1,278,870 $70,194 $179,917
----------- ----------- -----------
<CAPTION>
TCI Growth Portfolio TCI Balanced Portfolio VIPF Growth Portfolio
-------------------- ---------------------- ---------------------
<S> <C> <C> <C>
Net investment income
Dividends from investment income $ - $ - $ -
Less contract charges - mortality
and expense fees to The Lincoln National
Life Insurance Company 14 21 141
----------- ----------- -----------
Net investment income (loss) (14) (21) (141)
Net realized and unrealized gain
(loss) on investments
Net realized loss - - (2)
Net change in unrealized gain (loss) (883) (401) (5,878)
----------- ----------- -----------
(883) (401) (5,880)
----------- ----------- -----------
Net increase (decrease) in net assets resulting
from operations (897) (422) (6,021)
Net increase in net assets from
principal transactions 19,344 29,522 199,172
----------- ----------- -----------
Net increase in net assets 18,447 29,100 193,151
Net assets at beginning of period - - -
----------- ----------- -----------
Net assets at end of period $18,447 $29,100 $193,151
----------- ----------- -----------
</TABLE>
See accompanying notes.
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
Period from October 1, 1996 to December 31, 1996
<TABLE>
<CAPTION>
Calvert Responsibly
VIPF II Asset VIPF Equity- Invested Balanced
Manager Portfolio Income Portfolio Portfolio
----------------- ---------------- ---------
<S> <C> <C> <C>
Net investment income
Dividends from investment income $ - $ - $ 10,101
Less contract charges - mortality
and expense fees to The Lincoln National
Life Insurance Company 312 118 89
--------- --------- ---------
Net investment income (loss) (312) (118) 10,012
Net realized and unrealized gain
(loss) on investments
Net realized loss (1) - (1)
Net change in unrealized gain (loss) (6,765) (1,565) (12,067)
--------- --------- ---------
(6,766) (1,565) (12,068)
--------- --------- ---------
Net increase (decrease) in net assets resulting
from operations (7,078) (1,683) (2,056)
Net increase in net assets from
principal transactions 437,212 167,242 136,587
--------- --------- ---------
Net increase in net assets 430,134 165,559 134,531
Net assets at beginning of period - - -
--------- --------- ---------
Net assets at end of period $ 430,134 $ 165,559 $ 134,531
--------- --------- ---------
<CAPTION>
T. Rowe Price VIPF Money
International Series Market Portfolio
-------------------- ----------------
<S> <C> <C>
Net investment income
Dividends from investment income $ 722 $ 1
Less contract charges - mortality
and expense fees to The Lincoln National
Life Insurance Company 41 -
--------- ---------
Net investment income (loss) 681 1
Net realized and unrealized gain
(loss) on investments
Net realized loss - -
Net change in unrealized gain (loss) 526 -
--------- ---------
526 -
--------- ---------
Net increase (decrease) in net assets resulting
from operations 1,207 1
Net increase in net assets from
principal transactions 56,575 54
--------- ---------
Net increase in net assets 57,782 55
Net assets at beginning of period - -
--------- ---------
Net assets at end of period $ 57,782 $ 55
--------- ---------
</TABLE>
See accompanying notes.
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES
Organization:
- -------------
Lincoln National Variable Annuity Account L (the "Separate Account") is a
segregated investment account of The Lincoln National Life Insurance Company
("Lincoln Life") and is registered under the Investment Company Act of 1940.
The Separate Account was established in accordance with the laws of the State of
Indiana. Its registration statement became effective in September, 1996. The
assets are held for the exclusive benefit of the variable annuity contract
owners and may not be used to satisfy the obligations that may arise from any
other business conducted by Lincoln Life. Any excess of assets over liabilities
may be transferred to Lincoln Life's General Account. Principal markets are
hospitals and non-profit organizations located throughout the United States of
America, excluding New York.
On October 1, 1996, UNUM Life Insurance Company of America ("UNUM America")
completed the sale of its tax-qualified annuity business to Lincoln Life and
Lincoln Life & Annuity Company of New York ("Lincoln New York"), a wholly owned
subsidiary of Lincoln Life. The contracts of participants in the separate
accounts of UNUM America with respect to which consent is obtained from
contractholders and/or participants will be reinsured pursuant to an assumption
reinsurance agreement. Assets attributable to such participants' contracts will
be transferred to the Separate Account and separate accounts of Lincoln New
York. Assets attributable to contracts of participants with respect to which
such consent is not obtained will remain in the separate accounts of UNUM
America.
Investments:
- ------------
In accordance with the terms of the variable annuity contracts, all payments
transferred to the Separate Account by the contract owners are allocated to
purchase shares of either Dreyfus Stock Index Fund, Dreyfus Variable Investment
Fund: Small Cap Portfolio ("Dreyfus Small Cap Portfolio"), Twentieth Century's
TCI Portfolios, Inc.: TCI Growth ("TCI Growth Portfolio") and TCI Balanced
("TCI Balanced Portfolio"), Fidelity's Variable Insurance Products Fund: Growth
Portfolio ("VIPF Growth Portfolio"), Fidelity's Variable Insurance Products Fund
II: Asset Manager Portfolio ("VIPF II Asset Manager Portfolio"), Fidelity's
Variable Insurance Products Fund: Equity-Income Portfolio ("VIPF Equity-Income
Portfolio"), Calvert Responsibly Invested Balanced Portfolio or T. Rowe Price
International Series, Inc. ("T. Rowe Price International Series"). Fidelity's
Variable Insurance Products Funds: Money Market Portfolio ("VIPF Money Market
Portfolio") is used only for investment of initial contributions for which
Lincoln Life has not received complete order instructions. Upon receipt of
complete order instructions, the payments transferred to VIPF Money Market
Portfolio are allocated to purchase shares of one of the above funds.
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES (continued)
Investments: (continued)
- ------------
The Separate Account is fully invested in shares of Dreyfus Stock Index Fund,
Dreyfus Small Cap Portfolio, TCI Growth Portfolio, TCI Balanced Portfolio, VIPF
Growth Portfolio, VIPF II Asset Manager Portfolio, VIPF Equity-Income Portfolio,
Calvert Responsibly Invested Balanced Portfolio, T. Rowe Price International
Series and VIPF Money Market Portfolio which are carried at fair value. Security
transactions are recorded on the trade date. All contracts participating in the
Separate Account are in the accumulation phase. Dividends are fully reinvested
and immediately credited to participant accounts with the exception of VIPF
Money Market Portfolio which is invested monthly. Unrealized gain and loss
represent the difference between the cost and fair value of invested assets.
Realized gain and loss are reported on an average cost basis. Gross unrealized
gain for all investments was $526 as of December 31, 1996. Gross unrealized loss
for all investments was $33,913 as of December 31, 1996.
The fair value and cost of investments at December 31, 1996, was distributed
as follows:
<TABLE>
<CAPTION>
Fair Value
------------
Shares Share Price Cost
------ ----- ----- ----
<S> <C> <C> <C>
Dreyfus Stock Index Fund 3,462.6179 $20.28 $ 71,915
Dreyfus Small Cap Portfolio 3,456.0035 52.08 184,650
TCI Growth Portfolio 1,802.1535 10.24 19,338
TCI Balanced Portfolio 3,860.9446 7.54 29,512
VIPF Growth Portfolio 6,205.1248 31.14 199,105
VIPF II Asset Manager Portfolio 25,416.6595 16.93 437,069
VIPF Equity-Income Portfolio 7,875.6068 21.03 167,189
Calvert Responsibly Invested Balanced Portfolio 75,862.4046 1.774 146,647
T. Rowe Price International Series 4,573.1734 12.64 57,279
VIPF Money Market Portfolio 54.9400 1.00 55
</TABLE>
Contract Charges:
- -----------------
Lincoln Life is the depositor for the Separate Account. Administrative services
necessary for the operation of the Separate Account and the variable annuity
contracts are provided by Lincoln Life. Although Lincoln Life deducts for sales
and administrative expenses under the contracts, Lincoln Life assumes an expense
risk that these deductions may prove insufficient to cover the cost of those
expenses.
In addition, Lincoln Life assumes a mortality risk under the contracts in that
it agrees to make annuity payments regardless of how long a particular annuitant
or their payee lives and how long all annuitants or other payees in a class
live, if payment options involving life contingencies are chosen. Those annuity
payments are determined in accordance with annuity purchase rate provisions
established at the time the contracts are issued. Lincoln Life also assumes a
mortality risk in providing a death benefit under the contracts.
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES (continued)
Contract Charges: (continued)
- -----------------
To compensate Lincoln Life for assuming these mortality and expense risks, an
effective annual mortality and expense risk charge of 1.20% of each portfolio's
average daily net assets is imposed on each portfolio within the Separate
Account with the exception of the VIPF Money Market Portfolio. For 1996, the
mortality and expense risk charges totaled $916.
Federal Income Taxes:
- ---------------------
Operations of the Separate Account form a part of and are taxed with operations
of Lincoln Life, which is taxed as a "life insurance company" under the Internal
Revenue Code. Using current law, no federal income taxes are payable with
respect to the Separate Account's net investment income and the net realized
gain on investments.
Premium Taxes:
- --------------
Applicable state premium taxes are paid by Lincoln Life and deducted from the
account balances of contract owners either: (1) at the time of a total
withdrawal of a participant's account balance; (2) on the annuity commencement
date; (3) at such other date as the taxes are assessed.
NOTE 2. CAPITAL SHARE TRANSACTIONS
During 1996, the following transactions in capital stock occurred:
The Separate Account funds that invest in Dreyfus Stock Index Fund held
3,091.5026 units at a net asset value of $22.7054 at December 31, 1996.
<TABLE>
<CAPTION>
1996
----
Units Amount
----- ------
<S> <C> <C>
Units sold 3,091.5026 $71,007
Units redeemed - -
---------- -------
Net increase 3,091.5026 $71,007
========== =======
</TABLE>
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
NOTES TO FINANCIAL STATEMENTS
NOTE 2. CAPITAL SHARE TRANSACTIONS (continued)
The Separate Account funds that invest in Dreyfus Small Cap Portfolio held
11,769.9487 units at a net asset value of $15.2861 at December 31, 1996.
<TABLE>
<CAPTION>
1996
----
Units Amount
----- ------
<S> <C> <C>
Units sold 11,769.9487 $179,883
Units redeemed - -
----------- --------
Net increase 11,769.9487 $179,883
=========== ========
</TABLE>
The Separate Account funds that invest in TCI Growth Portfolio held 1,253.7393
units at a net asset value of $14.7133 at December 31, 1996.
<TABLE>
<CAPTION>
1996
----
Units Amount
----- ------
<S> <C> <C>
Units sold 1,253.7393 $19,344
Units redeemed - -
---------- -------
Net increase 1,253.7393 $19,344
========== =======
</TABLE>
The Separate Account funds that invest in TCI Balanced Portfolio held 1,794.8695
units at a net asset value of $16.2128 at December 31, 1996.
<TABLE>
<CAPTION>
1996
----
Units Amount
----- ------
<S> <C> <C>
Units sold 1,794.8695 $29,522
Units redeemed - -
---------- -------
Net increase 1,794.8695 $29,522
========== =======
</TABLE>
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
NOTES TO FINANCIAL STATEMENTS
NOTE 2. CAPITAL SHARE TRANSACTIONS (continued)
The Separate Account funds that invest in VIPF Growth Portfolio held 8,318.3784
units at a net asset value of $23.2198 at December 31, 1996.
