LINCOLN NATIONAL
VARIABLE ANNUITY
FUND A (Individual)
1300 South Clinton Street, Fort Wayne, Indiana 46802
Telephone: 1-800-348-1212
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
ISSUED BY:
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
The individual variable annuity contracts offered by this prospectus
are designed and offered: (a) for annuity purchase plans adopted by public
school systems and Section 501(c)(3) organizations pursuant to Section 403(b)
of the Internal Revenue Code of 1986, as amended (the "Code"), (b) for
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 Plans, (c)
for Individual Retirement Annuities and Accounts adopted by or on behalf of
individuals pursuant to Section 408 of the Code and (d) for Simplified Pension
Plans pursuant to Section 408(k) of the Code. Such qualified plans provide
special tax treatment to participating employees and self-employed individuals
and their beneficiaries. Contracts offered by this prospectus are also
designed for governmental and charitable organizations deferred compensation
plans meeting the requirements of Section 457 of the Code.
The principal investment objective of Lincoln National Variable
Annuity Fund A (the Fund) is the long-term growth of capital in relation to the
changing value of the dollar. A secondary investment objective is the
production of current income. The Fund seeks to accomplish these objectives by
investing in equity securities, principally common stocks.
Depending on the provisions of the plan, the Participant or Contract
Owner may elect, if the plan so provides, that a portion (in multiples of 10%)
of payments be applied by the Company to purchase fixed-dollar accumulation
units under the variable annuity contract. However, unless reference is
specifically made to fixed-dollar elements, this prospectus relates to variable
elements under the Separate Account.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION ABOUT THE FUND
THAT A PROSPECTIVE INVESTOR OUGHT TO KNOW BEFORE INVESTING. PLEASE READ IT
CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE.
ADDITIONAL INFORMATION ABOUT THE FUND HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THAT STATEMENT OF ADDITIONAL INFORMATION
(SAI), DATED APRIL 30, 1996, HAS BEEN INCORPORATED BY REFERENCE INTO THIS
PROSPECTUS AND WILL BE PROVIDED ON REQUEST AND WITHOUT CHARGE. WRITE KIM
OAKMAN, THE LINCOLN NATIONAL LIFE INSURANCE COMPANY, P.O. BOX 2340, FORT WAYNE,
INDIANA 46801, OR CALL 1-800-348-1212, extension 4912. A TABLE OF CONTENTS FOR
THE SAI APPEARS ON THE LAST PAGE OF THIS PROSPECTUS.
____________
THIS PROSPECTUS IS DATED APRIL 30, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Special Terms..................................................... 2
Expense Table..................................................... 3
Synopsis.......................................................... 4
Per-Accumulation-Unit Income and Capital Changes.................. 5
Financial Statements.............................................. 5
The Company....................................................... 5
The Fund.......................................................... 5
Investment Objectives and Policies of the Fund.................... 6
Charges and Deductions............................................ 7
Investment Management............................................. 9
The Variable Annuity Contracts.................................... 9
Accumulation Period............................................... 10
Annuity Period.................................................... 13
Fund Valuation Procedure.......................................... 15
Federal Tax Status................................................ 16
Voting Rights..................................................... 17
Legal Proceedings................................................. 17
Other Annuity Contracts........................................... 18
Custodian......................................................... 18
State Regulation.................................................. 18
Table of Contents of the Statement of Additional Information...... 18
</TABLE>
SPECIAL TERMS
As used in this prospectus the following terms have the indicated
meanings.
ACCUMULATION UNIT: A statistical device used to determine the value of
an individual account prior to the commencement of annuity payments.
ANNUITANT: The person on whose life or life expectancy the payments
are based.
ANNUITY: A series of payments for (a) life, (b) life with either a
minimum number of payments or an ascertainable sum guaranteed, or (c) the joint
lifetime of the Annuitant and another person and thereafter during the lifetime
of their survivor.
ANNUITY RATE PROMISE: The promise that the amount of annuity payments
will not be affected by the fact that Annuitants live longer than expected.
ANNUITY UNIT: A statistical device used to determine the amount of
annuity payments.
CONTRACT OWNER: The annuitant, or other designated person, except in
cases where a Contract is issued to a trustee of a trust or a custodian of a
qualified pension or profit-sharing plan under Section 401(a) of the Code or of
an Individual Retirement Annuity under Section 408 of the Code, or where a
Contract is issued in connection with a deferred compensation plan pursuant to
Section 457 of the Code. In cases where the Contract is issued to such a
trustee or custodian, as defined above, the Contract Owner is the trustee or
custodian.
FIXED-DOLLAR ANNUITY: An annuity with payments which remain fixed
throughout the payment period and which do not reflect the investment
experience of a separate account.
PAYMENTS: Amounts paid to purchase an annuity by or on behalf of an
Annuitant.
PARTICIPANT: The individual participating in a qualified pension or
profit-sharing plan pursuant to Section 401(a) of the Code, a deferred
compensation plan pursuant to Section 457 of the Code, a tax deferred annuity
pursuant to Section 403(a) of the Code, and a tax sheltered annuity pursuant to
403(b) of the Code.
SEPARATE ACCOUNT: Assets set aside in a separate account by The
Lincoln National Life Insurance Company with respect to payments received under
the variable annuity contracts offered by this prospectus and certain other
annuity contracts and designated as Lincoln National Variable Annuity Fund A.
TERMINATION AND SURRENDER: Surrender means redemption; the term
redemption may be used interchangeably with surrender. The termination options
permit redemption as set forth in Accumulation Period, below.
VARIABLE ANNUITY: An annuity providing for payments varying in
accordance with the changing values of securities held in a separate account.
VARIABLE ANNUITY CONTRACT: An agreement between the Company and the
Contract Owner providing a variable annuity.
2
<PAGE>
EXPENSE TABLE
<TABLE>
<CAPTION>
CONTRACT OWNER TRANSACTION EXPENSES
SINGLE PERIODIC
PREMIUM PREMIUM
------- --------
<S> <C> <C>
Sales Load Imposed on Purchases (as a percentage of purchase payments) 2%+$50 4.25%
------ ----
Administrative Expense $65.00 1.00%
------ ----
Minimum Death Benefit (if elected) .75% .75%
------ ----
ANNUAL EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees .32%
----
Annuity Rate and Expense Risk Fees 1.00%
----
Total Annual Expenses 1.32%
----
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE*
1 YEAR 3 YEARS 5 YEARS 10 YEARS
S.P. P.P. S.P. P.P. S.P. P.P. S.P. P.P.
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
At the end of the applicable time period, you would
pay the following expenses on a $1,000 investment,
assuming 5% annual return on assets: $147 $66 $173 $95 $202 $126 $287 $218
</TABLE>
*The figures are the same, whether the Contract Owner holds the contract,
surrenders it, or annuitizes. The expenses shown do not include charges for
the minimum death benefit, since the purchase of that benefit is optional with
the client. [S.P.=Single Premium; P.P.=Periodic Payment]
This table is provided to assist the Contract Owner in understanding the
various costs and expenses that he or she will bear directly or indirectly. The
table reflects expenses of operating both the Variable Annuity Contract and the
Fund. For a more complete description of the various costs and expenses
involved, see "Charges and Deductions" in this Prospectus. Premium taxes may
also be applicable, although they do not appear in the table. THE "EXAMPLE"
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. This table is unaudited.
3
<PAGE>
SYNOPSIS
WHAT ARE THE VARIABLE ANNUITIES BEING OFFERED?
The variable annuity contracts offered by this prospectus are of 2
types: immediate annuities and deferred annuities. Deferred annuities may be
purchased with a single payment or with periodic payments. Immediate annuities
may only be purchased with a single payment.
WHO IS THE PRINCIPAL UNDERWRITER?
The Lincoln National Life Insurance Company (the Company), a
registered broker-dealer, is the principal underwriter. It makes contracts
available through its registered representatives licensed to sell life
insurance policies and annuity contracts.
INVESTMENT ADVISER--NATURE OF BUSINESS
The Company, a stock life insurance company providing life insurance
and annuities, serves as investment adviser to the Fund.
WHAT FEES ARE CHARGED TO THE FUND?
For providing investment management services, the Company (the
adviser) will make daily deductions aggregating .323% annually of the average
daily value of the Fund. (See Investment Management, below.)
Daily deductions of 1.002% annually of the average daily value of the
Fund are also made for annuity rate and expense guarantees. (See Charges and
Deductions, below.)
In general, see Expense Table on page 3.
WHAT IS THE MAXIMUM SALES LOAD?
The maximum sales load under a periodic payment contract is 4.49% of
the net amount invested which is 4.25% of the offering price (gross payment
received).
Under a single payment contract, the maximum sales load is 3.9% of the
net amount invested. The maximum sales load is 2% of the offering price (gross
payment received) plus $50.
There are provisions for reduced sales charges. (See Charges and
Deductions, below.)
ADMINISTRATIVE EXPENSE CHARGES
In addition to the maximum sales load described above, a charge is
also deducted for administrative expenses. This charge is a maximum of 1%
under periodic payment contracts; under single payment contracts, the charge is
$65.
ARE THERE ANY OTHER DEDUCTIONS, CHARGES OR PENALTIES?
If the minimum death benefit has been elected, an additional deduction
of .75% is made from each purchase payment. Deductions are also made for any
applicable premium taxes. If you withdraw contract value or surrender the
contract before the annuity period begins, you may be subject to a penalty tax
under Section 72(q) of the Code.
IS THERE A SHORT-TERM CANCELLATION RIGHT?
Within 10 days after this contract is first received, it may be
cancelled for any reason by delivering or mailing it to the agent through whom
it was purchased or to the Home Office of the Company. Upon cancellation, this
contract shall be void from the beginning and the Company will return the value
of any payments made to the variable account (including the sales and
administrative charge).
IS A MINIMUM INVESTMENT REQUIRED?
Normally, under a periodic payment contract, the minimum amount of any
scheduled purchase payment is $25 and the scheduled purchase payments must
total at least $600 per year. Normally, under a single payment contract the
minimum payment is $5,000.
INVESTMENT OBJECTIVES
The principal investment objective of the Fund is the long-term growth
of capital in relation to the changing value of the dollar. A secondary
investment objective is the production of current income. (See Investment
Objectives and Policies of the Fund, below.)
TYPE OF FUND
The Fund is a segregated investment account of the Company, operated
as an open-end, diversified management investment company, which continuously
offers its variable annuity contracts for sale.
REDEMPTION OR REPURCHASE PRICE
Payments upon redemption will be made at the value of the account
without any charge. (See Accumulation Period, below.)
4
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
PER-ACCUMULATION-UNIT INCOME AND CAPITAL CHANGES
(For an accumulation unit outstanding throughout the year)
The following per-unit income and capital changes table of the Fund has
been audited by Ernst & Young LLP, independent auditors. This table should be
read in conjunction with the Fund's financial statements, notes and report of
independent auditors included in the Statement of Additional Information. The
information is for years ended December 31.
PER-ACCUMULATION-UNIT INCOME AND CAPITAL CHANGES
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income.......... $ .251 $ .217 $ .204 $ .206 $ .181 $ .146 $ .183 $ .150 $ .130 $ .105
Expenses................... .114 .095 .090 .083 .076 .064 .062 .053 .055 .044
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income.... .137 .122 .114 .123 .105 .082 .121 .097 .075 .061
Net realized and unreal-
lized gain (loss) on
investments............ 2.539 (.040) .522 (.099) 1.402 (.102) .786 .266 .166 .458
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Increase (decrease) in
accumulation unit value.. 2.676 .082 .636 .024 1.507 (.020) .907 .363 .241 .519
Accumulation unit value
at beginning of year..... 7.198 7.116 6.480 6.456 4.949 4.969 4.062 3.699 3.458 2.939
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
ACCUMULATION UNIT
VALUE AT END OF YEAR $9.874 $7.198 $7.116 $6.480 $6.456 $4.949 $4.969 $4.062 $3.699 $3.458
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
RATIOS
Ratio of expenses to
average net assets........ 1.28% 1.27% 1.27% 1.27% 1.27% 1.28% 1.28% 1.28% 1.30% 1.28%
Ratio of net investment
income to average
net assets................ 1.65% 1.75% 1.72% 2.01% 1.85% 1.72% 2.63% 2.49% 1.82% 1.86%
Portfolio turnover rate.... 48.95% 64.09% 49.90% 70.97% 36.99% 59.57% 201.20% 178.95% 146.44% 59.64%
Number of accumulation
units outstanding at
end of year (expressed
in thousands)............. 9,569 9,908 11,538 12,742 14,185 16,554 19,522 22,564 26,247 30,133
</TABLE>
FINANCIAL STATEMENTS
Financial statements for the Fund and for the Company are in the
Statement of Additional Information (SAI) for the Fund. To obtain a copy of the
SAI, call or write to the source listed on page 1 of this Prospectus.
