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AMERICAN LEGACY SHAREHOLDER'S ADVANTAGE
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 The Lincoln
National Life Insurance Company (LINCOLN LIFE). It is primarily 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. Lump sum transfers and rollovers for employees of public school systems and
certain tax-exempt organizations [403(b)];
2. Individual retirement annuities (IRA);
3. Roth IRAs.
Consult your investment dealer as to the availability of this CONTRACT for other
qualified plans.
The CONTRACT described in this Prospectus is also offered as a nonqualified
CONTRACT. A nonqualified CONTRACT can be owned jointly only by spouses.
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. Annuity benefits start at an ANNUITY
COMMENCEMENT DATE which you select. If the CONTRACTOWNER dies before the ANNUITY
COMMENCEMENT DATE, the ENHANCED GUARANTEED MINIMUM DEATH BENEFIT (EGMDB) will be
paid if in effect. If the EGMDB is not in effect, a DEATH BENEFIT equal to the
GUARANTEE OF PRINCIPAL will be paid to the BENEFICIARY. (See Death benefit
before annuity commencement date.) The EGMDB is not available under CONTRACTS
used for qualified plans (other than IRAs and Roth IRAs) or if the
CONTRACTOWNER'S issue age is 75 or more.
The minimum initial GROSS 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 GROSS PURCHASE PAYMENT to the CONTRACT is $100 per payment ($25 if
transmitted electronically), subject to a $300 annual minimum.
All investments (NET 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 NET PURCHASE PAYMENTS
(at net asset value) in Class 2 shares of one or more specified funds of the
American Variable Insurance Series (SERIES): Global Growth Fund, Global Small
Capitalization Fund, Growth Fund, Growth-Income Fund, International 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 amounts applied for 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.
NET PURCHASE PAYMENTS can be placed in the DOLLAR COST AVERAGING (DCA) FIXED
ACCOUNT. The DCA FIXED ACCOUNT 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 DCA FIXED ACCOUNT is made. Investments in these
CONTRACTS are neither insured nor guaranteed by the U.S. Government or by any
other person or entity.
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 November 30, 1998, 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 November 30, 1998.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Special terms 3
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Expense tables 5
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Synopsis 7
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Investment results 9
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Financial statements 9
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Lincoln National Life Insurance Co. 9
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DCA fixed account 9
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Variable annuity account (VAA) 9
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Investments of the variable annuity
account 9
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Charges and other deductions 11
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The contracts 13
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Annuity payouts 17
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<CAPTION>
PAGE
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<S> <C>
Federal tax status 18
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Voting rights 20
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Distribution of the contracts 20
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Return privilege 20
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State regulation 20
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Restrictions under the Texas Optional
Retirement Program 20
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Records and reports 21
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Other information 21
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Statement of additional information table
of contents for Variable Annuity Account
H American Legacy Shareholder's Advantage 23
- ------------------------------------------------------
</TABLE>
2
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SPECIAL TERMS
(Throughout this Prospectus, in order to make the following documents more
understandable to you, we have italicized the special terms.)
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 OR JOINT ANNUITANT -- The person(s) upon whose life the ANNUITY
BENEFIT PAYMENTS made after the ANNUITY COMMENCEMENT DATE will be based.
ANNUITY COMMENCEMENT DATE -- The VALUATION DATE when the CONTRACT VALUE is
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 CONTRACTOWNER'S death.
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 DCA FIXED ACCOUNT of the CONTRACT.
CONTRACT YEAR -- Each one-year period starting with the contract date of the
CONTRACT.
DCA FIXED ACCOUNT -- An account, established to accept NET PURCHASE PAYMENTS or
transfers of CONTRACT VALUE, that may only be used for DOLLAR COST AVERAGING
purposes. The DCA FIXED ACCOUNT is a part of the GENERAL ACCOUNT of LINCOLN
LIFE.
DEATH BENEFIT -- The amount payable to your designated BENEFICIARY if the owner
dies before the ANNUITY COMMENCE-MENT DATE. See The contracts.
DEPOSITOR -- Lincoln National Life Insurance Co.
DOLLAR COST AVERAGING (DCA) -- An option that allows automatic transfers of NET
PURCHASE PAYMENTS or CONTRACT VALUE in equal periodic installments over a
defined period in accordance with LINCOLN LIFE procedures. The transfers are
from the DCA FIXED ACCOUNT or VARIABLE SUBACCOUNT(S) made available by LINCOLN
LIFE for this purpose to one or more VARIABLE SUBACCOUNT(S) available under this
CONTRACT and selected by the OWNER. Any interest credited or other gains, if
any, attributable to the DCA FIXED ACCOUNT or VARIABLE SUBACCOUNT will be
transferred with the final DCA transfer.
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) from the time the EGMDB takes
effect up to and including the CONTRACTOWNER'S age 75 as adjusted in accordance
with the CONTRACT provisions.
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 NET PURCHASE PAYMENTS are invested.
GENERAL ACCOUNT -- An account consisting of all assets owned by LINCOLN LIFE
other than those assets in segregated investment accounts.
GROSS PURCHASE PAYMENT -- Amounts paid into this CONTRACT before deduction of
the SALES CHARGE.
GUARANTEE OF PRINCIPAL -- The DEATH BENEFIT payable if the EGMDB is not in
effect. The GUARANTEE OF PRINCIPAL is equal to the greater of: (1) the CONTRACT
VALUE as of the day on which LINCOLN LIFE approves the DEATH BENEFIT claim; or
(2) the sum of all NET PURCHASE PAYMENTS minus, on a pro-rata basis, WITHDRAWALS
and any premium taxes made.
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.
MATURITY DATE -- The date specified on the Contract Data Pages of the CONTRACT.
NET ASSET VALUE PER SHARE -- The market value of a FUND share calculated each
day by taking the closing market value of all securities owned, adding the value
of all other assets (such as cash), subtracting all liabilities, and then
dividing the result (total net assets) by the number of shares of the FUND
outstanding.
NET PURCHASE PAYMENT -- An amount equal to the GROSS PURCHASE PAYMENT less the
SALES CHARGE. The NET PURCHASE PAYMENTS is the amount allocated into the DCA
FIXED ACCOUNT and/or the VARIABLE ACCOUNT.
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QUALIFIED PLAN -- A retirement plan qualified for special tax treatment under
the Internal Revenue Code of 1986, as amended, including Sections 401, 403, 408,
408A and 457. All other plans are considered non-qualified.
SALES CHARGE -- A charge deducted from each GROSS PURCHASE PAYMENT prior to
allocation into the DCA FIXED ACCOUNT and/or the VARIABLE ACCOUNT, expressed as
a percentage of the GROSS PURCHASE PAYMENT.
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.
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.
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.
VARIABLE SUBACCOUNT OR AMERICAN LEGACY SHAREHOLDER'S ADVANTAGE VARIABLE
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 VARIABLE SUBACCOUNT which corresponds to each FUND.
WITHDRAWAL -- A CONTRACT right that allows you to obtain a portion of your CASH
VALUE.
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EXPENSE TABLES
CONTRACTOWNER TRANSACTION EXPENSES:
The maximum SALES CHARGE (as a percentage of GROSS PURCHASE
PAYMENTS): 5.75%.
The SALES CHARGE percentage decreases as the value accumulated under certain of
the owner's investment increases. (See Charges and other deductions).
- --------------------------------------------------------------------------------
VARIABLE ANNUITY ACCOUNT H ANNUAL EXPENSES FOR AMERICAN LEGACY SHAREHOLDER'S
ADVANTAGE VARIABLE SUBACCOUNTS*:
(as a percentage of average account value for each VARIABLE SUBACCOUNT):
<TABLE>
<CAPTION>
FOR EACH SUBACCOUNT* FOR EACH SUBACCOUNT*
WITH EGMDB WITHOUT EGMDB
<S> <C> <C>
Mortality and expense risk fees 0.59% 0.50%
Administrative charge .10% .10%
------ ------
Total annual expenses for AMERICAN LEGACY SHAREHOLDER'S
ADVANTAGE VARIABLE SUBACCOUNTS 0.69% 0.60%
</TABLE>
ANNUAL EXPENSES OF THE FUNDS FOR THE YEAR ENDED NOVEMBER 30, 1997:
(as a percentage of each FUND'S average net assets):
<TABLE>
<CAPTION>
MANAGEMENT 12b-1 OTHER TOTAL
FEES + FEES + EXPENSES = EXPENSES
- ----------------------------------------------------------------------------------------------------
<C><S> <C> <C> <C> <C> <C> <C> <C>
1. Global Growth .68% .25% .05% .98%
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2. Global Small Capitalization** .80 .25 .06 1.11
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3. Growth .39 .25 .01 .65
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4. International .57 .25 .08 .90
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5. Growth-Income .35 .25 .01 .61
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6. Asset Allocation .43 .25 .01 .69
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7. High-Yield Bond .48 .25 .02 .75
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8. Bond .50 .25 .01 .76
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9. U.S. Govt./AAA-Rated Securities .49 .25 .02 .76
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10. Cash Management .45 .25 .01 .71
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</TABLE>
* The VAA is divided into separately-named VARIABLE SUBACCOUNTS, ten of which
are available under the CONTRACTS. Each VARIABLE SUBACCOUNT, in turn, invests
NET PURCHASE PAYMENTS in shares of a class of its respective FUND.
** These expenses are estimated for the current fiscal year.
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EXAMPLES
(reflecting expenses both of the AMERICAN LEGACY SHAREHOLDER'S ADVANTAGE
VARIABLE SUBACCOUNTS and of the FUNDS and the maximum SALES CHARGE)
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
- -------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
1. Global Growth $ 70 $ 97 $ 126 $ 207
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2. Global Small Capitalization* 70 97 126 206
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3. Growth 70 98 127 209
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4. International 70 97 126 208
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5. Growth-Income 70 98 127 209
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6. Asset Allocation 70 97 127 209
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7. High-Yield Bond 70 97 127 209
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8. Bond 70 97 126 209
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9. U.S. Govt./AAA-Rated Securities 70 97 126 209
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10. Cash Management 70 97 127 209
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</TABLE>
* 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 depending on whether or not
the EGMDB is in effect. These examples reflect expenses both of the VAA for the
AMERICAN LEGACY SHAREHOLDER'S ADVANTAGE VARIABLE SUBACCOUNTS and of the
underlying FUNDS. These examples reflect expenses assuming that the EGMDB is in
effect. If the EGMDB is NOT in effect, these expenses will be lower.
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 examples. In addition, we reserve
the right to impose a charge on transfers between VARIABLE SUBACCOUNTS although
we do not currently do so. THESE 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.
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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 VARIABLE
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 VARIABLE SUBACCOUNTS, the
VAA uses your NET PURCHASE PAYMENTS to purchase SERIES shares, at your
direction, in one or more of the following investment FUNDS of the SERIES:
Global Growth, Global Small Capitalization, 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 NET PURCHASE PAYMENTS deposited into the VAA 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), you may
choose a variable or fixed annuity. If you select a variable annuity, your
CONTRACT VALUE 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?
This contract contains a front-end load that is assessed on each GROSS PURCHASE
PAYMENT as it is received. You may be eligible for a reduction in the amount of
the SALES CHARGE on any current GROSS PURCHASE PAYMENT, based on the assets you
accumulate under any individual American Legacy variable annuity contract and
most mutual funds offered by the American Funds Group. The maximum front-end
load that you would ever pay under the CONTRACT would be 5.75% of the GROSS
PURCHASE PAYMENT.
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 GROSS PURCHASE PAYMENTS or CONTRACT VALUE, as
applicable.
We assess annual charges in the aggregate amount of 0.69% against the daily net
asset value of the VAA, including that portion of the account attributable to
your NET PURCHASE PAYMENTS. These charges consist of 0.10% as an administrative
charge and 0.59% as a mortality and expense risk charge. If the EGMDB is not in
effect, the mortality and expense risk charge is 0.50%, resulting in an
aggregate charge against the VAA of 0.60%. 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. The class of shares of each SERIES
available under the CONTRACTS also bears expenses pursuant to a 12b-1 plan. 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 the EGMDB is in effect, the
BENEFICIARY whom you designate will receive the EGMDB. If the EGMDB is not in
effect, the BENEFICIARY will receive the GUARANTEE OF PRINCIPAL. Your
BENEFICIARY will have certain options for how the money is to be paid out. See
Death benefit before the annuity commencement date.
MAY I TRANSFER CONTRACT VALUE BETWEEN FUNDS IN THE SERIES? Yes, subject to
specific restrictions in the contract. See The contracts--Transfers on or before
the
7
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annuity commencement date and transfers after 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 Surrenders and withdrawals.
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 NET PURCHASE PAYMENTS which you allocate to the
variable side of the CONTRACT. See Return privilege.
8
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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. Total returns include the reinvestment of all distributions,
which are reflected in changes in unit value. Results will be calculated without
sales charges. These results will be higher. See the SAI for further
information.
FINANCIAL STATEMENTS
The financial statements of the VAA, and the statutory-basis financial
statements and schedules of LINCOLN LIFE are located in the SAI. If you would
like a free copy of the SAI, 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.
On October 1, 1998, The Lincoln National Life Insurance Company acquired certain
domestic individual life insurance business from Aetna, Inc. via a 100%
indemnity reinsurance transaction.
DCA FIXED ACCOUNT
NET PURCHASE PAYMENTS allocated to the DCA FIXED ACCOUNT become part of LINCOLN
LIFE'S GENERAL ACCOUNT, and DO NOT participate in the investment experience of
the VAA. The general account is subject to regulation and supervision by the
Indiana Insurance Department as well as the insurance laws and regulations of
the jurisdictions in which the CONTRACTS are distributed.
IN RELIANCE ON CERTAIN EXEMPTIONS, EXCLUSIONS AND RULES, LINCOLN LIFE HAS NOT
REGISTERED INTERESTS IN THE GENERAL ACCOUNT AS A SECURITY UNDER THE SECURITIES
ACT OF 1933 AND HAS NOT REGISTERED THE GENERAL ACCOUNT AS AN INVESTMENT COMPANY
UNDER THE 1940 ACT. ACCORDINGLY, NEITHER THE GENERAL ACCOUNT NOR ANY INTERESTS
THEREIN ARE SUBJECT TO REGULATION UNDER THE 1933 ACT OR THE 1940 ACT. LINCOLN
LIFE HAS BEEN ADVISED THAT THE STAFF OF THE SEC HAS NOT MADE A REVIEW OF THE
DISCLOSURES WHICH ARE INCLUDED IN THIS PROSPECTUS WHICH RELATE TO OUR GENERAL
ACCOUNT AND TO THE DCA FIXED ACCOUNT UNDER THE CONTRACT. THESE DISCLOSURES,
HOWEVER, MAY BE SUBJECT TO CERTAIN GENERALLY APPLICABLE PROVISIONS OF THE
FEDERAL SECURITIES LAWS RELATING TO THE ACCURACY AND COMPLETENESS OF STATEMENTS
MADE IN PROSPECTUSES. THIS PROSPECTUS IS GENERALLY INTENDED TO SERVE AS A
DISCLOSURE DOCUMENT ONLY FOR ASPECTS OF THE CONTRACT INVOLVING THE VAA, AND
THEREFORE CONTAINS ONLY SELECTED INFORMATION REGARDING THE DCA FIXED ACCOUNT OF
THE CONTRACT. COMPLETE DETAILS REGARDING THE DCA FIXED ACCOUNT ARE IN THE
CONTRACT.
NET PURCHASE PAYMENTS allocated to the DCA FIXED ACCOUNT are guaranteed to be
credited with a minimum interest rate, specified in the CONTRACT, of at least
3.0%. A NET PURCHASE PAYMENT allocated to the DCA FIXED ACCOUNT IS CREDITED WITH
INTEREST BEGINNING ON THE NEXT CALENDAR DAY FOLLOWING THE DATE OF RECEIPT IF ALL
DATA IS COMPLETE. LINCOLN LIFE may vary the way in which it credits interest to
the fixed side of the CONTRACT from time to time.
ANY INTEREST IN EXCESS OF 3.0% WILL BE DECLARED IN ADVANCE IN LINCOLN LIFE'S
SOLE DISCRETION, CONTRACTOWNERS BEAR THE RISK THAT NO INTEREST IN EXCESS OF 3.0%
WILL BE DECLARED.
VARIABLE ANNUITY ACCOUNT
(VAA)
On 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.
The VAA is used to support annuity contracts offered by LINCOLN LIFE other than
the CONTRACTS described in this prospectus. The other annuity contracts
supported by the VAA invest in the same portfolios of the SERIES as the
CONTRACTS described herein. These other annuity contracts may have different
charges that could affect performance of the VARIABLE SUBACCOUNT.
9
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INVESTMENTS OF THE VARIABLE
ANNUITY ACCOUNT
You decide the VARIABLE SUBACCOUNT(S) to which you allocate NET PURCHASE
PAYMENTS. There is a separate VARIABLE SUBACCOUNT which corresponds to each FUND
of 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 ten separate portfolios of FUNDS. FUND assets are segregated and
a shareholder's interest is limited to those FUNDS in which the shareholder owns
shares. 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.
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 arrangement;
and (4) each class has separate voting rights on any matter submitted to
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 as well as related expenses incurred by LINCOLN LIFE.
Each FUND has two classes of shares, designated as Class 1 shares 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 2 shares are available under the
CONTRACTS.
The investment objectives and policies of certain FUNDS are similar to the
investment objectives and policies of portfolios, other than the FUNDS, that are
advised by the ADVISOR. The investment results of the FUNDS, however, may be
higher or lower than the other portfolios that are advised by the ADVISOR. There
can be no assurance, and no representation is made, that the investment results
of any of the FUNDS will be comparable to the investment results of any other
portfolio advised by the ADVISOR.
Following are brief summaries of the investment objectives and policies of the
FUNDS. Each FUND is subject to certain investment policies and restrictions
which may not be changed without a majority vote of shareholders of that FUND.
More detailed information may be obtained from the current Prospectus for the
SERIES which is included in this booklet. PLEASE BE ADVISED THAT THERE IS NO
ASSURANCE THAT ANY OF THE FUNDS WILL ACHIEVE THEIR STATED OBJECTIVES.
1. Global Growth Fund --The 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.
2. Global Small Capitalization Fund seeks long-term growth of capital by
investing primarily in equity securities of companies domiciled around the
world with relatively small market capitalizations (share price times the
number of equity securities outstanding.) The FUND may also invest in
securities convertible into common stocks, straight debt securities,
government securities or nonconvertible preferred stocks.
3. 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.
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4. International Fund --The investment objective is long-term growth of
capital by investing primarily in securities of issuers domiciled outside
the United States.
5. 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.
6. 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).
7. 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.
8. Bond Fund --This 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.
9. 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.
10. 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 VARIABLE 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 VARIABLE 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.
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.
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CHARGES AND OTHER
DEDUCTIONS
We will deduct the charges described below to cover our costs and expenses,
services provided and risks assumed under the CONTRACTS. We incur certain costs
and expenses for the distribution and administration of the CONTRACTS and for
providing the benefits payable thereunder. More particularly, our administrative
services include: processing applications for and issuing the CONTRACTS,
processing purchases and redemptions of FUND shares as required (including
dollar cost averaging, cross-reinvestment, and automatic WITHDRAWAL services),
maintaining records, administering ANNUITY PAYOUTS, furnishing accounting and
valuation services (including the calculation and monitoring of daily VARIABLE
SUBACCOUNT values), reconciling and depositing cash receipts, providing CONTRACT
confirmations, providing toll-free inquiry services and furnishing telephone
FUND transfer services. 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, will exceed the actual CONTRACT VALUE; and 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. For example, the SALES
CHARGE collected may not fully cover all of the sales and distribution expenses
actually incurred by us.
SALES CHARGE
A front-end load, or SALES CHARGE, will apply to all initial and subsequent
GROSS PURCHASE PAYMENTS that you may make. This charge is taken as a percentage
of the GROSS PURCHASE PAYMENT and is based on the owner's investment at the time
each GROSS PURCHASE PAYMENT is made according to the following scale:
<TABLE>
<CAPTION>
SALES
owner's investment CHARGE
- ----------------------------------------- ----------
<S> <C>
Under $50,000 5.75%
$50,000 or greater but less than $100,000 4.50%
$100,000 or greater but less than
$250,000 3.50%
$250,000 or greater but less than
$500,000 2.50%
$500,000 or greater but less than
$1,000,000 2.00%
$1,000,000 or greater 1.00%
</TABLE>
The owner's investment is defined as the sum of:
a. the account values for any of the following individual LINCOLN LIFE CONTRACTS
owned by an eligible owner (defined below) marketed under the names of: The
American Legacy Variable Annuity, American Legacy II Variable Annuity,
American Legacy III Variable Annuity, or American Legacy Shareholder's
Advantage Variable Annuity; plus
b. the amount (in dollars) of an eligible owner's investment in existing mutual
funds in The American Funds Group in accordance with the procedures
established by the American Funds Group; plus
c. the amount of the current GROSS PURCHASE PAYMENT you are making into this
CONTRACT.
American Funds Group will determine which of the mutual funds are included in
this program. Currently, direct purchases of money market funds are excluded.
In determining the account values for the LINCOLN LIFE annuity CONTRACTS, the
variable account values are valued as of the close of market on the last
previous day the market was open and are adjusted for current day transactions.
The fixed accounts will include interest accrued through the close of market on
the last previous day the market was open.
An eligible owner includes you as the owner of your American Legacy
Shareholder's Advantage CONTRACT, your spouse, and any of your children under
the age of 21. If the owner of any contract under (a) above is a non-natural
owner and if you, your spouse, or any children of yours under the age of 21 are
the named annuitant, then you may include these account values in the
calculation of the owner's investment for the contracts issued in one of the
following IRS defined markets: Roth IRA, traditional IRA, non-qualified, SEP,
and 403(b) transfers. The non-natural owner will include the account values from
contracts in all other markets in its calculation of owner's investment.
DEDUCTIONS FROM THE VAA FOR AMERICAN
LEGACY SHAREHOLDER'S ADVANTAGE
We deduct from the VAA an amount, computed daily, which is equal to an annual
rate of 0.69% (0.60% for CONTRACTS without the EGMDB) of the daily net asset
value. The charge consists of a 0.10% administrative charge and a 0.59% (0.50%
for CONTRACTS without the EGMDB) mortality and expense risk charge.
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 GROSS
PURCHASE PAYMENT 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 more fully described in the Prospectus for the SERIES. Among
these
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deductions and expenses are 12b-1 fees which reimburse LINCOLN LIFE for certain
expenses incurred in connection with certain administrative and distribution
support services provided to the SERIES.
ADDITIONAL INFORMATION
The administrative charge and sales charge described previously may be reduced
or eliminated for any particular CONTRACT. However, this charge 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 this charge. 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
charge and sales charge 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 GROSS 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 GROSS 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
GROSS 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 GROSS 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 CONTRACTOWNER
cannot be older than age 90.
