<PAGE>
As filed with the Securities and Exchange Commission on April 7, 1999
Registration No. 33-26032
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / /
Post-Effective Amendment No. 14 / X /
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 18 / X /
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E
-------------------------------------------
(Exact Name of Registrant)
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
-------------------------------------------
(Name of Depositor)
1300 South Clinton Street
Fort Wayne, Indiana 46802
--------------------------
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number, including Area Code: (219)455-2000
JACK D. HUNTER, ESQ.
200 East Berry Street
Fort Wayne, Indiana 46802
-------------------------
(Name and Address of Agent for Service)
Copy to:
Kimberly J. Smith
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Ave., N.W.
Washington, D.C. 20004
---------------------------------------
Title of secrities being registered:
Interests in a separate account under individual flexible premium deferred
variable annuity contracts.
---------------------------------------
It is proposed that this filing will become effective
immediately upon filing pursuant to paragraph (b) of Rule 485
---
X On April 30, 1999, pursuant to paragraph (b) of Rule 485
---
60 days after filing pursuant to paragraph (a)(1) of Rule 485
---
On , 1998 Pursuant to paragraph (a)(1) of Rule 485
---
<PAGE>
American Legacy
Lincoln National Variable Annuity Account E
individual variable annuity contracts
Home Office:
Lincoln National Life Insurance Company
1300 South Clinton Street
Fort Wayne, IN 46801
This Prospectus describes the individual flexible premium deferred variable
annuity contract that is issued by Lincoln National Life Insurance Company
(Lincoln Life). It is for use with nonqualified and qualified retirement
plans. Generally, you do not pay federal income tax on the contract's growth
until it is paid out. Qualified 403(b) business will only be accepted for pur-
chase payments that are either lump sum transfers or rollovers. The contract
is designed to accumulate contract value and to provide retirement income that
you cannot outlive or for an agreed upon time. These benefits may be a vari-
able or fixed amount or a combination of both. If you die before the annuity
commencement date, we will pay your beneficiary a death benefit.
The minimum initial purchase payment for the contract is:
1. $1,500 for a nonqualified plan and a 403(b) transfer/rollover or
2. $300 for a qualified plan.
Additional purchase payments may be made to the contract and must be at least
$25 per payment and at least $300 annually.
You choose whether your contract value accumulates on a variable or a fixed
(guaranteed) basis or both. If you put all your purchase payments into the
fixed account, we guarantee your principal and a minimum interest rate. We
limit withdrawals and transfers from the fixed side of the contract.
All purchase payments for benefits on a variable basis will be placed in Lin-
coln National Variable Annuity Account E (variable annuity account [VAA]). The
VAA is a segregated investment account of Lincoln Life. If you put all or some
of your purchase payments into one or more of the contract's variable options
you take all the investment risk on the contract value and the retirement in-
come. If the subaccounts you select make money, your contract value goes up;
if they lose money, it goes down. How much it goes up or down depends on the
performance of the subaccounts you select. We do not guarantee how any of the
variable options or their funds will perform. Also, neither the U.S. Govern-
ment nor any federal agency insures or guarantees your investment in the con-
tract.
The available funds, listed below, are each part of American Variable Insur-
ance Series (series):
Global Growth
Global Small Capitalization
Growth
International
New World
Growth-Income
Asset Allocation
Bond
High-Yield Bond
U.S. Government/AAA-Rated Securities
Cash Management
This Prospectus gives you information about the contracts that you should know
before you decide to buy a contract and make purchase payments. You should
also review the prospectus for the funds that is attached, and keep both pro-
spectuses for reference.
Neither the SEC nor any state securities commission has approved this contract
or determined that this prospectus is accurate or complete. Any representation
to the contrary is a criminal offense.
You can obtain a current Statement of Additional Information (SAI) about the
contracts which has more information. Its terms are made part of this Prospec-
tus. For a free copy, write: Lincoln National Life Insurance Company, P.O. Box
2348, Fort Wayne, Indiana 46801, or call 1-800-942-5500. The SAI and other in-
formation about Lincoln Life and Account E are also available on the SEC's web
site (http://www.sec.gov). There is a table of contents for the SAI on the
last page of this Prospectus.
April 30, 1999
1
<PAGE>
Table of contents
<TABLE>
<CAPTION>
Page
- -------------------------------------------------
<S> <C>
Special terms 2
- -------------------------------------------------
Expense tables 3
- -------------------------------------------------
Summary 5
- -------------------------------------------------
Condensed financial information 6
- -------------------------------------------------
Financial statements 8
- -------------------------------------------------
Lincoln National Life Insurance Co. 8
- -------------------------------------------------
Fixed side of the contract 8
- -------------------------------------------------
Variable annuity account (VAA) 8
- -------------------------------------------------
Investments of the variable annuity account 8
- -------------------------------------------------
Charges and other deductions 10
- -------------------------------------------------
The contracts 12
- -------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Page
- ------------------------------------------------------------------------
<S> <C>
Annuity payouts 16
- ------------------------------------------------------------------------
Federal tax matters 17
- ------------------------------------------------------------------------
Voting rights 21
- ------------------------------------------------------------------------
Distribution of the contracts 21
- ------------------------------------------------------------------------
Return privilege 21
- ------------------------------------------------------------------------
State regulation 21
- ------------------------------------------------------------------------
Restrictions under the Texas Optional Retirement Program 21
- ------------------------------------------------------------------------
Records and reports 22
- ------------------------------------------------------------------------
Other information 22
- ------------------------------------------------------------------------
Statement of additional information table of contents for Variable
Annuity Account E American Legacy 23
- ------------------------------------------------------------------------
</TABLE>
Special terms
(We have italicized the terms that have special meaning throughout this Pro-
spectus.)
Account or variable annuity account (VAA) -- The segregated investment ac-
count, Account E, into which Lincoln Life sets aside and invests the assets
for the variable side of the contract offered in this Prospectus.
Accumulation unit -- A measure used to calculate contract value for the vari-
able side of the contract before the annuity commencement date.
Annuitant -- The person on whose life the annuity benefit payments made after
the annuity commencement date are based.
Annuity commencement date -- The valuation date when funds are withdrawn or
converted into annuity units or fixed dollar payout for payment of retirement
income benefits under the annuity payout option you select.
Annuity payout -- An amount paid at regular intervals after the annuity com-
mencement date under one of several options available to the annuitant and/or
any other payee. This amount may be paid on a variable or fixed basis, or a
combination of both.
Annuity unit -- A measure used to calculate the amount of annuity payouts for
the variable side of the contract after the annuity commencement date.
Beneficiary -- The person you choose to receive the death benefit that is paid
if you die before the annuity commencement date.
Contractowner (you, your, owner) -- The person who has the ability to exercise
the rights within the contract (decides on investment allocations, transfers,
payout option, designates the beneficiary, etc.). Usually, but not always, the
owner is the annuitant.
Contract value -- At a given time before the annuity commencement date, the
total value of all accumulation units for a contract plus the value of the
fixed side of the contract.
Contract year -- Each one-year period starting with the effective date of the
contract and starting with each contract anniversary after that.
Death benefit (GMDB, EGMDB) -- The amount payable to your designated benefi-
ciary if the owner dies before the annuity commencement date. An enhanced
guaranteed minimum death benefit is also available.
Lincoln Life (we, us, our) -- Lincoln National Life Insurance Company.
Purchase payments -- Amounts paid into the contract.
Series -- American Variable Insurance Series (series), the funds to which you
direct purchase payments.
Subaccount or American Legacy subaccount -- The portion of the VAA that re-
flects investments in accumulation and annuity units of a class of a particu-
lar fund available under the contracts. There is a separate subaccount which
corresponds to each class of a fund.
Valuation date -- Each day the New York Stock Exchange (NYSE) is open for
trading.
Valuation period -- The period starting at the close of trading (currently
4:00 p.m. New York time) on each day that the NYSE is open for trading (valua-
tion date) and ending at the close of such trading on the next valuation date.
2
<PAGE>
Expense tables
Summary of Contractowner expenses:
The maximum surrender charge (contingent deferred sales charge)
(as a percentage of purchase payments surrendered/withdrawn): 6%
The surrender charge percentage is reduced over time. The later the redemption
occurs, the lower the surrender charge with respect to that surrender or with-
drawal. We may waive this charge in certain situations. See Surrender charges.
- --------------------------------------------------------------------------------
Annual administration charge: $35
We make this charge against the contract value on the last valuation date of
each contract year and upon full surrender. It is not a separate charge for
each subaccount.
- --------------------------------------------------------------------------------
Account E annual expenses for American Legacy subaccounts:*
(as a percentage of average account value):
<TABLE>
<CAPTION>
With Enhanced Without Enhanced
Death Benefit Death Benefit
<S> <C> <C>
Mortality and expense risk charge 1.25% 1.25%
Enhanced Death Benefit charge .15% --
----- ----
Total annual charge for each American Legacy
subaccount 1.40% 1.25%
</TABLE>
Annual expenses of the funds for the year ended November 30, 1998:
(as a percentage of each fund's average net assets):
<TABLE>
<CAPTION>
Management Other Total
fees + expenses = expenses
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1. Global Growth .69% .06% .75%
- -------------------------------------------------------------------------
2. Global Small Capitalization** .79 .04 .83
- -------------------------------------------------------------------------
3. Growth .40 .01 .41
- -------------------------------------------------------------------------
4. International .57 .09 .66
- -------------------------------------------------------------------------
5. New World*** .85 08 .93
- -------------------------------------------------------------------------
6. Growth-Income .35 .01 .36
- -------------------------------------------------------------------------
7. Asset Allocation .44 .01 .45
- -------------------------------------------------------------------------
8. Bond .52 .02 .54
- -------------------------------------------------------------------------
9. High-Yield Bond .49 .02 .51
- -------------------------------------------------------------------------
10. U.S. Govt./AAA-Rated Securities .50 .01 .51
- -------------------------------------------------------------------------
11. Cash Management 45 .01 .46
- -------------------------------------------------------------------------
</TABLE>
* The VAA is divided into separately-named subaccounts.
** These expenses are annualized. The fund began operations on April 30, 1998.
***These expenses are estimated amounts for the current fiscal year. This fund
will not be available to you until June 17, 1999. After June 17, it may not be
available in all states.
3
<PAGE>
Examples
(expenses of the subaccounts and of the funds):
If you surrender your contract at the end of the time period shown, you would
pay the following expenses on a $1,000 investment, assuming a 5% annual re-
turn:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. Global Growth $82 $119 $148 $253
- ----------------------------------------------------------------------------------
2. Global Small Capitalization 80 112 136 229
- ----------------------------------------------------------------------------------
3. Growth 79 108 131 218
- ----------------------------------------------------------------------------------
4. International 81 116 143 244
- ----------------------------------------------------------------------------------
5. New World 84 124 157 272
- ----------------------------------------------------------------------------------
6. Growth-Income 78 107 128 213
- ----------------------------------------------------------------------------------
7. Asset Allocation 79 110 133 222
- ----------------------------------------------------------------------------------
8. Bond 80 112 137 232
- ----------------------------------------------------------------------------------
9. High-Yield Bond 80 112 136 229
- ----------------------------------------------------------------------------------
10. U.S. Govt./AAA-Rated Securities 80 112 136 229
- ----------------------------------------------------------------------------------
11. Cash Management 79 110 133 223
- ----------------------------------------------------------------------------------
If you do not surrender your contract, you would pay the following expenses on
a $1,000 investment, assuming a 5% annual return:
<CAPTION>
1 year 3 years 5 years 10 years
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. Global Growth $22 $69 $118 $253
- ----------------------------------------------------------------------------------
2. Global Small Capitalization 20 62 106 229
- ----------------------------------------------------------------------------------
3. Growth 19 58 101 218
- ----------------------------------------------------------------------------------
4. International 21 66 113 244
- ----------------------------------------------------------------------------------
5. New World 24 74 127 272
- ----------------------------------------------------------------------------------
6. Growth-Income 18 57 98 213
- ----------------------------------------------------------------------------------
7. Asset Allocation 19 60 103 222
- ----------------------------------------------------------------------------------
8. Bond 20 62 107 232
- ----------------------------------------------------------------------------------
9. High-Yield Bond 20 62 106 229
- ----------------------------------------------------------------------------------
10. U.S. Govt./AAA-Rated Securities 20 62 106 229
- ----------------------------------------------------------------------------------
11. Cash Management 19 60 103 223
- ----------------------------------------------------------------------------------
</TABLE>
We provide these examples to help you understand
the direct and indirect costs and expenses of the contract. The examples as-
sume that an enhanced death benefit is in effect. Without this benefit, ex-
penses would be lower.
For more information, see Charges and other deductions in this Prospectus, and
Fund Organization and Management in the Prospectus for the funds. Premium
taxes may also apply, although they do not appear in the examples. We also re-
serve the right to impose a charge on transfers between subaccounts and to and
from the fixed account--currently, there is no charge. These examples should
not be considered a representation of past or future expenses. Actual expenses
may be more or less than those shown.
4
<PAGE>
Summary
What kind of contract am I buying? It is an individual annuity contract between
you and Lincoln Life. It may provide for a fixed annuity and/or a variable an-
nuity. This Prospectus describes the variable side of the contract. See The
contracts.
What is the variable annuity account (VAA)? It is a separate account we estab-
lished under Indiana insurance law, and registered with the SEC as a unit in-
vestment trust. VAA assets are allocated to one or more subaccounts, according
to your investment choices. VAA assets are not chargeable with liabilities
arising out of any other business which Lincoln Life may conduct. See Variable
annuity account.
What are my investment choices? Based upon your instruction, the VAA applies
your purchase payments to buy series shares in one or more of the investment
funds of the series: Global Growth, Global Small Capitalization, Growth, Inter-
national, New World, Growth-Income, Asset Allocation, Bond, High-Yield Bond,
U.S. Government/ AAA-Rated Securities and Cash Management. In turn, each fund
holds a portfolio of securities consistent with its investment policy. See In-
vestments of the variable annuity account and Description of the series.
Who invests my money? The investment advisor for the series is Capital Research
and Management Company (CRMC), Los Angeles, California. CRMC is registered as
an investment advisor with the SEC. See Investments of the variable annuity ac-
count and Investment advisor.
How does the contract work? If we approve your application, we will send you a
contract. When you make purchase payments during the accumulation phase, you
buy accumulation units. If you decide to receive retirement income payments,
your accumulation units are converted to annuity units. Your retirement income
payments will be based on the number of annuity units you received and the
value of each annuity unit on payout days. See The contracts.
What charges do I pay under the contract? At the end of each contract year and
at the time of surrender, we will deduct $35 from your contract value as a
maintenance charge. If you withdraw contract value, you pay a surrender charge
from 0% to 6%, depending upon how many contract years those payments have been
in the contract. We may waive surrender charges in certain situations. See Sur-
render charges.
We will deduct any applicable premium tax from purchase payments or contract
value at the time the tax is incurred or at another time we choose.
We apply an annual charge totaling 1.25% to the daily net asset value of the
VAA for the mortality and expense risk charge. If the enhanced death benefit is
in effect, the mortality and expense risk charge is 1.25% and 0.15% for the en-
hanced death benefit, for an annual charge totaling 1.40%. See Charges and
other deductions.
The series pays a management fee to CRMC based on the average daily net asset
value of each fund. See Investments of the variable annuity account--Investment
advisor.
What purchase payments do I make, and how often? Subject to the minimum and
maximum payment amounts, your payments are completely flexible. See The con-
tracts--Purchase payments.
How will my annuity payouts be calculated? If you decide to annuitize, you may
select an annuity option and start receiving retirement income payments from
your contract as a fixed option or variable option or a combination of both.
See Annuity Options. Remember that participants in the VAA benefit from any
gain, and take a risk of any loss, in the value of the securities in the funds'
portfolios.
What happens if I die before I annuitize? If the enhanced death benefit is in
effect, your beneficiary will receive the greater of the enhanced death benefit
or the contract value. If the enhanced death benefit is not in effect, your
beneficiary will receive the greater of the guaranteed minimum death benefit or
the contract value. Your beneficiary has options as to how the death benefit is
paid. See Death benefit before the annuity commencement date.
May I transfer contract value between variable options and between the fixed
side of the contract? Yes, with certain limits. See The contracts--Transfers
between subaccounts on or before the annuity commencement date and Transfers
following the annuity commencement date. Transfers to and from the General Ac-
count on or before the annuity commencement date.
May I surrender the contract or make a withdrawal? Yes, subject to contract re-
quirements and to the restrictions of any qualified retirement plan for which
the contract was purchased. See Surrenders and withdrawals. If you surrender
the contract or make a withdrawal, certain charges may apply. See Charges and
other deductions. A portion of surrender/withdrawal proceeds may be taxable. In
addition, if you decide to take a distribution before age 59 1/2, a 10% Inter-
nal Revenue Service (IRS) tax penalty may apply. A surrender or a withdrawal
also may be subject to 20% withholding. See Federal tax status and withholding.
Do I get a free look at this contract? Yes. You can cancel the contract within
20 days (in some states longer) of the date you first receive the contract. You
need to return the contract, postage prepaid, to our home office. In most
states you assume the risk of any market drop on purchase payments you allocate
to the variable side of the contract. See Return privilege.
5
<PAGE>
Condensed financial information for the variable annuity account accumulation
unit values
(For an accumulation unit outstanding throughout the period)
The following information relating to accumulation unit values and number of
accumulation units for The American Legacy subaccounts for each of the ten
years in the period ended December 31, 1998 comes from the VAA's financial
statements. It should be read along with the VAA's financial statements and
notes which are all included in the SAI.
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Global Growth
subaccount*
Accumulation unit value
.Beginning of period....................................................................
.End of period..........................................................................
Number of accumulation
units
.End of period (000's omitted)..........................................................
- -----------------------------------------------------------------------------------------
Global Small Capitalization subaccount**
Accumulation unit value
.Beginning of period....................................................................
.End of period..........................................................................
Number of accumulation units
.End of period (000's omitted)..........................................................
- -----------------------------------------------------------------------------------------
Growth subaccount
Accumulation unit value
.Beginning of period.... $ .925 1.200 1.133 1.492 1.632 1.875 1.861 2.450
.End of period.......... $ 1.200 1.133 1.492 1.632 1.875 1.861 2.450 2.743
Number of accumulation
units
.End of period (000's
omitted)............... 93,979 99,094 106,335 110,169 111,230 105,312 101,710 90,842
- -----------------------------------------------------------------------------------------
International
subaccount***
Accumulation unit value
.Beginning of period............................................ $ 1.000 1.001 1.114
.End of period.................................................. $ 1.001 1.114 1.294
Number of accumulation
units
.End of period (000's omitted).................................. 27,787 31,592 38,351
- -----------------------------------------------------------------------------------------
Growth-Income subaccount
Accumulation unit value
.Beginning of period.... $ .952 1.180 1.136 1.392 1.484 1.646 1.659 2.180
.End of period.......... $ 1.180 1.136 1.392 1.484 1.646 1.659 2.180 2.556
Number of accumulation
units
.End of period (000's
omitted)............... 195,478 199,880 203,868 201,913 199,178 183,608 172,288 158,861
- -----------------------------------------------------------------------------------------
Asset Allocation
subaccount***
Accumulation unit value
.Beginning of period............................................ $ 1.000 .986 1.262
.End of period.................................................. $ .986 1.262 1.443
Number of accumulation
units
.End of period (000's omitted).................................. 3,807 5,168 7,199
- -----------------------------------------------------------------------------------------
Bond subaccount*+
Accumulation unit value
.Beginning of period............................................................ $ 1.000
.End of period.................................................................. $ 1.046
Number of accumulation
units
.End of period (000's omitted).................................................. 1,681
- -----------------------------------------------------------------------------------------
High-Yield Bond
subaccount
Accumulation unit value
.Beginning of period.... $ 1.103 1.204 1.234 1.543 1.714 1.971 1.819 2.188
.End of period.......... $ 1.204 1.234 1.543 1.714 1.971 1.819 2.188 2.447
Number of accumulation
units
.End of period (000's
omitted)............... 34,050 29,430 28,254 27,823 29,951 25,988 23,867 20,767
- -----------------------------------------------------------------------------------------
U.S. Government/AAA-
Rated subaccount
Accumulation unit value
.Beginning of period.... $ 1.012 1.108 1.187 1.359 1.444 1.586 1.498 1.707
.End of period.......... $ 1.108 1.187 1.359 1.444 1.586 1.498 1.707 1.738
Number of accumulation
units
.End of period (000's
omitted)............... 42,915 43,779 44,335 42,291 39,387 31,118 29,062 22,652
- -----------------------------------------------------------------------------------------
Cash Management
subaccount
Accumulation unit value
.Beginning of period.... $ 1.097 1.179 1.256 1.309 1.335 1.353 1.388 1.447
.End of period.......... $ 1.179 1.256 1.309 1.335 1.353 1.388 1.447 1.502
Number of accumulation
units
.End of period (000's
omitted)............... 31,446 29,312 19,913 21,963 13,982 14,312 10,001 9,605
</TABLE>
- --------------------------------------------------------------------------------
*The Global Growth subaccount began operations on April 30, 1997 so the figures
for 1997 represent experience of less than one year.
**The Global Small Capitalization subaccount began operations on April 30, 1998
so the figures for 1998 represent experience of less than one year.
***The International subaccount and Asset Allocation subaccount began
operations on January 3, 1994.
*+The Bond subaccount began operations on January 2, 1996 so the figures for
1996 represent experience of less than one year.
+The EGMDB rider was not available until May 1, 1997.
There is a New World subaccount but it is not in the chart because it did not
begin activity until 1999.
6
<PAGE>
<TABLE>
<CAPTION>
1997 1998
without with without
with EGMDB+ EGMDB EGMDB EGMDB
- -----------------------------------
<S> <C> <C> <C>
$1.000 1.000 1.076 1.077
$1.076 1.077 1.369 1.371
10 3,217 103 5,104
- -----------------------------------
................ .......$1.000 $ 1.000
................ .......$1.014 1.015
................ ..........116 2,312
- -----------------------------------
$ 1.000 2.743 3.523 3.525
$ 3.523 3.525 4.709 4.719
652 79,682 3,154 69,849
- -----------------------------------
$ 1.000 1.294 1.392 1.393
$ 1.392 1.393 1.664 1.668
386 36,534 954 30,346
- -----------------------------------
$ 1.000 2.556 3.175 3.177
$ 3.175 3.177 3.706 3.714
1,197 144,349 5,723 124,069
- -----------------------------------
$ 1.000 1.443 1.716 1.717
$ 1.716 1.717 1.914 1.918
49 9,636 228 10,239
- -----------------------------------
$ 1.000 2.447 2.714 2.716
$ 2.714 2.716 2.689 2.694
204 18,820 614 16,651
- -----------------------------------
$ 1.000 1.046 1.136 1.137
$ 1.136 1.137 1.170 1.172
2 2,437 84 3,664
- -----------------------------------
$ 1.000 1.738 1.860 1.862
$ 1.860 1.862 1.985 1.989
150 18,080 545 16,965
- -----------------------------------
$ 1.000 1.502 1.559 1.560
$ 1.559 1.560 1.616 1.620
213 7,157 456 7,102
</TABLE>
- ---------------------
7
<PAGE>
Financial Statements
The financial statements of the VAA and the statutory-basis financial state-
ments of Lincoln Life are located in the SAI. If you would like a free copy,
complete and mail the enclosed card, or call 1-800-942-5500.
Lincoln National Life
Insurance Co.
Lincoln Life was founded in 1905 and is organized under Indiana law. We are one
of the largest stock life insurance companies in the United States. We are
owned by Lincoln National Corp. (LNC) which is also organized under Indiana
law. LNC's primary businesses are insurance and financial services.
Fixed side of the contract
Purchase payments allocated to the fixed side of the contract become part of
Lincoln Life's general account, and do not participate in the investment expe-
rience of the VAA. The general account is subject to regulation and supervision
by the Indiana Insurance Department as well as the insurance laws and regula-
tions of the jurisdictions in which the contracts are distributed.
In reliance on certain exemptions, exclusions and rules, Lincoln Life has not
registered interests in the general account as a security under the Securities
Act of 1933 and has not registered the general account as an investment company
under the 1940 Act. Accordingly, neither the general account nor any interests
in it are regulated under the 1933 Act or the 1940 Act. Lincoln Life has been
advised that the staff of the SEC has not made a review of the disclosures
which are included in this Prospectus which relate to our general account and
to the fixed account under the contract. These disclosures, however, may be
subject to certain generally applicable provisions of the federal securities
laws relating to the accuracy and completeness of statements made in Prospec-
tuses. This Prospectus is generally intended to serve as a disclosure document
only for aspects of the contract involving the VAA, and therefore contains only
selected information regarding the fixed side of the contract. Complete details
regarding the fixed side of the contract are in the contract.
Purchase payments allocated to the fixed side of the contract are guaranteed to
be credited with a minimum interest rate, specified in the contract, of at
least 3.0%. A purchase payment allocated to the fixed side of the contract is
credited with interest beginning on the next calendar day following the date of
receipt if all data is complete. Lincoln Life may vary the way in which it
credits interest to the fixed side of the contract from time to time.
ANY INTEREST IN EXCESS OF 3.0% WILL BE DECLARED IN ADVANCE IN LINCOLN LIFE'S
SOLE DISCRETION, CONTRACTOWNERS BEAR THE RISK THAT NO INTEREST IN EXCESS OF
3.0% WILL BE DECLARED.
Variable annuity account
(VAA)
On September 26, 1986, the VAA was established as an insurance company separate
account under Indiana law. It is registered with the SEC as a unit investment
trust under the provisions of the Investment Company Act of 1940 (1940 Act).
The SEC does not supervise the VAA or Lincoln Life. The VAA is a segregated in-
vestment account, meaning that its assets may not be charged with liabilities
resulting from any other business that we may conduct. Income, gains and loss-
es, whether realized or not, from assets allocated to the VAA are, in accor-
dance with the applicable annuity contracts, credited to or charged against the
VAA. They are credited or charged without regard to any other income, gains or
losses of Lincoln Life. The VAA satisfies the definition of a separate account
under the federal securities laws. We do not guarantee the investment perfor-
mance of the VAA. Any investment gain or loss depends on the investment perfor-
mance of the funds. You assume the full investment risk for all amounts placed
in the VAA.
Investments of the variable
annuity account
You decide the subaccount(s) to which you allocate purchase payments. There is
a separate subaccount which corresponds to each class of each fund in the se-
ries. You may change your allocation without penalty or charges. Shares of the
funds will be sold at net asset value with no initial sales charge to the VAA
in order to fund the contracts. The series is required to redeem fund shares at
net asset value upon our request. We reserve the right to add, delete or sub-
stitute funds.
Investment advisor
The investment advisor for the series is Capital Research and Management Com-
pany (CRMC), 333 South Hope Street, Los Angeles, California 90071. CRMC is one
of the nation's largest and oldest investment management organizations. As com-
pensation for its services to the series, the investment advisor receives a fee
from the series which is accrued daily and paid monthly. This fee is based on
the net assets of each fund, as defined under Purchases and redemptions of
shares, in the Prospectus for the series.
8
<PAGE>
Description of the series
The series was organized as a Massachusetts business trust in 1983 and is reg-
istered as a diversified, open-end management investment company under the 1940
Act. Diversified means not owning too great a percentage of the securities of
any one company. An open-end company is one which, in this case, permits Lin-
coln Life to sell its shares back to the series when you make a withdrawal,
surrender the contract or transfer from one fund to another. Management invest-
ment company is the legal term for a mutual fund. These definitions are very
general. The precise legal definitions for these terms are contained in the
1940 Act.
The series has eleven separate portfolios of funds. The series has adopted a
plan pursuant to Rule 18f-3 under the 1940 Act to permit the series to estab-
lish a multiple class distribution system for all of its portfolios. The se-
ries' Board of Trustees may at any time establish additional funds or classes,
which may or may not be available to the VAA. Fund assets are segregated and a
shareholder's interest is limited to those funds in which the shareholder owns
shares.
Under the multi-class system adopted by the series, shares of each multi-class
fund represent an equal pro rata interest in that fund and, generally, have
identical voting, dividend, liquidation and other rights, preferences, powers,
restrictions, limitations, qualifications and terms and conditions, except
that: (1) each class has a different designation; (2) each class of shares
bears its class expenses; (3) each class has exclusive voting rights on any
matter submitted to shareholders that relates solely to its distribution ar-
rangement; and (4) each class has separate voting rights on any matter submit-
ted to shareholders in which the interests of one class differ from the inter-
ests of any other class. Expenses currently designated as class expenses by the
series' Board of Trustees under the plan pursuant to Rule 18f-3 include, for
example, service fees paid under a 12b-1 plan to cover servicing fees paid to
dealers selling the contracts.
Each fund has two classes of shares, designated as Class 1 and Class 2 shares.
Class 1 and 2 differ primarily in that Class 2 but not Class 1 shares are sub-
ject to a
12b-1 plan. Only Class 1 shares are available under
the contracts.
Certain funds offered as part of this contract have similar investment objec-
tives and policies to other portfolios managed by the advisor. The investment
results of the funds, however, may be higher or lower than the other portfolios
that are managed by the advisor. There can be no assurance, and no representa-
tion is made, that the investment results of any of the funds will be compara-
ble to the investment results of any other portfolio managed by the advisor.
Following are brief summaries of the investment objectives and policies of the
funds. Each fund is subject to certain investment policies and restrictions
which may not be changed without a majority vote of shareholders of that fund.
More detailed information may be obtained from the current Prospectus for the
series, which is included in this booklet. Please be advised that there is no
assurance that any of the funds will achieve their stated objectives.
1. Global Growth Fund--The fund seeks to make your investment grow over time by
investing primarily in common stocks of companies located around the world.
The fund is designed for investors seeking capital appreciation through
stocks. Investors in the fund should have a long-term perspective and be
able to tolerate potentially wide price fluctuations.
2. Global Small Capitalization Fund--The fund seeks to make your investment
grow over time by investing primarily in stocks of smaller companies located
around the world that typically have market capitalizations of $50 million
to $1.2 billion. The fund is designed for investors seeking capital appreci-
ation through stocks. Investors in the fund should have a long-term perspec-
tive and be able to tolerate potentially wide price fluctuations.
3. Growth Fund--The fund seeks to make your investment grow by investing pri-
marily in common stocks of companies that appear to offer superior opportu-
nities for growth of capital. The fund is designed for investors seeking
capital appreciation through stocks. Investors in the fund should have a
long-term perspective and be able to tolerate potentially wide price fluctu-
ations.
4. International Fund--The fund seeks to make your investment grow over time by
investing primarily in common stocks of companies located outside the United
States. The fund is designed for investors seeking capital appreciation
through stocks. Investors in the fund should have a long-term perspective
and be able to tolerate potentially wide price fluctuations.
5. New World Fund--The fund seeks to make your investment grow over time by in-
vesting primarily in stocks of companies with significant exposure to coun-
tries which have developing economies and/or markets. The fund may also in-
vest in debt securities of issuers, including issuers of high-yield, high-
risk bonds, in these countries. Please note: New World Fund will not be made
available to you until June 17, 1999. After June 17, this fund may not be
available in all states. Please consult your investment dealer for current
information about its availability.
6. Growth-Income Fund--The fund seeks to make your investment grow and provide
you with income over time by investing primarily in common stocks or other
securities which demonstrate the potential for appreciation and/or divi-
dends. The fund is designed for investors seeking both capital appreciation
and income.
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7. Asset Allocation Fund--The fund seeks to provide you with high total return
(including income and capital gains) consistent with preservation of capital
over the long-term by investing in a diversified portfolio of common stocks
and other equity securities; bonds and other intermediate and long-term debt
securities, and money market instruments (debt securities maturing in one
year or less).
8. Bond Fund--The fund seeks to maximize your level of current income and pre-
serve your capital by investing primarily in bonds. The fund is designed for
investors seeking income and more price stability than stocks, and capital
preservation over the long-term.
9. High-Yield Bond Fund--The fund seeks to provide you with a high level of
current income and secondarily capital appreciation by investing primarily
in lower quality debt securities (rated Ba or BB or below by Moody's Invest-
ors Services, Inc. or Standard & Poor's Corporation), including those of
non-U.S. issuers. The fund may also invest in equity securities that provide
an opportunity for capital appreciation.
10. U.S. Government/AAA-Rated Securities Fund--The fund seeks to provide you
with a high level of current income, as well as preserve your investment.