<TABLE>
<CAPTION>
1996
----
Units Amount
----- ------
<S> <C> <C>
Units sold 8,318.3784 $199,172
Units redeemed - -
---------- --------
Net increase 8,318.3784 $199,172
========== ========
</TABLE>
The Separate Account funds that invest in VIPF II Asset Manager Portfolio held
24,911.0257 units at a net asset value of $17.2668 at December 31, 1996.
<TABLE>
<CAPTION>
1996
----
Units Amount
----- ------
<S> <C> <C>
Units sold 24,911.0257 $437,212
Units redeemed - -
----------- --------
Net increase 24,911.0257 $437,212
=========== ========
</TABLE>
The Separate Account funds that invest in VIPF Equity-Income Portfolio held
10,485.2129 units at a net asset value of $15.7898 at December 31, 1996.
<TABLE>
<CAPTION>
1996
----
Units Amount
----- ------
<S> <C> <C>
Units sold 10,485.2129 $167,242
Units redeemed - -
----------- --------
Net increase 10,485.2129 $167,242
=========== ========
</TABLE>
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
NOTES TO FINANCIAL STATEMENTS
NOTE 2. CAPITAL SHARE TRANSACTIONS (continued)
The Separate Account funds that invest in Calvert Responsibly Invested Balanced
Portfolio held 9,459.1800 units at a net asset value of $14.2222 at December 31,
1996.
<TABLE>
<CAPTION>
1996
----
Units Amount
----- ------
<S> <C> <C>
Units sold 9,459.1800 $136,587
Units redeemed - -
---------- --------
Net increase 9,459.1800 $136,587
========== ========
</TABLE>
The Separate Account funds that invest in T. Rowe Price International Series
held 4,707.0763 units at a net asset value of $12.2756 at December 31, 1996.
<TABLE>
<CAPTION>
1996
----
Units Amount
----- ------
<S> <C> <C>
Units sold 4,707.0763 $56,575
Units redeemed - -
---------- -------
Net increase 4,707.0763 $56,575
========== =======
</TABLE>
The Separate Account funds that invest in VIPF Money Market Portfolio held
4.8714 units at a net asset value of $11.2772 at December 31, 1996.
<TABLE>
<CAPTION>
1996
----
Units Amount
----- ------
<C> <C>
<S>
Units sold 98.4501 $1,104
Units redeemed 93.5787 1,050
------- ------
Net increase 4.8714 $ 54
======= ======
</TABLE>
NOTE 3. RELATED PARTY TRANSACTIONS
LNC Equity Sales Corporation, an affiliate, acts as a distributor and principal
underwriter of the Separate Account.
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
NOTES TO FINANCIAL STATEMENTS
NOTE 4. SUBSEQUENT EVENT
Through April 1, 1997, the net assets of the Separate Account have increased by
approximately $263,407,000 from novations of assets from the separate accounts
of UNUM America.
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial statements and Exhibits
(a) The following financial statements are included in Part B:
Financial Statements of Registrant - Lincoln National Variable Annuity
Account L.
Financial Statements of Depositor - The Lincoln National Life
Insurance Company.
(b) Exhibits
1. Resolution adopted by the Board of Directors of The Lincoln
National Life Insurance Company on April 29, 1996 establishing
the Lincoln National Variable Annuity Account L ("Account
L").*
2. Not applicable.
3(a). Principal Underwriting Contract.*
3(b). Broker-dealer sales agreement.*
4(a). Forms of Group Annuity Contracts for The Lincoln National Life
Insurance Company.*
5(a). Form of application for Group Annuity Contract.*
5(b). Form of Participant enrollment form (including acknowledgment
of restrictions on redemption imposed by I.R.C. Section
403(b)).*
6. Articles of incorporation and by-laws of The Lincoln National
Life Insurance Company.*
7. Not applicable.
8(a). Participation Agreement between The Lincoln National Life
Insurance Company and Dreyfus Life & Annuity Index Fund, Inc.
and Dreyfus Variable Investment Fund.*
8(b). Participation Agreement between The Lincoln National Life
Insurance Company and Variable Insurance Products Fund and
Fidelity Distributors Corporation.*
8(c). Participation Agreement between The Lincoln National Life
Insurance Company and Variable Insurance Products Fund II and
Fidelity Distributors Corporation.*
8(d). Participation Agreement between The Lincoln National Life
Insurance Company and Twentieth Century Securities, Inc.*
8(e). Participation Agreement between The Lincoln National Life
Insurance Company and Acacia Capital Corporation.*
C-1
<PAGE>
8(f). Participation Agreement between The Lincoln National Life
Insurance Company and T. Rowe Price.*
9. Consent and opinion of Jeremy Sachs, Senior Counsel, The
Lincoln National Life Insurance Company, as to the legality of
the securities being registered.*
10(a). Consent of Ernst & Young LLP, Independent Auditors.
10(b). Not applicable.
11. Not applicable.
12. Not applicable.
13. Schedule for Computation of Performance Quotations.
14. Not applicable.
* Incorporated herein by reference to Pre-effective Amendment No.
1 on Form N-4 filed by the Lincoln National Variable Annuity
Account L of The Lincoln National Life Insurance Company with
the Securities and Exchange Commission on September 26,
1996.
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 Account L as well as the Contracts. The list also shows The Lincoln
National Life Insurance Company's executive officers.
<TABLE>
<CAPTION>
Name Positions and Offices with Lincoln Life
- ---- ---------------------------------------
<S> <C>
Ian M. Rolland** Director
Jon A. Boscia* President, Chief Executive Officer and Director
Carolyn P. Brody* Second Vice President
Thomas L. Clagg* Vice President and Associate General Counsel
Kelly D. Clevenger* Vice President
Jeffrey K Dellinger* Vice President
Jack D. Hunter** Executive Vice President and General Counsel
Donald E. Keller* Vice President
Reed P. Miller* Vice President
Lawrence T. Rowland*** Executive Vice President and Director
Keith J. Ryan* Vice President, Asst. Treasurer and Chief Financial
Officer
Richard C. Vaughan** Director
Janet C. Whitney** Vice President and Treasurer
C. Suzanne Womack** Assistant Vice President and Secretary
O. Douglas Worthingon* Vice President, Controller and Assistant Treasurer
</TABLE>
C-2
<PAGE>
* Principal business address of each person is 1300 South Clinton Street, Fort
Wayne, Indiana 46802.
** Principal business address is 200 East Berry Street, Fort Wayne, Indiana
46802-2706.
*** Principal business address is 1700 Magnavox Way, One Reinsurance Place, Fort
Wayne, Indiana 46804.
Item 26. Persons Controlled by or Under Common Control with The Lincoln
National Life Insurance Company ("Lincoln Life") or Account L
Account L is a separate account of Lincoln Life and may be deemed to be
controlled by Lincoln Life although Lincoln Life will follow voting instructions
of Contractholders with respect to voting on certain important matters requiring
a vote of Contractholders.
The following chart indicates the persons controlled by or under common control
with Lincoln Life and Account L:
C-3
<PAGE>
EXHIBIT
ORGANIZATIONAL CHART OF THE
LINCOLN NATIONAL INSURANCE HOLDING COMPANY SYSTEM
All the members of the holding company system are corporations, with the
exception of American States Lloyds Insurance Company, Delaware Distributors,
L.P., Founders CBO, L.P., and Lincoln National Mezzanine Fund, L.P. For purposes
of compliance with securities laws, this chart also shows Lincoln National Life
Insurance Company Separate Accounts. These are not independent, legal entities;
they are accounting entries under state insurance law, and are used to support
variable annuity and variable insurance products.
- ----------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
- ----------------------------------
|
| ----------------------------------------
|--| American States Financial Corporation|
| | 83.3% - Indiana - Holding Company |
| ----------------------------------------
| |
| | ---------------------------------------
| --| American States Insurance Company |
| | 100% - Indiana - Property/Casualty |
| ---------------------------------------
| |
| ----------------------------------------
| |--| American Economy Insurance Company |
| | | 100% - Indiana - Property/Casualty |
| | ----------------------------------------
| | | ----------------------------------------------
| | |--| American States Insurance Company of Texas |
| | | 100% - Texas - Property/Casualty |
| | ----------------------------------------------
| | --------------------------------------------
| |--| American States Life Insurance Company |
| | | 100% - Indiana - Life/Health |
| | --------------------------------------------
| | -------------------------------------------------
| |--| American States Lloyds Insurance Company |
| | | Lloyds Plan - * - Texas - Property/Casualty |
| | ------------------------------------------------
| | -------------------------------------------------
| |--| American States Preferred Insurance Company |
| | | 100% - Indiana - Property/Casualty |
| | -------------------------------------------------
| | ---------------------------------
| |--| City Insurance Agency, Inc. |
| | | 100% - Indiana |
| | ---------------------------------
| | -------------------------------------------------
| |--| Insurance Company of Illinois |
| | 100% - Illinois - Fire & Casualty Insurance |
| -------------------------------------------------
| ---------------------------------------------------------
|--| Aseguradora InverLincoln, S.A. Compania de Seguros Y |
| | Reaseguros, Grupo Financiero InverMexico |
| | 49% - Mexico - Life, Property and Casualty Insurance |
| ---------------------------------------------------------
1
<PAGE>
- ----------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
- ----------------------------------
|
| --------------------------------------------------
|--| The Insurers' Fund, Inc. # |
| | 100% - Maryland - Inactive |
| --------------------------------------------------
| --------------------------------------------------
|--| LNC Administrative Services Corporation |
| | 100% - Indiana - Third Party Administrator |
| --------------------------------------------------
|
| ----------------------------------------
|--| The Richard Leahy Corporation |
| | 100% - Indiana - Insurance Agency |
| ----------------------------------------
| | -----------------------------------
| |--| The Financial Alternative, Inc. |
| | | 100% - Utah- Insurance Agency |
| | -----------------------------------
| | -----------------------------------------
| |--| Financial Alternative Resources, Inc. |
| | | 100% - Kansas - Insurance Agency |
| | -----------------------------------------
| | -------------------------------------------
| |--| Financial Choices, Inc. |
| | | 100% - Pennsylvania - Insurance Agency |
| | -------------------------------------------
| | -------------------------------------------------
| | | Financial Investment Services, Inc. |
| |--| (formerly Financial Services Department, Inc.)|
| | | 100% - Indiana - Insurance Agency |
| | -------------------------------------------------
| | -------------------------------------------
| | | Financial Investments, Inc. |
| |--| (formerly Insurance Alternatives, Inc.) |
| | | 100% - Indiana - Insurance Agency |
| | -------------------------------------------
| | ---------------------------------------------
| |--| The Financial Resources Department, Inc. |
| | | 100% - Michigan - Insurance Agency |
| | ---------------------------------------------
| | -------------------------------------------
| |--| Investment Alternatives, Inc. |
| | | 100% - Pennsylvania - Insurance Agency |
| | -------------------------------------------
| | ----------------------------------------
| |--| The Investment Center, Inc. |
| | | 100% - Tennessee - Insurance Agency |
| | ----------------------------------------
| | ----------------------------------------
| |--| The Investment Group, Inc. |
| | | 100% - New Jersey - Insurance Agency |
| | ----------------------------------------
| | --------------------------------------
| |--| Personal Financial Resources, Inc. |
| | | 100% - Arizona - Insurance Agency |
| | --------------------------------------
| | ------------------------------------------
| |--| Personal Investment Services, Inc. |
| | 100% - Pennsylvania - Insurance Agency |
| ------------------------------------------
2
<PAGE>
- ----------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
- ----------------------------------
| -------------------------------------------------
|--|LincAm Properties, Inc. |
| |50% - Delaware - Real Estate Investment |
| -------------------------------------------------
| -------------------------------------------------
| | Lincoln Financial Group, Inc. |
|--| (formerly Lincoln National Sales Corporation) |
| | 100% - Indiana - Insurance Agency |
| -------------------------------------------------
| |
| | ------------------------------------
| |--| LNC Equity Sales Corporation |
| | | 100% - Indiana - Broker-Dealer |
| | ------------------------------------
| |
| | ----------------------------------------------------------------
