<PAGE>
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ACCOUNT C
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LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C INDIVIDUAL VARIABLE ANNUITY
CONTRACTS
issued by:
Lincoln National Life Insurance Co.
1300 South Clinton Street
Fort Wayne, Indiana 46802
This Prospectus describes individual variable annuity contracts issued by
Lincoln National Life Insurance Co. (Lincoln Life). They are for use with the
following retirement plans qualified for special tax treatment (qualified
contracts) under the Internal Revenue Code of 1986, as amended (the code):
1. Public school systems and 501(c)(3) tax-exempt organizations;
2. Qualified corporate employee pension and profit-sharing trusts and qualified
annuity plans;
3. Corresponding plans of self-employed individuals (H.R. 10 or Keogh);
4. Individual retirement annuities (IRA);
5. Government deferred compensation plans (457); and
6. Simplified employee pension plans (SEP).
The contracts described in this Prospectus are also offered to plans established
by persons who are not entitled to participate in one of the previously
mentioned plans (nonqualified contracts).
This Prospectus offers you, as contractowner, contracts of the following types:
1. Single premium deferred annuity;
2. Flexible premium deferred annuity; and
3. Periodic premium deferred annuity.
The contracts offer you the accumulation of contract value and payment of
periodic annuity benefits. These benefits may be paid on a variable or fixed
basis or a combination of both. Benefits start at an annuity commencement date
which you select and which must be on or before the annuitant's 85th birthday.
If the annuitant dies before the annuity commencement date, the contract value
will be paid to the beneficiary.
The minimum initial purchase payment for each of the three types of contract is:
1. Single premium deferred contract: $1,000 for IRAs and SEPs; $3,000 for all
others;
2. Flexible premium deferred contract: $1,000 for IRAs and SEPs; $3,000 for all
others (subsequent purchase payments: $100); and
3. Periodic premium deferred contract: $600 per contract year (minimum $25 per
purchase payment).
All investments (purchase payments) for benefits on a variable basis will be
placed in Lincoln National Variable Annuity Account C (variable annuity account
[VAA]). The VAA is a segregated investment account of Lincoln Life, which is the
Depositor. Based upon your instructions, the VAA invests purchase payments (at
net asset value) in specified mutual funds (the fund or funds and series). Both
the value of a contract before the annuity commencement date and the amount of
payouts afterward will depend upon the investment performance of the fund(s) or
series selected. Investments in these funds and series are neither insured or
guaranteed by the U.S. Government nor by any other person or entity.
Purchase payments for benefits on a fixed basis will be placed in the fixed side
of the contract, which is part of our General Account. However, this Prospectus
deals only with those elements of the contracts relating to the VAA, except
where reference to the fixed side is made.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (SEC) NOR HAS THE SEC PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus details the information regarding the VAA that you should know
before investing. This booklet also includes a current Prospectus for each of
the following funds: Lincoln National Aggressive Growth Fund, Inc., Lincoln
National Bond Fund, Inc., Lincoln National Capital Appreciation Fund, Inc.,
Lincoln National Equity-Income Fund, Inc., Lincoln National Global Asset
Allocation Fund, Inc., Lincoln National Growth and Income Fund, Inc., Lincoln
National International Fund, Inc., Lincoln National Managed Fund, Inc., Lincoln
National Money Market Fund, Inc., Lincoln National Social Awareness Fund, Inc.,
and Lincoln National Special Opportunities Fund, Inc. and a current Prospectus
for the Delaware Group Premium Fund, Inc., which contains information regarding
the Equity/Income Series, Global Bond Series and the Emerging Growth Series. All
Prospectuses should be read carefully and kept for future reference.
A statement of additional information (SAI), dated May 1, 1996, concerning the
VAA has been filed with the SEC and is incorporated by this reference into this
Prospectus. If you would like a free copy, write Kim Oakman, Lincoln National
Life Insurance Co., P.O. Box 2340, Fort Wayne, Indiana 46801, or call 1-800-348-
1212, Ext. 4912. A table of contents for the SAI appears on the last page of
this Prospectus.
This Prospectus is dated May 1, 1996.
1
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ACCOUNT C
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FOR YOUR INFORMATION:
IF YOU SURRENDER YOUR CONTRACT OR WITHDRAW CONTRACT VALUE, A SURRENDER CHARGE OF
UP TO 8% MAY BE DEDUCTED. THE AMOUNT OF THE SURRENDER CHARGE DEPENDS ON THE TYPE
OF CONTRACT AND ITS DURATION. HOWEVER, NO SURRENDER CHARGE IS ASSESSED WHEN
ANNUITY PAYOUTS BEGIN OR AT THE ANNUITANT'S DEATH. SEE CHARGES AND OTHER
DEDUCTIONS.
ALSO, YOU MAY BE SUBJECT TO A PENALTY TAX UNDER SECTION 72 (Q) OF THE CODE (SEE
FEDERAL TAX STATUS) SHOULD YOU WITHDRAW CONTRACT VALUE OR SURRENDER THE CONTRACT
BEFORE THE ANNUITY COMMENCEMENT DATE.
THESE CONTRACTS CONTAIN A FREE-LOOK PROVISION. SEE RETURN PRIVILEGE.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
- ------------------------------------------------------
<S> <C>
Special terms 3
- ------------------------------------------------------
Expense tables 4
- ------------------------------------------------------
Condensed financial information for the
variable annuity account 7
- ------------------------------------------------------
Financial statements 9
- ------------------------------------------------------
Lincoln National Life Insurance Co. 9
- ------------------------------------------------------
Variable annuity account (VAA) 9
- ------------------------------------------------------
Investments of the variable annuity account 9
- ------------------------------------------------------
Charges and other deductions 11
- ------------------------------------------------------
The contracts 13
- ------------------------------------------------------
Annuity payouts 16
- ------------------------------------------------------
Federal tax status 17
- ------------------------------------------------------
Voting rights 19
- ------------------------------------------------------
Distribution of the contracts 19
- ------------------------------------------------------
Return privilege 19
- ------------------------------------------------------
State regulation 19
- ------------------------------------------------------
Restrictions under the Texas Optional
Retirement Program 19
- ------------------------------------------------------
Records and reports 20
- ------------------------------------------------------
Other information 20
- ------------------------------------------------------
Statement of additional information
table of contents for Separate Account C 20
- ------------------------------------------------------
</TABLE>
2
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ACCOUNT C
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SPECIAL TERMS
(Throughout this Prospectus, in order to make the following documents more
understandable to you, we have italicized the special terms.)
Account or variable annuity account (VAA) -- The segregated investment account,
Account C, into which Lincoln Life sets aside and invests the assets for the
variable annuity contracts offered in this Prospectus.
Accumulation unit -- A measure used to calculate contract value for the variable
side of the contract before the annuity commencement date. See The contracts.
Advisor or investment advisor -- Lincoln Investment Management, Inc. (Lincoln
Investment), which provides investment management services to each of the funds.
See Investment advisor.
Annuitant -- The person to whom annuity payouts are or may be paid.
Annuity commencement date -- The date you choose for annuity payouts to begin to
the annuitant.
Annuity option -- One of the optional forms of payout of the annuity available
within the contract. See Annuity payouts.
Annuity payout -- An amount paid at regular intervals 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. See Annuity payouts.
Beneficiary -- The person whom you designate to receive the death benefit, if
any, in case of the annuitant's death.
Cash surrender value -- Upon surrender, the contract value less any applicable
charges, fees, and taxes.
Code -- The Internal Revenue Code of 1986, as amended.
Contract (variable annuity contract) -- The agreement between you and us
providing a variable annuity for the annuitant.
Contractowner (you, your) -- The person who has the ability to exercise the
rights within the contract (decides on investment allocations, transfers, payout
options; designates the beneficiary, etc.). Usually, but not always, the owner
is also the annuitant.
Contract value -- At a given time, the total value of all accumulation units for
a contract plus the value of the fixed side of the contract.
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
annuitant dies before the annuity commencement date. See The contracts.
Delaware Management -- Delaware Management Company, Inc.
Flexible premium deferred contract -- An annuity contract with an initial
purchase payment, allowing additional purchase payments to be made, and with
annuity payouts beginning at a future date.
Fund -- Any of the eleven individual Lincoln National underlying investment
options in which your purchase payments are invested.
Home office -- The headquarters of Lincoln National Life Insurance Co., located
at 1300 South Clinton Street, Fort Wayne, Indiana 46802.
Lincoln Investment -- Lincoln Investment Management, Inc.
Lincoln Life (we, us, our) -- Lincoln National Life Insurance Co.
Lump sum -- A one-time purchase payment of $5,000 or more ($1,000 for IRAs and
SEPs) made to a periodic premium deferred contract.
Periodic premium deferred contract -- An annuity contract with purchase payments
due periodically and with annuity payouts beginning at a future date.
Purchase payments -- Amounts paid to purchase an annuity for an annuitant.
Series -- Any of the three underlying portfolios of the Delaware Group Premium
Fund, Inc., in which your purchase payments are invested.
Single premium deferred contract -- An annuity contract with a single purchase
payment and with annuity payouts beginning at a future date.
Statement of additional information (SAI) -- A document required by the SEC to
be provided upon request to a prospective purchaser of a contract, you. This
free document gives more information about Lincoln Life, the VAA, and the
variable annuity contract.
Subaccount -- That portion of the VAA that reflects investments in accumulation
and annuity units of a particular fund. There is a separate subaccount which
corresponds to each fund.
Surrender -- A contract right that allows you to terminate your contract and
receive your cash surrender value. See The contracts.
Surrender charge -- The term that refers to what is known in the industry as a
contingent deferred sales charge. See Charges and other deductions.
Valuation date -- Each day the New York Stock Exchange (NYSE) is open for
trading.
Valuation period -- The period starting at the close of business on a particular
valuation date and ending at the close of business on the next valuation date.
Withdrawal -- A contract right that allows you to obtain a portion of your cash
surrender value.
3
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ACCOUNT C
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EXPENSE TABLES
Contractowner transaction expenses-single premium and periodic premium deferred
contracts:
Surrender charge (as a percentage of contract value
surrendered/withdrawn): 7% (single premium)
8% (periodic premium)
(Note: Upon the first withdrawal of contract value in any contract year, up to
15% of contact value may be withdrawn free of this charge.)
REDUCED SURRENDER CHARGES OVER TIME:
The surrender charge percentages listed above are the maximum percentages
charged as a percentage of contract value withdrawn. The later a
surrender/withdrawal occurs, the lower the surrender charge percentage applied,
according to the following table:
<TABLE>
<CAPTION>
Contract type Contract year
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2 3 4 5 6 7 8 9 10 11+
Single premium 7% 6 5 4 3 2 1 0 0 0 0
Periodic premium 8% 8 8 8 8 4 4 4 4 4 0
- --------------------------------------------------------------------------------
</TABLE>
CONTRACTOWNER TRANSACTION EXPENSES-FLEXIBLE PREMIUM DEFERRED CONTRACT:
Surrender charge (as a percentage of purchase
payments surrendered/withdrawn) 7% (flexible premium)
(Note: Upon the first withdrawal of purchase payments in any contract year, up
to 15% of those purchase payments may be withdrawn free of this charge.)
REDUCED SURRENDER CHARGE OVER TIME:
The surrender charge percentage listed above is the maximum percentage charged
as a percentage of purchase payments withdrawn. This charge is calculated
separately for each contract year's purchase payments. The later a
surrender/withdrawal occurs, the lower the surrender charge percentage applied,
according to the following table:
<TABLE>
<CAPTION>
Completed contract years between date of
Contract type purchase payments and date of surrender/withdrawal
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0 1 2 3 4 5 6 7+
Flexible premium 7% 6 5 4 3 2 1 0
</TABLE>
ANNUAL CONTRACT FEE
$-0-(single premium)
$25 (periodic and flexible premium)This fee is a single charge assessed against
contract value on the last valuation date of each contract year and upon full
surrender; it is not a separate charge for each subaccount.
VARIABLE ANNUITY ACCOUNT C ANNUAL EXPENSES
(as a percentage of average account value for each subaccount):
For each subaccount*
Mortality and expense risk fees 1.00%
-----
Total Account C annual expenses 1.00%
*The VAA is divided into 14 separately-named subaccounts, each of which, in
turn, invests purchase payments in its respective fund or series.
4
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ACCOUNT C
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ANNUAL EXPENSES OF THE FUNDS AND SERIES
(as a percentage of each fund's and series average net assets):
<TABLE>
<CAPTION>
Management Other Total
fees + expenses = expenses
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Aggressive Growth (AG) .75% .19% .94%
- ----------------------------------------------------------------------------------------------
2. Bond (B) .47 .02 .49
- ----------------------------------------------------------------------------------------------
3. Capital Appreciation (CA) .80 .27 1.07
- ----------------------------------------------------------------------------------------------
4. Equity-Income (EI) .95 .20 1.15
- ----------------------------------------------------------------------------------------------
5. Global Asset Allocation (GAA) .70 .22 .92
- ----------------------------------------------------------------------------------------------
6. Growth and Income (GI) .34 .01 .35
- ----------------------------------------------------------------------------------------------
7. International (I) .84 .43 1.27
- ----------------------------------------------------------------------------------------------
8. Managed (M) .41 .02 .43
- ----------------------------------------------------------------------------------------------
9. Money Market (MM) .48 .04 .52
- ----------------------------------------------------------------------------------------------
10. Social Awareness (SA) .47 .03 .50
- ----------------------------------------------------------------------------------------------
11. Special Opportunities (SO) .43 .02 .45
- ----------------------------------------------------------------------------------------------
12. Delaware Emerging Growth (DEG)* .58** .22 .80
- ----------------------------------------------------------------------------------------------
13. Delaware Equity/Income (DE/I)* .60** .09 .69
- ----------------------------------------------------------------------------------------------
14. Delaware Global Bond (DGB)* .54** .26 .80
- ----------------------------------------------------------------------------------------------
</TABLE>
* These expenses are estimated amounts for the fiscal year ended December 31,
1995.
** The investment advisors for these series currently voluntarily waive
management fees to the extent necessary to maintain the series total expense
ratio at .80% or less. Should they cease to waive those amounts in the future,
these management fee percentages and total expenses may be higher in future
years.
EXAMPLES
(reflecting expenses both of the VAA, the funds and series):
If you surrender your contract at the end of the applicable time period, you
would pay the following expenses on a $1,000 investment, assuming a 5% annual
return:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
Single Flexible Periodic Single Flexible Periodic Single Flexible Periodic Single Flexible Periodic
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. AG $92 $90 $102 $116 $111 $148 $139 $135 $197 $226 $226 $280
- ------------------------------------------------------------------------------------------------------------------------------------
2. B 88 85 98 103 97 136 117 111 176 178 178 234
- ------------------------------------------------------------------------------------------------------------------------------------
3. CA 93 91 103 119 115 152 146 141 203 239 239 239
- ------------------------------------------------------------------------------------------------------------------------------------
4. EI 94 92 104 122 117 154 150 145 207 248 248 300
- ------------------------------------------------------------------------------------------------------------------------------------
5. GAA 92 90 102 115 110 148 138 134 196 224 224 278
- ------------------------------------------------------------------------------------------------------------------------------------
6. GI 86 84 97 98 93 132 110 104 169 162 164 219
- ------------------------------------------------------------------------------------------------------------------------------------
7. I 95 93 105 124 121 158 156 151 213 260 260 312
- ------------------------------------------------------------------------------------------------------------------------------------
8. M 87 85 97 101 95 134 114 108 173 171 171 227
- ------------------------------------------------------------------------------------------------------------------------------------
9. MM 88 85 98 103 98 137 118 113 178 181 181 237
- ------------------------------------------------------------------------------------------------------------------------------------
10. SA 88 85 98 103 97 136 117 112 177 179 179 235
- ------------------------------------------------------------------------------------------------------------------------------------
11. SO 87 85 98 101 96 135 115 109 174 173 173 230
- ------------------------------------------------------------------------------------------------------------------------------------
12. DEG 92 90 102 116 112 149 140 136 198 228 228 282
- ------------------------------------------------------------------------------------------------------------------------------------
13. DE/I 90 87 100 108 103 141 127 122 186 199 199 254
- ------------------------------------------------------------------------------------------------------------------------------------
14. DGB 92 90 102 116 112 149 140 136 198 228 228 282
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
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ACCOUNT C
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If you do not surrender your contract, (whether single, flexible or periodic),
or if you annuitize, you would pay the following expenses on a $1,000
investment, assuming a 5% annual return:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. AG $20 $61 $105 $226
- --------------------------------------------------------------------------------
2. B 15 47 81 178
- --------------------------------------------------------------------------------
3. CA 21 65 111 239
- --------------------------------------------------------------------------------
4. EI 22 67 115 248
- --------------------------------------------------------------------------------
5. GAA 20 60 104 224
- --------------------------------------------------------------------------------
6. GI 14 43 74 162
- --------------------------------------------------------------------------------
7. I 23 71 121 260
- --------------------------------------------------------------------------------
8. M 15 45 78 171
- --------------------------------------------------------------------------------
9. MM 15 48 83 181
- --------------------------------------------------------------------------------
10. SA 15 47 82 179
- --------------------------------------------------------------------------------
11. SO 15 46 79 173
- --------------------------------------------------------------------------------
12. DEG 20 62 106 228
- --------------------------------------------------------------------------------
13. DE/I 17 53 92 199
- --------------------------------------------------------------------------------
14. DGB 20 62 106 228
- --------------------------------------------------------------------------------
</TABLE>
This table is provided to assist you in understanding the various costs and
expenses that you will bear directly or indirectly. The table reflects expenses
of the VAA, the 11 funds and the 3 series. For more complete descriptions of the
various costs and expenses involved, see Charges and other deductions in this
Prospectus, and Management of the funds in the Appendix to the funds'
Prospectuses and the Prospectus for Delaware Group Premium Fund, Inc. Premium
taxes may also be applicable, although they do not appear in the table. The
examples should not be considered a representation of past or future expenses.
Actual expenses may be more or less than those shown. This table is unaudited.
6
<PAGE>
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ACCOUNT C
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CONDENSED FINANCIAL INFORMATION FOR THE VARIABLE ANNUITY ACCOUNT
ACCUMULATION UNIT VALUES
The following information relating to accumulation unit values and number of
accumulation units for each of the 10 years in the period ended December 31,
1995 comes from the VAA's financial statements. It should be read in conjunction
with the VAA's financial statements and notes which are all included in the SAI.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Aggressive Growth subaccount
Accumulation unit value
. Beginning of period $ .896 1.000 1.000*
. End of period $1.196 .896 1.000* trading began in 1994.
Number of accumulation units
. End of period (000's omitted) 114,518 67,547 110
- ------------------------------------------------------------------------------------------------------------------------------------
Bond subaccount
Accumulation unit value
. Beginning of period $3.585 3.780 3.398 3.181 2.737 2.591 2.312 2.162 2.156 1.855
. End of period $4.228 3.585 3.780 3.398 3.181 2.737 2.591 2.312 2.162 2.156
Number of accumulation units
. End of period (000's omitted) 62,644 57,900 62,765 52,842 46,830 40,983 37,671 28,146 25,879 29,727
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation subaccount
Accumulation unit value
. Beginning of period $1.017 1.000 1.000*
. End of period $1.294 1.017 1.000* trading began in 1994.
Number of accumulation units
. End of period (000's omitted) 98,067 52,125 110
- ------------------------------------------------------------------------------------------------------------------------------------
Equity-Income subaccount
Accumulation unit value
. Beginning of period $1.046 1.000 1.000*
. End of period $1.391 1.046 1.000* trading began in 1994.
Number of accumulation units
. End of period (000's omitted) 171,817 75,383 110
- ------------------------------------------------------------------------------------------------------------------------------------
Global Asset Allocation subaccount
Accumulation unit value
. Beginning of period $1.642 1.689 1.453 1.378 1.174 1.175 1.005 .914 1.000*
. End of period $2.013 1.642 1.689 1.453 1.378 1.174 1.175 1.005 .914* trading
Number of accumulation units began in 1987.
. End of period (000's omitted) 126,558 122,061 92,778 67,873 57,199 50,149 39,835 27,750 23,120
- ------------------------------------------------------------------------------------------------------------------------------------
Growth and Income subaccount
Accumulation unit value
. Beginning of period $4.593 4.579 4.084 4.050 3.125 3.126 2.611 2.436 2.130 1.835
. End of period $6.292 4.593 4.579 4.084 4.050 3.125 3.126 2.611 2.436 2.130
Number of accumulation units
. End of period (000's omitted) 291,063 253,621 226,072 188,659 144,515 114,974 96,161 81,066 73,488 50,821
- ------------------------------------------------------------------------------------------------------------------------------------
International subaccount
Accumulation unit value
. Beginning of period $1.271 1.243 .901 .990 1.000*
. End of period $1.368 1.271 1.243 .901 .990* trading began in 1991.
Number of accumulation units
. End of period (000's omitted) 261,509 248,639 129,551 50,718 21,088
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* These values do not reflects a full years's experience because they are
calculated for the period from the beginning of investment activity of the
accounts, through December 31.
8
<PAGE>
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ACCOUNT C
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Managed subaccount
Accumulation unit value
. Beginning of period $2.747 2.827 2.558 2.492 2.065 2.015 1.737 1.609 1.495 1.319
. End of period $3.515 2.747 2.827 2.558 2.492 2.065 2.015 1.737 1.609 1.495
Number of accumulation units
. End of period (000's omitted) 172,789 167,184 162,485 139,606 115,929 104,011 95,285 84,586 78,432 54,994
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market subaccount
Accumulation unit value
. Beginning of period $2.137 2.079 2.044 1.996 1.907 1.783 1.651 1.553 1.472 1.395
. End of period $2.235 2.137 2.079 2.044 1.996 1.907 1.783 1.651 1.553 1.472
Number of accumulation units
. End of Period (000's omitted) 35,136 37,106 39,763 46,993 77,812 57,377 53,287 37,890 37,132 33,160
- ------------------------------------------------------------------------------------------------------------------------------------
Social Awareness subaccount
Accumulation unit value
. Beginning of period $2.005 2.021 1.796 1.750 1.285 1.357 1.042 1.000*
. End of period $2.843 2.005 2.021 1.796 1.750 1.285 1.357 1.042* trading began
Number of accumulation units in 1988
. End of period (000's omitted) 106,204 83,069 69,006 50,838 30,735 19,486 7,127 1,984
- ------------------------------------------------------------------------------------------------------------------------------------
Special Opportunities subaccount
Accumulation unit value
. Beginning of period $4.303 4.392 3.740 3.519 2.481 2.710 2.054 1.997 1.867 1.936
. End of period $5.618 4.303 4.392 3.740 3.519 2.481 2.710 2.054 1.997 1.867
Number of accumulation units
. End of period (000's omitted) 88,993 73,673 62,314 51,056 37,798 33,837 27,789 31,068 29,240 23,463
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[Note: The three series offered by the Delaware Group Premium Fund, Inc. were
not available in 1995, and thus do not appear in the table.]
*These values do not reflect a full years's experience because they are
calculated for the period from the beginning of investment activity of the
accounts, through December 31.
ADDITIONAL INFORMATION FOR THE MONEY MARKET SUBACCOUNT:
Seven-day yield: 5.44%; Length of base period-7 days; Date of last day of base
period: December 31, 1995.
PERFORMANCE DATA:
At times the VAA may advertise the Money Market subaccount's yield. The yield
refers to the income generated by an investment in the subaccount over a seven-
day period. This income is then annualized. The process of annualizing results
when the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The yield figure is based on historical earnings
and is not intended to indicate future performance.
The VAA advertises the annual performance of the subaccounts for the funds and
series on both a standardized and non-standardized basis.
The standardized calculation measures average annual total return. This is based
on a hypothetical $1,000 payment made at the beginning of a one-year, a five-
year, and a 10-year period. This calculation reflects all fees and charges that
are or could be imposed on all contractowner accounts.
The non-standardized calculation compares changes in accumulation unit values
from the beginning of the most recently completed calendar year to the end of
that year. It may also compare changes in accumulation unit values over shorter
or longer time periods. This calculation reflects mortality and expense risk
fees. It also reflects management fees and other expenses of the fund. It does
not include surrender charges or the account charge; if included, they would
decrease the performance.
For additional information about performance calculations, please refer to the
SAI.
8
<PAGE>
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ACCOUNT C
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
The financial statements for the VAA and Lincoln Life are located in the SAI.
You may obtain a free copy by writing Kim Oakman, Lincoln National Life
Insurance Co., P.O. Box 2340, Fort Wayne, Indiana 46801 or calling 1-800-348-
1212, Ext. 4912.
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 serve as
the principal underwriter for the contracts. We are owned by Lincoln National
Corp. (LNC) which is also organized under Indiana law. LNC's primary businesses
are insurance and financial services.
VARIABLE ANNUITY ACCOUNT (VAA)
On June 3, 1981, 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 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 and series. You assume the full investment risk for all
amounts placed in the VAA.
INVESTMENTS OF THE VARIABLE ANNUITY ACCOUNT
You decide the subaccount(s) to which you allocate purchase payments. There is a
separate subaccount which corresponds to each fund and series. You may change
your allocations without penalty or charges. Shares of the funds and series will
be sold at net asset value (See the Appendix to the funds' Prospectuses for an
explanation of net asset value) to the VAA in order to fund the contracts. The
funds and series are required to redeem their shares at net asset value upon our
request. We reserve the right to add, delete or substitute funds and series.
INVESTMENT ADVISOR
Lincoln Investment, the advisor for each of the funds, is owned by LNC. The
services it provides are explained in the Prospectuses of the funds. Under
advisory agreements with each fund, Lincoln Investment provides portfolio
management and investment advice to that fund, subject to the supervision of the
fund's Board of Directors. Additional information about Lincoln Investment and
its six sub-advisors may be found under Additional investment advisor
information.
Delaware Management is a wholly-owned, indirect subsidiary of Delaware
Management Holdings, Inc. On April 3, 1995, Delaware Management Holdings, Inc.
merged with Lincoln National Corporation, the holding company for Lincoln
National Life Insurance Company (Lincoln Life). As a result of the merger,
Delaware Management Holdings and Delaware Management became indirect, wholly-
owned subsidiaries of and are thus subject to the ultimate control of Lincoln
National Corporation. Additional information about Delaware Management may be
found in the Delaware Group Premium Fund, Inc. prospectus enclosed in this
booklet under Management of the Fund. Delaware International, an affiliate of
Delaware Management, furnishes investment management services to the Global Bond
series.
FUNDS
Following are brief summaries of the investment objectives and policies of the
funds. The year in which each fund started trading is in parentheses. There is
more detailed information in the current Prospectuses for the funds, which are
included in this booklet.
