<PAGE>
As filed with the Securities and Exchange Commission on April 30, 1997
Registration No. 2-25618
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 52 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 28 [X]
LINCOLN NATIONAL VARIABLE ANNUITY FUND A (GROUP)
-------------------------
[Exact Name of Registrant]
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
-------------------------
[Name of Insurance Company]
1300 South Clinton Street, P.O. Box 1110, Fort Wayne, Indiana 46801
-------------------------
(Address of Insurance Company's Principal Executive Offices) (Zip Code)
Insurance Company`s Telephone Number, including Area Code (219)455-2000
-------------------------
Jack D. Hunter, Esq.
The Lincoln National Life Insurance Company
200 East Berry Street
Fort Wayne, Indiana 46802
(Name and Address of Agent for Service)
Copy to:
Mark L. Lezell
Porter, Wright, Morris & Arthur
1667 K Street, NW, Suite 1100
Washington, DC 20006-1605
-------------------------
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b) of Rule 485
- ---------
X on 4/30/97 pursuant to paragraph (b) of Rule 485
- ---------
60 days after filing pursuant to paragraph (a)(i) of Rule 485
- ---------
on pursuant to paragraph (a)(i) of Rule 485
- ---------
75 days after filing pursuant to paragraph (a)(ii) of Rule 485
- ---------
on pursuant to paragraph (a)(ii) of Rule 485.
- ---------
If appropriate, check the following box:
this Post-Effective Amendment designates a
- --------- new effective date for a previously filed Post-Effective Amendment.
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A (GROUP)
POST-EFFECTIVE AMENDMENT NO. 52 ON FORM N-3
CROSS REFERENCE SHEET
N-3 Item Description Per Form N-3 Caption in the Prospectus (Part A)
- -------- ------------------------ ----------------------------------
1. Cover Page Cover Page
2. Definitions Special Terms
3. Synopsis Expense Table; Synopsis
4. Condensed Financial
Information
(a) Per-Unit Table Lincoln National Variable Annuity
Fund A Per-Accumulation-Unit
Income and Capital Changes
(b) Senior Securities Not Applicable
(c) Money Market Accounts Not Applicable
(d) Financial Statements Financial Statements
5. General Description of
Registrant and Insurance
Company
(a) Insurance Company The Company
(b Registrant The Fund
(c) Investment Objectives Investment Objectives and
and Policies of Registrant Policies of the Fund
(d) Lesser Investment Investment Objectives and
Policies of the Fund
(e) Principal Risk Factors Investment Objectives and
Policies of the Fund; The
Variable Annuity Contracts
6. Management
(a) Board of Managers The Fund
(b) Investment Adviser Investment Management
(c) Other Management Not Applicable
Services
(d) Certain Practices Not Applicable
7. Deductions and Expenses
(a) Describe Deductions Charges and Deductions;
Synopsis
(b) Sales Load Charges and Deductions;
Synopsis
(c) Special Purchase Plans Charges and Deductions;
Synopsis
(d) Dealer Commissions Not Applicable
(e) Registrant's Expenses [See Response to Item 4(a)]
(f) Alternate Compensation Not Applicable
to Investment Adviser
(g) Organizational Expenses Not Applicable
of Registrant
8. General Description of
Variable Annuity Contract
(a) Persons Having Material The Variable Annuity
Rights Contracts; Voting Rights
(b) Sub-Accounts Not Applicable
(c) Changes in Contract The Variable Annuity
or Operations Contracts; Voting Rights
(d) Contract Owner Inquiries The Variable Annuity Contracts
<PAGE>
9. Annuity Period
(a) Material Factors Accumulation Period; Annuity
Period; Fund Valuation Procedure
(b) Annuity Commencement Annuity Period
Date
(c) Payment Frequency and Annuity Period
Duration
(d) Assumed Investment Annuity Period
Return
(e) Minimum Annuity Payment Annuity Period
(f) Changes After Annuity Period
Annuitization
10. Death Benefit
(a) Calculation Accumulation Period
(b) Forms of the Benefit Accumulation Period
11. Purchases and Contract
Value
(a) Procedures for The Variable Annuity Contracts;
Purchasing Contract Accumulation Period
(b) Factors Affecting Accumulation Period; Fund
Accumulation Unit Valuation Procedure
Value
(c) Asset Valuation Method Fund Valuation Procedure
(d) When Accumulation Accumulation Period
Units Are Credited
(e) Principal Underwriter Not Applicable
12. Redemptions
(a) How to Redeem Accumulation Period; Synopsis
(b) O.R.P. Accumulation Period
(c) Delay in Redemption Accumulation Period
(d) Involuntary Redemptions Annuity Period
(e) Revocation Right Synopsis
(f) Redemption in Kind Not Applicable
13. Taxes Federal Tax Status
14. Legal Proceedings Not Applicable
15. Table of Contents of the Table of Contents of The State-
Statement of Additional ment of Additional Information
Information (SAI)
16. Cover Page Cover Page
17. Table of Contents Table of Contents
18. General Information
and History
(a) Insurance Company Name Not Applicable
Change; Suspension of
Sale
(b) Assets in the Sub- Not Applicable
Account
(c) Indirect Control General Information and
History of The Lincoln National
Life Insurance Company
19. Investment Objectives Investment Objectives and
and Policies Policies of the Fund
[refers back to full disclosure]
20. Management Management
21. Investment Advisory
and Other Services
(a) Control Relationship-- Investment Advisory and
Investment Adviser Related Services [refers back to
the Company and Investment Manage-
ment, in the Prospectus]; General
<PAGE>
Information and History
of The Lincoln National Life Insurance
Company
(b) Services from Investment Advisory and Other
Investment Adviser Services [refers back to Invest-
ment Management, in the Prospec-
tus]
21.
(c) Payment of Costs, Fees Not Applicable
(d) Management-Related Not Applicable
Services
(e) Other Investment Advice Not Applicable
(f) Distribution Expenses Not Applicable
(g) Custodian Other Services
(h) Other Holder of Port- Not Applicable
folio Securities
(i) Affiliated Administrator Management
22. Brokerage Allocation
(a) Brokerage Commissions Brokerage Allocation
(b) Affiliated Broker Not Applicable
(c) Broker Selection Brokerage Allocation
(d) Research Services Not Applicable
(e) Purchase of Securities Not Applicable
23. Purchase and Pricing
of Securities Being
Offered
(a) How Securities are Purchase and Pricing of Securities Offered
Being offered [See Synopsis and
The Variable Annuity Contracts,
in the Prospectus]
(b) Calculation of See Charges and Deductions,
Sales Load in the Prospectus
(c) Valuation Purchase and Pricing of
Securities Being Offered
(d) Crediting Purchase See Accumulation Period,
Payment in the Prospectus
(e) Redemption In Kind Not Applicable
24. Underwriters
(a)-
(c) Underwriters
(d) Payments to Unaffili- Not Applicable
ated Underwriter
25. Calculation of Yield Not Applicable
Quotations of Money
Market Sub-Accounts
26. Annuity Payments Purchase and Pricing of
Securities Being Offered
27. Financial Statements Financial Statements
<PAGE>
LINCOLN NATIONAL
VARIABLE ANNUITY
FUND A (Group)
1300 South Clinton Street, Fort Wayne, Indiana 46802
Telephone: 1-800-348-1212
GROUP VARIABLE ANNUITY CONTRACTS
ISSUED BY:
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
The group 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 ("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, 1997, HAS BEEN INCORPORATED BY REFERENCE INTO THIS PROSPECTUS AND
WILL BE PROVIDED ON REQUEST AND WITHOUT CHARGE. WRITE ANNUITIES CUSTOMER
SERVICE, THE LINCOLN NATIONAL LIFE INSURANCE COMPANY, P.O. BOX 2340, FORT
WAYNE, INDIANA 46801, OR CALL 1-800-348-1212. A TABLE OF CONTENTS FOR THE SAI
APPEARS ON THE LAST PAGE OF THIS PROSPECTUS.
---------
THIS PROSPECTUS IS DATED APRIL 30, 1997
PR-AG
<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................................................................... 6
Investment Objectives and Policies of the Fund............................. 6
Charges and Deductions..................................................... 7
Investment Management...................................................... 9
The Variable Annuity Contracts............................................. 10
Accumulation Period........................................................ 11
Annuity Period............................................................. 13
Fund Valuation Procedure................................................... 16
Federal Tax Status......................................................... 17
Voting Rights.............................................................. 18
Other Annuity Contracts.................................................... 19
Custodian.................................................................. 19
State Regulation........................................................... 19
Table of Contents of the Statement of Additional Information (SAI)......... 19
</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 or 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 for the
variable side of the contract 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.
PR-AG
2
<PAGE>
EXPENSE TABLE
CONTRACT OWNER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
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 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>
EXAMPLE*
<TABLE>
<CAPTION>
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.
PR-AG
3
<PAGE>
SYNOPSIS
WHAT ARE THE VARIABLE ANNUITIES BEING OFFERED?
The variable annuity contracts offered by this prospectus are of two 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.
REDEMPTION OR REPURCHASE PRICE
Payments upon redemption will be made at the value of the account without any
charge. (See Accumulation Period, below.)
PR-AG
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
derived from the financial statements of Lincoln National Variable Annuity
Fund A which have 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>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income....... $ .267 $ .251 $ .217 $ .204 $ .206 $ .181 $ .146 $ .183 $ .150 $ .130
Expenses................ .139 .114 .095 .090 .083 .076 .064 .062 .053 .055
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income... .128 .137 .122 .114 .123 .105 .082 .121 .097 .075
Net realized and
unrealized gain (loss)
on investments......... 1.735 2.539 (.040) .522 (.099) 1.402 (.102) .786 .266 .156
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Increase (decrease) in
accumulation unit
value.................. 1.863 2.676 .082 .636 .024 1.507 (.020) .907 .363 .241
Accumulation unit value
at beginning of year... 9.874 7.198 7.116 6.480 6.456 4.949 4.969 4.062 3.699 3.458
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
ACCUMULATION UNIT VALUE
AT END OF YEAR........ $11.737 $9.874 $7.198 $7.116 $6.480 $6.456 $4.949 $4.969 $4.062 $3.699
======= ====== ====== ====== ====== ====== ====== ====== ====== ======
RATIOS
Ratio of expenses to
average net assets..... 1.28% 1.28% 1.27% 1.27% 1.27% 1.27% 1.28% 1.28% 1.28% 1.30%
Ratio of net investment
income to average net
assets................. 1.17% 1.65% 1.75% 1.72% 2.01% 1.85% 1.72% 2.63% 2.49% 1.82%
Portfolio turnover rate. 49.94% 48.95% 64.09% 49.90% 70.97% 36.99% 59.57% 201.20% 178.95% 146.44%
Number of accumulation
units outstanding at
end of year (expressed
in thousands).......... 8,462 9,569 9,908 11,538 12,742 14,185 16,554 19,522 22,564 26,247
</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 one of this Prospectus.
THE COMPANY
Lincoln Life was founded in 1905 and is organized under Indiana law. We are
one of the largest stock life insurance companies in the United States. We are
owned by Lincoln National Corp. (LNC) which is also organized under Indiana
law. LNC's primary businesses are insurance and financial services. 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.
PR-AG
5
<PAGE>
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) 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
also otherwise interested persons of the Company as the term "interested
persons" is defined in the 1940 Act. Members of the Board of Managers are also
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; 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 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.
PR-AG
6
<PAGE>
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.
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. See
the Fund's portfolio turnover rates set forth in the Per-Accumulation-Unit
Income And Capital Changes Table.) The securities markets in general have
experienced volatility 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
1996 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.
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.
PR-AG
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With respect to the regular Group Variable Annuity Contract, 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. With respect to the Group Variable Annuity Deposit
Administration Contract, 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 of the
payments made in the first 14 contract years immediately following the first
contract year, as long as the payment in any of those 14 years is no more than
twice the original payment. The excess will be charged at the higher rate. For
both types of contracts, the deduction for sales and administrative expenses
may be decreased by the application of experience rating credits.
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 $12,259 in 1996, $12,796
in 1995 and $14,573 in 1994.
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;
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 rating 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 one of two
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 1996, 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.)
PR-AG
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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 4.0% (.04) 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 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.
By the terms of the variable annuity contracts, all periodic deductions and
annuity rates are subject to certain modifications by the Company. (See The
Variable Annuity Contracts, below.) However, in the case of deductions for
investment advisory services, such deductions may only be modified by a
majority vote of Contract Owners.
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
$345,624 in 1996, $288,545 in 1995 and $272,740 in 1994.
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.
PR-AG
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<PAGE>
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.
PURCHASE OF CONTRACTS
Two types of Group Variable Annuity Contracts are covered by this prospectus:
1. Under the regular Group Variable Annuity Contract, payments are allocated
to the accounts of individual Participants. Each Participant under the regular
Group Variable Annuity Contract receives a certificate which summarizes the
provisions of the group contract and evidences participation.
2. The Group Variable Annuity Deposit Administration Contract is designed for
use with defined benefit pension plans and defined benefit H.R.-10 plans.
In each case, the group contract is issued to the Contract Owner. The
payments are added to a single account for the contract.
Persons wishing to become Participants under a group contract must complete
application forms to be forwarded to the Home Office of the Company for its
acceptance. Upon acceptance, certificates are prepared and forwarded to the
Participant.
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 sections.
MODIFICATION OF CONTRACT
The variable annuity contract cannot be modified by the Company except with
approval of the Contract Owner (which is the employer or a trustee in the case
of group variable annuity contracts) until it has been in force for at least
three years. Further, no modifications can affect retired Participants in any
manner without their written consent, unless such modification is deemed by
the Company to be necessary to give the Contract Owner or Participants the
benefit of federal or state statutes or Treasury Department rules or
regulations. Moreover, under the regular Group Variable Annuity Contract, the
annuity rate promise, expense promise, and the deductions applicable at the
time of a Participant's entry into the plan will continue to apply for all
purchase payments made on his or her behalf, up to a maximum payment in any
year equal to 200% of the amount paid in the first year of participation. The
portion of the purchase payments in excess of such maximum will receive the
benefit of the promises applicable to new entrants into the plan in the year
such excess is first received by the Company, and these promises will continue
to apply if the increased payment is continuously made.
Under the Group Variable Annuity Deposit Administration Contract, the annuity
rate promise, expense promise and the deductions applicable at issue will
continue to apply for all payments made during the first 15 contract years up
to a maximum payment in any year equal to 200% of the amount paid in the first
contract year. The portion of the purchase payments in excess of such maximum
will receive the benefit of the promises applicable to new contracts in the
year such excess is first received by the Company and these promises will
continue to apply if the increased payment is continuously made during the
first 15 contract years. The Company has not found it necessary in the past to
change the annuity rate promise, expense promise, or the deductions applicable
at the time of a Participant's entry into the plan.
Notwithstanding the above, the Company reserves the right to unilaterally
modify this variable annuity contract to comply with federal and state laws.
ASSIGNMENT
Unless contrary to applicable law, assignment of variable annuity contracts
or participant's individual accounts thereunder is prohibited.
PR-AG
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PURCHASE LIMITS
Normally, under a periodic payment contract, the minimum amount of any
scheduled purchase payment is $25 per Participant and the scheduled purchase
payments must total at least $600 per year per Participant. Normally, under a
single payment contract, the minimum payment is $5,000 for any one
Participant.
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
Under the regular Group Variable Annuity Contract, the purchase payments made
with respect to a Participant, less deductions, are credited to the account of
the Participant in the form of Accumulation Units. Under the Group Variable
Annuity Deposit Administration Contract, net payments are credited to the
account of the Contract Owner. The number of Accumulation Units credited to an
account 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 Participant's
Individual 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.
PR-AG
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VALUE OF PARTICIPANT'S ACCOUNT
The value of a Participant's individual account at any time prior to the
commencement of annuity payments or the value of a Contract Owner's account
can be computed by multiplying the total number of Accumulation Units by the
current Accumulation Unit value. The Participant bears the investment risk,
that is, the risk that market values may decline. There is no assurance that
the value of the Participant's individual account will equal or exceed the
payments made on his or her behalf. Each Participant 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 the account.
DEATH BENEFIT BEFORE RETIREMENT
If the Annuitant dies prior to the commencement of benefit payments, death
proceeds payable will be the value of the person'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 minimum death benefit coverage has been elected, the variable annuity
contract will contain a promise that in the event of the death of the
Participant prior to the commencement of benefit payments, death proceeds
payable will be the greater of (a) the value of the Participant's account
determined as of the valuation next following receipt of written notice of
death by the Company or (b) in the event of such death prior to the
Participant's 65th birthday, 100% of the total purchase payments made on
behalf of the Participant minus a proportionate reduction for any partial
withdrawals of the value of the Participant's account. Payment of death
proceeds will be made within seven days of receipt of such notice.
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.
SURRENDER OF CONTRACT
The Contract Owner, if the plan so provides, has the right to surrender in
whole or in part at any time prior to the commencement of the annuity period.
The Contract Owner must submit a written request for surrender to the
Company's Home Office. The Contract Owner will receive the value of that
portion of the account surrendered computed as of the valuation time
coincident with or next following the date of surrender, and payment will be
made within seven days after the date of surrender. (For federal income tax
consequences of a surrender for cash, see Federal Tax Status, below and in the
SAI.) [Note: however, special restrictions on surrenders and withdrawals now
apply if your Contract was purchased as part of a retirement plan of a public
school system or tax-exempt institution under Section 403(b) of the Code.
Section 403(b) prohibits the withdrawal of post-1988 contributions pursuant to
a salary reduction agreement (within the meaning of Section 402(g)(3)(c) of
the Code), and earnings thereon, from a 403(b) contract except in the event
the participant: 1) attains age 59 1/2; 2) separates from service; 3) dies; 4)
becomes totally and permanently disabled; or 5) experiences financial hardship
(in which event the income attributable to such contributions may not be
withdrawn). Pre-1989 contributions and earnings through December 31, 1988, are
not subject to the above restrictions.
PR-AG
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Payment of any termination value may be postponed (a) when the New York Stock
Exchange is closed other than customary weekend and holiday closing 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 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 Participants.
For contracts issued in connection with qualified employee pension and
profit-sharing trust and qualified annuity plans including H.R.-10 trusts of
plans covering self-employed individuals and their employees and certain tax
deferred annuity plans, termination options will be as stated in the trust or
plan, and the terms of the trust or plan applicable to the Participant should
be consulted for limitations on early surrender or payment. (See Federal Tax
Status, below and in the SAI.)
For all other contracts, upon termination of payments on the Participant's
behalf and prior to the commencement of annuity payments, a Participant will
have the following options:
1. A Participant may have his or her individual account applied to provide
fixed or variable annuity payments or a combination thereof commencing
immediately under the selected annuity option. (See Annuity Period, below.)
2. A Participant may surrender the whole or any portion of his or her
individual account by submission of a written request for surrender and the
certificate to the Company's Home Office, and receive the value of the account
computed as of the valuation time coincident with or next following the date
of surrender. Payment will be made within seven days after the date of
surrender. 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.
3. The Participant may leave his or her individual account in force under the
group contract and the account will continue to participate in the investment
results of the Fund. When the originally selected retirement date arrives, the
Participant will begin to receive annuity payments under the selected option.
(See Annuity Period, below.) At any time in the interim, the Participant can
surrender his or her individual account in accordance with (2.) above.
If the Participant becomes an employee of another employer or a member of an
association which has a similar variable annuity contract in force with the
Company, the Participant may transfer his or her individual account to the
other contract.
A Participant may also purchase an individual variable annuity contract of
the type then being issued by the Company, if any, upon making such payments
as may then be required.
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 or her employer
before he or she can redeem his or her account.
ANNUITY PERIOD
ASSUMED INVESTMENT RATE (AIR)
Variable annuity contracts providing for deferred annuities contain a table
of annuity rates based on an AIR of 3.5% per year. The Company will permit the
Contract Owner to select an AIR permitted by state law or regulations as
follows: 3.5%, 4.5%, 5% or 6%. These AIRs are used merely to determine the
first monthly payment for each $1,000 of value. 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.
PR-AG
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The following table shows the Annuity Unit values at each year end for the
different AIRs:
Annuity Unit Values
Assumed Investment Rate
<TABLE>
<CAPTION>
DECEMBER 31 3.5% 4.5% 5% 6%
----------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
1987 1.834 1.508 1.368 1.127
1988 1.946 1.584 1.431 1.168
1989 2.300 1.855 1.667 1.348
1990 2.175 1.739 1.556 1.247
1991 2.565 2.031 1.809 1.436
1992 2.705 2.120 1.878 1.476
1993 2.870 2.227 1.964 1.529
1994 2.805 2.156 1.892 1.459
1995 3.718 2.830 2.472 1.888
1996 4.268 3.218 2.797 2.117
</TABLE>
RETIREMENT DATE; FORM OF ANNUITY
A Participant or Contract Owner in accordance with the plan, selects a
retirement date, typically not later than age 75, and an annuity option--
either of which may be changed at any time prior to 30 days before the date
upon which annuity payments are to commence--except that contracts issued
under plans qualified under Section 401(a) pursuant to qualified annuity plans
under Section 403(a) of the Code, including H.R.-10 plans, or plans pursuant
to Section 408, provide for annuity payments to commence at the date and under
the option specified under the plan. The contract provides four optional
annuity forms described below, each of which may be selected on either a fixed
annuity or variable annuity basis, or a combination thereof. 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. Amounts applied to the purchase of
a fixed-dollar annuity will not participate in the investment experience of
the Fund. If an election has not been made otherwise, the option with 120
monthly payments guaranteed will be effective, except in those cases in which
a joint and survivor annuity payout is required by law.
In such instance, the accumulated amount in the Fund will be applied to
provide variable annuity payments under such option and any amount accumulated
for a fixed annuity will be applied to provide fixed annuity payments under
such option. In such cases, the minimum first monthly payment required on the
new basis is $25, or $25 on each basis if a combination of fixed and variable
payments is elected. If at any time the payments are or become less than $25,
the Company has the right to change the frequency of payment to intervals that
will result in payments of at least $25.
While the contracts contain no provision under which an Annuitant or a
beneficiary may surrender his or her contract (see Accumulation Period, above)
and receive a lump-sum settlement in lieu thereof once annuity payments have
commenced, the Company has undertaken to 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 Option 2 when annuity payments are being continued during the
remainder of the guaranteed period to the beneficiary designated by the
Participant.
OPTIONAL ANNUITY FORMS
OPTION 1--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.
OPTION 2--LIFE ANNUITY WITH 120, 180, OR 240 MONTHLY PAYMENTS GUARANTEED
An annuity payable monthly during the lifetime of the Annuitant with the
guarantee that if, at the death of the Annuitant, payments have been made for
less than 120, 180 or 240 months as elected, annuity payments will be
continued during the remainder of such period to the beneficiary designated by
the Participant. If the beneficiary dies while receiving annuity payments, the
present value of the current dollar amount of the remaining guaranteed number
of annuity payments, computed on the basis of the AIR, shall be paid in one
sum to the estate of the beneficiary.
PR-AG
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<PAGE>
OPTION 3--UNIT REFUND LIFE ANNUITY
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 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 one 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 (4,694 remaining units X unit value of $2.05).
OPTION 4--JOINT AND 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.
Other annuity options may be provided if agreed upon by the Company and the
Contract Owner. If any such option involves the deferral of annuity payments,
the Annuitant shall have the right to surrender his contract at any time
during the period of deferral. 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
risk.
FIRST MONTHLY ANNUITY PAYMENT
Under the regular Group Variable Annuity Contract, when annuity payments are
to commence, the value of the Participant's individual 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 Participant's account as of the date annuity payments
commence.
The contract contains tables indicating the dollar amount of the first
monthly payment under each optional form of annuity for each $1,000 of value
applied. The first monthly payment varies according to the form of annuity
selected (see the descriptions above) and the adjusted age of the Annuitant.
The contract contains a formula for determining the adjusted age, and the
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 value of the Participant's individual
account (less any applicable premium taxes not previously deducted) by the
amount of the first monthly payment per $1,000 of value from the tables in the
contract.
If a greater first monthly payment would result, the Company will compute the
first monthly payment using an annuity rate based on the same mortality table
as is used in determining such payments under group variable annuity contracts
then being issued for a similar class of Annuitant.
Under the Group Variable Annuity Deposit Administration Contract, upon
written notice by the Contract Owner that annuity payments are to commence,
the Company shall determine as of the 14th day prior to the date the first
annuity payment is due, the amount necessary to provide the annuity specified
in the Plan. This amount is determined by dividing the annuity specified in
the Plan by the amount of the first monthly payment per $1,000 of value from
the tables in the contract and adding any applicable premium taxes not
previously deducted. The number of Accumulation Units to be removed from the
Contract Owner's unallocated account and used to purchase an annuity and pay
any applicable premium tax is determined by dividing the amount determined as
described in the preceding sentence by the Accumulation Unit value for the
14th day prior to the date the first annuity payment is due. 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.
PR-AG
15
<PAGE>
SUBSEQUENT MONTHLY ANNUITY PAYMENTS
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.
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
The period starting at the close of trading (currently 4:00 p.m. New York
time) on each day that the New York Stock Exchange is open for trading and
ending at the close of such trading on the next 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 two 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.)
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.
PR-AG
16
<PAGE>
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 (other
than plans qualified under Section 408 of the Code) and Section 403(b)
annuities are "eligible
PR-AG
17
<PAGE>
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.
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.
PR-AG
18
<PAGE>
OTHER ANNUITY CONTRACTS
Individual variable annuity contracts are also sold by the Company. Assets
with respect to the individual 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. It is anticipated that
Custodian for the Fund will change to Chase Manhattan Bank, New York, New
York, in approximately mid-1997.
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 every
five 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-7
Underwriters............................................................... B-7
Determination of Net Asset Value........................................... B-7
Financial Statements....................................................... B-8
</TABLE>
NOTE: SEE THE COVER PAGE OF THIS PROSPECTUS FOR DETAILS ABOUT HOW TO OBTAIN A
COPY OF THE SAI.
PR-AG
19
<PAGE>
LINCOLN NATIONAL
VARIABLE ANNUITY
FUND A (GROUP)
PROSPECTUS
APRIL 30, 1997
GROUP 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 (Group):
(Please Print)
Name: _________________________________________________________________________
Address: ______________________________________________________________________
City ______________________________________________________________ State Zip
Mail to: Annuities Customer Service, The Lincoln National Life Insurance
Company, P.O. Box 2340, Fort Wayne, Indiana 46801
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
- - -
Form 10547 4/97
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION (SAI)
LINCOLN NATIONAL VARIABLE ANNUITY FUND A (GROUP)
(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 (Group) dated April
30, 1997. You may obtain a copy of the Fund A (Group) Prospectus on request
and without charge. Please write Annuities Customer Service, The Lincoln
National Life Insurance Company, P.O. Box 2340, Fort Wayne, Indiana 46801 or
call 1-800-348-1212.
---------
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-7
Underwriters............................................................... B-7
Determination of Net Asset Value........................................... B-7
Financial Statements....................................................... B-8
</TABLE>
---------
SPECIAL NOTICE TO CONTRACT OWNERS ABOUT THIS YEAR'S COMPANY FINANCIAL
STATEMENTS. Each year the Company is required by law to prepare financial
statements for different purposes. Two of the most important purposes are
filing with state insurance departments and for inclusion in the securities
registration statements for our variable products, like this one. In the past
we have interpreted the prevailing regulations as requiring presentation of
these statements according to two different sets of accounting principles--one
for the insurance regulators (known as Statutory Accounting Principles, or
STAP) and one for the SEC (known as Generally Accepted Accounting Principles,
or GAAP).
When we create two sets of financial statements for the same insurer it
requires nearly double the time commitment of our internal accounting staff,
and two separate audits by our independent auditors. In an effort to control
costs and eliminate duplication of effort, we have reviewed the SEC's
requirements for the mode of presentation of the insurer's financial
statements in this registration statement. As a result of our review, and on
advice of counsel, we shall now begin to use the STAP-basis statements (which
we call Statutory Statements) exclusively, both for the insurance regulators
and for our securities registration statements. This is consistent with the
current practice of many other insurers.
We believe that both Statutory and GAAP statements fairly present the
financial position of the Company for the periods indicated, in accordance
with those respective accounting principles. However, between the two there
are some important differences in accounting theory and financial statement
presentation. FOR THAT REASON IN THIS TRANSITION YEAR WE INCLUDE HERE BOTH
STATUTORY AND GAAP STATEMENTS. This should permit you to evaluate the
financial position of the Company from both points of view, and should help
you understand the differences between Statutory and GAAP statements.
BEGINNING NEXT YEAR WE SHALL PRESENT ONLY STATUTORY STATEMENTS.
The date of this Statement of Additional Information is April 30, 1997
Form 10547 (SAI) 4/97
SAI-AG
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION (SAI)
LINCOLN NATIONAL VARIABLE ANNUITY FUND A (GROUP)
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 Insurance Company
1300 S. Clinton Street Member
Fort Wayne, IN 46802
*Barbara S. Kowalczyk Member Senior Vice President, Lincoln National Corporation (formerly
200 East Berry Street Senior Vice President, Lincoln Investment Management, Inc.)
Fort Wayne, IN 46802
Nancy L. Frisby, CPA Member Regional Vice President/Chief Financial Officer (formerly Vice
700 Broadway President -- Finance; Regional Controller of Finance),
Fort Wayne, IN 46802 St. Joseph Medical Center, Fort Wayne, Indiana
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.
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).
B-2
SAI-AG
<PAGE>
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.
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.
Securities of the same issuer may be purchased, held or sold at the same time
by the Fund or other accounts or companies for which the Advisor provides
investment advice (including affiliates of the Advisor). On occasions when the
Advisor deems the purchase or sale of a security to be in the best interest of
the Fund, as well as the other clients of the Advisor, the Advisor, to the
extent permitted by applicable laws and regulations, may aggregate such
securities to be sold or purchased for the Fund with those to be sold or
purchased for other clients in order to obtain best execution and lower
brokerage commissions, if any. In such event, allocation of the securities so
purchased or sold, as well as the expenses incurred in the transaction, will
be made by the Advisor in the manner it considers to be equitable and
consistent with its fiduciary obligations to all such clients, including the
Fund. In some instances, the procedures may impact the price and size of the
position obtainable for the Fund.
The Fund paid brokerage fees of $124,819.81 in 1996, $101,171 in 1995 and
$161,000 in 1994.
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.
Investment Income + Capital Gains - Capital Losses - Taxes
-------------------------------------------
Gross Investment Rate =
Value of Fund at Beginning of Valuation
Period
Net Investment Rate = Gross Investment Rate - .0000363 (for a one 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
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
one 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
B-3
SAI-AG
<PAGE>
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
Dollar Amount of First
Monthly Payment
Number of Annuity Units =
------------------------------
Annuity Unit Value on Date of
First Payment
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 Annuity Unit Value
Second and Subsequent = Number of Annuity Units X for Period in Which
Annuity Payment Payment is Due
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 one 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 net 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
B-4
SAI-AG
<PAGE>
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 (403(B) ANNUITY)
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.
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. For plan years beginning after December 31, 1996,
tax exempt organizations may have 401(k) plans.
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. For tax years beginning in 1997, the limit is raised from $250
to $2,000 for non-working spouses. 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
B-5
SAI-AG
<PAGE>
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 its creditors. Plans of state or local governments established
on August 20, 1996 or later, must hold all assets and income in trust (or
custodial accounts or an annuity contract) for the exclusive benefit of
participants and their beneficiaries. Section 457 plans that were in existence
before August 20, 1996 are allowed until January 1, 1999 to meet this
requirement. 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 (as indexed) 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.)
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) except during 1997, 1998 and 1999, a 15% penalty tax
on combined annual distributions in excess of $150,000 (as indexed) 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.
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
B-6
SAI-AG
<PAGE>
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
This information is disclosed 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 or by third parties
responsible to the Company. The Company has entered into an agreement with the
Delaware Management Company, 2005 Market Street, Philadelphia, PA 19203, to
provide accounting services to the Fund. 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 Contracts are no longer being offered. 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 Year's Day, President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day, and Christmas Day. It may also be closed on
other days.
FINANCIAL STATEMENTS
Financial statements for the Fund and the Company appear on the following
pages. For more information about the financial statements for the Company
provided in this SAI, please see the cover page of this SAI.
B-7
SAI-AG
<PAGE>
FINANCIAL STATEMENTS
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends.......................................... $ 2,551,263
Interest........................................... 61,478
------------
2,612,741
EXPENSES:
Investment management services..................... $ 345,624
Mortality and expense guarantees................... 1,018,598 1,364,222
------------ ------------
<CAPTION>
NET INVESTMENT INCOME 1,248,519
<S> <C> <C>
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments................... 9,896,271
Increase in net unrealized appreciation of
investments....................................... 7,531,873
------------
<CAPTION>
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 17,428,144
<S> <C> <C>
------------
<CAPTION>
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 18,676,663
<S> <C> <C>
============
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
------------ ------------
<S> <C> <C>
CHANGES FROM OPERATIONS:
Net investment income.............................. $ 1,248,519 $ 1,473,052
Net realized gain on investments................... 9,896,271 9,013,278
Increase in net unrealized appreciation of
investments....................................... 7,531,873 17,280,315
------------ ------------
<CAPTION>
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 18,676,663 27,766,645
<S> <C> <C>
Net decrease from equity transactions............... (13,726,463) (2,346,263)
------------ ------------
<CAPTION>
TOTAL INCREASE IN NET ASSETS 4,950,200 (25,420,382)
<S> <C> <C>
Net assets at beginning of year .................... 103,954,650 78,534,268
------------ ------------
<CAPTION>
NET ASSETS AT END OF YEAR $108,904,850 $103,954,650
<S> <C> <C>
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
B-8
SAI-AI
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERCENT NUMBER
OF OF
NET ASSETS SHARES MARKET VALUE
---------- ------ ------------
<S> <C> <C> <C>
INVESTMENTS
COMMON STOCKS:
AEROSPACE:..................................... 2.0%
McDonnell Douglas Corporation.................. 16,700 $ 1,068,800
United Technologies Corp....................... 17,600 1,161,600
------------
2,230,400
AIR TRANSPORTATION:............................ 1.4%
AMR Corp.*..................................... 8,000 705,000
Northwest Airlines Corp.*...................... 20,400 798,150
------------
1,503,150
BANKING AND INSURANCE: ........................ 12.3%
AmSouth Bancorporation......................... 5,800 280,575
Bank of Boston Corp............................ 24,100 1,548,425
Bank of New York Inc........................... 48,800 1,647,000
Chase Manhattan Corp........................... 25,800 2,302,650
Cigna Corp..................................... 13,200 1,803,450
Equitable Co................................... 10,300 253,638
First Chicago NBD Corp......................... 33,339 1,791,971
Marsh & McLennan Cos. Inc...................... 2,000 208,000
Nations Bank Corp.............................. 10,300 1,006,825
Transamerica Corp.............................. 6,700 529,300
Travelers Inc.................................. 45,466 2,063,020
------------
13,434,854
BROADCASTING:.................................. 0.6%
King World Productions Inc.*................... 19,200 708,400
BUILDING MATERIALS:............................ 0.8%
Dover Corp..................................... 17,900 899,475
BUILDING AND CONSTRUCTION:..................... 0.1%
Kaufman & Broad Home Corp...................... 7,100 91,413
CHEMICALS:..................................... 2.0%
Dow Chemical Co................................ 17,900 1,402,913
Olin Corp...................................... 20,600 775,075
------------
2,177,988
CONSUMER PRODUCTS AND SERVICES:................ 8.1%
American Brands Inc............................ 16,500 818,813
Johnson & Johnson.............................. 30,000 1,492,500
Omnicom Group Inc.............................. 23,400 1,070,550
Philip Morris Co. Inc.......................... 27,400 3,085,925
Procter & Gamble Co............................ 18,900 2,031,750
Stanley Works, Inc............................. 14,200 383,400
------------
8,882,938
CONTAINER: .................................... 0.3%
Stone Container Corp........................... 23,400 348,075
DRUG AND HOSPITAL SUPPLIES: ................... 7.3%
Abbott Laboratories............................ 15,500 786,625
Amgen Inc.*.................................... 29,300 1,595,019
Bristol Myers Squibb Co........................ 24,300 2,642,625
Lincae Holdings Inc.*.......................... 6,200 255,750
Merck & Co. Inc. .............................. 11,500 911,375
Schering-Plough Corp........................... 27,800 1,800,050
------------
7,991,444
ELECTRICAL AND ELECTRONICS:.................... 7.3%
Ascend Communications Inc.*.................... 15,600 969,150
Cooper Industries Inc.......................... 13,300 560,263
General Electric Co............................ 36,100 3,569,388
Harris Corp.................................... 13,800 947,025
Litton Industries Inc.*........................ 5,400 257,175
Raychem Corp................................... 4,700 376,588
Tektronix Inc.................................. 6,100 312,625
Tellabs Inc.*.................................. 17,700 667,069
UCAR International Inc.*....................... 6,900 259,613
------------
7,918,896
</TABLE>
B-9
SAI-AI
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
STATEMENT OF NET ASSETS--CONTINUED
<TABLE>
<CAPTION>
PERCENT NUMBER
OF OF
NET ASSETS SHARES MARKET VALUE
---------- ------ ------------
<S> <C> <C> <C>
ENTERTAINMENT:................................. 1.7%
Callaway Golf Co............................... 43,500 $ 1,250,625
Mirage Resorts Inc.*........................... 29,100 629,288
------------
1,879,913
FINANCIAL SERVICES:............................ 1.2%
Student Loan Marketing Assn.................... 14,100 1,313,063
FOOD AND BEVERAGE: ............................ 6.4%
Boston Chicken Inc.*........................... 4,200 150,675
Campbell Soup Company.......................... 8,400 674,100
Coca Cola Co. ................................. 41,600 2,189,200
ConAgra Inc. .................................. 8,200 407,950
CPC International Inc. ........................ 7,400 573,500
Heinz H. J. Co. ............................... 10,950 391,463
Hershey Foods Corp............................. 17,000 743,750
RJR Nabisco Holdings Corp. .................... 24,800 843,200
Safeway Inc.* ................................. 23,200 991,800
Universal Foods Corp. ......................... 1,600 56,400
------------
7,022,038
HOSPITAL AND HEALTHCARE: ...................... 1.3%
Oxford Health Plans Inc.*...................... 24,300 1,423,069
HOUSEHOLD APPLIANCES: ......................... 0.3%
Maytag Corp.................................... 14,300 282,425
INDUSTRIAL: ................................... 1.3%
Johnson Controls Inc........................... 16,500 1,367,438
MACHINERY & ENGINEERING: ...................... 1.4%
Caterpillar Inc. .............................. 15,800 1,188,950
Ingersoll-Rand Co. ............................ 6,800 302,600
------------
1,491,550
METALS AND MINING: ............................ 1.6%
ASARCO Inc. ................................... 16,600 412,925
Cleveland-Cliffs Inc. ......................... 900 40,838
Phelps Dodge Corp. ............................ 18,900 1,275,750
------------
1,729,513
MOTOR VEHICLES AND EQUIPMENT: ................. 3.0%
Chrysler Corp.................................. 50,100 1,653,300
General Motors Corp............................ 15,600 869,700
Goodrich BF Co................................. 17,800 720,900
------------
3,243,900
OFFICE AND BUSINESS EQUIPMENT AND SERVICES: ... 7.7%
Cadence Design Systems Inc.* .................. 31,275 1,243,181
Cisco Systems Inc.* ........................... 23,500 1,496,656
Compaq Computer Corp.*......................... 4,200 311,850
Computer Associates International Inc. ........ 8,700 432,825
Diebold Inc.................................... 9,200 578,450
Honeywell Inc.................................. 24,000 1,578,000
NCR Corp....................................... 1,100 36,988
Pairgain Technologies Inc.*.................... 22,200 675,713
Pitney Bowes Inc............................... 11,500 626,750
Sun Microsystems, Inc.* ....................... 53,000 1,361,438
------------
8,341,851
PAPER: ........................................ 1.5%
Avery Dennison Corp. .......................... 44,800 1,584,800
PETROLEUM AND PETROLEUM RELATED: .............. 10.7%
Atlantic Richfield Co. ........................ 8,600 1,139,500
Exxon Corp. ................................... 21,200 2,077,600
Halliburton Co. ............................... 16,200 976,050
Occidental Petroleum Corp...................... 47,000 1,098,625
Royal Dutch Petroleum Co....................... 11,700 1,997,775
Seagull Energy Corp.*.......................... 23,900 525,800
Texaco Inc..................................... 15,800 1,550,375
Unocal Corp.................................... 42,200 1,714,375
USX-Marathon Group Inc......................... 22,600 539,575
------------
11,619,675
PRINTING AND PUBLISHING: ...................... 0.5%
New York Times Co. ............................ 15,200 577,600
</TABLE>
B-10
SAI-AI
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
STATEMENT OF NET ASSETS--CONTINUED
<TABLE>
<CAPTION>
PERCENT NUMBER
OF OF
NET ASSETS SHARES MARKET VALUE
---------- ------ ------------
<S> <C> <C> <C>
PUBLIC UTILITIES: ............................ 3.2%
Edison International.......................... 19,100 $ 379,613
General Public Utilities Corp. ............... 14,700 494,288
Ohio Edison Co. .............................. 32,100 730,275
Texas Utilities Co............................ 38,500 1,568,875
Unicom Corp. ................................. 10,600 287,525
------------
3,460,576
REAL ESTATE: ................................. 0.5%
Oakwood Homes Inc.*........................... 23,700 542,138
RETAIL: ...................................... 3.8%
Eckerd Corp.* ................................ 2,828 90,496
Gap Inc....................................... 34,600 1,042,325
Jostens Inc. ................................. 33,000 697,125
Ross Stores Inc............................... 5,300 264,338
Sears, Roebuck & Co. ......................... 12,600 581,175
TJX Cos. Inc.................................. 30,800 1,459,150
------------
4,134,609
SECURITIES DEALERS: .......................... 1.7%
Bear, Stearns & Co. Inc. ..................... 34,205 953,464
Morgan Stanley Group.......................... 6,300 359,888
Pain Webber Group............................. 19,900 559,688
------------
1,873,040
SHOES: ....................................... 0.9%
Nike Inc. .................................... 16,400 979,900
SOAPS, CLEANER AND COSMETICS: ................ 0.7%
Clorox Co. ................................... 7,300 732,738
TELECOMMUNICATIONS: .......................... 7.0%
American Telephone & Telegraph Co. ........... 17,600 726,021
Ameritech Corp. .............................. 29,000 1,758,125
BellSouth Corp. .............................. 44,600 1,800,725
Nynex Inc..................................... 33,800 1,626,625
Pacific Telesis Group ........................ 46,600 1,712,550
------------
7,624,046
TRANSPORTATION: .............................. 0.6%
PHH Corp. .................................... 14,500 623,500
----- ------------
TOTAL INVESTMENTS
(Cost--$74,224,441) 99.2% 108,034,015
Excess of other assets over liabilities 0.8% 870,835
----- ------------
NET ASSETS 100.0% $108,904,850
===== ============
Net assets are represented by:
Value of accumulation units:
8,462,449 units at $11.737 unit value $ 99,332,458
Annuity reserves:
258,966 units at $11.737 unit value 3,039,454
440,987 units at $14.813 unit value 6,532,938
------------
699,953 9,572,392
======= ============
$108,904,850
============
</TABLE>
*Non-income producing
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
B-11
SAI-AI
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
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%.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of increases and decreases in net assets
from operations during the reporting period. Actual results could differ from
those estimates.