| | | Corporate agencies: Lincoln Financial Group, Inc. ("LFG") |
| |--| has subsidiaries of which LFG owns from 80%-100% of the |
| | | common stock (see Attachment #1). These subsidiaries serve |
| | | as the corporate agency offices for the marketing and |
| | | servicing of products of The Lincoln National Life Insurance |
| | | Company. Each subsidiary's assets are less than 1% of the |
| | | total assets of the ultimate controlling person. |
| | ----------------------------------------------------------------
| |
| | --------------------------------------------------
| |--| Professional Financial Planning, Inc. |
| | 100% - Indiana - Financial Planning Services |
| --------------------------------------------------
|
| -----------------------------------------
|--| Lincoln Life Improved Housing, Inc. |
| | 100% - Indiana |
| -----------------------------------------
|
| -------------------------------------------------
|--| Lincoln National (China) Inc. |
| | 100% - Indiana - China Representative Office |
| -------------------------------------------------
| -------------------------------------------------
|--|Lincoln National (India) Inc. |
| |100% - Indiana - India Representative Office |
| -------------------------------------------------
| ----------------------------------------------
|--|Lincoln National Intermediaries, Inc. |
| |100% - Indiana - Reinsurance Intermediary |
|---------------------------------------------- |
| ----------------------------------------------
|--|Lincoln National Investments, Inc. |
| |(fka Lincoln National Investment Companies, |
| |Inc.) 100% - Indiana - Holding Company |
| ----------------------------------------------
| ----------------------------------------------
|--|Lincoln National Investment Companies, Inc. |
| |(fka Lincoln National Investment Companies, |
| |Inc.) 100% - Indiana - Holding Company |
| ----------------------------------------------
| | ------------------------------------
| |--|Delaware Management Holdings, Inc.|
| | |100% - Delaware - Holding Company |
| | ------------------------------------
| | | -------------------------------------
| | |--|DMH Corp. |
| | |100% - Delaware - Holding Company |
| | -------------------------------------
| | | ---------------------------------------
| | |--|Delaware Distributors, Inc. |
| | | |100% - Delaware - General Partner |
| | | ---------------------------------------
| |
3
<PAGE>
-------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
-------------------------------
|
| --------------------------------------------------
|__| Lincoln National Investment Companies, Inc. |
| | (fka Lincoln National Investment Companies, Inc.)|
| | 100% - Indiana - Holding Company |
| --------------------------------------------------
| |
| | --------------------------------------------
| |--| Lincoln National Investment Companies, Inc.|
| | | (fka Lincoln National Investments, Inc.) |
| | | 100% - Indiana - Holding Company |
| | --------------------------------------------
| | | -----------------------------------
| | |--| Delaware Management Holdings, Inc.|
| | | | 100% - Delaware - Holding, Company|
| | | -----------------------------------
| | | | ----------------------------------
| | | |--| DMH Corp. |
| | | | | 100% - Delaware - Holding Company|
| | | ----------------------------------
| | | | -----------------------------------
| | | |--| Delaware Distributors, Inc. |
| | | | | 100% - Delaware - General Partner |
| | | | -----------------------------------
| | | | -----------------------------------------------------
| | | |--| Delaware Distributors, L.P. |
| | | | | 100% - Delaware - Mutual Fund Distributor & Broker/ |
| | | | | Dealer |
| | | | -----------------------------------------------------
| | | | ---------------------------------------
| | | |--| Delaware International Advisers Ltd. |
| | | | | 81.1% - England - Investment Advisor |
| | | | ---------------------------------------
| | | | -------------------------------------------------
| | | |--| Delaware Capitol Management, Inc. |
| | | | | (formerly Delaware Investment Counselors, Inc.) |
| | | | | 100% - Delaware - Investment Advisor |
| | | | -------------------------------------------------
| | | | ------------------------------------------------
| | | |--| Delaware Investment & Retirement Services, Inc.|
| | | | | 100% - Delaware - Registered Transfer Agent |
| | | | ------------------------------------------------
| | | | -------------------------------------------
| | | |--| Delaware International Holdings, Ltd. |
| | | | | 100% - Bermuda - Investment Advisor |
| | | | -------------------------------------------
| | | | ---------------------------------------
| | | |--| Delaware Management Company, Inc. |
| | | | | 100% - Delaware - Investment Advisor |
| | | | ---------------------------------------
| | | | | --------------------------------------
| | | | |--| Founders Holdings, Inc. |
| | | | | 100% - Delaware - General Partner |
| | | | --------------------------------------
| | | | | ------------------------------------------
| | | | |--| Founders CBO, L.P. |
| | | | | 100% - Delaware - Investment Partnership |
| | | | ------------------------------------------
| | | | | ----------------------------------------------
| | | | |--| Founders CBO Corporation |
| | | | | 100% - Delaware - Co-Issuer with Founders CBO|
| | | | ----------------------------------------------
| | | | ------------------------------------
| | | |--|Delaware Management Trust Company |
| | | | |100% - Pennsylvania - Trust Service |
| | | | ------------------------------------
| | | | -----------------------------------------------------
| | | |--| Delaware Service Company, Inc. |
| | | | | 100% - Delaware - Shareholder Services & Transfer |
| | | | | Agent |
| | | | -----------------------------------------------------
| | ----------------------------------------------------------
| | |Lincoln Investment Management, Inc. |
| |--|(formerly Lincoln National Investment Management Company) |
| | | 100% - Illinois - Mutual Fund Manager and |
| | | Registered Investment Adviser |
----------------------------------------------------------
4
<PAGE>
- ----------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
- ----------------------------------
|
| -----------------------------------------------------
|--| Lincoln National Investment Companies, Inc. |
| | (fka Lincoln National Investment Companies, Inc.) |
| | 100% - Indiana - Holding Company |
| -----------------------------------------------------
| |
| | -----------------------------------------------------
| |--| Lincoln National Investment Companies, Inc. |
| | | (fka Lincoln National Investments, Inc.) |
| | | 100% - Indiana - Holding Company |
| | -----------------------------------------------------
| | --------------------------------------------------------------
| |--| Lincoln Investment Management, Inc. |
| | | (formerly Lincoln National Investment Management Company) |
| | | 100% - Illinois - Mutual Fund Manager and |
| | | Registered Investment Adviser |
| | --------------------------------------------------------------
| | | ------------------------------------------------------------
| | | | Lincoln National Mezzanine Corporation |
| | |--| 100% - Indiana - General Partner for Mezzanine Financing |
| | | Limited Partnership |
| | ------------------------------------------------------------
| | | ------------------------------------------------------------
| | |--| Lincoln National Mezzanine Fund, L.P. |
| | | 50% - Delaware - Mezzanine Financing Limited Partnership |
| | ------------------------------------------------------------
| -----------------------------------------------------
| | Lincoln National Investments, Inc. |
|--| (fka Lincoln National Investment Companies, Inc.) |
| | 100% - Indiana - Holding Company |
| -----------------------------------------------------
| | -----------------------------------------------------
| |--| Lincoln National Investment Companies, Inc. |
| | | (fka Lincoln National Investment Companies, Inc.) |
| | | 100% - Indiana - Holding Company |
| | -----------------------------------------------------
| | | ----------------------------------------------
| | |--| Lynch & Mayer, Inc. |
| | | | 100% - Indiana - Investment Adviser |
| | | ----------------------------------------------
| | | | -------------------------------------------
| | | |--| Lynch & Mayer Asia, Inc. |
| | | | | 100% - Delaware - Investment Management |
| | | | -------------------------------------------
| | | | ---------------------------------------
| | | |--| Lynch & Mayer Securities Corp. |
| | | | | 100% - Delaware - Securities Broker |
| | | | ---------------------------------------
| | | -------------------------------------------------------
| | |--| Vantage Global Advisors, Inc. |
| | | | (formerly Modern Portfolio Theory Associates, Inc.) |
| | | | 100% - Delaware - Investment Adviser |
| | | -------------------------------------------------------
| -----------------------------------------------
|--| The Lincoln National Life Insurance Company |
| | 100% - Indiana |
| -----------------------------------------------
| | ----------------------------------------------
| |--| First Penn-Pacific Life Insurance Company |
| | | 100% - Indiana |
| | ----------------------------------------------
| | -----------------------------------------------
| | | Lincoln Life & Annuity Company of New York |
| |--| 100% - New York |
| | -----------------------------------------------
| | --------------------------------------------------
| | | Lincoln National Aggressive Growth Fund, Inc.+ |
| |--| 100% - Maryland - Mutual Fund |
| | --------------------------------------------------
| |
| | -------------------------------------
| | | Lincoln National Bond Fund, Inc.+ |
| |--| 100% - Maryland - Mutual Fund |
| | -------------------------------------
5
<PAGE>
- ----------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
- ----------------------------------
|
| -------------------------------------------------
|--| The Lincoln National Life Insurance Company |
| | 100% - Indiana |
| -------------------------------------------------
| | ------------------------------------------------------
| |--| Lincoln National Capital Appreciation Fund, Inc.+ |
| | | 100% - Maryland - Mutual Fund |
| | ------------------------------------------------------
| | ----------------------------------------------
| |--| Lincoln National Equity-Income Fund, Inc.+ |
| | | 100% - Maryland - Mutual Fund |
| | ----------------------------------------------
| | ---------------------------------------------------------
| |--| Lincoln National Global Asset Allocation Fund, Inc.+ |
| | | (formerly Lincoln National Putnam Master Fund, Inc.) |
| | | 100% - Maryland - Mutual Fund |
| | ---------------------------------------------------------
| | ---------------------------------------------------
| |--| Lincoln National Growth and Income Fund, Inc.+ |
| | | (formerly Lincoln National Growth Fund, Inc.) |
| | | 100% - Maryland - Mutual Fund |
| | ---------------------------------------------------
| | ----------------------------------------------------------
| |--| Lincoln National Health & Casualty Insurance Company |
| | | 100% - Indiana |
| | ----------------------------------------------------------
| | -----------------------------------------------
| |--| Lincoln National International Fund, Inc.+ |
| | | 100% - Maryland - Mutual Fund |
| | -----------------------------------------------
| |
| | -----------------------------------------
| |--| Lincoln National Managed Fund, Inc.+ |
| | | 100% - Maryland - Mutual Fund |
| | -----------------------------------------
| | ----------------------------------------------
| |--| Lincoln National Money Market Fund, Inc.+ |
| | | 100% - Maryland - Mutual Fund |
| | ----------------------------------------------
| | -------------------------------------------------
| |--| Lincoln National Social Awareness Fund, Inc.+ |
| | | 100% - Maryland - Mutual Fund |
| | -------------------------------------------------
| | -------------------------------------------------------
| |--| Lincoln National Special Opportunities Fund, Inc.+ |
| | | 100% - Maryland - Mutual Fund |
| | -------------------------------------------------------
| | -----------------------------------------
| |--| Lincoln National Reassurance Company |
| | 100% - Indiana - Life Insurance |
| -----------------------------------------
| | -------------------------------------------------
| |--| Special Pooled Risk Administrators, Inc. |
| | 100% - New Jersey - Catastrophe Reinsurance |
| | Pool Administrator |
| -------------------------------------------------
| -----------------------------------------------------------
|--| Lincoln National Management Services, Inc. |
| | 100% - Indiana - Underwriting and Management Services |