THE COMPANY
The Lincoln National Life Insurance Company (the Company) is a stock
life insurance company organized in 1905 under the laws of the State of Indiana.
It is principally engaged in the sale of life insurance, annuities, and
reinsurance. The Company is a wholly-owned subsidiary of Lincoln National
Corporation, a publicly-held insurance holding company. The Home Office of the
Company (principal business address) is located at 1300 South Clinton Street,
Fort Wayne, Indiana. The Company's Home Office mailing address is P.O. Box
2340, Fort Wayne, IN 46801.
THE FUND
On September 16, 1966 the Board of Directors of the Company
established a segregated investment account designated Lincoln National
Variable Annuity Fund A (the Fund or Variable Contract) in accordance with
certain provisions of Indiana Insurance Law. The Fund is an open-end,
diversified management investment company registered with the Securities and
Exchange Commission (SEC) under the Investment Company Act of 1940, as amended
(the 1940 Act).
The present Board of Managers for the Fund has been elected by the
Contract Owners (See Voting Rights, below.) A majority of these Members are
persons who are not otherwise interested persons of the Company as the term
"interested persons" is defined in the 1940 Act. Members of the Board of
Managers are Directors of the following: 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.
All of the foregoing are registered investment companies. The Board is
responsible, among other things, for authorizing investment programs for the
Fund, in accordance with the Fund's
5
<PAGE>
investment objectives and policies; for recommending to Contract Owners any
appropriate changes to those objectives and policies; and for contracting for
certain services necessary to the operation of the Fund.
The Indiana law under which the Fund was established provides it shall
not be chargeable with liabilities arising out of any other business which the
Company may conduct and which has no specific relation to or dependence upon
the Fund. Accordingly, the assets of the Fund will be held exclusively for the
benefit of Participants in, and persons entitled to payment under, variable
annuity contracts. Income, gains, and losses, whether or not realized, from
assets allocated to the Fund are, in accordance with the applicable variable
annuity contracts, credited to or charged against the Fund without regard to
other income, gains, or losses of the Company. The assets of the Fund may not
be charged with liabilities arising out of any other business of the Company.
The obligations arising under the variable annuity contracts are obligations of
the Company. The Fund is a "separate account" as that term is defined under the
federal securities laws.
The Company, in addition to serving as Investment Adviser for the Fund
(See Investment Management, below), provides overall management of the Fund's
business affairs, subject to the authority of the Board of Managers.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUND
All investment objectives and policies shown below (except
Restrictions 9 through 11) are fundamental and may not be changed without
approval of Contract Owners casting a majority of the votes entitled to be cast
(see Voting Rights, below).
OBJECTIVES
1. The principal investment objective is the selection of investments for
the long-term growth of capital in relation to the changing value of the
dollar. Investments will be made with the objective of providing annuity
payments which may tend to reflect changes in the value of the dollar. An
additional but secondary investment objective is the production of current
income.
2. Income and realized capital gains will be reinvested.
3. The Fund's assets will be kept fully invested except that (a) sufficient
cash will be kept on hand to meet variable annuity contract payments and (b)
reasonable amounts of cash or United States Government securities may be held
for limited periods pending investment in accordance with investment policies.
4. The Fund's assets will usually be invested in a portfolio of equity
securities, mainly common stocks, diversified over industries and companies.
Changes in such diversification may be made from time to time to take into
account changes in the outlook for particular industries or companies. The
investments of the Fund will not, however, be concentrated in any one industry,
and no more than 25% of the Fund's assets will be invested in any one industry.
Such diversification does not eliminate the risks inherent in the making of
equity investments. The purchasing of common stocks may occur in rising or
declining markets.
Further, when the Board of Managers determines that investments of
other types may be advantageous on the basis of combined considerations of
risk, income and appreciation, investments may be made in bonds, notes or other
evidences of indebtedness, issued publicly or placed privately, of a type
customarily purchased for investment by institutional investors including
United States Government securities. Such investments, if made, constitute a
defensive policy. Such investments may, or may not, be convertible into stock
or be accompanied by stock purchase options or warrants for the purchase of
stock. Warrants are purely speculative in that they have no voting rights, pay
no dividends and have no rights with respect to the assets of the corporation
issuing them. A warrant, basically, is an option to purchase a given security
within a specified period for a specified price. The prices of warrants do not
necessarily move parallel to the price of the underlying securities.
RESTRICTIONS
The investments of the Fund are subject to the provisions of the
Indiana Insurance Law concerning earnings records, preferred stock coverage,
self-dealing, real estate holdings and concentration.
Loans will not be made, but the purchase of a portion of an issue of
bonds, debentures or other securities publicly distributed or privately placed
with financial institutions shall not be considered the making of a loan.
The Fund will not:
1. Invest more than 5% of the value of the Fund's assets in securities of
any one issuer, except obligations of the United States Government and
instrumentalities thereof.
2. Acquire more than 10% of the voting securities of any one issuer.
3. Borrow money except for temporary or emergency purposes in an amount
up to 5% of the value of the assets.
4. Underwrite securities of other issuers.
5. Purchase or sell real estate as a principal activity. However, the right
is reserved to invest up to 10% of the value of the assets of the Fund in
real properties.
6. Purchase commodities or commodity contracts.
7. Make short sales of securities.
8. Make purchases on margin, except for such short-term credits as are
necessary for the clearance of transactions.
9. Invest in the securities of a company for the purpose of exercising
management or control.
6
<PAGE>
10. Place emphasis upon obtaining short-term trading profits, but it may
engage in short-term transactions in the event that a change in economic
conditions or a rapid appreciation or depreciation of stock prices occurs. The
Fund's portfolio turnover rates were 48.95% for 1995, 64.09% for 1994, and
49.9% for 1993. The securities markets in general have experienced volatility
<r/>
due to rapidly shifting economic trends. This volatility can affect turnover.
11. Plan to make investments in securities of other investment companies.
However, the right is reserved to make such investments up to a maximum of 10%
of the value of the assets of the Fund, provided that not more than 3% of the
total outstanding voting stock of any one investment company may be held.
SPECIAL RISKS
Investments, if made, in any securities of the type which are
privately placed with financial institutions and which cannot be sold to the
public without prior registration of such securities with the SEC, will be
limited in order that the total of such investments will not exceed 10% of the
value of the Fund's assets. Such securities are commonly referred to as
"restricted securities." Restricted securities may not be readily marketable
and the Fund may not be able to dispose of its holdings in these securities at
reasonable price levels if such securities are ever acquired. Furthermore,
registration of restricted securities under the Securities Act of 1933 may be
necessary if the Fund is to sell such securities publicly. Should a
considerable period of time elapse between the time that a decision is made to
sell restricted securities and the time when the Fund may be permitted to sell
them publicly under an effective registration statement, adverse market
conditions could develop with the result that the Fund might not be able to
obtain as favorable a price as that prevailing at the time the decision to sell
was made. During 1995 no restricted securities were held.
CHARGES AND DEDUCTIONS
DEDUCTION FROM PURCHASE PAYMENTS--SALES AND ADMINISTRATIVE EXPENSES
Under periodic payment contracts, a deduction of 4.25% for sales
expenses and 1% for administrative expenses is made from each purchase payment
when received. Under single payment contracts, which contemplate that lump sum
amounts under pension or retirement plans will be applied to the purchase of an
annuity, the deduction from each purchase payment made on behalf of a
Participant for sales and administrative expenses is 2% plus $50 for sales
expenses and $65 for administrative expenses. In addition to periodic
payments, the Contract Owner may make single payments on behalf of
Participants. The deduction from such a payment made for a Participant is 2%.
Administrative expenses include salaries, rent, postage, telephone,
travel, legal, actuarial and accounting fees, office equipment, and stationery.
The administrative charge is designed to cover the expense of administering
these contracts, and the Company does not expect to realize a profit by virtue
of this charge.
Should the Company increase the combined sales and administrative
expense charge, then, for existing holders of periodic payment contracts, the
Company promises not to deduct more than 5.25% from any year's payment, as long
as that payment is no more than twice the original year's payment. The excess
will be charged at the higher rate.
These services are provided under a Sales and Administrative Services
Agreement executed by the Company and the Fund. The Agreement continues in
effect from year to year if approved at least annually by a majority of the
Board of Managers who are not interested persons of the Company or the Fund,
cast in person at a meeting called for the purpose of voting on such approval.
Deductions for sales and administrative expenses made from purchase
payments applied to purchase fixed-dollar accumulation units are the same as
those made from payments applied to the Separate Account.
Over the actuarial life of the contracts issued by the Fund, the
aggregate sales load is expected to exceed the aggregate distribution expenses
associated with those contracts. To the extent that sales load does not exceed
distribution expenses during the first year of those contracts, the Company
pays those expenses out of its general assets. Aggregate sales load in years
after the first exceeds aggregate distribution expenses in those years.
For sales and administrative expenses, the Fund paid $12,796 in 1995,
$14,573 in 1994 and $18,663 in 1993.
REDUCED CHARGES
No sales or administrative expense charge is deducted from:
1. Amounts transferred between the fixed and the separate account portions
of contracts offered by this prospectus, if such transfers are permitted by the
underwriting practices of the Company;
7
<PAGE>
2. Purchase payments under contracts offered by this prospectus to (a)
Members of the Board of Managers and officers of the Fund, (b) directors,
officers and full-time employees of the Company, if they spend more than 50% of
their working time either (1) rendering investment advisory services to the
Fund, or supervising persons who spend more than 50% of their working time
rendering such services, or acting in a position necessary for such persons to
render such services, or (2) selling or offering for sale contracts of the Fund,
or supervising persons who spend more than 50% of their working time selling or
offering such contracts for sale, or acting in a position necessary for such
persons to sell or offer such contracts for sale, and (c) sales representatives
of the Company, or to any trust, pension, profit-sharing, or other benefit plan
for such persons, provided that each of the foregoing persons has acted as
above described for not less than 90 days, and provided further that such sales
are made with the written assurances of the purchaser that the purchase is made
for investment purposes and that the contracts will not be resold except
through redemption; and/or
3. Payments under contracts offered by this prospectus to the owners of or
beneficiaries under life insurance, endowment, or annuity contracts issued by
the Company in cases where and to the extent that proceeds payable under such
policies are applied to the purchase of contracts offered by this prospectus.
EXPERIENCE RATING CREDIT
The variable annuity contracts are non-participating and do not share
in the surplus of the Company; however, each variable annuity contract provides
for experience rating. The experience credit will be determined annually on the
basis of allocated costs compared with the amounts deducted for sales and
administrative expenses. If such costs exceed the amount deducted, no
additional deduction will be made from the Participant's individual account. If,
however, the amount deducted for such expenses exceeds allocated costs, the
Company, in its discretion, may allocate all, a portion on none of such excess
as an experience rating credit.
Credits will be applied without deduction of any amounts for sales or
administrative expenses. Application of the credit will be made in 1 of 2 ways,
as considered appropriate by the Company: (a) by a reduction in the amount
deducted from subsequent purchase payments for sales and administrative
expenses, or (b) by the crediting of a number of additional accumulation units
or annuity units, as applicable, equal in value to the amount of the credit less
any applicable premium taxes.
During 1995, there were no experience rating credits paid. In years in
which experience rating credits are granted, the granting of those credits in no
way obligates the Company to grant such credits in ensuing years, as the Company
retains sole discretion with respect to payment of experience rating credits.
DEDUCTION FROM PURCHASE PAYMENTS--MINIMUM DEATH BENEFIT
An additional deduction of .75% is made from each purchase payment for
the minimum death benefit, if such coverage has been elected. The Company
anticipates that the sale of this death benefit will generate profits for it.
(See Accumulation Period, below.)
DEDUCTION FROM PURCHASE PAYMENTS--PREMIUM TAXES
Any applicable premium taxes are deducted from purchase payments in
accordance with local law. Premium tax deductions are held in the General
Account of the Company until paid to the appropriate state on a quarterly or
annual basis. The balance of the payment less all deductions is placed in the
Fund and credited to the Participant's individual account. The tax ranges from
.5% (.005) to 5% (.05) of purchase payments.
DEDUCTION FROM AVERAGE DAILY VALUE OF THE FUND--ANNUITY RATE AND EXPENSE
PROMISES
Although variable annuity payments will vary in accordance with the
investment performance of the Fund, they will not be affected by adverse
mortality experience or by an increase in the Company's expenses to an amount
in excess of the expense deductions provided for in the variable annuity
contract. The Company assumes the risk that Annuitants as a class may live
longer than expected and that expenses may be higher than the deductions for
such expenses. In either case, the loss will fall on the Company. Conversely,
if such reserves and deductions prove more than sufficient, the excess will be
a profit to the Company.
