<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 19, 1999
Registration No. 333-5815
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 III)
Pre-Effective Amendment No. [_]
Post-Effective Amendment No. 4 [X]
AND/OR
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 14 [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
JACK D HUNTER, ESQUIRE
Lincoln National Life Insurance Company
200 East Berry Street
P.O. Box 1110
Fort Wayne, IN 46802
(Name and Complete Address of Agent for Service)
Copy to:
Kimberly J. Smith, Esquire
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2404
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, 1999, 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.
Title of securities being registered:
Interests in a separate account under group variable annuity contracts.
<PAGE>
Variable Annuity III
Lincoln National Variable Annuity Account L
Group Variable Annuity Contracts
Servicing Office:
Lincoln National Life Insurance Company Home Office:
P.O. Box 9740 Lincoln National Life Insurance
Company
Portland, ME 04104 1300 South Clinton Street
(800) 341-0441 Fort Wayne, IN 46802
This Prospectus describes group annuity contracts and individual certificates
issued by Lincoln National Life Insurance Company (Lincoln Life). They are for
use with qualified and non-qualified retirement plans. Generally, neither the
contractowner nor the individual participant pays federal income tax on the
contract's growth until it is paid out. The contract is designed to accumulate
account value and, as permitted by the plan for which the contractowner pur-
chases the contract, to provide retirement income that a participant cannot
outlive or for an agreed upon time. These benefits may be a variable or fixed
amount or a combination of both. If a participant dies before the annuity com-
mencement date, we pay the beneficiary or the plan a death benefit.
If the contractowner gives certain rights to plan participants, we issue active
life certificates to them. Participants choose whether account value accumu-
lates on a variable or a fixed (guaranteed) basis or both. If a participant al-
locates contributions to the fixed account, we guarantee principal and a mini-
mum interest rate.
All contributions for benefits on a variable basis will be placed in Lincoln
National Variable Annuity Account L (variable annuity account [VAA]). The VAA
is a segregated investment account of Lincoln Life. If a participant puts all
or some contributions into one or more of the contract's subaccounts, the par-
ticipant takes all the investment risk on the account value and the retirement
income. If the selected subaccounts make money, account value goes up; if they
lose money, it goes down. How much it goes up or down depends on the perfor-
mance of the selected subaccounts. We do not guarantee how any of the
subaccounts or their funds will perform. Also, neither the U.S. Government nor
any federal agency insures or guarantees the investment in the contract.
The available subaccounts, and the funds in which they invest, are listed be-
low. The contractowner decides which of these subaccounts are available under
the contract for participant allocations. For more information about the in-
vestment objectives, policies and risks of the funds please refer to the Pro-
spectuses for the funds.
Balanced Account -- American Century Variable Portfolios, Inc.: VP Balanced
Growth II Account -- American Century Variable
Portfolios, Inc.: VP Capital Appreciation
Small Cap Value Account -- Baron Capital Funds Trust: Baron Capital Asset Fund
Insurance Shares
Socially Responsible Account -- Calvert Variable Series: Calvert Social Bal-
anced Portfolio
Index Account -- Dreyfus Stock Index Fund
Small Cap Account -- Dreyfus Variable Investment Fund: Small Cap Portfolio
Growth I Account -- Fidelity Variable Insurance Products Fund: Growth Portfolio
Initial Class
Equity-Income Account -- Fidelity Variable Insurance Products Fund: Equity-
Income Portfolio Initial Class
Asset Manager Account -- Fidelity Variable Insurance Products Fund II: Asset
Manager Portfolio Initial Class
Global Growth Account -- Janus Aspen Series: Worldwide Growth Portfolio
Mid Cap Growth Account -- Lincoln National Aggressive Growth Fund, Inc.
Social Awareness Account -- Lincoln National Social Awareness Fund, Inc.
Mid Cap Value Account -- Neuberger Berman Advisers Management Trust: Partners
Portfolio
International Stock Account -- T. Rowe Price International Series, Inc.
On or about August 6, 1999 we anticipate (i) closing the Growth II Account and
replacing the VP Capital Appreciation with the Lincoln National Aggressive
Growth Fund and (ii) closing the Socially Responsible Account and replacing the
Calvert Social Balanced Portfolio with the Lincoln National Social Awareness
Fund.
This Prospectus gives you information about the con- tracts and certificates
that contractowners and participants should know before investing. Please
review the Pro- spectuses for the funds, and keep them for reference.
Neither the SEC nor any state securities commission has approved the contracts
or determined that this Prospectus is accurate and complete. Any representation
to the contrary is a criminal offense.
A Statement of Additional Information (SAI) has more information about the
contracts and certificates. Its terms are made part of this Prospectus. For a
free copy, write: Lincoln National Life Insurance Company, P.O. Box 9740,
Portland, ME 04104, or call 1-800-341-0441. The SAI and other information about
Lincoln Life and Account L are also available on the SEC's web site
(http://www.sec.gov). There is a table of contents for the SAI on the last page
of this Prospectus.
May 1, 1999
1
<PAGE>
Table of contents
<TABLE>
<CAPTION>
Page
- -----------------------------------------
<S> <C>
Special terms 2
- -----------------------------------------
Expense tables 3
- -----------------------------------------
Summary 5
- -----------------------------------------
Condensed financial information 7
- -----------------------------------------
Investment results 7
- -----------------------------------------
Financial statements 7
- -----------------------------------------
Lincoln National Life Insurance Co. 7
- -----------------------------------------
Fixed side of the contract 8
- -----------------------------------------
Variable annuity account (VAA) 9
- -----------------------------------------
Investments of the VAA 9
- -----------------------------------------
Description of the Funds 9
- -----------------------------------------
Charges and other deductions 11
- -----------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Page
- -----------------------------
<S> <C>
The Contracts 12
- -----------------------------
Annuity payouts 16
- -----------------------------
Federal tax matters 17
- -----------------------------
Voting rights 21
- -----------------------------
Distribution of the
contracts 21
- -----------------------------
Return privilege 21
- -----------------------------
State regulation 21
- -----------------------------
Records and reports 21
- -----------------------------
Other information 22
- -----------------------------
Variable Annuity III
Statement of Additional
Information Table of
Contents 23
- -----------------------------
</TABLE>
Special terms
Account or variable annuity account (VAA)--The segregated investment account,
Account L, into which Lincoln Life sets aside and invests the assets for the
variable side of the contract offered in this Prospectus.
Account value--At a given time before the annuity commencement date, the total
value of all accumulation units for a contract plus the value of the fixed
side of the contract.
Accumulation unit--A measure used to calculate account value for the variable
side of the contract.
Annuitant--The person on whose life the annuity benefit payments made after an
annuity commencement date are based.
Annuity commencement date--The date on which Lincoln Life makes the first an-
nuity payout to the annuitant.
Annuity payout--An amount paid at regular intervals after the annuity com-
mencement date under one of several options available to the annuitant and/or
any other payee. This amount may be paid on a variable or fixed basis, or a
combination of both.
Annuity unit--A measure used to calculate the amount of each annuity payout
for the variable side of the contract after an annuity commencement date.
Beneficiary--The person the participant chooses to receive any death benefit
paid if the participant dies before the annuity commencement date.
Contractowner--The party named on the group annuity contract (for example, an
employer, a retirement plan trust, an association, or other entity allowed by
law).
Contributions--Amounts paid into the contract.
Death benefit--An amount payable to a designated beneficiary if a participant
dies before his or her annuity commencement date.
Lincoln Life (we, us, our)--Lincoln National Life Insurance Company.
Participant--An employee or other person affiliated with the contractowner on
whose behalf we maintain an account under the 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.
Plan--The retirement program that an employer offers to its employees for
which a contract is used to accumulate funds.
Subaccount--The portion of the VAA that reflects investments in accumulation
and annuity units of a class of a particular fund available under the con-
tracts. There is a separate subaccount which corresponds to each fund.
Valuation date--Each day the New York Stock Exchange (NYSE) is open for trad-
ing.
Valuation period--The period starting at the close of trading (currently 4:00
p.m. New York time) on each day that the NYSE is open for trading (valuation
date) and ending at the close of such trading on the next valuation date.
2
<PAGE>
Expense tables
Contractowner transaction expenses:
Contract fee
Annual administration charge (per participant): $25
The annual administration charge may be paid by an employer on behalf of par-
ticipants. It is not charged during the annuity period.
We may reduce or waive this charge in certain situations. See Charges and other
deductions.
- --------------------------------------------------------------------------------
Account L annual expenses for Variable Annuity III subaccounts:
(as a percentage of average account value):
<TABLE>
<CAPTION>
<S> <C>
"Standard" mortality and expense risk charge* 1.00%
"Breakpoint" mortality and expense risk charge .75%
</TABLE>
Contracts issued with respect to plans meeting specified eligibility require-
ments will generally impose a lower
"breakpoint" mortality and expense risk charge, as shown above and described in
detail under Charges and other deductions.
*Before January 1, 1998, the mortality and expense risk charge was 1.20%.
Annual expenses of the funds for the year ended December 31, 1998:
(as a percentage of each fund's average net assets):
<TABLE>
<CAPTION>
Management 12b-1 Other Net
fees fees Expenses Expenses
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
American Century - VP Balanced/1/ 0.97% 0.00% 0.00% 0.97%
- -------------------------------------------------------------------------------
American Century - VP Capital Appreciation 1.00 0.00 0.00 1.00
- -------------------------------------------------------------------------------
Baron Capital Funds Trust: Baron Capital
Asset Fund Insurance Shares/2/ 1.00 0.25 0.20 1.45
- -------------------------------------------------------------------------------
Calvert Social Balanced Portfolio/3/ 0.70 0.00 0.18 0.88
- -------------------------------------------------------------------------------
Dreyfus Stock Index Fund 0.25 0.00 0.01 0.26
- -------------------------------------------------------------------------------
Dreyfus VIF: Small Cap Portfolio 0.75 0.00 0.02 0.77
- -------------------------------------------------------------------------------
Fidelity VIP - Growth Portfolio Initial
Class/4/ 0.59 0.00 0.09 0.68
- -------------------------------------------------------------------------------
Fidelity VIP - Equity-Income Portfolio
Initial Class/4/ 0.49 0.00 0.09 0.58
- -------------------------------------------------------------------------------
Fidelity VIP II - Asset Manager Initial
Class/4/ 0.54 0.00 0.10 0.64
- -------------------------------------------------------------------------------
Janus Aspen Series: Worldwide Growth
Portfolio/5/ 0.65 0.00 0.07 0.72
- -------------------------------------------------------------------------------
Lincoln National Aggressive Growth Fund 0.73 0.00 0.08 0.81
- -------------------------------------------------------------------------------
Lincoln National Social Awareness Fund 0.34 0.00 0.04 0.38
- -------------------------------------------------------------------------------
Neuberger Berman AMT: Partners
Portfolio/6/ 0.78 0.00 0.06 0.84
- -------------------------------------------------------------------------------
T. Rowe Price International Series 1.05 0.00 0.00 1.05
- -------------------------------------------------------------------------------
</TABLE>
/1/American Century Investment Management, Inc. voluntarily waived a portion of
its management fee from October 1, 1998 through November 16, 1998. In the ab-
sence of the waiver, the average ratio of operating expenses to average net
assets would have been 1.48% for the year ended December 31, 1998. The
annualized fee schedule for the fund, effective November 17, 1998, is as fol-
lows: 1.50% on the first $250 million; 1.20% on the next $250 million; and
1.10% thereafter.
/2/The Adviser is contractually obligated to reduce its fee to the extent re-
quired to limit Baron Capital Asset Fund's total operating expenses to 1.5%
for the first $250 million of assets in the Fund. 1.35% for Fund assets over
$250 million, and 1.25% for Fund assets over $500 million. Without the ex-
pense limitations, total operating expenses for the Fund for the period Octo-
ber 1, 1998 through December 31, 1998 would have been 7.62%.
/3/The figures above are based on expenses for fiscal year 1998, and have been
restated to reflect the elimination of the performance
adjustment in Social Balanced as of March 1, 1999 (pursuant to shareholder ap-
proval on February 24, 1999). The restatement includes the addition of 0.01%
to both portfolios.
/4/A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, certain funds, or FMR on behalf of certain
funds, have entered into arrangements with their custodian whereby credits
realized as a result of uninvested cash balances were used to reduce custo-
dian expenses. Including these reductions, the total operating expenses, af-
ter reimbursement for Index 500 Portfolio and Mid Cap Portfolio, presented in
the table would have been: Equity-Income Portfolio Initial Class 0.57%,
Growth Portfolio Initial Class 0.66% and Asset Manager Portfolio Initial
Class 0.63%.
/5/All expenses are stated with contractual waivers and fee reductions by Janus
Capital. Fee reductions for the Worldwide Growth Portfolio reduce the Manage-
ment Fee to the level of the corresponding Janus retail fund. Other waivers,
if applicable, are first applied against the Management Fee and then against
Other Expenses. Janus Capital has agreed to continue the waivers and fee re-
ductions until at least the next annual renewal of the advisory agreement.
Without these waivers, the total operating expenses for the portfolio would
have been 0.74%.
/6/Neuberger Berman Adviser Management Trust is divided into portfolios ("Port-
folios"), each of which invests all of its net investable assets in a corre-
sponding series ("Series") of Advisers Managers Trust. The figures reported
under "Management Fees" include the aggregate of the administration fees paid
by the Portfolio and the management fees paid by its corresponding Series.
Similarly, "Other Expenses" includes all other expenses of the Portfolio and
its corresponding Series.
3
<PAGE>
Examples
(expenses of the subaccounts and the funds):
If you surrender your contract at the end of the time period shown, you would
pay the following expenses on a $1,000 investment, assuming a 5% annual return:
<TABLE>
<CAPTION>
Standard*
1 year 3 years 5 years 10 years
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. American Century - VP Balanced $25 $76 $131 $279
- -------------------------------------------------------------------------------
2. American Century - VP Capital Appreciation 25 77 132 282
- -------------------------------------------------------------------------------
3. Baron Capital Funds Trust:
Baron Capital Asset Fund Insurance Shares 30 91 154 325
- -------------------------------------------------------------------------------
4. Calvert Social Balanced Portfolio 24 74 126 270
- -------------------------------------------------------------------------------
5. Dreyfus Stock Index Fund 18 55 94 205
- -------------------------------------------------------------------------------
6. Dreyfus VIF: Small Cap Portfolio 23 70 120 258
- -------------------------------------------------------------------------------
7. Fidelity VIP - Growth Portfolio Initial
Class 22 68 116 249
- -------------------------------------------------------------------------------
8. Fidelity VIP -
Equity Income Portfolio Initial Class 21 65 111 239
- -------------------------------------------------------------------------------
9. Fidelity VIP II - Asset Manager Initial
Class 22 66 114 245
- -------------------------------------------------------------------------------
10. Janus Aspen Series: Worldwide Growth
Portfolio 22 69 118 253
- -------------------------------------------------------------------------------
11. Lincoln National Aggressive Growth Fund 23 72 123 263
- -------------------------------------------------------------------------------
12. Lincoln National Social Awareness Fund 19 58 101 218
- -------------------------------------------------------------------------------
13. Neuberger Berman AMT: Partners Portfolio 24 72 124 266
- -------------------------------------------------------------------------------
14. T. Rowe Price International Series 26 79 135 287
- -------------------------------------------------------------------------------
If you do not surrender your contract, you would pay the following expenses on
a $1,000 investment, assuming a 5% annual return:
<CAPTION>
Standard*
1 year 3 years 5 years 10 years
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. American Century - VP Balanced $25 $76 $131 $279
- -------------------------------------------------------------------------------
2. American Century - VP Capital Appreciation 25 77 132 282
- -------------------------------------------------------------------------------
3. Baron Capital Funds Trust:
Baron Capital Asset Fund Insurance Shares 30 91 154 325
- -------------------------------------------------------------------------------
4. Calvert Social Balanced Portfolio 24 74 126 270
- -------------------------------------------------------------------------------
5. Dreyfus Stock Index Fund 18 55 94 205
- -------------------------------------------------------------------------------
6. Dreyfus VIF: Small Cap Portfolio 23 70 120 258
- -------------------------------------------------------------------------------
7. Fidelity VIP - Growth Portfolio Initial
Class 22 68 116 249
- -------------------------------------------------------------------------------
8. Fidelity VIP -
Equity Income Portfolio Initial Class 21 65 111 239
- -------------------------------------------------------------------------------
9. Fidelity VIP II - Asset Manager Initial
Class 22 66 114 245
- -------------------------------------------------------------------------------
10. Janus Aspen Series: Worldwide Growth
Portfolio 22 69 118 253
- -------------------------------------------------------------------------------
11. Lincoln National Aggressive Growth Fund 23 72 123 263
- -------------------------------------------------------------------------------
12. Lincoln National Social Awareness Fund 19 58 101 218
- -------------------------------------------------------------------------------
13. Neuberger Berman AMT: Partners Portfolio 24 72 124 266
- -------------------------------------------------------------------------------
14. T. Rowe Price International Series 26 79 135 287
- -------------------------------------------------------------------------------
</TABLE>
We provide these examples, which are unaudited, to show the direct and indirect
costs and expenses of the contract.
For more information, see Charges and other deductions in this Prospectus, and
in the Prospectuses for the funds. Premium taxes may also apply, although they
do not appear in the examples. These examples should not be considered a repre-
sentation of past or future expenses. Actual expenses may be more or less than
those shown.
*Examples shown may be less for plans qualifying for "breakpoint" mortality and
expense risk charge.
4
<PAGE>
Summary
What kind of contract is this? It is a group variable annuity contract between
the contractowner and Lincoln Life. It may provide for a fixed annuity and/or a
variable annuity. This Prospectus describes the variable side of the contract.
See The Contracts.
What is the variable annuity account (VAA)? It is a separate account we estab-
lished under Indiana insurance law, and registered with the SEC as a unit in-
vestment trust. VAA assets are allocated to one or more subaccounts, according
to your investment choices. VAA assets are not chargeable with liabilities
arising out of any other business which Lincoln Life may conduct. See the Vari-
able annuity account.
What are the contract's investment choices? Based on instructions, the VAA ap-
plies contributions to buy fund shares in one or more of the investment funds
of the subaccounts: American Century Variable Portfolios, Inc.: VP Balanced;
American Century Variable Portfolios, Inc.: VP Capital Appreciation; Baron Cap-
ital Funds Trust: Baron Capital Asset Fund; Calvert Variable Series: Calvert
Social Balanced Portfolio; Dreyfus Stock Index Fund; Dreyfus Variable Invest-
ment Fund: Small Cap Portfolio; Fidelity Variable Insurance Products Fund:
Growth Portfolio; Fidelity Variable Insurance Products Fund: Equity-Income
Portfolio; Fidelity Variable Insurance Products Fund II: Asset Manager Port-
folio; Janus Aspen Series: Worldwide Growth Portfolio; Lincoln National Aggres-
sive Growth Fund, Inc.; Lincoln National Social Awareness Fund, Inc.; Neuberger
Berman Advisers Management Trust: Partners Portfolio; and T. Rowe Price Inter-
national Series, Inc. In turn, each fund holds a portfolio of securities con-
sistent with its investment policy. On or about August 6, 1999 we anticipate
(i) closing the Growth II Account and replacing the VP Capital Appreciation
with the Lincoln National Aggressive Growth Fund and (ii) closing the Socially
Responsible Account and replacing the Calvert Social Balanced Portfolio with
the Lincoln National Social Awareness Fund. See the Variable annuity account
and the Funds for a description of the subaccounts.
Who invests contributions? American Century Investment Management, Inc. is the
investment advisor of American Century VP Balanced and VP Capital Appreciation.
BAMCO, Inc. is advisor to the Baron fund. The investment advisor for the Cal-
vert Social Balanced Portfolio is the Calvert Asset Management Company, Inc.,
Bethesda, MD. The investment advisor of the Dreyfus funds is The Dreyfus Corpo-
ration, New York, NY. The investment advisor of the Fidelity funds is Fidelity
Management & Research Company, Boston, MA. Janus Capital Corporation is the ad-
visor to the Janus fund. Lincoln Investments, Inc. is the investment advisor of
the Lincoln funds; Neuberger Berman Management Incorporated is the investment
advisor to the Neuberger Berman fund. Putnam Investments is sub-advisor to the
Lincoln National Aggressive Growth Fund and Vantage Investment Advisors is sub-
advisor to the Lincoln National Social Awareness Fund. Rowe Price-Fleming In-
ternational, Inc. is investment advisor of the T. Rowe Price International Se-
ries. See Description of the funds.
How does the contract work? If we approve the application, we will send the
contractowner a contract. When participants make contributions, they buy accu-
mulation units. If the contractowner decides to purchase retirement income pay-
ments for a participant, we convert accumulation units to annuity units. Re-
tirement income payments will be based on the number of annuity units received
and the value of each annuity unit on payout days. See The Contracts.
What are the charges under the contract? We charge an annual administration
charge of $25 per participant account.
We will deduct any applicable premium tax from contributions or account value
at the time the tax is incurred or at another time we choose.
We apply an annual charge totaling 1.00% "standard" or .75% "breakpoint", to
the daily net asset value of the VAA. See Charges and other deductions.
We may charge additional fees to set up a participant loan or establish a sys-
tematic withdrawal option.
We may waive these charges in certain situations.
The funds' investment management fees, 12b-1 fees, expenses and expense limita-
tions, if applicable, are more fully described in the Prospectuses for the
funds.
What contributions are necessary, and how often? Contributions by or on behalf
of participants may be in any amount unless the contractowner or the plan has a
minimum amount. See The Contracts--Contributions.
How will annuity payouts be calculated? If a participant decides to annuitize,
they select an annuity option and start receiving retirement income payments
from the contract as a fixed option or variable option or a combination of
both. See Annuity payout options. Remember that participants in the VAA benefit
from any gain, and take a risk of any loss, in the value of the securities in
the funds' portfolios.
What happens if a participant dies before he or she annuitizes? The beneficiary
has options as to how any death benefit is paid. See Death benefits and annuity
period.
May participants transfer account value between subaccounts, and between the
VAA and the fixed account? Before the annuity commencement date, yes, subject
to certain restrictions. A participant may not transfer more than 20% of his or
her fixed account holdings to the VAA per year, unless the participant intends
to liquidate their fixed account value. This liquidation must be over a 5-year
schedule. Transfers from the VAA or the fixed account may also be subject to
the terms of the contract and the plan. See the Fixed account and The Con-
tracts--Transfers between subaccounts on or before the annuity commencement
date.
5
<PAGE>
May a participant withdraw account value? Yes, during the accumulation period,
subject to contract requirements and to the restrictions of any plan. See Sur-
renders and withdrawals. Special limits apply to withdrawals from the fixed ac-
count. See The fixed account. The contractowner must also approve participant
withdrawals under Section 401(a) plans, plans subject to Title I of ERISA. Cer-
tain charges may apply. See Charges and other deductions. A portion of with-
drawal proceeds may be taxable. In addition, a 10% Internal Revenue Service
(IRS) tax penalty may apply to distributions before age 59 1/2. A withdrawal
also may be subject to 20% withholding. See Federal tax matters.
Do participants get a free look at their certificates? A participant under a
Section 403(b) or 408 plan and certain non-qualified plans can cancel the ac-
tive life certificate within ten days (in some states longer) of the date the
participant receives the certificate. The participant needs to give notice to
our servicing office. We will refund the participant's contributions less with-
drawals, or for the variable side of the contract if greater, the participant's
account balance on the day we receive the written notice. See Return privilege.
6
<PAGE>
Condensed financial
information
The financial data included below should be read along with the financial
statements of the VAA and the related data included in the SAI.
Accumulation unit values
(For an accumulation unit outstanding throughout the period)
<TABLE>
<CAPTION>
1996 1997 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Asset Manager Account*
. Beginning of period unit value......................... $16.309 17.267 20.583
. End of period unit value............................... $17.267 20.583 23.445
. End of period number of units (000's omitted).......... 25 4,471 4,638
- -------------------------------------------------------------------------------
Balanced Account*
. Beginning of period unit value......................... $15.698 16.213 18.550
. End of period unit value............................... $16.213 18.550 21.263
. End of period number of units (000's omitted).......... 2 1,267 1,269
- -------------------------------------------------------------------------------
Equity-Income Account*
. Beginning of period unit value......................... $14.763 15.790 19.985
. End of period unit value............................... $15.790 19.985 22.087
. End of period number of units (000's omitted).......... 10 3,608 4,155
- -------------------------------------------------------------------------------
Global Growth Account**
. Beginning of period unit value......................... 10.000
. End of period unit value............................... 12.520
. End of period number of units (000's omitted).......... 75
- -------------------------------------------------------------------------------
Growth I Account*
. Beginning of period unit value......................... $22.793 23.220 28.328
. End of period unit value............................... $23.220 28.328 39.122
. End of period number of units (000's omitted).......... 8 4,962 5,291
- -------------------------------------------------------------------------------
Growth II Account*
. Beginning of period unit value......................... $16.202 14.713 14.063
. End of period unit value............................... $14.713 14.063 13.623
. End of period number of units (000's omitted).......... 1 1,713 1,527
- -------------------------------------------------------------------------------
Index Account*
. Beginning of period unit value......................... $21.013 22.705 29.827
. End of period unit value............................... $22.705 29.827 37.861
. End of period number of units (000's omitted).......... 3 3,317 3,913
- -------------------------------------------------------------------------------
International Stock Account*
. Beginning of period unit value ........................ $11.687 12.276 12.503
. End of period unit value............................... $12.276 12.503 14.342
. End of period number of units (000's omitted).......... 5 1,837 2,049
- -------------------------------------------------------------------------------
Mid Cap Growth Account**
. Beginning of period unit value......................... 10.000
. End of period unit value............................... 12.454
. End of period number of units (000's omitted).......... 19
- -------------------------------------------------------------------------------
Mid Cap Value Account**
. Beginning of period unit value......................... 10.000
. End of period unit value............................... 11.861
. End of period number of units (000's omitted).......... 27
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1996 1997 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Small Cap Account*
. Beginning of period unit value.......................... $14.854 15.286 17.632
. End of period unit value ............................... $15.286 17.632 16.856
. End of period number of units (000's omitted)........... 12 3,524 3,954
- --------------------------------------------------------------------------------
Small Cap Growth Account**
. Beginning of period unit value.......................... 10.000
. End of period unit value ............................... 13.218
. End of period number of units (000's omitted)........... 27
- --------------------------------------------------------------------------------
Social Awareness Account**
. Beginning of period unit value.......................... 10.000
. End of period unit value ............................... 12.791
. End of period number of units (000's omitted)........... 33
- --------------------------------------------------------------------------------
Socially Responsible Account*
. Beginning of period unit value.......................... $13.799 14.222 16.873
. End of period unit value ............................... $14.222 16.873 19.423
. End of period number of units (000's omitted)........... 9 469 610
- --------------------------------------------------------------------------------
Pending Allocation Account*
. Beginning of period unit value.......................... $11.123 11.277 11.894
. End of period unit value................................ $11.277 11.894 12.544
. End of period number of units (000's omitted)........... 1 30 17
- --------------------------------------------------------------------------------
</TABLE>
*The Sub-Account indicated commenced operations on September 26, 1996.
**The Sub-Account indicated commenced operations on October 1, 1998.
Investment results
At times, the VAA may compare its investment results to various unmanaged indi-
ces or other variable annuities in reports to shareholders, sales literature
and advertisements. The results will be calculated on a total return basis for
various periods. Total returns include the reinvestment of all distributions,
which are reflected in changes in unit value. See the SAI for further informa-
tion.
Financial statements
The financial statements for the VAA and Lincoln Life are located in the SAI.
For a free copy of the SAI, complete and mail the enclosed card, or call
1-800-341-0441.
Lincoln National Life Insurance Co.
Lincoln Life was founded in 1905 and is organized under Indiana law. We are one
of the largest stock life insurance companies in the United States. We are
owned by Lincoln National Corp. (LNC) which is also organized under Indiana
law. LNC's primary businesses are insurance and financial services.
7
<PAGE>
Fixed side of the contract
Contributions allocated to the fixed account become part of Lincoln Life's
general account, and do not participate in the investment experience of the
VAA. The general account is subject to regulation and supervision by the Indi-
ana 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 interests in the general account as a security under the Securities
Act of 1933 and has not registered the general account as an investment com-
pany under the 1940 Act. Accordingly, neither the general account nor any in-
terests in it 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 our
general account and to the fixed side of the contract. These disclosures, how-
ever, may be subject to certain provisions of the federal securities laws re-
lating to the accuracy and completeness of statements made in the Prospectus.
This Prospectus is generally intended to serve as a disclosure document only
for aspects of the contract involving the VAA, and therefore contains only se-
lected information regarding the fixed side of the contract. Complete details
regarding the fixed side of the contract can be found in the contract.
Contributions allocated to the fixed account are guaranteed to be credited
with a minimum interest rate, specified in the contract, of at least 3.0%. A
contribution allocated to the fixed side of the contract is credited with in-
terest beginning on the next calendar day following the date of receipt if all
participant data is complete. Lincoln Life may vary the way in which it cred-
its interest to the fixed side of the contract from time to time.
ANY INTEREST IN EXCESS OF 3.0% WILL BE DECLARED IN ADVANCE IN LINCOLN LIFE'S
SOLE DISCRETION. PARTICIPANTS BEAR THE RISK THAT NO INTEREST IN EXCESS OF 3.0%
WILL BE DECLARED.
Special limits apply to transfers and withdrawals from the fixed account. Dur-
ing any one calendar year a pa
ticipant may make one withdrawal from the fixed account, OR one transfer to
the VAA from the fixed account, of up to 20% of their fixed account balance.
Participants who want to liquidate their entire fixed account balance, or
transfer it to the VAA, however, may make one withdrawal or transfer request
for five consecutive calendar years from their fixed account, according to the
following percentages:
<TABLE>
<CAPTION>
Year Request Received Percentage of Fixed
By Lincoln Life Account Available
- --------------------- -------------------
<S> <C>
1 20%
2 25%
3 33.33%
4 50%
5 100%
</TABLE>
The five consecutive withdrawals may not be made more frequently than twelve
months apart. We reserve the right to require that any participant stating
their intention to liquidate their fixed account balance stop contributions to
the contract. The above liquidation schedule is also subject to the same con-
ditions as other withdrawals.
In addition, at contract termination some contracts offer lump sum payouts
which may have a market value adjustment but will never be lower than the
principal accumulated at an annual effective rate of 3%.
Notwithstanding these limits, under certain conditions a participant may with-
draw part or all of his or her fixed account balance. These conditions include
the participant reaching age 59 1/2, or the participant's death or disability.
There may be other conditions allowing the total withdrawal of a fixed account
balance. See Withdrawals.
If a participant's plan permits loans, then during the participant's accumula-
tion period, the participant may apply for a loan by completing a loan appli-
cation that we provide. The participant's account balance in the fixed account
secures the loan. Loans are subject to restrictions imposed by the IRC, Title
I of the Employee Retirement Income Security Act of 1974 (ERISA), and the par-
ticipant's plan. For plans subject to Title I of ERISA, the initial amount of
a participant loan cannot exceed the lesser of 50% of the participant's vested
account balance in the fixed account or $50,000 and must be at least $1,000.
For plans not subject to Title I of ERISA, a participant may borrow up to
$10,000 of his or her vested account balance. A participant may have only one
loan outstanding at a time and may not take 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 below the loan interest rate provided in the contract. Under certain con-
tracts, a fee of up to $50 may be charged for a loan. More information about
loans and loan interest rates is in the contract, the active life certifi-
cates, the annuity loan agreement and is available from us.
8
<PAGE>
Variable annuity account (VAA)
On April 29, 1996, the VAA was established as an insurance company separate ac-
count under Indiana law. It is registered with the SEC as a unit investment
trust under the provisions of the 1940 Act. The SEC does not supervise the VAA
or Lincoln Life. The VAA is a segregated investment account, meaning that its
assets may not be charged with liabilities resulting from any other business
that we may conduct. Income, gains and losses, whether realized or not, from
assets allocated to the VAA are, in accordance with the applicable annuity con-
tracts, credited to or charged against the VAA. They are credited or charged
without regard to any other income, gains or losses of Lincoln Life. The VAA
satisfies the definition of a separate account under the federal securities
laws. We do not guarantee the investment performance of the VAA. Any investment
gain or loss depends on the investment performance of the funds. You assume the
full investment risk for all amounts placed in the VAA.
The VAA is used to support other annuity contracts offered by Lincoln Life in
addition to the contracts described in this Prospectus. The other annuity con-
tracts supported by the VAA invest in the same funds as the contracts described
in this Prospectus. These other annuity contracts may have different charges
that could affect the performance of the subaccount.
Investments of the VAA
The contractowner decides which of the subaccounts available under the contract
will be available for participant allocations. There is a separate subaccount
which corresponds to each fund. Participant allocations may be changed without
penalty or charges. Shares of the funds will be sold at net asset value with no
initial sales charge to the VAA in order to fund the contracts. The funds are
required to redeem fund shares at net asset value on our request. We reserve
the right to add, delete, or substitute funds.
Each fund, described below, is an investment vehicle for insurance company sep-
arate accounts. Certain funds offered as part of this contract have similar in-
vestment objectives and policies to other portfolios managed by the fund's ad-
visor. The investment results of the funds, however, may be higher or lower
than the results of other portfolios that are managed by the advisor. There can
be no assurance, and no representation is made, that the investment results of
any of the funds will be comparable to the investment results of any other
portfolio managed by the advisor.
