<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 2, 2000
Registration No. 333-32402
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-effective Amendment No. 1 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Pre-effective Amendment No. 1 [X]
LINCOLN LIFE VARIABLE ANNUITY ACCOUNT T
(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
ELIZABETH A. FREDERICK, ESQ.
1300 S. Clinton Street
Post Office Box 1110
Fort Wayne, Indiana 46802
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(Name and Address of Agent for Service)
COPY TO:
Gary D. Cohen, Esq.
Freedman, Levy, Kroll & Simonds
Washington Square, Suite 825
1050 Connecticut Avenue, N.W.
Washington, DC 20036
Title of securities being registered:
Interests in a separate account under individual flexible premium deferred
variable annuity contracts.
--------------------------------------------------------------------------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
shall determine.
<PAGE>
This Registration Statement contains two annuity contracts, which are
identical, except the contracts have different charges because they will be
offered for sale through two different distribution channels. Each contract
variation has its own prospectus.
<PAGE>
SEI Variable Annuity
Lincoln Life Variable Annuity Account T
Individual variable annuity contract
Home Office:
Lincoln National Life Insurance Company
1300 South Clinton Street
Fort Wayne, IN 46801
This Prospectus describes the individual flexible premium deferred variable
annuity contract that is issued by The Lincoln National Life Insurance Company
(Lincoln Life). It is primarily for use with nonqualified plans and retirement
plans under Sections 408 (IRAs) and 408A (Roth IRAs) of the tax code.
Generally, you do not pay federal income tax on the contract's growth until it
is paid out. The contract is designed to accumulate account value and to
provide retirement income that you cannot outlive or for an agreed upon time.
If you die before the annuity commencement date, we will pay your beneficiary a
death benefit. In the alternative, you may choose to receive a death benefit on
the death of the annuitant.
The minimum initial purchase payment for the contract is $25,000. Additional
purchase payments may be made to the contract and must be at least $100.
All purchase payments for benefits will be placed in Lincoln Life Variable
Annuity Account T (variable annuity account [VAA]). The VAA is a segregated
investment account of Lincoln Life. You take all of the investment risk on the
account value and the retirement income. If the subaccounts you select make
money, your account value goes up; if they lose money, your account value goes
down. How much it goes up or down depends on the performance of the subaccounts
you select. We do not guarantee how any of the variable options or their funds
will perform. Also, neither the U.S. Government nor any federal agency insures
or guarantees your investment in the contract.
The available funds, listed below, are each part of SEI Insurance Products
Trust (trust):
SEI VP Large Cap Growth Fund
SEI VP Large Cap Value Fund
SEI VP Small Cap Growth Fund
SEI VP Small Cap Value Fund
SEI VP International Equity Fund
SEI VP Emerging Markets Equity Fund
SEI VP Emerging Markets Debt Fund
SEI VP Core Fixed Income Fund
SEI VP High Yield Bond Fund
SEI VP International Fixed Income Fund
SEI VP Prime Obligation Fund
This Prospectus gives you information about the contract that you should know
before you decide to buy a contract and make purchase payments. You should also
review the prospectus for the funds that are attached, and keep both
prospectuses for future reference.
Neither the SEC nor any state securities commission has approved this contract
or determined that this Prospectus is accurate or complete. Any representation
to the contrary is a criminal offense.
You can obtain a Statement of Additional Information (SAI) about the contract
that has more information. Its terms are made part of this Prospectus. For a
free copy, write: Lincoln National Life Insurance Company, P.O. Box 7878, Fort
Wayne, Indiana 46801, or call 1-800-338-0355. The SAI and other information
about Lincoln Life and Account T 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.
, 2000
1
<PAGE>
Table of contents
<TABLE>
<CAPTION>
Page
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<S> <C>
Special terms.............................................................. 2
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Expense tables............................................................. 3
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Summary.................................................................... 6
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Condensed financial information............................................ 6
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Investment results......................................................... 7
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Financial statements....................................................... 7
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Lincoln National Life Insurance Co......................................... 7
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General account............................................................ 7
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Variable annuity account (VAA)............................................. 7
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Investments of the variable annuity account................................ 8
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Charges and other deductions............................................... 10
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The contracts.............................................................. 10
</TABLE>
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<TABLE>
<CAPTION>
Page
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<S> <C>
Annuity payouts........................................................... 14
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Federal tax matters....................................................... 16
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Voting rights............................................................. 19
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Distribution of the contracts............................................. 19
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Return privilege.......................................................... 19
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State regulation.......................................................... 20
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Records and reports....................................................... 20
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Other information......................................................... 20
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Statement of additional information table of contents for Variable Annuity
Account T SEI Variable Annuity........................................... 21
</TABLE>
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Special terms
(We have italicized the terms that have special meaning throughout the
Prospectus).
Account or variable annuity account (VAA)--The segregated investment account,
Account T, into which Lincoln Life sets aside and invests the assets 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.
Accumulation unit--A measure used to calculate account value before the annuity
commencement date.
Annuitant--The person on whose life the annuity benefit payments are based and
upon whose death a death benefit may be paid.
Annuity commencement date--The valuation date when funds are withdrawn or
converted into annuity units for payment of retirement income benefits under
the annuity payout option you select.
Annuity payout--An amount paid at regular intervals after the annuity
commencement 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 annuity payouts after
the annuity commencement date.
Beneficiary--The person you choose to receive the death benefit.
Contractowner (you, your, owner)--The person who has the ability to exercise
the rights within the contract (decides on investment allocations, transfers,
payout option, designates the beneficiary, etc.) Usually, but not always, the
owner is the annuitant.
Contract year--Each one-year period starting with the effective date of the
contract and starting with each contract anniversary after that.
Death benefit--The amount payable to your designated beneficiary if the owner
dies before the annuity commencement date or, if selected, to the contractowner
if the annuitant dies. Four death benefit options are available.
Lincoln Life (we, us, our)--The Lincoln National Life Insurance Company.
Purchase payments--Amounts paid into the contract.
Subaccount or SEI Variable Annuity subaccount--The portion of the VAA that
reflects investments in accumulation and annuity units of a class of a
particular fund available under the contracts. There is a separate subaccount
which corresponds to each class of a fund.
Trust--SEI Insurance Products Trust (trust), the funds to which you direct
purchase payments.
Valuation date--Each day the New York Stock Exchange (NYSE) is open for
trading.
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
Summary of Contractowner expenses:
Annual Account Fee: $40
(See Charges and other deductions).
The account fee will be waived for any contract year if your account value
equals or exceeds $50,000.00.
--------------------------------------------------------------------------------
Account T annual expenses for SEI Variable Annuity subaccounts:*
(as a percentage of average account value)
<TABLE>
<CAPTION>
Death benefit options
----------------------------
Return Annual 5%
Account of Step- Step-
Value Premium Up Up
<S> <C> <C> <C> <C>
Mortality and expense risk charge: 1.20% 1.25% 1.35% 1.50%
Administrative charge: .15% .15% .15% .15%
----- ----- ----- -----
Total annual charge for each subaccount: 1.35% 1.40% 1.50% 1.65%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
The
mortality
and expense
risk charge
is based on
the
particular
death
benefit
option you
choose. (See
Charges and
other
deductions.)
</TABLE>
Annual expenses of the funds:
(as a percentage of each fund's average net assets):
<TABLE>
<CAPTION>
Management Other expenses Total expenses Total expenses
Fees (before (before any (before any (after any
any waivers/ waivers/ waivers/ waivers/
reimbursements) reimbursements)** reimbursements) reimbursements)***
--------------- + ----------------- = --------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
1. Large Cap Growth 0.40% 0.82% 1.22% 0.85%
------------------------------------------------------------------------------------------------------------
2. Large Cap Value 0.35% 0.82% 1.17% 0.85%
------------------------------------------------------------------------------------------------------------
3. Small Cap Growth 0.65% 0.82% 1.47% 1.10%
------------------------------------------------------------------------------------------------------------
4. Small Cap Value 0.65% 0.82% 1.47% 1.10%
------------------------------------------------------------------------------------------------------------
5. International Equity 0.51% 1.06% 1.57% 1.28%
------------------------------------------------------------------------------------------------------------
6. Emerging Markets Equity 1.05% 1.33% 2.38% 1.95%
------------------------------------------------------------------------------------------------------------
7. Emerging Markets Debt 0.85% 1.44% 2.29% 1.35%
------------------------------------------------------------------------------------------------------------
8. Core Fixed Income 0.28% 0.75% 1.03% 0.60%
------------------------------------------------------------------------------------------------------------
9. High Yield Bond 0.49% 0.82% 1.31% 0.85%
------------------------------------------------------------------------------------------------------------
10. International Fixed Income 0.30% 1.41% 1.71% 1.00%
------------------------------------------------------------------------------------------------------------
11. Prime Obligation 0.08% 0.86% 0.94% 0.44%
------------------------------------------------------------------------------------------------------------
</TABLE>
* The VAA is divided into separately named subaccounts, eleven of which are
available under the contracts. Each subaccount, in turn, invests purchase
payments in shares of its respective fund.
** Other expenses are based on estimated amounts for the current fiscal year.
***SIMC and SEI Investments Fund Management have each voluntarily agreed to
waive a portion of their fees for the current year in order to keep total
operating expenses at a specified level. SIMC and/or SEI Investments Fund
Management may discontinue all or part of their waivers at any time.
3
<PAGE>
Examples
(expenses of the subaccounts and of 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>
1 year 3 years
<S> <C> <C>
For Account Value Death Benefit:
1. SEI VP Large Cap Growth Fund $26 $ 79
----------------------------------------------------------
2. SEI VP Large Cap Value Fund 26 78
----------------------------------------------------------
3. SEI VP Small Cap Growth Fund 29 85
----------------------------------------------------------
4. SEI VP Small Cap Value Fund 29 85
----------------------------------------------------------
5. SEI VP International Equity Fund 30 88
----------------------------------------------------------
6. SEI VP Emerging Markets Equity Fund 38 110
----------------------------------------------------------
7. SEI VP Emerging Markets Debt Fund 37 107
----------------------------------------------------------
8. SEI VP Core Fixed Income Fund 24 72
----------------------------------------------------------
9. SEI VP High Yield Bond Fund 27 80
----------------------------------------------------------
10. SEI VP International Fixed Income Fund 31 92
----------------------------------------------------------
11. SEI VP Prime Obligation Fund 23 70
----------------------------------------------------------
For Return of Premium Death Benefit:
1. SEI VP Large Cap Growth Fund $26 $ 80
----------------------------------------------------------
2. SEI VP Large Cap Value Fund 27 79
----------------------------------------------------------
3. SEI VP Small Cap Growth Fund 29 86
----------------------------------------------------------
4. SEI VP Small Cap Value Fund 29 86
----------------------------------------------------------
5. SEI VP International Equity Fund 30 89
----------------------------------------------------------
6. SEI VP Emerging Markets Equity Fund 38 111
----------------------------------------------------------
7. SEI VP Emerging Markets Debt Fund 37 109
----------------------------------------------------------
8. SEI VP Core Fixed Income Fund 25 74
----------------------------------------------------------
9. SEI VP High Yield Bond Fund 27 82
----------------------------------------------------------
10. SEI VP International Fixed Income Fund 31 93
----------------------------------------------------------
11. SEI VP Prime Obligation Fund 24 71
----------------------------------------------------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
1 year 3 years
<S> <C> <C>
For Annual Step-Up Death Benefit:
1. SEI VP Large Cap Growth Fund $27 $83
----------------------------------------------------------
2. SEI VP Large Cap Value Fund 28 82
----------------------------------------------------------
3. SEI VP Small Cap Growth Fund 30 89
----------------------------------------------------------
4. SEI VP Small Cap Value Fund 30 89
----------------------------------------------------------
5. SEI VP International Equity Fund 31 92
----------------------------------------------------------
6. SEI VP Emerging Markets Equity Fund 39 114
----------------------------------------------------------
7. SEI VP Emerging Markets Debt Fund 38 111
----------------------------------------------------------
8. SEI VP Core Fixed Income Fund 26 77
----------------------------------------------------------
9. SEI VP High Yield Bond Fund 28 85
----------------------------------------------------------
10. SEI VP International Fixed Income Fund 32 96
----------------------------------------------------------
11. SEI VP Prime Obligation Fund 25 74
----------------------------------------------------------
For 5% Step-Up Death Benefit:
1. SEI VP Large Cap Growth Fund $29 $88
----------------------------------------------------------
2. SEI VP Large Cap Value Fund 29 86
----------------------------------------------------------
3. SEI VP Small Cap Growth Fund 31 93
----------------------------------------------------------
4. SEI VP Small Cap Value Fund 31 93
----------------------------------------------------------
5. SEI VP International Equity Fund 32 96
----------------------------------------------------------
6. SEI VP Emerging Markets Equity Fund 40 118
----------------------------------------------------------
7. SEI VP Emerging Markets Debt Fund 40 115
----------------------------------------------------------
8. SEI VP Core Fixed Income Fund 27 81
----------------------------------------------------------
9. SEI VP High Yield Bond Fund 30 89
----------------------------------------------------------
10. SEI VP International Fixed Income Fund 34 100
----------------------------------------------------------
11. SEI VP Prime Obligation Fund 26 78
----------------------------------------------------------
</TABLE>
We provide these examples to help you understand the direct and indirect costs
and expenses of the contract. Examples are given for each of the death benefit
options.
For more information, see Charges and other deductions in this Prospectus, and
in the prospectus for the funds. Premium taxes may also apply, although they do
not appear in the examples. These examples should not be considered a
representation of past or future expenses. Actual expenses may be more or less
than those shown.
5
<PAGE>
Summary
What kind of contract am I buying? It is an individual variable annuity
contract between you and Lincoln Life. See The contracts.
What is the variable annuity account (VAA)? It is a separate account we
established under Indiana insurance law, and registered with the SEC as a unit
investment 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 Variable annuity account.
What are my investment choices? Based upon your instruction, the VAA applies
purchase payments to buy trust shares in one or more of the investment funds of
the trust: Large Cap Growth Fund, Large Cap Value Fund, Small Cap Growth Fund,
Small Cap Value Fund, International Equity Fund, Emerging Markets Equity Fund,
Emerging Markets Debt Fund, Core Fixed Income Fund, High Yield Bond Fund,
International Fixed Income Fund, Prime Obligation Fund. In turn, each fund
holds a portfolio of securities consistent with its investment policy. See
Investments of the variable annuity account and Description of the trust.
Who invests my money? The investment adviser for the trust is SEI Investments
Management Corporation (SIMC). SIMC is registered as an investment adviser with
the SEC. See Investments of the variable annuity and Investment adviser.
How does the contract work? If we approve your application, we will send you a
contract. When you make purchase payments during the accumulation phase, you
buy accumulation units. If you decide to receive retirement income payments,
your accumulation units are converted to annuity units. Your retirement income
payments will be based on the number of annuity units you received and the
value of each annuity unit on payout days. See The contracts.
What charges do I pay under the contract? We will deduct any applicable premium
tax from purchase payments or account value at the time the tax is incurred or
at another time we choose.
We apply an annual charge totaling 1.35%, 1.40%, 1.50% or 1.65% to the daily
net asset value of the VAA depending on the death benefit option chosen. This
charge includes 0.15% as an administrative charge; the balance of the charge is
a mortality and expense risk charge. We charge an account fee of $40 per
contract year if the account value is less than $50,000. See Charges and other
deductions.
This trust pays a management fee to SIMC based on the average daily net asset
value of each fund. See Investments of the variable annuity account-Investment
adviser. Each fund also has additional operating expenses. These are described
in the prospectus for the trust.
What purchase payments do I make, and how often? Subject to minimum and maximum
purchase payment amounts, your payments are completely flexible. See The
contracts--Purchase payments.
How will my annuity payouts be calculated? If you decide to annuitize, you may
select an annuity option and start receiving retirement income payments from
your contract as a fixed option or variable option or a combination of both.
See Annuity 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 I die before I annuitize? Your beneficiary will receive the
death benefit you have chosen. Your beneficiary has options as to how the death
benefit is paid or you may choose an option for your beneficiary. In the
alternative, you may choose to receive a death benefit upon the death of the
annuitant. See Death benefit before the annuity commencement date.
May I transfer account value between variable options? Yes, with certain
limits. See The contracts--Transfers on or before the annuity commencement date
and Transfers after the annuity commencement date.
May I surrender the contract or make a withdrawal? Yes, subject to contract
requirements and to the restrictions of any qualified retirement plan for which
the contract was purchased. See Surrenders and withdrawals.
In addition, if you decide to take a distribution before age 59 1/2, a 10%
Internal Revenue Service (IRS) tax penalty may apply. A surrender or a
withdrawal also may be subject to 20% withholding. See Federal tax matters.
Do I get a free look at this contract? Yes. You can cancel the contract within
ten days (in some states longer) of the date you first receive the contract.
You need to return the contract, postage prepaid, to our home office. In most
states you assume the risk of any market drop on purchase payments you allocate
to the variable side of the contract. See Return privilege.
Condensed financial information for the variable annuity account
Because the subaccounts which are available under the contracts did not begin
operation before the date of this Prospectus, financial information for the
subaccounts is not included in this Prospectus or in the SAI.
6
<PAGE>
Investment results
At times, the VAA may compare its investment results to various unmanaged
indices 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 information.
Financial statements
The statutory-basis financial statements of Lincoln Life are located in the
SAI. No financial statements are included for the VAA because as of December
31, 1999, the account had not yet commenced operations. If you would like a
free copy of the SAI, complete and mail the enclosed card, or call 1-800-338-
0355.
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.
General account
The general account of Lincoln Life is subject to regulation and supervision by
the Indiana Department of Insurance 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 company
under the Investment Company Act of 1940. Accordingly, neither the general
account nor any interests in it are regulated 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. These disclosures, however, may be subject to certain
generally applicable provisions of the federal securities laws regulating the
accuracy and completeness of statements made in prospectuses. This Prospectus
is generally intended to serve as a disclosure document only for aspects of the
contract involving the VAA, and therefore contains only selected information
regarding the fixed annuity payouts.
Variable annuity account
(VAA)
On January 25, 2000, the VAA was established as an insurance company separate
account under Indiana law. It is registered with the SEC as a unit investment
trust under the provisions of the Investment Company Act of 1940 (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 contracts, 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
contracts supported by the VAA invest in the same portfolios of the trust as
the contracts described in this Prospectus. These other annuity contracts may
have different charges that could affect the performance of the subaccount.
7
<PAGE>
Investments of the variable annuity account
You decide the subaccount(s) to which you allocate purchase payments. You may
change your allocation without penalty or charges. Shares of the funds will be
sold at net asset value. The trust is required to redeem fund shares at net
asset value upon our request. We reserve the right to add, delete or substitute
funds.
Investment adviser
The investment adviser for the trust is SEI Investments Management Corporation
(SIMC). As compensation for its services to the trust, the investment adviser
receives a fee from the trust which is accrued daily and paid monthly. This fee
is based on the net assets of each fund, as defined under Purchase and
Redemption of Shares, in the prospectus for the trust.
Additionally, SIMC currently has thirty-two sub-advisory agreements in which
the sub-adviser may perform some or substantially all of the investment
advisory services required by those respective funds. See the trust prospectus
for additional information on the sub-adviser.
No additional compensation from the assets of those funds will be assessed as a
result of the sub-advisory agreements.
Description of the trust
SEI Insurance Products Trust (trust) is an open-end management investment
company that has diversified and non-diversified portfolios. The trust was
organized as a Massachusetts business trust under a Declaration of Trust dated
December 14, 1998. The Declaration of Trust permits the trust to offer separate
series ("funds") of units of beneficial interest ("shares") and different
classes of shares. Each share of each fund represents an equal proportionate
interest in that fund with each other share of that fund. All consideration
received by the trust for shares of any class of any fund and all assets of
such fund or class belong to that fund or class, respectively, and would be
subject to the liabilities related thereto.
Following are brief summaries of the investment objectives and policies of the
funds. Each fund is subject to certain investment policies and restrictions
which may not be changed without a majority vote of shareholders of that fund.
More detailed information may be obtained from the current prospectus for the
trust which is included in this booklet. Please be advised that there is no
assurance that any of the funds will achieve their stated objectives.
1. SEI VP LARGE CAP GROWTH FUND--The investment objective of the SEI VP Large
Cap Growth Fund is capital appreciation.
The Fund invests primarily in U.S. companies with market capitalizations of
more than $1 billion.
2. SEI VP LARGE CAP VALUE FUND--The investment objective of the SEI VP Large
Cap Value Fund is long-term growth of capital and income.
The Fund invests primarily in common stocks of U.S. companies with market
capitalizations of more than $1 billion.
3. SEI VP SMALL CAP GROWTH FUND--The investment objective of the SEI VP Small
Cap Growth Fund is long-term capital appreciation.
The Fund invests primarily in common stocks of U.S. companies with market
capitalizations less than $2 billion.
4. SEI VP SMALL CAP VALUE FUND--The investment objective of the SEI VP Small
Cap Value Fund is capital appreciation.
The Fund invests primarily in common stocks of U.S. companies with market
capitalizations of less than $2 billion.
5. SEI VP INTERNATIONAL EQUITY FUND--The SEI VP International Equity Fund seeks
to provide long-term capital appreciation by investing primarily in a diver-
sified portfolio of equity securities of non-U.S. issuers.
6. SEI VP EMERGING MARKETS EQUITY FUND--The SEI VP Emerging Markets Equity Fund
seeks to provide capital appreciation by investing primarily in a diversi-
fied portfolio of equity securities of emerging market issuers.
7. SEI VP EMERGING MARKETS DEBT FUND--The investment objective of the SEI VP
Emerging Markets Debt Fund is to maximize total return.
The Fund invests primarily in U.S. dollar denominated debt securities of
government, government-related and corporate issuers in emerging market
countries and of entities organized to restructure the outstanding debt of
such issuers.
8. SEI VP CORE FIXED INCOME FUND--The investment objective of the SEI VP Core
Fixed Income Fund is current income consistent with the preservation of cap-
ital.
The Fund invests primarily in investment grade U.S. corporate and government
fixed income securities, including mortgage-backed securities.
9. SEI VP HIGH YIELD BOND FUND--The investment objective of the SEI VP High
Yield Bond Fund is to maximize total return.
The Fund invests primarily in fixed income securities that are rated below
investment grade ("junk bonds"), including corporate bonds and debentures,
convertible and preferred securities, and zero coupon obligations.
8
<PAGE>
10. SEI VP INTERNATIONAL FIXED INCOME FUND--The SEI VP International Fixed In-
come Fund seeks to provided capital appreciation and current income through
investment primarily in investment grade, non-U.S. dollar denominated gov-
ernment, corporate, mortgage-backed and asset-backed fixed income securi-
ties.
11. SEI VP PRIME OBLIGATION FUND--The SEI VP Prime Obligation Fund seeks to
preserve principal value and maintain a high degree of liquidity while pro-
viding current income.
Asset allocation portfolios
SIMC currently offers twelve asset allocation portfolios which are available to
variable annuity purchasers. You can choose one of these asset allocation
portfolios or choose the customized allocation in which you determine your own
allocations among the funds. If you choose one of these asset allocation
portfolios, SIMC will determine the allocation of your purchase payments into
the funds.
If you want to change your portfolio selection, you must notify us in writing
or over the telephone, if we have received proper telephone authorization.
The available portfolios are:
1. VP INSTITUTIONAL MODERATE GROWTH & INCOME PORTFOLIO
2. VP INSTITUTIONAL GROWTH & INCOME PORTFOLIO
3. VP INSTITUTIONAL CAPITAL GROWTH PORTFOLIO
4. VP INSTITUTIONAL EQUITY PORTFOLIO
5. VP GLOBAL MODERATE GROWTH & INCOME PORTFOLIO
6. VP GLOBAL GROWTH & INCOME PORTFOLIO
7. VP GLOBAL CAPITAL GROWTH PORTFOLIO
8. VP GLOBAL EQUITY PORTFOLIO
9. VP MODERATE GROWTH & INCOME PORTFOLIO
10. . VP GROWTH & INCOME PORTFOLIO
11. VP CAPITAL GROWTH PORTFOLIO
12. VP DOMESTIC EQUITY PORTFOLIO
We will periodically rebalance your account value among the funds in accordance
with the percentage allocations of your chosen asset allocation portfolio. In
addition, SIMC periodically reviews the percentage fund allocations associated
with each asset allocation portfolio. If SIMC determines that the allocations
of your chosen asset allocation portfolio should be adjusted, we will
reallocate your annuity account value among the funds accordingly.
Sale of fund shares
We will purchase shares of the funds at net asset value and direct them to the
appropriate subaccounts of the VAA. We will redeem sufficient shares of the
appropriate funds to pay annuity payouts, death benefits, surrender/withdrawal
proceeds or for other purposes described in the contract. If you want to
transfer all or part of your investment from one subaccount to another, we may
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 the assets of the subaccounts established by those insurance companies to
fund variable annuity and variable life insurance contracts.
When the trust sells shares in any of its funds both to variable annuity and to
variable life insurance separate accounts, it is said to engage in mixed
funding. When the trust sells shares in any of its funds to separate accounts
of unaffiliated life insurance companies, it is said to engage in shared
funding.
The trust currently engages in mixed and shared funding. Therefore, due to
differences in redemption rates or tax treatment, or other considerations, the
interests of various contractowners participating in a fund could conflict. The
trust's Board of Trustees will monitor for the existence of any material
conflicts, and determine what action, if any, should be taken. See the
prospectus for the trust.
Reinvestment of dividends and capital gain distributions
All dividend and capital gain distributions of the funds are automatically
reinvested in shares of the distributing funds at their net asset value on the
date of distribution. Dividends are not paid out to contractowners as
additional 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
substitutions for the trust 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 contract). We cannot substitute shares of one fund for another without the
approval by the SEC. We will also notify you.
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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 incur certain costs
and expenses for the distribution and administration of the contracts and for
providing the benefits payable thereunder. More particularly, our
administrative services include: processing applications for and issuing the
contracts, processing purchases and redemptions of fund shares as required
(including dollar cost averaging, cross-reinvestment and automatic withdrawal
services), maintaining records, administering annuity payouts, furnishing
accounting and valuation services (including 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, upon whose lives annuity payouts under contract are based, live
longer than we assumed when we calculated our guaranteed rates (these rates are
incorporated in the contract and cannot be changed); the risk that death
benefits paid will exceed the actual account value; and the risk that our costs
in providing the services will exceed our revenues from the contract charges
(which we cannot change). However, if the charges deducted prove more than
sufficient to cover our risks, we will keep the profit. 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 SEI Variable Annuity
We deduct from the VAA an amount, computed daily, which is equal to an annual
rate depending on the death benefit option elected of the daily net asset
value. The charge includes a 0.15% administrative charge and a mortality and
expense risk charge. The mortality and expense risk charge is 1.20% for the
account value death benefit option; 1.25% for the return of premium death
benefit option; 1.35% for the annual step-up death benefit option and 1.50% for
the 5% step-up death benefit option.
Account fee
For contracts with an account value of $50,000 or less, during the accumulation
period, we will deduct $40 from the account value on each contract anniversary
to compensate us for the administrative services provided to you; this $40
account fee will also be deducted from the account value upon surrender. This
fee may be lower in certain states, if required. The account fee will be waived
for any contract with an account value that is greater than $50,000 on the
contract anniversary.
Deductions for premium taxes
Any premium tax or other tax levied by any government entity as a result of the
existence of the contracts of the VAA will be deducted from the 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
administration interpretation or by judicial action. These premium taxes
generally depend upon the law of your state of residence. The tax ranges from
0.5% to 5.0%.
Other charges and deductions
There are deductions from and expenses paid out of the assets of the underlying
trust that are more fully described in the prospectus for the trust.
Additional information
The charges described previously may be reduced or eliminated for any
particular contract. However, these charges will be reduced only to the extent
that we anticipate lower distribution and/or administrative expenses, or that
we perform fewer sales or administrative services than those originally
contemplated in establishing the level of those charges. Lower distribution and
administrative expenses may be the result of economies associated with (1) the
use of mass enrollment procedures, (2) the performance of administrative or
sales functions by the employer, (3) the use by an employer of automated
techniques in submitting deposits or information related to deposits on behalf
of its employees or (4) any other circumstances which reduce distribution or
administrative expenses. The exact amount of charges applicable to a particular
contract will be stated in that contract.
The contracts
Purchase of contracts
If you wish to purchase a contract, you must apply for it through a sales
representative authorized by us. The completed application is sent to us and we
decide whether to accept or reject it. If the application is accepted, a
contract is prepared and executed by our legally authorized officers. The
contract is then sent to you through your sales representative. See
Distribution of the contracts.
When a completed application and all other information necessary for processing
a purchase order is received, an initial purchase payment will be priced no
later than two business days after we receive the order. While attempting to
finish an incomplete application, we may hold the initial purchase payment for
no more than five business days. If the incomplete application
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cannot be completed within those five days, you will be informed of the
reasons, and the purchase payment will be returned immediately. Once the
application is complete, the initial purchase payment must be priced within two
business days.
Who can invest
To apply for a contract, you must be of legal age in a state where the
contracts may be lawfully sold and also be eligible to participate in any of
the qualified or nonqualified plans for which the contracts are designed. The
contractowner, joint owner and annuitant must be less than age 91.
Purchase payments
Purchase payments are payable to us at a frequency and in an amount selected by
you in the application. The minimum initial purchase payment is $25,000. The
minimum payment to the contract at any one time must be at least $100 ($25 if
transmitted electronically). Purchase payments in total may not exceed
$2,000,000 for an owner or $1,000,000 for each joint owner without our
approval. We may terminate the contract as allowed by your state's non-
forfeiture law for individual deferred annuities. Payments may be made or, if
stopped, resumed at any time until the annuity commencement date, the surrender
of the contract, maturity date or the payment of any death benefit, whichever
comes first.
Valuation date
Accumulation 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 purchase payments
Purchase payments are placed into the VAA's subaccounts, each of which invests
in shares of its corresponding fund of the trust, according to your
instructions.
The minimum amount of any purchase payment that can be put into any one
subaccount is $20. Upon allocation to a subaccount, purchase payments are
converted into accumulation units. The number of accumulation units credited is
determined by dividing the amount
allocated to each subaccount by the value of an accumulation unit for that
subaccount on the valuation date on which the purchase payment is received at
our home office if received before 4:00 p.m., New York time. If the purchase
payment is received at or after 4:00 p.m., New York time, we will use the
accumulation unit value computed on the next valuation date. The number of
accumulation 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
accumulation unit will vary depending not only upon how well the underlying
fund's investment perform, but also upon the expenses of the VAA and the
underlying funds.
Valuation of accumulation units
Purchase payments allocated to the VAA are converted into accumulation units.
This is done by dividing each purchase payment by the value of an accumulation
unit for the valuation period during which the purchase payment 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
beginning of the valuation period by the net asset value per share of the
fund at the end of the valuation period, and adding any dividend or other
distribution 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 daily mortality and expense risk charge and the daily administrative charge
multiplied by the number of calendar days in the valuation period. Because a
different daily charge is made for contracts with different death benefit
options, contracts with different death benefit options will have different
corresponding accumulation unit values on any given day.
