<PAGE>
As filed with the Securities and Exchange Commission on March 31, 1997
Registration No.: 33-27783
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
POST-EFFECTIVE AMENDMENT NO. 10 [X]
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
AMENDMENT NO. 11 [X]
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
(Exact Name of Registrant)
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(Name of Depositor)
1300 South Clinton Street
Post Office Box 1110
Fort Wayne, Indiana 46801
- --------------------------------------------------------------------------------
(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
Post Office Box 1110
Fort Wayne, Indiana 46802
- --------------------------------------------------------------------------------
(Name and Address of Agent for Service)
Copy to:
Susan S. Krawczyk
Sutherland, Asbill & Brennan, L.L.P.
1275 Pennsylvania Avenue, N.W.
Washington, DC 20004
DECLARATION PURSUANT TO RULE 24F-2
The Registrant has registered an indefinite amount of securities under the
Securities Act of 1933 pursuant to Rule 24f-2 of the Investment Company Act of
1940. Pursuant to Rule 24f-2(b)(2), the Registrant filed a Rule 24f-2 Notice
for the last fiscal year (1996) on February 28, 1997.
It is proposed that this filing will become effective
[_] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on April 1, 1997 pursuant to paragraph (b) of Rule 485
[_] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on ------, ------ 1997 Pursuant to paragraph (a)(1) of Rule 485
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
CROSS REFERENCE SHEET
(PURSUANT TO RULE 495 OF REGULATION C
UNDER THE SECURITIES ACT OF 1933)
RELATING TO ITEMS REQUIRED BY FORM N-4
(POST-EFFECTIVE AMENDMENT NO. 11)
N-4 ITEM CAPTION IN PROSPECTUS (PART A)
- -------- ------------------------------
1. Cover Page
2. Special terms
3. (a) Expense Table
(b) Synopsis
(c) Synopsis
(d) Not Applicable
4. (a) Condensed Financial Information
(b) Investment Results
(c) Financial Statements
5. (a) Cover Page; The Lincoln National Life Insurance Company
(b) Variable Annuity Account; Investments of the Variable Annuity
Account; Cover Page
(c) Investments of the Variable Annuity Account
(d) Cover Page
(e) Voting Rights
(f) Not Applicable
6. (a) Charges and Other Deductions
(b) Charges and Other Deductions
(c) Charges and Other Deductions
(d) The Contracts - Commissions
(e) Charges and Other Deductions
(f) Charges and Other Deductions
(g) Not Applicable
7. (a) The Contracts; Investments of the Variable Annuity Account; Annuity
Payouts; Voting Rights; Return Privilege
(b) Investments of the Variable Annuity Account; The Contracts; Cover
Page
(c) The Contracts
(d) The Contracts
<PAGE>
CROSS REFERENCE SHEET TO ITEMS REQUIRED BY FORM N-4
N-4 ITEM CAPTION IN PROSPECTUS (PART A)
- -------- ------------------------------
8. (a) Annuity Payouts
(b) Annuity Payouts
(c) Annuity Payouts
(d) Annuity Payouts
(e) Annuity Payouts
(f) The Contracts; Annuity Payouts
9. (a) The Contracts; Annuity Payouts
(b) The Contracts; Annuity Payouts
10. (a) The Contracts; Cover Page; Charges and Other Deductions
(b) The Contracts; Investments of the Variable Annuity Account
(c) The Contracts
(d) Distribution of the Contracts
11. (a) The Contracts
(b) Restrictions Under the Texas Optional Retirement Program
(c) The Contracts
(d) The Contracts
(e) Return Privilege
12. (a) Federal Tax Status
(b) Cover Page; Federal Tax Status
(c) Federal Tax Status
13. Legal Proceedings
14. Table of Contents to the Statement of Additional
Information (SAI) for Lincoln National Variable
Annuity Account H
<PAGE>
CAPTION IN STATEMENT OF ADDITIONAL
N-4 ITEM INFORMATION (PART B) (continued)
- -------- ----------------------------------
15. Cover Page for Part B
16. Cover Page for Part B
17. (a) Not Applicable
(b) Not Applicable
(c) General Information and History of The Lincoln
National Life Insurance Company (Lincoln Life)
<PAGE>
CROSS REFERENCE SHEET TO ITEMS REQUIRED BY FORM N-4
CAPTION IN STATEMENT OF ADDITIONAL
N-4 ITEM INFORMATION (PART B)
- -------- ----------------------------------
18. (a) Not Applicable
(b) Not Applicable
(c) Services
(d) Not Applicable
(e) Not Applicable
(f) Not Applicable
19. (a) Purchase of Securities Being Offered
(b) Purchase of Securities Being Offered
20. (a) Not Applicable
(b) Principal Underwriter
(c) Not Applicable
(d) Not Applicable
21. Calculation of Investment Results
22. Annuity Payouts
23. (a) Financial Statements -- Lincoln National Variable
Annuity Account H
(b) Financial Statements -- The Lincoln
National Life Insurance Company
<PAGE>
AMERICAN LEGACY II
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
issued by:
Lincoln National Life Insurance Co.
1300 South Clinton Street
Fort Wayne, Indiana 46802
This Prospectus describes the individual flexible premium deferred variable
annuity contract (contract or variable annuity contract) issued by Lincoln
National Life Insurance Co. (Lincoln Life). It is for use with the following
retirement plans qualified for special tax treatment (qualified plans) under
the Internal Revenue Code of 1986, as amended (the code):
1. Public school systems and certain tax-exempt organizations [403(b)];
2. Qualified corporate employee pension and profit-sharing trusts and qualified
annuity plans;
3. Corresponding plans of self-employed individuals (H.R. 10 or Keogh);
4. Individual retirement annuities (IRA);
5. Government deferred compensation plans (457);
6. Simplified employee pension plans (SEP); and
7. SIMPLE 401(k) and IRA plans. Consult your investment dealer as to the
availability of this contract for these plans.
Section 403(b) business under number (1.) will normally be accepted only for
purchase payments qualifying as 403(b) lump sum transfers or rollovers.
The contract described in this Prospectus is also offered to plans established
by persons who are not entitled to participate in one of the previously
mentioned plans (nonqualified contracts).
The contract offers you the accumulation of contract value and payment of
periodic annuity benefits. These benefits may be paid on a variable or fixed
basis or a combination of both. Benefits start at an annuity commencement date
which you select. If the annuitant dies before the annuity commencement date,
the greater of: (1) the contract value; or (2) the guaranteed minimum death
benefit (GMDB) or, if it is then in effect, the enhanced guaranteed minimum
death benefit (EGMDB) will be paid to the beneficiary. You may elect the EGMDB
when you apply for the contract. (See Death benefit before annuity commencement
date)
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.
The minimum subsequent purchase payment for the contract is $25 per payment,
subject to a $300 annual minimum.
All investments (purchase payments) for benefits on a variable basis will be
placed in Lincoln National Variable Annuity Account H (variable annuity account
[VAA]). The VAA is a segregated investment account of Lincoln Life, which is
the depositor. Based upon your instructions, the VAA invests purchase payments
(at net asset value) in shares of a class of one or more specified funds of the
American Variable Insurance Series (series): Global Growth Fund, Growth Fund,
International Fund, Growth-Income Fund, Asset Allocation Fund, High-Yield Bond
Fund, Bond Fund, U.S. Government/AAA-Rated Securities Fund, and Cash Management
Fund. Both the value of a contract before the annuity commencement date and the
amount of payouts afterward will depend upon the investment performance of the
fund(s) selected. Investments in these funds are neither insured nor guaranteed
by the U.S. Government or by any other person or entity.
Purchase payments for benefits on a fixed basis will be placed in the fixed
side of the contract, which is part of our General Account. However, this
Prospectus deals only with those elements of the contracts relating to the VAA,
except where reference to the fixed side is made.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (SEC) NOR HAS THE SEC PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus details the information regarding the VAA that you should know
before investing. This booklet also includes a current Prospectus of the
series. Both should be read carefully before investing and kept for future
reference.
A statement of additional information (SAI), dated April 1, 1997, concerning
the VAA has been filed with the SEC and is incorporated by this reference into
this Prospectus. If you would like a free copy, complete and mail the enclosed
card, or call 1-800-942-5500. A table of contents for the SAI appears on the
last page of this Prospectus.
This Prospectus is dated April 1, 1997.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
- ----------------------------------------------------------------------
<S> <C>
Special terms 3
- ----------------------------------------------------------------------
Expense tables 4
- ----------------------------------------------------------------------
Synopsis 6
- ----------------------------------------------------------------------
Condensed financial information for the variable annuity account 8
- ----------------------------------------------------------------------
Investment results 9
- ----------------------------------------------------------------------
Financial statements 9
- ----------------------------------------------------------------------
Lincoln National Life Insurance Co. 9
- ----------------------------------------------------------------------
Variable annuity account (VAA) 9
- ----------------------------------------------------------------------
Investments of the variable annuity account 9
- ----------------------------------------------------------------------
Charges and other deductions 11
- ----------------------------------------------------------------------
The contracts 12
- ----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Page
- ------------------------------------------------------------------------
<S> <C>
Annuity payouts 16
- ------------------------------------------------------------------------
Federal tax status 18
- ------------------------------------------------------------------------
Voting rights 19
- ------------------------------------------------------------------------
Distribution of the contracts 19
- ------------------------------------------------------------------------
Return privilege 20
- ------------------------------------------------------------------------
State regulation 20
- ------------------------------------------------------------------------
Restrictions under the Texas Optional Retirement Program 20
- ------------------------------------------------------------------------
Records and reports 20
- ------------------------------------------------------------------------
Other information 20
- ------------------------------------------------------------------------
Statement of Additional Information table of contents for Separate
Account H 21
- ------------------------------------------------------------------------
</TABLE>
2
<PAGE>
SPECIAL TERMS
(Throughout this Prospectus, in order to make the following documents more
understandable to you, we have italicized the special terms.)
Account or variable annuity account (VAA) -- The segregated investment account,
Account H, 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
variable side of the contract before the annuity commencement date. See The
contracts.
Advisor or investment advisor -- Capital Research and Management Co. (CRMC),
which provides investment management services to the series. See Investment
advisor.
Annuitant -- The person upon whose life the annuity benefit payments made after
the annuity commencement date will be based.
Annuity commencement date -- The valuation date when the funds are withdrawn or
converted into annuity units or fixed dollar payout for payment of annuity
benefits under the annuity payout option selected. For purposes of determining
whether an event occurs before or after the annuity commencement date, the
annuity commencement date is deemed to begin at close of business on the
valuation date.
Annuity payout option -- An optional form of payout of the annuity available
within the contract. See Annuity payouts.
Annuity payout -- An amount paid at regular intervals after the annuity
commencement date under one of several options available to the annuitant
and/or any other payee. This amount may be paid on a variable or fixed basis,
or a combination of both.
Annuity unit -- A measure used to calculate the amount of annuity payouts after
the annuity commencement date. See Annuity payouts.
Beneficiary -- The person whom you designate to receive the death benefit, if
any, in case of the annuitant's death.
Cash surrender value -- Upon surrender, the contract value less any applicable
charges, fees and taxes.
Code -- The Internal Revenue Code of 1986, as amended.
Contract (variable annuity contract) -- The agreement between you and us
providing a variable annuity.
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 also the annuitant.
Contract value -- At a given time, the total value of all accumulation units
for a contract plus the value of the fixed side of the contract.
Contract year -- Each one-year period starting with the effective date of the
contract and starting with each contract anniversary after that.
Death benefit -- The amount payable to your designated beneficiary if the
annuitant dies before the annuity commencement date. See The contracts.
Depositor -- Lincoln National Life Insurance Co.
Enhanced Guaranteed Minimum Death Benefit (EGMDB) -- The EGMDB is the greater
of: (1) contract value as of the day on which Lincoln Life approves the payment
of a death benefit claim; or (2) the highest contract value on any policy
anniversary date (including the inception date) between the time the EGMDB
takes effect up to and including the annuitant's age 75. 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.
Flexible premium deferred contract -- An annuity contract with an initial
purchase payment, allowing additional purchase payments to be made, and with
annuity payouts beginning at a future date.
Fund -- Any of the underlying investment options available in the series in
which your purchase payments are invested.
Guaranteed Minimum Death Benefit (GMDB) -- The GMDB is equal to the sum of all
purchase payments plus any attributable gain, minus any withdrawals, partial
annuitizations and premium taxes incurred. We determine the attributable gain
separately for each contract year on its seventh anniversary (once its
surrender charge period has expired). See Death benefit before the annuity
commencement date.
Home office -- The headquarters of Lincoln National Life Insurance Co., located
at 1300 South Clinton Street, Fort Wayne, Indiana 46802.
Lincoln Life (we, us, our) -- Lincoln National Life Insurance Co.
Purchase payments -- Amounts paid into the contract.
Series -- American Variable Insurance Series (series), the funds in which
purchase payments are invested.
Statement of additional information (SAI) -- A document required by the SEC to
be provided upon request to a prospective purchaser of a contract, you. This
free document gives more information about Lincoln Life, the VAA and the
variable annuity contract.
Subaccount or American Legacy II subaccount -- That portion of the VAA that
reflects investments in accumulation and annuity units of a class of a
particular fund available under the contracts. There is a separate subaccount
which corresponds to each class of a fund.
Surrender -- A contract right that allows you to terminate your contract and
receive your cash surrender value. See The contracts.
Valuation date -- Each day the New York Stock Exchange (NYSE) is open for
trading.
Valuation period -- The period starting at the close of trading (currently 4:00
p.m. New York time) on each day that the NYSE is open for trading (valuation
date) and ending at the close of such trading on the next valuation date.
Withdrawal -- A contract right that allows you to obtain a portion of your cash
surrender value.
3
<PAGE>
EXPENSE TABLES
CONTRACTOWNER TRANSACTION EXPENSES:
The maximum contingent deferred sales charge
(as a percentage of purchase payments surrendered/withdrawn): 6%
The contingent deferred sales charge percentage is reduced over time. The later
a redemption occurs, the lower the contingent deferred sales charge with
respect to that surrender or withdrawal. See Contingent deferred sales charges.
(Note: This charge may be waived in certain cases. See Contingent deferred
sales charges.)
- --------------------------------------------------------------------------------
ANNUAL CONTRACT FEE: $35
This is a single charge assessed 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.
- --------------------------------------------------------------------------------
VARIABLE ANNUITY ACCOUNT H ANNUAL EXPENSES FOR AMERICAN LEGACY II SUBACCOUNTS:*
(as a percentage of average account value for each subaccount):
<TABLE>
<CAPTION>
Contracts with EGMDB Contracts without EGMDB
<S> <C> <C>
Mortality and expense risk fees 1.25% 1.25%
EGMDB Charge .15% --
Account fees and expenses .10% .10%
----- -----
Total Account H annual expenses
for American Legacy II
subaccounts 1.50% 1.35%
</TABLE>
ANNUAL EXPENSES OF THE FUNDS FOR THE YEAR ENDED NOVEMBER 30, 1996:
(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. Growth .42 .02 .44
- ------------------------------------------------------------------------
3. International .61 .08 .69
- ------------------------------------------------------------------------
4. Growth-Income .39 .02 .41
- ------------------------------------------------------------------------
5. Asset Allocation .47 .02 .49
- ------------------------------------------------------------------------
6. High-Yield Bond .50 .03 .53
- ------------------------------------------------------------------------
7. Bond .51 .01 .52
- ------------------------------------------------------------------------
8. U.S. Govt./AAA-Rated Securities .51 .02 .53
- ------------------------------------------------------------------------
9. Cash Management .45 .02 .47
- ------------------------------------------------------------------------
</TABLE>
*The VAA is divided into separately-named subaccounts, nine of which are
available under the contracts.
Each subaccount, in turn, invests purchase payments in shares of a class of
its respective fund.
**These expenses are estimated amounts for the current fiscal year.
4
<PAGE>
EXAMPLES
(reflecting expenses both of the American Legacy II subaccounts and of the
funds)
If you surrender your contract at the end of the applicable time period, you
would pay the following expenses* on a $1,000 investment, assuming a 5% annual
return:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. Global Growth** $81 $116 $143 $242
- --------------------------------------------------------------------
2. Growth 78 106 127 210
- --------------------------------------------------------------------
3. International 81 114 140 236
- --------------------------------------------------------------------
4. Growth-Income 78 105 125 207
- --------------------------------------------------------------------
5. Asset Allocation 79 108 129 215
- --------------------------------------------------------------------
6. High-Yield Bond 79 109 131 219
- --------------------------------------------------------------------
7. Bond 79 109 131 218
- --------------------------------------------------------------------
8. U.S. Gov't./AAA-Rated Securities 79 109 131 219
- --------------------------------------------------------------------
9. Cash Management 78 107 128 213
- --------------------------------------------------------------------
</TABLE>
If you do not surrender your contract, you would pay the following expenses*
on a $1,000 investment, assuming a 5% annual return:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. Global Growth** $20 $63 $108 $242
- -------------------------------------------------------------------
2. Growth 18 56 97 210
- -------------------------------------------------------------------
3. International 21 64 110 236
- -------------------------------------------------------------------
4. Growth-Income 18 55 95 207
- -------------------------------------------------------------------
5. Asset Allocation 19 58 99 215
- -------------------------------------------------------------------
6. High-Yield Bond 19 59 101 219
- -------------------------------------------------------------------
7. Bond 19 59 101 218
- -------------------------------------------------------------------
8. U.S. Govt./AAA-Rated Securities 19 59 101 219
- -------------------------------------------------------------------
9. Cash Management 18 57 98 213
- -------------------------------------------------------------------
</TABLE>
* These expenses, calculated as mandated by the SEC, reflect the annual
contract fee as the ratio of the total contract fees collected in the most
recent fiscal year to the total average net assets of the account.
** These expenses are estimated amounts for the current fiscal year.
All of the figures provided under the subheading Annual expenses of the funds
and part of the data used to produce the figures in the examples were supplied
by the underlying portfolio company (series) through the VAA's principal
underwriter, American Funds Distributors, Inc. We have not independently
verified this information.
These examples are provided to assist you in understanding the various costs
and expenses that you will bear directly or indirectly. These examples reflect
expenses both of the VAA and of the nine funds. These examples reflect expenses
assuming that the EGMDB is NOT in effect. If the EGMDB is in effect, these
expenses will be higher.
For more complete descriptions of the various costs and expenses involved, see
Charges and other deductions in this Prospectus, and Fund Organization and
Management in the Prospectus for the series. Premium taxes may also be
applicable, although they do not appear in the table. THE EXAMPLES SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY
BE MORE OR LESS THAN THOSE SHOWN. These examples are unaudited.
5
<PAGE>
SYNOPSIS
WHAT TYPE OF CONTRACT AM I BUYING? It is an individual annuity contract issued
by Lincoln Life. It may provide for a fixed annuity and/or a variable annuity.
This Prospectus is intended to provide disclosure only about the variable
portion of the contract. See The contracts.
WHAT IS THE VARIABLE ANNUITY ACCOUNT (VAA)? It is a segregated asset account
established under Indiana insurance law, and registered with the SEC as a unit
investment trust. The assets of the VAA are allocated to one or more
subaccounts, according to your investment choice. Those 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? Through its various subaccounts, the VAA uses
your purchase payments to purchase series shares, at your direction, in one or
more of the following investment funds of the series: Global Growth, Growth,
International, Growth-Income, Asset Allocation, High-Yield Bond, Bond, U.S.
Government/AAA-Rated Securities and Cash Management. In turn, each fund holds a
portfolio of securities consistent with its own particular investment policy.
See Investments of the variable annuity account and Description of the series.
WHO INVESTS MY MONEY? The investment advisor for the series is CRMC, Los
Angeles, California. CRMC is a long-established investment management
organization, and is registered as an investment advisor with the SEC. See
Investments of the variable annuity account and Investment advisor.
HOW DOES THE CONTRACT WORK? Once we approve your application, you will be
issued your individual annuity contract. During the accumulation period, while
you are paying in, your purchase payments will buy accumulation units under the
contract. Should you decide to annuitize (that is, change your contract to a
payout mode rather than an accumulation mode), your accumulation units will be
converted to annuity units. Your periodic annuity payout will be based upon the
number of annuity units to which you became entitled at the time you decided to
annuitize and the value of each unit on the valuation date. See The contracts.
WHAT CHARGES ARE ASSOCIATED WITH THIS 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.
Should you decide to withdraw contract value before your purchase payments have
been in your contract for a certain minimum period, you will incur a contingent
deferred sales charge of anywhere from 1% to 6%, depending upon how many full
contract years those payments have been in the contract. (Note: This sales
charge is not assessed upon: 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% withdrawal exception does not apply to a surrender of the
contract); automatic withdrawals, not in excess of 10% of the purchase payments
during a contract year, made by non contractowners who are at least 59 1/2; 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 code], after the effective date of the contract and before the annuitant's
65th birthday; a surrender of the contract as a result of the death of the
annuitant; or electing an annuity payout option available within the contract.
If your state assesses a premium tax with respect to your contract, then at the
time the tax is incurred (or at such other time as we may choose), we will
deduct those amounts from purchase payments or contract value, as applicable.
We assess charges in the aggregate annual amount of 1.35% against the daily net
asset value of the VAA, including that portion of the account attributable to
your purchase payments. These charges consist of a 0.10% administrative charge
and 1.25% mortality and expense risk charge. If the EGMDB is in effect, the
aggregate charge against the VAA is 1.50% consisting of a 0.10% administrative
charge, a 1.25% mortality and expense risk charge and a 0.15% charge for the
EGMDB. For a complete discussion of the charges associated with the contract,
see Charges and other deductions.
The series pays a fee to its investment advisor, CRMC, based upon the average
daily net asset value of each fund in the series. See Investments of the
variable annuity account--Investment advisor. In addition, there are other
expenses associated with the daily operation of the series. These are more
fully described in the Prospectus for the series.
HOW MUCH MUST I PAY, AND HOW OFTEN? Subject to the minimum and maximum payments
stated on the first page of the Prospectus, the amount and frequency of your
payments are completely flexible. See The contracts--Purchase payments.
HOW WILL MY ANNUITY PAYOUTS BE CALCULATED? If you decide to annuitize, you
elect an annuity payout option. Once you have done so, your periodic payout
will be based upon a number of factors. If you participate in the VAA, the
changing values of the funds in which you have invested will be one factor. See
Annuity payouts. REMEMBER THAT PARTICIPANTS IN THE VAA BENEFIT FROM ANY GAIN,
AND TAKE A RISK OF ANY DROP, IN THE VALUE OF THE SECURITIES IN THE FUNDS'
PORTFOLIOS.
WHAT HAPPENS IF I DIE BEFORE I ANNUITIZE? If you are the annuitant and also the
contractowner, then the beneficiary whom you designate will receive either the
GMDB, or the then current value of the contract, whichever is greater. If the
EGMDB is in effect, the
6
<PAGE>
beneficiary will receive either the EGMDB or the then current value of the
contract, whichever is greater. Your beneficiary will have certain options for
how the money is to be paid out. If a contractowner is not also the annuitant,
certain special rules apply. See The contracts--Death benefit before the
annuity commencement date and Death of contractowner.
MAY I TRANSFER CONTRACT VALUE BETWEEN FUNDS IN THE SERIES? Yes; however, there
are limits on how often you may do so. See The contracts--Transfers between
subaccounts on or before the annuity commencement date and Transfers after the
annuity commencement date.
MAY I TRANSFER CONTRACT VALUE FROM THE FIXED TO THE VARIABLE SIDE OF THE
CONTRACT, AND VICE-VERSA? Yes, subject once again to specific restrictions in
the contract. See The contracts--Transfers to and from the General Account on
or before the annuity commencement date.
MAY I SURRENDER THE CONTRACT OR MAKE A WITHDRAWAL? Yes, subject to contract
requirements and to restrictions imposed under certain qualified retirement
plans, for which the contract is purchased. See The contracts-- Surrenders and
withdrawals.
If you surrender the contract or make a withdrawal, certain charges may be
assessed, as discussed previously and under Charges and other deductions. In
addition, the Internal Revenue Service (IRS) may assess a 10% premature
withdrawal penalty tax. A surrender or a withdrawal may be subject to 20%
withholding. See Federal tax status and withholding.
DO I GET A FREE LOOK AT THIS CONTRACT? Yes. If within ten days (or a longer
period if required by law) of the date you first receive the contract you
return it, postage prepaid to the home office of Lincoln Life, it will be
canceled. However, except in some states, during this period, you assume the
risk of a market drop with respect to purchase payments which you allocate to
the variable side of the contract. See Return privilege.
7
<PAGE>
CONDENSED FINANCIAL INFORMATION FOR THE VARIABLE ANNUITY ACCOUNT
ACCUMULATION UNIT VALUES in the period ended December 31, 1996
comes from the VAA's financial
statements. It should be read in
conjunction with the VAA's financial
statements and notes which are all
included in the SAI.
The following information relating to
accumulation unit values and number
of accumulation units for the
American Legacy II subaccounts for
each of the eight years
<TABLE>
<CAPTION>
1989* 1990 1991 1992 1993 1994 1995 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Growth subaccount
Accumulation unit value
. Beginning of period... $ 1.000 1.009 .952 1.252 1.369 1.571 1.558 2.049
. End of period......... $ 1.009 .952 1.252 1.369 1.571 1.558 2.049 2.292
Number of accumulation
units
. End of period (000's
omitted)............... 48,888 298,367 486,812 752,797 980,310 1,133,151 1,335,028 1,446,260
- ----------------------------------------------------------------------------------------------------
International
subaccount**
Accumulation unit value
. Beginning of period .. $ 1.000 .947 1.044 1.021 1.354 1.361 1.514
. End of period ........ $ .947 1.044 1.021 1.354 1.361 1.514 1.755
Number of accumulation
units
. End of period (000's
omitted)............... 78,763 200,309 360,734 697,520 984,460 1,078,152 1,293,784
- ----------------------------------------------------------------------------------------------------
Growth-Income subaccount
Accumulation unit value
. Beginning of period... $ 1.000 1.021 .982 1.202 1.280 1.418 1.428 1.875
. End of period ........ $ 1.021 .982 1.202 1.280 1.418 1.428 1.875 2.196
Number of accumulation
units
. End of period (000's
omitted)............... 88,723 340,270 703,495 1,122,418 1,500,824 1,680,732 1,877,129 2,097,592
- ----------------------------------------------------------------------------------------------------
Asset Allocation
subaccount
Accumulation unit value
. Beginning of period... $ 1.000 1.022 .998 1.200 1.284 1.399 1.377 1.760
. End of period ........ $ 1.022 .998 1.200 1.284 1.399 1.377 1.760 2.011
Number of accumulation
units
. End of period (000's
omitted)............... 41,276 110,929 174,468 285,119 410,464 448,248 480,392 534,903
- ----------------------------------------------------------------------------------------------------
High-Yield Bond
subaccount
Accumulation unit value
. Beginning of period... $ 1.000 1.006 1.031 1.287 1.429 1.641 1.513 1.818
. End of period ........ $ 1.006 1.031 1.287 1.429 1.641 1.513 1.818 2.031
Number of accumulation
units
. End of period (000's
omitted)............... 5,671 17,624 47,739 101,884 191,433 216,546 256,041 294,401
- ----------------------------------------------------------------------------------------------------
Bond subaccount***
Accumulation unit value
. Beginning of period... $ 1.000
. End of period......... $ 1.044
Number of accumulation
units
. End of period (000's
omitted)............... 72,747
- ----------------------------------------------------------------------------------------------------
U.S. Government/AAA-
Rated subaccount
Accumulation unit value
. Beginning of period... $ 1.000 1.018 1.089 1.246 1.323 1.451 1.369 1.559
. End of period......... $ 1.018 1.089 1.246 1.323 1.451 1.369 1.559 1.586
Number of accumulation
units
. End of period (000's
omitted)............... 13,695 59,506 139,710 212,716 282,851 282,879 296,349 274,674
- ----------------------------------------------------------------------------------------------------
Cash Management
subaccount
Accumulation unit value
. Beginning of period... $ 1.000 1.029 1.095 1.140 1.161 1.177 1.206 1.256
. End of period ........ $ 1.029 1.095 1.140 1.161 1.177 1.206 1.256 1.302
Number of accumulation
units
. End of period (000's
omitted)............... 23,046 96,578 106,259 133,763 106,323 141,512 130,252 168,072
- ----------------------------------------------------------------------------------------------------
</TABLE>
*The VAA began operations on August 1, 1989, so the figures for 1989 represent
experience of less than one year.
**The International subaccount began operations on May 1, 1990, so the figures
for 1990 represent experience of less than one year.
***The Bond subaccount began operations on January 2, 1996 so the figures for
1996 represent experience of less than one year.
There is a Global Growth subaccount but it is not in the chart because it did
not begin activity until 1997.
8
<PAGE>
INVESTMENT RESULTS
At times, the VAA may compare its investment results to various unmanaged
indices or other variable annuities in reports to shareholders, sales
literature and advertisements. The results will be calculated on a total return
basis for various periods, with or without contingent deferred sales charges
and contract fees. Results calculated without contingent deferred sales charges
or contract fees will be higher. Total returns include the reinvestment of all
distributions, which are reflected in changes in unit value. See the SAI for
further information.
FINANCIAL STATEMENTS
The financial statements for the VAA and 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.
VARIABLE ANNUITY ACCOUNT
(VAA)
On February 7, 1989, the VAA was established as an insurance company separate
account under Indiana law. It is registered with the SEC as a unit investment
trust under the provisions of the Investment Company Act of 1940 (1940 Act).
The SEC does not supervise the VAA or Lincoln Life. The VAA is a segregated
investment account, meaning that its assets may not be charged with liabilities
resulting from any other business that we may conduct. Income, gains and
losses, whether realized or not, from assets allocated to the VAA are, in
accordance with the applicable annuity contracts, credited to or charged
against the VAA. They are credited or charged without regard to any other
income, gains or losses of Lincoln Life. The VAA satisfies the definition of
separate account under the federal securities laws. We do not guarantee the
investment performance of the VAA. Any investment gain or loss depends on the
investment performance of the funds. 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 a class of each fund in the series.
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
substitute funds.
INVESTMENT ADVISOR
The investment advisor for the series is CRMC, 333 South Hope Street, Los
Angeles, California 90071. CRMC is one of the nation's largest and oldest
investment management organizations. As compensation 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 Purchase and Redemption of Shares, in the Prospectus for the
series.
DESCRIPTION OF THE SERIES
The series was organized as a Massachusetts business trust in 1983 and is
registered 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
Lincoln 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
investment 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 nine separate portfolios of funds. The series has adopted a plan
pursuant to Rule 18f-3 under the 1940 Act to permit the series to establish a
multiple class distribution system for all of its portfolios. The series' 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
9
<PAGE>
arrangement; and (4) each class has separate voting rights on any matter
submitted to its shareholders in which the interests of one class differ from
the interests 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
subject to a 12b-1 plan. Only Class 1 shares are available under the
contracts.
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 investment objective is to achieve long-term growth
of capital by investing in securities of issuers domiciled around the
world. The fund will invest primarily in common stocks but may invest in
other securities such as preferred stock, debt securities and securities
convertible into common stock. PLEASE NOTE: THE GLOBAL GROWTH FUND WILL NOT
BE MADE AVAILABLE UNDER THE CONTRACTS UNTIL APRIL 30, 1997. IN ADDITION,
THIS FUND IS NOT YET AVAILABLE IN ALL STATES. PLEASE CONSULT YOUR
INVESTMENT DEALER FOR CURRENT INFORMATION ABOUT THE GLOBAL GROWTH FUND'S
AVAILABILITY.
2. Growth Fund--This fund seeks to provide growth of capital. Whatever current
income is generated by the fund is likely to be incidental to the objective
of capital growth. Ordinarily, accomplishment of the fund's objective of
capital growth will be sought by investing primarily in common stocks or
securities with common stock characteristics.
3. International Fund--The investment objective is long-term growth of capital
by investing primarily in securities of issuers domiciled outside the
United States.
4. Growth-Income Fund--The investment objective is growth of capital and
income. In the selection of securities for investment, the possibilities of
appreciation and potential dividends are given more weight than current
yield. Ordinarily, the assets of the Growth-Income Fund consist principally
of a diversified group of common stocks, but other types of securities may
be held when deemed advisable including preferred stocks and corporate
bonds, including convertible bonds.
5. Asset Allocation Fund--This fund seeks total return (including income and
capital gains) and preservation of capital over the long-term by investing
in a diversified portfolio of securities. These securities can include
common stocks and other equity-type securities (such as convertible bonds
and preferred stocks), bonds and other intermediate and long-term fixed-
income securities and money market instruments (debt securities maturing in
one year or less).
6. High-Yield Bond Fund--The investment objective is a fully managed,
diversified bond portfolio. It seeks high current income and secondarily
seeks capital appreciation. This fund will generally be invested
substantially in intermediate and long-term corporate obligations, with
emphasis on higher yielding, higher risk, lower rated or unrated
securities.
7. Bond Fund--The Bond Fund seeks a high level of current income as is
consistent with the preservation of capital by investing in a broad variety
of fixed income securities including: marketable corporate debt securities,
loan participations, U.S. Government securities, mortgage-related
securities, other asset-backed securities and cash or money market
instruments.
8. U.S. Government/AAA-Rated Securities Fund--This fund seeks a high level of
current income consistent with prudent investment risk and preservation of
capital by investing primarily in a combination of securities guaranteed by
the U.S. Government and other debt securities rated AAA or Aaa.
9. Cash Management Fund--The investment objective is high yield while
preserving capital by investing in a diversified selection of 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
appropriate funds to pay annuity payouts, death benefits, surrender/withdrawal
proceeds or for other purposes described in the contract. If you want to
transfer all or part of your investment from one subaccount to another, we may
redeem shares held in the first and purchase shares of the other. The shares
are retired, but they may be reissued later.
Shares of the funds are not sold directly to the general public. They are sold
to Lincoln Life, and may be sold to other insurance companies, for investment
of the assets of the subaccounts established by those insurance companies to
fund variable annuity and variable life insurance contracts.
When the 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
funding.
10
<PAGE>
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
conflicts, 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
reinvested in shares of the distributing funds at their net asset value on the
date of distribution. Dividends are not paid out to contractowners as
additional units, but are reflected as changes in unit values.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
We reserve the right, within the law, to make additions, deletions and
substitutions for the series and/or any funds within the series in which the
VAA participates. (We may substitute shares of other funds for shares already
purchased, or to be purchased in the future, under the contract. This
substitution might occur if shares of a fund should no longer be available, or
if investment in any fund's shares should become inappropriate, in the judgment
of our management, for the purposes of the contract.) No substitution of the
shares attributable to your account may take place without notice to you and
before approval of the SEC, in accordance with the 1940 Act.
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, automatic withdrawal services), maintaining records,
administering annuity payouts, furnishing accounting and valuation services
(including the calculation and monitoring of daily subaccount values),
reconciling and depositing cash receipts, providing contract confirmations,
providing toll-free inquiry services and furnishing telephone fund transfer
services. The benefits we provide include: death benefits, annuity payout
benefits and cash surrender value benefits. The risks we assume include: the
risk that the actual life span of persons receiving annuity payouts under
contract guarantees will exceed the assumptions reflected in our guaranteed
rates (these rates are incorporated in the contract and cannot be changed); the
risk that death benefits paid under the EGMDB or GMDB, will exceed actual
contract value; the risk that more owners than expected will qualify for
waivers of the contingent deferred sales charge; the risk that our costs in
providing the services will exceed our revenues from contract charges (which
cannot be changed by us). The amount of a charge may not necessarily correspond
to the costs associated with providing the services or benefits indicated by
the designation of the charge or associated with a particular contract. For
example, the contingent deferred sales charge collected may not fully cover all
of the sales and distribution expenses actually incurred by us.
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.
CONTINGENT DEFERRED SALES CHARGE
A contingent deferred sales charge does apply (except as described below) to
surrenders and withdrawals of other 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 than At least
2 years 2 3 4 5 6 7+
Contingent deferred
sales charge as a
percentage of the
surrendered or
withdrawn purchase
payments 6% 5 4 3 2 1 0
</TABLE>
A contingent deferred sales 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%
withdrawal 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 nontrustee 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 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
issued to employees and registered representatives of any member of the
selling group and their spouses and minor children, or to officers,
directors, trustees or bona-fide full-time employees of
11
<PAGE>
Lincoln National Corp. or The Capital Group, Inc. or their affiliated or man-
aged 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.
However, the contingent deferred sales charge is not waived as a result of the
death of a contractowner who is not the annuitant.
The contingent deferred sales 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 WITHDRAWN.) The contingent deferred sales 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 FROM THE VAA
We deduct from the VAA an amount, computed daily, which is equal to an annual
rate of 1.35% (1.50% for contracts with the EGMDB) of the daily net asset
value. The charge consists of a 0.10% administrative charge and a 1.25%
mortality and expense risk charge. For those contracts which include the EGMDB,
there is an additional risk charge of 0.15% of the daily net asset value.
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
generally depend upon the law of your state of residence. The tax ranges from
0.5% to 4.0%.
OTHER CHARGES AND DEDUCTIONS
There are deductions from and expenses paid out of the assets of the underlying
series that are described in the Prospectus for the series.
ADDITIONAL INFORMATION
The administrative and contingent deferred sales charges described previously
may be reduced or eliminated for any particular contract. However, these
charges will be reduced only to the extent that we anticipate lower
distribution and/or administrative expenses, or that we perform fewer sales or
administrative services than those originally contemplated in establishing the
level of those charges. Lower distribution and administrative expenses may be
the result of economies associated with (1) the use of mass enrollment
procedures, (2) the performance of administrative or sales functions by the
employer, (3) the use by an employer of automated techniques in submitting
deposits or information related to deposits on behalf of its employees or (4)
any other circumstances which reduce distribution or administrative expenses.
The exact amount of administrative and contingent deferred sales charges
applicable to a particular contract will be stated in that contract.
THE CONTRACTS
PURCHASE OF CONTRACTS
If you wish to purchase a contract, you must apply for it through a sales
representative authorized by us. The completed application is sent to us and we
decide whether to accept or reject it. If the application is accepted, a
contract is prepared and executed by our legally authorized officers. The
contract is then sent to you through your sales representative. See
Distribution of the contracts.
If a completed application and all other information necessary for processing a
purchase order are received, an initial purchase payment will be priced no
later than two business days after we receive the order. While attempting to
finish an incomplete application, we may hold the initial purchase payment for
no more than five business days. If the incomplete application cannot be
completed within those five days, you will be informed of the reasons, and the
purchase payment will be returned immediately (unless you specifically
authorize us to keep it until the application is complete). Once the
application is complete, the initial purchase payment must be priced within two
business days.
WHO CAN INVEST
To apply for a contract, you must be of legal age in a state where the
contracts may be lawfully sold and also be eligible to participate in any of
the qualified or nonqualified plans for which the contracts are designed. The
annuitant cannot be older than age 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 subsequent purchase payments
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
annuitant.
12
<PAGE>
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
payment of any death benefit, whichever comes first.
VALUATION DATE
Accumulation and annuity units will be valued once daily at the close of
trading (currently 4:00 p.m., New York time) on each day the NYSE is open
(valuation date). On any date other than a valuation date, the accumulation
unit value and the annuity unit value will not change.
ALLOCATION OF PURCHASE PAYMENTS
Purchase payments are placed into the VAA's subaccounts, each of which invests
in shares of 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 under the contract. Upon allocation to the appropriate
subaccount, purchase payments are converted into accumulation units. The number
of accumulation units credited is determined by dividing the amount allocated
to each subaccount by the value of an accumulation unit for that subaccount on
the valuation date on which the purchase payment is received at our home office
if received before 4:00 p.m., New York time. If the purchase payment is
received at or after 4:00 p.m., New York time, we will use the accumulation
unit value computed on the next valuation date. The number of accumulation
units determined in this way shall not be changed by any subsequent change in
the value of an accumulation unit. However, the dollar value of an accumulation
unit will vary depending not only upon how well the investments perform, but
also upon the expenses of the VAA and the underlying funds.
VALUATION OF ACCUMULATION UNITS
Accumulation units for each subaccount are valued separately. Initially, the
value of each accumulation unit was set at $1.00. Thereafter, the value of an
accumulation unit in any subaccount on any valuation date equals the value of
an accumulation unit in that subaccount as of the preceding valuation date
multiplied by the net investment factor of that subaccount for the current
valuation period.
The net investment factor is an index used to measure the investment
performance of a subaccount from one valuation date to the next. The net
investment factor for any subaccount for any valuation date reflects the change
in the net asset value per share of the fund held in the subaccount from one
valuation period to the next, adjusted for the daily deduction of the
administrative and mortality and expense risk charges from assets in the
subaccount. If any ex-dividend date occurs during the valuation period, the per
share amount of any dividend or capital gain distribution is taken into
account. Also, if any taxes need to be reserved, a per share charge or credit
for any taxes reserved for, which is determined by us to have resulted from the
operations of the subaccount, is taken into account.
Because a different daily charge is made for contracts with the EGMDB than for
those without, a different net investment factor is calculated for each of the
two types of contracts, resulting in 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
another. A transfer involves the surrender of accumulation units in one
subaccount and the purchase of accumulation units in the other subaccount. A
transfer will be done using the respective accumulation unit values as of the
valuation date we receive the request if received by 4 p.m. New York time. If
it 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 our home office or, if a Telephone
Exchange 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
contractowner a Personal Identification Number (PIN) to serve as
identification. We will not be liable for following telephone instructions we
reasonably believe are genuine. Telephone transfer 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 4:00 P.M. New York time.
When thinking about a transfer of contract value, you should consider the
inherent risk involved. Frequent transfers based on short-term expectations may
increase the risk that a transfer will be made at an inopportune time.
13
<PAGE>
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. 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
restrictions: (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
another 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 our home office. Each change of
beneficiary revokes any previous designation. We reserve the right to request
that you send us the contract for endorsement of a change of beneficiary.
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) Proof, satisfactory to us, of the death of the annuitant; (2) Written
authorization for payment; and (3) Our receipt of all required claim forms,
fully completed.
The GMDB is equal to the sum of all purchase payments plus any attributable
gain, minus any withdrawals, partial annuitizations and premium taxes incurred.
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 payable 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 (including the
inception date) from the time the EGMDB takes effect up to and including the
annuitant's age 75. 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 only elect the EGMDB at purchase by completing the EGMDB election form
available from us. If the EGMDB is elected at purchase, the benefit will take
effect on the inception date but we will not begin deducting the charge for the
EGMDB until the first policy anniversary date.
If you purchased a contract before January 1, 1997, 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 take effect as of the valuation time on the next
policy anniversary date following our receipt of the election of this benefit,
and we will begin deducting the charge for the EGMDB as of that date. If we
receive an election of this benefit 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 sending
a written request to
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Lincoln Life. The benefit will be discontinued effective at the valuation time
on the next policy anniversary date after we receive the request, 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 discontinue 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.
Federal 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 previously,
subject to the laws and regulations governing payment of death benefits. If an
election has not been made by the end of the 60-day period, a lump sum
settlement will be made to the beneficiary at that time. This payment may be
postponed as permitted by the 1940 Act.
Payment will be made in accordance with applicable laws and regulations
governing payment of death benefits.
Unless otherwise provided in the beneficiary designation, one of the following
procedures will take place on the death of a beneficiary:
1. If any beneficiary dies before the annuitant, that beneficiary's interest
will go to any other beneficiaries named, according to their respective
interests (There are no restrictions on the beneficiary's use of the
proceeds.); and/or
2. If no beneficiary survives the annuitant, the proceeds will be paid to the
contractowner or to the contractowner's 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,
independently of the other, may exercise any ownership rights in this contract.
A contingent owner may exercise ownership rights in this contract only after
the contractowner dies.
DEATH OF CONTRACTOWNER
If the contractowner of a nonqualified contract dies before the annuity
commencement date, then, in compliance with the code, the cash surrender value
of the contract will be paid as follows:
1. Upon the death of a nonannuitant contractowner, the cash surrender value
shall be paid to any surviving 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 contract
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 code requires that any distribution be paid within five years of the death
of the contractowner unless the beneficiary begins receiving, within one year
of the contractowner's death, the distribution in the form of a life annuity or
an annuity for a designated period not exceeding the beneficiary's life
expectancy.
SURRENDERS AND WITHDRAWALS
Before the annuity commencement date, we will allow the surrender of the
contract 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 option you select.
Special restrictions on surrenders/withdrawals apply if your contract is
purchased as part of a retirement plan of a public school system or 501(c)(3)
organization under Section 403(b) of the code. Beginning January 1, 1989, in
order for a contract to retain its tax-qualified status, Section 403(b)
prohibits a withdrawal from a 403(b) contract of post-1988 contributions (and
earnings on those contributions) pursuant to a salary reduction agreement.
However, this restriction does not apply if the annuitant (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 December 31, 1988, are not subject
to the previously stated restriction. Funds transferred to the contract from a
403(b)(7) custodial account will be subject to the restrictions.
The contract value available upon surrender/withdrawal is the cash surrender
value at the end of the valuation period during which the written request for
surrender/
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<PAGE>
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.
There are charges associated with 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.
Participants in the Texas Optional Retirement Program should refer to
Restrictions 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 request 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 transactions. You should consult
a tax advisor before you request a surrender/withdrawal or subsequent
reinvestment purchase.
AMENDMENT OF CONTRACT
We reserve the right to amend the contract to meet the requirements of the 1940
Act or other applicable federal or state laws or regulations. You will be
notified in writing of any changes, modifications or waivers.
COMMISSIONS
The commissions paid to dealers are a maximum of 4.70% 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 0.50% 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 0.25% of purchase
payments and up to 0.05% annually of the variable account value while the EGMDB
is in effect) may be provided to dealers maintaining certain sales volume
levels. In addition, the equivalent of 4.70% 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. 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. We assume no responsibility for the validity
or effect of any assignment. Consult your tax advisor about the tax
consequences of an assignment.
CONTRACTOWNER QUESTIONS
The obligations to purchasers under the contracts are those of Lincoln Life.
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 code] and qualified annuity
plans [described in Section 403(a) of the code], including H.R.10 trusts and
plans covering self-employed individuals and their employees, provide for
annuity payouts to start at the date and under the option specified in the
plan.)
The contract provides optional forms of payouts of annuities (annuity options),
each of which is payable on a variable basis, a fixed basis or a combination 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
installments. If the payouts from
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any subaccount would be or become less than $50, we have the right to reduce
their frequency until the payouts are at least $50 each. Following are
explanations of the annuity options available.
ANNUITY OPTIONS
LIFE ANNUITY. This option offers a periodic payout during the lifetime of the
annuitant and ends with the last payout before the death of the annuitant. This
option offers the highest periodic payout since there is no guarantee of a
minimum number of payouts or provision for a death benefit for beneficiaries.
HOWEVER, THERE IS THE RISK UNDER THIS OPTION THAT THE ANNUITANT WOULD RECEIVE
NO PAYOUTS IF 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
guarantees periodic payouts during a designated period, usually 10 or 20 years,
and then continues throughout the lifetime of the annuitant. The designated
period is selected by the contractowner.
JOINT LIFE ANNUITY. This option offers a periodic payout during the joint
lifetime of the annuitant and a designated joint annuitant. The payouts
continue during the lifetime of the survivor.
JOINT LIFE ANNUITY WITH GUARANTEED PERIOD. This option guarantees periodic
payouts during a designated period, usually 10 or 20 years, and continues
during the joint lifetime of the annuitant and a designated joint annuitant.
The payouts continue during the lifetime of the survivor. The designated period
is 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, divided by (b)
the annuity units represented by each payout to the annuitant multiplied by the
number of payouts paid before death. The value of the number of annuity units
is computed on the date the death claim is approved for payment by the home
office.
GENERAL INFORMATION
None of the options listed above currently provide withdrawal features,
permitting the contractowner to withdraw commuted values as a lump sum payment.
Other options, with or without withdrawal features, may be made available by
us. Options are only available to the extent they are consistent with the
requirements of the contract as well as Sections 72(s) and 401(a)(9) of the
code, if applicable. The mortality and expense risk charge and the charge for
administrative services 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
option or change the allocation of the investment among subaccounts up to 30
days before the scheduled annuity commencement date, upon written notice to the
home office. You must give us at least 30 days notice before the date on which
you want payouts to begin. If proceeds become available to a beneficiary in a
lump sum, the beneficiary may choose any annuity payout option.
Unless you select another option, the contract automatically provides for a
life annuity with annuity payouts guaranteed for 10 years (on a fixed, variable
or combination fixed and variable basis, in proportion to the account
allocations at the time of annuitization) except when a joint life payout is
required by law. Under any option providing for guaranteed payouts, the number
of payouts which remain unpaid at the date of the annuitant's death (or
surviving annuitant's death in the case of a joint life annuity) will be paid
to your beneficiary 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. There
is a more complete explanation of this calculation in the SAI.
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FEDERAL TAX STATUS
This section is a discussion of the Federal income tax rules applicable to the
contracts as of the date of this Prospectus. More information is provided in
the SAI. THESE DISCUSSIONS AND THOSE IN THE SAI ARE NOT INTENDED AS TAX ADVICE.
This section does not discuss the Federal tax consequences resulting from every
possible situation. No attempt has been made to consider any applicable state,
local or foreign tax law, other than the imposition of any state premium taxes
(See Deductions for premium taxes). If you are concerned about the tax
implications with respect to the contracts, you should consult a tax advisor.