Description of the funds
Following are brief summaries of the investment objectives and policies of the
funds, and a description of their managers. Each fund is subject to certain in-
vestment policies and restrictions which may not be changed without a majority
vote of shareholders of that fund. More detailed information can be obtained
from the current Prospectus for the fund. There is no assurance that any of the
funds will achieve its stated objective.
1. American Century Variable Portfolios, Inc.--American Century VP Balanced
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 ap-
preciation and the balance in bonds and other fixed income securities. Amer-
ican Century Investment Management, Inc. is the investment manager of this
portfolio.
2. American Century Variable Portfolios, Inc.--American Century VP Capital Ap-
preciation seeks capital growth by investing primarily in common stocks that
are considered by management to have better-than-average prospects for ap-
preciation. American Century Investment Management, Inc. is the investment
manager of this portfolio.
3. Baron Capital Funds Trust Baron Capital Asset Fund seeks capital apprecia-
tion through investments in securities of small sized companies with market
capitalizations of $100 million to $1.5 billion, with undervalued assets or
favorable growth prospects. BAMCO, Inc. serves as the Fund's investment ad-
visor.
4. Calvert Variable Series-The Calvert Social Balanced Portfolio seek to
achieve a competitive total return through actively managed portfolio of
stock, bonds and money market instruments which offer income and capital
growth opportunity and which satisfy the investment and social criteria.
Calvert Asset Management Company, Inc. serves as the Portfolio's investment
adviser.
5. Dreyfus Stock Index Fund is a non-diversified index fund that seeks to pro-
vide 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 spon-
sored by nor affiliated with Standard & Poor's Corporation. The Dreyfus Cor-
poration 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.
6. Dreyfus Variable Investment Fund--Small Cap Portfolio seeks to maximize cap-
ital appreciation investing primarily in common stocks of domestic and for
-
9
<PAGE>
eign issuers. The Small Cap Portfolio seeks out companies that have the po-
tential for significant growth. Under normal market conditions, the Portfolio
will invest at least 65% of its total assets in companies with market capi-
talization of less than $1.5 billion, at the time of purchase. The Portfolio
manager seeks companies believed 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 corpo-
rate restructurings, mergers or acquisitions. The Dreyfus Corporation serves
as the Portfolio's investment adviser.
7. Fidelity VIP--Growth 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.
Fidelity Management & Research Company ("FMR") is the manager of this port-
folio.
8. Fidelity VIP--Equity-Income Portfolio seeks reasonable income by investing
at least 65% of its total assets in income-producing securities. The Portfo-
lio has the flexibility, however, to invest the balance in all types of do-
mestic and foreign securities, including bonds. FMR is the investment man-
ager of this portfolio.
9. Fidelity Variable Insurance Products Fund II (VIP II)--Asset Manager Portfo-
lio seeks high total return with reduced risk over the long term by allocat-
ing its assets among domestic and foreign stocks, bonds and short-term money
market instruments. FMR is the investment manager of this portfolio.
10. Janus Aspen Series--Worldwide Growth Portfolio seeks long-term growth of
capital in a manner consistent with the preservation of capital by invest-
ing primarily in common stocks of foreign and domestic issuers. The Fund
has flexibility to invest on a worldwide basis in companies and other orga-
nizations of any size, regardless of country of organization or place of
principal business activity. The Fund normally invests in issuers from at
least five different countries, including the United States, but may at
times invest in fewer than five countries or even a single country. Janus
Capital Corporation serves as the Fund's investment advisor.
11. Lincoln National Aggressive Growth Fund, Inc. seeks to maximize capital ap-
preciation by investing in a diversified portfolio of equity securities of
small and medium-sized companies which have a dominant position within
their respective industries, are undervalued or have a potential for growth
in earnings. The fund invests in companies with market capitalizations of
between $250 million and $5 billion at the time of purchase. Lincoln In-
vestment is the fund's investment advisor, and Putnam Investments is the
fund's investment sub-advisor.
12. Lincoln National Social Awareness Fund, Inc. seeks long-term capital appre-
ciation by investing primarily in a portfolio of common stock and securi-
ties convertible into common stock, which adhere to certain specific social
criteria. Lincoln Investment Management, Inc. (Lincoln Investment) is the
fund's investment advisor and Vantage Investment Advisors is the fund's in-
vestment sub-advisor.
13. Neuberger Berman Advisers Management Trust Partners Portfolio seeks capital
growth by investing mainly in common stocks of mid- to large-capitalization
established companies. Neuberger & Berman Management Incorporated(R) serves
as the Fund's investment advisor. Neuberger & Berman, LLC serves as the
Fund's investment sub-adviser.
14. T. Rowe Price International Series, Inc.--T. Rowe Price International Stock
Portfolio seeks long-term growth of capital through investments primarily
in common stocks of established, non-U.S. companies. Rowe Price-Fleming In-
ternational, Inc. is the investment manager of this portfolio.
Fidelity VIP--Money Market Portfolio seeks to obtain as high a level of current
income as is consistent with preserving capital and providing liquidity. For
more information about the Portfolio, into which initial contributions are in-
vested pending Lincoln Life's receipt of a complete order. See The contracts.
On or about August 6, 1999 we anticipate (i) closing the Growth II Account and
replacing the VP Capital Appreciation with the Lincoln National Aggressive
Growth Fund and (ii) closing the Socially Responsible Account and replacing the
Calvert Social Balanced Portfolio with the Lincoln National Social Awareness
Fund.
Some advisors (or their affiliate) may pay compensation to Lincoln Life (or an
affiliate) for administration, distribution, or other expenses. Currently,
these advisors include American Century, BAMCO, FRM, Janus, and Neuberger
Berman. The amount of compensation is usually based on assets of the Portfolio
from contracts that we issue or administer, and some advisors may pay us more
than others.
Sale of shares by the funds
We will purchase shares of the funds at net asset value and direct them to the
appropriate subaccounts of the VAA. We will redeem shares of the appropriate
funds to pay annuity payouts, death benefits, surrender/withdrawal proceeds or
for other purposes described in the contract. If a participant wants to trans-
fer all or part of his or her account balance from one subaccount to another,
we redeem shares held in the first and purchase shares of the other. The shares
are retired, but they may be reissued later.
Shares of the funds are not sold directly to the general public. They are sold
to Lincoln Life and may be sold to other insurance companies for investment of
assets of the subaccounts established by those insurance companies to fund
variable annuity and variable life insurance contracts.
10
<PAGE>
When a fund sells shares both to variable annuity and to variable life insur-
ance separate accounts, it is engaging in mixed funding. When a fund sells
shares to separate accounts of unaffiliated life insurance companies, it is
engaging in shared funding.
The funds may engage in mixed and shared funding. Due to differences in re-
demption rates or tax treatment, or other considerations, the interests of
various contract owners participating in a fund could conflict. The funds' Di-
rectors or Trustees will monitor for the existence of any material conflicts,
and determine what action, if any, should be taken. See the Prospectuses for
the funds.
Reinvestment of dividends and capital gain distributions
All dividend and capital gain distributions of the funds are automatically re-
invested in shares of the distributing funds at their net asset value on the
date of distribution. Dividends are not paid out to contractowners as addi-
tional units, but are reflected as changes in unit values.
Addition, deletion or substitution of investments
We reserve the right, within the law, to make additions, deletions and substi-
tutions for the funds in which the VAA participates. (We may substitute shares
of other funds for shares already purchased, or to be purchased in the future,
under the contract. This substitution might occur if shares of a fund should
no longer be available, or if investment in any fund's shares should become
inappropriate, in the judgment of our management, for the purposes of the con-
tract.) We cannot substitute shares without approval by the SEC. We will also
notify contractowners and participants.
Charges and other deductions
We will deduct the charges described below to cover our costs and expenses,
services provided, and risks assumed under the contracts. We will incur cer-
tain costs and expenses for distribution and administration of the contracts
and for providing the benefits payable thereunder. More particularly, our ad-
ministrative services include: processing applications and enrollment forms
and issuing the contracts and active life certificates, processing purchases
and redemptions of fund shares as required, maintaining records, administering
annuity payout options, furnishing accounting and valuation services (includ-
ing the calculation and monitoring of daily subaccount values), reconciling
and depositing cash receipts, providing contract confirmations, providing
toll-free inquiry services and furnishing telephone fund transfer services.
The risks we assume include: the risk that annuitants receiving annuity payout
under the contract will live longer than we assumed when we calculated our
guaranteed rates (these rates cannot be changed); the risk that death benefits
paid will exceed actual participant account balances (less outstanding loans);
and the risk that our costs in providing the services will exceed our revenues
from contract charges which we cannot change. The amount of a charge may not
necessarily correspond to the costs associated with providing the services or
benefits indicated by the description of the charge.
Deductions from the VAA for Variable Annuity III
We deduct from the VAA an amount, computed daily, which is equal to maximum
annual rate of 1.00% or .75% of the daily net asset value (1.20% of the daily
net asset value before January 1, 1998). The charge is a mortality and expense
risk charge. It is assessed during the accumulation period and during the an-
nuity period, even though during the annuity period, we bear no mortality risk
on annuity options that do not have life contingencies.
Contracts eligible for the lower, or "breakpoint", mortality and expense risk
charge are those contracts which, either at issue or after issue and at the
end of a calendar quarter satisfy eligibility criteria anticipated to result
in lower issue and administrative costs for us over time. Such criteria in-
clude, for example, expected size of account value and contributions, adminis-
trative simplicity, and/or limited competition. For cases not eligible for the
lower mortality and risk expense charge at issue, the lower charge will be im-
plemented on the calendar quarter-end valuation date following the end of the
calendar quarter in which the contract becomes eligible for the lower charge.
We periodically modify the criteria for eligibility. Modifications will not be
unfairly discriminatory against any person, including participants under other
contracts issued through the VAA. Contact your agent for our current eligibil-
ity criteria.
Annual administration charge
During the accumulation period, we currently deduct $25 (or the balance of the
participant's account, if less) per year from each participant's account bal-
ance on the last business day of the month in which a participant anniversary
occurs. We also deduct the charge from a participant's account balance if the
participant's account is totally withdrawn. The charge may be increased or de-
creased.
Deductions for premium taxes
Any premium tax or other tax levied by any governmental entity as a result of
the existence of the contracts or the VAA will be deducted from account value
when incurred, or at another time of our choosing.
The applicable premium tax rates that states and other governmental entities
impose on the purchase of an annuity are subject to change by legislation, by
administrative interpretation or by judicial action. The tax ranges from 0.5%
to 4.0%.
11
<PAGE>
Other charges and deductions
There are deductions from and expenses paid out of the assets of the under-
lying funds that are more fully described in the Prospectuses for the funds.
We impose a $50 fee to establish a participant loan from the fixed account,
and loans are subject to loan interest charges. In addition, we impose a $30
fee to set up a systematic withdrawal option for a participant.
Additional information
The annual administration charge described previously may be reduced or elimi-
nated under a particular contract. However, these charges will be reduced only
to the extent that we anticipate lower distribution and/or administrative ex-
penses, or that we perform fewer sales or administrative services than those
originally contemplated in establishing the levels of those charges. Lower
distribution and/or administrative expenses may be the result of economies as-
sociated with (i) the size of a particular group; (ii) an existing relation-
ship with the contractowner or employer; (iii) the use of mass enrollment pro-
cedures; (iv) the performance of administrative or sales functions by the em-
ployer; or (v) the use by an employer of automated techniques in submitting
contributions or information relating to contributions on behalf of its em-
ployees. In addition, an employer may pay the annual administration charge on
behalf of participants under a contract, or by election impose this charge
only on participants with account balances in the VAA.
The contracts
Purchase of the contracts
We designed the contracts for employers and other entities to enable partici-
pants and employers to accumulate funds for retirement programs meeting the
requirements of the following Sections of the Internal Revenue Code of 1986,
as amended (tax code): 401(a), 403(b), 408 and other related sections, as well
as for programs offering non-qualified annuities. An employer, association or
trustee in some circumstances, may apply for a contract by completing an ap-
plication and returning it to us. If we accept the application, the
contractowner 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, we will issue to each participant a
separate active life certificate that describes the basic provisions of the
contract to each participant.
Contributions
Contractowners generally forward contributions to us 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 selected
from those subaccounts available by the contractowner.
Contributions by participants may be in any amount unless there is a minimum
amount set by the contractowner or plan. A contract may require the
contractowner to contribute a minimum annual amount on behalf of all partici-
pants. Annual contributions under qualified plans may be subject to maximum
limits imposed by the tax 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 tax code, we will ac-
cept transfers from other contracts and qualified rollover contributions.
Section 830.205 of the Texas Education Code provides that employer or state
contributions (other than salary reduction contributions) on behalf of partic-
ipants in the Texas Optional Retirement Program ("ORP") vest after one year of
participation in the program. We will return employer contributions to the
contractowner for those employees who terminate employment in all Texas insti-
tutions of higher education before becoming vested. During this first partici-
pation year in the ORP, ORP Participants may only direct employer and state
contributions to the fixed account.
Contributions must be in U.S. funds, and all withdrawals and distributions un-
der the contract will be in U.S. funds. If a bank or other financial institu-
tion does not honor the check or other payment method used for a contribution,
we will treat the contribution as invalid. All allocation and subsequent
transfers resulting from the invalid contributions will be reversed and the
party responsible for the invalid contribution must reimburse us for any
losses or expenses resulting from the invalid contribution.
Initial contributions
When we receive a completed enrollment form and all other information neces-
sary for processing a contribution, we will price the initial contribution for
a participant to his or her account no later than two business days after we
receive the contribution.
If we receive contributions without a properly complete enrollment form, we
will notify the contractowner and deposit the contributions to the pending al-
location account. Within two business days of receipt of a properly completed
enrollment form, we will transfer the participant's account balance in the
pending allocation account in accordance with the allocation percentages
elected on the enrollment form. We will allocate all future contributions in
accordance with these percentages until the participant notifies us of a
change. If we do not receive a properly completed enrollment form after we
send three monthly notices, then we will refund the participant's account bal-
ance in the pending allocation account within 105 days of the date of the ini-
tial contribution. The pending allocation account invests in Fidelity VIP--
Money Market Portfolio, which is not
12
<PAGE>
available as an investment option under the contract. We do not impose the
mortality and expense risk charges or the annual administration charge on the
pending allocation account. We begin imposing these charges when we receive a
properly completed enrollment form. The participant's participation date will
be the date we deposited the participant's contribution into the pending allo-
cation account.
Valuation date
Accumulation units and annuity units will be valued once daily at the close of
trading (currently 4:00 p.m., New York time) on each day the New York Stock
Exchange is open (valuation date). On any date other than a valuation date,
the accumulation unit value and the annuity unit value will not change.
Allocation of contributions
The contractowner forwards contributions to us, specifying the amount being
contributed on behalf of each participant and allocation information in accor-
dance with our procedures. Contributions are placed into the VAA's
subaccounts, each of which invests in shares of a fund, and/or the fixed ac-
count, according to written participant instructions and subject to the plan.
The contribution allocation percentage to the subaccounts or the fixed account
can be in any whole percent. A participant may allocate contributions to a
maximum of ten subaccounts, or to a maximum of nine subaccounts and the fixed
account.
Upon allocation to the appropriate subaccount, contributions are converted to
accumulation units. The number of accumulation units credited is determined by
dividing the amount allocated to each subaccount by the value of an accumula-
tion unit for that subaccount on the valuation date on which the contribution
is received by us if received before 4:00 p.m., New York time. If the contri-
bution is received at or after 4:00 p.m., New York time, we will use the accu-
mulation unit value computed on the next valuation date. The number of accumu-
lation units determined in this way is not changed by any subsequent change in
the value of an accumulation unit. However, the dollar value of an accumula-
tion unit will vary depending not only upon how well the underlying fund's in-
vestments perform, but also upon the expenses of the VAA and the underlying
funds.
Subject to the terms of the plan, a participant may change the allocation of
contributions by notifying us in writing or by telephone in accordance with
our published procedures. The change is effective for all contributions re-
ceived concurrently with the allocation change form and for all future contri-
butions, unless the participant specifies a later date. Changes in the alloca-
tion of future contributions have no effect on amounts a participant may have
already contributed. Such amounts, however, may be transferred between
subaccounts and the fixed account pursuant to the requirements described in
"Transfers on or before the annuity commencement date." Allocations of em-
ployer contributions may be restricted by the applicable plan.
Valuation of accumulation units
Contributions allocated to the VAA are converted into accumulation units. This
is done by dividing each contribution by the value of an accumulation unit for
the valuation period during which the contribution is allocated to the VAA.
The accumulation unit value for each subaccount was or will be established at
the inception of the subaccount. It may increase or decrease from valuation
period to valuation period. The accumulation unit value for a subaccount for a
later valuation period is determined as follows:
(1) The total value of the fund shares held in the subaccount is calculated by
multiplying the number of fund shares owned by the subaccount at the be-
ginning of the valuation period by the net asset value per share of the
fund at end of the valuation period, and adding any dividend or other dis-
tribution of the fund if an ex-dividend date occurs during the valuation
period; minus
(2) The liabilities of the subaccount at the end of the valuation period;
these liabilities include daily charges imposed on the subaccount, and may
include a charge or credit with respect to any taxes paid or reserved for
by us that we determine result from the operations of the VAA; and
(3) The result of (2) is divided by the number of subaccount units outstanding
at the beginning of the valuation period.
The daily charges imposed on a subaccount for any valuation period are equal
to the mortality and expense risk charge multiplied by the number of calendar
days in the valuation period.
Transfers on or before the annuity commencement date
Subject to the terms of a plan, a participant may transfer all or a portion of
the participant's account balance from one subaccount to another, and from the
VAA to the fixed account. Transfers and withdrawals from the fixed account are
subject to special limits. During any one calendar year, a participant may
make one transfer from the fixed account to the VAA in an amount of up to 20%
of the fixed account balance, if allowed by the terms of the contract. See The
fixed account.
A transfer from a subaccount involves the surrender of accumulation units in
that subaccount, and a transfer to a subaccount involves the purchase of accu-
mulation units in that subaccount. Subaccount transfers will be done using ac-
cumulation unit values determined at the end of the valuation date on which we
receive the transfer request. There is no charge for a transfer. We do not re-
quire
any minimum transfer amount, and do not limit the number of transfers.
A transfer may be made by writing to us or, if a Telephone Exchange Authoriza-
tion form (available from
13
<PAGE>
us) is on file with us, by a toll-free telephone call. In order to prevent un-
authorized or fraudulent telephone transfers, we may require the caller to
provide certain identifying information before we will act upon their instruc-
tions. We may also assign the participant a Personal Identification Number
(PIN) to serve as identification. We will not be liable for following tele-
phone instructions we reasonably believe are genuine. Telephone requests may
be recorded and written confirmation of all transfer requests will be mailed
to the participant on the next valuation date. If the participant or
contractowner determines that a transfer was made in error, the contractowner
or participant must notify us within 30 days of the confirmation date. Tele-
phone transfers will be processed on the valuation date that they are received
when they are received by us before 4:00 p.m. New York time.
When thinking about a transfer of account value, the participant should con-
sider the inherent risk involved. Frequent transfers based on short-term ex-
pectations may increase the risk that a transfer will be made at an inoppor-
tune time.
Transfers after the annuity commencement date
We do not permit transfers of a participant's account balance after the annu-
ity commencement date.
Death benefit before the annuity commencement date
The payment of death benefits is governed by the applicable plan and the tax
code. The participant may designate a beneficiary during the participant's
lifetime and change the beneficiary by filing a written request with us. Each
change of beneficiary revokes any previous designation.
If the participant dies before the annuity commencement date, the death bene-
fit paid to the participant's designated beneficiary will be the greater of:
(1) the net contributions; or (2) the participant's account balance less any
outstanding loan (including principal and due and accrued interest), provided
that, if we are not notified of the participant's death within six months of
such death, we pay the beneficiary the amount in (2).
We determine the value of the death benefit as of the date on which the death
claim is approved for payment. This payment will occur when we receive (1)
proof, satisfactory to us, of the death of the participant; (2) written autho-
rization for payment; and (3) all required claim forms, fully completed.
If a death benefit is payable, the beneficiary may elect to receive payment of
the death benefit either in the form of a lump sum settlement or an annuity
payout, or as a combination of these two.
If a lump sum settlement is requested, the proceeds will be mailed within
seven days of receipt of satisfactory claim documentation as discussed previ-
ously, subject to the laws and regulations governing payment of death bene-
fits. If no election is made within 60 days after we receive satisfactory no-
tice of the participant's death, we will pay a lump sum settlement to the ben-
eficiary at that time. This payment may be postponed as permitted by the 1940
Act.
Payment will be made in accordance with applicable laws and regulations gov-
erning payment of death benefits.
Under qualified contracts, if the beneficiary is someone other than the spouse
of the deceased participant, the tax code provides that the beneficiary may
not elect an annuity which would commence later than December 31st of the cal-
endar 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 tax
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, dis-
tributions generally are not required under the tax code to begin earlier than
December 31st of the calendar year in which the participant would have at-
tained age 70 1/2. If the surviving spouse dies before the date distributions
commence, then, for purposes of determining the date distributions to the ben-
eficiary must commence, the date of death of the surviving spouse is substi-
tuted for the date of death of the participant.
Other rules apply to non-qualified annuities. See Federal tax matters.
If there is no living named beneficiary on file with us at the time of a par-
ticipant's death and unless the plan directs otherwise, we 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 we re-
ceive proof of death no later than the end of the fourth calendar year follow-
ing the year of the participant's death. In such case, the value of the death
benefit will be determined as of the end of the valuation period during which
we receive due proof of death, and the lump sum death benefit generally will
be paid within seven days of that date.
Withdrawals
Before the annuity commencement date and subject to the terms of the plan,
withdrawals may be made from the subaccounts of all or part of the partici-
pant's account balance in the subaccounts remaining after deductions for any
applicable (1) annual administration charge (imposed on total withdrawals),
(2) premium taxes, and (3) outstanding loan including loan security. Annuity
conversion amounts are not considered withdrawals.
Special limits apply to withdrawals (and transfers to the VAA) from the fixed
account. See The fixed account.
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Notwithstanding such limits, a participant may withdraw 100% of their fixed ac-
count balance at any time provided that we receive satisfactory proof of the
following events: (a) the participant has attained age 59 1/2; (b) the partici-
pant has died; (c) the participant has incurred a disability as defined under
the contract; (d) the participant is separated from service from their employ-
er; or (e) the participant has incurred a financial hardship. A contractowner
has options of (i) choosing to eliminate financial hardship as an event enti-
tling the participant to a 100% withdrawal from the contract; and/or (ii) add-
ing a requirement that the participant be 55 years of age and separated from
service from their employer to be entitled to a 100% withdrawal from the fixed
account. Contractowners choosing one or more of these optional provisions may
receive a different declared interest rate on the fixed account than will hold-
ers of contracts without these provisions.
The account balance available for withdrawal is determined at the end of the
valuation period during which we receive the written withdrawal request. Unless
a request for withdrawal specifies otherwise, withdrawals will be made from all
subaccounts within the VAA and from the fixed account in the same proportion
that the amount of withdrawal bears to the total participant account balance.
Unless prohibited, withdrawal payments will be mailed within seven days after
we receive a valid written request. The payment may be postponed as permitted
by the 1940 Act.
The tax consequences of a withdrawal are discussed later in this booklet. See
Federal tax matters.
Total withdrawals. Only participants with no outstanding loans can make a total
withdrawal. A total withdrawal of a participant's account will occur when (a)
the participant or contractowner requests the liquidation of the participant's
entire account balance, or (b) the amount requested results in a remaining par-
ticipant account balance of an amount less than or equal to the annual adminis-
tration charge, in which case we treat the request as a request for liquidation
of the participant's entire account balance.
Any active life certificate must be surrendered to us when a total withdrawal
occurs. If the contractowner resumes contributions on behalf of a participant
after a total withdrawal, the participant will receive a new participation date
and active life certificate.
Partial withdrawals. A partial withdrawal of a participant's account balance
will occur when less than a total withdrawal is made from a participant's ac-
count.
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 eli-
gible for a Systematic Withdrawal Option ("SWO") under the contract. Payments
are made only from the fixed account. 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 with-
drawn on a periodic basis. A participant must have a vested pre-tax account
balance of at least $10,000 in the fixed account in order to select the SWO. A
participant may transfer amounts from the VAA to the fixed account in order to
support SWO payments. These transfers, however, are subject to the transfer re-
strictions imposed by any applicable plan. A one-time fee of up to $30 will be
charged to set up the SWO. This charge is waived for total vested pre-tax ac-
count balances of $25,000 or more. More information about SWO, including appli-
cable fees and charges, is available in the contracts and active life certifi-
cates and from us.
Maximum conservation option. Under certain contracts participants who are at
least age 70 1/2 may ask us to calculate and pay to them the minimum annual
distribution required by Sections 401(a)(9), 403(b)(10), or 408 of the tax
code. The participant must complete the forms we require to elect this option.
We will base our calculation solely on the participant's account value with us.
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 tax code and regulations
thereof and in any applicable plan document. That section provides that with-
drawals of salary reduction contributions deposited and earnings credited on
any salary reduction contributions after December 31, 1988 can only be made 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, these 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 tax status.
Withdrawal requests for a participant under Section 401(a) plans, and plans
subject to Title I of ERISA must be authorized by the contractowner on behalf
of a participant. All withdrawal requests will require the contractowner's
written authorization and written documentation specifying the portion of the
participant's account balance which is available for distribution to the par-
ticipant.
As required by Section 830.105 of the Texas Education Code, withdrawal requests
by participants in the Texas Optional Retirement Program ("ORP") are only
permit-
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ted 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 termina-
tion from the participant's employer before a withdrawal request can be grant-
ed.
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,
the participant must certify to us that one of the permitted distribution
events listed in the tax code has occurred (and provide supporting information,
if requested) and that we may rely on this representation in granting the with-
drawal request. See Federal tax matters. A participant should consult his or
her tax adviser as well as review the provisions of their plan before request-
ing a withdrawal.
A plan and applicable law may contain additional withdrawal or transfer re-
strictions.
Withdrawals may have Federal tax consequences. In addition, early withdrawals,
as defined under Section 72(q) and 72(t) of the tax code, may be subject to a
ten percent excise tax.
Amendment of the contract
We reserve the right to amend the contract to meet the requirements of the 1940
Act or other applicable federal or state laws or regulations. The contractowner
will be notified in writing of any changes, modifications or waivers.
Commissions
We pay commissions of up to 3.5% of contributions to dealers. In some instanc-
es, we may lower commissions on contributions by as much as 3.5% and include a
commission of up to .50% of annual contract values (or an equivalent schedule).
These commissions are not deducted from contributions or account value; they
are paid by us.
Ownership
Contractowners have all rights under the contract except those allocated to
participants. According to Indiana law, the assets of the VAA are held for the
exclusive benefit of all contractowners, participants, and their designated
beneficiaries; and the assets of the VAA are not chargeable with liabilities
arising from any other business that we may conduct. Qualified contracts and
active life certificates may not be assigned or transferred except as permitted
by ERISA and on written notification to us. In addition, a participant, benefi-
ciary, or annuitant may not, unless permitted by law, assign or encumber any
payment due under the contract.
Contractowner questions
The obligations to purchasers under the contracts are those of Lincoln Life.
Questions about the contract should be directed to us at 1-800-341-0441.
Annuity payouts
As 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 bal-
ance or the death benefit to a payout annuity. The contract provides optional
forms of payouts of annuities (annuity payout options), each of which is pay-
able on a variable basis, a fixed basis or a combination of both as specified.
If the contractowner does not give us instructions, we will apply the partici-
pant's account balance in the fixed account to a fixed annuity, and account
balance in the VAA to a variable annuity.
If the participant's account balance or the beneficiary's death benefit is less
than $2,000 or if the amount of the first payout is less than $20, we have the
right to cancel the annuity and pay the participant or beneficiary the entire
amount in a lump sum.
We may maintain variable payout annuities in the VAA, or in another separate
account of Lincoln Life (variable payout division). We do not impose a charge
when the annuity conversion amount is applied to a variable payout division to
provide an annuity payout option. The contract benefits and charges for an an-
nuity payout option, whether maintained in the VAA or in a variable payout di-
vision, are as described in this Prospectus. The selection of funds available
through a variable payout division may be different from the funds available
through the VAA. If we will maintain a participant's variable annuity payout in
a variable payout division, we will provide a Prospectus for the variable pay-
out division before the annuity commencement date.
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 benefi-
ciary. If the beneficiary is not the participant's spouse, the present value of
payouts to be made to the participant must be more than 50% of the present
value of the total payouts to be made to the participant and the beneficiary.
If an annuitant dies before the end of a guaranteed annuity period, the benefi-
ciary, if any, or the annuitant's estate will receive any remaining payouts due
under the annuity option in effect.
Annuity payout options
Note Carefully: Under the Single Life Annuity and Joint Life Annuity options it
would be possible for only one annuity payout to be made if the annuitant(s)
were to die before the due date of the second annuity payout; only two annuity
payouts if the annuitant(s) were to die before the due date of the third annu-
ity payout; and so forth.
Single Life Annuity. Payouts are made monthly during the lifetime of the annui-
tant, and the annuity terminates with the last payout preceding death.
Life Annuity with Guaranteed Period of 10, 15 or 20 Years. Payouts are made
monthly during the life-
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time of the annuitant with a monthly payout guaranteed to the beneficiary for
the remainder of the selected number of years, if the annuitant dies before
the end of the period selected. Payouts under this annuity option are smaller
than a single life annuity without a guaranteed payout period.
Joint Life Annuity. Payouts are made monthly during the joint lifetime of the
annuitant and a designated second person.
Non-Life Annuities. Annuity payouts are guaranteed monthly for the selected
number of years. While there is no right to make any total or partial with-
drawals during the annuity period, an annuitant or beneficiary who has se-
lected this annuity option as a variable annuity may request at any time dur-
ing the payout period that the present value of any remaining installments be
paid in one lump sum. This lump sum payout will be treated as a total with-
drawal during the accumulation period. See Charges and deductions and Federal
tax status.
Additional information
Annuity payout options are only available if consistent with the contract, the
plan, the tax code, and ERISA.
The annuity commencement date is the date on which we make the first annuity
payout to an annuitant. For plans subject to Section 401(a)(9)(B) of the tax
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
contractowner may select an annuity commencement date for the annuitant, which
is shown in the retired life certificate. Selection of an annuity commencement
date may be affected by the distribution restrictions under the tax code and
the minimum distribution requirements under Section 401(a)(9) of the tax code.
See Federal tax status.
You must send us written notice of the selected annuity commencement date, the
annuity payout option (including whether fixed or variable), and the annuity
conversion amount to be converted on behalf of a participant or beneficiary,
at least 30 days before the selected annuity commencement date. If proceeds
become available to a beneficiary in a lump sum, the beneficiary may choose
any annuity payout option.
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 payout
calculation date. For a fixed annuity, the annuity commencement date is usu-
ally one month after the annuity payout calculation date; subsequent payout
annuity payouts are at one-month intervals from the annuity commencement date.
For a variable annuity, the annuity commencement date is ten business days af-
ter the initial annuity payout calculation date; subsequent monthly payouts
have annuity payout calculation dates which are ten business days prior.
Annuity payout calculation
Fixed annuity payouts are determined by dividing the participant's annuity
conversion amount in the fixed account as of the initial annuity payout calcu-
lation date by the applicable annuity conversion factor (in the contract) for
the annuity payout option selected.
Variable annuity payouts will be determined using:
1. The participant's annuity conversion amount in the VAA as of the initial
annuity payout calculation date;
2. The annuity conversion factor in the contract;
3. The annuity payout option selected; and
4. The investment performance of the funds selected.
To determine the amount of annuity payouts, we make this calculation:
1. Determine the dollar amount of the first payout; then
2. Credit the retired life certificate with a specific number of annuity units
equal to the first payout divided by the annuity unit value; and
3. Calculate the value of the annuity units each period thereafter.
We assume an investment return of a specified percentage per year, as applied
to the applicable mortality table. The amount of each annuity payout after the
initial payout will depend upon how the underlying fund(s) perform, relative
to the assumed rate. If the actual net investment rate (annualized) exceeds
the assumed rate, the payment will increase at a rate proportional to the
amount of such excess. Conversely, if the actual rate is less than the assumed
rate, the annuity payouts will decrease. There is a more complete explanation
of this calculation in the SAI.
Federal tax matters
Introduction
The Federal income tax treatment of the contract is complex and sometimes un-
certain. The Federal income tax rules may vary with your particular circum-
stances. This discussion does not include all the Federal income tax rules
that may affect the contractowner, participant and contract. This discussion
also does not address other Federal tax consequences, or state or local tax
consequences, associated with the contract. As a result, contractowner and
participant should always consult a tax advisor about the application of tax
rules to their individual situation.
Taxation of nonqualified annuities
This part of the discussion describes some of the Federal income tax rules ap-
plicable to nonqualified annuities. A nonqualified annuity is a contract not
issued in connection with a qualified retirement plan receiving special tax
treatment under the tax code, such as an IRA or a section 403(b) plan.
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Tax deferral on earnings
The Federal income tax law generally does not tax any increase in the contract
value until contractowner or participant receives a contract distribution. How-
ever, for this general rule to apply, certain requirements must be satisfied:
. An individual must own the contract (or the tax law must treat the contact as
owned by an individual).