In return for the assumption of these risks, deductions aggregating
1.002% annually of the average daily value of the Fund are made consisting of
.9% for annuity rates and .102% for expenses.
DEDUCTION FROM AVERAGE DAILY VALUE OF THE FUND--INVESTMENT ADVISORY FEES
For providing investment advisory services to the Fund, the Company
makes deductions aggregating .323% annually of the average daily value of the
Fund. (See Investment Management, below.)
The Fund paid investment advisory fees of $288,545 in 1995, $272,740
for 1994, and $290,422 for 1993.
8
<PAGE>
INVESTMENT MANAGEMENT
The Company has been registered under the Investment Advisers Act of
1940 since 1967, and it serves as investment adviser of the Fund. (See The
Company, above, for a description of the Company; and Management, in the SAI,
for affiliated persons.) Investment management services are provided under an
Investment Management Services Agreement executed by the Company and the Board
of Managers. The Agreement continues in effect from year to year if approved
at least annually by a majority of the Board of Managers, who are not
interested persons of the Company or the Fund, cast in person at a meeting
called for the purpose of voting on such approval, and by either (a) the Board
of Managers, or (b) a majority vote of all Contract Owners.
The Agreement may be terminated at any time without penalty on 60
days' written notice to the Company by the Board of Managers or by a majority
vote of all Contract Owners. The Company may not terminate the Agreement
without the prior approval of a new investment advisory agreement by a majority
vote of all Contract Owners. In the event of assignment, the Agreement will
terminate.
In performing investment management services, the Company continuously
provides the Board of Managers with an investment program for its
consideration. Upon approval of such an investment program by the Board of
Managers, the Company executes the program by placing orders for the purchase
or sale of the assets of the Fund.
A "sub-advisory agreement" is in force between the Company and Vantage
Global Advisors, Inc. ("Vantage"), a Delaware corporation. Under it, Vantage
may perform some, or substantially all, of the investment advisory services
required by the Fund. However, the Company remains primarily responsible for
investment decisions affecting the Fund, and no additional compensation from
the assets of the Fund is assessed as a result of that agreement.
THE VARIABLE ANNUITY CONTRACTS
ANNUITY PROMISE
The variable annuity contract includes the Company's promise that
variable payments will be made for the lifetime of the Annuitant (commencing on
the selected annuity date) based upon mortality assumptions contained in the
contract and annuity option selected, regardless of the actual mortality
experience among the Annuitants. That is, while annuity payments are based on
life expectancies, Annuitants will nevertheless continue to receive annuity
payments if they live longer than expected. Annuity payments will not be
affected by an increase in the Company's expenses.
GENERAL COMMENTS
The periodic payment contract provides that the annuity rates and the
deductions for sales expenses, administrative expenses, and for annuity rate
and expense promises will apply to payments on an annualized basis not in
excess of twice the initial payment on an annualized basis. Payments in excess
of this limit may be made, however, with the consent of the Company. It is
anticipated that such consent will be granted at times when the individual
variable annuity contracts then being offered by the Company are substantially
similar in benefits and costs to those described herein.
Depending on the provisions of the plan, the Contract Owner may elect,
if the plan so provides, that a portion (in multiples of 10%) of payments be
applied by the Company to purchase fixed-dollar Accumulation Units (not
described in this prospectus) under the variable annuity contract. Either the
fixed or variable portion of a deferred annuity contract may be terminated by
the Contract Owner at any time prior to commencement of annuity payments
provided the payment allocated to the other portion satisfies the Company's
usual underwriting practices.
This prospectus describes only the elements of the contract pertaining
to the Separate Account except where reference to fixed-dollar elements is
specifically made.
PURCHASE OF CONTRACTS
Persons wishing to purchase contracts must complete application forms
to be forwarded to the Home Office of the Company for its acceptance. Upon
acceptance, contracts are prepared, executed by duly authorized officers of the
Company, and forwarded to the Contract Owner.
An initial purchase payment will be priced not later than two business
days after receipt of an order to purchase, if the application and all
information necessary for processing the purchase order are complete upon
receipt. The Company may retain the purchase payment for up to five business
days while attempting to complete an incomplete application. If the
application cannot be made complete within five days, the applicant will be
informed of the reasons for the delay and the purchase payment will be returned
immediately unless the applicant specifically consents to the Company retaining
the purchase payment until the application is made complete. Thereafter, this
initial purchase payment must be priced within two business days.
Certain significant provisions of the contracts are discussed in the
following paragraphs.
9
<PAGE>
INCREASE OR DECREASE IN AMOUNT OF PERIODIC PAYMENTS
Within the "purchase limits" stated below, the amount of a periodic
payment on an annualized basis may be increased up to twice the initial payment
on an annualized basis or decreased on any date a payment is due. Submission
of a payment different from the previous payment will constitute notice of such
change.
ASSIGNMENT
Unless contrary to applicable law, assignment of variable annuity
contracts or participants individual accounts thereunder is prohibited.
PURCHASE LIMITS
Normally, under a periodic payment contract, the minimum amount of any
scheduled purchase payment is $25 and the scheduled purchase payments must
total at least $600 per year. Normally, under a single payment contract the
minimum payment is $5,000.
REINVESTMENT PRIVILEGE
The Contract Owner or a Participant may elect to make a reinvestment
purchase with any part of the proceeds of a total or partial liquidation of the
contract without any deductions by the Company. Such election must be made
within 30 days of the date of such liquidation and the purchase 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 (see Synopsis, above). The number of Accumulation Units which will be
credited upon reinvesting the funds will be based on the value of the
Accumulation Unit(s) the next time such value is computed following receipt of
the proceeds and request for reinvestment at the Company's Home office. This
reinvestment privilege may be utilized only once with respect to any Contract
Owner or Participant. For tax reporting purposes, a liquidation and subsequent
reinvestment purchase will be treated by the Company as separate transactions.
Prior to a liquidation or subsequent reinvestment purchase, a tax adviser
should be consulted by the Contract Owner or Participant.
GENERAL RISK FACTORS
Variable annuities are designed to provide Participants with payments
which will tend to reflect changes in the cost of living. The Company seeks to
accomplish this objective by providing a medium for investment in equity
securities accompanied by annuity promises. There is no assurance that this
objective will be attained.
Historically, the value of a diversified portfolio of common stocks
held for an extended period of time has tended to rise during periods of
inflation. There has, however, been no exact correlation, and for some periods
the prices of securities have declined while the cost of living was rising.
The value of the investments held in the Fund fluctuates daily and is
subject to the risks of changing economic conditions as well as the risks
inherent in the ability of management to anticipate changes in such investments
necessary to meet changes in economic conditions.
There is no assurance that the value of a Participant's individual
account during the years prior to retirement or that the aggregate amount of
the variable annuity payments received during the years following the
commencement of annuity payments will equal or exceed the payments made on
behalf of a Participant. Neither is there assurance that the value of an
unallocated fund's contract will equal or exceed the payments made to this
account. The policy of investment in common stocks may be maintained in both
rising and declining markets.
CONTRACT OWNER INQUIRIES
The obligations to purchasers under the Variable Annuity Contracts are
those of the Company. Inquiries from Contract Owners should be directed to the
Company at 1-800-348-1212.
ACCUMULATION PERIOD
ACCUMULATION UNITS
The purchase payments, less deductions, are credited to the account of
the Contract Owner in the form of Accumulation Units. The number of
Accumulation Units credited for a Contract Owner is determined by dividing the
net purchase payment by the value of an Accumulation Unit when the net purchase
payment is received, if received prior to the close of trading on the New York
Stock Exchange and by the value computed on the next trading day, if received
thereafter. (See Fund Valuation Procedure, below.) Crediting of Accumulation
Units may be delayed on payments received which cannot be identified or
allocated to a specific Contract Owner's account.
The number of Accumulation Units so determined shall not be changed by
any subsequent change in the value of an Accumulation Unit, but the dollar
value of an Accumulation Unit will vary in amount depending upon the investment
experience of the Fund.
10
<PAGE>
VALUE OF CONTRACT OWNER'S ACCOUNT
The value of a Contract Owner's account at any time prior to the
commencement of annuity payments can be computed by multiplying the total
number of Accumulation Units by the current Accumulation Unit value. The
Contract Owner bears the investment risk, that is, the risk that market values
may decline. There is no assurance that the value of the Contract Owner's
account will equal or exceed the payments made by the Contract Owner. Each
Contract Owner is advised annually of the number of Accumulation Units credited
to his or her account, the current Accumulation Unit value, and the total value
of his or her account.
BENEFICIARY
For those optional forms of payment which provide for death benefits
either before or after retirement, the Contract Owner may designate a
beneficiary. The Contract Owner may change any beneficiary during the life of
the Annuitant unless otherwise provided in the previous designation. Each
change of beneficiary revokes any previous designation. A change may be made
by filing a written request in a form that the Company will accept at its Home
Office. The Company reserves the right to require the contract for endorsement
of a change of beneficiary.
Unless otherwise provided in the beneficiary designation, one of the
procedures described below will take place on the death of a beneficiary.
1. If any beneficiary dies before the Annuitant, that beneficiary's interest
will pass to other beneficiaries according to their respective interests.
2. If no beneficiary survives the Annuitant, the proceeds will be paid in
one sum to the Contract Owner, if living; otherwise to the Contract Owner's
estate.
DEATH OF CONTRACT OWNER
If the owner of a non-qualified contract dies before annuity payments
have begun, then in accordance with the provisions of Section 72(s) of the
Code, the Cash Surrender Value (proceeds) of the Contract will be paid as
follows: (i) Upon the death of a non-annuitant owner, the proceeds shall be
paid to any surviving joint or contingent owner(s); (ii) If no joint or
contingent owner has been named, then the proceeds shall be paid to the
annuitant named in the contract.
If the decedent owner or joint owner is also the annuitant, then the
death will be treated as death of the annuitant subject to the provisions of
this Contract regarding death of annuitant. If the recipient of the proceeds
is the surviving spouse of the Contract Owner, the Contract may be continued in
the name of the spouse as owner.
In accordance with Section 72(s), any distribution must be paid within
5 years of the death of the owner unless the beneficiary begins receiving,
within one year of the Contract Owner'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.
JOINT/CONTINGENT OWNERSHIP
If a joint owner is named in the application such joint owners shall
be treated as having equal undivided interests in the Contract. Either owner,
independent of the other, may exercise any ownership rights in this Contract.
A contingent owner cannot exercise any ownership rights in this Contract while
the contract owner is alive.
DEATH BENEFIT BEFORE RETIREMENT
If the Annuitant dies prior to the commencement of annuity payments,
death proceeds payable will normally be the value of the Contract Owner's
account determined as of the valuation date coincident with or next following
the date written notice of death is received by the Company. If the Contract
Owner has a minimum death benefit rider in force, the death proceeds will be
the greater of the total contributions applied (excluding rider premiums) or
the value of the account.
The proceeds due on death may be applied to provide variable payments,
fixed-dollar payments or a combination of both.
NON-FORFEITURE OPTIONS
SURRENDER OF CONTRACT
Upon default in payments and prior to the death of the Annuitant, the
Contract Owner may (a) exercise any of the Settlement Options described below
or (b) surrender the whole or a portion of his or her account by submission of
a written request for surrender and the contract to the Company's Home Office
and receive the cash value, subject to any limitations on early settlement
contained in an applicable qualified trust or plan. (See Federal Tax Status,
below and in the SAI.)
The payment of any value upon surrender will be made within 7 days
after the request for surrender is received by the Company at its Home Office.
If the payment of a surrender value results in reduction of the Company's state
premium tax liability, the amount payable will include the lesser of (a) the
amount by which the Company's premium tax liability is reduced or (b) the
amount previously deducted from purchase payments for premium taxes on the
contract being surrendered.
Payment may be postponed (a) for any period during which the New York
Stock Exchange is closed other than customary weekend and holiday closings or
during which trading on the New York Stock Exchange is restricted; (b) for any
period during which an emergency exists as a result of which (1) disposal of
securities in the Fund is not reasonably practicable or (2) it is not
reasonably
11
<PAGE>
practicable to determine the value of the Fund's net assets; or (c) for such
other periods as the SEC may by order permit for the protection of the Contract
Owners.
SUSPENSION OF PERIODIC PAYMENTS
In addition, a periodic payments Contract Owner may have his or her
account continued from the date of default in payments as a paid-up annuity to
commence on the maturity date stated in the contract.
Periodic payments may be resumed at any time prior to maturity,
surrender or death of the Annuitant.
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 as defined in Texas law, (2)
retirement, or (3) death. Accordingly, a participant in the ORP will be
required to obtain a certificate of termination from his/her employer before
he/she can redeem his/her account.