The following discussion is based upon our understanding of the present Federal
income tax laws as they are currently interpreted by the IRS. No representation
is made about the likelihood of continuation of the present Federal income tax
laws or their current interpretations by the IRS.
TAXATION OF NONQUALIFIED CONTRACTS
You are generally not taxed on increases in the value of your contract until a
distribution occurs. This distribution can be in the form of a lump sum payout
received by requesting all or part of the cash surrender value (i.e.
surrenders/withdrawals) or as annuity payouts. For this purpose, the assignment
or pledge of, or the agreement to assign or pledge, any portion of the value of
a contract will be treated as a distribution. A transfer of ownership of a
contract, or designation of an annuitant (or other beneficiary) who is not also
the contractowner, may also result in tax consequences. The taxable portion of
a distribution (in the form of a lump sum payout or an annuity) is taxed as
ordinary income. For purchase payments made after February 28, 1986, a
contractowner who is not a natural person (for example, a corporation), subject
to limited exceptions, will be taxed on any increase in the contract's cash
value over the investment in the contract during the taxable year, even if no
distribution occurs. [See Section 72(u) of the code.] The next discussion
applies to Contracts owned by natural persons.
In the case of a surrender under the contract or withdrawal of contract value,
generally amounts received are first treated as taxable income to the extent
that the cash value of the contract immediately before the surrender exceeds
the investment in the contract at that time. Any additional amount withdrawn is
not taxable. The investment in the contract generally equals the portion, if
any, of any purchase payment made by or on behalf of an individual under a
contract which is not excluded from the individual's gross income.
Even though the tax consequences may vary depending on the form of annuity
payout selected under the contract, the contractowner of an annuity payout
generally is taxed on the portion of the annuity payout that exceeds the
investment in the contract. For variable annuity payouts, the taxable portion
is determined by a formula that establishes a specific dollar amount of each
payout that is not taxed. The dollar amount is determined by dividing the
investment in the contract by the total number of expected periodic payouts.
For fixed annuity payouts, there generally is no tax on the portion of each
payout that represents the same ratio that the investment in the contract bears
to the total expected value of payouts for the term of the annuity; the
remainder of each payout is taxable. For individuals whose annuity starting
date is after December 31, 1986, the entire distribution (whether fixed or
variable) will be fully taxable once the recipient is deemed to have recovered
the dollar amount of the investment in the contract.
There may be imposed a penalty tax on distributions equal to 10% of the amount
treated as taxable income. The penalty tax is not imposed in certain
circumstances, which generally are distributions:
1. Received on or after the contractowner attaining age 59 1/2;
2. Made as a result of death or disability of the contractowner;
3. Received in substantially equal periodic payments such as a life annuity
(subject to special recapture rules if the series of payouts is subsequently
modified);
4. Under a qualified funding asset in a structured settlement;
5. Under an immediate annuity contract as defined in the code; and/or
6. Under a contract purchased in connection with the termination of certain
retirement plans.
TAXATION OF QUALIFIED CONTRACTS
The contracts may be purchased in connection with the following types of tax-
favored retirement plans:
1. Contracts purchased for employees of public school systems and certain tax-
exempt organizations, qualified under Section 403(b) of the code (normally
for transfers or rollovers only);
2. Pension and profit-sharing plans of self-employed individuals (H.R. 10 or
Keogh plans) or corporations, qualified under Section 401(a) or 403(a) of
the code;
3. IRAs, qualified under Section 408 of the code;
4. Deferred compensation plans of state or local governments, qualified under
Section 457 of the code;
5. SEPs, qualified under Section 408(k) of the code; and/or
6. Simple retirement accounts, qualified under Section 401(k)(11) of the code,
commonly referred to as SIMPLE or SIMPLE 401(k) and SIMPLE IRA plans.
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The tax rules applicable to these plans, including restrictions on
contributions and benefits, taxation of distributions and any tax penalties,
vary according to the type of plan and its terms and conditions. Participants
under such plans, as well as contractowners, annuitants and beneficiaries,
should be aware that the rights of any person to any benefits under such plans
may be subject to the terms and conditions of the plans themselves, regardless
of the terms and conditions of the contracts. Purchasers of contracts for use
with any qualified plan, as well as plan participants, should consult counsel
and other advisors as to the suitability of the contracts to their specific
needs, and as to applicable code limitations and tax consequences.
MULTIPLE CONTRACTS
All contracts entered into after October 21, 1988, and issued by the same
insurance company (or its affiliates) to the same contractowner during any
calendar year will be treated as a single contract for tax purposes.
INVESTOR CONTROL
The Treasury Department has indicated that guidelines may be issued under which
a variable annuity contract will not be treated as an annuity contract for tax
purposes if the contractowner has excessive control over the investments
underlying the contract. They may consider the number of investment options or
the number of transfer opportunities available between options as relevant when
determining excessive control. The issuance of those guidelines may require us
to impose limitations on your right to control the investment. We do not know
whether any such guidelines would have a retroactive effect.
Section 817(h) of the code and the related regulations that the Treasury
Department has adopted require that assets underlying a variable annuity
contract be adequately diversified. The regulations provide that a variable
annuity contract which does not satisfy the diversification standards will not
be treated as an annuity contract, unless the failure to satisfy the
regulations was inadvertent, the failure is corrected, and the contractowner or
we pay an amount to the IRS. The amount will be based on the tax that would
have been paid by the contractowner if the income, for the period the contract
was not diversified, had been received by the contractowner. If the failure to
diversify is not corrected in this manner, the contractowner of an annuity
contract will be deemed to be the owner of the underlying securities and will
be taxed on the earnings of his or her account. We believe, under our
interpretation of the code and regulations thereunder, that the investments
underlying this contract meet these diversification standards.
WITHHOLDING
Generally, pension and annuity distributions are subject to withholding for the
recipient's Federal income tax liability at rates that vary according to the
type of distribution and the recipient's tax status. Recipients, however,
generally are provided the opportunity to elect not to have tax withheld from
distributions. Under the Unemployment Compensation Amendments of 1992 (UCA),
20% income tax withholding may apply to eligible rollover distributions. All
taxable distributions from qualified plans (except IRAs) and Section 403(b)
annuities are eligible rollover distributions, except (1) annuities paid out
over life or life expectancy, (2) installments paid for a period spanning 10
years or more, and (3) required minimum distributions. The UCA imposes a
mandatory 20% income tax withholding on any eligible rollover distribution that
the contractowner does not elect to have paid in a direct rollover to another
qualified plan, Section 403(b) annuity or individual retirement account.
Distributions from Section 457 plans are subject to the general wage
withholding rules.
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
invest 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
applying your percentage interest in a subaccount to the total number of votes
attributable to the subaccount. In determining the number of votes, fractional
shares will be recognized.
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 shareholders meeting is called, each person having a voting interest
in a subaccount will receive proxy voting material, reports and other materials
relating to the series. Since the series engages in shared funding, other
persons or entities besides 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
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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 prepaid, to the home office
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 contract
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 purchase
payment(s).
STATE REGULATION
As a life insurance company organized and operated under Indiana law, we are
subject to provisions governing life insurers and to regulation by the Indiana
Commissioner of Insurance.
Our books and accounts are subject to review and examination by the Indiana
Insurance Department at all times. A full examination of our operations is
conducted by that Department at least every five years.
RESTRICTIONS UNDER THE
TEXAS OPTIONAL RETIREMENT
PROGRAM
Title 8, Section 830.105 of the Texas Government Code, consistent with prior
interpretations of the Attorney General of the State of Texas, permits
participants in the Texas Optional Retirement Program (ORP) to redeem their
interest in a variable annuity contract issued under the ORP only upon:
1. Termination of employment in all institutions of higher education as defined
in Texas law;
2. Retirement; or
3. Death.
Accordingly, a participant in the ORP will be required to obtain a certificate
of termination from their employer before accounts can be redeemed.
RECORDS AND REPORTS
As presently required by the 1940 Act and applicable regulations, we are
responsible for maintaining all records and accounts relating to the VAA. We
have entered into an agreement with the Delaware Management Company, 2005
Market Street, Philadelphia, PA 19203, to provide accounting services to the
VAA. We will mail to you, at your last known address of record at the home
office, at least semiannually after the first contract year, reports containing
information required by that 1940 Act or any other applicable law or
regulation.
OTHER INFORMATION
A Registration Statement has been filed with the SEC, under the Securities Act
of 1933 as amended, for the contracts being offered here. This Prospectus does
not contain all the information in the Registration Statement, its amendments
and exhibits. Please refer to the Registration Statement for further
information about the VAA, Lincoln Life and the contracts offered. Statements
in this Prospectus about the content of contracts and other legal instruments
are summaries. For the complete text of those contracts and instruments, please
refer to those documents as filed with the SEC.
Lincoln National Variable Annuity Account E and Lincoln Life Flexible Premium
Variable Life Accounts F, G and J (all registered as investment companies under
the 1940 Act) and Lincoln National Flexible Premium Group Variable Annuity
Accounts 50, 51 and 52 are all segregated investment accounts of Lincoln
National Life Insurance Co. (Lincoln Life) which also invest in the series. The
series also offers shares of the funds to other segregated investment accounts.
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STATEMENT OF ADDITIONAL
INFORMATION TABLE OF
CONTENTS FOR SEPARATE
ACCOUNT H
<TABLE>
<CAPTION>
Item
- -----------------------------------------
<S> <C>
General information and history of
Lincoln Life
- -----------------------------------------
Special terms
- -----------------------------------------
Services
- -----------------------------------------
Principal underwriter
- -----------------------------------------
Purchase of securities being offered
</TABLE>
<TABLE>
<CAPTION>
Item
----------------------------------
<S> <C>
Calculation of investment results
----------------------------------
Annuity payouts
----------------------------------
Federal tax status
----------------------------------
Automatic increase in the guaranteed
minimum death benefit
----------------------------------
Advertising and sales literature
----------------------------------
Financial statements
</TABLE>
For a free copy of the SAI please see page one of this booklet.
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AMERICAN LEGACY II
LINCOLN NATIONAL
VARIABLE ANNUITY ACCOUNT H (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 H dated April 1, 1997.
You may
obtain a copy of the American Legacy II Account H Prospectus on request and
without charge. Please write
American Legacy Customer Service, The 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
- ------------------------------------------
CALCULATION OF INVESTMENT RESULTS B-3
- ------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Page
-
<S> <C>
ANNUITY PAYOUTS B- 6
-
FEDERAL TAX STATUS B- 6
-
AUTOMATIC INCREASE IN THE GUARANTEED
MINIMUM DEATH BENEFIT B- 9
-
ADVERTISING AND SALES LITERATURE B-10
-
FINANCIAL STATEMENTS B-11
-
</TABLE>
SPECIAL NOTICE TO CONTRACTOWNERS ABOUT THIS YEAR'S LINCOLN LIFE FINANCIAL
STATEMENTS. Each year Lincoln Life is required by law to prepare financial
statements for different purposes. Two of the most important purposes are for
filing with state insurance departments and for inclusion in the securities
registration statements for our variable products, like this one. In the past
we have interpreted the prevailing regulations as requiring presentation of
these statements according to two different sets of accounting principles--one
for the insurance regulators (known as Statutory Accounting Principles, or
STAP) and one for the SEC (known as Generally Accepted Accounting Principles,
or GAAP).
When we create two sets of financial statements for the same insurer it
requires nearly double the time commitment of our internal accounting staff,
and two separate audits by our independent auditors. In an effort to control
costs and eliminate duplication of efforts, we have reviewed the SEC's
requirements fo r the mode of presentation of the insurer's financial
THIS SAI IS NOT A PROSPECTUS.
The date of this SAI is April 1, 1997.
statements in this registration statement, and we have discussed these
requirements with the SEC staff. As a result of these discussions and on
advice of counsel, we shall now begin to use the STAP-basis statements (which
we call Statutory Statements) exclusively, both for the insurance regulators
and for our securities registration statements. This is consistent with the
current practice of many other insurers.
We believe that both Statutory and GAAP statements fairly present the
financial position of Lincoln Life for the periods indicated, in accordance
with those respective accounting principles. However, between the two there
are some important differences in accounting theory and financial statement
presentation. FOR THAT REASON, IN THIS TRANSITION YEAR WE INCLUDE HERE BOTH
STATUTORY AND GAAP STATEMENTS. This should permit you to evaluate the
financial position of Lincoln Life from both points of view, and should help
you understand the differences between Statutory and GAAP statements.
BEGINNING NEXT YEAR WE SHALL PRESENT ONLY THE STATUTORY STATEMENTS.
<PAGE>
GENERAL INFORMATION AND
HISTORY OF
LINCOLN NATIONAL LIFE
INSURANCE CO. (LINCOLN LIFE)
The Lincoln National Life Insurance Company (Lincoln Life), organized in 1905,
is an Indiana stock insurance corporation, engaged primarily in the direct
insurance of life and health insurance contracts and annuities, and is also a
professional reinsurer. Lincoln Life is wholly owned by Lincoln National
Corporation (LNC), a publicly held insurance and financial services holding
company domiciled in Indiana.
SPECIAL TERMS
The special terms used in this SAI are the ones defined in the Prospectus. In
connection with the term, valuation date, the New York Stock Exchange (NYSE) is
currently closed on weekends and on these holidays: New Year's Day, President's
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day. If any of these holidays occurs on a weekend day, the NYSE
may also be closed on the business day occurring just before or just after the
holiday.
SERVICES
INDEPENDENT AUDITORS
The financial statements of the VAA and the financial statements and schedules
of Lincoln Life appearing in this SAI and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports which also appear elsewhere in this document and in the Registration
Statement. The financial statements and schedules audited by Ernst & Young LLP
have been included in this document in reliance on their report given on their
authority as experts in accounting and auditing.
KEEPER OF RECORDS
All accounts, books, records and other documents which are required to be
maintained for the VAA are maintained by Lincoln Life or by third parties
responsible to Lincoln Life. We have entered into an agreement with the
Delaware Management Company, 2005 Market Street, Philadelphia, PA 19203, to
provide accounting services to the VAA. No separate charge against the assets
of the VAA is made by Lincoln Life for this service.
PRINCIPAL UNDERWRITER
Lincoln Life 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 offered to the public through certain securities
broker/dealers who have entered into selling agreements with AFD and whose
personnel are legally authorized to sell annuity products. Although there are
no special purchase plans for any class of prospective 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 LNC, The Capital Group, Inc., their affiliated or managed
companies, and certain other persons. See Contingent deferred sales charges in
the Prospectus.
Both before and after the annuity commencement date, there are exchange
privileges 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.
The offering of the contracts is continuous.
CALCULATION OF INVESTMENT RESULTS
A. AVERAGE ANNUAL TOTAL RETURN:
The examples that follow show, for the various subaccounts of the VAA, an
average annual total return as of the stated periods, based upon a hypothetical
initial purchase payment of $1,000, calculated according to the formula
provided after the examples. The average annual total return has been
calculated to show the average annual total return for a hypothetical contract
with the enhanced guaranteed minimum death benefit (EGMDB) and without it.
Although the VAA commenced activity in 1989 and the EGMDB did not become
available until 1997, these figures are calculated as if the subaccounts had
commenced activity at the same time as the underlying funds.
B-2
<PAGE>
AVERAGE ANNUAL TOTAL RETURN
Period Ending December 31, 1996
<TABLE>
<CAPTION>
10-
1-year period 5-year period year period
Without With Without With Without With
EGMDB EGMDB EGMDB EGMDB EGMDB EGMDB
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Growth subaccount 5.80% 5.63% 12.53% 12.35% 13.42% 13.25%
(as if commenced activity 2/8/84)
International subaccount 9.91 9.74 10.62 10.45 8.63* 8.47*
(commenced activity 5/1/90)
Growth-Income subaccount 11.09 10.91 12.49 12.32 11.48 11.31
(as if commenced activity 2/8/84)
Asset Allocation subaccount 8.18 8.01 10.54 10.37 9.80* 9.63*
(commenced activity 8/1/89)
High-Yield Bond subaccount 5.64 5.47 9.20 9.03 9.85 9.68
(as if commenced activity 2/8/84)
Bond subaccount (1.63)* (1.78)* N/A N/A N/A N/A
(commenced activity 1/2/96)
U.S. Gov't./AAA subaccount (4.33) (4.49) 4.54 4.38 5.77 5.61
(as if commenced activity 12/1/85)
Cash Management subaccount (2.38) (2.54) 2.25 2.09 4.08 3.92
(as if commenced activity 2/8/84)
</TABLE>
*The lifetime of this subaccount is less than the complete period indicated.
See the date the subaccount commenced activity under its name.
There is a Global Growth subaccount but it is not in the chart because it did
not begin activity until 1997.
The length of the periods and the last day of each period used in the above
table are set
out in the table heading and in the footnotes above. The average annual total
return
for each period was determined by finding the average annual compounded rate of
return over each period that would equate the initial amount invested to the
ending
redeemable value for that period, according to the following formula--
P(1 + T)n = ERV
Where: P = a hypothetical initial purchase payment of $1,000
T
= average annual total return for the period in question
n
= number of years
ERV
= redeemable value (as of the end of the period in question) of a
hypothetical $1,000 purchase payment made at the beginning of the 1-
year, 5-year or 10-year period in question (or fractional portion
thereof)
The formula assumes that: 1) all recurring fees have been charged to
contractowner
accounts; 2) all applicable nonrecurring charges are deducted at the end of the
period in
question; and 3) there will be a complete redemption at the end of the period
in question.
B-3
<PAGE>
B. NONSTANDARDIZED INVESTMENT RESULTS:
The VAA may illustrate its results over various periods and compare its results
to indices and other variable annuities in sales materials including
advertisements, brochures and reports. Such results may be computed on a
cumulative and/or annualized basis.
Cumulative quotations are arrived at by calculating the change in the accumula-
tion unit value between the first and last day of the base period being mea-
sured, and expressing the difference as a percentage of the unit value at the
beginning of the base period.
Annualized quotations are arrived at by applying a formula which determines the
level rate of return which, if earned over the entire base period, would
produce the cumulative return.
NONSTANDARDIZED INVESTMENT RESULTS
SUBACCOUNTS OF ACCOUNT H*
$10,000 INVESTED IN
THIS FUND THROUGH
AMERICAN LEGACY II
THIS MANY YEARS AGO...
...WOULD HAVE GROWN TO THIS AMOUNT ON DECEMBER 31,
1996**
<TABLE>
<CAPTION>
Without EGMDB
-------------------------------------------------------------------
Growth Growth-Income High-Yield Bond Cash Management
- -------------------------------------------------------------------------------------------------------
Number Compound Compound Compound Compound
of growth growth growth growth
years Periods Amount rate Amount rate Amount rate Amount rate
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 12/31/95-12/31/96 $11,186 11.86% $11,715 17.15% $11,170 11.70% $10,368 3.68%
2 12/31/94-12/31/96 14,711 21.29 15,376 24.00 13,421 15.85 10,797 3.91
3 12/31/93-12/31/96 14,587 13.41 15,484 15.69 12,374 7.36 11,065 3.43
4 12/31/92-12/31/96 16,742 13.75 17,158 14.45 14,214 9.19 11,207 2.89
5 12/31/91-12/31/96 18,302 12.85 18,270 12.81 15,778 9.55 11,414 2.68
Lifetime of fund 02/08/84-12/31/96 54,531 14.06 52,591 13.74 40,958 11.55 17,832 4.59
<CAPTION>
With EGMDB
-------------------------------------------------------------------
Growth Growth-Income High-Yield Bond Cash Management
- -------------------------------------------------------------------------------------------------------
Number Compound Compound Compound Compound
of growth growth growth growth
years Periods Amount rate Amount rate Amount rate Amount rate
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 12/31/95-12/31/96 $11,169 11.69% $11,697 16.97% $11,153 11.53% $10,352 3.52%
2 12/31/94-12/31/96 14,668 21.11 15,329 23.81 13,382 15.68 10,764 3.75
3 12/31/93-12/31/96 14,521 13.24 15,416 15.52 12,319 7.20 11,017 3.28
4 12/31/92-12/31/96 16,642 13.58 17,056 14.28 14,131 9.03 11,142 2.74
5 12/31/91-12/31/96 18,165 12.68 18,133 12.64 15,656 9.38 11,331 2.53
Lifetime of fund 02/08/84-12/31/96 53,486 13.89 51,583 13.57 40,173 11.39 17,491 4.43
</TABLE>
*Although the VAA commenced activity in 1989, these figures are calculated as
if its subaccounts had commenced activity at the same time as the underlying
funds.
**For purposes of determining these investment results, American Legacy II's
1.35% annual asset charge and administrative fee (1.50% for contracts with the
EGMDB) have been taken into account. However, the annual maintenance fee of $35
is not reflected and these examples do not assume redemption at the end of the
period.
B-4
<PAGE>
<TABLE>
<CAPTION>
Without EGMDB With EGMDB
---------------- ----------------
U.S. Govt/AAA U.S. Govt/AAA
---------------- ----------------
Compound Compound
growth growth
Amount rate Amount rate
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/31/95-
1 12/31/96 $10,173 1.73% $10,157 1.57%
12/31/94-
2 12/31/96 11,582 7.62 11,548 7.46
12/31/93-
3 12/31/96 10,930 3.01 10,880 2.85
12/31/92-
4 12/31/96 11,989 4.64 11,916 4.48
12/31/91-
5 12/31/96 12,726 4.94 12,636 4.79
12/01/85-
Lifetime of fund 12/31/96 20,771 6.82 20,428 6.66
<CAPTION>
Asset Allocation Asset Allocation
---------------- ----------------
Compound Compound
growth growth
Amount rate Amount rate
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/31/95-
1 12/31/96 $11,425 14.25% $11,407 14.07%
12/31/94-
2 12/31/96 14,607 20.86 14,564 20.68
12/31/93-
3 12/31/96 14,372 12.85 14,307 12.68
12/31/92-
4 12/31/96 15,657 11.86 15,562 11.69
12/31/91-
5 12/31/96 16,760 10.88 16,632 10.71
08/01/89-
Lifetime of fund 12/31/96 20,109 9.88 19,886 9.71
<CAPTION>
International International
---------------- ----------------
Compound Compound
growth growth
Amount rate Amount rate
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/31/95-
1 12/31/96 $11,597 15.97% $11,580 15.80%
12/31/94-
2 12/31/96 12,894 13.55 12,855 13.38
12/31/93-
3 12/31/96 12,965 9.04 12,908 8.88
12/31/92-
4 12/31/96 17,188 14.50 17,086 14.33
12/31/91-
5 12/31/96 16,813 10.95 16,692 10.79
05/01/89-
Lifetime of fund 12/31/96 17,553 8.80 17,378 8.64
<CAPTION>
Bond Bond
---------------- ----------------
Compound Compound
growth growth
Amount rate Amount rate
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
01/02/96-
Lifetime of fund 12/31/96 $10,445 4.45% $10,429 4.29%
</TABLE>
B-5
<PAGE>
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
calculation: first, it determines the dollar amount of the first payout;
second, it credits the contract with a fixed number of annuity units based on
the amount of the first payout; and third, it calculates the value of the
annuity units each period thereafter. These steps are explained below.
The dollar amount of the first periodic variable annuity payout is determined
by applying the total value of the accumulation units credited under the
contract valued as of the annuity commencement date (less any premium taxes) to
the annuity tables contained in the contract. The variable annuity payout will
be paid 14 days after the annuity commencement date. This day of the month will
become the day on which all future annuity payouts will be paid. Amounts shown
in the tables are based on the 1971 Individual Annuity Mortality Tables,
modified, with an assumed investment return at the rate of 4% per annum. The
first annuity payout is determined by multiplying the benefit per $1,000 of
value shown in the contract tables by the number of thousands of dollars of
contract value. 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 increase 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.
We may use sex distinct annuity tables in contracts that are not associated
with employer sponsored plans and where not prohibited by law.
At an annuity commencement date, the annuitant is credited with annuity units
for each subaccount on which variable annuity payouts are based. The number of
annuity units to be credited is determined by dividing the amount of the first
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 periodic payouts is determined by multiplying the
contractowner's fixed number of annuity units in each subaccount by the
appropriate annuity unit value for the valuation date ending 14 days before the
date that 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 immediately
preceding valuation date by the product of:
(a)The net investment factor of the subaccount for the valuation period for
which the annuity unit value is being determined, and
(b)A factor to neutralize the assumed investment return in the annuity table.
The value of the annuity units is determined as of a valuation date 14 days
before the payout date in order to permit calculation of amounts of annuity
payouts and mailing of checks in advance of their due dates. Such checks will
normally be issued and mailed at least three days before the due date.
PROOF OF AGE, SEX AND SURVIVAL
We may require proof of age, sex or survival of any payee upon whose age, sex
or survival payouts depend.
FEDERAL TAX STATUS
GENERAL
The operations of the VAA form a part of, and are taxed with, the operations of
Lincoln Life under the Internal Revenue Code of 1986, as amended (the code).
Investment income and realized net capital gains on the assets of the VAA are
reinvested and taken into account in determining the accumulation and annuity
unit values. As a result, such investment income and realized net capital gain
are automatically retained as part of the reserves under the contract. Under
existing federal income tax law, we believe that the VAA investment income and
realized net capital gain are not taxed to the extent they are retained as part
of the reserves under the contract. Accordingly, we do 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 we may
impose a charge against the VAA (with respect to some or all contracts) in
order to make provision for payment of such taxes.
B-6
<PAGE>
TAX STATUS OF NONQUALIFIED CONTRACTS
Section 817(h) of the code provides that separate account investments (or the
investments of a mutual fund the shares of which are owned by separate accounts
of insurance companies) underlying the contract be adequately diversified in
accordance with Treasury regulations in order for the contract to qualify as an
annuity contract under Section 72 of the code. The 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, we believe 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
guidance concerning the extent to which contractowners may direct their
investments to particular subaccounts of a separate account. When guidance is
provided, the contract may need to be modified to comply with that guidance.
For these reasons, we reserve the right to modify the contract as necessary to
prevent the contractowner from being considered the owner of the assets of the
VAA.
In addition to the requirements of Section 817(h), code Section 72(s) provides
that contracts will not be treated 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 before the time the entire interest in the contract
has been distributed, the remaining portion of such interest must be
distributed at least as rapidly as under the method of distribution in effect
at the time of the contractowner's death; and (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 designated beneficiary is distributed over
that designated beneficiary's life, or a period not extending beyond the
designated beneficiary's life expectancy, and if that distribution begins
within one year of the contractowner's death. The designated beneficiary must
be a natural person. No regulations interpreting these requirements have yet
been issued. Thus, no assurance can be given that the provisions contained in
contracts satisfy all such code requirements. However, we believe that such
provisions in such contracts meet these requirements. We intend to review such
provisions and modify them as necessary to
assure that they comply with the requirements of Section 72(s) when clarified
by regulations or otherwise.
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
regulations, are complex and subject to change. These rules also vary according
to the type of plan and the terms and conditions of the plan itself. Therefore,
no attempt is made herein to provide more than general information about the
use of contracts with the various types of plans, based on Lincoln Life's
understanding of the current federal tax laws as interpreted by the IRS.
Purchasers of contracts for use with such a plan and plan participants and
beneficiaries should consult counsel and other competent advisors as to the
suitability of the plan and the contract to their specific needs, and as to
applicable code limitations and tax consequences. Participants under such
plans, as well as contractowners, annuitants and beneficiaries, should also be
aware that the rights of any person to any benefits under such plans may be
subject to the terms and conditions of the plans themselves regardless of the
terms and conditions of the contract.
Following are brief descriptions of the various types of plans and of the use
of contracts in connection therewith.
PUBLIC SCHOOL SYSTEMS AND 501(C)(3) ORGANIZATIONS [SECTION 403(B) PLANS]
Payments made to purchase annuity contracts by public school systems or code
Section 501(c)(3) organizations for their employees are excludable from the
gross income of the employee to the extent that aggregate payments for the
employee do not exceed the exclusion allowance provided by Section 403(b) of
the code, the over-all limits for excludable contributions of Section 415 of
the code or the limit on elective contributions. Furthermore, the investment
results of the fund credited to the account are not taxable until benefits are
received either in the form of annuity payouts, 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 [SECTION 401(A) PLANS]
Payments made by a corporate employer and the increments on all payments for
qualified corporate plans are not taxable as income to the employee until
distributed. However, the employee may be required to include these amounts in
gross income before
B-7
<PAGE>
distribution if the qualified plan or trust loses its qualification. Corporate
plans qualified under Sections 401(a) or 403(a) of the code are subject to
extensive rules, including limitations on maximum contributions or benefits.
For plan years beginning after December 31, 1996, tax exempt organizations,
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 available
in all cases.
SELF-EMPLOYED INDIVIDUALS
(H.R. 10 OR KEOGH)
Under code provisions, self-employed individuals may establish plans commonly
known as H.R. 10 or Keogh plans for themselves and their employees. The tax
consequences to participants under such plans depend upon the plan itself. Such
plans are subject to special rules in addition to those applicable to qualified
corporate plans; therefore, purchasers of the contracts for use with H.R. 10
plans should seek competent advice as to suitability of plan documents and the
funding contracts.
INDIVIDUAL RETIREMENT ANNUITIES (IRA)
Under Section 408 of the code, individuals may participate in a retirement
program known as Individual Retirement Annuity (IRA). An individual may make an
annual IRA contribution of up to the lesser of $2,000 (or $4,000 if IRAs are
maintained for both the individual and his nonworking spouse) or 100% of
compensation. However, IRA contributions may be nondeductible in whole or in
part if (1) the individual or his spouse is an active participant in certain
other retirement programs and (2) the income of the individual (or of the
individual and his spouse) exceeds a specified amount. Distributions from
certain other IRA plans or qualified plans may be rolled over to an IRA on a
tax deferred basis without regard to the limit on contributions, provided
certain requirements are met. Distributions from 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 (457 PLANS)
Under the code provisions, employees and independent contractors (participants)
performing services for state and local governments and certain tax-exempt
organizations may establish deferred compensation plans. While participants in
such plans may be permitted to specify the form of investment in which their
plan accounts will participate, all such investments are owned by the
sponsoring employer and are subject to the claims of its creditors. Plans of
state or local governments established on August 20, 1996, or later, must hold
all assets and income in trust (or custodial accounts or an annuity contract)
for the exclusive benefit of participants and their beneficiaries. Section 457
plans that were in existence before August 20, 1996 are allowed until January
1, 1999 to meet this requirement. The amounts deferred under a plan which meet
the requirements of Section 457 of the code are not taxable as income to the
participant until paid or otherwise made available to the participant or
beneficiary. Deferrals are taxed as compensation from the employer when they
are actually or constructively received by the employee. As a general rule, the
maximum amount which can be deferred in any one year is the lesser of $7,500 or
33 1/3% of the participant's includable compensation. However, in limited
circumstances, up to $15,000 may be deferred in each of the last three years
before retirement.
SIMPLIFIED EMPLOYEE PENSION PLANS [SECTION 408(K)]
An employer may make contributions on behalf of employees to a simplified
employee pension plan (SEP) as provided by Section 408(k) of the code. The
contributions and distribution dates are limited by the code provisions. All
distributions from the plan will be taxed as ordinary income. Any distribution
before the employee attains age 59 1/2 (except in the event of death or
disability) or the failure to satisfy certain other code requirements may
result in adverse tax consequences. For tax years after 1996, salary reduction
SEPs (SAR/SEP) may no longer be established. However, SAR/SEPs in existence
before January 1, 1997 may continue to receive contributions.
SAVINGS INCENTIVE MATCHED PLAN FOR EMPLOYEES (SIMPLE)
Employers with 100 or fewer employees, who earned $5,000.00 during the
preceding year, may establish SIMPLEs. For tax years beginning after December
31, 1996, SIMPLE plans are available and may be in the form of an IRA or part
of a 401(k) plan. Under a SIMPLE IRA, employees are permitted to make elective
contributions to an IRA, stated as a percentage of the employees compensation,
but not to exceed $6,000.00 annually as indexed. Such deferrals are not subject
to
B-8
<PAGE>
income tax until withdrawn. Withdrawals made by an employee in the first two
years of the employee's participation are subject to a 25 percent penalty.
Later withdrawals are subject to penalties applicable to IRAs. Under a SIMPLE
401(k), employee deferrals are limited to no more than $6,000.00 annually.
Employer contributions are usually required for each type of SIMPLE.
TAX ON DISTRIBUTIONS FROM
QUALIFIED CONTRACTS
The following rules generally apply to distributions from contracts purchased
in connection with the plans discussed previously, other than 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
(generally, the employee's own nondeductible contributions) constitutes his
investment in the contract. If a distribution is made in the form of annuity
payouts, the employee's investment in the contract (adjusted for certain refund
provisions) divided by his life expectancy (or other period for which annuity
payouts are expected to be made) constitutes a return of capital each year. The
dollar amount of annuity payouts received in any year in excess of such return
is taxable as ordinary income. However, 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 investment 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.
Rules generally provide that all distributions which are not received as an
annuity will be taxed as a pro rata distribution of taxable and nontaxable
amounts (rather than as a distribution first of nontaxable amounts).
If a surrender of or withdrawal from the contract is effected and a
distribution is made in a single payment, the proceeds may qualify for special
lump-sum distribution treatment under certain qualified plans, as discussed
previously. Otherwise, the amount by which the payment exceeds the investment
in the contract (adjusted for any prior withdrawals) allocated to that payout,
if any, will be taxed as ordinary income in the year of receipt.
Distributions from Section 401(a) plans, Section 403(b) plans, IRAs, SEPs and
Keoghs will be subject to (1) a 10% penalty tax if made before age 59 1/2
unless certain other exceptions apply, and (2) except during 1997,
1998, and 1999 a 15% penalty tax on combined annual distributions in excess of
$150,000 (as indexed), subject to various special rules. Failure to meet
certain minimum distribution requirements for the above plans, as well as for
Section 457 plans, will result in a 50% excise tax. Various other adverse tax
consequences may also be potentially applicable in certain circumstances to
these types of plans.
Upon an 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
consequences under these contracts are not exhaustive and that special rules
are provided with respect to other tax situations not discussed herein.
Further, the foregoing discussion does not address any applicable state, local
or foreign tax laws. In recent years, numerous changes have been made in the
federal income tax treatment of contracts and retirement plans, which are not
fully discussed previously. 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 National Life Insurance Co. (Lincoln Life)
will automatically increase the guaranteed minimum death benefit (GMDB):
We will automatically increase the GMDB, separately for each contract year's
purchase payment(s), effective upon the seventh anniversary of each eligible
contract year in which those payments were made (as the contingent 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 increase
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.
If on the seventh contract anniversary, the contract value is less than net
purchase payments, the GMDB will not be adjusted.
B-9
<PAGE>
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 AG, 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
application of the IRR methodology to any particular contract year could
allocate gain, if any, in a manner which does not precisely correlate with the
contract's actual investment experience for a particular contract year or
subaccount. The calculation of the IRR assumes all purchase payments and
withdrawals occur at the beginning of the 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 withdrawals
applied on a FIFO basis.
ADVERTISING AND SALES LITERATURE
As set forth in the Prospectus, Lincoln Life may refer to the following
organizations (and others) in its marketing materials:
A.M. BEST'S RATING SYSTEM is designed to evaluate the various factors affecting
the overall performance of an insurance company in order to provide an opinion
as to an insurance company's relative financial strength and ability to meet
its contractual obligations. The procedure includes both a quantitative and
qualitative review of each company. A.M. Best also provides certain rankings,
to which Lincoln Life intends to refer.
DUFF & PHELPS insurance company claims-paying ability (CPA) service provides
purchasers of insurance company policies and contracts with analytical and
statistical information on the solvency and liquidity of major U.S. licensed
insurance companies, both mutual and stock.
EAFE INDEX is prepared by Morgan Stanley Capital International (MSCI). It
measures performance of securities in Europe, Australia and the Far East. The
index reflects the movements of world stock markets by representing the
evolution of an unmanaged portfolio. The EAFE Index offers international
diversification with over 1000 companies across 20 different countries.
LIPPER VARIABLE INSURANCE PRODUCTS PERFORMANCE ANALYSIS SERVICE is a publisher
of statistical data covering the investment company industry in the United
States and overseas. Lipper is recognized as the leading source of data on
open-end and closed-end funds. Lipper currently tracks the performance of over
5,000 investment companies and publishes numerous specialized reports,
including reports on performance and portfolio analysis, fee and expense
analysis.
MOODY'S insurance claims-paying rating is a system of rating insurance
company's financial strength, market leadership and ability to meet financial
obligations. The purpose of Moody's ratings is to provide investors with a
simple system of gradation by which the relative quality of insurance companies
may be noted.
MORNINGSTAR is an independent financial publisher offering comprehensive
statistical and analytical coverage of open-end and closed-end funds and
variable annuities.
STANDARD & POOR'S insurance claims-paying ability rating is an assessment of an
operating insurance company's financial capacity to meet obligations under an
insurance policy in accordance with the terms. The likelihood of a timely flow
of funds from the insurer to the trustee for the bondholders is a key element
in the rating determination for such debt issues.
VARDS (VARIABLE ANNUITY RESEARCH DATA SERVICE) provides a comprehensive guide
to variable annuity contract features and historical fund performance. The
service also provides a readily understandable analysis of the comparative
characteristics and market performance of funds inclusive in variable
contracts.
STANDARD & POOR'S INDEX -- broad-based measurement of changes in stock-market
conditions based on the average performance of 500 widely held common stocks;
commonly known as the Standard & Poor's 500 (S&P 500). The selection of stocks,
their relative weightings to reflect differences in the number of outstanding
shares, and publication of the index itself are services of Standard & Poor's
Corp., a financial advisory, securities rating and publishing firm.
NASDAQ-OTC Price Index -- this index is based on the National Association of
Securities Dealers Automated Quotations (NASDAQ) and represents all domestic
over-the-counter stocks except those traded on exchanges and those having only
one market maker, a total of some 3,500 stocks. It is market value-weighted and
was introduced with a base of 100.00 on February 5, 1971.
DOW JONES INDUSTRIAL AVERAGE (DJIA) -- price-weighted average of 30 actively
traded blue chip stocks, primarily industrials but including American Express
Company and American Telephone and Telegraph Company. Prepared and published by
Dow Jones & Company, it is the oldest and most widely quoted of all
the market indicators. The average is quoted in points, not dollars.
B-10
<PAGE>
In its advertisements and other sales literature for the VAA and the series
funds, Lincoln Life intends to illustrate the advantages of the contracts in a
number of ways:
COMPOUND INTEREST ILLUSTRATIONS. These will emphasize several advantages of the
variable annuity contract. For example, but not by way of illustration, the
literature may emphasize the potential savings through tax deferral; the
potential advantage of the VAA over the fixed account; and the compounding
effect when a client makes regular deposits to his contract.
INTERNET. An electronic communications network which may be used to provide
information regarding Lincoln Life, performance of the subaccounts and
advertising and sales literature.
DOLLAR COST AVERAGING (DCA). You may systematically transfer on a monthly basis
amounts from certain subaccounts or from the fixed side of the contract into
the subaccounts or the fixed side of the contract. You may elect to participate
in the DCA program at the time of application or at anytime before the annuity
commencement date by completing an election form available from us. The minimum
amount to be dollar cost averaged is $10,000 over any period between six and 60
months. Once elected, the program will remain in effect until the earlier of:
(1) the annuity commencement date; (2) the value of the amount being DCA'd is
depleted; or (3) you cancel the program by written request or by telephone if
we have your telephone authorization on file. Currently, there is no charge for
this service. However, we reserve the right to impose one. A transfer under
this program is not considered a transfer for purposes of limiting the number
of transfers that may be made, or assessing any charges which may apply to
transfers. We reserve the right to discontinue this program at any time. DCA
does not assure a profit or protect against loss.
AUTOMATIC WITHDRAWAL SERVICE (AWS). AWS provides an automatic, periodic
withdrawal of contract value to you. You may elect to participate in AWS at the
time of application or at any time before the annuity commencement date by
sending a written request to our home office. The minimum contract value
required to establish AWS is $10,000. You may cancel or make changes to your
AWS program at any time by sending a written request to our home office.
Notwithstanding the requirements of the program, any withdrawal must be
permitted by Section 401(a)(9) of the code for qualified plans or permitted
under Section 72 for nonqualified contracts. To the extent that withdrawals
under AWS do not qualify for an exemption from the contingent deferred sales
charge, we will assess any applicable surrender charges on those withdrawals.
See Contingent deferred sales charges. Currently, there is no charge for this
service. However, we reserve the right to impose one. If a charge is imposed,
it will not exceed $25 per transaction or 2% of the amount withdrawn, whichever
is less. We reserve the right to discontinue this service at any time.
CROSS-REINVESTMENT SERVICE. Under this option, account value in a designated
subaccount or the fixed side of the contract that exceeds a certain baseline
amount is automatically transferred to another specific variable subaccount(s)
or the fixed side of the contract at specific intervals. You may elect to
participate in cross-reinvestment at the time of application or at any time
before the annuity commencement date by sending a written request to our home
office or by telephone if we have your telephone authorization on file. You
designate the holding account, the receiving account(s), and the baseline
amount. Cross-reinvestment will continue until we receive authorization to
terminate the program.
The minimum holding account value required to establish cross-reinvestment is
$10,000. Currently, there is no charge for this service. However, we reserve
the right to impose one. A transfer under this program is not considered a
transfer for purposes of limiting the number of transfers that may be made, or
assessing any charges which may apply to transfers. We reserve the right to
discontinue this service at any time.
LINCOLN LIFE'S CUSTOMERS. Sales literature for the VAA and the series funds may
refer to the number of employers and the number of individual annuity clients
which Lincoln Life serves. As of the date of this SAI, we were serving over
9,500 employers and had more than 750,000 annuity clients.
LINCOLN LIFE'S ASSETS, SIZE. Sales literature for the VAA may discuss Lincoln
Life's general financial condition (see, for example, the reference to A.M.
Best Company, above); it may refer to its assets; it may also discuss its
relative size and/or ranking among companies in the industry or among any sub-
classification of those companies, based upon recognized evaluation criteria
(see reference to A.M. Best Company above). For example, at year-end 1995
Lincoln Life was one of the ten largest U.S. stock life insurance companies
based upon admitted assets.
FINANCIAL STATEMENTS
Financial statements for the VAA and Lincoln Life appear on the following
pages. For more information about the financial statements for Lincoln Life
provided in this SAI, please see the cover page of this SAI.
B-11
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
STATEMENT OF ASSETS AND LIABILITY
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Percent Growth-
of Net Income Growth
Assets Combined Account Account
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in American Variable Insurance
Series at net asset value:
. Growth-Income Fund
141,223,350 shares at $32.66 per share
(cost-$3,675,152,933) 36.6% $ 4,612,354,618 $4,612,354,618
-------------------------------------------
. Growth Fund
83,729,560 shares at $39.63 per share
(cost-$2,701,684,031) 26.3 3,318,202,458 $3,318,202,458
-------------------------------------------
. Asset Allocation Fund
77,304,453 shares at $13.93 per share
(cost-$920,764,627) 8.6 1,076,851,024
-------------------------------------------
. High-Yield Bond Fund
41,602,491 shares at $14.39 per share
(cost-$561,988,627) 4.8 598,659,845
-------------------------------------------
. U.S. Government AAA-Rated Securities Fund
39,793,585 shares at $10.95 per share
(cost-$447,847,243) 3.5 436,137,690
-------------------------------------------
. Cash Management Fund
19,860,060 shares at $11.03 per share
(cost-$220,055,373 1.7 219,056,462
-------------------------------------------
. International Fund
150,661,161 shares at $15.09 per share
(cost-$1,913,049,576) 18.0 2,273,476,919
-------------------------------------------
. Bond Fund
7,478,693 shares at $10.17 per share
(cost-$74,003,332) 0.6 76,058,311
- -------------------------------------------- ----- --------------- -------------- --------------
TOTAL INVESTMENTS AND TOTAL ASSETS
(Cost-$10,534,545,742) 100.1 12,610,797,327 4,612,354,618 3,318,202,458
- --------------------------------------------
LIABILITY--
Payable to The Lincoln National Life
Insurance Company 0.1 14,422,976 5,284,774 3,854,737
- -------------------------------------------- ----- --------------- -------------- --------------
NET ASSETS 100.0% $12,596,374,351 $4,607,069,844 $3,314,347,721
===== =============== ============== ==============
Net assets are represented by:
. Units in accumulation period 2,093,418,167 1,443,311,235
-------------------------------------------
. Annuity reserves units 4,173,814 2,948,313
-------------------------------------------
. Unit value $2.196 $2.292
-------------------------------------------
. Value in accumulation period $4,597,902,642 $3,307,591,163
-------------------------------------------
. Annuity reserves 9,167,202 6,756,558
------------------------------------------- -------------- --------------
$4,607,069,844 $3,314,347,721
============== ==============
</TABLE>
See accompanying notes.
H-1
<PAGE>
<TABLE>
<CAPTION>
U.S.
Government/
Asset High-Yield AAA-Rated Cash
Allocation Bond Securities Management International Bond
Account Account Account Account Account Acccount
- -------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <S>
$1,076,851,024
$598,659,845
$436,137,690
$219,056,462
$2,273,476,919
$76,058,311
-------------- ------------ ------------ ------------ -------------- -----------
1,076,851,024 598,659,845 436,137,690 219,056,462 2,273,476,919 76,058,311
1,233,859 675,647 499,790 249,132 2,539,607 85,430
-------------- ------------ ------------ ------------ -------------- -----------
$1,075,617,165 $597,984,198 $435,637,900 $218,807,330 $2,270,937,312 $75,972,881
============== ============ ============ ============ ============== ===========
533,336,288 294,028,116 273,794,564 167,434,298 1,291,145,955 72,706,979
1,567,158 372,973 879,214 637,740 2,638,108 40,175
$2.011 $2.031 $1.586 $1.302 $1.755 $1.044
$1,072,465,826 $597,226,620 $434,243,450 $217,977,077 $2,266,306,726 $75,930,925
3,151,339 757,578 1,394,450 830,253 4,630,586 41,956
-------------- ------------ ------------ ------------ -------------- -----------
$1,075,617,165 $597,984,198 $435,637,900 $218,807,330 $2,270,937,312 $75,972,881
============== ============ ============ ============ ============== ===========
</TABLE>
H-2
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Growth-
Income Growth
Combined Account Account
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income:
. Dividends from investment income $ 277,129,375 $ 90,647,828 $ 18,369,396
----------------------------------
. Dividends from net realized
gains on investments 726,515,395 332,640,140 235,052,437
----------------------------------
. Mortality and expense guarantees (151,425,839) (54,864,055) (40,705,133)
- ----------------------------------- -------------- ------------ ------------
NET INVESTMENT INCOME 852,218,931 368,423,913 212,716,700
- -----------------------------------
Net realized and unrealized gain
(loss) on investments:
. Net realized gain (loss) on
investments 78,069,710 22,344,277 43,309,847
----------------------------------
. Net change in unrealized
appreciation or depreciation on
investments 553,623,030 256,750,744 82,026,981
- ----------------------------------- -------------- ------------ ------------
NET GAIN (LOSS) ON INVESTMENTS 631,692,740 279,095,021 125,336,828
- ----------------------------------- -------------- ------------ ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $1,483,911,671 $647,518,934 $338,053,528
- ----------------------------------- ============== ============ ============
</TABLE>
See accompanying notes.
H-3
<PAGE>
<TABLE>
<CAPTION>
U.S.
Government/
Asset High-Yield AAA-Rated Cash
Allocation Bond Securities Management International Bond
Account Account Account Account Account Account
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 36,649,106 $47,908,265 $33,334,045 $9,700,922 $ 38,137,872 $2,381,941
69,554,545 -- -- -- 89,268,273 --
(12,975,574) (7,065,463) (6,001,408) (2,694,965) (26,588,689) (550,552)
- ------------ ----------- ----------- ---------- ------------ ----------
93,228,077 40,842,802 27,332,637 7,005,957 100,837,456 1,831,389
5,475,918 412,935 (1,582,017) 83,517 7,981,314 43,919
30,984,974 17,882,219 (19,041,951) 94,873 182,870,211 2,054,979
- ------------ ----------- ----------- ---------- ------------ ----------
36,460,892 18,295,154 (20,623,968) 178,390 190,851,525 2,098,898
- ------------ ----------- ----------- ---------- ------------ ----------
$129,688,969 $59,137,956 $ 6,708,669 $7,184,347 $291,688,981 $3,930,287
============ =========== =========== ========== ============ ==========
</TABLE>
H-4
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Growth
Income Growth
Combined Account Account
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSETS AT JANUARY 1, 1995 $ 7,019,306,643 $2,404,456,004 $1,766,580,994
Changes from operations:
. Net investment income 558,167,503 176,928,002 214,034,026
-------------------------------
. Net realized gain (loss) on
investments 46,801,547 10,994,999 25,641,473
-------------------------------
. Net change in unrealized
appreciation or
depreciation on investments 1,225,286,412 594,578,736 344,000,760
- -------------------------------- --------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 1,830,255,462 782,501,737 583,676,259
- --------------------------------
Net increase (decrease) from
unit transactions 988,532,455 337,575,461 387,635,562
- -------------------------------- --------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS 2,818,787,917 1,120,077,198 971,311,821
- -------------------------------- --------------- -------------- --------------
NET ASSETS AT DECEMBER 31, 1995 9,838,094,560 3,524,533,202 2,737,892,815
- --------------------------------
Changes from operations:
. Net investment income 852,218,931 368,423,913 212,716,700
-------------------------------
. Net realized gain (loss) on
investments 78,069,710 22,344,277 43,309,847
-------------------------------
. Net change in unrealized
appreciation or
depreciation on investments 553,623,030 256,750,744 82,026,981
- -------------------------------- --------------- -------------- --------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 1,483,911,671 647,518,934 338,053,528
- --------------------------------
Net increase (decrease) from
unit transactions 1,274,368,120 435,017,708 238,401,378
- -------------------------------- --------------- -------------- --------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS 2,758,279,791 1,082,536,642 576,454,906
- -------------------------------- --------------- -------------- --------------
NET ASSETS AT DECEMBER 31, 1996 $12,596,374,351 $4,607,069,844 $3,314,347,721
- -------------------------------- =============== ============== ==============
</TABLE>
See accompanying notes.