2. INVESTMENTS
The aggregate cost of investments purchased and the aggregate proceeds from
investments sold (exclusive of short-term investments) during 1996 amounted to
$52,601,994 and $62,081,604, 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 $12,259 from the proceeds of the sale of annuity contracts during
1996 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, 1996, 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, 1996 consisted of the following:
<TABLE>
<S> <C>
Equity transactions $(141,446,807)
Accumulated net investment income 72,336,752
Accumulated net realized gain on investments 146,123,703
Net unrealized appreciation of investments 31,891,202
-------------
$ 108,904,850
=============
</TABLE>
B-12
SAI-AI
<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 the Securities and Exchange
Commission and contractowners 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. 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>
1996 1995
------------------------- -------------------------
UNITS AMOUNT UNITS AMOUNT
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Accumulation Units:
Balance at beginning of
year .................. 9,568,929 $(123,869,196) 9,907,664 $(121,421,039)
Contract purchases...... 153,035 1,603,060 84,705 701,434
Issued in connection
with merger of Fund B.. -- -- 763,488 7,157,877
Terminated contracts.... (1,259,515) (13,029,596) (1,186,928) (10,307,468)
---------- ------------- ---------- -------------
BALANCE AT END OF YEAR 8,462,449 $(135,295,732) 9,568,929 $(123,869,196)
========== ============= ========== =============
Annuity Reserves:
Balance at beginning of
year................... 831,033 $ (3,851,148) 862,789 $ (3,953,042)
Annuity payments........ (66,369) (1,207,775) (144,037) (1,077,169)
Issued in connection
with merger of Fund B.. -- -- 82,501 773,467
Receipt of guarantee
mortality adjustments.. (64,711) (1,092,152) 29,780 405,596
---------- ------------- ---------- -------------
BALANCE AT END OF YEAR 699,953 $ (6,151,075) 831,033 $ (3,851,148)
========== ============= ========== =============
</TABLE>
7. SUPPLEMENTAL INFORMATION--SELECTED PER UNIT DATA AND RATIOS
The following is selected financial data for an accumulation unit outstanding
throughout each year:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Investment income........................ $ 0.267 $0.251 $0.217 $0.204 $0.206
Expenses................................. 0.139 0.114 0.095 0.090 0.083
------- ------ ------ ------ ------
Net investment income.................... 0.128 0.137 0.122 0.114 0.123
Net realized and unrealized gain (loss)
on investments.......................... 1.735 2.539 (0.040) 0.522 (0.099)
------- ------ ------ ------ ------
Increase in accumulation unit value...... 1.863 2.676 0.082 0.636 0.024
Accumulation unit value at beginning of
year.................................... 9.874 7.198 7.116 6.480 6.456
------- ------ ------ ------ ------
ACCUMULATION UNIT VALUE AT END OF YEAR $11.737 $9.874 $7.198 $7.116 $6.480
======= ====== ====== ====== ======
Ratio of expenses to average net assets.. 1.28% 1.28% 1.27% 1.27% 1.27%
Ratio of net investment income to average
net assets.............................. 1.17% 1.65% 1.75% 1.72% 2.01%
Portfolio turnover rate.................. 49.94% 48.95% 64.09% 49.90% 70.97%
Number of accumulation units outstanding
at end of year (expressed in thousands). 8,462 9,569 9,908 11,538 12,742
</TABLE>
B-13
SAI-AI
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Managers and Contractowners
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, 1996, 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, and the selected
per unit data and ratios (Note 7 to financial statements) for each of the five
years in the period ended. These financial statements and per unit data and
ratios are the responsibility of the Fund's management. Our responsibility is
to express an opinion on these financial statements and per unit data and
ratios 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 and per
unit data and ratios are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1996, by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and selected per unit data and ratios
referred to above present fairly, in all material respects, the financial
position of the Lincoln National Variable Annuity Fund A at December 31, 1996,
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, and the
selected per unit data and ratios for each of the five years in the period
then ended in conformity with generally accepted accounting principles.
Fort Wayne, Indiana
February 12, 1997
B-14
SAI-AI
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
AUDITED FINANCIAL STATEMENTS
Prior to 1996, management of The Lincoln National Life Insurance Company
(Company) prepared annual financial statements of the Company using two
different types of accounting principles. Pursuant to insurance regulatory
requirements in several states, management prepared financial statements in
accordance with statutory accounting principles (STAP), which were subject to
audit by the Company's independent auditors. Additionally, solely for purposes
of inclusion in the registration statements of separate account products
requiring registration and periodic reporting to the Securities and Exchange
Commission (SEC), management also prepared financial statements of the Company
in accordance with generally accepted accounting principles (GAAP), which were
also subject to audit. In an attempt to reduce costs associated with the
preparation and audits of both GAAP and STAP-bases financial statements,
commencing with the registrations in 1997, management will prepare and have
audited only STAP-basis financial statements.
The STAP-basis financial statements included in this registration statement
have been prepared in conformity with accounting practices prescribed or
permitted by the Indiana Department of Insurance, which is an "other
comprehensive basis of accounting" as that term is defined by the American
Institute of Certified Public Accountants (see notes 1 and 2 to the enclosed
audited STAP-basis financial statements for information on such prescribed and
permitted practices).
Because 1996 is the initial year for which STAP-basis financial statements are
used for purposes of these separate account product filings with the SEC,
management has included the following financial statements of the Company to
allow for comparability between years:
. Section 1 contains the STAP-basis balance sheets of the Company as of Decem-
ber 31, 1996 and 1995 and the related STAP-basis statements of income,
changes in capital and surplus, and cash flows for the three years in the pe-
riod ended December 31, 1996.
. Section 2 contains the GAAP-basis balance sheets of the Company as of Decem-
ber 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 pe-
riod ended December 31, 1995.
G-1
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
1995 1994
----------- -----------
(000's omitted)
-----------------------
ASSETS
<S> <C> <C>
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
- ---------------------------------------------------- =========== ===========
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 Corp.) 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.
G-2
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
---------------------------------
(000's omitted)
---------------------------------
REVENUE
<S> <C> <C> <C>
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.
G-3
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
CONSOLIDATED STATEMENTS OF
SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
------------------------------
(000's omitted)
----------------------------------
<S> <C> <C> <C>
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 Corp. 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 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
- -----------------------------------------
========== ========== ==========
</TABLE>
See accompanying notes.
G-4
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
----------- ----------- ----------
(000's omitted)
------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
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)
- ----------------------------------------
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 Corp. 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
- ---------------------------------------- ----------- ----------- ----------
</TABLE>
<TABLE>
<S> <C> <C> <C>
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
- ------------------------------- ======== ======== ========
</TABLE>
See accompanying notes.
G-5
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 1995
1.SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of presentation
The accompanying consolidated financial statements include Lincoln National
Life Insurance Co. ("Lincoln Life") and its majority owned subsidiaries.
Lincoln Life and its subsidiaries operate multiple insurance businesses.
Operations are divided into two business segments (see Note 9). These con-
solidated financial statements have been prepared in conformity with gener-
ally 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 finan-
cial statements and accompanying notes. Actual results could differ from
those estimates.
Investments
Lincoln Life classifies its fixed maturity securities and equity securities
(common and non-redeemable preferred stocks) as available-for-sale and, ac-
cordingly, such securities are carried at fair value. The cost of fixed ma-
turity 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, Lincoln Life recognizes income using a constant effective yield
based on anticipated prepayments and the estimated economic life of the se-
curities. When estimates of prepayments change, the effective yield is re-
calculated to reflect actual payments to date and anticipated future pay-
ments. The net investment in the securities is adjusted to the amount that
would have existed had the new effective yield been applied since the ac-
quisition 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 re-
corded at fair value on the settlement date which establishes a new cost
basis. If 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, includ-
ing participation in a short-term investment pool administered by Lincoln
National Corp. (LNC), the Lincoln Life's parent.
Realized gain (loss) on investments is recognized in net income, net of re-
lated amortization of deferred acquisition costs, using the specific iden-
tification 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 se-
curities would have been sold at their fair value, and after deferred taxes
or credits to the extent deemed recoverable.
Derivatives
Lincoln Life hedges certain portions of its exposure to interest rate fluc-
tuations, the widening of bond yield spreads over comparable maturity U.S.
Government obligations and foreign exchange risk by entering into deriva-
tive transactions. A description of Lincoln Life's accounting for its hedge
of such risks is discussed in the following two paragraphs.
The premium paid for interest rate caps 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 in-
terest rate caps is recorded as investment income. Spread-lock agreements,
interest rate swaps and financial futures, which hedge fixed maturity secu-
rities 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 matu-
rity securities denominated in foreign currencies, are carried at fair
value with the
change in fair value reflected in earnings. Realized
G-6
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED
gain (loss) from the settlement of such derivatives is also zreflected in
earnings.
Hedge accounting is applied as indicated above after Lincoln Life deter-
mines that the items to be hedged expose Lincoln Life 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 deriva-
tives is included in net income.
Property and equipment
Property and equipment owned for Lincoln Life use is carried at cost less
allowances for depreciation.
Premiums and fees
Revenue for universal life and other interest-sensitive life insurance pol-
icies consists of policy charges for cost of insurance, policy initiation
and administration, and surrender charges that have been assessed. Tradi-
tional individual life-health and annuity premiums are recognized as reve-
nue 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 Lincoln Life for the exclusive benefit of pension and variable
life and annuity contractholders. The fees received by Lincoln Life for ad-
ministrative and contractholder maintenance services performed for these
separate accounts are included in Lincoln Life's consolidated statements of
income.
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 produc-
tion of new business, have been deferred to the extent recoverable. Acqui-
sition costs for universal and variable universal life insurance policies
are being amortized over the lives of the policies in relation to the inci-
dence of estimated gross profits from surrender charges and investment,
mortality and expense margins, and actual realized gain (loss) on invest-
ments. That amortization is adjusted retrospectively when estimates of cur-
rent or future gross profits to be realized from a group of policies are
revised. The traditional life-health and annuity acquisition costs are am-
ortized over the premium-paying period of the related policies using as-
sumptions consistent with those used in computing policy reserves.
Expenses
Expenses for universal and variable universal life insurance policies in-
clude interest credited to policy account balances and benefit claims in-
curred during the period in excess of policy account balances. Interest
crediting rates associated with funds invested in Lincoln Life'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 ac-
quisitions. 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 bal-
ances that accrue to the benefit of the policyholders, excluding surrender
charges. The liabilities for future policy benefits and expenses for tradi-
tional life policies and immediate and deferred paid-up annuities are com-
puted using a net level premium method and assumptions for investment
yields, mortality and withdrawals based principally on Lincoln Life experi-
ence projected at the time of policy issue, with provision for possible ad-
verse deviations. Interest assumptions for traditional direct individual
life reserves for all policies range from 2.3% to 11.7% graded to 5.7% af-
ter 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 annui-
ties range from 4.5% to 8.0%.
With respect to its policy liabilities and accruals, Lincoln Life carries
on a continuing review of its 1) overall reserve position, 2) reserving
techniques
G-7
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED
and 3) reinsurance arrangements, and as experience develops and new infor-
mation becomes known, liabilities are adjusted as deemed necessary. The ef-
fects of changes in estimates are included in the operating results for the
period in which such estimates occur.
Reinsurance
Lincoln Life enters into reinsurance agreements with other companies in the
normal course of their business. Lincoln Life 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 Lincoln Life use are computed principally on the
straight-line method over the estimated useful lives of the assets.
Postretirement medical and life insurance benefits
Lincoln Life accounts for its postretirement medical and life insurance
benefits using the full accrual method.
Income taxes
Lincoln Life 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, Lincoln Life and its eligible
subsidiaries provide for income taxes on a separate return filing basis.
The tax sharing agreement also provides that Lincoln Life and eligible sub-
sidiaries 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.
Lincoln Life uses the liability method of accounting for income taxes. De-
ferred 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. Lincoln Life 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, Lincoln Life changed its method of accounting
for postretirement medical and life insurance benefits for its eligible em-
ployees 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 cumu-
lative effect of accounting change by $5,100,000 ($0.51 per share). The im-
plementation 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.
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
Lincoln Life effective January 1, 1993. FAS 114 requires that if an im-
paired 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 ad-
ditions 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 In-
vestments in Debt and Equity Securities" ("FAS 115") issued in May 1993,
was adopted by Lincoln Life as of December 31, 1993. In accordance with the
rules, the
G-8
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
2. CHANGES IN ACCOUNTING PRINCIPLESAND CHANGES IN ESTIMATES CONTINUED
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 hold-
er's intent. Lincoln Life 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 se-
curities 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 ac-
quisition 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 appli-
cable to Security-Connecticut Corp.) to reflect the net unrealized gain on
fixed maturity securities classified as available-for-sale previously car-
ried at amortized cost. Prior to the adoption of FAS 115, Lincoln Life car-
ried a portion of its fixed maturity securities at fair value with
unrealized gains and losses carried as a separate component of sharehold-
er's equity. The remainder of such securities were carried at amortized
cost.
Change in estimate for net investment income related to mortgage-backed
securities
At December 31, 1993, Lincoln Life had $5,942,100,000 invested in mortgage-
backed securities. As indicated in Note 1, Lincoln Life recognizes income
on these securities using a constant effective yield based on anticipated
prepayments. With the implementation of new investment software in December
1993, Lincoln Life was able to significantly refine its estimate of the ef-
fective yield on such securities to better reflect actual prepayments and
estimates of future prepayments. This resulted in an increase in the amor-
tization 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 ac-
counting 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 seg-
ment was identified as the result of management's assessment of current ex-
pectations for morbidity trends and the impact of lower investment income
due to lower interest rates.
During the fourth quarter of 1995, Lincoln Life completed an in-depth re-
view of the experience of its disability income business. As a result of
this study, and based on the assumption that recent experience will con-
tinue 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.
G-9
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
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)
------------------------------------------------ ------ ------- -------
$136.2 $(138.5) $ 92.2
====== ======= =======
</TABLE>
Provisions (credits) for write-downs and net changes in pro-
visions 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
-----------------------------
----- ----- ------
$17.5 $58.1 $219.7
===== ===== ======
</TABLE>
G-10
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
3.INVESTMENTS CONTINUED
The change in unrealized appreciation (depreciation) on in-
vestments in fixed maturity and equity securities is as fol-
lows:
<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)
---------------------------------------------
-------- --------- --------
$2,141.8 $(1,929.7) $ 436.6
======== ========= ========
</TABLE>
The cost, gross unrealized gain and loss and fair value of
securities available-for-sale are as follows:
<TABLE>
<CAPTION>
Year ended 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 government 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
-------------------------------------
--------- -------- ------ ---------
$19,333.1 $1,725.6 $ 45.5 $21,013.2
========= ======== ====== =========
<CAPTION>
Year ended 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
-------------------------------------
--------- -------- ------ ---------
$18,610.2 $ 300.8 $762.5 $18,148.5
========= ======== ====== =========
</TABLE>
G-11
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
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
-------------------------------------- --------- ---------
13,961.2 15,230.0
Mortgage-backed securities 4,891.6 5,184.8
-------------------------------------- --------- ---------
$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 Par Cost Fair 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
-------- -------- -------- --------
$5,012.9 $4,891.6 $5,184.8
======== ======== ========
</TABLE>
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 Lincoln Life 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.
G-12
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
3.INVESTMENTS CONTINUED
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.
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 re-
corded 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>
G-13
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
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 fol-
lows:
<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, Lincoln Life had restruc-
tured loans of $62,500,000 and $36,200,000, respectively.
Lincoln Life 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, Lincoln Life had no outstanding commit-
ments to lend funds on restructured loans.
As of December 31, 1995, the Company's investment commit-
ments 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.
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 fol-
lows:
<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 fol-
lows:
<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>
G-14
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
3.INVESTMENTS CONTINUED
Adjustments to Deferred acquisition costs and amounts re-
quired to satisfy policyholder commitments are netted
against the Deferred acquisition costs asset account and in-
cluded with the Future policy benefits, claims and claims
expense liability on the balance sheet, respectively.
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)
-------- ------ ------ ------
$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>
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
-------- ------- ------
$(166.4) $134.5
======= ======
</TABLE>
G-15
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
4.FEDERAL INCOME TAXES CONTINUED
Significant components of Lincoln Life'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>
Lincoln Life is required to establish a "valuation allow-
ance" 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 eq-
uity before considering a valuation allowance. For Federal
income tax purposes, capital losses may only be used to off-
set 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 secu-
rities available-for-sale were greater than the cost basis
resulting in unrealized capital gains. Accordingly, no valu-
ation allowance was established as of December 31, 1995
since management believes it is more likely than not that
Lincoln Life 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
G-16
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
4.FEDERAL INCOME TAXES CONTINUED
to shareholder surplus and current income tax of $3,100,000
was paid. Under existing or foreseeable circumstances,
Lincoln Life 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 Lincoln Life 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.
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
------------------------------------------------
--------- ---------
$18,171.8 $17,028.6
========= =========
</TABLE>
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>
G-17
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
5.SUPPLEMENTAL FINANCIAL DATA CONTINUED
Fixed maturities of long-term debt are as follows (in mil-
lions):
1996 -- $ 1.31998 -- $18.42000 -- $ --
1997 -- 19.21999 -- --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>
The income statement caption, "Benefits and settlement ex-
penses," 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 de-
ferred 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 in-
vestments" 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.
Lincoln Life's funding policy is consistent with the funding
requirements of Federal laws and regulations. Contributions
are intended to provide not only the benefits attributed to
service to date, but also those expected to be earned in the
future. Plan assets consist principally of listed equity se-
curities 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 curtail-
ment of this plan did not have a significant effect on net
pension cost for 1994. Effective January 1, 1995, pension
benefits for agents have been provided by a new defined con-
tribution 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 pen-
sion benefits in excess of limits imposed by federal tax
law. A salary continuation plan provides certain officers of
Lincoln Life defined pension benefits based on years of
service and final monthly salary upon death or retirement.
G-18
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
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>
The determination of the projected benefits obligation for
the defined benefit plans was based on the following assump-
tions:
<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>
G-19
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
6.EMPLOYEE BENEFIT PLANS CONTINUED
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 Lincoln Life sponsor contributory defined contribu-
tion plans for eligible employees and agents. Lincoln Life's
contributions to the plans are equal to each participant's
pre-tax contribution, not to exceed 6% of base pay, multi-
plied by a percentage, ranging from 25% to 150%, which var-
ies 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.
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 Lincoln Life 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 bene-
fits, 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 retire-
ment. The life insurance benefits are noncontributory, al-
though participants can elect supplemental contributory ben-
efits.
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>
G-20
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
6.EMPLOYEE BENEFIT PLANS CONTINUED
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>
The calculation of the accumulated postretirement benefit
obligation assumes a weighted-average annual rate of in-
crease in the per capita cost of covered benefits (i.e.,
health care cost trend rate) of 9.5% for 1996 gradually de-
creasing to 5.5% by 2004 and remaining at that level there-
after. The health care cost trend rate assumption has a sig-
nificant effect on the amounts reported. For example, in-
creasing 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 ag-
gregate of the estimated service and interest cost compo-
nents 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 De-
cember 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 Lincoln Life and its insurance subsidiaries in 1995, 1994 and 1993 was
$284,500,000, $366,700,000 and $237,000,000, respectively. Lincoln Life'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.
Lincoln Life is subject to certain insurance department regulatory restric-
tions as to the transfer of funds and payments of dividends to LNC. In
1996, Lincoln Life 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 de-
ferred acquisition costs. The bulk of the increase to this liability re-
lates 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, Lincoln Life 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 termi-
nation 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. Lincoln
Life 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 em-
ployers cannot demonstrate
compliance and the insurance company is held re-
sponsible due to its marketing efforts, Lincoln Life
and other insurers may be subject to potential liability. It is not possi-
ble 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 con-
tracts, which are no longer be-
G-21
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
7. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
ing 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
Lincoln Life and certain of its subsidiaries lease their home office prop-
erties 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 Lincoln Life with the right of
first refusal to purchase the properties during the term of the lease, in-
cluding renewal periods, at a price as defined in the agreements. In addi-
tion, Lincoln Life 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 pe-
riods.
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>
<S> <C>
1996 $ 20.9
----------
1997 19.5
----------
1998 18.3
----------
1999 18.3
----------
2000 17.7
----------
Thereafter 172.4
---------- ------
$267.1
======
</TABLE>
Insurance ceded and assumed
Lincoln Life cedes insurance to other companies, including certain affili-
ates. That portion of risks exceeding each company's retention limit is re-
insured with other insurers. Lincoln Life 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, Lincoln Life acquires other insurance coverages with retentions
and limits which management believes are appropriate for the circumstances.
The accompanying financial statements reflect premiums, benefits and set-
tlement expenses and deferred acquisition costs, net of insurance ceded
(see Note 5). Lincoln Life and its subsidiaries remain liable if their re-
insurers are unable to meet their contractual obligations under the appli-
cable reinsurance agreements.
Lincoln Life assumes insurance from other companies, including certain af-
filiates. At December 31, 1995, Lincoln Life has provided $92,700,000 of
statutory surplus relief to other insurance companies under reinsurance
transactions. Generally, such amounts are offset by corresponding receiv-
ables from the ceding company, which are secured by future profits on the
reinsured business. However, Lincoln Life is subject to the risk that the
ceding company may become insolvent and the right of offset would not be
permitted.
Vulnerability from concentrations
At December 31, 1995, Lincoln Life did not have
a material concentration of financial instruments in
a single investee, industry or geographic location. Also at December 31,
1995, Lincoln Life did not have a concentration of 1) business transactions
with a particular customer, lender or distributor, 2) revenues from a par-
ticular product or service, 3) sources of supply of labor or services used
in the
business or 4) a market or geographic area in which
business is conducted that makes it vulnerable to an event that is at least
reasonably possible to occur in the near term and which could cause a se-
vere impact to Lincoln Life's financial condition.
Other contingency matters
Lincoln Life 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 re-
lief. 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 Lin-
coln Life.
The number of insurance companies that are under regulatory supervision has
resulted, and is expected to continue to result, in assessments by state
guaranty funds to cover losses to policyholders of insolvent or rehabili-
tated companies. Mandatory assessments may be partially recovered through a
reduction in future premium taxes in some states. Lincoln Life has accrued
for expected assessments net of estimated future premium tax deductions.
G-22
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
7.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
Guarantees
Lincoln Life has guarantees with off-balance-sheet risks
whose contractual amounts represent credit exposure. Out-
standing 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
--------------------------------------- ----- -----
$66.9 $95.8
===== =====
</TABLE>
Lincoln Life 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 part-
ners to indemnify the mortgagor in the event a partner is
unable to pay its principal and interest payments. In addi-
tion, Lincoln Life has sold commercial mortgage loans
through grantor trusts which issued pass-through certifi-
cates. Lincoln Life has agreed to repurchase any mortgage
loans which remain delinquent for 90 days at a repurchase
price substantially equal to the outstanding principal bal-
ance plus accrued interest thereon to the date of repur-
chase. 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
Lincoln Life. Accordingly, both the carrying value and fair
value of these guarantees is zero at December 31, 1995 and
1994.
G-23
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
7.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
Derivatives
Lincoln Life has derivatives with off-balance-sheet risks
whose notional or contract amounts exceed the credit expo-
sure. Lincoln Life 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, Lincoln Life 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. Outstand-
ing 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>
A reconciliation and discussion of the notional or contract
amounts for the significant programs using derivative agree-
ments 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>
G-24
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
7.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
<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>
Interest rate caps
The interest rate cap agreements, which expire in 1997
through 2003, entitle Lincoln Life to receive payments from
the counterparties on specified future reset dates, contin-
gent 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 Lincoln
Life's interest rate cap agreement program is to protect its
annuity line of business from the effect of fluctuating in-
terest 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 amor-
tized 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 Lincoln Life 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 Lincoln Life's
spread-lock program is to protect a portion of its fixed ma-
turity securities against widening of spreads.
G-25
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life is exposed to credit loss in the event of nonperformance by
counterparties on interest rate cap agreements, spread-lock agreements, in-
terest rate swaps, foreign exchange forward contracts, foreign currency op-
tions and foreign currency swaps, but Lincoln Life does not anticipate non-
performance 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
Lincoln Life'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 Lincoln Life's financial instruments.
Considerable judgment is required to develop these fair values and, accord-
ingly, the estimates shown are not necessarily indicative of the amounts
that would be realized in a one time, current market exchange of all of
Lincoln Life's financial instruments.
Fixed maturity and equity securities
Fair values for fixed maturity securities are based on quoted market pric-
es, 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 discount-
ing 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 sim-
ilar characteristics. The rating for mortgages in good standing are based
on property type, location, market conditions, occupancy, debt service cov-
erage, loan to value, caliber of tenancy, borrower and payment record. Fair
values for impaired mortgage loans are measured based either on the present
value of expected future cash flows discounted at the loan's effective in-
terest rate, at the loan's market price or the fair value of the collateral
if the loan is collateral dependent.
7.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES CONTINUED
Financial futures
Lincoln Life uses exchange-traded financial futures contracts and options
on those financial futures to hedge against interest rate risks and to man-
age duration of a portion of its fixed maturity securities. Financial
futures contracts obligate Lincoln Life to buy or sell a financial instru-
ment 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 Lincoln Life the right, but not the obli-
gation, to assume a long or short position in the underlying futures at a
specified price during a specified time period.
Foreign currency derivatives
Lincoln Life uses a combination of foreign exchange forward contracts, for-
eign currency options and foreign currency swaps, all of which are traded
over-the-counter, to hedge some of the foreign exchange risk of investments
in fixed maturity securities denominated in foreign currencies. The foreign
currency forward contracts obligate Lincoln Life to deliver a specified
amount of currency at a future date at a specified exchange rate. Foreign
currency options give Lincoln Life the right, but not the obligation, to
buy or sell a foreign currency at a specific exchange rate during a speci-
fied time period. A foreign currency swap is a contractual agreement to ex-
change the currencies of two different countries pursuant to an agreement
to reexchange the two currencies at the same rate of exchange at a speci-
fied 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) op-
tions 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.
G-26
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Short-term and long-term debt
Fair values for long-term debt issues are estimated using discounted cash
flow analysis based on Lincoln Life's current incremental borrowing rate
for similar types of borrowing arrangements. For short-term debt, the car-
rying value approximates fair value.
Guarantees
Lincoln Life's guarantees include guarantees related to real estate part-
nerships 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.
Derivatives
Lincoln Life'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 cur-
rency 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 broker-
age quotes, which utilized pricing models or formulas using current assump-
tions, 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 es-
tate are based on the difference between the value of the committed invest-
ments as of the date of the accompanying balance sheets and the commitment
date, which would take into account changes in interest rates, the
counterparties' credit standing and the remaining terms of the commitments.
8.FAIR VALUE OF FINANCIAL
INSTRUMENTS CONTINUED
Policy loans
The estimated fair value of investments in policy loans was calculated on a
composite discounted cash flow basis using Treasury interest rates consis-
tent with the maturity durations assumed. These durations were based on
historical experience.
Other investments and cash and invested cash
The carrying value for assets classified as other investments and cash and
invested cash in the accom-
panying balance sheets approximates their fair value.
Investment type insurance contracts
The balance sheet captions, "Future policy benefits, claims and claims ex-
penses" and "Contractholder funds," include investment type insurance con-
tracts (i.e., deposit contracts and guaranteed interest contracts). The
fair values for the deposit contracts and certain guaranteed interest con-
tracts 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 remain-
ing 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 insur-
ance contracts. Fair value disclosures are not required for these insurance
contracts and have not been determined by Lincoln Life. It is Lincoln
Life'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 Lincoln Life's shareholder's equity
determined on a fair value basis if only the fair value of assets and lia-
bilities defined as financial instruments are disclosed. Lincoln Life and
other companies in the insurance industry are monitoring the related ac-
tions of the various rule-making bodies and attempting to determine an ap-
propriate methodology for estimating and disclosing the "fair value" of
their insurance contract liabilities.
G-27
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
8.FAIR VALUE OF FINANCIAL INSTRUMENTS CONTINUED
The carrying values and estimated fair values of Lincoln
Life'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 values 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 de-
ferred acquisition costs in order that they be comparable
with the fair value basis.
9.SEGMENT INFORMATION
Lincoln Life has two major business segments: Life Insurance
and Annuities and Reinsurance. The Life Insurance and Annui-
ties 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 Lincoln
Life. Reinsurance sells reinsurance products and services to
insurance companies, HMOs, self-funded employers and other
primary risk accepting organizations in the U.S. and econom-
ically attractive international markets. Effective in the
fourth quarter of 1995, operating results of the direct dis-
ability income business previously included in the Life In-
surance and Annuities segment is now included in the Rein-
surance segment. This direct disability income business,
which is no longer being sold, is now managed by the Rein-
surance 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 seg-
ment 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 cor-
porate debt and unallocated corporate overhead expenses).
G-28
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
9.SEGMENT INFORMATION CONTINUED
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)
--------------------------------------- --------- --------- ---------
$ 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)
--------------------------------------- --------- --------- ---------
$ 449.5 $ 260.2 $ 335.7
========= ========= =========
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
--------------------------------------- --------- --------- ---------
$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, Lincoln Life 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 of-
fering and Lincoln Life received cash and notes, net of re-
lated expenses, totaling $237,700,000. The loss on sale and
disposal expenses did not differ materially from the esti-
mate recorded in the fourth quarter of 1993. For the year
ended December 31, 1993, Security-Connecticut, which oper-
ated in the Life Insurance and Annuities segment, had reve-
nue of $274,500,000 and net income of $24,000,000.
In 1994, Lincoln Life completed the sale of 100% of the com-
mon 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.
G-29
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life 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.
Lincoln Life 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 unau-
thorized companies. To take a reserve credit for such reinsurance, Lincoln
Life holds assets from the reinsurer, including funds held under reinsur-
ance 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, Lincoln Life has a receivable (included in the foregoing amounts)
from affiliated insurance companies in the amount of $241,900,000 for stat-
utory surplus relief received under financial reinsurance ceded agreements.
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 af-
filiates. This purchase is expected to be completed in the form of a rein-
surance transaction with an initial ceding commission of approximately
$70,000,000. This ceding commission represents the present value of busi-
ness in-force and, accordingly, will be classified as other intangible as-
sets upon the close of this transaction. This transaction, which is ex-
pected 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 Lincoln Life under
which it sells Lincoln Life's products and provides the service that other-
wise would be provided by a home office marketing department and regional
offices. For providing these selling and marketing services, Lincoln Life
paid LFGI override commissions and operating expense allowances of
$81,900,000, $78,500,000 and $74,500,000 in 1995, 1994 and 1993, respec-
tively. 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 Lincoln Life, which Lincoln
Life is not required to reimburse.
Cash and invested cash at December 31, 1995 and 1994 include Lincoln Life'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, respective-
ly. Short-term debt at December 31, 1995 and 1994 includes $67,000,000 and
$68,600,000, respectively, borrowed from LNC. Lincoln Life paid interest to
LNC of $24,000, $8,000 and $137,000 in 1995, 1994 and 1993, respectively.
G-30
<PAGE>
FINANCIAL SCHEDULES
The following consolidated financial statement schedules of
Lincoln National Life Insurance Company and subsidiaries are
included on pages G-32 through G-36:
I. Summary of Investments--Other than Investments in Related
Parties -- December 31, 1995
III. Supplementary Insurance Information Years ended Decem-
ber 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 ap-
plicable accounting regulation of the Securities and Ex-
change Commission are not required under the related in-
structions, are inapplicable or the required information is
included in the consolidated financial statements, and
therefore have been omitted.
G-31
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS --
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1995
<TABLE>
<CAPTION>
Column A Column B Column C Column D
- ------------------------------------------------------------------------------
Amount at
which shown
in the
balance
Type of Investment Cost Value sheet
- ------------------------------------------------------------------------------
(000's omitted)
-----------------------------------
<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.
G-32
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
<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)
- --------------------------------------------------------------------------------------
(000's omitted)
------------------------------------------------------------
<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
----------------------
---------- ---------- ------- --- ----------
$ 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
----------------------
---------- ---------- ------- --- ----------
$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
----------------------
---------- ---------- ------- --- ----------
$1,297,913 $8,798,230 $59,660 $-- $2,397,713
========== ========== ======= === ==========
</TABLE>
(A) Includes insurance fees on universal life and other interest sensitive
products.
G-33
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION CONTINUED
<TABLE>
<CAPTION>
Column A Column G Column H Column I Column J Column K
- -------------------------------------------------------------------------------------------
Amortization
Benefits, claims of deferred Other
Net investment and claim acquisition operating Premium
Segment income (B) expenses costs expenses (B) written
- -------------------------------------------------------------------------------------------
(000's omitted)
------------------------------------------------------------------
<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 --
---------------------- ---------- ---------- -------- -------- -----
$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 --
---------------------- ---------- ---------- -------- -------- -----
$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) --
---------------------- ---------- ---------- -------- -------- -----
$1,823,459 $3,033,139 $240,989 $640,810 $ --
========== ========== ======== ======== =====
</TABLE>
(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.