SETTLEMENT OPTIONS
Contracts issued in connection with qualified employee pension and
profit-sharing trusts and qualified annuity plans, including H.R.-10 trusts
and plans covering self-employed individuals and their employees and certain
tax deferred annuity plans will have settlement options as stated in the trust
or plan. The terms of the applicable trust or plan should be consulted for
limitations on early surrender or payment in settlement. In certain
circumstances, settlement options will be governed by applicable law rather
than by the terms of the trust or plan. With respect to contracts issued in
connection with plans qualifying under Section 403(b) of the Code, the First
and Sixth Options are limited as noted below and the Fourth and Fifth Options
will not be available. (See Federal Tax Status, below and in the SAI.)
Within the foregoing limitations, at any time prior to the
commencement of the annuity payments and during the lifetime of the Annuitant,
the Contract Owner may elect to have all or a portion of the amount due in
settlement of the contract on death of the Annuitant or upon surrender of the
contract applied under any of the 6 settlement options described below.
Therefore, a Contract Owner cannot make payments under a contract while
receiving payments pursuant to a Settlement Option under the contract.
During the lifetime of an Annuitant, the payee under a Settlement
Option is the Annuitant. After the death of the Annuitant, the payee under a
Settlement Option is the beneficiary during his or her lifetime.
There is no assurance that the value of a Contract Owner's individual
account during the years prior to retirement or that the aggregate amount of
the variable annuity payments received during the years following the
commencement of annuity payments will be equal or exceed the payments paid by a
Contract Owner.
All options may be selected on a fixed or variable basis or a
combination thereof except the Fifth Option which is available on a fixed basis
only. Amounts applied to the purchase of a fixed-dollar annuity will not
participate in the investment experience of the Fund. The allocation between
fixed and variable may be changed at any time prior to 30 days before the date
on which payments are to commence.
After annuity payments have commenced, the Company will honor any
request for a surrender of the remaining value of a contract in any case in
which annuity payments are being made under a form of annuity not involving
life contingencies. This applies to the First and Fourth Options at all times.
The charge for mortality guarantees also continue to be deducted from accounts
held under the First and Fourth Options, although these options are not based
on life contingencies.
FIRST OPTION--PAYMENTS FOR DESIGNATED PERIOD
The proceeds may be paid in monthly payments over a period from 1 to
30 years. However, under contracts issued in connection with Section 403(b)
plans, this option will not be available if the number of years in the period
over which the proceeds would otherwise be paid plus the attained age of the
Annuitant at the time the first payment is due would exceed 95.
SECOND OPTION--LIFE INCOME WITH PAYMENTS GUARANTEED FOR DESIGNATED
PERIOD
The proceeds may be paid in monthly payments during a designated
period elected and thereafter throughout the lifetime of the payee. The
designated period may be 10, 15 or 20 years. The amount of each payment will
depend on the payee's sex and age.
THIRD OPTION--UNIT REFUND LIFE ANNUITY
The unit refund life annuity is an annuity payable monthly during the
lifetime of the Annuitant with the guarantee that upon death a payment will be
made of the value of the number of Annuity Units equal to the excess, if any,
of (a) the total amount applied under this option divided by the Annuity Unit
value for the date annuity payments commence over (b) the Annuity Units
represented by each payment to the Annuitant multiplied by the number of
payments paid prior to 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, provided that if notice is not received prior to the close of trading at
the New York Stock Exchange on such date computation shall be made on the first
trading date thereafter.
For example, assume that $10,000 is applied under this option.
Further assume that the Annuity Unit value for the annuity commencement date is
$2 and the first monthly payment due the Annuitant is $61. This means that the
Annuitant has 5,000 Annuity Units credited to his or her account ($10,000
divided by $2 per unit) as of the annuity commencement date and that each
monthly payment received by the Annuitant will be equal to the monetary value,
at the time paid, of 30.5 units ($61 first monthly payment
12
<PAGE>
divided by $2 per unit). Assume the Annuitant receives 10 monthly payments and
then dies. Prior to death the Annuitant was paid the value of 305 units (30.5
per month x 10 months). The beneficiary is entitled to the value in 1 sum of
4,695 Annuity Units (5,000 units initially less 305 units already valued and
paid). If the value of an Annuity Unit is $2.05 on the relevant valuation date,
the cash payment to the beneficiary will be $9,624.75 (4,695 remaining units x
unit value of $2.05).
FOURTH OPTION--PAYMENTS OF DESIGNATED AMOUNT
The proceeds may be paid in equal annual, semi-annual, quarterly or monthly
payments of a designated amount (not less than $50 per year per $1,000 of
original proceeds left with the Company) until the proceeds adjusted by
investment experience are exhausted. The minimum amount withdrawable under
this option is not necessarily the recommended amount. This option will not be
available under contracts issued in connection with Section 403(b) plans.
FIFTH OPTION--INTEREST INCOME
The proceeds may be left on deposit with the Company, subject to withdrawal
upon demand, and interest thereon will be paid annually, semi-annually,
quarterly or monthly as elected. The company guarantees an interest rate of 3%
per year. This option will not be available under contracts issued in
connection with Section 403(b) plans.
SIXTH OPTION--ANNUITY SETTLEMENT
The proceeds may be paid in payments in the form provided by any single payment
immediate annuity contract issued by the Company on the date on which the
proceeds become payable. However, the amount of the first payment shall be
103% of the first payment which such proceeds would otherwise provide under
such annuity contract on the basis of the Company's rates in effect on such
date. For the purpose of calculating the first payment under the single
payment immediate annuity contract selected pursuant to this option, it is
assumed that a deduction for sales and administrative expenses (which currently
amounts to 2% plus $115 for single payment variable annuity contracts) has been
made from the amount applied under this option. Under contracts issued in
connection with Section 403(b) plans, no form of settlement option will be
available under this provision which is not available under the Second and
Third Options or which is not available under the First Option under contracts
issued in connection with Section 403(b) plans.
If at any time the interest payments or other payments to any payee under a
settlement option are or become less than $25 each, the Company shall have the
right to change the frequency of payment to such intervals as will result in
payments of at least $25.
At the death of any payee after a Settlement Option becomes operative, the then
present value of the current dollar amount of any unpaid payments certain under
the First or Second Option, or the amount payable at the death of the payee
under the Third Option or the proceeds remaining with the Company under the
Fourth or Fifth option shall be paid in 1 sum to the executors or
administrators of the payee unless other provision shall have been specified in
the election and approved by the Company. If the Sixth Option has been selected
and becomes operative, then at the death of the last surviving payee the amount
payable thereunder shall be paid in a single sum to the executors or
administrators of such payee unless other provisions have been specified in the
election and approved by the Company. Present values will be based on the
Assumed Investment Rate (AIR) used in determining annuity payments. The
mortality and expense risk charge and the charge for administrative services
will be assessed on all annuity options, including those that do not have a
life contingency and thus no mortality risks.
ANNUITY PERIOD
ASSUMED INVESTMENT RATE (AIR)
The Company will permit the Contract Owner to elect an AIR of 3.5%, 4.5% or 5%
if state law or regulations permit. These AIRs are used merely to determine
the required level of employer contributions in connection with certain pension
plans. It should not be inferred that such rates will bear any relationship to
the actual net investment experience of the Fund.
The choice of the AIR affects the pattern of annuity payments. A higher AIR
will produce a higher initial payment but a more slowly rising series of
subsequent payments (or a more rapidly falling series of subsequent payments)
than a lower AIR.
The objective of a variable annuity contract is to provide level payments
during periods when the economy is relatively stable and to reflect as
increased payments only the excess investment results flowing from inflation or
an increase in productivity. The achievement of this objective will depend in
part upon the validity of the assumption that the net investment rate of the
Fund equals the AIR during periods of stable prices. Subsequent payments will
be smaller than, equal to or greater than the first payment depending upon
whether the actual net investment rate is smaller than, equal to or greater
than the AIR.
The following table shows the Annuity Unit values at each year end for the
different AIRs:
<TABLE>
<CAPTION>
Annuity Unit Values Annuity Unit Values
Assumed Investment Rate Assumed Investment Rate
December 31 3.5% 4.5% 5% December 31 3.5% 4.5% 5%
<S> <C> <C> <C> <C> <C> <C> <C>
1986 1.775 1.473 1.343 1991 2.565 2.031 1.809
1987 1.834 1.508 1.368 1992 2.705 2.120 1.476
1988 1.946 1.584 1.431 1993 2.870 2.227 1.964
1989 2.300 1.855 1.667 1994 2.805 2.156 1.892
1990 2.175 1.739 1.556 1995 3.718 2.830 2.472
</TABLE>
13
<PAGE>
FORM OF ANNUITY
DEFERRED ANNUITY CONTRACTS
A Contract Owner selects prior to issue of the deferred annuity
contract a maturity date not later than age 75, except that contracts issued in
connection with qualified employee pension and profit-sharing trusts (described
in Section 401(a) and tax exempt under Section 501(a) of the Internal Revenue
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 payments to commence at the date and under the
option specified in the plan.
If a Contract Owner does not elect otherwise, the contract
automatically provides for a life annuity with 120 monthly payments guaranteed,
except in those cases in which a joint and survivor annuity payout is required
by law. (Under any option providing for guaranteed payments, the number of such
payments which remain unpaid at the date of the Annuitant's death will be paid
to the Annuitant's beneficiaries as such payments become due. (See
Accumulation Period, above.)
In addition to the automatic provision and the non-forfeiture and
Settlement Options, the contract includes 3 optional annuities (described
below) each of which may be selected on either a fixed annuity or variable
annuity basis, or a combination thereof. In the absence of an election to the
contrary, the amount accumulated in the Fund will be applied to provide
variable annuity payments and the amount accumulated for a fixed annuity will
be applied to provide fixed annuity payments. Within the limitations of the
plan, the Contract Owner may only change the maturity date, annuity options or
allocation between fixed and variable up to 30 days prior to the date annuity
payments would otherwise commence. If proceeds become available to a
beneficiary, the beneficiary may choose or change any payment option if
proceeds are available to the beneficiary in one sum. A choice or change must
be in writing in a form that the Company will accept.
IMMEDIATE ANNUITY CONTRACT
The Company offers 5 forms of immediate variable annuity contracts.
(See Accumulation Period--Settlement Options--Second and Third Options, above,
and Optional Annuity Forms, below.)
OPTIONAL ANNUITY FORMS
LIFE ANNUITY
An annuity payable monthly during the lifetime of the Annuitant and
terminating with the last monthly payment preceding the death of the Annuitant.
This option offers the maximum level of monthly payments since there is no
guarantee of a minimum number of payments or provision for a death benefit for
beneficiaries. It would be possible under this option for the Annuitant to
receive no annuity payment if he or she died prior to the due date of the first
annuity payment, one annuity payment if the Annuitant died before the second
annuity payment date, etc.
JOINT AND LAST SURVIVOR ANNUITY
An annuity payable monthly during the joint lifetime of the Annuitant
and a designated second person, and thereafter during the remaining lifetime of
the survivor.
JOINT AND TWO-THIRDS TO SURVIVOR ANNUITY
An annuity payable monthly during the joint lifetime of the Annuitant
and a designated second person with two-thirds of the number of Annuity Units
in effect during the joint lifetime continuing during the remaining lifetime of
the survivor.
MONTHLY ANNUITY PAYMENTS
DEFERRED ANNUITY CONTRACTS--FIRST MONTH
When annuity payments commence under a deferred annuity contract, the
value of the Contract Owner's account is determined as the product of the value
of an Accumulation Unit on the 14th day prior to the date the first annuity
payment is due and the number of Accumulation Units credited to the Contract
Owner's account as of the date annuity payments commence.
The contract contains tables indicating the dollar amount of the first
monthly payment under each form of annuity for each $1,000 of value of the
Contract Owner's account. The first monthly payment varies according to the
form of annuity selected (see the descriptions above) and the adjusted age of
the Annuitant.
The Company may use sex distinct tables in contracts that are not
associated with employer sponsored plans.
The contract contains a formula for determining the adjusted age, and
tables are determined from the Progressive Annuity Table assuming births in the
year 1900 and an AIR of 3.5% per year. The total first monthly annuity payment
is determined by multiplying the number of thousands of dollars of value of the
Contract Owner's account (less applicable premium taxes not previously
deducted) by the amount of the first monthly payment per $1,000 of value from
the table in the contract.
Each contract contains a provision that the first monthly payment will
not be less than 103% of the first monthly payment available under a then
currently issued immediate annuity at the same AIR if a single purchase payment
were made equal to the value which is being applied under the contract to
provide annuity benefits.