Transfers on or before the annuity commencement date
You may transfer all or a portion of your investment from one subaccount to
another. A transfer involves the surrender of accumulation units in one
subaccount and the purchase of accumulation units in the other subaccount. A
transfer will be done using the respective accumulation unit values determined
at the end of the valuation date on which the transfer request is received.
Currently, there is no charge for a transfer. However, we reserve the right to
impose a charge in the future for transfers.
Transfers between subaccounts are restricted to twelve times every contract
year. We reserve the right to waive this twelve-time limit. This limit does not
apply to
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transfers made under dollar cost averaging, cross reinvestment, or portfolio
rebalancing program or under the asset allocation portfolios elected on forms
available from us. (See Description of the trust for information on the asset
allocation portfolios and the SAI for information on the other programs.) The
minimum amount that may be transferred between subaccounts is $300 (or the
entire amount in the subaccount, if less than $300). If the transfer from a
subaccount would leave you with less than $300 in the subaccount, we may
transfer the entire balance of the subaccount.
A transfer request may be made to our home office using written, telephone or
electronic instructions, if the appropriate authorization is on file with us.
In order to prevent unauthorized or fraudulent telephone or electronic
transfers, we may require the user to provide certain identifying information
before we will act upon their instructions. We may also assign the
contractowner a Personal Identification Number (PIN) to serve as
identification. We will not be liable for following instructions we reasonably
believe are genuine. Telephone requests may be recorded and written
confirmation of all transfer requests will be mailed to the contractowner on
the next valuation date. Telephone and electronic transfers will be processed
on the valuation date that they are received when they are received at our
customer service center before 4 p.m. New York time.
When thinking about a transfer of account value, you should consider the
inherent risk involved. Frequent transfers based on short-term expectations may
increase the risk that a transfer will be made at an inopportune time. Lincoln
Life may allow more than twelve transfers in any contract year. This contract
is not designed for professional market timing organizations or other entities
using programmed and frequent transfers.
Repeated patterns of frequent transfers are disruptive to the operation of the
sub-accounts, and should Lincoln Life become aware of such disruptive
practices, Lincoln Life may refuse to permit such transfers.
Payment or transfer may be delayed as permitted by the 1940 Act.
Transfers after the annuity commencement date
You may transfer all or a portion of your investment in one subaccount to
another subaccount in the VAA or to the fixed side of the contract. Those
transfers will be limited to three times per contract year. Currently, there is
no charge for those transfers. However, we reserve the right to impose a
charge.
No transfers are allowed from the fixed side of the account to the subaccounts.
Death benefit before the annuity commencement date
You may designate a beneficiary during your lifetime and change the beneficiary
by filing a written request with our home office. Each change of beneficiary
revokes any previous designation. We reserve the right to request that you send
us the contract for endorsement of a change of beneficiary.
Upon the death of the contractowner, a death benefit will be paid to the
beneficiary. Upon the death of a joint owner, the death benefit will be paid to
the surviving joint owner. Upon the death of an annuitant who is not the
contractowner or joint owner, a death benefit may be paid to the contractowner
(and joint owner, if applicable, in equal shares). If the contractowner is a
corporation or other non-individual (non-natural person), the death of the
annuitant will be treated as death of the contractowner.
If the death occurs before the annuity commencement date, the death benefit
paid will depend on the death benefit option in effect on the day on which we
approve payment of the claim. Four death benefit options are available:
Account Value death benefit option: The death benefit is equal at all times to
the account value on the date on which the death claim is approved by us for
payment.
Return of Premium death benefit option: The death benefit is equal to the
greater of the account value on the date on which the death claim is approved
by us for payment or the sum of all purchase payments minus withdrawals,
partial annuitizations, and premium tax incurred.
Annual Step-Up death benefit option: The death benefit is equal to the greatest
of three amounts:
a) the account value on the date on which the death claim is approved by us for
payment;
b) the sum of all purchase payments minus withdrawals, partial annuitizations,
and premium tax incurred; or
c) the highest account value on any contract anniversary prior to the 81st
birthday of the deceased, increased by purchase payments and decreased by
partial withdrawals, partial annuitizations, and premium tax incurred
subsequent to the contract anniversary on which the highest account value is
obtained.
5% Step-Up death benefit option: The death benefit is equal to the greatest of
four amounts:
a) the account value on the date on which the death claim is approved by us for
payment,
b) the sum of all purchase payments minus withdrawals, partial annuitizations,
and premium tax incurred;
c) the highest account value on any contract anniversary prior to the 81st
birthday of the deceased, increased by purchase payments and decreased by
partial withdrawals, partial
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annuitizations, and premium tax incurred subsequent to the contract
anniversary on which the highest account value is obtained; or
d) the accumulation of all purchase payments minus the accumulation of all
withdrawals, partial annuitizations and premium tax; where each purchase
payment, withdrawal, partial annuitization and premium tax will be
accumulated daily at an annual rate of 5% from the date of the purchase
payment, withdrawal, partial annuitization and premium tax until the earlier
of the date of death of the deceased (owner, joint owner or annuitant) or
the contract date anniversary immediately preceding the 81st birthday of the
deceased (owner, joint owner, or annuitant) except that the accumulation of
any purchase payment, withdrawal, partial annuitization and premium tax will
not exceed 200% of that purchase payment, withdrawal, partial annuitization
and premium tax.
If there are joint owners, upon the death of the first contractowner, Lincoln
Life will pay a death benefit to the surviving joint owner. The surviving joint
owner will be treated as the primary, designated beneficiary. Any other
beneficiary designation on record at the time of death will be treated as a
contingent beneficiary. If the surviving joint owner is the spouse of the
deceased joint owner he/she may continue the contract as a sole contractowner.
Upon the death of the spouse who continues the contract, Lincoln Life will pay
a death benefit to the designated beneficiary(s).
If the beneficiary is the spouse of the contractowner, then the spouse may
elect to continue the contract as contractowner.
Upon the death of a contractowner, joint owner or annuitant, if the surviving
spouse continues the contract, any portion of the death benefit that would have
been payable (if the contract had not been continued) that exceeds the current
contract value will be credited to the contract. This provision applies only
one time for each contract.
If an annuitant who is not the contractowner or a joint owner dies, then the
contingent annuitant, if named, becomes the annuitant and no death benefit is
payable on the death of the annuitant. If no contingent annuitant is named, the
contractowner (or younger of joint owners) becomes the annuitant.
Alternatively, a death benefit may be paid to the contractowner (and joint
owner, if applicable, in equal shares) upon the death of the annuitant.
Notification of the election of this death benefit must be received by us
within 75 days of the death of the annuitant. If no contractowner is living on
the date of death of the annuitant, the death benefit will be available to the
beneficiary. The contract terminates when any death benefit is paid due to the
death of the annuitant. If the annuitant has been changed subsequent to the
effective date of this contract, unless the change occurred because of the
death of a prior annuitant, the death benefit option in effect will be
terminated and the Account Value death benefit option will become effective as
of the valuation date that the written notification to change the annuitant was
received in the home office.
The value of the death benefit will be determined as of the date on which the
death claim is approved for payment. This payment will occur upon receipt of:
(1) proof (e.g. an original certified death certificate), or any other proof of
death satisfactory to us, of the death; (2) written authorization for payment;
and (3) our receipt of all required claim forms, fully completed. If the
beneficiary is a minor, court documents appointing the guardian/custodian must
be submitted.
When applying for a contract, an applicant may request one of the four death
benefit options available. If no death benefit option is chosen, the Return of
Premium death benefit option will be the death benefit as of the contract date.
After a contract is issued, the contractowner may substitute a lower level
death benefit option for the option currently in effect. For purposes of
determining allowable substitutions, Account Value is the lowest level of death
benefit. Return of Premium is the next highest option, followed by Annual Step-
Up, with 5% Step-Up being the highest level of death benefit. A request for
substitution must be in writing on a form acceptable to us. The current death
benefit option will be discontinued and the new death benefit option will begin
as of the valuation date we receive the substitution request, and we will stop
deducting the charge for the current option and begin deducting the charge for
the new option as of that same date. A death benefit option may be substituted
for the current death benefit option only if the new option provides a lower
level of death benefit. See Charges and deductions.
Unless otherwise provided in the beneficiary designation, one of the following
procedures will take place on the death of a beneficiary:
(1) If any beneficiary dies before the contractowner, that beneficiary's
interest will go to any other beneficiaries named, according to their
respective interest; or
(2) If no beneficiary survives the contractowner, the proceeds will be paid to
the contractowner's estate.
Unless the contractowner has already selected a settlement option, the
beneficiary may choose the method of payment of the death benefit. The death
benefit payable to the beneficiary or joint owner must be distributed within
five years of the contractowner's date of death unless the beneficiary begins
receiving within one year of the contractowner's death the distribution in the
form of a life annuity or an annuity for a designated period not extending
beyond the beneficiary's life expectancy.
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The death benefit payable on the death of the annuitant will be distributed in
either a lump sum or under an annuity payout. The annuity payout must be
selected within 60 days after we have approved the death claim.
If a lump sum settlement is elected, the proceeds will be mailed within seven
days of approval by us of the claim, subject to the laws, regulations and tax
code governing payment of death benefits. This payment may be postponed as
permitted by the Investment Company Act of 1940.
Joint ownership
Joint owners shall be treated as having equal undivided interests in the
contract. Either owner, independently of the other, may exercise ownership
rights in this contract.
Surrenders and withdrawals
Before the annuity commencement date, we will allow the surrender of the
contract or a withdrawal of the account value upon your written request,
subject to the rules discussed below. The surrender/withdrawal option is not
available after the annuity commencement date.
The amount available upon the surrender/withdrawal is the account value less
any applicable fees and taxes at the end of the valuation period during which
the written request for surrender/withdrawal is received at the home office.
Unless a request for withdrawal specifies otherwise, withdrawals will be made
from all subaccounts within the VAA in the same proportion that the amount of
withdrawal bears to the total account value. Unless prohibited,
surrender/withdrawal payments will be mailed within seven days after we receive
a valid written request at the home office. The payment may be postponed as
permitted by the 1940 Act.
The minimum withdrawal is $300. Lincoln Life reserves the right to surrender
this contract if any withdrawal reduces the total account value to a level at
which this contract may be surrendered in accordance with applicable law for
individual deferred annuities.
The tax consequences of a surrender/withdrawal are discussed later, in this
booklet. See Federal tax matters.
Delay of payments
Contract proceeds from the VAA will be paid within seven days, except (i) when
the NYSE is closed (other than weekends and holidays); (ii) times when the
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 contractowners.
Amendment of 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. You will be
notified in writing of any changes, modifications or waivers.
Commissions
The commissions paid to dealers are a maximum of 1% account value annually.
Upon annuitization, an annual continuing commission of up to 1.00% of statutory
reserves can be paid to dealers. These commissions are not deducted from
purchase payments or account value; they are paid by us. In the future,
additional sales incentives may be provided to dealers.
Ownership
As contractowner, you have all rights under the contract. According to Indiana
law, the assets of the VAA are held for the exclusive benefit of all
contractowners 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 may not be assigned or transferred. Nonqualified
contracts may not be collaterally assigned. We assume no responsibility for the
validity or affect of any assignment. Consult your tax adviser about the tax
consequence of an assignment.
Contractowner questions
The obligations to purchasers under the contracts are those of Lincoln Life.
Questions about your contract should be directed to us at 1-800-338-0355.
Annuity payouts
When you apply for a contract, you may select any annuity commencement date
permitted by state insurance or tax law.
The contract provides optional forms of payouts of annuities (annuity options),
each of which is payable on a variable basis, fixed basis or a combination of
both as you specify. The contract provides that all or part of the account
value may be used to purchase an annuity.
You may elect annuity payouts in monthly, quarterly, semiannual or annual
installments. If the payouts from any subaccount would be or become less than
$50, we have the right to reduce their frequency until the payouts are at least
$50 each. Following are explanations of the annuity options available.
Annuity options
Life Annuity. This option offers a periodic payout during the lifetime of the
annuitant and ends with the last payout before the death of the annuitant. This
option offers the highest periodic payout since there is no guarantee of a
minimum number of payouts or provision for a death benefit for beneficiaries.
However, there is the risk under this option that the recipient would receive
no payouts if the annuitant dies before the date set for the first
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payout; only one payout if death occurs before the second scheduled payout, and
so on.
Life Income with Payouts Guaranteed for Designated Period. This option
guarantees periodic payouts during a designated period, usually 10 or 20 years,
and then continues throughout the lifetime of the annuitant. The designated
period is selected by the contractowner.
Joint Life Annuity. This option offers a periodic payout during the joint
lifetime of the annuitant and a designated joint annuitant. The payouts
continue during the lifetime of the survivor.
Joint Life Annuity with Guaranteed Period. This option guarantees periodic
payouts during a designated period, usually 10 or 20 years, and continues
during the joint lifetime of the annuitant and a designated joint annuitant.
The payouts continue during the lifetime of the survivor. The designated period
is elected by the contractowner.
Joint and Two-Thirds Survivor Annuity. This option provides a periodic payout
during the joint lifetime of the annuitant and a designated joint annuitant.
When one of the joint annuitants dies, the survivor receives two-thirds of the
periodic payout made when both were alive.
Unit Refund Life Annuity. This option offers a periodic payout during the
lifetime of the annuitant with the guarantee that upon death a payout will be
made of the value of the number of annuity units (see Variable annuity payouts)
equal to the excess, if any, of: (a) the total amount applied under this option
divided by the annuity unit value for the date payouts begin, minus (b) the
annuity units represented by each payout to the annuitant multiplied by the
number of payouts paid before death. The value of the number of annuity units
is computed on the date the death claim is approved for payment by the home
office.
General Information
Under the options listed above, you may not make withdrawals. Other options,
with or without withdrawal features, may be made available by us. You may pre-
select an annuity payout option as a method of paying the death benefit to a
beneficiary. If you do, the beneficiary cannot change this payout option. At
death, options are only available to the extent they are consistent with the
requirements of the contract as well as Sections 72(s) and 401(a)(9) of the tax
code, if applicable. The mortality and expense risk charge of 1.20% and the
charge for administrative services of .15% will be assessed on all variable
annuity payouts, including options that may be offered that do not have a life
contingency and therefore no mortality risk.
The annuity commencement date is usually on or before the contractowner's 90th
birthday. You may change the annuity commencement date, change the annuity
option or change the allocation of the investment among subaccounts up to 30
days before the scheduled annuity commencement date, upon written notice to the
home office. You must give us at least 30 days notice before the date on which
you want payouts to begin. If proceeds become available to a beneficiary in a
lump sum, the beneficiary may choose any annuity payout option.
Unless you select another option, the contract automatically provides for a
life annuity with annuity payouts guaranteed for 10 years (on a fixed, variable
or combination fixed and variable basis, in proportion to the account
allocations at the time of annuitization) except when a joint life payout is
required by law. Under any option providing for guaranteed period payouts, the
number of payouts which remain unpaid at the date of the annuitant's death (or
surviving annuitant's death in case of joint life annuity) will be paid to you,
if living, otherwise to your beneficiary as payouts become due.
Variable annuity payouts
Variable annuity payouts will be determined using:
1. The account value on the annuity commencement date less any applicable
premium taxes;
2. The annuity tables contained in the contract;
3. The annuity option selected; and
4. The investment performance of the fund(s) selected.
To determine the amount of payouts, we make this calculation:
1. Determine the dollar amount of the first periodic payout; then
2. Credit the contract with a fixed number of annuity units equal to the first
periodic payout divided by the annuity unit value; and
3. Calculate the value of the annuity units each period thereafter.
Annuity payouts assume an investment return of 3%, 4%, 5% or 6% per year, as
applied to the applicable mortality table. The higher the assumed interest rate
you choose, the higher your initial annuity payment will be. The amount of each
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, annuity payouts will decrease. The higher the
assumed interest rate, the less likely future annuity payments are to increase,
or the payments will increase more slowly than if a lower assumed rate was
used. There is a more complete explanation of this calculation in the SAI.
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Federal tax matters
Introduction
The Federal income tax treatment of the contract is complex and sometimes
uncertain. The Federal income tax rules may vary with your particular
circumstances. This discussion does not include all the Federal income tax
rules that may affect you and your contract. This discussion also does not
address other Federal tax consequences, or state or local tax consequences,
associated with the contract. As a result, you should always consult a tax
adviser about the application of tax rules to your individual situation.
Taxation of nonqualified annuities
This part of the discussion describes some of the Federal income tax rules
applicable 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.
Tax deferral on earnings
The Federal income tax law generally does not tax any increase in your account
value until you receive a contract distribution. However, for this general rule
to apply, certain requirements must be satisfied:
. An individual must own the contract (or the tax law must treat the contract
as owned by the individual).
. The investments of the VAA must be "adequately diversified" in accordance
with IRS regulations.
. Your 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 the 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
purposes. This means that the entity owning the contract pays tax currently on
the excess of the account value over the purchase payments 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 employer that owns a contract to provide deferred
compensation for its employees.
Investments in the VAA must be diversified
For a contact 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
diversified. If the VAA fails to comply with these diversification standards,
you could be required to pay tax currently on the excess of the account value
over the contract purchase payments. Although we do not control the investments
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 your right to choose particular investments for
the contract. Because the IRS has not issued guidance specifying those limits,
the limits are uncertain and your right to allocate account value among
subaccounts may exceed those limits. If so, you would be treated as the owner
of the assets 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 IRS 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 your
consent to try to prevent the tax law from considering you 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
purchase payments 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, you would be currently taxed on the excess
of the account value over the purchase payments 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 your contract will be treated as an annuity for Federal income tax
purposes and that the tax law will not tax any increase in your account value
until there is a distribution from your contract.
Taxation of withdrawals and surrenders
You will pay tax on withdrawals to the extent your account value exceeds your
purchase payments in the contract. This income (and all other income from your
contract) is considered ordinary income. A higher rate of tax is paid on
ordinary income than on capital gains. You will pay tax on a surrender to the
extent the amount you receive exceeds your purchase payments. In
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certain circumstances, your purchase payments are reduced by amounts received
from your 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 tax
rates) and treats a portion as a nontaxable return of your purchase payments 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
annuity payouts end because of the annuitant's death and before the total
amount of the purchase payments in the contract has been received, the amount
not received generally will be deductible.
Taxation of death benefits
We may distribute amounts from your contract because of the death of a
contractowner or an annuitant. The tax treatment of these amounts depends on
whether you 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 withdrawal.
. Death after the annuity commencement date--
. If death benefits are received in accordance with the existing annuity
payout option, they are excludible from income if they do not exceed the
purchase payments not yet distributed from the contract. All annuity
payouts in excess of the purchase payments not previously received are
includable in income.
. 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 purchase payments
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 your
contract which you must include in your gross income. The 10% penalty tax does
not apply if one of several exceptions exists. These exceptions include
withdrawals, surrenders or annuity payouts that:
. you receive on or after you reach age 59 1/2,
. you receive because you became disabled (as defined in the tax law),
. a beneficiary receives on or after your death, or
. you receive as a series of substantially equal periodic payments for life (or
life expectancy).
Special rules if you own more than one annuity contract
In certain circumstances, you must combine some or all of the nonqualified
annuity contracts you own in order to determine the amount of an annuity
payout, a surrender or a withdrawal that you must include in income. For
example, if you purchase two or more deferred annuity contracts from the same
life insurance company (or its affiliates) 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, withdrawal or an
annuity payout that you must include in income and the amount that might be
subject to the penalty tax described above.
Loans and assignments
Except for certain qualified contracts, the tax code treats any amount received
as a loan under a contract, and any assignments or pledge (or agreement to
assign or pledge) any portion of your account value, as withdrawal of such
amount or portion.
Gifting a contract
If you transfer ownership of your contract to a person other than your spouse
(or to your former spouse incident to divorce), and receive a payment less than
your account's value, you will pay tax on your account value to the extent it
exceeds your purchase payments not previously received. The new owner's
purchase payments in the contract would then be increased to reflect the amount
included in income.
Charges for a contract's death benefit
Your contract may have a death benefit, for which you may pay an annual charge,
computed daily. It is possible that the tax law may treat all or a portion of
the death benefit charge as a contract withdrawal.
Loss of income deduction
After June 8, 1997, if a contract is issued to a taxpayer that is not an
individual, 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 account value. Entities that are considering purchasing a
contract, or entities that will benefit from someone else's ownership of a
contract, should consult a tax adviser.
Qualified retirement plans
We also designed the contracts for use in connection with certain types of
retirement plans that receive favorable treatment under the tax code. Contracts
issued to or in connection with a qualified retirement plan are called
"qualified contracts." We issue contracts
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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 various types of qualified plans. Persons planning to use the
contract in connection with a qualified plan should obtain advice from a
competent tax adviser.
Types of qualified contracts and terms of contracts
Currently, we may issue contracts in connection with the following types of
qualified plans:
. Individual Retirement Accounts and Annuities ("Traditional IRAs")
. Roth IRAs
. Savings Incentive Matched Plan for Employees ("SIMPLE 401(k) plans")
. Public School system and tax-exempt organization annuity plans ("403(b)
plans")
. Qualified corporate employee pension and profit sharing plans ("401(a)
plans") and qualified annuity plans ("403(a) plans")
. Self-employed individual plans ("H.R. 10 plans" or "Keogh Plans")
. Deferred compensation plans of state and local governments and tax-exempt
organizations ("457 plans").
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
contracts vary with the type of plan and contract. For example,
. Federal tax rules limit the amount of purchase payments that can be made, and
the tax deduction or exclusion that may be allowed for the purchase payments.
These limits vary depending on the type of qualified plan and the plan
participant's specific circumstances, e.g., the participant's compensation.
. Under most qualified plans, e.g., 403(b) plans and Traditional IRAs, the
annuitant must begin receiving payments from the contract in certain minimum
amounts by a certain age, typically age 70 1/2. However, these "minimum
distribution 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
or may not permit loans.
Tax treatment of payments
Federal income tax rules generally include distributions from a qualified
contract in the recipient's income as ordinary income. These taxable
distributions will include purchase payments that were deductible or excludible
from income. Thus, under many qualified contracts the total amount received is
included in income since a deduction or exclusion from income was taken for
purchase payments. There are exceptions. For example, you do 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
minimum 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
qualified 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 depending on the type of qualified contract you purchase. For example, in
the case of an IRA, exceptions provide that the penalty tax does not apply to a
withdrawal, surrender or annuity payout:
. received on or after the annuitant reaches age 59 1/2,
. received on or after the annuitant's death or because of the annuitant's
disability (as defined in the tax law),
. received as a series of substantially equal periodic payments for the
annuitant'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
requirements of the exception may vary.
Transfers and direct rollovers
In many circumstances, money may be moved between qualified contracts and
qualified plans by means of a
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<PAGE>
rollover or transfer. Special rules apply to such rollovers and transfers. If
the applicable rules are not followed, you may suffer adverse Federal income
tax consequences, including paying taxes which might not otherwise have had to
be paid. A qualified adviser should always be consulted before you move or
attempt to move funds between any qualified plan or contract and another
qualified plan or contract.
The direct rollover rules apply to certain payments (called "eligible rollover
distributions") from section 401(a) plans, section 403(a) or (b) plans, H.R. 10
plans and contracts used in connection with these types of plans. (The direct
rollover rules do not apply to distributions from IRAs or section 457 plans.)
The direct rollover rules require that we withhold Federal income tax equal to
20% of the eligible rollover distribution from the distribution amount, unless
you elect to have the amount directly transferred to certain qualified plans or
contracts. Before we send a rollover distribution, we will provide the
recipient with a notice explaining these requirements and how the 20%
withholding can be avoided by electing a direct rollover.
The death benefit and IRAs
Pursuant to IRS regulations, IRAs may not invest in life insurance contracts.
We do not believe that these regulations prohibit the death benefit from being
provided under the contracts when we issue the contract as Traditional IRAs or
Roth IRAs. However, the law is unclear and it is possible that the presence of
the death benefit under a contract issued as a Traditional IRA or Roth IRA
could result in increased taxes to you.
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 distributee notifies us at or
before the time of the distribution that tax is not to be withheld. 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
recipient an explanation of the withholding requirements.
Tax status of Lincoln Life
Under existing Federal income tax laws, Lincoln Life does not pay tax on
investment 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
income 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 law
The above discussion is based on the tax code, IRS regulations and
interpretations 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 trust shares held in the VAA at meetings
of the shareholders of the trust. The voting will be done according to the
instructions of contractowners who have interests in the subaccounts which
invest in classes of funds of the trust. If the 1940 Act or any regulation
under it should be amended or if present interpretations should be amended or
if present interpretations should change, and if as a result we determine that
we are permitted to vote the trust shares in our own right, we may elect to do
so.
The number of votes which you have the right to cast will be determined by
applying your 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.
Trust shares of a class 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, each person having a voting interest
in a subaccount will receive proxy voting material, reports and other materials
relating to the trust. Since the trust engages in shared funding, other persons
or entities besides Lincoln Life may vote trust shares. See Sale of fund
shares.
Distribution of the contracts
Lincoln Life is the distributor and principal underwriter of the contracts.
Under an agreement with Lincoln Life, SEI Investment Distribution Co. (SEI)
will assist Lincoln Life in forming the selling group. SEI will also perform
certain functions in support of the selling group. The contracts will be sold
by properly licensed registered representatives of independent broker-dealers
which in turn have selling agreements with Lincoln Life and have been licensed
by state insurance departments to represent us. Lincoln Life will offer the
contracts in all states it is licensed to do business.
Return privilege
Within the free-look period after you receive the contract, you may cancel it
for any reason by delivering or mailing it postage prepaid, to the home
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office at P.O. Box 7878, 1300 South Clinton Street, Fort Wayne, Indiana, 46801.
A contract canceled under this provision will be void. With respect to the VAA,
except as explained in the following paragraph, we will return the account
value as of the date of receipt of the cancellation, plus any premium taxes
which had been deducted. A purchaser who participates in the VAA is subject to
the risk of a market loss during the free-look period.
For contracts written in those states whose laws require that we assume this
market risk during the free-look period, a contract may be canceled, subject to
the conditions explained before, except that we will return only the purchase
payment(s).
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
Insurance Department 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
responsible 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 will mail to you, at your last known address of record at the home
office, at least semiannually after the first contract year, reports containing
information required that Act or any other applicable law or regulation.
Other information
A Registration Statement has been filed with the SEC, under the Securities Act
of 1933 as amended, for the contracts being offered here. This Prospectus does
not contain all the information in the Registration Statement, its amendments
and exhibits. Please refer to the Registration Statement for further
information about the VAA, Lincoln Life and the contracts offered. Statements
in this Prospectus about the content of contracts and other legal instruments
are summaries. For the complete text of those contracts and instruments, please
refer to those documents as files with the SEC.
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.
The fund may also offer shares of the funds to other segregated investment
accounts.
Legal proceedings
Lincoln Life is involved in various pending or threatened legal proceedings
arising from the conduct of its business. Most of those proceedings are routine
and in the ordinary course of business. In some instances they include claims
for unspecified or substantial punitive damages and similar types of relief in
addition to amounts 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 effect on
the financial position of Lincoln Life.
Lincoln Life is presently defending several 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
substantial, the cases are in the preliminary stages of litigation, and it is
premature to make assessments about potential loss, if any. Management is
defending these suits vigorously. The amount of liability, if any, which may
ultimately arise as a result of these suits cannot be reasonably determined at
this time.
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Statement of additional
information table of
contents for Variable Annuity Account T SEI Variable Annuity
<TABLE>
<CAPTION>
Item
-----------------------------------------
<S> <C>
General information and history of
Lincoln Life B-2
-----------------------------------------
Special terms B-2
-----------------------------------------
Services B-2
-----------------------------------------
Principal underwriter B-2
-----------------------------------------
Purchase of securities being offered B-2
-----------------------------------------
</TABLE>
For a free copy of the SAI please see page one of this booklet.
<TABLE>
<CAPTION>
Item
--------------------------------------
<S> <C>
Calculation of investment results
B-2
--------------------------------------
Annuity payouts B-5
--------------------------------------
Advertising and sales literature B-5
--------------------------------------
Financial statements B-7
--------------------------------------
</TABLE>
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The Lincoln National Life Insurance Company
Attn: SEI Customer Service
P. O. Box 7878
Fort Wayne, IN 46801
7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7
PLACE
STAMP
HERE
POSTAL SERVICES
WILL NOT
DELIVER
UNLESS STAMPED
<PAGE>
7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7
STATEMENT OF ADDITIONAL INFORMATION REQUEST CARD
SEI VARIABLE ANNUITY
(LINCOLN LIFE VARIABLE ANNUITY ACCOUNT T)
Please send me a copy of the current Statement of Additional Information
for SEI VARIABLE ANNUITY. (Please print)
Name: ____________________________________________________________________
Address: _________________________________________________________________
City: ______________________________________________________ State: Zip:
C-Share
<PAGE>
SEI Variable Annuity
Lincoln Life
Variable Annuity Account T (Registrant)
The Lincoln National
Life Insurance Company (Depositor)
Statement of Additional Information (SAI)
This Statement of Additional Information should be read in conjunction with the
Prospectus of Lincoln Life Variable Annuity Account T dated , 2000.
You may obtain a copy of the SEI Variable Annuity Prospectus on request and
without charge. Please write, The Lincoln National Life Insurance Company, P.O.
Box 7878, Fort Wayne, Indiana 46801 or call 1-800-338-0355.
Table of Contents
<TABLE>
<CAPTION>
Item Page
-----------------------------------------------------
<S> <C>
General information and history of Lincoln Life B-2
-----------------------------------------------------
Special terms B-2
-----------------------------------------------------
Services B-2
-----------------------------------------------------
Principal underwriter B-2
-----------------------------------------------------
Purchase of securities being offered B-2
-----------------------------------------------------
</TABLE>
This SAI is not a Prospectus.
The date of this SAI is , 2000.
<TABLE>
<CAPTION>
Item Page
---------------------------------------
<S> <C>
Calculation of investment results
B-2
---------------------------------------
Annuity payouts B-4
---------------------------------------
Advertising and sales literature B-4
---------------------------------------
Financial statements B-6
---------------------------------------
</TABLE>
B-1
<PAGE>
General information
and history of Lincoln National Life Insurance Company (Lincoln Life)
The Lincoln National Life Insurance Company (Lincoln Life), organized in 1905,
is an Indiana stock insurance corporation, engaged primarily in the direct
insurance of life insurance contracts and annuities, and is also a
professional reinsurer. Lincoln Life is wholly owned by Lincoln National
Corporation (LNC), a publicly held insurance and financial services holding
company domiciled in Indiana.
Special terms
The special terms used in this SAI are the ones defined in the Prospectus. In
connection with the term, valuation date, the New York Stock Exchange is
currently closed on weekends and on these holidays: New Year's Day, Martin
Luther King's Birthday, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. If any of
these holidays occurs on a weekend day, the Exchange may also be closed on the
business day occurring just before or just after the holiday.
Services
Independent auditors
The statutory-basis financial statements of Lincoln Life appearing in this SAI
and Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report 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
report given on their authority as experts in accounting and auditing.