G-34
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE (A)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- --------------------------------------------------------------------------------------
Percentage
Ceded Assumed of amount
Gross to other from other assumed to
Segment amount companies companies Net amount net
- --------------------------------------------------------------------------------------
(000's omitted)
-------------------------------------------------------------
<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
---------------------- ------------ ----------- ------------ ------------
$ 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
---------------------- ------------ ----------- ------------ ------------
$ 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
---------------------- ------------ ----------- ------------ ------------
$ 2,158,822 $ 568,612 $ 807,503 $ 2,397,713
============ =========== ============ ============
</TABLE>
(B) Includes insurance fees on universal life and other interest sensitive
products.
G-35
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ---------------------------------------------------------------------------------
Additions
-----------------------
(1) (2)
Charged to
Balance at Charged other Deductions- Balance
beginning to costs and accounts- describe at end of
Description of period expenses (A) describe (B) period
- ---------------------------------------------------------------------------------
(000's omitted)
--------------------------------------------------------
<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
-----------------------
</TABLE>
(A) Exclude charges for the direct write-off of assets. The negative amounts
represent improvements in the underlying assets for which valuation ac-
counts had previously been established.
(B) Deductions reflect sales or foreclosures of the underlying holdings.
G-36
<PAGE>
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Board of Directors
Lincoln National Life Insurance Company
We have audited the accompanying consolidated balance sheets
of Lincoln National Life Insurance Co., a wholly owned sub-
sidiary of Lincoln National Corp., 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 page G-
31. These financial statements and schedules are the respon-
sibility 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 ac-
cepted 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 fi-
nancial statements. An audit also includes assessing the ac-
counting 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 Lincoln National Life Insurance Co. at
December 31, 1995 and 1994, and the consolidated result 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 state-
ments, in 1993 the Company changed its method of accounting
for postretirement benefits other than pensions, accounting
for impairment of loans and accounting for certain invest-
ments in debt and equity securities.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
February 7, 1996
G-37
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS--STATUTORY BASIS
<TABLE>
<CAPTION>
December 31
1996 1995
--------- ---------
(in millions)
--------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $19,389.6 $17,729.7
- -------------------------------------------------------------------------------------------------------
Preferred stocks 239.7 89.9
- -------------------------------------------------------------------------------------------------------
Unaffiliated common stocks 358.3 535.5
- -------------------------------------------------------------------------------------------------------
Affiliated common stocks 241.5 193.0
- -------------------------------------------------------------------------------------------------------
Mortgage loans on real estate 2,976.7 2,909.7
- -------------------------------------------------------------------------------------------------------
Real estate 621.3 655.2
- -------------------------------------------------------------------------------------------------------
Policy loans 626.5 515.8
- -------------------------------------------------------------------------------------------------------
Other investments 282.7 248.0
- -------------------------------------------------------------------------------------------------------
Cash and short-term investments 759.2 780.9
- ----------------------------------------------------------------------------------- --------- ---------
Total cash and investments 25,495.5 23,657.7
- -------------------------------------------------------------------------------------------------------
Premiums and fees in course of collection 60.9 17.1
- -------------------------------------------------------------------------------------------------------
Accrued investment income 343.6 342.5
- -------------------------------------------------------------------------------------------------------
Funds withheld by ceding companies 25.8 595.3
- -------------------------------------------------------------------------------------------------------
Other admitted assets 355.7 217.7
- -------------------------------------------------------------------------------------------------------
Separate account assets 23,735.1 18,461.6
- ----------------------------------------------------------------------------------- --------- ---------
Total admitted assets $50,016.6 $43,291.9
- ----------------------------------------------------------------------------------- ========= =========
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $ 5,954.0 $ 5,713.3
- -------------------------------------------------------------------------------------------------------
Other policyholder funds 17,262.4 15,598.5
- -------------------------------------------------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 250.2 499.3
- -------------------------------------------------------------------------------------------------------
Funds held under reinsurance treaties 564.6 1,053.5
- -------------------------------------------------------------------------------------------------------
Asset valuation reserve 375.5 270.0
- -------------------------------------------------------------------------------------------------------
Interest maintenance reserve 76.7 116.3
- -------------------------------------------------------------------------------------------------------
Other liabilities 490.9 391.3
- -------------------------------------------------------------------------------------------------------
Federal income taxes 4.3 3.2
- -------------------------------------------------------------------------------------------------------
Net transfers due from separate accounts (659.7) (548.0)
- -------------------------------------------------------------------------------------------------------
Separate account liabilities 23,735.1 18,461.6
- ----------------------------------------------------------------------------------- --------- ---------
Total liabilities 48,054.0 41,559.0
- -------------------------------------------------------------------------------------------------------
CAPITAL AND SURPLUS:
Common stock, $2.50 par value:
Authorized, issued and outstanding shares--10 million (owned by Lincoln National
Corporation) 25.0 25.0
- -------------------------------------------------------------------------------------------------------
Paid-in surplus 883.4 783.4
- -------------------------------------------------------------------------------------------------------
Unassigned surplus 1,054.2 924.5
- ----------------------------------------------------------------------------------- --------- ---------
Total capital and surplus 1,962.6 1,732.9
- ----------------------------------------------------------------------------------- --------- ---------
Total liabilities and capital and surplus $50,016.6 $43,291.9
- ----------------------------------------------------------------------------------- ========= =========
</TABLE>
See accompanying notes.
S-1
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF INCOME--STATUTORY BASIS
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
-----------------------
(in millions)
--------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $7,268.5 $4,899.1 $5,648.7
- -------------------------------------------------------------------------------
Net investment income 1,756.3 1,772.2 1,606.8
- -------------------------------------------------------------------------------
Amortization of interest maintenance reserve 27.2 34.0 9.8
- -------------------------------------------------------------------------------
Commissions and expense allowances on reinsurance
ceded 90.9 98.3 145.0
- -------------------------------------------------------------------------------
Expense charges on deposit funds 100.7 83.2 70.5
- -------------------------------------------------------------------------------
Other income 16.8 14.5 15.6
- --------------------------------------------------- -------- -------- --------
Total revenues 9,260.4 6,901.3 7,496.4
- -------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 5,989.9 4,184.0 5,071.6
- -------------------------------------------------------------------------------
Underwriting, acquisition, insurance and other
expenses 2,878.5 2,345.7 2,136.1
- --------------------------------------------------- -------- -------- --------
Total benefits and expenses 8,868.4 6,529.7 7,207.7
- --------------------------------------------------- -------- -------- --------
Gain from operations before dividends to
policyholders, income taxes and net realized gain
on investments 392.0 371.6 288.7
- -------------------------------------------------------------------------------
Dividends to policyholders 27.3 27.3 18.0
- --------------------------------------------------- -------- -------- --------
Gain from operations before federal income taxes
and net realized gain on investments 364.7 344.3 270.7
- -------------------------------------------------------------------------------
Federal income taxes 83.6 103.7 52.8
- --------------------------------------------------- -------- -------- --------
Gain from operations before net realized gain on
investments 281.1 240.6 217.9
- -------------------------------------------------------------------------------
Net realized gain on investments, net of income tax
expense (benefits) [1996--$28.5; 1995--$48.1;
1994--$(178.1)] and excluding net transfers to
(from) the interest maintenance reserve [1996--
$(12.4); 1995--$94.9; 1994--$(147.1)] 53.3 43.9 124.0
- --------------------------------------------------- -------- -------- --------
Net income $ 334.4 $ 284.5 $ 341.9
- --------------------------------------------------- ======== ======== ========
</TABLE>
See accompanying notes.
S-2
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS--STATUTORY BASIS
<TABLE>
<CAPTION>
Year
ended
December
31
1996 1995 1994
-------- -------- --------
(in millions)
----------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $1,732.9 $1,679.6 $1,302.5
- ----------------------------------------------------------------
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income 334.4 284.5 341.9
- ----------------------------------------------------------------
Differences in cost and admitted investment amounts 38.6 143.2 (123.3)
- ----------------------------------------------------------------
Nonadmitted assets (3.0) 2.9 (3.2)
- ----------------------------------------------------------------
Regulatory liability for reinsurance 0.6 (2.0) (1.1)
- ----------------------------------------------------------------
Life policy reserve valuation basis (0.4) 2.9 (1.3)
- ----------------------------------------------------------------
Asset valuation reserve (105.5) (112.5) 83.8
- ----------------------------------------------------------------
Mortgage loan, real estate and other investment reserves -- 2.2 218.6
- ----------------------------------------------------------------
Paid-in surplus 100.0 15.1 --
- ----------------------------------------------------------------
Separate account receivable due to change in valuation -- 27.0 --
- ----------------------------------------------------------------
Accounting for separate account contracts -- -- (13.3)
- ----------------------------------------------------------------
Dividends to shareholder (135.0) (310.0) (125.0)
- ---------------------------------------------------------------- -------- -------- --------
Capital and surplus at end of year $1,962.6 $1,732.9 $1,679.6
- ---------------------------------------------------------------- ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
S-3
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS--STATUTORY BASIS
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
----------------------------------
(in millions)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 8,059.4 $ 5,430.9 $ 5,654.5
- -------------------------------------------------------------------------------------
Allowances and reserve adjustments received (paid) on
reinsurance ceded (767.5) (383.6) 137.1
- -------------------------------------------------------------------------------------
Investment income received 1,700.6 1,713.2 1,588.5
- -------------------------------------------------------------------------------------
Benefits paid (4,050.4) (3,239.6) (3,054.1)
- -------------------------------------------------------------------------------------
Insurance expenses paid (2,972.2) (2,513.5) (2,542.5)
- -------------------------------------------------------------------------------------
Federal income taxes recovered (paid) (72.3) 38.4 (191.8)
- -------------------------------------------------------------------------------------
Dividends to policyholders (27.7) (16.5) (18.4)
- -------------------------------------------------------------------------------------
Other income received and expenses paid, net 6.3 14.4 59.2
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Net cash provided by operating activities 1,876.2 1,043.7 1,632.5
- -------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 12,542.0 13,183.9 11,877.0
- -------------------------------------------------------------------------------------
Purchase of investments (14,175.4) (14,049.6) (12,871.8)
- -------------------------------------------------------------------------------------
Other uses (266.5) (64.0) (123.4)
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Net cash used in investing activities (1,899.9) (929.7) (1,118.2)
- -------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in 100.0 15.1 --
- -------------------------------------------------------------------------------------
Proceeds from borrowings 100.0 63.0 63.0
- -------------------------------------------------------------------------------------
Repayment of borrowings (63.0) (63.0) (60.0)
- -------------------------------------------------------------------------------------
Dividends paid to shareholder (135.0) (310.0) (125.0)
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Net cash provided by (used in) financing activities 2.0 (294.9) (122.0)
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Net increase (decrease) in cash and short-term investments (21.7) (180.9) 392.3
- -------------------------------------------------------------------------------------
Cash and short-term investments at beginning of year 780.9 961.8 569.5
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Cash and short-term investments at end of year $ 759.2 $ 780.9 $ 961.8
- -------------------------------------------------------------------------------------
========== ========== ==========
</TABLE>
See accompanying notes.
S-4
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS
1.SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
The Lincoln National Life Insurance Company ("Company") is a wholly owned
subsidiary of Lincoln National Corporation ("LNC") and is domiciled in In-
diana. As of December 31, 1996, the Company owns 100% of the outstanding
common stock of four insurance company subsidiaries: First Penn-Pacific
Life Insurance Company, Lincoln National Health & Casualty Insurance Compa-
ny, Lincoln National Reassurance Company and Lincoln Life & Annuity Company
of New York.
The Company's principal business consist of underwriting annuities, depos-
it-type contracts, life and health insurance through multiple distribution
channels and the reinsurance of individual and group life and health busi-
ness. The Company is licensed and sells its products in 49 states, Canada
and several U.S. territories.
USE OF ESTIMATES
The preparation of financial statements requires management to make esti-
mates and assumptions that affect amounts reported in the financial state-
ments and accompanying notes. Such estimates and assumptions could change
in the future as more information becomes known, which could impact the
amounts reported and disclosed herein.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Indiana Department of
Insurance, which practices differ from generally accepted accounting prin-
ciples ("GAAP"). The more significant variances from GAAP are as follows:
INVESTMENTS
Bonds are reported at cost or amortized cost or market value based on their
National Association of Insurance Commissioners ("NAIC") rating. For GAAP,
the Company's bonds are classified as available-for-sale and, accordingly,
are reported at fair value with changes in the fair values reported di-
rectly in shareholder's equity after adjustments for related amortization
of deferred acquisition costs, additional policyholder commitments and de-
ferred income taxes.
Investments in real estate are reported net of related obligation rather
than on a gross basis.
Changes between cost and admitted asset investment amounts are credited or
charged directly to unassigned surplus rather than to a separate surplus
account.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized capital gains and losses on sales of fixed income investments,
principally bonds and mortgage loans, attributable to changes in the gen-
eral level of interest rates and amortizes those deferrals over the remain-
ing period to maturity of the individual security sold. The net deferral is
reported as the interest maintenance reserve in the accompanying balance
sheets. Realized capital gains and losses are reported in income net of
federal income tax and transfers to the interest maintenance reserve. The
asset valuation reserve is determined by an NAIC prescribed formula and is
reported as a liability rather than unassigned surplus. Under GAAP, real-
ized capital gains and losses are reported in the income statement on a
pre-tax basis in the period that the asset giving rise to the gain or loss
is sold and valuation allowances are provided when there has been a decline
in value deemed other than temporary, in which case, the provision for such
declines are charged to income.
SUBSIDIARIES
The accounts and operations of the Company's subsidiaries are not consoli-
dated with the accounts and operations of the Company as would be required
by GAAP. Under statutory accounting principles, the Company's subsidiaries
are carried at their statutory-basis net equity.
POLICY ACQUISITION COSTS
The costs of acquiring and renewing business are expensed when incurred.
Under GAAP, acquisition costs related to traditional life insurance, to the
extent recoverable from future policy revenues, are deferred and amortized
over the premium-paying period of the related policies using assumptions
consistent with those used in computing policy benefit reserves. For uni-
versal life insurance, annuity and other investment-type products, deferred
policy acquisition costs, to the extent recoverable from future gross prof-
its, are amortized generally in proportion to the present value of expected
gross profits from surrender charges and investment, mortality and expense
margins.
NONADMITTED ASSETS
Certain assets designated as "nonadmitted," principally furniture and
equipment and certain receivables, are excluded from the accompanying bal-
ance sheets and are charged directly to unassigned surplus.
PREMIUMS
Premiums and deposits with respect to universal life policies and annuity
and other investment-type contracts are reported as premium revenues;
whereas, under GAAP, such premiums and deposits are treated as liabilities
and policy charges represent revenues.
S-5
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
INCOME TAXES
Deferred income taxes are not provided for differences between financial
statement amounts and tax bases of assets and liabilities.
POLICYHOLDER DIVIDENDS
Policyholder dividends are recognized when declared rather than over the
term of the related policies.
Other significant accounting practices are as follows:
INVESTMENTS
The discount or premium on bonds is amortized using the interest method.
For mortgage-backed bonds, the Company recognizes income using a constant
effective yield based on anticipated prepayments and the estimated economic
life of the securities. When actual prepayments differ significantly from
anticipated prepayments, the effective yield is recalculated to reflect ac-
tual payments to date and anticipated future payments. The net investment
in the securities is adjusted to the amount that would have existed had the
new effective yield been applied since the acquisition of the securities.
Short-term investments include investments with maturities of less than one
year at the date of acquisition. The carrying amounts for these investments
approximate their fair values.
Preferred stocks are reported at cost or amortized cost.
Common stocks are reported at market value as determined by the Securities
Valuation Office of the NAIC and the related unrealized gains (losses) are
reported in unassigned surplus without adjustment for federal income taxes.
Policy loans are reported at unpaid balances.
The Company uses various derivative instruments as part of its overall lia-
bility-asset management program for certain investments and life insurance
and annuity products. The Company values all derivative instruments on a
basis consistent with that of the hedged item. Upon termination, gains and
losses on those instruments are included in the carrying values of the un-
derlying hedged items and are amortized over the remaining lives of the
hedged items as adjustments to investment income or benefits from the
hedged items. Any unamortized gains or losses are recognized when the un-
derlying hedged items are sold.
Mortgage loans on real estate are reported at unpaid balances, less allow-
ances for impairments. Real estate is reported at depreciated cost. As of
June 30, 1994, the Company changed its method of accounting for reserves on
impaired real estate and mortgage loans. The impaired investment is now
shown on a pre-tax basis as a nonadmitted asset. Previously, these reserves
were presented as a liability, net of related tax benefits, to approximate
the impact on surplus if losses were realized.
Realized investment gains and losses on investments sold are determined us-
ing the specific identification method. Changes in admitted asset carrying
amounts of
1.SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES CONTINUED
BENEFIT RESERVES
Certain policy reserves are calculated based on statutorily required inter-
est and mortality assumptions rather than on estimated expected experience
or actual account balances as would be required under GAAP.
Death benefits paid, policy and contract withdrawals, and the change in
policy reserves on universal life policies, annuity and other investment-
type contracts are reported as benefits and settlement expenses; in the ac-
companying statement of income, whereas, under GAAP, withdrawals are
treated as a reduction of the policy or contract liabilities and benefits
would represent the excess of benefits paid over the policy account value
and interest credited to the account values.
REINSURANCE
Premiums, claims and policy benefits and contract liabilities are reported
in the accompanying financial statements net of reinsurance amounts. For
GAAP, all assets and liabilities related to reinsurance ceded contracts are
reported on a gross basis.
A liability for reinsurance balances has been provided for unsecured policy
and contract liabilities and unearned premiums ceded to reinsurers not au-
thorized by the Indiana Department of Insurance to assume such business.
Changes to those amounts are credited or charged directly to unassigned
surplus. Under GAAP, an allowance for amounts deemed uncollectible is es-
tablished through a charge to income.
Commissions on business ceded are reported as income when received rather
than deferred and amortized with deferred policy acquisition costs.
Certain reinsurance contracts meeting risk transfer requirements under
statutory-basis accounting practices have been accounted for using tradi-
tional reinsurance accounting whereas such contracts would be accounted for
using deposit accounting under GAAP.
POSTRETIREMENT BENEFITS
For purposes of calculating the Company's postretirement benefit obliga-
tion, only vested employees and current retirees are included in the valua-
tion. Under GAAP, active employees not currently eligible would also be in-
cluded.
S-6
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Unpaid claims and claim adjustment expenses on accident and health policies
represent the estimated ultimate net cost of all reported and unreported
claims incurred during the year. The Company does not discount claims and
claim adjustment expense reserves. The reserves for unpaid claims and claim
adjustment expenses are estimated using individual case-basis valuations
and statistical analyses. Those estimates are subject to the effects of
trends in claim severity and frequency. Although considerable variability
is inherent in such estimates, management believes that the reserves for
claims and claim adjustment expenses are adequate. The estimates are con-
tinually reviewed and adjusted as necessary as experience develops or new
information becomes known; such adjustments are included in current opera-
tions.
REINSURANCE CEDED AND ASSUMED
Reinsurance premiums and claims and claim adjustment expenses are accounted
for on bases consistent with those used in accounting for the original pol-
icies issued and the terms of the reinsurance contracts. Certain business
is transacted on a funds withheld basis and investment income on funds
withheld are reported in net investment income.
PENSION BENEFITS
Costs associated with the Company's defined benefit pension plans is sys-
tematically accrued during the expected period of active service of the
covered employees.
INCOME TAXES
The Company and eligible subsidiaries have elected to file consolidated
federal and state income tax returns with LNC. Pursuant to an intercompany
tax sharing agreement with LNC, the Company provides for income taxes on a
separate return filing basis. The tax sharing agreement also provides that
the Company will receive benefit for net operating losses, capital losses
and tax credits which are not usable on a separate return basis to the ex-
tent such items may be utilized in the consolidated income tax returns of
LNC.
STOCK OPTIONS
The Company recognizes compensation expense for its stock option incentive
plans using the intrinsic value method of accounting. Under the terms of
the intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of LNC's common stock at the grant date, or other mea-
surement date, over the amount an employee must pay to acquire the stock.
ASSETS HELD IN SEPARATE ACCOUNTS AND LIABILITIES RELATED TO SEPARATE
ACCOUNTS
These assets and liabilities represent segregated funds administered and
invested by LNC's insurance subsidiaries for the exclusive benefit of pen-
sion and variable life and annuity contractholders. The fees received by
the Company for administrative and contractholder maintenance services per-
formed for these separate accounts are included in the Company's statements
of income.
1.SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES CONTINUED
bonds, mortgage loans and common and preferred stocks are credited or
charged directly in unassigned surplus.
DATA PROCESSING EQUIPMENT
Data processing equipment is reported at depreciated cost, with deprecia-
tion determined on a straight-line basis over five years.
GOODWILL
Goodwill, which represents the excess of the ceding commission over statu-
tory-basis net assets of business purchased under an assumption reinsurance
agreement, is amortized on a straight-line basis over ten years.
PREMIUMS
Life insurance and annuity premiums are recognized as revenue when due. Ac-
cident and health premiums are earned prorata over the contract term of the
policies.
BENEFITS
Life, annuity and accident and health benefit reserves are developed by ac-
tuarial methods and are determined based on published tables using statuto-
rily specified interest rates and valuation methods that will provide, in
the aggregate, reserves that are greater than or equal to the minimum or
guaranteed policy cash values or the amounts required by the Indiana De-
partment of Insurance. The Company waives deduction of deferred fractional
premiums on the death of life and annuity policy insureds and returns any
premium beyond the date of death, except for policies issued prior to March
1977. Surrender values on policies do not exceed the corresponding benefit
reserves. Additional reserves are established when the results of cash flow
testing under various interest rate scenarios indicate the need for such
reserve. If net premiums exceed the gross premiums on any insurance in-
force, additional reserves are established. Benefit reserves for policies
underwritten on a substandard basis are determined using the multiple table
reserve method.
The tabular interest, tabular less actual reserve released and the tabular
cost have been determined by formula or from the basic data for such items.
Tabular interest funds not involving life contingencies were determined us-
ing the actual interest credited to the funds plus the change in accrued
interest.
Liabilities related to guaranteed investment contracts and policyholder
funds left on deposit with the Company generally are equal to fund balances
less applicable surrender charges.
S-7
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A reconciliation of the Company's net income and capital and surplus deter-
mined on a statutory accounting basis with amounts determined in accordance
with GAAP is as follows:
<TABLE>
<CAPTION>
Capital and Surplus Net Income
-------------------- -----------------------
Year ended December
December 31 31
1996 1995 1996 1995 1994
--------- --------- ------ ------ -------
(in millions)
<S> <C> <C> <C> <C> <C>
Amounts reported on a
statutory basis $ 1,962.6 $ 1,732.9 $334.4 $284.5 $ 341.9
----------------------------
GAAP adjustments:
----------------------------
Deferred policy acquisition
costs and present value of
future profits 1,119.1 850.2 66.7 (63.0) 191.1
----------------------------
Policy and contract
reserves (1,405.3) (1,562.2) (57.1) (55.3) (53.6)
----------------------------
Interest maintenance
reserve 76.7 116.3 (39.7) 60.9 (157.0)
----------------------------
Deferred income taxes (27.4) (122.5) 1.8 38.3 (138.3)
----------------------------
Policyholders' share of
earnings and surplus on
participating business (81.9) (91.9) (.3) .2 (3.0)
----------------------------
Asset valuation reserve 375.5 270.0 -- -- --
----------------------------
Net realized gain (loss) on
investments (72.0) (67.4) 78.7 30.0 47.1
----------------------------
Adjustment to unrealized
gain (loss) 825.2 1,494.0 -- -- --
----------------------------
Nonadmitted assets,
including nonadmitted
investments (7.1) 57.9 -- -- --
----------------------------
Net GAAP adjustments of
subsidiary companies 156.6 131.2 29.9 34.3 48.2
----------------------------
Other, net (99.0) (89.7) (82.6) (7.3) (58.6)
---------------------------- --------- --------- ------ ------ -------
Net increase (decrease) 860.4 985.9 (2.6) 38.1 (124.1)
---------------------------- --------- --------- ------ ------ -------
Amounts on a GAAP basis $ 2,823.0 $ 2,718.8 $331.8 $322.6 $ 217.8
---------------------------- ========= ========= ====== ====== =======
</TABLE>
S-8
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
2.PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory-basis financial statements are prepared in accor-
dance with accounting practices prescribed or permitted by the Indiana De-
partment of Insurance (the "Department"). "Prescribed" statutory accounting
practices include state laws, regulations and general administrative rules,
as well as a variety of publications of the NAIC. "Permitted" statutory ac-
counting practices encompass all accounting practices that are not pre-
scribed; such practices may differ from state to state, may differ from
company to company within a state and may change in the future. The NAIC
currently is in the process of recodifying statutory accounting practices,
the result of which is expected to constitute the only source of "pre-
scribed" statutory accounting practices. Accordingly, that project, which
is expected to be completed in 1998, will likely change, to some extent,
prescribed statutory accounting practices, and may result in changes to the
accounting practices that the Company uses to prepare its statutory-basis
financial statements.
In 1994, the Company received approval from the Department to change its
accounting for surrender charges applicable to separate account liabilities
for variable life and annuity products so that the surrender charges on
these products are recorded as a liability in the separate account finan-
cial statements payable to the Company's general account. In the accompany-
ing financial statements, a corresponding receivable is recorded with the
related income impact recorded in the accompanying statement of operations
as a change in reserves or change in premium and other deposit funds. The
cumulative effect of this change increased 1994 net income by $13,299,000.
The Company has approval from the Department to establish valuation allow-
ances on mortgage loans on real estate in accordance with GAAP, which are
in excess of that prescribed by the NAIC and the Department.
Prior to 1995, the Company has considered certain amounts under modified
coinsurance reinsurance contracts as adjustments to premiums. As such, pol-
icyholder dividends, cash surrender charges and reserve adjustments with
interest thereon and commissions on reinsurance assumed are classified as
premiums, rather than on expense lines, with no net effect on net income or
capital and surplus. On a net-of-ceded basis for the year ended December
31, 1994, this practice resulted in increases to both revenues and expenses
of approximately $600,000,000. In addition, reserve adjustments with inter-
est thereon and commissions on reinsurance ceded were also classified as
premiums, rather than in other revenue classifications. For the year ended
December 31, 1994, this intra-revenue grouping reduced premiums by approxi-
mately $50,000,000. Beginning in 1995, the Company reports modified coin-
surance agreements on a gross basis. This change was made as a result of
communications with the Department. This accounting change had no effect on
income or surplus and prior period amounts have not been restated.
S-9
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
3. INVESTMENTS
The major categories of net investment income are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
-----------------------------------------
(in millions)
--------------------------
<S> <C> <C> <C>
Income:
Bonds $1,442.2 $1,457.4 $1,266.7
--------------------------------------------------------------------------------
Preferred stocks 9.6 6.4 5.8
--------------------------------------------------------------------------------
Unaffiliated common stocks 6.5 5.2 4.4
--------------------------------------------------------------------------------
Affiliated common stocks 9.5 12.6 62.5
--------------------------------------------------------------------------------
Mortgage loans on real estate 269.3 252.0 255.2
--------------------------------------------------------------------------------
Real estate 114.4 110.0 97.4
--------------------------------------------------------------------------------
Policy loans 35.0 32.1 29.7
--------------------------------------------------------------------------------
Other investments 22.4 62.6 121.3
--------------------------------------------------------------------------------
Cash and short-term investments 48.9 53.2 43.3
--------------------------------------------------------------- -------- -------- --------
Total investment income 1,957.8 1,991.5 1,886.3
-----------------------------------------------------------------------------------
Expenses:
Depreciation 25.0 25.9 21.9
--------------------------------------------------------------------------------
Other 176.5 193.4 257.6
--------------------------------------------------------------- -------- -------- --------
Total investment expenses 201.5 219.3 279.5
---------------------------------------------------------------- -------- -------- --------
Net investment income $1,756.3 $1,772.2 $1,606.8
---------------------------------------------------------------- ======== ======== ========
</TABLE>
Nonadmitted accrued investment income at December 31, 1996
and 1995 amounted to $2,500,000 and $11,500,000, respective-
ly, consisting principally of interest on bonds in default
and mortgage loans.
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in bonds are summa-
rized as follows:
<TABLE>
<CAPTION>
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------
(in millions)
-----------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1996:
Corporate $12,548.1 $ 586.5 $ 66.6 $13,068.0
--------------------------------------------------------------
U.S. government 1,088.7 43.2 18.0 1,113.9
--------------------------------------------------------------
Foreign government 1,234.0 105.1 1.4 1,337.7
--------------------------------------------------------------
Mortgage-backed 4,478.4 183.3 27.4 4,634.3
--------------------------------------------------------------
State and municipal 40.4 .1 -- 40.5
-------------------- --------- -------- ------ ---------
$19,389.6 $ 918.2 $113.4 $20,194.4
========= ======== ====== =========
At December 31, 1995:
Corporate $11,642.0 $1,074.7 $ 41.4 $12,675.3
--------------------------------------------------------------
U.S. government 546.4 82.2 -- 628.6
--------------------------------------------------------------
Foreign government 908.0 68.0 .6 975.4
--------------------------------------------------------------
Mortgage-backed 4,628.3 283.2 11.2 4,900.3
--------------------------------------------------------------
State and municipal 5.0 .1 -- 5.1
-------------------- --------- -------- ------ ---------
$17,729.7 $1,508.2 $ 53.2 $19,184.7
========= ======== ====== =========
</TABLE>
S-10
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
3. INVESTMENTS CONTINUED
Fair values for bonds are based on quoted market prices,
where available. For bonds not actively traded, fair values
are estimated using values obtained from independent pricing
services or, in the case of private placements, are esti-
mated by discounting expected future cash flows using a cur-
rent market rate applicable to the coupon rate, credit qual-
ity and maturity of the investments.
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1996, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
Cost or
Amortized Fair
Cost Value
------------------------------
(in millions)
-------------------
<S> <C> <C>
Maturity:
In 1997 $ 358.0 $ 360.1
----------------------------------------------------------------------------------------------
In 1998-2001 3,809.0 3,912.3
----------------------------------------------------------------------------------------------
In 2002-2006 4,760.9 4,917.3
----------------------------------------------------------------------------------------------
After 2006 5,983.3 6,370.4
----------------------------------------------------------------------------------------------
Mortgage-backed securities 4,478.4 4,634.3
--------------------------------------------------------------------------- --------- ---------
Total $19,389.6 $20,194.4
--------------------------------------------------------------------------- ========= =========
</TABLE>
The expected maturities may differ from the contractual ma-
turities in the foregoing table because certain borrowers
may have the right to call or prepay obligations with or
without call or prepayment penalties.
At December 31, 1996, the Company did not have a material
concentration of financial instruments in a single investee,
industry or geographic location.
Proceeds from sales of investments in bonds during 1996,
1995 and 1994 were $10,996,900,000, $12,234,100,000 and
$9,668,300,000, respectively. Gross gains during 1996, 1995
and 1994 of $169,700,000, $225,600,000 and $62,600,000, re-
spectively, and gross losses of $177,000,000, $83,100,000
and $286,800,000, respectively, were realized on those
sales.
At December 31, 1996 and 1995, investments in bonds, with an
admitted asset value of $70,700,000 and $60,700,000, respec-
tively, were on deposit with state insurance departments to
satisfy regulatory requirements.
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in unaffiliated
common stocks and preferred stocks are as follows:
<TABLE>
<CAPTION>
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------
<S> <C> <C> <C> <C>
(in millions)
-------------------------------
At December 31, 1996:
Preferred stocks $239.7 $ 10.5 $ 1.7 $248.5
----------------------------------------------------------
Unaffiliated common stocks 289.9 84.6 16.2 358.3
----------------------------------------------------------
At December 31, 1995:
Preferred stocks 89.9 13.9 .2 103.6
----------------------------------------------------------
Unaffiliated common stocks 438.0 110.0 12.5 535.5
----------------------------------------------------------
</TABLE>
S-11
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
3. INVESTMENTS CONTINUED
The carrying value of affiliated common stocks, representing
their statutory-basis net equity, was $241,500,000 and
$193,000,000 at December 31, 1996 and 1995, respectively.
The cost basis of investments in subsidiaries as of December
31, 1996 and 1995 was $194,000,000 and $123,000,000, respec-
tively.
During 1996, the maximum and minimum lending rates for mort-
gage loans were 10.5% and 6.0%, respectively. At the issu-
ance of a loan, the percentage of loan to value on any one
loan does not exceed 75%. At December 31, 1996, the Company
did not hold any mortgages with interest overdue beyond one
year. At December 31, 1996, the Company's investments in
mortgage loans were subject to $59,700,000 of prior liens.
All properties covered by mortgage loans have fire insurance
at least equal to the excess of the loan over the maximum
loan that would be allowed on the land without the building.
4.FEDERAL INCOME TAXES
The effective federal income tax rate for financial report-
ing purposes differs from the prevailing statutory tax rate
principally due to tax-exempt investment income, dividends-
received tax deductions, differences in policy acquisition
costs and policy and contract liabilities for tax return and
financial statement purposes.
Federal income taxes incurred of $83,600,000, $103,700,000
and $52,800,000 in 1996, 1995 and 1994, respectively, would
be subject to recovery in the event that the Company incurs
net operating losses within three years of the years for
which such taxes were paid.
Prior to 1984, a portion of the Company's current income was
not subject to current income tax, but was accumulated for
income tax purposes in a memorandum account designated as
"policyholders' surplus." The Company's balance in the "pol-
icyholders' surplus" account at December 31, 1983 of
$187,000,000 was "frozen" by the Tax Reform Act of 1984 and,
accordingly, there have been no additions to the accounts
after that date. That portion of current income on which in-
come taxes have been paid will continue to be accumulated in
a memorandum account designated as "shareholder's surplus,"
and is available for dividends to the shareholder without
additional payment of tax by the Company. The December 31,
1996 memorandum account balance for "shareholder's surplus"
was $1,606,000,000. Should dividends to the shareholder ex-
ceed its respective "shareholder's surplus," amounts would
need to be transferred from the "policyholders' surplus" and
would be subject to federal income tax at that time. Under
existing or foreseeable circumstances, the Company neither
expects nor intends that distributions will be made that
will result in any such tax.
5.SUPPLEMENTAL FINANCIAL DATA
The balance sheet caption, "Other Admitted Assets," includes
amounts recoverable from other insurers for claims paid by
the Company, and the balance sheet caption, "Future Policy
Benefits and Claims," has been reduced for insurance ceded
as follows:
<TABLE>
<CAPTION>
December 31
--------------------------
1996 1995 1994
----------------------------------------
(in millions)
----------------------------------------
<S> <C> <C> <C>
Insurance ceded $1,154.5 $1,634.0 $1,721.1
Amounts recoverable from other insurers 16.0 4.4 4.8
</TABLE>
S-12
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
5.SUPPLEMENTAL FINANCIAL DATA CONTINUED
Reinsurance transactions included in the income statement
caption, "Premiums and Deposits," are as follows:
<TABLE>
<CAPTION>
Year ended December
31
1996 1995 1994
--
(in millions)
--------------------
<S> <C> <C> <C>
Insurance assumed $241.3 $667.7 $607.3
-------------------------------
Insurance ceded 193.3 453.1 583.8
------------------------------- ------ ------ ------
Net amount included in premiums $ 48.0 $214.6 $ 23.5
------------------------------- ====== ====== ======
</TABLE>
The income statement caption, "Benefits and Settlement Ex-
penses," is net of reinsurance recoveries of $787,886,200,
$1,407,000,000 and $1,391,100,000 for 1996, 1995 and 1994,
respectively.
Deferred and uncollected life insurance premiums and annuity
considerations included in the balance sheet caption, "Pre-
miums and Fees in Course of Collection," are as follows:
<TABLE>
<CAPTION>
December 31, 1996
-----------------------
Net of
Gross Loading Loading
(in millions)
-----------------------
<S> <C> <C> <C>
Ordinary new business $ 3.9 $1.9 $ 2.0
---------------------
Ordinary renewal 35.1 3.0 32.1
---------------------
Group life 9.4 (.1) 9.5
---------------------
Group annuity -- -- --
--------------------- ------ ---- ------
$ 48.4 $4.8 $ 43.6
====== ==== ======
<CAPTION>
December 31, 1995
-----------------------
Net of
Gross Loading Loading
(in millions)
-----------------------
<S> <C> <C> <C>
Ordinary new business $ 2.5 $1.1 $ 1.4
---------------------
Ordinary renewal (19.1) 2.8 (21.9)
---------------------
Group life 15.8 -- 15.8
---------------------
Group annuity .2 -- .2
--------------------- ------ ---- ------
$ (.6) $3.9 $ (4.5)
====== ==== ======
</TABLE>
The Company has entered into non-exclusive managing general
agent agreements with International Benefit Services Corp.,
HRM Claim Management, Inc. and Pediatrics Insurance Consul-
tants, Inc. to write group life and health business. Direct
premiums written amounted to $26,200,000 $3,800,000 and
$8,600,000 in 1996 and $33,100,000, $10,600,000 and
$8,800,000 in 1995, respectively. During 1996, LNC Adminis-
trative Services entered into a similar agreement with the
Company with direct premiums written amounting to
$6,200,000. Authority granted by the managing general agents
agreements include underwriting, claims adjustment and
claims payment services.
S-13
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
6.ANNUITY RESERVES
At December 31, 1996, the Company's annuity reserves and de-
posit fund liabilities, including separate accounts, that
are subject to discretionary withdrawal with adjustment,
subject to discretionary withdrawal without adjustment and
not subject to discretionary withdrawal provisions are sum-
marized as follows:
<TABLE>
<CAPTION>
Amount Percent
----------------
(in millions)
-------------------
<S> <C> <C>
Subject to discretionary withdrawal with adjustment:
With market value adjustment $ 2,971.8 6.0%
------------------------------------------------------
At book value, less surrender charge 5,228.6 12.0
------------------------------------------------------
At market value 22,703.4 51.0
------------------------------------------------------ ---------- ------
30,903.8 69.0
Subject to discretionary withdrawal without adjustment
at book value with minimal or no charge or adjustment 10,986.4 25.0
------------------------------------------------------
Not subject to discretionary withdrawal 2,601.9 6.0
------------------------------------------------------
---------- ------
Total annuity reserves and deposit fund 44,492.1
liabilities--before reinsurance 100.0%
------------------------------------------------------
======
Less reinsurance 1,848.8
------------------------------------------------------ ----------
Net annuity reserves and deposit fund liabilities,
including separate accounts $42,643.3
------------------------------------------------------ ==========
</TABLE>
7.CAPITAL AND SURPLUS
Life insurance companies are subject to certain Risk-Based
Capital ("RBC") requirements as specified by the NAIC. Under
those requirements, the amount of capital and surplus main-
tained by a life insurance company is to be determined based
on the various risk factors related to it. At December 31,
1996, the Company exceeds the RBC requirements.