PURCHASE PAYMENTS
GROSS PURCHASE PAYMENTS are payable to us at a frequency and in an amount
selected by you in the application. The minimum initial GROSS 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 GROSS
PURCHASE PAYMENTS is $300 for nonqualified and qualified CONTRACTS. The minimum
payment to the CONTRACT at any one time must be at least $100 ($25 if
transmitted electronically). GROSS PURCHASE PAYMENTS in total may not exceed $1
million for an owner or $500,000 for each joint owner without prior HOME OFFICE
approval. If you stop making GROSS PURCHASE PAYMENTS, the CONTRACT will remain
in force subject to our right to terminate the CONTRACT in accordance with the
terms set forth in your state's nonforfeiture law for individual deferred
annuities. Payments may be made or, if stopped, resumed at any time until the
ANNUITY COMMENCEMENT DATE, the SURRENDER of the CONTRACT, maturity date or the
death of the CONTRACTOWNER (or joint owner, if applicable) that results in
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 New York Stock Exchange 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
NET PURCHASE PAYMENTS are placed into the VAA's VARIABLE SUBACCOUNTS, each of
which invests in shares of the class of its corresponding FUND of the SERIES,
according to your instructions. You may also allocate NET PURCHASE PAYMENTS into
the DCA FIXED ACCOUNT.
The minimum amount of any NET PURCHASE PAYMENT which can be put into any one
subaccount is $20 under the CONTRACT. Upon allocation to the appropriate
VARIABLE SUBACCOUNT, NET PURCHASE PAYMENTS are converted into ACCUMULATION
UNITS. The number of ACCUMULATION UNITS credited is determined by dividing the
amount allocated to each VARIABLE SUBACCOUNT by the value of an ACCUMULATION
UNIT for that VARIABLE 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 GROSS 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 is not 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
underlying FUND'S investments perform, but also upon the expenses of the VAA and
the underlying FUNDS.
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VALUATION OF ACCUMULATION UNITS
NET PURCHASE PAYMENTS allocated to the VAA are converted into ACCUMULATION
UNITS. This is done by dividing each NET PURCHASE PAYMENT by the value of an
ACCUMULATION UNIT for the VALUATION PERIOD during which the NET PURCHASE PAYMENT
is allocated to the VAA. The ACCUMULATION UNIT value for each VARIABLE
SUBACCOUNT was or will be established at the inception of the VARIABLE
SUBACCOUNT. It may increase or decrease from VALUATION PERIOD to VALUATION
PERIOD. The ACCUMULATION UNIT value for a VARIABLE SUBACCOUNT for a later
valuation period is determined as follows:
(1) The total value of the FUND shares held in the VARIABLE SUBACCOUNT is
calculated by multiplying the number of FUND shares owned by the VARIABLE
SUBACCOUNT at the beginning of the VALUATION PERIOD by the net asset value
per share of the FUND at the end of the VALUATION PERIOD, and adding any
dividend or other distribution of the FUND if an ex-dividend date occurs
during the VALUATION PERIOD; minus
(2) The liabilities of the VARIABLE SUBACCOUNT at the end of the VALUATION
PERIOD; these liabilities include daily charges imposed on the VARIABLE
SUBACCOUNT, and may include a charge or credit with respect to any taxes
paid or reserved for by us that we determine result from the operations of
the VAA; and
(3) The result of (2) is divided by the number of VARIABLE SUBACCOUNT units
outstanding at the beginning of the VALUATION PERIOD.
The daily charges imposed on a VARIABLE SUBACCOUNT for any VALUATION PERIOD are
equal to the daily mortality and expense risk charge and the daily
administrative charge multiplied by the number of calendar days in the VALUATION
PERIOD. Because a different daily charge is made for CONTRACTS with the EGMDB
than for those without, each of the two types of CONTRACTS will have different
corresponding ACCUMULATION UNIT values on any given day.
TRANSFERS ON OR BEFORE THE ANNUITY COMMENCEMENT DATE
Prior to the earlier of:
a. the MATURITY DATE;
b. SURRENDER of the CONTRACT;
c. payment of any DEATH BENEFIT; or
d. the ANNUITY COMMENCEMENT DATE,
the OWNER may direct a transfer of CONTRACT VALUE;
a. from a VARIABLE SUBACCOUNT to another VARIABLE SUBACCOUNT or to the DCA
FIXED ACCOUNT; or
b. from the DCA FIXED ACCOUNT (outside of the dollar cost averaging program) to
a VARIABLE SUBACCOUNT.
A transfer involves:
a. the surrender of ACCUMULATION UNITS in a VARIABLE SUBACCOUNT; or
b. a withdrawal of money from the DCA FIXED ACCOUNT
and
a. the purchase of ACCUMULATION UNITS in another VARIABLE SUBACCOUNT; or
b. the application of proceeds to the DCA FIXED ACCOUNT.
A transfer to or from a VARIABLE SUBACCOUNT will be done using the respective
ACCUMULATION UNIT values determined at the end of the VALUATION DATE on which
the transfer request is received. Currently, there is no charge for a transfer.
However, we reserve the right to impose a charge in the future for transfers.
Transfers between subaccounts cannot be made during the first 30 days after the
issue date of the CONTRACT and are restricted to six times every CONTRACT year.
We reserve the right to waive these limits. The limit of six transfers does not
apply to transfers made under a dollar cost averaging or cross-reinvestment
program elected on forms available from us. (The SAI contains more information
about these programs.) 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.
There are no restrictions on the maximum amount which may be transferred from a
VARIABLE SUBACCOUNT. Only one transfer will be allowed from the DCA FIXED
ACCOUNT in any 12 month period. The amount available for transfer is limited to
25% of the DCA FIXED ACCOUNT. These restrictions do not apply to transfers under
dollar cost averaging or cross-reinvestment programs.
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. Currently, there is no charge to you for a transfer. 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 requests may
be recorded and written confirmation of all transfer requests will be mailed to
the CONTRACTOWNER on the next VALUATION DATE. Telephone transfers will be
processed on the VALUATION DATE that they are received when they are received at
our customer service center before 4 p.m. New York time.
When thinking about a transfer of CONTRACT VALUE, you should consider the
inherent risk involved. Frequent transfers based on short-term expectations may
increase the risk that a transfer will be made at an inopportune time.
TRANSFERS AFTER THE ANNUITY COMMENCEMENT DATE
You may transfer all or a portion of your investment in one VARIABLE SUBACCOUNT
to another VARIABLE SUBACCOUNT or to
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the fixed side of the CONTRACT. Those transfers will be limited to three times
per CONTRACT YEAR. Currently, there is no charge for these transfers. However,
we reserve the right to impose a charge. No transfers are allowed from the fixed
side of the CONTRACT to the VARIABLE SUBACCOUNTS.
DEATH BENEFIT BEFORE THE ANNUITY COMMENCEMENT DATE
You may designate a BENEFICIARY during your lifetime 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 CONTRACTOWNER dies before the ANNUITY COMMENCEMENT DATE and the EGMDB is
in effect, the DEATH BENEFIT paid to your designated BENEFICIARY will be the
greater of: (1) the 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) on ages up
to, and including, the CONTRACTOWNER'S age 75. The highest CONTRACT VALUE is
increased by NET PURCHASE PAYMENTS and is decreased on a pro-rata basis by
partial WITHDRAWALS, and any premium taxes made, effected or incurred subsequent
to the anniversary date on which the highest CONTRACT VALUE is obtained. The
highest CONTRACT VALUE is adjusted for decreases such that the ratio of the
highest CONTRACT VALUE obtained to the actual CONTRACT VALUE is the same both
before and after a partial WITHDRAWAL or premium tax (if applicable) deduction.
If the EGMDB is not in effect, the DEATH BENEFIT will be equal to the GUARANTEE
OF PRINCIPAL. The GUARANTEE OF PRINCIPAL is equal to the greater of: (1) the
CONTRACT VALUE as of the day on which LINCOLN LIFE approves the payment of the
claim; or (2) the sum of all NET PURCHASE PAYMENTS minus, on a pro-rata basis,
WITHDRAWALS and premium tax incurred. The sum of all NET PURCHASE PAYMENTS is
adjusted for decreases such that the ratio of the sum of all NET PURCHASE
PAYMENTS to the CONTRACT VALUE is the same both before and after the partial
WITHDRAWAL or premium tax (if applicable) deduction.
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 OWNER; (2) written
authorization for payment; and (3) our receipt of all required claim forms,
fully completed.
When applying for a CONTRACT, an applicant can request a CONTRACT without the
EGMDB. The EGMDB is not available under CONTRACTS used for qualified plans
(other than IRAs) or CONTRACTS issued to a CONTRACTOWNER who is age 75 or older
at the time of issuance.
After a CONTRACT is issued, the CONTRACTOWNER may discontinue the EGMDB at any
time by completing the Enhanced Guaranteed Minimum Death Benefit Discontinuance
form and sending it to LINCOLN LIFE. The benefit will be discontinued effective
as of the VALUATION DATE we receive the request, and we will cease deducting the
charge for the benefit as of that date. See Charges and other deductions. If you
discontinue the benefit, it cannot be reinstated.
If the DEATH BENEFIT becomes payable, the BENEFICIARY may elect to receive
payment of the DEATH BENEFIT in one of several forms.
The DEATH BENEFIT payable to the BENEFICIARY must be distributed within five
years of the CONTRACTOWNER'S date of death 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 extending
beyond the BENEFICIARY'S life expectancy. If a lump sum settlement is elected,
the proceeds will be mailed within seven days of approval by us of the claim.
This payment may be postponed as permitted by the Investment Company Act of
1940.
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 CONTRACTOWNER, that BENEFICIARY'S
interest will go to any other BENEFICIARIES named, according to their
respective interests; and/or
2. If no BENEFICIARY survives the CONTRACTOWNER, the proceeds will be paid to
the CONTRACTOWNER'S estate.
If the BENEFICIARY is the spouse of the CONTRACTOWNER, then the spouse may elect
to continue the CONTRACT as owner. If the CONTRACTOWNER is a corporation or
other non-individual (non-natural person), the death of the ANNUITANT will be
treated as death of the CONTRACTOWNER and the above distribution rules apply.
If there are joint owners, upon the death of the first joint owner, the
surviving joint owner will receive the DEATH BENEFIT. The surviving joint owner
will be treated as the primary, designated BENEFICIARY. Any other BENEFICIARY
designation on record at the time of death will be treated as a contingent
BENEFICIARY.
If the surviving joint owner, as spouse of the decreased joint owner, elects to
continue the CONTRACT as the sole owner in lieu of receiving the DEATH BENEFIT,
then the designated BENEFICIARY(S) will receive the DEATH BENEFIT upon the death
of the surviving spouse.
JOINT 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. Only spouses
may be joint owners. Joint owners that are not spouses may be allowed in the
states of New Jersey, Oregon and Pennsylvania.
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DEATH OF ANNUITANT BEFORE THE ANNUITY COMMENCEMENT DATE
If the ANNUITANT is also the CONTRACTOWNER or a joint owner, then the DEATH
BENEFIT provided will be the DEATH BENEFIT subject to the provisions of this
CONTRACT regarding death of the CONTRACTOWNER. If the surviving spouse assumes
the CONTRACT, the contingent ANNUITANT becomes the ANNUITANT. If no contingent
ANNUITANT is named, the surviving spouse becomes the ANNUITANT.
If an ANNUITANT who is not the CONTRACTOWNER or joint owner dies, then the
contingent ANNUITANT, if any, becomes the ANNUITANT. If no contingent ANNUITANT
is named, the CONTRACTOWNER (or joint owner if younger) becomes the ANNUITANT.
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.
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.
A SURRENDER/WITHDRAWAL will be effective as of the VALUATION DATE on which
LINCOLN LIFE received a written request at its HOME OFFICE.
The minimum WITHDRAWAL is $300. LINCOLN LIFE reserves the right to SURRENDER
this CONTRACT if any WITHDRAWAL reduces the total CONTRACT VALUE to a level at
which this CONTRACT may be SURRENDERED in accordance with applicable law for
individual deferred annuities.
Unless a request for WITHDRAWAL specifies otherwise, LINCOLN LIFE will withdraw
the amount requested on a pro-rata basis from each VARIABLE SUBACCOUNT and the
DCA FIXED ACCOUNT.
Any cash payment will be mailed from LINCOLN LIFE'S home office within seven
days after the date of SURRENDER/WITHDRAWAL; however, LINCOLN LIFE may be
permitted to defer such payment under the Investment Company Act of 1940, as in
effect at the time such request for SURRENDER/WITHDRAWAL is received.
The SURRENDER/WITHDRAWAL option is not available after the ANNUITY COMMENCEMENT
DATE.
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 the
Restrictions under the Texas Optional Retirement Program, later in this
Prospectus booklet.
REINVESTMENT PRIVILEGE
You may elect to make a reinvestment purchase with any part of the proceeds of a
SURRENDER/WITHDRAWAL, without new SALES CHARGES. 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 5.00% of each GROSS PURCHASE
PAYMENT; plus an annual continuing commission of up to 0.25% of CONTRACT VALUE.
At times, additional sales incentives (up to 0.25% of each GROSS PURCHASE
PAYMENT and an annual continuing 0.10% of CONTRACT VALUE) may be provided to
dealers maintaining certain sales volume levels. Upon annuitization, an annual
continuing commission of up to 0.80% (or up to 0.90% for dealers maintaining
certain sales volume levels) of statutory reserves can be paid to dealers. 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
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designated BENEFICIARIES; and the assets of the VAA are not chargeable with
liabilities arising from any other business that we may conduct. Qualified
CONTRACTS may not be assigned or transferred except as permitted by the Employee
Retirement Income Security Act (ERISA) of 1974 and upon written notification to
us. Non-qualified CONTRACTS may not be collaterally assigned. 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 as you specify.
You may elect ANNUITY PAYOUTS in monthly, quarterly, semiannual or annual
installments. If the payouts from any VARIABLE 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 RECIPIENT WOULD RECEIVE NO
PAYOUTS IF THE ANNUITANT 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 CONTRACTOWNER'S 90th
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
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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 period payouts, the number of
payouts which remain unpaid at the date of the ANNUITANT'S death (or surviving
ANNUITANT'S death in case of joint life annuity) will be paid to your
BENEFICIARY as payouts become due. If there is no BENEFICIARY, any remaining
payments will be made to the ANNUITANT'S estate.
VARIABLE ANNUITY PAYOUTS
VARIABLE ANNUITY PAYOUTS will be determined using:
1. The CONTRACT VALUE on the ANNUITY COMMENCEMENT DATE;
2. The annuity tables contained in the CONTRACT;
3. The ANNUITY OPTION selected; and
4. The investment performance of the FUND(S) selected.
To determine the amount of payouts, we make this calculation:
1. Determine the dollar amount of the first periodic payout; then
2. Credit the CONTRACT with a fixed number of ANNUITY UNITS equal to the first
periodic payout divided by the ANNUITY UNIT value; and
3. Calculate the value of the ANNUITY UNITS each period thereafter.
We assume an investment return of 4% per year, as applied to the applicable
mortality table. The amount of each payout after the initial payout will depend
upon how the underlying FUND(S) perform, relative to the 4% assumed rate. If the
actual net investment rate (annualized) exceeds 4%, the payment will increase at
a rate equal to the amount of such excess. Conversely, if the actual rate is
less than 4%, ANNUITY PAYOUTS will decrease. There is a more complete
explanation of this calculation in the SAI.
FEDERAL TAX STATUS
This section is a discussion of the Federal income tax rules applicable to the
CONTRACTS as of the date of this Prospectus. More information is provided in the
SAI. THESE DISCUSSIONS AND THOSE IN THE SAI ARE NOT INTENDED AS TAX ADVICE. This
section does not discuss the Federal tax consequences resulting from every
possible situation. No attempt has been made to consider any applicable state,
local, or foreign tax law, other than the imposition of any state premium taxes
(See 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. In general, 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 GROSS 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, the entire distribution (whether fixed or variable)
will be fully taxable once
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the recipient is deemed to have recovered the dollar amount of the investment in
the CONTRACT.
All or a portion of a WITHDRAWAL may be taxable. Additionally, 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 attains 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;
6. Simple retirement accounts, qualified under Section 401(k)(11) of the code,
commonly referred to as SIMPLE or SIMPLE 401(k) plans and SIMPLE IRA plans;
and/or
7. Roth IRAs, qualified under Section 408A of the CODE.
The tax rules applicable to these plans, including restrictions on contributions
and benefits, taxation of distributions and any tax penalties, vary according to
the type of plan and its terms and conditions. Participants under such plans, as
well as CONTRACTOWNERS, ANNUITANTS and BENEFICIARIES, should be aware that the
rights of any person to any benefits under such plans may be subject to the
terms and conditions of the plans themselves, regardless of the terms and
conditions of the CONTRACTS. Purchasers of CONTRACTS for use with any qualified
plan, as well as plan participants, 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
CONTRACTS 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 regulation 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 Internal Revenue Service. 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 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. Income tax withholding of 20% 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
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life or life expectancy, (2) installments paid for a period spanning 10 years or
more, and (3) required minimum distributions. Mandatory 20% income tax
withholding is imposed 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 VARIABLE SUBACCOUNTS
which invest in classes of 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 VARIABLE SUBACCOUNT to the total number
of votes attributable to the VARIABLE SUBACCOUNT. In determining the number of
votes, fractional shares will be recognized.
SERIES shares of a class held in a VARIABLE 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 VARIABLE
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 VARIABLE 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 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 GIA and
DCA fixed account, we will return GROSS 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 premium taxes
which had been deducted. No 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 GROSS
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.
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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 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.
PREPARING FOR YEAR 2000
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the year 2000. The
year 2000 issue affects virtually all companies and organizations.
LINCOLN LIFE, as part of its year 2000 updating process, is responsible for the
updating of the VAA related computer systems. An affiliate of LINCOLN LIFE,
Delaware Service Company (Delaware), provides substantially all of the necessary
accounting and valuation services for the VAA. Delaware, for its part, is
responsible for updating all of its internal computer systems, including those
which service the VAA, to accommodate the year 2000. LINCOLN LIFE and Delaware
(the "Companies") have each been redirecting a large portion of their internal
information technology efforts and contracting with outside consultants as part
of this updating process. Meanwhile, they have been coordinating with each other
as part of the process.
The year 2000 issue is pervasive and complex and affects virtually every aspect
of the businesses of both LINCOLN LIFE and Delaware (the Companies). The
computer systems of the Companies and their interfaces with the computer systems
of vendors, suppliers, customers and other business partners are particularly
vulnerable. The inability to properly recognize date-sensitive electronic
information and to transfer data between systems could cause errors or even
complete failure of systems, which would result in a temporary inability to
process transactions correctly and engage in normal business activities for the
VAA. The Companies respectively are redirecting significant portions of their
internal information technology efforts and are contracting, as needed, with
outside consultants to help update their systems to accommodate the year 2000.
The Companies have respectively initiated formal discussions with other critical
parties that interface with their systems to gain an understanding of the
progress by those parties in addressing year 2000 issues. While the Companies
are making substantial efforts to address their own systems and the systems with
which they interface, it is not possible to provide assurance that operational
problems will not occur. The Companies presently believe that, assuming the
modification of existing computer systems, updates by vendors and conversion to
new software and hardware, the year 2000 issue will not pose significant
operations problems for their respective computer systems. In addition, the
Companies are incorporating potential issues surrounding year 2000 into their
contingency planning process, in the event that, despite these substantial
efforts, there are unresolved year 2000 problems. If the remediation efforts
noted above are not completed timely or properly, the year 2000 issue could have
a material adverse impact on the operation of the businesses of LINCOLN LIFE or
Delaware, or both.
The cost of addressing year 2000 issues and the timeliness of completion will be
closely monitored by management of the respective Companies. Nevertheless, there
can be no guarantee either by LINCOLN LIFE or by Delaware that the estimated
costs will be achieved, and actual results could differ significantly from those
anticipated. Specific factors that might cause such differences include, but are
not limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer problems, and other
uncertainties.
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LEGAL PROCEEDINGS
LINCOLN LIFE is involved in various pending or threatened legal proceedings
arising from the conduct of its business. Most of those proceedings are routine
and in the ordinary course 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 the ultimate liability, if any,
under these suits will not have a material adverse effect on the financial
position of LINCOLN LIFE.
During the 1990's class action lawsuits alleging sales practices fraud have been
filed against many life insurance companies, and LINCOLN LIFE has not been
immune. Several suits involve alleged fraud in the sale of interest-sensitive
universal and whole life insurance policies. Certain of these suits have been
filed as class actions against LINCOLN LIFE, although as of the date of this
Prospectus the court had not certified a class in any of them. Plaintiffs seek
unspecified damages and penalties for themselves and on behalf of the putative
class. Although the relief sought in these cases is substantial, the cases are
in the early stages of litigation, and it is premature to make assessments about
potential loss, if any. Management denies these allegations and intends to
defend these suits vigorously. The amount of liability, if any, which may arise
as a result of these suits (exclusive of any indemnification from professional
liability insurers) cannot be reasonably estimated at this time.
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STATEMENT OF ADDITIONAL
INFORMATION TABLE OF
CONTENTS FOR VARIABLE
ANNUITY ACCOUNT H
AMERICAN LEGACY
SHAREHOLDER'S ADVANTAGE
<TABLE>
<S> <C>
ITEM ITEM
- --------------------------------------------------- ---------------------------------------------------
General information and history of Calculation of investment results
Lincoln Life ---------------------------------------------------
- --------------------------------------------------- Annuity payouts
Special terms ---------------------------------------------------
- --------------------------------------------------- Federal tax status
Services ---------------------------------------------------
- --------------------------------------------------- Advertising and sales literature
Principal underwriter ---------------------------------------------------
- --------------------------------------------------- Financial statements
Purchase of securities being offered
</TABLE>
For a free copy of the SAI please see page one of
this booklet.
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To obtain a copy of the Statement of Additional Information, please complete and
mail this card.
STATEMENT OF ADDITIONAL INFORMATION REQUEST CARD
(LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H)
Please send me a copy of the current Statement of Additional
Information for American Legacy Shareholder's Advantage and American
Variable Insurance Series (Please print)
Name: __________________________________________________________________
Address: _______________________________________________________________
City: ____________________________________ State: ________ Zip: ________
<PAGE>
PLACE
STAMP
HERE
POSTAL SERVICES
WILL NOT
DELIVER
UNLESS STAMPED
THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
ATTN: AMERICAN LEGACY CUSTOMER
SERVICE
P.O. BOX 2348
FORT WAYNE, IN 46801-2348
<PAGE>
THE AMERICAN LEGACY SHAREHOLDER'S ADVANTAGE
LINCOLN NATIONAL
VARIABLE ANNUITY ACCOUNT H (REGISTRANT)
THE LINCOLN NATIONAL
LIFE INSURANCE COMPANY (DEPOSITOR)
STATEMENT OF ADDITIONAL INFORMATION (SAI)
This Statement of Additional Information should be read in conjunction with the
American Legacy Shareholder's Advantage Prospectus of Lincoln National Variable
Annuity Account H dated November 30, 1998.