All of the funds with the exception of the Special Opportunities Fund are
diversified, open-end management investment companies. Diversified means not
owning too great a percentage of the securities of any one company. An open-end
company is one which, in this case, permits Lincoln Life to sell its shares back
to the fund when you make a withdrawal, surrender the contract or transfer from
one fund to another. Management investment company is the legal term for a
mutual fund. The Special Opportunities Fund is open-end, but is non-diversified.
Non-diversified means the fund may own a larger percentage of the securities of
particular companies than will a diversified company. These definitions are very
general. The precise legal definitions for these terms are contained in the 1940
Act. Please be advised that there is no assurance that any of the funds will
achieve their stated objectives.
1. Aggressive Growth Fund (1994) -- The investment objective is to maximize
capital appreciation. The fund invests in stocks of smaller, lesser-known
companies which have a chance to grow significantlyin a short time.
2. Bond Fund (1981) -- The investment objective is maximum current income
consistent with prudent
9
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investment strategy. The fund invests primarily in medium-and long-term
corporate andgovernment bonds.
3. Capital Appreciation Fund (1994) -- The investment objective is long-term
growth of capital in a manner consistent with preservation of capital. The
fund primarily buys stocks in a large number of companies of all sizes if
the companies are competing well and if their products or services are in
high demand. It may also buy some money market securities and bonds,
including junk (high-risk) bonds.
4. Equity-Income Fund (1994) -- The investment objective is to achieve
reasonable income by investing primarily in income-producing equity
securities. The fund invests mostly in high-income stocks and some high-
yielding bonds (including junk bonds).
5. Global Asset Allocation Fund (1987) -- The investment objective is long-term
total return consistent with preservation of capital. The fund allocates its
assets among several categories of equity and fixed-income securities, both
of U.S. and foreign issuers.
6. Growth and Income Fund (1981) -- The investment objective is long-term
capital appreciation. The fund buys stocks of established companies.
7. International Fund (1991) -- The investment objective is long-term capital
appreciation. The fund trades in securities issued outside the United
States--mostly stocks, with an occasional bond or money market security.
8. Managed Fund (1983) -- The investment objective is maximum long-term total
return (capital gains plus income) consistent with prudent investment
strategy. The fund invests in a mix of stocks, bonds, and money market
securities, as determined by an investment committee.
9. Money Market Fund (1981) -- The investment objective is maximum current
income consistent with the preservation of capital. The fund invests in
short-term obligations issued by U.S. corporations; the U.S. Government; and
federally-chartered banks and U.S. branches of foreign banks.
10. Social Awareness Fund (1988) -- The investment objective is long-term
capital appreciation. The fund buys stocks of established companies which
adhere to certain specific social criteria.
11. Special Opportunities Fund (1981) -- The investment objective is maximum
capital appreciation. The fund primarily invests in mid-size companies whose
stocks have significant growth potential. Current income is a secondary
consideration.
SERIES
[PLEASE NOTE: AS OF THE DATE OF THIS PROSPECTUS, THE SERIES' WERE NOT YET
AVAILABLE IN ALL STATES. PLEASE CONSULT YOUR INVESTMENT DEALER FOR CURRENT
INFORMATION ABOUT THE SERIES AVAILABILITY.]
Following are brief summaries of the investment objectives and policies of the
three series being offered by Delaware Group Premium Fund, Inc. More detailed
information may be obtained from the current prospectus for those Series, which
is included in this booklet. Please be advised that there is no assurance that
any of the Series will achieve their stated objectives.
1. Equity/Income -- seeks the highest possible total rate of return by selecting
issues that exhibit the potential for capital appreciation while providing
higher than average dividend income. This Series has the same objective and
investment disciplines as the Decatur Total Return Fund of Delaware Group
Decatur Fund, Inc., a separate Delaware Group fund, in that it invests
generally, but not exclusively, in common stocks and income-producing
securities convertible into common stocks, consistent with the Series'
objective.
2. Emerging Growth -- seeks long-term capital appreciation by investing
primarily in small-cap common stocks and convertible securities of emerging
and other growth-oriented companies. These securities will have been judged
to be responsive to changes in the market place and to have fundamental
characteristics to support growth. Income is not an objective. This Series
has the same objective and investment disciplines as Delaware Group Trend
fund, Inc., a separate Delaware Group fund.
3. Global Bond -- seeks current income consistent with preservation of principal
by investing primarily in fixed income securities that may also provide the
potential for capital appreciation. This Series is a global fund. As such, at
least 65% of the Series' assets will be invested in fixed income securities
of issuers organized or having a majority of their assets in or deriving a
majority of their operating income in at least three different countries, one
of which may be the United States. This Series has the same objective and
investment disciplines as the Global Bond Series of Delaware Group Global &
International Funds, Inc., a separate Delaware Group fund.
Shares of the funds and series are sold to Lincoln Life for investment of the
assets of the VAA and of Lincoln Life Flexible Premium Variable Life Account K,
for variable life insurance contracts. Shares of some, but not all, of the funds
are also sold to Lincoln Life for investment of the assets of Lincoln Life
Flexible Premium Variable Life Accounts D and G, also to fund variable life
insurance contracts. See Other information. Shares of the funds and series are
not sold directly to the general public.
We will purchase shares of the funds and series at net asset value and direct
them to the appropriate subaccounts of the VAA. We will redeem sufficient shares
of the appropriate funds and series to pay annuity payouts, death benefits,
surrender/ withdrawal proceeds, or for purposes described in the contract. If
you desire to transfer all or part of your investment from one subaccount to
another, we may redeem shares held in the first and purchase shares for the
other subaccount. The shares are retired, but they may be reissued later.
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INVESTMENT OBJECTIVES, POLICIES, RESTRICTIONS, AND SOCIAL CRITERIA
All of the investment objectives of the funds and series are fundamental which
means that no changes may be made without the affirmative vote of a majority of
the outstanding voting securities of each respective fund or series. The extent
to which the particular investment policies, practices, or restrictions for each
fund or series are fundamental or non-fundamental depends on the particular fund
or series. If they are non-fundamental, they may be changed by the Board of
Directors of the funds or series without shareholder approval.
You are urged to consult the Prospectuses in this booklet and SAIs for each
individual fund or series for additional information regarding the fundamental
and non-fundamental policies, practices, and restrictions of each of the funds
and series.
ADDITIONAL INVESTMENT ADVISOR INFORMATION (funds only)
Lincoln Investment remains primarily responsible for investment decisions
affecting the funds. However, Lincoln Investment currently has sub-advisory
agreements with six companies. Under these agreements, the sub-advisor may
perform some, or all, of the investment advisory services required by those
respective funds.
No additional compensation from the assets of those funds will be assessed as a
result of the sub-advisory agreements.
- --------------------------------------------------------------------------------
Following is a chart that shows the fund names and the
six sub-advisors under Lincoln Investment (the advisor):
<TABLE>
<CAPTION>
Fidelity
Management Putnam Investment Vantage Global
Clay Finlay Inc. Trust Co. Janus Capital Corp. Lynch &Mayer, Inc. Management, Inc. Advisors,Inc.
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Global Asset Growth and
International Equity-Income Capital Appreciation Aggressive Growth Allocation Income
- --------------------------------------------------------------------------------------------------------------------------------
Managed
(for stock portfolio)
- --------------------------------------------------------------------------------------------------------------------------------
Social
Awareness
- --------------------------------------------------------------------------------------------------------------------------------
Special
Opportunities
- --------------------------------------------------------------------------------------------------------------------------------
The Bond and Money Market Funds do not have sub-advisors.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Delaware Management is responsible for investment decisions affecting the three
series of the Delaware Group Premium Fund, Inc. offered by this prospectus.
REINVESTMENT
All dividend and capital gain distributions of the funds and series are
automatically reinvested in shares of the distributing funds and series at their
net asset value on the date of distribution. Dividends are not paid out to
contractowners as additional units, but are reflected in 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 funds and series held by the VAA. (We may substitute
shares of another Series or 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 and series should no longer be available, or if investment in
any fund's and series shares should become inappropriate, in the judgement of
our management, for the purposes for the contract.) No substitution of the
shares attributable to your account may take place without notice to you and
prior approval of the SEC, in accordance with the 1940 Act.
CHARGES AND OTHER DEDUCTIONS
DEDUCTIONS FROM PURCHASE PAYMENTS
There are no front-end deductions for sales charges made from purchase payments.
However, we will deduct premium taxes, when applicable.
ACCOUNT CHARGE
There is no account charge for single premium deferred contracts. For periodic
and flexible premium deferred contracts, we will deduct $25 from the contract
value on the last valuation date of each contract year to compensate us for the
administrative services provided to you; this $25 account charge will also be
deducted from the contract value upon surrender. Administrative services include
processing applications; issuing contracts; processing purchase and redemptions
of fund shares; maintaining records; administering annuity payouts; providing
accounting, valuation, regulatory, and reporting services.
(Flexible Premium Contract purchasers please note: the account charge may be
waived for purchasers who make an initial purchase payment larger than the
minimum required. Check with your sales representative to see if you qualify
under our current rules.)
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SURRENDER CHARGES
There are charges associated with the surrender of a contract or the withdrawal
of contract value (or of purchase payments, for flexible contracts) before the
annuity commencement date. The surrender charges associated with surrender or
withdrawal are paid to us to compensate us for the loss we experience on
contract distribution costs when contractowners surrender or withdraw before
distributions costs have been recovered. Charges are the same for
surrenders/withdrawals except that, for the first withdrawal in a contract year,
up to 15% of contract value (purchase payments for flexible contracts) may be
withdrawn free of charges. This 15% withdrawal exception does not apply to a
surrender of a contract.
A. PERIODIC PREMIUM DEFERRED CONTRACT
For the first withdrawal in a contract year in excess of 15%, for any subsequent
withdrawals in the same contract year, or for surrender of the contract, there
will be a surrender charge of 8% for years 1-5; 4% in years 6-10; and no charge
after the contract has been in force for 10 years. In addition, as explained
previously, an account charge will be deducted for a surrender.
Surrender charges will be waived in the event of the death of the annuitant. If
between the effective date of the contract and the annuitant's 65th birthday,
the annuitant should become totally and permanently disabled [as defined in
Section 22(e)(3) of the code], surrender charges will also be waived. In
addition, for 403(b) and 457 contracts only, surrender charges will be waived in
the event the annuitant: (1) has terminated employment with the employer that
sponsored the contract; and (2) has been in the contract for at least five years
(the five year date beginning either November 1, 1991 or the date of the
contract, whichever is later); and (3) is at least age 55.
B. SINGLE PREMIUM DEFERRED CONTRACT OR NON-RECURRING LUMP SUM PAYMENT TO
PERIODIC PREMIUM DEFERRED CONTRACT
For a single premium deferred contract or a non-recurring lump sum payment made
to a periodic premium deferred contract, the surrender/withdrawal charges (when
applicable as described previously) will be:
<TABLE>
<CAPTION>
Contract year in which surrender/withdrawal occurs
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 2 3 4 5 6 7 8+
Charge as a percent 7% 6 5 4 3 2 1 0
of proceeds withdrawn
</TABLE>
Investment gains attributable to a non-recurring lump sum payment made to a
periodic premium deferred contract will be subject to surrender charges of 8% in
years 1-5, 4% in years 6-10, and no charge after the contract has been in force
for 10 years.
Lump sum payments may be deposited into a periodic premium deferred contract
within 12 months of the effective date of the contract. After the 12-month
period, a new contract must be established for a lump sum payment.
For periodic premium deferred contracts under which a non-recurring lump sum has
been received, withdrawals will be made first from any amount subject to the
lowest charge until that amount is gone.
Surrender charges will be waived in the event of the death of the annuitant. If
between the effective date of the contract and the annuitant's 65th birthday,
the annuitant should become totally and permanently disabled, surrender charges
will also be waived.
C. FLEXIBLE PREMIUM DEFERRED CONTRACT
For a flexible premium deferred contract, the surrender/withdrawal charges (when
applicable as described previously) will be:
<TABLE>
<CAPTION>
Completed contract years between date of purchase
payments and date of surrender/withdrawal*
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0 1 2 3 4 5 6 7+
Charge as a percent of
total purchase payments
surrendered/withdrawn
in a contract year 7% 6 5 4 3 2 1 0
</TABLE>
*The surrender charge is calculated separately for each contract year's purchase
payments.
For the first withdrawal of purchase payments in each contract year, up to 15%
of purchase payments will be free of these charges.
Surrender charges will be waived in the event of the death of the annuitant. If
between the effective date of the contract and the annuitant's 65th birthday,
the annuitant should become totally and permanently disabled, surrender charges
will also be waived.
The surrender charge is calculated separately for each contract years purchase
payments to which a charge applies. (For purposes of calculating this charge, we
assume that purchase payments are withdrawn on a first in-first out basis, and
that all purchase payments are withdrawn before any earnings are withdrawn.) The
surrender charges associated with surrender or withdrawal are paid to us to
compensate us for the loss we experience on contract distributions costs when
contractowners surrender or withdraw before distribution costs have been
recovered.
DEDUCTIONS FROM THE VAA FOR ASSUMPTION OF MORTALITY AND EXPENSE RISKS
We deduct from the VAA an amount, computed daily, which is equal to an annual
rate of 1.002% of the daily net asset value, to compensate us for our assumption
of certain risks described below. This charge is made up of two parts: (1) Our
assumption of mortality risks (0.900%) and (2) Our assumption of expense risks
(0.102%). The level of this charge is guaranteed not to change.
Our assumption of mortality risks guarantees that the annuity payouts made to
our contractowners will not be affected by the mortality experience (life span)
either of
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persons receiving those payouts or of the general population. We assume this
mortality risk through guaranteed annuity rates incorporated into the contract
which cannot be changed.
If the 1.002% charge proves insufficient to cover underwriting and
administrative costs in excess of the charges made for administrative expenses,
we will absorb the loss. However, if the amount deducted proves more than
sufficient, we will keep the profit.
DEDUCTIONS FOR PREMIUM TAXES
Any premium tax or other tax levied by any governmental entity as a result of
the existence of the contracts or the VAA will be deducted from the contract
value when incurred, or at another time of our choosing.
The applicable premium tax rates that states and other governmental entities
impose on the purchase of an annuity are subject to change by legislation, by
administrative interpretation, or by judicial action. These premium taxes will
generally depend upon the law of your state of residence. The tax ranges from
0.5% to 4.0%.
OTHER CHARGES AND DEDUCTIONS
There are deductions from and expenses paid out of the assets of the eleven
funds and the three series that are described later in this booklet in the
Appendix to the funds' Prospectuses and in the prospectus for the series
respectively.
ADDITIONAL INFORMATION
Participants in the Texas Optional Retirement Program should refer to
Restrictions under the Texas Optional Retirement Program, later in this
Prospectus booklet.
The charges associated with surrender/withdrawal are paid to us to compensate us
for the cost of distributing the contracts. As required by the 1940 Act, in no
event will the aggregate surrender charges under a contract exceed 9% of your
total purchase payments.
The surrender and account 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 surrender and
account 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 one of our
authorized sales representatives. 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.
If a completed application and all other information necessary for processing a
purchase order are 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 cannot be completed
within those five days, you will be informed of the reasons, and the purchase
payment will be returned immediately (unless you specifically authorize us to
keep it until the application is complete). Once the application is complete,
the initial purchase payment must be priced within two business days.
WHO CAN INVEST
To apply for a periodic premium deferred 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 annuitant cannot be older than age 74.
To apply for a flexible premium deferred contract, a single premium deferred
contract or to make a non-recurring lump sum payment to a periodic premium
deferred contract, you must meet the same requirements as for an application of
a periodic premium deferred contract, except that the annuitant cannot be older
than age 84.
PURCHASE PAYMENTS
Purchase payments are payable to us at a frequency and in an amount selected by
you in the application. The minimum purchase payment for a single premium
deferred contract is $3,000 ($1,000 for IRAs and SEPs). The minimum initial
purchase payment for a flexible premium deferred contract is $3,000 ($1,000 for
IRAs and SEPs), and subsequent purchase payments must be at least $100. For a
periodic premium deferred contract, the minimum amount of any scheduled purchase
payment is $25, and the scheduled purchase payments must total at least $600 per
year. Purchase payments in any one contract year which exceed twice the amount
of purchase payments made in the first contract year may be made only with our
permission. Purchase payments in total may not exceed $1 million for each
annuitant. If you stop making purchase payments, the contract will remain in
force as a paid-up contract as long as the total contract value is at least
$600. Payments may be resumed at any time until the annuity
13
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ACCOUNT C
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commencement date, the surrender of the contract, or the death of the annuitant,
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 that the New York Stock
Exchange is open for trading (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 or series, acccording to your instructions.
The minimum amount of any purchase payment which can be put into any one
subaccount is $20 under periodic premium deferred contracts and $1,000 under
single premium deferred contracts and flexible premium deferred contracts. Upon
allocation to the appropriate 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 the home office if received before 4:00 p.m., E.S.T. If the purchase
payment is received at or after 4:00 p.m., E.S.T., we will use the accumulation
unit value computed on the next valuation date. The number of accumulation units
determined in this way shall not be 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 investments perform, but also
upon the related expenses of the VAA and the underlying funds and series.
VALUATION OF ACCUMULATION UNITS
Accumulation units for each subaccount are valued separately. Initially, the
value of each accumulation unit was set at $1.00. Thereafter, the value of an
accumulation unit in any subaccount on any valuation date equals the value of an
accumulation unit in that subaccount as of the preceding valuation date
multiplied by the net investment factor of that subaccount for the current
valuation period.
To determine the net investment factor, first we calculate a gross investment
rate for each fund or series for the valuation period. This rate is equal to (a)
the investment income of the fund or series for the valuation period (plus
capital gains and minus capital losses for the period, realized or unrealized);
minus (b) a daily charge against net assets for investment advisory services and
other expenses accrued by the fund or series for each day of the valuation
period; then (c) the remainder is divided by the net asset value of the fund or
series at the beginning of the valuation period. This gross investment rate may
be positive or negative.
Once the gross investment rate is determined, we then derive the net investment
rate for each subaccount. That rate is equal to the gross investment rate for
the fund or series minus a daily charge at an annual rate of 1.002% for each day
of the valuation period.
Finally, to obtain the net investment factor for each subaccount, we add
1.000000, to its net investment rate for the valuation period.
TRANSFERS 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 as of the
valuation date immediately following receipt of the transfer request.
Transfers between subaccounts are restricted to once every 30 days; although, we
reserve the right to waive this 30-day period. The minimum amount which may be
transferred between subaccounts is $500 [or the entire amount in the subaccount,
if less than $500. (We have the right to reduce the minimum amount.)] If the
transfer from a subaccount would leave you with less than $100 in the
subaccount, we may transfer the total balance of the subaccount. We have the
right to reduce the minimum amounts. A transfer may be made by writing to the
home office or, if a Telephone Exchange Authorization form (available from us)
is on file with us, by a toll-free telephone call.
You may also transfer all or any part of the contract value from the
subaccount(s) to the fixed side of the contract. Transfers from the fixed side
of the contract to the various subaccount(s) are allowed subject to the
following restrictions: (1) no more than 25% of the value of the fixed side may
be transferred to the subaccount in any 12 month period; and (2) the minimum
amount which can be transferred is $500 or the amount in the fixed account. We
reserve the right to waive any of these restrictions.
When thinking about a transfer of contract 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.
There is no charge to you for a transfer. However, we reserve the right to
impose a charge in the future for any transfers to and from the General Account,
subject to approval of the SEC.
TRANSFERS ON OR FOLLOWING THE ANNUITY COMMENCEMENT DATE
You may transfer all or a portion of your investment in one subaccount to
another subaccount or to the fixed side of the contract. Those transfers will be
limited to three times per contract year. However, on or after the annuity
commencement date, no transfers are allowed from the fixed side of the contract
to the subaccounts.
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DEATH BENEFIT BEFORE THE ANNUITYCOMMENCEMENT DATE
You may designate a beneficiary during the life of the annuitant and change the
beneficiary by filing a written request with the 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.
If the annuitant dies before the annuity commencement date, a death benefit
equal to the current value of the contract will be paid to your designated
beneficiary. 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, satisfactory to us, of the death of the annuitant; (2)
Written authorization for payment; and (3) Our receipt of all required claim
forms, fully completed. The death benefit does not involve any element of
insurance.
At any time during a 60-day period beginning with the death of the annuitant,
the beneficiary may elect to receive payment either in the form of a lump sum
settlement or an annuity payout.
If a lump sum settlement is requested, the proceeds will be mailed within seven
days of receipt of satisfactory claim documentation, as discussed previously,
subject to the laws and regulations governing payment of death benefits. If an
election has not been made by the end of the 60-day period, a lump sum
settlement will be made to the beneficiary at that time. This payment may be
postponed as permitted by the 1940 Act.
If an annuity payout is elected, the annuity commencement date shall be the date
specified in the request but no later than 60 days after we receive satisfactory
claim documentation as discussed previously. Payment will be made in accordance
with applicable laws and regulations governing payment of death benefits.
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 annuitant, that beneficiary's interest
will go to any other beneficiaries named, according to their respective
interests. There are no restrictions on the beneficiary's use of the
proceeds; and/or
2. If no beneficiary survives the annuitant, the proceeds will be paid to the
contractowner or to his/her estate, as applicable.
JOINT/CONTINGENT OWNERSHIP
If joint owners are named in the application, the joint owners shall be treated
as having equal undivided interests in the contract. Either owner, independently
of the other, may exercise any ownership rights in this contract.
A contingent owner may exercise ownership rights in this contract only after the
contractowner dies.
DEATH OF CONTRACTOWNER
If the contractowner of a nonqualified contract dies before the annuity
commencement date, then, in compliance with the code, the cash surrender value
of the contract will be paid as follows:
1. Upon the death of a non-annuitant contractowner, the proceeds shall be paid
to any surviving joint or contingent owner(s). If no joint or contingent
owner has been named, then the proceeds shall be paid to the annuitant named
in the contract; and
2. Upon the death of a contractowner, who is also the annuitant, the death will
be treated as death of the annuitant and the provisions of this contract
regarding death of annuitant will control. If the recipient of the proceeds
is the surviving spouse of the contractowner, the contract may be continued
in the name of that spouse as the new contractowner.
The code requires that any distribution be paid within five years of the death
of the contractowner 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 period certain not exceeding the beneficiary's life expectancy.
SURRENDERS AND WITHDRAWALS
Before the annuity commencement date (but not after), we will allow the
surrender of the contract or a withdrawal of the contract value upon your
written request.
Special restrictions on surrenders/withdrawals apply if your contract is
purchased as part of a retirement plan of a public school system or 501(c)(3)
organization under Section 403(b) of the code. Beginning January 1, 1989, in
order for a contract to retain its tax-qualified status, Section 403(b)
prohibits a withdrawal from a 403(b) contract of post-1988 contributions (and
earnings on those contributions) pursuant to a salary reduction agreement.
However, this restriction does not apply if the annuitant attains age (a) 591/2,
(b) separates from service, (c) dies, (d) becomes totally and permanently
disabled and/or (e) experiences financial hardship (in which event the income
attributable to those contributions may not be withdrawn).
Pre-1989 contributions and earnings through December 31, 1988, are not subject
to the previously stated restriction.
The contract value available upon surrender/withdrawal is the value of the
contract 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 and from the General Account in the same proportion that the
amount of withdrawal bears to the total contract value. The minimum amount which
can be withdrawn is $100, and the remaining contract value must be at least
$300. Where permitted by contract, surrender/withdrawal payments will be mailed
within seven days after we receive a valid
15
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written request at the home office. The payment may be postponed as permitted by
the 1940 Act.
There are charges associated with surrender of a contract or withdrawal of
contract value before the annuity commencement date. See Charges and other
deductions.
The tax consequences of a surrender/withdrawal are discussed later in this
booklet. See Federal tax status.
If the total contract value is less than $600, and if no purchase payments have
been made for at least two years, we reserve the right to terminate the
contract.
REINVESTMENT PRIVILEGE
You may elect to make a reinvestment purchase with any part of the proceeds of a
surrender/withdrawal, and we will recredit the surrender/withdrawal charges
previously deducted. This election must be made within 30 days of the date of
the surrender/withdrawal, and the repurchase must be of a contract covered by
this Prospectus. A representation must be made that the proceeds being used to
make the purchase have retained their tax-favored status under an arrangement
for which the contracts offered by this Prospectus are designed. The number of
accumulation units which will be credited when the proceeds are reinvested will
be based on the value of the accumulation unit(s) on the next valuation date.
This computation will occur following receipt of the proceeds and request for
reinvestment at the home office. You may utilize the reinvestment privilege only
once. For tax reporting purposes, we will treat asurrender/withdrawal and a
subsequent reinvestment purchase as separate transactions. You should consult a
tax advisor before you request a surrender/withdrawal or subsequent reinvestment
purchase.
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 9% in the first contract year
and 4% in renewal contract years, or an equivalent schedule.
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. The assets of the VAA are not
chargeable with liabilities arising from any other business that we may conduct.
Contracts may not be assigned or transferred except as permitted by the Employee
Retirement Income Security Act (ERISA) of 1974 and upon written notification to
us. We assume no responsibility for the validity or effect of any assignment.
Consult your tax advisor about the tax consequences of an assignment.
CONTRACTOWNER QUESTIONS
The obligations to purchasers under the contracts are those of Lincoln Life.
Your questions and concerns should be directed to us at 1-800-348-1212.
ANNUITY PAYOUTS
When you apply for a contract, you may select any annuity commencement date
permitted by law. However, this date cannot be later than the annuitant's 85th
birthday. (PLEASE NOTE THE FOLLOWING EXCEPTION: Contracts issued under qualified
employee pension and profit-sharing trusts [described in Section 401(a) and tax
exempt under Section 501(a) of the code] and qualified annuity plans [described
in Section 403(a) of the code], including H.R. 10 trusts and plans covering
self-employed individuals and their employees, provide for annuity payouts to
start at the date and under the option specified in the plan.)
The contract provides that all or part of the contract value may be used to
purchase an annuity. Optional forms of payout of annuities (annuity options) are
available, each of which is payable on a variable basis, a fixed basis, or a
combination of both. We may choose to make other annuity options available in
the future.
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 annuitant WOULD RECEIVE NO
PAYOUTS IF death occurs 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 annuitant.
JOINT-AND-SURVIVOR 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-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, during their lifetime,
receives two thirds of the periodic payout made when both were alive.
16
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ACCOUNT C
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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, divided by (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 home office receives written notice of the annuitant's
death if received before 4:00 p.m. E.S.T. Otherwise, the computation shall be
made on the next valuation date.
Other options may be made available by us. The mortality and expense risk charge
and the charge for administrative services will be assessed on all annuity
payouts, including those that do not have a life contingency and therefore no
mortality risk.
You may change your annuity commencement date, change your annuity option, or
change the allocation of your investment among subaccounts up to 30 days before
your 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 (on a fixed, variable or combination fixed and variable basis, in
proportion to the account allocation at the time of annuitization) with 120
monthly payouts guaranteed, except when a joint and survivor payout is required
by law. Under any option providing for guaranteed payouts, the number of payouts
which remain unpaid at the date of the annuitant's death will be paid to your
beneficiary as payouts become due.