The payment of dividends by the Company is limited and can-
not be made except from earned profits. The maximum amount
of dividends that may be paid by life insurance companies
without prior approval of the Indiana Insurance Commissioner
is subject to restrictions relating to statutory surplus and
net gain from operations. In 1997, the Company can pay divi-
dends of $281,100,000 without prior approval of the Indiana
Insurance Commissioner.
8.EMPLOYEE BENEFIT PLANS
Pension plans
LNC maintains funded defined benefit pension plans for most
of its employees and, prior to January 1, 1995, full-time
agents. The benefits for employees are based on total years
of service and the highest 60 months of compensation during
the last 10 years of employment. The benefits for agents
were based on a percentage of each agent's yearly earnings.
The plans are funded by contributions to tax-exempt trusts.
The Company's funding policy is consistent with the funding
requirements of Federal laws and regulations. Contributions
are intended to provide not only the benefits attributed to
service to date, but also those expected to be earned in the
future. Plan assets consist principally of listed equity se-
curities, corporate obligations and government bonds.
All benefits applicable to the funded defined benefit plan
for agents were frozen as of December 31, 1994. The curtail-
ment of this plan did not have a significant effect on net
pension cost for 1994. Effective January 1, 1995, pension
benefits for agents have been provided by a new defined
S-14
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
8.EMPLOYEE BENEFIT PLANS CONTINUED
contribution plan. Contributions to this plan will be based
on 2.3% of an agent's earnings up to the social security
wage base and 4.6% of any excess.
LNC also administers two types of unfunded, non-qualified,
defined benefit plans for certain employees and agents. A
supplemental retirement plan provides employees and agents
defined benefit pension benefits in excess of limits imposed
by Federal tax law. A salary continuation plan provides cer-
tain officers of the Company defined pension benefits based
on years of service and final monthly salary upon death or
retirement.
The status of the funded defined benefit pension plans and
the amounts recognized in the balance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1996
------- 1995
(in millions)
----------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $(156.9) $(146.1)
-------------------------------------------------------------------------
Nonvested benefits (6.0) (7.7)
-------------------------------------------------------------------------
------- -------
Accumulated benefit obligation (162.9) (153.8)
-------------------------------------------------------------------------
Effect of projected future compensation increases (27.9) (28.5)
-------------------------------------------------------------------------
------- -------
Projected benefit obligation (190.8) (182.3)
-------------------------------------------------------------------------
Plan assets at fair value 186.1 173.2
-------------------------------------------------------------------------
------- -------
Projected benefit obligation in excess of plan assets (4.7) (9.1)
-------------------------------------------------------------------------
Unrecognized net loss 4.9 9.3
-------------------------------------------------------------------------
Unrecognized prior service cost 1.4 1.5
-------------------------------------------------------------------------
------- -------
Prepaid pension costs included in other liabilities $ 1.6 $ 1.7
-------------------------------------------------------------------------
======= =======
</TABLE>
The status of the unfunded defined benefit pension plans and
the amounts recognized in the balance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1996
----- 1995
(in
millions)
------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $(6.6) $(6.4)
-------------------------------------------------------------------
Nonvested benefits (.9) (1.1)
-------------------------------------------------------------------
----- -----
Accumulated benefit obligation (7.5) (7.5)
-------------------------------------------------------------------
Effect of projected future compensation increases (1.1) (1.7)
-------------------------------------------------------------------
----- -----
Projected benefit obligation (8.6) (9.2)
-------------------------------------------------------------------
Unrecognized net loss (gain) (.1) .9
-------------------------------------------------------------------
Unrecognized prior service cost .2 .3
-------------------------------------------------------------------
----- -----
Accrued pension costs included in other liabilities $(8.5) $(8.0)
-------------------------------------------------------------------
===== =====
</TABLE>
S-15
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
8.EMPLOYEE BENEFIT PLANS CONTINUED
The determination of the projected benefit obligation for
the defined benefit plans was based on the following assump-
tions:
<TABLE>
<CAPTION>
December 31
1996 1995 1994
---------------------------
<S> <C> <C> <C>
Weighted-average discount rate 7.0% 7.0% 8.0%
----------------------------------------------------------------------
Rate of increase in compensation:
----------------------------------------------------------------------
Salary continuation plan 5.5 6.0 6.5
----------------------------------------------------------------------
All other plans 4.5 5.0 5.0
----------------------------------------------------------------------
Expected long-term rate of return on plan assets 9.0 9.0 9.0
----------------------------------------------------------------------
The components of net pension cost for the defined benefit
pension plans are as follows:
<CAPTION>
Year ended
December 31
1996 1995 1994
---------------------------
<S> <C> <C> <C>
Service cost--benefits earned during the year $ 5.2 $ 4.1 $ 7.9
------------------------------------------------------------------------
Interest cost on projected benefit obligation 12.9 11.9 11.6
------------------------------------------------------------------------
Actual return on plan assets (17.5) (32.0) 4.2
------------------------------------------------------------------------
Net amortization (deferral) 3.1 20.3 (16.7)
------------------------------------------------------------------------ ----- ----- -----
Net pension cost $ 3.7 $ 4.3 $ 7.0
------------------------------------------------------------------------ ===== ===== =====
</TABLE>
401K PLAN
LNC and the Company sponsor contributory defined contribu-
tion plans for eligible employees and agents. The Company's
contributions to the plans are equal to each participant's
pre-tax contribution, not to exceed 6% of base pay, multi-
plied by a percentage ranging from 25% to 150%, which varies
according to certain incentive criteria as determined by
LNC's Board of Directors. Expense for these plans amounted
to $9,300,000, $6,700,000 and $11,200,000 in 1996, 1995 and
1994, respectively.
POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFIT PLANS
LNC sponsors unfunded defined benefit plans that provide
postretirement medical and life insurance benefits to full-
time employees and agents who, depending on the plan, have
worked for the Company 10 to 15 years and attained age 55 to
60. Medical benefits are also available to spouses and other
dependents of employees and agents. For medical benefits,
limited contributions are required from individuals retired
prior to November 1, 1988; contributions for later retirees,
which can be adjusted annually, are based on such items as
years of service at retirement and age at retirement. The
life insurance benefits are noncontributory, although par-
ticipants can elect supplemental contributory benefits.
The status of the postretirement medical and life insur-
ance benefit plans and the amounts recognized in the bal-
ance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1996 1995
--------------------------
(in millions)
--------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $(32.4) $(37.9)
------------------------------------------------------------------------
Fully eligible active plan participants (8.2) (8.7)
------------------------------------------------------------------------ ------ ------
Accumulated postretirement benefit obligation (40.6) (46.6)
------------------------------------------------------------------------
Unrecognized net loss (gain) (7.0) .8
------------------------------------------------------------------------ ------ ------
Accrued plan cost included in other liabilities $(47.6) $(45.8)
------------------------------------------------------------------------ ====== ======
</TABLE>
S-16
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
8.EMPLOYEE BENEFIT PLANS CONTINUED
The components of periodic postretirement benefit cost
are as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1996 1995 1994
---------------------------------
(in millions)
----------------
<S> <C> <C> <C>
Service cost $1.3 $1.1 $1.4
------------------------------------------------------------------------
Interest cost 2.7 3.0 3.1
------------------------------------------------------------------------
Amortized cost (credit) (.5) (.4) .1
------------------------------------------------------------------------ ---- ---- ----
Net periodic postretirement benefit cost $3.5 $3.7 $4.6
------------------------------------------------------------------------ ==== ==== ====
</TABLE>
The calculation of the accumulated postretirement benefit
obligation assumes a weighted-average annual rate of in-
crease in the per capita cost of covered benefits (i.e.,
health care cost trend rate) of 8.5% for 1997. It further
assumes the rate will gradually decrease to 5.0% by 2005 and
remain at that level. The health care cost trend rate as-
sumption has a significant effect on the amounts reported.
For example, increasing the assumed health care cost trend
rates by one percentage point each year would increase the
accumulated postretirement benefit obligation as of December
31, 1996 and 1995 by $1,900,000 and $2,100,000, respective-
ly. The aggregate of the estimated service and interest cost
components of net periodic postretirement benefit cost for
the year ended December 31, 1996 would increase by $184,000.
The calculation assumes a long-term rate of increase in com-
pensation of 4.5% and 5.0% at December 31, 1996 and 1995,
respectively. The weighted-average discount rate used in de-
termining the accumulated postretirement benefit obligation
was 7.0% for both December 31, 1996 and 1995.
9.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES
DISABILITY INCOME POLICIES
The liability for disability income claims net of the related asset for
amounts recoverable from reinsurers at December 31, 1996 and 1995 is a net
liability of $572,000,000 and $503,800,000, respectively. This liability is
based on the assumption that the recent experience will continue in the fu-
ture. If incidence levels or claim termination rates vary significantly
from these assumptions, adjustments to reserves may be required in the fu-
ture. Accordingly, this liability may prove to be deficient or excessive.
However, it is management's opinion that such future development will not
materially affect the financial position of the Company. The Company con-
tinually reviews and updates the level of these reserves.
During the fourth quarter of 1995, the Company completed an in-depth review
of the experience of its disability income business. As a result of this
study, and based on the assumption that recent experience will continue in
the future, net income decreased by $15,200,000 as a result of strengthen-
ing the disability income reserve.
MARKETING AND COMPLIANCE ISSUES
Regulators continue to focus on market conduct and compliance issues. Under
certain circumstances companies operating in the insurance and financial
services markets have been held responsible for providing incomplete or
misleading sales materials and for replacing existing policies with poli-
cies that were less advantageous to the policyholder. The Company's manage-
ment continues to monitor the Company's sales materials and compliance pro-
cedures and is making an extensive effort to minimize any potential liabil-
ity. However, due to the uncertainty surrounding such matters, it is not
possible to provide a meaningful estimate of the range of potential out-
comes at this time.
GROUP PENSION ANNUITIES
The liabilities for guaranteed interest and group pension annuity con-
tracts, which are no longer being sold by the Company, are supported by a
single portfolio of assets that attempts to match the duration of these li-
abilities. Due to the very long-term nature of group pension annuities and
the resulting inability to exactly match cash flows, a risk exists that fu-
ture cash flows from investments will not be reinvested at rates as high as
currently earned by the portfolio. Accordingly, these liabilities may prove
to be deficient or excessive. However, it is management's opinion that such
future development will
S-17
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
INSURANCE CEDED AND ASSUMED
The Company cedes insurance to other companies, including certain affili-
ates. The portion of risks exceeding the Company's retention limit is rein-
sured with other insurers. Industry regulations prescribe the maximum cov-
erage that the Company can retain on an individual insured. As of December
31, 1996, the Company's maximum retention on a single insured was
$3,000,000. To cover products other than life insurance, the Company ac-
quires other insurance coverages with retentions and limits that management
believes are appropriate for the circumstances. The accompanying financial
statements reflect premiums and benefits and settlement expenses, net of
insurance ceded. The Company remains liable if its reinsurers are unable to
meet their contractual obligations under the applicable reinsurance agree-
ments.
The Company assumes insurance from other companies, including certain af-
filiates. At December 31, 1996, the Company has provided $17,200,000 of
statutory surplus relief to other insurance companies under reinsurance
transactions. Generally, such amounts are offset by corresponding receiv-
ables from the ceding company, which are secured by future profits on the
reinsured business. However, the Company is subject to the risk that the
ceding company may become insolvent and the right of offset would not be
permitted.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1996, the Company did not have a concentration of: 1) busi-
ness transactions with a particular customer, lender or distributor; 2)
revenues from a particular product or service; 3) sources of supply of la-
bor or services used in the business; or 4) a market or geographic area in
which business is conducted that makes it vulnerable to an event that is at
least reasonably possible to occur in the near term and which could cause a
severe impact to the Company's financial condition.
9.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES CONTINUED
not materially affect the financial position of the Company.
LEASES
The Company leases its home office properties. The agreements provide for a
25 year lease period with options to renew for six additional terms of five
years each. The agreements also provide the Company with the right of first
refusal to purchase the properties during the term of the lease, including
renewal periods, at a price as defined in the agreements. In addition, the
Company has the option to purchase the leased properties at fair value as
defined in the agreements on the last day of the initial 25 year lease pe-
riod ending in 2009 or on the last day of any of the renewal periods.
Total rental expense on operating leases in 1996, 1995 and 1994 was
$26,400,000, $22,500,000 and $20,600,000, respectively. Future minimum
rental commitments are as follows (in millions):
<TABLE>
<S> <C>
1997 $ 17.5
1998 17.1
1999 17.4
2000 16.9
2001 17.2
Thereafter 151.6
------
$237.7
======
</TABLE>
S-18
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
9.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES CONTINUED
OTHER CONTINGENCY MATTERS
The Company is involved in various pending or threatened legal proceedings
arising from the conduct of business. In some instances, these proceedings
include claims for unspecified or substantial punitive damages and similar
types of relief in addition to amounts for alleged contractual liability or
requests for equitable relief. After consultation with legal counsel and a
review of available facts, it is management's opinion that these proceed-
ings ultimately will be resolved without materially affecting the financial
position or results of operations of the Company.
The number of insurance companies that are under regulatory supervision has
resulted, and is expected to continue to result, in assessments by state
guaranty funds to cover losses to policyholders of insolvent or rehabili-
tated companies. Mandatory assessments may be partially recovered through a
reduction in future premium taxes in some states. The Company has accrued
for expected assessments net of estimated future premium tax deductions.
REINSURANCE
The regulatory required liability for unsecured reserves ceded to unautho-
rized reinsurers was $4,300,000 and $5,600,000 at December 31, 1996 and
1995, respectively.
GUARANTEES
The Company has guarantees with off-balance-sheet risks whose contractual
amounts represent credit exposure. Outstanding guarantees with off-balance-
sheet risks, shown in notional or contract amounts, are as follows:
<TABLE>
<CAPTION>
Notional or
Contract Amounts
-----------------
December 31
-----------------
1996 1995
--------------------
(in millions)
-----------------
<S> <C> <C>
Mortgage loan pass-through certificates $ 50.3 $ 63.6
Real estate partnerships .5 3.3
-------- --------
$ 50.8 $ 66.9
======== ========
</TABLE>
The Company has invested in real estate partnerships that use conventional
mortgage loans. In some cases, the terms of these arrangements involve
guarantees by each of the partners to indemnify the mortgagor in the event
a partner is unable to pay its principal and interest payments. In addi-
tion, the Company has sold commercial mortgage loans through grantor trusts
which issued pass-through certificates. The Company has agreed to repur-
chase any mortgage loans which remain delinquent for 90 days at a repur-
chase price substantially equal to the outstanding principal balance plus
accrued interest thereon to the date of repurchase. It is management's
opinion that the value of the properties underlying these commitments is
sufficient that in the event of default the impact would not be material to
the Company. Accordingly, both the carrying value and fair value of these
guarantees is zero at December 31, 1996 and 1995.
S-19
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
9.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
DERIVATIVES
The Company has derivatives with off-balance-sheet risks
whose notional or contract amounts exceed the credit ex-
posure. The Company has entered into derivative transac-
tions to reduce its exposure to fluctuations in interest
rates, the widening of bond yield spreads over comparable
maturity U.S. Government obligations and foreign exchange
risks. In addition, the Company is subject to the risks
associated with changes in the value of its derivatives;
however, such changes in the value generally are offset
by changes in the value of the items being hedged by such
contracts. Outstanding derivatives with off-balance-sheet
risks, shown in notional or contract amounts along with
their carrying value and estimated fair values, are as
follows:
<TABLE>
<CAPTION>
Assets (Liabilities)
------------------------------
Notional or Carrying Fair Carrying Fair
contract amounts value value value value
---------------------------------------------
December 31 December 31 December 31
1996 1995 1996 1996 1995 1995
---------------------------------------------
(in millions)
------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate
derivatives:
Interest rate cap
agreements $5,500.0 $5,110.0 $20.8 $ 8.2 $22.7 $5.3
Spread-lock agreements -- 600.0 -- -- (.9) (.9)
Swaptions 672.0 -- 11.0 10.6 -- --
Financial futures
contracts 147.7 -- (2.4) (2.4) -- --
Interest rate swaps -- 5.0 -- -- .2 .2
-------- -------- ----- ----- ----- ----
6,319.7 5,715.0 29.4 16.4 22.0 4.6
Foreign currency
derivatives:
Foreign exchange forward
contracts 251.5 15.7 .2 (.2) (.6) (.6)
Foreign currency options 43.9 99.2 .6 .4 1.9 1.4
Foreign currency swaps 15.0 15.0 -- (2.1) .4 .4
-------- -------- ----- ----- ----- ----
310.4 129.9 .8 (1.9) 1.7 1.2
-------- -------- ----- ----- ----- ----
$6,630.1 $5,844.9 $30.2 $14.5 $23.7 $5.8
======== ======== ===== ===== ===== ====
</TABLE>
S-20
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
9.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
A reconciliation and discussion of the notional or contract
amounts for the significant programs using derivative agree-
ments and contracts at December 31 is as follows:
<TABLE>
<CAPTION>
Interest Rate Caps Spread Locks Swaptions
----------------------------------------------------------------------
1996 1995 1996 1995 1996 1995
----------------------------------------------------------------------
(in millions)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year $ 5,110.0 $ 4,400.0 $ 600.0 $ 1,300.0 $ -- $ --
New contracts 390.0 710.0 15.0 800.0 672.0 --
Terminations and -- -- (615.0) (1,500.0) -- --
maturities --------- --------- --------- --------- --------- ---------
Balance at end of year $ 5,500.0 $ 5,110.0 $ -- $ 600.0 $ 672.0 $ --
========= ========= ========= ========= ========= =========
<CAPTION>
Financial Futures
------------------------------------------
Contracts Options Interest Rate Swaps
1996 1995 1996 1995 1996 1995
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year $ -- $ 382.5 $ -- $ -- $ 5.0 $ --
New contracts 7,918.8 810.5 -- 181.6 -- --
Terminations and (7,771.1) (1,193.0) -- (181.6) (5.0) --
maturities --------- --------- --------- --------- --------- ---------
Balance at end of year $ 147.7 $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= ========= =========
<CAPTION>
Foreign Currency Derivatives
----------------------------------------------------------------------
Foreign Exchange Foreign Currency Foreign
Forward Contracts Options Currency Swaps
1996 1995 1996 1995 1996 1995
----------------------------------------------------------------------
(in millions)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year $ 15.7 $ 21.2 $ 99.2 $ -- $ 15.0 $ --
New contracts 406.9 131.2 1,168.8 356.6 -- 15.0
Terminations and (171.1) (136.7) (1,224.1) (257.4) -- --
maturities --------- --------- --------- --------- --------- ---------
Balance at end of year $ 251.5 $ 15.7 $ 43.9 $ 99.2 $ 15.0 $ 15.0
========= ========= ========= ========= ========= =========
</TABLE>
S-21
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
9.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES CONTINUED
INTEREST RATE CAPS
The interest rate cap agreements, which expire in 1997 through 2003, enti-
tle the Company to receive payments from the counterparties on specified
future reset dates, contingent on future interest rates. For each cap, the
amount of such quarterly payments, if any, is determined by the excess of a
market interest rate over a specified cap rate multiplied by the notional
amount divided by four. The purpose of the Company's interest rate cap
agreement program is to protect its annuity line of business from the ef-
fect of fluctuating interest rates. The premium paid for the interest rate
caps is included in other assets ($20,800,000 as of December 31, 1996) and
is being amortized over the terms of the agreements. This amortization is
included in net investment income.
SWAPTIONS
Swaptions, which expire in 2002, entitle the Company to receive settlement
payments from the counterparties on specified expiration dates, contingent
on future interest rates. For each swaption, the amount of such settlement
payments, if any, is determined by the present value of the difference be-
tween the fixed rate on a market rate swap and the strike rate multiplied
by the notional amount. The purpose of the Company's swaption program is to
protect the assets supporting its annuity line of business from the effect
of fluctuating interest rates. The premium paid for the swaptions is in-
cluded in other assets ($11,000,000 as of December 31, 1996) and is being
amortized over the terms of the agreements. This amortization is included
in net investment income.
SPREAD LOCKS
Spread-lock agreements provide for a lump sum payment to or by the Company,
depending on whether the spread between the swap rate and a specified U.S.
Treasury note is larger or smaller than a contractually specified spread.
Cash payments are based on the product of the notional amount, the spread
between the swap rate and the yield of an equivalent maturity U.S. Treasury
security and the price sensitivity of the swap at that time. It is ex-
pressed in dollars-per-basis point. The purpose of the Company's spread-
lock program is to protect a portion of its fixed maturity securities
against widening of spreads.
FINANCIAL FUTURES
The Company uses exchange-traded financial futures contracts and options on
those financial futures to hedge against interest rate risks and to manage
duration of a portion of its fixed maturity securities. Financial futures
contracts obligate the Company to buy or sell a financial instrument at a
specified future date for a specified price. They may be settled in cash or
through delivery of the financial instrument. Cash settlements on the
change in market values of financial futures contracts are made daily. Op-
tions on financial futures give the Company the right, but not the obliga-
tion, to assume a long or short position in the underlying futures at a
specified price during a specified time period.
FOREIGN CURRENCY DERIVATIVES
The Company uses a combination of foreign exchange forward contracts, for-
eign currency options and foreign currency swaps, all of which are traded
over-the-counter, to hedge some of the foreign exchange risk of investments
in fixed maturity securities denominated in foreign currencies. The foreign
currency forward contracts obligate the Company to deliver a specified
amount of currency at a future date at a specified exchange rate. Foreign
currency options give the Company the right, but not the obligation, to buy
or sell a foreign currency at a specific exchange rate during a specified
time period. A foreign currency swap is a contractual agreement to exchange
the currencies of two different countries pursuant to an agreement to re-
exchange the two currencies at the same rate of exchange at a specified fu-
ture date.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$6,900,000 and $5,600,000 in 1996 and 1995, respectively. Deferred losses
of $37,600,000 as of December 31, 1996, were the result of: 1) terminated
and expired spread-lock agreements; and 2) financial futures contracts.
These losses are included with the related fixed maturity securities to
which the hedge applied and are being amortized over the life of such secu-
rities.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on interest rate cap agreements, swaptions, spread-lock
agreements, interest rate swaps, foreign exchange forward contracts, for-
eign currency options and foreign currency swaps. However, the Company does
not anticipate nonperformance by any of these counterparties. The credit
risk associated with such agreements is minimized by purchasing such agree-
ments from financial institutions with long-standing, superior performance
records. The amount of such exposure is essentially the net replacement
cost or market value for such agreements with each counterparty if the net
market value is in the Company's favor. At December 31, 1996, the exposure
was $17,500,000.
10.FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair values of the Company's financial instruments.
Considerable judgment is required to develop these fair values. Ac-
S-22
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
10.FAIR VALUE OF FINANCIAL INSTRUMENTS
CONTINUED
cordingly, the estimates shown are not necessarily indicative of the
amounts that would be realized in a one-time, current market exchange of
all of the Company's financial instruments.
BONDS
Fair values of bonds are based on quoted market prices, where available.
For bonds not actively traded, fair values are estimated using values ob-
tained from independent pricing services. In the case of private place-
ments, fair values are estimated by discounting expected future cash flows
using a current market rate applicable to the coupon rate, credit quality
and maturity of the investments. The fair values of affiliated common
stocks are based on quoted market prices.
MORTGAGE LOANS ON REAL ESTATE
The estimated fair value of mortgage loans on real estate was established
using a discounted cash flow method based on credit rating, maturity and
future income when compared to the expected yield for mortgages having sim-
ilar characteristics. The rating for mortgages in good standing are based
on property type, location, market conditions, occupancy, debt service cov-
erage, loan to value, caliber of tenancy, borrower and payment record. Fair
values for impaired mortgage loan are measured based on: 1) the present
value of expected future cash flows discounted at the loan's effective in-
terest rate; 2) the loan's market price; or 3) the fair value of the col-
lateral if the loan is collateral dependent.
POLICY LOANS
The estimated fair value of investments in policy loans was calculated on a
composite discounted cash flow basis using Treasury interest rates consis-
tent with the maturity durations assumed. These durations were based on
historical experience.
OTHER INVESTMENTS AND CASH AND INVESTED CASH
The carrying value for assets classified as other investments and cash and
invested cash in the accompanying balance sheet approximates their fair
value.
INVESTMENT-TYPE INSURANCE CONTRACTS
The balance sheet captions, "Future Policy Benefits and Claims" and "Other
Policyholder Funds," include investment-type insurance contracts (i.e., de-
posit contracts and guaranteed interest contracts). The fair values for the
deposit contracts and certain guaranteed interest contracts are based on
their approximate surrender values. The fair values for the remaining guar-
anteed interest and similar contracts are based on their approximate sur-
render values. The fair values for the remaining guaranteed interest and
similar contracts are estimated using discounted cash flow calculations.
These calculations are based on interest rates currently offered on similar
contracts with maturities consistent with those remaining for the contracts
being valued.
The remainder of the balance sheet captions "Future Policy Benefits and
Claims" and "Other Policyholder Funds," that do not fit the definition of
"investment type insurance contracts" are considered insurance contracts.
Fair value disclosures are not required for these insurance contracts and
have not been determined by the Company. It is the Company's position that
the disclosure of the fair value of these insurance contracts is important
because readers of these financial statements could draw inappropriate con-
clusions about the Company's capital and surplus determined on a fair value
basis. It could be misleading if only the fair value of assets and liabili-
ties defined as financial instruments are disclosed. The Company and other
companies in the insurance industry are monitoring the related actions of
the various rule-making bodies and attempting to determine an appropriate
methodology for estimating and disclosing the "fair value" of their insur-
ance contract liabilities.
SHORT-TERM DEBT
Fair values of short-term debt approximates carrying values.
GUARANTEES
The Company's guarantees include guarantees related to real estate partner-
ships and mortgage loan pass-through certificates. Based on historical per-
formance where repurchases have been negligible and the current status,
which indicates none of the loans are delinquent, the fair value liability
for the guarantees related to the mortgage loan pass-through certificates
is insignificant.
DERIVATIVES
The Company's derivatives include interest rate cap agreements, swaptions,
spread-lock agreements, foreign currency exchange contracts, financial
futures contracts, options on financial futures, interest rate swaps, call
options, foreign currency options and foreign currency swaps.
Fair values for derivative contracts are based on current settlement val-
ues. These values are based on: 1) quoted market prices for the foreign
currency exchange contracts, financial future contracts, and options on fi-
nancial futures; and 2) brokerage quotes that utilized pricing models or
formulas using current assumptions for all other swaps and agreements.
S-23
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
10.FAIR VALUE OF FINANCIAL INSTRUMENTS
CONTINUED
INVESTMENT COMMITMENTS
Fair values for commitments to make investment in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real es-
tate are based on the difference between the value of the committed invest-
ments as of the date of the accompanying balance sheets and the commitment
date. These estimates would take into account changes in interest rates,
the counterparties' credit standing and the remaining terms of the commit-
ments.
S-24
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
10.FAIR VALUE OF FINANCIAL INSTRUMENTS
CONTINUED
The carrying values and estimated fair values of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31
----------------------------------------------
1996 1995
---------------------- ----------------------
Carrying Fair Carrying Fair
Assets (Liabilities) value value value value
---------------------------------------- ---------- ---------- ---------- ----------
(in millions)
----------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 19,389.6 $ 20,194.4 $ 17,729.7 $ 19,184.7
----------------------------------------
Preferred stock 239.7 248.5 89.9 103.6
----------------------------------------
Unaffiliated common stock 358.3 358.3 535.5 535.5
----------------------------------------
Mortgage loans on real estate 2,976.7 3,070.9 2,909.7 3,081.9
----------------------------------------
Policy loans 626.5 612.7 515.8 504.0
----------------------------------------
Other investments 282.7 282.7 248.0 248.0
----------------------------------------
Cash and short-term investments 759.2 759.2 780.9 780.9
----------------------------------------
Investment type insurance contracts:
----------------------------------------
Deposit contracts and certain
guaranteed interest contracts (17,871.6) (17,333.0) (15,586.7) (15,046.0)
----------------------------------------
Remaining guaranteed interest and
similar contracts (1,799.7) (1,835.4) (2,261.1) (2,340.4)
----------------------------------------
Short-term debt (100.0) (100.0) (63.0) (63.0)
----------------------------------------
Derivatives 26.5 13.8 23.7 5.8
----------------------------------------
Investment commitments -- (.6) -- (.8)
----------------------------------------
</TABLE>
11.ACQUISITIONS AND SALES OF SUBSIDIARIES
The Company sold its 100% interest in two subsidiaries--Se-
curity Connecticut Life Insurance Company ("SCL") and Em-
ployers Health Insurance Company ("EHI"). SCL was sold
through a public offering of stock in January 1994. This
transaction resulted in a realized gain of $90,000,000 and a
direct increase in surplus of $24,000,000. Net of expenses,
the Company received cash of $172,000,000 and notes of
$65,000,000.
EHI was also sold through public offerings in March and
April 1994. LNC purchased 29% of the stock of the new pub-
licly traded holding company from LNL. Prior to the sale,
the Company received a $50,000,000 dividend in the form of a
note. The sale transaction resulted in a realized gain of
$133,000,000 and a direct reduction in surplus of
$21,000,000 due to release of unrealized gain amounts, for a
net surplus increase of $112,000,000. Net of expenses, the
Company received cash of $348,000,000.
In October 1996, the Company and its wholly owned subsidiary
purchased a block of group tax qualified annuity business
from UNUM Corporation. The transaction was completed in the
form of a reinsurance transaction, which resulted in a ced-
ing commission of $71,800,000. The ceding commission has
been recorded as admissible goodwill of $62,300,000, which
is to be amortized on a straight-line basis over 10 years.
The Company's subsidiary was required by the New York De-
partment of Insurance to expense its portion of the ceding
commission in 1996. Policy liabilities and related accruals
of the Company and its wholly owned subsidiary increased by
$3,200,000,000 as a result of this transaction.
In its previously-filed 1996 NAIC Annual Statement, the Com-
pany recorded the ceding commission as a nonadmitted asset,
which was charged directly to unassigned surplus. According-
ly, unassigned surplus was understated at December 31, 1996
by $62,300,000, net of amortization in 1996. In 1997, man-
agement will correct its opening balance of unassigned sur-
plus in its NAIC Annual Statement.
S-25
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
The balance sheets include reinsurance balances with affiliated companies
as follows:
<TABLE>
<CAPTION>
December 31
1996 1995
-------- --------
(in millions)
-----------------
<S> <C> <C>
Future policy benefits and claims assumed $ 312.7 $ 344.8
Future policy benefits and claims ceded 891.8 1,344.5
Amounts recoverable on paid and unpaid losses 31.2 65.9
Reinsurance payable on paid losses 2.7 5.5
Funds held under reinsurance treaties--net liability 1,062.4 712.3
</TABLE>
Substantially all reinsurance ceded to affiliated companies is with unau-
thorized companies. To take a reserve credit for such reinsurance, the Com-
pany holds assets from the reinsurer, including funds held under reinsur-
ance treaties, and is the beneficiary on letters of credit aggregating
$314,200,000 and $306,800,000 at December 31, 1996 and 1995, respectively.
At December 31, 1996 and 1995, LNC had guaranteed $239,200,000 and
$241,400,000, respectively, of these letters of credit. At December 31,
1996, the Company has a receivable (included in the foregoing amounts) from
affiliated insurance companies in the amount of $135,700,000 for statutory
surplus relief received under financial reinsurance ceded agreements.
13. SEPARATE ACCOUNTS
Separate account assets and liabilities reported in the accompanying bal-
ance sheets represent funds that are separately administered, principally
for annuity contracts, and for which the contractholder, rather than the
Company, bears the investment risk. Separate account contractholders have
no claim against the assets of the general account of the Company. Separate
account assets are reported at fair value and consist primarily of long-
term bonds, common stocks, short-term investments and mutual funds. The de-
tailed operations of the separate accounts are not included in the accompa-
nying financial statements. Fees charged on separate account policyholder
deposits are included in other income.
Separate account premiums, deposits and other considerations amounted to
$4,148,700,000, $3,068,200,000 and $2,694,700,000 in 1996, 1995 and 1994,
respectively. Reserves for separate accounts with assets at fair value were
$23,047,800,000 and $17,891,400,000 at December 31, 1996 and 1995, respec-
tively. All reserves are subject to discretionary withdrawal at market val-
ue. Substantially all of the Company's separate accounts are nonguaranteed.
12. TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Financial Group, Inc. ("LFGI"),
has a nearly exclusive general agents contract with the Company under which
it sells the Company's products and provides the service that otherwise
would be provided by a home office marketing department and regional of-
fices. For providing these selling and marketing services, the Company paid
LFGI override commissions and operating expense allowances of $56,300,000,
$43,300,000 and $41,200,000 in 1996, 1995 and 1994, respectively. LFGI in-
curred expenses of $15,700,000, $10,400,000 and $10,700,000 in 1996, 1995
and 1994, respectively, in excess of the override commissions and operating
expense allowances received from the Company, which the Company is not re-
quired to reimburse.
Cash and short-term investments at December 31, 1996 and 1995 include the
Company's participation in a short-term investment pool with LNC of
$175,100,000 and $324,000,000, respectively. Related investment income
amounted to $15,300,000, $21,100,000 and $16,100,000 in 1996, 1995 and
1994, respectively. Other liabilities at December 31, 1996 and 1995 include
$100,000,000 of notes payable to LNC.
The Company provides services to and receives services from affiliated com-
panies which resulted in a net payment of $34,100,000 and $24,900,000 in
1996 and 1995, respectively.
The Company both cedes and accepts reinsurance from affiliated companies.
Premiums in the accompanying statement of income includes reinsurance
transactions with affiliated companies as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1996 1995 1994
------ ------ ------
(in millions)
--------------------
<S> <C> <C> <C>
Insurance assumed $ 17.9 $ 17.6 $ 19.8
Insurance ceded 302.8 214.4 481.3
</TABLE>
S-26
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
13. SEPARATE ACCOUNTS CONTINUED
A reconciliation of transfers to (from) separate accounts are as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1996 1995
----------------------------------------------------
(in millions)
---------------------
<S> <C> <C>
Transfers as reported in the Summary of
Operations of various Separate Accounts:
Transfers to separate accounts $ 4,149.6 $ 3,070.2
Transfers from separate accounts (2,058.5) (1,457.8)
--------- ---------
Net transfer to separate accounts as reported
in the Company's NAIC Annual Statement $ 2,091.1 $ 1,612.4
========= =========
</TABLE>
S-27
<PAGE>
OTHER FINANCIAL INFORMATION
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Lincoln National Life Insurance Company
We have audited the accompanying statutory-basis balance sheets of The Lincoln
National Life Insurance Company (a wholly owned subsidiary of Lincoln National
Corporation) as of December 31, 1996 and 1995, and the related statutory-basis
statements of income, changes in capital and surplus and cash flows for each of
the three years in the period ended December 31, 1996. These financial state-
ments are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or per-
mitted by the Indiana Department of Insurance, which practices differ from gen-
erally accepted accounting principles. The variances between such practices and
generally accepted accounting principles and the effects on the accompanying
financial statements are also described in Note 1.
In our opinion, because of the effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial posi-
tion of The Lincoln National Life Insurance Company at December 31, 1996 and
1995, or the results of its operations or its cash flows for each of the three
years in the period ended December 31, 1996.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Lincoln Na-
tional Life Insurance Company at December 31, 1996 and 1995, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with accounting practices prescribed or
permitted by the Indiana Department of Insurance.
As described in Note 2, in 1994 the Company changed its method of accounting
for separate account contracts.