You may obtain a copy of the American Legacy Shareholder's Advantage Prospectus
on request and without charge. Please write American Legacy Customer Service,
The Lincoln National Life Insurance Company, P.O. Box 2348, Fort Wayne, Indiana
46801 or call 1-800-942-5500.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
<S> <C>
- -------------------------------------------------------
GENERAL INFORMATION AND HISTORY
OF LINCOLN LIFE B-2
- -------------------------------------------------------
SPECIAL TERMS B-2
- -------------------------------------------------------
SERVICES B-2
- -------------------------------------------------------
PRINCIPAL UNDERWRITER B-2
- -------------------------------------------------------
PURCHASE OF SECURITIES BEING OFFERED B-2
- -------------------------------------------------------
<CAPTION>
ITEM PAGE
- -------------------------------------------------------
<S> <C>
CALCULATION OF INVESTMENT RESULTS B-2
- -------------------------------------------------------
ANNUITY PAYOUTS B-7
- -------------------------------------------------------
FEDERAL TAX STATUS B-7
- -------------------------------------------------------
ADVERTISING AND SALES LITERATURE B-10
- -------------------------------------------------------
FINANCIAL STATEMENTS B-12
- -------------------------------------------------------
</TABLE>
THIS SAI IS NOT A PROSPECTUS.
The date of this SAI is November 30, 1998.
B-1
<PAGE>
GENERAL INFORMATION
AND HISTORY OF THE
LINCOLN NATIONAL LIFE
INSURANCE COMPANY (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 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 is
currently closed on weekends and on these holidays: New Year's Day, Martin
Luther King's Birthday, President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day, and Christmas Day. If any of these holidays
occurs on a weekend day, the Exchange may also be closed on the business day
occurring just before or just after the holiday.
SERVICES
INDEPENDENT AUDITORS
The financial statements of the variable annuity account (VAA) and the
statutory-basis 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 also appearing 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 reports 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 Street, 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 sales charge
normally assessed on gross purchase payments 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 Charges
and other deductions in the Prospectus.
Both before and after the annuity commencement date, there are exchange
privileges between variable subaccounts, and from the VAA to the fixed side of
the contract subject to restrictions set out in the Prospectus. See The
contracts, in the Prospectus. No exchanges are permitted between the VAA and
other variable separate accounts.
The offering of the contracts is continuous.
CALCULATION OF INVESTMENT RESULTS
The paragraphs set forth below present performance information for the VAA and
the variable subaccounts calculated in several different ways. Paragraph A shows
the historical performance of each SUBACCOUNT over the periods indicated. The
information presented in Paragraph A is referred to as "standard performance"
because it is calculated in accordance with formulas prescribed by the SEC. The
performance information for periods prior to the introduction of the Class 2
shares of the SERIES (April 30, 1997) is calculated by adjusting the performance
of the Class 1 shares of the SERIES to reflect the 12b-1 fee imposed on Class 2
shares. For periods
B-2
<PAGE>
after April 30, 1997, Class 2 performance is reflected. For all periods shown,
historical SERIES performance has been adjusted to reflect the expenses of the
SUBACCOUNTS and the CONTRACTS. The standard performance of each SUBACCOUNT is
calculated with and without the enhanced guaranteed minimum death benefit
(EGMDB). Standard performance is described in Paragraph B. Under rules
prescribed by the SEC, standard performance must be included in certain
advertising material that discusses the performance of the VAA and the
SUBACCOUNTS.
Paragraph C shows the performance of the SERIES over the periods indicated in
the table adjusted to reflect the expenses of the SUBACCOUNTS and the CONTRACTS.
Paragraph D shows additional "non-standardized" performance information (i.e.,
performance information not calculated in accordance with SEC guidelines) for
each of the variable subaccounts that may be used to advertise the performance
of the VAA and the variable subaccounts. THIS INFORMATION DOES NOT INDICATE OR
REPRESENT FUTURE PERFORMANCE.
(A) AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDING DECEMBER 31, 1997
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION
WITH WITHOUT WITH WITHOUT WITH WITHOUT
EGMDB EGMDB EGMDB EGMDB EGMDB EGMDB
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
Global Growth Subaccount
(commenced activity 4/30/97) 1.70% 1.76% N/A N/A 2.55% 2.64%
- ------------------------------------------------------------------------------------------------------------------
Growth Subaccount
(commenced activity 2/7/89) 21.48 21.59 15.64% 15.74% 13.34 13.44
- ------------------------------------------------------------------------------------------------------------------
International Subaccount
(commenced activity 5/1/90) 1.83 1.92 12.22 12.32 8.25 8.35
- ------------------------------------------------------------------------------------------------------------------
Growth Income Subaccount
(commenced activity 2/7/89) 17.50 17.61 15.44 15.54 12.32 12.43
- ------------------------------------------------------------------------------------------------------------------
Asset-Allocation Subaccount
(commenced activity 8/1/89) 12.51 12.61 12.36 12.46 10.58 10.68
- ------------------------------------------------------------------------------------------------------------------
High-Yield Bond Subaccount
(commenced activity 2/7/89) 4.96 5.06 8.69 8.79 9.81 9.90
- ------------------------------------------------------------------------------------------------------------------
Bond Subaccount
(commenced activity 1/2/96) 2.83 2.92 N/A N/A 3.85 3.94
- ------------------------------------------------------------------------------------------------------------------
U.S. Gov't./AAA Subaccount
(commenced activity 2/7/89) 1.26 1.36 4.30 4.40 6.17 6.27
- ------------------------------------------------------------------------------------------------------------------
Cash Management Subaccount
(commenced activity 2/7/89) (1.81) (1.72) 2.27 2.37 3.33 3.43
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
There is a Global Small Capitalization variable subaccount but it is not in the
chart because it did not begin activity until 1998.
(b) FORMULAS
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) to the power of (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)
B-3
<PAGE>
The formula assumes that: 1) all recurring fees have been charged to
contractowner accounts; 2) all applicable non-recurring charges are deducted at
the end of the period in question; and 3) there will be a complete redemption at
the end of the period in question.
(c) FUND HISTORICAL PERFORMANCE ADJUSTED FOR CONTRACT EXPENSE CHARGES
The examples below show, for the various subaccounts of the VAA, annual total
return as of the stated periods, based upon a hypothetical initial gross
purchase payment of $1,000, calculated according to the formula provided after
the examples. The annual total return has been calculated to show the annual
total return for a hypothetical contract with EGMDB and without EGMDB. Although
the variable subaccounts did not commence activity until 1998, these figures are
calculated as if the variable subaccounts had commenced activity at the same
time as the underlying funds.
Further, the figures below are based on the performance of the class of shares
of the funds issued since the funds commenced operations in 1989, as adjusted to
reflect the fees and expenses chargeable against assets attributable to shares
of Class 2.
FUND HISTORICAL PERFORMANCE (ADJUSTED
FOR CONTRACT EXPENSE CHARGES)
PERIOD ENDING DECEMBER 31, 1997
<TABLE>
<CAPTION>
1-YEAR PERIOD 5-YEAR PERIOD 10-YEAR PERIOD
WITH WITHOUT WITH WITHOUT WITH WITHOUT
EGMDB EGMDB EGMDB EGMDB EGMDB EGMDB
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
Global Growth Variable Subaccount
(commenced activity 4/30/97) 1.70%* 1.76%* N/A N/A 2.55* 2.64*
- ------------------------------------------------------------------------------------------------------------------
Growth Variable Subaccount
(as if commenced activity 2/8/84) 21.48 21.59 15.64% 15.74% 21.41% 21.56%
- ------------------------------------------------------------------------------------------------------------------
International Variable Subaccount
(as if commenced activity 5/1/90) 1.83 1.92 12.22 12.32 8.25* 8.35*
- ------------------------------------------------------------------------------------------------------------------
Growth-Income Variable Subaccount
(as if commenced activity 2/8/84) 17.50 17.61 15.44 15.54 20.58 20.73
- ------------------------------------------------------------------------------------------------------------------
Asset Allocation Variable Subaccount
(as if commenced activity 8/1/89) 12.51 12.61 12.36 12.46 10.58* 10.68
- ------------------------------------------------------------------------------------------------------------------
High-Yield Bond Variable Subaccount
(as if commenced activity 2/8/84) 4.96 5.06 8.69 8.79 16.27 16.42
- ------------------------------------------------------------------------------------------------------------------
Bond Variable Subaccount
(as if commenced activity 1/2/96) 2.83 2.92 N/A N/A 3.85* 3.94*
- ------------------------------------------------------------------------------------------------------------------
U.S. Gov't./AAA Variable Subaccount
(as if commenced activity 12/1/85) 1.26 1.36 4.30 4.40 7.78 7.90
- ------------------------------------------------------------------------------------------------------------------
Cash Management Variable Subaccount
(as if commenced activity 2/8/84) (1.81) (1.72) 2.27 2.37 6.29 6.42
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* The lifetime of each variable subaccount is less than the complete period
indicated.
See the date the variable subaccount commenced activity under its name.
There is a Global Small Capitalization variable subaccount but it is not in the
chart because it did not begin activity until 1998.
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.
B-4
<PAGE>
(d) OTHER NON-STANDARDIZED 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
Accumulation Unit Value between the first and last day of the base period being
measured, and expressing the difference as a percentage of the unit value at the
beginning of the base period.
Annualized quotations are arrived at by applying a formula which determines the
level rate of return which, if earned over the entire base period, would produce
the cumulative return.
NON-STANDARDIZED INVESTMENT RESULTS
VARIABLE SUBACCOUNTS OF ACCOUNT H*
$10,000 INVESTED IN
THIS FUND THROUGH
AMERICAN LEGACY SHAREHOLDER'S ADVANTAGE
THIS MANY YEARS AGO . . .
. . . WOULD HAVE GROWN TO THIS AMOUNT ON DECEMBER 31, 1997**
<TABLE>
<CAPTION>
WITH EGMDB
GROWTH GROWTH-INCOME HIGH-YIELD BOND CASH MANAGEMENT
--------------------------------------------------------------------------------------
-------------------- -------------------- --------------------
COMPOUND COMPOUND COMPOUND COMPOUND
GROWTH GROWTH GROWTH GROWTH
NUMBER OF YEARS PERIODS AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
1 12/31/96-12/31/97 $12,889.60 28.90% $12,467.08 24.67% $11,136.31 11.36% $10,417.86 4.18%
- -------------------------------------------------------------------------------------------------------------------------------
2 12/31/95-12/31/97 14,478.19 20.33 14,666.10 21.10 12,491.09 11.76 10,846.16 4.14
- -------------------------------------------------------------------------------------------------------------------------------
3 12/31/94-12/31/97 19,121.13 24.12 19,328.37 24.57 15,071.20 14.65 11,342.26 4.29
- -------------------------------------------------------------------------------------------------------------------------------
4 12/31/93-12/31/97 19,036.59 17.46 19,546.39 18.21 13,953.64 8.69 11,672.28 3.94
- -------------------------------------------------------------------------------------------------------------------------------
5 12/31/92-12/31/97 21,940.66 17.02 21,748.66 16.81 16,096.61 9.99 11,872.40 3.49
- -------------------------------------------------------------------------------------------------------------------------------
Lifetime of fund 02/08/84-12/31/97 73,842.37 15.46 68,941.53 14.90 47,916.90 11.93 19,519.44 4.93
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
WITHOUT EGMDB
GROWTH GROWTH-INCOME HIGH-YIELD BOND CASH MANAGEMENT
--------------------------------------------------------------------------------------
-------------------- -------------------- --------------------
COMPOUND COMPOUND COMPOUND COMPOUND
GROWTH GROWTH GROWTH GROWTH
NUMBER OF YEARS PERIODS AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
1 12/31/96-12/31/97 $12,901.32 29.01% $12,478.40 24.78% $11,146.42 11.46% $10,427.32 4.27%
- -------------------------------------------------------------------------------------------------------------------------------
2 12/31/95-12/31/97 14,504.51 20.43 14,692.76 21.21 12,513.79 11.87 10,865.88 4.24
- -------------------------------------------------------------------------------------------------------------------------------
3 12/31/94-12/31/97 19,173.29 24.23 19,381.10 24.68 15,112.32 14.96 11,373.20 4.38
- -------------------------------------------------------------------------------------------------------------------------------
4 12/31/93-12/31/97 19,105.87 17.57 19,617.52 18.35 14,004.42 8.78 11,714.76 4.04
5 12/31/92-12/31/97 22,040.52 17.12 21,847.64 16.92 16,169.86 10.09 11,926.43 3.59
- -------------------------------------------------------------------------------------------------------------------------------
Lifetime of fund 02/08/84-12/31/97 74,780.05 15.57 69,816.98 15.00 48,525.37 12.03 19,767.30 5.02
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Although the variable subaccounts for the contracts did not commence activity
until 1998, these figures are calculated as if the variable subaccounts had
commenced activity at the same time as the corresponding underlying funds.
** For purposes of determining these investment results, American Legacy
Shareholder's Advantage's 0.69% mortality and expense risk charge and
administrative fee for those contracts with EGMDB and 0.60% for those contracts
without EGMDB have been taken into account. No sales charges have been deducted.
B-5
<PAGE>
There is also a Global Small Capitalization variable subaccount but it is not in
the chart because it did not begin activity until 1998.
<TABLE>
<CAPTION>
WITH EGMDB WITHOUT EGMDB
U.S. GOVT/AAA U.S. GOVT/AAA
-------------------- ----------------------
COMPOUND COMPOUND
GROWTH GROWTH
NUMBER OF YEARS PERIODS AMOUNT RATE AMOUNT RATE
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
1 12/31/96-12/31/97 $10,744.19 7.44% $ 10,753.95 7.54%
- ---------------------------------------------------------------------------------------------------------
2 12/31/95-12/31/97 10,975.14 4.76 10,995.09 4.86
- ---------------------------------------------------------------------------------------------------------
3 12/31/94-12/31/97 12,547.34 7.86 12,581.57 7.96
- ---------------------------------------------------------------------------------------------------------
4 12/31/93-12/31/97 11,890.55 4.42 11,933.82 4.52
- ---------------------------------------------------------------------------------------------------------
5 12/31/92-12/31/97 13,097.37 5.54 13,156.97 5.64
- ---------------------------------------------------------------------------------------------------------
Lifetime of fund 12/01/85-12/31/97 22,445.73 6.90 22,694.02 6.99
</TABLE>
<TABLE>
<CAPTION>
ASSET
ALLOCATION ASSET ALLOCATION
-------------------- ----------------------
COMPOUND COMPOUND
GROWTH GROWTH
NUMBER OF YEARS PERIODS AMOUNT RATE AMOUNT RATE
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
1 12/31/96-12/31/97 $11,937.07 19.37% $ 11,947.91 19.48%
- ---------------------------------------------------------------------------------------------------------
2 12/31/95-12/31/97 13,694.46 17.02 13,719.35 17.13
- ---------------------------------------------------------------------------------------------------------
3 12/31/94-12/31/97 17,581.75 20.69 17,629.71 20.80
- ---------------------------------------------------------------------------------------------------------
4 12/31/93-12/31/97 17,368.55 14.80 17,431.76 14.90
- ---------------------------------------------------------------------------------------------------------
5 12/31/92-12/31/97 19,001.67 13.70 19,088.14 13.80
- ---------------------------------------------------------------------------------------------------------
Lifetime of fund 08/01/89-12/31/97 24,753.33 11.36 24,943.20 11.46
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL INTERNATIONAL
-------------------- ----------------------
COMPOUND COMPOUND
GROWTH GROWTH
NUMBER OF YEARS PERIODS AMOUNT RATE AMOUNT RATE
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
1 12/31/96-12/31/97 $10,804.48 8.04% $ 10,814.30 8.14%
- ---------------------------------------------------------------------------------------------------------
2 12/31/95-12/31/97 12,582.43 12.17 12,605.30 12.27
- ---------------------------------------------------------------------------------------------------------
3 12/31/94-12/31/97 14,047.21 11.99 14,085.53 12.10
- ---------------------------------------------------------------------------------------------------------
4 12/31/93-12/31/97 14,184.30 9.13 14,235.92 9.23
- ---------------------------------------------------------------------------------------------------------
5 12/31/92-12/31/97 18,882.16 13.56 18,968.10 13.66
- ---------------------------------------------------------------------------------------------------------
Lifetime of fund 04/30/90-12/31/97 19,497.12 9.09 19,633.33 9.19
</TABLE>
<TABLE>
<CAPTION>
BOND BOND
-------------------- ----------------------
COMPOUND COMPOUND
GROWTH GROWTH
NUMBER OF YEARS PERIODS AMOUNT RATE AMOUNT RATE
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
1 12/31/96-12/31/97 $10,910.27 9.10% $ 10,920.18 9.20%
- ---------------------------------------------------------------------------------------------------------
Lifetime of fund 01/02/96-12/31/97 11,441.27 6.97 11,462.04 7.07
</TABLE>
<TABLE>
<CAPTION>
GLOBAL GROWTH GLOBAL GROWTH
-------------------- ----------------------
COMPOUND COMPOUND
GROWTH GROWTH
NUMBER OF YEARS PERIODS AMOUNT RATE AMOUNT RATE
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Lifetime of fund 04/30/97-12/31/97 $10,790.25 12.05% $ 10,796.78 12.15%
</TABLE>
B-6
<PAGE>
ANNUITY PAYOUTS
VARIABLE ANNUITY PAYOUTS
Variable annuity payouts will be determined on the basis of: (1) the dollar
value of the contract on 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 first 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 1983 Table "a" 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
value accumulated under the contract. These annuity tables vary according to the
form of annuity selected and the age of the annuitant at the annuity
commencement date. The 4% interest rate stated above is the measuring point for
subsequent annuity payouts. If the actual net investment rate (annualized)
exceeds 4%, the payout will 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.
Lincoln Life 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 contract is credited with annuity units for
each variable 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 variable
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 variable
subaccount by the appropriate annuity unit value for the valuation date ending
14 days prior to the date that payout is due.
The value of each variable subaccount's annuity unit will be set initially at
$1.00. The annuity unit value for each variable subaccount at the end of any
valuation date is determined as follows:
1. The total value of fund shares held in a given variable subaccount is
calculated by multiplying the number of shares by the net asset value at the
end of the valuation period plus any dividend or other distribution.
2. The liabilities of the variable subaccount, including daily charges and
taxes, are subtracted.
3. The result is divided by the number of annuity units in the variable
subaccount at the beginning of the valuation period, and adjusted by 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
prior to the payment date in order to permit calculation of amounts of annuity
payouts and mailing of checks in advance of their due dates. Such checks will
normally be issued and mailed at least three days before the due date.
PROOF OF AGE, SEX AND SURVIVAL
Lincoln Life may require proof of age, sex, or survival of any payee upon whose
age, sex, or survival payments 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). VAA
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, Lincoln Life believes 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, Lincoln Life
does not anticipate that it will incur any federal income tax liability
attributable to the VAA, and therefore it does not intend to make any provision
for such taxes.
B-7
<PAGE>
However, if changes in the federal tax laws or interpretations thereof result in
Lincoln Life's being taxed on income or gain attributable to the VAA, then
Lincoln Life may impose a charge against the VAA (with respect to some or all
(contracts) in order to make provision for payment of such taxes.
TAX STATUS OF NON-QUALIFIED 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, Lincoln Life believes that each fund in
which the VAA owns shares will meet the diversification requirements and that
therefore the contracts will be treated as annuities under the code.
The regulations relating to diversification requirements do not provide guidance
concerning the extent to which contractowners may direct their investments to
particular variable subaccounts of a separate account. When guidance is
provided, the contract may need to be modified to comply with that guidance. For
these reasons, Lincoln Life reserves the right to modify the contract as
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 prior to the time the entire interest in the contract
has been distributed, the remaining portion of such interest must be distributed
at least as rapidly as under the method of distribution in effect at the time of
the contractowner's death; and (2) if any contractowner dies prior to 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, Lincoln Life believes that such
provisions in such contracts meet these requirements. Lincoln Life intends 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 Internal
Revenue Service. Purchasers of contracts for use with such a plan and plan
participants and beneficiaries should consult counsel and other competent
advisers as to the suitability of the plan and the contract to their specific
needs, and as to applicable code limitations and tax consequences. Participants
under such plans, as well as 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.
B-8
<PAGE>
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 prior to distribution if the qualified plan or trust loses its
qualification. Corporate plans qualified under Sections 401(a) or 403(a) of the
code are subject to extensive rules, including limitations on maximum
contributions or benefits. Distributions of amounts in excess of non-deductible
employee contributions are generally taxable as ordinary income.
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 non-deductible 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.
ROTH IRA
Beginning in 1998, Roth IRA's may be established. Non-deductible contributions
of $2,000 per year can be made to the Roth IRA. The contribution limits for
deductible and non-deductible IRA's are coordinated. In general, distributions
from a Roth IRA are not taxable and are not subject to the 10% early withdrawal
penalty that applies to Traditional IRA's. A five-year holding period as well as
other requirements must be satisfied if distributions are to be non-taxable
and/or not subject to the 10% early withdrawal penalty. Assuming certain income
restrictions are satisfied, a Traditional IRA can be converted to a Roth IRA.
This is a taxable event.
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 and
local governments established on August 20, 1996, or later, must hold all assets
and income in trust (or custodial accounts or an annuity contract) for the
exclusive benefit of participants and their beneficiaries. Section 457 plans
that were in existence before August 20, 1996 are allowed until January 1, 1999
to meet this requirement. The amounts deferred under a plan which meet the
requirements of Section 457 of the code are not taxable as income to the
participant until paid or otherwise made available to the participant or
beneficiary. Deferrals are taxed as compensation from the employer when they are
actually or constructively received by the employee. As a general rule, the
maximum amount which can be deferred in any one year is the lesser of $7,500, as
increased for cost of living adjustments, 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") established prior to January 1, 1997, 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 prior to 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 during the preceding
year, may establish SIMPLEs. SIMPLE plans may be in the form of an IRA or
B-9
<PAGE>
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 employee's
compensation, but not to exceed $6,000 annually as indexed. Such deferrals are
not subject to 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 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 above, other than 457 plans and Roth IRAs.
The portion, if any, of any contribution under a contract made by or on behalf
of an individual which is not excluded from the employee's gross income
(generally, the employee's own non-deductible contributions) constitutes his
investment in the contract. If a distribution is made in the form of annuity
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 non-taxable amounts
(rather than as a distribution first of non-taxable amounts).