H-5
<PAGE>
<TABLE>
<CAPTION>
U.S.
Government/
Asset High-Yield AAA-Rated Cash
Allocation Bond Securities Management International Bond
Account Account Account Account Account Account
- ----------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <S>
$ 618,598,667 $328,387,626 $388,493,238 $170,871,848 $1,341,918,266 --
48,345,696 34,284,347 25,530,883 7,305,656 51,738,893 --
2,491,208 (707,578) (438,504) 540,337 8,279,612 --
125,365,119 38,118,567 30,274,816 (1,040,563) 93,988,977 --
-------------- ------------ ------------ ------------ -------------- -----------
176,202,023 71,695,336 55,367,195 6,805,430 154,007,482 --
52,991,477 68,159,559 19,409,960 (13,577,326) 138,337,762 --
-------------- ------------ ------------ ------------ -------------- -----------
229,193,500 137,854,895 74,777,155 (6,771,896) 292,345,244 --
-------------- ------------ ------------ ------------ -------------- -----------
847,792,167 466,242,521 463,270,393 164,099,952 1,634,263,510 --
93,228,077 40,842,802 27,332,637 7,005,957 100,837,456 $ 1,831,389
5,475,918 412,935 (1,582,017) 83,517 7,981,314 43,919
30,984,974 17,882,219 (19,041,951) 94,873 182,870,211 2,054,979
-------------- ------------ ------------ ------------ -------------- -----------
129,688,969 59,137,956 6,708,669 7,184,347 291,688,981 3,930,287
98,136,029 72,603,721 (34,341,162) 47,523,031 344,984,821 72,042,594
-------------- ------------ ------------ ------------ -------------- -----------
227,824,998 131,741,677 (27,632,493) 54,707,378 636,673,802 75,972,881
-------------- ------------ ------------ ------------ -------------- -----------
$1,075,617,165 $597,984,198 $435,637,900 $218,807,330 $2,270,937,312 $75,972,881
============== ============ ============ ============ ============== ===========
</TABLE>
H-6
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
The account: Lincoln National Variable Annuity Account H (the Variable Account)
is a segregated investment account of The Lincoln National Life Insurance
Company (the Company) and is registered under the Investment Company Act of
1940, as amended, as a unit investment trust.
Investments: The Variable Account invests in the American Variable Insurance
Series (AVIS) which consists of eight 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 and Bond Fund (the
Funds). Investments in the Funds are stated at the closing net asset value per
share on December 31, 1996. AVIS is registered as an open-ended management
investment company.
Investment transactions are accounted for on a trade data basis and dividend
income is recorded on the ex-dividend date. The cost of investments sold is
determined by the average cost method.
Dividends: Dividends paid to the Variable Account are automatically reinvested
in shares of the Funds on the payable date.
Federal Income Taxes: Operations of the Variable Account form a part of and are
taxed with operations of the Company, which is taxed as a "life insurance
company" under the Internal Revenue Code. Using current law, no federal income
taxes are payable with respect to the Variable Account's net investment income
and the net realized gain on investments.
Annuity Reserves: Reserves on contracts not involving life contingencies are
calculated using an assumed investment rate of 4%. Reserves on contracts
involving life contingencies are calculated using a modification of the 1971
Individual Annuitant Mortality Table and an assumed investment rate of 4%.
2. MORTALITY AND EXPENSE GUARANTEES AND OTHER TRANSACTIONS WITH AFFILIATE
Amounts are paid to the Company for mortality and expense guarantees at the
rate of .0036986% of the current value of the Variable Account per day (1.35%
on an annual basis). 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 1996:
<TABLE>
<S> <C>
Growth-Income Account $ 4,881,706
- --------------------------------------------
Growth Account 4,084,941
- --------------------------------------------
Asset Allocation Account 1,110,799
- --------------------------------------------
High-Yield Bond Account 665,527
- --------------------------------------------
U.S. Government/AAA-Rated Securities Account 609,456
- --------------------------------------------
Cash Management Account 649,261
- --------------------------------------------
International Account 2,283,242
- --------------------------------------------
Bond Account 25,593
- --------------------------------------------
-----------
$14,310,525
===========
</TABLE>
Accordingly, the Company is responsible for all sales, general, and
administrative expenses applicable to the Variable Account.
H-7
<PAGE>
This page was intentionally left blank.
H-8
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
NOTES TO FINANCIAL STATEMENTS CONTINUED
3. NET ASSETS
Net Assets at December 31, 1996 consisted of the following:
<TABLE>
<CAPTION>
Growth Asset
income Growth Allocation
Combined Account Account Account
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unit Transactions:
Accumulation units $ 8,214,276,365 $2,785,539,463 $2,051,789,425 $ 690,027,285
- ------------------------
Annuity reserves 20,629,929 6,500,050 5,628,153 2,258,885
- ------------------------ --------------- -------------- -------------- --------------
8,234,906,294 2,792,039,521 2,057,417,578 692,286,170
Accumulated net
investment income 2,078,722,956 833,952,288 518,152,580 217,859,608
- ------------------------
Accumulated net realized
gain (loss) on
investments 206,493,516 43,876,350 122,259,136 9,384,990
- ------------------------
Net unrealized
appreciation
(depreciation) on
investments 2,076,251,585 937,201,685 616,518,427 156,086,397
- ------------------------ --------------- -------------- -------------- --------------
$12,596,374,351 $4,607,069,844 $3,314,347,721 $1,075,617,165
=============== ============== ============== ==============
</TABLE>
4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
Units Amount Units Amount
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth-Income Account:
Accumulation Units:
Contract purchases 486,617,752 $ 973,924,835 385,390,093 $ 647,988,912
- ----------------------------------------
Terminated contracts and transfers to
annuity reserves (270,329,009) (541,691,853) (188,992,667) (310,925,032)
- ---------------------------------------- ------------ ------------- ------------ -------------
216,288,743 432,232,982 196,397,416 337,063,880
Annuity Reserves:
Transfers from accumulation units and
between accounts 1,979,594 3,822,907 820,366 1,280,881
- ----------------------------------------
Annuity Payments (652,261) (1,090,938) (517,281) (815,536)
- ----------------------------------------
Receipt of mortality
guarantee adjustment 24,471 52,757 29,918 46,236
- ---------------------------------------- ------------ ------------- ------------ -------------
1,351,804 2,784,276 333,003 511,581
Growth Account
Accumulation Units:
Contract purchases 440,799,983 930,868,833 426,597,921 798,976,148
- ----------------------------------------
Terminated contracts and transfers to
annuity reserves (332,516,710) (696,006,371) (224,720,522) (412,118,502)
- ---------------------------------------- ------------ ------------- ------------ -------------
108,283,273 234,862,462 201,877,399 386,857,646
Annuity Reserves:
Transfers from accumulation units and
between accounts 2,155,956 4,388,824 707,309 1,295,235
- ----------------------------------------
Annuity Payments (604,290) (895,284) (288,125) (521,189)
- ----------------------------------------
Receipt of mortality
guarantee adjustment 20,019 45,376 3,294 3,870
- ---------------------------------------- ------------ ------------- ------------ -------------
1,571,685 3,538,916 422,478 777,916
</TABLE>
H-9
<PAGE>
<TABLE>
<CAPTION>
U.S.
Government/
AAA-Rated Cash
High-Yield Securities Management International Bond
Bond Account Account Account Account Account
- --------------------------------------------------------------------
<C> <C> <C> <C> <S>
$444,395,696 $329,845,765 $180,220,554 $1,654,455,583 $72,002,594
553,777 1,161,667 772,396 3,714,993 40,000
------------ ------------ ------------ -------------- -----------
444,949,473 331,007,432 185,992,950 1,658,170,576 72,042,594
135,595,774 117,948,261 31,942,541 221,440,515 1,831,389
767,733 (1,608,240) 870,750 30,898,878 43,919
16,671,218 (11,709,553) (998,911) 360,427,343 2,054,979
------------ ------------ ------------ -------------- -----------
$597,984,198 $435,637,900 $218,807,330 $2,270,937,312 $75,972,881
============ ============ ============ ============== ===========
</TABLE>
H-10
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
NOTES TO FINANCIAL STATEMENTS CONTINUED
4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS CONTINUED
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
Units Amount Units Amount
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Allocation Account
Accumulation Units:
Contract purchases 126,213,576 $ 232,896,893 89,466,387 $141,915,536
- ----------------------------------------
Terminated contracts and transfers to
annuity reserves (73,269,132) (135,297,826) (57,322,585) (89,201,319)
- ---------------------------------------- ----------- ------------- ----------- ------------
52,944,444 97,599,067 32,143,802 52,714,217
Annuity Reserves:
Transfers from accumulation units and
between accounts 613,943 1,053,233 435,868 658,350
- ----------------------------------------
Annuity Payments (333,206) (525,202) (254,690) (374,470)
- ----------------------------------------
Receipt of mortality
guarantee adjustment 4,497 8,931 (5,151) (6,620)
- ---------------------------------------- ----------- ------------- ----------- ------------
285,234 536,962 175,845 277,260
High Yield Bond Account
Accumulation Units:
Contract purchases 104,270,687 196,862,795 95,779,226 160,602,539
- ----------------------------------------
Terminated contracts and transfers to
annuity reserves (66,283,425) (124,283,867) (56,284,453) (94,297,060)
- ---------------------------------------- ----------- ------------- ----------- ------------
37,987,262 75,578,928 39,494,773 66,305,479
Annuity Reserves:
Transfers from accumulation units and
between accounts 100,732 168,516 49,490 32,701
- ----------------------------------------
Annuity Payments (85,786) (140,894) (134,657) (178,831)
- ----------------------------------------
Receipt of mortality
guarantee adjustment (1,404) (2,829) 130 210
- ---------------------------------------- ----------- ------------- ----------- ------------
13,542 24,793 (85,037) (145,920)
U.S. Government/AAA-Rated Securities
Account
Accumulation Units:
Contract purchases 76,139,686 116,082,744 91,667,759 133,440,225
- ----------------------------------------
Terminated contracts and transfers to
annuity reserves (98,694,014) (150,553,945) (78,197,874) (113,990,072)
- ---------------------------------------- ----------- ------------- ----------- ------------
(22,554,328) (34,471,201) 13,469,885 19,450,153
Annuity Reserves:
Transfers from accumulation units and
between accounts 387,122 333,561 111,078 159,394
- ----------------------------------------
Annuity Payments (293,305) (194,168) (149,233) (218,967)
- ----------------------------------------
Receipt of mortality
guarantee adjustment (5,190) (9,354) 14,142 19,380
- ---------------------------------------- ----------- ------------- ----------- ------------
87,907 130,039 (24,013) (40,193)
</TABLE>
H-11
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
NOTES TO FINANCIAL STATEMENTS CONTINUED
4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS CONTINUED
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1996 December 31, 1995
Units Amount Units Amount
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Management Account
Accumulation Units:
Contract purchases 379,951,242 $ 482,476,565 299,743,238 $365,095,920
- ------------------------------------
Terminated contracts and transfers
to annuity reserves (342,769,158) (435,210,289) (311,002,759) (378,960,644)
- ------------------------------------ ------------ -------------- ------------ ------------
37,182,084 47,266,276 (11,259,521) (13,864,724)
Annuity Reserves:
Transfers from accumulation units
and between accounts 334,324 398,585 344,875 428,522
- ------------------------------------
Annuity Payments (134,563) (143,549) (116,047) (143,909)
- ------------------------------------
Receipt of mortality guarantee
adjustment 1,322 1,719 2,237 2,785
- ------------------------------------ ------------ -------------- ------------ ------------
201,083 256,755 231,065 287,398
International Account
Accumulation Units:
Contract purchases 413,237,895 663,188,609 301,858,508 430,264,442
- ------------------------------------
Terminated contracts and transfers
to annuity reserves (200,244,161) (319,876,422) (208,166,176) (292,419,209)
- ------------------------------------ ------------ -------------- ------------ ------------
212,993,734 343,312,187 93,692,332 137,845,233
Annuity Reserves:
Transfers from accumulation units
and between accounts 1,476,258 2,103,045 561,618 770,706
- ------------------------------------
Annuity Payments (495,611) (469,790) (229,919) (296,241)
- ------------------------------------
Receipt of mortality guarantee
adjustment 23,236 39,379 13,665 18,064
- ------------------------------------ ------------ -------------- ------------ ------------
1,003,883 1,672,634 345,364 492,529
Bond Account
Accumulation Units:
Contract purchases 90,136,993 88,973,283 -- --
- ------------------------------------
Terminated contracts and transfers
to annuity reserves (17,430,014) (16,970,689) -- --
- ------------------------------------ ------------ -------------- ------------ ------------
72,706,979 72,002,594 -- --
Annuity Reserves:
Transfers from accumulation units
and between accounts 40,913 40,893 -- --
- ------------------------------------
Annuity Payments (947) (1,110) -- --
- ------------------------------------
Receipt of mortality guarantee
adjustment 209 217 -- --
- ------------------------------------ ------------ -------------- ------------ ------------
40,175 40,000 -- --
-------------- ------------
NET INCREASE FROM UNIT TRANSACTIONS $1,274,368,120 $988,532,455
============== ============
</TABLE>
H-12
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
NOTES TO FINANCIAL STATEMENTS CONTINUED
5. PURCHASES AND SALES OF SECURITIES
The aggregate cost of investments purchased and the aggregate proceeds from
investments sold were as follows for 1996:
<TABLE>
<CAPTION>
Aggregate
Aggregate Cost Proceeds
of Purchases from Sales
- -------------------------------------------------------------------------
<S> <C> <C>
Growth-Income Account $ 900,375,081 $ 95,662,150
- --------------------------------------------
Growth Account 674,101,004 222,248,738
- --------------------------------------------
Asset Allocation Account 222,750,969 31,117,253
- --------------------------------------------
High-Yield Bond Account 137,648,756 24,054,151
- --------------------------------------------
U.S. Government/AAA-Rated Securities Account 65,238,828 72,273,200
- --------------------------------------------
Cash Management Account 261,968,878 207,378,722
- --------------------------------------------
International Account 502,741,929 56,226,572
- --------------------------------------------
Bond Account 75,869,334 1,909,921
- -------------------------------------------- -------------- ------------
$2,840,694,779 $710,870,707
============== ============
</TABLE>
6. NEW INVESTMENT FUND
Effective January 1, 1996, the AVIS Bond Fund became available as an investment
option for Variable Account contract owners.
7. DAILY UNIT VALUATION CALCULATIONS
Effective October 1996, the daily unit value calculation process was
transferred from Lincoln Life to the Delaware Group, an affiliate of Lincoln
National Corporation. Costs associated with the calculation of the unit value
are paid by Lincoln Life.
H-13
<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 H
We have audited the accompanying statement of assets and
liability of Lincoln National Variable Annuity Account H
(Variable Account) as of December 31, 1996, 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 responsibility of the Variable Account's management.
Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation
of securities owned as of December 31, 1996, by
correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of Lincoln National Variable Annuity Account H at
December 31, 1996, the results of its operations for the
year then ended, and the changes in its net assets for each
of the two years in the period then ended in conformity with
generally accepted accounting principles.
Fort Wayne, Indiana
March 14, 1997
H-14
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
AUDITED FINANCIAL STATEMENTS
Prior to 1996, management of The Lincoln National Life Insurance Company
(Company) prepared annual financial statements of the Company using two
different types of accounting principles. Pursuant to insurance regulatory
requirements in several states, management prepared financial statements in
accordance with statutory accounting principles (STAP), which were subject to
audit by the Company's independent auditors. Additionally, solely for purposes
of inclusion in the registration statements of separate account products
requiring registration and periodic reporting to the Securities and Exchange
Commission (SEC), management also prepared financial statements of the Company
in accordance with generally accepted accounting principles (GAAP), which were
also subject to audit. In an attempt to reduce costs associated with the
preparation and audits of both GAAP and STAP-bases financial statements,
commencing with the registrations in 1997, management will prepare and have
audited only STAP-basis financial statements.
The STAP-basis financial statements included in this registration statement
have been prepared in conformity with accounting practices prescribed or
permitted by the Indiana Department of Insurance, which is an "other
comprehensive basis of accounting" as that term is defined by the American
Institute of Certified Public Accountants (see notes 1 and 2 to the enclosed
audited STAP-basis financial statements for information on such prescribed and
permitted practices).
Because 1996 is the initial year for which STAP-basis financial statements are
used for purposes of these separate account product filings with the SEC,
management has included the following financial statements of the Company to
allow for comparability between years:
. Section 1 contains the STAP-basis balance sheets of the Company as of Decem-
ber 31, 1996 and 1995 and the related STAP-basis statements of income,
changes in capital and surplus, and cash flows for the three years in the pe-
riod ended December 31, 1996.
. Section 2 contains the GAAP-basis balance sheets of the Company as of Decem-
ber 31, 1995 and 1994 and the related consolidated statements of income,
shareholder's equity, and cash flows for each of the three years in the pe-
riod ended December 31, 1995.
G-1
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
1995 1994
----------- -----------
(000's omitted)
-----------------------
ASSETS
<S> <C> <C>
INVESTMENTS:
Securities available-for-sale, at fair value:
. Fixed maturity (cost: 1995 -- $18,852,837; 1994 --
$18,193,928) $20,414,785 $17,692,214
- ----------------------------------------------------
. Equity (cost: 1995 -- $480,261; 1994 -- $416,351) 598,435 456,333
- ----------------------------------------------------
Mortgage loans on real estate 3,147,783 2,795,914
- ----------------------------------------------------
Real estate 746,023 679,512
- ----------------------------------------------------
Policy loans 565,325 528,731
- ----------------------------------------------------
Other investments 241,219 158,196
- ---------------------------------------------------- ----------- -----------
Total investments 25,713,570 22,310,900
- ----------------------------------------------------
Cash and invested cash 802,743 990,880
- ----------------------------------------------------
Property and equipment 53,830 54,989
- ----------------------------------------------------
Deferred acquisition costs 953,834 1,736,526
- ----------------------------------------------------
Premiums and fees receivable 117,634 123,494
- ----------------------------------------------------
Accrued investment income 352,301 367,370
- ----------------------------------------------------
Assets held in separate accounts 18,461,629 13,000,540
- ----------------------------------------------------
Federal income taxes -- 134,463
- ----------------------------------------------------
Amounts recoverable from reinsurers 2,940,976 2,069,292
- ----------------------------------------------------
Goodwill 5,149 3,385
- ----------------------------------------------------
Other assets 185,398 233,708
- ---------------------------------------------------- ----------- -----------
Total assets $49,587,064 $41,025,547
- ---------------------------------------------------- =========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Policy liabilities and accruals:
. Future policy benefits, claims and claims expenses $ 8,435,019 $ 7,540,772
- ----------------------------------------------------
. Unearned premiums 55,174 61,472
- ---------------------------------------------------- ----------- -----------
Total policy liabilities and accruals 8,490,193 7,602,244
- ----------------------------------------------------
Contractholder funds 18,171,822 17,028,628
- ----------------------------------------------------
Liabilities related to separate accounts 18,461,629 13,000,540
- ----------------------------------------------------
Federal income taxes 166,430 --
- ----------------------------------------------------
Short-term debt 124,783 153,656
- ----------------------------------------------------
Long-term debt 40,827 54,794
- ----------------------------------------------------
Other liabilities 1,412,534 1,264,730
- ---------------------------------------------------- ----------- -----------
Total liabilities 46,868,218 39,104,592
- ----------------------------------------------------
SHAREHOLDER'S EQUITY:
Common stock, $2.50 par value:
. Authorized, issued and outstanding shares -- 10
million
(owned by Lincoln National Corp.) 25,000 25,000
- ----------------------------------------------------
Additional paid-in capital 809,557 791,605
- ----------------------------------------------------
Retained earnings 1,440,994 1,428,969
- ----------------------------------------------------
Net unrealized gain (loss) on securities available-
for-sale 443,295 (324,619)
- ---------------------------------------------------- ----------- -----------
Total shareholder's equity 2,718,846 1,920,955
- ---------------------------------------------------- ----------- -----------
Total liabilities and shareholder's equity $49,587,064 $41,025,547
- ---------------------------------------------------- =========== ===========
</TABLE>
See accompanying notes.
G-2
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
---------------------------------
(000's omitted)
---------------------------------
REVENUE
<S> <C> <C> <C>
Insurance premiums $ 846,873 $1,099,480 $1,972,630
- ------------------------------------------
Insurance fees 450,423 390,384 425,083
- ------------------------------------------
Net investment income 1,899,630 1,673,981 1,823,459
- ------------------------------------------
Realized gain (loss) on investments 136,195 (138,522) 92,150
- ------------------------------------------
Gain (loss) on sale of affiliates -- 68,954 (98,500)
- ------------------------------------------
Other 3,405 20,946 35,781
- ------------------------------------------ ---------- ---------- ----------
Total revenue 3,336,526 3,115,223 4,250,603
- ------------------------------------------
BENEFITS AND EXPENSES
Benefits and settlement expenses 2,122,616 2,194,047 3,033,139
- ------------------------------------------
Underwriting, acquisition, insurance and
other expenses 764,346 660,363 881,703
- ------------------------------------------
Interest expense 67 615 96
- ------------------------------------------ ---------- ---------- ----------
Total benefits and expenses 2,887,029 2,855,025 3,914,938
- ------------------------------------------ ---------- ---------- ----------
Income before federal income taxes
and cumulative effect of accounting change 449,497 260,198 335,665
- ------------------------------------------
Federal income taxes 127,472 40,400 142,544
- ------------------------------------------
Income before cumulative effect of
accounting change 322,025 219,798 193,121
- ------------------------------------------ ---------- ---------- ----------
Cumulative effect of accounting change
(postretirement benefits) -- -- 45,582
- ------------------------------------------ ---------- ---------- ----------
Net income $ 322,025 $ 219,798 $ 147,539
- ------------------------------------------ ========== ========== ==========
EARNINGS PER SHARE
Income before cumulative effect of
accounting change $32.20 $21.98 $19.31
- ------------------------------------------
Cumulative effect of accounting change
(postretirement benefits) -- -- (4.56)
- ------------------------------------------ ---------- ---------- ----------
Net income $32.20 $21.98 $14.75
- ------------------------------------------ ========== ========== ==========
</TABLE>
See accompanying notes.
G-3
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
CONSOLIDATED STATEMENTS OF
SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
------------------------------
(000's omitted)
----------------------------------
<S> <C> <C> <C>
Common stock -- balance at beginning and
end of year $ 25,000 $ 25,000 $ 25,000
- -----------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year 791,605 791,444 791,223
- -----------------------------------------
Contribution from Lincoln National Corp. 17,952 161 221
- -----------------------------------------
---------- ---------- ----------
Balance at end of year 809,557 791,605 791,444
- -----------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 1,428,969 1,334,171 1,198,632
- -----------------------------------------
Net income 322,025 219,798 147,539
- -----------------------------------------
Dividends declared (310,000) (125,000) (12,000)
- -----------------------------------------
---------- ---------- ----------
Balance at end of year 1,440,994 1,428,969 1,334,171
- -----------------------------------------
NET UNREALIZED GAIN (LOSS) ON SECURITIES
AVAILABLE-FOR-SALE:
Balance at beginning of year (324,619) 621,161 47,303
- -----------------------------------------
Cumulative effect of accounting change -- -- 564,153
- -----------------------------------------
Other change during year 767,914 (945,780) 9,705
- -----------------------------------------
---------- ---------- ----------
Balance at end of year 443,295 (324,619) 621,161
- -----------------------------------------
---------- ---------- ----------
Total shareholder's equity at end of year $2,718,846 $1,920,955 $2,771,776
- -----------------------------------------
========== ========== ==========
</TABLE>
See accompanying notes.
G-4
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
----------- ----------- ----------
(000's omitted)
------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 322,025 $ 219,798 $ 147,539
- ----------------------------------------
Adjustments to reconcile net income to
net cash
provided by operating activities:
. Deferred acquisition costs 124,526 (171,063) (92,183)
- ----------------------------------------
. Premiums and fees receivable 6,082 10,755 80,582
- ----------------------------------------
. Accrued investment income 15,069 (54,434) (18,827)
- ----------------------------------------
. Policy liabilities and accruals 621,603 114,038 345,142
- ----------------------------------------
. Contractholder funds 1,335,625 1,769,240 1,248,058
- ----------------------------------------
. Amounts recoverable from reinsurers (883,425) (884,388) (700,622)
- ----------------------------------------
. Federal income taxes 95,745 8,364 (130,308)
- ----------------------------------------
. Provisions for depreciation 39,089 38,870 41,516
- ----------------------------------------
. Amortization of discount and premium (86,653) 7,928 (100,274)
- ----------------------------------------
. Realized loss (gain) on investments (244,995) 219,682 (115,881)
- ----------------------------------------
. Loss (gain) on sale of affiliates -- (68,954) 98,500
- ----------------------------------------
. Cumulative effect of accounting change -- -- 45,582
- ----------------------------------------
. Other 458,542 (4,599) 51,369
- ---------------------------------------- ----------- ----------- ----------
Net adjustments 1,481,208 985,439 752,654
- ---------------------------------------- ----------- ----------- ----------
Net cash provided by operating
activities 1,803,233 1,205,237 900,193
- ----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale:
. Purchases (13,549,807) (12,100,213) (7,171,684)
- ----------------------------------------
. Sales 12,163,673 9,326,809 7,139,781
- ----------------------------------------
. Maturities 929,018 958,065 42,707
- ----------------------------------------
Fixed maturity securities held for
investment:
. Purchases -- -- (5,903,805)
- ----------------------------------------
. Sales -- -- 2,805,980
- ----------------------------------------
. Maturities -- -- 1,639,739
- ----------------------------------------
Purchases of other investments (1,711,427) (1,421,321) (1,936,013)
- ----------------------------------------
Sale or maturity of other investments 1,198,536 1,457,157 1,142,872
- ----------------------------------------
Sale of affiliates -- 520,340 --
- ----------------------------------------
Decrease in cash collateral on loaned
securities (39,681) (163,872) (40,454)
- ----------------------------------------
Other (213,708) (37,606) 83,751
- ---------------------------------------- ----------- ----------- ----------
Net cash used in investing activities (1,223,396) (1,460,641) (2,197,126)
- ----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (13,967) (200) (1,138)
- ----------------------------------------
Issuance of long-term debt -- -- 10,314
- ----------------------------------------
Net increase (decrease) in short-term
debt (28,873) 3,629 13,047
- ----------------------------------------
Universal life and investment contract
deposits 1,716,239 2,381,829 2,418,037
- ----------------------------------------
Universal life and investment contract
withdrawals (2,149,325) (1,604,450) (1,503,105)
- ----------------------------------------
Capital contribution from Lincoln
National Corp. 17,952 161 221
- ----------------------------------------
Dividends paid to shareholder (310,000) (125,000) (12,000)
- ---------------------------------------- ----------- ----------- ----------
Net cash provided by (used in) financing
activities (767,974) 655,969 925,376
- ---------------------------------------- ----------- ----------- ----------
</TABLE>
<TABLE>
<S> <C> <C> <C>
Net increase (decrease) in cash (188,137) 400,565 (371,557)
- -------------------------------
Cash at beginning of year 990,880 590,315 961,872
- ------------------------------- -------- -------- --------
Cash at end of year $802,743 $990,880 $590,315
- ------------------------------- ======== ======== ========
</TABLE>
See accompanying notes.
G-5
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 1995
1.SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of presentation
The accompanying consolidated financial statements include Lincoln National
Life Insurance Co. ("Lincoln Life") and its majority owned subsidiaries.
Lincoln Life and its subsidiaries operate multiple insurance businesses.
Operations are divided into two business segments (see Note 9). These con-
solidated financial statements have been prepared in conformity with gener-
ally accepted accounting principles.
Use of estimates
The nature of the insurance business requires management to make estimates
and assumptions that affect the amounts reported in the consolidated finan-
cial statements and accompanying notes. Actual results could differ from
those estimates.
Investments
Lincoln Life classifies its fixed maturity securities and equity securities
(common and non-redeemable preferred stocks) as available-for-sale and, ac-
cordingly, such securities are carried at fair value. The cost of fixed ma-
turity securities is adjusted for amortization of premiums and discounts.
The cost of fixed maturity and equity securities is adjusted for declines
in value that are other than temporary.
For the mortgage-backed securities portion of the fixed maturity securities
portfolio, Lincoln Life recognizes income using a constant effective yield
based on anticipated prepayments and the estimated economic life of the se-
curities. When estimates of prepayments change, the effective yield is re-
calculated to reflect actual payments to date and anticipated future pay-
ments. The net investment in the securities is adjusted to the amount that
would have existed had the new effective yield been applied since the ac-
quisition of the securities. This adjustment is reflected in net investment
income.
Mortgage loans on real estate are carried at outstanding principal balances
less unaccrued discounts and net of reserves for declines that are other
than temporary. Investment real estate is carried at cost less allowances
for depreciation. Such
real estate is carried net of reserves for declines in value that are other
than temporary. Real estate acquired through foreclosure proceedings is re-
corded at fair value on the settlement date which establishes a new cost
basis. If a subsequent periodic review of a foreclosed property indicates
the fair value, less estimated costs to sell, is lower than the carrying
value at the settlement date, the carrying value is adjusted to the lower
amount. Policy loans are carried at the aggregate unpaid balances. Any
changes to the reserves for mortgage loans on real estate and real estate
are reported as a realized gain (loss) on investments.
Cash and invested cash are carried at cost and include all highly liquid
debt instruments purchased with a maturity of three months or less, includ-
ing participation in a short-term investment pool administered by Lincoln
National Corp. (LNC), the Lincoln Life's parent.
Realized gain (loss) on investments is recognized in net income, net of re-
lated amortization of deferred acquisition costs, using the specific iden-
tification method. Changes in the fair values of securities carried at fair
value are reflected directly in shareholder's equity after deductions for
related adjustments for deferred acquisition costs and amounts required to
satisfy policyholder commitments that would have been recorded if these se-
curities would have been sold at their fair value, and after deferred taxes
or credits to the extent deemed recoverable.
Derivatives
Lincoln Life hedges certain portions of its exposure to interest rate fluc-
tuations, the widening of bond yield spreads over comparable maturity U.S.
Government obligations and foreign exchange risk by entering into deriva-
tive transactions. A description of Lincoln Life's accounting for its hedge
of such risks is discussed in the following two paragraphs.
The premium paid for interest rate caps is deferred and amortized to net
investment income on a straight-line basis over the term of the interest
rate cap. Any settlement received in accordance with the terms of the in-
terest rate caps is recorded as investment income. Spread-lock agreements,
interest rate swaps and financial futures, which hedge fixed maturity secu-
rities available-for-sale, are carried at fair value with the change in
fair value reflected directly in shareholder's equity. Realized gain (loss)
from the settlement of such derivatives is deferred and amortized over the
life of the hedged assets as an adjustment to the yield. Foreign exchange
forward contracts, foreign currency options and foreign currency swaps,
which hedge some of the foreign exchange risk of investments in fixed matu-
rity securities denominated in foreign currencies, are carried at fair
value with the
change in fair value reflected in earnings. Realized
G-6
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED
gain (loss) from the settlement of such derivatives is also zreflected in
earnings.
Hedge accounting is applied as indicated above after Lincoln Life deter-
mines that the items to be hedged expose Lincoln Life to interest rate
fluctuations, the widening of bond yield spreads over comparable maturity
U.S. Government obligations and foreign exchange risk; and the derivatives
used are designated as a hedge and reduce the indicated risk by having a
high correlation of changes in the value of the derivatives and the items
being hedged at both the inception of the hedge and throughout the hedge
period. Should such criteria not be met, the change in value of the deriva-
tives is included in net income.
Property and equipment
Property and equipment owned for Lincoln Life use is carried at cost less
allowances for depreciation.
Premiums and fees
Revenue for universal life and other interest-sensitive life insurance pol-
icies consists of policy charges for cost of insurance, policy initiation
and administration, and surrender charges that have been assessed. Tradi-
tional individual life-health and annuity premiums are recognized as reve-
nue over the premium-paying period of the policies. Group health premiums
are prorated over the contract term of the policies.
Assets held in separate accounts/ liabilities related to separate accounts
These assets and liabilities represent segregated funds administered and
invested by Lincoln Life for the exclusive benefit of pension and variable
life and annuity contractholders. The fees received by Lincoln Life for ad-
ministrative and contractholder maintenance services performed for these
separate accounts are included in Lincoln Life's consolidated statements of
income.
Deferred acquisition costs
Commissions and other costs of acquiring universal life insurance, variable
universal life insurance, traditional life insurance, annuities and group
health insurance which vary with and are primarily related to the produc-
tion of new business, have been deferred to the extent recoverable. Acqui-
sition costs for universal and variable universal life insurance policies
are being amortized over the lives of the policies in relation to the inci-
dence of estimated gross profits from surrender charges and investment,
mortality and expense margins, and actual realized gain (loss) on invest-
ments. That amortization is adjusted retrospectively when estimates of cur-
rent or future gross profits to be realized from a group of policies are
revised. The traditional life-health and annuity acquisition costs are am-
ortized over the premium-paying period of the related policies using as-
sumptions consistent with those used in computing policy reserves.
Expenses
Expenses for universal and variable universal life insurance policies in-
clude interest credited to policy account balances and benefit claims in-
curred during the period in excess of policy account balances. Interest
crediting rates associated with funds invested in Lincoln Life's general
account during 1993 through 1995 ranged from 6.1% to 8.25%.
Goodwill
The cost of acquired subsidiaries in excess of the fair value of net assets
(goodwill) is amortized using the straight-line method over periods that
generally correspond with the benefits expected to be derived from the ac-
quisitions. Goodwill is amortized over 40 years. The carrying value of
goodwill is reviewed periodically for indicators of impairment in value.
Policy liabilities and accruals
The liabilities for future policy benefits and expenses for universal and
variable universal life insurance policies consist of policy account bal-
ances that accrue to the benefit of the policyholders, excluding surrender
charges. The liabilities for future policy benefits and expenses for tradi-
tional life policies and immediate and deferred paid-up annuities are com-
puted using a net level premium method and assumptions for investment
yields, mortality and withdrawals based principally on Lincoln Life experi-
ence projected at the time of policy issue, with provision for possible ad-
verse deviations. Interest assumptions for traditional direct individual
life reserves for all policies range from 2.3% to 11.7% graded to 5.7% af-
ter 30 years depending on time of policy issue. Interest rate assumptions
for reinsurance reserves range from 5.0% to 11.0% graded to 8.0% after 20
years. The interest assumptions for immediate and deferred paid-up annui-
ties range from 4.5% to 8.0%.
With respect to its policy liabilities and accruals, Lincoln Life carries
on a continuing review of its 1) overall reserve position, 2) reserving
techniques
G-7
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED
and 3) reinsurance arrangements, and as experience develops and new infor-
mation becomes known, liabilities are adjusted as deemed necessary. The ef-
fects of changes in estimates are included in the operating results for the
period in which such estimates occur.
Reinsurance
Lincoln Life enters into reinsurance agreements with other companies in the
normal course of their business. Lincoln Life may assume reinsurance from
unaffiliated companies and/or cede reinsurance to such companies.
Assets/liabilities and premiums/benefits from certain reinsurance contracts
which grant statutory surplus to other insurance companies have been netted
on the balance sheets and income statements, respectively, since there is a
right of offset. All other reinsurance agreements are reported on a gross
basis.
Depreciation
Provisions for depreciation of investment real estate and property and
equipment owned for Lincoln Life use are computed principally on the
straight-line method over the estimated useful lives of the assets.
Postretirement medical and life insurance benefits
Lincoln Life accounts for its postretirement medical and life insurance
benefits using the full accrual method.
Income taxes
Lincoln Life and eligible subsidiaries have elected to file consolidated
Federal and state income tax returns with their parent, LNC. Pursuant to an
intercompany tax sharing agreement with LNC, Lincoln Life and its eligible
subsidiaries provide for income taxes on a separate return filing basis.
The tax sharing agreement also provides that Lincoln Life and eligible sub-
sidiaries will receive benefit for net operating losses, capital losses and
tax credits which are not usable on a separate return basis to the extent
such items may be utilized in the consolidated income tax returns of LNC.
Lincoln Life uses the liability method of accounting for income taxes. De-
ferred income taxes reflect
the net tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts
used for income tax return purposes. Lincoln Life establishes a valuation
allowance for any portion of its deferred tax assets which are unlikely to
be realized.
2.CHANGES IN ACCOUNTING PRINCIPLES
AND CHANGES IN ESTIMATES
Postretirement benefits other than pensions
Effective January 1, 1993, Lincoln Life changed its method of accounting
for postretirement medical and life insurance benefits for its eligible em-
ployees and agents from a pay-as-you-go method to a full accrual method in
accordance with Financial Accounting Standards No. 106 entitled "Employers'
Accounting for Postretirement Benefits Other Than Pensions" ("FAS 106").
This full accrual method recognizes the estimated obligation for retired
employees and agents and active employees and agents who are expected to
retire in the future. The effect of the change was to increase net periodic
postretirement benefit cost by $7,800,000 and decrease income before cumu-
lative effect of accounting change by $5,100,000 ($0.51 per share). The im-
plementation of FAS 106 resulted in a one-time charge to the first quarter
1993 net income of $45,600,000 or $4.56 per share ($69,000,000 pre-tax) for
the cumulative effect of the accounting change. See Note 6 for additional
disclosures regarding postretirement benefits other than pensions.
Accounting by creditors for impairment of a loan
Financial Accounting Standards No. 114 entitled "Accounting by Creditors
for Impairment of a Loan" ("FAS 114") issued in May 1993, was adopted by
Lincoln Life effective January 1, 1993. FAS 114 requires that if an im-
paired mortgage loan's fair value as described in Note 3 is less than the
recorded investment in the loan, the difference is recorded in the mortgage
loan allowance for losses account. The adoption of FAS 114 resulted in ad-
ditions to the mortgage loan allowance for losses account and reduced first
quarter 1993 income before cumulative effect of accounting change and net
income by $37,700,000, or $3.77 per share ($57,200,000 pre-tax). See Note 3
for further mortgage loan disclosures. Most of the effect of this change in
accounting was within the Life Insurance and Annuities business segment.
Accounting for certain investments in debt
and equity securities
Financial Accounting Standards No. 115 entitled "Accounting for Certain In-
vestments in Debt and Equity Securities" ("FAS 115") issued in May 1993,
was adopted by Lincoln Life as of December 31, 1993. In accordance with the
rules, the
G-8
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
2. CHANGES IN ACCOUNTING PRINCIPLESAND CHANGES IN ESTIMATES CONTINUED
prior year financial statements have not been restated to reflect the
change in accounting principle. Under FAS 115, securities can be classified
as available-for-sale, trading or held-to-maturity according to the hold-
er's intent. Lincoln Life classified its entire fixed maturity securities
portfolio as "available-for-sale." Securities classified as available-for-
sale are carried at fair value and unrealized gains and losses on such se-
curities are carried as a separate component of shareholder's equity. The
ending balance of shareholder's equity at December 31, 1993 was increased
by $564,200,000 (net of $377,500,000 of related adjustments to deferred ac-
quisition costs, $50,700,000 of policyholder commitments and $303,700,000
in deferred income taxes, all of which would have been recognized if those
securities would have been sold at their fair value, net of amounts appli-
cable to Security-Connecticut Corp.) to reflect the net unrealized gain on
fixed maturity securities classified as available-for-sale previously car-
ried at amortized cost. Prior to the adoption of FAS 115, Lincoln Life car-
ried a portion of its fixed maturity securities at fair value with
unrealized gains and losses carried as a separate component of sharehold-
er's equity. The remainder of such securities were carried at amortized
cost.
Change in estimate for net investment income related to mortgage-backed
securities
At December 31, 1993, Lincoln Life had $5,942,100,000 invested in mortgage-
backed securities. As indicated in Note 1, Lincoln Life recognizes income
on these securities using a constant effective yield based on anticipated
prepayments. With the implementation of new investment software in December
1993, Lincoln Life was able to significantly refine its estimate of the ef-
fective yield on such securities to better reflect actual prepayments and
estimates of future prepayments. This resulted in an increase in the amor-
tization of purchase discount on these securities of $58,000,000 and, after
related amortization of deferred acquisition costs ($18,300,000) and income
taxes ($14,300,000), increased 1993's income before cumulative effect of
accounting change and net income by $25,500,000 or $2.55 per share.
Most of the effect of this change in estimate was within the Life Insurance
and Annuities business segment.
Change in estimate for disability income reserves
During the fourth quarter of 1993, income before cumulative effect of ac-
counting change and net income decreased by $15,500,000 or $1.55 per share
as the result of strengthening reinsurance disability income reserves by
$23,900,000. The need for this reserve increase within the Reinsurance seg-
ment was identified as the result of management's assessment of current ex-
pectations for morbidity trends and the impact of lower investment income
due to lower interest rates.
During the fourth quarter of 1995, Lincoln Life completed an in-depth re-
view of the experience of its disability income business. As a result of
this study, and based on the assumption that recent experience will con-
tinue in the future, income before cumulative effect of accounting change
and net income decreased by $33,500,000 or $3.35 per share ($51,500,000
pre-tax) as a result of strengthening disability income reserves by
$15,200,000 and writing-off deferred acquisition costs of $36,300,000 in
the Reinsurance segment.
G-9
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
3.INVESTMENTS
The major categories of net investment income are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
----------
(in millions)
--------------------------
<S> <C> <C> <C>
Fixed maturity securities $1,549.4 $1,357.4 $1,497.6
-----------------------------
Equity securities 8.9 7.4 4.3
-----------------------------
Mortgage loans on real estate 268.3 271.3 294.2
-----------------------------
Real estate 110.0 97.8 75.2
-----------------------------
Policy loans 35.4 32.7 36.0
-----------------------------
Invested cash 55.4 46.4 24.8
-----------------------------
Other investments 15.8 7.3 8.0
----------------------------- -------- -------- --------
Investment revenue 2,043.2 1,820.3 1,940.1
-----------------------------
Investment expenses 143.6 146.3 116.6
----------------------------- -------- -------- --------
Net investment income $1,899.6 $1,674.0 $1,823.5
-----------------------------
======== ======== ========
</TABLE>
The realized gain (loss) on investments is as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
--------------------------
(in millions)
------------------------
<S> <C> <C> <C>
Fixed maturity securities available-for-sale:
. Gross gain $239.6 $ 69.6 $ 91.1
------------------------------------------------
. Gross loss (87.8) (294.1) (8.4)
------------------------------------------------
Equity securities available-for-sale:
. Gross gain 82.3 50.2 88.3
------------------------------------------------
. Gross loss (31.3) (50.5) (33.7)
------------------------------------------------
Fixed maturity securities held for investment:
. Gross gain -- -- 209.9
------------------------------------------------
. Gross loss -- -- (69.5)
------------------------------------------------
Other investments 42.2 5.1 (161.8)
------------------------------------------------
Related restoration or amortization of deferred
acquisition
costs and provision for policyholder commitments (108.8) 81.2 (23.7)
------------------------------------------------ ------ ------- -------
$136.2 $(138.5) $ 92.2
====== ======= =======
</TABLE>
Provisions (credits) for write-downs and net changes in pro-
visions for losses, which are included in realized gain
(loss) on investments shown above, are as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1995 1994 1993
(in millions)
-------------------
<S> <C> <C> <C>
Fixed maturity securities $10.4 $14.2 $ 55.6
-----------------------------
Equity securities 3.3 6.8 --
-----------------------------
Mortgage loans on real estate 14.7 19.5 136.7
-----------------------------
Real estate (7.2) 13.0 21.8
-----------------------------
Other long-term investments (1.5) .3 3.9
-----------------------------
Guarantees (2.2) 4.3 1.7
-----------------------------
----- ----- ------
$17.5 $58.1 $219.7
===== ===== ======
</TABLE>
G-10
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
3.INVESTMENTS CONTINUED
The change in unrealized appreciation (depreciation) on in-
vestments in fixed maturity and equity securities is as fol-
lows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
------------------------------
(in millions)
----------------------------
<S> <C> <C> <C>
Fixed maturity securities available-for-sale $2,063.7 $(1,903.7) $1,387.1
---------------------------------------------
Equity securities available-for-sale 78.1 (26.0) 9.2
---------------------------------------------
Fixed maturity securities held for investment -- -- (959.7)
---------------------------------------------
-------- --------- --------
$2,141.8 $(1,929.7) $ 436.6
======== ========= ========
</TABLE>
The cost, gross unrealized gain and loss and fair value of
securities available-for-sale are as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1995
-----------------------------------
Gross
unrealized
--------------- Fair
Cost Gain Loss value
----------------------------------------
(in millions)
-----------------------------------
<S> <C> <C> <C> <C>
Corporate bonds $12,412.1 $1,141.0 $ 28.7 $13,524.4
-------------------------------------
U.S. Government bonds 569.6 83.9 .1 653.4
-------------------------------------
Foreign government bonds 927.9 70.3 .6 997.6
-------------------------------------
Mortgage-backed securities:
. Mortgage pass-through securities 1,072.5 41.0 3.2 1,110.3
-------------------------------------
. Collateralized mortgage obligations 3,816.3 262.5 7.4 4,071.4
-------------------------------------
. Other mortgage-backed securities 2.8 .3 -- 3.1
-------------------------------------
State and municipal bonds 12.3 .1 -- 12.4
-------------------------------------
Redeemable preferred stocks 39.3 2.9 -- 42.2
-------------------------------------
--------- -------- ------ ---------
Total fixed maturity securities 18,852.8 1,602.0 40.0 20,414.8
-------------------------------------
Equity securities 480.3 123.6 5.5 598.4
-------------------------------------
--------- -------- ------ ---------
$19,333.1 $1,725.6 $ 45.5 $21,013.2
========= ======== ====== =========
<CAPTION>
Year ended December 31, 1994
-----------------------------------
Gross
unrealized
--------------- Fair
Cost Gain Loss value
----------------------------------------
(in millions)
-----------------------------------
<S> <C> <C> <C> <C>
Corporate bonds $11,519.3 $ 143.3 $514.4 $11,148.2
-------------------------------------
U.S. Government bonds 1,048.4 6.9 25.5 1,029.8
-------------------------------------
Foreign governments bonds 541.2 4.7 12.5 533.4
-------------------------------------
Mortgage-backed securities:
. Mortgage pass-through securities 1,176.8 3.0 44.1 1,135.7
-------------------------------------
. Collateralized mortgage obligations 3,835.5 85.8 148.6 3,772.7
-------------------------------------
. Other mortgage-backed securities 5.0 .1 .1 5.0
-------------------------------------
State and municipal bonds 16.3 .4 -- 16.7
-------------------------------------
Redeemable preferred stocks 51.4 .2 .9 50.7
-------------------------------------
--------- -------- ------ ---------
Total fixed maturity securities 18,193.9 244.4 746.1 17,692.2
-------------------------------------
Equity securities 416.3 56.4 16.4 456.3
-------------------------------------
--------- -------- ------ ---------
$18,610.2 $ 300.8 $762.5 $18,148.5
========= ======== ====== =========
</TABLE>
G-11
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
3.INVESTMENTS CONTINUED
Future maturities of fixed maturity securities available-
for-sale are as follows:
<TABLE>
<CAPTION>
December 31, 1995
-------------------
Fair
Cost value
--------- ---------
(in millions)
-------------------
<S> <C> <C>
Due in one year or less $ 278.4 $ 282.6
--------------------------------------
Due after one year through five years 2,955.7 3,102.1
--------------------------------------
Due after five years through ten years 4,918.2 5,265.9
--------------------------------------
Due after ten years 5,808.9 6,579.4
-------------------------------------- --------- ---------
13,961.2 15,230.0
Mortgage-backed securities 4,891.6 5,184.8
-------------------------------------- --------- ---------
$18,852.8 $20,414.8
========= =========
</TABLE>
The foregoing data is based on stated maturities. Actual
maturities will differ in some cases because borrowers may
have the right to call or pre-pay obligations.
At December 31, 1995, the current par, amortized cost and
estimated fair value of investments in mortgage-backed
securities summarized by interest rates of the underlying
collateral are as follows:
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------
Current Par Cost Fair value
----------- -------- ----------
(in millions)
-------------------------------
<S> <C> <C> <C>
Below 7% $ 292.6 $ 290.5 $ 293.6
--------
7%-8% 1,302.8 1,276.9 1,318.2
--------
8%-9% 1,607.0 1,564.7 1,669.8
--------
Above 9% 1,810.5 1,759.5 1,903.2
-------- -------- -------- --------
$5,012.9 $4,891.6 $5,184.8
======== ======== ========
</TABLE>
The quality ratings of fixed maturity securities available-
for-sale are as follows:
<TABLE>
<CAPTION>
December 31, 1995
-----------------
<S> <C>
Treasuries and AAA 34.1%
------------------
AA 8.0
------------------
A 25.9
------------------
BBB 24.5
------------------
BB 3.9
------------------
Less than BB 3.6
------------------ ------
100.0%
======
</TABLE>
Mortgage loans on real estate are considered impaired when,
based on current information and events, it is probable that
the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement.