The fund invests primarily in securities that are guaranteed by the "full
faith and credit" pledge of the U.S. Government and securities that are
rated AAA or Aaa by Moody's Investor's Services, Inc. or Standard & Poor's
Corporation or unrated but determined to be of equivalent quality.
11. Cash Management Fund--The fund seeks to provide you an opportunity to earn
income on your cash reserves while preserving the value of your investment
and maintaining liquidity by investing in a diversified selection of high
quality money market instruments.
Sale of fund shares by the series
We will purchase shares of the funds at net asset value and direct them to the
appropriate subaccounts of the VAA. We will redeem sufficient shares of the ap-
propriate funds to pay annuity payouts, death benefits, surrender/withdrawal
proceeds or for other purposes described in the contract. If you want to trans-
fer all or part of your investment from one subaccount to another, we may
redeem shares held in the first and purchase shares of the other. The shares
are retired, but they may be reissued later.
Shares of the funds are not sold directly to the general public. They are sold
to Lincoln Life, and may be sold to other insurance companies, for investment
of the assets of the subaccounts established by those insurance companies to
fund variable annuity and variable life insurance contracts.
When the series sells shares in any of its funds both to variable annuity and
to variable life insurance separate accounts, it is said to engage in mixed
funding. When the series sells shares in any of its funds to separate accounts
of unaffiliated life insurance companies, it is said to engage in shared fund-
ing.
The series currently engages in mixed and shared funding. Therefore, due to
differences in redemption rates or tax treatment, or other considerations, the
interests of various contractowners participating in a fund could conflict. The
series' Board of Trustees will monitor for the existence of any material con-
flicts, and determine what action, if any, should be taken. See the Prospectus
for the series.
Reinvestment of dividends and capital gain distributions
All dividend and capital gain distributions of the funds are automatically re-
invested in shares of the distributing funds at their net asset value on the
date of distribution. Dividends are not paid out to contractowners as addi-
tional units, but are reflected in changes in unit values.
Addition, deletion or substitution of investments
We reserve the right, within the law, to make additions, deletions and substi-
tutions for the series and/or any funds within the series in which the VAA par-
ticipates. (We may substitute shares of other funds for shares already pur-
chased, or to be purchased in the future, under the contract. This substitution
might occur if shares of a fund should no longer be available, or if investment
in any fund's shares should become inappropriate, in the judgment of our man-
agement, for the purposes of the contract.) We cannot substitute shares of one
fund for another without approval by the SEC. We will also notify you.
Charges and other deductions
We will deduct the charges described below to cover our costs and expenses,
services provided and risks assumed under the contract. We incur certain costs
and expenses for the distribution and administration of the contracts and for
providing the benefits payable thereunder. Our administrative services include:
processing applications for and issuing the contracts, processing purchases and
redemptions of fund shares as required (including dollar cost averaging, cross-
reinvestment, and automatic withdrawal services), maintaining records, adminis-
tering annuity payouts, furnishing accounting and valuation services (including
the calculation and monitoring of daily subaccount values), reconciling and de-
positing cash receipts, providing contract confirmations, providing toll-free
inquiry services and furnishing telephone fund transfer services. The benefits
we provide include death benefits, annuity payout benefits and cash surrender
value benefits. The risks we assume
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include: the risk that annuitants receiving annuity payouts under contract live
longer than we assumed when we calculated our guaranteed rates (these rates are
incorporated in the contract and cannot be changed); the risk that death bene-
fits paid under the EGMDB or GMDB, will exceed actual contract value; the risk
that more owners than expected will qualify for waivers of the surrender
charge; and the risk that our costs in providing the services will exceed our
revenues from contract charges (which we cannot change). The amount of a charge
may not necessarily correspond to the costs associated with providing the serv-
ices or benefits indicated by the description of the charge or associated with
a particular contract. For example, the surrender charge collected may not
fully cover all of the sales and distribution expenses actually incurred by us.
Deductions from the VAA for assumption of mortality and expense risks
We deduct from the VAA an amount, computed daily, which is equal to an annual
rate of 1.25% of the daily net asset value as a mortality and expense risk
charge. For those contracts which include the EGMDB, the aggregate charge
against the VAA is 1.40% consisting of a 1.25% mortality and expense risk
charge and a 0.15% risk charge for the EGMDB.
Maintenance charge
We will deduct a contract maintenance charge of $35 per contract year. This
charge will be deducted from the contract value on the last valuation date of
each contract year. This charge will also be deducted from the contract value
upon surrender.
Surrender charge
A surrender charge applies (except as described below) to surrenders and with-
drawals of purchase payments that have been invested for the periods indicated
as follows:
<TABLE>
<CAPTION>
Number of complete contract years
that
a
purchase
payment
has
been
invested
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Less At
than least
2 2 3 4 5 6 7+
surrender charge as a
percentage of the surrendered or withdrawn
purchase payments 6% 5 4 3 2 1 0
</TABLE>
A surrender charge does not apply to:
1. A surrender or withdrawal of purchase payments that have been invested at
least seven full contract years.
2. The first withdrawal of contract value during a contract year to the extent
the withdrawal does not exceed 10% of the purchase payments (this 10% with-
drawal exception does not apply to a surrender of a contract);
3. Automatic withdrawals, not in excess of 10% of the purchase payments during
a contract year, made by non-trustee contractowners who are at least 59 1/2;
4. A surrender of a contract or withdrawal of contract value as a result of the
annuitant's permanent and total disability [as defined in Section 22(e)(3)
of the tax code], after the effective date of the contract and before the
annuitant's 65th birthday.
5. A surrender of a contract or withdrawal of contract value of a contract is-
sued to employees and registered representatives of any member of the sell-
ing group and their spouses and minor children, or to officers, directors,
trustees or bona-fide full-time employees of LNC or The Capital Group, Inc.
or their affiliated or managed companies (based upon the contractowner's
status at the time the contract was purchased); and
6. A surrender of the contract as a result of the death of the annuitant. How-
ever, the surrender charge is not waived as a result of the death of a
contractowner who is not the annuitant.
The surrender charge is calculated separately for each contract year's purchase
payments to which a charge applies. (For purposes of calculating this charge,
we assume that purchase payments are withdrawn on a first in-first out basis,
and that all purchase payments are withdrawn before any earnings are with-
drawn.) The surrender charges associated with surrender or withdrawal are paid
to us to compensate us for the loss we experience on contract distribution
costs when contractowners surrender or withdraw before distribution costs have
been recovered.
Deductions for premium taxes
Any premium tax or other tax levied by any governmental entity as a result of
the existence of the contracts or the VAA will be deducted from the contract
value when incurred, or at another time of our choosing.
The applicable premium tax rates that states and other governmental entities
impose on the purchase of an annuity are subject to change by legislation, by
administrative interpretation or by judicial action. These premium taxes gener-
ally depend upon the law of your state of residence. The tax ranges from 0.5%
to 5.0%.
Other charges and deductions
There are deductions from and expenses paid out of the assets of the underlying
series that are described in the Prospectus for the series.
Additional information
The administrative and surrender charges described previously may be reduced or
eliminated for any particular contract. However, these charges will be reduced
only to the extent that we anticipate lower distribution and/or administrative
expenses, or that we perform
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fewer sales or administrative services than those originally contemplated in
establishing the level of those charges. Lower distribution and administrative
expenses may be the result of economies associated with (1) the use of mass
enrollment procedures, (2) the performance of administrative or sales func-
tions by the employer, (3) the use by an employer of automated techniques in
submitting deposits or information related to deposits on behalf of its em-
ployees or (4) any other circumstances which reduce distribution or adminis-
trative expenses. The exact amount of administrative and surrender charges ap-
plicable to a particular contract will be stated in that contract.
The contracts
Purchase of contracts
If you wish to purchase a contract, you must apply for it through a sales rep-
resentative authorized by us. The completed application is sent to us and we
decide whether to accept or reject it. If the application is accepted, a con-
tract is prepared and executed by our legally authorized officers. The con-
tract is then sent to you through your sales representative. See Distribution
of the contracts.
If a completed application and all other information necessary for processing
a purchase order are received, an initial purchase payment will be priced no
later than two business days after we receive the order. While attempting to
finish an incomplete application, we may hold the initial purchase payment for
no more than five business days. If the incomplete application cannot be com-
pleted within those five days, you will be informed of the reasons, and the
purchase payment will be returned immediately. Once the application is com-
plete, the initial purchase payment must be priced within two business days.
Who can invest?
To apply for a contract, you must be of legal age in a state where the con-
tracts may be lawfully sold and also be eligible to participate in any of the
qualified or nonqualified plans for which the contracts are designed. The an-
nuitant cannot be older than age 85 (or older than age 80 in Pennsylvania).
Purchase payments
Purchase payments are payable to us at a frequency and in an amount selected
by you in the application. The minimum initial purchase payment is $1,500 for
nonqualified contracts and Section 403(b) transfers/rollovers; and $300 for
qualified contracts. The minimum annual amount for additional purchase pay-
ments is $300 for nonqualified and qualified contracts, with a minimum of $25
per payment. Purchase payments in total may not exceed $1 million for each an-
nuitant. If you stop making purchase payments, the contract will remain in
force as a paid-up contract as long as the total contract value is at least
$300. Payments may be resumed at any time until the annuity commencement date,
the surrender of the contract, the maturity date, the death of the
contractowner or the death of the annuitant, whichever comes first.
Valuation date
Accumulation and annuity units will be valued once daily at the close of trad-
ing (currently 4:00 p.m., New York time) on each day the NYSE is open (valua-
tion date). On any date other than a valuation date, the accumulation unit
value and the annuity unit value will not change.
Allocation of purchase payments
Purchase payments are placed into the VAA's subaccounts, each of which invests
in shares of the class of its corresponding fund of the series, according to
your instructions.
The minimum amount of any purchase payment which can be put into any one
subaccount is $20. Upon allocation to a subaccount, purchase payments are con-
verted into accumulation units. The number of accumulation units credited is
determined by dividing the amount allocated to each subaccount by the value of
an accumulation unit for that subaccount on the valuation date on which the
purchase payment is received at the home office if received before 4:00 p.m.,
New York time. If the purchase payment is received at or after 4:00 p.m., New
York time, we will use the accumulation unit value computed on the next valua-
tion date. The number of accumulation units determined in this way shall not
be changed by any subsequent change in the value of an accumulation unit. How-
ever, the dollar value of an accumulation unit will vary depending not only
upon how well the investments perform, but also upon the expenses of the VAA
and the underlying funds.
Valuation of accumulation units
Purchase payments allocated to the VAA are converted into accumulation units.
This is done by dividing each purchase payment by the value of an accumulation
unit for the valuation period during which the purchase payment is allocated
to the VAA. The accumulation unit value for each subaccount was or will be es-
tablished at the inception of the subaccount. It may increase or decrease from
valuation period to valuation period. The accumulation unit value for a
subaccount for a later valuation period is determined as follows:
(1) The total value of the fund shares held in the subaccount is calculated by
multiplying the number of fund shares owned by the subaccount at the be-
ginning of the valuation period by the net asset value per share of the
fund at the end of the valuation period and adding any dividend or other
distribution of the fund if an ex-dividend date occurs during the valua-
tion period; minus
(2) The liabilities of the subaccount at the end of the valuation period;
these liabilities include daily charges
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imposed on the subaccount, and may include a charge or credit with respect to
any taxes paid or reserved for by us that we determine result from the opera-
tions of the VAA; and
(3) The result of (2) is divided by the number of subaccount units outstanding
at the beginning of the valuation period.
The daily charge imposed on a subaccount for any valuation period are equal to
the daily mortality and expense risk charge multiplied by the number of calen-
dar days in the valuation period. Because a different daily charge is made for
contracts with the EGMDB than for those without, each of the two types of con-
tracts will have different corresponding accumulation unit values on any given
day.
Transfers between subaccounts on or before the annuity commencement date
You may transfer all or a portion of your investment from one subaccount to an-
other. A transfer involves the surrender of accumulation units in one
subaccount and the purchase of accumulation units in the other subaccount. A
transfer will be done using the respective accumulation unit values as of the
valuation date we receive your request provided that your request is received
by 4 p.m. New York time. If your request is received after 4 p.m. New York
time, the transfer will be done using the accumulation unit values as of the
next valuation date.
Transfers between subaccounts are restricted to six times every contract year.
We reserve the right to waive this six-time limit. This limit does not apply to
transfers made under a dollar cost averaging or cross-reinvestment program
elected on forms available from us. The minimum amount which may be transferred
between subaccounts is $300 (or the entire amount in the subaccount, if less
than $300). If the transfer from a subaccount would leave you with less than
$300 in the subaccount, we may transfer the total balance of the subaccount.
A transfer may be made by writing to the home office or, if a telephone ex-
change authorization form (available from us) is on file with us, by a toll-
free telephone call. In order to prevent unauthorized or fraudulent telephone
transfers, we may require the caller to provide certain identifying information
before we will act upon their instructions. We may also assign the contract-
owner a Personal Identification Number (PIN) to serve as identification. We
will not be liable for following telephone instructions we reasonably believe
are genuine. Telephone requests may be recorded and written confirmation of all
transfer requests will be mailed to the contractowner on the next valuation
date. Telephone transfers will be processed on the valuation date that they are
received when they are received at our customer service center before 4 p.m.
New York time.
When thinking about a transfer of contract value, you should consider the in-
herent risk involved. Frequent transfers based on short-term expectations may
increase the risk that a transfer will be made at an inopportune time.
Transfers to and from the General Account on or before the annuity commencement
date
You may transfer all or any part of the contract value from the subaccount(s)
to the fixed side of the contract. These transfers cannot be elected more than
six times every contract year. We reserve the right to waive this six-time lim-
it. The minimum amount which can be transferred to the fixed side is $300 or
the total amount in the subaccount, if less than $300. However, if a transfer
from a subaccount would leave you with less than $300 in the subaccount, we may
transfer the total amount to the fixed side.
You may also transfer all or any part of the contract value from the fixed side
of your contract to the various subaccount(s) subject to the following restric-
tions: (1) the sum of the percentages of fixed value transferred is limited to
25% of the value of the fixed side in any 12 month period; (2) the minimum
amount which can be transferred is $300 or the amount in the fixed account; and
(3) a transfer cannot be made during the first 30 days after the issue date of
the contract.
These transfers cannot be elected more than six times every contract year. We
reserve the right to waive these restrictions. These restrictions do not apply
to transfers made under a dollar cost averaging or cross-reinvestment program
elected on forms available from us.
Transfers after the annuity commencement date
You may transfer all or a portion of your investment in one subaccount to an-
other subaccount or to the fixed side of the contract. Those transfers will be
limited to three times per contract year. However, no transfers are allowed
from the fixed side of the contract to the subaccounts.
Death benefit before the annuity commencement date
You may designate a beneficiary during the life of the annuitant and change the
beneficiary by filing a written request with the home office. Each change of
beneficiary revokes any previous designation. We reserve the right to request
that you send us the contract for endorsement of a change of beneficiary.
If the annuitant dies before the annuity commencement date, a death benefit
equal to the greater of: (1) the GMDB or, if elected, the EGMDB; or (2) the
current value of the contract, will be paid to your designated beneficiary.
The value of the death benefit will be determined as of the date on which the
death claim is approved for payment. This payment will occur upon receipt of:
(1)
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Proof (e.g. an original certified death certificate), or any other proof of
death satisfactory to us, of the death of the annuitant; (2) Written authori-
zation for payment; and (3) Our receipt of all required claim forms, fully
completed.
If the beneficiary is a minor, court documents appointing the
guardian/custodian must be submitted.
The GMDB is equal to the sum of all purchase payments plus any attributable
gain, minus any withdrawals, partial annuitizations and premium taxes in-
curred. We determine the attributable gain separately for each contract year
on its seventh anniversary (once its surrender charge period has expired). The
attributable gain consists of the earnings on a contract year's net purchase
payment(s) [purchase payment(s) minus any withdrawals and partial
annuitizations, applied on a first-in-first-out basis] as of the valuation
date just before its seventh anniversary. This amount will then be included in
the GMDB calculation.
If contract conditions are met, the GMDB will be increased automatically by us
according to the prescribed formula based upon the contract's internal rate of
return. For this to occur, the annuitant, as of the seventh anniversary of
each eligible contract year, must still be living and must be less than 81
years of age. For more information about GMDB calculations, please refer to
the SAI.
The EGMDB is an alternative to the GMDB for owners of nonqualified contracts
or contracts used under an IRA plan. Under the EGMDB, the death benefit pay-
able is the amount equal to the greater of: (1) contract value as of the day
on which Lincoln Life approves the payment of the claim; or (2) the highest
contract value which the contract attains on any policy anniversary date (in-
cluding the inception date) from the time the EGMDB takes effect up to and in-
cluding the annuitant's age up to and including 80. The highest contract value
so determined is then increased by purchase payments and decreased by partial
withdrawals, partial annuitizations and any premium taxes made, effected or
incurred subsequent to the anniversary date on which the highest contract
value is obtained.
You can elect the EGMDB during a limited period ending six months after the
benefit is approved in your state or ending December 31, 1997, whichever is
later. Please see your investment dealer for assistance.
If you elect the EGMDB during this limited period, the benefit will begin as
of the valuation date we receive the request and we will begin deducting the
charge for the EGMDB as of that date. If we receive an election for this bene-
fit on a policy anniversary date, the EGMDB will take effect and we will begin
deducting the charge for the benefit at the valuation time on that date.
If you elect the EGMDB, you may discontinue the benefit at any time by com-
pleting the Enchanced Guaranteed Minimum Death Benefit Discontinuance form and
sending it to Lincoln Life. The benefit will be discontinued effective at the
valuation time on the next policy anniversary date after we receive the re-
quest, and we will cease deducting the charge for the benefit as of that date.
If the benefit is discontinued on the policy anniversary date, the benefit and
the charge will terminate at the valuation time on that date. If you discon-
tinue the benefit, it cannot be reinstated. If you do not elect the EGMDB or
you discontinue the benefit after electing it, the GMDB will apply instead and
will determine what death benefit is payable.
If the death benefit becomes payable, the beneficiary may elect to receive
payment either in the form of a lump-sum settlement or an annuity payout. Fed-
eral tax law requires that an annuity election be made no later than 60 days
after we receive satisfactory notice of death as discussed previously.
If a lump-sum settlement is requested, the proceeds will be mailed within
seven days of receipt of satisfactory claim documentation as discussed previ-
ously, subject to the laws and regulations governing payment of death bene-
fits. If an election has not been made by the end of the 60-day period, a
lump-sum settlement will be made to the beneficiary at that time. This payment
may be postponed as permitted by the 1940 Act.
Payment will be made in accordance with applicable laws and regulations gov-
erning payment of death benefits.
Unless otherwise provided in the beneficiary designation, one of the following
procedures will take place on the death of a beneficiary:
1. If any beneficiary dies before the annuitant, that beneficiary's interest
will go to any other beneficiaries named, according to their respective in-
terests (There are no restrictions on the beneficiary's use of the pro-
ceeds.); and/or
2. If no beneficiary survives the annuitant, the proceeds will be paid to the
contractowner or to his/her estate, as applicable.
Joint/contingent ownership
If a joint owner is named in the application, the joint owners shall be
treated as having equal undivided interests in the contract. Either owner, in-
dependently of the other, may exercise any ownership rights in this contract.
A contingent owner may not exercise ownership rights in this contract while
the contractowner is living.
Death of contractowner
If the contractowner of a nonqualified contract dies before the annuity com-
mencement date, then, in compliance with the tax code, the cash surrender
value (contract value less any applicable charges, fees and taxes) of the con-
tract will be paid as follows:
1. Upon the death of a non-annuitant contractowner, the cash surrender value
shall be paid to any surviving
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joint or contingent owner(s). If no joint or contingent owner has been named,
then the cash surrender value shall be paid to the annuitant named in the
contract; and
2. Upon the death of a contractowner, who is also the annuitant, the death
will be treated as death of the annuitant and the provisions of this con-
tract regarding death of annuitant will control. If the beneficiary is the
surviving spouse of the contractowner, the contract may be continued in the
name of that spouse as the new contractowner. If the surviving spouse
elects to continue the contract, the contract will continue as though no
death benefit had been payable.
The tax code requires that any distribution be paid within five years of the
death of the contractowner unless the beneficiary begins receiving, within one
year of the contractowner's death, the distribution in the form of a life an-
nuity or an annuity for a designated period not exceeding the beneficiary's
life expectancy.
Surrenders and withdrawals
Before the annuity commencement date, we will allow the surrender of the con-
tract or a withdrawal of the contract value upon your written request, subject
to the rules discussed below. Surrender or withdrawal rights after the annuity
commencement date depend upon the annuity payout option you select.
The amount available upon surrender/withdrawal is the cash surrender value at
the end of the valuation period during which the written request for
surrender/withdrawal is received at the home office. Unless a request for
withdrawal specifies otherwise, withdrawals will be made from all subaccounts
within the VAA and from the General Account in the same proportion that the
amount of withdrawal bears to the total contract value. The minimum amount
which can be withdrawn is $300, and the remaining contract value must be at
least $300. Unless prohibited, surrender/ withdrawal payments will be mailed
within seven days after we receive a valid written request at the home office.
The payment may be postponed as permitted by the 1940 Act. Contract proceeds
from the VAA will be paid within seven days, except (i) when the NYSE is
closed (except weekends and holidays); (ii) times when market trading is re-
stricted or the SEC declares an emergency, and we cannot value units or the
funds cannot redeem shares; or (iii) when the SEC so orders to protect
contractowners.
There are charges associated with the surrender of a contract or withdrawal of
contract value. You may specify whether these charges are deducted from the
amount you request to be withdrawn or from the remaining contract value. See
Charges and other deductions.
The tax consequences of a surrender/withdrawal are discussed later in this
booklet. See Federal tax status.
Special restrictions on surrenders/withdrawals apply if your contract is pur-
chased as part of a retirement plan of a public school system or 501(c)(3) or-
ganization under Section 403(b) of the tax code. Beginning January 1, 1989, in
order for a contract to retain its tax-qualified status, Section 403(b) pro-
hibits a withdrawal from a 403(b) contract of post-1988 contributions (and
earnings on those contributions) pursuant to a salary reduction agreement.
However, this restriction does not apply if the annuitant (a) attains age 59
1/2, (b) separates from service, (c) dies, (d) becomes totally and permanently
disabled and/or (e) experiences financial hardship (in which event the income
attributable to those contributions may not be withdrawn).
Pre-1989 contributions and earnings through Decem-ber 31, 1988, are not sub-
ject to the previously stated restriction. Funds transferred to the contract
from a 403(b)(7) custodial account will be subject to the restrictions.
Participants in the Texas Optional Retirement Program should refer to Restric-
tions under the Texas Optional Retirement Program, later in this Prospectus
booklet.
If the total contract value is less than $300, and if no purchase payments
have been made for at least two years, we reserve the right to terminate the
contract.
Reinvestment privilege
You may elect to make a reinvestment purchase with any part of the proceeds of
a surrender/withdrawal, and we will recredit the surrender/withdrawal charges
previously deducted. This election must be made within 30 days of the date of
the surrender/withdrawal, and the repurchase must be of a contract covered by
this Prospectus. A representation must be made that the proceeds being used to
make the purchase have retained their tax-favored status under an arrangement
for which the contracts offered by this Prospectus are designed. The number of
accumulation units which will be credited when the proceeds are reinvested
will be based on the value of the accumulation unit(s) on the next valuation
date. This computation will occur following receipt of the proceeds and re-
quest for reinvestment at the home office. You may utilize the reinvestment
privilege only once. For tax reporting purposes, we will treat a
surrender/withdrawal and a subsequent reinvestment purchase as separate trans-
actions. You should consult a tax advisor before you request a
surrender/withdrawal or subsequent reinvestment purchase.
Amendment of contract
We reserve the right to amend the contract to meet the requirements of the
1940 Act or other applicable federal or state laws or regulations. You will be
notified in writing of any changes, modifications or waivers.
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Commissions
The maximum commission which will be paid to dealers is equal to 4.0% of each
purchase payment; plus an annual continuing commission equal to 0.25% of the
value of contract purchase payments invested for at least 15 months; plus an
annual persistency bonus equal to 0.40% of each contract year's increased GMDB
(regardless of whether or not the EGMDB is in effect), paid over a period of
eight years. At times, additional sales incentives (up to 0.30% of purchase
payments and up to 0.05% of the contract value in the VAA while the EGMDB is
in effect) may be provided to dealers maintaining certain sales volume levels.
In addition, the equivalent of 4.0% of contract value can be paid to dealers
upon annuitization. These commissions are not deducted from purchase payments
or contract value; they are paid by us.
Ownership
As contractowner, you have all rights under the contract. According to Indiana
law, the assets of the VAA are held for the exclusive benefit of all
contractowners and their designated beneficiaries; and the assets of the VAA
are not chargeable with liabilities arising from any other business that we
may conduct. Qualified contracts may not be assigned or transferred except as
permitted by the Employee Retirement Income Security Act (ERISA) of 1974 and
upon written notification to us. Non-qualified contracts may not be collater-
ally assigned. We assume no responsibility for the validity or effect of any
assignment. Consult your tax advisor about the tax consequences of an assign-
ment.
Contractowner questions
The obligations to purchasers under the contracts are those of Lincoln Life.
Questions about your contract should be directed to us at 1-800-942-5500.
Annuity payouts
When you apply for a contract, you may select any annuity commencement date
permitted by law. (Please note the following exception: Contracts issued under
qualified employee pension and profit-sharing trusts [described in Section
401(a) and tax exempt under Section 501(a) of the tax code] and qualified an-
nuity plans [described in Section 403(a) of the tax code], including H.R.10
trusts and plans covering self-employed individuals and their employees, pro-
vide for annuity payouts to start at the date and under the option specified
in the plan.)
The contract provides optional forms of payouts of annuities (annuity op-
tions), each of which is payable on a variable basis, a fixed basis or a com-
bination of both. The contract provides that all or part of the contract value
may be used to purchase an annuity.
You may elect annuity payouts in monthly, quarterly, semiannual or annual in-
stallments. If the payouts from any subaccount would be or become less than
$50, we have the right to reduce their frequency until the payouts are at
least $50 each. Following are explanations of the annuity options available:
Annuity options
Life Annuity. This option offers a periodic payout during the lifetime of the
annuitant and ends with the last payout before the death of the annuitant.
This option offers the highest periodic payout since there is no guarantee of
a minimum number of payouts or provision for a death benefit for beneficia-
ries. However, there is the risk under this option that the annuitant would
receive no payouts if he/she dies before the date set for the first payout;
only one payout if death occurs before the second scheduled payout, and so on.
Life Income with Payouts Guaranteed for Designated Period. This option guaran-
tees periodic payouts during a designated period, usually 10 or 20 years, and
then continues throughout the lifetime of the annuitant. The designated period
is selected by the contractowner.
Joint Life Annuity. This option offers a periodic payout during the joint
lifetime of the annuitant and a designated joint annuitant. The payouts con-
tinue during the lifetime of the survivor.
Joint Life Annuity with Guaranteed Period. This option guarantees periodic
payouts during a designated period, usually 10 or 20 years, and continues dur-
ing the joint lifetime of the annuitant and a designated joint annuitant. The
payouts continue during the lifetime of the survivor. The designated period is
selected by the contractowner.
Joint-and-Two-Thirds Survivor Annuity. This option provides a periodic payout
during the joint lifetime of the annuitant and a designated joint annuitant.
When one of the joint annuitants dies, the survivor receives two thirds of the
periodic payout made when both were alive.
Unit Refund Life Annuity. This option offers a periodic payout during the
lifetime of the annuitant with the guarantee that upon death a payout will be
made of the value of the number of annuity units (see Variable annuity
payouts) equal to the excess, if any, of: (a) the total amount applied under
this option divided by the annuity unit value for the date payouts begin, di-
vided by (b) the annuity units represented by each payout to the annuitant
multiplied by the number of payouts paid before death. The value of the number
of annuity units is computed on the date the death claim is approved for pay-
ment by the home office.
General information
Under the options listed above, you may not make withdrawals. Other options,
with or without withdrawal features, may be made available by us. Options
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are only available to the extent they are consistent with the requirements of
the contract as well as Sections 72(s) and 401(a)(9) of the tax code, if appli-
cable. The mortality and expense risk charge will be assessed on all variable
annuity payouts, including options that may be offered that do not have a life
contingency and therefore no mortality risk.
The annuity commencement date is usually on or before the annuitant's 85th
birthday. You may change the annuity commencement date, change the annuity op-
tion or change the allocation of the investment among subaccounts up to 30 days
before the scheduled annuity commencement date, upon written notice to the home
office. You must give us at least 30 days notice before the date on which you
want payouts to begin. If proceeds become available to a beneficiary in a lump
sum, the beneficiary may choose any annuity payout option.
Unless you select another option, the contract automatically provides for a
life annuity with annuity payouts guaranteed for 10 years (on a fixed, variable
or combination fixed and variable basis, in proportion to the account alloca-
tions at the time of annuitization) except when a joint life payout is required
by law. Under any option providing for guaranteed payouts, the number of
payouts which remain unpaid at the date of the annuitant's death (or surviving
annuitant's death in case of a joint life annuity) will be paid to your benefi-
ciary as payouts become due.
Variable annuity payouts
Variable annuity payouts will be determined using:
1. The contract value on the annuity commencement date;
2. The annuity tables contained in the contract;
3. The annuity option selected; and
4. The investment performance of the fund(s) selected.
To determine the amount of payouts, we make this calculation:
1. Determine the dollar amount of the first periodic payout; then
2. Credit the contract with a fixed number of annuity units equal to the first
periodic payout divided by the annuity unit value; and
3. Calculate the value of the annuity units each period thereafter.
We assume an investment return of 4% per year, as applied to the applicable
mortality table. The amount of each payout after the initial payout will depend
upon how the underlying fund(s) perform, relative to the 4% assumed rate. If
the actual net investment rate (annualized) exceeds 4%, the payment will in-
crease at a rate equal to the amount of excess. Conversely, if the actual rate
is less than 4%, annuity payouts will decrease. There is a more complete expla-
nation of this calculation in the SAI.
Federal tax matters
Introduction
The Federal income tax treatment of the contract is complex and sometimes un-
certain. The Federal income tax rules may vary with your particular circum-
stances. This discussion does not include all the Federal income tax rules that
may affect you and your contract. This discussion also does not address other
Federal tax consequences, or state or local tax consequences, associated with
the contract. As a result, you should always consult a tax advisor about the
application of tax rules to your individual situation.
Taxation of nonqualified annuities
This part of the discussion describes some of the Federal income tax rules ap-
plicable to nonqualified annuities. A nonqualified annuity is a contract not
issued in connection with a qualified retirement plan receiving special tax
treatment under the tax code, such as an IRA or a section 403(b) plan.
Tax deferral on earnings
The Federal income tax law generally does not tax any increase in your contract
value until you receive a contract distribution. However, for this general rule
to apply, certain requirements must be satisfied:
. An individual must own the contract (or the tax law must treat the contract
as owned by the individual).
. The investments of the VAA must be "adequately diversified" in accordance
with IRS regulations.
. Your right to choose particular investments for a contract must be limited.
. The annuity commencement date must not occur near the end of the annuitant's
life expectancy.
Contracts not owned by the individual
If a contract is owned by an entity (rather than an individual) the tax code
generally does not treat it as an annuity contract for Federal income tax pur-
poses. This means that the entity owning the contract pays tax currently on the
excess of the contract value over the purchase payments for the contract. Exam-
ples of contracts where the owner pays current tax on the contract's earnings
are contracts issued to a corporation or a trust. Exceptions to this rule ex-
ist. For example, the tax code treats a contract as owned by an individual if
the named owner is a trust or other entity that holds the contract as an agent
for an individual. However, this exception does not apply in the case of any
employer that owns a contract to provide deferred compensation for its employ-
ees.
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Investments in the VAA must be diversified
For a contact to be treated as an annuity for Federal income tax purposes, the
investments of the VAA must be "adequately diversified." IRS regulations de-
fine standards for determining whether the investments of the VAA are ade-
quately diversified. If the VAA fails to comply with these diversification
standards, you could be required to pay tax currently on the excess of the
contract value over the contract purchase payments. Although we do not control
the investments of the underlying investment options, we expect that the un-
derlying investment options will comply with the IRS regulations so that the
VAA will be considered "adequately diversified."