Keeper of records
All accounts, books, records and other documents which are required to be
maintained for the VAA are maintained by Lincoln Life or by third parties
responsible to Lincoln Life. We have entered into an agreement with the
Delaware Management Company, 2005 Market Street, Philadelphia, PA 19203, to
provide accounting services to the VAA. No separate charge against the assets
of the VAA is made by Lincoln Life for this service.
Principal underwriter
Lincoln Life is the principal underwriter for the contracts, which are offered
continuously. SEI Investment Distribution Co. (SEI) will assist Lincoln Life
in forming the selling group. SEI will also perform certain functions in
support of the selling group.
Purchase of securities being offered
The contracts are offered to the public through certain securities
broker/dealers who have entered into selling agreements with Lincoln Life and
whose personnel are legally authorized to sell annuity products.
Both before and after the annuity commencement date, there are exchange
privileges between variable subaccounts, subject to restrictions set out in
the Prospectus. See The contracts, in the Prospectus. No exchanges are
permitted between the VAA and other variable separate accounts.
The offering of the contracts is continuous.
Calculation of investment results
No performance data is included because, as of the date hereof, the VAA and
the funds have not been in operation long enough to provide appropriate
numbers. Nonstandardized performance data will be accompanied by standard
performance data once available.
Once available, the paragraphs set forth below will present performance
information for the VAA and the variable subaccounts calculated in several
different ways. Paragraph (A) will show the historical performance of each
subaccount over the periods indicated. The information that will be presented
in Paragraph (A) is referred to as "standard performance" because it is
calculated in accordance with formulas prescribed by the SEC. The standard
performance of each subaccount will be calculated with each of the death
benefit options. Standard performance is described in Paragraph (B). Under
rules prescribed by the SEC, standard performance must be included in certain
advertising material that discusses the performance of the VAA and the
subaccounts.
Paragraph (C) will show additional "non-standardized" performance information
(i.e., performance information not calculated in accordance with SEC
guidelines) for each of the variable subaccounts that may
B-2
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be used to advertise the performance of the VAA and the variable subaccounts.
THIS INFORMATION DOES NOT INDICATE OR REPRESENT FUTURE PERFORMANCE.
(A) Standard Performance Data as of December 31, XXXX (when available)
(B) Formulas
Average annual total return for each period was determined by finding the
average annual compounded rate of return over each period that would equate the
initial amount invested to the ending redeemable value for that period,
according to the following formula--
P(1 + T)n = ERV
Where: P = a hypothetical initial purchase payment of $1,000
T = average annual total return for the period in question
n = number of years
ERV = redeemable value (as of the end of the period in question) of a
hypothetical $1,000 purchase payment made at the beginning of the 1-
year, 5-year, or 10-year period in question (or fractional portion
thereof)
(C) Other Non-Standardized investment results:
The VAA may illustrate its results over various periods and compare its results
to indices and other variable annuities in sales materials including
advertisements, brochures and reports. Such results may be computed on a
cumulative and/or annualized basis.
Cumulative quotations are arrived at by calculating the change in the
accumulation unit value between the first and last day of the base period being
measured, and expressing the difference as a percentage of the unit value at
the beginning of the base period.
Annualized quotations are arrived at by applying a formula which determines the
level rate of return which, if earned over the entire base period, would
produce the cumulative return.
B-3
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Annuity payouts
Variable annuity payouts
Variable annuity payouts will be determined on the basis of: (1) the dollar
value of the contract on the annuity commencement date; (2) the annuity tables
contained in the contract; (3) the type of annuity option selected; and (4) the
investment results of the fund(s) selected. In order to determine the amount of
variable annuity payouts, Lincoln Life makes the following calculation: first,
it determines the dollar amount of the first payout; second, it credits the
contract with a fixed number of annuity units based on the amount of the first
payout; and third, it calculates the value of the annuity units each period
thereafter. These steps are explained below.
The dollar amount of the first periodic variable annuity payout is determined
by applying the total value of the accumulation units credited under the
contract valued as of the annuity commencement date (less any premium taxes) to
the annuity tables contained in the contract. The first variable annuity payout
will be paid 14 days after the annuity commencement date. This day of the month
will become the day on which all future annuity payouts will be paid. Amounts
shown in the tables are based on the 1983 Table "a" Individual Annuity
Mortality Tables, modified, with an assumed investment return at the rate of
3%, 4%, 5% or 6% per annum. The first annuity payout is determined by
multiplying the benefit per $1,000 of value shown in the contract tables by the
number of thousands of dollars of value accumulated under the contract. These
annuity tables vary according to the form of annuity selected and the age of
the annuitant at the annuity commencement date. The assumed interest rate
described above is the measuring point for subsequent annuity payouts. If the
actual net investment rate (annualized) exceeds the assumed interest rate, the
payout will increase at a rate equal to the amount of such excess. Conversely,
if the actual rate is less than the assumed interest rate, annuity payouts will
decrease. If the assumed interest rate were to be increased, annuity payouts
would start at a higher level but would decrease more rapidly or increase more
slowly.
Lincoln Life may use sex distinct annuity tables in contracts that are not
associated with employer sponsored plans and where not prohibited by law.
At an annuity commencement date, the contract is credited with annuity units
for each variable subaccount on which variable annuity payouts are based. The
number of annuity units to be credited is determined by dividing the amount of
the first periodic payout by the value of an annuity unit in each variable
subaccount selected. Although the number of annuity units is fixed by this
process, the value of such units will vary with the value of the underlying
fund. The amount of the second and subsequent periodic payouts is determined by
multiplying the contractowner's fixed number of annuity units in each variable
subaccount by the appropriate annuity unit value for the valuation date ending
14 days prior to the date that payout is due.
The value of each variable subaccount's annuity unit will be set initially at
$1.00. The annuity unit value for each variable subaccount at the end of any
valuation date is determined as follows:
1. The total value of fund shares held in a given variable subaccount is
calculated by multiplying the number of shares by the net asset value at the
end of the valuation period plus any dividend or other distribution.
2. The liabilities of the variable subaccount, including daily charges and
taxes, are subtracted.
3. The result is divided by the number of annuity units in the variable
subaccount at the beginning of the valuation period, and adjusted by a
factor to neutralize the assumed investment return in the annuity table.
The value of the annuity units is determined as of a valuation date 14 days
prior to the payment date in order to permit calculation of amounts of annuity
payouts and mailing of checks in advance of their due dates. Such checks will
normally be issued and mailed at least three days before the due date.
Proof of age, sex and survival
Lincoln Life may require proof of age, sex, or survival of any payee upon whose
age, sex, or survival payments depend.
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 is designed to evaluate 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. A.M. Best also provides certain rankings,
to which Lincoln Life intends to refer.
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
B-4
<PAGE>
equity 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 representing
over 1,000 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 financial strength rating is an opinion of an insurance
company's financial strength 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 annuities.
STANDARD & POOR'S insurance claims-paying ability rating is an opinion 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 AND 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 is a broad-based measurement of U.S. stock-market
performance based on the weighted average performance of 500 common stocks of
leading companies in leading industries; commonly known as the Standard &
Poor's 500 (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 Corporation, a financial
advisory, securities rating, and publishing firm.
NASDAQ-OTC PRICE 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) is a price-weighted average of 30 actively
traded blue chip stocks, primarily industrials currently including American
Express Company and American Telephone and Telegraph Company. Prepared and
published by Dow Jones & Company, it is the oldest and most widely quoted of
all the market indicators. The average is quoted in points, not dollars.
In its advertisements and other sales literature for the VAA and the trust
funds, Lincoln Life intends to illustrate the advantages of the contracts in a
number of ways:
COMPOUND INTEREST ILLUSTRATIONS will emphasize several advantages of the
variable annuity contract. For example, but not by way of illustration, the
literature may emphasize the potential tax savings through tax deferral; the
potential advantage of the variable annuity account over the fixed account; and
the compounding effect when a client makes regular deposits to his or her
contract.
INTERNET is an electronic communications network which may be used to provide
information regarding Lincoln Life, performance of the variable subaccounts and
advertisement literature.
DOLLAR-COST AVERAGING (DCA) may be used by you to systematically transfer on a
monthly basis amounts from the SEI VP Prime Obligation subaccount into the
other variable subaccounts. We reserve the right to change subaccounts under
this program. You may elect to participate in the DCA program at the time of
application or at anytime before the annuity commencement date by completing an
election form available from us. The minimum amount to be dollar cost averaged
is $1,500 over any period between six and 60 months. Once elected, the program
will remain in effect until the earlier of: (1) the annuity commencement date;
(2) the value of the amount being DCA'd is depleted; or (3) you cancel the
program by written request or by telephone if we have your telephone
authorization on file. Currently, there is no charge for this service. However,
we reserve the right to impose one. A transfer under this program is not
considered a transfer for purposes of limiting the number of transfers that may
be made, or assessing any charges which may apply to transfers. We reserve the
right to discontinue this program at any time. DCA does not assure a profit or
protect against loss.
AUTOMATIC WITHDRAWAL SERVICE (AWS) provides an automatic, periodic withdrawal
of account value to you. You may elect to participate in AWS at the time of
application or at any time before the annuity commencement date by sending a
written request to our home office. The minimum account value required to
establish AWS is $10,000. You may cancel or make changes to your AWS program at
any time by
B-5
<PAGE>
sending a written request to our home office. If telephone authorization has
been elected, certain changes may be made by telephone. Notwithstanding the
requirements of the program, any withdrawal must be permitted by Section
401(a)(9) of the code for qualified plans or permitted under Section 72 for
non-qualified contracts. Currently, there is no charge for this service.
However, we reserve the right to impose one. If a charge is imposed, it will
not exceed $25 per transaction or 2% of the amount withdrawn, whichever is
less. We reserve the right to discontinue this service at any time.
CROSS-REINVESTMENT SERVICE allows the account value in a designated variable
subaccount that exceeds a certain baseline amount to automatically be
transferred to another specific variable subaccount(s) at specific intervals.
You may elect to participate in cross-reinvestment at the time of application
or at any time before the annuity commencement date by sending a written
request to our home office or by telephone if we have your telephone
authorization on file. You designate the holding account, the receiving
account(s), and the baseline amount. Cross-reinvestment will continue until we
receive authorization to terminate the program.
PORTFOLIO REBALANCING is an option which, if elected by the contractowner, re-
stores to a pre-determined level the percentage of contract value allocated to
each variable account subaccount. This pre-determined level will be the alloca-
tion initially selected when the contract was purchased, unless subsequently
changed. The portfolio rebalancing allocation may be changed at any time by
submitting a request to Lincoln Life.
If portfolio rebalancing is elected, all purchase payments allocated to the
variable account subaccounts must be subject to portfolio rebalancing.
Portfolio rebalancing may take place on either a monthly, quarterly, semi-an-
nual or annual basis, as selected by the contractowner. Once the portfolio
rebalancing option is activated, any variable account subaccount transfers exe-
cuted outside of the portfolio rebalancing option will terminate the portfolio
rebalancing option. Any subsequent purchase payment or withdrawal that modifies
the account balance within each variable account subaccount may also cause ter-
mination of the portfolio rebalancing option. Any such termination will be con-
firmed to the contractowner. The contractowner may terminate the portfolio
rebalancing option or re-enroll at any time by calling or writing Lincoln Life.
The portfolio rebalancing program is not available if you have selected one of
the asset allocation portfolios discussed in the prospectus, or following the
annuity commencement date. Currently, there is no charge for this service.
However, we reserve the right to impose one.
The minimum holding account value required to establish cross-reinvestment is
$10,000. Currently, there is no charge for this service. However, we reserve
the right to impose one. A transfer under this program is not considered a
transfer for purposes of limiting the number of transfers that may be made, or
assessing any charges which may apply to transfers. We reserve the right to
discontinue this service at any time.
Lincoln Life's customers. Sales literature for the VAA and the trust's funds
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 Company, 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 sub-classification of those companies,
based upon recognized evaluation criteria (see reference to A.M. Best Company
above). For example, at year-end 1999 Lincoln Life had statutory admitted
assets of over $70 billion.
Financial statements
The statutory-basis financials statements of Lincoln Life appear on the
following pages. Financial Statements for the VAA are not included because, as
of the date hereof, the VAA had no assets, had incurred no liabilities, and had
not yet commenced operations.
B-6
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
--------- ---------
(IN MILLIONS)
---------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $22,985.0 $23,830.9
------------------------------------------------------------
Preferred stocks 253.8 236.0
------------------------------------------------------------
Unaffiliated common stocks 166.9 259.3
------------------------------------------------------------
Affiliated common stocks 604.7 322.1
------------------------------------------------------------
Mortgage loans on real estate 4,211.5 3,932.9
------------------------------------------------------------
Real estate 254.0 473.8
------------------------------------------------------------
Policy loans 1,652.9 1,606.0
------------------------------------------------------------
Other investments 426.6 434.4
------------------------------------------------------------
Cash and short-term investments 1,409.2 1,725.4
------------------------------------------------------------ --------- ---------
Total cash and investments 31,964.6 32,820.8
------------------------------------------------------------
Premiums and fees in course of collection 115.8 33.3
------------------------------------------------------------
Accrued investment income 435.3 432.8
------------------------------------------------------------
Reinsurance recoverable 199.0 171.6
------------------------------------------------------------
Funds withheld by ceding companies 73.5 53.7
------------------------------------------------------------
Federal income taxes recoverable from parent company 61.6 64.7
------------------------------------------------------------
Goodwill 43.1 49.5
------------------------------------------------------------
Other admitted assets 66.7 89.3
------------------------------------------------------------
Separate account assets 46,105.1 36,907.0
------------------------------------------------------------ --------- ---------
Total admitted assets $79,064.7 $70,622.7
------------------------------------------------------------ ========= =========
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $12,184.0 $12,310.6
------------------------------------------------------------
Other policyholder funds 16,589.5 16,647.5
------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 364.0 897.6
------------------------------------------------------------
Funds held under reinsurance treaties 796.9 795.8
------------------------------------------------------------
Asset valuation reserve 490.9 484.5
------------------------------------------------------------
Interest maintenance reserve 72.3 159.7
------------------------------------------------------------
Other liabilities 627.0 504.5
------------------------------------------------------------
Short-term loan payable to parent company 205.0 140.0
------------------------------------------------------------
Net transfers due from separate accounts (896.5) (789.0)
------------------------------------------------------------
Separate account liabilities 46,105.1 36,907.0
------------------------------------------------------------ --------- ---------
Total liabilities 76,538.2 68,058.2
------------------------------------------------------------
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 1,250.0
------------------------------------------------------------
Paid-in surplus 1,942.6 1,930.1
------------------------------------------------------------
Unassigned surplus -- deficit (691.1) (640.6)
------------------------------------------------------------ --------- ---------
Total capital and surplus 2,526.5 2,564.5
------------------------------------------------------------ --------- ---------
Total liabilities and capital and surplus $79,064.7 $70,622.7
------------------------------------------------------------ ========= =========
</TABLE>
See accompanying notes. S-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
--------- --------- --------
(IN MILLIONS)
--------------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $ 7,273.6 $12,737.6 $5,589.0
------------------------------------------------------------
Net investment income 2,203.2 2,107.2 1,847.1
------------------------------------------------------------
Amortization of interest maintenance reserve 29.1 26.4 41.5
------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded 472.3 179.9 99.7
------------------------------------------------------------
Expense charges on deposit funds 146.5 134.6 119.3
------------------------------------------------------------
Separate account investment management and administration
service fees 473.9 396.3 325.5
------------------------------------------------------------
Other income 88.8 31.3 21.3
------------------------------------------------------------ --------- --------- --------
Total revenues 10,687.4 15,613.3 8,043.4
------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 8,504.9 13,964.1 4,522.1
------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses 1,618.3 2,919.4 3,053.9
------------------------------------------------------------ --------- --------- --------
Total benefits and expenses 10,123.2 16,883.5 7,576.0
------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before dividends to
policyholders, income taxes and net realized gain on
investments 564.2 (1,270.2) 467.4
------------------------------------------------------------
Dividends to policyholders 80.3 67.9 27.5
------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before federal income taxes and
net realized gain on investments 483.9 (1,338.1) 439.9
------------------------------------------------------------
Federal income taxes (credit) 85.4 (141.0) 78.3
------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before net realized gain on
investments 398.5 (1,197.1) 361.6
------------------------------------------------------------
Net realized gain on investments, net of income tax expense
and excluding net transfers to the interest maintenance
reserve 114.4 46.8 31.3
------------------------------------------------------------ --------- --------- --------
Net income (loss) $ 512.9 $(1,150.3) $ 392.9
------------------------------------------------------------ ========= ========= ========
</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
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
------------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $2,564.5 $2,968.4 $1,868.0
------------------------------------------------------------
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income (loss) 512.9 (1,150.3) 392.9
------------------------------------------------------------
Difference in cost and admitted investment amounts (101.9) (304.8) (36.2)
------------------------------------------------------------
Nonadmitted assets (22.9) (17.1) (0.4)
------------------------------------------------------------
Regulatory liability for reinsurance 26.0 (35.2) (3.9)
------------------------------------------------------------
Gain on reinsurance of disability income business 71.8 -- --
------------------------------------------------------------
Life policy reserve valuation basis -- (0.4) (0.9)
------------------------------------------------------------
Asset valuation reserve (6.4) (34.5) (36.9)
------------------------------------------------------------
Proceeds from surplus notes from shareholder -- 1,250.0 --
------------------------------------------------------------
Paid-in surplus, including contribution of common stock of
affiliated company in 1997 12.5 108.4 938.4
------------------------------------------------------------
Separate account receivable due to change in valuation -- -- (2.6)
------------------------------------------------------------
Dividends to shareholder (530.0) (220.0) (150.0)
------------------------------------------------------------ -------- -------- --------
Capital and surplus at end of year $2,526.5 $2,564.5 $2,968.4
------------------------------------------------------------ ======== ======== ========
</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
1999 1998 1997
--------- ---------- ---------
(IN MILLIONS)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 7,671.1 $ 13,495.2 $ 6,364.3
------------------------------------------------------------
Allowances and reserve adjustments paid on reinsurance ceded (19.9) (632.4) (649.2)
------------------------------------------------------------
Investment income received 2,168.6 2,003.9 1,798.8
------------------------------------------------------------
Separate account investment management and administration
service fees 470.6 396.3 325.5
------------------------------------------------------------
Benefits paid (8,699.4) (7,395.8) (5,345.2)
------------------------------------------------------------
Insurance expenses paid (1,734.5) (2,909.7) (3,193.0)
------------------------------------------------------------
Proceeds related to sale of disability income business 71.8 -- --
------------------------------------------------------------
Federal income taxes recovered (paid) (81.2) 84.2 (87.0)
------------------------------------------------------------
Dividends to policyholders (82.8) (12.9) (28.4)
------------------------------------------------------------
Other income received and expenses paid, net 252.1 207.0 (8.7)
------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) operating activities 16.4 5,235.8 (822.9)
------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 6,557.7 10,926.5 12,142.6
------------------------------------------------------------
Purchase of investments (5,940.8) (16,950.0) (10,345.0)
------------------------------------------------------------
Other sources (uses) including reinsured policy loans (497.0) (778.3) 529.1
------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) investing activities 119.9 (6,801.8) 2,326.7
------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in 12.5 108.4 --
------------------------------------------------------------
Proceeds from surplus notes from shareholder -- 1,250.0 --
------------------------------------------------------------
Proceeds from borrowings from shareholder 205.0 140.0 120.0
------------------------------------------------------------
Repayment of borrowings from shareholder (140.0) (120.0) (100.0)
------------------------------------------------------------
Dividends paid to shareholder (530.0) (220.0) (150.0)
------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) financing activities (452.5) 1,158.4 (130.0)
------------------------------------------------------------ --------- ---------- ---------
Net increase (decrease) in cash and short-term investments (316.2) (407.6) 1,373.8
------------------------------------------------------------
Cash and short-term investments at beginning of year 1,725.4 2,133.0 759.2
------------------------------------------------------------ --------- ---------- ---------
Cash and short-term investments at end of year $ 1,409.2 $ 1,725.4 $ 2,133.0
------------------------------------------------------------ ========= ========== =========
</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 (the "Company") is a wholly
owned subsidiary of Lincoln National Corporation ("LNC") and is domiciled in
Indiana. As of December 31, 1999, the Company owned 100% of the outstanding
common stock of four insurance company subsidiaries and four non-insurance
subsidiaries. The Company also owned 85% of the common stock of an Internet
distributor of variable annuities.
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 accounting
principles generally accepted in the United States ("GAAP"). The more
significant variances from GAAP are as follows:
INVESTMENTS
Bonds and preferred stocks 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 and preferred stocks 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 a 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
writedowns 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
insurance subsidiaries are carried at their statutory-basis net equity and
the non-insurance subsidiaries are carried at their GAAP-basis net equity,
adjusted for certain items which would be non-admitted under statutory
accounting principles. Both insurance subsidiaries and non-insurance
subsidiaries are presented in the balance sheet as investments in affiliated
common stocks.
S-5
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
POLICY ACQUISITION COSTS
The costs of acquiring and renewing business are expensed when incurred.
Under GAAP, acquisition costs related to traditional life insurance, to the
extent recoverable from future policy revenues, are deferred and amortized
over the premium-paying period of the related policies using assumptions
consistent with those used in computing policy benefit reserves. For
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 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 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 are accounted
for using deposit accounting under GAAP.
S-6
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
INCOME TAXES
Deferred income taxes are not provided for differences between financial
statement amounts and tax bases of assets and liabilities.
POLICYHOLDER DIVIDENDS
Policyholder dividends are recognized when declared rather than over the
term of the related policies.
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
1999 1998 1999 1998 1997
----------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts reported on a statutory-basis $ 2,526.5 $ 2,564.5 $ 512.9 $(1,150.3) $392.9
-----------------------------------------
GAAP adjustments:
Deferred policy acquisition costs,
present value of future profits and
non-admitted goodwill 3,628.2 3,085.2 135.0 48.5 (98.9)
--------------------------------------
Policy and contract reserves (1,943.1) (2,299.9) (97.9) 1,743.4 (48.6)
--------------------------------------
Interest maintenance reserve 72.3 159.7 (86.6) 24.4 58.7
--------------------------------------
Deferred income taxes 244.5 181.6 (117.4) (218.6) 70.3
--------------------------------------
Policyholders' share of earnings and
surplus on participating business (122.7) (132.8) (1.8) 3.2 5.3
--------------------------------------
Asset valuation reserve 490.9 484.5 -- -- --
--------------------------------------
Net realized gain (loss) on investments (186.4) (174.1) (32.4) (116.7) (20.4)
--------------------------------------
Unrealized gain (loss) on investments (555.2) 1,335.1 -- -- --
--------------------------------------
Nonadmitted assets, including
nonadmitted investments 139.6 119.1 -- -- --
--------------------------------------
Investments in subsidiary companies 460.9 490.4 39.1 41.3 (80.5)
--------------------------------------
Surplus notes and related interest (1,250.0) (1,251.5) 1.5 (1.5) --
--------------------------------------
Other, net (61.0) (120.1) 129.8 103.6 (35.0)
-------------------------------------- --------- --------- --------- --------- ------
Net increase (decrease) 918.0 1,877.2 (30.7) 1,627.6 (149.1)
----------------------------------------- --------- --------- --------- --------- ------
Amounts on a GAAP basis $ 3,444.5 $ 4,441.7 $ 482.2 $ 477.3 $243.8
----------------------------------------- ========= ========= ========= ========= ======
</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 or deferred in IMR, where
applicable, and are amortized over the remaining lives of the hedged items
as adjustments to investment income. 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 amortized 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 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 are
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 cash collateral received which is
typically greater than the market value of the related securities loaned. In
other instances, the Company will hold as collateral securities with a
market value at least equal to the securities loaned. Securities held as
collateral are not recorded in the Company's balance sheet in accordance
with accounting guidance for secured borrowings and collateral. 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 reserves released and 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 the
intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of
S-9
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
LNC's common stock at the grant date, or other measurement date, over the
amount an employee or agent 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.
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") effective January 1, 2001. 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.
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
1999 1998 1997
--------------------------------------
(IN MILLIONS)
--------------------------------------
<S> <C> <C> <C>
Income:
Bonds $1,840.6 $1,714.3 $1,524.4
------------------------------------------------------------
Preferred stocks 20.3 19.7 23.5
------------------------------------------------------------
Unaffiliated common stocks 6.3 10.6 8.3
------------------------------------------------------------
Affiliated common stocks 7.8 5.2 15.0
------------------------------------------------------------
Mortgage loans on real estate 321.0 323.6 257.2
------------------------------------------------------------
Real estate 57.8 81.4 92.2
------------------------------------------------------------
Policy loans 101.7 86.5 37.5
------------------------------------------------------------
Other investments 50.6 26.5 28.2
------------------------------------------------------------
Cash and short-term investments 95.9 104.7 70.3
------------------------------------------------------------ -------- -------- --------
Total investment income 2,502.0 2,372.5 2,056.6
------------------------------------------------------------
Expenses:
Depreciation 14.4 19.3 21.0
------------------------------------------------------------
Other 284.4 246.0 188.5
------------------------------------------------------------ -------- -------- --------
Total investment expenses 298.8 265.3 209.5
------------------------------------------------------------ -------- -------- --------
Net investment income $2,203.2 $2,107.2 $1,847.1
------------------------------------------------------------ ======== ======== ========
</TABLE>
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, 1999:
Corporate $17,758.4 $ 229.6 $763.0 $17,225.0
------------------------------------------------
U.S. government 316.8 29.6 21.5 324.9
------------------------------------------------
Foreign government 984.5 49.8 39.9 994.4
------------------------------------------------
Mortgage-backed 3,913.7 46.2 139.0 3,820.9
------------------------------------------------
State and municipal 11.6 -- .5 11.1
------------------------------------------------ --------- -------- ------ ---------
$22,985.0 $ 355.2 $963.9 $22,376.3
========= ======== ====== =========
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
========= ======== ====== =========
</TABLE>
The carrying amounts of bonds in the balance sheets at
December 31, 1999 and 1998 reflect adjustments of
$38,900,000 and $11,800,000, respectively, to decrease
amortized cost as a result of the Securities Valuation
Office of the NAIC ("SVO") designating certain investments
as in or near default.
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1999, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
-------------------------
(IN MILLIONS)
-------------------------
<S> <C> <C>
Maturity:
In 2000 $ 598.0 $ 599.2
------------------------------------------------------------
In 2001-2004 4,359.8 4,313.4
------------------------------------------------------------
In 2005-2009 6,636.0 6,392.9
------------------------------------------------------------
After 2009 7,477.5 7,249.9
------------------------------------------------------------
Mortgage-backed securities 3,913.7 3,820.9
------------------------------------------------------------ --------- ---------
Total $22,985.0 $22,376.3
------------------------------------------------------------ ========= =========
</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 1999,
1998 and 1997 were $5,351,400,000, $9,395,000,000 and
$9,715,000,000, respectively. Gross gains during 1999, 1998
and 1997 of $95,400,000, $186,300,000 and $218,100,000,
respectively, and gross losses of $195,500,000, $138,000,000
and $78,000,000, respectively, were realized on those sales.
At December 31, 1999 and 1998, investments in bonds, with an
admitted asset value of $116,500,000 and $97,800,000,
respectively, were on deposit with state insurance
departments to satisfy regulatory requirements.
Unrealized gains and losses on investments in unaffiliated
common stocks are reported directly in unassigned surplus
and are not reported in the statutory-basis Statements of
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, 1999:
Preferred stocks $253.8 $ 1.3 $31.5 $223.6
----------------------------------------
Unaffiliated common stocks 150.4 34.2 17.7 166.9
----------------------------------------
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
----------------------------------------
</TABLE>
The carrying amount of preferred stocks in the balance
sheets at December 31, 1999 and 1998 reflects adjustments of
$4,100,000 and $5,800,000, respectively, to decrease
amortized cost as a result of the SVO designating certain
investments as low or lower quality.
During 1999, the minimum and maximum lending rates for
mortgage loans were 6.5% and 11.5%, respectively. At the
issuance of a loan, the percentage of loan to value on any
one loan does not exceed 75%. 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)
Components of the Company's investments in real estate are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------------------
(IN MILLIONS)
-------------------
<S> <C> <C>
Occupied by the Company:
Land $ 2.5 $ 2.5
------------------------------------------------------------
Buildings 11.1 9.0
------------------------------------------------------------
Less accumulated depreciation (2.2) (1.7)
------------------------------------------------------------ ------ ------
Net real estate occupied by the Company 11.4 9.8
------------------------------------------------------------
Other:
Land 46.2 93.2
------------------------------------------------------------
Buildings 226.8 413.0
------------------------------------------------------------
Other 4.7 7.9
------------------------------------------------------------
Less accumulated depreciation (35.1) (50.1)
------------------------------------------------------------ ------ ------
Net other real estate 242.6 464.0
------------------------------------------------------------ ------ ------
Net real estate $254.0 $473.8
------------------------------------------------------------ ====== ======
</TABLE>
Net realized capital gains are reported net of federal
income taxes and amounts transferred to the IMR as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------
(IN MILLIONS)
--------------------------------
<S> <C> <C> <C>
Net realized capital gains $ 20.8 $179.7 $209.3
------------------------------------------------------------
Less amount transferred to IMR (net of related taxes
(credits) of ($31.4), $27.3 and $54.0 in 1999, 1998 and
1997, respectively) (58.3) 50.8 100.2
------------------------------------------------------------ ------ ------ ------
79.1 128.9 109.1
Less federal income taxes (credits) on realized gains (35.3) 82.1 77.8
------------------------------------------------------------ ------ ------ ------
Net realized capital gains after transfer to IMR and taxes
(credits) $114.4 $ 46.8 $ 31.3
------------------------------------------------------------ ====== ====== ======
</TABLE>
4. SUBSIDIARIES
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 ("LNY"). The Company also owns 100% of
the outstanding common stock of four non-insurance company
subsidiaries: Lincoln National Insurance Associates
("LNIA"), Sagemark Consulting, Inc. ("Sagemark"), Wakefield
Tower Alpha Limited ("Wakefield"), and Lincoln Realty
Capital
S-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
Corporation ("LRCC"). The Company also owns 85% of one
non-insurance company subsidiary, AnnuityNet, Inc.