When Lincoln Life determines that a loan is impaired, a
provision for loss is established for the difference between
the carrying value of the mortgage loan and the estimated
value. Estimated value is based on either the present value
of expected future cash flows discounted at the loan's
effective interest rate, the loan's observable market price
or the fair value of the collateral. The provision for
losses is reported as realized gain (loss) on investments.
Mortgage loans deemed to be uncollectible are charged
against the provision for losses and subsequent recoveries,
if any, are credited to the provision for losses.
G-12
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
3.INVESTMENTS CONTINUED
The provision for losses is maintained at a level believed
adequate by management to absorb estimated probable credit
losses. Management's periodic evaluation of the adequacy of
the provision for losses is based on the Company's past loan
loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to
repay (including the timing of future payments), the
estimated value of the underlying collateral, composition of
the loan portfolio, current economic conditions and other
relevant factors. This evaluation is inherently subjective
as it requires estimating the amounts and timing of future
cash flows expected to be received on impaired loans that
may be susceptible to significant change.
Impaired loans along with the related allowance for losses
are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------ ------
(in millions)
--------------
<S> <C> <C>
Impaired loans with allowance for losses $144.7 $246.0
-------------------------------------------
Allowance for losses (28.5) (56.6)
-------------------------------------------
Impaired loans with no allowance for losses 2.1 2.2
-------------------------------------------
------ ------
Net impaired loans $118.3 $191.6
-------------------------------------------
====== ======
</TABLE>
Impaired loans with no allowance for losses are a result of
direct write-downs or for collateral dependent loans where
the fair value of the collateral is greater than the re-
corded investment in such loans.
A reconciliation of the mortgage loan allowance for losses
for these impaired mortgage loans is as follows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
------ ------- ------
(in millions)
-----------------------
<S> <C> <C> <C>
Balance at beginning of year $ 56.6 $ 220.7 $129.1
---------------------------------
Provisions for losses 14.7 19.5 79.5
---------------------------------
Provision for adoption of FAS 114 -- -- 57.2
---------------------------------
Releases due to write-downs (12.0) -- --
---------------------------------
Releases due to sales (15.9) (164.7) (12.2)
---------------------------------
Releases due to foreclosures (14.9) (18.9) (32.9)
---------------------------------
------ ------- ------
Balance at end of year $ 28.5 $ 56.6 $220.7
---------------------------------
====== ======= ======
</TABLE>
G-13
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
3.INVESTMENTS CONTINUED
The average recorded investment in impaired loans and the
interest income recognized on impaired loans were as fol-
lows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
------ ------ ------
(in millions)
--------------------
<S> <C> <C> <C>
Average recorded investment in impaired loans $181.7 $467.5 $703.6
---------------------------------------------
Interest income recognized on impaired loans 16.6 36.1 47.3
---------------------------------------------
</TABLE>
All interest income on impaired loans was recognized on the
cash basis of income recognition.
As of December 31, 1995 and 1994, Lincoln Life had restruc-
tured loans of $62,500,000 and $36,200,000, respectively.
Lincoln Life recorded $6,300,000 and $800,000 interest income
on these restructured loans in 1995 and 1994, respectively.
Interest income in the amount of $6,600,000 and $3,900,000
would have been recorded on these loans according to their
original terms in 1995 and 1994, respectively. As of December
31, 1995 and 1994, Lincoln Life had no outstanding commit-
ments to lend funds on restructured loans.
As of December 31, 1995, the Company's investment commit-
ments for fixed maturity securities (primarily private
placements), mortgage loans on real estate and real estate
were $543,100,000.
Fixed maturity securities available-for-sale, mortgage loans
on real estate and real estate with a combined carrying
value at December 31, 1995 of $1,300,000 were non-income
producing for the year ended December 31, 1995.
The cost information for mortgage loans on real estate, real
estate and other long-term investments are net of allowances
for losses. The balance sheet account for other liabilities
includes a reserve for guarantees of third-party debt. The
amount of allowances and a reserve for such items is as fol-
lows:
<TABLE>
<CAPTION>
December 31
1995 1994
----- -----
(in
millions)
-----------
<S> <C> <C>
Mortgage loans on real estate $28.5 $56.6
-----------------------------
Real estate 46.6 65.2
-----------------------------
Other long-term investments 11.8 13.5
-----------------------------
</TABLE>
Details underlying the balance sheet caption "Net Unrealized
Gain (loss) on Securities Available-for-Sale," are as fol-
lows:
<TABLE>
<CAPTION>
December 31
1995 1994
--------- ---------
(in millions)
--------------------
<S> <C> <C>
Fair value of securities available-for-sale $21,013.2 $18,148.5
----------------------------------------------------
Cost of securities available-for-sale 19,333.1 18,610.2
---------------------------------------------------- --------- ---------
Unrealized gain (loss) 1,680.1 (461.7)
----------------------------------------------------
Adjustments to deferred acquisition costs (492.1) 158.2
----------------------------------------------------
Amounts required to satisfy policyholder commitments (510.1) 8.6
----------------------------------------------------
Deferred income credits (taxes) (234.6) 105.9
----------------------------------------------------
Valuation allowance for deferred tax assets -- (135.6)
----------------------------------------------------
--------- ---------
Net unrealized gain (loss) on securities available-
for-sale $ 443.3 $ (324.6)
----------------------------------------------------
========= =========
</TABLE>
G-14
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
3.INVESTMENTS CONTINUED
Adjustments to Deferred acquisition costs and amounts re-
quired to satisfy policyholder commitments are netted
against the Deferred acquisition costs asset account and in-
cluded with the Future policy benefits, claims and claims
expense liability on the balance sheet, respectively.
4.FEDERAL INCOME TAXES
The Federal income tax expense (benefit) before cumulative
effect of accounting change is as follows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
(in millions)
----------------------
<S> <C> <C> <C>
Current $172.5 $(93.4) $261.3
--------
Deferred (45.0) 133.8 (118.8)
-------- ------ ------ ------
$127.5 $ 40.4 $142.5
====== ====== ======
</TABLE>
Cash paid for Federal income taxes in 1995, 1994 and 1993
was $27,500,000, $41,400,000 and $272,600,000, respectively.
The cash paid in 1995 is net of a $146,900,000 cash refund
related to the carryback of 1994 capital losses to prior
years.
The effective tax rate on pre-tax income before cumulative
effect of accounting change is lower than the prevailing
corporate Federal income tax rate. A reconciliation of this
difference is as follows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
---------
(in millions)
---------------------
<S> <C> <C> <C>
Tax rate times pre-tax income $157.3 $91.1 $117.5
------------------------------------
Effect of:
. Tax-exempt investment income (22.0) (21.5) (16.2)
------------------------------------
. Participating policyholders' share 5.4 3.4 4.1
------------------------------------
. Loss (gain) on sale of affiliates -- (24.1) 34.5
------------------------------------
. Other items (13.2) (8.5) 2.6
------------------------------------ ------ ----- ------
Provision for income taxes $127.5 $40.4 $142.5
------------------------------------ ====== ===== ======
Effective tax rate 28.4% 15.5% 42.5%
------------------------------------ ====== ===== ======
</TABLE>
The Federal income tax recoverable (liability) is as
follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------- ------
(in millions)
---------------
<S> <C> <C>
Current $ (25.0) $118.2
--------
Deferred (141.4) 16.3
-------- ------- ------
$(166.4) $134.5
======= ======
</TABLE>
G-15
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
4.FEDERAL INCOME TAXES CONTINUED
Significant components of Lincoln Life's net deferred tax
asset (liability) are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------- -------
(in millions)
----------------
<S> <C> <C>
Deferred tax assets:
. Policy liabilities and
accruals and
contractholder funds $ 694.5 $ 430.9
------------------------
. Loss on investments -- 16.8
------------------------
. Net unrealized loss on
securities available-
for-sale -- 161.6
------------------------
. Postretirement
benefits other than
pensions 25.3 24.2
------------------------
. Other 39.5 34.6
------------------------ ------- -------
Total deferred tax
assets 759.3 668.1
------------------------
Valuation allowance for
deferred tax assets -- (135.6)
------------------------ ------- -------
Net deferred tax assets 759.3 532.5
------------------------
Deferred tax
liabilities:
. Deferred acquisition
costs 218.8 475.5
------------------------
. Net unrealized gain on
securities available-
for-sale 579.6 --
------------------------
. Gain on investments 7.7 --
------------------------
. Other 94.6 40.7
------------------------ ------- -------
Total deferred tax
liabilities 900.7 516.2
------------------------ ------- -------
Net deferred tax
(liability) asset $(141.4) $ 16.3
------------------------ ======= =======
</TABLE>
Lincoln Life is required to establish a "valuation allow-
ance" for any portion of its deferred tax assets which are
unlikely to be realized. At December 31, 1994, $161,600,000
of deferred tax assets relating to net unrealized capital
losses on fixed maturity and equity securities available-
for-sale were available to be recorded in shareholder's eq-
uity before considering a valuation allowance. For Federal
income tax purposes, capital losses may only be used to off-
set capital gains in the current year or during a three-year
carryback and five-year carryforward period. Due to these
restrictions, and the uncertainty at that time of future
capital gains, these deferred tax assets were substantially
offset by a valuation allowance of $135,600,000. By December
31, 1995, the fair values of fixed maturity and equity secu-
rities available-for-sale were greater than the cost basis
resulting in unrealized capital gains. Accordingly, no valu-
ation allowance was established as of December 31, 1995
since management believes it is more likely than not that
Lincoln Life will realize the benefit of its deferred tax
assets.
Prior to 1984, a portion of the life companies' current
income was not subject to current income tax, but was
accumulated for income tax purposes in a memorandum account
designated as "policyholders' surplus." The total of the
life companies' balances in their respective "policyholders'
surplus" accounts at December 31, 1983 of $204,800,000 was
"frozen" by the Tax Reform Act of 1984 and, accordingly,
there have been no additions to the accounts after that
date. That portion of current income on which income taxes
have been paid will continue to be accumulated in a
memorandum account designated as "shareholder surplus," and
is available for dividends to the shareholder without
additional payment of tax. The December 31, 1995 total of
the life companies' account balances for their "shareholder
surplus" was $1,554,000,000. Should dividends to the
shareholder for each life company exceed its respective
"shareholder surplus," amounts would need to be transferred
from its respective "policyholders' surplus" and would be
subject to Federal income tax at that time. In connection
with the 1993 sale of a life insurance affiliate (see Note
10), $8,800,000 was transferred from policyholders' surplus
G-16
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
4.FEDERAL INCOME TAXES CONTINUED
to shareholder surplus and current income tax of $3,100,000
was paid. Under existing or foreseeable circumstances,
Lincoln Life neither expects nor intends that distributions
will be made from the remaining balance in "policyholders'
surplus" of $196,000,000 that will result in any such tax.
Accordingly, no provision for deferred income taxes has been
provided by Lincoln Life on its "policyholders' surplus"
account. In the event that such excess distributions are
made, it is estimated that income taxes of approximately
$68,600,000 would be due.
5.SUPPLEMENTAL FINANCIAL DATA
The balance sheet captions, "Real estate," "Other
investments" and "Property and equipment," are shown net of
allowances for depreciation as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------ ------
(in millions)
-------------
<S> <C> <C>
Real estate $ 51.6 $ 37.0
----------------------
Other investments 14.6 12.2
----------------------
Property and equipment 100.7 104.7
----------------------
</TABLE>
Details underlying the balance sheet caption,
"Contractholder funds," are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
--------- ---------
(in millions)
-------------------
<S> <C> <C>
Premium deposit funds $17,886.9 $16,770.3
------------------------------------------------
Undistributed earnings on participating business 91.9 63.6
------------------------------------------------
Other 193.0 194.7
------------------------------------------------
--------- ---------
$18,171.8 $17,028.6
========= =========
</TABLE>
Details underlying the balance sheet captions, "Short-term
and Long-term Debt," are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------ ------
(in millions)
-------------
<S> <C> <C>
Short-term debt:
---------------------------------------
. Short-term notes $123.5 $150.8
---------------------------------------
. Current portion of long-term debt 1.3 2.9
---------------------------------------
------ ------
Total short-term debt $124.8 $153.7
---------------------------------------
====== ======
Long-term debt less current portion:
---------------------------------------
. 7% mortgage note payable, due 1996 $ -- $ 4.9
---------------------------------------
. 9.48% mortgage note payable, due 1996 -- 7.7
---------------------------------------
. 12% mortgage note payable, due 1996 -- .2
---------------------------------------
. 8.42% mortgage note payable, due 1997 7.0 7.2
---------------------------------------
. 8.25% mortgage note payable, due 1997 10.1 10.2
---------------------------------------
. 8% mortgage note payable, due 1997 2.1 --
---------------------------------------
. 8.75% mortgage note payable, due 1998 18.4 18.8
---------------------------------------
. 9.75% mortgage note payable, due 2002 3.2 5.8
---------------------------------------
------ ------
Total long-term debt $ 40.8 $ 54.8
---------------------------------------
====== ======
</TABLE>
G-17
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
5.SUPPLEMENTAL FINANCIAL DATA CONTINUED
Fixed maturities of long-term debt are as follows (in mil-
lions):
1996 -- $ 1.31998 -- $18.42000 -- $ --
1997 -- 19.21999 -- --Thereafter -- 3.2
Cash paid for interest for 1995, 1994 and 1993 was $67,000,
$615,000 and $96,000, respectively.
Reinsurance transactions included in the income statement
caption, "Insurance premiums," are as follows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
------ ------ ------
(in millions)
--------------------
<S> <C> <C> <C>
Insurance assumed $777.6 $910.8 $807.5
------------------------
Insurance ceded 441.7 716.7 568.6
------------------------
------ ------ ------
Net reinsurance premiums $335.9 $194.1 $238.9
------------------------
====== ====== ======
</TABLE>
The income statement caption, "Benefits and settlement ex-
penses," is net of reinsurance recoveries of $456,000,
$524,000 and $438,000 for the years ended December 31, 1995,
1994 and 1993, respectively.
The income statement caption, "Underwriting, acquisition,
insurance and other Expenses," includes amortization of de-
ferred acquisition costs of $399,700,000, $115,200,000 and
$241,000,000 for the years ended December 31, 1995, 1994 and
1993, respectively. An additional $(85,200,000), $81,200,000
and ($23,700,000) of deferred acquisition costs was restored
(amortized) and netted against "Realized gain (loss) on in-
vestments" for the years ended December 31, 1995, 1994 and
1993, respectively.
6.EMPLOYEE BENEFIT PLANS
Pension plans
LNC maintains funded defined benefit pension plans for most
of its employees and, prior to January 1, 1995, full-time
agents. The benefits for employees are based on total years
of service and the highest 60 months of compensation during
the last 10 years of employment. The benefits for agents
were based on a percentage of each agent's yearly earnings.
The plans are funded by contributions to tax-exempt trusts.
Lincoln Life's funding policy is consistent with the funding
requirements of Federal laws and regulations. Contributions
are intended to provide not only the benefits attributed to
service to date, but also those expected to be earned in the
future. Plan assets consist principally of listed equity se-
curities and corporate obligations and government bonds.
All benefits applicable to the funded defined benefit plan
for agents were frozen as of December 31, 1994. The curtail-
ment of this plan did not have a significant effect on net
pension cost for 1994. Effective January 1, 1995, pension
benefits for agents have been provided by a new defined con-
tribution plan. Contributions to this plan will be based on
2.3% of an agent's earnings up to the social security wage
base and 4.6% of any excess.
LNC also administers two types of unfunded, nonqualified,
defined benefit plans for certain employees and agents. A
supplemental retirement plan provides defined benefit pen-
sion benefits in excess of limits imposed by federal tax
law. A salary continuation plan provides certain officers of
Lincoln Life defined pension benefits based on years of
service and final monthly salary upon death or retirement.
G-18
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
6.EMPLOYEE BENEFIT PLANS CONTINUED
The status of the funded defined benefit pension plans and
the amounts recognized on the balance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------- -------
(in millions)
----------------
<S> <C> <C>
Actuarial present value of benefit obligation:
. Vested benefits $(162.1) $(130.5)
------------------------------------------------------
. Nonvested benefits (9.2) (7.3)
------------------------------------------------------ ------- -------
Accumulated benefit obligation (171.3) (137.8)
------------------------------------------------------
Effect of projected future compensation increases (37.2) (24.3)
------------------------------------------------------ ------- -------
Projected benefit obligation (208.5) (162.1)
------------------------------------------------------
Plan assets at fair value 196.4 159.3
------------------------------------------------------ ------- -------
Projected benefit obligations in excess of plan assets (12.1) (2.8)
------------------------------------------------------
Unrecognized net loss (gain) 12.6 (.5)
------------------------------------------------------
Unrecognized prior service cost 1.2 1.1
------------------------------------------------------ ------- -------
Prepaid (accrued) pension cost included in other
liabilities $ 1.7 $ (2.2)
------------------------------------------------------ ======= =======
</TABLE>
The status of the unfunded defined benefit pension plans and
the amounts recognized on the balance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
------ -----
(in
millions)
-------------
<S> <C> <C>
Actuarial present value of benefit obligation:
. Vested benefits $ (7.0) $(5.4)
---------------------------------------------------
. Nonvested benefits (1.5) (1.0)
--------------------------------------------------- ------ -----
Accumulated benefit obligation (8.5) (6.4)
---------------------------------------------------
Effect of projected future compensation increases (2.4) (2.5)
--------------------------------------------------- ------ -----
Projected benefit obligation (10.9) (8.9)
---------------------------------------------------
Unrecognized transition obligation -- --
---------------------------------------------------
Unrecognized net loss (gain) 1.0 (.3)
---------------------------------------------------
Unrecognized prior service cost .8 .8
--------------------------------------------------- ------ -----
Accrued pension costs included in other liabilities $ (9.1) $(8.4)
--------------------------------------------------- ====== =====
</TABLE>
The determination of the projected benefits obligation for
the defined benefit plans was based on the following assump-
tions:
<TABLE>
<CAPTION>
1995 1994 1993
------------
<S> <C> <C> <C>
Weighted-average discount rate 7.0% 8.0% 7.0%
------------------------------------------------
Rate of increase in compensation:
. Salary continuation plan 6.0 6.5 6.0
------------------------------------------------
. All other plans 5.0 5.0 5.0
------------------------------------------------
Expected long-term rate of return on plan assets 9.0 9.0 9.0
------------------------------------------------
</TABLE>
G-19
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
6.EMPLOYEE BENEFIT PLANS CONTINUED
The components of net pension cost for the defined benefit
pension plans are as follows:
<TABLE>
<CAPTION>
Year ended December
31
1995 1994 1993
-------------------
(in millions)
-------------------
<S> <C> <C> <C>
Service cost--benefits earned during the year $ 5.0 $ 8.9 $ 8.5
---------------------------------------------
Interest cost on projected benefit obligation 13.2 12.9 12.4
---------------------------------------------
Actual return on plan assets (36.3) 4.7 (20.1)
---------------------------------------------
Net amortization (deferral) 22.9 (18.6) 6.1
--------------------------------------------- ------ ------ ------
Net pension cost $ 4.8 $ 7.9 $ 6.9
--------------------------------------------- ====== ====== ======
</TABLE>
401(k)
LNC and Lincoln Life sponsor contributory defined contribu-
tion plans for eligible employees and agents. Lincoln Life's
contributions to the plans are equal to each participant's
pre-tax contribution, not to exceed 6% of base pay, multi-
plied by a percentage, ranging from 25% to 150%, which var-
ies according to certain incentive criteria as determined by
LNC's Board of Directors. Expense for these plans amounted
to $8,000,000, $13,200,000 and $11,800,000 in 1995, 1994 and
1993, respectively.
Postretirement medical and life insurance benefit plans
LNC sponsors unfunded defined benefit plans that provide
postretirement medical and life insurance benefits to full-
time employees and agents who, depending on the plan, have
worked for Lincoln Life 10 to 15 years and attained age 55
to 60. Medical benefits are also available to spouses and
other dependents of employees and agents. For medical bene-
fits, limited contributions are required from individuals
retired prior to November 1, 1988; contributions for later
retirees, which can be adjusted annually, are based on such
items as years of service at retirement and age at retire-
ment. The life insurance benefits are noncontributory, al-
though participants can elect supplemental contributory ben-
efits.
The status of the postretirement medical and life insurance
benefit plans and the amounts recognized on the balance
sheets are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
--
(in millions)
--
<S> <C> <C>
Accumulated postretirement benefit obligation:
. Retirees $(39.8) $(34.9)
-----------------------------------------------
. Fully eligible active plan participants (9.9) (7.0)
-----------------------------------------------
. Other active plan participants (20.8) (15.0)
----------------------------------------------- ------ ------
Accumulated postretirement benefit obligation (70.5) (56.9)
-----------------------------------------------
Unrecognized net gain (.8) (5.5)
----------------------------------------------- ------ ------
Accrued plan cost included in other liabilities $(71.3) $(62.4)
----------------------------------------------- ====== ======
</TABLE>
G-20
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
6.EMPLOYEE BENEFIT PLANS CONTINUED
The components of periodic postretirement benefit cost are
as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1995 1994 1993
--
(in millions)
--
<S> <C> <C> <C>
Service cost $1.5 $1.7 $2.6
----------------------------------------
Interest cost 4.4 4.2 4.6
----------------------------------------
Amortization cost (credit) (.8) .1 --
---------------------------------------- ---- ---- ----
Net periodic postretirement benefit cost $5.1 $6.0 $7.2
---------------------------------------- ==== ==== ====
</TABLE>
The calculation of the accumulated postretirement benefit
obligation assumes a weighted-average annual rate of in-
crease in the per capita cost of covered benefits (i.e.,
health care cost trend rate) of 9.5% for 1996 gradually de-
creasing to 5.5% by 2004 and remaining at that level there-
after. The health care cost trend rate assumption has a sig-
nificant effect on the amounts reported. For example, in-
creasing the assumed health care cost trend rates by one
percentage point each year would increase the accumulated
postretirement benefit obligation as of December 1995 and
1994 by $5,100,000 and $4,100,000, respectively, and the ag-
gregate of the estimated service and interest cost compo-
nents of net periodic postretirement benefit cost for the
year ended December 31, 1995 by $488,000. The calculation
assumes a long-term rate of increase in compensation of 5.0%
for both December 31, 1995 and 1994. The weighted-average
discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% and 8.0% at De-
cember 31, 1995 and 1994, respectively.
7. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES
Shareholder's equity restrictions
Net income as determined in accordance with statutory accounting practices
for Lincoln Life and its insurance subsidiaries in 1995, 1994 and 1993 was
$284,500,000, $366,700,000 and $237,000,000, respectively. Lincoln Life's
shareholder's equity as determined in accordance with statutory accounting
practices at December 31, 1995 and 1994 was $1,732,900,000 and
$1,679,700,000, respectively.
Lincoln Life is subject to certain insurance department regulatory restric-
tions as to the transfer of funds and payments of dividends to LNC. In
1996, Lincoln Life can transfer up to $284,500,000 without seeking prior
approval from the insurance regulators.
Disability income claims
The liability for disability income claims net of the related asset for
amounts recoverable from reinsurers at December 31, 1995 and 1994 is a net
liability of $602,600,000 and $441,700,000, respectively, excluding de-
ferred acquisition costs. The bulk of the increase to this liability re-
lates to the assumption of a large block of disability claim reserves and
related assets during the third quarter of 1995. In addition, as indicated
in Note 2, Lincoln Life strengthened its disability income reserves and
wrote off certain related deferred acquisition costs in the fourth quarter
of 1995. The reserves were established on the assumption that the recent
experience will continue in the future. If incidence levels or claim termi-
nation rates vary significantly from these assumptions, further adjustments
to reserves may be required in the future. It is not possible to provide a
meaningful estimate of a range of possible outcomes at this time. Lincoln
Life reviews and updates the level of these reserves on an on-going basis.
Compliance of qualified annuity plans
Tax authorities continue to focus on compliance of
qualified annuity plans marketed by insurance companies. If sponsoring em-
ployers cannot demonstrate
compliance and the insurance company is held re-
sponsible due to its marketing efforts, Lincoln Life
and other insurers may be subject to potential liability. It is not possi-
ble to provide a meaningful estimate of the range of potential liability at
this time. Management continues to monitor this matter and to take steps to
minimize any potential liability.
Group pension annuities
The liabilities for guaranteed interest and group pension annuity con-
tracts, which are no longer be-
G-21
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
7. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
ing sold, are supported by a single portfolio of assets which attempts to
match the duration of these liabilities. Due to the very long-term nature
of group pension annuities and the resulting inability to exactly match
cash flows, a risk exists that future cash flows from investments will not
be reinvested at rates as high as currently earned by the portfolio. This
situation could cause losses which would be recognized at some future time.
Leases
Lincoln Life and certain of its subsidiaries lease their home office prop-
erties through sale-leaseback agreements. The agreements provide for a 25
year lease period with options to renew for six additional terms of five
years each. The agreements also provide Lincoln Life with the right of
first refusal to purchase the properties during the term of the lease, in-
cluding renewal periods, at a price as defined in the agreements. In addi-
tion, Lincoln Life has the option to purchase the leased properties at fair
market value as defined in the agreements on the last day of the initial 25
year lease period ending in 2009 or the last day of any of the renewal pe-
riods.
Total rental expense under operating leases in 1995, 1994 and 1993 was
$24,400,000, $21,700,000 and $27,100,000. Future minimum rental commitments
are as follows (in millions):
<TABLE>
<S> <C>
1996 $ 20.9
----------
1997 19.5
----------
1998 18.3
----------
1999 18.3
----------
2000 17.7
----------
Thereafter 172.4
---------- ------
$267.1
======
</TABLE>
Insurance ceded and assumed
Lincoln Life cedes insurance to other companies, including certain affili-
ates. That portion of risks exceeding each company's retention limit is re-
insured with other insurers. Lincoln Life seeks reinsurance coverage within
the business segment that sells life insurance that limits its liabilities
on an individual insured to $3,000,000. To cover products other than life
insurance, Lincoln Life acquires other insurance coverages with retentions
and limits which management believes are appropriate for the circumstances.
The accompanying financial statements reflect premiums, benefits and set-
tlement expenses and deferred acquisition costs, net of insurance ceded
(see Note 5). Lincoln Life and its subsidiaries remain liable if their re-
insurers are unable to meet their contractual obligations under the appli-
cable reinsurance agreements.
Lincoln Life assumes insurance from other companies, including certain af-
filiates. At December 31, 1995, Lincoln Life has provided $92,700,000 of
statutory surplus relief to other insurance companies under reinsurance
transactions. Generally, such amounts are offset by corresponding receiv-
ables from the ceding company, which are secured by future profits on the
reinsured business. However, Lincoln Life is subject to the risk that the
ceding company may become insolvent and the right of offset would not be
permitted.
Vulnerability from concentrations
At December 31, 1995, Lincoln Life did not have
a material concentration of financial instruments in
a single investee, industry or geographic location. Also at December 31,
1995, Lincoln Life did not have a concentration of 1) business transactions
with a particular customer, lender or distributor, 2) revenues from a par-
ticular product or service, 3) sources of supply of labor or services used
in the
business or 4) a market or geographic area in which
business is conducted that makes it vulnerable to an event that is at least
reasonably possible to occur in the near term and which could cause a se-
vere impact to Lincoln Life's financial condition.
Other contingency matters
Lincoln Life and its subsidiaries are involved in various pending or
threatened legal proceedings arising from the conduct of their business. In
some instances, these proceedings include claims for punitive damages and
similar types of relief in unspecified or substantial amounts, in addition
to amounts for alleged contractual liability or requests for equitable re-
lief. After consultation with counsel and a review of available facts, it
is management's opinion that these proceedings ultimately will be resolved
without materially affecting the consolidated financial statements of Lin-
coln Life.
The number of insurance companies that are under regulatory supervision has
resulted, and is expected to continue to result, in assessments by state
guaranty funds to cover losses to policyholders of insolvent or rehabili-
tated companies. Mandatory assessments may be partially recovered through a
reduction in future premium taxes in some states. Lincoln Life has accrued
for expected assessments net of estimated future premium tax deductions.
G-22
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
7.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
Guarantees
Lincoln Life has guarantees with off-balance-sheet risks
whose contractual amounts represent credit exposure. Out-
standing guarantees with off-balance-sheet risks, shown in
notional or contract amounts, are as follows:
<TABLE>
<CAPTION>
Notional or
contract
amounts
-----------
December 31
1995 1994
---------------
(in
millions)
-----------
<S> <C> <C>
Real estate partnerships $ 3.3 $17.6
---------------------------------------
Mortgage loan pass-through certificates 63.6 78.2
--------------------------------------- ----- -----
$66.9 $95.8
===== =====
</TABLE>
Lincoln Life has invested in real estate partnerships that
use conventional mortgage loans. In some cases, the terms of
these arrangements involve guarantees by each of the part-
ners to indemnify the mortgagor in the event a partner is
unable to pay its principal and interest payments. In addi-
tion, Lincoln Life has sold commercial mortgage loans
through grantor trusts which issued pass-through certifi-
cates. Lincoln Life has agreed to repurchase any mortgage
loans which remain delinquent for 90 days at a repurchase
price substantially equal to the outstanding principal bal-
ance plus accrued interest thereon to the date of repur-
chase. It is management's opinion that the value of the
properties underlying these commitments is sufficient that
in the event of default the impact would not be material to
Lincoln Life. Accordingly, both the carrying value and fair
value of these guarantees is zero at December 31, 1995 and
1994.
G-23
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
7.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
Derivatives
Lincoln Life has derivatives with off-balance-sheet risks
whose notional or contract amounts exceed the credit expo-
sure. Lincoln Life has entered into derivative transactions
to reduce its exposure to fluctuations in interest rates,
the widening of bond yield spreads over comparable maturity
U.S. Government obligations and foreign exchange risks. In
addition, Lincoln Life is subject to the risks associated
with changes in the value of its derivatives; however, such
changes in the value generally are offset by changes in the
value of the items being hedged by such contracts. Outstand-
ing derivatives with off-balance-sheet risks, shown in
notional or contract amounts along with their carrying value
and estimated fair values, are as follows:
<TABLE>
<CAPTION>
Assets (Liabilities)
------------------------------
Notional or Carrying Fair Carrying Fair
contract amounts value value value value
----------------- -------- ----- -------- -----
December 31 December 31 December 31
1995 1994 1995 1995 1994 1994
-------- -------- -------- ----- -------- -----
(in millions)
------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate
derivatives:
Interest rate cap
agreements $5,110.0 $4,400.0 $22.7 $5.3 $23.3 $34.4
------------------------
Spread-lock agreements 600.0 1,300.0 (.9) (.9) 3.2 3.2
------------------------
Financial futures
contracts -- 382.5 -- -- (7.5) (7.5)
------------------------
Interest rate swaps 5.0 5.0 .2 .2 .2 .2
------------------------ -------- -------- ----- ---- ----- -----
5,715.0 6,087.5 22.0 4.6 19.2 30.3
Foreign currency
derivatives:
Foreign exchange forward
contracts 15.7 21.2 (.6) (.6) .2 .2
------------------------
Foreign currency options 99.2 -- 1.9 1.4 -- --
------------------------
Foreign currency swaps 15.0 -- .4 .4 -- --
------------------------ -------- -------- ----- ---- ----- -----
129.9 21.2 1.7 1.2 .2 .2
-------- -------- ----- ---- ----- -----
$5,844.9 $6,108.7 $23.7 $5.8 $19.4 $30.5
======== ======== ===== ==== ===== =====
</TABLE>
A reconciliation and discussion of the notional or contract
amounts for the significant programs using derivative agree-
ments and contracts is as follows:
<TABLE>
<CAPTION>
Interest rate
caps Spread locks
----------------- -------------------
December 31 December 31
1995 1994 1995 1994
-------- -------- --------- --------
(in millions)
-------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $4,400.0 $3,800.0 $ 1,300.0 $1,700.0
----------------------------
New contracts 710.0 600.0 800.0 --
----------------------------
Terminations and maturities -- -- (1,500.0) (400.0)
---------------------------- -------- -------- --------- --------
Balance at end of year $5,110.0 $4,400.0 $ 600.0 $1,300.0
---------------------------- ======== ======== ========= ========
</TABLE>
G-24
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
7.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
<TABLE>
<CAPTION>
Financial futures
-------------------------------------
Contracts Options
1995 1994 1995 1994
--------- -------- ------- -------
(in millions)
-------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 382.5 $ 33.1 $ -- $ --
----------------------------
New contracts 810.5 1,087.7 181.6 308.0
----------------------------
Terminations and maturities (1,193.0) (738.3) (181.6) (308.0)
---------------------------- --------- -------- ------- -------
Balance at end of year $ -- $ 382.5 $ -- $ --
---------------------------- ========= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Foreign currency derivatives
-----------------------------------------
Foreign
exchange Foreign Foreign
forward currency currency
contracts options swaps
1995 1994 1995 1994 1995 1994
------- ------ ------- ---- ----- ----
(in millions)
-----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 21.2 $ -- $ -- $ -- $ -- $ --
----------------------------
New contracts 131.2 38.5 356.6 -- 15.0 --
----------------------------
Terminations and maturities (136.7) (17.3) (257.4) -- -- --
---------------------------- ------- ------ ------- ---- ----- ----
Balance at end of year $ 15.7 $ 21.2 $ 99.2 $ -- $15.0 $ --
---------------------------- ======= ====== ======= ==== ===== ====
</TABLE>
Interest rate caps
The interest rate cap agreements, which expire in 1997
through 2003, entitle Lincoln Life to receive payments from
the counterparties on specified future reset dates, contin-
gent on future interest rates. For each cap, the amount of
such quarterly payments, if any, is determined by the excess
of a market interest rate over a specified cap rate times
the notional amount divided by four. The purpose of Lincoln
Life's interest rate cap agreement program is to protect its
annuity line of business from the effect of fluctuating in-
terest rates. The premium paid for the interest rate caps is
included in other assets ($22,700,000 and $23,400,000 as of
December 31, 1995 and 1994, respectively) and is being amor-
tized over the terms of the agreements and is included in
net investment income.
Spread locks
Spread-lock agreements in effect at December 31, 1995 all
expire in 2005. Spread-lock agreements provide for a lump
sum payment to or by Lincoln Life depending on whether the
spread between the swap rate and a specified U.S. Treasury
note is larger or smaller than a contractually specified
spread. Cash payments are based on the product of the
notional amount, the spread between the swap rate and the
yield of an equivalent maturity U.S. Treasury security and
the price sensitivity of the swap at that time, expressed in
dollars per basis point. The purpose of Lincoln Life's
spread-lock program is to protect a portion of its fixed ma-
turity securities against widening of spreads.
G-25
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life is exposed to credit loss in the event of nonperformance by
counterparties on interest rate cap agreements, spread-lock agreements, in-
terest rate swaps, foreign exchange forward contracts, foreign currency op-
tions and foreign currency swaps, but Lincoln Life does not anticipate non-
performance by any of these counterparties. The credit risk associated with
such agreements is minimized by purchasing such agreements from financial
institutions with long-standing, superior performance records. The amount
of such exposure is essentially the net replacement cost or market value
for such agreements with each counterparty if the net market value is in
Lincoln Life's favor. At December 31, 1995, the exposure was $6,900,000.
8.FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair value of Lincoln Life's financial instruments.
Considerable judgment is required to develop these fair values and, accord-
ingly, the estimates shown are not necessarily indicative of the amounts
that would be realized in a one time, current market exchange of all of
Lincoln Life's financial instruments.
Fixed maturity and equity securities
Fair values for fixed maturity securities are based on quoted market pric-
es, where available. For fixed maturity securities not actively traded,
fair values are estimated using values obtained from independent pricing
services or, in the case of private placements, are estimated by discount-
ing expected future cash flows using a current market rate applicable to
the coupon rate, credit quality and maturity of the investments. The fair
values for equity securities are based on quoted market prices.
Mortgage loans on real estate
The estimated fair value of mortgage loans on real estate was established
using a discounted cash flow method based on credit rating, maturity and
future income when compared to the expected yield for mortgages having sim-
ilar characteristics. The rating for mortgages in good standing are based
on property type, location, market conditions, occupancy, debt service cov-
erage, loan to value, caliber of tenancy, borrower and payment record. Fair
values for impaired mortgage loans are measured based either on the present
value of expected future cash flows discounted at the loan's effective in-
terest rate, at the loan's market price or the fair value of the collateral
if the loan is collateral dependent.
7.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES CONTINUED
Financial futures
Lincoln Life uses exchange-traded financial futures contracts and options
on those financial futures to hedge against interest rate risks and to man-
age duration of a portion of its fixed maturity securities. Financial
futures contracts obligate Lincoln Life to buy or sell a financial instru-
ment at a specified future date for a specified price and may be settled in
cash or through delivery of the financial instrument. Cash settlements on
the change in market values of financial futures contracts are made daily.
Options on financial futures give Lincoln Life the right, but not the obli-
gation, to assume a long or short position in the underlying futures at a
specified price during a specified time period.
Foreign currency derivatives
Lincoln Life uses a combination of foreign exchange forward contracts, for-
eign currency options and foreign currency swaps, all of which are traded
over-the-counter, to hedge some of the foreign exchange risk of investments
in fixed maturity securities denominated in foreign currencies. The foreign
currency forward contracts obligate Lincoln Life to deliver a specified
amount of currency at a future date at a specified exchange rate. Foreign
currency options give Lincoln Life the right, but not the obligation, to
buy or sell a foreign currency at a specific exchange rate during a speci-
fied time period. A foreign currency swap is a contractual agreement to ex-
change the currencies of two different countries pursuant to an agreement
to reexchange the two currencies at the same rate of exchange at a speci-
fied future date.
Additional derivative information
Expenses for the agreements and contracts described above amounted to
$5,600,000 and $5,400,000 in 1995 and 1994, respectively. Deferred losses
of $21,800,000 as of December 31, 1995, resulting from (1) terminated and
expired spread-lock agreements, (2) financial futures contracts and (3) op-
tions on financial futures, are included with the related fixed maturity
securities to which the hedge applied and are being amortized over the life
of such securities.
G-26
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Short-term and long-term debt
Fair values for long-term debt issues are estimated using discounted cash
flow analysis based on Lincoln Life's current incremental borrowing rate
for similar types of borrowing arrangements. For short-term debt, the car-
rying value approximates fair value.
Guarantees
Lincoln Life's guarantees include guarantees related to real estate part-
nerships and mortgage loan pass-through certificates. Based on historical
performance where repurchases have been negligible and the current status,
which indicates none of the loans are delinquent, the fair value liability
for the guarantees related to the mortgage loan pass-through certificates
is insignificant. Fair values for all other guarantees are based on fees
that would be charged currently to enter into similar agreements, taking
into consideration the remaining terms of the agreements and the
counterparties' credit standing.
Derivatives
Lincoln Life's derivatives include interest rate cap agreements, spread-
lock agreements, foreign currency exchange contracts, financial futures
contracts, options on financial futures, interest rate swaps, foreign cur-
rency options and foreign currency swaps. Fair values for these contracts
are based on current settlement values. The current settlement values are
based on quoted market prices for the foreign currency exchange contracts,
financial future contracts and options on financial futures and on broker-
age quotes, which utilized pricing models or formulas using current assump-
tions, for all other swaps and agreements.
Investment commitments
Fair values for commitments to make investment in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real es-
tate are based on the difference between the value of the committed invest-
ments as of the date of the accompanying balance sheets and the commitment
date, which would take into account changes in interest rates, the
counterparties' credit standing and the remaining terms of the commitments.
8.FAIR VALUE OF FINANCIAL
INSTRUMENTS CONTINUED
Policy loans
The estimated fair value of investments in policy loans was calculated on a
composite discounted cash flow basis using Treasury interest rates consis-
tent with the maturity durations assumed. These durations were based on
historical experience.
Other investments and cash and invested cash
The carrying value for assets classified as other investments and cash and
invested cash in the accom-
panying balance sheets approximates their fair value.
Investment type insurance contracts
The balance sheet captions, "Future policy benefits, claims and claims ex-
penses" and "Contractholder funds," include investment type insurance con-
tracts (i.e., deposit contracts and guaranteed interest contracts). The
fair values for the deposit contracts and certain guaranteed interest con-
tracts are based on their approximate surrender values. The fair values for
the remaining guaranteed interest and similar contracts are estimated using
discounted cash flow calculations based on interest rates currently being
offered on similar contracts with maturities consistent with those remain-
ing for the contracts being valued.
The remainder of the balance sheet captions, "Future policy benefits,
claims and claims expenses" and "Contractholder funds," that do not fit the
definition of "investment type insurance contracts" are considered insur-
ance contracts. Fair value disclosures are not required for these insurance
contracts and have not been determined by Lincoln Life. It is Lincoln
Life's position that the disclosure of the fair value of these insurance
contracts is important in that readers of these financial statements could
draw inappropriate conclusions about Lincoln Life's shareholder's equity
determined on a fair value basis if only the fair value of assets and lia-
bilities defined as financial instruments are disclosed. Lincoln Life and
other companies in the insurance industry are monitoring the related ac-
tions of the various rule-making bodies and attempting to determine an ap-
propriate methodology for estimating and disclosing the "fair value" of
their insurance contract liabilities.
G-27
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
8.FAIR VALUE OF FINANCIAL INSTRUMENTS CONTINUED
The carrying values and estimated fair values of Lincoln
Life's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
---------------------------------------------
Carrying Fair Carrying Fair
Assets (Liabilities) value value value value
---------------------------------------------------------------------------
(in millions)
----------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities $ 20,414.8 $ 20,414.8 $ 17,692.2 $ 17,692.2
-------------------------
Equity securities 598.4 598.4 456.3 456.3
-------------------------
Mortgage loans on real
estate 3,147.8 3,330.5 2,795.9 2,720.6
-------------------------
Policy loans 565.3 557.4 528.7 508.1
-------------------------
Other investments 241.2 241.2 158.2 158.2
-------------------------
Cash and invested cash 802.7 802.7 990.9 990.9
-------------------------
Investment type insurance
contracts:
-------------------------
. Deposit contracts and
certain guaranteed
interest contracts (15,390.8) (15,179.1) (14,294.7) (14,052.5)
-------------------------
. Remaining guaranteed
interest and similar
contracts (2,470.9) (2,396.5) (2,485.5) (2,423.9)
-------------------------
Short-term debt (124.8) (124.8) (153.7) (153.7)
-------------------------
Long-term debt (40.8) (36.7) (54.8) (57.0)
-------------------------
Derivatives 23.7 5.8 19.4 30.5
-------------------------
Investment commitments -- (.8) -- (.5)
-------------------------
</TABLE>
As of December 31, 1995 and 1994, the carrying values of the
deposit contracts and certain guaranteed contracts is net of
deferred acquisition costs of $333,797,000 and $399,000,000,
respectively, excluding adjustments for deferred acquisition
costs applicable to changes in fair value of securities. The
carrying values of these contracts are stated net of de-
ferred acquisition costs in order that they be comparable
with the fair value basis.
9.SEGMENT INFORMATION
Lincoln Life has two major business segments: Life Insurance
and Annuities and Reinsurance. The Life Insurance and Annui-
ties segment offers universal life, pension products and
other individual coverages through a network of career
agents, independent general agencies and insurance agencies
located within a variety of financial institutions. These
products are sold throughout the United States by Lincoln
Life. Reinsurance sells reinsurance products and services to
insurance companies, HMOs, self-funded employers and other
primary risk accepting organizations in the U.S. and econom-
ically attractive international markets. Effective in the
fourth quarter of 1995, operating results of the direct dis-
ability income business previously included in the Life In-
surance and Annuities segment is now included in the Rein-
surance segment. This direct disability income business,
which is no longer being sold, is now managed by the Rein-
surance segment along with its disability income business.
Prior to the sale of 100% of the ownership of its primary
underwriter of employee life-health benefit coverages in
1994 (see Note 10), the Employee Life-Health Benefits seg-
ment distributed group life and health insurance, managed
health care and other related coverages through career
agents and independent general agencies. Activity which is
not included in the major business segments is shown as
"Other Operations."
"Other Operations" includes operations not directly related
to the business segments and unallocated corporate items
(i.e., corporate investment income, interest expense on cor-
porate debt and unallocated corporate overhead expenses).
G-28
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
9.SEGMENT INFORMATION CONTINUED
The revenue, pre-tax income and assets by segment for 1993
through 1995 are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
---------------------------
(in millions)
-----------------------------
<S> <C> <C> <C>
Revenue:
. Life Insurance and Annuities $ 2,569.2 $ 2,065.3 $ 2,341.9
---------------------------------------
. Reinsurance 751.2 660.4 610.7
---------------------------------------
. Employee Life-Health Benefits -- 314.9 1,326.8
---------------------------------------
. Other Operations 16.1 74.6 (28.8)
--------------------------------------- --------- --------- ---------
$ 3,336.5 $ 3,115.2 $ 4,250.6
========= ========= =========
Income (loss) before income taxes and
cumulative effect of accounting change:
. Life Insurance and Annuities $ 361.0 $ 75.6 $ 265.3
---------------------------------------
. Reinsurance 83.5 93.9 31.6
---------------------------------------
. Employee Life-Health Benefits -- 22.9 83.0
---------------------------------------
. Other Operations 5.0 67.8 (44.2)
--------------------------------------- --------- --------- ---------
$ 449.5 $ 260.2 $ 335.7
========= ========= =========
Assets:
. Life Insurance and Annuities $45,280.0 $37,675.9 $36,021.0
---------------------------------------
. Reinsurance 3,383.5 2,311.5 2,328.9
---------------------------------------
. Employee Life-Health Benefits -- -- 588.5
---------------------------------------
. Other Operations 923.6 1,038.1 770.0
--------------------------------------- --------- --------- ---------
$49,587.1 $41,025.5 $39,708.4
========= ========= =========
</TABLE>
Provisions for depreciation and capital additions were not material.
10.SALE OF AFFILIATES
In December 1993, Lincoln Life recorded a provision for loss
of $98,500,000 (also $98,500,000 after-tax) in the "Other
Operations" segment for the sale of Security-Connecticut
Life Insurance Company (Security-Connecticut). The sale was
completed on February 2, 1994 through an initial public of-
fering and Lincoln Life received cash and notes, net of re-
lated expenses, totaling $237,700,000. The loss on sale and
disposal expenses did not differ materially from the esti-
mate recorded in the fourth quarter of 1993. For the year
ended December 31, 1993, Security-Connecticut, which oper-
ated in the Life Insurance and Annuities segment, had reve-
nue of $274,500,000 and net income of $24,000,000.
In 1994, Lincoln Life completed the sale of 100% of the com-
mon stock of EMPHESYS (parent company of Employers Health
Insurance Company, which comprised the Employee Life-Health
Benefits segment) for $348,200,000 of cash, net of related
expenses, and a $50,000,000 promissory note. A gain on sale
of $69,000,000 (also $69,000,000 after-tax) was recognized
in 1994 in "Other Operations". For the year ended December
31, 1993, EMPHESYS had revenues of $1,304,700,000 and net
income of $55,300,000. EMPHESYS had revenue and net income
of $314,900,000 and $14,400,000, respectively, during the
three months of ownership in 1994.
G-29
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Lincoln Life provides services to and receives services from affiliated
companies which resulted in a net receipt of $7,500,000, $13,900,000 and
$18,900,000 in 1995, 1994 and 1993, respectively.
Lincoln Life both cedes and accepts reinsurance from affiliated companies.
Premiums in the accompanying statements of income includes reinsurance
transactions with affiliated companies as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1995 1994
---------
(in millions)
---------
<S> <C> <C>
Insurance assumed $ 17.6 $ 19.8
-----------------
Insurance ceded 214.4 481.3
-----------------
</TABLE>
The balance sheets include reinsurance balances with affiliated companies
as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
-----------------------------------------------
(in millions)
-----------------------------------------------
<S> <C> <C>
Future policy benefits and claims assumed $ 344.8 $341.3
---------------------------------------------------
Future policy benefits and claims ceded 1,344.5 857.7
---------------------------------------------------
Amounts recoverable on paid and unpaid losses 65.9 36.8
---------------------------------------------------
Reinsurance payable on paid losses 5.5 3.5
---------------------------------------------------
Funds held under reinsurance treaties-net liability 712.3 238.4
---------------------------------------------------
</TABLE>
Substantially all reinsurance ceded to affiliated companies is with unau-
thorized companies. To take a reserve credit for such reinsurance, Lincoln
Life holds assets from the reinsurer, including funds held under reinsur-
ance treaties, and is the beneficiary on letters of credit aggregating
$340,800,000 and $308,200,000 at December 31, 1995 and 1994, respectively.
At December 31, 1995 and 1994, LNC had guaranteed $275,300,000 and
$298,200,000, respectively, of these letters of credit. At December 31,
1995, Lincoln Life has a receivable (included in the foregoing amounts)
from affiliated insurance companies in the amount of $241,900,000 for stat-
utory surplus relief received under financial reinsurance ceded agreements.