/s/ Ernst & Young LLP
February 6, 1997
S-28
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA
DECEMBER 31, 1996 (IN MILLIONS)
<TABLE>
<S> <C>
Investment income earned:
Government bonds $ 74.6
---------------------------------------------------------------------
Other bonds (unaffiliated) 1,367.6
---------------------------------------------------------------------
Preferred stocks (unaffiliated) 9.6
---------------------------------------------------------------------
Common stocks (unaffiliated) 6.5
---------------------------------------------------------------------
Common stocks of affiliates 9.5
---------------------------------------------------------------------
Mortgage loans 269.3
---------------------------------------------------------------------
Real estate 114.4
---------------------------------------------------------------------
Premium notes, policy loans and liens 35.0
---------------------------------------------------------------------
Cash on hand and on deposit 0.9
---------------------------------------------------------------------
Short-term investments 48.0
---------------------------------------------------------------------
Other invested assets 17.6
---------------------------------------------------------------------
Derivative instruments (6.3)
---------------------------------------------------------------------
Aggregate write-ins for investment income 11.1
----------------------------------------------------------- --------
Gross investment income $1,957.8
- ------------------------------------------------------------- ========
Real estate owned (cost, less encumbrances) $ 621.3
- ------------------------------------------------------------- ========
Mortgage loans (unpaid balance):
Farm mortgages $ 1.1
---------------------------------------------------------------------
Residential mortgages 3.7
---------------------------------------------------------------------
Commercial mortgages 2,971.9
----------------------------------------------------------- --------
Total mortgage loans $2,976.7
- ------------------------------------------------------------- ========
Mortgage loans by standing (unpaid balance):
Good standing $2,922.1
----------------------------------------------------------- ========
Good standing with restructured terms $ 39.6
----------------------------------------------------------- ========
Interest overdue more than three months, not in foreclosure $ --
----------------------------------------------------------- ========
Foreclosure in process $ 14.9
----------------------------------------------------------- ========
Other long-term assets (statement value) $ 248.1
- ------------------------------------------------------------- ========
</TABLE>
S-29
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA CONTINUED
DECEMBER 31, 1996 (IN MILLIONS)
<TABLE>
<S> <C>
Bonds and stocks of parent, subsidiaries and affiliates (cost):
Common stocks $ 194.0
------------------------------------------------------------- ==========
Bonds and short-term investments by class and maturity:
Bonds by maturity (statement value):
Due within one year or less $ 1,618.0
-------------------------------------------------------------
Over 1 year through 5 years 5,928.1
-------------------------------------------------------------
Over 5 years through 10 years 6,025.9
-------------------------------------------------------------
Over 10 years through 20 years 3,670.6
-------------------------------------------------------------
Over 20 years 2,860.4
------------------------------------------------------------- ----------
Total by maturity $ 20,103.0
- --------------------------------------------------------------- ==========
Bonds by class (statement value):
Class 1 $ 14,013.7
-------------------------------------------------------------
Class 2 4,504.1
-------------------------------------------------------------
Class 3 807.6
-------------------------------------------------------------
Class 4 705.9
-------------------------------------------------------------
Class 5 71.4
-------------------------------------------------------------
Class 6 0.3
------------------------------------------------------------- ----------
Total by class $ 20,103.0
- --------------------------------------------------------------- ==========
Total bonds publicly traded $ 16,520.3
- --------------------------------------------------------------- ==========
Total bonds privately placed $ 3,582.7
- --------------------------------------------------------------- ==========
Preferred stocks (cost or amortized cost) $ 239.7
- --------------------------------------------------------------- ==========
Unaffiliated common stocks (market value) $ 358.3
- --------------------------------------------------------------- ==========
Short-term investments (cost or amortized cost) $ 713.4
- --------------------------------------------------------------- ==========
Financial options and caps owned (statement value) $ 32.2
- --------------------------------------------------------------- ==========
Financial options and caps written (statement value) $ 0.3
- --------------------------------------------------------------- ==========
Swap and forward agreements open (statement value) $ 0.2
- --------------------------------------------------------------- ==========
Futures contracts open (current value) $ 161.2
- --------------------------------------------------------------- ==========
Cash on deposit $ 45.8
- --------------------------------------------------------------- ==========
Life insurance in-force:
Ordinary $ 97.9
------------------------------------------------------------- ==========
Group life $ 31.4
------------------------------------------------------------- ==========
</TABLE>
S-30
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA CONTINUED
DECEMBER 31, 1996 (IN MILLIONS)
<TABLE>
<S> <C>
Amount of accidental death insurance in-force under ordinary policies $ 4.9
- ----------------------------------------------------------------------------------------------- =========
Life insurance policies with disability provisions in-force:
Ordinary $ 4.9
--------------------------------------------------------------------------------------------- =========
Group life $ 12.9
--------------------------------------------------------------------------------------------- =========
Supplementary contracts in-force:
Ordinary--not involving life contingencies:
Amount on deposit $ --
--------------------------------------------------------------------------------------------- =========
Income payable $ 3.2
--------------------------------------------------------------------------------------------- =========
Ordinary--involving life contingencies:
Income payable $ 0.9
--------------------------------------------------------------------------------------------- =========
Group--not involving life contingencies:
Income payable $ --
--------------------------------------------------------------------------------------------- =========
Group--involving life contingencies:
Income payable $ 0.9
--------------------------------------------------------------------------------------------- =========
Annuities:
Ordinary:
Immediate--amount of income payable $ 68.4
--------------------------------------------------------------------------------------------- =========
Deferred--fully paid account balance $ 0.6
--------------------------------------------------------------------------------------------- =========
Deferred--not fully paid account balance $ 326.6
--------------------------------------------------------------------------------------------- =========
Group:
Amount of income payable $ --
--------------------------------------------------------------------------------------------- =========
Fully paid account balance $ --
--------------------------------------------------------------------------------------------- =========
Not fully paid account balance $ 78.1
--------------------------------------------------------------------------------------------- =========
Accident and health insurance--premiums in-force:
Ordinary $ 180.6
--------------------------------------------------------------------------------------------- =========
Group $ 97.1
--------------------------------------------------------------------------------------------- =========
Deposit funds and dividend accumulations:
Deposit funds account balance $17,456.6
--------------------------------------------------------------------------------------------- =========
Dividend accumulations--account balance $ 114.7
--------------------------------------------------------------------------------------------- =========
</TABLE>
S-31
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA CONTINUED
DECEMBER 31, 1996 (IN MILLIONS)
Claim payments 1996:
Group Accident and Health:
<TABLE>
<S> <C>
1996 $ 9.4
=====
--------------
1995 $ 3.1
=====
--------------
1994 $ 0.1
=====
--------------
1993 $ --
=====
--------------
1992 $(0.1)
=====
--------------
Prior $ --
=====
--------------
</TABLE>
S-32
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTE TO SUPPLEMENTAL SCHEDULE OF SELECTED STATUTORY-BASIS FINANCIAL DATA
NOTE--BASIS OF PRESENTATION
The accompanying schedule presents selected statutory-basis financial data as
of December 31, 1996 and for the year then ended for purposes of complying with
paragraph 9 of the Annual Audited Financial Reports in the General Section of
the National Association of Insurance Commissioners' Annual Statement Instruc-
tions and agrees to or is included in the amounts reported in The Lincoln Na-
tional Life Insurance Company's 1996 Statutory Annual Statement as filed with
the Indiana Department of Insurance.
S-33
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON
OTHER FINANCIAL INFORMATION
Board of Directors
The Lincoln National Life Insurance Company
Our audits were conducted for the purpose of forming an
opinion on the statutory-basis financial statements taken as
a whole. The accompanying supplemental schedule of selected
statutory-basis financial data is presented to comply with
the National Association of Insurance Commissioners' Annual
Statement Instructions and is not a required part of the
statutory-basis financial statements. Such information has
been subjected to the auditing procedures applied in our au-
dit of the statutory-basis financial statements and, in our
opinion, is fairly stated in all material respects in rela-
tion to the statutory-basis financial statements taken as a
whole.
/s/ Ernst & Young LLP
February 6, 1997
S-34
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY FUND A (GROUP)
Post-Effective Amendment No. 52 on Form N-3
PART C--OTHER INFORMATION
Item 28.
(a) LIST OF FINANCIAL STATEMENTS
1. The Table of Per-Accumulation-Unit Income and
Capital Changes for Fund A is included in Part
A of this Registration Statement.
2. The following Financial Statements of Fund A
are included in Part B of this Registration
Statement:
Statement of Operations--Year ended
December 31, 1996
Statements of Changes in Net Assets--
Years ended December 31, 1996 and 1995
Statement of Net Assets--
December 31, 1996
Notes to Financial Statements--
December 31, 1996
Report of Ernst & Young LLP, Independent Auditors
3. The following GAAP Consolidated Financial Statements and Schedules of The
Lincoln National Life Insurance Company are included in Part B of this
Registration Statement:
Consolidated Balance Sheets--December 31,
1995 and 1994
Consolidated Statements of Income--Years
ended December 31, 1995, 1994 and 1993
Consolidated Statements of Shareholder's
Equity--Years ended December 31, 1995,
1994 and 1993
Consolidated Statements of Cash Flows--
Years Ended December 31,
1995, 1994 and 1993
Notes to Consolidated Financial Statements--
December 31, 1995
Schedule I-Summary of Investments-Other than
Investments in Related Parties--December 31,
1995
Schedule III--Supplementary Insurance Information--
Years Ended December 31, 1995, 1994 and 1993
Schedule IV-Reinsurance--Years ended December 31,
1995, 1994 and 1993
Schedule V-Valuation and Qualifying Accounts--
Years ended December 31, 1995, 1994, and 1993
Report of Ernst & Young LLP, Independent Auditors
<PAGE>
3. (Continued)
The following Statutory Financial Statements and Schedules of Lincoln National
Life Insurance Company are included in Part B of this Registration Statement:
Balance Sheets -- Years ended December 31, 1996 and 1995
Statements of Income -- Years ended December 31, 1996, 1995 and 1994
Statements of Capital and Surplus -- Years ended December 31, 1996, 1995 and
1994
Notes to Financial Statements -- December 31, 1996
Supplemental Schedule of Selected Statutory Basis Financial Data -- December 31,
1996
Report of Ernst & Young LLP, Independent Auditors
(b) LIST OF EXHIBITS
Exhibit Number Exhibit Name
- -------------- -------------
3 Custodian Agreement
4(a)(i) Contract
6 Sales and Administrative Services Agreement
9(d) Services Agreement between Lincoln National
Life Insurance Company, Delaware Management
Holding Companies, Inc. and Delaware Services
Company Inc. dated August 15, 1996.
13 Consent of Ernst & Young LLP,
Independent Auditors
17 Financial Data Schedule
19(a) Organizational Chart of the
Lincoln National Insurance Holding
Company System
(b) Books and Records
(d) Power of Attorney - O. Douglas Worthington
Item 29.
DIRECTORS AND OFFICERS OF THE INSURANCE COMPANY
<TABLE>
Positions and
Name and Principal Positions and Offices Offices with
Business Address with Insurance Company Registrant
- ---------------- ---------------------- ----------
<S> <C> <C>
JON A. BOSCIA* President, Chief
Executive Officer
(formerly Chief Operating
Officer)
THOMAS L. CLAGG* Vice President and Associate
General Counsel
CAROLYN P. BRODY* Vice President
KELLY D. CLEVENGER* Vice President
Chairman and Member
</TABLE>
<PAGE>
JEFFREY K. DELLINGER* Vice President
JACK D. HUNTER** Executive Vice President
and General Counsel,
Lincoln National
Corporation and The Lincoln
National Life Insurance Company
DONALD E. KELLER* Vice President
H. THOMAS MCMEEKIN* Director
REED P. MILLER* Vice President
STEPHEN H. LEWIS* Senior Vice President;
President, Lincoln Financial
Group (formerly Lincoln
National Sales Corporation)
IAN M. ROLLAND** Director
KEITH J. RYAN* Assistant Treasurer,
Vice President and Chief
Financial Officer
CYNTHIA A. ROSE** Secretary, Secretary
The Lincoln National
Life Insurance Company and
Lincoln National Corporation
LAWRENCE T. ROWLAND*** Executive Vice President and
Director
RICHARD C. VAUGHAN** Director
JANET C. WHITNEY** Vice President and Vice President and
Treasurer, Lincoln Treasurer
National Corporation and
The Lincoln National
Life Insurance Company
O. DOUGLAS WORTHINGTON* Vice President, Controller
and Assistant Treasurer
Footnotes:
* Principal business address is 1300 S. Clinton Street, Fort Wayne, Indiana
46802
** Principal business address is 200 E. Berry Street, Fort Wayne, Indiana
46802
*** Principal business address is 1700 Magnavox Way, One Reinsurance Place,
Fort Wayne,
<PAGE>
Indiana 46804
This list is also designed to satisfy the requirements of Item 33.
Item 30.
PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE INSURANCE COMPANY
OR REGISTRANT
See Exhibit 19(a): Organizational Chart of the Lincoln National Insurance
Holding Company System. The Fund is a segregated account established pursuant
to Indiana Law, and thus does not appear on the Chart.
Item 31.
NUMBER OF CONTRACTOWNERS
As of March 31, 1997, there were 8,979 group contractowners of qualified
contracts. The Fund does not offer non-qualified contracts.
Item 32.
INDEMNIFICATION--UNDERTAKING
(a) Brief description of indemnification provisions.
See prior filings.
(b) Undertaking pursuant to Rule 484 of Regulation C under the
Securities Act of 1933:
See prior filings.
Item 33. Business and Other Connections of Investment Adviser.
The Lincoln National Life Insurance Company (Lincoln Life), the Investment
Adviser, is principally engaged in the sale of life insurance, annuities, and
related products and services, and is a professional reinsurer.
Information concerning other activities of certain directors and officers of
Lincoln Life is set out in item 29 above.
Item 34. Principal Underwriters
(a) Lincoln Life also currently serves as Principal Underwriter for Lincoln
National Variable Annuity Fund A (Individual), and Lincoln National Variable
Annuity Account C; and is the Sponsor of Lincoln National Flexible Premium
Variable Life Accounts D, F, G, J, and K and Lincoln National Variable Annuity
Accounts E, H, L, 50, 51 and 52.
(b) Not Applicable.
Item 35. Location of Accounts and Records
Exhibit 19(b) incorporated by reference herein, in response to this Item.
Item 36. Management Services
See Exhibit 9(d): Services Agreement between Lincoln National Life Insurance
Company, Delaware Management Holding Companies, Inc. and Delaware Services
Company Inc. dated August 15, 1996.
Item 37. Undertakings
(a) Not Applicable.
(b) See prior filings.
(c) See prior filings.
(d) Lincoln National Life Insurance Company hereby represents that the fees and
charges deducted under the contract, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to be incurred, and
the risks assumed by the Lincoln National Life Insurance Company.
<PAGE>
SIGNATURES
(a) As required by the Securities Act of 1933 and the Investment Company
Act of 1940, the Registrant certifies that it meets the requirements of
Securities Act Rule 485(b) for effectiveness of this Amendment and has caused
this Amendment to the Registration Statement to be signed on its behalf, in the
City of Fort Wayne, and State of Indiana on this 30th day of April, 1997.
LINCOLN NATIONAL VARIABLE ANNUITY
FUND A (Group)
By /s/ Kelly D. Clevenger
----------------------------------------
Kelly D. Clevenger, Chairperson
Board of Managers
(Signature and Title)
By THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY (Lincoln Life)
(Depositor)
By /s/ Jon A. Boscia
----------------------------------------
Jon A. Boscia
Chief Executive Officer
(Name and title of officer of Depositor)
(b) As required by the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Jon A. Boscia President, Chief Executive April 30, 1997
- ---------------------------- Officer and Director
Jon A. Boscia (Principal Executive Officer)
/s/ Ian M. Rolland Director April 30, 1997
- ----------------------------
Ian M. Rolland
Executive Vice President ______________
- ---------------------------- and Director
Lawrence T. Rowland
/s/ Richard C. Vaughan Director April 30, 1997
- ----------------------------
Richard C. Vaughan
/s/ H. Thomas McMeekin Director April 30, 1997
- ----------------------------
H. Thomas McMeekin
/s/ Keith J. Ryan Vice President, Assistant April 30, 1997
- ---------------------------- Treasurer, and Chief
Keith J. Ryan Financial Officer
(Principal Financial Officer)
*** Controller and Assistant April 30, 1997
- ---------------------------- Treasurer (Principal
O. Douglas Worthington Accounting Officer)
/s/ Jack D. Hunter Director April 30, 1997
- ----------------------------
Jack D. Hunter
***By /s/ Jeremy Sachs
----------------------, pursuant to a Power of Attorney filed with this
Jeremy Sachs Post-Effective Amendment No. 52 to the
Registration Statement.
</TABLE>
<PAGE>
Exhibit 3
CUSTODIAN AGREEMENT
-------------------
This Custodian Agreement ("Agreement"), effective March 4, 19985, made by
and between Lincoln National Variable Annuity Fund A (hereinafter called
"Fund"), and Bankers Trust Company, a New York banking corporation (hereinafter
called "Custodian"), is made with reference to the following facts:
A. Fund is engaged in the business of a mutual fund and desires to have
Custodian act in the capacity of custodian for its investment securities.
B. Custodian is willing to act in such capacity upon the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual agreements herein made, Fund
and Custodian agree as follows:
1. Definitions. The word "securities" as used herein includes stocks,
bonds, debentures, notes, bankers' acceptances, certificates of deposit,
evidences of indebtedness, evidences of interest, warrants, and other
securities, irrespective of their form, the name by which they may be described,
or the character or form of the entities by which they are issued or created,
including without limitation, "put" and "call" options, repurchase agreements,
and such other money market instruments in which Fund is authorized to invest.
The words "officer's certificate" shall mean a request or direction or
instruction (1) in writing signed in the name of Fund by the President, a Vice
President, the Secretary, the Treasurer, an Assistant Secretary, or an Assistant
Treasurer; or (2) transmitted electronically by an authorized person through
Custodian's Cash Connector System; or (3) telephoned to Custodian by an
authorized person, in which case Custodian will phone Fund after initial phone
call, speak with another authorized person, and verify and confirm the
instruction. In the instance of a telephone officer's certificate, Custodian
shall act upon the oral instruction and Fund will send Custodian written or
electronic confirmation of the instruction.
The word "receipt" whenever used in this Agreement in connection with
receipt of securities by Custodian shall mean receipt by Custodian of (1)
securities in bearer form or in form for transfer satisfactory to Custodian; or
(2) written, telegraphic, or electronic advice from a Depository that securities
have been credited to the account of Custodian at the Depository; or (3)
written, telegraphic, or electronic advice from any branch of Custodian doing
business in the United States and/or any foreign country that such securities
have been deposited with it; or (4) in the case of repurchase agreements entered
into between Fund and a bank, written, telegraphic, or electronic advice from
such bank evidencing purchase by Fund of securities owned by such bank along
with written, telegraphic, or electronic evidence of the agreement by such bank
to purchase such securities from Fund; or (5) written, telegraphic, or
electronic advice from any Sub-Custodian appointed pursuant to Section 11 that
securities have been credited to the account of
1
<PAGE>
Custodian or the Sub-Custodian.
The word "receipt" whenever used in this Agreement in connection with
receipt of payment of Custodian shall mean receipt by Custodian of (1) cash or
check certified or issued by a bank (which term as used herein shall include a
Federal Reserve Bank), trust company, member firm of a national securities
exchange, or a Depository; or (2) written telegraphic, or electronic advice from
a bank, trust company, registered clearing agency, or a Depository that funds
have been or will be credited to the account of Custodian at one or more of the
foregoing; or (3) payment other than the foregoing if specified in an officer's
certificate covering the transaction in question.
The word "Depository" as used herein shall mean any "system" or "person"
contemplated by Section 17 (f) of the Investment Company Act of 1940 in which
Custodian may, under that Section and any rules, regulations, or orders
thereunder and under Section 16 of this Agreement, deposit all or part of the
securities of Fund with the consent of Fund.
2. Officers and Authorized Persons. Fund will furnish to Custodian from
time to time, whenever any change occurs, a written officer's certificate
setting forth the names and signatures of its officers and the names of its
authorized persons. Custodian will compare these signatures with those on any
written officer's certificate before acting upon the officer's certificate. An
"authorized person" is a person duly appointed and authorized by a resolution of
the Board of Managers of Fund to effect officer's certificates by transmitting
electronic instructions through Custodian's Cash Connector System or by
telephoning custodian with instructions. Fund will provide the authorization
code of Custodian's Cash Connector System only to such authorized persons, and
Custodian will not act upon an electronic instruction unless it has been
transmitted using the proper authorization codes, e.g.: identification number(s)
and passwords.
3. Receipt and Disbursement of Money.
A. Custodian shall open and maintain a separate account or accounts
in the name of Fund and shall hold in such account or accounts all cash received
by it for the account of Fund. Custodian shall make and receive payments of cash
for the account of Fund from and to such cash only (a) upon the purchase of
securities for the portfolio of Fund and receipt of such securities by
Custodian, (b) for payments in connection with sale, conversion, exchange, or
surrender of securities owned by Fund, (c) for payment pursuant to a specified
agreement for loaning Fund's securities, (d) subject to the provisions of
Section 7 of this Agreement, upon the exercise of a covered call option written
by Fund for which Custodian or a Depository has executed an escrow receipt or
depository receipt, or (e) for other proper corporate purposes.
In making and receiving any such payment pursuant to clauses (a), (b),
(d), and (e) above, Custodian shall first receive an officer's certificate
requesting that such payment be made. In receiving payments pursuant to clause
(c) above, Custodian shall act pursuant tot he parties'
2
<PAGE>
agreement contained in a Securities Loan Amendment to Custodian Agreement, as
may be amended from time to time. Prior to any payment pursuant to clause (e)
of this Subsection A, Custodian shall have received a written officer's
certificate and a certified copy of a resolution of the Board of Managers of
Fund, signed by an officer of Fund and certified by its Secretary or an
Assistant Secretary, setting forth the purposes of such payment, declaring such
purposes to be proper corporate purposes, and naming the person or persons to
whom such payment is to be made.
B. Custodian is hereby authorized to endorse an collect all checks,
drafts, or other orders for the payment of money received by Custodian for the
account of Fund.
4. Receipt of Securities. Custodian agrees that book entry or Depository-
eligible securities will be held in Custodian's account at the Federal Reserve
Bank or a Depository, as appropriate, and agrees to receive and hold in a
separate account all other securities delivered to it by or for the account of
Fund. All such securities are to be held or disposed of subject at all times to
the instructions of Fund pursuant to the terms of this Agreement. Custodian
shall have no power or authority to assign, hypothecate, pledge, or otherwise
dispose of any such securities and investment, except pursuant to the directive
of Fund and only for the account of Fund as set out in Section 5 of this
Agreement.
5. Transfer, Exchange, or Delivery of Securities. Custodian shall have
sole power to release or deliver any securities of Fund held by it pursuant to
this Agreement. Custodian agrees to cause the transfer, exchange, or delivery
of securities held by it hereunder only (a) upon sale of such securities for the
account of Fund and receipt of Custodian of payment thereof, (b) when securities
are called, redeemed, retired, or otherwise become payable, (c) for examination
by any broker selling any such securities in accordance with "street delivery"
custom, (d) in exchange for or upon conversion into other securities alone or
other securities and cash whether pursuant to any plan or merger, consolidation,
reorganization, or readjustment, or otherwise, (e) upon conversion of such
securities pursuant to their terms into other securities, (f) upon exercise of
subscription, purchase, or other similar rights represented by such securities,
(g) for the purpose of exchanging interim receipts or temporary securities for
definitive securities, (h) for the purpose of redeeming in kind shares of
capital stock of Fund, (i) for the purpose of loaning Fund's securities against
receipt by Custodian of collateral therefor, (j) upon deposit of securities of
Fund in a Depository, (k) subject to the provisions of Section 7 of this
Agreement, upon the exercise of a covered call option written by Fund for which
Custodian or a Depository has executed an escrow receipt or depository receipt,
(1) to a party without receipt by Custodian of payment thereof upon written
instruction of Fund (which shall be referred to as "free deliver"); of (m) for
other corporate purposes. As to any deliveries made by Custodian pursuant to
items (b), (d), (e), (f), and (g), securities or cash receivable in exchange
therefor shall be deliverable to Custodian.
In making such transfer, exchange, or delivery pursuant to clauses (a),
(d), (f), (h), (k), (l), or (m) above, Custodian shall first receive an
officer's certificate requesting such transfer, exchange, or delivery. In
making any transfer, exchange or delivery pursuant to clause (i) above,
3
<PAGE>
Custodian shall act pursuant to the parties' agreement contained in a Securities
Loan Amendment to Custodian Agreement, as may be amended from time to time.
Prior to any transfer, exchange, or delivery pursuant to clause (1) above,
Custodian shall have received a written officer's certificate. Prior to any
transfer, exchange, or delivery pursuant to clause (m) above, Custodian shall
have received a written officer's certificate and a certified copy of a
resolution of the Board of Managers of Fund, signed by an officer of Fund and
certified by its Secretary or Assistant Secretary, specifying and the securities
to be delivered, setting forth the purposes for which such delivery is to be
made, declaring such purposes to be proper corporate purposes, and naming the
person or persons to whom delivery of such securities shall be made.
6. Custodian's Acts Without Instructions. Unless and until Custodian
receives an officer's certificate to the contrary, Custodian shall (a) present
for payment all coupons and other income items held by it for the account of
Fund which call for payment upon presentation, and hld the cash received by it
upon such payment for the account of Fund, (b) collect interest and cash
dividends received, and other income of any kind, with notice to Fund, for the
account of Fund, (c) hold for the account of Fund hereunder all stock dividends,
rights, and similar securities issued with respect to any securities held by it
hereunder, (d) execute as agent on behalf of Fund all necessary ownership
certificates required by the Internal Revenue Code of the Income Tax Regulations
of the United States Treasury Department now or hereafter in effect, inserting
Fund's name on such certificates as the owner of the securities covered thereby,
to the extent it may lawfully do so, and (e) make transfers, exchanges, or
deliveries pursuant to clauses (b), (c), (e), (g), and (j) of Section 5.
7. Escrow Receipts. Upon receipt of an officer's certificate so
requesting, Custodian will execute, or cause a Depository to execute, an escrow
receipt or depository receipt relating to a covered call option written by Fund
and will deliver such escrow receipt or depository receipt against payment of
the premium therefor. Such officer's certificate shall contain all information
necessary for the issuance of such receipt and will authorize the deposit of the
securities or cash, as the case may be, specified therein into the custody
account of Fund. Securities or cash so deposited into the custody account will
be held by Custodian or a Depository subject to the terms of such escrow receipt
or deposit receipt. However, Custodian agrees that it will not deliver, or
cause a Depository to deliver, any securities or cash deposited in the custody
account pursuant to an exercise notice unless (a) Custodian has received an
officer's certificate to do so; or (b) (i) Custodian has duly requested the
issuance of such an officer's certificate, (ii) at least two business days have
elapsed since the receipt by the Fund of such request, and (iii) in the case of
exercise of a covered call option, Fund has not advised Custodian that it has
purchased securities that are to be delivered by Custodian or a Depository
pursuant to the exercise notice, or in the case of exercise of a put option,
Fund has not advised Custodian that it has arranged for the escrow account.
Fund agrees that it will not issue any officer's certificate which shall
conflict with the terms of an escrow receipt or deposit receipt executed by
Custodian or any Depository in relation to Fund and which is then in effect.
The parties agree that Custodian need not maintain any written evidence of
any covered
4
<PAGE>
call option or put option written by Fund as part of its duties under this
Agreement. The parties also agree that fund may write calls on securities which
may be received upon conversion from convertible securities which are owned by
Fund and issue officer's certificates to Custodian to execute, or cause a
Depository to execute, an escrow receipt or deposit receipt on the securities to
be received upon conversion which are, or are to be, owned by Fund. In such
event, the parties agree that any officer's certificate as to the execution of
the escrow receipt will relate only to the securities to be received upon
conversion, but that any officer's certificate as to the delivery and conversion
of such securities will relate only to the convertible securities.
8. Registration of Securities. Custodian shall register all securities,
except such as are in bearer form or held by a Depository (except as otherwise
directed by an officer's certificate), in the name of a registered nominee of
Custodian as defined in the Internal Revenue Code and any Regulations of the
Treasury Department issued thereunder or in any provisions of any subsequent
federal tax law exempting such transaction from liability for stock transfer
taxes, and shall execute and deliver all such certificates in connection
therewith as may be required by such laws or regulations or under the laws of
any state. Fund shall from time to time furnish to Custodian appropriate
instruments to enable Custodian to hold or deliver in proper form for transfer
or to register in the name of its registered nominee, any securities which it
may hold for the account of Fund and which may from time to time be registered
in the name of Fund.
9. Voting and Other Actions. Without further instructions or
authorization from Fund, Custodian shall deliver promptly to Fund all forms of
proxies, proxy statement, authorizations, notices, and stockholder reports which
Custodian may receive with respect to the securities of Fund. In the event the
securities to which any such proxies or other authorizations relate shall be
registered in the name of Custodian or its nominee, such proxies or other
authorizations when so delivered to Fund shall be duly executed in blank by
Custodian or its said nominee, as the case may be.
10. Transfer Taxes and Other Disbursements. Fund shall pay or reimburse
Custodian from time to time for any transfer taxes payable upon transfers of
securities made hereunder, and for all other necessary and proper disbursements
and expenses made or incurred by Custodian in the Performance of this Agreement.
Custodian shall execute and deliver any certificate in connection with
securities delivered to it or by it under this Agreement as may be required
under the provisions of the Internal Revenue Code and any Regulations of the
Treasury Department issued thereunder, or under the laws of any state, to exempt
from taxation any exempt transfers or deliveries of any such securities.
11. Custodian's Liability; Appointment of Agents; Sub-Custodians.
A. Upon receipt of property deposited with Custodian for custody and
upon the debit or credit of Fund's account by Custodian, or, in the instance of
free delivery or free
5
<PAGE>
receipt, upon issue of Custodian's non-negotiable advice of receipt of property
deposited, Custodian assumes full responsibility for the safekeeping of such
property while in Custodian's actual possession. In the event that property is
deposited with the Federal Reserve/Treasury Book Entry System (the "System") or
the Depository Trust Company ("DTC") or with any other Depository pursuant to
Section 16 of this Agreement, then, and in such event, the possession of the
System, DTC or other Depository shall be deemed to be the Custodian's actual
possession,
Custodian shall be responsible for losses of or damage to the property
under its care, custody, possession, or control, or under the care, custody,
possession, or control of its nominee or agent, including but not limited to
losses due to fire, burglary, robbery, theft, or mysterious disappearance. In
the event of loss of or damage to property under the care, custody, possession,
or control of Custodian or its nominee or agent, Custodian shall, upon demand by
Fund, promptly replace such securities with like kind and quality together with
all rights and privileges pertaining to such property, or if acceptable to Fund,
deliver cash equal to the then fair market value of the property. Under no
circumstance, however, shall Custodian be liable for consequential damages under
this Agreement nor for causes beyond its control, which causes shall be war,
insurrection, hurricane, cyclone, tornado, earthquake, volcanic eruption,
nuclear fission, fusion or radioactivity.
B. Custodian may appoint (and at any time remove) any other bank,
trust company, or responsible commercial agent as its agent to carry out such of
the provisions of this Agreement as Custodian may from time to time direct and,
in accordance with proper instructions from Fund, may employ one or more Sub-
Custodians. The appointment of any such agent or Sub-Custodian shall not relieve
Custodian of any of its responsibilities under this Agreement.
C. Custodian shall have no liability or responsibility for the
genuineness of any securities deposited with it or ownership by Fund.
12. Reports. Custodian shall advise Fund with respect to transactions for
the account of Fund and shall report as to the composition of Fund's assets at
such times as Fund shall reasonably request. The books and records of Custodian
pertaining to its actions under this Agreement and the securities and other
investments held by Custodian under this Agreement shall be open to inspection
and audit at reasonable times by Fund's officers and auditors.
13. Custodian's Compensation. Custodian shall be paid as compensation for
its services pursuant to this Agreement such compensation as may from time to
time be agreed upon between the two parties.
14. Termination or Assignment of Agreement. This Agreement may be
terminated by Fund on thirty days' notice or by Custodian on sixty days' notice
given in writing and sent by registered mail to Custodian at Custody Services,
Bankers Trust Company, P.O. Box 318, Church Street Station, New York, New York
10015, or to Fund at 1300 South Clinton Street, Fort Wayne, Indiana 46802.
6
<PAGE>
Upon termination of this Agreement, or in the event a successor to
Custodian shall be selected or appointed pursuant to Section 15A hereof,
Custodian shall make delivery or payment of cash or securities held by it
hereunder whether or not full payment shall have been made by Fund of all
liabilities7 constituting a charge on or against the cash and securities then
held by Custodian or on or against Custodian, and whether or not full payment
shall have been made to Custodian of all its fees, compensation, costs, and
expenses, or whether Custodian shall have been furnished with security and
indemnity satisfactory to it against any liability, obligation, fees,
compensation, cost or expense in connection with this Agreement (to the extent
Custodian is entitled thereto under Section 11 hereof) or on account of any
action taken or omitted by Fund or its officers or directors hereunder.
Notwithstanding the provisions of the foregoing sentence, nothing herein shall
be deemed to relieve Fund of its obligation to pay such liabilities constituting
such a charge or such fees, compensation, costs, and expenses, or to furnish
such security to which Custodian is entitled to be indemnified under Section 11
hereof. Nothing in this Agreement shall be construed to allow Custodian to set-
off any of its fees, charges, or other claims against any securities or cash
held by it as custodian hereunder.
This Agreement may not be assigned by Custodian without the consent of
Fund, authorized or approved by a resolution of its Board of Managers.
15. Successors.
A. Upon termination of this Agreement, or in the event that Custodian
shall be dissolved, or otherwise shall become incapable of acting, or in the
event that control of Custodian or its offices shall be taken over by any public
officer or officers,
(i) Fund, by an officer's certificate furnished to Custodian, may
designate a successor, to whom Custodian shall thereupon deliver all cash
and securities of Fund held by it, by a Sub-Custodian, or held in its name
by a Depository, or
(ii) Fund may, by furnishing to Custodian an officer's certificate and a
certified copy of a resolution of the Board of Managers of Fund authorizing
that Fund may function without a qualified bank or trust company to hold
its cash and securities, request delivery of all cash and securities to it,
by a Sub-Custodian or held in its name by a Depository to Fund, or
(iii) in the absence of any officer's certificate pursuant to (i) or (ii)
within a period of sixty days after such termination, dissolution,
incapacity, or taking over, Custodian may deliver any cash and securities
of Fund held by it, by a Sub-Custodian or held in its name by a Depository
to a bank or trust company in the City of New York, having a capital
surplus and undivided profits aggregating not less than $5,000,000 selected
by it, such cash and securities to be held subject to the same terms as
these set forth in this Agreement.
7
<PAGE>
Any successor appointed by Fund or selected by Custodian may,
within 1 year after such appointment, be replaced by the holders of not less
than majority of the shares of the capital stock of Fund at the time
outstanding, and upon acceptance of such appointment by the successor custodian
and notice thereof to the retiring Custodian, the successor Custodian without
further act or deed shall become Custodian hereunder, and the retiring Custodian
shall deliver all cash, securities and records held by it to such successor.
B. Any bank or trust company into which Custodian or any successor
hereunder may be merged or converted, or with which it or its successors may be
consolidated, or any bank or trust company resulting from any merger, conversion
or consolidation to which Custodian or any successor shall be a party, or any
bank or trust company succeeding to the business of Custodian or any successor,
shall be substituted as successor under this Agreement and any amendments hereof
without the execution of any instruments or any further act on the part of Fund
or any successor, provided such bank or trust company be a national banking
association or trust company or banking corporation organized under the laws of
the United States or of any state thereof and have a capital surplus and
undivided profits aggregating not less than $5,000,000.
C. Any successor resulting from the provisions of Subsections A or B
above shall be vested with all powers, duties and obligations of its predecessor
under this Agreement and any amendments thereof, and shall succeed to all
exemptions and privileges of its predecessor under this Agreement and any
amendments thereof.
16. Depositories. The parties agree that, as of the date of this
Agreement, the Depositories to the use of which both parties have consented are
Federal Reserve/Treasury Book Entry System (the "System") and the Depository
Trust Company ("DTC:), the use of which is subject to the terms and conditions
of this Section 16. Other Depositories may be used under this Agreement if both
parties consent in writing to the use thereof and if such Depository has been
approved by the Department of Insurance of the State of Indiana; any such use
shall be subject to the terms and conditions of this Section 16 applicable to
the System and DTC except to the extent, if any, to which such terms and
conditions were changed, as to any Depository or Depositories other than the
System and DTC, in any such consent or consents.
The terms of the use of the System, DTC, and any other Depository under
this Agreement shall be governed by the terms and conditions of Rule 17f-4 under
the Investment Company Act of 1940, to which terms and conditions shall
supersede any conflicting provisions of this Agreement. The Board of Managers
of Fund has approved the use of the System and DTC.
If and to the extent that the System and/or DTC permits the withdrawal of a
security from the System and/or DTC in certificate form and Fund requires a
certificate for making a loan or otherwise, Custodian shall take all necessary
and appropriate action to obtain such certificate upon receipt of an officer's
certificate requesting the same.
8
<PAGE>
17. Miscellaneous. Custodian agrees to cooperate with Fund (i) in
providing the information necessary for the preparation of routine reports to
holders of shares of Fund, to the Securities and Exchange Commission, including
Forms N-1R and N-1Q, to State "Blue Sky" authorities and to others, (ii) in
connection with audits of the accounts of Fund, and (iii) in connection with
other similar matters requiring access to the securities held by custodian
hereunder and the records maintained by Custodian with respect thereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers.
ATTEST: LINCOLN NATIONAL VARIABLE ANNUITY
FUND A
/S/ MARILYN A. VACHON By /S/ MAX ROESLER
----------------------------- ----------------------------
Secretary Max A. Roesler
Vice President and Treasurer
ATTEST: BANKERS TRUST COMPANY
- --------------------------- By /S/ W. MOSS BROWN
-----------------------------------
Name W. MOSS BROWN
---------------------------------
Title VICE PRESIDENT
--------------------------------
Name /S/ MARK A. BACH
---------------------------------
Title Assistant Vice President
--------------------------------
9
<PAGE>
Exhibit 4(a)(i)
The Lincoln National Life Insurance Company
Contract Number
Maturity Date
Date of Issue
Stipulated Payment
Annuitant
Deferred Annuity--Ten Years Certain Life Annuity or Optional Annuity
Settlement--Stipulated Payments Payable Until Maturity Date or
Prior Death of Annuitant--Nonparticipating
The Lincoln National
Life Insurance Company
Fort Wayne, Indiana
WILL PAY to the Annuitant on the Maturity Date, if the Annuitant is then living,
the first of a series of Monthly Instalments and subsequent instalments on the
same day of each month thereafter so long as the Annuitant shall live with the
guarantee that, if the death of the Annuitant occurs within ten years after the
Maturity Date, a total of One Hundred Twenty Monthly Instalments, including the
first, shall be paid (see provision 23). The dollar amounts of the instalments
shall be determined as herein provided.
The Owner may elect to change the date of commencement of the annuity payable
under this Contract or the form of such annuity or both, as provided in
provisions 22 and 24.
Upon receipt of due proof of the death of the Annuitant occurring before the
Maturity Date, the Company will pay to the Beneficiary the Full Value at the
valuation date coincident with or next following written notice of death is
received by the Company.
The stipulated payment and other Contract data are shown on page three. The
first stipulated payment is due on the Date of Issue and subsequent
stipulated payments are payable periodically thereafter at the intervals
specified on page three and until stipulated payments have been paid to the
Maturity Date or until the prior death of the Annuitant. The stipulated
payment includes the additional premium for any benefit provided by rider
attached to this Contract. When any such additional premium is no longer
payable, the stipulated payment for this Contract shall be reduced
accordingly.
The provisions set forth on the subsequent pages hereof are hereby made a part
of this Contract.
Executed by The Lincoln National Life Insurance Company (the "Company") at its
Home Office in Fort Wayne, Indiana, on the Date of Issue.