14
<PAGE>
For purposes of calculating the first payment under the single payment
immediate annuity contract selected pursuant to this provision, it is assumed
that a deduction for sales and administrative expenses (which currently amounts
to 2% plus $115 for single payment variable annuity contracts) has been made
from the amount applied under this provision.
If the annuity specified in the plan can be obtained at a lower cost to
the Contract Owner by using the same mortality table as is used in determining
payments under group variable annuity contracts then being issued by the
Company for a similar class of Annuitants, it will be done.
DEFERRED ANNUITY CONTRACTS--SUBSEQUENT MONTHS
The amount of the first monthly annuity payment, is divided by the
value of an Annuity Unit for the valuation period in which the payment is due
to determine the number of Annuity Units represented by the first payment. This
number of Annuity Units remains fixed during the annuity period, and in each
subsequent month, the dollar amount of the annuity payment is determined by
multiplying this fixed number of Annuity Units by the then value of an Annuity
Unit.
IMMEDIATE ANNUITY CONTRACTS
In the case of immediate annuities, the number of Annuity Units
purchased is specified in the contract. The number of such units is determined
by (a) multiplying the net single payment (after deductions) by the applicable
annuity factor from the annuity tables then used by the Company for immediate
variable annuity contracts, and (b) dividing such product by the value of the
Annuity Unit based on the net investment factor calculated on the Valuation
Date coincident with or next following the date of issue of the contract. This
number of Annuity units remains fixed during the annuity period, and the dollar
amount of the annuity payment is determined by multiplying this fixed number of
Annuity Units by the then value of an Annuity Unit.
FUND VALUATION PROCEDURE
VALUATION DATE
A valuation date is any date on which the New York Stock Exchange is
open for trading. On any date other than a valuation date, the Accumulation
Unit value or the Annuity Unit value will be the same as that on the next
following valuation date.
VALUATION PERIOD
A valuation period is that period of time from the beginning of the day
following a valuation date to the end of the next following valuation date.
ACCUMULATION UNIT VALUE
The value of an Accumulation Unit was set at $1 effective March 1,
1967. The value of an Accumulation Unit on the last day of any subsequent
valuation period is determined by multiplying such value on the last day of the
prior valuation period by the net investment factor for the current valuation
period. Accumulation Units will be valued daily, as of the close of trading on
the New York Stock Exchange.
ANNUITY UNIT VALUE
The value of an Annuity Unit for the valuation period ending March 1,
1967 was established at $1. The value of the Annuity Unit for any subsequent
valuation period is determined by multiplying the value for the immediately
preceding valuation period by the product of (a) the net investment factor for
the valuation period containing the 14th day prior to the last day of the
current valuation period and (b) a factor to neutralize the AIR built into the
annuity tables contained in the contract which is not applicable as actual net
investment income is credited instead.
The value of an Annuity Unit on any date upon which the New York Stock
Exchange is closed is its value on the next succeeding valuation date. The net
investment factor for the 14th day prior to the current valuation date is used
in calculating the value of an Annuity Unit in order to permit calculation of
amounts of annuity payments and mailing of checks in advance of their due
dates. Such checks will normally be issued and mailed at least 3 days before
the due date.
NET INVESTMENT FACTOR
The net investment rate for any valuation period is equal to the gross
investment rate expressed in decimal form to 8 places less a deduction of the
product of .00363% (1.325% on an annual basis; deduction for providing
investment management, annuity rate promises and expense promises) and the
number of days in the valuation period.
The gross investment rate is the quotient of 2 factors, "a" and "b."
"a" is equal to investment income for the valuation period, plus capital gains,
minus capital losses and taxes (see Federal Tax Status, below and in the SAI.)
"b" is equal to the value of the Fund at the beginning of the valuation period.
"a" is divided by "b" to yield the gross investment rate. The gross investment
rate may be positive or negative.
The net investment factor for the Fund is 1.0 plus the net investment
rate for the period. (See Purchase and Pricing of Securities Being Offered, in
the SAI, for an illustration of the method of calculation of Accumulation Unit
value and Annuity Unit value.)
15
<PAGE>
VALUING THE FUND'S ASSETS
In determining the value of the assets of the Fund, each security
traded on a national securities exchange is valued at the last reported sale
price on the valuation date. If there has been no sale on such day, then the
value of such security is taken to be the average of the reported bid and asked
prices at the time as of which the value is being ascertained.
Any security not traded on a securities exchange but traded in the
over-the-counter market is valued at the average of the quoted bid and asked
prices on the valuation date. Securities, including restricted securities, if
any, or other assets for which market quotations are not readily available are
valued at fair value as determined in good faith by the Board of Managers.
FEDERAL TAX STATUS
The following is a general discussion of the federal income tax rules
applicable with respect to the Contracts as of the date of the Prospectus.
Further information is provided in the Statement of Additional Information
(SAI). NEITHER THESE DISCUSSIONS NOR THOSE IN THE SAI ARE INTENDED AS TAX
ADVICE. This section does not discuss the federal tax consequences resulting
from every possible situation, nor does it discuss any applicable state, local
or foreign tax laws. Prior to the purchase of a Contract, a prospective
purchaser should consult a competent tax adviser.
GENERAL
The operations of the Fund form a part of, and are taxed with, the
operations of the Company under the Internal Revenue Code of 1986, as amended
(the "Code"). Under existing federal income tax law, the Company does not
anticipate that it will incur any federal income tax liability attributable to
the Fund, and therefore the Company does not intend to make provision for any
such taxes. However, if the Company determines that it may be taxed on income
or gains attributable to the Fund or certain types of Contracts, then the
Company may impose a charge against the Fund (with respect to some or all
Contracts) in order to provide for payment of such taxes.
QUALIFIED CONTRACTS
The Contracts may be purchased in connection with the following types
of tax- favored retirement plans: (1) annuity contracts purchased for employees
by public school systems and Section 501(c)(3) 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) individual retirement
annuities, qualified under Section 408 of the Code; (4) deferred compensation
plans of state or local governments and tax exempt organizations, qualified
under Section 457 of the Code; and (5) simplified employee pension plans,
qualified under Section 408(k) of the Code. Participants under such plans, as
well as Contract Owners, annuitants and beneficiaries, should be aware that the
rights of any person to any benefits under such plans may be subject to the
terms, conditions and limitations 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 competent advisers as to the suitability of the Contracts to
their specific needs, and as to applicable Code limitations and tax
consequences.
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 the plan and its terms and conditions. Generally,
in the case of a distribution under a Contract purchased in connection with
these plans (other than plans qualified under Section 457 of the Code), the
amount received is taxable only to the extent it exceeds the "investment in the
contract." The "investment in the contract" equals the portion of plan
contributions invested in the Contract that was not excluded from the
individual's gross income, and may be zero. Special favorable tax treatment may
be available for lump sum distributions, and partial or total distributions
that are "rolled over" to other retirement programs within 60 days of receipt.
Adverse tax consequences may result from excess contributions, distributions
prior to age 59 1/2 (subject to certain exceptions), distributions that
commence later than dates specified by the Code, distributions in excess of a
specified annual amount, and in certain other circumstances.
MULTIPLE CONTRACTS
All non-qualified contracts entered into after October 21, 1988, and issued by
the same insurance company (or its affiliates) to the same contract owner
during any calendar year will be treated as a single contract, for tax
purposes.
WITHHOLDING
Pension and annuity distributions generally 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, may
be provided the opportunity to elect not to have tax withheld from
distributions. Distributions from Section 457 plans are subject to the general
wage withholding rules. Under the Unemployment Compensation Amendments of 1992
("UCA"), twenty percent (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 ten years or more, and (3) required minimum distributions. The
UCA imposes a mandatory twenty percent (20%) income tax withholding on any
eligible rollover distribution that the holder does not elect to have paid in a
direct rollover to another qualified plan, Section 403(b) annuity, or
individual retirement account.
16
<PAGE>
VOTING RIGHTS
When a meeting is to be held, the Rules and Regulations of the Fund
specify a quorum as 25% of the Contract Owners entitled to vote at an annual or
special meeting. Therefore, less than a majority of those entitled to vote
could take action which is not prohibited by law which could affect other
Contract Owners' rights.
The number of votes which a Contract Owner may cast for Participants in
the accumulation period is equal to the number of Accumulation Units under the
contract. For Annuitants receiving annuity payments, the Contract Owner may
cast the number of votes equal to (a) the amount of assets established in the
Fund to meet the annuity obligations related to such Annuitants divided by (b)
the value of an Accumulation Unit. The amount of the assets established in the
Fund for an Annuitant receiving annuity payments will decrease as annuity
payments are made.
Since assets are maintained in the Fund with respect to other contracts
than those offered by this prospectus, Contract Owners under such other
contracts are also entitled to vote. The number of votes which they are
entitled to cast is computed in the same manner as for Contract Owners of the
variable annuity contracts offered by this prospectus.
The number of votes each Contract Owner may cast shall be determined as
of a date to be chosen by the Board of Managers within 90 days of the date of
the meeting, and at least 20 days' written notice of the meeting will be given.
To be entitled to vote, a Contract Owner must have been an owner on both the
date as of which the number of votes was determined and the date of the written
notice.
During the accumulation period, a Participant under a group contract
with respect to which assets are maintained in the Fund or an employee covered
by an individual contract issued in connection with an H.R.-10 plan or pursuant
to Section 403(b) of the Internal Revenue Code will have the right to instruct
the Contract Owner with respect to the votes attributable to his or her
individual account, and a Participant under a group contract or an employee
covered by an individual contract issued pursuant to a qualified employee
pension or profit- sharing trust or a qualified annuity plan (other than one
involving an H.R.-10 plan or pursuant to Section 403(b) will have the right to
instruct the Contract Owner only with respect to votes attributable to payments
made by him or her, if any, and with respect to additional votes that are
authorized by the terms of the plan, if any. All other votes entitled to be
cast during such period under such a trust or plan may be cast by the Contract
Owner in its sole discretion.
During the annuity period, every Participant and every employee will
have the right to instruct the Contract Owner with respect to all votes
attributable to the amount of assets established in the Fund to meet the
annuity obligations related to such Participant or employee. Each Contract
Owner and each employee and Participant having the right to instruct a Contract
Owner with respect to any votes will receive all proxy materials.
The Rules and Regulations of the Fund provide that each Contract Owner
shall cast the votes with respect to which instructions from an employee or a
Participant have been received in accordance with such instructions and all
votes with respect to which no instructions are received, other than those as
to which no employee or Participant is entitled to give instructions, shall be
cast in the same proportion as are votes with respect to which instructions are
received by such Contract Owners. If no one is entitled to instruct a Contract
Owner or if a Contract Owner receives no instructions, all votes to which such
Contract Owner is entitled may be cast in the Contract Owner's sole discretion.
The Company and the Fund have no duty to ascertain whether Contract
Owners actually cast votes under such contracts in accordance with the voting
rights provisions described in this section.
The Rules and Regulations of the Fund permit the Board of Managers to
dispense with an annual meeting in any year in which the Investment Company Act
of 1940 does not require a Contract Owner to vote on: 1) election of members of
the Board of Managers; 2) approval of an investment advisory agreement; 3)
ratification of the independent public accountant; or 4) approval of a
distribution agreement. Each year, prior to the date set by the Rules and
Regulations for the annual meeting, the Board of Managers will determine
whether such meeting need be held.
Special meetings may be called for any proper purpose when permitted by
applicable law. As a result of the option for the Board to dispense with
annual meetings of Contract Owners, special meetings must be called whenever
there is a change in the Fund's independent public accountant, and whenever
fewer than 50% of the existing Members of the Board of Managers has been
elected by Contract Owners. Also, since dispensing with annual meetings
results in perpetuating Members of the Board of Managers in office, the Fund is
required to call a special meeting when Contract Owners who meet the standards
of Section 16(c) of the Investment Company Act of 1940 apply to the Fund
requesting that such a meeting be called for the purpose of removing one or
Members of the Board of Managers. That section also requires that the Fund
facilitate communication between Contract Owners who wish to solicit the
approval of other Contract Owners for the calling of such a meeting. Additional
information about this procedure is available from Fund management.
LEGAL PROCEEDINGS
As of the date of this Prospectus, neither the Fund nor the Company was
involved in any material pending legal proceedings, other than ordinary routine
litigation incidental to the business.
17
<PAGE>
OTHER ANNUITY CONTRACTS
Group variable annuity contracts are also sold by the Company. Assets
with respect to the group variable annuity contracts are also held in the Fund
and are affected by its investment experience. All such contracts initially
meet the requirements of Section 403(b) of the Internal Revenue Code, or are
issued with respect to (a) plans initially qualifying under Section 401(a) of
the Code, (b) annuity plans initially qualifying under Section 403(a) of the
Code, (c) retirement plans initially qualifying for special tax treatment under
Section 408 of the Code, or (d) governmental deferred compensation plans as
defined in Section 414(d) or meeting the requirements of Section 457 of the
Code.