. The investments of the VAA must be "adequately diversified" in accordance
with IRS regulations.
. The right to choose particular investments for a contract must be limited.
. The annuity commencement date must not occur near the end of the annuitant's
life expectancy.
Contracts not owned by an individual
If a contract is owned by an entity (rather than an individual) the tax code
generally does not treat it as an annuity contract for Federal income tax pur-
poses. This means that the entity owning the contract pays tax currently on the
excess of the contract value over the contributions for the contract. Examples
of contracts where the owner pays current tax on the contract's earnings are
contracts issued to a corporation or a trust. Exceptions to this rule exist.
For example, the tax code treats a contract as owned by an individual if the
named owner is a trust or other entity that holds the contract as an agent for
an individual. However, this exception does not apply in the case of any em-
ployer that owns a contract to provide deferred compensation for its employees.
Investments in the VAA must be diversified
For a contract to be treated as an annuity for Federal income tax purposes, the
investments of the VAA must be "adequately diversified." IRS regulations define
standards for determining whether the investments of the VAA are adequately di-
versified. If the VAA fails to comply with these diversification standards,
participant could be required to pay tax currently on the excess of the con-
tract value over the contract contributions. Although we do not control the in-
vestments of the underlying investment options, we expect that the underlying
investment options will comply with the IRS regulations so that the VAA will be
considered "adequately diversified."
Restrictions
Federal income tax law limits contractowner's and participant's rights to
choose particular investments for the contract. Because the I.R.S. has not is-
sued guidance specifying those limits, the limits are uncertain and your right
to allocate contract values among the subaccounts may exceed those limits. If
so, contractowner and/or participant would be treated as the owner of the as-
sets of the VAA and thus subject to current taxation on the income and gains
from those assets. We do not know what limits may be set by the I.R.S. in any
guidance that it may issue and whether any such limits will apply to existing
contracts. We reserve the right to modify the contract without contractowner's
or participant's consent to try to prevent the tax law from considering them as
the owner of the assets of the VAA.
Age at which annuity payouts begin
Federal income tax rules do not expressly identify a particular age by which
annuity payouts must begin. However, those rules do require that an annuity
contract provide for amortization, through annuity payouts, of the contract's
contributions and earnings. If annuity payouts under the contract begin or are
scheduled to begin on a date past the annuitant's 85th birthday, it is possible
that the tax law will not treat the contract as an annuity for Federal income
tax purposes. In that event, contractowner and/or participant would be cur-
rently taxable on the excess of the contract value over the contributions of
the contract.
Tax treatment of payments
We make no guarantees regarding the tax treatment of any contract or of any
transaction involving a contract. However, the rest of this discussion assumes
that the contract will be treated as an annuity for Federal income tax purposes
and that the tax law will not tax any increase in the contract value until
there is a distribution from the contract.
Taxation of withdrawals and surrenders
Contractowner and/or participant will pay tax on withdrawals to the extent
their contract value exceeds contributions in the contract. This income (and
all other income from the contract) is considered ordinary income. A higher
rate of tax is paid on ordinary income than on capital gains. Contractowner
and/or participant will pay tax on a surrender to the extent the amount re-
ceived exceeds contributions. In certain circumstances contributions are re-
duced by amounts received from the contract that were not included in income.
Taxation of annuity payouts
The tax code imposes tax on a portion of each annuity payout (at ordinary in-
come tax rates) and treats a portion as a nontaxable return of contributions in
the contract. We will notify you annually of the taxable amount of your annuity
payout. Once you have recovered the total amount of the purchase payment in the
contract, you will pay tax on the full amount of your annuity payouts. If annu-
ity payouts end because of the annuitant's death and before the total amount of
the contributions in the contract has been received, the amount not received
generally will be deductible.
Taxation of death benefits
We may distribute amounts from the contract because of the death of a partici-
pant. The tax
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treatment of these amounts depends on whether participant or the annuitant
dies before or after the annuity commencement date.
. Death prior to the annuity commencement date--
. If the beneficiary receives death benefits under an annuity payout option,
they are taxed in the same manner as annuity payouts.
. If the beneficiary does not receive death benefits under an annuity payout
option, they are taxed in the same manner as a withdrawal.
. Death after the annuity commencement date--
. If death benefits are received in accordance with the existing annuity pay-
out option, they are excludible from income if they do not exceed the con-
tributions not yet distributed from the contract. All annuity payouts in
excess of the contributions not previously received are includible in in-
come.
. If death benefits are received in a lump sum, the tax law imposes tax on
the amount of death benefits which exceeds the amount of contributions not
previously received.
Penalty taxes payable on withdrawals, surrenders, or annuity payouts
The tax code may impose a 10% penalty tax on any distribution from the con-
tract which contractowner and/or participant must include in gross income. The
10% penalty tax does not apply if one of several exceptions exists. These ex-
ceptions include withdrawals, surrenders, or annuity payouts that:
. participant receives on or after they reach age 59 1/2,
. participant receives because they became disabled (as defined in the tax
law),
. a beneficiary receives on or after participant's death, or
. participant receives as a series of substantially equal periodic payments
for their life (or life expectancy).
Special rules if you own more than one annuity contract
In certain circumstances, we must combine some or all of the nonqualified an-
nuity contracts participant owns in order to determine the amount of an annu-
ity payout, a surrender, or a withdrawal that participant must include in in-
come. For example, if contractowner and/or participant purchase two or more
deferred annuity contracts from the same life insurance company (or its affil-
iates) during any calendar year, the tax code treats all such contracts as one
contract. Treating two or more contracts as one contract could affect the
amount of a surrender, a withdrawal or an annuity payout that participant must
include in income and the amount that might be subject to the penalty tax de-
scribed above.
Loans and assignments
Except for certain qualified contracts, the tax code treats any amount re-
ceived as a loan under a contract, and any assignment or pledge (or agreement
to assign or pledge) any portion of participant's contract value, as a with-
drawal of such amount or portion.
Gifting a contract
If contractowner and participant transfer ownership of the contract to a per-
son other than participant's spouse (or to participant's former spouse inci-
dent to divorce), and receive a payment less than the contract's value, par-
ticipant will pay tax on their contract value to the extent it exceeds
contractowner's and participant's contributions not previously received. The
new owner's contributions in the contract would then be increased to reflect
the amount included in contractowner's and/or participant's income.
Loss of interest deduction
After June 8, 1997 if a contract is issued to a taxpayer that is not an indi-
vidual, or if a contract is held for the benefit of an entity, the entity will
lose a portion of its deduction for otherwise deductible interest expenses.
This disallowance does not apply if you pay tax on the annual increase in the
contract value. Entities that are considering purchasing a contract, or enti-
ties that will benefit from someone else's ownership of a contract, should
consult a tax advisor.
Qualified retirement plans
We also designed the contracts for use in connection with certain types of re-
tirement plans that receive favorable treatment under the tax code. Contracts
issued to or in connection with a qualified retirement plan are called "quali-
fied contracts." We issue contracts for use with different types of qualified
plans. The Federal income tax rules applicable to those plans are complex and
varied. As a result, this Prospectus does not attempt to provide more than
general information about use of the contract with the various types of quali-
fied plans. Persons planning to use the contract in connection with a quali-
fied plan should obtain advice from a competent tax advisor.
Types of qualified contracts and terms of contracts
Currently, we issue contracts in connection with the following types of quali-
fied plans:
. Individual Retirement Accounts and Annuities ("Traditional IRAs")
. Public school system and tax-exempt organization annuity plans ("403(b)
plans)
. Qualified employee pension and profit-sharing plans ("401(a) plans") and
qualified annuity plans ("403(a) plans")
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We may issue a contract for use with other types of qualified plans in the fu-
ture.
We will amend contracts to be used with a qualified plan as generally necessary
to conform to tax law requirements for the type of plan. However, the rights of
a person to any qualified plan benefits may be subject to the plan's terms and
conditions, regardless of the contract's terms and conditions. In addition, we
are not bound by the terms and conditions of qualified plans to the extent such
terms and conditions contradict the contract, unless we consent.
Tax treatment of qualified contracts
The Federal income tax rules applicable to qualified plans and qualified con-
tracts vary with the type of plan and contract. For example,
. Federal tax rules limit the amount of contributions that can be made, and the
tax deduction or exclusion that may be allowed for the contributions. These
limits vary depending on the type of qualified plan and the plan partici-
pant's specific circumstances, e.g., the participant's compensation.
. Under most qualified plans, e.g., 403(b) plans and Traditional IRAs, the par-
ticipant must begin receiving payments from the contract in certain minimum
amounts by a certain age, typically age 70 1/2. However, these "minimum dis-
tribution rules" do not apply to a Roth IRA.
. Loans are allowed under certain types of qualified plans, but Federal income
tax rules prohibit loans under other types of qualified plans. For example,
Federal income tax rules permit loans under some section 403(b) plans, but
prohibit loans under Traditional and Roth IRAs. If allowed, loans are subject
to a variety of limitations, including restrictions as to the loan amount,
the loan's duration, and the manner of repayment. Your contract or plan may
not permit loans.
Tax treatment of payments
Federal income tax rules generally include distributions from a qualified con-
tract in the participant's income as ordinary income. These taxable distribu-
tions will include contributions that were deductible or excludible from in-
come. Thus, under many qualified contracts the total amount received is in-
cluded in income since a deduction or exclusion from income was taken for con-
tributions. There are exceptions. For example, participant does not include
amounts received from a Roth IRA in income if certain conditions are satisfied.
Failure to comply with the minimum distribution rules applicable to certain
qualified plans, such as Traditional IRAs, will result in the imposition of an
excise tax. This excise tax generally equals 50% of the amount by which a mini-
mum required distribution exceeds the actual distribution from the qualified
plan.
Federal penalty taxes payable on distributions
The tax code may impose a 10% penalty tax on the amount received from the qual-
ified contract that must be included in income. The tax code does not impose
the penalty tax if one of several exceptions applies. The exceptions vary de-
pending on the type of qualified contract purchased. For example, in the case
of an IRA, exceptions provide that the penalty tax does not apply to a with-
drawal, surrender, or annuity payout:
. received on or after the participant reaches age 59 1/2,
. received on or after the participant's death or because of the participant's
disability (as defined in the tax law),
. received as a series of substantially equal periodic payments for the partic-
ipant's life (or life expectancy), or
. received as reimbursement for certain amounts paid for medical care.
These exceptions, as well as certain others not described here, generally apply
to taxable distributions from other qualified plans. However, the specific re-
quirements of the exception may vary.
Transfers and direct rollovers
In many circumstances, money may be moved between qualified contracts and qual-
ified plans by means of a rollover or a transfer. Special rules apply to such
rollovers and transfers. If the applicable rules are not followed, participant
may suffer adverse Federal income tax consequences, including paying taxes
which might not otherwise have had to be paid. A qualified advisor should al-
ways be consulted before contractowner or participant move or attempt to move
funds between any qualified plan or contract and another qualified plan or con-
tract.
The direct rollover rules apply to certain payments (called "eligible rollover
distributions") from section 401(a) plans, section 403(a) or (b) plans, HR 10
plans, and contracts used in connection with these types of plans. (The direct
rollover rules do not apply to distributions from IRAs). The direct rollover
rules require that we withhold Federal income tax equal to 20% of the eligible
rollover distribution from the distribution amount, unless participant elects
to have the amount directly transferred to certain qualified plans or con-
tracts. Before we send a rollover distribution, we will provide the participant
with a notice explaining these requirements and how the 20% withholding can be
avoided by electing a direct rollover.
Federal income tax withholding
We will withhold and remit to the IRS a part of the taxable portion of each
distribution made under a contract unless the participant notifies us at or be-
fore the time of the distribution that tax is not to be withheld.
20
<PAGE>
In certain circumstances, Federal income tax rules may require us to withhold
tax. At the time a withdrawal, surrender, or annuity payout is requested, we
will give the participant an explanation of the withholding requirements.
Tax status of Lincoln Life
Under existing Federal income tax laws, Lincoln Life does not pay tax on in-
vestment income and realized capital gains of the VAA. Lincoln Life does not
expect that it will incur any Federal income tax liability on the income and
gains earned by the VAA. We, therefore, do not impose a charge for Federal in-
come taxes. If Federal income tax law changes and we must pay tax on some or
all of the income and gains earned by the VAA, we may impose a charge against
the VAA to pay the taxes.
Changes in the law
The above discussion is based on the tax code, IRS regulations, and interpreta-
tions existing on the date of this Prospectus. However, Congress, the IRS, and
the courts may modify these authorities, sometimes retroactively.
Voting rights
As required by law, we will vote the fund shares held in the VAA at meetings of
shareholders of the funds. The voting will be done according to the instruc-
tions of participants that have interests in any subaccounts which invest in
the funds. If the 1940 Act or any regulation under it should be amended or if
present interpretations should change, and if as a result we determine that we
are permitted to vote the fund shares in our own right, we may elect to do so.
The number of votes which the participant has the right to cast will be deter-
mined by applying the participant's percentage interest in a subaccount to the
total number of votes attributable to the subaccount. In determining the number
of votes, fractional shares will be recognized.
Shares held in a subaccount for which no timely instructions are received will
be voted by us in proportion to the voting instructions which are received for
all contracts participating in that subaccount. Voting instructions to abstain
on any item to be voted on will be applied on a pro-rata basis to reduce the
number of votes eligible to be cast.
Whenever a shareholders meeting is called, we will furnish participants with a
voting interest in a subaccount with proxy voting materials, reports, and vot-
ing instruction forms. Since the funds engage in shared funding, other persons
or entities besides Lincoln Life may vote fund shares. See Sale of fund shares.
Distribution of the contracts
Lincoln Financial Advisors Corporation (LFA), 1300 South Clinton Street, Fort
Wayne, Indiana 46802, is the distributor and principal underwriter of the con-
tracts. The contracts will be sold by properly licensed registered representa-
tives of independent broker-dealers which in turn have selling agreements with
LFA and have been licensed by state insurance departments to represent us. LFA
is registered with the SEC under the Securities Exchange Act of 1934 as a bro-
ker-dealer and is a member of the National Association of Securities Dealers
(NASD). Lincoln Life will offer contracts in all states where it is licensed to
do business.
Return privilege
Participants under Sections 403(b), 408 and certain non-qualified plans will
receive an active life certificate. Within the free-look period (ten days) af-
ter the participant receives the active life certificate, the participant may
cancel it for any reason by giving us written notice. The postmark date of the
notice is the date of notice for these purposes. An active life certificate
canceled under this provision will be void. With respect to the fixed side of
the contract, we will return the participant's contributions less withdrawals
made on behalf of the participant. With respect to the VAA, we will return the
greater of the participant's contributions less withdrawals made on behalf of
the participant, or the participant's account balance in the VAA on the date we
receive the written notice.
State regulation
As a life insurance company organized and operated under Indiana law, we are
subject to provisions governing life insurers and to regulation by the Indiana
Commissioner of Insurance.
Our books and accounts are subject to review and examination by the Indiana De-
partment of Insurance at all times. A full examination of our operations is
conducted by that department at least every five years.
Records and reports
As presently required by the 1940 Act and applicable regulations, we are re-
sponsible for maintaining all records and accounts relating to the VAA. We have
entered into an agreement with the Delaware Management Company, 2005 Market
Street, Philadelphia, PA 19203, to provide accounting services to the VAA. We
21
<PAGE>
will mail to the contractowner, at its last known address of record at our of-
fices, at least semiannually after the first contract year, reports containing
information required by that Act or any other applicable law or regulation.
Other information
Contract deactivation. Under certain contracts, we may deactivate a contract by
prohibiting new contributions and/or new participants after the date of deacti-
vation. We will give the contractowner and participants at least ninety days
notice of the deactivation date.
Delay in payments. We may delay payments from the fixed account for up to six
months. During this period, we will continue to credit the current declared in-
terest rate to a participant's account in the fixed account. Contract proceeds
from the VAA will be paid within seven days, except (i) when the NYSE is closed
(except weekends and holidays); (ii) times when market trading is restricted or
the SEC declares an emergency, and we cannot value units or the funds cannot
redeem shares; or (iii) when the SEC so orders to protect contract owners.
IMSA. We are a member of the Insurance Marketplace Standards Association
("IMSA") and may include the IMSA logo and information about IMSA membership in
our advertisements. Companies that belong to IMSA subscribe to a set of ethical
standards covering the various aspects of sales and services for individually
sold life insurance and annuities.
Preparing for Year 2000
Many existing computer programs use only two digits in the date field to iden-
tify the year. If left uncorrected these programs, which were designed and de-
veloped without considering the impact of the upcoming change in the century,
could fail to operate or could produce erroneous results when processing dates
after December 31, 1999. For example, for a bond with a stated maturity date of
July 1, 2000, a computer program could read and store the maturity date as July
1, 1900. This problem is known by many names, such as the "Year 2000 Problem",
"Y2K", and the "Millenium Bug".
The Year 2000 Problem affects virtually all computer programs worldwide. It can
cause a computer system to suddenly stop operating. It can also result in a
computer corrupting vital company records, and the problem could go undetected
for a long time. For our products, if left unchecked it could cause such prob-
lems as contributions collection and deposit errors; claim payment difficul-
ties; accounting errors; erroneous unit values; and difficulties or delays in
processing transfers, surrenders and withdrawals. In a worst case scenario,
this could result in a material disruption to the operations both of Lincoln
Life and of Delaware Service Company Inc. (Delaware), the provider of the ac-
counting and valuation services for the VAA.
However, both companies are wholly owned by Lincoln National Corporation (LNC),
which has had Year 2000 processes in place since 1996. LNC projects aggregate
expenditures in excess of $92 million for its Y2K efforts through the year
2000. Both Lincoln Life and Delaware have dedicated Year 2000 teams and steer-
ing committees that are answerable to their counterparts in LNC.
In light of the potential problems discussed above, Lincoln Life, as part of
its Year 2000 updating process, has assumed responsibility for correcting all
high-priority Information Technology (IT) systems which service the VAA. Dela-
ware is responsible for updating all its high-priority IT systems to support
these vital services. The Year 2000 effort, for both IT and non-IT systems, is
organized into four phases:
. awareness-raising and inventory of all assets (including third-party agent
and vendor relationships)
. assessment and high-level planning and strategy
. remediation of affected systems and equipment; and
. testing to verify Year 2000 readiness.
Both companies are currently on schedule to have their high-priority IT systems
remediated and tested to demonstrate readiness by June 30, 1999. During the
third and fourth quarters of 1999 additional testing of the environment will
continue. Both companies are currently on schedule to have their high-priority
non-IT systems (elevators, heating and ventilation, security systems, etc.)
remediated and tested by October 31, 1999.
The work on Year 2000 issues has not suffered significant delays; however, some
uncertainty remains. Specific factors that give rise to this uncertainty in-
clude (but are certainly not limited to) a possible loss of technical resources
to perform the work; failure to identify all susceptible systems; and non-com-
pliance by third parties whose systems and operations impact Lincoln Life. In a
report dated February 26, 1999, entitled, Investigating the Impact of the Year
2000 Technology Problem, S. Prt. 106-10, the U.S. Senate Special Committee on
the Year 2000 Technology Problem expressed its concern that "Financial services
firms...are particularly vulnerable to...the risk that a material customer or
business partner will fail, as a result of the computer problems, to meet its
obligations".
One important source of uncertainty is the extent to which the key trading
partners of Lincoln Life and of Delaware will be successful in their own
remediation and testing efforts. Lincoln Life and Delaware have been monitoring
the progress of their trading partners; however, the efforts of these partners
are beyond our control.
Lincoln Life and Delaware expect to have completed their necessary remediation
and testing efforts prior to
22
<PAGE>
December 31, 1999. However, given the nature and complexity of the problem,
there can be no guarantee by either company that there will not be significant
computer problems after December 31, 1999.
Legal proceedings. Lincoln Life is involved in various pending or threatened
legal proceedings arising from the conduct of its business. Most of those pro-
ceedings are routine and in the ordinary course of business. In some instances
they include claims for unspecified or substantial punitive damages and simi-
lar types of relief in addition to amounts for equitable relief. After consul-
tation with legal counsel and a review of available facts, it is management's
opinion that the ultimate liability, if, any, under these suits will not have
a material adverse effect on the financial position of Lincoln Life.
Lincoln Life is presently defending three lawsuits in which Plaintiffs seek to
represent national classes of policyholders in connection with alleged fraud,
breach of contract and other claims relating to the sale of interest-sensitive
universal and participating whole life insurance policies. As of the date of
this prospectus, the courts have not certified a class in any of the suits.
Plaintiffs seek unspecified damages and penalties for themselves and on behalf
of the putative class. Although the relief sought in these cases is substan-
tial, the cases are in the preliminary stages of litigation, and it is prema-
ture to make assessments about potential, loss, if any. Management is defend-
ing these suits vigorously. The amount of liability, if any, which may ulti-
mately arise as a result of these suits cannot be reasonably determined at
this time.
Variable Annuity III Statement of Additional Information Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
DEFINITIONS 2
DETERMINATION OF VARIABLE ANNUITY PAYMENTS 2
PERFORMANCE CALCULATIONS 3
TAX LAW CONSIDERATIONS 7
DISTRIBUTION OF CONTRACTS 9
INDEPENDENT AUDITORS 9
ADVERTISING AND SALES LITERATURE 10
FINANCIAL STATEMENTS 12
</TABLE>
23
<PAGE>
VARIABLE ANNUITY III
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1999
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 Variable Annuity Payments................................. 2
Performance Calculations................................................... 3
Tax Law Considerations..................................................... 7
Distribution of Contracts.................................................. 9
Independent Auditors....................................................... 9
Advertising and sales literature........................................... 10
Financial Statements....................................................... 12
</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, 1999.
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.
90023
<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 VARIABLE ANNUITY PAYMENTS
As stated in the prospectus, the amount of each Variable Annuity payment will
vary depending on investment experience.
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, 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.
2
<PAGE>
Illustration of Calculation of Annuity Unit Value
<TABLE>
<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
</TABLE>
Illustration of Annuity Payments
<TABLE>
<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>
PERFORMANCE CALCULATIONS
Standard Total Return Calculation
The Variable Annuity Account 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
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 III of Lincoln Life and under
corresponding accounts of UNUM Life Insurance Company of America, pending
assumption reinsurance by Lincoln Life of Variable Annuity III 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.
3
<PAGE>
For Sub-Account average annual total return information calculated according to
the formula prescribed by the SEC, see "Sub-Account Performance."
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. Such non-standard performance
information may be based on the historical performance of a Fund and adjusted
to reflect some or all of the fees and charges imposed under a Contract.
The Variable Annuity Account 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 any Annual Administration
Charge. The total return percentage under this method will be higher than the
resulting percentage 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 the Annual Administration
Charge or premium taxes, and assumes no transfers. Such percentages would be
lower if these charges were included in the calculation.
In addition, the Variable Annuity Account may present actual aggregate total
return figures for various periods, reflecting the cumulative change in value
of an investment in the Variable Annuity Account for the specified period.
For information regarding the historical performance of the Funds adjusted for
the fees and charges imposed under a Contract, see "Historical Fund Performance
Adjusted for Variable Annuity Account and Contract Fees and Charges."
Performance Information
The tables below provide performance information for each Sub-Account for
specified periods ending December 31, 1998. 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.
Sub-Account Performance
Table A below assumes a hypothetical investment of $1,000 at the beginning of
the period in the Sub-Account investing in the applicable Fund and withdrawal
of the investment on 12/31/98. The rates reflect the mortality and expense risk
charge, the withdrawal charge and a pro rata portion of the Annual
Administration Charge. Table A shows Sub-Account average annual total return
information calculated according to the formula prescribed by the SEC. This
information does not indicate or represent future performance.
4
<PAGE>
TABLE A -- SUB-ACCOUNT STANDARDIZED AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
LIFE OF
SUB- SUB-
ACCOUNT 1 YEAR 3 YEAR 5 YEAR 10 YEAR ACCOUNT
INCEPTION ENDING ENDING ENDING ENDING ENDING
DATE 12/31/98 12/31/98 12/31/98 12/31/98 12/31/98
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balanced Account/1/ 05/01/91 14.57% 13.22% 11.51% N/A 10.25%
(American Century VP
Balanced)
Growth II Account/1/ 05/01/91 -3.18% -4.44% 1.97% N/A 4.04%
(American Century VP
Capital Appreciation)
Small Cap Growth Ac- 10/01/98 N/A N/A N/A N/A N/A
count/2
/ (Baron Capital Asset
Fund)
Socially Responsible Ac- 05/02/94 15.06% 14.91% N/A N/A 15.21%
count/1
/ (Calvert Social Bal-
anced Portfolio)
Index Account/1 12/12/89 26.88% 26.32% 22.08% N/A 15.86%
/ (Dreyfus Stock Index
Fund)
Small Cap Account/1 05/02/89 -4.45% 8.24% N/A N/A 11.77%
/ (Dreyfus VIF Small
Cap Portfolio)
Growth I Account/1 05/01/91 38.05% 24.00% 20.26% N/A 19.37%
/ (Fidelity VIP Growth
Portfolio)
Equity-Income Account/1 05/01/94 10.47% 16.40% N/A N/A 18.43%
/ (Fidelity VIP Equity-
Income Portfolio)
Asset Manager Account/1/ 05/01/91 13.86% 15.35% 10.45% N/A 11.66%
(Fidelity VIP II--Asset
Manager)
Global Growth Account/2 10/01/98 N/A N/A N/A N/A N/A
/ (Janus Aspen Series:
Worldwide Growth
Portfolio)
Mid Cap Growth Account/2 10/01/98 N/A N/A N/A N/A N/A
/ (Lincoln National Ag-
gressive Growth Fund)
Social Awareness Ac- 10/01/98 N/A N/A N/A N/A N/A
count/2
/ (Lincoln National So-
cial Awareness Fund)
Mid Cap Value Account/2 10/01/98 N/A N/A N/A N/A N/A
/ (Neuberger Berman
AMT: Partners Portfo-
lio)
International Stock Ac- 05/02/94 14.65% 9.75% N/A N/A 7.96%
count/1
/ (T. Rowe Price Inter-
national Series)
</TABLE>
- --------
/1/ Sub-account inception dates which reflect inception dates of sub-accounts
of the UNUM Variable Annuity-III Separate Account
/2/ Sub-account inception dates which reflect inception dates of sub-accounts
of the Lincoln Variable Annuity-III Separate Account
5
<PAGE>
Historical Fund Performance Adjusted for Variable Annuity Account and Contract
Fees and Charges
Performance information for the periods prior to the date the Sub-Accounts
commenced operations will be calculated based on the performance of the Funds
and the assumption that the Sub-Accounts were in existence for the same
periods as those indicated for the Funds, with the Contract charges that were
in effect during the time periods shown. This performance information is
referred to as "adjusted" performance information. This information does not
indicate or represent future performance.
Table B below assumes a hypothetical investment of $1,000 at the beginning of
the period in the Sub-Account investing in the applicable fund and withdrawal
of the investment on 12/31/98. The rates reflect the mortality and expense
risk charge but do not reflect deductions of the pro rata portion of the
annual administration charge because certain contract and participants are not
assessed such a charge.
TABLE B -- SUB-ACCOUNT ADJUSTED AVERAGE TOTAL RETURN ASSUMING 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 12/31/98 12/31/98 12/31/98 12/31/98 12/31/98
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balanced Account 05/01/91 14.62% 13.28% 11.58% N/A 10.33%
(American Century VP
Balanced)
Growth II Account 11/20/87 -3.13% -4.38% 2.03% 7.40% 6.95%
(American Century VP Capital
Appreciation)
Small Cap Growth Account 10/01/98 N/A N/A N/A N/A N/A
(Baron Capital Asset Fund)
Socially Responsible Account 09/02/86 15.12% 14.97% 13.25% 11.54% 10.29%
(Calvert Social Balanced
Portfolio)
Index Account 09/29/89 26.94% 26.38% 22.15% N/A 15.70%
(Dreyfus Stock Index Fund)
Small Cap Account 08/31/90 -4.40% 8.30% 11.57% N/A 35.62%
(Dreyfus VIF Small Cap Port-
folio)
Growth I Account 10/09/86 38.10% 24.06% 20.33% 18.00% 15.96%
(Fidelity VIP Growth
Portfolio)
Equity-Income Account 10/09/86 10.52% 16.45% 17.40% 14.26% 13.05%
(Fidelity VIP Equity-Income
Portfolio)
Asset Manager Account 09/06/89 13.91% 15.41% 10.51% N/A 11.60%
(Fidelity VIP II--Asset
Manager)
Global Growth Account 09/13/93 27.64% 25.40% 20.11% N/A 22.78%
(Janus Aspen Series:
Worldwide Growth Portfolio)
Mid Cap Growth Account 02/03/94 -7.13% 9.36% N/A N/A 8.78%
(Lincoln National Aggressive
Growth Fund)
Social Awareness Account 05/02/88 18.69% 27.20% 23.59% 18.67% 17.84%
(Lincoln National Social
Awareness Fund)
Mid Cap Value Account 03/22/94 3.17% 19.80% N/A N/A 18.51%
(Neuberger Berman AMT: Part-
ners Portfolio)
International Stock Account 03/31/94 14.70% 9.80% N/A N/A 8.39%
(T. Rowe Price International
Series)
</TABLE>
6
<PAGE>
Table C below shows total return information on a calendar year basis. The
rates of return shown reflect the mortality and expense risk charge but do not
reflect deduction of the pro rata portion of the Annual Administration Charge
because certain Contracts and Participants are not assessed such a charge.
TABLE C -- SUB-ACCOUNT ADJUSTED CALENDAR YEAR ANNUAL RETURN ASSUMING NO
WITHDRAWAL AND NO ANNUAL ADMINISTRATION CHARGE*
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
----- ------ ------ ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balanced Account n/a n/a n/a -7.17 6.38 -0.58 19.68 10.81 14.42 14.62
Growth II Account 27.17 -2.40 40.18 -2.52 8.99 -2.34 29.55 -5.43 -4.42 -3.13
Small Cap Growth Account n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
Socially Responsible
Account 19.53 2.94 15.02 6.33 6.72 -4.39 28.24 11.28 18.64 15.12
Index Account n/a -4.69 28.29 5.82 8.02 -0.32 35.16 21.09 31.36 26.94
Small Cap Account n/a n/a 156.65 69.25 66.31 6.47 27.85 15.22 15.35 -4.40
Growth I Account 29.95 -12.78 43.78 8.00 17.94 -1.21 33.75 13.35 22.00 38.10
Equity-Income Account 15.95 -16.29 29.88 15.50 16.89 5.80 33.49 12.92 26.57 10.52
Asset Manager Account n/a 5.45 21.11 10.53 19.60 -7.20 15.57 13.24 19.20 13.91
Global Growth Account n/a n/a n/a n/a n/a n/a n/a n/a n/a 27.64
Mid Cap Growth Account n/a n/a n/a n/a n/a n/a n/a n/a n/a -7.13
Social Awareness Account n/a n/a n/a n/a n/a n/a n/a n/a n/a 18.69
Mid Cap Value Account n/a n/a n/a n/a n/a n/a n/a n/a n/a 3.17
International Stock
Account n/a n/a n/a n/a n/a n/a n/a 13.34 1.86 14.70
</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. 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 Administration
Charge.
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 tax 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) and 408
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 years 1998 and 1999 the maximum elective salary deferral
contributions to a 401(k) Plan which is a type of 401(a) Plan is limited to
$10,000; for a 403(b) plan the limit is $10,000 unless the employee is
qualified employee.
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.
7
<PAGE>
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 $10,000 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.
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.
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.
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;
8
<PAGE>
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. Distributions from 408
Plans may qualify for additional exceptions.
Minimum Distribution Rules:
The value in a contract under Sections 401(a), 403(b) and 408 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). For 403(b)
and 401(a) Plans, an employee 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 (other than a more-than-5% owner). 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
Lincoln Financial Advisors Corporation ("LFA"), 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. LFA is the
Variable Investment Division's 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 statutory-basis financial statements of The Lincoln National Life Insurance
Company appearing in this SA1 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 audited by Ernst & Young LLP have been included in this
document in reliance on their reports given on their authority as experts in
accounting and auditing.
9
<PAGE>
ADVERTISING AND SALES LITERATURE
As set forth in the Prospectus, Lincoln Life may refer to the following
organizations (and others) in its marketing materials:
A.M. Best's Rating System--evaluates the various factors affecting the overall
performance of an insurance company in order to provide an opinion as to an
insurance company's relative financial strength and ability to meet its
contractual obligations. The procedure includes both a quantitative and
qualitative review of each company.
Duff & Phelps--insurance company claims paying ability (CPA) service provides
purchasers of insurance company policies and contracts with analytical and
statistical information on the solvency and liquidity of major U.S. licensed
insurance companies, both mutual and stock.
EAFE Index--is prepared by Morgan Stanley Capital International (MSCI). It
measures performance of securities in Europe, Australia and the Far East. The
index reflects the movements of world stock markets by representing the
evolution of an unmanaged portfolio. The EAFE Index offers international
diversification with over 1000 companies across 20 different countries.
Lipper Variable Insurance Products Performance Analysis Service--is a publisher
of statistical data covering the investment company industry in the United
States and overseas. Lipper is recognized as the leading source of data on
open-end and closed-end funds. Lipper currently tracks the performance of over
5,000 investment companies and publishes numerous specialized reports,
including reports on performance and portfolio analysis, fee and expense
analysis.