Restrictions
Federal income tax law limits your right to choose particular investments for
the contract. Because the IRS has not issued guidance specifying those limits,
the limits are uncertain and your right to allocate contract value among
subaccounts may exceed those limits. If so, you would be treated as the owner
of the assets of the VAA and thus subject to current taxation on the income
and gains from those assets. We do not know what limits may be set by the IRS
in any guidance that it may issue and whether any such limits will apply to
existing contracts. We reserve the right to modify the contract without your
consent to try to prevent the tax law from considering you as the owner of the
assets of the VAA.
Age at which annuity payouts begin
Federal income tax rules do not expressly identify a particular age by which
annuity payouts must begin. However, those rules do require that an annuity
contract provide for amortization, through annuity payouts, of the contract's
purchase payments and earnings. If annuity payouts under the contract begin or
are scheduled to begin on a date past the annuitant's 85th birthday, it is
possible that the tax law will not treat the contract as an annuity for Fed-
eral income tax purposes. In that
event, you would be currently taxable on the excess of the contract value over
the purchase payments of the contract.
Tax treatment of payments
We make no guarantees regarding the tax treatment of any contract or of any
transaction involving a contract. However, the rest of this discussion assumes
that your contract will be treated as an annuity for Federal income tax pur-
poses and that the tax law will not tax any increase in your contract value
until there is a distribution from your contract.
Taxation of withdrawals and surrenders
You will pay tax on withdrawals to the extent your contract value exceeds your
purchase payments in the contract. This income (and all other income from your
contract) is considered ordinary income. A higher rate of tax is paid on ordi-
nary income than on capital gains. You will pay tax on a surrender to the ex-
tent the amount you receive extends your purchase payments. In certain circum-
stances, your purchase payments are reduced by amounts received from your con-
tract that were not included in income.
Taxation of annuity payouts
The tax code imposes tax on a portion of each annuity payout (at ordinary tax
rates) and treats a portion as a nontaxable return of your purchase payments
in the contract. We will notify you annually of the taxable amount of your an-
nuity payout. Once you have recovered the total amount of the purchase payment
in the contract, you will pay tax on the full amount of your annuity payouts.
If annuity payouts end because of the annuitant's death and before the total
amount of the purchase payments in the contract has been received, the amount
not received generally will be deductible.
Taxation of death benefits
We may distribute amounts from your contract because of the death of a
contractowner or an annuitant. The tax treatment of these amounts depends on
whether you or the annuitant dies before or after the annuity commencement
date.
. Death prior to the annuity commencement date--
. If the beneficiary receives death benefits under an annuity payout option,
they are taxed in the same manner as annuity payouts.
. If the beneficiary does not receive death benefits under an annuity payout
option, they are taxed in the same manner as withdrawal.
. Death after the annuity commencement date--
. If death benefits are received in accordance with the existing annuity
payout option, they are excludible from income if they do not exceed the
purchase payments not yet distributed from the contract. All annuity
payouts in excess of the purchase payments not previously received are
includible in income.
. If death benefits are received in a lump sum, the tax law imposes tax on
the amount of death benefits which exceeds the amount of purchase payments
not previously received.
Penalty taxes payable on withdrawals, surrenders, or annuity payouts
The tax code may impose a 10% penalty tax on any distribution from your con-
tract which you must include in your gross income. The 10% penalty tax does
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not apply if one of several exceptions exists. These exceptions include with-
drawals, surrenders or annuity payouts that:
. you receive on or after you reach age 59 1/2,
. you receive because you became disabled (as defined in the tax law),
. a beneficiary receives on or after your death, or
. you receive as a series of substantially equal periodic payments for life (or
life expectancy).
Special rules if you own more than one annuity contract
In certain circumstances, you must combine some or all of the nonqualified an-
nuity contracts you own in order to determine the amount of an annuity payout,
a surrender or a withdrawal that you must include in income. For example, if
you purchase two or more deferred annuity contracts from the same life insur-
ance company (or its affiliates) during any calendar year, the tax code treats
all such contracts as one contract. Treating two or more contracts as one con-
tract could affect the amount of a surrender, withdrawal or an annuity payout
that you must include in income and the amount that might be subject to the
penalty tax described above.
Loans and assignments
Except for certain qualified contracts, the tax code treats any amount received
as a loan under a contract,
and any assignments or pledge (or agreement to assign or pledge) any portion of
your contract value, as withdrawal of such amount or portion.
Gifting a contract
If you transfer ownership of your contract to a person other than your spouse
(or to your former spouse incident to divorce), and receive a payment less than
your contract's value, you will pay tax on your contract value to the extent it
exceeds your purchase payments not previously received. The new owner's pur-
chase payments in the contract would then be increased to reflect the amount
included in income.
Charges for a contract's death benefit
Your contract may have an EGMDB, for which you pay an annual charge, computed
daily. It is possible that the tax law may treat all or a portion of the EGMDB
charge as a contract withdrawal.
Loss of income deduction
After June 8, 1997, if a contract is issued to a taxpayer that is not an indi-
vidual, or if a contract is held for the benefit of an entity, the entity will
lose a portion of its deduction for otherwise deductible interest expenses.
This disallowance does not apply if you pay tax on the annual increase in the
contract value. Entities that are considering purchasing a contract, or enti-
ties that will benefit from someone else's ownership of a contract, should con-
sult a tax advisor.
Qualified retirement plans
We also designed the contracts for use in connection with certain types of re-
tirement plans that receive favorable treatment under the tax code. Contracts
issued to or in connection with a qualified retirement plan are called "quali-
fied contracts." We issue contracts for use with different types of qualified
plans. The Federal income tax rules applicable to those plans are complex and
varied. As a result, this Prospectus does not attempt to provide more than gen-
eral information about use of the contract with various types of qualified
plans. Persons planning to use the contract in connection with a qualified plan
should obtain advice from a competent tax advisor.
Types of qualified contracts and terms of contracts
Currently, we issue contracts in connection with the following types of quali-
fied plans:
. Individual Retirement Accounts and Annuities ("Traditional IRAs")
. Roth IRAs
. Simplified Employee Pensions ("SEPs")
. Savings Incentive Matched Plan for Employees ("SIMPLE 401(k) plans")
. Public School system and tax-exempt organization annuity plans ("403(b)
plans")
. Qualified corporate employee pension and profit sharing plans ("401(a)
plans") and qualified annuity plans ("403(a) plans")
. Self-employed individual plans ("H.R. 10 plans" or "Keogh Plans")
. Deferred compensation plans of state and local governments and tax-exempt or-
ganizations ("457 plans").
Section 403(b) business will normally be accepted only for purchase payments
qualifying as a 403(b) lump sum transfer or rollover. We may issue a contract
for use with other types of qualified plans in the future.
We will amend contracts to be used with a qualified plan as generally necessary
to conform to tax law requirements for the type of plan. However, the rights of
a person to any qualified plan benefits may be subject to the plan's terms and
conditions, regardless of the contract's terms and conditions. In addition, we
are not bound by the terms and conditions of qualified plans to the extent such
terms and conditions contradict the contract, unless we consent.
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Tax treatment of qualified contracts
The Federal income tax rules applicable to qualified plans and qualified con-
tracts vary with the type of plan and contract. For example,
. Federal tax rules limit the amount of purchase payments that can be made, and
the tax deduction or exclusion that may be allowed for the purchase payments.
These limits vary depending on the type of qualified plan and the plan par-
ticipant's specific circumstances, e.g., the participant's compensation.
. Under most qualified plans, e.g., 403(b) plans and Traditional IRAs, the an-
nuitant must begin receiving payments from the contract in certain minimum
amounts by a certain age, typically age 70 1/2. However, these "minimum dis-
tribution rules" do not apply to a Roth IRA.
. Loans are allowed under certain types of qualified plans, but Federal income
tax rules prohibit loans under other types of qualified plans. For example,
Federal income tax rules permit loans under some section 403(b) plans, but
prohibit loans under Traditional and Roth IRAs. If allowed, loans are subject
to a variety of limitations, including restrictions as to the loan amount,
the loan's duration, and the manner of repayment. Your contract or plan may
or may not permit loans.
Tax treatment of payments
Federal income tax rules generally include distributions from a qualified con-
tract in the recipient's income as ordinary income. These taxable distributions
will include purchase payments that were deductible or excludible from income.
Thus, under many qualified contracts the total amount received is included in
income since a deduction or exclusion from income was taken for purchase pay-
ments. There are exceptions. For example, you do not include amounts received
from a Roth IRA in income if certain conditions are satisfied.
Failure to comply with the minimum distribution rules applicable to certain
qualified plans, such as Traditional IRAs, will result in the imposition of an
excise tax. This excise tax generally equals 50% of the amount by which a mini-
mum required distribution exceeds the actual distribution from the qualified
plan.
Federal penalty taxes payable on distributions
The tax code may impose a 10% penalty tax on the amount received from the qual-
ified contract that must be included in income. The tax code does not impose
the penalty tax if one of several exceptions applies. The exceptions vary de-
pending on the type of qualified contract you purchase. For example, in the
case of an IRA, exceptions provide that the penalty tax does not apply to a
withdrawal, surrender or annuity payout:
. received on or after the annuitant reaches age 59 1/2,
. received on or after the annuitant's death or because of the annuitant's dis-
ability (as defined in the tax law),
. received as a series of substantially equal periodic payments for the
annuitant's life (or life expectancy), or
. received as reimbursement for certain amounts paid for medical care.
These exceptions, as well as certain others not described here, generally apply
to taxable distributions from other qualified plans. However, the specific re-
quirements of the exception may vary.
Transfers and direct rollovers
In many circumstances, money may be moved between qualified contracts and qual-
ified plans by means of a rollover or transfer. Special rules apply to such
rollovers and transfers. If the applicable rules are not followed, you may suf-
fer adverse Federal income tax consequences, including paying taxes which might
not otherwise have had to be paid. A qualified advisor should always be con-
sulted before you move or attempt to move funds between any qualified plan or
contract and another qualified plan or contract.
The direct rollover rules apply to certain payments (called "eligible rollover
distributions") from section 401(a) plans, section 403(a) or (b) plans, H.R. 10
plans and contracts used in connection with these types of plans. (The direct
rollover rules do not apply to distributions from IRAs or section 457 plans.)
The direct rollover rules require that we withhold Federal income tax equal to
20% of the eligible rollover distribution from the distribution amount, unless
you elect to have the amount directly transferred to certain qualified plans or
contracts. Before we send a rollover distribution, we will provide the recipi-
ent with a notice explaining these requirements and how the 20% withholding can
be avoided by electing a direct rollover.
The EGMDB and IRAs
Pursuant to IRS regulations, IRAs may not invest in life insurance contracts.
We do not believe that these regulations prohibit the EGMDB from being provided
under the contracts when we issue the contract as Traditional IRAs or Roth
IRAs. However, the law is unclear and it is possible that the presence of the
EGMDB under a contract issued as a Traditional IRA or Roth IRA could result in
increased taxes to you.
Federal income tax withholding
We will withhold and remit to the IRS a part of the taxable portion of each
distribution made under a contract unless the distributee notifies us at or be-
fore the time of the distribution that tax is not to be withheld. In certain
circumstances, Federal income tax rules may require us to withhold tax. At the
time a withdrawal, surrender or annuity payout is requested, we will give the
recipient an explanation of the withholding requirements.
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Tax status of Lincoln Life
Under existing Federal income tax laws, Lincoln Life does not pay tax on in-
vestment income and realized capital gains of the VAA. Lincoln Life does not
expect that it will incur any Federal income tax liability on the income and
gains earned by the VAA. We, therefore, do not impose a charge for Federal in-
come taxes. If Federal income tax law changes and we must pay tax on some or
all of the income and gains earned by the VAA, we may impose a charge against
the VAA to pay the taxes.
Changes in law
The above discussion is based on the tax code, IRS regulations and interpreta-
tions existing on the date of this Prospectus. However, Congress, The IRS and
the courts may modify these authorities, sometimes retroactively.
Voting rights
As required by law, we will vote the series shares held in the VAA at meetings
of the shareholders of the series. The voting will be done according to the
instructions of contractowners who have interests in any subaccounts which in-
vest in funds of the series. If the 1940 Act or any regulation under it should
be amended or if present interpretations should change, and if as a result we
determine that we are permitted to vote the series shares in our own right, we
may elect to do so.
The number of votes which you have the right to cast will be determined by ap-
plying your percentage interest in a subaccount to the total number of votes
attributable to the subaccount. In determining the number of votes, fractional
shares will be recognized. After the annuity commencement date, the votes at-
tributable to a contract will decrease.
Series shares of a class held in a subaccount for which no timely instructions
are received will be voted by us in proportion to the voting instructions
which are received for all contracts participating in that subaccount. Voting
instructions to abstain on any item to be voted on will be applied on a pro-
rata basis to reduce the number of votes eligible to be cast.
Whenever a shareholder's meeting is called, each person having a voting inter-
est in a subaccount will receive proxy voting material, reports and other ma-
terials relating to the series. Since the series engages in shared funding,
other persons or entities beside Lincoln Life may vote series shares. See Sale
of fund shares by the series.
Distribution of the contracts
American Funds Distributors, Inc. (AFD), 333 South Hope Street, Los Angeles,
Ca 90071, is the distributor and principal underwriter of the contracts. They
will be sold by properly licensed registered representatives of independent
broker-dealers which in turn have selling agreements with AFD and have been
licensed by state insurance departments to represent us. AFD is registered
with the SEC under the Securities Exchange Act of 1934 as a broker-dealer and
is a member of the National Association of Securities Dealers (NASD). Lincoln
Life will offer contracts in all states where it is licensed to do business.
Return privilege
Within the free-look period after you receive the contract, you may cancel it
for any reason by delivering or mailing it postage pre-paid, to the home of-
fice at P.O. Box 2348, 1300 South Clinton Street, Fort Wayne, Indiana, 46801.
A contract canceled under this provision will be void. With respect to the
fixed portion of a contract, we will return purchase payments. With respect to
the VAA, except as explained in the following paragraph, we will return the
contract value as of the date of receipt of the cancellation, plus any con-
tract maintenance and administrative fees and any premium taxes which had been
deducted. No contingent deferred sales charge will be assessed. A purchaser
who participates in the VAA is subject to the risk of a market loss during the
free-look period.
For contracts written in those states whose laws require that we assume this
market risk during the free-look period, a contract may be canceled, subject
to the conditions explained before, except that we will return only the pur-
chase payment(s).
State regulation
As a life insurance company organized and operated under Indiana law, we are
subject to provisions governing life insurers and to regulation by the Indiana
Commissioner of Insurance.
Our books and accounts are subject to review and examination by the Indiana
Insurance Department at all times. A full examination of our operations is
conducted by that Department at least every five years.
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 partic-
ipants in the Texas Optional Retirement Program (ORP) to redeem their interest
in a variable annuity contract issued under the ORP only upon:
1. Termination of employment in all institutions of higher education as de-
fined in Texas law;
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2. Retirement; or
3. Death.
Accordingly, participants in the ORP will be required to obtain a certificate
of termination from their employer(s) before accounts can be redeemed.
Records and reports
As presently required by the 1940 Act and applicable regulations, we are re-
sponsible for maintaining all records and accounts relating to the VAA. We
have entered into an agreement with the Delaware Management Company, 2005 Mar-
ket Street, Philadelphia, PA 19203, to provide accounting services, to the
VAA. We will mail to you, at your last known address of record at the home of-
fice, at least semiannually after the first contract year, reports containing
information required by the 1940 Act or any other applicable law or regula-
tion.
Other information
A Registration Statement has been filed with the SEC, under the Securities Act
of 1933 as amended, for the contracts being offered here. This Prospectus does
not contain all the information in the Registration Statement, its amendments
and exhibits. Please refer to the Registration Statement for further informa-
tion about the VAA, Lincoln Life and the contracts offered. Statements in this
Prospectus about the content of contracts and other legal instruments are sum-
maries. For the complete text of those contracts and instruments, please refer
to those documents as filed with the SEC.
Lincoln National Variable Annuity Account H and Lincoln National Flexible Pre-
mium Variable Life Accounts F, G and J (all registered as investment companies
under the 1940 Act) and Lincoln National Flexible Premium Group Variable Annu-
ity Accounts 50, 51 and 52 are all segregated investment accounts of Lincoln
Life which also invest in the series. The series also offers shares of the
funds to other segregated investment accounts.
We are a member of the Insurance Marketplace Standards Association ("IMSA")
and may include the IMSA logo and information about IMSA membership in our ad-
vertisements. Companies that belong to IMSA subscribe to a set of ethical
standards covering the various aspects of sales and services for individually
sold life insurance and annuities.
Preparing for Year 2000
Many existing computer programs use only two digits in the date field to iden-
tify the year. If left uncorrected these programs, which were designed and de-
veloped without considering the impact of the upcoming change in the century,
could fail to operate or could produce erroneous results when processing dates
after December 31, 1999. For example, for a bond with a stated maturity date
of July 1, 2000, a computer program could read and store the maturity date as
July 1, 1900. This problem is known by many names, such as the "Year 2000
Problem", "Y2K", and the "Millenium Bug".
The Year 2000 Problem affects virtually all computer programs worldwide. It
can cause a computer system to suddenly stop operating. It can also result in
a computer corrupting vital company records, and the problem could go unde-
tected for a long time. For our products, if left unchecked it could cause
such problems as purchase payment collection and deposit errors; claim payment
difficulties; accounting errors; erroneous unit values; and difficulties or
delays in processing transfers, surrenders and withdrawals. In a worst case
scenario, this could result in a material disruption to the operations both of
Lincoln Life and of Delaware Service Company (Delaware), the provider of the
accounting and valuation services for the VAA.
However, both companies are wholly owned by Lincoln National Corporation
(LNC), which has had Year 2000 processes in place since 1996. LNC projects ag-
gregate expenditures in excess of $92 million for its Y2K efforts through the
year 2000. Both Lincoln Life and Delaware have dedicated Year 2000 teams and
steering committees that are answerable to their counterparts in LNC.
In light of the potential problems discussed above, Lincoln Life, as part of
its Year 2000 updating process, has assumed responsibility for correcting all
high-priority Information Technology (IT) systems which service the VAA. Dela-
ware is responsible for updating all its high-priority IT systems to support
these vital services. The Year 2000 effort, for both IT and non-IT systems, is
organized into four phases:
. awareness-raising and inventory of all assets (including third-party
agent and vendor relationships)
. assessment and high-level planning and strategy
. remediation of affected systems and equipment; and
. testing to verify Year 2000 readiness.
Both companies are currently on schedule to have their high-priority IT sys-
tems remediated and tested to demonstrate readiness by June 30, 1999. During
the third and fourth quarters of 1999 additional testing of the environment
will continue. Both companies are currently on schedule to have their high-
priority non-IT systems (elevators, heating and ventilation, security systems,
etc.) remediated and tested by October 31, 1999.
The work on Year 2000 issues has not suffered significant delays; however,
some uncertainty remains. Specific factors that give rise to his uncertainty
include (but are certainly not limited to) a possible loss of technical re-
sources to perform the work; failure to identify all susceptible systems; and
non-compliance by third parties whose systems and operations impact Lincoln
22
<PAGE>
Life. In a report dated February 26, 1999, entitled, Investigating the Impact
of the Year 2000 Technology Problem, S. Prt. 106-10, the U.S. Senate Special
Committee on the Year 2000 Technology Problem expressed its concern that "Fi-
nancial services firms . . . are particularly vulnerable to . . . the risk
that a material customer or business partner will fail, as a result of the
computer problems, to meet its obligations".
One important source of uncertainty is the extent to which the key trading
partners of Lincoln Life and of Delaware will be successful in their own
remediation and testing efforts. Lincoln Life and Delaware have been monitor-
ing the progress of their trading partners; however, the efforts of these
partners are beyond our control.
Lincoln Life and Delaware expect to have completed their necessary remediation
and testing efforts prior to December 31, 1999. However, given the nature and
complexity of the problem, there can be no guarantee by either company that
there will not be significant computer problems after December 31, 1999.
Legal proceedings
Lincoln Life is involved in various pending or threatened legal proceedings
arising from the conduct of its business. Most of these proceedings are rou-
tine and in the
Statement of additional
information table of
contents for
Separate Account E
<TABLE>
<CAPTION>
Item Page
- ------------------------------------------
<S> <C>
General information and history of
Lincoln Life B-2
- ------------------------------------------
Special terms B-2
- ------------------------------------------
Services B-2
- ------------------------------------------
Principal underwriter B-2
- ------------------------------------------
Purchase of securities being offered B-2
- ------------------------------------------
</TABLE>
For a free copy of the SAI please see page one of this booklet.
ordinary course of business. In some instances they include claims for unspec-
ified or substantial punitive damages and similar types of relief in addition
to amounts for equitable relief. After consultation with legal counsel and a
review of available facts, it is management's opinion that the ultimate lia-
bility, if any, under these suits will not have a material adverse effect on
the financial position of Lincoln Life.
Lincoln Life is presently defending three lawsuits in which Plaintiffs seek to
represent national classes of policyholders in connection with alleged fraud,
breach of contract and other claims relating to the sale of interest-sensitive
universal and participating whole life insurance policies. As of the date of
this prospectus, the courts have not certified a class in any of the suits.
Plaintiffs seek unspecified damages and penalties for themselves and on behalf
of the putative class. Although the relief sought in these cases is substan-
tial, the cases are in the preliminary stages of litigation, and it is prema-
ture to make assessments about potential loss, if any. Management is defending
these suits vigorously. The amount of liability, if any, which may ultimately
arise as a result of these suits cannot be reasonably determined at this time.
<TABLE>
<CAPTION>
Item Page
- ------------------------------------------
<S> <C>
Annuity payouts B-2
- ------------------------------------------
Federal tax status B-3
- ------------------------------------------
Automatic increase in the guaranteed
minimum death benefit B-6
- ------------------------------------------
Financial statements B-6
- ------------------------------------------
</TABLE>
23
<PAGE>
The American Legacy
Lincoln National
Variable Annuity Account E (Registrant)
Lincoln National
Life Insurance Co. (Depositor)
Statement of additional information (SAI)
This SAI should be read in conjunction with the Prospectus of Lincoln National
Variable Annuity Account E dated April 30, 1999. You may obtain a copy of the
Account E Prospectus on request and without charge. Please write American Leg-
acy Customer Service, Lincoln National Life Insurance Co., P.O. Box 2348, Fort
Wayne, Indiana 46801 or call 1-800-942-5500.
Table of contents
<TABLE>
<CAPTION>
Page
- ------------------------------------------
<S> <C>
General information and history of
Lincoln Life B-2
- ------------------------------------------
Special terms B-2
- ------------------------------------------
Services B-2
- ------------------------------------------
Principal underwriter B-2
- ------------------------------------------
Purchase of securities being offered B-2
- ------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Page
-
<S> <C>
Annuity payouts B-2
-
Federal tax status B-3
-
Automatic increase in the guaranteed
minimum death benefit B-6
-
Financial statements B-6
-
</TABLE>
The date of this SAI is April 30, 1999.
<PAGE>
General information and history of Lincoln National Life Insurance Co.
(Lincoln Life)
The prior Depositor of the Account, Lincoln National Pension Insurance Compa-
ny, was merged into Lincoln Life, effective January 1, 1989. Lincoln Life, or-
ganized in 1905, is an Indiana stock insurance corporation, engaged primarily
in the direct issuance of annuities and life and health insurance contracts,
and is also a professional reinsurer. Lincoln Life is wholly owned by Lincoln
National Corporation (LNC), a publicly held insurance holding company domi-
ciled in Indiana.
Special terms
The special terms used in this SAI are the ones defined in the Prospectus. In
connection with the term, valuation date, the NYSE is currently closed on
weekends and on these holidays: New Year's Day, Martin Luther King's Birthday,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. If any of these holidays occurs on a week-
end day, the Exchange may also be closed on the business day occurring just
before or just after the holiday.
Services
Independent auditors
The financial statements of the variable annuity account (VAA) and the statu-
tory-basis financial statements of Lincoln Life appearing in this SAI and Reg-
istration Statement have been audited by Ernst & Young LLP, independent audi-
tors, as set forth in their reports which also appear elsewhere in this docu-
ment and in the Registration Statement. The financial statements audited by
Ernst & Young LLP have been included in this document in reliance on their re-
ports given on their authority as experts in accounting and auditing.
Keeper of records
All accounts, books, records and other documents which are required to be
maintained for the VAA are maintained by Lincoln Life or by third parties re-
sponsible to Lincoln Life. We have entered into an agreement with the Delaware
Management Company, 2005 Market Street, Philadelphia, PA 19203, to provide
accounting services to the VAA. No separate charge against the assets of the
VAA is made by Lincoln Life for this service.
Principal underwriter
Lincoln Life has contracted with American Funds Distributors, Inc. (AFD), 333
South Hope St., Los Angeles, California 90071, a licensed broker-dealer, to
distribute the contracts through certain legally authorized sales persons and
organizations (brokers). AFD and its brokers are compensated under a standard
compensation schedule.
Purchase of securities being offered
The contracts are no longer being offered. Although there are no special pur-
chase plans for any class of prospectus buyers, the contingent deferred sales
charge normally assessed upon surrender or withdrawal of contract value will
be waived for officers, directors or bona fide full time employees of the LNC,
the Capital Group, Inc., their affiliated or managed companies and certain
other persons. See Charges and other deductions in the Prospectus.
Both before and after the annuity commencement date, there are exchange privi-
leges between subaccounts, and from the VAA to the General Account, subject to
restrictions set out in the Prospectus. See The contracts, in the Prospectus.
No exchanges are permitted between the VAA and other separate accounts.
Annuity payouts
Variable annuity payouts
Variable annuity payouts will be determined on the basis of: (1) the dollar
value of the contract before the annuity commencement date; (2) the annuity
tables contained in the contract; (3) the type of annuity option selected; and
(4) the investment results of the fund(s) selected. In order to determine the
amount of variable annuity payouts, Lincoln Life makes the following calcula-
tion: first, it determines the dollar amount of the first payout; second, it
credits the contract with a fixed number of annuity units based on the amount
of the first payout; and third, it calculates the value of the annuity units
each period thereafter. These steps are explained as follows.
The dollar amount of the first periodic variable annuity payout is determined
by applying the total value of the accumulation units credited under the con-
tract valued as of the annuity commencement date (less any premium taxes) to
the annuity tables contained in the contract. The first variable annuity pay-
out will be paid 14 days after the annuity commencement date. This day of the
month will become the day on which all future annuity payouts will be paid.
Amounts shown in the tables are based on
B-2
<PAGE>
the 1971 Individual Annuity Mortality Tables, modified, with an assumed in-
vestment return at the rate of 4% per annum. The first annuity payout is de-
termined by multiplying the benefit per $1,000 of value shown in the contract
tables by the number of thousands of dollars of value accumulated under the
contract. These annuity tables vary according to the form of annuity selected
and the age of the annuitant at the annuity commencement date. The 4% interest
rate stated above is the measuring point for subsequent annuity payouts. If
the actual net investment rate (annualized) exceeds 4%, the payout will in-
crease at a rate equal to the amount of such excess. Conversely, if the actual
rate is less than 4%, annuity payouts will decrease. If the assumed rate of
interest were to be increased, annuity payouts would start at a higher level
but would decrease more rapidly or increase more slowly.
Lincoln Life may use sex distinct annuity tables in contracts that are not as-
sociated with employer sponsored plans and where not prohibited by law.
At the annuity commencement date, the contract is credited with annuity units
for each subaccount on which variable annuity payouts are based. The number of
annuity units to be credited is determined by dividing the amount of the first
periodic payout by the value of an annuity unit in each subaccount selected.
Although the number of annuity units is fixed by this process, the value of
such units will vary with the value of the underlying fund. The amount of the
second and subsequent annuity payouts is determined by multiplying the
contractowner's fixed number of annuity units in each subaccount by the appro-
priate annuity unit value for the valuation date ending 14 days before the
date that payout is due.
The value of each subaccount's annuity unit will be set initially at $1.00.
The annuity unit value for each subaccount at the end of any valuation date is
determined by multiplying the subaccount annuity unit value for the immedi-
ately preceding valuation date by the product of:
a. The net investment factor of the subaccount for the valuation period for
which the annuity unit value is being determined, and
b. A factor to neutralize the assumed investment return in the annuity table.
The value of the annuity units is determined as of a valuation date 14 days
before the payout date in order to permit calculation of amounts of annuity
payouts and mailing of checks in advance of their due dates. Such checks will
normally be issued and mailed at least three days before the due date.
Proof of age, sex and survival
Lincoln Life may require proof of age, sex or survival of any payee upon whose
age, sex or survival payouts depend.
Federal tax status
General
The operations of the VAA form a part of, and are taxed with, the operations
of Lincoln Life under the Internal Revenue Code of 1986, as amended (the
code). Investment income and realized net capital gains on the assets of the
VAA are reinvested and taken into account in determining the accumulation and
annuity unit values. As a result, such investment income and realized net cap-
ital gain are automatically retained as part of the reserves under the con-
tract. Under existing federal income tax law, Lincoln Life believes that the
VAA investment income and realized net capital gain are not taxed to the ex-
tent they are retained as part of the reserves under the contract. According-
ly, Lincoln Life does not anticipate that it will incur any federal income tax
liability attributable to the VAA, and therefore it does not intend to make
any provision for such taxes. However, if changes in the federal tax laws or
interpretations thereof result in Lincoln Life's being taxed on income or gain
attributable to the VAA, then Lincoln Life may impose a charge against the VAA
(with respect to some or all contracts) in order to make provision for payment
of such taxes.
Tax status of nonqualified contracts
Section 817(h) of the code provides that separate account investments (or the
investments of a mutual fund the shares of which are owned by separate ac-
counts of insurance companies) underlying the contract be adequately diversi-
fied in accordance with Treasury regulations in order for the contract to
qualify as an annuity contract under Section 72 of the code. The VAA, through
each of the funds, intends to comply with the diversification requirements
prescribed in regulations, which affect how the assets in each of the funds in
which the VAA invests may be invested. Capital Research and Management Company
is not affiliated with Lincoln Life and Lincoln Life does not have control
over the series or its investments. However, Lincoln Life believes that each
fund in which the VAA owns shares will meet the diversification requirements
and that therefore the contracts will be treated as annuities under the code.
The regulations relating to diversification requirements do not provide guid-
ance concerning the extent to which contractowners may direct their invest-
ments to particular subaccounts of a separate account. When guidance is pro-
vided, the contract may need to be modified to comply with that guidance. For
these reasons, Lincoln Life reserves the right to modify the contract as nec-
essary to prevent the contractowner from being considered the owner of the as-
sets of the VAA.
In addition, Section 72(s) of the code provides that contracts issued after
January 18, 1995, will not be treated
B-3
<PAGE>
as annuity contracts for purposes of Section 72 unless the contract provides
that (1) if any contractowner dies on or after the annuity starting date be-
fore the time the entire interest in the contract has been distributed, the
remaining portion of such interest must be distributed at least as rapidly as
under the method of distribution in effect at the time of the contractowner's
death; and (2) if any contractowner dies before the annuity starting date, the
entire interest must be distributed within five years after the death of the
contractowner. These requirements are considered satisfied if any portion of
the contractowner's interest that is payable to or for the benefit of a desig-
nated beneficiary is distributed over that designated beneficiary's life, or a
period not extending beyond the designated beneficiary's life expectancy, and
if that distribution begins within one year of the contractowner's death. The
designated beneficiary must be a natural person. However, the contract may be
continued in the name of the contractowner's surviving spouse as the
contractowner. Contracts issued after January 18, 1995, contain provisions in-
tended to comply with these code requirements. No regulations interpreting
these requirements have yet been issued. Thus, no assurance can be given that
the provisions contained in contracts issued after January 18, 1995 satisfy
all such code requirements. However, Lincoln Life believes that such provi-
sions in such contracts meet these requirements. Lincoln Life intends to re-
view such provisions and modify them as necessary to assure that they comply
with the requirements of Section 72(s) when clarified by regulation or other-
wise.