CUSTODIAN
Bankers Trust Company, 14 Wall Street, 4th Floor, New York, New York
10005 ("Bankers") is Custodian for the Fund pursuant to a Custodian Agreement
effective March 4, 1985. Under this Agreement, Bankers shall (1) receive and
disburse money; (2) receive and hold securities; (3) transfer, exchange, or
deliver securities; (4) present for payment coupons and other income items,
collect interest and cash dividends received, hold stock dividends, etc.; (5)
cause escrow and deposit receipts to be executed; (6) register securities; and
(7) deliver to the Fund proxies, proxy statements, etc.
STATE REGULATION
As a life insurance company organized and operating under Indiana law,
the Company is subject to provisions governing such companies and to regulation
by the Indiana Commissioner of Insurance.
The Company's books and accounts are subject to review and examination
by the Indiana Insurance Department (Department) at all times and a full
examination of its operations normally is conducted by the Department at least
once in every 5 years.
TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION (SAI)
<TABLE>
<CAPTION>
ITEM Page
<S> <C>
General Information and History....................................... B-2
Special Terms......................................................... B-2
Investment Objectives and Policies of the Fund........................ B-2
Management............................................................ B-2
Investment Advisory and Related Services.............................. B-3
Brokerage Allocation.................................................. B-3
Purchase and Pricing of Securities Being Offered...................... B-3
Distribution of Variable Annuity Contracts............................ B-4
Federal Tax Status.................................................... B-4
Other Services........................................................ B-6
Underwriters.......................................................... B-6
Determination of Net Asset Value...................................... B-6
Financial Statements.................................................. B-7
</TABLE>
NOTE: SEE THE COVER PAGE OF THIS PROSPECTUS FOR DETAILS ABOUT HOW TO OBTAIN A
COPY OF THE SAI.
18
<PAGE>
LINCOLN NATIONAL
LIFE INSURANCE CO.
-------------------
A part of LINCOLN NATIONAL CORPORATION
LINCOLN NATIONAL
VARIABLE ANNUITY
FUND A (INDIVIDUAL)
PROSPECTUS
APRIL 30, 1996
INDIVIDUAL VARIABLE ANNUITY
CONTRACTS ISSUED BY
The Lincoln National Life Insurance Company
Fort Wayne, Indiana
No person has been authorized to give any information or to make any
representations other than those contained in the prospectus and, if given or
made, such information or representations must not be relied upon as having
been authorized. This prospectus does not constitute an offer of, or
solicitation of an offer to acquire, any interest or participation in the
variable annuity contracts offered by this prospectus in any jurisdiction to
anyone to whom it is unlawful to make such an offer or solicitation in such
jurisdiction.
To obtain a copy of the Statement of Additional Information, please complete
and mail the following form:
- --------------------------------------------------------------------------------
Please send me a copy of the current Statement of Additional Information for
Lincoln National Variable Annuity Fund A Individual:
(Please Print)
Name:
---------------------------------------------------------------------------
Address:
------------------------------------------------------------------------
City State Zip
------------------------ ------------------------- ------------------
Mail to: Kim Oakman, The Lincoln National Life Insurance Company, P.O. Box
2340, Fort Wayne, Indiana 46801
- --------------------------------------------------------------------------------
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION (SAI)
LINCOLN NATIONAL VARIABLE ANNUITY FUND A (INDIVIDUAL)
(REGISTRANT)
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(DEPOSITOR)
THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE
PROSPECTUS OF LINCOLN NATIONAL VARIABLE ANNUITY FUND A (INDIVIDUAL) DATED APRIL
30, 1996. YOU MAY OBTAIN A COPY OF THE FUND A (INDIVIDUAL) PROSPECTUS ON
REQUEST AND WITHOUT CHARGE. PLEASE WRITE KIM OAKMAN, THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY, P.O. BOX 2340, FORT WAYNE, INDIANA 46801 OR CALL 1-800-348-
1212, EXTENSION 4912.
____________
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
<S> <C>
General Information and History...................................... B-2
Special Terms........................................................ B-2
Investment Objectives and Policies of the Fund....................... B-2
Management........................................................... B-2
Investment Advisory and Related Services............................. B-3
Brokerage Allocation................................................. B-3
Purchase and Pricing of Securities Being Offered..................... B-3
Distribution of Variable Annuity Contracts........................... B-4
Federal Tax Status................................................... B-4
Other Services....................................................... B-6
Underwriters......................................................... B-6
Determination of Net Asset Value..................................... B-6
Financial Statements................................................. B-7
------------
</TABLE>
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS APRIL 30, 1996
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION (SAI)
LINCOLN NATIONAL VARIABLE ANNUITY FUND A (INDIVIDUAL)
GENERAL INFORMATION AND HISTORY OF
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
The Lincoln National Life Insurance Company (the Company) is an Indiana
insurance corporation, engaged primarily in the direct issuance of life
insurance contracts and annuities, and is also a professional reinsurer. The
Company is wholly owned by Lincoln National Corporation, 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.
INVESTMENT OBJECTIVES AND POLICIES OF THE FUND
See that heading in the Prospectus.
MANAGEMENT
MANAGERS AND OFFICERS OF THE FUND
The Fund is managed by a Board of Managers, whose Members are elected
annually by the Contract Owners. The affairs of the Fund are conducted in
accordance with Rules and Regulations adopted by the Board of Managers.
<TABLE>
<CAPTION>
POSITION PRESENT POSITION AND PRINCIPAL
NAME AND ADDRESS WITH THE FUND OCCUPATION DURING LAST FIVE YEARS
<S> <C> <C>
John B. Borsch, Jr. Member Retired (formerly Associate Vice President--Investments,
1776 Sherwood Road Northwestern University, Evanston, Illinois)
Des Plaines, IL 60016
*Kelly D. Clevenger Chairman and Vice President, Lincoln National Life
1300 S. Clinton Street Member Insurance Company
Fort Wayne, IN 46802
Nancy L. Frisby, CPA Member Regional Vice President/Chief Financial
700 Broadway Officer (formerly Vice President - Finance;
Fort Wayne, IN 46802 St. Joseph Medical Center, Fort Wayne,
Indiana
*Barbara Kowalczyk Member Senior Vice President, Lincoln National
1300 S. Clinton Street Corporation (formerly Senior Vice President
Fort Wayne, IN 46802 Lincoln Investment Management, Inc.
Stanley R. Nelson Member Executive in Residence, Program in Health Services Adminis-
University of Minnesota tration, University of Minnesota, Minneapolis, Minnesota,
(Mayo Box 97) (formerly President, Henry Ford Health Care Corporation,
420 Delaware Street, S.E. Detroit, Michigan)
Minneapolis, MN 55455
*Cynthia A. Rose Secretary to the Board Assistant Secretary
200 East Berry Street of Managers
Fort Wayne, IN 46802
*Janet C. Whitney Vice President and Vice President and Treasurer
200 East Berry Street Treasurer
Fort Wayne, IN 46802
</TABLE>
* An "interested person" of the Fund as that term is defined in the Investment
Company Act of 1940.
<r/>
REMUNERATION OF CERTAIN AFFILIATED PERSONS
No person receives any remuneration from the Fund. The Company pays
all expenses relative to the operation of the Fund, for which it deducts
certain amounts (see the Prospectus).
CONTROL OF THE FUND
No person is the record or beneficial owner of 5% or more of the Fund.
In addition, Members of the Board of Managers and officers of the Fund as a
group own less than 1% of the Registrant.
B-2
<PAGE>
INVESTMENT ADVISORY AND RELATED SERVICES
This information is disclosed in the Prospectus.
BROKERAGE ALLOCATION
The Company places orders for the purchase and sale of securities for
the Fund's portfolio. It is the Fund's policy to have orders placed with
brokers or dealers who will give the best execution of such orders at prices
and under conditions most favorable to the Fund. The Company will customarily
deal with principal market makers in purchasing over-the-counter securities.
In the allocation of brokerage business, preference may be given to those
brokers and dealers who provide statistical, research, or other services--so
long as there is no sacrifice in getting the best price and execution.
Consistent with the policy of seeking best price and execution for the
transaction size and the risk involved, in selecting brokers or dealers or
negotiating the commissions to be paid, the Company considers each firm's
financial responsibility and reputation, range and quality of the service made
available to the Fund and the broker's or dealer's professional services,
including execution, clearance procedures, wire service quotations and ability
to provide performance, statistical and other research information for
consideration, analysis and evaluation by the Company. In accordance with this
policy, the Company does not execute brokerage transactions solely on the basis
of the lowest commission rates available for a particular transaction.
The Fund paid brokerage fees of $101,171 in 1995, $161,000 in 1994,
$108,356 in 1993.
PURCHASE AND PRICING OF SECURITIES BEING OFFERED
OFFERING TO PUBLIC; SALES LOAD
This information is disclosed in the Prospectus.
GENERAL FORMULAS FOR DETERMINING VALUE OF THE ACCUMULATION UNIT
The following formulas set out in general terms the computation of the
Accumulation Unit value at the close of trading on any day upon which the New
York Stock Exchange is open.
<TABLE>
<S><C>
Gross Investment Rate = Investment Income + Capital Gains - Capital Losses - Taxes
----------------------------------------------------------
Value of Fund at Beginning of Valuation Period
Net Investment Rate = Gross Investment Rate - .0000363 (for a 1 day Valuation
Period)
Net Investment Factor = Net Investment Rate + 1.00000000
Accumulation Unit Value = Accumulation Unit Value x Net Investment Factor
on Preceding Valuation Date
</TABLE>
CALCULATION OF ACCUMULATION UNIT VALUE USING HYPOTHETICAL EXAMPLE
The above computations may be illustrated by the following hypothetical
example. Assume that the value of the assets of the Fund at the beginning of a
1 day valuation period was $5,000,000; that the value of an Accumulation Unit
on that date was $1.135; and that during the valuation period the investment
income was $4,000, the net unrealized capital gains were $6,000 and the net
realized capital losses were $3,000. Assuming these figures are net after
provision for applicable taxes, the value of the assets of the Fund at the end
of the valuation period, before adding payments received during the period,
would thus be $5,007,000 ($5,000,000 plus $4,000 plus $6,000 minus $3,000).
The gross investment rate for the valuation period would be equal to
(a) $7,000 ($4,000 plus $6,000 less $3,000) divided by (b) $5,000,000 which
produces .14% (.0014). The net investment rate for the valuation period is
determined by deducting .00363% (.0000363) from the gross investment rate,
which results in a net investment rate of .13637% (.0013637). The net
investment factor for the valuation period would be determined as the net
investment rate plus 1.0, or 1.0013637.
The value of the Accumulation Unit at the end of the valuation period
would be equal to the value at the beginning of the period ($1.135) multiplied
by the net investment factor for the period (1.0013637), which produces
$1.1365478.
GENERAL FORMULAS FOR DETERMINING DOLLAR AMOUNT OF ANNUITY PAYMENTS
Number of Annuity Units = Dollar Amount of First Monthly Payment
-------------------------------------------
Annuity Unit Value on Date of First Payment
<TABLE>
<S><C>
Value of Annuity Unit Factor to Net Investment Factor for
Annuity Unit Value = on Preceding Valuation x Neutralize x 14th Day Preceding Current
Date AIR Valuation Date
Dollar Amount of Second Annuity Unit Value for Period
and Subsequent Annuity Payment = Number of Annuity Units x in Which Payment is Due
</TABLE>
B-3
<PAGE>
CALCULATION OF ANNUITY PAYMENTS USING HYPOTHETICAL EXAMPLE
The determination of the Annuity Unit value and the annuity payment
may be illustrated by the following hypothetical example. Assume a Participant
at the date of retirement has credited to his individual account 30,000
Accumulation Units, and that the value of an Accumulation Unit on the 14th day
preceding the last day of the valuation period in which annuity payments
commence was $1.15 producing a total value of his individual account of
$34,500. Assume also that the Participant elects an option for which the table
in the variable annuity contract indicates the first monthly payment is $6.57
per $1,000 of value applied; the Participant's first monthly payment would thus
be 34.5 multiplied by $6.57 or $226.67.
Assume that the Annuity Unit value for the valuation period in which
the first payment was due was $1.10. When this is divided into the first
monthly payment the number of Annuity Units represented by that payment is
determined to be 206.064. The value of this same number of Annuity Units will
be paid in each subsequent month.
Assume further that the net investment factor for the Fund for the
14th day preceding the last day of the valuation period in which the next
annuity payment is due is 1.0019. Multiplying this factor by .99990575 (for a
1 day valuation period) to neutralize the AIR of 3.5% per year built into the
number of Annuity Units determined as per above, produces a result of
1.00180557. This is then multiplied by the Annuity Unit value for the
valuation period preceding the period in which the next annuity payment is due
(assume $1.105) to produce an Annuity Unit value for the current valuation
period of $1.10699515.