/s/ G. M. Bryce /s/ H. J. Rood
Secretary President
ALL PAYMENTS AND VALUES PROVIDED BY THIS CONTRACT, WHEN BASED ON INVESTMENT
EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE AND ARE NOT GUARANTEED AS TO
FIXED DOLLAR AMOUNT
Examined by:
Form IVA-1-TB-4-67
<PAGE>
CONTRACT NUMBER
DATE OF ISSUE MATURITY DATE
ANNUITANT STIPULATED PAYMENT
AGE AT ISSUE
SEX
OWNER
BENEFICIARY
STIPULATED
PAYMENT INTERVAL
ACCOUNT ALLOCATION OF GENERAL ACCOUNT % SEPARATE ACCOUNT %
STIPULATED PAYMENT
EXCLUDING PREMIUMS FOR
ACCOUNTS PROVIDED BY RIDER
SCHEDULE OF ADDITIONAL GENERAL ACCOUNT BENEFITS PROVIDED BY RIDER
NUMBER
BENEFIT ANNUAL OF YEARS
PREMIUM PAYABLE
Page Three
<PAGE>
1. General Definitions--As used in this Contract, the terms:
(a) "Separate Account" means those assets of the Company set aside in a
segregated investment account, entitled "Lincoln National Variable Annuity
Fund A," established by the Company for this class of Contracts pursuant to
applicable law;
(b) "General Account" means those assets of the company not in the Separate
Account or any other segregated investment account established by the
Company;
(c) "Valuation Period" means the period of seven calendar days from the
immediately preceding valuation date except at the end of the year when a
partial week is used to value accumulation and annuity units as of the last
market day in the year.
2. Stipulated Payments--Stipulated payments are payable in advance at intervals
of twelve months (annually), six months (semiannually), three months (quarterly)
or one month (monthly). The first stipulated payment is due as of the Date of
Issue and each subsequent stipulated payment is due on the first day following
the interval covered by the next preceding stipulated payment and on the same
day of the month as the Date of Issue. The amount of the stipulated payment on
an annualized basis may be increased up to twice the first stipulated payment on
an annualized basis or decreased on any due date, and submission of a stipulated
payment different from the previous payment made will constitute notice of such
change. Increases in stipulated payments in excess of those described in the
previous sentence will be accepted only upon consent of the Company.
The mode of stipulated payment may be changed only on a Contract anniversary
unless otherwise agreed by the Company. Without the consent of the Company, no
semiannual, quarterly or monthly stipulated payment shall be less than $10.00.
Stipulated payments are payable to the Company, either at its Home Office or
elsewhere, in exchange for the Company's receipt therefor, signed by the
President or the Secretary.
The payment of any stipulated payment shall not continue this Contract in
force beyond the date when the next stipulated payment is due, except as
otherwise provided herein. Failure to pay a stipulated payment on or before the
date on which it is due constitutes default in stipulated payments. As long as
any stipulated payment remains unpaid, the date of default is the earliest date
on which an unpaid stipulated payment was due.
3. Grace Period--A grace period of thirty-one days will be allowed for the
payment of every stipulated payment after the first, during which period this
Contract shall continue in force. Except as otherwise provided herein, this
Contract shall be cancelled and forfeited at the expiration of the grace period
for the payment of a stipulated payment if such stipulated payment is not paid
before the end of such period.
4. The Contract--This Contract is issued in consideration of the application
and of the payment of stipulated payments as provided. This Contract and the
application constitute the entire contract. All statements made by the Annuitant
or on his behalf shall be deemed representations and not warranties, and no such
statement shall be used in defense to a claim under this Contract unless it is
contained in the application and a copy of the application is attached to this
Contract when issued.
5. Control--In the absence of a special endorsement or written instrument filed
with the Company which provides otherwise, the Owner may, during the lifetime of
the Annuitant and without the consent of any contingent owner or revocable
beneficiary, assign or surrender this Contract, amend or modify it with the
consent of the company, and exercise, receive and enjoy every other right,
benefit and privilege contained in this Contract.
6. Modification of Contract--Only the President, a Vice-President, the
Secretary or an Assistant Secretary of the Company has power on behalf of the
Company to change, modify or waive the provisions of this Contract, and then
only in writing. The Company shall not be bound by any promise or representation
heretofore or hereafter made by or to any agent or person other than as
specified above.
7. Incontestability--This Contract, excepting any provisions granting benefits
in event of total and permanent disability, shall be incontestable after it has
been in force during the lifetime of the Annuitant for two years from the Date
of Issue except for nonpayment of stipulated payments.
8. Age--As used in this Contract, the term "Attained Age" of the Annuitant on
any date after the Date of Issue means the age of the Annuitant at issue as
shown on page three plus the number of years, including fractions, elapsed from
the Date of Issue to such date.
Misstatement of Age or Sex--If the age or sex of the Annuitant has been
misstated, the benefits hereunder shall be such as would have been provided at
the correct age and sex. Any underpayments already made by the Company shall be
made up immediately and any overpayments made by the Company shall be charged
against the benefits falling due after adjustment.
9. Reinstatement--This Contract, unless surrendered for its Net Termination
Value, may be reinstated, without benefits provided by any rider attached to
this Contract, at any time after date of default in payment of the stipulated
payment upon payment of one stipulated payment. Reinstatement will become
effective on that date most recently preceding receipt of such stipulated
payment on which an unpaid stipulated payment would have been due. For
reinstatement of benefits provided by riders attached to this Contract,
presentation of evidence of insurability satisfactory to the Company and
compliance with reinstatement provisions incorporated in such riders will be
required.
10. Assignment--No assignment of this Contract shall be binding on the Company
unless it is in writing and until it is filed with the Company at its Home
Office. The Company will assume no responsibility for the validity or
sufficiency of any assignment. Unless otherwise provided in the assignment, the
interest of any revocable beneficiary shall be subordinate to the interest of
any assignee, whether the assignment was made before or after the designation of
beneficiary, and the assignee shall receive any sum payable to the extent of his
interest.
11. Settlement--Any payment by the Company under this Contract is payable at
its Home Office.
12. Change of Beneficiary or Mode of Payment of Proceeds--While this Contract
is in force, if the right to change the beneficiary has been reserved, the
Owner, subject to the terms of any existing assignment, may change the
beneficiary, or may change the mode of payment of the proceeds of this Contract
to any mode of payment upon which the Owner and the Company may agree, by filing
at the Home Office of the Company a written request satisfactory to the Company
accompanied by this Contract for endorsement. Such change, either in beneficiary
or mode of payment of proceeds, shall take effect only upon endorsement on this
Contract by the Company. During the lifetime of any irrevocable beneficiary the
written consent of such beneficiary shall be necessary for any revoca-
Page Five
<PAGE>
Page Six
tion or change of beneficiary or change in mode of payment of proceeds.
If any beneficiary, whether revocably or irrevocably designated, predeceases
the Annuitant, the interest of such beneficiary shall pass to the surviving
beneficiary or, if more than one survive, to such surviving beneficiaries in
proportion to their respective interests, unless otherwise provided by
endorsement on this Contract. If no designated beneficiary survives the
Annuitant and it is not otherwise provided, the proceeds of this Contract shall
be payable in one sum to the Owner, surviving the annuitant, otherwise to the
executors or administrators of the Owner.
13. Settlement Options--During the lifetime of the Annuitant, the Owner may
elect that, in lieu of payment in one sum, the amount or any part thereof which
may become due in settlement of this Contract on the death of the Annuitant or
on surrender of this Contract for its Net Termination Value be applied under any
one of the settlement options hereinafter provided or in any other manner that
may be agreed upon with the Company. With respect to proceeds payable on the
death of the Annuitant, if on such death no election by the Owner is in effect,
an election may be made by the Beneficiary on such death or within one year
thereafter and before any payment has been made hereunder.
First Option--Instalments for Designated Period--The proceeds may be paid in
monthly instalments over a period of from one to thirty years. The amount of
each instalment for each $1,000 due shall be determined in accordance with the
appropriate table in provision 31.
Second Option--Life Income with Instalments Guaranteed for Designated
Period--The proceeds may be paid in monthly instalments during the period
certain elected and thereafter throughout the lifetime of the payee. The period
certain may be (a) 10 years, (b) 15 years, or (c) 20 years. The amount of each
instalment will depend upon the sex of the payee and upon the payee's adjusted
age at nearest birthday at the time the first instalment is due and shall be
determined for each $1,000 due in accordance with the appropriate table in
provision 31. Payment under this option shall be subject to satisfactory proof
of age of the payee.
Third Option--Unit Refund Life Annuity--The proceeds may be paid in monthly
instalments during the lifetime of the payee terminating with the last
instalment due prior to the death of the payee, provided that, at such death, an
additional payment will be made of the then dollar value of the number of
annuity units equal to the excess, if any, of (a) over (b) where (a) is the
total amount applied under the option divided by the annuity unit value, as
defined in provision 27, at the effective date of the Supplementary Contract
(see below) and (b) is the product of annuity units represented by each
instalment and the number of instalment paid prior to such death.
Fourth Option--Instalments of Designated Amount--The proceeds may be paid in
equal annual, semiannual, quarterly or monthly instalments of a designated
amount (not less than $50.00 per annum per $1,000 of original proceeds left with
the Company) until the remaining balance is less than the amount of one
instalment. The remaining balance in either the General or Separate Account at
the end of any valuation period is equal to the product of (a) such balance at
the end of the previous period decreased by the amount of any instalment paid
during the period and (b) the net investment factor for the period. If the
remaining balance at any time is less than the amount of one instalment, such
balance will be paid and will be the final payment under the option.
Fifth Option--Interest Income--The proceeds may be left in the General Account
of the Company and interest thereon will be paid annually, semiannually,
quarterly or monthly as elected. The amount of interest shall be equal to the
General Account net investment rate for the period covered by the interest
payment multiplied by the amount remaining on deposit at the end of such
period.
Supplementary Contract--At such time as one of these settlement options may
become operative, this Contract shall be surrendered to the Company in exchange
for a Supplementary Contract providing for the manner of settlement elected.
Such Supplementary Contract may not be assigned. The effective date of the
Supplementary Contract shall be the date of death of the Annuitant or surrender
of this Contract for its Net Termination Value, as the case may be. The first
instalment payment under the First, Second, Third or Fourth Option shall be made
as of the effective date of the Supplementary Contract. The first interest
payment under the Fifth Option shall be made at the end of the period elected,
measured from the effective date of the Supplementary Contract. Subsequent
payments will be made periodically in accordance with the manner of payment
elected.
General Provisions--The minimum amount of proceeds which may be applied under
any settlement option for any payee shall be $2,000; proceeds of a smaller
amount due and payee will be paid in one sum. If at any time the interest or
instalment payments to any payee under a settlement option are or become less
than $20.00 each, the company shall have the right to change the frequency of
payment to such intervals as will result in payments of at least $20.00.
Except with the consent of the company, these settlement options shall not be
available with respect to any part of the proceeds payable to an assignee or to
other than a natural person entitled to receive proceeds in his or her own
right.
The payee under a settlement option operative on or after the death of the
Annuitant shall be the Beneficiary during the lifetime of such Beneficiary. The
payee under a settlement option operative on or after surrender of this Contract
for its Net Termination Value shall be the Annuitant during the lifetime of such
Annuitant.
No payee shall have the right to assign, encumber or alienate any of the
payments under a settlement option. The Supplementary Contract will contain
such provisions with respect to the right of the payee to commute or withdraw
the proceeds or to change the manner of settlement as may be specified in the
election and approved by the Company. Any right of commutation or withdrawal
shall be restricted to the commuting of the then current dollar amount of all
remaining instalments under the First Option at a net investment rate of 3% per
annum in the General Account and 3 1/2% per annum in the separate Account, or
the withdrawal of all or any part of the proceeds remaining with the Company
under the Fourth of Fifth Option. The payee may make no change in the manner of
settlement except as provided in the election.
To the extent permitted by law, neither the proceeds nor the payments under
any of these settlement options shall be subject to any beneficiary's debts,
contracts or engagements or to any judicial process to levy upon or attach the
same for payment thereof.
At the death of any payee after a settlement option become operative, the then
present value of the current dollar amount of any unpaid instalments certain
under the First or Second Option or the amount specified above as 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 one sum to the
executors or administrators of the payee unless other provision shall have been
specified in the election and approved by the Company. Present values will be
based on a net investment rate of (a) 3 1/2% per annum for the Separate Account
and under the Second Option for the General Account and (b) 3% per annum under
the First Option for the General Account.
<PAGE>
Form IVA-1TB-5
14. CONTRACT LOANS--While this Contract is in force, the Company will lend on
proper assignment of this Contract and on the sole security thereof an amount
which, with any existing indebtedness, together with interest on the total
indebtedness to the next Contract anniversary or, if earlier, the due date of
the next stipulated payment, will not exceed the Loan Value of this Contract at
the next Contract anniversary or, if earlier, the due date of the next
stipulated payment. The Loan Value shall be the Full Value less, prior to the
second Contract anniversary, an amount equal to 2% of the Full Value. The Full
Value shall be equal to the value of the accumulation units credited to the
Contract determined on the basis set forth in provision 19. Interest at the
rate of 22 1/2% per annum will be due and payable at the end of each Contract
year and, if not so paid, will be added to the principal and bear the same rate
of interest. If required by the Company, this Contract must be presented for
endorsement of a Contract loan. Whenever the total indebtedness shall equal or
exceed the Loan Value, this Contract shall terminate but in no event until
thirty-one days after notice shall have been mailed to the last known address of
the Owner and of any assignee.
Any Contract loan will be allocated to the General Account and the Separate
Account in the same proportion as the respective net termination values in such
accounts bear to the total Net Termination Value on the valuation date next
following the date of the loan. There will be allocated to each respective
Contract loan account such number of accumulation units as are equal to the
value of the portion of the loan (or any loan interest thereon not paid when
due) allocated to such account on the basis of the accumulation unit value for
such account on the valuation date next following the date of the loan (or the
due date of such unpaid loan interest). If at any time the indebtedness
allocated to any account including unpaid interest thereon exceeds the Loan
Value of that account, the excess will be considered a loan against the other
account.
The whole or any part of any indebtedness may be repaid at any time while this
Contract is in force prior to its maturity or prior to the time a settlement
option becomes operative. The amount of any indebtedness repaid will be
allocated to the loans outstanding in each account under this Contract in the
same proportion that the indebtedness in each account bears to the total
indebtedness. The number of accumulation units allocated to each Contract loan
account will be reduced by the number of such units equal in value to the amount
of the repayment under each account and the number of accumulation units under
the Contract not allocated to the Contract loan accounts will be increased by
the number of such units equal in value to he amount of repayment, on the basis
of the accumulation unit value on the last day of the valuation period in which
repayment is made.
On any Contract anniversary the Owner may, by sending notice to the Company at
its Home Office in advance of such date, elect to have any accumulation units
allocated to the Contract loan account applied to repay any Contract
indebtedness (including unpaid interest thereon), in which case the Owner shall
forfeit the right to replace the value of such units.
In any settlement of this Contract, accumulation units allocated to any
Contract loan account will be applied automatically to repay any indebtedness
(including unpaid interest thereon).
15. INDEBTEDNESS--Indebtedness, wherever referred to in this Contract, shall
mean any indebtedness to the Company on or secured by this Contract, including
Contract loans plus accrued or accruing interest.
16. NONFORFEITURE OPTIONS--In event of default in stipulated payments, either
of the following nonforfeiture options may be elected by written request of the
Owner received by the Company at its Home Office prior to the death of the
Annuitant.
NEW TERMINATION VALUE--The Company will, upon due surrender of this Contract pay
to the Owner the Net Termination Value of this Contract less, prior to the
second Contract anniversary, an amount equal to 2% of the Full Value. The Net
Termination Value shall be the Full Value diminished by any existing
indebtedness.
At any time, the portion of the Contract in either account may be surrendered
provided that the portion of the stipulated payment allocated to the
other account on the date of surrender is at least equal to the minimum amount
required by the Company under its usual underwriting practices on that date.
The Net Termination Value will be computed on the valuation date coincident
with or next following the date of surrender and payment will be made within
seven days after the date request for surrender is received by the Company at
its Home Office, except as the Company may be permitted to defer such payment
under the Investment Company Act of 1940, as in effect at the time such request
is received.
PAID-UP ANNUITY--This Contract may be continued from the date of default in
stipulated payments as a paid-up annuity Contract, beginning on the Maturity
Date. In event of the death of the Annuitant prior to the Maturity Date, the
death benefit under such paid-up Contract will be equal to its Full Value on the
valuation date coincident with or following the date written notice of death is
received by the Company.
AUTOMATIC OPTION--If, on the expiration of thirty-one days after the date of
default in stipulated payments, no nonforfeiture option has been elected, this
Contract will automatically be continued under the paid-up annuity option from
the date of default.
17. NET STIPULATED PAYMENT--The net stipulated payment is equal to (a) 91.25%
of the stipulated payment after deducting any additional premium for any
benefit provided by rider attached to this Contract, less (b) any applicable
premium taxes on such stipulated payment.
The Company shall apply each net stipulated payment as of the last day of the
valuation period during which such Payment is received at its Home Office to
provide accumulation units as determined by the then current value of such
units. Such application shall be made separately for net stipulated payments
allocated to the Separate Account and the General Account in the manner
specified on page three.
The number of accumulation units provided in each Account shall be determined
by dividing the net stipulated payment for that Account by the dollar value of
one accumulation unit in that Account. The number of accumulation units so
determined for any stipulated payment shall not be changed by any subsequent
change in the dollar value of accumulation units. The dollar value of the
accumulation unit in the General Account will increase by a uniform percentage
each valuation period, but the dollar value of the accumulation unit in the
Separate Account will vary from period to period.
18. NET INVESTMENT RATE AND NET INVESTMENT FACTOR--
(a) The General Account net investment rate for each valuation period is
guaranteed, and is equivalent to an investment rate of 3 1/2% per annum
compounded annually, except that, for the First, Fourth, and Fifth Options
under provision 13 it shall be 3% compounded annually.
(b) The Separate Account net investment rate for any valuation period is equal
to the gross investment rate expressed in decimal form to six places less a
deduction of .000250. Such gross investment rate is equal to (i) the
investment income and capital gains and losses, whether realized or
unrealized, on the assets of the Separate Account less a deduction for
any applicable income taxes arising from such income and realized and
unrealized capital gains, divided by (ii) the amount of such assets at the
beginning of the valuation period. Such gross investment rate may be either
positive or negative.
(c) The net investment factor for each Account is the sum of 1.000000 plus the
net investment rate for the Account.
Page Seven
<PAGE>
Page Eight
19. Accumulation Unit Value--The value of an accumulation unit was established
at $1.00 on March 1, 1967. The value of the respective accumulation units in
each Account on the last day of any subsequent valuation period is determined by
multiplying such value on the last day of the immediately preceding valuation
period by the net investment factor for that Account for the current valuation
period.
20. Additional General Account Units--At the end of each valuation period
during the first five contract years, the Company will increase the number of
General Account accumulation units by a number which is equivalent to a 1% per
annum additional net investment return. At the end of each valuation period
during the sixth to tenth contract years, inclusive, the Company will increase
the number of such units by a number which is equivalent to a 1/2% per annum
additional net investment return. The company may credit additional General
Account accumulation units at any time to reflect credits of investment return
over and above those described in this provision.
21. Valuation of Assets--The valuation of all assets in the Separate Account
shall be determined in accordance with the provisions of the Rules and
Regulations of the Separate Account. The method of determination by the Company
of the value of an accumulation unit and annuity unit will be conclusive upon
the Owner, any assignee, the Annuitant and any Beneficiary.
22. Option to Commence Annuity Payments at Later or Earlier Date--Upon written
request by the Owner and any assignee and irrevocable beneficiary, the
commencement of Monthly Instalments may be deferred until any Contract
anniversary after the Maturity Date but not beyond the Contract anniversary on
which the Attained Age of the Annuitant is 75. Stipulated payments shall be
continued on and after the Maturity Date in the manner specified in this
Contract or shall cease on the Maturity Date, as elected in said request.
In the event of the death of the Annuitant during the period during which
annuity payments are deferred, the Company will pay to the Beneficiary the Full
Value on the valuation date coincident with or following the date written
notice of death is received by the Company.
Upon written request by the Owner and any assignee and irrevocable
beneficiary and upon due surrender of this Contract, either before, after or on
the Maturity Date, the Net Termination Value may be applied, subject to and in
accordance with provision 13, to provide monthly instalments commencing on the
date of surrender.
23. Payment of Guaranteed Monthly Instalments--In event of the death of the
Annuitant after having received the first Monthly Instalment provided by this
policy but before all of the one hundred twenty Monthly Instalments guaranteed
shall have been paid, the remaining guaranteed instalments shall be paid as they
become due to the Beneficiary, if living; otherwise the present value of the
then current dollar amount of the remaining guaranteed number of annuity
instalments shall be commuted on the basis of 3 1/2% interest compounded
annually and paid in one sum to the Annuitant's executors or administrators. In
the event of the death of the Beneficiary subsequent to that of the Annuitant
but before all of the guaranteed instalments shall have been paid, the present
value of the then current dollar amount of the remaining guaranteed instalments
shall be commuted at 3 1/2% interest per annum compounded annually and paid in
one sum to the executors or administrators of the Beneficiary.
24. Optional Annuities--Upon written request by the Owner and any assignee and
irrevocable beneficiary and upon due surrender of this policy, either before,
after or on the Maturity Date, the Net Termination Value may be applied to
provide any one of the following:
(1) a monthly life annuity payable throughout the lifetime of the Annuitant or
(2) a monthly annuity payable throughout the joint lifetime of the Annuitant
and a Nominee of the Owner's selection and continuing for life to the
survivor upon the death of the Annuitant or Nominee or
(3) a monthly annuity payable throughout the joint lifetime of the Annuitant
and a Nominee of the Owner's selection, with two thirds of the number of
annuity units in effect during such joint lifetime continuing for life to
the survivor upon the death of the Annuitant or Nominee.
The first instalment under any of these annuities shall be paid as of the
date of surrender. The amounts of the instalments shall be computed on the basis
of the sex and adjusted age of the Annuitant and of the Nominee, if any, on the
date of surrender and shall be determined for each $1000 due in accordance with
the appropriate tables in provision 31.
25. Allocation of Annuities--At the time of commencement of any annuity under
the provisions of this Contract, except the Fourth and Fifth Options under
provision 13, the Owner may elect to have the Net Termination Value applied to
provide a variable annuity, a fixed annuity or a combination of both. The
Election of the Fourth Option under provision 13 may specify that the net
investment factor for the Separate Account or the General Account is to apply or
the amount due may be split between the two Accounts. If no election is made to
the contrary, that portion of the Net Termination Value from the Separate
Account shall be applied to provide a variable annuity and that portion of the
Net Termination Value from the General Account shall be applied to provide a
fixed dollar annuity. Election of the Fifth Option under provision 13 shall
constitute election of fixed income.
26. Variable and Fixed Annuities--
(a) Variable Annuity--A variable annuity is an annuity with instalments varying
in amount in accordance with the net investment result of the Separate
Account. The number of Separate Account annuity units is determined by
dividing the first monthly instalment, determined as described in
provision 31, by the Separate Account annuity unit value at the date upon
which annuity instalments commence. The number of annuity units remains
fixed during the annuity payment period.
The dollar amount of the second and subsequent instalments is not
predetermined and may change from month to month. The actual amount of
these instalments is determined by multiplying the number of Separate
Account annuity units by the Separate Account annuity unit value,
determined as described in provision 27, for the valuation period in which
the payment is due.
The Company guarantees that the dollar amount of each instalment after the
first shall not be affected by variations in mortality experience from
mortality assumptions used to determine the first instalment.
(b) Fixed Dollar Annuity--A fixed dollar annuity is an annuity with instalments
which remain fixed as to dollar amount throughout the payment period.
A number of annuity units is determined when instalments commence, but the
value of the General Account annuity unit value is always $1.00.
Although fixed dollar annuity instalments may never be less than the first
monthly instalment, each instalment certain under the First and Second
Option of provision 13 and the net investment rate applied under the Fourth
and Fifth Options of provision 13 may be increased by such interest as may
be apportioned thereto by the Company in excess of the rates guaranteed.
27. Annuity Unit Value--The value of a General Account annuity unit is fixed at
$1.00. The value of a Separate Account annuity unit for the valuation period
ending March 1, 1967 was established at $1.00, and for
Form IVA-1-TB-7
<PAGE>
any subsequent valuation period, is determined by multiplying the value of the
Separate Account annuity unit for the immediate preceding valuation period by
the product of (a) .999351 and (b) the net investment factor of the Separate
Account for the second valuation period immediately preceding the valuation
period for which the value is being calculated.
28. Adjustment of Monthly Instalments and Optional Annuity Instalments--If the
net termination value at the time chosen as the maturity of this Contract is
less than $2,000, the Company shall have the right to pay such Net Termination
Value in one sum in lieu of the Monthly Instalments or any Optional Annuity set
forth in provision 24. If such Net Termination Value is not less than $2,000 but
(a) the Monthly Instalment or (b) the Optional Annuity instalment, as the case
may be, would be or become less than $10.00, the Company shall have the right to
change the frequency of payment to such intervals as will result in instalments
of at least $10.00.
29. Surrender of Contract of Supplementary Contract--At the time chosen for
commencement of Monthly Instalments or an Optional Annuity, this policy shall be
surrendered to the Company in exchange for a Supplementary Contract providing
for the annuity selected.
30. Proof of Survival--The Company shall have the right to require evidence of
the survival of the Annuitant at the time each Instalment payable to the
Annuitant is due.
31. Annuity Tables--The Tables below show the dollar amount of the first
monthly instalment for each $1,000 applied. The accumulation units applied to
effect an annuity for an annuitant will be at the accumulation unit value as of
the last day of the second valuation period immediately preceding the date
annuity instalments commence. Amounts shown for Single Life Annuities, Joint and
Last Survivor Annuity and Joint and Two Thirds to Survivor Annuity are based on
the Progressive Annuity Table with interest at the rate of 3 1/2% per annum and
assume births in the year 1900. Under these annuity options, the amount of each
payment will depend upon the sex and adjusted age of the Annuitant and Nominee
if any. The adjusted age is determined from the actual age nearest birthday at
the time the first payment is due in the following manner.
Calendar year Adjusted
of Birth Age
Before 1900.................... Actual Age plus 1
1900-1919...................... Actual Age
1920-1939...................... Actual Age minus 1
1940-1959...................... Actual Age minus 2
1960-1979...................... Actual Age minus 3
The tables for the option providing Instalments for a Designated Period are
based on interest at the rate of 3% per annum for the General Account and 3 1/2%
for the Separate Account.
DOLLAR AMOUNT OF THE FIRST MONTHLY PAYMENT WHICH IS PURCHASED
WITH EACH $1,000 OF PROCEEDS APPLIED
Single Life Annuities
-----Adjusted Age----- --------- Guaranteed Payments------- Unit
Male Female None 120 180 240 Refund
50 54 $ 4.74 $4.69 $4.62 $4.52 $4.53
51 55 4.84 4.78 4.70 4.58 4.60
52 56 4.94 4.87 4.78 4.65 4.67
53 57 5.04 4.97 4.87 4.71 4.75
54 58 5.16 5.07 4.95 4.78 4.84
55 59 5.28 5.18 5.04 4.85 4.93
56 60 5.40 5.29 5.13 4.91 5.02
57 61 5.54 5.41 5.23 4.98 5.12
58 62 5.69 5.53 5.33 5.05 5.22
59 63 5.84 5.66 5.43 5.11 5.32
60 64 6.01 5.79 5.53 5.18 5.44
61 65 6.18 5.94 5.63 5.24 5.56
62 66 6.37 6.08 5.74 5.30 5.68
63 67 6.57 6.24 5.84 5.36 5.82
64 68 6.79 6.40 5.95 5.41 5.96
65 69 7.02 6.57 6.05 5.46 6.10
66 70 7.27 6.74 6.15 5.51 6.26
67 71 7.54 6.91 6.26 5.55 6.43
68 72 7.83 7.10 6.35 5.59 6.60
69 73 8.14 7.28 6.45 5.62 6.78
70 74 8.48 7.47 6.54 5.65 6.98
71 75 8.84 7.66 6.62 5.68 7.19
72 76 9.23 7.85 6.70 5.70 7.41
73 77 9.65 8.04 6.77 5.71 7.65
74 78 10.11 8.23 6.83 5.72 7.89
75 79 10.61 8.41 6.88 5.73 8.16
<PAGE>
Page Ten
Joint and Survivor Life Annuity
<TABLE>
<CAPTION>
Adjusted age of -----------------------------Adjusted Age of Annuitant----------------------------------
Nominee Male 51 Male 56 Male 58 Male 61 Male 63 Male 66 Male 71
Male Female Female 55 Female 60 Female 62 Female 65 Female 67 Female 70 Female 75
<S> <C> <C> <C> <C> <C> <C> <C> <C>
50 54 $4.21 $4.35 $4.40 $4.47 $4.51 $4.57 $4.64
55 59 4.37 4.58 4.66 4.78 4.85 4.94 5.07
57 61 4.43 4.67 4.77 4.90 4.99 5.10 5.26
60 64 4.51 4.80 4.92 5.09 5.20 5.36 5.59
62 66 4.55 4.88 5.01 5.22 5.35 5.54 5.82
65 69 4.62 4.99 5.15 5.39 5.56 5.81 6.19
70 74 4.70 5.14 5.34 5.65 5.88 6.23 6.83
</TABLE>
Joint and Two-Thirds to Survivor Life Annuity
<TABLE>
<CAPTION>
Adjusted age of -----------------------------Adjusted Age of Annuitant----------------------------------
Nominee Male 51 Male 56 Male 58 Male 61 Male 63 Male 66 Male 71
Male Female Female 55 Female 60 Female 62 Female 65 Female 67 Female 70 Female 75
<S> <C> <C> <C> <C> <C> <C> <C> <C>
50 54 $4.58 $4.79 $4.89 $5.03 $5.13 $5.29 $5.56
55 59 4.80 5.06 5.17 5.35 5.47 5.67 6.00
57 61 4.89 5.18 5.30 5.49 5.63 5.84 6.20
60 64 5.04 5.36 5.50 5.72 5.87 6.12 6.54
62 66 5.14 5.49 5.64 5.88 6.05 6.32 6.79
65 69 5.30 5.68 5.85 6.13 6.33 6.64 7.19
70 74 5.58 6.03 6.23 6.57 6.82 7.21 7.95
</TABLE>
Installments for a Designated Period
<TABLE>
<CAPTION>
Amount of Amount of Amount of
Monthly Monthly Monthly
Years of --------Installment--------- Years of --------Installment-------- Years of --------Installment--------
Payment Gen. Acct. Sep. Acct. Payment Gen. Acct. Sep. Acct. Payment Gen. Acct. Sep. Acct.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1.......... 84.47 84.65 11.......... 8.86 9.09 21.......... 5.32 5.56
2.......... 42.82 43.05 12.......... 8.24 8.46 22.......... 5.15 5.39
3.......... 28.99 29.19 13.......... 7.71 7.94 23.......... 4.99 5.24
4.......... 22.06 22.27 14.......... 7.26 7.49 24.......... 4.84 5.09
5.......... 17.91 18.12 15.......... 6.87 7.10 25.......... 4.71 4.96
6.......... 15.14 15.35 16.......... 6.53 6.76 26.......... 4.59 4.84
7.......... 13.16 13.38 17.......... 6.23 6.47 27.......... 4.47 4.73
8.......... 11.68 11.90 18.......... 5.96 6.20 28.......... 4.37 4.63
9.......... 10.53 10.75 19.......... 5.73 5.97 29.......... 4.27 4.53
10.......... 9.61 9.83 20.......... 5.51 5.75 30.......... 4.18 4.45
</TABLE>
If it would produce greater benefits, the Company agrees that the first
monthly instalment to the Annuitant will be 103% of the first monthly instalment
produced by a then currently issued immediate annuity of the same form with a
single stipulated payment equal to the Net Termination Value which is applied
under this contract.
32. Nonparticipating--This contract is nonparticipating and will not share in
the surplus earnings of the Company.
33. Voting Rights--The Owner shall have the right to vote at the meetings of
contract owners and shall cast the votes attributable to the Contract in
conformity with the provisions of the Rules and Regulations of the Separate
Account.
34. Ownership of the Assets--The Company shall have exclusive and absolute
ownership and control of the assets of both its General Account and Separate
Account.
Form IVA-1-TB-9
<PAGE>
- --------------------------------------------------------------------------------
REGISTER OF CHANGE OF BENEFICIARY
================================================================================
DATED ENDORSED BENEFICIARY ENDORSED BY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REGISTER OF CHANGE IN MODE OF PAYMENT OF PROCEEDS UNDER THIS POLICY
================================================================================
DATED ENDORSED HOW PAYABLE ENDORSED BY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Deferred Annuity--Ten Years Certain Life Annuity or Optional Annuity
Settlement--Stipulated Payments Payable Until Maturity Date or
<PAGE>
Exhibit (6)
Agreement Re: Sales and Administrative Services
The Lincoln National Life Insurance Company ("The Lincoln") hereby agrees
to provide all sales and administrative services relative to individual variable
annuity contracts (Form Number IVA-1-TB-4-67 and revisions thereof herein called
"Contracts") sold by The Lincoln for which reserves are maintained in the
Lincoln National Variable Annuity Fund A ("Fund"), a segregated investment
account created by The Lincoln's Board of Directors on September 16, 1966
pursuant to Indiana Law.
For providing the sales services The Lincoln shall receive 6.75% of the
stipulated payments received by The Lincoln under the Contracts. For providing
the administrative services (including but not limited to payment of such
expenses as salaries, rent, postage, telephone, travel, legal, actuarial and
auditing fees, office equipment and stationery) The Lincoln shall receive 2% of
the stipulated payments received by The Lincoln under the Contracts.
This agreement shall continue in full force and effect from year to year
until terminated by The Lincoln or the Board of Managers of the Fund.
Termination of this agreement may be effected by either party, without the
payment of any penalty, on not more than sixty days written notice. This
agreement shall automatically terminate upon any assignment thereof by The
Lincoln. This agreement shall not continue in effect for a period more than two
years from the date of its execution unless such continuance is specifically
approved at least annually by the affirmative vote of a majority of such Board
of Managers, which majority shall include the majority of the members of the
Board of Managers who are not
<PAGE>
otherwise affiliated with The Lincoln or officers or employees of the Fund, or
by a vote of owners of Contracts casting a majority of the votes which all
owners of Contracts are entitled to cast.
Notwithstanding termination of this agreement by The Lincoln, The Lincoln
shall continue to provide the sales and administrative services provided for
herein with respect to Contracts in effect on the date of termination, and The
Lincoln shall continue to receive 8.75% of all stipulated payments received by
The Lincoln under such Contracts.
This agreement shall be and is subject to and under the provisions of the
Investment Company Act of 1940, as amended, the Securities Act of 1933, as
amended, and the rules and regulations promulgated by the Securities and
Exchange Commission pursuant to the aforesaid Acts.
Executed this day of , 1967.
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
By
-------------------------------------------
Walter O. Menge, Chairman of the Board
The Lincoln National Life Insurance Company
Attest:
- -------------------------------------------
G. M. Bryce, Secretary
The Lincoln National Life Insurance Company
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
By
-------------------------------------
Gathings Stewart
Chairman of the Board of Managers
Witness:
- ----------------------------------
Gordon C. Reeves
Secretary to the Board of Managers
2
<PAGE>
SERVICES AGREEMENT
------------------
(Exhibit B and Schedules Omitted)
THIS SERVICES AGREEMENT (the "Agreement") is made as of August 15, 1996, by
and among Delaware Management Holdings, Inc., a Delaware corporation
("Holdings"), Delaware Service Company, Inc., a Delaware corporation and a
wholly owned subsidiary of Holdings ("Delaware"), Lincoln National Life
Insurance Company, an Indiana insurance corporation ("Lincoln Life"), and each
of the investment companies listed in Exhibit A hereto, each a Maryland
corporation (together with any other investment company designated in accordance
with Section 5.1, the "Funds," or individually, a "Fund").
The parties hereto, in consideration of the mutual covenants hereinafter
expressed, agree as follows:
ARTICLE 1
DEFINITIONS
-----------
Section 1.1 Definitions. The following terms shall have the respective
meanings set forth in this Section 1.1 for all purposes of this Agreement except
where the application of such definitions is limited by reference in this
Section 1.1 to a specific Article of this Agreement (such definitions to be
equally applicable to both the singular and plural forms of the terms herein
defined):
"Acceptance Test" means a test, reasonably acceptable to Lincoln Life,
Delaware and the Funds, of the performance of the Value Calculation Services for
the Accounts included in the respective Phases, to be conducted in accordance
with Article 4.
"Accounting Services" means the services listed in the Cutover Schedule
with respect to the Accounts.
"Accounts" means the Funds and the Separate Accounts, collectively.
"Affiliate" means, with respect to any entity, any other entity
controlling, controlled by or under common control with such entity.
"Business Day" means a day on which the New York Stock Exchange is open for
trading.
"Calculation Losses" means any losses suffered by a Contractowner, Third
Party Administrator, Fund or Separate Account directly caused by an error in a
Net Asset Value or Unit Value, or by the delivery to Lincoln Life or any Fund of
a Net Asset Value or Unit Value after the applicable deadline provided for in
Section 2.1; provided, however, that such losses shall not include any
consequential damages.
<PAGE>
"Contractowner" means the present or former owner of an insurance or
annuity contract supported by a Separate Account, or any beneficiary or
annuitant thereof.
"Cutover Date," with respect to any Phase, means the date, which shall be a
Business Day, on which Delaware actually commences providing the Accounting
Services with respect to such Phase in accordance with Section 4.2. The planned
Cutover Date for each Phase is set forth in the Cutover Schedule.
"Cutover Schedule" means Schedule 1.1(a) hereto, which sets forth the
accounting services to be rendered pursuant to this Agreement and the planned
Cutover Dates, as such Schedule may be amended from time to time pursuant to
Section 16.1.
"Delaware" has the meaning set forth in the preamble to this Agreement.
"Delaware Affiliate" means Holdings and any entity that is directly or
indirectly controlled by Holdings.
"Fee Schedule" means Schedule 6.1 hereto, as such Schedule may be amended
from time to time pursuant to Section 16.1.