Tax status of contracts used with certain plans
The rules governing the tax treatment of contributions and distributions under
qualified plans, as set forth in the code and applicable rulings and regula-
tions, are complex and subject to change. These rules also vary according to
the type of plan and the terms and conditions of the plan itself. Therefore,
no attempt is made herein to provide more than general information about the
use of contracts with the various types of plans, based on Lincoln Life's un-
derstanding of the current federal tax laws as interpreted by the IRS. Pur-
chasers of contracts for use with such a plan and plan participants should
consult counsel and other competent advisors as to the suitability of the plan
and the contract to their specific needs, and as to applicable code limita-
tions and tax consequences. Participants under such plans, as well as
contractowners, annuitants and beneficiaries, should also be aware that the
rights of any person to any benefits under such plans may be subject to the
terms and conditions of the plans themselves regardless of the terms and con-
ditions 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 501(c)(3)
organizations [Section 403(b) plans]
Payments made to purchase annuity contracts by public school systems or
501(c)(3) organizations for their employees are excludable from the gross in-
come of the employee to the extent that aggregate payments for the employee do
not exceed the exclusion allowance provided by Section 403(b) of the code, the
over-all limits for excludable contributions of Section 415 of the code or the
limit on elective contributions. Furthermore, the investment results of the
fund credited to the account are not taxable until benefits are received ei-
ther in the form of annuity payments, in a single sum, or a withdrawal.
If an employee's individual account is surrendered, usually the full amount
received would be includable in income for that year at ordinary rates.
Qualified corporate employee's pension
and profit-sharing trusts and qualified
annuity plans
Payments made by a corporate employer and the increments on all payments for
qualified corporate plans are not taxable as income to the employee until dis-
tributed. However, the employee may be required to include these amounts in
gross income before distribution if the qualified plan or trust loses its
qualification. Corporate plans qualified under Section 401(a) or 403(a) of the
code are subject to extensive rules, including limitations on maximum contri-
butions or benefits. For plan years beginning after December 31, 1996, tax ex-
empt organizations, except state and local governments, 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 59 1/2, taxable gain may be eligible for
special lump sum averaging treatment. These special tax rules are not avail-
able 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
B-4
<PAGE>
rules in addition to those applicable to qualified corporate plans, although
certain of these rules have been repealed or modified effective in 1984. Pur-
chasers of the contracts for use with H.R. 10 plans should seek competent ad-
vice 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 (or $4,000 if IRAs
are maintained for both the individual and his spouse) or 100% of compensa-
tion. 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 re-
tirement programs and (2) the income of the individual (or of the individual
and his spouse) exceeds a specified amount. Distributions from certain other
IRA plans or qualified plans may be rolled over to an IRA on a tax deferred
basis without regard to the limit on contributions, provided certain require-
ments are met. Distributions from IRA's 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
(Section 457 Plans)
Under the code provisions, employees and independent contractors (partici-
pants) performing services for state and local governments and tax-exempt or-
ganizations may establish deferred compensation plans. While participants in
such plans may be permitted to specify the form of investment in which their
plan accounts will participate, all such investments are owned by the sponsor-
ing 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 as-
sets 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 bene-
ficiary. Deferrals are taxed as compensation from the employer when they are
actually or constructively received by the employee. As a general rule, the
maximum amount which can be deferred in any one year is the lesser of $7,500
or 33 1/3% of the participant's includable compensation. However, in the lim-
ited circumstances, up to $15,000 may be deferred in each of the last three
years before retirement.
Simplified employee pension plans [Section 408(k)]
An employer may make contributions on behalf of employees to a simplified em-
ployee pension plan (SEP) as provided by Section 408(k) of the code. The con-
tributions and distribution dates are limited by the code provisions. All dis-
tributions 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 dis-
ability) or the failure to satisfy certain other code requirements may result
in adverse tax consequences. For tax years after 1996, salary reductions SEPs
(SAR/SEP) may no longer be established. However, SAR/SEPs in existence before
January 1, 1997 may continue to receive contributions.
Tax on distributions from qualified contracts
The following rules generally apply to distributions from contracts purchased
in connection with the plans discussed above, other than 457 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 (gen-
erally, the employee's own nondeductible contributions) constitutes his in-
vestment in the contract. If a distribution is made in the form of annuity
payouts, the employee's investment in the contract (adjusted for certain re-
fund provisions) divided by his life expectancy (or other period for which an-
nuity payouts are expected to be made) constitutes a tax-free return of capi-
tal each year. The dollar amount of annuity payouts received in any year in
excess of such return is taxable as ordinary income. However, for employees
whose annuity starting date is after December 31, 1986, all distributions will
be fully taxable once the employee is deemed to have recovered the dollar
amount of his investment in the contract. Notwithstanding the above, if the
employee's annuity starting date was on or before July 1, 1986 and if his in-
vestment in the contract will be recovered within three years of his annuity
starting date, no amount is included in income until he has fully recovered
such investment. For amounts distributed after 1986, new rules generally pro-
vide that all distributions which are not received as an annuity will be taxed
as a pro rata distribution of taxable and nontaxable amounts (rather than as a
distribution first of nontaxable amounts).
If a surrender of or withdrawal from the contract is effected and a distribu-
tion is made in a single payout, the proceeds may qualify for special lump-sum
distribution treatment under certain qualified plans, as discussed previously.
Otherwise, the amount by which the payout exceeds the investment in the con-
tract (adjusted for any prior withdrawals) allocated to that payout, if any,
will be taxed as ordinary income in the year of receipt.
B-5
<PAGE>
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 excep-
tions 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 require-
ments 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 annuitant's death, the taxation of benefits payable to his beneficiary
generally follow these same principles, subject to a variety of special rules.
Other considerations
It should be understood that the foregoing comments about the federal tax con-
sequences 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 for-
eign tax laws. In recent years, numerous changes have been made in the federal
income tax treatment of contracts and retirement plans, which are not fully
discussed above. Before an investment is made in any of the above plans, a tax
advisor should be consulted.
Automatic increase in the guaranteed minimum death benefit
Subject to the following terms and conditions, once a contract has been in
force for a certain period, Lincoln Life will automatically increase the guar-
anteed minimum death benefit (GMDB):
Lincoln Life will automatically increase the GMDB, separately for each con-
tract year's purchase payment(s), effective upon the seventh anniversary of
each eligible contract year in which those payments were made (as the contin-
gent deferred sales charge expires on those payments).
The attributable gain (AG), used to increase the GMDB, will be calculated
based on the contract value at the close of business on the last valuation
date preceding the seventh anniversary of the contract year for which the in-
crease is made. The AG will be the amount which results from allocating the
total appreciation in the contract to each contract year's purchase payments
adjusted by withdrawals on a first-in-first out (FIFO) basis based on Lincoln
Life's internal rate of return (IRR) calculation (as described below).
If a single purchase payment was deposited or multiple deposits were made in
the first contract year only, then, upon adjustment, the increased GMDB will
be the contract value on the seventh contract anniversary. However, if con-
tract value is less than net purchase payments, the GMDB will not be adjusted.
If purchase payments have been deposited in multiple contract years, then,
upon adjustment, the increased GMDB will be the sum of all purchase payments
plus any attributable gain, as calculated for each contract year which has
reached its seventh anniversary, minus any withdrawals, partial annuitizations
and premium taxes incurred.
The IRR is the level compound rate of return, calculated by Lincoln Life, at
which purchase payments less withdrawals will accumulate to the contract value
on the contract anniversary beginning with the seventh anniversary. The appli-
cation of the IRR methodology to any particular contract year could allocate
gain, if any, in a manner which does not precisely correlate with the con-
tract's actual investment experience for a particular contract year or
subaccount. The calculation of the IRR assumes all purchase payments and with-
drawals occur at the beginning of the contract year in which they were made.
Once the IRR has been determined, the gain attributable to each contract year
is calculated by applying the IRR to the purchase payments, less any withdraw-
als applied on a FIFO basis.
Financial statements
Financial statements of the VAA and the statutory-basis financial statements
of Lincoln Life appear on the following pages.
B-6
<PAGE>
Lincoln National Variable Annuity Account E
Statement of Assets and Liability
December 31, 1998
<TABLE>
<CAPTION>
Growth- Asset
Income Growth Allocation
Combined Account Account Account
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Investments at Market--
Unaffiliated (Cost
$742,178,998) $1,006,365,296 $482,002,847 $344,475,892 $20,080,159
-------------- ------------ ------------ -----------
Total Assets 1,006,365,296 482,002,847 344,475,892 20,080,159
Liability--Payable to The
Lincoln National Life
Insurance Company 34,327 16,473 11,686 687
-------------- ------------ ------------ -----------
Net assets $1,006,330,969 $481,986,374 $344,464,206 $20,079,472
============== ============ ============ ===========
Percent of net assets 100.00% 47.89% 34.23% 2.00%
============== ============ ============ ===========
Net assets are
represented by:
Legacy I without
guaranteed minimum death
benefit:
. Units in accumulation
period 123,175,662 69,344,473 10,140,130
------------------------
. Annuity reserves units 893,070 504,326 98,537
------------------------
. Unit value $ 3.714 $ 4.719 $ 1.918
------------------------ ------------ ------------ -----------
. Value in accumulation
period 457,459,710 327,229,369 19,453,266
------------------------
. Annuity reserves 3,316,754 2,379,861 189,038
------------------------ ------------ ------------ -----------
460,776,464 329,609,230 19,642,304
------------------------ ------------ ------------ -----------
Legacy I with guaranteed
minimum death benefit:
. Units in accumulation
period 5,723,011 3,154,427 228,386
------------------------
. Unit value $ 3.706 $ 4.709 $ 1.914
------------------------ ------------ ------------ -----------
. Value in accumulation
period 21,209,910 14,854,976 437,168
------------------------ ------------ ------------ -----------
Net assets $481,986,374 $344,464,206 $20,079,472
============ ============ ===========
</TABLE>
See accompanying notes.
B-7
<PAGE>
<TABLE>
<CAPTION>
U.S.
Government/
High-Yield AAA-Rated Cash Global Global Small
Bond Securities Management International Bond Growth Capitalization
Account Account Account Account Account Account Account
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$46,519,772 $34,829,391 $12,242,373 $52,212,921 $4,393,288 $7,143,063 $2,465,590
----------- ----------- ----------- ----------- ---------- ---------- ----------
46,519,772 34,829,391 12,242,373 52,212,921 4,393,288 7,143,063 2,465,590
1,596 1,216 406 1,786 151 242 84
----------- ----------- ----------- ----------- ---------- ---------- ----------
$46,518,176 $34,828,175 $12,241,967 $52,211,135 $4,393,137 $7,142,821 $2,465,506
=========== =========== =========== =========== ========== ========== ==========
4.62% 3.46% 1.22% 5.19% 0.44% 0.71% 0.24%
=========== =========== =========== =========== ========== ========== ==========
16,577,703 16,874,471 7,083,744 30,224,570 3,609,330 4,950,189 2,311,789
73,080 90,550 17,982 121,406 54,397 153,478 --
$ 2.695 $ 1.989 $ 1.620 $ 1.668 $ 1.172 $ 1.372 $ 1.015
----------- ----------- ----------- ----------- ---------- ---------- ----------
44,669,416 33,565,994 11,475,585 50,421,032 4,231,491 6,791,564 2,347,525
196,916 180,119 29,131 202,531 63,774 210,569 --
----------- ----------- ----------- ----------- ---------- ---------- ----------
44,866,332 33,746,113 11,504,716 50,623,563 4,295,265 7,002,133 2,347,525
----------- ----------- ----------- ----------- ---------- ---------- ----------
614,406 545,229 456,150 953,749 83,683 102,783 116,305
$ 2.689 $ 1.985 $ 1.616 $ 1.665 $ 1.170 $ 1.369 $ 1.014
----------- ----------- ----------- ----------- ---------- ---------- ----------
1,651,844 1,082,062 737,251 1,587,572 97,872 140,688 117,981
----------- ----------- ----------- ----------- ---------- ---------- ----------
$46,518,176 $34,828,175 $12,241,967 $52,211,135 $4,393,137 $7,142,821 $2,465,506
=========== =========== =========== =========== ========== ========== ==========
</TABLE>
B-8
<PAGE>
Lincoln National Variable Annuity Account E
Statement of operations
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Growth- Asset
Income Growth Allocation
Combined Account Account Account
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Investment Income:
.Dividends from
investment income $ 17,585,638 $ 7,936,512 $ 1,135,411 $ 668,889
- --------------------------
.Dividends from net
realized gains on
investments 117,221,552 68,022,225 45,981,302 1,364,154
- --------------------------
Mortality and expense
guarantees:
.Legacy I without
guaranteed minimum death
benefit (11,540,987) (5,723,803) (3,650,897) (230,098)
- --------------------------
.Legacy I with guaranteed
minimum death benefit (373,902) (192,650) (122,509) (4,389)
- -------------------------- ------------ ------------ ----------- ----------
Net investment income 122,892,301 70,042,284 43,343,307 1,798,556
- --------------------------
Net realized and
unrealized gain (loss) on
investments:
.Net realized gain (loss)
on investments 40,684,337 23,883,099 14,636,236 338,845
- --------------------------
.Net change in unrealized
appreciation or
depreciation on
investments 15,462,196 (20,327,136) 32,372,928 (125,855)
- -------------------------- ------------ ------------ ----------- ----------
Net realized and
unrealized gain (loss) on
investments 56,146,533 3,555,963 47,009,164 212,990
- -------------------------- ------------ ------------ ----------- ----------
Net increase (decrease) in
net assets resulting from
operations $179,038,834 $ 73,598,247 $90,352,471 $2,011,546
- -------------------------- ============ ============ =========== ==========
</TABLE>
See accompanying notes.
B-9
<PAGE>
<TABLE>
<CAPTION>
U.S.
Government/ Global
High-Yield AAA-Rated Cash Global Small
Bond Securities Management International Bond Growth Capitalization
Account Account Account Account Account Account Account
- -----------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <S>
$ 4,197,785 $2,052,086 $ 601,404 $ 670,792 $ 250,209 $ 58,824 $ 13,726
644,423 -- -- 929,748 20,324 227,475 31,901
(603,397) (420,239) (149,364) (640,083) (46,112) (64,452) (12,542)
(16,956) (9,665) (6,979) (18,155) (838) (1,183) (578)
----------- ---------- --------- ---------- --------- ---------- --------
4,221,855 1,622,182 445,061 942,302 223,583 220,664 32,507
481,279 170,143 13,391 1,138,439 (12,596) 54,672 (19,171)
(5,008,809) 452,020 10,075 7,036,206 (114,211) 959,034 207,944
----------- ---------- --------- ---------- --------- ---------- --------
(4,527,530) 622,163 23,466 8,174,645 (126,807) 1,013,706 188,773
----------- ---------- --------- ---------- --------- ---------- --------
$ (305,675) $2,244,345 $ 468,527 $9,116,947 $ 96,776 $1,234,370 $221,280
=========== ========== ========= ========== ========= ========== ========
</TABLE>
B-10
<PAGE>
Lincoln National Variable Annuity Account E
<TABLE>
Statements of changes in net assets
<CAPTION>
Growth- Asset
Income Growth Allocation
Combined Account Account Account
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net assets at January 1, 1997 $ 821,673,963 $406,077,476 $249,214,524 $10,387,551
Changes From Operations:
. Net investment income 92,637,511 46,763,082 32,076,735 1,215,233
- -----------------------------------------------------------
. Net realized gain (loss) on investments 36,167,339 18,719,451 15,157,912 195,674
- -----------------------------------------------------------
. Net change in unrealized appreciation or
depreciation on investments 47,580,272 29,836,639 19,220,263 818,918
- --------------------------------------------- -------------- ------------ ------------ -----------
Net increase (decrease) in net assets
resulting from operations 176,385,122 95,319,172 66,454,910 2,229,825
- -----------------------------------------------------------
Change From Unit Transactions:
Accumulation Units:
. Contract purchases 99,213,771 27,854,605 23,374,570 6,947,952
- -----------------------------------------------------------
. Terminated contracts and transfers to
annuity reserves (180,789,164) (67,107,967) (55,799,816) (3,037,757)
- --------------------------------------------- -------------- ------------ ------------ -----------
(81,575,393) (39,253,362) (32,425,246) 3,910,195
Annuity Reserves:
. Transfer from accumulation units and
between accounts 1,303,750 569,607 123,024 163,028
- -----------------------------------------------------------
. Annuity payments (814,251) (352,637) (192,532) (60,514)
- -----------------------------------------------------------
. Receipt (reimbursement) of mortality
guarantee adjustment 4,677 6,317 (853) --
- --------------------------------------------- -------------- ------------ ------------ -----------
494,176 223,287 (70,361) 102,514
Net increase (decrease) in net assets
resulting from unit transactions (81,081,217) (39,030,075) (32,495,607) 4,012,709
- --------------------------------------------- -------------- ------------ ------------ -----------
Total increase (decrease) in net assets 95,303,905 56,289,097 33,959,303 6,242,534
- --------------------------------------------- -------------- ------------ ------------ -----------
Net assets at December 31, 1997 916,977,868 462,366,573 283,173,827 16,630,085
- -----------------------------------------------------------
Changes from operations:
. Net investment income 122,892,301 70,042,284 43,343,307 1,798,556
- -----------------------------------------------------------
. Net realized gain (loss) on investments 40,684,337 23,883,099 14,636,236 338,845
- -----------------------------------------------------------
. Net change in unrealized appreciation or
depreciation on investments 15,462,196 (20,327,136) 32,372,928 (125,855)
- --------------------------------------------- -------------- ------------ ------------ -----------
Net increase (decrease) in net assets
resulting from operations 179,038,834 73,598,247 90,352,471 2,011,546
- -----------------------------------------------------------
Change from unit transactions:
Accumulation units:
. Contract purchases 129,114,132 38,864,166 31,402,360 5,678,293
- -----------------------------------------------------------
. Terminated contracts and transfers to
annuity reserves (219,443,153) (93,145,754) (60,915,801) (4,201,548)
- --------------------------------------------- -------------- ------------ ------------ -----------
(90,329,021) (54,281,588) (29,513,441) 1,476,745
Annuity Reserves:
. Transfer from accumulation units and
between accounts 1,862,889 787,496 748,421 65,743
- -----------------------------------------------------------
. Annuity payments (1,227,838) (491,099) (296,803) (104,794)
- -----------------------------------------------------------
. Receipt (reimbursement) of mortality
guarantee adjustment 8,237 6,745 (269) 147
- --------------------------------------------- -------------- ------------ ------------ -----------
643,288 303,142 451,349 (38,904)
Net increase (decrease) in net assets
resulting from unit transactions (89,685,733) (53,978,446) (29,062,092) 1,437,841
- --------------------------------------------- -------------- ------------ ------------ -----------
Total increase (decrease) in net assets 89,353,101 19,619,801 61,290,379 3,449,387
- --------------------------------------------- -------------- ------------ ------------ -----------
Net assets at December 31, 1998 $1,006,330,969 $481,986,374 $344,464,206 $20,079,472
============================================= ============== ============ ============ ===========
</TABLE>
Years ended December 31, 1997 and 1998
See accompanying notes.
B-11
<PAGE>
<TABLE>
<CAPTION>
U.S.
Government/ Global
High-Yield AAA-Rated Cash Global Small
Bond Securities Management International Bond Growth Capitalization
Account Account Account Account Account Account Account
- ------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <S>
$50,815,515 $39,373,752 $14,428,182 $49,618,840 $1,758,123 $ -- $ --
4,301,582 1,948,331 481,095 5,704,337 140,732 6,384 --
594,175 33,776 26,232 1,422,318 18,252 (451) --
413,269 426,825 (17,868) (3,134,977) 30,725 (13,522) --
----------- ----------- ----------- ----------- ---------- ---------- -----------
5,309,026 2,408,932 489,459 3,991,678 189,709 (7,589) --
5,624,882 1,975,014 14,793,214 13,126,908 1,391,251 4,125,375 --
(10,168,247) (9,884,586) (18,157,160) (15,306,258) (663,594) (663,779) --
----------- ----------- ----------- ----------- ---------- ---------- -----------
(4,543,365) (7,909,572) (3,363,946) (2,179,350) 727,657 3,461,596 --
160,790 99,012 -- 56,495 108,430 23,364 --
(67,342) (33,755) (55,568) (41,491) (9,514) (898) --
530 640 84 151 -- (2,192) --
----------- ----------- ----------- ----------- ---------- ---------- -----------
93,978 65,897 (55,484) 15,155 98,916 20,274 --
(4,449,387) (7,843,675) (3,419,430) (2,164,195) 826,573 3,481,870 --
----------- ----------- ----------- ----------- ---------- ---------- -----------
859,639 (5,434,743) (2,929,971) 1,827,483 1,016,282 3,474,281 --
----------- ----------- ----------- ----------- ---------- ---------- -----------
51,675,154 33,939,009 11,498,211 51,446,323 2,774,405 3,474,281 --
4,221,855 1,622,182 445,061 942,302 223,583 220,664 32,507
481,279 170,143 13,391 1,138,439 (12,596) 54,672 (19,171)
(5,008,809) 452,020 10,075 7,036,206 (114,211) 959,034 207,944
----------- ----------- ----------- ----------- ---------- ---------- -----------
(305,675) 2,244,345 468,527 9,116,947 96,776 1,234,370 221,280
6,740,370 7,333,988 21,570,779 7,644,881 3,621,203 3,493,376 2,764,716
(11,482,659) (8,660,566) (21,240,095) (15,988,577) (2,061,197) (1,226,466) (520,490)
----------- ----------- ----------- ----------- ---------- ---------- -----------
(4,742,289) (1,326,578) 330,684 (8,343,696) 1,560,006 2,266,910 2,244,226
(14,489) 32,660 -- 34,089 -- 208,969 --
(95,062) (61,875) (55,542) (42,690) (38,050) (41,923) --
537 614 87 162 -- 214 --
----------- ----------- ----------- ----------- ---------- ---------- -----------
(109,014) (28,601) (55,455) (8,439) (38,050) 167,260 --
(4,851,303) (1,355,179) 275,229 (8,352,135) 1,521,956 2,434,170 2,244,226
----------- ----------- ----------- ----------- ---------- ---------- -----------
(5,156,978) 889,166 743,756 764,812 1,618,732 3,668,540 2,465,506
----------- ----------- ----------- ----------- ---------- ---------- -----------
$46,518,176 $34,828,175 $12,241,967 $52,211,135 $4,393,137 $7,142,821 $2,465,506
=========== =========== =========== =========== ========== ========== ===========
</TABLE>
B-12
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
B-13
<PAGE>
Lincoln National Variable Annuity Account E
Notes to financial statements
1. Accounting policies & account information
The Account: Lincoln National Variable Annuity Account E (the Variable Account)
is a segregated investment account of The Lincoln National Life Insurance Com-
pany (the Company) and is registered with the Securities and Exchange Commis-
sion under the Investment Company Act of 1940, as amended, as a unit investment
trust. The Variable Account consists of one product offering a guaranteed mini-
mum death benefit (GMDB) rider option.
The assets of the Variable Account are owned by the Company. The portion of the
Variable Account's assets supporting the annuity contracts may not be used to
satisfy liabilities arising out of any other business of the Company.
Basis of Presentation: The accompanying financial statements have been prepared
in accordance with generally accepted accounting principles for unit investment
trusts.
Investments: The Variable Account invests in the American Variable Insurance
Series (AVIS) which consists of the following funds: Growth-Income Fund, Growth
Fund, Asset Allocation Fund, High-Yield Bond Fund, U.S. Government/AAA Rated
Securities Fund, Cash Management Fund, International Fund, Bond Fund, Global
Growth Fund and Global Small Capitalization Fund (the Funds). AVIS is regis-
tered as an open-ended management investment company. Investment in the funds
are stated at the closing net asset value per share on December 31, 1998, which
approximates fair value. The difference between cost and fair value is re-
flected as unrealized appreciation and depreciation of investments.
Investment transactions are accounted for on a trade date-basis. The cost of
investments sold is determined by the average-cost method.
Dividends: Dividends paid to the Variable Account are automatically reinvested
in shares of the Funds on the payable date. Dividend income is recorded on the
ex-dividend date.
Federal Income Taxes: Operations of the Variable Account form a part of and are
taxed with operations of the Company, which is taxed as a "life insurance com-
pany" under the Internal Revenue Code. The Variable Account will not be taxed
as a regulated investment company under Subchapter M of the Internal Revenue
Code. Under current federal income tax law, no federal income taxes are payable
with respect to the Variable Account's net investment income and the realized
gain on investments.
Annuity Reserves: Reserves on contracts not involving life contingencies are
calculated using an assumed investment rate of 4%. Reserves on contracts in-
volving life contingencies are calculated using a modification of the 1971 In-
dividual Annuitant Mortality Table and an assumed investment rate of 4%.
2. Mortality and expense guarantees & other transactions with affiliates
Amounts are paid to the Company for mortality and expense guarantees at a per-
centage of the current value of the Variable Account each day. The rates are as
follows:
. Legacy I at a daily rate of .0034247% (1.25% on an annual basis)
. Legacy I with GMDB at a daily rate of .00383561643% (1.40% on an annual ba-
sis)
In addition, amounts retained by the Company from the proceeds of the sales of
annuity contracts for contract charges and surrender charges were as follows
during 1998:
<TABLE>
<S> <C>
Growth-Income Account $316,083
- --------------------------------------------
Growth Account 196,230
- --------------------------------------------
Asset Allocation Account 11,093
- --------------------------------------------
High-Yield Bond Account 36,491
- --------------------------------------------
U.S. Government/AAA-Rated Securities Account 24,006
- --------------------------------------------
Cash Management Account 15,696
- --------------------------------------------
International Account 36,582
- --------------------------------------------
Bond Account 1,943
- --------------------------------------------
Global Growth Account 2,425
- --------------------------------------------
Global Small Capitalization Account 439
- -------------------------------------------- --------
$640,988
========
</TABLE>
Accordingly, the Company is responsible for all sales, general, and administra-
tive expenses applicable to the Variable Account.
B-14
<PAGE>
Lincoln National Variable Annuity Account E
Notes to financial statements continued
3. Net assets
The following is a summary of net assets owned at December 31, 1998:
<TABLE>
<CAPTION>
Growth- Asset
Income Growth Allocation
Combined Account Account Account
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unit Transactions:
Accumulation units $ 101,856,315 $ 27,956,546 $ 12,391,987 $13,318,880
- ------------------------
Annuity reserves 2,640,106 1,276,681 642,409 128,182
- ------------------------ -------------- ------------ ------------ -----------
104,496,421 29,233,227 13,034,396 13,447,062
Accumulated net
investment income 468,047,636 240,231,520 131,215,135 4,437,740
- ------------------------
Accumulated net realized
gain (loss) on
investments 169,600,614 80,165,594 78,974,971 760,118
- ------------------------
Net unrealized
appreciation
(depreciation) on
investments 264,186,298 132,356,033 121,239,704 1,434,552
- ------------------------ -------------- ------------ ------------ -----------
$1,006,330,969 $481,986,374 $344,464,206 $20,079,472
============== ============ ============ ===========
</TABLE>
B-15
<PAGE>
<TABLE>
<CAPTION>
U.S.
Government/
High-Yield AAA-Rated Cash Global Global Small
Bond Securities Management International Bond Growth Capitalization
Account Account Account Account Account Account Account
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 3,769,807 $ 1,373,893 $ 1,169,966 $29,927,188 $3,975,316 $5,728,506 $2,244,226
77,768 112,563 (472) 154,575 60,866 187,534 --
- ----------- ----------- ----------- ----------- ---------- ---------- ----------
3,847,575 1,486,456 1,169,494 30,081,763 4,036,182 5,916,040 2,244,226
40,894,817 29,651,524 9,893,955 11,061,484 401,906 227,048 32,507
2,953,419 2,754,339 1,240,573 2,712,151 4,399 54,221 (19,171)
(1,177,635) 935,856 (62,055) 8,355,737 (49,350) 945,512 207,944
- ----------- ----------- ----------- ----------- ---------- ---------- ----------
$46,518,176 $34,828,175 $12,241,967 $52,211,135 $4,393,137 $7,142,821 $2,465,506
=========== =========== =========== =========== ========== ========== ==========
</TABLE>
4. Purchases and sales of investments
The aggregate cost of investments purchased and the aggregate proceeds from in-
vestments sold were as follows for 1998.
<TABLE>
<CAPTION>
Aggregate Aggregate
Cost of Proceeds
Purchases from Sales
- -----------------------------------------------------------------------
<S> <C> <C>
Growth-Income Account $ 80,044,529 $ 63,980,031
- --------------------------------------------
Growth Account 52,370,378 38,087,138
- --------------------------------------------
Asset Allocation Account 6,021,041 2,784,526
- --------------------------------------------
High-Yield Bond Account 7,706,056 8,335,679
- --------------------------------------------
U.S. Government/AAA-Rated Securities Account 6,661,669 6,394,611
- --------------------------------------------
Cash Management Account 17,002,656 16,282,355
- --------------------------------------------
International Account 4,258,073 11,667,911
- --------------------------------------------
Bond Account 3,574,326 1,828,731
- --------------------------------------------
Global Growth Account 3,407,489 752,531
- --------------------------------------------
Global Small Capitalization Account 2,657,165 380,348
- --------------------------------------------
------------ ------------
$183,703,382 $150,493,861
============ ============
</TABLE>
B-16
<PAGE>
Lincoln National Variable Annuity Account E
Notes to financial statements continued
5. Investments
The following is a summary of investments owned at December 31, 1998.
<TABLE>
<CAPTION>
Net
Shares Asset Value of Cost of
Outstanding Value Shares Shares
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth-Income Account 13,281,974 $36.29 $ 482,002,847 $349,646,814
- ---------------------------
Growth Account 6,570,206 52.43 344,475,892 223,236,188
- ---------------------------
Asset Allocation Account 1,289,670 15.57 20,080,159 18,645,607
- ---------------------------
High-Yield Bond Account 3,497,727 13.30 46,519,772 47,697,407
- ---------------------------
U.S. Government/AAA-Rated
Securities Account 3,079,522 11.31 34,829,391 33,893,535
- ---------------------------
Cash Management Account 1,110,923 11.02 12,242,373 12,304,428
- ---------------------------
International Account 3,067,739 17.02 52,212,921 43,857,184
- ---------------------------
Bond Account 431,985 10.17 4,393,288 4,442,638
- ---------------------------
Global Growth Account 536,266 13.32 7,143,063 6,197,551
- ---------------------------
Global Small Capitalization
Account 245,822 10.03 2,465,590 2,257,646
- ---------------------------
-------------- ------------
$1,006,365,296 $742,178,998
============== ============
</TABLE>
6. New investment funds
Effective April 25, 1997, the AVIS Global Growth Account became available as an
investment option for Variable Account contract owners. Effective April 30,
1998, the AVIS Global Small Capitalization Account became available as an in-
vestment option for Variable Account contract owners.
B-17
<PAGE>
Report of Ernst & Young LLP,
Independent Auditors
Board of Directors of The Lincoln National Life Insurance Company
and
Contract Owners of Lincoln National Variable Annuity Account E
We have audited the accompanying statement of assets and liability of Lincoln
National Variable Annuity Account E ("Variable Account") (comprised of the AVIS
Growth-Income, AVIS Growth, AVIS Asset Allocation, AVIS High-Yield Bond, AVIS
US Government/AAA-Rated Securities, AVIS Cash Management, AVIS International,
AVIS Bond, AVIS Global Growth, and AVIS Global Small Capitalization
subaccounts), as of December 31, 1998, and the related statement of operations
for the year then ended and the statements of changes in net assets for each of
the two years in the period then ended. These financial statements are the re-
sponsibility of the Variable Account's management. Our responsibility is to ex-
press an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted 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. Our procedures
included confirmation of investments owned as of December 31, 1998, by corre-
spondence with the custodian. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evalu-
ating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
subaccounts constituting the Lincoln National Variable Annuity Account E at De-
cember 31, 1998, the results of their operations for the year then ended, and
the changes in their net assets for each of the two years in the period then
ended in conformity with generally accepted accounting principles.