The current monthly payment is then determined by multiplying the
fixed number of Annuity Units by the current Annuity Unit value or 206.064
times $1.10699515, which produces a current monthly payment of $228.11.
DISTRIBUTION OF VARIABLE ANNUITY CONTRACTS
Variable annuity contracts will be sold by registered representatives
of the Company who have been licensed by the state insurance departments, by
certain employees of the Company and through selected dealers who are members
of the National Association of Securities Dealers, Inc. (NASD).
The Company is registered with the SEC under the Securities Exchange
Act of 1934 as a broker-dealer and is a member of the NASD. For contracts of
the Fund sold through other broker-dealers, the Company will pay the
broker-dealer an amount equivalent to the amount deducted for sales expenses.
The amount paid to the broker-dealer may be greater during the first year of a
variable annuity contract than the amount deducted for sales expenses. The
Company pays any excess over the amount deducted for sales expenses.
FEDERAL TAX STATUS
GENERAL
The operations of the Fund form a part of, and are taxed with, the
operations of the Company under the Internal Revenue Code of 1986, as amended
(the "Code"). Investment income and realized capital gains on the assets of
the Fund are reinvested and taken into account in determining the accumulation
and annuity unit values. As a result, such investment income and realized
capital gains are automatically applied to increase reserves under the
Contract. Under existing federal income tax law, separate account investment
income and capital gains are not taxed to the extent they are applied to
increase reserves under a contract issued in connection with the Fund.
Accordingly, the Company does not anticipate that it will incur any federal
income tax liability attributable to the Fund, and therefore the Company does
not intend to make provisions for any such taxes. However, if changes in the
federal tax laws or interpretations thereof result in the Company being taxed
on income or gains attributable to the Fund or certain types of Contracts, then
the Company may impose a charge against the Fund (with respect to some or all
Contracts) in order to make provision for payment of such taxes. The terms of
the plan may limit the rights otherwise available under the Contracts.
QUALIFIED CONTRACTS
The rules governing the tax treatment of contributions and
distributions under such 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 the
Company's understanding of the current Federal tax laws as interpreted by the
Internal Revenue Service. Purchasers of Contracts for use with such a plan and
plan participants and beneficiaries should consult counsel and other competent
advisers 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 Contract Owners, 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 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 overall 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 not taxable until benefits are
received either in the form of annuity payments 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.
Distributions are subject to certain restrictions.
B-4
<PAGE>
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 prior to 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 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 age
59 1/2, 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 payments made
prior to 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. Purchasers of the Contracts for 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 Individual Retirement Annuity (IRA). An individual
may make an annual IRA contribution of up to the lesser of $2,000 ($2,250 if
IRAs are maintained for both the individual and his nonworking spouse) or 100%
of compensation. However, IRA contributions may be nondeductible in whole or
in part if (1) the individual or his spouse is an active participant in certain
other retirement programs and (2) the income of the individual (or of the
individual and his spouse) exceeds a specified amount. Distributions from
certain other IRA plans or qualified plans may be "rolled over" to an IRA on a
tax deferred basis without regard to the limit on contributions, provided
certain requirements are met. Distributions from IRAs are subject to certain
restrictions. Deductible IRA contributions and all IRA earnings will be taxed
as ordinary income when distributed. The failure to satisfy certain Code
requirements with respect to an IRA may result in adverse tax consequences.
DEFERRED COMPENSATION PLANS (457 PLANS)
Under the Code provisions, employees and independent contractors
performing services for state and local governments or tax-exempt organizations
may establish deferred compensation plans with a governmental employer or
tax-exempt organization. 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 such employer's 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 limited circumstances, up to $15,000 may be deferred in each of the
last three years before retirement. Deferred compensation plans of tax-exempt
employers must also comply with the requirements of Section 457.
SIMPLIFIED EMPLOYEE PENSION PLANS
An employer may make contributions on behalf of employees to a
simplified pension plan 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. Any distribution
before the employee attains age 59 1/2 (except in the event of death or
disability) or the failure to satisfy certain other Code requirements may result
in adverse tax consequences.
TAXATION OF DISTRIBUTIONS FROM QUALIFIED CONTRACTS
The following rules generally apply to distributions from contracts
purchased in connection with the plans discussed above, other than governmental
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
his "investment in the contract." If a distribution is made in the form of
annuity payments, the employee's "investment in the contract" (adjusted for
certain refund provisions) divided by his life expectancy (or other period for
which annuity payments are expected to be made) constitutes a tax-free return
of capital each year. The dollar amount of annuity payments 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 his investment in the contract. For amounts
distributed after 1986, rules generally provide that all distributions 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.)
B-5
<PAGE>
If a surrender of or withdrawal from the contract is effected and a
distribution is made in a single payment, 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) will be taxed as ordinary
income in the year of receipt.
Distributions from qualified plans, 403(b) plans and IRAs will be
subject to (1) a 10% penalty tax if made before age 59 1/2 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. 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 his
beneficiary generally follow 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 payments. The estate tax exclusion
previously afforded benefits from certain plans was generally repealed with
respect to persons dying after 1984.
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 Contract Owner dies on or after the annuity
starting date but prior to the time the entire interest in the Contract has
been distributed, the remaining portion of such interest must be distributed,
at least as rapidly as under the method of distribution in effect at the time
of the Contract Owner's death; and (B) if any Contract Owner dies prior to the
annuity starting date, the entire interest must be distributed within five
years after the death of the Contract Owner. These requirements are considered
satisfied if any portion of the Contract Owner'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 Contract Owner's death. The "designated beneficiary" is the person
designated by the Contract Owner as a beneficiary and to whom Contract
ownership passes by reason of death, and must be a natural person. However, if
the recipient of the proceeds is the surviving spouse of the Contract Owner,
the Contract may be continued in the name of such surviving spouse as the
Contract Owner. Contracts issued after January 18, 1985 contain provisions
intended to comply with these Code requirements, although regulations
interpreting these requirements have not yet been issued. The Company 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.
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. Before an investment is made in any of the above plans, a
tax adviser should be consulted.
OTHER SERVICES
CUSTODIAN
The Custodian for the securities purchased by the Eligible Funds is
Bankers Trust Company, 14 Wall Street, 4th Floor, New York, New York 10005.
Custodian will perform those functions outlined in the Prospectus.
INDEPENDENT AUDITORS
The financial statements of the Fund and the consolidated financial
statements and schedules of the Company, which have been included in this
Statement of Additional Information, and the Per-Accumulation-Unit Income and
Capital Changes Table appearing in the Prospectus, have been audited by Ernst &
Young LLP, 2300 Fort Wayne National Bank Building, Fort Wayne, Indiana 46802,
independent auditors, as set forth in their reports thereon appearing elsewhere
herein and in the Registration Statement, and are included 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 Fund are maintained by the Company. No separate charge
against the assets of the Fund is made by the Company for this service.
UNDERWRITERS
The Company is the principal underwriter for the variable annuity
contracts. The offering of the Contracts is continuous. The Company retains no
underwriting commissions from the sale of the variable annuity contracts.
DETERMINATION OF NET ASSET VALUE
A description of the days on which the Fund'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 it
will be closed on New Years 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.
B-6
<PAGE>
FINANCIAL STATEMENTS
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends ............................................ $ 2,451,414
Interest ............................................. 158,447
-----------
2,609,861
EXPENSES:
Investment management services ....................... $ 288,545
Mortality and expense guarantees ..................... 848,264 1,136,809
----------- -----------
NET INVESTMENT INCOME 1,473,052
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments ..................... 9,013,278
Increase in net unrealized appreciation of investments 17,280,315
-----------
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS 26,293,593
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $27,766,645
===========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31
1995 1994
----------- -----------
<S> <C> <C>
CHANGES FROM OPERATIONS:
Net investment income ................................ $ 1,473,052 $ 1,480,481
Net realized gain on investments ..................... 9,013,278 7,201,941
Increase (decrease) in net unrealized appreciation
of investments ..................................... 17,280,315 (7,661,756)
------------ -----------
NET INCREASE IN NET
ASSETS RESULTING FROM OPERATIONS 27,766,645 1,020,666
NET DECREASE FROM EQUITY TRANSACTIONS .................. (2,346,263) (12,355,642)
------------ -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 25,420,382 (11,334,976)
NET ASSETS AT BEGINNING OF YEAR ........................ 78,534,268 89,869,244
------------ -----------
NET ASSETS AT END OF YEAR $103,954,650 $78,534,268
============ ===========
</TABLE>
See accompanying notes to financial statements.
B-7
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PERCENT NUMBER
OF OF MARKET
NET ASSETS SHARES VALUE
---------- ------ ------
<S> <C> <C> <C>
INVESTMENTS
COMMON STOCKS:
AEROSPACE: ................................................ 1.3%
McDonnell Douglas Corporation ........................... 14,500 $ 1,334,000
AIR TRANSPORTATION:........................................ 0.4
AMR Corp.*............................................... 5,200 386,100
BANKING AND INSURANCE: .................................... 10.5
AllState Corp............................................ 22,080 908,040
American General Corp.................................... 38,200 1,332,225
Bank of Boston Corp...................................... 28,300 1,308,875
Bank of New York Inc..................................... 29,400 1,433,250
Chemical Banking Corp.................................... 25,800 1,515,750
Cigna Corp............................................... 13,200 1,362,900
First Chicago NBD Corp................................... 39,639 1,565,741
NationsBank Corp......................................... 10,300 717,137
Transamerica Corp........................................ 5,500 400,812
Travelers Inc............................................ 5,700 358,388
----------
10,903,118
BROADCASTING:.............................................. 1.1
Capital Cities ABC Inc................................... 3,000 370,125
King World Productions Inc.*............................. 19,200 746,400
----------
1,116,525
BUILDING MATERIALS:........................................ 1.3
Armstrong World Industries Inc........................... 14,100 874,200
Dover Corp............................................... 6,500 239,688
Parker Hannifin Corp..................................... 7,500 256,875
----------
1,370,763
CHEMICALS:................................................. 3.0
Dow Chemical Co.......................................... 8,600 605,225
Du Pont E I De Nemours & Co.............................. 10,100 705,738
Eastman Chemical Co...................................... 7,700 482,212
Olin Corp................................................ 10,300 764,775
Union Carbide Corp....................................... 13,800 517,500
----------
3,075,450
CONSUMER PRODUCTS AND SERVICES:............................ 6.5
American Brands Inc...................................... 16,500 736,312
Black & Decker Corp...................................... 8,000 282,000
Omnicom Group Inc........................................ 28,400 1,057,900
Philip Morris Co. Inc.................................... 32,200 2,914,100
Procter & Gamble Co...................................... 21,600 1,792,800
----------
6,783,112
DRUG AND HOSPITAL SUPPLIES:................................ 8.0
Baxter International Inc................................. 35,600 1,490,750
Bristol Myers Squibb Co.................................. 25,800 2,215,575
Lilly (Eli) & Co......................................... 22,400 1,260,000
Merck & Co. Inc.......................................... 4,300 282,725
Pharmacia & Upjohn Inc.*................................. 37,190 1,441,113
Schering-Plough Corp..................................... 30,000 1,642,500
----------
8,332,663
ELECTRICAL AND ELECTRONICS:................................ 8.6
Alliance Semiconductor Corp.*............................ 32,400 376,650
Applied Materials Inc.*.................................. 34,700 1,366,313
Arrow Electronics Inc.*.................................. 3,500 150,938
Avnet Inc................................................ 4,200 187,950
General Electric Co...................................... 39,400 2,836,800
Harris Corp.............................................. 13,800 753,825
Micron Technology Inc.................................... 10,700 423,987