The contract contains no provision under which an annuitant or a beneficiary may
surrender their contract or make a withdrawal and receive a lump-sum settlement
once annuity payouts have begun. See Surrenders and withdrawals. Options are
only available to the extent they are consistent with the requirements of
Section 72(s) of the code, if applicable.
VARIABLE ANNUITY PAYOUTS
Variable annuity payouts will be determined using:
1. The contract value before the annuity commencement date;
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 annuitant 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 month thereafter.
We assume an investment return of 5% per year, as applied to the applicable
mortality table. The amount of each payout after the initial payout will depend
upon how the underlying fund(s) and series perform, relative to the 5% assumed
rate. There is a more complete explanation of this calculation in the SAI.
FEDERAL TAX STATUS
This section is a discussion of the Federal income tax rules applicable to the
contracts as of the date of this Prospectus. More information is provided in the
SAI. THESE DISCUSSIONS AND THOSE IN THE SAI ARE NOT INTENDED AS TAX ADVICE. This
section does not discuss the Federal tax consequences resulting from every
possible situation. No attempt has been made to consider any applicable state,
local, or foreign tax law, other than the imposition of any state premium taxes
(See Charges and other deductions). If you are concerned about the tax
implications with respect to the contracts, you should consult a tax advisor.
The following discussion is based upon our understanding of the present Federal
income tax laws as they are currently interpreted by the Internal Revenue
Service(IRS). No representation is made about the likelihood of continuation of
the present Federal income tax laws or their current interpretations by the IRS.
TAXATION OF NONQUALIFIED CONTRACTS
You are generally not taxed on increases in the value of your contract until a
distribution occurs. This distribution can be in the form of a lump sum payout
received by requesting all or part of the cash surrender value (i.e.
surrenders/withdrawals) or as annuity payouts. For this purpose, the assignment
or pledge of, or the agreement to assign or pledge, any portion of the value of
a contract will be treated as a distribution. A transfer of ownership of a
contract, or designation of an annuitant (or other beneficiary) who is not also
the contractowner, may also result in tax consequences. The taxable portion of a
distribution (in the form of a lump sum payout or an annuity) is taxed as
ordinary income. For purchase payments made after February 28, 1986, a
contractowner who is not a natural person (for example, a corporation) [subject
to limited exceptions] will be taxed on any increase in the contract's cash
value over the investment in the contract during the taxable year, even if no
distribution occurs. The next discussion applies to contracts owned by natural
persons.
In the case of a surrender under the contract or with-drawal of contract value,
generally amounts received are first treated as taxable income to the extent
that the cash value of the contract immediately before the surrender
17
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ACCOUNT C
- --------------------------------------------------------------------------------
exceeds the investment in the contract at that time. Any additional amount
withdrawn is not taxable. In the case of a surrender under a contract issued
before August 14, 1982, and allocable to an investment in the contract made
before that date, amounts received are treated as taxable income only to the
extent that they exceed the investment in the contract. The investment in the
contract generally equals the portion, if any, of any premium paid by or on
behalf of an individual under a contract which is not excluded from the
individual's gross income.
Even though the tax consequences may vary depending on the form of annuity
payout selected under the contract, the recipient of an annuity payout generally
is taxed on the portion of such payout that exceeds the investment in the
contract. For variable annuity payouts, the taxable portion is determined by a
formula that establishes a specific dollar amount of each payout that is not
taxed. The dollar amount is determined by dividing the investment in the
contract by the total number of expected periodic payouts. For fixed annuity
payouts, there generally is no tax on the portion of each payout that represents
the same ratio that the investment in the contract bears to the total expected
value of payouts for the term of the annuity; the remainder of each payout is
taxable. For individuals whose annuity starting date is after December 31, 1986,
the entire distribution (whether fixed or variable) will be fully taxable once
the recipient is deemed to have recovered the dollar amount of the investment in
the contract.
There may be imposed a penalty tax on distributions equal to 10% of the amount
treated as taxable income. The penalty tax is not imposed in certain
circumstances, which generally are distributions:
1. Received on or after age 591/2;
2. Made as a result of death or disability;
3. Received in substantially equal periodic payments as a life annuity (subject
to special recapture rules if the series of payouts is subsequently
modified);
4. Allocable to the investment in the contract before August 14, 1982;
5. Under a qualified funding asset in a structured settlement;
6. Under an immediate annuity contract as defined in the code; and/or
7. Under a contract purchased in connection with the termination of certain
retirement plans.
QUALIFIED CONTRACTS
The contracts may be purchased in connection with the following types of tax-
favored retirement plans:
1. Contracts purchased for employees of public school systems and certain tax-
exempt organizations, qualified under Section 403(b) of the code;
2. Pension and profit-sharing plans of self-employed individuals (H.R. 10 or
Keogh plans) or corporations, qualified under Section 401(a) or 403(a) of the
code;
3. IRAs, qualified under Section 408 of the code;
4. Deferred compensation plans of state or local governments, qualified under
Section 457 of the code; and/or
5. SEPs, qualified under Section 408(k) of the code.
The tax rules applicable to these plans, including restrictions on contributions
and benefits, taxation of distributions and any tax penalties, vary according to
the type of plan and its terms and conditions. Participants under such plans, as
well as contractowners, annuitants and beneficiaries, should be aware that the
rights of any person to any benefits under such plans may be subject to the
terms and conditions of the plans themselves, regardless of the terms and
conditions of the contracts. Purchasers of contracts for use with any qualified
plan, as well as plan participants and beneficiaries, should consult counsel and
other advisors as to the suitability of the contracts to their specific needs,
and as to applicable code limitations and tax consequences.
MULTIPLE CONTRACTS
All contracts entered into after October 21, 1988, and issued by the same
insurance company (or its affiliates) to the same contractowner during any
calendar year will be treated as a single contract for tax purposes.
INVESTOR CONTROL
The Treasury Department has indicated that guidelines may be issued under which
a variable annuity contract will not be treated as an annuity contract for tax
purposes if the contractowner has excessive control over the investments
underlying the contract. The issuance of those guidelines may require us to
impose limitations on your right to control the investment. We do not know
whether any such guidelines would have a retroactive effect.
WITHHOLDING
Generally, pension and annuity distributions are subject to withholding for the
recipient's Federal income tax liability at rates that vary according to the
type of distribution and the recipient's tax status. Recipients, however,
generally are provided the opportunity to elect not to have tax withheld from
distributions. Under the Unemployment Compensation Amendments of 1992 (UCA), 20%
income tax withholding may apply to eligible rollover distributions. All taxable
distributions from qualified plans and Section 403(b) annuities are eligible
rollover distributions, except (1) annuities paid out over life or life
expectancy, (2) installments paid for a period spanning 10 years or more, and
(3) required minimum distributions. The UCA imposes a mandatory 20% income tax
withholding on any eligible rollover distribution that the contractowner does
not elect to have paid in a direct rollover to another qualified plan, Section
403(b) annuity or individual retirement account.
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ACCOUNT C
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Distributions from Section 457 plans are subject to the general wage withholding
rules.
VOTING RIGHTS
As required by law, we will vote the fund and series shares held in the VAA at
meetings of the shareholder of the various funds and series. The voting will be
done according to the instructions of contractowners who have interests in any
subaccounts which invest in a fund or funds and series. If the 1940 Act or any
regulation under it should be amended or if present interpretations should
change, and if as a result we determine that we are permitted to vote the fund
shares in our own right, we may elect to do so.
The number of votes which 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. After the annuity commencement date, the votes
attributable to a contract will decrease.
Fund shares held in a subaccount for which no timely instructions are received
will be voted by us in proportion to the voting instructions which are received
for all contracts participating in that subaccount. Voting instructions to
abstain on any item to be voted on will be applied on a pro-rata basis to reduce
the number of votes eligible to be cast.
Maryland law and the bylaws of each fund and series allow investment companies
registered under the 1940 Act to dispense with annual meetings of shareholders
in certain cases where the meetings are only a formality. The Board of Directors
of each fund will decide each year whether or not to hold the shareholder's
annual meeting for that year.
The dispensing with annual meetings of the shareholder in effect results in
retaining the existing Directors in office. Consequently, the SEC requires the
funds to assure contractowners that a majority of those Directors have at some
point been elected by the shareholder. The SEC also requires that the funds
comply with Section 16(c) of the 1940 Act, concerning procedures by which
shareholders may remove Directors. For a more detailed explanation of this
procedure, see Description of shares in the Appendix to the Prospectuses for the
funds; also see the Prospectus for the series fund.
Annual meetings of each fund and of the series fund normally will not be held,
unless the Board of Directors decides to hold them. Special meetings of the
shareholder may be called for any valid purpose. Whenever a shareholder's
meeting is called, each person having a voting interest in a subaccount will
receive proxy voting material, reports and other materials relating to the fund.
DISTRIBUTION OF THE CONTRACTS
We are the distributor of the contracts. They will be sold by our registered
representatives who have been licensed by state insurance departments. The
contracts will also be sold by independent broker-dealers who have been licensed
by state insurance departments to represent us and who have selling agreements
with us. We are registered with the SEC under the Securities Exchange Act of
1934 as a broker-dealer and are a member of the National Association of Security
Dealers (NASD). Lincoln Life will offer contracts in all states where it is
licensed to do business.
RETURN PRIVILEGE
Within the free-look period after you first receive the contract, you may cancel
it for any reason by delivering or mailing it postage pre-paid, to the home
office at P.O. Box 2340, 1300 South Clinton Street, Fort Wayne, Indiana, 46801.
A contract canceled under this provision will be void. With respect to the fixed
portion of a contract, we will return purchase payments. With respect to the
VAA, except as explained in the following paragraph, we will return the contract
value as of the date of receipt of the cancellation, plus any contract
maintenance and administrative fees and any premium taxes which had been
deducted. No surrender charge will be made. 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 once every five years.
RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Title 8, Section 830.105 of the Texas Government Code, consistent with prior
interpretations of the Attorney General of the State of Texas, permits
participants in the Texas Optional Retirement Program (ORP) to redeem their
interest in a variable annuity contract issued under the ORP only upon:
1. Termination of employment in all institutions of higher education as defined
in Texas law;
2. Retirement; or
3. Death.
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ACCOUNT C
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Accordingly, participants in the ORP will be required to obtain a certificate of
termination from their employer(s) before accounts can be redeemed.
RECORDS AND REPORTS
As presently required by the 1940 Act and applicable regulations, we will
maintain all records and accounts relating 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 by 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 filed with the SEC.
Lincoln National Flexible Premium Variable Life Accounts D, G and K, segregated
investment accounts of ours registered under the 1940 Act, are authorized to
invest assets in the following funds and series: Bond, Growth and Income,
Managed, Money Market and Special Opportunities (for Account D); Growth and
Income and Special Opportunities (for Account G) and all funds and series for
Account K. Through the VAA and the Variable Life Accounts we are the sole
shareholder in the eleven funds. However, we are not the sole shareholder of
series shares in the Delaware Group Premium Fund, Inc. Collectively, the VAA and
the Variable Life Accounts may be referred to in this booklet and in the SAI as
the variable accounts.
Due to differences in redemption rates, tax treatment or other considerations,
the interests of contractowners under the Variable Life Accounts could conflict
with those of contractowners under the VAA. In those cases where assets from
variable life and variable annuity Separate accounts are invested in the same
fund or funds or series (i.e., where mixed funding occurs), or where different
the Boards of Directors of the funds involved will monitor for any material
conflicts and determine what action, if any, should be taken. Refer to the
Prospectus for each fund and for the series fund for more information about
mixed funding.
In the future, we may purchase shares in the funds and series for one or more
unregistered segregated investment accounts.
ADVERTISEMENTS/SALES LITERATURE
In marketing the variable annuity contracts, we and our various sales
representatives may refer to certain ratings assigned to us under the Rating
System of the A.M. Best Co., Oldwick, New Jersey. The objective of Best's Rating
System is to evaluate the various factors affecting the overall performance of
an insurance company in order to provide Best's opinion about that company's
relative financial strength and ability to meet its contractual obligations. The
procedure includes both a quantitative and qualitative review of the insurance
company. In marketing the contracts and the underlying funds and series, we may
at times use data published by other nationally-known independent statistical
services. These service organizations provide relative measures of such factors
as an insurer's claim-paying ability, the features of particular contracts, and
the comparative investment performance of the funds and series with other
portfolios having similar objectives. A few such services are: Duff & Phelps,
the Lipper Group, Moody's, Morningstar, Standard and Poor's and VARDS. There is
more information about each of these services under Advertising and sales
literature in the SAI. Marketing materials may employ illustrations of compound
interest and dollar-cost averaging; discuss automatic withdrawal services;
describe our customer base, assets, and our relative size in the industry. They
may also discuss other features of Lincoln Life, the VAA, the funds, the series,
and their investment management.
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS FOR SEPARATE ACCOUNT C
Item
- --------------------------------------------------------------------------------
General information and history of
Lincoln Life
Special terms
Services
Purchase of securities being offered
Underwriters
Calculation of performance data
Annuity payments
Federal tax status
Determination of net asset value
Advertising and sales literature/graphics
Financial statements
For a free copy of the SAI please see page one of this booklet.
20
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ACCOUNT C
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LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C (VAA) (REGISTRANT)
LINCOLN NATIONAL LIFE INSURANCE COMPANY (DEPOSITOR)
Statement of Additional Information (SAI)
This SAI should be read in conjunction with the Prospectus of the VAA dated May
1, 1996. You may obtain a copy of the Account C Prospectus on request and
without charge. Please write Kim Oakman, Lincoln National Life Insurance Co.,
P.O. Box 2340, Fort Wayne, Indiana 46801 or call 1-800-348-1212, Ext. 4912.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
- ------------------------------------------------------
<S> <C>
GENERAL INFORMATION AND HISTORY
OF LINCOLN LIFE B- 2
- ------------------------------------------------------
SPECIAL TERMS B- 2
- ------------------------------------------------------
SERVICES B- 2
- ------------------------------------------------------
PURCHASE OF SECURITIES BEING OFFERED B- 2
- ------------------------------------------------------
UNDERWRITERS B- 2
- ------------------------------------------------------
CALCULATION OF PERFORMANCE DATA B- 2
- ------------------------------------------------------
ANNUITY PAYOUTS B- 5
- ------------------------------------------------------
FEDERAL TAX STATUS B- 5
- ------------------------------------------------------
DETERMINATION OF NET ASSET VALUE B- 8
- ------------------------------------------------------
ADVERTISING AND SALESLITERATURE/GRAPHICS B- 8
- ------------------------------------------------------
FINANCIAL STATEMENTS B-12
- ------------------------------------------------------
</TABLE>
This SAI is not a PROSPECTUS.
The date of this SAI is May 1, 1996
B-1
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ACCOUNT C
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GENERAL INFORMATION AND HISTORY OF LINCOLN NATIONAL LIFE INSURANCE CO. (LINCOLN
LIFE)
The prior Depositor of the account, Lincoln National Pension Insurance Co., was
merged into Lincoln Life, effective January 1, 1989. Lincoln Life, organized in
1905, is an Indiana stock insurance corporation, engaged primarily in insurance
and financial services. Lincoln Life is owned by Lincoln National Corp., a
publicly held insurance holding company domiciled in Indiana.
SPECIAL TERMS
The special terms used in this SAI are the ones defined in the Prospectus. They
are italicized to make this document more understandable.
SERVICES
CUSTODIAN
The custodian for the securities purchased by the Bond, Growth and Income,
Managed, Money Market, Social Awareness and Special Opportunities Funds is
Bankers Trust C., 14 Wall Street, 4th Floor, New York, New York 10005. For the
Aggressive Growth, Capital Appreciation, Equity-Income, International and Global
Asset Allocation Funds, the custodian is State Street Bank and Trust C., 225
Franklin Street, Boston, Massachusetts 02110. The custodian, as authorized by
each eligible fund, will hold, transfer, exchange, deliver or loan the fund's
securities and will maintain certain cash accounts in support of those
functions.
INDEPENDENT AUDITORS
The financial statements of the VAA and the consolidated financial statements
and schedules of Lincoln Life appearing in this SAI and registration statement
have been audited by Ernst & Young LLP, independent auditors, to the extent
indicated in their reports thereon also appearing elsewhere herein and in the
registration statement. Such financial statements and schedules have been
included herein in reliance upon such reports given upon the authority of such
firm 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. 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 variable annuity contracts.
PURCHASE OF SECURITIES BEING OFFERED
The variable annuity contracts are offered to the public through licensed
insurance agents who specialize in selling Lincoln Life products; through
independent insurance brokers; and through certain securities broker/dealers
selected by Lincoln Life whose personnel are legally authorized to sell annuity
products. There are no special purchase plans for any class of prospective
buyers.
There are exchange privileges between subaccounts, and between the VAA and
Lincoln Life's General Account (See Transfers of accumulation units between
subaccounts in the Prospectus.) No exchanges are permitted between the VAA and
other separate accounts.
UNDERWRITERS
Lincoln Life has contracted with some broker/dealers, and may contract with
others, to sell the variable contracts through certain legally authorized
persons and organizations. These dealers are compensated under a standard
Compensation Schedule.
Lincoln Life is the principal underwriter for the variable contracts. The
offering of the contracts is continuous. Lincoln Life retains no underwriting
commissions from the sale of the variable contracts.
CALCULATION OF PERFORMANCE DATA
a. MONEY MARKET FUNDED SUBACCOUNTS:
1. Seven-day yield: 5.44%
Length of base period used in computing the yield: 7 days
Last Day in the base period: December 31, 1995
2. The yield reported above and in the table of Condensed financial
information in the
B-1
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ACCOUNT C
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Prospectus is determined by calculating the change in unit value for the
base period (the7-day period ended December 31, 1995); then dividing this
figure by the account value at the beginning of the period; then
annualizing this result by the factor of 365/7. This yield includes all
deductions charged to the contractowner's account, and excludes any
realized gains and losses from the sale of securities.
B. OTHER SUBACCOUNTS:
1. TOTAL RETURN -- the table below shows, for the various subaccounts of the
VAA, an average annual total return as of the stated periods, based upon a
hypothetical initial purchase payment of $1,000, calculated according to
the formula set out after the table.
AVERAGE ANNUAL TOTAL RETURN PERIOD ENDING December 31, 1995
<TABLE>
<CAPTION>
1-year period 5-year period 10-year period
Periodic Single & Flexible Periodic Single & Flexible Periodic Single & Flexible
Pymt. Contracts Prem. Contracts Pymt. Contracts Prem. Contracts Pymt. Contracts Prem. Contracts
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
B/1/ 8.45% 10.81% 8.12% 8.57% 8.48% 8.48%
- ----------------------------------------------------------------------------------------------------------------------------------
G&I/1/ 25.96% 28.70% 14.01% 14.48% 13.00% 13.00%
- ----------------------------------------------------------------------------------------------------------------------------------
I/2/ -1.07% 1.08% N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
M/3/ 17.66% 20.22% 10.24% 10.70% 10.19% 10.19%
- ----------------------------------------------------------------------------------------------------------------------------------
GAA/4/ 12.71% 15.16% 10.40% 10.86% 8.03% 8.56%
- ----------------------------------------------------------------------------------------------------------------------------------
SA/5/ 30.39% 38.23% 16.18% 16.66% 13.88% 14.49%
- ----------------------------------------------------------------------------------------------------------------------------------
SO/1/ 20.28% 22.64% 16.71% 17.20% 11.13% 11.13%
- ----------------------------------------------------------------------------------------------------------------------------------
AG/6/ 22.67% 25.34% N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
CA/6/ 16.95% 19.50% N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
EI/6/ 22.17% 24.83% N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Key: B=Bond Fund; G&I=Growth & Income Fund; I=International Fund; M=Managed
Fund; GAA=Global Asset Allocation Fund; SA=Social Awareness Fund; SO=Special
Opportunities Fund; AG=Aggressive Growth Fund; CA=Capital Appreciation Fund;
EI=Equity-Income Fund
* The lifetime of this subaccount is less than the complete period indicated.
See the date the subaccount commenced activity under the notation Footnotes.
FOOTNOTES:
1 Subaccount commenced activity on December 21, 1981
2 Subaccount commenced activity on May 1, 1991
3 Subaccount commenced activity on April 29, 1983
4 Subaccount commenced activity on August 3, 1987
5 Subaccount commenced activity on May 2, 1988
6 Subaccount commenced activity on Jan 3, 1994
N/A = not applicable.
The length of the periods and the last day of each period used in the above
table are set out in the table heading and in the footnotes above. The 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)
The formula assumes that: 1) all recurring fees have been charged to
contractowner accounts; 2) all applicable non-recurring charges are deducted at
the end of the period in question; and 3) there will be a complete redemption at
the end of the period in question. The performance figures shown in the table
above relate to the contract form containing the highest level of charges.
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ACCOUNT C
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C. NON-STANDARDIZED PERFORMANCE DATA
The VAA advertises the performance of its various subaccounts by observing how
they perform over various time periods--monthly, year-to-date, yearly (fiscal
year); and over periods of two years and more. Monthly, year-to-date and yearly
performance are computed on a cumulative basis; performance for a two-year
period and for greater periods is computed both on a cumulative and on an
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.
The table below sets out representative performance quotations, according to the
definitions above, for each of the subaccounts, for the following base periods:
1) monthly; 2) year-to-date; 3) yearly; and 4) a two-year period. For all
quotations except 2), the end of the base period is December 31, 1995. For
number two, the end of the base period is November 30, 1995. (The year-to-date
quotation would equal the yearly quotation if the end of the base period
selected for the former were December 31.) In addition, the account may
advertise by quotations with base periods of more than two years. These will be
calculated in an identical manner to the method used to calculate the quotation
for the two-year period; the only difference is that the base period utilized in
the formula will be longer.
NON-STANDARDIZED PERFORMANCE DATA SUBACCOUNTS OF ACCOUNT C+
<TABLE>
<CAPTION>
Type of
Performance Subaccount
Data AG B CA EI GAA G&I I M
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Monthly
(12/31/95) 2.32% 1.56% 1.24% 2.69% 1.85% .28% 1.88% 1.08%
Year-to-Date
(11/30/95) 30.39 16.15 25.64 29.40 20.31 36.61 5.61 26.61
Yearly
(12/31/95) 33.42 17.96 27.20 32.87 22.59 37.00 7.60 27.97
3-Year (Cum.) N/A 24.43 N/A N/A 38.52 54.08 51.77 37.42
3-Year (Ann.) N/A 7.56 N/A N/A 11.47 15.50 14.92 11.18
Type of Subaccount
Performance Data MM SA SO
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Monthly (12/31/95) .37% .49% -1.29%
Year-to-Date (11/30/95) 4.21 41.12 32.24
Yearly (12/31/95) 4.59 41.82 30.54
3-Year (Cum.) 9.35 58.32 50.20
3-Year (Ann.) 3.02 16.55 14.52
</TABLE>
+ - Table excludes surrender charges.
Key: AG=Aggressive Growth Fund; B=Bond Fund; CA=Capital Appreciation Fund;
EI=Equity-Income Fund; GAA=Global Asset Allocation Fund; G&I=Growth & Income
Fund; I=International Fund; M=Managed Fund; MM=Money Market Fund; SA=Social
Awareness Fund; SO=Special Opportunities Fund
Cum.= Cumulative return
Ann.= Annualized return
N/A= Not Applicable
All performance quotations may be advertised on a cumulative basis; performance
quotations with a base period of two years or longer may also be advertised on
an annualized basis.
B-4
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ACCOUNT C
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ANNUITY PAYOUTS
VARIABLE ANNUITY PAYOUTS
Variable annuity payouts will be determined on the basis of: (1) the value of
the contract before the annuity commencement date; (2) the annuity tables
contained in the contract; (3) the type of annuity option selected; and (4) the
investment performance of the eligible 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 annuitant 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 variable annuity payout is determined by applying
the total value of the accumulation units credited under the contract valued as
of the 14th day before the annuity commencement date (less any premium taxes) to
the annuity tables contained in the contract. Amounts shown in the tables are
based on the 1971 Individual Annuity Mortality Tables, modified with an assumed
investment return at the rate of 5% 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 5% interest
rate stated above is the measuring point for subsequent annuity payouts. If the
actual Net Investment Rate (annualized) exceeds 5%, the payment will increase at
a rate equal to the amount of such excess. Conversely, if the actual rate is
less than 5%, annuity payouts will decrease. If the assumed rate of interest
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 where not prohibited by law.
At an annuity commencement date, the annuitant is credited with annuity units
for each 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
payout by the value of an annuity unit in each 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 eligible funds. The amount of the second
and subsequent annuity payouts is determined by multiplying the contractowner's
fixed number of annuity units in each subaccount by the appropriate annuity unit
value for the valuation date ending 14 days before the date that payment is due.
The value of each subaccount annuity unit was set initially at $1.00. The
annuity unit value for each subaccount at the end of any valuation date is
determined by multiplying the subaccount annuity unit value for the immediately
preceding valuation date by the product of:
a. The net investment factor of the subaccount for the valuation period for
which the annuity unit value is being determined, and
b. 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
before the payout 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 payouts depend.
FEDERAL TAX STATUS
GENERAL
The operations of the VAA form a part of, and are taxed with, the operations of
Lincoln Life under the Internal Revenue Code of 1986, as amended (the code).
Investment income and realized net capital gains on the assets of the VAA are
reinvested and taken into account in determining the accumulation and annuity
unit values. As a result, such investment income and realized net capital gains
are automatically retained as part of the reserves under the contract. Under
existing federal income tax law, Lincoln Life believes that VAA investment
income and realized net capital gains are not taxed to the extent they are
retained as part of the reserves under the contracts. Accordingly, Lincoln Life
does not anticipate that it will incur any federal income tax liability
attributable to the VAA, and therefore it does not intend to make any provision
for such taxes. However, if changes in the federal tax laws or interpretations
thereof result in Lincoln Life's being taxed on income or gains attributable to
the VAA, then Lincoln Life may impose a charge against
B-5
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ACCOUNT C
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the VAA in order to make provision for payment of such taxes.
TAX STATUS OF NONQUALIFIED CONTRACTS
Section 817(h) of the code provides that separate account investments (or the
investments of a mutual fund the shares of which are owned by separate accounts
of insurance companies) underlying the contract be adequately diversified in
accordance with Treasury regulations in order for the contract to qualify as an
annuity contract under Section 72 of the code. The variable account, through
each fund, intends to comply with the diversification requirements prescribed in
the regulations, which affect how the assets in each fund in which the variable
account invests may be invested. Although Lincoln Investment Management, Inc.
(Lincoln Investment) is an affiliate of Lincoln Life, Lincoln Life does not have
control over the funds or their investments. However, Lincoln Life believes that
each fund in which the variable account owns shares will meet the
diversification requirements and therefore, the contracts will be treated as
annuities under the code.