Fort Wayne, Indiana
March 26, 1999
B-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------- ---------
(IN MILLIONS)
--------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $23,830.9 $18,560.7
- ------------------------------------------------------------------------------------
Preferred stocks 236.0 257.3
- ------------------------------------------------------------------------------------
Unaffiliated common stocks 259.3 436.0
- ------------------------------------------------------------------------------------
Affiliated common stocks 322.1 412.1
- ------------------------------------------------------------------------------------
Mortgage loans on real estate 3,932.9 3,012.7
- ------------------------------------------------------------------------------------
Real estate 473.8 584.4
- ------------------------------------------------------------------------------------
Policy loans 1,606.0 660.5
- ------------------------------------------------------------------------------------
Other investments 434.4 335.5
- ------------------------------------------------------------------------------------
Cash and short-term investments 1,725.4 2,133.0
- ------------------------------------------------------------------------------------ --------- ---------
Total cash and investments 32,820.8 26,392.2
- ------------------------------------------------------------------------------------
Premiums and fees in course of collection 33.3 42.4
- ------------------------------------------------------------------------------------
Accrued investment income 432.8 343.5
- ------------------------------------------------------------------------------------
Reinsurance recoverable 171.6 71.1
- ------------------------------------------------------------------------------------
Funds withheld by ceding companies 53.7 44.1
- ------------------------------------------------------------------------------------
Federal income taxes recoverable from parent company 64.7 6.9
- ------------------------------------------------------------------------------------
Goodwill 49.5 52.4
- ------------------------------------------------------------------------------------
Other admitted assets 89.3 85.6
- ------------------------------------------------------------------------------------
Separate account assets 36,907.0 31,330.9
- ------------------------------------------------------------------------------------ --------- ---------
Total admitted assets $70,622.7 $58,369.1
- ------------------------------------------------------------------------------------ --------- ---------
--------- ---------
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $12,310.6 $ 5,872.9
- ------------------------------------------------------------------------------------
Other policyholder funds 16,647.5 16,360.1
- ------------------------------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 897.6 878.2
- ------------------------------------------------------------------------------------
Funds held under reinsurance treaties 795.8 720.4
- ------------------------------------------------------------------------------------
Asset valuation reserve 484.5 450.0
- ------------------------------------------------------------------------------------
Interest maintenance reserve 159.7 135.4
- ------------------------------------------------------------------------------------
Other liabilities 504.5 294.7
- ------------------------------------------------------------------------------------
Short-term loan payable to parent company 140.0 120.0
- ------------------------------------------------------------------------------------
Net transfers due from separate accounts (789.0) (761.9)
- ------------------------------------------------------------------------------------
Separate account liabilities 36,907.0 31,330.9
- ------------------------------------------------------------------------------------ --------- ---------
Total liabilities 68,058.2 55,400.7
- ------------------------------------------------------------------------------------
CAPITAL AND SURPLUS:
Common stock, $2.50 par value:
Authorized, issued and outstanding shares -- 10 million (owned by Lincoln National
Corporation) 25.0 25.0
- ------------------------------------------------------------------------------------
Surplus notes due to Lincoln National Corporation 1,250.0 --
- ------------------------------------------------------------------------------------
Paid-in surplus 1,930.1 1,821.8
- ------------------------------------------------------------------------------------
Unassigned surplus (deficit) (640.6) 1,121.6
- ------------------------------------------------------------------------------------ --------- ---------
Total capital and surplus 2,564.5 2,968.4
- ------------------------------------------------------------------------------------ --------- ---------
Total liabilities and capital and surplus $70,622.7 $58,369.1
- ------------------------------------------------------------------------------------ --------- ---------
--------- ---------
</TABLE>
See accompanying notes. S-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $12,737.6 $ 5,589.0 $ 7,268.5
- ----------------------------------------------------------------------------
Net investment income 2,107.2 1,847.1 1,756.3
- ----------------------------------------------------------------------------
Amortization of interest maintenance reserve 26.4 41.5 27.2
- ----------------------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded 179.9 99.7 90.9
- ----------------------------------------------------------------------------
Expense charges on deposit funds 134.6 119.3 100.7
- ----------------------------------------------------------------------------
Separate account investment management and administration service fees 396.3 325.5 244.6
- ----------------------------------------------------------------------------
Other income 31.3 21.3 16.8
- ---------------------------------------------------------------------------- --------- --------- ---------
Total revenues 15,613.3 8,043.4 9,505.0
- ----------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 13,964.1 4,522.1 5,989.9
- ----------------------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses 2,919.4 3,053.9 3,123.1
- ---------------------------------------------------------------------------- --------- --------- ---------
Total benefits and expenses 16,883.5 7,576.0 9,113.0
- ---------------------------------------------------------------------------- --------- --------- ---------
Gain (loss) from operations before dividends to policyholders, income taxes
and net realized gain on investments (1,270.2) 467.4 392.0
- ----------------------------------------------------------------------------
Dividends to policyholders 67.9 27.5 27.3
- ---------------------------------------------------------------------------- --------- --------- ---------
Gain (loss) from operations before federal income taxes and net realized
gain on investments (1,338.1) 439.9 364.7
- ----------------------------------------------------------------------------
Federal income taxes (credit) (141.0) 78.3 83.6
- ---------------------------------------------------------------------------- --------- --------- ---------
Gain (loss) from operations before net realized gain on investments (1,197.1) 361.6 281.1
- ----------------------------------------------------------------------------
Net realized gain on investments, net of income tax expense and excluding
net transfers to the interest maintenance reserve 46.8 31.3 53.3
- ---------------------------------------------------------------------------- --------- --------- ---------
Net income (loss) $(1,150.3) $ 392.9 $ 334.4
- ---------------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
S-2
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $ 2,968.4 $ 1,962.6 $ 1,732.9
- -----------------------------------------------------------------------------
Correction of prior year's asset valuation reserve -- (37.6) --
- -----------------------------------------------------------------------------
Correction of prior year's admitted assets -- (57.0) --
- ----------------------------------------------------------------------------- --------- --------- ---------
2,968.4 1,868.0 1,732.9
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income (loss) (1,150.3) 392.9 334.4
- -----------------------------------------------------------------------------
Difference in cost and admitted investment amounts (304.8) (36.2) 38.6
- -----------------------------------------------------------------------------
Nonadmitted assets (17.1) (0.4) (3.0)
- -----------------------------------------------------------------------------
Regulatory liability for reinsurance (35.2) (3.9) 0.6
- -----------------------------------------------------------------------------
Life policy reserve valuation basis (0.4) (0.9) (0.4)
- -----------------------------------------------------------------------------
Asset valuation reserve (34.5) (36.9) (105.5)
- -----------------------------------------------------------------------------
Proceeds from surplus notes from shareholder 1,250.0 -- --
- -----------------------------------------------------------------------------
Paid-in surplus, including contribution of common stock of affiliated
company in 1997 108.4 938.4 100.0
- -----------------------------------------------------------------------------
Separate account receivable due to change in valuation -- (2.6) --
- -----------------------------------------------------------------------------
Dividends to shareholder (220.0) (150.0) (135.0)
- ----------------------------------------------------------------------------- --------- --------- ---------
Capital and surplus at end of year $ 2,564.5 $ 2,968.4 $ 1,962.6
- ----------------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes. S-3
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
---------- ---------- ----------
(IN MILLIONS)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 13,495.2 $ 6,364.3 $ 8,059.4
- -----------------------------------------------------------------------
Allowances and reserve adjustments paid on reinsurance ceded (632.4) (649.2) (767.5)
- -----------------------------------------------------------------------
Investment income received 2,003.9 1,798.8 1,700.6
- -----------------------------------------------------------------------
Separate account investment management and administration service fees 396.3 325.5 244.6
- -----------------------------------------------------------------------
Benefits paid (7,395.8) (5,345.2) (4,050.4)
- -----------------------------------------------------------------------
Insurance expenses paid (2,909.7) (3,193.0) (3,216.8)
- -----------------------------------------------------------------------
Federal income taxes recovered (paid) 84.2 (87.0) (72.3)
- -----------------------------------------------------------------------
Dividends to policyholders (12.9) (28.4) (27.7)
- -----------------------------------------------------------------------
Other income received and expenses paid, net 207.0 (8.7) 117.0
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) operating activities 5,235.8 (822.9) 1,986.9
- -----------------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 10,926.5 12,142.6 12,542.0
- -----------------------------------------------------------------------
Purchase of investments (16,950.0) (10,345.0) (14,175.4)
- -----------------------------------------------------------------------
Other sources (uses) including reinsured policy loans (778.3) 529.1 (377.2)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) investing activities (6,801.8) 2,326.7 (2,010.6)
- -----------------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in 108.4 -- 100.0
- -----------------------------------------------------------------------
Proceeds from surplus notes from shareholder 1,250.0 -- --
- -----------------------------------------------------------------------
Proceeds from borrowings from shareholder 140.0 120.0 100.0
- -----------------------------------------------------------------------
Repayment of borrowings from shareholder (120.0) (100.0) (63.0)
- -----------------------------------------------------------------------
Dividends paid to shareholder (220.0) (150.0) (135.0)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) financing activities 1,158.4 (130.0) 2.0
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net increase (decrease) in cash and short-term investments (407.6) 1,373.8 (21.7)
- -----------------------------------------------------------------------
Cash and short-term investments at beginning of year 2,133.0 759.2 780.9
- ----------------------------------------------------------------------- ---------- ---------- ----------
Cash and short-term investments at end of year $ 1,725.4 $ 2,133.0 $ 759.2
- ----------------------------------------------------------------------- ---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
S-4
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
ORGANIZATION AND OPERATIONS
The Lincoln National Life Insurance Company ("Company") is a wholly owned
subsidiary of Lincoln National Corporation ("LNC") and is domiciled in
Indiana. As of December 31, 1998, the Company owns 100% of the outstanding
common stock of four insurance company subsidiaries: First Penn-Pacific Life
Insurance Company ("First Penn"), Lincoln National Health & Casualty
Insurance Company ("LNH&C"), Lincoln National Reassurance Company ("LNRAC")
and Lincoln Life & Annuity Company of New York ("LLANY").
The Company's principal businesses consist of underwriting annuities,
deposit-type contracts and life and health insurance through multiple
distribution channels and the reinsurance of individual and group life and
health business. The Company is licensed and sells its products in 49
states, Canada and several U.S. territories.
USE OF ESTIMATES
The nature of the insurance and investment management businesses requires
management to make estimates and assumptions that affect the amounts
reported in the statutory-basis financial statements and accompanying notes.
Actual results could differ from those estimates.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Indiana Department of
Insurance ("Insurance Department"), which practices differ from generally
accepted accounting principles ("GAAP"). The more significant variances from
GAAP are as follows:
INVESTMENTS
Bonds are reported at cost or amortized cost or fair value based on their
National Association of Insurance Commissioners ("NAIC") rating. For GAAP,
the Company's bonds are classified as available-for-sale and, accordingly,
are reported at fair value with changes in the fair values reported directly
in shareholder's equity after adjustments for related amortization of
deferred acquisition costs, additional policyholder commitments and deferred
income taxes.
Investments in real estate are reported net of related obligations rather
than on a gross basis. Real estate owned and occupied by the Company is
classified as a real estate investment rather than reported as an operating
asset, and investment income and operating expenses include rent for the
Company's occupancy of those properties. Changes between cost and admitted
asset investment amounts are credited or charged directly to unassigned
surplus rather than to a separate surplus account.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized capital gains and losses on sales of fixed income investments,
principally bonds and mortgage loans, attributable to changes in the general
level of interest rates and amortizes those deferrals over the remaining
period to maturity of the individual security sold. The net deferral is
reported as the Interest Maintenance Reserve ("IMR") in the accompanying
balance sheets. Realized capital gains and losses are reported in income net
of federal income tax and transfers to the IMR. The asset valuation reserve
("AVR") is determined by an NAIC prescribed formula and is reported as a
liability rather than unassigned surplus. Under GAAP, realized capital gains
and losses are reported in the income statement on a pre-tax basis in the
period in which the asset giving rise to the gain or loss is sold and
valuation allowances are provided when there has been a decline in value
deemed other than temporary, in which case, the provision for such declines
are charged to income.
SUBSIDIARIES
The accounts and operations of the Company's subsidiaries are not
consolidated with the accounts and operations of the Company as would be
required by GAAP. Under statutory accounting principles, the Company's
subsidiaries are carried at their statutory-basis net equity and presented
in the balance sheet as affiliated common stocks.
POLICY ACQUISITION COSTS
The costs of acquiring and renewing business are expensed when incurred.
Under GAAP, acquisition costs related to traditional life insurance, to the
extent recoverable from future policy revenues, are deferred and amortized
over the premium-paying
S-5
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
period of the related policies using assumptions consistent with those used
in computing policy benefit reserves. For universal life insurance, annuity
and other investment-type products, deferred policy acquisition costs, to
the extent recoverable from future gross profits, are amortized generally in
proportion to the present value of expected gross profits from surrender
charges and investment, mortality and expense margins.
NONADMITTED ASSETS
Certain assets designated as "nonadmitted," principally furniture and
equipment and certain receivables, are excluded from the accompanying
balance sheets and are charged directly to unassigned surplus.
PREMIUMS
Revenues for universal life policies consist of the entire premium received.
Under GAAP, premiums received in excess of policy charges are not recognized
as premium revenue.
Premiums and deposits with respect to annuity and other investment-type
contracts are reported as premium revenues; whereas, under GAAP, such
premiums and deposits are treated as liabilities and policy charges
represent revenues.
BENEFIT RESERVES
Certain policy reserves are calculated based on statutorily required
interest and mortality assumptions rather than on estimated expected
experience or actual account balances as would be required under GAAP.
Death benefits paid, policy and contract withdrawals, and the change in
policy reserves on universal life policies, annuity and other
investment-type contracts are reported as benefits and settlement expenses
in the accompanying statements of income; whereas, under GAAP, withdrawals
are treated as a reduction of the policy or contract liabilities and
benefits would represent the excess of benefits paid over the policy account
value and interest credited to the account values.
REINSURANCE
Premiums, claims and policy benefits and contract liabilities are reported
in the accompanying financial statements net of reinsurance amounts. For
GAAP, all assets and liabilities related to reinsurance ceded contracts are
reported on a gross basis.
A liability for reinsurance balances has been provided for unsecured policy
and contract liabilities and unearned premiums ceded to reinsurers not
authorized by the Insurance Department to assume such business. Changes to
those amounts are credited or charged directly to unassigned surplus. Under
GAAP, an allowance for amounts deemed uncollectible is established through a
charge to income.
Commissions on business ceded are reported as income when received rather
than deferred and amortized with deferred policy acquisition costs. Business
assumed under 100% indemnity and assumption reinsurance agreements is
accounted for as a purchase for GAAP reporting purposes and the ceding
commission represents the purchase price. Under purchase accounting, assets
acquired and liabilities assumed are reported at fair value at the date of
the transaction and the excess of the purchase price over the sum of the
amounts assigned to assets acquired less liabilities assumed is recorded as
goodwill. On a statutory-basis, the ceding commission is expensed when paid
and reinsurance premiums and benefits are accounted for on bases consistent
with those used in accounting for the original policies issued and the terms
of the reinsurance contracts.
Certain reinsurance contracts meeting risk transfer requirements under
statutory-basis accounting practices have been accounted for using
traditional reinsurance accounting whereas such contracts would be accounted
for using deposit accounting under GAAP.
INCOME TAXES
Deferred income taxes are not provided for differences between financial
statement amounts and tax bases of assets and liabilities.
POLICYHOLDER DIVIDENDS
Policyholder dividends are recognized when declared rather than over the
term of the related policies.
S-6
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
SURPLUS NOTES DUE TO LNC
Surplus notes due to LNC are reported as surplus rather than as liabilities.
On a statutory-basis, interest on surplus notes is not accrued until
approval is received from the Indiana Insurance Commissioner whereas under
GAAP, interest would be accrued periodically based on the outstanding
principal and the interest rate.
STATEMENTS OF CASH FLOWS
Cash and short-term investments in the statements of cash flows represent
cash balances and investments with initial maturities of one year or less.
Under GAAP, the corresponding captions of cash and cash equivalents include
cash balances and investments with initial maturities of three months or
less.
A reconciliation of the Company's net income (loss) and capital and surplus
determined on a statutory-basis with amounts determined in accordance with
GAAP is as follows:
<TABLE>
<CAPTION>
CAPITAL AND SURPLUS NET INCOME (LOSS)
-----------------------------------------------------
DECEMBER 31 YEAR ENDED DECEMBER 31
1998 1997 1998 1997 1996
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts reported on a statutory-basis $ 2,564.5 $ 2,968.4 $(1,150.3) $ 392.9 $ 334.4
- -------------------------------------------
GAAP adjustments:
Deferred policy acquisition costs,
present value of future profits and
goodwill 3,085.2 958.3 48.5 (98.9) 66.7
----------------------------------------
Policy and contract reserves (2,299.9) (1,672.9) 1,743.4 (48.6) (57.1)
----------------------------------------
Interest maintenance reserve 159.7 135.4 24.4 58.7 (39.7)
----------------------------------------
Deferred income taxes 181.6 (13.0) (218.6) 70.3 1.8
----------------------------------------
Policyholders' share of earnings and
surplus on participating business (132.8) (79.8) 3.2 5.3 (.3)
----------------------------------------
Asset valuation reserve 484.5 450.0 -- -- --
----------------------------------------
Net realized gain (loss) on investments (174.1) (91.5) (116.7) (20.4) 78.7
----------------------------------------
Unrealized gain on investments 1,335.1 1,245.5 -- -- --
----------------------------------------
Nonadmitted assets, including nonadmitted
investments 119.1 61.0 -- -- --
----------------------------------------
Investments in subsidiary companies 490.4 188.8 41.3 (80.5) 29.9
----------------------------------------
Surplus notes and related interest (1,251.5) -- (1.5) -- --
----------------------------------------
Other, net (120.1) (162.5) 103.6 (35.0) (82.6)
---------------------------------------- --------- --------- --------- --------- ---------
Net increase (decrease) 1,877.2 1,019.3 1,627.6 (149.1) (2.6)
- ------------------------------------------- --------- --------- --------- --------- ---------
Amounts on a GAAP basis $ 4,441.7 $ 3,987.7 $ 477.3 $ 243.8 $ 331.8
- ------------------------------------------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
S-7
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Other significant accounting practices are as follows:
INVESTMENTS
Bonds not backed by loans are principally stated at amortized cost and the
discount or premium is amortized using the interest method.
Mortgage-backed bonds are valued at amortized cost and income is recognized
using a constant effective yield based on anticipated prepayments and the
estimated economic life of the securities. When actual prepayments differ
significantly from anticipated prepayments, the effective yield is
recalculated to reflect actual payments to date and anticipated future
payments. The net investment in the securities is adjusted to the amount
that would have existed had the new effective yield been applied since the
acquisition of the securities.
Short-term investments include investments with maturities of less than one
year at the date of acquisition. The carrying amounts for these investments
approximate their fair values.
Preferred stocks are reported at cost or amortized cost.
Unaffiliated common stocks are reported at fair value as determined by the
Securities Valuation Office of the NAIC and the related unrealized gains
(losses) are reported in unassigned surplus without adjustment for federal
income taxes.
Policy loans are reported at unpaid balances.
The Company uses various derivative instruments as part of its overall
liability-asset management program for certain investments and life
insurance and annuity products. The Company values all derivative
instruments on a basis consistent with that of the hedged item. Upon
termination, gains and losses on those instruments are included in the
carrying values of the underlying hedged items and are amortized over the
remaining lives of the hedged items as adjustments to investment income or
benefits from the hedged items through the IMR. Any unamortized gains or
losses are recognized when the underlying hedged items are sold. The
premiums paid for interest rate caps and swaptions are deferred and
amoritized to net investment income on a straight-line basis over the term
of the respective derivative.
Hedge accounting is applied as indicated above after the Company determines
that the items to be hedged expose the Company to interest rate
fluctuations, the widening of bond yield spreads over comparable maturity
U.S. government obligations, increased liabilities associated with certain
reinsurance agreements and foreign exchange risk. Moreover, the derivatives
used are designated as a hedge and reduce the indicated risk by having a
high correlation between changes in the value of the derivatives and the
items being hedged at both the inception of the hedge and throughout the
hedge period. Should such criteria not be met or if the hedged items have
been sold, terminated or matured, the change in value of the derivatives is
included in net income.
Mortgage loans on real estate are reported at unpaid balances, less
allowances for impairments. Real estate is reported at depreciated cost.
Realized investment gains and losses on investments sold are determined
using the specific identification method. Changes in admitted asset carrying
amounts of bonds, mortgage loans and common and preferred stocks are
credited or charged directly in unassigned surplus.
LOANED SECURITIES
Securities loaned are treated as collateralized financing transactions and a
liability is recorded equal to the repurchase price. It is the Company's
policy to take possession of securities with a market value at least equal
to the securities loaned. Securities loaned are recorded at amortized cost
as long as the value of the related collateral is sufficient. The Company's
agreements with third parties generally contain contractual provisions to
allow for additional collateral to be obtained when necessary. The Company
values collateral daily and obtains additional collateral when deemed
appropriate.
GOODWILL
Goodwill, which represents the excess, subject to certain limitations, of
the ceding commission over statutory-basis net assets of business purchased
S-8
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
under an assumption reinsurance agreement, is amortized on a straight-line
basis over ten years.
PREMIUMS
Life insurance and annuity premiums are recognized as revenue when due.
Accident and health premiums are earned pro rata over the contract term of
the policies.
BENEFITS
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables using
statutorily specified interest rates and valuation methods that will
provide, in the aggregate, reserves that are greater than or equal to the
minimum or guaranteed policy cash values or the amounts required by the
Insurance Department. The Company waives deduction of deferred fractional
premiums on the death of life and annuity policy insureds and returns any
premium beyond the date of death, except for policies issued prior to March
1977. Surrender values on policies do not exceed the corresponding benefit
reserves. Additional reserves are established when the results of cash flow
testing under various interest rate scenerios indicate the need for such
reserves. If net premiums exceed the gross premiums on any insurance
in-force, additional reserves are established. Benefit reserves for policies
underwritten on a substandard basis are determined using the multiple table
reserve method.
The tabular interest, tabular less actual reserve released and the tabular
cost have been determined by formula or from the basic data for such items.
Tabular interest funds not involving life contingencies were determined
using the actual interest credited to the funds plus the change in accrued
interest.
Liabilities related to guaranteed investment contracts and policyholder
funds left on deposit with the Company generally are equal to fund balances
less applicable surrender charges.
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Unpaid claims and claim adjustment expenses on accident and health policies
represent the estimated ultimate net cost of all reported and
unreported claims incurred during the year. The Company does not discount
claims and claim adjustment expense reserves. The reserves for unpaid claims
and claim adjustment expenses are estimated using individual case-basis
valuations and statistical analyses. Those estimates are subject to the
effects of trends in claim severity and frequency. Although considerable
variability is inherent in such estimates, management believes that the
reserves for claims and claim adjustment expenses are adequate. The
estimates are continually reviewed and adjusted as necessary as experience
develops or new information becomes known; such adjustments are included in
current operations.
REINSURANCE CEDED AND ASSUMED
Reinsurance premiums, benefits and claims and claim adjustment expenses are
accounted for on bases consistent with those used in accounting for the
original policies issued and the terms of the reinsurance contracts. Certain
business is transacted on a funds withheld basis and investment income on
investments managed by the Company are reported in net investment income.
PENSION BENEFITS
Costs associated with the Company's defined benefit pension plans are
systematically accrued during the expected period of active service of the
covered employees.
INCOME TAXES
The Company and eligible subsidiaries have elected to file consolidated
federal and state income tax returns with LNC and certain LNC subsidiaries.
Pursuant to an intercompany tax sharing agreement with LNC, the Company
provides for income taxes on a separate return filing basis. The tax sharing
agreement also provides that the Company will receive benefit for net
operating losses, capital losses and tax credits which are not usable on a
separate return basis to the extent such items may be utilized in the
consolidated income tax returns of LNC.
STOCK OPTIONS
The Company recognizes compensation expense for its stock option incentive
plans using the intrinsic value method of accounting. Under the terms of
S-9
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
the intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of LNC's common stock at the grant date, or other
measurement date, over the amount an employee must pay to acquire the stock.
ASSETS HELD IN SEPARATE ACCOUNTS AND LIABILITIES RELATED TO SEPARATE
ACCOUNTS
Separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered for variable life
and variable annuity contracts and for which the contractholder, rather than
the Company, bears the investment risk. Separate account assets are reported
at fair value. The operations of the separate accounts are not included in
the accompanying financial statements. Policy administration and investment
management fees charged on separate account policyholder deposits are
included in income from separate account investment management and
administration service fees. Mortality charges on variable universal life
contracts are included in income from expense charges on deposit funds. Fees
charged relative to variable annuity and variable universal life
administration agreements for separate account products sold by other
insurance companies and not recorded on the Company's financial statements
are included in income from separate account investment management and
administration service fees.
RECLASSIFICATION
Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1998 presentation. These reclassifications had no effect on
unassigned surplus or net income previously reported.
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory-basis financial statements are prepared in
accordance with accounting practices prescribed or permitted by the
Insurance Department. "Prescribed" statutory accounting practices are
interspersed throughout state insurance laws and regulations, the NAIC's
ACCOUNTING PRACTICES AND PROCEDURES MANUAL and a variety of other NAIC
publications. "Permitted" statutory accounting practices encompass all
accounting practices that are not prescribed; such practices may differ from
state to state, may differ from company to company within a state and may
change in the future.
In 1998, the NAIC adopted codified statutory accounting principles
("Codification"). Codification will likely change, to some extent,
prescribed statutory accounting practices and may result in changes to the
accounting practices that the Company uses to prepare its statutory-basis
financial statements. Codification will require adoption by the various
states before it becomes the prescribed statutory-basis of accounting for
insurance companies domesticated within those states. Accordingly, before
Codification becomes effective for the Company, the state of Indiana must
adopt Codification as the prescribed basis of accounting on which domestic
insurers must report their statutory-basis results to the Insurance
Department. At this time, it is anticipated that Indiana will adopt
Codification, however, based on current guidance, management believes that
the impact of Codification will not be material to the Company's
statutory-basis financial statements.
The Company has received written approval from the Insurance Department to
record surrender charges applicable to separate account liabilities for
variable life and annuity products as a liability in the separate account
financial statements payable to the Company's general account. In the
accompanying financial statements, a corresponding receivable is recorded
with the related income impact recorded in the accompanying Statement of
Operations as a change in reserves or change in premium and other deposit
funds.
S-10
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS
The major categories of net investment income are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Income:
Bonds $ 1,714.3 $ 1,524.4 $ 1,442.2
----------------------------------------------------------------
Preferred stocks 19.7 23.5 9.6
----------------------------------------------------------------
Unaffiliated common stocks 10.6 8.3 6.5
----------------------------------------------------------------
Affiliated common stocks 5.2 15.0 9.5
----------------------------------------------------------------
Mortgage loans on real estate 323.6 257.2 269.3
----------------------------------------------------------------
Real estate 81.4 92.2 114.4
----------------------------------------------------------------
Policy loans 86.5 37.5 35.0
----------------------------------------------------------------
Other investments 26.5 28.2 22.4
----------------------------------------------------------------
Cash and short-term investments 104.7 70.3 48.9
---------------------------------------------------------------- --------- --------- ---------
Total investment income 2,372.5 2,056.6 1,957.8
- -------------------------------------------------------------------
Expenses:
Depreciation 19.3 21.0 25.0
----------------------------------------------------------------
Other 246.0 188.5 176.5
---------------------------------------------------------------- --------- --------- ---------
Total investment expenses 265.3 209.5 201.5
- ------------------------------------------------------------------- --------- --------- ---------
Net investment income $ 2,107.2 $ 1,847.1 $ 1,756.3
- ------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
Nonadmitted accrued investment income at December 31, 1997
amounted to $2,600,000, consisting principally of interest
on bonds in default and mortgage loans. No accrued
investment income was nonadmitted at December 31, 1998.
S-11
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in bonds are
summarized as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------
(IN MILLIONS)
----------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1998:
Corporate $17,658.4 $ 1,159.8 $ 148.2 $18,670.0
------------------------------------------------
U.S. government 900.7 88.8 3.4 986.1
------------------------------------------------
Foreign government 947.8 59.9 61.2 946.5
------------------------------------------------
Mortgage-backed 4,312.1 171.6 33.4 4,450.3
------------------------------------------------
State and municipal 11.9 .7 -- 12.6
------------------------------------------------ --------- ----------- ----------- ---------
$23,830.9 $ 1,480.8 $ 246.2 $25,065.5
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
At December 31, 1997:
Corporate $13,003.8 $ 942.2 $ 60.1 $13,885.9
------------------------------------------------
U.S. government 436.3 67.9 -- 504.2
------------------------------------------------
Foreign government 1,202.1 104.9 5.4 1,301.6
------------------------------------------------
Mortgage-backed 3,874.3 215.2 27.1 4,062.4
------------------------------------------------
State and municipal 44.2 .3 -- 44.5
------------------------------------------------ --------- ----------- ----------- ---------
$18,560.7 $ 1,330.5 $ 92.6 $19,798.6
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</TABLE>
The carrying amount of bonds in the balance sheets at
December 31, 1998 and 1997 reflects adjustments of
$11,800,000 and $5,500,000, respectively, to decrease
amortized cost as a result of the Securities Valuation
Office of the NAIC ("SVO") designating certain investments
as low or lower quality.
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1998, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Maturity:
In 1999 $ 705.6 $ 712.6
--------------------------------------------------------------------------
In 2000-2003 4,041.9 4,142.8
--------------------------------------------------------------------------
In 2004-2008 6,652.0 6,860.1
--------------------------------------------------------------------------
After 2008 8,119.3 8,899.7
--------------------------------------------------------------------------
Mortgage-backed securities 4,312.1 4,450.3
-------------------------------------------------------------------------- --------- ---------
Total $23,830.9 $25,065.5
- ----------------------------------------------------------------------------- --------- ---------
--------- ---------
</TABLE>
S-12
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The expected maturities may differ from the contractual
maturities in the foregoing table because certain borrowers
may have the right to call or prepay obligations with or
without call or prepayment penalties.
Proceeds from sales of investments in bonds during 1998,
1997 and 1996 were $9,395,000,000, $9,715,000,000 and
$10,996,900,000, respectively. Gross gains during 1998, 1997
and 1996 of $186,300,000, $218,100,000 and $169,700,000,
respectively, and gross losses of $138,000,000, $78,000,000
and $177,000,000, respectively, were realized on those
sales.
At December 31, 1998 and 1997, investments in bonds, with an
admitted asset value of $97,800,000 and $76,200,000,
respectively, were on deposit with state insurance
departments to satisfy regulatory requirements.
Unrealized gains and losses on investments in unaffiliated
common stocks and preferred stocks are reported directly in
unassigned surplus and do not affect operations. The cost or
amortized cost, gross unrealized gains and losses and the
fair value of investments in unaffiliated common stocks and
preferred stocks are as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------
(IN MILLIONS)
--------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1998:
Preferred stocks $236.0 $ 8.9 $ 2.4 $242.5
- ----------------------------------------
Unaffiliated common stocks 223.3 62.0 26.0 259.3
- ----------------------------------------
At December 31, 1997:
Preferred stocks $257.3 $12.1 $ .7 $268.7
- ----------------------------------------
Unaffiliated common stocks 357.0 98.5 19.5 436.0
- ----------------------------------------
</TABLE>
The carrying amount of preferred stocks in the balance
sheets at December 31, 1998 and 1997 reflects adjustments of
$5,800,000 and $4,000,000, respectively, to decrease
amortized cost as a result of the SVO designating certain
investments as low or lower quality.
During 1998, the minimum and maximum lending rates for
mortgage loans were 6.41% and 8.08%, respectively. At the
issuance of a loan, the percentage of loan to value on any
one loan does not exceed 75%. At December 31, 1998, the
Company did not hold any mortgages with interest overdue
beyond one year. All properties covered by mortgage loans
have fire insurance at least equal to the excess of the loan
over the maximum loan that would be allowed on the land
without the building.