11.SUBSEQUENT EVENT
In January 1996, LNC announced that it had signed a definitive agreement to
acquire the group tax-sheltered annuity business of UNUM Corporation's af-
filiates. This purchase is expected to be completed in the form of a rein-
surance transaction with an initial ceding commission of approximately
$70,000,000. This ceding commission represents the present value of busi-
ness in-force and, accordingly, will be classified as other intangible as-
sets upon the close of this transaction. This transaction, which is ex-
pected to close in the third quarter of 1996, will increase LNC's assets
and policy liabilities and accruals by approximately $3,200,000,000.
12.TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Financial Group, Inc. ("LFGI"),
has a nearly exclusive general agents contract with Lincoln Life under
which it sells Lincoln Life's products and provides the service that other-
wise would be provided by a home office marketing department and regional
offices. For providing these selling and marketing services, Lincoln Life
paid LFGI override commissions and operating expense allowances of
$81,900,000, $78,500,000 and $74,500,000 in 1995, 1994 and 1993, respec-
tively. LFGI incurred expenses of $10,400,000, $10,700,000 and $10,500,000
in 1995, 1994 and 1993, respectively, in excess of the override commission
and operating expense allowances received from Lincoln Life, which Lincoln
Life is not required to reimburse.
Cash and invested cash at December 31, 1995 and 1994 include Lincoln Life's
participation in a short-term investment pool with LNC of $333,800,000 and
$428,300,000, respectively. Related investment income amounted to
$22,500,000, $17,100,000 and $9,100,000 in 1995, 1994 and 1993, respective-
ly. Short-term debt at December 31, 1995 and 1994 includes $67,000,000 and
$68,600,000, respectively, borrowed from LNC. Lincoln Life paid interest to
LNC of $24,000, $8,000 and $137,000 in 1995, 1994 and 1993, respectively.
G-30
<PAGE>
FINANCIAL SCHEDULES
The following consolidated financial statement schedules of
Lincoln National Life Insurance Company and subsidiaries are
included on pages G-32 through G-36:
I. Summary of Investments--Other than Investments in Related
Parties -- December 31, 1995
III. Supplementary Insurance Information Years ended Decem-
ber 31, 1995, 1994 and 1993
IV. Reinsurance -- Years ended December 31, 1995, 1994 and
1993
V. Valuation and Qualifying Accounts -- Years ended December
31, 1995, 1994 and 1993
All other schedules for which provision is made in the ap-
plicable accounting regulation of the Securities and Ex-
change Commission are not required under the related in-
structions, are inapplicable or the required information is
included in the consolidated financial statements, and
therefore have been omitted.
G-31
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS --
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1995
<TABLE>
<CAPTION>
Column A Column B Column C Column D
- ------------------------------------------------------------------------------
Amount at
which shown
in the
balance
Type of Investment Cost Value sheet
- ------------------------------------------------------------------------------
(000's omitted)
-----------------------------------
<S> <C> <C> <C>
Fixed maturity securities available-
for-sale:
Bonds:
. United States Government and
government agencies and authorities $ 569,552 $ 653,444 $ 653,444
--------------------------------------
. States, municipalities and political
subdivisions 12,325 12,375 12,375
--------------------------------------
. Mortgage-backed securities 4,891,521 5,184,751 5,184,751
--------------------------------------
. Foreign governments 927,901 997,567 997,567
--------------------------------------
. Public utilities 2,572,309 2,772,990 2,772,990
--------------------------------------
. Convertibles and bonds with warrants
attached 181,431 199,658 199,658
--------------------------------------
. All other corporate bonds 9,658,371 10,551,770 10,551,770
--------------------------------------
Redeemable preferred stocks 39,427 42,230 42,230
-------------------------------------- ----------- ----------- -----------
Total fixed maturity securities 18,852,837 20,414,785 20,414,785
- ---------------------------------------
Equity securities available-for-sale:
Common stocks:
. Public utilities 8,980 10,989 10,989
--------------------------------------
. Banks, trust and insurance companies 74,897 89,197 89,197
--------------------------------------
. Industrial, miscellaneous and all
other 345,434 436,556 436,556
--------------------------------------
Nonredeemable preferred stocks 50,950 61,693 61,693
-------------------------------------- ----------- ----------- -----------
Total equity securities 480,261 598,435 598,435
- ---------------------------------------
Mortgage loans on real estate 3,176,275 3,147,783(A)
Real estate:
. Investment properties 635,135 635,135
--------------------------------------
. Acquired in satisfaction of debt 157,441 110,888(A)
--------------------------------------
Policy loans 565,325 565,325
- ---------------------------------------
Other investments 253,015 241,219(A)
- --------------------------------------- ----------- -----------
Total investments $24,120,189 $25,713,570
- --------------------------------------- =========== ===========
</TABLE>
(A) Investments which are deemed to have declines in value that are other than
temporary are written down or reserved for to reduce their carrying value
to their estimated realizable value.
G-32
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- --------------------------------------------------------------------------------------
Future policy
benefits, Other policy
Deferred claims and claims and
acquisition claim Unearned benefits Premium
Segment costs expenses premiums payable revenue (A)
- --------------------------------------------------------------------------------------
(000's omitted)
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1995:
Life insurance and
annuities $ 713,213 $6,530,475 $ 9,145 $-- $ 685,258
----------------------
Reinsurance 247,921 1,855,039 45,951 -- 611,416
----------------------
Other (including
consolidating
adjustments) (7,300) 49,505 78 -- 622
----------------------
---------- ---------- ------- --- ----------
$ 953,834 $8,435,019 $55,174 $-- $1,297,296
========== ========== ======= === ==========
Year ended December 31,
1994:
Life insurance and
annuities $1,427,692 $5,888,581 $11,201 $-- $ 647,416
----------------------
Reinsurance 304,913 1,626,033 51,618 -- 542,034
----------------------
Employee life-health
benefits -- -- -- -- 299,338
----------------------
Other (including
consolidating
adjustments) 3,921 26,158 (1,347) -- 1,076
----------------------
---------- ---------- ------- --- ----------
$1,736,526 $7,540,772 $61,472 $-- $1,489,864
========== ========== ======= === ==========
Year ended December 31,
1993:
Life insurance and
annuities $ 999,126 $6,782,207 $ 5,188 $-- $ 662,353
----------------------
Reinsurance 298,787 1,616,088 54,157 -- 491,397
----------------------
Employee life-health
benefits -- 228,892 -- -- 1,243,576
----------------------
Other (including
consolidating
adjustments) -- 171,043 315 -- 387
----------------------
---------- ---------- ------- --- ----------
$1,297,913 $8,798,230 $59,660 $-- $2,397,713
========== ========== ======= === ==========
</TABLE>
(A) Includes insurance fees on universal life and other interest sensitive
products.
G-33
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION CONTINUED
<TABLE>
<CAPTION>
Column A Column G Column H Column I Column J Column K
- -------------------------------------------------------------------------------------------
Amortization
Benefits, claims of deferred Other
Net investment and claim acquisition operating Premium
Segment income (B) expenses costs expenses (B) written
- -------------------------------------------------------------------------------------------
(000's omitted)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1995:
Life insurance and
annuities $1,741,231 $1,649,119 $298,020 $261,016 $ --
----------------------
Reinsurance 134,000 472,198 101,729 93,750 --
----------------------
Other (including
consolidating
adjustments) 24,399 1,299 -- 9,898 --
---------------------- ---------- ---------- -------- -------- -----
$1,899,630 $2,122,616 $399,749 $364,664 $ --
========== ========== ======== ======== =====
Year ended December 31,
1994:
Life insurance and
annuities $1,542,552 $1,554,479 $ 85,697 $349,529 $ --
----------------------
Reinsurance 116,957 419,266 29,477 117,238 --
----------------------
Employee life-health
benefits (C) 10,838 218,672 -- 73,355 --
----------------------
Other (including
consolidating
adjustments) 3,634 1,630 -- 5,682 --
---------------------- ---------- ---------- -------- -------- -----
$1,673,981 $2,194,047 $115,174 $545,804 $ --
========== ========== ======== ======== =====
Year ended December 31,
1993:
Life insurance and
annuities $1,676,163 $1,615,883 $197,363 $268,066 $ --
----------------------
Reinsurance 115,582 467,824 38,351 72,840 --
----------------------
Employee life-health
benefits 54,513 943,235 -- 300,648 --
----------------------
Other (including
consolidating
adjustments) (22,799) 6,197 5,275 (744) --
---------------------- ---------- ---------- -------- -------- -----
$1,823,459 $3,033,139 $240,989 $640,810 $ --
========== ========== ======== ======== =====
</TABLE>
(B) The allocation of expenses between investments and other operations are
based on a number of assumptions and estimates. Results would change if
different methods were applied.
(C) Includes data through the March 21, 1994 date of sale of the direct writer
of employee life-health coverages.
G-34
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE (A)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- --------------------------------------------------------------------------------------
Percentage
Ceded Assumed of amount
Gross to other from other assumed to
Segment amount companies companies Net amount net
- --------------------------------------------------------------------------------------
(000's omitted)
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1995:
Life insurance in force $ 51,570,782 $17,612,782 $142,794,000 $176,752,000 80.8%
-----------------------
Premiums:
-----------------------
Health insurance 302,463 299,222 273,572 276,813 98.8
----------------------
Life insurance (B) 658,936 142,523 504,070 1,020,483 49.4
---------------------- ------------ ----------- ------------ ------------
$ 961,399 $ 441,745 $ 777,642 $ 1,297,296
============ =========== ============ ============
Year ended December 31,
1994:
Life insurance in force $ 79,802,000 $45,822,000 $125,640,000 $159,620,000 78.7%
-----------------------
Premiums:
-----------------------
Health insurance 666,609 496,090 359,659 530,178 67.8
----------------------
Life insurance (B) 629,185 220,678 551,179 959,686 57.4
---------------------- ------------ ----------- ------------ ------------
$ 1,295,794 $ 716,768 $ 910,838 $ 1,489,864
============ =========== ============ ============
Year ended December 31,
1993:
Life insurance in force $135,401,000 $61,401,000 $109,257,000 $183,257,000 59.6%
-----------------------
Premiums:
-----------------------
Health insurance 1,387,414 217,705 262,171 1,431,880 18.3
----------------------
Life insurance (B) 771,408 350,907 545,332 965,833 56.5
---------------------- ------------ ----------- ------------ ------------
$ 2,158,822 $ 568,612 $ 807,503 $ 2,397,713
============ =========== ============ ============
</TABLE>
(B) Includes insurance fees on universal life and other interest sensitive
products.
G-35
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE CO. AND SUBSIDIARIES
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ---------------------------------------------------------------------------------
Additions
-----------------------
(1) (2)
Charged to
Balance at Charged other Deductions- Balance
beginning to costs and accounts- describe at end of
Description of period expenses (A) describe (B) period
- ---------------------------------------------------------------------------------
(000's omitted)
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1995:
Deducted from asset
accounts:
. Reserve for mortgage
loans
on real estate $ 56,614 $ 2,659 $ -- $ (30,781) $ 28,492
-----------------------
. Reserve for real
estate 65,186 (7,227) -- (11,406) 46,553
-----------------------
. Reserve for other
long-term investments 13,492 (1,541) -- (155) 11,796
-----------------------
Year ended December 31,
1994:
Deducted from asset
accounts:
. Reserve for mortgage
loans
on real estate $220,671 $ 19,464 $ -- $(183,521) $ 56,614
-----------------------
. Reserve for real
estate 121,427 13,058 -- (69,299) 65,186
-----------------------
. Reserve for other
long-term investments 26,730 262 -- (13,500) 13,492
-----------------------
Included in other
liabilities:
Investment guarantees 1,804 4,280 -- (6,084) --
-----------------------
Year ended December 31,
1993:
Deducted from asset
accounts:
. Reserve for mortgage
loans
on real estate $129,093 $136,717 $ -- $ (45,139) $220,671
-----------------------
. Reserve for real
estate 114,178 21,776 -- (14,527) 121,427
-----------------------
. Reserve for other
long-term investments 31,582 3,905 -- (8,757) 26,730
-----------------------
Included in other
liabilities:
Investment guarantees 12,550 1,674 -- (12,420) 1,804
-----------------------
</TABLE>
(A) Exclude charges for the direct write-off of assets. The negative amounts
represent improvements in the underlying assets for which valuation ac-
counts had previously been established.
(B) Deductions reflect sales or foreclosures of the underlying holdings.
G-36
<PAGE>
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Board of Directors
Lincoln National Life Insurance Company
We have audited the accompanying consolidated balance sheets
of Lincoln National Life Insurance Co., a wholly owned sub-
sidiary of Lincoln National Corp., as of December 31, 1995
and 1994, and the related consolidated statements of income,
shareholder's equity and cash flows for each of the three
years in the period ended December 31, 1995. Our audits also
included the financial statement schedules listed on page G-
31. These financial statements and schedules are the respon-
sibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally ac-
cepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the fi-
nancial statements. An audit also includes assessing the ac-
counting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Lincoln National Life Insurance Co. at
December 31, 1995 and 1994, and the consolidated result of
its operations and its cash flows for each of the three
years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when
considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects
the information set forth therein.
As discussed in Note 2 to the consolidated financial state-
ments, in 1993 the Company changed its method of accounting
for postretirement benefits other than pensions, accounting
for impairment of loans and accounting for certain invest-
ments in debt and equity securities.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
February 7, 1996
G-37
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS--STATUTORY BASIS
<TABLE>
<CAPTION>
December 31
1996 1995
--------- ---------
(in millions)
--------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $19,389.6 $17,729.7
- -------------------------------------------------------------------------------------------------------
Preferred stocks 239.7 89.9
- -------------------------------------------------------------------------------------------------------
Unaffiliated common stocks 358.3 535.5
- -------------------------------------------------------------------------------------------------------
Affiliated common stocks 241.5 193.0
- -------------------------------------------------------------------------------------------------------
Mortgage loans on real estate 2,976.7 2,909.7
- -------------------------------------------------------------------------------------------------------
Real estate 621.3 655.2
- -------------------------------------------------------------------------------------------------------
Policy loans 626.5 515.8
- -------------------------------------------------------------------------------------------------------
Other investments 282.7 248.0
- -------------------------------------------------------------------------------------------------------
Cash and short-term investments 759.2 780.9
- ----------------------------------------------------------------------------------- --------- ---------
Total cash and investments 25,495.5 23,657.7
- -------------------------------------------------------------------------------------------------------
Premiums and fees in course of collection 60.9 17.1
- -------------------------------------------------------------------------------------------------------
Accrued investment income 343.6 342.5
- -------------------------------------------------------------------------------------------------------
Funds withheld by ceding companies 25.8 595.3
- -------------------------------------------------------------------------------------------------------
Other admitted assets 355.7 217.7
- -------------------------------------------------------------------------------------------------------
Separate account assets 23,735.1 18,461.6
- ----------------------------------------------------------------------------------- --------- ---------
Total admitted assets $50,016.6 $43,291.9
- ----------------------------------------------------------------------------------- ========= =========
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $ 5,954.0 $ 5,713.3
- -------------------------------------------------------------------------------------------------------
Other policyholder funds 17,262.4 15,598.5
- -------------------------------------------------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 250.2 499.3
- -------------------------------------------------------------------------------------------------------
Funds held under reinsurance treaties 564.6 1,053.5
- -------------------------------------------------------------------------------------------------------
Asset valuation reserve 375.5 270.0
- -------------------------------------------------------------------------------------------------------
Interest maintenance reserve 76.7 116.3
- -------------------------------------------------------------------------------------------------------
Other liabilities 490.9 391.3
- -------------------------------------------------------------------------------------------------------
Federal income taxes 4.3 3.2
- -------------------------------------------------------------------------------------------------------
Net transfers due from separate accounts (659.7) (548.0)
- -------------------------------------------------------------------------------------------------------
Separate account liabilities 23,735.1 18,461.6
- ----------------------------------------------------------------------------------- --------- ---------
Total liabilities 48,054.0 41,559.0
- -------------------------------------------------------------------------------------------------------
CAPITAL AND SURPLUS:
Common stock, $2.50 par value:
Authorized, issued and outstanding shares--10 million (owned by Lincoln National
Corporation) 25.0 25.0
- -------------------------------------------------------------------------------------------------------
Paid-in surplus 883.4 783.4
- -------------------------------------------------------------------------------------------------------
Unassigned surplus 1,054.2 924.5
- ----------------------------------------------------------------------------------- --------- ---------
Total capital and surplus 1,962.6 1,732.9
- ----------------------------------------------------------------------------------- --------- ---------
Total liabilities and capital and surplus $50,016.6 $43,291.9
- ----------------------------------------------------------------------------------- ========= =========
</TABLE>
See accompanying notes.
S-1
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF INCOME--STATUTORY BASIS
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
-----------------------
(in millions)
--------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $7,268.5 $4,899.1 $5,648.7
- -------------------------------------------------------------------------------
Net investment income 1,756.3 1,772.2 1,606.8
- -------------------------------------------------------------------------------
Amortization of interest maintenance reserve 27.2 34.0 9.8
- -------------------------------------------------------------------------------
Commissions and expense allowances on reinsurance
ceded 90.9 98.3 145.0
- -------------------------------------------------------------------------------
Expense charges on deposit funds 100.7 83.2 70.5
- -------------------------------------------------------------------------------
Other income 16.8 14.5 15.6
- --------------------------------------------------- -------- -------- --------
Total revenues 9,260.4 6,901.3 7,496.4
- -------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 5,989.9 4,184.0 5,071.6
- -------------------------------------------------------------------------------
Underwriting, acquisition, insurance and other
expenses 2,878.5 2,345.7 2,136.1
- --------------------------------------------------- -------- -------- --------
Total benefits and expenses 8,868.4 6,529.7 7,207.7
- --------------------------------------------------- -------- -------- --------
Gain from operations before dividends to
policyholders, income taxes and net realized gain
on investments 392.0 371.6 288.7
- -------------------------------------------------------------------------------
Dividends to policyholders 27.3 27.3 18.0
- --------------------------------------------------- -------- -------- --------
Gain from operations before federal income taxes
and net realized gain on investments 364.7 344.3 270.7
- -------------------------------------------------------------------------------
Federal income taxes 83.6 103.7 52.8
- --------------------------------------------------- -------- -------- --------
Gain from operations before net realized gain on
investments 281.1 240.6 217.9
- -------------------------------------------------------------------------------
Net realized gain on investments, net of income tax
expense (benefits) [1996--$28.5; 1995--$48.1;
1994--$(178.1)] and excluding net transfers to
(from) the interest maintenance reserve [1996--
$(12.4); 1995--$94.9; 1994--$(147.1)] 53.3 43.9 124.0
- --------------------------------------------------- -------- -------- --------
Net income $ 334.4 $ 284.5 $ 341.9
- --------------------------------------------------- ======== ======== ========
</TABLE>
See accompanying notes.
S-2
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS--STATUTORY BASIS
<TABLE>
<CAPTION>
Year
ended
December
31
1996 1995 1994
-------- -------- --------
(in millions)
----------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $1,732.9 $1,679.6 $1,302.5
- ----------------------------------------------------------------
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income 334.4 284.5 341.9
- ----------------------------------------------------------------
Differences in cost and admitted investment amounts 38.6 143.2 (123.3)
- ----------------------------------------------------------------
Nonadmitted assets (3.0) 2.9 (3.2)
- ----------------------------------------------------------------
Regulatory liability for reinsurance 0.6 (2.0) (1.1)
- ----------------------------------------------------------------
Life policy reserve valuation basis (0.4) 2.9 (1.3)
- ----------------------------------------------------------------
Asset valuation reserve (105.5) (112.5) 83.8
- ----------------------------------------------------------------
Mortgage loan, real estate and other investment reserves -- 2.2 218.6
- ----------------------------------------------------------------
Paid-in surplus 100.0 15.1 --
- ----------------------------------------------------------------
Separate account receivable due to change in valuation -- 27.0 --
- ----------------------------------------------------------------
Accounting for separate account contracts -- -- (13.3)
- ----------------------------------------------------------------
Dividends to shareholder (135.0) (310.0) (125.0)
- ---------------------------------------------------------------- -------- -------- --------
Capital and surplus at end of year $1,962.6 $1,732.9 $1,679.6
- ---------------------------------------------------------------- ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
S-3
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS--STATUTORY BASIS
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
----------------------------------
(in millions)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 8,059.4 $ 5,430.9 $ 5,654.5
- -------------------------------------------------------------------------------------
Allowances and reserve adjustments received (paid) on
reinsurance ceded (767.5) (383.6) 137.1
- -------------------------------------------------------------------------------------
Investment income received 1,700.6 1,713.2 1,588.5
- -------------------------------------------------------------------------------------
Benefits paid (4,050.4) (3,239.6) (3,054.1)
- -------------------------------------------------------------------------------------
Insurance expenses paid (2,972.2) (2,513.5) (2,542.5)
- -------------------------------------------------------------------------------------
Federal income taxes recovered (paid) (72.3) 38.4 (191.8)
- -------------------------------------------------------------------------------------
Dividends to policyholders (27.7) (16.5) (18.4)
- -------------------------------------------------------------------------------------
Other income received and expenses paid, net 6.3 14.4 59.2
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Net cash provided by operating activities 1,876.2 1,043.7 1,632.5
- -------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 12,542.0 13,183.9 11,877.0
- -------------------------------------------------------------------------------------
Purchase of investments (14,175.4) (14,049.6) (12,871.8)
- -------------------------------------------------------------------------------------
Other uses (266.5) (64.0) (123.4)
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Net cash used in investing activities (1,899.9) (929.7) (1,118.2)
- -------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in 100.0 15.1 --
- -------------------------------------------------------------------------------------
Proceeds from borrowings 100.0 63.0 63.0
- -------------------------------------------------------------------------------------
Repayment of borrowings (63.0) (63.0) (60.0)
- -------------------------------------------------------------------------------------
Dividends paid to shareholder (135.0) (310.0) (125.0)
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Net cash provided by (used in) financing activities 2.0 (294.9) (122.0)
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Net increase (decrease) in cash and short-term investments (21.7) (180.9) 392.3
- -------------------------------------------------------------------------------------
Cash and short-term investments at beginning of year 780.9 961.8 569.5
- -------------------------------------------------------------------------------------
---------- ---------- ----------
Cash and short-term investments at end of year $ 759.2 $ 780.9 $ 961.8
- -------------------------------------------------------------------------------------
========== ========== ==========
</TABLE>
See accompanying notes.
S-4
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS
1.SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
The Lincoln National Life Insurance Company ("Company") is a wholly owned
subsidiary of Lincoln National Corporation ("LNC") and is domiciled in In-
diana. As of December 31, 1996, the Company owns 100% of the outstanding
common stock of four insurance company subsidiaries: First Penn-Pacific
Life Insurance Company, Lincoln National Health & Casualty Insurance Compa-
ny, Lincoln National Reassurance Company and Lincoln Life & Annuity Company
of New York.
The Company's principal business consist of underwriting annuities, depos-
it-type contracts, life and health insurance through multiple distribution
channels and the reinsurance of individual and group life and health busi-
ness. The Company is licensed and sells its products in 49 states, Canada
and several U.S. territories.
USE OF ESTIMATES
The preparation of financial statements requires management to make esti-
mates and assumptions that affect amounts reported in the financial state-
ments and accompanying notes. Such estimates and assumptions could change
in the future as more information becomes known, which could impact the
amounts reported and disclosed herein.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Indiana Department of
Insurance, which practices differ from generally accepted accounting prin-
ciples ("GAAP"). The more significant variances from GAAP are as follows:
INVESTMENTS
Bonds are reported at cost or amortized cost or market value based on their
National Association of Insurance Commissioners ("NAIC") rating. For GAAP,
the Company's bonds are classified as available-for-sale and, accordingly,
are reported at fair value with changes in the fair values reported di-
rectly in shareholder's equity after adjustments for related amortization
of deferred acquisition costs, additional policyholder commitments and de-
ferred income taxes.
Investments in real estate are reported net of related obligation rather
than on a gross basis.
Changes between cost and admitted asset investment amounts are credited or
charged directly to unassigned surplus rather than to a separate surplus
account.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized capital gains and losses on sales of fixed income investments,
principally bonds and mortgage loans, attributable to changes in the gen-
eral level of interest rates and amortizes those deferrals over the remain-
ing period to maturity of the individual security sold. The net deferral is
reported as the interest maintenance reserve in the accompanying balance
sheets. Realized capital gains and losses are reported in income net of
federal income tax and transfers to the interest maintenance reserve. The
asset valuation reserve is determined by an NAIC prescribed formula and is
reported as a liability rather than unassigned surplus. Under GAAP, real-
ized capital gains and losses are reported in the income statement on a
pre-tax basis in the period that the asset giving rise to the gain or loss
is sold and valuation allowances are provided when there has been a decline
in value deemed other than temporary, in which case, the provision for such
declines are charged to income.
SUBSIDIARIES
The accounts and operations of the Company's subsidiaries are not consoli-
dated with the accounts and operations of the Company as would be required
by GAAP. Under statutory accounting principles, the Company's subsidiaries
are carried at their statutory-basis net equity.
POLICY ACQUISITION COSTS
The costs of acquiring and renewing business are expensed when incurred.
Under GAAP, acquisition costs related to traditional life insurance, to the
extent recoverable from future policy revenues, are deferred and amortized
over the premium-paying period of the related policies using assumptions
consistent with those used in computing policy benefit reserves. For uni-
versal life insurance, annuity and other investment-type products, deferred
policy acquisition costs, to the extent recoverable from future gross prof-
its, are amortized generally in proportion to the present value of expected
gross profits from surrender charges and investment, mortality and expense
margins.
NONADMITTED ASSETS
Certain assets designated as "nonadmitted," principally furniture and
equipment and certain receivables, are excluded from the accompanying bal-
ance sheets and are charged directly to unassigned surplus.
PREMIUMS
Premiums and deposits with respect to universal life policies and annuity
and other investment-type contracts are reported as premium revenues;
whereas, under GAAP, such premiums and deposits are treated as liabilities
and policy charges represent revenues.
S-5
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
INCOME TAXES
Deferred income taxes are not provided for differences between financial
statement amounts and tax bases of assets and liabilities.
POLICYHOLDER DIVIDENDS
Policyholder dividends are recognized when declared rather than over the
term of the related policies.
Other significant accounting practices are as follows:
INVESTMENTS
The discount or premium on bonds is amortized using the interest method.
For mortgage-backed bonds, the Company recognizes income using a constant
effective yield based on anticipated prepayments and the estimated economic
life of the securities. When actual prepayments differ significantly from
anticipated prepayments, the effective yield is recalculated to reflect ac-
tual payments to date and anticipated future payments. The net investment
in the securities is adjusted to the amount that would have existed had the
new effective yield been applied since the acquisition of the securities.
Short-term investments include investments with maturities of less than one
year at the date of acquisition. The carrying amounts for these investments
approximate their fair values.
Preferred stocks are reported at cost or amortized cost.
Common stocks are reported at market value as determined by the Securities
Valuation Office of the NAIC and the related unrealized gains (losses) are
reported in unassigned surplus without adjustment for federal income taxes.
Policy loans are reported at unpaid balances.
The Company uses various derivative instruments as part of its overall lia-
bility-asset management program for certain investments and life insurance
and annuity products. The Company values all derivative instruments on a
basis consistent with that of the hedged item. Upon termination, gains and
losses on those instruments are included in the carrying values of the un-
derlying hedged items and are amortized over the remaining lives of the
hedged items as adjustments to investment income or benefits from the
hedged items. Any unamortized gains or losses are recognized when the un-
derlying hedged items are sold.
Mortgage loans on real estate are reported at unpaid balances, less allow-
ances for impairments. Real estate is reported at depreciated cost. As of
June 30, 1994, the Company changed its method of accounting for reserves on
impaired real estate and mortgage loans. The impaired investment is now
shown on a pre-tax basis as a nonadmitted asset. Previously, these reserves
were presented as a liability, net of related tax benefits, to approximate
the impact on surplus if losses were realized.
Realized investment gains and losses on investments sold are determined us-
ing the specific identification method. Changes in admitted asset carrying
amounts of
1.SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES CONTINUED
BENEFIT RESERVES
Certain policy reserves are calculated based on statutorily required inter-
est and mortality assumptions rather than on estimated expected experience
or actual account balances as would be required under GAAP.
Death benefits paid, policy and contract withdrawals, and the change in
policy reserves on universal life policies, annuity and other investment-
type contracts are reported as benefits and settlement expenses; in the ac-
companying statement of income, whereas, under GAAP, withdrawals are
treated as a reduction of the policy or contract liabilities and benefits
would represent the excess of benefits paid over the policy account value
and interest credited to the account values.
REINSURANCE
Premiums, claims and policy benefits and contract liabilities are reported
in the accompanying financial statements net of reinsurance amounts. For
GAAP, all assets and liabilities related to reinsurance ceded contracts are
reported on a gross basis.
A liability for reinsurance balances has been provided for unsecured policy
and contract liabilities and unearned premiums ceded to reinsurers not au-
thorized by the Indiana Department of Insurance to assume such business.
Changes to those amounts are credited or charged directly to unassigned
surplus. Under GAAP, an allowance for amounts deemed uncollectible is es-
tablished through a charge to income.
Commissions on business ceded are reported as income when received rather
than deferred and amortized with deferred policy acquisition costs.
Certain reinsurance contracts meeting risk transfer requirements under
statutory-basis accounting practices have been accounted for using tradi-
tional reinsurance accounting whereas such contracts would be accounted for
using deposit accounting under GAAP.
POSTRETIREMENT BENEFITS
For purposes of calculating the Company's postretirement benefit obliga-
tion, only vested employees and current retirees are included in the valua-
tion. Under GAAP, active employees not currently eligible would also be in-
cluded.
S-6
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Unpaid claims and claim adjustment expenses on accident and health policies
represent the estimated ultimate net cost of all reported and unreported
claims incurred during the year. The Company does not discount claims and
claim adjustment expense reserves. The reserves for unpaid claims and claim
adjustment expenses are estimated using individual case-basis valuations
and statistical analyses. Those estimates are subject to the effects of
trends in claim severity and frequency. Although considerable variability
is inherent in such estimates, management believes that the reserves for
claims and claim adjustment expenses are adequate. The estimates are con-
tinually reviewed and adjusted as necessary as experience develops or new
information becomes known; such adjustments are included in current opera-
tions.
REINSURANCE CEDED AND ASSUMED
Reinsurance premiums and claims and claim adjustment expenses are accounted
for on bases consistent with those used in accounting for the original pol-
icies issued and the terms of the reinsurance contracts. Certain business
is transacted on a funds withheld basis and investment income on funds
withheld are reported in net investment income.
PENSION BENEFITS
Costs associated with the Company's defined benefit pension plans is sys-
tematically accrued during the expected period of active service of the
covered employees.
INCOME TAXES
The Company and eligible subsidiaries have elected to file consolidated
federal and state income tax returns with LNC. Pursuant to an intercompany
tax sharing agreement with LNC, the Company provides for income taxes on a
separate return filing basis. The tax sharing agreement also provides that
the Company will receive benefit for net operating losses, capital losses
and tax credits which are not usable on a separate return basis to the ex-
tent such items may be utilized in the consolidated income tax returns of
LNC.
STOCK OPTIONS
The Company recognizes compensation expense for its stock option incentive
plans using the intrinsic value method of accounting. Under the terms of
the intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of LNC's common stock at the grant date, or other mea-
surement date, over the amount an employee must pay to acquire the stock.
ASSETS HELD IN SEPARATE ACCOUNTS AND LIABILITIES RELATED TO SEPARATE
ACCOUNTS
These assets and liabilities represent segregated funds administered and
invested by LNC's insurance subsidiaries for the exclusive benefit of pen-
sion and variable life and annuity contractholders. The fees received by
the Company for administrative and contractholder maintenance services per-
formed for these separate accounts are included in the Company's statements
of income.
1.SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES CONTINUED
bonds, mortgage loans and common and preferred stocks are credited or
charged directly in unassigned surplus.
DATA PROCESSING EQUIPMENT
Data processing equipment is reported at depreciated cost, with deprecia-
tion determined on a straight-line basis over five years.
GOODWILL
Goodwill, which represents the excess of the ceding commission over statu-
tory-basis net assets of business purchased under an assumption reinsurance
agreement, is amortized on a straight-line basis over ten years.
PREMIUMS
Life insurance and annuity premiums are recognized as revenue when due. Ac-
cident and health premiums are earned prorata over the contract term of the
policies.
BENEFITS
Life, annuity and accident and health benefit reserves are developed by ac-
tuarial methods and are determined based on published tables using statuto-
rily specified interest rates and valuation methods that will provide, in
the aggregate, reserves that are greater than or equal to the minimum or
guaranteed policy cash values or the amounts required by the Indiana De-
partment of Insurance. The Company waives deduction of deferred fractional
premiums on the death of life and annuity policy insureds and returns any
premium beyond the date of death, except for policies issued prior to March
1977. Surrender values on policies do not exceed the corresponding benefit
reserves. Additional reserves are established when the results of cash flow
testing under various interest rate scenarios indicate the need for such
reserve. If net premiums exceed the gross premiums on any insurance in-
force, additional reserves are established. Benefit reserves for policies
underwritten on a substandard basis are determined using the multiple table
reserve method.
The tabular interest, tabular less actual reserve released and the tabular
cost have been determined by formula or from the basic data for such items.
Tabular interest funds not involving life contingencies were determined us-
ing the actual interest credited to the funds plus the change in accrued
interest.
Liabilities related to guaranteed investment contracts and policyholder
funds left on deposit with the Company generally are equal to fund balances
less applicable surrender charges.
S-7
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A reconciliation of the Company's net income and capital and surplus deter-
mined on a statutory accounting basis with amounts determined in accordance
with GAAP is as follows:
<TABLE>
<CAPTION>
Capital and Surplus Net Income
-------------------- -----------------------
Year ended December
December 31 31
1996 1995 1996 1995 1994
--------- --------- ------ ------ -------
(in millions)
<S> <C> <C> <C> <C> <C>
Amounts reported on a
statutory basis $ 1,962.6 $ 1,732.9 $334.4 $284.5 $ 341.9
----------------------------
GAAP adjustments:
----------------------------
Deferred policy acquisition
costs and present value of
future profits 1,119.1 850.2 66.7 (63.0) 191.1
----------------------------
Policy and contract
reserves (1,405.3) (1,562.2) (57.1) (55.3) (53.6)
----------------------------
Interest maintenance
reserve 76.7 116.3 (39.7) 60.9 (157.0)
----------------------------
Deferred income taxes (27.4) (122.5) 1.8 38.3 (138.3)
----------------------------
Policyholders' share of
earnings and surplus on
participating business (81.9) (91.9) (.3) .2 (3.0)
----------------------------
Asset valuation reserve 375.5 270.0 -- -- --
----------------------------
Net realized gain (loss) on
investments (72.0) (67.4) 78.7 30.0 47.1
----------------------------
Adjustment to unrealized
gain (loss) 825.2 1,494.0 -- -- --
----------------------------
Nonadmitted assets,
including nonadmitted
investments (7.1) 57.9 -- -- --
----------------------------
Net GAAP adjustments of
subsidiary companies 156.6 131.2 29.9 34.3 48.2
----------------------------
Other, net (99.0) (89.7) (82.6) (7.3) (58.6)
---------------------------- --------- --------- ------ ------ -------
Net increase (decrease) 860.4 985.9 (2.6) 38.1 (124.1)
---------------------------- --------- --------- ------ ------ -------
Amounts on a GAAP basis $ 2,823.0 $ 2,718.8 $331.8 $322.6 $ 217.8
---------------------------- ========= ========= ====== ====== =======
</TABLE>
S-8
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
2.PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory-basis financial statements are prepared in accor-
dance with accounting practices prescribed or permitted by the Indiana De-
partment of Insurance (the "Department"). "Prescribed" statutory accounting
practices include state laws, regulations and general administrative rules,
as well as a variety of publications of the NAIC. "Permitted" statutory ac-
counting practices encompass all accounting practices that are not pre-
scribed; such practices may differ from state to state, may differ from
company to company within a state and may change in the future. The NAIC
currently is in the process of recodifying statutory accounting practices,
the result of which is expected to constitute the only source of "pre-
scribed" statutory accounting practices. Accordingly, that project, which
is expected to be completed in 1998, will likely change, to some extent,
prescribed statutory accounting practices, and may result in changes to the
accounting practices that the Company uses to prepare its statutory-basis
financial statements.
In 1994, the Company received approval from the Department to change its
accounting for surrender charges applicable to separate account liabilities
for variable life and annuity products so that the surrender charges on
these products are recorded as a liability in the separate account finan-
cial statements payable to the Company's general account. In the accompany-
ing financial statements, a corresponding receivable is recorded with the
related income impact recorded in the accompanying statement of operations
as a change in reserves or change in premium and other deposit funds. The
cumulative effect of this change increased 1994 net income by $13,299,000.
The Company has approval from the Department to establish valuation allow-
ances on mortgage loans on real estate in accordance with GAAP, which are
in excess of that prescribed by the NAIC and the Department.
Prior to 1995, the Company has considered certain amounts under modified
coinsurance reinsurance contracts as adjustments to premiums. As such, pol-
icyholder dividends, cash surrender charges and reserve adjustments with
interest thereon and commissions on reinsurance assumed are classified as
premiums, rather than on expense lines, with no net effect on net income or
capital and surplus. On a net-of-ceded basis for the year ended December
31, 1994, this practice resulted in increases to both revenues and expenses
of approximately $600,000,000. In addition, reserve adjustments with inter-
est thereon and commissions on reinsurance ceded were also classified as
premiums, rather than in other revenue classifications. For the year ended
December 31, 1994, this intra-revenue grouping reduced premiums by approxi-
mately $50,000,000. Beginning in 1995, the Company reports modified coin-
surance agreements on a gross basis. This change was made as a result of
communications with the Department. This accounting change had no effect on
income or surplus and prior period amounts have not been restated.
S-9
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
3. INVESTMENTS
The major categories of net investment income are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
-----------------------------------------
(in millions)
--------------------------
<S> <C> <C> <C>
Income:
Bonds $1,442.2 $1,457.4 $1,266.7
--------------------------------------------------------------------------------
Preferred stocks 9.6 6.4 5.8
--------------------------------------------------------------------------------
Unaffiliated common stocks 6.5 5.2 4.4
--------------------------------------------------------------------------------
Affiliated common stocks 9.5 12.6 62.5
--------------------------------------------------------------------------------
Mortgage loans on real estate 269.3 252.0 255.2
--------------------------------------------------------------------------------
Real estate 114.4 110.0 97.4
--------------------------------------------------------------------------------
Policy loans 35.0 32.1 29.7
--------------------------------------------------------------------------------
Other investments 22.4 62.6 121.3
--------------------------------------------------------------------------------
Cash and short-term investments 48.9 53.2 43.3
--------------------------------------------------------------- -------- -------- --------
Total investment income 1,957.8 1,991.5 1,886.3
-----------------------------------------------------------------------------------
Expenses:
Depreciation 25.0 25.9 21.9
--------------------------------------------------------------------------------
Other 176.5 193.4 257.6
--------------------------------------------------------------- -------- -------- --------
Total investment expenses 201.5 219.3 279.5
---------------------------------------------------------------- -------- -------- --------
Net investment income $1,756.3 $1,772.2 $1,606.8
---------------------------------------------------------------- ======== ======== ========
</TABLE>
Nonadmitted accrued investment income at December 31, 1996
and 1995 amounted to $2,500,000 and $11,500,000, respective-
ly, consisting principally of interest on bonds in default
and mortgage loans.
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in bonds are summa-
rized as follows:
<TABLE>
<CAPTION>
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------
(in millions)
-----------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1996:
Corporate $12,548.1 $ 586.5 $ 66.6 $13,068.0
--------------------------------------------------------------
U.S. government 1,088.7 43.2 18.0 1,113.9
--------------------------------------------------------------
Foreign government 1,234.0 105.1 1.4 1,337.7
--------------------------------------------------------------
Mortgage-backed 4,478.4 183.3 27.4 4,634.3
--------------------------------------------------------------
State and municipal 40.4 .1 -- 40.5
-------------------- --------- -------- ------ ---------
$19,389.6 $ 918.2 $113.4 $20,194.4
========= ======== ====== =========
At December 31, 1995:
Corporate $11,642.0 $1,074.7 $ 41.4 $12,675.3
--------------------------------------------------------------
U.S. government 546.4 82.2 -- 628.6
--------------------------------------------------------------
Foreign government 908.0 68.0 .6 975.4
--------------------------------------------------------------
Mortgage-backed 4,628.3 283.2 11.2 4,900.3
--------------------------------------------------------------
State and municipal 5.0 .1 -- 5.1
-------------------- --------- -------- ------ ---------
$17,729.7 $1,508.2 $ 53.2 $19,184.7
========= ======== ====== =========
</TABLE>
S-10
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
3. INVESTMENTS CONTINUED
Fair values for bonds are based on quoted market prices,
where available. For bonds not actively traded, fair values
are estimated using values obtained from independent pricing
services or, in the case of private placements, are esti-
mated by discounting expected future cash flows using a cur-
rent market rate applicable to the coupon rate, credit qual-
ity and maturity of the investments.
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1996, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
Cost or
Amortized Fair
Cost Value
------------------------------
(in millions)
-------------------
<S> <C> <C>
Maturity:
In 1997 $ 358.0 $ 360.1
----------------------------------------------------------------------------------------------
In 1998-2001 3,809.0 3,912.3
----------------------------------------------------------------------------------------------
In 2002-2006 4,760.9 4,917.3
----------------------------------------------------------------------------------------------
After 2006 5,983.3 6,370.4
----------------------------------------------------------------------------------------------
Mortgage-backed securities 4,478.4 4,634.3
--------------------------------------------------------------------------- --------- ---------
Total $19,389.6 $20,194.4
--------------------------------------------------------------------------- ========= =========
</TABLE>
The expected maturities may differ from the contractual ma-
turities in the foregoing table because certain borrowers
may have the right to call or prepay obligations with or
without call or prepayment penalties.
At December 31, 1996, the Company did not have a material
concentration of financial instruments in a single investee,
industry or geographic location.
Proceeds from sales of investments in bonds during 1996,
1995 and 1994 were $10,996,900,000, $12,234,100,000 and
$9,668,300,000, respectively. Gross gains during 1996, 1995
and 1994 of $169,700,000, $225,600,000 and $62,600,000, re-
spectively, and gross losses of $177,000,000, $83,100,000
and $286,800,000, respectively, were realized on those
sales.
At December 31, 1996 and 1995, investments in bonds, with an
admitted asset value of $70,700,000 and $60,700,000, respec-
tively, were on deposit with state insurance departments to
satisfy regulatory requirements.
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in unaffiliated
common stocks and preferred stocks are as follows:
<TABLE>
<CAPTION>
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------
<S> <C> <C> <C> <C>
(in millions)
-------------------------------
At December 31, 1996:
Preferred stocks $239.7 $ 10.5 $ 1.7 $248.5
----------------------------------------------------------
Unaffiliated common stocks 289.9 84.6 16.2 358.3
----------------------------------------------------------
At December 31, 1995:
Preferred stocks 89.9 13.9 .2 103.6
----------------------------------------------------------
Unaffiliated common stocks 438.0 110.0 12.5 535.5
----------------------------------------------------------
</TABLE>
S-11
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
3. INVESTMENTS CONTINUED
The carrying value of affiliated common stocks, representing
their statutory-basis net equity, was $241,500,000 and
$193,000,000 at December 31, 1996 and 1995, respectively.
The cost basis of investments in subsidiaries as of December
31, 1996 and 1995 was $194,000,000 and $123,000,000, respec-
tively.
During 1996, the maximum and minimum lending rates for mort-
gage loans were 10.5% and 6.0%, respectively. At the issu-
ance of a loan, the percentage of loan to value on any one
loan does not exceed 75%. At December 31, 1996, the Company
did not hold any mortgages with interest overdue beyond one
year. At December 31, 1996, the Company's investments in
mortgage loans were subject to $59,700,000 of prior liens.
All properties covered by mortgage loans have fire insurance
at least equal to the excess of the loan over the maximum
loan that would be allowed on the land without the building.
4.FEDERAL INCOME TAXES
The effective federal income tax rate for financial report-
ing purposes differs from the prevailing statutory tax rate
principally due to tax-exempt investment income, dividends-
received tax deductions, differences in policy acquisition
costs and policy and contract liabilities for tax return and
financial statement purposes.
Federal income taxes incurred of $83,600,000, $103,700,000
and $52,800,000 in 1996, 1995 and 1994, respectively, would
be subject to recovery in the event that the Company incurs
net operating losses within three years of the years for
which such taxes were paid.
Prior to 1984, a portion of the Company's current income was
not subject to current income tax, but was accumulated for
income tax purposes in a memorandum account designated as
"policyholders' surplus." The Company's balance in the "pol-
icyholders' surplus" account at December 31, 1983 of
$187,000,000 was "frozen" by the Tax Reform Act of 1984 and,
accordingly, there have been no additions to the accounts
after that date. That portion of current income on which in-
come taxes have been paid will continue to be accumulated in
a memorandum account designated as "shareholder's surplus,"
and is available for dividends to the shareholder without
additional payment of tax by the Company. The December 31,
1996 memorandum account balance for "shareholder's surplus"
was $1,606,000,000. Should dividends to the shareholder ex-
ceed its respective "shareholder's surplus," amounts would
need to be transferred from the "policyholders' surplus" and
would be subject to federal income tax at that time. Under
existing or foreseeable circumstances, the Company neither
expects nor intends that distributions will be made that
will result in any such tax.
5.SUPPLEMENTAL FINANCIAL DATA
The balance sheet caption, "Other Admitted Assets," includes
amounts recoverable from other insurers for claims paid by
the Company, and the balance sheet caption, "Future Policy
Benefits and Claims," has been reduced for insurance ceded
as follows:
<TABLE>
<CAPTION>
December 31
--------------------------
1996 1995 1994
----------------------------------------
(in millions)
----------------------------------------
<S> <C> <C> <C>
Insurance ceded $1,154.5 $1,634.0 $1,721.1
Amounts recoverable from other insurers 16.0 4.4 4.8
</TABLE>
S-12
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
5.SUPPLEMENTAL FINANCIAL DATA CONTINUED
Reinsurance transactions included in the income statement
caption, "Premiums and Deposits," are as follows:
<TABLE>
<CAPTION>
Year ended December
31
1996 1995 1994
--
(in millions)
--------------------
<S> <C> <C> <C>
Insurance assumed $241.3 $667.7 $607.3
-------------------------------
Insurance ceded 193.3 453.1 583.8
------------------------------- ------ ------ ------
Net amount included in premiums $ 48.0 $214.6 $ 23.5
------------------------------- ====== ====== ======
</TABLE>
The income statement caption, "Benefits and Settlement Ex-
penses," is net of reinsurance recoveries of $787,886,200,
$1,407,000,000 and $1,391,100,000 for 1996, 1995 and 1994,
respectively.
Deferred and uncollected life insurance premiums and annuity
considerations included in the balance sheet caption, "Pre-
miums and Fees in Course of Collection," are as follows:
<TABLE>
<CAPTION>
December 31, 1996
-----------------------
Net of
Gross Loading Loading
(in millions)
-----------------------
<S> <C> <C> <C>
Ordinary new business $ 3.9 $1.9 $ 2.0
---------------------
Ordinary renewal 35.1 3.0 32.1
---------------------
Group life 9.4 (.1) 9.5
---------------------
Group annuity -- -- --
--------------------- ------ ---- ------
$ 48.4 $4.8 $ 43.6
====== ==== ======
<CAPTION>
December 31, 1995
-----------------------
Net of
Gross Loading Loading
(in millions)
-----------------------
<S> <C> <C> <C>
Ordinary new business $ 2.5 $1.1 $ 1.4
---------------------
Ordinary renewal (19.1) 2.8 (21.9)
---------------------
Group life 15.8 -- 15.8
---------------------
Group annuity .2 -- .2
--------------------- ------ ---- ------
$ (.6) $3.9 $ (4.5)
====== ==== ======
</TABLE>
The Company has entered into non-exclusive managing general
agent agreements with International Benefit Services Corp.,
HRM Claim Management, Inc. and Pediatrics Insurance Consul-
tants, Inc. to write group life and health business. Direct
premiums written amounted to $26,200,000 $3,800,000 and
$8,600,000 in 1996 and $33,100,000, $10,600,000 and
$8,800,000 in 1995, respectively. During 1996, LNC Adminis-
trative Services entered into a similar agreement with the
Company with direct premiums written amounting to
$6,200,000. Authority granted by the managing general agents
agreements include underwriting, claims adjustment and
claims payment services.
S-13
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
6.ANNUITY RESERVES
At December 31, 1996, the Company's annuity reserves and de-
posit fund liabilities, including separate accounts, that
are subject to discretionary withdrawal with adjustment,
subject to discretionary withdrawal without adjustment and
not subject to discretionary withdrawal provisions are sum-
marized as follows:
<TABLE>
<CAPTION>
Amount Percent
----------------
(in millions)
-------------------
<S> <C> <C>
Subject to discretionary withdrawal with adjustment:
With market value adjustment $ 2,971.8 6.0%
------------------------------------------------------
At book value, less surrender charge 5,228.6 12.0
------------------------------------------------------
At market value 22,703.4 51.0
------------------------------------------------------ ---------- ------
30,903.8 69.0
Subject to discretionary withdrawal without adjustment
at book value with minimal or no charge or adjustment 10,986.4 25.0
------------------------------------------------------
Not subject to discretionary withdrawal 2,601.9 6.0
------------------------------------------------------
---------- ------
Total annuity reserves and deposit fund 44,492.1
liabilities--before reinsurance 100.0%
------------------------------------------------------
======
Less reinsurance 1,848.8
------------------------------------------------------ ----------
Net annuity reserves and deposit fund liabilities,
including separate accounts $42,643.3
------------------------------------------------------ ==========
</TABLE>
7.CAPITAL AND SURPLUS
Life insurance companies are subject to certain Risk-Based
Capital ("RBC") requirements as specified by the NAIC. Under
those requirements, the amount of capital and surplus main-
tained by a life insurance company is to be determined based
on the various risk factors related to it. At December 31,
1996, the Company exceeds the RBC requirements.