The Treasury Department has indicated that guidelines may be forthcoming under
which a variable annuity contract will not be treated as an annuity contract for
tax purposes if the contractowner has excessive control over the investments
underlying the contract. The issuance of such guidelines may require Lincoln
Life to impose limitations on a contractowner's right to control the investment.
It is not known whether any such guidelines would have a retroactive effect. For
these reasons, Lincoln Life reserves the right to modify the contract as
necessary to prevent the contractowner from being considered the owner of the
assets for the variable account.
In addition to the requirements of Section 817(h), the code (Section 72(s))
provides that contracts issued after January 18, 1985, will not be treated as
annuity contracts for purposes of Section 72 unless the contract provides that
(A) if any contractowner dies on or after the annuity starting date, but before
the time the entire interest in the contract has been distributed, the remaining
portion of such interest must be distributed at least as rapidly as under the
method of distribution in effect at the time of the contractowner's death; and
(B) if any contractowner dies before the annuity starting date, the entire
interest must be distributed within five years after the death of the
contractowner. These requirements are considered satisfied if any portion of the
contractowner's interest that is payable to or for the benefit of a designated
beneficiary is distributed over that designated beneficiary's life, or a period
not extending beyond the designated beneficiary's life expectancy, and if that
distribution begins within one year of the contractowner's death. The designated
beneficiary must be a natural person. Contracts issued after January 18, 1985
contain provisions intended to comply with these code requirements, although
regulations interpreting these requirements have yet to be issued. Lincoln Life
intends to review such provisions and modify them if necessary to assure that
they comply with the requirements of Section 72(s) when clarified by regulation
or otherwise.
QUALIFIED CONTRACTS
The rules governing the tax treatment of contributions and distributions under
qualified plans, as set forth in the code and applicable rulings and
regulations, are complex and subject to change. These rules also vary according
to the type of plan and the terms and conditions of the plan itself. Therefore,
no attempt is made herein to provide more than general information about the use
of contracts with the various types of plans, based on Lincoln Life's
understanding of the current federal tax laws as interpreted by the Internal
Revenue Service (IRS). Purchasers of contracts for use with such a plan and plan
participants and beneficiaries should consult counsel and other competent
advisors as to the suitability of the plan and the contract to their specific
needs, and as to applicable code limitations and tax consequences. Participants
under such plans, as well as contractowners, annuitants and beneficiaries,
should also be aware that the rights of any person to any benefits under such
plans may be subject to the terms and conditions of the plans themselves
regardless of the terms and conditions of the contract.
Following are brief descriptions of the various types of plans and of the use of
contracts in connection therewith.
PUBLIC SCHOOL SYSTEMS AND SECTION 501(C)(3) ORGANIZATIONS
Payments made to purchase annuity contracts by public school systems or certain
Section 501(c)(3) organizations for their employees are excludable from the
gross income of the employee to the extent that aggregate payments for the
employee do not exceed the exclusion allowance provided by Section 403(b) of the
code, the over-all limits for excludable contributions of Section 415 of the
code or the limit on elective contributions. Furthermore, the investment results
of the fund credited to the account are
B-6
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ACCOUNT C
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not taxable until benefits are received either in the form of annuity payouts or
in a single sum.
If an employee's individual account is surrendered, usually the full amount
received would be includable in income for that year at ordinary rates.
QUALIFIED CORPORATE EMPLOYEE'S PENSION AND PROFIT-SHARING TRUSTS AND QUALIFIED
ANNUITY PLANS
Payments made by a corporate employer and the increments on all payments for
qualified corporate plans are not taxable as income to the employee until
distributed. However, the employee may be required to include these amounts in
gross income before distribution if the qualified plan or trust loses its
qualification. Corporate plans qualified under Sections 401(a) or 403(a) of the
code are subject to extensive rules, including limitations on maximum
contributions or benefits.
Distributions of amounts in excess of nondeductible employee contributions
allocated to such distributions are generally taxable as ordinary income. If an
employee or beneficiary receives a lump sum distribution, that is, if the
employee or beneficiary receives in a single tax year the total amounts payable
with respect to that employee and the benefits are paid as a result of the
employee's death or separation from service or after the employee attains 591/2,
taxable gain may be either eligible for special lump sum averaging treatment or,
if the recipient was age 50 before January 1, 1986, eligible for taxation at a
20% rate to the extent the distribution reflects payouts made before January 1,
1974. These special tax rules are not available in all cases.
SELF-EMPLOYED INDIVIDUALS (H.R. 10 OR KEOGH)
Under code provisions, self-employed individuals may establish plans commonly
known as H.R.10 or Keogh plans for themselves and their employees. The tax
consequences to participants under such plans depend upon the plan itself. Such
plans are subject to special rules in addition to those applicable to qualified
corporate plans, although certain of these rules have been repealed or modified
effective in 1984. Purchasers of the contracts to use with H.R. 10 plans should
seek competent advice as to suitability of plan documents and the funding
contracts.
INDIVIDUAL RETIREMENT ANNUITIES (IRA)
Under Section 408 of the code, individuals may participate in a retirement
program known as an IRA. An individual may make an annual IRA contribution of up
to the lesser of $2,000 (or $2,250 if IRAs are maintained for both the
individual and the nonworking spouse) or 100% of compensation. However, under
rules effective for tax years beginning after 1986, IRA contributions may be
nondeductible in whole or in part if (1) the individual or the spouse is an
active participant in certain other retirement programs and (2) the income of
the individual (or of the individual and the spouse) exceeds a specified amount.
Distributions from certain types of retirement plans may be rolled over to an
IRA on a tax-deferred basis if certain requirements are met. Distributions from
IRA's are subject to certain restrictions. Deductible IRA contributions and all
earnings will be taxed as ordinary income when distributed. The failure to
satisfy certain code requirements with respect to an IRA results in adverse tax
consequences.
DEFERRED COMPENSATION PLANS (457 PLANS)
Under the code provisions, employees and independent contractors (participants)
performing services for state and local governments and tax-exempt organizations
may establish deferred compensation plans. While participants in such plans may
be permitted to specify the form of investment in which their plan accounts will
participate, all such investments are owned by the sponsoring employer and are
subject to the claims of its creditors. The amounts deferred under a plan which
meet the requirements of Section 457 of the code are not taxable as income to
the participant until paid or otherwise made available to the participant or
beneficiary. Deferrals are taxed as compensation from the employer when they are
actually or constructively received by the employee. As a general rule, the
maximum amount which can be deferred in any one year is the lesser of $7,500 or
33 1/3% of the participant's includable compensation. However, in the limited
circumstances, up to $15,000 may be deferred in each of the last three years
before retirement.
SIMPLIFIED EMPLOYEE PENSION PLANS (SEP)
An employer may make contributions on behalf of employees to a SEP as provided
by Section 408(k) of the code. The contributions and distribution dates are
limited by the code provisions. All distributions from the plan will be taxed as
ordinary income.
B-7
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Any distribution before the employee attains age 591/2 (except in the event of
death or disability) or the failure to satisfy certain other code requirements
may result in adverse tax consequences.
TAX ON DISTRIBUTIONS FROM QUALIFIED CONTRACTS
The following rules generally apply to distributions from contracts purchased in
connection with the plans discussed previously, other than deferred compensation
plans.
The portion, if any, of any contribution under a contract made by or on behalf
of an individual which is not excluded from the employee's gross income
(generally, the employee's own non-deductible contributions) constitutes the
investment in the contract. If a distribution is made in the form of annuity
payouts, the employee's investment in the contract (adjusted for certain refund
provisions) divided by the life expectancy (or other period for which annuity
payouts are expected to be made) constitutes a tax-free return of capital each
year. The dollar amount of annuity payouts received in any year in excess of
such return is taxable as ordinary income. However, for employees whose annuity
starting date is after December 31, 1986, all distributions will be fully
taxable once the employee is deemed to have recovered the dollar amount of the
investment in the contract.
If a surrender of or withdrawal from the contract is effected and distribution
is made from the plan in a single payout, the proceeds may qualify for special
lump sum distribution treatment under certain qualified plans, as discussed
above. Otherwise, the amount by which the payment exceeds the investment in the
contract (adjusted for any prior withdrawal) allocated to that payment, if any,
will be taxed as ordinary income in the year of receipt. For amounts distributed
after 1986, rules generally provide that all distributions which are not
received as an annuity will be taxed as a pro rata distribution of taxable and
nontaxable amounts (rather than as a distribution first of nontaxable amounts).
Distributions from qualified plans, Keoghs, SEPs, 403(b) plans and IRAs will be
subject to (1) a 10% penalty tax if made before age 591/2 unless certain other
exceptions apply, and (2) a 15% penalty tax on combined annual distributions in
excess of $150,000 subject to various special rules. Effective for taxable years
beginning after 1988, failure to meet certain minimum distribution requirements
for the above plans, as well as for Section 457 plans, will result in a 50%
excise tax. Various other adverse tax consequences may also be potentially
applicable in certain circumstances to these types of plans.
Upon an employee's death, the taxation of benefits payable to the beneficiary
generally follows these same principles, subject to a variety of special rules.
In particular, tax on death benefits paid as a lump sum may be deferred if,
within 60 days after the lump sum becomes payable, the beneficiary instead
elects to receive annuity payouts.
OTHER CONSIDERATIONS
It should be understood that the foregoing comments about the federal tax
consequences under these contracts are not exhaustive and that special rules are
provided with respect to other tax situations not discussed herein. Further, the
foregoing discussion does not address any applicable state, local or foreign tax
laws. Finally, in recent years numerous changes have been made in the federal
income tax treatment of contracts and retirement plans, which are not fully
discussed above. Before an investment is made in any of the contracts, a
competent tax advisor should be consulted.
DETERMINATION OF NET ASSET VALUE
A description of the days on which variable account's net asset value per share
will be determined is given in the Prospectus. The New York Stock Exchange's
most recent announcement (which is subject to change) states that in 1996 it
will be closed on New Year's Day, January 1; President's Day, February 19; Good
Friday, April 5; Memorial Day, May 27; Independence Day, July 4; Labor Day,
September 2; Thanksgiving Day, November 28; and Christmas Day, December 25. It
may also be closed on other days.
Since the portfolios of some of the eligible funds will consist of securities
primarily listed on foreign exchanges or otherwise traded outside the United
States, those securities may be traded (and the net asset value of those funds
and of the variable account could therefore be significantly affected) on days
when the investor has no access to those funds.
ADVERTISING AND SALES LITERATURE
As set forth in the Prospectus, Lincoln Life may refer to the following
organizations (and others) in its marketing materials:
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A.M. BEST'S RATING SYSTEM evaluates the various factors affecting the overall
performance of an insurance company in order to provide an opinion as to an
insurance company's relative financial strength and ability to meet its
contractual obligations. The procedure includes both a quantitative and
qualitative review of each company.
DUFF & PHELPS insurance company claims paying ability (CPA) service provides
purchasers of insurance company policies and contracts with analytical and
statistical information on the solvency and liquidity of major U.S licensed
insurance companies, both mutual and stock.
EAFE Index is prepared by Morgan Stanley Capital International (MSCI). It
measures performance of securities in Europe, Australia and the Far East. The
index reflects the movements of world stock markets by representing the
evolution of an unmanaged portfolio. The EAFE Index offers international
diversification with over 1000 companies across 18 different countries.
LIPPER VARIABLE INSURANCE PRODUCTS PERFORMANCE ANALYSIS SERVICE is a publisher
of statistical data covering the investment company industry in the United
States and overseas. Lipper is recognized as the leading source of data on open-
end and closed-end funds. Lipper currently tracks the performance of over 5,000
investment companies and publishes numerous specialized reports, including
reports on performance and portfolio analysis, fee and expense analysis.
MOODY'S insurance claims-paying rating is a system of rating insurance company's
financial strength, market leadership and ability to meet financial obligations.
The purpose of Moody's ratings is to provide investors with a simple system of
gradation by which the relative quality of insurance companies may be noted.
MORNINGSTAR is an independent financial publisher offering comprehensive
statistical and analytical coverage of open-end and closed-end funds and
variable annuities.
STANDARD & POOR's CORP. insurance claims-paying ability rating is an assessment
of an operating insurance company's financial capacity to meet obligations under
an insurance policy in accordance with the terms. The likelihood of a timely
flow of funds from the insurer to the trustee for the bondholders is a key
element in the rating determination for such debt issues.
VARDS (Variable Annuity Research Data Service) provides a comprehensive guide to
variable annuity contract features and historical fund performance. The service
also provides a readily understandable analysis of the comparative
characteristics and market performance of funds inclusive in variable contracts.
STANDARD & POOR'S 500 INDEX(S&P 500) -- broad-based measurement of changes in
stock-market conditions based on the average performance of 500 widely held
common stocks; commonly known as the S&P 500. The selection of stocks, their
relative weightings to reflect differences in the number of outstanding shares
and publication of the index itself are services of Standard & Poor's Corp., a
financial advisory, securities rating, and publishing firm. The index tracks 400
industrial company stocks, 20 transportation stocks, 40 financial company stocks
and 40 public utilities.
NASDAQ-OTC Price Index -- this index is based on the National Association of
Securities Dealers Automated Quotations (NASDAQ) and represents all domestic
over-the-counter stocks except those traded on exchanges and those having only
one market maker, a total of some 3,500 stocks. It is market value-weighted and
was introduced with a base of 100.00 on February 5, 1971.
DOW JONES INDUSTRIAL AVERAGE (DJIA) -- price-weighted average of 30 actively
traded blue chip stocks, primarily industrials but including American Express C.
and American Telephone and Telegraph C. Prepared and published by Dow Jones &
C., it is the oldest and most widely quoted of all the market indicators. The
average is quoted in points, not dollars.
BOSTON SAFE INDEX -- The Boston SAFE (South Africa-Free Equity) Index is a
benchmark developed by The Boston C., Inc. to measure the effects of divestiture
and the relative performance of South Africa-Free portfolios. The Boston SAFE
Index includes only those stocks within the S&P 500 Stock Index which meet the
following criteria: companies which are not conducting business in South Africa
and banks which are not making loans to South Africa. The composition of the
Boston SAFE Index is adjusted quarterly to reflect new information. The Index is
capitalization-weighted based on shares outstanding and current stock prices.
B-9
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In its advertisements and other sales literature for the variable account and
the eligible funds, Lincoln Life intends to illustrate the advantages of the
contracts in a number of ways:
COMPOUND INTEREST ILLUSTRATIONS. These will emphasize several advantages of the
variable annuity contract. For example, but not by way of limitation, the
literature may emphasize the potential savings through tax deferral; the
potential advantage of the variable account over the fixed side; and the
compounding effect when a client makes regular contributions to its account.
DOLLAR-COST AVERAGING ILLUSTRATIONS. These illustrations will generally discuss
the price-leveling effect of making regular purchases in the same subaccounts
over a period of time, to take advantage of the trends in market prices of the
portfolio securities purchased for those subaccounts.
AUTOMATIC WITHDRAWAL SERVICE. A service provided by Lincoln Life, through which
a contractowner may take any distribution allowed by code Section 401(a)(9) in
the case of qualified contracts, or permitted under code Section 72 in the case
of nonqualified contracts, by way of an automatically generated payment.
EARNINGS SWEEP. A service provided by Lincoln Life which allows a client to
designate one of the variable subaccounts or the fixed side as a holding
account, and to transfer earnings from that side to any other variable
subaccount. The contractowner chooses a specific fund as the holding account. At
specific intervals, account value in the holding account fund that exceeds a
certain designated baseline amount is automatically transferred to another
specified fund(s). The minimum account value required for the Earnings Sweep
feature is $10,000.
LINCOLN LIFE'S CUSTOMERS. Sales literature for the variable account and the
eligible 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 9,500 organizations and had more than 750,000 annuity
clients.
LINCOLN LIFE'S ASSETS, SIZE. Lincoln Life may discuss its general financial
condition (see, for example, the reference to A.M. Best C., 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. For example, at year-end 1994 Lincoln
Life was the tenth largest U.S. life insurance company based upon overall
assets.
Sales literature may reference the Multi Fund newsletter which is a newsletter
distributed quarterly to clients of the Multi Fund. The contents of the
newsletter will be a commentary on general economic conditions and, on some
occasions, referencing matters in connection with the Multi Fund annuity.
Sales literature and advertisements may reference these and other similar
reports from Best's or other similar publications which report on the insurance
and financial services industries.
The graphs below compare accumulations attributable to contributions to
conventional savings vehicles such as savings accounts at a bank or credit
union, nonqualified contracts purchased with after tax contributions, and
qualified contracts purchased with pre-tax contributions under tax-favored
retirement programs.
THE POWER OF TAX DEFERRED GROWTH
[GRAPH APPEARS HERE]
The hypothetical chart above compares the results of contributing $1,200 per
year ($100 per month) during the time periods illustrated. Each graph assumes a
28% tax rate and an 8% fixed rate of return (before fees and charges). For tax
Deferred annuities (TDA), the results are based on contributing $1,666.66
($138.88 per month) during the time periods illustrated. The additional $38.88
per month is the amount of federal taxes paid by those contributing to the
conventional savings accounts or nonqualified contracts. In this example, it has
been invested by the contributors to the qualified contracts. The deduction of
fees and charges is also indicated in the graph. The dotted lines represent
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the amount remaining after deducting any taxes due and all fees (including
surrender charges). Additionally, a 10% tax penalty (not included here) may
apply to withdrawals before age 59 1/2.
The contributions and interest earnings on conventional savings accounts are
usually taxed currently. For nonqualified contracts contributions are usually
taxed currently, while earning are not usually subject to income tax until
withdrawn. However, contributions to and earnings on qualified plans are
ordinarily not subject to income tax until withdrawn. Therefore, having greater
amounts re-invested in a qualified or nonqualified plan increases the
accumulation power of savings over time.
As you can see, a tax deferred plan can provide a much higher account value over
a long period of time. Therefore, it is an important retirement plan or for
other long-term financial goals. (The above chart is for illustrative purposes
and should not be construed as representative of actual results, which may be
more or less).
TAX BENEFITS TODAY
When you put a portion of your salary in a tax deferred retirement plan, your
contributions don't appear as taxable income on your W-2 form at the end of the
calendar year. So while you are contributing, you can reduce your taxes and
increase your take-home pay.
Here's an example: Let's assume you are single, your taxable income is $50,000,
and you are in the 28% tax bracket.
<TABLE>
<CAPTION>
Traditional Savings of
savings plan pre-tax dollars
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Your income $50,000 $50,000
Tax-deferred savings -0- 2,400
Taxable income 50,000 47,600
*Estimated federal income taxes 10,481 9,809
Income after taxes 39,519 37,791
After-tax savings 2,400 -0-
Remaining income after savings
and taxes 37,119 37,791
</TABLE>
With a tax-deferred plan, you have $672 more spendable income each year because
you are paying less taxes.
* The above chart assumes a 28% marginal federal tax rate on conventional
contributions. TDA contributions are generally taxed as ordinary income when
withdrawn. Federal tax penalties generally apply to distributions before age
591/2. For illustrative purposes only.