"Fund" has the meaning set forth in the preamble to this Agreement.
"Holdings" has the meaning set forth in the preamble to this Agreement.
"Lincoln Affiliate" means any Affiliate of Lincoln Life other than a
Delaware Affiliate.
"Lincoln Life" has the meaning set forth in the preamble to this Agreement.
"Net Asset Value" means the daily net asset value per share of the
respective Funds for each Business Day, all determined in accordance with the
terms of the Cutover Schedule and with any applicable prospectus or regulatory
requirement.
"Phase" means a set of Accounts comprising the Phase I Accounts, the Phase
II Accounts or the Phase III Accounts.
"Phase I Account" means an Account designated as such on the Cutover
Schedule.
"Phase II Account" means an Account designated as such on the Cutover
Schedule.
"Phase III Account" means an Account designated as such on the Cutover
Schedule.
"Renewal Term" means each successive one-year term occurring
<PAGE>
after the expiration of the initial term of this Agreement as described in
Section 11.1.
"Separate Account" means a separate account of Lincoln Life identified as
such on the Cutover Schedule, and any additional separate account or sub-account
of Lincoln Life or any Lincoln Affiliate (or of any other person if Lincoln Life
or any Lincoln Affiliate has administrative responsibilities with respect to
such separate account or sub-account pursuant to any reinsurance agreement or
otherwise) designated in accordance with Section 5.1.
"Test Period" means, with respect to each Phase, a period of time prior to
the Cutover Date for such Phase, commencing on the date specified by Delaware
pursuant to Section 4.1 and having a duration of three weeks or such longer
period as may be determined pursuant to Section 4.1.
"Third Party Administrator" means an administrator of insurance or annuity
contracts acting on behalf of Contractowners.
"Unit Value" means the daily unit value per unit of the respective Separate
Accounts or sub-accounts thereof for each Business Day, all determined in
accordance with the terms of the Cutover Schedule and with any applicable
prospectus or regulatory requirement.
"Value Calculation Services" means those Accounting Services consisting of
or incidental to the calculation and communication of Unit Values and Net Asset
Values in accordance with the terms of this Agreement.
ARTICLE 2
SCOPE OF SERVICES; CUTOVER
--------------------------
Section 2.1 Scope of Services. Delaware shall provide the Accounting
Services to each of the Funds and to Lincoln Life with respect to each of the
Separate Accounts, all in accordance with the terms of this Agreement. Without
limiting the generality of the foregoing, from and after the Cutover Date for
each respective Phase, Delaware, no later than 6:00 p.m. (New York City time) on
each Business Day, shall in accordance with the terms of this Agreement provide
to Lincoln Life and to the Funds the Value Calculation Services for each of the
Accounts included in such Phase. In the event of any error in the Value
Calculation Services, the parties hereto will follow the procedures set forth in
Schedule 2.1, without prejudice to any other rights described in this Agreement.
Section 2.2 Cutover Schedule. Delaware, Lincoln Life and the Funds shall
use their respective best efforts to cause the Cutover Date to occur no later
than (a) August 15, 1996, with respect to the Phase I Accounts, (b) October 31,
1996, with
<PAGE>
respect to the Phase II Accounts and (c) January 1, 1997 with respect to the
Phase III Accounts.
ARTICLE 3
LINCOLN LIFE'S SUPPORT OBLIGATIONS
----------------------------------
Section 3.1 Provision of Data. Lincoln Life shall use its best efforts to
provide or cause to be provided to Delaware the data identified in Schedule 3.1
during the periods and in accordance with the procedures identified in such
Schedule, it being understood that Delaware shall not be responsible for any
Calculation Losses or other claims, suits, hearings, actions, damages,
liabilities, fines, penalties, costs, losses or expenses, including reasonable
attorney's fees, which any party may sustain or incur, directly or indirectly,
in each case to the extent caused by or arising from Lincoln Life's failure to
provide such data in accordance with such Schedule 3.1.
Section 3.2 Data to Be Provided by Third Parties. With respect to each of
the mutual funds identified in Schedule 3.2 as an available investment of one or
more of the Separate Accounts (other than mutual funds managed by Lincoln Life
or Delaware or their respective Affiliates) and each third party service
provider identified in such Schedule, Lincoln Life shall direct each of the
managers of such funds or such service provider, as the case may be, to provide
or cause to be provided to Delaware the data identified in Schedule 3.2 in
accordance with the procedures and time deadlines identified in such Schedule.
Section 3.3 Information for Periods Prior to Cutover Date. Lincoln Life
will provide appropriate financial and other information with respect to the
Accounts to Delaware, and will cooperate with Delaware, in connection with the
preparation of data for 1996 annual reports to Contractowner and other elements
of the Accounting Services that relate to periods prior to the Cutover Dates for
the respective Accounts. In addition, Lincoln Life will provide to Delaware
appropriate financial and other information regarding the Accounts for periods
prior to 1996 to the extent relevant to the performance of the Accounting
Services for 1996 and subsequent periods.
ARTICLE 4
ACCEPTANCE TEST; CUTOVER DATE
-----------------------------
Section 4.1 Acceptance Testing. Delaware shall notify Lincoln Life of the
date, which shall be a Business Day, on which the Value Calculation Services for
each respective Phase will be ready for the commencement of the Acceptance Test
for such Phase. During the Test Period for each Phase, Delaware, Lincoln Life
and the Funds shall cooperate in performing the Acceptance Test for such Phase,
and Delaware and Lincoln Life, respectively, shall use its best efforts to
remedy any failure in the performance of the Value Calculation Services caused
by such party. In the event that, during the Test Period with respect to any
Phase,
<PAGE>
performance of the Value Calculation Services is suspended for such Phase in
order to effect such remedy or for any other reason, the Test Period for such
Phase shall be extended by the number of days of such suspension. Further, if
at the date that would otherwise be the end of the Test Period for any Phase
Delaware is not performing the Value Calculation Services with respect to such
Phase to the reasonable satisfaction of Lincoln Life, and Lincoln Life shall so
notify Delaware, the Test Period shall be extended until the date on which
Lincoln Life notifies Delaware that the Value Calculation Services are being
performed to the reasonable satisfaction of Lincoln Life. All references in this
Section 4.1 to the performance of the Value Calculation Services shall refer to
the performance thereof in a test mode.
Section 4.2 Cutover Date. With respect to each Phase, upon the
termination of the Test Period, Lincoln Life, the Funds and Delaware shall
execute a written acknowledgment in the form of Exhibit B hereto confirming such
termination and specifying the Cutover Date, which shall be the Business Day
immediately following the date of such termination unless Lincoln Life, the
Funds and Delaware shall agree upon a different date.
ARTICLE 5
NEW ACCOUNTS; NEW INVESTMENT MANAGERS
-------------------------------------
Section 5.1 Additional Accounts. Lincoln Life may from time to time
designate (i) one or more additional investment companies or separate accounts
to constitute Funds or Separate Accounts, as the case may be, for all purposes
of this Agreement, or (ii) one or more newly established sub-accounts of any
Separate Account. Such designation shall be:
(a) subject to Delaware's consent, which shall not be unreasonably
withheld; provided, that such consent shall be considered to be
unreasonably withheld if Delaware does not make reasonable
efforts to accept such new investment companies, separate
accounts and sub-accounts, which efforts shall include, but not
be limited to, reasonable consideration of the expansion of
Delaware's infrastructure to handle such new investment
companies, separate accounts and sub-accounts; and
(b) evidenced by a writing executed by Lincoln Life, Delaware and, if
applicable, each such investment company, setting forth the name
of such investment company, separate account or new sub-account,
the applicable rate under the Fee Schedule that shall apply to
the Accounting Services for such investment company, separate
account or new sub-account, the effective date of the designation
thereof as a Fund, Separate Account or new sub-account, and any
other matters the parties wish to include.
<PAGE>
Notwithstanding clause (b) of the preceding sentence, if Delaware's performance
of the Accounting Services for such additional Funds, Separate Accounts, or sub-
accounts of such Separate Accounts would, in Delaware's reasonable opinion,
result in higher costs than the costs Delaware incurs for providing the
Accounting Services to the current Accounts, then the affected parties hereto
shall negotiate in good faith an addendum to the Fee Schedule for such
additional Funds, Separate Accounts and sub-accounts and Delaware shall not be
deemed to have unreason ably withheld its consent under clause (b) of this
Section 5.1 until such addendum has been agreed to. Except as otherwise
specified in such writing, from and after such effective date, Delaware shall
provide to such Fund, or to Lincoln Life with respect to a Separate Account or
new sub-account, the same Accounting Services as are specified in the Cutover
Schedule with respect to the other Funds, Separate Accounts or sub-account of a
Separate Account, as the case may be.
Section 5.2 New Investment Managers. If new investment managers are added
to provide investment advisory services to any of the Accounts, and Delaware's
performance of the Accounting Services is, as a result thereof, significantly
more costly to Delaware, the affected parties shall negotiate in good faith an
addendum to the Fee Schedule for such Accounts.
ARTICLE 6
FEES
----
Section 6.1 Accrual of Fees. From and after the Cutover Date with respect
to each Phase, Lincoln Life shall pay fees for the Accounting Services for each
of the Separate Accounts included in such Phase, and each Fund included in such
Phase shall pay fees for the Accounting Services for such Fund, in each case at
the respective rates per annum determined in accordance with the Fee Schedule.
Fees accrued pursuant to this Section 6.1 shall be payable in arrears on a
monthly basis.
Section 6.2 Payment of Fees by Lincoln Life. Delaware shall submit to
Lincoln Life an invoice for each month for all of the fees payable pursuant to
Section 6.1 with respect to each of the Separate Accounts, which invoice shall
be itemized to show the portion of such fees allocable to each of the Separate
Accounts in accordance with the Fee Schedule. Subject to the terms of this
Agreement, invoices for such fees shall be payable within 30 days of receipt.
Section 6.3 Payment of Fees by the Funds. Delaware shall submit to
each Fund, with a copy to Lincoln Life, an invoice for each month for all of the
fees payable pursuant to Section 6.1 with respect to such Fund. Subject to the
terms of this Agreement, invoices for such fees shall be payable within 30 days
of receipt.
<PAGE>
ARTICLE 7
STANDARD OF CARE; INDEMNIFICATION
---------------------------------
Section 7.1 Standard of Care. Delaware shall provide the Accounting
Services with a level of care equal to or greater than the level of care at
which it performs similar functions for mutual funds that are sponsored or
managed by any Delaware Affiliate, and in any event, Delaware shall always
exercise reasonable care in performing the Accounting Services.
Section 7.2 Indemnification
(a) Indemnification by Lincoln Life. Lincoln Life shall indemnify,
defend and hold harmless Delaware and any Delaware Affiliate, and the directors,
officers and employees of the fore going (each individually, a "Delaware
Indemnified Party"), against any and all claims, suits, hearings, actions,
damages, liabilities, fines, penalties, costs, losses or expenses, including
reasonable attorney's fees, which any Delaware Indemnified Party may sustain or
incur, directly or indirectly, in each case to the extent caused by or arising
from (i) the negligence, recklessness or intentional misconduct of Lincoln Life
or any Lincoln Affiliate, or any director, officer or employee thereof, in the
performance of this Agreement; or (ii) the failure of Lincoln Life to comply
with the terms of this Agreement.
(b) Indemnification by Delaware. Subject to Section 3.1, Delaware
shall indemnify, defend and hold harmless Lincoln Life, the Lincoln Affiliates
and the Funds, and the directors, officers and employees of the foregoing (each
individually, a "Lincoln Indemnified Party") against any and all claims, suits,
hearings, actions, damages, liabilities, fines, penalties, costs, losses
(including but not limited to (a) Calculation Losses reimbursed by Lincoln Life
and (b) any market fluctuation losses incurred by Lincoln Life in effecting such
reimbursement) or expenses, including reasonable attorney's fees, which any
Lincoln Indemnified Party may sustain or incur, directly or indirectly, in each
case to the extent caused by or arising from (i) the negligence, recklessness or
intentional misconduct of Delaware or any Delaware Affiliate, or any director,
officer or employee thereof, in the performance of this Agreement; or (ii) the
failure of Delaware to comply with the terms of this Agreement.
(c) Procedures. Subject to the provisions of Section 7.2(d), promptly
after receipt by a Delaware Indemnified Party or a Lincoln Indemnified Party
(each, an "Indemnified Party") of notice of the commencement of any action,
proceeding, investigation or claim by any Contractowner or other third party (a
"Proceeding"), the Indemnified Party shall, if a claim in respect thereof is to
be made pursuant to this Section 7.2 against another party to this Agreement
(the "Indemnifying Party"), notify the Indemnifying Party in writing of the
commencement thereof; but the failure so to notify the Indemnifying Party
<PAGE>
shall not relieve the Indemnifying Party from any liability under this Section
7.2, except to the extent that such failure to notify actually prejudices the
Indemnifying Party. In case any such Proceeding shall be brought against an
Indemnified Party, the Indemnifying Party shall be entitled to participate in
and to assume the defense thereof, with counsel satisfactory to the Indemnified
Party, and after notice from the Indemnifying Party to the Indemnified Party of
the Indemnifying Party's election to assume the defense thereof, the
Indemnifying Party shall not be liable to the Indemnified Party for any legal or
other expenses subsequently incurred by the Indemnified Party in connection with
the defense thereof other than reasonable costs of investigation; provided,
however, that (i) if, in the reasonable judgment of the Indemnified Party, it is
advisable for the Indemnified Party to be represented by separate counsel other
than counsel for the Indemnifying Party, the Indemnified Party shall have the
right to employ a single counsel to represent the Indemnified Party, in which
event the reasonable fees and expenses of such separate single counsel shall be
borne by the Indemnifying Party, and (ii) in the case of any Proceeding brought
by any governmental authority, the Indemnifying Party shall have the right to
participate in, but not to assume the defense of, such Proceeding. The
Indemnifying Party shall not be obligated under any settlement agreement
relating to any Proceeding under this Section 7.2 to which it has not consented
in writing, which consent shall not be unreasonably withheld.
(d) Preserving Rights with Respect to Calculation Losses. Notwithstanding
Section 7.2(c), Lincoln Life may in its sole discretion elect to reimburse a
Contractowner, Third Party Administrator, Separate Account or Fund for
Calculation Losses out of Lincoln Life's own funds and such reimbursement shall
have no effect on the respective indemnification obligations of the parties
pursuant to Section 7.2(a) and (b).
(e) Overpayments. The parties agree that there may be circumstances in
which it would not be commercially reasonable for Lincoln Life and the Funds to
seek reimbursement from one or more Contractowners of overpayments made them,
taking into account relevant factors such as industry practice; the amount of
such overpayments; the number of Contractowners overpaid; the cost of seeking
reimbursement; and the implications for customer relations of seeking
reimbursement. In the event of any overpayment to a Contractowner for which
Lincoln Life or any Fund intends to seek indemnification from Delaware pursuant
to Section 7.2(b) without seeking reimbursement from the Contractowner, the
parties shall negotiate in good faith as to what effect, if any, the
determination not to seek such reimbursement should have under the circumstances
on the rights of Lincoln Life or the Funds to indemnification for the amounts
overpaid.
<PAGE>
ARTICLE 8
INSURANCE COVERAGE
------------------
Section 8.1 Insurance. Delaware and Holdings shall maintain
insurance coverage at a level at least equal to the insurance coverage held by
each of them at the time this Agreement becomes effective.
ARTICLE 9
FORCE MAJEURE AND DISASTER RECOVERY PLAN
----------------------------------------
Section 9.1 Force Majeure; Disaster Recovery Plan. No party shall be
liable to any other party for any damages caused by delays beyond its reasonable
control, including, without limitation, those delays occasioned by fire, strike,
labor dispute, acts of the other party, acts of any common carrier, pricing
service, corporate action service, or telephone network, acts of the power
supply company or its networks, restrictions by civil or military authorities,
acts of nature, or unforeseen transportation failures. In the event of any such
delay, the hindered party shall promptly notify the other parties and, upon the
giving of such notice, the period of time for performance of obligations
hereunder affected by such delays will be extended by the same number of days as
the delay. Notwithstanding the foregoing, Delaware shall maintain and implement
a customary disaster recovery plan and such plan shall be reasonably acceptable
to Lincoln Life and the Funds. This Article 9 shall not excuse any failure to
perform, or extend the time for performance of, any obligation of Delaware under
this Agreement to the extent that such failure or delay would have been avoided
by compliance with such disaster recovery plan, or by the use of reasonable,
readily available alternatives.
ARTICLE 10
EFFECTIVENESS
-------------
Section 10.1 Effectiveness.
(a) This Agreement shall become effective upon the later of:
(i) the date first set forth above; or
(ii) the date as of which Lincoln Life has complied with the
requirements of the Indiana insurance holding company laws
at Section 27-1-23-4 of the Indiana Code.
(b) Lincoln Life shall diligently and reasonably pursue the satisfaction
of the requirements of the Indiana insurance holding company laws at
Section 27-1-23-4 of the Indiana Code.
<PAGE>
ARTICLE 11
TERM AND TERMINATION
--------------------
Section 11.1 Term. The initial term of this Agreement shall end on
the fourth anniversary of the Cutover Date of Phase III, and this Agreement
shall be automatically renewed for subsequent Renewal Terms thereafter unless
sooner terminated under Section 11.2.
Section 11.2 Termination. Subject to the procedures set forth in
Article 12 and to Section 11.3, this Agreement may be terminated as follows:
(a) by Lincoln Life, Delaware, or any Fund, in each case upon notice
to each of the other parties at least 180 days prior to the
expiration of the initial term or any Renewal Term, with such
termination to become effective upon such expiration; and
(b) by Lincoln Life, Delaware or any Fund upon 30 days notice to each
of the other parties, for any material breach of this Agreement
unless such breach is cured within such notice period.
For the purpose of this Section 11.2(b) only, a "material breach" shall include,
but not be limited to, the failure by Delaware to provide Accounting Services
hereunder of a quality reasonably determined by Lincoln Life or any Fund to be
consistent with a superior level of service in the industry.
Section 11.3 Effect of Termination by a Fund. In the event one or
more Funds shall terminate this Agreement, this Agreement shall nonetheless
continue in full force and effect between and among those parties who have not
terminated this Agreement.
ARTICLE 12
PROCEDURES UPON TERMINATION
---------------------------
Section 12.1 Obligations Upon Termination. Upon termination of this
Agreement by any party under Article 11, each party shall be obligated to
cooperate with each other party to provide for the transfer of all
responsibilities, duties and obligations of this Agreement as may be necessary
to ensure the orderly, undisrupted business of each party. Such cooperation
shall include, but not be limited to, returning all papers, documents, materials
or equipment to the party owning such materials. In the event that this
Agreement is terminated by Lincoln Life or any Fund under Section 11.2(b),
Lincoln Life and the Funds shall have the right to require Delaware to continue
performing all or any part of its responsibilities, duties and obligations under
this Agreement until the earlier of (a) 210 days following the date notice of
such termination was given, or (b) the date that is 30 days after notice from
Lincoln Life or the Funds that
<PAGE>
Delaware shall cease such performance. For this purpose, (a) the terms of this
Agreement (including without limitation the obligation of Lincoln Life and the
Funds to pay Delaware's fees under Article 6, and the obligation of Delaware to
continue to exercise the standard of care required under Section 7.1 shall
remain in effect with respect to the period in which Delaware is obligated to
continue such performance, and (b) if any portion of Delaware's
responsibilities, duties and obligations during such period are not so extended
as required by Lincoln Life, the parties shall mutually agree in good faith on a
reduction of fees which reflects the termination of such responsibilities,
duties and obligations.
ARTICLE 13
REPRESENTATIONS AND WARRANTIES
------------------------------
Each party represents and warrants to the other parties as follows:
Section 13.1 Organization and Authority. Such party is duly organized,
validly existing and in good standing as a corporation under the laws of the
state indicated on the first page of this Agreement, with the requisite
authority and power, in conformity with applicable laws, rules and regulations,
to execute and deliver this Agreement and to perform its obligations hereunder.
Such party has taken all necessary action to authorize such execution, delivery
and performance.
Section 13.2 No Conflict with Laws. The execution, delivery and
performance of this Agreement by such party do not conflict with or violate any
laws applicable to such party, any provision of its constituent documents, any
order or judgment of any court or governmental agency applicable to it or any of
its assets or any contractual restriction binding on it or its assets.
Section 13.3 Obligation. This Agreement constitutes a legal, valid and
binding obligation of such party, enforceable in accordance with its terms,
subject to applicable bankruptcy, insolvency, reorganization, moratorium and
similar laws relating to the enforcement of creditors' rights generally and
subject to principles of equity.
ARTICLE 14
PARENT GUARANTY
---------------
Section 14.1 Parent Guaranty. Holdings hereby unconditionally guarantees
the full and punctual performance of the covenants, agreements and obligations
of Delaware under this Agreement, including but not limited to the payment when
due of all amounts that may from time to time be payable by Delaware pursuant to
Section 7.2(b) (the "Guaranteed Obligations").
Section 14.2 Guaranty Unconditional. The obligations of
<PAGE>
Holdings hereunder shall be unconditional and absolute and, without limiting the
generality of the foregoing, shall not be released or discharged by:
(a) any extension, settlement, compromise, waiver or release in
respect of any obligation of Delaware under this Agreement;
(b) any modification or amendment of or supplement to this
Agreement;
(c) any change in the corporate existence, structure or ownership of
Delaware, or any insolvency, bankruptcy, reorganization or other similar
proceeding affecting Delaware or its assets; or
(d) any other act or omission to act or delay of any kind by
Delaware, Lincoln Life, any Fund or any other person which would, but for
the provisions of this paragraph (d), constitute a legal or equitable
discharge of Holding's obligations hereunder;
provided, however, that in the event of any extension, settlement, compromise,
waiver or release of any obligation of Delaware under this Agreement, or any
modification or amendment of or supplement to this Agreement, the guaranty
provided for in this Article 14 shall apply to the obligations of Delaware as so
extended, settled, compromised, waived, released, modified, amended or
supplemented.
Section 14.3 Discharge Only Upon Payment or Performance in Full;
Reinstatement in Certain Circumstances. Holding's obligations hereunder shall
remain in full force and effect until the Guaranteed Obligations shall have been
paid or performed in full. If at any time any payment of Guaranteed Obligations
by Delaware under this Agreement is rescinded or must be otherwise restored or
returned upon the insolvency, bankruptcy or reorganization of Delaware or
otherwise, Holding's obligations hereunder with respect to such payment shall be
reinstated as though such payment had been due but not made at such time.
Section 14.4 Waiver by Holdings. Holdings irrevocably waives acceptance
hereof, presentment, demand, protest and any notice not provided for herein, as
well as any requirement that at any time any action be taken by any person
against Delaware or any other person.
Section 14.5 Subrogation. Upon making any payment with respect to
Delaware hereunder, Holdings shall be subrogated to the rights of the payee
against Delaware with respect to such payment; provided that Holdings shall not
enforce payment by way of subrogation until all Guaranteed Obligations have been
paid or performed in full.
<PAGE>
ARTICLE 15
DISPUTE RESOLUTION
------------------
Before commencing litigation of any dispute arising out of or relating to
this Agreement, the parties shall attempt in good faith to resolve the dispute
by the following means:
Section 15.1 Negotiation. The parties shall in good faith attempt to
resolve any dispute arising out of or relating to this Agreement promptly by
negotiations between executives who have authority to settle the controversy. A
party may give the other parties written notice of any dispute not resolved in
the normal course of business. Within 20 days after delivery of that notice,
executives of the affected parties shall meet at a mutually acceptable time and
place, and thereafter as often as they reasonably deem necessary, to exchange
relevant information and to attempt to resolve the dispute. If the matter has
not been resolved within 60 days of the disputing party's notice, or if the
parties fail to meet within 20 days, either party may initiate mediation of the
controversy or claim as provided in Section 15.2. If a negotiator intends to be
accompanied at a meeting by an attorney, the other negotiator shall be given at
least 3 Business Days' notice of that intention and may also be accompanied by
an attorney.
Section 15.2 Mediation. If the dispute has not been resolved by
negotiation as provided in Section 15.1, the parties shall endeavor for an
additional period of 60 days to settle the dispute by mediation under the then-
current Center for Public Resources (CPR) Model Procedure for Mediation of
Business Disputes. The neutral third party will be selected from the CPR Panel
of Neutrals. If the parties encounter difficulty in agreeing on a neutral, they
will seek the assistance of CPR in the selection process.
Section 15.3 Confidentiality. All activities under this Article 15 are
confidential and shall be treated as compromise and settlement negotiations for
purposes of the Federal Rules of Evidence and state rules of evidence.
ARTICLE 16
MISCELLANEOUS
-------------
Section 16.1 Amendment. This Agreement, including any Exhibits or
Schedules, may be amended, modified or supplemented only in writing signed by
Delaware, Lincoln Life and any Fund affected thereby. This Agreement shall be
binding upon all successors, assigns or transferees of the parties to this
Agreement.
Section 16.2 Assignment. This Agreement and the rights, duties and
obligations of the parties hereto shall not be assign able by any party, except
assignment to successors in the case of mergers, sales of all or substantially
all of the assets of such
<PAGE>
party or transfer of ownership by reorganization or similar restructuring to a
successor in interest to the business of such party, without the prior written
consent of the other parties, and any purported assignment in the absence of
such consent shall be void.
Section 16.3 Notices. All notices given or submitted pursuant to this
Agreement shall be made in writing and shall be deemed given when (a) deposited
with the United States Postal Service, postage prepaid, registered or certified
mail, return receipt requested; (b) deposited with a nationally recognized
overnight mail delivery service; (c) sent by facsimile with electronic
confirmation of delivery or with a copy sent by mail as described in (a) or (b)
above; or (d) delivered in person; all to the last address of record of each
party being notified.
Any notice under this Agreement to Lincoln Life shall be given to:
ATTN: O. Douglas Worthington
Vice President and Controller
Lincoln National Life Insurance Company
1300 South Clinton Street
Fort Wayne, IN 46801
Phone: (219) 455-3669
Facsimile: (219) 455-1939
Any notice under this Agreement to Delaware or Holdings
shall be given to:
ATTN: Michael J. Bishof
Vice President and Treasurer
Delaware Management Company
1818 Market Street; 7th Floor
Philadelphia, PA 19103
Phone: (215) 255-2852
Facsimile: (215) 255-1645
With a copy to:
Richard J. Flannery
Managing Director, Corporate
& Tax Affairs
Delaware Management Company
2005 Market Street
Philadelphia, PA 19103
Phone: (215) 255-1244
Facsimile: (215) 255-2822
<PAGE>
Any notice under this Agreement to any Fund shall be given
to:
ATTN: Kelly D. Clevenger
Lincoln National Life Insurance Company
1300 South Clinton Street
Fort Wayne, IN 46801
Phone: (219) 455-5119
Facsimile: (219) 455-1773
Any party may, by means of written notice in compliance with this Section
16.3, change the address or the identity of the person to whom any notice, or
copy thereof, is to be sent.
Section 16.4 Severability. If any provision of this Agreement, as applied
to any party or to any circumstances, shall be found by a court of competent
jurisdiction to be void, invalid or unenforceable, the same shall in no way
affect any other provision of this Agreement, the application of any such provi
sion in any other circumstances, or the validity or enforce ability of this
Agreement; provided, however, that nothing in this Section 16.4 shall adversely
affect the fundamental benefits received by the parties under this Agreement.
Section 16.5 Waiver. A waiver by any party of any of the terms and
conditions of this Agreement in any one instance shall not be deemed or
construed to be waiver of any such term or condition for the future, or of any
subsequent breach thereof, nor shall it be deemed a waiver of performance of any
other obligation hereunder. No waiver of any provision of this Agreement shall
be valid unless agreed to in writing by the party or parties against whom such
waiver is sought to be enforced.
Section 16.6 Entire Agreement. This Agreement contains the entire
understanding of the parties hereto relating to the subject matter of this
Agreement and supersedes all prior and collateral agreements, understandings,
statements and negotiations of the parties.
Section 16.7 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Indiana, without giving
effect to the conflict of law provisions thereof.
Section 16.8 Section and Paragraph Headings. The titles of the sections
and paragraphs of this Agreement are for convenience only and shall not in any
way affect the interpretation of any provision or condition of this Agreement.
Section 16.9 Counterparts. This Agreement may be executed in counterparts
which, taken together, shall constitute the whole of the Agreement as between
the parties.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first written above.
LINCOLN LIFE:
LINCOLN NATIONAL LIFE INSURANCE COMPANY
By: ____________________________
O. Douglas Worthington
Title: Vice President and
Controller
Date: __________________________
HOLDINGS:
DELAWARE MANAGEMENT HOLDINGS, INC.
By: ____________________________
Title: _________________________
Date: __________________________
DELAWARE:
DELAWARE SERVICE COMPANY, INC.
By: ____________________________
Title: _________________________
Date: __________________________
<PAGE>
FUNDS:
LINCOLN NATIONAL AGGRESSIVE GROWTH
FUND, INC.
LINCOLN NATIONAL BOND FUND, INC.
LINCOLN NATIONAL CAPITAL
APPRECIATION FUND, INC.
LINCOLN NATIONAL EQUITY-INCOME
FUND, INC.
LINCOLN NATIONAL GLOBAL ASSET
ALLOCATION FUND, INC.
LINCOLN NATIONAL GROWTH AND INCOME
FUND, INC.
LINCOLN NATIONAL INTERNATIONAL
FUND, INC.
LINCOLN NATIONAL MANAGED FUND, INC.
LINCOLN NATIONAL MONEY MARKET FUND,
INC.
LINCOLN NATIONAL SOCIAL AWARENESS
FUND, INC.
LINCOLN NATIONAL SPECIAL
OPPORTUNITIES FUND, INC.
By: ____________________________
Kelly D. Clevenger
In his capacity as President of each of
the above-named Funds.
Date: __________________________
<PAGE>
EXHIBIT A
---------
INVESTMENT COMPANIES
<PAGE>
EXHIBIT A
---------
INVESTMENT COMPANIES
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.
Lincoln National Special Opportunities Fund, Inc.
<PAGE>
EXHIBIT B
---------
FORM OF WRITTEN ACKNOWLEDGEMENT OF CUTOVER DATE
<PAGE>
SCHEDULE 1.1(a)
---------------
CUTOVER SCHEDULE
<PAGE>
SCHEDULE 2.1
------------
PROCEDURES FOR CORRECTING ERRORS
<PAGE>
SCHEDULE 3.1
------------
DATA PROVIDED BY LINCOLN LIFE
<PAGE>
SCHEDULE 3.2
------------
UNAFFILIATED MUTUAL FUNDS
AND
SERVICE PROVIDERS
<PAGE>
SCHEDULE 6.1
------------
FEE SCHEDULE
<PAGE>
EXHIBIT 13
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the captions "Per-Accumulation-
Unit Income and Capital Changes" and "Independent Auditors" in the Post-
Effective Amendment No. 52 to the Registration Statement (Form N-3 No. 2-25618)
and related Prospectus and Statement of Additional Information appearing therein
and pertaining to the Lincoln National Variable Annuity Fund A (Group), and to
the use therein of our reports dated (a) February 6, 1997, with respect to the
statutory-basis financial statements of The Lincoln National Life Insurance
Company for each of the three years in the period ended December 31, 1996; (b)
February 7, 1996, with respect to the consolidated financial statements of The
Lincoln National Life Insurance Company for each of the three years in the
period ended December 31, 1995; and (c) February 12, 1997 with respect to the
financial statements of Lincoln National Variable Annuity Fund A (Group).
/s/ Ernst & Young LLP
Fort Wayne, Indiana
April 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND> This schedule contains summary financial information extracted from
Lincoln National Variable Annuity Fund A and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 74,224,441
<INVESTMENTS-AT-VALUE> 108,034,015
<RECEIVABLES> 0
<ASSETS-OTHER> 870,835
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 108,904,850
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> (141,446,807)
<SHARES-COMMON-STOCK> 9,162,402
<SHARES-COMMON-PRIOR> 10,399,962
<ACCUMULATED-NII-CURRENT> 72,336,752
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 146,123,703
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 31,891,202
<NET-ASSETS> 108,904,850
<DIVIDEND-INCOME> 2,551,263
<INTEREST-INCOME> 61,478
<OTHER-INCOME> 0
<EXPENSES-NET> 1,364,222
<NET-INVESTMENT-INCOME> 1,248,519
<REALIZED-GAINS-CURRENT> 9,896,271
<APPREC-INCREASE-CURRENT> 7,531,873
<NET-CHANGE-FROM-OPS> 18,676,663
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 88,324
<NUMBER-OF-SHARES-REDEEMED> 1,325,884
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 4,950,200
<ACCUMULATED-NII-PRIOR> 71,088,233
<ACCUMULATED-GAINS-PRIOR> 136,227,432
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,364,222
<AVERAGE-NET-ASSETS> 106,429,750
<PER-SHARE-NAV-BEGIN> 9.874
<PER-SHARE-NII> 0.128
<PER-SHARE-GAIN-APPREC> 1.735
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.737
<EXPENSE-RATIO> 1.28
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT
ORGANIZATIONAL CHART OF THE
LINCOLN NATIONAL INSURANCE HOLDING COMPANY SYSTEM
All the members of the holding company system are corporations, with the
exception of American States Lloyds Insurance Company, Delaware Distributors,
L.P., Founders CBO, L.P., and Lincoln National Mezzanine Fund, L.P. For purposes
of compliance with securities laws, this chart also shows Lincoln National Life
Insurance Company Separate Accounts. These are not independent, legal entities;
they are accounting entries under state insurance law, and are used to support
variable annuity and variable insurance products.