The payment of dividends by the Company is limited and can-
not be made except from earned profits. The maximum amount
of dividends that may be paid by life insurance companies
without prior approval of the Indiana Insurance Commissioner
is subject to restrictions relating to statutory surplus and
net gain from operations. In 1997, the Company can pay divi-
dends of $281,100,000 without prior approval of the Indiana
Insurance Commissioner.
8.EMPLOYEE BENEFIT PLANS
Pension plans
LNC maintains funded defined benefit pension plans for most
of its employees and, prior to January 1, 1995, full-time
agents. The benefits for employees are based on total years
of service and the highest 60 months of compensation during
the last 10 years of employment. The benefits for agents
were based on a percentage of each agent's yearly earnings.
The plans are funded by contributions to tax-exempt trusts.
The Company's funding policy is consistent with the funding
requirements of Federal laws and regulations. Contributions
are intended to provide not only the benefits attributed to
service to date, but also those expected to be earned in the
future. Plan assets consist principally of listed equity se-
curities, corporate obligations and government bonds.
All benefits applicable to the funded defined benefit plan
for agents were frozen as of December 31, 1994. The curtail-
ment of this plan did not have a significant effect on net
pension cost for 1994. Effective January 1, 1995, pension
benefits for agents have been provided by a new defined
S-14
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
8.EMPLOYEE BENEFIT PLANS CONTINUED
contribution plan. Contributions to this plan will be based
on 2.3% of an agent's earnings up to the social security
wage base and 4.6% of any excess.
LNC also administers two types of unfunded, non-qualified,
defined benefit plans for certain employees and agents. A
supplemental retirement plan provides employees and agents
defined benefit pension benefits in excess of limits imposed
by Federal tax law. A salary continuation plan provides cer-
tain officers of the Company defined pension benefits based
on years of service and final monthly salary upon death or
retirement.
The status of the funded defined benefit pension plans and
the amounts recognized in the balance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1996
------- 1995
(in millions)
----------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $(156.9) $(146.1)
-------------------------------------------------------------------------
Nonvested benefits (6.0) (7.7)
-------------------------------------------------------------------------
------- -------
Accumulated benefit obligation (162.9) (153.8)
-------------------------------------------------------------------------
Effect of projected future compensation increases (27.9) (28.5)
-------------------------------------------------------------------------
------- -------
Projected benefit obligation (190.8) (182.3)
-------------------------------------------------------------------------
Plan assets at fair value 186.1 173.2
-------------------------------------------------------------------------
------- -------
Projected benefit obligation in excess of plan assets (4.7) (9.1)
-------------------------------------------------------------------------
Unrecognized net loss 4.9 9.3
-------------------------------------------------------------------------
Unrecognized prior service cost 1.4 1.5
-------------------------------------------------------------------------
------- -------
Prepaid pension costs included in other liabilities $ 1.6 $ 1.7
-------------------------------------------------------------------------
======= =======
</TABLE>
The status of the unfunded defined benefit pension plans and
the amounts recognized in the balance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1996
----- 1995
(in
millions)
------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $(6.6) $(6.4)
-------------------------------------------------------------------
Nonvested benefits (.9) (1.1)
-------------------------------------------------------------------
----- -----
Accumulated benefit obligation (7.5) (7.5)
-------------------------------------------------------------------
Effect of projected future compensation increases (1.1) (1.7)
-------------------------------------------------------------------
----- -----
Projected benefit obligation (8.6) (9.2)
-------------------------------------------------------------------
Unrecognized net loss (gain) (.1) .9
-------------------------------------------------------------------
Unrecognized prior service cost .2 .3
-------------------------------------------------------------------
----- -----
Accrued pension costs included in other liabilities $(8.5) $(8.0)
-------------------------------------------------------------------
===== =====
</TABLE>
S-15
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
8.EMPLOYEE BENEFIT PLANS CONTINUED
The determination of the projected benefit obligation for
the defined benefit plans was based on the following assump-
tions:
<TABLE>
<CAPTION>
December 31
1996 1995 1994
---------------------------
<S> <C> <C> <C>
Weighted-average discount rate 7.0% 7.0% 8.0%
----------------------------------------------------------------------
Rate of increase in compensation:
----------------------------------------------------------------------
Salary continuation plan 5.5 6.0 6.5
----------------------------------------------------------------------
All other plans 4.5 5.0 5.0
----------------------------------------------------------------------
Expected long-term rate of return on plan assets 9.0 9.0 9.0
----------------------------------------------------------------------
The components of net pension cost for the defined benefit
pension plans are as follows:
<CAPTION>
Year ended
December 31
1996 1995 1994
---------------------------
<S> <C> <C> <C>
Service cost--benefits earned during the year $ 5.2 $ 4.1 $ 7.9
------------------------------------------------------------------------
Interest cost on projected benefit obligation 12.9 11.9 11.6
------------------------------------------------------------------------
Actual return on plan assets (17.5) (32.0) 4.2
------------------------------------------------------------------------
Net amortization (deferral) 3.1 20.3 (16.7)
------------------------------------------------------------------------ ----- ----- -----
Net pension cost $ 3.7 $ 4.3 $ 7.0
------------------------------------------------------------------------ ===== ===== =====
</TABLE>
401K PLAN
LNC and the Company sponsor contributory defined contribu-
tion plans for eligible employees and agents. The Company's
contributions to the plans are equal to each participant's
pre-tax contribution, not to exceed 6% of base pay, multi-
plied by a percentage ranging from 25% to 150%, which varies
according to certain incentive criteria as determined by
LNC's Board of Directors. Expense for these plans amounted
to $9,300,000, $6,700,000 and $11,200,000 in 1996, 1995 and
1994, respectively.
POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFIT PLANS
LNC sponsors unfunded defined benefit plans that provide
postretirement medical and life insurance benefits to full-
time employees and agents who, depending on the plan, have
worked for the Company 10 to 15 years and attained age 55 to
60. Medical benefits are also available to spouses and other
dependents of employees and agents. For medical benefits,
limited contributions are required from individuals retired
prior to November 1, 1988; contributions for later retirees,
which can be adjusted annually, are based on such items as
years of service at retirement and age at retirement. The
life insurance benefits are noncontributory, although par-
ticipants can elect supplemental contributory benefits.
The status of the postretirement medical and life insur-
ance benefit plans and the amounts recognized in the bal-
ance sheets are as follows:
<TABLE>
<CAPTION>
December 31
1996 1995
--------------------------
(in millions)
--------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $(32.4) $(37.9)
------------------------------------------------------------------------
Fully eligible active plan participants (8.2) (8.7)
------------------------------------------------------------------------ ------ ------
Accumulated postretirement benefit obligation (40.6) (46.6)
------------------------------------------------------------------------
Unrecognized net loss (gain) (7.0) .8
------------------------------------------------------------------------ ------ ------
Accrued plan cost included in other liabilities $(47.6) $(45.8)
------------------------------------------------------------------------ ====== ======
</TABLE>
S-16
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
8.EMPLOYEE BENEFIT PLANS CONTINUED
The components of periodic postretirement benefit cost
are as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1996 1995 1994
---------------------------------
(in millions)
----------------
<S> <C> <C> <C>
Service cost $1.3 $1.1 $1.4
------------------------------------------------------------------------
Interest cost 2.7 3.0 3.1
------------------------------------------------------------------------
Amortized cost (credit) (.5) (.4) .1
------------------------------------------------------------------------ ---- ---- ----
Net periodic postretirement benefit cost $3.5 $3.7 $4.6
------------------------------------------------------------------------ ==== ==== ====
</TABLE>
The calculation of the accumulated postretirement benefit
obligation assumes a weighted-average annual rate of in-
crease in the per capita cost of covered benefits (i.e.,
health care cost trend rate) of 8.5% for 1997. It further
assumes the rate will gradually decrease to 5.0% by 2005 and
remain at that level. The health care cost trend rate as-
sumption has a significant effect on the amounts reported.
For example, increasing the assumed health care cost trend
rates by one percentage point each year would increase the
accumulated postretirement benefit obligation as of December
31, 1996 and 1995 by $1,900,000 and $2,100,000, respective-
ly. The aggregate of the estimated service and interest cost
components of net periodic postretirement benefit cost for
the year ended December 31, 1996 would increase by $184,000.
The calculation assumes a long-term rate of increase in com-
pensation of 4.5% and 5.0% at December 31, 1996 and 1995,
respectively. The weighted-average discount rate used in de-
termining the accumulated postretirement benefit obligation
was 7.0% for both December 31, 1996 and 1995.
9.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES
DISABILITY INCOME POLICIES
The liability for disability income claims net of the related asset for
amounts recoverable from reinsurers at December 31, 1996 and 1995 is a net
liability of $572,000,000 and $503,800,000, respectively. This liability is
based on the assumption that the recent experience will continue in the fu-
ture. If incidence levels or claim termination rates vary significantly
from these assumptions, adjustments to reserves may be required in the fu-
ture. Accordingly, this liability may prove to be deficient or excessive.
However, it is management's opinion that such future development will not
materially affect the financial position of the Company. The Company con-
tinually reviews and updates the level of these reserves.
During the fourth quarter of 1995, the Company completed an in-depth review
of the experience of its disability income business. As a result of this
study, and based on the assumption that recent experience will continue in
the future, net income decreased by $15,200,000 as a result of strengthen-
ing the disability income reserve.
MARKETING AND COMPLIANCE ISSUES
Regulators continue to focus on market conduct and compliance issues. Under
certain circumstances companies operating in the insurance and financial
services markets have been held responsible for providing incomplete or
misleading sales materials and for replacing existing policies with poli-
cies that were less advantageous to the policyholder. The Company's manage-
ment continues to monitor the Company's sales materials and compliance pro-
cedures and is making an extensive effort to minimize any potential liabil-
ity. However, due to the uncertainty surrounding such matters, it is not
possible to provide a meaningful estimate of the range of potential out-
comes at this time.
GROUP PENSION ANNUITIES
The liabilities for guaranteed interest and group pension annuity con-
tracts, which are no longer being sold by the Company, are supported by a
single portfolio of assets that attempts to match the duration of these li-
abilities. Due to the very long-term nature of group pension annuities and
the resulting inability to exactly match cash flows, a risk exists that fu-
ture cash flows from investments will not be reinvested at rates as high as
currently earned by the portfolio. Accordingly, these liabilities may prove
to be deficient or excessive. However, it is management's opinion that such
future development will
S-17
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
INSURANCE CEDED AND ASSUMED
The Company cedes insurance to other companies, including certain affili-
ates. The portion of risks exceeding the Company's retention limit is rein-
sured with other insurers. Industry regulations prescribe the maximum cov-
erage that the Company can retain on an individual insured. As of December
31, 1996, the Company's maximum retention on a single insured was
$3,000,000. To cover products other than life insurance, the Company ac-
quires other insurance coverages with retentions and limits that management
believes are appropriate for the circumstances. The accompanying financial
statements reflect premiums and benefits and settlement expenses, net of
insurance ceded. The Company remains liable if its reinsurers are unable to
meet their contractual obligations under the applicable reinsurance agree-
ments.
The Company assumes insurance from other companies, including certain af-
filiates. At December 31, 1996, the Company has provided $17,200,000 of
statutory surplus relief to other insurance companies under reinsurance
transactions. Generally, such amounts are offset by corresponding receiv-
ables from the ceding company, which are secured by future profits on the
reinsured business. However, the Company is subject to the risk that the
ceding company may become insolvent and the right of offset would not be
permitted.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1996, the Company did not have a concentration of: 1) busi-
ness transactions with a particular customer, lender or distributor; 2)
revenues from a particular product or service; 3) sources of supply of la-
bor or services used in the business; or 4) a market or geographic area in
which business is conducted that makes it vulnerable to an event that is at
least reasonably possible to occur in the near term and which could cause a
severe impact to the Company's financial condition.
9.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES CONTINUED
not materially affect the financial position of the Company.
LEASES
The Company leases its home office properties. The agreements provide for a
25 year lease period with options to renew for six additional terms of five
years each. The agreements also provide the Company with the right of first
refusal to purchase the properties during the term of the lease, including
renewal periods, at a price as defined in the agreements. In addition, the
Company has the option to purchase the leased properties at fair value as
defined in the agreements on the last day of the initial 25 year lease pe-
riod ending in 2009 or on the last day of any of the renewal periods.
Total rental expense on operating leases in 1996, 1995 and 1994 was
$26,400,000, $22,500,000 and $20,600,000, respectively. Future minimum
rental commitments are as follows (in millions):
<TABLE>
<S> <C>
1997 $ 17.5
1998 17.1
1999 17.4
2000 16.9
2001 17.2
Thereafter 151.6
------
$237.7
======
</TABLE>
S-18
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
9.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES CONTINUED
OTHER CONTINGENCY MATTERS
The Company is involved in various pending or threatened legal proceedings
arising from the conduct of business. In some instances, these proceedings
include claims for unspecified or substantial punitive damages and similar
types of relief in addition to amounts for alleged contractual liability or
requests for equitable relief. After consultation with legal counsel and a
review of available facts, it is management's opinion that these proceed-
ings ultimately will be resolved without materially affecting the financial
position or results of operations of the Company.
The number of insurance companies that are under regulatory supervision has
resulted, and is expected to continue to result, in assessments by state
guaranty funds to cover losses to policyholders of insolvent or rehabili-
tated companies. Mandatory assessments may be partially recovered through a
reduction in future premium taxes in some states. The Company has accrued
for expected assessments net of estimated future premium tax deductions.
REINSURANCE
The regulatory required liability for unsecured reserves ceded to unautho-
rized reinsurers was $4,300,000 and $5,600,000 at December 31, 1996 and
1995, respectively.
GUARANTEES
The Company has guarantees with off-balance-sheet risks whose contractual
amounts represent credit exposure. Outstanding guarantees with off-balance-
sheet risks, shown in notional or contract amounts, are as follows:
<TABLE>
<CAPTION>
Notional or
Contract Amounts
-----------------
December 31
-----------------
1996 1995
--------------------
(in millions)
-----------------
<S> <C> <C>
Mortgage loan pass-through certificates $ 50.3 $ 63.6
Real estate partnerships .5 3.3
-------- --------
$ 50.8 $ 66.9
======== ========
</TABLE>
The Company has invested in real estate partnerships that use conventional
mortgage loans. In some cases, the terms of these arrangements involve
guarantees by each of the partners to indemnify the mortgagor in the event
a partner is unable to pay its principal and interest payments. In addi-
tion, the Company has sold commercial mortgage loans through grantor trusts
which issued pass-through certificates. The Company has agreed to repur-
chase any mortgage loans which remain delinquent for 90 days at a repur-
chase price substantially equal to the outstanding principal balance plus
accrued interest thereon to the date of repurchase. It is management's
opinion that the value of the properties underlying these commitments is
sufficient that in the event of default the impact would not be material to
the Company. Accordingly, both the carrying value and fair value of these
guarantees is zero at December 31, 1996 and 1995.
S-19
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
9.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
DERIVATIVES
The Company has derivatives with off-balance-sheet risks
whose notional or contract amounts exceed the credit ex-
posure. The Company has entered into derivative transac-
tions to reduce its exposure to fluctuations in interest
rates, the widening of bond yield spreads over comparable
maturity U.S. Government obligations and foreign exchange
risks. In addition, the Company is subject to the risks
associated with changes in the value of its derivatives;
however, such changes in the value generally are offset
by changes in the value of the items being hedged by such
contracts. Outstanding derivatives with off-balance-sheet
risks, shown in notional or contract amounts along with
their carrying value and estimated fair values, are as
follows:
<TABLE>
<CAPTION>
Assets (Liabilities)
------------------------------
Notional or Carrying Fair Carrying Fair
contract amounts value value value value
---------------------------------------------
December 31 December 31 December 31
1996 1995 1996 1996 1995 1995
---------------------------------------------
(in millions)
------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate
derivatives:
Interest rate cap
agreements $5,500.0 $5,110.0 $20.8 $ 8.2 $22.7 $5.3
Spread-lock agreements -- 600.0 -- -- (.9) (.9)
Swaptions 672.0 -- 11.0 10.6 -- --
Financial futures
contracts 147.7 -- (2.4) (2.4) -- --
Interest rate swaps -- 5.0 -- -- .2 .2
-------- -------- ----- ----- ----- ----
6,319.7 5,715.0 29.4 16.4 22.0 4.6
Foreign currency
derivatives:
Foreign exchange forward
contracts 251.5 15.7 .2 (.2) (.6) (.6)
Foreign currency options 43.9 99.2 .6 .4 1.9 1.4
Foreign currency swaps 15.0 15.0 -- (2.1) .4 .4
-------- -------- ----- ----- ----- ----
310.4 129.9 .8 (1.9) 1.7 1.2
-------- -------- ----- ----- ----- ----
$6,630.1 $5,844.9 $30.2 $14.5 $23.7 $5.8
======== ======== ===== ===== ===== ====
</TABLE>
S-20
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
9.RESTRICTIONS, COMMITMENTS AND CONTINGENCIES CONTINUED
A reconciliation and discussion of the notional or contract
amounts for the significant programs using derivative agree-
ments and contracts at December 31 is as follows:
<TABLE>
<CAPTION>
Interest Rate Caps Spread Locks Swaptions
----------------------------------------------------------------------
1996 1995 1996 1995 1996 1995
----------------------------------------------------------------------
(in millions)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year $ 5,110.0 $ 4,400.0 $ 600.0 $ 1,300.0 $ -- $ --
New contracts 390.0 710.0 15.0 800.0 672.0 --
Terminations and -- -- (615.0) (1,500.0) -- --
maturities --------- --------- --------- --------- --------- ---------
Balance at end of year $ 5,500.0 $ 5,110.0 $ -- $ 600.0 $ 672.0 $ --
========= ========= ========= ========= ========= =========
<CAPTION>
Financial Futures
------------------------------------------
Contracts Options Interest Rate Swaps
1996 1995 1996 1995 1996 1995
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year $ -- $ 382.5 $ -- $ -- $ 5.0 $ --
New contracts 7,918.8 810.5 -- 181.6 -- --
Terminations and (7,771.1) (1,193.0) -- (181.6) (5.0) --
maturities --------- --------- --------- --------- --------- ---------
Balance at end of year $ 147.7 $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= ========= =========
<CAPTION>
Foreign Currency Derivatives
----------------------------------------------------------------------
Foreign Exchange Foreign Currency Foreign
Forward Contracts Options Currency Swaps
1996 1995 1996 1995 1996 1995
----------------------------------------------------------------------
(in millions)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year $ 15.7 $ 21.2 $ 99.2 $ -- $ 15.0 $ --
New contracts 406.9 131.2 1,168.8 356.6 -- 15.0
Terminations and (171.1) (136.7) (1,224.1) (257.4) -- --
maturities --------- --------- --------- --------- --------- ---------
Balance at end of year $ 251.5 $ 15.7 $ 43.9 $ 99.2 $ 15.0 $ 15.0
========= ========= ========= ========= ========= =========
</TABLE>
S-21
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
9.RESTRICTIONS, COMMITMENTS AND
CONTINGENCIES CONTINUED
INTEREST RATE CAPS
The interest rate cap agreements, which expire in 1997 through 2003, enti-
tle the Company to receive payments from the counterparties on specified
future reset dates, contingent on future interest rates. For each cap, the
amount of such quarterly payments, if any, is determined by the excess of a
market interest rate over a specified cap rate multiplied by the notional
amount divided by four. The purpose of the Company's interest rate cap
agreement program is to protect its annuity line of business from the ef-
fect of fluctuating interest rates. The premium paid for the interest rate
caps is included in other assets ($20,800,000 as of December 31, 1996) and
is being amortized over the terms of the agreements. This amortization is
included in net investment income.
SWAPTIONS
Swaptions, which expire in 2002, entitle the Company to receive settlement
payments from the counterparties on specified expiration dates, contingent
on future interest rates. For each swaption, the amount of such settlement
payments, if any, is determined by the present value of the difference be-
tween the fixed rate on a market rate swap and the strike rate multiplied
by the notional amount. The purpose of the Company's swaption program is to
protect the assets supporting its annuity line of business from the effect
of fluctuating interest rates. The premium paid for the swaptions is in-
cluded in other assets ($11,000,000 as of December 31, 1996) and is being
amortized over the terms of the agreements. This amortization is included
in net investment income.
SPREAD LOCKS
Spread-lock agreements provide for a lump sum payment to or by the Company,
depending on whether the spread between the swap rate and a specified U.S.
Treasury note is larger or smaller than a contractually specified spread.
Cash payments are based on the product of the notional amount, the spread
between the swap rate and the yield of an equivalent maturity U.S. Treasury
security and the price sensitivity of the swap at that time. It is ex-
pressed in dollars-per-basis point. The purpose of the Company's spread-
lock program is to protect a portion of its fixed maturity securities
against widening of spreads.
FINANCIAL FUTURES
The Company uses exchange-traded financial futures contracts and options on
those financial futures to hedge against interest rate risks and to manage
duration of a portion of its fixed maturity securities. Financial futures
contracts obligate the Company to buy or sell a financial instrument at a
specified future date for a specified price. They may be settled in cash or
through delivery of the financial instrument. Cash settlements on the
change in market values of financial futures contracts are made daily. Op-
tions on financial futures give the Company the right, but not the obliga-
tion, to assume a long or short position in the underlying futures at a
specified price during a specified time period.
FOREIGN CURRENCY DERIVATIVES
The Company uses a combination of foreign exchange forward contracts, for-
eign currency options and foreign currency swaps, all of which are traded
over-the-counter, to hedge some of the foreign exchange risk of investments
in fixed maturity securities denominated in foreign currencies. The foreign
currency forward contracts obligate the Company to deliver a specified
amount of currency at a future date at a specified exchange rate. Foreign
currency options give the Company the right, but not the obligation, to buy
or sell a foreign currency at a specific exchange rate during a specified
time period. A foreign currency swap is a contractual agreement to exchange
the currencies of two different countries pursuant to an agreement to re-
exchange the two currencies at the same rate of exchange at a specified fu-
ture date.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$6,900,000 and $5,600,000 in 1996 and 1995, respectively. Deferred losses
of $37,600,000 as of December 31, 1996, were the result of: 1) terminated
and expired spread-lock agreements; and 2) financial futures contracts.
These losses are included with the related fixed maturity securities to
which the hedge applied and are being amortized over the life of such secu-
rities.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on interest rate cap agreements, swaptions, spread-lock
agreements, interest rate swaps, foreign exchange forward contracts, for-
eign currency options and foreign currency swaps. However, the Company does
not anticipate nonperformance by any of these counterparties. The credit
risk associated with such agreements is minimized by purchasing such agree-
ments from financial institutions with long-standing, superior performance
records. The amount of such exposure is essentially the net replacement
cost or market value for such agreements with each counterparty if the net
market value is in the Company's favor. At December 31, 1996, the exposure
was $17,500,000.
10.FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair values of the Company's financial instruments.
Considerable judgment is required to develop these fair values. Ac-
S-22
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
10.FAIR VALUE OF FINANCIAL INSTRUMENTS
CONTINUED
cordingly, the estimates shown are not necessarily indicative of the
amounts that would be realized in a one-time, current market exchange of
all of the Company's financial instruments.
BONDS
Fair values of bonds are based on quoted market prices, where available.
For bonds not actively traded, fair values are estimated using values ob-
tained from independent pricing services. In the case of private place-
ments, fair values are estimated by discounting expected future cash flows
using a current market rate applicable to the coupon rate, credit quality
and maturity of the investments. The fair values of affiliated common
stocks are based on quoted market prices.
MORTGAGE LOANS ON REAL ESTATE
The estimated fair value of mortgage loans on real estate was established
using a discounted cash flow method based on credit rating, maturity and
future income when compared to the expected yield for mortgages having sim-
ilar characteristics. The rating for mortgages in good standing are based
on property type, location, market conditions, occupancy, debt service cov-
erage, loan to value, caliber of tenancy, borrower and payment record. Fair
values for impaired mortgage loan are measured based on: 1) the present
value of expected future cash flows discounted at the loan's effective in-
terest rate; 2) the loan's market price; or 3) the fair value of the col-
lateral if the loan is collateral dependent.
POLICY LOANS
The estimated fair value of investments in policy loans was calculated on a
composite discounted cash flow basis using Treasury interest rates consis-
tent with the maturity durations assumed. These durations were based on
historical experience.
OTHER INVESTMENTS AND CASH AND INVESTED CASH
The carrying value for assets classified as other investments and cash and
invested cash in the accompanying balance sheet approximates their fair
value.
INVESTMENT-TYPE INSURANCE CONTRACTS
The balance sheet captions, "Future Policy Benefits and Claims" and "Other
Policyholder Funds," include investment-type insurance contracts (i.e., de-
posit contracts and guaranteed interest contracts). The fair values for the
deposit contracts and certain guaranteed interest contracts are based on
their approximate surrender values. The fair values for the remaining guar-
anteed interest and similar contracts are based on their approximate sur-
render values. The fair values for the remaining guaranteed interest and
similar contracts are estimated using discounted cash flow calculations.
These calculations are based on interest rates currently offered on similar
contracts with maturities consistent with those remaining for the contracts
being valued.
The remainder of the balance sheet captions "Future Policy Benefits and
Claims" and "Other Policyholder Funds," that do not fit the definition of
"investment type insurance contracts" are considered insurance contracts.
Fair value disclosures are not required for these insurance contracts and
have not been determined by the Company. It is the Company's position that
the disclosure of the fair value of these insurance contracts is important
because readers of these financial statements could draw inappropriate con-
clusions about the Company's capital and surplus determined on a fair value
basis. It could be misleading if only the fair value of assets and liabili-
ties defined as financial instruments are disclosed. The Company and other
companies in the insurance industry are monitoring the related actions of
the various rule-making bodies and attempting to determine an appropriate
methodology for estimating and disclosing the "fair value" of their insur-
ance contract liabilities.
SHORT-TERM DEBT
Fair values of short-term debt approximates carrying values.
GUARANTEES
The Company's guarantees include guarantees related to real estate partner-
ships and mortgage loan pass-through certificates. Based on historical per-
formance where repurchases have been negligible and the current status,
which indicates none of the loans are delinquent, the fair value liability
for the guarantees related to the mortgage loan pass-through certificates
is insignificant.
DERIVATIVES
The Company's derivatives include interest rate cap agreements, swaptions,
spread-lock agreements, foreign currency exchange contracts, financial
futures contracts, options on financial futures, interest rate swaps, call
options, foreign currency options and foreign currency swaps.
Fair values for derivative contracts are based on current settlement val-
ues. These values are based on: 1) quoted market prices for the foreign
currency exchange contracts, financial future contracts, and options on fi-
nancial futures; and 2) brokerage quotes that utilized pricing models or
formulas using current assumptions for all other swaps and agreements.
S-23
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
10.FAIR VALUE OF FINANCIAL INSTRUMENTS
CONTINUED
INVESTMENT COMMITMENTS
Fair values for commitments to make investment in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real es-
tate are based on the difference between the value of the committed invest-
ments as of the date of the accompanying balance sheets and the commitment
date. These estimates would take into account changes in interest rates,
the counterparties' credit standing and the remaining terms of the commit-
ments.
S-24
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
10.FAIR VALUE OF FINANCIAL INSTRUMENTS
CONTINUED
The carrying values and estimated fair values of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31
----------------------------------------------
1996 1995
---------------------- ----------------------
Carrying Fair Carrying Fair
Assets (Liabilities) value value value value
---------------------------------------- ---------- ---------- ---------- ----------
(in millions)
----------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 19,389.6 $ 20,194.4 $ 17,729.7 $ 19,184.7
----------------------------------------
Preferred stock 239.7 248.5 89.9 103.6
----------------------------------------
Unaffiliated common stock 358.3 358.3 535.5 535.5
----------------------------------------
Mortgage loans on real estate 2,976.7 3,070.9 2,909.7 3,081.9
----------------------------------------
Policy loans 626.5 612.7 515.8 504.0
----------------------------------------
Other investments 282.7 282.7 248.0 248.0
----------------------------------------
Cash and short-term investments 759.2 759.2 780.9 780.9
----------------------------------------
Investment type insurance contracts:
----------------------------------------
Deposit contracts and certain
guaranteed interest contracts (17,871.6) (17,333.0) (15,586.7) (15,046.0)
----------------------------------------
Remaining guaranteed interest and
similar contracts (1,799.7) (1,835.4) (2,261.1) (2,340.4)
----------------------------------------
Short-term debt (100.0) (100.0) (63.0) (63.0)
----------------------------------------
Derivatives 26.5 13.8 23.7 5.8
----------------------------------------
Investment commitments -- (.6) -- (.8)
----------------------------------------
</TABLE>
11.ACQUISITIONS AND SALES OF SUBSIDIARIES
The Company sold its 100% interest in two subsidiaries--Se-
curity Connecticut Life Insurance Company ("SCL") and Em-
ployers Health Insurance Company ("EHI"). SCL was sold
through a public offering of stock in January 1994. This
transaction resulted in a realized gain of $90,000,000 and a
direct increase in surplus of $24,000,000. Net of expenses,
the Company received cash of $172,000,000 and notes of
$65,000,000.
EHI was also sold through public offerings in March and
April 1994. LNC purchased 29% of the stock of the new pub-
licly traded holding company from LNL. Prior to the sale,
the Company received a $50,000,000 dividend in the form of a
note. The sale transaction resulted in a realized gain of
$133,000,000 and a direct reduction in surplus of
$21,000,000 due to release of unrealized gain amounts, for a
net surplus increase of $112,000,000. Net of expenses, the
Company received cash of $348,000,000.
In October 1996, the Company and its wholly owned subsidiary
purchased a block of group tax qualified annuity business
from UNUM Corporation. The transaction was completed in the
form of a reinsurance transaction, which resulted in a ced-
ing commission of $71,800,000. The ceding commission has
been recorded as admissible goodwill of $62,300,000, which
is to be amortized on a straight-line basis over 10 years.
The Company's subsidiary was required by the New York De-
partment of Insurance to expense its portion of the ceding
commission in 1996. Policy liabilities and related accruals
of the Company and its wholly owned subsidiary increased by
$3,200,000,000 as a result of this transaction.
In its previously-filed 1996 NAIC Annual Statement, the Com-
pany recorded the ceding commission as a nonadmitted asset,
which was charged directly to unassigned surplus. According-
ly, unassigned surplus was understated at December 31, 1996
by $62,300,000, net of amortization in 1996. In 1997, man-
agement will correct its opening balance of unassigned sur-
plus in its NAIC Annual Statement.
S-25
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
The balance sheets include reinsurance balances with affiliated companies
as follows:
<TABLE>
<CAPTION>
December 31
1996 1995
-------- --------
(in millions)
-----------------
<S> <C> <C>
Future policy benefits and claims assumed $ 312.7 $ 344.8
Future policy benefits and claims ceded 891.8 1,344.5
Amounts recoverable on paid and unpaid losses 31.2 65.9
Reinsurance payable on paid losses 2.7 5.5
Funds held under reinsurance treaties--net liability 1,062.4 712.3
</TABLE>
Substantially all reinsurance ceded to affiliated companies is with unau-
thorized companies. To take a reserve credit for such reinsurance, the Com-
pany holds assets from the reinsurer, including funds held under reinsur-
ance treaties, and is the beneficiary on letters of credit aggregating
$314,200,000 and $306,800,000 at December 31, 1996 and 1995, respectively.
At December 31, 1996 and 1995, LNC had guaranteed $239,200,000 and
$241,400,000, respectively, of these letters of credit. At December 31,
1996, the Company has a receivable (included in the foregoing amounts) from
affiliated insurance companies in the amount of $135,700,000 for statutory
surplus relief received under financial reinsurance ceded agreements.
13. SEPARATE ACCOUNTS
Separate account assets and liabilities reported in the accompanying bal-
ance sheets represent funds that are separately administered, principally
for annuity contracts, and for which the contractholder, rather than the
Company, bears the investment risk. Separate account contractholders have
no claim against the assets of the general account of the Company. Separate
account assets are reported at fair value and consist primarily of long-
term bonds, common stocks, short-term investments and mutual funds. The de-
tailed operations of the separate accounts are not included in the accompa-
nying financial statements. Fees charged on separate account policyholder
deposits are included in other income.
Separate account premiums, deposits and other considerations amounted to
$4,148,700,000, $3,068,200,000 and $2,694,700,000 in 1996, 1995 and 1994,
respectively. Reserves for separate accounts with assets at fair value were
$23,047,800,000 and $17,891,400,000 at December 31, 1996 and 1995, respec-
tively. All reserves are subject to discretionary withdrawal at market val-
ue. Substantially all of the Company's separate accounts are nonguaranteed.
12. TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Financial Group, Inc. ("LFGI"),
has a nearly exclusive general agents contract with the Company under which
it sells the Company's products and provides the service that otherwise
would be provided by a home office marketing department and regional of-
fices. For providing these selling and marketing services, the Company paid
LFGI override commissions and operating expense allowances of $56,300,000,
$43,300,000 and $41,200,000 in 1996, 1995 and 1994, respectively. LFGI in-
curred expenses of $15,700,000, $10,400,000 and $10,700,000 in 1996, 1995
and 1994, respectively, in excess of the override commissions and operating
expense allowances received from the Company, which the Company is not re-
quired to reimburse.
Cash and short-term investments at December 31, 1996 and 1995 include the
Company's participation in a short-term investment pool with LNC of
$175,100,000 and $324,000,000, respectively. Related investment income
amounted to $15,300,000, $21,100,000 and $16,100,000 in 1996, 1995 and
1994, respectively. Other liabilities at December 31, 1996 and 1995 include
$100,000,000 of notes payable to LNC.
The Company provides services to and receives services from affiliated com-
panies which resulted in a net payment of $34,100,000 and $24,900,000 in
1996 and 1995, respectively.
The Company both cedes and accepts reinsurance from affiliated companies.
Premiums in the accompanying statement of income includes reinsurance
transactions with affiliated companies as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1996 1995 1994
------ ------ ------
(in millions)
--------------------
<S> <C> <C> <C>
Insurance assumed $ 17.9 $ 17.6 $ 19.8
Insurance ceded 302.8 214.4 481.3
</TABLE>
S-26
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS CONTINUED
13. SEPARATE ACCOUNTS CONTINUED
A reconciliation of transfers to (from) separate accounts are as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1996 1995
----------------------------------------------------
(in millions)
---------------------
<S> <C> <C>
Transfers as reported in the Summary of
Operations of various Separate Accounts:
Transfers to separate accounts $ 4,149.6 $ 3,070.2
Transfers from separate accounts (2,058.5) (1,457.8)
--------- ---------
Net transfer to separate accounts as reported
in the Company's NAIC Annual Statement $ 2,091.1 $ 1,612.4
========= =========
</TABLE>
S-27
<PAGE>
OTHER FINANCIAL INFORMATION
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Lincoln National Life Insurance Company
We have audited the accompanying statutory-basis balance sheets of The Lincoln
National Life Insurance Company (a wholly owned subsidiary of Lincoln National
Corporation) as of December 31, 1996 and 1995, and the related statutory-basis
statements of income, changes in capital and surplus and cash flows for each of
the three years in the period ended December 31, 1996. These financial state-
ments are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or per-
mitted by the Indiana Department of Insurance, which practices differ from gen-
erally accepted accounting principles. The variances between such practices and
generally accepted accounting principles and the effects on the accompanying
financial statements are also described in Note 1.
In our opinion, because of the effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial posi-
tion of The Lincoln National Life Insurance Company at December 31, 1996 and
1995, or the results of its operations or its cash flows for each of the three
years in the period ended December 31, 1996.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Lincoln Na-
tional Life Insurance Company at December 31, 1996 and 1995, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with accounting practices prescribed or
permitted by the Indiana Department of Insurance.
As described in Note 2, in 1994 the Company changed its method of accounting
for separate account contracts.
/s/ Ernst & Young LLP
February 6, 1997
S-28
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA
DECEMBER 31, 1996 (IN MILLIONS)
<TABLE>
<S> <C>
Investment income earned:
Government bonds $ 74.6
---------------------------------------------------------------------
Other bonds (unaffiliated) 1,367.6
---------------------------------------------------------------------
Preferred stocks (unaffiliated) 9.6
---------------------------------------------------------------------
Common stocks (unaffiliated) 6.5
---------------------------------------------------------------------
Common stocks of affiliates 9.5
---------------------------------------------------------------------
Mortgage loans 269.3
---------------------------------------------------------------------
Real estate 114.4
---------------------------------------------------------------------
Premium notes, policy loans and liens 35.0
---------------------------------------------------------------------
Cash on hand and on deposit 0.9
---------------------------------------------------------------------
Short-term investments 48.0
---------------------------------------------------------------------
Other invested assets 17.6
---------------------------------------------------------------------
Derivative instruments (6.3)
---------------------------------------------------------------------
Aggregate write-ins for investment income 11.1
----------------------------------------------------------- --------
Gross investment income $1,957.8
- ------------------------------------------------------------- ========
Real estate owned (cost, less encumbrances) $ 621.3
- ------------------------------------------------------------- ========
Mortgage loans (unpaid balance):
Farm mortgages $ 1.1
---------------------------------------------------------------------
Residential mortgages 3.7
---------------------------------------------------------------------
Commercial mortgages 2,971.9
----------------------------------------------------------- --------
Total mortgage loans $2,976.7
- ------------------------------------------------------------- ========
Mortgage loans by standing (unpaid balance):
Good standing $2,922.1
----------------------------------------------------------- ========
Good standing with restructured terms $ 39.6
----------------------------------------------------------- ========
Interest overdue more than three months, not in foreclosure $ --
----------------------------------------------------------- ========
Foreclosure in process $ 14.9
----------------------------------------------------------- ========
Other long-term assets (statement value) $ 248.1
- ------------------------------------------------------------- ========
</TABLE>
S-29
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA CONTINUED
DECEMBER 31, 1996 (IN MILLIONS)
<TABLE>
<S> <C>
Bonds and stocks of parent, subsidiaries and affiliates (cost):
Common stocks $ 194.0
------------------------------------------------------------- ==========
Bonds and short-term investments by class and maturity:
Bonds by maturity (statement value):
Due within one year or less $ 1,618.0
-------------------------------------------------------------
Over 1 year through 5 years 5,928.1
-------------------------------------------------------------
Over 5 years through 10 years 6,025.9
-------------------------------------------------------------
Over 10 years through 20 years 3,670.6
-------------------------------------------------------------
Over 20 years 2,860.4
------------------------------------------------------------- ----------
Total by maturity $ 20,103.0
- --------------------------------------------------------------- ==========
Bonds by class (statement value):
Class 1 $ 14,013.7
-------------------------------------------------------------
Class 2 4,504.1
-------------------------------------------------------------
Class 3 807.6
-------------------------------------------------------------
Class 4 705.9
-------------------------------------------------------------
Class 5 71.4
-------------------------------------------------------------
Class 6 0.3
------------------------------------------------------------- ----------
Total by class $ 20,103.0
- --------------------------------------------------------------- ==========
Total bonds publicly traded $ 16,520.3
- --------------------------------------------------------------- ==========
Total bonds privately placed $ 3,582.7
- --------------------------------------------------------------- ==========
Preferred stocks (cost or amortized cost) $ 239.7
- --------------------------------------------------------------- ==========
Unaffiliated common stocks (market value) $ 358.3
- --------------------------------------------------------------- ==========
Short-term investments (cost or amortized cost) $ 713.4
- --------------------------------------------------------------- ==========
Financial options and caps owned (statement value) $ 32.2
- --------------------------------------------------------------- ==========
Financial options and caps written (statement value) $ 0.3
- --------------------------------------------------------------- ==========
Swap and forward agreements open (statement value) $ 0.2
- --------------------------------------------------------------- ==========
Futures contracts open (current value) $ 161.2
- --------------------------------------------------------------- ==========
Cash on deposit $ 45.8
- --------------------------------------------------------------- ==========
Life insurance in-force:
Ordinary $ 97.9
------------------------------------------------------------- ==========
Group life $ 31.4
------------------------------------------------------------- ==========
</TABLE>
S-30
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA CONTINUED
DECEMBER 31, 1996 (IN MILLIONS)
<TABLE>
<S> <C>
Amount of accidental death insurance in-force under ordinary policies $ 4.9
- ----------------------------------------------------------------------------------------------- =========
Life insurance policies with disability provisions in-force:
Ordinary $ 4.9
--------------------------------------------------------------------------------------------- =========
Group life $ 12.9
--------------------------------------------------------------------------------------------- =========
Supplementary contracts in-force:
Ordinary--not involving life contingencies:
Amount on deposit $ --
--------------------------------------------------------------------------------------------- =========
Income payable $ 3.2
--------------------------------------------------------------------------------------------- =========
Ordinary--involving life contingencies:
Income payable $ 0.9
--------------------------------------------------------------------------------------------- =========
Group--not involving life contingencies:
Income payable $ --
--------------------------------------------------------------------------------------------- =========
Group--involving life contingencies:
Income payable $ 0.9
--------------------------------------------------------------------------------------------- =========
Annuities:
Ordinary:
Immediate--amount of income payable $ 68.4
--------------------------------------------------------------------------------------------- =========
Deferred--fully paid account balance $ 0.6
--------------------------------------------------------------------------------------------- =========
Deferred--not fully paid account balance $ 326.6
--------------------------------------------------------------------------------------------- =========
Group:
Amount of income payable $ --
--------------------------------------------------------------------------------------------- =========
Fully paid account balance $ --
--------------------------------------------------------------------------------------------- =========
Not fully paid account balance $ 78.1
--------------------------------------------------------------------------------------------- =========
Accident and health insurance--premiums in-force:
Ordinary $ 180.6
--------------------------------------------------------------------------------------------- =========
Group $ 97.1
--------------------------------------------------------------------------------------------- =========
Deposit funds and dividend accumulations:
Deposit funds account balance $17,456.6
--------------------------------------------------------------------------------------------- =========
Dividend accumulations--account balance $ 114.7
--------------------------------------------------------------------------------------------- =========
</TABLE>
S-31
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA CONTINUED
DECEMBER 31, 1996 (IN MILLIONS)
Claim payments 1996:
Group Accident and Health:
<TABLE>
<S> <C>
1996 $ 9.4
=====
--------------
1995 $ 3.1
=====
--------------
1994 $ 0.1
=====
--------------
1993 $ --
=====
--------------
1992 $(0.1)
=====
--------------
Prior $ --
=====
--------------
</TABLE>
S-32
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTE TO SUPPLEMENTAL SCHEDULE OF SELECTED STATUTORY-BASIS FINANCIAL DATA
NOTE--BASIS OF PRESENTATION
The accompanying schedule presents selected statutory-basis financial data as
of December 31, 1996 and for the year then ended for purposes of complying with
paragraph 9 of the Annual Audited Financial Reports in the General Section of
the National Association of Insurance Commissioners' Annual Statement Instruc-
tions and agrees to or is included in the amounts reported in The Lincoln Na-
tional Life Insurance Company's 1996 Statutory Annual Statement as filed with
the Indiana Department of Insurance.
S-33
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON
OTHER FINANCIAL INFORMATION
Board of Directors
The Lincoln National Life Insurance Company
Our audits were conducted for the purpose of forming an
opinion on the statutory-basis financial statements taken as
a whole. The accompanying supplemental schedule of selected
statutory-basis financial data is presented to comply with
the National Association of Insurance Commissioners' Annual
Statement Instructions and is not a required part of the
statutory-basis financial statements. Such information has
been subjected to the auditing procedures applied in our au-
dit of the statutory-basis financial statements and, in our
opinion, is fairly stated in all material respects in rela-
tion to the statutory-basis financial statements taken as a
whole.
/s/ Ernst & Young LLP
February 6, 1997
S-34
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
REGISTRATION STATEMENT 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 for the Variable Account are
included in Part B of this Registration Statement:
Statement of Assets and Liability -- December 31, 1996
Statement of Operations -- Year ended December 31, 1996
Statements of Changes in Net Assets -- Years ended December 31, 1996
and 1994
Notes to Financial Statements -- December 31, 1996
Report of Ernst & Young LLP, Independent Auditors
3. Part B The following Consolidated Financial Statements and Schedules
of The Lincoln National Life Insurance Company are included in Part B
of the Registration Statement:
Consolidated Balance Sheets -- December 31, 1995 and 1994
Consolidated Statements of Income -- Years ended December 31, 1995,
1994, and 1993
Consolidated Statements of Shareholder's Equity -- Years ended
December 31, 1995, 1994, and 1993
Consolidated Statements of Cash Flows -- Years Ended December 31,
1995, 1994, and 1993
Notes to Consolidated Financial Statements -- December 31, 1995
Schedule I-Summary of Investments Other than Investments in Related
Parties -- December 31, 1995
Schedule III-Supplementary Insurance Information -- Years ended
December 31, 1995, 1994, and 1993
Schedule IV-Reinsurance -- Years ended December 31, 1995, 1994, and
1993
Schedule V-Valuation and Qualifying Accounts--Years ended December
31, 1995, 1994, and 1993
Report of Ernst & Young LLP, Independent Auditors
The following Statutory Financial Statements and Schedules of Lincoln National
Life Insurance Company are included in the SAI:
Balance Sheets--Years ended December 31, 1996 and 1995
Statements of Income--Years ended December 31, 1996, 1995 and 1994
Statements of Capital and Surplus--Years ended December 31, 1996, 1995, and 1994
Notes to Financial Statements--December 31, 1996
Supplemental Schedule of Selected Statutory Basis Financial Data--December 31,
1996
Report of Ernst & Young LLP, Independent Auditors
<PAGE>
Item 24. (Continued)
(b) List of Exhibits
(3)(a) Underwriting Agreement
(3)(b) Amendment to Underwriting Agreement
(4) Rider to Variable Annuity Contract.
(8) Services Agreement with the Delaware Management Company is incorporated
herein by reference to Registration Statement on Form N-4 (33-27783)
filed on December 5, 1996.
(8)(a) Participation Agreement.
(8)(b) Amendment to Participation Agreement.
(8)(c) Amendment to the Indemnification Agreement
(9) Consent of Jeremy Sachs, Senior Counsel, Lincoln National Life
Insurance Company as to legality of securities being issued.
(10) Consent of Ernst & Young LLP, Independent Auditors.
(13) Schedule for Computation of Performance Quotations is incorporated herein
by reference to Registration Statement on Form N-4 (33-27783) filed on
December 5, 1996.
(14) Other Exhibits:
(a) Organizational Chart of the Lincoln National Insurance
Holding Company System
(b) Books and Records Report
17(a) Financial Data Schedule Lincoln - National Variable Annuity Account H
17(b) Financial Data Schedule - Lincoln National Life Insurance Company - GAAP
Financial Statements
Item 25.
DIRECTORS AND OFFICERS OF THE DEPOSITOR
Name Positions and Offices with LNL
- ---- ------------------------------
Jon A. Boscia* President, Chief Executive Officer and Director
Carolyn P. Brody* Vice President
Thomas L. Clagg* Vice President and Associate General Counsel
Kelly D. Clevenger* Vice President
Jeffrey K. Dellinger* Vice President
Jack D. Hunter* Executive Vice President and General Counsel
Donald E. Keller* Vice President
Stephen H. Lewis* Senior Vice President
H. Thomas McMeekin** Director
Reed P. Miller* Vice President
Ian M. Rolland** Director
Lawrence T. Rowland *** Executive Vice President
Keith J. Ryan* Vice President, Chief Financial Officer and
Assistant Treasurer
Richard C. Vaughan** Director
Roy V. Washington* Vice President
Janet C. Whitney** Vice President and Treasurer
C. Suzanne Womack** Secretary and Assistant Vice President
O. Douglas Worthington* Vice President, Controller and Assistant Treasurer
<PAGE>
*Principal business address is 1300 South Clinton Street, Fort Wayne, Indiana
46802.
**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.
<PAGE>
Item 26.
PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
WITH THE DEPOSITOR OR REGISTRANT
See Exhibit 14(b): Organizational Chart of the Lincoln National Insurance
Holding Company System.
Item 27.
NUMBER OF CONTRACTOWNERS
As of December 31, 1996, there were 230,760 (variable and fixed) Contract
Owners under Account H.
Item 28. Indemnification
See prior filings.