If a surrender of or withdrawal from the contract is effected and a distribution
is made in a single payment, the proceeds may qualify for special lump-sum
distribution treatment under certain qualified plans, as discussed above.
Otherwise, the amount by which the payment exceeds the investment in the
contract (adjusted for any prior withdrawals) allocated to that payment, 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 a 10% penalty tax if made before age 59 1/2 unless
certain other exceptions apply. 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
above. Before an investment is made in any of the above plans, a tax adviser
should be consulted.
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 1,000 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
B-10
<PAGE>
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
Corporation, 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.
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 variable annuity account over the fixed account; and
the compounding effect when a client makes regular deposits to his or her
contract.
INTERNET. An electronic communications network which may be used to provide
information regarding Lincoln Life, performance of the variable subaccounts and
advertisement literature.
DOLLAR-COST AVERAGING. (DCA) -- You may systematically transfer on a monthly
basis amounts from the DCA fixed account or certain variable subaccounts into
the variable subaccounts or guaranteed period subaccounts. The variable
subaccounts that are currently available for dollar cost averaging are the
variable subaccounts with the Cash Management Fund and the U.S. Government/AAA-
Rated Securities Fund. We reserve the right to change subaccounts under this
program. 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. If
telephone authorization has been elected, certain changes may be made by
telephone. Notwithstanding the requirements of the
B-11
<PAGE>
program, any withdrawal must be permitted by Section 401(a)(9) of the code for
qualified plans or permitted under Section 72 for non-qualified contracts.
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
variable 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, Lincoln Life was serving
over 15,000 employers and had more than 1 million annuity clients.
LINCOLN LIFE'S ASSETS, SIZE. Lincoln Life may discuss its 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 1997 Lincoln Life had statutory admitted assets
of over $58 billion.
FINANCIAL STATEMENTS
Financial statements of the VAA and the statutory-basis financials statements
and schedules of LINCOLN LIFE appear on the following pages.
B-12
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMBINED LEGACY II LEGACY III
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------
ASSETS:
Investment Securities -- at market
(cost $12,943,058,221) $15,811,428,616 $15,301,632,118 $509,796,498
Liability -- Payable to The Lincoln
Life Insurance Company 586,537 567,475 19,062
- --------------------------------------- --------------- --------------- ------------
Net assets 15,810,842,079 15,301,064,643 509,777,436
- --------------------------------------- --------------- --------------- ------------
--------------- --------------- ------------
CONTRACT OWNER RESERVES:
Reserves for Redeemable Annuity
Contracts 15,771,427,071 15,264,270,522 507,156,549
Reserves for Annuity Contracts On
Benefit 39,415,008 36,794,121 2,620,887
- --------------------------------------- --------------- --------------- ------------
Total contract owner reserves $15,810,842,079 $15,301,064,643 $509,777,436
- --------------------------------------- --------------- --------------- ------------
--------------- --------------- ------------
</TABLE>
See accompanying notes.
H-1
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMBINED LEGACY II LEGACY III
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------
Net Investment Income:
- Dividends from Investment Income $ 326,829,337 $ 322,253,841 $ 4,575,496
-------------------------------------
- Dividends from Net Realized Gains
on Investments 1,420,362,090 1,382,510,372 37,851,718
-------------------------------------
- Mortality and Expense Guarantees:
-------------------------------------
- Legacy w/o Guaranteed Minimum
Death Benefit Rider (190,589,831) (190,218,555) (371,276)
- Legacy w/ Guaranteed Minimum
Death Benefit Rider (4,873,326) (3,183,556) (1,689,770)
- --------------------------------------- -------------- -------------- ------------
NET INVESTMENT INCOME 1,551,728,270 1,511,362,102 40,366,168
- ---------------------------------------
Net realized and unrealized gain (loss)
on investments:
- Net Realized Gain on Investments 220,798,258 220,794,057 4,201
-------------------------------------
- Net Change in Unrealized
Appreciation or Depreciation on
Investments 792,118,810 823,411,043 (31,292,233)
- --------------------------------------- -------------- -------------- ------------
NET GAIN (LOSS) ON INVESTMENTS 1,012,917,068 1,044,205,100 (31,288,032)
- --------------------------------------- -------------- -------------- ------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $2,564,645,338 $2,555,567,202 $ 9,078,136
- --------------------------------------- -------------- -------------- ------------
-------------- -------------- ------------
</TABLE>
See accompanying notes.
H-2
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
COMBINED
YEAR ENDED DECEMBER 31,
1997 1996
<S> <C> <C>
- -------------------------------------------------------------------------
NET ASSETS AT JANUARY 1 $12,596,374,351 $ 9,838,094,560
Changes from operations:
- Net Investment Income 1,551,728,270 852,218,931
-------------------------------------
- Net Realized Gain on Investments 220,798,258 78,069,710
-------------------------------------
- Net Change in Unrealized
Appreciation or Depreciation on
Investments 792,118,810 553,623,030
- --------------------------------------- --------------- ---------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 2,564,645,338 1,483,911,671
- ---------------------------------------
Net increase from unit transactions 649,822,390 1,274,368,120
- --------------------------------------- --------------- ---------------
TOTAL INCREASE IN NET ASSETS 3,214,467,728 2,758,279,791
- --------------------------------------- --------------- ---------------
NET ASSETS AT DECEMBER 31 $15,810,842,079 $12,596,374,351
- --------------------------------------- --------------- ---------------
--------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
LEGACY II
YEAR ENDED DECEMBER 31,
1997 1996
<S> <C> <C>
- -------------------------------------------------------------------------
NET ASSETS AT JANUARY 1 $12,596,374,351 $ 9,838,094,560
Changes from operations:
- Net Investment Income 1,511,362,102 852,218,931
-------------------------------------
- Net Realized Gain on Investments 220,794,057 78,069,710
-------------------------------------
- Net Change in Unrealized
Appreciation or Depreciation on
Investments 823,411,043 553,623,030
- --------------------------------------- --------------- ---------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 2,555,567,202 1,483,911,671
- ---------------------------------------
Net increase from unit transactions 149,123,090 1,274,368,120
- --------------------------------------- --------------- ---------------
TOTAL INCREASE IN NET ASSETS 2,704,690,292 2,758,279,791
- --------------------------------------- --------------- ---------------
NET ASSETS AT DECEMBER 31 $15,301,064,643 $12,596,374,351
- --------------------------------------- --------------- ---------------
--------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
LEGACY III
YEAR ENDED DECEMBER 31,
1997 1996
<S> <C> <C>
- -------------------------------------------------------------------------
NET ASSETS AT JANUARY 1 $ -- $ --
Changes from operations:
- Net Investment Income 40,366,168 --
-------------------------------------
- Net Realized Gain on Investments 4,201 --
-------------------------------------
- Net Change in Unrealized
Appreciation or Depreciation on
Investments (31,292,233) --
- --------------------------------------- --------------- ---------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 9,078,136 --
- ---------------------------------------
Net increase from unit transactions 500,699,300 --
- --------------------------------------- --------------- ---------------
TOTAL INCREASE IN NET ASSETS 509,777,436 --
- --------------------------------------- --------------- ---------------
NET ASSETS AT DECEMBER 31 $ 509,777,436 $ --
- --------------------------------------- --------------- ---------------
--------------- ---------------
</TABLE>
See accompanying notes.
H-3
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES & ACCOUNT INFORMATION
THE ACCOUNT: Lincoln National Variable Annuity Account H (Variable Account) is a
segregated investment account of The Lincoln Life Insurance Company (the
Company) and is registered under the Investment Company Act of 1940, as amended,
as a unit investment trust. The Variable Account consists of two products, each
with a Company annuity contract offering a guaranteed minimum death benefit
(GMDB) rider option. The available contracts are as follows:
- - Legacy II
- - Legacy III
Effective April 30, 1997, the Legacy III contract became available to clients of
the Company.
INVESTMENTS: The Variable Account invests in the American Variable Insurance
Series (AVIS) which consists of nine funds. Growth Income Fund, Growth Fund,
Asset Allocation Fund, High-Yield Bond Fund, U.S. Government/AAA-Rated
Securities Fund, Cash Management Fund, International Fund, Bond Fund and Global
Growth Fund (the Funds). Legacy II and Legacy III invest in different classes of
shares of the Funds and these investments are stated at the closing net asset
value per share on December 31, 1997. AVIS is registered as an open-ended
management investment company.
Investment transactions are accounted for on a trade date basis and dividend
income is recorded on the ex-dividend date. The cost of investments sold is
determined by the average cost method.
DIVIDENDS: Dividends 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. Under 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 & OTHER TRANSACTIONS WITH AFFILIATES
Amounts are paid to the Company for mortality and expense guarantees at a
percentage of the current value of the Variable Account each day. The rates are
as follows for the two contract types and the corresponding rider options within
the Variable Account:
- - Legacy II at a daily rate of .0036986% (1.35% on an annual basis),
- - Legacy II with GMDB rider at a daily rate of .0041096% (1.50% on an annual
basis),
- - Legacy III at a daily rate of .0034247% (1.25% on an annual basis),
- - Legacy III with GMDB rider at a daily rate of .0038356% (1.40% 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 1997:
<TABLE>
<CAPTION>
LEGACY II LEGACY III
<S> <C> <C>
- -----------------------------------------------------------------
Growth Account $ 4,271,353 $ 2,289
International Account 2,730,589 1,041
Growth-Income Account 5,752,656 3,507
Asset Allocation Account 1,257,664 525
Bond Account 82,345 18
High-Yield Bond Account 676,920 2
U.S. Govemment/AAA-Rated Securities
Account 522,461 0
Cash Management Account 846,158 5,474
Global Growth 19,384 75
- --------------------------------------- ----------- -----------
- ---------------------------------------
$16,159,530 $12,931
----------- -----------
----------- -----------
</TABLE>
Accordingly, the Company is responsible for all sales, general and
administrative expenses applicable to the Variable Account.
H-4
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
NOTES TO FINANCIAL STATEMENTS CONTINUED
3. PURCHASES AND SALES OF SECURITIES
The aggregate cost of investments purchased and the aggregate proceeds from
investments sold were as follows for 1997:
<TABLE>
<CAPTION>
COMBINED AGGREGATE
AGGREGATE COST OF PROCEEDS FROM
PURCHASES SALES
<S> <C> <C>
- ------------------------------------------------------------------------------
Growth Fund $ 836,767,470 $ 315,018,391
International Fund 564,889,484 232,328,305
Growth Income Fund 1,141,868,690 273,691,162
Asset Allocation Fund 259,444,048 56,187,274
Bond Fund 75,261,595 6,852,372
High-Yield Bond Fund 150,674,021 47,048,225
U.S. Government/AAA-Rated Securities
Fund 58,354,968 82,569,794
Cash Management Fund 245,442,791 263,189,288
Global Growth Fund 134,431,778 2,535,813
- --------------------------------------- ------------------ ----------------
$3,467,134,845 $ 1,279,420,624
------------------ ----------------
------------------ ----------------
</TABLE>
<TABLE>
<CAPTION>
LEGACY II AGGREGATE
AGGREGATE COST OF PROCEEDS FROM
PURCHASES SALES
<S> <C> <C>
- ------------------------------------------------------------------------------
Growth Fund $ 736,424,112 $ 314,963,526
International Fund 501,092,644 232,215,097
Growth Income Fund 934,180,895 273,627,544
Asset Allocation Fund 206,522,044 55,976,479
Bond Fund 60,949,172 6,822,825
High-Yield Bond Fund 125,217,747 47,044,780
U.S. Government/AAA-Rated Securities
Fund 47,866,400 80,773,680
Cash Management Fund 223,068,178 255,555,698
Global Growth Fund 80,665,045 2,376,917
- --------------------------------------- ------------------ ----------------
$2,915,986,237 $ 1,269,356,546
------------------ ----------------
------------------ ----------------
</TABLE>
<TABLE>
<CAPTION>
LEGACY III AGGREGATE
AGGREGATE COST OF PROCEEDS FROM
PURCHASES SALES
<S> <C> <C>
- ------------------------------------------------------------------------------
Growth Fund $ 100,343,358 $ 54,865
International Fund 63,796,840 113,208
Growth Income Fund 207,687,795 63,618
Asset Allocation Fund 52,922,004 210,795
Bond Fund 14,312,423 29,547
High-Yield Bond Fund 25,456,274 3,445
U.S. Government/AAA-Rated Securities
Fund 10,488,568 1,796,114
Cash Management Fund 22,374,613 7,633,590
Global Growth Fund 53,766,733 158,896
- --------------------------------------- ------------------ ----------------
$ 551,148,608 $ 10,064,078
------------------ ----------------
------------------ ----------------
</TABLE>
H-5
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
NOTES TO FINANCIAL STATEMENTS CONTINUED
4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS
<TABLE>
<CAPTION>
LEGACY II LEGACY III
UNITS AMOUNT UNITS AMOUNT
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
GROWTH ACCOUNT
Accumulation Units:
Contract purchases 238,284,940 $ 728,546,239 75,302,468 $ 90,888,019
- ---------------------------------------
Terminated contracts & transfers to
annuity reserves (259,330,680) (776,465,942) (1,404,144) (1,946,987)
- --------------------------------------- ------------- -------------- ------------ --------------
(21,045,740) (47,919,703) 73,898,324 88,941,032
Annuity Reserves:
Transfers from accum. Units & between
accts. 787,251 1,980,548 544,941 676,526
- ---------------------------------------
Annuity payments (476,043) (1,158,554) (30,018) (36,798)
- ---------------------------------------
Receipt (payment) of mortality
guarantee adj. 16,761 47,626 0 0
- --------------------------------------- ------------- -------------- ------------ --------------
327,969 869,620 514,923 639,728
------------- -------------- ------------ --------------
Account Total: (20,717,771) (47,050,083) 74,413,247 89,580,760
- ---------------------------------------
INTERNATIONAL ACCOUNT
Accumulation Units:
Contract purchases 254,391,249 563,896,305 54,896,368 59,737,776
- ---------------------------------------
Terminated contracts & transfers to
annuity reserves (249,942,107) (559,225,049) (1,574,793) (2,024,029)
- --------------------------------------- ------------- -------------- ------------ --------------
4,449,142 4,671,256 53,321,575 57,713,747
Annuity Reserves:
Transfers from accum. Units & between
accts. 1,013,140 1,901,955 187,062 204,394
- ---------------------------------------
Annuity payments (505,294) (976,576) (7,659) (7,992)
- ---------------------------------------
Receipt (payment) of mortality
guarantee adj. 6,871 12,677 (105) (105)
- --------------------------------------- ------------- -------------- ------------ --------------
514,717 938,056 179,298 196,297
------------- -------------- ------------ --------------
Account Total: 4,963,859 5,609,312 53,500,873 57,910,044
- ---------------------------------------
GROWTH-INCOME ACCOUNT
Accumulation Units:
Contract purchases 345,247,553 986,854,299 166,504,709 191,858,393
- ---------------------------------------
Terminated contracts & transfers to
annuity reserves (308,301,070) (905,566,078) (2,832,635) (3,799,497)
- --------------------------------------- ------------- -------------- ------------ --------------
36,946,483 81,288,221 163,672,074 188,058,896
Annuity Reserves:
Transfers from accum. Units & between
accts. 1,318,985 3,337,569 762,112 899,607
- ---------------------------------------
Annuity payments (745,210) (1,900,756) (41,987) (49,315)
- ---------------------------------------
Receipt (payment) of mortality
guarantee adj. 12,634 33,680 (357) (414)
- --------------------------------------- ------------- -------------- ------------ --------------
586,409 1,470,493 719,768 849,878
------------- -------------- ------------ --------------
Account Total: 37,532,892 82,758,714 164,391,842 188,908,774
- ---------------------------------------
</TABLE>
H-6
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
NOTES TO FINANCIAL STATEMENTS CONTINUED
4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS CONTINUED
<TABLE>
<CAPTION>
LEGACY II LEGACY III
UNITS AMOUNT UNITS AMOUNT
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSET ALLOCATION ACCOUNT
Accumulation Units:
Contract purchases 99,487,819 $ 253,359,668 45,808,506 $ 51,111,537
- ---------------------------------------
Terminated contracts & transfers to
annuity reserves 1.2504
(74,895,282) (201,113,144) (1,327,543) (1,659,971)
- --------------------------------------- ------------- -------------- ------------ --------------
- ---------------------------------------
24,592,537 52,246,524 44,480,964 49,451,566
Annuity Reserves:
Transfers from accum. Units & between
accts. 779,739 1,701,628 118,021 134,397
- ---------------------------------------
Annuity payments (425,728) (939,220) (3,183) (3,613)
- ---------------------------------------
Receipt (payment) of mortality
guarantee adj. 4,785 11,258 0 0
- --------------------------------------- ------------- -------------- ------------ --------------
358,796 773,666 114,838 130,784
------------- -------------- ------------ --------------
Account Total: 24,951,333 53,020,190 44,595,802 49,582,350
- ---------------------------------------
BOND ACCOUNT
Accumulation Units:
Contract purchases 67,545,512 80,136,740 13,364,059 14,154,820
- ---------------------------------------
Terminated contracts & transfers to
annuity reserves (24,241,138) (33,142,189) (404,465) (424,215)
- --------------------------------------- ------------- -------------- ------------ --------------
- ---------------------------------------
43,304,374 46,994,551 12,959,594 13,730,605
Annuity Reserves:
Transfers from accum. Units & between
accts. 615,032 691,290 123,284 132,811
- ---------------------------------------
Annuity payments (91,077) (102,359) (3,066) (3,293)
- ---------------------------------------
Receipt (payment) of mortality
guarantee adj. (206) (234) 0 0
- --------------------------------------- ------------- -------------- ------------ --------------
523,749 588,697 120,218 129,518
------------- -------------- ------------ --------------
Account Total: 43,828,123 47,583,248 13,079,812 13,860,123
- ---------------------------------------
HIGH-YIELD BOND ACCOUNT
Accumulation Units:
Contract purchases 71,467,210 184,270,318 23,184,054 24,783,776
- ---------------------------------------
Terminated contracts & transfers to
annuity reserves (60,381,200) (160,961,554) (518,161) (581,153)
- --------------------------------------- ------------- -------------- ------------ --------------
- ---------------------------------------
11,086,010 23,308,764 22,665,893 24,202,623
Annuity Reserves:
Transfers from accum. Units & between
accts. 281,001 602,849 180,292 195,211
- ---------------------------------------
Annuity payments (128,221) (269,443) (6,899) (7,401)
- ---------------------------------------
Receipt (payment) of mortality
guarantee adj. (2,157) (4,844) 0 0
- --------------------------------------- ------------- -------------- ------------ --------------
150,623 328,562 173,393 187,810
------------- -------------- ------------ --------------
Account Total: 11,236,633 23,637,326 22,839,286 24,390,433
- ---------------------------------------
</TABLE>
H-7
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
NOTES TO FINANCIAL STATEMENTS CONTINUED
4. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS CONTINUED
<TABLE>
<CAPTION>
LEGACY II LEGACY III
UNITS AMOUNT UNITS AMOUNT
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S GOVERNMENT/AAA-RATED ACCOUNT
Accumulation Units:
Contract purchases 41,386,459 $ 83,083,299 10,741,078 $ 10,953,372
- ---------------------------------------
Terminated contracts & transfers to
annuity reserves (75,125,421) (137,391,592) (2,855,925) (2,791,708)
- --------------------------------------- ------------- -------------- ------------ --------------
- ---------------------------------------
(33,738,962) (54,308,293) 7,885,153 8,161,664
Annuity Reserves:
Transfers from accum. Units & between
accts. (3,273) (2,080) 315,587 331,202
- ---------------------------------------
Annuity payments (119,164) (193,843) (14,183) (14,806)
- ---------------------------------------
Receipt (payment) of mortality
guarantee adj. (21,861) (37,097) (107) (114)
- --------------------------------------- ------------- -------------- ------------ --------------
(144,298) (233,020) 301,297 316,282
------------- -------------- ------------ --------------
Account Total: (33,883,260) (54,541,313) 8,186,450 8,477,946
- ---------------------------------------
CASH MANAGEMENT ACCOUNT
Accumulation Units:
Contract purchases 268,850,528 437,685,502 28,016,677 28,789,775
- ---------------------------------------
Terminated contracts & transfers to
annuity reserves (298,457,449) (477,381,751) (13,733,991) (14,362,271)
- --------------------------------------- ------------- -------------- ------------ --------------
- ---------------------------------------
(29,606,921) (39,696,249) 14,282,686 14,427,504
Annuity Reserves:
Transfers from accum. Units & between
accts. (182,663) (238,314) 0 0
- ---------------------------------------
Annuity payments (143,177) (192,442) 0 0
- ---------------------------------------
Receipt (payment) of mortality
guarantee adj. 1,305 1,762 0 0
- --------------------------------------- ------------- -------------- ------------ --------------
(324,535) (428,994) 0 0
------------- -------------- ------------ --------------
Account Total: (29,931,456) (40,125,243) 14,282,686 14,427,504
- ---------------------------------------
GLOBAL GROWTH ACCOUNT
Accumulation Units:
Contract purchases 81,389,511 94,807,473 50,699,765 54,736,214
- ---------------------------------------
Terminated contracts & transfers to
annuity reserves (8,248,535) (16,701,300) (1,195,537) (1,342,871)
- --------------------------------------- ------------- -------------- ------------ --------------
- ---------------------------------------
73,140,976 78,106,173 49,504,228 53,393,343
Annuity Reserves:
Transfers from accum. Units & between
accts. 123,148 129,435 159,025 175,393
- ---------------------------------------
Annuity payments (4,358) (4,669) (6,739) (7,262)
- ---------------------------------------
Receipt (payment) of mortality
guarantee adj. 0 0 (103) (108)
- --------------------------------------- ------------- -------------- ------------ --------------
118,790 124,766 152,183 168,023
------------- -------------- ------------ --------------
Account Total: 73,259,766 78,230,939 49,656,411 53,561,366
------------- -------------- ------------ --------------
- ---------------------------------------
PRODUCT TOTAL $ 149,123,090 $ 500,699,300
-------------- --------------
-------------- --------------
- ---------------------------------------
</TABLE>
H-8
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
NOTES TO FINANCIAL STATEMENTS CONTINUED
5. SUMMARY OF UNITS OUTSTANDING AT 12/31/97
<TABLE>
<CAPTION>
ACCUMULATION RESERVE UNIT ACCUMULATION RESERVE
LEGACY II INVESTMENTS UNITS UNITS VALUE AMOUNT AMOUNT NET ASSET TOTAL
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
LEGACY II
Growth Fund 1,371,456,096 3,276,283 $ 2.942 $ 4,034,333,274 $ 9,637,653 $ 4,043,970,927
International Fund 1,251,630,743 3,152,825 1.889 2,363,901,327 5,954,605 2,369,855,932
Growth Income Fund 2,042,635,917 4,760,223 2.727 5,570,035,673 12,980,586 5,583,016,259
Asset Allocation Fund 538,888,224 1,925,954 2.390 1,288,182,052 4,603,885 1,292,785,937
Bond Fund 112,840,010 563,924 1.135 128,038,263 639,878 128,678,141
High-Yield Bond Fund 295,795,685 523,596 2.253 666,318,704 1,179,469 667,498,173
U.S. Government/AAA-Rated
Securities Fund 232,571,089 734,916 1.697 394,672,212 1,247,150 395,919,362
Cash Management Fund 131,494,182 313,235 1.351 177,602,876 423,071 178,025,947
Global Growth Fund 70,350,506 118,790 1.076 75,700,581 127,824 75,828,405
----------------- ----------------- --------------- --------------- ---------------
Subtotal 6,047,662,452 15,369,746 14,698,784,962 36,794,121 14,735,579,083
LEGACY II WITH GMDB RIDER
Growth Fund 50,809,398 -- 2.939 149,316,846 -- 149,316,846
International Fund 43,964,354 -- 1.886 82,911,160 -- 82,911,160
Growth Income Fund 87,728,733 -- 2.724 238,988,462 -- 238,988,462
Asset Allocation Fund 19,040,601 -- 2.388 45,470,596 -- 45,470,596
Bond Fund 3,171,343 -- 1.134 3,594,882 -- 3,594,882
High-Yield Bond Fund 9,318,441 -- 2.250 20,970,022 -- 20,970,022
U.S. Government/AAA-Rated
Securities Fund 7,484,513 -- 1.695 12,688,557 -- 12,688,557
Cash Management Fund 6,333,165 -- 1.349 8,545,332 -- 8,545,332
Global Growth Fund 2,790,470 -- 1.075 2,999,703 -- 2,999,703
----------------- ----------------- --------------- --------------- ---------------
Subtotal 230,641,018 -- 565,485,560 -- 565,485,560
----------------- ----------------- --------------- --------------- ---------------
TOTAL LEGACY II 6,278,303,470 15,369,746 $15,264,270,522 $ 36,794,121 $15,301,064,643
----------------- ----------------- --------------- --------------- ---------------
----------------- ----------------- --------------- --------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATION RESERVE UNIT ACCUMULATION RESERVE
LEGACY III INVESTMENTS UNITS UNITS VALUE AMOUNT AMOUNT NET ASSET TOTAL
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
LEGACY III
Growth Fund 12,933,461 514,923 $ 1.256 $ 16,241,826 $ 646,640 $ 16,888,466
International Fund 8,628,728 179,298 1.025 8,843,539 183,762 9,027,301
Growth Income Fund 31,735,011 719,767 1.187 37,674,736 854,484 38,529,220
Asset Allocation Fund 9,909,379 114,838 1.141 11,302,043 130,977 11,433,020
Bond Fund 2,561,568 120,218 1.081 2,768,578 129,934 2,898,512
High-Yield Bond Fund 3,665,424 173,394 1.096 4,017,386 190,043 4,207,429
U.S. Government/AAA-Rated
Securities Fund 1,559,073 301,297 1.067 1,663,299 321,439 1,984,738
Cash Management Fund 3,421,740 0 1.024 3,505,520 -- 3,505,520
Global Growth Fund 8,427,168 152,182 1.075 9,059,867 163,608 9,223,475
--------------- --------------- --------------- --------------- ---------------
Subtotal 82,841,552 2,275,917 95,076,794 2,620,887 97,697,681
LEGACY III WITH GMDB RIDER
Growth Fund 60,964,863 -- 1.255 76,481,573 -- 76,481,573
International Fund 44,692,847 -- 1.024 45,759,103 -- 45,759,103
Growth Income Fund 131,937,064 -- 1.186 156,474,168 -- 156,474,168
Asset Allocation Fund 34,571,585 -- 1.139 39,390,796 -- 39,390,796
Bond Fund 10,398,026 -- 1.080 11,226,674 -- 11,226,674
High-Yield Bond Fund 19,000,468 -- 1.095 20,804,333 -- 20,804,333
U.S. Government/AAA Rated
Securities Fund 6,326,080 -- 1.066 6,742,199 -- 6,742,199
Cash Management Fund 10,860,946 -- 1.023 11,115,710 -- 11,115,710
Global Growth Fund 41,077,061 -- 1.073 44,085,199 -- 44,085,199
--------------- --------------- --------------- --------------- ---------------
Subtotal 359,828,940 -- 412,079,755 -- 412,079,755
--------------- --------------- --------------- --------------- ---------------
TOTAL LEGACY III 442,670,492 2,275,917 $ 507,156,549 $ 2,620,887 $ 509,777,436
--------------- --------------- --------------- --------------- ---------------
--------------- --------------- --------------- --------------- ---------------
</TABLE>
H-9
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
NOTES TO FINANCIAL STATEMENTS CONTINUED
6. INVESTMENTS
Fund shares are purchased at the net asset value with net contract payments
(contract purchases less surrenders/ withdrawals and amounts payable to the
Company for administrative and surrender charges) and with reinvestment of
distributions made by the funds. The following is a summary of fund shares owned
at 12/31/97.