B-11
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C LINCOLN NATIONAL
STATEMENT OF ASSETS AND LIABILITY
December 31, 1995
<TABLE>
<CAPTION>
Lincoln Lincoln
National Lincoln National
Percent Aggressive National Capital
of Net Growth Bond Appreciation
Assets Combined Account Account Account
------ -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments at net asset value:
Lincoln National Aggressive Growth Fund, Inc.-
11,256,287 shares at $12.18 per share
(cost-$111,341,349)........................... 2.9% $137,130,147 $137,130,147
Lincoln National Bond Fund, Inc.-
20,415,001 shares at $12.25 per share
(cost-$240,581,424)........................... 5.3 250,016,165 $250,016,165
Lincoln National Capital Appreciation Fund, Inc.-
9,779,639 shares at $12.92 per share
(cost-$104,724,464).......................... 2.7 126,315,508 $126,315,508
Lincoln National Equity-Income Fund, Inc.-
17,511,979 shares at $13.51 per share
(cost-$197,211,387)........................... 5.0 236,534,931
Lincoln National Global Asset Allocation Fund, Inc.-
18,552,953 shares at $13.39 per share
(cost-$206,818,570).......................... 5.3 248,441,515
Lincoln National Growth and Income Fund, Inc.-
61,041,312 shares at $29.76 per share
(cost-$1,347,131,552)........................ 38.4 1,816,370,745
Lincoln National International Fund, Inc.-
26,614,570 shares at $13.40 per share
(cost-$319,542,932).......................... 7.5 356,571,626
Lincoln National Managed Fund, Inc.-
36,949,684 shares at $15.89 per share
(cost-$475,787,549).......................... 12.4 587,303,180
Lincoln National Money Market Fund, Inc.-
7,432,164 shares at $10.00 per share
(cost-$74,321,636)........................... 1.6 74,321,636
Lincoln National Social Awareness Fund, Inc.-
13,173,738 shares at $22.59 per share
(cost-$221,728,562).......................... 6.3 297,595,561
Lincoln National Special Opportunities Fund, Inc.-
17,932,171 shares at $27.38 per share
(cost-$414,761,431).......................... 10.4 491,036,611
------ -------------- ------------ ------------ ------------
TOTAL INVESTMENTS (Cost-$3,713,950,856) 97.8 4,621,637,625 137,130,147 250,016,165 126,315,508
Dividends Receivable 2.3 110,259,893 60,153 15,515,582 899,251
------ -------------- ------------ ------------ ------------
TOTAL ASSETS 100.1 4,731,897,518 137,190,300 265,531,747 127,214,759
LIABILITY-Payable to Lincoln National
Life Insurance Co. ...................... 0.1 3,974,223 112,212 222,793 105,363
------ -------------- ------------ ------------ ------------
NET ASSETS................ 100.0% $4,727,923,295 $137,078,088 $265,308,954 $127,109,396
====== ============== ============ ============ ============
Net assets are represented by:
Units in accumulation period-Qualified 114,518,159 61,793,528 98,066,947
Units in accumulation period-Non-Qualified - 850,234 -
Annuity reserves units 121,371 102,322 184,450
Unit value $1.196 $4.228 $1.294
Value in accumulation period-Qualified $136,932,961 $261,281,265 $126,870,770
Value in accumulation period-Non-Qualified - 3,595,041
Annuity reserves 145,127 432,648 238,626
------------ ------------ ------------
$137,078,088 $265,308,954 $127,109,396
============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Lincoln Lincoln Lincoln
National National National
Percent Equity- Global Asset Growth and
of Net Income Allocation Income
Assets Combined Account Account Account
------ -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments at net asset value:
Lincoln National Aggressive Growth Fund, Inc.-
11,256,287 shares at $12.18 per share
(cost-$111,341,349)........................... 2.9% $137,130,147
Lincoln National Bond Fund, Inc.-
20,415,001 shares at $12.25 per share
(cost-$240,581,424)........................... 5.3 250,016,165
Lincoln National Capital Appreciation Fund, Inc.-
9,779,639 shares at $12.92 per share
(cost-$104,724,464).......................... 2.7 126,315,508
Lincoln National Equity-Income Fund, Inc.-
17,511,979 shares at $13.51 per share
(cost-$197,211,387)........................... 5.0 236,534,931 $236,534,931
Lincoln National Global Asset Allocation Fund, Inc.-
18,552,953 shares at $13.39 per share
(cost-$206,818,570).......................... 5.3 248,441,515 $248,441,515
Lincoln National Growth and Income Fund, Inc.-
61,041,312 shares at $29.76 per share
(cost-$1,347,131,552)........................ 38.4 1,816,370,745 $1,816,370,745
Lincoln National International Fund, Inc.-
26,614,570 shares at $13.40 per share
(cost-$319,542,932).......................... 7.5 356,571,626
Lincoln National Managed Fund, Inc.-
36,949,684 shares at $15.89 per share
(cost-$475,787,549).......................... 12.4 587,303,180
Lincoln National Money Market Fund, Inc.-
7,432,164 shares at $10.00 per share
(cost-$74,321,636)........................... 1.6 74,321,636
Lincoln National Social Awareness Fund, Inc.-
13,173,738 shares at $22.59 per share
(cost-$221,728,562).......................... 6.3 297,595,561
Lincoln National Special Opportunities Fund, Inc.-
17,932,171 shares at $27.38 per share
(cost-$414,761,431).......................... 10.4 491,036,611
------ -------------- ------------ ------------ --------------
TOTAL INVESTMENTS (Cost-$3,713,950,856) 97.8 4,621,637,625 236,534,931 248,441,515 1,816,370,745
Dividends Receivable 2.3 110,259,893 3,452,731 7,484,300 39,282,738
------ -------------- ------------ ------------ --------------
TOTAL ASSETS 100.1 4,731,897,518 239,987,662 255,925,815 1,855,653,483
LIABILITY-Payable to Lincoln National
Life Insurance Co. ...................... 0.1 3,974,223 197,471 214,759 1,564,971
------ -------------- ------------ ------------ --------------
NET ASSETS................ 100.0% $4,727,923,295 $239,790,191 $255,711,056 $1,854,088,512
====== ============== ============ ============ ==============
Net assets are represented by:
Units in accumulation period-Qualified 171,816,944 124,512,227 288,565,832
Units in accumulation period-Non-Qualified - 2,045,995 2,496,642
Annuity reserves units 831,673 496,101 3,605,470
Unit value $1.391 $2.013 $6.292
Value in accumulation period-Qualified $238,911,848 $250,594,803 $1,815,693,244
Value in accumulation period-Non-Qualified - 4,117,794 15,709,189
Annuity reserves 878,343 998,459 22,686,079
------------ ------------ --------------
$239,790,191 $255,711,056 $1,854,088,512
============ ============ ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Lincoln
Lincoln Lincoln National
Percent National National Money
of Net International Managed Market
Assets Combined Account Account Account
------ -------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments at net asset value:
Lincoln National Aggressive Growth Fund, Inc.-
11,256,287 shares at $12.18 per share
(cost-$111,341,349)........................... 2.9% $137,130,147
Lincoln National Bond Fund, Inc.-
20,415,001 shares at $12.25 per share
(cost-$240,581,424)........................... 5.3 250,016,165
Lincoln National Capital Appreciation Fund, Inc.-
9,779,639 shares at $12.92 per share
(cost-$104,724,464).......................... 2.7 126,315,508
Lincoln National Equity-Income Fund, Inc.-
17,511,979 shares at $13.51 per share
(cost-$197,211,387)........................... 5.0 236,534,931
Lincoln National Global Asset Allocation Fund, Inc.-
18,552,953 shares at $13.39 per share
(cost-$206,818,570).......................... 5.3 248,441,515
Lincoln National Growth and Income Fund, Inc.-
61,041,312 shares at $29.76 per share
(cost-$1,347,131,552)........................ 38.4 1,816,370,745
Lincoln National International Fund, Inc.-
26,614,570 shares at $13.40 per share
(cost-$319,542,932).......................... 7.5 356,571,626 $356,571,626
Lincoln National Managed Fund, Inc.-
36,949,684 shares at $15.89 per share
(cost-$475,787,549).......................... 12.4 587,303,180 $587,303,180
Lincoln National Money Market Fund, Inc.-
7,432,164 shares at $10.00 per share
(cost-$74,321,636)........................... 1.6 74,321,636 74,321,636
Lincoln National Social Awareness Fund, Inc.-
13,173,738 shares at $22.59 per share
(cost-$221,728,562).......................... 6.3 297,595,561
Lincoln National Special Opportunities Fund, Inc.-
17,932,171 shares at $27.38 per share
(cost-$414,761,431).......................... 10.4 491,036,611
------ -------------- ------------ ------------ ------------
TOTAL INVESTMENTS (Cost-$3,713,950,856) 97.8 4,621,637,625 356,571,626 587,303,180 74,321,636
Dividends Receivable 2.3 110,259,893 1,932,081 22,371,817 4,498,932
------ -------------- ------------ ------------ ------------
TOTAL ASSETS 100.1 4,731,897,518 358,503,707 609,674,997 78,820,568
LIABILITY-Payable to Lincoln National
Life Insurance Co. ...................... 0.1 3,974,223 299,787 513,540 66,938
------ -------------- ------------ ------------ ------------
NET ASSETS................ 100.0% $4,727,923,295 $358,203,920 $609,161,457 $78,753,630
====== ============== ============ ============ ============
Net assets are represented by:
Units in accumulation period-Qualified 261,508,580 170,785,901 34,711,698
Units in accumulation period-Non-Qualified - 2,003,159 424,424
Annuity reserves units 352,529 502,543 98,475
Unit value $1.368 $3.515 $2.235
Value in accumulation period-Qualified $357,721,690 $600,353,314 $77,584,887
Value in accumulation period-Non-Qualified - 7,041,584 948,639
Annuity reserves 482,230 1,766,559 220,104
------------ ------------ ------------
$358,203,920 $609,161,457 $78,753,630
============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Lincoln Lincoln
National National
Percent Social Special
of Net Awareness Opportunities
Assets Combined Account Account
------ -------------- ------------ -------------
<S> <C> <C> <C> <C>
ASSETS
Investments at net asset value:
Lincoln National Aggressive Growth Fund, Inc.-
11,256,287 shares at $12.18 per share
(cost-$111,341,349)........................... 2.9% $137,130,147
Lincoln National Bond Fund, Inc.-
20,415,001 shares at $12.25 per share
(cost-$240,581,424)........................... 5.3 250,016,165
Lincoln National Capital Appreciation Fund, Inc.-
9,779,639 shares at $12.92 per share
(cost-$104,724,464).......................... 2.7 126,315,508
Lincoln National Equity-Income Fund, Inc.-
17,511,979 shares at $13.51 per share
(cost-$197,211,387)........................... 5.0 236,534,931
Lincoln National Global Asset Allocation Fund, Inc.-
18,552,953 shares at $13.39 per share
(cost-$206,818,570).......................... 5.3 248,441,515
Lincoln National Growth and Income Fund, Inc.-
61,041,312 shares at $29.76 per share
(cost-$1,347,131,552)........................ 38.4 1,816,370,745
Lincoln National International Fund, Inc.-
26,614,570 shares at $13.40 per share
(cost-$319,542,932).......................... 7.5 356,571,626
Lincoln National Managed Fund, Inc.-
36,949,684 shares at $15.89 per share
(cost-$475,787,549).......................... 12.4 587,303,180
Lincoln National Money Market Fund, Inc.-
7,432,164 shares at $10.00 per share
(cost-$74,321,636)........................... 1.6 74,321,636
Lincoln National Social Awareness Fund, Inc.-
13,173,738 shares at $22.59 per share
(cost-$221,728,562).......................... 6.3 297,595,561 $297,595,561
Lincoln National Special Opportunities Fund, Inc.-
17,932,171 shares at $27.38 per share
(cost-$414,761,431).......................... 10.4 491,036,611 $491,036,611
------ -------------- ------------ ------------
TOTAL INVESTMENTS (Cost-$3,713,950,856) 97.8 4,621,637,625 297,595,561 491,036,611
Dividends Receivable 2.3 110,259,893 4,913,302 9,849,006
------ -------------- ------------ ------------
TOTAL ASSETS 100.1 4,731,897,518 302,508,863 500,885,617
LIABILITY-Payable to Lincoln National
Life Insurance Co. ...................... 0.1 3,974,223 253,471 422,918
------ -------------- ------------ ------------
NET ASSETS................ 100.0% $4,727,923,295 $302,255,392 $500,462,699
====== ============== ============ ============
Net assets are represented by:
Units in accumulation period-Qualified 105,395,981 88,085,292
Units in accumulation period-Non-Qualified 808,173 908,423
Annuity reserves units 112,348 90,623
Unit value $2.843 $5.618
Value in accumulation period-Qualified $299,638,371 $494,850,206
Value in accumulation period-Non-Qualified 2,297,618 5,103,386
Annuity reserves 319,403 509,107
------------ ------------
$302,255,392 $500,462,699
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
STATEMENT OF OPERATIONS
December 31, 1995
Lincoln Lincoln Lincoln Lincoln
National Lincoln National National National
Aggressive National Capital Equity- Global Asset
Growth Bond Appreciation Income Allocation
Combined Account Account Account Account Account
-------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Investment Income (Loss):
Dividends from investment income $110,259,893 $60,153 $15,515,582 $899,251 $3,452,731 $7,484,300
Dividends from net realized gains
on investments 105,255,695 - - - 577,960 -
Mortality and expense guarantees (39,086,803) (966,089) (2,345,984) (908,882) (1,545,093) (2,252,332)
------------ ----------- ----------- ----------- ----------- -----------
NET INVESTMENT INCOME (LOSS) 176,428,785 (905,936) 13,169,598 (9,631) 2,485,598 5,231,968
Net realized and unrealized
gain on investments:
Net realized gain (loss) on investments 8,981,733 896,058 (282,800) 580,996 441,027 950,383
Net change in unrealized appreciation or
depreciation on investments 790,623,398 27,064,946 25,508,393 21,258,762 39,159,306 39,936,516
------------ ----------- ----------- ----------- ----------- -----------
NET GAIN ON INVESTMENTS 799,605,131 27,961,004 25,225,593 21,839,758 39,600,333 40,886,899
------------ ----------- ----------- ----------- ----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $976,033,916 $27,055,068 $38,395,191 $21,830,127 $42,085,931 $46,118,867
============ =========== =========== =========== =========== ===========
Lincoln Lincoln Lincoln Lincoln
National Lincoln National National National Lincoln
Growth and National Money Social Special National
Income International Managed Market Awareness Opportunities
Account Account Account Account Account Account
------- ------- ------- ------- ------- -------
Net Investment Income (Loss):
Dividends from investment income $39,282,738 $1,932,081 $22,371,817 $4,498,932 $4,913,302 $9,849,006
Dividends from net realized gains
on investments 68,487,083 14,681,116 716,169 - 6,174,660 14,618,707
Mortality and expense guarantees (15,177,401) (3,312,980) (5,331,031) (820,462) (2,263,656) (4,162,893)
------------ ----------- ----------- ---------- ----------- -----------
NET INVESTMENT INCOME (LOSS) 92,592,420 13,300,217 17,756,955 3,678,470 8,824,306 20,304,820
Net realized and unrealized
gain on investments:
Net realized gain (loss) on investments 2,581,323 1,927,628 1,287,963 - 229,227 369,928
Net change in unrealized appreciation or
depreciation on investments 366,086,846 9,952,160 110,426,495 - 67,848,514 83,381,460
------------ ----------- ----------- ---------- ----------- -----------
NET GAIN ON INVESTMENTS 368,668,169 11,879,788 111,714,458 - 68,077,741 83,751,388
------------ ----------- ----------- ---------- ----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $461,260,589 $25,180,005 $129,471,413 $3,678,470 $76,902,047 $104,056,208
============ =========== ============ ========== =========== ============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
STATEMENTS OF CHANGES IN NET ASSETS
Years ended December 31, 1995 and 1994 Lincoln Lincoln Lincoln Lincoln
National Lincoln National National National
Aggressive National Capital Equity- Global Asset
Growth Bond Appreciation Income Allocation
Combined Account Account Account Account Account
-------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
NET ASSETS AT JANUARY 1, 1994 $2,562,503,760 $110,000 $237,730,108 $110,000 $110,000 $157,034,078
Changes from operations:
Net investment income (loss) 166,236,054 ($246,497) $20,726,266 $83,869 $540,126 $14,394,788
Net realized gain (loss) on investments 1,969,702 (13,022) (683,555) 432 6,346 128,622
Net change in unrealized appreciation
or depreciation on investments (199,112,550) (1,276,148) (31,910,949) 332,282 164,238 (19,874,725)
-------------- ------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS (30,906,794) (1,535,667) (11,868,238) 416,583 710,710 (5,351,315)
Net increase (decrease) from unit
transactions 593,633,429 62,014,620 (17,936,544) 52,525,104 78,633,070 49,442,218
-------------- ------------ ------------ ------------ ------------ ------------
TOTAL INCREASE (DECREASE) IN
NET ASSETS 562,726,635 60,478,953 (29,804,782) 52,941,687 79,343,780 44,090,903
-------------- ------------ ------------ ------------ ------------ ------------
NET ASSETS AT DECEMBER 31, 1994 3,125,230,395 60,588,953 207,925,326 53,051,687 79,453,780 201,124,981
Changes from operations:
Net investment income (loss) 176,428,785 ($905,936) $13,169,598 ($9,631) $2,485,598 $5,231,968
Net realized gain (loss) on investments 8,981,733 896,058 (282,800) 580,996 441,027 950,383
Net change in unrealized appreciation
or depreciation on investments 790,623,398 27,064,946 25,508,393 21,258,762 39,159,306 39,936,516
-------------- ------------ ------------ ------------ ------------ ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 976,033,916 27,055,068 38,395,191 21,830,127 42,085,931 46,118,867
Net increase (decrease) from unit
transactions 626,658,984 49,434,067 18,988,437 52,227,582 118,250,480 8,467,208
-------------- ------------ ------------ ------------ ------------ ------------
TOTAL INCREASE (DECREASE) IN
NET ASSETS 1,602,692,900 76,489,135 57,383,628 74,057,709 160,336,411 54,586,075
-------------- ------------ ------------ ------------ ------------ ------------
NET ASSETS AT DECEMBER 31, 1995 $4,727,923,295 $137,078,088 $265,308,954 $127,109,396 $239,790,191 $255,711,056
============== ============ ============ ============ ============ ============
Lincoln Lincoln Lincoln Lincoln
National Lincoln Lincoln National National National
Growth and National National Money Social Special
Income International Managed Market Awareness Opportunities
Account Account Account Account Account Account
------- ------- ------- ------- ------- -------
NET ASSETS AT JANUARY 1, 1994 $1,049,008,642 $161,418,447 $460,621,302 $82,764,856 $139,640,840 $273,955,487
Changes from operations:
Net investment income (loss) $65,845,494 ($1,973,792) $33,293,465 $2,311,995 9,194,042 22,066,298
Net realized gain (loss) on investments 1,910,076 615,665 327,561 - 327,723 (650,146)
Net change in unrealized appreciation
or depreciation on investments (64,677,388) 3,692,172 (47,159,981) - (10,984,286) (27,417,765)
-------------- ------------ ------------ ------------ ------------ -------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 3,078,182 2,334,045 (13,538,955) 2,311,995 (1,462,521) (6,001,613)
Net increase (decrease) from unit
transactions 130,213,346 152,790,077 13,619,529 (5,686,209) 28,586,364 49,431,854
-------------- ------------ ------------ ------------ ------------ -------------
TOTAL INCREASE (DECREASE) IN
NET ASSETS 133,291,528 155,124,122 80,574 (3,374,214) 27,123,843 43,430,241
-------------- ------------ ------------ ------------ ------------ -------------
NET ASSETS AT DECEMBER 31, 1994 1,182,300,170 316,542,569 460,701,876 79,390,642 166,764,683 317,385,728
Changes from operations:
Net investment income (loss) 92,592,420 13,300,217 17,756,955 3,678,470 8,824,306 20,304,820
Net realized gain (loss) on investments 2,581,323 1,927,628 1,287,963 - 229,227 369,928
Net change in unrealized appreciation
or depreciation on investments 366,086,846 9,952,160 110,426,495 - 67,848,514 83,381,460
-------------- ------------ ------------ ------------ ------------ -------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 461,260,589 25,180,005 129,471,413 3,678,470 76,902,047 104,056,208
Net increase (decrease) from unit
transactions 210,527,753 16,481,346 18,988,168 (4,315,482) 58,588,662 79,020,763
-------------- ------------ ------------ ------------ ------------ -------------
TOTAL INCREASE (DECREASE) IN
NET ASSETS
671,788,342 41,661,351 148,459,581 (637,012) 135,490,709 183,076,971
-------------- ------------ ------------ ------------ ------------ -------------
NET ASSETS AT DECEMBER 31, 1995 $1,854,088,512 $358,203,920 $609,161,457 $78,753,630 $302,255,392 $500,462,699
============== ============ ============ ============ ============ =============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
1. ACCOUNTING POLICIES
The Account:
- ------------
The Lincoln National Variable Annuity Account C (the Variable Account) is a
segregated investment account of The Lincoln National Life Insurance Company
(the Company) and is registered under the Investment Company Act of 1940, as
amended, as a unit investment trust.
Investments:
- -----------
The Variable Account invests in the Lincoln National Aggressive Growth Fund,
Inc., Lincoln National Bond Fund, Inc., Lincoln National Capital Appreciation
Fund, Inc., Lincoln National Equity-Income Fund, Inc., Lincoln National Global
Asset Allocation Fund, Inc., Lincoln National Growth and Income Fund, Inc.,
Lincoln National International Fund, Inc., Lincoln National Managed Fund, Inc.,
Lincoln National Money Market Fund, Inc., Lincoln National Social Awareness
Fund, Inc., and Lincoln National Special Opportunities Fund, Inc. (the Funds).
Investments in the Funds are stated at the closing net values per share on
December 31, 1995. The Funds are registered as open end investment management
companies.
Investment transactions are accounted for on a trade date basis and dividend
income is recorded on the ex-dividend date. The cost of investments sold is
determined by the average cost method.
Dividends:
- ---------
Dividends are automatically reinvested in shares of the Funds on the payable
date.
Federal Income Taxes:
- --------------------
Operations of the Variable Account form a part of and are taxed with operations
of the Company, which is taxed as a "life insurance company" under the Internal
Revenue Code. Using current law, no federal income taxes are payable with
respect to the Variable Account's net investment income and the net realized
gain on investments.
Annuity Reserves:
- ----------------
Reserves on contracts not involving life contingencies are calculated using an
assumed investment rate of 5%. Reserves on contracts involving life
contingencies are calculated using a modification of the 1971 Individual
Annuitant Mortality Table and an assumed investment rate of 5%.
2. MORTALITY AND EXPENSE GUARANTEES AND OTHER TRANSACTIONS WITH AFFILIATE
Amounts are paid to the Company for mortality and expense guarantees at the rate
of .002745% of the current value of the Variable Account per day (1.002% on an
annual basis). In addition, amounts retained by the Company from the proceeds of
the sales of annuity contracts for contract charges and for surrender charges
were as follows during 1995:
<TABLE>
<CAPTION>
<S> <C>
Lincoln National Aggressive Growth Account $ (3,404)
Bond Account 529,593
Lincoln National Capital Appreciation Account (2,414)
Lincoln National Equity-Income Account (3,733)
Lincoln National Global Asset Allocation Account 422,872
Lincoln National Growth and Income Account 2,694,377
Lincoln National International Account 562,168
Lincoln National Managed Account 921,291
Lincoln National Money Market Account 396,619
Lincoln National Social Awareness Account 426,029
Lincoln National Special Opportunities Account 685,954
----------
$6,629,352
==========
</TABLE>
Accordingly, the Company is responsible for all sales, general, and
administrative expenses applicable to the Variable Account.
3. NET ASSETS
Net Assets at December 31, 1995 consisted of the following:
<TABLE>
<CAPTION>
Lincoln Lincoln Lincoln Lincoln
National Lincoln National National National
Aggressive National Capital Equity- Global Asset
Growth Bond Appreciation Income Allocation
Combined Account Account Account Account Account
-------- ---------- ------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Unit Transactions:
Accumulation units $2,949,858,283 $111,440,838 $149,160,730 $104,662,000 $196,338,339 $173,256,439
Annuity reserves 17,505,550 117,849 340,649 200,686 655,211 745,420
-------------- ------------ ------------ ------------ ------------ ------------
2,967,363,833 111,558,687 149,501,379 104,862,686 196,993,550 174,001,859
Accumulated net investment
income (loss) 801,943,440 (1,152,433) 106,717,136 74,238 3,025,724 38,501,567
Accumulated net realized gain
(loss) on investments 50,929,253 883,036 (344,302) 581,428 447,373 1,584,685
Net unrealized appreciation
on investments 907,686,769 25,788,798 9,434,741 21,591,044 39,323,544 41,622,945
-------------- ------------ ------------ ------------ ------------ ------------
$4,727,923,295 $137,078,088 $265,308,954 $127,109,396 $239,790,191 $255,711,056
============== ============ ============ ============ ============ ============
Lincoln Lincoln Lincoln Lincoln
National Lincoln Lincoln National National National
Growth and National National Money Social Special
Income International Managed Market Awareness Opportunities
Account Account Account Account Account Account
-------------- ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Unit Transactions:
Accumulation units $1,045,998,335 $307,625,527 $334,702,996 $30,340,395 $198,564,180 $297,768,504
Annuity reserves 13,066,934 390,223 1,239,130 200,149 211,539 337,760
-------------- ------------- ------------ ------------ ------------ ------------
1,059,065,269 308,015,750 335,942,126 30,540,544 198,775,719 298,106,264
Accumulated net investment
income (loss) 312,836,820 10,335,594 159,061,470 48,213,086 24,326,711 100,003,527
Accumulated net realized gain
(loss) on investments 12,947,230 2,823,882 2,642,230 - 3,285,963 26,077,728
Net unrealized appreciation
on investments 469,239,193 37,028,694 111,515,631 - 75,866,999 76,275,180
-------------- ------------- ------------ ------------ ------------ ------------
$1,854,088,512 $358,203,920 $609,161,457 $78,753,630 $302,255,392 $500,462,699
============== ============= ============ ============ ============ ============
</TABLE>
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT C
NOTES TO FINANCIAL STATEMENTS (Continued)
4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS
<TABLE>
<CAPTION>
Year Ended December 31
1995 1994
-------------------------- ---------------------------
Units Amount Units Amount
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Aggressive Growth Account
Accumulation Units:
Contract purchases 86,104,243 $ 89,562,485 84,107,448 $ 76,068,218
Terminated contracts and transfers to annuity reserves (39,132,839) (40,190,032) (16,670,693) (14,109,833)
----------- ------------- ----------- -------------
46,971,404 49,372,453 67,436,755 61,958,385
Annuity Reserves:
Transfers from accumulation units and between accounts 84,743 82,683 63,724 58,724
Annuity payments (20,294) (21,424) (7,083) (2,460)
Receipt (reimbursement) of mortality guarantee adjustment 313 355 (32) (29)
----------- ------------- ----------- -------------
64,762 61,614 56,609 56,235
Bond Account
Accumulation Units:
Contract purchases 19,365,131 75,287,744 16,354,396 58,570,949
Terminated contracts and transfers to annuity reserves (14,621,455) (56,288,542) (21,219,415) (76,460,665)
----------- ------------- ----------- -------------
4,743,676 18,999,202 (4,865,019) (17,889,716)
Annuity Reserves:
Transfers from accumulation units and between accounts 12,671 42,825 24,083 5,490
Annuity payments (16,433) (55,063) (37,451) (51,881)
Receipt (reimbursement) of mortality guarantee adjustment 386 1,473 (122) (437)
----------- ------------- ----------- -------------
(3,376) (10,765) (13,490) (46,828)
Capital Appreciation Account
Accumulation Units:
Contract purchases 66,122,712 75,254,717 58,317,908 58,239,344
Terminated contracts and transfers to annuity reserves (20,180,412) (23,190,279) (6,303,261) (5,751,782)
----------- ------------- ----------- -------------
45,942,300 52,064,438 52,014,647 52,487,562
Annuity Reserves:
Transfers from accumulation units and between accounts 161,891 180,041 64,891 46,320
Annuity payments (15,470) (18,086) (27,670) (8,581)
Receipt (reimbursement) of mortality guarantee adjustment 1,002 1,189 (194) (197)
----------- ------------- ----------- -------------
147,423 163,144 37,027 37,542
Equity-Income Account
Accumulation Units:
Contract purchases 126,796,961 154,590,919 87,288,845 89,340,582
Terminated contracts and transfers to annuity reserves (30,362,775) (36,426,079) (12,016,087) (11,277,083)
----------- ------------- ----------- -------------
96,434,186 118,164,840 75,272,758 78,063,499
Annuity Reserves:
Transfers from accumulation units and between accounts 269,564 220,202 605,336 617,160
Annuity payments (178,459) (133,771) (64,330) (47,859)
Receipt (reimbursement) of mortality guarantee adjustment (696) (791) 258 270
----------- ------------- ----------- -------------
90,409 85,640 541,264 569,571
Global Asset Allocation Account
Accumulation Units:
Contract purchases 30,492,535 54,864,824 53,015,835 87,399,009
Terminated contracts and transfers to annuity reserves (25,995,053) (46,489,629) (23,733,003) (38,406,000)
----------- ------------- ----------- -------------
4,497,482 8,375,195 29,282,832 48,993,009
Annuity Reserves:
Transfers from accumulation units and between accounts 93,022 167,479 371,857 516,579
Annuity payments (44,060) (79,943) (97,734) (63,073)
Receipt (reimbursement) of mortality guarantee adjustment 3,189 4,477 (2,617) (4,297)
----------- ------------- ----------- -------------
52,151 92,013 271,506 449,209
Growth and Income Account
Accumulation Units:
Contract purchases 78,788,015 435,781,433 71,469,595 324,622,854
Terminated contracts and transfers to annuity reserves (41,346,455) (224,231,067) (43,920,709) (197,878,237)
----------- ------------- ----------- -------------
37,441,560 211,550,366 27,548,886 126,744,617
Annuity Reserves:
Transfers from accumulation units and between accounts 120,000 664,486 1,037,499 4,701,947
Annuity payments (303,716) (1,689,271) (296,140) (1,289,274)
Receipt (reimbursement) of mortality guarantee adjustment (6,247) 2,172 12,205 56,056
----------- ------------- ----------- -------------
(189,963) (1,022,613) 753,564 3,468,729
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Lincoln National International Account
Accumulation Units:
Contract purchases 125,636,747 161,050,848 194,314,664 246,895,222
Terminated contracts and transfers to annuity reserves (112,767,417) (144,572,098) (75,225,996) (94,146,874)
------------ ------------ ----------- ------------
12,869,330 16,478,750 119,088,668 152,748,348
Annuity Reserves:
Transfers from accumulation units and between accounts 157,378 104,047 116,964 126,298
Annuity payments (157,737) (102,827) (83,606) (84,058)
Receipt (reimbursement) of mortality guarantee adjustment 1,063 1,376 (402) (511)
------------ ------------ ----------- ------------
704 2,596 32,956 41,729
Lincoln National Managed Account
Accumulation Units:
Contract purchases 30,628,296 95,910,986 36,109,775 98,575,292
Terminated contracts and transfers to annuity reserves (25,023,163) (76,850,028) (31,411,054) (85,243,976)
------------ ------------ ----------- ------------
5,605,133 19,060,958 4,698,721 13,331,316
Annuity Reserves:
Transfers from accumulation units and between accounts 87,231 183,273 188,209 486,300
Annuity payments (112,721) (257,050) (87,747) (198,953)
Receipt of mortality guarantee adjustment 143 987 315 866
------------ ------------ ----------- ------------
(25,347) (72,790) 100,777 288,213
Lincoln National Money Market Account
Accumulation Units:
Contract purchases 45,135,781 96,320,764 55,509,834 113,503,638
Terminated contracts and transfers to annuity reserves (47,105,496) (100,754,678) (58,167,403) (119,190,736)
------------ ------------ ----------- ------------
(1,969,715) (4,433,914) (2,657,569) (5,687,098)
Annuity Reserves:
Transfers from accumulation units and between accounts 70,227 150,907 66,325 33,184
Annuity payments (18,070) (34,758) (65,378) (31,558)
Receipt (reimbursement) of mortality guarantee adjustment 1,052 2,283 (345) (737)
------------ ------------ ----------- ------------
53,209 118,432 602 889
Lincoln National Social Awareness Account
Accumulation Units:
Contract purchases 39,371,799 97,257,107 30,523,160 61,205,129
Terminated contracts and transfers to annuity reserves (16,236,637) (38,656,851) (16,459,939) (32,685,698)
------------ ------------ ----------- ------------
23,135,162 58,600,256 14,063,221 28,519,431
Annuity Reserves:
Transfers from accumulation units and between accounts 17,276 37,515 48,369 98,958
Annuity payments (19,731) (40,978) (15,774) (31,992)
Reimbursement of mortality guarantee adjustment (2,827) (8,131) (17) (33)
------------ ------------ ----------- ------------
(5,282) (11,594) 32,578 66,933
Lincoln National Special Opportunities Account
Accumulation Units:
Contract purchases 33,694,088 169,910,302 37,792,494 162,254,574
Terminated contracts and transfers to annuity reserves (18,373,914) (90,956,261) (26,432,618) (112,865,138)
------------ ------------ ----------- ------------
15,320,174 78,954,041 11,359,876 49,389,436
Annuity Reserves:
Transfers from accumulation units and between accounts 21,950 121,796 20,826 78,494
Annuity payments (10,255) (58,948) (10,796) (34,645)
Receipt (reimbursement) of mortality guarantee adjustment 844 3,874 (332) (1,431)
------------ ------------ ----------- ------------
12,539 66,722 9,698 42,418
NET INCREASE FROM UNIT TRANSACTIONS $626,658,984 $593,633,429
============ ============
</TABLE>
5. PURCHASES AND SALES OF SECURITIES
The aggregate cost of investments purchased and the aggregate proceeds from
investments sold were as follows for 1995.