Moody's--insurance claims-paying rating is a system of rating insurance
company's financial strength, market leadership and ability to meet financial
obligations. The purpose of Moody's ratings is to provide investors with a
simple system of gradation by which the relative quality of insurance companies
may be noted.
Morningstar--is an independent financial publisher offering comprehensive
statistical and analytical coverage of open-end and closed-end funds and
variable annuity contracts.
Standard & Poor's Corp.--insurance claims-paying ability rating is an
assessment of an operating insurance company's financial capacity to meet
obligations under an insurance policy in accordance with the terms. The
likelihood of a timely flow of funds from the insurer to the trustee for the
bondholders is a key element in the rating determination for such debt issues.
VARDS (Variable Annuity Research Data Service)--provides a comprehensive guide
to variable annuity contract features and historical fund performance. The
service also provides a readily understandable analysis of the comparative
characteristics and market performance of funds inclusive in variable
contracts.
Standard & Poor's 500 Index (S&P 500)--broad-based measurement of changes in
stock-market conditions based on the average performance of 500 widely held
common stocks; commonly known as the S&P 500. The selection of stocks, their
relative weightings to reflect differences in the number of outstanding shares
and publication of the index itself are services of Standard & Poor's Corp., a
financial advisory, securities rating and publishing firm.
NASDAQ-OTC Price Index--This index is based on the National Association of
Securities Dealers Automated Quotations (NASDAQ) and represents all domestic
over-the-counter stocks except those traded on exchanges and those having only
one market maker, a total of some 3,500 stocks. It is market value-weighted and
was introduced with a base of 100.00 on February 5, 1971.
Dow Jones Industrial Average (DJIA)--Price-weighted average of 30 actively
traded blue chip stocks, primarily industrials but including American Express
Co. and American Telephone and Telegraph Co. Prepared and published by Dow
Jones & Co., it is the oldest and most widely quoted of all the market
indicators. The average is quoted in points, not dollars.
10
<PAGE>
Russell 1000 Index--Measures the performance of the 1,000 largest companies in
the Russell 3000 Index, which represents approximately 90% of the total market
capitalization of the Russell 3000 that measures 3000 of the largest US
companies.
Russell 2000 Index--Measures the performance of the 2,000 smallest companies
in the Russell 3000 Index, which represents approximately 10% of the total
market capitalization of the Russell 3000 that measures 3000 of the largest US
companies.
Lehman Brothers Aggregate Bond Index--Composed of securities from Lehman
Brothers Government/Corporate Bond Index, Mortgage-Backed Securities Index,
and the Asset-Backed Securities Index. Indexes are rebalanced monthly by
market capitalization.
Lehman Brothers Government/Corporate Bond Index--Composed of all bonds that
are investment grade (rated Baa or higher by Moody's or BBB or higher by S&P,
if unrated by Moody's). Issues must have at least one year to maturity.
Lehman Brothers Government Intermediate Bond Index--Composed of all bonds
covered by the Lehman Brothers Government Bond Index (all publicly issued,
nonconvertible, domestic debt of the US government or any agency thereof,
quasi-federal corporations, or corporate debt guaranteed by the US government)
with maturities between one and 9.99 years.
Merrill Lynch High Yield Master Index--This is an index of high yield debt
securities. High yield securities are those below the top four quality rating
categories and are considered more risky than investment grade. Issues must be
rated by Standard & Poor's or by Moody's Investors Service as less than
investment grad (i,e., BBB or Baa) but not in default (i.e. DDD1 or less).
Issues must be in the form of publicly placed nonconvertible, coupon-bearing
US domestic debt and must carry a term to maturity of at least one year.
Morgan Stanley Emerging Markets Free Index--A market capitalization weighted
index composed of companies representative of the market structure of 22
Emerging Market countries in Europe, Latin America, and the Pacific Basin.
This index excludes closed markets and those shares in otherwise free markets,
which are not purchasable by foreigners.
Morgan Stanley World Capital International World Index--A market
capitalization weighted index composed of companies representative of the
market structure of 22 Developed Market countries in North America, Europe and
the Asia/Pacific Region.
Morgan Stanley Pacific Basin (Ex-Japan) Index--An arithmetic, market value-
weighted average of the performance of securities listed on the stock
exchanges of the following Pacific Basin Countries: Australia, Hong Kong,
Malaysia, New Zealand and Singapore.
Nareit Equity Reit Index--All of the data is based on the last closing price
of the month for all tax-qualified REITs listed on the New York Stock
Exchange, American Stock Exchange, and the NASDAQ National Market System. The
data is market weighted.
Salomon Brothers World Government Bond (Non US) Index--A market capitalization
weighted index consisting of government bond markets of the following 13
countries: Australia, Austria, Belgium, Canada, Denmark, France, Germany,
Italy, Japan, The Netherlands, Spain, Sweden, and The United Kingdom.
Salomon Brothers 90 Day Treasury-Bill Index--Equal dollar amounts of three-
month Treasury bills are purchase at the beginning of each of three
consecutive months. As each bill matures, all proceeds are rolled over or
reinvested in a new three-month bill.
Standard and Poor's Index (S&P 400)--Consists of 400 domestic stocks chosen
for market size, liquidity, and industry group representations.
Standard and Poor's Utilities Index--The utility index is one of several
industry groups within the broader S&P 500. Utility stocks include electric,
natural gas, and telephone companies included in the S&P 500.
11
<PAGE>
Internet--As an electronic communications network may be used to provide
information regarding Lincoln Life performance of the subaccounts and
advertisement literature.
In its advertisements and other sales literature for the VAA and the eligible
funds, Lincoln Life intends to illustrate the advantages of the contracts in a
number of ways:
Compound interest illustrations. These will emphasize several advantages of
the variable annuity contract. For example, but not by way of limitation, the
literature may emphasize the potential savings through tax deferral; the
potential advantage of the variable account over the fixed side; and the
compounding effect when a client makes regular contributions to his or her
account.
Lincoln Life's customers. Sales literature for the VAA, the funds and series
may refer to the number of employers and the number of individual annuity
clients which Lincoln Life serves. As of the date of this SAI, Lincoln Life
was serving over 10,000 employers and more than 1 million individuals.
Lincoln Life's assets, size. Lincoln Life may discuss its general financial
condition (see, for example, the reference to A.M. Best Co., above); it may
refer to its assets; it may also discuss its relative size and/or ranking
among companies in the industry or among any subclassification of those
companies, based upon recognized evaluation criteria (see reference to A.M.
Best Company above). For example, at year-end 1998, Lincoln Life had statutory
admitted assets of over $70 Billion.
Sales literature may reference the Group Variable Annuity newsletter which is
a newsletter distributed quarterly to clients of the VAA. The contents of the
newsletter will be a commentary on general economic conditions and, on some
occasions, referencing matters in connection with the Group Variable Annuity.
Sales literature and advertisements may reference these and other similar
reports from Best's or other similar publications which report on the
insurance and financial services industries.
FINANCIAL STATEMENTS
Financial statements of the VAA and the statutory-basis financial statements
of Lincoln Life appear on the following pages.
12
<PAGE>
Lincoln National Variable Annuity Account L
Statement of assets and liability
December 31, 1998
<TABLE>
<CAPTION>
American
Century American
Dreyfus Dreyfus VP Capital Century VIPF
Stock Index Small Cap Appreciation VP Balanced Growth
Combined Fund Portfolio Portfolio Portfolio Portfolio
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
. Investments at
Market--Affiliated
(Cost $588,289) $ 652,941 $ -- $ -- $ -- $ -- $ --
- ------------------------
. Investments at
Market--Unaffiliated
(Cost $590,814,441) 713,224,632 148,155,631 66,655,396 20,805,014 26,988,065 207,013,607
- ------------------------ ------------ ------------ ----------- ----------- ----------- ------------
Total Assets 713,877,573 148,155,631 66,655,396 20,805,014 26,988,065 207,013,607
- ------------------------
Liability--Payable to
The Lincoln National
Life Insurance Company 19,666 4,143 1,774 558 772 5,731
- ------------------------ ------------ ------------ ----------- ----------- ----------- ------------
Net Assets $713,857,907 $148,151,488 $66,653,622 $20,804,456 $26,987,293 $207,007,876
- ------------------------ ============ ============ =========== =========== =========== ============
Percent of net assets 100.00% 20.75% 9.34% 2.91% 3.78% 29.00%
- ------------------------ ============ ============ =========== =========== =========== ============
Net assets are
represented by:
. Units in accumulation
period 3,913,049 3,954,259 1,527,144 1,269,238 5,291,328
- ------------------------
. Unit value $ 37.861 $ 16.856 $ 13.623 $ 21.263 $ 39.122
- ------------------------ ------------ ----------- ----------- ----------- ------------
Net Assets $148,151,488 $66,653,622 $20,804,456 $26,987,293 $207,007,876
- ------------------------ ============ =========== =========== =========== ============
</TABLE>
See accompanying notes.
L-1
<PAGE>
<TABLE>
<CAPTION>
Lincoln Lincoln
VIPF VIPF II Calvert VIPF Baron Janus Aspen National National
Equity- Asset Social T. Rowe Price Money AMT Capital Series Social Aggressive
Income Manager Balanced International Market Partners Asset WorldWide Awareness Growth
Portfolio Portfolio Portfolio Series Portfolio Fund Fund Fund Fund Fund
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $420,190 $232,751
91,784,505 108,744,983 11,852,060 29,388,022 209,732 322,445 362,706 942,466 -- --
- ----------- ------------ ----------- ----------- -------- -------- -------- -------- -------- --------
91,784,505 108,744,983 11,852,060 29,388,022 209,732 322,445 362,706 942,466 420,190 232,751
2,516 2,976 325 810 -- 9 10 25 11 6
- ----------- ------------ ----------- ----------- -------- -------- -------- -------- -------- --------
$91,781,989 $108,742,007 $11,851,735 $29,387,212 $209,732 $322,436 $362,696 $942,441 $420,179 $232,745
=========== ============ =========== =========== ======== ======== ======== ======== ======== ========
12.86% 15.23% 1.66% 4.12% 0.03% 0.05% 0.05% 0.13% 0.06% 0.03%
=========== ============ =========== =========== ======== ======== ======== ======== ======== ========
4,155,428 4,638,170 610,185 2,049,028 16,720 27,184 27,441 75,275 32,849 18,688
$ 22.087 $ 23.445 $ 19.423 $ 14.342 $ 12.544 $ 11.861 $ 13.217 $ 12.520 $ 12.791 $ 12.454
- ----------- ------------ ----------- ----------- -------- -------- -------- -------- -------- --------
$91,781,989 $108,742,007 $11,851,735 $29,387,212 $209,732 $322,436 $362,696 $942,441 $420,179 $232,745
=========== ============ =========== =========== ======== ======== ======== ======== ======== ========
</TABLE>
L-2
<PAGE>
Lincoln National Variable Annuity Account L
Statement of operations
Year Ended December 31, 1998
<TABLE>
<CAPTION>
American
Century American
Dreyfus Dreyfus VP Capital Century VIPF
Stock Index Small Cap Appreciation VP Balanced Growth
Combined Fund Portfolio Portfolio Portfolio Portfolio
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Investment Income:
. Dividends from
investment income $ 7,565,761 $ 1,770,138 $ 1,666 $ -- $ 444,972 $ 734,138
-----------------------
. Dividends from net
realized gains on
Investments 37,888,265 211,952 1,259,049 1,168,007 2,759,229 19,203,507
-----------------------
. Mortality and expense
guarantees (6,279,496) (1,248,057) (644,038) (215,246) (262,606) (1,699,027)
- ------------------------ ------------ ----------- ----------- ----------- ---------- -----------
Net investment income 39,174,530 734,033 616,677 952,761 2,941,595 18,238,618
- ------------------------
Net Realized and
Unrealized Gain (loss)
on Investments:
. Net realized gain
(loss) on investments 3,419,297 1,482,539 (106,334) (301,838) 184,157 1,517,383
-----------------------
. Net change in
unrealized
appreciation on
investments 69,625,312 27,492,153 (3,589,388) (1,352,820) 438,875 36,722,248
- ------------------------ ------------ ----------- ----------- ----------- ---------- -----------
Net realized and
unrealized gain (loss)
on investments 73,044,609 28,974,692 (3,695,722) (1,654,658) 623,032 38,239,631
- ------------------------ ------------ ----------- ----------- ----------- ---------- -----------
Net increase in net
assets resulting from
operations $112,219,139 $29,708,725 $(3,079,045) $ (701,897) $3,564,627 $56,478,249
- ------------------------ ============ =========== =========== =========== ========== ===========
</TABLE>
See accompanying notes.
L-3
<PAGE>
<TABLE>
<CAPTION>
Janus Lincoln Lincoln
VIPF VIPF II Calvert VIPF Baron Aspen National National
Equity- Asset Social T. Rowe Price Money AMT Capital Series Social Aggressive
Income Manager Balanced International Market Partners Asset Worldwide Awareness Growth
Portfolio Portfolio Portfolio Series Portolio Fund Fund Fund Fund Fund
- -------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <S>
$1,046,442 $ 2,948,926 $ 265,366 $ 341,463 $10,109 $ -- $ -- $ 1,243 $ 1,298 $ --
3,724,101 8,846,777 595,126 120,517 -- -- -- -- -- --
(840,676) (1,001,689) (99,522) (266,157) -- (367) (374) (996) (473) (268)
---------- ----------- ----------- ---------- ------- ------- ------- ------- ------- -------
3,929,867 10,794,014 760,970 195,823 10,109 (367) (374) 247 825 (268)
364,660 97,882 52,997 124,560 -- 312 1,522 540 718 199
3,733,755 2,201,200 614,617 3,164,543 -- 12,992 35,322 87,163 41,835 22,817
---------- ----------- ----------- ---------- ------- ------- ------- ------- ------- -------
4,098,415 2,299,082 667,614 3,289,103 -- 13,304 36,844 87,703 42,553 23,016
---------- ----------- ----------- ---------- ------- ------- ------- ------- ------- -------
$8,028,282 $13,093,096 $ 1,428,584 $3,484,926 $10,109 $12,937 $36,470 $87,950 $43,378 $22,748
========== =========== =========== ========== ======= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
L-4
<PAGE>
Lincoln National Variable Annuity Account L
Statements of changes in net assets
Years Ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
American
Century American
Dreyfus Dreyfus VP Capital Century
Stock Index Small Cap Appreciation VP Balanced VIPF Growth
Combined Fund Portfolio Portfolio Portfolio Portfolio
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Assets at January 1,
1997 $ 1,278,870 $ 70,194 $ 179,917 $ 18,447 $ 29,100 $ 193,151
Changes From Operations:
. Net investment income 12,466,492 3,122,822 3,037,898 27,473 422,635 572,293
-----------------------
. Net realized gain
(loss) on investments 1,338,555 212,838 427,284 54,777 52,203 265,667
-----------------------
. Net change in
unrealized
appreciation or
depreciation on
investments 52,882,918 11,894,423 4,104,018 14,236 1,799,102 17,798,189
- ------------------------ ------------- ------------ ------------ ----------- ----------- ------------
Net increase in net
assets resulting from
operations 66,687,965 15,230,083 7,569,200 96,486 2,273,940 18,636,149
- ------------------------
Change From Unit
Transactions:
. Contract purchases 497,192,046 86,811,718 57,826,354 26,258,775 22,919,086 125,011,713
-----------------------
. Terminated contracts (19,606,198) (3,162,750) (3,443,735) (2,285,559) (1,342,773) (2,708,233)
- ------------------------ ------------- ------------ ------------ ----------- ----------- ------------
Net increase in net
assets resulting from
unit transactions 477,585,848 83,648,968 54,382,619 23,973,216 21,576,313 122,303,480
- ------------------------ ------------- ------------ ------------ ----------- ----------- ------------
Total increase in net
assets 544,273,813 98,879,051 61,951,819 24,069,702 23,850,253 140,939,629
- ------------------------ ------------- ------------ ------------ ----------- ----------- ------------
Net assets at December
31, 1997 545,552,683 98,949,245 62,131,736 24,088,149 23,879,353 141,132,780
- ------------------------
Changes From Operations:
. Net investment income 39,174,530 734,033 616,677 952,761 2,941,595 18,238,618
-----------------------
. Net realized gain
(loss) on investments 3,419,297 1,482,539 (106,334) (301,838) 184,157 1,517,383
-----------------------
. Net change in
unrealized
appreciation or
depreciation on
investments 69,625,312 27,492,153 (3,589,388) (1,352,820) 438,875 36,722,248
- ------------------------ ------------- ------------ ------------ ----------- ----------- ------------
Net increase (decrease)
in net assets resulting
from operations 112,219,139 29,708,725 (3,079,045) (701,897) 3,564,627 56,478,249
- ------------------------
Change From Unit
Transactions:
. Contract purchases 176,888,310 42,083,567 23,847,325 4,749,580 5,683,978 38,227,170
-----------------------
. Terminated contracts (120,802,225) (22,590,049) (16,246,394) (7,331,376) (6,140,665) (28,830,323)
- ------------------------ ------------- ------------ ------------ ----------- ----------- ------------
Net increase (decrease)
in net assets resulting
from unit transactions 56,086,085 19,493,518 7,600,931 (2,581,796) (456,687) 9,396,847
- ------------------------ ------------- ------------ ------------ ----------- ----------- ------------
Total increase
(decrease) in net
assets 168,305,224 49,202,243 4,521,886 (3,283,693) 3,107,940 65,875,096
- ------------------------ ------------- ------------ ------------ ----------- ----------- ------------
Net assets at December
31, 1998 $ 713,857,907 $148,151,488 $ 66,653,622 $20,804,456 $26,987,293 $207,007,876
- ------------------------ ============= ============ ============ =========== =========== ============
</TABLE>
See accompanying notes.
L-5
<PAGE>
<TABLE>
<CAPTION>
Janus Lincoln Lincoln
VIPF II Calvert Baron Aspen National National
VIPF Equity- Asset Social T. Rowe Price VIPF Money AMT Capital Series Social Aggressive
Income Manager Balanced International Market Partners Asset WorldWide Awareness Growth
Portfolio Portfolio Portfolio Series Portfolio Fund Fund Fund Fund Fund
- -----------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <S>
$ 165,559 $ 430,134 $ 134,531 $ 57,782 $ 55 $ -- $ -- $ -- $ -- $ --
1,235,750 3,255,156 481,524 303,707 7,234 -- -- -- -- --
120,428 93,747 38,290 73,321 -- -- -- -- -- --
8,959,823 8,136,420 374,408 (197,701) -- -- -- -- -- --
------------ ------------ ----------- ----------- ----------- -------- -------- -------- -------- --------
10,316,001 11,485,323 894,222 179,327 7,234 -- -- -- -- --
62,752,861 83,124,241 7,271,713 24,229,972 985,613 -- -- -- -- --
(1,126,579) (3,018,433) (381,236) (1,500,450) (636,450) -- -- -- -- --
------------ ------------ ----------- ----------- ----------- -------- -------- -------- -------- --------
61,626,282 80,105,808 6,890,477 22,729,522 349,163 -- -- -- -- --
------------ ------------ ----------- ----------- ----------- -------- -------- -------- -------- --------
71,942,283 91,591,131 7,784,699 22,908,849 356,397 -- -- -- -- --
------------ ------------ ----------- ----------- ----------- -------- -------- -------- -------- --------
72,107,842 92,021,265 7,919,230 22,966,631 356,452 -- -- -- -- --
3,929,867 10,794,014 760,970 195,823 10,109 (367) (374) 247 825 (268)
364,660 97,882 52,997 124,560 -- 312 1,522 540 718 199
3,733,755 2,201,200 614,617 3,164,543 -- 12,992 35,322 87,163 41,835 22,817
------------ ------------ ----------- ----------- ----------- -------- -------- -------- -------- --------
8,028,282 13,093,096 1,428,584 3,484,926 10,109 12,937 36,470 87,950 43,378 22,748
27,399,400 18,491,100 4,281,621 8,719,313 1,152,783 329,477 421,431 876,175 396,874 228,516
(15,753,535) (14,863,454) (1,777,700) (5,783,658) (1,309,612) (19,978) (95,205) (21,684) (20,073) (18,519)
------------ ------------ ----------- ----------- ----------- -------- -------- -------- -------- --------
11,645,865 3,627,646 2,503,921 2,935,655 (156,829) 309,499 326,226 854,491 376,801 209,997
------------ ------------ ----------- ----------- ----------- -------- -------- -------- -------- --------
19,674,147 16,720,742 3,932,505 6,420,581 (146,720) 322,436 362,696 942,441 420,179 232,745
------------ ------------ ----------- ----------- ----------- -------- -------- -------- -------- --------
$ 91,781,989 $108,742,007 $11,851,735 $29,387,212 $ 209,732 $322,436 $362,696 $942,441 $420,179 $232,745
============ ============ =========== =========== =========== ======== ======== ======== ======== ========
</TABLE>
L-6
<PAGE>
Lincoln National Variable Annuity Account L
Notes to Financial Statements
1. Accounting Policies & Account Information
The Account: Lincoln National Variable Annuity Account L (the Variable Ac-
count) is a segregated investment account of The Lincoln National Life Insur-
ance Company (the Company) and is registered with the Securities and Exchange
Commission under the Investment Company Act of 1940, as amended, as a unit in-
vestment trust.
On October 1, 1996, UNUM Life Insurance Company of America (UNUM America) com-
pleted the sale of their tax-qualified annuity business to the Company and
Lincoln Life & Annuity Company of New York (LLANY), a wholly owned subsidiary
of the Company. The contracts of participants in the variable accounts of UNUM
America with respect to which consent is obtained from the contractholders
and/or participants have been reinsured pursuant to an assumption reinsurance
agreement. Assets attributable to such participants' contracts were trans-
ferred to the Variable Account and variable accounts of LLANY. Assets attrib-
utable to contracts of participants with respect to which such consent is not
obtained will remain in the variable accounts of UNUM America. During 1998 and
1997, the net assets of the Variable Account increased by approximately
$12,045,131 and $407,679,672, respectively, from novations of assets from the
variable accounts of UNUM America.
The assets of the Variable Account are owned by the Company. The portion of
the Variable Account's assets supporting the annuity contracts may not be used
to satisfy liabilities arising out of any other business of the Company.
Basis of Presentation: The accompanying financial statements have been pre-
pared in accordance with generally accepted accounting principles for unit in-
vestment trusts.
Investments: In accordance with the terms of the variable annuity contracts,
all payments transferred to the Variable Account by contract owners are allo-
cated to purchase shares of either the Dreyfus Stock Index Fund, Dreyfus Vari-
able Investment Fund: Small Cap Portfolio (Dreyfus Small Cap Portfolio), Amer-
ican Century Variable Portfolios: American Century VP Capital Appreciation
(American Century VP Capital Appreciation Portfolio) and American Century VP
Balanced (American Century VP Balanced Portfolio), Fidelity's Variable Insur-
ance Products Fund: Growth Portfolio (VIPF Growth Portfolio) and Equity-Income
Portfolio (VIPF Equity-Income Portfolio), Fidelity's Variable Insurance Prod-
ucts II: Asset Manager Portfolio (VIPF Asset Manager Portfolio), Calvert So-
cial Balanced Portfolio, T. Rowe Price International Series, Inc. (T. Rowe
Price International Series), AMT Partners (MidCap Value Fund), Baron Capital
Asset Fund (Small Cap Growth Fund), Janus Aspen Series Worldwide (Global
Fund), Lincoln National Social Awareness Fund or Lincoln National Aggressive
Growth Fund (the Funds). Fidelity's Variable Insurance Product Funds: Money
Market Portfolio (VIPF Money Market Portfolio) is used only for investments of
initial contributions for which the Company has not yet received complete or-
der instructions. Upon receipt of complete order instructions, the payments
transferred to the VIPF Money Market Portfolio are allocated to purchase
shares of one of the above Funds.
Investments in the Funds are stated at the closing net asset value per share
on December 31, 1998, which approximates fair value. The difference between
cost and fair value is reflected as unrealized appreciation and depreciation
of investments.
Investment transactions are accounted for on a trade date basis. The cost of
investments sold is determined by the average cost method.
Dividends: Dividends paid to the Variable Account are automatically reinvested
in shares of the Funds on the payable date with the exception of VIPF Money
Market Portfolio which is invested monthly. Dividend income is recorded on the
ex-dividend date.
Federal Income Taxes: Operations of the Variable Account form a part of and
are taxed with operations of the Company, which is taxed as a "life insurance
company" under the Internal Revenue Code. The Variable Account will not be
taxed as a regulated investment company under Subchapter M of the Internal
Revenue Code. Using current federal income tax law, no federal income taxes
are payable with respect to the Variable Account's net investment income and
the net realized gain on investments.
2. Mortality and Expense Guarantees
Amounts are paid to the Company for mortality and expense guarantees at an ef-
fective annual rate of 1.00% (1.20% prior to January 1, 1998) of each portfo-
lio's average daily net assets within the Variable Account with the exception
of VIPF Money Market Portfolio. Accordingly, the Company is responsible for
all sales, general, and administrative expenses applicable to the Variable Ac-
counts.
L-7
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
L-8
<PAGE>
Lincoln National Variable Annuity Account L
Notes To Financial Statements (continued)
3. Net Assets
The following is a summary of net assets owned at December 31, 1998.
<TABLE>
<CAPTION>
American
Century American
Dreyfus Dreyfus VP Capital Century VIPF
Stock Index Small Cap Appreciation VP Balanced Growth
Combined Fund Portfolio Portfolio Portfolio Portfolio
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Unit Transactions:
. Accumulation units $534,968,531 $103,213,493 $62,163,433 $21,410,764 $21,149,148 $131,899,499
- -----------------------
. Accumulated net
investment income 51,656,686 3,857,735 3,659,271 980,220 3,364,209 18,810,770
- -----------------------
. Accumulated net
realized gain (loss)
on investments 4,757,847 1,695,377 320,949 (247,061) 236,360 1,783,048
- -----------------------
. Net unrealized
appreciation
(depreciation) on
investments 122,474,843 39,384,883 509,969 (1,339,467) 2,237,576 54,514,559
- ----------------------- ------------ ------------ ----------- ----------- ----------- ------------
$713,857,907 $148,151,488 $66,653,622 $20,804,456 $26,987,293 $207,007,876
============ ============ =========== =========== =========== ============
</TABLE>
L-9
<PAGE>
<TABLE>
<CAPTION>
Lincoln Lincoln
VIPF VIPF II Calvert VIPF Baron Janus Aspen National National
Equity- Asset Social T. Rowe Price Money AMT Capital Series Social Aggressive
Income Manager Balanced International Market Partners Asset WorldWide Awareness Growth
Portfolio Portfolio Portfolio Series Portfolio Fund Fund Fund Fund Fund
- ----------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <S>
$73,439,389 $ 84,170,666 $ 9,530,985 $25,721,752 $192,388 $309,499 $326,226 $854,491 $376,801 $209,997
5,165,499 14,048,858 1,252,506 500,211 17,344 (367) (374) 247 825 (268)
485,088 191,628 91,286 197,881 -- 312 1,522 540 718 199
12,692,013 10,330,855 976,958 2,967,368 -- 12,992 35,322 87,163 41,835 22,817
----------- ------------ ----------- ----------- -------- -------- -------- -------- -------- --------
$91,781,989 $108,742,007 $11,851,735 $29,387,212 $209,732 $322,436 $362,696 $942,441 $420,179 $232,745
=========== ============ =========== =========== ======== ======== ======== ======== ======== ========
</TABLE>
L-10
<PAGE>
Lincoln National Variable Annuity Account L
Notes to Financial Statements (continued)
4. Purchases and Sales of Investments
The aggregate cost of investments purchased and the aggregate proceeds from in-
vestments sold were as follows for 1998.
<TABLE>
<CAPTION>
Aggregate Aggregate
Cost of Proceeds
Purchases from Sales
- ----------------------------------------------------------------------------
<S> <C> <C>
Dreyfus Stock Index Fund $ 27,122,839 $ 6,894,388
Dreyfus Small Cap Portfolio 12,031,461 3,814,087
American Century VP Capital Appreciation Portfolio 2,318,804 3,948,057
American Century VP Balanced Portfolio 5,719,431 3,234,529
VIPF Growth Portfolio 36,684,919 9,048,315
VIPF Equity Income Portfolio 20,245,942 4,670,049
VIPF Asset Manager Portfolio 19,228,139 4,806,508
Calvert Social Balanced Portfolio 3,902,238 637,281
T. Rowe Price International Series 5,148,138 2,016,605
VIPF Money Market Portfolio 715,648 862,368
AMT Partners Fund 322,187 13,046
Baron Capital Asset Fund 359,918 34,056
Janus Aspen Series Worldwide Fund 871,963 17,200
Lincoln National Social Awareness Fund 395,548 17,911
Lincoln National Aggressive Growth Fund 223,191 13,456
------------ -----------
$135,290,366 $40,027,856
============ ===========
</TABLE>
5. Investments
The following is a summary of investments owned at December 31, 1998.
<TABLE>
<CAPTION>
Net
Shares Asset Value of Cost of
Outstanding Value Shares Shares
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dreyfus Stock Index Fund 4,555,831 $32.52 $148,155,631 $108,770,748
Dreyfus Small Cap Portfolio 1,236,420 53.91 66,655,396 66,145,427
American Century VP Capital
Appreciation Portfolio 2,306,543 9.02 20,805,014 22,144,481
American Century VP Balanced
Portfolio 3,235,979 8.34 26,988,065 24,750,489
VIPF Growth Portfolio 4,613,631 44.87 207,013,607 152,499,048
VIPF Equity Income Portfolio 3,610,720 25.42 91,784,505 79,092,492
VIPF Asset Manager Portfolio 5,988,160 18.16 108,744,983 98,414,128
Calvert Social Balanced Portfolio 5,546,121 2.14 11,852,060 10,875,102
T. Rowe Price International
Series 2,023,968 14.52 29,388,022 26,420,654
VIPF Money Market Portfolio 209,732 1.00 209,732 209,732
AMT Partners Fund 17,034 18.93 322,445 309,453
Baron Capital Asset Fund 27,374 13.25 362,706 327,384
Janus Aspen Series Worldwide Fund 32,398 29.09 942,466 855,303
Lincoln National Social Awareness
Fund 10,431 40.28 420,190 378,355
Lincoln National Aggressive
Growth Fund 17,411 13.37 232,751 209,934
------------ ------------
$713,877,573 $591,402,730
============ ============
</TABLE>
6. New Investment Funds
Effective October 1, 1998, the AMT Partners Fund, Baron Capital Asset Fund, Ja-
nus Aspen Series Worldwide Fund, Lincoln National Social Awareness Fund and
Lincoln National Aggressive Growth Fund became available as an investment op-
tion for Variable Account contract owners.
L-11
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors of The Lincoln National Life Insurance Company
and
Contractowners of Lincoln National Variable Annuity Account L
We have audited the accompanying statement of assets and liability
of Lincoln National Variable Annuity Account L ("Variable Account")
(comprised of the Dreyfus Stock Index Fund, Dreyfus Small Cap Port-
folio, American Century VP Capital Appreciation Portfolio, American
Century VP Balanced Portfolio, VIP Fidelity Growth Portfolio, VIP
Fidelity Equity-Income Portfolio, VIP Fidelity II Asset Manager
Portfolio, Calvert Social Balanced Portfolio, T. Rowe Price Interna-
tional Series, VIP Fidelity Money Market Portfolio, AMT Partners
Fund, Baron Capital Asset Fund, Janus Aspen Series Worldwide Fund,
Lincoln National Social Awareness Fund and Lincoln National Aggres-
sive Growth Fund subaccounts), as of December 31, 1998, and the re-
lated statement of operations for the year then ended and the state-
ments of changes in net assets for each of the two years in the pe-
riod then ended. These financial statements are the responsibility
of the Variable Account's management. Our responsibility is to ex-
press an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted audit-
ing 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 ex-
amining, on a test basis, evidence supporting the amounts and dis-
closures in the financial statements. Our procedures included con-
firmation of investments owned as of December 31, 1998, by corre-
spondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by manage-
ment, as well as evaluating the overall financial statement presen-
tation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of each of
the respective subaccounts constituting the Lincoln National Vari-
able Annuity Account L at December 31, 1998, the results of their
operations for the year then ended, and the changes in their net as-
sets for each of the two years in the period then ended in confor-
mity with generally accepted accounting principles.