<TABLE>
<CAPTION>
GROWTH- ASSET
GROWTH INTERNATIONAL INCOME ALLOCATION
LEGACY II COMBINED ACCOUNT ACCOUNT ACCOUNT ACCOUNT
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Unit Transactions:
Accumulation units: $ 8,358,967,609 $ 2,003,869,722 $ 1,659,126,839 $2,866,827,684 $ 742,273,809
- ---------------------------
Annuity reserves 25,061,775 6,497,773 4,653,049 7,970,551 3,032,551
- --------------------------- --------------- --------------- --------------- -------------- --------------
8,384,029,384 2,010,367,495 1,663,779,888 2,874,798,235 745,306,360
Accumulated net investment
Income 3,590,085,058 990,362,936 487,157,071 1,416,815,693 316,569,207
- ---------------------------
Accumulated net realized
gain (loss) on
investments 427,287,573 202,797,593 81,071,588 121,510,140 21,201,350
- ---------------------------
Net unrealized appreciation
(depreciation) on
investments: 2,899,662,628 989,759,730 220,758,551 1,408,880,664 255,179,617
- --------------------------- --------------- --------------- --------------- -------------- --------------
- ---------------------------
$15,301,064,643 $ 4,193,287,754 $ 2,452,767,098 $5,822,004,732 $1,338,256,534
--------------- --------------- --------------- -------------- --------------
--------------- --------------- --------------- -------------- --------------
GROWTH- ASSET
GROWTH INTERNATIONAL INCOME ALLOCATION
LEGACY III COMBINED ACCOUNT ACCOUNT ACCOUNT ACCOUNT
- --------------------------------------------------------------------------------------------------------------
Unit Transactions:
Accumulation units $ 498,080,980 $ 88,941,032 $ 57,713,747 $ 188,058,896 $ 49,451,566
- ---------------------------
Annuity reserves 2,618,320 639,728 196,297 849,878 130,784
- --------------------------- --------------- --------------- --------------- -------------- --------------
500,699,300 89,580,760 57,910,044 188,908,774 49,582,350
Accumulated net investment
income 40,366,168 10,704,245 5,771,525 18,708,120 3,126,965
- ---------------------------
Accumulated net realized
gain (loss) on
investments 4,201 527 (7,333) 667 (395)
- ---------------------------
Net unrealized appreciation
(depreciation) on
investments (31,292,233) (6,915,495) (8,887,830) (12,614,175) (1,885,103)
- --------------------------- --------------- --------------- --------------- -------------- --------------
$ 509,777,436 $ 93,370,037 $ 54,786,406 $ 195,003,386 $ 50,823,817
--------------- --------------- --------------- -------------- --------------
--------------- --------------- --------------- -------------- --------------
</TABLE>
H-10
<PAGE>
<TABLE>
<CAPTION>
U.S. GOVT
AAA-RATED CASH GLOBAL
BOND HIGH-YIELD SECURITIES MANAGEMENT GROWTH
ACCOUNT BOND ACCOUNT ACCOUNT ACCOUNT ACCOUNT
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
Unit Transactions:
Accumulation units: $118,997,145 $467,704,460 $275,537,472 $146,524,305 $78,106,173
- ---------------------------
Annuity reserves 628,697 882,339 928,647 343,402 124,766
- --------------------------- ------------ ------------ ------------ ------------ -----------
119,625,842 468,586,799 276,466,119 146,867,707 78,230,939
Accumulated net investment
Income 8,455,007 190,781,522 140,066,935 39,822,418 54,269
- ---------------------------
Accumulated net realized
gain (loss) on
investments 297,279 2,774,032 (3,534,889) 1,165,921 4,559
- ---------------------------
Net unrealized appreciation
(depreciation) on
investments: 3,894,897 26,325,845 (4,390,246) (1,284,770) 538,340
- --------------------------- ------------ ------------ ------------ ------------ -----------
- ---------------------------
$132,273,025 $688,468,198 $408,607,919 $186,571,276 $78,828,107
------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ -----------
U.S. GOVT
AAA-RATED CASH GLOBAL
BOND HIGH-YIELD SECURITIES MANAGEMENT GROWTH
LEGACY III ACCOUNT BOND ACCOUNT ACCOUNT ACCOUNT ACCOUNT
- ------------------------------------------------------------------------------------------------
-------------------------------------------------------------------
Unit Transactions:
Accumulation units $ 13,730,605 $ 24,202,623 $ 8,161,664 $ 14,427,504 $53,393,343
- ---------------------------
Annuity reserves 129,518 187,810 316,282 -- 168,023
- --------------------------- ------------ ------------ ------------ ------------ -----------
13,860,123 24,390,433 8,477,946 14,427,504 53,561,366
Accumulated net investment
income 422,226 1,061,465 214,181 312,971 44,470
- ---------------------------
Accumulated net realized
gain (loss) on
investments 118 9 11,144 (1,065) 529
- ---------------------------
Net unrealized appreciation
(depreciation) on
investments (157,282) (440,143) 23,665 (118,178) (297,692)
- --------------------------- ------------ ------------ ------------ ------------ -----------
$ 14,125,185 $ 25,011,764 $ 8,726,936 $ 14,621,232 $53,308,673
------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ -----------
</TABLE>
H-11
<PAGE>
LINCOLN NATIONAL VARIABLE ANNUITY ACCOUNT H
NOTES TO FINANCIAL STATEMENTS CONTINUED
7. NET ASSETS
<TABLE>
<CAPTION>
NET
PERCENTAGE SHARES ASSET VALUE OF COST OF UNREALIZED
LEGACY II INVESTMENTS OF NET OUTSTANDING VALUE SHARES SHARES APPRECIATION
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Growth Fund 27.4% 93,229,053.011 $ 44.98 $ 4,193,442,804 $ 3,203,683,074 $ 989,759,730
International Fund 16.0% 169,396,297.263 14.48 2,452,858,384 2,232,099,833 220,758,551
Growth Income Fund 38.0% 159,863,282.211 36.42 5,822,220,738 4,413,340,074 1,408,880,664
Asset Allocation Fund 8.8% 87,356,799.553 15.32 1,338,306,169 1,083,126,552 255,179,617
Bond Fund 0.9% 12,682,448.341 10.43 132,277,936 128,383,039 3,894,897
High-Yield Bond Fund 4.5% 46,964,102.195 14.66 688,493,738 662,167,893 26,325,845
U.S. Government/AAA-Rated
Securities Fund 2.7% 36,812,889.048 11.10 408,623,068 413,013,314 (4,390,246)
Cash Management Fund 1.2% 16,946,253.787 11.01 186,578,254 187,863,024 (1,284,770)
Global Growth Fund 0.5% 7,312,711.250 10.78 78,831,027 78,292,687 538,340
------ --------------- --------------- ---------------
LEGACY II TOTAL 100.0% $15,301,632,118 $12,401,969,490 $ 2,899,662,628
------ --------------- --------------- ---------------
------ --------------- --------------- ---------------
LEGACY III INVESTMENTS
Growth Fund (class II shares) 18.3% 2,076,351.452 $ 44.97 $ 93,373,525 $ 100,289,020 $ (6,915,495)
International Fund (class II
shares) 10.7% 3,783,734.077 14.48 54,788,469 63,676,299 (8,887,830)
Growth Income Fund (class II
shares) 38.2% 5,355,964.534 36.41 195,010,669 207,624,844 (12,614,175)
Asset Allocation Fund (class
II shares) 10.0% 3,319,772.098 15.31 50,825,711 52,710,814 (1,885,103)
Bond Fund (class II shares) 2.8% 1,354,334.833 10.43 14,125,712 14,282,994 (157,282)
High-Yield Bond Fund (class II
shares) 4.9% 1,707,351.222 14.65 25,012,695 25,452,838 (440,143)
U.S. Government/AAA-Rated
Securities Fund (class II
shares) 1.7% 786,239.905 11.10 8,727,263 8,703,598 23,665
Cash Management Fund (class II
shares) 2.9% 1,328,045.420 11.01 14,621,780 14,739,958 (118,178)
Global Growth Fund (class II
shares) 10.5% 4,949,923.324 10.77 53,310,674 53,608,366 (297,692)
------ --------------- --------------- ---------------
Legacy III Total 100.0% $ 509,796,498 $ 541,088,731 $ (31,292,233)
------ --------------- --------------- ---------------
------
ACCOUNT "H" TOTAL $15,811,428,616 $12,943,058,221 $ 2,868,370,395
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
8. NEW INVESTMENT FUNDS
Effective January 1, 1996, the AVIS Bond Fund became available as an investment
option for Variable Account contract owners. Effective April 25, 1997 the AVIS
Global Growth Fund became available as an investment option for Variable Account
contract owners.
9. DAILY UNIT VALUATION CALCULATIONS
Effective October 1996, the daily unit value calculation process was transferred
from the Company to the Delaware Services Company, an affiliate of Lincoln
National Corporation. Costs associated with the calculation of the unit values
are paid by the Company.
H-12
<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 net assets of Lincoln
National Variable Annuity Account H ("Variable Account") as of
December 31, 1997, 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, 1997, 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, 1997, 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.
[SIG]
Fort Wayne, Indiana
March 11, 1998
H-13
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------- ---------
(IN MILLIONS)
--------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $18,560.7 $19,389.6
- ------------------------------------------------------------------------------------
Preferred stocks 257.3 239.7
- ------------------------------------------------------------------------------------
Unaffiliated common stocks 436.0 358.3
- ------------------------------------------------------------------------------------
Affiliated common stocks 412.1 241.5
- ------------------------------------------------------------------------------------
Mortgage loans on real estate 3,012.7 2,976.7
- ------------------------------------------------------------------------------------
Real estate 584.4 621.3
- ------------------------------------------------------------------------------------
Policy loans 660.5 626.5
- ------------------------------------------------------------------------------------
Other investments 335.5 282.7
- ------------------------------------------------------------------------------------
Cash and short-term investments 2,133.0 759.2
- ------------------------------------------------------------------------------------ --------- ---------
Total cash and investments 26,392.2 25,495.5
- ------------------------------------------------------------------------------------
Premiums and fees in course of collection 42.4 60.9
- ------------------------------------------------------------------------------------
Accrued investment income 343.5 343.6
- ------------------------------------------------------------------------------------
Funds withheld by ceding companies 44.1 25.8
- ------------------------------------------------------------------------------------
Other admitted assets 216.0 355.7
- ------------------------------------------------------------------------------------
Separate account assets 31,330.9 23,735.1
- ------------------------------------------------------------------------------------ --------- ---------
Total admitted assets $58,369.1 $50,016.6
- ------------------------------------------------------------------------------------ --------- ---------
--------- ---------
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $ 5,872.9 $ 5,954.0
- ------------------------------------------------------------------------------------
Other policyholder funds 16,360.1 17,262.4
- ------------------------------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 878.2 250.2
- ------------------------------------------------------------------------------------
Funds held under reinsurance treaties 720.4 564.6
- ------------------------------------------------------------------------------------
Asset valuation reserve 450.0 375.5
- ------------------------------------------------------------------------------------
Interest maintenance reserve 135.4 76.7
- ------------------------------------------------------------------------------------
Other liabilities 413.9 490.9
- ------------------------------------------------------------------------------------
Federal income taxes 0.8 4.3
- ------------------------------------------------------------------------------------
Net transfers due from separate accounts (761.9) (659.7)
- ------------------------------------------------------------------------------------
Separate account liabilities 31,330.9 23,735.1
- ------------------------------------------------------------------------------------ --------- ---------
Total liabilities 55,400.7 48,054.0
- ------------------------------------------------------------------------------------
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 1,821.8 883.4
- ------------------------------------------------------------------------------------
Unassigned surplus 1,121.6 1,054.2
- ------------------------------------------------------------------------------------ --------- ---------
Total capital and surplus 2,968.4 1,962.6
- ------------------------------------------------------------------------------------ --------- ---------
Total liabilities and capital and surplus $58,369.1 $50,016.6
- ------------------------------------------------------------------------------------ --------- ---------
--------- ---------
</TABLE>
See accompanying notes. S-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF INCOME -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $ 5,589.0 $ 7,268.5 $ 4,899.1
- -----------------------------------------------------------------------------
Net investment income 1,847.1 1,756.3 1,772.2
- -----------------------------------------------------------------------------
Amortization of interest maintenance reserve 41.5 27.2 34.0
- -----------------------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded 99.7 90.9 98.3
- -----------------------------------------------------------------------------
Expense charges on deposit funds 119.3 100.7 83.2
- -----------------------------------------------------------------------------
Other income 21.3 16.8 14.5
- ----------------------------------------------------------------------------- --------- --------- ---------
Total revenues 7,717.9 9,260.4 6,901.3
- -----------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 4,522.1 5,989.9 4,184.0
- -----------------------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses 2,728.4 2,878.5 2,345.7
- ----------------------------------------------------------------------------- --------- --------- ---------
Total benefits and expenses 7,250.5 8,868.4 6,529.7
- ----------------------------------------------------------------------------- --------- --------- ---------
Gain from operations before dividends to policyholders, income taxes and net
realized gain on investments 467.4 392.0 371.6
- -----------------------------------------------------------------------------
Dividends to policyholders 27.5 27.3 27.3
- ----------------------------------------------------------------------------- --------- --------- ---------
Gain from operations before federal income taxes and net realized gain on
investments 439.9 364.7 344.3
- -----------------------------------------------------------------------------
Federal income taxes 78.3 83.6 103.7
- ----------------------------------------------------------------------------- --------- --------- ---------
Gain from operations before net realized gain on investments 361.6 281.1 240.6
- -----------------------------------------------------------------------------
Net realized gain on investments, net of income tax expense and excluding net
transfers to the interest maintenance reserve 31.3 53.3 43.9
- ----------------------------------------------------------------------------- --------- --------- ---------
Net income $ 392.9 $ 334.4 $ 284.5
- ----------------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
S-2
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $ 1,962.6 $ 1,732.9 $ 1,679.6
- -----------------------------------------------------------------------------
Correction of prior years' asset valuation reserve (Note 15) (37.6) -- --
- -----------------------------------------------------------------------------
Correction of prior year's admitted assets (Note 15) (57.0) -- --
- ----------------------------------------------------------------------------- --------- --------- ---------
1,868.0 1,732.9 1,679.6
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income 392.9 334.4 284.5
- -----------------------------------------------------------------------------
Difference in cost and admitted investment amounts (36.2) 38.6 143.2
- -----------------------------------------------------------------------------
Nonadmitted assets (0.4) (3.0) 2.9
- -----------------------------------------------------------------------------
Regulatory liability for reinsurance (3.9) 0.6 (2.0)
- -----------------------------------------------------------------------------
Life policy reserve valuation basis (0.9) (0.4) 2.9
- -----------------------------------------------------------------------------
Asset valuation reserve (36.9) (105.5) (112.5)
- -----------------------------------------------------------------------------
Mortgage loan, real estate and other investment reserves -- -- 2.2
- -----------------------------------------------------------------------------
Paid-in surplus, including contribution of common stock of affiliated
company in 1997 938.4 100.0 15.1
- -----------------------------------------------------------------------------
Separate account receivable due to change in valuation (2.6) -- 27.0
- -----------------------------------------------------------------------------
Dividends to shareholder (150.0) (135.0) (310.0)
- ----------------------------------------------------------------------------- --------- --------- ---------
Capital and surplus at end of year $ 2,968.4 $ 1,962.6 $ 1,732.9
- ----------------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes. S-3
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
---------- ---------- ----------
(IN MILLIONS)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 6,364.3 $ 8,059.4 $ 5,430.9
- -----------------------------------------------------------------------
Allowances and reserve adjustments paid on reinsurance ceded (649.2) (767.5) (383.6)
- -----------------------------------------------------------------------
Investment income received 1,798.8 1,700.6 1,713.2
- -----------------------------------------------------------------------
Benefits paid (5,345.2) (4,050.4) (3,239.6)
- -----------------------------------------------------------------------
Insurance expenses paid (2,867.5) (2,972.2) (2,513.5)
- -----------------------------------------------------------------------
Federal income taxes recovered (paid) (87.0) (72.3) 38.4
- -----------------------------------------------------------------------
Dividends to policyholders (28.4) (27.7) (16.5)
- -----------------------------------------------------------------------
Other income received and expenses paid, net (42.7) 6.3 14.4
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) operating activities (856.9) 1,876.2 1,043.7
- -----------------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 12,142.6 12,542.0 13,183.9
- -----------------------------------------------------------------------
Purchase of investments (10,345.0) (14,175.4) (14,049.6)
- -----------------------------------------------------------------------
Other sources (uses) 563.1 (266.5) (64.0)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) investing activities 2,360.7 (1,899.9) (929.7)
- -----------------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in -- 100.0 15.1
- -----------------------------------------------------------------------
Proceeds from borrowings from shareholder 120.0 100.0 63.0
- -----------------------------------------------------------------------
Repayment of borrowings from shareholder (100.0) (63.0) (63.0)
- -----------------------------------------------------------------------
Dividends paid to shareholder (150.0) (135.0) (310.0)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) financing activities (130.0) 2.0 (294.9)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net increase (decrease) in cash and short-term investments 1,373.8 (21.7) (180.9)
- -----------------------------------------------------------------------
Cash and short-term investments at beginning of year 759.2 780.9 961.8
- ----------------------------------------------------------------------- ---------- ---------- ----------
Cash and short-term investments at end of year $ 2,133.0 $ 759.2 $ 780.9
- ----------------------------------------------------------------------- ---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
S-4
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
ORGANIZATION AND OPERATIONS
The Lincoln National Life Insurance Company ("Company") is a wholly owned
subsidiary of Lincoln National Corporation ("LNC") and is domiciled in
Indiana. As of December 31, 1997, the Company owns 100% of the outstanding
common stock of four insurance company subsidiaries: First Penn-Pacific Life
Insurance Company ("First Penn"), Lincoln National Health & Casualty
Insurance Company ("LNH&C"), Lincoln National Reassurance Company ("LNRAC")
and Lincoln Life & Annuity Company of New York ("LLANY").