<TABLE>
<CAPTION>
Aggregate Aggregate
Cost of Proceeds
Purchases from Sales
------------ ------------
<S> <C> <C>
Lincoln National Aggressive Growth Account $ 55,109,502 $ 6,511,823
Lincoln National Bond Account 40,389,473 10,234,243
Lincoln National Capital Appreciation Account 55,742,916 4,009,943
Lincoln National Equity-Income Account 121,497,123 3,167,467
Lincoln National Global Asset Allocation Account 23,071,206 11,170,826
Lincoln National Growth and Income Account 312,079,177 16,202,162
Lincoln National International Account 61,286,471 32,746,570
Lincoln National Managed Account 51,131,484 16,506,561
Lincoln National Money Market Account 44,749,878 46,725,113
Lincoln National Social Awareness Account 67,790,852 1,769,164
Lincoln National Special Opportunities Account 110,026,089 13,110,077
------------ ------------
$942,874,171 $162,153,949
============ ============
</TABLE>
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors of The Lincoln National Life Insurance Company and
ContractOwners of Lincoln National Variable Annuity Account C
We have audited the accompanying statement of assets and liability of Lincoln
National Variable Annuity Account C (Variable Account) as of December 31, 1995,
and the related statement of operations for the year then ended, and the
statement of changes in net assets for each of the two years in the period then
ended. These financial statements are the responsibility of the Variable
Account's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1995, by correspondence with
the custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lincoln National Variable
Annuity Account C at December 31, 1995, the results of its operations for the
year then ended, and the changes in its net assets for each of the two years in
the period then ended in conformity with generally accepted accounting
principles.
Fort Wayne, Indiana
March 6, 1996 /s/ Ernst & Young LLP
<PAGE>
The Lincoln National Life Insurance Company
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1995 1994
(000's omitted)
<S> <C> <C>
Assets
Investments:
Securities available-for-sale, at fair value:
Fixed maturity (cost: 1995-$18,852,837;
1994-$18,193,928) $20,414,785 $17,692,214
Equity (cost: 1995-$480,261; 1994-$416,351) 598,435 456,333
Mortgage loans on real estate 3,147,783 2,795,914
Real estate 746,023 679,512
Policy loans 565,325 528,731
Other investments 241,219 158,196
Total investments 25,713,570 22,310,900
Cash and invested cash 802,743 990,880
Property and equipment 53,830 54,989
Deferred acquisition costs 953,834 1,736,526
Premiums and fees receivable 117,634 123,494
Accrued investment income 352,301 367,370
Assets held in separate accounts 18,461,629 13,000,540
Federal income taxes -- 134,463
Amounts recoverable from reinsurers 2,940,976 2,069,292
Goodwill 5,149 3,385
Other assets 185,398 233,708
Total assets $49,587,064 $41,025,547
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
December 31
1995 1994
(000's omitted)
<S> <C> <C>
Liabilities and shareholder's equity
Liabilities:
Policy liabilities and accruals:
Future policy benefits, claims and
claims expenses $ 8,435,019 $ 7,540,772
Unearned premiums 55,174 61,472
Total policy liabilities and accruals 8,490,193 7,602,244
Contractholder funds 18,171,822 17,028,628
Liabilities related to separate accounts 18,461,629 13,000,540
Federal income taxes 166,430 --
Short-term debt 124,783 153,656
Long-term debt 40,827 54,794
Other liabilities 1,412,534 1,264,730
Total liabilities 46,868,218 39,104,592
Shareholder's equity:
Common stock, $2.50 par value:
Authorized, issued and outstanding
shares-10 million (owned by Lincoln
National Corporation) 25,000 25,000
Additional paid-in capital 809,557 791,605
Retained earnings 1,440,994 1,428,969
Net unrealized gain (loss) on
securities available-for-sale 443,295 (324,619)
Total shareholder's equity 2,718,846 1,920,955
Total liabilities and shareholder's equity $49,587,064 $41,025,547
</TABLE>
See accompanying notes.
<PAGE>
The Lincoln National Life Insurance Company
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(000's omitted)
<S> <C> <C> <C>
Revenue:
Insurance premiums $ 846,873 $1,099,480 $1,972,630
Insurance fees 450,423 390,384 425,083
Net investment income 1,899,630 1,673,981 1,823,459
Realized gain (loss) on investments 136,195 (138,522) 92,150
Gain (loss) on sale of affiliates -- 68,954 (98,500)
Other 3,405 20,946 35,781
Total revenue 3,336,526 3,115,223 4,250,603
Benefits and expenses:
Benefits and settlement expenses 2,122,616 2,194,047 3,033,139
Underwriting, acquisition,
insurance and other expenses 764,346 660,363 881,703
Interest expense 67 615 96
Total benefits and expenses 2,887,029 2,855,025 3,914,938
Income before Federal income taxes
and cumulative effect of
accounting change 449,497 260,198 335,665
Federal income taxes 127,472 40,400 142,544
Income before cumulative
effect of accounting change 322,025 219,798 193,121
Cumulative effect of accounting
change (postretirement benefits) -- -- 45,582
Net income $ 322,025 $ 219,798 $ 147,539
Earnings per share:
Income before cumulative
effect of accounting change $ 32.20 $ 21.98 $ 19.31
Cumulative effect of accounting
change (postretirement benefits) -- -- (4.56)
Net income $ 32.20 $ 21.98 $ 14.75
</TABLE>
See accompanying notes.
<PAGE>
The Lincoln National Life Insurance Company
Consolidated Statements of Shareholder's Equity
Year ended December 31
1995 1994 1993
(000's omitted)
Common stock-balance
at beginning and end of year $ 25,000 $ 25,000 $ 25,000
Additional paid-in capital:
Balance at beginning of year 791,605 791,444 791,223
Contribution from Lincoln
National Corporation 17,952 161 221
Balance at end of year 809,557 791,605 791,444
Retained earnings:
Balance at beginning of year 1,428,969 1,334,171 1,198,632
Net income 322,025 219,798 147,539
Dividends declared (310,000) (125,000) (12,000)
Balance at end of year 1,440,994 1,428,969 1,334,171
Net unrealized gain (loss) on
securities available-for-sale:
Balance at beginning of year (324,619) 621,161 47,303
Cumulative effect of
accounting change -- -- 564,153
Other change during the year 767,914 (945,780) 9,705
Balance at end of year 443,295 (324,619) 621,161
Total shareholder's equity
at end of year $2,718,846 $1,920,955 $2,771,776
See accompanying notes.
<PAGE>
The Lincoln National Life Insurance Company
Consolidated Statements of Cash Flows
Year ended December 31
1995 1994 1993
(000's omitted)
Cash flows from operating activities
Net income $ 322,025 $ 219,798 $ 147,539
Adjustments to reconcile net income
to net cash provided
by operating activities:
Deferred acquisition costs 124,526 (171,063) (92,183)
Premiums and fees receivable 6,082 10,755 80,582
Accrued investment income 15,069 (54,434) (18,827)
Policy liabilities and accruals 621,603 114,038 345,142
Contractholder funds 1,335,625 1,769,240 1,248,058
Amounts recoverable from reinsurers (883,425) (884,388) (700,622)
Federal income taxes 95,745 8,364 (130,308)
Provisions for depreciation 39,089 38,870 41,516
Amortization of discount and premium (86,653) 7,928 (100,274)
Realized loss (gain) on investments (244,995) 219,682 (115,881)
Loss (gain) on sale of affiliates -- (68,954) 98,500
Cumulative effect of
accounting change -- -- 45,582
Other 458,542 (4,599) 51,369
Net adjustments 1,481,208 985,439 752,654
Net cash provided by
operating activities 1,803,233 1,205,237 900,193
Cash flows from investing activities
Securities available-for-sale:
Purchases (13,549,807) (12,100,213) (7,171,684)
Sales 12,163,673 9,326,809 7,139,781
Maturities 929,018 958,065 42,707
Fixed maturity securities
held for investment:
Purchases -- -- (5,903,805)
Sales -- -- 2,805,980
Maturities -- -- 1,639,739
Purchases of other investments (1,711,427) (1,421,321) (1,936,013)
Sale or maturity of other investments 1,198,536 1,457,157 1,142,872
Sale of affiliates -- 520,340 --
Decrease in cash collateral
on loaned securities (39,681) (163,872) (40,454)
Other (213,708) (37,606) 83,751
Net cash used in
investing activities (1,223,396) (1,460,641) (2,197,126)
<PAGE>
The Lincoln National Life Insurance Company
Consolidated Statements of Cash Flows (continued)
Year ended December 31
1995 1994 1993
(000's omitted)
Cash flows from financing activities
Principal payments on long-term debt $ (13,967) $ (200) $ (1,138)
Issuance of long-term debt -- -- 10,314
Net increase (decrease) in
short-term debt (28,873) 3,629 13,047
Universal life and investment
contract deposits 1,716,239 2,381,829 2,418,037
Universal life and
investment contract withdrawals (2,149,325) (1,604,450) (1,503,105)
Capital contribution from
Lincoln National Corporation 17,952 161 221
Dividends paid to shareholder (310,000) (125,000) (12,000)
Net cash provided by
(used in) financing activities (767,974) 655,969 925,376
Net increase (decrease) in cash (188,137) 400,565 (371,557)
Cash at beginning of year 990,880 590,315 961,872
Cash at end of year $ 802,743 $ 990,880 $ 590,315
See accompanying notes.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements
December 31, 1995
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include The Lincoln National
Life Insurance Company ("Company") and its majority-owned subsidiaries. The
Company and its subsidiaries operate multiple insurance businesses. Operations
are divided into two business segments (see Note 9). These consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles.
Use of Estimates
The nature of the insurance business requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Investments
The Company classifies its fixed maturity securities and equity securities
(common and non-redeemable preferred stocks) as available-for-sale and,
accordingly, such securities are carried at fair value. The cost of fixed
maturity securities is adjusted for amortization of premiums and discounts.
The cost of fixed maturity and equity securities is adjusted for declines in
value that are other than temporary.
For the mortgage-backed securities portion of the fixed maturity securities
portfolio, the Company recognizes income using a constant effective yield
based on anticipated prepayments and the estimated economic life of the
securities. When estimates of prepayments change, the effective yield is
recalculated to reflect actual payments to date and anticipated future
payments. The net investment in the securities is adjusted to the amount that
would have existed had the new effective yield been applied since the
acquisition of the securities. This adjustment is reflected in net investment
income.
Mortgage loans on real estate are carried at outstanding principal balances
less unaccrued discounts and net of reserves for declines that are other than
temporary. Investment real estate is carried at cost less allowances for
depreciation. Such real estate is carried net of reserves for declines in
value that are other than temporary. Real estate acquired through foreclosure
proceedings is recorded at fair value on the settlement date which establishes
a new cost basis. If
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
a subsequent periodic review of a foreclosed property indicates the fair
value, less estimated costs to sell, is lower than the carrying value at the
settlement date, the carrying value is adjusted to the lower amount. Policy
loans are carried at the aggregate unpaid balances. Any changes to the
reserves for mortgage loans on real estate and real estate are reported as a
realized gain (loss) on investments.
Cash and invested cash are carried at cost and include all highly liquid debt
instruments purchased with a maturity of three months or less, including
participation in a short-term investment pool administered by Lincoln National
Corporation ("LNC"), the Company's parent.
Realized gain (loss) on investments is recognized in net income, net of
related amortization of deferred acquisition costs, using the specific
identification method. Changes in the fair values of securities carried at
fair value are reflected directly in shareholder's equity after deductions for
related adjustments for deferred acquisition costs and amounts required to
satisfy policyholder commitments that would have been recorded if these
securities would have been sold at their fair value, and after deferred taxes
or credits to the extent deemed recoverable.
Derivatives
The Company hedges certain portions of its exposure to interest rate
fluctuations, the widening of bond yield spreads over comparable maturity U.S.
Government obligations and foreign exchange risk by entering into derivative
transactions. A description of the Company's accounting for its hedge of such
risks is discussed in the following two paragraphs.
The premium paid for an interest rate cap is deferred and amortized to net
investment income on a straight-line basis over the term of the interest rate
cap. Any settlement received in accordance with the terms of the interest
rate caps is recorded as investment income. Spread-lock agreements, interest
rate swaps and financial futures, which hedge fixed maturity securities
available-for-sale, are carried at fair value with the change in fair value
reflected directly in shareholder's equity. Realized gain (loss) from the
settlement of such derivatives is deferred and amortized over the life of the
hedged assets as an adjustment to the yield. Foreign exchange forward
contracts, foreign currency options and foreign currency swaps, which hedge
some of the foreign exchange risk of investments in fixed maturity securities
denominated in foreign currencies, are carried at fair value with the change
in fair value reflected in earnings. Realized gain (loss) from the settlement
of such derivatives is also reflected in earnings.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Hedge accounting is applied as indicated above after the Company determines
that the items to be hedged expose the Company to interest rate fluctuations,
the widening of bond yield spreads over comparable maturity U.S. Government
obligations and foreign exchange risk; and the derivatives used are designated
as a hedge and reduce the indicated risk by having a high correlation of
changes in the value of the derivatives and the items being hedged at both the
inception of the hedge and throughout the hedge period. Should such criteria
not be met, the change in value of the derivatives is included in net income.
Property and Equipment
Property and equipment owned for company use is carried at cost less
allowances for depreciation.
Premiums and Fees
Revenue for universal life and other interest-sensitive life insurance policies
consists of policy charges for cost of insurance, policy initiation and
administration, and surrender charges that have been assessed. Traditional
individual life-health and annuity premiums are recognized as revenue over the
premium-paying period of the policies. Group health premiums are prorated over
the contract term of the policies.
Assets Held in Separate Accounts/Liabilities Related to Separate Accounts
These assets and liabilities represent segregated funds administered and
invested by the Company for the exclusive benefit of pension and variable life
and annuity contractholders. The fees received by the Company for
administrative and contractholder maintenance services performed for these
separate accounts are included in the Company's consolidated statements of
income.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
Deferred Acquisition Costs
Commissions and other costs of acquiring universal life insurance, variable
universal life insurance, traditional life insurance, annuities and group
health insurance which vary with and are primarily related to the production
of new business, have been deferred to the extent recoverable. Acquisition
costs for universal and variable universal life insurance policies are being
amortized over the lives of the policies in relation to the incidence of
estimated gross profits from surrender charges and investment, mortality and
expense margins, and actual realized gain (loss) on investments. That
amortization is adjusted retrospectively when estimates of current or future
gross profits to be realized from a group of policies are revised. The
traditional life-health and annuity acquisition costs are amortized over the
premium-paying period of the related policies using assumptions consistent
with those used in computing policy reserves.
Expenses
Expenses for universal and variable universal life insurance policies include
interest credited to policy account balances and benefit claims incurred
during the period in excess of policy account balances. Interest crediting
rates associated with funds invested in the Company's general account during
1993 through 1995 ranged from 6.1% to 8.25%.
Goodwill
The cost of acquired subsidiaries in excess of the fair value of net assets
(goodwill) is amortized using the straight-line method over periods that
generally correspond with the benefits expected to be derived from the
acquisitions. Goodwill is amortized over 40 years. The carrying value of
goodwill is reviewed periodically for indicators of impairment in value.
Policy Liabilities and Accruals
The liabilities for future policy benefits and expenses for universal and
variable universal life insurance policies consist of policy account balances
that accrue to the benefit of the policyholders, excluding surrender charges.
The liabilities for future policy benefits and expenses for traditional life
policies and immediate and deferred paid-up annuities are computed using a net
level premium method and assumptions for investment yields, mortality and
withdrawals based principally on Company experience projected at the time of
policy issue, with provision for possible adverse deviations. Interest
assumptions for traditional direct individual life reserves for all policies
range from 2.3% to 11.7% graded to 5.7% after 30 years depending on time of
policy issue. Interest rate assumptions for reinsurance reserves range from
5.0% to 11.0% graded to 8.0% after 20 years. The interest assumptions for
immediate and deferred paid-up annuities range from 4.5% to 8.0%.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
With respect to its policy liabilities and accruals, the Company carries on a
continuing review of its 1) overall reserve position, 2) reserving techniques
and 3) reinsurance arrangements, and as experience develops and new
information becomes known, liabilities are adjusted as deemed necessary. The
effects of changes in estimates are included in the operating results for the
period in which such estimates occur.
Reinsurance
The Company enters into reinsurance agreements with other companies in the
normal course of their business. The Company may assume reinsurance from
unaffiliated companies and/or cede reinsurance to such companies.
Assets/liabilities and premiums/benefits from certain reinsurance contracts
which grant statutory surplus to other insurance companies have been netted on
the balance sheets and income statements, respectively, since there is a right
of offset. All other reinsurance agreements are reported on a gross basis.
Depreciation
Provisions for depreciation of investment real estate and property and
equipment owned for Company use are computed principally on the straight-line
method over the estimated useful lives of the assets.
Postretirement Medical and Life Insurance Benefits
The Company accounts for its postretirement medical and life insurance
benefits using the full accrual method.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Income Taxes
The Company and eligible subsidiaries have elected to file consolidated
Federal and state income tax returns with their parent, LNC. Pursuant to an
intercompany tax sharing agreement with LNC, the Company and its eligible
subsidiaries provide for income taxes on a separate return filing basis. The
tax sharing agreement also provides that the Company and eligible subsidiaries
will receive benefit for net operating losses, capital losses and tax credits
which are not usable on a separate return basis to the extent such items may
be utilized in the consolidated income tax returns of LNC.
The Company uses the liability method of accounting for income taxes.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax return purposes. The Company
establishes a valuation allowance for any portion of its deferred tax assets
which are unlikely to be realized.
2. Changes in Accounting Principles and Changes in Estimates
Postretirement Benefits Other Than Pensions
Effective January 1, 1993, the Company changed its method of accounting for
postretirement medical and life insurance benefits for its eligible employees
and agents from a pay-as-you-go method to a full accrual method in accordance
with Financial Accounting Standards No. 106 entitled "Employers' Accounting
for Postretirement Benefits Other Than Pensions" ("FAS 106"). This full
accrual method recognizes the estimated obligation for retired employees and
agents and active employees and agents who are expected to retire in the
future. The effect of the change was to increase net periodic postretirement
benefit cost by $7,800,000 and decrease income before cumulative effect of
accounting change by $5,100,000 ($0.51 per share). The implementation of FAS
106 resulted in a one-time charge to the first quarter 1993 net income of
$45,600,000 or $4.56 per share ($69,000,000 pre-tax) for the cumulative effect
of the accounting change. See Note 6 for additional disclosures regarding
postretirement benefits other than pensions.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. Changes in Accounting Principles and Changes in Estimates (continued)
Accounting by Creditors for Impairment of a Loan
Financial Accounting Standards No. 114 entitled "Accounting by Creditors for
Impairment of a Loan" ("FAS 114") issued in May 1993, was adopted by the
Company effective January 1, 1993. FAS 114 requires that if an impaired
mortgage loan's fair value as described in Note 3 is less than the recorded
investment in the loan, the difference is recorded in the mortgage loan
allowance for losses account. The adoption of FAS 114 resulted in additions
to the mortgage loan allowance for losses account and reduced first quarter
1993 income before cumulative effect of accounting change and net income by
$37,700,000 or $3.77 per share ($57,200,000 pre-tax). See Note 3 for further
mortgage loan disclosures. Most of the effect of this change in accounting
was within the Life Insurance and Annuities business segment.
Accounting for Certain Investments in Debt and Equity Securities
Financial Accounting Standards No. 115 entitled "Accounting for Certain
Investments in Debt and Equity Securities" ("FAS 115") issued in May 1993, was
adopted by the Company as of December 31, 1993. In accordance with the rules,
the prior year financial statements have not been restated to reflect the
change in accounting principle. Under FAS 115, securities can be classified
as available-for-sale, trading or held-to-maturity according to the holder's
intent. The Company classified its entire fixed maturity securities portfolio
as "available-for-sale." Securities classified as available-for-sale are
carried at fair value and unrealized gains and losses on such securities are
carried as a separate component of shareholder's equity. The ending balance
of shareholder's equity at December 31, 1993 was increased by $564,200,000
(net of $377,500,000 of related adjustments to deferred acquisition costs,
$50,700,000 of policyholder commitments and $303,700,000 in deferred income
taxes, all of which would have been recognized if those securities would have
been sold at their fair value, net of amounts applicable to Security-
Connecticut Corporation) to reflect the net unrealized gain on fixed maturity
securities classified as available-for-sale previously carried at amortized
cost. Prior to the adoption of FAS 115, the Company carried a portion of its
fixed maturity securities at fair value with unrealized gains and losses
carried as a separate component of shareholder's equity. The remainder of
such securities were carried at amortized cost.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
2. Changes in Accounting Principles and Changes in Estimates (continued)
Change in Estimate for Net Investment Income Related to Mortgage-Backed
Securities
At December 31, 1993, the Company had $5,942,100,000 invested in mortgage-
backed securities. As indicated in Note 1, the Company recognizes income on
these securities using a constant effective yield based on anticipated
prepayments. With the implementation of new investment software in December
1993, the Company was able to significantly refine its estimate of the
effective yield on such securities to better reflect actual prepayments and
estimates of future prepayments. This resulted in an increase in the
amortization of purchase discount on these securities of $58,000,000 and,
after related amortization of deferred acquisition costs ($18,300,000) and
income taxes ($14,300,000), increased 1993's income before cumulative effect
of accounting change and net income by $25,500,000 or $2.55 per share. Most
of the effect of this change in estimate was within the Life Insurance and
Annuities business segment.
Change in Estimate for Disability Income Reserves
During the fourth quarter of 1993, income before cumulative effect of
accounting change and net income decreased by $15,500,000 or $1.55 per share
as the result of strengthening reinsurance disability income reserves by
$23,900,000. The need for this reserve increase within the Reinsurance
segment was identified as the result of management's assessment of current
expectations for morbidity trends and the impact of lower investment income
due to lower interest rates.
During the fourth quarter of 1995, the Company completed an in-depth review of
the experience of its disability income business. As a result of this study,
and based on the assumption that recent experience will continue in the
future, income before cumulative effect of accounting change and net income
decreased by $33,500,000 or $3.35 per share ($51,500,000 pre-tax) as a result
of strengthening disability income reserves by $15,200,000 and writing-off
deferred acquisition costs of $36,300,000 in the Reinsurance segment.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments
The major categories of net investment income are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(in millions)
<S> <C> <C> <C>
Fixed maturity securities $1,549.4 $1,357.4 $1,497.6
Equity securities 8.9 7.4 4.3
Mortgage loans on real estate 268.3 271.3 294.2
Real estate 110.0 97.8 75.2
Policy loans 35.4 32.7 36.0
Invested cash 55.4 46.4 24.8
Other investments 15.8 7.3 8.0
Investment revenue 2,043.2 1,820.3 1,940.1
Investment expenses 143.6 146.3 116.6
Net investment income $1,899.6 $1,674.0 $1,823.5
</TABLE>
The realized gain (loss) on investments is as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(in millions)
<S> <C> <C> <C>
Fixed maturity securities available-for-sale:
Gross gain $239.6 $ 69.6 $ 91.1
Gross loss (87.8) (294.1) (8.4)
Equity securities available-for-sale:
Gross gain 82.3 50.2 88.3
Gross loss (31.3) (50.5) (33.7)
Fixed maturity securities held for investment:
Gross gain -- -- 209.9
Gross loss -- -- (69.5)
Other investments 42.2 5.1 (161.8)
Related restoration or amortization
of deferred acquisition costs and
provision for policyholder
commitments (108.8) 81.2 (23.7)
Total $136.2 $(138.5) $ 92.2
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
Provisions (credits) for write-downs and net changes in provisions for losses,
which are included in realized gain (loss) on investments shown above, are as
follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(in millions)
<S> <C> <C> <C>
Fixed maturity securities $10.4 $14.2 $ 55.6
Equity securities 3.3 6.8 --
Mortgage loans on real estate 14.7 19.5 136.7
Real estate (7.2) 13.0 21.8
Other long-term investments (1.5) .3 3.9
Guarantees (2.2) 4.3 1.7
Total $17.5 $58.1 $219.7
</TABLE>
The change in unrealized appreciation (depreciation) on investments in fixed
maturity and equity securities is as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(in millions)
<S> <C> <C> <C>
Fixed maturity securities
available-for-sale $2,063.7 $(1,903.7) $1,387.1
Equity securities available-for-sale 78.1 (26.0) 9.2
Fixed maturity securities
held for investment -- -- (959.7)
Total $2,141.8 $(1,929.7) $ 436.6
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
The cost, gross unrealized gain and loss and fair value of securities
available-for-sale are as follows:
<TABLE>
<CAPTION>
December 31, 1995
Gross Unrealized Fair
Cost Gain Loss Value
(in millions)
<S> <C> <C> <C> <C>
Corporate bonds $12,412.1 $1,141.0 $28.7 $13,524.4
U.S. Government bonds 569.6 83.9 .1 653.4
Foreign governments bonds 927.9 70.3 .6 997.6
Mortgage-backed securities:
Mortgage pass-through securities 1,072.5 41.0 3.2 1,110.3
Collateralized mortgage obligations 3,816.3 262.5 7.4 4,071.4
Other mortgage-backed securities 2.8 .3 -- 3.1
State and municipal bonds 12.3 .1 -- 12.4
Redeemable preferred stocks 39.3 2.9 -- 42.2
Total fixed maturity securities 18,852.8 1,602.0 40.0 20,414.8
Equity securities 480.3 123.6 5.5 598.4
Total $19,333.1 $1,725.6 $45.5 $21,013.2
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
Gross Unrealized Fair
Cost Gain Loss Value
(in millions)
<S> <C> <C> <C> <C>
Corporate bonds $11,519.3 $143.3 $514.4 $11,148.2
U.S. Government bonds 1,048.4 6.9 25.5 1,029.8
Foreign governments bonds 541.2 4.7 12.5 533.4
Mortgage-backed securities:
Mortgage pass-through securities 1,176.8 3.0 44.1 1,135.7
Collateralized mortgage obligations 3,835.5 85.8 148.6 3,772.7
Other mortgage-backed securities 5.0 .1 .1 5.0
State and municipal bonds 16.3 .4 -- 16.7
Redeemable preferred stocks 51.4 .2 .9 50.7
Total fixed maturity securities 18,193.9 244.4 746.1 17,692.2
Equity securities 416.3 56.4 16.4 456.3
Total $18,610.2 $300.8 $762.5 $18,148.5
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
Future maturities of fixed maturity securities available-for-sale are as
follows:
<TABLE>
<CAPTION>
December 31, 1995
Fair
Cost Value
(in millions)
<S> <C> <C>
Due in one year or less $ 278.4 $ 282.6
Due after one year through five years 2,955.7 3,102.1
Due after five years through ten years 4,918.2 5,265.9
Due after ten years 5,808.9 6,579.4
Subtotal 13,961.2 15,230.0
Mortgage-backed securities 4,891.6 5,184.8
Total $18,852.8 $20,414.8
</TABLE>
The foregoing data is based on stated maturities. Actual maturities will
differ in some cases because borrowers may have the right to call or pre-pay
obligations.