Fort Wayne, Indiana
March 30, 1999
L-12
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------- ---------
(IN MILLIONS)
--------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $23,830.9 $18,560.7
- ------------------------------------------------------------------------------------
Preferred stocks 236.0 257.3
- ------------------------------------------------------------------------------------
Unaffiliated common stocks 259.3 436.0
- ------------------------------------------------------------------------------------
Affiliated common stocks 322.1 412.1
- ------------------------------------------------------------------------------------
Mortgage loans on real estate 3,932.9 3,012.7
- ------------------------------------------------------------------------------------
Real estate 473.8 584.4
- ------------------------------------------------------------------------------------
Policy loans 1,606.0 660.5
- ------------------------------------------------------------------------------------
Other investments 434.4 335.5
- ------------------------------------------------------------------------------------
Cash and short-term investments 1,725.4 2,133.0
- ------------------------------------------------------------------------------------ --------- ---------
Total cash and investments 32,820.8 26,392.2
- ------------------------------------------------------------------------------------
Premiums and fees in course of collection 33.3 42.4
- ------------------------------------------------------------------------------------
Accrued investment income 432.8 343.5
- ------------------------------------------------------------------------------------
Reinsurance recoverable 171.6 71.1
- ------------------------------------------------------------------------------------
Funds withheld by ceding companies 53.7 44.1
- ------------------------------------------------------------------------------------
Federal income taxes recoverable from parent company 64.7 6.9
- ------------------------------------------------------------------------------------
Goodwill 49.5 52.4
- ------------------------------------------------------------------------------------
Other admitted assets 89.3 85.6
- ------------------------------------------------------------------------------------
Separate account assets 36,907.0 31,330.9
- ------------------------------------------------------------------------------------ --------- ---------
Total admitted assets $70,622.7 $58,369.1
- ------------------------------------------------------------------------------------ --------- ---------
--------- ---------
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $12,310.6 $ 5,872.9
- ------------------------------------------------------------------------------------
Other policyholder funds 16,647.5 16,360.1
- ------------------------------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 897.6 878.2
- ------------------------------------------------------------------------------------
Funds held under reinsurance treaties 795.8 720.4
- ------------------------------------------------------------------------------------
Asset valuation reserve 484.5 450.0
- ------------------------------------------------------------------------------------
Interest maintenance reserve 159.7 135.4
- ------------------------------------------------------------------------------------
Other liabilities 504.5 294.7
- ------------------------------------------------------------------------------------
Short-term loan payable to parent company 140.0 120.0
- ------------------------------------------------------------------------------------
Net transfers due from separate accounts (789.0) (761.9)
- ------------------------------------------------------------------------------------
Separate account liabilities 36,907.0 31,330.9
- ------------------------------------------------------------------------------------ --------- ---------
Total liabilities 68,058.2 55,400.7
- ------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------
Surplus notes due to Lincoln National Corporation 1,250.0 --
- ------------------------------------------------------------------------------------
Paid-in surplus 1,930.1 1,821.8
- ------------------------------------------------------------------------------------
Unassigned surplus (deficit) (640.6) 1,121.6
- ------------------------------------------------------------------------------------ --------- ---------
Total capital and surplus 2,564.5 2,968.4
- ------------------------------------------------------------------------------------ --------- ---------
Total liabilities and capital and surplus $70,622.7 $58,369.1
- ------------------------------------------------------------------------------------ --------- ---------
--------- ---------
</TABLE>
See accompanying notes. S-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $12,737.6 $ 5,589.0 $ 7,268.5
- ----------------------------------------------------------------------------
Net investment income 2,107.2 1,847.1 1,756.3
- ----------------------------------------------------------------------------
Amortization of interest maintenance reserve 26.4 41.5 27.2
- ----------------------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded 179.9 99.7 90.9
- ----------------------------------------------------------------------------
Expense charges on deposit funds 134.6 119.3 100.7
- ----------------------------------------------------------------------------
Separate account investment management and administration service fees 396.3 325.5 244.6
- ----------------------------------------------------------------------------
Other income 31.3 21.3 16.8
- ---------------------------------------------------------------------------- --------- --------- ---------
Total revenues 15,613.3 8,043.4 9,505.0
- ----------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 13,964.1 4,522.1 5,989.9
- ----------------------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses 2,919.4 3,053.9 3,123.1
- ---------------------------------------------------------------------------- --------- --------- ---------
Total benefits and expenses 16,883.5 7,576.0 9,113.0
- ---------------------------------------------------------------------------- --------- --------- ---------
Gain (loss) from operations before dividends to policyholders, income taxes
and net realized gain on investments (1,270.2) 467.4 392.0
- ----------------------------------------------------------------------------
Dividends to policyholders 67.9 27.5 27.3
- ---------------------------------------------------------------------------- --------- --------- ---------
Gain (loss) from operations before federal income taxes and net realized
gain on investments (1,338.1) 439.9 364.7
- ----------------------------------------------------------------------------
Federal income taxes (credit) (141.0) 78.3 83.6
- ---------------------------------------------------------------------------- --------- --------- ---------
Gain (loss) from operations before net realized gain on investments (1,197.1) 361.6 281.1
- ----------------------------------------------------------------------------
Net realized gain on investments, net of income tax expense and excluding
net transfers to the interest maintenance reserve 46.8 31.3 53.3
- ---------------------------------------------------------------------------- --------- --------- ---------
Net income (loss) $(1,150.3) $ 392.9 $ 334.4
- ---------------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
S-2
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $ 2,968.4 $ 1,962.6 $ 1,732.9
- -----------------------------------------------------------------------------
Correction of prior year's asset valuation reserve -- (37.6) --
- -----------------------------------------------------------------------------
Correction of prior year's admitted assets -- (57.0) --
- ----------------------------------------------------------------------------- --------- --------- ---------
2,968.4 1,868.0 1,732.9
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income (loss) (1,150.3) 392.9 334.4
- -----------------------------------------------------------------------------
Difference in cost and admitted investment amounts (304.8) (36.2) 38.6
- -----------------------------------------------------------------------------
Nonadmitted assets (17.1) (0.4) (3.0)
- -----------------------------------------------------------------------------
Regulatory liability for reinsurance (35.2) (3.9) 0.6
- -----------------------------------------------------------------------------
Life policy reserve valuation basis (0.4) (0.9) (0.4)
- -----------------------------------------------------------------------------
Asset valuation reserve (34.5) (36.9) (105.5)
- -----------------------------------------------------------------------------
Proceeds from surplus notes from shareholder 1,250.0 -- --
- -----------------------------------------------------------------------------
Paid-in surplus, including contribution of common stock of affiliated
company in 1997 108.4 938.4 100.0
- -----------------------------------------------------------------------------
Separate account receivable due to change in valuation -- (2.6) --
- -----------------------------------------------------------------------------
Dividends to shareholder (220.0) (150.0) (135.0)
- ----------------------------------------------------------------------------- --------- --------- ---------
Capital and surplus at end of year $ 2,564.5 $ 2,968.4 $ 1,962.6
- ----------------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes. S-3
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
---------- ---------- ----------
(IN MILLIONS)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 13,495.2 $ 6,364.3 $ 8,059.4
- -----------------------------------------------------------------------
Allowances and reserve adjustments paid on reinsurance ceded (632.4) (649.2) (767.5)
- -----------------------------------------------------------------------
Investment income received 2,003.9 1,798.8 1,700.6
- -----------------------------------------------------------------------
Separate account investment management and administration service fees 396.3 325.5 244.6
- -----------------------------------------------------------------------
Benefits paid (7,395.8) (5,345.2) (4,050.4)
- -----------------------------------------------------------------------
Insurance expenses paid (2,909.7) (3,193.0) (3,216.8)
- -----------------------------------------------------------------------
Federal income taxes recovered (paid) 84.2 (87.0) (72.3)
- -----------------------------------------------------------------------
Dividends to policyholders (12.9) (28.4) (27.7)
- -----------------------------------------------------------------------
Other income received and expenses paid, net 207.0 (8.7) 117.0
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) operating activities 5,235.8 (822.9) 1,986.9
- -----------------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 10,926.5 12,142.6 12,542.0
- -----------------------------------------------------------------------
Purchase of investments (16,950.0) (10,345.0) (14,175.4)
- -----------------------------------------------------------------------
Other sources (uses) including reinsured policy loans (778.3) 529.1 (377.2)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) investing activities (6,801.8) 2,326.7 (2,010.6)
- -----------------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in 108.4 -- 100.0
- -----------------------------------------------------------------------
Proceeds from surplus notes from shareholder 1,250.0 -- --
- -----------------------------------------------------------------------
Proceeds from borrowings from shareholder 140.0 120.0 100.0
- -----------------------------------------------------------------------
Repayment of borrowings from shareholder (120.0) (100.0) (63.0)
- -----------------------------------------------------------------------
Dividends paid to shareholder (220.0) (150.0) (135.0)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) financing activities 1,158.4 (130.0) 2.0
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net increase (decrease) in cash and short-term investments (407.6) 1,373.8 (21.7)
- -----------------------------------------------------------------------
Cash and short-term investments at beginning of year 2,133.0 759.2 780.9
- ----------------------------------------------------------------------- ---------- ---------- ----------
Cash and short-term investments at end of year $ 1,725.4 $ 2,133.0 $ 759.2
- ----------------------------------------------------------------------- ---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
S-4
<PAGE>
THE 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
Indiana. As of December 31, 1998, the Company owns 100% of the outstanding
common stock of four insurance company subsidiaries: First Penn-Pacific Life
Insurance Company ("First Penn"), Lincoln National Health & Casualty
Insurance Company ("LNH&C"), Lincoln National Reassurance Company ("LNRAC")
and Lincoln Life & Annuity Company of New York ("LLANY").
The Company's principal businesses consist of underwriting annuities,
deposit-type contracts and life and health insurance through multiple
distribution channels and the reinsurance of individual and group life and
health business. The Company is licensed and sells its products in 49
states, Canada and several U.S. territories.
USE OF ESTIMATES
The nature of the insurance and investment management businesses requires
management to make estimates and assumptions that affect the amounts
reported in the statutory-basis financial statements and accompanying notes.
Actual results could differ from those estimates.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Indiana Department of
Insurance ("Insurance Department"), which practices differ from generally
accepted accounting principles ("GAAP"). The more significant variances from
GAAP are as follows:
INVESTMENTS
Bonds are reported at cost or amortized cost or fair 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 directly
in shareholder's equity after adjustments for related amortization of
deferred acquisition costs, additional policyholder commitments and deferred
income taxes.
Investments in real estate are reported net of related obligations rather
than on a gross basis. Real estate owned and occupied by the Company is
classified as a real estate investment rather than reported as an operating
asset, and investment income and operating expenses include rent for the
Company's occupancy of those properties. 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 general
level of interest rates and amortizes those deferrals over the remaining
period to maturity of the individual security sold. The net deferral is
reported as the Interest Maintenance Reserve ("IMR") in the accompanying
balance sheets. Realized capital gains and losses are reported in income net
of federal income tax and transfers to the IMR. The asset valuation reserve
("AVR") is determined by an NAIC prescribed formula and is reported as a
liability rather than unassigned surplus. Under GAAP, realized capital gains
and losses are reported in the income statement on a pre-tax basis in the
period in which 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
consolidated 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 and presented
in the balance sheet as affiliated common stocks.
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
S-5
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
period of the related policies using assumptions consistent with those used
in computing policy benefit reserves. For universal life insurance, annuity
and other investment-type products, deferred policy acquisition costs, to
the extent recoverable from future gross profits, 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
balance sheets and are charged directly to unassigned surplus.
PREMIUMS
Revenues for universal life policies consist of the entire premium received.
Under GAAP, premiums received in excess of policy charges are not recognized
as premium revenue.
Premiums and deposits with respect to 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.
BENEFIT RESERVES
Certain policy reserves are calculated based on statutorily required
interest 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 accompanying statements 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
authorized by the Insurance Department 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 established 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. Business
assumed under 100% indemnity and assumption reinsurance agreements is
accounted for as a purchase for GAAP reporting purposes and the ceding
commission represents the purchase price. Under purchase accounting, assets
acquired and liabilities assumed are reported at fair value at the date of
the transaction and the excess of the purchase price over the sum of the
amounts assigned to assets acquired less liabilities assumed is recorded as
goodwill. On a statutory-basis, the ceding commission is expensed when paid
and reinsurance premiums and benefits are accounted for on bases consistent
with those used in accounting for the original policies issued and the terms
of the reinsurance contracts.
Certain reinsurance contracts meeting risk transfer requirements under
statutory-basis accounting practices have been accounted for using
traditional reinsurance accounting whereas such contracts would be accounted
for using deposit accounting under GAAP.
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.
S-6
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
SURPLUS NOTES DUE TO LNC
Surplus notes due to LNC are reported as surplus rather than as liabilities.
On a statutory-basis, interest on surplus notes is not accrued until
approval is received from the Indiana Insurance Commissioner whereas under
GAAP, interest would be accrued periodically based on the outstanding
principal and the interest rate.
STATEMENTS OF CASH FLOWS
Cash and short-term investments in the statements of cash flows represent
cash balances and investments with initial maturities of one year or less.
Under GAAP, the corresponding captions of cash and cash equivalents include
cash balances and investments with initial maturities of three months or
less.
A reconciliation of the Company's net income (loss) and capital and surplus
determined on a statutory-basis with amounts determined in accordance with
GAAP is as follows:
<TABLE>
<CAPTION>
CAPITAL AND SURPLUS NET INCOME (LOSS)
-----------------------------------------------------
DECEMBER 31 YEAR ENDED DECEMBER 31
1998 1997 1998 1997 1996
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts reported on a statutory-basis $ 2,564.5 $ 2,968.4 $(1,150.3) $ 392.9 $ 334.4
- -------------------------------------------
GAAP adjustments:
Deferred policy acquisition costs,
present value of future profits and
goodwill 3,085.2 958.3 48.5 (98.9) 66.7
----------------------------------------
Policy and contract reserves (2,299.9) (1,672.9) 1,743.4 (48.6) (57.1)
----------------------------------------
Interest maintenance reserve 159.7 135.4 24.4 58.7 (39.7)
----------------------------------------
Deferred income taxes 181.6 (13.0) (218.6) 70.3 1.8
----------------------------------------
Policyholders' share of earnings and
surplus on participating business (132.8) (79.8) 3.2 5.3 (.3)
----------------------------------------
Asset valuation reserve 484.5 450.0 -- -- --
----------------------------------------
Net realized gain (loss) on investments (174.1) (91.5) (116.7) (20.4) 78.7
----------------------------------------
Unrealized gain on investments 1,335.1 1,245.5 -- -- --
----------------------------------------
Nonadmitted assets, including nonadmitted
investments 119.1 61.0 -- -- --
----------------------------------------
Investments in subsidiary companies 490.4 188.8 41.3 (80.5) 29.9
----------------------------------------
Surplus notes and related interest (1,251.5) -- (1.5) -- --
----------------------------------------
Other, net (120.1) (162.5) 103.6 (35.0) (82.6)
---------------------------------------- --------- --------- --------- --------- ---------
Net increase (decrease) 1,877.2 1,019.3 1,627.6 (149.1) (2.6)
- ------------------------------------------- --------- --------- --------- --------- ---------
Amounts on a GAAP basis $ 4,441.7 $ 3,987.7 $ 477.3 $ 243.8 $ 331.8
- ------------------------------------------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
S-7
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Other significant accounting practices are as follows:
INVESTMENTS
Bonds not backed by loans are principally stated at amortized cost and the
discount or premium is amortized using the interest method.
Mortgage-backed bonds are valued at amortized cost and income is recognized
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 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.
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.
Unaffiliated common stocks are reported at fair 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
liability-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 underlying hedged items and are amortized over the
remaining lives of the hedged items as adjustments to investment income or
benefits from the hedged items through the IMR. Any unamortized gains or
losses are recognized when the underlying hedged items are sold. The
premiums paid for interest rate caps and swaptions are deferred and
amoritized to net investment income on a straight-line basis over the term
of the respective derivative.
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, increased liabilities associated with certain
reinsurance agreements and foreign exchange risk. Moreover, the derivatives
used are designated as a hedge and reduce the indicated risk by having a
high correlation between 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 or if the hedged items have
been sold, terminated or matured, the change in value of the derivatives is
included in net income.
Mortgage loans on real estate are reported at unpaid balances, less
allowances for impairments. Real estate is reported at depreciated cost.
Realized investment gains and losses on investments sold are determined
using the specific identification method. Changes in admitted asset carrying
amounts of bonds, mortgage loans and common and preferred stocks are
credited or charged directly in unassigned surplus.
LOANED SECURITIES
Securities loaned are treated as collateralized financing transactions and a
liability is recorded equal to the repurchase price. It is the Company's
policy to take possession of securities with a market value at least equal
to the securities loaned. Securities loaned are recorded at amortized cost
as long as the value of the related collateral is sufficient. The Company's
agreements with third parties generally contain contractual provisions to
allow for additional collateral to be obtained when necessary. The Company
values collateral daily and obtains additional collateral when deemed
appropriate.
GOODWILL
Goodwill, which represents the excess, subject to certain limitations, of
the ceding commission over statutory-basis net assets of business purchased
S-8
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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.
Accident and health premiums are earned pro rata over the contract term of
the policies.
BENEFITS
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables using
statutorily 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
Insurance Department. 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 scenerios indicate the need for such
reserves. 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
using 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.
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 continually reviewed and adjusted as necessary as experience
develops or new information becomes known; such adjustments are included in
current operations.
REINSURANCE CEDED AND ASSUMED
Reinsurance premiums, benefits and claims and claim adjustment expenses are
accounted for on bases consistent with those used in accounting for the
original policies issued and the terms of the reinsurance contracts. Certain
business is transacted on a funds withheld basis and investment income on
investments managed by the Company are reported in net investment income.
PENSION BENEFITS
Costs associated with the Company's defined benefit pension plans are
systematically 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 and certain LNC subsidiaries.
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 extent 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
S-9
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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
measurement date, over the amount an employee must pay to acquire the stock.
ASSETS HELD IN SEPARATE ACCOUNTS AND LIABILITIES RELATED TO SEPARATE
ACCOUNTS
Separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered for variable life
and variable annuity contracts and for which the contractholder, rather than
the Company, bears the investment risk. Separate account assets are reported
at fair value. The operations of the separate accounts are not included in
the accompanying financial statements. Policy administration and investment
management fees charged on separate account policyholder deposits are
included in income from separate account investment management and
administration service fees. Mortality charges on variable universal life
contracts are included in income from expense charges on deposit funds. Fees
charged relative to variable annuity and variable universal life
administration agreements for separate account products sold by other
insurance companies and not recorded on the Company's financial statements
are included in income from separate account investment management and
administration service fees.
RECLASSIFICATION
Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1998 presentation. These reclassifications had no effect on
unassigned surplus or net income previously reported.
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory-basis financial statements are prepared in
accordance with accounting practices prescribed or permitted by the
Insurance Department. "Prescribed" statutory accounting practices are
interspersed throughout state insurance laws and regulations, the NAIC's
ACCOUNTING PRACTICES AND PROCEDURES MANUAL and a variety of other NAIC
publications. "Permitted" statutory accounting practices encompass all
accounting practices that are not prescribed; such practices may differ from
state to state, may differ from company to company within a state and may
change in the future.
In 1998, the NAIC adopted codified statutory accounting principles
("Codification"). Codification 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. Codification will require adoption by the various
states before it becomes the prescribed statutory-basis of accounting for
insurance companies domesticated within those states. Accordingly, before
Codification becomes effective for the Company, the state of Indiana must
adopt Codification as the prescribed basis of accounting on which domestic
insurers must report their statutory-basis results to the Insurance
Department. At this time, it is anticipated that Indiana will adopt
Codification, however, based on current guidance, management believes that
the impact of Codification will not be material to the Company's
statutory-basis financial statements.
The Company has received written approval from the Insurance Department to
record surrender charges applicable to separate account liabilities for
variable life and annuity products as a liability in the separate account
financial statements payable to the Company's general account. In the
accompanying 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.
S-10
<PAGE>
THE 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
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Income:
Bonds $ 1,714.3 $ 1,524.4 $ 1,442.2
----------------------------------------------------------------
Preferred stocks 19.7 23.5 9.6
----------------------------------------------------------------
Unaffiliated common stocks 10.6 8.3 6.5
----------------------------------------------------------------
Affiliated common stocks 5.2 15.0 9.5
----------------------------------------------------------------
Mortgage loans on real estate 323.6 257.2 269.3
----------------------------------------------------------------
Real estate 81.4 92.2 114.4
----------------------------------------------------------------
Policy loans 86.5 37.5 35.0
----------------------------------------------------------------
Other investments 26.5 28.2 22.4
----------------------------------------------------------------
Cash and short-term investments 104.7 70.3 48.9
---------------------------------------------------------------- --------- --------- ---------
Total investment income 2,372.5 2,056.6 1,957.8
- -------------------------------------------------------------------
Expenses:
Depreciation 19.3 21.0 25.0
----------------------------------------------------------------
Other 246.0 188.5 176.5
---------------------------------------------------------------- --------- --------- ---------
Total investment expenses 265.3 209.5 201.5
- ------------------------------------------------------------------- --------- --------- ---------
Net investment income $ 2,107.2 $ 1,847.1 $ 1,756.3
- ------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
Nonadmitted accrued investment income at December 31, 1997
amounted to $2,600,000, consisting principally of interest
on bonds in default and mortgage loans. No accrued
investment income was nonadmitted at December 31, 1998.
S-11
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in bonds are
summarized 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, 1998:
Corporate $17,658.4 $ 1,159.8 $ 148.2 $18,670.0
------------------------------------------------
U.S. government 900.7 88.8 3.4 986.1
------------------------------------------------
Foreign government 947.8 59.9 61.2 946.5
------------------------------------------------
Mortgage-backed 4,312.1 171.6 33.4 4,450.3
------------------------------------------------
State and municipal 11.9 .7 -- 12.6
------------------------------------------------ --------- ----------- ----------- ---------
$23,830.9 $ 1,480.8 $ 246.2 $25,065.5
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
At December 31, 1997:
Corporate $13,003.8 $ 942.2 $ 60.1 $13,885.9
------------------------------------------------
U.S. government 436.3 67.9 -- 504.2
------------------------------------------------
Foreign government 1,202.1 104.9 5.4 1,301.6
------------------------------------------------
Mortgage-backed 3,874.3 215.2 27.1 4,062.4
------------------------------------------------
State and municipal 44.2 .3 -- 44.5
------------------------------------------------ --------- ----------- ----------- ---------
$18,560.7 $ 1,330.5 $ 92.6 $19,798.6
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</TABLE>
The carrying amount of bonds in the balance sheets at
December 31, 1998 and 1997 reflects adjustments of
$11,800,000 and $5,500,000, respectively, to decrease
amortized cost as a result of the Securities Valuation
Office of the NAIC ("SVO") designating certain investments
as low or lower quality.
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1998, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Maturity:
In 1999 $ 705.6 $ 712.6
--------------------------------------------------------------------------
In 2000-2003 4,041.9 4,142.8
--------------------------------------------------------------------------
In 2004-2008 6,652.0 6,860.1
--------------------------------------------------------------------------
After 2008 8,119.3 8,899.7
--------------------------------------------------------------------------
Mortgage-backed securities 4,312.1 4,450.3
-------------------------------------------------------------------------- --------- ---------
Total $23,830.9 $25,065.5
- ----------------------------------------------------------------------------- --------- ---------
--------- ---------
</TABLE>
S-12
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The expected maturities may differ from the contractual
maturities in the foregoing table because certain borrowers
may have the right to call or prepay obligations with or
without call or prepayment penalties.
Proceeds from sales of investments in bonds during 1998,
1997 and 1996 were $9,395,000,000, $9,715,000,000 and
$10,996,900,000, respectively. Gross gains during 1998, 1997
and 1996 of $186,300,000, $218,100,000 and $169,700,000,
respectively, and gross losses of $138,000,000, $78,000,000
and $177,000,000, respectively, were realized on those
sales.
At December 31, 1998 and 1997, investments in bonds, with an
admitted asset value of $97,800,000 and $76,200,000,
respectively, were on deposit with state insurance
departments to satisfy regulatory requirements.
Unrealized gains and losses on investments in unaffiliated
common stocks and preferred stocks are reported directly in
unassigned surplus and do not affect operations. 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
--------------------------------------------
(IN MILLIONS)
--------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1998:
Preferred stocks $236.0 $ 8.9 $ 2.4 $242.5
- ----------------------------------------
Unaffiliated common stocks 223.3 62.0 26.0 259.3
- ----------------------------------------
At December 31, 1997:
Preferred stocks $257.3 $12.1 $ .7 $268.7
- ----------------------------------------
Unaffiliated common stocks 357.0 98.5 19.5 436.0
- ----------------------------------------
</TABLE>
The carrying amount of preferred stocks in the balance
sheets at December 31, 1998 and 1997 reflects adjustments of
$5,800,000 and $4,000,000, respectively, to decrease
amortized cost as a result of the SVO designating certain
investments as low or lower quality.
During 1998, the minimum and maximum lending rates for
mortgage loans were 6.41% and 8.08%, respectively. At the
issuance of a loan, the percentage of loan to value on any
one loan does not exceed 75%. At December 31, 1998, the
Company did not hold any mortgages with interest overdue
beyond one year. 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.
S-13
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The components of the Company's real estate are summarized
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Occupied by the Company:
Land $ 2.5 $ 2.5
--------------------------------------------------------------------------------
Buildings 9.0 8.4
--------------------------------------------------------------------------------
Less accumulated depreciation (1.7) (1.2)
-------------------------------------------------------------------------------- --------- ---------
Net real estate occupied by the Company 9.8 9.7
- -----------------------------------------------------------------------------------
Other:
Land 93.2 124.1
--------------------------------------------------------------------------------
Buildings 413.0 491.6
--------------------------------------------------------------------------------
Other 7.9 8.1
--------------------------------------------------------------------------------
Less accumulated depreciation (50.1) (49.1)
-------------------------------------------------------------------------------- --------- ---------
Net other real estate 464.0 574.7
- ----------------------------------------------------------------------------------- --------- ---------
Net real estate $ 473.8 $ 584.4
- ----------------------------------------------------------------------------------- --------- ---------
--------- ---------
</TABLE>
Realized capital gains are reported net of federal income
taxes and amounts transferred to the IMR as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Realized capital gains $ 179.7 $ 209.3 $ 69.3
- ------------------------------------------------------------------------
Less amount transferred to IMR (net of related taxes (credit) of $27.3,
$54.0 and $(6.7) in 1998, 1997 and 1996, respectively) 50.8 100.2 (12.4)
- ------------------------------------------------------------------------ --------- --------- ---------
128.9 109.1 81.7
Less federal income taxes on realized gains 82.1 77.8 28.4
- ------------------------------------------------------------------------ --------- --------- ---------
Net realized capital gains $ 46.8 $ 31.3 $ 53.3
- ------------------------------------------------------------------------ --------- --------- ---------
--------- --------- ---------
</TABLE>
S-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES
Statutory-basis financial information related to the
Company's four wholly owned insurance subsidiaries is
summarized as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
--------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $ 1,221.1 $ 333.9 $ 403.6 $ 1,938.0
- ---------------------------------------------------------
Other assets 40.3 31.3 490.0 270.2
- --------------------------------------------------------- --------- ----------- --------- ---------
Total admitted assets $ 1,261.4 $ 365.2 $ 893.6 $ 2,208.2
- --------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
Insurance reserves $ 1,149.8 $ 266.3 $ 281.8 $ 1,814.5
- ---------------------------------------------------------
Other liabilities 42.0 24.0 553.7 45.1
- ---------------------------------------------------------
Liabilities related to separate accounts -- -- -- 236.9
- ---------------------------------------------------------
Capital and surplus 69.6 74.9 58.1 111.7
- --------------------------------------------------------- --------- ----------- --------- ---------
Total liabilities and capital and surplus $ 1,261.4 $ 365.2 $ 893.6 $ 2,208.2
- --------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
--------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 310.4 $ 165.0 $ 150.3 $ 1,402.6
- -----------------------------------------------------------
Expenses 310.6 164.4 139.5 1,656.1
- -----------------------------------------------------------
Net realized gains (losses) (0.3) 0.9 (0.1) (0.7)
- ----------------------------------------------------------- --------- ----------- --------- ---------
Net income (loss) $ (0.5) $ 1.5 $ 10.7 $ (254.2)
- ----------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
------------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $ 1,154.4 $ 284.8 $ 399.0 $ 796.3
- -----------------------------------------------------------
Other assets 36.9 77.3 481.6 130.8
- ----------------------------------------------------------- --------- ----------- ----------- -----------
Total admitted assets $ 1,191.3 $ 362.1 $ 880.6 $ 972.1
- ----------------------------------------------------------- --------- ----------- ----------- -----------
--------- ----------- ----------- -----------
Insurance reserves $ 1,072.2 $ 266.7 $ 279.3 $ 588.7
- -----------------------------------------------------------
Other liabilities 48.4 21.7 546.4 5.8
- -----------------------------------------------------------
Liabilities related to separate accounts -- -- -- 164.7
- -----------------------------------------------------------
Capital and surplus 70.7 73.7 54.9 212.9
- ----------------------------------------------------------- --------- ----------- ----------- -----------
Total liabilities and capital and surplus $ 1,191.3 $ 362.1 $ 880.6 $ 972.1
- ----------------------------------------------------------- --------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
S-15
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
----------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 267.6 $ 135.4 $ 125.3 $ 230.0
- -------------------------------------------------------------
Expenses 262.6 244.2 114.6 224.4
- -------------------------------------------------------------
Net realized gains (losses) .1 .6 (.1) (.1)
- ------------------------------------------------------------- --------- --------- ----------- -----------
Net income (loss) $ 5.1 $ (108.2) $ 10.6 $ 5.5
- ------------------------------------------------------------- --------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
The Company also owns three non-insurance subsidiaries, all
of which were formed or acquired in 1998. AnnuityNet, Inc.
was formed for the distribution of variable annuities over
the internet and is valued on the equity method with an
admitted asset value of $1,500,000 at December 31, 1998.
Lincoln National Insurance Associates was purchased for
$600,000 and is valued on the equity method with an admitted
asset value of $600,000 at December 31, 1998. Sagemark
Consulting, Inc. ("Sagemark") was purchased in 1998 and is a
broker dealer acquired in connection with a reinsurance
transaction completed in 1998. Sagemark is valued on the
equity method with an admitted asset value of $5,700,000 at
December 31, 1998.
The carrying value of all affiliated common stocks, was
$322,100,000 and $412,100,000 at December 31, 1998 and 1997,
respectively. The insurance affiliates are carried at
statutory-basis net equity while other affiliates are
recorded at GAAP basis net equity, adjusted for certain
items which would be non-admitted under statutory accounting
principles. The cost basis of investments in subsidiaries as
of December 31, 1998 and 1997 was $631,100,000 and
$466,200,000, respectively.
During 1998, 1997 and 1996 the Company's insurance
subsidiaries paid dividends of $5,200,000, $15,000,000 and
$10,500,000, respectively.
5. FEDERAL INCOME TAXES
The effective federal income tax rate in the accompanying
statements of operations differs from the prevailing
statutory tax rate principally due to tax-exempt investment
income, dividends received tax deductions and differences
between statutory accounting and tax return recognition
relative to policy acquisition costs, policy and contract
liabilities and reinsurance ceding commissions.
In 1997 and 1996, federal income taxes incurred totaled
$78,300,000 and $83,600,000, respectively. In 1998, a
federal income tax net operating loss of $103,800,000 and
tax credits of $19,300,000 were incurred and carried back to
recover taxes paid in prior years.
The Company paid $2,300,000, $164,500,000 and $100,400,000
to LNC in 1998, 1997 and 1996, respectively, for federal
income taxes.
Under prior income tax law, one-half of the excess of a life
insurance company's income from operations over its taxable
investment income was not taxed, but was set aside in a
special tax account designated as "Policyholders' Surplus."
The Company has approximately $187,000,000 of untaxed
"Policyholders' Surplus" on which no payment of federal
income taxes will be required unless it is distributed as a
dividend, or under other specified conditions. Barring the
passage of unfavorable legislation, the Company does not
believe that any significant portion of the account will be
taxed in the foreseeable future and no related tax liability
has been recognized. If the entire balance of the account
S-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES (CONTINUED)
became taxable under the current federal income tax rate,
the tax would be approximately $65,500,000.
6. 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
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Insurance ceded $ 4,081.8 $ 1,431.0
- -------------------------------------------------------------------------------
Amounts recoverable from other insurers 79.9 35.9
- -------------------------------------------------------------------------------
</TABLE>
Reinsurance transactions, excluding assumption reinsurance,
included in the income statement caption, "Premiums and
deposits," are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 9,018.9 $ 727.2 $ 241.3
- ----------------------------------------------------------------------
Insurance ceded 877.1 302.9 193.3
- ---------------------------------------------------------------------- --------- --------- ---------
Net amount included in premiums $ 8,141.8 $ 424.3 $ 48.0
- ---------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
The income statement caption, "Benefits and settlement
expenses," is net of reinsurance recoveries of
$2,098,800,000, $1,240,500,000 and $787,900,000 for 1998,
1997 and 1996, respectively.
Details underlying the balance sheet caption "Other
policyholder funds" are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Premium deposit funds $16,285.2 $16,201.8
- -----------------------------------------------------------------------------
Undistributed earnings on participating business 348.4 142.0
- -----------------------------------------------------------------------------
Other 13.9 16.3
- ----------------------------------------------------------------------------- --------- ---------
$16,647.5 $16,360.1
--------- ---------
--------- ---------
</TABLE>
S-17
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
6. SUPPLEMENTAL FINANCIAL DATA (CONTINUED)
Deferred and uncollected life insurance premiums and annuity
considerations included in the balance sheet caption,
"Premiums and fees in course of collection," are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------
NET OF
GROSS LOADING LOADING
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Ordinary new business $ 9.5 $ 3.4 $ 6.1
- -----------------------------------------------------------------------
Ordinary renewal (13.7) 11.3 (25.0)
- -----------------------------------------------------------------------
Group life 14.2 .2 14.0
- ----------------------------------------------------------------------- --------- ----- -----------
$ 10.0 $ 14.9 $ (4.9)
--------- ----- -----------
--------- ----- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------
NET OF
GROSS LOADING LOADING
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Ordinary new business $ 3.2 $ 2.4 $ .8
- ------------------------------------------------------------------------
Ordinary renewal 17.8 3.2 14.6
- ------------------------------------------------------------------------
Group life 10.6 .2 10.4
- ------------------------------------------------------------------------ --------- --- -----
$ 31.6 $ 5.8 $ 25.8
--------- --- -----
--------- --- -----
</TABLE>
The Company has entered into non-exclusive managing general
agent agreements with International Benefit Services Corp.,
HRM Claim Management, Inc. and Pediatrics Insurance
Consultants, Inc. to write group life and health business.