The Company's principal businesses consist of underwriting annuities,
deposit-type contracts and life and health insurance through multiple
distribution channels and the reinsurance of individual and group life and
health business. The Company is licensed and sells its products in 49
states, Canada and several U.S. territories.
USE OF ESTIMATES
The nature of the insurance and investment management businesses requires
management to make estimates and assumptions that affect the amounts
reported in the statutory-basis financial statements and accompanying notes.
Actual results could differ from those estimates.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Indiana Department of
Insurance ("Department"), which practices differ from generally accepted
accounting principles ("GAAP"). The more significant variances from GAAP are
as follows:
INVESTMENTS
Bonds are reported at cost or amortized cost or fair value based on their
National Association of Insurance Commissioners ("NAIC") rating. For GAAP,
the Company's bonds are classified as available-for-sale and, accordingly,
are reported at fair value with changes in the fair values reported directly
in shareholder's equity after adjustments for related amortization of
deferred acquisition costs, additional policyholder commitments and deferred
income taxes.
Investments in real estate are reported net of related obligations rather
than on a gross basis.
Changes between cost and admitted asset investment amounts are credited or
charged directly to unassigned surplus rather than to a separate surplus
account.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized capital gains and losses on sales of fixed income investments,
principally bonds and mortgage loans, attributable to changes in the general
level of interest rates and amortizes those deferrals over the remaining
period to maturity of the individual security sold. The net deferral is
reported as the Interest Maintenance Reserve ("IMR") in the accompanying
balance sheets. Realized capital gains and losses are reported in income net
of federal income tax and transfers to the IMR. The asset valuation reserve
("AVR") is determined by an NAIC prescribed formula and is reported as a
liability rather than unassigned surplus. Under GAAP, realized capital gains
and losses are reported in the income statement on a pre-tax basis in the
period 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
consolidated with the accounts and operations of the Company as would be
required by GAAP. Under statutory accounting principles, the Company's
subsidiaries are carried at their statutory basis net equity and presented
in the balance sheet as affiliated common stocks.
POLICY ACQUISITION COSTS
The costs of acquiring and renewing business are expensed when incurred.
Under GAAP, acquisition costs related to traditional life insurance, to the
extent recoverable from future policy revenues, are deferred and amortized
over the premium-paying period of the related policies using assumptions
consistent with those used in computing policy benefit reserves. For
universal life insurance, annuity and other investment-type products,
deferred
S-5
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
policy acquisition costs, to the extent recoverable from future gross
profits, are amortized generally in proportion to the present value of
expected gross profits from surrender charges and investment, mortality and
expense margins.
NONADMITTED ASSETS
Certain assets designated as "nonadmitted," principally furniture and
equipment and certain receivables, are excluded from the accompanying
balance sheets and are charged directly to unassigned surplus.
PREMIUMS
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.
BENEFIT RESERVES
Certain policy reserves are calculated based on statutorily required
interest and mortality assumptions rather than on estimated expected
experience or actual account balances as would be required under GAAP.
Death benefits paid, policy and contract withdrawals, and the change in
policy reserves on universal life policies, annuity and other
investment-type contracts are reported as benefits and settlement expenses
in the accompanying statements of income; whereas, under GAAP, withdrawals
are treated as a reduction of the policy or contract liabilities and
benefits would represent the excess of benefits paid over the policy account
value and interest credited to the account values.
REINSURANCE
Premiums, claims and policy benefits and contract liabilities are reported
in the accompanying financial statements net of reinsurance amounts. For
GAAP, all assets and liabilities related to reinsurance ceded contracts are
reported on a gross basis.
A liability for reinsurance balances has been provided for unsecured policy
and contract liabilities and unearned premiums ceded to reinsurers not
authorized by the Department to assume such business. Changes to those
amounts are credited or charged directly to unassigned surplus. Under GAAP,
an allowance for amounts deemed uncollectible is established through a
charge to income.
Commissions on business ceded are reported as income when received rather
than deferred and amortized with deferred policy acquisition costs.
Certain reinsurance contracts meeting risk transfer requirements under
statutory-basis accounting practices have been accounted for using
traditional reinsurance accounting whereas such contracts would be accounted
for using deposit accounting under GAAP.
INCOME TAXES
Deferred income taxes are not provided for differences between financial
statement amounts and tax bases of assets and liabilities.
POLICYHOLDER DIVIDENDS
Policyholder dividends are recognized when declared rather than over the
term of the related policies.
STATEMENTS OF CASH FLOWS
Cash and short-term investments in the statements of cash flows represent
cash balances and investments with initial maturities of one year or less.
Under GAAP, the corresponding captions of cash and cash equivalents include
cash balances and investments with initial maturities of three months or
less.
S-6
<PAGE>
THE 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
determined on a statutory accounting basis with amounts determined in
accordance with GAAP is as follows:
<TABLE>
<CAPTION>
CAPITAL AND SURPLUS NET INCOME
-----------------------------------------------------
DECEMBER 31 YEAR ENDED DECEMBER 31
1997 1996 1997 1996 1995
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts reported on a statutory basis $ 2,968.4 $ 1,962.6 $ 392.9 $ 334.4 $ 284.5
- ---------------------------------------------
GAAP adjustments:
Deferred policy acquisition costs and
present value of future profits 958.3 1,119.1 (98.9) 66.7 (63.0)
------------------------------------------
Policy and contract reserves (1,672.9) (1,405.3) (48.6) (57.1) (55.3)
------------------------------------------
Interest maintenance reserve 135.4 76.7 58.7 (39.7) 60.9
------------------------------------------
Deferred income taxes (13.0) (27.4) 70.3 1.8 38.3
------------------------------------------
Policyholders' share of earnings and
surplus on participating business (79.8) (81.9) 5.3 (.3) .2
------------------------------------------
Asset valuation reserve 450.0 375.5 -- -- --
------------------------------------------
Net realized gain (loss) on investments (91.5) (72.0) (20.4) 78.7 30.0
------------------------------------------
Unrealized gain on investments 1,245.5 825.2 -- -- --
------------------------------------------
Nonadmitted assets, including nonadmitted
investments 61.0 (7.1) -- -- --
------------------------------------------
Investments in subsidiary companies 188.8 156.6 (80.5) 29.9 34.3
------------------------------------------
Other, net (162.5) (99.0) (35.0) (82.6) (7.3)
------------------------------------------ --------- --------- --------- --------- ---------
Net increase (decrease) 1,019.3 860.4 (149.1) (2.6) 38.1
- --------------------------------------------- --------- --------- --------- --------- ---------
Amounts on a GAAP basis $ 3,987.7 $ 2,823.0 $ 243.8 $ 331.8 $ 322.6
- --------------------------------------------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
S-7
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Other significant accounting practices are as follows:
INVESTMENTS
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
actual payments to date and anticipated future payments. The net investment
in the securities is adjusted to the amount that would have existed had the
new effective yield been applied since the acquisition of the securities.
Short-term investments include investments with maturities of less than one
year at the date of acquisition. The carrying amounts for these investments
approximate their fair values.
Preferred stocks are reported at cost or amortized cost.
Unaffiliated common stocks are reported at fair value as determined by the
Securities Valuation Office of the NAIC and the related unrealized gains
(losses) are reported in unassigned surplus without adjustment for federal
income taxes.
Policy loans are reported at unpaid balances.
The Company uses various derivative instruments as part of its overall
liability-asset management program for certain investments and life
insurance and annuity products. The Company values all derivative
instruments on a basis consistent with that of the hedged item. Upon
termination, gains and losses on those instruments are included in the
carrying values of the underlying hedged items and are amortized over the
remaining lives of the hedged items as adjustments to investment income or
benefits from the hedged items through the IMR. Any unamortized gains or
losses are recognized when the underlying hedged items are sold. The
premiums paid for interest rate caps and swaptions are deferred and
amoritized to net investment income on a straight-line basis over the term
of the respective derivative.
Hedge accounting is applied as indicated above after the Company determines
that the items to be hedged expose the Company to interest rate
fluctuations, the widening of bond yield spreads over comparable maturity
U.S. Government obligations, increased liabilities associated with certain
reinsurance agreements and foreign exchange risk. Moreover, the derivatives
used are designated as a hedge and reduce the indicated risk by having a
high correlation between changes in the value of the derivatives and the
items being hedged at both the inception of the hedge and throughout the
hedge period. Should such criteria not be met or if the hedged items have
been sold, terminated or matured, the change in value of the derivatives is
included in net income.
Mortgage loans on real estate are reported at unpaid balances, less
allowances for impairments. Real estate is reported at depreciated cost.
Realized investment gains and losses on investments sold are determined
using the specific identification method. Changes in admitted asset carrying
amounts of bonds, mortgage loans and common and preferred stocks are
credited or charged directly in unassigned surplus.
LOANED SECURITIES
Securities loaned are treated as collateralized financing transactions and a
liability is recorded equal to the amount to be paid to reacquire the
security. It is the Company's policy to take possession of securities with a
market value at least equal to the value of the securities loaned.
Securities loaned are recorded at amortized cost as long as the value of the
related collateral is sufficient. The Company's agreements with third
parties generally contain contractual provisions to allow for additional
collateral to be obtained when necessary. The Company values collateral
daily and obtains additional collateral when deemed appropriate.
GOODWILL
Goodwill, which represents the excess of the ceding commission over
statutory-basis net assets of business purchased under an assumption
reinsurance agreement, is amortized on a straight-line basis over ten years.
S-8
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
PREMIUMS
Life insurance and annuity premiums are recognized as revenue when due.
Accident and health premiums are earned pro rata over the contract term of
the policies.
BENEFITS
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables using
statutorily specified interest rates and valuation methods that will
provide, in the aggregate, reserves that are greater than or equal to the
minimum or guaranteed policy cash values or the amounts required by the
Department. The Company waives deduction of deferred fractional premiums on
the death of life and annuity policy insureds and returns any premium beyond
the date of death, except for policies issued prior to March 1977. Surrender
values on policies do not exceed the corresponding benefit reserves.
Additional reserves are established when the results of cash flow testing
under various interest rate scenerios indicate the need for such reserves.
If net premiums exceed the gross premiums on any insurance in-force,
additional reserves are established. Benefit reserves for policies
underwritten on a substandard basis are determined using the multiple table
reserve method.
The tabular interest, tabular less actual reserve released and the tabular
cost have been determined by formula or from the basic data for such items.
Tabular interest funds not involving life contingencies were determined
using the actual interest credited to the funds plus the change in accrued
interest.
Liabilities related to guaranteed investment contracts and policyholder
funds left on deposit with the Company generally are equal to fund balances
less applicable surrender charges.
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Unpaid claims and claim adjustment expenses on accident and health policies
represent the estimated ultimate net cost of all reported and unreported
claims incurred during the year. The Company does not discount claims and
claim adjustment expense reserves. The reserves for unpaid claims and claim
adjustment expenses are estimated using individual case-basis valuations and
statistical analyses. Those estimates are subject to the effects of trends
in claim severity and frequency. Although considerable variability is
inherent in such estimates, management believes that the reserves for claims
and claim adjustment expenses are adequate. The estimates are continually
reviewed and adjusted as necessary as experience develops or new information
becomes known; such adjustments are included in current operations.
REINSURANCE CEDED AND ASSUMED
Reinsurance premiums and claims and claim adjustment expenses are accounted
for on bases consistent with those used in accounting for the original
policies issued and the terms of the reinsurance contracts. Certain business
is transacted on a funds withheld basis and investment income on funds
withheld are reported in net investment income.
PENSION BENEFITS
Costs associated with the Company's defined benefit pension plans is
systematically accrued during the expected period of active service of the
covered employees.
INCOME TAXES
The Company and eligible subsidiaries have elected to file consolidated
federal and state income tax returns with LNC. Pursuant to an intercompany
tax sharing agreement with LNC, the Company provides for income taxes on a
separate return filing basis. The tax sharing agreement also provides that
the Company will receive benefit for net operating losses, capital losses
and tax credits which are not usable on a separate return basis to the
extent such items may be utilized in the consolidated income tax returns of
LNC.
STOCK OPTIONS
The Company recognizes compensation expense for its stock option incentive
plans using the intrinsic value method of accounting. Under the terms of 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
S-9
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
measurement 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 the Company for the exclusive benefit of pension and variable
life and annuity contractholders. The fees received by the Company for
administrative and contractholder maintenance services performed for these
separate accounts are included in the Company's statements of income.
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory-basis financial statements are prepared in
accordance with accounting practices prescribed or permitted by 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 accounting practices
encompass all accounting practices that are not prescribed; such practices
may differ from state to state, may differ from company to company within a
state and may change in the future. The NAIC currently is in the process of
recodifying statutory accounting practices ("Codification"). Codification
will likely change, to some extent, prescribed statutory accounting
practices and may result in changes to the accounting practices that the
Company uses to prepare its statutory-basis financial statements.
Codification, which is expected to be approved by the NAIC in 1998, will
require adoption by the various states before it becomes the prescribed
statutory-basis of accounting for insurance companies domesticated within
those states. Accordingly, before Codification becomes effective for the
Company, the state of Indiana must adopt Codification as the prescribed
basis of accounting on which domestic insurers must report their
statutory-basis results to the Department. At this time, it is unclear
whether Indiana will adopt Codification. However, based on the current draft
guidance, management believes that the impact of Codification will not be
material to the Company's statutory-basis financial statements.
The Company has received written approval from the Department to record
surrender charges applicable to separate account liabilities for variable
life and annuity products as a liability in the separate account financial
statements payable to the Company's general account. In the accompanying
financial statements, a corresponding receivable is recorded with the
related income impact recorded in the accompanying statement of operations
as a change in reserves or change in premium and other deposit funds.
S-10
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS
The major categories of net investment income are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Income:
Bonds $ 1,524.4 $ 1,442.2 $ 1,457.4
----------------------------------------------------------------
Preferred stocks 23.5 9.6 6.4
----------------------------------------------------------------
Unaffiliated common stocks 8.3 6.5 5.2
----------------------------------------------------------------
Affiliated common stocks 15.0 9.5 12.6
----------------------------------------------------------------
Mortgage loans on real estate 257.2 269.3 252.0
----------------------------------------------------------------
Real estate 92.2 114.4 110.0
----------------------------------------------------------------
Policy loans 37.5 35.0 32.1
----------------------------------------------------------------
Other investments 28.2 22.4 62.6
----------------------------------------------------------------
Cash and short-term investments 70.3 48.9 53.2
---------------------------------------------------------------- --------- --------- ---------
Total investment income 2,056.6 1,957.8 1,991.5
- -------------------------------------------------------------------
Expenses:
Depreciation 21.0 25.0 25.9
----------------------------------------------------------------
Other 188.5 176.5 193.4
---------------------------------------------------------------- --------- --------- ---------
Total investment expenses 209.5 201.5 219.3
- ------------------------------------------------------------------- --------- --------- ---------
Net investment income $ 1,847.1 $ 1,756.3 $ 1,772.2
- ------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
Nonadmitted accrued investment income at December 31, 1997
and 1996 amounted to $2,600,000 and $2,500,000,
respectively, consisting principally of interest on bonds in
default and mortgage loans.
S-11
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in bonds are
summarized as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------
(IN MILLIONS)
----------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1997:
Corporate $13,003.8 $ 942.2 $ 60.1 $13,885.9
------------------------------------------------
U.S. government 436.3 67.9 -- 504.2
------------------------------------------------
Foreign government 1,202.1 104.9 5.4 1,301.6
------------------------------------------------
Mortgage-backed 3,874.3 215.2 27.1 4,062.4
------------------------------------------------
State and municipal 44.2 .3 -- 44.5
------------------------------------------------ --------- ----------- ----------- ---------
$18,560.7 $ 1,330.5 $ 92.6 $19,798.6
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
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
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</TABLE>
The carrying amount of bonds in the balance sheets at
December 31, 1997 and 1996 reflects NAIC adjustments of
$5,500,000 and $2,700,000, respectively, to decrease
amortized cost.
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
estimated by discounting expected future cash flows using a
current market rate applicable to the coupon rate, credit
quality and maturity of the investments.
S-12
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1997, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Maturity:
In 1998 $ 490.1 $ 494.9
--------------------------------------------------------------------------
In 1999-2002 3,088.7 3,185.4
--------------------------------------------------------------------------
In 2003-2007 4,762.7 4,971.0
--------------------------------------------------------------------------
After 2007 6,344.9 7,084.9
--------------------------------------------------------------------------
Mortgage-backed securities 3,874.3 4,062.4
-------------------------------------------------------------------------- --------- ---------
Total $18,560.7 $19,798.6
- ----------------------------------------------------------------------------- --------- ---------
--------- ---------
</TABLE>
The expected maturities may differ from the contractual
maturities in the foregoing table because certain borrowers
may have the right to call or prepay obligations with or
without call or prepayment penalties.
At December 31, 1997, 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 1997,
1996 and 1995 were $9,715,000,000, $10,996,900,000 and
$12,234,100,000, respectively. Gross gains during 1997, 1996
and 1995 of $218,100,000, $169,700,000 and $225,600,000,
respectively, and gross losses of $78,000,000, $177,000,000
and $83,100,000, respectively, were realized on those sales.
At December 31, 1997 and 1996, investments in bonds, with an
admitted asset value of $76,200,000 and $70,700,000,
respectively, 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
--------------------------------------------
(IN MILLIONS)
--------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1997:
Preferred stocks $257.3 $12.1 $ .7 $268.7
- ----------------------------------------
Unaffiliated common stocks 357.0 98.5 19.5 436.0
- ----------------------------------------
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
- ----------------------------------------
</TABLE>
The carrying amount of preferred stocks in the balance
sheets at December 31, 1997 and 1996 reflects NAIC
adjustments of $4,000,000 and $700,000, respectively, to
decrease amortized cost.
S-13
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
During 1997, the minimum and maximum lending rates for
mortgage loans were 7.09% and 9.25%, respectively. At the
issuance of a loan, the percentage of loan to value on any
one loan does not exceed 75%. At December 31, 1997, the
Company did not hold any mortgages with interest overdue
beyond one year. All properties covered by mortgage loans
have fire insurance at least equal to the excess of the loan
over the maximum loan that would be allowed on the land
without the building.
Realized capital gains are reported net of federal income
taxes and amounts transferred to the IMR as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Realized capital gains $ 209.3 $ 69.3 $ 186.8
- ------------------------------------------------------------------------
Less amount transferred to IMR (net of related taxes (credit) of $54.0,
$(6.7) and $51.1 in 1997, 1996 and 1995, respectively) 100.2 (12.4) 94.8
- ------------------------------------------------------------------------ --------- --------- ---------
109.1 81.7 92.0
Less federal income taxes on realized gains 77.8 28.4 48.1
- ------------------------------------------------------------------------ --------- --------- ---------
Net realized capital gains $ 31.3 $ 53.3 $ 43.9
- ------------------------------------------------------------------------ --------- --------- ---------
--------- --------- ---------
</TABLE>
4. SUBSIDIARIES
Statutory-basis financial information related to the
Company's four wholly-owned subsidiaries is summarized as
follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
--------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $ 1,154.4 $ 284.8 $ 399.0 $ 796.3
- -----------------------------------------------------------
Other assets 36.9 77.3 481.6 130.8
- ----------------------------------------------------------- --------- ----------- --------- ---------
Total admitted assets $ 1,191.3 $ 362.1 $ 880.6 $ 972.1
- ----------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
Insurance reserves $ 1,072.2 $ 266.7 $ 279.3 $ 588.7
- -----------------------------------------------------------
Other liabilities 48.4 21.7 546.4 5.8
- -----------------------------------------------------------
Liabilities related to separate accounts -- -- -- 164.7
- -----------------------------------------------------------
Capital and surplus 70.7 73.7 54.9 212.9
- ----------------------------------------------------------- --------- ----------- --------- ---------
Total liabilities and capital and surplus $ 1,191.3 $ 362.1 $ 880.6 $ 972.1
- ----------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 267.6 $ 135.4 $ 125.3 $ 230.0
- ------------------------------------------------------------
Expenses 262.6 244.2 114.6 224.4
- ------------------------------------------------------------
Net realized gains (losses) .1 .6 (.1) (.1)
- ------------------------------------------------------------ --------- --------- --------- ---------
Net income $ 5.1 $ (108.2) $ 10.6 $ 5.5
- ------------------------------------------------------------ --------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
S-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
------------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $ 1,090.7 $ 146.4 $ 406.7 $ 664.3
- -----------------------------------------------------------
Other assets 31.8 17.7 503.1 9.1
- ----------------------------------------------------------- --------- ----------- ----------- -----------
Total admitted assets $ 1,122.5 $ 164.1 $ 909.8 $ 673.4
- ----------------------------------------------------------- --------- ----------- ----------- -----------
--------- ----------- ----------- -----------
Insurance reserves $ 1,013.5 $ 72.7 $ 261.8 $ 601.1
- -----------------------------------------------------------
Other liabilities 41.3 18.7 597.2 22.1
- -----------------------------------------------------------
Capital and surplus 67.7 72.7 50.8 50.2
- ----------------------------------------------------------- --------- ----------- ----------- -----------
Total liabilities and capital and surplus $ 1,122.5 $ 164.1 $ 909.8 $ 673.4
- ----------------------------------------------------------- --------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 246.5 $ 104.9 $ 120.8 $ 642.7
- -------------------------------------------------------------
Expenses 247.1 97.1 114.1 661.3
- -------------------------------------------------------------
Net realized gains (losses) (.6) -- -- --
- ------------------------------------------------------------- --------- ----------- ----------- -----------
Net income (loss) $ (1.2) $ 7.8 $ 6.7 $ (18.6)
- ------------------------------------------------------------- --------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
The carrying value of affiliated common stocks, representing
their statutory-basis net equity, was $412,100,000 and
$241,500,000 at December 31, 1997 and 1996, respectively.
The cost basis of investments in subsidiaries as of December
31, 1997 and 1996 was $466,200,000 and $194,000,000,
respectively.
During 1997 and 1996, the Company's insurance subsidiaries
paid dividends of $15,000,000 and $10,500,000, respectively.
5. FEDERAL INCOME TAXES
The effective federal income tax rate for financial
reporting 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 $78,300,000, $83,600,000
and $103,700,000 in 1997, 1996 and 1995, 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
"policyholders' 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
income 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, 1997 memorandum account balance for
"shareholder's surplus"
S-15
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES (CONTINUED)
was $1,905,000,000. Should dividends to the shareholder
exceed 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.