| -----------------------------------------------------------
|
| -----------------------------------------
|--| Lincoln National Realty Corporation |
| | 100% - Indiana - Real Estate |
| -----------------------------------------
| -------------------------------------------------------------
|--| Lincoln National Reinsurance Company (Barbados) Limited |
| | 100% - Barbados |
| -------------------------------------------------------------
6
<PAGE>
- ----------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
- ----------------------------------
| ------------------------------------------------
|--| Lincoln National Reinsurance Company Limited |
| | (formerly Heritage Reinsurance, Ltd.) |
| | 100% ** - Bermuda |
| ------------------------------------------------
| |
| | ------------------------------------------
| | --| Lincoln European Reinsurance Company |
| | | 100% - Belgium |
| | ------------------------------------------
| |
| | -----------------------------------------------------------
| |--| Lincoln National Underwriting Serevices, Ltd. |
| | | 90% - England/Wales - Life/Accident/Health Underwriter |
| | | (Remaining 10% owned by Old Fort Ins. Co. Ltd.) |
| | -----------------------------------------------------------
| |
| | ---------------------------------------------------------
| | | Servicios de Evaluacion de Riesgo, S. de R.L. de C.V. |
| |--| 51% - Mexico - Reinsurance Underwriter |
| | | (Remaining 49% owned by Lincoln National Corp.) |
| ---------------------------------------------------------
|
| ---------------------------------------------
|--|Lincoln National Risk Management, Inc. |
| | 100% - Indiana - Risk Management Services |
| ---------------------------------------------
|
| ------------------------------------------------
|--| Lincoln National Structured Settlement, Inc. |
| | 100% - New Jersey |
| ------------------------------------------------
|
| ------------------------------------------
|--| Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
| ------------------------------------------
| |
| | ------------------------------------------
| |--| Allied Westminster & Company Limited |
| | | 100% - England/Wales - Sales Services |
| | ------------------------------------------
| |
| | -----------------------------------
| |--| Cannon Fund Managers Limited |
| | | 100% - England/Wales - Inactive |
| | -----------------------------------
| |
| | --------------------------------------------------------
| |--| Culverin Property Services Limited |
| | | 100% - England/Wales - Property Development Services |
| | | -----------------------------------------------------
| |
| | -----------------------------------------------------------
| |--| HUTM Limited |
| | | 100% - England/Wales - Unit Trust Management (Inactive) |
| | -----------------------------------------------------------
| |
| | -------------------------------------------
| |--| ILI Supplies Limited |
| | | 100% - England/Wales - Computer Leasing |
| | -------------------------------------------
| |
| | -----------------------------------------
| |--| Laurentian Financial Group PLC |
| | | 100% - England/Wales - Holding Company |
| | ------------------------------------------
| | | ---------------------------------------------------
| | |--| Lincoln Financial Advisers Limited |
| | | | (formerly: Laurentian Financial Advisers Ltd.) |
| | | | 100% - England/Wales - Sales Company |
| | | ---------------------------------------------------
| | | ------------------------------------------------
| | |--| Lincoln Investment Management Limited |
| | | | (formerly: Laurentian Fund Management Ltd.) |
| | | | 100% - England/Wales - Investment Management |
| | | ------------------------------------------------
| | | --------------------------------------------------------------
| | |--| Lincoln Independent Limited |
| | | | (formerly: Laurentian Independent Financial Planning Ltd.) |
| | | | 100% - England/Wales - Independent Financial Adviser |
| | | --------------------------------------------------------------
7
<PAGE>
- ----------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
- ----------------------------------
|
| -------------------------------------------
| | Lincoln National (UK) PLC |
|--| 100% - England/Wales - Holding Company |
| -------------------------------------------
| |
| | ------------------------------------------
| |--| Laurentian Financial Group PLC |
| | | 100% - England/Wales - Holding Company |
| | ------------------------------------------
| | | -----------------------------------------
| | |--| Laurentian Life PLC |
| | | | 100% - England/Wales - Life Insurance |
| | | -----------------------------------------
| | | |
| | | | -----------------------------------------
| | | |--|Barnwood Property Group Limited |
| | | | |100% - England/Wales - Holding Company |
| | | | -----------------------------------------
| | | | |
| | | | | ---------------------------------------------
| | | | |--| Barnwood Developments Limited |
| | | | | | 100% England/Wales - Property Development |
| | | | | ---------------------------------------------
| | | | | ----------------------------------------------
| | | | |--| Barnwood Properties Limited |
| | | | | 100% - England/Wales - Property Investment |
| | | | ----------------------------------------------
| | | | --------------------------------------------------------
| | | |--|IMPCO Properties Limited |
| | | |100% - England/Wales - Property Investment (Inactive) |
| | | --------------------------------------------------------
| | | ---------------------------------------------
| | |--| Laurentian Management Services Limited |
| | | | 100% - England/Wales - Management Services|
| | | ---------------------------------------------
| | | | --------------------------------------------------
| | | |--|Laurit Limited |
| | | |100% - England/Wales - Data Processing Systems |
| | | --------------------------------------------------
| | | -----------------------------------------
| | |--| Laurentian Milldon Limited |
| | | | 100% - England/Wales - Sales Company |
| | | -----------------------------------------
| | | ------------------------------------------------
| | |--| Laurentian Unit Trust Management Limited |
| | | | 100% - England/Wales - Unit Trust Management |
| | | ------------------------------------------------
| | | | -------------------------------------------
| | | |--| LUTM Nominees Limited |
| | | | 100% - England/Wales - Nominee Services |
| | | -------------------------------------------
| | | ------------------------------------------------------------
| | |--| Laurtrust Limited |
| | | | 100% - England/Wales - Pension Scheme Trustee (Inactive) |
| | | ------------------------------------------------------------
| | | -----------------------------------------
| | |--| The Money Club Direct Company Limited |
| | | 100% - Dormant |
| | -----------------------------------------
| |
| | ------------------------------------------
| |--| Liberty Life Assurance Limited |
| | | 100% - England/Wales - Inactive |
| | ------------------------------------------
| | -------------------------------------------------
| |--| Liberty Life Pension Trustee Company Limited |
| | | 100% - England/Wales - Corporate Pension Fund |
| | -------------------------------------------------
| | --------------------------------------------
| |--| Liberty Press Limited |
| | | 100% - England/Wales - Printing Services |
| | --------------------------------------------
8
<PAGE>
- ----------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
- ----------------------------------
|
|
| ------------------------------------------
|--|Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
| ------------------------------------------
| |
| | ----------------------------------------------
| |--|Lincoln Assurance Limited |
| | | 100% ** - England/Wales - Life Assurance |
| | ----------------------------------------------
| |
| | ---------------------------------------------------
| |--| Lincoln Fund Managers Limited |
| | | 100% - England/Wales - Unit Trust Management |
| | ---------------------------------------------------
| |
| | ------------------------------------------------------
| |--| Lincoln Insurance Services Ltd. |
| | | 100% - Holding Company |
| | ------------------------------------------------------
| | |
| | | -----------------------------------
| | |--| British National Life Sales Ltd.|
| | | | 100% - Inactive |
| | | -----------------------------------
| | |
| | | -------------------------------------------------
| | |--| BNL Trustees Limited |
| | | | 100% - England/Wales - Corporate Pension Fund |
| | | -------------------------------------------------
| | |
| | | ---------------------------------------
| | |--| Chapel Ash Financial Services Ltd. |
| | | | 100% - Direct Insurance Sales |
| | | ---------------------------------------
| | |
| | | ------------------------------------------------
| | | | Lincoln General Insurance Co. Ltd. |
| | | | 100% - Accident & Health Insurance |
| | | ------------------------------------------------
| | |
| | | ----------------------------
| | |--| P.N. Kemp-Gee & Co. Ltd. |
| | | 100% - Inactive |
| | ----------------------------
| |
| | ----------------------------------------------------
| |--| Lincoln National Training Services Limited |
| | | 100% - England/Wales - Training Company |
| | ----------------------------------------------------
| |
| | ---------------------------------------------------
| |--| Lincoln Pension Trustees Limited |
| | | 100% - England/Wales - Corporate Pension Fund |
| | ---------------------------------------------------
| |
| | -----------------------------------------------------------
| |--| LIV Limited (formerly Lincoln Investment Management Ltd.)|
| | | 100% - England/Wales - Investment Management Services |
| | -----------------------------------------------------------
| | |
| | | -------------------------------------------------
| | |--| CL CR Management Ltd. |
| | | 50% - England/Wales - Administrative Services |
| | -------------------------------------------------
| |
| | ---------------------------------------------------
| |--| LN Management Limited |
| | | 100% - England/Wales - Administrative Services |
| | ----------------------------------------------------
| | |
| | | -------------------------------------
| | |--| UK Mortgage Securities Limited |
| | | 100% - England/Wales - Inactive |
| | -------------------------------------
| |
9
<PAGE>
- ----------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
- ----------------------------------
|
| -------------------------------------------
|--| Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
| -------------------------------------------
| |
| | --------------------------------------------
| |--| LN Securities Limited |
| | | 100% - England/Wales - Nominee Company |
| | --------------------------------------------
| |
| | -----------------------------------------------
| |--| Niloda Limited |
| | 100% - England/Wales - Investment Company |
| -----------------------------------------------
|
| ----------------------------------------------------
| | Linsco Reinsurance Company |
|--| (formerly Lincoln National Reinsurance Company) |
| | 100% - Indiana - Property/Casualty |
| ----------------------------------------------------
|
| ------------------------------------
|--| Old Fort Insurance Company, Ltd. |
| | 100% ** - Bermuda |
| ------------------------------------
| |
| | -----------------------------------------------------------
| | | Lincoln National Underwriting Services, Ltd. |
| |--| 10% - England/Wales - Life/Accident/Health Underwriter |
| | (Remaining 90% owned by Lincoln Natl. Reinsurance Co.) |
| -----------------------------------------------------------
|
| ------------------------------------------------------------
| | Servicios de Evaluacion de Riesgos, S. de R.L. de C.V. |
|--| 49% - Mexico - Reinsurance Underwriter |
| | (Remaining 51% owned by Lincoln Natl. Reinsurance Co.) |
| ------------------------------------------------------------
|
| ---------------------------------------------
|--| Underwriters & Management Services, Inc. |
| 100% - Indiana - Underwriting Services |
---------------------------------------------
Footnotes:
- ----------
* The funds contributed by the Underwriters were, and continue to be subject
to trust agreements between American States Insurance Company, the grantor,
and each Underwriter, as trustee.
** Except for director-qualifying shares
# Lincoln National Corporation has subscribed for and paid for 100 shares of
Common Stock (with a par value of $1.00 per share) at a price of $10 per
share, as part of the organizing of the fund. As such stock is further
sold, the ownership of voting securities by Lincoln National Corporation
will decline and fluctuate.