Direct premiums written related to the agreements amounted
to $11,900,000 and $13,400,000 in 1998 and 1997,
respectively. During 1996, LNC Administrative Services
Corporation, an affiliate, entered into a similar agreement
with the Company with direct premiums written amounting to
$7,000,000 and $7,200,000 in 1998 and 1997, respectively.
Authority granted by the managing general agents agreements
include underwriting, claims adjustment and claims payment
services.
S-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
7. ANNUITY RESERVES
At December 31, 1998, the Company's annuity reserves and
deposit 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
summarized as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
----------------------
(IN MILLIONS)
----------------------
<S> <C> <C>
Subject to discretionary withdrawal with adjustment:
With market value adjustment $ 2,659.5 5%
-----------------------------------------------------------------------------
At book value, less surrender charge 2,959.2 5
-----------------------------------------------------------------------------
At market value 35,472.0 63
----------------------------------------------------------------------------- --------- ---
41,090.7 73
Subject to discretionary withdrawal without adjustment at book value with
minimal or no charge or adjustment 12,747.3 22
- --------------------------------------------------------------------------------
Not subject to discretionary withdrawal 2,625.1 5
- -------------------------------------------------------------------------------- --------- ---
Total annuity reserves and deposit fund liabilities -- before reinsurance 56,463.1 100%
- -------------------------------------------------------------------------------- ---
---
Less reinsurance 1,683.8
- -------------------------------------------------------------------------------- ---------
Net annuity reserves and deposit fund liabilities, including separate accounts $54,779.3
- -------------------------------------------------------------------------------- ---------
---------
</TABLE>
A reconciliation of the total net annuity reserves and
deposit fund liabilities to the amounts reported in the
Company's 1998 Annual Statement and the Company's Separate
Accounts Annual Statement is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
(IN MILLIONS)
-------------
<S> <C>
Per 1998 Annual Statement:
Exhibit 8, Section B -- Total (net) $ 2,554.6
- ----------------------------------------------------------------
Exhibit 8, Section C -- Total (net) 26.0
- ----------------------------------------------------------------
Exhibit 10, Column 1, Line 19 16,579.6
- ---------------------------------------------------------------- -------------
19,160.2
- ---------------------------------------------------------------- -------------
Per Separate Accounts Annual Statement
Exhibit 6, Column 2, Line 0299999 146.4
- ----------------------------------------------------------------
Page 3, Line 3 35,472.7
- ---------------------------------------------------------------- -------------
35,619.1
- ---------------------------------------------------------------- -------------
Total net annuity reserves and deposit fund liabilities $54,779.3
- ---------------------------------------------------------------- -------------
-------------
</TABLE>
8. CAPITAL AND SURPLUS
In 1998, the Company issued two surplus notes to LNC in return for cash of
$1,250,000,000. The first note for $500,000,000 was issued to LNC in
connection with the CIGNA indemnity reinsurance transaction on January 5,
1998. This note calls for the Company to pay the principal amount of the
notes on or before March 31, 2028 and interest to be paid quarterly at an
annual rate of 6.56%. Subject to approval by the Indiana Insurance
Commissioner, LNC also has a right to redeem the note for immediate
repayment in total or in part once per year on the anniversary date of the
note, but not before January 5, 2003. Any payment of interest or
S-19
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
8. CAPITAL AND SURPLUS (CONTINUED)
repayment of principal may be paid only out of the Company's earnings, only
if the Company's surplus exceeds specified levels ($2,315,700,000 at
December 31, 1998), and subject to approval by the Indiana Insurance
Commissioner. No interest payments were approved by the Indiana Insurance
Commissioner as of December 31, 1998 and, thus, no amounts were accrued at
that date.
The second note for $750,000,000 was issued on December 18, 1998 to LNC in
connection with the Aetna indemnity reinsurance transaction. This note calls
for the Company to pay the principal amount of the notes on or before
December 31, 2028 and interest to be paid quarterly at an annual rate of
6.03%. Subject to approval by the Indiana Insurance Commissioner, LNC also
has a right to redeem the note for immediate repayment in total or in part
once per year on the anniversary date of the note, but not before December
18, 2003. Any payment of interest or repayment of principal may be paid only
out of the Company's earnings, only if the Company's surplus exceeds
specified levels ($2,379,600,000 at December 31, 1998), and subject to
approval by the Indiana Insurance Commissioner. No interest payments were
approved by the Indiana Insurance Commissioner as of December 31, 1998 and,
thus, no amounts were accrued at that date.
A summary of the terms of these surplus notes follows:
<TABLE>
<CAPTION>
CURRENT YEAR
PRINCIPAL PRINCIPAL INTEREST
DATE ISSUED AMOUNT OF NOTE OUTSTANDING PAID
------------------------------- -------------- ------------- ------------
<S> <C> <C> <C>
January 5, 1998 $500,000,000 $ 500,000,000 $ 32,300,000
-------------------------------
December 18, 1998 750,000,000 750,000,000 --
-------------------------------
</TABLE>
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 maintained by a life insurance company is to be
determined based on the various risk factors related to it. At December 31,
1998, the Company exceeds the RBC requirements.
The payment of dividends by the Company is limited and cannot 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 January 1998, the Company assumed a block of
individual life insurance and annuity business from CIGNA and in October
1998, the Company assumed a block of individual life insurance business from
Aetna (SEE NOTE 10). The statutory accounting regulations do not allow
goodwill to be recognized on indemnity reinsurance transactions and
therefore, the related ceding commission was expensed in the accompanying
Statement of Operations and resulted in the reduction of unassigned surplus.
As a result of these transactions, the Company's statutory-basis unassigned
surplus is negative as of December 31, 1998 and it will be necessary for the
Company to obtain prior approval of the Indiana Insurance Commissioner
before paying any dividends to LNC until such time as statutory-basis
unassigned surplus is positive. It is expected that statutory-basis
unassigned surplus will return to a positive position within two to three
years from the closing of the Aetna transaction assuming a level of
statutory-basis earnings coinciding with recent earnings patterns. If
statutory-basis earnings are less then recent patterns due to adverse
operating conditions or further indemnity reinsurance transactions of this
nature or other factors, or if dividends are approved and paid at amounts
higher than recent history, the statutory-basis unassigned surplus may not
return to a positive position as soon as expected. Although no assurance can
be given, management believes that the approvals for the payment of such
dividends in amounts consistent with those paid in the past can be obtained.
S-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFIT PLANS
LNC maintains defined benefit pension plans for its employees (including
Company employees) and a defined contribution plan for the Company's agents.
LNC also maintains 401(k) plans, deferred compensation plans and
postretirement medical and life insurance plans for its employees and agents
(including the Company's employees and agents). The aggregate expenses and
accumulated obligations for the Company's portion of these plans are not
material to the Company's statutory-basis financial statements of income or
financial position for any of the periods shown.
LNC has various incentive plans for key employees, agents and directors of
LNC and its subsidiaries that provide for the issuance of stock options,
stock appreciation rights, restricted stock awards and stock incentive
awards. These plans are comprised primarily of stock option incentive plans.
Stock options granted under the stock option incentive plans are at the
market value at the date of grants and, subject to termination of
employment, expire ten years from the date of grant. Such options are
transferable only upon death and are exercisable one year from the date of
grant for options issued prior to 1992. Option issued subsequent to 1991 are
exercisable in 25% increments on the option issuance anniversary in the four
years following issuance.
As of December 31, 1998, 885,252 and 504,369 shares of LNC common stock were
subject to options granted to Company employees and agents, respectively,
under the stock option incentive plans of which 430,053 and 87,160,
respectively, were exercisable on that date. The exercise prices of the
outstanding options range from $23.50 to $96.41. During 1998, 1997 and 1996,
136,469, 170,789 and 72,405 options were exercised, respectively, and
18,288, 1,846 and 10,950 options were forfeited, respectively.
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES
DISABILITY INCOME CLAIMS
The liability for disability income claims net of the related asset for
amounts recoverable from reinsurers at December 31, 1998 and 1997 is a net
liability of $670,100,000 and $516,900,000, respectively. This liability is
based on the assumption that the recent experience will continue in the
future. If incidence levels and/or claim termination rates fluctuate
significantly from the assumptions underlying reserves, adjustments to
reserves could be required in the future. Accordingly, this liability may
prove to be deficient or excessive. The Company reviews reserve levels on an
ongoing basis. However, it is management's opinion that such future
development will not materially affect the financial position of the
Company.
During 1997, the Company conducted an in-depth review of loss experience on
its disability income business. As a result of this study, the reserve level
was deemed to be inadequate to meet future obligations if current incident
levels were to continue in the future. In order to address this situation,
the Company strengthened its disability income reserves by $80,000,000 in
1997.
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 policies
that were less advantageous to the policyholder. The Company's management
continues to monitor the Company's sales materials and compliance procedures
and is making an extensive effort to minimize any potential liability. Due
to the uncertainty surrounding such matters, it is not possible to provide a
meaningful estimate of the range of potential outcomes at this time;
however, it is management's opinion that such future development will not
materially affect the financial position of the Company.
GROUP PENSION ANNUITIES
The liabilities for guaranteed interest and group pension annuity contracts,
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
liabilities. Due to the 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. Accordingly, these liabilities may prove
to be deficient or excessive. However, it is management's opinion that such
future
S-21
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
development will not materially affect the financial position of the
Company.
LEASES
The Company leases its 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. The Company also 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 ending in 2009 or on
the last day of any of the renewal periods.
Total rental expense on operating leases in 1998, 1997 and 1996 was
$34,000,000, $29,300,000 and $26,400,000, respectively. Future minimum
rental commitments are as follows (in millions):
<TABLE>
<S> <C>
1999 $ 18.9
- --------------------------------------
2000 18.4
- --------------------------------------
2001 18.7
- --------------------------------------
2002 18.7
- --------------------------------------
2003 18.6
- --------------------------------------
Thereafter 116.6
- -------------------------------------- ---------
$ 209.9
---------
---------
</TABLE>
INFORMATION TECHNOLOGY COMMITMENT
In February 1998, the Company signed a seven-year contract with IBM Global
Services for information technology services for the Fort Wayne operations.
Total costs incurred in 1998 were $54,800,000. Future minimum annual costs
range from $33,600,000 to $56,800,000, however future costs are dependent on
usage and could exceed these amounts.
INSURANCE CEDED AND ASSUMED
The Company cedes insurance to other companies, including certain
affiliates. The portion of risks exceeding the Company's retention limit is
reinsured with other insurers. Prior to December 31, 1997, the Company
limited its maximum coverage that it retained on an individual to
$3,000,000. Based on a review of the capital and business in-force effective
in January 1998, the Company changed the amount it will retain on an
individual to $10,000,000. Portions of the Company's deferred annuity
business have also been reinsured with other companies to limit its exposure
to interest rate risks. At December 31, 1998, the reserves associated with
these reinsurance arrangements totaled $1,608,500,000. To cover products
other than life insurance, the Company acquires other insurance coverages
with retentions and limits that management believes are appropriate for the
circumstances. The accompanying statutory-basis financial statements reflect
premiums, benefits and policy acquisition expenses net of reinsurance ceded.
The Company remains liable if its reinsurers are unable to meet their
contractual obligations under the applicable reinsurance agreements.
Proceeds from the sale of common stock of American Statements Financial
Corporation ("American States") and proceeds from the January 5, 1998
surplus note, were used to finance an indemnity reinsurance transaction
whereby the Company and LLANY reinsured 100% of a block of individual life
insurance and annuity business from CIGNA Corporation ("CIGNA"). The Company
paid $1,264,400,000 to CIGNA on January 2, 1998 under the terms of the
reinsurance agreement and recognized a ceding commission expense of
$1,127,700,000 in 1998, which is included in the Statement of Operations
line item "Underwriting, acquisition, insurance and other expenses." At the
time of closing, this block of business had statutory liabilities of
$4,658,200,000 that became the Company's obligation. The Company also
received assets, measured on a historical statutory basis, equal to the
liabilities.
Pursuant to the terms of the reinsurance agreement, the Company, LLANY and
CIGNA are in the final stages of agreeing to the statutory-basis values of
these assets and liabilities. Any changes to these values that may occur in
future periods will not be material to the Company's financial position.
Subsequent to this transaction, the Company and LLANY announced that they
had reached an agreement to sell the administration rights to a variable
S-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
annuity portfolio that had been acquired as part of the block of business
assumed on January 2, 1998. This sale closed on October 12, 1998 with an
effective date of August 1, 1998.
In connection with the completion of the CIGNA reinsurance transaction, the
Company recorded a charge of $31,000,000 to cover certain costs of
integrating the existing operations with the new block of business.
On October 1, 1998, the Company and LLANY entered into an indemnity
reinsurance transaction whereby the Company and LLANY reinsured 100% of a
block of individual life insurance business from Aetna, Inc. The Company
paid $856,300,000 to Aetna on October 1, 1998 under the terms of the
reinsurance agreement and recognized a ceding commission expense of
$815,300,000 in 1998, which is included in the Statement of Operations line
item "Underwriting, acquisition, insurance and other expenses." At the time
of closing, this block of business had statutory liabilities of
$2,813,300,000 that became the Company's obligation. The Company also
received assets, measured on a historical statutory basis, equal to the
liabilities. The Company financed this reinsurance transaction with proceeds
from short-term debt borrowings from LNC until the December 18, 1998 surplus
note was approved by the Insurance Department. Subsequent to the Aetna
transaction, the Company and LLANY announced that they had reached an
agreement to retrocede the sponsored life business assumed for $87,600,000.
The retrocession agreement closed on October 14, 1998 with an effective date
of October 1, 1998.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1998, the Company has provided $44,900,000 of
statutory-basis surplus relief to other insurance companies under
reinsurance transactions. The Company has retroceded 100% of this accepted
surplus relief to its off-shore reinsurance affiliates. 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.
The regulatory required liability for unsecured reserves ceded to
unauthorized reinsurers was $43,400,000 and $8,200,000 at December 31, 1998
and 1997, respectively.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1998, the Company did not have a material concentration of
financial instruments in a single investee or industry. The Company's
investments in mortgage loans principally involve commercial real estate. At
December 31, 1998, 25% of such mortgages ($980,500,000) involved properties
located in Texas and California. Such investments consist of first mortgage
liens on completed income-producing properties and the mortgage outstanding
on any individual property does not exceed $58,200,000.
At December 31, 1998, the Company did not have a concentration of: 1)
business transactions with a particular customer, lender or distributor; 2)
revenues from a particular product or 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 severe
impact to the Company's financial condition.
OTHER CONTINGENCY MATTERS
The Company is involved in various pending or threatened legal proceedings
arising from the conduct of business. Most of these proceedings are routine
in the ordinary course of business. The Company maintains professional
liability insurance coverage for claims in excess of $5,000,000. The degree
of applicability of this coverage will depend on the specific facts of each
proceeding. In some instances, these proceedings include claims for
compensatory and 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 the ultimate liability, if any, under these suits
will not have a material adverse affect on the financial position of the
Company.
S-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
Four lawsuits involving alleged fraud in the sale of interest sensitive
universal life and whole life insurance have been filed as class actions
against the Company, although the court has not certified a class in any of
these cases. Plaintiffs seek unspecified damages and penalties for
themselves and on behalf of the putative class. While the relief sought in
these cases is substantial, it is premature to make assessments about the
potential loss, if any, because the status of the cases ranges from the
early states of litigation to the dismissal and appeals stage. Management
intends to defend these suits vigorously. The amount of liability, if any,
which may arise as a result of these suits cannot be reasonably estimated at
this time.
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.
GUARANTEES
The Company has guarantees with off-balance-sheet risks whose contractual
amounts represent credit exposure. Outstanding guarantees with off-
balance-sheet risks at December 31, 1998 relate to mortgage loan
pass-through certificates. 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. The
outstanding guarantees as of December 31, 1998 and 1997 were $30,900,000 and
$41,600,000, respectively. 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, 1998 and 1997.
The Company's wholly owned subsidiary, LNH&C, accepts personal accident
reinsurance programs from other insurance companies. Most of these programs
are presented to LNH&C by independent brokers who represent the ceding
companies. Certain excess of loss personal accident reinsurance programs
created in the London market during 1993 through 1996 have produced and have
potential to produce significant losses. At December 31, 1998 and 1997,
liabilities of $177,400,000 and $186,300,000, respectively, have been
established for such programs. These reserves are based on various estimates
that are subject to considerable uncertainty. Accordingly, this reserve 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 and LNH&C continue to investigate the personal accident
reinsurance programs to determine if there are additional programs including
certain workers compensation programs, which may produce losses. At this
time, the Company and LNH&C do not have sufficient information to determine
whether or not it is probable that additional losses have been incurred nor
can the Company and LNH&C accurately estimate the ultimate cost or timing of
the outcome on these programs.
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, commodity risk, credit risk, increased liabilities
associated with reinsurance agreements 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 value generally are
offset by changes in the value of the items
S-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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>
NOTIONAL OR ASSETS (LIABILITIES)
CONTRACT AMOUNTS -----------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1997 1998 1998 1997 1997
-------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate cap agreements $4,108.8 $4,900.0 $ 9.3 $ .9 $13.9 $ .9
---------------------------------
Swaptions 1,899.5 1,752.0 16.2 2.5 6.9 6.9
---------------------------------
Interest rate swaps 258.3 10.0 -- 9.9 -- (1.8)
---------------------------------
Put options 21.3 -- -- 2.2 -- --
--------------------------------- -------- -------- -------- ----- -------- ------
6,287.9 6,662.0 25.5 15.5 20.8 6.0
Foreign currency derivatives:
Forward contracts 1.5 163.1 -- -- 5.4 5.4
---------------------------------
Foreign currency swaps 47.2 15.0 -- .3 -- (2.1)
--------------------------------- -------- -------- -------- ----- -------- ------
48.7 178.1 -- .3 5.4 3.3
Commodity derivatives:
Commodity swaps 8.1 -- -- 2.4 -- --
--------------------------------- -------- -------- -------- ----- -------- ------
$6,344.7 $6,840.1 $25.5 $18.2 $26.2 $ 9.3
-------- -------- -------- ----- -------- ------
-------- -------- -------- ----- -------- ------
</TABLE>
A reconciliation of the notional or contract amounts for the significant
programs using derivative agreements and contracts at December 31 is as
follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------
INTEREST RATE CAPS SPREAD LOCKS SWAPTIONS
1998 1997 1998 1997 1998 1997
------------------------------------------------------------------
(IN MILLIONS)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 4,900.0 $ 5,500.0 $ -- $ -- $ 1,752.0 $ 672.0
- ------------------------------------
New contracts 708.8 -- -- 50.0 218.3 1,080.0
- ------------------------------------
Terminations and maturities (1,500.0) (600.0) -- (50.0) (70.8) --
- ------------------------------------ --------- --------- --- --------- --------- ---------
Balance at end of year $ 4,108.8 $ 4,900.0 $ -- $ -- $ 1,899.5 $ 1,752.0
- ------------------------------------ --------- --------- --- --------- --------- ---------
--------- --------- --- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL FUTURES
CONTRACTS INTEREST RATE SWAPS
--------------------------------------------
1998 1997 1998 1997
--------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ -- $ 147.7 $ 10.0 $ --
- -------------------------------------------------------------
New contracts -- 88.3 2,226.6 10.0
- -------------------------------------------------------------
Terminations and maturities -- (236.0) (1,978.3) --
- ------------------------------------------------------------- --- --------- --------- ---------
Balance at end of year $ -- $ -- $ 258.3 $ 10.0
- ------------------------------------------------------------- --- --------- --------- ---------
--- --------- --------- ---------
</TABLE>
S-25
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
<TABLE>
<CAPTION>
PUT OPTIONS COMMODITY SWAPS
------------------------------------------------
1998 1997 1998 1997
------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ -- $ -- $ -- $ --
- --------------------------------------------------------------------
New contracts 21.3 -- 8.1 --
- --------------------------------------------------------------------
Terminations and maturities -- -- -- --
- -------------------------------------------------------------------- --------- --- --- ---
Balance at end of year $ 21.3 $ -- $ 8.1 $ --
- -------------------------------------------------------------------- --------- --- --- ---
--------- --- --- ---
</TABLE>
<TABLE>
<CAPTION>
FOREIGN CURRENCY DERIVATIVES (FOREIGN INVESTMENTS)
------------------------------------------------------------------
FOREIGN EXCHANGE FOREIGN CURRENCY FOREIGN CURRENCY
FORWARD CONTRACTS OPTIONS SWAPS
1998 1997 1998 1997 1998 1997
------------------------------------------------------------------
(IN MILLIONS)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 163.1 $ 251.5 $ -- $ 43.9 $ 15.0 $ 15.0
- -------------------------------------------
New contracts 419.8 833.1 -- -- 39.2 --
- -------------------------------------------
Terminations and maturities (581.4) (921.6) -- (43.9) (7.0) --
- ------------------------------------------- --------- --------- --- --------- --------- ---------
Balance at end of year $ 1.5 $ 163.0 $ -- $ -- $ 47.2 $ 15.0
- ------------------------------------------- --------- --------- --- --------- --------- ---------
--------- --------- --- --------- --------- ---------
</TABLE>
INTEREST RATE CAP AGREEMENTS
The interest rate cap agreements, which expire in 1999 through 2006, entitle
the Company to receive quarterly payments from the counterparties on
specified future reset dates, contingent on future interest rates. For each
cap, the amount of such 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 effect
of rising interest rates. The premium paid for the interest rate caps is
included in other assets ($9,300,000 as of December 31, 1998) and is being
amortized over the terms of the agreements. This amortization is included in
net investment income.
SWAPTIONS
Swaptions, which expire in 1999 through 2003, 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 between 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 its annuity line of business from the effect of rising
interest rates. The premium paid for the swaptions is included in other
assets ($16,200,000 as of December 31, 1998) and is being amortized over the
terms of the agreements. This amortization is included in net investment
income.
SPREAD LOCK AGREEMENTS
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
government 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 government
security and the price sensitivity of the swap at that time. The purpose of
the Company's spread-lock program is to protect a portion of its fixed
maturity securities against widening of spreads.
FINANCIAL FUTURE CONTRACTS
The Company uses exchange-traded financial futures contracts to hedge
against interest rate risks and to manage duration of a portion of its
S-26
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
INTEREST RATE SWAP AGREEMENTS
The Company uses interest rate swap agreements to hedge its exposure to
floating rate bond coupon payments, replicating a fixed rate bond. An
interest rate swap is a contractual agreement to exchange payments at one or
more times based on the actual or expected price, level, performance or
value of one or more underlying interest rates. The Company is required to
pay the counterparty to the agreements the stream of variable coupon
payments generated from the bonds, and in turn, receives a fixed payment
from the counterparty at a predetermined interest rate. The net
receipts/payments from interest rate swaps are recorded in net investment
income.
The Company also uses interest rate swap agreements to hedge its exposure to
interest rate fluctuations related to the anticipated purchase of assets to
support newly acquired or assumed blocks of business. Once the assets are
purchased, the gains resulting from the termination of the swap agreements
are applied to the basis of the assets purchased. The gains are recognized
in earnings over the life of the assets.
PUT OPTION
The Company uses put options, combined with various perpetual fixed income
securities, and interest rate swaps to replicate a fixed income, fixed
maturity investment. The put options give the Company the right, but not the
obligation, to sell to the counterparty of the agreement the specified
securities on a specified date at a fixed price.
FOREIGN CURRENCY DERIVATIVES (FOREIGN INVESTMENTS)
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
re-exchange the two currencies at the same rate of exchange at a specified
future date.
COMMODITY SWAP
The Company uses a commodity swap to hedge its exposure to fluctuations in
the price of gold, which is the underlying variable in determining the
periodic interest payments associated with a fixed income security. A
commodity swap is a contractual agreement to exchange a certain amount of a
particular commodity for a fixed amount of cash. The Company owns a fixed
income security that meets its coupon payment obligations in gold bullion.
The Company is obligated to pay to the counterparty the gold bullion, and in
return, receives from the counterparty a stream of fixed income payments.
The fixed income payments are the product of the swap notional multiplied by
the fixed rate stated in the swap agreement. The net receipts/payments from
commodity swaps are recorded in net investment income.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$10,000,000, $7,000,000 and $6,900,000 in 1998, 1997 and 1996, respectively.
Deferred losses of $48,200,000 as of December 31, 1998, were the result of:
1) terminated and expired spread-lock agreements and; 2) terminated interest
rate swaps. These losses 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, swaptions, spread-lock
agreements, financial futures, interest rate swaps, put options and foreign
currency derivatives. However, the Company does not anticipate
nonperformance
S-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
by any of the 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, 1998, the exposure was $21,100,000.
11. 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. 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.
BONDS AND UNAFFILIATED COMMON STOCK
Fair values of 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. In the case of private placements, 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 unaffiliated common stocks
are based on quoted market prices.
PREFERRED STOCK
Fair values of preferred stock are based on quoted market prices, where
available. For preferred stock not actively traded, fair values are based on
values of issues of comparable yield and quality.
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. The ratings 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 based on: 1) the present value
of expected future cash flows discounted at the loan's effective interest
rate; 2) the loan's market price; or 3) the fair value of the collateral if
the loan is collateral dependent.
POLICY LOANS
The estimated fair values of investments in policy loans are calculated on a
composite discounted cash flow basis using Treasury interest rates
consistent with the maturity durations assumed. These durations are based on
historical experience.
OTHER INVESTMENTS AND CASH AND SHORT-TERM INVESTMENTS
The carrying values for assets classified as other investments and cash and
short-term investments in the accompanying statutory-basis balance sheets
approximate 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.,
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. These calculations are based on interest rates
currently offered on similar contracts with maturities that are 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
conclusions 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
liabilities defined as financial instruments are disclosed. The Company and
other
S-28
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 DEBT
For short-term debt, the carrying value approximates fair value.
SURPLUS NOTES DUE TO LNC
Fair values for surplus notes are estimated using discounted cash flow
analysis based on the Company's current incremental borrowing rate for
similar types of borrowing arrangements.
GUARANTEES
The Company's guarantees include guarantees related to 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 zero.
DERIVATIVES
The Company employs several different methods for determining the fair value
of its derivative instruments. Fair values for these contracts are based on
current settlement values. These values are based on quoted market prices
for the foreign currency exchange contracts and financial future contracts
and; 2) industry standard models that are commercially available for
interest rate cap agreements, swaptions, spread lock agreements, interest
rate swaps, commodity swaps and put options.
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. These estimates would take into account changes in interest
rates, the counterparties' credit standing and the remaining terms of the
commitments.
SEPARATE ACCOUNTS
Assets held in separate accounts are reported in the accompanying
statutory-basis balance sheets at fair value. The related liabilities are
also reported at fair value in amounts equal to the separate account assets.
S-29
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. 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
----------------------------------------------
1998 1997
----------------------------------------------
CARRYING CARRYING
ASSETS (LIABILITIES) VALUE FAIR VALUE VALUE FAIR VALUE
- -----------------------------------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 23,830.9 $ 25,065.5 $ 18,560.7 $ 19,798.6
- -----------------------------------------------
Preferred stocks 236.0 242.5 257.3 268.7
- -----------------------------------------------
Unaffiliated common stocks 259.3 259.3 436.0 436.0
- -----------------------------------------------
Mortgage loans on real estate 3,932.9 4,100.1 3,012.7 3,179.2
- -----------------------------------------------
Policy loans 1,606.0 1,685.9 660.5 648.3
- -----------------------------------------------
Other investments 434.4 434.4 335.5 335.5
- -----------------------------------------------
Cash and short-term investments 1,725.4 1,725.4 2,133.0 2,133.0
- -----------------------------------------------
Investment-type insurance contracts:
Deposit contracts and certain guaranteed
interest contracts (17,845.8) (17,486.4) (17,324.2) (16,887.6)
--------------------------------------------
Remaining guaranteed interest and similar
contracts (714.4) (738.2) (1,267.0) (1,294.6)
--------------------------------------------
Short-term debt (140.0) (140.0) (120.0) (120.0)
- -----------------------------------------------
Surplus notes due to LNC (1,250.0) (1,335.1) -- --
- -----------------------------------------------
Derivatives 25.5 18.2 26.2 9.3
- -----------------------------------------------
Investment commitments -- (0.6) -- (0.5)
- -----------------------------------------------
Separate account assets 36,907.0 36,907.0 31,330.9 31,330.9
- -----------------------------------------------
Separate account liabilities (36,907.0) (36,907.0) (31,330.9) (31,330.9)
- -----------------------------------------------
</TABLE>
12. ACQUISITIONS AND SALES OF SUBSIDIARIES
In October 1996, the Company and LLANY purchased a block of group
tax-qualified annuity business from UNUM Corporation affiliates. The bulk of
the transaction was completed in the form of an assumption reinsurance
transaction, which resulted in a ceding commission of $71,800,000. The
ceding commission resulted in admissible goodwill of $62,300,000, which is
being amortized on a straight-line basis over 10 years. LLANY was required
by the New York Department 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 1997, LNC contributed 25,000,000 shares of common stock of American
States to the Company. American States is a property casualty insurance
holding company of which LNC owned 83.3%. The contributed common stock was
accounted for as a capital contribution equal to the fair value of the
common stock received by the Company. Subsequently, the American States
common stock owned by the Company, along with all other American States
common stock owned by LNC and its affiliates, was sold. The Company received
proceeds from the sale in the amount of $1,175,000,000. The Company
recognized no gain or loss on the sale of its portion of the common stock
due to the receipt of the stock at fair value. The proceeds from this sale
of stock were used to partially finance the CIGNA indemnity reinsurance
transaction.
S-30
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Life and Annuity Distributors,
Inc. ("LLAD"), has a nearly exclusive general agent's 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 LLAD override commissions of $76,700,000 in 1998 and override
commissions and operating expense allowances of $61,600,000 and $56,300,000
in 1997 and 1996, respectively. LLAD incurred expenses of $102,400,000,
$5,500,000 and $15,700,000 in 1998, 1997 and 1996, respectively, in excess
of the override commissions and operating expense allowances received from
the Company, which the Company is not required to reimburse. Effective in
January 1998, the Company and LLAD agreed to increase the override
commission expense and eliminate the operating expense allowance.
Cash and short-term investments at December 31, 1998 and 1997 include the
Company's participation in a short-term investment pool with LNC of
$383,600,000 and $325,600,000, respectively. Related investment income
amounted to $16,800,000, $15,500,000 and $15,300,000 in 1998, 1997 and 1996,
respectively. Short-term loan payable to parent company at December 31, 1998
and 1997 represent notes payable to LNC.
The Company provides services to and receives services from affiliated
companies which resulted in a net payment of $92,100,000, $48,500,000 and
$34,100,000 in 1998, 1997 and 1996, respectively.
The Company cedes and accepts reinsurance from affiliated companies.
Premiums in the accompanying statements of income include premiums on
insurance business accepted under reinsurance contracts and exclude premiums
ceded to other affiliated companies, as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 13.7 $ 11.9 $ 17.9
- ----------------------
Insurance ceded 290.1 100.3 302.8
- ----------------------
</TABLE>
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Future policy benefits
and claims assumed $ 197.3 $ 245.5
- ------------------------
Future policy benefits
and claims ceded 1,125.0 997.2
- ------------------------
Amounts recoverable on
paid and unpaid losses 84.2 30.4
- ------------------------
Reinsurance payable on
paid losses 6.0 5.3
- ------------------------
Funds held under
reinsurance treaties --
net liability 1,375.4 1,115.4
- ------------------------
</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 $318,300,000 and $280,900,000 at December 31, 1998 and 1997,
respectively. The letters of credit are issued by banks and represent
guarantees of performance under the reinsurance agreement. At December 31,
1998 and 1997, LNC had guaranteed $237,000,000 and $229,100,000,
respectively, of these letters of credit. At December 31, 1998, the Company
has a receivable (included in the foregoing amounts) from affiliated
insurance companies in the amount of $122,400,000 for statutory surplus
relief received under financial reinsurance ceded agreements.
14. SEPARATE ACCOUNTS
Separate account assets held by the Company consist primarily of long-term
bonds, common stocks, short-term investments and mutual funds and are
carried at market value. Substantially all of the separate accounts do not
have any minimum guarantees and the investment risks associated with market
value changes are borne entirely by the policyholder.
Separate account premiums, deposits and other considerations amounted to
$3,953,300,000, $4,821,800,000 and $4,148,700,000 in 1998, 1997
S-31
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
14. SEPARATE ACCOUNTS (CONTINUED)
and 1996, respectively. Reserves for separate accounts with assets at fair
value were $36,145,900,000 and $30,560,700,000 at
December 31, 1998 and 1997, respectively. All reserves are subject to
discretionary withdrawal at market value.