6. SUPPLEMENTAL FINANCIAL DATA
The balance sheet caption, "Other Admitted Assets", includes
amounts recoverable from other insurers for claims paid by
the Company, and the balance sheet caption, "Future Policy
Benefits and Claims," has been reduced for insurance ceded
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Insurance ceded $ 1,431.0 $ 1,154.5
- -------------------------------------------------------------------------------
Amounts recoverable from other insurers 35.9 16.0
- -------------------------------------------------------------------------------
</TABLE>
Reinsurance transactions included in the income statement
caption, "Premiums and Deposits," are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 727.2 $ 241.3 $ 667.7
- ------------------------------------------------------------------------
Insurance ceded 302.9 193.3 453.1
- ------------------------------------------------------------------------ --------- --------- ---------
Net amount included in premiums $ 424.3 $ 48.0 $ 214.6
- ------------------------------------------------------------------------ --------- --------- ---------
--------- --------- ---------
</TABLE>
The income statement caption, "Benefits and Settlement
Expenses," is net of reinsurance recoveries of
$1,240,500,000, $787,900,000 and $1,407,000,000 for 1997,
1996 and 1995, respectively.
S-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
6. SUPPLEMENTAL FINANCIAL DATA (CONTINUED)
Deferred and uncollected life insurance premiums and annuity
considerations included in the balance sheet caption,
"Premiums and Fees in Course of Collection," are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------
NET OF
GROSS LOADING LOADING
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Ordinary new business $ 3.2 $ 2.4 $ .8
- ------------------------------------------------------------------------
Ordinary renewal 17.8 3.2 14.6
- ------------------------------------------------------------------------
Group life 10.6 .2 10.4
- ------------------------------------------------------------------------ --------- --- -----
$ 31.6 $ 5.8 $ 25.8
--------- --- -----
--------- --- -----
</TABLE>
<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
- ------------------------------------------------------------------------ --------- --- -----
$ 48.4 $ 4.8 $ 43.6
--------- --- -----
--------- --- -----
</TABLE>
The Company has entered into non-exclusive managing general
agent agreements with International Benefit Services Corp.,
HRM Claim Management, Inc. and Pediatrics Insurance
Consultants, Inc. to write group life and health business.
Direct premiums written related to the agreements amounted
to $2,000,000, $2,600,000 and $8,800,000 in 1997 and
$26,200,000, $3,800,000 and $8,600,000 in 1996,
respectively. During 1996, LNC Administrative Services
Corporation entered into a similar agreement with the
Company with direct premiums written amounting to $7,200,000
and 6,200,000 in 1997 and 1996, respectively. Authority
granted by the managing general agents agreements include
underwriting, claims adjustment and claims payment services.
7. ANNUITY RESERVES
At December 31, 1997, the Company's annuity reserves and
deposit fund liabilities, including separate accounts, that
are subject to discretionary withdrawal with adjustment,
S-17
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
7. ANNUITY RESERVES (CONTINUED)
subject to discretionary withdrawal without adjustment and
not subject to discretionary withdrawal provisions are
summarized as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
----------------------
(IN MILLIONS)
----------------------
<S> <C> <C>
Subject to discretionary withdrawal with adjustment:
With market value adjustment $ 2,426.3 5%
-----------------------------------------------------------------------------
At book value, less surrender charge 4,225.8 8
-----------------------------------------------------------------------------
At market value 30,064.7 59
----------------------------------------------------------------------------- --------- ---
36,716.8 72
Subject to discretionary withdrawal without adjustment at book value with
minimal or no charge or adjustment 11,657.7 23
- --------------------------------------------------------------------------------
Not subject to discretionary withdrawal 2,531.1 5
- -------------------------------------------------------------------------------- --------- ---
Total annuity reserves and deposit fund liabilities -- before reinsurance 50,905.6 100%
- -------------------------------------------------------------------------------- ---
---
Less reinsurance 1,797.5
- -------------------------------------------------------------------------------- ---------
Net annuity reserves and deposit fund liabilities, including separate accounts $49,108.1
- -------------------------------------------------------------------------------- ---------
---------
</TABLE>
8. 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 maintained by a life insurance company is to be
determined based on the various risk factors related to it. At December 31,
1997, the Company exceeds the RBC requirements.
The payment of dividends by the Company is limited and cannot be made except
from earned profits. The maximum amount of dividends that may be paid by
life insurance companies without prior approval of the Indiana Insurance
Commissioner is subject to restrictions relating to statutory surplus and
net gain from operations. In 1998, the Company can pay dividends of
$361,600,000 without prior approval of the Indiana Insurance Commissioner.
9. EMPLOYEE BENEFIT PLANS
LNC maintains defined benefit pension plans for its employees (including
Company employees) and a defined contribution plan for the Company's agents.
LNC also maintains 401(k) plans, deferred compensation plans and
postretirement medical and life insurance plans for its employees and agents
(including the Company's employees and agents). The aggregate expenses and
accumulated obligations for the Company's portion of these plans are not
material to the Company's statutory-basis financial statements of income or
financial position for any of the periods shown.
LNC has various incentive plans for key employees, agents and directors of
LNC and its subsidiaries that provide for the issuance of stock options,
stock appreciation rights, restricted stock awards and stock incentive
awards. These plans are comprised primarily of stock option incentive plans.
Stock options granted under the stock option incentive plans are at the
market value at the date of grants and, subject to termination of
employment, expire ten years from the date of grant. Such options are
transferable only upon death and are exercisable one year from the date of
grant for options issued prior to 1992. Option issued subsequent to 1991 are
exercisable in 25% increments on the option issuance anniversary in the four
years following issuance.
As of December 31, 1997, 716,211 shares of LNC common stock were subject to
options granted to Company employees and agents under the stock option
incentive plans of which 370,239 were exercisable on that date. The exercise
prices of the outstanding options range from $23.50 to $75.66. During 1997,
1996 and 1995, 170,789, 72,405 and
S-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
117,806 options were exercised, respectively, and 1,846, 10,950 and 11,473
options were forfeited, respectively.
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES
DISABILITY INCOME CLAIMS
The liability for disability income claims net of the related asset for
amounts recoverable from reinsurers at December 31, 1997 and 1996 is a net
liability of $516,900,000 and $572,000,000, respectively. This liability is
based on the assumption that the recent experience will continue in the
future. If incidence levels or claim termination rates fluctuate
significantly from the assumptions underlying reserves, adjustments to
reserves may be required in the future. 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 reviews reserve levels on an ongoing basis.
During 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 strengthening the disability income
reserve.
Because of continuing adverse experience and worsening projections of future
experience, the Company conducted an additional in-depth review of loss
experience on its disability income business during 1997. As a result of
this study, the reserve level was deemed to be inadequate to meet future
obligations if current incident levels were to continue in the future. In
order to address this situation, the Company strengthened its disability
income reserve by $80,000,000 (pre-tax).
MARKETING AND COMPLIANCE ISSUES
Regulators continue to focus on market conduct and compliance issues. Under
certain circumstances companies operating in the insurance and financial
services markets have been held responsible for providing incomplete or
misleading sales materials and for replacing existing policies with policies
that were less advantageous to the policyholder. The Company's management
continues to monitor the Company's sales materials and compliance procedures
and is making an extensive effort to minimize any potential liability. Due
to the uncertainty surrounding such matters, it is not possible to provide a
meaningful estimate of the range of potential outcomes at this time;
however, it is management's opinion that such future development will not
materially affect the financial position of the Company.
GROUP PENSION ANNUITIES
The liabilities for guaranteed interest and group pension annuity contracts,
which are no longer being sold by the Company, are supported by a single
portfolio of assets that attempts to match the duration of these
liabilities. Due to the long-term nature of group pension annuities and the
resulting inability to exactly match cash flows, a risk exists that future
cash flows from investments will not be reinvested at rates as high as
currently earned by the portfolio.
Accordingly, these liabilities may prove to be deficient or excessive.
However, it is management's opinion that such future development will not
materially affect the financial position of the Company.
LEASES
The Company leases its home office properties through sale-leaseback
agreements. The agreements provide for a 25 year lease period with options
to renew for six additional terms of five years each. The agreements also
provide the Company with the right of first refusal to purchase the
properties during the term of the lease, including renewal periods, at a
price as defined in the agreements. The Company also has the option to
purchase the leased properties at fair market value as defined in the
agreements on the last day of the initial 25-year lease ending in 2009 or on
the last day of any of the renewal periods.
Total rental expense on operating leases in 1997, 1996 and 1995 was
$29,300,000, $26,400,000 and
S-19
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
$22,500,000, respectively. Future minimum rental commitments are as follows
(in millions):
<TABLE>
<S> <C>
1998 $ 18.5
- --------------------------------------
1999 18.9
- --------------------------------------
2000 20.1
- --------------------------------------
2001 20.4
- --------------------------------------
2002 20.7
- --------------------------------------
Thereafter 152.2
- -------------------------------------- ---------
$ 250.8
---------
---------
</TABLE>
The future commitments include amounts for space and equipment to be used by
the personnel that were added on January 2, 1998 as a result of the purchase
of a block of individual life and annuity business (see NOTE 12).
INFORMATION TECHNOLOGY COMMITMENT
In February 1998, the Company signed a seven-year contract with IBM Global
Services for providing information technology services for the Fort Wayne
operations. Annual costs are estimated to range from $33,600,000 to
$56,800,000.
INSURANCE CEDED AND ASSUMED
The Company cedes insurance to other companies, including certain
affiliates. The portion of risks exceeding the Company's retention limit is
reinsured with other insurers. Industry regulations prescribe the maximum
coverage that the Company can retain on an individual insured. Prior to
December 31, 1997, the Company limited its maximum coverage that it retained
on an individual to $3,000,000. Based on a review of the capital and
business in-force (including the addition of the block of business described
in NOTE 12), effective in January 1998, the Company changed the amount it
will retain on an individual to $10,000,000. Portions of the Company's
deferred annuity business have also been reinsured with other companies to
limit its exposure to interest rate risks. At December 31, 1997, the
reserves associated with these reinsurance arrangements totaled
$1,760,000,000. To cover products other than life insurance, the Company
acquires other insurance coverages with retentions and limits that
management believes are appropriate for the circumstances. The Company
remains liable if its reinsurers are unable to meet their contractual
obligations under the applicable reinsurance agreements.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1997, the Company has provided $12,400,000 of
statutory surplus relief to other insurance companies under reinsurance
transactions. Generally, such amounts are offset by corresponding
receivables from the ceding company, which are secured by future profits on
the reinsured business. However, the Company is subject to the risk that the
ceding company may become insolvent and the right of offset would not be
permitted.
The regulatory required liability for unsecured reserves ceded to
unauthorized reinsurers was $8,200,000 and $4,300,000 at December 31, 1997
and 1996, respectively.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1997, the Company did not have a concentration of: 1)
business transactions with a particular customer, lender or distributor; 2)
revenues from a particular product or service; 3) sources of supply of labor
or services used in the business; or 4) a market or geographic area in which
business is conducted that makes it vulnerable to an event that is at least
reasonably possible to occur in the near term and which could cause a severe
impact to the Company's financial condition.
OTHER CONTINGENCY MATTERS
The Company is involved in various pending or threatened legal proceedings
arising from the conduct of business. Most of these proceedings are routine
in the ordinary course of business. The Company maintains professional
liability insurance coverage for claims in excess of $5,000,000. The degree
of applicability of this coverage depends on the specific facts of each
proceeding. In some instances, these proceedings include claims for
compensatory and punitive damages and similar types of relief in addition to
amounts for alleged contractual liability or requests for equitable relief.
After consultation with legal counsel and a review of available facts, it is
management's opinion that the ultimate liability, if any, under these suits
will
S-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
not have a material adverse affect on the financial position or results of
operations of the Company.
Two lawsuits involve alleged fraud in the sale of interest sensitive
universal life and whole life insurance policies. These two suits have been
filed as class actions against the Company, although the court has not
certified a class in either case. Plaintiffs seek unspecified damages and
penalties for themselves and on behalf of the putative class while the
relief sought in these cases in substantial, the cases are in the early
stages of litigation, and it is premature to make assessments about
potential loss, if any. Management intends to defend these suits vigorously.
The amount of liability, if any, which may arise as a result of these suits
cannot be reasonably estimated at this time.
The number of insurance companies that are under regulatory supervision has
resulted, and is expected to continue to result, in assessments by state
guaranty funds to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments may be partially recovered
through a reduction in future premium taxes in some states. The Company has
accrued for expected assessments net of estimated future premium tax
deductions.
GUARANTEES
The Company has guarantees with off-balance-sheet risks whose contractual
amounts represent credit exposure. Outstanding guarantees with off-
balance-sheet risks, shown in notional or contract amounts, are as follows:
<TABLE>
<CAPTION>
NOTIONAL OR
CONTRACT AMOUNTS
--------------------
DECEMBER 31
--------------------
1997 1996
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Mortgage loan pass-through
certificates $ 41.6 $ 50.3
- ------------------------------
Real estate partnerships -- .5
- ------------------------------ --------- ---------
$ 41.6 $ 50.8
--------- ---------
--------- ---------
</TABLE>
The Company has invested in real estate partnerships that use conventional
mortgage loans to finance their projects. In some cases, the terms of these
arrangements involve guarantees by each of the partners to indemnify the
mortgagor in the event a partner is unable to pay its principal and interest
payments. In addition, the Company has sold commercial mortgage loans
through grantor trusts which issued pass-through certificates. The Company
has agreed to repurchase any mortgage loans which remain delinquent for 90
days at a repurchase price substantially equal to the outstanding principal
balance plus accrued interest thereon to the date of repurchase. It is
management's opinion that the value of the properties underlying these
commitments is sufficient that in the event of default the impact would not
be material to the Company. Accordingly, both the carrying value and fair
value of these guarantees is zero at December 31, 1997 and 1996.
DERIVATIVES
The Company has derivatives with off-balance-sheet risks whose notional or
contract amounts exceed the credit exposure. The Company has entered into
derivative transactions to reduce its exposure to fluctuations in interest
rates, the widening of bond yield spreads over comparable maturity U.S.
Government obligations, increased liabilities associated with reinsurance
agreements and foreign exchange risks. In addition, the Company is subject
to the risks associated with changes in the value of its derivatives;
however, such changes in value generally are offset by changes in the value
of the items 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:
S-21
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
<TABLE>
<CAPTION>
NOTIONAL OR ASSETS (LIABILITIES)
CONTRACT AMOUNTS -----------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1997 1996 1997 1997 1996 1996
-------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate cap agreements $4,900.0 $5,500.0 $13.9 $ .9 $20.8 $ 8.2
---------------------------------
Swaptions 1,752.0 672.0 6.9 6.9 11.0 10.6
---------------------------------
Financial futures contracts -- 147.7 -- -- (2.4) (2.4)
---------------------------------
Interest rate swaps 10.0 -- -- (1.8) -- --
--------------------------------- -------- -------- -------- ----- -------- ------
6,662.0 6,319.7 20.8 6.0 29.4 16.4
Foreign currency derivatives:
Forward contracts 163.1 251.5 5.4 5.4 .2 (.2)
---------------------------------
Foreign currency options -- 43.9 -- -- .6 .4
---------------------------------
Foreign currency swaps 15.0 15.0 -- (2.1) -- (2.1)
--------------------------------- -------- -------- -------- ----- -------- ------
178.1 310.4 5.4 3.3 .8 (1.9)
-------- -------- -------- ----- -------- ------
$6,840.1 $6,630.1 $26.2 $ 9.3 $30.2 $ 14.5
-------- -------- -------- ----- -------- ------
-------- -------- -------- ----- -------- ------
</TABLE>
A reconciliation and discussion of the notional or contract amounts for the
significant programs using derivative agreements and contracts at December
31 is a follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------
INTEREST RATE CAPS SPREAD LOCKS SWAPTIONS
1997 1996 1997 1996 1997 1996
----------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 5,500.0 $ 5,110.0 $ -- $ 600.0 $ 672.0 $ --
- -----------------------------------
New contracts -- 390.0 50.0 15.0 1,080.0 672.0
- -----------------------------------
Terminations and maturities (600.0) -- (50.0) (615.0) -- --
- ----------------------------------- --------- --------- --------- --------- --------- ---------
Balance at end of year $ 4,900.0 $ 5,500.0 $ -- $ -- $ 1,752.0 $ 672.0
- ----------------------------------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL FUTURES INTEREST RATE SWAPS
CONTRACTS
------------------------------------------
1997 1996 1997 1996
------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 147.7 $ -- $ -- $ 5.0
- ------------------------------------------------------------
New contracts 88.3 7,918.8 10.0 --
- ------------------------------------------------------------
Terminations and maturities (236.0) (7,771.1) -- (5.0)
- ------------------------------------------------------------ --------- --------- --------- ---------
Balance at end of year $ -- $ 147.7 $ 10.0 $ --
- ------------------------------------------------------------ --------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
S-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
<TABLE>
<CAPTION>
FOREIGN CURRENCY DERIVATIVES
----------------------------------------------------------------
FOREIGN EXCHANGE FOREIGN CURRENCY FOREIGN CURRENCY
FORWARD CONTRACTS OPTIONS SWAPS
1997 1996 1997 1996 1997 1996
----------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 251.5 $ 15.7 $ 43.9 $ 99.2 $ 15.0 $ 15.0
- --------------------------------------
New contracts 833.1 406.9 -- 1,168.8 -- --
- --------------------------------------
Terminations and maturities (921.6) (171.1) (43.9) (1,224.1) -- --
- -------------------------------------- --------- --------- --------- --------- --------- ---------
Balance at end of year $ 163.1 $ 251.5 $ -- $ 43.9 $ 15.0 $ 15.0
- -------------------------------------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
INTEREST RATE CAPS
The interest rate cap agreements, which expire in 1998 through 2003, entitle
the Company to receive quarterly payments from the counterparties on
specified future reset dates, contingent on future interest rates. For each
cap, the amount of such payments, if any, is determined by the excess of a
market interest rate over a specified cap rate multiplied by the notional
amount divided by four. The purpose of the Company's interest rate cap
agreement program is to protect its annuity line of business from the effect
of rising interest rates. The premium paid for the interest rate caps is
included in other assets ($13,900,000 as of December 31, 1997) and is being
amortized over the terms of the agreements. This amortization is included in
net investment income.
SWAPTIONS
Swaptions, which expire in 2002 and 2003, entitle the Company to receive
settlement payments from the counterparties on specified expiration dates,
contingent on future interest rates. For each swaption, the amount of such
settlement payments, if any, is determined by the present value of the
difference between the fixed rate on a market rate swap and the strike rate
multiplied by the notional amount. The purpose of the Company's swaption
program is to protect its annuity line of business from the effect of
fluctuating interest rates. The premium paid for the swaptions is included
in other assets ($6,900,000 as of December 31, 1997) 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
Government note is larger or smaller than a contractually specified spread.
Cash payments are based on the product of the notional amount, the spread
between the swap rate and the yield of an equivalent maturity Government
security and the price sensitivity of the swap at that time. The purpose of
the Company's spread-lock program is to protect a portion of its fixed
maturity securities against widening of spreads.
FINANCIAL FUTURES
The Company uses exchange-traded financial futures contracts 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.
INTEREST RATE SWAPS
The Company uses interest rate swap agreements to hedge its exposure to
floating rate bond coupon payments, replicating a fixed rate bond. An
interest rate swap is a contractual agreement to exchange payments at one or
more times based on the actual or expected price, level, performance or
value of one or more underlying interest rates. The Company is required to
pay the counterparty to the
S-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
agreements the stream of variable coupon payments generated from the bonds,
and in turn, receives a fixed payment from the counterparty at a
predetermined interest rate. The net receipts/payments from interest rate
swaps are recorded in net investment income.
FOREIGN CURRENCY DERIVATIVES
The Company uses a combination of foreign exchange forward contracts,
foreign currency options and foreign currency swaps, all of which are traded
over-the-counter, to hedge some of the foreign exchange risk of investments
in fixed maturity securities denominated in foreign currencies. The foreign
currency forward contracts obligate the Company to deliver a specified
amount of currency at a future date at a specified exchange rate. Foreign
currency options give the Company the right, but not the obligation, to buy
or sell a foreign currency at a specific exchange rate during a specified
time period. A foreign currency swap is a contractual agreement to exchange
the currencies of two different countries pursuant to an agreement to
re-exchange the two currencies at the same rate of exchange at a specified
future date.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$7,000,000, $6,900,000 and $5,600,000 in 1997, 1996 and 1995, respectively.
Deferred losses of $2,600,000 as of December 31, 1997, 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 securities.
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, foreign
currency options and foreign currency swaps. However, the Company does not
anticipate nonperformance by any of the counterparties. The credit risk
associated with such agreements is minimized by purchasing such agreements
from financial institutions with long-standing, superior performance
records. The amount of such exposure is essentially the net replacement cost
or market value for such agreements with each counterparty if the net market
value is in the Company's favor. At December 31, 1997, the exposure was
$11,700,000.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair values of the Company's financial instruments.
Considerable judgment is required to develop these fair values. Accordingly,
the estimates shown are not necessarily indicative of the amounts that would
be realized in a one-time, current market exchange of all of the Company's
financial instruments.
BONDS AND UNAFFILIATED COMMON STOCK
Fair values of bonds are based on quoted market prices, where available. For
bonds not actively traded, fair values are estimated using values obtained
from independent pricing services. In the case of private placements, fair
values are estimated by discounting expected future cash flows using a
current market rate applicable to the coupon rate, credit quality and
maturity of the investments. The fair values of unaffiliated common stocks
are based on quoted market prices.
MORTGAGE LOANS ON REAL ESTATE
The estimated fair values of mortgage loans on real estate are established
using a discounted cash flow method based on credit rating, maturity and
future income. The rating for mortgages in good standing are based on
property type, location, market conditions, occupancy, debt service
coverage, loan to value, caliber of tenancy, borrower and payment record.
Fair values for impaired mortgage loans are based on: 1) the present value
of expected future cash flows discounted at the loan's effective interest
rate; 2) the loan's market price; or 3) the fair value of the collateral if
the loan is collateral dependent.
POLICY LOANS
The estimated fair values of investments in policy loans are calculated on a
composite discounted cash flow basis using Treasury interest rates
consistent with the maturity durations assumed. These durations are based on
historical experience.
S-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
OTHER INVESTMENTS AND CASH AND SHORT-TERM INVESTMENTS
The carrying values for assets classified as other investments and cash and
short-term investments in the accompanying statutory-basis balance sheets
approximate their fair value.