+ Ownership of the shares in the eleven funds is on behalf of variable life
and/or annuity contract owners who own interests in Lincoln Life Separate
Accounts established under IC 27-1-5-1, Class 1. These are: Variable Annuity
Accounts A, C, E, H and L; Variable Universal Life Accounts D, F, G, J, and K.
For Separate Account A [a/k/a Fund A] (Group) and Separate Account A [a/k/a
Fund A] (Individual), Lincoln Life is the "insurance company", as that term is
defined in Investment Company Act Form N-3.
For Separate Accounts C,E,H and L the respective Separate Account is the
"Registrant" and Lincoln Life is the "Depositor", as those terms are defined in
Investment Company Act Form N-4.
For Separate Accounts D,F,G,J and K the respective Separate Account is the "unit
investment trust" or "trust", and Lincoln Life is the "Depositor", as those
terms are defined in Investment Company Act Form N-8B-2.
10
<PAGE>
ATTACHMENT #1
LINCOLN FINANCIAL GROUP, INC.
CORPORATE AGENCY SUBSIDIARIES
1) Lincoln Financial Group, Inc. (AL)
2) Lincoln Southwest Financial Group, Inc. (Phoenix, AZ)
3) Lincoln Financial and Insurance Services Corporation (Walnut Creek, CA)
3a) California Fringe Benefit and Insurance Marketing Corporation
DBA/California Fringe Benefit Company (Walnut Creek, CA)
4) Colorado-Lincoln Financial Group, Inc. (Denver, CO)
5) Lincoln National Financial Services, Inc. (Lake Worth, FL)
6) CMP Financial Services, Inc. (Chicago, IL)
7) Lincoln Financial Group of Northern Indiana, Inc. (Fort Wayne, IN)
8) Financial Planning Partners, Ltd. (Mission, KS)
9) The Lincoln National Financial Group of Louisiana, Inc. (Shreveport, LA)
10) Benefits Marketing Group, Inc. (D.C. & Chevy Chase, MD)
11) Lincoln National Sales Corporation of Maryland (Baltimore, MD)
(formerly: Morgan Financial Group, Inc.)
12) Lincoln Financial Services and Insurance Brokerage of New England, Inc.
(formerly: Lincoln National of New England Insurance Agency, Inc.)
(Worcester, MA)
13) Lincoln Financial Group of Michigan, Inc. (Troy, MI)
13a) Financial Consultants of Michigan, Inc. (Troy, MI)
14) Lincoln Financial Group of Missouri, Inc. (formerly: John J. Moore &
Associates, Inc.) (St. Louis, MO)
15) Beardslee & Associates, Inc. (Clifton, NJ)
16) Lincoln Financial Group, Inc. (formerly: Resources/Financial, Inc.)
(Albuquerque, NM)
17) Lincoln Cascades, Inc. (Portland, OR)
18) Lincoln Financial Services, Inc. (Pittsburgh, PA)
19) Lincoln National Financial Group of Philadelphia, Inc. (Philadelphia, PA)
20) Lincoln Financial Group, Inc. (Salt Lake City, (UT)
11
<PAGE>
Item 27. Number of Contractholders
As of March 31, 1997, Registrant had 329 Contractholders.
Item 28. Indemnification
Under the Participation Agreements entered into between Lincoln Life and the
Dreyfus Life & Annuity Index Fund, Inc., Dreyfus Variable Investment Fund and
Dreyfus Corporation, Variable Insurance Products Funds I and II and Fidelity
Distributors Corporation, Twentieth Century Management Company, Acacia Capital
Corporation, and T. Rowe Price (the "Funds"), Lincoln Life and its directors,
officers, employees, agents and control persons have been indemnified by the
Funds against any losses, claims or liabilities that arise out of any untrue
statement or alleged untrue statement or omission of a material fact in the
Funds' registration statements, prospectuses or sales literature. In addition,
the Funds will indemnify Lincoln Life against any liability, loss, damages,
costs or expenses which Lincoln Life may incur as a result of the Funds'
incorrect calculations, incorrect reporting and/or untimely reporting of the
Funds' net asset values, dividend rates or capital gain distribution rates.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, 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 Securities Act
of 1933 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 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 Securities
Act of 1933 and will be governed by the final adjudication of such issue.
Item 29. Principal Underwriter
(a) LNC Equity Sales Corporation also acts as the principal
underwriter for Lincoln Life & Annuity Variable Annuity Account
L, the VA-I Separate Account of UNUM Life Insurance Company of
America, and the VA-I Separate Account of First UNUM Life
Insurance Company.
(b)(1) The following table sets forth certain information regarding
the officers and directors of LNC Equity Sales Corporation:
C-4
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITIONS AND OFFICERS
- ----------------
WITH LNC EQUITY SALES
---------------------
<S> <C>
J. Michael Hemp* President and Director
Priscilla S. Brown* Chief Operating Officer, Sales and
Marketing and Director
John M. Behrendt* Vice President and Director
Richard C. Boyles*** Chief Financial Officer and
Administrative Officer
Kenneth Ehinger*** Chief Operating Officer and
Director
Gary D. Giller**** Director
Janet C. Whitney** Vice President and Treasurer
C. Suzanne Womack** Secretary
</TABLE>
* Principal business address of each person is 1300 S. Clinton
Street, Fort Wayne, Indiana 46802.
** Principal business address of each person is 200 East Berry
Street, Fort Wayne, Indiana 46802-2706.
*** Principal business address of each person is 3811 Illinois
Road, Suite 205, Fort Wayne, Indiana 46804-1202.
**** 7650 Rivers Edge Dr., Suite 250, Columbus, OH 43235.
c)
<TABLE>
<CAPTION>
Name of Net Underwriting
Principal Discounts and Compensation Brokerage
Underwriter Commissions on Redemption Commissions Compensation
- ----------- ---------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
LNC Equity $0 N/A N/A N/A
Sales Corporation
</TABLE>
Item 30. Location of Accounts and Records
The records required to be maintained by Section 31(a) of the Investment Company
Act of 1940 and Rules 31a-1 to 31a-3 thereunder are maintained by Lincoln Life
at 82 Running Hill Road, South Portland, ME 04101.
Item 31. Management Services
None
Item 32. Undertakings and Representations
The Registrant hereby undertakes:
(a) to file a post-effective amendment to this registration statement as
frequently as is necessary to ensure that the audited financial statements
in this registration statement are never more than 16 months old for so
long as
C-5
<PAGE>
payments under the variable annuity contracts may be accepted, unless
otherwise permitted.
(b) to include either (1) as part of any application to purchase a 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 similar written
communication affixed to or included in the prospectus that the applicant
can remove to send for a Statement of Additional Information.
(c) 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.
403(b) ANNUITIES
----------------
The Registrant intends to rely on the no-action response dated November 28,
1988, from Ms. Angela C. Goelzer of the Commission staff to the American Council
of Life Insurance concerning the redeemability of Section 403(b) annuity
contracts and the Registrant has complied with the provisions of paragraphs (1)-
(4) thereof.
TEXAS ORP
---------
The Registrant intends to offer Contracts to Participants in the Texas
Optional Retirement Program. In connection with that offering, Rule 6c-7 of the
Investment Company Act of 1940 is being relied upon and paragraphs (a)-(d) of
that Section will be complied with.
FEES AND CHARGES
----------------
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.
C-6
<PAGE>
SIGNATURES
(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 Amendment and has caused this Amendment to
the Registration Statement to be signed on its behalf, in the City of Fort
Wayne, and State of Indiana on this 28th day of April, 1997.
Lincoln National Variable Annuity Account L
(Group Variable Annuity I) (Registrant)
By: /s/ Stephen H. Lewis
--------------------------
Stephen H. Lewis, Senior Vice President
(Name of Officer of Depositor) (Title)
The Lincoln National Life Insurance Company
(Depositor)
By: /s/ Jon A. Boscia
-----------------
Jon A. Boscia, Chief Executive Officer
(Signature and Title)
(b) As required by the Securities Act of 1933, this Amendment to the
Registration Statement has been signed for the Depositor by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Jon A. Boscia President, Chief Executive April 28, 1997
- ---------------------------- Officer and Director
Jon A. Boscia (Principal Accounting Officer)
* Director April 28, 1997
- ----------------------------
Ian M. Rolland
* Vice President, Assistant April 28, 1997
- ---------------------------- Treasurer and Controller
O. Douglas Worthington (Principal Accounting Officer)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/ * Vice President, Chief Financial April 28, 1997
- ---------------------------- Officer and Assistant Treasurer
Keith J. Ryan (Principal Financial Officer)
Executive Vice President April 28, 1997
- ---------------------------- and Director
Lawrence T. Rowland
* Director April 28, 1997
- ----------------------------
Richard C. Vaughan
* Director April 28, 1997
- ----------------------------
H. Thomas McMeekin
* Executive Vice President April 28, 1997
- ---------------------------- and Director
Jack D. Hunter
</TABLE>
* By /s/ Jeremy Sachs, attorney-in-fact, pursuant to a Power of Attorney filed
----------------
with the initial Registration Statement.