A reconciliation of transfers to (from) separate accounts is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997
------------------------
(IN MILLIONS)
------------------------
<S> <C> <C>
Transfers as reported in the Summary of Operations of the
various separate accounts:
Transfers to separate accounts $ 3,954.9 $ 4,824.0
- ------------------------------------------------------------
Transfers from separate accounts (4,069.8) (2,943.8)
- ------------------------------------------------------------ --------- ---------
Net transfers to (from) separate accounts as reported in the
Summary of Operations $ (114.9) $ 1,880.2
- ------------------------------------------------------------ --------- ---------
--------- ---------
</TABLE>
15. RECONCILIATION OF ANNUAL STATEMENT TO AUDITED FINANCIAL STATEMENTS
In 1997, certain errors were identified by the Illinois
Insurance Department in the calculation of the AVR as of
December 31, 1996 and 1995. The effects of the AVR errors
also resulted in the need for revisions in the calculation
of certain investment limitation thresholds, the results of
which indicated that additional assets should have been
nonadmitted as of December 31, 1996. As discussed by the
Company with the Indiana and Illinois Insurance Departments,
corrections were made to affected pages of the Company's
NAIC Annual Statement which were refiled with various state
insurance departments. However, due to immateriality of the
corrections in relation to the financial statements taken as
a whole, the audited 1996 and 1995 statutory-basis financial
statements were not corrected and re-issued.
The Company's 1997 NAIC Annual Statement, as filed with
various state insurance departments, also includes the
corrected balances for 1996 and 1995. The following is a
reconciliation of total admitted assets, total liabilities
and capital and surplus as of December 31, 1996 as presented
in the 1997 NAIC Annual Statement (as corrected) to the
accompanying audited financial statements.
<TABLE>
<CAPTION>
TOTAL CAPITAL
ADMITTED TOTAL AND
ASSETS LIABILITIES SURPLUS
---------------------------------
<S> <C> <C> <C>
Balance as of December 31, 1996 as
reported in the accompanying audited
financial statements $50,016.6 $ 48,054.0 $1,962.6
- ----------------------------------------
Effect of AVR errors -- 37.6 (37.6)
- ----------------------------------------
Effect of change in investment
limitations (57.0) -- (57.0)
- ---------------------------------------- --------- ----------- --------
Balance as of December 31, 1996 as
reported in the 1997 NAIC Annual
Statement $49,959.6 $ 48,091.6 $1,868.0
- ---------------------------------------- --------- ----------- --------
--------- ----------- --------
</TABLE>
S-32
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
16. CENTURY COMPLIANCE (UNAUDITED)
The Year 2000 issue is pervasive and complex and affects virtually every
aspect of the Company's business. The Company's computer systems and
interfaces with the computer systems of vendors, suppliers, customers and
business partners are particularly vulnerable. The Company has been
redirecting a large portion of internal Information Technology efforts and
contracting with outside consultants to update systems to address Year 2000
issues. Experts have been engaged to assist in developing work plans and
cost estimates and to complete remediation activities.
For the year ended December 31, 1998, the Company identified expenditures of
$26,300,000 to address this issue. This brings the expenditures for 1996
through 1998 to $34,200,000 million. The Company's financial plans for 1999
and 2000 include expected expenditures of an additional $38,300,000 bringing
estimated overall Year 2000 expenditures to $72,500,000. Because updating
systems and procedures is an integral part of the Company's on-going
operations, approximately 50% of expenditures shown above are expected to
continue after all Year 2000 issues have been resolved. Actual Year 2000
expenditures through December 31, 1998 and future Year 2000 expenditures are
expected to be funded from operating cash flows. The anticipated cost of
addressing Year 2000 issues is based on management's current best estimates
which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors. Such costs will be closely monitored
by management. Nevertheless, there can be no guarantee that actual costs
will not be higher than these estimated costs. Specific factors that might
cause such differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct
all relevant computer problems and other uncertainties. The total
expenditures identified represent only the Company's portion of LNC's larger
expenditures to address the Year 2000 issue.
The current scope of the overall Year 2000 program includes the following
four major project areas: 1) addressing the readiness of business
applications, operating systems and hardware on mainframe, personal computer
and Local Area Network platforms (IT); 2) addressing the readiness of non-IT
embedded software and equipment (non-IT); 3) addressing the readiness of key
business partners and 4) establishing Year 2000 contingency plans.
The projects to address IT and non-IT readiness have four major phases.
Phase one involves raising awareness and creating an inventory of all IT and
non-IT assets. The second phase consists of assessing all items inventoried
to initially determine whether they are affected by the Year 2000 issue and
preparing general plans and strategies. The third phase entails the detailed
planning and remediation of affected systems and equipment. The last phase
consists of testing to verify Year 2000 readiness.
The Company has completed those four phases for over two-thirds of its high
priority IT systems, including those provided by software vendors. While the
Company's year 2000 program for nearly all high priority IT systems is
expected to be completed in the first quarter 1999, phase four, for a small
but important subset of these systems, will continue through the end of the
second quarter 1999. As of December 31, 1998, the status of projects
addressing readiness of IT assets is: 100% of IT assets have been
inventoried (Phase 1) and assessed (Phase 2); 94% of IT projects have been
through the remediation phase (Phase 3) with the last project scheduled for
completion by the end of March 1999; and 69% of IT projects have completed
the testing phase (Phase 4) with the last project scheduled to finish
testing by the end of June 1999. A portion of the effort that extends into
1999 is dependent on outside third parties and is behind the original
schedule. The Company is working with these parties to modify the completion
schedule.
As of December 31, 1998, the status of projects that address readiness of
high priority non-IT assets is: 100% of non-IT assets have been inventoried
(Phase 1) and assessed (Phase 2); 79% of non-IT projects addressing
remediation (Phase 3) have been completed and 21% of non-IT projects have
completed the testing phase (Phase 4). The Company expects to have all
phases related to high priority non-IT completed by the end of October 1999.
S-33
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
16. CENTURY COMPLIANCE (UNAUDITED) (CONTINUED)
Concurrent with the IT and non-IT projects, the readiness of key business
partners is being reviewed and Year 2000 contingency plans are being
developed. The most significant categories of key business partners are
financial institutions, software vendors and utility providers (gas,
electric and telecommunications). Surveys have been mailed to these key
business partners. Based on responses received, current levels of readiness
are being assessed, follow-up contacts are underway, alternative strategies
are being developed and testing is being scheduled where feasible. This
effort is expected to continue well into 1999. As noted above, software
vendor assessments are considered part of the IT projects and, therefore,
would follow the schedule shown above for such projects.
While the Company is working to meet the schedules outlined above, some
uncertainty remains. Specific factors that give rise to this uncertainty
include a possible loss of technical resources to perform the work, failure
to identify all susceptible systems, non-compliance by third parties whose
systems and operations impact the Company and other similar uncertainties.
A worst case scenario might include the Company's inability to achieve Year
2000 readiness with respect to one or more of the Company's significant
policyholder systems resulting in a material disruption to the Company's
operations. Specifically, the Company could experience an interruption in
its ability to collect and process premiums or deposits, process claim
payments, accurately maintain policyholder information, accurately maintain
accounting records and/or perform adequate customer service. Should the
worst case scenario occur, it could, depending on its duration, have a
material impact on the Company's results of operations and financial
position. Simple failures can be repaired and returned to production within
a matter of hours with no material impact. Unanticipated failures with a
longer service disruption period would have a more serious impact. For this
reason, the Company is placing significant emphasis on risk management and
Year 2000 contingency planning. The Company is in the process of modifying
its contingency plans to address potential Year 2000 issues. Where these
efforts identify high risks due either to unacceptable work around
procedures or significant readiness risks, appropriate risk management
techniques are being developed. These techniques, such as resource shifting
or use of alternate providers, will be employed to provide stronger
assurances of readiness. The Company has gone through exercises to identify
worst case scenario failures. At this time, the Company believes its plans
are sufficient to mitigate identified worst case scenarios.
S-34
<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,
1998 and 1997, and the related statutory-basis statements of
operations, changes in capital and surplus and cash flows for
each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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.
As described in Note 1 to the financial statements, the Company
presents its financial statements in conformity with accounting
practices prescribed or permitted by the Indiana Department of
Insurance, which practices differ from generally 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 position of The
Lincoln National Life Insurance Company at December 31, 1998 and
1997, or the results of its operations or its cash flows for
each of the three years in the period ended December 31, 1998.
However, in our opinion, the financial statements referred to
above present fairly, in all material respects, the financial
position of The Lincoln National Life Insurance Company at
December 31, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with accounting practices
prescribed or permitted by the Indiana Department of Insurance.
/s/ Ernst & Young LLP
February 1, 1999
S-35
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) List of Financial Statements
1. Part A. The Table of Condensed Financial Information is included in
Part A of this Registration Statement.
2. Part B. The following Financial Statements of Account L are included in
Part B of this Registration Statement;
Statement of Assets and Liability -- December 31, 1998
Statement of Operations -- Year ended December 31, 1998
Statements of Changes in Net Assets -- Years ended December 31, 1998
and 1997
Notes to Financial Statements -- December 31, 1998
Report of Ernst & Young LLP, Independent Auditors
3. The following Statutory-Basis Financial Statements of the Lincoln
National Life Insurance Company are included in the SAI:
Balance Sheets -- Statutory Basis -- Years ended December 31, 1998 and
1997
Statements of Operations -- Statutory Basis -- Years ended December 31,
1998, 1997, and 1996
Statements of Changes in Capital and Surplus -- Statutory Basis --
Years ended December 31, 1998, 1997, and 1996
Statements of Cash Flows -- Statutory Basis -- Years ended December 31
1998, 1997, and 1996
Notes to Financial Statements -- December 31, 1998
Report of Ernst & Young LLP, Independent Auditors
<TABLE>
<S> <C>
1(a). 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/
1(b). Amendment dated December 2, 1996 adopted by the Board
of Directors to resolution establishing Account L./3/
2. Not applicable.
3(a). Principal Underwriting Contract./2/
3(b). Broker-dealer sales agreement./2/
4(a). Forms of Group Annuity Contracts for The Lincoln
National Life Insurance Company./2/
4(b). Form of endorsement to Group Annuity Contract and
Certificate./3/
5(a). Form of application for Group Annuity Contract./2/
5(b). Form of Participant enrollment form (including
acknowledgement of restrictions on redemption imposed
by I.R.C. Section 403(b))./2/
6. Articles of incorporation and by-laws of The Lincoln
National Life Insurance Company./2/
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./2/
8(b). Participation Agreement between The Lincoln National
Life Insurance Company and Variable Insurance
Products Fund and Fidelity Distributors
Corporation./2/
8(c). Participation Agreement between The Lincoln National
Life Insurance Company and Variable Insurance
Products Fund II and Fidelity Distributors
Corporation./2/
</TABLE>
C-1
<PAGE>
<TABLE>
<S> <C>
8(d). Participation Agreement between The Lincoln National
Life Insurance Company and Twentieth Century
Securities, Inc. /2/
8(e). Participation Agreement between The Lincoln National
Life Insurance Company and Acacia Capital
Corporation. /2/
8(f). Participation Agreement between The Lincoln National
Life Insurance Company and T. Rowe Price. /2/
8(g). Services Agreement between Delaware Management
Holdings, Inc., Delaware Service Company, Inc. and
Lincoln National Life Insurance Company. /4/
8(h). Participation Agreement between The Lincoln National
Life Insurance Company and Janus Aspen Series./7/
8(i). Participation Agreement between The Lincoln National
Life Insurance Company and The Lincoln National
Aggressive Growth Fund, Inc./7/
8(j). Participation Agreement between The Lincoln National
Life Insurance Company and The Lincoln National
Social Awareness Fund, Inc./7/
8(k). Participation Agreement between The Lincoln National
Life Insurance Company and Neuberger & Berman
Advisors Management Trust./7/
8(l). Participation Agreement between The Lincoln National
Life Insurance Company and Baron Capital Funds Trust.
/7/
9. Consent and opinion of Jeremy Sachs, Senior Counsel,
The Lincoln National Life Insurance Company, as to
the legality of the securities being registered. /2/
10(a). Consent of Ernst & Young LLP, Independent Auditors.
11. Not applicable.
12. Not applicable.
13(a). Schedule for Computation of Performance
Quotations. /5/
13(b). Supplement to Schedule for Computation of Performance
Quotations./6/
14. Not applicable.
15(a). Organizational Chart of Lincoln National Life
Insurance Holding Company System.
15(b). Memorandum Concerning Books and Records.
16(a). Powers of Attorney.
/1/ Incorporated herein by reference to the registrant's
initial registration statement filed with the
Securities and Exchange Commission on June 12, 1996
(File No. 333-5815).
/2/ Incorporated herein by reference to the 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 (File
No. 333-05815).
/3/ Incorporated herein by reference to Post-effective
Amendment No. 2 on Form N-4 filed by the Lincoln
National Variable Annuity Account L of The Lincoln
National Life Insurance Company on April 30, 1998
(File No. 333-04999).
/4/ Incorporated herein by reference to Registration
Statement on Form S-6 filed by Lincoln Life Flexible
Premium Variable Life Account F of The Lincoln
National Life Insurance Company on November 21, 1997
(File No. 333-40745).
/5/ Incorporated herein by reference to Post-effective
Amendment No. 1 on Form N-4 filed by the Lincoln
National Variable Annuity Account L of The Lincoln
National Life Insurance Company on April 30, 1997
(File No. 333-04999).
/6/ Incorporated herein by reference to Post-effective
Amendment No. 2 on Form N-4 filed by the Lincoln
National Variable Annuity Account of The Lincoln
National Life Insurance Company on April 30, 1998
(File No. 333-5815).
/7/ Incorporated herein by reference to Post-effective
Amendment No. 3 on Form N-4 filed by the Lincoln
National Variable Annuity Account L of The Lincoln
National Life Insurance Company on September 30, 1998
(File No. 333-5815).
</TABLE>
Item 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
The following list contains the officers and directors of The Lincoln National
Insurance Company who are engaged directly or indirectly in activities relating
to Lincoln National Variable Annuity 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>
Gabriel L. Shaheen* President, Chief Executive Officer and Director
Jon A. Boscia** Director
John H. Gotta**** Senior Vice President
Stephen H. Lewis* Senior Vice President
H. Thomas McMeekin** Director
Cynthia A Rose** Secretary and Assistant Vice President
Lawrence T. Rowland*** Executive Vice President and Director
Keith J. Ryan* Senior Vice President
Chief Financial Officer and Asst. Treasurer
Eldon J. Summers** Assistant Vice President and Treasurer
Richard C. Vaughan** Director
Roy V. Washington***** Vice President and Chief Compliance Officer
</TABLE>
C-2
<PAGE>
* Principal business address of each person is 1300 South Clinton Street,
Fort Wayne, Indiana 46802-3506.
** 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 46804-1538.
**** Principal business address is 350 Church Street, Hartford, CT 06103.
***** Principal business address is 915 S. Clinton, Fort Wayne, IN 46802.
Item 26. Persons Controlled by or Under Common Control with The Lincoln
National Life Insurance Company ("Lincoln Life") or Lincoln
National Variable Annuity Account L
Lincoln National Variable Annuity 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.
See Exhibit 15(a): The Organizational Chart of Lincoln National Life Insurance
Holding Company System is hereby incorporated herein by this
reference.
C-3
<PAGE>
Item 27. Number of Contractholders
As of March 31, 1999, Registrant had 170 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) Lincoln Financial Advisors Corporation also acts as the
principal underwriter for Lincoln Life & Annuity Variable
Annuity Account L, the VA-1 Separate Account of UNUM Life
Insurance Company of America, and the VA-1 Separate Account of
First UNUM Life Insurance Company.
(b)(1) The following table sets forth certain information regarding
the officers and directors of Lincoln Financial Advisors
Corporation:
<TABLE>
<CAPTION>
POSITIONS AND OFFICERS
WITH LINCOLN FINANCIAL
NAME AND ADDRESS ADVISORS CORPORATION
- ---------------- --------------------
<S> <C>
J. Michael Hemp***** President and Director
Priscilla S. Brown* Vice President
John M. Behrendt* Vice President and Director
Richard C. Boyles*** Chief Financial Officer and
Administrative Officer
Carolyn P. Brody* Vice President and Director
Gary D. Giller**** Director
Michael McMath***** Senior Vice President
Todd R. Stephenson*** Senior Vice President
Janet C. Chrzan** Vice President and Treasurer
Cynthia A. Rose** Secretary
</TABLE>
* Principal business address of each person is 1300 S. Clinton Street,
Fort Wayne, Indiana 46802-2706.
** 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, Ohio 43235.
***** 350 Church Street, Hartford, CT 06103
(c)
<TABLE>
<CAPTION>
Name of Net Underwriting
Principal Discounts and Compensation Brokerage
Underwriter Commissions on Redemption Commissions Compensation
- ----------- ---------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Lincoln Financial $362,000
Advisors Corporation N/A N/A N/A
</TABLE>
C-4
<PAGE>
Item 30. Location of Accounts and Records
Exhibit 15(b) is hereby expressly incorporated herein by this reference.
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 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-5
<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 as has caused this Amendment to
the Registration Statement to be signed on its behalf, in the City of Fort
Wayne, and the State of Indiana on this 19 day of April, 1999.
LINCOLN NATIONAL VARIABLE ANNUITY
Account L--Group Variable Annuity I
(Registrant)
By: /s/ Stephen H. Lewis
-------------------------------------------
Stephen H. Lewis
(Signature--Officer of Depositor
Senior Vice President LNL
(Title)
By: THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(Depositor)
By: /s/ Kelly D. Clevenger
-------------------------------------------
Kelly D. Clevenger
Vice President, LNL
(b) As required by the Securities Act of 1933, this Amendment to the
Registration Statement has been signed for the Depositors by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
* Chief Executive Officer, April 19, 1999
- ----------------------------------- President & Director
Gabriel L. Shaheen (Principal Executive Officer)
* Executive Vice President April 19, 1999
- ----------------------------------- and Director
Lawrence T. Rowland
* Senior Vice President, Chief April 19, 1999
- ----------------------------------- Financial Officer and Assistant
Keith J. Ryan Treasurer (Principal Accounting
Officer and Principal Financial
Officer)
* Director April 19, 1999
- -----------------------------------
Jon A. Boscia
* Director April 19, 1999
- -----------------------------------
H. Thomas McMeekin
* Director April 19, 1999
- -----------------------------------
Richard C. Vaughan
*By /s/ Steven M. Kluever pursuant to a Power of Attorney filed with
-------------------------------- this Registration Statement
Steven M. Kluever
</TABLE>
C-6
<PAGE>
Exhibit 10(a)
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. 4 to the Registration Statement (Form N-4
No. 333-5815) and 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 1, 1999, with respect to the
statutory-basis financial statements of The Lincoln National Life Insurance
Company, and (b) March 30,1999, with respect to the financial statements of
Lincoln National Variable Annuity Account L.
Fort Wayne, Indiana
April 14, 1999
<PAGE>
<TABLE>
<CAPTION>
<S><C>
ORGANIZATIONAL CHART OF THE
LINCOLN NATIONAL INSURANCE HOLDING COMPANY SYSTEM
All the members of the holding company system are corporations, with
the exception of, Delaware Distributors, L.P and Founders CBO, L.P.
--------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| ---------------------------------------------
|--| Lincoln National Management Corporation |
| | 100% - Pennsylvania - Management Company |
| ---------------------------------------------
| ---------------------------------------------
|--| City Financial Partners Ltd. |
| | 100% - England/Wales - Distribution of life |
| | assurance & pension products |
| ---------------------------------------------
| ------------------------------------------------
|--| LNC Administrative Services Corporation |
| | 100% - Indiana - Third Party Administrator |
| ------------------------------------------------
| ---------------------------------------------------
|--|Lincoln National Financial Institutions Group, Inc.|
| |(fka 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 |
--------------------------------------
<PAGE>
-------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
-------------------------------
| ---------------------------------------------------
|--|Lincoln National Financial Institutions Group, Inc.|
| |(fka The Richard Leahy Corporation) |
| |100% - Indiana - Insurance Agency |
| ---------------------------------------------------
| | ------------------------------------
| |--| Personal Financial Resources, Inc. |
| | | 100% - Arizona - Insurance Agency |
| | ------------------------------------
| | ----------------------------------------
| |--| Personal Investment Services, Inc. |
| | 100% - Pennsylvania - Insurance Agency |
| ----------------------------------------
| -------------------------------------------
|--| LincAm Properties, Inc. |
| | 50% - Delaware - Real Estate Investment |
| -------------------------------------------
| ----------------------------------------------
| | Lincoln Life and Annuity Distributors, Inc. |
|--| (formerly Lincoln Financial Group, Inc.) |
| | 100% - Indiana - Insurance Agency |
| ----------------------------------------------
| | ----------------------------------------
| |--| Lincoln Financial Advisors Corporation |
| | | (formerly LNC Equity Sales Corporation)|
| | | 100% - Indiana - Broker-Dealer |
| | ----------------------------------------
| | -------------------------------------------------------------
| | |Corporate agencies: Lincoln Life and Annuity Distributors, |
| | |Inc. ("LLAD")has subsidiaries of which LLAD 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 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 Investments, Inc.) |
| | | 100% - Indiana - Holding Company |
--------------------------------------------
<PAGE>
-------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
-------------------------------
| --------------------------------------------------
|__| Lincoln National Investments, 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 International Advisers Ltd. |
| | | | 81.1% - England - Investment Advisor |
| | | ----------------------------------------
| | | --------------------------------------
| | |--| Delaware Management Trust Company |
| | | | 100% - Pennsylvania - Trust Service |
| | | --------------------------------------
| | | | -------------------------------------------------
| | | |__| Delaware International Holdings, Ltd. |
| | | | | 100% - Bermuda - Investment Advisor |
| | | | -------------------------------------------------
| | | | | --------------------------------------
| | | | |--| Delaware International Advisers, Ltd.|
| | | | | 18.9% - England - Investment Advisor |
| | | | --------------------------------------
| | | | -------------------------------------------------
| | | |__| Delvoy, Inc. |
| | | | | 100% - Minnesota - Holding Company |
| | | | -------------------------------------------------
| | | | | ---------------------------------------
| | | | |--| Delaware Management Company, Inc. |
| | | | | | 100% - Delaware - Investment Advisor |
| | | | | ---------------------------------------
| | | | | | ------------------------------------------------------
| | | | | |--| Delaware Distributors, L.P. |
| | | | | | | 98%-Delaware-Mutual Fund Distributor & Broker/Dealer |
| | | | | | | 1% Equity-Delaware Capital Management, Inc. |
| | | | | | | 1% Equity-Delaware Distributors, Inc. |
| | | | | | ------------------------------------------------------
| | | | | | ------------------------------------
| | | | | |--| Founders Holdings, Inc. |
| | | | | | | 100% - Delaware - General Partner |
| | | | | | ------------------------------------
| | | | | | | -----------------------------------------
| | | | | | |--| Founders CBO, L.P. |
| | | | | | | 1% - Delaware - Investment Partnership |
| | | | | | | 99% held by outside investors |
| | | | | | -----------------------------------------
| | | | | | | ------------------------------------------
| | | | | | |--|Founders CBO Corporation |
| | | | | | | |100%-Delaware-Co-Issuer with Founders CBO |
| | | | | | | ------------------------------------------
<PAGE>
--------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| --------------------------------------------------
|__| Lincoln National Investments, 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 |
| | | | -----------------------------------
| | | | -------------------------------------------------
| | | |__| Delvoy, Inc. |
| | | | | 100% - Minnesota - Holding Company |
| | | | -------------------------------------------------
| | | | | ------------------------------------
| | | | |--| Delaware Distributors, Inc. |
| | | | | | 100% - Delaware - General Partner |
| | | | | ------------------------------------
| | | | | | -------------------------------------------------------
| | | | | |--| Delaware Distributors, L.P. |
| | | | | | | 98%-Delaware-Mutual Fund Distributor & Broker/Dealer |
| | | | | | 1% Equity-Delaware Capital Management, Inc. |
| | | | | | 1% Equity-Delaware Distributors, Inc. |
| | | | | -------------------------------------------------------
| | | | | -----------------------------------------------
| | | | |--| Delaware Capital Management, Inc. |
| | | | | |(formerly Delaware Investment Counselors, Inc.)|
| | | | | | 100% - Delaware - Investment Advisor |
| | | | | -----------------------------------------------
| | | | | | -----------------------------------------------------------
| | | | | |--| Delaware Distributors, L.P. |
| | | | | | | 98%-Delaware-Mutual Fund Distributor & Broker/Dealer |
| | | | | | | 1% Equity-Delaware Capital Management, Inc. |
| | | | | | | 1% Equity-Delaware Distributors, Inc. |
| | | | | -----------------------------------------------------------
| | | | | -----------------------------------------------------
| | | | |--| Delaware Service Company, Inc. |
| | | | | | 100%-Delaware-Shareholder Services & Transfer Agent |
| | | | | -----------------------------------------------------
| | | | | -------------------------------------------------
| | | | |__| Delaware Investment & Retirement Services, Inc. |
| | | | | | 100% - Delaware - Registered Transfer Agent |
| | | | | -------------------------------------------------
| | | -----------------------------------------
| | |--| Lynch & Mayer, Inc. |
| | | | 100% - Indiana - Investment Adviser |
| | | -----------------------------------------
| | | | ---------------------------------------
| | | |--| Lynch & Mayer Securities Corp. |
| | | | 100% - Delaware - Securities Broker |
| | | ---------------------------------------
| | | ----------------------------------------------------
| | | | Vantage Global Advisors, Inc. |
| | |--| (formerly Modern Portfolio Theory Associates, Inc.)|
| | | | 100% - Delaware - Investment Adviser |
----------------------------------------------------
<PAGE>
--------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| --------------------------------------------------
|__| Lincoln National Investments, Inc. |
| | (fka Lincoln National Investment Companies, Inc.)|
| | 100% - Indiana - Holding Company |
| --------------------------------------------------
| | -----------------------------------------------------------
| | | Lincoln Investment Management, Inc. |
| |--| (formerly Lincoln National Investment Management Company) |
| | | 100% - Illinois - Mutual Fund Manager and |
| | | Registered Investment Adviser |
| | -----------------------------------------------------------
| -----------------------------------------------
|--| The Lincoln National Life Insurance Company |
| | 100% - Indiana |
| -----------------------------------------------
| | --------------------------------------------------
| |--|AnnuityNet, Inc. |
| | |100% - Indiana - Distribution of annuity products |
| | --------------------------------------------------
| | | -------------------------------------
| | |--| AnnuityNet Insurance Agency, Inc. |
| | | | 100% - Indiana - Insurance Agency |
| | -------------------------------------
| | -------------------------------------------
| |--|Lincoln National Insurance Associates, Inc.|
| | |(fka Cigna Associates, Inc.) |
| | |100% - Connecticut - Insurance Agency |
| | -------------------------------------------
| | | --------------------------------------------------------
| | |--|Lincoln National Insurance Associates of Alabama, Inc. |
| | | |100% - Alabama - Insurance Agency |
| | | --------------------------------------------------------
| | | -------------------------------------------------------------
| | | | Lincoln National Insurance Associates of Massachusetts, Inc.|
| | | | (formerly Cigna Associates of Massachusetts, Inc.) |
| | |--| 100% - Massachusetts - Insurance Agency |
| | -------------------------------------------------------------
| | -------------------------------------------
| |--| Sagemark Consulting, Inc. |
| | | (fka Cigna Financial Advisors, Inc.) |
| | | 100% - Connecticut - Broker Dealer |
| | -------------------------------------------
| | -------------------------------------------
| |--| 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 |
| | -----------------------------------
| | --------------------------------------------------
| |--| 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 |
| | ------------------------------------------------------
<PAGE>
--------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| -----------------------------------------------
|--| The Lincoln National Life Insurance Company |
| | 100% - Indiana |
| -----------------------------------------------
| | ------------------------------------------------
| | | 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 Re, S.A. |
| | | 1% Argentina - General Business Corp |
| | | (Remaining 99% owned by Lincoln National |
| | | Reassurance Company) |
| | -----------------------------------------------
| | -------------------------------------------
| |--| 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 |
| ------------------------------------------------------
| | -----------------------------------------------
| |--| Lincoln Re, S.A. |
| | | 99% Argentina - General Business Corp |
| | | (Remaining 1% owned by Lincoln National Health|
| | | & Casualty Insurance Company) |
| | -----------------------------------------------
| | -----------------------------------------------
| |--| 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 |
| -----------------------------------------------------------
| ----------------------------------------------
|--| Lincoln National Reinsurance Company Limited |
| | (formerly Heritage Reinsurance, Ltd.) |
| | 100% ** - Bermuda |
----------------------------------------------
<PAGE>
--------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| ----------------------------------------------
|--| Lincoln National Reinsurance Company Limited |
| | (formerly Heritage Reinsurance, Ltd.) |
| | 100% ** - Bermuda |
| ----------------------------------------------
| | ---------------------------------------------------------
| | | Lincoln National Underwriting Services, Ltd. |
| |--| 90% - England/Wales - Life/Accident/Health Underwriter |
| | | (Remaining 10% owned by Old Fort Ins. Co. Ltd.) |
| | ---------------------------------------------------------
| | --------------------------------------------------------
| | | Servicios de Evaluacion de Riesgos, 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 |
| | | (formerly One Olympic Way Financial Services Limited) |
| | | 100% - England/Wales - Sales Services |
| | -------------------------------------------------------
| | --------------------------------------------------------
| |--| 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 |
| | --------------------------------------------
| | ------------------------------------------------
| |--| Lincoln Financial Advisers Limited |
| | | (formerly: Laurentian Financial Advisers Ltd.) |
| | | 100% - England/Wales - Sales Company |
| | ------------------------------------------------
| | --------------------------------------------------
| |--| Lincoln Financial Group PLC |
| | | (formerly: Laurentian Financial Group PLC) |
| | | 100% - England/Wales - Holding Company |
| | --------------------------------------------------
| | | ----------------------------------------------------
| | |--| Lincoln ISA Management Limited |
| | | | (formerly Lincoln Unit Trust Management Limited; |
| | | | Laurentian Unit Trust Management Limited) |
| | | | 100% - England/Wales - Unit Trust Management |
----------------------------------------------------
<PAGE>
--------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| -----------------------------------------
|--| Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
| -----------------------------------------
| | --------------------------------------------------
| |--| Lincoln Financial Group PLC |
| | | (formerly: Laurentian Financial Group PLC) |
| | | 100% - England/Wales - Holding Company |
| | --------------------------------------------------
| | | ---------------------------------------
| | |--| Lincoln Milldon Limited |
| | | | (formerly: Laurentian Milldon Limited)|
| | | | 100% - England/Wales - Sales Company |
| | | ---------------------------------------
| | | -----------------------------------------------------------
| | |--| Laurtrust Limited |
| | | | 100% - England/Wales - Pension Scheme Trustee (Inactive) |
| | | -----------------------------------------------------------
| | | --------------------------------------------------
| | |--|Lincoln Management Services Limited |
| | | |(formerly: Laurentian Management Services Limited)|
| | | |100% - England/Wales - Management Services |
| | | --------------------------------------------------
| | | | ------------------------------------------------
| | | |--|Laurit Limited |
| | | | |100% - England/Wales - Data Processing Systems |
| | | | ------------------------------------------------
| | --------------------------------------------------------
| |--| Liberty Life Pension Trustee Company Limited |
| | | 100% - England/Wales - Corporate Pension Fund (Dormat) |
| | --------------------------------------------------------
| | ----------------------------------------------------------
| |--| LN Management Limited |
| | | 100% - England/Wales - Administrative Services (Dormat) |
| | ----------------------------------------------------------
| | | -----------------------------------
| | |--| UK Mortgage Securities Limited |
| | | 100% - England/Wales - Inactive |
| | -----------------------------------
| | ------------------------------------------
| |--| Liberty Press Limited |
| | | 100% - England/Wales - Printing Services |
------------------------------------------
<PAGE>
--------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| -----------------------------------------
|--| Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
| -----------------------------------------
| | ----------------------------------------------
| |--| Lincoln General Insurance Co. Ltd. |
| | | 100% - Accident & Health Insurance |
| | ----------------------------------------------
| | --------------------------------------------
| |--|Lincoln Assurance Limited |
| | |100% ** - England/Wales - Life Assurance |
| | --------------------------------------------
| | | | ---------------------------------------------
| | | |--|Barnwood Property Group Limited |
| | | | |100% - England/Wales - Property Management Co|
| | | | ---------------------------------------------
| | | | | ------------------------------------------
| | | | |--| Barnwood Developments Limited |
| | | | | | 100% England/Wales - Property Development|
| | | | | ------------------------------------------
| | | | | --------------------------------------------
| | | | |--| Barnwood Properties Limited |
| | | | | | 100% - England/Wales - Property Investment |
| | | | | --------------------------------------------
| | | | -----------------------------------------------------
| | | |--|IMPCO Properties G.B. Ltd. |
| | | | |100% - England/Wales - Property Investment (Inactive)|
| | | -----------------------------------------------------
| | | ----------------------------------------------------
| | |--| Lincoln Insurance Services Limited |
| | | | 100% - Holding Company |
| | | ----------------------------------------------------
| | | | ---------------------------------
| | | |--| British National Life Sales Ltd.|
| | | | | 100% - Inactive |
| | | | ---------------------------------
| | | | ----------------------------------------------------------
| | | |--| BNL Trustees Limited |
| | | | | 100% - England/Wales - Corporate Pension Fund (Inactive) |
| | | | ----------------------------------------------------------
| | | | -------------------------------------
| | | |--| Chapel Ash Financial Services Ltd. |
| | | | | 100% - Direct Insurance Sales |
-------------------------------------
<PAGE>
--------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
--------------------------------
| -----------------------------------------
|--| Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
| -----------------------------------------
| | |----------------------------------------------
| |--| Lincoln Unit Trust Managers Limited |
| | | 100% - England/Wales - Investment Management |
| | ----------------------------------------------
| | ----------------------------------------------------------
| |--| LIV Limited (formerly Lincoln Investment Management Ltd.)|
| | | 100% - England/Wales - Investment Management Services |
| | ----------------------------------------------------------
| | | -----------------------------------------------
| | |--| CL CR Management Ltd. |
| | | 50% - England/Wales - Administrative Services |
| | -----------------------------------------------
| | -----------------------------------------------------------
| |--| Lincoln Independent Limited |
| | | (formerly: Laurentian Independent Financial Planning Ltd.)|
| | | 100% - England/Wales - Independent Financial Adviser |
| | -----------------------------------------------------------
| | ----------------------------------------------
| |--| Lincoln Investment Management Limited |
| | | (formerly: Laurentian Fund Management Ltd.) |
| | | 100% - England/Wales - Investment Management |
| | ----------------------------------------------
| | ------------------------------------------
| |--| LN Securities Limited |
| | | 100% - England/Wales - Nominee Company |
| | ------------------------------------------
| | --------------------------------------------
| |--| Niloda Limited |
| | | 100% - England/Wales - Investment Company |
| | --------------------------------------------
| | ------------------------------------------------
| |--| Lincoln National Training Services Limited |
| | | 100% - England/Wales - Training Company |
| | ------------------------------------------------
| | ------------------------------------------------
| |--| Lincoln Pension Trustees Limited |
| | | 100% - England/Wales - Corporate Pension Fund |
| | ------------------------------------------------
| | ------------------------------------------------
| |--| Lincoln Independent (Jersey) Limited |
| | | (formerly Lincoln National (Jersey) Limited) |
| | | 100% - England/Wales - Dormat |
| | ------------------------------------------------
| | ------------------------------------------------
| |--| Lincoln National(Guernsey) Limited |
| | | 100% - England/Wales - Dormat |
| | ------------------------------------------------
| | ------------------------------------------------
| |--| Lincoln SBP Trustee Limited |
| | | 100% - England/Wales |
------------------------------------------------
<PAGE>
--------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding 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.) |
| | --------------------------------------------------------
| | ---------------------------------------------------
| | | Solutions Holdings, Inc. |
| |--| 100% - Delaware - General Business Corporation |
| | ---------------------------------------------------
| | | -----------------------------------------
| | |--|Solutions Reinsurance Limited |
| | | |100% - Bermuda - Class III Insurance Co |
| -----------------------------------------
| ----------------------------------------------------------
| | Seguros Serfin Lincoln, S.A. |
|--| 49% - Mexico - Insurance |
| ----------------------------------------------------------
| ----------------------------------------------------------
| | 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 |
--------------------------------------------
</TABLE>
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.