INVESTMENT-TYPE INSURANCE CONTRACTS
The balance sheet captions, "Future Policy Benefits and Claims" and "Other
Policyholder Funds," include investment type insurance contracts (i.e.,
deposit contracts and guaranteed interest contracts). The fair values for
the deposit contracts and certain guaranteed interest contracts are based on
their approximate surrender values. The fair values for the remaining
guaranteed interest and similar contracts are estimated using discounted
cash flow calculations. These calculations are based on interest rates
currently offered on similar contracts with maturities that are consistent
with those remaining for the contracts being valued.
The remainder of the balance sheet captions "Future Policy Benefits and
Claims" and "Other Policyholder Funds," that do not fit the definition of
"investment-type insurance contracts" are considered insurance contracts.
Fair value disclosures are not required for these insurance contracts and
have not been determined by the Company. It is the Company's position that
the disclosure of the fair value of these insurance contracts is important
because readers of these financial statements could draw inappropriate
conclusions about the Company's capital and surplus determined on a fair
value basis. It could be misleading if only the fair value of assets and
liabilities defined as financial instruments are disclosed. The Company and
other companies in the insurance industry are monitoring the related actions
of the various rule-making bodies and attempting to determine an appropriate
methodology for estimating and disclosing the "fair value" of their
insurance contract liabilities.
SHORT-TERM DEBT
Fair values of short-term debt approximates carrying values.
GUARANTEES
The Company's guarantees include guarantees related to real estate
partnerships and mortgage loan pass-through certificates. Based on
historical performance where repurchases have been negligible and the
current status, which indicates none of the loans are delinquent, the fair
value liability for the guarantees related to the mortgage loan pass-through
certificates is insignificant.
DERIVATIVES
The Company's derivatives include interest rate cap agreements, swaptions,
spread-lock agreements, foreign currency exchange contracts, financial
futures contracts, interest rate swaps, foreign currency options and foreign
currency swaps. Fair values for these contracts are based on current
settlement values. These values are based on: 1) quoted market prices for
the foreign currency exchange contracts and financial future contracts and;
2) brokerage quotes that utilize pricing models or formulas using current
assumptions for all other swaps and agreements.
INVESTMENT COMMITMENTS
Fair values for commitments to make investment in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real
estate are based on the difference between the value of the committed
investments as of the date of the accompanying balance sheets and the
commitment date. These estimates would take into account changes in interest
rates, the counterparties' credit standing and the remaining terms of the
commitments.
S-25
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying values and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------
1997 1996
----------------------------------------------
CARRYING CARRYING
ASSETS (LIABILITIES) VALUE FAIR VALUE VALUE FAIR VALUE
- -----------------------------------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 18,560.7 $ 19,798.6 $ 19,389.6 $ 20,194.4
- -----------------------------------------------
Preferred stock 257.3 268.7 239.7 248.5
- -----------------------------------------------
Unaffiliated common stock 436.0 436.0 358.3 358.3
- -----------------------------------------------
Mortgage loans on real estate 3,012.7 3,179.2 2,976.7 3,070.9
- -----------------------------------------------
Policy loans 660.5 648.3 626.5 612.7
- -----------------------------------------------
Other investments 335.5 335.5 282.7 282.7
- -----------------------------------------------
Cash and short-term investments 2,133.0 2,133.0 759.2 759.2
- -----------------------------------------------
Investment-type insurance contracts:
Deposit contracts and certain guaranteed
interest contracts (17,324.2) (16,887.6) (17,871.6) (17,333.0)
--------------------------------------------
Remaining guaranteed interest and similar
contracts (1,267.0) (1,294.6) (1,799.7) (1,835.4)
--------------------------------------------
Short-term debt (120.0) (120.0) (100.0) (100.0)
- -----------------------------------------------
Derivatives 26.2 9.3 26.5 13.8
- -----------------------------------------------
Investment commitments -- (.5) -- (.6)
- -----------------------------------------------
</TABLE>
12. ACQUISITIONS AND SALES OF SUBSIDIARIES
In October 1996, the Company and LLANY purchased a block of group
tax-qualified annuity business from UNUM Corporation's affiliate. The
transaction was completed in the form of a reinsurance transaction, which
resulted in a ceding 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. LLANY was required by the
New York Department of Insurance to expense its portion of the ceding
commission in 1996. Policy liabilities and related accruals of the Company
and its wholly owned subsidiary increased by $3,200,000,000 as a result of
this transaction.
In 1997, LNC contributed 25,000,000 shares of common stock of American
States Financial Corporation ("American States") to the Company. American
States is a property casualty insurance holding company of which LNC owned
83.3%. The contributed common stock was accounted for as a capital
contribution equal to the fair value of the common stock received by the
Company. Subsequently, the American States common stock owned by the
Company, along with all other American States common stock owned by LNC and
its affiliates, was sold. The Company received proceeds from the sale in the
amount of $1,175,000,000. The Company recognized no gain or loss on the sale
of its portion of the common stock due to the receipt of such stock at fair
value.
On January 2, 1998, the Company issued a surplus note to LNC in return for
$500,000,000 in cash. The note calls for the Company to pay, on or before
March 31, 2028, the principal amount of the note and interest quarterly at a
6.56% annual rate. LNC also has a right to redeem the note for immediate
repayment in total or in part once per year on the
S-26
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
12. ACQUISITIONS AND SALES OF SUBSIDIARIES (CONTINUED)
anniversary date of the note, but not before January 2, 2003. Any payment of
interest or repayment of principal may be paid only out of excess surplus
(as defined in the note) and is subject to the approval of the Commissioner
of the Indiana Department of Insurance.
Proceeds from the sale of the Company's American States common stock, as
well as proceeds from the surplus note, were used to finance an indemnity
reinsurance transaction whereby the Company reinsured 100% of a block of
individual life insurance and annuity business from CIGNA Corporation. The
Company paid $1,264,400,000 to CIGNA on January 2, 1998 under the terms of
the reinsurance agreement, which will result in a decrease to surplus in
1998 of approximately $1,000,000,000. Operating results generated by this
block of business after the closing date will be included in the Company
financial statements from the closing date. At the time of closing, this
block of business had statutory liabilities of $4,658,200,000 that became
the Company's obligation. The company also received assets, measured on a
historical statutory basis, equal to the liabilities. During 1997, this
block produced premiums, fees and deposits of $1,051,000,000 and earnings of
$87,200,000 on a statutory basis. The Company also expects to pay
$30,000,000 to cover expenses associated with the reinsurance agreement and
to record a charge of approximately $12,000,000 during 1998 to cover certain
costs of integrating the existing operations with the new block of business.
13. TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Financial Group, Inc. ("LFGI"),
has a nearly exclusive general agents contract with the Company under which
it sells the Company's products and provides the service that otherwise
would be provided by a home office marketing department and regional
offices. For providing these selling and marketing services, the Company
paid LFGI override commissions and operating expense allowances of
$61,600,000, $56,300,000 and $43,300,000 in 1997, 1996 and 1995,
respectively. LFGI incurred expenses of $5,500,000, $15,700,000 and
$10,400,000 in 1997, 1996 and 1995, respectively, in excess of the override
commissions and operating expense allowances received from the Company,
which the Company is not required to reimburse. Effective in January 1998,
the Company and LFGI agreed to increase the override commission expense and
eliminate the operating expense allowance.
Cash and short-term investments at December 31, 1997 and 1996 include the
Company's participation in a short-term investment pool with LNC of
$325,600,000 and $175,100,000, respectively. Related investment income
amounted to $15,500,000, $15,300,000 and $21,100,000 in 1997, 1996 and 1995,
respectively. Other liabilities at December 31, 1997 and 1996 include
$120,000,000 and $100,000,000, respectively, of notes payable to LNC.
The Company provides services to and receives services from affiliated
companies which resulted in a net payment of $48,500,000, $34,100,000 and
$24,900,000 in 1997, 1996 and 1995, respectively.
The Company cedes and accepts reinsurance from affiliated companies.
Premiums in the accompanying statements of income include premiums on
insurance business accepted under reinsurance contracts and exclude premiums
ceded to other affiliated companies, as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 11.9 $ 17.9 $ 17.6
- ----------------------
Insurance ceded 100.3 302.8 214.4
- ----------------------
</TABLE>
S-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTIONS WITH AFFILIATES (CONTINUED)
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Future policy benefits
and claims assumed $ 245.5 $ 312.7
- ------------------------
Future policy benefits
and claims ceded 997.2 891.8
- ------------------------
Amounts recoverable on
paid and unpaid losses 30.4 31.2
- ------------------------
Reinsurance payable on
paid losses 5.3 2.7
- ------------------------
Funds held under
reinsurance treaties --
net liability 1,115.4 1,062.4
- ------------------------
</TABLE>
Substantially all reinsurance ceded to affiliated companies is with
unauthorized companies. To take a reserve credit for such reinsurance, the
Company holds assets from the reinsurer, including funds held under
reinsurance treaties, and is the beneficiary on letters of credit
aggregating $280,900,000 and $314,200,000 at December 31, 1997 and 1996,
respectively. The letters of credit are issued by banks and represent
guarantees of performance under the reinsurance agreement. At December 31,
1997 and 1996, LNC had guaranteed $229,100,000 and $239,200,000,
respectively, of these letters of credit. At December 31, 1997, the Company
has a receivable (included in the foregoing amounts) from affiliated
insurance companies in the amount of $130,700,000 for statutory surplus
relief received under financial reinsurance ceded agreements.
14. SEPARATE ACCOUNTS
Separate account assets and liabilities reported in the accompanying balance
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 detailed
operations of the separate accounts are not included in the accompanying
financial statements. Fees charged on separate account policyholder deposits
are included in other income.
Separate account premiums, deposits and other considerations amounted to
$4,821,800,000, $4,148,700,000 and $3,068,200,000 in 1997, 1996 and 1995,
respectively. Reserves for separate accounts with assets at fair value were
$30,560,700,000 and $23,047,800,000 at December 31, 1997 and 1996,
respectively. All reserves are subject to discretionary withdrawal at market
value. Substantially all of the Company's separate accounts are
nonguaranteed.
S-28
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
14. SEPARATE ACCOUNTS (CONTINUED)
A reconciliation of transfers to (from) separate accounts are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
------------------------
(IN MILLIONS)
------------------------
<S> <C> <C>
Transfers as reported in the Summary of Operations of
various Separate Accounts:
Transfers to separate accounts $ 4,824.0 $ 4,149.6
- ------------------------------------------------------------
Transfers from separate accounts (2,943.8) (2,058.5)
- ------------------------------------------------------------ --------- ---------
Net transfer to separate accounts as reported in the
Company's NAIC Annual Statement -- Summary of Operations $ 1,880.2 $ 2,091.1
- ------------------------------------------------------------ --------- ---------
--------- ---------
</TABLE>
15. RECONCILIATION OF ANNUAL STATEMENT TO AUDITED FINANCIAL STATEMENTS
In 1997, certain errors were identified by the Illinois
Insurance Department in the calculation of the AVR as of
December 31, 1996 and 1995. The effects of the AVR errors
also resulted in the need for revisions in the calculation
of certain investment limitation thresholds, the results of
which indicated that additional assets should have been
nonadmitted as of December 31, 1996. As discussed by the
Company with the Indiana and Illinois Insurance Departments,
corrections were made to affected pages of the Company's
NAIC Annual Statement which were refiled with various state
insurance departments. However, due to immateriality of the
corrections in relation to the financial statements taken as
a whole, the audited 1996 and 1995 statutory-basis financial
statements were not corrected and re-issued.
The Company's 1997 NAIC Annual Statement, as filed with
various state insurance departments, also includes the
corrected balances for 1996 and 1995. The following is a
reconciliation of total admitted assets, total liabilities
and capital and surplus as of December 31, 1996 as presented
in the 1997 NAIC Annual Statement (as corrected) to the
accompanying audited financial statements.
<TABLE>
<CAPTION>
TOTAL CAPITAL
ADMITTED TOTAL AND
ASSETS LIABILITIES SURPLUS
---------------------------------
<S> <C> <C> <C>
Balance as of December 31, 1996 as
reported in the accompanying audited
financial statements $50,016.6 $ 48,054.0 $ 1962.6
- ----------------------------------------
Effect of AVR errors -- 37.6 (37.6)
- ----------------------------------------
Effect of change in investment
limitations (57.0) -- (57.0)
- ---------------------------------------- --------- ----------- --------
Balance as of December 31, 1996 as
reported in the 1997 NAIC Annual
Statement $49,959.6 $ 48,091.6 $1,868.0
- ---------------------------------------- --------- ----------- --------
--------- ----------- --------
</TABLE>
16. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 Issue is pervasive and complex and affects virtually every
aspect of the Company's business. The Company's computer systems and
interfaces with the computer systems of vendors, suppliers, customers and
business partners are particularly vulnerable. The inability to properly
recognize date sensitive electronic information and transfer data between
systems could cause errors or even a complete systems failure which would
result in a temporary inability to process transactions correctly and engage
in normal business
S-29
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
16. IMPACT OF YEAR 2000 (UNAUDITED) (CONTINUED)
activities. The Company is redirecting a large portion of its internal
information technology efforts and contracting with outside consultants to
update its systems to accommodate the year 2000. Also, the Company has
initiated formal communications with critical parties that interface with
the Company's systems to gain an understanding of their progress in
addressing Year 2000 Issues. While the Company is making every effort to
address its own systems and the systems with which it interfaces, it is not
possible to provide assurance that operational problems will not occur. The
Company presently believes that with the modification of existing computer
systems, updates by vendors and conversion to new software and hardware, the
Year 2000 Issue will not pose significant operational problems for its
computer systems. In addition, the Company is developing contingency plans
in the event that, despite its best efforts, there are unresolved year 2000
problems. If the remediation efforts noted above are not completed timely or
properly, the Year 2000 Issue could have a material adverse impact on the
operation of the Company's business.
During 1997 and 1996, the Company incurred expenditures of approximately
$5,500,000 ($3,600,000 after-tax) to address this issue. The Company's
financial plans for 1998 through 2000 include expected expenditures of an
additional $20,000,000 ($13,000,000 after-tax) on this issue. The cost of
addressing Year 2000 Issues and the timeliness of completion will be closely
monitored by management and are based on managements's current best
estimates which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third
party modification plans and other factors. Nevertheless, there can be no
guarantee that these estimated costs will be achieved and actual results
could differ significantly from those anticipated. Specific factors that
might cause such differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer problems and other uncertainties.
S-30
<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,
1997 and 1996, 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, 1997. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company
presents its financial statements in conformity with accounting
practices prescribed or permitted by the Indiana Department of
Insurance, which practices differ from generally accepted
accounting principles. The variances between such practices and
generally accepted accounting principles and the effects on the
accompanying financial statements are also described in Note 1.
In our opinion, because of the effects of the matter described
in the preceding paragraph, the financial statements referred to
above do not present fairly, in conformity with generally
accepted accounting principles, the financial position of The
Lincoln National Life Insurance Company at December 31, 1997 and
1996, or the results of its operations or its cash flows for
each of the three years in the period ended December 31, 1997.
However, in our opinion, the financial statements referred to
above present fairly, in all material respects, the financial
position of The Lincoln National Life Insurance Company at
December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with accounting practices
prescribed or permitted by the Indiana Department of Insurance.
/s/ Ernst & Young LLP
February 5, 1998
S-31
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA
DECEMBER 31, 1997 (IN MILLIONS)
<TABLE>
<S> <C> <C>
Investment income earned:
Government bonds $ 52.8
-----------------------------------------------------------------------------------------
Other bonds (unaffiliated) 1,471.6
-----------------------------------------------------------------------------------------
Preferred stocks (unaffiliated) 23.5
-----------------------------------------------------------------------------------------
Common stocks (unaffiliated) 8.3
-----------------------------------------------------------------------------------------
Common stocks of affiliates 15.0
-----------------------------------------------------------------------------------------
Mortgage loans 257.2
-----------------------------------------------------------------------------------------
Real estate 92.2
-----------------------------------------------------------------------------------------
Premium notes, policy loans and liens 37.5
-----------------------------------------------------------------------------------------
Cash on hand and on deposit 1.0
-----------------------------------------------------------------------------------------
Short-term investments 69.3
-----------------------------------------------------------------------------------------
Other invested assets 21.9
-----------------------------------------------------------------------------------------
Derivative instruments (10.0)
-----------------------------------------------------------------------------------------
Aggregate write-ins for investment income 16.3
----------------------------------------------------------------------------------------- ---------
Gross investment income $ 2,056.6
- ---------------------------------------------------------------------------------------------------- ---------
---------
Real estate owned (cost, less encumbrances) $ 585.2
- ---------------------------------------------------------------------------------------------------- ---------
---------
Mortgage loans (unpaid balance):
Farm mortgages $ 0.1
-----------------------------------------------------------------------------------------
Residential mortgages 3.1
-----------------------------------------------------------------------------------------
Commercial mortgages 3,009.5
----------------------------------------------------------------------------------------- ---------
Total mortgage loans $ 3,012.7
- ---------------------------------------------------------------------------------------------------- ---------
---------
Mortgage loans by standing (unpaid balance):
Good standing $ 2,974.1
----------------------------------------------------------------------------------------- ---------
---------
Good standing with restructured terms $ 38.5
----------------------------------------------------------------------------------------- ---------
---------
Interest overdue more than three months, not in foreclosure $ --
----------------------------------------------------------------------------------------- ---------
---------
Foreclosure in process $ 0.1
----------------------------------------------------------------------------------------- ---------
---------
Other long-term assets (statement value) $ 281.5
- ---------------------------------------------------------------------------------------------------- ---------
---------
</TABLE>
S-32
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA (CONTINUED)
DECEMBER 31, 1997 (IN MILLIONS)
<TABLE>
<S> <C>
Bonds and stocks of parent, subsidiaries and affiliates (cost):
Common stocks of subsidiaries $ 466.2
- ----------------------------------------------------------------------------------------------- ---------
---------
Bonds and short-term investments by class and maturity:
Bonds by maturity (statement value):
Due within one year or less $ 3,140.1
------------------------------------------------------------------------------------------
Over 1 year through 5 years 5,182.8
------------------------------------------------------------------------------------------
Over 5 years through 10 years 5,772.8
------------------------------------------------------------------------------------------
Over 10 years through 20 years 3,275.3
------------------------------------------------------------------------------------------
Over 20 years 3,270.6
------------------------------------------------------------------------------------------ ---------
Total by maturity $20,641.6
-------------------------------------------------------------------------------------------- ---------
---------
Bonds by class (statement value):
Class 1 $13,879.0
------------------------------------------------------------------------------------------
Class 2 5,215.6
------------------------------------------------------------------------------------------
Class 3 848.0
------------------------------------------------------------------------------------------
Class 4 668.8
------------------------------------------------------------------------------------------
Class 5 23.6
------------------------------------------------------------------------------------------
Class 6 6.6
------------------------------------------------------------------------------------------ ---------
Total by class $20,641.6
-------------------------------------------------------------------------------------------- ---------
---------
Total bonds publicly traded $16,457.1
- ----------------------------------------------------------------------------------------------- ---------
---------
Total bonds privately placed $ 4,184.5
- ----------------------------------------------------------------------------------------------- ---------
---------
Preferred stocks (statement value) $ 257.3
- ----------------------------------------------------------------------------------------------- ---------
---------
Unaffiliated common stocks (market value) $ 436.0
- ----------------------------------------------------------------------------------------------- ---------
---------
Short-term investments (cost or amortized cost) $ 2,080.9
- ----------------------------------------------------------------------------------------------- ---------
---------
Financial options and caps owned (statement value) $ 20.8
- ----------------------------------------------------------------------------------------------- ---------
---------
Financial options and caps written (statement value) $ --
- ----------------------------------------------------------------------------------------------- ---------
---------
Swap and forward agreements open (statement value) $ 5.4
- ----------------------------------------------------------------------------------------------- ---------
---------
Futures contracts open (current value) $ --
- ----------------------------------------------------------------------------------------------- ---------
---------
Cash on deposit $ 52.1
- ----------------------------------------------------------------------------------------------- ---------
---------
Life insurance in-force:
Ordinary $ 108.6
------------------------------------------------------------------------------------------ ---------
---------
Group life $ 31.2
------------------------------------------------------------------------------------------ ---------
---------
</TABLE>
S-33
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA (CONTINUED)
DECEMBER 31, 1997 (IN MILLIONS)
<TABLE>
<S> <C>
Amount of accidental death insurance in-force under ordinary policies $ 5.3
- ----------------------------------------------------------------------------------------------- ---------
---------
Life insurance policies with disability provisions in-force:
Ordinary $ 5.5
------------------------------------------------------------------------------------------ ---------
---------
Group life $ --
------------------------------------------------------------------------------------------ ---------
---------
Supplementary contracts in-force:
Ordinary -- not involving life contingencies:
Amount on deposit $ --
------------------------------------------------------------------------------------------ ---------
---------
Income payable $ 0.8
------------------------------------------------------------------------------------------ ---------
---------
Ordinary -- involving life contingencies:
Income payable $ 3.0
------------------------------------------------------------------------------------------ ---------
---------
Group -- not involving life contingencies:
Income payable $ 1.1
------------------------------------------------------------------------------------------ ---------
---------
Group -- involving life contingencies:
Income payable $ --
------------------------------------------------------------------------------------------ ---------
---------
Annuities:
Ordinary:
Immediate -- amount of income payable $ 71.8
------------------------------------------------------------------------------------------ ---------
---------
Deferred -- fully paid account balance $ 0.7
------------------------------------------------------------------------------------------ ---------
---------
Deferred -- not fully paid account balance $ 264.0
------------------------------------------------------------------------------------------ ---------
---------
Group:
Amount of income payable $ 0.3
------------------------------------------------------------------------------------------ ---------
---------
Fully paid account balance $ 0.1
------------------------------------------------------------------------------------------ ---------
---------
Not fully paid account balance $ 72.3
------------------------------------------------------------------------------------------ ---------
---------
Accident and health insurance -- premiums in-force:
Ordinary $ 166.0
------------------------------------------------------------------------------------------ ---------
---------
Group $ 77.7
------------------------------------------------------------------------------------------ ---------
---------
Deposit funds and dividend accumulations:
Deposit funds account balance $16,507.3
------------------------------------------------------------------------------------------ ---------
---------
Dividend accumulations -- account balance $ 114.4
------------------------------------------------------------------------------------------ ---------
---------
</TABLE>
S-34
<PAGE>
THE 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, 1997 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
Instructions and agrees to or is included in the amounts
reported in The Lincoln National Life Insurance Company's 1997
Statutory Annual Statement as filed with the Indiana Department
of Insurance.
S-35
<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 audit of the statutory-basis
financial statements and, in our opinion, is fairly stated in
all material respects in relation to the statutory-basis
financial statements taken as a whole.
/s/ Ernst & Young LLP
February 5, 1998
S-36