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., The Bond Fund of America, 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., The Intermediate Bond Fund of America,
The Investment Company of America, Limited Term Tax-Exempt Bond Fund of
America, 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
5657 Lemona Avenue
Van Nuys, CA 91411
John A. Agar Regional Vice President
1501 N. University Drive
Little Rock, AR 72207
<PAGE>
Robert B. Aprison Vice President
2983 Bryn Wood Drive
Madison, WI 53711
%Richard Armstrong Assistant Vice President
*William W. Bagnard Vice President
Steven L. Barnes Senior Vice President
8000 Town Line Avenue South
Suite 204
Minneapolis, MN 55438
Michelle A. Bergeron Vice President
4160 Gateswalk Drive
Smyrna, GA 30080
<PAGE>
Item 29. Principal Underwriter (continued)
(b) (continued)
(1) (2)
Name and Principal Positions and Offices
Business Address with Underwriter
- ------------------ ---------------------
Joseph T. Blair Senior Vice President
27 Drumlin Road
West Simsbury, CT 06092
John A. Blanchard Regional Vice President
6421 Aberdeen Road
Mission Hills, KS 66208
Ian B. Bodell Senior Vice President
3100 West End Avenue, Suite 870
Nashville, TN 37215
Michael L. Brethower Vice President
108 Hagen Court
Georgetown, TX 78628
C. Alan Brown Regional Vice President
4619 McPherson Avenue
St. Louis, MO 63108
*Daniel C. Brown Senior Vice President
@J. Peter Burns Vice President
Brian C. Casey Regional Vice President
9508 Cable Drive
Kensington, MO 20895
Victor C. Cassato Vice President
609 W. Littleton Blvd.
Suite 310
Littleton, CO 80121
Christopher J. Cassin Senior Vice President
111 West Chicago Avenue
Suite G3
Hinsdale, IL 60521
Denise M. Cassin Regional Vice President
1301 Stoney Creek Drive
San Ramon, CA 94538
<PAGE>
*Larry P. Clemmensen Director
*Kevin G. Clifford Director, Senior Vice President
Ruth M. Collier Vice President
145 West 67th Street, Suite #12K
New York, NY 10023
Thomas E. Cournoyer Vice President
2333 Granada Boulevard
Coral Gables, FL 33134
Douglas A. Critchell Vice President
4116 Woodbine St.
Chevy Chase, MD 20815
*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
<PAGE>
Item 29. Principal Underwriters (continued)
(b) (continued)
(1) (2)
Name and Principal Positions and Offices
Business Address with Underwriter
- --------------------- ---------------------
G. Michael Dill Senior Vice President
505 East Main Street
Jenks, OK 74037
Kirk D. Dodge Vice President
2617 Salisbury Road
Ann Arbor, MI 48103
Peter J. Doran Senior Vice President
1205 Franklin Avenue
Garden City, NY 11530
*Michael J. Downer Secretary
Robert W. Durbin Vice President
74 Sunny Lane
Tiffin, OH 44883
&Lloyd G. Edwards Vice President
*Paul H. Fieberg Senior Vice President
John Fodor Regional Vice President
15 Latisquana Road
Southborough, MA 01772
*Mark P. Freeman, Jr. Director and President
Clyde E. Gardner Senior Vice President
Route 2, Box 3162
Osage Beach, MO 65065
#Evelyn K. Glassford Vice President
Jeffrey J. Greiner Regional Vice President
5898 Heather Glen Court
<PAGE>
Dublin, OH 43017
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 Regional Vice President
1225 Vista Del Mar Dr.
Delray Beach, FL 33483
*Robert L. Johansen Vice President and Controller
Michael J. Johnston Chairman of the Board
630 Fifth Ave., 36th Floor
New York, NY 10111
Victor J. Kriss Senior Vice President
P. O. Box 274
Surfside, CA 90743
Arthur J. Levine Vice President
12558 Highlands Place
Fishers, IN 46038
<PAGE>
Item 29. Principal Underwriters (continued)
(b) (continued)
(1) (2)
Name and Principal Positions and Offices
Business Address with Underwriter
- ------------------ ------------------------
#Karl A. Lewis Assistant Vice President
T. Blake Liberty Regional Vice President
1940 Blake St., Ste. 303
Denver, CO 80202
*Lorin E. Liesy Assistant Vice President
*Susan G. Lindgren Vice President - Institutional
Investment Services Division
%Stella Lopez Vice President
+Robert W. Lovelace Director
Stephen A. Malbasa Regional Vice President
13405 Lake Shore Boulevard
Cleveland, OH 44110
Steven M. Markel Vice President
5241 South Race St.
Littleton, CO 80121
*John C. Massar Director and Senior Vice President
*E. Lee McClennahan Senior Vice President
Laurie B. McCurdy Regional Vice President
3500 W. Camino de Urania
Tucson, AZ 85255
%John V. McLaughlin Senior Vice President
Terry W. McNabb Vice President
2002 Barrett Station Road
St. Louis, MO 63131
*R. William Melinat Vice President
Institutional Investment
Services Division
David R. Murray Vice President
25701 S. E. 32nd Place
Issaquah, WA 98027
<PAGE>
Stephen S. Nelson Vice President
7215 Trevor Road
Charlotte, NC 28226
William E. Noe Regional Vice President
304 River Oaks Road
Brentwood, TN 37027
Peter A. Nyhus Regional Vice President
3084 Wilds Ridge Court
Prior Lake, MN 55372
Eric P. Olson Regional Vice President
62 Park Drive
Glenview, IL 60025
Frederic Phillips Vice President
32 Ridge Avenue
Newton Centre, MA 02159
#Candance D. Pilgrim Assistant Vice President
<PAGE>
Item 29. Principal Underwriters (continued)
- -------
(b) (continued)
(1) (2)
Name and Principal Positions and Offices
Business Address with Underwriter
- ------------------ ---------------------
Carl S. Platou Regional Vice President
4021 96th Avenue, SE
Mercer Island, WA 98040
*John O. Post, Jr. Vice President
Steven J. Reitman Vice President
212 The Lane
Hinsdale, IL 60521
Brian A. Roberts Regional Vice President
12025 Delmahoy Drive
Charlotte, NC 28277
George S. Ross Vice President
55 Madison Avenue
Morristown, NJ 07962
*Julie D. Roth Vice President
*James F. Rothenberg Director
Douglas F. Rowe Regional Vice President
30309 Oak Tree Drive
Georgetown, TX 78628
Christopher Rowey Regional Vice President
9417 Beverlywood Street
Los Angeles, CA 90034
Dean B. Rydquist Vice President
1080 Bay Pointe Crossing
Alpharetta, GA 30202
Richard R. Samson Vice President
4604 Glencoe Ave., #4
<PAGE>
Marina Del Rey, CA 90292
Joe D. Scarpitti Regional Vice President
31465 St. Andrews
Westlake, OH 44145
*Daniel B. Seivert Assistant Vice President
*R. Michael Shanahan Director
David W. Short Director and Senior Vice President
1000 RIDC Plaza, Suite 212
Pittsburgh, PA 15238
William P. Simon, Jr. Vice President
554 Canterbury Lane
Berwyn, PA 19312
*John C. Smith Assistant Vice President
Institutional Investment Services
Division
*Mary E. Smith Assistant Vice President
Institutional Investment Services
Division
Rodney G. Smith Vice President
100 N. Central Expressway
Suite 1214
Richardson, TX 75080
Nicholas D. Spadaccini Regional Vice President
855 Markley Woods Way
Cincinnati, OH 45230
<PAGE>
Item 29. Principal Underwriters (continued)
- --------
(b) (continued)
(1) (2)
Name and Principal Positions and Offices
Business Address with Underwriter
- ------------------ ---------------------
Daniel S. Spradling Senior Vice President
#4 West Fourth Avenue, Suite 406
San Mateo, CA 94402
Thomas A. Stout Regional Vice President
12913 Kendale Lane
Bowie, MD 20715
Craig R. Strausser Regional Vice President
17040 Summer Place
Lake Oswego, OR 97035
Francis N. Strazzeri Regional Vice President
31641 Saddletree Drive
Westlake Village, CA 91361
*Drew Taylor Assistant Vice President
%James P. Toomey Assistant Vice President
&Christopher E. Trede Assistant Vice President
George F. Truesdail Vice President
400 Abbotsford Court
Charlotte, NC 28270
Scott W. Ursin-Smith Regional Vice President
606 Glenwood Avenue
Mill Valley, CA 94941
*David M. Ward Assistant Vice President
Institutional Investment Services
Division
Thomas E. Warren Regional Vice President
4001 Crockers Lake Blvd.
Sarasota, FL 34238
*J. Kelly Webb Senior Vice President and Treasurer
<PAGE>
Gregory J. Weimer Vice President
125 Surrey Drive
Canonsburg, PA 15317
#Timothy W. Weiss Director
**N. Dexter Williams Vice President
Timothy J. Wilson Regional Vice President
113 Farmview Place
Venetia, PA 15367
#Laura L. Wimberly Assistant Vice President
*Marshall D. Wingo Director and Senior Vice President
*Robert L. Winston Director and Senior Vice President
William Yost Regional 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
209 Robinson Drive
Tustin Ranch, CA 92782
* Business Address, 333 South Hope Street, Los Angeles, CA 90071
**Business Address, One Market Plaza, Steuart Tower, Suite 1800, San Francisco,
CA 94111
+ Business Address, 11100 Santa Monica Blvd., Los Angeles, CA 90025
# Business Address, 135 South State College Boulevard, Brea, CA 92821
% Business Address, 8000 IH-10, Suite 1400, San Antonio, TX 78230
@ Business Address, 5300 Robin Hood Road, Norfolk, VA 23513
& Business Address, 8332 Woodfield Crossing Boulevard, Indianapolis, IN
46240
Item 32(d)
- ----------
The Lincoln National Life Insurance Company hereby represents that the fees
and charges deducted under the contract, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to be incurred, and the
risks assumed by The Lincoln National Life Insurance Company.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant hereby certifies that this
Amendment meets all the requirements for effectiveness under paragraph (b) of
Rule 485 under the Securities Act of 1933, and duly has caused this Amendment
to the Registration Statement to be signed on its behalf, in the City of Fort
Wayne, and the State of Indiana on this 31st day of March, 1997.
LINCOLN NATIONAL VARIABLE ANNUITY
ACCOUNT H (American Legacy II)
(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 (LNL)
(Depositor)
By: /s/ Jon A. Boscia
-------------------------------------
Jon A. Boscia
President
(Title)
Pursuant to the requirements of 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.
Signature Title Date
- --------- ----- ----
/s/ Jon A. Boscia President, Chief Executive March 31, 1997
- ----------------- Officer & Director ----------------
Jon A. Boscia (Principal Executive
Officer)
/s/ Jack D. Hunter Executive Vice President, March 31, 1997
- ------------------ General Counsel & Director ----------------
Jack D. Hunter
- ---------------------- Executive Vice President ----------------
Lawrence T. Rowland and Director
** Vice President and Controller March 31, 1997
- -------------------------- (Principal Accounting ----------------
O. Douglas Worthington Officer)
/s/ Keith J. Ryan Vice President, and Assistant March 31, 1997
- ----------------- Treasurer and Chief ----------------
Keith J. Ryan Financial Officer (Principal
Financial Officer)
* March 31, 1997
- ---------------------- Director ----------------
Ian M. Rolland
- ---------------------- Director ----------------
H. Thomas McMeekin
/s/ Richard C. Vaughan Director March 31, 1997
- ---------------------- ----------------
Richard C. Vaughan
*By /s/ Jeremy Sachs pursuant to a Power of Attorney filed with the
---------------- initial Registration Statement
Jeremy Sachs Statement.
**By /s/ Jeremy Sachs pursuant to a Power of Attorney filed with Post-
----------------- Effective Amendment No. 5 to this Registration
Jeremy Sachs Statement.
<PAGE>
EXHIBIT 3
PRINCIPAL UNDERWRITING AGREEMENT
THIS AGREEMENT is effective on the 12th day of July, 1989 among THE LINCOLN
NATIONAL LIFE INSURANCE COMPANY ("Lincoln National"), a life insurance company
organized under the laws of the State of Indiana on behalf of itself and
SEPARATE ACCOUNT H OF THE LINCOLN NATIONAL LIFE INSURANCE COMPANY ("Separate
Account"), a separate account established by Lincoln National pursuant to the
Indiana Insurance Code and AMERICAN FUNDS DISTRIBUTORS, INC. ("AFD"), a
corporation organized under the laws of the State of California.
WITNESSETH:
WHEREAS, Lincoln National proposes to issue to the public certain variable
annuity contracts ("Contracts") and has, by resolution of its Board of Directors
on November 4, 1982, and by directive of its Chief Executive Officer on February
7, 1989, authorized the creation of a segregated investment account in
connection therewith; and
WHEREAS, Lincoln National has established the Separate Account for the
purpose of issuing the Contracts and has registered the Separate Account with
the Securities and Exchange Commission ("Commission") as a unit investment trust
under the Investment Company Act of 1940; and
WHEREAS, the Contracts to be issued by Lincoln National are registered with
the Commission for offer and sale to the public, and otherwise are in compliance
with all applicable laws; and
WHEREAS, AFD is a broker-dealer registered under the Securities Exchange
Act of 1934 and a member of the National Association of Securities Dealers,
Inc., and proposes to form a selling group for the distribution of said
Contracts; and
WHEREAS, Lincoln National desires to obtain the services of AFD as
principal underwriter of the Contracts issued by Lincoln National through the
Separate Account;
NOW THEREFORE, in consideration of the foregoing, and of the mutual
covenants and conditions set forth herein, and for other good and valuable
consideration, Lincoln National, the Separate Account and AFD hereby agree as
follows:
Duties of AFD
- -------------
1. AFD will form a selling group consisting of broker-dealers appointed by
Lincoln National to distribute the Contracts which are issued by Lincoln
National through the Separate Account and are registered with the Commission for
offer and sale to the public. Broker-dealers listed in the attached Schedule B -
Schedule of Broker-Dealers to be Excluded from the Selling Group - may not be
members of such selling group. Said Schedule B may be amended from time to time
by the mutual consent of the undersigned parties.
2. AFD will enter into and maintain a dealer agreement with each broker-
dealer joining such selling group ("member"); an executed copy of each will be
provided to Lincoln National. Any such dealer agreement expressly will be made
subject to this Agreement. Any such dealer agreement will provide: (i) that each
member will distribute the Contracts only in those jurisdictions in which the
Contracts are registered or qualified for sale and only through duly licensed
registered representatives of the members who are fully licensed with Lincoln
National to sell the Contracts in the applicable jurisdiction(s); (ii) that all
applications and initial and subsequent payments under the Contracts collected
by the member will be remitted promptly
<PAGE>
by the member to Lincoln National at such address as it may from time to time
designate; (iii) that each member will comply with all applicable federal and
stated laws, rules and regulations; and (iv) that the Contracts will not be
offered in connection with plans qualified under Section 403(b) of the U.S.
Internal Revenue Code.
3. AFD will use reasonable efforts to provide information and marketing
assistance to the members, including preparing and providing members with
advertising materials and sales literature, and providing members with current
Prospectuses of the Contracts and of American Variable Insurance Series (the
"Series"). AFD will use reasonable efforts to ensure that members deliver only
the currently effective Prospectuses of the Contracts and the Series. AFD and
Lincoln National will cooperate in the development of advertising and sales
literature, as requested. AFD will deliver to members, and use reasonable
efforts to ensure that members use, only sales literature and advertising
material which conforms to the requirements of federal and state laws and
regulations and which has been authorized by Lincoln National and AFD. AFD will
be responsible for filing sales literature and advertising material, where
necessary, with appropriate securities regulatory authorities, including the
National Association of Securities Dealers, Inc. AFD will not distribute any
Prospectus, sales literature, advertising material or any other printed matter
or material relating to the Contracts or the Series if, to its knowledge, any of
the foregoing misstates and duties, obligations or liabilities of Lincoln
National or AFD. AFD will not actively encourage any member to sell Contracts to
employees of hospitals in the State of California that are members of the
California Hospital Association.
4. AFD shall not be responsible for (i) taking or transmitting applications
for the Contracts; (ii) examining or inspecting risks or approving, issuing or
delivering Contracts; (iii) receiving, collecting or transmitting premium
payments; (iv) assisting in the completion of applications for Contracts; (v)
paying sales commissions to licensed broker-dealers and insurance agents; and
(vi) otherwise offering and selling Contracts directly to the public.
5. AFD will bear all its expenses of providing services under this
Agreement, including the cost of preparing, printing and mailing advertising and
sales literature, and the cost of printing and mailing Series and Contract
Prospectuses which are used for sale purposes, except that AFD shall not bear
the expenses of registering and qualifying shares for Contracts for sale under
federal and state laws and expenses of preparing, printing and mailing
Prospectuses, proxies and shareholder reports to the extent authorized by laws.
It is understood that Lincoln National will not be required to bear the cost of
preparing, printing and mailing Series Prospectuses. AFD will, except with
respect to agents and brokers with Lincoln National Sales Corporation ("LNSC"),
reimburse Lincoln National for all state appointing fees and associated renewal
fees incurred to enable members to sell the Contracts.
6. AFD will furnish to Lincoln National such information with respect to
the Series in such form and signed by such of its officers as Lincoln National
may reasonably request, and will warrant that the statements therein contained
when so signed will be true and correct. AFD will advise Lincoln National
immediately of: (a) any request by the Commission (i) for amendment of the
registration statement relating to the Contracts or the Series or (ii) for
additional information; (b) the issuance by the Commission of any stop order
suspending the effectiveness of the registration statement of the Contracts or
the Series or the initiation of any proceedings for that purpose; (c) the
institution of any proceeding, investigation or hearing involving the offer of
sale of the Contracts or the Series of which it becomes aware; or (d) the
happening of any material even, if known, which makes untrue any statement made
in the registration statement of the Contracts or the Series or which requires
the making of a change therein in order to make any statement made therein not
misleading.
<PAGE>
7. AFD will use reasonble efforts to have the Series register for sale
under the Securities Act of 1933 and, as required, under state securities laws,
from time to time as necessary, such additional shares of the Series as may
reasonably be necessary for use as the funding vehicle for the Contracts.
Duties of Lincoln National
- --------------------------
8. Lincoln National or its agent will receive and process applications and
premium payments in accordance with the terms of the Contracts and the current
Prospectuses. All applications for Contracts are subject to acceptance or
rejection by Lincoln National in its sole discretion. Lincoln National will
inform AFD of any such rejection and the reason therefor.
9. Lincoln National will be responsible for filing the Contracts,
applications, forms, sales literature and advertising material, where necessary,
with appropriate insurance regulatory authorities.
10. Lincoln National will furnish to AFD such information with respect to
the Separate Account and the Contracts in such form and signed by such of its
officers as AFD may reasonably request, and will warrant that the statements
therein contained when so signed will be true and correct. Lincoln National will
advise AFD immediately of: (a) any request by the Commission (i) for amendment
of the registration statement relating to the Contracts or the Series or (ii)
for additional information; (b) the issuance by the Commission of any stop order
suspending the effectiveness of the registration statement of the Contracts or
the Series or the initiation of any proceedings for that purpose; (c) the
institution of any proceeding, investigation, hearing or other action involving
the offer or sale of the Contracts or the fund of which it becomes aware; (d)
the happening of any material event, if known, which makes untrue any statement
made in the registration statement of the Contracts or the Series or which
requires the making of a change therein in order to make any statement made
therein not misleading.
11. Lincoln National will use reasonable efforts to register for sale, from
time to time as necessary, additional dollar amounts of the Contracts under the
Securities Act of 1933, and, should it ever be required, under state securities
laws and to file for approval under state insurance laws when necessary and will
maintain the Investment Company Act of 1940 registration of the Separate
Account.
12. Lincoln National will pay to members of this selling group such
commissions as are from time to time set forth in dealer agreements. Such dealer
agreements shall provide for the return of sales commissions by the members to
Lincoln National if the Contracts are tendered for redemption to Lincoln
National in accordance with the 10-day review provision in the Contract.
13. Lincoln National will bear its expenses of providing services under
this Agreement, including the cost of preparing (including typesetting costs),
printing and mailing Prospectuses of the Contracts to Contract Owners, expenses
and fees of registering or qualifying the Contracts and the Separate Account
under federal or state laws, and any direct expenses incurred by its employees
in assisting AFD in performing its duties hereunder. Lincoln National will pay
to AFD such remuneration for its services and for the services of its salaried
employees, and such reimbursement for its charges and expenses, as may be
contained in such schedule of renumeration as may be adopted and appended to
this Agreement from time to time. (See Schedule A - Commission to Members and
Remuneration to AFD.) Said Schedule A may be amended from time to time by the
mutual consent of the undersigned parties; except that AFD may alter the ratio
of commissions paid to dealers and renumeration paid to AFD as set forth in
paragraph 25 of this Agreement.
<PAGE>
Warranties
- ----------
14. Lincoln National represents and warrants to AFD that: (i) a
registration statement under the Securities Act of 1933 (File No. 33-27783) and
under the Investment Company Act of 1940 (File no. 811-5721) on Form N-4 with
respect to the Contracts and Separate Account has been filed with the Commission
in the form previously delivered to AFD, and copies of any and all amendments
thereto will be forwarded to AFD at the time that they are filed with the
Commission; (ii) the registration statement and any further amendments or
supplements thereto will, when they become effective, conform in all material
respects to the requirements of the Securities Act of 1993 and the Investment
Company Act of 1940, and the rules and regulations of the Commission thereunder,
and will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein, or necessary to make the statements
therein not misleading; provided, however, that this representation and warranty
shall not apply to any statement or omission made in reliance upon and in
conformity with information furnished in writing to Lincoln National by AFD
expressly for use therein; (iii) Lincoln National is validly existing as a stock
life insurance company in good standing under the laws of the State of Indiana,
with power (corporate or other) to own its properties and conduct its business
as described in the Prospectus, and has been duly qualified for the transaction
of business and is in good standing under the laws of each other jurisdiction in
which it owns or leases properties, or conducts any business, so as to require
such qualification; (iv) the Contracts to be issued through the Separate Account
have been duly and validly authorized and, when issued and delivered against
payment therefor as provided in the Prospectuses and in the Contracts, will be
duly and validly issued and will conform to the description of such Contracts
contained in the Prospectuses relating thereto; (v) Lincoln National will not
pay commissions to persons who, to the best of Lincoln National's knowledge, are
not appropriately licensed in a manner as to comply with the state insurance
laws; (vi) the performance of this Agreement and the consummation of the
transactions herein contemplated will not result in a breach or violation of any
of the terms or provisions of, or constitute a default under any statute, any
indenture, mortgage, deed of trust, note agreement or other agreement or
instrument to which Lincoln National is a party or by which Lincoln National is
bound, Lincoln National's Charter as a stock life insurance company or By-laws,
or any order, rule or regulation of any court or governmental agency or body
having jurisdiction over Lincoln National or any of its properties; and no
consent, approval, authorization or order of any court or governmental agency or
body which has not been obtained by the effective date of this Agreement is
required for the consummation by Lincoln National of the transactions
contemplated by this Agreement; and (vii) there are no material legal or
governmental proceedings pending to which Lincoln National or the Separate
Account is a party or of which any property of Lincoln National or the Separate
Account is the subject, other than set forth in the Prospectus relating to the
Contracts, and other litigation incident to the kind of business conducted by
Lincoln National which, if determined adversely to Lincoln National, would not
individually or in the aggregate have a material adverse effect on the financial
position, surplus or operations of Lincoln National; and (viii) any information
furnished in writing by Lincoln National to AFD for use in the registration
statement of the Series will not result in the registration statement's failing
to conform in all respects to the requirements of the Securities Act of 1933 and
the rules and regulations thereunder or containing any untrue statement of a
material fact or omission to state a material fact required to be stated therein
or necessary to make the statements therein not misleading.
15. AFD represents and warrants to Lincoln National that: (i) a
registration statement under the Securities Act of 1933 (File No. 2-86838), and
under the Investment Company Act of 1940 (File No. 811-3857) with respect to
American Variable Insurance Series has been filed with the Commission in the
form previously delivered to Lincoln National, and copies of any and all
amendments thereto will be forwarded to Lincoln National at the time they are
filed with the Commission; (ii) the Series' registration statement and any
further amendments or supplements thereto will, when they become effective,
conform in all material respects to the requirements of the Securities Act of
1933 and the Investment Company Act of 1940, and the rules and regulations of
the Commission thereunder, and will not contain an untrue statement of material
fact or omit to
<PAGE>
state a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided however, that this representation
and warranty shall not apply to any statements of omissions made in reliance
upon and in conformity with information furnished in writing to AFD by Lincoln
National expressly for use therein; (iii) the performance of its duties under
this Agreement by AFD will not result in a breach or violation of any of the
terms or provisions or constitute a default under any statute, any indenture,
mortgage, deed of trust, note agreement or other agreement or instrument to
which AFD is a party or by which AFD is bound, the Certificate of Incorporation
or By-Laws of AFD, or any order, rule or regulation of any court or governmental
agency or body having jurisdiction over AFD or its property; and (iv) any
information furnished in writing by AFD to Lincoln National for use in the
registration statement for the Contracts will not result in the registration
statement's failing to conform in all respects to the requirements of the
Securities Act of 1933 and the rules and regulations thereunder or containing
any untrue statement of a material fact or omission to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading; (v) it is a broker-dealer duly registered with the Commission
pursuant to the Securities Exchange Act of 1934 and a member in good standing of
the National Association of Securities Dealers, Inc. and is in compliance with
the securities laws in those states in which it conducts business as a broker-
dealer; (vi) it will use reasonable efforts to ensure that no offering, sale or
other disposition of the Contracts will be made until it has been notified by
Lincoln National that the subject registration statements have been declared
effective and the Contracts have been released for sale by Lincoln National, and
that such offering, sale or other disposition shall be limited to those
jurisdictions that have approved or otherwise permit the offer and sale of the
Contracts by Lincoln National; and (vii) it will comply with the requirements of
state broker-dealer regulations and the Securities Exchange Act of 1934 as each
applies to AFD and shall conduct its affairs in accordance with the Rules of
Fair Practice of the National Association of Securities Dealers, Inc.
Miscellaneous
- -------------
16. AFD makes no representation or warranty regarding the number of
Contracts to be sold by licensed broker-dealers and insurance agents or the
amount to be paid thereunder. AFD does, however, represent that it will actively
engage in its duties under this Agreement on a continuous basis while the
Agreement is in effect and there is an effective registration of the Contracts
and of the Series, or its successor, with the Commission.
17. AFD may act as principal underwriter, sponsor, distributor or dealer
for issuers other than Lincoln National or its affiliates in connection with
mutual funds or insurance products; except that AFD shall not, while this
Agreement is in effect, act as principal underwriter, sponsor, distributor or
dealer with respect to insurance contracts which are issued by insurance
companies other than Lincoln National or its affiliates that are similar to the
Contracts.
While this Agreement is in effect, Lincoln National will not issue, through
any broker-dealer (except LNSC) and those broker-dealers listed in Schedule B
attached hereto--"Schedule of Brokers to be Excluded from the Selling Group"),
any insurance contract similar to the Contracts, without the written consent of
AFD. Schedule C attached hereto--"List of Broker-Dealers Selling Similar
Contracts With Consent of AFD"-- contains the listing of those broker-dealers
for which AFD has so consented. Furthermore, Lincoln National will not enter
into any agreement with any other organization for the purpose of distributing
the Contracts.
In addition, AFD agrees not to offer the Contracts through the Broker-
Dealers listed in the aforesaid Schedule B. It is understood that shares of
American Variable Insurance Series may be sold to fund insurance contracts of
issuers other than Lincoln National or its affiliates or to other shareholders
in accordance with Internal Revenue Code Section 817 (h) and the regulations
thereunder.
<PAGE>
18. Nothing in this Agreement shall obligate Lincoln National to appoint
any member or registered representative of a member its agent for purposes of
the distribution of the Contracts. Nothing in this Agreement shall be construed
as requiring AFD to effect sales of the Contracts directly to the public or to
act as an insurance agent or insurance broker on behalf of Lincoln National for
purposes of state insurance laws.
19. AFD agrees to indemnify Lincoln National (or any control person,
shareholder, director, officer or employee of Lincoln National) for any
liability incurred (including costs relating to defense of any action) arising
out of any AFD act or omission relating to (i) rendering services under this
Agreement or (ii) the purchase, retention or surrender of a Contract by any
person or entity; provided, however that indemnification will not be provided
hereunder for any such liability that results from the willful misfeasance, bad
faith or gross negligence of Lincoln National or from the reckless disregard by
Lincoln National of the duties and obligations arising under this Agreement.
20. Lincoln National agrees to indemnify AFD (or any control person,
shareholder, director, officer or employee of AFD) for any liability incurred
(including costs relating to defense of any action) arising out of any Lincoln
National act or omission relating to (i) rendering services under this Agreement
or (ii) the purchase, retention or surrender of a Contract by any person or
entity; provided, however, that indemnification will not be provided hereunder
for any such liabilty that results from the willful misfeasance, bad faith and
gross negligence of AFD or from the reckless disregard by AFD of the duties and
obligations arising under this Agreement.
21. This Agreement will terminate automatically upon its assignment, as
that term is defined in the Investment Company Act of 1940. The parties
understand that there is no intention to create a joint venture in the subject
matter of this Agreement. Accordingly, the right to terminate this Agreement and
to engage in any activity not inconsistent with this Agreement is absolute. This
Agreement will terminate, without the payment of any penalty by either party:
(a) at the option of Lincoln National upon six months' advance written notice to
AFD; or (b) at the option of AFD upon six months' advance written notice to
Lincoln National; or (c) at the option of Lincoln National upon institution of
formal proceedings against AFD by the National Association of Securities
Dealers, Inc. or by the Commission; or (d) at the option of AFD upon the
institution of formal proceedings against LNL by the Department of Insurance of
a state; or (e) as otherwise provided in the Investment Company Act of 1940.
22. Each notice required by this Agreement shall be given in writing and
delivered by certified mail-return receipt requested.
23. This Agreement shall be subject to the laws of the State of Indiana
and construed so as to interpret the Contracts as insurance products written
within the business operation of Lincoln National.
24. This Agreement covers and includes all agreements, oral and written
(expressed or implied) between Lincoln National and AFD with regard to the
marketing and distribution of the Contracts, and supersedes any and all
Agreements between the parties with respect to the subject matter of this
Agreement; except that this Agreement shall not affect the operation of any
previous agreements entered into between Lincoln National and AFD unrelated to
the subject matter of this Agreement.
25. This Agreement, along with any Schedules attached hereto and
incorporated herein by reference, may be amended from time to time by the mutual
agreement and consent of the undersigned parties, provided such amendment be in
writing and duly executed; except that with respect to any Schedule A, AFD in
its sole discretion, may alter upon written notice to Lincoln National the ratio
of member commissions paid to remuneration paid to AFD. AFD agrees to reimburse
Lincoln National any remuneration previously received
<PAGE>
to the extent necessary to pay additional commissions to members due to a
retroactive change of this ratio.
IN WITNESS WHEREOF, the undersigned parties have caused this Agreement to be
duly executed and attested as follows:
The Lincoln National Life
Insurance Company on behalf of
itself and Separate Account H
of the Lincoln National Life
Insurance Company
Attest: /s/ Kelly D. Clevenger By: /s/ Robert A. Nikels
----------------------- ------------------------------
American Funds Distributors, Inc.
Attest: /s/ Mike Downer By: /s/ Hoyt J. Turner
----------------------- ------------------------------
<PAGE>
SCHEDULE A - COMMISSIONS TO MEMBERS AND REMUNERATION TO AFD
Effective July 12, 1989
1. All Sales of the Contracts (also referred to herein as "American Legacy
II").
a) Lincoln National will make direct payment of commissions to members
and remuneration to AFD with respect to all sales of the above-cited
Contracts according to the schedule set forth below. Where state law
prohibits direct payment to AFD, payment will be made in accordance
with the applicable state law.
Commissions
to Members
Other than Remuneration
LNSC To AFD
----------- ------------
All Contract Purchase Payments
From Contracts Sold 4.7% 1.00%
Commissions Remuneration
To LNSC To AFD
----------- ------------
All Contract Purchase Payments
From Contracts Sold 5.2% 0.50%
b) All annual .25% continuing commission will be paid to dealers on the
value of all Contract purchase payments beginning in the second
Contract year. This compensation will be paid at the end of each
calendar quarter and will be calculated as follows: At the end of each
calendar quarter, Lincoln National will calculate and pay, for all
Contracts which have been in force for 15 months or more as of the
last day of the quarter, an amount equal to .0625% of an amount equal
to the quarter ending account value less any deposits made in the
previous 15 months. This continuing commission is not paid on
Contracts that have been annuitized.
c) A .25% commission is all that will be paid on transfers from The
American Legacy to American Legacy II.
2. Annuitization
Commissions
to Members
Other than Remuneration
LNSC To AFD
----------- ------------
All Purchase Payments 4.7% 1.00%
five years and individual
Contract Earnings which are
annuitized (Contracts issued
by LNL that are annuitized
solely on a fixed basis will
result in a separate
Contract being issued.)
<PAGE>
Commissions Remuneration
To LNSC To AFD
----------- ------------
All Purchase Payments held
five years and individual 5.2% 0.45%
Contract Earnings which are
annuitized (Contracts issued
by LNL that are annuitized
solely on a fixed basis will
result in a separate Contract
being issued.)
3. Sell and Reload
---------------
Commissions
to Members
Other than Remuneration
LNSC To AFD
----------- ------------
All Contract Purchase Payments
arising from Reloaded Contracts Sold 3.7% 1.00%
Commissions Remuneration
To LNSC To AFD
----------- ------------
All Contract Purchase Payments
arising from Reloaded Contracts Sold 4.2% 0.50%
b) "Sell and Reload" occurs when Contract Purchase Payments are again
subjected to a contingent deferred sales charge (once such charge has
expired with respect to all Contract Purchase Payments) for purposes
of increasing the minimum death benefit.
c) An annual continuing commission of .25% will be paid on the value of
such Purchase Payments in the manner indicated in 1(b) above, except
that the first year's continuing commission of .25% will be paid when
the initial commission is paid.
4. Sales Volume Allowance
----------------------
AFD will give up a portion of its remuneration in order to provide an
extra sales volume allowance of .25% of Purchase Payments to be paid to
dealers maintaining a sales volume of at least $5,000,000 in each calendar
year. Lincoln National, upon notification from AFD, will deduct enough from
AFD's remuneration to pay this additional allowance to that dealer on all
sales for that calendar year. Payments will be made to dealers every
quarter after notification from AFD is received by Lincoln National.
5. Introductory Period
-------------------
From September 1 through October 31, 1989, AFD will waive its
remuneration in connection with new sales of the Contracts, in order that
the commissions to dealers be increased by amounts which AFD has waived.
<PAGE>
IN WITNESS WHEREOF, the undersigned parties have caused this Schedule A -
Commissions to Members and Remuneration to AFD to be duly executed and
attested as follows:
The Lincoln National Life
Insurance Company
Attest: /s/ Kelly D. Clevenger By: /s/ Robert A. Nikels
----------------------- -------------------------
American Funds Distributors, Inc.
Attest: /s/ Mike Downer By: /s/ Hoyt J. Turner
----------------------- -------------------------
<PAGE>
SCHEDULE B - BROKER-DEALERS TO BE EXCLUDED FROM SELLING GROUP
-------------------------------------------------------------
ABI Management
H.C. Copeland
Durham
James Freeman
Mutual of America
United Resources
R.M. Weber
Western Annuities
Zahorik
<PAGE>
SCHEDULE C - LIST OF BROKER-DEALERS SELLING
SIMILAR CONTRACTS WITH CONSENT OF AFD
1. Advisory Financial Consultants - CA
2. American Capital Corp. - PA
*3. American Investors Company - CA
4. APS Securities Corp. - TX
*5. Bates Securities, Inc. - IL
6. Beach Street Financial Corp. - CA
7. Benefit Securities Inc. - AK
8. Berthel, Fisher & Fleischman - IA
*9. Boardwalk Capital Corp. - CA
10. Capital Analysts Inc. - PA
11. CBL Equities, Inc. - IL
12. CES Insurance Agency - MA
*13. Chubb Securities Corp. - NH
14. Colorado Investors Resources Inc. - CO
*15. DeRand Investment Corp. - TX
*16. E.F. Hutton Inc. - MI
*17. E.I. Sales Inc. - IA
18. Equity Services Inc. - VT
19. Federation for Financial Independence - CA
(Ind. Advantage Fin. & Ins. Services, Inc.)
20. Financial Designs, Ltd. - CA
*21. Financial Network Investment Corp. - CA
22. First Financial Capital Corp. - TX
23. Frank B. Hall Securities Inc. - WA
*24. FSC Securities Corp. - GA
*25. Hackett Associates - PA
26. H.C. Copeland - NJ
*27. H.D. Vest - TX
*28. International Money Management Group - MD
29. Investors Brokerage Services - IL
30. Jason Mackinzie Securities Inc. - GA
*31. Laney & Company - WA
*32. Linsco Financial Group Inc. - MA
*33. Main Street Management Co. - CT
*34. Market Securities Corp. - FL
35. Marsh & McLennan Securities Corp. - NY
36. Municicorp of California - CA
*37. Mutual Service Corporation - MI
*38. Paine Webber Jackson & Curtis - NY
39. Pal-Star Management Corp. - IL
*40. Parker-Hunter Inc. - PA
41. PEBSCO - OH
42. Philadelphia Financial Advisors - PA
43. Portsmouth Financial Services - CA
*44. Raffensperger, Hughes & Co. - IN
*45. William L. Marshall - PA
46. Zahorik - CA
* Also have Group Selling Agreement with AFD
<PAGE>
EXHIBIT 3(b)
AMENDMENT TO THE PRINCIPAL UNDERWRITING AGREEMENT
This amendment, dated as of March , 1997 (this "Amendment"), to a certain
Principal Underwriting Agreement effective on the 12th day of July, 1989 (the
"Original Agreement"), is executed by and between LINCOLN NATIONAL LIFE
INSURANCE COMPANY ("Lincoln National"), a life insurance company organized under
the laws of the State of Indiana, on behalf of itself and SEPARATE ACCOUNT H OF
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY ("Separate Account"), a separate
account established by Lincoln National pursuant to the Indiana Insurance Code,
and AMERICAN FUNDS DISTRIBUTORS, INC. ("AFD"), a corporation organized under the
laws of the state of California (collectively, the "Parties").
WITNESSETH:
WHEREAS, the Original Agreement provides for AFD to serve as principal
underwriter for certain variable annuity contracts defined more fully therein
and marketed under the name "American Legacy II"; and
WHEREAS, the Parties desire to restate in full the compensation schedule to
the Original Agreement to reflect amendments to the schedule that the Parties
have agreed upon from time to time; and
WHEREAS, the Parties desire to extend the terms and conditions of the
Original Agreement to cover a new class of variable annuity contracts proposed
to be issued by Lincoln National through the Separate Account, which would
provide for investment in Class 2 Shares of the American Variable Insurance
Series (the "Series") and for which AFD would serve as principal underwriter and
which would be marketed under the name "American Legacy III";
NOW THEREFORE, in consideration of the foregoing, and of the mutual
covenants and conditions contained herein and in the Original Agreement, and of
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, Lincoln National, the Separate Account and AFD hereby agree
as follows:
1. American Legacy II Compensation. Schedule A to the Original Agreement is
hereby replaced by Schedule A-II attached to this Amendment, which restates in
full the compensation agreed upon by the Parties for the American Legacy II
Contracts, as modified from time to time by the Parties pursuant to Section 25
of the Original Agreement. All terms and conditions of the Original Agreement,
except as Schedule A is amended hereby, are hereby ratified and confirmed with
respect to the American Legacy II Contracts.
2. American Legacy III Contracts. Lincoln National hereby authorizes AFD to
serve as principal underwriter for the American Legacy III Contracts and, in
such capacity, to form a selling group for the American Legacy III Contracts,
and AFD accepts such authorization, subject to the same terms and conditions of
the Original Agreement as apply to the American Legacy II Contracts as though
set forth in full herein, except as provided otherwise in Section 3
<PAGE>
of this Amendment. For this purpose and subject to Section 3 of this Amendment,
all references to "Contracts" in the Original Agreement, as amended hereby,
shall include the American Legacy III Contracts; all references therein to
"Member" shall include each broker-dealer joining the American Legacy III
selling group; all references therein to "Registration Statement" for the
Contracts shall include the Registration Statement of the Lincoln National
Variable Annuity Account H as filed with the Commission on Form N-4 (SEC File
No. 333-18419); and all references therein to "Series" shall include the Class 2
Shares of the Funds of the American Variable Insurance Series.
3. Special Terms and Conditions for the American Legacy III Contracts. The
following terms and conditions shall apply with respect to the American Legacy
III Contracts.
a. Effective Date. The duties, warranties, and other undertakings of the
Parties under the Original Agreement shall not take effect with
respect to American Legacy III Contracts until the initial
registration statement for the American Legacy III Contracts has been
declared effective by the Commission.
b. Compensation. Compensation with respect to the American Legacy III
Contracts shall be paid in accordance with Schedule A-III which is
attached to, and hereby incorporated into this Amendment; provided,
however, that Lincoln National shall not be obligated to pay servicing
fees or trail commissions to Members in the event that Lincoln
National has not received, or is no longer eligible to receive,
payments to reimburse expenses under the plan of distribution adopted
by the Class 2 Shares of the Series of the American Variable Insurance
Series pursuant to rule 12b-1 under the Investment Company Act of
1940. Changes may be made to Schedule A-III from time to time in
accordance with Section 25 of the Original Agreement governing changes
to the Schedules.
c. 12b-1 Plan. AFD shall take all necessary and appropriate actions to
ensure that the plan of distribution adopted by the Class 2 Shares of
the Funds of American Variable Insurance Series pursuant to rule 12b-1
under the Investment Company Act of 1940 is administered and operated
in accordance with all applicable rules and regulations promulgated by
the Commission which are either currently in effect or which may be
adopted from time to time, and that such plan shall provide for
reimbursement to Lincoln National of its expenses relating to sales
and servicing of American Legacy III Contracts by Members.
4. Counterparts. This Amendment may be executed in two or more
counterparts, each of which, when so executed, shall be deemed to be an
original, but such counterparts taken together shall constitute but one and the
same instrument.
<PAGE>
IN WITNESS WHEREOF, the undersigned parties have caused this Amendment to
be duly executed and attested as follows:
The Lincoln National Life Insurance Company
on behalf of itself and Separate Account H of
the Lincoln National Life Insurance Company
Attest: By:
Attest: American Funds Distributors:
By:
<PAGE>
EXHIBIT 4
ENHANCED GUARANTEED MINIMUM DEATH BENEFIT (EGMDB)
Made a part of the Contract to which it is attached ("this Contract").
The following shall be inserted into Section 2.13 DEATH OF ANNUITANT. It
replaces the first paragraph of Section 2.13. It also replaces the "Increased
Guaranteed Minimum Death Benefit" rider Form DBA-2 which was attached to your
Contract.
The payment of the death benefit will occur upon receipt of: (1) Proof,
satisfactory to LNL, of the death of the Annuitant; (2) Written
authorization for payment; and (3) Receipt by LNL of all required claim
forms, fully completed. LNL will then pay to the Beneficiary a Death
Benefit equal to the greater of the following two amounts:
a) the current value of the Contract as of the date on which the death
claim is approved for payment as described above; or
b) for Annuitant ages up to and including 75: the highest account value
at the time of fund valuation on any policy anniversary date following
election of this rider.
for Annuitant ages over 75: the highest account value at the time of
fund valuation on any policy anniversary date up to and including age
75 following election of this rider.
The highest account value is adjusted for certain transactions. It is
increased by Purchase Payments and is decreased by partial
withdrawals, partial annuitizations, and premium taxes incurred
subsequent to such policy anniversary date on which the highest
account value occurred.
For benefits to be payable under the EGMDB, due proof of the death of the
Annuitant must be received before a choice is made to receive proceeds under
an Annuity Payment Option. Once the Annuity Payment Option has been elected,
the EGMDB will be discontinued and the charge for this benefit will cease.
Due proof of death may be a certificate of death, a certified copy of the
statement of death from the attending physician, a certified copy of a
decree of a court of competent jurisdiction as to the finding of death, or
any other proof of death that is acceptable to LNL.
The EGMDB takes effect as of the time of fund valuation on the next policy
anniversary date following the election of this benefit. For an election of
this benefit made on any policy anniversary date or at Contract inception,
the EGMDB takes effect at the time of fund valuation on that date.
There is a daily charge for this benefit at an annual rate of 0.15%, which is
deducted from the Gross Investments Rate of each sub-account. The charge will
begin at the time of fund valuation on the policy anniversary date following
the election of this rider. This charge will continue for all future Contract
years, including years following age 75, unless the Owner elects to
discontinue this benefit.
After this benefit has been elected, the Owner may discontinue it at any
time. If discontinued, the benefit will terminate at the time of fund
valuation on the next policy anniversary date. The 0.15% annual charge will
also cease when the benefit terminates. If the Owner elects to discontinue
this benefit, the first paragraph of Section 2.13 will be reinstated in its
original form prior to election of this rider. Rider Form DBA-2 will also be
reinstated in its entirety. If the Owner elects to discontinue this benefit
on a policy anniversary date, the benefit and the charge will terminate at
the time of fund valuation on that date. Once discontinued, the Owner may not
re-elect this benefit.
The following shall be inserted into Section 1.04 NET INVESTMENT RATE AND NET
INVESTMENT FACTOR following the sixth paragraph:
For any period in which the EGMDB is in effect, the Net Investment Rate for
each sub-account is equal to the Gross Investment Rate of the Fund less a
daily charge. The daily charge is deducted at an annual rate of 1.50% on each
day of the Valuation Period. The Net Investment Rate is then adjusted, plus
or minus, for any taxes imposed due to the operation of the Variable Account.
This daily charge of 1.50% consists of 1.25% for mortality and distribution
expense risks, 0.15% for the EGMDB rider, and 0.10% for administrative
expenses.
The Lincoln National Life Insurance Company
Nancy J. Alford, Vice President
Form DBA-4 1/97
<PAGE>
EXHIBIT 8(a)
FUND PARTICIPATION AGREEMENT
-----------------------------
THIS AGREEMENT, effective this 12th day of July, 1989 among THE LINCOLN
NATIONAL LIFE INSURANCE COMPANY ("Lincoln National"), a life insurance company
organized under the laws of the State of Indiana for itself and on behalf of
SEPARATE ACCOUNT H OF THE LINCOLN NATIONAL LIFE INSURANCE COMPANY ("Account"), a
separate account established by Lincoln National in accordance with the laws of
the State of Indiana, and AMERICAN VARIABLE INSURANCE SERIES ("Series"), an
open-end management company organized under the laws of the State of
Massachusetts.
WITNESSETH
WHEREAS, the Account has been established by Lincoln National pursuant to
the Indiana Insurance Code in connection with certain variable annuity contracts
("Contracts") proposed to be issued to the public by Lincoln National; and
WHEREAS, the Account has been registered as a unit investment trust under
the Investment Company Act of 1940; and
WHEREAS, the income, gains and losses, whether or not realized, from assets
allocated to the Account are, in accordance with the applicable Contracts, to be
credited to or charged against such Account without regard to other income,
gains or losses of Lincoln National; and
WHEREAS, the Account is subdivided into various subaccounts ("Subaccounts")
under which income, gains and losses, whether or not realized, from assets
allocated to each such Subaccount are, in accordance with the applicable
Contracts, to be credited to or charged against such Subaccounts without regard
to other income, gains or losses of other Subaccounts or of Lincoln National;
and
WHEREAS, the Series is divided into various funds ("Funds"), each Fund
being subject to certain fundamental investment policies and restrictions which
may not be changed without a majority vote of the shareowners of such Fund; and
WHEREAS, certain Funds will serve as the underlying investment medium for
certain Subaccounts; and
WHEREAS, American Funds Distributors, Inc., the principal underwriter for
the Contracts to be funded by the Account, is a broker-dealer registered as such
under the Securities Exchange Act of 1934;
NOW THEREFORE, in consideration of the foregoing and of mutual covenants
and conditions set forth herein and for other good and valuable consideration,
Lincoln National, the Account, and the Series, hereby agree as follows:
<PAGE>
1. The Contracts funded through the Account will provide for the
allocation of net amounts among certain Subaccounts for investment in such
shares of the Funds as may be offered from time to time in the prospectus of the
Contracts. The selection of the particular Subaccount is to be made by the
Contract Owner and such selection may be changed in accordance with the terms of
the Contracts.
2. Fund shares to be made available to certain Subaccounts shall be sold
by the respective Funds and purchased by Lincoln National for the corresponding
Subaccount at the net asset value (without the imposition of a sales load) next
computed after receipt of each order, as established in accordance with the
provisions of the then current prospectus of the Series. Shares of particular
Funds shall be ordered in such quantities and at such times as determined by
Lincoln National to be necessary to meet the requirements of the Contracts.
Orders or payments for shares purchased will be sent promptly to the Series and
will be made in the manner established from time to time by the Series.
The Series reserves the right to delay transfer of its shares until the
payment check has cleared. The Series reserves the right to suspend sales if the
Board of Trustees of the Series deems it appropriate and in the best interests
of the Series or in response to the order of an appropriate regulatory
authority.
3. Transfer of the Series' shares will be by book entry only. No stock
certificates will be issued to the Account. Shares ordered from a particular
Fund will be recorded in an appropriate title for the corresponding Subaccount
by Lincoln National.
4. The Series shall furnish notice promptly to Lincoln National of any
dividend or distribution payable on any shares underlying Subaccounts. All of
such dividends and distributions as are payable on shares of a Fund recorded in
the title for the corresponding Subaccount shall be automatically reinvested in
additional shares of that Fund. The Series shall notify Lincoln National of the
number of shares so issued. Lincoln National will provide the Series a list of
Contract owners upon written notice from the Series' Board.