<PAGE>
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Independent Auditors"
in the Post Effective Amendment No. 6 to the Registration Statement (Form N-4,
No. 333-4999) and to the related Statement of Additional Information appearing
therein and pertaining to Lincoln National Variable Annuity Account L, and to
the use therein of our reports dated (a) February 6, 1997, with respect to the
statutory-basis financial statements of The Lincoln National Life Insurance
Company for each of the three years in the period ended December 31, 1996; (b)
February 7, 1996, with respect to the consolidated financial statements of The
Lincoln National Life Insurance Company for each of the three years in the
period ended December 31, 1995; and (c) April 1, 1997, with respect to the
financial statements of Lincoln National Variable Annuity Account L.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
April 24, 1997
<PAGE>
<TABLE>
<CAPTION>
Non-NY -VAI
One
Quarter
Small Cap Index Growth II Balanced Growth I Asst. Mgr. Equity Soc. Resp. Interntl
Income
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fund Value \1,021.97 \1,078.99 \908.26 \1,033.99 \1,017.55 \1,057.55 \1,063.19 \1,033.03 \1,043.60
Fee \0.38 \0.39 \0.36 \0.38 \0.38 \0.39 \0.39 \0.38 \0.38
Surr Charge \51.08 \53.93 \45.40 \51.68 \50.86 \52.86 \53.14 \51.63 \52.16
Final Value \970.51 \1,024.67 \862.51 \981.92 \966.31 \1,004.31 \1,009.66 \981.02 \991.06
Annual Return -2.949% 2.467% -13.749% -1.808% -3.369% 0.431% 0.966% -1.898% -0.894%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Calculation of Previous Quarter's
Return
Final Value Quarter One = 1,000 * (31-Dec-96 Unit Value/30-Sep-96 Unit Value)
- - Annual Fee - Surrendrer Charge
Annual Return = Final Value Quarter One/1,000 - 1
<TABLE>
<CAPTION>
Date Small Cap Index Growth II Balanced Growth I Asst. Equity Soc. Interntl
Mgr. Income Resp.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
09/30/96 14.957500 21.043200 16.199400 15.679900 22.819400 16.327100 14.851400 13.767400 11.762700
- ---------------------------------------------------------------------------------------------------------------------------------
12/31/96 15.286100 22.705400 14.713300 16.212800 23.219800 17.266800 15.789800 14.222200 12.275600
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year To
Date
Small Cap Index Growth II Balanced Growth I Asst. Equity Soc. Interntl
Mgr. Income Resp.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Fund Value \1,151.82 \1,210.54 \944.13 \1,108.29 \1,133.18 \1,132.17 \1,129.00 \1,112.61 \1,133.14
Fee \0.40 \0.41 \0.36 \0.39 \0.40 \0.40 \0.40 \0.40 \0.40
Surr Charge \57.57 \60.51 \47.19 \55.39 \56.64 \56.59 \56.43 \55.61 \56.64
Final Value \1,093.84 \1,149.61 \896.58 \1,052.50 \1,076.14 \1,075.19 \1,072.18 \1,056.61 \1,076.10
Annual Return 9.384% 14.961% -10.342% 5.250% 7.614% 7.519% 7.218% 5.661% 7.610%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Calculation of Year to Date Return
Final Value Year to Date= 1,000 * (31-Dec-96 Unit Value/31-Dec-95 Unit value)
- - Annual Fee - Surrender Charge
Annual Return = Final Value Year to Date/1,000
- 1
<TABLE>
<CAPTION>
Date Small Cap Index Growth II Balanced Growth I Asst. Equity Soc. Interntl
Mgr. Income Resp.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
12/31/95 13.271300 18.756500 15.584000 14.628600 20.490900 15.251000 13.985600 12.782700 10.833300
- ----------------------------------------------------------------------------------------------------------------------------------
12/31/96 15.286100 22.705400 14.713300 16.212800 23.219800 17.266800 15.789800 14.222200 12.275600
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Separate Account C - Standardized 1 Year Returns
One Year Returns Period Ending 12/31/96
<TABLE>
<CAPTION>
Small Cap Index Growth II Balanced Growth I Asst. Equity Soc. Interntl
Mgr. Income Resp.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Fund Value \1,151.82 \1,210.54 \944.13 \1,108.29 \1,133.18 \1,132.17 \1,129.00 \1,112.61 \1,133.14
Fee \0.40 \0.41 \0.36 \0.39 \0.40 \0.40 \0.40 \0.40 \0.40
Surr Charge \57.57 \60.51 \47.19 \55.39 \56.64 \56.59 \56.43 \55.61 \56.64
Final Value \1,093.84 \1,149.61 \896.58 \1,052.50 \1,076.14 \1,075.19 \1,072.18 \1,056.61 \1,076.10
Annual Return 9.384% 14.961% -10.342% 5.250% 7.614% 7.519% 7.218% 5.661% 7.610%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Calculation of Annual
Return
Final Value = 1,000 * (31-Dec-96 Unit Value/31-Dec-95 Unit value)
- - Annual Fee - Surrender Charge
Annual Return = Final Value/1,000 - 1
<TABLE>
<CAPTION>
Date Small Cap Index Growth II Balanced Growth I Asst. Equity Soc. Interntl
Mgr. Income Resp.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
12/31/95 13.271300 18.756500 15.584000 14.628600 20.490900 15.251000 13.985600 12.782700 10.833300
- ---------------------------------------------------------------------------------------------------------------------------------
12/31/96 15.286100 22.705400 14.713300 16.212800 23.219800 17.266800 15.789800 14.222200 12.275600
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THREE YEAR RETURNS:
<TABLE>
<CAPTION>
Small Cap Index Growth II Balanced Growth I Asst. Equity Soc. Interntl
Mgr. Income Resp.
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One Year \1,064.61 \996.75 \976.47 \994.05 \987.84 \927.85 \1,057.85 \956.08
Fee \0.48 \0.46 \0.46 \0.46 \0.46 \0.44 \0.47 \0.45
Final Value \1,064.14 \996.29 \976.02 \993.59 \987.38 \927.41 \1,057.37 \955.63
Two Year \1,360.31 \1,346.39 \1,264.22 \1,189.18 \1,320.58 \1,071.68 \1,411.33 \1,225.33
Fee \0.50 \0.49 \0.47 \0.45 \0.48 \0.42 \0.51 \0.45
Final Value \1,359.81 \1,345.90 \1,263.76 \1,188.73 \1,320.10 \1,071.26 \1,410.82 \1,224.88
Three Year \1,566.25 \1,629.26 \1,193.15 \1,317.46 \1,495.90 \1,212.86 \1,592.82 \1,362.81
Fee \0.55 \0.56 \0.46 \0.47 \0.53 \0.43 \0.56 \0.48
Surr Charge \78.29 \81.44 \59.63 \65.85 \74.77 \60.62 \79.61 \68.12
Final Value \1,487.42 \1,547.27 \1,133.05 \1,251.14 \1,420.61 \1,151.81 \1,512.65 \1,294.21
Annual Return 14.150% 15.662% 4.252% 7.755% 12.415% 4.824% 14.792% 8.977% NA
=================================================================================================================================
</TABLE>
Calculation of Three Year Return
Final Value Year One = 1,000 * (31-Dec-94 Unit Value/ 31-Dec-93 Unit Value)
- - Annual Fee Year One
Final Value Year Two = 1,000 * (31-Dec-95 Unit Value/ 31-Dec-94 Unit Value)
- - Annual Fee Year Two
Final Value Year Three = 1,000 * (31-Dec-96 Unit Value/ 31-Dec-95 Unit Value)
- - Annual Fee Year Three - Surrender Charge
Annual Return = (Final Value Year Five/1000) *
(1/3) - 1
<TABLE>
<CAPTION>
Date Small Cap Index Growth II Balanced Growth I Asst. Equity Soc.
Mgr. Income Resp.
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/93 9.751704 13.924500 12.321200 12.295700 15.509400 14.224100 9.905037 10.427126 0.000000
- ---------------------------------------------------------------------------------------------------------------------------------
12/31/94 10.381800 13.879200 12.031300 12.222500 15.320800 13.197900 10.478000 9.969200 9.862200
- ---------------------------------------------------------------------------------------------------------------------------------
12/31/95 13.271300 18.756500 15.584000 14.628600 20.490900 15.251000 13.985600 12.782700 10.833300
- ---------------------------------------------------------------------------------------------------------------------------------
12/31/96 15.286100 22.705400 14.713300 16.212800 23.219800 17.266800 15.789800 14.222200 12.275600
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Separate Account L - Standardized 5 Year Returns
FIVE YEAR RETURNS PERIOD ENDING 12/31/96:
<TABLE>
<CAPTION>
Small Cap Index Growth II Balanced Growth I Asst. Equity Soc.
Mgr. Income Resp.
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One Year \1,693.69 \1,056.11 \974.77 \928.26 \1,080.04 \1,105.35 \1,154.81 \1,063.18
Fee \0.77 \0.58 \0.56 \0.55 \0.59 \0.60 \0.61 \0.59
Final Value \1,692.92 \1,055.53 \974.21 \927.71 \1,079.45 \1,104.75 \1,154.19 \1,062.59
Two Year \2,812.75 \1,140.19 \1,061.79 \986.90 \1,273.08 \1,321.25 \1,348.96 \1,133.82
Fee \1.15 \0.56 \0.52 \0.49 \0.60 \0.62 \0.64 \0.56
Final Value \2,811.59 \1,139.63 \1,061.27 \986.41 \1,272.48 \1,320.63 \1,348.32 \1,133.26
Three Year \2,993.26 \1,135.92 \1,036.30 \980.54 \1,257.00 \1,225.35 \1,426.31 \1,083.49
Fee \1.34 \0.53 \0.48 \0.45 \0.58 \0.59 \0.64 \0.51
Final Value \2,991.92 \1,135.39 \1,035.81 \980.09 \1,256.42 \1,224.76 \1,425.67 \1,082.98
Four Year \3,824.64 \1,534.38 \1,341.68 \1,173.03 \1,680.41 \1,415.29 \1,902.92 \1,388.62
Fee \1.42 \0.56 \0.49 \0.45 \0.61 \0.55 \0.69 \0.51
Final Value \3,823.23 \1,533.83 \1,341.18 \1,172.58 \1,679.80 \1,414.74 \1,902.23 \1,388.10
Five Year \4,403.65 \1,856.75 \1,266.25 \1,299.56 \1,903.51 \1,601.74 \2,147.63 \1,544.42
Fee \1.54 \0.64 \0.49 \0.46 \0.67 \0.56 \0.76 \0.55
Surr Charge \220.11 \92.81 \63.29 \64.95 \95.14 \80.06 \107.34 \77.19
Final Value \4,182.01 \1,763.31 \1,202.47 \1,234.14 \1,807.69 \1,521.11 \2,039.53 \1,466.68
Annual Return 33.130% 12.012% 3.756% 4.297% 12.571% 8.751% 15.320% 7.961%
===========================================================================================================================
</TABLE>
Calculation of Five Year Return
Final Value Year One = 1,000 * (31-Dec-92 Unit Value/ 31-Dec-91 Unit Value)
- - Annual Fee Year One
Final Value Year Two = 1,000 * (31-Dec-93 Unit Value/ 31-Dec-92 Unit Value)
- - Annual Fee Year Two
Final Value Year Three = 1,000 * (31-Dec-94 Unit Value/ 31-Dec-93 Unit Value)
- - Annual Fee Year Three
Final Value Year Four = 1,000 * (31-Dec-95 Unit Value/ 31-Dec-94 Unit Value)
- - Annual Fee Year Four
Final Value Year Five = 1,000 * (31-Dec-96 Unit Value/ 31-Dec-95 Unit Value)
- - Annual Fee Year Five - Surrender Charge
Annual Return = (Final Value Year Five/1000) *
(1/5) - 1
<TABLE>
<CAPTION>
Date Small Cap Index Growth II Balanced Growth I Asst. Equity Soc. Interntl
Mgr. Income Resp.
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/91 3.465400 12.205700 11.597500 12.451500 12.175900 10.759800 7.338842 9.191348 0.000000
- ---------------------------------------------------------------------------------------------------------------------------------
12/31/92 5.869315 12.890600 11.304900 11.558200 13.150500 11.893300 8.474945 9.772041 0.000000
- ---------------------------------------------------------------------------------------------------------------------------------
12/31/93 9.751704 13.924500 12.321200 12.295700 15.509400 14.224100 9.905037 10.427126 0.000000
- ---------------------------------------------------------------------------------------------------------------------------------
12/31/94 10.381800 13.879200 12.031300 12.222500 15.320800 13.197900 10.478000 9.969200 9.862200
- ---------------------------------------------------------------------------------------------------------------------------------
12/31/95 13.271300 18.756500 15.584000 14.628600 20.490900 15.251000 13.985600 12.782700 10.833300
- ---------------------------------------------------------------------------------------------------------------------------------
12/31/96 15.286100 22.705400 14.713300 16.212800 23.219800 17.266800 15.789800 14.222200 12.275600
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Separate Account L - Standardized 10
Year
10 Year Returns for Period Ending
12/31/1996:
<TABLE>
<CAPTION>
Growth I Equity Soc.
Income Resp.