- ----------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
- ----------------------------------
|
| ----------------------------------------
|--| American States Financial Corporation|
| | 83.3% - Indiana - Holding Company |
| ----------------------------------------
| |
| | ---------------------------------------
| --| American States Insurance Company |
| | 100% - Indiana - Property/Casualty |
| ---------------------------------------
| |
| ----------------------------------------
| |--| American Economy Insurance Company |
| | | 100% - Indiana - Property/Casualty |
| | ----------------------------------------
| | | ----------------------------------------------
| | |--| American States Insurance Company of Texas |
| | | 100% - Texas - Property/Casualty |
| | ----------------------------------------------
| | --------------------------------------------
| |--| American States Life Insurance Company |
| | | 100% - Indiana - Life/Health |
| | --------------------------------------------
| | -------------------------------------------------
| |--| American States Lloyds Insurance Company |
| | | Lloyds Plan - * - Texas - Property/Casualty |
| | ------------------------------------------------
| | -------------------------------------------------
| |--| American States Preferred Insurance Company |
| | | 100% - Indiana - Property/Casualty |
| | -------------------------------------------------
| | ---------------------------------
| |--| City Insurance Agency, Inc. |
| | | 100% - Indiana |
| | ---------------------------------
| | -------------------------------------------------
| |--| Insurance Company of Illinois |
| | 100% - Illinois - Fire & Casualty Insurance |
| -------------------------------------------------
| ---------------------------------------------------------
|--| Aseguradora InverLincoln, S.A. Compania de Seguros Y |
| | Reaseguros, Grupo Financiero InverMexico |
| | 49% - Mexico - Life, Property and Casualty Insurance |
| ---------------------------------------------------------
1
<PAGE>
- ----------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
- ----------------------------------
|
| --------------------------------------------------
|--| The Insurers' Fund, Inc. # |
| | 100% - Maryland - Inactive |
| --------------------------------------------------
| --------------------------------------------------
|--| LNC Administrative Services Corporation |
| | 100% - Indiana - Third Party Administrator |
| --------------------------------------------------
|
| ----------------------------------------
|--| The Richard Leahy Corporation |
| | 100% - Indiana - Insurance Agency |
| ----------------------------------------
| | -----------------------------------
| |--| The Financial Alternative, Inc. |
| | | 100% - Utah- Insurance Agency |
| | -----------------------------------
| | -----------------------------------------
| |--| Financial Alternative Resources, Inc. |
| | | 100% - Kansas - Insurance Agency |
| | -----------------------------------------
| | -------------------------------------------
| |--| Financial Choices, Inc. |
| | | 100% - Pennsylvania - Insurance Agency |
| | -------------------------------------------
| | -------------------------------------------------
| | | Financial Investment Services, Inc. |
| |--| (formerly Financial Services Department, Inc.)|
| | | 100% - Indiana - Insurance Agency |
| | -------------------------------------------------
| | -------------------------------------------
| | | Financial Investments, Inc. |
| |--| (formerly Insurance Alternatives, Inc.) |
| | | 100% - Indiana - Insurance Agency |
| | -------------------------------------------
| | ---------------------------------------------
| |--| The Financial Resources Department, Inc. |
| | | 100% - Michigan - Insurance Agency |
| | ---------------------------------------------
| | -------------------------------------------
| |--| Investment Alternatives, Inc. |
| | | 100% - Pennsylvania - Insurance Agency |
| | -------------------------------------------
| | ----------------------------------------
| |--| The Investment Center, Inc. |
| | | 100% - Tennessee - Insurance Agency |
| | ----------------------------------------
| | ----------------------------------------
| |--| The Investment Group, Inc. |
| | | 100% - New Jersey - Insurance Agency |
| | ----------------------------------------
| | --------------------------------------
| |--| Personal Financial Resources, Inc. |
| | | 100% - Arizona - Insurance Agency |
| | --------------------------------------
| | ------------------------------------------
| |--| Personal Investment Services, Inc. |
| | 100% - Pennsylvania - Insurance Agency |
| ------------------------------------------
2
<PAGE>
- ----------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
- ----------------------------------
| -------------------------------------------------
|--|LincAm Properties, Inc. |
| |50% - Delaware - Real Estate Investment |
| -------------------------------------------------
| -------------------------------------------------
| | Lincoln Financial Group, Inc. |
|--| (formerly Lincoln National Sales Corporation) |
| | 100% - Indiana - Insurance Agency |
| -------------------------------------------------
| |
| | ------------------------------------
| |--| LNC Equity Sales Corporation |
| | | 100% - Indiana - Broker-Dealer |
| | ------------------------------------
| |
| | ----------------------------------------------------------------
| | | Corporate agencies: Lincoln Financial Group, Inc. ("LFG") |
| |--| has subsidiaries of which LFG owns from 80%-100% of the |
| | | common stock (see Attachment #1). These subsidiaries serve |
| | | as the corporate agency offices for the marketing and |
| | | servicing of products of The Lincoln National Life Insurance |
| | | Company. Each subsidiary's assets are less than 1% of the |
| | | total assets of the ultimate controlling person. |
| | ----------------------------------------------------------------
| |
| | --------------------------------------------------
| |--| Professional Financial Planning, Inc. |
| | 100% - Indiana - Financial Planning Services |
| --------------------------------------------------
|
| -----------------------------------------
|--| Lincoln Life Improved Housing, Inc. |
| | 100% - Indiana |
| -----------------------------------------
|
| -------------------------------------------------
|--| Lincoln National (China) Inc. |
| | 100% - Indiana - China Representative Office |
| -------------------------------------------------
| -------------------------------------------------
|--|Lincoln National (India) Inc. |
| |100% - Indiana - India Representative Office |
| -------------------------------------------------
| ----------------------------------------------
|--|Lincoln National Intermediaries, Inc. |
| |100% - Indiana - Reinsurance Intermediary |
|---------------------------------------------- |
| ----------------------------------------------
|--|Lincoln National Investments, Inc. |
| |(fka Lincoln National Investment Companies, |
| |Inc.) 100% - Indiana - Holding Company |
| ----------------------------------------------
| ----------------------------------------------
|--|Lincoln National Investment Companies, Inc. |
| |(fka Lincoln National Investment Companies, |
| |Inc.) 100% - Indiana - Holding Company |
| ----------------------------------------------
| | ------------------------------------
| |--|Delaware Management Holdings, Inc.|
| | |100% - Delaware - Holding Company |
| | ------------------------------------
| | | -------------------------------------
| | |--|DMH Corp. |
| | |100% - Delaware - Holding Company |
| | -------------------------------------
| | | ---------------------------------------
| | |--|Delaware Distributors, Inc. |
| | | |100% - Delaware - General Partner |
| | | ---------------------------------------
| |
3
<PAGE>
-------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
-------------------------------
|
| --------------------------------------------------
|__| Lincoln National Investment Companies, Inc. |
| | (fka Lincoln National Investment Companies, Inc.)|
| | 100% - Indiana - Holding Company |
| --------------------------------------------------
| |
| | --------------------------------------------
| |--| Lincoln National Investment Companies, Inc.|
| | | (fka Lincoln National Investments, Inc.) |
| | | 100% - Indiana - Holding Company |
| | --------------------------------------------
| | | -----------------------------------
| | |--| Delaware Management Holdings, Inc.|
| | | | 100% - Delaware - Holding, Company|
| | | -----------------------------------
| | | | ----------------------------------
| | | |--| DMH Corp. |
| | | | | 100% - Delaware - Holding Company|
| | | ----------------------------------
| | | | -----------------------------------
| | | |--| Delaware Distributors, Inc. |
| | | | | 100% - Delaware - General Partner |
| | | | -----------------------------------
| | | | -----------------------------------------------------
| | | |--| Delaware Distributors, L.P. |
| | | | | 100% - Delaware - Mutual Fund Distributor & Broker/ |
| | | | | Dealer |
| | | | -----------------------------------------------------
| | | | ---------------------------------------
| | | |--| Delaware International Advisers Ltd. |
| | | | | 81.1% - England - Investment Advisor |
| | | | ---------------------------------------
| | | | -------------------------------------------------
| | | |--| Delaware Capitol Management, Inc. |
| | | | | (formerly Delaware Investment Counselors, Inc.) |
| | | | | 100% - Delaware - Investment Advisor |
| | | | -------------------------------------------------
| | | | ------------------------------------------------
| | | |--| Delaware Investment & Retirement Services, Inc.|
| | | | | 100% - Delaware - Registered Transfer Agent |
| | | | ------------------------------------------------
| | | | -------------------------------------------
| | | |--| Delaware International Holdings, Ltd. |
| | | | | 100% - Bermuda - Investment Advisor |
| | | | -------------------------------------------
| | | | ---------------------------------------
| | | |--| Delaware Management Company, Inc. |
| | | | | 100% - Delaware - Investment Advisor |
| | | | ---------------------------------------
| | | | | --------------------------------------
| | | | |--| Founders Holdings, Inc. |
| | | | | 100% - Delaware - General Partner |
| | | | --------------------------------------
| | | | | ------------------------------------------
| | | | |--| Founders CBO, L.P. |
| | | | | 100% - Delaware - Investment Partnership |
| | | | ------------------------------------------
| | | | | ----------------------------------------------
| | | | |--| Founders CBO Corporation |
| | | | | 100% - Delaware - Co-Issuer with Founders CBO|
| | | | ----------------------------------------------
| | | | ------------------------------------
| | | |--|Delaware Management Trust Company |
| | | | |100% - Pennsylvania - Trust Service |
| | | | ------------------------------------
| | | | -----------------------------------------------------
| | | |--| Delaware Service Company, Inc. |
| | | | | 100% - Delaware - Shareholder Services & Transfer |
| | | | | Agent |
| | | | -----------------------------------------------------
| | ----------------------------------------------------------
| | |Lincoln Investment Management, Inc. |
| |--|(formerly Lincoln National Investment Management Company) |
| | | 100% - Illinois - Mutual Fund Manager and |
| | | Registered Investment Adviser |
----------------------------------------------------------
4
<PAGE>
- ----------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
- ----------------------------------
|
| -----------------------------------------------------
|--| Lincoln National Investment Companies, Inc. |
| | (fka Lincoln National Investment Companies, Inc.) |
| | 100% - Indiana - Holding Company |
| -----------------------------------------------------
| |
| | -----------------------------------------------------
| |--| Lincoln National Investment Companies, Inc. |
| | | (fka Lincoln National Investments, Inc.) |
| | | 100% - Indiana - Holding Company |
| | -----------------------------------------------------
| | --------------------------------------------------------------
| |--| Lincoln Investment Management, Inc. |
| | | (formerly Lincoln National Investment Management Company) |
| | | 100% - Illinois - Mutual Fund Manager and |
| | | Registered Investment Adviser |
| | --------------------------------------------------------------
| | | ------------------------------------------------------------
| | | | Lincoln National Mezzanine Corporation |
| | |--| 100% - Indiana - General Partner for Mezzanine Financing |
| | | Limited Partnership |
| | ------------------------------------------------------------
| | | ------------------------------------------------------------
| | |--| Lincoln National Mezzanine Fund, L.P. |
| | | 50% - Delaware - Mezzanine Financing Limited Partnership |
| | ------------------------------------------------------------
| -----------------------------------------------------
| | Lincoln National Investments, Inc. |
|--| (fka Lincoln National Investment Companies, Inc.) |
| | 100% - Indiana - Holding Company |
| -----------------------------------------------------
| | -----------------------------------------------------
| |--| Lincoln National Investment Companies, Inc. |
| | | (fka Lincoln National Investment Companies, Inc.) |
| | | 100% - Indiana - Holding Company |
| | -----------------------------------------------------
| | | ----------------------------------------------
| | |--| Lynch & Mayer, Inc. |
| | | | 100% - Indiana - Investment Adviser |
| | | ----------------------------------------------
| | | | -------------------------------------------
| | | |--| Lynch & Mayer Asia, Inc. |
| | | | | 100% - Delaware - Investment Management |
| | | | -------------------------------------------
| | | | ---------------------------------------
| | | |--| Lynch & Mayer Securities Corp. |
| | | | | 100% - Delaware - Securities Broker |
| | | | ---------------------------------------
| | | -------------------------------------------------------
| | |--| Vantage Global Advisors, Inc. |
| | | | (formerly Modern Portfolio Theory Associates, Inc.) |
| | | | 100% - Delaware - Investment Adviser |
| | | -------------------------------------------------------
| -----------------------------------------------
|--| The Lincoln National Life Insurance Company |
| | 100% - Indiana |
| -----------------------------------------------
| | ----------------------------------------------
| |--| First Penn-Pacific Life Insurance Company |
| | | 100% - Indiana |
| | ----------------------------------------------
| | -----------------------------------------------
| | | Lincoln Life & Annuity Company of New York |
| |--| 100% - New York |
| | -----------------------------------------------
| | --------------------------------------------------
| | | Lincoln National Aggressive Growth Fund, Inc.+ |
| |--| 100% - Maryland - Mutual Fund |
| | --------------------------------------------------
| |
| | -------------------------------------
| | | Lincoln National Bond Fund, Inc.+ |
| |--| 100% - Maryland - Mutual Fund |
| | -------------------------------------
5
<PAGE>
- ----------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
- ----------------------------------
|
| -------------------------------------------------
|--| The Lincoln National Life Insurance Company |
| | 100% - Indiana |
| -------------------------------------------------
| | ------------------------------------------------------
| |--| Lincoln National Capital Appreciation Fund, Inc.+ |
| | | 100% - Maryland - Mutual Fund |
| | ------------------------------------------------------
| | ----------------------------------------------
| |--| Lincoln National Equity-Income Fund, Inc.+ |
| | | 100% - Maryland - Mutual Fund |
| | ----------------------------------------------
| | ---------------------------------------------------------
| |--| Lincoln National Global Asset Allocation Fund, Inc.+ |
| | | (formerly Lincoln National Putnam Master Fund, Inc.) |
| | | 100% - Maryland - Mutual Fund |
| | ---------------------------------------------------------
| | ---------------------------------------------------
| |--| Lincoln National Growth and Income Fund, Inc.+ |
| | | (formerly Lincoln National Growth Fund, Inc.) |
| | | 100% - Maryland - Mutual Fund |
| | ---------------------------------------------------
| | ----------------------------------------------------------
| |--| Lincoln National Health & Casualty Insurance Company |
| | | 100% - Indiana |
| | ----------------------------------------------------------
| | -----------------------------------------------
| |--| Lincoln National International Fund, Inc.+ |
| | | 100% - Maryland - Mutual Fund |
| | -----------------------------------------------
| |
| | -----------------------------------------
| |--| Lincoln National Managed Fund, Inc.+ |
| | | 100% - Maryland - Mutual Fund |
| | -----------------------------------------
| | ----------------------------------------------
| |--| Lincoln National Money Market Fund, Inc.+ |
| | | 100% - Maryland - Mutual Fund |
| | ----------------------------------------------
| | -------------------------------------------------
| |--| Lincoln National Social Awareness Fund, Inc.+ |
| | | 100% - Maryland - Mutual Fund |
| | -------------------------------------------------
| | -------------------------------------------------------
| |--| Lincoln National Special Opportunities Fund, Inc.+ |
| | | 100% - Maryland - Mutual Fund |
| | -------------------------------------------------------
| | -----------------------------------------
| |--| Lincoln National Reassurance Company |
| | 100% - Indiana - Life Insurance |
| -----------------------------------------
| | -------------------------------------------------
| |--| Special Pooled Risk Administrators, Inc. |
| | 100% - New Jersey - Catastrophe Reinsurance |
| | Pool Administrator |
| -------------------------------------------------
| -----------------------------------------------------------
|--| Lincoln National Management Services, Inc. |
| | 100% - Indiana - Underwriting and Management Services |
| -----------------------------------------------------------
|
| -----------------------------------------
|--| Lincoln National Realty Corporation |
| | 100% - Indiana - Real Estate |
| -----------------------------------------
| -------------------------------------------------------------
|--| Lincoln National Reinsurance Company (Barbados) Limited |
| | 100% - Barbados |
| -------------------------------------------------------------
6
<PAGE>
- ----------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
- ----------------------------------
| ------------------------------------------------
|--| Lincoln National Reinsurance Company Limited |
| | (formerly Heritage Reinsurance, Ltd.) |
| | 100% ** - Bermuda |
| ------------------------------------------------
| |
| | ------------------------------------------
| | --| Lincoln European Reinsurance Company |
| | | 100% - Belgium |
| | ------------------------------------------
| |
| | -----------------------------------------------------------
| |--| Lincoln National Underwriting Serevices, Ltd. |
| | | 90% - England/Wales - Life/Accident/Health Underwriter |
| | | (Remaining 10% owned by Old Fort Ins. Co. Ltd.) |
| | -----------------------------------------------------------
| |
| | ---------------------------------------------------------
| | | Servicios de Evaluacion de Riesgo, S. de R.L. de C.V. |
| |--| 51% - Mexico - Reinsurance Underwriter |
| | | (Remaining 49% owned by Lincoln National Corp.) |
| ---------------------------------------------------------
|
| ---------------------------------------------
|--|Lincoln National Risk Management, Inc. |
| | 100% - Indiana - Risk Management Services |
| ---------------------------------------------
|
| ------------------------------------------------
|--| Lincoln National Structured Settlement, Inc. |
| | 100% - New Jersey |
| ------------------------------------------------
|
| ------------------------------------------
|--| Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
| ------------------------------------------
| |
| | ------------------------------------------
| |--| Allied Westminster & Company Limited |
| | | 100% - England/Wales - Sales Services |
| | ------------------------------------------
| |
| | -----------------------------------
| |--| Cannon Fund Managers Limited |
| | | 100% - England/Wales - Inactive |
| | -----------------------------------
| |
| | --------------------------------------------------------
| |--| Culverin Property Services Limited |
| | | 100% - England/Wales - Property Development Services |
| | | -----------------------------------------------------
| |
| | -----------------------------------------------------------
| |--| HUTM Limited |
| | | 100% - England/Wales - Unit Trust Management (Inactive) |
| | -----------------------------------------------------------
| |
| | -------------------------------------------
| |--| ILI Supplies Limited |
| | | 100% - England/Wales - Computer Leasing |
| | -------------------------------------------
| |
| | -----------------------------------------
| |--| Laurentian Financial Group PLC |
| | | 100% - England/Wales - Holding Company |
| | ------------------------------------------
| | | ---------------------------------------------------
| | |--| Lincoln Financial Advisers Limited |
| | | | (formerly: Laurentian Financial Advisers Ltd.) |
| | | | 100% - England/Wales - Sales Company |
| | | ---------------------------------------------------
| | | ------------------------------------------------
| | |--| Lincoln Investment Management Limited |
| | | | (formerly: Laurentian Fund Management Ltd.) |
| | | | 100% - England/Wales - Investment Management |
| | | ------------------------------------------------
| | | --------------------------------------------------------------
| | |--| Lincoln Independent Limited |
| | | | (formerly: Laurentian Independent Financial Planning Ltd.) |
| | | | 100% - England/Wales - Independent Financial Adviser |
| | | --------------------------------------------------------------
7
<PAGE>
- ----------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
- ----------------------------------
|
| -------------------------------------------
| | Lincoln National (UK) PLC |
|--| 100% - England/Wales - Holding Company |
| -------------------------------------------
| |
| | ------------------------------------------
| |--| Laurentian Financial Group PLC |
| | | 100% - England/Wales - Holding Company |
| | ------------------------------------------
| | | -----------------------------------------
| | |--| Laurentian Life PLC |
| | | | 100% - England/Wales - Life Insurance |
| | | -----------------------------------------
| | | |
| | | | -----------------------------------------
| | | |--|Barnwood Property Group Limited |
| | | | |100% - England/Wales - Holding Company |
| | | | -----------------------------------------
| | | | |
| | | | | ---------------------------------------------
| | | | |--| Barnwood Developments Limited |
| | | | | | 100% England/Wales - Property Development |
| | | | | ---------------------------------------------
| | | | | ----------------------------------------------
| | | | |--| Barnwood Properties Limited |
| | | | | 100% - England/Wales - Property Investment |
| | | | ----------------------------------------------
| | | | --------------------------------------------------------
| | | |--|IMPCO Properties Limited |
| | | |100% - England/Wales - Property Investment (Inactive) |
| | | --------------------------------------------------------
| | | ---------------------------------------------
| | |--| Laurentian Management Services Limited |
| | | | 100% - England/Wales - Management Services|
| | | ---------------------------------------------
| | | | --------------------------------------------------
| | | |--|Laurit Limited |
| | | |100% - England/Wales - Data Processing Systems |
| | | --------------------------------------------------
| | | -----------------------------------------
| | |--| Laurentian Milldon Limited |
| | | | 100% - England/Wales - Sales Company |
| | | -----------------------------------------
| | | ------------------------------------------------
| | |--| Laurentian Unit Trust Management Limited |
| | | | 100% - England/Wales - Unit Trust Management |
| | | ------------------------------------------------
| | | | -------------------------------------------
| | | |--| LUTM Nominees Limited |
| | | | 100% - England/Wales - Nominee Services |
| | | -------------------------------------------
| | | ------------------------------------------------------------
| | |--| Laurtrust Limited |
| | | | 100% - England/Wales - Pension Scheme Trustee (Inactive) |
| | | ------------------------------------------------------------
| | | -----------------------------------------
| | |--| The Money Club Direct Company Limited |
| | | 100% - Dormant |
| | -----------------------------------------
| |
| | ------------------------------------------
| |--| Liberty Life Assurance Limited |
| | | 100% - England/Wales - Inactive |
| | ------------------------------------------
| | -------------------------------------------------
| |--| Liberty Life Pension Trustee Company Limited |
| | | 100% - England/Wales - Corporate Pension Fund |
| | -------------------------------------------------
| | --------------------------------------------
| |--| Liberty Press Limited |
| | | 100% - England/Wales - Printing Services |
| | --------------------------------------------
8
<PAGE>
- ----------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
- ----------------------------------
|
|
| ------------------------------------------
|--|Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
| ------------------------------------------
| |
| | ----------------------------------------------
| |--|Lincoln Assurance Limited |
| | | 100% ** - England/Wales - Life Assurance |
| | ----------------------------------------------
| |
| | ---------------------------------------------------
| |--| Lincoln Fund Managers Limited |
| | | 100% - England/Wales - Unit Trust Management |
| | ---------------------------------------------------
| |
| | ------------------------------------------------------
| |--| Lincoln Insurance Services Ltd. |
| | | 100% - Holding Company |
| | ------------------------------------------------------
| | |
| | | -----------------------------------
| | |--| British National Life Sales Ltd.|
| | | | 100% - Inactive |
| | | -----------------------------------
| | |
| | | -------------------------------------------------
| | |--| BNL Trustees Limited |
| | | | 100% - England/Wales - Corporate Pension Fund |
| | | -------------------------------------------------
| | |
| | | ---------------------------------------
| | |--| Chapel Ash Financial Services Ltd. |
| | | | 100% - Direct Insurance Sales |
| | | ---------------------------------------
| | |
| | | ------------------------------------------------
| | | | Lincoln General Insurance Co. Ltd. |
| | | | 100% - Accident & Health Insurance |
| | | ------------------------------------------------
| | |
| | | ----------------------------
| | |--| P.N. Kemp-Gee & Co. Ltd. |
| | | 100% - Inactive |
| | ----------------------------
| |
| | ----------------------------------------------------
| |--| Lincoln National Training Services Limited |
| | | 100% - England/Wales - Training Company |
| | ----------------------------------------------------
| |
| | ---------------------------------------------------
| |--| Lincoln Pension Trustees Limited |
| | | 100% - England/Wales - Corporate Pension Fund |
| | ---------------------------------------------------
| |
| | -----------------------------------------------------------
| |--| LIV Limited (formerly Lincoln Investment Management Ltd.)|
| | | 100% - England/Wales - Investment Management Services |
| | -----------------------------------------------------------
| | |
| | | -------------------------------------------------
| | |--| CL CR Management Ltd. |
| | | 50% - England/Wales - Administrative Services |
| | -------------------------------------------------
| |
| | ---------------------------------------------------
| |--| LN Management Limited |
| | | 100% - England/Wales - Administrative Services |
| | ----------------------------------------------------
| | |
| | | -------------------------------------
| | |--| UK Mortgage Securities Limited |
| | | 100% - England/Wales - Inactive |
| | -------------------------------------
| |
9
<PAGE>
- ----------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
- ----------------------------------
|
| -------------------------------------------
|--| Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
| -------------------------------------------
| |
| | --------------------------------------------
| |--| LN Securities Limited |
| | | 100% - England/Wales - Nominee Company |
| | --------------------------------------------
| |
| | -----------------------------------------------
| |--| Niloda Limited |
| | 100% - England/Wales - Investment Company |
| -----------------------------------------------
|
| ----------------------------------------------------
| | Linsco Reinsurance Company |
|--| (formerly Lincoln National Reinsurance Company) |
| | 100% - Indiana - Property/Casualty |
| ----------------------------------------------------
|
| ------------------------------------
|--| Old Fort Insurance Company, Ltd. |
| | 100% ** - Bermuda |
| ------------------------------------
| |
| | -----------------------------------------------------------
| | | Lincoln National Underwriting Services, Ltd. |
| |--| 10% - England/Wales - Life/Accident/Health Underwriter |
| | (Remaining 90% owned by Lincoln Natl. Reinsurance Co.) |
| -----------------------------------------------------------
|
| ------------------------------------------------------------
| | Servicios de Evaluacion de Riesgos, S. de R.L. de C.V. |
|--| 49% - Mexico - Reinsurance Underwriter |
| | (Remaining 51% owned by Lincoln Natl. Reinsurance Co.) |
| ------------------------------------------------------------
|
| ---------------------------------------------
|--| Underwriters & Management Services, Inc. |
| 100% - Indiana - Underwriting Services |
---------------------------------------------
Footnotes:
- ----------
* The funds contributed by the Underwriters were, and continue to be subject
to trust agreements between American States Insurance Company, the grantor,
and each Underwriter, as trustee.
** Except for director-qualifying shares
# Lincoln National Corporation has subscribed for and paid for 100 shares of
Common Stock (with a par value of $1.00 per share) at a price of $10 per
share, as part of the organizing of the fund. As such stock is further
sold, the ownership of voting securities by Lincoln National Corporation
will decline and fluctuate.
+ Ownership of the shares in the eleven funds is on behalf of variable life
and/or annuity contract owners who own interests in Lincoln Life Separate
Accounts established under IC 27-1-5-1, Class 1. These are: Variable Annuity
Accounts A, C, E, H and L; Variable Universal Life Accounts D, F, G, J, and K.
For Separate Account A [a/k/a Fund A] (Group) and Separate Account A [a/k/a
Fund A] (Individual), Lincoln Life is the "insurance company", as that term is
defined in Investment Company Act Form N-3.
For Separate Accounts C,E,H and L the respective Separate Account is the
"Registrant" and Lincoln Life is the "Depositor", as those terms are defined in
Investment Company Act Form N-4.
For Separate Accounts D,F,G,J and K the respective Separate Account is the "unit
investment trust" or "trust", and Lincoln Life is the "Depositor", as those
terms are defined in Investment Company Act Form N-8B-2.
10
<PAGE>
ATTACHMENT #1
LINCOLN FINANCIAL GROUP, INC.
CORPORATE AGENCY SUBSIDIARIES
1) Lincoln Financial Group, Inc. (AL)
2) Lincoln Southwest Financial Group, Inc. (Phoenix, AZ)
3) Lincoln Financial and Insurance Services Corporation (Walnut Creek, CA)
3a) California Fringe Benefit and Insurance Marketing Corporation
DBA/California Fringe Benefit Company (Walnut Creek, CA)
4) Colorado-Lincoln Financial Group, Inc. (Denver, CO)
5) Lincoln National Financial Services, Inc. (Lake Worth, FL)
6) CMP Financial Services, Inc. (Chicago, IL)
7) Lincoln Financial Group of Northern Indiana, Inc. (Fort Wayne, IN)
8) Financial Planning Partners, Ltd. (Mission, KS)
9) The Lincoln National Financial Group of Louisiana, Inc. (Shreveport, LA)
10) Benefits Marketing Group, Inc. (D.C. & Chevy Chase, MD)
11) Lincoln National Sales Corporation of Maryland (Baltimore, MD)
(formerly: Morgan Financial Group, Inc.)
12) Lincoln Financial Services and Insurance Brokerage of New England, Inc.
(formerly: Lincoln National of New England Insurance Agency, Inc.)
(Worcester, MA)
13) Lincoln Financial Group of Michigan, Inc. (Troy, MI)
13a) Financial Consultants of Michigan, Inc. (Troy, MI)
14) Lincoln Financial Group of Missouri, Inc. (formerly: John J. Moore &
Associates, Inc.) (St. Louis, MO)
15) Beardslee & Associates, Inc. (Clifton, NJ)
16) Lincoln Financial Group, Inc. (formerly: Resources/Financial, Inc.)
(Albuquerque, NM)
17) Lincoln Cascades, Inc. (Portland, OR)
18) Lincoln Financial Services, Inc. (Pittsburgh, PA)
19) Lincoln National Financial Group of Philadelphia, Inc. (Philadelphia, PA)
20) Lincoln Financial Group, Inc. (Salt Lake City, (UT)
11
<PAGE>
EXHIBIT 19(b)
BOOKS AND RECORDS
LINCOLN NATIONAL VARIABLE ANNUITY FUND A
RULES UNDER SECTION 31 OF THE INVESTMENT COMPANY ACT OF 1940
Records to Be Maintained by Registered Investment Companies, Certain
Majority-Owned Subsidiaries Thereof, and Other Persons Having Transactions
with Registered Investment Companies.
Reg. 270.31a-1. (a) Every registered investment company, and every
underwriter, broker, dealer, or investment advisor which is a majority-owned
subsidiary of such a company, shall maintain and keep current the accounts,
books, and other documents relating to its business which constitute the record
forming the basis for financial statements required to be filed pursuant to
Section 30 of the Investment Company Act of 1940 and of the auditor's
certificates relating thereto.
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Annual Reports F&RM Eric Jones Permanently, the first two
To Shareholders years in an easily accessible
place
Semi-Annual F&RM Eric Jones Permanently, the first two
Reports years in an easily accessible
place
Form N-SAR F&RM Eric Jones Permanently, the first two
years in an easily accessible
place
(b) Every registered investment company shall maintain and keep current the
following books, accounts, and other documents:
Type of Record
- --------------
(1) Journals (or other records of original entry) containing an itemized daily
record in detail of all purchases and sales of securities (including sales and
redemptions of its own securities), all receipts and deliveries of securities
(including certificate numbers if such detail is not recorded by custodian or
transfer agent), all receipts and disbursements of cash and all other debits and
credits. Such records shall show for each such transaction the name and quantity
of securities, the unit and aggregate purchase or sale price, commission paid,
the market on which effected, the trade date, the settlement date, and the name
of the person through or from whom purchased or received or to whom sold or
delivered.
Purchases and Sales Journals
- ----------------------------
Daily reports Delaware Fund Accounting Permanently, the first two
of securities years in an easily accessible
transactions place
Portfolio Securities
- --------------------
Equity Notifi- Delaware Fund Accounting Permanently, the first two
cations years in an easily accessible
place
<PAGE>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Public Bond Delaware Fund Accounting Permanently, the first two
Trades years in an easily accessible
Notifications place
(Bank Statement)
Receipts and Deliveries of Securities (units)
- ---------------------------------------------
Not Applicable.
Portfolio Securities
- --------------------
Debit and Delaware Fund Accounting Permanently, the first two
Credit Advices years in an easily accessible
from Bankers place
Trust Company
Receipts and Disbursements of Cash and other Debits and Credits
- ---------------------------------------------------------------
Investment Delaware Fund Accounting Permanently, the first two
Journal years in an easily accessible
place
Daily Journals Delaware Fund Accounting Permanently, the first two
years in an easily accessible
place
(2) General and auxiliary ledgers (or other record) reflecting all asset,
liability, reserve, capital, income and expense accounts, including:
(i) Separate ledger accounts (or other records) reflecting the following:
(a) Securities in transfer;
(b) Securities in physical possession;
(c) Securities borrowed and securities loaned;
(d) Monies borrowed and monies loaned (together with a record of the
collateral therefore and substitutions in such collateral);
(e) Dividends and interest received;
(f) Dividends receivable and interest accrued.
Instructions. (a) and (b) shall be stated in terms of securities quantities
only; (c) and (d) shall be stated in dollar amounts and securities quantities as
appropriate; (e) and (f) shall be stated in dollar amounts only.
General Ledger
- --------------
LNL trial Delaware Fund Accounting Permanently, the first two
balance (4000 years in an easily accessible
series) place
Separate Ledger Accounts
------------------------
Securities in Transfer
- ----------------------
Bank Advices Delaware Fund Accounting Permanently, the first two
years in an easily accessible
place
<PAGE>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Notification Treasurers- Ken Hobson
of Securities Sec. Custody
Transactions.
(Original
records main-
tained by
custodian bank.)
Securities in Physical Possession
- ---------------------------------
Securities Treasurers- Ken Hobson Permanently, the first
Ledger. Sec. Custody two years in an easily
(Portfolio accessible place
report
available on
request from
Bankers Trust
Company -
Keeper of
original
records).
Monthly Securities Nate Wagley Permanently, the first
Portfolio Compliance two years in an easily
Listings accessible place
Securities Borrowed and Loaned
- ------------------------------
AOS file Treasurers- Ken Hobson Permanently, the first
Sec. Custody two years in an easily
accessible place
Monies Borrowed and Loaned
- --------------------------
Not Applicable.
Dividends and Interest Received
- -------------------------------
Interest File Delaware Fund Accounting Permanently, the first
Accrual two years in an easily
Activity accessible place
Journal
Dividend Master Delaware Fund Accounting Permanently, the first
File Display two years in an easily
accessible place
Dividends Receivable and Interest Accrued
- -----------------------------------------
Interest File Delaware Fund Accounting Permanently, the first
Accrual two years in an easily
Activity accessible place
Journal
Dividend Master Delaware Fund Accounting Permanently, the first
File Display two years in an easily
accessible place
<PAGE>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Investment Delaware Fund Accounting Permanently, the first two
Journal years in an easily
accessible place
(ii) Separate ledger accounts (or other records) for each portfolio security,
showing (as of trade dates), (a) the quantity and unit and aggregate price for
each purchase, sale, receipt, and delivery of securities and commodities for
such accounts, and (b) all other debits and credits for such accounts.
Securities positions and money balances in such ledger accounts (or other
records) shall be brought forward periodically but not less frequently than at
the end of fiscal quarters. Any portfolio security, the salability of which is
conditioned, shall be so noted. A memorandum record shall be available setting
forth, with respect to each portfolio security accounts, the amount and
declaration, ex-dividend, and payment dates of each dividend declared thereon.
Ledger Account for each portfolio Security
- ------------------------------------------
Inventory Delaware Fund Accounting Permanently, the first two
(on line) years in an easily
accessible place
(iii) Separate ledger accounts (or other records) for each broker-dealer, bank
or other person with or through which transactions in portfolio securities are
affected, showing each purchase or sale of securities with or through such
persons, including details as to the date of the purchase or sale, the quantity
and unit and aggregate prices of such securities, and the commissions or other
compensation paid to such persons. Purchases or sales effected during the same
day at the same price may be aggregated.
Broker-Dealer Delaware Fund Accounting Permanently, the first two
Ledger years in an easily
accessible place
(iv) Separate ledger accounts (or other records), which may be maintained by a
transfer agent or registrar, showing for each shareholder of record of the
investment company the number of shares of capital stock of the company held. in
respect of share accumulation accounts (arising from periodic investment plans,
dividend reinvestment plans, deposit of issued shares by the owner thereof,
etc.), details shall be available as to the dates and number of shares of each
accumulation, and except with respect to already issued shares deposited by the
owner thereof, prices of each such accumulation.
Shareholder Accounts
- --------------------
Master file Annuities Sharon Edwards Permanently, the first two
record ADM. years in an easily
accessible place
(3) A securities record or ledger reflecting separately for each portfolio
security as of trade date all "long" and "short" positions carried by the
investment company for its own account and showing the location of all
securities long and the off-setting position to all securities short. The record
called for by this paragraph shall not be required in circumstances under which
all portfolio securities are maintained by a bank or banks or a member or
members of a national securities exchange as custodian under a custody agreement
or as agent for such custodian.
<PAGE>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Securities Position Record
- --------------------------
Maintained by Bankers William P. Kelly Permanently, the first two
Custodian of Trust years in an easily
Securities Company accessible place
(4) Corporate charters, certificates of incorporation or trust agreements, and
bylaws, and minute books of stockholders' and directors' or trustees' meetings;
and minute books of directors' or trustees' committee and advisory board or
advisory committee meetings.
Corporate Documents
- -------------------
Bylaws and Executive- Sue Womack Permanently, the first two
minute books. Corp. Secy. years in an easily
accessible place
(5) A record of each brokerage order given by or in behalf of the investment
company for, or in connection with, the purchase or sale of securities, whether
executed or unexecuted. Such record shall include the name of the broker, the
terms and conditions of the order and of any modification or cancellation
thereof, the time of entry or cancellation, the price at which executed, and the
time of receipt of report of execution. The record shall indicate the name of
the person who placed the order in behalf of the investment company.
Sales Order or Vantage Kevin Lee Six years, the first two
Purchase Order Global years in easily accessible
place
Confirmations Vantage Kevin Lee Six years, the first two
Global years in an easily
accessible place
Notification Investment Pat Roller Six years, the first two
Form (Generate Admin. years in an easily
from AOS accessible place
trading system)
(6) A record of all other portfolio purchase or sales showing details
comparable to those prescribed in paragraph 5 above.
Short-Term Investments
- ----------------------
Notification Investment Pat Roller Six years, the first two
Form (Generate Admin. years in an easily
from AOS accessible place
trading system)
Bank Advice and LIM Ann Warner Six years, the first two
Issuer years in an easily
Confirmation accessible place
(7) A record of all puts, calls, spreads, straddles, and other options in which
the investment company has any direct or indirect interest or which the
investment company has granted or guaranteed; and a record of any contractual
commitments to purchase, sell, receive or deliver securities or other property
<PAGE>
(but not including open orders placed with broker-dealers for the purchase or
sale of securities, which may be cancelled by the company on notices without
penalty or cost of any kind); containing at least an identification of the
security, the number of units involved, the option price, the date of maturity,
the date of issuance, and the person to whom issued.
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Record of Puts, Calls, Spreads, Etc.
- ------------------------------------
Not Applicable.
(8) A record of the proof of money balances in all ledger accounts (except
shareholder accounts), in the form of trial balances. Such trial balances shall
be prepared currently at least once a month.
Trial Balance
- -------------
General Ledger Delaware Fund Accounting Permanently, the first two
years in an easily
accessible place
(9) A record for each fiscal quarter, which shall be completed within 10 days
after the end of such quarter, showing specifically the basis or bases upon
which the allocation of orders for the purchase and sale of portfolio securities
to named brokers or dealers and the division of brokerage commissions or other
compensation on such purchase and sale orders among named persons were made
during such quarter. The record shall indicate the consideration given to (a)
sales of shares of the investment company by brokers or dealers, (b) the
supplying of services or benefits by brokers or dealers to the investment
company, its investment advisor or principal underwriter or any persons
affiliated therewith, and (c) any other considerations other than the technical
qualifications of the brokers and the dealers as such. The record shall show the
nature of their services or benefits made available, and shall describe in
detail the application of any general or specific formula or other determinant
used in arriving at such allocation of purchase and sales orders and such
division of brokerage commissions or other compensation. The record shall also
include the identifies of the person responsible for the determination of such
allocation and such division of brokerage commissions or other compensation.
Brokerage LIM Gina Rohrbacher Six years, the first two
Allocation years in an easily
Report accessible place
(10) A record in the form of an appropriate memorandum identifying the person
or persons, committees, or groups authorizing the purchase or sale of portfolio
securities. Where an authorization is made by a committee or group, a record
shall be kept in the names of its members who participated in the authorization.
There shall be retained a part of the record required by this paragraph any
memorandum, recommendation, or instruction supporting or authorizing the
purchase or sale of portfolio securities. The requirements of this paragraph are
applicable to the extent they are not met by compliance with the requirements of
paragraph 4 of this Rule 31a1(b).
Trading LIM/ Kevin Lee Six years, the first two
Authorization Vantage years in an easily
Global accessible place
Advisory Law Division Jeremy Sachs Six years, the first two
Agreements years in an easily
accessible place
<PAGE>
(11) Files of all advisory material received from the investment advisor, any
advisory board or advisory committee, or any other persons from whom the
investment company accepts investment advice publications distributed generally.
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Issue Folders LIM/ Kevin Lee Six years, the first two
Vantage years in an easily
Global accessible place
(12) The term "other records" as used in the expressions "journals (or other
records of original entry)" and "ledger accounts (or other records)" shall be
construed to include, where appropriate, copies of voucher checks,
confirmations, or similar documents which reflect the information required by
the applicable rule or rules in appropriate sequence and in permanent form,
including similar records developed by the use of automatic data processing
systems.
Correspondence Product Nancy Alford Six years, the first two
Admin. years in an easily
Product accessible place
Management
Pricing Sheets Delaware Fund Accounting Permanently, the first two
years in an easily
accessible place
Bank Delaware Fund Accounting Six years, the first two
Statements, years in easily accessible
and Cash place
Reconciliations
Proxy State- Annuities Nancy Alford Six years, the first two
ments and Division - years in an easily
Proxy Cards Admin. accessible place
March 12, 1997
<PAGE>
EX.19(d)
POWER OF ATTORNEY
LET IT BE KNOWN that I, O. Douglas Worthington, hereby revoke all Powers of
Attorney authorizing any person to act as attorney-in-fact relative to Lincoln
National Variable Annuity Account H (Legacy III), Lincoln National Variable
Annuity Fund A (Individual), and Lincoln National Variable Annuity Fund A
(Group) which were previously executed by me and appoint Jeremy Sachs, Dennis
Schoff, and C. Suzanne Womack, jointly and severally, my attorneys-in-fact, with
power of substitution, for me in any and all capacities, to sign any and all
amendments to the Registration Statement for Lincoln National Variable Annuity
Account H (Legacy III), Lincoln National Variable Annuity Fund A (Individual),
and Lincoln National Variable Annuity Fund A (Group) and to file such
amendments, with exhibits and other documents, with the Securities and Exchange
Commission, hereby ratifying all that each attorney-in-fact may do or cause to
be done by virtue of this power.
/s/ O. Douglas Worthington
-----------------------------
O. Douglas Worthington
STATE OF INDIANA)
)SS:
COUNTY OF ALLEN )
Subscribed and sworn to before me
this 7th day of April, 1997.
/s/ Janet L. Lindenberg
-----------------------
Notary Public
My Commission Expires: JANET L. LINDENBERG
NOTARY PUBLIC STATE OF INDIANA
ALLEN COUNTY
MY COMMISSION EXP. JULY 6, 1997