At December 31, 1995, the current par, amortized cost and estimated fair value
of investments in mortgage-backed securities summarized by interest rates of
the underlying collateral are as follows:
<TABLE>
<CAPTION>
December 31, 1995
Current Fair
Par Cost Value
(in millions)
<S> <C> <C> <C>
Below 7% $ 292.6 $ 290.5 $ 293.6
7%-8% 1,302.8 1,276.9 1,318.2
8%-9% 1,607.0 1,564.7 1,669.8
Above 9% 1,810.5 1,759.5 1,903.2
Total $5,012.9 $4,891.6 $5,184.8
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
The quality ratings of fixed maturity securities available-for-sale are as
follows:
<TABLE>
<CAPTION>
December 31, 1995
<S> <C>
Treasuries and AAA 34.1%
AA 8.0
A 25.9
BBB 24.5
BB 3.9
Less than BB 3.6
100.0%
</TABLE>
Mortgage loans on real estate are considered impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. When the Company determines that a loan is impaired, a provision
for loss is established for the difference between the carrying value of the
mortgage loan and the estimated value. Estimated value is based on either the
present value of expected future cash flows discounted at the loan's effective
interest rate, the loan's observable market price or the fair value of the
collateral. The provision for losses is reported as realized gain (loss) on
investments. Mortgage loans deemed to be uncollectible are charged against
the provision for losses and subsequent recoveries, if any, are credited to
the provision for losses.
The provision for losses is maintained at a level believed adequate by
management to absorb estimated probable credit losses. Management's periodic
evaluation of the adequacy of the provision for losses is based on the
Company's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay
(including the timing of future payments), the estimated value of the
underlying collateral, composition of the loan portfolio, current economic
conditions and other relevant factors. This evaluation is inherently
subjective as it requires estimating the amounts and timing of future cash
flows expected to be received on impaired loans that may be susceptible to
significant change.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
Impaired loans along with the related allowance for losses are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
(in millions)
<S> <C> <C>
Impaired loans with allowance for losses $144.7 $246.0
Allowance for losses (28.5) (56.6)
Impaired loans with no allowance for losses 2.1 2.2
Net impaired loans $118.3 $191.6
</TABLE>
Impaired loans with no allowance for losses are a result of direct write-downs
or for collateral dependent loans where the fair value of the collateral is
greater than the recorded investment in such loans.
A reconciliation of the mortgage loan allowance for losses for these impaired
mortgage loans is as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(in millions)
<S> <C> <C> <C>
Balance at beginning of year $56.6 $220.7 $129.1
Provisions for losses 14.7 19.5 79.5
Provision for adoption of FAS 114 -- -- 57.2
Releases due to write-downs (12.0) -- --
Releases due to sales (15.9) (164.7) (12.2)
Releases due to foreclosures (14.9) (18.9) (32.9)
Balance at end of year $28.5 $ 56.6 $220.7
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
The average recorded investment in impaired loans and the interest income
recognized on impaired loans were as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(in millions)
<S> <C> <C> <C>
Average recorded investment in impaired loans $181.7 $467.5 $703.6
Interest income recognized on impaired loans 16.6 36.1 47.3
</TABLE>
All interest income on impaired loans was recognized on the cash basis of
income recognition.
As of December 31, 1995 and 1994, the Company had restructured loans of
$62,500,000 and $36,200,000, respectively. The Company recorded $6,300,000
and $800,000 interest income on these restructured loans in 1995 and 1994,
respectively. Interest income in the amount of $6,600,000 and $3,900,000
would have been recorded on these loans according to their original terms in
1995 and 1994, respectively. As of December 31, 1995 and 1994, the Company
had no outstanding commitments to lend funds on restructured loans.
As of December 31, 1995, the Company's investment commitments for fixed
maturity securities (primarily private placements), mortgage loans on real
estate and real estate were $543,100,000.
Fixed maturity securities available-for-sale, mortgage loans on real estate
and real estate with a combined carrying value at December 31, 1995 of
$1,300,000 were non-income producing for the year ended December 31, 1995.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
The cost information for mortgage loans on real estate, real estate and other
long-term investments are net of allowances for losses. The balance sheet
account for other liabilities includes a reserve for guarantees of third-party
debt. The amount of allowances and a reserve for such items is as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
(in millions)
<S> <C> <C>
Mortgage loans on real estate $28.5 $56.6
Real estate 46.6 65.2
Other long-term investments 11.8 13.5
</TABLE>
Details underlying the balance sheet caption "Net Unrealized Gain (Loss) on
Securities Available-for-Sale," are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
(in millions)
<S> <C> <C>
Fair value of securities available-for-sale $21,013.2 $18,148.5
Cost of securities available-for-sale 19,333.1 18,610.2
Unrealized gain (loss) 1,680.1 (461.7)
Adjustments to deferred acquisition costs (492.1) 158.2
Amounts required to satisfy
policyholder commitments (510.1) 8.6
Deferred income credits (taxes) (234.6) 105.9
Valuation allowance for deferred tax assets -- (135.6)
Net unrealized gain (loss) on
securities available-for-sale $ 443.3 $ (324.6)
</TABLE>
Adjustments to deferred acquisition costs and amounts required to satisfy
policyholder commitments are netted against the Deferred Acquisition Costs
asset account and included with the Future Policy Benefits, Claims and Claims
Expense liability account on the balance sheet, respectively.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
4. Federal Income Taxes
The Federal income tax expense (benefit) before cumulative effect of
accounting change is as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(in millions)
<S> <C> <C> <C>
Current $172.5 $(93.4) $261.3
Deferred (45.0) 133.8 (118.8)
Total $127.5 $ 40.4 $142.5
</TABLE>
Cash paid for Federal income taxes in 1995, 1994 and 1993 was $27,500,000,
$41,400,000 and $272,600,000, respectively. The cash paid in 1995 is net of a
$146,900,000 cash refund related to the carryback of 1994 capital losses to
prior years.
The effective tax rate on pre-tax income before cumulative effect of
accounting change is lower than the prevailing corporate Federal income tax
rate. A reconciliation of this difference is as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(in millions)
<S> <C> <C> <C>
Tax rate times pre-tax income $157.3 $91.1 $117.5
Effect of:
Tax-exempt investment income (22.0) (21.5) (16.2)
Participating policyholders' share 5.4 3.4 4.1
Loss (gain) on sale of affiliates -- (24.1) 34.5
Other items (13.2) (8.5) 2.6
Provision for income taxes $127.5 $40.4 $142.5
Effective tax rate 28.4% 15.5% 42.5%
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
4. Federal Income Taxes (continued)
The Federal income tax recoverable (liability) is as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
(in millions)
<S> <C> <C>
Current $ (25.0) $118.2
Deferred (141.4) 16.3
Total $(166.4) $134.5
</TABLE>
Significant components of the Company's net deferred tax asset (liability) are
as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
(in millions)
<S> <C> <C>
Deferred tax assets:
Policy liabilities and accruals
and contractholder funds $ 694.5 $430.9
Loss on investments -- 16.8
Net unrealized loss on
securities available-for-sale -- 161.6
Postretirement benefits other than pensions 25.3 24.2
Other 39.5 34.6
Total deferred tax assets 759.3 668.1
Valuation allowance for deferred tax assets -- (135.6)
Net deferred tax assets 759.3 532.5
Deferred tax liabilities:
Deferred acquisition costs 218.8 475.5
Net unrealized gain on
securities available-for-sale 579.6 --
Gain on investments 7.7 --
Other 94.6 40.7
Total deferred tax liabilities 900.7 516.2
Net deferred tax (liability) asset $(141.4) $ 16.3
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
4. Federal Income Taxes (continued)
The Company is required to establish a "valuation allowance" for any portion
of its deferred tax assets which are unlikely to be realized. At December 31,
1994, $161,600,000 of deferred tax assets relating to net unrealized capital
losses on fixed maturity and equity securities available-for-sale were
available to be recorded in shareholder's equity before considering a
valuation allowance. For Federal income tax purposes, capital losses may only
be used to offset capital gains in the current year or during a three year
carryback and five year carryforward period. Due to these restrictions, and
the uncertainty at that time of future capital gains, these deferred tax
assets were substantially offset by a valuation allowance of $135,600,000. By
December 31, 1995, the fair values of fixed maturity and equity securities
available-for-sale were greater than the cost basis resulting in unrealized
capital gains. Accordingly, no valuation allowance was established as of
December 31, 1995 since management believes it is more likely than not that
the Company will realize the benefit of its deferred tax assets.
Prior to 1984, a portion of the life companies' current income was not subject
to current income tax, but was accumulated for income tax purposes in a
memorandum account designated as "policyholders' surplus." The total of the
life companies' balances in their respective "policyholders' surplus" accounts
at December 31, 1983 of $204,800,000 was "frozen" by the Tax Reform Act of
1984 and, accordingly, there have been no additions to the accounts after that
date. That portion of current income on which income taxes have been paid
will continue to be accumulated in a memorandum account designated as
"shareholder surplus," and is available for dividends to the shareholder
without additional payment of tax. The December 31, 1995 total of the life
companies' account balances for their "shareholder surplus" was
$1,554,000,000. Should dividends to the shareholder for each life company
exceed its respective "shareholder surplus," amounts would need to be
transferred from its respective "policyholders' surplus" and would be subject
to Federal income tax at that time. In connection with the 1993 sale of a
life insurance affiliate (see Note 10), $8,800,000 was transferred from
policyholders' surplus to shareholder surplus and current income tax of
$3,100,000 was paid. Under existing or foreseeable circumstances, the Company
neither expects nor intends that distributions will be made from the remaining
balance in "policyholders' surplus" of $196,000,000 that will result in any
such tax. Accordingly, no provision for deferred income taxes has been
provided by the Company on its "policyholders' surplus" account. In the event
that such excess distributions are made, it is estimated that income taxes of
approximately $68,600,000 would be due.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. Supplemental Financial Data
The balance sheet captions, "Real Estate," "Other Investments" and "Property
and Equipment," are shown net of allowances for depreciation as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
(in millions)
<S> <C> <C>
Real estate $ 51.6 $ 37.0
Other investments 14.6 12.2
Property and equipment 100.7 104.7
</TABLE>
Details underlying the balance sheet caption, "Contractholder Funds," are as
follows:
<TABLE>
<CAPTION>
December 31
1995 1994
(in millions)
<S> <C> <C>
Premium deposit funds $17,886.9 $16,770.3
Undistributed earnings on participating business 91.9 63.6
Other 193.0 194.7
Total $18,171.8 $17,028.6
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. Supplemental Financial Data (continued)
Details underlying the balance sheet captions, "Short-term and Long-term
Debt," are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
(in millions)
<S> <C> <C>
Short-term debt:
Short-term notes $123.5 $150.8
Current portion of long-term debt 1.3 2.9
Total short-term debt $124.8 $153.7
Long-term debt less current portion:
7% mortgage note payable, due 1996 $ -- $ 4.9
9.48% mortgage note payable, due 1996 -- 7.7
12% mortgage note payable, due 1996 -- .2
8.42% mortgage note payable, due 1997 7.0 7.2
8.25% mortgage note payable, due 1997 10.1 10.2
8% mortgage note payable, due 1997 2.1 --
8.75% mortgage note payable, due 1998 18.4 18.8
9.75% mortgage note payable, due 2002 3.2 5.8
Total long-term debt $ 40.8 $ 54.8
</TABLE>
Future maturities of long-term debt are as follows (in millions):
1996 -- $ 1.3 1998 -- $18.4 2000 -- $ --
1997 -- 19.2 1999 -- -- Thereafter -- 3.2
Cash paid for interest for 1995, 1994 and 1993 was $67,000, $615,000 and
$96,000, respectively.
Reinsurance transactions included in the income statement caption, "Insurance
Premiums," are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(in millions)
<S> <C> <C> <C>
Insurance assumed $777.6 $910.8 $807.5
Insurance ceded 441.7 716.7 568.6
Net reinsurance premiums $335.9 $194.1 $238.9
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
5. Supplemental Financial Data (continued)
The income statement caption, "Benefits and Settlement Expenses," is net of
reinsurance recoveries of $456,000, $524,000 and $438,000 for the years ended
December 31, 1995, 1994 and 1993, respectively.
The income statement caption, "Underwriting, Acquisition, Insurance and Other
Expenses," includes amortization of deferred acquisition costs of
$399,700,000, $115,200,000 and $241,000,000 for the years ended December 31,
1995, 1994 and 1993, respectively. An additional $(85,200,000), $81,200,000
and ($23,700,000) of deferred acquisition costs was restored (amortized) and
netted against "Realized Gain (Loss) on Investments" for the years ended
December 31, 1995, 1994 and 1993, respectively.
6. Employee Benefit Plans
Pension Plans
LNC maintains funded defined benefit pension plans for most of its employees
and, prior to January 1, 1995, full-time agents. The benefits for employees
are based on total years of service and the highest 60 months of compensation
during the last 10 years of employment. The benefits for agents were based on
a percentage of each agent's yearly earnings. The plans are funded by
contributions to tax-exempt trusts. The Company's funding policy is
consistent with the funding requirements of Federal laws and regulations.
Contributions are intended to provide not only the benefits attributed to
service to date, but also those expected to be earned in the future. Plan
assets consist principally of listed equity securities and corporate
obligations and government bonds.
All benefits applicable to the funded defined benefit plan for agents were
frozen as of December 31, 1994. The curtailment of this plan did not have a
significant effect on net pension cost for 1994. Effective January 1, 1995,
pension benefits for agents have been provided by a new defined contribution
plan. Contributions to this plan will be based on 2.3% of an agent's earnings
up to the social security wage base and 4.6% of any excess.
LNC also administers two types of unfunded, nonqualified, defined benefit
plans for certain employees and agents. A supplemental retirement plan
provides defined benefit pension benefits in excess of limits imposed by
Federal tax law. A salary continuation plan provides certain officers of the
Company defined pension benefits based on years of service and final monthly
salary upon death or retirement.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. Employee Benefit Plans (continued)
The status of the funded defined benefit pension plans and the amounts
recognized on the balance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
(in millions)
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $(162.1) $(130.5)
Nonvested benefits (9.2) (7.3)
Accumulated benefit obligation (171.3) (137.8)
Effect of projected future compensation increases (37.2) (24.3)
Projected benefit obligation (208.5) (162.1)
Plan assets at fair value 196.4 159.3
Projected benefit obligations in
excess of plan assets (12.1) (2.8)
Unrecognized net loss (gain) 12.6 (.5)
Unrecognized prior service cost 1.2 1.1
Prepaid (accrued) pension cost
included in other liabilities $ 1.7 $ (2.2)
</TABLE>
The status of the unfunded defined benefit pension plans and the amounts
recognized on the balance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
(in millions)
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $(7.0) $(5.4)
Nonvested benefits (1.5) (1.0)
Accumulated benefit obligation (8.5) (6.4)
Effect of projected future compensation increases (2.4) (2.5)
Projected benefit obligation (10.9) (8.9)
Unrecognized transition obligation -- --
Unrecognized net loss (gain) 1.0 (.3)
Unrecognized prior service cost .8 .8
Accrued pension costs included in other liabilities $(9.1) $(8.4)
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. Employee Benefit Plans (continued)
The determination of the projected benefits obligation for the defined benefit
plans was based on the following assumptions:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Weighted-average discount rate 7.0% 8.0% 7.0%
Rate of increase in compensation:
Salary continuation plan 6.0 6.5 6.0
All other plans 5.0 5.0 5.0
Expected long-term rate of return on plan assets 9.0 9.0 9.0
</TABLE>
The components of net pension cost for the defined benefit pension plans are
as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(in millions)
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 5.0 $ 8.9 $ 8.5
Interest cost on projected benefit obligation 13.2 12.9 12.4
Actual return on plan assets (36.3) 4.7 (20.1)
Net amortization (deferral) 22.9 (18.6) 6.1
Net pension cost $ 4.8 $ 7.9 $ 6.9
</TABLE>
401(k)
LNC and the Company sponsor contributory defined contribution plans for
eligible employees and agents. The Company's contributions to the plans are
equal to each participant's pre-tax contribution, not to exceed 6% of base
pay, multiplied by a percentage, ranging from 25% to 150%, which varies
according to certain incentive criteria as determined by LNC's Board of
Directors. Expense for these plans amounted to $8,000,000, $13,200,000 and
$11,800,000 in 1995, 1994 and 1993, respectively.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. Employee Benefit Plans (continued)
Postretirement Medical and Life Insurance Benefit Plans
LNC sponsors unfunded defined benefit plans that provide postretirement
medical and life insurance benefits to full-time employees and agents who,
depending on the plan, have worked for the Company 10 to 15 years and attained
age 55 to 60. Medical benefits are also available to spouses and other
dependents of employees and agents. For medical benefits, limited
contributions are required from individuals retired prior to November 1, 1988;
contributions for later retirees, which can be adjusted annually, are based on
such items as years of service at retirement and age at retirement. The life
insurance benefits are noncontributory, although participants can elect
supplemental contributory benefits.
The status of the postretirement medical and life insurance benefit plans and
the amounts recognized on the balance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
(in millions)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $(39.8) $(34.9)
Fully eligible active plan participants (9.9) (7.0)
Other active plan participants (20.8) (15.0)
Accumulated postretirement benefit obligation (70.5) (56.9)
Unrecognized net gain (.8) (5.5)
Accrued plan cost included in other liabilities $(71.3) $(62.4)
</TABLE>
The components of periodic postretirement benefit cost are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(in millions)
<S> <C> <C> <C>
Service cost $1.5 $1.7 $2.6
Interest cost 4.4 4.2 4.6
Amortization cost (credit) (.8) .1 --
Net periodic postretirement benefit cost $5.1 $6.0 $7.2
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
6. Employee Benefit Plans (continued)
The calculation of the accumulated postretirement benefit obligation assumes a
weighted-average annual rate of increase in the per capita cost of covered
benefits (i.e., health care cost trend rate) of 9.5% for 1996 gradually
decreasing to 5.5% by 2004 and remaining at that level thereafter. The health
care cost trend rate assumption has a significant effect on the amounts
reported. For example, increasing the assumed health care cost trend rates by
one percentage point each year would increase the accumulated postretirement
benefit obligation as of December 1995 and 1994 by $5,100,000 and $4,100,000,
respectively, and the aggregate of the estimated service and interest cost
components of net periodic postretirement benefit cost for the year ended
December 31, 1995 by $488,000. The calculation assumes a long-term rate of
increase in compensation of 5.0% for both December 31, 1995 and 1994. The
weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% and 8.0% at December 31, 1995 and
1994, respectively.
7. Restrictions, Commitments and Contingencies
Shareholder's Equity Restrictions
Net income as determined in accordance with statutory accounting practices for
the Company and its insurance subsidiaries in 1995, 1994 and 1993 was
$284,500,000, $366,700,000 and $237,000,000, respectively. The Company's
shareholder's equity as determined in accordance with statutory accounting
practices at December 31, 1995 and 1994 was $1,732,900,000 and $1,679,700,000,
respectively.
The Company is subject to certain insurance department regulatory restrictions
as to the transfer of funds and payments of dividends to LNC. In 1996, the
Company can transfer up to $284,500,000 without seeking prior approval from
the insurance regulators.
Disability Income Claims
The liability for disability income claims net of the related asset for
amounts recoverable from reinsurers at December 31, 1995 and 1994 is a net
liability of $602,600,000 and $441,700,000, respectively, excluding deferred
acquisition costs. The bulk of the increase to this liability relates to the
assumption of a large block of disability claim reserves and related assets
during the third quarter of 1995. In addition, as indicated in Note 2, the
Company strengthened its disability income reserves and wrote off certain
related deferred acquisition costs in the fourth quarter of 1995. The
reserves were established on the assumption that the recent experience will
continue in the future. If incidence levels or claim termination rates vary
significantly from these assumptions, further adjustments to reserves may be
required in the future. It is not possible to provide a meaningful estimate
of a range of possible outcomes at this time. The Company reviews and updates
the level of these reserves on an on-going basis.
Compliance of Qualified Annuity Plans
Tax authorities continue to focus on compliance of qualified annuity plans
marketed by insurance companies. If sponsoring employers cannot demonstrate
compliance and the insurance company is held responsible due to its marketing
efforts, the Company and other insurers may be subject to potential liability.
It is not possible to provide a meaningful estimate of the range of potential
liability at this time. Management continues to monitor this matter and to
take steps to minimize any potential liability.
Group Pension Annuities
The liabilities for guaranteed interest and group pension annuity contracts,
which are no longer being sold, are supported by a single portfolio of assets
which attempts to match the duration of these liabilities. Due to the very
long-term nature of group pension annuities and the resulting inability to
exactly match cash flows, a risk exists that future cash flows from
investments will not be reinvested at rates as high as currently earned by the
portfolio. This situation could cause losses which would be recognized at
some future time.
Leases
The Company and certain of its subsidiaries lease their home office properties
through sale-leaseback agreements. The agreements provide for a 25 year lease
period with options to renew for six additional terms of five years each. The
agreements also provide the Company with the right of first refusal to
purchase the properties during the term of the lease, including renewal
periods, at a price as defined in the agreements. In addition, the Company
has the option to purchase the leased properties at fair market value as
defined in the agreements on the last day of the initial 25 year lease period
ending in 2009 or the last day of any of the renewal periods.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Restrictions, Commitments and Contingencies (continued)
Total rental expense under operating leases in 1995, 1994 and 1993 was
$24,400,000, $21,700,000 and $27,100,000. Future minimum rental commitments
are as follows (in millions):
<TABLE>
<CAPTION>
<S> <C>
1996 $ 20.9
1997 19.5
1998 18.3
1999 18.3
2000 17.7
Thereafter 172.4
Total $267.1
</TABLE>
Insurance Ceded and Assumed
The Company cedes insurance to other companies, including certain affiliates.
The portion of risks exceeding each companys retention limit is reinsured
with other insurers. The Company seeks reinsurance coverage within the
business segment that sells life insurance that limits its liabilities on an
individual insured to $3,000,000. To cover products other than life
insurance, the Company acquires other insurance coverages with retentions and
limits which management believes are appropriate for the circumstances. The
accompanying financial statements reflect premiums, benefits and settlement
expenses and deferred acquisition costs, net of insurance ceded (see Note 5).
The Company and its subsidiaries remain liable if their reinsurers are unable
to meet their contractual obligations under the applicable reinsurance
agreements.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1995, the Company has provided $92,700,000 of
statutory surplus relief to other insurance companies under reinsurance
transactions. Generally, such amounts are offset by corresponding receivables
from the ceding company, which are secured by future profits on the reinsured
business. However, the Company is subject to the risk that the ceding company
may become insolvent and the right of offset would not be permitted.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Restrictions, Commitments and Contingencies (continued)
Vulnerability from Concentrations
At December 31, 1995, the Company did not have a material concentration of
financial instruments in a single investee, industry or geographic location.
Also at December 31, 1995, the Company did not have a concentration of 1)
business transactions with a particular customer, lender or distributor, 2)
revenues from a particular product of service, 3) sources of supply of labor
or services used in the business or 4) a market or geographic area in which
business is conducted that makes it vulnerable to an event that is at least
reasonably possible to occur in the near term and which could cause a serve
impact to the Company's financial condition.
Other Contingency Matters
The Company and its subsidiaries are involved in various pending or threatened
legal proceedings arising from the conduct of their business. In some
instances, these proceedings include claims for punitive damages and similar
types of relief in unspecified or substantial amounts, in addition to amounts
for alleged contractual liability or requests for equitable relief. After
consultation with counsel and a review of available facts, it is management's
opinion that these proceedings ultimately will be resolved without materially
affecting the consolidated financial statements of the Company.
The number of insurance companies that are under regulatory supervision has
resulted, and is expected to continue to result, in assessments by state
guaranty funds to cover losses to policyholders of insolvent or rehabilitated
companies. Mandatory assessments may be partially recovered through a
reduction in future premium taxes in some states. The Company has accrued for
expected assessments net of estimated future premium tax deductions.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Restrictions, Commitments and Contingencies (continued)
Guarantees
The Company has guarantees with off-balance-sheet risks whose contractual
amounts represent credit exposure. Outstanding guarantees with off-balance-
sheet risks, shown in notional or contract amounts, are as follows:
<TABLE>
<CAPTION>
Notional or
Contract Amounts
December 31
1995 1994
(in millions)
<S> <C> <C>
Real estate partnerships $ 3.3 $17.6
Mortgage loan pass-through certificates 63.6 78.2
Total $66.9 $95.8
</TABLE>
The Company has invested in real estate partnerships that use conventional
mortgage loans. In some cases, the terms of these arrangements involve
guarantees by each of the partners to indemnify the mortgagor in the event a
partner is unable to pay its principal and interest payments. In addition,
the Company has sold commercial mortgage loans through grantor trusts which
issued pass-through certificates. The Company has agreed to repurchase any
mortgage loans which remain delinquent for 90 days at a repurchase price
substantially equal to the outstanding principal balance plus accrued interest
thereon to the date of repurchase. It is management's opinion that the value
of the properties underlying these commitments is sufficient that in the event
of default the impact would not be material to the Company. Accordingly, both
the carrying value and fair value of these guarantees is zero at December 31,
1995 and 1994.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Restrictions, Commitments and Contingencies (continued)
Derivatives
The Company has derivatives with off-balance-sheet risks whose notional or
contract amounts exceed the credit exposure. The Company has entered into
derivative transactions to reduce its exposure to fluctuations in interest
rates, the widening of bond yield spreads over comparable maturity U.S.