(AnnuityNet). Statutory-basis financial information related
to the insurance subsidiaries is summarized as follows (in
millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------
FIRST
PENN LNH&C LNRAC LNY
----------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $1,318.7 $434.6 $443.6 $1,888.6
---------------------------------------------------------
Other assets 40.6 55.5 492.6 403.1
--------------------------------------------------------- -------- ------ ------ --------
Total admitted assets $1,359.3 $490.1 $936.2 $2,291.7
--------------------------------------------------------- ======== ====== ====== ========
Insurance reserves $1,242.2 $394.4 $261.4 $1,802.4
---------------------------------------------------------
Other liabilities 44.3 27.9 614.4 25.6
---------------------------------------------------------
Liabilities related to separate accounts -- -- -- 328.8
---------------------------------------------------------
Capital and surplus 72.8 67.8 60.4 134.9
--------------------------------------------------------- -------- ------ ------ --------
Total liabilities and capital and surplus $1,359.3 $490.1 $936.2 $2,291.7
--------------------------------------------------------- ======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------
FIRST
PENN LNH&C LNRAC LNY
-----------------------------------------------
<S> <C> <C> <C> <C>
Revenues $332.7 $263.3 $ 88.4 $ 313.3
-----------------------------------------------------------
Expenses 329.0 346.9 75.4 291.4
-----------------------------------------------------------
Net realized gains (losses) -- -- .2 (2.0)
----------------------------------------------------------- ------ ------ ------ --------
Net income (loss) $ 3.7 $(83.6) $ 13.2 $ 19.9
----------------------------------------------------------- ====== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------
FIRST
PENN LNH&C LNRAC LNY
----------------------------------
<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>
S-15
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
---------------------------------
FIRST
PENN LNH&C LNRAC LNY
---------------------------------
<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>
AnnuityNet was formed in 1998 for the distribution of
variable annuities over the Internet and is valued on the
equity method (at 85% of GAAP equity) with an admitted asset
value of $2,400,000 at December 31, 1999. LNIA was purchased
in 1998 for $600,000 and is valued on the equity method with
an admitted asset value of $800,000 at December 31, 1999.
Sagemark is a broker dealer and was acquired in connection
with a reinsurance transaction completed in 1998. Sagemark
is valued on the equity method with an admitted asset value
of $6,400,000 at December 31, 1999. Wakefield was formed in
1999 to engage in the ownership and management of
investments and is valued on the equity method with an
admitted asset value of $248,300,000. Wakefield's assets as
of December 31, 1999 consist entirely of investments in
bonds. LRCC was formed in 1999 to engage in the management
of certain real estate investments. It was capitalized with
cash and three real estate investments of $12,700,000 and is
valued on the equity method with an admitted asset value of
$10,900,000.
The carrying value of all affiliated common stocks, was
$604,700,000 and $322,100,000 at December 31, 1999 and 1998,
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, 1999 and 1998 was $970,700,000 and
$631,100,000, respectively.
During 1999, 1998 and 1997 the Company's insurance
subsidiaries paid dividends of $5,200,000, $5,200,000 and
$15,000,000, 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 1999, 1998 and 1997, federal income tax expense (benefit)
incurred totaled $85,400,000, ($141,000,000) and
$78,300,000, respectively. In 1999, capital losses of
$151,700,000 were incurred, and carried back to recover
taxes paid in prior years.
The Company paid $45,300,000, $2,300,000 and $164,500,000 to
LNC in 1999, 1998 and 1997, respectively, in 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
S-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES (CONTINUED)
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
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 "Reinsurance recoverable" includes
amounts recoverable from other insurers for claims paid by
the Company. The balance sheet caption, "Future policy
benefits and claims," and the balance sheet caption "Other
policyholder funds" have been reduced for insurance ceded as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-----------------------
(IN MILLIONS)
-----------------------
<S> <C> <C>
Insurance ceded $5,340.0 $4,081.8
------------------------------------------------------------
Amounts recoverable from other insurers 81.2 79.9
------------------------------------------------------------
</TABLE>
Reinsurance transactions, excluding assumption reinsurance,
included in the income statement caption, "Premiums and
deposits," are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
------------------------------------
(IN MILLIONS)
------------------------------------
<S> <C> <C> <C>
Insurance assumed $2,606.5 $9,018.9 $727.2
------------------------------------------------------------
Insurance ceded 1,675.1 877.1 302.9
------------------------------------------------------------ -------- -------- ------
Net amount included in premiums $ 931.4 $8,141.8 $424.3
------------------------------------------------------------ ======== ======== ======
</TABLE>
The income statement caption, "Benefits and settlement
expenses," is net of reinsurance recoveries of
$2,609,000,000, $2,098,800,000 and $1,240,500,000 for 1999,
1998 and 1997, respectively.
Details underlying the balance sheet caption "Other
policyholder funds" are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------------------------
(IN MILLIONS)
-------------------------
<S> <C> <C>
Premium deposit funds $16,208.3 $16,285.2
------------------------------------------------------------
Undistributed earnings on participating business 346.9 348.4
------------------------------------------------------------
Other 34.3 13.9
------------------------------------------------------------ --------- ---------
$16,589.5 $16,647.5
========= =========
</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, 1999
---------------------------------
NET OF
GROSS LOADING LOADING
---------------------------------
(IN MILLIONS)
---------------------------------
<S> <C> <C> <C>
Ordinary new business $10.8 $ 7.3 $ 3.5
------------------------------------------------------------
Ordinary renewal 54.2 6.8 47.4
------------------------------------------------------------
Group life 13.7 .1 13.6
------------------------------------------------------------ ----- ----- -----
$78.7 $14.2 $64.5
===== ===== =====
</TABLE>
<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>
7. ANNUITY RESERVES
At December 31, 1999, 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 $ 2,427.7 4%
------------------------------------------------------------
At book value, less surrender charge 2,237.3 3
------------------------------------------------------------
At market value 44,076.2 68
------------------------------------------------------------ --------- ---
48,741.2 75
Subject to discretionary withdrawal without adjustment at
book value with minimal or no charge or adjustment 13,486.5 21
------------------------------------------------------------
Not subject to discretionary withdrawal 2,622.4 4
------------------------------------------------------------ --------- ---
Total annuity reserves and deposit fund 64,850.1 100%
------------------------------------------------------------ ===
Less reinsurance 1,548.0
------------------------------------------------------------ ---------
Net annuity reserves and deposit fund liabilities, including
separate accounts $63,302.1
------------------------------------------------------------ =========
</TABLE>
S-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
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 Corporation ("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
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, 1999), and subject to approval by the Indiana Insurance
Commissioner.
The second note for $750,000,000 was issued on December 18, 1998 to LNC in
connection with the Aetna, Inc. ("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, 1999), and subject
to approval by the Indiana Insurance Commissioner.
A summary of the terms of these surplus notes follows (in millions):
<TABLE>
<CAPTION>
PRINCIPAL INCEPTION ACCRUED
OUTSTANDING AT TO DATE INTEREST AT
PRINCIPAL DECEMBER 31, CURRENT YEAR INTEREST DECEMBER 31,
DATE ISSUED AMOUNT OF NOTE 1999 INTEREST PAID PAID 1999
----------- -------------- -------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
January 5, 1998 $ 500.0 $ 500.0 $ 32.8 $ 65.1 $ --
-------------------------------
December 18, 1998 750.0 750.0 46.7 46.7 --
-------------------------------
</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,
1999, 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, 1999 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. The time frame for
unassigned surplus to return to a positive position is dependent upon future
statutory earnings and dividends paid to LNC. 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-19
<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). Effective July 1, 1999, the
agents' postretirement plan was changed to require agents retiring on or
after that date to pay the full premium costs. This change to the plan
resulted in a one-time curtailment gain of $1,400,000 in 1999. 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 Operations 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. Options issued subsequent to 1991
are exercisable in 25% increments on the option issuance anniversary in the
four years following issuance.
As of December 31, 1999, there were 2,072,087 and 1,397,005 shares of LNC
common stock subject to options granted to Company employees and agents,
respectively, under the stock option incentive plans of which 919,749 and
241,097, respectively, were exercisable on that date. The exercise prices of
the outstanding options range from $12.50 to $56.75. During 1999, 1998 and
1997, there were 318,421, 136,469 and 170,789 options exercised,
respectively, and 82,024, 18,288 and 1,846 options 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, 1999 and 1998 is
$221,600,000 and $670,100,000, 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.
PERSONAL ACCIDENT PROGRAMS
In the past, the Company and its wholly owned subsidiary, LNH&C, accepted
personal accident reinsurance programs from other insurance companies. Most
of these programs were presented by independent brokers who represented 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. The liabilities for these
programs, net of related assets recoverable from reinsurers, were
$174,700,000 and $177,400,000 at December 31, 1999 and 1998, respectively.
Settlement activities relating to the Company's participation in workers'
compensation carve-out (i.e., life and health risks associated with workers'
compensation coverage) programs managed by Unicover Managers, Inc. have
allowed the Company to evaluate the possibility of settlements and to
estimate its potential costs to settle Unicover-related exposures. As of
December 31, 1999, a liability of $62,200,000 has been established for the
S-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
settlement of the Company's exposure to the Unicover programs.
These amounts are based on various estimates that are subject to
considerable uncertainty. Accordingly, the liabilities may prove to be
deficient or excessive. However, it is management's opinion that future
developments in these programs will not materially affect the financial
position of the Company.
HMO EXCESS-OF-LOSS REINSURANCE PROGRAMS
In light of the continued volatility in the HMO excess-of-loss line of
business, LNH&C discontinued writing new HMO excess-of-loss reinsurance
programs in the third quarter of 1999. The liability for HMO claims, net of
the related assets for amounts recoverable from reinsurers, was $101,900,000
and $55,900,000 at December 31, 1999 and 1998, respectively. LNH&C reviews
reserve levels on an ongoing basis. The liability is based on the assumption
that recent experience will continue in the future. If claims and loss
ratios fluctuate significantly from the assumptions underlying the reserves,
adjustments to reserves could be required in the future. Accordingly, the
liability may prove to be deficient or excessive. However, it is
management's opinion that such future developments will not materially
affect the financial position of the Company.
MARKETING AND COMPLIANCE MATTERS
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 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 1999, 1998 and 1997 was
$38,900,000, $34,000,000 and $29,300,000, respectively. Future minimum
rental commitments are as follows (in millions):
<TABLE>
<S> <C>
2000 $ 28.7
--------------------------------
2001 28.8
--------------------------------
2002 27.5
--------------------------------
2003 26.2
--------------------------------
2004 26.5
--------------------------------
Thereafter 123.5
-------------------------------- ------
$261.2
======
</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
S-21
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
operations. Total costs incurred in 1999 and 1998 were $67,400,000 and
$54,800,000, respectively. 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. The Company limits its maximum coverage that
it retains on an individual to $10,000,000. Portions of the Company's
deferred annuity business have also been coinsured with other companies to
limit its exposure to interest rate risks. At December 31, 1999, the
reserves associated with these reinsurance arrangements totaled
$1,422,800,000. 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 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 States 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 LNY reinsured 100% of a block of individual life
insurance and annuity business from 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 $4,780,300,000 that became
the Company's obligation. The Company also received assets, measured on a
historical statutory-basis, equal to the liabilities.
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.
In 1999, the Company and CIGNA reached an agreement through arbitration on
the final statutory-basis values of the assets and liabilities reinsured. As
a result, the Company's ceding commission for this transaction was reduced
by $58.6 million.
Subsequent to this transaction, the Company and LNY announced that they had
reached an agreement to sell the administration rights to a variable 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 September 1, 1998.
On October 1, 1998, the Company and LNY entered into an indemnity
reinsurance transaction whereby the Company and LNY reinsured 100% of a
block of individual life insurance business from Aetna. 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 $2,813,800,000
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 LNY 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.
On November 1, 1999, the Company closed its previously announced agreement
to transfer a block of disability income business to MetLife. Under this
indemnity reinsurance agreement, the Company transferred $490,800,000 of
cash to MetLife representing the statutory reserves transferred on this
business less $17,800,000 of purchase price consideration. A gain on the
reinsurance transaction of $71,800,000 was recorded directly in unassigned
S-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
surplus and will be recognized in statutory earnings over the life of the
business.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1999, the Company provided $270,000,000 of
statutory-basis surplus relief to other insurance companies under
reinsurance transactions. The Company 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 $17,300,000 and $43,400,000 at December 31, 1999
and 1998, respectively.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1999, 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, 1999, 29% of such mortgages ($1,212,700,000) 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 $70,000,000.
At December 31, 1999, 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 certain 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
proceedings will not have a material adverse affect on the financial
position of the Company.
With the recent filing of a lawsuit alleging fraud in the sale of interest
sensitive universal and whole life insurance policies, the Company now has
several such actions pending. While each of these lawsuits seeks class
action status, the court has not certified a class in any of them. In each
of these lawsuits, plaintiffs seek unspecified damages and penalties for
themselves and on behalf of the putative class. While relief sought in these
lawsuits is substantial, they are in the discovery stages of litigation, and
it is premature to make assessments about potential loss, if any. Management
intends to defend these lawsuits vigorously. The amount of liability, if
any, which may arise as a result of these lawsuits cannot be reasonably
estimated at this time. In another lawsuit, a settlement has been
preliminarily approved by the court, and a class has been conditionally
certified for settlement purposes. Two other similar lawsuits previously
have been resolved and dismissed.
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
S-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
credit exposure. Outstanding guarantees with off-balance-sheet risks at
December 31, 1999 relate to mortgage loan pass-through certificates. The
Company has sold commercial mortgage loans through grantor trusts that
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, 1999 and 1998 were $25,900,000 and $30,900,000, 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, 1999 and 1998.
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 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 being hedged by
such contracts.
Outstanding derivatives with off-balance-sheet risks, shown in notional or
contract amounts along with their carrying value and estimated fair values,
are as follows:
<TABLE>
<CAPTION>
ASSETS (LIABILITIES)
---------------------------------
NOTIONAL OR CARRYING FAIR CARRYING FAIR
CONTRACT AMOUNTS VALUE VALUE VALUE VALUE
-----------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1998 1999 1999 1998 1998
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate cap agreements $2,508.8 $4,108.8 $ 5.2 $ 3.2 $ 9.3 $ .9
---------------------------------
Swaptions 1,837.5 1,899.5 12.2 10.8 16.2 2.5
---------------------------------
Interest rate swaps 630.9 258.3 -- (19.5) -- 9.9
---------------------------------
Put options 21.3 21.3 -- 1.9 -- 2.2
--------------------------------- -------- -------- ----- ------ ----- -----
4,998.5 6,287.9 17.4 (3.6) 25.5 15.5
Foreign currency derivatives:
Forward contracts -- 1.5 -- -- -- --
---------------------------------
Foreign currency swaps 44.2 47.2 -- (.4) -- .3
--------------------------------- -------- -------- ----- ------ ----- -----
44.2 48.7 -- (.4) -- .3
Commodity derivatives:
Commodity swaps -- 8.1 -- -- -- 2.4
--------------------------------- -------- -------- ----- ------ ----- -----
$5,042.7 $6,344.7 $17.4 $ (4.0) $25.5 $18.2
======== ======== ===== ====== ===== =====
</TABLE>
S-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 SWAPTIONS
-----------------------------------------------------
1999 1998 1999 1998
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $4,108.8 $4,900.0 $1,899.5 $1,752.0
-------------------------------------------------------
New contracts -- 708.8 -- 218.3
-------------------------------------------------------
Terminations and maturities (1,600.0) (1,500.0) (62.0) (70.8)
------------------------------------------------------- -------- -------- -------- --------
Balance at end of year $2,508.8 $4,108.8 $1,837.5 $1,899.5
------------------------------------------------------- ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
INTEREST RATE SWAPS
-----------------------
1999 1998
-----------------------
<S> <C> <C>
Balance at beginning of year $ 258.3 $ 10.0
------------------------------------------------------------
New contracts 482.4 2,226.6
------------------------------------------------------------
Terminations and maturities (109.8) (1,978.3)
------------------------------------------------------------ ------- ---------
Balance at end of year $ 630.9 $ 258.3
------------------------------------------------------------ ======= =========
</TABLE>
<TABLE>
<CAPTION>
COMMODITY
PUT OPTIONS SWAPS
----------------------------------------
1999 1998 1999 1998
----------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $21.3 $ -- $ 8.1 $ --
------------------------------------------------------------
New contracts -- 21.3 -- 8.1
------------------------------------------------------------
Terminations and maturities -- -- (8.1) --
------------------------------------------------------------ ----- ----- ----- ----
Balance at end of year $21.3 $21.3 $ -- $8.1
------------------------------------------------------------ ===== ===== ===== ====
</TABLE>
<TABLE>
<CAPTION>
FOREIGN CURRENCY DERIVATIVES
(FOREIGN INVESTMENTS)
-------------------------------------------
FOREIGN CURRENCY
SWAPS
FOREIGN EXCHANGE
-------------------------------------------
FORWARD CONTRACTS
1999 1998 1999 1998
-------------------------------------------
(IN MILLIONS)
-------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 1.5 $ 163.1 $47.2 $15.0
------------------------------------------------------------
New contracts 2.7 419.8 -- 39.2
------------------------------------------------------------
Terminations and maturities (4.2) (581.4) (3.0) (7.0)
------------------------------------------------------------ ----- ------- ----- -----
Balance at end of year $ -- $ 1.5 $44.2 $47.2
------------------------------------------------------------ ===== ======= ===== =====
</TABLE>
INTEREST RATE CAP AGREEMENTS
The interest rate cap agreements, which expire in 2000 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
S-25
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
premium paid for the interest rate caps is included in other investments
(amortized costs of $5.2 million as of December 31, 1999) and is being
amortized over the terms of the agreements. This amortization is included in
net investment income.
SWAPTIONS
Swaptions, which expire in 2000 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
investments (amortized cost of $12.2 million as of December 31, 1999) 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 security 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. While spreadlocks are
used periodically, there are no spreadlock agreements outstanding at
December 31, 1999.
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 agreement the stream of variable interest
payments based on the coupon payments hedged 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 blocks of business or to extend
the duration of certain portfolios of assets. Once the assets are purchased
the gains (losses) resulting from the termination of the swap agreements
will be applied to the basis of the assets. The gains (losses) will be
recognized in earnings over the life of the assets. The anticipated purchase
of assets related to extending the duration of certain portfolios of assets
is expected to be completed in 2000.
PUT OPTIONS
The Company uses put options, combined with various perpetual fixed income
securities, and interest rate swaps to replicate fixed income, fixed
maturity investments. The risk being hedged is a drop in bond prices due to
credit concerns with international bond issuers. The put options allow the
Company to put the bonds back to the counterparties at original par.
FOREIGN CURRENCY DERIVATIVES
The Company uses a combination of foreign exchange forward contracts and
foreign currency swaps, 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. A foreign currency swap is a contractual
agreement to exchange the currencies of two different countries at a fixed
rate of exchange in the future.
COMMODITY SWAPS
The Company used a commodity swap to hedge its exposure to fluctuations in
the price of gold. A commodity swap is a contractual agreement to exchange a
certain amount of a particular commodity for a fixed amount of cash. The
Company owned a fixed income security that met its coupon
S-26
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 were the
product of the swap notional multiplied by the fixed rate stated in the swap
agreement. The net receipts or payments from commodity swaps were recorded
in net investment income. The fixed income security was called in the third
quarter of 1999 and the commodity swap expired.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$6,200,000, $10,000,000 and $7,000,000 in 1999, 1998 and 1997, respectively.
Deferred gains of $100,000 as of December 31, 1999, were the result of
terminated interest rate swaps. These gains are included with the related
fixed maturity securities to which the hedge applied or as deferred
liabilities 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 various derivative contracts. However, the Company does
not anticipate nonperformance 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 less collateral held for such agreements with each
counterparty if the net market value is in the Company's favor. At
December 31, 1999, the exposure was $8,500,000.
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.,
S-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
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
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-28
<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
-------------------------------------------------------------
1999 1998
-------------------------------------------------------------
CARRYING CARRYING
ASSETS (LIABILITIES) VALUE FAIR VALUE VALUE FAIR VALUE
--------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 22,985.0 $ 22,376.3 $ 23,830.9 $ 25,065.5
-----------------------------------------------
Preferred stocks 253.8 223.6 236.0 242.5
-----------------------------------------------
Unaffiliated common stocks 166.9 166.9 259.3 259.3
-----------------------------------------------
Mortgage loans on real estate 4,211.5 4,104.0 3,932.9 4,100.1
-----------------------------------------------
Policy loans 1,652.9 1,770.5 1,606.0 1,685.9
-----------------------------------------------
Other investments 426.6 426.6 434.4 434.4
-----------------------------------------------
Cash and short-term investments 1,409.2 1,409.2 1,725.4 1,725.4
-----------------------------------------------
Investment-type insurance contracts:
Deposit contracts and certain guaranteed
interest contracts (17,730.4) (17,364.3) (17,845.8) (17,486.4)
--------------------------------------------
Remaining guaranteed interest and similar
contracts (454.7) (465.1) (714.4) (738.2)
--------------------------------------------
Short-term debt (205.0) (205.0) (140.0) (140.0)
-----------------------------------------------
Surplus notes due to LNC (1,250.0) (1,022.1) (1,250.0) (1,335.1)
-----------------------------------------------
Derivatives 17.4 (4.0) 25.5 18.2
-----------------------------------------------
Investment commitments -- (0.8) -- (.6)
-----------------------------------------------
Separate account assets 46,105.1 46,105.1 36,907.0 36,907.0
-----------------------------------------------
Separate account liabilities (46,105.1) (46,105.1) (36,907.0) (36,907.0)
-----------------------------------------------
</TABLE>
12. ACQUISITIONS AND SALES OF SUBSIDIARIES
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.
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 $60,400,000 and
$76,700,000 in 1999 and 1998, respectively, and override commissions and
operating expense allowances of $61,600,000 in 1997. LLAD incurred expenses
of $113,400,000, $102,400,000 and
S-29
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTIONS WITH AFFILIATES (CONTINUED)
$5,500,000 in 1999, 1998 and 1997, 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, 1999 and 1998 include the
Company's participation in a short-term investment pool with LNC of
$390,300,000 and $383,600,000, respectively. Related investment income
amounted to $16,700,000, $16,800,000 and $15,500,000 in 1999, 1998 and 1997,
respectively. Short-term loan payable to parent company at December 31, 1999
and 1998 represent notes payable to LNC.
The Company provides services to and receives services from affiliated
companies which resulted in a net payment of $49,400,000, $92,100,000 and
$48,500,000 in 1999, 1998 and 1997, 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
1999 1998 1997
------------------------
(IN MILLIONS)
------------------------
<S> <C> <C> <C>
Insurance assumed $ 19.7 $ 13.7 $ 11.9
----------------------
Insurance ceded 777.6 290.1 100.3
</TABLE>
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-----------------------
(IN MILLIONS)
-----------------------
<S> <C> <C>
Future policy benefits
and claims assumed
$ 413.7 $ 197.3
------------------------
Future policy benefits
and claims ceded 1,680.4 1,125.0
------------------------
Amounts recoverable on
paid and unpaid losses 146.4 84.2
------------------------
Reinsurance payable on
paid losses 8.8 6.0
------------------------
Funds held under
reinsurance treaties --
net liability 2,106.4 1,375.4
------------------------
</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 $917,300,000 and $318,300,000 at December 31, 1999 and 1998,
respectively. The letters of credit are issued by banks and represent
guarantees of performance under the reinsurance agreement. At December 31,
1999 and 1998, LNC had guaranteed $818,900,000 and $237,000,000,
respectively, of these letters of credit. At December 31, 1999 and 1998, the
Company has a receivable (included in the foregoing amounts) from affiliated
insurance companies in the amount of $118,800,000 and $122,400,000,
respectively, 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 none of the separate accounts have
any minimum guarantees and the investment risks associated with market
S-30
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
14. SEPARATE ACCOUNTS (CONTINUED)
value changes are borne entirely by the policyholder.
Separate account premiums, deposits and other considerations amounted to
$4,572,600,000, $3,953,300,000 and $4,821,800,000 in 1999, 1998 and 1997,
respectively. Reserves for separate accounts with assets at fair value were
$45,198,900,000 and $36,145,900,000 at December 31, 1999 and 1998,
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
1999 1998 1997
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Transfers as reported in the Summary of Operations of the
various separate accounts:
Transfers to separate accounts $ 4,573.2 $ 3,954.9 $ 4,824.0
------------------------------------------------------------
Transfers from separate accounts (4,933.8) (4,069.8) (2,943.8)
------------------------------------------------------------ --------- --------- ---------
Net transfers to (from) separate accounts as reported in the
Summary of Operations $ (360.6) $ (114.9) $ 1,880.2
------------------------------------------------------------ ========= ========= =========
</TABLE>
15. CENTURY COMPLIANCE (UNAUDITED)
The Year 2000 issue was complex and affected many aspects of the Company's
business. The Company was particularly concerned with Year 2000 issues that
related to the Company's computer systems and interfaces with the computer
systems of vendors, suppliers, customers and business partners. From 1996
through 1999 the Company and its operating subsidiaries redirected a large
portion of internal Information Technology ("IT") efforts and contracted
with outside consultants to update systems to address Year 2000 issues.
Experts were engaged to assist in developing work plans and cost estimates
and to complete remediation activities.
For the year ended December 31, 1999, the Company identified expenditures of
$39,500,000 to address this issue. This brings the expenditures for 1996
through 1999 to $75,300,000. Because updating systems and procedures is an
integral part of the Company's on-going operations, most of the expenditures
shown above are expected to continue after all Year 2000 issues have been
resolved. All Year 2000 expenditures have been funded from operating cash
flows.
The scope of the overall Year 2000 program included 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 Company
completed these projects prior to year-end.
The Company's businesses have not identified any major problems in their
business processing. Minor problems have been resolved quickly. The
Company's businesses have not experienced any significant interruption in
service to clients or business partners or in reporting to regulators.
S-31
<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 (the "Company"),
a wholly owned subsidiary of Lincoln National Corporation, as of
December 31, 1999 and 1998, 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, 1999. 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 auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. 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 accounting principles
generally accepted in the United States. The variances between
such practices and accounting principles generally accepted in
the United States 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 accounting
principles generally accepted in the United States, the
financial position of The Lincoln National Life Insurance
Company at December 31, 1999 and 1998, or the results of its
operations or its cash flows for each of the three years in the
period ended December 31, 1999.
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, 1999 and 1998, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting practices
prescribed or permitted by the Indiana Department of Insurance.
January 31, 2000
S-32
<PAGE>
SEI Variable Annuity
Lincoln Life Variable Annuity Account T
Individual variable annuity contract
Home Office:
Lincoln National Life Insurance Company
1300 South Clinton Street
Fort Wayne, IN 46801
This Prospectus describes the individual flexible premium deferred variable
annuity contract that is issued by The Lincoln National Life Insurance Company
(Lincoln Life). It is primarily for use with nonqualified plans and retirement
plans under Sections 408 (IRAs) and 408A (Roth IRAs) of the tax code.
Generally, you do not pay federal income tax on the contract's growth until it
is paid out. The contract is designed to accumulate account value and to
provide retirement income that you cannot outlive or for an agreed upon time.
If you die before the annuity commencement date, we will pay your beneficiary a
death benefit. In the alternative, you may choose to receive a death benefit on
the death of the annuitant.
The minimum initial purchase payment for the contract is $25,000. Additional
purchase payments may be made to the contract and must be at least $100.
This product will only be sold as part of an asset management program made
available by fee based financial planners. The fees and expenses of the asset
management program are separate from and in addition to the fees and expenses
of the annuity contract. You should consult your financial planner for details
regarding the asset management program, including fees and expenses.
All purchase payments for benefits will be placed in Lincoln Life Variable
Annuity Account T (variable annuity account [VAA]). The VAA is a segregated
investment account of Lincoln Life. You take all of the investment risk on the
account value and the retirement income. If the subaccounts you select make
money, your account value goes up; if they lose money, your account value goes
down. How much it goes up or down depends on the performance of the subaccounts
you select. We do not guarantee how any of the variable options or their funds
will perform. Also, neither the U.S. Government nor any federal agency insures
or guarantees your investment in the contract.
The available funds, listed below, are each part of SEI Insurance Products
Trust (trust):
SEI VP Large Cap Growth Fund
SEI VP Large Cap Value Fund
SEI VP Small Cap Growth Fund
SEI VP Small Cap Value Fund
SEI VP International Equity Fund
SEI VP Emerging Markets Equity Fund
SEI VP Emerging Markets Debt Fund
SEI VP Core Fixed Income Fund
SEI VP High Yield Bond Fund
SEI VP International Fixed Income Fund
SEI VP Prime Obligation Fund
This Prospectus gives you information about the contract that you should know
before you decide to buy a contract and make purchase payments. You should also
review the prospectus for the funds that are attached, and keep both
prospectuses for future reference.
Neither the SEC nor any state securities commission has approved this contract
or determined that this Prospectus is accurate or complete. Any representation
to the contrary is a criminal offense.
You can obtain a Statement of Additional Information (SAI) about the contract
that has more information. Its terms are made part of this Prospectus. For a
free copy, write: Lincoln National Life Insurance Company, P.O. Box 7878, Fort
Wayne, Indiana 46801, or call 1-800-338-0355. The SAI and other information
about Lincoln Life and Account T 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.
, 2000
1
<PAGE>
Table of contents
<TABLE>
<CAPTION>
Page
--------------------------------------------------------------------------------
<S> <C>
Special terms.............................................................. 2
--------------------------------------------------------------------------------
Expense tables............................................................. 3
--------------------------------------------------------------------------------
Summary.................................................................... 6
--------------------------------------------------------------------------------
Condensed financial information............................................ 6
--------------------------------------------------------------------------------
Investment results......................................................... 7
--------------------------------------------------------------------------------
Financial statements....................................................... 7
--------------------------------------------------------------------------------
Lincoln National Life Insurance Co......................................... 7
--------------------------------------------------------------------------------
General account............................................................ 7
--------------------------------------------------------------------------------
Variable annuity account (VAA)............................................. 7
--------------------------------------------------------------------------------
Investments of the variable annuity account................................ 8
--------------------------------------------------------------------------------
Charges and other deductions............................................... 10
--------------------------------------------------------------------------------
The contracts.............................................................. 10
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
--------------------------------------------------------------------------------
<S> <C>
Annuity payouts........................................................... 14
--------------------------------------------------------------------------------
Federal tax matters....................................................... 15
--------------------------------------------------------------------------------
Voting rights............................................................. 19
--------------------------------------------------------------------------------
Distribution of the contracts............................................. 19
--------------------------------------------------------------------------------
Return privilege.......................................................... 20
--------------------------------------------------------------------------------
State regulation.......................................................... 20
--------------------------------------------------------------------------------
Records and reports....................................................... 20
--------------------------------------------------------------------------------
Other information......................................................... 20
--------------------------------------------------------------------------------
Statement of additional information table of contents for Variable Annuity
Account T SEI Variable Annuity........................................... 21
</TABLE>
--------------------------------------------------------------------------------
Special terms
(We have italicized the terms that have special meaning throughout the
Prospectus).
Account or variable annuity account (VAA)--The segregated investment account,
Account T, into which Lincoln Life sets aside and invests the assets 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.
Accumulation unit--A measure used to calculate account value before the annuity
commencement date.
Annuitant--The person on whose life the annuity benefit payments are based and
upon whose death a death benefit may be paid.
Annuity commencement date--The valuation date when funds are withdrawn or
converted into annuity units for payment of retirement income benefits under
the annuity payout option you select.
Annuity payout--An amount paid at regular intervals after the annuity
commencement 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 annuity payouts after
the annuity commencement date.
Beneficiary--The person you choose to receive the death benefit.
Contractowner (you, your, owner)--The person who has the ability to exercise
the rights within the contract (decides on investment allocations, transfers,
payout option, designates the beneficiary, etc.) Usually, but not always, the
owner is the annuitant.