S-13
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The components of the Company's real estate are summarized
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Occupied by the Company:
Land $ 2.5 $ 2.5
--------------------------------------------------------------------------------
Buildings 9.0 8.4
--------------------------------------------------------------------------------
Less accumulated depreciation (1.7) (1.2)
-------------------------------------------------------------------------------- --------- ---------
Net real estate occupied by the Company 9.8 9.7
- -----------------------------------------------------------------------------------
Other:
Land 93.2 124.1
--------------------------------------------------------------------------------
Buildings 413.0 491.6
--------------------------------------------------------------------------------
Other 7.9 8.1
--------------------------------------------------------------------------------
Less accumulated depreciation (50.1) (49.1)
-------------------------------------------------------------------------------- --------- ---------
Net other real estate 464.0 574.7
- ----------------------------------------------------------------------------------- --------- ---------
Net real estate $ 473.8 $ 584.4
- ----------------------------------------------------------------------------------- --------- ---------
--------- ---------
</TABLE>
Realized capital gains are reported net of federal income
taxes and amounts transferred to the IMR as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Realized capital gains $ 179.7 $ 209.3 $ 69.3
- ------------------------------------------------------------------------
Less amount transferred to IMR (net of related taxes (credit) of $27.3,
$54.0 and $(6.7) in 1998, 1997 and 1996, respectively) 50.8 100.2 (12.4)
- ------------------------------------------------------------------------ --------- --------- ---------
128.9 109.1 81.7
Less federal income taxes on realized gains 82.1 77.8 28.4
- ------------------------------------------------------------------------ --------- --------- ---------
Net realized capital gains $ 46.8 $ 31.3 $ 53.3
- ------------------------------------------------------------------------ --------- --------- ---------
--------- --------- ---------
</TABLE>
S-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES
Statutory-basis financial information related to the
Company's four wholly owned insurance subsidiaries is
summarized as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
--------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $ 1,221.1 $ 333.9 $ 403.6 $ 1,938.0
- ---------------------------------------------------------
Other assets 40.3 31.3 490.0 270.2
- --------------------------------------------------------- --------- ----------- --------- ---------
Total admitted assets $ 1,261.4 $ 365.2 $ 893.6 $ 2,208.2
- --------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
Insurance reserves $ 1,149.8 $ 266.3 $ 281.8 $ 1,814.5
- ---------------------------------------------------------
Other liabilities 42.0 24.0 553.7 45.1
- ---------------------------------------------------------
Liabilities related to separate accounts -- -- -- 236.9
- ---------------------------------------------------------
Capital and surplus 69.6 74.9 58.1 111.7
- --------------------------------------------------------- --------- ----------- --------- ---------
Total liabilities and capital and surplus $ 1,261.4 $ 365.2 $ 893.6 $ 2,208.2
- --------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
--------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 310.4 $ 165.0 $ 150.3 $ 1,402.6
- -----------------------------------------------------------
Expenses 310.6 164.4 139.5 1,656.1
- -----------------------------------------------------------
Net realized gains (losses) (0.3) 0.9 (0.1) (0.7)
- ----------------------------------------------------------- --------- ----------- --------- ---------
Net income (loss) $ (0.5) $ 1.5 $ 10.7 $ (254.2)
- ----------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
------------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $ 1,154.4 $ 284.8 $ 399.0 $ 796.3
- -----------------------------------------------------------
Other assets 36.9 77.3 481.6 130.8
- ----------------------------------------------------------- --------- ----------- ----------- -----------
Total admitted assets $ 1,191.3 $ 362.1 $ 880.6 $ 972.1
- ----------------------------------------------------------- --------- ----------- ----------- -----------
--------- ----------- ----------- -----------
Insurance reserves $ 1,072.2 $ 266.7 $ 279.3 $ 588.7
- -----------------------------------------------------------
Other liabilities 48.4 21.7 546.4 5.8
- -----------------------------------------------------------
Liabilities related to separate accounts -- -- -- 164.7
- -----------------------------------------------------------
Capital and surplus 70.7 73.7 54.9 212.9
- ----------------------------------------------------------- --------- ----------- ----------- -----------
Total liabilities and capital and surplus $ 1,191.3 $ 362.1 $ 880.6 $ 972.1
- ----------------------------------------------------------- --------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
S-15
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
----------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 267.6 $ 135.4 $ 125.3 $ 230.0
- -------------------------------------------------------------
Expenses 262.6 244.2 114.6 224.4
- -------------------------------------------------------------
Net realized gains (losses) .1 .6 (.1) (.1)
- ------------------------------------------------------------- --------- --------- ----------- -----------
Net income (loss) $ 5.1 $ (108.2) $ 10.6 $ 5.5
- ------------------------------------------------------------- --------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
The Company also owns three non-insurance subsidiaries, all
of which were formed or acquired in 1998. AnnuityNet, Inc.
was formed for the distribution of variable annuities over
the internet and is valued on the equity method with an
admitted asset value of $1,500,000 at December 31, 1998.
Lincoln National Insurance Associates was purchased for
$600,000 and is valued on the equity method with an admitted
asset value of $600,000 at December 31, 1998. Sagemark
Consulting, Inc. ("Sagemark") was purchased in 1998 and is a
broker dealer acquired in connection with a reinsurance
transaction completed in 1998. Sagemark is valued on the
equity method with an admitted asset value of $5,700,000 at
December 31, 1998.
The carrying value of all affiliated common stocks, was
$322,100,000 and $412,100,000 at December 31, 1998 and 1997,
respectively. The insurance affiliates are carried at
statutory-basis net equity while other affiliates are
recorded at GAAP basis net equity, adjusted for certain
items which would be non-admitted under statutory accounting
principles. The cost basis of investments in subsidiaries as
of December 31, 1998 and 1997 was $631,100,000 and
$466,200,000, respectively.
During 1998, 1997 and 1996 the Company's insurance
subsidiaries paid dividends of $5,200,000, $15,000,000 and
$10,500,000, respectively.
5. FEDERAL INCOME TAXES
The effective federal income tax rate in the accompanying
statements of operations differs from the prevailing
statutory tax rate principally due to tax-exempt investment
income, dividends received tax deductions and differences
between statutory accounting and tax return recognition
relative to policy acquisition costs, policy and contract
liabilities and reinsurance ceding commissions.
In 1997 and 1996, federal income taxes incurred totaled
$78,300,000 and $83,600,000, respectively. In 1998, a
federal income tax net operating loss of $103,800,000 and
tax credits of $19,300,000 were incurred and carried back to
recover taxes paid in prior years.
The Company paid $2,300,000, $164,500,000 and $100,400,000
to LNC in 1998, 1997 and 1996, respectively, for federal
income taxes.
Under prior income tax law, one-half of the excess of a life
insurance company's income from operations over its taxable
investment income was not taxed, but was set aside in a
special tax account designated as "Policyholders' Surplus."
The Company has approximately $187,000,000 of untaxed
"Policyholders' Surplus" on which no payment of federal
income taxes will be required unless it is distributed as a
dividend, or under other specified conditions. Barring the
passage of unfavorable legislation, the Company does not
believe that any significant portion of the account will be
taxed in the foreseeable future and no related tax liability
has been recognized. If the entire balance of the account
S-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES (CONTINUED)
became taxable under the current federal income tax rate,
the tax would be approximately $65,500,000.
6. SUPPLEMENTAL FINANCIAL DATA
The balance sheet caption, "Other admitted assets", includes
amounts recoverable from other insurers for claims paid by
the Company, and the balance sheet caption, "Future policy
benefits and claims," has been reduced for insurance ceded
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Insurance ceded $ 4,081.8 $ 1,431.0
- -------------------------------------------------------------------------------
Amounts recoverable from other insurers 79.9 35.9
- -------------------------------------------------------------------------------
</TABLE>
Reinsurance transactions, excluding assumption reinsurance,
included in the income statement caption, "Premiums and
deposits," are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 9,018.9 $ 727.2 $ 241.3
- ----------------------------------------------------------------------
Insurance ceded 877.1 302.9 193.3
- ---------------------------------------------------------------------- --------- --------- ---------
Net amount included in premiums $ 8,141.8 $ 424.3 $ 48.0
- ---------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
The income statement caption, "Benefits and settlement
expenses," is net of reinsurance recoveries of
$2,098,800,000, $1,240,500,000 and $787,900,000 for 1998,
1997 and 1996, respectively.
Details underlying the balance sheet caption "Other
policyholder funds" are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Premium deposit funds $16,285.2 $16,201.8
- -----------------------------------------------------------------------------
Undistributed earnings on participating business 348.4 142.0
- -----------------------------------------------------------------------------
Other 13.9 16.3
- ----------------------------------------------------------------------------- --------- ---------
$16,647.5 $16,360.1
--------- ---------
--------- ---------
</TABLE>
S-17
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
6. SUPPLEMENTAL FINANCIAL DATA (CONTINUED)
Deferred and uncollected life insurance premiums and annuity
considerations included in the balance sheet caption,
"Premiums and fees in course of collection," are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------
NET OF
GROSS LOADING LOADING
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Ordinary new business $ 9.5 $ 3.4 $ 6.1
- -----------------------------------------------------------------------
Ordinary renewal (13.7) 11.3 (25.0)
- -----------------------------------------------------------------------
Group life 14.2 .2 14.0
- ----------------------------------------------------------------------- --------- ----- -----------
$ 10.0 $ 14.9 $ (4.9)
--------- ----- -----------
--------- ----- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------
NET OF
GROSS LOADING LOADING
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Ordinary new business $ 3.2 $ 2.4 $ .8
- ------------------------------------------------------------------------
Ordinary renewal 17.8 3.2 14.6
- ------------------------------------------------------------------------
Group life 10.6 .2 10.4
- ------------------------------------------------------------------------ --------- --- -----
$ 31.6 $ 5.8 $ 25.8
--------- --- -----
--------- --- -----
</TABLE>
The Company has entered into non-exclusive managing general
agent agreements with International Benefit Services Corp.,
HRM Claim Management, Inc. and Pediatrics Insurance
Consultants, Inc. to write group life and health business.
Direct premiums written related to the agreements amounted
to $11,900,000 and $13,400,000 in 1998 and 1997,
respectively. During 1996, LNC Administrative Services
Corporation, an affiliate, entered into a similar agreement
with the Company with direct premiums written amounting to
$7,000,000 and $7,200,000 in 1998 and 1997, respectively.
Authority granted by the managing general agents agreements
include underwriting, claims adjustment and claims payment
services.
S-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
7. ANNUITY RESERVES
At December 31, 1998, the Company's annuity reserves and
deposit fund liabilities, including separate accounts, that
are subject to discretionary withdrawal with adjustment,
subject to discretionary withdrawal without adjustment and
not subject to discretionary withdrawal provisions are
summarized as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
----------------------
(IN MILLIONS)
----------------------
<S> <C> <C>
Subject to discretionary withdrawal with adjustment:
With market value adjustment $ 2,659.5 5%
-----------------------------------------------------------------------------
At book value, less surrender charge 2,959.2 5
-----------------------------------------------------------------------------
At market value 35,472.0 63
----------------------------------------------------------------------------- --------- ---
41,090.7 73
Subject to discretionary withdrawal without adjustment at book value with
minimal or no charge or adjustment 12,747.3 22
- --------------------------------------------------------------------------------
Not subject to discretionary withdrawal 2,625.1 5
- -------------------------------------------------------------------------------- --------- ---
Total annuity reserves and deposit fund liabilities -- before reinsurance 56,463.1 100%
- -------------------------------------------------------------------------------- ---
---
Less reinsurance 1,683.8
- -------------------------------------------------------------------------------- ---------
Net annuity reserves and deposit fund liabilities, including separate accounts $54,779.3
- -------------------------------------------------------------------------------- ---------
---------
</TABLE>
A reconciliation of the total net annuity reserves and
deposit fund liabilities to the amounts reported in the
Company's 1998 Annual Statement and the Company's Separate
Accounts Annual Statement is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
(IN MILLIONS)
-------------
<S> <C>
Per 1998 Annual Statement:
Exhibit 8, Section B -- Total (net) $ 2,554.6
- ----------------------------------------------------------------
Exhibit 8, Section C -- Total (net) 26.0
- ----------------------------------------------------------------
Exhibit 10, Column 1, Line 19 16,579.6
- ---------------------------------------------------------------- -------------
19,160.2
- ---------------------------------------------------------------- -------------
Per Separate Accounts Annual Statement
Exhibit 6, Column 2, Line 0299999 146.4
- ----------------------------------------------------------------
Page 3, Line 3 35,472.7
- ---------------------------------------------------------------- -------------
35,619.1
- ---------------------------------------------------------------- -------------
Total net annuity reserves and deposit fund liabilities $54,779.3
- ---------------------------------------------------------------- -------------
-------------
</TABLE>
8. CAPITAL AND SURPLUS
In 1998, the Company issued two surplus notes to LNC in return for cash of
$1,250,000,000. The first note for $500,000,000 was issued to LNC in
connection with the CIGNA indemnity reinsurance transaction on January 5,
1998. This note calls for the Company to pay the principal amount of the
notes on or before March 31, 2028 and interest to be paid quarterly at an
annual rate of 6.56%. Subject to approval by the Indiana Insurance
Commissioner, LNC also has a right to redeem the note for immediate
repayment in total or in part once per year on the anniversary date of the
note, but not before January 5, 2003. Any payment of interest or
S-19
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
8. CAPITAL AND SURPLUS (CONTINUED)
repayment of principal may be paid only out of the Company's earnings, only
if the Company's surplus exceeds specified levels ($2,315,700,000 at
December 31, 1998), and subject to approval by the Indiana Insurance
Commissioner. No interest payments were approved by the Indiana Insurance
Commissioner as of December 31, 1998 and, thus, no amounts were accrued at
that date.
The second note for $750,000,000 was issued on December 18, 1998 to LNC in
connection with the Aetna indemnity reinsurance transaction. This note calls
for the Company to pay the principal amount of the notes on or before
December 31, 2028 and interest to be paid quarterly at an annual rate of
6.03%. Subject to approval by the Indiana Insurance Commissioner, LNC also
has a right to redeem the note for immediate repayment in total or in part
once per year on the anniversary date of the note, but not before December
18, 2003. Any payment of interest or repayment of principal may be paid only
out of the Company's earnings, only if the Company's surplus exceeds
specified levels ($2,379,600,000 at December 31, 1998), and subject to
approval by the Indiana Insurance Commissioner. No interest payments were
approved by the Indiana Insurance Commissioner as of December 31, 1998 and,
thus, no amounts were accrued at that date.
A summary of the terms of these surplus notes follows:
<TABLE>
<CAPTION>
CURRENT YEAR
PRINCIPAL PRINCIPAL INTEREST
DATE ISSUED AMOUNT OF NOTE OUTSTANDING PAID
------------------------------- -------------- ------------- ------------
<S> <C> <C> <C>
January 5, 1998 $500,000,000 $ 500,000,000 $ 32,300,000
-------------------------------
December 18, 1998 750,000,000 750,000,000 --
-------------------------------
</TABLE>
Life insurance companies are subject to certain Risk-Based Capital ("RBC")
requirements as specified by the NAIC. Under those requirements, the amount
of capital and surplus maintained by a life insurance company is to be
determined based on the various risk factors related to it. At December 31,
1998, the Company exceeds the RBC requirements.
The payment of dividends by the Company is limited and cannot be made except
from earned profits. The maximum amount of dividends that may be paid by
life insurance companies without prior approval of the Indiana Insurance
Commissioner is subject to restrictions relating to statutory surplus and
net gain from operations. In January 1998, the Company assumed a block of
individual life insurance and annuity business from CIGNA and in October
1998, the Company assumed a block of individual life insurance business from
Aetna (SEE NOTE 10). The statutory accounting regulations do not allow
goodwill to be recognized on indemnity reinsurance transactions and
therefore, the related ceding commission was expensed in the accompanying
Statement of Operations and resulted in the reduction of unassigned surplus.
As a result of these transactions, the Company's statutory-basis unassigned
surplus is negative as of December 31, 1998 and it will be necessary for the
Company to obtain prior approval of the Indiana Insurance Commissioner
before paying any dividends to LNC until such time as statutory-basis
unassigned surplus is positive. It is expected that statutory-basis
unassigned surplus will return to a positive position within two to three
years from the closing of the Aetna transaction assuming a level of
statutory-basis earnings coinciding with recent earnings patterns. If
statutory-basis earnings are less then recent patterns due to adverse
operating conditions or further indemnity reinsurance transactions of this
nature or other factors, or if dividends are approved and paid at amounts
higher than recent history, the statutory-basis unassigned surplus may not
return to a positive position as soon as expected. Although no assurance can
be given, management believes that the approvals for the payment of such
dividends in amounts consistent with those paid in the past can be obtained.
S-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFIT PLANS
LNC maintains defined benefit pension plans for its employees (including
Company employees) and a defined contribution plan for the Company's agents.
LNC also maintains 401(k) plans, deferred compensation plans and
postretirement medical and life insurance plans for its employees and agents
(including the Company's employees and agents). The aggregate expenses and
accumulated obligations for the Company's portion of these plans are not
material to the Company's statutory-basis financial statements of income or
financial position for any of the periods shown.
LNC has various incentive plans for key employees, agents and directors of
LNC and its subsidiaries that provide for the issuance of stock options,
stock appreciation rights, restricted stock awards and stock incentive
awards. These plans are comprised primarily of stock option incentive plans.
Stock options granted under the stock option incentive plans are at the
market value at the date of grants and, subject to termination of
employment, expire ten years from the date of grant. Such options are
transferable only upon death and are exercisable one year from the date of
grant for options issued prior to 1992. Option issued subsequent to 1991 are
exercisable in 25% increments on the option issuance anniversary in the four
years following issuance.
As of December 31, 1998, 885,252 and 504,369 shares of LNC common stock were
subject to options granted to Company employees and agents, respectively,
under the stock option incentive plans of which 430,053 and 87,160,
respectively, were exercisable on that date. The exercise prices of the
outstanding options range from $23.50 to $96.41. During 1998, 1997 and 1996,
136,469, 170,789 and 72,405 options were exercised, respectively, and
18,288, 1,846 and 10,950 options were forfeited, respectively.
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES
DISABILITY INCOME CLAIMS
The liability for disability income claims net of the related asset for
amounts recoverable from reinsurers at December 31, 1998 and 1997 is a net
liability of $670,100,000 and $516,900,000, respectively. This liability is
based on the assumption that the recent experience will continue in the
future. If incidence levels and/or claim termination rates fluctuate
significantly from the assumptions underlying reserves, adjustments to
reserves could be required in the future. Accordingly, this liability may
prove to be deficient or excessive. The Company reviews reserve levels on an
ongoing basis. However, it is management's opinion that such future
development will not materially affect the financial position of the
Company.
During 1997, the Company conducted an in-depth review of loss experience on
its disability income business. As a result of this study, the reserve level
was deemed to be inadequate to meet future obligations if current incident
levels were to continue in the future. In order to address this situation,
the Company strengthened its disability income reserves by $80,000,000 in
1997.
MARKETING AND COMPLIANCE ISSUES
Regulators continue to focus on market conduct and compliance issues. Under
certain circumstances companies operating in the insurance and financial
services markets have been held responsible for providing incomplete or
misleading sales materials and for replacing existing policies with policies
that were less advantageous to the policyholder. The Company's management
continues to monitor the Company's sales materials and compliance procedures
and is making an extensive effort to minimize any potential liability. Due
to the uncertainty surrounding such matters, it is not possible to provide a
meaningful estimate of the range of potential outcomes at this time;
however, it is management's opinion that such future development will not
materially affect the financial position of the Company.
GROUP PENSION ANNUITIES
The liabilities for guaranteed interest and group pension annuity contracts,
which are no longer being sold by the Company, are supported by a single
portfolio of assets that attempts to match the duration of these
liabilities. Due to the long-term nature of group pension annuities and the
resulting inability to exactly match cash flows, a risk exists that future
cash flows from investments will not be reinvested at rates as high as
currently earned by the portfolio. Accordingly, these liabilities may prove
to be deficient or excessive. However, it is management's opinion that such
future
S-21
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
development will not materially affect the financial position of the
Company.
LEASES
The Company leases its home office properties through sale-leaseback
agreements. The agreements provide for a 25 year lease period with options
to renew for six additional terms of five years each. The agreements also
provide the Company with the right of first refusal to purchase the
properties during the term of the lease, including renewal periods, at a
price as defined in the agreements. The Company also has the option to
purchase the leased properties at fair market value as defined in the
agreements on the last day of the initial 25-year lease ending in 2009 or on
the last day of any of the renewal periods.
Total rental expense on operating leases in 1998, 1997 and 1996 was
$34,000,000, $29,300,000 and $26,400,000, respectively. Future minimum
rental commitments are as follows (in millions):
<TABLE>
<S> <C>
1999 $ 18.9
- --------------------------------------
2000 18.4
- --------------------------------------
2001 18.7
- --------------------------------------
2002 18.7
- --------------------------------------
2003 18.6
- --------------------------------------
Thereafter 116.6
- -------------------------------------- ---------
$ 209.9
---------
---------
</TABLE>
INFORMATION TECHNOLOGY COMMITMENT
In February 1998, the Company signed a seven-year contract with IBM Global
Services for information technology services for the Fort Wayne operations.
Total costs incurred in 1998 were $54,800,000. Future minimum annual costs
range from $33,600,000 to $56,800,000, however future costs are dependent on
usage and could exceed these amounts.
INSURANCE CEDED AND ASSUMED
The Company cedes insurance to other companies, including certain
affiliates. The portion of risks exceeding the Company's retention limit is
reinsured with other insurers. Prior to December 31, 1997, the Company
limited its maximum coverage that it retained on an individual to
$3,000,000. Based on a review of the capital and business in-force effective
in January 1998, the Company changed the amount it will retain on an
individual to $10,000,000. Portions of the Company's deferred annuity
business have also been reinsured with other companies to limit its exposure
to interest rate risks. At December 31, 1998, the reserves associated with
these reinsurance arrangements totaled $1,608,500,000. To cover products
other than life insurance, the Company acquires other insurance coverages
with retentions and limits that management believes are appropriate for the
circumstances. The accompanying statutory-basis financial statements reflect
premiums, benefits and policy acquisition expenses net of reinsurance ceded.
The Company remains liable if its reinsurers are unable to meet their
contractual obligations under the applicable reinsurance agreements.
Proceeds from the sale of common stock of American Statements Financial
Corporation ("American States") and proceeds from the January 5, 1998
surplus note, were used to finance an indemnity reinsurance transaction
whereby the Company and LLANY reinsured 100% of a block of individual life
insurance and annuity business from CIGNA Corporation ("CIGNA"). The Company
paid $1,264,400,000 to CIGNA on January 2, 1998 under the terms of the
reinsurance agreement and recognized a ceding commission expense of
$1,127,700,000 in 1998, which is included in the Statement of Operations
line item "Underwriting, acquisition, insurance and other expenses." At the
time of closing, this block of business had statutory liabilities of
$4,658,200,000 that became the Company's obligation. The Company also
received assets, measured on a historical statutory basis, equal to the
liabilities.
Pursuant to the terms of the reinsurance agreement, the Company, LLANY and
CIGNA are in the final stages of agreeing to the statutory-basis values of
these assets and liabilities. Any changes to these values that may occur in
future periods will not be material to the Company's financial position.
Subsequent to this transaction, the Company and LLANY announced that they
had reached an agreement to sell the administration rights to a variable
S-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
annuity portfolio that had been acquired as part of the block of business
assumed on January 2, 1998. This sale closed on October 12, 1998 with an
effective date of August 1, 1998.
In connection with the completion of the CIGNA reinsurance transaction, the
Company recorded a charge of $31,000,000 to cover certain costs of
integrating the existing operations with the new block of business.
On October 1, 1998, the Company and LLANY entered into an indemnity
reinsurance transaction whereby the Company and LLANY reinsured 100% of a
block of individual life insurance business from Aetna, Inc. The Company
paid $856,300,000 to Aetna on October 1, 1998 under the terms of the
reinsurance agreement and recognized a ceding commission expense of
$815,300,000 in 1998, which is included in the Statement of Operations line
item "Underwriting, acquisition, insurance and other expenses." At the time
of closing, this block of business had statutory liabilities of
$2,813,300,000 that became the Company's obligation. The Company also
received assets, measured on a historical statutory basis, equal to the
liabilities. The Company financed this reinsurance transaction with proceeds
from short-term debt borrowings from LNC until the December 18, 1998 surplus
note was approved by the Insurance Department. Subsequent to the Aetna
transaction, the Company and LLANY announced that they had reached an
agreement to retrocede the sponsored life business assumed for $87,600,000.
The retrocession agreement closed on October 14, 1998 with an effective date
of October 1, 1998.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1998, the Company has provided $44,900,000 of
statutory-basis surplus relief to other insurance companies under
reinsurance transactions. The Company has retroceded 100% of this accepted
surplus relief to its off-shore reinsurance affiliates. Generally, such
amounts are offset by corresponding receivables from the ceding company,
which are secured by future profits on the reinsured business. However, the
Company is subject to the risk that the ceding company may become insolvent
and the right of offset would not be permitted.
The regulatory required liability for unsecured reserves ceded to
unauthorized reinsurers was $43,400,000 and $8,200,000 at December 31, 1998
and 1997, respectively.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1998, the Company did not have a material concentration of
financial instruments in a single investee or industry. The Company's
investments in mortgage loans principally involve commercial real estate. At
December 31, 1998, 25% of such mortgages ($980,500,000) involved properties
located in Texas and California. Such investments consist of first mortgage
liens on completed income-producing properties and the mortgage outstanding
on any individual property does not exceed $58,200,000.
At December 31, 1998, the Company did not have a concentration of: 1)
business transactions with a particular customer, lender or distributor; 2)
revenues from a particular product or service; 3) sources of supply of labor
or services used in the business; or 4) a market or geographic area in which
business is conducted that makes it vulnerable to an event that is at least
reasonably possible to occur in the near term and which could cause a severe
impact to the Company's financial condition.
OTHER CONTINGENCY MATTERS
The Company is involved in various pending or threatened legal proceedings
arising from the conduct of business. Most of these proceedings are routine
in the ordinary course of business. The Company maintains professional
liability insurance coverage for claims in excess of $5,000,000. The degree
of applicability of this coverage will depend on the specific facts of each
proceeding. In some instances, these proceedings include claims for
compensatory and punitive damages and similar types of relief in addition to
amounts for alleged contractual liability or requests for equitable relief.
After consultation with legal counsel and a review of available facts, it is
management's opinion that the ultimate liability, if any, under these suits
will not have a material adverse affect on the financial position of the
Company.
S-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
Four lawsuits involving alleged fraud in the sale of interest sensitive
universal life and whole life insurance have been filed as class actions
against the Company, although the court has not certified a class in any of
these cases. Plaintiffs seek unspecified damages and penalties for
themselves and on behalf of the putative class. While the relief sought in
these cases is substantial, it is premature to make assessments about the
potential loss, if any, because the status of the cases ranges from the
early states of litigation to the dismissal and appeals stage. Management
intends to defend these suits vigorously. The amount of liability, if any,
which may arise as a result of these suits cannot be reasonably estimated at
this time.
The number of insurance companies that are under regulatory supervision has
resulted, and is expected to continue to result, in assessments by state
guaranty funds to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments may be partially recovered
through a reduction in future premium taxes in some states. The Company has
accrued for expected assessments net of estimated future premium tax
deductions.
GUARANTEES
The Company has guarantees with off-balance-sheet risks whose contractual
amounts represent credit exposure. Outstanding guarantees with off-
balance-sheet risks at December 31, 1998 relate to mortgage loan
pass-through certificates. The Company has sold commercial mortgage loans
through grantor trusts which issued pass-through certificates. The Company
has agreed to repurchase any mortgage loans which remain delinquent for 90
days at a repurchase price substantially equal to the outstanding principal
balance plus accrued interest thereon to the date of repurchase. The
outstanding guarantees as of December 31, 1998 and 1997 were $30,900,000 and
$41,600,000, respectively. It is management's opinion that the value of the
properties underlying these commitments is sufficient that in the event of
default the impact would not be material to the Company. Accordingly, both
the carrying value and fair value of these guarantees is zero at December
31, 1998 and 1997.
The Company's wholly owned subsidiary, LNH&C, accepts personal accident
reinsurance programs from other insurance companies. Most of these programs
are presented to LNH&C by independent brokers who represent the ceding
companies. Certain excess of loss personal accident reinsurance programs
created in the London market during 1993 through 1996 have produced and have
potential to produce significant losses. At December 31, 1998 and 1997,
liabilities of $177,400,000 and $186,300,000, respectively, have been
established for such programs. These reserves are based on various estimates
that are subject to considerable uncertainty. Accordingly, this reserve may
prove to be deficient or excessive. However, it is management's opinion that
such future development will not materially affect the financial position of
the Company.
The Company and LNH&C continue to investigate the personal accident
reinsurance programs to determine if there are additional programs including
certain workers compensation programs, which may produce losses. At this
time, the Company and LNH&C do not have sufficient information to determine
whether or not it is probable that additional losses have been incurred nor
can the Company and LNH&C accurately estimate the ultimate cost or timing of
the outcome on these programs.
DERIVATIVES
The Company has derivatives with off-balance-sheet risks whose notional or
contract amounts exceed the credit exposure. The Company has entered into
derivative transactions to reduce its exposure to fluctuations in interest
rates, the widening of bond yield spreads over comparable maturity U.S.
government obligations, commodity risk, credit risk, increased liabilities
associated with reinsurance agreements and foreign exchange risks. In
addition, the Company is subject to the risks associated with changes in the
value of its derivatives; however, such changes in value generally are
offset by changes in the value of the items
S-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
being hedged by such contracts. Outstanding derivatives with
off-balance-sheet risks, shown in notional or contract amounts along with
their carrying value and estimated fair values, are as follows:
<TABLE>
<CAPTION>
NOTIONAL OR ASSETS (LIABILITIES)
CONTRACT AMOUNTS -----------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1997 1998 1998 1997 1997
-------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate cap agreements $4,108.8 $4,900.0 $ 9.3 $ .9 $13.9 $ .9
---------------------------------
Swaptions 1,899.5 1,752.0 16.2 2.5 6.9 6.9
---------------------------------
Interest rate swaps 258.3 10.0 -- 9.9 -- (1.8)
---------------------------------
Put options 21.3 -- -- 2.2 -- --
--------------------------------- -------- -------- -------- ----- -------- ------
6,287.9 6,662.0 25.5 15.5 20.8 6.0
Foreign currency derivatives:
Forward contracts 1.5 163.1 -- -- 5.4 5.4
---------------------------------
Foreign currency swaps 47.2 15.0 -- .3 -- (2.1)
--------------------------------- -------- -------- -------- ----- -------- ------
48.7 178.1 -- .3 5.4 3.3
Commodity derivatives:
Commodity swaps 8.1 -- -- 2.4 -- --
--------------------------------- -------- -------- -------- ----- -------- ------
$6,344.7 $6,840.1 $25.5 $18.2 $26.2 $ 9.3
-------- -------- -------- ----- -------- ------
-------- -------- -------- ----- -------- ------
</TABLE>
A reconciliation of the notional or contract amounts for the significant
programs using derivative agreements and contracts at December 31 is as
follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------
INTEREST RATE CAPS SPREAD LOCKS SWAPTIONS
1998 1997 1998 1997 1998 1997
------------------------------------------------------------------
(IN MILLIONS)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 4,900.0 $ 5,500.0 $ -- $ -- $ 1,752.0 $ 672.0
- ------------------------------------
New contracts 708.8 -- -- 50.0 218.3 1,080.0
- ------------------------------------
Terminations and maturities (1,500.0) (600.0) -- (50.0) (70.8) --
- ------------------------------------ --------- --------- --- --------- --------- ---------
Balance at end of year $ 4,108.8 $ 4,900.0 $ -- $ -- $ 1,899.5 $ 1,752.0
- ------------------------------------ --------- --------- --- --------- --------- ---------
--------- --------- --- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL FUTURES
CONTRACTS INTEREST RATE SWAPS
--------------------------------------------
1998 1997 1998 1997
--------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ -- $ 147.7 $ 10.0 $ --
- -------------------------------------------------------------
New contracts -- 88.3 2,226.6 10.0
- -------------------------------------------------------------
Terminations and maturities -- (236.0) (1,978.3) --
- ------------------------------------------------------------- --- --------- --------- ---------
Balance at end of year $ -- $ -- $ 258.3 $ 10.0
- ------------------------------------------------------------- --- --------- --------- ---------
--- --------- --------- ---------
</TABLE>
S-25
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
<TABLE>
<CAPTION>
PUT OPTIONS COMMODITY SWAPS
------------------------------------------------
1998 1997 1998 1997
------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ -- $ -- $ -- $ --
- --------------------------------------------------------------------
New contracts 21.3 -- 8.1 --
- --------------------------------------------------------------------
Terminations and maturities -- -- -- --
- -------------------------------------------------------------------- --------- --- --- ---
Balance at end of year $ 21.3 $ -- $ 8.1 $ --
- -------------------------------------------------------------------- --------- --- --- ---
--------- --- --- ---
</TABLE>
<TABLE>
<CAPTION>
FOREIGN CURRENCY DERIVATIVES (FOREIGN INVESTMENTS)
------------------------------------------------------------------
FOREIGN EXCHANGE FOREIGN CURRENCY FOREIGN CURRENCY
FORWARD CONTRACTS OPTIONS SWAPS
1998 1997 1998 1997 1998 1997
------------------------------------------------------------------
(IN MILLIONS)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 163.1 $ 251.5 $ -- $ 43.9 $ 15.0 $ 15.0
- -------------------------------------------
New contracts 419.8 833.1 -- -- 39.2 --
- -------------------------------------------
Terminations and maturities (581.4) (921.6) -- (43.9) (7.0) --
- ------------------------------------------- --------- --------- --- --------- --------- ---------
Balance at end of year $ 1.5 $ 163.0 $ -- $ -- $ 47.2 $ 15.0
- ------------------------------------------- --------- --------- --- --------- --------- ---------
--------- --------- --- --------- --------- ---------
</TABLE>
INTEREST RATE CAP AGREEMENTS
The interest rate cap agreements, which expire in 1999 through 2006, entitle
the Company to receive quarterly payments from the counterparties on
specified future reset dates, contingent on future interest rates. For each
cap, the amount of such payments, if any, is determined by the excess of a
market interest rate over a specified cap rate multiplied by the notional
amount divided by four. The purpose of the Company's interest rate cap
agreement program is to protect its annuity line of business from the effect
of rising interest rates. The premium paid for the interest rate caps is
included in other assets ($9,300,000 as of December 31, 1998) and is being
amortized over the terms of the agreements. This amortization is included in
net investment income.