5. The Series shall pay all expenses incidental to its performance under
this Agreement. The Series shall see to it that all of its shares are registered
and authorized for issue in accordance with applicable federal and state laws
prior to their purchase for the Subaccount. The Series shall bear the expenses
for the cost of registration of its shares, preparation of its prospectuses,
proxy materials and reports, the printing and distribution of such items to each
Contract owner who has allocated net amounts to any Subaccount, the preparation
of all statements and notices required by any federal or state law, or taxes on
the issue or transfer of the Series' shares subject to this Agreement.
6. Lincoln National shall make no representations concerning the Series'
shares except those contained in the then current prospectus of the Series and
in printed information subsequently issued on behalf of the Series as
supplemental to such prospectus.
<PAGE>
7. Shares of the Series may be offered to separate accounts of various
insurance companies in addition to Lincoln National. The parties to this
Agreement recognize that, due to differences in tax treatment or other
considerations, the interests of various Contract (or policy) owners
participating in one or more Funds might, at some time, be in conflict.
Each party shall report to the other party any potential or existing
conflict of which it becomes aware. The Board of Trustees of the Series shall
promptly notify Lincoln National of the existence of an irreconcilable material
conflict and its implications. If such a conflict exists, Lincoln National will,
at its own expense, take whatever action it deems necessary to remedy such
conflict; in any case, Contract owners will not be required to bear such
expenses.
8. Lincoln National shall be responsible for assuring that the Account
calculates pass-through voting privileges of Contract owners in a manner
consistent with the method of calculating pass-through voting privileges set
forth in the current Contract prospectuses.
9. The Series agrees to comply with the diversification requirements of
IRC 817(h) and any regulations therefor.
10. This Agreement shall terminate:
a. at the option of Lincoln National or of the Series upon six
months' advance written notice to the other;
b. at the option of Lincoln National upon institution of formal
proceedings against the Series by the Securities and Exchange
Commission;
c. Upon requisite vote of the Contract owners having an interest in a
particular Subaccount to substitute the shares of another
investment company for the corresponding Series shares in
accordance with the terms of the Contracts for which those Series
shares had been selected to serve as the underlying investment
medium. Lincoln National will give 30 days' prior written notice
to the Series of the date of any proposed vote to replace Series'
shares; and
d. In the event the Series' shares are not registered, issued or sold
in accordance with applicable state and/or federal law or such law
precludes the use of such shares as an underlying investment for
the Contracts issued or to be issued by Lincoln National; in such
event prompt notice shall be given by Lincoln National or the
Series to the other.
11. If this Agreement terminates, any provision of this Agreement
necessary to the orderly windup of business under it will remain in effect as to
that business, after termination.
12. The obligations of the Series under this Agreement are not binding
upon any of the Trustees, officers, employees or shareholders of the Series
individually, but bind only the Series' assets. When seeking satisfaction for
any liability of the Series in respect of this Agreement,
<PAGE>
Lincoln National and the Account agree not to seek recourse against said
Trustees, officers, employees or shareholders, or any of them, or any of their
personal assets for such satisfaction.
13. This Agreement shall be construed in accordance with the laws of the
State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested as of the date first above written.
THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY FOR ITSELF
AND ON BEHALF OF SEPARATE
ACCOUNT H
Attest:
/s/ Kelly D. Clevenger By: /s/ Robert A. Nikels
- ----------------------- ----------------------
AMERICAN VARIABLE INSURANCE SERIES
Attest:
/s/ Michael Downer By: /s/ Hoyt J. Turner
- ----------------------- ----------------------
K56676
<PAGE>
EXHIBIT 8(b)
AMENDMENT TO FUND PARTICIPATION AGREEMENT
-----------------------------------------
This amendment (this "Amendment"), dated as of March _____, 1997, to a Fund
Participation Agreement effective July 12, 1989 (the "Original Agreement"), is
executed by and among LINCOLN NATIONAL LIFE INSURANCE COMPANY ("Lincoln
National"), a life insurance company organized under the laws of the State of
Indiana, on behalf of itself and SEPARATE ACCOUNT H OF THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY (the "Account"), a separate account established by Lincoln
National pursuant to the Indiana Insurance Code, and AMERICAN VARIABLE INSURANCE
SERIES (the "Series"), an open-end management investment company organized under
the laws of the Commonwealth of Massachusetts (collectively, the "Parties").
WITNESSETH:
WHEREAS, the Series, as originally established, authorized the issuance of
a single class of shares corresponding to each Fund of the Series; and
WHEREAS, the Series has reclassified its shares for each Fund into two
classes, Class 1 and Class 2 shares, and has redesignated all outstanding shares
as Class 1 shares; and
WHEREAS, the Series intends that Class 2 shares shall differ from Class 2
shares in that, among other things, Class 2 shares shall be subject to expenses
charged against Fund assets attributable to Class 2 shares under a distribution
plan adopted in accordance with Rule 12b-1 under the Investment Company Act of
1940; and
WHEREAS, Lincoln National desires to continue purchasing Class 1 shares for
the Contracts described in the Original Agreement, and desires to commence
purchasing Class 2 shares for another class of variable annuity contracts for
which a registration statement has been filed with the Securities and Exchange
Commission (the "Commission") and which will be marketed under the name
"American Legacy III Contracts"; and
WHEREAS, the Parties desire to extend the terms and conditions of the
Original Agreement to cover the Class 2 shares of the Funds of the Series;
NOW THEREFORE, in consideration of the foregoing, and of the mutual covenants
and conditions contained herein and in the Original Agreement, and of other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Lincoln National, the Account and the Series hereby agree as
follows:
1. Class 1 Shares. Class 1 shares of each Fund shall continue to remain
available for purchase by the subaccounts of the Account on the same basis and
subject to the same terms and conditions as set forth in the Original Agreement.
2. Class 2 Shares. Class 2 shares of each Fund shall be made available to
<PAGE>
subaccounts of the Account on the same basis and subject to the same terms and
conditions as set forth in the Original Agreement, except as otherwise provided
in Section 5 of this Amendment.
3. Defined Terms. Unless the context otherwise requires and except as
provided otherwise in Section 5 of this Amendment, all references in the
Original Agreement, as amended hereby, to the "Contracts" shall include the
American Legacy III Contracts; all references therein to "Shares" shall include
Class 1 and Class 2 shares of the Funds of the Series; and all references
therein to "Subaccounts" shall include subaccounts of the Account established to
invest in Class 2 shares of the Funds of the Series.
4. Orders. All redemption and purchase orders for shares shall specify
the applicable class of shares.
5. Special Terms and Conditions for the Class 2 Shares of the Funds of
the American Variable Insurance Series. The following terms and conditions shall
apply with respect to the Class 2 Shares of the Funds of the Series.
a. Effective Date. The rights and obligations, representations and
warranties, and other undertakings of the Parties under the Original
Agreement shall not take effect with respect to the Class 2 shares
of the Funds until the post-effective amendment to the Series'
registration statement relating to the establishment of the Class 2
shares has either been declared effective by the Commission or
becomes effective automatically and the registration statement for
the American Legacy III Contracts has been declared effective by
the Commission.
b. 12b-1 Plan. The Series shall take all necessary and appropriate
actions to ensure that the plan of distribution adopted by the Class
2 shares of the Funds pursuant to rule 12b-1 under the Investment
Company Act of 1940 is administered and operated in accordance
with all applicable rules and regulations promulgated by the
Commission which are either currently in effect or which may be
adopted from time to time.
6. Counterparts. This Amendment may be executed in two or more
counterparts, each of which, when so executed, shall be deemed to be an
original, but such counterparts taken together shall constitute but one and the
same instrument.
<PAGE>
IN WITNESS WHEREOF, the undersigned parties have caused this Amendment to
be duly executed and attested as follows:
The Lincoln National Life Insurance Company on
behalf of itself and Separate Account H of the
Lincoln National Life Insurance Company
Attest: By:
- ---------------------- --------------------------------
Attest: American Variable Insurance Series
By:
- ---------------------- --------------------------------
<PAGE>
EXHIBIT 8(c)
AMENDMENT TO THE INDEMNIFICATION AGREEMENT
This amendment (this "Amendment") to an Indemnification Agreement (the
"Original Agreement") is executed by and between LINCOLN NATIONAL LIFE INSURANCE
COMPANY ("LNL"), on its own behalf and on behalf of LINCOLN NATIONAL VARIABLE
ANNUITY ACCOUNT H ("Account H"), and CAPITAL RESEARCH and MANAGEMENT COMPANY
("CRMC") (collectively, the "Parties"). The effective date of this Amendment is
the date on which the Securities and Exchange Commission (the "SEC") shall
declare effective the initial registration statement on Form N-4 (SEC File No.
333-18419) for certain variable annuity contracts to be issued through Account H
(the "American Legacy III Contracts") and providing for investment of purchase
payments in the American Variable Insurance Series (the "Series").
RECITALS
A. The Series, as originally established, authorized the issuance of a
single class of shares corresponding to each Fund of the Series (the "Original
Shares") which have been made available for purchase payments received under
certain variable annuity contracts issued through the Account and marketed
under the name "American Legacy II Contracts."
B. The Series has reclassified its shares for each Fund of the Series into
two classes, Class 1 and Class 2 shares, and has redesignated all outstanding
Original Shares as Class 1 shares.
C. CRMC desires that LNL continue utilizing Class 1 shares of the Funds
of the Series as the underlying investment vehicle for purchase
payments received under the American Legacy II Contracts, and commence
utilizing the Class 2 shares of the Funds of the Series as the
underlying investment vehicle for purchase payments received under the
American Legacy III Contracts.
D. LNL is willing to utilize the Class 1 and Class 2 shares of the Funds
of the Series as the underlying investment vehicles so long as CRMC
undertakes to indemnify LNL on the same basis and subject to the same
terms and conditions as CRMC has agreed to so indemnify LNL with
respect to the Original Shares as set forth in the Original Agreement.
AGREEMENT
NOW THEREFORE, for good and sufficient consideration, the receipt of which is
hereby acknowledged, the Parties agree as follows:
1. CRMC agrees that the indemnification obligation provided for in the
Original Agreement shall apply to the Class 1 and Class 2 shares, subject to the
same terms and conditions as apply to the Original Shares in the Original
Agreement as though set forth in full herein. For this purpose, all references
in the Original Agreement, as amended hereby, to
<PAGE>
"Contracts" shall include the American Legacy III Contracts; and all references
therein to "Series" shall include the Class 1 and Class 2 shares of the Funds of
the American Variable Insurance Series.
2. This Amendment may be executed in two or more counterparts, each of
which, when so executed, shall be deemed to be an original, but such
counterparts taken together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the Parties have caused this Amendment to be duly executed
and attested as of the effective date provided for above.
THE LINCOLN NATIONAL LIFE INSURANCE
COMPANY FOR ITSELF AND ON BEHALF OF
SEPARATE ACCOUNT H
Attest:
By:
- ------------------- ------------------------------------
CAPITAL RESEARCH AND MANAGEMENT COMPANY
Attest:
By:
- ------------------- ------------------------------------
<PAGE>
LINCOLN NATIONAL LIFE INSURANCE COMPANY
Law Division 7C03
1300 South Clinton
Fort Wayne, Indiana 46802
Phone: (219) 455-3018
Fax: (219) 455-5135
Exhibit 9
VIA EDGAR
- ---------
March 26, 1997
Securities and Exchange Commission
Division of Insurance Management
Office of Insurance Products
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Lincoln National Variable Annuity Account H (American Legacy II)
File Nos. 33-27783; 811-5721
Opinion and Consent of Counsel
Ladies and Gentlemen:
I have recently made such examination of law and have examined such records and
documents as I have deemed necessary to render the opinion expressed below.
I am of the opinion that upon acceptance by Lincoln National Variable Annuity
Account H (the "Account"), a segregated account of Lincoln National Life
Insurance Company (Lincoln Life), of contributions from a person pursuant to an
insurance policy issued in accordance with the prospectus contained in this
amended Registration Statement on Form N-4, and upon compliance with applicable
law, such person will have a legally issued interest in his or her individual
account with the Account, and the securities issued will represent binding
obligations of Lincoln Life.
I consent to the filing of this Opinion as an exhibit to the Account's Post-
Effective Amendment No. 10 to the Registration Statement on Form N-4.
Very truly yours,
/s/ Jeremy Sachs
Jeremy Sachs
Senior Counsel
JS/sb/A:\SEC2.LTR
Enclosure
<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. 10 to the Registration Statement (Form N-4
No. 33-27783) and related Statement of Additional Information pertaining to the
Lincoln National Variable Annuity Account H and to the use therein of our
reports (a) dated February 7, 1997 with respect to the consolidated financial
statements of The Lincoln National Life Insurance Company and (b) dated March 6,
1997 with respect to the financial statements of Lincoln National Variable
Annuity Account H.
Fort Wayne, Indiana
March 25, 1997
<PAGE>
EXHIBIT
ORGANIZATIONAL CHART OF THE
LINCOLN NATIONAL INSURANCE HOLDING COMPANY SYSTEM
All the members of the holding company system are corporations, with the
exception of American States Lloyds Insurance Company, Delaware Distributors,
L.P., Founders CBO, L.P., and Lincoln National Mezzanine Fund, L.P. For purposes
of compliance with securities laws, this chart also shows Lincoln National Life
Insurance Company Separate Accounts. These are not independent, legal entities;
they are accounting entries under state insurance law, and are used to support
variable annuity and variable insurance products.
- ----------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
- ----------------------------------
|
| ----------------------------------------
|--| American States Financial Corporation|
| | 83.3% - Indiana - Holding Company |
| ----------------------------------------
| |
| | ---------------------------------------
| --| American States Insurance Company |
| | 100% - Indiana - Property/Casualty |
| ---------------------------------------
| |
| ----------------------------------------
| |--| American Economy Insurance Company |
| | | 100% - Indiana - Property/Casualty |
| | ----------------------------------------
| | | ----------------------------------------------
| | |--| American States Insurance Company of Texas |
| | | 100% - Texas - Property/Casualty |
| | ----------------------------------------------
| | --------------------------------------------
| |--| American States Life Insurance Company |
| | | 100% - Indiana - Life/Health |
| | --------------------------------------------
| | -------------------------------------------------
| |--| American States Lloyds Insurance Company |
| | | Lloyds Plan - * - Texas - Property/Casualty |
| | ------------------------------------------------
| | -------------------------------------------------
| |--| American States Preferred Insurance Company |
| | | 100% - Indiana - Property/Casualty |
| | -------------------------------------------------
| | ---------------------------------
| |--| City Insurance Agency, Inc. |
| | | 100% - Indiana |
| | ---------------------------------
| | -------------------------------------------------
| |--| Insurance Company of Illinois |
| | 100% - Illinois - Fire & Casualty Insurance |
| -------------------------------------------------
| ---------------------------------------------------------
|--| Aseguradora InverLincoln, S.A. Compania de Seguros Y |
| | Reaseguros, Grupo Financiero InverMexico |
| | 49% - Mexico - Life, Property and Casualty Insurance |
| ---------------------------------------------------------
1
<PAGE>
- ----------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
- ----------------------------------
|
| --------------------------------------------------
|--| The Insurers' Fund, Inc. # |
| | 100% - Maryland - Inactive |
| --------------------------------------------------
| --------------------------------------------------
|--| LNC Administrative Services Corporation |
| | 100% - Indiana - Third Party Administrator |
| --------------------------------------------------
|
| ----------------------------------------
|--| The Richard Leahy Corporation |
| | 100% - Indiana - Insurance Agency |
| ----------------------------------------
| | -----------------------------------
| |--| The Financial Alternative, Inc. |
| | | 100% - Utah- Insurance Agency |
| | -----------------------------------
| | -----------------------------------------
| |--| Financial Alternative Resources, Inc. |
| | | 100% - Kansas - Insurance Agency |
| | -----------------------------------------
| | -------------------------------------------
| |--| Financial Choices, Inc. |
| | | 100% - Pennsylvania - Insurance Agency |
| | -------------------------------------------
| | -------------------------------------------------
| | | Financial Investment Services, Inc. |
| |--| (formerly Financial Services Department, Inc.)|
| | | 100% - Indiana - Insurance Agency |
| | -------------------------------------------------
| | -------------------------------------------
| | | Financial Investments, Inc. |
| |--| (formerly Insurance Alternatives, Inc.) |
| | | 100% - Indiana - Insurance Agency |
| | -------------------------------------------
| | ---------------------------------------------
| |--| The Financial Resources Department, Inc. |
| | | 100% - Michigan - Insurance Agency |
| | ---------------------------------------------
| | -------------------------------------------
| |--| Investment Alternatives, Inc. |
| | | 100% - Pennsylvania - Insurance Agency |
| | -------------------------------------------
| | ----------------------------------------
| |--| The Investment Center, Inc. |
| | | 100% - Tennessee - Insurance Agency |
| | ----------------------------------------
| | ----------------------------------------
| |--| The Investment Group, Inc. |
| | | 100% - New Jersey - Insurance Agency |
| | ----------------------------------------
| | --------------------------------------
| |--| Personal Financial Resources, Inc. |
| | | 100% - Arizona - Insurance Agency |
| | --------------------------------------
| | ------------------------------------------
| |--| Personal Investment Services, Inc. |
| | 100% - Pennsylvania - Insurance Agency |
| ------------------------------------------
2
<PAGE>
- ----------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
- ----------------------------------
| -------------------------------------------------
|--|LincAm Properties, Inc. |
| |50% - Delaware - Real Estate Investment |
| -------------------------------------------------
| -------------------------------------------------
| | Lincoln Financial Group, Inc. |
|--| (formerly Lincoln National Sales Corporation) |
| | 100% - Indiana - Insurance Agency |
| -------------------------------------------------
| |
| | ------------------------------------
| |--| LNC Equity Sales Corporation |
| | | 100% - Indiana - Broker-Dealer |
| | ------------------------------------
| |
| | ----------------------------------------------------------------
| | | Corporate agencies: Lincoln Financial Group, Inc. ("LFG") |
| |--| has subsidiaries of which LFG owns from 80%-100% of the |
| | | common stock (see Attachment #1). These subsidiaries serve |
| | | as the corporate agency offices for the marketing and |
| | | servicing of products of The Lincoln National Life Insurance |
| | | Company. Each subsidiary's assets are less than 1% of the |
| | | total assets of the ultimate controlling person. |
| | ----------------------------------------------------------------
| |
| | --------------------------------------------------
| |--| Professional Financial Planning, Inc. |
| | 100% - Indiana - Financial Planning Services |
| --------------------------------------------------
|
| -----------------------------------------
|--| Lincoln Life Improved Housing, Inc. |
| | 100% - Indiana |
| -----------------------------------------
|
| -------------------------------------------------
|--| Lincoln National (China) Inc. |
| | 100% - Indiana - China Representative Office |
| -------------------------------------------------
| -------------------------------------------------
|--|Lincoln National (India) Inc. |
| |100% - Indiana - India Representative Office |
| -------------------------------------------------
| ----------------------------------------------
|--|Lincoln National Intermediaries, Inc. |
| |100% - Indiana - Reinsurance Intermediary |
|---------------------------------------------- |
| ----------------------------------------------
|--|Lincoln National Investments, Inc. |
| |(fka Lincoln National Investment Companies, |
| |Inc.) 100% - Indiana - Holding Company |
| ----------------------------------------------
| ----------------------------------------------
|--|Lincoln National Investment Companies, Inc. |
| |(fka Lincoln National Investment Companies, |
| |Inc.) 100% - Indiana - Holding Company |
| ----------------------------------------------
| | ------------------------------------
| |--|Delaware Management Holdings, Inc.|
| | |100% - Delaware - Holding Company |
| | ------------------------------------
| | | -------------------------------------
| | |--|DMH Corp. |
| | |100% - Delaware - Holding Company |
| | -------------------------------------
| | | ---------------------------------------
| | |--|Delaware Distributors, Inc. |
| | | |100% - Delaware - General Partner |
| | | ---------------------------------------
| |
3
<PAGE>
-------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
-------------------------------
|
| --------------------------------------------------
|__| Lincoln National Investment Companies, Inc. |
| | (fka Lincoln National Investment Companies, Inc.)|
| | 100% - Indiana - Holding Company |
| --------------------------------------------------
| |
| | --------------------------------------------
| |--| Lincoln National Investment Companies, Inc.|
| | | (fka Lincoln National Investments, Inc.) |
| | | 100% - Indiana - Holding Company |
| | --------------------------------------------
| | | -----------------------------------
| | |--| Delaware Management Holdings, Inc.|
| | | | 100% - Delaware - Holding, Company|
| | | -----------------------------------
| | | | ----------------------------------
| | | |--| DMH Corp. |
| | | | | 100% - Delaware - Holding Company|
| | | ----------------------------------
| | | | -----------------------------------
| | | |--| Delaware Distributors, Inc. |
| | | | | 100% - Delaware - General Partner |
| | | | -----------------------------------
| | | | -----------------------------------------------------
| | | |--| Delaware Distributors, L.P. |
| | | | | 100% - Delaware - Mutual Fund Distributor & Broker/ |
| | | | | Dealer |
| | | | -----------------------------------------------------
| | | | ---------------------------------------
| | | |--| Delaware International Advisers Ltd. |
| | | | | 81.1% - England - Investment Advisor |
| | | | ---------------------------------------
| | | | -------------------------------------------------
| | | |--| Delaware Capitol Management, Inc. |
| | | | | (formerly Delaware Investment Counselors, Inc.) |
| | | | | 100% - Delaware - Investment Advisor |
| | | | -------------------------------------------------
| | | | ------------------------------------------------
| | | |--| Delaware Investment & Retirement Services, Inc.|
| | | | | 100% - Delaware - Registered Transfer Agent |
| | | | ------------------------------------------------
| | | | -------------------------------------------
| | | |--| Delaware International Holdings, Ltd. |
| | | | | 100% - Bermuda - Investment Advisor |
| | | | -------------------------------------------
| | | | ---------------------------------------
| | | |--| Delaware Management Company, Inc. |
| | | | | 100% - Delaware - Investment Advisor |
| | | | ---------------------------------------
| | | | | --------------------------------------
| | | | |--| Founders Holdings, Inc. |
| | | | | 100% - Delaware - General Partner |
| | | | --------------------------------------
| | | | | ------------------------------------------
| | | | |--| Founders CBO, L.P. |
| | | | | 100% - Delaware - Investment Partnership |
| | | | ------------------------------------------
| | | | | ----------------------------------------------
| | | | |--| Founders CBO Corporation |
| | | | | 100% - Delaware - Co-Issuer with Founders CBO|
| | | | ----------------------------------------------
| | | | ------------------------------------
| | | |--|Delaware Management Trust Company |
| | | | |100% - Pennsylvania - Trust Service |
| | | | ------------------------------------
| | | | -----------------------------------------------------
| | | |--| Delaware Service Company, Inc. |
| | | | | 100% - Delaware - Shareholder Services & Transfer |
| | | | | Agent |
| | | | -----------------------------------------------------
| | ----------------------------------------------------------
| | |Lincoln Investment Management, Inc. |
| |--|(formerly Lincoln National Investment Management Company) |
| | | 100% - Illinois - Mutual Fund Manager and |
| | | Registered Investment Adviser |
----------------------------------------------------------
4
<PAGE>
- ----------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
- ----------------------------------
|
| -----------------------------------------------------
|--| Lincoln National Investment Companies, Inc. |
| | (fka Lincoln National Investment Companies, Inc.) |
| | 100% - Indiana - Holding Company |
| -----------------------------------------------------
| |
| | -----------------------------------------------------
| |--| Lincoln National Investment Companies, Inc. |
| | | (fka Lincoln National Investments, Inc.) |
| | | 100% - Indiana - Holding Company |
| | -----------------------------------------------------
| | --------------------------------------------------------------
| |--| Lincoln Investment Management, Inc. |
| | | (formerly Lincoln National Investment Management Company) |
| | | 100% - Illinois - Mutual Fund Manager and |
| | | Registered Investment Adviser |
| | --------------------------------------------------------------
| | | ------------------------------------------------------------
| | | | Lincoln National Mezzanine Corporation |
| | |--| 100% - Indiana - General Partner for Mezzanine Financing |
| | | Limited Partnership |
| | ------------------------------------------------------------
| | | ------------------------------------------------------------
| | |--| Lincoln National Mezzanine Fund, L.P. |
| | | 50% - Delaware - Mezzanine Financing Limited Partnership |
| | ------------------------------------------------------------
| -----------------------------------------------------
| | Lincoln National Investments, Inc. |
|--| (fka Lincoln National Investment Companies, Inc.) |
| | 100% - Indiana - Holding Company |
| -----------------------------------------------------
| | -----------------------------------------------------
| |--| Lincoln National Investment Companies, Inc. |
| | | (fka Lincoln National Investment Companies, Inc.) |
| | | 100% - Indiana - Holding Company |
| | -----------------------------------------------------
| | | ----------------------------------------------
| | |--| Lynch & Mayer, Inc. |
| | | | 100% - Indiana - Investment Adviser |
| | | ----------------------------------------------
| | | | -------------------------------------------
| | | |--| Lynch & Mayer Asia, Inc. |
| | | | | 100% - Delaware - Investment Management |
| | | | -------------------------------------------
| | | | ---------------------------------------
| | | |--| Lynch & Mayer Securities Corp. |
| | | | | 100% - Delaware - Securities Broker |
| | | | ---------------------------------------
| | | -------------------------------------------------------
| | |--| Vantage Global Advisors, Inc. |
| | | | (formerly Modern Portfolio Theory Associates, Inc.) |
| | | | 100% - Delaware - Investment Adviser |
| | | -------------------------------------------------------
| -----------------------------------------------
|--| The Lincoln National Life Insurance Company |
| | 100% - Indiana |
| -----------------------------------------------
| | ----------------------------------------------
| |--| First Penn-Pacific Life Insurance Company |
| | | 100% - Indiana |
| | ----------------------------------------------
| | -----------------------------------------------
| | | Lincoln Life & Annuity Company of New York |
| |--| 100% - New York |
| | -----------------------------------------------
| | --------------------------------------------------
| | | Lincoln National Aggressive Growth Fund, Inc.+ |
| |--| 100% - Maryland - Mutual Fund |
| | --------------------------------------------------
| |
| | -------------------------------------
| | | Lincoln National Bond Fund, Inc.+ |
| |--| 100% - Maryland - Mutual Fund |
| | -------------------------------------
5
<PAGE>
- ----------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
- ----------------------------------
|
| -------------------------------------------------
|--| The Lincoln National Life Insurance Company |
| | 100% - Indiana |
| -------------------------------------------------
| | ------------------------------------------------------
| |--| Lincoln National Capital Appreciation Fund, Inc.+ |
| | | 100% - Maryland - Mutual Fund |
| | ------------------------------------------------------
| | ----------------------------------------------
| |--| Lincoln National Equity-Income Fund, Inc.+ |
| | | 100% - Maryland - Mutual Fund |
| | ----------------------------------------------
| | ---------------------------------------------------------
| |--| Lincoln National Global Asset Allocation Fund, Inc.+ |
| | | (formerly Lincoln National Putnam Master Fund, Inc.) |
| | | 100% - Maryland - Mutual Fund |
| | ---------------------------------------------------------
| | ---------------------------------------------------
| |--| Lincoln National Growth and Income Fund, Inc.+ |
| | | (formerly Lincoln National Growth Fund, Inc.) |
| | | 100% - Maryland - Mutual Fund |
| | ---------------------------------------------------
| | ----------------------------------------------------------
| |--| Lincoln National Health & Casualty Insurance Company |
| | | 100% - Indiana |
| | ----------------------------------------------------------
| | -----------------------------------------------
| |--| Lincoln National International Fund, Inc.+ |
| | | 100% - Maryland - Mutual Fund |
| | -----------------------------------------------
| |
| | -----------------------------------------
| |--| Lincoln National Managed Fund, Inc.+ |
| | | 100% - Maryland - Mutual Fund |
| | -----------------------------------------
| | ----------------------------------------------
| |--| Lincoln National Money Market Fund, Inc.+ |
| | | 100% - Maryland - Mutual Fund |
| | ----------------------------------------------
| | -------------------------------------------------
| |--| Lincoln National Social Awareness Fund, Inc.+ |
| | | 100% - Maryland - Mutual Fund |
| | -------------------------------------------------
| | -------------------------------------------------------
| |--| Lincoln National Special Opportunities Fund, Inc.+ |
| | | 100% - Maryland - Mutual Fund |
| | -------------------------------------------------------
| | -----------------------------------------
| |--| Lincoln National Reassurance Company |
| | 100% - Indiana - Life Insurance |
| -----------------------------------------
| | -------------------------------------------------
| |--| Special Pooled Risk Administrators, Inc. |
| | 100% - New Jersey - Catastrophe Reinsurance |
| | Pool Administrator |
| -------------------------------------------------
| -----------------------------------------------------------
|--| Lincoln National Management Services, Inc. |
| | 100% - Indiana - Underwriting and Management Services |
| -----------------------------------------------------------
|
| -----------------------------------------
|--| Lincoln National Realty Corporation |
| | 100% - Indiana - Real Estate |
| -----------------------------------------
| -------------------------------------------------------------
|--| Lincoln National Reinsurance Company (Barbados) Limited |
| | 100% - Barbados |
| -------------------------------------------------------------
6
<PAGE>
- ----------------------------------
| |
| Lincoln National Corporation |
| Indiana - Holding Company |
- ----------------------------------
| ------------------------------------------------
|--| Lincoln National Reinsurance Company Limited |
| | (formerly Heritage Reinsurance, Ltd.) |
| | 100% ** - Bermuda |
| ------------------------------------------------
| |
| | ------------------------------------------
| | --| Lincoln European Reinsurance Company |
| | | 100% - Belgium |
| | ------------------------------------------
| |
| | -----------------------------------------------------------
| |--| Lincoln National Underwriting Serevices, Ltd. |
| | | 90% - England/Wales - Life/Accident/Health Underwriter |
| | | (Remaining 10% owned by Old Fort Ins. Co. Ltd.) |
| | -----------------------------------------------------------
| |
| | ---------------------------------------------------------
| | | Servicios de Evaluacion de Riesgo, S. de R.L. de C.V. |
| |--| 51% - Mexico - Reinsurance Underwriter |
| | | (Remaining 49% owned by Lincoln National Corp.) |
| ---------------------------------------------------------
|
| ---------------------------------------------
|--|Lincoln National Risk Management, Inc. |
| | 100% - Indiana - Risk Management Services |
| ---------------------------------------------
|
| ------------------------------------------------
|--| Lincoln National Structured Settlement, Inc. |
| | 100% - New Jersey |
| ------------------------------------------------
|
| ------------------------------------------
|--| Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
| ------------------------------------------
| |
| | ------------------------------------------
| |--| Allied Westminster & Company Limited |
| | | 100% - England/Wales - Sales Services |
| | ------------------------------------------
| |
| | -----------------------------------
| |--| Cannon Fund Managers Limited |
| | | 100% - England/Wales - Inactive |
| | -----------------------------------
| |
| | --------------------------------------------------------
| |--| Culverin Property Services Limited |
| | | 100% - England/Wales - Property Development Services |
| | | -----------------------------------------------------
| |
| | -----------------------------------------------------------
| |--| HUTM Limited |
| | | 100% - England/Wales - Unit Trust Management (Inactive) |
| | -----------------------------------------------------------
| |
| | -------------------------------------------
| |--| ILI Supplies Limited |
| | | 100% - England/Wales - Computer Leasing |
| | -------------------------------------------
| |
| | -----------------------------------------
| |--| Laurentian Financial Group PLC |
| | | 100% - England/Wales - Holding Company |
| | ------------------------------------------
| | | ---------------------------------------------------
| | |--| Lincoln Financial Advisers Limited |
| | | | (formerly: Laurentian Financial Advisers Ltd.) |
| | | | 100% - England/Wales - Sales Company |
| | | ---------------------------------------------------
| | | ------------------------------------------------
| | |--| Lincoln Investment Management Limited |
| | | | (formerly: Laurentian Fund Management Ltd.) |
| | | | 100% - England/Wales - Investment Management |
| | | ------------------------------------------------
| | | --------------------------------------------------------------
| | |--| Lincoln Independent Limited |
| | | | (formerly: Laurentian Independent Financial Planning Ltd.) |
| | | | 100% - England/Wales - Independent Financial Adviser |
| | | --------------------------------------------------------------
7
<PAGE>
- ----------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
- ----------------------------------
|
| -------------------------------------------
| | Lincoln National (UK) PLC |
|--| 100% - England/Wales - Holding Company |
| -------------------------------------------
| |
| | ------------------------------------------
| |--| Laurentian Financial Group PLC |
| | | 100% - England/Wales - Holding Company |
| | ------------------------------------------
| | | -----------------------------------------
| | |--| Laurentian Life PLC |
| | | | 100% - England/Wales - Life Insurance |
| | | -----------------------------------------
| | | |
| | | | -----------------------------------------
| | | |--|Barnwood Property Group Limited |
| | | | |100% - England/Wales - Holding Company |
| | | | -----------------------------------------
| | | | |
| | | | | ---------------------------------------------
| | | | |--| Barnwood Developments Limited |
| | | | | | 100% England/Wales - Property Development |
| | | | | ---------------------------------------------
| | | | | ----------------------------------------------
| | | | |--| Barnwood Properties Limited |
| | | | | 100% - England/Wales - Property Investment |
| | | | ----------------------------------------------
| | | | --------------------------------------------------------
| | | |--|IMPCO Properties Limited |
| | | |100% - England/Wales - Property Investment (Inactive) |
| | | --------------------------------------------------------
| | | ---------------------------------------------
| | |--| Laurentian Management Services Limited |
| | | | 100% - England/Wales - Management Services|
| | | ---------------------------------------------
| | | | --------------------------------------------------
| | | |--|Laurit Limited |
| | | |100% - England/Wales - Data Processing Systems |
| | | --------------------------------------------------
| | | -----------------------------------------
| | |--| Laurentian Milldon Limited |
| | | | 100% - England/Wales - Sales Company |
| | | -----------------------------------------
| | | ------------------------------------------------
| | |--| Laurentian Unit Trust Management Limited |
| | | | 100% - England/Wales - Unit Trust Management |
| | | ------------------------------------------------
| | | | -------------------------------------------
| | | |--| LUTM Nominees Limited |
| | | | 100% - England/Wales - Nominee Services |
| | | -------------------------------------------
| | | ------------------------------------------------------------
| | |--| Laurtrust Limited |
| | | | 100% - England/Wales - Pension Scheme Trustee (Inactive) |
| | | ------------------------------------------------------------
| | | -----------------------------------------
| | |--| The Money Club Direct Company Limited |
| | | 100% - Dormant |
| | -----------------------------------------
| |
| | ------------------------------------------
| |--| Liberty Life Assurance Limited |
| | | 100% - England/Wales - Inactive |
| | ------------------------------------------
| | -------------------------------------------------
| |--| Liberty Life Pension Trustee Company Limited |
| | | 100% - England/Wales - Corporate Pension Fund |
| | -------------------------------------------------
| | --------------------------------------------
| |--| Liberty Press Limited |
| | | 100% - England/Wales - Printing Services |
| | --------------------------------------------
8
<PAGE>
- ----------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
- ----------------------------------
|
|
| ------------------------------------------
|--|Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
| ------------------------------------------
| |
| | ----------------------------------------------
| |--|Lincoln Assurance Limited |
| | | 100% ** - England/Wales - Life Assurance |
| | ----------------------------------------------
| |
| | ---------------------------------------------------
| |--| Lincoln Fund Managers Limited |
| | | 100% - England/Wales - Unit Trust Management |
| | ---------------------------------------------------
| |
| | ------------------------------------------------------
| |--| Lincoln Insurance Services Ltd. |
| | | 100% - Holding Company |
| | ------------------------------------------------------
| | |
| | | -----------------------------------
| | |--| British National Life Sales Ltd.|
| | | | 100% - Inactive |
| | | -----------------------------------
| | |
| | | -------------------------------------------------
| | |--| BNL Trustees Limited |
| | | | 100% - England/Wales - Corporate Pension Fund |
| | | -------------------------------------------------
| | |
| | | ---------------------------------------
| | |--| Chapel Ash Financial Services Ltd. |
| | | | 100% - Direct Insurance Sales |
| | | ---------------------------------------
| | |
| | | ------------------------------------------------
| | | | Lincoln General Insurance Co. Ltd. |
| | | | 100% - Accident & Health Insurance |
| | | ------------------------------------------------
| | |
| | | ----------------------------
| | |--| P.N. Kemp-Gee & Co. Ltd. |
| | | 100% - Inactive |
| | ----------------------------
| |
| | ----------------------------------------------------
| |--| Lincoln National Training Services Limited |
| | | 100% - England/Wales - Training Company |
| | ----------------------------------------------------
| |
| | ---------------------------------------------------
| |--| Lincoln Pension Trustees Limited |
| | | 100% - England/Wales - Corporate Pension Fund |
| | ---------------------------------------------------
| |
| | -----------------------------------------------------------
| |--| LIV Limited (formerly Lincoln Investment Management Ltd.)|
| | | 100% - England/Wales - Investment Management Services |
| | -----------------------------------------------------------
| | |
| | | -------------------------------------------------
| | |--| CL CR Management Ltd. |
| | | 50% - England/Wales - Administrative Services |
| | -------------------------------------------------
| |
| | ---------------------------------------------------
| |--| LN Management Limited |
| | | 100% - England/Wales - Administrative Services |
| | ----------------------------------------------------
| | |
| | | -------------------------------------
| | |--| UK Mortgage Securities Limited |
| | | 100% - England/Wales - Inactive |
| | -------------------------------------
| |
9
<PAGE>
- ----------------------------------
| Lincoln National Corporation |
| Indiana - Holding Company |
- ----------------------------------
|
| -------------------------------------------
|--| Lincoln National (UK) PLC |
| | 100% - England/Wales - Holding Company |
| -------------------------------------------
| |
| | --------------------------------------------
| |--| LN Securities Limited |
| | | 100% - England/Wales - Nominee Company |
| | --------------------------------------------
| |
| | -----------------------------------------------
| |--| Niloda Limited |
| | 100% - England/Wales - Investment Company |
| -----------------------------------------------
|
| ----------------------------------------------------
| | Linsco Reinsurance Company |
|--| (formerly Lincoln National Reinsurance Company) |
| | 100% - Indiana - Property/Casualty |
| ----------------------------------------------------
|
| ------------------------------------
|--| Old Fort Insurance Company, Ltd. |
| | 100% ** - Bermuda |
| ------------------------------------
| |
| | -----------------------------------------------------------
| | | Lincoln National Underwriting Services, Ltd. |
| |--| 10% - England/Wales - Life/Accident/Health Underwriter |
| | (Remaining 90% owned by Lincoln Natl. Reinsurance Co.) |
| -----------------------------------------------------------
|
| ------------------------------------------------------------
| | Servicios de Evaluacion de Riesgos, S. de R.L. de C.V. |
|--| 49% - Mexico - Reinsurance Underwriter |
| | (Remaining 51% owned by Lincoln Natl. Reinsurance Co.) |
| ------------------------------------------------------------
|
| ---------------------------------------------
|--| Underwriters & Management Services, Inc. |
| 100% - Indiana - Underwriting Services |
---------------------------------------------
Footnotes:
- ----------
* The funds contributed by the Underwriters were, and continue to be subject
to trust agreements between American States Insurance Company, the grantor,
and each Underwriter, as trustee.
** Except for director-qualifying shares
# Lincoln National Corporation has subscribed for and paid for 100 shares of
Common Stock (with a par value of $1.00 per share) at a price of $10 per
share, as part of the organizing of the fund. As such stock is further
sold, the ownership of voting securities by Lincoln National Corporation
will decline and fluctuate.
+ Ownership of the shares in the eleven funds is on behalf of variable life
and/or annuity contract owners who own interests in Lincoln Life Separate
Accounts established under IC 27-1-5-1, Class 1. These are: Variable Annuity
Accounts A, C, E, H and L; Variable Universal Life Accounts D, F, G, J, and K.
For Separate Account A [a/k/a Fund A] (Group) and Separate Account A [a/k/a
Fund A] (Individual), Lincoln Life is the "insurance company", as that term is
defined in Investment Company Act Form N-3.
For Separate Accounts C,E,H and L the respective Separate Account is the
"Registrant" and Lincoln Life is the "Depositor", as those terms are defined in
Investment Company Act Form N-4.
For Separate Accounts D,F,G,J and K the respective Separate Account is the "unit
investment trust" or "trust", and Lincoln Life is the "Depositor", as those
terms are defined in Investment Company Act Form N-8B-2.
10
<PAGE>
ATTACHMENT #1
LINCOLN FINANCIAL GROUP, INC.
CORPORATE AGENCY SUBSIDIARIES
1) Lincoln Financial Group, Inc. (AL)
2) Lincoln Southwest Financial Group, Inc. (Phoenix, AZ)
3) Lincoln Financial and Insurance Services Corporation (Walnut Creek, CA)
3a) California Fringe Benefit and Insurance Marketing Corporation
DBA/California Fringe Benefit Company (Walnut Creek, CA)
4) Colorado-Lincoln Financial Group, Inc. (Denver, CO)
5) Lincoln National Financial Services, Inc. (Lake Worth, FL)
6) CMP Financial Services, Inc. (Chicago, IL)
7) Lincoln Financial Group of Northern Indiana, Inc. (Fort Wayne, IN)
8) Financial Planning Partners, Ltd. (Mission, KS)
9) The Lincoln National Financial Group of Louisiana, Inc. (Shreveport, LA)
10) Benefits Marketing Group, Inc. (D.C. & Chevy Chase, MD)
11) Lincoln National Sales Corporation of Maryland (Baltimore, MD)
(formerly: Morgan Financial Group, Inc.)
12) Lincoln Financial Services and Insurance Brokerage of New England, Inc.
(formerly: Lincoln National of New England Insurance Agency, Inc.)
(Worcester, MA)
13) Lincoln Financial Group of Michigan, Inc. (Troy, MI)
13a) Financial Consultants of Michigan, Inc. (Troy, MI)
14) Lincoln Financial Group of Missouri, Inc. (formerly: John J. Moore &
Associates, Inc.) (St. Louis, MO)
15) Beardslee & Associates, Inc. (Clifton, NJ)
16) Lincoln Financial Group, Inc. (formerly: Resources/Financial, Inc.)
(Albuquerque, NM)
17) Lincoln Cascades, Inc. (Portland, OR)
18) Lincoln Financial Services, Inc. (Pittsburgh, PA)
19) Lincoln National Financial Group of Philadelphia, Inc. (Philadelphia, PA)
20) Lincoln Financial Group, Inc. (Salt Lake City, (UT)
11
<PAGE>
EXHIBIT 14(b)
BOOKS AND RECORDS
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
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 reports relating thereto.
<TABLE>
<CAPTION>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
<S> <C> <C> <C>
Annual Reports F&RM Eric Jones Permanently, the first two
To Shareholders years in an easily accessible
place
Semi-Annual F&RM Eric Jones Permanently, the first two
Reports years in an easily accessible
place
Form N-SAR F&RM Eric Jones Permanently, the first two
years in an easily accessible
place
</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 certificat e numbers if such detail is not recorded by custodian or
transfer agent), all receipts and disbursements of cash and all other debits and
credits. Such records shall show for each such transaction the name and quantity
of securities, the unit and aggregate purchase or sale price, commission paid,
the market on which effected, the trade date, the settlement date, and the name
of the person through or from whom purchased or received or to whom sold or
delivered.
Purchases and Sales Journals
- ----------------------------
<TABLE>
<S> <C> <C> <C>
Daily reports CSRM Nancy Alford Permanently, the first two
of securities years in an easily accessible
transactions place
</TABLE>
Portfolio Securities
- --------------------
Not Applicable.
<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
F&RM 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.
General Ledger
- --------------
LNL Trial F&RM Eric Jones Permanently, the first two
Balance (5000 years in an easily
series) accessible place
Securities in Transfer
- ----------------------
Not Applicable.
Securities in Physical Possession
- ---------------------------------
Not Applicable.
Securities Borrowed and Loaned
- ------------------------------
Not Applicable.
Monies Borrowed and Loaned
- --------------------------
Not Applicable.
Dividends and Interest Received
- -------------------------------
LNL Trial Controllers Eric Jones Permanently, the first two
Balance (5000 years in an easily
series) accessible place
<PAGE>
LN-Record Location Person to Contact Retention
Dividends Receivable and Interest Accrued
<TABLE>
<CAPTION>
<S> <C> <C> <C>
LNL Trial F&RM 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>
<CAPTION>
<S> <C> <C>
Daily Report Not Permanently, the first two
of Securities Applicable years in an easily accessible
transactions place
</TABLE>
(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>
<CAPTION>
<S> <C> <C> <C>
Master file F&RM Eric Jones Permanently, the first two
Record CSRM Nancy Alford years in an easily accessible
place
</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.
<PAGE>
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
- -------------------
Not Applicable.
(5) A record of each brokerage order given by or in behalf of the investment
company for, or in connection with, the purchase or sale of securities, whether
executed or unexecuted. Such record shall include the name of the broker, the
terms and conditions of the order and of any modification or cancellation
thereof, the time of entry or cancellation, the price at which executed, and the
time of receipt of report of execution. The record shall indicate the name of
the person who placed the order in behalf of the investment company.
Order Tickets
- -------------
UIT applica- CSRM Nancy Alford Six years, the first two
tions and years in an easily accessible
daily reports place
of securities
transactions
(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.
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.
<PAGE>
LN-Record Location Person to Contact Retention
- --------- --------------------------- ---------
Trial Balance
- -------------
LNL Trial F&RM Eric Jones Permanently, the first two
Balance (5000 years in an easily accessible
series) place
(9) A record for each fiscal quarter, which shall be completed within 10 days
after the end of such quarter, showing specifically the basis or bases upon
which the allocation of orders for the purchase and sale of portfolio securities
to named brokers or dealers and the division of brokerage commissions or other
compensation on such purchase and sale orders among named persons were made
during such quarter. The record shall indicate the consideration given to (a)
sales of shares of the investment company by brokers or dealers, (b) the
supplying of services or benefits by brokers or dealers to the investment
company, its investment advisor or principal underwriter or any persons
affiliated therewith, and (c) any other considerations other than the technical
qualifications of the brokers and the dealers as such. The record shall show the
nature of their services or benefits made available, and shall describe in
detail the application of any general or specific formula or other determinant
used in arriving at such allocation of purchase and sales orders and such
division of brokerage commissions or other compensation. The record shall also
include the identifies of the person responsible for the determination of such
allocation and such division of brokerage commissions or other compensation.
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).
Advisory Law Division Sandy Lamp Six years, the first two
Agreements years in an easily accessible
place
(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 accounts (or other records)" shall be
construed to include, where appropriate, copies of voucher checks,
confirmations, or similar documents which reflect the information required by
the applicable rule or rules in appropriate sequence and in permanent form,
including similar records developed by the use of automatic data processing
systems.
Correspondence CSRM Nancy Alford Six years, the first two
years in an easily accessible
place
<PAGE>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Proxy State- CSRM Nancy Alford Six years, the first two
ments and years in an easily accessible
Proxy Cards place
Pricing Sheets F&RM Eric Jones Permanently, the first two
years in an easily accessible
place
Bank State- Treasurers Rusty Summers
ments
March 12, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND> This schedule contains summary financial information extracted from
Lincoln National Variable Annuity Account H financial statements and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 10,534,545,742
<INVESTMENTS-AT-VALUE> 12,610,797,327
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 12,610,797,327
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 14,422,976
<TOTAL-LIABILITIES> 14,422,976
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8,234,906,294
<SHARES-COMMON-STOCK> 6,182,433,098
<SHARES-COMMON-PRIOR> 5,462,045,594
<ACCUMULATED-NII-CURRENT> 2,078,722,956
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 206,493,516
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,076,251,585
<NET-ASSETS> 12,596,374,351
<DIVIDEND-INCOME> 1,003,644,770
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 151,425,839
<NET-INVESTMENT-INCOME> 852,218,931
<REALIZED-GAINS-CURRENT> 78,069,710
<APPREC-INCREASE-CURRENT> 553,623,030
<NET-CHANGE-FROM-OPS> 1,483,911,671
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,917,596,569
<NUMBER-OF-SHARES-REDEEMED> 1,410,664,814
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2,758,279,791
<ACCUMULATED-NII-PRIOR> 1,226,504,025
<ACCUMULATED-GAINS-PRIOR> 128,423,806
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 151,425,839
<AVERAGE-NET-ASSETS> 11,217,234,456
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 8,326,651,960
<INVESTMENTS-AT-VALUE> 9,849,280,515
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9,849,280,515
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 11,185,955
<TOTAL-LIABILITIES> 11,185,955
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,960,538,174
<SHARES-COMMON-STOCK> 5,462,045,594
<SHARES-COMMON-PRIOR> 4,894,830,800
<ACCUMULATED-NII-CURRENT> 1,226,504,025
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 128,423,806
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,522,628,555
<NET-ASSETS> 9,838,094,560
<DIVIDEND-INCOME> 671,953,566
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 113,786,063
<NET-INVESTMENT-INCOME> 558,167,503
<REALIZED-GAINS-CURRENT> 46,801,547
<APPREC-INCREASE-CURRENT> 1,225,286,412
<NET-CHANGE-FROM-OPS> 1,830,255,462
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,693,596,940
<NUMBER-OF-SHARES-REDEEMED> 1,126,382,149
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2,818,787,917
<ACCUMULATED-NII-PRIOR> 288,501,054
<ACCUMULATED-GAINS-PRIOR> 43,972,798
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 113,786,063
<AVERAGE-NET-ASSETS> 8,428,700,602
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