Contract year--Each one-year period starting with the effective date of the
contract and starting with each contract anniversary after that.
Death benefit--The amount payable to your designated beneficiary if the owner
dies before the annuity commencement date or, if selected, to the contractowner
if the annuitant dies. Four death benefit options are available.
Lincoln Life (we, us, our)--The Lincoln National Life Insurance Company.
Purchase payments--Amounts paid into the contract.
Subaccount or SEI Variable Annuity subaccount--The portion of the VAA that
reflects investments in accumulation and annuity units of a class of a
particular fund available under the contracts. There is a separate subaccount
which corresponds to each class of a fund.
Trust--SEI Insurance Products Trust (trust), the funds to which you direct
purchase payments.
Valuation date--Each day the New York Stock Exchange (NYSE) is open for
trading.
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
Summary of Contractowner expenses:
Annual Account Fee: $40
(See Charges and other deductions).
The account fee will be waived for any contract year if your account value
equals or exceeds $50,000.00.
--------------------------------------------------------------------------------
Account T annual expenses for SEI Variable Annuity subaccounts:*
(as a percentage of average account value)
<TABLE>
<CAPTION>
Death benefit options
----------------------------
Return Annual 5%
Account of Step- Step-
Value Premium Up Up
<S> <C> <C> <C> <C>
Mortality and expense risk charge: .20% .25% .35% .50%
Administrative charge: .15% .15% .15% .15%
---- ---- ---- ----
Total annual charge for each subaccount: .35% .40% .50% .65%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
The
mortality
and expense
risk charge
is based on
the
particular
death
benefit
option you
choose. (See
Charges and
other
deductions.)
</TABLE>
Annual expenses of the funds:
(as a percentage of each fund's average net assets):
<TABLE>
<CAPTION>
Management Other expenses Total expenses Total expenses
Fees (before (before any (before any (after any
any waivers/ waivers/ waivers/ waivers/
reimbursements) reimbursements)** reimbursements) reimbursements)***
--------------- + ----------------- = --------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
1. Large Cap Growth 0.40% 0.82% 1.22% 0.85%
------------------------------------------------------------------------------------------------------------
2. Large Cap Value 0.35% 0.82% 1.17% 0.85%
------------------------------------------------------------------------------------------------------------
3. Small Cap Growth 0.65% 0.82% 1.47% 1.10%
------------------------------------------------------------------------------------------------------------
4. Small Cap Value 0.65% 0.82% 1.47% 1.10%
------------------------------------------------------------------------------------------------------------
5. International Equity 0.51% 1.06% 1.57% 1.28%
------------------------------------------------------------------------------------------------------------
6. Emerging Markets Equity 1.05% 1.33% 2.38% 1.95%
------------------------------------------------------------------------------------------------------------
7. Emerging Markets Debt 0.85% 1.44% 2.29% 1.35%
------------------------------------------------------------------------------------------------------------
8. Core Fixed Income 0.28% 0.75% 1.03% 0.60%
------------------------------------------------------------------------------------------------------------
9. High Yield Bond 0.49% 0.82% 1.31% 0.85%
------------------------------------------------------------------------------------------------------------
10. International Fixed Income 0.30% 1.41% 1.71% 1.00%
------------------------------------------------------------------------------------------------------------
11. Prime Obligation 0.08% 0.86% 0.94% 0.44%
------------------------------------------------------------------------------------------------------------
</TABLE>
* The VAA is divided into separately named subaccounts, eleven of which are
available under the contracts. Each subaccount, in turn, invests purchase
payments in shares of its respective fund.
** Other expenses are based on estimated amounts for the current fiscal year.
***SIMC and SEI Investments Fund Management have each voluntarily agreed to
waive a portion of their fees for the current year in order to keep total
operating expenses at a specified level. SIMC and/or SEI Investments Fund
Management may discontinue all or part of their waivers at any time.
3
<PAGE>
Examples
(expenses of the subaccounts and of 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>
1 year 3 years
<S> <C> <C>
For Account Value Death Benefit:
1. SEI VP Large Cap Growth Fund $16 $49
----------------------------------------------------------
2. SEI VP Large Cap Value Fund 16 49
----------------------------------------------------------
3. SEI VP Small Cap Growth Fund 18 56
----------------------------------------------------------
4. SEI VP Small Cap Value Fund 18 56
----------------------------------------------------------
5. SEI VP International Equity Fund 19 59
----------------------------------------------------------
6. SEI VP Emerging Markets Equity Fund 28 82
----------------------------------------------------------
7. SEI VP Emerging Markets Debt Fund 27 80
----------------------------------------------------------
8. SEI VP Core Fixed Income Fund 14 43
----------------------------------------------------------
9. SEI VP High Yield Bond Fund 17 51
----------------------------------------------------------
10. SEI VP International Fixed Income Fund 21 63
----------------------------------------------------------
11. SEI VP Prime Obligation Fund 13 40
----------------------------------------------------------
For Return of Premium Death Benefit:
1. SEI VP Large Cap Growth Fund $16 $50
----------------------------------------------------------
2. SEI VP Large Cap Value Fund 16 50
----------------------------------------------------------
3. SEI VP Small Cap Growth Fund 19 58
----------------------------------------------------------
4. SEI VP Small Cap Value Fund 19 58
----------------------------------------------------------
5. SEI VP International Equity Fund 20 61
----------------------------------------------------------
6. SEI VP Emerging Markets Equity Fund 28 84
----------------------------------------------------------
7. SEI VP Emerging Markets Debt Fund 27 81
----------------------------------------------------------
8. SEI VP Core Fixed Income Fund 15 45
----------------------------------------------------------
9. SEI VP High Yield Bond Fund 17 53
----------------------------------------------------------
10. SEI VP International Fixed Income Fund 21 65
----------------------------------------------------------
11. SEI VP Prime Obligation Fund 14 42
----------------------------------------------------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
1 year 3 years
<S> <C> <C>
For Annual Step-Up Death Benefit:
1. SEI VP Large Cap Growth Fund $17 $53
----------------------------------------------------------
2. SEI VP Large Cap Value Fund 17 53
----------------------------------------------------------
3. SEI VP Small Cap Growth Fund 20 61
----------------------------------------------------------
4. SEI VP Small Cap Value Fund 20 61
----------------------------------------------------------
5. SEI VP International Equity Fund 21 64
----------------------------------------------------------
6. SEI VP Emerging Markets Equity Fund 29 87
----------------------------------------------------------
7. SEI VP Emerging Markets Debt Fund 28 84
----------------------------------------------------------
8. SEI VP Core Fixed Income Fund 16 48
----------------------------------------------------------
9. SEI VP High Yield Bond Fund 18 56
----------------------------------------------------------
10. SEI VP International Fixed Income Fund 22 68
----------------------------------------------------------
11. SEI VP Prime Obligation Fund 15 45
----------------------------------------------------------
For 5% Step-Up Death Benefit:
1. SEI VP Large Cap Growth Fund $19 $58
----------------------------------------------------------
2. SEI VP Large Cap Value Fund 19 58
----------------------------------------------------------
3. SEI VP Small Cap Growth Fund 22 65
----------------------------------------------------------
4. SEI VP Small Cap Value Fund 22 65
----------------------------------------------------------
5. SEI VP International Equity Fund 23 68
----------------------------------------------------------
6. SEI VP Emerging Markets Equity Fund 31 91
----------------------------------------------------------
7. SEI VP Emerging Markets Debt Fund 30 88
----------------------------------------------------------
8. SEI VP Core Fixed Income Fund 17 52
----------------------------------------------------------
9. SEI VP High Yield Bond Fund 20 60
----------------------------------------------------------
10. SEI VP International Fixed Income Fund 24 72
----------------------------------------------------------
11. SEI VP Prime Obligation Fund 16 49
----------------------------------------------------------
</TABLE>
We provide these examples to help you understand the direct and indirect costs
and expenses of the contract. Examples are given for each of the death benefit
options.
For more information, see Charges and other deductions in this Prospectus, and
in the prospectus for the funds. Premium taxes may also apply, although they do
not appear in the examples. These examples should not be considered a
representation of past or future expenses. Actual expenses may be more or less
than those shown.
5
<PAGE>
Summary
What kind of contract am I buying? It is an individual variable annuity
contract between you and Lincoln Life. See The contracts.
What is the variable annuity account (VAA)? It is a separate account we
established under Indiana insurance law, and registered with the SEC as a unit
investment 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 Variable annuity account.
What are my investment choices? Based upon your instruction, the VAA applies
purchase payments to buy trust shares in one or more of the investment funds of
the trust: Large Cap Growth Fund, Large Cap Value Fund, Small Cap Growth Fund,
Small Cap Value Fund, International Equity Fund, Emerging Markets Equity Fund,
Emerging Markets Debt Fund, Core Fixed Income Fund, High Yield Bond Fund,
International Fixed Income Fund, Prime Obligation Fund. In turn, each fund
holds a portfolio of securities consistent with its investment policy. See
Investments of the variable annuity account and Description of the trust.
Who invests my money? The investment adviser for the trust is SEI Investments
Management Corporation (SIMC). SIMC is registered as an investment adviser with
the SEC. See Investments of the variable annuity and Investment adviser.
How does the contract work? If we approve your application, we will send you a
contract. When you make purchase payments during the accumulation phase, you
buy accumulation units. If you decide to receive retirement income payments,
your accumulation units are converted to annuity units. Your retirement income
payments will be based on the number of annuity units you received and the
value of each annuity unit on payout days. See The contracts.
What charges do I pay under the contract? We will deduct any applicable premium
tax from purchase payments or account value at the time the tax is incurred or
at another time we choose.
We apply an annual charge totaling .35%, .40%, .50% or .65% to the daily net
asset value of the VAA depending on the death benefit option chosen. This
charge includes 0.15% as an administrative charge; the balance of the charge is
a mortality and expense risk charge. We charge an account fee of $40 per
contract year if the account value is less than $50,000. See Charges and other
deductions.
This trust pays a management fee to SIMC based on the average daily net asset
value of each fund. See Investments of the variable annuity account-Investment
adviser. Each fund also has additional operating expenses. These are described
in the prospectus for the trust.
What purchase payments do I make, and how often? Subject to minimum and maximum
purchase payment amounts, your payments are completely flexible. See The
contracts--Purchase payments.
How will my annuity payouts be calculated? If you decide to annuitize, you may
select an annuity option and start receiving retirement income payments from
your contract as a fixed option or variable option or a combination of both.
See Annuity 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 I die before I annuitize? Your beneficiary will receive the
death benefit you have chosen. Your beneficiary has options as to how the death
benefit is paid or you may choose an option for your beneficiary. In the
alternative, you may choose to receive a death benefit upon the death of the
annuitant. See Death benefit before the annuity commencement date.
May I transfer account value between variable options? Yes, with certain
limits. See The contracts--Transfers on or before the annuity commencement date
and Transfers after the annuity commencement date.
May I surrender the contract or make a withdrawal? Yes, subject to contract
requirements and to the restrictions of any qualified retirement plan for which
the contract was purchased. See Surrenders and withdrawals.
In addition, if you decide to take a distribution before age 59 1/2, a 10%
Internal Revenue Service (IRS) tax penalty may apply. A surrender or a
withdrawal also may be subject to 20% withholding. See Federal tax matters.
Do I get a free look at this contract? Yes. You can cancel the contract within
ten days (in some states longer) of the date you first receive the contract.
You need to return the contract, postage prepaid, to our home office. In most
states you assume the risk of any market drop on purchase payments you allocate
to the variable side of the contract. See Return privilege.
Condensed financial information for the variable annuity account
Because the subaccounts which are available under the contracts did not begin
operation before the date of this Prospectus, financial information for the
subaccounts is not included in this Prospectus or in the SAI.
6
<PAGE>
Investment results
At times, the VAA may compare its investment results to various unmanaged
indices 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 information.
Financial statements
The statutory-basis financial statements of Lincoln Life are located in the
SAI. No financial statements are included for the VAA because as of December
31, 1999, the account had not yet commenced operations. If you would like a
free copy of the SAI, complete and mail the enclosed card, or call 1-800-338-
0355.
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.
General account
The general account of Lincoln Life is subject to regulation and supervision by
the Indiana Department of Insurance 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 company
under the Investment Company Act of 1940. Accordingly, neither the general
account nor any interests in it are regulated 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. These disclosures, however, may be subject to certain
generally applicable provisions of the federal securities laws regulating the
accuracy and completeness of statements made in prospectuses. This Prospectus
is generally intended to serve as a disclosure document only for aspects of the
contract involving the VAA, and therefore contains only selected information
regarding the fixed annuity payouts.
Variable annuity account
(VAA)
On January 25, 2000, the VAA was established as an insurance company separate
account under Indiana law. It is registered with the SEC as a unit investment
trust under the provisions of the Investment Company Act of 1940 (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 contracts, 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
contracts supported by the VAA invest in the same portfolios of the trust as
the contracts described in this Prospectus. These other annuity contracts may
have different charges that could affect the performance of the subaccount.
7
<PAGE>
Investments of the variable annuity account
You decide the subaccount(s) to which you allocate purchase payments. You may
change your allocation without penalty or charges. Shares of the funds will be
sold at net asset value. The trust is required to redeem fund shares at net
asset value upon our request. We reserve the right to add, delete or substitute
funds.
Investment adviser
The investment adviser for the trust is SEI Investments Management Corporation
(SIMC). As compensation for its services to the trust, the investment adviser
receives a fee from the trust which is accrued daily and paid monthly. This fee
is based on the net assets of each fund, as defined under Purchase and
Redemption of Shares, in the prospectus for the trust.
Additionally, SIMC currently has thirty-two sub-advisory agreements in which
the sub-adviser may perform some or substantially all of the investment
advisory services required by those respective funds. See the trust prospectus
for additional information on the sub-adviser.
No additional compensation from the assets of those funds will be assessed as a
result of the sub-advisory agreements.
Description of the trust
SEI Insurance Products Trust (trust) is an open-end management investment
company that has diversified and non-diversified portfolios. The trust was
organized as a Massachusetts business trust under a Declaration of Trust dated
December 14, 1998. The Declaration of Trust permits the trust to offer separate
series ("funds") of units of beneficial interest ("shares") and different
classes of shares. Each share of each fund represents an equal proportionate
interest in that fund with each other share of that fund. All consideration
received by the trust for shares of any class of any fund and all assets of
such fund or class belong to that fund or class, respectively, and would be
subject to the liabilities related thereto.
Following are brief summaries of the investment objectives and policies of the
funds. Each fund is subject to certain investment policies and restrictions
which may not be changed without a majority vote of shareholders of that fund.
More detailed information may be obtained from the current prospectus for the
trust which is included in this booklet. Please be advised that there is no
assurance that any of the funds will achieve their stated objectives.
1. SEI VP LARGE CAP GROWTH FUND--The investment objective of the SEI VP Large
Cap Growth Fund is capital appreciation.
The Fund invests primarily in U.S. companies with market capitalizations of
more than $1 billion.
2. SEI VP LARGE CAP VALUE FUND--The investment objective of the SEI VP Large
Cap Value Fund is long-term growth of capital and income.
The Fund invests primarily in common stocks of U.S. companies with market
capitalizations of more than $1 billion.
3. SEI VP SMALL CAP GROWTH FUND--The investment objective of the SEI VP Small
Cap Growth Fund is long-term capital appreciation.
The Fund invests primarily in common stocks of U.S. companies with market
capitalizations less than $2 billion.
4. SEI VP SMALL CAP VALUE FUND--The investment objective of the SEI VP Small
Cap Value Fund is capital appreciation.
The Fund invests primarily in common stocks of U.S. companies with market
capitalizations of less than $2 billion.
5. SEI VP INTERNATIONAL EQUITY FUND--The SEI VP International Equity Fund seeks
to provide long-term capital appreciation by investing primarily in a diver-
sified portfolio of equity securities of non-U.S. issuers.
6. SEI VP EMERGING MARKETS EQUITY FUND--The SEI VP Emerging Markets Equity Fund
seeks to provide capital appreciation by investing primarily in a diversi-
fied portfolio of equity securities of emerging market issuers.
7. SEI VP EMERGING MARKETS DEBT FUND--The investment objective of the SEI VP
Emerging Markets Debt Fund is to maximize total return.
The Fund invests primarily in U.S. dollar denominated debt securities of
government, government-related and corporate issuers in emerging market
countries and of entities organized to restructure the outstanding debt of
such issuers.
8. SEI VP CORE FIXED INCOME FUND--The investment objective of the SEI VP Core
Fixed Income Fund is current income consistent with the preservation of cap-
ital.
The Fund invests primarily in investment grade U.S. corporate and government
fixed income securities, including mortgage-backed securities.
9. SEI VP HIGH YIELD BOND FUND--The investment objective of the SEI VP High
Yield Bond Fund is to maximize total return.
The Fund invests primarily in fixed income securities that are rated below
investment grade ("junk bonds"), including corporate bonds and debentures,
convertible and preferred securities, and zero coupon obligations.
8
<PAGE>
10. SEI VP INTERNATIONAL FIXED INCOME FUND--The SEI VP International Fixed In-
come Fund seeks to provided capital appreciation and current income through
investment primarily in investment grade, non-U.S. dollar denominated gov-
ernment, corporate, mortgage-backed and asset-backed fixed income securi-
ties.
11. SEI VP PRIME OBLIGATION FUND--The SEI VP Prime Obligation Fund seeks to
preserve principal value and maintain a high degree of liquidity while pro-
viding current income.
Asset allocation portfolios
SIMC currently offers twelve asset allocation portfolios which are available to
variable annuity purchasers. You can choose one of these asset allocation
portfolios or choose the customized allocation in which you determine your own
allocations among the funds. If you choose one of these asset allocation
portfolios, SIMC will determine the allocation of your purchase payments into
the funds.
If you want to change your portfolio selection, you must notify us in writing
or over the telephone, if we have received proper telephone authorization.
The available portfolios are:
1. VP INSTITUTIONAL MODERATE GROWTH & INCOME PORTFOLIO
2. VP INSTITUTIONAL GROWTH & INCOME PORTFOLIO
3. VP INSTITUTIONAL CAPITAL GROWTH PORTFOLIO
4. VP INSTITUTIONAL EQUITY PORTFOLIO
5. VP GLOBAL MODERATE GROWTH & INCOME PORTFOLIO
6. VP GLOBAL GROWTH & INCOME PORTFOLIO
7. VP GLOBAL CAPITAL GROWTH PORTFOLIO
8. VP GLOBAL EQUITY PORTFOLIO
9. VP MODERATE GROWTH & INCOME PORTFOLIO
10. . VP GROWTH & INCOME PORTFOLIO
11. VP CAPITAL GROWTH PORTFOLIO
12. VP DOMESTIC EQUITY PORTFOLIO
We will periodically rebalance your account value among the funds in accordance
with the percentage allocations of your chosen asset allocation portfolio. In
addition, SIMC periodically reviews the percentage fund allocations associated
with each asset allocation portfolio. If SIMC determines that the allocations
of your chosen asset allocation portfolio should be adjusted, we will
reallocate your annuity account value among the funds accordingly.
Sale of fund shares
We will purchase shares of the funds at net asset value and direct them to the
appropriate subaccounts of the VAA. We will redeem sufficient shares of the
appropriate funds to pay annuity payouts, death benefits, surrender/withdrawal
proceeds or for other purposes described in the contract. If you want to
transfer all or part of your investment from one subaccount to another, we may
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 the assets of the subaccounts established by those insurance companies to
fund variable annuity and variable life insurance contracts.
When the trust sells shares in any of its funds both to variable annuity and to
variable life insurance separate accounts, it is said to engage in mixed
funding. When the trust sells shares in any of its funds to separate accounts
of unaffiliated life insurance companies, it is said to engage in shared
funding.
The trust currently engages in mixed and shared funding. Therefore, due to
differences in redemption rates or tax treatment, or other considerations, the
interests of various contractowners participating in a fund could conflict. The
trust's Board of Trustees will monitor for the existence of any material
conflicts, and determine what action, if any, should be taken. See the
prospectus for the trust.
Reinvestment of dividends and capital gain distributions
All dividend and capital gain distributions of the funds are automatically
reinvested in shares of the distributing funds at their net asset value on the
date of distribution. Dividends are not paid out to contractowners as
additional 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
substitutions for the trust 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 contract). We cannot substitute shares of one fund for another without the
approval by the SEC. We will also notify you.
9
<PAGE>
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 incur certain costs
and expenses for the distribution and administration of the contracts and for
providing the benefits payable thereunder. More particularly, our
administrative services include: processing applications for and issuing the
contracts, processing purchases and redemptions of fund shares as required
(including dollar cost averaging, cross-reinvestment and automatic withdrawal
services), maintaining records, administering annuity payouts, furnishing
accounting and valuation services (including 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, upon whose lives annuity payouts under contract are based, live
longer than we assumed when we calculated our guaranteed rates (these rates are
incorporated in the contract and cannot be changed); the risk that death
benefits paid will exceed the actual account value; and the risk that our costs
in providing the services will exceed our revenues from the contract charges
(which we cannot change). However, if the charges deducted prove more than
sufficient to cover our risks, we will keep the profit. 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 SEI Variable Annuity
We deduct from the VAA an amount, computed daily, which is equal to an annual
rate depending on the death benefit option elected of the daily net asset
value. The charge includes a 0.15% administrative charge and a mortality and
expense risk charge. The mortality and expense risk charge is .20% for the
account value death benefit option; .25% for the return of premium death
benefit option; .35% for the annual step-up death benefit option and .50% for
the 5% step-up death benefit option.
Account fee
For contracts with an account value of $50,000 or less, during the accumulation
period, we will deduct $40 from the account value on each contract anniversary
to compensate us for the administrative services provided to you; this $40
account fee will also be deducted from the account value upon surrender. This
fee may be lower in certain states, if required. The account fee will be waived
for any contract with an account value that is greater than $50,000 on the
contract anniversary.
Deductions for premium taxes
Any premium tax or other tax levied by any government entity as a result of the
existence of the contracts of the VAA will be deducted from the 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
administration interpretation or by judicial action. These premium taxes
generally depend upon the law of your state of residence. The tax ranges from
0.5% to 5.0%.
Other charges and deductions
There are deductions from and expenses paid out of the assets of the underlying
trust that are more fully described in the prospectus for the trust.
Additional information
The charges described previously may be reduced or eliminated for any
particular contract. However, these charges will be reduced only to the extent
that we anticipate lower distribution and/or administrative expenses, or that
we perform fewer sales or administrative services than those originally
contemplated in establishing the level of those charges. Lower distribution and
administrative expenses may be the result of economies associated with (1) the
use of mass enrollment procedures, (2) the performance of administrative or
sales functions by the employer, (3) the use by an employer of automated
techniques in submitting deposits or information related to deposits on behalf
of its employees or (4) any other circumstances which reduce distribution or
administrative expenses. The exact amount of charges applicable to a particular
contract will be stated in that contract.
The contracts
Purchase of contracts
If you wish to purchase a contract, you must apply for it through a sales
representative authorized by us. The completed application is sent to us and we
decide whether to accept or reject it. If the application is accepted, a
contract is prepared and executed by our legally authorized officers. The
contract is then sent to you through your sales representative. See
Distribution of the contracts.
When a completed application and all other information necessary for processing
a purchase order is received, an initial purchase payment will be priced no
later than two business days after we receive the order. While attempting to
finish an incomplete application, we may hold the initial purchase payment for
no more than five business days. If the incomplete application
10
<PAGE>
cannot be completed within those five days, you will be informed of the
reasons, and the purchase payment will be returned immediately. Once the
application is complete, the initial purchase payment must be priced within two
business days.
Who can invest
To apply for a contract, you must be of legal age in a state where the
contracts may be lawfully sold and also be eligible to participate in any of
the qualified or nonqualified plans for which the contracts are designed. The
contractowner, joint owner and annuitant must be less than age 91.
Purchase payments
Purchase payments are payable to us at a frequency and in an amount selected by
you in the application. The minimum initial purchase payment is $25,000. The
minimum payment to the contract at any one time must be at least $100 ($25 if
transmitted electronically). Purchase payments in total may not exceed
$2,000,000 for an owner or $1,000,000 for each joint owner without our
approval. We may terminate the contract as allowed by your state's non-
forfeiture law for individual deferred annuities. Payments may be made or, if
stopped, resumed at any time until the annuity commencement date, the surrender
of the contract, maturity date or the payment of any death benefit, whichever
comes first.
Valuation date
Accumulation 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 purchase payments
Purchase payments are placed into the VAA's subaccounts, each of which invests
in shares of its corresponding fund of the trust, according to your
instructions.
The minimum amount of any purchase payment that can be put into any one
subaccount is $20. Upon allocation to a subaccount, purchase payments are
converted into accumulation units. The number of accumulation units credited is
determined by dividing the amount
allocated to each subaccount by the value of an accumulation unit for that
subaccount on the valuation date on which the purchase payment is received at
our home office if received before 4:00 p.m., New York time. If the purchase
payment is received at or after 4:00 p.m., New York time, we will use the
accumulation unit value computed on the next valuation date. The number of
accumulation 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
accumulation unit will vary depending not only upon how well the underlying
fund's investment perform, but also upon the expenses of the VAA and the
underlying funds.
Valuation of accumulation units
Purchase payments allocated to the VAA are converted into accumulation units.
This is done by dividing each purchase payment by the value of an accumulation
unit for the valuation period during which the purchase payment 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
beginning of the valuation period by the net asset value per share of the
fund at the end of the valuation period, and adding any dividend or other
distribution 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 daily mortality and expense risk charge and the daily administrative charge
multiplied by the number of calendar days in the valuation period. Because a
different daily charge is made for contracts with different death benefit
options, contracts with different death benefit options will have different
corresponding accumulation unit values on any given day.
Transfers on or before the annuity commencement date
You may transfer all or a portion of your investment from one subaccount to
another. A transfer involves the surrender of accumulation units in one
subaccount and the purchase of accumulation units in the other subaccount. A
transfer will be done using the respective accumulation unit values determined
at the end of the valuation date on which the transfer request is received.
Currently, there is no charge for a transfer. However, we reserve the right to
impose a charge in the future for transfers.
Transfers between subaccounts are restricted to twelve times every contract
year. We reserve the right to waive this twelve-time limit. This limit does not
apply to
11
<PAGE>
transfers made under dollar cost averaging, cross reinvestment, or portfolio
rebalancing program or under the asset allocation portfolios elected on forms
available from us. (See Description of the trust for information on the asset
allocation portfolios and the SAI for information on the other programs.) The
minimum amount that may be transferred between subaccounts is $300 (or the
entire amount in the subaccount, if less than $300). If the transfer from a
subaccount would leave you with less than $300 in the subaccount, we may
transfer the entire balance of the subaccount.
A transfer request may be made to our home office using written, telephone or
electronic instructions, if the appropriate authorization is on file with us.
In order to prevent unauthorized or fraudulent telephone or electronic
transfers, we may require the user to provide certain identifying information
before we will act upon their instructions. We may also assign the
contractowner a Personal Identification Number (PIN) to serve as
identification. We will not be liable for following instructions we reasonably
believe are genuine. Telephone requests may be recorded and written
confirmation of all transfer requests will be mailed to the contractowner on
the next valuation date. Telephone and electronic transfers will be processed
on the valuation date that they are received when they are received at our
customer service center before 4 p.m. New York time.
When thinking about a transfer of account value, you should consider the
inherent risk involved. Frequent transfers based on short-term expectations may
increase the risk that a transfer will be made at an inopportune time. Lincoln
Life may allow more than twelve transfers in any contract year. This contract
is not designed for professional market timing organizations or other entities
using programmed and frequent transfers.
Repeated patterns of frequent transfers are disruptive to the operation of the
sub-accounts, and should Lincoln Life become aware of such disruptive
practices, Lincoln Life may refuse to permit such transfers.
Payment or transfer may be delayed as permitted by the 1940 Act.
Transfers after the annuity commencement date
You may transfer all or a portion of your investment in one subaccount to
another subaccount in the VAA or to the fixed side of the contract. Those
transfers will be limited to three times per contract year. Currently, there is
no charge for those transfers. However, we reserve the right to impose a
charge.
No transfers are allowed from the fixed side of the account to the subaccounts.
Death benefit before the annuity commencement date
You may designate a beneficiary during your lifetime and change the beneficiary
by filing a written request with our home office. Each change of beneficiary
revokes any previous designation. We reserve the right to request that you send
us the contract for endorsement of a change of beneficiary.
Upon the death of the contractowner, a death benefit will be paid to the
beneficiary. Upon the death of a joint owner, the death benefit will be paid to
the surviving joint owner. Upon the death of an annuitant who is not the
contractowner or joint owner, a death benefit may be paid to the contractowner
(and joint owner, if applicable, in equal shares). If the contractowner is a
corporation or other non-individual (non-natural person), the death of the
annuitant will be treated as death of the contractowner.
If the death occurs before the annuity commencement date, the death benefit
paid will depend on the death benefit option in effect on the day on which we
approve payment of the claim. Four death benefit options are available:
Account Value death benefit option: The death benefit is equal at all times to
the account value on the date on which the death claim is approved by us for
payment.
Return of Premium death benefit option: The death benefit is equal to the
greater of the account value on the date on which the death claim is approved
by us for payment or the sum of all purchase payments minus withdrawals,
partial annuitizations, and premium tax incurred.
Annual Step-Up death benefit option: The death benefit is equal to the greatest
of three amounts:
a) the account value on the date on which the death claim is approved by us for
payment;
b) the sum of all purchase payments minus withdrawals, partial annuitizations,
and premium tax incurred; or
c) the highest account value on any contract anniversary prior to the 81st
birthday of the deceased, increased by purchase payments and decreased by
partial withdrawals, partial annuitizations, and premium tax incurred
subsequent to the contract anniversary on which the highest account value is
obtained.
5% Step-Up death benefit option: The death benefit is equal to the greatest of
four amounts:
a) the account value on the date on which the death claim is approved by us for
payment;
b) the sum of all purchase payments minus withdrawals, partial annuitizations,
and premium tax incurred;
c) the highest account value on any contract anniversary prior to the 81st
birthday of the deceased, increased by purchase payments and decreased by
partial withdrawals, partial annuitizations, and premium tax incurred
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subsequent to the contract anniversary on which the highest account value is
obtained; or
d) the accumulation of all purchase payments minus the accumulation of all
withdrawals, partial annuitizations and premium tax; where each purchase
payment, withdrawal, partial annuitization and premium tax will be
accumulated daily at an annual rate of 5% from the date of the purchase
payment, withdrawal, partial annuitization and premium tax until the earlier
of the date of death of the deceased (owner, joint owner or annuitant) or
the contract date anniversary immediately preceding the 81st birthday of the
deceased (owner, joint owner, or annuitant) except that the accumulation of
any purchase payment, withdrawal, partial annuitization and premium tax will
not exceed 200% of that purchase payment, withdrawal, partial annuitization
and premium tax.