<PAGE>
ATTACHMENT #1
LINCOLN LIFE AND ANNUITY DISTRIBUTORS, INC.
CORPORATE AGENCY SUBSIDIARIES
1) Lincoln Financial Group, Inc. (AL)
2) Lincoln Financial and Insurance Services Corporation (Walnut Creek, CA)
3) 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 Financial Services and Insurance Brokerage of New England, Inc.
(formerly: Lincoln National of New England Insurance Agency, Inc.)
(Worcester, MA)
12) Financial Consultants of Michigan, Inc. (Troy, MI)
13) Lincoln Financial Group of Missouri, Inc. (formerly: John J. Moore &
Associates, Inc.) (St. Louis, MO)
14) Beardslee & Associates, Inc. (Clifton, NJ)
15) Lincoln Financial Group, Inc. (formerly: Resources/Financial, Inc.
(Albuquerque, NM)
16) Lincoln Cascades, Inc. (Portland, OR)
17) Lincoln Financial Group, Inc. (Salt Lake City, (UT)
<PAGE>
Summary of Changes to Organizational Chart:
JANUARY 1, 1995-DECEMBER 31, 1995
SEPTEMBER 1995
a. Lincoln National (Jersey) Limited was incorporated on September 18, 1995.
Company is dormat and was formed for tax reasons per Barbara Benoit,
Assistant Corporate Secretary at Lincoln UK.
JANUARY 1, 1996-DECEMBER 1, 1996
MARCH 1996
a. Delaware Investment Counselors, Inc. changed its name to Delaware Capital
Management, Inc. effective March 29, 1996.
AUGUST 1996
a. Lincoln National (Gernsey) Limited was incorporated on August 9, 1996;
company is dormat and was formed for tax reasons.
SEPTEMBER 1996
a. Morgan Financial Group, Inc. changed its name to Lincoln National Sales
Corporation of Maryland effective September 23, 1996.
OCTOBER 1996
a. Addition of Lincoln National (India) Inc., incorporated as an Indiana
corporation on October 17, 1996.
NOVEMBER 1996
a. Lincoln National SBP Trustee Limited was bought "off the shelf" and was
incorporated on November 26, 1996; it was formed to act as Trustee for
Lincoln Staff Benefits Plan.
DECEMBER 1996
a. Addition of Lincoln National Investments, Inc., incorporated as an Indiana
corporation on December 12, 1996.
JANUARY 1, 1997-DECEMBER 31, 1997
JANUARY 1997
a. Delaware Management Holdings, Inc., Lynch & Mayer, Inc. and Vantage Global
Advisors, Inc. were transferred via capital contribution to Lincoln
National Investments, Inc. effective January 2, 1997.
b. Lincoln National Investments, Inc. changed its name to Lincoln National
Investment Companies, Inc. effective January 24, 1997.
c. Lincoln National Investment Companies, Inc. changed its named to Lincoln
National Investments, Inc. effective January 24, 1997.
JANUARY 1997 CON'T
<PAGE>
d. The following Lincoln National (UK) subsidiaries changed their name
effective January 1, 1997: Lincoln Financial Group PLC (formerly Laurentian
Financial Group PLC); Lincoln Milldon Limited (formerly Laurentian Milldon
Limited); Lincoln Management Services Limited (formerly Laurentian
Management Services Limited).
FEBRUARY 1997
a. Removal of Lincoln National Financial Group of Philadelphia, Inc. which was
dissolved effective February 25, 1997.
MARCH 1997
a. Removal of Lincoln Financial Services, Inc. which was dissolved effective
March 4, 1997.
APRIL 1997
a. Acquisition of Dougherty Financial Group, Inc. on April 30, 1997. Company
then changed its name to Delvoy, Inc. The acquisition included the mutual
fund group of companies as part of the Voyager acquisition. The following
companies all then were moved under the newly formed holding company,
Delvoy, Inc. effective April 30, 1997: Delaware Management Company, Inc.,
Delaware Distributors, Inc., Delaware Capital Management, Inc., Delaware
Service Company, Inc. and Delaware Investment & Retirement Services, Inc.
b. Acquisition of Voyager Fund Managers, Inc. and Voyager Fund Distributors,
Inc. on April 30, 1997; merger is scheduled for May 31, 1997 for Voyager
Fund Managers, Inc. into Delaware Management Company, Inc. and Voyager Fund
Distributors, Inc. is to merge into Delaware Distributors, L.P.
c. Removal of Aseguradora InverLincoln, S.A. Compania de Seguros y Reaseguros,
Grupo Financiero InverMexico. Stock was sold to Grupo Financiero
InverMexico effective April 18, 1997.
MAY 1997
a. Name change of The Richard Leahy Corporation to Lincoln National Financial
Institutions Group, Inc. effective May 6, 1997.
b. Voyager Fund Managers, Inc. merged into Delaware Management Company, Inc.
effective May 30, 1997 at 10:00 p.m. with Delaware Management Company, Inc.
surviving.
c. On May 31, 1997 at 2:00 a.m., Voyager Fund Distributors, Inc. merged into a
newly formed company Voyager Fund Distributors (Delaware), Inc.,
incorporated as a Delaware corporation on May 23, 1997. Voyager Fund
Distributors (Delaware), Inc. then merged into Delaware Distributors, L.P.
effective May 31, 1997 at 2:01 a.m. Delaware Distributors, L.P. survived.
JUNE 1997
a. Removal of Lincoln National Sales Corporation of Maryland -- company
dissolved June 13, 1997.
b. Addition of Lincoln Funds Corporation, incorporated as a Delaware
corporation on June 10, 1997 at 2:00 p.m.
c. Addition of Lincoln Re, S.A., incorporated as an Argentina company on June
30, 1997.
<PAGE>
JULY 1997
a. LNC Equity Sales Corporation changed its name to Lincoln Financial Advisors
Corporation effective July 1, 1997.
b. Addition of Solutions Holdings, Inc., incorporated as a Delaware
corporation on July 27, 1997.
SEPTEMBER 1997
a. Addition of Solutions Reinsurance Limited, incorporated as a Bermuda
corporation on September 29, 1997.
OCTOBER 1997
a. Removal of the following companies: American States Financial Corporation,
American States Insurance Company, American Economy Insurance Company,
American States Insurance Company of Texas, American States Life Insurance
Company, American States Lloyds Insurance Company, American States
Preferred Insurance Company, City Insurance Agency, Inc. and Insurance
Company of Illinois -- all were sold 10-1-97 to SAFECO Corporation.
b. Liberty Life Assurance Limited was sold to Liberty International Holdings
PLC effective 10-6-97.
c. Addition of Seguros Serfin Lincoln, S.A., acquired by LNC on 10-15-97.
DECEMBER 1997
a. Addition of City Financial Partners Ltd. as a result of its acquisition by
Lincoln National Corporation on December 22, 1997. This company will
distribute life assurance and pension products of Lincoln Assurance
Limited.
b. Removal of Lynch & Mayer Asia, Inc. which was dissolved December 24, 1997.
JANUARY 1998
a. Addition of Cigna Associates, Inc., Cigna Financial Advisors, Inc. and
Cigna Associates of Massachusetts, Inc., acquired by The Lincoln National
Life Insurance Company on January 1, 1998. Cigna Associates of
Massachusetts is 100% owned by Cigna Associates, Inc.
b. Removal of Lincoln National Mezzanine Corporation and Lincoln National
Mezzanine Fund, L.P. Lincoln National Mezzanine Corporation was dissolved
on January 12, 1998 and Lincoln National Mezzanine Fund, L.P. was cancelled
January 12, 1998.
c. Corporate organizational changes took place in the UK group of companies on
January 21, 1998: Lincoln Insurance Services Limited and its subsidiaries
were moved from Lincoln National (UK) PLC to Lincoln Assurance Limited;
Lincoln General Insurance Co. Ltd. was moved from Lincoln Insurance
Services Limited to Lincoln National (UK) PLC.
d. Addition of AnnuityNet, Inc., incorporated as an Indiana corporation on
January 16, 1998 and a wholly-owned subsidiary of The Lincoln National Life
Insurance Company.
JUNE 1998
<PAGE>
a. Name Change of CIGNA Financial Advisors, Inc. to Sagemark Consulting, Inc.
effective June 1, 1998.
b. Name Change of CIGNA Associates, Inc. to Lincoln National Insurance
Associates, Inc. effective June 1, 1998.
c. Addition of Lincoln National Insurance Associates of Alabama, Inc.,
incorporated as a wholly-owned subsidiary of Lincoln National Insurance
Associates, Inc. as an Alabama domiciled corporation.
d. Dissolution of LUTM Nominees Limited effective June 10, 1998.
e. Dissolution of Cannon Fund Managers Limited June 16, 1998.
f. Dissolution of P.N. Kemp Gee & Co. Ltd. June 2, 1998.
JULY 1998
a. Name change of CIGNA Associates of Massachusetts, Inc. to Lincoln National
Insurance Associates of Massachusetts, Inc. effective July 22, 1998.
SEPTEMBER 1998
a. Removal of Lincoln Financial Group of Michigan, Inc., voluntarily dissolved
September 15, 1998.
b. Name change of Lincoln Financial Group, Inc. to Lincoln Life and Annuity
Distributors, Inc. on September 29, 1998.
c. Removal of Lincoln European Reinsurance S.A. -- company dissolved September
30, 1998.
d. Removal of Lincoln Funds Corporation -- company voluntarily dissolved
September 30, 1998.
OCTOBER 1998
a. Addition of AnnuityNet Insurance Agency, Inc., incorporated as an Indiana
corporation October 2, 1998., a wholly-owned subsidiary of AnnuityNet, Inc.
b. Removal of Lincoln National (India) Inc., voluntarily dissolved October 26,
1998.
DECEMBER 1998
a. Removal of The Insurers' Fund, Inc., voluntarily dissolved December 10,
1998.
b. Addition of Lincoln National Management Corporation, a Pennsylvania
corporation and a wholly-owned subsidiary of Lincoln National Corporation,
incorporated on December 17, 1998.
JANUARY 1999
Lincoln Unit Trust Management changed its name on January 5, 1999 to Lincoln ISA
Management Limited.
FEBRUARY 1999
Removal of Lincoln Soutwest Financial Group, Inc. -- company's term of existence
expired July 18, 1998.
<PAGE>
BOOKS AND RECORDS
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT L
RULES UNDER SECTION 31 OF THE INVESTMENT COMPANY ACT OF 1940
Records to Be Maintained by Registered Investment Companies, Certain
Majority-Owned Subsidiaries Thereof, and Other Persons Having Transactions with
Registered Investment Companies.
Reg. 270.31a-1. (a) Every registered investment company, and every
underwriter, broker, dealer, or investment advisor which is a majority-owned
subsidiary of such a company, shall maintain and keep current the accounts,
books, and other documents relating to its business which constitute the record
forming the basis for financial statements required to be filed pursuant to
Section 30 of the Investment Company Act of 1940 and of the auditor's reports
relating thereto.
<TABLE>
<CAPTION>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
<S> <C> <C> <C>
Annual Reports Finance Eric Jones Permanently, the first two
To Shareholders years in an easily accessible
place
Semi-Annual Finance Eric Jones Permanently, the first two
Reports years in an easily accessible
place
Form N-SAR Finance Eric Jones Permanently, the first two
years in an easily accessible
place
</TABLE>
(b) Every registered investment company shall maintain and keep current the
following books, accounts, and other documents:
Type of Record
- --------------
(1) Journals (or other records of original entry) containing an itemized daily
record in detail of all purchases and sales of securities (including sales and
redemptions of its own securities), all receipts and deliveries of securities
(including certificate numbers if such detail is not recorded by custodian or
transfer agent), all receipts and disbursements of cash and all other debits and
credits. Such records shall show for each such transaction the name and quantity
of securities, the unit and aggregate purchase or sale price, commission paid,
the market on which effected, the trade date, the settlement date, and the name
of the person through or from whom purchased or received or to whom sold or
delivered.
Purchases and Sales Journals
- ----------------------------
<PAGE>
<TABLE>
<S> <C> <C> <C>
Daily reports CSRM Kathleen Adamson Permanently, the first two
of securities (Portland) Eric Jones years in an easily accessible
transactions Finance place
Portfolio Securities
- ----------------------
C-Port Purchase/ Finance Eric Jones Permanently, the first two
Sales Reports years in an easily accessible
place
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
<S> <C> <C> <C>
Receipts and Deliveries of Securities (units)
- ---------------------------------------------
Not Applicable.
Portfolio Securities
- --------------------
Not Applicable.
Receipts and Disbursements of Cash and other Debits and Credits
- ---------------------------------------------------------------
Daily Journals CSRM (Portland) Kathleen Adamson Permanently, the first two
Finance Eric Jones years in an easily accessible
place
</TABLE>
(2) General and auxiliary ledgers (or other record) reflecting all asset,
liability, reserve, capital, income and expense accounts, including:
(i) Separate ledger accounts (or other records) reflecting the
following:
(a) Securities in transfer;
(b) Securities in physical possession;
(c) Securities borrowed and securities loaned;
(d) Monies borrowed and monies loaned (together with a record of the
collateral therefore and substitutions in such collateral);
(e) Dividends and interest received;
(f) Dividends receivable and interest accrued.
Instructions. (a) and (b) shall be stated in terms of securities quantities
only; (c) and (d) shall be stated in dollar amounts and securities quantities as
appropriate; (e) and (f) shall be stated in dollar amounts only.
<TABLE>
<CAPTION>
General Ledger
- --------------
<S> <C> <C> <C>
LNL trial Finance Eric Jones Permanently, the first two
Balance (5000 years in an easily accessible
series) place
</TABLE>
Securities in Transfer
- ----------------------
Not Applicable.
Securities in Physical Possession
- ---------------------------------
Not Applicable.
Securities Borrowed and Loaned
- ------------------------------
Not Applicable.
Monies Borrowed and Loaned
- --------------------------
<PAGE>
Not Applicable.
<TABLE>
<CAPTION>
Dividends and Interest Received
- -------------------------------
<S> <C> <C> <C>
LNL Trial Finance Eric Jones Permanently, the first two
Balance (5000 years in an easily accessible
series) place
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Dividends Receivable and Interest Accrued
- -----------------------------------------
LNL Trial Finance Eric Jones Permanently, the first two
Balance (5000 years in an easily accessible
series) place
</TABLE>
(ii) Separate ledger accounts (or other records) for each portfolio security,
showing (as of trade dates), (a) the quantity and unit and aggregate price for
each purchase, sale, receipt, and delivery of securities and commodities for
such accounts, and (b) all other debits and credits for such accounts.
Securities positions and money balances in such ledger accounts (or other
records) shall be brought forward periodically but not less frequently than at
the end of fiscal quarters. Any portfolio security, the salability of which is
conditioned, shall be so noted. A memorandum record shall be available setting
forth, with respect to each portfolio security accounts, the amount and
declaration, ex-dividend, and payment dates of each dividend declared thereon.
<TABLE>
<CAPTION>
Ledger Account for each portfolio Security
- ------------------------------------------
<S> <C> <C> <C>
Daily Report Finance Eric Jones Permanently, the first two
Of Securities years in an easily accessible
Transactions place
(Daily Trade File)
</TABLE>
(iii) Separate ledger accounts (or other records) for each broker-dealer, bank
or other person with or through which transactions in portfolio securities are
affected, showing each purchase or sale of securities with or through such
persons, including details as to the date of the purchase or sale, the quantity
and unit and aggregate prices of such securities, and the commissions or other
compensation paid to such persons. Purchases or sales effected during the same
day at the same price may be aggregated.
Not Applicable.
(iv) Separate ledger accounts (or other records), which may be maintained by a
transfer agent or registrar, showing for each shareholder of record of the
investment company the number of shares of capital stock of the
<PAGE>
company held. in respect of share accumulation accounts (arising from periodic
investment plans, dividend reinvestment plans, deposit of issued shares by the
owner thereof, etc.), details shall be available as to the dates and number of
shares of each accumulation, and except with respect to already issued shares
deposited by the owner thereof, prices of each such accumulation.
<TABLE>
<CAPTION>
Shareholder Accounts
- --------------------
<S> <C> <C> <C>
Master file Finance Eric Jones Permanently, the first two
Record (Daily CSRM (Portland) Kathleen Adamson years in an easily accessible
Trade File & Leg place
Syst Client Rpt)
</TABLE>
(3) A securities record or ledger reflecting separately for each portfolio
security as of trade date all "long" and "short" positions carried by the
investment company for its own account and showing the location of all
securities long and the off-setting position to all securities short. The record
called for by this paragraph shall not be required in circumstances under which
all portfolio securities are maintained by a bank or banks or a member or
members of a national securities exchange as custodian under a custody agreement
or as agent for such custodian.
<PAGE>
<TABLE>
<CAPTION>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
<S> <C> <C> <C>
Not Applicable
(4) Corporate charters, certificates of incorporation or trust agreements, and
bylaws, and minute books of stockholders' and directors' or trustees' meetings;
and minute books of directors' or trustees' committee and advisory board or
advisory committee meetings.
Corporate Documents
- -------------------
Memorandum Legal Janet Lindenberg Permanently, the first two
Establishing SA years in an easily accessible
place
</TABLE>
(5) A record of each brokerage order given by or in behalf of the investment
company for, or in connection with, the purchase or sale of securities, whether
executed or unexecuted. Such record shall include the name of the broker, the
terms and conditions of the order and of any modification or cancellation
thereof, the time of entry or cancellation, the price at which executed, and the
time of receipt of report of execution. The record shall indicate the name of
the person who placed the order in behalf of the investment company.
<TABLE>
<CAPTION>
Order Tickets
- -------------
<S> <C> <C> <C>
UIT applica- CSRM (Portland) Kathleen Adamson Six years, the first two
tions and Finance Eric Jones years in an easily accessible
daily reports place
of securities
transactions
</TABLE>
(6) A record of all other portfolio purchase or sales showing details
comparable to those prescribed in paragraph 5 above.
Commercial Paper
- ----------------
Not Applicable.
(7) A record of all puts, calls, spreads, straddles, and other options in which
the investment company has any direct or indirect interest or which the
investment company has granted or guaranteed; and a record of any contractual
commitments to purchase, sell, receive or deliver securities or other property
(but not including open orders placed with broker-dealers for the purchase or
sale of securities, which may be cancelled by the company on notices without
penalty or cost of any kind); containing at least an identification of the
security, the number of units involved, the option price, the date of maturity,
the date of issuance, and the person to whom issued.
Record of Puts, Calls, Spreads, Etc.
- ------------------------------------
Not Applicable.
(8) A record of the proof of money balances in all ledger accounts (except
shareholder accounts), in the form of trial balances. Such trial balances shall
be prepared currently at least once a month.
<PAGE>
<TABLE>
<CAPTION>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
<S> <C> <C> <C>
Trial Balance
- -------------
LNL Trial Finance Eric Jones Permanently, the first two
Balance (5000 years in an easily accessible
series) place
</TABLE>
(9) A record for each fiscal quarter, which shall be completed within 10 days
after the end of such quarter, showing specifically the basis or bases upon
which the allocation of orders for the purchase and sale of portfolio securities
to named brokers or dealers and the division of brokerage commissions or other
compensation on such purchase and sale orders among named persons were made
during such quarter. The record shall indicate the consideration given to (a)
sales of shares of the investment company by brokers or dealers, (b) the
supplying of services or benefits by brokers or dealers to the investment
company, its investment advisor or principal underwriter or any persons
affiliated therewith, and (c) any other considerations other than the technical
qualifications of the brokers and the dealers as such. The record shall show the
nature of their services or benefits made available, and shall describe in
detail the application of any general or specific formula or other determinant
used in arriving at such allocation of purchase and sales orders and such
division of brokerage commissions or other compensation. The record shall also
include the identities of the person responsible for the determination of such
allocation and such division of brokerage commissions or other compensation.
Not Applicable.
(10) A record in the form of an appropriate memorandum identifying the person or
persons, committees, or groups authorizing the purchase or sale of portfolio
securities. Where an authorization is made by a committee or group, a record
shall be kept in the names of its members who participated in the authorization.
There shall be retained a part of the record required by this paragraph any
memorandum, recommendation, or instruction supporting or authorizing the
purchase or sale of portfolio securities. The requirements of this paragraph are
applicable to the extent they are not met by compliance with the requirements of
paragraph 4 of this Rule 31a1(b).
<TABLE>
<S> <C> <C> <C>
Advisory Legal Janet Lindenberg Six years, the first two
Agreements years in an easily accessible
place
</TABLE>
(11) Files of all advisory material received from the investment advisor, any
advisory board or advisory committee, or any other persons from whom the
investment company accepts investment advice publications distributed generally.
Not Applicable.
(12) The term "other records" as used in the expressions "journals (or other
records of original entry)" and "ledger accounts (or other records)" shall be
construed to include, where appropriate, copies of voucher checks,
confirmations, or similar documents which reflect the information required by
the applicable rule or rules in appropriate sequence and in permanent form,
including similar records developed by the use of automatic data processing
systems.
<TABLE>
<S> <C> <C> <C>
Correspondence CSRM (Portland) Kathleen Adamson Six years, the first two
years in an easily accessible
place
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
<S> <C> <C> <C>
Proxy State- CSRM (Portland) Kathleen Adamson Six years, the first two
ments and years in an easily accessible
Proxy Cards place
Pricing Sheets Finance Eric Jones Permanently, the first two
years in an easily accessible
place
Bank State- Treasurers Rusty Summers Six years, the first two years
ments in an easily accessible place
</TABLE>
March 24, 1999
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby revoke all powers of attorney authorizing any person
to act as attorney-in-fact relative to Lincoln National Variable Annuity Account
L (Group Variable Annuity III), which were previously executed by us and do
hereby severally constitute and appoint Kelly D. Clevenger, Jeffrey K.
Dellinger, and Steven M. Kluever, our true and lawful attorneys-in-fact, with
full power in each of them to sign for us, in our names and in the capacities
indicated below, any and all amendments to Registration Statement No. 333-5815
filed with the Securities and Exchange Commission under the Securities Act of
1933, on behalf of the Company in its own name or in the name of one of its
Separate Accounts, hereby ratifying and confirming our signatures as they may be
signed by any of our attorneys-in-fact to any such amendment to that
Registration Statement. The power of attorney was signed by us on February 3,
1999.
Signature Title
- --------- -----
/s/Gabriel L. Shaheen
- ------------------------ President, Chief Executive Officer and Director
Gabriel L. Shaheen (Principal Executive Officer)
- ------------------------ Executive Vice President and Director
Lawrence T. Rowland
- ------------------------ Senior Vice President, Assistant Treasurer and
Keith J. Ryan Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
- ------------------------ Director
H. Thomas McMeekin
- ------------------------ Director
Richard C. Vaughan
- ------------------------ Director
Jon A. Boscia
STATE OF INDIANA)
)SS:
COUNTY OF ALLEN)
Subscribed and sworn to before me this
3rd day of February, 1999.
/s/Janet L. Lindenberg
----------------------------------
Notary public
Commission Expires: 7-10-2001
---------
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby revoke all powers of attorney authorizing any person
to act as attorney-in-fact relative to Lincoln National Variable Annuity Account
L (Group Variable Annuity III), which were previously executed by us and do
hereby severally constitute and appoint Kelly D. Clevenger, Jeffrey K.
Dellinger, and Steven M. Kluever, our true and lawful attorneys-in-fact, with
full power in each of them to sign for us, in our names and in the capacities
indicated below, any and all amendments to Registration Statement No. 333-5815
filed with the Securities and Exchange Commission under the Securities Act of
1933, on behalf of the Company in its own name or in the name of one of its
Separate Accounts, hereby ratifying and confirming our signatures as they may be
signed by any of our attorneys-in-fact to any such amendment to that
Registration Statement. The power of attorney was signed by us on February 3,
1999.
Signature Title
- --------- -----
- ------------------------ President, Chief Executive Officer and Director
Gabriel L. Shaheen (Principal Executive Officer)
/s/Lawrence T. Rowland Executive Vice President and Director
- ------------------------
Lawrence T. Rowland
- ------------------------ Senior Vice President, Assistant Treasurer and
Keith J. Ryan Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
- ------------------------ Director
H. Thomas McMeekin
- ------------------------ Director
Richard C. Vaughan
- ------------------------ Director
Jon A. Boscia
STATE OF INDIANA)
)SS:
COUNTY OF ALLEN)
Subscribed and sworn to before me this
3rd day of February, 1999.
/s/Janet L. Lindenberg
-----------------------------------
Notary public
Commission Expires: 7-10-2001
---------
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby revoke all powers of attorney authorizing any person
to act as attorney-in-fact relative to Lincoln National Variable Annuity Account
L (Group Variabl Annuity III), which were previously executed by us and do
hereby severally constitute and appoint Kelly D. Clevenger, Jeffrey K.
Dellinger, and Steven M. Kluever, our true and lawful attorneys-in-fact, with
full power in each of them to sign for us, in our names and in the capacities
indicated below, any and all amendments to Registration Statement No. 333-5815
filed with the Securities and Exchange Commission under the Securities Act of
1933, on behalf of the Company in its own name or in the name of one of its
Separate Accounts, hereby ratifying and confirming our signatures as they may be
signed by any of our attorneys-in-fact to any such amendment to that
Registration Statement. The power of attorney was signed by us on February 3,
1999.
Signature Title
- --------- -----
- ------------------------ President, Chief Executive Officer and Director
Gabriel L. Shaheen (Principal Executive Officer)
- ------------------------ Executive Vice President and Director
Lawrence T. Rowland
/s/Keith J. Ryan
- ------------------------ Senior Vice President, Assistant Treasurer and
Keith J. Ryan Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
- ------------------------ Director
H. Thomas McMeekin
- ------------------------ Director
Richard C. Vaughan
- ------------------------ Director
Jon A. Boscia
STATE OF INDIANA)
)SS:
COUNTY OF ALLEN)
Subscribed and sworn to before me this
3rd day of February, 1999.
/s/Janet L. Lindenberg
---------------------------------
Notary public
Commission Expires: 7-10-2001
---------
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby revoke all powers of attorney authorizing any person
to act as attorney-in-fact relative to Lincoln National Variable Annuity Account
L (Group Variable Annuity III), which were previously executed by us and do
hereby severally constitute and appoint Kelly D. Clevenger, Jeffrey K.
Dellinger, and Steven M. Kluever, our true and lawful attorneys-in-fact, with
full power in each of them to sign for us, in our names and in the capacities
indicated below, any and all amendments to Registration Statement No. 333-5815
filed with the Securities and Exchange Commission under the Securities Act of
1933, on behalf of the Company in its own name or in the name of one of its
Separate Accounts, hereby ratifying and confirming our signatures as they may be
signed by any of our attorneys-in-fact to any such amendment to that
Registration Statement. The power of attorney was signed by us on February 3,
1999.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
President, Chief Executive Officer and Director
- ------------------------------------- (Principal Executive Officer)
Gabriel L. Shaheen
Executive Vice President and Director
- -------------------------------------
Lawrence T. Rowland
Senior Vice President, Assistant Treasurer and
- ------------------------------------- Chief Financial Officer
Keith J. Ryan (Principal Financial Officer and Principal
Accounting Officer)
/s/ H. Thomas McMeekin Director
- -------------------------------------
H. Thomas McMeekin
Director
- -------------------------------------
Richard C. Vaughan
Director
- -------------------------------------
Jon A. Boscia
STATE OF INDIANA )
)SS:
COUNTY OF ALLEN )
Subscribed and sworn to before me this
3rd day of February, 1999.
/s/Janet L. Lindenberg
--------------------------------------
Notary public
Commission Expires: 7-10-2001
---------
</TABLE>
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby revoke all powers of attorney authorizing any person
to act as attorney-in-fact relative to Lincoln National Variable Annuity Account
L (Group Variable Annuity III), which were previously executed by us and do
hereby severally constitute and appoint Kelly D. Clevenger, Jeffrey K.
Dellinger, and Steven M. Kluever, our true and lawful attorneys-in-fact, with
full power in each of them to sign for us, in our names and in the capacities
indicated below, any and all amendments to Registration Statement No. 333-5815
filed with the Securities and Exchange Commission under the Securities Act of
1933, on behalf of the Company in its own name or in the name of one of its
Separate Accounts, hereby ratifying and confirming our signatures as they may be
signed by any of our attorneys-in-fact to any such amendment to that
Registration Statement. The power of attorney was signed by us on February 3,
1999.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
President, Chief Executive Officer and Director
- ------------------------------------- (Principal Executive Officer)
Gabriel L. Shaheen
Executive Vice President and Director
- -------------------------------------
Lawrence T. Rowland
Senior Vice President, Assistant Treasurer and
- ------------------------------------- Chief Financial Officer
Keith J. Ryan (Principal Financial Officer and Principal
Accounting Officer)
Director
- -------------------------------------
H. Thomas McMeekin
/s/ Richard C. Vaughan Director
- -------------------------------------
Richard C. Vaughan
Director
- -------------------------------------
Jon A. Boscia
STATE OF INDIANA )
)SS:
COUNTY OF ALLEN )
Subscribed and sworn to before me this
3rd day of February, 1999.
/s/Janet L. Lindenberg
--------------------------------------
Notary public
Commission Expires: 7-10-2001
---------
</TABLE>
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby revoke all powers of attorney authorizing any person
to act as attorney-in-fact relative to Lincoln National Variable Annuity Account
L (Group Variable Annuity III), which were previously executed by us and do
hereby severally constitute and appoint Kelly D. Clevenger, Jeffrey K.
Dellinger, and Steven M. Kluever, our true and lawful attorneys-in-fact, with
full power in each of them to sign for us, in our names and in the capacities
indicated below, any and all amendments to Registration Statement No. 333-5815
filed with the Securities and Exchange Commission under the Securities Act of
1933, on behalf of the Company in its own name or in the name of one of its
Separate Accounts, hereby ratifying and confirming our signatures as they may be
signed by any of our attorneys-in-fact to any such amendment to that
Registration Statement. The power of attorney was signed by us on February 3,
1999.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
President, Chief Executive Officer and Director
- ------------------------------------- (Principal Executive Officer)
Gabriel L. Shaheen
Executive Vice President and Director
- -------------------------------------
Lawrence T. Rowland
Senior Vice President, Assistant Treasurer and
- ------------------------------------- Chief Financial Officer
Keith J. Ryan (Principal Financial Officer and Principal
Accounting Officer)
Director
- -------------------------------------
H. Thomas McMeekin
Director
- -------------------------------------
Richard C. Vaughan
/s/ Jon A. Boscia Director
- -------------------------------------
Jon A. Boscia
STATE OF INDIANA )
)SS:
COUNTY OF ALLEN )
Subscribed and sworn to before me this
3rd day of February, 1999.
/s/Janet L. Lindenberg
--------------------------------------
Notary public
Commission Expires: 7-10-2001
---------
</TABLE>