SWAPTIONS
Swaptions, which expire in 1999 through 2003, entitle the Company to receive
settlement payments from the counterparties on specified expiration dates,
contingent on future interest rates. For each swaption, the amount of such
settlement payments, if any, is determined by the present value of the
difference between the fixed rate on a market rate swap and the strike rate
multiplied by the notional amount. The purpose of the Company's swaption
program is to protect its annuity line of business from the effect of rising
interest rates. The premium paid for the swaptions is included in other
assets ($16,200,000 as of December 31, 1998) and is being amortized over the
terms of the agreements. This amortization is included in net investment
income.
SPREAD LOCK AGREEMENTS
Spread-lock agreements provide for a lump sum payment to or by the Company,
depending on whether the spread between the swap rate and a specified
government note is larger or smaller than a contractually specified spread.
Cash payments are based on the product of the notional amount, the spread
between the swap rate and the yield of an equivalent maturity government
security and the price sensitivity of the swap at that time. The purpose of
the Company's spread-lock program is to protect a portion of its fixed
maturity securities against widening of spreads.
FINANCIAL FUTURE CONTRACTS
The Company uses exchange-traded financial futures contracts to hedge
against interest rate risks and to manage duration of a portion of its
S-26
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
fixed maturity securities. Financial futures contracts obligate the Company
to buy or sell a financial instrument at a specified future date for a
specified price. They may be settled in cash or through delivery of the
financial instrument. Cash settlements on the change in market values of
financial futures contracts are made daily.
INTEREST RATE SWAP AGREEMENTS
The Company uses interest rate swap agreements to hedge its exposure to
floating rate bond coupon payments, replicating a fixed rate bond. An
interest rate swap is a contractual agreement to exchange payments at one or
more times based on the actual or expected price, level, performance or
value of one or more underlying interest rates. The Company is required to
pay the counterparty to the agreements the stream of variable coupon
payments generated from the bonds, and in turn, receives a fixed payment
from the counterparty at a predetermined interest rate. The net
receipts/payments from interest rate swaps are recorded in net investment
income.
The Company also uses interest rate swap agreements to hedge its exposure to
interest rate fluctuations related to the anticipated purchase of assets to
support newly acquired or assumed blocks of business. Once the assets are
purchased, the gains resulting from the termination of the swap agreements
are applied to the basis of the assets purchased. The gains are recognized
in earnings over the life of the assets.
PUT OPTION
The Company uses put options, combined with various perpetual fixed income
securities, and interest rate swaps to replicate a fixed income, fixed
maturity investment. The put options give the Company the right, but not the
obligation, to sell to the counterparty of the agreement the specified
securities on a specified date at a fixed price.
FOREIGN CURRENCY DERIVATIVES (FOREIGN INVESTMENTS)
The Company uses a combination of foreign exchange forward contracts,
foreign currency options and foreign currency swaps, all of which are traded
over-the-counter, to hedge some of the foreign exchange risk of investments
in fixed maturity securities denominated in foreign currencies. The foreign
currency forward contracts obligate the Company to deliver a specified
amount of currency at a future date at a specified exchange rate. Foreign
currency options give the Company the right, but not the obligation, to buy
or sell a foreign currency at a specific exchange rate during a specified
time period. A foreign currency swap is a contractual agreement to exchange
the currencies of two different countries pursuant to an agreement to
re-exchange the two currencies at the same rate of exchange at a specified
future date.
COMMODITY SWAP
The Company uses a commodity swap to hedge its exposure to fluctuations in
the price of gold, which is the underlying variable in determining the
periodic interest payments associated with a fixed income security. A
commodity swap is a contractual agreement to exchange a certain amount of a
particular commodity for a fixed amount of cash. The Company owns a fixed
income security that meets its coupon payment obligations in gold bullion.
The Company is obligated to pay to the counterparty the gold bullion, and in
return, receives from the counterparty a stream of fixed income payments.
The fixed income payments are the product of the swap notional multiplied by
the fixed rate stated in the swap agreement. The net receipts/payments from
commodity swaps are recorded in net investment income.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$10,000,000, $7,000,000 and $6,900,000 in 1998, 1997 and 1996, respectively.
Deferred losses of $48,200,000 as of December 31, 1998, were the result of:
1) terminated and expired spread-lock agreements and; 2) terminated interest
rate swaps. These losses are included with the related fixed maturity
securities to which the hedge applied and are being amortized over the life
of such securities.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on interest rate cap agreements, swaptions, spread-lock
agreements, financial futures, interest rate swaps, put options and foreign
currency derivatives. However, the Company does not anticipate
nonperformance
S-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
by any of the counterparties. The credit risk associated with such
agreements is minimized by purchasing such agreements from financial
institutions with long-standing, superior performance records. The amount of
such exposure is essentially the net replacement cost or market value for
such agreements with each counterparty if the net market value is in the
Company's favor. At December 31, 1998, the exposure was $21,100,000.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair values of the Company's financial instruments.
Considerable judgment is required to develop these fair values. Accordingly,
the estimates shown are not necessarily indicative of the amounts that would
be realized in a one-time, current market exchange of all of the Company's
financial instruments.
BONDS AND UNAFFILIATED COMMON STOCK
Fair values of bonds are based on quoted market prices, where available. For
bonds not actively traded, fair values are estimated using values obtained
from independent pricing services. In the case of private placements, fair
values are estimated by discounting expected future cash flows using a
current market rate applicable to the coupon rate, credit quality and
maturity of the investments. The fair values of unaffiliated common stocks
are based on quoted market prices.
PREFERRED STOCK
Fair values of preferred stock are based on quoted market prices, where
available. For preferred stock not actively traded, fair values are based on
values of issues of comparable yield and quality.
MORTGAGE LOANS ON REAL ESTATE
The estimated fair value of mortgage loans on real estate was established
using a discounted cash flow method based on credit rating, maturity and
future income. The ratings for mortgages in good standing are based on
property type, location, market conditions, occupancy, debt service
coverage, loan to value, caliber of tenancy, borrower and payment record.
Fair values for impaired mortgage loans are based on: 1) the present value
of expected future cash flows discounted at the loan's effective interest
rate; 2) the loan's market price; or 3) the fair value of the collateral if
the loan is collateral dependent.
POLICY LOANS
The estimated fair values of investments in policy loans are calculated on a
composite discounted cash flow basis using Treasury interest rates
consistent with the maturity durations assumed. These durations are based on
historical experience.
OTHER INVESTMENTS AND CASH AND SHORT-TERM INVESTMENTS
The carrying values for assets classified as other investments and cash and
short-term investments in the accompanying statutory-basis balance sheets
approximate their fair value.
INVESTMENT-TYPE INSURANCE CONTRACTS
The balance sheet captions, "Future policy benefits and claims" and "Other
policyholder funds," include investment type insurance contracts (i.e.,
deposit contracts and guaranteed interest contracts). The fair values for
the deposit contracts and certain guaranteed interest contracts are based on
their approximate surrender values. The fair values for the remaining
guaranteed interest and similar contracts are estimated using discounted
cash flow calculations. These calculations are based on interest rates
currently offered on similar contracts with maturities that are consistent
with those remaining for the contracts being valued.
The remainder of the balance sheet captions "Future policy benefits and
claims" and "Other policyholder funds," that do not fit the definition of
"investment-type insurance contracts" are considered insurance contracts.
Fair value disclosures are not required for these insurance contracts and
have not been determined by the Company. It is the Company's position that
the disclosure of the fair value of these insurance contracts is important
because readers of these financial statements could draw inappropriate
conclusions about the Company's capital and surplus determined on a fair
value basis. It could be misleading if only the fair value of assets and
liabilities defined as financial instruments are disclosed. The Company and
other
S-28
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
companies in the insurance industry are monitoring the related actions of
the various rule-making bodies and attempting to determine an appropriate
methodology for estimating and disclosing the "fair value" of their
insurance contract liabilities.
SHORT-TERM DEBT
For short-term debt, the carrying value approximates fair value.
SURPLUS NOTES DUE TO LNC
Fair values for surplus notes are estimated using discounted cash flow
analysis based on the Company's current incremental borrowing rate for
similar types of borrowing arrangements.
GUARANTEES
The Company's guarantees include guarantees related to mortgage loan
pass-through certificates. Based on historical performance where repurchases
have been negligible and the current status, which indicates none of the
loans are delinquent, the fair value liability for the guarantees related to
the mortgage loan pass-through certificates is zero.
DERIVATIVES
The Company employs several different methods for determining the fair value
of its derivative instruments. Fair values for these contracts are based on
current settlement values. These values are based on quoted market prices
for the foreign currency exchange contracts and financial future contracts
and; 2) industry standard models that are commercially available for
interest rate cap agreements, swaptions, spread lock agreements, interest
rate swaps, commodity swaps and put options.
INVESTMENT COMMITMENTS
Fair values for commitments to make investment in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real
estate are based on the difference between the value of the committed
investments as of the date of the accompanying balance sheets and the
commitment date. These estimates would take into account changes in interest
rates, the counterparties' credit standing and the remaining terms of the
commitments.
SEPARATE ACCOUNTS
Assets held in separate accounts are reported in the accompanying
statutory-basis balance sheets at fair value. The related liabilities are
also reported at fair value in amounts equal to the separate account assets.
S-29
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying values and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------
1998 1997
----------------------------------------------
CARRYING CARRYING
ASSETS (LIABILITIES) VALUE FAIR VALUE VALUE FAIR VALUE
- -----------------------------------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 23,830.9 $ 25,065.5 $ 18,560.7 $ 19,798.6
- -----------------------------------------------
Preferred stocks 236.0 242.5 257.3 268.7
- -----------------------------------------------
Unaffiliated common stocks 259.3 259.3 436.0 436.0
- -----------------------------------------------
Mortgage loans on real estate 3,932.9 4,100.1 3,012.7 3,179.2
- -----------------------------------------------
Policy loans 1,606.0 1,685.9 660.5 648.3
- -----------------------------------------------
Other investments 434.4 434.4 335.5 335.5
- -----------------------------------------------
Cash and short-term investments 1,725.4 1,725.4 2,133.0 2,133.0
- -----------------------------------------------
Investment-type insurance contracts:
Deposit contracts and certain guaranteed
interest contracts (17,845.8) (17,486.4) (17,324.2) (16,887.6)
--------------------------------------------
Remaining guaranteed interest and similar
contracts (714.4) (738.2) (1,267.0) (1,294.6)
--------------------------------------------
Short-term debt (140.0) (140.0) (120.0) (120.0)
- -----------------------------------------------
Surplus notes due to LNC (1,250.0) (1,335.1) -- --
- -----------------------------------------------
Derivatives 25.5 18.2 26.2 9.3
- -----------------------------------------------
Investment commitments -- (0.6) -- (0.5)
- -----------------------------------------------
Separate account assets 36,907.0 36,907.0 31,330.9 31,330.9
- -----------------------------------------------
Separate account liabilities (36,907.0) (36,907.0) (31,330.9) (31,330.9)
- -----------------------------------------------
</TABLE>
12. ACQUISITIONS AND SALES OF SUBSIDIARIES
In October 1996, the Company and LLANY purchased a block of group
tax-qualified annuity business from UNUM Corporation affiliates. The bulk of
the transaction was completed in the form of an assumption reinsurance
transaction, which resulted in a ceding commission of $71,800,000. The
ceding commission resulted in admissible goodwill of $62,300,000, which is
being amortized on a straight-line basis over 10 years. LLANY was required
by the New York Department of Insurance to expense its portion of the ceding
commission in 1996. Policy liabilities and related accruals of the Company
and its wholly owned subsidiary increased by $3,200,000,000 as a result of
this transaction.
In 1997, LNC contributed 25,000,000 shares of common stock of American
States to the Company. American States is a property casualty insurance
holding company of which LNC owned 83.3%. The contributed common stock was
accounted for as a capital contribution equal to the fair value of the
common stock received by the Company. Subsequently, the American States
common stock owned by the Company, along with all other American States
common stock owned by LNC and its affiliates, was sold. The Company received
proceeds from the sale in the amount of $1,175,000,000. The Company
recognized no gain or loss on the sale of its portion of the common stock
due to the receipt of the stock at fair value. The proceeds from this sale
of stock were used to partially finance the CIGNA indemnity reinsurance
transaction.
S-30
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Life and Annuity Distributors,
Inc. ("LLAD"), has a nearly exclusive general agent's contract with the
Company under which it sells the Company's products and provides the service
that otherwise would be provided by a home office marketing department and
regional offices. For providing these selling and marketing services, the
Company paid LLAD override commissions of $76,700,000 in 1998 and override
commissions and operating expense allowances of $61,600,000 and $56,300,000
in 1997 and 1996, respectively. LLAD incurred expenses of $102,400,000,
$5,500,000 and $15,700,000 in 1998, 1997 and 1996, respectively, in excess
of the override commissions and operating expense allowances received from
the Company, which the Company is not required to reimburse. Effective in
January 1998, the Company and LLAD agreed to increase the override
commission expense and eliminate the operating expense allowance.
Cash and short-term investments at December 31, 1998 and 1997 include the
Company's participation in a short-term investment pool with LNC of
$383,600,000 and $325,600,000, respectively. Related investment income
amounted to $16,800,000, $15,500,000 and $15,300,000 in 1998, 1997 and 1996,
respectively. Short-term loan payable to parent company at December 31, 1998
and 1997 represent notes payable to LNC.
The Company provides services to and receives services from affiliated
companies which resulted in a net payment of $92,100,000, $48,500,000 and
$34,100,000 in 1998, 1997 and 1996, respectively.
The Company cedes and accepts reinsurance from affiliated companies.
Premiums in the accompanying statements of income include premiums on
insurance business accepted under reinsurance contracts and exclude premiums
ceded to other affiliated companies, as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 13.7 $ 11.9 $ 17.9
- ----------------------
Insurance ceded 290.1 100.3 302.8
- ----------------------
</TABLE>
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Future policy benefits
and claims assumed $ 197.3 $ 245.5
- ------------------------
Future policy benefits
and claims ceded 1,125.0 997.2
- ------------------------
Amounts recoverable on
paid and unpaid losses 84.2 30.4
- ------------------------
Reinsurance payable on
paid losses 6.0 5.3
- ------------------------
Funds held under
reinsurance treaties --
net liability 1,375.4 1,115.4
- ------------------------
</TABLE>
Substantially all reinsurance ceded to affiliated companies is with
unauthorized companies. To take a reserve credit for such reinsurance, the
Company holds assets from the reinsurer, including funds held under
reinsurance treaties, and is the beneficiary on letters of credit
aggregating $318,300,000 and $280,900,000 at December 31, 1998 and 1997,
respectively. The letters of credit are issued by banks and represent
guarantees of performance under the reinsurance agreement. At December 31,
1998 and 1997, LNC had guaranteed $237,000,000 and $229,100,000,
respectively, of these letters of credit. At December 31, 1998, the Company
has a receivable (included in the foregoing amounts) from affiliated
insurance companies in the amount of $122,400,000 for statutory surplus
relief received under financial reinsurance ceded agreements.
14. SEPARATE ACCOUNTS
Separate account assets held by the Company consist primarily of long-term
bonds, common stocks, short-term investments and mutual funds and are
carried at market value. Substantially all of the separate accounts do not
have any minimum guarantees and the investment risks associated with market
value changes are borne entirely by the policyholder.
Separate account premiums, deposits and other considerations amounted to
$3,953,300,000, $4,821,800,000 and $4,148,700,000 in 1998, 1997
S-31
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
14. SEPARATE ACCOUNTS (CONTINUED)
and 1996, respectively. Reserves for separate accounts with assets at fair
value were $36,145,900,000 and $30,560,700,000 at
December 31, 1998 and 1997, respectively. All reserves are subject to
discretionary withdrawal at market value.
A reconciliation of transfers to (from) separate accounts is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997
------------------------
(IN MILLIONS)
------------------------
<S> <C> <C>
Transfers as reported in the Summary of Operations of the
various separate accounts:
Transfers to separate accounts $ 3,954.9 $ 4,824.0
- ------------------------------------------------------------
Transfers from separate accounts (4,069.8) (2,943.8)
- ------------------------------------------------------------ --------- ---------
Net transfers to (from) separate accounts as reported in the
Summary of Operations $ (114.9) $ 1,880.2
- ------------------------------------------------------------ --------- ---------
--------- ---------
</TABLE>
15. RECONCILIATION OF ANNUAL STATEMENT TO AUDITED FINANCIAL STATEMENTS
In 1997, certain errors were identified by the Illinois
Insurance Department in the calculation of the AVR as of
December 31, 1996 and 1995. The effects of the AVR errors
also resulted in the need for revisions in the calculation
of certain investment limitation thresholds, the results of
which indicated that additional assets should have been
nonadmitted as of December 31, 1996. As discussed by the
Company with the Indiana and Illinois Insurance Departments,
corrections were made to affected pages of the Company's
NAIC Annual Statement which were refiled with various state
insurance departments. However, due to immateriality of the
corrections in relation to the financial statements taken as
a whole, the audited 1996 and 1995 statutory-basis financial
statements were not corrected and re-issued.
The Company's 1997 NAIC Annual Statement, as filed with
various state insurance departments, also includes the
corrected balances for 1996 and 1995. The following is a
reconciliation of total admitted assets, total liabilities
and capital and surplus as of December 31, 1996 as presented
in the 1997 NAIC Annual Statement (as corrected) to the
accompanying audited financial statements.
<TABLE>
<CAPTION>
TOTAL CAPITAL
ADMITTED TOTAL AND
ASSETS LIABILITIES SURPLUS
---------------------------------
<S> <C> <C> <C>
Balance as of December 31, 1996 as
reported in the accompanying audited
financial statements $50,016.6 $ 48,054.0 $1,962.6
- ----------------------------------------
Effect of AVR errors -- 37.6 (37.6)
- ----------------------------------------
Effect of change in investment
limitations (57.0) -- (57.0)
- ---------------------------------------- --------- ----------- --------
Balance as of December 31, 1996 as
reported in the 1997 NAIC Annual
Statement $49,959.6 $ 48,091.6 $1,868.0
- ---------------------------------------- --------- ----------- --------
--------- ----------- --------
</TABLE>
S-32
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
16. CENTURY COMPLIANCE (UNAUDITED)
The Year 2000 issue is pervasive and complex and affects virtually every
aspect of the Company's business. The Company's computer systems and
interfaces with the computer systems of vendors, suppliers, customers and
business partners are particularly vulnerable. The Company has been
redirecting a large portion of internal Information Technology efforts and
contracting with outside consultants to update systems to address Year 2000
issues. Experts have been engaged to assist in developing work plans and
cost estimates and to complete remediation activities.
For the year ended December 31, 1998, the Company identified expenditures of
$26,300,000 to address this issue. This brings the expenditures for 1996
through 1998 to $34,200,000 million. The Company's financial plans for 1999
and 2000 include expected expenditures of an additional $38,300,000 bringing
estimated overall Year 2000 expenditures to $72,500,000. Because updating
systems and procedures is an integral part of the Company's on-going
operations, approximately 50% of expenditures shown above are expected to
continue after all Year 2000 issues have been resolved. Actual Year 2000
expenditures through December 31, 1998 and future Year 2000 expenditures are
expected to be funded from operating cash flows. The anticipated cost of
addressing Year 2000 issues is based on management's current best estimates
which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors. Such costs will be closely monitored
by management. Nevertheless, there can be no guarantee that actual costs
will not be higher than these estimated costs. Specific factors that might
cause such differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct
all relevant computer problems and other uncertainties. The total
expenditures identified represent only the Company's portion of LNC's larger
expenditures to address the Year 2000 issue.
The current scope of the overall Year 2000 program includes the following
four major project areas: 1) addressing the readiness of business
applications, operating systems and hardware on mainframe, personal computer
and Local Area Network platforms (IT); 2) addressing the readiness of non-IT
embedded software and equipment (non-IT); 3) addressing the readiness of key
business partners and 4) establishing Year 2000 contingency plans.
The projects to address IT and non-IT readiness have four major phases.
Phase one involves raising awareness and creating an inventory of all IT and
non-IT assets. The second phase consists of assessing all items inventoried
to initially determine whether they are affected by the Year 2000 issue and
preparing general plans and strategies. The third phase entails the detailed
planning and remediation of affected systems and equipment. The last phase
consists of testing to verify Year 2000 readiness.
The Company has completed those four phases for over two-thirds of its high
priority IT systems, including those provided by software vendors. While the
Company's year 2000 program for nearly all high priority IT systems is
expected to be completed in the first quarter 1999, phase four, for a small
but important subset of these systems, will continue through the end of the
second quarter 1999. As of December 31, 1998, the status of projects
addressing readiness of IT assets is: 100% of IT assets have been
inventoried (Phase 1) and assessed (Phase 2); 94% of IT projects have been
through the remediation phase (Phase 3) with the last project scheduled for
completion by the end of March 1999; and 69% of IT projects have completed
the testing phase (Phase 4) with the last project scheduled to finish
testing by the end of June 1999. A portion of the effort that extends into
1999 is dependent on outside third parties and is behind the original
schedule. The Company is working with these parties to modify the completion
schedule.
As of December 31, 1998, the status of projects that address readiness of
high priority non-IT assets is: 100% of non-IT assets have been inventoried
(Phase 1) and assessed (Phase 2); 79% of non-IT projects addressing
remediation (Phase 3) have been completed and 21% of non-IT projects have
completed the testing phase (Phase 4). The Company expects to have all
phases related to high priority non-IT completed by the end of October 1999.
S-33
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
16. CENTURY COMPLIANCE (UNAUDITED) (CONTINUED)
Concurrent with the IT and non-IT projects, the readiness of key business
partners is being reviewed and Year 2000 contingency plans are being
developed. The most significant categories of key business partners are
financial institutions, software vendors and utility providers (gas,
electric and telecommunications). Surveys have been mailed to these key
business partners. Based on responses received, current levels of readiness
are being assessed, follow-up contacts are underway, alternative strategies
are being developed and testing is being scheduled where feasible. This
effort is expected to continue well into 1999. As noted above, software
vendor assessments are considered part of the IT projects and, therefore,
would follow the schedule shown above for such projects.
While the Company is working to meet the schedules outlined above, some
uncertainty remains. Specific factors that give rise to this uncertainty
include a possible loss of technical resources to perform the work, failure
to identify all susceptible systems, non-compliance by third parties whose
systems and operations impact the Company and other similar uncertainties.
A worst case scenario might include the Company's inability to achieve Year
2000 readiness with respect to one or more of the Company's significant
policyholder systems resulting in a material disruption to the Company's
operations. Specifically, the Company could experience an interruption in
its ability to collect and process premiums or deposits, process claim
payments, accurately maintain policyholder information, accurately maintain
accounting records and/or perform adequate customer service. Should the
worst case scenario occur, it could, depending on its duration, have a
material impact on the Company's results of operations and financial
position. Simple failures can be repaired and returned to production within
a matter of hours with no material impact. Unanticipated failures with a
longer service disruption period would have a more serious impact. For this
reason, the Company is placing significant emphasis on risk management and
Year 2000 contingency planning. The Company is in the process of modifying
its contingency plans to address potential Year 2000 issues. Where these
efforts identify high risks due either to unacceptable work around
procedures or significant readiness risks, appropriate risk management
techniques are being developed. These techniques, such as resource shifting
or use of alternate providers, will be employed to provide stronger
assurances of readiness. The Company has gone through exercises to identify
worst case scenario failures. At this time, the Company believes its plans
are sufficient to mitigate identified worst case scenarios.
S-34
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Lincoln National Life Insurance Company
We have audited the accompanying statutory-basis balance sheets
of The Lincoln National Life Insurance Company (a wholly owned
subsidiary of Lincoln National Corporation) as of December 31,
1998 and 1997, and the related statutory-basis statements of
operations, changes in capital and surplus and cash flows for
each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company
presents its financial statements in conformity with accounting
practices prescribed or permitted by the Indiana Department of
Insurance, which practices differ from generally accepted
accounting principles. The variances between such practices and
generally accepted accounting principles and the effects on the
accompanying financial statements are also described in Note 1.
In our opinion, because of the effects of the matter described
in the preceding paragraph, the financial statements referred to
above do not present fairly, in conformity with generally
accepted accounting principles, the financial position of The
Lincoln National Life Insurance Company at December 31, 1998 and
1997, or the results of its operations or its cash flows for
each of the three years in the period ended December 31, 1998.
However, in our opinion, the financial statements referred to
above present fairly, in all material respects, the financial
position of The Lincoln National Life Insurance Company at
December 31, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with accounting practices
prescribed or permitted by the Indiana Department of Insurance.
/s/ Ernst & Young LLP
February 1, 1999
S-35
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E
POST-EFFECTIVE AMENDMENT ON FORM N-4
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) List of Financial Statements
1. Part A. The Table of Condensed Financial Information is included in
Part A of this Registration Statement.
2. Part B. The following Financial Statements of Account E are included
in Part B of this Registration Statement:
Statement of Assets and Liability -- December 31, 1998
Statement of Operations -- Year ended December 31, 1998
Statements of Changes in Net Assets -- Years ended December 31, 1998
and 1997
Notes to Financial Statements -- December 31, 1998
Report of Ernst & Young LLP, Independent Auditors
3. The following Statutory-Basis Financial Statements of The Lincoln
National Life Insurance Company are included in the SAI:
Balance Sheets -- Statutory Basis -- Years ended December 31, 1998 and
1997
Statements of Operations -- Statutory Basis -- Years ended December
31, 1998, 1997, and 1996
Statements of Changes in Capital and Surplus -- Statutory Basis --
Years ended December 31, 1998, 1997, and 1996
Statements of Cash Flows -- Statutory Basis -- Years ended December
31, 1998, 1997, and 1996
Notes to Financial Statements -- December 31, 1998
Report of Ernst & Young LLP, Independent Auditors
(b) List of Exhibits
(1)(a) Resolutions of the Board of Directors of the Lincoln National Life
Insurance Company establishing Separate Account E incorporated herein
by reference to Registration Statement on Form N-4 (33-26032) filed on
April 28, 1998.
(1)(b) Establishing Resolution of Segregated Investment Account incorporated
herein by reference to Registration Statement on Form N-4 (33-26032)
filed on April 28, 1998.
(2) None.
(3)(a) Underwriting Agreement incorporated herein by reference to Registration
Statement on Form N-4 (33-26032) filed on April 28, 1998.
(3)(b) Amendment to Underwriting Agreement incorporated herein by reference to
Registration Statement on Form N-4 (33-26032) filed on April 28, 1998.
(3)(c) Selling Group Agreement incorporated herein by reference to
Registration Statement on Form N-4 (33-27783) filed on March 27, 1998.
(4)(a) Variable Annuity Contract incorporated herein by reference to
Registration Statement on Form N-4 (33-26032) filed on April 28, 1998.
(4)(b) Form of Rider to Variable Annuity Contract incorporated herein by
reference to Registration Statement on Form N-4 (33-27783) filed on
March 31, 1997.
(5) Application incorporated herein by reference to Registration Statement
on Form N-4 (33-26032) filed on April 28, 1998.
(6) Articles of Incorporation and Bylaws of Lincoln National Life Insurance
Company are incorporated herein by reference to Registration Statement
on Form N-4 (333-40937) filed on November 9, 1998.
(7) Not applicable.
(8)(a) Services Agreement between Delaware Management Holdings, Inc., Delaware
Service Company, Inc. and Lincoln National Life Insurance Company is
incorporated herein by reference to the Registration Statement on Form
S-6 (333-40745) filed on November 21, 1997).
(8)(b) Participation Agreement incorporated herein by reference to
Registration Statement on Form N-4 (33-26032) filed on April 28, 1998.
(9) Consent and Opinion of Jeremy Sachs, incorporated herein by reference
to Post-Effective Amendment #12 filed on April 22, 1998.
(10) Consent of Ernst & Young LLP, Independent Auditors
(11) Not applicable
(12) Not applicable
(13) Not applicable
(14) Other Exhibits:
(a) Organizational Chart of the Lincoln National Insurance
Holding Company System incorporated herein by reference
to Registration Statement on Form N-4 (33-27783) filed
on March 30, 1999.
(b) Books and Records Report.
(15) Powers of Attorney
<PAGE>
Item 25.
DIRECTORS AND OFFICERS OF THE DEPOSITOR
Name Positions and Offices with LNL
- ---- ------------------------------
Gabriel L. Shaheen* President, Chief Executive Officer and Director
Jon A. Boscia** Director
John H. Gotta**** Senior Vice President
Stephen H. Lewis* Senior Vice President
H. Thomas Mc Meekin** Director
Cynthia A. Rose** Secretary and Assistant Vice President
Lawrence T. Rowland*** Executive Vice President and Director
Keith J. Ryan* Senior Vice President, Chief Financial Officer and
Asst. Treasurer
Eldon J. Summers** Assistant Vice President and Treasurer
Richard C. Vaughan** Director
Roy V. Washington***** Vice President and Chief Compliance Officer
*Principal business address is 1300 South Clinton Street, Fort Wayne, Indiana
46802-3506
**Principal business address is 200 East Berry Street, Fort Wayne, Indiana
46802-2706.
***Principal business address is 1700 Magnavox Way, One Reinsurance Place,
Fort Wayne, Indiana 46804-1538
****Principal business address is 350 Church Street, Hartford, CT
06103
*****Principal business address is 915 S. Clinton, Fort Wayne, IN 46802
Item 26.
PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
WITH THE DEPOSITOR OR REGISTRANT
See Exhibit 15(a): Organizational Chart of the Lincoln National Insurance
Holding Company System
Item 27.
NUMBER OF CONTRACTOWNERS
As of January 31, 1999, there were 13,010 Contract Owners (fixed and
variable).
Item 28. Indemnification
Refer to the initial Registration Statement.
Item 29. Principal Underwriter
(a) American Funds Distributors, Inc., is also the Principal Underwriter of
shares of: AMCAP Fund, Inc., American Balanced Fund, Inc., The American Funds
Income Series, The American Funds Tax-Exempt Series I, The American Funds Tax-
Exempt Series II, American High-Income Municipal Bond Fund, Inc., American High-
Income Trust, American Mutual Fund, Inc., Capital Income Builder, Inc., Capital
World Bond Fund, Inc., Capital World Growth and Income Fund, Inc., The Cash
Management Trust of America, EuroPacific Growth Fund, Fundamental Investors,
Inc., The Growth Fund of America, Inc., The Income Fund of America, Inc.,
Intermediate Bond Fund of America, The Investment Company of America, Limited
Term Tax-Exempt Bond Fund of America, The New Economy Fund, New Perspective
Fund, Inc., SMALLCAP World Fund, Inc., The Tax-Exempt Bond Fund of America,
Inc., The Tax-Exempt Money Fund of America, The U.S. Treasury Money Fund of
America and Washington Mutual Investors Fund, Inc.