If there are joint owners, upon the death of the first contractowner, Lincoln
Life will pay a death benefit to the surviving joint owner. The surviving joint
owner will be treated as the primary, designated beneficiary. Any other
beneficiary designation on record at the time of death will be treated as a
contingent beneficiary. If the surviving joint owner is the spouse of the
deceased joint owner he/she may continue the contract as a sole contractowner.
Upon the death of the spouse who continues the contract, Lincoln Life will pay
a death benefit to the designated beneficiary(s).
If the beneficiary is the spouse of the contractowner, then the spouse may
elect to continue the contract as contractowner.
Upon the death of a contractowner, joint owner or annuitant, if the surviving
spouse continues the contract, any portion of the death benefit that would have
been payable (if the contract had not been continued) that exceeds the current
contract value will be credited to the contract. This provision applies only
one time for each contract.
If an annuitant who is not the contractowner or a joint owner dies, then the
contingent annuitant, if named, becomes the annuitant and no death benefit is
payable on the death of the annuitant. If no contingent annuitant is named, the
contractowner (or younger of joint owners) becomes the annuitant.
Alternatively, a death benefit may be paid to the contractowner (and joint
owner, if applicable, in equal shares) upon the death of the annuitant.
Notification of the election of this death benefit must be received by us
within 75 days of the death of the annuitant. If no contractowner is living on
the date of death of the annuitant, the death benefit will be available to the
beneficiary. The contract terminates when any death benefit is paid due to the
death of the annuitant. If the annuitant has been changed subsequent to the
effective date of this contract, unless the change occurred because of the
death of a prior annuitant, the death benefit option in effect will be
terminated and the Account Value death benefit option will become effective as
of the valuation date that the written notification to change the annuitant was
received in the home office.
The value of the death benefit will be determined as of the date on which the
death claim is approved for payment. This payment will occur upon receipt of:
(1) proof (e.g. an original certified death certificate), or any other proof of
death satisfactory to us, of the death; (2) written authorization for payment;
and (3) our receipt of all required claim forms, fully completed. If the
beneficiary is a minor, court documents appointing the guardian/custodian must
be submitted.
When applying for a contract, an applicant may request one of the four death
benefit options available. If no death benefit option is chosen, the Return of
Premium death benefit option will be the death benefit as of the contract date.
After a contract is issued, the contractowner may substitute a lower level
death benefit option for the option currently in effect. For purposes of
determining allowable substitutions, Account Value is the lowest level of death
benefit. Return of Premium is the next highest option, followed by Annual Step-
Up, with 5% Step-Up being the highest level of death benefit. A request for
substitution must be in writing on a form acceptable to us. The current death
benefit option will be discontinued and the new death benefit option will begin
as of the valuation date we receive the substitution request, and we will stop
deducting the charge for the current option and begin deducting the charge for
the new option as of that same date. A death benefit option may be substituted
for the current death benefit option only if the new option provides a lower
level of death benefit. See Charges and deductions.
Unless otherwise provided in the beneficiary designation, one of the following
procedures will take place on the death of a beneficiary:
(1) If any beneficiary dies before the contractowner, that beneficiary's
interest will go to any other beneficiaries named, according to their
respective interest; or
(2) If no beneficiary survives the contractowner, the proceeds will be paid to
the contractowner's estate.
Unless the contractowner has already selected a settlement option, the
beneficiary may choose the method of payment of the death benefit. The death
benefit payable to the beneficiary or joint owner must be distributed within
five years of the contractowner's date of death unless the beneficiary begins
receiving within one year of the contractowner's death the distribution in the
form of a life annuity or an annuity for a designated period not extending
beyond the beneficiary's life expectancy.
The death benefit payable on the death of the annuitant will be distributed in
either a lump sum or under an annuity payout. The annuity payout must be
selected within 60 days after we have approved the death claim.
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If a lump sum settlement is elected, the proceeds will be mailed within seven
days of approval by us of the claim, subject to the laws, regulations and tax
code governing payment of death benefits. This payment may be postponed as
permitted by the Investment Company Act of 1940.
Joint ownership
Joint owners shall be treated as having equal undivided interests in the
contract. Either owner, independently of the other, may exercise ownership
rights in this contract.
Surrenders and withdrawals
Before the annuity commencement date, we will allow the surrender of the
contract or a withdrawal of the account value upon your written request,
subject to the rules discussed below. The surrender/withdrawal option is not
available after the annuity commencement date.
The amount available upon the surrender/withdrawal is the account value less
any applicable fees and taxes at the end of the valuation period during which
the written request for surrender/withdrawal is received at the home office.
Unless a request for withdrawal specifies otherwise, withdrawals will be made
from all subaccounts within the VAA in the same proportion that the amount of
withdrawal bears to the total account value. Unless prohibited,
surrender/withdrawal payments will be mailed within seven days after we receive
a valid written request at the home office. The payment may be postponed as
permitted by the 1940 Act.
The minimum withdrawal is $300. Lincoln Life reserves the right to surrender
this contract if any withdrawal reduces the total account value to a level at
which this contract may be surrendered in accordance with applicable law for
individual deferred annuities.
The tax consequences of a surrender/withdrawal are discussed later, in this
booklet. See Federal tax matters.
Delay of payments
Contract proceeds from the VAA will be paid within seven days, except (i) when
the NYSE is closed (other than weekends and holidays); (ii) times when the
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 contractowners.
Amendment of 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. You will be
notified in writing of any changes, modifications or waivers.
Commissions
Since the financial planners who sell this contract normally charge a fee
directly to their clients for their services, Lincoln Life does not pay any
compensation for the sale of this contract.
Ownership
As contractowner, you have all rights under the contract. According to Indiana
law, the assets of the VAA are held for the exclusive benefit of all
contractowners 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 may not be assigned or transferred. Nonqualified
contracts may not be collaterally assigned. We assume no responsibility for the
validity or affect of any assignment. Consult your tax adviser about the tax
consequence of an assignment.
Contractowner questions
The obligations to purchasers under the contracts are those of Lincoln Life.
Questions about your contract should be directed to us at 1-800-338-0355.
Annuity payouts
When you apply for a contract, you may select any annuity commencement date
permitted by state insurance or tax law.
The contract provides optional forms of payouts of annuities (annuity options),
each of which is payable on a variable basis, fixed basis or a combination of
both as you specify. The contract provides that all or part of the account
value may be used to purchase an annuity.
You may elect annuity payouts in monthly, quarterly, semiannual or annual
installments. If the payouts from any subaccount would be or become less than
$50, we have the right to reduce their frequency until the payouts are at least
$50 each. Following are explanations of the annuity options available.
Annuity options
Life Annuity. This option offers a periodic payout during the lifetime of the
annuitant and ends with the last payout before the death of the annuitant. This
option offers the highest periodic payout since there is no guarantee of a
minimum number of payouts or provision for a death benefit for beneficiaries.
However, there is the risk under this option that the recipient would receive
no payouts if the annuitant dies before the date set for the first payout; only
one payout if death occurs before the second scheduled payout, and so on.
Life Income with Payouts Guaranteed for Designated Period. This option
guarantees periodic payouts during a designated period, usually 10 or 20 years,
and then continues throughout the lifetime of the annuitant. The designated
period is selected by the contractowner.
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Joint Life Annuity. This option offers a periodic payout during the joint
lifetime of the annuitant and a designated joint annuitant. The payouts
continue during the lifetime of the survivor.
Joint Life Annuity with Guaranteed Period. This option guarantees periodic
payouts during a designated period, usually 10 or 20 years, and continues
during the joint lifetime of the annuitant and a designated joint annuitant.
The payouts continue during the lifetime of the survivor. The designated period
is elected by the contractowner.
Joint and Two-Thirds Survivor Annuity. This option provides a periodic payout
during the joint lifetime of the annuitant and a designated joint annuitant.
When one of the joint annuitants dies, the survivor receives two-thirds of the
periodic payout made when both were alive.
Unit Refund Life Annuity. This option offers a periodic payout during the
lifetime of the annuitant with the guarantee that upon death a payout will be
made of the value of the number of annuity units (see Variable annuity payouts)
equal to the excess, if any, of: (a) the total amount applied under this option
divided by the annuity unit value for the date payouts begin, minus (b) the
annuity units represented by each payout to the annuitant multiplied by the
number of payouts paid before death. The value of the number of annuity units
is computed on the date the death claim is approved for payment by the home
office.
General Information
Under the options listed above, you may not make withdrawals. Other options,
with or without withdrawal features, may be made available by us. You may pre-
select an annuity payout option as a method of paying the death benefit to a
beneficiary. If you do, the beneficiary cannot change this payout option. At
death, options are only available to the extent they are consistent with the
requirements of the contract as well as Sections 72(s) and 401(a)(9) of the tax
code, if applicable. The mortality and expense risk charge of 1.20% and the
charge for administrative services of .15% will be assessed on all variable
annuity payouts, including options that may be offered that do not have a life
contingency and therefore no mortality risk.
The annuity commencement date is usually on or before the contractowner's 90th
birthday. You may change the annuity commencement date, change the annuity
option or change the allocation of the investment among subaccounts up to 30
days before the scheduled annuity commencement date, upon written notice to the
home office. You must give us at least 30 days notice before the date on which
you want payouts to begin. If proceeds become available to a beneficiary in a
lump sum, the beneficiary may choose any annuity payout option.
Unless you select another option, the contract automatically provides for a
life annuity with annuity payouts guaranteed for 10 years (on a fixed, variable
or combination fixed and variable basis, in proportion to the account
allocations at the time of annuitization) except when a joint life payout is
required by law. Under any option providing for guaranteed period payouts, the
number of payouts which remain unpaid at the date of the annuitant's death (or
surviving annuitant's death in case of joint life annuity) will be paid to you,
if living, otherwise to your beneficiary as payouts become due.
Variable annuity payouts
Variable annuity payouts will be determined using:
1. The account value on the annuity commencement date; less any applicable
premium taxes;
2. The annuity tables contained in the contract;
3. The annuity option selected; and
4. The investment performance of the fund(s) selected.
To determine the amount of payouts, we make this calculation:
1. Determine the dollar amount of the first periodic payout; then
2. Credit the contract with a fixed number of annuity units equal to the first
periodic payout divided by the annuity unit value; and
3. Calculate the value of the annuity units each period thereafter.
Annuity payouts assume an investment return of 3%, 4%, 5% or 6% per year, as
applied to the applicable mortality table. The higher the assumed interest rate
you choose, the higher your initial annuity payment will be. The amount of each
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, annuity payouts will decrease. The higher the
assumed interest rate, the less likely future annuity payments are to increase,
or the payments will increase more slowly than if a lower assumed rate was
used. 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
uncertain. The Federal income tax rules may vary with your particular
circumstances. This discussion does not include all the Federal income
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tax rules that may affect you and your contract. This discussion also does not
address other Federal tax consequences, or state or local tax consequences,
associated with the contract. As a result, you should always consult a tax
adviser about the application of tax rules to your individual situation.
Taxation of nonqualified annuities
This part of the discussion describes some of the Federal income tax rules
applicable 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.
Tax deferral on earnings
The Federal income tax law generally does not tax any increase in your account
value until you receive a contract distribution. However, for this general rule
to apply, certain requirements must be satisfied:
. An individual must own the contract (or the tax law must treat the contract
as owned by the individual).
. The investments of the VAA must be "adequately diversified" in accordance
with IRS regulations.
. Your 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 the 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
purposes. This means that the entity owning the contract pays tax currently on
the excess of the account value over the purchase payments 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 employer that owns a contract to provide deferred
compensation for its employees.
Investments in the VAA must be diversified
For a contact 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
diversified. If the VAA fails to comply with these diversification standards,
you could be required to pay tax currently on the excess of the account value
over the contract purchase payments. Although we do not control the investments
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 your right to choose particular investments for
the contract. Because the IRS has not issued guidance specifying those limits,
the limits are uncertain and your right to allocate account value among
subaccounts may exceed those limits. If so, you would be treated as the owner
of the assets 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 IRS 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 your
consent to try to prevent the tax law from considering you 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
purchase payments 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, you would be currently taxed on the excess
of the account value over the purchase payments 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 your contract will be treated as an annuity for Federal income tax
purposes and that the tax law will not tax any increase in your account value
until there is a distribution from your contract.
Taxation of withdrawals and surrenders
You will pay tax on withdrawals to the extent your account value exceeds your
purchase payments in the contract. This income (and all other income from your
contract) is considered ordinary income. A higher rate of tax is paid on
ordinary income than on capital gains. You will pay tax on a surrender to the
extent the amount you receive exceeds your purchase payments. In certain
circumstances, your purchase payments are reduced by amounts received from your
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 tax
rates) and treats a portion as a
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nontaxable return of your purchase payments 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 annuity payouts end because of the
annuitant's death and before the total amount of the purchase payments in the
contract has been received, the amount not received generally will be
deductible.
Taxation of death benefits
We may distribute amounts from your contract because of the death of a
contractowner or an annuitant. The tax treatment of these amounts depends on
whether you 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 withdrawal.
. Death after the annuity commencement date--
. If death benefits are received in accordance with the existing annuity
payout option, they are excludible from income if they do not exceed the
purchase payments not yet distributed from the contract. All annuity
payouts in excess of the purchase payments not previously received are
includable in income.
. 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 purchase payments
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 your
contract which you must include in your gross income. The 10% penalty tax does
not apply if one of several exceptions exists. These exceptions include
withdrawals, surrenders or annuity payouts that:
. you receive on or after you reach age 59 1/2,
. you receive because you became disabled (as defined in the tax law),
. a beneficiary receives on or after your death, or
. you receive as a series of substantially equal periodic payments for life (or
life expectancy).
Special rules if you own more than one annuity contract
In certain circumstances, you must combine some or all of the nonqualified
annuity contracts you own in order to determine the amount of an annuity
payout, a surrender or a withdrawal that you must include in income. For
example, if you purchase two or more deferred annuity contracts from the same
life insurance company (or its affiliates) 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, withdrawal or an
annuity payout that you must include in income and the amount that might be
subject to the penalty tax described above.
Loans and assignments
Except for certain qualified contracts, the tax code treats any amount received
as a loan under a contract, and any assignments or pledge (or agreement to
assign or pledge) any portion of your account value, as withdrawal of such
amount or portion.
Gifting a contract
If you transfer ownership of your contract to a person other than your spouse
(or to your former spouse incident to divorce), and receive a payment less than
your account's value, you will pay tax on your account value to the extent it
exceeds your purchase payments not previously received. The new owner's
purchase payments in the contract would then be increased to reflect the amount
included in income.
Charges for a contract's death benefit
Your contract may have a death benefit, for which you may pay an annual charge,
computed daily. It is possible that the tax law may treat all or a portion of
the death benefit charge as a contract withdrawal.
Charges for asset management program
Withdrawals from contract value to pay any fee associated with the asset
management program may be subject to income tax and a 10% penalty tax.
Loss of income deduction
After June 8, 1997, if a contract is issued to a taxpayer that is not an
individual, 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 account value. Entities that are considering purchasing a
contract, or entities that will benefit from someone else's ownership of a
contract, should consult a tax adviser.
Qualified retirement plans
We also designed the contracts for use in connection with certain types of
retirement plans that receive favorable treatment under the tax code. Contracts
issued to or in connection with a qualified retirement plan are called
"qualified contracts." We issue contracts for use with different types of
qualified plans. The Federal income tax rules applicable to those plans are
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complex and varied. As a result, this Prospectus does not attempt to provide
more than general information about use of the contract with various types of
qualified plans. Persons planning to use the contract in connection with a
qualified plan should obtain advice from a competent tax adviser.
Types of qualified contracts and terms of contracts
Currently, we may issue contracts in connection with the following types of
qualified plans:
. Individual Retirement Accounts and Annuities ("Traditional IRAs")
. Roth IRAs
. Savings Incentive Matched Plan for Employees ("SIMPLE 401(k) plans")
. Public School system and tax-exempt organization annuity plans ("403(b)
plans")
. Qualified corporate employee pension and profit sharing plans ("401(a)
plans") and qualified annuity plans ("403(a) plans")
. Self-employed individual plans ("H.R. 10 plans" or "Keogh Plans")
. Deferred compensation plans of state and local governments and tax-exempt
organizations ("457 plans").
Section 403(b) business will normally be accepted only for purchase payments
qualifying as a 403(b) lump sum transfer or rollover. We may issue a contract
for use with other types of qualified plans in the future.
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
contracts vary with the type of plan and contract. For example,
. Federal tax rules limit the amount of purchase payments that can be made, and
the tax deduction or exclusion that may be allowed for the purchase payments.
These limits vary depending on the type of qualified plan and the plan
participant's specific circumstances, e.g., the participant's compensation.
. Under most qualified plans, e.g., 403(b) plans and Traditional IRAs, the
annuitant must begin receiving payments from the contract in certain minimum
amounts by a certain age, typically age 70 1/2. However, these "minimum
distribution 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
or may not permit loans.
Tax treatment of payments
Federal income tax rules generally include distributions from a qualified
contract in the recipient's income as ordinary income. These taxable
distributions will include purchase payments that were deductible or excludible
from income. Thus, under many qualified contracts the total amount received is
included in income since a deduction or exclusion from income was taken for
purchase payments. There are exceptions. For example, you do 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
minimum 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
qualified 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 depending on the type of qualified contract you purchase. For example, in
the case of an IRA, exceptions provide that the penalty tax does not apply to a
withdrawal, surrender or annuity payout:
. received on or after the annuitant reaches age 59 1/2,
. received on or after the annuitant's death or because of the annuitant's
disability (as defined in the tax law),
. received as a series of substantially equal periodic payments for the
annuitant'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
requirements of the exception may vary.
18
<PAGE>
Transfers and direct rollovers
In many circumstances, money may be moved between qualified contracts and
qualified plans by means of a rollover or transfer. Special rules apply to such
rollovers and transfers. If the applicable rules are not followed, you may
suffer adverse Federal income tax consequences, including paying taxes which
might not otherwise have had to be paid. A qualified adviser should always be
consulted before you move or attempt to move funds between any qualified plan
or contract and another qualified plan or contract.
The direct rollover rules apply to certain payments (called "eligible rollover
distributions") from section 401(a) plans, section 403(a) or (b) plans, H.R. 10
plans and contracts used in connection with these types of plans. (The direct
rollover rules do not apply to distributions from IRAs or section 457 plans.)
The direct rollover rules require that we withhold Federal income tax equal to
20% of the eligible rollover distribution from the distribution amount, unless
you elect to have the amount directly transferred to certain qualified plans or
contracts. Before we send a rollover distribution, we will provide the
recipient with a notice explaining these requirements and how the 20%
withholding can be avoided by electing a direct rollover.
The death benefit and IRAs
Pursuant to IRS regulations, IRAs may not invest in life insurance contracts.
We do not believe that these regulations prohibit the death benefit from being
provided under the contracts when we issue the contract as Traditional IRAs or
Roth IRAs. However, the law is unclear and it is possible that the presence of
the death benefit under a contract issued as a Traditional IRA or Roth IRA
could result in increased taxes to you.
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 distributee notifies us at or
before the time of the distribution that tax is not to be withheld. 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
recipient an explanation of the withholding requirements.
Tax status of Lincoln Life
Under existing Federal income tax laws, Lincoln Life does not pay tax on
investment 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
income 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 law
The above discussion is based on the tax code, IRS regulations and
interpretations 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 trust shares held in the VAA at meetings
of the shareholders of the trust. The voting will be done according to the
instructions of contractowners who have interests in the subaccounts which
invest in classes of funds of the trust. If the 1940 Act or any regulation
under it should be amended or if present interpretations should be amended or
if present interpretations should change, and if as a result we determine that
we are permitted to vote the trust shares in our own right, we may elect to do
so.
The number of votes which you have the right to cast will be determined by
applying your 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.
Trust shares of a class 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, each person having a voting interest
in a subaccount will receive proxy voting material, reports and other materials
relating to the trust. Since the trust engages in shared funding, other persons
or entities besides Lincoln Life may vote trust shares. See Sale of fund
shares.
Distribution of the contracts
Lincoln Life is the distributor and principal underwriter of the contracts.
Under an agreement with Lincoln Life, SEI Investment Distribution Co. (SEI)
will assist Lincoln Life in forming the selling group. SEI will also perform
certain functions in support of the selling group. The contracts will be sold
by properly licensed registered representatives of independent broker-dealers
which in turn have selling agreements with Lincoln Life and have been licensed
by state insurance departments to represent us. Lincoln Life will offer the
contracts in all states it is licensed to do business.
19
<PAGE>
Return privilege
Within the free-look period after you receive the contract, you may cancel it
for any reason by delivering or mailing it postage prepaid, to the home office
at P.O. Box 7878, 1300 South Clinton Street, Fort Wayne, Indiana, 46801. A
contract canceled under this provision will be void. With respect to the VAA,
except as explained in the following paragraph, we will return the account
value as of the date of receipt of the cancellation, plus any premium taxes
which had been deducted. A purchaser who participates in the VAA is subject to
the risk of a market loss during the free-look period.
For contracts written in those states whose laws require that we assume this
market risk during the free-look period, a contract may be canceled, subject to
the conditions explained before, except that we will return only the purchase
payment(s).
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
Insurance Department 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
responsible 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 will mail to you, at your last known address of record at the home
office, at least semiannually after the first contract year, reports containing
information required that Act or any other applicable law or regulation.
Other information
A Registration Statement has been filed with the SEC, under the Securities Act
of 1933 as amended, for the contracts being offered here. This Prospectus does
not contain all the information in the Registration Statement, its amendments
and exhibits. Please refer to the Registration Statement for further
information about the VAA, Lincoln Life and the contracts offered. Statements
in this Prospectus about the content of contracts and other legal instruments
are summaries. For the complete text of those contracts and instruments, please
refer to those documents as files with the SEC.
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.
The fund may also offer shares of the funds to other segregated investment
accounts.
Legal proceedings
Lincoln Life is involved in various pending or threatened legal proceedings
arising from the conduct of its business. Most of those proceedings are routine
and in the ordinary course of business. In some instances they include claims
for unspecified or substantial punitive damages and similar types of relief in
addition to amounts 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 effect on
the financial position of Lincoln Life.
Lincoln Life is presently defending several 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
substantial, the cases are in the preliminary stages of litigation, and it is
premature to make assessments about potential loss, if any. Management is
defending these suits vigorously. The amount of liability, if any, which may
ultimately arise as a result of these suits cannot be reasonably determined at
this time.
20
<PAGE>
Statement of additional
information table of
contents for Variable Annuity Account T SEI Variable Annuity
<TABLE>
<CAPTION>
Item
-----------------------------------------
<S> <C>
General information and history of
Lincoln Life B-2
-----------------------------------------
Special terms B-2
-----------------------------------------
Services B-2
-----------------------------------------
Principal underwriter B-2
-----------------------------------------
Purchase of securities being offered B-2
-----------------------------------------
</TABLE>
For a free copy of the SAI please see page one of this booklet.
<TABLE>
<CAPTION>
Item
--------------------------------------
<S> <C>
Calculation of investment results
B-2
--------------------------------------
Annuity payouts B-4
--------------------------------------
Advertising and sales literature B-4
--------------------------------------
Financial statements B-6
--------------------------------------
</TABLE>
21
<PAGE>
The Lincoln National Life Insurance Company
Attn: SEI Customer Service
P. O. Box 7878
Fort Wayne, IN 46801
7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7
PLACE
STAMP
HERE
POSTAL SERVICES
WILL NOT
DELIVER
UNLESS STAMPED
<PAGE>
7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7
STATEMENT OF ADDITIONAL INFORMATION REQUEST CARD
SEI VARIABLE ANNUITY
(LINCOLN LIFE VARIABLE ANNUITY ACCOUNT T)
Please send me a copy of the current Statement of Additional Information
for SEI VARIABLE ANNUITY. (Please print)
Name: ____________________________________________________________________
Address: _________________________________________________________________
City: ______________________________________________________ State: Zip:
Fee Based
<PAGE>
SEI Variable Annuity
Lincoln Life
Variable Annuity Account T (Registrant)
The Lincoln National
Life Insurance Company (Depositor)
Statement of Additional Information (SAI)
This Statement of Additional Information should be read in conjunction with the
Prospectus of Lincoln Life Variable Annuity Account T dated , 2000.
You may obtain a copy of the SEI Variable Annuity Prospectus on request and
without charge. Please write, The Lincoln National Life Insurance Company, P.O.
Box 7878, Fort Wayne, Indiana 46801 or call 1-800-338-0355.
Table of Contents
<TABLE>
<CAPTION>
Item Page
-----------------------------------------------------
<S> <C>
General information and history of Lincoln Life B-2
-----------------------------------------------------
Special terms B-2
-----------------------------------------------------
Services B-2
-----------------------------------------------------
Principal underwriter B-2
-----------------------------------------------------
Purchase of securities being offered B-2
-----------------------------------------------------
</TABLE>
This SAI is not a Prospectus.
The date of this SAI is , 2000.
<TABLE>
<CAPTION>
Item Page
---------------------------------------
<S> <C>
Calculation of investment results
B-2
---------------------------------------
Annuity payouts B-4
---------------------------------------
Advertising and sales literature B-4
---------------------------------------
Financial statements B-6
---------------------------------------
</TABLE>
B-1
<PAGE>
General information
and history of Lincoln National Life Insurance Company (Lincoln Life)
The Lincoln National Life Insurance Company (Lincoln Life), organized in 1905,
is an Indiana stock insurance corporation, engaged primarily in the direct
insurance of life insurance contracts and annuities, and is also a
professional reinsurer. Lincoln Life is wholly owned by Lincoln National
Corporation (LNC), a publicly held insurance and financial services holding
company domiciled in Indiana.
Special terms
The special terms used in this SAI are the ones defined in the Prospectus. In
connection with the term, valuation date, the New York Stock Exchange is
currently closed on weekends and on these holidays: New Year's Day, Martin
Luther King's Birthday, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. If any of
these holidays occurs on a weekend day, the Exchange may also be closed on the
business day occurring just before or just after the holiday.
Services
Independent auditors
The statutory-basis financial statements of Lincoln Life appearing in this SAI
and Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report 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
report given on their authority as experts in accounting and auditing.
Keeper of records
All accounts, books, records and other documents which are required to be
maintained for the VAA are maintained by Lincoln Life or by third parties
responsible to Lincoln Life. We have entered into an agreement with the
Delaware Management Company, 2005 Market Street, Philadelphia, PA 19203, to
provide accounting services to the VAA. No separate charge against the assets
of the VAA is made by Lincoln Life for this service.
Principal underwriter
Lincoln Life is the principal underwriter for the contracts, which are offered
continuously. SEI Investment Distribution Co. (SEI) will assist Lincoln Life
in forming the selling group. SEI will also perform certain functions in
support of the selling group.
Purchase of securities being offered
The contracts are offered to the public through certain securities
broker/dealers who have entered into selling agreements with Lincoln Life and
whose personnel are legally authorized to sell annuity products.
Both before and after the annuity commencement date, there are exchange
privileges between variable subaccounts, subject to restrictions set out in
the Prospectus. See The contracts, in the Prospectus. No exchanges are
permitted between the VAA and other variable separate accounts.
The offering of the contracts is continuous.
Calculation of investment results
No performance data is included because, as of the date hereof, the VAA and
the funds have not been in operation long enough to provide appropriate
numbers. Nonstandardized performance data will be accompanied by standard
performance data once available.
Once available, the paragraphs set forth below will present performance
information for the VAA and the variable subaccounts calculated in several
different ways. Paragraph (A) will show the historical performance of each
subaccount over the periods indicated. The information that will be presented
in Paragraph (A) is referred to as "standard performance" because it is
calculated in accordance with formulas prescribed by the SEC. The standard
performance of each subaccount will be calculated with each of the death
benefit options. Standard performance is described in Paragraph (B). Under
rules prescribed by the SEC, standard performance must be included in certain
advertising material that discusses the performance of the VAA and the
subaccounts.
Paragraph (C) will show additional "non-standardized" performance information
(i.e., performance information not calculated in accordance with SEC
guidelines) for each of the variable subaccounts that may
B-2
<PAGE>
be used to advertise the performance of the VAA and the variable subaccounts.
THIS INFORMATION DOES NOT INDICATE OR REPRESENT FUTURE PERFORMANCE.
(A) Standard Performance Data as of December 31, XXXX (when available)
(B) Formulas
Average annual total return for each period was determined by finding the
average annual compounded rate of return over each period that would equate the
initial amount invested to the ending redeemable value for that period,
according to the following formula--
P(1 + T)n = ERV
Where: P = a hypothetical initial purchase payment of $1,000
T = average annual total return for the period in question
n = number of years
ERV = redeemable value (as of the end of the period in question) of a
hypothetical $1,000 purchase payment made at the beginning of the 1-
year, 5-year, or 10-year period in question (or fractional portion
thereof)
(C) Other Non-Standardized investment results:
The VAA may illustrate its results over various periods and compare its results
to indices and other variable annuities in sales materials including
advertisements, brochures and reports. Such results may be computed on a
cumulative and/or annualized basis.
Cumulative quotations are arrived at by calculating the change in the
accumulation unit value between the first and last day of the base period being
measured, and expressing the difference as a percentage of the unit value at
the beginning of the base period.
Annualized quotations are arrived at by applying a formula which determines the
level rate of return which, if earned over the entire base period, would
produce the cumulative return.
B-3
<PAGE>
Annuity payouts
Variable annuity payouts
Variable annuity payouts will be determined on the basis of: (1) the dollar
value of the contract on the annuity commencement date; (2) the annuity tables
contained in the contract; (3) the type of annuity option selected; and (4)
the investment results of the fund(s) selected. In order to determine the
amount of variable annuity payouts, Lincoln Life makes the following
calculation: first, it determines the dollar amount of the first payout;
second, it credits the contract with a fixed number of annuity units based on
the amount of the first payout; and third, it calculates the value of the
annuity units each period thereafter. These steps are explained below.
The dollar amount of the first periodic variable annuity payout is determined
by applying the total value of the accumulation units credited under the
contract valued as of the annuity commencement date (less any premium taxes)
to the annuity tables contained in the contract. The first variable annuity
payout will be paid 14 days after the annuity commencement date. This day of
the month will become the day on which all future annuity payouts will be
paid. Amounts shown in the tables are based on the 1983 Table "a" Individual
Annuity Mortality Tables, modified, with an assumed investment return at the
rate of 3%, 4%, 5% or 6% per annum. The first annuity payout is determined by
multiplying the benefit per $1,000 of value shown in the contract tables by
the number of thousands of dollars of value accumulated under the contract.
These annuity tables vary according to the form of annuity selected and the
age of the annuitant at the annuity commencement date. The assumed interest
rate described above is the measuring point for subsequent annuity payouts. If
the actual net investment rate (annualized) exceeds the assumed interest rate,
the payout will increase at a rate equal to the amount of such excess.
Conversely, if the actual rate is less than the assumed interest rate, annuity
payouts will decrease. If the assumed interest rate were to be increased,
annuity payouts would start at a higher level but would decrease more rapidly
or increase more slowly.
Lincoln Life may use sex distinct annuity tables in contracts that are not
associated with employer sponsored plans and where not prohibited by law.