- ---------------------------------------------------------------
<S> <C> <C> <C>
Year One \1,024.20 \976.81 \1,055.29
Fee \0.97 \0.95 \0.98
Final Value \1,023.23 \975.86 \1,054.30
Year Two \1,168.48 \1,183.12 \1,162.86
Fee \0.95 \0.93 \0.96
Final Value \1,167.53 \1,182.18 \1,161.90
Year Three \1,517.09 \1,370.62 \1,385.81
Fee \1.04 \0.99 \0.99
Final Value \1,516.04 \1,369.63 \1,384.82
Year Four \1,322.00 \1,146.22 \1,425.38
Fee \0.99 \0.88 \0.98
Final Value \1,321.01 \1,145.34 \1,424.40
Year Five \1,899.19 \1,487.36 \1,636.95
Fee \1.02 \0.83 \0.97
Final Value \1,898.17 \1,486.52 \1,635.99
Year Six \2,050.11 \1,716.65 \1,739.34
Fee \1.12 \0.91 \0.96
Final Value \2,048.99 \1,715.74 \1,738.38
Year Seven \2,416.53 \2,005.26 \1,854.92
Fee \1.14 \0.95 \0.92
Final Value \2,415.38 \2,004.30 \1,854.00
Year Eight \2,386.01 \2,120.24 \1,772.58
Fee \1.11 \0.95 \0.84
Final Value \2,384.90 \2,119.29 \1,771.74
Year Nine \3,189.70 \2,828.74 \2,271.76
Fee \1.16 \1.03 \0.84
Final Value \3,188.55 \2,827.72 \2,270.92
Year Ten \3,613.18 \3,192.50 \2,526.65
Fee \1.27 \1.13 \0.90
Period \10.00 \10.00 \10.00
Surr Charge \0.00 \0.00 \0.00
Final Value \3,611.91 \3,191.37 \2,525.76
Annual Return 13.703% 12.305% 9.708%
===============================================================
</TABLE>
Calculation of Ten Year Return
Final Value Year One = 1,000 * (31-Dec-87 Unit Value/ 31-Dec-86 Unit Value)
- - Annual Fee Year One
Final Value Year Two = 1,000 * (31-Dec-88 Unit Value/ 31-Dec-87 Unit Value)
- - Annual Fee Year Two
Final Value Year Three = 1,000 * (31-Dec-89 Unit Value/ 31-Dec-88 Unit Value)
- - Annual Fee Year Three
Final Value Year Four = 1,000 * (31-Dec-90 Unit Value/ 31-Dec-89 Unit Value)
- - Annual Fee Year Four
Final Value Year Five = 1,000 * (31-Dec-91 Unit Value/ 31-Dec-90 Unit Value)
- - Annual Fee Year Five
Final Value Year Six = 1,000 * (31-Dec-92 Unit Value/ 31-Dec-91 Unit Value)
- - Annual Fee Year Six
Final Value Year Seven = 1,000 * (31-Dec-93 Unit Value/ 31-Dec-92 Unit Value)
- - Annual Fee Year Seven
Final Value Year Eight = 1,000 * (31-Dec-94 Unit Value/ 31-Dec-93 Unit Value)
- - Annual Fee Year Eight
Final Value Year Nine = 1,000 * (31-Dec-95 Unit Value/ 31-Dec-94 Unit Value)
- - Annual Fee Year Nine
Final Value Year Ten = 1,000 * (31-Dec-96 Unit Value/ 31-Dec-95 Unit Value)
- - Annual Fee Year Ten - Surrender Charge
Annual Return = (Final Value for Year Ten/1,000) *
(1/Ten) - 1
<TABLE>
<CAPTION>
Date Growth I Equity Soc.
Income Resp.
- ---------------------------------------------------------------
<S> <C> <C> <C>
12/31/86 6.390635 4.918136 5.597187
- ---------------------------------------------------------------
12/31/87 6.545312 4.804088 5.906645
- ---------------------------------------------------------------
12/31/88 7.474411 5.824373 6.514813
- ---------------------------------------------------------------
12/31/89 9.712202 6.752771 7.770294
- ---------------------------------------------------------------
12/31/90 8.469114 5.651296 7.997875
- ---------------------------------------------------------------
12/31/91 12.175900 7.338842 9.191348
- ---------------------------------------------------------------
12/31/92 13.150500 8.474945 9.772041
- ---------------------------------------------------------------
12/31/93 15.509400 9.905037 10.427126
- ---------------------------------------------------------------
12/31/94 15.320800 10.478000 9.969200
- ---------------------------------------------------------------
12/31/95 20.490900 13.985600 12.782700
- ---------------------------------------------------------------
12/31/96 23.219800 15.789800 14.222200
- ---------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Lifetime
Small Cap Index Growth II Balanced Growth I Asst. Equity Soc. Interntl
Mgr. Income Resp.
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Eleven Years Prior \1,000.25 \999.25 \964.34
Fee \1.06 \1.06 \1.04
Final Value \999.19 \998.19 \963.29
Ten Years Prior \1,070.57 \1,023.37 \975.04 \1,016.55
Fee \0.99 \0.97 \0.95 \0.95
Final Value \1,069.58 \1,022.40 \974.10 \1,015.60
Nine Years Prior \1,032.34 \1,167.53 \1,180.97 \1,120.17
Fee \0.91 \0.95 \0.93 \0.92
Final Value \1,031.43 \1,166.58 \1,180.04 \1,119.25
Eight Years Prior \1,013.97 \1,312.61 \1,515.85 \1,004.31 \1,368.14 \1,334.94
Fee \0.78 \0.91 \1.04 \0.78 \0.99 \0.95
Final Value \1,013.18 \1,311.70 \1,514.81 \1,003.53 \1,367.15 \1,333.99
Seven Years Prior \1,016.89 \965.63 \1,279.34 \1,320.93 \1,058.04 \1,144.15 \1,373.06
Fee \0.71 \0.69 \0.91 \0.99 \0.72 \0.88 \0.95
Final Value \1,016.18 \964.94 \1,278.43 \1,319.93 \1,057.32 \1,143.27 \1,372.11
Six Years Prior \2,607.69 \1,240.38 \1,789.82 \1,245.15 \1,897.64 \1,274.93 \1,484.66 \1,576.86
Fee \1.14 \0.70 \0.97 \0.71 \1.02 \0.74 \0.83 \0.93
Final Value \2,606.54 \1,239.68 \1,788.85 \1,244.44 \1,896.63 \1,274.19 \1,483.83 \1,575.93
Five Years Prior \4,414.68 \1,309.24 \1,743.72 \1,155.16 \2,048.44 \1,408.43 \1,713.54 \1,675.50
Fee \2.00 \0.72 \1.00 \0.68 \1.12 \0.76 \0.91 \0.92
Final Value \4,412.68 \1,308.52 \1,742.72 \1,154.48 \2,047.32 \1,407.66 \1,712.63 \1,674.57
Four Years Prior \7,331.55 \1,413.47 \1,899.39 \1,228.14 \2,414.56 \1,683.53 \2,001.63 \1,786.83
Fee \3.01 \0.70 \0.93 \0.61 \1.14 \0.79 \0.95 \0.89
Final Value \7,328.54 \1,412.77 \1,898.45 \1,227.53 \2,413.42 \1,682.74 \2,000.68 \1,785.94
Three Years Prior \7,802.07 \1,408.17 \1,853.79 \1,220.23 \2,384.07 \1,561.34 \2,116.41 \1,707.51 \1,008.82
Fee \3.49 \0.65 \0.87 \0.56 \1.11 \0.75 \0.95 \0.81 \0.46
Final Value \7,798.58 \1,407.52 \1,852.92 \1,219.66 \2,382.96 \1,560.59 \2,115.46 \1,706.70 \1,008.36
Two Years Prior \9,969.10 \1,902.14 \2,400.06 \1,459.76 \3,187.11 \1,803.36 \2,823.62 \2,188.37 \1,107.65
Fee \3.69 \0.69 \0.88 \0.56 \1.16 \0.70 \1.03 \0.81 \0.44
Final Value \9,965.41 \1,901.45 \2,399.18 \1,459.20 \3,185.95 \1,802.66 \2,822.60 \2,187.56 \1,107.21
One Year Prior \11,478.32 \2,301.78 \2,265.13 \1,617.23 \3,610.24 \2,040.93 \3,186.72 \2,433.91 \1,254.62
Fee \4.02 \0.79 \0.87 \0.58 \1.27 \0.72 \1.13 \0.87 \0.44
Period \6.34 \7.25 \9.12 \5.67 \10.24 \7.32 \10.24 \10.34 \2.76
Surr Charge \458.97 \69.03 \22.64 \80.83 \0.00 \61.21 \0.00 \0.00 \62.71
Final Value \11,015.33 \2,231.96 \2,241.62 \1,535.82 \3,608.97 \1,979.00 \3,185.60 \2,433.04 \1,191.47
Annual Return 46.002% 11.707% 9.254% 7.855% 13.359% 9.769% 11.985% 8.982% 6.562%
=================================================================================================================================
</TABLE>
Separate Account L - Standardized Lifetime Returns
Small Cap Fund
Final Value Year One = 1,000 * (31-Dec-90 Unit Value/ 31-Aug-90 Unit Value)
- - Annual Fee Year One
Final Value Year Two = 1,000 * (31-Dec-91 Unit Value/ 31-Dec-90 Unit Value)
- - Annual Fee Year Two
Final Value Year Three = 1,000 * (31-Dec-92 Unit Value/ 31-Dec-91 Unit Value)
- - Annual Fee Year Three
Final Value Year Four = 1,000 * (31-Dec-93 Unit Value/ 31-Dec-92 Unit Value)
- - Annual Fee Year Four
Final Value Year Five = 1,000 * (31-Dec-94 Unit Value/ 31-Dec-93 Unit Value)
- - Annual Fee Year Five
Final Value Year Six = 1,000 * (31-Dec-95 Unit Value/ 31-Dec-94 Unit Value)
- - Annual Fee Year Six
Final Value Year Seven = 1,000 * (31-Dec-96 Unit Value/ 31-Dec-95 Unit Value)
- - Annual Fee Year Seven - Surrender Charge
Annual Return = (Final Value for Last Year/1,000)
(1/Period) - 1
Index
Final Value Year One = 1,000 * (31-Dec-89 Unit Value/ 2-Oct-89 Unit Value)
- Annual Fee Year One
Final Value Year Two = 1,000 * (31-Dec-90 Unit Value/ 31-Dec-89 Unit Value)
- - Annual Fee Year Two
Final Value Year Three = 1,000 * (31-Dec-91 Unit Value/ 31-Dec-90 Unit Value)
- - Annual Fee Year Three
Final Value Year Four = 1,000 * (31-Dec-92 Unit Value/ 31-Dec-91 Unit Value)
- - Annual Fee Year Four
Final Value Year Five = 1,000 * (31-Dec-93 Unit Value/ 31-Dec-92 Unit Value)
- - Annual Fee Year Five
Final Value Year Six = 1,000 * (31-Dec-94 Unit Value/ 31-Dec-93 Unit Value)
- - Annual Fee Year Six
Final Value Year Seven = 1,000 * (31-Dec-95 Unit Value/ 31-Dec-94 Unit Value)
- - Annual Fee Year Seven
Final Value Year Eight = 1,000 * (31-Dec-96 Unit Value/ 31-Dec-95 Unit Value)
- - Annual Fee Year Eight - Surrender Charge
Annual Return = (Final Value for Last Year/1,000)
(1/Period) - 1
Growth II
Final Value Year One = 1,000 * (31-Dec-87 Unit Value/ 20-Nov-87 Unit Value)
- - Annual Fee Year One
Final Value Year Two = 1,000 * (31-Dec-88 Unit Value/ 31-Dec-87 Unit Value)
- - Annual Fee Year Two
Final Value Year Three = 1,000 * (31-Dec-89 Unit Value/ 31-Dec-88 Unit Value)
- - Annual Fee Year Three
Final Value Year Four = 1,000 * (31-Dec-90 Unit Value/ 31-Dec-89 Unit Value)
- - Annual Fee Year Four
Final Value Year Five = 1,000 * (31-Dec-91 Unit Value/ 31-Dec-90 Unit Value)
- - Annual Fee Year Five
Final Value Year Six = 1,000 * (31-Dec-92 Unit Value/ 31-Dec-91 Unit Value)
- - Annual Fee Year Six
Final Value Year Seven = 1,000 * (31-Dec-93 Unit Value/ 31-Dec-92 Unit Value)