Read Rite Corp*.......................................... 34,500 802,125
Teradyne Inc.*........................................... 38,800 970,000
Texas Instruments Inc.................................... 5,500 284,625
TRW Inc.................................................. 10,100 782,750
----------
8,935,963
ENTERTAINMENT:............................................. 1.5
Mattel Inc............................................... 12,787 393,200
Mirage Resorts Inc.*..................................... 35,100 1,210,950
----------
1,604,150
</TABLE>
B-8
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
STATEMENT OF NET ASSETS-CONTINUED
<TABLE>
<CAPTION>
PERCENT NUMBER
OF OF MARKET
NET ASSETS SHARES VALUE
---------- ------ --------------
<S> <C> <C> <C>
FINANCE: .................................................. 1.1%
Household International Inc. .......................... 18,600 $ 1,099,725
FOOD AND BEVERAGE: ........................................ 6.8
Campbell Soup Company ................................. 12,200 732,000
Coca Cola Co. ......................................... 24,400 1,811,700
ConAgra Inc. .......................................... 14,000 577,500
CPC International Inc. ................................ 7,400 507,825
Heinz H. J. Co. ....................................... 9,450 313,031
IBP Inc. .............................................. 21,200 1,070,600
RJR Nabisco Holdings Corp. ............................ 16,600 512,525
Safeway Inc.* ......................................... 28,300 1,457,450
Universal Foods Corp. ................................. 1,600 64,200
--------------
7,046,831
MACHINERY & ENGINEERING: .................................. 1.5
Novellus Systems Inc.* ................................ 21,800 1,177,200
Outboard Marine Corp. ................................. 17,300 352,487
--------------
1,529,687
METALS AND MINING: ........................................ 1.7
ASARCO Inc. ........................................... 16,600 531,200
Cleveland-Cliffs Inc. ................................. 900 36,900
Phelps Dodge Corp. .................................... 18,900 1,176,525
--------------
1,744,625
MOTOR VEHICLES AND EQUIPMENT: ............................. 2.7
Eaton Corp. ........................................... 18,300 981,338
Ford Motor Co. ........................................ 31,800 922,200
Goodrich BF Co. ....................................... 8,900 606,312
Navistar International Corp.* ......................... 30,900 324,450
--------------
2,834,300
OFFICE AND BUSINESS EQUIPMENT AND SERVICES: ............... 6.1
Adaptec Inc. * ......................................... 9,700 397,700
Cadence Design Systems Inc. * .......................... 26,250 1,102,500
Cisco Systems Inc. * ................................... 9,700 723,863
Computer Associates International Inc. ................. 5,800 329,875
Dell Computer Corp. * .................................. 27,700 959,112
Digital Equipment Corp.* ............................... 3,200 205,200
Mentor Graphics Corp. * ................................ 11,900 217,175
Reynolds & Reynolds Co. ................................ 4,200 163,275
Seagate Technology * ................................... 18,100 859,750
Sun Microsystems, Inc * ................................ 31,000 1,414,375
--------------
6,372,825
PAPER: .................................................... 1.5
Avery Dennison Corp. .................................. 11,100 556,388
Bowater Inc. .......................................... 14,300 507,650
Stone Container Corp. ................................. 23,400 336,375
Union Camp Corp. ...................................... 4,700 223,837
--------------
1,624,250
PETROLEUM AND PETROLEUM RELATED: .......................... 9.7
Amoco Corp. ........................................... 10,100 725,938
Atlantic Richfield Co. ................................ 8,600 952,450
Exxon Corp. ........................................... 34,900 2,796,362
Halliburton Co. ....................................... 21,100 1,068,187
Lyondell Petrochemical Co. ............................ 36,600 837,225
Mobil Corp. ........................................... 10,600 1,187,200
Occidental Petroleum Corp. ............................ 17,200 367,650
Royal Dutch Petroleum Co. ............................. 13,600 1,919,300
Williams Companies Inc. ............................... 5,100 223,763
--------------
10,078,075
PRINTING AND PUBLISHING: .................................. 0.4
New York Times Co. .................................... 15,200 450,300
PUBLIC UTILITIES: ......................................... 4.3
Consolidated Edison Co. ............................... 42,700 1,366,400
General Public Utilities Corp. ........................ 14,700 499,800
Northeast Utilities ................................... 47,400 1,155,375
Ohio Edison Co. ....................................... 32,100 754,350
SCE Corp. ............................................. 19,100 339,025
Unicom Corp. .......................................... 10,600 347,150
--------------
4,462,100
RAILROADS: ................................................ 1.3
Conrail Inc. .......................................... 3,500 245,000
Illinois Central Corp. ................................ 29,600 1,135,900
--------------
1,380,900
</TABLE>
B-9
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
STATEMENT OF NET ASSETS - CONTINUED
<TABLE>
<CAPTION>
PERCENT NUMBER
OF OF MARKET
NET ASSETS SHARES VALUE
---------- ------ ------
<S> <C> <C> <C>
RETAIL: ................................................... 4.4%
Eckerd Corp.* ........................................... 3,600 $ 160,650
Jostens Inc. ............................................ 43,000 1,042,750
Kroger Co.* ............................................. 37,100 1,391,250
Sears, Roebuck & Co. .................................... 12,600 491,400
Staples Inc.* ........................................... 33,050 805,594
Waban Inc.* ............................................. 33,700 631,875
------------
4,523,519
SECURITIES DEALERS: ....................................... 1.3
Bear, Stearns & Co. Inc. ................................ 42,100 836,737
Dean Witter Discover & Co. .............................. 11,300 531,100
------------
1,367,837
SHOES: .................................................... 0.8
Nike Inc. ............................................... 11,600 807,650
SOAPS, CLEANER AND COSMETICS: ............................. 1.7
Clorox Co. .............................................. 7,300 522,863
Colgate-Palmolive Co. ................................... 17,750 1,246,937
------------
1,769,800
TELECOMMUNICATIONS: ....................................... 8.8
American Telephone & Telegraph Co. ...................... 28,700 1,858,325
Ameritech Corp. ......................................... 33,500 1,976,500
Bellsouth Corp. ......................................... 50,600 2,201,100
Comsat Corp. ............................................ 2,000 37,250
Pacific Telesis Group ................................... 46,600 1,566,925
<r/>
Sprint Corp. ............................................ 38,600 1,539,175
------------
9,179,275
TRANSPORTATION: ........................................... 0.7
PHH Corp. ............................................... 14,800 691,900
----- ------------
TOTAL COMMON STOCKS
(Cost-$74,527,710) 97.0 100,805,443
PAR
AMOUNT
------
COMMERCIAL PAPER:
(Cost-$2,300,000)
Morgan Stanley Group, Inc.
6.05%, 1/2/96 ......................................... 2.2 $2,300,000 2,300,000
----- ------------
TOTAL INVESTMENTS
(Cost-$76,827,710) 99.2 103,105,443
Excess of other assets over liabilities 0.8 849,207
----- ------------
NET ASSETS 100.0% $103,954,650
===== ============
Net assets are represented by:
Value of accumulation units:
9,568,929 units at $9.874 unit value $ 94,487,611
Annuity reserves:
323,677 units at $9.874 unit value 3,196,126
507,356 units at $12.360 unit value 6,270,913
------- ------------
831,033 9,467,039
======= ------------
$103,954,650
============
</TABLE>
*Non-income producing
See accompanying notes to financial statements.
B-10
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. SIGNIFICANT ACCOUNTING POLICIES
The Fund: Lincoln National Variable Annuity Fund A (Fund) is a segregated
investment account of The Lincoln National Life Insurance Company. The Fund is
registered under the Investment Company Act of 1940, as amended, as an
open-end, diversified management investment company. The Fund's investment
objective is to maximize long-term growth of capital. The Fund invests
primarily in equity securities diversified over industries and companies.
Investments: Security transactions are accounted for on the date the securities
are purchased or sold. Stocks are valued at the closing sales prices for those
traded on a national stock exchange and the mean between the quoted bid and
asked prices for those traded over-the-counter. Short-term investments are
stated at cost which approximates market. The cost of investments sold is
determined using the specific identification method.
Federal Income Taxes: Operations of the Fund form a part of, and are taxed with,
operations of The Lincoln National Life Insurance Company, which is taxed as a
"life insurance company" under the Internal Revenue Code. Under current law, no
federal income taxes are payable with respect to the investment income and
gains on investments of the Fund. Accordingly, no provision for any such
liability has been made.
Income: Dividends are recorded as earned on the ex-dividend date and interest
is accrued as earned.
Annuity Reserves: Reserves on contracts not involving life contingencies are
calculated using assumed investment rates of 3.5%, 4.5%, 5%, or 6%. Reserves
on contracts involving life contingencies are calculated using the Progressive
Annuity Table with the age adjusted for persons born before 1900 or after 1919
and assumed investment rates of 3.5%, 4.5%, 5%, or 6%.
2. INVESTMENTS
The aggregate cost of investments purchased and the aggregate proceeds from
investments sold (exclusive of short-term investments) during 1995 amounted to
$42,219,230 and $52,568,232, respectively.
3. EXPENSES AND SALES CHARGES
Amounts are paid to The Lincoln National Life Insurance Company for investment
management services at the rate of .000885% of the current value of the Fund
per day (.323% on an annual basis) and for mortality and expense guarantees at
the rate of .002745% of the current value of the Fund per day (1.002% on an
annual basis). In addition, The Lincoln National Life Insurance Company
retained from the proceeds of the sale of annuity contracts $12,796 during 1995
for sales and administrative charges. Accordingly, The Lincoln National Life
Insurance Company is responsible for all sales, general, and administrative
expenses applicable to the Fund.
The custodian bank of the Fund has agreed to waive its custodial fees when the
Fund maintains a prescribed amount of cash on deposit in certain non-interest
bearing accounts. For the year ended December 31, 1995, the custodial fee
offset arrangement was not material to either total expenses or to the
calculation of average net assets and the ratio of expenses to average net
assets.
4. NET ASSETS
Net assets at December 31, 1995 consisted of the following:
<TABLE>
<S> <C>
Equity transactions $(127,720,344)
Accumulated net investment income 71,088,233
Accumulated net realized gain on investments 136,227,432
Net unrealized appreciation of investments 24,359,329
-------------
$ 103,954,650
=============
<r/>
</TABLE>
B-11
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
NOTES TO FINANCIAL STATEMENTS--CONTINUED
5. MERGER
Effective October 4, 1995, an Agreement and Plan of Reorganization was executed
to merge the Lincoln National Variable Annuity Fund B (Fund B), a segregated
investment account of the Lincoln National Life Insurance Company, into the
Fund. The merger received approval of regulators and contract owners of the
Fund and Fund B at a special meeting on August 1, 1995. The merger was
accomplished by a tax-free exchange of 763,488 accumulation units and 82,501
annuity reserve units of the Fund for all of the 897,517 accumulation units and
96,984 annuity reserve units of Fund B outstanding on the date of exchange.
Fund B's net assets at the merger date of $7,931,344, including unrealized
appreciation on investments of $1,918,404, were combined with those of the
Fund, whose net assets prior to the merger were $92,566,438. The statements of
operations and changes in net assets have not been restated for Fund B's
operations prior to the merger date. For the period January 1, 1995 to October
4, 1995, Fund B had net investment income of $88,334 and net realized and
unrealized gains of $1,864,313.
6. SUMMARY OF CHANGES IN EQUITY TRANSACTIONS
<TABLE>
<CAPTION>
1995 1994
-------------------------------- -------------------------------
Units Amount Units Amount
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Accumulation Units:
Balance at beginning of year ... 9,907,664 $(121,421,039) 11,538,380 $(109,744,849)
Contract purchases ............ 84,706 701,434 118,031 997,597
<r/>
Issued in connection with merger
of Fund B ..................... 763,488 7,157,877 - -
Terminated contracts .......... (1,186,928) (10,307,468) (1,748,747) (12,673,787)
---------- ------------- ---------- -------------
BALANCE AT END OF YEAR 9,568,929 $(123,869,196) 9,907,664 $(121,421,039)
========== ============= ========== =============
Annuity Reserves:
Balance at beginning of year .. 862,789 $ (3,953,042) 945,353 $ (3,273,590)
Annuity payments .............. (144,037) (1,077,169) (103,958) (853,903)
Issued in connection with merger
of Fund B ..................... 82,501 773,467 - -
Receipt of guarantee mortality
adjustments ................... 29,780 405,596 21,394 174,451
---------- ------------- ---------- -------------
BALANCE AT END OF YEAR 831,033 $ (3,851,148) 862,789 $ (3,953,042)
========== ============= ========== =============
</TABLE>
B-12
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Managers and Contract Owners
Lincoln National Variable Annuity Fund A
We have audited the accompanying statement of net assets of Lincoln National
Variable Annuity Fund A as of December 31, 1995, the related statement of
operations for the year then ended, and the statements of changes in net
assets for each of the two years in the period then ended. These financial
statements are the responsibility of the Fund'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 the Lincoln National Variable
Annuity Fund A 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.
We have also previously audited, in accordance with generally accepted auditing
standards, the financial statements for each of the nine years in the period
ended December 31, 1994 (none of which are presented herein, except for the
statement of changes in net assets for the year ended December 31, 1994); and we
expressed unqualified opinions on those financial statements. In our opinion,
the per-accumulation-unit income and capital changes table for each of the ten
years in the period ended December 31, 1995, appearing on page 5 of the
Prospectus, is fairly stated in all material respects in relation to the
financial statements from which it has been derived.
/S/ERNST & YOUNG LLP
Fort Wayne, Indiana
February 12, 1996
B-13
<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>