At an annuity commencement date, the contract is credited with annuity units
for each variable subaccount on which variable annuity payouts are based. The
number of annuity units to be credited is determined by dividing the amount of
the first periodic payout by the value of an annuity unit in each variable
subaccount selected. Although the number of annuity units is fixed by this
process, the value of such units will vary with the value of the underlying
fund. The amount of the second and subsequent periodic payouts is determined
by multiplying the contractowner's fixed number of annuity units in each
variable subaccount by the appropriate annuity unit value for the valuation
date ending 14 days prior to the date that payout is due.
The value of each variable subaccount's annuity unit will be set initially at
$1.00. The annuity unit value for each variable subaccount at the end of any
valuation date is determined as follows:
1. The total value of fund shares held in a given variable subaccount is
calculated by multiplying the number of shares by the net asset value at
the end of the valuation period plus any dividend or other distribution.
2. The liabilities of the variable subaccount, including daily charges and
taxes, are subtracted.
3. The result is divided by the number of annuity units in the variable
subaccount at the beginning of the valuation period, and adjusted by a
factor to neutralize the assumed investment return in the annuity table.
The value of the annuity units is determined as of a valuation date 14 days
prior to the payment date in order to permit calculation of amounts of annuity
payouts and mailing of checks in advance of their due dates. Such checks will
normally be issued and mailed at least three days before the due date.
Proof of age, sex and survival
Lincoln Life may require proof of age, sex, or survival of any payee upon
whose age, sex, or survival payments depend.
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 is designed to evaluate 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. A.M. Best also provides
certain rankings, to which Lincoln Life intends to refer.
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.
B-4
<PAGE>
EAFE INDEX is prepared by Morgan Stanley Capital International (MSCI). It
measures performance of equity 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 representing over 1,000 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 financial strength rating is an opinion of an insurance
company's financial strength 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 annuities.
STANDARD & POOR'S insurance claims-paying ability rating is an opinion 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 AND 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 is a broad-based measurement of U.S. stock-market
performance based on the weighted average performance of 500 common stocks of
leading companies in leading industries; commonly known as the Standard &
Poor's 500 (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 Corporation, a financial
advisory, securities rating, and publishing firm.
NASDAQ-OTC PRICE 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) is a price-weighted average of 30 actively
traded blue chip stocks, primarily industrials currently including American
Express Company and American Telephone and Telegraph Company. Prepared and
published by Dow Jones & Company, it is the oldest and most widely quoted of
all the market indicators. The average is quoted in points, not dollars.
In its advertisements and other sales literature for the VAA and the trust
funds, Lincoln Life intends to illustrate the advantages of the contracts in a
number of ways:
COMPOUND INTEREST ILLUSTRATIONS will emphasize several advantages of the
variable annuity contract. For example, but not by way of illustration, the
literature may emphasize the potential tax savings through tax deferral; the
potential advantage of the variable annuity account over the fixed account; and
the compounding effect when a client makes regular deposits to his or her
contract.
INTERNET is an electronic communications network which may be used to provide
information regarding Lincoln Life, performance of the variable subaccounts and
advertisement literature.
DOLLAR-COST AVERAGING (DCA) may be used by you to systematically transfer on a
monthly basis amounts from the SEI VP Prime Obligation subaccount into the
other variable subaccounts. We reserve the right to change subaccounts under
this program. You may elect to participate in the DCA program at the time of
application or at anytime before the annuity commencement date by completing an
election form available from us. The minimum amount to be dollar cost averaged
is $1,500 over any period between six and 60 months. Once elected, the program
will remain in effect until the earlier of: (1) the annuity commencement date;
(2) the value of the amount being DCA'd is depleted; or (3) you cancel the
program by written request or by telephone if we have your telephone
authorization on file. Currently, there is no charge for this service. However,
we reserve the right to impose one. A transfer under this program is not
considered a transfer for purposes of limiting the number of transfers that may
be made, or assessing any charges which may apply to transfers. We reserve the
right to discontinue this program at any time. DCA does not assure a profit or
protect against loss.
B-5
<PAGE>
AUTOMATIC WITHDRAWAL SERVICE (AWS) provides an automatic, periodic withdrawal
of account value to you. You may elect to participate in AWS at the time of
application or at any time before the annuity commencement date by sending a
written request to our home office. The minimum account value required to
establish AWS is $10,000. You may cancel or make changes to your AWS program
at any time by sending a written request to our home office. If telephone
authorization has been elected, certain changes may be made by telephone.
Notwithstanding the requirements of the program, any withdrawal must be
permitted by Section 401(a)(9) of the code for qualified plans or permitted
under Section 72 for non-qualified contracts. Currently, there is no charge
for this service. However, we reserve the right to impose one. If a charge is
imposed, it will not exceed $25 per transaction or 2% of the amount withdrawn,
whichever is less. We reserve the right to discontinue this service at any
time.
CROSS-REINVESTMENT SERVICE allows the account value in a designated variable
subaccount that exceeds a certain baseline amount to automatically be
transferred to another specific variable subaccount(s) at specific intervals.
You may elect to participate in cross-reinvestment at the time of application
or at any time before the annuity commencement date by sending a written
request to our home office or by telephone if we have your telephone
authorization on file. You designate the holding account, the receiving
account(s), and the baseline amount. Cross-reinvestment will continue until we
receive authorization to terminate the program.
PORTFOLIO REBALANCING is an option which, if elected by the contractowner, re-
stores to a pre-determined level the percentage of contract value allocated to
each variable account subaccount. This pre-determined level will be the allo-
cation initially selected when the contract was purchased, unless subsequently
changed. The portfolio rebalancing allocation may be changed at any time by
submitting a request to Lincoln Life.
If portfolio rebalancing is elected, all purchase payments allocated to the
variable account subaccounts must be subject to portfolio rebalancing.
Portfolio rebalancing may take place on either a monthly, quarterly, semi-an-
nual or annual basis, as selected by the contractowner. Once the portfolio
rebalancing option is activated, any variable account subaccount transfers ex-
ecuted outside of the portfolio rebalancing option will terminate the portfo-
lio rebalancing option. Any subsequent purchase payment or withdrawal that
modifies the account balance within each variable account subaccount may also
cause termination of the portfolio rebalancing option. Any such termination
will be confirmed to the contractowner. The contractowner may terminate the
portfolio rebalancing option or re-enroll at any time by calling or writing
Lincoln Life.
The portfolio rebalancing program is not available if you have selected one of
the asset allocation portfolios discussed in the prospectus, or following the
annuity commencement date. Currently, there is no charge for this service.
However, we reserve the right to impose one.
The minimum holding account value required to establish cross-reinvestment is
$10,000. Currently, there is no charge for this service. However, we reserve
the right to impose one. A transfer under this program is not considered a
transfer for purposes of limiting the number of transfers that may be made, or
assessing any charges which may apply to transfers. We reserve the right to
discontinue this service at any time.
Lincoln Life's customers. Sales literature for the VAA and the trust's funds
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 Company, 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 sub-classification of those
companies, based upon recognized evaluation criteria (see reference to A.M.
Best Company above). For example, at year-end 1999 Lincoln Life had statutory
admitted assets of over $70 billion.
Financial statements
The statutory-basis financials statements of Lincoln Life appear on the
following pages. Financial Statements for the VAA are not included because, as
of the date hereof, the VAA had no assets, had incurred no liabilities, and
had not yet commenced operations.
B-6
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
--------- ---------
(IN MILLIONS)
---------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $22,985.0 $23,830.9
------------------------------------------------------------
Preferred stocks 253.8 236.0
------------------------------------------------------------
Unaffiliated common stocks 166.9 259.3
------------------------------------------------------------
Affiliated common stocks 604.7 322.1
------------------------------------------------------------
Mortgage loans on real estate 4,211.5 3,932.9
------------------------------------------------------------
Real estate 254.0 473.8
------------------------------------------------------------
Policy loans 1,652.9 1,606.0
------------------------------------------------------------
Other investments 426.6 434.4
------------------------------------------------------------
Cash and short-term investments 1,409.2 1,725.4
------------------------------------------------------------ --------- ---------
Total cash and investments 31,964.6 32,820.8
------------------------------------------------------------
Premiums and fees in course of collection 115.8 33.3
------------------------------------------------------------
Accrued investment income 435.3 432.8
------------------------------------------------------------
Reinsurance recoverable 199.0 171.6
------------------------------------------------------------
Funds withheld by ceding companies 73.5 53.7
------------------------------------------------------------
Federal income taxes recoverable from parent company 61.6 64.7
------------------------------------------------------------
Goodwill 43.1 49.5
------------------------------------------------------------
Other admitted assets 66.7 89.3
------------------------------------------------------------
Separate account assets 46,105.1 36,907.0
------------------------------------------------------------ --------- ---------
Total admitted assets $79,064.7 $70,622.7
------------------------------------------------------------ ========= =========
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $12,184.0 $12,310.6
------------------------------------------------------------
Other policyholder funds 16,589.5 16,647.5
------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 364.0 897.6
------------------------------------------------------------
Funds held under reinsurance treaties 796.9 795.8
------------------------------------------------------------
Asset valuation reserve 490.9 484.5
------------------------------------------------------------
Interest maintenance reserve 72.3 159.7
------------------------------------------------------------
Other liabilities 627.0 504.5
------------------------------------------------------------
Short-term loan payable to parent company 205.0 140.0
------------------------------------------------------------
Net transfers due from separate accounts (896.5) (789.0)
------------------------------------------------------------
Separate account liabilities 46,105.1 36,907.0
------------------------------------------------------------ --------- ---------
Total liabilities 76,538.2 68,058.2
------------------------------------------------------------
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 1,250.0
------------------------------------------------------------
Paid-in surplus 1,942.6 1,930.1
------------------------------------------------------------
Unassigned surplus -- deficit (691.1) (640.6)
------------------------------------------------------------ --------- ---------
Total capital and surplus 2,526.5 2,564.5
------------------------------------------------------------ --------- ---------
Total liabilities and capital and surplus $79,064.7 $70,622.7
------------------------------------------------------------ ========= =========
</TABLE>
See accompanying notes. S-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
--------- --------- --------
(IN MILLIONS)
--------------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $ 7,273.6 $12,737.6 $5,589.0
------------------------------------------------------------
Net investment income 2,203.2 2,107.2 1,847.1
------------------------------------------------------------
Amortization of interest maintenance reserve 29.1 26.4 41.5
------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded 472.3 179.9 99.7
------------------------------------------------------------
Expense charges on deposit funds 146.5 134.6 119.3
------------------------------------------------------------
Separate account investment management and administration
service fees 473.9 396.3 325.5
------------------------------------------------------------
Other income 88.8 31.3 21.3
------------------------------------------------------------ --------- --------- --------
Total revenues 10,687.4 15,613.3 8,043.4
------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 8,504.9 13,964.1 4,522.1
------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses 1,618.3 2,919.4 3,053.9
------------------------------------------------------------ --------- --------- --------
Total benefits and expenses 10,123.2 16,883.5 7,576.0
------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before dividends to
policyholders, income taxes and net realized gain on
investments 564.2 (1,270.2) 467.4
------------------------------------------------------------
Dividends to policyholders 80.3 67.9 27.5
------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before federal income taxes and
net realized gain on investments 483.9 (1,338.1) 439.9
------------------------------------------------------------
Federal income taxes (credit) 85.4 (141.0) 78.3
------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before net realized gain on
investments 398.5 (1,197.1) 361.6
------------------------------------------------------------
Net realized gain on investments, net of income tax expense
and excluding net transfers to the interest maintenance
reserve 114.4 46.8 31.3
------------------------------------------------------------ --------- --------- --------
Net income (loss) $ 512.9 $(1,150.3) $ 392.9
------------------------------------------------------------ ========= ========= ========
</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
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
------------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $2,564.5 $2,968.4 $1,868.0
------------------------------------------------------------
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income (loss) 512.9 (1,150.3) 392.9
------------------------------------------------------------
Difference in cost and admitted investment amounts (101.9) (304.8) (36.2)
------------------------------------------------------------
Nonadmitted assets (22.9) (17.1) (0.4)
------------------------------------------------------------
Regulatory liability for reinsurance 26.0 (35.2) (3.9)
------------------------------------------------------------
Gain on reinsurance of disability income business 71.8 -- --
------------------------------------------------------------
Life policy reserve valuation basis -- (0.4) (0.9)
------------------------------------------------------------
Asset valuation reserve (6.4) (34.5) (36.9)
------------------------------------------------------------
Proceeds from surplus notes from shareholder -- 1,250.0 --
------------------------------------------------------------
Paid-in surplus, including contribution of common stock of
affiliated company in 1997 12.5 108.4 938.4
------------------------------------------------------------
Separate account receivable due to change in valuation -- -- (2.6)
------------------------------------------------------------
Dividends to shareholder (530.0) (220.0) (150.0)
------------------------------------------------------------ -------- -------- --------
Capital and surplus at end of year $2,526.5 $2,564.5 $2,968.4
------------------------------------------------------------ ======== ======== ========
</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
1999 1998 1997
--------- ---------- ---------
(IN MILLIONS)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 7,671.1 $ 13,495.2 $ 6,364.3
------------------------------------------------------------
Allowances and reserve adjustments paid on reinsurance ceded (19.9) (632.4) (649.2)
------------------------------------------------------------
Investment income received 2,168.6 2,003.9 1,798.8
------------------------------------------------------------
Separate account investment management and administration
service fees 470.6 396.3 325.5
------------------------------------------------------------
Benefits paid (8,699.4) (7,395.8) (5,345.2)
------------------------------------------------------------
Insurance expenses paid (1,734.5) (2,909.7) (3,193.0)
------------------------------------------------------------
Proceeds related to sale of disability income business 71.8 -- --
------------------------------------------------------------
Federal income taxes recovered (paid) (81.2) 84.2 (87.0)
------------------------------------------------------------
Dividends to policyholders (82.8) (12.9) (28.4)
------------------------------------------------------------
Other income received and expenses paid, net 252.1 207.0 (8.7)
------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) operating activities 16.4 5,235.8 (822.9)
------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 6,557.7 10,926.5 12,142.6
------------------------------------------------------------
Purchase of investments (5,940.8) (16,950.0) (10,345.0)
------------------------------------------------------------
Other sources (uses) including reinsured policy loans (497.0) (778.3) 529.1
------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) investing activities 119.9 (6,801.8) 2,326.7
------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in 12.5 108.4 --
------------------------------------------------------------
Proceeds from surplus notes from shareholder -- 1,250.0 --
------------------------------------------------------------
Proceeds from borrowings from shareholder 205.0 140.0 120.0
------------------------------------------------------------
Repayment of borrowings from shareholder (140.0) (120.0) (100.0)
------------------------------------------------------------
Dividends paid to shareholder (530.0) (220.0) (150.0)
------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) financing activities (452.5) 1,158.4 (130.0)
------------------------------------------------------------ --------- ---------- ---------
Net increase (decrease) in cash and short-term investments (316.2) (407.6) 1,373.8
------------------------------------------------------------
Cash and short-term investments at beginning of year 1,725.4 2,133.0 759.2
------------------------------------------------------------ --------- ---------- ---------
Cash and short-term investments at end of year $ 1,409.2 $ 1,725.4 $ 2,133.0
------------------------------------------------------------ ========= ========== =========
</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 (the "Company") is a wholly
owned subsidiary of Lincoln National Corporation ("LNC") and is domiciled in
Indiana. As of December 31, 1999, the Company owned 100% of the outstanding
common stock of four insurance company subsidiaries and four non-insurance
subsidiaries. The Company also owned 85% of the common stock of an Internet
distributor of variable annuities.
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 accounting
principles generally accepted in the United States ("GAAP"). The more
significant variances from GAAP are as follows:
INVESTMENTS
Bonds and preferred stocks 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 and preferred stocks 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 a 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
writedowns 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
insurance subsidiaries are carried at their statutory-basis net equity and
the non-insurance subsidiaries are carried at their GAAP-basis net equity,
adjusted for certain items which would be non-admitted under statutory
accounting principles. Both insurance subsidiaries and non-insurance
subsidiaries are presented in the balance sheet as investments in affiliated
common stocks.
S-5
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
POLICY ACQUISITION COSTS
The costs of acquiring and renewing business are expensed when incurred.
Under GAAP, acquisition costs related to traditional life insurance, to the
extent recoverable from future policy revenues, are deferred and amortized
over the premium-paying period of the related policies using assumptions
consistent with those used in computing policy benefit reserves. For
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 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 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 are accounted
for using deposit accounting under GAAP.
S-6
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
INCOME TAXES
Deferred income taxes are not provided for differences between financial
statement amounts and tax bases of assets and liabilities.
POLICYHOLDER DIVIDENDS
Policyholder dividends are recognized when declared rather than over the
term of the related policies.
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
1999 1998 1999 1998 1997
----------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts reported on a statutory-basis $ 2,526.5 $ 2,564.5 $ 512.9 $(1,150.3) $392.9
-----------------------------------------
GAAP adjustments:
Deferred policy acquisition costs,
present value of future profits and
non-admitted goodwill 3,628.2 3,085.2 135.0 48.5 (98.9)
--------------------------------------
Policy and contract reserves (1,943.1) (2,299.9) (97.9) 1,743.4 (48.6)
--------------------------------------
Interest maintenance reserve 72.3 159.7 (86.6) 24.4 58.7
--------------------------------------
Deferred income taxes 244.5 181.6 (117.4) (218.6) 70.3
--------------------------------------
Policyholders' share of earnings and
surplus on participating business (122.7) (132.8) (1.8) 3.2 5.3
--------------------------------------
Asset valuation reserve 490.9 484.5 -- -- --
--------------------------------------
Net realized gain (loss) on investments (186.4) (174.1) (32.4) (116.7) (20.4)
--------------------------------------
Unrealized gain (loss) on investments (555.2) 1,335.1 -- -- --
--------------------------------------
Nonadmitted assets, including
nonadmitted investments 139.6 119.1 -- -- --
--------------------------------------
Investments in subsidiary companies 460.9 490.4 39.1 41.3 (80.5)
--------------------------------------
Surplus notes and related interest (1,250.0) (1,251.5) 1.5 (1.5) --
--------------------------------------
Other, net (61.0) (120.1) 129.8 103.6 (35.0)
-------------------------------------- --------- --------- --------- --------- ------
Net increase (decrease) 918.0 1,877.2 (30.7) 1,627.6 (149.1)
----------------------------------------- --------- --------- --------- --------- ------
Amounts on a GAAP basis $ 3,444.5 $ 4,441.7 $ 482.2 $ 477.3 $243.8
----------------------------------------- ========= ========= ========= ========= ======
</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 or deferred in IMR, where
applicable, and are amortized over the remaining lives of the hedged items
as adjustments to investment income. 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 amortized 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 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 are
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 cash collateral received which is
typically greater than the market value of the related securities loaned. In
other instances, the Company will hold as collateral securities with a
market value at least equal to the securities loaned. Securities held as
collateral are not recorded in the Company's balance sheet in accordance
with accounting guidance for secured borrowings and collateral. 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 reserves released and 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 the
intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of
S-9
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
LNC's common stock at the grant date, or other measurement date, over the
amount an employee or agent 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.
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") effective January 1, 2001. 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.
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
1999 1998 1997
--------------------------------------
(IN MILLIONS)
--------------------------------------
<S> <C> <C> <C>
Income:
Bonds $1,840.6 $1,714.3 $1,524.4
------------------------------------------------------------
Preferred stocks 20.3 19.7 23.5
------------------------------------------------------------
Unaffiliated common stocks 6.3 10.6 8.3
------------------------------------------------------------
Affiliated common stocks 7.8 5.2 15.0
------------------------------------------------------------
Mortgage loans on real estate 321.0 323.6 257.2
------------------------------------------------------------
Real estate 57.8 81.4 92.2
------------------------------------------------------------
Policy loans 101.7 86.5 37.5
------------------------------------------------------------
Other investments 50.6 26.5 28.2
------------------------------------------------------------
Cash and short-term investments 95.9 104.7 70.3
------------------------------------------------------------ -------- -------- --------
Total investment income 2,502.0 2,372.5 2,056.6
------------------------------------------------------------
Expenses:
Depreciation 14.4 19.3 21.0
------------------------------------------------------------
Other 284.4 246.0 188.5
------------------------------------------------------------ -------- -------- --------
Total investment expenses 298.8 265.3 209.5
------------------------------------------------------------ -------- -------- --------
Net investment income $2,203.2 $2,107.2 $1,847.1
------------------------------------------------------------ ======== ======== ========
</TABLE>
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, 1999:
Corporate $17,758.4 $ 229.6 $763.0 $17,225.0
------------------------------------------------
U.S. government 316.8 29.6 21.5 324.9
------------------------------------------------
Foreign government 984.5 49.8 39.9 994.4
------------------------------------------------
Mortgage-backed 3,913.7 46.2 139.0 3,820.9
------------------------------------------------
State and municipal 11.6 -- .5 11.1
------------------------------------------------ --------- -------- ------ ---------
$22,985.0 $ 355.2 $963.9 $22,376.3
========= ======== ====== =========
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
========= ======== ====== =========
</TABLE>
The carrying amounts of bonds in the balance sheets at
December 31, 1999 and 1998 reflect adjustments of
$38,900,000 and $11,800,000, respectively, to decrease
amortized cost as a result of the Securities Valuation
Office of the NAIC ("SVO") designating certain investments
as in or near default.
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1999, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
-------------------------
(IN MILLIONS)
-------------------------
<S> <C> <C>
Maturity:
In 2000 $ 598.0 $ 599.2
------------------------------------------------------------
In 2001-2004 4,359.8 4,313.4
------------------------------------------------------------
In 2005-2009 6,636.0 6,392.9
------------------------------------------------------------
After 2009 7,477.5 7,249.9
------------------------------------------------------------
Mortgage-backed securities 3,913.7 3,820.9
------------------------------------------------------------ --------- ---------
Total $22,985.0 $22,376.3
------------------------------------------------------------ ========= =========
</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 1999,
1998 and 1997 were $5,351,400,000, $9,395,000,000 and
$9,715,000,000, respectively. Gross gains during 1999, 1998
and 1997 of $95,400,000, $186,300,000 and $218,100,000,
respectively, and gross losses of $195,500,000, $138,000,000
and $78,000,000, respectively, were realized on those sales.
At December 31, 1999 and 1998, investments in bonds, with an
admitted asset value of $116,500,000 and $97,800,000,
respectively, were on deposit with state insurance
departments to satisfy regulatory requirements.
Unrealized gains and losses on investments in unaffiliated
common stocks are reported directly in unassigned surplus
and are not reported in the statutory-basis Statements of
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, 1999:
Preferred stocks $253.8 $ 1.3 $31.5 $223.6
----------------------------------------
Unaffiliated common stocks 150.4 34.2 17.7 166.9
----------------------------------------
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
----------------------------------------
</TABLE>
The carrying amount of preferred stocks in the balance
sheets at December 31, 1999 and 1998 reflects adjustments of
$4,100,000 and $5,800,000, respectively, to decrease
amortized cost as a result of the SVO designating certain
investments as low or lower quality.
During 1999, the minimum and maximum lending rates for
mortgage loans were 6.5% and 11.5%, respectively. At the
issuance of a loan, the percentage of loan to value on any
one loan does not exceed 75%. 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)
Components of the Company's investments in real estate are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------------------
(IN MILLIONS)
-------------------
<S> <C> <C>
Occupied by the Company:
Land $ 2.5 $ 2.5
------------------------------------------------------------
Buildings 11.1 9.0
------------------------------------------------------------
Less accumulated depreciation (2.2) (1.7)
------------------------------------------------------------ ------ ------
Net real estate occupied by the Company 11.4 9.8
------------------------------------------------------------
Other:
Land 46.2 93.2
------------------------------------------------------------
Buildings 226.8 413.0
------------------------------------------------------------
Other 4.7 7.9
------------------------------------------------------------
Less accumulated depreciation (35.1) (50.1)
------------------------------------------------------------ ------ ------
Net other real estate 242.6 464.0
------------------------------------------------------------ ------ ------
Net real estate $254.0 $473.8
------------------------------------------------------------ ====== ======
</TABLE>
Net realized capital gains are reported net of federal
income taxes and amounts transferred to the IMR as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------
(IN MILLIONS)
--------------------------------
<S> <C> <C> <C>
Net realized capital gains $ 20.8 $179.7 $209.3
------------------------------------------------------------
Less amount transferred to IMR (net of related taxes
(credits) of ($31.4), $27.3 and $54.0 in 1999, 1998 and
1997, respectively) (58.3) 50.8 100.2
------------------------------------------------------------ ------ ------ ------
79.1 128.9 109.1
Less federal income taxes (credits) on realized gains (35.3) 82.1 77.8
------------------------------------------------------------ ------ ------ ------
Net realized capital gains after transfer to IMR and taxes
(credits) $114.4 $ 46.8 $ 31.3
------------------------------------------------------------ ====== ====== ======
</TABLE>
4. SUBSIDIARIES
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 ("LNY"). The Company also owns 100% of
the outstanding common stock of four non-insurance company
subsidiaries: Lincoln National Insurance Associates
("LNIA"), Sagemark Consulting, Inc. ("Sagemark"), Wakefield
Tower Alpha Limited ("Wakefield"), and Lincoln Realty
Capital
S-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
Corporation ("LRCC"). The Company also owns 85% of one
non-insurance company subsidiary, AnnuityNet, Inc.
(AnnuityNet). Statutory-basis financial information related
to the insurance subsidiaries is summarized as follows (in
millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------
FIRST
PENN LNH&C LNRAC LNY
----------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $1,318.7 $434.6 $443.6 $1,888.6
---------------------------------------------------------
Other assets 40.6 55.5 492.6 403.1
--------------------------------------------------------- -------- ------ ------ --------
Total admitted assets $1,359.3 $490.1 $936.2 $2,291.7
--------------------------------------------------------- ======== ====== ====== ========
Insurance reserves $1,242.2 $394.4 $261.4 $1,802.4
---------------------------------------------------------
Other liabilities 44.3 27.9 614.4 25.6
---------------------------------------------------------
Liabilities related to separate accounts -- -- -- 328.8
---------------------------------------------------------
Capital and surplus 72.8 67.8 60.4 134.9
--------------------------------------------------------- -------- ------ ------ --------
Total liabilities and capital and surplus $1,359.3 $490.1 $936.2 $2,291.7
--------------------------------------------------------- ======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------
FIRST
PENN LNH&C LNRAC LNY
-----------------------------------------------
<S> <C> <C> <C> <C>
Revenues $332.7 $263.3 $ 88.4 $ 313.3
-----------------------------------------------------------
Expenses 329.0 346.9 75.4 291.4
-----------------------------------------------------------
Net realized gains (losses) -- -- .2 (2.0)
----------------------------------------------------------- ------ ------ ------ --------
Net income (loss) $ 3.7 $(83.6) $ 13.2 $ 19.9
----------------------------------------------------------- ====== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------
FIRST
PENN LNH&C LNRAC LNY
----------------------------------
<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>
S-15
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
---------------------------------
FIRST
PENN LNH&C LNRAC LNY
---------------------------------
<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>
AnnuityNet was formed in 1998 for the distribution of
variable annuities over the Internet and is valued on the
equity method (at 85% of GAAP equity) with an admitted asset
value of $2,400,000 at December 31, 1999. LNIA was purchased
in 1998 for $600,000 and is valued on the equity method with
an admitted asset value of $800,000 at December 31, 1999.
Sagemark is a broker dealer and was acquired in connection
with a reinsurance transaction completed in 1998. Sagemark
is valued on the equity method with an admitted asset value
of $6,400,000 at December 31, 1999. Wakefield was formed in
1999 to engage in the ownership and management of
investments and is valued on the equity method with an
admitted asset value of $248,300,000. Wakefield's assets as
of December 31, 1999 consist entirely of investments in
bonds. LRCC was formed in 1999 to engage in the management
of certain real estate investments. It was capitalized with
cash and three real estate investments of $12,700,000 and is
valued on the equity method with an admitted asset value of
$10,900,000.
The carrying value of all affiliated common stocks, was
$604,700,000 and $322,100,000 at December 31, 1999 and 1998,
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, 1999 and 1998 was $970,700,000 and
$631,100,000, respectively.
During 1999, 1998 and 1997 the Company's insurance
subsidiaries paid dividends of $5,200,000, $5,200,000 and
$15,000,000, 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 1999, 1998 and 1997, federal income tax expense (benefit)
incurred totaled $85,400,000, ($141,000,000) and
$78,300,000, respectively. In 1999, capital losses of
$151,700,000 were incurred, and carried back to recover
taxes paid in prior years.
The Company paid $45,300,000, $2,300,000 and $164,500,000 to
LNC in 1999, 1998 and 1997, respectively, in 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
S-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES (CONTINUED)
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
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 "Reinsurance recoverable" includes
amounts recoverable from other insurers for claims paid by
the Company. The balance sheet caption, "Future policy
benefits and claims," and the balance sheet caption "Other
policyholder funds" have been reduced for insurance ceded as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-----------------------
(IN MILLIONS)
-----------------------
<S> <C> <C>
Insurance ceded $5,340.0 $4,081.8
------------------------------------------------------------
Amounts recoverable from other insurers 81.2 79.9
------------------------------------------------------------
</TABLE>
Reinsurance transactions, excluding assumption reinsurance,
included in the income statement caption, "Premiums and
deposits," are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
------------------------------------
(IN MILLIONS)
------------------------------------
<S> <C> <C> <C>
Insurance assumed $2,606.5 $9,018.9 $727.2
------------------------------------------------------------
Insurance ceded 1,675.1 877.1 302.9
------------------------------------------------------------ -------- -------- ------
Net amount included in premiums $ 931.4 $8,141.8 $424.3
------------------------------------------------------------ ======== ======== ======
</TABLE>
The income statement caption, "Benefits and settlement
expenses," is net of reinsurance recoveries of
$2,609,000,000, $2,098,800,000 and $1,240,500,000 for 1999,
1998 and 1997, respectively.
Details underlying the balance sheet caption "Other
policyholder funds" are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------------------------
(IN MILLIONS)
-------------------------
<S> <C> <C>
Premium deposit funds $16,208.3 $16,285.2
------------------------------------------------------------
Undistributed earnings on participating business 346.9 348.4
------------------------------------------------------------
Other 34.3 13.9
------------------------------------------------------------ --------- ---------
$16,589.5 $16,647.5
========= =========
</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, 1999
---------------------------------
NET OF
GROSS LOADING LOADING
---------------------------------
(IN MILLIONS)
---------------------------------
<S> <C> <C> <C>
Ordinary new business $10.8 $ 7.3 $ 3.5
------------------------------------------------------------
Ordinary renewal 54.2 6.8 47.4
------------------------------------------------------------
Group life 13.7 .1 13.6
------------------------------------------------------------ ----- ----- -----
$78.7 $14.2 $64.5
===== ===== =====
</TABLE>
<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>
7. ANNUITY RESERVES
At December 31, 1999, 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 $ 2,427.7 4%
------------------------------------------------------------
At book value, less surrender charge 2,237.3 3
------------------------------------------------------------
At market value 44,076.2 68
------------------------------------------------------------ --------- ---
48,741.2 75
Subject to discretionary withdrawal without adjustment at
book value with minimal or no charge or adjustment 13,486.5 21
------------------------------------------------------------
Not subject to discretionary withdrawal 2,622.4 4
------------------------------------------------------------ --------- ---
Total annuity reserves and deposit fund 64,850.1 100%
------------------------------------------------------------ ===
Less reinsurance 1,548.0
------------------------------------------------------------ ---------
Net annuity reserves and deposit fund liabilities, including
separate accounts $63,302.1
------------------------------------------------------------ =========
</TABLE>
S-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
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 Corporation ("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
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, 1999), and subject to approval by the Indiana Insurance
Commissioner.