Government obligations and foreign exchange risks. In addition, the Company
is subject to the risks associated with changes in the value of its
derivatives; however, such changes in the value generally are offset by
changes in the value of the items being hedged by such contracts. Outstanding
derivatives with off-balance-sheet risks, shown in notional or contract
amounts along with their carrying value and estimated fair values, are as
follows:
<TABLE>
<CAPTION>
Assets (Liabilities)
Notional or Carrying Fair Carrying Fair
Contract Amounts Value Value Value Value
December 31 December 31 December 31
1995 1994 1995 1995 1994 1994
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate
cap agreements $5,110.0 $4,400.0 $22.7 $5.3 $23.3 $34.4
Spread-lock
agreements 600.0 1,300.0 (.9) (.9) 3.2 3.2
Financial
futures contracts -- 382.5 -- -- (7.5) (7.5)
Interest rate swaps 5.0 5.0 .2 .2 .2 .2
5,715.0 6,087.5 22.0 4.6 19.2 30.3
Foreign currency
derivatives:
Foreign exchange
forward contracts 15.7 21.2 (.6) (.6) .2 .2
Foreign currency
options 99.2 -- 1.9 1.4 -- --
Foreign currency
swaps 15.0 -- .4 .4 -- --
129.9 21.2 1.7 1.2 .2 .2
$5,844.9 $6,108.7 $23.7 $5.8 $19.4 $30.5
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Restrictions, Commitments and Contingencies (continued)
A reconciliation and discussion of the notional or contract amounts for the
significant programs using derivative agreements and contracts is as follows:
<TABLE>
<CAPTION>
Interest Rate Caps Spread Locks
December 31 December 31
1995 1994 1995 1994
(in millions)
<S> <C> <C> <C> <C>
Balance at beginning of year $4,400.0 $3,800.0 $1,300.0 $1,700.0
New contracts 710.0 600.0 800.0 --
Terminations and maturities -- -- (1,500.0) (400.0)
Balance at end of year $5,110.0 $4,400.0 $ 600.0 $1,300.0
</TABLE>
<TABLE>
<CAPTION>
Financial Futures
Contracts Options
1995 1994 1995 1994
(in millions)
<S> <C> <C> <C> <C>
Balance at beginning of year $ 382.5 $ 33.1 $ -- $ --
New contracts 810.5 1,087.7 181.6 308.0
Terminations and maturities (1,193.0) (738.3) (181.6) (308.0)
Balance at end of year $ -- $ 382.5 $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
Foreign Currency Derivatives
Foreign
Exchange Foreign Foreign
Forward Currency Currency
Contracts Options Swaps
1995 1994 1995 1994 1995 1994
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 21.2 $ -- $ -- $-- $ -- $--
New contracts 131.2 38.5 356.6 -- 15.0 --
Terminations and maturities (136.7) (17.3) (257.4) -- -- --
Balance at end of year $ 15.7 $21.2 $ 99.2 $-- $15.0 $--
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Restrictions, Commitments and Contingencies (continued)
Interest Rate Caps
The interest rate cap agreements, which expire in 1997 through 2003, entitle
the Company to receive payments from the counterparties on specified future
reset dates, contingent on future interest rates. For each cap, the amount of
such quarterly payments, if any, is determined by the excess of a market
interest rate over a specified cap rate times the notional amount divided by
four. The purpose of the Company's interest rate cap agreement program is to
protect its annuity line of business from the effect of fluctuating interest
rates. The premium paid for the interest rate caps is included in other
assets ($22,700,000 and $23,400,000 as of December 31, 1995 and 1994,
respectively) and is being amortized over the terms of the agreements and is
included in net investment income.
Spread Locks
Spread-lock agreements in effect at December 31, 1995 all expire in 2005.
Spread-lock agreements provide for a lump sum payment to or by the Company
depending on whether the spread between the swap rate and a specified U.S.
Treasury note is larger or smaller than a contractually specified spread.
Cash payments are based on the product of the notional amount, the spread
between the swap rate and the yield of an equivalent maturity U.S. Treasury
security and the price sensitivity of the swap at that time, expressed in
dollars per basis point. The purpose of the Company's spread-lock program is
to protect a portion of its fixed maturity securities against widening of
spreads.
Financial Futures
The Company uses exchange-traded financial futures contracts and options on
those financial futures to hedge against interest rate risks and to manage
duration of a portion of its fixed maturity securities. Financial futures
contracts obligate the Company to buy or sell a financial instrument at a
specified future date for a specified price and may be settled in cash or
through delivery of the financial instrument. Cash settlements on the change
in market values of financial futures contracts are made daily. Options on
financial futures give the Company the right, but not the obligation, to
assume a long or short position in the underlying futures at a specified price
during a specified time period.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
7. Restrictions, Commitments and Contingencies (continued)
Foreign Currency Derivatives
The Company uses a combination of foreign exchange forward contracts, foreign
currency options and foreign currency swaps, all of which are traded over-the-
counter, to hedge some of the foreign exchange risk of investments in fixed
maturity securities denominated in foreign currencies. The foreign currency
forward contracts obligate the Company to deliver a specified amount of
currency at a future date at a specified exchange rate. Foreign currency
options give the Company the right, but not the obligation, to buy or sell a
foreign currency at a specific exchange rate during a specified time period.
A foreign currency swap is a contractual agreement to exchange the currencies
of two different countries pursuant to an agreement to reexchange the two
currencies at the same rate of exchange at a specified future date.
Additional Derivative Information
Expenses for the agreements and contracts described above amounted to
$5,600,000 and $5,400,000 in 1995 and 1994, respectively. Deferred losses of
$21,800,000 as of December 31, 1995, resulting from 1) terminated and expired
spread-lock agreements, 2) financial futures contracts and 3) options on
financial futures, are included with the related fixed maturity securities to
which the hedge applied and are being amortized over the life of such
securities.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on interest rate cap agreements, spread-lock agreements,
interest rate swaps, foreign exchange forward contracts, foreign currency
options and foreign currency swaps, but the Company does not anticipate
nonperformance by any of these counterparties. The credit risk associated
with such agreements is minimized by purchasing such agreements from financial
institutions with long-standing, superior performance records. The amount of
such exposure is essentially the net replacement cost or market value for such
agreements with each counterparty if the net market value is in the Company's
favor. At December 31, 1995, the exposure was $6,900,000.
8. Fair Value of Financial Instruments
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair value of the Company's financial instruments.
Considerable judgment is required to develop these fair values and,
accordingly, the estimates shown are not necessarily indicative of the amounts
that would be realized in a one time, current market exchange of all of the
Company's financial instruments.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. Fair Value of Financial Instruments (continued)
Fixed Maturity and Equity Securities
Fair values for fixed maturity securities are based on quoted market prices,
where available. For fixed maturity securities not actively traded, fair
values are estimated using values obtained from independent pricing services
or, in the case of private placements, are estimated by discounting expected
future cash flows using a current market rate applicable to the coupon rate,
credit quality and maturity of the investments. The fair values for equity
securities are based on quoted market prices.
Mortgage Loans on Real Estate
The estimated fair value of mortgage loans on real estate was established
using a discounted cash flow method based on credit rating, maturity and
future income when compared to the expected yield for mortgages having similar
characteristics. The rating for mortgages in good standing are based on
property type, location, market conditions, occupancy, debt service coverage,
loan to value, caliber of tenancy, borrower and payment record. Fair values
for impaired mortgage loans are measured based either on the present value of
expected future cash flows discounted at the loan's effective interest rate,
at the loan's market price or the fair value of the collateral if the loan is
collateral dependent.
Policy Loans
The estimated fair value of investments in policy loans was calculated on a
composite discounted cash flow basis using Treasury interest rates consistent
with the maturity durations assumed. These durations were based on historical
experience.
Other Investments and Cash and Invested Cash
The carrying value for assets classified as other investments and cash and
invested cash in the accompanying balance sheets approximates their fair
value.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. Fair Value of Financial Instruments (continued)
Investment Type Insurance Contracts
The balance sheet captions, "Future Policy Benefits, Claims and Claims
Expenses" and "Contractholder Funds," include investment type insurance
contracts (i.e., deposit contracts and guaranteed interest contracts). The
fair values for the deposit contracts and certain guaranteed interest
contracts are based on their approximate surrender values. The fair values
for the remaining guaranteed interest and similar contracts are estimated
using discounted cash flow calculations based on interest rates currently
being offered on similar contracts with maturities consistent with those
remaining for the contracts being valued.
The remainder of the balance sheet captions, "Future Policy Benefits, Claims
and Claims Expenses" and "Contractholder Funds," that do not fit the
definition of "investment type insurance contracts" are considered insurance
contracts. Fair value disclosures are not required for these insurance
contracts and have not been determined by the Company. It is the Company's
position that the disclosure of the fair value of these insurance contracts is
important in that readers of these financial statements could draw
inappropriate conclusions about the Company's shareholder's equity determined
on a fair value basis if only the fair value of assets and liabilities defined
as financial instruments are disclosed. The Company and other companies in
the insurance industry are monitoring the related actions of the various rule-
making bodies and attempting to determine an appropriate methodology for
estimating and disclosing the "fair value" of their insurance contract
liabilities.
Short-Term and Long-Term Debt
Fair values for long-term debt issues are estimated using discounted cash flow
analysis based on the Company's current incremental borrowing rate for similar
types of borrowing arrangements. For short-term debt, the carrying value
approximates fair value.
Guarantees
The Company's guarantees include guarantees related to real estate
partnerships and mortgage loan pass-through certificates. Based on historical
performance where repurchases have been negligible and the current status,
which indicates none of the loans are delinquent, the fair value liability for
the guarantees related to the mortgage loan pass-through certificates is
insignificant. Fair values for all other guarantees are based on fees that
would be charged currently to enter into similar agreements, taking into
consideration the remaining terms of the agreements and the counterparties'
credit standing.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. Fair Value of Financial Instruments (continued)
Derivatives
The Company's derivatives include interest rate cap agreements, spread-lock
agreements, foreign currency exchange contracts, financial futures contracts,
options on financial futures, interest rate swaps, foreign currency options
and foreign currency swaps. Fair values for these contracts are based on
current settlement values. The current settlement values are based on quoted
market prices for the foreign currency exchange contracts, financial future
contracts and options on financial futures and on brokerage quotes, which
utilized pricing models or formulas using current assumptions, for all other
swaps and agreements.
Investment Commitments
Fair values for commitments to make investment in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real estate
are based on the difference between the value of the committed investments as
of the date of the accompanying balance sheets and the commitment date, which
would take into account changes in interest rates, the counterparties' credit
standing and the remaining terms of the commitments.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
8. Fair Value of Financial Instruments (continued)
The carrying values and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
Carrying Fair Carrying Fair
Assets (Liabilities) Value Value Value Value
(in millions)
<S> <C> <C> <C> <C>
Fixed maturity securities $20,414.8 $20,414.8 $17,692.2 $17,692.2
Equity securities 598.4 598.4 456.3 456.3
Mortgage loans on real estate 3,147.8 3,330.5 2,795.9 2,720.6
Policy loans 565.3 557.4 528.7 508.1
Other investments 241.2 241.2 158.2 158.2
Cash and invested cash 802.7 802.7 990.9 990.9
Investment type
insurance contracts:
Deposit contracts and
certain guaranteed
interest contracts (15,390.8) (15,179.1) (14,294.7) (14,052.5)
Remaining guaranteed
interest and similar
contracts (2,470.9) (2,396.5) (2,485.5) (2,423.9)
Short-term debt (124.8) (124.8) (153.7) (153.7)
Long-term debt (40.8) (36.7) (54.8) (57.0)
Derivatives 23.7 5.8 19.4 30.5
Investment commitments -- (.8) -- (.5)
</TABLE>
As of December 31, 1995 and 1994, the carrying value of the deposit contracts
and certain guaranteed contracts is net of deferred acquisition costs of
$333,797,000 and $399,000,000, respectively, excluding adjustments for
deferred acquisition costs applicable to changes in fair value of securities.
The carrying values of these contracts are stated net of deferred acquisition
costs in order that they be comparable with the fair value basis.
9. Segment Information
The Company has two major business segments: Life Insurance and Annuities and
Reinsurance. The Life Insurance and Annuities segment offers universal life,
pension products and other individual coverages through a network of career
agents, independent general agencies and insurance agencies located within a
variety of financial institutions. These products are sold throughout the
United States by the Company. Reinsurance sells reinsurance products and
services to insurance companies, HMOs, self-funded employers and other primary
risk accepting organizations in the U.S. and economically attractive
international markets. Effective in the fourth quarter of 1995, operating
results of the direct disability income business previously included in the
Life Insurance and Annuities segment is now included in the Reinsurance
segment. This direct disability income business, which is no longer being
sold, is now managed by the Reinsurance segment along with its disability
income business. Prior to the sale of 100% of the ownership of its primary
underwriter of employee life-health benefit coverages in 1994 (see Note 10),
the Employee Life-Health Benefits segment distributed group life and health
insurance, managed health care and other related coverages through career
agents and independent general agencies. Activity which is not included in
the major business segments is shown as "Other Operations."
"Other Operations" includes operations not directly related to the business
segments and unallocated corporate items (i.e., corporate investment income,
interest expense on corporate debt and unallocated corporate overhead
expenses).
The revenue, pre-tax income and assets by segment for 1993 through 1995 are as
follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
(in millions)
<S> <C> <C> <C>
Revenue:
Life Insurance and Annuities $2,569.2 $2,065.3 $2,341.9
Reinsurance 751.2 660.4 610.7
Employee Life-Health Benefits -- 314.9 1,326.8
Other Operations 16.1 74.6 (28.8)
Total $3,336.5 $3,115.2 $4,250.6
Income (loss) before income taxes and
cumulative effect of accounting change:
Life Insurance and Annuities $ 361.0 $ 75.6 $ 265.3
Reinsurance 83.5 93.9 31.6
Employee Life-Health Benefits -- 22.9 83.0
Other Operations 5.0 67.8 (44.2)
Total $ 449.5 $ 260.2 $ 335.7
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
9. Segment Information (continued)
<TABLE>
<CAPTION>
December 31
1995 1994 1993
(in millions)
<S> <C> <C> <C>
Assets:
Life Insurance and Annuities $45,280.0 $37,675.9 $36,021.0
Reinsurance 3,383.5 2,311.5 2,328.9
Employee Life-Health Benefits -- -- 588.5
Other Operations 923.6 1,038.1 770.0
Total $49,587.1 $41,025.5 $39,708.4
</TABLE>
Provisions for depreciation and capital additions were not material.
10. Sale of Affiliates
In December 1993, the Company recorded a provision for loss of $98,500,000
(also $98,500,000 after-tax) in the "Other Operations" segment for the sale of
Security-Connecticut Life Insurance Company ("Security-Connecticut"). The
sale was completed on February 2, 1994 through an initial public offering and
the Company received cash and notes, net of related expenses, totaling
$237,700,000. The loss on sale and disposal expenses did not differ
materially from the estimate recorded in the fourth quarter of 1993. For the
year ended December 31, 1993, Security-Connecticut, which operated in the Life
Insurance and Annuities segment, had revenue of $274,500,000 and net income of
$24,000,000.
In 1994, the Company completed the sale of 100% of the common stock of
EMPHESYS (parent company of Employers Health Insurance Company, which
comprised the Employee Life-Health Benefits segment) for $348,200,000 of cash,
net of related expenses, and a $50,000,000 promissory note. A gain on sale of
$69,000,000 (also $69,000,000 after-tax) was recognized in 1994 in "Other
Operations". For the year ended December 31, 1993, EMPHESYS had revenues of
$1,304,700,000 and net income of $55,300,000. EMPHESYS had revenue and net
income of $314,900,000 and $14,400,000, respectively, during the three months
of ownership in 1994.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
11. Subsequent Event
In January 1996, LNC announced that it had signed a definitive agreement to
acquire the group tax-sheltered annuity business of UNUM Corporation's
affiliates. This purchase is expected to be completed in the form of a
reinsurance transaction with an initial ceding commission of approximately
$70,000,000. This ceding commission represents the present value of business
in-force and, accordingly, will be classified as other intangible assets upon
the close of this transaction. This transaction, which is expected to close
in the third quarter of 1996, will increase LNC's assets and policy
liabilities and accruals by approximately $3,200,000,000.
12. Transactions With Affiliates
A wholly owned subsidiary of LNC, Lincoln Financial Group, Inc. ("LFGI"), has
a nearly exclusive general agents contract with the Company under which it
sells the Company's products and provides the service that otherwise would be
provided by a home office marketing department and regional offices. For
providing these selling and marketing services, the Company paid LFGI override
commissions and operating expense allowances of $81,900,000, $78,500,000 and
$74,500,000 in 1995, 1994 and 1993, respectively. LFGI incurred expenses of
$10,400,000, $10,700,000 and $10,500,000 in 1995, 1994 and 1993, respectively,
in excess of the override commission and operating expense allowances received
from the Company, which the Company is not required to reimburse.
Cash and invested cash at December 31, 1995 and 1994 include the Company's
participation in a short-term investment pool with LNC of $333,800,000 and
$428,300,000, respectively. Related investment income amounted to
$22,500,000, $17,100,000 and $9,100,000 in 1995, 1994 and 1993, respectively.
Short-term debt at December 31, 1995 and 1994 includes $67,000,000 and
$68,600,000, respectively, borrowed from LNC. The Company paid interest to
LNC of $24,000, $8,000 and $137,000 in 1995, 1994 and 1993, respectively.
The Company provides services to and receives services from affiliated
companies which resulted in a net receipt of $7,500,000, $13,900,000 and
$18,900,000 in 1995, 1994 and 1993, respectively.
<PAGE>
The Lincoln National Life Insurance Company
Notes to Consolidated Financial Statements (continued)
12. Transactions With Affiliates (continued)
The Company both cedes and accepts reinsurance from affiliated companies.
Premiums in the accompanying statements of income includes reinsurance
transactions with affiliated companies as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1995 1994
(in millions)
<S> <C> <C>
Insurance assumed $ 17.6 $ 19.8
Insurance ceded 214.4 481.3
</TABLE>
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
December 31
1995 1994
(in millions)
<S> <C> <C>
Future policy benefits and claims assumed $ 344.8 $341.3
Future policy benefits and claims ceded 1,344.5 857.7
Amounts recoverable on paid and unpaid losses 65.9 36.8
Reinsurance payable on paid losses 5.5 3.5
Funds held under reinsurance treaties-net liability 712.3 238.4
</TABLE>
Substantially all reinsurance ceded to affiliated companies is with
unauthorized companies. To take a reserve credit for such reinsurance, the
Company holds assets from the reinsurer, including funds held under
reinsurance treaties, and is the beneficiary on letters of credit aggregating
$340,800,000 and $308,200,000 at December 31, 1995 and 1994, respectively. At
December 31, 1995 and 1994, LNC had guaranteed $275,300,000 and $298,200,000,
respectively, of these letters of credit. At December 31, 1995, the Company
has a receivable (included in the foregoing amounts) from affiliated insurance
companies in the amount of $241,900,000 for statutory surplus relief received
under financial reinsurance ceded agreements.
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
The Lincoln National Life Insurance Company
We have audited the accompanying consolidated balance sheets of The Lincoln
National Life Insurance Company, a wholly owned subsidiary of Lincoln National
Corporation, as of December 31, 1995 and 1994, and the related consolidated
statements of income, shareholder's equity and cash flows for each of the three
years in the period ended December 31, 1995. Our audits also included the
financial statement schedules listed on B- . These financial statements and
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Lincoln
National Life Insurance Company at December 31, 1995, and 1994, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
As discussed in Note 2 to the consolidated financial statements, in 1993 the
Company changed its method of accounting for postretirement benefits other than
pensions, accounting for impairment of loans and accounting for certain
investments in debt and equity securities.
/S/ ERNST & YOUNG LLP
Fort Wayne, Indiana
February 7, 1996
<PAGE>
FINANCIAL SCHEDULES
The following consolidated financial statement schedules of The Lincoln National
Life Insurance Company and subsidiaries are included on Pages B- through
B- .
I Summary of Investments Other than Investments in Related Parties December
31, 1995
III Supplementary Insurance Information Years ended December 31, 1995, 1994 and
1993
IV Reinsurance Years ended December 31, 1995, 1994 and 1993
V Valuation and Qualifying Accounts Years ended December 31, 1995, 1994 and
1993
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions, are inapplicable or the required information is included
in the consolidated financial statements, and therefore have been omitted.
<PAGE>
The Lincoln National Life Insurance Company and Subsidiaries
Schedule I
Summary of Investments Other Than Investments in Related Parties
December 31, 1995
(000's omitted)
<TABLE>
<CAPTION>
Column A Column B Column C Column D
Amount at
Which
Shown in
the Balance
Type of Investment Cost Value Sheet
<S> <C> <C> <C>
Fixed maturity securities available-for-sale:
Bonds:
United States Government and
government agencies and authorities $ 569,552 $ 653,444 $ 653,444
States, municipalities
and political subdivisions 12,325 12,375 12,375
Mortgage-backed securities 4,891,521 5,184,751 5,184,751
Foreign governments 927,901 997,567 997,567
Public utilities 2,572,309 2,772,990 2,772,990
Convertibles and bonds
with warrants attached 181,431 199,658 199,658
All other corporate bonds 9,658,371 10,551,770 10,551,770
Redeemable preferred stocks 39,427 42,230 42,230
Total fixed maturity securities 18,852,837 20,414,785 20,414,785
Equity securities available-for-sale:
Common stocks:
Public utilities 8,980 10,989 10,989
Banks, trust and insurance companies 74,897 89,197 89,197
Industrial, miscellaneous and all other 345,434 436,556 436,556
Nonredeemable preferred stocks 50,950 61,693 61,693
Total equity securities 480,261 598,435 598,435
Mortgage loans on real estate 3,176,275 3,147,783 (A)
Real estate:
Investment properties 635,135 635,135
Acquired in satisfaction of debt 157,441 110,888 (A)
Policy loans 565,325 565,325
Other investments 253,015 241,219 (A)
Total investments $24,120,189 $25,713,570
</TABLE>
(A) Investments which are deemed to have declines in value that are other than
temporary are written down or reserved for to reduce their carrying value to
their estimated realizable value.
<PAGE>
The Lincoln National Life Insurance Company and Subsidiaries
Schedule III
Supplementary Insurance Information
(000's omitted)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
Future Policy
Benefits, Other Policy
Deferred Claims and Claims and
Acquisition Claim Unearned Benefits Premium
Segment Costs Expenses Premiums Payable Revenue (A)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Life insurance and annuities $ 713,213 $6,530,475 $ 9,145 $-- $ 685,258
Reinsurance 247,921 1,855,039 45,951 -- 611,416
Other (including consolidating
adjustments) (7,300) 49,505 78 -- 622
Total $ 953,834 $8,435,019 $ 55,174 $-- $1,297,296
Year ended December 31, 1994:
Life insurance and annuities $1,427,692 $5,888,581 $ 11,201 $-- $ 647,416
Reinsurance 304,913 1,626,033 51,618 -- 542,034
Employee life-health benefits -- -- -- -- 299,338
Other (including consolidating
adjustments) 3,921 26,158 (1,347) -- 1,076
Total $1,736,526 $7,540,772 $ 61,472 $-- $1,489,864
Year ended December 31, 1993:
Life insurance and annuities $ 999,126 $6,782,207 $ 5,188 $-- $ 662,353
Reinsurance 298,787 1,616,088 54,157 -- 491,397
Employee life-health benefits -- 228,892 -- -- 1,243,576
Other (including consolidating
adjustments) -- 171,043 315 -- 387
Total $1,297,913 $8,798,230 $ 59,660 $-- $2,397,713
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company and Subsidiaries
Schedule III
Supplementary Insurance Information (continued)
(000's omitted)
<TABLE>
<CAPTION>
Column A Column G Column H Column I Column J Column K
Amortization
Benefits, of Deferred
Net Claims and Policy Other
Investment Claim Acquisition Operating Premium
Segment Income (B) Expenses Costs Expenses (B) Written
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Life insurance and annuities $1,741,231 $1,649,119 $298,020 $261,016 $--
Reinsurance 134,000 472,198 101,729 93,750 --
Other (including consolidating
adjustments) 24,399 1,299 -- 9,898 --
Total $1,899,630 $2,122,616 $399,749 $364,664 $--
Year ended December 31, 1994:
Life insurance and annuities $1,542,552 $1,554,479 $ 85,697 $349,529 $--
Reinsurance 116,957 419,266 29,477 117,238 --
Employee life-health benefits (C) 10,838 218,672 -- 73,355 --
Other (including consolidating
adjustments) 3,634 1,630 -- 5,682 --
Total $1,673,981 $2,194,047 $115,174 $545,804 $--
Year ended December 31, 1993:
Life insurance and annuities $1,676,163 $1,615,883 $197,363 $268,066 $--
Reinsurance 115,582 467,824 38,351 72,840 --
Employee life-health benefits 54,513 943,235 -- 300,648 --
Other (including consolidating
adjustments) (22,799) 6,197 5,275 (744) --
Total $1,823,459 $3,033,139 $240,989 $640,810 $--
(A) Includes insurance fees on universal life and other interest sensitive products.
(B) The allocation of expenses between investments and other operations are based on a number of assumptions and estimates.
Results would change if different methods were applied.
(C) Includes data through the March 21, 1994 date of sale of the direct writer of employee life-health coverages.
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company and Subsidiaries
Schedule IV
Reinsurance (A)
(000's omitted)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
Percentage
Ceded Assumed of Amount
Gross to Other from Other Net Assumed
Amount Companies Companies Amount to Net
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Life insurance in force $ 51,570,782 $17,612,782 $142,794,000 $176,752,000 80.8%
Premiums:
Health insurance 302,463 299,222 273,572 276,813 98.8
Life insurance (B) 658,936 142,523 504,070 1,020,483 49.4
Total $ 961,399 $ 441,745 $ 777,642 $ 1,297,296
Year ended December 31, 1994:
Life insurance in force $ 79,802,000 $45,822,000 $125,640,000 $159,620,000 78.7%
Premiums:
Health insurance 666,609 496,090 359,659 530,178 67.8
Life insurance (B) 629,185 220,678 551,179 959,686 57.4
Total $ 1,295,794 $ 716,768 $ 910,838 $ 1,489,864
Year ended December 31, 1993:
Life insurance in force $135,401,000 $61,401,000 $109,257,000 $183,257,000 59.6%
Premiums:
Health insurance 1,387,414 217,705 262,171 1,431,880 18.3
Life insurance (B) 771,408 350,907 545,332 965,833 56.5
Total $ 2,158,822 $ 568,612 $ 807,503 $ 2,397,713
(A) Special-purpose bulk reinsurance transactions have been excluded.
(B) Includes insurance fees on universal life and other interest sensitive products.
</TABLE>
<PAGE>
The Lincoln National Life Insurance Company and Subsidiaries
Schedule V
Valuation and Qualifying Accounts
(000's omitted)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Additions
(1) (2)
Charged
Charged to
Balance at to Other Balance at
Beginning Costs and Accounts- Deductions- End of
of Period Expenses (A) Describe Describe (B) Period
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Deducted from asset accounts:
Reserve for mortgage loans on real estate $ 56,614 $ 2,659 $-- $ (30,781) $ 28,492
Reserve for real estate 65,186 (7,227) -- (11,406) 46,553
Reserve for other long-term investments 13,492 (1,541) -- (155) 11,796
Year ended December 31, 1994:
Deducted from asset accounts:
Reserve for mortgage loans on real estate $220,671 $ 19,464 $-- $(183,521) $ 56,614
Reserve for real estate 121,427 13,058 -- (69,299) 65,186
Reserve for other long-term investments 26,730 262 -- (13,500) 13,492
Included in other liabilities:
Investment guarantees 1,804 4,280 -- (6,084) --
Year ended December 31, 1993:
Deducted from asset accounts:
Reserve for mortgage loans on real estate $129,093 $136,717 $-- $ (45,139) $220,671
Reserve for real estate 114,178 21,776 -- (14,527) 121,427
Reserve for other long-term investments 31,582 3,905 -- (8,757) 26,730
Included in other liabilities:
Investment guarantees 12,550 1,674 -- (12,420) 1,804
(A) Exclude charges for the direct write-off of assets. The negative amounts represent improvements in the underlying assets for
which valuation accounts had previously been established.
(B) Deductions reflect sales or foreclosures of the underlying holdings.
</TABLE>