(b) (1) (2)
Name and Principal Positions and Offices
Business Address with Underwriter
------------------ ---------------------
David L. Abzug Regional Vice President
27304 Park Vista Road
Agoura Hills, CA 91301
John A. Agar Vice President
1501 N. University Drive, Suite 227A
Little Rock, AR 72207
<PAGE>
Robert B. Aprison Vice President
2983 Bryn Wood Drive
Madison, WI 53711
L William W. Bagnard Vice President
Steven L. Barnes Senior Vice President
5400 Mount Meeker Road
Boulder, CO 80301
B Carl R. Bauer Assistant Vice President
Michelle A. Bergeron Vice President
4160 Gateswalk Drive
Smyrna, GA 30080
Joseph T. Blair Senior Vice President
27 Drumlin Road
West Simsbury, CT 06092
<PAGE>
(b) (1) (2)
Name and Principal Positions and Offices
Business Address with Underwriter
------------------ ---------------------
John A. Blanchard Vice President
6421 Aberdeen Road
Mission Hills, KS 66208
Ian B. Bodell Senior Vice President
P.O. Box 1665
Brentwood, TN 37024-1655
Michael L. Brethower Vice President
2320 North Austin Avenue
Georgetown, TX 78628
C. Alan Brown Regional Vice President
4129 Laclede Avenue
St. Louis, MO 63108
H J. Peter Burns Vice President
Brian C. Casey Regional Vice President
8002 Greentree Road
Bethesda, MD 20817
<PAGE>
Victor C. Cassato Senior Vice President
609 W. Littleton Blvd., Suite 310
Littleton, CO 80120
Christopher J. Cassin Senior Vice President
111 W. Chicago Avenue, Suite G3
Hinsdale, IL 60521
Denise M. Cassin Vice President
1301 Stoney Creek Drive
San Ramon, CA 94538
L Larry P. Clemmensen Director
L Kevin G. Clifford Director, President and Co-Chief
Executive Officer
Ruth M. Collier Senior Vice President
145 West 67th Street, Suite #12K
New York, NY 10023
S David Coolbaugh Assistant Vice President
<PAGE>
(b) (1) (2)
Name and Principal Positions and Offices
Business Address with Underwriter
--------------------- ---------------------
Thomas E. Cournoyer Vice President
2333 Granada Boulevard
Coral Gables, FL 33134
Douglas A. Critchell Senior Vice President
3521 Rittenhouse Street,
N.W.
Washington, D.C. 20015
L Carl D. Cutting Vice President
Dan J. Delianedis Regional Vice President
8689 Braxton Drive
Eden Prairie, MN 55347
Michael A. Dilella Vice President
P.O. Box 661
Ramsey, NJ 07446
G. Michael Dill Senior Vice President
505 E. Main Street
Jenks, OK 74037
<PAGE>
Kirk D. Dodge Senior Vice President
633 Menlo Avenue, Suite 210
Menlo Park, CA 94025
Peter Doran Senior Vice President
1205 Franklin Avenue
Garden City, NY 11530
L Michael J. Downer Secretary
Robart W. Durbin Vice President
74 Sunny Lane
Tiffin, OH 44883
I Lloyd G. Edwards Senior Vice President
L Paul H. Fieberg Sr. Vice President
John R. Fodor Vice President
15 Latisquama Road
Southborough, MA 01772
<PAGE>
(b) (1) (2)
Name and Principal Positions and Offices
Business Address with Underwriter
------------------ ----------------------
Clyde E. Gardner Senior Vice President
Route 2, Box 3162
Osage Beach, MO 65065
B Evelyn K. Glassford Vice President
Jeffrey J. Greiner Vice President
12210 Taylor Road
Plain City, OH 43064
L Paul G. Haaga, Jr. Director
B Mariellen Hamann Assistant Vice President
David E. Harper Senior Vice President
R.D. 1, Box 210, Rte 519
Frenchtown, NJ 08825
Ronald R. Hulsey Vice President
6744 Avalon
Dallas, TX 75214
Robert S. Irish Vice President
1225 Vista Del Mar Drive
Delray Beach, FL 33483
L Robert L. Johansen Vice President
Michael J. Johnston Director
630 Fifth Ave., 36th Floor
New York, NY 10111-0121
B Damien M. Jordan Vice President
Arthur J. Levine Vice President
12558 Highlands Place
Fishers, IN 46038
<PAGE>
(b) (1) (2)
Name and Principal Positions and Offices
Business Address with Underwriter
------------------ ---------------------
B Karl A. Lewis Assistant Vice President
T. Blake Liberty Regional Vice President
5506 East Mineral Lane
Littleton, CO 80122
Mark Lien Regional Vice President
5570 Beechwood Terrace
West Des Moines, IA 50266
L Lorin E. Liesy Assistant Vice President
L Susan G. Lindgren Vice President - Institutional
Investment Services Division
LW Robert W. Lovelace Director
Stephen A. Malbasa Vice President
13405 Lake Shore Blvd.
Cleveland, OH 44110
Steven M. Markel Senior Vice President
5241 South Race Street
Littleton, CO 80121
L J. Clifton Massar Director, Senior Vice President
L E. Lee McClennahan Senior Vice President
L Jamie R. McCrary Assistant Vice President
S John V. McLaughlin Senior Vice President
Terry W. McNabb Vice President
2002 Barrett Station Road
St. Louis, MO 63131
L R. William Melinat Vice President-Institutional
Investment Services
David R. Murray Vice President
60 Briant Avenue
Sudbury, MA 01776
Stephen S. Nelson Vice President
P.O. Box 470528
Charlotte, NC 28247-0528
<PAGE>
(b) (1) (2)
Name and Principal Positions and Offices
Business Address with Underwriter
------------------ ---------------------
William E. Noe Regional Vice President
304 River Oaks Road
Brentwood, TN 37207
Peter A. Nyhus Vice President
3084 Wilds Ridge Court
Prior Lake, MN 55372
Eric P. Olson Vice President
62 Park Drive
Glenview, IL 60025
Fredric Phillips Senior Vice President
175 Highland Avenue, 4th Floor
Needham, MA 02494
B Candance D. Pilgrim Assistant Vice President
Carl S. Platou Vice President
4021 96th Avenue, SE
Mercer Island, WA 98040
L John O. Post Vice President
S Richard P. Prior Assistant Vice President
Steven J. Reitman Senior Vice President
212 The Lane
Hinsdale, IL 60521
Brian A. Roberts Vice President
P.O. Box 472245
Charlotte, NC 28247
George S. Ross Senior Vice President
55 Madison Avenue
Morristown, NJ 07962
L Julie D. Roth Vice President
L James F. Rothenberg Director
Douglas F. Rowe Vice President
30008 Oakland Hills Drive
Georgetown, TX 78628
<PAGE>
(b) (1) (2)
Name and Principal Positions and Offices
Business Address with Underwriter
------------------ ---------------------
Christopher Rowey Regional Vice President
9417 Beverlywood Street
Los Angeles, CA 90034
Dean B. Rydquist Senior Vice President
1080 Bay Pointe Crossing
Alpharetta, GA 30202
Richard R. Samson Senior Vice President
4604 Glencoe Avenue, No. 4
Marina del Rey, CA 90292
Joseph D. Scarpitti Vice President
31465 St. Andrews
Westlake, OH 44145
L R. Michael Shanahan Director
David W. Short Director, Chairman of the Board
Suite 212, 1000 RIDC Plaza and Co-Chief Executive Officer
Pittsburgh, PA 15238-2941
William P. Simon, Jr. Senior Vice President
912 Castlehill Lane
Devon, PA 91333
L John C. Smith Assistant Vice President-
Institutional Investment
Services
L Mary E. Smith Vice President-
Institutional Investment
Services Division
Rodney G. Smith Vice President
100 N. Central Expressway, Suite 1214
Richardson, TX 75080
Tony Soave Regional Vice President
8831 Morning Mist Drive
Clarkston, MI 48348
Nicholas D. Spadaccini Regional Vice President
855 Markley Woods Way
Cincinnati, OH 45230
L Kristen J. Spazafumo Assistant Vice President
<PAGE>
(b) (1) (2)
Name and Principal Positions and Offices
Business Address with Underwriter
------------------ ---------------------
Daniel S. Spradling Senior Vice President
181 Second Avenue, Suite 228
San Mateo, CA 94401
B Max D. Stites Vice President
Thomas A. Stout Regional Vice President
3919 Whooping Crane Circle
Virginia Beach, VA 23455
Craig R. Strauser Vice President
3 Dover Way
Lake Oswego, OR 97034
Francis N. Strazzeri Senior Vice President
31641 Saddletree Drive
Westlake Village, CA 91361
L Drew Taylor Assistant Vice President
S James P. Toomey Vice President
I Christopher E. Trede Vice President
George F. Truesdail Vice President
400 Abbotsford Court
Charlotte, NC 28270
Scott W. Ursin-Smith Vice President
60 Reedland Woods Way
Tiburon, CA 94920
Thomas E. Warren Regional Vice President
119 Faubel Street
Sarasota, FL 34242
L J. Kelly Webb Sr. Senior Vice President, Treasurer
<PAGE>
<TABLE>
<CAPTION>
(b) (1) (2)
<S> <C>
Name and Principal Positions and Offices
Business Address with Underwriter
------------------ ---------------------
Gregory J. Weimer Vice President
206 Hardwood Drive
Venetia, PA 15367
B Timothy W. Weiss Director
George Wenzel Regional Vice President
3406 Shakespeare Drive
Troy, MI 48084
N. Dexter Williams Senior Vice President
P.O. Box 2200
Danville, CA 94526
Timothy J. Wilson Vice President
113 Farmview Place
Venetia, PA 15367
B Laura L. Wimberly Vice President
H Marshall D. Wingo Sr. Director, Senior Vice President
L Robert L. Winston Director, Sr. Vice President
William R. Yost Vice President
9320 Overlook Trail
Eden Prairie, MN 55347
Janet M. Young Regional Vice President
1616 Vermont
Houston, TX 77006
Scott D. Zambon Regional Vice President
320 Robinson Drive
Tustin Ranch, CA 92782
</TABLE>
- -------------
L Business Address, 333 South Hope Street, Los Angeles, CA 90071
LW Business Address, 11100 Santa Monica Boulevard, 15th Floor, Los Angeles,
CA 90025
B Business Address, 135 South State College Boulevard, Brea, CA 92821
S Business Address, 3500 Wiseman Boulevard, San Antonio, TX 78251
H Business Address, 5300 Robin Hood Road, Norfolk, VA 23513
I Business Address, 8332 Woodfield Crossing Blvd., Indianapolis, IN 46240
(C) Name of Principal Underwriter: American Funds Distributors, Inc.; Net
Underwriting Discounts and Commissions: $9,736,697.41
<PAGE>
Item 30. Location of Accounts and Records
Exhibit 15(b) is hereby expressly incorporated herein by this reference.
Item 31. Management Services
Not Applicable.
50
Item 32. Undertakings
- ---------------------
(a) Registrant undertakes that it will file a post-effective amendment to
this registration statement as frequently as necessary to ensure that
the audited financial statements in the registration statement are
never more than 16 months old for so long as payments under the
variable annuity contracts may be accepted.
(b) Registrant undertakes that it will include either (1) as part of any
application to purchase a Certificate or an Individual Contract
offered by the Prospectus, a space that an applicant can check to
request a Statement of Additional Information, or (2) a post card or
similar written communication affixed to or included in the Prospectus
that the applicant can remove to send for a Statement of Additional
Information.
(c) Registrant undertakes to deliver any Statement of Additional
Information and any financial statements required to be made available
under this Form promptly upon written or oral request to Lincoln Life
at the address or phone number listed in the Prospectus.
(d) 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.
Item 33. ( Additional Item) - Undertaking Concerning the Texas Optional
Retirement Program
Refer to the initial Registration Statement.
Item 34. (Additional Item) - Undertaking Concerning Withdrawal Restrictions
on IRC Section 403(b) Plan Participants
Refer to initial Registration Statement.
51
<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 7th day of April, 1999.
LINCOLN NATIONAL VARIABLE ANNUITY
ACCOUNT E--Legacy I (Registrant)
By: /s/ Stephen H. Lewis
--------------------------------
Stephen H. Lewis
(Signature-Officer of Depositor)
Senior Vice President, LNL
(Title)
By: THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
(Depositor)
By: /s/ Gabriel L. Shaheen
--------------------------------
Gabriel L. Shaheen
Chief Executive Officer
(Title)
(b) As required by the Securities Act of 1933, this Amendment to the
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Gabriel L. Shaheen Chief Executive Officer, President April 7, 1999
- ----------------------- & Director (Principal Executive
Gabriel L. Shaheen Officer)
/s/ Lawrence T. Rowland Executive Vice President and April 7, 1999
- ----------------------- Director
Lawrence T. Rowland
/s/ Keith J. Ryan Senior Vice President, Chief April 7, 1999
- ----------------------- Financial Officer and Assistant
Keith J. Ryan Treasurer (Principal Accounting
Officer and Principal Financial Officer)
Director April 7, 1999
- -----------------------
Jon A. Boscia
Director April 7, 1999
- -----------------------
H. Thomas McMeekin
/s/ Richard C. Vaughan Director April 7, 1999
- -----------------------
Richard C. Vaughan
</TABLE>
<PAGE>
Exhibit 10
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Independent Auditors"
in the Post Effective Amendment No. 14 to the Registration Statement (Form N-4
No. 33-26032) and the related Statement of Additional Information appearing
therein and pertaining to Lincoln National Variable Annuity Account E, and to
the use therein of our reports dated (a) February 1, 1999, with respect to the
statutory-basis financial statements of The Lincoln National Life Insurance
Company for each of the three years in the period ended December 31, 1998, and
(b) March 26, 1999, with respect to the financial statements of Lincoln National
Variable Annuity Account E.
Fort Wayne, Indiana
April 1, 1999
<PAGE>
BOOKS AND RECORDS
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT E
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.
<TABLE>
<CAPTION>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
<S> <C> <C> <C>
Annual Reports Finance Eric Jones Permanently, the first two
To Shareholders years in an easily accessible
place
Semi-Annual Finance Eric Jones Permanently, the first two
Reports years in an easily accessible
place
Form N-SAR Finance Eric Jones Permanently, the first two
years in an easily accessible
place
</TABLE>
(b) Every registered investment company shall maintain and keep current the
following books, accounts, and other documents:
Type of Record
- --------------
(1) Journals (or other records of original entry) containing an itemized daily
record in detail of all purchases and sales of securities (including sales and
redemptions of its own securities), all receipts and deliveries of securities
(including certificate numbers if such detail is not recorded by custodian or
transfer agent), all receipts and disbursements of cash and all other debits and
credits. Such records shall show for each such transaction the name and quantity
of securities, the unit and aggregate purchase or sale price, commission paid,
the market on which effected, the trade date, the settlement date, and the name
of the person through or from whom purchased or received or to whom sold or
delivered.
<PAGE>
<TABLE>
<CAPTION>
Purchases and Sales Journals
- ----------------------------
<S> <C> <C> <C>
Daily reports CSRM Nancy Alford Permanently, the first two
of securities Finance Eric Jones years in an easily
transactions accessible place
Portfolio Securities
- --------------------
C-Port Purchase/ Finance Eric Jones Permanently, the first two
Sales Report years in an easily accessible
place
</TABLE>
<PAGE>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Receipts and Deliveries of Securities (units)
- ---------------------------------------------
Not Applicable.
Portfolio Securities
- --------------------
Not Applicable.
Receipts and Disbursements of Cash and other Debits and Credits
- ---------------------------------------------------------------
Daily Journals CSRM Nancy Alford Permanently, the first two
Finance Eric Jones 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.
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
<TABLE>
<CAPTION>
General Ledger
- --------------
<S> <C> <C> <C>
LNL trial Finance Eric Jones Permanently, the first two
Balance years in an easily
(5000 accessible place
series)
</TABLE>
Securities in Transfer
- ----------------------
Not Applicable.
<PAGE>
Securities in Physical Possession
- ---------------------------------
Not Applicable.
Securities Borrowed and Loaned
- ------------------------------
Not Applicable.
Monies Borrowed and Loaned
- --------------------------
Not Applicable.
<TABLE>
<CAPTION>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
<S> <C> <C> <C>
Dividends and Interest Received
- -------------------------------
LNL Trial Finance Eric Jones Permanently, the first two
Balance (5000 years in an easily accessible
series) place
Dividends Receivable and Interest Accrued
- -----------------------------------------
LNL Trial Finance Eric Jones Permanently, the first two
Balance (5000 years in an easily accessible
series) place
</TABLE>
(ii) Separate ledger accounts (or other records) for each portfolio security,
showing (as of trade dates), (a) the quantity and unit and aggregate price for
each purchase, sale, receipt, and delivery of securities and commodities for
such accounts, and (b) all other debits and credits for such accounts.
Securities positions and money balances in such ledger accounts (or other
records) shall be brought forward periodically but not less frequently than at
the end of fiscal quarters. Any portfolio security, the salability of which is
conditioned, shall be so noted. A memorandum record shall be available setting
forth, with respect to each portfolio security accounts, the amount and
declaration, ex-dividend, and payment dates of each dividend declared thereon.
Ledger Account for each portfolio Security
- ------------------------------------------
<TABLE>
<S> <C> <C> <C>
Daily Report Finance Eric Jones Permanently, the first two
Of Securities years in an easily accessible
Transactions (Daily place
Trade File)
</TABLE>
<PAGE>
(iii) Separate ledger accounts (or other records) for each broker-dealer, bank
or other person with or through which transactions in portfolio securities are
affected, showing each purchase or sale of securities with or through such
persons, including details as to the date of the purchase or sale, the quantity
and unit and aggregate prices of such securities, and the commissions or other
compensation paid to such persons. Purchases or sales effected during the same
day at the same price may be aggregated.
Not Applicable.
(iv) Separate ledger accounts (or other records), which may be maintained by a
transfer agent or registrar, showing for each shareholder of record of the
investment company the number of shares of capital stock of the 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
- --------------------
<TABLE>
<S> <C> <C> <C>
Master file Finance Eric Jones Permanently, the first two
Record (Daily Trade CSRM Nancy Alford years in an easily accessible
File & Leg. Syst. place
Client Rpt.)
</TABLE>
(3) A securities record or ledger reflecting separately for each portfolio
security as of trade date all "long" and "short" positions carried by the
investment company for its own account and showing the location of all
securities long and the off-setting position to all securities short. The record
called for by this paragraph shall not be required in circumstances under which
all portfolio securities are maintained by a bank or banks or a member or
members of a national securities exchange as custodian under a custody agreement
or as agent for such custodian.
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Not Applicable
(4) Corporate charters, certificates of incorporation or trust agreements, and
bylaws, and minute books of stockholders' and directors' or trustees' meetings;
and minute books of directors' or trustees' committee and advisory board or
advisory committee meetings.
Corporate Documents
- -------------------
<TABLE>
<S> <C> <C> <C>
Memorandum Legal Janet Lindenberg Permanently, the first two
Establishing SA Years in an easily accessible
place
</TABLE>
(5) A record of each brokerage order given by or in behalf of the investment
company for, or in connection with, the purchase or sale of securities, whether
executed or unexecuted. Such record shall include the name of the broker, the
terms and conditions of the order and of any modification or cancellation
thereof, the time of entry or cancellation, the price at which executed, and the
time of receipt of report of execution. The record shall indicate
<PAGE>
the name of the person who placed the order in behalf of the investment company.
Order Tickets
- -------------
<TABLE>
<S> <C> <C> <C>
UIT applica- CSRM Nancy Alford Six years, the first two
tions and Finance Eric Jones years in an easily accessible
daily reports place
of securities
transactions
</TABLE>
(6) A record of all other portfolio purchase or sales showing details
comparable to those prescribed in paragraph 5 above.
Commercial Paper
- ----------------
Not Applicable.
(7) A record of all puts, calls, spreads, straddles, and other options in which
the investment company has any direct or indirect interest or which the
investment company has granted or guaranteed; and a record of any contractual
commitments to purchase, sell, receive or deliver securities or other property
(but not including open orders placed with broker-dealers for the purchase or
sale of securities, which may be cancelled by the company on notices without
penalty or cost of any kind); containing at least an identification of the
security, the number of units involved, the option price, the date of maturity,
the date of issuance, and the person to whom issued.
<PAGE>
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
- -------------
<TABLE>
<S> <C> <C> <C>
LNL Trial Finance Eric Jones Permanently, the first two
Balance (5000 years in an easily accessible
series) place
</TABLE>
(9) A record for each fiscal quarter, which shall be completed within 10 days
after the end of such quarter, showing specifically the basis or bases upon
which the allocation of orders for the purchase and sale of portfolio securities
to named brokers or dealers and the division of brokerage commissions or other
compensation on such purchase and sale orders among named persons were made
during such quarter. The record shall indicate the consideration given to (a)
sales of shares of the investment company by brokers or dealers, (b) the
supplying of services or benefits by brokers or dealers to the investment
company, its investment advisor or principal underwriter or any persons
affiliated therewith, and (c) any other considerations other than the technical
qualifications of the brokers and the dealers as such. The record shall show the
nature of their services or benefits made available, and shall describe in
detail the application of any general or specific formula or other determinant
used in arriving at such allocation of purchase and sales orders and such
division of brokerage commissions or other compensation. The record shall also
include the identifies of the person responsible for the determination of such
allocation and such division of brokerage commissions or other compensation.
Not Applicable.
(10) A record in the form of an appropriate memorandum identifying the person or
persons, committees, or groups authorizing the purchase or sale of portfolio
securities. Where an authorization is made by a committee or group, a record
shall be kept in the names of its members who participated in the authorization.
There shall be retained a part of the record required by this paragraph any
memorandum, recommendation, or instruction supporting or authorizing the
purchase or sale of portfolio securities. The requirements of this paragraph are
applicable to the extent they are not met by compliance with the requirements of
paragraph 4 of this Rule 31a1(b).
<TABLE>
<S> <C> <C> <C>
Advisory Legal Janet Lindenberg Six years, the first two
Agreements years in an easily accessible
place
</TABLE>
(11) Files of all advisory material received from the investment advisor, any
advisory board or advisory committee, or any other persons from whom the
investment company accepts investment advice publications distributed generally.
Not Applicable.
(12) The term "other records" as used in the expressions "journals (or other
records of original entry)" and "ledger
<PAGE>
accounts (or other records)" shall be construed to include, where appropriate,
copies of voucher checks, confirmations, or similar documents which reflect the
information required by the applicable rule or rules in appropriate sequence and
in permanent form, including similar records developed by the use of automatic
data processing systems.
<TABLE>
<CAPTION>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
<S> <C> <C> <C>
Correspondence CSRM Nancy Alford Six years, the first two
years in an easily accessible
place
Proxy State- CSRM Nancy Alford Six years, the first two
ments and years in an easily accessible
Proxy Cards place
Pricing Sheets Finance Eric Jones Permanently, the first two
years in an easily accessible
place
Bank Statements Treasurers Rusty Summers Six years, the first two
years in an easily accessible
place
</TABLE>
March 24, 1999
<PAGE>
Exhibit 15(a)
POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby revoke all powers of attorney authorizing any person
to act as attorney-in-fact relative to Lincoln National Variable Annuity Account
E (American Legacy I), which were previously executed by us and do hereby
severally constitute and appoint Kelly D. Clevenger, Jeffrey K. Dellinger, and
Steven M. Kluever, our true and lawful attorneys-in-fact, with full power in
each of them to sign for us, in our names and in the capacities indicated below,
any and all amendments to Registration Statement No. 33-26032 filed with the
Securities and Exchange Commission under the Securities Act of 1933, on behalf
of the Company in its own name or in the name of one of its Separate Accounts,
hereby ratifying and confirming our signatures as they may be signed by any of
our attorneys-in-fact to any such amendment to that Registration Statement. The
power of attorney was signed by us on February 3, 1999.
Signature Title
- --------- -----
/s/Gabriel L. Shaheen President, Chief Executive Officer and Director
- ------------------------ (Principal Executive Officer)
Gabriel L. Shaheen
Executive Vice President and Director
- -----------------------------
Lawrence T. Rowland
Senior Vice President, Assistant Treasurer and
- ----------------------------- Chief Financial Officer
Keith J. Ryan (Principal Financial Officer and Principal
Accounting Officer)
Director
- -----------------------------
H. Thomas McMeekin
Director
- -----------------------------
Richard C. Vaughan
Director
- -----------------------------
Jon A. Boscia
STATE OF INDIANA)
)SS:
COUNTY OF ALLEN)
Subscribed and sworn to before me this
3rd day of February, 1999.
/s/Janet L. Lindenberg
----------------------
Notary public
Commission Expires: 7-10-2001
---------
<PAGE>
Exhibit 15(b)
POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby revoke all powers of attorney authorizing any person
to act as attorney-in-fact relative to Lincoln National Variable Annuity Account
E (American Legacy I), which were previously executed by us and do hereby
severally constitute and appoint Kelly D. Clevenger, Jeffrey K. Dellinger, and
Steven M. Kluever, our true and lawful attorneys-in-fact, with full power in
each of them to sign for us, in our names and in the capacities indicated below,
any and all amendments to Registration Statement No. 33-26032 filed with the
Securities and Exchange Commission under the Securities Act of 1933, on behalf
of the Company in its own name or in the name of one of its Separate Accounts,
hereby ratifying and confirming our signatures as they may be signed by any of
our attorneys-in-fact to any such amendment to that Registration Statement. The
power of attorney was signed by us on February 3, 1999.
Signature Title
- --------- -----
President, Chief Executive Officer and Director
- ------------------------ (Principal Executive Officer)
Gabriel L. Shaheen
/s/ Lawrence T. Rowland Executive Vice President and Director
- -----------------------------
Lawrence T. Rowland
Senior Vice President, Assistant Treasurer and
- ----------------------------- Chief Financial Officer
Keith J. Ryan (Principal Financial Officer and Principal
Accounting Officer)
/s/H. Thomas McMeekin Director
- -----------------------------
H. Thomas McMeekin
Director
- -----------------------------
Richard C. Vaughan
Director
- -----------------------------
Jon A. Boscia
STATE OF INDIANA)
)SS:
COUNTY OF ALLEN)
Subscribed and sworn to before me this
3rd day of February, 1999.
/s/Janet L. Lindenberg
----------------------
Notary public
Commission Expires: 7-10-2001
---------
<PAGE>
Exhibit 15(c)
POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby revoke all powers of attorney authorizing any person
to act as attorney-in-fact relative to Lincoln National Variable Annuity Account
E (American Legacy I), which were previously executed by us and do hereby
severally constitute and appoint Kelly D. Clevenger, Jeffrey K. Dellinger, and
Steven M. Kluever, our true and lawful attorneys-in-fact, with full power in
each of them to sign for us, in our names and in the capacities indicated below,
any and all amendments to Registration Statement No. 33-26032 filed with the
Securities and Exchange Commission under the Securities Act of 1933, on behalf
of the Company in its own name or in the name of one of its Separate Accounts,
hereby ratifying and confirming our signatures as they may be signed by any of
our attorneys-in-fact to any such amendment to that Registration Statement. The
power of attorney was signed by us on February 3, 1999.
Signature Title
- --------- -----
President, Chief Executive Officer and Director
- ------------------------ (Principal Executive Officer)
Gabriel L. Shaheen
Executive Vice President and Director
- -----------------------------
Lawrence T. Rowland
/s/Keith J. Ryan Senior Vice President, Assistant Treasurer and
- ----------------------------- Chief Financial Officer
Keith J. Ryan (Principal Financial Officer and Principal
Accounting Officer)
Director
- -----------------------------
H. Thomas McMeekin
Director
- -----------------------------
Richard C. Vaughan
Director
- -----------------------------
Jon A. Boscia
STATE OF INDIANA)
)SS:
COUNTY OF ALLEN)
Subscribed and sworn to before me this
3rd day of February, 1999.
/s/Janet L. Lindenberg
----------------------
Notary public
Commission Expires: 7-10-2001
---------
<PAGE>
Exhibit 15(d)
POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby revoke all powers of attorney authorizing any person
to act as attorney-in-fact relative to Lincoln National Variable Annuity Account
E (American Legacy I), which were previously executed by us and do hereby
severally constitute and appoint Kelly D. Clevenger, Jeffrey K. Dellinger, and
Steven M. Kluever, our true and lawful attorneys-in-fact, with full power in
each of them to sign for us, in our names and in the capacities indicated below,
any and all amendments to Registration Statement No. 33-26032 filed with the
Securities and Exchange Commission under the Securities Act of 1933, on behalf
of the Company in its own name or in the name of one of its Separate Accounts,
hereby ratifying and confirming our signatures as they may be signed by any of
our attorneys-in-fact to any such amendment to that Registration Statement. The
power of attorney was signed by us on February 3, 1999.
Signature Title
- --------- -----
President, Chief Executive Officer and Director
- ------------------------ (Principal Executive Officer)
Gabriel L. Shaheen
Executive Vice President and Director
- -----------------------------
Lawrence T. Rowland
Senior Vice President, Assistant Treasurer and
- ----------------------------- Chief Financial Officer
Keith J. Ryan (Principal Financial Officer and Principal
Accounting Officer)
/s/H. Thomas McMeekin Director
- -----------------------------
H. Thomas McMeekin
Director
- -----------------------------
Richard C. Vaughan
Director
- -----------------------------
Jon A. Boscia
STATE OF INDIANA)
)SS:
COUNTY OF ALLEN)
Subscribed and sworn to before me this
3rd day of February, 1999.
/s/Janet L. Lindenberg
----------------------
Notary public
Commission Expires: 7-10-2001
---------
<PAGE>
Exhibit 15(e)
POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby revoke all powers of attorney authorizing any person
to act as attorney-in-fact relative to Lincoln National Variable Annuity Account
E (American Legacy I), which were previously executed by us and do hereby
severally constitute and appoint Kelly D. Clevenger, Jeffrey K. Dellinger, and
Steven M. Kluever, our true and lawful attorneys-in-fact, with full power in
each of them to sign for us, in our names and in the capacities indicated below,
any and all amendments to Registration Statement No. 33-26032 filed with the
Securities and Exchange Commission under the Securities Act of 1933, on behalf
of the Company in its own name or in the name of one of its Separate Accounts,
hereby ratifying and confirming our signatures as they may be signed by any of
our attorneys-in-fact to any such amendment to that Registration Statement. The
power of attorney was signed by us on February 3, 1999.
Signature Title
- --------- -----
President, Chief Executive Officer and Director
- ------------------------ (Principal Executive Officer)
Gabriel L. Shaheen
Executive Vice President and Director
- -----------------------------
Lawrence T. Rowland
Senior Vice President, Assistant Treasurer and
- ----------------------------- Chief Financial Officer
Keith J. Ryan (Principal Financial Officer and Principal
Accounting Officer)
Director
- -----------------------------
H. Thomas McMeekin
/s/Richard C. Vaughan Director
- -----------------------------
Richard C. Vaughan
Director
- -----------------------------
Jon A. Boscia
STATE OF INDIANA)
)SS:
COUNTY OF ALLEN)
Subscribed and sworn to before me this
3rd day of February, 1999.
/s/Janet L. Lindenberg
----------------------
Notary public
Commission Expires: 7-10-2001
---------
<PAGE>
Exhibit 15(f)
POWER OF ATTORNEY
We, the undersigned directors and officers of The Lincoln National Life
Insurance Company, hereby revoke all powers of attorney authorizing any person
to act as attorney-in-fact relative to Lincoln National Variable Annuity Account
E (American Legacy I), which were previously executed by us and do hereby
severally constitute and appoint Kelly D. Clevenger, Jeffrey K. Dellinger, and
Steven M. Kluever, our true and lawful attorneys-in-fact, with full power in
each of them to sign for us, in our names and in the capacities indicated below,
any and all amendments to Registration Statement No. 33-26032 filed with the
Securities and Exchange Commission under the Securities Act of 1933, on behalf
of the Company in its own name or in the name of one of its Separate Accounts,
hereby ratifying and confirming our signatures as they may be signed by any of
our attorneys-in-fact to any such amendment to that Registration Statement. The
power of attorney was signed by us on February 3, 1999.
Signature Title
- --------- -----
President, Chief Executive Officer and Director
- ------------------------ (Principal Executive Officer)
Gabriel L. Shaheen
Executive Vice President and Director
- -----------------------------
Lawrence T. Rowland
Senior Vice President, Assistant Treasurer and
- ----------------------------- Chief Financial Officer
Keith J. Ryan (Principal Financial Officer and Principal
Accounting Officer)
Director
- -----------------------------
H. Thomas McMeekin
Director
- -----------------------------
Richard C. Vaughan
/s/Jon A. Boscia Director
- -----------------------------
Jon A. Boscia
STATE OF INDIANA)
)SS:
COUNTY OF ALLEN)
Subscribed and sworn to before me this
3rd day of February, 1999.
/s/Janet L. Lindenberg
----------------------
Notary public
Commission Expires: 7-10-2001
---------