- - Annual Fee Year Seven
Final Value Year Eight = 1,000 * (31-Dec-94 Unit Value/ 31-Dec-93 Unit Value)
- - Annual Fee Year Eight
Final Value Year Nine = 1,000 * (31-Dec-95 Unit Value/ 31-Dec-94 Unit Value)
- - Annual Fee Year Nine
Final Value Year Ten = 1,000 * (31-Dec-96 Unit Value/ 31-Dec-95 Unit Value)
- - Annual Fee Year Ten - Surrender Charge
Annual Return = (Final Value for Last Year/1,000)
(1/Period) - 1
Balanced
Final Value Year One = 1,000 * (31-Dec-91 Unit Value/ 1-May-91 Unit Value)
- Annual Fee Year One
Final Value Year Two = 1,000 * (31-Dec-92 Unit Value/ 31-Dec-91 Unit Value)
- - Annual Fee Year Two
Final Value Year Three = 1,000 * (31-Dec-93 Unit Value/ 31-Dec-92 Unit Value)
- - Annual Fee Year Three
Final Value Year Four = 1,000 * (31-Dec-94 Unit Value/ 31-Dec-93 Unit Value)
- - Annual Fee Year Four
Final Value Year Five = 1,000 * (31-Dec-95 Unit Value/ 31-Dec-94 Unit Value)
- - Annual Fee Year Five
Final Value Year Six = 1,000 * (31-Dec-96 Unit Value/ 31-Dec-95 Unit Value)
- - Annual Fee Year Six - Surrender Charge
Annual Return = (Final Value for Last Year/1,000)
(1/Period) - 1
Growth I
Final Value Year One = 1,000 * (31-Dec-86 Unit Value/ 9-Oct-86 Unit Value)
- Annual Fee Year One
Final Value Year Two = 1,000 * (31-Dec-87 Unit Value/ 31-Dec-86 Unit Value)
- - Annual Fee Year Two
Final Value Year Three = 1,000 * (31-Dec-88 Unit Value/ 31-Dec-87 Unit Value)
- - Annual Fee Year Three
Final Value Year Four = 1,000 * (31-Dec-89 Unit Value/ 31-Dec-88 Unit Value)
- - Annual Fee Year Four
Final Value Year Five = 1,000 * (31-Dec-90 Unit Value/ 31-Dec-89 Unit Value)
- - Annual Fee Year Five
Final Value Year Six = 1,000 * (31-Dec-91 Unit Value/ 31-Dec-90 Unit Value)
- - Annual Fee Year Six
Final Value Year Seven = 1,000 * (31-Dec-92 Unit Value/ 31-Dec-91 Unit Value)
- - Annual Fee Year Seven
Final Value Year Eight = 1,000 * (31-Dec-93 Unit Value/ 31-Dec-92 Unit Value)
- - Annual Fee Year Eight
Final Value Year Nine = 1,000 * (31-Dec-94 Unit Value/ 31-Dec-93 Unit Value)
- - Annual Fee Year Nine
Final Value Year Ten = 1,000 * (31-Dec-95 Unit Value/ 31-Dec-94 Unit Value)
- - Annual Fee Year Ten
Final Value Year Eleven = 1,000 * (31-Dec-96 Unit Value/ 31-Dec-95 Unit Value)
- - Annual Fee Year Eleven - Surrender Charge
Annual Return = (Final Value for Last Year/1,000)
(1/Period) - 1
Asset Manager
Final Value Year One = 1,000 * (31-Dec-89 Unit Value/ 6-Sep-89 Unit Value)
- Annual Fee Year One
Final Value Year Two = 1,000 * (31-Dec-90 Unit Value/ 31-Dec-89 Unit Value)
- - Annual Fee Year Two
Final Value Year Three = 1,000 * (31-Dec-91 Unit Value/ 31-Dec-90 Unit Value)
- - Annual Fee Year Three
Final Value Year Four = 1,000 * (31-Dec-92 Unit Value/ 31-Dec-91 Unit Value)
- - Annual Fee Year Four
Final Value Year Five = 1,000 * (31-Dec-93 Unit Value/ 31-Dec-92 Unit Value)
- - Annual Fee Year Five
Final Value Year Six = 1,000 * (31-Dec-94 Unit Value/ 31-Dec-93 Unit Value)
- - Annual Fee Year Six
Final Value Year Seven = 1,000 * (31-Dec-95 Unit Value/ 31-Dec-94 Unit Value)
- - Annual Fee Year Seven
Final Value Year Eight = 1,000 * (31-Dec-96 Unit Value/ 31-Dec-95 Unit Value)
- - Annual Fee Year Eight - Surrender Charge
Annual Return = (Final Value for Last Year/1,000)
(1/Period) - 1
<PAGE>
Equity Income
Final Value Year One = 1,000 * (31-Dec-86 Unit Value/ 9-Oct-86 Unit Value)
- Annual Fee Year One
Final Value Year Two = 1,000 * (31-Dec-87 Unit Value/ 31-Dec-86 Unit Value)
- - Annual Fee Year Two
Final Value Year Three = 1,000 * (31-Dec-88 Unit Value/ 31-Dec-87 Unit Value)
- - Annual Fee Year Three
Final Value Year Four = 1,000 * (31-Dec-89 Unit Value/ 31-Dec-88 Unit Value)
- - Annual Fee Year Four
Final Value Year Five = 1,000 * (31-Dec-90 Unit Value/ 31-Dec-89 Unit Value)
- - Annual Fee Year Five
Final Value Year Six = 1,000 * (31-Dec-91 Unit Value/ 31-Dec-90 Unit Value)
- - Annual Fee Year Six
Final Value Year Seven = 1,000 * (31-Dec-92 Unit Value/ 31-Dec-91 Unit Value)
- - Annual Fee Year Seven
Final Value Year Eight = 1,000 * (31-Dec-93 Unit Value/ 31-Dec-92 Unit Value)
- - Annual Fee Year Eight
Final Value Year Nine = 1,000 * (31-Dec-94 Unit Value/ 31-Dec-93 Unit Value)
- - Annual Fee Year Nine
Final Value Year Ten = 1,000 * (31-Dec-95 Unit Value/ 31-Dec-94 Unit Value)
- - Annual Fee Year Ten
Final Value Year Eleven = 1,000 * (31-Dec-96 Unit Value/ 31-Dec-95 Unit Value)
- - Annual Fee Year Eleven - Surrender Charge
Annual Return = (Final Value for Last Year/1,000)
(1/Period) - 1
Socially Responsible
Final Value Year One = 1,000 * (31-Dec-86 Unit Value/ 2-Sep-86 Unit Value)
- Annual Fee Year One
Final Value Year Two = 1,000 * (31-Dec-87 Unit Value/ 31-Dec-86 Unit Value)
- - Annual Fee Year Two
Final Value Year Three = 1,000 * (31-Dec-88 Unit Value/ 31-Dec-87 Unit Value)
- - Annual Fee Year Three
Final Value Year Four = 1,000 * (31-Dec-89 Unit Value/ 31-Dec-88 Unit Value)
- - Annual Fee Year Four
Final Value Year Five = 1,000 * (31-Dec-90 Unit Value/ 31-Dec-89 Unit Value)
- - Annual Fee Year Five
Final Value Year Six = 1,000 * (31-Dec-91 Unit Value/ 31-Dec-90 Unit Value)
- - Annual Fee Year Six
Final Value Year Seven = 1,000 * (31-Dec-92 Unit Value/ 31-Dec-91 Unit Value)
- - Annual Fee Year Seven
Final Value Year Eight = 1,000 * (31-Dec-93 Unit Value/ 31-Dec-92 Unit Value)
- - Annual Fee Year Eight
Final Value Year Nine = 1,000 * (31-Dec-94 Unit Value/ 31-Dec-93 Unit Value)
- - Annual Fee Year Nine
Final Value Year Ten = 1,000 * (31-Dec-95 Unit Value/ 31-Dec-94 Unit Value)
- - Annual Fee Year Ten
Final Value Year Eleven = 1,000 * (31-Dec-96 Unit Value/ 31-Dec-95 Unit Value)
- - Annual Fee Year Eleven - Surrender Charge
Annual Return = (Final Value for Last Year/1,000)
(1/Period) - 1
International
Final Value Year One = 1,000 * (31-Dec-94 Unit Value/ 31-Mar-94 Unit Value)
- - Annual Fee Year One
Final Value Year Two = 1,000 * (31-Dec-95 Unit Value/ 31-Dec-94 Unit Value)
- - Annual Fee Year Two
Final Value Year Three = 1,000 * (31-Dec-96 Unit Value/ 31-Dec-95 Unit Value)
- - Annual Fee Year Three - Surrender Charge
Annual Return = (Final Value for Last Year/1,000)
(1/Period) - 1
<TABLE>
<CAPTION>
Date Small Cap Index Growth II Balanced Growth I Asst. Equity Soc. Interntl
Mgr. Income Resp.
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Inception Date 08/31/90 10/02/89 11/20/87 05/01/91 10/09/86 09/06/89 10/09/86 09/02/86 03/31/94
- ---------------------------------------------------------------------------------------------------------------------------------
Inception Date
Unit Value 1.327993 8.066183 5.562404 8.030360 5.247336 7.832084 4.921813 5.804181 9.775967
- ---------------------------------------------------------------------------------------------------------------------------------
12/31/86 6.390635 4.918136 5.597187
- ---------------------------------------------------------------------------------------------------------------------------------
12/31/87 6.906269 6.545312 4.804088 5.906645
- ---------------------------------------------------------------------------------------------------------------------------------
12/31/88 6.665810 7.474411 5.824373 6.514813
- ---------------------------------------------------------------------------------------------------------------------------------
12/31/89 9.962900 8.482949 9.712202 8.463502 6.752771 7.770294
- ---------------------------------------------------------------------------------------------------------------------------------
12/31/90 1.350421 9.495300 8.273703 8.469114 8.923285 5.651296 7.997875
- ---------------------------------------------------------------------------------------------------------------------------------
12/31/91 3.465400 12.205700 11.597500 12.451500 12.175900 10.759800 7.338842 9.191348
- ---------------------------------------------------------------------------------------------------------------------------------
12/31/92 5.869315 12.890600 11.304900 11.558200 13.150500 11.893300 8.474945 9.772041
- ---------------------------------------------------------------------------------------------------------------------------------
12/31/93 9.751704 13.924500 12.321200 12.295700 15.509400 14.224100 9.905037 10.427126
- ---------------------------------------------------------------------------------------------------------------------------------
12/31/94 10.381800 13.879200 12.031300 12.222500 15.320800 13.197900 10.478000 9.969200 9.862200
- ---------------------------------------------------------------------------------------------------------------------------------
12/31/95 13.271300 18.756500 15.584000 14.628600 20.490900 15.251000 13.985600 12.782700 10.833300
- ---------------------------------------------------------------------------------------------------------------------------------
12/31/96 15.286100 22.705400 14.713300 16.212800 23.219800 17.266800 15.789800 14.222200 12.275600
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