The second note for $750,000,000 was issued on December 18, 1998 to LNC in
connection with the Aetna, Inc. ("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, 1999), and subject
to approval by the Indiana Insurance Commissioner.
A summary of the terms of these surplus notes follows (in millions):
<TABLE>
<CAPTION>
PRINCIPAL INCEPTION ACCRUED
OUTSTANDING AT TO DATE INTEREST AT
PRINCIPAL DECEMBER 31, CURRENT YEAR INTEREST DECEMBER 31,
DATE ISSUED AMOUNT OF NOTE 1999 INTEREST PAID PAID 1999
----------- -------------- -------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
January 5, 1998 $ 500.0 $ 500.0 $ 32.8 $ 65.1 $ --
-------------------------------
December 18, 1998 750.0 750.0 46.7 46.7 --
-------------------------------
</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,
1999, 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, 1999 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. The time frame for
unassigned surplus to return to a positive position is dependent upon future
statutory earnings and dividends paid to LNC. 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-19
<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). Effective July 1, 1999, the
agents' postretirement plan was changed to require agents retiring on or
after that date to pay the full premium costs. This change to the plan
resulted in a one-time curtailment gain of $1,400,000 in 1999. 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 Operations 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. Options issued subsequent to 1991
are exercisable in 25% increments on the option issuance anniversary in the
four years following issuance.
As of December 31, 1999, there were 2,072,087 and 1,397,005 shares of LNC
common stock subject to options granted to Company employees and agents,
respectively, under the stock option incentive plans of which 919,749 and
241,097, respectively, were exercisable on that date. The exercise prices of
the outstanding options range from $12.50 to $56.75. During 1999, 1998 and
1997, there were 318,421, 136,469 and 170,789 options exercised,
respectively, and 82,024, 18,288 and 1,846 options 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, 1999 and 1998 is
$221,600,000 and $670,100,000, 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.
PERSONAL ACCIDENT PROGRAMS
In the past, the Company and its wholly owned subsidiary, LNH&C, accepted
personal accident reinsurance programs from other insurance companies. Most
of these programs were presented by independent brokers who represented 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. The liabilities for these
programs, net of related assets recoverable from reinsurers, were
$174,700,000 and $177,400,000 at December 31, 1999 and 1998, respectively.
Settlement activities relating to the Company's participation in workers'
compensation carve-out (i.e., life and health risks associated with workers'
compensation coverage) programs managed by Unicover Managers, Inc. have
allowed the Company to evaluate the possibility of settlements and to
estimate its potential costs to settle Unicover-related exposures. As of
December 31, 1999, a liability of $62,200,000 has been established for the
S-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
settlement of the Company's exposure to the Unicover programs.
These amounts are based on various estimates that are subject to
considerable uncertainty. Accordingly, the liabilities may prove to be
deficient or excessive. However, it is management's opinion that future
developments in these programs will not materially affect the financial
position of the Company.
HMO EXCESS-OF-LOSS REINSURANCE PROGRAMS
In light of the continued volatility in the HMO excess-of-loss line of
business, LNH&C discontinued writing new HMO excess-of-loss reinsurance
programs in the third quarter of 1999. The liability for HMO claims, net of
the related assets for amounts recoverable from reinsurers, was $101,900,000
and $55,900,000 at December 31, 1999 and 1998, respectively. LNH&C reviews
reserve levels on an ongoing basis. The liability is based on the assumption
that recent experience will continue in the future. If claims and loss
ratios fluctuate significantly from the assumptions underlying the reserves,
adjustments to reserves could be required in the future. Accordingly, the
liability may prove to be deficient or excessive. However, it is
management's opinion that such future developments will not materially
affect the financial position of the Company.
MARKETING AND COMPLIANCE MATTERS
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 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 1999, 1998 and 1997 was
$38,900,000, $34,000,000 and $29,300,000, respectively. Future minimum
rental commitments are as follows (in millions):
<TABLE>
<S> <C>
2000 $ 28.7
--------------------------------
2001 28.8
--------------------------------
2002 27.5
--------------------------------
2003 26.2
--------------------------------
2004 26.5
--------------------------------
Thereafter 123.5
-------------------------------- ------
$261.2
======
</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
S-21
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
operations. Total costs incurred in 1999 and 1998 were $67,400,000 and
$54,800,000, respectively. 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. The Company limits its maximum coverage that
it retains on an individual to $10,000,000. Portions of the Company's
deferred annuity business have also been coinsured with other companies to
limit its exposure to interest rate risks. At December 31, 1999, the
reserves associated with these reinsurance arrangements totaled
$1,422,800,000. 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 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 States 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 LNY reinsured 100% of a block of individual life
insurance and annuity business from 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 $4,780,300,000 that became
the Company's obligation. The Company also received assets, measured on a
historical statutory-basis, equal to the liabilities.
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.
In 1999, the Company and CIGNA reached an agreement through arbitration on
the final statutory-basis values of the assets and liabilities reinsured. As
a result, the Company's ceding commission for this transaction was reduced
by $58.6 million.
Subsequent to this transaction, the Company and LNY announced that they had
reached an agreement to sell the administration rights to a variable 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 September 1, 1998.
On October 1, 1998, the Company and LNY entered into an indemnity
reinsurance transaction whereby the Company and LNY reinsured 100% of a
block of individual life insurance business from Aetna. 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 $2,813,800,000
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 LNY 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.
On November 1, 1999, the Company closed its previously announced agreement
to transfer a block of disability income business to MetLife. Under this
indemnity reinsurance agreement, the Company transferred $490,800,000 of
cash to MetLife representing the statutory reserves transferred on this
business less $17,800,000 of purchase price consideration. A gain on the
reinsurance transaction of $71,800,000 was recorded directly in unassigned
S-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
surplus and will be recognized in statutory earnings over the life of the
business.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1999, the Company provided $270,000,000 of
statutory-basis surplus relief to other insurance companies under
reinsurance transactions. The Company 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 $17,300,000 and $43,400,000 at December 31, 1999
and 1998, respectively.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1999, 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, 1999, 29% of such mortgages ($1,212,700,000) 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 $70,000,000.
At December 31, 1999, 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 certain 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
proceedings will not have a material adverse affect on the financial
position of the Company.
With the recent filing of a lawsuit alleging fraud in the sale of interest
sensitive universal and whole life insurance policies, the Company now has
several such actions pending. While each of these lawsuits seeks class
action status, the court has not certified a class in any of them. In each
of these lawsuits, plaintiffs seek unspecified damages and penalties for
themselves and on behalf of the putative class. While relief sought in these
lawsuits is substantial, they are in the discovery stages of litigation, and
it is premature to make assessments about potential loss, if any. Management
intends to defend these lawsuits vigorously. The amount of liability, if
any, which may arise as a result of these lawsuits cannot be reasonably
estimated at this time. In another lawsuit, a settlement has been
preliminarily approved by the court, and a class has been conditionally
certified for settlement purposes. Two other similar lawsuits previously
have been resolved and dismissed.
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
S-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
credit exposure. Outstanding guarantees with off-balance-sheet risks at
December 31, 1999 relate to mortgage loan pass-through certificates. The
Company has sold commercial mortgage loans through grantor trusts that
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, 1999 and 1998 were $25,900,000 and $30,900,000, 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, 1999 and 1998.
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 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 being hedged by
such contracts.
Outstanding derivatives with off-balance-sheet risks, shown in notional or
contract amounts along with their carrying value and estimated fair values,
are as follows:
<TABLE>
<CAPTION>
ASSETS (LIABILITIES)
---------------------------------
NOTIONAL OR CARRYING FAIR CARRYING FAIR
CONTRACT AMOUNTS VALUE VALUE VALUE VALUE
-----------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1998 1999 1999 1998 1998
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate cap agreements $2,508.8 $4,108.8 $ 5.2 $ 3.2 $ 9.3 $ .9
---------------------------------
Swaptions 1,837.5 1,899.5 12.2 10.8 16.2 2.5
---------------------------------
Interest rate swaps 630.9 258.3 -- (19.5) -- 9.9
---------------------------------
Put options 21.3 21.3 -- 1.9 -- 2.2
--------------------------------- -------- -------- ----- ------ ----- -----
4,998.5 6,287.9 17.4 (3.6) 25.5 15.5
Foreign currency derivatives:
Forward contracts -- 1.5 -- -- -- --
---------------------------------
Foreign currency swaps 44.2 47.2 -- (.4) -- .3
--------------------------------- -------- -------- ----- ------ ----- -----
44.2 48.7 -- (.4) -- .3
Commodity derivatives:
Commodity swaps -- 8.1 -- -- -- 2.4
--------------------------------- -------- -------- ----- ------ ----- -----
$5,042.7 $6,344.7 $17.4 $ (4.0) $25.5 $18.2
======== ======== ===== ====== ===== =====
</TABLE>
S-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 SWAPTIONS
-----------------------------------------------------
1999 1998 1999 1998
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $4,108.8 $4,900.0 $1,899.5 $1,752.0
-------------------------------------------------------
New contracts -- 708.8 -- 218.3
-------------------------------------------------------
Terminations and maturities (1,600.0) (1,500.0) (62.0) (70.8)
------------------------------------------------------- -------- -------- -------- --------
Balance at end of year $2,508.8 $4,108.8 $1,837.5 $1,899.5
------------------------------------------------------- ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
INTEREST RATE SWAPS
-----------------------
1999 1998
-----------------------
<S> <C> <C>
Balance at beginning of year $ 258.3 $ 10.0
------------------------------------------------------------
New contracts 482.4 2,226.6
------------------------------------------------------------
Terminations and maturities (109.8) (1,978.3)
------------------------------------------------------------ ------- ---------
Balance at end of year $ 630.9 $ 258.3
------------------------------------------------------------ ======= =========
</TABLE>
<TABLE>
<CAPTION>
COMMODITY
PUT OPTIONS SWAPS
----------------------------------------
1999 1998 1999 1998
----------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $21.3 $ -- $ 8.1 $ --
------------------------------------------------------------
New contracts -- 21.3 -- 8.1
------------------------------------------------------------
Terminations and maturities -- -- (8.1) --
------------------------------------------------------------ ----- ----- ----- ----
Balance at end of year $21.3 $21.3 $ -- $8.1
------------------------------------------------------------ ===== ===== ===== ====
</TABLE>
<TABLE>
<CAPTION>
FOREIGN CURRENCY DERIVATIVES
(FOREIGN INVESTMENTS)
-------------------------------------------
FOREIGN CURRENCY
SWAPS
FOREIGN EXCHANGE
-------------------------------------------
FORWARD CONTRACTS
1999 1998 1999 1998
-------------------------------------------
(IN MILLIONS)
-------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 1.5 $ 163.1 $47.2 $15.0
------------------------------------------------------------
New contracts 2.7 419.8 -- 39.2
------------------------------------------------------------
Terminations and maturities (4.2) (581.4) (3.0) (7.0)
------------------------------------------------------------ ----- ------- ----- -----
Balance at end of year $ -- $ 1.5 $44.2 $47.2
------------------------------------------------------------ ===== ======= ===== =====
</TABLE>
INTEREST RATE CAP AGREEMENTS
The interest rate cap agreements, which expire in 2000 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
S-25
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
premium paid for the interest rate caps is included in other investments
(amortized costs of $5.2 million as of December 31, 1999) and is being
amortized over the terms of the agreements. This amortization is included in
net investment income.
SWAPTIONS
Swaptions, which expire in 2000 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
investments (amortized cost of $12.2 million as of December 31, 1999) 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 security 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. While spreadlocks are
used periodically, there are no spreadlock agreements outstanding at
December 31, 1999.
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 agreement the stream of variable interest
payments based on the coupon payments hedged 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 blocks of business or to extend
the duration of certain portfolios of assets. Once the assets are purchased
the gains (losses) resulting from the termination of the swap agreements
will be applied to the basis of the assets. The gains (losses) will be
recognized in earnings over the life of the assets. The anticipated purchase
of assets related to extending the duration of certain portfolios of assets
is expected to be completed in 2000.
PUT OPTIONS
The Company uses put options, combined with various perpetual fixed income
securities, and interest rate swaps to replicate fixed income, fixed
maturity investments. The risk being hedged is a drop in bond prices due to
credit concerns with international bond issuers. The put options allow the
Company to put the bonds back to the counterparties at original par.
FOREIGN CURRENCY DERIVATIVES
The Company uses a combination of foreign exchange forward contracts and
foreign currency swaps, 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. A foreign currency swap is a contractual
agreement to exchange the currencies of two different countries at a fixed
rate of exchange in the future.
COMMODITY SWAPS
The Company used a commodity swap to hedge its exposure to fluctuations in
the price of gold. A commodity swap is a contractual agreement to exchange a
certain amount of a particular commodity for a fixed amount of cash. The
Company owned a fixed income security that met its coupon
S-26
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 were the
product of the swap notional multiplied by the fixed rate stated in the swap
agreement. The net receipts or payments from commodity swaps were recorded
in net investment income. The fixed income security was called in the third
quarter of 1999 and the commodity swap expired.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$6,200,000, $10,000,000 and $7,000,000 in 1999, 1998 and 1997, respectively.
Deferred gains of $100,000 as of December 31, 1999, were the result of
terminated interest rate swaps. These gains are included with the related
fixed maturity securities to which the hedge applied or as deferred
liabilities 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 various derivative contracts. However, the Company does
not anticipate nonperformance 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 less collateral held for such agreements with each
counterparty if the net market value is in the Company's favor. At
December 31, 1999, the exposure was $8,500,000.
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.,
S-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
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
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-28
<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
-------------------------------------------------------------
1999 1998
-------------------------------------------------------------
CARRYING CARRYING
ASSETS (LIABILITIES) VALUE FAIR VALUE VALUE FAIR VALUE
--------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 22,985.0 $ 22,376.3 $ 23,830.9 $ 25,065.5
-----------------------------------------------
Preferred stocks 253.8 223.6 236.0 242.5
-----------------------------------------------
Unaffiliated common stocks 166.9 166.9 259.3 259.3
-----------------------------------------------
Mortgage loans on real estate 4,211.5 4,104.0 3,932.9 4,100.1
-----------------------------------------------
Policy loans 1,652.9 1,770.5 1,606.0 1,685.9
-----------------------------------------------
Other investments 426.6 426.6 434.4 434.4
-----------------------------------------------
Cash and short-term investments 1,409.2 1,409.2 1,725.4 1,725.4
-----------------------------------------------
Investment-type insurance contracts:
Deposit contracts and certain guaranteed
interest contracts (17,730.4) (17,364.3) (17,845.8) (17,486.4)
--------------------------------------------
Remaining guaranteed interest and similar
contracts (454.7) (465.1) (714.4) (738.2)
--------------------------------------------
Short-term debt (205.0) (205.0) (140.0) (140.0)
-----------------------------------------------
Surplus notes due to LNC (1,250.0) (1,022.1) (1,250.0) (1,335.1)
-----------------------------------------------
Derivatives 17.4 (4.0) 25.5 18.2
-----------------------------------------------
Investment commitments -- (0.8) -- (.6)
-----------------------------------------------
Separate account assets 46,105.1 46,105.1 36,907.0 36,907.0
-----------------------------------------------
Separate account liabilities (46,105.1) (46,105.1) (36,907.0) (36,907.0)
-----------------------------------------------
</TABLE>
12. ACQUISITIONS AND SALES OF SUBSIDIARIES
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.
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 $60,400,000 and
$76,700,000 in 1999 and 1998, respectively, and override commissions and
operating expense allowances of $61,600,000 in 1997. LLAD incurred expenses
of $113,400,000, $102,400,000 and
S-29
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTIONS WITH AFFILIATES (CONTINUED)
$5,500,000 in 1999, 1998 and 1997, 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, 1999 and 1998 include the
Company's participation in a short-term investment pool with LNC of
$390,300,000 and $383,600,000, respectively. Related investment income
amounted to $16,700,000, $16,800,000 and $15,500,000 in 1999, 1998 and 1997,
respectively. Short-term loan payable to parent company at December 31, 1999
and 1998 represent notes payable to LNC.
The Company provides services to and receives services from affiliated
companies which resulted in a net payment of $49,400,000, $92,100,000 and
$48,500,000 in 1999, 1998 and 1997, 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
1999 1998 1997
------------------------
(IN MILLIONS)
------------------------
<S> <C> <C> <C>
Insurance assumed $ 19.7 $ 13.7 $ 11.9
----------------------
Insurance ceded 777.6 290.1 100.3
</TABLE>
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-----------------------
(IN MILLIONS)
-----------------------
<S> <C> <C>
Future policy benefits
and claims assumed
$ 413.7 $ 197.3
------------------------
Future policy benefits
and claims ceded 1,680.4 1,125.0
------------------------
Amounts recoverable on
paid and unpaid losses 146.4 84.2
------------------------
Reinsurance payable on
paid losses 8.8 6.0
------------------------
Funds held under
reinsurance treaties --
net liability 2,106.4 1,375.4
------------------------
</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 $917,300,000 and $318,300,000 at December 31, 1999 and 1998,
respectively. The letters of credit are issued by banks and represent
guarantees of performance under the reinsurance agreement. At December 31,
1999 and 1998, LNC had guaranteed $818,900,000 and $237,000,000,
respectively, of these letters of credit. At December 31, 1999 and 1998, the
Company has a receivable (included in the foregoing amounts) from affiliated
insurance companies in the amount of $118,800,000 and $122,400,000,
respectively, 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 none of the separate accounts have
any minimum guarantees and the investment risks associated with market
S-30
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
14. SEPARATE ACCOUNTS (CONTINUED)
value changes are borne entirely by the policyholder.
Separate account premiums, deposits and other considerations amounted to
$4,572,600,000, $3,953,300,000 and $4,821,800,000 in 1999, 1998 and 1997,
respectively. Reserves for separate accounts with assets at fair value were
$45,198,900,000 and $36,145,900,000 at December 31, 1999 and 1998,
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
1999 1998 1997
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Transfers as reported in the Summary of Operations of the
various separate accounts:
Transfers to separate accounts $ 4,573.2 $ 3,954.9 $ 4,824.0
------------------------------------------------------------
Transfers from separate accounts (4,933.8) (4,069.8) (2,943.8)
------------------------------------------------------------ --------- --------- ---------
Net transfers to (from) separate accounts as reported in the
Summary of Operations $ (360.6) $ (114.9) $ 1,880.2
------------------------------------------------------------ ========= ========= =========
</TABLE>
15. CENTURY COMPLIANCE (UNAUDITED)
The Year 2000 issue was complex and affected many aspects of the Company's
business. The Company was particularly concerned with Year 2000 issues that
related to the Company's computer systems and interfaces with the computer
systems of vendors, suppliers, customers and business partners. From 1996
through 1999 the Company and its operating subsidiaries redirected a large
portion of internal Information Technology ("IT") efforts and contracted
with outside consultants to update systems to address Year 2000 issues.
Experts were engaged to assist in developing work plans and cost estimates
and to complete remediation activities.
For the year ended December 31, 1999, the Company identified expenditures of
$39,500,000 to address this issue. This brings the expenditures for 1996
through 1999 to $75,300,000. Because updating systems and procedures is an
integral part of the Company's on-going operations, most of the expenditures
shown above are expected to continue after all Year 2000 issues have been
resolved. All Year 2000 expenditures have been funded from operating cash
flows.
The scope of the overall Year 2000 program included 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 Company
completed these projects prior to year-end.
The Company's businesses have not identified any major problems in their
business processing. Minor problems have been resolved quickly. The
Company's businesses have not experienced any significant interruption in
service to clients or business partners or in reporting to regulators.
S-31
<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 (the "Company"),
a wholly owned subsidiary of Lincoln National Corporation, as of
December 31, 1999 and 1998, 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, 1999. 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 auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. 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 accounting principles
generally accepted in the United States. The variances between
such practices and accounting principles generally accepted in
the United States 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 accounting
principles generally accepted in the United States, the
financial position of The Lincoln National Life Insurance
Company at December 31, 1999 and 1998, or the results of its
operations or its cash flows for each of the three years in the
period ended December 31, 1999.
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, 1999 and 1998, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting practices
prescribed or permitted by the Indiana Department of Insurance.
January 31, 2000
S-32
<PAGE>
Part C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements provided in the Statement of Additional Information.
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 for the Variable Account are
included in Part B of this Registration Statement. Not applicable
3. Part B The following Statutory-Basis Financial Statements of The Lincoln
National Life Insurance Company are included in the SAI:
Balance Sheets--Statutory Basis--December 31, 1999, and 1998
Statements of Operations--Statutory Basis--Years ended December 31, 1999, 1998
and 1997
Statements of Changes in Capital and Surplus--Statutory Basis--Years ended
December 31, 1999, 1998, and 1997
Statements of Cash Flows--Statutory Basis--Years ended December 31, 1999, 1998,
and 1997
Notes to Statutory-Basis Financial Statements--December 31, 1999
Report of Ernst & Young LLP, Independent Auditors
(b) Exhibits
(1) Resolution of the Board of Directors and Memorandum from the
President of The Lincoln National Life Insurance Company authorizing
establishment of the Variable Account.
(2) Not Applicable.
(3) (a) Standard Selling Group Agreement
(3) (b) SEI Broker Group Agreement
(4) Form of Variable Annuity contract.
(5) Form of Application.
(6) (a) Articles of Incorporation of The Lincoln National Life Insurance
Company are incorporated herein by reference to Registration
Statement on Form N-4 (333-40937) filed on November 9, 1998.
(b) By-laws of The Lincoln National Life Insurance Company are
incorporated herein by reference to Registration Statement on Form
N-4 (333-40937) filed on November 9, 1998.
(7) Not applicable.
(8) (a) Participation Agreement
(b) Service Agreement between Delaware Management Holdings, Inc.,
Delaware Services Company, Inc. and The Lincoln National Life
Insurance Company is incorporated herein by reference to the
Registration Statement of Flexible Premium Variable Life Account F,
Form S-6 (333-40745) filed November 21, 1997.
<PAGE>
(9) Opinion and Consent of Mary Jo Ardington, Counsel, of The Lincoln
National Life Insurance Company.
(10) Consent of Ernst & Young LLP, Independent Auditors.
(11) Not applicable.
(12) Not applicable.
(13) Schedule for Computation of Performance Quotations.
(14) Not applicable.
(15) (a) Organizational Chart of the Lincoln National Insurance Holding
Company System.
(b) Books and Records Report.
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
NAME POSITIONS AND OFFICES WITH DEPOSITOR
---- ------------------------------------
Jon A. Boscia** President and Director
John H. Gotta**** Senior Vice President, Chief Executive Officer of
Life Insurance and Director
Stephen H. Lewis* Senior Vice President, Interim Chief Executive
Officer of Annuities and Director
H. Thomas McMeekin** Director
Cynthia A. Rose** Secretary and Assistant Vice President
Lawrence T. Rowland*** Executive Vice President and Director
Keith J. Ryan* Vice President, Controller, and Chief Accounting
Officer
Janet Chrzan* Senior Vice President, Chief Financial Officer and
Director
Eldon J. Summers** Second Vice President and Treasurer
Richard C. Vaughan** Director
Diane Dillman* Interim Director of Compliance for Annuities
* Principal business address is 1300 South Clinton Street,
Fort Wayne, IN 46802-3506
** Principal business address is Central Square, West Tower, 1500
Market St., Ste 3900, Philadelphia, PA 19102-2112
*** Principal business address is 1700 Magnavox Way, One Reinsurance
Place, Fort Wayne, IN 46804-1538
**** Principal business address is 350 Church Street, Hartford,
CT 06103
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
See Exhibit 15(a): Organizational Chart of the Lincoln National Insurance
Holding Company System.
ITEM 27. NUMBER OF PURCHASERS
Not applicable.
ITEM 28. INDEMNIFICATION
(a) Brief description of indemnification provisions.
In general, Article VII of the By-laws of The Lincoln National Life
Insurance Company (Lincoln Life) provides that Lincoln Life will indemnify
certain persons against expenses, judgments and certain other specified
costs incurred by any such person if he/she is made a party or is
threatened to be made a party to a suit or proceeding because he/she was a
director, officer, or employee of Lincoln Life, as long as he/she acted in
good faith and in a manner he/she reasonably believed to be in the best
interests of, or not opposed to the best interests of, Lincoln Life.
Certain additional conditions apply to indemnification in criminal
proceedings.
In particular, separate conditions govern indemnification of directors,
officers, and employees of Lincoln Life in connection with suits by, or in
the right of, Lincoln Life. Please refer to Article VII of the By-laws of
Lincoln Life (Exhibit No. 6(b) hereto) for the full text of the
indemnification provisions. Indemnification is permitted by, and is subject
to the requirements of, Indiana law.
(b) Undertaking pursuant to Rule 484 of Regulation C under the Securities
Act of 1933.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described in Item 28(a) above or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is again public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Life Insurance (avail. Nov. 28, 1988) no-action letter
with respect to Contracts used in connection with retirement plans meeting
the requirements of Section 403(b) of the Internal Revenue Code, and
represents further that it will comply with the provisions of paragraphs
(1) through (4) set forth in that no-action letter.
ITEM 29. PRINCIPAL UNDERWRITER
(a) SEI Investments Distribution Co. ("SIDCo") does not act as principal
underwriter for any other funds.
1) 2)
(b) Name and Principal Positions and offices
Business Address* with Underwriter
------------------ ---------------------
Alfred P. West, Jr. Director, Chairman of the Board of Directors
Richard B. Lieb Director, Executive Vice President
Carmen V. Romeo Director
Mark J. Held President & Chief Operating Officer
Gilbert L. Beebower Executive Vice President
Dennis J. McGonigle Executive Vice President
Robert M. Silvestri Chief Financial Officer & Treasurer
Leo J. Dolan, Jr. Senior Vice President
Carl A. Guarino Senior Vice President
Larry Hutchison Senior Vice President
Jack May Senior Vice President
Hartland J. McKeown Senior Vice President
Kevin P. Robins Senior Vice President & General Counsel
Patrick K. Walsh Senior Vice President
Robert Aller Vice President
Timothy D. Barto Vice President & Assistant Secretary
Gordon W. Carpenter Vice President
Todd Cipperman Vice President & Assistant Secretary
S. Courtney E. Collier Vice President & Assistant Secretary
Robert Crudup Vice President & Managing Director
Richard A. Deak Vice President & Assistant Secretary
Barbara Doyne Vice President
Jeff Drennen Vice President
James R. Foggo Vice President & Assistant Secretary
Vic Galef Vice President & Managing Director
Lydia A. Gavalis Vice President & Assistant Secretary
Greg Gettinger Vice President & Assistant Secretary
Kathy Heilig Vice President
Jeff Jacobs Vice President
Samuel King Vice President
Kim Kirk Vice President & Managing Director
John Krzeminski Vice President & Managing Director
Christine M. McCullough Vice President & Assistant Secretary
Carolyn McLaurin Vice President & Managing Director
Mark Nagle Vice President
Joanne Nelson Vice President
Cynthia M. Parrish Vice President & Secretary
Rob Redican Vice President
Maria Rinehart Vice President
Edward T. Searle Vice President & Assistant Secretary
Steve Smith Vice President
Daniel Spaventa Vice President
Kathryn L. Stanton Vice President
Lynda J. Striegel Vice President & Assistant Secretary
Lori L. White Vice President & Assistant Secretary
Wayne M. Withrow Vice President & Managing Director
* The principal business address is One Freedom Valley Drive,
Oaks, PA 19456
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITER
(c) Name of Principal Underwriter: Net Underwriting Discounts and Commissions:
None.
Item 30. Location of Accounts and Records
See Exhibit 14(b) is hereby incorporated herein by reference. (TO BE FILED
BY AMENDMENT)
Item 31. Management Services
Not Applicable.
Item 32
-------
(a) Registrant undertakes that it will file a post-effective amendment to this
registration statement as frequently as necessary to ensure that the
audited financial statements in the registration statement are never more
than 16 months old for so long as payments under the variable annuity
contracts may be accepted.
(b) Registrant undertakes that it will include either (1) as part of any
application to purchase a Certificate or an Individual 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 a similar written
communication affixed to or included in the Prospectus that the applicant
can remove to send for a statement of Additional Information.
(c) Registrant undertakes 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 to Lincoln Life at the address or
phone number listed in the Prospectus.
(d) 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.
(e) Registrant hereby represents that it is relying on the American Council of
Life Insurance (avail. Nov. 28, 1988) no-action letter with respect to
Contracts used in connection with retirement plans meeting the requirements
of Section 403(b) of the Internal Revenue Code, and represents further that
it will comply with the provisions of paragraphs (1) through (4) set forth
in that no-action letter.
(f) For Contracts sold in connection with the Texas Option Retirement Program,
Registrant is relying on Rule 6c-7 and represents that paragraphs (a)
through (d) of that rule have been complied with.
<PAGE>
SIGNATURES
(a) As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant 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 2nd day of June, 2000.
LINCOLN LIFE VARIABLE ANNUITY
ACCOUNT T -- SEI VARIABLE ANNUITY
(Registrant)
By: /s/ Jeffrey K. Dellinger
-------------------------------------
Jeffrey K. Dellinger
Vice President, Lincoln Life
(Title)
By: THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
(Depositor)
By: /s/ Stephen H. Lewis
-------------------------------------
Stephen H. Lewis
(Signature-Officer of Depositor)
Senior Vice President, Lincoln Life
(Title)
(b) As required by the Securities Act of 1933, this Amendment to the
Registration Statement has been signed for the Depositor by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jon A. Boscia President and Director June 2, 2000
----------------------- (Principal Executive Officer)
Jon A. Boscia
/s/ Keith J. Ryan Vice President and Controller June 2, 2000
----------------------- (Principal Accounting Officer)
Keith J. Ryan
/s/ Janet Chrzan Senior Vice President, June 2, 2000
----------------------- Chief Financial Officer
Janet Chrzan and Director (Principal
Financial Officer)
/s/ Stephen H. Lewis Senior Vice President, June 2, 2000
----------------------- Interim Chief Executive Officer
Stephen H. Lewis of Annuities and Director
/s/ John H. Gotta Senior Vice President, June 2, 2000
----------------------- Chief Executive Officer of
John H. Gotta Life Insurance and Director
/s/ Lawrence T. Rowland Executive Vice President June 2, 2000
----------------------- and Director
Lawrence T. Rowland
/s/ H. Thomas McMeekin Director June 2, 2000
-----------------------
H. Thomas McMeekin
/s/ Richard C. Vaughan Director June 2, 2000
-----------------------
Richard C. Vaughan
</TABLE>
